Monday, 24 February 2014

21. Internationalization

What drives the cycle of invention, discussed in item 18, in particular the move towards new niches (generalization)? In developmental psychology, there is a ‘principle of over-confidence’: an instinct to apply what is successful outside the context in which it was learned, as observed in child play. Having learned to hit a hammer on blocks the infant recklessly tries it out on the passing cat. One may even speculate that people have this instinct because while risky it leads to innovation, which was advantageous in evolution.

This psychological drive may also play a role in the internationalization of business. In economics, there are other considerations, such as the need for sustained growth of profits, to expand to new markets. Such may be the motives, rather than any planned effort to learn, even though in fact it leads to learning. However, I heard from a former CEO from Shell that they have caught on to the principle and now use internationalization as a deliberate strategy for innovation.

The cycle of invention throws light on the debate, in the management literature, on the conduct of multinationals, in processes of globalization. There, an important question is whether multinationals should engage in a ‘global strategy’, imposing the practices from their home country worldwide, or allow for variety, in a ‘multi-national strategy’.

There are many relevant considerations here. The choice depends on economic arguments, such as the need for a uniform practice to maintain economies of scale. That, in turn, depends on technological opportunities and competitive pressures on price, and on commercial considerations, such as demand for differentiated products as a function of different circumstances of use, technical differentiability of products, or, on the contrary, market considerations to maintain a uniform product worldwide (e.g. to reduce search costs, as in the case of McDonald’s). This is not the place to reiterate the relevant literature.

The point here is that even if multinationals have the power to impose their familiar practices, with their offer of employment, technology, capital and access to global markets, to impose their home country practices, it may in the longer term be wiser to employ adaptation to different circumstances in different host countries, as a learning strategy (for a study of these two alternatives, in multi-national ventures in China, see Child, 2002).[1] 

In the first case, the firm may just hire local labour and impose conditions on local suppliers. In the second case they would engage in collaboration or joint ventures with local firms. The latter would force them to immerse themselves in local mentalities and practices, which would provide the variety that feeds innovation. 

In more detail, the extent and form of loosening one’s home practices may follow the logic of the cycle of invention. In differentiation one may still keep practice close to the chest, with local collaboration but maintaining autonomy, further relaxing it in reciprocation, with local alliances, and for accommodation a breakaway from the parent firm in local joint venture. Perhaps, in the stage of consolidation one might re-integrate the activity into the large firm, to re-establish economies of scale.

[1] Child, J. 2002. ‘A configurational analysis of international joint ventures’, Organisation Studies, 23/5: 781-816.

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