PROCESS OF THE THE INTERNATIONALIZATION DEVELOPMENT FIRM-A MODELOF KNOWLEDGE FOREIGN AND INCREASING MARKET COMMITMENTS

JAN JOHANSON* Center of International Business Studies University of Uppsala JAN-ERIK VAHLNE* Institute of International Business Stockholm School of Economics

Abstract. On the basis of empirical research, a model of the internationalization the firm is developed. The model focuses on the gradual acquisition, integration knowledge about foreign markets and operations, and on the incrementally commitments to foreign markets. In particular, attention is concentrated on the involvement in the individual foreign country.

process of and use of increasing increasing

* Several studies of international business have indicated that internationalization of the firms is a process in which the firms gradually increase their international involvement. It seems reasonable to assume that, within the frame of economic and business factors, the characteristics of this process influence the pattern and pace of internationalization of firms. In this paper we develop a model of the internationalization process of the firm that focuses on the development of the individual firm, and particularly on its gradual acquisition, integration, and use of knowledge about foreign markets and operations, and on its successively increasing commitment to foreign markets. The basic assumptions of the model are that lack of such knowledge is an important obstacle to the development of international operations and that the necessary knowledge can be acquired mainly through operations abroad. This holds for the two directions of internationalization we distinguish: increasing involvement of the firm in the individual foreign country, and successive establishment of operations in new countries. In this paper we will, however, concentrate on the extension of operations in individual markets. We have incorporated in our model some results of previous empirical studies of the development of international operations, seeking theoretical explanation through the behavioral theory of the firm (Cyert and March, 1963). Specifically, we believe that internationalization is the product of a series of incremental decisions. Our aim is to identify elements shared in common by the successive decision situations and to develop thereby a model of the internationalization process which will have explanatory value. Because we, for the time being, disregard the decision style of the decision-maker himself, and, to a certain extent, the specific properties of the various decision situations, our model has only limited predictive value. We believe, however, that all the decisions to start exporting to a that, taken together, constitute the internationalization process-decisions country, to establish export channels, to start a selling subsidiary, and so forth-have some common characteristics which are also very important to the subsequent internationalization. Our model focuses on these common traits. We hope that the model will contribute to conceptualization in the field of internationalization of the firm and thus increase understanding of the development of international operations as described in the empirical studies. We hope, too, that it can serve as a frame of reference for future studies in the problem area and may also be useful as a tool in the analysis of the effects of various factors on the pattern and pace of internationalization of the firm. * Jan Johanson is a memberof the facultyof the Centerfor International Business Studies at the University of Vahlneis on the facultyof the Institute of International Schoolof Business, Stockholm Uppsala,Sweden. Jan-Erik Economics,Stockholm,Sweden. The authors are indebted to their colleagues at the Centerfor Internatonal Business Studies, Department of Business Administraton, of Uppsalaforvaluablecommentsand to DavidBakerforcarefulcriticism of University content and language. Financial Foundation forSocial supporthas been given by the Svenska Handelsbanken Science Research.

INTRODUCTION

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Inthe firstsection we described the empiricalbackgroundof our study. Nextwe outlinethe model of the internationalization process, definingthe mainvariablesand the interaction among them.We then sum up by discussing some implicationsof the model and suggesting some problemsfor futureresearch.

EMPIRICAL The model is based on empircalobservations fromour studies in international business at the BACKGROUND University of Uppsala, that show thatSwedish firmsoften develop theirinternational operationsin small steps, ratherthan by makinglarge foreign productioninvestmentsat single points in time. Typically,firmsstart exportingto a countryvia an agent, laterestablish a sales subsidiary,and eventually,in some cases, begin productionin the host country. We have also observed a similarsuccessive establishment of operations in new countries. Of interestin the present context is thatthe time orderof such establishmentsseems to be particular relatedto the psychic distance between the home and the import/host countries(Hornell, Vahlne& 1972, Johanson & Wiedersheim-Paul, Wiedersheim-Paul, 1974). The psychic distance is defined as the sum of factors preventingthe flow of information fromand to the market.Examplesare differences in language, education, business practices, culture,and industrial development. Studies of the exportorganization of the Swedish special steel firms(Johanson, 1966) and of the Swedish pulp and paper industry(Forsgren& Kinch, 1970) have shown that almost all sales subsidiaries of Swedish steel companies and pulp and paper companies have been established throughacquisitionof the formeragent or have been organizedaroundsome person employed by the agent. Mostof the establishmentswere occasioned by variouskindsof economic crises inthe agent firms.Sales to a marketby the agent had preceded establishmentof a sales subsidiaryin each of nine cases investigated by Hornelland Vahlne (1972). Furthercase studies of the activitiesby Swedish firmshave allowedus to generalizeourobservadevelopmentof international tions: sales subsidiariesare preceded in virtually all cases by selling via an agent; similarly, local productionis generallypreceded by sales subsidiaries. A summaryof the results we reached in two studies follows.They are by no means meant to be statisticallyrepresentative,but the results are typical of studies we know.The firstexample is a case study of the internationalization process of the second largest Swedish pharmaceutical firm, Pharmacia.At the time of the case study (1972) Pharmaciahad organizationsof its own in nine countries, of which three were performingmanufacturing activities. In eight of these cases the development patternwas as follows. The firmreceived orders fromthe foreignmarketand after some timemade an agreementwithan agent (orsold licenses regardingsome partsof the product established sales subsidiariesin seven of those countries(and in line).Aftera few years Pharmacia the eighth they bought a manufacturing company bearing the same name, Pharmacia,that had previously served as an agent). Two of the seven sales subsidiaries furtherincreased their involvementby startingmanufacturing activities.It is interestingto note thateven this production decision was incremental; the new production units began withthe least complicatedmanufacturing activitiesand latersuccessively added more complicated ones. In the ninthcountryPharmaciastarted a sales subsidiaryalmost immediately when demand from the marketwas discovered. Butthe company did not totallylackexperience even inthis case. The decision-makerhad received parts of his education in.the countryin question, and before the decision he had become acquainted withthe representativeof anotherpharmaceutical firmwho was latermade the head of the subsidiary(Hornell, Vahlne,& Wiedersheim-Paul, 1973). In anotherstudy we investigatedthe internationalization of fourSwedish engineeringfirms.Below we quote some of the conclusions of the study (Johanson & Wiedersheim-Paul, 1975). The establishmentchain-no regularexport,independentrepresentative(agent), sales subsidiary, production-seems to be a correct description of the order of the development countries.Thisis illustrated operationsof the firmsin individual in Table I.Ofsixty-three sales subsidiariesfifty-six were preceded by agents; this patternholds forallthe firms.With regard to the productionestablishmentsthere is a diffe,ence between Sandvikand AtlasCopco on

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Table I Establishment Patterns for the Investigated Firms. Sales Production Pattern Firm Sandvik Atlas Copco Facit Volvo subsidiary n a 4 I s s 2 3 0 2 7 18 14 14 10 56 n I p 0 0 0 0 0 subsidiary a s i i p p 2 3 2 2 9 13 9 3 3 28

"n" denotes no regular export activity "a" denotes selling via agent "s" denotes sales subsidiary "p" denotes production subsidiary an arrow denotes change from one state to another one hand, where twenty-two out of twenty-seven establishments were preceded by sales subsidiaries, and Facit and Volvo on the other, where five out of seven occurred without the firm having any sales subsidiary in the country. However, in no case has a firm started production in a country without having sold in the country via an agency or a sales subsidiary before. Regarding the first establishments of sales subsidiaries, they do not seem to have been a step in a conscious and goal directed internationalization-at least not in Sandvik, Atlas Copco, and Volvo. For various reasons they had to take over representatives or start subsidiaries. As they gradually have gained experience in starting and managing subsidiaries, they have developed policies of marketing through subsidiaries in some of the firms. Itshould be noted that the firm, Atlas Copco, which most consistently used subsidiaries for export marketing did so when it acquired a new general manager, a former manager of a department store. The producing subsidiaries almost all produce for local or in some cases regional markets. Their activity embraces finishing, assembly, or component works which could be called marketing production. The only exception is Atlas Copco's factory in Belgium making stationary pneumatic equipment. Generally the development of the firm seems to be in accordance with the incremental internationalization view discussed. This gradual internationalization is not exclusively a Swedish phenomenon, as the following quotations demonstrate: On its part exporting is a means also of reducing costs of market development. Even if investment is necessary in the future, exporting helps to determine the nature and size of the market. As the market develops, warehouse facilities are established: later sales branches and subsidiaries (Singer, National Cash Register, United Show Machinery). The record of company development indicates that the use of selling subsidiaries at an early stage reduced the later risks of manufacturing abroad. These selling affiliates permitted the slow development of manufacturing from repairing, to packaging, to mixing, to finishing, to processing or assembling operations, and finally to full manufacture (Behrman, 1969, p 3). Within countries there is often a pattern of exports from the United States, followed by the establishment of an assembly or packaging plant, followed by progressively more integrated manufacturing activities (Vaupel, 1971, p 42). Without reference to any specific empirical observations Gruber, Mehta, and Vernon (1967) mention that "one way of looking at the overseas direct investments of U.S. producers of manufacturers is that they are the final step in a process which begins with the involvement of such producers in export trade". Knickerbocker (1972) also refers to this process and explicitly distinguishes agents and sales subsidiaries as separate steps in the process. Lipsey and Weiss (1969; 1972) refer to a "market cycle" model with similar characteristics. However, in none of these cases have the dynamics of this process been investigated. It has only been used as an argument in the discussion of related problems

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Specificaton of the Problem

If internationalization indeed followsthe patterndescribed above, how can we explain it? We do allocationof resources to different countries not believe that it is the resultof a strategyforoptimum where alternative ways of exploitingforeignmarketsare comparedand evaluated.We see it rather as the consequence of a process of incremental adjustmentsto changing conditionsof the firm and its environment (cf. Aharoni,1966). Lackingroutines Changes in the firmand its environment expose new problemsand opportunities. forthe solutionof such sporadic problems,the concern's management"searches inthe area of the is regarded as an essentially unpreproblem"(Cyertand March,1963). Each new discontinuity cedented and unparalleledcase; the problemsand opportunitiespresented are handled in their resource contexts. Thus commitmentsto othermarketsare not explicitlytaken intoconsideration; allocationsdo not compete witheach other. Another constraint on the problem solution is the lack of, and difficultyof obtaining market decisions have an incremental operations. That internationalization knowledge in international and the uncertainty occasioned characteris, we feel, largelydue to this lack of marketinformation 1972; Johanson, 1970). We believe that lack of thereby (Hornell,Vahlneand Wiedersheim-Paul, knowledge due to differences between countries with regard to, for example, language and obstacle to decision makingconnected withthe developmentof internaculture,is an important tional operations.We would even say that these differences constitutethe maincharacteristicof as distinctfromdomestic, operations. By marketknowledge we mean information international, about markets, and operations in those markets, which is somehow stored and reasonably in computermemories,and in written retrievable-in the mindof individuals, reports.Inourmodel with we consider knowledgeto be vested in the decision-making system: we do notdeal explicitly decision-maker. the individual

THEINTER- As indicated in the introduction, a model in which the same basic mechanism can be used to NATIONALIZA- explain all steps in the internationalization would be useful. We also thinkthat a dynamic model TIONMODEL would be suitable. In such a model the outcome of one decision-or more generallyone cycle of is given by the distinction between the events-constitutes the inputof the next.The mainstructure state and change aspects of internationalization variables.To clarify,we can say thatthe present is one important state of internationalization factorexplainingthe course of following internationalization, as in expression (1) below.
A I = f(l. ..)

where I state of internationalization The state aspects we consider are the resource commitmentto the foreign markets-market commitment-and knowledge about foreign marketsand operations. The change aspects are decisions to commit resources and the performanceof currentbusiness activities. The basic mechanism is illustrated schematicallyin Figure1. Figure1. and Change Aspects. The Basic Mechanismof Internationalization-State

Market knowledge

Commitment decisions

Market commitment

Current activities

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are assumed to affect bothcommitment decisions and Market knowledge and marketcommitment the way currentactivitiesare performed.These in turnchange knowledge and commitment (cf. Aharoni,1966). whichis assumed to Inthe model, it is assumed thatthe firmstrivesto increase its long-term profit, at a low be equivalentto growth (Williamson, 1966). The firmis also strivingto keep risk-taking level. These strivingsare assumed to characterizedecision-makingon all levels of the firm.Given these premises and the state of the economic and business factors which constitutethe framein which a decision is taken, the model assumes that the state of internationalization affects perdecisions and current ceived opportunities and riskswhichinturninfluencecommitment activities. We willdiscuss the mechanism in detail in the followingsections.

The two state aspects are resources committedto foreign markets-market commitment-and knowledge about foreign marketspossessed by the firmat a given pointof time. The reason for to a market is thatwe assume thatthe commitment affects the consideringthe marketcommitment firm'sperceived opportunities and risk.

State Aspects

Let us firsttake a look at the marketcommitmentconcept. To begin with, we assume that it is Market that Commitment composed of two factors-the amountof resources committedand the degree of commitment, themto it. Resources of findingan alternative use forthe resources and transferring is, the difficulty to thatmarket. market area can often be considered a commitment located in a particular However, in some cases such resources can be sold and the financialresources can easily be used forother is higherthe morethe resources in question are integrated purposes. The degree of commitment with other parts of the firmand theirvalue is derived fromthese integratedactivities.Thus, as a rule, vertical integrationmeans a higher degree of commitmentthan a conglomerativeforeign investment.An example of resources that cannot easily be directed to anothermarketor used for that is specialized aroundthe productsof the firmand other purposes is a marketing organization has established integratedcustomer relations.However,resources located in the home country of productsfora separate marketalso constitutea and employed in developmentand production commitmentto that market.The more specialized the resources are to the specific marketthe greater is the degree of commitment.And even if such resources can easily be directed to forothermarkets,as forexample engineers in a centralengineering developmentand production department, they cannot always be profitablyused there. Consider Volvo-the Swedish car of cars forthe manufacturer-witha large partof its productioncapacity employed in production U.S. market.Even if that capacity is not highlycommittedto the U.S. production,it is not easy, at least in the short run, to use it for productionfor other markets.And although the engineers can probablybe used foranotherpurpose, employed in adaptingthe car to the U.S. requirements it is not certainthat they can be profitably employed there. On the whole, it seems reasonableto assume that the resources that are located in the particular marketare most committedto that market;but we shall not disregard the commitmentthat follows from employing parts of the domestic capacity for a particular market. The otherpartof marketcommitment-the amountof resources committed-is easy to grasp. Itis close to the size of the investmentin the market,using this concept in a broad sense, including investmentin marketing, organization,personnel, and other areas.

Inour model, knowledge is of interestbecause commitment decisions are based on several kinds Market of knowledge. First, knowledge of opportunitiesor problems is assumed to initiatedecisions. Knowledge Second, evaluationof alternativesis based on some knowledge about relevantpartsof the market environment and about performance of variousactivities.Verygenerally,the knowledge"relatesto and to channels fordistribution, present and futuredemand and supply,to competition to payment conditionsand the transferability of money, and those thingsvaryfromcountryto countryand from time to time"(Carlson, 1974).

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A classificationof knowledge which is useful for us is based on the way in which knowledge is acquired (Penrose, 1966, p 53). "One type, objective knowledge, can be taught; the other, experience or experientialknowledge, can only be learned throughpersonal experience. With experientialknowledge, emphasis is placed on the change in the services the humanresources can supply which arises fromtheiractivity" (ibid, p 53); and ". . . experience itselfcan never be transmitted,it produces a change-frequently a subtle change-in individualsand cannot be of the experience of businessmen is frequently so closely separated fromthem"(ibid,p 53). "Much associated with a particularset of circumstances that a large part of a man's most valuable services may be availableonly under these circumstances"(ibid, p 53). We believe thatthis experiential knowledge is the criticalkindof knowledgeinthe presentcontext. It is criticalbecause it cannot be so easily acquired as objective knowledge. Indomestic operations, we can to a large extent relyon lifelongbasic experiences to whichwe can add the specific organizationsand markets.Inforeignoperations,however,we have no experiences of individuals, such basic experiential knowledge to start with. It must be gained successively during the operationsin the country. We believe thatthe less structured and well defined the activitiesand the requiredknowledgeare, is experiential in connection the more important knowledge.Wethinkthatitis particularly important withactivitiesthat are based on relationsto other individuals. workand marketing are Managerial examples of such activities. Especially in the marketingof complex and soft-ware-intensive products, experientialknowledge is crucial. An important forperceivingand aspect of experiential knowledge is that it providesthe framework formulating opportunities.On the basis of objective marketknowledge it is possible to formulate only theoreticalopportunities; experientialknowledge makes it possible to perceive "concrete" about how they fit intothe present and futureactivities. opportunities-to have a "feeling" We can also distinguish between general knowledge and market-specificknowledge. General methods and common characteristicsof knowledge concerns, in the present context, marketing certaintypes of customers, irrespectiveof theirgeographical location,depending, forexample, in the case of industrialcustomers, on similarities in the productionprocess. The market-specific knowledge is knowledge about characteristicsof the specific nationalmarket-its business cliof the market characteristics of the mate, cultural patterns,structure system, and, most importantly, individual customer firmsand theirpersonnel. and performanceof a certainkindof operationor activityin a countryrequireboth Establishment general knowledge and market-specificknowledge. Market-specific knowledge can be gained mainly through experience in the market,whereas knowledge of the operation can often be transferred fromone countryto anothercountry.Itis the diffusionof this general knowledgewhich facilitates lateral growth;that is, the establishment of technically similaractivities in dissimilar business environments. Thereis a direct relationbetween marketknowledgeand marketcommitment. Knowledgecan be considered a resource (or, perhaps preferably, a dimensionof the humanresources), and consequently the better the knowledge about a market,the more valuable are the resources and the to the market. Thisis especially trueof experiential strongeris the commitment knowledge,whichis conditions on the marketin question and thus cannot be usually associated with the particular transferred to other individuals or other markets.

Change Aspects

The change aspects we have considered are currentactivitiesand decisions to commitresources to foreignoperations.

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Current There is, to begin with, a lag between most currentactivities and their consequences. Those Business consequences may, in fact, not be realized unless the activities are repeated more or less Activities continuously.Consider, for example, marketingactivities,which generally do not resultin sales unless they are repeated for some time. In many cases the time lag is considerable, and the investmentrepresentsan important and ever-increasingcommitment to the market. The marketing of the firmmounts.Itseems reasonable to assume that longer the lag, the higherthe commitment the more complicated and the more differentiated the productis, the largerthe totalcommitment as a consequence of currentactivitieswillcome to be.

Currentactivities are also the prime source of experience. It could be argued that experience could be gained alternatively throughthe hiringof personnel withexperience, or throughadvice frompersons withexperience. To clarifythe roles of these alternative ways of integrating experience intothe firmin the internationalization process, we distinguishbetween firmexperience and marketexperience, both of whichare essential. Personsworking on the boundarybetween the firm and its marketmust be able to interpret information frominside the firmand fromthe market. The of one kindof information is possible only forone who has experience withthe other interpretation activities,both kindsof experience are part.We conclude that, for the performanceof marketing required;and in this area it is difficultto substitutepersonnel or advice fromoutside for current activities. The more the activities are production-oriented, or the less interactionis required between the firmand its marketenvironment, the easier it will be to substitutehiredpersonnelor advice for currentactivities;and consequentlythe easier itwillbe to startnew operationsthat are not incrementaladditionsto the formeroperations. Itshould be remembered,however,thateven productionactivities are dependent on the general business climate, which cannot easily be assessed in ways other than performanceof business activities. To some extent it may be possible to hire personnel with marketexperience and to use them aftersome time in the marketing activities.The delay is occasioned by the need forthe profitably new personnelto gain the necessary experience in the firm.But ifthe new personnelhave already worked as representativesfor the exporter,the delay may approach zero. Thus, the best way to quicklyobtainand use market experience is to hirea sales manageror a salesman of a representative or to buy the whole or a partof the firm.Inmanycases this kindof experience is notforsale; at the timeof entryto a market the experience may noteven exist. Ithas to be acquiredthrougha long reason why the learningprocess in connection withcurrentactivities.This factor is an important internationalization process often proceeds slowly.

The second change aspect is decisions to commit resources to foreignoperations.We assume Commitment that such decisions depend on what decision alternativesare raised and how they are chosen. Decisions Regardingthe firstpartwe assume that decisions are made in response to perceived problems and/or opportunitieson the market.Problemsand opportunities-that is awareness of need and possibilitiesfor business actions-are assumed to be dependent on experience. LikePenrose,we mighteven say that opportunities-and problems-are partof that experience. Firm experience, as well as marketexperience, is relevant.Problemsare mainlydiscovered by those parts of the organizationthat are responsible for operations on the marketand primarily by those who are solutionto problemswillbe the extension of the operationson workingthere. Forthem, the natural the marketto complementingoperations. In any case we assume thatsolutionsto marketoperations problems are searched for in the neighborhoodof the problem symptoms, that is in the marketactivities(Cyert& March,1963). Inthe same way opportunities willbe perceived mainlyby those who are workingon the market,and such opportunitieswill also lead to extension of the operations on the market.They will be related to those parts of the environment that the firmis interactingwith (Pfeffer, 1974). Thus, whether decision alternativesare raised in response to problemsor in response to opportunities, they willbe relatedto the operationscurrently performed on the market.Alternative solutionswillgenerallyconsist of activitiesthatmean an extensionof the boundariesof the organization and an increase incommitment to the market. We could speak of an horizonthat-given the operationsperformed-describes the kindof activitiesthatare opportunity likelyto be suggested by those responsible for operations. But opportunitiesare also seen by individualsin organizationswithwhich the firmis interacting; these individuals solutionsto the firminthe formof offersor demands. The may propose alternative thatthe firmis offeredopportunities fromoutside is dependent on the scale and type of probability that is, on its commitment to the market. operations it is performing; We distinguishbetween an economic effect and an uncertainty effect of each additionalcommitment. We assume that the economic effect is associated primarily with increases in the scale of operationson the market,and that the uncertainty effect concerns the marketuncertainty, that is the decision-makers' perceived lack of abilityto estimate the present and future marketand factors. We mean that this marketuncertainty is reduced throughincreases in market-influencing interaction and integration withthe marketenvironment-steps such as increases in communicationwithcustomers, establishmentof new service activitiesor, inthe extremecase, the take-overof customers.

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Ourthinkingon this point is further illustrated by the system of relationshipsbelow: Ri = maximumtolerable market(marketi) risk = f (firm'sresource position, firm'srisk approach)
Ri = existing market risk situation = Ci ? Ui

where Ci = existing marketcommitment U, = existing marketuncertainty A R, = incrementalriskimpliedby an incremental additionto operationson marketi. Scale increasingdecisions are assumed to affect the size of Ci but not the size of Uiso that
A R, = Ui A Ci > 0

so that reducing decisions are assumed to affect U, primarily Uncertainty

A Ri = A Ui (Cj + A C,) + A Ci U, < 0

we say thatscale-increasing decisions willbe taken when R,< R*i. The firm Using this framework will incrementally extend its scale of existing operations on the market-in expectation of large returns-until its tolerable riskfrontier (R*,)is met. Scale-increasingcommitmentsmay, forexamabout the market(Uj)incidentalto gaining market ple, be occasioned by a decline in uncertainty can be expected when knowledge acquiredwithexperience. Such a decline in market uncertainty the marketconditionsare fairlystable and heterogeneous. Ifmarketconditionsare very unstable, And, if marketconditionsare experience cannot be expected to lead to decreased uncertainty. for marketknowledge. very homogeneous, experience is probablynot a necessary requirement Undersuch marketconditionsan optimalscale of operationscan be chosen fromthe beginning. can also decline as a consequence of a competitive-or political-stabilization Market uncertainty
of market conditions. Scale-increasing commitments may also follow a rise of the maximum tolerable risk level due to an increase in the total resources of the firm or a more aggressive approach toward risk. We can, in any event, say that large increases in the scale of operations in the market will only take place in firms with large total resources or in firms which feel little uncertainty about the market. Uncertainty-reducing commitments on the other hand will be made when R, > R*j.The firm will respond to this imbalance by taking steps to increase interactions and integration with the market environment. Such an imbalance may be the result of a decrease in the maximum tolerable market risk (R*,) or an increase in the existing risk situation on the market Ri). The latter case may, in its turn, be occasioned by an increase in market commitment (C,) or market uncertainty (U~).Market commitments that increase risk are, according to our assumptions, those that increase the scale of existing operations on the market. Such increases are likely to be associated with current activities in an expanding market but can also be a consequence of the scale-increasing decisions discussed in the previous paragraph. Note that increases in the scale of operations on the market can be expected to lead to uncertainty-reducing commitments, that is increased interaction and integration with the market environment. Market uncertainty (U,) can be expected to rise as a consequence of experience in a dynamic market environment, showing that the original perception of the market was too simple. It may also rise because of a structural change in market conditions, for example, in connection with the entrance of new competitors on the market or introduction of new techniques. A typical example of the former is the change of the market situation of Swedish pulp and paper firms 'due to the entrance of North American producers on the European market (Kinch, 1974). However, increases in market uncertainty due to political changes cannot be expected to lead to the uncertainty-reducing commitments discussed here since such commitments cannot be expected to affect the political situaton. This discussion requires some further comments. First, it is very partial since we do not take into account how various factors other than scale may affect the economy of the market operations. The technology of the firm probably has a great impact on the economy of different types of market operations. Secondly, the variable "firm'sapproach to market risk" is a very complicated factor. We can, for example, distinguish between three different strategies with respect to this factor. One may be that a high risk level on one market is compensated by a low risk level on other markets. Another is that the tolerable risk level is the same on all markets. A third is that risk taking on the market is delegated to those working on the market as long as decisions do not require additional resources from the firm. We conclude this discussion of commitment decisions by observing that additional commitments will be made in small steps unless the firm has very large resources and/or market conditions are stable and homogeneous, or the firm has much experience from other markets with similar

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conditions.Ifnot, marketexperience willlead to a step-wise increase inthe scale of the operations and of the integration withthe marketenvironment where steps willbe takento correct imbalance with respect to the risksituationon the market.Market growthwillspeed up this process.

We thinkthat the general characteristicsof the model fit nicely withempiricalobservationsgiven Empirical earlier.In order to validate it empirically we intendto make two kindsof empiricalstudies. Firstly, Verification we shall make one or two intensive case studies to see if the mechanism can be used for explanationin empiricalsituations.Inthose case studies, we shalltryto measurethe internationalization variables, marketcommitmentand marketknowledge, and investigatehow they develop of the firm. duringthe internationalization we intend to make courses of different Secondly, comparativestudies of the internationalization firms.Assumingthat such factors as firmsize, technology,productline,home country,etc., viathe mechanism discussed affect the character of the internationalization in differentways, we will investigate whether firms that differwith respect to those factors also differwith respect to the Such studies will require more systematic discussions of the patterns of internationalization. expected influence of the factors. The present model will constitute the frameworkof such discussions.

In many countries various programs to affect foreign trade and operations are designed and Possible carriedout. Stillmore are discussed. Usuallysuch programsare based on models inwhichprices Applications of factors and products in differentcountries are the only explainingfactors. We thinkthat our model can help in giving such discussions and programs a better base. An evaluationof a Swedish export stimulationprogramshowed that the "exportstimulation measures affect firms' exportbehaviorin different ways due to differencesintheirdegrees of previousexportexperience" (Olson, 1975). Our model indicates how such experience can be expected to affect the export behavior. It also makes it possible to develop a better understandingof foreign investment behavior. We also thinkthatthe model can be useful in planningand decision makinginthe firm withregard to international a promisingstrategy. There operations. Manyfirmsconsider internationalization are, however, numerous examples of firms which have started international operations without success. We thinkthat the importanceof the experience factor is often overlooked.The model indicates how it is related to other internationalization variables thus giving a better base for planningand executing the internationalization process. And finally we hope, as do otherstudents in the field, thatourway of reasoningwilladd something to the understandingof the process by which firms become international or even multinational. trade and investmenthave shown thatoligopolisticindustries Thus, many studies of international have the greatest international engagement. Such features as high R&Dintensity,advertising characterized these industries(Gruber,Mehta, intensity,and efforts at product differentiation Vernon,1967; Hymer,1960; Kindleberger, 1969; Caves, 1971; Vaupel, 1971). Oligopolistic competition,however, lacks explanatoryvalue at the firmlevel; we have to look for otherfeatures to involvementamong the several firms in a given explain variationsin the level of international oligopolisticindustry(Horst,1972; Knickerbocker, 1973). Perhaps our model of the internationalization process can help in providing a partof this explanationby stressing the importance of some factors affecting the decision-makingprocess.

Aharoni,Y. The ForeignInvestmentDecision Process. Boston, 1966. BIBLIOGRAPHY Behrman,J. Some Patternsin the Rise of the Multinational Enterprise.Chapel Hill,1969. Carlson, S. Investment in Knowledge and the Cost of Information. Acta Academiae Regiae ScientiarumUpsaliensis: Uppsala, 1974. Caves, R.E. "International Corporations:The IndustrialEconomics of Foreign Investment." Economics (1971): vol. 38. of the Firm.EnglewoodCliffs,1963. Cyert,R.M.& March,J.G. A BehavioralTheory 31

Forsgren, M. & Kinch, N. Fdretagets anpassning tillfdrandringari omgivande system. En studie av massa-och pappersindustrin: Uppsala, 1970. Gruber, W., Mehta, R., & Vernon, R. "The R & D Factor in International Trade and International Investment of the United States." Journal of Political Economy, February 1967. Horst, T. O. "Firmand Industry Determinants of the Decision to Invest Abroad: An Empirical Study." Review of Economics and Statistics, 1972. Hymer, S. "The International Operations of National Firms: A Study of Direct Investment," Doctoral dissertation, Mass. Institute of Technology, 1960. Haakansson, F. & Wootz, B. "Supplier Selection in an International Environment-An Experimental Study," Journal of Marketing Research, February 1975. Hornell, E., Vahlne, J-E., & Wiedersheim-Paul F. Export och utlandsetableringar. Stockholm, 1973. Johanson, J., ed., Exportstrategiska problem. Stockholm, 1972. Johanson, J. "Svenskt kvalitetsstal pa utlandska marknader," Mimeographed licentiate dissertation, Dept. of Business Administration: Uppsala, 1966. Johanson, J. & Wiedersheim-Paul, F. "The Internationalizationof the Firm- Four Swedish Cases." Journal of Management Studies, 1975. Kinch, N. "Utlandsetableringar inom massa-och pappers-industrin." In Fdretagsekonomisk forskning kring internationellt fdretagande, edited by Jan-Erik Vahlne. Stockholm, 1974. Kindleberger, C.P. American Business Abroad. New Haven, 1969. Knickerbocker, F.T. Oligopolistic Reaction and Multinational Enterprise. Boston, 1973. Lipsey, R. E. & Weiss, M.Y. "The Relation of US Manufacturing Abroad to US Exports. A Framework for Analysis." Business and Economics Section Proceedings, American Statistical Association, 1969. Lipsey, R.E. & Weiss, M.Y. "Analyzing Direct Investment and Trade at the Company Level," Business and Economic Section Proceedings, American Statistical Association, 1972. Olson, H. C. Studies in Export Promotion. Attempts to Evaluate Export Stimulation Measures for the Swedish Textile and Clothing Industries. Uppsala, 1975. Penrose, E. The Theory of the Growth of the Firm. Oxford, 1966. Pfeffer, J. "Merger as a Response to Organizational Interdependence," Administrative Science Quarterly, 6, (1972). Vaupel, J.V. "Characteristics and Motivations of the US Corporations that Manufacture Abroad." Mimeographed, Boston, 1971. Williamson, J. "ProfitGrowth and Sales Maximization." Economica, 33 (1966).

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