Internationalization: challenges for policy and strategy

1. Internationalization: challenges for policy and strategy MDRI, June 19, 2013 Ari Kokko Department of International Economics and Management Copenhagen Business School

2. Outline • About internationalization and exporters Why and why is it so difficult? • Export promotion What can government do to facilitate internationalization? • Internationalization of large firms A matter of strategy? • The secret of success Innovation and entrepreneurship • Some examples from Europe

3. 1. Internationalization • Theory • Motives, explanations, patterns • Policy • What is a good policy environment for globalization? • Strategy • What is required at the firm level?

4. Drivers of internationalization Hard to manage outside

5. Why internationalize? • Company • Sales revenue • Scale • Technology • Ìntermediate goods • Resources • Competitiveness Profitability Survival • Economy • Employment • Efficiency • Knowledge • Income • Growth National wealth Standard of living

6. Barriers to internationalization • Culture • Language • Tastes • Norms, values and behavior • Religion • Work culture • Corruption • Legal and regulatory • Tariffs • Subsidies • Public procurement • Border controls • Controls on immigration • Technical • Technical standards • Private standards • Transportation and distribution • Risk • Competition • Liability of foreignness

7. Internationalization is a complex process Source: Wiedersheim-Paul & Welsch (1980)

8. Exporters need to be strong to overcome liability of foreignness

9. The exporters • Most SMEs do not export • It is difficult and costly to become an exporter • More sporadic exporters than permanent exporters • Most firms have to try several times before they succeed • Most exporting companies export one product variety to one foreign market • A little bit more knowledge and skill needed for every new export market and every new export product

10. 2. What is needed for export success? • Large firms • A good domestic business environment • Macroeconomic stability • Low trade barriers • Competitive exchange rate • Efficient bureaucracy and reasonable tax rates • Good infrastructure • Flexible labor market • Access to human capital and technology • Financial resources / export credit guarantees • SMEs • Same + support to overcome barriers to internationalization • Market information • Links to partners / network in foreign market • Marketing support / visibility • Institutions for quality control and quality standards • Financial resources

11. Export promotion: global experiences • Red light • Protectionism • Export subsidies • Yellow light • Preferential access to credits and foreignexchange • Green light • Openness to trade and FDI • Infrastructure and education • Institutions for technology and market research • Qualitycontrol and quality standards • Competitiveexchange rate

12. Example: Business Sweden The Swedish government and the Industry have established Business Sweden to help Swedish private companies develop contacts with customers in other countries Analyses and advice Practical help

13. Business Sweden’s offer to private companies in Sweden

14. Business Sweden in the world • Belgium • Bulgaria • Denmark • Estonia • EU • Finland • France • Greece • Italy • Latvia • Lithuania • Holland • Norway • Poland • Portugal • Rumania • Russia • Switzerland • Serbia • Spain • Great Britain &Ireland • Sweden • Czech Republic • Turkey • Germany • Ukraine • Hungary • Austria Australia New Zeeland • UAE • Hong Kong • India • Indonesia • Iraq • Japan • Kazakhstan • China • Malaysia • Saudi Arabia • Singapore • South Korea • Taiwan • Thailand • Vietnam Europe Asia & the MiddleEast Africa Americas • Argentina • Brazil • Chile • Colombia • Canada • Mexico • USA Oceania • Botswana • Egypt • Kenya • Morocco • Nigeria • South Africa

15. Other agencies supporting Swedish exports Swedish International Development Cooperation Agency The Swedish Agency for Economic and Regional Growth Exportkreditnämndenis a business partner to exporting companies and banks Swedish Export Credit Corporation: Experts in international financing A channel for investment based on an industrial policy that promotes economic growth The Swedish Governmental Agency for Innovation Systems The Swedish Environmental Technology Council Swedfundis a committed, active and long term investment partner

16. 3. Internationalization of large firms • Larger scale allows investment in export-specific assets, skills, and knowledge • Limited dependence on public export promotion structures • Exceptions: export credits, credit guarantees • Focus on internationalization strategy • To create sustainable competitive advantage leading to growth and profitability • To get customers to prefer your offer over your competitors’ • To use or create market imperfections

17. Strategy: Goal and how to get there

18. Why do we need a strategy? What happens if we do nothing?

19. Whathappenswithoutstrategy? Second law of thermodynamics • Entropy, disorganization, randomness and chaosincrease(ifwe do not interfereand create order)! Rudolf Clausius

20. Organizations and strategy

21. Tools • Market analysis – external as well as internal • Porter’s five forces • SWOT • Strategic positioning • Balancing pressure for cost reductions against pressure for local responsiveness

22. Internal and external fit Internal Resources Strength Weaknesses Strategy Opportunities Threats External Environment

25. Generic strategies

26. International strategies

27. However, textbook models seldom generate blue ocean strategies where you have the whole ocean for yourself • When others do the same, it makes the oceanred

28. 4. The secret of success

29. Entrepreneurship leads to Fundamental Competition which operates through Creative Destruction and creates Temporary Monopolies

30. Fundamental competition • Competition from • A new commodity • A new technology • A new source of supply • A new type of organization • Breaking up cartels or reorganizing an industry • Competition which commands a decisive cost or quality advantage... • ... and strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives

31. Fundamental competition • From local grocery stores to global supermarket chains (Wal-Mart) • From local craftsmanship to global do-it yourself in furniture (IKEA) • From instant photography (Polaroid) and film-based photography (Kodak) to digital photography (Sony, Nokia) • From mainframes (IBM) to the PC (Compaq) to the powerful mobile phone (Nokia, Sony-Ericsson)?

32. Innovation: Key strategy even in seemingly simple industries Core values of • Seek opportunities • Dare to try • Challenge the boundaries • Listen to and encourage new ideas • Fight bureaucracy • Act and look for a more efficient solution • Constant improvement • Fast pace • Curiosity • Open doors • Respect others

33. But innovation is hard… • Most new ideas are bad ideas • The Iron Law of Innovation: 10-20-70

34. N=86

35. How to promote entrepreneurship and innovation • Compare yourself with your best competitors • Benchmarking • Prepare for tomorrow’s challenges already today • Foresight and market analysis • Invest more in knowledge and skills than what you need today • Create Excess Capacity

36. How to promote entrepreneurship and innovation

37. 5. Examples from Europe • Global financial crisis has forced firms to innovate in order to survive • Three innovation strategies • Increased value added from higher efficiency in existing activities: product / process innovation • Increased value added from new position in value chain: functional innovation • Move to new value chain: inter-chain innovation

38. Innovation trajectories

39. Strategy B: upgrading within the value chain R&D Center Branding • Value added Marketing Center Design Center Manufacturing Center OperationCenter R&D Design Engineering Manufacturing Operation Marketing Sales Services

40. Examplestrategy B: AS Kodumaja, Estonia

41. AS Kodumaja turnover 2004-2011 and forecast 2012

42. Examplestrategy C: AS Estiko Plastar(packages for construction materials –> packages for food industry) Employees Turnover Export

43. Thank you for your attention!