Beyond Uppsala: pathways of SME internationalization

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Beyond Uppsala: pathways of SME internationalization

Christina Saulich, Prof. Dr. Veit Wohlgemuth

Introduction

Globalization has changed the business environments for small and medium-sized enterprises (SMEs) dramatically. The increasing internationalization of markets has created new business opportunities for SMEs. At the same time the latter are faced with enhanced competition which requires new strategies and capabilities in order to remain internationally competitive. In the light of these developments the internationalization of SMEs has become an important and multi-faceted field of research.

SME internationalization refers to the “process of adapting firms' operations (strategy, structure, resource, etc.) to international environments” [2]. The past four decades of research on SME internationalization have revealed that SMEs follow different pathways to internationalization [1; 6; 8-10]. In the course of empirical studies three predominant stereotypical internationalization patterns have been identified: 1) incremental internationalization; 2) radical internationalization; and 3) late internationalization. These patterns differ in terms of the timing of entry into foreign markets, the scope, and the scale of internationalization.

This paper seeks to provide an overview of the internationalization patterns and pathways of small and medium-sized firms. The next part briefly introduces the terms internationalization pattern and internationalization pathway and provides an overview of the three stereotypical internationalization patterns that have been identified in the literature, namely, the Uppsala model, the born global model, and the born-again global model. The paper concludes with a discussion of the limitations of the three internationalization patterns and maps out two avenues for future research.

Patterns and Pathways of SME Internationalization

An internationalization pattern refers to “firm-level behavior that crosses national borders and can be evidenced at specific points in time” [10]. The term implies that firms/entrepreneurs adopt similar responses when facing specific situations. In the course of its internationalization process an SME may live through various internationalization patterns which make up its unique internationalization pathway [9]. This pathway may encompass different episodes, including de-internationalization [1]. A firm's actual internationalization pathway can hence only be analyzed through longitudinal studies with several points of measurement over time [9].

The internationalization pathways of firms are determined by a number of internal and external factors. On the one hand, the internationalization pattern an SME chooses depends on the interaction between a range of factors at firm level, e.g. internal resources or the entrepreneur's experience and mindset, and the environment in which the firm operates [9]. On the other hand, the type of industry, e.g. manufacturing or services, may also determine SMEs' internationalization patterns [1]. Proponents of network theory [3]have stressed the fact that the internationalization patterns of SMEs are linked to the networks in which they are embedded. Networks can provide access to information, finance, and human resources that promote a firm's internationalization [1]. Taken together, these factors also affect the outcome of a firm's internationalization process.

The internationalization patterns that distinguish internationalization paths can be measured in terms of scope, scale, and time lag. The scope of internationalization usually refers to the number of target countries. However, it can also refer to a range of different aspects, including the number of regions and continents, the distance between the home and the foreign markets, a ratio of less than 50% of sales within the home continent, or the diversity of nationalities among employees located in different regions. The scale of internationalization encompasses a firm's operation mode(s) and its export intensity. The term operation mode refers to the mode of entry that a firm pursues when operating in foreign markets, e.g. export or FDI. Export intensity can be measured by the foreign sales to total sales ratio [9]. Finally, the time lag indicates when SMEs start to engage in international activities. It is the primary differentiating factor between internationalization patterns [10]. While incremental internationalization is characterized by a long time span between a firm's foundation and the beginning of its international activities, radical internationalization takes place between two and five years after the firm's founding [9].

The following three sub-sections provide an overview of the stereotypical internationalization patterns identified in the literature on SME internationalization. The internationalization process of an SME is not a linear process but highly individual and situation specific [1]. This implies a) that patterns change over time and at different speeds and b) that firms live through different internationalization episodes, including de-internationalization [9].

Incremental Internationalization: The Uppsala Model

The so-called `Uppsala model' [4-6] views a firm's internationalization as a process with gradually increasing commitments to foreign markets. It helps to explain SMEs' foreign market selection and their operation modes over time. Scholars of the Uppsala model propose that SMEs internationalize in a step-by-step manner. Internationalization is understood as a self-reinforcing learning process where firms gradually gain deeper knowledge about foreign markets and in turn increase their commitment [10]. The model by Johanson and Wiedershzeim-Paul [6] identifies four stages along the establishment chain: stage 1) no regular export activities; stage 2) export via independent representatives (agents); stage 3) sales subsidiary; and stage 4) production/manufacturing. Proponents of incremental internationalization argue that SMEs first enter foreign markets with a low psychic distance and - once they have acquired sufficient knowledge - successively expand to markets with greater psychic distance [5].

In the light of more recent research on SME internationalization the Uppsala model has attracted some criticism. Despite some empirical evidence of incremental internationalization not all firms internationalize in a gradual and linear, forward moving manner. Rather, some firms engage in international activities shortly after their founding. Critics of the Uppsala model therefore argue that it is too deterministic and fails to explain the emergence of so-called `born globals' or international joint ventures [1; 10].

Radical Internationalization: The Born Global Model

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Born globals, born regional or international new ventures follow the pattern of radical internationalization [8; 7; 12]. These types of firms are “business organization[s] that, from inception, seek[…] to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries” [12]. They are committed internationalists that internationalize from inception or shortly (two to five years) after their founding. This internationalization pattern is predominant among smaller technology-intensive firms operating in highly specialized global niches. The management of early internationalizing firms has a global focus and a strong commitment to invest specific resources into international activities. Born globals perceive the world as one market place, hence, psychic distance does not determine the selection of foreign markets [7; 10].

Radical internationalization challenges the idea of incremental internationalization proposed by the Uppsala model. In contrast to gradually internationalizing tradition firms, born globals follow a proactive and more structured approach towards internationalization. In some cases SMEs access international markets before they engage in their home market. Market expansion at the international and domestic level may also occur simultaneously or domestic markets are neglected altogether [1].

Late Internationalization: The Born-Again Global Model. The third and final internationalization pattern refers to long-established firms, commonly from traditional industries, that suddenly expand into foreign markets, i.e. are re-born as globally operating firms [1; 13; 14]. In most cases, a critical incident or a combination of incidents precipitates this sudden turn towards committed internationalization. Usually late internationalization results from a change in ownership and/or management, often combined with access to additional funding and/or networks. Sometimes firms suddenly internationalize in order to follow a domestic client into new markets or as a response to market innovations or new information technologies [1]. Born-again global firms differ from born globals in so far as they internationalize much later and can draw on a pool of resources for their internationalization process [10].

Conclusion

Research on the pathways of SME internationalization has revealed three predominant internationalization patterns. The Uppsala model describes a pattern of incremental internationalization with several stages of increasing international commitment. The born global model focuses on radical internationalizers, i.e. firms that engage in international activities from inception or shortly after their founding. Finally, late internationalization refers to firms that are already well established in their home markets and suddenly internationalize in response to a critical incident.

Despite empirical evidence for all three internationalization patterns, the explanatory power of these stereotypical patterns is limited. Little attention is paid to variations of the three internationalization patterns with respect to the scope and scale of internationalization. A first attempt to address this limitation is provided by Kuivalainen et al. [9] in a theoretical overview of possible variations within internationalization patterns. For example, a born global firm with a high foreign to total sales ratio could operate in a large number of different countries via different operation modes. What is more, the division of firms into three categories is somewhat static and fails to depict that firms change their internationalization patterns over time. In fact, the unique internationalization pathway of a firm could include various episodes of internationalization, de-internationalization and mixed episodes, e.g. a simultaneous increase in scope and decrease in scale [9].

While the field of SME internationalization leaves ample room for further studies we propose two avenues for future research. First, the reciprocal relationships between external and internal factors that shape a firm's internationalization pathway, the (varying) internationalization patterns it pursues, and its internationalization outcomes remain unclear. This holds true for the links between different internationalization pathways and the performance of SMEs over time as well as for the backlashes of specific internationalization patterns on internal firm factors [9; 10]. Second, the internationalization patterns described above predominantly focus on the internationalization of SMEs in industrialized countries. However, the context of SME internationalization in developing countries may differ substantially [11]. Future research on SME internationalization in the Global South could therefore reveal further internationalization patterns.

The list of references

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