Commitment and opportunity development in the internationalization process: a note on the Uppsala internationalization process model.
* This paper starts from the observation that the internationalisation process (IP) model frequently is interpreted as a model of risk reduction in the internationalization of the firm. The dominating view of the model seems to be that commitment is the dependent variable and experience is the independent variable. A basic assumption of the original model, however, is that opportunity development is an important outcome of commitment. The purpose of this note is to articulate this relation, which is not stressed enough in earlier writings.
* A causal chain from relationship commitment over relationship knowledge development and network knowledge development to opportunity development is specified. Two propositions are formulated regarding the effects of mutual relationship commitment and of network embeddedness in a country market on opportunity development in the market.
25 years afterwards, we are surprised. Firstly, we never expected this longevity of the model. Secondly, we are surprised, because after some thinking we have arrived at the conclusion, that we would not have built the model differently today, but with somewhat different underpinning. In a way we were lucky in using concepts such as "knowledge" and "commitment", which later came to be widely used in research on the theory of the firm but also in some functional disciplines. We were left with our inductively produced understanding of these concepts. We are grateful to the organizers of the conference and editors of this issue of MIR for focusing on the IP model and giving us this opportunity to elaborate on it.
But, we must point out that the model is not "the establishment chain", going from ad hoc exports to the establishment of manufacturing subsidiaries. This was the empirical phenomenon we observed, giving the impetus to construct the model. The model is on learning and commitment building or, more precisely, on the interplay between knowledge development and increasing foreign market commitments. While the effect of knowledge development on foreign market commitment has been recognized and studied by many researchers the effect of commitment on knowledge development has been less noticed. The purpose of this note is to elaborate on this latter effect. In particular, we are here interested in the effect on opportunity development.
Admittedly, this note is written in a way that it presupposes the reader is familiar with the original version of the internationalization model published in 1977 (Johanson/Vahlne 1977). In that article we tried to explain the gradual internationalization process observed by relying on two interdependent sub-processes--experiential learning and commitment building. We related those processes to the focal company only, later realizing that indeed these processes occur as interplay between at least two (potential) partners (Johanson and Vahlne 1990). In Johanson/Vahlne (2003), we tied the mechanisms of our original model closer to the network view of industrial markets by focusing on the critical role of building and changing relationships. One implication is that the concept of a "country market" is no longer seen as a valid unit of analysis. In this note, we focus on network or partner commitment and its role not only for uncertainty reduction, but on a sub-set of issues, notably--opportunity development. We believe we have under-estimated this aspect and the purpose of this note is to make up for that.
The paper is structured as follows. After a short introductory review of important applications of the IP model in international business research, we discuss the change from market commitment to relationship commitment. In a following section, we discuss the relations between relationship commitment and knowledge development. Next, we widen the discussion to include network relationships, social capital and knowledge development. In the subsequent section, we return to the central question of the paper, the effect of commitment on opportunity development. This section is summarized in two propositions. Finally, we give some concluding comments.
Some Comments on Literature Based on the IP Model
The model is mostly characterized as a learning model of the internationalization process (Forsgren 2002), in which experience is the main explanatory construct (Blomstermo/Sharma 2003). Interestingly, however, most studies referring to the IP model do not study experiential learning, but take it for granted and see knowledge--or, as suggested by the model, experiential knowledge--as the independent variable, and commitment--or, in some articles, performance--as the dependent variable. They usually operationalize experiential knowledge by number of years (Luo/Peng 1999) or number of countries (Erramilli 1991). A number of studies have used various forms of experience to explain why firms enter foreign countries, invest in foreign countries or are more or less successful abroad. Foreign experience (Hohenthal 2001), international operations experience (Yu 1990), international experience (Delios/Beamish 1999), entry experience (Chang 1995), decision specific experience (Padmanabhan/Cho 1999) and other types of experience have been used in explanations of various types of internationalization behavior. Studies of performance and survival in internationalization process seem to view it as a test of the effectiveness of experiential learning (Barkema/Bell/Pennings 1996, Luo 1999).
With the exception of Hadjikhani (1997) studies of commitment as explanation of internationalization are absent. Nor has, to our knowledge, anything been written explicitly about the interplay between knowledge development and commitment.
Moreover, experiential knowledge is generally assumed to be important because it reduces uncertainty associated with the foreign market commitments (Buckley/ Ghauri 1994). Although this is an important role of experiential knowledge in the model, we also stressed that it "provides the framework for perceiving and formulating opportunities" (Johanson/Vahlne 1977, p. 28). Admittedly, the opportunity side of the internationalization process is not very well developed in our earlier papers. We had a feeling that it was important as demonstrated by the sentence "The reason for considering market commitment is that we assume that the commitment to a market affects the firm's perceived opportunities and risk" (ibid., p. 27) but we had no conceptual tools for developing it. Later on, a number of such tools have become available and in this little note the aim is to develop the causal line from commitment over experiential knowledge to opportunity development.
From Market Commitment to Relationship Commitment
An important change of the model was introduced in Johanson and Vahlne (1990) and developed further in Johanson and Vahlne (2003), which discuss business relationship learning and commitment in the internationalization process. The original version focused on the focal firm only. Later we realized that similar processes went on also at the other end of the relationships constituting the business world. The following discussion is based on this idea. In short, our reasoning is as follows. When a focal firm and another firm are mutually committed to future business with each other, they have a basis not only for learning about and from each other, but also for creating new knowledge through interaction. In this way, they develop opportunities for new business. Moreover, if the partner firm also is committed to other relationships, the focal firm becomes indirectly linked to a wider network of interconnected firms, who are committed to each other and, to some extent, have a shared knowledge capital. In this way, the relationship provides a bridge into a new knowledge world and the opportunities created in the relationship have a wider significance than just business with the partner firm. The critical issue is that building the relationship is a costly, time-consuming and uncertain process. We believe that this, in addition to other reasons discussed in the earlier IP writings, is one important reason why it takes time to internationalize with high long-term performance.
The internationalization process suggested by this reasoning is, on the surface, the same as the internationalization process, in which the main role of experiential knowledge is uncertainty reduction. But while uncertainty reduction puts a check on the process, the proposed mechanism drives it. It identifies and develops hitherto unimagined business opportunities with strong long-term implications for the development of the firm. Below we comment on the mechanisms of the model.
Relationship Commitment and Knowledge Development
It is an established fact that companies form relationships with other companies. Such relationships are in many cases lasting long, sometimes for decades and a major part of the business exchange is often carried out in such relationships. Exchange performed in such relationships seems to improve on the efficiency of the partners involved (Hakansson 1982, Ford 2002), thanks to joint co-ordination. The general explanation to this phenomenon is that resources, and organisations, are not homogeneous but rather heterogeneous, and consequently one partner fits better than another. Still more, heterogeneity means that the partners always can find new ways of relating to each other so that they gradually, adjust to each other and gradually become more interdependent (Anderson/Hakansson/Johanson 1994). In this paper, we are primarily focusing on the relationship between two partners. It is, however, important to realize that the two focal companies have more relationships, perhaps partially over-lapping, as to form a network of such relationships involving numerous more or less critical actors. Thus, through its relationships with other firms, the firm is engaged in a wider network of relationships. A particular relationship cannot be fully understood in isolation. It should be considered in the context of the connected network relationships.
Relationships may start as the result of ad hoc events, e.g. unplanned meetings. Or they can start as a result of systematic search for a partner, for example a supplier. A successful first deal, performed as an arm's length transaction, may lead to more business between the two companies and this can be the start of a process whereby the two companies find themselves in a relationship. The relationship is continued and deepened as long as both partners benefit from it.
A relationship between two companies is therefore characterized by exchange, involving for example material products, services and information. Furthermore a relationship implies mutual existence of interdependence, trust and knowledge about each other in many dimensions, such as capabilities, needs and routines. Mutual commitment by the partners to future business with each other can be said to be the basic characteristic of business relationships (Blankenburg/Eriksson/Johanson 1999). But building relationships is not without its problems. Similarly, Anderson and Weitz (1992) examined how the partners through interactive pledges build and sustain commitments to their relationships. According to an unpublished analysis of the relationship data from the IMP project it took on average five years of investment through interactive adaptations to build a relationship characterized by mutual commitment. But relationship building is not always successful. Hohenthal (2001) conducted a case study of the creation of new business relationships that were expected to become an important part of the firms' future business. Three years after initiation seven of the ten prospective new business relationships were terminated and three were still expected to become successful.
Being a partner in a relationship can be regarded as an asset. A well functioning relationship is a result of investments. Having an asset implies having an advantage. But there is also the disadvantage of being dependent. There will be switching costs and inertia connected with breaking up a relationship. And the fact, that the focal relationship is only one of many of a network of relationships, implies that there are "rings on the water" from relationship change (Cook/Emerson 1978).
Relationships have many dimensions: technical, legal, economical but also human. The latter is critical as people learn and build the social construction the relationship essentially is, even if there are also material dimensions. Consequently, how a relationship develops depends on the people involved. Obviously, there are processes of learning and trust building involved.
Hakansson (1989) and Hakansson and Eriksson (1994) found that customer-supplier relationships are conducive to product development efforts arguing that efficiency as well as innovation are, to a large extent created through synchronization, which is "the confrontation, combination, interlocking and integration of the activities and resources of different actors". Von Hippel (1988) has reported similar findings.
Another example is described in Dahlqvist (1998). A supplier, who is offered an idea for improving of a component to be used by a customer, finds the idea "absurd". However, the customer managed to get the supplier interested and in a process, such as the one described above, an innovation was finally launched. The process implied drastic re-thinking and development of shared meaning.
The above reported findings are made in studies of vertical relationships, where it is relatively easy to imagine that an opportunity to improve is of interest to both partners can be identified. Hamel (1991) has studied learning within strategic alliances, from formal joint ventures to agreements to cooperate, where the competitive aspect is present. According to these findings the original intent of the partners is important. In some cases this was an explicit intent while in others not. Learning occurred in the former and not at all in the latter. Attitudes are important. Openness for the previously unknown was found critical. The competitive aspect is pronounced. It seems that the dominating view is to learn from an actual or potential competitor, while limiting the partner's access to own knowledge. "Creating new knowledge" did not appear to exist on the agenda, in our interpretation of the findings. The phenomenon of cooperating to gain new knowledge seems to have become widespread.
An important part of the interaction in a relationship concerns learning about each other, but more so to identify opportunities for improving on the business of the two partners, that is to create new knowledge (Dahlqvist 1998).
Some knowledge is easy to acquire. It can be learned by reading written material produced by the partner-objective knowledge. Some knowledge can only be learned from doing-experiential knowledge (Penrose 1959). Such knowledge could concern for example knowledge of uncodified routines at the partner's organization. Such routines can be tacit (Polyani 1967). As these are not made explicit they can only be learned about in an experiential fashion and perhaps stay as tacit also with the partner. To make experiences takes time.
Obviously, organizational routines may be seen as manifestations of knowledge shared by the members of that organization. This "collective" knowledge may be either explicit or tacit. Such knowledge is "fundamentally embedded in the forms of social and institutional practise that reside in the tacit experiences and enactment of the collective" (Brown/Duguid 1991).
However, this latter view of knowledge and learning implies that the knowledge does exist and can be found. And of course, such knowledge and learning is important and necessary as a prerequisite for "learning with partner" (Dahlqvist 1998). As the two partners can be assumed to be interested in improving on the efficiency and effectiveness of their joint activities, they can be expected to build new knowledge. The processes of learning and creating are intertwined. Such knowledge can be seen as socially constructed (Berger/Luckmann 1966).
Network Relationships, Social Capital and Knowledge Development
Nahapiet and Ghoshal (1998) add to our insights into the process of creation of new knowledge and assumptions conducive to the progress of that process. Their focus is the importance of social capital in building intellectual capital, with aim of contributing to the "Theory of the Firm" and the formation of firm-specific advantage rather than the exploitation of such advantages, which has been the main occupation among theorists. Although, the paper takes the individual company as the unit of analysis, the company is clearly seen as consisting of a number of sub-units and individuals. The firm is regarded as a network and there are no difficulties in applying their findings on inter-firm relationships and networks.
Social capital can be seen as "networks of strong, crosscutting personal relationships developed over time that provides the basis for trust, cooperation, and collective action ..." (Jacobs 1965 as cited by Nahapiet/Ghoshal 1998). This is developed through a history of interactions (Granovetter 1992). Emotional aspects are important and Fukuyama (1995) stresses trust and trustworthiness as ingredients of a unit benefiting from social capital. There is also a "cognitive dimension" such as "shared representations, interpretations, and systems of meaning among parties" (Cicourel 1973) to the social capital. Other important cognitive aspects are shared language and narratives. Interestingly, these are assets shared by the partners and cannot be exploited individually.
As we see it, the concept of social capital as used by Nahapiet and Ghoshal has a lot in common with the concept of commitment in ours and in Morgan and Hunt's (1994) definitions. The difference might be that commitment includes an explicit willingness to act as to maintain or develop the relationship (Morgan/Hunt 1994). It may, however, be implicit in Nahapiet's and Ghoshal's social capital, as they claim, with supporting references, that social capital encourages cooperative behaviour. We use the concepts of social capital and mutual commitments interchangeably.
Access to social capital provides advantages to the extent that mutual trust and shared meaning decrease uncertainty and improves the effectiveness of joint undertakings. It furthermore has a positive impact on adaptive efficiency, creativity, learning and cooperative behaviour (Nahapiet/Ghoshal 1998). Within the cooperative behaviour, though, different views have to be negotiated and can to that extent be described as an "incremental trouble shooting process" (Malmberg/Solvell/Zander 1996).
New knowledge, new intellectual capital, is created through two generic processes: combination and exchange. The former refers to pieces of knowledge from different areas of knowledge being combined to form new knowledge. The latter, including combinative elements, stresses the fact that interaction, teamwork, in the creation of new knowledge. "... develops an increasing knowledge of the possibilities for action and the ways in which action can be taken ..." (Penrose 1959). This points to the discovery of opportunities, perhaps created jointly by two partners in a relationship. Such knowledge is socially constructed.
For this to happen, certain conditions must be met (Nahapiet/Ghoshal 1998). There must be an opportunity to combine or cooperate. That is, the existing body of knowledge--explicit or tacit--must create scope for opportunities. Receptivity and motivation are other such conditions. Finally, previous knowledge has an important impact on the process. The absorptive capacity is strongly related to "the existence of related prior knowledge" (Cohen and Levinthal 1990). This may be part of the explanation why there seems to be much path dependence in business behaviour (Johanson/Vahlne 1977, Zander 1994).
There are reasons to believe that the processes of developing social capital and knowledge (intellectual capital) evolve in a parallel fashion thereby strengthening each other (Fukuyama 1995). Referring to Bourdieu (1986), Nahapiet and Ghoshal (1998) state: "Social capital resides in relationships, and relationships are created through exchange". In effect cooperation breeds trust and trust breeds cooperation. And the same source citing Fairtlough (1994): "People in the two companies could rely on each other. This was cooperation, which certainly went beyond contractual obligations. It might also go beyond enlightened self interest, and beyond good professional behaviour, because the scientists liked working together, felt committed to the overall project and felt a personal obligation to help the others involved". It has also been shown that mutual dependence has a positive effect on value creation (Blankenburg/Eriksson/Johanson 1999).
As has been pointed out, the progress of the processes of building social capital and new knowledge depends on the existence of certain preconditions. If these are not existent, the processes will never start. If they change to be less conducive, the processes may slow down or come to an end. Therefore these processes are not deterministic in nature. But even if they presumably are partially unplanned, they can to some extent be managed, for example by improving on the motivation. It should also be realized, that not only are these processes at least partially unplanned, they are more or less continuously ongoing, at least whenever the partners interact.
There may be several opportunity effects following from relationship commitment. Most important is a shared social and intellectual capital, that is, new knowledge. Both should be regarded as valuable assets. The former is important as a foundation for potential future efforts to continue to build new or exploit existing, by the partners created, knowledge. We are talking of an alternative cost above what is usually implied by "switching costs". If the new knowledge can be patented and the partners agree to selling a license, may be they can appropriate the benefit. If not, they may be forced to continue to cooperate to appropriate the benefit. Everything equal, there should be an incentive to continue cooperating if the cooperation has implied favourable consequences to both partners.
There may also exist material linkages as an effect of the cooperation. If for example, for efficiency reasons, the two partners have re-allocated their research resources as to benefit from scale and specialization the interdependence may be extremely strong. Finally, assuming that both the two companies involved and the individuals performing the joint or collaborative activities, are always looking for still further opportunities to improve, there is a probability that some of these will be made use of.
Relationship Commitment and Opportunity Development
"An important aspect of experiential knowledge is that it provides the framework for perceiving and formulating opportunities. (Johanson and Vahlne 1977, p. 28) This implies that experiential knowledge gives absorptive capacity (Cohen and Levinthal 1990), which is ability to assimilate, evaluate and interpret new knowledge.
Kirzner (1973) provided a foundation for research about opportunities. In his theory entrepreneurial discovery of market opportunities has a central role. He assumes that market actors are ignorant and makes a distinction between sheer or unknown ignorance and known ignorance. While known ignorance and search in order to reduce ignorance has been critical in earlier thinking on opportunity recognition he places attention on unknown ignorance and the discovery of the hitherto unknown (Kirzner 1997, Johanson/Johanson 2006). Although he stresses the role of market experience in the market process he sees discovery of opportunities primarily as a result of a natural alertness, a preparedness to become surprised. This implies that opportunity recognition rather is associated with ongoing business activities than with specific opportunity seeking activities, a view which seems to underlie March's (1991) distinction between exploitation and exploration.
From a different theoretical point of view, Denrell, Fang and Winther (2003) recently analyzed the economics of strategic opportunity and found much like Kirzner that such opportunities are likely to be the result of a serendipitous strategy process characterized by effort and luck combined with alertness and flexibility. Their analysis focused on the resource base of the firm and an interesting normative implication of the analysis is that the relation between the idiosyncratic resources of the firm and the resources outside are critical in opportunity development since the firm has privileged information about the existence of the internal resources. This can be compared with the assumed need for both firm experience and market experience in the IP model (Gelbuda/Starkus/Zidonis/Tamasevicius 2003). The similarity is not surprising since both the resource based view and the IP model are based on Penrose (1959). Heterogeneity of resources is a basic assumption in both.
Based on Kirzner and Shane (2000) investigated the role of prior knowledge and found that it seems to have a stronger impact on opportunity recognition than special attributes of the individuals because it makes them better at discovering certain opportunities than others. His findings suggest that "potential entrepreneurs should look to discover opportunities in what they know rather than in what is popular with other entrepreneurs" (Shane 2000, p. 467). A conclusion from his study with relevance for our purpose is "that efforts to centralize opportunity discovery will meet with difficulty" (ibid. p. 467). Ardichvili, Cardozo and Ray (2003) summarized Shane's findings stating that three major dimensions of prior knowledge are important. They are "prior knowledge of markets, prior knowledge of ways to serve markets, and prior knowledge of customer problems" (p. 114).
This leads us to the relation between commitment and opportunity development. We have discussed how mutual commitment to relationships evolves through interaction between the relationship partners; a process in which they build knowledge about each other. It seems almost impossible to avoid the conclusion that opportunities are likely to develop as a consequence of the privileged knowledge the partners create through interaction with each other. There they see and can develop business opportunities, which others cannot see and develop. In interaction they may even be able to create new business opportunities. This development process is, we posit, of the same nature as the process of the IP model and of relationship development. It is basically a matter of interrelated processes of knowledge development about and commitment to an opportunity idea. It may be unilateral when the firm learns about the other firm's needs, technology, market and network thereby creating an opportunity. It may as well be bilateral when the two firms interact thereby creating an opportunity. This opportunity development may even be a multilateral development process to which several parties become successively more committed. It seems also likely that, in such multilateral opportunity development processes, firms that are connected to the initial partners will have the greatest chances to become involved. Against this background we find that the importance attached to serendipity (Denrell/Fang/Winther 2003) and alertness (Kirzner 1973) is exaggerated. Moreover, since we consider these processes as interactive and gradual we find that it is meaningless to make a distinction between recognition and development (Ardichvili/ Cardozo/Ray 2003). There is an interactive and gradually increasing commitment to a gradual concretization and realization of an opportunity idea.
The development of a relationship with a partner in a foreign market also gives the firm some access to the network knowledge of the market (Kogut/Shan/Walker 1993). In this way the firm may be able to develop new opportunities involving other firms in that network with different capabilities and needs. In principle, we can expect the same opportunity development process as in the earlier paragraph occur although involving several firms with privileged information about each other's resources and competencies.
We find that research about opportunities and network relationship strongly supports the expectation that commitment has a positive effect on opportunity development and hence on internationalization. We summarize the discussion in two propositions:
Proposition 1. Opportunity development in a country market is positively related to mutual relationship commitment with firms in the market.
Proposition 2. Opportunity development in a country market is positively related to the partner firms' network embeddedness in the market.
Having concluded that the establishment chain is not the model, it is easy to claim that we have no definite opinion about the exact shape of the path of internationalization. Our discussion of commitment and opportunity development and the important role of serendipity clearly demonstrate that it is not possible to say more than that some paths of internationalization are more likely than others. We believe though, that if the process of increasing knowledge and commitment in the focal firm and its partners on the foreign market has evolved successfully, "the next step" will be characterized by larger investments and consequently higher levels of control and risks. But the opposite might occur as is evident in any relationship: mutual commitment has not increased or joint learning has demonstrated that there is no opportunity to exploit. So, we claim our model is not deterministic.
We strongly believe that learning and commitment building are important ingredients in the business process. Postulating a drive to develop the business of one's employer, or at least the engineer's wish to improve the efficiency of a particular technical solution used by the customer, learning and commitment building are steps in this direction. Clearly, learning then includes the discovery or construction of opportunities (Berger/Luckmann 1966).
In our 1977 article, it is clear that learning and commitment building was important as uncertainty reducing measures. Here we have changed focus from uncertainty reduction to opportunity development, but the model is the same. Learning and commitment building is more about discovering or constructing opportunities for improving on the business. In Nahapiet and Ghoshal's (1998) words: "The concept (social capital, our remark), therefore, is central to the understanding of institutional dynamics, innovation and value creation." Or with Morgan and Hunt (1994): "Therefore, when both commitment and trust--not just one or the other--are present, they produce outcomes that promote efficiency, productivity and effectiveness."
As we now see it, the incremental internationalization process is about exploiting the opportunities identified at the moment. It could well be that for various reasons, the opportunities identified at a particular point in time are strongly dependent on the prevailing stock of knowledge and commitment, exactly as our model explains. It does imply, that opportunities explored and exploited are marginal in relation to what the company is already doing (cf. the concept of problemistic search, Cyert and March 1963). That is incrementalism.
Manuscript received March 2004, final version received April 2005.
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Jan Johanson, Professor of International Business, Uppsala University, Mid Sweden University, and Malardalen University, Sweden.
Jan-Erik Vahlne, Professor of International Business, School of Business, Economics and Law, Gothenburg University, Sweden.
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|Author:||Johanson, Jan; Vahlne, Jan-Erik|
|Publication:||Management International Review|
|Date:||Apr 1, 2006|
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