Internationalization process

Full text

1
INTERNATIONALIZATION PROCESS
∗
Alvaro CUERVO-CAZURRA
Sonoco International Business Department, Moore School of Business, U. South Carolina
1705 College Street, room 557, Columbia, South Carolina 29208, USA
Tel.: 1-803-777-0314. Fax: 1-803-777-3609. e-mail: acuervo@moore.sc.edu
24 March 2009
For the published version, please see:
Cuervo-Cazurra, A. 2010. Internationalization Process. In Kellermanns, F. and Mazzola, P. (Eds.).
Handbook of Strategy Process Research. Northampton, MA: Edward Elgar.
Abstract. This chapter reviews the state of knowledge on a firm’s internationalization process, the
sequence of events that a firm follows as it expands outside its country of origin. First I review traditional
models and organize them around the questions they answer: How to internationalize, how to enter a
country, and how to select among countries in which to expand. I then discuss challenges to these models
that have emerged in recent times – the rapid internationalization of small high-tech firms and learning
through networks – and indicate how these challenges can be integrated with previous arguments. I
continue the review by discussing how new phenomena, offshoring and global supply chains and
developing-country multinationals, require new explanations. I conclude with a reflection on research
areas that need attention: the transformation from a small and simple to large and complex multinational
firm, the reduction of internationalization, and the relationship between internationalization process and
performance.
Key words: internationalization process, multinational firms, exporting, foreign direct investment, entry
methods.
JEL classification: F23
∗ The chapter benefitted from suggestions from the editors Franz Kellermanns and Pietro Mazzola, Luis Dau, Annique
Un, and participants at a research seminar at EGADE at the Tecnológico de Monterrey. The financial support of the Center for
International Business Education and Research at the University of South Carolina, the Moore School of Business Research
Grant Program at the University of South Carolina, and the Chair on Firms’ Internationalization Schemas at the Tecnológico de
Monterrey are gratefully acknowledged. All errors are mine.

2
INTRODUCTION
The number of multinational companies (MNCs) has increased significantly in recent times. The
United Nations Conference on Trade and Development (UNCTAD) World Investment Report indicates
that in 1992 there were 35 000 MNCs, or firms with assets abroad, while in 2008 there were 78 817
(UNCTAD, 1992, 2008). This increase in the number of MNCs has been facilitated by technological
advances in transportation and information and communication technologies, as well as by the
liberalization of investment and trade that accompanied the structural reforms of the last third of the 20th
century. Companies have moved out of their national borders in search of new markets, new and better
inputs and new sources of knowledge.
Theoretical advances explaining the internationalization process of firms, the sequence of events
that a firm follows as it expands outside its country of origin, have not kept pace with real world events.
More than three decades have passed since the key theoretical models explaining a firm’s
internationalization process were developed: the innovation-related models (Bilkey and Tesar, 1977;
Cavusgil, 1980; Czinkota, 1982; Reid, 1981), the incremental internationalization model (Johanson and
Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) and the product cycle model (Vernon, 1966).
Although these models have been refined and updated over time, they have been challenged by new
phenomena, such as the rapid internationalization of small high-tech firms (Knight and Cavusgil, 2004;
Oviatt and McDougal, 1994). Additionally, further advancements in the world economy, such as global
supply chains and offshoring and the internationalization of developing-country firms, are providing
additional challenges to existing arguments that need a theoretical explanation.
Therefore, this chapter takes stock of where we stand regarding the internationalization process,
summarizing what we currently know about the topic, discussing challenges to traditional arguments and
identifying new areas of research that have not been properly studied yet. Such a review and identification
of new research areas will help researchers better understand the current state of knowledge and direct
their attention and effort to areas that have promising prospects of impact. The review will also help
managers learn from a distillation of advances in theory and practice in the area of internationalization
process.
To do this, the chapter is organized in four parts, of which only the first has received attention in
previous reviews of the literature. The first part briefly reviews the traditional models of the
internationalization process (innovation-related, incremental, product cycle). The second part summarizes
two challenges to traditional models that have appeared in the literature: the internationalization of high-
tech firms and learning through networks. The third part analyzes emerging phenomena that need to be
incorporated into internationalization process research: global supply chains and offshoring and
developing-country MNCs. Because such phenomena are not fully analyzed, this third part provides some
suggestions for how to conduct future studies. The chapter concludes with an indication of areas that need
additional research to have a complete understanding of a firm’s internationalization process: the process
of transformation from a small and simple to a large and complex MNC, the process of reducing foreign
expansion and the relationship between internationalization process and performance.
TRADITIONAL MODELS OF THE INTERNATIONALIZATION PROCESS
The internationalization process of the firm is a complex phenomenon that has multiple dimensions. As a
result, several models have appeared in the literature. Although these traditional models seem to offer
alternative explanations, in most cases they offer complementary ones because the models focus on
related but different dimensions of the process. To clarify the arguments of the traditional models I
organize them by the research question they answer: how to become an international firm, how to enter a
country and how to select among countries to enter. Such organization helps establish the
complementarities among models and illustrate the complexity of the internationalization process of the
firm. All these models have an underlying motivation of a firm expanding abroad to sell; later I review
emerging arguments that do not have such underlying motivation.
The present review briefly outlines the key arguments of the models. Readers interested in more
detailed explanations are encouraged to read the original sources and other reviews, which this one

3
complements by taking a different focus, such as Melin (1992), Andersen (1993, 1997), Kumar and
Subramaniam (1997), Blomstermo and Sharma (2003) and Cuervo-Cazurra and Ramos (2004).
There are other arguments and theories that explain the international expansion of a firm but that
are not process models because they do not provide a prediction regarding the sequence of events in the
firm’s internationalization. One is the eclectic paradigm or ownership-location-internalization (OLI)
framework (Dunning, 1977; 1995), which proposes that a firm will select among countries in which to set
up production facilities depending on the location advantage that the country provides, on the ownership
advantage that the firm has and on the internalization advantage that the firm may gain from controlling
such production facility. However, it does not provide a prediction on the sequence of countries a firm
may enter because the selection depends on the specific advantages the firm can realize at the time of the
decision. Another is the internalization theory of the multinational (Buckley and Casson, 1976) and
related transaction-cost model (Hennart, 1982), which explain why a firm internalizes cross-border
relationships rather than use market mechanisms in its foreign operations. A firm selects among license,
exports, sales subsidiary or production subsidiary to serve the country based on which method is better for
it to achieve its objective while reducing internalization and transaction costs the most (Anderson and
Gatignon, 1988; for a review see Datta, Herrman and Rasheed, 2002). I will not review these models
further in this chapter. For a detailed review of them see Dunning (2001) and Hennart (2001).
Becoming an international firm: innovation-related models
The first set of models explains how a firm changes from being a purely domestic company to becoming
an international firm, with an underlying explanation based on managerial knowledge and attitudes.
Several researchers have analyzed the steps taken by firms as they moved from only having domestic
sales to exporting (Bilkey and Tesar, 1977; Cavusgil, 1980; Czinkota, 1982; Reid, 1981). These analyses
are called innovation-related models because they explained the internationalization process of the firm in
similar terms to the adoption of an innovation (Andersen, 1993). The models have a common theoretical
basis on behavioral economics, proposing that internationalization is the outcome of an information
processing approach, with managerial knowledge of and attitudes about foreign markets changing with
the involvement of the firm in foreign markets. Although each model provides slightly different steps, an
abstraction of all of them is the following process. The firm is initially uninterested in exporting because
managers know little about foreign markets and their attention is focused on the home country. However,
sporadic orders from foreign markets place demands on managerial attention. The firm starts exporting to
serve these requests for products from foreign countries, but this is done in a passive way. However,
increasing requests from foreign markets create a conflict with the attitudes of domestically-oriented
managers. This conflict and the experience gained serving foreign markets induces managers to revise
their expectations regarding foreign markets and refocus their firms to become active exporters.
Although useful for understanding how and why a domestic firm becomes an international
company with sales abroad, these models provide a limited explanation of the internationalization process
beyond exports. They are not designed to explain how the firm becomes an MNC with value-added
operations abroad.
Entering a country: incremental internationalization model
An answer to how to enter a country is provided by the incremental internalization model, which is a true
process explanation of the internationalization process because it provides a logic and a sequence of steps
to follow when entering a country. The incremental internationalization model developed by Johanson
and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) explains the entry into a country and the
selection of countries; I review the entry into a country now and the selection among countries later. The
model builds on behavioral economics and assumes that managers are risk averse and have bounded
rationality, and that lack of knowledge is an important obstacle for expanding abroad. It proposes that
managers’ lack of knowledge and their risk aversion result in the firm following an incremental
internationalization, gradually increasing its commitment and investments in a foreign country.
Incremental internationalization enables managers to learn about the foreign country through direct
experience and reduce risks as they increase commitment toward it. The firm internationalizes

4
incrementally by increasing its commitment in the country in stages: no export activities, exports via
independent representatives, a sales or marketing subsidiary and finally a production subsidiary.
Later studies provided additional depth by discussing how managers’ lack of three types of
knowledge induce them to follow the sequential approach because of perceived costs of operating abroad
(Eriksson, Johanson, Majkgard and Sharma, 1997; Eriksson, Majkgard and Sharma 2000): (1)
internationalization knowledge, or knowledge about how to manage the increase in complexity and
diversity associated with the overall foreign expansion; (2) foreign business knowledge, or knowledge of
clients, markets and competitors abroad; and (3) foreign institutional knowledge, or knowledge of
government, institutional frameworks, rules, norms and values prevalent in foreign countries.
The incremental internationalization model has become one of the cornerstones of the explanation
of the internationalization process. However, its prediction regarding the sequence that the firm will
follow in the foreign country has received criticisms of being overly deterministic. Nevertheless, many of
the criticisms are directed more toward the specific sequence than toward its underlying logic
(Hadjikhani, 1997). Thus, as I discuss later, some of the criticisms can be accommodated within the
theoretical basis of the model by modifying its view of knowledge in the firm.
Selecting among countries: product cycle and incremental internationalization models
A third set of models tackles the selection among the countries a firm would enter first and those it would
enter later. Two process models have provided answers to this question: the product cycle model, which
has explained the spread of innovations around the world although has limitations explaining the behavior
of firms nowadays; and the incremental internationalization model, which in addition to explaining the
entry in a country I reviewed before also provides an explanation of the selection among countries.
Product cycle model. The product cycle model (Vernon, 1966) builds on the concept of the
product life cycle, or the stages that a product innovation goes through – introduction, growth, maturity
and decline – and uses these to describe the location of sales and production across countries over time.
The model views innovations being generated in developed countries and gradually spreading to
developing countries. The model proposes that in the introduction stage, a firm located in a developed
country innovates and introduces the innovative product in the home country to serve the needs of
customers there. It undertakes some exports in order to gain economies of scale. These exports are
directed to other developed countries that are similar to the home country in terms of demand. In the
growth stage, the firm increases exports and later establishes some foreign production facilities as demand
builds in other developed countries. Pressures for cost efficiency increase as imitators enter into the
industry and the production method becomes standardized. As foreign demand continues to increase,
demand becomes more price elastic while labor costs become a concern due to the standardization of
technology. Thus, in the maturity stage, developed-country markets saturate, the product becomes
standardized and production moves to countries with low-cost labor. Finally, in the decline stage,
production in the home country stops as demand declines and the now standardized product is imported
from less-developed economies. Vernon (1979) revised the model to accommodate developments in
international business that limited the scope of its applicability, such as the shortening of life cycles or the
existence of firms that introduced innovations in developed and developing countries simultaneously.
However, although the model is useful to explain the movement of innovations across countries at the
industry level (Wells, 1972), it has limited predictability for explaining the internationalization process at
the level of the firm (Melin, 1992).
Incremental internationalization model. The incremental internationalization model also
explains the selection of countries in which to internationalize. This is based on the concept of psychic
distance, which is defined as ‘the sum of factors preventing the flow of information from and to the
market. Examples are differences in language, education, business practices, culture, and industrial
development.’ (Johanson and Valhne, 1977: 24). Psychic distance limits the transfer of information across
national borders and reduces managers’ ability to understand information from the foreign country and
apply their knowledge there. Because of managers’ lack of knowledge about foreign markets and their
risk aversion, the firm internationalizes sequentially based on the psychic distance between the home and
destination country. The firm first expands into countries that are close to the country of origin in terms of

5
psychic distance. This enables managers to reduce risks by using knowledge developed in the home
market in a similar environment. The firm then enters more distant countries as managers gain experience
operating in the initial foreign country.
The model has been challenged in its application. Although the concept of psychic distance has
been widely used, in many studies it has been analyzed as cultural distance (for example, Barkema, Bell
and Pennings, 1996; Benito and Grisprud, 1992; Kogut and Singh, 1988; see Shenkar, 2001, for a
review). Moreover, it is not clear that entering a country with a low psychic distance will always result in
a successful operation (O’Grady and Lane, 1996; Mitchell, Shaver and Yeung 1994).
CHALLENGES TO TRADITIONAL MODELS
Although the traditional models reviewed have been updated and modified over time, two lines of
research have emerged to challenge their predictions: the rapid internationalization of small high-tech
firms and learning about foreign markets through networks. These two lines of research challenge the
sequences that a firm may follow in its internationalization process, but they are not necessarily in
contradiction with previous arguments on a theoretical level. All have as a common theoretical basis the
notion that managerial knowledge and attitudes, in particular the stock of knowledge and its transfer to
and from abroad, affect a firm’s internationalization process. The traditional models and new research
lines highlight different aspects of this relationship. The internationalization of small high-tech firms
highlights how advances in information and communication technologies and the reduction of barriers to
international trade have, for some firms, reduced the cost of obtaining knowledge about foreign markets
and using knowledge abroad, thus facilitating their internationalization. Learning through networks
highlights the ability of the firm to obtain knowledge about foreign markets indirectly from network
partners rather than having to obtain it directly through its own experience, thus also facilitating its
internationalization. Hence, these two research lines complement previous arguments and explain new
phenomena not considered in the traditional models.
Rapid internationalization of small high-tech firms
The rapid internationalization of small high-tech firms has been presented as a challenge to existing
models. These firms, usually referred to as born-global firms – ‘business organizations that, from or near
their founding, seek superior international business performance from the application of knowledge-based
resources to the sale of outputs in multiple countries’ (Knight and Cavusgil, 2004: 124) – have received
much attention in the literature (Knight and Cavusgil, 1996, 2004; Oviatt and McDougall, 1994; 1997;
see the reviews in Rialp, Rialp and Knight, 2005, and Zahra and George, 2002). Born-global firms appear
to challenge both the innovation-related models and the incremental internationalization model. First, in
contrast to the predictions of the innovation-related models, born-global firms do not first sell in their
domestic market and later become international firms. Instead, they become international firms right at
the start of their existence; their managers are focused on foreign markets from the beginning. Second, in
contrast to the predictions of the incremental internationalization model, born-global firms do no first
enter countries that are close in psychic distance and later enter countries that are far away. Instead, these
firms do not appear to be constrained by psychic distance and start selling in a myriad of countries; their
managers do not appear to be affected by differences in knowledge across countries.
Although born-global firms challenge the sequences of previous models, they do not fully
challenge their theoretical foundations; instead, they can be seen as identifying theoretical boundaries in
terms of the existence and use of managerial knowledge abroad. First, some firms have managers with
knowledge about foreign markets and experience in serving them before the companies are created. These
managers have developed the knowledge and attitude needed for serving foreign markets in previous jobs
(for example, Reuber and Fischer, 1997). When they join the company they already have the needed
attitude and knowledge that enables the firm to internationalize from its inception. Second, some firms
face low or no psychic distance in their exporting thanks to technological advances and reductions in
barriers to trade. Many of the firms studied are in information and telecommunication industries (for
example, Bell, 1985), where the internet has reduced the influence of psychic distance by making
irrelevant the location of producers and consumers: the products are transferred in digital form, payments
are also done in digital form and producers and consumers use a common language. Thus, managers’ lack

6
of knowledge on internationalization, business and institutions that induces firms to follow a sequential
model may not apply to some small high-tech firms. Third, many analyses of born-global firms highlight
the speed at which these firms internationalize. As such, these analyses bring to the fore another
dimension to consider in the internationalization process of the firm: timing of internationalization.
Traditional models have tended to focus on how rather than when to internationalize.
The born-global firms argument is not free from limitations. First, it is focused on the initial
internationalization of the firm through exports, but does not explain well the continued expansion of the
firm using foreign direct investment or other methods to serve foreign markets. Second, however, it does
highlight the use of intermediate methods, such as alliances, to internationalize; many of these firms ally
with other companies to internationalize because they have a limited resource set. Third, it is difficult to
asses the time when the firm was created and when it started serving foreign markets. Thus, it is not clear
whether firms are global from creation or merely internationalize very quickly after creation (Moen and
Servais, 2002). Finally, there are still firms that do not internationalize from inception, even in recent
times. The born-global firms argument cannot be generalized to all firms.
Learning about foreign markets through networks
Several studies have argued that managers and their firms can learn about foreign markets indirectly from
firms in their network of relationships, resulting in changes to the predicted internationalization sequence.
The studies are not commonly viewed as being part of an overarching model, but they can be grouped
because they build on a common explanation of learning through networks affecting the
internationalization process. These studies propose viewing the firm as part of a network of relationships
from which managers are able to obtain knowledge about foreign markets (Ghoshal and Bartlett, 1990;
Johanson and Vahlne, 2003; see Pedersen, Petersen and Sharma, 2005 for a review of learning in the
internationalization process). This extended view of the firm sees managers as active learners who can
obtain knowledge about foreign markets not only through direct experience, as proposed in traditional
models, but also through indirect experience from its relationships with others.
Studies that analyze learning about foreign markets through networks can be grouped into two
sets. First, managers can learn about foreign markets before their firms venture abroad from networks in
the home country, such as from business relationships (Johansen and Vahlne, 2003; Luo and Peng, 1999),
competitors (Knickerbocker, 1973; Delios, Gaur and Makino, 2008; Henisz and Delios, 2001; Meyer,
2006; Shaver, Mitchell and Yeung, 1997) or firms that belong to the same business group (Guillen, 2003).
Managers internalize the experiences and knowledge of others about foreign countries, increase their
stock of knowledge on foreign operations and countries and reduce psychic distance. Second, managers
can also learn about foreign markets from networks in other countries once the firm has expanded abroad.
Existing operations in foreign countries become part of the learning network of the firm, with the firm
using knowledge developed in other countries to enter distant countries (Barkema and Drogendijk, 2007),
using alternative methods of entry as it continues expanding (Barkema, Bell and Pennings, 1996;
Nadolska and Barkema, 2007) and expanding within the foreign country (Aharoni, 1966; Chang, 1995;
Kogut, 1983; Song, 2002; Tong, Reuer and Peng, 2008).
Many of these arguments are in line with the theoretical basis of the incremental
internationalization model. However, they provide additional depth and nuances that were not discussed
in the initial proposition of the model (see Forsgren, 2002, for a review of learning in the incremental
internationalization model). EMERGING EXTENSIONS
In addition to these two challenges, new phenomena that affect the internationalization process need to be
theoretically explained: offshoring and global supply chains and the internationalization of developing-
country firms. The incorporation of these phenomena into the internationalization process requires
additional modifications because they are built on a different theoretical assumption than existing models
and extensions. Instead of assuming that the firm expands abroad to sell as the models and challenges
discussed so far do, these emerging extensions assume that the firm internationalizes to acquire: acquire
access to low-cost factors of production in the case of offshoring and global supply chain
internationalization or acquire access to advanced capabilities in the case of a developing-country firm’s

7
internationalization. These phenomena do not mean that a firm will no longer expand abroad to sell, but
that in some of its foreign expansions it would not aim to sell but to buy instead. Since the reasons for
internationalizing differ, the explanations need to be altered.
Access low-cost factors of production: offshoring and global supply chains
Reductions of barriers to international trade and advances in information and telecommunication
technologies have resulted in the globalization of supply chains. The rise of Asian countries, notably
China, and some Latin American and Eastern European countries as bases for low-cost manufacturing,
and the recent rise of Asian countries, notably India, and some Eastern European countries as the bases
for low-cost provision of services, have resulted in a different type of internationalization process that
needs explanation. Firms in developed countries have taken advantage of these opportunities and moved
into developing countries to access these low-cost factors of production, giving rise to global supply
chains and the offshoring of manufacturing and services. This has resulted in a heated debate (Bhagwati,
Panagariya, and Srinivasan, 2004; Harrison and McMillan, 2006) and an emerging literature in
international business explaining this phenomenon (Doh, 2005; Espino-Rodriguez and Padron-Robaina,
2006; Farrell, 2005; Pyndt and Pedersen, 2006).
The process by which a firm expands abroad to access low-cost factors of production would
therefore need a new explanation. One could build on the logic of the incremental internationalization
process and modify it to account for this phenomenon. This would require discussing two sequences, one
for selecting the country from which to supply and another for entering the country. I outline some of the
logic and sequences; future research can take this outline and explain the relationships in more detail.
First, to select among the countries from which to supply, two new concepts – factor distance and
access distances – would be needed. Factor distance refers to the differences in factor costs between home
and host countries, while access distance refers to the differences in access to the desired factors between
home and host countries. The idea of first entering countries with low psychic distance discussed in
traditional models loses relevance because the firm is seeking countries with differences in endowments
to benefit from such differences in its purchases, rather than countries with similarities in environments to
benefit from selling to similar customers. However, similarly to traditional models, managers’ perceptions
and knowledge about differences in factor costs and ease of access affect the firms’ internationalization
process. When evaluating countries from which to supply, managers would need to balance the
differences in the cost of the factor they seek to obtain for their firms with the ease of access. Although
some countries have the lowest cost factors, they may not necessarily be the optimal location because of
the difficulty in accessing such factors. The interaction between these two distances can result in a
sequence of expansion whereby the firm first moves into countries with lower factor distance but lower
access distance and continues into countries with higher factor distance and higher access distance as their
managers gain experience in solving the challenges of accessing factors of production abroad.
Second, to analyze the sequence of entry into a country to access low-cost factors of production,
the theoretical basis of the incremental internationalization model can be adjusted. Managers’ lack of
knowledge on foreign markets, risk aversion and potential transaction costs induce them to
internationalize their firm’s supply chain gradually. Managers start the process by first buying foreign
inputs and intermediate products in the home country from importers. As managers learn about foreign
inputs and their sources, they can start importing directly from the country using intermediaries,
especially if the input is important to the production process. Once managers have gained experience
about how to buy directly from abroad, they can then contact the producers in the country directly and set
up supply chain centers in the host country, bypassing intermediaries and achieving direct access to
multiple producers in the host country; some of these producers may not have been considered by the
intermediaries, which gives the firm a broader set of suppliers in the host country. This sequence may be
altered when there are no local providers of the inputs at the level of technological sophistication that the
firm requires. In such a case, the firm will have to jump the proposed sequence and invest directly with its
own supply facilities, accessing local pools of factors of production and exporting them, or the product
they embody, to its home country.
Access to advanced capabilities: internationalization of developing-country MNCs

8
Another challenge to existing models is the internationalization process of developing-country firms when
they enter developed countries not to sell there, but to purchase higher quality factors of production and
capabilities to complement and upgrade existing operations in the home country. This argument explains
some, not all, of the foreign expansions of Asian and Latin American firms (for example, Cuervo-
Cazurra, 2007, 2008; Luo and Tung, 2007; Matthews, 2006), which enter developed countries as sources
of high quality inputs.
These foreign expansions of developing-country firms require a different explanation of the
process because the firms do not move abroad only to sell as traditional models and their extensions
argue, but also to buy advanced capabilities. Managers of developing-country firms lead their firms to
enter developed countries not only to access superior factors of production, but also to access the superior
capabilities of specific firms there. As a result, the process of selecting among countries and the process
of entering a particular country vary.
First, when assessing the selection of countries where to access advanced capabilities, managers
need to be concerned about sophistication distance, the difference in quality or sophistication of factors of
production in the host country, rather than psychic distance as in traditional models. Sophistication
distance differs from the factor distance discussed before because instead of cost, quality is the dimension
that matters to managers who are seeking to upgrade the firm’s capabilities. Additionally, managers
would need to be concerned with the ease of absorption, in terms of the ability of the firm to use the
advanced capabilities accessed abroad. This differs from the ease of access discussed before, in the sense
that what matters to managers is not only whether it is easy to access the advanced capabilities, but also
whether the company can use such capabilities to upgrade its own capabilities. As a result, in the selection
of countries managers would have to balance sophistication distance with ease of absorption. This
balancing may result in firms first entering countries with an easier absorption although not a high
sophistication distance and as the firm updates its capabilities and builds it absorptive capacity, enter
countries that are at a higher sophistication distance.
Second, when considering the sequence of actions to enter a country to obtain advanced
capabilities, managers face a situation similar to the one discussed in the analysis of global supply chains.
The logic differs slightly because managers are seeking to obtain advanced capabilities for their firms.
These advanced capabilities take the form of knowledge available in other countries, but knowledge is
difficult to access and transfer across countries (Kogut and Zander, 1992; Nonaka, 1994). As a result, the
sequence is driven by an increase in the acquisition of relatively more tacit knowledge, which is also more
difficult to transfer across countries, and the subsequent upgrading of capabilities. This would result in a
sequence that takes the following form. The firm starts in the home country by purchasing knowledge
from foreign providers there; this enables managers to access knowledge that is explicit and can be easily
transferred across countries. Once the firm improves its capabilities, it can go to the host country to obtain
licenses from providers of knowledge and capabilities there, gaining access to still explicit but more
difficult to transfer knowledge. Once managers and employees in the firm have mastered the explicit
knowledge, they can obtain the tactic knowledge embedded in the capabilities of firms that have them,
establishing tight relationships with or acquiring existing operations in the host country. In contrast with
the case of low-cost factors, advanced capabilities have poorly developed markets, and are instead
embedded in companies, requiring the firm to access them by establishing tight links with firms in the
host country. ADDITIONAL EXTENSIONS
Finally, there are other areas of research that would benefit from additional analyses to gain a better
understanding of the complete internationalization process of the firm. These areas include: the
transformation of a firm from a small and simple MNC to a large and complex one, the process of
reducing internationalization and the relationship between internationalization process and performance.
From small and simple MNC to large and complex MNC
We need additional analyses to understand how the firm moves from being a small and simple MNC to
become a large and complex MNC. Most analyses of the internationalization process are focused on
predicting the behavior of firms as they become MNCs and start selling and operating in a few countries.

9
At the same time, there is a large literature analyzing the behavior of large and complex MNCs (Bartlett
and Ghoshal, 1989; see reviews in Tallman and Yip, 2001, and Westney and Zaheer, 2001). The
intermediate stages have received less attention. The challenge in analyzing the intermediate steps is that
the increase in complexity in the firm also requires a complex theoretical apparatus that can explain not
only the entry in multiple countries, but also the building of relationships among operations in countries.
Some literature has explored this middle area, but there is need for additional analyses to gain a
better understanding of the process. For example, studies on learning from networks discussed before
have analyzed how a firm uses existing foreign operations to continue expanding abroad, and how a firm
may extend operations beyond the initial area of entry in the country. There are also some developments
in the area of the structure of the firm and how it changes over time as the operations of the firm become
more complex, moving from having an international division, to organizing operations by markets, to
creating a matrix structure (Malnight, 1995; Stopford and Wells, 1992; see Westney and Zaheer, 2001, for
a review). There are also developments in the analysis of the transformation of subsidiaries and their
position within the network of subsidiaries as they gain competencies (Birkinshaw and Hood, 1998; see
Birkinshaw, 2001, for a review). The challenge for future literature is to develop a process analysis of the
middle stage that explains the complexity that arises.
Process of reducing internationalization
Reducing internationalization is another area that has received less attention. The vast majority of
research has focused on analyzing the expansion of the firm across countries, implicitly assuming that a
company will continue expanding abroad. However, firms do reduce their international presence. There is
some literature on this topic (for example, Benito, 1997; Benito and Welch, 1997; Henisz and Delios,
2004; Hennart, Roehl, and Zeng, 2002; Mata and Portugal, 2000) but the topic has barely been analyzed,
especially from a process perspective. Future research can study the process of reducing operations in a
country and the process of fully exiting from one or multiple countries. Even though exit tends to be
viewed as failure, it may not always be so. The conditions of operation in the country evolve and the firm
may have achieved the objectives it set out to obtain with the operation in the country. In this case, exit is
not failure but success. However, exit may turn such success into failure if the process is not done
properly. Unfortunately, we know little about why and how to successfully exit a country.
Relationship between internationalization process and performance
The link between internationalization process and performance is another area that has received
comparatively little attention despite the importance of this question. Some researchers have focused on a
related but different question of how the degree of internationalization affects performance (Contractor,
Kundu and Hu, 2003; Hitt, Hoskisson and Kim, 1997; Lu and Beamish, 2005; Tallman and Li, 1996),
explained by the ability of firms to learn and solve liabilities of foreignness (Zaheer, 1995; Zaheer and
Mosakowski, 1997; see Cuervo-Cazurra, Maloney, and Manrakhan, 2007, for a review of the causes of
the difficulties in internationalization). Few researchers have focused on the relationship between
internationalization process and performance; the exception being work such as Vermeulen and Barkema
(2002), who have discussed how the speed, scope and degree of internationalization affect performance.
We need further analyses in this area to be able to provide suggestions to managers on which
internationalization process is likely to result in better performance.
CONCLUSIONS
This chapter reviews the literature on internationalization process, identifies new areas of research and
provides suggestions for future research. There is a large body of literature analyzing internationalization
process, but most studies analyze parts of the process and do not provide a holistic view. The review and
ideas presented in this chapter could be summarized into an integrative model that Figure 1 illustrates.
The model has managers and their knowledge and attitude as the key drivers of the internationalization
process followed by the firm. Their knowledge and attitude determine how the characteristics of the firm,
the network of the firm, the country of operation and the conditions of the world affect the
internationalization process of the firm. This process takes different dimensions depending on the
question answered: (1) Why internationalize, with two main drivers, selling abroad which is the
underlying assumption in most studies of the internationalization process, and buying from abroad, which

10
is the assumption of new phenomena such as offshoring and some of the expansions of developing-
country MNCs. (2) What to do in the internationalization process, which includes not only the start of
internationalization and increase of commitment in a country, but also the diversification of operations in
the country and, in some cases, exit. (3) How to internationalize, which refers to the discussion of
selecting between methods such as contracts, greenfield operations (internal development), alliances, and
acquisitions. (4) Where to internationalize, which refers to the decision of selecting in which countries to
operate first and in which countries to operate later. (5) When to internationalize, which refers to the
timing of internationalization in terms of speed and pace. The final step of the integrative model is the
analysis of the impact of the internationalization process on performance.
*** Insert Figure 1 here ***
The review indicates that the models developed to explain the internationalization process of the
firm have been the basis of a large literature, literature that has continued evolving as new phenomena and
theoretical advances have entered the field. At the same time, the review highlights the need for additional
research on the topic, not only because new phenomena require explanation, but also because there are
topics in this area of investigation that have not received sufficient attention. The continued expansion of
firms around the globe and the changes in the environment of operations are a reminder that this topic is
not only relevant for managers, but its analysis is far from being settled. Whereas we seem to reach
agreement on certain aspects of the internationalization process of the firm, new aspects emerge,
providing additional opportunities for theoretical and empirical analyses. I hope that a future review of the
topic will show both answers to the questions posed in this review and new questions that can result in
interesting and useful research. REFERENCES
Aharoni, Y. (1966), The Foreign Investment Decision Process, Boston, MA: Division of Research,
Graduate School of Business Administration, Harvard University, US.
Andersen, O. (1997), ‘Internationalization and market entry mode: A review of theories and conceptual
frameworks’, Management International Review, 37, 27-42.
Andersen, O. (1993), ‘On the internationalization process of firms: A critical analysis’, Journal of
International Business Studies, 24, 209-231.
Barkema, H. G., and R. Drogendijk (2007), ‘Internationalising in small, incremental or larger steps?’,
Journal of International Business Studies, 38, 1132-1148.
Barkema, H. G., J. Bell and J. M. Pennings (1996), Foreign entry, cultural barriers, and learning. Strategic
Management Journal, 17: 151-166.
Bartlett, C. A. and S. Ghoshal (1989), Managing Across Borders: The Transnational Solution, Boston,
MA, US: Harvard Business School Press.
Bell, J. (1985), ‘The internationalisation of small computer software firms: A further challenge to “stage”
theories’, European Journal of Marketing, 29, 60-75.
Benito, G. R. G. (1997), ‘Divestment of foreign production operations’, Applied Economics, 29, 1365-
1377.
Benito, G. R. G. and G. Gripsrud (1992), ‘The expansion of foreign direct investments: Discrete rational
location choices or a cultural learning process?’, Journal of International Business Studies, 23,
461-476.
Benito, G. R. G. and L. S. Welch, (1997), ‘De-internationalization’, Management International Review,
37 (special issue), 7-25.
Bhagwati, J., A. Panagariya and T. N. Srinivasan (2004), ‘The muddles over outsourcing’, Journal of
Economic Perspectives, 18, 93-114.
Bilkey, W. J. and G. Tesar, (1977), ‘The export behavior of smaller Wisconsin manufacturing firms’,
Journal of International Business Studies, 9, 93–98.
Birkinshaw, J. and N. Hood, (1998), ‘Multinational subsidiary development: Capability evolution and
charter change in foreign-owned subsidiary companies’, Academy of Management Review, 23,
773-795.

11
Blomstermo, A. and D. D. Sharma, (2003), ‘Three decades of research on the internationalization process
of firms’, in A. Blomstermo and D. D. Sharma (eds.), Learning in the Internationalization
Process of Firms, Cheltenham, UK and Northampton, MA, US: Edward Elgar, pp. 16-35.
Buckley, P. J. and M. Casson, (1976), The Future of the Multinational Enterprise, New York: Holmes &
Meier.
Cavusgil, T. S. (1980), ‘On the internationalization process of firms’, European Research, 8, 273-281.
Chang, S. J. (1995), ‘International expansion strategy of Japanese firms: Capability building through
sequential entry’, Academy of Management Journal, 38, 383-407.
Contractor, F. J., S. K. Kundu and C. C. Hsu (2003), ‘A three-stage theory of international expansion: the
link between multinationality and performance in the service sector’, Journal of International
Business Studies, 34, 5-18.
Cuervo-Cazurra, A. (2007), ‘Sequence of value-added activities in the internationalization of developing
country MNEs’, Journal of International Management, 13, 258-277.
Cuervo-Cazurra, A. (2008), ‘The internationalization of developing country MNEs: The case of
Multilatinas’, Journal of International Management, 14, 138-154.
Cuervo-Cazurra, A. and M. Ramos (2004), ‘Explaining the process of internationalization by building
bridges among existing models’, In S. W. Floyd, J. Roos, C. Jacobs and F. Kellermanns (eds),
Innovating Strategy Processes, Oxford, UK and Malden, MA, US: Blackwell Publishing, pp.
111-122.
Cuervo-Cazurra, A., M. Maloney and S. Manrakhan (2007), ‘Causes of the difficulties in
internationalization’, Journal of International Business Studies, 38, 709-725.
Czinkota, M. R. (1982), Export Development Strategies: US Promotion Policies, New York: Praeger.
Delios, A., A. S. Gaur and S. Makino (2008), ‘The timing of international expansion: Information, rivalry
and imitation among Japanese firms, 1980-2002’, Journal of Management Studies, 45, 169-195.
Doh, J. (2005), ‘Offshore outsourcing: Implications for international business and strategic management
theory and practice’, Journal of Management Studies, 42, 695-704.
Dunning, J. H. (1977), ‘Trade, location of economic activity and the MNE: A search for an eclectic
approach’, in B. Ohlin, P. O. Hesselborn and P. M. Wijkman (eds), The International Allocation
of Economic Activity, London: Macmillan, pp. 395-418.
Dunning, J. H. (1995), ‘Reappraising the eclectic paradigm in an age of alliance capitalism’, Journal of
International Business Studies, 26, 461-493.
Dunning, J. H. (2001), ‘The key literature on IB activities: 1960-2000’, in A. M. Rugman and T. L.
Brewer (eds), Oxford Handbook of International Business, Oxford, UK and New York, US:
Oxford University Press, pp. 36-68.
Eriksson, K., J. Johanson, A. Majkgard and D. D. Sharma (1997), ‘Experiential knowledge and cost in
the internationalization process’, Journal of International Business Studies, 28, 337-360.
Eriksson, K., A. Majkgard and D. D. Sharma (2000), ‘Path dependence and knowledge development in
the internationalization process’, Management International Review, 40, 307-328.
Espino-Rodriguez, T. F. and V. Padron-Robaina (2006), ‘A review of outsourcing from the resource-
based view of the firm’, International Journal of Management Reviews, 8, 49-70.
Farrell, D. (2005), ‘Offshoring: Value creation through economic change’, Journal of Management
Studies, 42, 675-683.
Forsgren, M. (2002), ‘The concept of learning in the Uppsala internationalization process model: A
critical review’, International Business Review, 11, 257-278.
Ghoshal, S. and C. A. Bartlett, (1990), ‘The multinational corporation as an interorganizational network’,
Academy of Management Review, 15, 603-625.
Guillen, M. F. (2003), ‘Experience, imitation, and the sequence of foreign entry: Wholly owned and joint-
venture manufacturing by South Korean firms and business groups in China, 1987-1995’, Journal
of International Business Studies, 34, 185-198.
Hadjikhani A. (1997), ‘A note on the criticisms against the internationalization process model’,
Management International Review, 37, 43-66.

12
Harrison, A. E. and M. S. McMillan, (2006), ‘Dispelling some myths about offshoring’, Academy of
Management Perspectives, 20 (4), 6-22.
Hennart, J.-F. (1982), A Theory of Multinational Enterprise, Ann Arbor: MI: University of Michigan
Press.
Hennart, J.-F. (2001), ‘Theories of the multinational enterprise’, in A. M. Rugman and T. L. Brewer (eds),
Oxford Handbook of International Business, Oxford, UK and New York, US: Oxford University
Press, pp. 127-149.
Hennart, J.-F., T. Roehl and M. Zeng (2002), ‘Do exits proxy a liability of foreignness?: The case of
Japanese exits from the US’, Journal of International Management, 8, 241-264.
Henisz, W. J. and A. Delios (2004), ‘Information or influence? The benefits of experience for managing
political uncertainty’, Strategic Organization, 2, 389-421.
Johanson, J. and J. E. Vahlne (1977), ‘The internationalization process of the firm: A model of knowledge
development and increasing foreign market commitments’, Journal of International Business
Studies, 8, 23-32.
Johanson, J. and J. E. Vahlne (1990), ‘The mechanism of internationalization’, International Marketing
Review, 7, 11-24.
Johanson, J. and J. E. Vahlne (2003), ‘Business relationship learning and commitment in the
internationalization process’, Journal of International Entrepreneurship, 1, 83-101.
Johanson, J. and F. Wiedersheim-Paul, (1975), ‘The internationalization of the firm: Four Swedish case
studies’, Journal of Management Studies, 12, 305–22.
Knickerbocker, F. T. (1973), Oligopolistic Reaction and the Multinational Enterprise, Cambridge, MA:
Harvard University Press.
Knight, G. A. and S. T. Cavusgil (1996), ‘The Born Global firm: A challenge to traditional
internationalization theory’, in S. T. Cavusgil, (ed.), Advances in International Marketing, 8, 11-
26.
Knight, G. A. and S. T. Cavusgil (2004), ‘Innovation organizational capabilities and the born-global
firm’, Journal of International Business Studies, 35, 124-141.
Kogut, B. (1983), ‘Foreign direct investment as a sequential process’, in C. Kindleberger and D.
Audretsch (eds), The Multinational Corporation in the 1980s, Cambridge, MA: MIT Press.
Kogut, B. and H. Singh (1988), ‘The effect of national culture on the choice of entry mode’, Journal of
International Business Studies, 19, 411-432.
Kogut, B. and U. Zander (1992), ‘Knowledge of the firm, combinative capabilities, and the replication of
technology’, Organization Science, 3, 383-397.
Kumar, V. and V. Subramaniam (1997), ‘A contingency framework for the mode of entry decision’,
Journal of World Business, 32, 53-72.
Lu, J. W. and P. W. Beamish (2004), ‘International diversification and firm performance: The s-curve
hypothesis’, Academy of Management Journal, 47, 598-609.
Luo, Y. and M. W. Peng (1999), ‘Learning to compete in a transition economy: Experience, environment,
and performance’, Journal of International Business Studies, 30, 269-295.
Luo, Y. and R. L. Tung (2007), ‘International expansion of emerging market enterprises: A springboard
perspective’, Journal of International Business Studies, 38, 481-498.
Malnight, T. W. (1995), ‘Globalization of an ethnocentric firm: An evolutionary perspective’, Strategic
Management Journal, 16, 119-131.
Mata, J. and P. Portugal (2000), ‘Closure and divestiture by foreign entrant: The impact of entry and post-
entry strategies’, Strategic Management Journal, 21, 549-562.
Mathews, J. A. (2006), ‘Dragon multinationals: New players in 21st century globalization’, Asia Pacific
Journal of Management, 23, 5-27.
Melin, L. (1992), ‘Internationalization as a strategy process’, Strategic Management Journal, 13 (winter
special issue), 99-118.
Meyer, K. (2006), ‘Globalfocusing: From domestic conglomerates to global specialists’, Journal of
Management Studies, 43, 1109-1144.

13
Mitchell, W., M. Shaver and B. Yeung (1994), ‘Foreign entrant survival and foreign market share:
Canadian companies’ experience in United States medical sector markets’, Strategic Management
Journal, 15, 555-567.
Moen, O. and P. Servais (2002), ‘Born Global or Gradual Global? Examining the export behaviour of
small and medium-sized enterprises’, Journal of International Marketing, 10, 49-72.
Nadolska, A. and H. G. Barkema (2007), ‘Learning to internationalise: the pace and success of foreign
acquisitions’, Journal of International Business Studies, 38, 1170-1186.
Nonaka, I. (1994), ‘A dynamic theory of organizational knowledge creation’, Organization Science, 5,
14-37.
O'Grady, S. and H. W. Lane (1996), ‘The psychic distance paradox’, Journal of International Business
Studies, 27, 309-333.
Oviatt, B. M. and P. P. McDougall (1994), ‘Toward a theory of international new ventures’, Journal of
International Business Studies, 25, 45-64.
Oviatt, B. M. and P. P. McDougall (1997), ‘Challenges for internationalization process theory: The case
of international new ventures’, Management International Review, 37, 85-99.
Petersen, B., L. S. Welch and P. Liesch (2002), ‘The internet and foreign market expansion by firms:
theoretical questions and three predictions’, Management International Review, 42, 207-221.
Pyndt, J. and T. Pedersen (2006), Managing Global Offshoring Strategies, Copenhagen, Copenhagen
Business School Press.
Reid, S. D. (1981), ‘The decision-maker and export entry and expansion’, Journal of International
Business Studies, 12, 101-112.
Reuber, A. R. and E. Fischer (1997), ‘The influence of the management team's international experience
on the internationalization behavior of SMEs’, Journal of International Business Studies, 28, 807-
825.
Rialp, A., J. Rialp and G. A. Knight (2005), ‘The phenomenon of early internationalizing firms: what do
we know after a decade (1993-2003) of scientific inquiry?’, International Business Review, 14,
147-166.
Shaver, J. M., W. Mitchell and B. Yeung (1997), ‘The effect of own-firm and other-firm experience on
foreign direct investment survival in the United States, 1987-92’, Strategic Management Journal,
18, 811-824.
Shenkar, O. (2001), ‘Cultural distance revisited: Towards a more rigorous conceptualization and
measurement of cultural differences’, Journal of International Business Studies, 32, 519-535.
Song, J. (2002), ‘Firm capabilities and technological ladders: Sequential foreign direct investments of
Japanese electronics firms in East Asia’, Strategic Management Journal, 23, 191-210.
Stopford, J. M. and L. T. Wells (1972), Managing the Multinational Enterprise, New York: Basic Books.
Tallman, S. B. and G. S. Yip (2001), ‘Strategy and the multinational enterprise’, in A. M. Rugman and T.
L. Brewer (eds), The Oxford Handbook of International Business, Oxford, UK and New York,
US: Oxford University Press, pp. 317-348.
Tallman, S. and J. Li (1996), ‘Effects of international diversity and product diversity on the performance
of multinational firms’, Academy of Management Journal, 39, 179-196.
Tong, T. W., J. J. Reuer and M. W. Peng (2008), ‘International joint ventures and the value of growth
options’, Academy of Management Journal, 51, 1014-1029.
UNCTAD (1992), World Investment Report 1992, New York: United Nations.
UNCTAD (2008), World Investment Report 2008, New York: United Nations.
Vermeulen, F. and H. Barkema (2002), ‘Pace, rhythm, and scope: Process dependence in building a
profitable multinational corporation’, Strategic Management Journal, 23, 637-650.
Vernon R. (1979), ‘The product cycle hypothesis in a new international environment’, Oxford Bulletin of
Economics and Statistics, 41, 255-267.
Vernon, R. (1966), ‘International investment and international trade in the product cycle’, Quarterly
Journal of Economics, 80, 190-207.

14
Wells Jr, L. T. (ed.). (1972), The Product Life Cycle and International Trade, Boston: Harvard University
Press.
Westney, E. D. and S. Zaheer (2001), ‘The multinational enterprise as an organization’, in A. M. Rugman
and T. L. Brewer (eds), The Oxford Handbook of International Business, Oxford, UK and New
York, US: Oxford University Press, pp. 349-379.
Zaheer, S. (1995), ‘Overcoming the liability of foreignness’, Academy of Management Journal, 38, 341-
363.
Zaheer, S. and E. Mosakowski (1997), ‘The dynamics of the liability of foreignness: A global study of
survival in financial services’, Strategic Management Journal, 18, 439-464.
Zahra, S. A. and G. George (2002), ‘International Entrepreneurship: The current status of the field and
future research agenda’, in M. A. Hitt, R. D. Ireland, S. M. Camp and D. L. Sexton (eds)
Strategic Entrepreneurship: Creating a New Mindset, Oxford, UK, and Malden, MA, US:
Blackwell, pp. 255-288.

15
Figure 1
Integrated model of the internationalization process