In the field of international business, understanding the dynamics and strategies of market entry is crucial for firms seeking to expand globally. The Uppsala Model, also known as the Uppsala Internationalization Process Model, provides a theoretical framework that explains how firms gradually increase their international presence over time. In this article, we take a closer look at the Uppsala Model, examining its key concepts, underlying principles, and significance in the field of international business.
Understanding the Uppsala Model
The Uppsala Model was developed in the late 1970s by Swedish scholars Johanson and Vahlne based on their empirical observations of the international expansion of Swedish firms. It provides insights into the incremental and experiential nature of internationalization, emphasizing how firms acquire knowledge and reduce uncertainty as they enter new foreign markets. The model is based on two basic concepts: the internationalization process and the establishment chain.
The internationalization process
The Uppsala model posits that the internationalization of firms is a gradual and sequential process. It suggests that firms initially focus on their home market, accumulating knowledge and experience. As firms gain confidence and resources, they gradually venture into foreign markets, starting with geographically and culturally close countries before expanding to more distant and dissimilar markets. This step-by-step approach allows firms to learn from their experiences, adapt to market conditions, and minimize the risks associated with international expansion.
Establishment chain
The establishment chain refers to the sequence of activities and commitments that firms make when entering new markets. According to the Uppsala model, firms typically start with low-risk entry modes, such as exporting or licensing, to test the waters and gain market knowledge. As firms gain experience and confidence, they may move to higher levels of commitment, such as establishing sales offices, joint ventures, or wholly owned subsidiaries. The chain of establishment reflects the increasing resource commitment and market integration as firms expand their international footprint.
Key principles of the Uppsala Model
The Uppsala Model is anchored in several key principles that form its theoretical foundation:
- Learning and knowledge: The model emphasizes the role of experiential learning and knowledge accumulation as firms internationalize. As firms engage in foreign markets, they gain insights into market dynamics, customer preferences, cultural nuances, and business practices. This learning process enables firms to make informed decisions and adapt their strategies to diverse international environments.
- Psychic distance: The concept of psychic distance plays an important role in the Uppsala Model. Psychic distance refers to the perceived cultural, linguistic, legal and socio-economic differences between the home country and foreign markets. The model suggests that firms are more likely to enter markets with low psychic distance initially and gradually expand into markets with higher psychic distance as their knowledge and capabilities grow.
- Network relationships: The Uppsala model recognizes the importance of network relationships in internationalization. Firms often rely on networks of contacts, partnerships, and collaborations to access market knowledge, gain legitimacy, and build relationships with local stakeholders. Networks provide valuable resources, information, and support that facilitate firms’ international expansion.
Significance and Criticism of the Uppsala Model
The Uppsala Model has made significant contributions to the field of international business. It provides a valuable framework for understanding the gradual and experiential nature of internationalization, emphasizing the role of learning, knowledge, and market experience. The model has influenced subsequent research, strategic decision-making, and management practices in international business.
However, it is important to note that the Uppsala model has also been criticized. Some scholars argue that the model may oversimplify the complexities of internationalization, overlook the strategic motivations behind firms’ market entry decisions, or neglect the role of proactive and born-global firms that pursue rapid global expansion from the outset.
Successful applications of the Uppsala Model: Real world examples
There are several companies that have successfully applied the Uppsala Model in their internationalization processes. Here are a few examples:
IKEA
The Swedish furniture retailer IKEA is a prime example of a company that has effectively applied the Uppsala Model. IKEA began its international expansion by first focusing on neighboring Nordic countries, where cultural and geographic proximity reduced perceived psychic distance. As the company gained experience and knowledge, it gradually expanded to other European markets and eventually to markets around the world. IKEA’s step-by-step approach allowed it to adapt its products, store formats and marketing strategies to different cultural contexts.
H&M
The Swedish fashion retailer H&M is another notable example. Like IKEA, H&M began its internationalization journey by targeting nearby markets such as Norway and Denmark. By gradually expanding into geographically and culturally similar markets, H&M gained insights into consumer preferences, local fashion trends, and supply chain logistics. This experiential learning enabled H&M to adapt its product offering and marketing strategies to different international markets, leading to its successful global presence.
Tetra Pak
Tetra Pak, a Swedish packaging and processing solutions company, is another example of applying the Uppsala model. Tetra Pak initially focused on its home market and neighboring countries before expanding to more distant markets. By gradually entering markets with less psychic distance, Tetra Pak gained industry knowledge, built relationships with local stakeholders, and established manufacturing and distribution capabilities. This step-by-step approach enabled Tetra Pak to become a global leader in its industry.
Volvo
Swedish car manufacturer Volvo is known for its successful internationalization using the Uppsala model. Volvo first focused on Scandinavian and European markets before venturing into other regions. By starting with markets that had similarities in terms of consumer preferences, driving conditions, and regulatory environments, Volvo built its reputation and brand awareness. Over time, Volvo expanded its presence to different global markets, leveraging its accumulated knowledge and experience.
It’s important to note that while these companies have applied the Uppsala Model, their internationalization journeys may not be an exact replication of the model’s principles. Each company’s approach and adaptation of the model may vary depending on its specific industry, resources and strategic considerations. Nevertheless, these examples demonstrate how firms have successfully used incremental entry, experiential learning, and the establishment chain to expand their global presence.
Conclusion
The Uppsala model offers valuable insights into the process and dynamics of internationalization for firms seeking to expand their global presence. By emphasizing experiential learning, incremental entry, and the establishment chain, the model provides a framework for understanding how firms acquire knowledge, reduce uncertainty, and navigate foreign markets. Although the model has its limitations, its contributions to the field of international business cannot be underestimated. Understanding the Uppsala Model helps firms make informed decisions, develop effective internationalization strategies, and adapt to the challenges and opportunities of global markets.
FAQ
What is the Uppsala model for internationalization?
The Uppsala model is a theory that describes how companies gradually increase their internationalization activities. It was developed by Carlson in 1966 and empirically confirmed for Sweden by Jan Johanson and Finn Wiedersheim-Paul. It is similar to the POM model of Reijo Luostarinen (1979).
The Uppsala model distinguishes between a temporal and local pattern. Both describe an “incremental” internationalization process with increasing complexity. The temporal pattern assumes that companies first gain experience in the home market and then start exporting. If this step is successful, it is followed by the establishment of foreign agencies and possibly the relocation of production abroad.
What is the Uppsala model used for?
The Uppsala model explains how companies intensify their investments and activities in foreign markets. The authors, Johanson and Vahlne, describe it as a step-by-step learning process and gaining knowledge through experience. This is correlated to the amount of investments into foreign markets.
This model, proposed by Johanson and Wiedersheim-Paul in 1975, is one of the most widely used in international management. It considers that the development of companies’ activities abroad takes place in an incremental and sequential manner. It links the learning effect, psychological distance and the mode of internationalization used; recently, the network effect has also been integrated into the model (Johanson and Vahlne, 2009).
The Uppsala model is thus by definition opposed to the current view that companies can have an international dimension from their origin, which is grouped under the terminology “born globals” or “international new ventures”.
What companies use the Uppsala model?
Because of that, the Swedish researchers create their own model of internationalization – the Uppsala model. It is based on an analysis of four Swedish manufacturing companies – Sandvik, Atlas Copco, Facit and Volvo.
What is the internationalization process model?
The internationalization process model suggests that firms internationalize by building positions in foreign markets and networks, following iterative cycles of learning and changes in commitment.
The internationalization strategy aims to open up new market shares internationally by finding commercial outlets. It is an offensive expansion strategy. It can also be a question of finding growth relays in a historical market that has become poorly remunerative.
Is the Uppsala model still relevant?
The Uppsala internationalization process model remains much cited—and much critiqued. It has also been revised by its original authors, remaining current with these revisions. Its importance to the IB field cannot be understated.
Why is the Uppsala model good?
The Uppsala Internationalization Model deals with entering new market which is nearby or investing in single country rather than making a mess. It has leapfrogging tendency which allows entering in distant market. It shows companies can learn from their past experiences and practical knowledge.
What is the final step of Uppsala model?
Starting the production in the foreign market through wholly owned subsidiaries is the last step of internationalisation within the framework of Uppsala model of internationalisation.
Which internationalization strategy is IKEA using?
IKEA’s Internationalisation Strategies
As stated on the IKEA official website, the key concept behind production, research and development is “Democratic design.” The elements of the concept are as follows: a beautiful design, good function, sustainability, good quality and availability at a low price.
Whats the first and last stage of the Uppsala model?
Step 1: No regular export activities (sporadic export). Step 2: Export via independent representative (export mode). Step 3: Establishment of a foreign sales subsidiary. Step 4: Foreign production/manufacturing.
What is internationalization and examples?
while an example of internationalization is sourcing, producing or selling materials or delivering services from one or more countries, setting up of the branches and subsidiaries in other countries, etc.
What sort of approach does the Uppsala model advocate?
Hypothesis HD1 – The Uppsala model is a risk-aversion or risk-avoidance model (Bjorkman & Forsgren, 2000), which contends that firms would only move to higher commitment modes as they gained experience in a given foreign market (or other foreign markets also, if this experience could be transferred).
How can monopolistic advantage theory explain how certain companies can succeed internationally without much competition?
How can monopolistic advantage theory explain how certain companies can succeed internationally without much competition? Companies succeed overseas if they have developed resources and capabilities that no other company has.
What is the Uppsala Model PDF?
The Uppsala model is based on the relation between knowledge of the market the company. seeks to penetrate, managerial decisions regarding commitment and the outcome of initial. activities as a determinant for future commitment. Johanson & Wahlne (1990) described the process and the interrelation between these factors.
What is psychic distance in Uppsala model?
Later, Uppsala scholars adopted psychic distance as one of the focal elements in their internationalization model of the firm and defined it as the ”factors preventing or disturbing the flow of information between firm and market” (Johanson and Wiedersheim-Paul 1975, p.
What is network theory in international business?
Internationalization Theories: The Uppsala Model
Why do companies internationalize?
Competitive advantage. Cultural differences and language barriers. Economic and political stability. Customer service expectations.
What is psychic distance international business?
Psychic distance is defined as the distance between the home market and a foreign market, resulting from the perception of both cultural and business differences. Such differences include culture, language, religion, education, legislation, politics, economic conditions, market structure, and business practices.
Is Tesla a born global company?
A highly successful Born Global firm is Tesla Company, established in California in , about 50% of sales came from international markets. In April 2016, Tesla showed higher stock market value than General Motors and was the most valuable US automaker.
What are the stages of Uppsala model?
The Uppsala model is based on four core concepts: market commitment, market knowledge, current activities and commitment decisions. These four concepts are then divided into state aspects and change aspects.
What is the Uppsala Model PDF?
The Uppsala model is based on the relation between knowledge of the market the company. seeks to penetrate, managerial decisions regarding commitment and the outcome of initial. activities as a determinant for future commitment. Johanson & Wahlne (1990) described the process and the interrelation between these factors.
Did Ikea use the Uppsala model?
IKEA has managed to expand globally as a furniture retailer despite different market dynamics and economic conditions. For a company to internationalize, it has to develop knowledge in overseas markets.