Knowledge, Networks and Power

The Uppsala School of International Business

U. Holm, M. Forsgren, J. Johanson, U. Holm, M. Forsgren, J. Johanson

• Publisher: Palgrave Macmillan
• Year: 2015
• Print ISBN: 9781349506125, 9781137508805
• eBook ISBN: 9781137508829
• Topic: Business
• Subtopic: Business General
• Index: Business

This book presents more than four decades of research in international business at the Department of Business Studies, Uppsala University. Gradually, this research has been recognized as 'The Uppsala School'. The work in Uppsala over the years reflects a broad palette of issues and approaches.

Part I

Introduction

1

Knowledge, Networks and Power – The Uppsala School of International Business

Mats Forsgren, Ulf Holm and Jan Johanson

Introduction

In the early 1960s, Sune Carlson, who came to the new Department of Business Studies after staying 10 years in the UN, started a research program on international business. The initiation of this program was considered against the background of the accelerating European economic integration that was expected to have important consequences for different segments of Swedish industry. Another important factor was that after World War II, many US companies entered European markets, thereby changing the international markets where Swedish firms operated. A number of young doctoral students were engaged in international business research projects. Some of these concerned the international operations of various Swedish industries, such as the special steel industry and the pulp and paper industry. Other projects concerned specific kinds of international business decisions, such as foreign direct investment by Swedish firms, foreign firms’ investments in Sweden or Swedish firms’ establishment of sales subsidiaries abroad. A common characteristic of the studies was a strong empirical orientation. Important research questions were “How do the firms compete in foreign markets?”; “How are they organized?”; “What are the important problems they face when going abroad?”; “How do they adapt to changing competition in their markets?”; etc. Evidently, these questions were relevant for the firms. Also it was easy to get access for interviews and those interviews were generally very fruitful, thanks to the open attitudes of the managers interviewed. Thus several of the studies were influenced by the experiences of the managers. As a consequence, much of the research was inductive in nature. Most of the doctoral students had a relatively strong microeconomic education and there was a degree of tension between theory and practice. Much of the ensuing research in these early days was strongly influenced by this tension and quite often the researchers found explanations in the emerging organization theories.

From the beginning back in the 1960s, continuing up until today, the research in international business at Uppsala University has contained many different issues and perspectives, and consequently, it is an overwhelming task to present a complete overview of this research conducted over more than four decades. However, there are some themes over the years that have been more persistently focused on than others and which also to a large extent explain why “The Uppsala School” gradually has become a well-known concept among scholars within the field. The first theme is knowledge as an asset and as a problem in an international context. The second theme is the conceptualization of markets as webs of business relationships. The third is power in terms of who exerts an influence on firms’ behavior. These three themes have been dealt with in different ways in relation to the internationalization process of firms and the multinational corporation (MNC) as a phenomenon.

Most publications from Uppsala over the years have dealt with these fundamental themes in different ways. Some articles have focused primarily on one of the issues while others, especially during later years, have addressed simultaneously two or even all three of these issues. Below, we illustrate the dominating focus on these three issues and discuss how they have been studied in different ways in some articles about internationalization or the MNC since the end of 1960s.¹

The internationalization process of the firm

The issue of knowledge

It is reasonable to claim that the intellectual starting point for research in international business was the notion that all operations abroad must be carried out in a context of limited knowledge about foreign conditions (Carlson 1966). This simple fact was expected to have a profound impact on the extent to which and how firms establish foreign operations, and also on the managing of the operations once they have been established (Carlson 1973, 1974a, 1974b). Right from the outset it was also recognized that lack of knowledge was not only an issue of simply needing to collect necessary information. The fact that so much knowledge is embedded in social and business contexts and, therefore, it is difficult to acquire “from outside” became a basic assumption behind what later became known as the “Uppsala model of internationalization process.” Inspired by Edith Penrose’s work (Penrose 1959), the concept “experiential knowledge” was applied to highlight the fact that some knowledge cannot be acquired without first-hand experience of the relevant context. The first article that formulated a comprehensive model of the internationalization process in which experiential knowledge is both a barrier and a driver for internationalization was written by Johanson and Vahlne (1977). The time-consuming way in which experiential knowledge is developed leads the authors to view the firm’s internationalization as a behavioral process rather than as a strategic plan. This process is conceptualized as a dynamic interplay between knowledge development, uncertainty and commitment that successively and incrementally increases the firm’s operations in foreign country markets.

Here, it is worth observing the empirical roots of the model. Vahlne and Wiedersheim-Paul (1973) found that firms’ order of entry into foreign country markets was correlated with psychic distance, defined in terms of the factors hindering the information flow between countries. Case studies also demonstrated that, in each country in which firms began to operate, the firms tended to increase their engagement sequentially (Hörnell, Vahlne & Vahlne 1973). This was called the establishment chain. Those two patterns indicated that knowledge was a critical factor in the internationalization of firms as shown in an empirical study of four Swedish companies (Johanson & Wiedersheim-Paul 1975). The 1977 model was a theoretical conceptualization explaining the earlier empirical observations of firm practice.

The original treatment of knowledge in the 1977 article has been developed and scrutinized in other articles from Uppsala since 1977, although without questioning the fundamental assumption of the importance of knowledge in the internationalization process and its tacit nature.

In the original Uppsala model of internationalization, knowledge and lack of knowledge were primarily linked to the foreign market. In that sense, the context of knowledge was something located outside the firm itself rather than inside it, although experience from the foreign operations meant that knowledge was developed in the firm. Furthermore, knowledge about foreign markets was quite a broad and general concept encompassing everything from specific knowledge about accepted business conduct, customers, suppliers and competitors as well as about rules, regulations and institutions, etc.

In later research performed in Uppsala, the knowledge concept underpinning the Uppsala model has been developed and modified quite considerably. One typical example is the article about experiential knowledge and the perceived cost of internationalization by Eriksson, Johanson, Majkgård and Sharma (1997). When it comes to experiential knowledge about the foreign market, the authors make a distinction between business knowledge and institutional knowledge. The first type deals with experiential knowledge about “clients, markets and competitors,” while the second type refers to experiential knowledge of “governments, institutional framework, rules, norms and values” (1997: 343).

The authors also introduce a third type of knowledge, called internationalization knowledge. Knowledge of this kind has to do with the successive learning of how to organize and manage internationalization efforts and concerns how to develop and do business abroad in general, rather than knowledge about a specific market. So, from the concern about lack of knowledge about a specific (country) market in the original version of the Uppsala model, the focus partly changes to the competence a firm acquires gradually, related to issues concerning going international, irrespective of the country in which this takes place. Such knowledge is stored in the firm’s routines and programs, much in line with the evolutionary theory of the firm (Nelson & Winter 1982). It is much more firm-specific than the other types of knowledge and constitutes a particular firm’s “way of going international” (Eriksson, Johanson, Majkgård and Sharma 1997: 345).

The recognition that knowledge of the internationalization process is an important driver for internationalization implies that the process might speed up and take somewhat different routes as compared to if only experiential, context-specific knowledge about particular country markets is being considered. Or, expressed differently, it is recognized that, to a certain degree, the latter type of knowledge can actually be useful in other contexts through the transformation of such knowledge into the firm’s general routines and programs. Thus, it was demonstrated that country variation has an effect on the internationalization knowledge (Eriksson et al. 2000a). Interestingly, the time over which international operations had endured (the duration) had a more complex effect on knowledge accumulation. First, as expected, duration has a negative effect on perceived lack of internationalization knowledge and business knowledge. Second, unexpectedly, the effect on perceived lack of institutional knowledge is positive, which means that the firm realizes that it has less institutional knowledge than the managers had believed to be the case. Third, a longer duration of activity in overseas markets has a lower effect on perceived knowledge development than a shorter duration. Fourth, the analysis indicates that, after several years, some kind of re-evaluation and restructuring of knowledge takes place (Eriksson et al. 2000b).

Other research in Uppsala has developed the understanding of the concept of foreign market knowledge in the Uppsala model. For instance, Hadjikhani (1997) has pointed out that foreign market knowledge above all is manifested in “intangible commitments,” that is, knowledge that is closely linked to specific relationships with business counterparts. The extent of intangible commitments is, consequently, a more relevant indicator of the extent of resources deployed – and indirectly of the firm’s knowledge of the market – than the so-called establishment chain, which is a common way of testing the model (Hadjikhani 1997). This conclusion points to the link between the Uppsala model and the conceptualization of the market as a business network, which will be addressed in greater detail in the next section.

The Uppsala model assumes that the firm is prepared to take a certain foreign risk, and that this risk is a function of uncertainty and commitment. It has been demonstrated that this function can be analyzed as an “iso-risk” curve, in which there is an inverse relation between uncertainty and commitment, so that, for a similar reduction in uncertainty brought about by experiential learning, a successively larger increase in commitment occurs during the internationalization process. This might explain why the rate of expansion abroad is slower at the beginning of the process than in the later phases, but would also demonstrate that the balance between risk, uncertainty and commitment explains not only increasing commitments, but also decreasing commitments, for instance when the firm experiences a higher degree of uncertainty or a higher risk as a result of changes in market conditions (Figueira-de-Lemos, Johanson & Vahlne 2011).

The internationalization process model does not say anything about why and how the firm starts its internationalization. In some related studies, however, Wiedersheim-Paul and his associates wrote some articles indicating that pre-export activities have an effect on the start of internationalization (Wiedersheim-Paul, Olson & Welch 1978; Welch & Wiedersheim-Paul 1980). In particular, they stress the importance of extra-regional expansion or “domestic internationalization.”

A conclusion of the Uppsala model is that if the uncertainty is so high that even a small investment abroad would mean that the firm would go beyond the level of risk deemed tolerable, then there would be no such investment. This conclusion should be qualified if one takes into account the fact that in certain situations the firm experiences that the risk of not investing abroad is even higher. This might be the case if the competitive situation in the industry is such that not investing abroad will threaten the firm’s business at home (Forsgren & Hagström 2007).

The core of the Uppsala model is that firms acquire knowledge about foreign markets through experience drawn from business operations. This knowledge is exploited in their further operations abroad. It has been pointed out, though, that foreign operations reflect not only exploitation of knowledge, but also exploration with the intention of learning more about a specific market, and that this is more pronounced when the firm perceives a gap between the knowledge it has and what it needs (Barkema & Drogendijk 2007, Figueira de Lemos 2013).

As a fact, the 1977 model viewed opportunity-seeking as an important underlying driver in the internationalization process. Nevertheless, for some decades, this issue was almost completely absent in the Uppsala research. However, in a theoretical analysis of market discovery, it was assumed, following Kirzner, that the discovery of opportunities would be made when performing current activities in the market (Hohenthal, Johanson & Johanson 2003). A later empirical study of entry in a turbulent market indicated that different search, improvisation and routine activities in the market had different impacts on the kind of discovery that had been made – that is, whether it was operative or strategic (Johanson & Johanson 2006). Another effort to explain firms’ international expansion in turbulent markets was to introduce expectations as a mediating variable in the experiential learning – commitment interplay (Hadjikhani & Johanson 2001). In that way, they could explain firm expansion in some turbulent markets. This approach has recently been developed in order to provide a coherent explanation of deviations from the predicted internationalization patterns according to the 1977 model. In addition to expectations, “unknown” uncertainty is critical in the approach.

It has been pointed out that to acquire market knowledge, other types of learning than experiential learning must also be accounted for. For instance, firms use different forms of “short-cuts” to learning to a certain extent, such as incorporating other units with the required knowledge about a foreign market (e.g. acquisition of a host-country firm), imitation of other firms’ internationalization behavior, or leaning on knowledge held by business partners (Forsgren 2002). If these other types of learning are recognized as important aspects of firms’ internationalization behavior, it follows that the internationalization process might be less straightforward, less path-dependent and less cautious than the original model predicts.

The issue of markets

As argued above, knowledge and lack of knowledge about foreign markets played a crucial role in the first attempts in Uppsala to conceptualize the internationalization process adopted by firms. In a sense, the knowledge concept was more important than the market concept in the model. How firms deal with uncertainty caused by a lack of knowledge about a certain market was the crucial issue, not the market concept as such. The market was treated more or less as equal to a count...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Preface and Acknowledgments
• Notes on Contributors
• Part I Introduction
• Part II The Internationalization Process of the Firm
• Part III The Multinational Corporation
• Index