The Uppsala internationalization model is a theoretical framework that explains the process by which firms gradually expand their operations into foreign markets. The model was developed by Swedish researchers Jan Johanson and Jan-Erik Vahlne in the 1970s.
Key Facts
- Sequential Steps: The model proposes that firms go through a series of sequential steps when entering foreign markets. These steps are:
a. No regular export activities (sporadic export)
b. Export via independent representative (export mode)
c. Establishment of a foreign sales subsidiary
d. Foreign production/manufacturing - Psychic Distance: The model suggests that firms initially focus on nearby markets where they have better knowledge and control. As they gain experience and resources, they gradually expand to more distant markets. Psychic distance, which includes cultural, language, political, and geographical differences, plays a role in market selection.
- Market Knowledge and Commitment: The Uppsala model emphasizes the importance of market knowledge and commitment in the internationalization process. It suggests that increased market knowledge leads to increased market commitment, and vice versa. Market knowledge can be general or specific to a particular market, and specific knowledge is acquired through activities in that market.
- Limitations: The Uppsala model has been criticized for its limitations. Some of these limitations include:
a. Ignoring other forms of market entry, such as franchising and licensing, which may not fit into the sequential steps of the model.
b. Not considering management incentives and their impact on decision-making .
c. Not discussing the reasons behind foreign direct investment and why it is considered the ultimate market operation .
d. Focusing primarily on product-oriented firms and not adequately addressing the internationalization process of service industries .
Key Concepts of the Uppsala Model
Sequential Steps: The model proposes that firms go through a series of sequential steps when entering foreign markets. These steps are:
- No regular export activities (sporadic export)
- Export via independent representative (export mode)
- Establishment of a foreign sales subsidiary
- Foreign production/manufacturing
Psychic Distance: The model suggests that firms initially focus on nearby markets where they have better knowledge and control. As they gain experience and resources, they gradually expand to more distant markets. Psychic distance, which includes cultural, language, political, and geographical differences, plays a role in market selection.
Market Knowledge and Commitment: The Uppsala model emphasizes the importance of market knowledge and commitment in the internationalization process. It suggests that increased market knowledge leads to increased market commitment, and vice versa. Market knowledge can be general or specific to a particular market, and specific knowledge is acquired through activities in that market.
Limitations of the Uppsala Model
The Uppsala model has been criticized for its limitations. Some of these limitations include:
- Ignoring other forms of market entry, such as franchising and licensing, which may not fit into the sequential steps of the model.
- Not considering management incentives and their impact on decision-making.
- Not discussing the reasons behind foreign direct investment and why it is considered the ultimate market operation.
- Focusing primarily on product-oriented firms and not adequately addressing the internationalization process of service industries.
Despite these limitations, the Uppsala model remains a valuable framework for understanding the internationalization process of firms. It provides a structured approach for analyzing the factors that influence firms’ decisions to enter foreign markets and the strategies they use to do so.
Conclusion
The Uppsala internationalization model is a classic theory in international business research. It provides a framework for understanding how firms gradually expand their operations into foreign markets. While the model has some limitations, it remains a valuable tool for researchers and practitioners alike.
FAQs
What is the Uppsala internationalization model?
The Uppsala internationalization model is a theoretical framework that explains the process by which firms gradually expand their operations into foreign markets.
What are the key concepts of the Uppsala model?
The key concepts of the Uppsala model include sequential steps, psychic distance, and market knowledge and commitment.
What are the limitations of the Uppsala model?
The Uppsala model has been criticized for ignoring other forms of market entry, not considering management incentives, not discussing the reasons behind foreign direct investment, and focusing primarily on product-oriented firms.
What are some of the factors that influence firms’ decisions to enter foreign markets?
Some of the factors that influence firms’ decisions to enter foreign markets include market potential, competition, government policies, and cultural and linguistic differences.
What are some of the strategies that firms use to enter foreign markets?
Some of the strategies that firms use to enter foreign markets include exporting, licensing, franchising, and foreign direct investment.
How can firms overcome the challenges of entering foreign markets?
Firms can overcome the challenges of entering foreign markets by conducting thorough market research, developing a strong marketing strategy, and partnering with local businesses.
What are some of the benefits of internationalization for firms?
Some of the benefits of internationalization for firms include increased sales and profits, diversification of risk, and access to new markets and resources.
What are some of the risks of internationalization for firms?
Some of the risks of internationalization for firms include political and economic instability, currency fluctuations, and cultural and linguistic differences.