The Uppsala Internationalization Process

Model Revisited

Afzaal AliAngel ArbizuWasim AhmadYasir Shahab

Jan Johanson

Studied at Uppsala University

Professor Emeritus at Uppsala University, Sweden

Research interests include Internationalization processes, business networks

Jan-Erik Vahlne

Ph.D., Uppsala University

Professor at Gothenburg University, Sweden

Research interests include Internationalization and globalization processes

In 1977 the Swedish doctors wrote the “Uppsala Internationalization process model”.

In 2009 they made an actualization, due to the changes of economic and regulatory environments.

The change mechanisms in the new version are the same although they have added the trust-building & knowledge creation.

The Uppsala model explains the characteristics of the internationalization process of the firm. However when they constructed the model there was only a

rudimentary understanding of market complexities.

Introduction

Markets are networks of relationships, hence insider-ship in relevant networks is necessary for successful internationalization and there’s a liability of outsider-ship.

Relationships offer potential for learning and for building trust and commitment.

Core Argument

They did empirical observations that contradicted the established economics and normative, international business literature of the time.

According to that literature, firms choose the optimal mode for entering a market by analyzing their costs and risks based on market characteristics and taking into consideration their own resources.

However, their empirical observations from a database of Swedish-owned subsidiaries abroad, and also from a number of industry studies of Swedish companies in international markets, indicated:

Swedish companies frequently started internationalization with ad hoc exporting.

They would subsequently formalize their entries through what is called: the Establishment Chain;

The 1977 Model

The Establishment Chain

Ad Hoc Exporting

Agents

Own sales organization

Manufacturing in Foreign market

Tim

e

Sales

Internationalization frequently started in foreign markets that were close to the domestic market in terms of psychic distance. These are factors that make it difficult to understand foreign

environments. The companies will enter into other markets that were further

away in psychic distance terms.

This process had its origin in the liability of foreignness a concept that originally explained why a foreign investor needed to have a firm-specific advantage to more than offset this liability. The larger the psychic distance the largeris the liability of

foreignness.

Psychic distance & Liability of foreignness

The underlying assumptions of model were uncertainty and bounded rationality.

Two change mechanisms of Model:-

Firms chage by learning from their experience of operations, current activities in foreign markets.

They change through the commitment decisions taht they make to strengthen their position in the foreign market. They defined the commitment as the:

Size of the Investment X Degree of inflexibility

The 1977 Model, continued

They argued that the process is by no means deterministic: commitment might decline or even cease, if performance and prospects are not sufficiently promising.

Their model is considered to be descriptive, it has been characterized in the subsequent literature as behavioral.

Their 1977 model can be considered a model of rational internationalization, and be used for prescriptive purposes.

The 1977 Model, continued

Need for further development in model, due to realization of:

The Importance of Networks Concept of Insidership: developed before the entry in new markets or

even before the firm was created. Lasting relationships with important customers.

IMP project carried out in late 1970s and early 1980 by Swedish and other European countries. It demonstrated that:-

Close and lasting business relationships between suppliers and customers are indeed important.

Relationships usually involve a number of managers who coordinate the activities of the different firms.

The Firm in Market Environment: a Business Network view

Greater accumulation of knowledge and building trust: creating greater commitment: From: Weak ties and unilateral dependence, Into: Strong relationship, bilateral dependence

Realization of Importance of mutual commitment for Internationalization

Time taking (5 years) and managerial efforts to create working relationships

Effect of the liability of foreignness.

The webs of connected relationships are called business networks.

The Firm in Market Environment: a Business Network view (II)

Knowledge does not only accrue from the firm's own activities but also from the activities of the partners.

Based on the above, they view the firm as a business entity engaged primarily in exchange activities: exchange rather that production.

A firm’s success requires that it be well established in one or more networks. Anything that happens, happens in the context of a relationship. A firm that is well established in a network is an insider. It is via relationships that firms learn and build trust and

commitment – the essential elements of the internationalization process.

A firm that doesn’t have a position in a relevant network is an outsider. If a firm tries to enter a market without a relevant network: it’ll suffer from: liability of outsidership. “We as international students might have that problem”.

The Firm in Market Environment: a Business Network view (III)

Recent studies demonstrated that Market Entry shouldn’t be studied as a decision of modes of entry, but instead as a position-building process in a foreign market network.

A lack of institutional market knowledge: language, laws and rules, has to do with psychic distance and to the liability of foreignness.

Some important experiences they didn’t take into consideration in their initial plan: foreign market entry, model specific, core business, alliance, acquisition and other specific kinds of internationalization.

They add to their model the concept of: relationship-specific knowledge. That includes knowledge about each others heterogeneous resources and capabilities.

Management teams may have a strong efffect on internationalization: management’s team prior experience probably provide extremely important knowledge.

The 1977 model is general, doesn't consider all the kinds of knowledge. However they think that empirical studies of the internationalization process demonstrate the central role of the experiential learning in the process.

Knowledge and Learning

The original model doesn't explicitly include any affective or emotional dimensions in relationships. Though it can be argued that they are implicitly present in the concept of

knowledge. They now think those dimensions should be explicit.

Much has since been writen in social capital, trus and similar concepts, which of course include affective and cognitive elements.

They realize some empirical observations that affective dimensions are indeed important for understanding the relationships.

Trust plays an important element, it can even substitute knowledge, e.g.: when a firm lacks market knowledge and so lets a trusted middleman run its foreign business. Trust can be transformed into commitment if there is willingness

and positive intentions. There are reasons for firms to believe in the trustworthiness of

their business partners: relationships will continue if they both benefit in L/T.

Trust is a costly and time-consuming process.

Trust and Commitment Building

Assumptions of Model Perceived opportunities and risks affect commitment decisions. Knowledge of opportunities or problems initiate the company

decisions. “Risk Avoidance or Reduction Model (Risk Management)”

Knowledge and opportunities Objective knowledge leads to theoretical opportunities. Experiential knowledge leads to concrete opportunities.

Opportunities in Internationalization Process Opportunities exist in market because markets are never in

equilibrium (Kirzner, 1973). Prior knowledge of firm leads to discovery of knowledge and

privileged knowledge (internal resources) (Shane, 2000). Knowledge of external resources through network relationships. Interaction between partners for knowledge building.

Opportunity Development

Unilateral: One firm learning about the other firm’s needs, capabilities, markets and network thereby identifying an opportunity.

Bilateral: Two firms identifying an opportunity. Multilateral: Several firms interacting and increasing their commitment to an

idea/opportunity.

Opportunity Research

Opportunity Development Process & Internationalization Process:

Opportunity Stages

1. Recognition: gradually and sequentially increasing learning.

2. Exploitation: commitment feeds by trust.

Two Ends of Spectrum

1. Opportunity discovery 2. Opportunity creation

Declining Validity of Establishment Chain Companies behavior and rapid internationalization

Establishment Chain, empirical observations and inductive theoretical arguments.

Phenomena of international new ventures or born global.

International expansion cannot be done quickly. In fact, it takes a sufficient time for learning and relationship building.

Acquisition is a good way to enter into foreign market.

Changed business world but companies need to learn, to create and strengthen relationships in order to exploit opportunities.

Business Network Model of Internationalization Process

Traditional Way

• Overcoming various barriers• Less Important now

Present• Internationalization• More Important now• Undertaken to strengthen a

firm’s position in the network

Entry in Foreign Market

Internationalization Process Model

Internationalization

Developing Opportunities

Resemble Entrepreneurship

High degrees of Uncertainties

Effectuation Process

• Useful in understanding & dealing with spheres of human action

• a process entrepreneur follow while launching a new company

• useful in dealing with the uncertainties of future phenomena and problems of existence.

Effectuation Process (Sarasvathy, 2001)

Effectuation Process vs Internationalization Process Model

Environmental Characteristics

Limited number of available options

Incremental development

Emphasis on cooperative strategies

Similarities

Effectuation Process vs Internationalization Process Model

• Emphasis on Actors & Characteristics

• Consistent with ModelEffectuation Process

• Actors implicitly present in model

• To the extent actors are carriers of tacit knowledge, trust, commitment & network relations.

Internationalization Process Model

The Business Network Internationalization Process Model

Knowledge Opportunities

Network Position

Relationship Commitment Decision

LearningCreatingTrust-Building

State Change

Characteristics and Components of Model

Characteristics

Dynamic

Cumulative Process of learning

Trust & commitment building

Components

State Variables

Change Variables

State Variables

Opportunities

(subset of

knowledge)

Knowledge

(needs, capabiliti

es, strategie

s, and networks

)

Knowledge

Opportunities

Internationalization Process Network Network

Position

Change Variables

LearningCreating

Trust-Building

• In Old Model “Current activities”• Learning (higher level of abstraction: more

than experiential learning) • Affective dimension of “Trust-building” is

more explicit in this model• Opportunity creation: knowledge producing

dimension (more highlighted in this model)• Developing Opportunities: critical part of

any relationship• Knowledge, trust & commitment (High

levels) results in more efficient creative process

• Nahapiet & Ghoshal (1998) explained these by using concepts of Intellectual Capital & Social Capital.

Change Variables

Relationship Commitment

Decisions

• In Old Model “Commitment Decisions”• Addition of “Relationship” is to identify that

commitment is to relationships or to network of relationships

• Variable implies that focal firm decides either to increase or decrease the level of commitment to one or several relationships in its network

• From network point of view there are two kinds of decision regarding commitment to relationship:-• a: to develop new relationships (in most

business cases)• b: building bridges to new networks and

filling structural holes• Alternatively, to protect or support firms’

existing network of strategic relationships e.g. Volvo

Implications of Revised Model

Internationalization depends on a firm’s relationships and network.

Relationship partner who is going abroad, or already is abroad, wants the focal firm to follow. i.e. demonstrates its commitment to the relationship.

Where will an internationalizing company go?

Where focal firm and its partners see opportunities

In foreign market where the partner has a strong position

If no valuable partner then firm can go where it is easy to connect with a new firm that already has a position in the foreign market. E.g. Middleman i.e. An agent or a distributor

How might the process start?

Look for explanations in the state variables, such as knowledge, trust or commitment to the firm’s specific relationships.

Focal firm may exploit some of its existing connections by using the trust that a partner has established with another party or parties.

On other hand increased knowledge may cause either the focal firm or its partners to become dissatisfied with the relationship.

Firm, then may either decide to decrease its commitment or even end the relationship.

Applicability of Revised Model

Earlier Paper: Uppsala Model more applicable to smaller firms due to the argument that access to information is of more relevance to large companies.

Now, the model should be equally applicable to large and small firms as knowledge is highly context specific.

Large firms are better informed when they acquire a firm in a market where they are already active.

“Experience” matters more than size, in acquisitions which are not unusual.

Formulating a more unified explanation of the emergence and growth of multinational enterprise………Similarities between the Internalization Theory (Buckley & Casson, 1976; Hennart, 1982; Rugman, 1981) and the Eclectic Paradigm (Dunnings, 1980) on one hand, and the Business Network Model of the Internationalization process on the other.

Suggested research agenda:

Business Network

Model of the International

ization

Internalization Theory

Eclectic Paradig

m

The Internalization Theory

The Internalization Theory

• Internalization theory tries to explain whether MNCs use licensing or franchising methods for the sale of their products abroad or they produce abroad through FDI by themselves.

• In other words it answers the question why a company prefers FDI instead of producing in the home country and then exporting it.

Eclectic Paradigm:

Eclectic Paradigm

• Ownership Advantages: If an organization has more and valuable competitive advantages than its competitors, then the firm will more likely to engage in FDI, instead of going for licensing, franchising etc.

• Location Advantages: If another country or location has more benefits in term of cheap material, low wage rate, tax/ tariff exemption etc, then it should go for foreign direct investment instead of licensing/ franchising etc.

• Internalization advantages: The greater the net benefits of internalizing cross-border product markets, the more likely a firm will prefer to engage in foreign production itself rather than license the right to do so.

A firm’s problems and opportunities in international business are becoming less a matter of country-specificity and more one of relationship-specificity and network- specificity.

The problems associated with the foreign market entry are largely the same as those associated with entry into any other market.

There is a need for research that may explain when the liability of foreignness (the costs of doing business abroad) is the main problem in foreign market entry and when the liability of outsider-ship (a market where no network exist) is the primary difficulty?

Conti…

The business network model of internationalization can be used to study both resource- seeking and market – seeking internationalization.

Conti…

Resource seekers: The resource seeking companies are those investing abroad in order to obtain resources (Dunning, 1993).

Conti…

Market seekers: This category of motives focuses on demand aspects i.e. to increase sales, to exploit new markets, to increase revenue, to get first mover advantage etc.

Conti…