Internationalization (I18N)

In economics, internationalization has been described as a process of increasing involvement of enterprises in international markets. A variety of theories explain the existence of the multinational companies and the I18N process.The models explain why do multinationals exist? What should be the pattern of I18N? What should be the entry mode?

The Uppsala Model

Probably the most know I18N model is the Uppsala Model developed in 1977 and conceptualizing I18N as a sequential, path dependent learning process. The model is based on empirical observations from studies in international business at the University of Uppsala, that showed that Swedish firms often develop their international operations in small steps, rather than by making large foreign production investments at single points in time.

Johanson & Vahlne (1977) observed that I18N is a gradual, incremental process, lack of foreign market knowledge create uncertainty and psychic distance disturb learning (accumulation of such knowledge). As a result companies will carry out gradual market commitments (investments). The firm will start exporting to similar/well known countries and gradually expand to other countries.

Results of empirical study

1. The time order of establishments seems to be related to the psychic distance between the home and the import/host countries (Hornell, Vahlne & Wiedersheim-Paul, 1972, Johanson & Wiedersheim-Paul, 1974). The psychic distance is defined as the sum of factors preventing the flow of information from and to the market. Examples are differences in language, education, business practices, culture, and industrial development.

2. Swedish firms often develop their international operations in small steps, rather than by making large foreign production investments at single points in time.

3. Internationalization is not the result of a strategy for optimum allocation of resources, it is the consequence of a process of incremental adjustments to changing conditions of the firm and its environment (Aharoni, 1966).

4. Lack of knowledge due to differences between countries with regard to, for example, language and culture, is an important obstacle to decision making connected with the development of international operations.

5. Firms start exporting to a country via an agent, later establish a sales subsidiary, and eventually, in some cases, begin production in the host country.

6. Almost all sales subsidiaries of Swedish steel companies and pulp and paper companies have been established through acquisition of the former agent or have been organized around some person employed by the agent, as they gradually have gained experience in starting and managing subsidiaries.

7. Exporting is a means also of reducing costs of market development. Even if investment is necessary in the future, exporting helps to determine the nature and size of the market.

8. Use of selling subsidiaries at an early stage reduced the later risks of manufacturing abroad.

The Internationalization Model

In such model the outcome of one decision - or more generally one cycle of events - constitutes the input of the next. The main structure is given by the distinction between the state and change aspects of internationalization variables. To clarify, we can say that the present state of internationalization is one important factor explaining the course of following internationalization.

Fig. 1. State aspects and change aspects

State Aspects

State aspects are attirbuted to market commitment and knowledge commitment. The reason for considering the market commitment is that we assume that the commitment to a market affects the firm's perceived opportunities and risk.

Market commitment describes the amount of resources committed and the degree of commitment.

Market Knowledge describes the knowledge of opportunities or problems.

Market knowledge and market commitment are connected, the better the knowledge about a market, the more valuable are the resources and the stronger is the commitment to the market.

Change Aspects

The change aspects we have considered are current activities and decisions to commit resources to foreign operations.

Current business activities

There is a lag between most current activities and their consequences. Those consequences may not be realized unless the activities are repeated more or less continuously. The longer the lag, the higher the commitment of the firm mounts. The more complicated and the more differentiated the product is, the larger the total commitment as a consequence of current activities will come to be. Current activities are also the prime source of experience (firm experience and market experience). The more the activities are production-oriented, or the less interaction is required between the firm and its market environment, the easier it will be to substitute hired personnel or advice for current activities; and the easier it will be to start new operations that are not incremental additions to the former operations.

Commitment decisions

Decisions are made in response to perceived problems and/or opportunities on the market. Opportunities and problems are part of experience. Problems and opportunities are mainly discovered by those parts of the organization that are responsible for operations on the market and primarily by those who are working there. 

It is distinguished between an economic effect and an uncertainty effect of each additional commitment. 

The economic effect is associated primarily with increases in the scale of operations on the market, and concerns the market uncertainty, that is the decision-makers' perceived lack of ability to the uncertainty effect estimate the present and future market and market-influencing factors.

Market uncertainty is reduced through increases in interaction and integration with the market environment-steps such as increases in communication with customers, establishment of new service activities or, in the extreme case, the take-over of customers.

Source: Johanson & Vahlne (1977): The Internationalization Process of the Firm - a Model of Knowledge Development and Increasing Foreign Market Commitments, Journal of International Business Studies, 8, 1, pp. 23-32.