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How and why transnational companies internationalize

Term Paper (Advanced seminar) 2012 18 Pages

Geography / Earth Science - Economic Geography

Excerpt

Table of Contents

1. Introduction

2. How firms internationalize
2.1 The Product Life Cycle
2.2 Different Ways of TNC progress
2.3 Born Global Firms

3. Why firms internationalize
3.1 Market Access
3.2 Lower Production Costs
3.3 (Natural) Resources
3.4 Transnational Strategy

4. Case Study: Volkswagen

5. Conclusion

6. Bibliography
6.1 Research Literature
6.2 Online Sources
6.3 List of Figures

1. Introduction

“I hear people say we have to stop and debate globalization. You might as well debate whether autumn should follow summer. In the era of rapid globalization, there is no mystery about what works – an open, liberal economy, prepared constantly to change to remain competitive.”

(Tony Blair, see Lule, p. 25)

This quote adequately summarizes that globalization is a temporal phenomenon, which is irreversible and which therefore needs to be seen as an accomplished fact. (Lule: 2012) With regard to the business world, increased competition forces companies to identify new markets and to cut costs while at the same time maintaining profit by forcing down prices through the standardization of their products and the production process itself. International competition and international trade are no new phenomena but the process of globalization intensified and accelerated these appearances. (Hamilton; Webster: 2012)

The proper handling of competitors is certainly not the only reason for going international. The aim of this paper is to categorize other reasons of internationalization and to identify possible ways of going international. The aim of this paper is to answer the following questions:

1. Is there a best possible way for internationalization?
2. What economic incentives play a role when a firm decides to go international?

The focus of this research paper will be on transnational companies (TNCs), which are not just doing business across borders, but rather have the individual characteristic of direct production and to a large extent also direct business activity in a foreign country. (Gillies: 2012) What strategies TNCs choose in order to pursue their target of directness will be demonstrated in this paper, which is roughly divided into three parts.

The first part of the paper will be based on a look at a traditional view on the internationalization process, which will help to give a first understanding of the sequential development a firm could pass through on its way of becoming international before diverse trajectories will serve to allow deeper insights into the process of internationalization. In this context, the paper also offers an inquiring look at the so-called born global firms. The second part will reveal several reasons, which express the motivation of a company for going international.

In the end, the company Volkswagen will be analyzed according to their individual process of internationalization in order to integrate a practical example into the analysis. Volkswagen has been chosen due to the fact that this transnational enterprise, compared to the other two big automotive concerns in Germany (BMW and Daimler-Benz), displays both an extended and quantitative and qualitative significant history of internationalization. (Pries: 1999)

2. How firms internationalize

2.1 The Product Life Cycle

In order to answer the question whether there is a best possible way for internationalization one has to take a look at sequential development paths a firm could pass through on its way of becoming an internationally operating firm.

The Product Life Cycle, henceforth referred to as PLC, expresses a traditional view on the internationalization process. The PLC takes over the assumption of the TNC having a strong domestic position before expanding geographically and this is why the PLC is a suitable notion to start with when observing the internationalization process of TNCs.

According to Dicken, Vernon starts from the premise that it is easier to introduce a new product in the own domestic market than it is from elsewhere. He further argues that this new product would as a result best reflect domestic characteristics. In the following, the PLC is explained in more detail by including the United States as an example. The PLC is divided into five different phases, which look as follows:

illustration not visible in this excerpt

The first phase is characterized by domestic production and by the satisfaction of overseas demand by exports. In case of saturation of the domestic market and consistent profitability locally, the expansion into markets beyond the domestic market is indispensable. As a result of the distribution of economic activities, the US reduces its production and distribution costs and at the same time its market position can be improved.

The second phase is characterized by starting overseas production in other high-income countries. At this point, new production facilities abroad displace the US former exports and thus these exports can go to places where production has not begun yet. The hereby-saved production costs make exports to third country markets or even back to the US domestic market possible, which is displayed in phase three and four of the PLC.

In the fifth phase of the cycle, production is completely standardized and the US can eventually shift its production to low-cost locations in developing countries. (Dicken: 2012)

However, this approach has been criticized with respect to its lack of illustrating the more multifaceted and complex structure of TNCs. It furthermore leaves the more likely cross investment between the industrialized countries out of consideration. (Dicken: 2012) Others take the view that the PLC does not follow a set pattern but that it is rather the result of selected marketing strategies than their cause. The particular phases of the cycle are temporally not predictable because they differ from product to product. (Michel; Pifko: 2009) All these arguments show that it is necessary to take a look at different ways of TNC progress, which is done in the next passage of this paper.

2.2 Different ways of TNC progress

At first appearance, the representation of different ways of TNC progress can be classified as being very similar to the PLC outlined above. Throughout this section of the paper, however, it will become clear that this approach of TNCs progression is more open and leaves room for interpretation.

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Details

Pages
18
Year
2012
ISBN (eBook)
9783656392057
ISBN (Book)
9783656392279
File size
694 KB
Language
English
Catalog Number
v211038
Institution / College
Christian-Albrechts-University of Kiel – Geographisches Institut
Grade
1,0
Tags
transnational companies product life cycle Volkswagen internationalization internationalisation international strategy TNC born globals born global firms transnational strategy production costs market access transnationale unternehmen produktlebenszyklus internationalisierung TNC progress

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Title: How and why transnational companies internationalize