Uppasala model for internationalisation of business operations is not valid for ________
Services organisations
Understanding the Uppsala Model of Internationalisation
The Uppsala model, developed by researchers at the University of Uppsala in Sweden, describes the process of internationalisation of firms as a sequential and incremental process. It suggests that firms gradually increase their international involvement as they gain experience in foreign markets.
Key tenets of the Uppsala model include:
- Incremental Steps: Firms move into international markets in small, gradual steps rather than making large, rapid changes.
- Learning by Doing: Experience gained from operating in foreign markets is crucial for future international decisions.
- Psychic Distance: Firms tend to enter markets that are 'psychically' closer first (markets that are similar in language, culture, political systems, etc.) before venturing into more distant ones.
- Establishment Chain: Firms move through different modes of foreign market entry, starting with irregular exports, then through export via independent representatives, sales subsidiaries, and finally, manufacturing/production facilities in the foreign market.
Applying the Uppsala Model to Different Business Types
The Uppsala model was primarily developed based on studies of Swedish manufacturing firms internationalising. Its principles align well with businesses that produce physical goods.
- Manufacturing Organisations: These firms produce tangible goods. The model's emphasis on sequential market entry (export, sales subsidiary, production) and learning is highly relevant to managing production and distribution complexities of physical products in foreign markets.
- Agribusiness Enterprises: Similar to manufacturing, agribusiness often involves producing and trading tangible agricultural products. The challenges of distribution, logistics, and market adaptation in foreign markets align with the incremental approach suggested by the model.
- Trading Enterprises: Businesses primarily involved in importing and exporting goods also fit within the scope of the model, as they deal with tangible products and benefit from gradual expansion and learning in different trading markets.
Why the Uppsala Model is Less Valid for Services Organisations
Services organisations differ significantly from goods-producing firms due to the unique characteristics of services:
- Intangibility: Services cannot be stored, transported, or inspected before consumption in the same way as goods.
- Simultaneity: Production and consumption of many services occur simultaneously, often requiring the service provider and the customer to be present at the same location.
- Heterogeneity: The quality and delivery of services can vary significantly.
- Perishability: Services cannot be saved; if not used, they are lost.
These characteristics make the traditional sequential, distance-based internationalisation process described by the Uppsala model less directly applicable to services. For example:
- The need for simultaneity often requires a direct physical presence (Foreign Direct Investment - FDI) much earlier in the internationalisation process than the Uppsala model suggests for goods firms.
- Psychic distance might be less about geographical or cultural distance and more about regulatory differences, professional standards, or trust-building, which may not follow the same incremental path.
- Some services, like online consulting or software-as-a-service (SaaS), can reach global markets instantly without the need for physical presence or gradual psychic distance reduction.
Therefore, while some aspects of learning and commitment increase might still be relevant, the core sequential and distance-based stages of the Uppsala model are often less valid or require significant modification when applied to services organisations.
Conclusion
Based on the nature of their operations and the characteristics of their offerings, manufacturing organisations, agribusiness enterprises, and trading enterprises generally align better with the incremental internationalisation process described by the Uppsala model. Services organisations, however, often face different challenges and opportunities that make the model's sequential and distance-based stages less universally applicable or valid.
| Business Type | Applicability of Uppsala Model | Reasoning |
|---|---|---|
| Manufacturing Organisations | Generally Valid | Deals with tangible goods; sequential entry & learning relevant. |
| Services Organisations | Less Valid | Intangibility & simultaneity require different entry strategies; less reliance on physical distance. |
| Agribusiness Enterprises | Generally Valid | Deals with tangible products; distribution & market learning relevant. |
| Trading Enterprises | Generally Valid | Involves physical goods trade; benefits from gradual market knowledge. |
Revision Table: Key Concepts of Uppsala Model
| Concept | Description |
|---|---|
| Incremental Internationalisation | Gradual increase in foreign market involvement. |
| Learning by Doing | Gaining experience in foreign markets to inform decisions. |
| Psychic Distance | Factors preventing/distorting flow of information (language, culture, politics, education, industrial development). |
| Establishment Chain | Sequence of entry modes (export, sales subsidiary, production). |
Additional Information: Alternatives and Extensions
While the Uppsala model is influential, other theories exist to explain internationalisation, especially for firms that do not follow the incremental path (e.g., "born globals" or firms entering distant markets early). Extensions to the Uppsala model itself have also been proposed to incorporate factors like network relationships and opportunity recognition, acknowledging that internationalisation isn't always a purely linear, sequential process.
Understanding the limitations of models like Uppsala helps in analysing the diverse ways businesses, particularly those in the services sector or those leveraging digital technologies, internationalise in the modern global economy.
Important Questions from Modes of entry into international business
The mode of joint venturing in international business that allows a company to conduct business in another country whose laws discourage foreign ownership is known as:
In which one of the following modes of entry into foreign markets risk and profit potential are the highest?
- The exporting firm is termed 'rider' where the other firm with an established distribution channel in the target country is termed as 'Carrier'. This phenomenon is known as:
