Theories of internationalization: application in the retail sector

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To begin with, internationalization is one of the most important current trends in the retailing segment at present. This process is not new. However it has accelerated in the last two decades (Zentes et al, 2007). It was less than 30 years ago that almost all of the world's retail firms were pure national firms with a negligible share in foreign markets. That scenario has changed dramatically. Taking a look at the top 250 global retailers, almost all of them operate in numerous countries, having established business capacities in foreign markets (Deloitte report, 2013). To make it more explicit, among Top 250 retailing companies the average number of countries they operate in equals 9, and in case of Top 10 retailers - 16,7. It is noteworthy that distribution of retailers by regions and countries is not even. The United States, Europe and Japan remain the leading markets for retailing, and France among other European countries accounts for 5,2% of the global retail industry.

Moreover, today many retail companies earn a significant share of their revenue in international markets. Thus in the year 2011 Top 250 retail companies generated 29% of their revenues from foreign operations. To be more precise, over 50% of the sales of the German retailer Metro and over 80% of the sales of Dutch company Ahold come from the foreign operations (Hanf and Pall, 2009). As for French retailing companies, according to Deloitte data they gain 43% of revenues from operations abroad. It is also a fact worth paying attention to, that in accordance with Deloitte report, no one firm from these 13 French retailers are considered to be single-country operator, which means that internationalization is indeed a burning issue for these companies.

Table 1. Region/country profiles, 2011

Figure 1

When studying internationalization processes in retailing usually conventional theories of going international are applied. The most discussed among them in this context are Dunning's eclectic (OLI) paradigm, market imperfection theory by Hymer, the strategic behavior theory of Knickerbockers as well as Uppsala model.

To start describing the way how internationalization theories can be interpreted concerning the retail sector, it is necessary to point out main functions of retailing and explain what retail internationalization means in general (Hanf and Pall, 2009).

Retailing has several traditional functions such as:

· balancing the place differences between production and consumption: the production and consumption are often in different places. Retailing makes the products, which come from distance places, available for the consumers.

· balancing the time differences: the production and consumption happens often in different time (e.g. agricultural production, where the harvest is once a year and the consumption is continuous), retail balances this difference with storage.

· balancing the quantity differences: producers produce large quantities while consumers buy only small quantities.

· harmonizing the production and consumption pattern: retailers have contact with consumers they know their demand and preferences, they forward this information to the producers.

· financing: retailer often give credit to the consumers in order to bridge the gap between their demand and financial possibilities.

· sharing information: retailer give information about the product to the consumers.

· Promoting the products: retailers promote the products in their store (e.g. advertisement, discounts).

However today these functions are changing: some of them pass to processors and producers, some, on the contrary, pass to retailers from them.

Regarding the definition of retail internationalization it can be understood as a process of increasing involvement of retail companies in international operations, which can be inward and outward, and market seeking (sell of goods) and efficiency seeking (international sourcing). National retailers source also their products internationally. This form of internationalization is often overlooked.

The different motivations for internationalization are emphasized by Hollander who distinguishes among resource seeking and efficiency seeking internationalization (Hollander, 1970). This differentiation is also stated by Zentes who argues that retail internationalization has two elements: sourcing and selling (Zentes et al, 2007). Many studies focus on market seeking internationalization, though the efficiency seeking internationalization is equally relevant for the retail internationalization research. Coe and Hess argue that these inter linked and overlapping dimensions of internationalization namely store operation and sourcing, make retailing a fertile are for research (Coe and Hess, 2005). The significance of firm specific advantages as enablers of internationalization is a common characteristic of several theories. From the market imperfection, resource advantage and the eclectic theory we can conclude that retail companies should possess firm specific advantages in order to compete in international markets. These are regarded in many studies as superior management and the ownership of specific assets. For instance, ownership specific advantages are the volume buying, the superior supply chain management of Aldi and Wal-Mart and the private brands of discount retailers which can be easily exported and enhance competitive advantage in foreign countries. The capability to gather, store, monitor and analyses information is a key firm specific advantage (Dunning, 1988). As Mulhern argues the collection of consumer information is a key driver of the integrated retail management (Mulhern, 1997). The capability to adapt to new markets is also part of the knowledge of international retailers and therefore a significant resource (Dawson, 2007). According to the market imperfection theory the imperfect markets make possible for firms to exploit their competitive advantages. The imperfections in the goods markets, the increasing role of the brands give way to the private branded products of retailers. Imperfections on the factor markets stimulate the use of unique sourcing capacities. The imperfections as a result of economy of scale are regarded as one of the most important sources of competitive advantage of international retailers.

Brenda Sternquist applied the eclectic theory of Dunning for the retail business in order to explain the internationalization of US retail firms and developed the Strategic International Retail Expansion Model (SIRE) model (Sternquist, 1997). She intended to make a holistic explanation of retail internationalization. She emphasized the importance of the ownership advantages and distinguished between asset and transaction based advantages as Dunning, but explained the later differently. She argued that transaction advantages come from the way as things are done (e.g. volume buying). The transaction specific advantages were introduced by Dunning as advantages which are provided by the multinational in contrast to new or local companies. In retailing they can be interpreted as economy of scale and scope. International retailers invest in regional distribution centers which enable them to distribute the goods more efficiently. They can use private brands and marketing tools in many countries gaining economy of scope.

Similarly to the drivers and enablers business internationalization theories are used to discuss the direction of retail internationalization. Some authors argue that international retailers follow each other in new markets. One reason is that they associate the country invaded by the competitors as less risky. This observation corresponds with the strategic behavior theory. The direction of internationalization is often explained with the internationalization process model, arguing that companies start to invade countries with the less psychic distance, just later go in more distance countries. But this model is regarded in the literature as controversial. Sternquist accepts this thesis, while Vida and Fairhust discuss this question providing examples pro and contra. The examples of Vida and Fairhust include US retailers and other companies who started their expansion in Canada, UK and Australia, Australian firms expanding in New Zealand and European firms moving to the neighboring countries. On the other hand they cite Benito and Grispud who have found that the market selection of service and processing industries is a discrete choice rather than a cultural learning process (Benito and Grispud, 1993).

Some other authors argue also that psychic distance cannot explain nowadays the internationalization of retailers. Burt argues that market attractiveness has a more important role by the expansion of retailers (Burt et al, 2008). He states that the expansion of Ahold (Spain-1976, USA-1977, Czechoslovakia-1991, Portugal-1992 and Poland-1995), Delhaize and Carrefour can be explained better with the market opportunity (market pull) thesis than with a pre-planned strategy based on geographical or cultural proximity. One explanation of the problems associated to the internationalization process model is the changed business climate. In the 1970s, when the international process model was developed, the technological, political and socio-economic environment was clearly different. The spread of internet made communication, therefore information collection, control and coordination easier. The collapse of the Soviet Union, the Asian financial crises and the increasing purchasing power of the Eastern European consumers stimulated a new pattern of internationalization. Nowadays many firms penetrate distant markets without collecting experience in neighboring countries.

The globalization versus adaptation debate is also vital in retailing. Different retail strategies focus on these two elements differently. The procurement based strategies take advantage of the standardization of processes and the reduction costs (eg. Aldi), while market based approaches focus on adjustment, product diversification (eg. Carrefour). Retailers tend to concentrate on these aspects to different extent leading to strategies between the two extreme of production and market orientation.

The framework of Bartlett and Ghoshal can be applied to analyze the behaviour of retailers in international markets. Clearly there are retailers who replicate their business model in new markets without major modification developing international strategy. Examples are Aldi, Lidl and Wal-Mart. Some of them tend to take advantage of the convergence of consumer preferences and the economy of scale and scope and start to create global strategy. However the global integration of processes and management is not achieved yet, therefore there is no real global strategy in the retail business. Other retailers adjust more to the local conditions and have multinational strategy (e.g. Carrefour). But the subsidiaries are not fully independent and there is integration in the procurement processes (Bartlett and Ghoshal, 1989).

Therefore there is no real multinational strategy either. The global strategy can be observed often when the procurement processes are centralized but the subsidiaries have flexibility to select the assortment. The firm specific advantages of retailers influence their strategy. For example firms owning superior supply chain management skills and strong supplier relationships are likely to take advantage of the global integration and adapt an international orientation.

To sum up, internationalization in retailing as a specific industry surely has some differing features. However this process can be successfully studied within the framework of general theories concerning strategies of internationalization including traditional and more modern ones.

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List of references

1. Zentes J 2007; Morschett, D; Schramm-Klein Hanna (2007): Strategic Retail Management, Gabler Verlag, Wiesbaden.

2. Jon H. Hanf, Zsombor Pall “Is retailing really unique? Insights into retail internationalization using business theories”.

3. Hollander S.C. (1970): Multinational Retailing. East Lansing, MI: Michigan State University.

4. Coe N.M., Hess M. (2005): The internationalization of retailing: Implications for supply network restructuring in East Asia and Eastern Europe. Journal of Economic Geography, 449-473.

5. Dunning J.H. (1988): The eclectic paradigm of international production: A restatement and some possible extensions, Journal of International Business Studies, 19, pp. 1-31.

6. Mulhern F. (1997): Retail marketing: From distribution to integration International Journal of Research in Marketing 14.

7. Dawson J. (2007): Scoping and conceptualizing retailer internationalization, Journal of Economic Geography Vol. 7 No. 4:373-397; pp. 1-26.

8. Sternquist B (1997): International expansion of US retailers, International Journal of Retail & Distribution Management Volume 25 Number 8 997 pp. 262-268.

9. Benito G.R.; Gripsud G (1993): The expansion of foreign direct investment: Discrete rational location choices or a cultural learning process? Journal of International Business Studies 23 (3).

10. Burt S.; Davies K; Dawson J. and Sparks L. (2008) Categorizing Patterns and Processes in Retail Grocery Internationalisation, Journal of Retailing and Consumer Services, Vol. 15, 2, pp 78-92.

11. Bartlett C.; S. Ghoshal (1989): Managing Across Borders. The Transnational Solution. Harvard Business School Press, Boston MA.

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