Somalilandsun: The process of internationalisation of firms is an area which before 1975 and 1977 was not widely covered in research and the studies made on the topic was focused on internal issues and fragmented at best. In the 1970s research teams in both Sweden and Finland were studying the process of internationalisation. The Swedish research team led by Johanson & Vahlne from the University of Uppsala presented a theory that suggests that the internationalisation of business occurs in sequential steps.
The Swedish researchers developed their model as an independent and complete model to explain the sequential steps in the direction of increased foreign dedication to a market. The model was based on empirical observations of Swedish manufacturers and it was also to a certain extent influenced by the works of Penrose Cyert & March, Aharoni, Vernon and other researchers. The Uppsala Internationalisation model distinguishes between four different steps or phases of market entry. Step 1: No regular export activities (sporadic export). Step 2: Export via an independent representative (export mode). Step 3: Establishment of a foreign sales subsidiary. Step 4: Foreign production/manufacturing, the direct establishment of a subsidiary in the host country.
From the observations, they concluded that companies normally initiate their expansion in a psychically and culturally nearby market. There, they have greater knowledge of the market and a control of resources, thereafter gradually as the company become more experienced and acquired better resources, they expand to the more distant market.
Secondly, most often companies entered a new market through export before the establishment of foreign sales subsidiary or opening up foreign production facilities. In their research Johanson & Vahlne in part, refer to fellow researcher Aharoni, and the discussion about the interdependence of market knowledge and market commitment and they developed a matrix model to illustrate the positive correlation between market knowledge and the commitment decisions, as well to emphasise the sequential development of market activities and its positive correlation to market commitment.
The core explanation of the model is that increased market knowledge will lead to increased market commitment and vice versa. The Uppsala model is based on the relationship between knowledge about the market the company seeks to penetrate, managerial decisions regarding commitment and the outcome of initial activities as a determinant for future commitment. Johanson & Wahlne described the process and the interrelation between these factors as “Market knowledge and market commitment are assumed to affect decisions regarding the commitment of resources to foreign markets and the way current activities are performed. Market knowledge and market commitment are in turn affected by current activities and commitment decisions”.
The underlying assumptions of the 1977 model are uncertainty and bounded rationality. It also has two change mechanisms. First, firms change by learning from their experience of current activities, in foreign markets. The firm also augment their activities through the commitment decisions that they make to strengthen their position in the foreign market. They defined commitment as the product of the size of the investment times its degree of inflexibility.
Whilst a large investment does not necessarily indicate a strong commitment, unwavering dedication to meeting the needs of customers does. Experience builds a firm’s knowledge of a market, and that body of knowledge influences decisions about the level of commitment and the activities that subsequently grow out of them, this leads to the next level of commitment.
Hence, we must take in to account the model is dynamic. It does not specify the form that increased commitment might take. Indeed, commitment may decline, or even cease, if performance and prospects are not sufficiently promising. Contrary to the views expressed by some researchers, the process is by no means deterministic. Johanson & Vahlne assumed nonetheless that the process of internationalising will continue as long as the performance and prospects are favourable, an assumption that is challenged by other researchers who claim companies do not always act in a rational manner and despite intel telling them to withdraw or reduce their commitment they tend to carry on with their original strategy despite the fact most or all intelligence point to the need to a change in strategy.
Johanson & Vahlne also assumed that learning and commitment building takes time. This explains why moves into riskier, but potentially rewarding, modes and moves into markets that are more distant in terms of psychic distance are made incrementally. The model is considered to be descriptive, largely because it is based on the theories of Cyert and March even though the latter focused more on the internal processes in the firm.
The behavioural approach puts the firm in the position as the basic unit of analysis. It attempts to predict behaviour with respect to price, output and resource allocation decisions. It emphasizes the decision-making process. In general, one can state that larger firms have a tendency to skip the first steps in the model and go directly to stage 3 and 4. Whilst small and medium-sized companies tend to be mare careful and the process of penetrating the foreign market tends to be to some extent a more extended process of learning and avoiding uncertainty. Larger companies therefore to a larger extent tend to expand into a foreign market as follows: Step 3: Establishment of a foreign sales subsidiary. Step 4: Foreign production/manufacturing, the direct establishment of a subsidiary in the host country.
This, whilst smaller companies according to Johansson & Vahlne tend to follow the model more precise. This is maybe not surprising since the model originally was adapted to gain an understanding of how small and mid-sized companies behaved in the process of internationalisation. The initial model created in 1975 and 1977 failed to take into account factors such as the importance of networks, The Uppsala model was from the beginning a rudimentary attempt to describe the basic process behind internationalisation but it failed to take into account factors such as the importance of networks.
Johanson & Vahlne continued in steps to adapt their model to an increasingly complex business environment and challenges from other researchers. 2009 they wrote a paper titled “ The Uppsala internationalisation process model revisited: From liability of foreignness to the liability of outsidership” where they focused more on the network aspects of the internationalisation process of the firm.
A number of scientific studies have proven the role of networks and their importance in the internationalisation of firms. Coviello and Munro conducted empirical studies of the internationalisation of small software firms. They found that network relationships have an impact on foreign market selection as well as on the mode of entry in the context of ongoing network processes. Their findings led them to develop a model that combines the process model such as the Uppsala Model with a more network-oriented approach. Many researchers have looked at networks and their importance in studies of internationalisation.
Johanson & Vahlne in time also understood that their original model had a need to be developed further in light of such clear evidence of the importance of networks in the internationalisation of firms. The research that has been done to date generally has studied the ways in which networks influence internationalisation, without discussing how those networks have been created, and without considering the network structure in the country or countries firms entered.
The original Uppsala model focused on the process in which firms spread their business activities abroad whilst other researchers like Coviello, Porter among others, focus more on the network and cluster aspects of the internationalisation process. On the other end of the spectrum, we have, Cyert and March as well as the legendary researcher Edith Penrose which had a more introspective approach where they focus on the different stakeholders within the firm as well as the processes that leads to a certain decision
Todays business environment has changed and the question is how well the model of Johansson & Vahlne has aged. Many firms today due to globalisation and the digital economy internationalise much more rapidly or in many cases instantaneously. One theory that takes notice of this is the theory of Born Global. The born global firm internationalise in a way that is very different from what we see in the model created by Johansson& Vahlne.
The definition of a born global firm is “a business organisation that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries.” Many companies go global, but that does not make them born global firms.
What distinguishes born global firms from the rest of international organisations is that they originate internationally. Born global firms, from their beginnings, have a global focus and commit their resources to international ventures.
The Born global theory is also complemented by the theory of the Born Regional, where the firm acts in a way similar to the Born Global but is restricted by certain boundaries. Some firms within the EU can be seen as Born Regionals since the EU with its freedom of trade with goods and services as well as the freedom of movement of people and capital provides the growing grounds for the firm. One Such firm is the IT recruitment firm JoBs4U OÜ (www.jobs4u.fi).
Firms like this can operate within a certain area but due to formal ( Laws, constitutions etc.) or informal institutions ( Culture, values etc.) the firm can not operate outside a certain region. One can say that the Uppsala model of internationalisation was the first real attempt to describe a process whilst the theory was rudimentary. During the course of the last 60 years, the view regarding the internationalisation of firms has gone from an introspective view of the firm and its actions via the works of Johansson & Vahlne to a more network-based approach to the born global and borderless firms.
At the moment we find our self caught up in a battle, the battle between those who seek to continue on the path to globalisation and those who oppose it. This battle will not just affect us on a personal level but it will also have an effect on businesses and how they internationalise. How this will end? No one knows but if the outcome leads us to a less integrated world, perhaps the theories of Johansson & Vahlne will be revived.
By Henrik G.S. Arvidsson & Ruslana Arvidsson