As in many areas of the human knowledge, the study of internationalization of multinational companies presents theories that help us understand why, when, how and which external markets companies must select to start their internationalization expansion. For example, in 1960 Stephen Hymer developed the Market Power theory, which explains why multinational companies have specific competitive advantages (such as tangible assets, technology and organizational knowledge) that make them superior to other competitors. Therefore, the process of internationalization is the result of an analysis that involves benefits (gains in foreign markets) and costs (due to an unknown markets).
According to the Product Life Cycle theory, created by Raymond Vernon in 1966, products must be developed, manufactured and consumed in the markets where there is economic sense for each one of these activities. For example, an innovation must be developed in a country where there are both capabilities that support research and development and a strong consumer market that pays premiums for innovations. When products reach technological maturity and competition becomes visible, manufacturing needs to be transferred to low-cost markets. In conclusion, the theory of product life cycle explains why the international expansion of companies is a result not only of the technological evolution of products but also the type of demand of any given market.
The Uppsala model, developed by Jan Johanson and Jan-Erik Vahlne in 1977 and updated by the same authors in 2009, seeks to explain the processes of internationalization of Nordic companies – the Vikings of the title, whose international expansion processes were addressed neither by the theories of market power nor by the theory of product life cycle. According to the authors, several companies from countries with small internal markets have internationalized long before companies originated in countries with large consumer markets. In other words, firms that follow the Uppsala model “internationalize before they grow”, while firms from large economies (United States, European countries and Japan) seek to “grow (in their native markets) before they internationalize”. According to Johanson and Vahlne the process of internationalization has two remarkable features: i) is a consequence of skills developed during the international expansions, and ii) takes place in nations with short “psychic distance” from their original markets. The concept of psychic distance involves the cultural, administrative, geographic and economic differences between two markets. This blog already analyzed the topic “psychic distance” here. Figure 1 presents the Uppsala model as originally proposed by Johanson and Vahlne.Figure 1: Uppsala model, 1977
It is interesting to note that the Uppsala model evolved significantly over time. While its first version focused on the choice of nearby markets in terms of psychic distance, the 2009 version focused on the importance of firms belonging to networks (or web of relationships) that facilitate their international expansion. If in the 1997 model the psychic distance between countries and companies was the driving force behind the international expansion of organizations, in the 2009 version the concept of networks of relationship explains why companies expands into foreign markets. The original model of the Uppsala school, according to the authors, showed that companies were subject to “liability of foreignness”, a concept that explains why internationalization is more difficult (or expensive) as the foreign becomes more distinct than the native one. The updated model of Uppsala explains that the uncertainty in the internationalization process comes from the “liability of outsidership”, which occurs when an organization does not belong to a network of relationships. Figure 2 presents the 2009 version of the Uppsala model.
As usual, here come two questions for the curious minds:
a. What would be an example of network of relationships that Johanson and Vahlne mentioned in their 2009 article?
b. Where the network of relationships should be located? In the home or in the host country?
Johanson, J. & Vahlne, J.-E. Journal of International Business Studies (2009) 40, 1411–1431