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Export Behaviour Theories
Prof. Jiban K. Mukhopadhyay(Fmr. Chief Economic Adviser, Tata Group)
E-mail ID - [email protected]: 9821920928
Jan 2011SPJIMR
International Business
Export Behaviour Theories
Models for Internationalization:o The Uppsala Modelo The Transaction Cost Theoryo The Network Model
The Uppsala Model (Johanson & Wiedersheim- Paul, 1975, Uppsala
University, Sweden)
o Study of Swedish manufacturing firmso Nearby to Far Flung markets – incremental growtho Begins with exports and subsequently sets up manufacturing units
StagesSporadic Export
Stage 1
Export via independent
Representatives
Stage 2
Establish Foreign Sales Subsidiary
Stage 3 Stage 4
Market A
Market B
Market C
Market N
Increasing Geographic diversification
Increasing Internationalization
Increasing Market Commitment
Foreign Production/Manufacturing Units
Entering Int’l Mktg - Four Sequential Modes
•No regular (sporadic) exports.
•Export via independent reps (export modes).
•Establishing foreign sales subsidiary (FDI).
•Foreign production/manufacturing (FDI).
Market Commitment Dimension
Factors Amount of Resource Committed
Size of investment in the market (mktg, orgn, personnel, etc.
Degree of Commitment Difficulty of finding alternative use of resources & transferring them to alternative use
Internationalization : Assumptions
General Knowledge
Market Specific Knowledgeo Gained through experience in the marketo Directly related with resource commitment
Knowledge of operationso Can be transferred within markets
Geographical dimensionso Psychic distance (diff. in language, culture, political systems etc.) o Firms start internalization by going to those mrkts they understand
most easily.
Six dimensions of Internationalization (Added by Welch & Loustarinen , 1988)
Sales Objective (What ?) – Goods, services, know-how, systems
Markets (Where? )– Political, Cultural, Psychic / Physical distance differences btwn mrkts
Finance – Finance to support international activities
Operations Methods (How ?) – Agents, subsidiaries, licensing, franchising
Organization Structure – Export department, International division
Personnel – International skills, experience and training
Assumptions & Exceptions
Assumptions Exceptions
Step-by-step process Larger firms take larger steps
Market knowledge, requires experience
Other ways of gaining experience
Possibility of generalizing the experience
Lack of knowledge, a major hindrance
Perceived risk of not investing
Critical views of the model
Leap-frogging Psychic distance Too deterministic Not useful for service sector/ high tech/ born global companies
Transaction Cost Analysis
Based on the seminal study by Ronald Coase, The Nature of the Firm, 1937, and The Problem of Social Cost, 1960.
Subsequently developed by Oliver E Williamson, Transaction Cost Economics
The TCA Model Basis of foundation:
“ A firm will tend to expand until the cost
of organizing an extra transaction within the organization becomes equal to the cost of carrying out the same transaction by means of an exchange in the open market.”
(Ronald Coase, 1937)
The Transaction Cost
Cost incurred in making an economic exchange or cost of participating in a market [e.g. in buying/ selling a stock, one has to pay a commission (= TC) to the broker]
Search and information cost Bargaining cost Policing and enforcement costs
The TCA Model- Important terms (w.r.t a Firm)
Internationalization – process of going ‘global’ (a firm going to different geographies)
Externalization (engaging agents, distributors…)
Internalisation (operating through internal contracts, sales subsidiaries…)
Free riding potential
The TCA matrix
TCA matrix
Asset/Investment specificity
Low Medium High
Frequency of transaction
Low OccasionalTransactions Contracts
Contracts / Turnkey projects
High
Externalization(mkt.
transactions = distributer /Importer)
Bilateral agreements
(Joint ventures)
Internalization(Vertical
Integration = 100% owned subsidiaries)
The TCA Model: Limitations(factors producing transactional difficulties, Williamson)
Bounded rationality Opportunism Asymmetrical Information Oligopoly conditions
The TCA Model
• Too narrow assumption of human nature• Ignores internal transaction cost
e.g. internal transfer prices settlement• SME structure : clan structure based on
co-operation
The Network ModelIndividual firm is dependent on resources controlled by
other firms & access to them is through networking.
Exchange between firm’s object of study rather than transactions
Networks are loosely coupled than hierarchies, change shape easily
Emerge where co-ordination will lead to gains & conditions change rapidly
Country A (home)Country B
Country C
An International Network
The Network Model
Cases of Internationalization
Degree of Internationalization of the market
Low High
Degree of Internationalization of
the firm
Low The early starter The late starter
High The lonely international
The international among others
Johanson & Mattson, 1982
Network Model for SME subcontractors
ControlBetween major auto company and sub contractors (SC)
Co-ordinationAllows firms to concentrate on Core competency
Co-operationSC-industry partnership
Export behavior theory - Linkages
The three models discussed above – not to be taken in isolation.
Stage by stage linkages Despite criticisms, the model has important
relevance Based on empirical studies Read carefully table 3.1, export behavior
theories in the handout.