An Organisational Model

An Organizational Model for Understanding Internationalization Processes
Author(s): Namrata Malhotra and CR (Bob) Hinings

Source: Journal of International Business Studies, Vol. 41, No. 2 (Feb. - Mar., 2010), pp. 330-
349
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Journalof International Business Studies (2010) 41, 330-349
2010 Academyof InternationalBusiness All rightsreserved0047-2506
www.jibs.nety
An organizational model for understanding

internationalization processes
Namrata Malhotra1 and Abstract

CR (Bob) Hinings2 We propose an organizational model for understanding internationalization
processes. We argue that these processes differwith the type of organization.
We compare the internationalizationprocesses of three organization types: the
imperial College Business School, Imperial
mass production organization; the disaggregated production organization; and
College London, London, UK; 2Faculty of
Business, University of Alberta, Edmonton, the project-based organization. Each organization type responds differently
Canada to critical elements of the internationalization process, namely, the focus of
entry, the degree of presence and physical presence requirements in the
Correspondence: foreign market, which in turn influencewhat modal forms are adopted as
N Malhotra, Business
Imperial College the process progresses. Consequently, we observe different approaches to
School, London, London
Imperial College resource commitment in the foreignmarket over time.
SW7 2AZ, UK.
Tel: +44(0) 20 7594 9214; Journalof InternationalBusiness Studies (2010) 41, 330-349.
Fax: +44(0) 20 7823 7685 doi:IO.I057/jibs.2009.75
Keywords: internationalization; process; organizational types
INTRODUCTION
The internationalization of processfirms is a
of increasing
involvement in international
operations (Luostarinen & Welch,
1990: 249). The work of the Uppsala School has been the most
influential in studying the process of internationalization. The
Uppsala model (U model), as outlined by Johanson and Vahlne
(1977), proposed that internationalization of a firm is an incre
mental process of building commitment in a host country. They
asserted that the gradual acquisition, integration and use of
knowledge about the host-country context reduces market uncer
tainty, resulting in a pattern of incremental market commitment
(Johanson & Vahlne, 1977). The incremental process enables firms
to learn from the experience they acquire through current
operations, and experiential knowledge reduces the uncertainty
they perceive in subsequent expansion in the host country.
Reviews of internationalization process research show mixed
empirical support for this incremental approach (Coviello &
McAuley, 1999; Erramilli, Srivastava, & Kim, 1999; Hadjikhani,
1997; Petersen & Pedersen, 1997). Some studies confirm the
incremental process by demonstrating successive establishment
of operations in small steps, typically starting with exports
followed by sales subsidiaries and eventually manufacturing
Received: 21 September 2006
subsidiaries (e.g., Johanson & Wiedersheim-Paul, 1975; Juul &
Revised: 16 June2009
other studies suggest alternatives to
Accepted: 18 June2009 Walters, 1987). However,
Online publication date: 19 November 2009 incremental behavior (e.g., Bonnaccorsi, 1992; Knight & Cavusgil,

model for internationalization Namrata Malhotra and CR (Bob) Hinings_ '
_Organizational processes
331
1996; Loane &

Bell, 2006; Luostarinen & Welch, We propose an organizational model for
& Bayliss, 1990; Oviatt & McDougall,
1990; Millington understanding internationalization processes. We
1994; Turnbull, 1987; Zahra, Ireland, & Hitt, 2000). conceptualize an internationalization process as
Scholars have questioned the U model, describing it encompassing four critical elements: how the firm
as rigid and narrow in its specification of the enters the foreign market, in terms of its focus on
pattern that characterizes the incremental process a specific client or a market as a whole; how it
(Petersen & Pedersen, 1997). We propose here that sustains and enhances its commitment and con
whether the process is incremental or not is no tinued presence in the market; to what extent and
longer a theoretically fruitful debate; rather we inwhat form itneeds to have a physical presence in
need to steer the debate toward a different ques the host market; and what modes of operation or
tion: why do we observe different processes of inter modal forms are adopted that reflect the firm's
nationalization and, consequently, different approaches evolving resource and institutional commitment in
to resource commitment in the foreignmarket over time? a host market as the internationalization process
While recent studies have drawn attention to progresses. We analyze the internationalization
various factors that are likely to cause variations processes of three organization types that differ
in the process of internationalization, we need on specific organizational characteristics, namely
to understand more systematically why such varia the nature of production activity, the nature of
tions occur. dominant assets, and the degree of centrality of the
We argue that different
types of organizations customer/client to the production and delivery of a
follow different processes of internationalization. product or service. Each of these characteristics has
An important missing element in current research direct ramifications for how the internationalizing
is an understanding of how the organizational firm responds to the three issues of focus of entry,
characteristics of an internationalizing firm influ the degree of presence and physical presence
ence its internationalization process. Since the requirements in the foreign market, which in turn
Uppsala model was proposed, the landscape of influences what modal forms are appropriate.
internationalizing organizations has changed sig Accordingly, we establish, first, that the internatio
nificantly. A wider array of organizations are nalization processes of the three organization types
entering foreign markets. They include: manufac are different and, second, how they are different.
turing firms; consumer services, such as hotels, We provide two insights. First, heterogeneity
restaurants, leasing, car rentals, and retailing; among organizations is crucial to understanding
professional services, such as accounting, engineer why there are variations in internationalization
ing, architectural firms, management consulting, processes. Differences in specific characteristics that
health, and financial services; and other knowl are directly connected to what an organization does
edge-based organizations providing software deve to organize the creation and delivery of a product
lopment and R&D services. These are very different or service in a foreign market produce variations
organizations, with very different production tech in the process of internationalization. Second, we
nologies and asset portfolios. Our central argument illuminate how a process of internationalization
is that to understand why internationalization emerges from an ongoing and combined assess
processes proceed in a certain way we need to ment of organization type, concerns about foreign
take account of
different organizational types, market uncertainty, and other non-organizational
paying to
attention what these organizations do to factors. As a result of these insights, we provide a
organize the creation and delivery of a product more systematic understanding of why the various
or service in a foreign market. Following quite internationalizing organizations take different
recent conversations among international busi approaches to resource commitment over time in
ness scholars (e.g., the JIBS Emerging Frontiers a foreign market.
Conference 2005) about whether internationaliza
tion processes, and hence internationalization THEORETICAL BACKGROUND
process models, are still relevant, our paper rein We distilled three themes from the literature. First,
forces the view that they matter even more today, there are studies that frame the debate around
as a much wider range of organizations are whether or not incrementalism exists. Second,
embarking on internationalization, bringing to there are studies that point to contingencies
light new and more complex issues in managing that moderate the relationship between market
the process. uncertainty and incremental behavior. Third, the
Journalof International Business Studies

Organizational model for internationalization processes Namrata Malhotra and CR (Bob) Hinings
332
internationalization process has been conceptua nutshell, these studies challenge the notion of
lized as something that just evolves, without any incrementalism in internationalization processes.
strategic decisions.
Role of Contingencies
Incrementalism or Not? While the above studies have questioned the very
Much of the debate has been framed around idea of incrementalism, other studies
identify
critiquing the incrementalmodel of internationa contingency factors that moderate the relationship
lization, and questioning its existence (e.g., between foreign market uncertainty and incremen
Bjorkman & Eklund, 1996; Camino & Cazorla, tal expansion. For example, Rhee and Cheng (2002)
1998; Millington & Bayliss, 1990). Some of this found that the higher the resource recoverability
critique is centered around the narrow focus of the of the industry in which the firm operates, the less
model on market-specific experiential knowledge as positive was the relationship between foreign
the key mitigator of market uncertainty, and the market uncertainty and incremental expansion.
assumption that such market-specific knowledge is Higher resource recoverability is possible in more
acquired mainly through experience from a firm's labor-intensive service firms compared with more
own activities, explaining why internationalization capital-intensive manufacturing firms (e.g., Miller
is a slow, incremental process (e.g., Sullivan & & Cardinal, 1994). Bell (1995) and Sharma and
Bauerschmidt, 1990). Several studies have pointed Johanson (1987) examined the internationalization
out that there are other forms of knowledge and of of software firms and
technical consulting firms,
learning that hasten the process of internationali respectively, and not
did find support for the
zation. In addition to knowledge about the specific incremental model. These studies suggested that,
foreign market, there is knowledge of operating unlike manufacturing firms, the market specificity
affiliate networks, experiential knowledge related of services production is relatively low, in that it
to a specific mode of operation, knowledge of can be moved rapidly and at a lower cost. In a study
foreign market entry in general, knowledge of local of foreign market entry of service firms, Erramilli
business counterparts, and knowledge of the local (1991) argued that these firms have greater lati
institutional environment (e.g., Delios & Henisz, tude than manufacturing firms in establishing high
2003; Eriksson, Johanson, Majkgard, & Sharma, resource commitment modes of operation, even
1997; Johanson & Vahlne, 1990; Padmanabhan & with little or no international experience. This is
Cho, 1996; Petersen, Pedersen, & Sharma, 2002; because they incur lower overheads and can
Sapienza, Autio, George, & Zahra, 2006). redeploy resources easily. Several scholars have
Revisiting their 1977 model, Johanson and noted that internationalization strategies of manu
Vahlne (2009) have acknowledged gen that more facturing firms may differ from those of service
eral internationalization knowledge is also impor firms owing to unique characteristics of the latter
tant in addition to market-specific knowledge. and different strategic challenges (e.g., Aung &
Further, there is a relationship-specific knowledge Heeler, 2001; Barkema & Drogendijk, 2007; Capar
that develops from interaction between business & Kotabe, 2003; Eriksson et al., 1997; Erramilli &
partners and then contributes to a more general Rao, 1993; Goerzen & Makino, 2007; Habib &
relationship knowledge, which feeds into develop Victor, 1991). It is implicit in these studies that
ing different relationships in alternative situations patterns of internationalization cannot be general
(Hoang & Rothaermel, 2005; Johanson & Vahlne, ized across different types of firms (e.g., manufac
2009). Similarly, there are forms of learning other turing vs services; different services firms), and this
than experiential learning, such as learning signals the need for a deeper, more systematic
through acquisitions of other local units, learning analysis. We proposeto pursue this line of enquiry
through imitation, and searching for new alter by taking organizational differences into account to
natives rather than just learning about current develop a richer theoretical understanding of why
activities. These forms of learning hasten the processes of internationalization differ.
process of internationalization, evolving in a non
incremental way
(Forsgren, 2002). There is also The Process
evidence to
suggest that incremental patterns When we look deeper into the U model and the
of internationalization may reduce risk, but are wider internationalization literature we find var
not the most optimal for a firm in terms of ious embedded elements that shed light on critical
overall profitability (Delios & Henisz, 2003). In a aspects of the process of internationalization.

_Organizational model for internationalization processes Nam rataMalhotra and CR (Bob) Hininqs_
333
However, often the conceptual distinction between that it can easily incorporate strategic intentions
these is fuzzy, or some aspects have been empha and managerial discretion. They emphasize that
sized more than others. Based on our review, we internationalization is contingent upon developing
bring to light aspects that are important to defining and exploiting new opportunities. A firm can either
and bringing greater granularity to the process. recognize newopportunities unilaterally or take
First, embedded in the Johanson and Vahlne (1977) advantage of new opportunities that emerge from
model and the wider literature is the issue of a interactions embodied in the firm's existing rela
firm's motivation for entry at the time of embark tionships (Ghauri, Hadjikhani, & Johanson, 2005;
ing on internationalization in a host market. Johanson & Vahlne, 2009). We argue that a firm
Johanson and Vahlne (1990) noted that the U needs to strategically pursue and detect potential
model is applicable primarily to international opportunities, foster new relationships and increase
operations motivated by market seeking. In a study the effectiveness of current operations in the host
of internationalizing processes in Danish firms, market to build
its intangible commitment to the
Petersen and Pedersen (1997) found that firms market. Such deliberate efforts ensure its continued
motivated by market seeking displayed incremental presence, but also enhance its degree of presence in
behavior. Erramilli and Rao (1990) found that the host market. This aspect of the internationali
firms that followed clients
existingexhibited zation process is separate from the more tangible
significantly greater aggressiveness in choosing resource and institutional commitment manifested
entry modes than when seeking new clients. in modal forms.
Service firms such as accounting, insurance, bank The literature highlights modal forms as a
ing and advertising often follow their home tangible indicator of different levels of resource
country client firms into the host country (Erramilli commitment and degrees of control of the inter
& Rao, 1990; Li & Guisinger, 1992; Qian & Delios, nationalizing firm. As a firm internationalizes, it
2008; Terpstra & Yu, 1988). How a firm enters a faces complex choices among a variety of institu
foreign market is triggered either by market-seeking tional arrangements, such as wholly owned ven
motivations or by following the client. In other tures, joint ventures, and non-equity arrangements,
words, as a firm internationalizes into a host such as licensing, franchising, management service
market, an important element of the internationa contracts and forms (e.g., Anderson
subcontractual
lization process iswhether the firm's focus is on the & Gatignon, 1986; Contractor & Kundu, 1998;
whole market or on a specific client. Hennart & Reddy, 1997; Hill, Hwang, & Kim, 1990).
Second, the literature tends to merge two Each of these forms corresponds to a different
aspects encompassed in the U model: the stages level of investment in dedicated assets in the
in the form of progressive modes of operation foreign market, tangible or intangible (Hill et al.,
as an indicator of incremental commitment (stage 1990). The choice of modal form is therefore an
model), and successive and incremental market important aspect of an internationalization pro
commitment (process model). Hadjikhani (1997) cess. As the process progresses, a path of modal
observes that studies that have reviewed and tested forms emerges.
the U model have tended to blur this distinction Our third observation of the internationalization
and emphasized the more tangible stages aspect. literature draws attention to another issue that is
He notes that it is important to recognize the implicit in that literature but has never been clearly
conceptual distinction between the resource and articulated as a critical aspect of the internationa
institutional form of market commitment (modal lization process. It concerns whether or not the
- that
forms) and the more intangible commitment firm needs to have a physical presence in the host
is, the degree of commitment. The latter entails market. For example, the locational advantage of
growing long-term relationships and often making setting up production in the host market is a key
short-term sacrifices in order to maintain those motivator in foreign direct investment (FDI) deci
relationships (Hadjikhani, 1997). Other scholars sions of firms (e.g., Dunning, 1988, 1993; Dunning
have pointed out that the internationalization & Lundan, 2008; Rhee & Cheng, 2002). Lewin et al.
process does not simply unfold without making a (1998) elaborate on the localization strategy of
deliberate effort to advance the process (Forsgren, Japanese global firms, where these firms replicate
2002; Lewin, Okumura, Sakano, & Valikangas, their production systems in the host market, and
1998; Petersen et al., 2002). In revisiting their the strategy is designed to serve the market within
1977 model, Johanson and Vahlne (2009) clarify which manufacturing takes place. In services firms

334
the inseparability of production and consump In the next section we arrive at three organization
tion of the product or service drives firms to types, differentiated on specific organizational
locate physically in the host country (Boddewyn, characteristics a direct bearing on the
that have
Halbrich, & Perry 1986; Campbell & Verbeke, 1994; production and
delivery of a product or service.
Erramilli & Rao, 1990). Scholars have argued that In the following section we compare the interna
FDI (wholly owned or joint ventures) is more tionalization processes of the three organization
common among services firms than among non types by establishing how the characteristics of
equity arrangements, because services are intangi each organization type impact upon the different
ble and knowledge is generated in the course of elements of the internationalization process.
delivering the service (e.g., Goerzen & Makino,
2007). We argue that these issues are more perti ORGANIZATION TYPES
nent to assessing the need for a physical presence in In order to arrive at our typology of organizations
the host market rather than governance form. The we first identify organizational characteristics that
issue of physical presence tends to be subsumed have a direct bearing on the production and
within the decision about modal forms, such as delivery of a product or service. We draw on the
setting up a wholly owned venture or a joint Bowen, Siehl, and Schneider
(1989) framework of
venture. an overlap
Such is certainly prevalent in prototypical of
characteristicsmanufacturing and
certain types of firms, especially manufacturing, service firms for deriving our organizational char
but the distinction ismore apparent in other types, acteristics. We use this framework as a backdrop
such as engineering consulting and legal firms because it is one of the most comprehensive and,
(Lowendahl, 2000). The need for physical presence most importantly, the characteristics lie on a
is related to the logistics of organizing and continuum, allowing us to take account of diversity
coordinating the actual production and delivery in organizations, which is central to our aim of
of a product or service. capturing differences in internationalization pro
Drawing on our second and third observations, cesses. We draw on three key characteristics from
we suggest that the more tangible stages (modal the Bowen et al. framework: standardized vs
forms) aspect, the intangible process (degree of customized output; capital intensity vs labour
presence) aspect, and the physical presence aspect intensity; and high or low degree of customer
need to be untangled. These are conceptually participation. Each of these has implications for
distinct elements of an internationalization pro how the creation and delivery of a product or
cess. Our first observation points to the importance service are organized, accordingly, we derive
and
of a firm's focus, market or client, as it internatio specific organizationalcharacteristics: the nature of
nalizes. To summarize, we define the process of production activity, the nature of dominant assets
internationalization in terms of four critical ele used, and the degree of centrality of the client
ments: First, how does the firm enter a specific to the process of product/service creation and
foreign market in terms of its focus on a specific delivery. All three organizational characteristics lie
client or a market as a whole? The issue is about on a continuum, permitting different combinations
the focus of entry. Second, how does it sustain and and a resulting typology of organization types. We
enhance its commitment and continued presence chose organizations corresponding to three points
in the market? This is the degree ofpresence of a firm on the continuum: the two extremes, and one in
in a host market. Third, to what extent and inwhat the middle. Although we cannot accommodate
form does it need a physical presence in the all possible organization types in our discussion, a
market? is about the firm's physical presence
This comparison among the three types supports our
needs. Fourth, what modal forms are adopted that aim of illuminating variations in internationaliza
reflect a firm's evolving resource and institutional tion processes emanating from differences in the
commitment in a host market? This is about the type of organization. Furthermore, these three
choice of modal form and emerging path of modal organization types constitute a large proportion of
forms as the process of internationalization pro the population of organizations, as our examples
gresses. We argue that internationalization pro below reflect.
cesses, encompassing these elements, vary with First, Bowen et al. (1989) point to firms at one end
the type of organization. Our aim is to compare of the continuum that have a completely standar
internationalization processes of different organi dized output, and at the other end those that have a
zation types. highly customized output. The nature of the output
journal of International Business Studies

model for internationalization processes Namrata Malhotra and CR (Bob) Hinings_ I
_Organizational
335
has implications for the way the production of that the customer or client, which has implications for
is - that the nature of
output organized is, how central
the customer/client is to the process of
production activity. Firms producing standardized organizing the creation and delivery of a product
output use mass production activity. Examples or service. In a mass production organization,
are large-batch production, as in automobile man typically the clients are peripheral to the actual
ufacturing firms, and traditional continuous pro process of output creation, because these firms
cesses in chemical plants (Woodward, 1965) and produce tangible products that conform to pre
service factories such as airlines, trucking, auto determined specifications (Buzzell & Gale, 1983).
mated banking and warehouse and catalog stores A car or television manufacturer can produce a
(Schmenner, 1986). On the other hand, firms sample that is concrete and observable to show to
producing highly customized output usually adopt the customer. Such tangibility also facilitates a
a project-based production activity. Professional separation between production and consumption
services and knowledge-intensive firms, such as of the product. Thus in the mass production
engineering consulting, business
advisory services, organization the degree of centrality of the client
management consulting, and architecture, fit this is low. Even in business-to-business relationships,
category. The creation and delivery of the output such as that between the firms and their suppliers,
in these organizations occurs largely on a project the relationship is typically characterized by for
basis. So organizations at one end of the Bowen malization and routinization focused on precision
continuum are characterized by mass production of deliveries and consistency of quality rather than
activity and at the other end by a project-based close interaction(Johanson, 1982).
production activity. We classify these as the mass At the other end of the spectrum the project
production organization and the project-based orga based organization faces different challenges in
nization respectively. terms of the role of the client. Professional services,
Second, Bowen et al. (1989) point to a differ for instance, draw on abstract knowledge, which
entiating characteristic between firms that are makes demonstration of the
required skills and
highly capital intensive and those that are highly competence difficult.
Essentially, the client pur
labor intensive, indicating the nature of the chases intangibles, namely ideas and the "process"
dominant asset that the firm applies to the creation of service delivery, which only later are embodied
and delivery of its product or service. Mass produc in a tangible form such as an engineering design,
tion organizations such as large-batch manufactur an audit report, a property lease, or a business
ing firms (e.g., automobiles) and continuous plan (Malhotra, 2003; Rose & Hinings, 1999). The
production firms (e.g., chemical plants) are highly intangibility creates performance ambiguity
capital intensive, because they rely heavily on (Mills & Moberg, 1982) for the client, but can be
physical plant and equipment as the core assets mitigated by allowing the client to participate
(Woodward, 1965). This is the case for some highly actively in the service creation process. The in
mechanized services as well (e.g., automated bank tangibility also reinforces the inseparability of
ing), and also for services such as airlines and production and consumption ofthe output. In
trucking, where there is a greater role of human professional service firms clients have been
assets but the physical component continues to described as partial employees because of their
dominate. On the other hand, project-based orga joint participation in the creation of the service
nizations are more reliant on human capital or (Mills & Morris, 1986). Clients in some form
people. services, for example,
Professional sell the contribute their behavior and information as a part
experience services
and of particular individuals of the raw material to be transformed into an
(Aharoni, 1993; Lowendahl, 2000). These organiza output (Bowen et al., 1989: 76). Thus in project
tions locate knowledge and expertise within the based organizations the client is usually highly
individualprofessional, and provide sufficient central to the process of organizing the output.
autonomy to those professionals to utilize that In terms of Bowen et al. (1989), the output of
knowledge (e.g., Abbott, 1988; Greenwood, Hin organizations in the middle of the continuum
ings, & Brown, 1990). Thus the mass production corresponds to a medium degree of customization.
organization is least people intensive whereas the Firms in this category include manufacturing
project-based organization is highly people intensive. involving batch and craft production, and services
A third characteristic in the Bowen et al. (1989) such as hotels, fast food restaurants, leasing,
framework is that of the extent of participation of auto repairs, and car rentals. The implication for

* Organizational model for internationalization processes Namrata Malhotra and CR (Bob) Hininqs
336
production activity is the adoption of disaggregated because of differences in characteristics of the

production, where the creation and delivery of the nature of the production activity, the nature of
product or service occur through disaggregated the dominant asset and the degree of centrality
units such as local stores or franchises rather than of the client. Responses to these elements of the
a factory floor (Chase & Tansik, 1983). We label internationalization in turn influence
process
this the disaggregated production organization. The the choice of appropriate modal forms and the
dominant assets applied in the production as the process
process emerging path of modal forms
of this organization type are those of physical progresses for each organization type. Figure 1
capital and real estate, and also a significant depicts the
overarching model, the
outlining
knowledge-based element in the form of manage between the and
relationship organizational type
rial expertise (Contractor & Kundu, 1998; Dunning different aspects of the internationalization pro
& McQueen, 1981). So the disaggregated produc cess. Figure 2 is a detailed depiction of the process
tion organization is moderately intensive for each organization
people type. Further, in our discus
relative to the mass production and project-based sion we also consider the role of market uncer
organizations. As for the degree of centrality of tainty. Sincethe role of market in
uncertainty
client, the disaggregated production organization shaping internationalization processes has been
typically involves the client to a moderate extent consistently supported in past research, we take
compared with the other two organization types. that into consideration to highlight what variations
In hotels, restaurants and car rentals, for example, it creates in the process that follows from organiza
in spite of the physical representation of service tional considerations.
through physical facilities and appearance of
personnel, the clients buy the whole service
ORGANIZATIONAL DIVERSITY AND THE
experience, encompassing reliability and approach PROCESS OF INTERNATIONALIZATION
ability of the service provider; demonstration
of competence and credibility by the provider; The Mass Production Organization and the
and courtesy and communication (Zeithaml, Process of Internationalization
Parasuraman, & Berry, 1985, 1990). These intangi In a mass production organization the nature of the
bles are experienced at the point of consumption, production the firm to follow
activity persuades
and the client is an active participant in that the market, based on an assessment of current
process. and potential demand in the host country
In summary, we have a typology of three (Gomes-Casseres, 1989; Kim & Hwang, 1992).
organization types: the mass production organiza Underpinning a market-following focus is a long
tion, the disaggregated production organization, term connotation that makes the need to enhance
and the project-based organization. Table 1 outlines the degree
of presence in the host market critical.
their differentiating characteristics. In the next Increasing market share or holding on to existing
section we compare the internationalization pro markets, especially in volatile environments, is the
cesses of the three organization types. We discuss route for these organizations to ensure continuity
how each organization type responds differently to and sustain the process of internationalization.
the three critical elements of focus of entry into the This is accomplished a deep
through developing
host market, enhancing the degree of presence and of the market, harnessing
understanding long-term
the physical presence requirements in the market with customers and suppliers, and
relationships
Table 1 Three organization types based on three characteristics

differentiating
Organization type characteristic

Differentiating
Nature ofproductionactivity Nature of dominant asset Degree of centralityof

client
Mass production organization Mass production Least intensiveLow

people
Disaggregated production Disaggregated production Moderately people intensive Medium
organization
Project-based organization Project-based production Highly people intensiveHigh
journal of International Business Studies

337
Elements of the internationalizationprocess:

FE, DP, PP, MP
I
Figure 1 Organization type and the internationalization

process.
Elements of the internationalizationprocess:

FE, DP, PP, MP
Figure 2 Organization type and the internationalizationprocess: detailed model. FE, focus of entry; DP, degree of presence;
PP, physical presence; MP, modal path.
establishing a reputation in the market (Hadjikhani, influenced by the nature of its dominant asset
1997; Johanson & Vahlne, 2009). The physical and the centrality of the client in the production
presence requirements of a mass production orga process. The creation and delivery of a product
nization when it enters a host market are or service incorporate a technical component and

Organizational model for internationalization processes Nam rataMalhotra and CR (Bob) Hinings
338
a relationship component, and the relative impor options, from exports to wholly owned ventures. In
tance of these two components depends upon the fact, in the absence of the need for physical
dominant asset in the organization - or will
physical presence, exports licensing adequately
capital or people (Bowen et al., 1989). Because the support the firm's market focus and its aim to
mass production organization is highly capital enhance its degree of presence. The firm could just
intensive, the emphasis is on the technical aspect - continue with either of these modes. But as its
ensuring that things are done economically degree of presence goes from strength to strength,
and efficiently (Gronroos & Gummesson, 1986). it will make strategic sense for it to increase its
In some host-country contexts valuable indigenous resource and institutional commitment by moving
resources or country-specific advantages (Dunning, to a joint venture or a wholly owned venture. The
1988; Dunning & Lundan, 2008; Rugman & degree of market uncertainty will also have a role in
Verbeke, 1990) can be combined or bundled shaping that path. Ifmarket uncertainty is high the
fruitfully with the internationalizing firm's firm will start with exports or licensing, gradually
source of advantage to facilitate economical and move to partnering arrangements, and at a later
efficient production. However, these location stage consider switching to a higher control form
specific advantages can be reaped only by the firm such as a wholly owned venture once its market
physically locating in the host market (Benito & knowledge increases. We call this path of modal
Gripsrud, 1992; Cuervo-Cazurra, 2007; Dunning, forms the slow and steady path, demonstrated in
1988, 1993). Given the nature of assets, the Figure 3a. It supports the firm'smarket focus and its
physical presence of a mass production organiza increasing degree of presence through expanding
tion will take the form of setting up the whole market share.
complement of physical infrastructure in the host However, if there are other factors that compel a
market. A low level of centrality of the client firm to hasten the process of increasing resource
also influences the physical presence requirements commitments in the host market and diminish
in that it does not require close proximity to the role of market uncertainty, the choice of modal
the client, thus minimizing the need for physical forms and the emerging path will change. For
presence of the firm. Sothe need for physical example, if the firm has accumulated market
presence in the host market will depend upon experience through the prior internationalization
whether or not there are any location-specific of its other businesses in the same host market,
advantages in the host country that can be coupled thus reducing market uncertainty, itwill be able to
with the firm's advantage to enhance productivity transition to a mode involving a higher resource
and serve the host country better. commitment, such as a wholly owned venture,
Given the above-mentioned considerations, the early in the process (Barkema, Bell, & Pennings,
firm will make different choices of modal forms as 1996; Chang & Rosenzweig, 2001). Similarly, in the
the process of internationalization progresses. One face of intense global competition the firm
scenario is where there is no need for physical would choose to intensify its involvement in the
presence in the host market. The organization will country, opting for a mode with a higher resource
be able to pursue itsmarket focus and enhance its commitment and control sooner rather than later,
degree of presence by choosing from a range of mitigating considerations of market uncertainty
Sales Joint Wholly

Exports Licensing owned
subsidiary venture
venture Time
Joint Joint Joint Joint

venture venture venture venture
Time
Joint Wholly Wholly Wholly

owned owned owned
venture
venture venture venture Time
Figure 3 Modal paths: (a) Slow and steady path; (b) & (c) leapfroggerpaths.

_Organizational model for internationalization processes Nam rataMalhotra and CR (Bob) Hinings_
339
(Barkema & Drogendijk, 2007; Pedersen & Petersen, effect of market uncertainty if the expected
1998). In general, mass production firms are benefits of locating production in the host country
increasingly making market entry decisions in outweigh the perceived risk accruing from market
more uncertain and volatile environments where uncertainty. A joint venture and a wholly owned
markets can grow or decline unpredictably, pressur venture are both supportive of the firm's market
ing firms to change their commitment to the focus, enhancing its degree of presence and its
market accordingly (Buckley & Casson, 1998). In physical presence requirements. If the firm is
other words, in dynamically evolving environments relatively unfamiliar with the context it is likely
the degree of presence can fluctuate significantly, to choose a joint venture arrangement initially
thus requiring these firms to demonstrate greater (e.g., Hennart & Park, 1993; Kogut, 1988). It has
flexibility in switching between modal forms to the option then to continue to grow that partner
support those changes. To sum up, when there is no ship or move to a wholly owned venture as the
requirement for a physical presence in the host process of internationalization progresses.
market and there are moderating effects on market We label these paths leapfrogger paths, as demon
uncertainty, the mass production organization has strated in Figures 3b and 3c. The pace of resource
the option to more rapidly move to modal forms commitment, in terms of how rapidly the firm
requiring higher resource commitments in the host moves to a higher resource commitment, is greater
market. There is ample versatility here formanagers than is the case in the slow and steady path.
to exercise their discretion - what some scholars The particular decision on whether to continue as
have referred to as managerial - in a joint venture or change to a wholly owned
intentionality
choosing the pace of resource commitments venture will be influenced by other factors as well.
(e.g., Hutzschenreuter, Pedersen, & Volberda, 2007; For example, studies have identified the extent
Volberda & Baden-Fuller, 2003). of intangible assets held by the entrant firm as
To recapitulate, the internationalization process being an important determinant of this decision
of the mass production organization that does not (Caves, 1996). Technology-intensive firms, in parti
need a physical presence in the host market will cular, are likely to abandon joint ventures in favor
be marked a path of exports and licensing
by of wholly owned ventures owing to contractual
arrangements as
the firm's degree of presence hazards (Guillen, 2003), or when the risk of
increases through rising market share. As the firm's dissipation of intangibles is greater. This is espe
degree of presence continues to accelerate, it will cially the case when property rights are not well
have the option to transition to joint ventures or protected in a host country (e.g., Eriksson et al.,
wholly owned ventures. This slow and steady path 1997; Henisz & Williamson, 1999). Hennart (2009)
is compatible with a steadily rising degree of points out that initial entry mode and its subse
presence, but is also appropriate when market quent evolution, say from a joint venture to a
uncertainty is high. When other factors intervene wholly owned venture, should be the equilibrium
to diminish the role of market uncertainty, the outcome of the entrant firm's own considerations
firm has the flexibility to move more rapidly to with regard to the transactional characteristics of
the high resource commitment modes of joint the advantage it wants to bundle and those of
ventures or wholly owned ventures. the owners of the local complementary assets in the
A second scenario is when physical presence is host market. For example, if the markets both
a critical requirement for the firm: this invokes a for the advantage that the entrant firm holds and
different set ofmodal choices. Physical presence for for the local complementary assets are inefficient,
the mass production organization means setting up both parties would gain by simultaneously owning
a whole complement of physical assets in the host equity, pointing to an equity joint venture as an
country, which limits the modal options to a joint optimal option (Hennart, 2009). Luo and Tung
venture with a local firm or a wholly owned (2007) point to more non-economic strategic
venture, with both
forms requiring significantly reasons that are prompting emerging market
greater commitment of resources at a very early multinational firms to move very quickly to a
stage of the process. There is less flexibility in the higher commitment of wholly owned ventures
choice ofmodal forms, but it is a necessary trade-off through either greenfield or acquisition routes.
that the firmwould need tomake to build location These firms are tending to be more aggressive in
specific advantages into the production process. order to rapidly acquire strategic assets to over
The need for physical presence will play down the come their resource void and their latecomer

340
disadvantage on the global stage. Also, managers' further reinforced by the degree of centrality of
assessment of future market opportunities can the client. Even though these organizations require
trigger them to transition to a wholly owned a moderate level of client involvement, from a
venture, which is likely to afford greater opera logistical point of view production and consump
tional flexibility to the firm than a joint venture tion are location-bound or inseparable, making
(Belderbos & Zou, 2007). In sum, the internationa the interaction between the client
provider and
lization process of the mass production organiza necessary and unavoidable.
Physical presence for
tion when physical presence is critical in the host these firms takes the form of local outlets and local
market will be marked by a path of joint ventures or facilities.
joint ventures followed by wholly owned ventures. In sum, the disaggregated organization follows
This supports its market focus and the need to the market; enhances its degree of presence by
establish a full complement of physical infrastruc continuously monitoring and scanning for new
ture as the firm's degree of presence expands customer groups in different parts of the host
through increasing market share. Figure 2 sum market; and requires a physical presence in the
marizes the process. market. As a result, management service contracts
and franchises are appropriate modal options. Both
The Disaggregated Production Organization and these non-equity modes are long-term contracts,
the Process of Internationalization subject to renewal, and so are supportive of a
The production activity of a disaggregated produc market focus. Sustaining and enhancing the degree
tion organization (e.g., hotels, fast food restaurants, of presence in the country is supported by con
car rentals) persuades it to assess the developmental tinually renewing these contracts, expanding exist
potential of different local locations and hubs in ing contracts to create more outlets, or issuing new
the host market. Accordingly, its focus of entry is contracts as new customer groups or locations
the market. The nature of disaggregated production emerge. Further, these contractual arrangements
also influences how these firms enhance their are able to support the delivery of the product or
degree of presence in the host market: that is, by service consistently and reliably through the local
continuously scanning for
potential clientele outlets and units. This is because of the way
sprouting in specific locations (e.g., new suburbs, management service contracts and franchise
shopping malls, tourist complexes) in the host arrangements are designed. In hotels, for example,
market, assessing new opportunities, and adding a management service contract involves the legal
outlets to serve new emerging customer groups. owner of the property or real estate in the host
The physical presence requirements of the dis country entering into a contract with the entrant
aggregated production organization are driven hotel firm. There is a separation of the capital
by itsmoderate people-intensiveness. The relation intensive element (hotel premises in host country)
ship component is relatively more important, and the managerial expertise or knowledge-based
adding a stronger personalized element to the element (entrant hotel firm). Daily management,
creation and delivery of the product or service to quality control and control over strategic codified
the client, requiring physical presence. Conside assets, such as a global reservation system and the
rable reliance on people produces variability or brand name, lie with the internationalizing hotel
heterogeneity in creating and delivering a product firm, while control over the physical assets lies with
or service, on account of individual differences the owner of the real estate (Contractor & Kundu,
(Campbell & Verbeke, 1994). However, these orga 1998). The internationalizing firm provides exten
nizations reduce variability through extensive codi sive on-site technical and management support
fication of knowledge and expertise, and the (Erramilli, Agarwal, & Dev, 2002). Consequently,
development of operating guidelines (Contractor the outlets are able to deliver consistent quality
& Kundu, 1998). In fast food restaurants rigorous service and preserve the reputation of the brand
employee training is provided, and there are well name so that customers cannot tell the difference
established rules and procedures to direct customer from one outlet to another (Reynolds, 1994). In
service, thus reducing variability (Enderwick, 1992). franchise arrangements, common among hotels
In the process, these organizations are able to build and fast food chains, control over physical assets
consistency and reliability into the personalized as well as daily management and quality control
experience delivered in a face-to-face interaction rests with the franchisee. The franchisor (interna
with the client. The need for a physical presence is tionalizing firm) controls the codified assets,

341
Management Management Management Management

service service service service
contract or contract or contract or contract or
Time
franchise franchise franchise franchise
Wholly owned
Management Management Management and
service service service management
contract or contract or contract or service
Time
franchise franchise franchise contract or
franchise
Figure4 (a) & (b) Contractual paths.
including the brand name, and trains and guides host country (Dunning & Kundu, 1995). The firm
the franchisee (Erramilli et al., 2002). So franchise will then typically have both equity and non-equity
outlets are also subject to rigorous training, and forms of institutional and resource commitments.
need to adhere to systems put in place by the Figure 4b demonstrates this variation of the con
franchisor requiring delivery of service in a certain tractual path.
format, again to create a consistent customer When the internationalizing firm experiences
experience across outlets. high market uncertainty due to complete unfami
Thus in the disaggregated production organiza liarity with the host country, it will consider
tion management service contracts or franchises a different modal form at the time of entry. For
are preferred modal forms. As the process of example, fast food chains and hotels sometimes
internationalization progresses, the path evolves enter a country by establishing wholly owned
as a series of these non-equity modes. This is facilities, at the start, to serve as anchors while
the contractual path (Figure 4a). Existing work they build relationships in the host country to
suggests that organizations such as hotels, fast support further entry through non-equity modes
food restaurants and car rentals usually adopt such as franchising and management service con
non-equity modes (Contractor & Kundu, 1998; tracts (Bartlett & Ghoshal, 2000). Once familiarity
Fladmoe-Lindquist & Jacque, 1995). In the case of and relationships develop in the market, non
hotels, these non-equity contractual arrangements equity contractual forms are readily adopted to
account for over 60% of multinational properties support the increasing degree of presence.
worldwide (Contractor & Kundu, 1998; Erramilli To summarize, the internationalization process
et al., 2002). Franchising ismost common among of the disaggregated production organization will
fast food and other chain restaurants, as well as be marked by a predominantly contractual path
car rentals. of management or franchise
service contracts
Along the contractual path the pace of resource (continuously renewed
and expanding), which will
commitment is stable for a length of time followed support itsmarket focus and the need for a growing
by a step up as the degree of presence accelerates. number of physical local outlets as the firm's degree
This is because of resource commit
the nature of presence increases through identifying new
ment of the entrant
firm mostly involves intangi customer groups in different locations in the host
bles (e.g., brand-name building; codified strategic market. Figure 2 summarizes
the process. It is
assets), and the benefits of an initial investment in important to note that while both contractual
these assets can be reaped for a number of forms - market service contracts and franchise
thus supporting an contracts - are of the organization's
contracts, increasing degree supportive
of presence for a length of time. It is possible that at focus, degree of presence and physical presence
some point of the process the firm opts for a partial requirements, it does need to choose between the
or full equity mode, which provides a higher degree two contractual alternatives. The assessment is
of control and fends off the risk of cancellation of dictated by factors such as the extent to which
non-equity contracts by real-estate owners in the capabilities (e.g., organizational competence, quality

342
competence) being transferred to the host market Offices to sales or marketing offices, depending on
are inimitable (Erramilli et al., 2002); the avail the requirements of each project.
ability of managerial staff in the host market; the The high degree of centrality of a client in the
development of a franchising infrastructure in the project-based organization further reinforces the
host market; and the enforcement of intellectual need for physical presence because the client is
property laws. more included in the process, and sometimes
even indispensable (Sharma, 1997). The more
The Project-Based Organization and the Process knowledgeable client expects a greater degree of
of Internationalization consultation and participation in the process
An organization with project-based production of service creation. On the other hand, where there
tends to follow a specific project into a host market. is greater knowledge asymmetry between the client
The entry is often motivated by a project offered and service provider, the client expects hand
by an existing client (Cypert, 1991; Erramilli & Rao, holding and continuous assurances. In either
1990). In some instances the firm follows a partner situation there
is need for frequent face-to-face
who has a project in the host market. For example, interaction and
physical proximity to build trust
architects often ride on the coat-tails of an and reduce uncertainty. Physical presence require
engineering consulting firm that has won a project ments are therefore adapted to the unique demands
and wants the architects to follow (Malhotra, of each client.
2003). A project-focused entry into the host market,
The first project denotes presence in the host the degree of presence centered on projects, and
market only for the duration of that project. So for a physical presence requirements tailored to unique
project-based firm to increase its degree of presence needs of different projects, tie choices about modal
it needs to ensure a continuing flow of projects in form to specific projects. The modal path evolves
the market. It is likely that a firm's entry will be project by project, and the modal form chosen for a
sporadic or one-off, and itmakes a deliberate choice particular project is dissolved with its completion.
to end the process with that one project. At other Since each project is unique, the modal form varies
times, its presence in the market spans several with the nuances of each project. Project work is
projects for a specific client. Yet another scenario is usually organized in teams, involving collaboration
for the firm to enhance its presence beyond a with external parties to garner a variety of expertise
single one-off project and beyond a single client. (Jones, Hesterly, Fladmoe-Lindquist, & Borgatti,
Cultivating relationships within the boundaries 1998). For example, engineering consultants team
of one project can generate opportunities for up with other engineering consultants or with
other, often unrelated, projects (Hadjikhani, 1997; architects on a project. But this requires that the
Johanson & Vahlne, 2009). Johanson and Vahlne's scope of work of each party, and the relationship
(2009) point that opportunities in international between them, be clearly defined, based on the
business are becoming less a matter of country specific requirements of the project. Moreover,
specificity and more about relationship or network clients' demands vary with each project. They want
specificity rings especially true for the project-based not only a clear point of accountability but, often,
organization. an active role in deciding who is to be involved in
Relying heavily on people as the dominant asset various tasks, and the type of arrangement they
influences the need for and the form of physical prefer (Lowendahl, 2000).
presence required in the host country. Clients often There is evidence of a variety of complex,
demand that particular individuals be involved in multi-party contractual relationships, such as sub
delivering the service, as the "individual" matters contractual arrangements or associations, contract
(Lowendahl, 2000). Further, contact with the client by-contract joint ventures, and consortia, in some
and managing that relationship well are often key of the professional services, such as engineering
sources of competitive advantage (Hinings, Brown, and architecture (Eccles, 1981), and similar loose
& Greenwood, 1991). It requires a high
degree of associations and alliances in law. Because of the
interaction, which is facilitated by being physically bounded duration of the projects these are tempor
present at the client's location. The mobile nature ary modal forms. We label this the bounded
of assets creates a range of options for physical commitment modal path shown in Figure 5a. To
presence, from temporary visits by project team sum up, the internationalization process of the
members, through temporary trailer or project project-based organization is marked by a path of

343
Project 1 Project 2 Project 3 Project 4

Temporary Temporary Temporary Temporary
modal form modal form modal form modal form Time
Project 1 Project 2 Project 3 Project 4

Temporary Temporary Temporary Temporary
modal form modal form modal form modal form Time
-
Permanent modal form
Time
Figure 5 (a) & (b) Bounded commitment paths.
project-based modal forms accompanied by differ commitment alongside the continuing project-by
ent forms of physical presence to serve the different project activity, the mobile nature of assets (people)
projects that emerge with the firm's increasing mitigates the overall risks, even ifmarket uncer
degree of presence. The pace of resource commit tainty is high. One could argue that the highly
ment continuously expands and shrinks, depend emergent nature of the internationalization process
ing on the scale and flow of projects. of a project-based makes the role of
organization
A project-based entry and project-based continu managerial (Hutzschenreuter et al.,
intentionality
ity in the host market does not, however, mean 2007) verysignificant, both organizationally and
that the project-based organization is never faced strategically, in shaping the process and the pace of
with the choice of setting up a more permanent resource commitment.
modal form, especially if and when its focus shifts
from a project to the market. A sustained flow DISCUSSION AND CONCLUSIONS
and volume of projects may justify dedicating In this paper we have developed an organizational
permanent staff and resources in the host market. model for understanding why internationalization
Itmakes strategic sense in this scenario for the firm processes differ. We propose that whether the
to establish a more permanent resource and process of internationalization is incremental or
institutional commitment in the host country. It not is no longer a theoretically fruitful debate.
also serves to build credibility among clients in that Rather we need to take a different tack by asking:
market. There is abundant evidence of global why do we observe different processes of interna
business advisory firms, engineering consulting tionalization and, consequently, different appro
firms, law firms, and management consulting firms aches to resource commitment in the foreign
setting up a network of subsidiaries and joint market over time? We compared the internationa
venture arrangements in their international mar lization processes of three different organization
kets (e.g., Aharoni, 1993; Morgan & Quack, 2005; types, and demonstrated that the processes vary
Rose & Hinings 1999; Spar, 1997). There may be with the type of organization. Each organization
other factors, such as host-country regulations that type has different
organizational requirements,
require a firm to establish a permanent modal form. generating different responses to the focus of
However, the temporary modal forms, project by entry, degree of presence and physical presence
project, continue alongside a permanent mode, and requirements in the host country. The responses to
the physical presence requirements are also con these aspects in turn influence what modal forms
figuredproject by project (Figure 5b). For a pro are appropriate. We have demonstrated that differ
ject-based organization the influence of market ent modal paths will emerge for each organization
uncertainty in the host market is diffused, for two type as the internationalization process progresses.
reasons: first, because resources are limited to The mass follows a slow
production organization
individual projects; and second, because even when and steady modal path when physical presence in
the firm establishes a more permanent resource the host market is not a necessity, and leapfrogger

344
paths when physical presence is critical. The

disaggregated production organization follows con
tractual paths. Finally, the project-based organiza
tion follows bounded commitment paths.
Each of these modal paths reflects very different
approaches to resource commitment in the host
market over time. Figures 6a, 6b and 6c illustrate
the approaches to resource commitment over time
for each organization type. In the mass production
organization, resource commitment along the slow
and steady path evolves gradually, a reflection of
the U model. Along the leapfrogger path, on the
other hand, the pace of resource commitment
ismuch more rapid, as the firm commits to higher
resources very quickly. The pace is the most rapid
in the case where the firm transitions from a joint
venture to a wholly owned venture relatively early
in the process. The three approaches to resource
commitment are shown in Figure 6a.
In the disaggregated organization type, the con
tractual paths reflect a different approach to
resource commitment over time. Unlike the mass
production organization, these firms do not incur
the capital-intensive element of the costs in the
host market. The internationalizing firm commits
resources primarily in intangibles, including build
ing a brand reputation, managerial training, oper
ating policies and procedures, reservation systems,
and quality control systems. Once the firm makes
an initial investment in these intangibles it can
reap its benefits over a
length of time, spread
over several
franchising or management service
contracts. In other words, the resource commit
ment is relatively stable for a period of time. When
there is a substantial surge in new opportunities,
requiring additional franchise and management
service contracts, or even an equity commitment
to serve the new clientele, the firm steps up its
resource commitment. Figure 6b illustrates a
stepped approach to resource commitment in the
6 to resource commitment: (a) Mass
Figure Approaches
internationalization process.
productionorganization (E, exports; JV,jointventure; L, licensing;
In a project-based organization the bounded
WOV, wholly owned venture; SS, sales subsidiary);(b) Disaggre
commitment path reflects a third variation of
gated productionorganization (Fr,franchise; MSC, management
resource commitment over time. Such a path is servicecontract;WOV, wholly owned venture); (c) Project-based
characterized by a continuously fluctuating com organization (P1-P5, projects).
mitment, driven by the scale and flow of projects.
Project opportunities requiring varied amounts of
resource commitments emerge randomly, and the project flow. Intermittently, there are likely to be
number of projects at any given time is erratic: as abrupt discontinuities in resource commitment.
some projects reach completion, others are in Figure 6c illustrates the fluctuating resource com
progress, and new ones begin. Even if the firm mitment over time.
establishes a permanent modal form, resource The organizational model brings to light hetero
commitment will expand and contract with the geneity among internationalizing organizations by

model for internationalization Namrata Malhotra and CR (Bob) Hininqs_ '
_Organizational processes
345
drawing attention to what different organizations 2009; Kenney, Massini, & Murtha, 2009; Manning,
do. An organization internationalizes to transmit a Massini, & Lewin, 2008). Traditionally, off shoring
source of advantage (product or service) effectively has been associated with manufacturing produc
to a foreign market, and so the way the advantage tion activities, fitting with the mass production
needs organizing cannot be separated from the organization type. In the past decade off shoring has
process of internationalizing itself. Rather, as we become an important phenomenon in the software
have demonstrated, it has important ramifications development industry (Oshri & Kotlarsky, 2008).
for critical elements of the process. Consequently, However, more recently the emphasis has shifted
we observe different approaches to resource commit to offshoring administrative and technical services,
ment in the foreign market as the internationaliza and to non-routine product development processes
tion process progresses. In a sense our arguments such as R&D and product design (e.g., Kenney
echo Barkema and Drogendijk's (2007) point that et al., 2009; Kuemmerle,1999; Subramaniam &
firms have a strategic choice in how they inter Venkatraman, 2001). Accordingly, the focus has
nationalize, but there are also constraints on that moved away from cost drivers of offshoring toward
strategic freedom. Our organizational model helps strategic motivations, such as access to qualified
us understand the strategic choices that are avail personnel or sourcing talent pools (Lewin & Couto,
able to managers in an internationalizing firm, 2007). In the context of our model, firms offshoring
depending on what type of organization it is. complex, non-routine activities such as product
A second insight is that a process of internatio development are a variant of the project-based
nalization emerges from an ongoing and combined organization: the nature of production is project
assessment of organizational considerations, con based; people are the core asset; the degree of
cerns about foreign market uncertainty, and other centrality of the client is high. However, there are
non-organizational factors. The role of market likely to be interesting variations in terms of how
uncertainty in shaping internationalization pro these characteristics impact upon the key elements
cesses has been consistently supported in existing of the internationalization process in our model.
research. Our analysis also demonstrates that the The nature of production activity of these firms is
combination of organizational factors with market project based, but is centered on a business model of
uncertainty produces variations in the ensuing offshoring the core product development work to
process. Similarly, factors that moderate the role specific hubs or clusters of highly skilled science and
of market uncertainty produce other variations. engineering talent (e.g., Bunyaratavej, Hahn, & Doh,
Our consideration of
the combination of the 2007; Lewin & Couto, 2007; Lewin & Peeters, 2006;
different factorsis by no means comprehen Manning et al., 2008). Thus the focus of entry into a
sive, but provides a strong basis for future research foreign market is talent seeking rather than market
to examine how these different organizational seeking or client following. In terms of the degree of
and non-organizational factors operate together to presence a project-based organization enhances its
shape the internationalization process. presence through an uninterrupted flow of projects.
What is interesting about the offshoring firm is that
Future Research Directions it itself is the originator of projects, but its challenge
The next step is to test the models by empirically is to develop and retain talent to sustain those
investigating differences in the internationalization projects. To this end these firms have been experi
processes of different organization types. By doing menting with attractive global career programs and
so we expect to elaborate and extend the analysis incentive systems (Deloitte, 2004). So increasing
and the models. In particular, as the models are the degree of presence in specific talent hubs is
brought to bear on newly emerging organizational about strategically managing employee turnover
phenomena, we will obtain further traction on the (Manning et al., 2008). This needs to be examined
three organization types. This will lead to further more systematically.
elaboration on the nature of the three organization As for the degree of centrality of the client, the
types. To illustrate this we use the example of offshoring firm itself is the client as it inter
offshoring, which is becoming increasingly salient nationalizes to access talent in a host market to
in the global arena. support business functions back home or globally.
Offshoring is the relocation abroad of business This has interesting consequences for physical
functions and activities to support operations at presence requirements, because the people who
home or globally (e.g., Doh, Bunyaratavej, & Hahn, hold the talent are already physically present in the

346
host market, but

they have to interface with We haveused the example of offshoring as an
counterparts in
the home-country facilities. important future research direction because of its
Manning et al. (2008) have argued that knowledge rising significance. Just as extending the applica
interfaces can be managed through web-based tion of our model to the offshoring phenomenon
knowledge management systems, but some face will provide a more fine-grained understanding of
to-face interaction is imperative for the transfer the project-based category of organizations, there
of the more tacit routines and processes, and for will be other organizational phenomena to help
managerial, operational and quality control. These elaborate the other organization types.
firms rotate key people between home and offshore Another important area to investigate empirically
facilities (Manning et al., 2008). is whether organizational considerations take pre
In terms of a modal form and modal path that cedence over the non-organizational factors at the
are likely to support the offshoring firm's talent first point of making choices about the different
seeking focus, its degree of presence by generating elements of the internationalization process. Our
a captive talent pool and physical presence require analysis suggests that specific organizational char
ments, this firm is likely to have a few different acteristics that differentiate the three organization
options. First, it could enter into temporary con types will first determine how a firm responds to
tractual arrangements with people who have the issues about focus of entry, the degree of presence,
required talent to serve the needs of a specific and physical presence needs in the host market,
project. Second, the firm could internalize the which in turn influence the choice of modal forms
relationships by recruiting people as employees of and emergent modal paths. Further variations to
the firm. Even if people leave, they could be this process will be affected by concerns of market
recruited repeatedly on any subsequent projects uncertainty. However, this needs to be tested
where their talent is suited, allowing continuity in empirically. Further, we have alluded to other
relationships for the longer term. Third, the firm factors, such as the nature of competition, protec
could enter into strategic alliances with local tion of intangibles, ease of transfer of capabilities,
universities in the offshore hubs to tailor talent to and other host-country characteristics that may
their specific needs, creating high asset-specificity moderate the role of market uncertainty. Since our
and thus securing the relationship in the long run aim has been to highlight the role of organizational
(Manning et al., 2008). These are ongoing arrange characteristics, we have not carried out a systematic
ments, and could culminate in a permanent modal analysis of these other possible factors. In particu
form as a local science and engineering company lar, a greater understanding of managerial inten
reflectingthe offshoring firm's brand name (see tionality and the varying degrees of flexibility
Manning et al., 2008). What might emerge is a path managers might have in choosing a path of
of temporary modal forms coupled with a perma internationalization and pace of resource commit
nent mode, similar to the project-based organiza ment across different organizational types would be
tion. Currently, offshoring firms are going through fruitful.
a period of experimentation (Kenney et al., 2009),
and it is timely to use the organizational model as ACKNOWLEDGEMENTS
a framework to examine empirically the different We would like to thank JIBS Editor-in-Chief Lorraine
options of modal paths, and what the pace and Eden, former Editor Arie Lewin, and the anonymous
pattern of resource commitment would be for reviewers for their helpful comments on drafts of this
these firms. This will also permit a more fine paper. We are very grateful to Tim Morris, Jaideep
grained understanding of the project-based type of Prabhu, Michael Smets, and Henri Schildt for their
organization. insightful suggestions and encouragement.
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An Organizational Model for Understanding Internationalization Processes

Author(s): Namrata Malhotra and CR (Bob) Hinings

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An organizational model for understanding

Namrata Malhotra1 and Abstract

Keywords: internationalization; process; organizational types

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1996; Loane &

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journal of International Business Studies

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production activity is the adoption of disaggregated because of differences in characteristics of the

Table 1 Three organization types based on three characteristics

Organization type characteristic

Nature ofproductionactivity Nature of dominant asset Degree of centralityof

Mass production organization Mass production Least intensiveLow

journal of International Business Studies

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Elements of the internationalizationprocess:

Figure 1 Organization type and the internationalization

Elements of the internationalizationprocess:

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Sales Joint Wholly

Joint Joint Joint Joint

Joint Wholly Wholly Wholly

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Journalof International Business Studies

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Management Management Management Management

Figure4 (a) & (b) Contractual paths.

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Project 1 Project 2 Project 3 Project 4

Project 1 Project 2 Project 3 Project 4

Figure 5 (a) & (b) Bounded commitment paths.

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paths when physical presence is critical. The

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host market, but

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Journalof International Business Studies