RISK AND UNCERTAINTY IN FIRMS INTERNATIONALIZATION THEORIES: DEFINITIONS AND CHALLENGES FOR SMEs

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1 RISK AND UNCERTAINTY IN FIRMS INTERNATIONALIZATION THEORIES: DEFINITIONS AND CHALLENGES FOR SMEs ABSTRACT This study has as general objective the definition for risk and for uncertainty in firms internationalization process, providing elements to help small and medium enterprises (SMEs) in this process. Methodologically, an in-depth review is conducted on selected literature published on indexed journal databases over the subject. The review shows the existence of a complementary relation in the field of risk between the theories analyzed. It was also evident that the theories used complement each other providing a deeper understanding over risk management. From that, we propose a definition of risk and uncertainty to the area of internationalization, with the challenges applied to small and medium enterprises to comply. The conclusion demonstrates the importance to review and propose definitions for the variables risk and uncertainty, since this scientific field proves to be still lacking in the construction and understanding of concepts, specifically for helping small and medium enterprises in regard to their internationalization process. It also became possible to affirm that the theories reviewed do communicate with each other, whereas it is remarkable the existence of a complementary relation between those with regard to risk and uncertainty. Keywords: Internationalization Process, Risk, Uncertainty, Small and medium enterprises. INTRODUCTION Information and knowledge are nowadays much easier to acquire in comparison with the past, thanks to creations such as the Internet and global information platforms. However, the more information is acquired, the more questions and doubts will arise; as expressed by the famous Socratic paradox All I know is that I know nothing." This need to acquire knowledge is pivotal in the case of Small and Medium Enterprises (SMEs) during the process of internationalization. This field has a variety of theories (e.g. Uppsala model, Network theory, and International Entrepreneurship) which seek to explain through different perspectives, the steps that follow when a company decides to expand its activities abroad. However, when based on only one theoretical approach, the understanding of the process turns out to be limited and not sufficient to elucidate questions such as: why some SMEs are not able to handle the risks of the internationalization process, which sometimes leads to failure of the project?

2 In the research field over internationalization only a small number of studies on the subject risk management exist. Even the definition of clear concepts for the variables risk and uncertainty are yet to be proposed in this field of study. In this paper is accepted that for Small and Medium Enterprises (SMEs), to have clear and comprehensive concepts over the variables risk and uncertainty is fundamental in the conduct of decision-making and the future success of the internationalization process. In this sense, our general objective is the definition for risk and for uncertainty in firms internationalization process, providing elements to help small and medium enterprises (SMEs) in this process. Specifically, we aim to: i) propose definitions for risk and for uncertainty, from the definitions in the theoretical approaches; ii) to assess the elements from these definitions that SMEs should consider to achieve success in their internationalization process; and, iii) verify the existence of a complementary relationship between the internationalization theories here treated with regard to the risk subject and its management. The objectives will be achieved by reviewing the main models from the behavioral theoretical current with focus on the process of internationalization of SMEs, namely: the Uppsala model, considered by many scholars and firms to be still the reference theory when deciding to go abroad, and also for being an of the few models to develop the concept of risk and uncertainty; the Network theory and the model of International Entrepreneurship. The last two are more appropriate as strategies for dealing with risk and uncertainty in addition to increasing the speed of the internationalization process. The formulated premise is that, for the construction of a useful and simple theoretical concept of risk and uncertainty in the context of the internationalization of SMEs, it will be necessary to understand how these variables are presented and the possibilities for managing them. By clarifying these points, light will be set over the thematic, opening the path for future research to deepen the understanding of risk management during the firm s internationalization process. It is also believed that the Uppsala model offers an initial understanding for the relevant variables, which is complemented by the theories of Network and International Entrepreneurship. It is possible to say that those theories are complementary in regards the management of risk. METHODOLOGY The research was conducted by analyzing the seminal papers from the three most relevant theories of the behavioral chain: Uppsala model, Network theory and International Entrepreneurship approach. The works selected concerning the first model were the contributions made by Johanson and Vahlne (1977 and 1990) and later the complementary work of Figueira-of- Lemos, Johanson and Vahlne (2011). For the Network theory the base was given by the pioneering

3 work from Johanson and Mattson (1993). The last theory was reviewed from the contributions of McDougall et al. (1994) and McDougall and Oviatt (1997). The choice of these three theories - over others that also exist in the field of internationalization - was due to the literary relevance they possess and because of the number of SMEs that use them as models for their internationalization process. The study conducted here can be classified as exploratory and descriptive with qualitative approach, since the focus was directed into examining the existing theories and then understand the design and significance of the variable risk and uncertainty. The literature review method enables a deeper understanding of the researcher about the focus problem, and keep track of notes, records, correlate the facts and variables without manipulating them. The selection of papers for review sought the original productions and publications from the authors whom substantiate the theories discussed, thus because those articles contain concepts, main ideas, reflections, results etc., that best enable the development of this paper. A second group of works selected were from authors who have developed more deeply the concepts of the previous theories, thus complementing the study over the management of risk and uncertainty during internationalization. THEORETICAL REVIEW The literature review unveiled that the majority of scientific papers dealing with the process of internationalization from companies do not attach great importance to the topic of risk management, and also the theories developed to explain the movement of going abroad in SMEs usually only mention the existence of risk and uncertainty. This leak on information can lead a company to the naive believe that while following the steps advocated by the theoretical model of reference, the internationalization process will take place without major problems and success will be certain. Seeking to bring more light to the subject, this article focused on the behavioral theories, since those are considered the best in regard of explaining the internationalization of SMEs. Among those theories there is one that indicates the risk and uncertainty as relevant variables - that is the Uppsala model - and two that present possibilities for conducting the risk management - the Network theory and International Entrepreneurship approach. The method of Uppsala, in synthesis, proposes that a company when following the path of internationalization, will gradually go through the path of acquisition, integration, accumulation of knowledge and affirmation of commitments in the foreign market (investments) (Johanson; Vahlne,

4 1977 and 1990 ). The Network theory consider the market's interdependencies and development, analyzing them through a network of relationships view; the theory claims that companies will seek knowledge for the purpose of conducting business, but especially for the formation of bonds (Johanson and Mattson, 1993). The information gained will set the level of the relationship established between the network partners and this will affect the internationalization process (Ruzzier, Hisrich, and Antončič, 2006). In turn, the International Entrepreneurship model moves the focus of analysis from the enterprise level to the individual perspective, here seem as the entrepreneur (Andersson, 2000). This theory points that the entrepreneurial behavior of companies and individuals are the key figure in the movement of internationalization, since it will be the agent that causes change, brings innovations and deals with the risks when evaluating market opportunities. Other relevant variables in this theory are the innovative capacity of the agent and the perception of opportunities in a variety of markets, thanks to the network, established relationships and knowledge (McDougall et al., 1994 and McDougall and Oviatt, 1997). While searching the definitions for uncertainty, it became possible to affirm that a single concept for the terminology has yet to be achieved. The cause for that is the wide variety of scientific fields in which this word is present. An interesting concept for uncertainty, though not specifically related to the field of internationalization, was presented by Hubbard (2010). According to the author uncertainty is the lack of complete certainty, which means the existence of different possibilities or results not likely to be properly planned. Similarly, the word risk also has a variety of definitions, but these are more consistent with each other, having only some slight variations. For example, the Project Management Institute (2013) defines risk as "an uncertain event or condition that, if it occurs, has a positive or negative effect on a project s objectives," which is not far from the concept defined by Hubbard (2010, p.50), where risk is a "A state of uncertainty where some of the possibilities involve a loss, catastrophe or other undesirable outcome". The reviewed of the three theories shows in common one important variable, which always appears when they establish the relation between uncertainty and the risk: the knowledge. The firms seek to acquire knowledge and during that process they realize how little they really possess of it; this realization take them to search other forms of acquiring information. The Uppsala model define this perceived leak on the information level as the uncertainty (Figueira-of-Lemos et al., 2011). The gain of knowledge leads to commitment decisions - which are essential for the development of the internationalization process - however all those decisions are also connected with a certain amount of risk, since the firm will be entering an uncertain environment/market (Johandon and Vahlne, 1977 e 1990).

5 The Uppsala model defines the vacuum of information as the uncertainty faced by firms. Thus, this theoretical approach recognizes the important existence of this variable during the internationalization process and claims that a new level of uncertainty will be created for each new commitment decision taken. This happens since the agents do not possess all the knowledge at their disposition (boundedly rational), presenting limited potential of learning and therefore not being able to predict all market behavior possibilities (Figueira-of-Lemos et al., 2011). The relation between the market uncertainties and the commitment decisions has as its result, the formation of what is called market risk (Johanson and Vahlne, 1977 e 1990). Therefore, the risk (Ri) can be said to be the consequence of an uncertainty set", hence defined as the result of the relation between "commitment decisions" (Ci) versus "uncertainty" (Ui), or in a mathematical way as (Ri = Ci x Ui). The risk alternatives will be analyzed and commitment decisions will be taken on the lines of taking the risk or not taking the risk, those choices will be responsible for setting the internationalization path, and consequently defining the growth and speed of the process (Figueiraof-Lemos et al., 2011). The definitions for risk and for uncertainty in an internationalization context, the goal of this paper, follows from the combination of concepts from Hubbard (2010) and the Uppsala model, complying with our intention to present them in an easy, understandable and simple manner. That been said, the concept for uncertainty is defined as follow: a situation where the agent cannot predict the challenges and possible outcomes due to the lack of knowledge over the respective field or area. The definition for risk is: a situation where the firm needs to adopt a position in relation to an expected or unexpected event, where the possible results can be analyzed in accordance to the knowledge possessed. Now that definitions have been set for both variables, we enter the topic of dealing with the risk. It would be logical to believe that the more knowledge one acquire less uncertain will the future be, since it becomes easier to predict future challenges and its results. However, a variety of authors as Figueira-of-Lemos et al. (2011), Forsgren (2002), Rodriguez, Barcos e Álvarez (2010), are positive to say that it would be impossible to accumulate infinite knowledge, that happens because the agents possess limited rationality. As a result the firms when acting alone are more vulnerable and exposed, having to face challenges to acquire information and also to manage it; thus in many situations those firms are incapable of avoiding the existent risks. Hence, when following the internationalization process, the SMEs must learn how to deal and manage the international environment uncertainty and the market risk, learning also how to operate inside it. The Uppsala method can be considered to be a conservative model in what concern the risk, since it recommends avoiding risk always. However, in regard to the uncertainty, the theory is

6 positive that it can counter by "(...) increase in interaction and integration with the market environment - steps such as increases in communication with customers, establishment of new service activities (...)" (Johanson and Vahlne, 1977, p. 29). The authors also say that knowledge acquired trough experience plays a relevant role in reducing the uncertainties and risks existing in the market - it is here interesting to highlight that the market knowledge is specific to each country in question, being then hardly generalized for other markets (Johanson and Vahlne, 1990). It is pertinent to notice how this idea find ground in the precepts from the Network theory. For that model the creation of strong and long lasting net plays an important role when dealing with risks and uncertainties. As presented by Falize and Couerderoy (2012), the risk can become bigger because of other companies who compete in the market and possess more knowledge, thus the bigger the knowledge acquired, the lower the risk faced. But that is exactly the problem: how to accumulate the knowledge? One can work alone towards that goal, which will lead to a long, expansive and limited path. Or follow the alternative path of using the networks and relationships established for having access to the knowledge sought in a faster and cheaper way. Those advantages from the second path turn it into a really attractive possibility for SMEs, since those firms normally do not possess as much resources and influence on the market as their bigger competitors (Lin, 2010). The effort to acquire all this knowledge will however stand to lose, if it is not converted into something profitable for the company. Here, the International Entrepreneurship approach presents its contribution. The entrepreneur is seen as an agent that seeks risk, this because through the analysis of this risk that the entrepreneur is able to identify possibilities and opportunities that will be translated into investments for the company. This process is extremely important in the case of SMEs, which need these innovations and opportunities to be competitive in the international market and achieve positive return rates, or else the attractiveness of the internationalization process will not appear appealing enough. The theory of International Entrepreneurship believes that in order to bring innovations, opportunities and positive results for the company a certain amount of risk must be taken by the entrepreneur in the decision-making process. Consequently, an acceleration of the internationalization will happen, as the entrepreneur goes to the international market and uses its network to seek information and analyze the risks of all existing possibilities. CONCLUSION In this work definitions were created for two variables that are always present during the process of internationalization: uncertainty and risk. We also sought to determine the existence of a

7 complementary relationship between the internationalization theories here addressed, with regard to the risk subject and its management. This study contributes to bring light to a field that needs further academic research, that is: the risk in the internationalization process. The relevance of this paper to the field can be found, as a first study which proposes definitions for the variables risk and uncertainty, and also with contributions for the empirical area, specifically for small and medium enterprises that start the process of internationalization and seek clarity and understanding over the variables that will be present during the process. The results provided two definitions, the first for risk which defined as a situations where the firm needs to take a position in relation to an expected or unexpected event, where the possible results can be analyzed in accordance to the knowledge possessed; and the second where the uncertainty is described as a situation where the agent can not predict the challenges and possible outcomes due to the lack of knowledge over the field or area. Figuratively, the uncertainty could be portrayed as a dark path in which the agent (company) is considering to start walking. The knowledge would be the torch that he needs in order to see a bit of the way, the more light it has, less dark will be the way. With light, the agent will also be able to identify obstacles (risk) and shortcuts (opportunities) that come in the way, evaluating it properly and adopting the best decision on how to handle those setbacks. It was also shown that, there is a complementarity relation between the theories addressed, since the first (Uppsala) propose the basis for understanding the variables risk and uncertainty, and the theories that follow (theory of Network and International Entrepreneurship) proffer through the use of relationships networks and entrepreneurial innovative activity a positively way for SMEs to see and deal with risk and uncertainty in the international environment, resulting in the acceleration of the acquisition of knowledge and the increase in level of investment. Which leads the company to achieve unique competitive advantages in the market. To end, the limitation of this study is that it has no basis in case studies of firms following the internationalization process. Therefore, it would be interesting to conduct further research which will test the suitability of the concepts set forth and assess the effectiveness of the method for dealing with risk and uncertainty proposed by the theories when applied to real case studies over the process of internationalization. REFERENCES

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