The role of uncertainty and risk in the decisions which international business firms make on the internationalisation process

Résumé du document

Uncertainty is what drives the business environment. Without uncertainty, there would not be entrepreneurship nor need for firms to develop, explore and evolve. But, with uncertainty comes risk and companies try to maximize their profits while minimizing the underlying risk of their activities. When developing a framework for integrated risk management, Miller (1992) identified three main sources of uncertainty: the general environment (political, fiscal and monetary, macro-economic), the industry (input market, product market, competitive) and the firm itself (operating, liability, R&D, credit, behavioral).

Because firms can more easily monitor and manage risk inherent to their internal uncertainty, the external environment is the major concern in the internationalization process. The main sources of uncertainty in the external environment can be detailed following the PESTEL framework: Political (role of governments), Economic (macro-economic factors), Social (cultures and demographics), Technological (innovations), Environmental ("green‟ issues) and Legal (legislative constraints). These factors are highly influential and shape international markets in various ways and models to quantitatively assess markets and countries attractiveness based on their related uncertainty have emerged.

Extraits

[...] These businesses have been labelled „international new ventures‟ (McDougall, Shane, & Oviatt, 1994) or „born globals‟ (Cavusgil, 1994). If we adopt an industry-based view, we find that the international process of a firm can be related to the industry in which it is operating. Thus, Root (1987) gives the example of high technology firms, for whom licensing may be the mode of first entry into international markets. To conclude, we have seen that we should consider risk and uncertainty as multi-dimensional characteristics which highly influence the internationalisation process of firms. [...]

[...] Nevertheless, uncertainty and risk management play an important role in the internationalisation process. However, the study should not limit its consideration to these two factors as other determinants shape international strategies. Since the end of the three models for explaining the internationalisation process have developed to form the basis for the theoretical framework. We already covered one of these theories above, the Uppsala model. The two other are the following: The transaction cost approach (TCA) (Coase 1939; Williamson 1979; Dunning 1980) sets the following paradigmatic question: upon deciding to enter a foreign market, should a firm do so through internalisation within its own boundaries subsidiary) or through some form of collaboration with an external partner (externalisation)? [...]

[...] Page 2 When going global, firms may use particular strategies to cope with the different levels of uncertainty and risk. These strategies can be either sequential or non-sequential (Osarenkhoe, 2009). One of the most famous internationalisation sequential models is obviously the Uppsala model (Johanson & Vahlne, 1977). Firms tend to intensify their commitment towards foreign markets as their experience grows. Uncertainty comes from foreign market ignorance and the core antecedents of the Uppsala internationalisation model are experiential learning and risk aversion. [...]

[...] Global strategy: An organizing framework. Strategic Management Journal Haner, F. (n.d.). Business Environment Risk Intelligence. Retrieved Mars 2012, from http://www.beri.com Johanson, J., & Mattsson, L.-G. (1988). Internationalization in industrial systems a network approach. Strategies in Global Competition , 287-314. Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, No 23-32. Knight, F. (1921). [...]

[...] The purpose of this essay is to critically appraise the role of uncertainty and risk in the decisions which international business firms make on the internationalisation process. We will see that, firstly, uncertainty and risk should be seen as multi-dimension characteristics rather than one-dimension determinants. Secondly, firms follow specific internationalisation patterns, depending on the level of uncertainty and risk attributed to foreign markets. Thirdly, this process is not only driven by uncertainty and risk but also by other factors. Uncertainty is what drives the business environment. [...]