Week 3

Question 1

What are the assumptions of the Uppsala model? (2)

Answer 1

1. Uncertainty
2. Bounded Rationality

Question 2

What are the 2 mechanisms of the Uppsala model?

Answer 2

1. Firms change by learning from their experience of operations, and current activities, in foreign markets.
2. They change through commitment decisions that they make to strengthen their position in the foreign market.

Question 3

Define liability of foreignness

Answer 3

Disadvantages faced by foreign firms due to their lack of local market knowledge.

Question 4

Describe the Uppsala Internationalization Process Model: (4)

Answer 4

1. The model displays internationalization as a gradual, incremental process.
2. Firms initially enter nearby markets with low psychic distance and gradually venture further as they accumulate knowledge and experience.
3. The concept of liability of foreignness is a key driver of this approach.
   a. Developing relationships is an informal process, which becomes harder as the psychic distance increases.
4. The model suggests increasing commitment, however if the performance or prospect is not sufficiently met, the level of commitment may decrease.

Question 5

What type of firm would be considered an “outsider”?

Answer 5

An outsider would be a firm that does not have a position in a relevant network.

Question 6

Define the liability of outsidership (4)

Answer 6

If a firm is considered an “outsider”, this suggests the firm would face challenges with learning (1), building trust (2), developing commitment (3), as well as identifying and exploiting opportunities (4).

Question 7

What are the different types of knowledge?

Answer 7

1. Institutional Market Knowledge
2. Business Market Knowledge
3. Relationship-Specific knowledge
4. General relationship knowledge

Question 8

Why may a firm have a lack of institutional market knowledge? (2)

Answer 8

This would be due to factors related to a large psychic distance, and to the liability of foreignness.

Question 9

Why may a firm have a lack of business market knowledge? (2)

Answer 9

This is related to the firms business environment and the relationships between firms in this environment.

Question 10

Define relationship-specific knowledge

Answer 10

This is knowledge developed through interaction between two partners, and that includes knowledge about each others heterogeneous resources and capabilities.

Question 11

What conclusion was drawn from the Johanson, et al. (2009) paper on Experimental Learning?

Answer 11

Experimental learning should be utilized as a basic mechanism in the business network view of the internationalization process.

Question 12

How does Opportunity Development occur when firms expand to a foreign country? (2)

Answer 12

Following a similar structure to the internationalization or relationship process, the experience gained when working with foreign companies allow firms to identify many opportunities that only insiders can.
This is because of 2 main reasons:
1. Market research is not always available extensively, meaning they may not identify certain opportunities with the resources provided.
2. Due to the heterogeneity of resources and characteristics of foreign firms, companies that have expanded into that foreign country may be able to identify opportunities in which they can provide value.
The paper concludes exploitation breeds exploration.

Question 13

How has the correlation between the company that enters the foreign market and psychic distance changed? How does the psychic distance affect the company?

Answer 13

The correlation has weakened. The relationship between market entry order and psychic distance applies at the level of the decision maker, not at that of the firm.
The psychic distance may also impact the relationship development, the process of learning, trust building, and so on…

Question 14

What plays a significant role in displaying the level of commitment when expanding to a foreign country?

Answer 14

Contextual aspects can play a more significant role than entry modes.
- i.e. An acquisition is more likely to be successful if it is seen as some sort of exchange between the acquirer and acquiree.

Question 15

Describe the Business Network Model of the Internationalization Process (4)

Answer 15

1. Internationalization is seen as the outcome of firm actions to strengthen network positions by what is traditionally referred to as improving or protecting their position in the market.
2. As networks are borderless, the distinction between entry and expansion in the foreign market is less relevant, following the network context of the revised model.
3. The model infers existing business relationships have a considerable impact on the particular geographical market a firm will decide to enter, and on which mode to use.
4. The study has reason to believe that learning and commitment are strongly related to identifying and exploiting opportunities.

Question 16

What are the sets of variables in the Business Network Model? (2)

Answer 16

• State variables
• Change variables
  (Or stock and flow)

Question 17

What are the man reasons for foreign expansion through following a partner abroad? (2)

Answer 17

1. Likelihood of finding interesting business opportunities.
2. When a relationship partner who is going abroad, or already is abroad, wants the focal firm to follow.

Question 18

Why does the papers subtitle say, “from liability of foreignness to liability of outsidership”?

Answer 18

This refers to the fact that a firms problems and opportunities in international business are becoming less a matter of country-specificity and more so toward relationship-specificity and network-specificity.

Question 19

Define internalization

Answer 19

The process of a company handling activities or functions in-house, instead of outsourcing or depending on external suppliers or markets, often to improve control, reduce costs, or manage risks.

Question 20

What are the advantages of internalizing a market? (5)

Answer 20

1. Improved coordination over time: When a business process has multiple steps spread out over time and the company is dependent on an external market, by internalizing, this would give them better insight and can make internal coordination smoother.
2. Flexible pricing within the company: Setting prices within the company can allow it to use its market power more efficiently than if it relied on external markets.
3. Bilateral concentration of market power: When the business controls both sides of the transaction, it avoids power struggles and instability that could come from dealing with outside buyers or sellers. (Powerful suppliers could mark up costs which becomes an issue if companies are dependent on them)
4. Less buyer-seller misinformation: internalizing different aspects of a business removes any information gaps, so that the buyer and seller are on the same page.
5. Internal transfer pricing: This reduces tax liability on international transactions.

Question 21

What are the disadvantages of internalizing a market?

Answer 21

1. Higher resource costs when a single external market becomes several internal markets (can be reduced by partial internalization)
2. Communication costs in internal markets rise (vary with psychic distance)
3. Management costs in running complex multiplant multicurrency operations
4. Political problems of foreignness

Question 22

Define rational action modeling

Answer 22

This assumes businesses make logical decisions to maximize their outcomes.

Question 23

What is the coase framework

Answer 23

This is a framework focused on internalizing activities for companies when external markets are inefficient or incomplete.

Question 24

What was the initial reason for internalizing vs the reason now?

Answer 24

The initial reason was to protect specialized knowledge, but now companies find more value in internalizing general marketing skills.

Question 25

Looking at book, The Future of the Multinational Enterprise, what were the 3 predictions?

Answer 25

1. More externalization (licensing) and outsourcing by multinationals and greater use of International Joint Ventures (IJVs) as a way for MNCs to align their goals with the policies of the governments in which they operate.
2. More adaptation of existing products and processes to new environments. In particular, in less developed (emerging) economies.
3. Licensing agreements would eventually replace FDI as the primary mode of expansion.

Question 26

How can firms navigate uncertainty according to the book The Future of the Mutlinational Enterprise?

Answer 26

Firms can either:
- Take calculated risks based on expected probabilities
- Invest in research to gather information about costs both domestically and abroad.