The onset of globalisation compelled many companies in the local markets to establish business in foreign markets. Globalisation refers to the process of integrating people, governments, and organisations across the globe. It has resulted in easing communication due to the recent past immense development in telephony and internet technologies. Traditional challenges that were experienced by organisations that sought to take their business to the global front have incredibly been eased. Consequently, the term international firm has become a common vocabulary in international business debates. Grosse and Behrman (1992) describe an international organisation as firm, which conducts its business in more than one nation. However, when making market entry into new nations, an international organisation has to choose the appropriate market entry methods because each nation acts as a market segment whose consumption is determined by a variety of factors such as culture, economic, social, and political affiliations among others. This paper focuses on economic factors that have to be considered by internationalising organisations. The paper critically assesses theories of transaction economics, cost, and resource-based views in terms of their usefulness in explaining firms’ internationalising strategies
Transaction Economics Cost
An arising question in the economic theory concerns why many economic activities occur outside the spheres of price systems or where centralised market directions replace the transaction markets. Hodgson (n.d) concludes that certain costs, which are experienced in the market, are possible to eliminate through centralised directions. Such costs are termed as transaction costs. Since late 1970s, the concept of transaction costs has acted as a key component in the servicing of international markets. Monye (2010) defines transaction costs as expenses that are incurred during the process of acquiring and handling of information that relates to production inputs, quality analysis, establishment of the relevant prices, evaluation of supplier reputation, contractual agreement costs, and negotiation expenses among others. They also include the costs of investor behaviour and overheads that are associated with its avoidance. For instance, an internationalising organisation seeks to acquire a larger market than all other organisations that operate in a given nation. By so doing, it must incur costs of ensuring that it acquires the entire market (investor behaviour), where possible, through strategies such as extensive marketing and/or ensuring that other organisations do not engage in such behaviours so that it can dominate them.
Upon considering the nature of transaction costs, an organisation that seeks to maximise its profits as the main goal of expanding itself to include operations in the international platforms, minimising costs, which do not increase the output levels, is necessary. Thus, an organisation must pursue strategies that guarantee minimal costs. This claim suggests that the transaction economic theory is useful in making decisions on internationalisation strategies that an organisation can adopt.
Organisations can engage in international business by exploring strategies such as franchising, direct foreign investments, and engaging in international business joint ventures among others. In the selection of the most appropriate strategy, transaction economic costs theory is useful. For instance, where the costs of opportunist behaviour and its avoidance become too high depending on the nations where an organisation seeks to establish operations, internationalising scope becomes prohibitive. Indeed, Monye (2010) confirms that where transaction costs are too large, internationalisation through the establishment of foreign operations is inappropriate. Rather, direct foreign investment becomes appropriate (Monye 2010). McDonald’s and its competitor KFC exemplify the usefulness of transaction economics costs in influencing internationalisation decisions. Both companies utilise the franchising model to internationalise.
McDonald’s stands out as one of the biggest global fast food retailers. It offers fast foods in more than 119 countries all over the globe. McDonald’s restaurants and franchises, which stand at about 33, 500, continue to grow as the organisation penetrates new markets in Asia. This immense success is attributed to the number of factors among them being an incredible emphasis on consumer engagement, appropriate leadership that fits well the business of the organisation, and exceptional investments of the organisational resources to enhance successful marketing planning. Similarity, KFC has operations via franchises not only in America and Asia, but also in Europe and now, in Africa. Franchises are critical internationalisation models in terms of their capacity to reduce transaction costs.
For McDonald’s and KFC, franchising entails a means of administration in which organisations develop the capability to have effective control and monitoring of the operations of the franchises in foreign markets without having to incur direct transaction costs. Under the internationalisation-franchising model that is deployed by KFC and McDonald’s, contractual agreements between the franchisor and organisations permit the franchisor to deploy its proven operation model to produce and sell services and goods. The franchisor receives monetary rewards for permitting the two organisations to use its trademark and brand name (Monye 2010). McDonald’s and KFC are strategic to engage only in international business arrangements, which do not attract high transaction costs to ensure that the organisations remain profitable both in the short-term and long-term.
Although transaction economic costs are useful predictors of the likelihood of adopting specific internationalisation strategies by organisations, the transaction economics theory suffers some drawbacks in terms of explaining the form and nature of organisations that participate in the international business, the two being definitive of strategic decision-making processes. Macher and Richman (2008) assert that in deploying transaction economic costs theory in making internationalisation decisions, challenges of uncertainty and incapacity to determine the frequency of the occurrence of the costs are encountered. In this context, selection of specific approaches to transaction economic costs becomes problematic.
Hodgson (n.d) quotes Scott Master who identified specific challenges that are encountered while testing any form of transaction economic costs. In transaction economic cost, major problems are encountered due to challenges that relate to measuring and/or observation of transaction costs, their analysis, and estimation of the existing relationships between organisational form and observed traits (Hodgson n.d). However, indirect tests have no capacity to stipulate whether the identified variations occur due to systematic or unexplored variations of various costs that are experienced by an organisation in its internal production. Additionally, in making decisions, several theoretical explanations may be consistent with the available data on savings from transaction costs upon exploring one or more internationalisation strategies.
The resource-based view (RBV) has shaped the management theory and economics for over two decades. This view has been subjected to several criticisms, especially on how it influences organisational internationalisation decisions. It is mainly concerned with explaining the sources of an organisation’s sustained competitive advantage (SCA) (Barney, Wright & Ketchen 2001). Kraaijenbrink, Spender, and Groen (2009) claim that its central assertion is that an organisation acquires SCA after getting hold of its valuable, limited, inimitable, and non-substitutable resources. An organisation, which has capabilities, must exit to absorb these resources. Helfat and Peteraf’s (2003) theoretical paradigm of an organisational dynamic capabilities supports this view. Considering that an organisation has a noble objective of increasing its competitive advantage through internationalisation, the RBV theory may constitute an important theoretical paradigm for analysing internationalisation decisions that are made by an organisation.
Internationalisation requires the development of strategies for enhancing sustained competitive advantage. For instance, when McDonald’s considered its new strategic direction of enhancing its competitive advantage by exploiting the Chinese foreign market, it needed to conduct market planning for its products before offering them in the Chinese market. This step was critical in facilitating the long-term success of its products. Indeed, through such market planning, the company realised that its beef hamburgers would not have had mass appeal since Chinese, even today, prefer chicken to beef. Consequently, through the franchising model, McDonald’s successful operation required it to have the resource capability to develop new product lines that fitted the specific market characteristics. Currently, KFC experiences a similar capability challenge. It exploits new international markets in which people are highly conscious of eating healthy foods. Thus, having the capability to develop new products is inevitable for both organisations to gain sustained competitive advantage in the international markets. This observation suggests that the RBV theory is pivotal in making internationalisation decision for both McDonald’s and KFC.
Although RBV theory is instrumental in formulating internationalisation decisions by different organisations, it faces some challenges in terms of the realisation of this purpose. In the case of McDonald’s and KFC, the capability to innovate new products is incredibly useful in ensuring that they acquire and retain their SCA in the local and international markets. However, although this capability is consistent with RBV’s main proposition, Priem and Butler (2001) assert that organisations that possess the capability of creating structures of ensuring better product innovation strategies surpass their counterparts who possess the best possible products ‘innovation abilities. This claim suggests that when RBV proposes that the capability to innovate determines an organisation’s sustained competitive advantage, long-term success arises due to the possession of the ability to create structures for developing new products and services. Thus, RBV is reduced to only having the capability to facilitate the achievement of sustainable competitive advantage of an organisation in the short-term. Since the goal of participating in international markets is to achieve short-term and long-term competitive advantage, RBV becomes inappropriate and inapplicable in making internationalisation decisions.
However, in the light of the above assertion, Lado et al. (2006) confirm that infinite regress is problematic for people who argue for or against economic science and management from a positivist perspective. Upon appreciating that strategic management produces practical organisational engagement in the international business, one will realise that infinite regress is not useful. Besides, when people consider high-order potential more superior compared to low-order capabilities, the central focus extends to the analysis of their interaction. Rather, as Teece (2007) proposes, it is important to consider the relationship between organisational meta-competence and operational aptitude while making internationalisation decisions. For KFC and McDonald’s, this relationship can differentiate between their failures and success in the international business, rather than just focusing on the development of structures for innovating products and services to be offered in the international markets.
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