The Internalization Process

The Internalization Process

Abstract

Johanson and Vahlne's model provides a starting point for building a model that suits the investment approach and decision making process of financial holding companies. In practice, when firms make an international investment decision, there is a need for a model that can generate outputs based on financial measures such as profit, investment returns, and tolerable levels of risk. Thus, in this paper, Johanson and Vahlne's concepts are studied and two financial managers are interviewed to derive two revised international investment decision models.

Keyword: integer programming, internationalization process model, investment decisions

The Internalization Process

1. Introduction

Firms continuously search for opportunities and formulate strategies for profit development. Operational strategies such as product diversification, vertical or horizontal integration, and internationalization are commonly used by enterprises. Numerous researchers have provided conceptual frameworks and models of the internationalization process that have been adopted by multinational investment firms. Johanson and Vahlne (1977) are among the first to model the internationalization process and state that understanding the marketplace or having market knowledge is essential for making new market commitments or redirecting business activities to exploit international opportunities. Strategic choices that continuously become available provide companies' with specific competitive advantages and directly affect their international performance. Further, risk and uncertainty are key factors impacting internationalization strategies. The accurate evaluation of multiple factors is required to enter and succeed in difficult markets. This research provides two revised international investment decision models that expand the practical application of Johanson and Vahlne early model to financial holding companies. The revised models consider the investment decision methods of financial managers and apply integer programming to incorporate the financial perspectives of experts. In order to demonstrate the practical applications of the model, interviews of investment advisors are conducted to provide case data and to create two investment decision models.

This study is organized as follows. Section 2 outlines the internationalization process model of Johanson and Vahlne. In Section 3, a literature review of international investment decision models is provided. Section 4 demonstrates the application of Johanson and Vahlne's original model and derives the integer programming model. Section 5 discusses the case study which includes data from two financial holding companies and the investment decision models are defined. Finally, section 6 presents the discussion and conclusion.

2. The Internationalization Process Model

This section discusses the early contributions of the authors and the research that has stimulated others to study internationalization process models.

2.1. Johanson and Vahlne's internationalization viewpoint

The internationalization process model developed by Johanson and Vahlne is based on an analysis of the firm's market knowledge, market commitment, commitment decision and current activities. The model emphasizes that a lack of knowledge about a foreign market of interest is a major obstacle to international investment operations. The accuracy of market knowledge leads to greater investment success whereas poor market knowledge increases the likelihood of a failed investment. Even though market knowledge can be purchased in the form of research reports or referenced from experience, the quality of knowledge underlies the success of firms entering ...