A Critical Evaluation of the Stages Model of Internationalization according to Johanson and Vahlne

Table of contents

List of figures

1 Introduction
1.1 Problem
1.2 Goal
1.3 Structure

2 Stages Model of internationalization according to Johanson and Vahlne
2.1 Introduction
2.2 Basic principles
2.3 Patterns of internationalization
2.3.1 Establishement chain
2.3.2 Psychic distance chain
2.4 Model of internationalization
2.4.1 Market commitment
2.4.2 Market knowledge
2.4.3 Current activities
2.4.4 Commitment decisions

3 Limitations of the stages model
3.1 The determinism of the stages model
3.2 The psychic distance aspect
3.3 Today's relevance

4 Conclusion

List of literature

List of figures

Figure 1: Establishement chain,

Figure 2: Psychic distance chain,

Figure 3: Internationalization process of the firm,

1 Introduction

1.1 Problem

In spite of a progressing globalization, characterized by improvements in communica­tion technologies,^{[1] [2] [3]} the world faces four billion people who live in poverty, mostly due to underemployment. By building up business activities in these markets, especially multinational corporations, are not only able to supply the local consumers with goods, but also create income potentials, while, at the same time, doing good in an economic sense. But these markets are often coined with problems, like a lack of basic infrastruc- ture^[4], which makes entering these markets a long lasting, expensive and risky process for firms.

1.2. Goal

Goal of this paper is to illustrate the stages model of internationalization according to Johanson and Vahlne in detail and evaluate its validation limits, 30 years after its first release, by summing up contemporary and recent reviews.

1.3 Structure

After a short introduction, the basic principles will be identified, before pointing out the two fundamental parts of the stages model. While pointing out these parts, each section of it will be explained. Following the theoretical background, the limitations of the stag­es model, according to critics, will be presented. To conclude this work, an approach to evaluate the today's relevance of the model and an overall conclusion will follow.

2 Stages model of internationalization according to Johanson and Vahlne

2.1 Introduction

Based on the question how companies can build up business activities in foreign mar­kets, one can access the stage model of Johanson and Vahlne, which is also often called the Uppsala model, due to its development at the University Uppsala in Sweden in the mid-1970s.^[5] Their model is based on “empirical observations from a database of Swe­dish-owned subsidiaries abroad, and also from a number of industry studies of Swedish companies in international markets.”^{[6] [7]} In the following, the stage model of international­ization will be illustrated. The illustration contains both, the original model and the modifications by Johanson and Vahlne themselves.

2.2 Basic principles

The stage model according to Johanson and Vahlne emanates from the basic idea that the internationalization of companies is an incremental, gradual and dynamic process. Their model contains two parts, the patterns of internationalization and the model of internationalization. While the patterns of internationalization are based on findings from empirical studies, the model of internationalization constitutes a theoretical found-ing.

2.3 Patterns of internationalization

2.3.1 Establishment chain

Johanson and Vahlne assume, that entering a foreign market can always be seen as a progressive sequence of four different stages, which are characterized by a growing market commitment and a higher input. The result is a universally valid process for eve­ry single foreign market and is called Establishment Chain.^[8] On the first stage the firm hasn't done any, or at most, just sporadic export activities. On the second stage, one can identify regular export activities by the firm, but mostly operated by independent agents or trade representatives. The next stage is characterized by building up an own distribu­tion network in the foreign market. The last stage is accomplished by building up for­eign productions plants. The four stages can be seen in the following figure.

illustration not visible in this excerpt

The running business activities of a firm on each stage differ from each other regarding the level of knowledge about the specific market. While a firm on the first stage of the internationalization process possesses only a marginal market knowledge, the next stag­es are characterized by increase of knowledge and also with a growing input in the for­eign market, which causes a higher risk for the company.^[9]

2.3.2 Psychic distance chain

Furthermore, Johanson and Vahlne name another variable. The so called Psychic Dis­tance Chain “is defined as the sum of factors preventing the flow of information from and to the market. Examples are differences in language, education, business practices, culture and industrial development.”^[10] Hence, it defines the order in which companies extend their business activities into foreign markets, because the bigger the psychic dis­tance between the domestic market and the foreign market, the bigger the effort has to be to collect information about it and interpret it correctly.^[11] Johanson and Vahlne fig­ured out, that “the operations of the firm are extended first to those markets that best fit the cognitive and resource character of the company, and ultimately those of the poorest fit” So the decision of a firm, whether to enter a market or not strongly depends on the places of location and the intensity of former commitments to foreign markets. These findings can be illustrated in a figure again, see figure 2.

illustration not visible in this excerpt

Figure 2: Psychic distance chain; on the basis of Johanson, J. (1990).

2.4 Model of internationalization

Next to the patterns of internationalization, the model of internationalization forms the second essential part of the stage model. With this model, Johanson and Vahlne provide a theoretical justification for their statements in the previous chapter, which are primari­ly based on empirical researches. The internationalization model contains the state as­pects, market commitment and market knowledge and the change aspects, current activ­ities and commitment decisions. Those four elements affect each other in an interde­pendent correlation and are displayed by Johanson and Vahlne like in Figure 3. Those elements will be specified during the following progress of the paper.

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^[1] Cp. Schmauch, C. (2013), p. 36.

^[2] Cp. Hammond, A. (2007), p.3.

^[3] Cp. Kolk, A. (2006), p. 790.; Hart, S. (2002), p. 5.

^[4] Cp. Narayan, D. (2000), p. 46.

^[5] Cp. Ulrich, S. (2011), p. 75.

^[6] Cp. Johanson, J. (2009), p. 1412.

^[7] Cp. Johanson, J. (2009), p. 1415.

^[8] Cp. Johanson, J. (1990), p. 13.

^[9] Cp. Johanson J. (1990), p. 13.

^[10] Johanson, J. (1977), p. 24.

^[11] Cp. Eriksson, K. (2000), p. 312.