Introduction
Business processes require a serious approach to analysis and study to make companies’ work more efficient. Methods and theories have been developed to improve the work of managers. The internationalization of products and companies is a crucial element in an organization’s development.
Adapting to foreign cultures and policies is essential for the successful development of international business. Additionally, Hofstede’s cultural dimensions offer valuable insights into diverse cultures. Analysis of modern business processes is crucial for the development of companies and the effective growth of the economy.
The Major Risks of Internationalization for Firms
Internationalization can occur for various economic, internal, and external reasons. The most significant of these are the benefits of large-scale production and sales, the advantages of effective purchasing management, and the attraction of international sources of financing (Eduardsen & Marinova, 2020). Entering international markets is always associated with certain risks for the company. Barriers to trade, foreign laws, cultural differences, and political situations in different countries can create business risks (Srivastava & Rogers, 2021).
Since internationalization implies a more significant risk management effort than in a domestic market, one should also expect a higher return on investment. A company entering international markets must have sufficient resources to transfer its knowledge and skills to the desired region and the flexibility to adapt to the local game rules (Igwe & Kanyembo, 2019). Operational plans are based on decisions on the order and course of action the company will follow in the selected region.
Before taking any concrete steps, a company should thoroughly study the factors that determine the success of internationalization. According to Buzavaite and Korsakiene (2019), the study should include a proposal for organizing activities, financing, production, and supply, as well as an assessment of the availability of necessary resources. Success in foreign markets implies such a transition through the barrier of cultural differences, which provides an opportunity for one’s own corporate culture to receive additional incentives for its development. Statistics indicate that one out of five attempts to enter the international market results in failure (Li & Xiong, 2022). Mistakes are often made when acquiring a company and attempting to take control of it into one’s own hands.
For many firms, internationalization appears to be equivalent to exporting. However, there are fewer and fewer supporters of this point of view: the transfer of know-how, licensing, and franchising are constantly increasing their share in international operations; however, their volume is still relatively small (Gereffi, Bamber, and Fernandez-Stark, 2022). The primary factors influencing the internationalization process are the need to enter international markets, the growth of these markets, and the associated risks (Vuorio & Torkkeli, 2022).
Internationalization increases the company’s vulnerability since it is often necessary to operate abroad under increased risks. This is facilitated by unexpected environmental changes and the tightening of manufacturer obligations concerning consumers (Zainudin, Mahdzan, and Mohamad, 2021). Changes in the political situation often bring surprises for international companies and can sometimes even render such activities unprofitable.
During the company’s internationalization process, it is essential to continually monitor the risks that arise from this, collect the necessary information, and, based on the collected data, continually develop systems for managing emerging risks. It is also necessary to constantly update the available data and be aware of ongoing changes in legislation, technical standards, patent applications, and currency control measures (Thukral & Jain, 2021). These reasons can hinder a profitable business if the necessary measures are not taken.
Foreign Direct Investment (FDI)
The most critical factors determining the investment climate and attractiveness to foreign investors are. Hence, the geographical focus of FDI includes the state of the national economy, its development level, and the degree of economic and political stability. (Okafor et al. 2022). It is essential to note that in a market economy, international competitiveness, a key indicator, can change significantly, as reflected in FDI inflows.
Ratios are changing even among the leading countries for this indicator (Beazer & Blake, 2018). In determining the prospects for an influx of FDI in the United States, paying special attention to two more circumstances is necessary. The first is related to fundamental structural changes in the American economy aimed at forming a “new economy” based on information technology, which will significantly strengthen the United States’ position in global markets.
Generally, foreign direct investment must be significant and long-term to enable the foreign investor to establish effective control over the management of the invested enterprise. At the same time, the long-term investment in FDI limits the opportunities for investors to quickly exit the market, thereby increasing the interest of FDI-importing countries in them (Jadil et al., 2022). In many countries, the implementation of investment projects involving foreign capital is regulated by law.
In the structure of the executive power, there is typically a state body responsible for developing and implementing state policy in the field of investment. The primary focus of FDI is on international companies and financial groups (Schmid & Morschett, 2020). A merger or acquisition is a mandatory aspect of FDI contracts. This type of company has a significant advantage over others because it can operate in countries with diverse economies.
The simplest example of direct investment for an individual is buying real estate and then renting it out or reselling it at a higher price in the future. There is also the management of the investment object, with a direct dependence of the amount of profit on efficiency (Hu, T., Guo, and Ning, 2022). Moreover, it does not matter what kind of real estate a person purchases: an apartment, a house, or an office space.
After acquiring real estate, the profit will not flow into a pocket by itself; specific actions will be required (Jiang et al., 2022). For example, when renting out, it is necessary to prepare the property for its intended purpose. If it is a residential apartment, perhaps repair or redevelopment is needed. To discuss commercial real estate, specifically office space, it will be necessary to consider all the nuances of the business, manage all necessary communications, and establish specific conditions.
Hofstede’s Cultural Dimensions
Many scientists have studied the formation of corporate culture and its influencing factors. Sociologist Geert Hofstede was the first to identify the correlation between corporate culture, which is shaped by a company’s environment, and the absorption of national cultural features (Sent & Kroese, 2022). Accordingly, what gives excellent results in one country may be useless or even harmful in another.
According to Heydari et al. (2021), Hofstede surveyed IBM employees in the 1960s and 1970s. His research spanned 50 countries and later expanded to include even more organizations worldwide. This large-scale study became the basis for many international companies.
In his typology, Hofstede explored the cultures of different countries to form a general understanding of them, which he referred to as dimensions. Power distance depends on the expectations that employees have. If the culture has a low power distance, employees tend to show more initiative and are more likely to participate in decision-making. If the power distance is considerable, then a clear hierarchy is built, and employees’ actions are more dependent on the decisions of top management (Minkov & Kaasa, 2020).
In the least developed countries, the distance is, for the most part, strongly pronounced. However, in the developed countries, the situation is no longer so clear: it is insignificant in the Scandinavian states but also significant in France and Belgium (Rojo et al., 2020). The further north a country is located and the smaller its population, the more likely the power distance is to be small.
The opposite of individualism is collectivism, when people strive to achieve a common goal and are more dependent on the opinions of others. Collectivism is characteristic of many countries in Asia, Latin America, and Africa (Vollero et al., 2020). A feature of the collectivist culture is the desire to “save face.”
For example, suppose a Chinese person says he turned down a high-paying job because of the company’s values. In that case, his friends and acquaintances will publicly approve of him, even if it is clear to all of them that the real reason lies in his behavior or lack of competence.
Masculinity is a dimension that determines how gender roles are distributed in society. If the culture is masculine, then gender roles are clearly demarcated. Some professions are considered “male,” while others are considered “female,” and in society, purposefulness, self-confidence, and perseverance are highly valued (Noorbehbahani & Salehi, 2021). Masculinity is prevalent in countries such as the USA, Great Britain, Switzerland, Austria, Ireland, Germany, and Italy.
In feminine cultures, the roles of the sexes are similar, and modesty and care are valued. Such features are characteristic of the Scandinavian countries, Japan, the Netherlands, and France. For example, the Dutch may struggle to present themselves in the United States, as they value modesty and perceive American behavior as boastful and excessive.
Uncertainty avoidance is the next dimension that shows how prepared people are for unexpected situations and whether they value constancy and stability. According to Hofstede’s findings, this is associated with emotionality and, as a result, with more significant anxiety and susceptibility to stress. Uncertainty avoidance is also prevalent among people in Eastern and Central Europe, Latin America, Japan, and German-speaking countries (Rojo et al., 2020). However, in countries with a low uncertainty avoidance index, problems of a different order are observed: here, individuals are more likely to fall into boredom and despondency, exhibiting laziness and slowness. This situation is typical for Great Britain, Denmark, and Sweden.
Strategic Thinking or Long-Term Orientation is a measure of how forward-looking a culture is and whether people are capable of setting long-term goals. In countries with a long-term orientation, it is customary to act prudently and cautiously. This feature is exemplified by Japan, South Korea, and China (Fitzgerald & Rowley, 2018). Short-term orientation suggests that goals must be achieved quickly: this is typical of the United States, Canada, and Australia. Hofstede connects this aspect with religion: in East Asian countries with polytheistic religions, a long-term orientation dominates, while Christian and Muslim countries are mostly short-term oriented.
The Assumption, or Measure of Happiness, measures whether people of a particular culture can afford to enjoy life or restrain their desires. Countries with a high Assumption Index value tend to prioritize freedom of speech and the pursuit of happiness, which is where the concept of employee happiness originated. A high level of acceptance is typical for the countries of North and South America, Western Europe, and, in some cases, Africa. Restraint is inherent in Eastern Europe, Asia, and Muslim countries.
The Key Criticisms of the Study
Among the critical elements in this model, one can first think of a reasonably high level of stereotyping. Due to the individual characteristics of the psyche, the social environment, and the corresponding features of culture, each person perceives the world around them in their own way and is the bearer of a particular way of thinking and potential actions(Batra & Dhir, 2022). Because of this, it can be assumed that the Hofstede model is not ideal, as it does not adequately consider cultural diversity within countries.
In addition, the scientist paid little attention to calculating errors in his system, considering that representatives of one culture can behave differently (White III et al., 2020). Hofstede’s critics disagreed with the methodology he used. They pointed to the inconsistency of the sample with the task set, which was to identify the features of national characters.
Much of the criticism of this theory concerns the information collected. The results obtained have been criticized for being representative of the sample, as it is impossible to provide a comprehensive picture of the diverse cultures of employees within the same company. In addition, the survey results cannot be considered objective because the respondents’ cultural stereotypes were subject to correction under the pressure of corporate values imposed upon them (Lee & Yau, 2020). As a result, the national cultural characteristics of these individuals were distorted beyond recognition; thus, we are referring to cultural anomalies not shared by other representatives of the studied culture.
The Key Reasons for International Joint Ventures (IJV) Formation
A joint venture is characterized by several key features: the pooling of capital belonging to the individuals participating in it; joint financing and management to achieve a specific economic outcome; joint bearing of risks and losses, as well as joint participation in income and distribution. At the same time, great importance is attached to the fact that a joint venture is also an association of legal subjects, including individuals and legal entities, aimed at cooperation in a commercial venture for an extended period (Sajadi & Badreh, 2019).
There are several reasons for forming an international joint venture. First, a significant advantage is the reduction of initial financial risks and investments. This item is attractive because joint business allows managers to reduce the number of personal investments required from each shareholder for business development (Nippa & Reuer, 2019). This is one of the main reasons for creating an IJV, as it minimizes the risks of failure.
In addition, the studied type of doing business is distinguished by effective opposition to competitors and supervisory agencies. A newly created business is quite vulnerable, so many people prefer to form IJVs, as they are more resilient to external shocks (Pedada et al., 2021). A lone entrepreneur must rely only on their strength and acquaintances. The collective business allows for a combination of the acquaintances and connections of partners.
The combined business has several other important reasons for its formation. Sometimes, there are cases of entrepreneurial stagnation when a businessperson finds themselves at a dead end and does not see a possible way out of the situation. In this case, the opinion of a partner who is also interested in business development can help (Lee, Xiao, and Choi, 2021). Mutual psychological support is an essential factor in forming international joint ventures. Business is not without many stressful situations that can lead to stress for the entrepreneur and even provoke a state of depression (Wild, J., Wild, M., and Wild, K. 2022). Any failure negatively affects a person’s confidence, up to a state of depression. In such situations, the psychological feeling of support from partners is significant.
At the start of business, it is crucial to minimize financial costs. The most effective option in this case is to take on all the main functions together with a partner (Dong et al., 2019). Unlike an employee, an entrepreneur is always ready to work for free to establish and develop their business. However, it is not always possible to correctly and effectively solve emerging problems, while it is easier with a business partner.
Why Companies Would Divest Their Ownership from the IJV Subsidiary
The reason may be that it is more profitable for companies to diversify their business than to combine it. In this way, IJV creates a more advanced network management system, as each subsidiary has its own management (Hui, Hult, and Ketchen Jr., 2020). In addition, major companies often hold a non-controlling interest in the shares of their subsidiaries to simplify financial reporting and reduce expenses. Increasing the role of a foreign subsidiary can positively impact the direction’s development, which in turn will benefit the parent company.
Conclusion
Analysis of business concepts and theories for international companies is a crucial element of an organization’s activities. Managers are responsible for exploring ways their companies can better adapt to operating conditions in foreign markets. For the organization’s successful operation, it is essential to assess the risks associated with internationalization.
In addition, Hofstede’s theory is reviewed in the paper, which reveals that many factors contribute to the formation of organizational culture, depending on the external environment. In addition, the impact of foreign direct investment and its effects on a business are being clarified. In the context of analyzing international joint ventures, it can be concluded that they possess several significant advantages. The considered processes assume operations of the company in foreign markets.
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