Export Behaviour Theories

Prof. Jiban K. Mukhopadhyay(Fmr. Chief Economic Adviser, Tata Group)

E-mail ID - jiban@spjimr.orgCell: 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.