[ 68 ]

Management Decision
35/ 1 [1997] 6878
MCB University Press
[I SSN 0021-1747]
Theori es of i nt ernat i onal t rade, f orei gn di rect
i nvest ment and rm i nt ernat i onal i zat i on: a cri t i que
Rober t E. Morgan
Cardiff Business School, University of Wales, UK
Const ant i ne S. Kat si keas
Cardiff Business School, University of Wales, UK
It has been suggested that
there is a lack of consensus
regarding the conceptual
domain of cross-national
studies. That said, the theo-
retical focus of such scholarly
activities has tended to
reect the multidisciplinary
nature of the eld. By far the
most signicant contributions
to knowledge in the area can
be sourced to the interna-
tional economics, interna-
tional nance and interna-
tional business literatures.
The proliferation in focuses
and the diversity of empirical
studies to be found within
these literatures demon-
strates the wealth of under-
standing which can be attrib-
uted to the research of cross-
national commercial activities
and operations. Attempts to
explicate many of the domi-
nant theories within these
literatures. Contributions to
the macro level of analysis
can be found in the form of
theories of international
trade. Alternatively, micro
theories engage the organiza-
tion, as the level of analysis
and consideration is given to
both the foreign direct invest-
ment decision process and
the pattern pursued by rms
in internationalization.
Discusses the nature and
emphasis of these theories in
the form of a critique.
Int roduct i on
At i ts most basi c, economi c exchange across
nati onal boundari es has taken place for sev-
eral centuri es. Further more, one of the most
remarkable aspects of economi c li fe nowa-
days i s the manner i n whi ch all countri es
i ncreasi ngly nd themselves an i ntri nsi c part
of the global economy (Auerbach, 1996). Such
i nterdependence means that the concepts of
the global villageand spaceship earth are
reecti ons of the fact that the contemporary
marketplace i s i nherently i nter nati onal.
Moreover, thi s new world order wi th i ts i nter-
nati onal competi ti on, economi c tradi ng blocs
(e.g., Associ ati on of South East Asi an
Nati ons, North Ameri can Free Trade Agree-
ment and the Si ngle European Market) and
global emphasi s, i s forci ng r ms towards a
new reali ty (Lazer, 1993, p. 93) whi ch
demands a global marketi ng i mperative.
Czi nkota et al. (1995) have descri bed thi s sce-
nari o as follows:
The global i mperative i s upon us! No longer
merely an i nspi ri ng exhortati on, thi nki ng
and acti ng globally i s the key pri nci ple for
busi ness success. Both the wi lli ng and the
unwi lli ng are becomi ng parti ci pants i n
global busi ness affai rs. No matter how large
or small your busi ness, ready or not, here
comes the world (p. 1).
I n attempti ng to explai n cross-nati onal com-
merci al activi ti es, the i nter nati onal econom-
i cs, i nter nati onal nance and i nter nati onal
busi ness li teratures have, over the last three
decades, wi tnessed si gni cant advances.
However, such i ntellectual developments
have fostered a diversi ty i n knowledge whi ch
i s evi dent from the range of extant theori es.
Thi s arti cle wi ll endeavour to explore many
of these theori es and provi de an understand-
i ng of the mechani cs and processes wi tnessed
i n cross-nati onal tradi ng activi ti es at both
macro and mi cro levels of analysi s. The di s-
cussi on i s presented by way of an exposi ti on
of i nter nati onal trade and economi c theory,
whi ch i s followed by a revi ew and assessment
of i nter nati onal trade theori es, forei gn di rect
i nvestment (FDI ) theori es and i nter nati onal-
i zati on theori es of the r m. The majori ty of
the presentati on i s given to a di scussi on of
the thi rd set of theori es whi ch i s beli eved to
be an area where most contemporary
theoreti cal controversy exi sts. Further more,
si gni cant renewed i nterest i n patter ns of
r m i nter nati onali zati on has recently ari sen,
whi ch suggests a revi ew and assessment of
current knowledge may be ti mely.
Int ernat i onal t rade and economi c
t heory
The i mportance of i nter nati onal trade to a
nati ons economi c welfare and development
has been heavi ly documented i n the econom-
i cs li terature si nce Adam Smi ths (1776) pi o-
neeri ng i nqui ry i nto the nature and causes of
the wealth of nati ons. The rati onale underly-
i ng thi s relati onshi p suggests that economi es
need to export goods and servi ces i n order to
generate revenue to nance i mported goods
and servi ces whi ch cannot be produced
i ndi genously (Coutts and Godley, 1992;
McCombi e and Thi rlwall, 1992).
Probably one of the broadest i ndi cators of a
nati ons economi c strength can be gauged
from i ts gross domesti c product (GDP), as thi s
measure i s an esti mate of the value of goods
and servi ces produced by an economy i n a
given peri od (Tayeb, 1992). The noti on that
i nter nati onal trade can i nuence GDP has
been explored by several economi c theori sts
(Mari n, 1992; Mei er, 1984) and culmi nated i n
the export-led growth thesi s. The tenet under-
lyi ng thi s volume of research i s that as export
sales i ncrease, other thi ngs bei ng equal, the
GDP of a nati on wi ll ri se and provi de a sti mu-
lus to i mproved economi c well-bei ng and
soci etal prosperi ty. The way i n whi ch thi s
relati onshi p can be i nterpreted suggests that
export perfor mance has a sti mulati ng effect
throughout a countrys economy i n the for m
of technologi cal spi llovers and other related
favourable exter nali ti es (Mari n, 1992). Export
activi ti es may exert these i nuences because
exposure to i nter nati onal markets demands
i mproved effi ci ency, and supports product
and process i nnovati on activi ti es, whi le
i ncreases i n speci ali zati on encourage prof-
i table exploi tati on of economi es of scale
(Temple, 1994). Thus, the export-led growth
thesi s predi cts export growth wi ll cause
economy-wi de productivi ty gai ns i n the for m
of enhanced levels of GDP.
Another mechani sm through whi ch
exports are connected wi th sustai nable rates
[ 69 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
of economi c growth i s the balance of pay-
ments. The balance of payments constrai nt
can be expressed as follows. I n general, eco-
nomi c growth creates a vari ety of demands
whi ch cannot be sati sed solely by domesti c
output. Therefore, beyond a certai n level, the
faster the rate of domesti c demand, the more
accelerated the growth of i mports (Abdel-
Malek, 1969). However, any excess of i mports
over and above exports requi res the trade
deci t to be nanced by ei ther government
borrowi ng from overseas or drawi ng on the
economys stock of assets. I f thi s si tuati on i s
sustai ned, i t becomes vi tal for the home gov-
er nment to address the i ssue of such a trade
i mbalance (de J onqui eres, 1994; Hor nby,
1994).
Int ernat i onal t rade t heori es
I nter nati onal trade i ssues generally pose
three types of questi ons for economi sts. The
rst i s based on explanati ons of trade ows
between at least two nati ons. The second
refers to the nature and extent of gai ns or
losses to an economy. Fi nally, the thi rd i ssue
concer ns the effects of trade poli ci es on an
economy. Most theori es of i nter nati onal trade
are dedi cated to the rst questi on, and atten-
ti on wi ll now tur n to theoreti cal responses to
such an i ssue i n the for m of: classi cal trade
theory; factor proporti on theory; and product
li fe cycle theory.
Classi cal trade theory di ctates that the extent
to whi ch a country exports and i mports
relates to i ts tradi ng patter n wi th other
nati ons. That i s, countri es are able to gai n i f
each devotes resources to the generati on of
goods and servi ces i n whi ch they have an
economi c advantage (Ri cardo, 1817; Smi th,
1776). Therefore, classi cal trade theory effec-
tively descri bes the scenari o where a country
generates goods and servi ces i n whi ch i t has
an advantage, for consumpti on i ndi genously,
and subsequently exports the surplus. Conse-
quently, i t i s sensi ble for countri es to i mport
those goods and servi ces i n whi ch they have
an economi c di sadvantage. Economi c advan-
tages/ di sadvantages may ari se from country
di fferences i n factors such as resource
endowments, labour, capi tal, technology or
entrepreneurshi p. Thus, classi cal trade
theory contends that the basi s for i nter na-
ti onal trade can be sourced to di fferences i n
producti on characteri sti cs and resource
endowments whi ch are founded on domesti c
di fferences i n natural and acqui red economi c
advantages. However, over and above such a
general i nsi ght i nto i nter nati onal trade, clas-
si cal trade theory i s unable to offer any expla-
nati on as to what causes di fferences i n rela-
tive advantages.
The factor proporti on theory, i n contrast to
classi cal trade theory, i s able to provi de an
explanati on for the di fferences i n advantage
exhi bi ted by tradi ng countri es. Accordi ng to
thi s theory, countri es wi ll tend to generate
and export goods and servi ces that har ness
large amounts of abundant producti on fac-
tors that they possess, whi le they wi ll i mport
goods and servi ces that requi re large
amounts of producti on factors whi ch may be
relatively scarce (Hecksher and Ohli n, 1933).
Therefore, thi s theory extends the concept of
economi c advantage by consi deri ng the
endowment and costs of factors of producti on.
Both of these theori es have been shown to
be deci ent i n explai ni ng more recent pat-
ter ns of i nter nati onal trade. For example, the
1960s wi tnessed si gni cant technologi cal
progress and the ri se of the multi nati onal
enterpri se, whi ch resulted i n a call for new
theori es of i nter nati onal trade to reect
changi ng commerci al reali ti es (Leonti ef,
1966). At that ti me, the product li fe cycle
theory of i nter nati onal trade was found to be
a useful framework for explai ni ng and pre-
di cti ng i nter nati onal trade patter ns as well
as multi nati onal enterpri se expansi on. Thi s
theory suggested that a trade cycle emerges
where a product i s produced by a parent rm,
then by i ts forei gn subsi di ari es and nally
anywhere i n the world where costs are at
thei r lowest possi ble (Ver non, 1966, 1971;
Wells, 1968, 1969). Further more, i t explai ns
how a product may emerge as a countrys
export and work through the li fe cycle to
ulti mately become an i mport (Table I ). The
essence of the i nter nati onal product li fe cycle
i s that technologi cal i nnovati on and market
expansi on are cri ti cal i ssues i n explai ni ng
patter ns of i nter nati onal trade. That i s, tech-
nology i s a key factor i n creati ng and develop-
i ng new products, whi le market si ze and
structure are i nuenti al i n deter mi ni ng the
extent and type of i nter nati onal trade.
Whi le these theori es are i nsi ghtful (Table
I ), a number of moder n i nter nati onal trade
theori es have emerged recently whi ch take
account of other i mportant consi derati ons
such as gover nment i nvolvement and regula-
ti on. However, i t remai ns that these theori es
make several assumpti ons whi ch detract
from thei r potenti al si gni cance and contri -
buti on to i nter nati onal busi ness. For
i nstance, they assume that: factors of produc-
ti on are i mmobi le between countri es; perfect
i nfor mati on for i nter nati onal trade opportu-
ni ti es exi sts; and, tradi ti onal i mporti ng and
classical trade theory effectively describes the scenario where
a country generates goods and services in which it has an
advantage, for consumption indigenously
[ 70 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
exporti ng are the only mechani sms for trans-
ferri ng goods and servi ces across nati onal
boundari es (Bradley, 1991).
Forei gn di rect i nvest ment t heori es
Certai n theori sts have attempted to address
li mi tati ons of i nter nati onal trade theori es
under the rubri c of FDI . A selecti on of
these wi ll now be di scussed whi ch concer n
market i mperfecti ons theory, i nter nati onal
producti on theory and i nter nali zati on theory
(Table I ).
The market i mperfecti ons theory states
that r ms constantly seek market opportuni -
ti es and thei r deci si on to i nvest overseas i s
explai ned as a strategy to capi tali ze on cer-
tai n capabi li ti es not shared by competi tors i n
forei gn countri es (Hymer, 1970). The capabi li -
ti es or advantages of r ms are explai ned by
market i mperfecti ons for products and fac-
tors of producti on. That i s, the theory of per-
fect competi ti on di ctates that r ms produce
homogeneous products and enjoy the same
level of access to factors of producti on. How-
ever, the reali ty of i mperfect competi ti on,
whi ch i s reected i n i ndustri al organi zati on
theory (Porter, 1985), deter mi nes that rms
gai n di fferent types of competi tive advan-
tages and each to varyi ng degrees. Nonethe-
less, market i mperfecti ons theory does not
explai n why forei gn producti on i s consi dered
the most desi rable means of har nessi ng the
r ms advantage. Dunni ng (1980) and
Fayerweather (1982) have addressed thi s i ssue
and developed what can be descri bed as i nter-
nati onal producti on theory.
I nter nati onal producti on theory (Table I )
suggests that the propensi ty of a rm to i ni ti -
ate forei gn producti on wi ll depend on the
speci c attracti ons of i ts home country com-
pared wi th resource i mpli cati ons and advan-
tages of locati ng i n another country. Thi s
theory makes i t expli ci t that not only do
resource di fferenti als and the advantages of
the r m play a part i n deter mi ni ng overseas
i nvestment activi ti es, but forei gn gover nment
acti ons may si gni cantly i nuence the pi ece-
meal attractiveness and entry condi ti ons for
r ms. A related aspect of thi s forei gn i nvest-
ment theory i s the concept of i nter nali zati on
whi ch has been extensively i nvesti gated by
Buckley (1982, 1988) and Buckley and Casson
(1976, 1985).
I nter nali zati on theory (Table I ) centres on
the noti on that r ms aspi re to develop thei r
own i nter nal markets whenever transacti ons
can be made at lower cost wi thi n the r m.
Thus, i nter nali zati on i nvolves a for m of verti -
cal i ntegrati on bri ngi ng new operati ons and
activi ti es, for merly carri ed out by i nter medi -
ate markets, under the ownershi p and gover-
nance of the r m. Much of thi s research,
however, adopted the multi nati onal enter-
pri se as the uni t of analysi s and excluded the
process that preceded that level of i nter na-
ti onal development. I n response, a more
dynami c, process-based perspective was
Tabl e I
Selected theories of international trade and foreign direct investment
Theory t ype Theoret i cal emphasi s Credi t ed wri t ers
Int ernat i onal t rade t heori es
Cl assi cal t rade t heory Countries gain if each devotes resources to the production of goods and services Ricardo (1817)
in which it has an advantage Smith (1776)
Fact or propor t i on t heory Countries will tend to specialize in the production of goods and services that Hecksher and Ohlin (1933)
utilize their most abundant resources
Product l i fe cycl e t heory The cycle follows that: a countrys export strength builds; foreign production Vernon (1966, 1971)
(for i nt ernat i onal t rade) starts; foreign production becomes competitive in export markets; and Wells (1968, 1969)
import competition emerges in the countrys home market
Forei gn di rect i nvest ment t heori es
Market i mper fect i ons t heory The rms decision to invest overseas is explained as a strategy to capitalize on Hymer (1970)
certain capabilities not shared by competitors in foreign countries
Int ernat i onal product i on t heory The propensity of a rm to initiate foreign production will depend on the specic Dunning (1980)
attractions of its home country compared with resource implications and Fayerweather (1982)
advantages of locating in another country
Int ernal i zat i on t heory Internalization concerns extending the direct operations of the rm and bringing Buckley (1982, 1988)
under common ownership and control the activities conducted by intermediate Buckley and Casson
markets that link the rm to customers. Firms will gain in creating their own (1976, 1985)
internal market such that transactions can be carried out at a lower cost within
the rm
[ 71 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
called for whi ch demanded recogni ti on of the
i nter nati onali zati on of the r m. Nowadays,
publi shed research on i nter nati onali zati on
for ms a si gni cant part of the i nter nati onal
busi ness li terature.
Int ernat i onal i zat i on t heori es of t he
rm
Concept of i nt ernat i onal i zat i on
As was recorded i n a semi nal arti cle by Hayes
and Aber nathy (1980), the trade deci t perfor-
mance of a nati on cannot always be explai ned
by macro-economi c phenomena. I t needs to
be recogni zed that the role of the entrepre-
neur plays a part i n explai ni ng the i nter na-
ti onal tradi ng activi ti es of a nati on. Given
that an economy may compri se several i ndus-
tri es accommodati ng an array of r ms, i t
appears reasonable that the role of deci si on
makers wi thi n such organi zati ons can, collec-
tively, provi de a substanti al contri buti on to
economi c perfor mance. I n contrast to the
i nter nati onal trade and FDI theori es, out-
li ned above, i nter nati onali zati on theori es
endeavour to explai n how and why the rm
engages i n overseas activi ti es and, i n parti cu-
lar, how the dynami c nature of such behav-
i our can be conceptuali zed.
Even though the ter m i nter nati onali zati on
has been used extensively, few real attempts
have been made to provi de an operati onal
deni ti on of i ts meani ng. Pi ercy (1981) and
Tur nbull (1985) descri be i nter nati onali zati on
as the outward movement of a r ms opera-
ti ons. However, thi s expressi on could be
embelli shed on to descri be i nter nati onali za-
ti on as the process of i ncreasi ng i nvolve-
ment i n i nter nati onal operati ons (Welch and
Luostari nen, 1988, p. 36). Thi s latter deni ti on
takes account of both the i nward and outward
growth of i nter nati onal r ms. For example,
the growth of countertrade, i n the for m of
barter or buy-back arrangements, clearly
i llustrates the way i n whi ch outward growth
i s related to i nward growth (Huszagh and
Huszagh, 1986; Khoury, 1984). The meri ts of
Welch and Luostari nens (1988) deni ti on
have been recogni zed by others (Young, 1990)
because i t i s a worki ng explanati on whi ch i s
conci se and readi ly i nterpretable. Further-
more, i t i s suffi ci ently holi sti c to take account
of the multi ple factors associ ated wi th i nter-
nati onal expansi on.
The i nter nati onali zati on process of r ms
has been subject to wi despread research
attenti on and empi ri cal i nvesti gati on
(Anderson, 1993). Welch and Luostari nen
(1988) have comprehensively revi ewed thi s
li terature and concluded that there i s a
wi de range of potenti al paths any r m mi ght
take i n i nter nati onali sati on (p. 43). An array
of approaches and perspectives have con-
tri buted to the contemporary understandi ng
of r m i nter nati onali zati on. For example,
economi c, econometri c, organi zati onal,
marketi ng and manageri al models have been
for mulated whi ch help to explai n the struc-
tural and behavi oural i ssues underlyi ng
i nter nati onali zati on theory (Dalli , 1994).
However, despi te such a profusi on of i nterest
from such scholars one approach has devel-
oped a si gni cant body of li terature on the
subject of i nter nati onali zati on: export devel-
opment.
Given that export activi ti es of the r m
perpetually change, the mode of export
behavi our, qui te naturally, tends to be devel-
opment (Albaum et al., 1989) and a large
number of studi es have adopted thi s frame of
reference i n studyi ng r ms dynami c and
evoluti onary process of i nter nati onali zati on.
I t has been contended that the li terature con-
cer ned wi th i nter nati onali zati on, from an
export development perspective, i s probably
one of the most advanced and mature areas of
knowledge i n i nter nati onal busi ness (Haar
and Orti z-Buonana, 1995). Thi s i s pri mari ly
because these studi es synthesi ze many of the
di saggregated concepts i n the area and
devote thei r attenti on to challengi ng ques-
ti ons such as: what factors deter mi ne the
advancement of the r m along the path of
i nter nati onali zati on; what are the phases
whi ch characteri ze the exporti ng process;
and what are the i ngredi ents of a typi cal
export behavi our patter n.
I n order to appreci ate the parti cular
research efforts i n thi s area, the followi ng
secti ons wi ll revi ew two promi nent
approaches for descri bi ng i nter nati onali za-
ti on theory i n the context of exporti ng. These
two approaches have been characteri zed as:
the Uppsala i nter nati onali zati on model and
related hybri d models; and i nnovati on-
related i nter nati onali zati on taxonomi es.
Uppsal a i nt ernat i onal i zat i on model and
rel at ed hybri d model s
Much of the extant li terature on i nter nati on-
ali zati on has been i nspi red by the work of
Scandanavi an researchers who are collec-
tively referred to as the Uppsala School (e.g.
J ohanson and Vahlne, 1977; J ohanson and
Wi edershei m-Paul, 1975). Thi s li terature
generally suggests that the process of i nter-
nati onali zati on i s founded on an evoluti onary
and sequenti al bui ld-up of forei gn commi t-
ments over ti me.
the growth of countertrade, in the form of barter or buy-back
arrangements, clearly illustrates the way in which outward
growth is related to inward growth
[ 72 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
J ohanson and Wi edershei m-Paul (1975)
studi ed the establi shment chai ns of four large
Swedi sh multi nati onals and found that the
growth patter ns of these r ms were di sti n-
gui shed by a number of small i ncremental
changes whi ch could be descri bed as an i nter-
nati onali zati on process. They i denti ed four
steps wi thi n thi s process whi ch were di sti n-
gui shed by those r ms wi th: no regular
export activi ti es; export activi ti es vi a
i ndependent representatives or agents; the
establi shment of an overseas subsi di ary; and
overseas producti on/ manufacturi ng uni ts.
To explai n the concept of i ncremental i nter-
nati onali zati on further, J ohanson and Vahlne
(1977) rened thi s work and for mulated a
dynami c model. The contenti on i mpli ci t
wi thi n thi s model i s that the r m proceeds
along the i nter nati onali zati on path i n the
for m of logi cal steps, based on i ts gradual
acqui si ti on and use of i ntelli gence from for-
ei gn markets and operati ons, whi ch deter-
mi ne successively greater levels of commi t-
ment to those overseas desti nati ons. J ohan-
son and Vahlne (1977) have postulated that
i nter nati onali zati on i s based on lear ni ng
through the development of experi enti al
knowledge about forei gn markets, whi ch i s
gai ned so as to reduce thei r psychi c
di stance (p. 30). Consequently, the r m i s
able to enter further overseas markets,
previ ously characteri zed by greater levels
of psychi c di stance, and thereby commi t
greater levels of resources to i nter nati onal-
i zati on.
Thi s evoluti onary model, whi ch i s based on
the behavi oural theory of the r m (Cyert and
March, 1963), has been endorsed by the
Fi nni sh research of Luostari nen (1980) and
Lari mo (1985), the Swedi sh research of Hor-
nell and Vahlne (1982), Swedenborg (1982) and
Gandemo and Mattsson (1984), the Norwegi an
research of J uul and Walters (1987), as well as
work i n other, non-Scandi navi an, setti ngs
(Yoshi hara, 1978). Thi s rei nforces a previ ous
conclusi on by Wi lki ns (1974) who i denti ed a
gradual process of r ms i nter nati onal
i nvolvement from hi s longi tudi nal study of
Ameri can r ms i nter nati onali zati on pat-
ter ns. Further more, Bri ti sh researchers have
found that a number of i nter medi ate stages
are experi enced by r ms i n the bui ld-up to
forei gn i nvolvement activi ti es (Buckley et al.,
1979, 1981).
Innovat i on-rel at ed i nt ernat i onal i zat i on
t axonomi es
An extensive volume of research has exam-
i ned the way i n whi ch r ms progress along
the i nter nati onali zati on conti nuum and sug-
gests that a sequence of di screte stages exi sts
whi ch proxy the stop and go (Dalli , 1994,
p. 92), stepwi se process exempli fyi ng the
evoluti on of i nter nati onal i nvolvement.
I mpli ci t between each set of stages i s the
noti on that fai rly stable peri ods exi st i n
whi ch rms consoli date and generate an
appropri ate resource base to respond to
fortui tous envi ronmental condi ti ons whi ch
allow them to proceed to the next i nter nati on-
ali zati on stage. Tables I I and I I I i llustrate
selected i nnovati on-related i nter nati onali za-
ti on taxonomi es, all of whi ch follow a si mi lar
sequence based on organi zati onal lear ni ng
and derive, i n part, from Rogers (1962) stages
of the i nnovati on adopti on process.
I nnovati on adopti on descri bes the selecti on
of an i nnovati on as the most acceptable alter-
native, among a seri es of opti ons, at a given
poi nt i n ti me (Zaltman and Sti ff, 1973). The
uti li zati on of the i nnovati on adopti on frame-
work i n export deci si on maki ng was rst
consi dered by Si mmonds and Smi th (1968)
but si gni cant advances were made by Bi lkey
and Tesar (1977). These authors concluded
that the process of export development was
depi cted by several di sti nct stages and that
vari ous di fferent factors affected deci si on
maki ng at each stage.
The taxonomi es hi ghli ghted i n Tables I I
and I I I share many of the same characteri s-
ti cs. However, the mai n di fferences i nclude
the number of stages i n each model. For
example, Bi lkey and Tesar (1977) and
Czi nkota (1982) recogni zed si x stages, whi le
Rao and Nai du (1992) were only able to i den-
ti fy four stages i n thei r research. A bri ef
di scussi on wi ll now follow for each of the
taxonomi es presented i n Tables I I and I I I .
Bi lkey and Tesar (1977) conceptuali zed the
process of export development on the basi s of
r ms i ncreasi ng i nvolvement i n exporti ng to
psychologi cally more di stant markets. Thei r
taxonomy was composed of si x export devel-
opment stages wi th the extremes rangi ng
from r ms whose management had no i nter-
est i n exporti ng to those whose management
explored the feasi bi li ty of exporti ng to perpet-
ually greater psychologi cally more di stant
countri es.
Cavusgi l (1980) proposed a taxonomy wi th
ve stages whi ch were descri bed as r ms
activi ti es i n: domesti c marketi ng; pre-export
i nvolvement; active export i nvolvement; and
commi tted export i nvolvement. Thi s export
development process was founded on man-
agements successive deci si ons regardi ng
exporti ng over a peri od of ti me. Further more,
the rm proceeds along the internationalization path in
the form of logical steps, based on its gradual acquisition and
use of intelligence from foreign markets and operations, which
determine successively greater levels of commitment to those
overseas destinations
[ 73 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
i t was suggested, on the basi s of empi ri cal
evi dence, that several fi r m-speci fi c charac-
teri sti cs and manageri al factors acted as
deter mi nants i n the process of faci li tati ng or
i nhi bi ti ng the progress of fi r ms from one
i nter nati onali zati on stage to the next.
Rei d (1981) purported an expli ci t i nnova-
ti on adopti on sequence of exporti ng. He
conceived the i nnovati on to follow the stages
of a fi r ms: export awareness; export i nten-
ti on; export tri al; export evaluati on; and
export acceptance. I n thi s context, export
adopti on was beli eved to requi re a
favourable management atti tude to export-
i ng, an avai lable forei gn market opportuni ty
and the presence of spare resource capaci ty
wi thi n the fi r m.
Wortzel and Wortzel (1981) were able to
i denti fy ve stages of i nter nati onal market
entry and expansi on. Each of these stages
was di sti ngui shed by the extent of control
exerci sed by the exporter concer ni ng i ts
activi ti es i n overseas markets. That i s, each
successive stage was si gni ed by a greater
i nter nali zati on of marketi ng, producti on and
admi ni strative functi ons previ ously
perfor med by forei gn market-based i nter me-
di ari es. Underlyi ng thi s taxonomy i s the
si gni cance of conti ngency i ssues whi ch
i nuence the deter mi nati on of appropri ate
and desi rable levels of i nter nati onal
i nvolvement.
Czi nkota (1982) attempted to segment r ms
on the basi s of an i nter nati onali zati on
taxonomy so as to be able to target govern-
ment export assi stance requi rements effec-
tively. Si x di sti nct groups of r ms emerged,
whi ch ranged from those completely uni nter-
ested i n exporti ng, and restri cted to the
domesti c market, to those that could be
descri bed as experi enced large exporters. An
empi ri cal i nvesti gati on revealed that r ms,
at vari ous stages, si gni cantly di ffered i n
ter ms of thei r organi zati onal and manageri al
characteri sti cs.
Li m et al. (1991) expanded on the work of
Rei d (1981) and i denti ed four levels of export
i nnovati on, these bei ng: export awareness;
export i nterest; export i ntenti on and export
adopti on. Strong evi dence of support for thi s
framework was found whi ch suggested that
i nnovati on adopti on does have consi derable
appli cabi li ty i n the context of export deci si on
maki ng.
Rao and Nai du (1992) analysed groups of
r ms accordi ng to an a pri ori assi gnment of
r ms classed as: non-exporters; export i nten-
ders; sporadi c exporters; and regular
exporters. Thi s taxonomy was empi ri cally
tested and vali dated on the basi s that each
stage captured the di sti nct attri butes of r ms
i nter nati onali zati on activi ti es.
All of these taxonomi es possess a common
theme i n whi ch they attempt to i ntroduce a
classi cati on of export behavi ours whi ch
generate heterogeneous proles of r ms that
reect di fferent degrees of development along
a reference li ne of i nter nati onali zati on.
Tabl e II
Selected innovation-related internationalization taxonomies
Bi l key and Tesar (1977) Cavusgi l (1980) Rei d (1981)
Stage 1
Management is not interested in exporting Domestic marketing: the rm sells only to Export awareness: problem of opportunity
the home market recognition, arousal of need
Stage 2
Management is willing to ll unsolicited orders, Pre-export engagement: the rm searches Export intention: motivation, attitude, beliefs
but makes no effort to explore the feasibility for information and evaluates the feasibility and expectancy about export
of active exporting of undertaking exporting
Stage 3
Management actively explores the feasibility Experimental export involvement: the rm Export trial: personal experience from limited
of active exporting starts exporting on a limited basis to some exporting
psychologically close country
Stage 4
The rm exports on an experimental basis to Active export involvement: exporting to Export evaluation: results from engaging in
some psychologically close country more new countries direct exporting exporting
increase in sales volume
Stage 5
The rm is an experienced exporter Committed export involvement: management Export acceptance: adoption
constantly makes choices in allocating of exporting/ rejection of exporting
limited resources between domestic
and foreign markets
Stage 6
Management explores the feasibility of
exporting to other more psychologically
distant countries
[ 74 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
Increment al i nt ernat i onal i zat i on:
cont radi ct ory evi dence
Both the Uppsala i nter nati onali zati on model
(and related hybri d models) and the i nnova-
ti on-related i nter nati onali zati on taxonomi es
conr m the fundamental tenet that a r ms
i nter nati onali zati on i s largely attri buted to
two key elements: the amount of knowledge
the r m possesses, parti cularly experi enti al
knowledge; and uncertai nty regardi ng the
deci si on to i nter nati onali ze. Despi te the
wi despread recogni ti on and general accep-
tance of these models i n the extant li terature,
they have been recently subject to cri ti ci sm
regardi ng thei r theoreti cal foundati on
(Anderson, 1993) and generali zabi li ty (Sulli -
van and Bauerschmi dt, 1990).
Further more, others have subsequently
found that the i ncremental i nter nati onali za-
ti on thesi s fai ls to explai n fully the nature
and character of r ms i nter nati onal i nvolve-
ment (Gri psrud, 1990; Grnhaug and
Kvi tastei n, 1993; Mi lli ngton and Bayli ss, 1990;
Shar ma and J ohansson, 1987; Tur nbull, 1987).
A number of reasons account for thi s.
Fi rst, Mi lli ngton and Bayli ss (1990) pai d
parti cular attenti on to the role of strategi c
planni ng i n the process of i nter nati onali za-
ti on and found that the i ncremental stepwi se
development of r ms was the excepti on
rather than the rule. They concluded that, i n
the early part of i nter nati onal i nvolvement,
r ms rely on market experi ence and thereby
make i ncremental adjustments. However, as
the degree of i nter nati onal experi ence
i ncreases, planni ng systems are i mplemented
whi ch for mali ze strategi c analysi s and i nfor-
mati on search. I nter nati onal i nvolvement
conti nues to i ncrease to the extent that
experi ence may be translated across di fferent
markets and between vari ous product groups,
thus, enabli ng r ms to leapfrog the i ncremen-
tal process wi thi n markets. Si mi lar argu-
ments of leapfroggi ng have been proposed by
researchers i n other contexts. For example,
i nter nati onal i nvolvement patter ns by
Swedi sh (Hedlund and Kver neland, 1983) and
Australi an (Bureau of I ndustry Economi cs,
1984) r ms have found thi s to be the case.
Second, an i mportant i ssue of i ntra-stage
evoluti on i s not consi dered wi thi n these
models. Commonly referred to as
mi cro-i nter nati onali zati on (Dalli , 1994,
p. 95), thi s i ssue can have si gni cant
i mpli cati ons for the development of small and
medi um-si zed r ms because a number of
subtle changes regardi ng systems, proce-
dures and other i nter nal and exter nal phe-
nomena may i nuence thei r outlook on
exporti ng (Bonaccorsi and Dalli , 1990).
Third, it is largely considered that rms
advance along the path of internationalization
Tabl e III
Further selected innovation-related internationalization taxonomies
Wor t zel and Wor t zel (1981) Czi nkot a (1982) Li m et al . (1991) Rao and Nai du (1992)
Stage 1
Importer pull The completely uninterested rm Export awareness Non-exporters: the rm has no
current export activity nor any
future interest
Stage 2
Basic production capacity marketing The partially interested rm Export interest Export intenders: the rm is a
current non-exporter, but would
like to explore future export
opportunities
Stage 3
Advanced production capacity marketing The exporting rm Export intention Sporadic exporters: the rm
exports, but in a sporadic fashion
Stage 4
Product marketing channel push The experimental rm Export adoption Regular exporters: the rm
exports on a regular basis
Stage 5
Product marketing consumer pull The experienced small exporter
Stage 6
The experienced large exporter
I nternational involvement continues to increase to the extent
that experience may be translated across different markets and
between various product groups, thus, enabling rms to leapfrog
the incremental process within markets
[ 75 ]
Robert E. Morgan and
Constantine S. Katsikeas
Theories of international
trade, foreign direct
investment and rm
internationalization:
a critique
Management Decision
35/ 1 [1997] 6878
rather than the reverse. Some i nter nati onal
r ms may encounter the si tuati on where the
aggregate di sadvantages of i nter nati onal
i nvolvement outwei gh the potenti al advan-
tages of such a strategy. Given thi s scenari o,
i t i s possi ble that r ms may undergo a
process of de-i nter nati onali zati on (Welch
and Luostari nen, 1988, p. 37) and thereby
reverse the sequence of i nter nati onal expan-
si on through divestment and other si mi lar
tacti cs (Boddewyn, 1989).
The fi nal i ssue has been addressed by Sul-
livan and Bauerschmi dt (1990) who
attempted to test the i ncremental i nter na-
ti onali zati on hypothesi s. Although these
researchers acknowledged a number of
methodologi cal shortcomi ngs i n thei r study,
no si gni fi cant di fferences were revealed
wi th regard to barri ers and i ncentives to
i nter nati onali ze among fi r ms at vari ous
levels of i nter nati onal i nvolvement. Thus, no
fi ndi ngs were evi dent to support the i ncre-
mental fashi on of a fi r ms path to i nter na-
ti onali zati on.
Despi te the controversy surroundi ng the
i ncremental i nter nati onali zati on thesi s, i t
seems reasonable to suggest that the concept
of a sequenti al process of i nter nati onal
i nvolvement does not i mply that such a tran-
si ti on i s ei ther consi stent or uni for m. The
li keli hood i s that some general evoluti onary
patter n of i nter nati onal i nvolvement can be
pursued whi ch could be i rregular and ad hoc.
To i llustrate thi s, Mi ntzberg and McHugh
(1985) i nti mate that most strategi es for
growth are characteri zed by peaks and
troughs of commi tment whi ch are related to
the di sconti nuous emergence of opportuni -
ti es and threats i n the r ms envi ronment.
Consequently, the outcome of i nter nati onal
i nvolvement may be the result of a combi na-
ti on of deli berate and emergent strategi es
over ti me.
One of the key problems that wi ll li kely con-
found further progress i n i nter nati onali za-
ti on research wi ll be the preci se method of
measuri ng and deter mi ni ng the degree of
i nter nati onali zati on. For i nstance, Sullivan
(1994) consi dered that the reli abi li ty of mea-
suri ng the degree of i nter nati onali zati on of
a fi r m remai ns almost completely specula-
tive. I n consequence, attempts at theory
bui ldi ng may lack the evi dence to ensure
that compari son between di fferent conceptu-
ali zati ons of i nter nati onali zati on are sui t-
able. Therefore, future research should nec-
essari ly take account of these anomali es i n
i nter nati onali zati on measures, i n order to
draw more preci se conclusi ons underlyi ng
the nature of i nter nati onal i nvolvement and
expansi on.
Concl usi ons
Thi s cri ti que was based on the premi ss that
the functi on of a theory i s that of preventi ng
the observer from bei ng dazzled by the full-
blown complexi ty of natural or concrete
events (Hall and Li ndzey, 1957, p. 9). There-
fore, theoreti cal statements have two pur-
poses: to organi ze parsi moni ously; and com-
muni cate clearly (Bacharach, 1989). Despi te
the fact that sophi sti cated frameworks have
been advanced to assess the ri gour of theori es
(e.g., Blalock, 1969; Dubi n, 1976; Nagel, 1961;
Popper, 1959), the approach taken here
adopted the stance of a broad revi ew of the
major extant theori es of i nter nati onal trade,
forei gn di rect i nvestment and r m i nter na-
ti onali zati on.
Many of the theori es detai led i n thi s arti -
cle can be consi dered laudable (Bradley,
1987) and sati sfy the general cri teri a of
theoreti cal parsi mony and communi cabi li ty.
I n demonstrati ng thi s, i llustrati on was given
to the i ssues underlyi ng each theory and
certai n contrasts were drawn between the
theory types i n an effort to frame them i n
relati on to thei r i ntellectual bi ases of
i nter nati onal economi cs, i nter nati onal
fi nance and i nter nati onal busi ness. Whi le
no speci fi c attempt was made to compare the
theori es, the di scussi on emphasi sed thei r
parti cular focus, accredi ted wri ters and
general conclusi ons.
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Appl i cat i on quest i ons
1 How well does the body of theory on i nter-
nati onal trade i nfor m acti ons i n i nter-
nati onal trade i n your experi ence? How
useful i s i t?
2 Look agai n at the arti cle, and compare and
synthesi ze the vari ous theori es presented
by the authors. Where i s the di scussi on
leadi ng? What further research would you
advi se?