An Evolutionary Four Stage Internationalization Process

Published Date: 23 Mar 2015

The international process perspective grew from the seminal work of Johanson et al. (1975) on the internationalization of four Swedish firms. They realized that those firms followed an evolutionary four-stage internationalization process known as the establishment chain. Initially, the firm has occasional exporting activities. In the second stage, the firm exports regularly through agents due to its growing knowledge of the foreign market. In the third stage the firm has a deeper involvement abroad and exploits the market through a sales marketing subsidiary and, finally, the firm engages in international production in the fourth step. Clearly, FDI only occurs in the third and fourth stages (http://www.scielo.oces.mctes.pt/scielo.php?script=sci_arttext&pid=S0873-74442009000100004&lng=en&nrm=iso&tlng=en)

This process is based on a linear cumulative path in which the absence of international experience reduces the propensity of the firm to engage in unknown markets. As a consequence, the firm initially focuses its activities on the national market in order to avoid unnecessary risks. As soon as the firm gains experience in foreign markets and manages to internalize the knowledge gained, it is willing to underpin its subsequent stages committing more resources and controlling its operations abroad (Johanson et al., 1977). In order to explain the progression of the firm's activities to foreign markets, Johanson et al. (1975) used the concept of psychic distance which involves differences in culture, languages, education, industrial development, political systems, among other things. They found that SMEs normally internationalize to low psychic distant markets in the first movements abroad and once they gain experience in these markets they expand their activities to more psychic distant markets. Despite their linear point of view, Johanson et al. (1977, 1990) claim that not all firms must go through all stages. Firstly, some firms are resource intensive or large enough to short-circuit stages (mergers and acquisitions are typical examples). Secondly, when foreign markets are as stable as local markets or when firms have a strong stock of knowledge gained in other markets, firms are expected to skip some stages as a consequence of their former experience. This model lives in a undeviating dilemma confronting the dynamic and static perspectives of internationalization. whilst the static perspective focuses on the operations, commitments and knowledge the firm holds in the market, the dynamic perspective deals with the evolution of the international activities, namely with the decision of committing the firms' resources vis-à-vis the risk of the several markets and the lack of experience in those markets.

Forsgren (1989) advances two criticisms on conceptual grounds defending that the Uppsala model does not only explain why the firm starts its internationalization process and does not include acquisition as a means of entrance in their markets. Although the model has been extensively validated (Bilkey and Tesar, 1977) in its evolutionary progression it ignores two important aspects: (a) how the inward internationalization process has underpinned the firm's outward posture (Stahl, 1999); and (b) how firms supervise the intricacies of de-internationalization in its outward internationalization process (Wech and Loustarinen, 1988). More recently, the emergence of the born-globals (Rennie, 1993; Madsen and Servais, 1996; Rasmussen et al., 2000) has also questioned the traditional pattern of the internationalization. Some criticisms have been put forward on numerous grounds. Reid (1983) and Andersen (1993) question the model asserting that while it describes the international expansion process it does not explain the reasons why firms go aboard on each stage of the model. Turnbull (1987) criticized its deterministic perspective defending that internationalization does not necessarily follow a linear path. Sullivan et al. (1990) have questioned the influence of geographic distance in the internationalization process in their research.

Leonidou and Katsikeas (1996) have also criticized the Uppsala model on structural, methodological and conceptual grounds. They defend that casting away other business activities besides those being assessed evidently undermined the operationality of the model. Another criticism advanced is the lack of extensive support of the psychic distance which was totally different at the time the model was presented and the international, more open business environment we find in this day and age.

process which has been affected by the globalization process and the development of new communication and information technologies [1] .

The Network Approach to Internationalization

The significance of the relationship stuck between all agents of the value chain was popularized by Håkansson (1987) with his interactive approach on the Industrial Marketing and Purchasing Model. The participants (suppliers, buyers, competitors or other institutions) in the process and the environment of an interaction affect the way in which firms interact. The complementarities of the participants facilitate the creation of a network of relationships in which the internationalization takes place when the network is extended abroad. This network-based internationalization should be based on the context in which participants operate and on the condition in which they operate (Madsen et al., 1997) and on the interdependent, non-hierarchical exchanges (Coviello et al., 1999) that lead to the emergence of the concept of business networks.

The network approach to internationalization was suggested by Johanson et al. (1988), who concluded that the degree of the firm's internationalization depends on both the networks established by the firm and the position of the firm in that network. As a consequence, the network in which the firm operates affects its international position. Johanson et al. (1988) claim that traditional models are biased when both the firm and the market are strongly internationalized because the degree of market internationalization affects the factors that lead firms to internationalize. Despite the networked approach, Johanson et al. (1992) recognized that the internationalization is a cumulative process that depends on the result of the firm's interaction and on the long-term perspective of the relationships. Coviello et al. (1997) concluded that firms' internationalization is more based on opportunities as a result of previous contacts than on strategic decisions. They claim that the incremental process view should be merged with the networked perspective in order to address how the lack of resources of most SMEs does not inhibit firms in their search for foreign markets. Clearly, internationalization approaches are far from a unique solution. As Loustarinen (1994) and Welch et al. (1993) claim, the process perspective should encompass the inward, outward and cooperative phases from a holistic point of view.

Accordingly, the internationalization process should not be seen as a one-way street and should include the de-internationalization of the firm (Loustarinen and Welch, 1988). From the firm's resources point of view, internationalization should be based on the firm's competencies. Accordingly, due to resource differences, all firms should not only have different internationalization processes but should also emerge in different strategies and relationships. As a consequence, there should not be any definite sequence pattern in the internationalization process and the network approach should be interpreted as a search for dynamic complementarities between firms belonging to markets with different growing and economic potentials. Another important point that merits a more consistent approach is the relationship between the need for cooperative agreements and its relationships with the R&D investment strategy. Although the entrance in any form of cooperative agreement presupposes that the firm has core competencies in particular areas, it is not clear how distributed is the cooperative network and how all participants harmonize each other dynamic complementarities. The growing number of firms that are internationally involved from their beginning (Coviello and Munro, 1997; Madsen and Servais, 1997) challenge the traditional approach followed by the Uppsala model. Based on research on the pattern of the international expansion of new technology-based firms (NTBFs), it was clear that those NTBFs relied on a significant number of cooperative agreements to add force to their international agreements and did not follow the gradual pattern of the Uppsala model. These born-global firms, as Rennie (1993) called them, represent a new challenge for the internationalization of firms.

Finally, the emerging multinationals of the new economy or metanationals (Doz, Santos and Williamson, 2001) overcome their competitors by sensing, mobilizing and integrating their resources at international level. According to Doz, Santos and Williamson (2001) metanationals have three levels of competition: (1) the identification and assessment of new competences, innovative technologies and leading market knowledge; (2) the integration of scattered capabilities and knowledge in order to pioneer new products and services; and (3) the optimization of efficiency of their distributed operations. The particularity of the metanationals is that all new challenges and new opportunities of the three levels of competition happen at a global level, and the winners are those that manage to tap the potential of technology, capabilities and market potential scattered around the globe. For metanationals to succeed in this new knowledge economy, they need to augment their existing capabilities in place of relying on the clones of today's multinationals. As in the case of born-globals, the metanational questions the gradual pattern of the Uppsala model and emphasizes the importance of networking activities that hunt for the complementarity of the firm's resources.