INTERNATIONAL BUSINESS MANAGEMENT

Evaluation of Internationalization Theory

Abstract

The essay contains an explanation of the internationalization theory as given by Jan Johanson and Jan-Erik Vahlne in the year 1977 and discusses the application of the internationalization theory on Tesco. The theory has been criticized in many ways and many times. The theory is based on the internationalization strategy of four companies that internationalized in a step by step manner. They did not start off with a very heavy investment in the foreign country, instead they focussed on seeing the response in the host country and then increasing the investment. The need for internationalization determines the time that the company has in the internationalization process. Moreover, the company has to consider two important factors that are the level of knowledge about the new market and the level of commitment in the host country. The theory has been widely criticised for its deterministic approach and Tesco is a testament to the fact that the internationalization theory is not the only way of succeeding in the international market. There are always exceptions to the rule. However, this is not to suggest that the theory is flawed. The underlying point is that the case for internationalization is different for different companies and this difference comes from many internal and external factors related to the company and the host country.

Table of Contents

The Internationalization theory1

Market commitment2

Market knowledge3

Pros of the internationalization theory5

Criticism of the internationalization theory5

Tesco and the theory of internationalization7

Organization Brief7

Application of the theory8

Conclusion9

References11

Evaluation of Internationalization Theory

The Internationalization theory

Jan Johanson and Jan-Erik Vahlne gave the internationalization model in the year 1977. For the two theorists, internationalization is a process of learning. International expansion is a step-wise process. By adopting an evolutionary approach, the companies can minimize the risks inherent in internationalization. The model was developed after studying four case studies. These case studies were as follows:

Volvo

Sandvik

Atlas Copco

Facit

There was something common in these four firms. Johanson and Vahlne (1977) found that all the four firms had been phenomenal in their expansion, in the international market. Moreover, all these companies followed a common expansion strategy. Instead of investing a huge amount of capital in the new foreign markets, these companies invested in the new markets partially. This investment decision was based on two variables, the level of commitment that could be found in the host country and the extent of the market knowledge that is needed to make wise decisions pertaining to the geographical expansion (Autio 2000, p. 903). The internationalization model is given as follows:

Market commitment

According to Johanson and Vahlne (1977) market expansion takes place in four steps. As a firm advances through each of the steps, it has to employ more and more resources into the market. The four steps referred to as the establishment chain are as follows:

No traditional export activities

Export through independent sales representatives

Establishment of overseas sales subsidiary

Establishment of production or manufacturing

The more a company commits its resources into a new market, the ...