Challenging the Uppsala internationalization model: a contingent approach to the internationalization of services.

AutorCarneiro, Jorge

INTRODUCTION

The Uppsala model (Johanson & Vahlne, 1977, 1990) is one of most frequently cited models in the internationalization literature (c.f. Andersen, 1993; Langhoff, 1997; Oviatt & McDougall, 1994). The model states that firms will tend to internationalize first to psychically close countries and gradually move to more psychically distant markets. The model also states that, as a firm chooses a new foreign country, it will start from a low resource-commitment mode and only move to higher commitment modes as it gains experiential knowledge in the foreign market.

The model has been tested mainly in manufacturing industries. However, considering the growing importance of services in the world economy, it is questionable whether the model assumptions would also apply to services.

Services are defined as " ... deeds, performances, and efforts that provide benefit to customers" (Cloninger, 2000, p. 9). Such a definition is broad enough to cover all types of services, including those embodied in a product offer. Nevertheless, our focus here is on service industries, i.e., those industries whose products are predominantly intangible. We suggest here that the usual categorizations--such as, services vs. goods, services industries boundaries, hard vs. soft services--may not be the best way to approach the particularities of services and their impact on the internationalization path of services firms. Other strategic dimensions of services may help to shed more light on this issue.

By contrasting and integrating the conceptual and empirical literature, this paper advances hypotheses that can help one to test whether the Uppsala internationalization model can properly explain the international expansion of different types of services industries, discussing whether the generic assumption of a gradually increasing commitment path would hold under different combinations of environmental circumstances and service configurations. Such a discussion provides conceptual support for a contingency approach to the internationalisation of services. We contend that the assumption of a gradual commitment path might not hold for service industries, and that the effect of some variables on the foreign entry mode chosen by service firms might depend on the level of other variables.

Moreover, one ought to investigate not only how firms actually behave under a given combination of circumstances (contingencies)--i.e., a descriptive perspective--, but also how they should behave in order to improve their results (in the sense of economic return or financial performance) under a given combination of circumstances (contingencies)--i.e., a normative perspective. In this paper we have focused the discussion on one of the variables used to characterize the internationalization process of firms: the entry mode.

Paraphrasing Brouthers, Brouthers and Werner (1999), the research questions here revolve around the following theme: can the Uppsala internationalization model be used to describe the most commonly selected entry modes for service firms (descriptive power) and can the Uppsala internationalization model also predict the best performing entry modes (normative power)?

Recognizing that (i) theoretical models and empirical research have mostly been based on manufacturing industries, (ii) differences between services and goods may imply differences in internationalization decision-making and processes, (iii) differences across types of services may also have implications for the specific internationalization path followed and the performance results obtained, and (iv) that there may be complex interactions among environmental and service-specific variables, this paper addresses three main objectives:

* Identify relevant services dimensions and characteristics that can help account for differences between the internationalization paths for goods and services in addition to differences across service categories;

* Advance hypotheses to assess the descriptive power of the Uppsala internationalization model, as far as the assumption of a gradually increasing commitment path is concerned;

* Advance hypotheses to assess the normative power of the Uppsala internationalization model as far as its (albeit implicit) implications associated with the impact of entry mode on performance are concerned.

In this paper our intention is to advance hypotheses, supported by a conceptual discussion, although we do not actually test them here. The key constructs in the hypotheses (specifically, some environmental and also some service-specific variables) need to be operationalized before data can be properly collected and the hypotheses empirically tested.

The paper is organized as follows. Following this introduction, we briefly present the assumptions of the Uppsala internationalization model and address the foreign entry mode decision. We then discuss differences between goods and services and link them to differences in internationalization patterns. We move on to present typologies of services that highlight some dimensions that might explain differences in internationalization paths across types of services and then review previous empirical studies on the internationalization of services. In the next section we advance testable hypotheses that challenge the assumption of a gradually increasing resource-commitment path of the Uppsala internationalization model--as illustrated by certain service-specific variables and environmental circumstances--and also propose performance implications thereof. Some final remarks and suggestions for future research close the paper.

THE UPPSALA INTERNATIONALIZATION MODEL AND FOREIGN ENTRY MODE DECISION

Assumptions of the Uppsala Model

The Uppsala Internationalization Model (Johanson & Vahlne, 1977, 1990) was initially developed based on case studies of Swedish manufacturers (Johanson & Wiedersheim-Paul, 1975) adopting a behavioral perspective (Andersen & Buvik, 2002; Bjorkman & Forsgren, 2000) inspired by the work of Penrose (1959), Cyert and March (1963), and Aharoni (1966). The model asserts that a firm's market knowledge (or lack thereof) would be the driving force of its internationalization path. Market knowledge is seen as a function of psychic distance between home and host countries and the firm's accumulated experience in each given market. The model contends that (i) firms choose new countries for expansion according to their psychic closeness to the host country, moving to more psychically distant countries only as they gain experiential knowledge from past international operations; and (ii) resource commitments in each selected country increase in incremental steps as the firm gains experience in each market.

Foreign Entry Mode Decision

The foreign entry mode choice includes two basic decisions (Erramilli, 1992). The first decision is whether production should be conducted in the host country or in the home country. So this is a decision about foreign (local) production versus exporting. The second decision relates to who should control production. This comes to a decision between full control, or sole ownership, modes (either sole exporting or wholly-owned FDI) versus shared control modes (e.g., exporting by agents, licensing, franchising, joint ventures).

Hill, Hwang and Kim (1990) proposed three underlying variables that would influence the entry mode decision: level of control desired, amount of resource commitment and dissemination risk (i.e., risk that information may leak and be inadvertently used by a third party, usually a supposedly trustable partner, with the consequent loss of revenues). They considered three general entry modes: licensing, joint ventures and wholly-owned subsidiaries. Depending on the level of each variable, different entry modes could be more appropriate, and trade-offs would have to be accepted when choosing one entry mode over another.

It can be reasonably assumed that managers will choose one entry mode over another in expectation of getting a higher risk-adjusted return on investment., i.e., they will choose the highest risk-adjusted return on investment from the feasible set of entry options (Agarwal & Ramaswamy, 1992). Therefore, higher control would supposedly be chosen if it would expectedly raise returns (e.g., through better management of operations) or reduce risks (e.g., through more decision freedom and responsiveness). Much by the same token, lower commitment would be sought in order to reduce investment (the denominator of the ROI formula). As for the intention to reduce dissemination risk, firms may seek protective action, either by means of contractual and monitoring agreements or, alternatively, by the internalization of foreign activities.

However, classical assumptions of perfect information, symmetry in risk aversion, and rational decision-making--which would tend to lead to some optimal and predictable outcome--may not occur in real circumstances (Bazerman, 2001) and decision-makers tend to suffer from bounded rationality (March & Simon, 1958). Therefore, it may be interesting to investigate whether firms actually behave as suggested by theoretical considerations and whether those which do actually tend to outperform those which do not.

SERVICES VIS-A-VIS GOODS INTERNATIONALIZATION PATTERNS

Relevance of Services in International Trade

Services represent a major part of the world GDP and account for a significant share of international trade (Axinn & Matthyssens, 2002; Dahringer, 1991). Furthermore, the internationalization of services has been growing at a rapid pace (Dunning, 1989; Javalgi, Griffith, & White, 2003; Mathe & Perras, 1994). Whereas in the 1970s it represented around 25% of the world's FDI stock, by the early 2000s it accounted for 60% of the stock and two-thirds of FDI inflows (United Nations Conference on Trade and Development [UNCTAD], 2004). As for exports, in 2006 world exports of services amounted to around 2.8 trillion...

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