To what extent do firms follow distinct stages as they internationalise? Draw on relevant theories of internationalisation to develop your answer.

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Since the rapid development of globalisation post Second World War, there has been much interest in theories relating to the internationalization of firms. These theories are diverse and varied; attempting to answer both why and how companies become ‘international'. Welch and Luostarinen (188) defined internationalization as ‘the process of increasing involvement in international operations' and theories on internationalization were first established in the 160's (Hymer, 160 & Aharoni, 166) and new theories are still being developed (Buckley and Ghauri, 1).

This paper will attempt to provide an overview of these internationalization theories, whilst attempting to analyse if firms do follow distinct stages during the process of becoming international. The theories that will be outlined include the development of the mainstream ‘stages' approach, highlighting the Uppsala Model (Johanson and Wiedersheim-Paul, 175; Johanson and Vahlne, 177) and Vernon's (166) Product Life Cycle model. Attention will then be brought to the more ‘contingent' approaches to internationalization, focusing on the Eclectic model (Dunning, 188). Finally, the Network Perspective will be analysed in relation to the question, focusing on the work of Johanson and Mattsson (188).

The Stages Model theory of internationalization views the firm's progression from domestic to international as being a chronological, methodical process. A firm moves through a set of specific stages, each stage needs the firm to have certain perquisites and only once fulfilled may they move onto the next stage. As the firm moves up each stage they gain greater knowledge and understanding coupled with a changing perception of risk (Young, 18). This model, known as the ‘international model', is best conceptualised in the work of the Business Administration department at the Uppsala University. The results of their work and contributions from Johanson and Wiedersheim-Paul (175) and Johanson and Vahlne (177) led to the development of the Uppsala model, which contains several different steps that led to a firm becoming internationalised, this was known as an ‘establishment chain'.

The steps are outlined below

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1.No regular export activities.

.Export via independent representatives (agents).

.Establishment of an overseas sales subsidiary.

4.Overseas production/manufacturing units.

Thus, according to the Uppsala model, in the first stage the ‘company has made no commitment of resources to the market as it does no process enough information about the market' (Tayeb, 000). In the second stage, it will begin to export their products, via independent agents and over time company moves to the next stage establishing a sales subsidiary in a foreign country. Finally, the last stage is reached and the company begins production abroad.

The model focuses upon the export mode of entry into a foreign country and an important assumption is the concept of ‘psychic' distance. As stated by Tayeb (000) ‘this concept is defined as factors preventing or disturbing the flows of information between firms and markets' as firms' enter foreign markets they will be affected by greater psychic distance (Johanson and Vahlne, 175). Thus Johanson and Vahlne (175) assume that as a result of an increasing physic distance, the process of change takes place slowly due to factors like culture, political systems, and language causing foreign direct investment to be more difficult. As a result the firm is forced to take gradual incremental steps in its move toward internationalization, because it must gain knowledge and experience about the highlighted factors.

The Uppsala model supports the statement that a firm does indeed follow a general pattern, with the company following four distinct steps in its process of internationalization. However, although widely accepted as a theory, some criticisms of the model have appeared, highlighting the need for its development. Many studies have highlighted the fact that firms with greater resources can take larger steps and thus these stages become less distinct than first thought (Johanson and Vahlne, 1). Lewitt (18) also claims that the ‘psychic' distance is not as apparent as once might have been. He claims that the contribution of technology has resulted in a move towards homogenisation, and thus the apparent factors preventing the flow of information are reduced. Therefore, it is possible to conclude that improved communication will reduce obstacles that firm face before moving up to the next stage and thus reducing the importance of some of the stages. For example, instead of establishing an overseas subsidiary (stage ), some firms may jump to the final stage and begin overseas production. One final criticism of the Uppsala model comes from Turnbull and Valla (186) whose studies have shown that the modes of entry and internationalization pattern is effected both by their country of origin and the industry in which they operate. The very fact the initial research for the Uppsala model was based on a study on only four Swedish firms supports this argument.

Despite heavy criticism, the Uppsala model is well received and it is not the first model to suggest that firms do follow distinct stages as they internationalise. In 166, Vernon presented the product life cycle concept that provided a solution for trade and foreign investments in a staged process. Vernon's argument if the firm is in an environment that encourages the innovation of products, or equally new techniques of production, then internationalisation will occur when this innovation is transferred across different economies (Tayeb, 000). Vernon provides a simple model in order to described the process.

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