INTERNATIONALIZATION OF ADVERTISING AGENCIES

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1 INTERNATIONALIZATION OF ADVERTISING AGENCIES An assessment of the applicability of the eclectic theory and the Uppsala model towards advertising agencies Bachelor Thesis 6th Semester Author: Christian Holm Engell Christiansen Supervisor: Ingo Kleindienst Number of characters (excl. blanks): Study Number AARHUS UNIVERSITY BUSINESS & SOCIAL SCIENCE DEPARTMENT OF ECONOMICS & BUSINESS

2 Executive summary This thesis questions the applicability of the well-known Uppsala model, and Dunning s eclectic theory (OLI framework) towards internationalization of advertising agencies. By looking into the specific characteristics of the Uppsala model and the eclectic theory and compare them to earlier empirical studies in the general literature, the thesis suggests an explanatory model on how the process of internationalization of advertising agencies may be. The thesis finds that both the Uppsala model and the eclectic theory to some extend are able to account for elements dealing with the internationalization of advertising agencies. The model developed in this context consist of aspects that, combine elements from both the Uppsala model as well as the eclectic theory and earlier empirical studies towards the subject of internationalization of advertising agencies. In addition to the general findings about the Uppsala model and the eclectic theory, the thesis investigate whether standardization or specialization within the advertising industry between foreign markets is appropriate. Drawing upon the cultural dimensions created by Geert Hofstede and earlier research into this subject, it is assess that advertising agencies due to differences in the cultural understanding across nations, that a general specialization approach is needed. As an extension to this, it is suggested that the use of a standardized or specialized approach of advertising campaigns needs to be assessed in relation to the specific characteristics between different countries. Page 1 of 37

3 Table of content Executive summary... 1 Structure of the bachelor thesis Introduction Problem statement and research question Literature review Delimitations Methodology Source criticism Theoretical review John H. Dunning s eclectic theory (OLI framework) The ownership advantage (O) The location advantage (L) The internalization advantage (I) Criticism of Dunning s eclectic theory The original Uppsala model Market Knowledge Market commitment Commitment decisions: Current activities: The stage process The first stage The second stage The third stage The fourth stage The revisited Uppsala model (2009) Knowledge opportunities: Network position: Relationship commitment decisions: Learning Creating and trust building: Motives for internationalization Summary: Introduction to the analysis Page 2 of 37

4 3.1 Advertising agencies and the Uppsala model Advertising agencies and the eclectic theory Standardization or specialization of advertising in foreign cultures? Overall assessment and a new explanatory model The two-way approach of internationalization of advertising agencies Further studies Conclusion List of references Page 3 of 37

5 Structure of the bachelor thesis This bachelor thesis consist of different sections, in order to maintain a clear structure of the thesis as a whole. The first section have the initial statements of the thesis, which will help to create a clear image for the reader of the reasons behind the creation of this bachelor thesis. This first section consist of an introduction to the thesis together with the problem statement, research questions and literature review related to the thesis. Further, this first section aims to clarify the delimitations of the thesis together with the methodology. The second section of the thesis consist of the theoretical review. Here, a thoroughly introduction of the theory and models, which create the foundation of the further studies in the thesis will be accounted for. This introduction consist of the relevant findings that are the basis of the theory and models, in order to create a strong foundation for the reader to understand further studies in the thesis. The third section, consist of the actual analysis of the thesis. The analysis is an important element in the process of answering the problem statement and research questions where the aim is to theoretically, challenge the theory and model from section two. The fourth and final section of this bachelor thesis consist of an evaluation of the findings related to the analysis in the third section. Besides the evaluation of the findings from the analysis, the fourth section consist of an overall conclusion related to the findings throughout the thesis. Section 1: Intorduction the the thesis Problem statement and research questions. Literature review. Delimitations. Methodology. Section 2: Theoretical review: Eclectic theory. Uppsala model. Section 3: Advertising vs. Uppsala, eclectic theory and standardization Section 4: Evaluation Conclusion Source: Own making Page 4 of 37

6 1. Introduction In today s world, internationalization is playing a growing role in companies search for further development and growth. The definition of internationalization is when a company moves from operating solely in the domestic market, and begins to expand their activities into a foreign market (Susman 2007). Throughout the years, many theories and models related to the question of internationalization has been developed, where the focus often have been towards the manufacturing industry. One of the well-known models related to the internationalization question is the Uppsala model, developed by Swedish researchers Jan-Erik Vahlne and Jan Johanson in the 1970 s. John H. Dunning suggested another theory related to internationalization in the early 1980 s, which has been known as the eclectic theory or the OLI framework. Both the Uppsala model and the eclectic theory was originally based on findings within the manufacturing industry (Vahlne & Johanson 1977; Dunning 1980). An interesting question occur when investigating the findings from both studies, which is whether or not the findings described in the eclectic theory and the Uppsala model, could be applied in other settings outside the manufacturing industry and into the service industry. There have been a dramatically expansion in the internationalization of service companies, which have been fueled by technological innovation and reduction in trade barriers (Rajshekhar et al, 2003). The service industry has become a driving force in the global picture, where the service sector is considered as the largest element in some developed nations globally (Aharoni 1993). The aim of this bachelor thesis is to assess if John H. Dunning s eclectic theory (1980) and the Uppsala model by Vahlne & Johanson (1977) and the revisited Uppsala model (2009) would be applicable towards the service industry. The service industry consists of many different players from banking to transport and advertising. Since the different entities within the service industry have many different characteristics, it may not be possible to conclude that the internationalization process would be the same within every branch of the service industry. Based on this, only one branch within the service industry will be used in the assessment in this thesis, namely the advertising industry. The reason for this is that, due to globalization, different cultures is assumed to interact with each other in a higher degree than earlier, which makes the advertising industry interesting due to the close interaction between advertising and cultural perspectives. The thesis will try to determine if there are any important factors, which could affect the willingness of advertising agencies to engage in internationalization. In extension to identifying these factors, which could influence the decision of internationalization of advertising agencies, the thesis is also focusing on potential issues, which could occur when an advertising agency expand their activities outside the domestic market. Page 5 of 37

7 1.1 Problem statement and research question This bachelor thesis aims to investigate the correlation and applicability of the eclectic theory (1980) by John H. Dunning and the Uppsala model (1977) and the revisited Uppsala model (2009) by Vahlne & Johanson towards advertising agencies. Firstly, this bachelor thesis aims to account for the nature of the eclectic theory and both Uppsala models in order to create a strong theoretical foundation for the later assessment. Further, the thesis aims to account for some of the motivational factors, which could influence a company s decision to internationalize. After the assessment of the applicability of the eclectic theory and Uppsala model, the thesis aims to identify key elements, which could help to explain the internationalization process of advertising agencies. As an extension to the general assessment of the eclectic theory and Uppsala model, the aim is to investigate whether advertising services can be standardized or need to be specialized, and how this could affect internationalization in advertising agencies. Research questions: Does the eclectic theory (1980) and Uppsala models (1977; 2009) apply to advertising agencies? Which factors are important for advertising agencies in the decision towards internationalization? Is standardization applicable in the advertising industry? Page 6 of 37

8 1.2 Literature review This bachelor thesis aims to investigate the applicability for the eclectic theory by John H. Dunning (1980) and the Uppsala model by Jan-Erik Vahlne & Jan Johanson (1977 & 2009) towards internationalization of advertising agencies. The following section contains a review of some of the theory and studies that have been the foundation of this thesis, to illuminate some of the work revolving around the selected topic. The focus in this literature review will primarily focus on the theories, which are used as main drivers in the thesis. This means that the focus is to the theory and models, which are used the most in the thesis, where statements only used to a small degree in the thesis will be left out. Dunning (1980) is a paper which main purpose is to identify main features of the eclectic theory of international production. The intension of the paper is to evaluate ownership and location specific variables, in order to explain the industrial pattern of U.S Affiliates in fourteen manufacturing industries in seven different countries. The findings in the paper tries to explain how a manufacturing company should penetrate a new market. In order to assess the entry mode, Dunning suggests that a company needs to have some specific ownership advantages (competitive advantages) over their competitors. In addition, Dunning explains that there can be some location advantages in a foreign market (such as market size), which could influence the entry mode that a company should use. Dunning uses a qualitative approach to test for hypotheses of correlation of specific ownership and location advantages in relation to the way companies act in a foreign market. As stated earlier, the paper only examined industries within manufacturing. This creates uncertainty about the applicability of the findings towards other industries (e.g. service industries). Vahlne & Johanson (1977) is an empirical research, with inductive theoretical arguments, which aim was to develop a model, explaining the internationalization process of a company. The model they developed suggested that a company would increase their market commitment in a foreign market based on increased market knowledge. Their attention in the paper was concentrated on an increased involvement in an individual foreign market. The focus was on observations, which showed how Swedish companies increases their degree of internationalization through a series of smaller steps, instead of jumping into foreign direct investment. The model that was developed states that a company at the beginning in the internationalization process seeks markets with low geographical diversification, together with a small commitment in the foreign market (e.g. sporadic export). As the company increases their knowledge about the market, they would increase their commitment (e.g. subsidiaries joint venture FDI) in that market. Later the company could use the experience that it had gained to increase their geographical diversification as well, so that they would operate in markets with increasingly differences from the domestic market. Implications of the model concerns the applicability of describing the international process of all companies, within different industries. The development in technological advances have made the way of internationalization easier, which could imply that the process of internationalization may not start in such a low degree as the Uppsala model suggest. Another issue that is of concern with the Uppsala model (1977) is that due to globalization, companies are witnessed more as a part of a network instead of independent players, which the original model describes. As a final note, the model do not seem to give any indication to how a company moves through the different stages in the model. Page 7 of 37

9 Vahlne & Johanson (2009) is a revisit of their original Uppsala internationalization process model. Vahlne & Johanson made this revisit of the Uppsala model in order to update their original model so that it would fit with the changes in the business practice and theoretical advances, which had occurred since the 1970 s. Their new model now define a company as being a part of a network, instead of the traditional view of independent companies and customers. All though many of the elements of the revisited model bear similarities with their original model, some changes was suggested. Vahlne & Johanson added an aspect of trust building into their new model, together with knowledge creation, where they now acknowledge that new knowledge is possible to develop in relationships (networks). Vahlne & Johanson (2009) finds that the companies now are embedded in a business network including actors of different variety. In their new model, internationalization is now viewed as the outcome of a company s actions to strengthen their position in the network, which they prior to the new model viewed as improvement of their market position. The element of trust is one of the important factors in this new revisited model; Where Vahlne & Johanson argue that trust could substitute for a lack of knowledge about a market. The trust aspect could be related to a case where the company lets another entity manage their foreign activities. A great strength of this revisited model is that (which was also the purpose) that the model now, reflects the business environment in a contemporary way, with the view of business as a part of a network (product of globalization). Fanny & Wing-Fai (2007) is a paper that examines the expansion of multinational enterprises the service industry. Their focus was to investigate advertising agencies development in the Chinese market in order to see if the stage theories, which has been developed could help to explain the internationalization issues in a global world. The study uses a qualitative approach, where 32 advertising agencies was interviewed through personal In-depth interviews about their entry in the Chinese market, and how their development in market commitment had been since the initial stage of internationalization. The responses from the 32 advertising agencies showed that the majority of the agencies (37, 5 %) initially started their activities through the establishment of associate relationships with local organizations. Further, 31,25 % stated that their initial activities was made through brokers or media brokers, while the rest of the participating advertising agencies either used a mix of associates and external brokers or through the establishment of a joint venture. In addition to these findings, the majority of the participating advertising agencies (30 out of 32) stated that they had changed their initial involvement in the Chinese market, where the market involvement had increased over time. The basis of the increased market commitment (according to the agencies themselves), was that their clients had increased their commitment in the Chinese market, so that the advertising agencies needed to increase their commitment to follow their clients. Fanny & Wing-Fai found that the increased involvement in the market, mainly happened in different stages, where it was found that after the initial stage (e.g. through the use of associates), the majority of the advertising agencies established own representative offices and later joint networks within the Chinese market. The question of the study s transferability could be addressed, since the researchers only have focus on the Chinese market. The study do not say anything about the transferability of the findings into other markets such as the U-S market. The way that the study is conducted (through interviews with the agencies) is assessed to be a strength for the reliability of the study, to assess the overall question asked. Page 8 of 37

10 Taylor & Johnson (2002) the paper gives a review of the literature related to standardization or specialization of global advertising throughout the 1990s. From their examination, it is established that many companies uses a degree of standardization in their broad advertising strategy, while local advertisement in specific markets uses a specialized (localized) approach. One of the important elements in the paper from Taylor and Johnson is related to the issue of culture. The paper states that the different cultures around the world can make is necessary to advertising agencies to specialize their advertisement to these local cultures. Further, the paper address advertising as a powerful force that are able to create changes within cultures. From their overall review of the literature, it is established that general standardization within advertising is widespread, where markets with no or insignificance differences cross-nationally could be the target for the standardized approach. Further, the paper acknowledge that markets with large differences in their cultural believes should be the target of specialization. As a final remark, it is stated that markets with high proximity (geographical distance) do not necessarily share similarities in their cultural believes, which implies that a standardized approach is not necessarily applicable in the near markets. Terpstra & Yu (1988) investigates the impact of different factors on foreign direct investment within U.S. advertising agencies. What they did was to use theories, which was developed for the manufacturing industry related to foreign market size, international experience, geographical proximity, company size and oligopolistic reaction together with the presence of domestic customers in the foreign market. The investigation was targeted towards the twenty largest U.S. advertising agencies, where the results is measured against hypotheses made using relevant theory about the subjects. The findings in the investigation points towards a positive correlation between the foreign market size and the advertising agency s desire to enter this market, no discrimination between foreign markets due to geographical location and high correlation between the size of the company and the desire to go abroad. Further, the findings establish that the advertising agencies were more inclined to expand to a foreign market if they have international experience and that they follow their domestic clients in going abroad. Page 9 of 37

11 1.3 Delimitations This thesis only focuses on the internationalization aspects of Dunning s eclectic theory (1980) and the Uppsala model (1977) and the revisited Uppsala model (2009) by Vahlne & Johanson. Therefore, no other internationalization theories or models will be included in this thesis. The author of this thesis acknowledge that Dunning have made modifications towards his original model over the years, but the paper will not consider these modification (other than in smaller statements) since the focus is only on his original model. The reason why the focus is only towards Uppsala and the eclectic theory, is that the internationalization subject covers a large amount of material, which could result in a too broad thesis if all needed to be included. The general focus of the thesis is towards advertising agencies. Therefore, other branches within the service industry will not be investigated in any deeper level. Further investigations in relation to internationalization of the manufacturing industry will not be included (besides the theory itself) due to the selection of advertising agencies as focus. 1.4 Methodology In the beginning of the thesis I will account for the nature of the eclectic theory by Dunning (1980) and both the original and the revisited Uppsala model (1977 & 2009) by Vahlne & Johanson. To do this, their original research are used as the main source. This part is relevant in order to make a foundation for the further discussion in the thesis. The discussion/analysis is looking into some earlier empirical studies, in order to assess if it is possible to apply the findings from the eclectic theory and the Uppsala model towards advertising agencies internationalization. The reason for why the eclectic theory and Uppsala model was selected in relation to advertising agencies is that they originally was made for the manufacturing industry, which then have raised the question whether they could be applied towards the service industry. Since the service industry consist of many different players, the advertising industry was selected, since it would be difficult to generalize the findings to service industry. The overall assessment and explanatory model has its foundation from the findings in the discussion/analysis Source criticism The overall information gathering have been conducted through desk research, where studies from journals such as international business review, Journal of international business studies and Journal of service marketing, have been used. This have contributed to a higher degree of validity, since the studies have been published in well-known scientific journals. Page 10 of 37

12 2. Theoretical review Over time, various researchers have developed many theories and models in relation to the subject of internationalization. These theories and modes often seeks to explain how companies expand their business activities to a foreign market. Two of these theories/models have been selected to be the foundation for further investigation in this thesis, namely John H. Dunning s eclectic theory (1980) and the Uppsala model (1977 & 2009) By Jan-Erik Vahlne and Jan Johanson. The following pages contains a review of the models, in order to create a strong knowledge base for the reader, in relation to the further studies of the thesis. 2.1 John H. Dunning s eclectic theory (OLI framework) The first theory this bachelor thesis will investigate is the eclectic theory, also known as the OLI framework (Ownership-Location-Internalization) developed in the early 1980 s by John H. Dunning who is a professor of international investment and Business Studies at the University of Reading, Great Britain (Dunning 1980). Dunning developed the hypothesis that companies encouragement of engaging in internationalization is determined by a series of factors or advantages, which together could help to explain the movements of a company in a foreign market (Dunning 1980). The eclectic theory explores different entry modes such as licensing, export and foreign direct investment, where the determinants for choosing one over the other is related to Ownership advantages, location advantages and internalization advantages. The ownership advantages has its origins in firm relates theories, while the location advantage, which is related to the foreign market, have its origins in host-country theories. Finally, the internationalization advantage is considered as an element that has it foundation from theories about market imperfections (Pedersen 2003). The following will account for the various elements, which relates to the ownership, location and internationalization advantages as suggested by Dunning. It is noticed that the more advantages a company have (related to O- L-I) the more involved a company would be in a foreign market The ownership advantage (O) According to the study into an eclectic theory (1980), Dunning suggest that the ownership advantage occurs if a company is possessing competitor advantages or are able to acquire these competitor advantages better than what their competitors have the ability to do (Dunning 1980). Dunning states that having an ownership advantage could manifest through a specific recognized trademark, a high level of technological expertise or organizational advantages. According to a later study made by Dunning in 2007, he states that the element of ownership advantages could be places into two different categories. The first way of assessing the ownership advantage is to describe them as being static. According to Dunning (2007), the static advantages are those that generate income form a given set of ownership advantages. The second category as suggested by Dunning (2007) relates to Dynamic advantages. The dynamic ownership advantages relates to a company s ability to sustain and increase income-generating assets over time. The income-generating assets also relates to assets acquired from foreign sources (Dunning (2007). Elements, which could be relevant when looking at ownership advantages, are related to the size of the company and the experience in relation to international Page 11 of 37

13 market. Dunning suggest that if a company possess an ownership advantage, but do not have advantages related to location nor internalization, licensing would be a viable entry mode into a foreign market (Dunning 1980). Licensing could be characterized as an externalization of the company s ownership advantages, and consist of a written contract in which a company give a license or right of disposal to another person or company, who then are allowed to use these ownership advantages themselves (Business dictionary). As an example of this, there could be a company with a strong and recognized trademark. This trademark could then be subject of licensing to a foreign organization or company, which then could use the trademark The location advantage (L) The next dimension of the eclectic theory deals with advantages that relates to location. When assessing whether a foreign market is attractive, Dunning (1980) suggest that there could be some locational specific advantages, which makes a foreign market attractive. Of these location advantages Dunning (1980) argue that elements such as specific natural resources, most kinds of labor and proximity to other markets. According to Dunning, locational advantages needs to be present in a foreign market, in order for a company to engage and benefit from foreign direct investment. As an example of a location advantage, we could look at a company based in Denmark. If the company was to investigate the possibilities for foreign direct investment in a country like China or an area like Eastern Europe, there could be a location advantage in relation to the cost of labor in these markets. The reason for this is that the salary in Denmark is high compared to China and some countries in Eastern Europe. This is backed up by an analysis made by the Swiss bank UBS in 2011, which placed the Danish hourly wage as the second highest in the world, with only the citizens in Zürich above (Berlingske Business 2011). In the assessment of possible entry modes, a location advantage would suggest foreign direct investment as a possible entry mode. This though, needs to be assessed together with the final dimension of the eclectic theory, related to internationalization The internalization advantage (I) The final element of the eclectic theory deals with the dimension of internationalization. Here, the company need to assess whether or not foreign direct investment, would be appropriate to use as an entry mode in the foreign target market (Dunning 1980). Essentially, this final dimension is looking into the advantages of internalization (doing is yourself) or externalization (let someone else do it for you). If a company would yield a better result by presenting themselves in a foreign market, then there would be a high incentive for internationalization. On the other hand, if the company assess that there is more disadvantages by presenting themselves, then externalization using licensing (e.g. franchise) could be a viable option of entry mode. Dunning (1980) argues that the incentive for internalization of a company s ownership advantages is to avoid some of the disadvantages that could occur in an imperfect market. Market imperfection could occur if the cost of transaction or negotiation is very high. In a situation, where there is an internationalization advantage, together with the ownership advantage, then export could be assessed to be a possible way of entering a foreign market. If the company in its final assessment argue that they possess the advantages in relation to the three elements of the eclectic theory, then Dunning suggest that it would be beneficial for the company to do foreign direct investment, with foreign establishment of production facilities and sales channels. (Dunning 1980) Page 12 of 37

14 Source Dunning Criticism of Dunning s eclectic theory Since the time of the development of the eclectic theory, there have been some criticism targeted towards it. Pedersen (2003) addressed some of these critique elements, where he states that the theory to some extend is too broad in its definitions. Further, Pedersen (2003) argues that the advantages of ownership, location and internationalization addressed by Dunning, may not necessarily create the conditions, which is enough to say that foreign direct investment would be an appropriate market entry form. Rugman submitted further critique in 1981, where he argued that the distinguishing between ownership advantages and the advantage of internationalization is difficult to see (Rugman 1981) 1 In relation to the lose structure and broad definition of the eclectic theory it is interesting that Dunning do not address to what extend a company needs to have the different advantages. This could make it difficult to assess if there is a sufficient amount of ownership and location advantages for engaging in foreign activities. 1 Notation from Pedersen 2003 Page 13 of 37

15 2.2 The original Uppsala model 1977 Swedish researchers Jan Johanson and Jan-Erik Vahlne developed in 1977 the Uppsala model where the focus is towards the internationalization process of a company (Vahlne & Johanson 1977). The model has its foundation from empirical observation of Swedish manufacturing companies from which the two researchers developed their model. From their study, Vahlne & Johanson argued that companies move gradually through a series of stages, when they are internationalizing (Vahlne & Johanson 1977). The background for the development of the models was to identify elements that could make up for an explanatory value of the internationalization process (Vahlne & Johanson 1977). The model itself, consist of two different dimensions of increasing market commitment and increasing geographical diversification. The dimension of market commitment deals with the different entry modes a company use when they are expanding their activities to a foreign market. The second dimension of geographical diversification is concerned about the diversity of the different markets a company is going to enter (Vahlne & Johanson 1977). The essential meaning of these two dimensions is that over time, companies will increase their market commitment and then based on the experience they get from a specific market, they are able to explore increasingly diverse market. Vahlne & Johanson (1977). Further, Vahlne & Johanson (1977) argues that there are four basic mechanisms of internationalization. These mechanisms consist of market knowledge, commitment decisions, market commitment and current activities. These basic mechanisms are divided into two aspects, namely the state aspect and the change aspect (Vahlne & Johanson 1977). The state aspect is related to market knowledge and market commitment, while the change aspect is towards commitment decisions and current activities. The basic explanation of the Uppsala model could be that an increase in a company s knowledge about a foreign market, leads to an increase in market commitment and vice versa. This in turn, will overall increase a company s degree of internationalization, which is determined by the degree of commitment and the diversification of the markets a company is present. The following pages, seeks to explain the mechanisms in more detail, together with an outline of the different stages a company is undergoing in the internationalization process. The basic Mechanism of internationalization state and change aspect (Vahlne & Johanson 1977 p. 26) Page 14 of 37

16 2.2.1 Market Knowledge According to Vahlne & Johanson (1977), a company s market knowledge is an important factor of the internationalization process, since the knowledge of a foreign markets state and conditions affect the commitment decisions made for the selected market. Vahlne & Johanson (1977) argues that, two of the key elements related to market knowledge, is to know what possibilities and issues that could occur in the foreign market. Further extensions to market knowledge, can be related to elements such as, knowledge of present and future demand in the foreign market, competition conditions and the various distribution channels that can be used by the company (Vahlne & Johanson 1977). If we look further into how knowledge can be obtained, Vahlne & Johanson (1977) argues that there is two kinds of knowledge, namely objective knowledge and experience knowledge. The objective knowledge is related to the knowledge that is possible to be taught from one person to another, while experience knowledge is something that is obtained through personal experiences (Vahlne & Johanson 1977 p. 28). As an example, we could say that objective knowledge is what a student obtain while attending a university and the experience knowledge can be acquired, if a manager works in a foreign market and thereby gets experience about foreign markets. Market knowledge leads, as stated earlier, to the commitment decisions in the foreign market Market commitment Vahlne & Johanson argues that market commitment is composed of two factors, namely the amount of resources committed and the degree of commitment. The degree of commitment relates to the difficulty of finding alternative use for the resources and the job of transferring them into an alternative (Vahlne & Johanson 1977). The allocation of resources in a foreign market is an important determinant for assessing the overall market commitment. Vahlne & Johanson (1977) argues that the degree of specialization of resources also plays a role in the total market commitment. As an example, there could be a company with a production facility in a foreign market. If then the company decides to expand their activities through further foreign direct investment, then the degree of market commitment would increase Commitment decisions: Based on the objective or experience knowledge that a company possess, different decisions will be made in relation to how committed a company should be in a foreign market. According to Vahlne & Johanson (1977), these decisions will especially be affected by the knowledge of the possibilities or problems, related to the foreign market. The experience of the company also plays a role in the decisions made towards a change in the level of commitment. To put the possibilities and problems into a more clarified picture, we could look at an example of a company working in a foreign market. If we say that a company faces problems related to lower demand in the foreign market, they could choose to delay or close down any further commitment to that specific market. In relation to the possibilities, we could have a company facing higher demand in the foreign market, which could motivate them to expand their commitment to the market even further. Further extensions to the commitment decisions could include that it is vital for the company to analyze the longterm trends in the foreign market. If the company decides to invest further resources in a foreign market Page 15 of 37

17 based only on current higher demand, they could face problems over time, if the demand does not develop positively Current activities: According to Vahlne & Johanson (1977), it is important to remember that there is a lag between the current activities in a market and the results of these activities. As an example of this, Vahlne & Johanson (1977) stated that the activities from marketing campaigns would not give any results in relation to sales, unless they are repeated over time. The current activities in a specific market is the main source of experience and it is possible to divide the experience into two different aspects of company experience and market experience. In order to create experience, the personnel working within the company needs to have experience with the market. On the other hand, they should also have experience related to the company, which in turn would mean that experience from both aspects (company experience and market experience) is needed. In order to create market experience, Vahlne & Johanson (1977) states that it would be possible to hire personnel with the level of market experience needed. This though, would result in a period where the hired personnel is not profitable, since they need to gain experience in relation to the company (Vahlne &Johanson 1977 p. 29). Further they states, that a possibility to overcome this delay for the personnel to be profitable for the company is to hire people that already have experience with the company. This could be the case if a person have worked for the company before. Vahlne & Johanson (1977) further states that the best way of obtaining market knowledge, would be to hire a sales manager or sales representatives that have represented the company before, or to some extend to buy the company that have been used for export for the domestic company (Vahlne & Johanson 1977 p. 29). As a final note, it is important to remember that the market experience in many cases is not something that is present at the time of entry. Therefore, the process behind obtaining market experience can be a long process. 2.3 The stage process Now that we have accounted for the state and change aspect of market commitment and knowledge, the focus will be related to the process and steps that a company will go through in the internationalization process. Relate the stages that the Uppsala model describes, can as previously stated, to small steps that a company is going through, towards foreign direct investment. As earlier mentioned, the stages that a company faces it a product of increasing market commitment and geographical diversification. The first stage that a company is going through in the internationalization process is according to Vahlne & Johanson (1977) based on sporadic export to a single market (International Markedsføring 2012 p. 387). When a company enters a new market, the Uppsala model states that the company at first have no regular export to that market. This stage of the model suggests no targeted marketing commitment, where the focus often would be in sort-term actions that could have the characteristics of a kind of coincidental export. Extensions to this could be that, in this early state of the internationalization process, the export could bear the imprint of a less proactive approach towards internationalization. Further, the market to where the exported products has its destination, could be selected using a near market method, where a company in Denmark may start their export by sporadically exporting to markets such as Germany, Sweden or Norway, which have an advantage in relation to physical distance. Page 16 of 37

18 The second stage in the internationalization process, the company then increase their degree of market commitment and geographical diversification. This could be done through the use of external export intermediary. (International Markedsføring 2012 p. 387) The company could have the possibility to draw experience from the first stage, when they are expanding their foreign activities and market commitment; although the model still suggest that, the commitment to the foreign market is moderate. Using a foreign importer, the company is still in this early stage of the internationalization process, able to minimize the involvement in the foreign market. This could help lowering the work; needed to reach the foreign market (International Markedsføring 2012 p. 387). Here the book also states that to possibility of using an export agent in the later stage of second stage. The third stage drawing on the experience from the export agent and foreign importer, the domestic company could in start to use their own foreign sales subsidiary (International Markedsføring 2012 p. 387). If the company was to set up own foreign sales subsidiaries, the market commitment would increase, since the level of activities and resources, placed in the foreign market would increase, and relates to the elements of market commitment and resources, described earlier. With the increasing involvement and commitment in the foreign market, it would be fair to assume that the level of control in relation to sales would increase as well. From the first two stages of the Uppsala model, the level of control over own sales can be considered to be low, if the company only uses external export intermediaries and sporadic export. The level of control could especially increase in relation to the marketing of the company s products or services and of cause, the sales work behind. A further expansion in relation to geographical diversification could also be considered, when the company s knowledge and experience of export increases. The fourth stage in the Uppsala model deals with the setup of own production facilities in a foreign market. (International Markedsføring 2012 p. 387) If the company have had success with the establishment of export and sales subsidiaries as described in the earlier stages, the next step would be to establish their own production in the foreign market. This stage also have the highest degree of internationalization in the model and could be considered as the target for all companies, with the desire of an international figure. According to Vahlne & Johanson (1977), it is important for the company to use experience and knowledge, obtained in one stage of the internationalization process to prepare for the next stage. No regular export (Sporadic) Experience independent Foreign sales representatives Experience subsidiary Experience Foreign production and sales subsidiary The process of internationalization (Uppsala model Vahlne & Johanson 1977) Since Vahlne & Johanson developed their model of the internationalization process, it has been subject of some criticism related to the usability of describe the actual process of internationalization. Bell & Young placed some of this critique in their 2004 study of Small firm and internationalization and business strategy (Bell & Young 2004), And Andersen (1993). In the study of Bell & Young, they target the earlier focus there has been towards the models of internationalization, which includes the different stages that a company is going through, (Such as the Uppsala model) in the internationalization process (Bell & Young 2004). They argue that these models do not give any clear definition related to how a company should move from one stage to the next, as the Uppsala model suggests. This gives an image of lack between theory and practice Page 17 of 37

19 (Bell & Young 2004 p. 25) and (Andersen 1993 p. 216). Further, Bell & Young (2004) state that the development in the structure of companies, since the Uppsala model was developed (1977), have made the process of internationalization, which the model describes, less adequate. This could be seen in the number of born global companies, where the focus from the beginning (or at least already a few years after establishment) is related to international trade (International Markedsføring 2012 p. 392). The born global companies thereby, do not follow the Uppsala models criteria of internationalization, where the company needs to go through the different stages of the model. Anderson (1993) also targets criticism to the lack of explanation, regarding factors that could influence the process of internationalization. Further Anderson (1993) states that it seems as the process in the model would continue regardless to any decisions made in relation to the direction of the four stages of the model (Andersen 1993 p. 217). As a final remark, the development in technological opportunities and the increase in global networks have made the Uppsala model less applicable to describe the internationalization process of small firms (Bell & Young 2004 p. 26). 2.4 The revisited Uppsala model (2009) As a result of the development in economics and regulatory environment since 1977 (and possible as a result of some of the criticism) Vahlne & Johanson made a reviewed model of their 1977 Uppsala model, in 2009 (Vahlne & Johanson 2009). In this restatement of the original model, Vahlne and Johanson (2009) have their focus related to a framework that states that business environment now (2009) is viewed as more of a network of relations instead of the traditional view from 1977 that defined the business environment to consist of many independent suppliers and customers (Vahlne & Johanson 2009 p. 1411). From the 1977 view, Vahlne & Johanson made a renewed version of the basic mechanism of internationalization as described earlier. The new model follows the same state and change aspect as their 1977 model. Changes to the model was in relation to the factors in the state and change aspect as illustrated below. The business network internationalization process model by Vahlne & Johanson (2009 model) Page 18 of 37

20 2.4.1 Knowledge opportunities: In the Vahlne and Johanson s 1977 model, market knowledge was described as fundamental to a company s internationalization such as the knowledge obtained through experience in current operations (Vahlne & Johanson 2009 p. 1415). In their 2009 revisiting of the model, Vahlne & Johanson acknowledges that trust can be an important part of learning and could actually be a substitute for knowledge (Vahlne & Johanson 2009 p. 1415). They further state that trust could substitute knowledge if the necessary level of knowledge is not high enough, where trust in a middleman to actually run their foreign activities could be important (Vahlne & Johanson 2009 p. 1415) As stated in their 1977 study, the knowledge in relation to opportunities is important (Vahlne & Johanson 1977 p. 27). In their new study from 2009, they further discuss this element of knowledge and acknowledge, due to resent years of studies that opportunities is one of the most important relations of knowledge (Vahlne & Johanson 2009) Network position: The network position is a new dimension added in Vahlne & Johanson s 2009-reviewed Uppsala model, and could be related to the change in perception of the business environment as described earlier. This new dimension deals with the network in which a company is represented. Vahlne & Johanson draw on studies made by various researchers and concludes that the network in which a company is represented, affects the internationalization process for that specific company (Vahlne & Johanson 2009 p. 1413). They further state that, the impact of the network affects how companies choose their foreign market and how they are going to enter the specific market. A further extension to why networking is important could be seen because of the increasing competition in the global market. As an example there could be a company that through the use of a network, is able to reach the international market, by drawing on the expertise and experience of other companies in that specific network. The internationalization of the company may not had been an option, if the company stood alone, without the possibility to draw on the experience and competences of the other companies representing the network Relationship commitment decisions: From their 1977 model, Vahlne & Johanson stated that the commitment decisions were a result of the market knowledge obtained by a company. In their revisited model from 2009, they add the relationship aspect to this, which can be defined as the decisions made in relation to the degree of commitment to relationships in the network (Vahlne & Johanson 2009 p. 1424). This aspect further implies that, the company needs to decide whether to decrease or increase their commitment to the relations in the network. The decision to either decrease or increase the commitment (involvement) to others in the network will result in changes in the choice of entry mode, investment size, organizational changes and the level of independence (Vahlne & Johanson 2009 p. 1424). Page 19 of 37

21 2.4.4 Learning Creating and trust building: The final dimension of the reviewed model have replaced current activities from the original model. In the reviewed model, Vahlne & Johanson made this change in order to make the outcome of current activities more explicit (Vahlne & Johanson 2009 p. 1424). The original model had focus on the current activities as the daily activities, which helped a company to create knowledge, trust and commitment. The reviewed version suggests that the learning process consist of more than the experience based knowledge (from daily activities), but that this kind of learning still is the most import kind of learning (Vahlne & Johanson 2009 p. 1424). The new model suggests that the speed of which the learning process is proceeding, creation of knowledge and trust building is a product of the current level of knowledge, trust and commitment (Vahlne & Johanson 2009 p. 1424). As an extension, Vahlne & Johanson highlights opportunities and its creation, since they believe that this is an important factor in any relationship, where a further statement states that the efficiency of the creative process, is a product of the level of knowledge, trust and commitment (Vahlne & Johanson 2009 p. 1424) Page 20 of 37

22 2.5 Motives for internationalization When looking at the motivational factors for internationalization, it would be possible to divide these into two groups consisting of proactive internal and external factors and reactive internal and external factors. The internal factors can be defined as factors within the company, which can contributed to the desire of internationalization, while the external factors can be defined as factors outside of the company, which can affect the company s desire of internationalization. The proactive and reactive behavior can be recognized by the company s way to approach to the question of internationalization. If the company were expanding their activities by their own initiative, it would be seen as an offensive and proactive approach. If the company were expanding their activities based on an outside pressure or as a necessity, it would be a more defensive and reactive approach (Pett 2004.) Companies that are using the proactive approach will probably be positive towards internationalization, since the motivational factors included in the proactive approach generally relates to companies with strengths such as knowhow, market knowledge, high technological advances (Pett 2004). In extension proactive motivational factors, the strength of having a unique product, can also be the source to why a company wants to internationalize. According to Pett (2004), a reactive approach could be the product of a necessary response to unfavorable conditions in the market of which they have their current activities. The conditions in the current market, which could impose the reactive approach, could be elements such as increased competitive pressure, excess capacity or a stagnant or declining current market (Pett 2004). As mentioned earlier, the motivational factors are also possible to divide into internal and external motives. The internal factors can be related to firm-based elements, while the external factors is environmental-based. Elements within the internal motivational factors have to do with the management ambitions towards internationalization. In the relation of management attitude of internalization, it have been discovered that, a company with a management that is deeply involved in internationalization process and have a high level of ambitions towards this, will give a better outcome for the company (International Markedsføring 2012 p. 381). Factors, related to growth targets and economics of scale, risk management and access capacity could be described as internal motivational factors. In relation to the external motivational factors, elements such as a growing export market, internationalized consumer preferences, stagnant or declining current market and high competition in the domestic market could be applied (International Markedsføring 2012 p. 380). The following figure helps illustrate, how the different motivational factors can be divided into different segments of proactive and reactive, internal and external motivational factors. Proactive internal motivation Proactive external motivation Reactive internal motivation Reactive external motivation Management ambitions Growth targets Unique product Economics of scale Growing exportmarket internationalized consumer preferences Risk management excess capacity High competition stagnant or declining current market Small domestic market unsolicited request Source: own making input from Pett 2004 and International Markedsføring 2012 Page 21 of 37

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