International Business Strategy: An Analysis of the Uppsala Model

This report provides a comprehensive overview of the Uppsala Model of Firm Internationalization, a key framework in international business strategy. It begins with an introduction to the model, detailing its incremental approach to internationalization and its four distinct stages: no regular export activities, export through independent representatives, sales subsidiary, and manufacturing or production. The report then delves into the two versions of the model, highlighting the older version's focus on market uncertainty and the newer version's emphasis on relationships and networks. It discusses the state and change variables associated with each version, including market commitment, knowledge, trust building, and experiential learning. The report also explores the network perspective of the updated Uppsala Model, emphasizing the importance of strong networks for success in foreign markets. Finally, it provides examples to illustrate the model's application in explaining the internationalization process, particularly in the context of Taiwanese textile and electronics firms, and how the model aids in understanding market entry decisions and the role of psychic distance.

Running head: INTERNATIONAL BUSINESS STRATEGY
International Business Strategy
Name of the Student:
Name of the University:
Author Note:

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Executive Summary:
The report is a discussion on Uppsala Model of the Internationalization of the firms. In
explaining the internationalization, the report not only gives a brief description of the model but
the way it helps in internationalization of the firm in four unique stages. Through the report, one
also comes to know that there are two different versions of the model. Further, the report also
discusses about the state side and change side variables of internationalization explained as per
the two different versions of the model. There is also explanation of the extent to which the
model plays a role in the process of internationalization of the firms with the help of examples.

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Table of Contents
Introduction:....................................................................................................................................3
Uppsala Model of Firm Internationalization...................................................................................3
Explanation to what Extent Uppsala Model Helps in Understanding Internationalization Process
of Firms............................................................................................................................................8
Conclusion:....................................................................................................................................10
References:....................................................................................................................................10

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Introduction:
The report gives an overview of the Uppsala Model of Firm Internationalization. In order
to do this, the report discusses about initial proposal of the Uppsala Model. There is also
mention about how it helps in explaining the internationalization process with the help of four
stages. The report also gives us an overview of the two versions of the Uppsala Model, where the
older version focuses on the uncertainty level of the market whereas the newer version focuses
on relationships and networks. The report in order to explain the internationalization process puts
forward the state side variables according to both the versions, There is also mention of the
change side variables based on both the versions. The report also discusses about the network
perspective of the new Uppsala Model. Further, the report also takes examples to explain the
extent to which the Uppsala Model contributes in explaining the internationalization process.
Uppsala Model of Firm Internationalization
The first proposal of Internationalization of an individual firm on an incremental basis
made by the researchers of Uppsala University of Sweden and considered as the Uppsala Model
of firm Internationalization. The Uppsala Model depends on incremental decisions, the
successive steps of which depend on learning and acquisition of knowledge on the foreign
market and operation (Vahlne and Johanson 2013). The Uppsala Model of Firm
internationalization process has four stages that explain the impact of the current environment of
the firm on the perception effect of learning and opportunity. The four stages includes export
activities not undertaken regularly, export through independent representatives, sales subsidiary

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and manufacturing or production. Most authors consider the model dynamic since the result of a
single process serves as the input for the processes of the next step that will provide input for the
upcoming process and the process continues. However, the circular relationship that exists
between the concepts makes a statement that the process does not indicate a beginning or end.
Thus, the Uppsala Model ensures in making a distinction between the state and change variables
where each of them identified to have two aspects. There are however two versions of the
Uppsala Model, one is the older version and the other is the newer version. The old Model
focuses on specific firms and the activities it has in the foreign market and the level of
uncertainty in the market, the new model puts more focus on networks and relationships (Shane
2012).
Figure: The Internationalization Process Model
Source: (Johanson and Mattsson 2015)
The State Side:
The state variables in the original model refer to the aspects that have a fixed nature on a
temporary basis that refers to the present position or situation. However, since the process of
internationalization take place within the network of the firm therefore, the current position of

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the network forms an important aspect. Based on the previous version of the model, this aspect
only referred to market commitment (Costa e Silva et.al 2012). However, the updated model put
forward an argument that market commitment was a narrower concept so the model made an
inclusion of the current relations of the firm. These relations characterized by commitment, trust
and level of knowledge. Thus, within this position, the firm can not only seize opportunities of
the market but also develop knowledge.
The second aspect of the state variables focuses on the opportunities and knowledge.
Knowledge refers to the present knowledge on the foreign market within the firm. However, this
knowledge is critical for recognizing opportunities (Zhu, Wittmann and Peng 2012). However,
according to the present Uppsala Model a firm is able to recognize the opportunities that lie
outside the boundaries in the context of network. Thus, the knowledge of internal capabilities is
important as resource knowledge within the entire network.
The Change Side:
The change variables in the original model refer to the aspects of the change that included
current as well as committed decisions. The term relationship added to commitment decision for
clarification of the firm’s decision on further commitment of relationships within the specific
country. However, the updated model has replaced the current activities through trust building,
creation and learning. The model considers the current activities as important but more focus is
on the outcome of current activities (Figueira de Lemos 2013). However, experiential learning
has been part of both the versions of the model though there have been additions on the various
learning processes on the newer version. This remains as the most important form of learning.
Trust building finds an importance in the newer version with the addition of the network view.

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Thus, there should be a presence of mutual trust for network or relations to be rewarding. This
implies every aspect of internationalization process remains interlinked. An international firm
gathers knowledge based on its current network position. On the other hand, the firm’s ability in
perceiving opportunities depending on which relationship commitment decisions made depends
on the entire amount of knowledge. The decisions taken again leads to the trust building, creation
and learning of the firm that will enable the firm in forming a newer position with the passage of
time. Thus, the cycle of events and actions leads to the understanding of the internationalization
process of the Uppsala Model thereby starting with high uncertainty and low commitment that
increases on an incremental basis with the increase of knowledge.
The Network Theory within the Uppsala Model
The perspective of Network added to the original version of Uppsala Model because of
increasing globalization, communication and new information technologies. However, the entry
mode and the choice of country depend on the position and network of the firm (Teece 2012).
According to the updated version of the model, business environment referred as an international
network of relations because of the fact that the boundaries between markers and firms remained
vague in the last decades. There has been instances when companies become a part of various
networks and is linked in various ways that either differ in closeness and complexity compared
to other firms. Thus, for ensuring success in the overseas market it is very necessary for the firms
to form a strong network. Therefore, the relations of a firm created through social engagements
with other existing firms where the concerned firm gets involved through sequential and
interactive development. Thus, with the evolution of the relation the firm is able to not only
accumulate knowledge but also trust. Thus, through participation in networks firms are not only
expanding their knowledge but also reducing uncertainty.

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The older version of the Uppsala Model, commitment and uncertainty are the two
determining factors that defines the risk level associated with market entry which is also the
fundamental aspect of the newer version. However, uncertainty defines the lack of knowledge of
the firm about the present market and commitment reflects the resources invested by the firm in
the foreign market (Hilmersson and Jansson 2013). The firm is not only risking but also loosing
these resources through investment and operation of such an uncertain market. Thus, through
changing the level of commitment and market knowledge a firm can have an impact on its risk
level. Therefore, the relationship between the factors determined by the following formula:
R= U x CR where, R represents total associated risk, U represents uncertainty faced and
C represents commitment.
In the early version of Uppsala Model for internationalization of firm, uncertainty
depends on psychic and physical distance between the foreign and the home market. The
physical distance however refers to the distance in geographic terms between both the markets
while psychic distance refers to the all the factors responsible for prevention of information flow
from and to the foreign market (Hutzschenreuter, Kleindienst and Lange 2014). These factors
include education, language, culture and industrial development. However, with the introduction
of the network perspective into the model, the focus on psychic factors reduced and the
importance of being a part of the knowledge accumulation network increased.
Explanation to what Extent Uppsala Model Helps in Understanding Internationalization
Process of Firms
The expansion or internationalization of a firm according to the Uppsala Model depends
on the psychic distance that determines the entry to the foreign market that is not only familiar

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but also closer to host country (Devinney 2013). The psychic distance however depends on
factors that include language, education, culture, business practice and industrial development.
Thus, the spread of international operations geographically depends on the cultural proximity
and geography of the foreign countries. However, in terms of modes of entry, the incremental
expansion for market commitment defined by the initial entry in a foreign market through a
commitment mode that is followed by higher levels of commitment in the market. On a similar
basis commitment based on the level of ownership correlates with psychic distance where entry
mode involves low ownership in the market with greater psychic distance from the home country
(Johanson and Mattsson 2015).
The Uppsala Model of firm internationalization has substantial attention and appeal
because of its largely intuitive nature, simplicity and evolutionary learning perspective that leads
to an attractive framework. Thus, in order to explain the extent of Uppsala Model in the
internationalization process of firms, multinationals from textile or electronics industry selected
(Jiang et.al 2012). Three firms examined each from textile and electronic industry in Taiwan.
These firms started as suppliers then transformed into original manufacturers of equipments and
finally ventured into the manufacturing activities in the home country. In case of the Taiwanese
firms chose the global market of China because of lower psychic distance considerations.
However, in the global market most of the firms acted as original equipment suppliers and
continued to expand in the overseas market that supported the investment pattern put forward by
the Uppsala Model (Pierce and Aguinis 2013).
Thus, the Uppsala Model helped in the identification of two unique decisions, the first
being the choice of country and second being the way of entry in addition to considering how the
choices gets determined through psychic distance (Kolstad and Wiig 2012.). While discussing

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internationalization in the perspective of Uppsala Model, the focus was mainly on how the firms
started its manufacturing across the borders. However, traditional business practice enabled the
firms in utilizing the sister concern for undertaking the manufacturing facilities abroad before the
establishment of the facilities for their own manufacturing (Poulis, Poulis and Plakoyiannaki
2013). This kind of joint ventures were a part of the predictions of the Uppsala Model. There
were instances when firms neither went through all the stages nor the safest mode of entry
ensured did they ensure the safest entry modes when psychic distance remained high. Thus, the
firm that leapfrogged stages experienced internationalization.
In the context of Uppsala Model for internationalization, if one of the textile firms of
Taiwan started finishing and dyeing firm for the customers then it would have to make an
investment that enhanced its capacity (Mura and Gašparíková 2014). As per the upgraded model,
if the textile firm instead of investing in capacity invested in network building with the
established suppliers that had excess capacity. This helped the Taiwanese company in better
internationalization with the help of the network perspective of the Uppsala Model (Kuivalainen
et. al 2012).
Conclusion:
The report by explaining the role the Uppsala Model plays in the internationalization
process of firms. In doing so, an example of a textile industry in Taiwan is drawn. Thus, based
on the Uppsala Model the internationalization decision examined in two parts, the first is the
choice of the market and the second refers to the mode of entry. However, observation from the
discussion is that the country choice and the mode of entry get determined with the help of
psychic distance. Thus, internationalization of firms according to the Uppsala Model passes

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through different investment stages that begins with export and ends with owning manufacturing
subsidiaries in countries. A firm’s entry into another country for manufacturing is examined and
anticipation was made that the choice of the country would be determined by psychic distance
and networking. The report also gives a descriptive analysis of the Uppsala Model of
Internationalization based on the four stages. In addition, there has been a mention of two
version of the Uppsala Model that accordingly explains that state side and change side variables
respectively.

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References:
Costa e Silva, S., Pacheco, E., Meneses, R. and Brito, C., 2012. The importance of second-hand
knowledge in the revised Uppsala model: can European textiles producers export to
China?. Journal of Global Marketing, 25(3), pp.141-160.
Devinney, T.M., 2013. Is microfoundational thinking critical to management thought and
practice?. The Academy of Management Perspectives, 27(2), pp.81-84.
Figueira de Lemos, F., 2013. A political view on the internationalization process (Doctoral
dissertation, Uppsala universitet).
Hilmersson, M. and Jansson, H., 2013, May. Reducing uncertainty in the emerging market entry
process: on the relationship among international experiential knowledge, institutional distance,
and uncertainty. American Marketing Association.
Hutzschenreuter, T., Kleindienst, I. and Lange, S., 2014. Added psychic distance stimuli and
MNE performance: Performance effects of added cultural, governance, geographic, and
economic distance in MNEs' international expansion. Journal of International
Management, 20(1), pp.38-54.
Jiang, K., Lepak, D.P., Hu, J. and Baer, J.C., 2012. How does human resource management
influence organizational outcomes? A meta-analytic investigation of mediating
mechanisms. Academy of management Journal, 55(6), pp.1264-1294.
Johanson, J. and Mattsson, L.G., 2015. Internationalisation in industrial systems—a network
approach. In Knowledge, Networks and Power (pp. 111-132). Palgrave Macmillan UK.