The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership
The Uppsala internationalization process model
evisited: From liability of foreignness to liability
of outsidership
Jan Johanson1 and
Jan-Erik Vahlne2
1Uppsala University, Uppsala, Sweden;
2Gothenburg University, Gothenburg, Sweden
Co
espondence:
J Johanson, Uppsala University,
PO Box 513, SE-751 20, Uppsala, Sweden.
Tel: þ XXXXXXXXXX;
E-mail: XXXXXXXXXX
Received: 10 July 2007
Revised: 15 October 2008
Accepted: 4 November 2008
Online publication date: 21 May 2009
Abstract
The Uppsala internationalization process model is revisited in the light of
changes in business practices and theoretical advances that have been made
since 1977. Now the business environment is viewed as a web of relationships,
a network, rather than as a neoclassical market with many independent
suppliers and customers. Outsidership, in relation to the relevant network,
more than psychic distance, is the root of uncertainty. The change mechanisms
in the revised model are essentially the same as those in the original version,
although we add trust-building and knowledge creation, the latter to recognize
the fact that new knowledge is developed in relationships.
Journal of International Business Studies (2009), 40, 1411–1431.
doi:10.1057/jibs XXXXXXXXXX
Keywords: internationalization theories and foreign market entry; network relations
theory; experiential knowledge; commitment; trust; opportunity
INTRODUCTION
Much has changed since our model of the internationalization
process of the firm was published in the Journal of International
Business Studies (JIBS) ( Johanson & Vahlne, XXXXXXXXXXIn fact, the
economic and regulatory environments have changed dramati-
cally. Company behavior is also different in some respects. The
esearch frontier has moved too. There are some concepts and
insights that did not exist when our model was published.
The Uppsala model explains the characteristics of the inter-
nationalization process of the firm. When we constructed the
model there was only a rudimentary understanding of market
complexities that might explain internationalization difficulties,
ut subsequent research on international marketing and purchasing
in business markets provides us with a business network view of the
environment faced by an internationalizing firm. We further develop
this view and explore its implications for the internationalization
process of the firm. Our core argument is based on business
network research, and has two sides. The first is that markets
are networks of relationships in which firms are linked to each
other in various, complex and, to a considerable extent, invisible
patterns. Hence insidership in relevant network(s) is necessary
for successful internationalization, and so by the same token there
is a liability of outsidership. Second, relationships offer potential
Journal of International Business Studies XXXXXXXXXX, 1411–1431
& 2009 Academy of International Business All rights reserved XXXXXXXXXX
www.jibs.net
for learning and for building trust and commitment,
oth of which are preconditions for internationaliza-
tion. Before we look at this business network view in
depth, we summarize our original model.
THE 1977 MODEL
Researchers in the Department of Business Studies
at Uppsala University in the mid-1970s made
empirical observations that contradicted the estab-
lished economics and normative, international
usiness literature of the time. According to that
literature, firms choose, or should choose, the
optimal mode for entering a market by analyzing
their costs and risks based on market characteristics
and taking into consideration their own resources
(e.g. Hood & Young, XXXXXXXXXXHowever, our empirical
observations from a database of Swedish-owned
subsidiaries a
oad, and also from a number of
industry studies of Swedish companies in interna-
tional markets, indicated that Swedish companies
frequently began internationalizing with ad hoc
exporting (Carlson, 1975; Forsgren & Kinch, 1970;
Hörnell, Vahlne, & Wiedersheim-Paul, 1973;
Johanson, 1966; Nellbeck, XXXXXXXXXXThey would
subsequently formalize their entries through deals
with intermediaries, often agents who represented
the focal companies in the foreign market. Usually,
as sales grew, they replaced their agents with thei
own sales organization, and as growth continued
they began manufacturing in the foreign market to
overcome the trade ba
iers that were still in place
in the post World War II era. We labeled this
dimension of the internationalization pattern the
establishment chain. Another feature of the pattern
was that internationalization frequently started in
foreign markets that were close to the domestic
market in terms of psychic distance, defined as
factors that make it difficult to understand foreign
environments. The companies would then gradu-
ally enter other markets that were further away
in psychic distance terms (Johanson & Wiedersheim-
Paul, 1975; Vahlne & Wiedersheim-Paul, XXXXXXXXXXThis
process had its origin in the liability of foreignness, a
concept that originally explained why a foreign
investor needed to have a firm-specific advantage to
more than offset this liability (Hymer, 1976; Zaheer,
1995). The larger the psychic distance the larger is the
liability of foreignness.
We searched primarily in the theory of the firm
for explanations for the deviations between what
the extant theories prescribed and the Swedish
pattern of internationalization, and developed ou
original model based on the work of Penrose
(1966), Cyert and March (1963), and Aharoni
XXXXXXXXXXThe underlying assumptions of our 1977
model are uncertainty and bounded rationality. It
also has two change mechanisms. First, firms
change by learning from their experience of opera-
tions, cu
ent activities, in foreign markets. Second,
they change through the commitment decisions
that they make to strengthen their position in
the foreign market. We define commitment as the
product of the size of the investment times its
degree of inflexibility. While a large investment in
saleable equipment does not necessarily indicate a
strong commitment, unwavering dedication to
meeting the needs of customers does. Experience
uilds a firm’s knowledge of a market, and that
ody of knowledge influences decisions about
the level of commitment and the activities
that subsequently grow out of them: this leads to
the next level of commitment, which engenders
more learning still (Figure 1). Hence the model is
dynamic.
The model does not specify the form that increased
commitment might take. Indeed, commitment may
decline, or even cease, if performance and prospects
are not sufficiently promising. Contrary to the views
expressed by some, the process is by no means
deterministic. We assumed nonetheless that the
process of internationalizing will continue as long
as the performance and prospects are favorable.
We also assumed that learning and commitment
uilding take time. This explains why moves into
more risky, but potentially rewarding, modes and
moves into markets that are more distant in terms
of psychic distance are made incrementally.
We considered the model to be descriptive,
largely because we based it on Cyert and March
State Change
Market
knowledge
Market
commitment
Commitment
decisions
Cu
ent activities
Figure 1 The basic mechanism of internationalization: state
and change aspects (Johanson & Vahlne, 1977: 26).
The Uppsala model revisited Jan Johanson and Jan-Erik Vahlne
1412
Journal of International Business Studies
XXXXXXXXXXIt has generally been characterized in the
subsequent literature as behavioral, compared with
other theories that are seen as economic, such as
internalization theory (Buckley & Casson, 1976),
transaction cost theory (Hennart, 1982), and the
eclectic paradigm (Dunning, XXXXXXXXXXMore recent
empirical studies have indicated that the interna-
tionalization process as explained by our model
has a positive impact on performance (Barkema,
Bell, & Pennings, 1996; Delios & Beamish, 2001; Li,
1995; Luo & Peng, XXXXXXXXXXOur model can therefore
e considered a model of rational internationaliza-
tion, and can be used for prescriptive purposes.
THE FIRM IN THE MARKET ENVIRONMENT:
A BUSINESS NETWORK VIEW
A number of studies have demonstrated the role of
networks in the internationalization of firms.
Coviello and Munro (1995, 1997) conducted
empirical studies of the internationalization of
small software firms. They found that network
elationships have an impact on foreign market
selection as well as on the mode of entry in the
context of ongoing network processes. Their find-
ings led them to develop a model that combines the
process model and the network approach. In a
study of the international expansion of Japanese
suppliers of automotive components, Martin,
Swaminathan, and Mitchell XXXXXXXXXXfound that the
inter-organizational relationships of suppliers,
especially those with buyers, affected their pattern
of international expansion. Other researchers
have looked at networks in studies of internationa-
lization strategy (Welch & Welch, 1996), the
location of foreign direct investment (Chen &
Chen, 1998), the first step a
oad (Ellis, 2000),
SME internationalization (Chetty & Blankenburg
Holm, 2000), internationalization of firms from
emerging markets (Elango & Pattnaik, 2007), and
apid internationalization (Loane & Bell, 2006), to
name but a few.
We conclude that our original model needs to
e developed further in light of such clear evidence
of the importance of networks in the interna-
tionalization of firms. The research that has been
done to date generally has studied the ways in
which networks influence internationalization,
without discussing how those networks have been
created, and without considering the network
structure in the country or countries firms entered.
Based on case analyses, Coviello XXXXXXXXXXdeveloped
a model of ‘‘how [international new venture]
networks evolve’’ during the early phase of interna-
tionalization. Our aim differs from that of Coviello
in that we focus on business networks as a market
structure in which the internationalizing firm is
embedded and on the co
esponding business
network structure of the foreign market. While ou
goal is to develop a more general business network
model of firm internationalization, Coviello’s (2006)
work is nevertheless of great interest, as she shows
that ‘‘insidership’’ in networks, developed before
entry into a new market, even before the founda-
tion of the firm, is instrumental to the specific
internationalization process at hand.
The studies on which the 1977 model was based
indicated that the received theories of markets and
marketing were not useful in trying to understand
the market situation of individual firms. An inter-
national business-to-business marketing research
program started in Uppsala in the mid-1970s in
order to develop a better understanding of business
markets and marketing. Early observations that
firms develop lasting relationships with important
customers were an important input into this research
program (Forsgren & Kinch, 1970; Johanson, 1966).
An interaction approach that focused on the
adaptation and exchange between suppliers and
customers was used as a theoretical framework fo
studies of business relationships (Håkansson &
Östberg, 1975).
A large-scale empirical study of international
marketing and purchasing of industrial products
(the IMP project) that was ca
ied out in the late
1970s and early 1980s by researchers from Sweden
and four other European countries was based on the
interaction approach (Ford, 1997; Håkansson,
1982; Turnbull & Valla, XXXXXXXXXXWork done during
the project demonstrated that close and lasting
usiness relationships between suppliers and cus-
tomers are indeed important, be they within a
given country or between countries (Hallén, 1986).
A number of studies since then have shown the
importance of relationships in the internationaliza-
tion process – client-following strategies for example
(Bonaccorsi, 1992; E
amilli & Rao, 1990; Majkgård
& Sharma, 1998; Sharma & Johanson, 1987).
IMP project studies also showed that such relation-
ships usually involve a number of managers who
coordinate the activities of the different firms,
and who together create inte
elated routines
(Cunningham & Homse, XXXXXXXXXXMoreover, these
elationships seem to develop through social
exchange processes in which the firms involved
enact the relationship interactively and sequen-
tially (Kelley & Thibaut, XXXXXXXXXXThe result is the
The Uppsala model revisited Jan Johanson and Jan-Erik Vahlne
1413
Journal of International Business Studies
accumulation of knowledge and building of trust,
and eventually greater commitment, as also
demonstrated in channel and relationship market-
ing studies (Anderson & Weitz, 1992; Dwyer,
Schu
, & Oh, 1987; Morgan & Hunt, XXXXXXXXXXIn
the process, weak ties and unilateral dependence
can be transformed into strong relationships
and bilateral interdependence, and ultimately
increased joint productivity (Hallén, Johanson, &
Seyed-Mohamed, 1991; Zajac & Olsen, XXXXXXXXXXAs
with the internationalization process model, the
esearch done in the IMP project shows that
elationships develop through a process of experi-
ential learning whereby firms learn about the
esources and capabilities of their counterparts,
and gradually increase their commitments (Hägg
& Johanson, XXXXXXXXXXThere is one important differ-
ence between our model and the findings of
the IMP project: relationship development is a
ilateral process that involves two parties who
learn interactively and make a mutual commitment
to the relationship (Anderson & Weitz, 1992;
Blankenburg Holm, Eriksson, & Johanson, 1999).
When we constructed our original model we were
not aware of the importance of mutual commit-
ment for internationalization. Now our view is
that successful internationalization requires a
eciprocal commitment between the firm and its
counterparts (Johanson & Vahlne, 1990; Vahlne &
Johanson, 2002).
It takes time – some data indicate as long as 5
years – and managerial effort to create working
elationships, and many attempts fail (Hohenthal,
2001). Thus a working relationship is the result
of considerable investment, and is an important
firm resource (Dyer & Singh, XXXXXXXXXXWhile there
may be some formal aspects, developing relation-
ships is essentially an informal process (Powell,
1990). Intentions, expectations, and interpreta-
tions are important. Relationships are basically
socially constructed. The informal and subtle
nature of relationships makes it almost impossible
for anyone who is not personally involved to judge
the scope of the investment that has gone into
uilding it, or its value. The larger the psychic
distance, other things being equal, the more
difficult it is to build new relationships. This is
the effect of the liability of foreignness. Two firms
that are parties to a relationship are tied to each
other to some extent: they share in their mutual
future development, and may exercise some
degree of power over one another (Granovetter,
1985). Thus, in