Overview Of The Uppsala Model Of Firm Internationalization

Initial proposal of the Uppsala Model

Question:

Discuss about the Uppsala Model of the Internationalization of the firms.

The report gives an overview of the Uppsala Model of Firm Internationalization. In order to do this, the report discusses about initial proposal of the Uppsala Model. There is also mention about how it helps in explaining the internationalization process with the help of four stages. The report also gives us an overview of the two versions of the Uppsala Model, where the older version focuses on the uncertainty level of the market whereas the newer version focuses on relationships and networks. The report in order to explain the internationalization process puts forward the state side variables according to both the versions, There is also mention of the change side variables based on both the versions. The report also discusses about the network perspective of the new Uppsala Model. Further, the report also takes examples to explain the extent to which the Uppsala Model contributes in explaining the internationalization process.

The first proposal of Internationalization of an individual firm on an incremental basis made by the researchers of Uppsala University of Sweden and considered as the Uppsala Model of firm Internationalization. The Uppsala Model depends on incremental decisions, the successive steps of which depend on learning and acquisition of knowledge on the foreign market and operation (Vahlne and Johanson 2013). The Uppsala Model of Firm internationalization process has four stages that explain the impact of the current environment of the firm on the perception effect of learning and opportunity.  The four stages includes export activities not undertaken regularly, export through independent representatives, sales subsidiary and manufacturing or production. Most authors consider the model dynamic since the result of a single process serves as the input for the processes of the next step that will provide input for the upcoming process and the process continues. However, the circular relationship that exists between the concepts makes a statement that the process does not indicate a beginning or end. Thus, the Uppsala Model ensures in making a distinction between the state and change variables where each of them identified to have two aspects. There are however two versions of the Uppsala Model, one is the older version and the other is the newer version. The old Model focuses on specific firms and the activities it has in the foreign market and the level of uncertainty in the market, the new model puts more focus on networks and relationships (Shane 2012).

Four stages of the Uppsala Model

Figure: The Internationalization Process Model

Source: (Johanson and Mattsson  2015)

The state variables in the original model refer to the aspects that have a fixed nature on a temporary basis that refers to the present position or situation. However, since the process of internationalization take place within the network of the firm therefore, the current position of the network forms an important aspect. Based on the previous version of the model, this aspect only referred to market commitment (Costa e Silva et.al 2012). However, the updated model put forward an argument that market commitment was a narrower concept so the model made an inclusion of the current relations of the firm. These relations characterized by commitment, trust and level of knowledge. Thus, within this position, the firm can not only seize opportunities of the market but also develop knowledge.

The second aspect of the state variables focuses on the opportunities and knowledge. Knowledge refers to the present knowledge on the foreign market within the firm. However, this knowledge is critical for recognizing opportunities (Zhu, Wittmann and Peng 2012). However, according to the present Uppsala Model a firm is able to recognize the opportunities that lie outside the boundaries in the context of network. Thus, the knowledge of internal capabilities is important as resource knowledge within the entire network.

The change variables in the original model refer to the aspects of the change that included current as well as committed decisions. The term relationship added to commitment decision for clarification of the firm’s decision on further commitment of relationships within the specific country. However, the updated model has replaced the current activities through trust building, creation and learning. The model considers the current activities as important but more focus is on the outcome of current activities (Figueira de Lemos 2013). However, experiential learning has been part of both the versions of the model though there have been additions on the various learning processes on the newer version. This remains as the most important form of learning. Trust building finds an importance in the newer version with the addition of the network view. Thus, there should be a presence of mutual trust for network or relations to be rewarding. This implies every aspect of internationalization process remains interlinked. An international firm gathers knowledge based on its current network position. On the other hand, the firm’s ability in perceiving opportunities depending on which relationship commitment decisions made depends on the entire amount of knowledge. The decisions taken again leads to the trust building, creation and learning of the firm that will enable the firm in forming a newer position with the passage of time. Thus, the cycle of events and actions leads to the understanding of the internationalization process of the Uppsala Model thereby starting with high uncertainty and low commitment that increases on an incremental basis with the increase of knowledge.

Two versions of the Uppsala Model

The perspective of Network added to the original version of Uppsala Model because of increasing globalization, communication and new information technologies. However, the entry mode and the choice of country depend on the position and network of the firm (Teece 2012). According to the updated version of the model, business environment referred as an international network of relations because of the fact that the boundaries between markers and firms remained vague in the last decades. There has been instances when companies become a part of various networks and is linked in various ways that either differ in closeness and complexity compared to other firms. Thus, for ensuring success in the overseas market it is very necessary for the firms to form a strong network. Therefore, the relations of a firm created through social engagements with other existing firms where the concerned firm gets involved through sequential and interactive development. Thus, with the evolution of the relation the firm is able to not only accumulate knowledge but also trust. Thus, through participation in networks firms are not only expanding their knowledge but also reducing uncertainty.

The older version of the Uppsala Model, commitment and uncertainty are the two determining factors that defines the risk level associated with market entry which is also the fundamental aspect of the newer version. However, uncertainty defines the lack of knowledge of the firm about the present market and commitment reflects the resources invested by the firm in the foreign market (Hilmersson and Jansson 2013). The firm is not only risking but also loosing these resources through investment and operation of such an uncertain market. Thus, through changing the level of commitment and market knowledge a firm can have an impact on its risk level. Therefore, the relationship between the factors determined by the following formula:

R= U x CR where, R represents total associated risk, U represents uncertainty faced and C represents commitment.

In the early version of Uppsala Model for internationalization of firm, uncertainty depends on psychic and physical distance between the foreign and the home market. The physical distance however refers to the distance in geographic terms between both the markets while psychic distance refers to the all the factors responsible for prevention of information flow from and to the foreign market (Hutzschenreuter, Kleindienst and Lange 2014). These factors include education, language, culture and industrial development. However, with the introduction of the network perspective into the model, the focus on psychic factors reduced and the importance of being a part of the knowledge accumulation network increased.

State variables in the Uppsala Model

The expansion or internationalization of a firm according to the Uppsala Model depends on the psychic distance that determines the entry to the foreign market that is not only familiar but also closer to host country (Devinney 2013). The psychic distance however depends on factors that include language, education, culture, business practice and industrial development. Thus, the spread of international operations geographically depends on the cultural proximity and geography of the foreign countries. However, in terms of modes of entry, the incremental expansion for market commitment defined by the initial entry in a foreign market through a commitment mode that is followed by higher levels of commitment in the market. On a similar basis commitment based on the level of ownership correlates with psychic distance where entry mode involves low ownership in the market with greater psychic distance from the home country (Johanson and Mattsson 2015).

The Uppsala Model of firm internationalization has substantial attention and appeal because of its largely intuitive nature, simplicity and evolutionary learning perspective that leads to an attractive framework. Thus, in order to explain the extent of Uppsala Model in the internationalization process of firms, multinationals from textile or electronics industry selected (Jiang et.al 2012). Three firms examined each from textile and electronic industry in Taiwan. These firms started as suppliers then transformed into original manufacturers of equipments and finally ventured into the manufacturing activities in the home country. In case of the Taiwanese firms chose the global market of China because of lower psychic distance considerations. However, in the global market most of the firms acted as original equipment suppliers and continued to expand in the overseas market that supported the investment pattern put forward by the Uppsala Model (Pierce and Aguinis 2013).

Thus, the Uppsala Model helped in the identification of two unique decisions, the first being the choice of country and second being the way of entry in addition to considering how the choices gets determined through psychic distance (Kolstad and Wiig 2012.). While discussing internationalization in the perspective of Uppsala Model, the focus was mainly on how the firms started its manufacturing across the borders. However, traditional business practice enabled the firms in utilizing the sister concern for undertaking the manufacturing facilities abroad before the establishment of the facilities for their own manufacturing (Poulis, Poulis and Plakoyiannaki 2013). This kind of joint ventures were a part of the predictions of the Uppsala Model. There were instances when firms neither went through all the stages nor the safest mode of entry ensured did they ensure the safest entry modes when psychic distance remained high. Thus, the firm that leapfrogged stages experienced internationalization.

Change variables in the Uppsala Model

In the context of Uppsala Model for internationalization, if one of the textile firms of Taiwan started finishing and dyeing firm for the customers then it would have to make an investment that enhanced its capacity (Mura and Gašparíková 2014). As per the upgraded model, if the textile firm instead of investing in capacity invested in network building with the established suppliers that had excess capacity. This helped the Taiwanese company in better internationalization with the help of the network perspective of the Uppsala Model (Kuivalainen et. al 2012).

Conclusion:

The report by explaining the role the Uppsala Model plays in the internationalization process of firms. In doing so, an example of a textile industry in Taiwan is drawn. Thus, based on the Uppsala Model the internationalization decision examined in two parts, the first is the choice of the market and the second refers to the mode of entry.   However, observation from the discussion is that the country choice and the mode of entry get determined with the help of psychic distance. Thus, internationalization of firms according to the Uppsala Model passes through different investment stages that begins with export and ends with owning manufacturing subsidiaries in countries. A firm’s entry into another country for manufacturing is examined and anticipation was made that the choice of the country would be determined by psychic distance and networking. The report also gives a descriptive analysis of the Uppsala Model of Internationalization based on the four stages. In addition, there has been a mention of two version of the Uppsala Model that accordingly explains that state side and change side variables respectively

References:

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Devinney, T.M., 2013. Is microfoundational thinking critical to management thought and practice?. The Academy of Management Perspectives, 27(2), pp.81-84.

Figueira de Lemos, F., 2013. A political view on the internationalization process (Doctoral dissertation, Uppsala universitet).

Hilmersson, M. and Jansson, H., 2013, May. Reducing uncertainty in the emerging market entry process: on the relationship among international experiential knowledge, institutional distance, and uncertainty. American Marketing Association.

Hutzschenreuter, T., Kleindienst, I. and Lange, S., 2014. Added psychic distance stimuli and MNE performance: Performance effects of added cultural, governance, geographic, and economic distance in MNEs' international expansion. Journal of International Management, 20(1), pp.38-54.

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Johanson, J. and Mattsson, L.G., 2015. Internationalisation in industrial systems—a network approach. In Knowledge, Networks and Power (pp. 111-132). Palgrave Macmillan UK.

Kolstad, I. and Wiig, A., 2012. What determines Chinese outward FDI?. Journal of World Business, 47(1), pp.26-34.

Kuivalainen, O., Sundqvist, S., Saarenketo, S. and McNaughton, R., 2012. Internationalization patterns of small and medium-sized enterprises. International Marketing Review, 29(5), pp.448-465

Mura, L. and Gašparíková, V., 2014. Penetration of small and medium sized food companies on foreign markets. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 58(3), pp.157-164.

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