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the internationalisation process

2487 words (10 pages) Essay in International Studies

5/12/16 International Studies Reference this

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Assess the claim that the Uppsala model is a poor guide to the internationalisation process

Internationalisation is the process of increasing the international activity of a firm. This could be though exports or the direct purchase of a factory in a new market. In order to invest in a foreign market it is important for a firm to analyse which one it is equipped to enter in to, and also the mode of entry in to it.

The Uppsala model is one of the best known models of how firms set about the internationalisation process. It presents a sequential approach, meaning that the firm internationalises incrementally. The model assumes that there is a lack of knowledge of the foreign market which is detrimental to internationalisation. Therefore it suggests that a firm should firstly establish itself in its domestic market, and then increase its commitment and resources in the target country in stages, progressing to the next stage once sufficient understanding and knowledge of the foreign market conditions have been attainted.

The four stages identified by this model are referred to as the establishment chain. Step 1 is when the firm has no regular export activity; step 2 is when the firm begins to export to the target country through agents or independent representatives; step 3 involves the establishment of sales subsidiaries and finally the 4th step is starting to produce and or manufacture in the target country. This appears to be a logical and sensible approach to internationalisation; however the authors are already aware that it doesn’t work for every firm. For example, those firms with extensive experience in foreign markets may well jump stages in the establishment chain and invest in production facilities in a particular location without prior knowledge of it.

This framework also relies heavily on the concept of psychic distance, defined as the factors preventing or disturbing the flows of information between firms and markets. (Tayeb 2000 P141) This suggests that firms are more likely to build international relations with countries which appear to have the most similarities to them. These factors could include language, culture, political systems, educational systems and industrial development. Cultural differences are extremely important in business; it can make the difference between success and failure for a firm. For example the Japanese can appear to withhold information, which comes across to the western world as them being quite secretive, on the contrary the Japanese consider Westerners to be too blunt when speaking and explaining things. Other aspects like numbers and colours need to be taken in to consideration, especially with marketing. For example here in Europe we associate the colour red with love and passion, however in India it symbolises purity, and in South Africa it is the colour of mourning! The Uppsala model correctly highlights the importance of all these factors and demonstrates that many things need to be considered when planning to embark on an international venture. This makes it a good guide to internationalisation.

However recent studies have shown that psychic distance is decreasing and “the world has become more homogeneous” (Perrons 2004 P35). This is due to globalisation, a multi faceted process which actively seeks similarities in image, products and also in such things as marketing and advertisements. By highlighting the interdependence of countries the world seems like a smaller place. Technological advances also make communication between countries easier and quicker. A good example of this is the decrease in cost of international phone calls. Debra Johnson states that the cost of a 3minute phone call between New York and London has reduced from $250 in 1930 to just 75 cents by 1990. (Johnson and Turner 2006 P44-45) This highlights the drastic reductions in communication costs, which means firms, can afford to communicate for much longer periods of time, in turn improving relations. It is still important for the Uppsala model to assess psychic distance in spite of this.

Psychic distance is often linked with geographical distance, but this is not always the case. Examples of this are the relationships between the United Kingdom with countries like New Zealand and Australia; the countries have a relatively small psychic distance as they speak the same language, have similar cultures and also similar political and educational structures, and yet are geographically far apart. Edwards and Buckley found that most Australian firms who have invested in British factories or facilities have not begun with an export phase (quoted by Fenwick, M in the International Business Review ). The Uppsala model highlights internationalisation as a slow and steady process of learning through experience, but thanks to the advances in technology, education and travel many new businesses have vast amounts of international knowledge, thanks to relations with MNC’S. This highlights that companies with experience, or entrepreneurial firms would find the Uppsala model a poor guide to internationalisation, as they already have sufficient knowledge and resources to skip stages and invest in a foreign market.

The Uppsala model does not consider the use of joint ventures as a pathway to internationalisation. Joint ventures allow firms to share each others skills and knowledge of each others markets, thus reducing the risks. One example of this is NUMMI (New United Motor Manufacturing Inc); this is the joint venture between General Motors and Toyota. Toyota benefited from access to the US market, and General Motors benefited from Toyota’s technological knowledge and its renowned management structures. (Czinkota 2001 P414) Joint ventures also help the firms overcome cultural problems. Both will share knowledge of their market allowing psychic distance to be further reduced. As a result it is well suited to countries which would otherwise have huge cultural differences. However these advantages are not incorporated in to the Uppsala model.

The model suggests an identical step-by-step process for the internationalisation of the firm, which is intended to be repeated for each country that the firm tries to enter into. (Firms usually enter new markets with progressively greater psychic distance) However this view does not suggest a degree of difficulty from step to step, or from country to country. Furthermore it assumes that the quantity and type of knowledge required is identical in each market, when in fact some knowledge will be transferable and apply to more than one market. On the other hand some markets will be vastly different.

The Uppsala model also fails to consider the specific market environment and industry characteristics in the target country. This includes economies of scale, research and development intensity and also government regulations. Government regulations can vary within a country, state or city so it’s important to know what legislation applies in the specific place you wish to invest. The model is a fairly good guide to internationalisation as it encourages incremental learning which reduces some of the uncertainties linked with foreign markets. However it could be criticised because it fails to take in to consideration that some of the information obtained is transferable.

Some argue that the Uppsala model is too deterministic. This is the view that all occurrences have sufficient causes. In relation to the model, this suggests that all the actions taken by the firm are controlled by previous events or conditions. However firms can exercise free will, and have the freedom to choose from a selection of strategies and entry modes. These could include licensing, joint ventures or direct entry. This makes the Uppsala a pretty poor guide to internationalisation, as it gives the impression that the decisions made by the firm are determined by previous events, rather than previous events simply being influential on the decisions made.

SME’s for example often begin the internationalisation process when they are relatively small and gradually increase their international presence. The majority of SME’s have a lack of international knowledge, as they are traditionally domestic businesses resulting in limited international experience. Therefore the decision to launch themselves internationally is more risky than that of larger firms, this is also due to the required investment needed to internationalise, inadequate management and lack of brand recognition. For these firms it seems that the Uppsala model allows them to gain this essential experience in stages, increasing their knowledge of the international markets and allowing them to analyse the opportunities and problems which exist. By allowing the firm to familiarise itself with the market, with relatively low risk exports the Uppsala model removes or reduces most of the disadvantages that SME’s face when trying to internationalise. However it does not deal with the potential lack of finance facing many of these firms. The firm may also encounter problems with instability of exchange rates, local laws and regulations or political shocks; however this is not exclusive to SME’s. This suggests that the model is quite an efficient guide for SME’s however with a lack of capital an SME may find it difficult to progress to the 3rd of 4th stages of the establishment chain unless the exports have generated them sufficient profits.

Recent studies by Havnes and Hague ( book…. 2002) have in fact shown that a number of SME’s do not follow the Uppsala model. An increasing number of SME’s are increasing their involvement in foreign markets, and often start off with foreign direct investments or by forming alliances. Alliances provide mutual benefits for both parties, they can share knowledge creating a competitive advantage and it also significantly reduces the risks. Firms in two different countries can offer each other reciprocal services without either of them making an investment. One example is the alliance between British Airways and American airline companies. The two work seamlessly together, with British Airways providing the transatlantic leg of the journey and the American airlines taking care of all the domestic flights. By having an agreement between these two parties, British tourists for example can travel seamlessly from London to Florida via New York. With their baggage being automatically transferred on to the domestic flight due to the arrangement between the airlines. The Uppsala model fails to consider that internationalisation can start at any stage. Today with highly entrepreneurial SME’s it is highly likely that a company could directly invest in a foreign market without first starting with exports in that market. Again the Uppsala model does not consider these other methods of integration, and it appears that is more beneficial for certain SME’s to not follow that structure.

Born Global firms often become active in international markets soon after being established. Unlike the Uppsala model suggests, these firms may not establish themselves in their domestic market before internationalising. This is because they do not need to develop the firm any further, in other words, they have sufficient knowledge of the market and already believe they have an international product. A few examples of born global firms are Google, Facebook and Ebay. They are used world wide, are extremely popular and can be easily translated in to another language and be launched in another country. The Uppsala model is an extremely poor guide for born global firms. Their cutting edge products or services are already ready to be launched internationally without the need to develop the firm in the domestic market, or follow the establishment chain.

In general it appears that the Uppsala model can be a fairly good guide to internationalisation. It is noticeably suited to those firms with little to no international experience. Perhaps their decision to become internationalised has stemmed from saturation of their home market, and the need for new opportunities. Similarly it also appears suited to those firms who have limited resources perhaps because they have only just established themselves in their domestic market. The Uppsala model clearly reduces risks for these firms. It allows them to increase their commitment incrementally, only progressing further when they feel they have gained enough knowledge and experience.

However it is also obvious that there are multiple occasions when the model is a poor guide to the internationalisation of the firm.

Firstly when markets are similar it is unnecessary for firms to repeat all the stages set out in the establishment chain, as it is possible to transfer some of the knowledge obtained. It has been reported that psychic distances are decreasing and that countries are becoming more and more similar, so theoretically more and more knowledge should be transferable between markets.

Secondly when the firm already has a deal of international experiences. In these instances the firms may have sufficient knowledge to invest directly in to a foreign market. This is also true of firms with many resources; an investment in a factory in a new market for example would have relatively small consequences if they already had a multi million pound empire. In these instances the firms appear to jump stages of the establishment chain, simply because it is not necessary for them to incrementally increase their involvement in the foreign market.

This can also be true of born global firms. As these are highly entrepreneurial firms, they often develop rapidly internationally as they use many entry modes in to the foreign markets and appear skilled at building international relationships. Furthermore these products are often service based. Service based industries often create a global image with a standardised market approach, this is true of firms like Ebay and Facebook whose services are standardised across the world and simply translated into the relevant language. The Uppsala model therefore would be a poor model for highly entrepreneurial firms as they are not deterred by psychic distance. It would also be a fairly poor model for service based firms, who would perhaps benefit more from the reduction in psychic distance provided by franchising. Overall it seems that the Uppsala model could be a good guide to internationalisation, however it is only appropriate in certain situations.

References

  • Clegg. J, 1997. Internationalisation strategies P193-196. London: Macmillan Press
  • Czinkota. M, Ronkainen. I, Moffett. M and Moynihan. E, 2001. Global Business P414. Fort Worth: Harcourt College Publishers
  • Fenwick. M, 2003. International Business Review, Volume 12, Issue 3 P297-309. Available:http://www.ibrjournal.com
  • Johanson. J and J.E Vahlne, 1977. The internationalisation process of the firm P23-32. Cheltnam: Edward Elgar Publishing
  • Johanson. J and Wiedersheim-Paul, 1975. The internationalisation of the firm P305 – 322. Cheltnam: Edward Elgar Publishing
  • Johnson. D and Turner. C, 2006. International Business P44-45, P436 – 481. Oxon: Routledge
  • Hannson. G, 2004. The new modified Uppsala model. Sweeden: Kristianstad University
  • Perrons. D, 2004. Globalization and social change: people and places in a divided world P35. London: Routledge
  • Tayeb. M, 2000. International business P141. London: Prentice Hall
  • Welch. D.J and Luostarinen. R, 1988. Internationalization: Evolution of a Concept, Journal of General Management P 36-64. Henley-On-Thames: Braybrooke Press Ltd
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