The Uppsala internationalization process model revisited:

From liability of foreignness to liability of outsidership

Article presentation
International Business seminar

Vuong Minh Giang (CFVG PhD program - Intake 8)

Hanoi, November 29th, 2018
Contents

1. Authors’ background

2. Contextualization of the article

3. Structure of the article and summary of its main points

4. Major issues addressed

5. Key contributions of the article

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Authors’ background
 Jan Johanson
- Professor emeritus of International Business in
Department of Business Studies, Uppsala University,
Sweden.
- His main research area concerns the internationalization
process of the firm. He has published several
international peer reviewed journal articles and books.
- He is one of the founders of the Uppsala School of
International Business.

 Jan-Erik Vahlne
- Professor emeritus of International Business at the
Centre for International Business Studies in the School of
Business, Economics and Law, University of Gothenburg,
Sweden.
- His research interests include internationalization,
evolution of the multinational business enterprise and
globalization.
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Contextualization of the article
- The Uppsala internationalization process model was published in the
Journal of International Business Studies in 1997.
- Since then, there have been changes in business practices and
theoretical advances.
• The economic and regulatory environments have changed dramatically.
o The business environment is viewed as a web of relationships (a network),
rather than a neoclassical market with many independent suppliers and
customers.
• Company behavior is different in some respects.
• There are some new concepts and insights.
o Many subsequent research on international marketing and purchasing in
business markets.
o Business networks, insidership in networks, liability of outsidership, etc.
- Hence, the article further develops the original model with a business
network view of the environment faced by an internationalizing firm, and
explores its implications for the internationalization process of the firm.

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Structure of the article and summary of its main points (1/9)
 Introduction
• Contextualization of the article
• The authors’ core argument in the revised model is based on business network
research:
o Insidership in relevant network(s) is necessary for successful
internationalization; and
o Relationships offers potential for learning and for building trust and
commitment – preconditions for internationalization.
 The original model
• In the mid-1970s, empirical observations of Swedish-owned companies abroad
contradicted the established economics and normative international business
literature.
• Establishment chain, psychic distance, liability of foreignness.
• Underlying assumptions of the model are uncertainty and bounded rationality.
• The model has two change mechanisms: firms change by learning from their
experience of operations in foreign markets, and through the commitment decisions
they make to strengthen their position in the foreign market.
• The model is dynamic and descriptive: the process of internationalizing will continue
as long as the performance and prospects are favorable.
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Structure of the article and summary of its main points (2/9)

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Structure of the article and summary of its main points (3/9)
 The firm in the market environment: a business network view
• A number of studies have demonstrated the role of networks in the internationalization
of firms: foreign market selection, mode of entry, location of FDI, etc.
• The authors conclude that the original model needs to be developed further in light of
such clear evidence of the importance of networks in the internationalization of firms.
o The importance of mutual/reciprocal commitment between the firm and its
counterparts
o A working relationship is the result of considerable investment, and is an
important firm resource.
o A network of business relationships provides a firm with an extended knowledge
base.
o The firm as a business entity engaged primarily in exchange activities, rather
than production.
o A firm that is well established in a relevant network or networks is an “insider”. A
firm that does not have a position in a relevant network is an “outsider” and will
suffer from the liability of outsidership.

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Structure of the article and summary of its main points (4/9)
 Knowledge and learning
• The original model is based on the assumption that developing knowledge is
fundamental to a firm’s internationalization.
• Market-specific knowledge is the critical kind of knowledge. The lack of it constitutes
the liability of outsidership.
• The concept of relationship-specific knowledge is added to the model, which is
developed through interaction between the two partners, and that includes knowledge
about each other’s heterogeneous resources and capabilities.
• Empirical studies of the internationalization process demonstrate the central role of
experiential learning in the process.
 Trust and commitment building
• The original model does not explicitly include emotional dimensions in relationships.
• Research on social capital, trust and similar concepts includes both affective and
cognitive elements.
• The authors realize from empirical observation that affective dimensions are important
for understanding the relationships.
• Trust is an important ingredient for successful learning and the development of new
knowledge. And trust is a prerequisite for commitment. Trust persuades people to
share information, promotes the building of joint expectations, and is especially
important in situations of uncertainty.
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• Trust building is a costly and time-consuming process.
Structure of the article and summary of its main points (5/9)
 Opportunity development
• The authors recognize that the original model did neglect the opportunity dimension of
experiential learning. Meanwhile, the field of opportunity research has grown
significantly with many findings.
• Prior knowledge seems to have a stronger impact on discovering opportunities than
the personal characteristics of individuals.
• Opportunity recognition is likely to be an outcome of ongoing business activities that
add experience to the existing stock of knowledge.
• Opportunity development is based on interaction between partners who build
knowledge together and come to trust each other as they commit themselves further
to the relationship.
• The interrelated processes of knowledge development and commitment to an
opportunity may be unilateral, bilateral or multilateral.
• Since opportunity recognition is associated with prior knowledge, it is difficult to
centralize the search for opportunities.
• Opportunity development is an interactive process characterized by gradually and
sequentially increasing recognition (learning) and exploitation (commitment) of an
opportunity, with trust being an important lubricant.
• The process of opportunity identification and exploitation in the network perspective is
very similar to the internationalization process and to the relationship development
process.
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Structure of the article and summary of its main points (6/9)
 The declining validity of the establishment chain
• The establishment chain implied that companies start to internationalize in neighboring
markets and subsequently move further away in terms of psychic distance, beginning
by using low-commitment modes, such as a middle man, and subsequently switch to
stronger commitment modes, such as wholly owned subsidiaries.

• The network view helps to explain deviations from the establishment chain. Changes
in company behavior are more from changes in the international environment than
from changes in internationalization mechanisms.

• Environmental changes, such as globalization, rapid technological changes,

deregulation, force companies to enter into alliances and joint ventures, because no
single company owns all the resources required to exploit larger and continuously
changing markets.

• Acquisitions have now become the primary mode of entry in terms of value.

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Structure of the article and summary of its main points (7/9)
 A business network model of the internationalization process
• Internationalization is seen as the outcome of firm actions to strengthen network
positions.
• Internationalization may be described as corporate entrepreneurship and is
characterized by high degrees of uncertainty. Reducing uncertainty has to do with the
differences between the culture and institutions of the home country and those of the
foreign country.
• Although the basic structure of the model is the same as the 1977 one, some slight
changes have been made.
o “Recognition of opportunities” has been added to the “knowledge” concept. It is
considered as the most important element of the body of knowledge that drives
the process, beside needs, capabilities, strategies, and networks of related
firms.
o “Market commitment” in the original model has been labeled “network position”
meaning that the internationalization process is pursued within a network.
o The original label of “Current activities” has been changed to “Learning,
creating, and trust-building” to make the outcome of current activities more
explicit. The term “learning” is used at a higher level of abstraction, more than
experiential learning – the most important kind of learning.
o The affective dimension of trust-building has been made more explicit.
o “Relationship” has been added to “commitment decisions” to clarify that
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commitment is to relationships or to networks of relationships.
Structure of the article and summary of its main points (8/9)
• Implications of the revised model for the internationalization process:
o Internationalization depends on a firm’s relationships and network. The focal firm
to go abroad based on its relationships with important partners who are
committed to developing the business through internalization.
o The internationalizing firm will go to a foreign market where it and its partners
see opportunities. Short psychic distance will facilitate the establishment and
development of relationships.
o Given the business network model’s process view, any determination of a
starting point will be arbitrary.
o The earlier model was argued to be more applicable to smaller firms because
access to information is of more relevance to large companies. But, as
knowledge is highly context specific, the model should be equally applicable to
large and small firms. It is more a matter of experience than of size.

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Structure of the article and summary of its main points (9/9)
 Suggested research agenda
• Research on similarities between the internalization theory and the eclectic paradigm,
and the business network model of the internationalization process.
• Firm-specific advantages with the internationalization process
• International business network coordination: the means of coordination, the possible
allocation of coordination responsibilities between designated organizational units.
• Studies of the impact of psychic distance on the formation and deepening of
relationships, the role of relationships as vehicles in learning about institutional and
cultural conditions.
• Research on trading companies – a type of network firm with a long international
business tradition, based on the business network model of internalization.

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Major issues addressed
Overcome shortcomings of the original internationalization process model
exposed during changes in business practices and theoretical advances.
 Reconcile clear evidence of the importance of networks in the
internationalization of firms reported in various empirical research.

 Acknowledge relationship-specific knowledge, which is developed

through interaction between partners.

 Explicitly recognize emotional dimensions in relationships.

 Emphasize the role of experiential learning in opportunity development.

 Justify the declining validity of the establishment chain.

 Enhance and fine-tune the internationalization mechanism with

relationship-network view.
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Key contributions of the article
 Make comprehensive literature review of research on
internationalization process over three decades from 1977 (155 journal
articles and books mentioned in References).

 Discuss, summarize concepts, research results and defend against

scientific criticisms of the original model properly.

 Successfully incorporate the new IB research findings into the enhanced

theoretical framework with business network perspective.

 Open new research issues to explore further in the light of the revised
Uppsala model.

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Thank you for your attention!

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