Internationalization an overseas subsidiary operation in dealing with

Internationalization is the process through which a firm increases its involvement in international operations (Calof and Beamish,1995). This can be achieved through export, international joint ventures, establishing foreign subsidiaries, international advertising campaigns etc. There are four presumed models of internationalization, however, this essay compares two; the staged Uppsala and the network model.

 

The staged Uppsala model involves the gradual increment of the international presence of a firm. This is achieved through an ‘interplay between development and knowledge about the foreign market as well as an increased commitment of resources.’ (Johanson and Vahlne, 1990). There are four stages of internationalization under this. In stage one, the firm would have to have an established market presence in the domestic market and no export activities. Stage two occurs when the entrepreneur exports through an agent or independent representative. Stage three involves the establishment of an overseas subsidiary operation in dealing with customers and stage four includes production/manufacturing overseas (Johanson and Wiedersheim-Paul, 1975). This shows the gradual but incremental integration into the international market. Advocates of the Uppsala suggest that a gradual approach reduces uncertainties in the market. Also, it is expected that a firm, when entering the foreign market, would enter markets with a smaller psychic distance, that is firms that they can most easily understand before gradually broadening the distance. (Moen, Gavlen and Endresen 2003).

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Alternatively, the network model of internationalization stipulates that the entrepreneur’s social capital and relationships are key to the internationalization process. Johanson and Mattsson (1988) asserted that an important feature of a network is ‘that the firm’s activities in industrial markets are cumulative processes in which relationships are continually established, maintained and developed… which secures long-term survival and development of the firm.’ This is because of the general assumption that a firm cannot be analysed as an independent actor but viewed in relation to others in the international market. (Hollensen, 2010, p. 73). There is a range of approaches to the network model involving different types of ‘interlinked relationships both at the individual and organizational level’ (Soldberg and Durrieu, 2006, p. 59). The degree of the firm’s network determines its position in the international market.

                                                             

In comparing and contrasting the staged Uppsala and the network model, this essay aims to determine the more effective approach to the study of internationalization.

Similarities

Staged Method of Internationalization

Like with the staged Uppsala, the network model has four processes of network integration: the early starter, the late starter, the lonely international and the international amongst others (Johanson and Mattsson, 1988, p. 298). These processes are developed in a sequential order which occurs in three ways. First is ‘market expansion’, where the firm finds a new position in the market to establish the network. Secondly, there is ‘market penetration’, which develops the relationship and improves the network position of the firm by committing more resources to the network. Lastly, is the ‘market integration’ process, which aims to harmonize different positions in the market to create a well-functioning network (Johanson and Mattsson 1988). In a similar manner to the Uppsala model, the firm initially engages with the domestic network before developing relationships with firms in other countries. Equivalently, the Uppsala model has the aforementioned four stages of Internationalization; the first being limited involvement in the international market, expanding up until the fourth which is an integration in the market through overseas manufacturing. Both models denote an incremental process of internationalization at different stages.

 

Importance of Knowledge for Internationalization

Both the staged Uppsala and the network model emphasize the influence of gaining knowledge of the market to effectively internationalize. For the staged Uppsala, ‘the strength of the model lies in the central postulate that internationalization is a matter of learning.’ (Pauwels, Lommelen, and Matthyssens, 2004,). This is because internationalization is furthered by empirical knowledge which generates business opportunities. Also, this reflects the firm’s resources and ability to engage in international business (Johanson and Vahlne,1990, 2009).

 

Similarly, the network approach addresses the importance of ‘relationship–specific knowledge’ (Johanson and Valne 2009). Creating networks through relationships generates knowledge and information about the market, which aids in further integrating and expanding networks. In accordance with Mahoney (2000), path dependence is fundamental to these methods. Path dependence pertains to the expansion of the resources of the firm, influenced by knowledge gained from learning about the market. Such resources include ‘networking, network relationships, market knowledge and commitment.’ (Pauwels, Lommelen, and Matthyssens, 2004). Thus, knowledge of the market can foster the growth of networks and commitment in the market.

 

Incorporation of the Network Approach into the Uppsala Model

Johanson and Vahlne (1990) further developed the 1997 staged Uppsala model by creating a network aspect. They asserted that in addition to gaining market knowledge, internationalization should also be fostered by ‘relationships to other bodies in the foreign market.’ (Johanson and Vahlne, 1990, 2009).  Giving a network approach to the Uppsala model creates a similar link between the approaches. Conjointly, Coviello and Munro, in their research on independent software companies, found that these firms, which are knowledge-intensive, depend on networks in order to advance internationalization. In their findings, the companies combined the staged Uppsala with the network model, making a more cohesive approach to internationalization. (Coviello and Munro 1995,1997). Johanson and Vahlne also consider the Uppsala model’s business environment to be an ‘international network of relationships.’ As the firm continues to improve its network relationships, knowledge and commitment, which are key features of the Uppsala model, can be built and solidified (Johanson and Vahlne, 2009). To this end, both models assert the importance of relationships for internationalization.

Differences

Unit of Analysis

While there are similarities with the Uppsala and the network model, there are also inherent differences in their construction. Firstly, the primary unit of analysis of the Uppsala is the firm, while that of network is an interconnected web of relationships built between different firms and markets (Hollensen, 2011). The network model asserts that entry into the international market is established through relationships because firms are typically dependent on each other for their resources (Malhotra, Agarwal, Ulgado 2003).

 

On the other hand, the limited consideration of the interdependencies between markets has been a major criticism of the Uppsala model (Hollensen, 2011). The Uppsala model analyses the market through the firm and the market is made up of independent suppliers and consumers. It focuses on the firm’s knowledge of the market which is used to select countries for internationalization. Turnbull (1986) highlights this as a weakness because of the ‘one-sided focus upon the activities of the manufacturer in the flow of goods and services’ (Whitelock, 2002, p. 344). Thus, emphasizing the need for a relationship between suppliers, distributors and customers.

 

Analysis of Firm’s Behaviour

In terms of the assumptions about the firm’s behaviour, another difference is that the network model does not emphasize gradual integration as the staged Uppsala does. Hollensen (2011) states that the network model makes for a faster integration into the international market while the staged Uppsala emphasizes gradual integration. The major premise of the network model lies in the personal, technical, legal and economic ties between the firms. At the onset, the firm’s relationships will be the most important aspect in solidifying the ties which subsequently establishes market routines and systems. With the staged Uppsala, firms evolve from sporadic exports to overseas manufacturing/production units as knowledge of the market develops. As a result, export operations which were completely owned by a firm are slower and are typically ‘established only after several years of exports to the same market.’ (Hollensen, 2010 p. 74).

 

Rigidness of Firm’s Internationalization Method

In the network model, it is generally assumed that any firm can create new relationships and sever old ones.  According to Hollensen (2011), this makes the model more fluid as firms can ‘modify their structure.’ It can be expected that firms would be able to change their networking patterns according to ‘business fluctuations and varying conditions in the market.’  On the other hand, the Uppsala is typically viewed as a rigid, irreversible process (Pauwels, Lommelen and Matthyssens, 2004). It has been described as deterministic due to the direct relationship between ‘market knowledge and market commitment’ (Hollensen, 2010, p 74). This is because of the assumption that internationalization would always occur according to a ‘predefined trajectory’, an assumption which has constantly been criticized (Pauwels, Lommelen and Matthyssens, 2004 page 124).

 

Influences on the Firm’s Development in the International Market

The staged Uppsala model has two major determinants of its development. Firstly, the firm’s market commitment and knowledge. According to Johanson and Vahlne (1977), knowledge in the market leads to committed decisions in that market which fosters market activities by the firm and ultimately solidifies market commitment.

 

 Secondly, a firm’s development is determined by the firm’s psychic distance. Psychic distance refers to the perception of differences between home firms and overseas markets. These differences may include language, religion, levels of education, political systems and cultural practices. Firms typically enter the market at a greater psychic distance. Accumulated knowledge and commitment drive the selection of which market to enter and gradually decreases the psychic distance (Ruzzier, Hisrich, Antoncic, 2006). Although firms typically start in the markets that are close in psychic distance, this variable can be criticized because it over-estimates the implication of psychic distance. Owing to the wider scope of global integration today, there has been an increased interaction among people from different parts of the world who operate in different markets.

 

In contrast, network approach does not address psychic distance. The determining factor of the development of firms in the international market is that they are interdependent on each other’s resources and get access to the resources through the network positions. Thus, there is some form of required interaction between firms (Hollensesn, 2011). Ojala (2009) points out that network relationships can aid entrance into markets, creating deeper networking avenues. The risk of this is that the firms must actively retain these networks to sustain real market potential.

Critical Evaluation and Conclusion

It has been argued that the Uppsala model relies too heavily on psychic distance as studies have found firms being prone to ‘leapfrog stages’, where firms enter markets with a larger psychic distance at the early stage (Hollensen, 2011). This is especially true in the service industry. Deo Sharma and Johanson (1987) conducted research into a typical service industry- Swedish technical consultants and concluded that the reinforcement of commitment as has been established by the Uppsala model is non-existent in this sector. The Uppsala model is slow in entering markets with a larger psychic distance and the service industry is quite dynamic and does not always follow the conventional route of psychic distance.  Additionally, Jarillo (1998) highlights that the network models ‘lack of depth’ due to the absence of a theoretical framework. Networks have varying behavioural patterns in terms of relationships (Anderson, Håkansson and Johanson 1994).

 

Despite this, there remains support for market knowledge aspect of the Uppsala model. It is generally accepted that the lack of knowledge of the foreign market is a major barrier to internationalization (Johanson and Vahlne, 2009). Equally, the network approach has been appraised for its relevance in the international market. For instance, the importance of networks in studying Foreign Direct Investments (FDI) abroad as a means of entering markets (Chen and Chen, 1998). 

 

Owing to their strengths and limitations, it should be considered that the updated Uppsala model which incorporates the network approach is the most compatible way for firms to effectively internationalize. Firms would be able to simultaneously gain market knowledge, enhance commitment through acquired resources and build effective relationships. In deciding whether to internationalize, it has been shown that the motivations of small firms are beyond the promise of economic returns. The most major concern for small firms seeking to elevate themselves in the international market is typically to enhance organizational capability, knowledge and skills (Burpitt and Rondinelli, 2000). In line with this, an approach which incorporates both models, that is the revised Uppsala would enable firms to effectively achieve these aims.

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