Internet and Internationalization

Literature Review

December 9, 2013

The Digital Economy

The past decade has witnessed an exponential growth in the now called Digital/Internet economy. According to “The Seoul Declaration for the Future of the Internet Economy” (OECD, 2008), Internet Economy “covers the full range of our economic, social and cultural activities supported by the Internet and related information and communications technologies (ICT)”. Today, the Internet is an essential infrastructure of the OECD countries and an essential part for the development of these economies (OECD, 2013). The adoption of the Internet as a mean for trading has, in today’s economy, expanded to every industry. Many economic transactions, such as sales, distribution and consumption, happen on the Internet (OECD, 2013). A high-tech tertiary sector has emerged as the world migrates more of its business processes and personal life interactions to the Web, especially to Cloud computing, enabling a constant, fast-paced information exchange and new ways of making business.

According to Zekos (2005) there are two types of digital economies, namely (i) those who are cyber based companies, such as Google, who offers all their products and services online, and (ii) those who are online selling physical products. As the author points out, because software products can be distributed online, it represents a new retailing channel, making the traditional obsolete when it comes to products that don’t need necessarily to be physical

On Madhavaiah et al. (2012) findings, literature and companies adopting Cloud Computing strategies have still not found a common definition for it, but all of them have mentioned some of the 16 revealing keywords, such as ‘service delivery’, ‘hardware’, ‘software’, ‘pay-per-use’, ‘virtualization’, ‘abstraction’, ‘infrastructure’, and ‘delivery-on-demand’ that are common to every definition proposed. For this work, the definition provided by the authors will be used, where they propose that

“Cloud computing is an information technology-based business model, provided as a service over the Internet, where both hardware and software computing services are delivered on-demand to customers in a self-service fashion, independent of device and location within high levels of quality, in a dynamically scalable, rapidly provisioned, shared and virtualized way and with minimal service provider interaction.”

As the definition suggests, Cloud computing allows software companies to sell their services over the Web, enhancing the reach of new customers worldwide, reducing costs (Fan et al., 2009) and the necessary traditional interactive processes for a company to internationalize. The definition of Cloud Computing is, therefore, very close to the definition of Software as a Service (SaaS), since, generally speaking, they are the same.

According to Oliveira and Martins (2011), literature on the effects of the Internet in Portuguese companies is scarce. With this in mind, there is a necessity for a study that identifies the new wave of Internet use and how, specifically, software companies are using the Software as a Service (SaaS) model to reach new markets and new customers, when compared to the traditional model of exporting the software stored in a physical unit.

Literature has studied how software providers would use the Internet to expand their market reach to sell their On-premises Software - software stored in a physical unit, usually a CD-ROM, sold and installed in the customer’s computer -, but nothing has been  found on the distribution model and how these companies internationalize using the Internet as their market. Although it is becoming more predominant only now, this trend of using the Internet as the main platform to develop international business has been mentioned by Loane et al. (2004) when analyzing the internationalization of internet-enabled entrepreneurial firms.

IT companies, according to IDC Predictions 2013 Report (Gens, 2012) report, will adopt more SaaS as the Cloud services attract more customers to use these services. With the growth of always connected devices, such as smartphones, tablets and personal computers, opportunities to offer integrated SaaS will define the Portuguese software companies’ distribution models. Has confidence on using these online services grow (improved security, constant updated software) by users, software companies will adopt this distribution mode which allows them to deliver their software on a service level, instead of as uniquely as a product with the related services associated. The direct benefits of this model, of providing the software online, allows for users to access it anytime and anywhere in the world (Reuwer et al., 2013).

With Cloud computing, empirically, the concept suggests that software providers no longer have the need to export the software in a physical storage or have other necessities, such as customer support, by having to open a localized office in order to help in the installation and constant support, because the software is stored in an, and always available, external infrastructure. This automatically eliminates (almost) hardware specifications since the software runs online. This new paradigm of providing services digitally in constant connected devices is what the World Economic Forum (2013) called the digitization of economy. As the report shows, digitization has effects on firms’ business models, by lowering barriers of entry and of expansion, on how they communicate with their customers, how they globally manufacture their goods, and on how they automate certain operations. In Portugal, Portugal Telecom telecommunications operator is investing heavily in this area with the inauguration of its Data Center in Covilhã. The company is now connected to the world, offering the rent of data storage space and Software as a Service. This new platform provides Portuguese software companies with the necessary cloud computing environment (Simões, 2013) and opens doors for the internationalization.

The Internationalization via Internet

The study of the Internet as a mean for internationalization began in the mid 1990’s, with authors approaching how the use of the Internet could be used as a way to overcome certain barriers. Many argued that companies would be able to internationalize at an early phase of their own development (Bennett, 1997; Kuemmerle, 2002; Saarenketo et al., 2004; Moen et al, 2004), contrary to the stage theory (Uppsala model).

Due to the early limitations of the Internet in the 1990’s (low Internet penetration and slow connections), research was focused mainly on the advantages of the e-commerce platform as a new sales channel (Arenius et al., 2005; Gabrielsson & Gabrielsson, 2011). Because of their size and lower access to financial resources, Coviello and Munro (1997) found that international network relationships influence the internationalization and “the pattern market investment” in small software firms. The authors claim that this is common due to the need of externalizing their international activities with partners that are also knowledge-intensive focused firms and because of their resource constraints, typical in the software industry.

Since the Internet started spreading across the globe, research has been analyzing how this new paradigm link to existing internationalization theories in various subjects such as psychic distance (Yamin & Sinkovics, 2006) and export marketing (Gregory et al., 2007). Traditionally, psychic distance, amongst other characteristics, was a relevant factor in determining whether to enter a certain foreign market or not. A firm would have to take into account its experience and how it would be able to adapt to the differences in the new market. When firms create websites to promote and sell their services and products, they are automatically able to reach new markets and customers to those who have access to their website, independently of where they are in the world (Kotha et al., 2001). Using the Internet to reach new clients allows companies to reduce marketing communication costs and depend less on intermediaries (Loane, 2006).

Depending on the compromise level of the website, literature has distinguished between Default and Active Online Internationalization, where the first one does not have a clear intention to use the Internet as a mean for Internationalization, while Active Online Internationalization (AOI) has a clear intention of targeting foreign countries in order to conduct businesses using the online channel (Yamin & Sinkovics, 2006). As the authors have pointed out, one company that decides to launch a website is immediately at the reach of a worldwide audience and may receive orders from them, whether they are wanted or not; on the other hand, a company that launches an adjusted website, offering, for example, content in other languages it is trying to reach, has a clear intention in internationalizing to specific markets. According to them, Online Internationalization is when every transaction, either it is the exchange of goods, services, or money takes place in the virtual realm, between countries, opposed to the physical one. This has effects on the value chain, where online internationalization may refer to (i) the use of the Internet for marketing and sales purpose for physical products (Sahay & Gould, 1998), for example, cars and commodities, and (ii) where the products are themselves digital (music, software...), and the entire supply chain value is created solely online (Kotha et al., 2001).

Reuwer et al. (2013) findings suggest that, although the distribution model via the Internet reduces the physical distance, characteristics of the business implied that personal contact with the final customer was essential due to the complexity of the service provided. Network relationships are important for software companies internationalization and that the entry modes differ from market to market, therefore the stage theory receives few support from the authors (Moen et al., 2004). The Internet is taken into account and the authors mention a company that used AOI by establishing several websites for different markets. As the authors point out, these virtual sales offices can be regarded as “a new type of foreign entry form,” being the Internet a virtual distribution channel.

Software industry has many similar characteristics with other knowledge-intensive industry (Zain & Ng, 2006). The authors’ findings show that the analyzed Software companies, when entering international markets, were highly dependent on their network relationships. The reasons are concerned to the niche markets and low resources that these small companies have (Chetty & Stangl, 2010). The Internet is so crucial that Etemad et al. (2010) coined the term “internetization” to refer to the crucial role of the Internet on the internationalization of firms. The authors affirm that companies adopt a hybrid system of internationalization, one where the Internet plays a vital role, and other where it is only as a support system, and have rebuilt Johanson & Mattsson (1988) strategic positions framewok of the firm:

  • The early starter: low capabilities in using the Internet business models, such as e-commerce;
  • Lonely internetized firm: when a company is a pioneer in using new Internet related business models.
  • Internetized among others: the Internet augments the network relationship through the Internet among other companies;
  • The late starter: it falls behind in establishing network relationships via the Internet or to adopt new business models propelled by the Internet.

This bold move of re-adapting Johanson & Mattsson (1988) framework is worth of showing that the Internet is a network that has developed its own culture, which, in Etemad et al. (2010) own words “these internet-assisted functional and professional networks are likely to replace the institution of community center located in a location.” With its own culture, the location is the Internet itself, something intangible which is becoming more known as the Cloud.

According to Bell & Loane (2010), literature views on the Internet went from facilitator, to enabler, and finally to creator or driver. The first views the Internet has a way for enabling enterprises to have an online presence which could reach outer markets; the second views the Internet as a place where transactions may occur (e-commerce); and, the third, where all these things happen, but views the Internet as the place where one can be to create, enable new business and cooperate with others online.

For SME’s, with lower resources, the Internet provided them with the opportunity to overcome a major barrier that implied huge resources, namely the physical distance from home country to target market (geographical barrier) (Samiee, 1998; Freeman, 2006). This gave new opportunities for companies to learn more about foreign markets and to reach out to customers without having to invest heavily in foreign offices. This opportunity led to the advent of the E-commerce.

E-commerce provides an online channel for the selling of either physical or digital products. When products can be delivered solely online, such as music, books, video, among others, this is a truly electronic commerce, since everything, from the buying process to the consumption place can be done solely online (Liu, 2011). Distributing a product only online will have impacts on the traditional distribution channel (Khouja & Wang, 2010). The publishing industry is an exemple where products can be consumed in a physical or digitally form.

Jiang & Katsamakas (2010) have a study on the e-book industry, where they analyze how e-book retail business model affects the physical retail business model. Contrary to the publishing industry, software are already digital products, which can only be accessed when running on a hardware (computer, cell phone, ATM machines, etc.). However, the authors have pointed out that the selling of e-books from independent digital retailers may cannibalize the sales of physical books. On the software industry the question arises if the same may also happen, and what is the predominance of software distribution hubs, such as Apple’s Appstore, Google’s Play store, or Microsoft’s Windows Store, which sell, in a closed environment, apps (short for applications, which are software) for specific hardware (iPhone, Android Phones, Windows Phones, among others) that run their operating systems (iOS, Android, Windows, among others), when compared to open environments such as the World Wide Web (WWW) where anyone can access a webpage (unless it has regional restrictions) and have access to that software. These business models leads us to more questions:

Five By using a software distribution hub can a software company internationalize faster?

Six What are the barriers and constrains that these hubs offer?

Seven Do Software as a Service business’ model cannibalize the On-premises Software business?

An Internet based enterprise, such as an e-commerce, can internationalize faster than what the traditional theories suggest. The distribution channel is the Internet, therefore there is a faster flow of products from retailer to the consumer, cultural constrains are lessened and intermediaries can be avoided (Luo et al., 2005). However, as many authors have referred to the reduction of the psychic distance, Yamin & Sinkovics, (2006) relate this to the concept of ‘virtuality trap’, where the authors argue that companies may fall into the “trap” of solely relying their learning of their target markets on the virtual channel and missing vital information from the non-virtual interactions that may occur. The attraction of following an entire online strategy, for the software companies, is associated with the lower costs that the virtual platform offers. This allows for the firms to entirely manage their international operations from their initial location, since investment in activities and assets in the target markets is not necessary (market isolation). Plus, because the internationalization is made entirely online, the information flow between the home country and the targeted markets is constant, compressing the learning time of new foreign markets to enter (dilution of sequencing). This opens the opportunity to better assess market trends and forecast customers’ demands with the use of analytical tools and techniques.

From an entrepreneurial view, Reuber & Fischer (2011) have identified, from the internet-related international entrepreneurship literature, three “internet-related firm level resources”, namely online-reputation, online technological capabilities, and online brand communities and how these are crucial for successful online internationalization. They have come up with an understanding on how (i) an online reputation is important for an international competitive advantage amongst other competitors, by attracting investors and consumers’ interest, (ii) their internal knowledge intensive resources are important in order to exploit new opportunities ahead of others, and (iii) how online brand communities provide a more efficient and accurate flow of information vital for the company. For software companies that provide their software solely online, such as Google’s Google Documents (a text processor available for free), as users use this product they are sending, automatically reports on the usage and bugs that the company receives instantly, making it possible to correct errors and update the software more fast when compared to software that is sold and installed on the user’s computer. Moen et al., (2004) findings show that the Internet is the main tool used for the flow of information in a timely manner. However, if Internet access is constrained, businesses that solely rely on this model may have their offer limited.

Barriers to Internet-based Business Models

When compared to the traditional supply of goods, where good roads, airports and port systems are required, the delivery of intangible and digital products depend on other infrastructures, namely the Internet bandwidth available and electricity supply in the market host (Reuwer et al., 2013). Therefore, Portuguese firms delivering their digital products and services online will prefer markets with similar infrastructure development or will engage in hosting their digital products in the host markets’ servers (Pezderka & Sinkovics, 2011). Besides that, language and after-sales support, which are seen as barriers in e-commerce (Moudi, 2013), may also be barriers for service-related activities.

Samiee (1998), presented six structural constraints for the use of the Internet by exporters:

  1. All parties must have access to the Internet and computers;
  2. Internet access must be affordable;
  3. Access to equipment to access the Internet;
  4. Internet access regulations and censorship;
  5. Multi-language sites must be available;
  6. Each country culture will influence the Internet adoption.

Although the Internet reality is nowadays different from that one in the late 1990’s, these constraints still apply today. For example, the impossibility of providing certain products and services in foreign countries could be a barrier to the providers, since some countries may require for those digital products sold online to be hosted on-site servers. An example of that is the Brazilian project that is aiming that major United States based giant companies, such as Google and Facebook, host their data and services provided to Brazilian customers in data centers based on Brazilian soil, under Brazilian law supervision (Israel & Boadle, 2013). These constrains will affect a firms’ online market entry, since it could raise the costs of internationalization and affect the level of control one might have when hosting their services and data in foreign servers, leading to reliability problems such as the constant availability of the services online (Pezderka & Sinkovics, 2011).

Internet censorship in target countries will be a problem that can affect companies, because governments might want to block some external content. Famous examples of censorship include Iran (Lee, 2013), Pakistan (Rashid, 2012), North Korea (Zeller, 2006), and China (Kim & Douai, 2012) whose governments try to control the Internet freedom. The decision to access such markets, driven by the market size, enforces companies to comply the local laws, and may affect the positioning of these companies, from an ethical point of view (Kim & Douai, 2012). As no studies on Portuguese have been found, questions arise:

Eight To which markets do Portuguese SaaS companies internationalize to?

Nine Does the Internet censorship lead companies to enter with physical software instead?