Firm Internationalization Concept And Background

Published Date: 02 Nov 2017

According to the definition by Hollensen (2007, p. 5), internationalization can be considered as "Doing business in many countries of the world, but often limited to a certain region (e.g. Europe)". The reason for the firm to internationalize is usually as Knight (2000, p. 12) states the initiative to extend business in foreign countries when the firm seeks to expand its sales to a new and more profitable markets. This is true in a growing number of cases, because the boundaries between domestic and international markets have been diminishing and the international competition has increased. Besides wider markets, internationalization may increase firm's profitability, attain latest technology and innovations in the product and manufacturing process. (Knight 2000, p. 12-13).

Altogether, this phenomenon of this kind of internationalization is called „globalization‟: "Globalization imitates the trend of companies selling and distributing products and brands in countless countries around the world. It is connected with governments tumbling trade and investment blockades, large firms manufacturing in multiple countries, local firms sourcing raw materials or parts from cost-effective suppliers abroad, and foreign companies progressively contending in home markets" (Dunning 1993 cited in Knight 2000, p. 12). The current era of globalization began after World War II when Western nations committed to global trade and investment and, in addition to suitable political environment, the further development has been driven by technological innovations, transportation and communication (Peng 2006, p. 19-20). Nowadays, globalization has resulted in "the increasing interdependence of national economies – involving consumers, producers, suppliers and governments in different countries". Globalization has encouraged firms to find new opportunities by internationalizing their operations and the greater amount of interconnections has made this possible. Many small and medium-sized technology-based companies are forced to adopt international perspectives, too, as global competition has increased (Litvak 1990 cited in Karagozoglu & Lindell 1998). Therefore, the need for globalization is not anymore what only MNEs have.

2.2 Earlier Theories for Internationalization

The internationalization of a firm has been discussed by a number of scholars. The early literature was influenced by general marketing theories, followed by a view of internationalization as a choice between exporting and Foreign Direct Investment (FDI) decisions (Hollensen 2007, p. 61-62). The traditional marketing approach, called also as the Penrosian tradition, had a strong marketing focus. It was originally introduced by Penrose in 1959 and further developed by Kindleberger in 1969 and Hymer in 1976 with the idea of having a compensating advantage to overcome the cost of foreignness (Hollensen 2007, p. 61-62). A sequential model of internationalization called Vernon product cycle hypothesis was introduced in 1966 and it explained internationalization as going through different phases of penetration into the target country. Product life cycle hypothesis introduced also the question between standardized products and product differentiation and where the manufacturing could be located (Hollensen 2007, p. 61-62). The Transaction cost approach was created in 1976 by Buckley and Casson to drive the focus towards the decisions between firm’s own operations and licensing (Hollensen 2007, p. 62). The Innovation-Related Internationalization Model in turn by Cavusgil (1980), Czinkota (1982) and Reid (1981) is considering internationalization as an innovation for the firm. In 1982 Caves and also Rugman were using the transaction cost explanation to explain the choice of foreign entry modes by firms. (Andersen 1993, p. 213, 218). Dunning’s eclectic approach from 1988 explained the Ownership-Location-Internationalization (OLI) framework to take locational variables in FDI into consideration (Hollensen 2007, p. 62; Andersen 1993, p. 218). Studies of the internationalization of Swedish companies resulted in formation of the Uppsala model by Johanson and Vahlne in 1977. In 1988, the network aspect was added to the model by Johanson and Mattson, which led to the network model of internationalization. (Hollensen 2007, p. 61-62) Research on internationalization has also showed that different theories and factors can be used on firms on different stages on their internationalization process. For example, some theories describe a firm in the early stage of the international development well whereas other theories describe a firm on late stages (Andersson 2003, p. 852).

2.3 The Uppsala Internationalization Model

Johanson and Wiedersheim-Paul developed the internationalization process model of the firm and published it first in 1975 and two years after that by Johanson and Vahlne (Andersen 1993, p. 210; Johanson and Vahlne 2009, p. 1411). In this chapter we discuss the theory of the Uppsala model and the critical views of it. The Uppsala model is in the background of the network model and that is why we consider it as important factor and pay more attention to it.

Theory behind the Uppsala model

The basic characteristic of the Uppsala internationalization model could be explained like this: "There is a loop process sandwiched between the market and the company whereby market knowledge guides to commitment decisions in the company, the ensuing marketing activities in their turn leading to augmented market obligation and knowledge, and many more" (Durrieu and Soldberg 2006, p. 60). In other words, learning process takes place primarily through experience in the market leading the company to be involved in international markets. The base for internationalization comes from managerial learning (Coviello and Munro 1997, p. 363). As Johanson and Vahlne (1990) is cited in Durrieu and Soldberg's research (2006, p. 61) empirical knowledge is a driving force in the internationalization process generating business opportunities.

The Uppsala model presents that a company goes through four steps of gradual engagement during the internationalization process. In the beginning, the firm has no regular export activities. On the next phase, the firm engages in indirect exporting. Third phase is the establishment of a sales agency and finally, on the fourth phase, the company sets up a wholly owned foreign subsidiary. (Christofor 2008, p. 58-59; (Johanson and Wiedersheim-Paul 1975 cited in Andersen 1993, p. 210) Overpass through stages of the process is referred as the establishment chain. The selection of the target country depends on so called psychic distance which means the psychologically perceived difference between home and the target countries that the managers may have. It consists of features that render it complicated to understand foreign environments (Johanson and Vahlne 2009, p. 1412). These factors can be such as language, political system, level of education and industrial development. An internationalizing firm seeks to find a target country where the psychic distance is low. The firms will proceed gradually into markets which are far away in psychic distance, because knowledge is developed gradually (Johanson and Vahlne 2009, p. 1412; Johanson and Vahlne 2003, p. 90). But the bigger the psychic space the bigger is the liability of foreignness. The latter term clarifies the reason why a overseas investor desires to have a firm-specific advantage to more than counteract this liability. Penetrations into psychic distance markets with risks yet potential reward are made incrementally. It is because learning and commitment building take time (Johanson and Vahlne 2009, p. 1412). The Uppsala model has two change mechanisms that make it dynamic. In the first place, firms transform by learning from their experience of their recent activities in overseas markets. Secondly, firms transform in the course of the commitment decisions made for strengthening their position in the foreign market. Experience increases firm's market knowledge, which in turn influences decisions about the level of commitment and the activities that later grow out of them. So naturally lack of knowledge concerning foreign markets is the main barrier to internationalization (Johanson and Vahlne 2003, p. 89). Hence to develop knowledge is crucial to a firm's internationalization and especially that knowledge that grows out of experience in current operations is decisive in the learning process (Johanson and Vahlne 2009, p. 1415).