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Download 1 A note on the revisited Uppsala internationalization process ... and more Exams Business in PDF only on Docsity! 1 A note on the revisited Uppsala internationalization process model – The implications of business networks and entrepreneurship Abstract In their article from 2009, Johanson and Vahlne suggest a reformulation of the Uppsala internationalization process model by incorporating business network theory and entrepreneurship theory into the model. The present paper makes a critical examination of this reformulation. The overall conclusion is that several issues have to be addressed regarding the relationship between business networks and firms’ internationalization, the meaning of entrepreneurship as well as the possibility to combine business network theory and entrepreneurship theory in the Uppsala model before the full potential of such an incorporation can be realized. INTRODUCTION The Uppsala internationalization process model was launched in a paper by Johanson and Vahlne in 1977 (Johanson & Vahlne, 1977) and, ever since, it has been used as a platform for further studies of the internationalization process of firms by different scholars. In several papers written since the 90’s, the authors have looked back at the model (Johanson & Vahlne 1990; 2003; 2006;). In a comprehensive article published in 2009 in this journal, The Uppsala internationalization process model revisited: From liability of foreigness to liability of outsidership, Johanson & Vahlne suggest a reformulation of the model, that in a fundamental way differ from the model of 1977, especially regarding internationalization as an entrepreneurial process in a business network context. In recent writings by the authors and other scholars the revisited Uppsala model seems to be received as a more appropriate way to analyse firms’ internationalization behaviour (see e.g. Schweizer, Vahlne & 2 Johanson 2010; Santangelo & Meyer 2011; Johanson & Vahlne 2013; Casillas & Moreno-Menendez 2014; Sui & Baum 2014; Blankenburg Holm, Johanson & Kao 2015; Oehme & Bort 2015). We argue, though, that the consequences of incorporating business network theory and entrepreneurship into the model need more considerations before it can be claimed that this will increase our understanding of the basic features of a firm’s internationalization behaviour in a profound way. For instance, what is the relationship between the characteristics of the firm’s business network and its foreign investment behavior in terms of pace, direction and level of commitments? In what way can the concept of liability of outsidership add to our understanding of a firm’s internationalization process? What type of entrepreneurship theory is appropriate for developing the Uppsala model? Is it possible to combine the business network theory and entrepreneurship theory in one and the same model? In the following, therefore, the revisited model of Johanson and Vahlne (2009) will be critically examined by looking at these consequences. More specifically, this paper consists of three sections: The first deals with the Uppsala model in a business network theory context with a special focus on liability of outsidership and the development of business relationships. The second section discusses the fit between the Uppsala model and the model of entrepreneurship, suggested by Johanson and Vahlne (2009). The third section focuses on some issues related to the compatibility between business network theory and entrepreneurship in the context of the Uppsala model. BUSINESS NETWORK THEORY AND THE UPPSALA MODEL One important trait of the ’77 model was the assumption that a firm’s market is more or less equivalent to a country market (Johanson & Vahlne 1977). In the revised model, the country market concept is substituted by a perception of the foreign market as a business network (Johanson & Vahlne, 2009). What does this change imply? 5 Take structural embeddedness first. A common issue in the discussion of a firm’s structural embeddedness is the advantage of open versus closed networks. (Burt 1992; Coleman 1988). The advantage associated with open networks results from diversity of information and the firm’s access to brokerage opportunities by bridging otherwise disconnected groups. It has to do with the position of the firm in its network and to what extent this position furnishes access to unique, non-redundant information (Walker, Kogut & Shan 1997; Oehme & Bort 2015). The advantage of closed networks, in contrast, is related to the social capital created in a close-knit network. Such social capital will have a positive effect on the production of social norms and sanctions that facilitate trust and cooperative exchanges (Gargiulo & Benassi 2000). The Uppsala model is basically a model of the recognition and exploitation of opportunities associated with foreign risk. Foreign risk is a product of the uncertainties associated with operating in foreign markets abroad and of commitments made in these markets (Johanson-Vahlne 1977, 2009; Figuera-de-Lemos, Johanson & Vahlne 2011). Both open and closed networks might affect the firm’s internationalization behavior in line with the Uppsala model. First, it has been demonstrated that if a firm is embedded in an open network, it is easier for it to recognize business opportunities, including opportunities in foreign markets (Moran 2005; Zaheer& Bell 2005). This rests on the assumption that, if a firm’s business network is rich with “structural holes”, it may provide the firm with information about new opportunities (Burt 1992; Gargiuolo & Benassi 2000; Zaheer & Bell 2005). For instance, if a firm has a brokerage role between a supplier in the home country and a customer in a foreign country, this will create a potential for arbitrage that might lead to increased foreign business for the firm (Walker, Kogut & Shan 1997). Secondly, it has also been demonstrated that the possibility to exploit a business opportunity is dependent on the tightness of the firm’s network. It has been argued that closed networks facilitate the transfer of knowledge and reduce the firm’s risk associated with knowledge exchange because of the social capital fostered in such a network (Moran 2005). For instance, if there is a relation between the firm’s supplier at home and its customer abroad, the risk of the firm investing resources in exchange with these counterparts in order to develop a business opportunity will be lower because a 6 closed network is conducive to cooperation and minimizes opportunistic behavior (Walker, Kogut & Shan 1997). So, even if open networks facilitate discovery of opportunities in the foreign market, closed networks might be conducive to the exploitation of these opportunities. This reasoning leads to what has sometimes been called the “paradox of embeddedness” (Uzzi 1997), whereby there is a trade-off between network structures that guarantee “safety” for cooperation and the minimization of risk, on the one hand, and network structures that optimize flexibility and the recognition of opportunity on the other (Gargiulo & Benassi 2000). The ability to exploit opportunities, though, is also dependent on relational embeddedness, that is on how deep, in terms of mutual dependence and trust, the firm’s relationships are with other business actors in the network. It has been demonstrated that relational embeddedness has a positive impact on the outcome of innovation (Moran 2005). The reason for this is that innovations are more likely to be characterized by the exchange of intangible resources and mutual learning, paths that are uncertain, vague and risky for both the firm and its counterparts. Strong ties provide a better conduit for actually transferring and exchanging complex issues and ideas (Hansen 1999; Anderson, Forsgren & Holm 2002). In line with the assumption that the internationalization process is an entrepreneurial one (Jones & Coviello 2005) in which the firm experiences a “liability of newness” (Mudambi & Zahra 2007), internationalization will often involve a movement away from established practice and therefore introduce substantial risk (Moran 2005). When the firm embarks on risky paths, confidence in the quality of the resources received becomes more important (Krackhardt 1990; Uzzi 1996). A reasonable conclusion, therefore, is that deep relationships with other business actors in the firm’s business network will facilitate the establishment of a position in a foreign business network in order to exploit and develop a business opportunity. It should be pointed out that a corresponding analysis is also applicable for the potential foreign network. For instance, if that network is open and/or dominated by arms’-length relationships, the firm’s perceived outsidership concerning opportunity discovery is probably lower than if the network is closed and dominated by deep relationships between actors (Coviello 2006). At the same time, such a network might be less conducive for developing and exploiting the opportunities 7 identified owing to uncertainty about cooperation, and losses caused by “defection and opportunism” (Gargiulo & Benassi 2000: 193). To summarize, an appropriate analysis of the role of liability of outsidership in the internationalization process of firms needs to start by looking into the structure of the firms’ existing network and the characteristics of the dyadic relationships each firm has with different counterparts in its network. A tentative conclusion from the reasoning above is that an open network might reduce the firms’ liability of outsidership associated with the ability to discover business opportunities in a foreign network, but might at the same time increase the liability of outsidership concerning the possibility to develop and exploit these opportunities. It is more problematic to guard an open network from foreign risk and to secure the quality of exchange of necessary resources compared to a closed one. Furthermore, a closed network, in which the firm is involved in deep relationships with other actors, implies access to social capital. The more social capital available to a firm, the fewer resources it needs to manage existing relationships and the more resources it can dedicate to the development of a business opportunity and the establishment of new relationships in the foreign market (Walker, Kogut & Shan 1997). From this, it follows that the higher the foreign risk arising from perceived market uncertainty and the level of investment needed to exploit a business opportunity, the greater the need for the firm to have access to social capital linked to deep relationships in a closed network. By applying the rich literature about how network embeddedness influences firm behavior, it is possible to develop the concept of liability of outsidership and to discuss how a firm’s perceived outsidership might influence the internationalization process. The reasoning above opens up an interesting discussion about the trade-off between “flexibility” and “safety” (Gargiulo & Benassi 2000). Or, expressed differently, the issue becomes one of how the firm can strike a balance between networks that reduce the liability of outsidership in the opportunity discovery phase of the internationalization process, and networks that reduce it in the opportunity development phase. This is a fascinating area for future research. 10 put it himself: “… my own work has nothing to say about the secrets of successful entrepreneurship. My work has explored, not the nature of the talent needed for entrepreneurial success, nor any guidelines to be followed by would-be successful entrepreneurs, but, instead, the nature of the market process set in motion by the entrepreneurial decisions (both successful and unsuccessful ones!)” (Kirzner 2009:145). In fact, Kirzner insists that “ownership and entrepreneurship are to be viewed as completely separate functions. Once we have adopted the convention of concentrating all elements into the hands of pure entrepreneurs, we have automatically excluded the asset owner from an entrepreneurial role. Pure entrepreneurial decisions are by definition reserved by decision-makers, and nothing else” (Kirzner, 1978: 47). It is a metaphor of the entrepreneur rather than the entrepreneurial function that is the centre of the analysis (Foss & Klein 2012). Kirzner’s focus is neither the discovery process, nor the opportunity development process, and, consequently, is of limited value for the Uppsala model, in which the core is the interplay between market opportunities, firms’ resources and foreign investments. Second, the Uppsala model is a risk management model (Johanson & Vahlne 1977, Figuero de-Lemos, Johanson & Vahlne 2011). In Kirzner’s treatment, the entrepreneur does not suffer from any substantial risk for the simple reason that he invests no (or very limited) resources. He performs “…only a discovery function, rather than an investment function” (Foss & Klein 2012: 57). In a model in which “foreign risk” attributable to investments in foreign markets is crucial, Kirzner’s heavy emphasis on “socially-productive ideas” rather than on investment in resources (Kirzner & Sautet 2006) is both problematic and has little value for understanding how the firm handles the risk it is exposed to in its internationalization process. Third, experiential learning, incremental behavior and path dependence are important concepts of the Uppsala model. It is a processual model about on-going business activities. This approach goes clearly beyond Kirzner’s interest in what constitutes entrepreneurship (Foss & Klein 2012:71). Or, expressed differently, Kirzner’s model is not about processes, but deals with entrepreneurship as a question of opportunity discovery, irrespective of history or future. Consequently, although opportunity discovery is crucial in a model on internationalization because 11 “knowledge of opportunities and problems is assumed to initiate decisions” (Johanson & Vahlne 2009:1418), Kirzner’s analysis is of limited value to understand the process of internationalization. Thus, Kirzner’s model on entrepreneurship is so different from the core of the Uppsala model that it is questionable whether a fruitful combination and therefore a “step forward” in terms of developing the model is really possible. It should be pointed out, though, that Johanson & Vahlne claim that Kirzner’s view offers a starting point for analyzing entrepreneurship in relation to the Uppsala model, rather than something they incorporate in its entirety. For instance, in their discussion of the importance of prior knowledge of the discovery process based on Shane (Shane 2000) and of the development of opportunities as a relationship development process, they go beyond Kirzner’s analysis and suggest that he “exaggerates the role of serendipity” (Johanson & Vahlne 2009: 1419) in entrepreneurship. Entrepreneurial judgement and the Uppsala model There are fruitful alternatives to to the one presented by Kirzner for incorporating the entrepreneurial dimension into the Uppsala model. The most obvious is Knight’s treatment of entrepreneurship (Knight 1921). Knight identifies the entrepreneur as a recipient of pure profit as a reward for bearing the costs of investing in an “unknown future” (Casson 2003; Foss & Klein 2012). Although Knight’s entrepreneur is an individual (or team of individuals) with special skills and perceptions of the future (Casson 2003), in contrast to Kirzner’s understanding, entrepreneurship is closely linked to the firm and its resources. Knight’s entrepreneurs “establish firms… because their beliefs about the future cannot be easily articulated and communicated to existing resource owners” (Foss & Klein 2012:85). If Kirzner emphasizes opportunities waiting to be discovered (Shane & Venkataraman 2002), Knight’s focus is on investments based on the entrepreneur’s subjective expectations about an uncertain future. In an attempt to develop the theory of entrepreneurship from Knight’s perspective, it has been suggested that entrepreneurship is basically about “judgement”. In this approach, “entrepreneurs are modelled as decision-makers who invest resources based on their judgement of future market conditions, investment that may or may not yield positive return” (Foss & Klein 2012: 20). Such 12 judgement is the (largely tacit) ability to make decisions under conditions of genuine uncertainty, decisions that turn out to be successful ex post (Langlois 2007). The latter view on entrepreneurship harmonizes better with the Uppsala model for the following reasons: First, entrepreneurial decisions about foreign commitments are performed within the context of firms rather than independent of them. Second, entrepreneurship is an activity characterized by experimentation and learning. Third entrepreneurial decision-making is a process rather than a matter of opportunity discovery. Fourth, foreign commitments based on entrepreneurial judgement imply risk. In contrast to Kirzner, this view is more compatible with a model that handles risk exposure by muddling through and incremental behavior. Fifth, Knight’s entrepreneur bases his decision-making not only on (unique) expectations about the future, but also on the firm’s existing resources. This is more in line with the suggestion by Johanson & Vahlne (2009:1423) that one should look upon the entrepreneurial process as an effectuation process, in which the characteristics of existing resources, including business relationships, influence the space of opportunities that the entrepreneur explores (Sarasvathy 2001; Foss & Klein 2012). The “affordable loss principle” as part of the effectuation logic is also a natural element in the manner in which the Uppsala model conceptualizes risk management in foreign ventures (Kalinic, Sarasvathy & Forza 2014). Thus, Knight’s perspective on the entrepreneur and the conceptualization of entrepreneurial judgement probably has more to contribute to the Uppsala model than Kirzner’s model of entrepreneurship. It also opens up some intriguing questions on how the inclusion of the entrepreneurial dimension affects the Uppsala model’s predictions concerning speed, direction and level of commitment. Here we will just mention a few: what is the impact of liability of foreignness (and liability of outsidership) on firms’ foreign investment behavior if we take entrepreneurial judgement based on a unique perception of the future seriously? To what extent are these liabilities barriers for the “Knightian entrepreneur” who believes that “he is right while everyone else is wrong” (Casson 1982:14)? Another intriguing issue is the extent to which entrepreneurial judgement itself can be an explanatory factor for differences between firms’ internationalization behavior in addition to obvious factors like industry, firm size, global experience, networks, etc. (see e.g. Anderson 1993, 15 insidership”. This reasoning has much in common with the notion that in a loosely constrained network, meaning a network in which the “insidership” is less pronounced, it is easier for the entrepreneur to develop and protect the basic business idea (Coviello, 2006). Third, similar to the original model the revised Uppsala model is essentially a “learning-cycle” model (March and Olsen 1976; Leavitt & March 1988; Forsgren 2002). Learning through feedback from previous experience of developing business relationships constitutes an important explanatory factor to firm’s behavior. This also contributes to the path-dependence and incremental character of the model. An interesting issue is whether the entrepreneurship view is compatible with a learning-cycle model of this kind. Even if we lean towards a model of entrepreneurship more in line with “entrepreneurial judgement” described above, there is always a strong element associated with individual entrepreneurs’ unexpected discoveries independent of their previous experience. The question is whether entrepreneurship in this sense harmonizes with a “learning cycle”, or if, instead, behaving as an entrepreneur implies that there will inevitably be repeated “breaks” in the cycle with far-reaching consequences for the internationalization process in terms of pace, direction and commitment compared to to the ’77 model. SOME FINAL REMARKS The revisited Uppsala internationalization process model represents a new perspective on internationalization more strongly than a specific model of firm’s internationalization. One may even conclude that such a model is not needed, because firms’ internationalization is fully captured in models of firms’ general business behavior, for instance in models of how firms’ grow by strengthening their position in business networks. However, if we assume that we need a full-fledged model dealing with the same issues as the ’77 model – pace, direction and commitments of firms’ foreign operations – the revisited model might, at best, provide a fruitful starting point for elaborating such a model. We suggest that any elaboration of this kind should consider certain important aspects: First, the concept liability of outsidership must be conceptualized in a way that allows for an analysis 16 that goes beyond what is already inherent in the liability of foreignness. Second, rather than looking upon the business relationship development and the internationalization process as identical processes, a more fruitful approach would be to assume that they are different, but that they influence one another. Third, the role of entrepreneurship in the model is important, but a more suitable conceptualization of entrepreneurship based on Knight’s approach is more fruitful than the one presented in the revisited model. Finally, the possibility to combine business network theory and entrepreneurship in one and the same model needs further consideration. Endnotes 1. The authors maintain that networks are “borderless” and argue that internationalization has less to do with market entry than it has to do with improving positions in networks (Johanson and Vahlne 2009, p. 1423.). 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