Oviatt and Mcdougalls Theory of International New Ventures - Essay Example

Oviatt and Mcdougall’s theory of international new ventures is an alternative theory to Johanson and Vahlne’s Uppsala model. Discuss. “Examining thetemporal limits of theory could contribute to the development of new theory or lead to the more complete and accurate specification of existing theory…” (Zaheer, Albert and Zaheer, 1999, pp 726) Internationalization is a phenomenon which is increasingly on the rise both as a market policy and as an academic research area. With the global focus on integration of financial systems, liberalization, opening of markets, in addition to the trend towards economic and social homogeneity across boundaries, internationalisation was but only naturally a inevitable emergence. It has now been defined in several ways and modelled and remodelled extensively. Welch & Luostarinen (1988) defined internationalization as “the process of increasing involvement in international operations.” . Another definition extended by Calof & Beamish was “the process of adapting firms’ operations (strategy, structure, resource, etc) to international environments” (1995). Indeed there have been other definitions and other paradigms which were extended and did in part explain the phenomenon. However internationalization remains a process which is still considerably fragmented. Of the various models now available in the literature, the two that will be focussed on are Johanson and Vahlne’s Uppsala model and Oviatt and Mcdougall’s theory of international new ventures. International ventures can be driven by economics driven practices or by process driven ventures. Process driven ventures are based less on the business per say but more on the behavioural patterns of the sector. Economics driven processes on the other hand may look at factors like transaction costs, internalisation/externalisation benefits, industry capabilities etc. Johanson and Vahlne’s Uppsala model and Oviatt and Mcdougall’s theory of international new ventures are representatives of these two distinct types of processes respectively. Empirical studies have been the main stay of academic research in the field of management ventures. Such studies since the 1960s have supported the view that the preliminary step for firms initially is to gain a strong foothold in their domestic market before venturing into international business. As a result of this trend the entrepreneurship literature for a long time focussed on market dimensions within a domestic setting. Entrepreneurship and internationalization were rarely looked upon at the same time. Examples of such theories based on a frequently observed pattern of incremental stages were those presented by Vernon in 1966 and a decade later by Johanson and Vahlne. The latter of the two emerged as a most widely recognized theory pertaining to the dynamics of internationalization and undoubtedly it has had much relevance for small firms and even larger organisations in the past (Johanson & Vahlne, 1990, 1977) Methodology Prior to commencing with the main features of this work it may perhaps be important to identify the sytematic process that has been used to obtain the evidence and make a meaningful compilation. electronic means have been combined with manual searches with an attempt to decrease omiting relevant information. The use of electronic tools as a way of search was conducted by scanning Emerald as well as by searching other Internet resources, using key words such as “international new venture”, “born-global”, “global start-up”, “international entrepreneurship” and the names of the authors mentioned. Leading journals for research in the International Business, International Marketing, and Entrepreneurship literatures have also been studied. However to remain withing the range (required word limit) not all studies have been included. Uppsala model; an early study of the internationalisation process Johanson and Vahlne’s Uppsala model can be considered to represent the process driven ventures. This model formed the basis of several early studies of the internationalisation process of firms The features central to the Uppsala model are now very well characterised. The initial theory emerged based on the behaviour of some Swedish firms. Johanson and Vahlne (1990) do however quote studies of German, US, Japanese, Turkish and Australian firms which support the idea underlying the model. The basic underlying feature of the model was that the companies develop their international ventures over time and in an incremental fashion. Knowledge development and progressive learning curves after the initial small inroad into a new territory (small step forward in the internatinalisation process) was inextricably linked with the whole concept. It was suggested that for expansion, firms would first target markets which were psychically close, and would venture into “distant” markets with the progressive increase in knowledge and awareness of the market (Johanson and Vahlne, 1977). It may be evident here that the uppsala model relies heavily on knowledge which be gained through personal experience. The concept of objective knowledge (which can be learnt without personal experience of the situation) in international marketing was largely ignored in the initial extension of this model in 1977. However it is important to note that, the concepts on which the model was based has been further reviewd and updated since the inception of the idea. Furthermore this theory of stages in international involvement of firms has been found support in several following reaseach and studies (Bilkey and Tesar, 1977; Cavusgil, 1980). The following additions to the preliminary theory of 1977 were made by the authors in 1990; they stated that when firms with large resources were likely to take larger internationalisation steps and that appropriate market knowledge can be gained in ways other than through experience provided that the market conditions are stable. Despite these additions the theory is flawed in several assumptions it makes which shall be discussed now. Criticism of the model; need for an alternative Johanson & Vahlne (1977, 1990) model suffers from some major drawbacks. These limitations have not been adequately addressed even in the comprehensive explantion extended by thew authors in 1990. The uppsala model is criticized as being applicable only for preliminary steps in the overall process of internationalisation. Furthermore market considerations such as cooperation in entry modes of the establishment chain and competition from local competitors or a global market leader with respect to international commitments is not included in the model. Indeed the latter has also been recognized by confirmed by Johanson & Vahlne (1990). In addition the idea that the initial market entry will always be by export through an independent middleman as suggested by Johanson & Vahlne has not appreciated in a number of studies. Turnbull (1987) found that considerably large companies with extensive international experience and obligations used a range of export marketing approachesin their international ventures. That is to say that it is not essential that initial market entry would always be dependent on export through an independent middleman. It also appears that the model is limited in its general approach. It is based on the use of just one explanatory variable (experience, or knowledge gained through experience) which could not be cannot be the only determinant of the choice of operation mode of an enterprise. Furthermore its application is limited to manufacturing enterprises alone. Technological enterprises and sevices sectors would not be accounted for on the basis of this model. Studies reveal that over the last two decades the services sector have become the chief segment of the world economy (UNCTAD, 1996). This sector has seen much internationalizion and in the mid 1990s they accounted for about 65 percent of worldwide foreign direct investment flows. Since outputs of this sector are often non tradeable, foreign direct investment is regularly one of the first modes of internationalization for the services firms. The traditional Uppsala theory, which focuses on manufacturing, is centred on the idea that exports precede foreign direct investment (UNCTAD, 1996). Hence the Uppsala model of internationalization is found lacking in its universal application for industries. Moreover, it was increasingly being observed that empirical research since the 1980s was finding a significant numbers of firms that did not follow the internationalization course envisaged by the Uppsala model. This trend became more significant in the 1990s (Bloodgood, Sapienza, & Almeida, 1996; Coviello & Munro, 1997; McDougall, Shane, & Oviatt, 1994; OECD, 1997) Overall it could be surmised that Johanson and Vahlne’s Uppsala model while providing a good foundation for studying and perhaps managing the initial stages of international business ventures does not reflect the contemporary market trend. It can only be considered a ground for further research and development in the field of entrepreneurship and international business. Alternate relevant paradigms A need for a dynamic theory relevant to the process of firm internationalization in the context of the economic conditions for the years post 1990 was indeed the need widely acknowledged. Market situation and hence firm activities had changed since the initial inception of the internationalisation concept of the 1960s and 1970s. Firms which were starting international activities from the very beginning were reportedly on the rise (Oviatt and Mcdougall 1994, Knight, and Cavusgil, 1996). It was a new form of organizational behaviour in terms of internationalization and the need to either develop new theories or develop existing theories to incorporate the changes in the market and firm behaviour was paramount. A term which emerged in the literature, which could be used to define such novel approaches in the internationalisation scenario, was International new ventures (Oviatt and Mcdougall 1994). It was a broad term, encompassing several modes of entry into the international market which differed considerably from the ideas of traditional exporters and small step concept of the previous decades. Other novel ideas were referred to as ‘born globals’ (Chetty and Campbell-Hunt 2004, Knight, and Cavusgil, 1996) or ‘instant internationals’ (Miles and Batez 1999).Such novel concepts were a marked advancement in the existing awareness and literature of international ventures. Previous theories such as the Uppsala concept had relied heavily on supposition and assumptions that could only be applied more than two decades back. Organisation structures, and indeed the market trends had changed since then and the International new venture concept would need to reflect the same. While there are no clear distinctions for the various alternate concepts that emerged the Oviatt and Mcdougnall international new venture seemed to become increasing popular. Oviatt and Mcdougall’s theory This theory marked the intersection of two well-established lines of research, international business and entrepreneurship. The idea behind the new concept extended by Oviatt and Mcdougnall (1994) was not altogether new. As early as 1988, there had been suggestions of “international entrepreneurship” Morrow (1988). Infact Zahra and George (2002) suggest that the term “international entrepreneurship” was first noted in the paper by Morrow! And indeed an ideal way to describe Oviatt and Mcdougall’s theory of international ventures would be to term it “international entrepreneurship”. Prior to describing the basic framework of the concept of international new ventures it is essential to understand how internationalisation is defined by the authors of the theory. Their definition is drawn from previous work by Welch who states that increasing involvement in operations outside the home country is critical for internationalisation (Welch & Loustarinen, 1988). Inputs and/or outputs of the firm with respect to parts of its value chain when required form a important part of their definition. This is considerably different from the Uppsala model which overlooked such considerations. A good example of the new concept is the research and development work which may be done in another country for the design of its initial product. Also selling of its product in a number of foreign countries over time may also be included. Thus, Oviatt and Mcdougall’s theory of international ventures incorporates a multidimensional view for the whole process of internationalisation in firms. It is hence reflective of the multi-disciplinary nature of both entrepreneurship and international business. McDougall (1994) defined International New Venture as “… a business organization that, from inception, seeks to derive significant advantage from the use of resources and the sale of outputs in multiple countries”(p. 49). While the interpretation as well as empirical operationalization of each of the involved concepts in this definition can be subjected to much scrutiny, its importance relative to implicit managerial knowledge of foreign markets and industry trends seem to be generally well accepted. It is a proposition which has an important role as determinants of the speed, breadth, and mode of internationalization, and the role of emerging firms in this respect. Questions in the present context As may be evident now, there are considerable difference between Johanson and Vahlne’s Uppsala model and Oviatt and Mcdougall’s theory of international new ventures. While both theories relate to the same domain of international operations of firms, they draw from different market settings in terms of the time gap. The rapid changes in technology, services, and organisational structures may be in part responsible for these differences. However the political, economic and social structures should not be ignored in order to have an unbiased review of the concepts. The evolutionary pattern suggested by internationalization stage theories (Johanson & Vahlne, 1977) present a continuum hypothesis that moves through stages of exporting, licensing, alliances and consequent start-ups. Evidently in such theories a firm’s proximity to its markets and customers is conducive to rapid learning and also for making incremental progress. However, many new ventures are increasingly skipping some of these phases or stages of expansion. Such firms undertake high control transactions (e.g. acquisitions) or extensive global integration that requires close interactions with various international market venture capitalists. A new venture firm using high control entry modes in international markets is hence more likely to experience more steep learning gradients than those using the older modus operandi. While an increasing numbers of new ventures showing proactive internationalization (OECD, 1997) the global orientations which would be responsible for such an occurrence would need to be questioned. It would be important to understand the predictors and plausible explanation for the early internationalization trends on the rise. It would be possible to deduce that there is a directly proportional relationship between new ventures use of high control modes of international market entry and the overall pace of technological advancement and learning. In addition opening up of the international market in recent years has provided for internationalisation opportunities. The trends of international new ventures could then perhaps explained by the ability of firms now to effectively leverage the knowledge gained from foreign operations despite not having personal /experience based knowledge (McDougall, Shane & Oviatt, 1994). The deliberate incremental and considerably risk disinclined internationalization process described by the Uppsala model may apply best where competitive industry conditions are not completely international or perhaps only domestic. In the present market or industrial scene such competition insulated frameworks would be exceptionally uncommon. The relevance of the Uppsala model hence may be considered to be on the decline for a large proportion of present day firms in both the manufacturing and services sector. However it may be important to note that a significant number of firms (in the range of 20 %) still use the incremental stages of internationalisation and the Uppsala model hence still has some relevance despite its drawbacks. This is in contrast to the 1996 scenario where about 40% of the firms demonstrated such a trend (OECD 1997) and the Uppsala model could be considered as having been more relevant in the context. However the link between decline in relevance of this model and increased acceptance of the International new venture concept still remains to be ascertained. An integrating theory- the way to go! A possible confluence between Johanson and Vahlne’s concept and Oviatt and Mcdougall’s theory of international new ventures is observed in the networking concept. Attempts to draw upon network theory in a paradigm of relevance to international ventures are becoming increasingly prevalent in the literature. Oviatt and Mcdougnall in 1994 stated that the network structures are critical components for firms involved in international ventures. Furthermore very recently in 2003 Johanson and Vahlne extended a network model with a view to integrate the existing theories in the field of internationalisation. Both organisational and personal enterpreneural have been examined and critically analysed as a powerful framework for increasing levels of internationalisation worldwide. Two aspects of the Uppsala model that are particularly relevant were the knowledge or learning process central to the concept and the influence of human resource with respect to firm internationalisation. In general depending on the knowledge of managers/entrepreneurs about market situations, decisions regarding internationalisation are stepped up (Johanson & Vahlne, 1977). Further more Oviatt and Mcdougnall (1999) identified this aspect to be an important aspect of their process theory and also acknowledged the relevance of the Uppsala hypothesis in this respect. There is much evidence of case studies in the literature which suggest that both services and technolgical industries would stand to benefit from such attempts of integrated network theories. None theless it is important to recognize that such unification attempts need further development as they have not been subjected to rigorous empirical tests. However the potential of unification of the several concepts is a positive indication for the field of international business. Conclusion The field of internationalisation has a come a long way from the initial concepts of internationalization process theory which were based on firms demonstarting Internationalization in a slow and rather incremental manner. (Johanson and Vahlne, 1977, 1990). Since there has been enough time to analyse and study the critical assumptions underlying these internationalization process models, and to empirically examine the concept, several paradoxes and disagreements have now emerged relating to them. exhaustive evaluations of these export stage models have questioned their sufficiency and impressed the need for novel idead (Andersen 1993). The consequent result was the theory of development of international new ventures or start-ups that, from their inception, engage in international business (Oviatt and Mcdougnall 1994) . However time and changing industry trends have witnessed further modifications and perhaps evolution of the definition of this concept . A most contemporary definition is provided by much more widely-accepted and comprehensive definitions of International Entrepreneurship McDougall and Oviatt (1997,1999), or Autio (2005) or Zahra and George (2002, p. 11). To quote the last of them international enterpreneurship would be “the process of creatively discovering and exploiting opportunities that lie outside a firm’s domestic markets in the pursuit of competitive advantage” Thus each theory has made a significant contribution to the research on the area and has been a building block for a newer and more contemporary idea, which in turn has led to the evolution of a multidimensional conceptualisation of diversified list of frameworks and co-existent effective approaches. References Autio, E. (2005) “Creative Tension: The Significance of Ben Oviatt’s and Patricia Oviatt, B. And Mcdougall, P. 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