Che cos’è l’internazionalizzazionconsule

Internationalization: the possible future

"For Italian companies, and particularly those in the northeast, internationalization more than a choice is a necessity. It is unimaginable to be able to grow or even to be able to survive by remaining anchored in the domestic market."

These are the words of Paolo Gubitta, full professor of Business Organization, in an interview quoted by Francesco Mainoldi in The Processes of Internationalization and the Value of Made in Italy. A binomial to revitalize Italian SMEs, dissertation discussed in 2014-2015 at the University of Padua.

The domestic market still stagnant due to the effects of the 2008-2009 economic and financial crisis on domestic demand poses our SMEs with the problem of thoroughly reviewing their business model in order to survive and then grow in an economy and production fabric that have undergone great change.

As we have seen in previous articles ("What is globalization" and "Italian SMEs in the globalized world"), globalization has had a strong impact on our production system and thus on SMEs, which now find themselves operating in a very different scenario from the one that saw them thrive.

Indeed, with globalization has been determined:

• the shift of entire commodity sectors to developing countries and thus a more extensive and interconnected market;
• the reduction of the potential market due to the arrival of foreign competitors;
• the continued development and application of technological innovations and business models and the subsequent entry of new players into the market.

Our companies, and SMEs in particular, have therefore had to come to terms with the reality of an domestic market that is increasingly shrinking, partly due to the effects of the post-2008 recession, and increasingly crowded due to the entry of new competitors, mostly foreign, and have therefore begun to consider foreign markets as new outlets for their products or services.

Opening up abroad, previously considered a "luxury" reserved for large companies, has thus become an opportunity and a necessity for SMEs as well, which hope from it to gain market share in one or more foreign countries through primarily selling their products or services.

"Internationalization: the magic word

To echo the statement in the opening and as has been demonstrated by the Cerved SME Report 2018, the decisive challenge for these companies is therefore that of internationalization, another one of those now widely used terms that in simple words indicates the possibility for companies to seek new and better opportunities to grow by marketing their products or services in foreign markets.

Internationalization can be even better defined, again resorting to Paolo Gubitta’s words, as "the set of processes aimed at ensuring that the enterprise has the possibility of international presence or active participation," i.e., first and foremost, entering foreign markets in various ways in order to seize the opportunities they offer in terms of sales.

For small businesses the sale, as Marco Sabatino well points out in the article "SMEs: what reasons to internationalize" is in fact the classic activity for starting an internationalization journey that is often stimulated by an interest shown in one’s products or services by potential foreign customers during trade shows or other promotional events.

Subsequently, the process also affects sales collateral activities (after-sales service and support, marketing and communication).

Internationalization, however, is something more complex. As Cristina Maccarrone writes in "Internationalization and SMEs," it is that process of expansion abroad that aims not only at exporting one or more products, but also at establishing a company within one or more foreign markets in simpler ways (stores, branches, distribution activities) or more challenging ways (setting up after-sales service centers and production facilities).

Internationalization can then include, again following Marco Sabatino’s work,

• the research and development;
• the activities of supplying raw materials and semi-finished goods and manufacturing abroad (so-called "offshoring"). People choose to carry out these activities abroad in order to use a labor force with lower labor costs but with the appropriate skills or to bring the company closer to outlet markets or take advantage of economies of scale.

Finally, another type of internationalization is financial, motivated by the possibility of:

• access to more favorable sources of financing;
• minimize the currency and political risk;
• obtain tax and governance advantages.

The benefits of internationalization

Experts and practitioners agree that the benefits of internationalization are many. Some of the benefits of internationalization are well summarized in a blog article by the consulting firm Stargate Consulting according to which it entails, among other things:

• the increased volume of business because, of course, if you operate in a wider market than the national market you expand your customer base and thus increase your sales;
• the creation of economies of scale, because the cost advantages that result from growth in firm size will be exploited. As the market base grows, the ability to access new financial resources will then increase and marginal costs can be cut;
• the diversification of risk that results from the company’s presence in multiple markets, which shields it from any crisis that might occur in one or some among them;
• the increase of business know-how with access to new useful data, comparison with other realities, creation of new strategic partnerships.

The why, how and strategies of internationalization

As Vladimir Nanut and Andrea Tracogna point out in their study on "Internationalization Processes of Enterprises - Old and New Paradigms" (in Synergy No. 60/2003), there are three main questions about the internationalization process:

• Why does a business go international?
• What are the possible modalities of internationalization?
• What are the best strategies for operating in international markets?

The why of internationalization

Picking up on Marco Sabatino’s work already cited above, if a company wants to exploit in foreign markets a competitive advantage it already has, with internationalization it wants to seize new market opportunities by taking advantage of an innovative and successful product or particular skills, such as better technology or well-known brands.

If, on the other hand, the firm wants to seize a competitive advantage precisely through its foreign activities, what drives it is the search for increased competitiveness factors that allow it savings in production costs (e.g., in labor costs) and privileged access to raw materials.

Internationalization can then be motivated by the need or desire to reduce operational and market risks through the differentiation of outlets or supplies, or by the need to access protected markets that require a certain "local content" in the productions offered.

For companies, therefore, internationalization can be both a necessity (to defend their market shares or positions) and a competitive opportunity to grow the company and maximize its profits.

The modalities of internationalization

As Francesco Mainoldi well explains, internationalization can take place in ways encompassed in three broad categories: exports (direct and indirect), strategic alliances and direct investment (FDI).

Exports are the easiest way to enter foreign markets from a strategic and organizational point of view.

• Indirect exports take place through an intermediary who is experienced in the market because he is either a local player or has been operating in it for a long time as a specialized exporter. He usually buys goods and resells them for his own account and in his own name, bearing all the risks. However, this mode, although suitable for companies projecting themselves abroad for the first time, prevents them from controlling foreign markets and gaining experience.
• In direct exports, intermediaries act in the name and on behalf of the enterprise, which has full control over the export and marketing of the product or service and can therefore demand more cooperation from the intermediary. However, these benefits are offset by greater managerial, organizational and financial burdens. Direct export is accomplished in many ways: the agent, foreign distribution channel, foreign branch, e-commerce.

However, strategic alliances, which are more complex and risky than exports, allow the company to increase its presence and knowledge of the foreign market without exposing itself too much organizationally. The most important among these arrangements are franchising, licensing and joint-ventures.

• With franchising, an independent operator is granted the use of a product or business model in exchange for royalties, and thus has a distribution purpose. It allows for very fast expansion into international markets with low investment, however, it requires a lot of attention on the management of product flows from franchisor to franchisee and a franchise structure focused on structural and behavioral uniformity across markets.
• With licensing the licensor (of one country) grants the licensee (of another country) the right to produce or distribute a product in exchange for royalties. It is used by companies with product or process technologies and brands that are attractive to foreign markets. With licensing you can take advantage of the extensive and fast presence and spread of your product/brand/technology abroad with low investment. The disadvantages, on the other hand, are the loss of control over the marketing strategy adopted in the foreign country and the strengthening of the licensee who, once the contract expires, could exploit the acquired know-how to become a potential competitor.
• Joint ventures**, the most advanced form of strategic alliance, require significant strategic, organizational and financial investment, albeit less than that required for a foreign direct investment (FDI), as they involve the start-up of a new company formed by two or more operators of different nationalities to carry out joint activities. The main advantage of this type of collaboration is that the development of an autonomous business structure with resources generally greater than those available to the individual company can lead to its evolution and generate new opportunities for growth in foreign markets.

Direct investments (FDI) are of two types:

• Those aimed at the direct management of trade relations in the foreign market, resulting from the consolidation of exports and the company’s desire to have more contact with foreign demand.
• Those in production facilities, to find suitable space for production or to take advantage of more efficient production conditions (lower cost).

Exporting is a mode of internationalization used in cases of a supply capable of bearing the cost burden of production located in the country of origin, also to exploit its specificities. It requires fewer resources, especially financial resources, is safer, and produces revenues more quickly.

Direct investment prevails in sectors where the competitive advantages (e.g., technologies and brands) that the firm possesses over competitors regardless of its geographical location count. These resources are separable from the markets in which they operate and internationally exploitable, especially where there are local advantages such as a low-cost labor force, access to energy sources, and direct knowledge of local markets. FDI is also preferred where export activity is subject to high transaction costs.

FDI requires a greater financial commitment, and thus is less reversible and flexible in case of political instability or uncertainty in the target markets. Exporting, therefore, which is easier is less financially demanding, has always been the first step for SMEs to enter international markets.

Finally, strategies for entering international markets fall between the extremes of strategy

• "multi-local" (directed at entering a number of separate national markets so as to meet the specific local needs of its customers) and
• "global" (in which the company that wants to expand its activities on a global scale operates in a homogeneous market through a standardized offering).

In the next article in this series we will look at the situation of Italian SMEs: whether, how, and how much they expand abroad compared to foreign competitors.