International Business

Export Behaviour Theories

Prof. Jiban K. Mukhopadhyay
(Fmr. Chief Economic Adviser, Tata Group)
E-mail ID - jiban@spjimr.org
Cell: 9821920928

SPJIMR
Jan 2011
Export Behaviour Theories

 Models for Internationalization:

o The Uppsala Model
o The Transaction Cost Theory
o The Network Model
 The Uppsala Model
(Johanson & Wiedersheim- Paul, 1975, Uppsala
University, Sweden)

o Study of Swedish manufacturing firms

o Nearby to Far Flung markets – incremental
growth
o Begins with exports and subsequently sets
up manufacturing units
 Stage 1 Stage 2 Stage 3 Stage 4

Export via
Sporadic Stages Establish Foreign Foreign Production/
independent
Export Sales Subsidiary Manufacturing Units
Representatives

Market A

Increasing Market
Commitment
Market B

Market C

Increasing Geographic Increasing

diversification Internationalization
Market N
• Foreign production/manufacturing (FDI).
• Establishing foreign sales subsidiary (FDI).
• Export via independent reps (export modes).
• No regular (sporadic) exports.
Entering Int’l Mktg - Four Sequential Modes
 Market Commitment Dimension
 Factors
 Amount of Resource Committed
 Size of investment in the market (mktg, orgn,
personnel, etc.

 Degree of Commitment
 Difficulty of finding alternative use of resources
& transferring them to alternative use
 Internationalization : Assumptions

 General Knowledge

 Market Specific Knowledge

o Gained through experience in the market
o Directly related with resource commitment

 Knowledge of operations
o Can be transferred within markets

 Geographical dimensions
o Psychic distance (diff. in language, culture, political systems etc.)
o Firms start internalization by going to those mrkts they understand
most easily.
Six dimensions of Internationalization
(Added by Welch & Loustarinen , 1988)
Sales Objective (What ?) – Goods, services, know-how, systems

Operations Methods (How ?) – Agents, subsidiaries, licensing,

franchising

Markets (Where? )– Political, Cultural, Psychic / Physical distance

differences btwn mrkts

Organization Structure – Export department, International division

Finance – Finance to support international activities

Personnel – International skills, experience and training

 Assumptions & Exceptions
Assumptions Exceptions
Step-by-step process Larger firms take larger
steps
Market knowledge, requires Other ways of gaining
experience experience
Possibility of generalizing
the experience
Lack of knowledge, a major Perceived risk of not
hindrance investing
 Critical views of the model
 Leap-frogging
 Psychic distance
 Too deterministic
 Not useful for service sector/ high tech/
born global companies
 Transaction Cost Analysis

 Based on the seminal study by Ronald

Coase, The Nature of the Firm, 1937, and
The Problem of Social Cost, 1960.

 Subsequently developed by Oliver E

Williamson, Transaction Cost Economics
 The TCA Model
 Basis of foundation:

“ A firm will tend to expand until the cost

of organizing an extra transaction within
the organization becomes equal to the cost
of carrying out the same transaction by
means of an exchange in the open market.”
(Ronald Coase, 1937)
 The Transaction Cost
 Cost incurred in making an economic exchange or
cost of participating in a market [e.g. in buying/
selling a stock, one has to pay a commission (= TC) to
the broker]
 Search and information cost
 Bargaining cost
 Policing and enforcement costs
 The TCA Model- Important terms
(w.r.t a Firm)

Internationalization – process of going

‘global’ (a firm going to different geographies)
Externalization (engaging agents,
distributors…)
Internalisation (operating through internal
contracts, sales subsidiaries…)
Free riding potential
 The TCA matrix
Asset/Investment specificity
TCA matrix
Low Medium High

Contracts /
Low Occasional Contracts Turnkey
Transactions
projects

Frequency of
transaction
Externalizatio Bilateral Internalization
n(mkt. (Vertical
High transactions = agreements Integration =
(Joint
distributer ventures) 100% owned
/Importer) subsidiaries)
 The TCA Model: Limitations
(factors producing transactional difficulties, Williamson)

 Bounded rationality
 Opportunism
 Asymmetrical Information
 Oligopoly conditions
 The TCA Model

• Too narrow assumption of human nature

• Ignores internal transaction cost
e.g. internal transfer prices settlement
• SME structure : clan structure based on
co-operation
 The Network Model
Individual firm is dependent on resources controlled by
other firms & access to them is through networking.

Exchange between firm’s object of study rather than

transactions

Networks are loosely coupled than hierarchies, change

shape easily

Emerge where co-ordination will lead to gains & conditions

change rapidly
 An International Network
Country A (home)
Country B

Country C
 The Network Model
Degree of Internationalization of the
market
Cases of Internationalization

Low High

Low The early starter The late starter

Degree of
Internationalization of
the firm
The lonely The international
High international among others

Johanson & Mattson, 1982

Network Model for SME subcontractors
Control
Between major auto company and sub contractors
(SC)

Co-ordination
Allows firms to concentrate on Core competency

Co-operation
SC-industry partnership
Export behavior theory - Linkages
 The three models discussed above – not to
be taken in isolation.
 Stage by stage linkages
 Despite criticisms, the model has important
relevance
 Based on empirical studies
 Read carefully table 3.1, export behavior
theories in the handout.