1 Introduction
This term paper deals with the Uppsala model of internationalization and the question whether it is still working today or if modern companies have more possibilities to enter new markets in foreign countries in a different way. The model was developed over forty years ago and the framework and conditions of internationalization and technological progress have changed a lot. In economics, internationalization is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. There are several internationalization theories which try to explain why there are international activities. This paper will stick to the classic school theory, the Uppsala model or international stage model in comparison to modern ways of internationalization by the example of ‛Born Globals’. The Uppsala model provides a universal explanation of how internationalization works in the form of sequential stages during its early development. ‛Born Globals’ are young companies that start to globalize very fast from the beginning without any preceding long term period of internationalization. They do not follow the stages in the suggested order, they rather leap-frog some of the steps given by the model. The aim is to show that the business world has changed and the model is not contemporary anymore.
This paper will start with the backround of the Uppsala model, its structure. A description of the establishment chain and the psychic chain will follow. After that the internationalization model will be illustrated which will lead to the critical view of the Uppsala model. Chapter three describes the modern way of internationalization using the example of ‛Born Globals’. The last chapter of this term paper is the conclusion.
2 The Uppsala internationalization model
2.1 Backround of the Uppsala model
In the 1970s Swedish researchers (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) who work for the University of Uppsala questioned the theories of international behavior at that time. They believe that most of those theories tone down the problems of cultural differences. Every culture has its characteristics in needs, buying behaviour and its own typical orientations. These characteristics define the members of a culture and shape their collective identity. According to Hofstede culture can be described as “the collective programming of the mind that distinguishes the members of one group or category of people from another”.1
Furthermore they assume that the theories ignore the internal foundations needed so that companies can handle international activities. Because of that, the Swedish researchers create their own model of internationalization – the Uppsala model.2 It is based on an analysis of four Swedish manufacturing companies – Sandvik, Atlas Copco, Facit and Volvo. During this time, those companies sold more than two-thirds of their turnover across the globe and had production facilities in various countries.3 This theory explains the process of internationalization and the trouble the companies had to face doing that. The Uppsala model distinguishes between the establishment chain concerning the pattern of internationalization and the psychic distance chain, incorporating knowledgement of markets and culture. They assume that companys start to grow and develop in the domestic market before they start to expand in other places. Internationalization is the consequence of a series of incremental decisions. The main idea of this model is the step-by-step development a company passes through during the process of upscaling. In their opinion, the reason why companies do not expand in the beginning is the lack of knowledge about foreign countries, their culture and the tendency to avoid uncertainty just like the lack of resources.4
2.2 The establishment chain – international penetration
According to Johanson and Wiedersheim-Paul, the Uppsala model sub-divides the process of entering an international market into four different steps, where the successive stages represent higher degrees of international involvement and market commitment. Those steps have to be viewed from a company’s perspective combined with the market and the market knowledge.
Step 1 – No regular export activities (sporadic exports)
Step 2 – Export via independent representatives (export modes) Step 3 – Establishment of a foreign sales subsidiary
Step 4 – Foreign production/manufacturing units5
Those steps indicate business activities depending on the market experience gained by the company during their process of development and expansion.
Step 1 is the initial one where the company starts to enter a foreign market but does not export on a regular basis. Market knowledge is limited and experience is gained by chances not systematical.
In step 2 the company exports systematical through agents. This indirect export will provide the company with some experiences and market knowledge about the customers in this market.
If a company is willing to commit itself to more export, in step 3 it will take over the middleman’s operation and try on its own. This means that the firm has to have the necessary knowledge and information about the market and how to establish its own operations.6
The last step is to establish the production facilities of the company in the market it already exports to. This happens as the company has the feeling of having enough knowledge and wants to gain locational advantages. Of course it can always be that it is forced to offshore as regulation demands this or risks like currency risks can hedge this way.7
Figure 1: Hollensen, 2007, p. 64
2.3 The psychic chain – international expansion
During their research, they find out that companies usually start to expand in a market that has less psychic distance. The chances of being successful in those markets are higher and market uncertainty is low.8 Psychic distance is correlated with geographic distance and is also defined as the distance between home market and a foreign market resulting from the perception, learning and understanding of business differences. Johanson and Wiedersheim-Paul define it as the differences in language, culture, political systems, etc., that makes it hard or easy for a company to enter the new market. When a firm has chosen where to go, the psychic distance is assumed to reduce to the increased market-specific knowledge. If knowledge can be transferred from one country to another, firms with an extensive international experience are likely to perceive the psychic distance to a new country as shorter than firms with little international experience . 9
2.4 The internationalization model
There is a difference between state and change aspects of internationalization. Using this model, Johanson and Vahlne try to explain why they divided the Uppsala model into establishment chain and psychic chain. The state aspects are market commitment and market knowledge; the change aspects are current business activities and commitment decisions.10 Those four elements affect each other in an interdependent way and the process can be seen as causal cycles.11 According to Johanson and Vahlne, in the process of internationalization, companies start to transfer resources to foreign countries. These resources can be tangible or intangible goods. This process will lead to a market commitment. The difficulty to apply resources in other markets will tighten the bond to a certain market/ country.12
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