Explore the Evaluating internationalization theory of Johanson and Vahlne
The term Internationalization is significant for the firms, but the knowledge of the companies which are new in this global market is quite limited. Now days we all listen and read a lot of things about Internationalization and globalization, but what these terms exactly mean‘‘Internationalization is basically planning and implementing the products or services in other countries according to local habits and choice, and it is quickly changing economic landscape, with growing supply of science and technology. (Kim, Daekwan, journal of international marketing, 2010)This essay is to determine acceleration of internationalization and how it affects organization, Economy, and customers, also identify and analyse factors that attracts company towards internationalization, based on incremental and knowledge based internationalization process (by Johanson and vahlne 1977)
In economical terms expansion of business in international market is called as Internationalization, but there is no particular definition for it, it is very important for a company to understand the pattern of Internationalization, where the Internationalization comes after ‘‘stage approach in which company starts selling their products in home countries’’ and once settled in the market expands in different countries. (Elgar, Edward (2003). Learning in the Internationalisation Process of Firm)
According to Uppsala Internationalization Model, by Johanson and vahlne,“Enterprise gradually increases its international involvement”, which means the company that plans to expand internationally first enters in neighboring countries, where the political systems, culture and language is not very different, known as ‘‘psychic distance’’. Once company gains knowledge and experience to work in different country then it can gradually approach new market, according to this view, we get two different types knowledge one objective and other experience based, company initially starts with occasional export and then once settled in the market gradually enters in regular exports, Johanson and vahlne, consider the experience based knowledge to be more relevant, they says that ‘‘to built and understand commitments it is important to discover and make opportunities by involving other companies in their business’’. A firm process like ‘‘rings in the water’’ it is not only that firm settles business in home country but it expands in other countries steps by step. This stage model it identify four stages which are taken by a company for internationalization,
1. A company do not prefer regular export; 2.this export is done through an agent, 3.believes in offshore productions, 4. The offshore sales are not very important.
Since many years companies are committing themselves to internationalization, even though it give easy availability of labour and growth in market and other opportunities, it is not a very easy process. When any country expands in other than their home country they need to understand the national as well as commercial culture, company must understand the reason of the cultural barriers (if any).this stage model theory can help company to gain vital information and resources.
Joint venture also comes under Internationalization in some cases, as many big companies when enters new country it is been observed that they prefers to start in joint venture, for example. Walmart being world’s largest retail industry opened their first international store in Mexico in joint venture with Cifra, and they implemented this strategy in UK starting in joint venture with ASDA both these companies were the best retailers in their respective countries, and for almost every new country they started, this was the main strategy. Another example is, Finnish SME’S (small and medium enterprises). Study shows that some companies in Finland apply Uppsala internationalization model by first starting business in Sweden and then expanding in other countries, which helped them to expand smooth and steadily . So before internationalization a company needs to understand company’s world wide which can help them for further expansion. Keeping all these factors in mind I feel that the stage model theory by Johanson and Vahlne, can help a company to understand every aspect of internationalization, and before taking any step further, company will get time to think over their decisions which will prevent firm from facing any huge loss.
Even though Uppsala internationalization theory by Johanson and Vahlne (stage model) do not cause any loss for any firm, it is being applied in some companies and also been avoided by some.
It is said that this stage approach seems to be very parsimonious, and it has also been challenged and criticized about the data being limited to Scandinavian market. It was also questioned about theoretical validity about stage model and it claims that the theory has unnecessary repetition of the same statement and focus only on market knowledge, (Andersen 1993). There are also some studies which contradicts stage model, as many companies which do not follow stage model for internationalization, and their profit is much quicker than explained and expected by stage model. According to study of ‘‘OECD 1997 (Organisation for Economic Co-operation and Development)’’ the stage model was unable to explain different pattern use for internationalization or the early international expansion of the companies which is also known as ‘‘born global’’ (That is when company expands internationally from the beginning and do not follow any steps), (FRONTIERS OF E-BUSINESS RESEARCH 2004).
These particularly argue and appose incremental internationalization. The study of 87 US states shows that a company prefer to take risk than applying stage model, these ‘born global’ firms are most of the time technology based, and rises questions on stage model. It has not been proved that a company must have market knowledge to be successful internationally; concept of psychic distance was also accused as it is observer that many companies go for the risk where they can increase number of foreign market and gain profit.
As we know, With time views and demands changes, and same applies with stage model theory, even though it is not harmful for any organization to expand or to take any decisions in steps, but now a days this theory is not considered to be a best way of expansion, though internationalization is considered to be complex and involves may dimensions it is accepted by many companies these days. There are many reasons for company to go international, the basic reason is growth or expansion, but companies also expand internationally for alternative source of employees, resources, ideas etc.
Born global companies are “a business organization that, from inception, seeks to derive signi?cant competitive advantage from the use of resources and the sale of outputs in multiple countries” (Oviatt & McDou- gall, 1994, p. 49). This born global concept was carried out in 1997, data was collected for some medium size Danish firms and the study proved that these born global firms had maximum foreign sale which was around 70%.
Today Company seeks internationalization or rather to be born global more than before, ‘‘it is due to the fast growing economic integration and independency of countries worldwide’’. There are many companies that began their business with the traditional approach but now they follow born global strategies in business. For example Nokia which is a communication corporation (mobile manufacturer) is Finland based company but serves worldwide, with annual revenue more than $42 billion from their international market, and $2 billion, do not apply stage model theory and is one of the loved brand in India.
Emirates airlines which is one of the latest airlines in middle east, this airline operates one of the worlds non-stop commercial flights, a very good example of a company which totally implements born global strategy. Emirate airline has a very attractive business model, which is a key factor for company’s international growth. with great emphasis on quality company has also moved into resorts and tourism space, as 2004 it was one of the highest profits earning company. (Gang, yu. 1997 operation research in the airline industry)
Australian export manufacturer small and medium size firms are on the top list of the born global companies, they have proved that it is not impossible to succeed internationally without an established domestic base. These companies didn’t achieve their success in steps but they are born global. Their growth rate is growing 25percent throughout five years.
There are many examples in favour of born global concept, but some companies still believe in stage model due to some financial losses faced by them in internationalization, for example Starbucks as they closed 200 shops in US due to loss.
Even though we have entered a stage where there is very less cross border trade barriers and due to transportation and telecommunication it is not very convenient to go global. With all of this information discussed above, we understand that internationalization is a long and demanding process, which needs management and resources to be successful in market. A company needs to be totally committed towards their resources as the degree of commitment is higher the more resources are expected and if not then there will be a risk of shut down, there has to be a different business model to understand international market. In born global concept there may occur some cross culture issues, language barriers especially for small firms. Being born global a firm needs to consider, huge financial back up, which is not practically possible for a small firm, and franchising may result in less control and there is always risk about maintaining quality. (Branding capability of technology born global, 27th June 2010)
There are advantages and some disadvantages in the theories, Johanson and Vahlne (stage model) and born global concept. according to stage model theory a company should expand step by step, which will help company to understand the market conditions, cultural differences, and then expand in countries which are physically not very far,(geographically near). Which sounds fare enough, because any company whether it is small, medium or huge in size do not want to face any loss. On other hand with rapid growth in internationalization every company is trying to be global. Some of them are born global firms, where firm starts business internationally from beginning or within two years, without any practical knowledge about the market. This may or may not lead to success.
From the above discussion about internationalization which is been discussed in two parts, Johanson and Vahlne (stage model) and born global concept with reference to many journals ,I understand that accelerating economy, technology, information, manufacturing process ,and global competition are forcing companies for internationalization and is considered to be one of the most important factor to grow in industry.
Considering both stage model and born global model can built a good foundation for a company. Application of stage model will give knowledge about the market, time to understand the culture, company can learn from their competitor’s mistakes, foreign business drawbacks and opportunities can be gained by other firms experience, it is very important especially for a small firm because it is been observer that when a small firm enters global market it faces more loss than any profit. As being a global company it involves huge amount of investment.
Since it takes time to gain knowledge about international business environment it will be a slow n steady process but on other hand where new market conditions demands fast growth and quick internationalization, if a company want to star as born global, it needs to study all these points which affects growth of business. If a company starts analysing market conditions before entering global market it can prevent them from facing cultural, technological and overall issues which can affect sale.
So combining both the theories together in a convenient way for every individual company, keeping market knowledge, history, demands, environment, culture, language in mind a company can built a strong foundation even in international market. I strongly believe that if conditions of knowledge and experience specified in Uppsala model is considered before being born global company can be at the top in international market.
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