Introduction
The process of globalization is currently happening and it is really fast because there are different reasons. Change in information technology has provided the impression of decreased physical distance, and also has the development in communication technology. Furthermore, the economic growth of developing countries has introduced new actors to the world stage. Everything of these have been helped by the adoption of different types of international trade agreements, with the formation of economic zones, like the European Union, only to remark the most famous instance. Whatever the nature and cause of the globalization process, the internationalization of different organizations becomes even more important in this context because organizations now have the needs they need, as well as rapid and effective access to new countries and markets to seize global opportunities and to avoid being left behind by its competitors. There are individual goals that can lead a company to make different decisions about how to go international and how it enters the international market (Brouthers et al. 2016). Moreover, this essay is aimed to explain and critique some internationalization theories offered by academics, which attempt to illustrate why and how the process of internationalization has taken place.
Discussion
Critical evaluation as well as a comparison between two internationalization theories
- The Uppsala Model
The Uppsala model defines the process of internationalization by companies as a growing and increasing phenomenon that spreads to new countries and thus begins to be exported to new markets, the next step in new markets and operated in the global market/country. The key to this process is to gain knowledge or experience from the people working in the organization if the expansion continues. During the process, every step becomes a platform for the next stage and the company can expand to other markets and countries. In addition, this model suggests that developing companies will attempt to enter countries and markets that are considered to be psychic distance too small, so expanding to markets and countries that are more developed (not only geographically but also the viewpoint of psychic distance) and so on. This is the stage-based approach that takes the course of the process of internationalization (Knight and Liesch, 2016).
This model has been criticized for its simplicity and may be more general. In this way, the model that fully assumes the nature and scope of organizational learning that is considered only the experiential learning by organizational management, although there may be other ways where learning happens. For example, an organization may acquire through imitation of its rivals by overall taking a completely diverse approach from the present competitor, or simply acquire a new company that is already operating in a new market and therefore keep relevant skills or knowledge.
Another critique is the one-dimensional approach to this model, which follows the process of internationalization happens through exports by the third-party intermediaries, first through sales subsidiary and finally via the formation of production facilities in new markets. Moreover, this procedure may not be very upfront in practice as well as organizations may use other, even mixed approach, based on the separate market they operate in. In this case, Castaño et al. (2016) analyzed the context of European companies in Japan that generally support the path of joint ventures as a way to enter the market.
The company can also achieve various goals by setting up overseas manufacturing facilities. For instance, licensing may be the preferred strategy for the high-tech organizations.
- The Eclectic Paradigm
Dunning formulated the eclectic paradigm in 1988 seeks to underline the importance of three key conditions in the process of internationalization that impact the decisions to internationalize the activities of an organization. First, the organization should enjoy the benefits of ownership related to indigenous competitors (e.g. return to scale, trademark right, specialized entrepreneurial skill, etc.). Second, the market to be entered should be concerned about the resource and factor endowment it appreciates (i.e. certain natural resources, low wages, etc.). Third, there must be a benefit in the internalization of the production of company. It is to say in providing or manufacturing products itself instead of presenting them through the contractual arrangements with third parties. Therefore, the process of internationalization is observed as a coherent one on the basis of the assessment of its profits as compared to its costs (Coviello et al. 2017).
This approach can be very simple, especially in relation to the various risk diversification theory. The author mentions that if there is a special investment opportunity abroad, different companies of the same company may evaluate the product differently among other things according to their understanding and attitude towards risk. Companies will often strive for different risks and spread their respective portfolios. Thus, in the context of the eclectic paradigm, individual organizations may perform in a different way related to same set of ownership, ownership, internationalization and locational benefits. Further, the model will be short to the extent that it cannot consider the firm-specific factors and circumstance that could ultimately influence internationalization decisions (Pathan, 2017).
In short, different aspects of the decision to internationalize the firm have different theories and qualifications. The Uppsala model is more concerned with the knowledge and experience gained from these factors as an influential key element in the decision to make it international. Then again, the eclectic paradigm attentions on the cost of a transaction leading to a company’s presence in a new market. None of these models and theories can be described in detail, so it can be needed a separate approach, it can select and apply each of the core elements and components, so that most can be covered if there is no related front (Forsgren, 2016).
Use of two real-life examples
In the relevant case, it can be seen that the Uppsala model is relevant for several organizations. The model is useful and valid for many organizations. An incremental entry tactic aids them in evaluating the global markets, acquire knowledge, and enable them to minimize risk and uncertainty in foreign market activities. It should be noted that the Uppsala model is slowly evolving its strategy of internationalization, based on inspirational research from four Swedish companies, including Atlas Copco, Sandwick AB, Volvo, and Facit. They began its business through exporting to a new country in which psychic distance and risk is low. The company began internationalization process with improvised exporting. Generally, Facit and Volvo launched its manufacture holdings in the neighboring countries. There is no other company to start manufacture in any country deprived of having sales experience (Rahman et al. 2018).
Erling Persson opened first H&M shop in 1947 through providing only garments for women at Vasteras, Sweden. Following its success in the local marketplace, the organization adopted Uppsala model market entry market by exporting to Scandinavian nations, including Denmark and Norway. By gaining experience and knowledge about overseas markets, the company is able to increase its commitment level in resource and launched new H&M stores in Denmark and Norway in 1964 and 1967 correspondingly. Prior to the procedure of internationalization, H&M established a strong place in the local marketplace to care global exertions of organization. Further, the perception of psychic distance is also an important element in the model through the process of internationalization of H&M. Denmark and Norway share the same history and culture, leading to the shortest psychic distance with Sweden. Progressively, H&M has extended its operations through the European marketplace.
The first stage of IKEA’s decision to enter the foreign market also coordinated incremental and sequential entry of the Eclectic Paradigm. IKEA began its expansion in Norway in 1963 as well as then following the Danish marketplace in 1969. Besides, the test store can be outlined as highly exploitative and plays an important role in gaining experience and knowledge in overseas markets as described in the model. When IKEA started a store in Germany, it painted a store with the color of the Swedish flag. This is comprehended that this color supports them to be prominent in other Zones. Then it has started coloring blue and yellow in every IKEA store (Schellenberg et al. 2018).
Conclusion
The Uppsala model has become a well-known and widely discussed internationalization theory. It makes an important contribution to the understanding of internationalization and serves as a guide for many organizations through this procedure. Because of the unpredictable point of model with the new realisms of business environment and the rapid globalization process, the Uppsala model has faced with enlarged several critical opinions from different researchers and scholars. This indicates that the Uppsala model avoids a number of aspects that have noteworthy implications for the internationalization process. Also, changes in the industry challenge the model both empirically and theoretically and raise questions about the validity of the perception. But not each element proves that the Uppsala model is wrong in the current internationalization strategy.
Despite all these criticisms and limitations, the U-model concept has been used and supported by some companies through the process of internationalization. A comprehensive entry strategy is still effective and relevant to several companies to test their demand in overseas markets. This study shows that market commitment and market experience, remains an important factor in understanding international business management. Not every company follows strong internationalization strategies and another types of market entry. Besides, the stage model is still reliable and preferable entry mode for some SMEs due to some small risks. This is fact that in a new period of internationalization world turns into more standardized but culture barriers cannot overcome completely. The psychic distance is still a significant issue in internationalization strategies. The company has spent a lot of effort and money to acquire the new market culture and how to do business there. The author of the model tries to inform according to the changing business environment, and respond to criticism. Besides, the model has been modified and revised numerous times and add new perspectives to increase its applicability in the modern world.
References
Brouthers, K.D., Geisser, K.D. and Rothlauf, F., 2016. Explaining the internationalization of ibusiness firms. Journal of International Business Studies, 47(5), pp.513-534.
Castaño, M.S., Méndez, M.T. and Galindo, M.Á., 2016. Innovation, internationalization and business-growth expectations among entrepreneurs in the services sector. Journal of Business Research, 69(5), pp.1690-1695.
Coviello, N., Kano, L. and Liesch, P.W., 2017. Adapting the Uppsala model to a modern world: Macro-context and microfoundations. Journal of International Business Studies, 48(9), pp.1151-1164.
Forsgren, M., 2016. A note on the revisited Uppsala internationalization process model–the implications of business networks and entrepreneurship. Journal of International Business Studies, 47(9), pp.1135-1144.
Knight, G.A. and Liesch, P.W., 2016. Internationalization: From incremental to born global. Journal of World Business, 51(1), pp.93-102.
Pathan, S.K., 2017. An empirical analysis of the impact of three important aspects of Eclectic Paradigm on Foreign Direct Investment (FDI). International Research Journal of Arts & Humanities (IRJAH), 45(45).
Rahman, A., Bridge, A., Rowlinson, S., Hubbard, B. and Xia, B., 2018. Multinational contracting and the eclectic paradigm of internationalization. Engineering, Construction and Architectural Management, 25(11), pp.1418-1435.
Schellenberg, M., Harker, M.J. and Jafari, A., 2018. International market entry mode–a systematic literature review. Journal of Strategic Marketing, 26(7), pp.601-627.
