(PDF) The Uppsala model on evolution of the multinational

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Running head:Dissertation - Literature Review ChapterDissertation – Literature review ChapterName of the Student: Amit VermaName of the University: Auckland University of TechnologyStudent ID: 17976607
1Dissertation -Literature Review Chapter1.Literature Review1.1 IntroductionBusinesses grow when they decide to expand their business in other countries (Han,2016; Wang, 2013).The aim of this chapter is to review the research on the entry of businessfirms in the foreign market. In order to do this, the scholarly work in the area of the widelyaccepted frameworks of firms’ internationalisation such as OLI paradigm and Uppsala Modelare presented first.Then scholarly work in the area ofMultinational Enterprise (MNE) entryinto new national market is presented second. Then business expansion to other countries ispresentedfollowed by the review of extant literature oncompetitivedynamics andrepositioning and Porter’s five forces of competition and generic competitive strategies arediscussed and Competitive Responses and Word Responses will be the final discussion.1.2Uppsalamodel and OLI paradigmThe Uppsala Model explains the different types of characteristics for theinternationalization of the business organization. The change in the economic and regulatoryenvironment of the business has enabled a huge change in the business format.The OLIparadigm also known as the Electric paradigm theory is an extension of theinternationalization model. It consists of the advantages of ownership, location andinternationalization.As multinational companies seek to increase their international presencethrough provision of online sales services, local firms have adopted different techniques tocounteract the competitive force. Brick and mortar retailers face difficulty when attempting tointernationalize their operations compared to online retailers who internationalizeimmediately after commencing operations.To have the proper guideline on how to expand thebusiness, there are some theories, which direct the process.There are some dominant theoriesregarding the way in which international businesses expand, including the staged (Upsalla)model, and eclectic paradigm (OLI). According to Johanson and Vahlne (1977), the UppsalaModel details sequential steps which are often taken by companies in their internationalexpansion, expanding in both number of markets and operational commitment to thesemarkets over time as they gain experience in the market and in internationalizing (Hodnett&Hsieh, 2012; Ito &Komoriya, 2015). According to the proposition of Uppsala, expansionshould start in physically close markets. After continuous growth, the business can then seekdistant investment (Zekos, 2003). MNE’s can enter the market in either indirect or FDImodes (Rathert, 2016). According to Dunning’s (2001), eclectic paradigm (OLI) modelsuggests that businesses consider ownership, location, and internalization advantages when
2Dissertation -Literature Review Chaptermaking decisions about whether to enter a new market via a FDI mode, or a less direct mode,such as exporting. These two foundational theories of international expansion help to explainthe way in which firms internationalize, choose market and entry mode.Thus the differentauthors have quite well explained the theories however the absence of any practical exampleshas limited the scope of the research.1.3 MNE entry into a new national marketMultinational enterprises need to expand in the global market so that it can earn profitin the business. However, the entry into a new market can be difficult owing to the fact that itneeds to analyse certain environmental factors that dominate the business.According toChmielewski (2010), the presence of an MNE lies in its capacity to disguise externalities byassembling resources and activities at a more proficient rate than local markets do. Han(2016), also stated that the entry of a new business into a country affects its national marketin a manner that could be disruptive for the incumbent.Research shows that before makingentry decisions, many factors are considered, such as potential returns (Al-Habash, Mmieh&Cleeve, 2015), and the ability to finance and establish the new business, in a contextcontaining different market policies (Ayden, Demirbag&Tatoglu, 2018). Researchers haveidentified that making entry decisions regarding both country choice and choice of entrymode also requires proper understanding of market forces. According to Beleska-Spasova,Loykulnanta and Nguyen (2016), strategic planning is the primary ingredient in survivingunpredicted market forces. As described by Ayden, Demirbag and Tatoglu (2018) a companyneeds a competitive advantage in every market that they operateto keep pace with rivalry. Akey aspect of which is being able to anticipate to competitive rivalry also a company needs acouple of aspects like good customer relations, enhanced brand image and offer qualityproducts and services so as to gain the competitive edge in the market and industry at large.The presence of foreign online retailers may trigger economic development by stirringdomestic competition. The competition in the host country leads to more productivity,excellent resource allocation and low prices and price stability. In addition, the increasedcompetition spurs investments by firms in plants and other capital investments as the straggleto gain a competitive edge over their rivals. It also helps the firms to advocate for newtechnologies and adopt new practices that lead to enhanced services and products. Onlineretails possess quite a challenge to the local retailers as they tend to have better services thanthe host competitors. This is even more given the entry of a multinational company to the
3Dissertation -Literature Review Chapterhost country (Durnev, 2010; Ernes, 2003Dikova&vanWitteloostuijn, 2007; Fleury & Fleury2014).Previous research on new market entry has focused on the mode of entry into the newmarket, and the opportunities of internationalization (Han, 2016; Hennart, 2009;Kabiraj&Sinha, 2014). According to the authors, some of the advantages of new market entryare increased profit resulting from low competition and therefore control of significantmarket share (Dikova&vanWitteloostuijn, 2007). Additionally, the business spreads risks toother areas. Instead of operating in one area, the business benefits from diverse culture andtastes (Manea& Pearce, 2006).Hence, based on the analysis of the market, it can be said thatthe factors that affect the performances of the MNEs in the organisation can be analysed.From this particular section, it has been seen that the MNEs can help in the development ofan economy but the entry to new markets can be challenging. Analysis of market forces isrequired to gain entry into the international market. However, the gap that exists in theresearch is the fact that the mode of entry in the international market is more competitive thanit used to be.1.4 Factors affecting MNE PerformancesGenerally, the internal and external factors of an environment affect the progress of aparticular organisation. This includes proper analysis of the factors that are involved in themarket and the manner in which it can be used to analyse the effectiveness it has on theeconomy.There is also significant research on the factors that affect MNE performances oncethey enter the new market (Standing, 2011). According to Blomkvist, Kappen and Zander(2010), there are 4 different factors which are important in ensuring the success of the marketentry they arepolitical factors, technological changes, information technology and socialfactors. In areas where political instability is witnessed, the chances of business thriving arevery minimal (Chen & Johnson, 2015). Duanmu(2006) also affirms that technologicalchanges contribute to business performance in new markets. Information technologyinfrastructure and technical capabilities determine the prosperity of a new entrant in themarket. Social factors such as religion and wealth also have a crucial role in securing demandfor goods and services (Duanmu, 2006).It has been seen that these factors affect the hostcountry in a positive and negative manner. The analysis has shown various modern dayfactors that are involved in making an impact on the business. At the same time gaps are
4Dissertation -Literature Review Chapteridentified in the proper application of the factors that can help the organizations understandthe manner in which the internal factors also affect the business.1.5 Impacts on Host CountryEvery country needs to analyse the pros and cons that are involved with the existenceof MNC. In particular, the host country needs to adapt to the changes that are brought aboutdue to the existence of the organizations in the country.According to Brouthers (2013), entryof an MNE into anew national market creates innovation and change in themarket.Theresearch carried out by Kabirajand Sinha (2014) stated the importance of MNEsentering the new market, they further explained some of the advantages of MNE entering anew national market. One the hostcountrybenefits from the skilled foreign labour. Second,the host country benefits from the inflow of foreign capital, which MNE brings in. Third, thehost country can utilise its idle human and physical resources, whichcan results in theincrease in national income of the host country fourth, the entry of MNE could result the endof local monopolies(Kabiraj& Sinha, 2014). New technologies are introduced in the country,which is used to boost other sectors of the economy. Moreover, the new businesses createemployment, improving the living standards of the locals(Ernes, 2003). The government ofthe host country collects more returns due to the high circulation of money in theeconomy.Challenges are called forth by a new market entrant to a national condition. Theygive government the benefits of taxes received and share a good stand in the economicsituation the country has at present.The analysis provides a systematic analysis of thebenefits that the host country may get with the introduction of new organisations. At the sametime, the culture of the country may change due to the urge of the people to buy andimplement recent trends in the society.1.6 Age of Competitve DynamicsIn the modern world, every organisation wants to gain profit and recognition in themarket. The urge to gain control in the market keeps an organisation performing. Thiscompetativeness is seen in organisations that are willing to establish itself in the internationalmarket.The new entrant market is then driven to challenge incumbent market of their powerand capability in acquiring and achieving excellence in the economy the host country sharedwith them(Ernes, 2003).According to Brouthers (2013), an MNE entry into a host countrycould have a multi-layered impact on the host country's business. One example could be bylowering the price of goods and services, which could create tough competition for the local
5Dissertation -Literature Review Chaptercompanies (Buckley &Casson, 2010; Demirbag, McGuinness & Altay, 2010). When amultinational enterprise enters a new national market, it has implications for the competitivedynamics of the host country businesses and industries, an area which is less well researched(Durnev, 2010; Ernes, 2003). The weaker companies find it hard to survive due tocompetitive advantages including economies of scale, which the MNE often brings to themarket (Dikova&vanWitteloostuijn, 2007). Although it is beneficial to the country looking atthe tax collected, there are also challenges faced by local businesses, such as increases inmarketing costs (Dimitropoulou, Pearce &Papanastassiou, 2009).According to Parboteeah and Cullen (2017), an MNE can disrupt conventional retailplans of action of the host country in various ways. MNE entry into the market of a hostcountry can affect the profitability of the local retailers, for example, retailer margins couldfall, along with the profitability and share prices of the local retailers (Demirbag,McGuinness & Altay, 2010). The two major impacts on competitive dynamics in the hostcountry by an MNE is that, an MNE could affect the host countries retailers’ sales growth tomoderate or decay, as an MNE start taking up the volume share. The second reason MNE’sattention on low costs forces local retailers to decrease their costs, which affects negativelyon the host country’s business line (Fleury & Fleury, 2014).1.7 Online RetailIn the modern world, technology plays an important role in business. Most businessorganizations focus on the use of technology and online mode of making transactions andestablishing relationship with customers. In the case of retail stores, the online application fthe store is hugely popular as people can choose from a wide variety of products.However,these studies are focused on traditional bricks and mortar retailers, rather than online platformretail. Information technology has facilitated businesses to expand internationally, resulting insome suggesting these theories of internationalisation are in need of revision (Zekos, 2003).Online platforms have facilitated entry of new markets by offering opportunities to exploreglobal markets (Herrmann, 2005; Abo, 2012). Others have also explored how online retailhas changed retail competition (Morgan, 2009), but what has not been well researched is theimpact of digital international expansion on local bricks and mortar retail dynamics in thehost country (Papanastassiou, 1997). Moreover, there is very little literature overallconcerning the impacts of Multinational Enterprises entry into developed markets (Zeng&Glaister, 2015).
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