Uppsala model of Firm Internationalization
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Introduction
Many multinational organizations begin their internationalization involvement gradually. However, the process of internationalization is influenced by business and economic factors in a certain country. In a foreign market, a firm intends to take advantage of global market opportunities. One the critical decision that an international firm should make is the choice of the appropriate country markets. In this respect, a firm must have adequate knowledge of the market is the key factor in choosing profitable markets (Thai and Turkina 2014, p. 41). Moreover, an organization needs to consider the psychic distance. The latter refers to total factors that disturb or prevent information low between markets and firms. According to the Uppsala model of internationalization, a firm gradually expands its activities in foreign markets (Weerawardena, Mort, Liesch and Knight 2007, p. 3). Therefore, a firm should acquire experience of domestic market before expanding its foreign operations. Finally, it should establish its foreign operations in countries that have cultural and geographical proximity (Andersson, and Holm 2010, p. 7).
The Uppsala model
The Uppsala model of internationalization refers to gradual increase in business operation of a firm based on a wide range of incremental decisions depending on knowledge acquisition and learning of foreign operations and market. According to Qian, Li, and Rugman (2013), there are four stages of the international expansion process in an organization. The stages include no regular export operations, overseas manufacturing or production, sales subsidiary and export through independent agents or representatives (Qian, Li, and Rugman 2013, p. 7). Furthermore, Santangelo and Meyer (2011) argue that the Uppsala model is a dynamic approach where the results of one cycle of events turn to be inputs for the next stage (Santangelo and Meyer 2011, p. 7). Additionally, according to Liesch, Welch and Buckley (2011) the key internationalization mechanisms are change and stages aspects. The stage aspects refer to the foreign market commitment and market knowledge. Consequently, when a firm has market knowledge, it has more commitment to the foreign market. Moreover, the stage aspect influences the successive change aspect via business activities and commitment decisions (Liesch, Welch and Buckley 2011, p. 9).
Research by Weerawardena, Mort, Liesch and Knight (2007) indicated that a higher level of market commitment and knowledge would lead into commitment decisions and higher levels of business operations in a foreign market. Therefore, internationalization is a process of evolution that is associated with learning (Weerawardena, Mort, Liesch and Knight 2007, p. 8). In most cases, a firm makes decisions depending on perceived opportunities and risks on the foreign markets. In addition, in a new market, risks and opportunities are part of the firms experience (Chen and Hsu 2010). A foreign firm must provide a solution to the problems that affects its operations in the market. Furthermore, alternative solutions will be developed aimed to increase commitment to the market (Qian, Li, and Rugman 2013, p. 19). Appropriate decisions are made concerning the reducing uncertainties in the market and other factors that influence. Most notably, decisions should target reduction of integration and interaction in the market environment through an increase in communication with customers and developing new services operations (Liesch, Welch and Buckley 2011, p. 9).
Market committee is composed of two aspects, which include the magnitude of the commitment and the amount of financial resources that a firm has committed (Clark, Pugh, and Mallory 1997). If an organization commits adequate resources in a firm, it shows that it has a higher level of commitment to that market. In some instances, such resources can be sold or diverted to other activities (Thai and Turkina 2014, p. 47). If the magnitude of commitment is higher, the firm integrates many resources in other parts of the company. Nonetheless, Johanson and Wiedersheim-Paul (1999) argue that resources situated in the home country and used in the production and development of products for a separate market create a commitment to foreign market. Additionally, higher level of commitment is developed from the huge resources to a certain market (Johanson and Wiedersheim-Paul 1999, p. 12).
According to the Uppsala model, market knowledge is important since commitment decisions depend on different types of knowledge (Santangelo and Meyer 2011, p. 12). Most importantly, knowledge of problems or opportunities is regarded to influence decisions. Furthermore, assessments of evaluation depend on the kind of knowledge concerning crucial parts of the market environment as well as performance of different activities (Almor, Hashai, and Hirsch 2006, p. 5). There are different types of knowledge related to money transferability, payment conditions, channels of distribution and supply and demand that vary depending on country and time (Kim 2003, p. 12).
Most notably, knowledge can be acquired through personal experience. Experiential knowledge is crucial form of knowledge because it is not easily obtained as objective knowledge. In the process of internationalization of foreign business, it is not easy to acquire experiential knowledge (Weerawardena, Mort, Liesch and Knight 2007, p. 9). However, knowledge acquisition takes place after a firm start its operations in the host country. The most important experiential knowledge in foreign business is the well-defined activities. Experiential knowledge is very important in foreign market as it offers the framework for formulating and perceiving opportunities. Johanson and Wiedersheim-Paul (1999) argue that there is a difference between market-specific knowledge and general knowledge (Johanson and Wiedersheim-Paul 1999).
General knowledge refers to marketing strategies and general features of particular forms of customers regardless of their geographical locations. On the other hand, market-specific knowledge is a type of knowledge that is acquired via market experience. In addition, this form of knowledge is easily transferable from one country to another. Most importantly, this type of knowledge ensures lateral growth, i.e., the development of technically related activities or unrelated business environments. There are direct association between market commitment and market knowledge. Johanson and Vahlne (2009) asserted that knowledge could be regarded as a resource. Therefore, when a firm has proper knowledge concerning a certain market, it consequently develops valuable resources and stronger market commitment Johanson and Vahlne (2009). In this regard, it is usually associated with experiential knowledge because it affects certain factors on the market and hence it is not transferable to other markets or individuals (Qian, Li, and Rugman 2013, p. 13).
Possible applications
In a wide range of countries, nations with different programs influence foreign operations and trade. In this respect, such programs depend on prices of various products in many countries. Programs in a country affect the export behaviours of international company. The Uppsala model is very useful in decision making and planning of organizations depending on international trades and operations (Qian, Li, and Rugman 2013, p. 1).
A study conducted by Johanson and Vahlne (2009) noted that the expansion or internationalization of companies in different foreign markets is associated to psychic distance (Johanson and Vahlne 2009, p.7). Therefore, the Uppsala model suggests that a firm should enter a foreign market that is closer and familiar to psychic distance to the host nation. Consequently, a firm should expand its business operations to foreign markets with greater psychic distance. According to Brewewer (2007), psychic distance refers to the different aspect in a certain country that prevent information flow from and to the market. For instance, industrial development, culture, business practices, education and language. In this regard, the geographical expansion of foreign investments depends on the degree of cultural and geographical proximity of the foreign host nation to the home country (Brewewer 2007, p. 4).
With regard to mode of entry, the incremental development of commitment in the market means that early foreign market entry represents some type of low commitment mode such as smaller joint ventures. Subsequently, the investors increase their commitment leading to higher levels of market commitment, which leads to the development of huge joint venture and completely owned subsidiary (Casillas, and Acedo 2012). According to Carneiro, Rocha and Silva (2008), commitment depending on the ownership level in various markets is associated with their psychic distance. In this regard, the mode of entry encompasses a lower ownership level in market that has higher psychic distance from the home nation (Carneiro, Rocha and Silva 2008, p. 9).
Internationalization Process
Empirical studies conducted in Swedish firms to investigate internationalization, business shows that these firms develop their global business activities in small steps. In this respect, the studies established that international businesses do not huge foreign investments at one point in time (Wang and Suh 2009, p. 9). The studies also noted that the majority of international companies started to export their products or services to another country through an agent (Santangelo and Meyer 2011, p. 13). However, they later develop a sales subsidiary and finally, the firm start a production is the host nation. In addition, the research noted that the order of establishment of international businesses depends on the psychic distance between the host/import and the home countries (Casillas, and Acedo 2012, p.9).
A study on the Swedish steel export firms, paper industry and Swedish pulp industry indicated that their sales subsidiaries were developed via acquisition of former agents. Similarly, the studies noted that an individual who was employed by the agent in the host nation could also establish sales (Qian, Li, and Rugman 2013, p. 16). The research focussed on a Swedish firm known as Pharmacia on its development patterns. Pharmacia had developed organizations in nine nations across the world. In addition, out of these nine countries, the firm had established manufacturing activities in three countries (Etemad 2013). Furthermore, the process of internationalization in eight out of nine countries was as follows. The firm acquired orders from foreign markets in these countries. Following a short period, Pharmacia signed an agreement with an agent or acquired solid licenses associated with product line. Furthermore, the firm developed sales subsidiaries in seven of those nations (Wang and Suh 2009, p. 11).
Most importantly, in the eighth country, they purchased a manufacturing firm that had initially worked as an agent. Addition, two of the seven sales subsidiaries in those nations further enhanced their engagement by beginning manufacturing activities. Most notably, the firm recorded increase in production decisions (Qian, Li, and Rugman 2013, p. 14). In this regard, the firm started with less complex manufacturing and later successfully initiated additional complicated productions.
Furthermore, Pharmacia began its sales subsidiaries in the ninth nation when it recorded higher demand. The organization had insufficient knowledge in this case. Prior to making decisions in this country, the company had received advice on how to work with an agent of another pharmaceutical firm – who became the leader of the subsidiary (Casillas, Moreno, Acedo, Gallego and Ramos 2009).
A research conducted by Johanson and Vahlne (2009) to investigate the internationalization process among the engineering firm in Sweden. The researcher established that the process of internationalization involves the creation of chain, identifying an independent agent or representative, sales subsidiary and finally establishment of production in the host country (Johanson and Vahlne 2009, p. 13). Therefore, the process of internationalization follows a pattern.
Moreover, in a new environment, a firm is likely to be exposed to new opportunities and problems. In the process of internationalization, they experience challenges of acquiring market knowledge in global functions (Wang and Suh 2009, p. 12). Insufficient knowledge due to variations in many nations in terms of culture and language also affects the internationalization. In addition, it affects decision-making process related to establishment of global functions. According to Fletcher, and Harris (2012) market, commitment and market knowledge influence both the way contemporary functions are carried out and commitment to decisions. Consequently, commitment and knowledge are changed (Fletcher, and Harris 2012, p. 3).
Uppsala model suggest that an international company develops measures to increase its sustainable profits that is assumed synonymous to growth. Casillas, Moreno, Acedo, Gallego and Ramos (2009) argue that a firm attempts to reduce the level of risks. Therefore, a firm makes decisions that would minimize risks in the industry. Furthermore, the Uppsala models assume that internationalization affects perceived risks and opportunities, which later affect current activities and commitment decisions (Casillas, Moreno, Acedo, Gallego and Ramos 2009, p. 10).
Psychic Distance
According to Johanson and Vahlne (2009), the concept of psychic distance is developed on the idea that firms are able to spread their operations in some countries more easily as compared to others. Therefore, research has indicated that an international company first enters a more familiar market before introducing its operations in less familiar markets (Johanson and Vahlne 2009, p. 14). Therefore, Fletcher, and Harris (2012) argue that psychic distance is indeed common to “familiarity.” However, the researcher argues that a firm determines its psychic distance based on the perceived differences between the environment in their home country and the host country markets. Moreover, an international firm chooses a market that is assumed similar or familiar to their home country (Fletcher, and Harris 2012).
Eventually, a firm enters into foreign markets that are assumed dissimilar. Where business and other factors are similar in two markets international firms has easy mode of entry (Jones 2009, p. 10). Research has noted that one of the most important psychic distances in the market is the determination of cultural differences. Therefore, cultural factors play a critical role in global business operations. However, Fletcher, and Harris (2012) contradicts with other researches, which support the idea that cultural factors play a crucial part in psychic distance. Instead, the research suggests that due to emergence of new technology, cultural factors do not have effects on international business operations (Fletcher, and Harris 2012, p. 15).
Uncertainties and Risk
Uncertainties and risks play a critical role in explanation of internationalization of a firm and in theorising based on international entrepreneurship. According to Christofor (2008), an international company must strive to keep the level of risk and uncertainty at minimum level (Christofor 2008). In the internationalization process, a firm should develop links to other factors such as the personal background, culture, networks and knowledge of decision making. Therefore, Liesch, Welch and Buckley (2011) suggest that in order to reduce risk and uncertainties in a foreign market, a firm should take into consideration these factors (Liesch, Welch and Buckley 2011, p. 12).
According to Fletcher, and Harris (2012) international entrepreneur should establish a culture of risk management that help to prepare for risk. In particular, an international business should take caution of personal financial risks (Fletcher, and Harris 2012, p. 12). However, a study by Casillas, Moreno, Acedo, Gallego and Ramos (2009) indicated that the majority of international entrepreneurs are risk takers hence they are able to act boldly. The international entrepreneurship tends to concentrate on individual entrepreneurship and their risks. Furthermore, the researchers argued that high uncertainties and risks are regarded as constraining aspects to their growth momentum (Cavusgil and Knight 2009). In addition, Fletcher, and Harris (2012) argued that if risks and uncertainties linked with a business commitment are decreased to an appropriate level, the level of commitment is unlikely to take place (Fletcher, and Harris 2012). Furthermore, risks and uncertainties affected content and nature of action taken. Risks and uncertainties may be important in process of making decisions at different levels of international businesses (Forsgren 2002).
However, business is involved in new operations such as entering new markets through different operation modes or shifting their international strategies. In the initial steps of internationalization, the majority of companies have inadequate knowledge and information about their markets (Jones 2009, p. 13). Similarly, Giarratana and Torrisi (2010) asserted that some of the international companies lack sufficient experience to work in new markets. However, through international experience most of the international organizations are able to lower the perception of higher risk and raise benefit awareness (Giarratana and Torrisi 2010, p. 7). According Figueira-de-Lemos, Johanson, and Vahlne (2011) uncertainties hinders the capacity of companies to establish value by restricting the effectiveness and scope of the operations they undertake (Figueira-de-Lemos, Johanson, and Vahlne 2011).
Researches have revealed that many international firms are not conscious of insufficient experience and knowledge at global market. Many international ventures are risky hence; entrepreneurs should have adequate knowledge and awareness when making critical decisions (Larimo and Vissak 2009, p. 4).
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