The Internationalization Process of Danish Firms

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Essay on the Uppsala Internationalization model according to article “The Internationalization Process of Danish Firms - gradual learning or discrete rational choices?”

This essay based on the article “The Internationalization Process of Danish Firms - gradual learning or discrete rational choices? By associated Professor Torben Pedersen of Copenhagen Business School”. His study was examined on the basis of the Uppsala Internationalization model, called the Uppsala model, that has a strongly influence on business economics research in the Nordic Countries, including Denmark. In the article was discussed the Uppsala model, and then was shown applicability of the theory and aspects of the model were empirically tested on data about the establishment of Danish firms abroad. The purpose of this essay to show the result of the research of Danish scientist, where Professor Torben Pedersen is reflecting how far the Danish firms follow the typical internationalization course claimed by the Uppsala model.

Information about the establishment of Danish firms abroad has been gathered through a establishment study of 1991 year - which included all Danish firms with establishments abroad in 1990. The analysis includes a total of 195 Danish firms with, together, 704 establishments abroad. Main information that was used in the analysis is data about the foreign establishment activity of Danish firms, including the function of the establishments, when the establishments were made, how they were established and to what extent there had been any preceding activity in the country in question etc.

According to Uppsala Internationalization Model, by Johanson and Vahlne, the internationalization process for small and medium-sized firms is usually a long, slow and incremental process. The process has two dimensions, partly a geographical/cultural dimension where the establishments move from culturally close to more distant markets, and partly a "commitment' dimension, where the form of market operation becomes steadily more demanding. It means the company that plans to expand internationally first enters in neighboring countries, where the political systems, culture and language is not very different, known as ``psychic distance''. An essential starting point for the Uppsala model is that the single internationalization steps cannot be viewed independently of each other. The firms' choice of the form of market operation on a market cannot be viewed independently of the firm's preceding activities on the market, and the firm's choice of market cannot be seen independently of the market experience that the firm has already gained. internationalization market risk obligation

I accordance with the Uppsala model, firms will first set up in the markets where the geographic and cultural distance is shortest. The following hypothesis can therefore be put forward: The smaller the geographic and cultural distance from Denmark to another country, the earlier in the course of internationalization will Danish firms set up subsidiaries in the country in question.

The hypothesis is tested by giving every single establishment a ranking number that indicates the order in which each parent company has set up their establishments. Then a variance analysis is done, which tests whether there is systematic variation between countries in the ranking number that the establishments in the country in question have. If there is no systematic variation between countries, or if the variation is found to be different from the expected one, the hypothesis can be rejected, because on the basis of the hypothesis, a systematic variation is expected, where the ranking number on average is lower for countries where the geographic and cultural distance is shortest.

The data shows that the systematic variation is broadly consistent with the hypothesis. The four countries with the lowest average ranking number are the four neighboring countries, Norway, Sweden, Germany and Great Britain. Most of the European countries are in Duncan group A, while the overseas countries, USA, Australia and Japan, have significantly higher ranking numbers, because of the fact that they are not in Duncan group A. However, it is surprising that Singapore is in Duncan group A, but this can be partly explained by Singapore's status as a financial centre, which is why the banks have to set up in Singapore early in the course of their internationalization. It is likewise surprising that Holland is down in Duncan group C, but this is probably because Holland, like Switzerland, is the host country for a lot of holding companies, which are set up relatively late in the course of internationalization. I general, it must be said that the analysis confirm the hypothesis that the international activities of the Danish firms move sequentially from the culturally close markets to the more distant markets.

The Uppsala model likewise claims that there is a sequential expansion of commitment in the single markets. The individual firm will go from forms of market operation that need very limited market commitment to steadily more demanding forms of market operation. Specifically, it is pointed out that firms will adopt the following sequence in the forms of market operation: sporadic export, export agent, sales company and production company. The Uppsala model also claims that only firms with great international experience would "skip" some of the sequences, for example by setting up subsidiaries abroad without preceding activity in the market in question (i.e. without having exports or other form of sales on the market). The following hypothesis can thus be put forward: Establishments without preceding activity will be set up later in the course of internationalization than establishments with preceding activity.

The hypothesis is tested in the same way as above by making an analysis of variance that tests whether there is systematic variation in the ranking number for establishments that were implemented with and without preceding activity in the market in question before the actual establishment. The preceding activity includes export via a home-based sales force, export agent and possibly other forms of establishment. If the hypothesis is to be confirmed, the ranking number must be found to be systematically higher for establishments without preceding activity than for establishments with preceding activity in the market. This means that no systematic difference can be found in the ranking number for establishments with and without preceding activity. The data shows the Duncan grouping for sales and production establishments respectively. The data also shows that the average ranking number, as expected, is higher for establishments without preceding activity than for establishments with preceding activity. This applies to both sales and production establishments. But nevertheless, the variation is so small that significant differences cannot be demonstrated, as postulated by the Uppsala model.

It can also be seen that many establishments were set up completely without preceding activity (32% of the sales subsidiaries and 46% of the production subsidiaries). Among the sales subsidiaries with preceding activity in the market in question, there are 74% that were preceded by export agents or similar, while 26% were preceded by export via a homebased sales force. And among the production subsidiaries with preceding activity, there were 35% that were preceded by sales subsidiaries, 40% that were preceded by export agents and 25% that were preceded by exports via a home-based sales force. The results confirm up to a point that there is a sequential expansion of market commitment, in pace with the building up of market experience, but at the same time, the analysis indicates that this expansion of market commitment occurs in a considerably more differentiated way than the Uppsala model suggests.

In the following, the discussion and the empirical test will deal with whether significant differences can be found between the establishment pattern in large firms and small firms. The Uppsala model will here claim that, on account of greater aversion to risk and fewer resources, the small firm will take smaller steps in the course of internationalization. Since establishment abroad is not just a question about knowledge of the market, but also a question of acquiring experience in the management of subsidiaries, the Uppsala model can be interpreted to mean that the large firm will typically have access to more resources (including management experience) and be less averse to risk, because their activities are more differentiated. The large firm will therefore at a relatively early stage be able to "skip some steps" in the course of internationalization. According to the Uppsala model, the large firms will therefore set up establishments without preceding activity considerably earlier in the course of internationalization than the smaller firms. The following hypothesis can therefore be put forward: This conclusion covers the group of Danish firms with establishments abroad, while, possibly, other patterns can be found among the Danish export firms that can confirm the Uppsala model. Firms that set up establishments without preceding activity will be larger than firms that set up establishments with preceding activity.

The hypothesis is likewise tested with an analysis of variance. Here the test is whether there is systematic variation in the size of firms that set up establishments with and without preceding activity, respectively. If the hypothesis is to be confirmed, the firms that set up establishments without preceding activity must be found to be systematically larger than the firms that set up establishments with preceding activity. The analysis shown, completely contrary to expectations, that the average size of the firms that set up establishments without preceding activity are smaller (1,579 employees) than the firms that set up establishments with preceding activity (1,694 employees). Somewhat surprisingly, no systematic differences between the large and small firms in the data material can thus be found as regards the establishment pattern and aversion to risk. A possible explanation is that previous studies have shown that there are two different types of very internationalized firms in Denmark (Pedersen, Schultz & Vestergaard, 1993). The firms in the study range in size from 20 employees to over 2,000 employees.

There are the large Danish firms, who have successively built up considerable activities abroad over the years, and then there is a new type of small young firms, who right from the start have a very international aim and set up establishments abroad at an early stage. The former type of firm has largely followed the sequences of the Uppsala model, while the latter type has "left out" several steps in the chain, and established subsidiaries in markets where they had not previously had sales. The fact that firms increasingly set up abroad through acquisitions can also be a contributory explanation of the surprising result. Over 20% of the foreign subsidiaries of the Danish firms were set up by acquisitions of existing firms, and in the last decade, this share has grown very strongly , referenced to Pedersen, Schultz & Vestergaard, 1993. Several foreign studies have come to similar results, so they support the above mentioned explanations. In a study of the internationalization process for young, technology-based, Swedish firms, Lindqvist (1991) found that (the young technology-based) firms went through the course of internationalization more quickly (and not, as expected, more slowly) than the large Swedish firms. She explains this by the fact that it was necessary for the technology-based firms to speed up internationalization, because they were exposed to global competition. In a comprehensive study of the connection between the size of firms and the export intensity in Italian firms, Bonnaccorsi (1992) found that there was no essential difference between the export intensity in small and large firms, which is why the small firms were not appreciably hindered in their export activities by the lack of internal resources. He explained this surprising result by the fact that the small firms had great flexibility, that the export barriers are limited after all, and that the small firms often get together and support each other in exports. All in all, the results indicate that the differences in the course of internationalization for large and small firms are relatively limited, and that they will probably become smaller and smaller in the future. The differences that could be found can for the most part be attributed to factors other than differences in the size of firms (such as technology intensity, market potential and international competitive conditions).

This article has examined the internationalization process of Danish firms, primarily by testing on Danish empirical material some of the hypotheses that can be deduced from the Uppsala Internationalization Model. The Uppsala model is the only real attempt made up to now to put forward a dynamic theory (or model) that can explain the internationalization process of firms. The Uppsala model comprises two central elements. One, a mainly analytical part, which asserts that the course of internationalization is an incremental process that is a result of two separate, but closely linked, processes: the building up of specific market knowledge and the expansion of market commitment, which together create a better basis of information, whereby uncertainty and risk are minimized.

The other is a predominantly descriptive part, which, on the basis of empirical studies, asserts the sequential nature of the course of internationalization, both in the geographical spread (from culturally close to more distant markets) and in the extent of commitment on the single markets (with the following sequence: sporadic export, export agent, sales company and production company). The analysis based on Danish data confirms that the Danish firms have extended their international activities sequentially as regards the geographic dimension. It is clear that internationalization is begun in the culturally close markets. Norway, Sweden and Germany stand out as being the markets where the Danish firms typically set up first. After these come the main part of the northern European countries in the next group, while the southern European and overseas countries follow in the third group. It is also confirmed that firms sequentially extend their market commitment, but this gradual extension of market commitment is done in a more varied way than suggested by the Uppsala model in its sequence from direct export over export agent to the establishment of a subsidiary.

The hypothesis about the minimization of risk and uncertainty as the crucial driving force in the internationalization process is poorly supported in the data material, because it emerges that the small firms go through the course of internationalization just as quickly as the larger firms. It can be concluded that the Uppsala model is only a partial explanation of the internationalization process of firms, where a more general theory would have to include other explanations of the internationalization process than the "learning" process in the firm. A more general theory would also have to include factors such as the firms' assessment of the market potential and the global competitive conditions, because these, too, are important driving forces in the internationalization process.

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