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Unit 6: Theoretical models underlying
internationalization of business
 The Uppsala Internationalization Model
 The Internalization Model
 The Eclectic Paradigm
 The Network Model
Training material: Morrison, J. (2009): International
Business: Challenges in a Changing World. Palgrave
MacMillan, pp 54-56.
The Uppsala Internationalization Model
 It was introduced by Swedish scholars (Johanson & Vahlne,
1977; 1990). Distinguishes 4 stages of international expansion
(the establishment chain):
1.Weak exporting activity
2.Permanent exporting activity through representatives
3.Establishment of sales divisions abroad
4.Production abroad
 Host countries are selected primarily according to their
proximity with regard to “psychic distance”. Psychic distance is
defined as “the factors preventing or disturbing firms from
learning about and understanding of a foreign environment”.
These factors concern mostly differences in language, culture,
political systems, level of education, or level of industrial
development (Johanson and Vahlne 1977).
Dimensions of Distance: The CAGE Framework
Prof. Ghemawat (2001) countered Friedman’s allegations about
world being a “global village”. Instead, he argued that MNCs will
continue to face enormous difficulties due to persisting distance
between people (cultural, administrative, geographic, economic):
Cultural Distance concerns different ethnicities, religions,
languages, and social values. Industries most affected include
food and those having linguistic content (media, TV). Size is also
a cultural factor (Americans prefer big cars, Japanese small
ones). In the Americas a strong demand exists for small trucks,
while in Europe this does not happen.
Administrative Distance refers to commercial zones, links
between former colonies, diplomatic relations, government
systems etc (e.g. Mexico and Spain, Portugal and Brazil).
Geographic Distance influences producers of fragile &
perishable goods (glass, fruit), of low value-to-weight (cement), or
of high transportation costs (tourism).
Economic Distance has to do with differences in development
and people welfare. Most affected industries are luxury products,
cars & high-tech.
DISRUPTION OF EUROZONE. Country Differences?
The Uppsala Internationalization Model (cont)
 According to the Uppsala pattern, prospective MNCs
start investing in one or few neighboring countries
rather than in a variety of countries simultaneously.
 Investment in a foreign country is carried out
cautiously, gradually, and according to the learning
progress of the MNC people who are employed in that
market (experimental market knowledge).
 Thereafter, the company is expected to follow a
sequence from low to high commitment and to enter
new markets with successively greater psychic
The Uppsala model
The process of internationalization according to the Uppsala model
The Internalization Model
 Internalization: The process through which the MNC eliminates
transaction costs owed to market imperfections through vertical
 Transaction costs: If the MNC decides to buy a product or
service from the market, it has to pay costs beyond its real value:
1.Search & information costs: Market search & selection.
2.Bargaining costs: Time & funds spent on reaching an
acceptable agreement and elaborating the contract.
3.Policing and enforcement costs: Insurance & legal action in case
of violation of the agreement.
 Transaction costs can be eliminated, or at least substantially
reduced, if coordination of value-adding activities is carried out
within one and the same firm; that is, if its operations are
 Internalization arises through the cost-efficient coordination of
transactions of the MNC across borders. The raison d’ etre, or
the competitive advantage of the MNC lies in the fact that it can
handle transactions of assets more cheaply and efficiently than
the market.
The Internalization Model (cont)
 In other words, transactions carried out by the MNC are apt to
be more cost-efficient than those offered by the external market
(make or buy decision).
 If transaction costs are estimated to be low, then arms-length
arrangements (occasional agreements e.g. leasing, licensing,
franchising, joint ventures) are more preferable (trade-off
between risk and returns).
 Modern corporation/MNC: “The product of a series of org
innovations that have the purpose and effect of economizing on
transaction costs” (Williamson, 1981)
 This approach is in contradiction with previous monopolistic
theories which claim that MNCs expand abroad primarily in
order to exploit their capacity and to offer surplus products to
new markets.
The Eclectic Paradigm
 Was developed by Prof. Dr. John Dunning, Rutgers U
(1993, 2002, 2008).
 Attempts to interpret all stages of international
expansion, from exporting till FDI.
 The contemporary company is viewed as fully
informed about predominant conditions in
international markets.
 Activities of MNCs are likely to be oriented to
countries offering optimal combinations of
preconditions described below. Different combinations
of the three variables determine the modes, industries
and geographical distribution of MNCs’ international
The Eclectic Paradigm (cont)
 Distinguishes 3 categories of advantages that enhance
globalization of business:
• Ownership Advantages
• Location Advantages
• Internalization Advantages
 From the initials, the Eclectic Paradigm is widely
known as “OLI Framework”.
OLI: Ownership Advantage
MNCs have to possess some firm-specific competitive
advantages over local firms in serving particular
national markets.
Ownership, or firm-specific advantages, arise from the
monopoly control of tangible and intangible assets by
MNCs. These often reflect the characteristics of MNCs’
home-countries. According to the Product Cycle Theory
MNCs export their products abroad only after the
home market becomes saturated. This normally
happens at the maturity stage of the Product Life
 Ownership assets: Core competencies, patents &
trademarks, technology, brand name.
OLI: Location Advantage
It might be more profitable for MNCs to exploit their
Ownership advantages by combining them with
others pertaining to the exploitation of resources
located outside the home country. This provides the
incentive to locate some part of their activities
Otherwise, MNCs could either import or outsource
these inputs locally, and then serve overseas markets
via exports.
 Location possible assets: Low cost & high quality of
transportation, favorable host government policy,
access to raw materials, technology & human capital.
OLI: Internalisation Advantage
 It might be more profitable for MNCs to exploit their
O&L Advantages through internalisation rather than
by using arm’s-length market arrangements
(occasional transactions often without a long-term
orientation e.g. leasing, licensing, franchising, joint
 On the other hand, if transaction costs are estimated
to be low, then arm’s-length arrangements may prove
more promising.
 Internalization Assets: Transaction cost benefits,
internal alignment of activities, value-adding potential.
The OLI Framework
Location Advantage:
Location Specific factors. These are external
to the firm including transportation cost,
government regulation, infrastructure factors
Ownership Advantage:
Firm specific factors including
technology, , patent, process,
name recognition, and other
core competencies
Cost advantage from vertical and
horizontal integration, due to
transaction cost caused by market
Business Models
Global Matrix Structure of MNCs
The Head of German branch coordinates all affiliates within Germany; the Head
of plastic products coordinates the Manufacturing & Sale of products worldwide.
The GM of plant producing plastic containers in Germany reports to both Head
of the plastic products division and to the Head of German operations.
Plastic Products
Glass Fibers
Latin America
Introduction to the Network Model
The Collapse of the Global Matrix
In the 90s, the matrix structure was considered the
most efficient way to combine global coordination with
local responsiveness. The main advantage of matrix
(compared to hierarchical structures) lies in its ability
to accommodate managers with worldwide product
responsibility and country managers responsible for
geographic regions. In practice, however, the system
did not work.
 Dow Chemical, a pioneer of the global matrix,
eventually returned to more conventional structures
with clear lines of responsibilities.
 Citibank, another advocate of the global matrix,
discarded the system after years of much publicized
The Collapse of the Global Matrix
Reasons of the collapse:
 Conflict & confusion due to dual reporting and
overlapping responsibilities of managers. Separated by
barriers of distance, culture, time, and language,
managers often found it impossible to clarify
 Excessive time spent on compromising decisions.
 Duplication of information and communication, high
administrative costs.
 Eventual emergence of one dominant decision-making
center instead of two or more relevant – the matrix
being abolished in practice.
The Network Model
 The network model postulates that the MNC comprises different
business actors (subs & units), albeit constituting one legal and
administrative entity. MNC is viewed as an heterogeneous, loosely
coupled org in which no unit, including the headquarters,
possesses full control ( differentiated global network). Power is
unequally distributed among subs and units. Each sub is
embedded in a specific network of business relationships, distinct
from the others.
Each sub identifies problems and oppts in its own business
network, therefore it will strive either for:
 Autonomy from the rest of the company, or for:
 Power to influence the development of other parts of the MNC in
a way that supports its own network.
Subs are more or less loosely coupled, and are greatly influenced
by their business network actors, irrespective of whether these
are located inside or outside the MNC. Simultaneous roles:
 Compliance with the HQ guidelines (centripetal).
 Development within their own business network (centrifugal).
The Network Structure of the MNC
The Network Model (cont)
Key terms:
 Embedded relationships: Very close in terms of mutual
adaptation of resources and activities, and knowledge exchange.
It is difficult for the units or companies engaged to substitute the
loss of this business relationship with a new one.
 Arm’s length relationships: They concern sporadic and
impersonal transactions, without entailing long-term
commitment of the parties involved. Business relationships are
designated as flexible and opportunistic.
Subs are developing both embedded and arm’s length business
relationships. The network of embedded relationships does not
coincide with the MNC boundaries. The essence of the network
model is the blurring of company borders: Subs may develop
embedded relationships with external businesses, while retaining
arm’s length relationships with units inside the MNC.
The Network Model (cont)
 Balancing role of the MNC HQ: Simply one player among others
in the org. No unit, even the HQ, exercises full control.
Management from the HQ involves an extensive bargaining
process between conflicting needs and demands of powerful subs
and units.
 Paradox: It is quite possible to exert a considerable amount of
influence on the political decisions made in a society without
having full control over the organization on which this influence
is actually based. “Weak management” inside the MNC vs. strong
political influence stemming from the MNC power to move capital
and production along countries (exercise of economic
 Market conditions do exist inside the MNC in terms of inter-unit
competition and antagonism. Since subs have a free rein,
coordination of activities is enormously complicated. The HQ may
have only imperfect knowledge of subs’ activities. Even when the
HQ have an accurate picture, it remains unclear which activities
should be coordinated and why.