- Introduction
Firms often lack knowledge about foreign markets. As a result a number of internationalisation theories have been developed to help academicians and business people interested in international markets understand how firms deal with the uncertainties in new markets. For example, Hadjikhani (1997) suggests that the research arena for international business has been one which includes a variety of theories and models such as transaction cost theory, which is concerned with bounded rationality and opportunistic behaviour, as well as the ecletic paradigm, which introduces the three variables of ownership advantages, internationalisation and local advantages. Two such theories have attracted a great deal of attention in internationalisation literature and research. These include the Uppsala Model (Organic Pathway) of Internationalisation and the Bond Global Pathway of Internationalisation. There has been considerable debate in internationalisation literature with regards to the merits of the aforementioned models. While some studies provide support for the theories, others have not been able to provide any. It is the interest of this paper to compare and contrast these two theories so as to determine the best internationalisation model. The paper also aims at providing a critique of the bond global pathway. The rest of the paper is organised as follows: section two provides an overview of the organic and born global pathways; section three compares and contrasts both theories; and section four provides a critique of the born global pathway.
- Overview of Organic and Born Global Pathways
- Uppsala Model (Organic Pathway)
The Uppsala model is a model based on knowledge acquisition (Forsgren, 2002). It aims at understanding how organisations learn and how their learning affects their investment behaviour (Johnson and Vahlne, 1977, 1990; Forsgren, 2002). Like most models in business, the Uppsala model is based on a number of assumptions.
The Uppsala model has one basic assumption: “that lack of knowledge about foreign markets is a major obstacle to international operations, but such knowledge can be acquired” (Johnson and Vahlne, 1977:23). According to Johnson and Vahlne (1997) the organisation’s operations remain the main source of knowledge given the ‘tacit’ character of market knowledge. Forsgren (2002) suggests that acquisition of knowledge depends on the organisation’s activity in the new environment rather than the collecting and analysing of information. A firm’s operations in a particular environment does not only provide it with the opportunity to obtain information about the market; alongside this, the firm also becomes closely connected to the market in such a way that it is difficult for it to use its resources for other purposes (Forsgren, 2002).
A second assumption of the organic pathway is that due to market uncertainty, decisions and implementations concerning foreign investments are made in stages that increase over time (Forsgren, 2002). This process, which has been termed “incrementalism” is considered a management learning process in which ‘learning by doing’ is a basic logic (Johnson, 1988; Quinn, 1980). As the firm continues to undertake successive businesses in the new markets, it gradually acquires knowledge about the market (Forsgren, 2002). As the firm accumulates more and more knowledge about the new market, its perceived risk regarding the market gradually declines and as such the firm becomes more confident to make investments in the new market. This, therefore, indicates that the firm starts out with a very minimal level of investment, which gradually increases with time as the firm accumulates knowledge about the new market. According to Johnson and Vahlne (1997: 34), “the firm postpones each successive step into a certain market until the perceived risk associated with the new investment is lower than the maximum tolerable risk. The perceived risk is therefore a function of the level of market knowledge acquired through its operations in the new market.” (Forsgren, 2002).
Another assumption of the Uppsala model is that knowledge has a high correlation with individuals such that it is difficult to transfer to other individuals and to other contexts. Johanson and Vahlne (1977: 30) making reference to Pemose (1958) argues that: “experience itself can never be transmitted, it produces a change-frequently a subtle change – in individuals and cannot be separated from them”. The foregoing indicates that with regards the idiosyncratic or market, specific problems and opportunities of each market will ideally be discovered by those people who are working in the market such as sales people in a subsidiary or some frontline unit. These people view the adaptation and extension of present operations as the natural solution to a problem or the reaction to an opportunity (Johansen and Vahlne, 1977: 33). Individuals’ experiences in the new markets are regarded as means for generating business opportunities, as well as serving as a driving force for change in the internationalisation process (Jahanson and Vahlne, 1997: 1).
The Uppsala Model is founded on four core concepts viz: (i) market knowledge; (ii) market commitment; (iii) commitment decisions; and, (iv) current activities. Commitment decisions and the manner in which the activities are carried out are said to be affected by market knowledge and market commitment. Commitment decisions and current activities in turn affect market knowledge and market commitment (Forsgren, 2002). Therefore, based on the aforementioned four concepts, as well as the incrementalism assumption, the Uppsala model posits that the “basic pattern of firms’ internationalisation is: (i) to start and continue to invest in just one or few neighbouring countries, rather than to invest in several countries simultaneously; and (ii) that the investments in a specific country are carried out cautiously, sequentially and concurrently with the learning of the firm’s people operating in that market” (Forsgren, 2002: 260). Firms thus enter new markets with successively greater psychic distance and investments in the new market develop in line with the ‘establishment chain (Johanson and Vahlne, 1990). The model is principally concerned with the manner in which organisations learn and how this learning subsequently affects the behaviour of the organisation (Forsgren, 2002).
- Born Global Pathway
Traditional views on internationalisation have been challenged by the emergence of a new stream of literature on the internationalisation of the firm (Bell et al., 2001). According to Bell et al. (2001) small entrepreneurial firms tend to adopt a global focus from the outset and embark on rapid and dedicated internationalisation. The “born global” literature provides evidence of an alternative pathway, described as rapid and dedicated internationalisation by firms that have not felt constrained by what is supposed to be the logical processing towards internationalisation (Knight et al., 2001). Unlike firms following the Uppsala model, Firms following the born global pathway adopt a global focus from the outset and have an innovative international vision focused on international sales growth (Knight et al., 2001). According to Bell (1995) “born global” firms may have no domestic market at all. Proponents of the “born global” pathway contend that “born global” firms typically possess a knowledge base competitive advantage that enables them to provide value-added products and services (Mckinsey and Co, 1993). Empirical evidence suggests that some “born global” firms have even gone as a far as completely ignoring the domestic market. Such firms prefer targeting lead markets overseas from the onset (Bell, 1995; Masden and Servais, 1997).
Firms adopting the bond global pathway to internationalisation are said to have been influenced by new technologies and globalisation (Knight and Cavusgil, 1996). Madsen and Servais (1997) suggest that the rapid growth of born globals can be attributed to at least three important factors including new market conditions, technological developments in the areas of production, transportation and communication, as well as more elaborate capabilities of people, including the founder/entrepreneur who starts the born global firm. These three factors are also said to be interrelated (Madsen and Servais, 1997). Changing market conditions to which many industries have been exposed in the past decades may have a significant impact on born globals. For example, increasing specialisation and hence the number of niche markets is said to be one of the market conditions that has led to the proliferation of born globals. Today more firms tend to produce very specific parts and components, which they have to sell in the international market place, simply because domestic demand is too small. Moreover, technological developments have created niche markets for entrepreneurs in high tech markets who may have to sell their innovative products worldwide (Madsen, 1997). More often than not, “born-global” firms are formed by active entrepreneurs, often due to a significant breakthrough in process or technology, and their offerings commonly involve substantial value-adding (Bell et al., 2001). The accelerated pace of “born global” firms to international markets is driven by a desire to gain “first mover advantage” and to “lock-in” new customers. The need to swiftly exploit proprietary knowledge particularly in sectors where rapid technological change, coupled with the difficulty of protecting intellectual capital and patents, and contribute to narrow “windows” of opportunity is a strong motivating factor (Bell et al., 2001). Bell et al. (2001) review the work of Knight and Cavusgil (1996) who suggests that a number of different trends have led to the emergence of “born global” firms. These trends include (Bell et al, 2001: 176-177):
- The increasing role of niche markets and greater demand for specialised or customised products;
- Significant advances in process technologies, which enable firms to engage in profitable small-scale production of complex components;
- Advances in communications technology, such as fax, e-mail and world wide web (www), which means that small firms can manage international operations more efficiently and have greater access to information;
- The inherent advantage of small firms in terms of quicker response time, flexibility and adaptability;
- The internationalisation of knowledge, tools, technology and facilitating institutions, which provide opportunities for technology transfer and access to funding; and
- Trends towards global networks, which are facilitating the development of mutually beneficial relationships with international partners.
- Similarities and differences between the Uppsala Model and the Bond Global Pathway
Having provided a brief overview of the Uppsala model and born globals, one can suggest that the main similarity between the two models is the fact that they are all internationalisation models and all deal with how firms move into new markets. However, there is a great difference between the two models. The Uppsala model on the one hand assumes that the internationalisation process is a gradual learning process; it assumes that firms lack knowledge about the new market and as such tend to be sceptical when making investments in new markets. Moreover, the investments tend to be incremental indicating that more investments are made as the firm becomes more and more familiar with the market. Conversely, the born global pathway assumes that firms already have knowledge about the new market. They move into the new market with full force making all the necessary investments from the outset without having to waste useful time trying to study and understand the risk of the market. This means that the main difference between the two models is that one model assumes lack of knowledge while the other assumes the presence of knowledge about the new market.
- Critique of the Born Global Pathway
Based on the foregoing discussion, one can observe that the born global pathway is a complete opposite of the step model (Uppsala model). The born global pathway assumes that organisations are already endowed with the knowledge about the international market. The big question is: are these organisations actually endowed with knowledge about the international market? This paper believes that the answer to this question is “YES”. Yes because, knowledge about different parts of the world is easily transferred from one part to the other. Today, there are many students who study in different countries, and they learn new processes, technologies, cultures and ways of life. Most industries today are run by people who have studied in many different parts of the world; such people can contribute tremendously to the internationalisation process because they are endowed with knowledge about a variety of markets. In addition, many companies send employees to various international business conferences, which enable them to accumulate knowledge about different markets. Firms that have such employees find it easy to internationalise. Moreover, the internet provides a conducive environment for businesses to learn about international markets. Developments in international markets are reported in the business press and other media instantaneously and this provides the interested company an opportunity to gain access to the required knowledge for internationalisation. Based on these, the born global pathway is a more valid pathway to internationalisation in today’s globalised, technologically-driven and customer-focused business environment. The current business environment requires companies to be able to introduce new products and services faster than ever before; this is due to changing customer preferences, expectations and tastes, and calls for firms to always be several steps ahead in the market. The only model that supports such a rapid pace of new product development is the born global pathway. Empirical evidence from the U.K. supports the born global pathway (e.g., Bell et al., 1995). The evidence suggests that there are significant differences in the pace and patterns of internationalisation. Knowledge intensive firms adopt much more proactive and structured patterns of internationalisation and are more flexible in relation to their choice of entry model. These firms also internationalise more rapidly, with domestic expansion often occurring at the same time and pace. (Bell et al., 2001). There are even cases from the U.K. where international expansion preceded domestic expansion. Moreover, studies from Australia and New Zealand provide evidence consistent with findings from the U.K (Bell et al., 2001). This all indicates that the born global pathway is a more valid model for international expansion.
References
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