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Introduction
Literature review is a very significant part of any research because the previous researches are critically reviewed and evaluated in this portion of the research. It helps to make a standard and benchmark on which the whole research will be conducted. Moreover, the literature review also helps to make a theoretical background on which the whole research will be based on. The critical analysis and evaluation of the past research helps the researchers to make a good understanding of the issues in the research. Normally, there are two types of variables in a research: dependent and independent variables. In this particular case, the push and pull factors are considered to be the independent factors, on the other hand the adaptation of the internationalization strategy is considered to be the dependent variable because the push and pull factors combine to affect the adaptation of internationalization strategies.
In this specific research, the literature review will be conducted on “An investigation into how push and pull factors combined to motivate a company to adapt an internationalisation strategy”. The previous research regarding the push and pull factors will be critically and analysed and it will also be investigated how these factors combine to inspire an organization to adapt an internationalization strategy. The developed benchmark and the standard will help to conduct the whole research and to evaluate the research findings.
The literature review will be conducted in such a way that will investigate the factors of the push and pull and at the conceptual framework, it will be shown that how the combination of the factors motivates a company to adapt the internationalization strategy.
2.1 Push and Pull factors:
Push factors lead a company to expand the business in a new market, on the other hand, pull factors attracts the companies in another country (Hughes, 2003). Push factors can be exemplified as saturation of the home market, economic difficulty in the domestic market, end of the product life cycle in the home market and the need for risk diversification (Kirkwood, 2009). These factors motivates a company to invest and open new business operation in another country. If the market is saturated in the home market, the companies will be interested to invest in a newer market to utilize the potentials (Sternquist, 1997). Pull factors refer to those factors that attract a company to invest in that country. If a company sees that the existing product has demand in another market, or it is finds that expansion of the business in another market would extend the product life cycle and increase the sales, then the company will be attracted at the factors which are called the pull factors (Folsom et al., 2012). The pull factors can be exemplified as increase sales in the host market, greater economies of scale, extended product life cycle, competitive advantage etc.
2.2 Internationalization Strategy:
Internationalization strategy refers to increasing the presence in the international market (Marschan-Piekkari & Welch, 2004). A company adapts the internationalization strategy when it perceives that there are more opportunity at the host countries and that the investment at that country would bring higher growth for the company (Bartlett & Ghoshal, 1999). A company may adopt standardization or localization strategy in case of expansion of the business in the foreign countries. Standardization strategy will help the company to sell the same products that is sells in the home market, as a result, it will experience economies of scale (Peng, 2001). The company will adopt the localization strategy if it finds that the products and services should be customized as per the needs and preferences of the customers of the host market. The approaches to enter a foreign market may be accomplished through exporting, franchising, foreign direct investment etc. (Killing, 2012). The selection of the strategy depends on the extent of control that the company wants to leverage to the host people.
2.3 Push factors leading to internationalization strategy:
2.3.1 Saturation of domestic market leading to internationalization strategy:
When a certain product is prevalent in the market among the customers, the situation is called the saturation of market (Kose, Otrok & Whiteman, 2003). When a product is produced by the companies, the company expect that the products will be sold in the market. But after a certain time, the market and the customers already has the product, in this case there is very minimum chances that the product will experience higher level of sales in the future (Dunning, 1999). This situation is called the saturation of the domestic market. In this situation, a company may want to experience higher level of sales and growth but staying in the domestic market will not result in fulfilment of the vision. This is possible if the company expands the business operation in foreign countries (Kehoe & Perri, 2002). The situation in the home market is called the push factor that motivates the company to adapt the internationalization strategy of expanding the business in the new market where the market potential and opportunities are still untapped. The push factor is inspiring the company to expand the business in the foreign market because of higher growth rate.
2.3.2 Economic difficulty in domestic market facilitating internationalization strategy:
A country may be negatively affected by the economic factors internal and external to the country. The most significant problems are unemployment, lower economic growth, government borrowing and some other external factors (Child & Tse, 2001). These problems are considered to be the push factors that motivate the companies to expand to the international market because the companies want to avoid the problems in the home market. One such economic difficulty is lower employment rate, when the employment rate is lower in the economy, the purchasing power of the people decreases and thus companies want to expand the business to other countries (Leung et al., 2005). Another example of economic difficulty is the economic growth of the country, lower economic growth means lower level of development. Therefore, when the economic growth rate is lower than expected, companies want to expand the market in newer countries that has potential. The level of government debt is another example of economic difficulty that motivates a company to take the way of internationalization strategy because when the level of debt increase, there is fewer number of long-term investment and thus the growth rate of the country decreases. These economic factors work as pushing factors motivates the companies to take the internationalization strategy for international expansion of the business because higher growth in the developing world will contributes to the development of the company (Stock & Watson, 2005).
2.3.3 Excess capacity leading to internationalization strategy:
Excess capacity is a situation where a company has more capability to serve the customers than the market offers. In this case, this is a significant pushing factor that motivates the companies to adapt the internationalization strategies (Ghauri, 2004). Excess capacity of a company lets itself think about the use of the capacity, but utilization of the excess capacity may not be possible in the home market. In this case the company becomes encouraged to expand to the global market through the internationalization strategies (Doh, 2005). The company becomes very much interested to expand the business to the international market because expansion would help the company to experience the economies of scale and economies of scope, the total sales would be increased and the risks would be minimized (Heathcote & Perri, 2002). Therefore, the company’s sales growth as well as the development would increase. Therefore, this is a significant pushing factor for adapting the internationalization of strategy. The needs and demands of the host market is another important factor that determine the success of the international expansion. If the offered products and services meet the demand of the customers, then the company will find it easy to expand the product in the host market, on the contrary, if the products fail to meet the needs of the customers at the host market, it will be difficult to expand the market.
2.3.4 Risk diversification
Investing in a single country and in a single market poses significant risk for any company because the business is not diversified and if there is a business failure for any reason, this will be a reason of calamity for the business (Schmidheiny, 1992). In this case, diversification of the business is a significant factor to reduce the extent of risk. Risk diversification refers to the taking those initiatives that diversify the business and thus the risk is diversified too. Therefore, if a business perceives that staying in a single market poses several risk, then the company wants to expand the business in the global market. Therefore, risk in the local market and the need for risk diversification are a prominent pushing factor to adapt the internationalization strategy (Govindarajan & Gupta, 2001). This enables the company to expand the business operation in the foreign market, if there is a problems or a risk in the home market, this risk can be avoided or minimized through other operation in the other countries. As a result, there has been tendency of the companies to adapt the internationalization strategies to expand the business to the host market.
2.4 Pull Factors leading to internationalization strategy:
2.4.1 Attractions of foreign market for increased sales:
One of the significant factor of adapting the internationalization strategy is that companies want more sales in the host market. Sometimes this happens that a company finds the home market very much saturated and it also finds that the host market still has very much potentiality (Thomas & Inkson, 2004). In this case the companies are very much encouraged to expend the business to the host market if the market demonstrate substantial potential. This types of situation in the host market that attracts the companies of another country are called the pulling factor that motivates a company to adapt the internationalization strategy (Nolan, 2001). All the countries are not self-dependent and some countries depend on the business of another country. As a result, a company having less sales in one country and getting the chance to sell more in another host country are highly motivated to take the internationalization strategy. Therefore, when there is chance to sell more in another country, the companies are very much motivated to adapt the internationalization strategy.
2.4.2 Economies of scale:
When the cost per unit reduces with the increasing amount of production, then the situation is called the economies of scale. Economies of scale is another important fact and this is a pulling factor because economies of scale may be possible in another country and this attracts the business to expand the operations (Dunning, 2006). When a company operates the business in the home country, the market is relatively small and thus production and selling, marketing activities are also small. In this case this is difficult to experience economies of in such small business operation (Christensen et al., 2007). But this is seen that there are market and production opportunities in other countries where the company may experience economies of scale because the total production cost will decline due to bulk production, total marketing cost will also decline due to targeting a huge market. These factors and opportunities at the host market pose significant opportunities for the company to expand the business in the international arena and to adapt the internationalization strategy (Engardio, 2007). From the above discussion this is seen that, opportunities and economies of scale, which are called the pulling factors, motivates the companies to adapt the internationalization strategy.
2.4.3 Exploiting competitive advantage:
Competitive advantage refers to the advantage that enables a company to serve and produce a certain product or service with more efficiency and advantage than the competitors (Vogel, 2008). A company operating in one country may face huge challenge and competitions because there are other companies offering the same products and services. In such a situation, this will be difficult for any company to excel in the market. But the company may find that the expertise that the company has in the home market are considered to be especial in another market. Therefore, the company will find that the advantage at the host nations attract it and thus competitive advantage at the host market is the pulling factor for the company (Hill, Richardson & McKaig, 2006). Thus the company adapts the internationalization strategy. If the company expands the business in the host market, it will be able to easily grow the market share because it has advantage over the market and the competition.
2.4.4 Extending the product life cycle:
Business in a country may see that a certain product has reached the end of the product life cycle, in this case this is difficult to grow the sales in the market because there are already more and newer products (Pohle & Chapman, 2006). But this is very common that the same product may not be available in another market where the same product is in high demand. The need for extending the product life cycle that is possible in another market is one of the potential pulling factor to adapt the internationalization strategy. When the product is produced and sold in the host market, the potential of the new market is fully optimized and thus the company grows and thus this is a significant contributor to adapt the internationalization strategy.