Academic journal article Management International Review

Foreign Market Uncertainty and Incremental International Expansion: The Moderating Effect of Firm, Industry, and Host Country Factors (1)

Academic journal article Management International Review

Foreign Market Uncertainty and Incremental International Expansion: The Moderating Effect of Firm, Industry, and Host Country Factors (1)

Article excerpt

Abstract

* This study first tests the basic proposition of Johanson and Vahlne's (1977) internationalization theory that foreign market uncertainty leads firms to adopt an incremental approach to international expansion. This is done using a pooled, within-country research design with historical data on firms' internationalization processes.

* It then conducts a contingency analysis to investigate the theory's boundary conditions by examining the impact of firm, industry, and host country characteristics on the internationalization process.

Key Results

* While the study's findings provide general support for the basic proposition, they also show that the effect of foreign market uncertainty on firms' incremental internationalization differs between general operational uncertainty and country-specific cultural uncertainty. They also show that there are important boundary conditions to the model's predictive utility, which help explain some of the conflicting results reported by past research.

Introduction

A firm's viability and prosperity depend on its ability to respond effectively to environmental challenges. In recent years, increasing pressure to compete on a global basis has driven many firms to expand their operations internationally. However, international expansion is not risk free. Internationalizing firms face many challenges that do not concern domestic firms, especially those associated with the uncertainty arising from operating in unfamiliar environments. How a firm responds to foreign market uncertainty can significantly affect the success of its internationalization as well as its ability to compete in a global economy.

The research by Johanson and Vahlne (1977) shows that many firms minimize the uncertainty risks in internationalization by adopting an incremental approach. Specifically, they expand their foreign operations gradually, beginning with entry into foreign markets with similar cultures before moving on to the dissimilar ones. And, for each foreign market entry, the process starts with exporting, followed by setting up local sales subsidiaries, and then the establishment of production facilities. This incremental process allows firms to learn from the experience they acquire in the initial operations, and use this knowledge to reduce the uncertainty they face in subsequent expansion efforts. Additionally, it protects firms from the downside risks of failure by increasing their overseas resource commitment over a certain time period, contingent on the performance of prior foreign operations.

Widely known as the incremental model of international expansion, Johanson and Vahlne's (1977) research has been one of the most influential work in the study of firm internationalization (Bjorkman/Eklund 1996). Due to its intuitive logic and theoretical parsimony, the incremental model has been labeled as axiomatic (Andersen 1993). However, several recent reviews (Coviello/McAuley 1999, Erramilli/Srivastava/Kim 1999, Hadjikhani 1997) have reported that empirical support for the model is mixed. While a number of studies have confirmed that firms started their internationalization with exporting and then progressed to the next two steps of establishing sales and manufacturing subsidiaries (e.g., Juul/Walters 1987, Nicholas et al 1996), other studies have reported different results. For example, Millington and Bayliss (1990) and Bjorkman and Eklund (1996) found that many firms made their initial entry into a foreign market by establishing a manufacturing subsidiary. Also, Camino and Cazorla (1998) found that about 30% of their sample firms did not follow the incremental process, jumping from exporting to manufacturing (without the intermediate step of a sales subsidiary). These conflicting findings suggest that there may exist certain contingency or boundary conditions that restrict the incremental model's explanatory power. The identification of such conditions will help resolve the conflicts in prior research findings and add to the model's predictive utility. …

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