Inward International Operation Has Been Neglected Management

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During the past thirty years, interest in internationalization of the firms has grown and there have been a lot of articles that have paid to this subject.

In spite of a lot of research about outward internationalization, Inward international operation has been neglected in internationalization articles and has been viewed as a clerical which only serve the purchasing and production than strategic.

Thus, in this paper has been tried to present somehow more strategic and comprehensive view about inward international operation and role of inward activities in SMEs performance and successful outward operations.

As well, important Causing factors in inward internationalization, related theories and models about that, as well contingency factors in decision making for inward operation will present.

It is necessary to be said, in the end of each part, a proposition has been given that, for sure, should be operationalised in some cases for having more result

1- Introduction:

During the past thirty years, interest in internationalization of the firms has grown and there has been a lot of articles that have paid to this subject.

While Internationalization issues in different industries has been researched in several firms from 1970s (Holmund, Kock, & Vanyushyn, 2007) but emphasis of major portion of these articles has been on actions which business apply to develop their outward operations in international context.

(Welch & Luostarinen, 1993 buckly and Ghauri 1993) and there are not a lot of articles in which Inward internationalization has been paid attention broadly and even directly.

(Korhonen, Luostarinen, & Welch,1996).

While, according to definition of Welch and Luostarinen (1988, p.36) Internationalization is ''the process of increasing involvement in international operations'' and drawing to this definition inward internationalization can be considered as a basic form of internationalization that has been neglected in internationalization articles.

(Welch & Luostarinen, 1993).

Most of the current models in these area has not had comprehensive view of internationalization of business that include inward operations.

(Ståhl, 2000) .

However Welch and Luostarinen have tried to pay attention to inward issues in their articles.

(Welch & Luostarinen, 1993) .

In while Inward internationalization can be consider as a initial step for outward internationalization and precede it (Korhonen, Luostarinen, & Welch,1996).

Moreover SMEs as major part of industries and due to lack of resources have more attention to Inward internationalization than outward internationalization operations.

Thus , in the light of having more attention to inward internationalization as a initial step in internationalization ,as well, according to theory of life cycle internationalization this paper is prepared to have more attention to Inward internationalizations process , influential factors and theories that can help us for deeper understanding of inward internationalization .

2- Internationalization

Small and medium enterprises (SMEs), today, play important role in global market and because of lack of resources and gain earning many SMEs are active in international operations.

(Wright, Westhead, & Ucbasaran, 2007) .

Also, nowadays, study of marketing activities in many researches has been increased (Ståhl, 2000) , and companies try to define their growth through international expansion.

(Björkman & Kock, 1997).

Many scholars like Luostarinen (1988), Rao and Naidu (1992), Easton and Li (1993) and Johanson and Vahlne (1993) has presented definitions about internationalization and have considered it as a process of involvement of businesses in international environment (Fletcher, A holistic approach to internationalisation, 2001) .In this paper Luostarinen definition about internationalization has been used, in which Internationalization is ''the process of increasing involvement in international operations'' (Welch & Luostarinen, 1988, p.36)

Fletcher (2001) and Welch & Luostarinen (1988) believed firms have a life cycle with respect to their international involvement - that include inward internationalization, outward internationalization as well periods that businesses consider de- internationalization.

In this cycle businesses may link between inward international operations to outward internationalization operation.

(Fletcher, The internationalisation from a network perspective: A longitudinal study, 2008) .

Luostarinen and Welch (1990) grouped international business operation into 3 major categories: outward operations, Inward operations and cooperative operations.

Furthermore, they have divided outward operations into 7 part such as exporting operations, licensing, franchising, management contract, subcontracting and contract manufacturing, project and finally subsidiary operations.

They viewed Inward operation as a mirror image of Outward operations.

And believed companies often use inward operations as a requirement for being success in outward operation.

Third part of international operation in their category is cooperative operations that are including research and development cooperation, commercial cooperation, Industrial cooperation and managerial operation.

(Luostarinin & Welch, 1990).

3- Internationalziation models:

3-1-Stage model:

Stage model consider internationalization as an incremental process in which learning, whereby experiential knowledge, grows out over the international operations.

Obtained knowledge form foreign market decrease uncertainty of operating on abroad and surely will have potential opportunities for firm's activities.

(Ståhl, 2000)Basic assumption of all stages model is, firm should be well established in the domestic market then get into abroad.

(Bell, Mc Naughton, Young, & Crick, 2003) .Another assumption in U model is the market knowledge is obtained initially by business activities in abroad.

And then commitment will increase step by step through internationalization life cycle.

(Björkman & Kock, 1997)

3-2- Networking theory:

Due to have better understanding in internationalization process many scholars like (Sharma and Johanson, 1981;, Johanson and Mattsson, 1988; Axelsson and Johanson, 1992; Johanson and Vahlne, 1992; Benito and Welch, 1994; Vatne, 1995) have referred to networking theory.

According to 'network' approach development of networks of relationships create knowledge about buyers and sellers.

(Fletcher, 2001) focal point of network theory is firm's tend to make exchange in set of reasonable relationship specially in industrial markets.

(Ståhl, 2000)

3-3- Eclectic paradigm

According to Dunning (1980) eclectic paradigm, firms involve in international market based upon their advantages.

In this model there are 3 categories that make advantage for firm due to international activities.

Ownership advantages, Location advantages and Internalization advantages that are so-called OLI framework.

In which Ownership advantage focus on competitive advantages which emanates from firms resources such as having trademark, production technique, entrepreneurial skills, and returns to scale.

Locational advantages that are including Locational advantages such as existence of raw materials, low wages, special taxes or tariffs, that are needed for international operation of firms .

this advantage originated in countries or regions immobile, natural or created resources.

Internalization advantages?refer to advantages form firm's core competencies , in which advantages by own production are rather than producing through a partnership arrangement such as licensing or a joint venture.

(Twomey, 2000).

Thus, according to this I offer:

Proposition 1: Networking originated from inward internationalization help SMEs who are looking for a way to reduce uncertainty in foreign country.

4- Inward internationalization:

In spite of a lot of research about outward internationalization.

Inward international operation has been neglected in internationalization articles and has been viewed as a clerical which only serve the purchasing and production than strategic.

(Welch & Luostarinen, 1993 , Ståhl, 2000 ,Rodriguez, 2007), But First international operation of firm in most cases are inward operations such as imports of raw material and machinery, technology, or some other products, which are part of initial inward internationalization process.

(Korhonen, 1999).In a research that has been done in Finland showed more than half number of SMEs have commenced their international operations by inward internationalization.

(Korhonen, 1999).

According to Jones (1999) importing is common starting stage in the internationalization process of the businesses.

(Holmund, Kock, & Vanyushyn, 2007)

In earlier studies inward operations has been viewed as routine operations that do by purchasing staff and play a supporting role in firm activities , in firm which strategic decisions of are made by top management, or key manager from production and marketing part, and opportunities that has been created by valuable information by inward operations become neglected.

(Adersson, 2002) But ,today ,firm's attention to purchasing part and more specifically inward internationalization has changed and Rather than being viewed as merely a clerical or service function, in many cases, it has come to be viewed as a major strategic resource for the company.

And This transmutation can be easily viewed in recent business analysis and academic articles and textbooks (Karlsen, Silseth, Benit, & Welch, 2003) Luostarinen and Welch (1990) considered Inward internationalization as a mirror image of outward internationalization .Welch and Luostarinen (1993) have divided Inward internationalization into 3 sections.

First is include physical product operations, second, services operations and finally know how operations.

Physical product operations are include: importing of machinery, spare parts etc .

Services operations are planning and supervising, installation and testing, training and development and service and maintenance and ultimately know how operations are licensing.

Like outward international operations, acting inward operation need knowledge that can be gained by trip to foreign countries to be familiar with their culture.

So, like outward internationalization that refer different operation , inward internationalziation include different activity such as importing, get licensing, franchising , getting investment and cooperative operations like allices agreements.

(Rodriguez, 2007)

According to Luostarinen and Welch (1990) inward operations has several roles like a prerequisite for the running a business , like import machinery , raw material from foreign country or sometimes getting managerial, and marketing know-how that are insufficient to start a business.

Also Franchising, licensing, or even turnkey projects can be considered when firm are dealing with lack of needed knowledge in a country as Inward operation.

(Luostarinin & Welch, 1990) Other types of inward activities include various forms of inward foreign direct investment, including joint ventures, which may involve a package of imports of physical equipment, personnel, and know-how (Korhonen, Luostarinen, & Welch, 1996).

Lack of resources and domestic supplier as well price and quality are most important reason for why firm use inward operation however in recent year getting competitive advantage from new technological has added to these reasons.

(Holmund, Kock, & Vanyushyn, 2007, Korhonen, 1999).

Inward internationalization, also, can be regarded when firms are seeking to compete in its own domestic market (Rodriguez, 2007).

Many scholars such us Roberts(19950); Chatterji(1996); Lambe and Spekman (1997); Hagedoorn and Duysters(2002) has emphasized on role of Inward internationalization on creating and development of innovation in firms (Tsai & Wang, 2007) .

Zahra (1996) showed in a research that inward internationalization especially technology acquisition have positive impact on corporate venturing.

As well, Inward internationalization will have effect on firm's performance and are important for gaining competitiveness for firms (Tsai & Wang, 2007).

So , I offer

Proposition 2: SMEs can be used of international inward operations as a way when they are dealing with lack of resources.

Proposition 3: Inward internationalization can be regarded as way to gain advantage when SMEs are looking for competitive advantages for outward internationalization.

Proposition 4: International inward operations are one way for being innovative by SMEs.

5- Inward Internationalization process:

In process of inward internationalization, International buyers can be imagined in two side of a continuum that, in one side there are international buyers with active search for inward process and, other side, inactive buyer in which sale initiated by foreign supplier.

Active buyer, try to examine different foreign sources and visited them, and inactive buyer have no contact with foreign market and they prefer to obtained product by local agent and so on.

(Welch & Luostarinen, 1993) .

Luostarinen and Welch (1990) have presented inward international operations as a mirror image of Outward side.

Thus, they have numerated inward international operation as following:

Direct import , indirect import, own import ( importer) , licensing buying (licensee) , Know how agreement (contractee ) , franchising (franchisee) , ( subcontracting ( subcontractee) , contract manufacturing (contractee) and joint mixed venture (partner) (Luostarinin & Welch, 1990)

According to Korhonen (1999) Inward internationalization process of manufacturing firms is can also be analyzed from the perspectives of product, operation and market, and patterns respectively.

5-1- Product pattern:

Luostarinen in 1997 developed a classification , in which product are include (1) goods, (2) services, (3) systems, and ( 4) know-how.

According to Hakansson and Wootz (1975 ) that have been explored in Swedish firms , buying take place in a gradually process in which purchaser start buying from abroad by products that are low need uncertainty products abroad, Then share of high need uncertainty products will increase.

As well, Monczka and Trent (1991) cited in their articles that buying start with standard product and then firm experience buying more complex inward operations.

Carter and Narasimhan (1990),and Luostarinen and Hellman (1995) showed inward internationalization commence by import raw material and continues with other operations(Korhonen, 1999).

So, inward internationalization according to product pattern develop through the (1)goods, (2)services, (3) know-how, and finally (4) Systems.

5-2- Operation Pattern

Based on of operation type, inward operations can be classified into the following stages:


Domestic purchasing stage


Indirect import stage


Direct import stage


Stage of purchasing through contract manufacturing or licensing abroad


Stage of purchasing through own buying unit abroad


Stage of purchasing through co-production abroad


Stage of importing from own manufacturing units abroad (Korhonen , 1999)

According to Monczka and Trent (1991), international procurement are include 4 stages: (1) Domestic purchasing only, (2) foreign buying based on need, (3) foreign buying as part of procurement strategy, and (4) integration of global

Finally , according to firm's function ( buying and marketing) and degree of foreign direct investment (Non investment and direct-investment) , Luostarinen (1970, 1978a,1979) , developed a classification of international inward operations ,that are include : (1) non-investment buying operations, (2) direct investment buying operations, (3) non-investment production operations, and (4) direct investment production operations.

(Korhonen, 1999)

Classification of international inward operations

Non investment operations



-Import operations for goods

-Service import operations

- Know-how import operations



Licensing operations

Franchising operations

Project operations

Source: cited in Korhonen 1999, Based on Luostarinen 1970, 1978a,1979

5-3- Market Pattern

Due to identifying market pattern Luostarinen (1978c, 1979) developed business distance concept that imply greater the distance between the domestic and foreign country, will increase firm's need for getting knowledge about foreign market (Welch & Luostarinen, 1993).

Similarly, Johanson and Vahlne (1977) used of "psychic distance" for explaining this pattern; however they applied psychic distance for outward operations.

Psychic distance is "the sum of factors preventing the flow of information from and to the market" (Johanson & Vahlne 1977: 25).

However price is a determining factor on decision for buying from abroad but imperfect flow of information in real world has been made decision making difficult.

According to perceived risk model by Håkansson and Wootz (1975a), for example, supplier choice is affected by supplier characteristics such as location and size, and bid characteristics such as price and quality.

Likewise, Hall6n (1982) cited that generally in dealing with potential domestic and foreign supplier buyer prefer domestic , and in high uncertainty situations such as international sourcing, buyers perceive supplier characteristics as more important than bid characteristics (Håkansson and Wootz 1975).

Thus, because of decision makers seem to be risk avoiders, firms first enter those markets that are geographically, culturally and economically close, ie" markets with short business distance or low psychic distance (Håkansson and Wootz t975a; Luostarinen 1978a , Johansson , 1977).

And try to reduce risk of buying from foreign countries.

So , Korhonen in 1999 according to (Luostarinen 1978a)suggested that the place where purchases are made develops as follows


Domestic Purchasing stage


Stage of purchasing foreign items in domestic markets


Stage of purchasing from abroad' starting from markets with short business distance


Foreign Purchasing stage

Thus, according to this I offer:

Proposition 5: International Inward operation is a contingency pathway in which, product pattern, market pattern and operation pattern should be considered before decision making.

6- Influencing factors in international inward operations:

There are extensive studies that have explored factors causing internationalization, Reichel (1986) mentioned, There is many factors that a firms should consider when they are going to buy from foreign country such as: social, cultural, economic, political, legal, technical and geographical aspects.

(Reichel, 1986).

Fletcher (2001) summarized these studies and divided them into 3 categories.

1- Management characteristics

2- Organization characteristics and

3- External impediments or external incentive to engage in business abroad.

According to Fletcher (2001) Important management characteristics are included demographic such as age (Barrett, 1986) and education ( Fletcher, 1996); and those factors that involving aspects of international exposure such as country that a firm are born ( Barrett, 1986, Eriksson, Jahanson, Majkgard & Sharma, 1999), time spent living overseas ( Barrett, 1986; Fletcher, 1996), and frequency of business trips overseas (Barrett, 1986); having knowledge about international business knowing culture and international business practices (Fletcher, 1996) and international transactions experience (Fletcher, 1996) , structured approach to management-such as planning orientation (Cavusgil, 1984) or having a strategic or proactive approach (Dominguez & Sequeira, 1991) (Fletcher, 2001).

However this factors has been seen with outward perspective to internationalization , but it seems most of these factors can be considered as influential factors in Inward internationalization operations , as well.

Even though , by considering inward operations apart from outward one these factors can be re-organized in 2 section , some are more important in just outward such as frequency of business trips overseas, international transactions experience -because this item emanates from inward internationalization involvement-, and second , factors that are important in both like age, education, and other that have been mentioned.

The point is , management must not to have a negative view to inward operations as those who view inward operation like import as a case that decrease their trade balance.

Second , important organizational characteristics are included willingness to develop products for overseas markets (Chetty & Hamilton, 1993), technological advantage (Chang & Grubb, 1992), willingness to fund international activities (Evangelista, 1994), size as measured by employment (Chetty & Hamilton, 1993), willingness to research overseas markets (Cavusgil, 1984), having a focus on research and development (Chang & Grubb, 1992), and finally the nature of the product (Akoorie & Enderwick, 1992) (Fletcher , 2001) In which , getting technological advantage in just important in inward and somehow in cooperative operations and some are just for outward such as willingness to develop products for overseas markets , having a focus on research and development and finally the nature of the product .

ultimately some are common among them like willingness to fund international activities , size as measured by employment and willingness to research overseas markets .

Third, external impediments such as marketing activities by competitors in overseas markets and perception of higher risk in overseas markets including lack of continuity in overseas orders, tariff and non-tariff barriers (Bilkey, 1978), exchange-rate movements (Cavusgil, 1982), knowledge of the market and how it operates (Reid, 1983), issues related to agents and control including attitudes of foreign governments (Bello & Williamson, 1985), cost issues, lack of export training and government assistance (Bilkey, 1985) (Fletcher, 2001) in which except lack of export training that can be replace by inward operations training most of them can be considered as external impediment in inward .

Finally, the most important external incentives are availability of export incentives from government (Kaynak & Kothari, 1984), overseas demand factors such as competitiveness (Reid, 1984) and inquiries via industry bodies or government representatives overseas or information in publications.

Others include fall in domestic demand or excess capacity (Ogunmokun & Ng, 1998), and reduction in costs of production (Reid, 1983;).

(Fletcher, 2001).

In this category, as well , many factors are not fit with inward actions and just scarcely incentive from government , and reduction in cost of production can be viewed as external incentives.

Ultimately it seems according to SMEs characteristic that internationalization factors, as far as most of Small businesses are owner manager this factors are restricted to just management characteristic in addition to some other factors.

Thus most influence factors in inward internationalization of SMEs are age , education , time spent living overseas , frequency of business trips overseas , having knowledge about international business knowing culture and international business practices and access to technological advantage.

Thus I offer:

Proposition 6: Entrepreneur's experience and characteristics are most important determining factors in internationalization inward operation among SMEs.


Internationalization process , always, has been one of the greatest concern among firms that are pursuing growth and even other firms that just due to their lack resources or lack of market , involve in international market.

As well, governments, in order to improve balance of payments, in developed and developing countries, have paid specially attention to this subject.

(Welch & Luostarinen, 1993) .

In spite of importance of inward international operation, this subject has been neglected in scholars' researches, and there are not many articles and text book about it (Rodriguez, 2007).

Moreover, importance of inward international operation not only can be regarded solely due to its impact on firm performance and but also has significant influence on outward international operation.

In order to find how inward international operation influence on outward side, So, Many scholar, believed inward-outward connection in international life cycle of firm can help us in getting more understanding of how inward activities impact on outward activities (Holmund, Kock, & Vanyushyn, 2007).

Often, international inward operations are regarded before international outward operations and cooperative operations.

Which lead to this guess that international inward activities can make a base for successful outward foreign operations.

(Korhonen, 1999).

Active SMEs in international inward activities , always , have better knowledge about foreign market , and having stronger international vision make them to have more chance for having contact with them and this lead them to more successful operations in foreign countries.

(Welch & Luostarinen, 1993) .

By Inward international operations, specially acquiring external technology, SMEs can gain benefits such as shortening development time and avoiding development risks and by increasing their knowledge about technology improve their competitive advantages.

(Holmund, Kock, & Vanyushyn, 2007)

However, there is no single theory that captures the variety of options for internationalization (Rodriguez, 2007), but three major streams in theories and models for predicting inward internationalization can be imagined: stage model, networking and eclectic paradigm.

However others theories like innovation related can be regarded.

In order to gaining information for increasing commitment in international market, inward internationalization process can play important role.

Thus , underlying this mechanism of inward internationalization consistent with the Uppsala model (Ståhl, 2000) So that Network linkages, as a potential source of learning, can help SMEs to improve transfer needed skills and having access to raw materials, and novel technology and management know how.

(Sun, 2009).

The network theory develop a framework for understanding how inward operation help outward operations and finding what relations are there in inward -outward connections (Korhonen, 1999, Karlsen, Silseth, Benit, & Welch, 2003) ).

As far as Survival of the network depends on continuing exchange activities, inward internationalization not only in earlier stage of internationalization but also when outward internationalization have been stopped for while , can help SMEs for long term relation in international market (Korhonen, 1999).

According to eclectic paradigm SMEs whose are resource seeking and efficiency seeking (Barbosa & Eiriz, 2009)can use international inward operations.