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Robert E. Morgan
Cardiff Business School, University of Wales, UK
Constantine S. Katsikeas
Cardiff Business School, University of Wales, UK
Table I
Selected theories of international trade and foreign direct investment
Theory type Theoretical emphasis Credited writers
International trade theories
Classical trade theory Countries gain if each devotes resources to the production of goods and services Ricardo (1817)
in which it has an advantage Smith (1776)
Factor proportion theory Countries will tend to specialize in the production of goods and services that Hecksher and Ohlin (1933)
utilize their most abundant resources
Product life cycle theory The cycle follows that: a country’s export strength builds; foreign production Vernon (1966, 1971)
(for international trade) starts; foreign production becomes competitive in export markets; and Wells (1968, 1969)
import competition emerges in the country’s home market
[ 70 ]
Robert E. Morgan and called for which demanded recognition of the (Anderson, 1993). Welch and Luostarinen
Constantine S. Katsikeas internationalization of the firm. Nowadays, (1988) have comprehensively reviewed this
Theories of international published research on internationalization literature and concluded that “…there is a
trade, foreign direct forms a significant part of the international wide range of potential paths any firm might
investment and firm
business literature. take in internationalisation” (p. 43). An array
internationalization:
a critique of approaches and perspectives have con-
Management Decision tributed to the contemporary understanding
35/1 [1997] 68–78 Internationalization theories of the of firm internationalization. For example,
firm economic, econometric, organizational,
Concept of internationalization marketing and managerial models have been
As was recorded in a seminal article by Hayes formulated which help to explain the struc-
and Abernathy (1980), the trade deficit perfor- tural and behavioural issues underlying
mance of a nation cannot always be explained internationalization theory (Dalli, 1994).
by macro-economic phenomena. It needs to However, despite such a profusion of interest
be recognized that the role of the entrepre- from such scholars one approach has devel-
neur plays a part in explaining the interna- oped a significant body of literature on the
tional trading activities of a nation. Given subject of internationalization: export devel-
that an economy may comprise several indus- opment.
tries accommodating an array of firms, it Given that export activities of the firm
appears reasonable that the role of decision perpetually change, the mode of export
makers within such organizations can, collec- behaviour, quite naturally, tends to be devel-
tively, provide a substantial contribution to opment (Albaum et al., 1989) and a large
economic performance. In contrast to the number of studies have adopted this frame of
international trade and FDI theories, out- reference in studying firms’ dynamic and
lined above, internationalization theories evolutionary process of internationalization.
endeavour to explain how and why the firm It has been contended that the literature con-
engages in overseas activities and, in particu- cerned with internationalization, from an
lar, how the dynamic nature of such behav- export development perspective, is probably
iour can be conceptualized. one of the most advanced and mature areas of
knowledge in international business (Haar
‘…the growth of countertrade, in the form of barter or buy-back and Ortiz-Buonafina, 1995). This is primarily
arrangements, clearly illustrates the way in which outward because these studies synthesize many of the
growth is related to inward growth…’ disaggregated concepts in the area and
devote their attention to challenging ques-
tions such as: what factors determine the
Even though the term internationalization
advancement of the firm along the path of
has been used extensively, few real attempts
internationalization; what are the phases
have been made to provide an operational
which characterize the exporting process;
definition of its meaning. Piercy (1981) and
and what are the ingredients of a typical
Turnbull (1985) describe internationalization
export behaviour pattern.
as the outward movement of a firm’s opera-
In order to appreciate the particular
tions. However, this expression could be
embellished on to describe internationaliza- research efforts in this area, the following
tion as “…the process of increasing involve- sections will review two prominent
ment in international operations” (Welch and approaches for describing internationaliza-
Luostarinen, 1988, p. 36). This latter definition tion theory in the context of exporting. These
takes account of both the inward and outward two approaches have been characterized as:
growth of international firms. For example, the Uppsala internationalization model and
the growth of countertrade, in the form of related hybrid models; and innovation-
barter or buy-back arrangements, clearly related internationalization taxonomies.
illustrates the way in which outward growth
is related to inward growth (Huszagh and Uppsala internationalization model and
Huszagh, 1986; Khoury, 1984). The merits of related hybrid models
Welch and Luostarinen’s (1988) definition Much of the extant literature on internation-
have been recognized by others (Young, 1990) alization has been inspired by the work of
because it is a working explanation which is Scandanavian researchers who are collec-
concise and readily interpretable. Further- tively referred to as the Uppsala School (e.g.
more, it is sufficiently holistic to take account Johanson and Vahlne, 1977; Johanson and
of the multiple factors associated with inter- Wiedersheim-Paul, 1975). This literature
national expansion. generally suggests that the process of inter-
The internationalization process of firms nationalization is founded on an evolutionary
has been subject to widespread research and sequential build-up of foreign commit-
attention and empirical investigation ments over time.
[ 71 ]
Robert E. Morgan and Johanson and Wiedersheim-Paul (1975) Innovation-related internationalization
Constantine S. Katsikeas studied the establishment chains of four large taxonomies
Theories of international Swedish multinationals and found that the An extensive volume of research has exam-
trade, foreign direct growth patterns of these firms were distin- ined the way in which firms progress along
investment and firm
guished by a number of small incremental the internationalization continuum and sug-
internationalization:
a critique changes which could be described as an inter- gests that a sequence of discrete stages exists
nationalization process. They identified four which proxy the “stop and go” (Dalli, 1994,
Management Decision
35/1 [1997] 68–78 steps within this process which were distin- p. 92), stepwise process exemplifying the
guished by those firms with: no regular evolution of international involvement.
export activities; export activities via Implicit between each set of stages is the
independent representatives or agents; the notion that fairly stable periods exist in
establishment of an overseas subsidiary; and which firms consolidate and generate an
overseas production/manufacturing units. appropriate resource base to respond to
To explain the concept of incremental inter- fortuitous environmental conditions which
nationalization further, Johanson and Vahlne allow them to proceed to the next internation-
(1977) refined this work and formulated a alization stage. Tables II and III illustrate
dynamic model. The contention implicit selected innovation-related internationaliza-
within this model is that the firm proceeds tion taxonomies, all of which follow a similar
along the internationalization path in the sequence based on organizational learning
form of logical steps, based on its gradual and derive, in part, from Rogers’ (1962) stages
acquisition and use of intelligence from for- of the innovation adoption process.
eign markets and operations, which deter- Innovation adoption describes the selection
mine successively greater levels of commit- of an innovation as the most acceptable alter-
ment to those overseas destinations. Johan- native, among a series of options, at a given
son and Vahlne (1977) have postulated that point in time (Zaltman and Stiff, 1973). The
internationalization is based on learning utilization of the innovation adoption frame-
through the development of experiential work in export decision making was first
knowledge about foreign markets, which is considered by Simmonds and Smith (1968)
gained so as to reduce their “psychic but significant advances were made by Bilkey
distance” (p. 30). Consequently, the firm is and Tesar (1977). These authors concluded
able to enter further overseas markets, that the process of export development was
previously characterized by greater levels depicted by several distinct stages and that
of psychic distance, and thereby commit various different factors affected decision
greater levels of resources to international- making at each stage.
ization.
The taxonomies highlighted in Tables II
and III share many of the same characteris-
tics. However, the main differences include
‘…the firm proceeds along the internationalization path in the number of stages in each model. For
the form of logical steps, based on its gradual acquisition and example, Bilkey and Tesar (1977) and
use of intelligence from foreign markets and operations, which Czinkota (1982) recognized six stages, while
determine successively greater levels of commitment to those Rao and Naidu (1992) were only able to iden-
overseas destinations…’ tify four stages in their research. A brief
discussion will now follow for each of the
taxonomies presented in Tables II and III.
This evolutionary model, which is based on Bilkey and Tesar (1977) conceptualized the
the behavioural theory of the firm (Cyert and process of export development on the basis of
March, 1963), has been endorsed by the firms’ increasing involvement in exporting to
Finnish research of Luostarinen (1980) and psychologically more distant markets. Their
Larimo (1985), the Swedish research of Hor- taxonomy was composed of six export devel-
nell and Vahlne (1982), Swedenborg (1982) and opment stages with the extremes ranging
Gandemo and Mattsson (1984), the Norwegian from firms whose management had no inter-
research of Juul and Walters (1987), as well as est in exporting to those whose management
work in other, non-Scandinavian, settings explored the feasibility of exporting to perpet-
(Yoshihara, 1978). This reinforces a previous ually greater psychologically more distant
conclusion by Wilkins (1974) who identified a countries.
gradual process of firms’ international Cavusgil (1980) proposed a taxonomy with
involvement from his longitudinal study of five stages which were described as firms’
American firms’ internationalization pat- activities in: domestic marketing; pre-export
terns. Furthermore, British researchers have involvement; active export involvement; and
found that a number of intermediate stages committed export involvement. This export
are experienced by firms in the build-up to development process was founded on man-
foreign involvement activities (Buckley et al., agement’s successive decisions regarding
1979, 1981). exporting over a period of time. Furthermore,
[ 72 ]
Robert E. Morgan and it was suggested, on the basis of empirical taxonomy so as to be able to target govern-
Constantine S. Katsikeas evidence, that several firm-specific charac- ment export assistance requirements effec-
Theories of international teristics and managerial factors acted as tively. Six distinct groups of firms emerged,
trade, foreign direct determinants in the process of facilitating or which ranged from those completely uninter-
investment and firm
internationalization:
inhibiting the progress of firms from one ested in exporting, and restricted to the
a critique internationalization stage to the next. domestic market, to those that could be
Reid (1981) purported an explicit innova- described as experienced large exporters. An
Management Decision
35/1 [1997] 68–78 tion adoption sequence of exporting. He empirical investigation revealed that firms,
conceived the innovation to follow the stages at various stages, significantly differed in
of a firm’s: export awareness; export inten- terms of their organizational and managerial
tion; export trial; export evaluation; and characteristics.
export acceptance. In this context, export Lim et al. (1991) expanded on the work of
adoption was believed to require a Reid (1981) and identified four levels of export
favourable management attitude to export- innovation, these being: export awareness;
ing, an available foreign market opportunity export interest; export intention and export
and the presence of spare resource capacity adoption. Strong evidence of support for this
within the firm. framework was found which suggested that
Wortzel and Wortzel (1981) were able to innovation adoption does have considerable
identify five stages of international market applicability in the context of export decision
entry and expansion. Each of these stages making.
was distinguished by the extent of control Rao and Naidu (1992) analysed groups of
exercised by the exporter concerning its firms according to an a priori assignment of
activities in overseas markets. That is, each firms classed as: non-exporters; export inten-
successive stage was signified by a greater ders; sporadic exporters; and regular
internalization of marketing, production and exporters. This taxonomy was empirically
administrative functions previously tested and validated on the basis that each
performed by foreign market-based interme- stage captured the distinct attributes of firms’
diaries. Underlying this taxonomy is the internationalization activities.
significance of contingency issues which All of these taxonomies possess a common
influence the determination of appropriate theme in which they attempt to introduce a
and desirable levels of international classification of export behaviours which
involvement. generate heterogeneous profiles of firms that
Czinkota (1982) attempted to segment firms reflect different degrees of development along
on the basis of an internationalization a reference line of internationalization.
Table II
Selected innovation-related internationalization taxonomies
Bilkey and Tesar (1977) Cavusgil (1980) Reid (1981)
Stage 1
Management is not interested in exporting Domestic marketing: the firm sells only to Export awareness: problem of opportunity
the home market recognition, arousal of need
Stage 2
Management is willing to fill unsolicited orders, Pre-export engagement: the firm searches Export intention: motivation, attitude, beliefs
but makes no effort to explore the feasibility for information and evaluates the feasibility and expectancy about export
of active exporting of undertaking exporting
Stage 3
Management actively explores the feasibility Experimental export involvement: the firm Export trial: personal experience from limited
of active exporting starts exporting on a limited basis to some exporting
psychologically close country
Stage 4
The firm exports on an experimental basis to Active export involvement: exporting to Export evaluation: results from engaging in
some psychologically close country more new countries – direct exporting exporting
– increase in sales volume
Stage 5
The firm is an experienced exporter Committed export involvement: management Export acceptance: adoption
constantly makes choices in allocating of exporting/rejection of exporting
limited resources between domestic
and foreign markets
Stage 6
Management explores the feasibility of
exporting to other more psychologically
distant countries
[ 73 ]
Robert E. Morgan and Incremental internationalization: planning in the process of internationaliza-
Constantine S. Katsikeas contradictory evidence tion and found that the incremental stepwise
Theories of international Both the Uppsala internationalization model development of firms was the exception
trade, foreign direct (and related hybrid models) and the innova- rather than the rule. They concluded that, in
investment and firm
tion-related internationalization taxonomies the early part of international involvement,
internationalization:
a critique confirm the fundamental tenet that a firm’s firms rely on market experience and thereby
internationalization is largely attributed to make incremental adjustments. However, as
Management Decision
35/1 [1997] 68–78 two key elements: the amount of knowledge the degree of international experience
the firm possesses, particularly experiential increases, planning systems are implemented
knowledge; and uncertainty regarding the which formalize strategic analysis and infor-
decision to internationalize. Despite the mation search. International involvement
widespread recognition and general accep- continues to increase to the extent that
tance of these models in the extant literature, experience may be translated across different
they have been recently subject to criticism markets and between various product groups,
regarding their theoretical foundation thus, enabling firms to leapfrog the incremen-
(Anderson, 1993) and generalizability (Sulli- tal process within markets. Similar argu-
van and Bauerschmidt, 1990). ments of leapfrogging have been proposed by
researchers in other contexts. For example,
international involvement patterns by
‘…International involvement continues to increase to the extent Swedish (Hedlund and Kverneland, 1983) and
that experience may be translated across different markets and Australian (Bureau of Industry Economics,
between various product groups, thus, enabling firms to leapfrog 1984) firms have found this to be the case.
the incremental process within markets…’ Second, an important issue of intra-stage
evolution is not considered within these
models. Commonly referred to as
Furthermore, others have subsequently “micro-internationalization” (Dalli, 1994,
found that the incremental internationaliza- p. 95), this issue can have significant
tion thesis fails to explain fully the nature implications for the development of small and
and character of firms’ international involve- medium-sized firms because a number of
ment (Gripsrud, 1990; Grønhaug and subtle changes regarding systems, proce-
Kvitastein, 1993; Millington and Bayliss, 1990; dures and other internal and external phe-
Sharma and Johansson, 1987; Turnbull, 1987). nomena may influence their outlook on
A number of reasons account for this. exporting (Bonaccorsi and Dalli, 1990).
First, Millington and Bayliss (1990) paid Third, it is largely considered that firms
particular attention to the role of strategic advance along the path of internationalization
Table III
Further selected innovation-related internationalization taxonomies
Wortzel and Wortzel (1981) Czinkota (1982) Lim et al. (1991) Rao and Naidu (1992)
Stage 1
Importer pull The completely uninterested firm Export awareness Non-exporters: the firm has no
current export activity nor any
future interest
Stage 2
Basic production capacity marketing The partially interested firm Export interest Export intenders: the firm is a
current non-exporter, but would
like to explore future export
opportunities
Stage 3
Advanced production capacity marketing The exporting firm Export intention Sporadic exporters: the firm
exports, but in a sporadic fashion
Stage 4
Product marketing – channel push The experimental firm Export adoption Regular exporters: the firm
exports on a regular basis
Stage 5
Product marketing – consumer pull The experienced small exporter
Stage 6
The experienced large exporter
[ 74 ]
Robert E. Morgan and rather than the reverse. Some international internationalization measures, in order to
Constantine S. Katsikeas firms may encounter the situation where the draw more precise conclusions underlying
Theories of international aggregate disadvantages of international the nature of international involvement and
trade, foreign direct involvement outweigh the potential advan- expansion.
investment and firm
tages of such a strategy. Given this scenario,
internationalization:
a critique it is possible that firms may undergo a
Management Decision
process of “de-internationalization” (Welch Conclusions
35/1 [1997] 68–78 and Luostarinen, 1988, p. 37) and thereby
This critique was based on the premiss that
reverse the sequence of international expan-
the function of a theory “is that of preventing
sion through divestment and other similar
the observer from being dazzled by the full-
tactics (Boddewyn, 1989).
blown complexity of natural or concrete
The final issue has been addressed by Sul-
events” (Hall and Lindzey, 1957, p. 9). There-
livan and Bauerschmidt (1990) who
fore, theoretical statements have two pur-
attempted to test the incremental interna-
poses: to organize parsimoniously; and com-
tionalization hypothesis. Although these
municate clearly (Bacharach, 1989). Despite
researchers acknowledged a number of
the fact that sophisticated frameworks have
methodological shortcomings in their study,
been advanced to assess the rigour of theories
no significant differences were revealed
(e.g., Blalock, 1969; Dubin, 1976; Nagel, 1961;
with regard to barriers and incentives to
Popper, 1959), the approach taken here
internationalize among firms at various
adopted the stance of a broad review of the
levels of international involvement. Thus, no
major extant theories of international trade,
findings were evident to support the incre-
foreign direct investment and firm interna-
mental fashion of a firm’s path to interna-
tionalization.
tionalization.
Many of the theories detailed in this arti-
Despite the controversy surrounding the
cle can be considered laudable (Bradley,
incremental internationalization thesis, it
1987) and satisfy the general criteria of
seems reasonable to suggest that the concept
theoretical parsimony and communicability.
of a sequential process of international
In demonstrating this, illustration was given
involvement does not imply that such a tran-
to the issues underlying each theory and
sition is either consistent or uniform. The
certain contrasts were drawn between the
likelihood is that some general evolutionary
theory types in an effort to frame them in
pattern of international involvement can be
pursued which could be irregular and ad hoc. relation to their intellectual biases of
To illustrate this, Mintzberg and McHugh international economics, international
(1985) intimate that most strategies for finance and international business. While
growth are characterized by peaks and no specific attempt was made to compare the
troughs of commitment which are related to theories, the discussion emphasised their
the discontinuous emergence of opportuni- particular focus, accredited writers and
ties and threats in the firm’s environment. general conclusions.
Consequently, the outcome of international
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Application questions
1 How well does the body of theory on inter- 2 Look again at the article, and compare and
national trade inform actions in inter- synthesize the various theories presented
national trade in your experience? How by the authors. Where is the discussion
useful is it? leading? What further research would you
advise?
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