The Uppsala Internationalization Process Model - Essay Example

?Internationalization Process Introduction Outward Direct Investment (ODI) is a business strategy, which helps the domestic company to expand on a global scale. This applies techniques through green field investment, merger, acquisition and expansion of an existing foreign facility. The employment of direct investment is a natural progression for companies. The green field investment occurs when the multinational corporations plan to enter into a developing country to start a new venture, operation facilities etc, for further development of the company. Outward investment also includes mergers and acquisitions and it is observed that ODI is steadily increasing due to the increasing productivity of the organizations. However, it has been observed that only productive companies can invest in foreign country operation facilities. There is a huge difference in the steadiness and competitiveness of the companies, which results in different productive indigenousness in the host countries. The study will deal with the various outwards opportunities faced by the Chinese organizations in the last two decades from the developing and developed countries. The recent evolution procedure in internationalization process has helped in the significant growth in the outward foreign direct investment. The developed countries are the main source of ODI for the developing economies, which is increasing steadily. It has been observed that China has been the leading source of ODI since the 1990’s and it has also helped in cross border investment facilities through the Foreign Direct Investment (FDI) (Vox, 2008). It has been observed that among all the developing economies, China is one of the highest outward investor and the ratio of outward China has been 17 percent. China earns most of its ODI earnings from its manufacturing operations overseas, joint venture mining activities and also by setting up increasing sales office in the overseas operations (Ning, Lane and Sutherland, 2010). The Uppsala Internationalization Process Model As per authors Johanson & Wiedersheim (1977 cited in Ning, Lane and Sutherland, 2010) the internationalization is an incremental process, which involves no regular export activities, export through independent representatives, production and sales subsidiary. These authors developed a theoretical model regarding the internationalization process model. The internationalization process model focused on the development of the individual business organization and the gradual acquisition, integration of activities and the utilization of the operational facilities for overseas expansion. The basic fundamental aspect of the organization is that lack of understanding of the knowledge, which is an important obstacle in the development of the international operational facilities. These need to be acquired through necessary knowledge about the foreign markets, which can lower the perceived risks and the transaction costs and increase the commitment to the foreign markets (Lou and Tung, 2007).The market knowledge and the commitment will affect both the managerial and commitment decisions. It is assumed in the model that the organization strives to keep the risk taking decisions at lower level. The internationalization model assumes that the state of globalization or internationalization affects the perceived opportunities and the risks, which in turn have the potentiality of influencing the commitment decisions. The model describes the various operational phases especially at the multi stage level. In the first stage the organization’s engagement in a particular country develops according to the chain; the chain involves established market pattern of a particular company (Sauvant, Maschek and McAllister, 2009). In the second stage, the organization enters the developed economy with a psychic distance (Environment.fi, 2012). Although, there are various restrictions regarding the internationalization model which is consistent among the different actors. These elements between the actors can only be judged an understood through the experience within the interaction of the organizational members. Institutional Theory: Regulative, Normative and Cognitive Dimensions This theory depends upon the profound and resilient aspects of the social structure, which includes schemes, norms, regulations and routine (Henisz and Levitt, 2011). It also considers the process through which structures can be established through proper social behaviour. This theory has been incorporated and modified by various authors like Max Weber, Cooley and Mead and was mostly formulated in the end of the nineteenth century (Henisz and Levitt, 2011).However, the contemporary theories focus more on the rationality forms because the economic, legal, psychological perspectives of the organization, which are increasingly laying emphasis on the mechanisms, facilitate cooperation to reduce the incidence of opportunism by taking the counterparties into consideration that are sustained values for future transactions also known as relational transactions (Ardalan, 2009). As compared to the opportunistic efforts to diversify the available resource between the counterparties and this framework provides challenge that is critical to the performance of the organization (Barrett, Donaldson and Pearson, 2009). The institutional framework for defining the support of mechanisms for the means end chains includes the broader context of the cognitive, normative, regulatory aspects of the institutions which help in shaping up the nature of the organization, competition and also of the markets (Lamb, Hair and McDaniel, 2011). This framework helps in support and creation of the structures that helps in synchronizing with the insuring accountability, acquiring legitimacy and securing social fitness that helps the organization to maximize the profits (Alexander, 2002). Eclectic Paradigm The Eclectic theory of paradigm, which is also known as OLI Model framework, is further development of the internalization that was formulated by H. Dunning in the year 1980. The theory of internalization is based on the cost transaction theory, which is made within the institution. When the transactions costs are made within the institution, the free market is higher than the internal costs. This process is also called internalization. Three kinds of advantages are associated with the international production, which is also called Dunning’s Eclectic Theory. There are four specific components of the Eclectic theory which are as follows: Ownership Specific Advantages: It refers to the organizations access to the tangible and intangible sources that the foreign competitors do now acquire or possess. Internalization Advantages: It refers to the advantages that help in adding value to the organization from its personal internal use of its specific advantages. Location Specific Advantages: It refers to the advantages that are achieved through location of product or services in domestic or overseas location. The explanation for international trade is more of a country enterprise that posses certain specific advantages and certain specific incentive advantages to internalize them. The organization finds it absolutely profitable to exploit the advantages and the disadvantages outside the national boundaries, which are more likely to engage in FDI (Stanford Business, 2013). A country’s involvement in the international direct investment becomes a regular part of the internalization and ownership process relative to the other nationalities and the specific location endowments relative to the other countries. The ownership and the location advantages are not detachable and are quite separate from each other from a methodological perspective. Multinational Enterprises Perspective from Developed Market Perspective The multinational enterprises play an integral role in the development of various emerging markets and have received due attention from various political and economic analyst (Taylor, Tower, Der Zahn and Neilson, 2008). Firstly, the perspective of the analyst and management is essential in understanding the importance of MNE in the economy (SmallBiz Connect, 2013). Secondly, the application of theories and research methodologies revolving around internationalization helps in the development of the management research (SmallBiz Connect, 2013). The role of MNE is important for the policy makers and the organization, as they contribute significantly to the economy. The impact of the MNE is equally important and is quite relevant to managers, which help in utilizing certain opportunities that is beneficial for the stakeholders and shareholders together. Policy making is essential because it helps the MNE to operate on a global scale and develop new strategies with the help of optimum utilization of resources. Internationalization Process from the Chinese Perspective The Chinese companies are widely recognized for their acquisitions and then penetrating into the foreign markets. The effectiveness of the organization can be explained by the traditional and contemporary theories which incorporate suitable marketing strategies (Vanasco, 2000). As mentioned before that the Chinese companies have the highest internalization and internationalization procedure which include the Chinese MNE to acquire various markets, resource. It also requires the organization to seek innovations for investment purposes. The main objective of the Chinese enterprises is to globally seek a strong footing and also gain worldwide recognition. Conclusion It has been observed that in spite of the challenging economy and the varied political risk associated with the projects, the success of the Chinese economy has been largely viewed as an interesting concept (Queensland Government, 2013). This is because the Chinese MNE have been able to utilize the resources at the optimum level and been able to develop high level strategies for the accomplishment of tasks and objectives. Rapid technological change has led to a drastic change of face of the Chinese economy. Thus, it is observed that internationalization of the Chinese enterprises is largely influenced by the Eclectic Paradigm and Institutional theory which touches cognitive, regulative and normative theory. Reference List Alexander, E.A., 2002. The effects of legal, normative, and cultural-cognitive institutions on innovation in technology alliances. Management International Review, [e-journal] 52(6). Available through: [Accessed 24 August 2013]. Ardalan, K. (2009). Globalization and culture: Four paradigmatic views. International Journal of Social Economics, 36 (5), 513-534. Barrett, J., Donaldson, W., Kiwiets, E. and Pearson, M., 2009. Marketing. Cape Town: Pearson South Africa. Environment.fi, 2012. Legal Obligations for Businesses. [online] Available at: < http://www.ymparisto.fi/default.asp?node=18314&lan=en > [Accessed 24 August 2013]. Henisz, W.J. and Levitt, R.E., 2011. 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