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How international are you?

INTRODUCTION

To operate successfully across national borders, firms must effectively deal with partners, customers, and suppliers. In doing so, firms need to be introspective and ask the vital question of how internationalized are their operations? To answer such a question requires, among other things, measuring the degree of internationalization of the firm. Such a measurement provides useful information about where the firm is in term of expansion into foreign markets, how far it has to go to assume the appropriate level of internationalization, what opportunities can it exploit, and how should it prepare for such a journey.

MEASURE OF INTERATIONALIZATION

Globalization and vanishing national borders have influenced almost everything that we do, particularly in business. Business organizations are steadily going international. The responsibility of managing internationally can be satisfied if these firms assume a multinational/multicultural approach. Internationalization of a firm has two separate aspects. One aspect is geographic expansion and involvement in international business activities outside its own home market. This results in establishing operations in foreign lands and building relationships with diverse people (e.g. Sethi, Guisinger, Phelan, & Berg, 2003). The other aspect is a change in mentality of the firm's management, or cognitive change. Cognitive change could develop through acculturation and exposure to various cultural settings and diverse environments.

While the two aspects of internationalization are intertwined, the direction of relationship is not clear. Arguments have been presented in favor of treating internationalization both as independent or dependent variables. Scholars have wondered whether global mindset (cognitive change) follows strategy and structure (operational aspect) or vice versa (e.g. Murtha et al., 1998; Harveston et al., 2000; Nummela et al., 2004; Bouquest, 2005; Levy, 2005).

The first aspect of internationalization could be measured quantitatively. Geographic expansion and performance of subsidiary operations in other markets are reflected in reports, business documents, and financial data that could be used in constructing a measure of internationalization. To measure the second aspect, we need to construct a cognitive instrument that could capture the mentality of a firm's executives and their global perspective.

Operational Aspects

Internationalization has immediate and concrete effect on the operation of firm and its financial performance. When a firm expands abroad, its financial reports documents performance data related to business activities outside the home market, such as sales revenues, profits, assets size, number of employee, etc.

Information regarding firms' operations abroad is available publicly in the form of foreign direct investment (FDI). FDI is a n indication of ownership of assets abroad. The number of employees can be a proxy for size. Usually, FDI information includes financial data on sales revenues, profits, return on investment, economic value added, and the number of employees. Information on sales revenues, assets size, and number of employees abroad could be used to measure the degree of internationalization of firms.

To construct financial measure, a simple average of three ratios could be calculated. These include foreign sales, foreign assets, and foreign employees each divided by its respective total figures. We could include an additional item of foreign debt to this measure. The ability to tap into global finance is one of the advantages of internationalization of the firm. According to Agmon and Lessard (1977),MNCs have an advantage relative to single-country firms because of their ability to financially diversify. This diversification is the result of financial market imperfection. Global financial market offers opportunities that would not be available to domestic firms. Therefore, foreign debt ratio could be added to this measurement.

The first indication of a firm's involvement in international business is the portion of total sales that is attributed to foreign sales. The larger this portion, the more the firm has business commitment to markets other than its home market. However, as Ghemawat and Ghadar have mentioned (2006), it would be extremely useful to have data on value-added and use it instead of sales figures. But in the absence of value-added data, sales figures are a reasonable measure of the size of operations.

Internationalization of the firm has a range that starts with the simplest form of import/export and ends up with the most complex form, FDI. The simple forms of international business do not require maintaining assets in foreign countries. Investment commitment to foreign markets signifies deeper involvement in foreign markets and a higher degree of internationalization, Usually, the number of employees is a reasonable measure of the size of a firm. Of course, industry characteristics have an influence on this figure. For example, a heavy reliance on capital equipment and technology may reduce the need for more employees.

Borrowing from institutions outside the home country when foreign financing is cheaper provides an MNC with the added advantage and flexibility. Often, domestic firms are limited to local sources for financing their operations. However, MNCs have the option of global sources of finance. This flexibility is one of the advantages of MNCs over local firms. Following this line of reasoning, it appears that foreign debt could be a differentiating factor and a sign of internationalization. Based on the above reasoning, a formula could be constructed using the financial ratios as follows:

Financial Measure of Internationalization = ((foreign sales/total sales)+(foreign assets/total assets)+(number of foreign employees/total number of employees)+(foreign debts/total debts))/4.

Market Penetration or Market Engagement

Financial data provide a partial measure of operational involvement of a firm outside its own home market. It is possible that a firm has operations just in one market besides its own home market. Such a firm could be considered less internationalized than the one that has businesses in many countries. As Rugamn and Verbeke (2004) have suggested, the ultimate test to assess whether MNCs are global is their actual penetration of markets across the globe. Therefore, we need information on the number of markets in which a firm is engaged.

For constructing this ratio, the nominator could be the number of countries in which the firm operates. The denominator could be the total number of countries in world. However, such a measure would be very small. Besides, not all countries are involved in international business. For this reason, we could use an estimate for the denominator. North and South America can be assigned 10, Europe 30, Africa 10, Asia and Australia 20, or the total of 70. This number is very close to the reality of today's international business. According to The Wall Street Journal (Ferguson, 2010), in 2010, China, the fastest growing market in the world, had invested in 75 countries. Therefore, the following could be the market penetration ratio.

Market Peneteration = (number of countries in which the firm operates)/70.

The average summation of both ratios, financial ratio and market penetration ratio, would constitute a measure of internationalization of the firm. The closer this ratio to one, the more internationalized is the firm.

Cognitive Aspects

There appears to be an evolutionary pattern of internationalization that determines executives' state of mind. This state of mind has to do with the attitude of the executives toward foreign people, ideas, resources, relationships, and even adversaries and competitors, at home and abroad. This attitude not only differentiates between the executives of international and domestic firms, it also differentiates among executives of multinational companies (MNCs) (Begley & Boyd, 2003).

It has been proposed that the degree of internationalization of firms could be estimated by the mentality and orientation of the executives (Chakravarty & Perlmutter, 1985; Fatehi, 2008). Various states of mind or attitudes toward key decisions on products, functions and geography have been identified. These states of mind range from ethnocentric to geocentric mentality. The last phase, geocentric mentality, described below, has relevance to our discussion.

Internationalization and engagement in international business is a cognitive process (Murtha et al., 1989; Paul, 2000). Unless managers of MNCs have a global view and a geocentric mindset, they may not be successful in involving their firms in businesses outside their home market (e.g. Kefalas, 1998; Jeannet, 2000). They may not have had a geocentric mentality when starting their careers, but the success in a global firm necessitates the development of a corresponding mindset.

A number of scholars, among them Kedia and Mukherji (1999) and Baird (1994), have proposed that global managers need to develop a mindset that reflects the nature of their worldwide operations. Such a mindset takes an integrative position that weaves together a complex web of partnerships, alliances, and relationships that shifts and reconfigures over time as situations demand. The integrator is able to bridge differences between people, values, and cultures and manage them in a meaningful way. Successful global firms optimize the geographic portfolio of globally dispersed and integrated assets employed by their subsidiaries (Adler & Ghadar, 1990). This type of managing requires an integrative mindset or integrative geocentrism.

Heenan and Perlmutter identified integrative geocentrism as a decision making process whereby MNC managers assess decisions based on their impact on each country. Such a mindset takes a global systems approach to decision making (Kobrin, 1997). Integrative geocentrism takes the position that "Superiority is not equated with nationality.... Good ideas come from any country and go to any country within the firm" (Heenan & Perlmutter, 1979).

If international managers should possess integrative geocentric mentality, measuring this cognitive aspect would be very useful. Similar to the measurement of any psychological phenomenon, we could employ a questionnaire to gauge integrative geocentric mindset. In doing so, we could adopt from the studies by Kobrin (1994), Gupta and Govindarajan (2002), and Arora et al. (2004). These researchers used questionnaires to examine various aspects of internationalization of firms. Pertinent parts of these questionnaires could be modified to construct a cognitive measure of internationalization.

CONCLUDING REMARKS

This paper was an attempt toward the construction of a metric to measure the degree of internationalization of firms. Such a metric is useful to MNCs as a measure of internationalization progress. It is a road map directing the firms in their pursuit of expansion into global markets. The benefit of this measure is twofold. First, it could identify the necessary operational actions to expand internationally. Second, it results in an understating about the mindset of managers and points out the needed changes.

Often a question is posed about the international standing of a firm, either by the managers inside the firm or by others outside. Almost always, the answer to such a question is an opinion and a guess. By constructing an internationalization measure of the firm, such a question can be answered objectively. Of course, no claim is made that this metric is perfect. We anticipate, indeed we recommend, that other researchers provide improvements for it. We suggest that improvements can be made by developing a cognitive measure and by refining the operational component. As identified earlier, cognitive measure could be constructed by borrowing from existing studies that have identified various aspects of interntionalization. However, validity and reliability of such a measurement should be verified statistically. Similarly, operational measure, and particularly the market penetration aspect, could be refined.

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Kamal Fatehi, Kennesaw State University, U.S.A.

Gulnara Demeuova, University of International Business, Republic of Kazakhstan
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Author:Fatehi, Kamal; Demeuova, Gulnara
Publication:Competition Forum
Date:Jun 1, 2011
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