Crossing borders for economic reasons has been a practice that dates back thousands of years. Nowadays, businesses, including family-owned and publicly traded ones, operate on an international level. Smaller companies, such as start-ups and medium-sized businesses, also pursue opportunities for growth by entering international markets. [12]

The process of internationalization has become increasingly common among companies, resulting in the global diffusion of products, technology, and knowledge. This is due to both the necessity and ease of expanding business activities abroad. While multinational firms dominated international business in the past, recent developments have allowed all types of companies to participate and benefit. [12]

„Internationalization refers to the increasing importance of international trade, international relations, treaties, alliances, etc. Inter-national, of course, means between or among nations. The basic unit remains the nation, even as relations among nations become increasingly necessary and important. “[19]

Why and how do companies internationalize?

Internationalization helps businesses gain global recognition, competitiveness, and increased sales in markets with high barriers [14]. Motivations for internationalization include accessing new markets, targeting specific customer groups, and overcoming domestic market crises. It also reduces risks through diversification, maximizes economies of scale, and leverages the product life cycle for financial success. Three types of motivations are intrinsic, extrinsic, and mixed: [24]

• Intrinsic motives: Companies expand internationally to access new markets, resources, expertise, and improve overall efficiency.

• Extrinsic motives: Factors outside the company, like home- and host-country conditions, drive international expansion to capitalize on opportunities or overcome challenges.

• Mixed motives: Combination of intrinsic and extrinsic factors influenced by industry dynamics, market structure, and competition [24]

There is a variety of ways in which an organization can internationalize. A company may decide to internationalize a portion of its manufacturing or services or even just one aspect of a multi-level production, such as sales. The decision of what is internationalized and how this is executed is crucial since these decisions will determine whether a company's expansion is successful or not. [14]

How is internationalization different when it comes to expanding within the European Union? 

When a company is created and registered as a European organization, it has the power of expanding across the European Union using a specific single set of rules.

According to the official website of the European Union the requirements to be considered a European organization are:

1. A company must be registered in the same country as its head office

2. There must be a presence in other EU countries either as a subsidiary or a branch and they must comply with the laws of the countries in which it is present. 

3. There must be a "minimum subscribed capital of EUR 120 000" [22]

4. There must be a plan of action for internal communication amongst the company representatives and other bodies within the organization. 

Once a company has complied with all the requirements it is now considered a European organization. Tt can take advantage of the benefits that come with being able to expand into European markets. [22] However, companies must analyze the potential market rules and regulations as they may vary depending on the nation. 

Low Control Strategies 

Exporting and Global Sourcing are considered "Low Control Strategies" with limited control in foreign markets. These strategies have advantages such as fewer obligations and resource investments, allowing flexibility and lower risk. However, they offer lower investment returns and require minimal commitment. Many companies choose low-control strategies due to the lower risk involved. [12]

Global Sourcing

Global Sourcing is another "low control strategy." It essentially relies on having a contract between a buyer. This can be a local company and another company that is the supplier. In more straightforward terms, it's importing materials to be sold in another country. For example, the supermarket "Carrefour," a French retailer, is a large-scale importer. It sells products from other countries in its stores. This is especially beneficial to the company when it's a new product in the market, and there is less competition. [12]

Moderate Control Strategies 

Compared to low control methods, the level of flexibility in the moderate control strategies is lower, but the level of control is higher. Franchising and Licensing are two separate methods of moderate control strategies.

Licensing

According to Schmid, licensing involves a contractual agreement where a domestic licensor grants foreign licensees the rights to certain assets in exchange for royalties [13]. Coca-Cola utilized multiple licenses to expand internationally by allowing businesses outside the US to bottle and distribute their soft drinks [13]. Licensing is a common method to enter new markets, although there can be concerns regarding product usage, technology transfer, or quality control [11].

Foreign Direct Investment in Europe

Europe is the world's largest destination for Foreign Direct Investment (FDI), with intra-European investment being the primary source. The creation of a single market through European integration has facilitated cross-border investment and increased Europe's attractiveness for FDI. Unlike other regions, Europe places greater emphasis on the service sector as the main recipient of FDI, while manufacturing and resource extraction receive less focus. FDI in Europe has contributed to economic development by introducing new technologies, management practices, and market access, fostering innovation and growth. However, there is a need to balance the benefits of FDI with protecting local industries. Overall, Europe's unique characteristics make it a significant FDI destination. [43]

The Integration-Responsiveness Framework

The Integration-Responsiveness Framework helps managers in multinational corporations understand and interact with unique national markets and diverse businesses. It emphasizes global integration, value chain management, and country-specific risk assessment. Based on around 20 case studies and numerous interviews, the framework optimizes cross-border integration for maximum global effectiveness. It categorizes business environments into four types: global, multinational, international, and transnational. [1]

International Environment

Businesses operating in an international context do not need to concentrate on either integration or responsiveness, in contrast to those operating in a global and multinational setting. They utilize all of the company's skills in all of their facilities in addition to the knowledge that they currently have. Knowledge is created in one central area, then distributed to all units. [2]

Transnational Environment

The transnational business environment is highly complex, requiring companies to focus on both local differentiation and global integration. To succeed in this environment, companies must establish independent national units capable of exchanging information for global operations. Effective and efficient communication is crucial for success. [1]

Pros and Cons of the PESTEL Analysis

The PESTEL Analysis helps to look at different and influential factors that could affect the success of the product at the same time. Also, it can be of use in identifying and exploiting new opportunities and threats. Lastly, this method can encourage the development of strategic thinking within the company. [34] [35]

Although there are many advantages to using the PESTEL framework, there are also many disadvantages. The process is considered being time-consuming. If not conducted regularly, the effectiveness of the PESTEL Analysis is not guaranteed. Also, the oversimplification of information can lead to insufficient data, which can be problematic when identifying new opportunities and taking action to mitigate identified issues. [34] Lastly, each decision is subjective and could become costly as the framework must be done constantly to avoid outdated data. [4]

Timing strategies are referred to as the entry timing of the markets and the phases involved. This term differs from the market-timing strategies in the investment area, which refers to the act of moving money in or out of a financial market or switching funds between asset classes. [11]

There are three market entry strategies: Waterfall, Sprinkler, and Wave. The Wave strategy involves launching the product simultaneously in countries with similar cultures and characteristics. The Sprinkler strategy involves launching the product at the same time in all appropriate countries. The Waterfall strategy, on the other hand, entails launching the product in one country first and then expanding to new markets only after establishing sales in the previous one. [36] The timing strategies are explained in more detail below.

Pros and Cons of the Waterfall Strategy

Advantages

• Provides an opportunity to gain comprehensive insights into the market.

• Enables the company to tailor its marketing mix to satisfy the distinct needs of individual markets. [37]

• Offers a logical structure that is easy to understand and manage: This strategy is suitable for predictable projects and ensures more predictable results. [7][9] There are some clearly defined deliverables in each stage to review and approve.

• Permits the renewal of products in the development stage, draws out the life cycle while keeping a steady situation inside the market, and limits risks. [9]

Disadvantages

• Lack of flexibility: Due to its linear nature, it is difficult to reverse a step in the process.

• The cost of defect elimination may be increased as errors in the requirements and design are only detectable until the testing phase.

• Not suitable for time-sensitive projects because it takes a long time to produce a working product in the development life cycle. It may be a poor choice for high-uncertainty and high-risk environments. [7]

Pros and Cons of the Sprinkler Strategy

Advantages

• Good choice for companies in an outrunning competition and can help gain the technological edge or utilize the first-mover advantage: The first-mover will have more time to research and develop to know the market better and make some adjustments.

• Increasing the possibility to gain a large number of benefits by entering many markets at the same time. It refers to the income and the chance to register intellectual property. [9]

Disadvantages

• High risk because of the simultaneous penetration in multiple markets

• Requires significant resources and production capacity [37]

Pros and Cons of the Wave Strategy

Advantages

• Combines the expanse of the Sprinkler strategy with the safety of the Waterfall strategy.

• Cost-effective because of the minimal risk of each particular market. [9]

Disadvantages

• One’s competitive advantage can be lost because of the permitted possibility of entering all the available markets at once.

• Consumes extra time for analyzing markets in order to group them. More detailed analyses are required as well. [9]

Factors to Consider When Choosing a Foreign Market Entry Strategy

The decision of a firm to choose its entry mode for a particular product or target country is influenced by multiple conflicting forces. Predicting the magnitude and direction of these forces makes the entry mode selection process complex, involving trade-offs among different options. Generally, the choice of entry mode should prioritize its potential impact on profitability. However, this can be challenging, particularly in foreign markets where data availability is limited. [56]

Some of the factors that need to be considered are:

The core business goals and objectives of the firm have major role in guiding a company’s operations therefore chosen market entry strategy should also facilitate the achievement of those goals. Although firms are typically seen as profit maximisers, we can observe a shift towards the concept of shared value, where profit comes hand in hand with giving back to society. A company may prefer to set up a base of operations and manufacturing in a target market if they are conscious of their carbon footprint from purely exporting, even if it means that they give up a higher profit margin.

International experience is another firm-specific factor influencing mode choice. The extent of a firm's involvement in operating internationally, either in a particular country or in the general international environment, contributes to its experience. This experience reduces the cost and uncertainty of entering foreign markets and increases the likelihood of resource commitment. According to Johanson and Vahlne (1977), direct experience in international markets, rather than objective knowledge acquisition, reduces market uncertainty and encourages firms to allocate additional resources to foreign markets [56]

Similarly, the firm’s resource capacity, especially the level of excess capacity the firm can devote to international expansion impacts the ability of the firm to choose which strategy to follow.

The physical attributes of a product or service, such as its value/weight ratio, perishability, and composition, significantly influence production location and entry mode selection. Products with high value/weight ratios, like luxury watches, are often suitable for direct exporting when production economies of scale exist or when maintaining control over production is important. Conversely, industries such as soft drinks and beer tend to establish licensing agreements or invest in local production facilities due to the high costs of shipping to distant markets. The nature of the product also impacts channel selection, as products vary in characteristics, usage, and selling requirements. Technical products may require pre- and post-sale services that some intermediaries cannot provide, leading firms to opt for hierarchical entry modes. Product differentiation, including physical variations, brand reputation, advertising, and after-sales services, allows firms to absorb higher costs in foreign markets, create entry barriers, and enhance their competitive position by effectively meeting customer needs. [56]

Country risk/demand uncertainty. Foreign markets are typically considered riskier than domestic markets, and the level of risk a firm faces depends on both the market itself and its chosen method of entry. Apart from financial investments, the firm also faces risks associated with inventories, receivables, and exchange rate fluctuations. Additionally, political risks can pose significant challenges. When the country risk is high, firms tend to limit their exposure by opting for entry modes that involve lower resource commitments, such as export modes. Unpredictability in the political and economic environment of the host market increases perceived risk and demand uncertainty, discouraging firms from choosing entry modes that require substantial resource commitments. Instead, flexibility becomes a highly desirable characteristic. [56]

Sociocultural differences between a firm's home country and the host country can create internal uncertainties, influencing the preferred mode of entry. Socioculturally similar countries share common business practices, language, educational levels, and cultural characteristics. The greater the perceived distance in culture, economic systems, and business practices between the home and host country, the more likely firms are to opt for joint venture agreements over direct investment. Joint ventures provide flexibility, allowing firms to withdraw from the host market if they struggle to adapt to the unfamiliar environment. In summary, when there is a significant perceived distance between the home and host country, firms prefer entry modes with lower resource commitments and greater flexibility. [56]

Market size and consumer demand for the firm’s product will influence how heavily the firm will want to get involved if at all in a market. As firms are primarily profit seekers, if there is little potential for growth in the market the firm may choose to look elsewhere. Even with a large market size, the market concentration ratio can deter a ‘high-control’ entry initially. Whether there are a large number of competitors, the market power of the largest competitors may deter high-involvement entry as this could increase the barriers to entry. A high concentration ratio would mean that it would be much harder for the firm to gain a significant market share straight away to recoup their costs of entering the market, this may mean a firm will again opt for a low resource commitment strategy to gain a footing in the market first and then choose to expand once already in the market, rather than entering with a ‘higher-control’ strategy straight away. [23]

Stages of Internationalization in Business

With reference to the process models of internationalisation, Welch &Luostarinen (1988) define internationalization “as the process of increasing involvement in international operations”. It allows companies to adapt their products to meet the needs of consumers in foreign countries.

The choice of internalization strategy depends on the stage of internationalization the company is in. There are 4 stages that we defined in this article. Also important to note that some companies can internationalize more rapidly or slowly than others - speed of internalisation will be covered in the next section.

"Born Global"

An example of rapid internalization would be companies categorized as "born global" also called International New Ventures (INVs), which are defined as:

“companies who have reached a share of foreign sales of at least 25 per cent within a time frame of two to three years after their establishment”.[51] 

or 

"business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. The distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e.g., material, people, financing, time) in more than one nation." [55]

Generally, there is no one clear definition – neither theoretically nor empirically – of a Born Global or similar concepts. Born Globals have “borderless” view of the world and develop the strategies needed to expand abroad at or soon after the firm’s founding in contrast to the traditional pattern of businesses that operate in the home country for many years and gradually evolve into international trade – term to describe skipping of classical internalization stages is called  ‘leapfrogging’.

The emergence of born global firms can be attributed to factors such as globalization, technological advancements, and an entrepreneurial mindset. These firms leverage digital platforms, access to information and resources, and changing consumer behaviors to quickly expand into international markets. Supportive ecosystems further enable their rapid international growth by providing resources, mentorship, and networking opportunities. [50]

Examples of Born Global are Skype, Spotify, Netflix, Google, Logitech, Checklens and many more. 

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[50]  Paper proposed to be presented in the 28th EIBA Conference 2002, in the special session “SME internationalization and born globals - different European views and evidence” by Erik S. Rasmussen and Tage Koed Madsen 

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