The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign...

7/30/2019 The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign Mark

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THEINTERNATIONALIZATIONROCESSOF THEFIRM-A MODELOF KNOWLEDGE EVELOPMENTAND INCREASING OREIGNMARKETCOMMITMENTSJAN JOHANSON*Center of InternationalBusiness StudiesUniversity of UppsalaJAN-ERIK VAHLNE*Instituteof InternationalBusinessStockholm School of Economics

Abstract. On the basis of empirical research, a model of the internationalization process ofthe firm is developed. The model focuses on the gradual acquisition, integration and use ofknowledge about foreign markets and operations, and on the incrementally increasingcommitments to foreign markets. In particular, attention is concentrated on the increasinginvolvement in the individual foreign country.

* Several studies of international business have indicated that internationalizationof the firms is aprocess in which the firms gradually increase their international involvement. Itseems reasonableto assume that, within the frame of economic and business factors, the characteristics of thisprocess influence the pattern and pace of internationalization of firms. Inthis paper we develop amodel of the internationalization process of the firm that focuses on the development of theindividual firm,and particularly on its gradual acquisition, integration, and use of knowledge aboutforeign markets and operations, and on its successively increasing commitment to foreign mar-kets. The basic assumptions of the model are that lack of such knowledge is an importantobstacleto the development of international operations and that the necessary knowledge can be acquiredmainly through operations abroad. This holds for the two directions of internationalization wedistinguish: increasing involvement of the firm in the individual foreign country, and successiveestablishment of operations in new countries. In this paper we will, however, concentrate on theextension of operations in individual markets.We have incorporated in our model some results of previous empirical studies of the developmentof internationaloperations, seeking theoretical explanation through the behavioral theory of the firm(Cyert and March, 1963). Specifically, we believe that internationalization is the product of a seriesof incremental decisions. Our aim is to identify elements shared in common by the successivedecision situations and to develop thereby a model of the internationalization process which willhave explanatory value. Because we, for the time being, disregard the decision style of thedecision-maker himself, and, to a certain extent, the specific properties of the various decisionsituations, our model has only limited predictive value. We believe, however, that all the decisionsthat, taken together, constitute the internationalization process-decisions to start exporting to acountry, to establish export channels, to start a selling subsidiary, and so forth-have somecommon characteristics which are also very important to the subsequent internationalization. Ourmodel focuses on these common traits.We hope that the model will contribute to conceptualization in the field of internationalization of thefirmand thus increase understanding of the development of international operations as describedin the empirical studies. We hope, too, that it can serve as a frame of reference forfuture studies inthe problem area and may also be useful as a tool inthe analysis of the effects of various factors onthe pattern and pace of internationalization of the firm.* Jan Johanson is a memberof the facultyof the Center or International usiness Studiesat the UniversityfUppsala,Sweden. Jan-Erik ahlne s on thefacultyofthe Institutef Internationalusiness,Stockholm chool ofEconomics,Stockholm,Sweden.The authorsare indebted to theircolleagues at the Centerfor Internatonal usiness Studies, Department fBusinessAdministraton, niversityf Uppsalaforvaluablecommentsandto DavidBaker orcarefulcriticism fcontent and language.Financialupporthas been givenbythe SvenskaHandelsbankenFoundationorSocialScience Research.

INTRODUCTION

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Inthe first ection we described the empiricalbackgroundof ourstudy.Nextwe outline hemodelof the internationalizationrocess, defining he mainvariablesandthe interaction mongthem.Wethen sum up by discussing some implicationsof the model and suggesting some problemsforfutureresearch.

EMPIRICAL The model is based on empircalobservationsfromour studies in international usiness at theBACKGROUND University f Uppsala,that show that Swedishfirmsoftendevelop their nternationalperations nsmall steps, rather han by making arge foreignproductionnvestmentsat single pointsintime.Typically, irmsstartexporting o a countryvia an agent, laterestablisha sales subsidiary,andeventually, n some cases, begin production n the host country.We have also observed a similarsuccessive establishmentof operationsin new countries. Ofparticularnterest nthe presentcontext is that the time orderof such establishments eems to berelatedto the psychic distance betweenthe homeandthe import/hostountries Hornell,Vahlne&Wiedersheim-Paul,972, Johanson &Wiedersheim-Paul,974).The psychic distance is definedas the sum of factors preventing he flowof informationrom and to the market.Examplesaredifferencesin language, education,business practices,culture,and industrial evelopment.Studies of the exportorganization f the Swedish special steel firms Johanson,1966)and of theSwedish pulp and paper industry Forsgren& Kinch,1970) have shown that almost all salessubsidiariesof Swedish steel companies and pulpand papercompanieshave been establishedthroughacquisitionof the former gent or have been organizedaround ome personemployed bythe agent. Mostof the establishmentswere occasioned by variouskinds of economiccrises intheagent firms.Sales to a marketby the agent had preceded establishmentof a sales subsidiary neach of nine cases investigated by Hornell and Vahlne (1972). Further ase studies of thedevelopmentof internationalctivitiesbySwedishfirmshaveallowed us to generalizeourobserva-tions:sales subsidiaries are preceded invirtuallyllcases by sellingvia an agent;similarly,ocalproductions generally preceded by sales subsidiaries.A summaryof the resultswe reached in two studies follows.Theyare by no means meantto bestatisticallyrepresentative,but the results are typicalof studies we know.The firstexample is acase studyof the internationalizationrocess of the second largestSwedishpharmaceuticalirm,Pharmacia.Atthe time of the case study (1972) Pharmaciahad organizationsof its own in ninecountries,of whichthree were performingmanufacturingctivities.Ineight of these cases thedevelopmentpatternwas as follows.The firmreceivedorders from he foreignmarketand aftersome timemade anagreementwithanagent (orsold licenses regarding ome partsoftheproductline).Aftera fewyearsPharmacia stablishedsales subsidiaries nseven ofthose countries andinthe eighth they bought a manufacturingompanybearingthe same name, Pharmacia,hat hadpreviouslyserved as an agent). Two of the seven sales subsidiaries further ncreased theirinvolvementby startingmanufacturingctivities.Itis interesting o note thateven thisproductiondecision was incremental;he new productionunitsbegan with he leastcomplicatedmanufactur-ing activitiesand latersuccessively added morecomplicatedones.Inthe ninthcountryPharmacia tarted a sales subsidiaryalmostimmediatelywhendemandfromthe marketwas discovered.But he companydid nottotallyackexperienceeven inthiscase. Thedecision-makerhad received parts of his education in.the country n question,and beforethedecision he had become acquaintedwith he representativeof anotherpharmaceuticalirmwhowas latermade the head of the subsidiary Hornell,Vahlne,&Wiedersheim-Paul,973).Inanotherstudy we investigated he internationalizationf fourSwedishengineering irms.Belowwe quote some of the conclusions of the study (Johanson&Wiedersheim-Paul,975).

The establishmentchain-no regular xport, ndependentrepresentativeagent),sales sub-sidiary,production-seems to be a correct descriptionof the order of the developmentoperationsof the firms nindividualountries.This s illustratednTableI.Ofsixty-threealessubsidiaries ifty-sixwere preceded by agents; this patternholds forallthefirms.With egard24 to the production stablishmentsthere is a diffe,ence betweenSandvikand Atlas Copco on


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Table IEstablishment Patterns for the Investigated Firms.Sales Production

Pattern subsidiary subsidiaryn a n a sFirm 4 I I i is s p p pSandvik 2 18 0 2 13Atlas Copco 3 14 0 3 9Facit 0 14 0 2 3Volvo 2 10 0 2 3

7 56 0 9 28"n" denotes no regular export activity"a" denotes selling via agent"s" denotes sales subsidiary"p" denotes production subsidiaryan arrow denotes change from one state to another

one hand, where twenty-two out of twenty-seven establishments were preceded by salessubsidiaries, and Facit and Volvo on the other, where five out of seven occurred without thefirm having any sales subsidiary in the country. However, in no case has a firm startedproduction in a country without having sold in the country via an agency or a sales subsidiarybefore.Regarding the first establishments of sales subsidiaries, they do not seem to have been astep in a conscious and goal directed internationalization-at least not in Sandvik, AtlasCopco, and Volvo. For various reasons they had to take over representatives or start sub-sidiaries. As they gradually have gained experience in starting and managing subsidiaries,they have developed policies of marketing through subsidiaries insome of the firms. Itshouldbe noted that the firm, Atlas Copco, which most consistently used subsidiaries for exportmarketing did so when itacquired a new general manager, a formermanager of a departmentstore.The producing subsidiaries almost all produce for local or in some cases regional markets.Their activity embraces finishing, assembly, or component works which could be calledmarketing production. The only exception is Atlas Copco's factory in Belgium making station-ary pneumatic equipment.Generally the development of the firm seems to be in accordance with the incrementalinternationalization view discussed.

This gradual internationalization is not exclusively a Swedish phenomenon, as the followingquotations demonstrate:On its part exporting is a means also of reducing costs of market development. Even ifinvestment is necessary in the future, exporting helps to determine the nature and size of themarket. As the market develops, warehouse facilities are established: later sales branchesand subsidiaries (Singer, National Cash Register, United Show Machinery). The record ofcompany development indicates that the use of selling subsidiaries at an early stage reducedthe later risks of manufacturing abroad. These selling affiliates permitted the slow develop-ment of manufacturing from repairing, to packaging, to mixing, to finishing, to processing orassembling operations, and finally to full manufacture (Behrman, 1969, p 3).Within countries there is often a pattern of exports from the United States, followed by theestablishment of an assembly or packaging plant, followed by progressively more integratedmanufacturing activities (Vaupel, 1971, p 42).Without reference to any specific empirical observations Gruber, Mehta, and Vernon (1967)mention that "one way of looking at the overseas direct investments of U.S. producers of manufac-turers is that they are the final step in a process which begins with the involvement of suchproducers in export trade". Knickerbocker (1972) also refers to this process and explicitly disting-uishes agents and sales subsidiaries as separate steps in the process. Lipsey and Weiss (1969;1972) refer to a "marketcycle" model withsimilarcharacteristics. However, in none of these caseshave the dynamics of this process been investigated. It has only been used as an argument inthediscussion of related problems 25


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Specificaton ofthe Problem

THEINTER-NATIONALIZA-TIONMODEL

If nternationalizationndeed followsthe patterndescribed above, how can we explainit? We donot believe that tis the resultofa strategy oroptimum llocationof resources to different ountrieswherealternativeways of exploiting oreignmarketsarecomparedand evaluated.We see it ratheras the consequence of a process of incremental djustments o changingconditionsof the firmand its environmentcf. Aharoni,1966).Changes inthe firmand its environmentxpose newproblemsandopportunities.Lacking outinesforthe solutionof such sporadicproblems, he concern'smanagement"searches in the area of theproblem" Cyertand March,1963). Each new discontinuitys regardedas an essentially unpre-cedented and unparalleled ase; the problemsand opportunitiespresentedare handledin theircontexts. Thus commitments o othermarketsare notexplicitlyakenintoconsideration; esourceallocationsdo notcompete witheach other.Another constrainton the problem solution is the lack of, and difficultyof obtainingmarketknowledge in international perations.That internationalizationecisions have an incrementalcharacter s, we feel, largelydue to thislack of market nformationnd the uncertaintyccasionedthereby(Hornell,Vahlneand Wiedersheim-Paul,972; Johanson, 1970). We believe that lackofknowledge due to differences between countrieswith regard to, for example, language andculture, s an important bstacle to decision makingconnected with he developmentof interna-tionaloperations.We would even say that these differencesconstitute he main characteristicofinternational,s distinct fromdomestic, operations. By marketknowledgewe mean informationabout markets,and operations in those markets,which is somehow stored and reasonablyretrievable-inthe mindof individuals,ncomputermemories,and inwritten eports.Inour modelwe considerknowledgeto be vested inthe decision-making ystem:we do not deal explicitlywiththe individualdecision-maker.

As indicated in the introduction, model in whichthe same basic mechanism can be used toexplainall steps in the internationalizationould be useful.We also think hata dynamicmodelwouldbe suitable.Insuch a model the outcomeof one decision-or moregenerallyone cycle ofevents-constitutes the inputofthe next. Themainstructures givenbythe distinctionbetweenthestate and change aspects of internationalizationariables.Toclarify,we can say thatthe presentstate of internationalizations one importantactorexplaining he course of followingnternationali-zation,as inexpression (1) below.A I = f(l. ..)where

I state of internationalizationThe state aspects we consider are the resource commitment o the foreignmarkets-marketcommitment-and knowledge about foreignmarketsand operations.The change aspects aredecisions to commit resources and the performanceof currentbusiness activities.The basicmechanism is illustratedchematically n Figure1.

Figure1. The Basic Mechanismof Internationalization-Statend ChangeAspects.

Marketknowledge

Commitmentdecisions

Currentactivities

Marketcommitment

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Market nowledgeand market ommitment reassumed to affect bothcommitment ecisions andthe way currentactivities are performed.These in turnchange knowledgeand commitmentcf.Aharoni,1966).Inthe model, it is assumed that the firm trives o increaseitslong-termprofit,which s assumed tobe equivalent o growth(Williamson, 966). The firm s also striving o keep risk-taking t a lowlevel.These strivingsare assumed to characterizedecision-making n all levels of the firm.Giventhese premises and the state of the economic and business factorswhichconstitute he frame nwhich a decision is taken, the model assumes that the state of internationalizationffects per-ceived opportunities nd riskswhich nturn nfluencecommitment ecisions and current ctivities.We willdiscuss the mechanismin detailinthe following ections.

The two state aspects are resources committed o foreignmarkets-marketcommitment-and State Aspectsknowledgeaboutforeignmarketspossessed by the firmat a given pointof time. The reason forconsideringthe market ommitment s thatwe assume that he commitment o a market ffects thefirm'sperceived opportunities nd risk.

Let us firsttake a look at the marketcommitment oncept. To begin with,we assume that it is Marketcomposed oftwo factors-the amountof resourcescommittedandthedegree ofcommitment,hat Commitmentis, the difficulty f findingan alternative se for he resourcesandtransferringhemto it.Resourceslocatedina particularmarket rea can oftenbe considereda commitmento thatmarket.However,insome cases such resourcescan be sold and thefinancial esourcescan easilybe used forotherpurposes. The degree of commitment s higher he morethe resources inquestionare integratedwith other partsof the firmand theirvalue is derivedfrom hese integratedactivities.Thus,as arule,verticalintegrationmeans a higher degree of commitment han a conglomerative oreigninvestment.Anexample of resources that cannoteasily be directedto anothermarketorused forotherpurposes is a marketing rganizationhat is specialized around he productsof the firm ndhas established integratedcustomer relations.However,resources located inthe home countryand employedindevelopmentand production f products ora separatemarketalso constituteacommitment o that market.The more specialized the resources are to the specific market hegreater is the degree of commitment.And even if such resources can easily be directed todevelopmentand productionor othermarkets,as forexampleengineers in a centralengineeringdepartment,they cannot always be profitablyused there. Consider Volvo-the Swedish carmanufacturer-witha large partof its production apacity employedinproduction f cars fortheU.S. market.Evenifthatcapacity is not highlycommitted o the U.S.production,t is noteasy, atleast in the short run, to use it for production or other markets.And althoughthe engineersemployedinadaptingthe car to the U.S. requirementsan probablybe used foranotherpurpose,it is not certain hatthey can be profitably mployedthere.On the whole,it seems reasonabletoassume that the resources thatare located in the particularmarketare most committed o thatmarket;but we shall not disregardthe commitment hat follows fromemploying parts of thedomestic capacity for a particularmarket.Theotherpartof market ommitment-the amountof resources committed-is easy to grasp. It sclose to the size of the investment nthe market,using this concept in a broadsense, includinginvestment n marketing, rganization,personnel,and otherareas.

Inourmodel,knowledgeis of interestbecause commitment ecisions are based on severalkinds Marketof knowledge. First,knowledge of opportunitiesor problems is assumed to initiatedecisions. KnowledgeSecond, evaluationof alternatives s based on some knowledgeaboutrelevantpartsof the marketenvironment nd aboutperformance fvariousactivities.Verygenerally, he knowledge"relates opresentand futuredemand andsupply,to competition nd to channels fordistribution,o paymentconditionsand the transferabilityf money,andthose thingsvary romcountryocountryand fromtimeto time"(Carlson,974). 27


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A classificationof knowledgewhich is useful for us is based on the way inwhichknowledgeisacquired (Penrose, 1966, p 53). "One type, objective knowledge, can be taught;the other,experience or experientialknowledge, can only be learnedthroughpersonal experience. Withexperientialknowledge,emphasis is placed on the change in the services the humanresourcescan supplywhicharises from heiractivity"ibid, p 53); and ". . . experienceitselfcan neverbetransmitted, t produces a change-frequently a subtle change-in individualsand cannot beseparatedfrom hem" ibid,p 53). "Much f the experienceof businessmen is frequentlyo closelyassociated with a particular et of circumstances that a large partof a man's most valuableservices may be availableonlyunder these circumstances" ibid,p 53).We believethat thisexperientialknowledgeis the criticalkindof knowledge nthe presentcontext.Itis criticalbecause it cannot be so easily acquiredas objective knowledge.Indomesticopera-tions,we can to a largeextentrelyon lifelongbasic experiences to which we can add thespecificexperiences of individuals, rganizations nd markets. n oreignoperations,however,we havenosuch basic experiential knowledge to start with. It must be gained successively duringtheoperations n the country.We believe that the less structured nd well definedtheactivitiesand the requiredknowledgeare,the moreimportants experiential nowledge.Wethink hat t s particularlymportantnconnectionwithactivities hat are based on relations o otherindividuals.Managerialworkand marketing reexamples of such activities. Especially in the marketingof complex and soft-ware-intensiveproducts,experientialknowledgeis crucial.Animportantspect of experientialknowledge s that tprovidesthe frameworkorperceivingandformulating pportunities.Onthe basis of objectivemarketknowledgeit is possible to formulateonly theoreticalopportunities; xperientialknowledgemakes it possible to perceive "concrete"opportunities-to have a "feeling" bout howtheyfit intothe presentand futureactivities.We can also distinguishbetween general knowledge and market-specificknowledge.Generalknowledgeconcerns, in the presentcontext,marketingmethodsand commoncharacteristicsofcertain ypes of customers,irrespectiveof theirgeographicallocation,depending,forexample,inthe case of industrial ustomers,on similaritiesn the productionprocess. The market-specificknowledgeis knowledgeabout characteristicsof the specific nationalmarket-its business cli-mate,cultural atterns, tructure fthe market ystem,and,mostimportantly,haracteristics f theindividual ustomerfirmsand theirpersonnel.Establishment nd performanceof a certain kindof operationoractivityn a countryrequirebothgeneral knowledge and market-specificknowledge.Market-specific nowledgecan be gainedmainlythrough experience in the market,whereas knowledge of the operationcan often betransferred romone country o anothercountry. t s the diffusionof thisgeneralknowledgewhichfacilitateslateralgrowth;that is, the establishmentof technicallysimilaractivitiesin dissimilarbusiness environments.There s a directrelationbetweenmarketknowledgeand market ommitment.Knowledgecan beconsidered a resource(or,perhapspreferably, dimensionof the humanresources),and conse-quentlythe better the knowledgeabout a market, he more valuable are the resourcesand thestronger sthe commitmentothe market.This s especiallytrueofexperiential nowledge,which susuallyassociated withthe particular onditions on the market n questionand thus cannot betransferred o otherindividuals r othermarkets.

Change Aspects Thechange aspects we have considered are currentactivitiesanddecisions to commitresourcesto foreignoperations.

Current There is, to begin with,a lag between most currentactivities and theirconsequences. ThoseBusiness consequences may, in fact, not be realized unless the activities are repeated more or lessActivities continuously.Consider,forexample, marketingactivities,whichgenerallydo not result nsalesunless they are repeated for some time. In many cases the time lag is considerable,and themarketingnvestmentrepresentsan importantndever-increasing ommitment othe market.Thelongerthe lag, the higher he commitment f the firmmounts. Itseems reasonable to assume thatthe morecomplicatedand the moredifferentiatedhe product s, the larger he totalcommitment28 as a consequence of currentactivitieswillcome to be.


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Currentactivitiesare also the primesource of experience. It could be argued thatexperiencecould be gained alternativelyhrough he hiringof personnelwithexperience,or throughadvicefrompersons withexperience.To clarify he roles of these alternativeways of integrating xperi-ence intothe firm n the internationalizationrocess, we distinguishbetweenfirm xperienceandmarket xperience, both ofwhichareessential.Personsworking n the boundarybetweenthefirmand its marketmustbe able to interpretnformationrom nsidethe firmand from he market.Theinterpretationf one kindof informations possible onlyfor one who has experiencewith heotherpart.We conclude that,for the performanceof marketing ctivities,both kindsof experiencearerequired;and in this area it is difficult o substitutepersonnelor advice fromoutside forcurrentactivities. The more the activities are production-oriented,r the less interaction s requiredbetween the firmand its marketenvironment,he easier it willbe to substitutehiredpersonneloradvice for currentactivities;and consequentlythe easier it willbe to startnew operations hatarenot incremental dditionsto the formeroperations.Itshouldbe remembered,however, hatevenproductionactivities are dependent on the general business climate,which cannot easily beassessed inways other thanperformanceof business activities.To some extent it may be possible to hire personnelwithmarketexperience and to use themprofitably ftersome time inthe marketing ctivities.Thedelay is occasioned bythe need forthenew personnel o gainthe necessary experience inthe firm.But fthe newpersonnelhavealreadyworkedas representatives orthe exporter, he delay may approachzero. Thus,the best waytoquicklyobtainanduse market xperienceis tohirea sales managerora salesman of a representa-tive or to buythe wholeor a partof the firm. nmanycases thiskindofexperienceis notforsale;atthetimeofentry o a marketheexperiencemaynot even exist. Ithas to be acquired hrougha longlearning process inconnectionwithcurrentactivities.Thisfactor is an important easonwhytheinternationalizationrocess often proceeds slowly.

The second change aspect is decisions to commitresources to foreignoperations.We assume Commitmentthatsuch decisions depend on what decision alternativesare raised and howthey are chosen. DecisionsRegardingthe firstpartwe assume thatdecisions are made in response to perceived problemsand/oropportunities n the market.Problemsand opportunities-thatis awareness of need andpossibilities orbusiness actions-are assumed to be dependenton experience.LikePenrose,wemighteven say thatopportunities-and problems-are partof thatexperience. Firm xperience,as well as marketexperience, is relevant.Problemsare mainlydiscovered by those partsof theorganization hat are responsible for operationson the marketand primarily y those who areworkinghere.For hem,the natural olution o problemswillbe the extensionof theoperationsonthe market o complementingoperations.Inany case we assume thatsolutions o marketopera-tions problemsare searched for in the neighborhoodof the problemsymptoms,that is in themarketactivities Cyert&March,1963). In he same wayopportunitieswillbe perceivedmainlybythose who are workingon the market,and such opportunitieswillalso lead to extensionof theoperationson the market.Theywillbe relatedto those partsof the environmenthat the firm sinteractingwith (Pfeffer,1974). Thus, whetherdecision alternativesare raised in response toproblemsorinresponse to opportunities,heywillbe related o theoperationscurrently erformedon the market.Alternativeolutionswillgenerallyconsist of activities hatmean anextensionoftheboundariesof theorganization ndan increaseincommitment othe market.We couldspeakof anopportunity orizon hat-given the operationsperformed-describes the kindofactivities hatarelikely o be suggested by those responsibleforoperations.Butopportunitiesare also seen by individuals norganizationswithwhichthe firm s interacting;these individualsmayproposealternativeolutions othefirmnthe formofoffersordemands. Theprobabilityhatthe firm s offeredopportunitiesromoutside is dependenton thescale andtypeofoperationsit is performing;hat is, on its commitment o the market.We distinguishbetween an economic effect and an uncertaintyffect of each additional ommit-ment.We assume thatthe economic effect is associated primarily ith ncreases inthe scale ofoperationson the market,and thatthe uncertainty ffect concerns the marketuncertainty,hatisthe decision-makers'perceived lack of abilityto estimate the present and futuremarketandmarket-influencingactors.We mean thatthis marketuncertaintys reducedthrough ncreases ininteraction nd integrationwiththe market nvironment-steps such as increases incommunica-tionwithcustomers,establishmentofnewserviceactivitiesor,inthe extremecase, thetake-overofcustomers. 29


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Our hinking n this pointis furtherllustrated y the system of relationshipsbelow:Ri = maximum olerablemarket(market ) risk = f (firm'sresource position,firm'sriskapproach)Ri = existing market risk situation = Ci ?Uiwhere Ci = existingmarketcommitmentU, = existingmarketuncertaintyA R, = incremental isk mpliedby an incremental ddition o operationson market .Scale increasingdecisions are assumed to affectthe size of Cibutnot the size of Uiso that

A R, = Ui A Ci > 0Uncertainty educingdecisions are assumed to affect U,primarilyo thatA Ri = A Ui (Cj + A C,) + A Ci U, < 0

Using this frameworkwe say thatscale-increasingdecisions willbe taken whenR,< R*i.Thefirmwillincrementallyxtend its scale of existingoperationson the market-in expectationof largereturns-untilitstolerablerisk rontierR*,)s met. Scale-increasingcommitmentsmay,forexam-ple, be occasioned by a decline in uncertainty bout the market Uj) ncidental o gainingmarketknowledge acquiredwithexperience.Such a decline in marketuncertaintyan be expected whenthe marketconditionsare fairly table and heterogeneous.Ifmarket onditionsare veryunstable,experience cannot be expected to lead to decreased uncertainty.And, if marketconditionsarevery homogeneous, experience is probablynot a necessary requirementor marketknowledge.Undersuch marketconditionsan optimalscale of operationscan be chosen from he beginning.Market ncertaintyan also decline as a consequence of a competitive-or political-stabilizationof market conditions. Scale-increasing commitments may also follow a rise of the maximumtolerable risk level due to an increase in the total resources of the firm or a more aggressiveapproach toward risk. We can, in any event, say that large increases in the scale of operations inthe market will only take place in firms with large total resources or in firms which feel littleuncertainty about the market.Uncertainty-reducing commitments on the other hand will be made when R, > R*j.The firm willrespond to this imbalance by taking steps to increase interactions and integration with the marketenvironment. Such an imbalance may be the result of a decrease inthe maximum tolerable marketrisk (R*,)or an increase in the existing risk situation on the market Ri).The latter case may, in itsturn, be occasioned by an increase in market commitment (C,) or market uncertainty (U~).Marketcommitments that increase risk are, according to our assumptions, those that increase the scale ofexisting operations on the market. Such increases are likelyto be associated with currentactivitiesin an expanding market but can also be a consequence of the scale-increasing decisionsdiscussed in the previous paragraph. Note that increases in the scale of operations on the marketcan be expected to lead to uncertainty-reducing commitments, that is increased interaction andintegration with the market environment. Market uncertainty (U,) can be expected to rise as aconsequence of experience ina dynamic marketenvironment, showing that the original perceptionof the market was too simple. Itmay also rise because of a structuralchange in marketconditions,for example, in connection with the entrance of new competitors on the market or introduction ofnew techniques. A typical example of the former is the change of the market situation of Swedishpulp and paper firms'due to the entrance of North American producers on the European market(Kinch, 1974). However, increases in market uncertainty due to political changes cannot beexpected to lead to the uncertainty-reducing commitments discussed here since such commit-ments cannot be expected to affect the political situaton.This discussion requires some further comments. First, it is very partial since we do not take intoaccount how various factors other than scale may affect the economy of the market operations. Thetechnology of the firm probably has a great impact on the economy of different types of marketoperations. Secondly, the variable "firm'sapproach to market risk"is a very complicated factor.We can, for example, distinguish between three different strategies with respect to this factor. Onemay be that a high risk level on one market is compensated by a low risk level on othermarkets. Another is that the tolerable risk level is the same on all markets. A third is that risktakingon the market is delegated to those working on the market as long as decisions do not requireadditional resources from the firm.

We conclude this discussion of commitment decisions by observing that additional commitmentswill be made in small steps unless the firmhas very large resources and/or market conditions arestable and homogeneous, or the firm has much experience from other markets with similar30


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conditions.Ifnot,market xperiencewill ead to a step-wiseincreasein the scale of the operationsand of the integrationwith he market nvironmentwheresteps willbe takento correctimbalancewithrespect to the risk situationon the market.Market rowthwillspeed up this process.

We think hat the generalcharacteristicsof the model fitnicelywithempiricalobservationsgiven Empiricalearlier.Inorderto validateitempiricallywe intendto maketwo kindsof empirical tudies. Firstly, Verificationwe shall make one or two intensive case studies to see if the mechanism can be used forexplanationnempirical ituations. nthose case studies,we shalltry o measurethe internationali-zationvariables,marketcommitmentand marketknowledge,and investigatehow they developduring he internationalizationf the firm.Secondly, we intend to make comparativestudies of the internationalizationourses of differentfirms.Assuming hat such factors as firm ize, technology, product ine,homecountry, tc., viathemechanismdiscussed affect the characterof the internationalizationn differentways, we willinvestigatewhetherfirms that differwithrespect to those factors also differwithrespect to thepatterns of internationalization.uch studies will requiremore systematic discussions of theexpected influence of the factors. The present model will constitute the frameworkof suchdiscussions.

In many countriesvariousprogramsto affect foreigntrade and operationsare designed and Possiblecarriedout. Stillmoreare discussed. Usuallysuch programsare based on modelsinwhichprices Applicationsof factors and products in differentcountries are the only explaining actors. We think hatourmodel can help in giving such discussions and programsa better base. An evaluationof aSwedish exportstimulationprogramshowed thatthe "export timulationmeasures affect firms'exportbehavior ndifferentways due todifferences ntheirdegrees of previousexportexperience"(Olson, 1975). Ourmodel indicates how such experience can be expected to affect the exportbehavior. It also makes it possible to develop a better understandingof foreign investmentbehavior.Wealso think hatthe model can be usefulinplanningand decision making nthefirmwithregardto internationalperations.Many irmsconsider internationalizationpromisingstrategy.Thereare, however, numerousexamples of firmswhich have startedinternationalperationswithoutsuccess. We think hatthe importanceof the experience factor is often overlooked.The modelindicates how it is related to other internationalizationariables thus giving a better base forplanningand executingthe internationalizationrocess.Andfinallywe hope, as do otherstudents inthe field,thatourwayof reasoningwilladd somethingto the understandingof the process by whichfirmsbecome international r even multinational.Thus,manystudies of internationalrade and investmenthave shown thatoligopolistic ndustrieshave the greatest internationalngagement. Such features as high R&D ntensity,advertisingintensity,and efforts at productdifferentiationharacterizedthese industries(Gruber,Mehta,Vernon,1967; Hymer,1960; Kindleberger, 969; Caves, 1971;Vaupel, 1971). Oligopolistic om-petition,however,lacks explanatoryvalue at the firm evel;we have to look forotherfeatures toexplain variations n the level of internationalnvolvementamong the several firmsin a givenoligopolistic ndustry Horst,1972; Knickerbocker,973). Perhapsourmodelof the internationali-zationprocess can help inproviding partofthisexplanationbystressingthe importance f somefactorsaffectingthe decision-makingprocess.

Aharoni,Y. TheForeignInvestmentDecisionProcess. Boston, 1966. BIBLIOGRAPHYBehrman,J. Some Patterns n the Rise of the Multinationalnterprise.ChapelHill,1969.Carlson, S. Investment in Knowledge and the Cost of Information.Acta Academiae RegiaeScientiarumUpsaliensis:Uppsala, 1974.Caves, R.E. "InternationalCorporations:The IndustrialEconomics of Foreign Investment."Economics (1971):vol. 38.Cyert,R.M.&March,J.G. A BehavioralTheory f the Firm.EnglewoodCliffs,1963. 31


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Forsgren, M. & Kinch, N. Fdretagets anpassning tillfdrandringar omgivande system. En studie avmassa-och pappersindustrin: Uppsala, 1970.Gruber, W., Mehta, R., & Vernon, R. "The R & D Factor in International Trade and InternationalInvestment of the United States." Journal of Political Economy, February 1967.Horst, T. O. "Firmand IndustryDeterminants of the Decision to Invest Abroad: An EmpiricalStudy."Review of Economics and Statistics, 1972.Hymer, S. "The InternationalOperations of National Firms:A Study of Direct Investment," Doctoraldissertation, Mass. Institute of Technology, 1960.Haakansson, F. &Wootz, B. "Supplier Selection in an International Environment-An ExperimentalStudy," Journal of Marketing Research, February 1975.Hornell, E., Vahlne, J-E., &Wiedersheim-Paul F. Export och utlandsetableringar. Stockholm, 1973.Johanson, J., ed., Exportstrategiska problem. Stockholm, 1972.Johanson, J. "Svenskt kvalitetsstal pa utlandska marknader," Mimeographed licentiate disserta-tion, Dept. of Business Administration: Uppsala, 1966.Johanson, J. &Wiedersheim-Paul, F. "The Internationalizationof the Firm Four Swedish Cases."Journal of Management Studies, 1975.Kinch, N. "Utlandsetableringar inom massa-och pappers-industrin." InFdretagsekonomisk forskn-ing kring internationelltfdretagande, edited by Jan-Erik Vahlne. Stockholm, 1974.Kindleberger, C.P. American Business Abroad. New Haven, 1969.Knickerbocker, F.T. Oligopolistic Reaction and MultinationalEnterprise. Boston, 1973.Lipsey, R. E. &Weiss, M.Y. "TheRelationof US Manufacturing Abroad to US Exports. A Frameworkfor Analysis." Business and Economics Section Proceedings, American Statistical Association,1969.Lipsey, R.E. & Weiss, M.Y. "Analyzing Direct Investment and Trade at the Company Level,"Business and Economic Section Proceedings, American Statistical Association, 1972.Olson, H. C. Studies in Export Promotion.Attempts to Evaluate ExportStimulation Measures for theSwedish Textile and Clothing Industries. Uppsala, 1975.Penrose, E. The Theoryof the Growth of the Firm. Oxford, 1966.Pfeffer, J. "Merger as a Response to Organizational Interdependence," Administrative ScienceQuarterly, 6, (1972).Vaupel, J.V. "Characteristics and Motivations of the US Corporations that Manufacture Abroad."Mimeographed, Boston, 1971.Williamson, J. "ProfitGrowth and Sales Maximization." Economica, 33 (1966).

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The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign...

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