A number of Swedish researchers, Johansson, Wholesome-Paul and Avalanche, at the university of Pascal studied the metallization process during the sass. They were influenced by Penrose theory on the growth of the firm. The Pascal model seeks to explain and predict two aspects of internationalization of the firm: the step-by-step pattern of industrial development within individual national markets and the expansion of companies across national markets, as they move from nations which are proximal to those which are Increasingly psychically distant.
Johansson, Withholders-Paul and Avalanche studied the Internationalization of Swedish manufacturing companies and developed a model of the companies’ choice of market and form of entry when going abroad. It is a dynamic model that describes the internationalization of the company as a process. They were also influenced by Aaron’s seminal study from 1966. The Stage Model The Swedish researchers Interpreted the pattern In the internationalization process they had observed In the Swedish companies.
The first thing they noticed was that the companies had begun to operate abroad in a nearby market and then slowly penetrated markets far away. Another conclusion was that it appeared as the Swedish companies chose to enter new markets through export, instead of using sales organization or manufacturing subsidiaries of their own. After several years of exports the company could establish wholly owned or majority-owned operations. The process Is Interplay between the development of knowledge about foreign market and operations on one hand and an Increasing commitment of resources to foreign markets on the other.
The geographical dimension in this figure shows that companies enter new markets with successively greater psychic distance. Psychic distance can be defined by factors such as differences in language, culture and political systems, which disturb the flow of information between the companies and the market. Companies start Internationalization by going to these markets they can most easily understand, where they will see opportunities, and where the perceived market uncertainty Is low.
The Internationalization process model can explain two patterns in the internationalization of the company. The first pattern is that the company’s engagement in the specific country market develops according to an establishment chain, e. G. T the start no regular export activities are performed in the market, then export takes place via independent representatives in the market, later through a sales subsidiary and eventually manufacturing may follow. This stage Indicates an Increasing commitment of resources to the market.
The second stage is when the company has an information channel to the market and receives superficial information about the market conditions. These activities will lead to more differentiated and wide market experience. According to the second pattern the distance can as earlier mentioned be defined by factors such as differences in engage, culture, political systems, which disturb the flow of Information between The study of the Swedish companies shows that market commitment often will be made in small incremental steps, both in the market commitment dimension and in the geographical dimension.
There are three exceptions; the first one is companies that have large resources experience small consequences of their commitments and can therefore take larger internationalization steps. The second exception is when the market is stable and homogeneous, relevant market knowledge can be gained in other ways than experience. Thirdly, when a company has considerable experience from markets with similar conditions, it may be able to generalist this experience to any specific market. State Aspects The state aspects of internationalization are market commitment and market knowledge.
Market commitment and market knowledge are assumed to effect decisions regarding commitment of resources to foreign market and the way current activities are performed. Market Commitment The concept of market commitment contained two factors, the amount of resources committed and the degree of commitment. The amount of resources could be personalized to the size of investment in the market, while the degree of commitment refers to difficulty of finding an alternative use for the resources and transferring them to the alternative use.
Resources located in a particular market can often be considered a commitment to that market. In some cases such resources can be sold and the financial resources can easily be used for other purposes. The degree of commitment is higher the more the resources are integrated with other parts of the firm and their value is derived from these integrated activities. An example of resources with a high degree of commitment is a marketing department with special product knowledge and established integrated consumer relations in a particular market.
Market Knowledge Knowledge is an important factor because commitment decisions are based on several kinds of knowledge. First, knowledge of opportunities or problems is assumed to initiate decisions. Second, evaluation of alternatives is based on some knowledge about relevant parts of the market environment. Internationalization requires both general knowledge and market-specific knowledge. Market-specific knowledge is nearly gained through experience in the market, where it can be transferred from one country to another.
The Pascal model stresses that it is important to have a direct relation between market knowledge and market commitment. Knowledge is considered a human resource and the better knowledge a company has about a market the more valuable are the resources and the stronger the commitment to the market. Experiential knowledge is not transferable and is “closely associated with a particular set of circumstances”. The relation to a consumer differs a lot, since every industrial buyer has unique characteristics.
This is way established relations are valuable and it is also a explanation of way sales subsidiaries often are established by the acquisition of the former agent. Change Aspects The change aspects that affect the state aspect are current activities and commitment decisions. Current Business Activities There is “a lag between most current activities and their consequences”. The longer the lag, the higher the commitment of the company mounts. It is reasonable to larger the total commitment as a consequence of current activities will be. Current activities are also the prime source of experience.
Experience can be gained both through hiring personnel with experience or through advice from persons with experience. It is possible to distinguish between company experience and market experience. “Persons working on the boundary between the firm and its market must be able to interpret information from inside the firm and from the market”. It is only possible to interpret one kind of information for one who has experience with the other part. It is to some extent possible to hire personnel with market experience and to use the profitably after some time in the market activities.
A delay will occur tit the need for the new personnel to gain the necessary experience in the company. The best way to obtain market experience is to hire a sales manager or a salesman of a representative or to buy the whole or a part of the company. This kind of experiences is often not for sale, then it has o be acquired through a long learning process in connection with current activities. This factor is an important reason why the internationalization process often proceeds slowly.
Commitment Decisions The second change aspect deals with decisions to commit resources to foreign operations. Here Buckley and Gharry assumed that decisions are made in response o problems and opportunities on the market. These problems are assumed to be dependent on experience from activities on the specific market. Other factors that plays an important role in decision making is existing market risk and existing market uncertainty. Criticism of the Pascal Model Since the Pascal model was presented in 1977 there have been various criticisms of the theory.
One criticism is that the model is too deterministic. Other criticism related to the Pascal model is that the model doses not take into account interdependencies between different country markets. There have been many empirical tests related to the Pascal model and the studies have shown that the internationalization process model is not valid for service industries. Others have claimed that companies have lately seemed prone to leap-frog stages in the establishment chain, entering ‘distant’ markets in terms of psychic distance at an early stage.
The internationalization process generally seems to have speeded up. In 1990 Nordstrom made a test that confirmed this criticism. Countries like the I-J, Germany and the USA have become more comment market for the first establishment of sales subsidiaries by Swedish companies than their Scandinavian neighbors. The leap-frigging tendency not only involves entering distance markets”. A company can also leap-frog some intermediate entry modes in order to move away from the sequential pattern and more directly to some kind of foreign investment.
Other criticism stated is that the Pascal school is not valid in situations of highly internationalists companies and industries. “In these cases, competitive forces and factors override psychic distance as the principal explanatory factor for the firm’s process of internationalization”. If knowledge of transactions easy can be transferred from one country to another, companies with international experiences are likely to perceive the psychic distance to a new country shorter than companies with little international experiences.
According to Nordstrom, 1990 the world has become much more homogeneous and that has lead to that psychic large markets that are close to Sweden in a culture sense. It has developed a market for knowledge about foreign markets. It is now possible to buy knowledge about legal and financial standards from international accounting companies and investment banks. Which make it easy to gain information about competitors, market potential, distribution system and possible entry modes. Companies have also quicker and easier access to knowledge about doing business abroad.
It is no longer necessary to build up knowledge ‘in-house’. Transaction Cost Theory The need for control of transactions is more of an obstacle in small companies’ antidisestablishmentarianism than in large companies. We have already established that the greater the degree of uncertainty the greater the advantage will be for the company to control the transactions itself. Since small companies often posses less resources than large, we thought that this would create an obstacle in the internationalization process. Small companies have also fewer transactions than large and with less business partners.
The single most important location-specific factor when moving production abroad is labor costs. Dunning, 1980 cited in Dickens 1992 argues, in his eclectic paradigm, that the single most important location- specific factor is labor. We thought that it would be interesting to see if this was the single most important location-specific factor that companies took in consideration when they were about to move production abroad, or if there were other equally important factors influencing. Networks The main reasons for engaging in networks are to co-operate against common rivals and to reduce costs.
According to Beers, 2002 the motives for engaging in inter-organizational network relationship can be quite varied. To co-operate against common rivals and to reduce costs are mentioned as two of the most common reasons. A company’s development is dependent on networks in its internationalization process. This hypothesis was developed solely on our curiosity to study if networks, in fact, have such a great importance as stressed in our studied literature and if the companies considered networks important in their internationalization process.
Swedish manufacturing companies begin their internationalization process by establishing in the Nordic countries. According to the stage model the Swedish researchers stressed that Swedish manufacturing companies began to operate abroad in a nearby market and then slowly penetrated markets far away. This model was developed in the sass and has lately been criticized for no longer being relevant. Our intention was to find out if this assumption was valid for our population. Companies establish in the region of Western European industrialized countries when the Nordic region is covered.
As earlier mentioned the Pascal model was developed in the sass when the East of Europe was still under the companies. The Eastern Europe market has opened up since then, so we wanted to find out if this hypothesis still was valid. Small companies have a higher propensity than large companies to follow the traditional establishment pattern when going abroad. Since small companies have fewer resources than large and have less developed knowledge and experience of psychic distance, they are more likely to follow the traditional establishment pattern when going abroad.