The uppsala internationalization process model revisited

The Uppsala Internationalization
Process Model Revisited
Afzaal Ali
Angel Arbizu
Wasim Ahmad
Yasir 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

Introduction
 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.

Core Argument
 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.

The 1977 Model
 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 Establishment Chain
Ad Hoc
Exporting
Agents
Own sales
organization
Manufacturing
in Foreign
market
Time
Sales

Psychic distance & Liability of foreignness
 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.

The 1977 Model, continued
 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 Firm in Market Environment: a Business
Network view
 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.

Network view (II)
 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.

Network view (III)
 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”.

Knowledge and Learning
 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.

Trust and Commitment Building
 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.

Opportunity Development
 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 Process &
Internationalization Process:
 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 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 vs Internationalization
Process Model
Environmental
Characteristics
Limited number
of available
options
Similarities
Incremental
development
Emphasis on
cooperative
strategies

Effectuation Process vs Internationalization
Process Model
•Emphasis on Actors &
Characteristics
Effectuation Process •Consistent with Model
•Actors implicitly present in model
• To the extent actors are carriers
of tacit knowledge, trust,
commitment & network relations.
Process Model

The Business Network Internationalization
Process Model
Knowledge
Opportunities
Network
Position
Relationship
Commitment
Decision
Learning
Creating
Trust-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,
capabilities,
strategies,
and networks)
Knowledge
Opportunities
Process Network
Network
Position

Change Variables
Learning
Creating
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?
In foreign market
where the partner
has a strong position
Where focal firm and its
partners see
opportunities
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.

Suggested research agenda:
 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.
Business Network
Model of the
Internalization
Theory
Eclectic
Paradigm

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.

Conti…
 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.

The uppsala internationalization process model revisited

The uppsala internationalization process model revisited

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