Introduction theory I approaches the study best. Resource-Based
Introduction The study of internationalisation is one that comprises of multiple explanatory theories. But one thing that is common is the idea of internationalisation as a process whereby firms expand sales into foreign markets, with potential to increase profitability, competitiveness and innovation (Knight, 2000, p.16). In a society progressively becoming more integrated through the globalization of markets, advances in transportation and communication technologies, the study of internationalisation is gaining importance in the growth strategies of entrepreneurial firms (ibid. p.12). The multidisciplinary nature of international business and entrepreneurship has fostered the development of theories and frameworks from economic, psychological and financial disciplines (Oviatt & McDougall 2005). Through this essay, I will explore how two theories of internationalisation contribute to this field. An evaluative comparison of ‘The Resource-Based View’ and ‘The Staged Uppsala Model’ will show where the models align with one another, whilst also drawing on their differences. In doing so, an initial outline of both theories will be presented followed by a comparison and contrast on the basis of three criteria – model assumptions, generalisability and modern relevance. Upon concluding and identifying areas for further research, I will outline the theory I approaches the study best. Resource-Based View Of recent, the Resource-Based View (RBV) has been incorporated into entrepreneurship studies having been founded in the work of Penrose (1959). The neoclassical theory limited resources to: financial capital, labour and land (Hunt and Morgan, 1995, p.3) but has since been modified in the interest of resources discussed in entrepreneurship literature. The RBV classifies firms as a unique collection of resources which it deploys to gain a competitive advantage (Barney, 1991). The need to possess a valuable, rare, inimitable and nonsubstitutable resource base has widely been accepted as underpinning the RBV (ibid). This search for competitive advantage has increased firms’ tendencies to exert their unique bundles of resources through internationalisation (Bloodgood et al. 1996). In adopting the RBV, Westhead et. al (2001) identify a variety of factors that encourage entrepreneurial firms to export goods or services abroad. Through questionnaires and interviews with construction, manufacturing and services businesses, the authors note that the ‘internal resources of a firm influences the competitive strategies pursued by them as well as their performance’. Firms likely to be exporters were characterised as ‘businesses with older principal founders, with more resources, denser information and contact networks’ (ibid. p.335). Similarly, Olmos (2011) further supports the relevance of the RBV in internationalization; a multivariate analysis of 211 wineries showed a positive relationship between the size of the firm and the degree of internationalisation, with this being attributed to the breadth of resources within the larger firms. Uppsala Model One approach adopted by various researchers realises the internationalisation process as an incremental increase in a firm’s international holding. As such, Johanson and Vahnle (1977) developed the Uppsala model. This model suggests that firms undergo a gradual acquisition, integration and use of knowledge about foreign markets and operations which is channelled to determine its commitment to the market. Johanson and Wiedersheim-Paul (1975) first empirically studied the Uppsala model on four Swedish firms who underwent international expansion in sequential stages. The progression through the four stages entails: no exporting initially, followed by exporting via an overseas agent, which then progresses to establishing a sales subsidiary abroad, with the final stage characterised by production manufacturing in the host country. They propose a cyclical mechanism which demonstrates the positive influence of experience and knowledge on commitment. The concept of psychic distance is deemed as a function of the firm’s expansion decisions. This is defined as ‘factors disturbing flows of information between firm and market such as differences in language, culture, political systems and level of industrial development’ (ibid. p.308). As the Uppsala model is a risk-aversion model (Bjorkman and Forsgren, 2000), the pioneers of the model demonstrate how firms have a greater propensity to initially target countries high in psychical proximity. Model Assumptions Where the Uppsala and the RBV coincide with one another is witnessed through the emphasis on experiential knowledge as a resource deemed influential in determining commitment decisions within foreign operations (Johanson and Vahnle, 1977, p.27). The Uppsala model’s pivotal focus on the heterogeneous approach necessary to gain experiential knowledge ties in with the RBV assumption of non-imitability of resources. Unlike the Uppsala which emphasises the gradual manner in which resources are gained, Connor (2002, p.312) argues how the RBV focuses less so on the nature in which knowledge is acquired and more so on the qualities of the resource base that maintain a competitive advantage. In doing so, the RBV approach shuns the classical assumption of perfect information, symmetry in risk-aversion and rational decision-making which should result in optimal decisions – but this is not always the case as firms are still able to gain a sustained international competitive advantage (Bazerman, 2001). Moreover, the Uppsala extends its economic credibility by accounting for bounded rationality in the decision of firms. Despite this, a prevalent flaw in the Uppsala lies in its disregard for variations in managerial decision styles (Johanson and Vahlne 1977) whereas the RBV places emphasis on managerial competence as well as the aspirations of the entrepreneur in a firm’s ability to enter export markets (Westhead et. al 2001). The RBV sees resource accumulation as an internal process and thus the competitive advantage stems from firmspecific resources (Dierickx and Cool, 1989). There is a direct relationship between a firm’s ability to enter foreign markets and its accumulation of tangible and intangible resource stocks argued by Bloodgood et. al (1996). This implies that those with a larger resource base are more inclined to expand into foreign markets, as found by Westhead et. al (2001). Contrasting the linear view adopted by the Uppsala, which brings forth its ignorance to the influence of external factors, the RBV does acknowledge that those with a denser network are more likely to export (ibid). A holistic view is arguably employed by the Uppsala’s focus on psychic distance. Johanson and Vahlne (1977) utilise the RBV in their study to show how psychic distance acts as a barrier to entry if a firm does not possess the necessary resources to overcome the inherent constraints. The increased cost and risks in psychically distant countries leaves firms more prone to a liability of foreignness which acts as a deterrent to internationalisation. The theory of psychic distance collapses when applying the Uppsala model to firms with a predominantly intangible resource base as Carneiro et al (2008) makes a distinction between service firms based on their tangibility. The likes of consulting and advisory services are deemed ‘more prone to a client-following pattern’ relative to ‘object-based services i.e. fast food restaurants’ who are less susceptible to cultural differences due to their reduced dependence on personal interaction. This raises the question: Is the Uppsala model thus only applicable to firms that are reliant on heavy client interaction? If so, in an era where technological progress is computerising business, will the Uppsala model overestimate the effect of psychical distance in explaining the internationalisation process? Particularly with service firms, Pluta-Olearnik (2011) emphasises the idea that service providers need not possess a physical presence in a country due to technological development, undermining the final stage of the Uppsala. Contrary to the Uppsala, the RBV does not limit firms in their ability to deploy their resources heterogeneously. In her study on Blancco Ltd. – a data security company – Nummela (2002) highlights how the RBV is used to complement the staged model. As Blancco Ltd. progressed through the internationalisation stages, its increasing resource base helped to build brand reputation, providing a resource to alter their strategies within each foreign market. The idiosyncratic strategies of firms directly contrast to the Uppsala due to its reductionist staged approach. Opposing the RBV, this therefore fails to capture the need for firms to adapt to different forms of organisational structure when internationalising. Instead, the Uppsala model has been criticised for its deterministic nature. Validity and Generalisability One of the shortcomings of the Uppsala model lies in the derivation of the model stemming solely from four Swedish manufacturing firms. In doing so, the model falsely oversimplifies this approach unto alternative types of firms. As has been observed, the internationalisation strategies of SMEs differ to MNCs (Crick and Jones 2000). Their study on ten indigenous firms each with a maximum of 100 employees and all relatively new to international activities, found that the staged approach lacked in applicability to SMEs. Despite eight firms engaging in export activity, only two firms (A and F) made use of a subsidiary abroad. Rather, the influence of resource constraints having a major effect on overseas expansion speed and direction credits the RBV more so when looking at SMEs. Is it that small and medium enterprises are able to exploit and leverage resources better than larger firms? Young (1987) finds evidence to suggest that SMEs have other means of gaining international presence through licensing and joint ventures whilst Forte and Carvalho (2013) conduct a case study on internationalisation through franchising. Though the Uppsala model maintains credibility in providing groundwork for research into internationalisation, the issue of generalisability both sectorally and geographically arises. Empirical studies subsequent to Johanson and Vahlne (1975) using the staged approach suffer from ethnocentricity as they are predominantly focussed on developed economies (Bruton & Lau, 2008). The Uppsala model fails to account for interdependencies between country markets, instead opting to view them as separate entities (Hollensen, 2004) which highlights its disregard to view emerging economies any differently to developed ones. Unlike this, the RBV, though originated in developed economies, still maintains a holding within international operations. Lu et al (2009) argues that despite the difference in institutional environments, when analysing 300 firms over 6 regions within China, they found the RBV to be prevalent in recognising the potential of institutional capital and managerial ties to enhance the firm’s competitive advantage. They also go further to note the influence of managerial ties as a mode for building up relations and gaining via a network approach. Modern Relevance In light of being in an era where knowledge accessibility has made it relatively easier to conduct business overseas, the Uppsala model dates back to a previous period and can thus be deemed outdated. Take IKEA as an example, Jonsson and Foss (2011) analysed the process of internationalisation; the international expansion began in 1963 in the firm’s neighbouring Norwegian market, followed by the Danish market. Whilst this is consistent with the Uppsala Model’s emphasis on sequential psychic entry, the succeeding market entries failed to align with the model. Are we therefore witnessing a burgeoning gap between the relevance of the Uppsala at its time of inception and in contemporary business? If so, does this suggest that the theory behind RBV may too be subjected to a dwindling significance? The RBV empirical work is still relatively in its infancy due to the redevelopments of the theory to meet changes in market conditions therefore it is susceptible to change. As Nordström (1990) argues, the concept of psychic distance has decreased in the explanatory value with the world gearing towards homogeneity. However, what this does not consider is how the potential of overembeddedness eventually acting as a barrier to internationalization may reinstate the need for psychically distant exporting. This trend in isomorphism also clashes with the RBV’s reliance on the VRIN framework necessary to seek a competitive advantage. In a more homogeneous environment, firms may be more likely to skip stages of the model due to an increased ease in imitability and through capitalising on other firms’ strategies. A major limitation of the Uppsala model is the failure to recognise that there are existing firms that export from inception – those referred to as ‘born global’ (Oviatt and Mcdougall, 1995). The failure of the Uppsala in explaining how the process starts, nor of the nature of the mechanism whereby knowledge affects commitment limits one’s ability analyse the obscure gap in reasoning between the staged and born global approaches. Conclusion It is evident that both these approaches serve as credible contributions to the development of our understanding of the internationalisation process. The Uppsala model outlines of a gradual learning process on internationalisation which has been dwarfed in its credibility owing to issues surrounding its oversimplicity, deterministic nature and faltering relevance. Whereas the RBV, though still subjected to its own limitations, provides a detailed insight into the deployment of firm-specific resources in foreign market exporting. Despite both their flaws, the RBV stands as the favoured to providing a valid and holistic insight into internationalisation. The RBV constant redevelopment ensures that valuable insights will thus be gained in the future. As for future research using the RBV, one detrimental shortcoming would be the absence of an insight into how valuable, rare, inimitable and non-sustainable resources are created within a firm. Internationalisation is a complex process where no existing line of research can account for all of its aspects. An intertwined dependence between the Uppsala model, which demonstrates the significance of knowledge acquisition, the RBV which demonstrates the exclusivity in a resource base and the network model which highlights the importance of relationships – all of which would ideally come together to form a holistic stream of research into the study of internationalisation.