AN APPLICATION OF EXPERIENTIAL LEARNING IN INTERNATIONAL TRADE AND FOREIGN DIRECT INVESTMENT Developments in Business Simulation and Experiential Exercises, Volume 9, 1982 AN APPLICATION OF EXPERIENTIAL LEARNING IN INTERNATIONAL TRADE AND FOREIGN DIRECT INVESTMENT1 Chaim M. Ehrman, The Wharton School, University of Pennsylvania 1 ABSTRACT Evidence on the value of experiential learning is mixed. In the area of international trade and investment, it is possible to isolate an effective instrument that will show the effects of experiential learning. The propensity to export and invest in manufacturing abroad is influenced by the degree of experiential learning of the firm’s decision makers in business and trade abroad. Experiential learning in this context of foreign trade is defined as top managers who have lived abroad and conducted business abroad for at least one year. Traditional learning is defined as transfer of knowledge of foreign trade through textbooks concerning the cultural habits and methods of doing business abroad without ever living for a significant period of time abroad. INTRODUCTION In reviewing the literature, one finds differing attitudes toward experiential learning. Kelley and Easton (1980) mention conflicting opinions on the effectiveness of experiential learning. One opinion cited empirical evidence that, given two competing teams, the “experiential learning” team did not do better than the “traditional learning” team. (Wolfe, 1975). Stokes and Stoner (1980), on the other hand, analyzed student perceptions in the use of simulation in MIS, and concluded that, “the simulation improved their analytical and decision making skills.” Kelly (1979) experimented with a didactic approach and an experiential approach in his personal management course. The student’s perception regarding experiential learning as opposed to traditional learning was that no additional knowledge took place over traditional learning. Another possible shortcoming with Stokes’ findings is one of bias due to the instructor. The teacher clearly can have more effect on the student’s perceptions of additional learning through experiential techniques than the learning methods. It is very possible that the instructor for the sections that used simulation in Stokes’ experiment were enthusiastic about their experiment and did a better job of teaching. IL is extremely difficult to isolate all extraneous inputs and measure the learning that is directly resulting from the experiential component alone. The problem we face is, how can we measure the effects from experiential learning. In this paper I would like to propose an area where it is possible to identify, quantify, and measure the learning that can be attributed to the experiential component. The international area of foreign direct investment and export activity may provide us with dependent variables that will react to experiential learning and not to traditional learning. Area of Analysis: Trade and/or direct investment abroad by a United States firm. Foreign direct investment is defined as an enterprise located in one country controlled by persons who are not its citizens (Caves, 1971, p. 2). In the area of foreign direct investment, a lot of work has been done determining why certain firms have a propensity to branch out abroad. Through an analysis of Swedish firms, a pattern has been identified for foreign direct investment as follows; Production facility abroad Export through subsidiary Export via independent agent No Export activity Although some Swedish firms may skip the independent agent phase, no firm went from no-export phase to the production abroad phase. (Johanson, Wiedensheim- Paul, 1975). This model is widely quoted for multinational development. (Bilkey, 1977, p. 40) One dependent variable that we may analyze is export activity of the firm. Another dependent variable that we may analyze is the establishment of a production facility abroad. These two variables are sequential in nature. Export activity alone can be necessary but not sufficient to cause manufacturing investment abroad. We are interested in defining “key internal company-related variables” that are associated with export behavior of the firm and with foreign manufacturing investment of the firm. Design The contrasted control group design is frequently used in social science research. We have Oi representing the ith recorded observation and X representing a treatment.” The experiment will analyze the difference between the observed value of the experimental group and the control group to determine if the treatment is effective. We want both experimental groups and control groups to be as similar as possible in all other aspects except the treatment, otherwise, the selection process may produce the differences between the control and experimental group even if the treatment is ineffective. We can illustrate the process as indicated in Figure 1. Figure 1 Experimental 01 02 X 03 Control 01 02 03 Measures are taken prior to the treatment at more than one interval. This additional measurement will allow us to detect differences between the two groups that are not attributable to the treatment (Cook and Campbell, p. 117). In our analyses of empirical studies, both control and experimental groups are homogeneous to a certain degree. Both are from a particular region, confronted 1 1 would like to express my appreciation to Dr. Morris Hamburg for his encouragement and guidance and to Dr. .1. Scott Armstrong for reviewing this article and for his constructive comments. 164 Developments in Business Simulation and Experiential Exercises, Volume 9, 1982 with the same tax system, governmental and environmental forces. Our 0~ focuses on whether or not export activity takes place. Our X value is whether top management has encountered experiential learning for foreign markets. Experiential learning is defined as learning which uses the learner’s experience as a base (Armstrong, 1977),In the context of export and foreign investment, “learners experience’ refers Lo having “experienced” foreign culture. This can include being born abroad, living abroad for sufficient time to experience cultural shock, and/or studying that foreign language in school. We will quote the results of studies analyzing firms in Wisconsin, Sweden and Great Britain. I will cite empirical findings on the affect of experiential learning in five areas; Export activity, awareness of opportunity abroad, sequence of country selection for exports, and location of foreign direct investors. 1. Export Activity and Experiential Learning Empirical Findings: Experiential learning may be a necessary factor for export activity. In the literature, we find that empirical investigations have been conducted to identify determinants of export marketing behavior generated from within the firm. Cavusgil and Nevin (1981) and Bilkey (1978) surveyed 816 manufacturing firms in Wisconsin to determine the probability of exports. The key internal or company-related variables that were found to be significant are: Expectations of management (regarding the effects of exports on the firm’s growth), Level of commitment to exports (market planning, policy toward exports, and systematic exploration), Differential firm advantage (firm’s size, technology, intensiveness and possession of a unique product), and Strength of managerial aspirations (for growth and for security of markets). The second variable, level of commitment to exports correlated very highly with whether or not top management had studied a foreign language while in school; whether or not they had lived abroad sufficiently long to have experienced cultural shock; and whether that experience was attractive (Langston and Teas, 1976). A key factor internal to the firm which will influence the firm’s propensity to export is, therefore, the presence of experiential learning. The presence of traditional learning will not give us a sufficient score on the “commitment” variable, and foreign export trade will not take place. Similarly, another empirical study on the export activity of Swedish firms concluded that experiential knowledge of the foreign market will directly determine the “commitment’ decision (Johanson and Vahlne, 1977). In this study, the distinction between experiential knowledge and acquired knowledge is explained. “Objective knowledge can be taught, experiential knowledge can only be learned through personal experience. Experience itself can never be transmitted, it produces a change-- frequently a subtle change--in individuals and cannot be separated from them.” (Penrose, 1966, p. 53; Johanson and Vahlne, p. 28). Success in exports and experiential learning may be interrelated. We find that experiential learning can be a significant factor for attaining knowledge of the foreign market. Many firms in export or foreign investment ignore this important component of experiential learning, and ultimately withdraw from further export activity. “Many firms consider internationalization a promising strategy. There are, however, numerous examples of firms which have started international operations without success. We think that the importance of the experience factor is often overlooked.” (Johanson and Vahlne, op. cit.). 2. Awareness of Opportunities Abroad and Experiential Learning Empirical Findings: A British study on the origin of multinational enterprises found international orientation to be important. International orientation refers LO people born and raised abroad or experienced living abroad for a significant time period. (Stopford, 1974, p. 18, also quoted in Wiedersheim-Paul, Olson, and Welch, 1977). The importance of this international orientation is the following: people with international orientation perceive and consider events occurring outside their own country, with greater depth and interest (Simmonds and Smith, 1968, also quoted in Wiedersheim-Paul, et al., op. cit). Thus, experiential learning will enable top management to identify opportunities abroad. 3. Sequence of Country Selection for Export Activity and Experiential Learning Empirical Findings: Export behavior can be viewed as a sequential learning process. Initially, countries that are psychologically close are trading partners. Companies that are based in the United States find Canada, England, and Australia as first-choice countries for export activity. A firm that has never explored concentrates on gaining basic export experience through trade with countries that are similar in language, culture and business practices (Bilkev, 1977). (Bilkey’s finding is based on forty three studies on export behavior of firms involving eleven countries.) 4. Foreign Direct Investment and Experiential Learning Empirical Findings: Focusing on the location of the production facility abroad, Davidson (1980) conducted an empirical analysis based on a survey of 180 multinationals from the inception to 1975, representing 70% of total foreign direct investment by United States enterprises. His analysis indicates two basic phases for multinational firms. In the “critical phase” (the time frame for gaining basic export experience as seen in Bilkey, [1977]), firms tend to focus on countries that have similar cultures (Canada, England). As firms become more experienced, the “uncertainty premium” applied to culturally-distant countries disappears and direct investment abroad is based on market potential, relative production and delivery costs, and investment climate. “The effect of corporate experience on location pattern is two-fold. Firms prefer nations in which they are already active. In addition, firms with extensive experience exhibit less preference for near, similar, and familiar markets. Markets that others may perceive as less attractive because of high uncertainty levels are given increased priority as 165 Developments in Business Simulation and Experiential Exercises, Volume 9, 1982 the firm’s experience rises. As firms gain experience, the location of foreign investment activity will increasingly represent an efficient response to global economic opportunities and conditions.” (Davidson, 1980, p. ~8). When the dependent variable is the location of the manufacturing facility abroad, experience of the firm in foreign markets will determine the ability of the firm to judge and evaluate the opportunities of foreign direct investment in countries that have a high “psychic distance” and are culturally dissimilar to the home country of operations. Conclusion The effects of experiential learning as opposed to objective learning are hard to quantify. In a classroom setting, there are many additional inputs that may color and distort the net effect of experiential learning, such as enthusiasm of the instructor. In the international application of experiential learning, empirical studies have isolated experience in foreign countries as a key internal company-related determinant for foreign export behavior and location of foreign direct investment for the multinational firm. The implications for a firm contemplating ventures abroad are clear: top management should be exposed to experiences in trading abroad. Managers-to-be in charge of foreign operations should be sent to countries that have a high probability of foreign trade and investment. A sabbatical abroad may be an appropriate means for encouraging top management to experience foreign trading techniques. Similarly, top management should be encouraged to train in foreign languages and gain experience abroad. The hiring of foreigners for positions with line authority in the area of foreign direct investment would be very appropriate. Finally, compensation and incentive plans could be structured to encourage experiential learning at the international level. REFERENCES [1] Armstrong, J. Scott. “Designing and Using Experiential Exercises, in Delozier et. al. Experiential Learning in Marketing and Education, University of South Carolina, 1977. [2] Bilkey, Warren J. “An Attempted Integration of the Literature on the Export Behavior of Firms,’ Journal of International Business Studies, Vol. 9, pp. 33-46. [3] Caves, Richard A. “International Corporations: The Industrial Economics of Foreign Investment,” Economics, February 1971. [4] Cavusgil, S. Tamer and Nevin, John R, “Internal Determinants of Export Marketing Behavior,” Journal of Marketing Research, February 1981. [5] Cook, Thomas D. and Campbell, Donald T., Quasi Experimentation (Chicago: Rand McNally, 1979). [6] Davidson, William H., “The Location of Foreign Direct Investment Activity: Country Characteristics and Experience Effects,’ Journal of International Business Studies, Fall, 1980. [7] Johanson, Jan and Vahlne, Jan-Erik, “The Internationalization Process of the Firm,” Journal of International Business Studies, Spring, 1977. [8] ______________and Wiedersheim-Paul, Finn, “The Internationalization of the Finn,” Journal of International Business Studies Spring, 1975. [9] Kelley, L., “An Experiential Evaluation of an Integrated, Didatic-experiential Approach,” Journal of Experiential Learning Science, Vol. 1, No. 1, Jan. 1979, pp. 34-44. [10] Kelley, Lane and Easton, Jeffrey, “Problems in Evolution of Experiential Learning in Management Education,” Developments in Business Simulation and Experiential Exercises, in Biggs and Fritzsche eds. Volume 8, 1980. [11] Langston, C. M., and Teas, R. K., “Export Commitment and Characteristics of Management,” presented at the Annual Meeting of the Midwest Business Association, St. Louis, MO., April 2, 1976. [12] Penrose, E., The Theory of the Growth of the Firm, Oxford, 1966. [13] Simmonds, K. and Smith, H., “The First Export Order,” British Journal of Marketing, Vol. 2, Summer, 1968. [14] Stokes, Robert L. and Stoner, Charles R., “Students’ Perceptions of the Use of a Computerized Simulation in Teaching Management Information Systems,” Developments in Business Simulation and Experiential Exercises, Vol. 8, 1980. [15] Stopford, J. M., “The Origins of British-Based Multinational Manufacturing Enterprises,” Business History Review, Vol. 48, 1974. [16] Wiedersheim-Paul, Finn Olson, Hans C. Welch, Lawrence S., “Pre-Export Activity, The First Step in Internationalization,” Journal of International Business Studies, 1977. [17] Wolfe, J., “A Comparative Evaluation of the Experiential Approach as a Business Policy Learning Environment,” Academy of Management Journal, Vol. 18, September 1975. 166 Table of Contents Volume 9, 1982 The Value of Conjoint Analysis in Enhancing Experiential Learning The Effect of Participation in a Collective Bargaining Simulation on the Expectations and Attitudes of Union and Management Representatives Conflict Resolution in Experiential Learning The Use of Simulation to Test Theories of Bargaining in a Business Context The Nominal Group Technique: A Vehicle for Improving Case Method Courses A Framework for Developing a Business Policy Case Produce Your Own Video Cases for Classroom Use: A Demonstration An Experiential Effect from Charismatic Encounters Nine Topic Oriented Mini Simulations: Descriptions, Purposes, and Observations A Hospital Simulator (HOSPSIM) A Report of the Model and Results Expected from Field Testing An Evaluation of SLIM (A System Laboratory for Information Management) An Experiential Exercise Introducing Students to the Role Ambiguity Faced by Salespersons The Advertising Research Project as an Innovative Experiential Learning Technique The Small Group Research Project: An Experiential Learning Approach for Undergraduate Marketing Research Students The Relationship of Cognitive Style Maps to the Preference for Experiential Learning of Undergraduate Students The Learning Style Inventory Debate Revisited: An Empirical Assessment fo the Construct Validity Issue Related to Experiential Learning Theory Conducting a Classroom to Facilitate Career Goal Attainment Corporation Executives' Ratings of Policy Learning Techniques The Generation and Application of Evaluation Criteria for Management Policy and Strategy Simulation Games Experiential Opportunities with Microcomputers Leading Students to Learning: The Teacher's Obligation An Experiment in Teaching Principles Courses: The Mini Debate Formula Developing Creative Thinking Through Experiential Learning Heuristic and Systematic Evaluation of Policy: Exercise in Decision Making A Case Study Approach for the Litigation Decision: Employing Decision Analysis to Determine When a Business Should Settle or Go to Court Learning Negotiation Skills Through Simulation Union vs. Management: A Simulation of Collective Bargaining in Action Inside the Black Box: An Analysis of Underlying Demand Functions in Contemporary Business Simulations A Review of Channel Exercises and the Description of a New Alternative SIMCON I: A computer Based Simulation Model for Evaluating Physical Distribution Strategies Involving Order Consolidation Toward Competency-Based Management Education: The Interpersonal/Communications cluster The Value of Pre-Teaching in Role Playing Some Effects of Positive Personal Reinforcement upon Socializing Students in an Experiential Learning Course Who Gains and Who Does Not from Experiential learning Toward the Ultimate Experiential Exercise, the Student View Simulating Professional Writing Experiences in the Classroom The Johari Window as a Measure of Personal Development Windows Into Management: A Participative Aid to Learning Get Your Faculty Involved A Pedagogical Approach to Business Gaming for the Commuter Student Super Service for Computer Game Administrators Expand the Role of Simulation with Creative Scenarios The Delivery, Administration, and Evaluation of an Executive Development Program Using a Total Enterprise Business Game An Application of Experiential Learning in International Trade and Foreign Direct Investment International Management: Building Bridges Analysis of a Business Simulation Exercise: Organizational Survival and Success The FALRIS Organizational Scavenger Hunt Trainee V. Trainee Subordinates' Evaluation of Experiential Learning Longitudinal Analysis of an Innovative Teaching Intervention Student Perceptions of Effective Teacher Behaviors Revisited Realism and Learning: The Evolution of a Management Game A Merger and Acquisition Simulation A Stock Market Investor Simulation Experiential Learning in Consumer Behavior: Perceptual and Attitude Change Exercises The Recycling Industry Problems of Women in Management: A Role Playing Exercise for a Course in Contemporary Organizational Problems Experimental Three Weekend Course: Empirical Results A Process for the Analysis and Development of Course Content and Instructional Methodology for Large Class Sections Problems Associated with the Assessment of Experiential learning Using the Multiple Choice Test Combining Lecture and Simulation Teaching Methodologies Qualitative Determinants of Team Performance in a Simulation Game The Effects of Different Team Sizes on Business Game Performance Comparison of Problem-Solving Technologies: A Free Simulation Approach Consistency in Business Games A computer Simulation of Personnel Selection Decisions Giving Praise Exercise Job Enrichment A Look at the Spoken and Written Word in Organizations A Pattern of Group Communication A New Generation in Business Simulation Adapting Mainframe Business Simulations to Min Computers File Access is the Essential Prerequisite to Time-Flexible and Interactive Computer Simulation A Microcomputer Simulation for Teaching Retail Location Strategy Blocks & Chips: A computer-Assisted, Geno-Typical Entrepreneurial Game Development of a Self-Paced Course in Business Statistics The Involvement of Student Bodies in the Teaching of Advanced Technical Concepts Systems Learning Sequence: An Experiential Course Module for Management Information Systems An Experiential Approach to Developing Managerial Competencies Communication Research, Inc. An Experiential Learning Activity Developed as a Practicum for a Course in Organizational Communication