LECTURE 3

INTERNATIONALIZATION THEORIES &

INTERNATIONAL MARKET SELECTION
Learning Objectives

• The Uppsala internationalization model

• The transaction cost analysis (TCA) model
• The network model
• Born globals
• International market selection

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Different Theoretical Approaches to International Marketing

• The Uppsala internationalization model

• The transaction cost analysis (TCA) model
• The network model

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The Uppsala Internationalization Model (The Stage Model)

• During the 1970s, a number of Swedish researchers at the University of Uppsala

focused their interest on the internationalization process.
• The Uppsala researchers had noted, first of all, that companies appeared to begin
their operations abroad in markets that were fairly close geographically and only
gradually penetrated more far-flung markets.
• Second, it appeared that companies entered new markets through exports. It was
very rare for companies to enter new markets with sales organizations or
manufacturing subsidiaries of their own. Wholly-owned or majority-owned
operations were established only after several years of exports to the same market.

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The Uppsala Internationalization Model
• Johanson and Wiedersheim-Paul (1975)
distinguish between four different modes of
entering an international market, where the
successive stages represent higher degrees of
international involvement/market commitment:
• Stage 1: no regular export activities
(sporadic export)
• Stage 2: export via independent
representatives (export modes)
• Stage 3: establishment of a foreign sales
subsidiary
• Stage 4: foreign production / manufacturing
units

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The Uppsala Internationalization Model

• Firms enter new markets with successively greater psychic distance. Thus firms start
internationalization by going to those markets they most easily understand. There they
will see opportunities, and the perceived market uncertainty will be low (Brewer, 2007).
• Additional market commitment will be made in small incremental steps, both in the
market commitment dimension and in the geographical dimension.
• Three exceptions:
1. Firms that have large resources experience small consequences of their
commitments and can take larger internationalization steps.
2. When market conditions are stable and homogeneous, relevant market knowledge
can be gained in ways other than experience.
3. When the firm has considerable experience from markets with similar conditions, it
may be able to generalize this experience to any specific market.
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The Underlying Assumption in Uppsala Model
• Internationalization is a slow, time-consuming
and iterative process.
• Especially when the industry is highly complex
and uncertainties involved are immense,
internationalization decisions made too quickly
and too boldly run a real risk of failure, with
potentially large and negative consequences.
• Management has to accept that the
globalization of the company may proceed at a
slower pace to allow for learning and
adjustment to take place.

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Critical Views of the Original Uppsala Model
• The model does not take into account interdependencies
between different country markets (Johanson and Mattson,
1986).
• The model is not valid for service industries.

• Firms have seemed prone to leapfrog stages in the

establishment chain, entering ‘distant’ markets in terms of
psychic distance at an early stage (world has become more
homogeneous). Some firms also leapfrog some intermediate
entry modes and more directly to some kind of foreign
investment.
• The model is not valid in situations of highly internationalized
firms and industries. Firms with extensive international
experience are likely to perceive the psychic distance to a
new country as shorter than firms with little international
experience. 8
Physic Distance Paradox
• Companies tend to begin their
internationalization process in countries that
are 'psychically' close; as psychically close
countries are more easily understood than
distant ones; and offer more familiar operating
environments.
• The psychic distance paradox is that
operations in psychically close countries are
not necessarily easy to manage, because
assumptions of similarity can prevent
executives from learning about critical
differences.

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The Transaction Cost Analysis (TCA) Model

• The transaction cost analysis (TCA) framework argues that cost minimization
explains structural decisions.
• Firms internalize, that is, integrate vertically, to reduce transaction costs.

• Transaction cost = Ex ante costs + Ex post Costs

• Ex ante costs
• Search costs – Cost of gathering information to identify and evaluation potential export
intermediaries
• Contracting costs – Costs associated with negotiating and writing agreement
• Ex post costs
• Monitoring costs – monitoring the agreement to ensure buyer and seller fulfill
obligations
• Enforcement costs – Cost associated with sanctioning of trading partner who does not
perform in accordance with agreement
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The Transaction Cost
Analysis (TCA) Model

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The Transaction Cost Analysis (TCA) Model
• A fundamental assumption of Conclusion
transaction cost theory is that firms will If the transaction costs through
attempt to minimize the combination of externalization (e.g. through an importer
these costs when undertaking or agent) are higher than the control cost
transactions. through an internal hierarchical system,
then the firm should seek internalization
• Thus, when considering the most
of activities, i.e. implementing the global
efficient form of organizing export
marketing strategy in wholly-owned
functions, transaction cost theory
subsidiaries.
suggests that firms will choose the
solution that minimizes the sum of ex
ante and ex post costs.

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Limitations of the TCA Framework
• Narrow assumptions of human nature – Actually firms can build trust with their
externalized agents and distributors by turning them into partners. In this way the firms
would avoid large investments in subsidiaries around the world.
• Excluding “internal” transaction costs – The TCA framework also seems to ignore the
‘internal’ transaction cost, assuming zero friction within a multinational firm.
• Relevance of “intermediate” forms for SMEs – The TCA framework cannot explain the
internationalization process of SMEs (Christensen and Lindmark, 1993). The lack of
resources and knowledge in SMEs is a major force for the externalization of activities.
• Importance of production is understated – The importance of transaction cost is
overstated while the importance of production cost has not been taken into consideration.
According to Williamson (1985), the most efficient choice of internationalization mode is
one that will help to minimize the sum of production and transaction costs.
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The Network Model

• A basic assumption in the network model is that the individual firm is dependent on
resources controlled by other firms. The companies get access to these external
resources through their network positions.
• The relationships of a firm in a domestic network can be used as bridges to other
networks in other countries. In some cases, the customer demands that the supplier
follows it abroad if the supplier wants to keep the business at home.
• Technical, economic, legal; as well as social and cognitive ties (between the people
engaged in the business relationships) will be formed in a network.

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An Example of An International Network
• One of the subsuppliers established a
subsidiary in country B.
• Here the production subsidiary is served
by the local company of the subsupplier.
• Countries E and F, and partly country C,
are sourced from the production
subsidiary in country B.
• Generally it can be assumed that direct or
indirect bridges exist between firms and
different country networks. Such bridges
can be important both in the initial steps
abroad and in the subsequent entry of
new markets. 15
The Network Model
• When entering a network, the internationalization
process of the firm will often proceed more quickly.
• In particular, SMEs in high-tech industries tend to
go directly to more distant markets and to set up
their own subsidiaries more rapidly.
• One reason seems to be that the entrepreneurs
behind those companies have networks of
colleagues dealing with the new technology.
• Internationalization, in these cases, is an
exploitation of the advantage that this network
constitutes.
https://monocle.com/about/
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Born Globals
• A born global can be defined as ‘a firm that from its
inception pursues a vision of becoming global and
globalizes rapidly without any preceding long-term
domestic or internationalization period’ (Oviatt and
McDougall, 1994; Gabrielsson and Kirpalani,
2004).
• Born globals represent an interesting case of firms
operating under time and space compression
conditions that have allowed them to assume a
global geographic scope from the moment of their
start-up.

https://youtu.be/3Ou8WmrZ0Pw
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Internet-Based Born Globals

• The internet revolution offers new opportunities

for young SMEs to establish a global sales
platform by developing e-commerce websites.
• Today many new and small firms are born
globals in that they are ‘start-ups’ on the internet
and sell to a global audience via a centralized e-
commerce website.
• A study of the born globals usage of
international sales channels showed that born
globals are relatively quick to adopt internet-
based sales channels.

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Two Extreme Pathways
of Internationalization –
Organic vs Born Global

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Born Globals Are Challenging Traditional Theories

• In many ways the slow organic (Uppsala model) process and the accelerated born
global pathways are opposites, at the two extremes of a spectrum
• They also often represent the choice of doing it alone (the organic pathway), while the
born global pathway is based on different types of cooperation and partnerships in
order to facilitate rapid growth and internationalization.
• Nevertheless, there are also some common characteristics in all models –
internationalization is seen as a process where knowledge, learning and commitment
go hand in hand, even when it is rapid. Past knowledge and experience contribute to
current knowledge of the company.

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The Five-Stage Decision Model in Global Marketing

The decision whether to internationalize

Deciding which markets to enter

Market entry strategies

Designing the global marketing programme

Implementing and coordinating the global marketing programme

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Determinants of the Firm’s Choice of Foreign Markets

Research from the Uppsala school

on the internationalization process
of firms has suggested several
potential determinants of firms’
choice of foreign markets. These
can be classified into two groups:

(i) environmental characteristics

(ii) firm characteristics

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International Market Segmentation

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Step 1 & 2: Defining Criteria & Developing Segments
Criteria for effective segmentation are as follows:
• Measurability: the degree to which the size and
purchasing power of resulting segments can be
measured.
• Accessibility: the degree to which the resulting
segments can be effectively reached and
served.
• Substantiality/profitability: the degree to
which segments are sufficiently large and/or
profitable.
• Actionability: the degree to which the
organization has sufficient resources to
formulate effective marketing programmes and
‘make things happen’. Basis of international market segmentation
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Step 3: Screening of Segments (Markets / Countries)
The screening process can be divided into two stages (Gaston-Breton and Martin,
2011; Sinha et al., 2015):

• Preliminary screening – This is where markets/countries are screened primarily

according to external screening criteria (the state of the market).
• Fine-grained screening – This is where the firm’s competitive power (and special
competences) in the different markets can be taken into account.

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Preliminary Screening
The number of markets is reduced by coarse-grained, macro-oriented screening
methods based on criteria such as:
• Population size
• Gross national product (GNP) in total
• Gross national product (GNP) per capita
• Restrictions in the export of goods from one country to another
• Share of population with access to the internet
• Smartphones owned per 1,000 of the population
• Cars owned per 1,000 of the population
• Government spending as a percentage of GNP
• Population per hospital bed

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Fine-Grained Screening

• A countries – These are the primary markets

(i.e. the key markets), which offer the best
opportunities for long-term strategic development
• B countries – These are the secondary markets,
where opportunities are identified but political or
economic risk is perceived as being too high to
make long-term irrevocable commitments. These
markets would be handled in a more pragmatic
way due to the potential risks identified
• C countries – These are the tertiary or ‘catch
what you can’ markets. They will be perceived as
high risk, and so the allocation of resources will
be minimal

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Step 4: Microsegmentation: Develop Subsegments
Once the prime markets have been identified, firms then use standard techniques to
segment markets within countries, using variables such as:
• Demographic/economic factors
• Lifestyles
• Consumer motivations
• Buyer behaviour
• Psychographics

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The International Market
Segmentation –
An Example

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