International Business 861N1 Tutor: Roger Strange CandNo: 64327 MSc International Management
The Uppsala model is one of several behavioural models of firm internationalisation. Critically discuss the Uppsala model, and compare its main features with those of one other behavioural model.
The first ideas of sequential internationalization and importance of experiences in that process can be found from an article published as early as 1956 by Penrose. She claimed that a very considerable input of the managerial and technical resources of the investing firms may be required to ascertain what foreign opportunities exist and how they may best be taken advantage of (Penrose 1956, pp. 228). Robert Owen Keohane (1996), in his book, Internationalization and Domestic Politics, referred Internationalization as the process generated by underlying shifts in transaction costs that produce observable flow of goods, services and capital. Rapid increases in International economic exchanges during the last threefour decades have led to the growth of international trade and investment and hence Internationalization. Internationalization affects the aggregate welfare of countries, their sensitivity and vulnerability to external changes (Keohane, 1996). Several studies of international business have indicated that Internationalization of the firms is a process in which the firms gradually increase their international involvement. If this is to be assumed within the frame of economic and business factors, the characteristics of this process determines the pace and pattern of Internationalization of firms (Johanson and Vahlne, 1977). The Internationalization of firms can be viewed and measured through two broad perspectives. Under the first perspective or the market internationalization theory, imperfections in international markets motivate transactions cost minimizing firms to bring exchange into the firm s governance structure. (Steen and Liesch, 2007). At the same time, on the other hand, another theory, made famous by Carlson 1974,Johanson/Wiedersheim-Paul 1975, etc., emerged, which took the behavioral approach to explain the process through which firms who go international, traversed as they moved into foreign markets and got very involved in these markets (Steen and Liesch, 2007). Behavioral Models of internationalization are concerned with the processes as well as the outcomes of international expansion (Aaharoni, 1966; Johanson & Vahlne, 1977). 1
This model describes internationalization as a sequential process. forming a casual cycle (Johanson & Vahlne. where the successive stages represent higher degrees of international involvement : Stage 1. y Knowledge is highly dependent on individuals and hence difficult to transfer to others (Forsgren.1990). pp. formed the starting points for the later researchers. Establishment of an overseas sales subsidiary. the lower the perceived risk will be.model) and the Innovation process models for corporate internationalization (I-model). 23) y Decisions and implementations concerning foreign investment are made incrementally due to market uncertainty. Stage 2. 1977).
The Uppsala Internationalization Model
The internationalization of the firm. 1977. No regular export activities.CandNo: 64327 There are broadly four behavioral models of firm internationalization. His contributions towards the concepts of different stages which were used in this process.but such knowledge can be acquired (Johanson & Vahlne. Sune Carlson and his colleagues started this research in the 1960s. 1966 The Uppsala process model for company internationalization A Finnish variant proposed by Luostarinen (1979) Innovation process models for corporate internationalization
The Behavioral models that received the most appreciation from prominent scholars are the Uppsala process model for firm internationalization (U. y Lack of knowledge about foreign markets isa major obstacle to international operations. have been greatly studied at the department of Business Administration in Uppsala University. y y y y The decision process model by Aharoni. Incrementalism can be seen as a management learning process. The Uppsala internationalization process is most closely associated with the research of Johanson & Weidersheim-Paul (1975) and Johanson & Vahlne (1977.1990) had m ade three basic assumption. Overseas production/manufacturing units. over the years. Stage 4. Stage 3. 2
. Johanson and Wiedersheim-Paul (1975) distinguish between four different modes of entering an international market. Sweden. Export via independent representatives (agents). and the higher the level of foreign investment. Prof.
Johanson and Vahlne in their two articles (1977. These two models are by far more practical and broad. where market commitment decisions and current activities depend on market knowledge and current commitment in this particular market and vice versa. The more the firm knows about the market. 2002).
This theory was initially applied on four Swedish firms. which in turn. personnel) . business practice.CandNo: 64327 Anoth assu tion that some s holars say this process makes is that market knowledge and market commitment affect both commitment decisions and the way current decisions are performed. involving factors such as language.Market Specific Knowledge . affect market knowledge and commitment (Tornroos.Marketing methods.Alternative use for the committed resources and transferring them into the alternative one Commitment Decisions . .Si e of investment (marketing.
Figure 1.Perceived opportunities and problems on a specific market . culture. the internationalization process of the firm (Johanson & Vahlne. pp. This model deals with knowledge acquisition(learning). Market Knowledge . 2002). has been defined as the sum of the factors preventing the flow of information firm and the market.Uncertainty effect Current Business Activities .The economic effect . .Amount of resources . Volvo.General Knowledge .1990) To explain the internationali ation across country markets.Degree of commitment .Climate. Atlas Copco and Facit. it was hypothesized that firms would enter new markets with successively greater psychic distance The concept. The role of knowledge is being seen fundamental in this process. organi ation. psychic . characteristics of customer firms and their personnel Market Commitment . education. The Uppsala model is quite simple and is presented in figure 1. The main emphasis is on experimental learning through ongoing activities. Sandvik.A lag in current business and their consequences 3
. 24).Business culture. political system and the level of industrial development (Johanson & Vahlne 1977. distance.Common characteristics of customers .
Forsgren(2002) in his study mentions that the relationship between experiential knowledge and incremental behavior is negative rather than being positive.CandNo: 64327 . search and acquisition of foreign firms. To sum up the Uppsala model a table is being presented (figure 2.). one important strength of the Uppsala model is its simplicity. Andersen(1993).
. He also proposed that firms can acquire knowledge not only through knowledge but also from imitation. Another limitation of this model is that it pays little attention to the internationalisation processes of multinationals (Forsgren 1989. y Firms sometimes invest in foreign markets without own experiential knowledge. They are : y Firms invest in a foreign market at an increasing pace. These researches have given support to the idea of gradualism and sequential moves in the foreign markets. states that the relationship between market knowledge and market commitment is not straightforward. y Gradual accumulation of market knowledge does not restrain the firm from radical changes in foreign investment behavior. (Source: Johanson & Vahlne. Other studies have confirmed that experiential knowledge plays a pivotal role in the internationalisation of the firms.The prime source of experiences. There are some propositions presented by Forsgren in his paper published in 2002. The model is only appl icable for small and inexperienced firms. This model has found support by the researches carried out by Juul & Walters(1987) and Calof(1995). The Uppsala model has its share of critics. 1977). In spite of all its criticisms.2002). y Firms invest abroad without possessing any substantial knowledge if the perceived risk of investing abroad is lower than the perceived risk of not investing abroad.
pp.The models are derived fromRoger's stages of the adoption process [Rogers 1962. Andersen(1993) gives a comparative study to show how these authors have used steps in order to see how firms start exporting and deepen their involvement from a non-exporting firm into international markets. Cavusgil(1980). Andersen (1993) further makes a well-structured presentation about these models referring to some articles by Bilkey & Tesar(1977).CandNo: 64327
Figure 2. The Uppsala Model in brief
The Innovation Process models
Rogers(1962) presented the best-known theoretical work on diffusion of innovation and an innovation stage model. but in this case as illustrating internationalizationsteps instead of innovation steps. The phases presented in these articles closely follow the articles closely follow the ideas put forth by Rogers(1962). The models put forward these core points : y A stepwise. 81-86].2002). Czinkota(1982) and Reid(1981). These process models are mainly directed towards explaining export behavior and not other internationalisation alternatives (Tornroos. incremental involvement to exporting and new markets. 5
Whereas. there is a clear understanding of the assumed sequence or time order of the internationalization process. 2007). y If Boundary(space and time) is taken as an aspect of distinction then it can be seen that U-model has no specified restrictions as to units of analysis or time whereas I-model can only be implied to small and medium sized firms and it is time bounded. But they still have some differences as shown by Andersen(1993). In the account of more recent historical evolution of the Uppsala model. He has also put forth some propositions which has been discussed earlier in the essay. But in case of the I-models. it will hard to compare them. y The U-model describes the internationalization process as casual cycles. whereas the I-models portray the internationalization process as a step by step development. And there is a lack of proper definitions. It can be concluded by saying that the application of organizational learning in the Uppsala Model is limited to certain aspects leaving out the other aspects(Forsgren. the I-models follow proper explanatory chains. both these models are behavioral models. 2002). usually towards a deeper penetration of markets as well as to geographically and culturally more distant markets (Johanson & Vahlne.y y
CandNo: 64327 The experimental nature and the innovative phases are explicated through empirical evidence The existence of psychic distance. Here efforts have been made to specify variables and operationalizational definitions for the stages involved.
Comparison of the U-Model with the I-Models
Since. Johanson & Vahlne(2003) claim that a new and more realistic picture of the internationalization of the firm emerged from the research being carried out at the Uppsala University. which is overcome through experiential learning.
. No explanation is presented regarding how the process will start. y The U-model is presented as a more dynamic model. 1990). the Uppsala model suffers from conceptual ambiguity about the mechanisms within the firm that enable the exploitation of international market opportunities(Steen & Liesch. y The concepts of U-model are not defined. The Umodel is pointing out the existence of a gradual process. 1977.
Although the Penrosean growth theory and the Uppsala model has many simila rities.
Luostarinen. & Vahlne. Johanson. pp. E. P. (2002) The Concept of Learning in the Uppsala Internationalization process Model : A Critical Review . Y.
Johanson. (1993) On the Internationalisation Process of Firms: A Critical Analysis . J. (Spring/Summer). October) Internationalization behavior of small and medium -sized South African Enterprises . (1990) The Mechanism of Internationalization . Helsinki School of Economics. Journal of Management Studies. (1982) Publications. J. New York. Czinkota. O. International Business Review. J. E. & Vahlne. J. Praeger
Forsgren. Juul. Journal of International Entrepreneurship. Forsgren. pp. (1979) Internationalization of the Firm . Export development Strategies: US Promotion Policies . (1966) International Business Research. 273-281. Marketing Review. 27(1). 1. E. London. Tesar (1977) The Export Behavior of Smaller Wisconsin Manufacturing Firms . pp. Cavusgil. J. 93-98. Boston. W. Uppsala: Acta Universitatis Upsaliensis. (1966) The Foreign Investment Decision Process . London: Routledge. 11. O. & Walters. S. J.CandNo: 64327
Aharoni. Helsinki School of Economics. 305-322. J. Management International Review. R. (1980) On the Internationalization Process of Firms . T. S. 71-79. (2003) Business Relationship Learning and Commitment in the Internationalization Process . M. Johanson.3. M.Journal of International Business Studies. Journal of International Business. Carlson. 209-231. 257-277. Keohane. 7
. (1996) Internationalization and Domestic Politics . F. (1989) Managing the Internationalization Process: the Swedish Case . Journal of International Business. & Wiedersheim-Paul. European Research. 8 (November). Helsinki. (1987) The Internationalization of Norwegian Firms: A Study of the UK experience . Andersen. (1995. 12.March) The Internationalization Process of the Firm a Model of Knowledge Development and Foreign Market Commitment . R. (1975) The Internationalization of the Firm-Four Cases . International
Johanson. Series A: 30. Cambridge University Press. 83-101. M. Dissertation. 11-24. J. & G. J. & Vahlne. Second Quarter. Harvard University. R. Bilkey. 33(4). (197 7. 8. Calof. Journal of Small Business Management . 7(4). 23-32. M. 9-25.
(1962) Diffusion of Innovation . & Liesch. Lyon. M. John Wiley & Sons. J-A (2002) Internationalisation of the Firm A Theoretical Review with Implications for Business Network Research . Resource Bundles and th Uppsala Model of Internationalisation . T. E. Steen. New York: The Free Press. E. (1959) Theory of the Growth of the Firm . Rogers. J. 193-206. P. pp. September. 47.
. W. 18th Annual IMP Conference.CandNo: 64327 Penrose. (2007) A Note on Penrosean Growth. New York. Management International Review. Tornroos. Vol.