Uppsala Model and the Network Approaches to Internationalisation

Question: Compare and contrast two approaches to the study of internationalization.

Introduction

Internationalisation has been defined as the process of gradually increasing involvement of enterprises in the international environment (Johanson and Vahlne, 1977). In an increasingly global market, the study of internationalisation is paramount in understanding how firms expand beyond local markets. Several approaches have been put forward to understand the process however, this essay will focus on the staged Uppsala model and the network approaches to internationalisation. This essay argues that, despite the differences between these approaches, they both present useful ideas and they are not mutually exclusive. It also argues that there is no one ‘correct’ approach to internationalisation.

The Uppsala Model

The Uppsala Model is a process model that originated from studies on internationalisation by researchers at the University of Uppsala, based on empirical studies. The research studied Swedish firms, finding that they tend to develop their international operations in small gradual steps (Johanson and Vahlne, 1977:24). This model presents the internationalization process as sequential and linear (Stremtan et al, 2009), based on the premise that internationalization is the product of a series of incremental decisions (Johanson and Vahlne, 1977:23). There is an establishment chain which begins with the ad hoc export of products, then progresses to selling through an agent, establishing sales subsidiaries and finally a production subsidiary. The model was designed to be dynamic and emphasises the need for experiential knowledge about foreign markets and their operations (Johanson and Vahlne, 1977:23). This knowledge is integral to the process as it informs decisions on market commitment and the activities which flow from these, with further resource commitment and decisions being influenced by information acquired from current activities and a firm’s subsequent involvement. This response to information is dubbed the “change aspect” (Johanson and Vahlne, 1977:26). Experiential knowledge gained from personal experience cannot be taught or transferred, as opposed to objective knowledge which is transferable (Penrose, 1966:53). The less a firm understands, the higher the psychic distance and perceived uncertainty will be. Psychic distance refers to the factors affecting the flow of information between foreign markets, such as differences in education, languages, business culture and practices and industrial development (Johanson and Vahlne, 1997:24). It is proposed that firms begin by establishing operations in psychically similar markets before venturing into heterogenous markets. Consequently, a firm will begin its first foreign operations in a market with which it is similar and hence has a low psychic distance. Market-specific knowledge is also identified as critical in establishing technically similar activities in characteristically different business environments (Johanson and Vahlne, 1977:28).

The Network Approaches

According to the network approach, the internationalisation process is determined by the establishment of formal and informal relationships with network participants in foreign markets and maintaining and developing these relationships in order to gain access to external resources (Johanson and Mattson, 1988). This implies a structure of interdependency which requires coordination of operations and management of ties. Johanson et al (1988) propose that internationalisation can be achieved either by international extension, penetration or integration. The network theory is concerned with the firm as well as its relations with network participants, allowing for the cooperation of firms while still embedded in their distinct environments (Etemad, 2013:49). ‘Insiders’ are firms that are well established in relevant networks and therefore privy to network’s knowledge and resources. ‘Outsiders’ which do not have a position in a relevant network are at a disadvantage as they lack this access (Forsgren, 2008). This is referred to as the liability of outsidership and it can be a barrier to internationalisation, particularly to a firm attempting to enter a foreign market with no relevant network position (Johanson and Vahlne, 2009: 1415). It was found that insidership in networks developed prior to entering new markets, “even before the foundation of the firm, is instrumental to the internationalisation process” (Coviello, 2006). A distinction is drawn between strong ties, referring to a high level of social relationships, and weak ties which are less personal and serve as links to otherwise inaccessible parts of the network which are useful for resource and opportunity identification (Granovetter, 1985). Conversely, strong ties tend to exist between firms in the same or similar markets so the information available here is likely to be limited (Ojala, 2009). Being over-embedded in a network means there is access to less variety of new information (Uzzi, 1997).

Evaluation

Both models of the internationalisation process are based on the behavioural view of the firm (Cyert & March,1963). The two models also share the underlying notions of resource heterogeneity and the relationship between knowledge and commitment (Johanson and Kao, 2010). Hence, knowledge must be gathered in order to combat uncertainty, and to understand and enter into new markets. This knowledge will influence the commitment, current activities and decision-making of a firm seeking to internationalize (Stremţan et al, 2009:1028), and therefore the progress of internationalisation.

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One difference between the two processes is their approaches to gathering the information required. The Uppsala model stresses the importance of experiential learning to gather market-specific knowledge (Johanson and Vahlne, 1977). It has been found that internationalisation knowledge is positively correlated to variations in the experiences a firm has in different markets (Barkema and Vermeulen, 1998). However, researchers have also found that more general internationalisation knowledge is equally important (Johanson and Vahlne, 2009). It has also been suggested that certain types of non-experiential learning can also be effective, such as imitation of firms with high legitimacy (DiMaggio and Powell, 1983) and the acquisition of other firms (Forsgren, 2002). Consequently, this implies that the Uppsala model exaggerates the gradual nature of the learning process. Additionally, it has been found that firms can learn through focused research when faced with a problem or opportunity (Huber,1991). The network approach in contrast, stipulates that relationships in the relevant networks guarantees access and facilitates the transfer of knowledge (Majkgård and Sharma, 1998). It consists of general internationalisation knowledge available through the network which can aid the firm’s internationalisation. Nevertheless, as empirical studies of the internationalization process demonstrate the importance of experiential learning, it should continue to be valued, and supported with other methods of knowledge development (Johanson and Vahlne, 2009).

The Uppsala model also presents psychic distance as the main determinant of market entry order. In contrast, according to the network approach firms will enter markets based on relationships with network participants. Research has found that psychic distance influences internationalisation as the performance of firms in international markets are affected by the level of similarity (Evans et al, 2000). It has also been found that firms prefer to enter markets where English is spoken, to reduce language barriers (Ojala, 2009), which supports the relevance of psychic distance. A study found that software firms’ network relationships first give them access to psychically similar countries and then in time these relationships give access to countries with higher psychic distance (Coviello and Munro, 1997) which is in line with the psychic distance argument in the Uppsala model. A larger psychic distance would make it more difficult to build new relationships due to the liability of foreignness (Johanson and Valhne, 2009). However, the market selection was not based on psychic distance, but rather as a result of the relationships the firms had in networks (Coviello and Munro, 1997). Furthermore, a study of Finnish firms entering Japan showed that other factors affect market entry decisions, such as “market size or sophisticated industry structure” (Ojala, 2008). Firms, particularly in high-technology sectors, internationalise because the target customers for the niche products they offer are in other markets. In addition, the effects of psychic distance are not insurmountable. Finnish firms were able to overcome psychic distance in Japan by hiring local employees and managers (Ojala, 2008). It has also been found that knowledge-intensive SMEs are more likely to select the target country without network influence, before utilising existing partners of forming new relationships to achieve entry into the market (Ojala, 2009). This shows that though relationships are important to these firms when entering markets, the actual decision to do so is strategic.

The Uppsala model’s sequential one-way approach and establishment chain have also been described as outdated. It was found that software firms begin to internationalise their operations early on in leading markets and the majority did not follow the entry route suggested by the Uppsala model, with many starting with direct entry modes (Ojala, 2008). A study of technical consultants also shows that because the sale and the production of services cannot be kept separate, and it is easier for these firms to establish a subsidiary abroad, they do not follow the establishment chain (Sharma and Johanson, 1987). This shows that the establishment chain has limited applicability to service industries. Some companies make deliberate decisions to avoid certain stages in the chain, which contradicts the model (Andersson, 2011). Furthermore, as a result of globalisation, markets have become more homogenous, making it easier to set up businesses abroad (Petersen et al, 2003), hence the establishment chain is obsolete in many instances like in relation to born-global companies. In contrast, the network approach can explain the internationalisation process of different companies based on the degree of company internationalisation and market internationalisation making it more widely applicable to firms in different conditions (Johanson & Mattson 1988).

The Uppsala model postulates a “monotonically increasing proportionality between knowledge accumulation and resource commitment” (Petersen et al, 2003) which means there is some resource commitment at the outset and this increases in correspondence with the gradual completion of each stage of the process. In contrast, with the network approach resource commitment is only required after relevant network relationships are established and information is accessible to make decisions. Hence, the network approach is less resource dependent in the initial stages of internationalisation and therefore a more accessible option for those with limited resources.

The Uppsala model fails to explain the beginning of the internationalisation process (Andersen, 1993) nor does it consider the decision makers’ perceptions and roles, which makes it appear deterministic (Andersson, 2000). The network approach in contrast stipulates that it is unnecessary to consider the beginning but rather think of how firms strengthen their network positions (Johanson and Vahlne, 2009). It also provides a better explanation for the internationalisation of SME’s which rely on networks for the supply of international experiential knowledge and is influenced by manager’s personalities which facilitate the international relationships and (Barbosa et al, 2005). However, the network approach fails to explain how networks are created and to consider the network structures in the countries being entered (Johanson and Vahlne, 2009). It also does not address issues associated with over-embeddedness such as power play, overdependence and influence from networks leading to redirection of resources from original plans.

It is apparent that both approaches have limitations and so are not sufficient on their own. A review of the literature on the internationalisation process shows that many view the network approaches and Uppsala stage model as alternatives to the other, however they need not be mutually exclusive. To illustrate this, consider the business network model proposed by the originators of the Uppsala model (Johanson and Vahlne, 2009) which integrates the two models. The process model is retained but the firm is seen as embedded in a simultaneously enabling and constraining business network where actors participate in a wide variety of interdependent relationships. Internationalisation is then achieved as a result of a firm’s efforts to strengthen its network positions (Johanson and Vahlne, 2003). The recognition of opportunities would be from the privileged knowledge from the network in addition to the firm’s experience. The integration of the models would also eliminate some issues related to over-embeddedness as firms will be less vulnerable to network pressure as they are still following the process. Rather, the network involvement will be beneficial in reducing the psychic distance by establishing relationships which would make it easier to have access to agents or to set up subsidiaries.

Despite this suggestion, from the practical study of internationalisation, there does not appear to be a model which is applicable to all companies seeking to internationalise (Stremtan et al, 2009). Firstly, much of the research on internationalisation is done on specific markets and industries, and as such it may be inaccurate to extrapolate the findings to other types of businesses or markets. Moreover, the global business environment is constantly changing, and this affects the perceived psychic distance and the separation of markets. Hence it seems the knowledge factor the models are based on have diminished in their effect on the internationalisation process (Petersen et al, 2003). With advances in ICT and the accessibility of the internet, objective and tacit knowledge can be codified meaning information about different markets can easily be obtained resulting in the acceleration of the internationalisation process (Petersen et al, 2003).

In conclusion, the process of internationalisation can be seen as changeable as the world market continues to be globalised. A better approach could be to view the internationalisation process as consisting of choices, which are influenced by factors such as context, the business itself and “commercial, industrial, and environmental and opportunity determinants” that influence decisions (Stremtan et al, 2009). However, evidently network relationships will continue to be influential in achieving internationalisation as businesses operate within multilateral networks.

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Reflection on the course

When I began this course, I expected to learn about the practical issues that originate and influence decisions to start a business. I assumed it would take a practical approach in explaining what enterprise involves. I expected to come across issues like barriers to enterprise such as project financing, and factors that determine failure and success of firms, with case studies on successful businesses such as Apple.

The reality of the course was different. Although some of the issues I expected to be addressed were outlined, it was on a more theoretical basis than I envisioned, which I found surprising. I had yet to come across entrepreneurship as an academic field of study, having always seen enterprise as a practical venture. The module has taught me to view entrepreneurship through different and sometimes opposing theoretical lenses.

As a non-business student, this module served primarily as an introduction to the study of entrepreneurship. This means that I had no pre-existing views of entrepreneurship or the perspectives we have studied. I have since gained a better understanding. From studying the network-based view, I now have meaningful insight into just how influential networks can be in different aspects of enterprise, ranging from the passing of information, resources and opportunities to the expansion of businesses and internationalisation. My previously superficial views have been substantiated by academic material.

The module has shown me that a clear understanding of different approaches and looking at situations from different perspectives, can be instrumental in tackling issues. It was particularly interesting to analyse current business situations such as the demise of the high-street based companies such as Debenhams whose profitability has been significantly affected by its structure. I have learnt that by approaching issues from the different theoretical perspectives, companies can develop the best strategy for their success. The resource-based view for instance has taught me to appreciate that it is important to ascertain which of a company’s capabilities and resources are valuable and in what way, based on a VRIO analysis, and the importance of understanding this in order to gain competitive advantages.

I enjoyed the teaching style employed on the course. I was able to gain a basic and clear understanding of the concepts being taught during lectures and then further understanding during seminars where we broke down the seemingly complex theoretical approaches by discussing research and examples related to the topics.

The presentation aspect of the course was also enjoyable. It was the first time in the course of my degree that I have been tasked to give a group presentation. I was able to practice and improve my oral presentation skills, as well as my team working skills. I was also glad of the opportunity to critically analyse and challenge a published academic piece of work. It was refreshing to express my own opinions and views. The experience has taught me to view academic writing differently by recognising that they can be challenged in the face of evidence from practical study and changing contexts.