The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign Market Commitments.

Summary of: Johanson, J. & Vahlne J-E. (1977). The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8(1), 23-32

INTERNATIONALIZATION PROCESS

Internationalization of the firms is a process in which the firms gradually increase their international involvement. This article focuses on the development of the individual firm.

The model is based on empirical observations from our studies in international business at the University of Uppsala, that show that Swedish firms often develop their international operations in small steps, rather than by making large foreign production investments at single points in time. Typically, firms start exporting to a country via an agent, later establish a sales subsidiary, and eventually begin production in the host country.

-> The time order of such establishments seems to be related to the psychic distance between the home and host countries.

Psychic distance: sum of factors preventing the flow of information from and to the market (e.g. language, education, etc.)

The authors see internationalization as the consequence of a process of incremental adjustments to changing conditions of the firm and its environment.

Largely due to the lack of market information and uncertainty occasioned thereby, the internationalization decisions have an incremental character.

The internationalization model

(See Attachment 1)

The present state of internationalization is one important factor explaining the course of following internationalization.

In the model, it is assumed that the firm strives to increase its long-term profit, which is assumed to be equivalent to growth. The firm is also striving to keep risk-taking at a low level.

State aspects

1. Market commitment: resources committed to foreign markets. Composed of two factors:

   1. The amount of resources committed

   2. The degree of commitment (the difficulty of finding and alternative use for the resources and transferring them to it). The degree of commitment is higher the more the resources in question are integrated with other parts of the firm and their value is derived from these integrated activities.  Vertical integration means higher degree of commitment than a conglomerative foreign investment.

2. Market knowledge: knowledge about foreign markets possessed by the firm at a given point of time. Information about markets, and operations in those markets, which is somehow stored and reasonably retrievable.

   1. Objective knowledge: can be taught

   2. Experiential knowledge: can only be learned through personal experience (is critical in this context because it cannot be so easily acquired as objective knowledge). It provides the framework for perceiving and formulating opportunities.

   3. General knowledge: marketing methods and common characteristics of certain types of customers, irrespective of their geographical location. (can be transferred from one country to another)

   4. Market specific knowledge: characteristics of the specific national market – its business climate, cultural patterns, structure of the market system and characteristics of the individual customer firms and their personnel. (experience)

There is a direct relation between market knowledge and market commitment. Knowledge can be considered a resource, and consequently the better the knowledge about a market, the more valuable are the resources and the stronger is the commitment to the market.

Change aspects

1. Current activities: There is a lag between most current activities and their consequences. The longer the lag, the higher the commitment of the firm mounts. It seems reasonable to assume that the more complicated and the more differentiated the product is, the larger the total commitment as a consequence of the current activities will come to be. Current activities are also the prime source of experience.

Argued could be gained through:

1. Hiring of personnel with experience
2. Advice from persons with experience

Two forms of experience:

1. Firm experience
2. Market experience: The best way to quickly obtain and use market experience is to hire a sales manager or a salesman of a representative or to buy the whole or a part of the firm.

2. Decisions to commit resources: Decisions are made in response to perceived problems and/ or opportunities on the market. Decision alternatives will be related to the operations currently performed on the market. The probability that the firm is offered alternative opportunities from outside is dependent on the scale and type of operations it is performing (i.e. market commitment). Effect of each additional commitment:
   

   1. Economic effect: if the existing market risk situation is lower than the maximum tolerable market risk, then the firm will incrementally extend its scale of current operations, which will not affect market risks in stable and heterogeneous markets (this will only take place in firms with large total resources or in firms which feel little uncertainty).

   2. Uncertainty effect: if the existing market risk situation is higher than the maximum tolerable market risk, then the firm will take steps to increase interactions and integration with the market environment.