How do digital information good characteristics influence pace and modalities of international market entry?

As it was described in the previous post - Internationalization of Internet Companies - digital goods providers can deploy different internationalization strategies. In this post I will use eBay as a case, describing its internationalization process compared to three literature-streams: internationalization theory, internalization theory, and research on international new ventures.

The Internet allows small firms to become international via a website, and communication costs are reduced in international operations.

Digital information goods differ from other goods in several dimensions and their economic implication. These are:

a. experience good character
b. transportation costs
c. (re-) production costs
d. product adaptation costs 

Digital information good providers seek to enter foreign markets through entry modes that allow

a. control for branding and advertising strategies, and
b. gaining access to locked-in customer bases.

Digital information good providers select foreign markets for entry that have high Internet penetration and advanced telecommunication infrastructure. They seek to penetrate foreign markets rapidly and through entry modes that allow them to benefit from economies of scale in production and demand (network effects), as well as industrial networks. By monitoring web pages customers visit, they can gather data on how much time they spend there and what fields they click on. This can produce customer data that is almost instantly available and allow rapid change of product specifications and features.

Digital information good providers enter foreign markets more rapidly than physical good providers because of the possibility of low learning costs and rapid post-entry product adaptations.

eBay’s internationalization process

eBay faced a significant amount of competition, especially as it expanded overseas, where local competitors have first mover advantages and strong local brands. In many countries, eBay had to compete with local companies who understand the local market better.

•The proposition that internationally expanding firms choose entry modes to minimize transactional risks that are associated with lacking foreign market knowledge (internalization theory) or controls for foreign country risks through limiting resource exposure until market knowledge has been acquired (internationalization theory) is partially supported at best. This begs the question for alternative explanations regarding entry choices during international entry.

•With regards to theoretical predictions, eBay's internationalization process started in countries with low psychic distance, but then rapidly moved to countries with greater psychic distance. So we are entitled to expect that the internationalization path of digital information good providers may be driven by other factors than those suggested in stage models of internationalization.

•In markets where strong local competitors have already created a market for online auctions, the possibility for eBay to take advantage of high share prices to enter the market via mergers may have been the best option to gain market leadership despite the obvious difficulties of entering a foreign market as a second mover.

•Psychic distance matters less when digital good providers select markets according to market size and growth, complementary infrastructure investments by others, competitor presence during market development, and availability of strong acquisition targets that allow brand leverage due to a large installed customer base. These factors may be far more important to achieve network effects and economies of scale in production in particular markets that the digital good provider might want to serve.

Source: Mahnke, Volker & Venzin, Markus: How do digital information good characteristics influence pace and modalities of international market entry?