yip_the+role+of+the+internationalization+process+in+the+performance+of+newly+internationalized+firms

The Role of the InternationalizationProcess in the Performance of NewlyInternationalizing Firms

ABSTRACT

George S, Yip, JavierGomez Biscarri, and

Joseph A. Monti

Submitted Scplcmber 1998Revispei February 1S99

December 1999

© foumal of International MarketingVol. 8. No. :i. 21)00. pp. 10-3.5

\' n)fi9-03IX

A study of 68 recently internationalized U.S. firms, using struc-tural equations, shows that newly internationaUzing firms donot on average follow a highly systematic approach. Some firmsmake use of a systematic sequence of steps, and the more sys-tematic the approach, the better is the performance.

Newly internationalizing companies face many difficulties.Most fail or achieve low levels of success. This is particularlytrue not at the initial internationalization stage of sending outsome exports but at the next stage of real international com-mitment: making an international investment. Such invest-ments take the form of sales offices, equity investments,acquisitions, alliances, and the like. At this stage, companiesare hampered primarily by two things. First, the firms are, bydefinition, inexperienced. They face the problem of "un-known unknowns." Several differences and obstacles in in-ternational markets can trip them up. Second, because theytypically are smaller companies, they lack the resources andcapabilities to deal properly with potential problems. In con-trast, existing multinational companies (MNCs) can bringboth extensive experience and resources to each new interna-tional venture. Perhaps as important, many smaller compa-nies assume that they cannot take a thorough approach tointernationalization but must make do with unsystematic, adhoc efforts.

We became aware of this view from our initial interviews withthe chief executive officers of 13 U.S.-based mid-sized firmsthat had recently internationalized.' This view is also sup-ported by previous studies. Karagozoglu and Lindell (1998) ar-gue that the resource constraints and capacity limitations ofsmaller firms make it harder for these firms to face the chal-lenges of international competition. Their study of 34 small(fewer than 999 employees], technology-based U.S. firms findsthat 44'/o cite lack of managerial experience and competenceto exploit international business opportunities, 44% had diffi-culties in gathering information about global markets, and32% faced differences in resource availability in relation tolarge global competitors. Van Hoorn (1979) shows that smallercompanies have informal structures; insufficiently developedadministrative procedures and techniques; and unsystematic,often nonrational decision-making processes. But more-formal

10

planning seems to be associated with more success in interna-tionalization. Baird, Lyles, and Orris (1994) find that smallfirms that are internationally oriented have more-formal plan-ning systems than those who are not.

In this article, we focus on the extent to which small and mid-sized (U.S.-hased) companies take a systematic approach tonew internationalization and the performance differences he-tween systematic and unsystematic approaches. In this con-text, systematic means using formal strategic planning andmarket research, considering many alternative countries andentry modes, developing contingency plans, and having long-term objectives for foreign ventures. Unsystematic or ad hocmeans not doing these things and being generally opportunis-tic in decisions and behavior about foreign ventures. To ad-dress these issues, we develop and empirically test a model ofa systematic internationalization process.

This issue of systematic versus ad hoc internationalizationfits into the ongoing theoretical debate regarding deliberateversus emergent strategies, a topic broader than internation-alization. Researchers favoring a planned approach includeKotler (1984) for marketing strategy and Root (1987) for inter-national market entry, whereas those favoring an emergentapproach include Mintzberg (1973) for strategy in generaland Aharoni (1966) for the internationalization process. Inparticular, Aharoni emphasizes the ad hoc nature of the in-ternationalization process in small and medium-sized com-panies and influences the development of the classicUppsala view of the internationalization process (Johansonand Vahlne 1977; Melin 1997).

However, it could be argued that MNCs, management consul-tants, and researchers have gained so much more experienceof internationalization in the past 20 years that their com-bined learning should have spilled over to newly internation-alizing firms. Therefore, these firms are in a better position todevelop and apply more systematic approaches. We examinethis possibility, thereby contributing to the debate on deliber-ate versus emergent internationalization strategies.

Relevant studies on the internationalization process includeHill, Hwang, and Kim (1990), Norwell, Andrus, and Gogu-malla (1995), Kutscher and Baumile (1997), and Melin(1997). But to research our two key issues, whether newly in-ternationalizing firms use a systematic process and whethersuch a process provides superior performance, we need amodel of a systematic internationalization process. There-fore, we examined two of the best-known existing models inthe academic literature (Johanson and Vahlne 1977; Root1987) and a third, managerially oriented model (Miller 1993).In their classic article, Johanson and Vahlne (1977) develop a

PREVIOUS MODELS OF THEINTERNATIONALIZATIONPROCESS

The Role of the Internationalization Process 11

theory about the continuous process that takes place in firmsthat enter foreign markets. On the basis of their experiencewith Swedish companies, they find that these and other Eu-ropean companies usually develop their international opera-tions in small steps, as a continuous process of incrementaladjustments to changing conditions in the firm and the envi-ronment. The two key terms in their article and theory are"knowledge" and "commitment"; that is, knowledge ob-tained in and about foreign markets drives the decision tocommit more resources to those markets. These decisions areimplemented, and the increased commitment enables thecompany to continue gathering improved knowledge thatdrives posterior commitment. After these two logical stepsthat feed back into each other (knowledge—^commitment-*knowledge-* ...), companies increase their international op-erations consistently. As such, Johanson and Vahlne's (1977)model can be characterized as a combination of deliberate (orsystematic) and emergent (or ad hoc) approaches. However,this theory (the Uppsala view), insightful as it is, providesHmited guidance for managers, because it stays at too broad alevel of generalization.

In his model. Root (1987) starts by assuming that the firm hasalready decided to enter a foreign market. He develops a se-ries of broad steps (p. 4) and then a second set of more con-crete steps (p. 22) that companies should follow. His model iscomprehensive and easy to understand and implement but,by assuming that the company is ready to enter a foreign mar-ket, omits a process of developing the motivation to go inter-national in the first place. In addition, his model does notreadily lend itself to our intended test of a systematicprocess, because it emphasizes entry activities rather thanthe planning process.

Miller's (1993) model is mnch more concrete and process-ori-ented than Root's (1987) and specifies ten steps into whichthe internationalization process should be divided. We be-lieve, however, that some of the steps, especially the firstthree, are slightly redundant and that Miller forgot to specifythe key decision of foreign market selection as a separatestep. If an explicit decision must be made after a global as-sessment of markets and competition (step 4), this decisionwould need to be included between his fourth and fifth steps.However, the parallelism of his model with ours is high.

For the reasons discussed previously, we needed to develop amodel of our own that more explicitly sets out a systematicinternationalization process so that we could test whetherfirms apply it. This model should focus on the thoroughness,or lack of it, of each stage in a comprehensive sequence. Ac-cordingly, we developed our "way station" model of the in-ternationalization process.

12 George S.Yip, Javier Gomez Biscarri, and Joseph A. Monti

We developed our way station model (Figure 1) using the fol-lowing methods: THE WAY STATION MODEL

• Reviewing previous models, as discussed.• Drawing on the consulting experience of Grant Thorn-

ton, a $1.3-biUion multinational, professional servicesorganization that is the sixth largest accounting firm inthe world.

• Conducting in-depth personal interviews with the chiefexecutive officers of 13 U.S.-based mid-sized firms thathad recently experienced the internationalizationprocess (these firms had annual revenues in the $100million to $300 million range).

Our resulting model can be combined with the insights of theUppsala theory to yield a more applicable model for the in-ternationalization process (see Figure 1 for tbe correspon-dence of Johanson and Vahlne's [1977] steps to the waystation model). This model can also be compared with the

Johanson andVahlne's Model

WayStation Model

Root'sModel

Miller'sTen Steps

Knowledge

Commitment

decisions

Actual

market

commitment

1

Motivation

and

strategic

planning

1Market

researcti

Assessing

products

and

toreign

markets

Market

selection

Selection ot

entry mode

Objectives

and goals

Entry mode

1

Planning for

contingencies

and problems

Postentry

strategic

commitment

Evaluation ot company's

readiness (or foreign entry

Company analysis

Reassessment ot

domestic business plan

Global assessment of

markets and competition

Development of a toreign

market entry plan

Identitication and selection of

foreign partners

Compliance witti regulations

Selection ot service support

providers in botti markets

Marketing

plan

Entry

operations

target market

Market introduction ot the

company's products

Establistiment ot physical

presence in foreign markets

II II II

International success

Figure 1.The Way Station Model in theContext of Johanson andVahlne's (1977) Theory andComparison with Root's (1987)and Miller's (1993) Models

The Bole of tbe Internationalization Process 13

ones specified by Root (1987) and Miller (1993) (Figure 1).We believe that our model, which has been derived directlyfrom practitioners' experience, is an appropriate way to thinkabout the process of internationalization: It is a suitable oper-ationalization of Johanson and Vahlne's (1977) theory, and itincludes the two steps that Root (1987) and Miller (1993)overlook in their models.

According to lohanson and Vahlne (1977), when a firm is con-sidering jumping to international markets, it first must gatherrelevant knowledge and then must make a commitment of re-sources (see also Eriksson et al. 1997). What type of knowl-edge is needed in this crucial stage of the company's life?When exactly does the commitment come? We divide theknowledge/commitment stages into six different way stations.As on a road, these way stations come in a logical sequence(see Figure 1) and signal the path that must be followed. Thesix way stations are motivation and strategic planning, marketresearch, market selection, selection of entry mode, planningof contingencies, and postentry strategic commitment. Tbefirst two way stations deal with acquiring knowledge and get-ting ready for "the big jump," the first part of Johanson andVahlne's process. Next, firms must use this knowledge to de-fine their strategies for commitment of resources.

We add three new way stations to capture the first decisionsthat companies must take that already imply a commitment:market selection, selection of entry mode, and planning forcontingencies. The sixth way station consists of the actualstrategic commitment of resources to the final destination.

1. Motivation and strategic planning: Firms need a motiva-tion to go international: They are looking for externalsources of increased competitive advantage (Baird, Lyles,and Orris 1994), are following their competitors' moves,have been asked explicitly by their customers (Norwell,Andrus, and Gogumalla 1995), or need a larger market po-tential for economies of scale and scope. The conclusionis that an initial strong motivation must trigger all subse-quent processes. But motivation does not come sponta-neously: The company must be alert and keep gatheringthe relevant information that will indicate when the mo-ment bas arrived (this is aiso Miller's [1993] first step).The firm therefore must be engaged in continuous strate-gic planning. The key point is that not all firms will findinternationalization to be the best strategy, but all firmsmust constantly question themselves whether the rightmoment has arrived or is about to arrive.

2. Market research: When the motivation for international-ization has arisen, companies start doing more intense re-search to select the right destination. Knowledge in this


stage is key, because a fit must be obtained between thefirm's objectives and capabilities and the destination thatwill be chosen. Miller (1993) also gives some broad linesfor the analysis of relevant information before firms de-cide on a target market.

3. Market selection: After the information gathered in thesecond way station has been processed, the final destina-tion must be chosen. This is neither a trivial choice nor adirect consequence of the information gathered in the pre-vious step. As Davidson (1980) points out, prior experi-ence in a specific country makes a big difference in acompany's performance. In the case of newly internation-alizing firms, this prior experience does not exist, and soit becomes even more crucial to obtain a high degree ofknowledge about potential markets that are being consid-ered. Then the decision of which market the companyshould enter first must be made. Probably the most impor-tant consideration in this stage is the fit among the coun-try's characteristics, the company's competencies, thepossibility of synergistic effects [Dunning 1997), and for-eign market demand characteristics. That is, a countrythat is the most attractive for a specific company mightnot be the optimal one for another company, or a countrymight present extremely convenient operational condi-tions but not fit the company's strategy at different levels,such as organizational, political, or financial. This makesthe selection of the final destination a step different fromthat of researching market conditions: The informationgathered in the stage of market research has to be put inthe broader context of the company's strategy. It is likelythat no market will be optimal in all dimensions of thecompany's strategy, so the final decision must be taken bycomparing the overall implications of each candidate.

4. Selecting the entry mode: When a firm knows whereit wants to go, how should it go there? Major entrymodes—export strategies, licensing, franchising, market-ing alliances, joint ventures, and self-sufficient sub-sidiaries—differ in the degree of control a firm exertsover foreign operations. Benito and Welch (1997), Hill,Hwang, and Kim (1990), and Lau (1992) give generalconsiderations on the convenience of various types ofentry mode. But one thing must be said: No particularmode of entry gives a higher probability of success thananother a priori. Each situation requires a thoroughanalysis of the best way to enter the specific foreign mar-ket, but no general solutions can be given. Deciding fac-tors include the firm's desire for control, resources andcapabilities, and risk preference. The decision is a realway station. If the decision is taken lightly, the com-pany's performance might be jeopardized. However,


choosing the right way to go is usually not enough forsuccess. It is only a necessary condition. The interna-tional venture then must be well managed.

5. Planning for contingencies and problems: A fifth aspectthat companies must consider when getting ready for inter-national expansion is the possibility that contingenciesand country-specific problems may arise. Being proactivein this sense pays off, because usually a large percentage ofthe problems that harm companies could have been fore-cast with a more thorough process of market evaluation.

6. Postentry strategy and commitment of resources: A care-ful assessment and implementation of the competitivestrategy that the company will follow after it has estab-lished physical presence in the foreign market will be thelast step. What is the best strategy? Again, it depends(Baird, Lyles, and Orris 1994; Fujita 1995): Differentstrategies might be suitable for different competitive envi-ronments. But all these possible strategies must share onefeature: commitment. Researchers strongly agree thatcommitment is essential for the success of the process ofinternationalization (Johanson and Vahlne 1977: Norwell,Andrus, and Gogumalla 1995). When a firm has reached aforeign market, resources must be committed to the mar-ket, and a high level of involvement is necessary to updatethe knowledge that will be used for later international in-volvement. In addition, more-dynamic markets demandmore-dynamic and responsive strategies, and these are notattainable without explicit commitment and almost irrev-ocable involvement in the reality of the market (Benitoand Welch 1997). This commitment will be manifest inseveral aspects of the company: human resources, organi-zational structure, marketing strategies, and so on. Suc-cess will then stem from this commitment, not only inpurely economic terms but also in terms of competitiveadvantage and the knowledge that will help continue theprocess of internationalization.

Through the way station model, we try to explain the suc-Summary ot Model cess of the initial internationalization process by examin-

ing how firms have followed six systematic steps. Thesteps are presented in a sequentially logical order (see Fig-ure 1), but some of them, especially in the knowledge-gath-ering stage, will overlap in time. An important feature ofthis model is that it puts the stress on the thoroughness ofthe planning steps (the first five way stations) and on theactual degree of commitment to the foreign market (thesixth way station) That is, the process of internationaliza-tion will be successful if the first five steps are carried outthoroughly and the company commits strongly to the for-eign market.


We hypothesize that correct use of the way stations will re-sult in superior performance in the internationalizationprocess. But we also need to consider one otber factor: Per-formance is affected not just by the internationalizationprocess but by the firm's initial competitive advantage. Forexample, Microsoft's internationalization has been far moresuccessful than Apple's. This differential performance can beattributed much more to the two companies' competitive ad-vantages than to their internationalization processes. Simi-larly, the link from the internationalization process toperformance is mediated by competitive advantage acquiredin going international. Therefore, our complete model startswith the initial competitive advantage of the firm, proceedsthrough the six way stations and then acquired competitiveadvantage, and ends in internationalization performance(Figure 2).

The way station model enables us to formalize three hy-potheses around our research issues:

Hj: Most newly internationalizing companies todaymake significant use of a formal internationaliza-tion process.

Adding CompetitiveAdvantage andInternational Performance

Resulting Hypotheses

Initialcompetitiveadvantage

Thoroughnessof motivationand strategic

planning

Thorougtiness otentry modeselection

Intemationalizationperformance

Figure 2.The Way Station Modelof Internationalization


METHODOLOGY

Data Gathering

H2: Newly internationalizing companies that makeuse of a formal internationalization process followa systematic sequence of steps.

H:J: The more newly internationalizing companiesfollow a systematic sequence, the better will bethe performance of their international ventures.

Positive findings for these three hypotheses would supportthe deliberate rather than the emergent view of international-ization.

Our research methodology involved designing a question-naire, gathering data, specifying the structure of the modeltested, operationalizing the variables, and conducting thetests. We test H^ by examining the mean scores on the way sta-tions. We test the way station model and H^ and H3 usingstructural equations. Hi will be supported if there are high lev-els of usage of the various way stations. H^ will be supported ifthe overall model in Figure 2 shows significant paths connect-ing the way stations and has an overall significant fit. H, willbe supported if there is a significant path from degree of post-entry commitment to internationalization performance.

We used the interviews from the model development stageto help design a mail questionnaire. To target substantiveinternational experiences, this questionnaire defined inter-national activities as "any significant cross-border ventureexcluding importing or exporting" and focused on the firstforeign entry. The questionnaire consisted of 23 questions,each of which had several items on a seven-point Likert scale(for a total of 120 items). The questions were subdivided intosix groups that corresponded to the way stations and a finalgroup that included questions about performance and factorsthat affected performance, including some that pertained tothe company's core competencies. We mailed the question-naire to two waves of 300 mid-sized, U.S.-based companieseach, all of which were Grant Thornton clients or potentialclients.- We received 68 responses, 31 from the first groupand 37 from the second group. To check possible differencesbetween the two groups, we performed a t-test of differenceof means and an F-test of difference in variances on the re-sponses on the 120 items. Only 10 of the 120 presented sig-nificant differences in means,' a proportion that enahles us toproceed to our analysis with little concern about the dissimi-larity of the two samples. Nor does there seem to be a specificresponse bias. We might fear, however, that only those com-panies that succeeded in their internationalization processwould have answered the questionnaire. In that sense, wecould expect a small upward bias in the measures related tosuccess (overall corporate performance and acquired com-petitive advantage). At the same time, because the sample re-


veals a good spread in explanatory variables (e.g., use of theway stations) and dependent variables (e.g., performance),the coefficients of paths betu^een explanatory and dependentvariables are unlikely to be greatly biased. Furthermore, asdiscussed previously, there were few differences betweenearly responders and late responders. Table 1 presents thesample characteristics of the respondent companies.

Although we have no time series data, the definition of the con-structs has a built-in time dimension for most constructs.Therefore, initial competitive advantage, postentry commit-ment, acquired competitive advantage, and internationaliza-tion performance follow one another in sequence by definition.Admittedly, the five way stations (other than postentry com-mitment) could occur at any time relative to one another, buteach is also defined to occur before entry (i.e., we asked re-spondents about the extent to which they used these processesbefore foreign entry).

To test our model, we used a structural equation model withlatent variables. As Roos, Yip, and Johansson (1997) rightlypoint out, strategic models ask, by their very nature, for a la-tent variable methodology in which the data are examinedwith a holistic approach (and not just with a simple linear re-gression that assumes independence of explanatory variables,for example). In addition, structural equation models allowmultiple indicators to represent constructs or latent variables.

Although our sample size of 68 is small for traditional esti-mation techniques, various methods of structural equationmodeling now allow for quite small sample sizes. Typically, a

OwnershipManagementTotal annual revenuesYears in businessNumber of employeesPercentage of revenues from internationalPrimary line of businessKey export markets in rank order

Industries

44% public/56% private40% family managed$211 million41122224%Intermediate producer

1. Canada2. United Kingdom3. Mexico4. Germany5. France6. Asian countries

Industrial manufacturing 60.0%Services 13.8%Electronics 10.8%Consumer products 7.7%Distribution 4.0%Other 3.1%,

Method and Model Specified

Table 1.Demographic Variables of theCompanies Surveyed

Tbe Bole of tbe Internationalization Process 19

Figure 3.Operationalization of the

Way Station Model

causal subsystem sequence of paths is estimated separately{Anderson and Gerhing 1988). For example, LohmoUer(1982) demonstrates examples in which a model with 27variables is appropriately estimated with only 10 observa-tions and a model of 96 indicators and 26 constructs is esti-mated on a sample of 100.

Various alternative types of structural equation modeling arenow used. We chose the Bentler-Weeks model.* In thismethod, the relationships among variables are all assumed tobe linear. Even though this is a limitation, because some rela-tionships among our variables are definitely not linear, theintuition behind a linear relationship seems to warrant thelinear specification of most analyses (e.g., a positive correla-tion just means that higher values of a variable will corre-spond to higher values of another variable'). For software, weused the EQS program specifically developed by PeterBentler to provide the tools for structural equation modelingin the context of the Bentler-Weeks model (Bentler 1995).The proposed model appears in Figure 3. There are two inde-pendent variables: motivation and strategic planning (MOTI-VATION) and initial competitive advantage (INITIAL). Thelatter variable acts as a control for company differences. Thecovariance of these two variables is assumed free and is rep-resented by the double-headed arrow.

The next five way stations appear in sequence. That is, MO-TIVATION precedes market research (RESEARCH), which inturn precedes market selection (SELECTION), and so on.This sequence must be interpreted not as causation but ascorrelation plus precedence in time. This means that the waystations follow a sequence (precedence in time) and that if

MOTIVATION

RESEARCH

INITIAL SELECTION ACQUIRED PERFORMANCE

MODE

COMMITMENT

COMPETENCIES INNOVATION TRANSFER

20 George S.Yip, Javier Gomez Biscarri, and fosepb A. Monti

the company is thorough in one of them, it is likely that itwill also he thorough in tbe next one (correlation).

All way stations and INITIAL conditions are supposedto have a direct influence on both acquired competitiveadvantage (ACQUIRED) and overall corporate performance(PERFORMANCE) as measures of success of the internation-alization process.

Two paths were dropped from the model to avoid linear de-pendencies among the parameters. We used the Wald test fea-ture of EQS to find out which two paths could be eliminatedwithout affecting the overall fit. These paths turned out to bethose going from RESEARCH to ACQUIRED and from selec-tion of entry mode (MODE) to PERFORMANCE. That theWald test pointed to them as the preferred ones to bedropped implies that they are not significantly different fromzero and that the constrained model in which they are forcedto be zero is a better depiction of reality than if they were leftfree to be estimated.

Also, we specified ACQUIRED to have an effect on PERFOR-MANCE: This effect corresponds to the theory known in thestrategy literature as the "resource-based view of the firm."According to this theory, it is the special characteristics ofeach firm (its core competencies) or firm-specific resources,as in Wernerfelt (1984), that determine its performance, or atleast its performance compared witb competitors in the sameindustry. Thus, the process of internationalization's enhance-ment of these competencies implies also that it contributes toan improved performance of the company. In a sense, thistheory is principally measured hy the path from INITIAL toPERFORMANCE. The interpretation, then, of tbe path goingfrom ACQUIRED to PERFORMANCE should be the increasein performance caused by increased competencies comingfrom the process of internationalization.

To obtain measures of the five way station constructs, we didnot conduct factor analysis but derived the components of Operationalization or thethe constructs from the initial interviews. We preferred to Constructs and Variablestest an a priori model derived from our interviews rather thanone generated by factor analysis. Then we developed thequestionnaire specifically to provide us with measures of thefive factors, some of them multiple, which is why we used la-tent variables. Similarly, some of the other constructs aremade up of multiple latent variables, as shown in Figure 3. Inestimating the model in Figure 3, we use composite valuesfor the manifest constructs (the arithmetic averages of multi-ple items'). In the case of latent constructs (those for whichthere is no single measure but that can he indicated by othermeasurahle variables), we used more than one composite in-dicator. Instead of confirmatory factor analysis, we use the


structural equation model to provide a test of the latent con-structs through the measurement model.

INITIAL. We used the average of three measures to indicatethe initial competencies of the firm, which are possible keysto success in the international venture: technological advan-tage, company's hrand name awareness, and ability to trans-fer capabilities to foreign markets.

MOTIVATION. Norwell, Andrus, and Cogumalla (1995) ex-plicitly relate motivation to the level of commitment in theforeign market and to the triggering of the selection process.We found the measure MOTIVATION, the average of severalitems that reflect motivation factors, to be the best indicatorfor the motivation and strategic planning way station.

RESEARCH. We collected data on two aspects of market re-search: (1) use of various advisers (e.g., attorneys) and [2) theextent to which various cost drivers were analyzed. Wefound that the arithmetic average of the latter measures (RE-SEARCH) provided the best indicator of the market researchconstruct.

SELECTION. This construct measures how thorough theplanning of the internationalization process has been. Wechose two variables as indicators for this latent construct.One of them corresponds to Yip's (1992) drivers for globaliza-tion, which in our study are loosely interpreted as drivers forinternationalization (DRIVERS), which includes the numberand extent to which market and government factors wereweighed in the final decision. The second variable,PROCESS, measures the use of different processes for evalu-ating foreign market fit with the company's strategy, whichrelates to the intensity of the planning process.

MODE. We collected data on two aspects of the selection ofentry mode: (1) alternative entry modes (e.g., equity jointventure) and (2) degree to which various factors (e.g., salespotential) were considered. As stated in the theory section,the choice of a specific entry mode should not affect per-formance, for what is necessary is the fit between the entrymode and the characteristics of the company and marketselected. We did indeed find that the choice of entry modedid not contribute in our estimated model to the explana-tion of economic performance. Instead, we found the ap-propriate indicator of the selection of entry mode to be thedegree to which various factors were considered in the en-try process.

Planning for Contingencies and Problems. We had a measurefor the fifth way station (planning for contingencies andproblems). In the analyses, however, this construct seemed

22 George S.Yip, Javier Gomez Biscarri, and Josepb A. Monti

unrelated to any of the other relevant constructs. Therefore,we decided to take it out of the analysis. This was a con-scious decision based on the data and not on the theoreticalsoundness of the variable and the construct it is measuring.

Our decision not to include this fifth way station in ouranalysis does not imply that companies do not plan for pos-sible contingencies or problems, because both the interviewsand the answers to the questionnaire reflected that this prac-tice is a concrete stage of the internationalization process.

It seems, however, that its relation to other way stations andits contribution to success are not relevant: Companies thatare thorough in the rest of the way stations seem not to needto be thorough in their planning for contingencies to achievetheir goals. Also, the low correlations of the answers to thisquestion with the rest of the questions means that companiesprobably view the planning for contingencies as the least im-portant aspect of the process, especially if the other five havebeen carefully followed.

Postentry Strategy and Commitment (COMMITMENT). Thethree indicators chosen for this construct all refer to the de-gree to which the company commits itself to the target mar-ket: STRUCTURE refers to organizational structure changesthat come as a result of entering foreign markets. STRATECYrefers to specific strategic commitments, such as developingcultural integration programs or providing training and up-dating of local labor forces. HUMAN RESOURCES refers tohuman resources commitment and measures the percentageof management of local foreign operations that is composedof local nationals.

ACQUIRED. One of our dependent performance constructs isthe degree to which the internationalization experience hasenhanced the competitive advantage of the company. Thisconstruct is indicated by three measures: overall contribu-tion to core competencies (COMPETENCIES); enhanced in-novativeness (INNOVATION), a key characteristic of aninternational firm, as explained by Eontes and Coombs(1997) and Eujita (1995); and increased ability to transferknowledge and technology within the boundaries of the firm(TRANSFER). This last item has theoretical importance: Theability to transfer knowledge and technology and to coordi-nate interdependent activities better than the market, a"Coasian" view of the multinational firm, is considered bymany researchers as the origin and rationale for the existenceof the multinational firm (for the theoretical development ofthis view, see, e.g., Buckley and Casson Il97fi] and Hennart[1982], and for an empirical study, see Eriksson et al [1997]).Eor this reason, we wanted to include TRANSFER as an ad-ditional indicator of acquired competitive advantage.


RESULTS

Extent of Use of SystematicInternationalization Process

Goodness of Fit

PERFORMANCE. Our second dependent construct is overallcorporate performance that results from the process of inter-nationalization. For this construct, we used a single measureestimated by respondents in the context of other, more spe-cific: performance measures such as market share, number ofinternational markets served, and new technology or exper-tise gained. Self-reported measures of performance are oftenused successfnlly in strategy studies (see Venkatraman andRamanujam 1986).

The results do not support Hi (actual use of formal process)but cannot reject H2 (use of systematic sequence) and H3 (per-formance effect).

The raw data, before the model is estimated, indicate onlypartial use of a systematic approach at each stage. The meanvalues of tbe five way stations range from only 2.55 to 4.25 ofa possible maximum of 7.0 (Table 2). Thus, there is not strongsupport for H .

We estimated the model in Figure 3 with EQS, using robustmaximum likelihood estimation (the variables used are allnormal/ but a value of Mardia's coefficient slightly largerthan three led us to obtain robust estimates because of multi-variate nonnormality). In Table 2, we provide summary sta-tistics for the measured variables. In Table 3, we present thecorrelation matrix, which shows that most of the model con-structs and variables are significantly correlated with eachother, which provides an initial indication tbat the structuralequation model will work well.

Tbe overall model appears to provide a good explanation ofthe data. In Table 4, we present the relevant statistics onmodel fit. The value of the chi-square for the independencemodel was 424.8 on 78 degrees of freedom [p < .01). The

Table 2.Summary Statistics of

Measured Variables MOTIVATIONCOMPETIENCIESINNOVATIONTRANSFERRESEARCHPROCESSDRIVERSMODESTRUCTURESTRATEGYHUMAN RESOURCESPERFORMANCEINITIAL

Mean

2,554.563.943.633.343.873.754.253.163.553.755.104.40

StandardDeviation

.941.551.701.881.341.261,131.181,311.421.771.131.23

Skewness

,46-.64-.37

.06

.04

-.37-.62-.39

.08

-.00-.88-.45-.86

Kurtosis

-.50-.25-.90

-1.07-.60

.11

.77

.11

-.92-.69

-1.13.10

.39

24 George S.Yip, favier Gomez Biscarri, and Joseph A. Monti

bJ

ao

uQd1—^

Cd en

en

eO

RE:

Z

iE

NC

E

<0!O^UICL.

Table 3.Correlation Matrixof Measured Variables

value of the chi-square for our proposed model with 50 de-grees of freedom was 63.1, which yielded a p-value of .10(60.4 and .15 for the Satorra-Bentler scaled chi-square inrobust estimation). This means that we cannot reject theassumption that our model adequately explains the relation-ships that exist in the sample. All fit indices confirm theexcellent fit of the model. The iterative process convergedwithout special problems in 11 iterations. Therefore, the re-snlts support H2, that newly internationalizing companiesthat make use of a formal internationalization process followa systematic sequence of steps.


Table 4.Results of Maximum

Likelihood Estimationof the Model

Measurement Model

Model Paths

Independence chi-square 424.7fi7Degrees of freedom 78Model chi-square 63.984Degrees of freedom 51p-Value .104Satorra-Bentler chi-square 61.634p-Value .146Bentler-Bonnet normed fit index ,849Bentler-Bonnet nonnormed fit index ,943Comparative fit index ,963Robust comparative fit index .964Root mean square error of approximation .062Number of iterations 11Mardia's coefficient 3.23

The small size of the sample might raise doubts about thereal relevance of the results, because any logical model mightyield a good enough fit of the data with so few ohservations.Several reasonable alternative models were run." These mod-els tended to perform worse than our proposed one. Therewas one exception: If the model was limited to explain com-petitive advantage {dropping overall corporate performanceas the last construct to be explained), its significance wouldincrease, and the p-value would approach .5. We believe,however, that our particular model is more meaningful andinsightful. Because success seems to be a bigher-dimensionalconstruct, not just a function of competitive advantage, wedecided to retain our first specification.

The three latent constructs are adequately measured by thesuggested indicators, which shows that the measurementmodel is correct. Cronbach's alpha for the three factors SELEC-TION, COMMITMENT, and ACQUIRED were .75, .67, and .88,respectively, and all the loadings are highly significant: .79 forPROCESS and J7 for DRIVERS on SELECTION; .78 forSTRUCTURE, .75 for STRATECY, and .42 for HUMAN RE-SOURCES; and .79 for OVERALL, .90 for INNOVATION, and.82 for TRANSEER on ACQUIRED. The alpha for COMMIT-MENT is small. It would increase, and the whole model wouldfit better, if we took out the indicator HUMAN RESOURCES,but this indicator is an important index of commitment.

The estimates of the path coefficients appear in Figure 4,from which factor loadings have been eliminated. As all vari-ables [except for one) are measured on a scale from one toseven, even the unstandardized coefficients would be di-rectly comparable. We do not believe, however, that thiscomparison is meaningful, because the measurement of thevariables is somewhat arbitrary (even though a one-to-sevenscale is a standard approach, Matell and Jacoby [1971] findthat different scales yield the same qualitative results thoughdifferent coefficients). Therefore, we discuss the signs andsignificance of the coefficients but not their actual values.


MOTIVATION

.27 y^ .53

RESEARCH

INITIAL

\

\

,32 *

\

\\ .54 '^

V

, .52 \

SELECTION

.85

MODE

r .22 /

COMMITMENT

^34

\

/.41

ACQUIREDR' = .42

...--.'37

Figure 4.Results

PERFORMANCE

R' = .28

,30

Nales: Displays only paths Itiat are signilicant al ihe 5% level

^Nay Stations Sequence. The different way stations are corre-lated with one another. All paths relevant to the sequence aresignificant and positive, which shows that the companieswere consistent in either following the entire sequence or notfollowing it. This supports the view that there is a systematicsequence that some smaller companies can implement. Atthe same time, the paths range in value from .22 to .85, whichshows that compliance with the systematic approach is onlypartial (only if ail paths had values of 1.00 could we say thatall companies completely followed the systematic approach).We refer subsequently to the causal relevance of the pathsand their implications for an analysis of events following atime sequence.

Determinants of Acquired Competitive Advantage. Of thepaths linking independent variables to ACQUIRED, two aresignificant: those coming from MOTIVATION and COMMIT-MENT. The finding for MOTIVATION suggests that interna-tionalization is a process that involves more than justeconomic performance. Companies consider foreign marketsas possible sources of increased advantage over competitorsor places to catch up with a competitor that is now in an ad-vantageous position. The more motivated tbe company is,the more careful and well prepared the internationalizationprocess is and the larger the competitive advantage createdby the process. However, the strength of INITIAL does nothave a direct influence on ACQUIRED, only an indirect onethrough MOTIVATION and COMMITMENT.

High commitment to the foreign market (postentry strategy)seems to be a correct strategy for a newly internationalizingfirm. It significantly contributes to acquiring competitive ad-vantages. There is a puzzle in that RESEARCH, SELECTION,

The Bole of the Internationalization Process 27

and MODE appear not to bave a significant effect on competi-tive advantage:' Are three of our way stations not related tosuccess? This can be understood if we interpret tbe planningway stations as minimum requirements: If a firm has a strongmotivation, its researcb, market selection, and choice of modeof entry will also be thorougb. But tbese steps do not ensurefinal success. The firm must implement its strategy and com-mit to the market to obtain results. The R for the constructACQUIRED is .42. Therefore, our model seems to explain com-petitive advantage fairly well.

Determinants of Corporate Performance. The paths to PER-FORMANCE give rise to probably tbe most interesting re-sults. Only one of tbe paths going to tbis manifest constructis positive and significant: the one coming from INITIAL. Noother paths are significant.'" Other variables, including post-entry strategy, do not seem to be directly related to perfor-mance; not even acquired competitive advantage has a signif-icant effect. The R for PERFORMANCE is .28, which isworse than tbat for ACQUIRED but still a reasonable amountof explained variance. An alternative model was run inwhich we set the path from ACQUIRED to PERFORMANCEfixed to zero. In that case, the coefficient going from COM-MITMENT to PERFORMANCE (the dashed line in Figure 4]became significant. This is a consequence of the structuralmethodology: Wben tbe patb from ACQUIRED to PERFOR-MANCE is left free, even though it is not significant, it takesaway some of the variance of PERFORMANCE, and it sepa-rates the influence of COMMITMENT on PERFORMANCEinto a direct effect (the direct patb] and an indirect effect(wbicb would correspond to the product of the pathsCOMMITMENT-»ACQUIRED and ACQUIRED-*PERFOR-MANCE]. Thus, the total influence of COMMITMENT onPERFORMANCE is somehow blurred by the decompositionof effects. We can conclude, however, that this effect indeedexists and that postentry commitment has an effect in bothincreasing the company's competitive advantage and provid-ing economic performance. In conclusion, this finding sup-ports H(, that following a systematic internationalizationapproach improves performance.

• To check tbat the way station model makes a significant con-Tests of Simpler Models tribution to tbe explanation of performance for newly inter-

nationalizing firms, we tested four simpler models thatexcluded the way stations. We wanted to test how tbese sim-pler models could explain PERFORMANCE compared withthe R of .28 achieved by the way station model (for a previ-ous test of alternative models in international research, seeJohansson and Yip 1994].

First, we simply regressed INITIAL on PERFORMANCE. Tbepatb is significant, and the R is .20. Tbis means that we get


an increase in R- of .08—that is, a 40% increase in varianceexplained—by including tbe way stations and the full model.It seems, though, that INITIAL is probably the best single ex-planatory variable. But that is fine as it is also positively re-lated to the way stations, so companies with high initialcompetitive advantage tend to do a better job in the way sta-tions and, because of tbe two, end up witb better overall cor-porate performance. Alternatively, when we regressed onlythe five way station variables on PERFORMANCE, the resul-tant R- is .25 (but the fit is not really good, because there is aproblem in the optimization process"). Therefore, the waystations on their own are as important or more so than theinitial competitive advantage.

Second, we regressed ACQUIRED on PERFORMANCE. Thepath is significant, and R is .14, only half that of tbe com-plete model. Recall that the significance of this path disap-pears in the structural equation model, which means that therelationship is coming from the common relationship of AC-QUIRED and PERFORMANCE to INITIAL and the way sta-tions (which is why when we include INITIAL and the waystations tbe path becomes insignificant).

Third, we estimated the model INITIAL-»ACQUIRED-»PER-FORMANCE. Both paths are significant, and the R is .17.Therefore, if INITIAL is given only an indirect effect on PER-FORMANCE, the R is less than when INITIAL is directlylinked witb PERFORMANCE (R- is .20). It seems clear thatINITIAL to PERFORMANCE is a strong relationship.

Fourth, we estimated the model INITIAL-»PERFOR-MANCE-»ACQUIRED. Now the path from INITIAL to PER-FORMANCE is still significant, but the path ACQUIRED toPERFORMANCE is not significant anymore, which is fineconsidering tbat that path is not significant in tbe full modeleither. R- is .19, which is much less than the full model's .28.

In conclusion, alternative, similar models that exclude theway stations do not achieve as complete an explanation ofperformance as does the full model.

In this study, we find that a sample of U.S.-based newly in- ^ ^ ^ — ^ ^ ^ ^ ^ ^ - ^ ^ ^ ^ ^ — ^ ^ — -ternationalizing firms is mixed in the extent to which the DISCUSSIONfirms take a systematic approach in the internationalizationprocess. Some firms behave in the ad hoc mode argued forby Aharoni (1966) and Johanson and Vahlne (1977). Butsome firms bebave in tbe more systematic mode advocatedby Root (1987) and others. In addition, when firms are sys-tematic, they also tend to be consistent in their degree ofthoroughness at each stage of the internationalizationprocess. Furthermore, firms that are systematic seem toachieve better performance.

Tbe Role of tbe Internationalization Process 29

The summary findings need to be taken in the context of thespecific model of systematic internationalization that wetested. Furthermore, the methodological limitations of ourstudy—particularly the low response rate and small samplesize, lack of time series data, and possible bias from usingsingle informants—restrict the robustness and generalizabil-ity of our conclusions. In particular, the use of a single infor-mant in each firm can produce a bias, especially between thereported use of a systematic internatioualizatiou approachand suhsequeut performauce. Therefore, our results arelikely to show a stronger link thau is really the case. At thesame time, the respondents did not report particularly highlevels of the use of each way statiou (at the 3 or 4 level on ourseveu-point scale, as reported in Table 2), so there does notseem to be prima facie evidence that the respondents wereoverestimating their use of systematic planning. Despite thelimitations, the results can be viewed as highly indicative.

With these caveats, we have found that our model of a sys-tematic internationalization process—the way stationmodel—is compatible with the data from our sample of 68medium-sized U.S. companies. Assuming that our findingsare correct, the results for this model have several implica-tions. It is important to start with an initial competitive ad-vantage that can be leveraged abroad. The siguificauce of thedirect path from initial competitive advantage to overall cor-porate performance shows that there are inherent capabilitiesin companies that help explain their superior performance. Ininternational markets, these capabilities seem to matter evenmore. Furthermore, ou its own, this single variahle explainedthe largest portion of variance in performance, though lessthau the way statiou variables on their own as a group. How-ever, initial competitive advantage does not have a direct ef-fect on acquired competitive advantage, so if a firm startsfrom an advantageous position, this competitive advantage ofthe firm is not enhanced by going to international markets. Ifa firm is already strong, part of its motivation to go abroad isto leverage that strength aud obtain economic returns, not somuch to improve its advantages. Many firms enhance theiroverall competitive advantages by going iuternational andfind that success abroad helps enhance success at home, butthis study suggests that the sequence from advantage to inter-nationalization is more common than from internationaliza-tion to advantage.

Conversely, acquired competitive advantage seems to be gen-erated both by the motivation to go abroad (i.e., by a carefulplanning of the objectives and consequeuces of going to for-eign markets) and, after that, by a strategy of positive com-mitment to the international adventure. Immediate ecouomicperformance seems to be uurelated to this competitive ad-vantage, but an enhanced competitive advantage obtained in


the foreign market should, over a longer time horizon, pro-vide the leverage to obtain subsequent economic profit. Ourdata set does not enable us to perform an analysis over time,hut this seems to he a future priority for research.

In terms of the w ay stations themselves, our study suggests,with caveats, that firms that are thorough at each stage (re-gardless of time sequence among the first five way stations)should enjoy hetter performance in their initial international-ization efforts. Being thorough in all the way stations meanshaving a clear motivation for going international, performingmarket research to select the target market, selecting theentry mode, anticipating possible problems and preparingcontingent solutions, and defining and implementing a pos-tentry strategy of high commitment. One surprising finding isthat planning for prohlems dropped out of our final model.Our explanation is that thoroughness in the other way sta-tions seems to minimize the need for thoroughness in thisstage. More research needs to be done on this last point.

Thoroughness of motivation and strategic planning, at thestart of the possihle sequence, and thoroughness in postentrycommitment at the end of the sequence seem to have directeffects on performance {as discussed previously, our mea-sures of postentry commitment defined it to occur after theprior way stations). The three other way stations we analyzed{market research, market selection, and selection of entrymode) seem to he necessary conditions for success, but theydo not have a direct linear relationship with the degree ofsuccess, another interesting finding. They can he interpretedas minimum requirements that seem to be triggered by thecompany's prior planning and motivation.

Our results, though consistent with the model proposed, do notprovide the definitive test for its usefulness but yield insightfulconclusions that may help direct further research in interna-tional strategies and managerial practice. The use of larger sam-ples and multiple informants will help improve the rohustnessof the results. The inclusion in a firm's demographics of targetindustry characteristics and target country/country-of-origineffects also appears to be a stream of research that should be en-couraged. This would help us understand, in the context of theway station model, the effect of a firm's strengths and weak-nesses, industry factors {in the typical industrial organizationapproach to strategy), and country characteristics on the proha-bility of success in the process of internationalization.

This article has significant implications for international man-agers, especially international marketing managers.

First, the company needs a significant competitive advantagethat it can leverage abroad. The most thorough international-

Further Research

Managerial Implications

The Bole of the Internationalization Process 31

ization process will yield poor results without an initial edge.Second, it seems worthwhile to invest the time and effort in asystematic approach to the internationalization process.

Managers can no longer use the excuse that their company istoo small to do things the right way. That admonition also re-flects the progress of the last 20 years in business educationand research. Business schools have moved from teaching ac-tual practice to espousing best and potentially better prac-tice. Newly internationalizing companies can do the same.Managers also need to monitor their progress over time. Evenif they start with an unsystematic process, there will come apoint when it is time to shift to a more systematic one.Watching for the signs of success and failure will help iden-tify the time to change.

" 1. A copy of the survey used in this study is available fromNOTES the authors.

2. However, this is not likely to have created any bias in theinitial targeted group. The operations of Grant Thorntonare wide enough to encompass a sampling frame represen-tative of the entire business population.

3. A similar number held for the variances, though the vari-ables for which the differences in means and varianceswere significant did not overlap. All levels of confidencein these tests and in the relations analyzed throughout thearticle were set at 5%.

4. A technical appendix is available from the authors, givinga brief explanation of the structure of the model and thereasons we decided to use it instead of the more com-monly used LISREL model.

5. Consciously, we do not make any comment ahout the va-lidity of causal statements that come from correlations ofnonexperimental data. The causality is given by our un-derlying model, and all our comments about causationmust be understood in that context.

6. An analysis of principal components on the covariancematrix of the responses to the items was done for each ofthe questions to check if the arithmetic mean was a mean-ingful way to collapse the items. The analysis tended togenerate one single component for each of the questionsand load all items with similar weights. Thus, the use ofthe arithmetic mean of the items proves adequate for thepurposes of finding a single measure for each question.

7. See Table 2 for summary statistics of the measured vari-ables.

8. These models implied changes in the causal setup of thevariables, not just including or excluding paths from vari-ables/residuals to variables/residuals with the objective ofimproving the fit.

9. Some of the coefficients from the second, third, and fourthway stations to the two dependent variables are negative,

32 George S.Yip, favier Gomez Biscarri, and Joseph A. Monti

but their standard error is so high (z-statistics less thanone in both cases) that this negative value must be takenas obtained by chance. Any other set of data might give apositive and still nonsignificant value for this coefficient.

10. The significance of other paths is not suppressed in struc-tural equation modeling by correlations among explana-tory variables, as these correlations are left free to beestimated.

11. This problem sometimes arises when variables are com-bined with indicators. We tried other estimation methods(not maximum likelihood but ordinary least squares andgeneralized least squares), and the results are similar: R isalways approximately .20.

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THE AUTHORS

George S. Yip is tbeBeckwitb professor of

marketing and strategy atCambridge University.

Javier Gomez Biscarri is adoctoral candidate in businesseconomics at tbe University of

California, Los Angeles.

Joseph A, Monti is apartner in tbe firm

CAST ManagementConsultants, Los Angeles.

ACKNOWLEDGMENTS

The authors thank Peter M.Bentler, University of California, Los

Angeles, for his helpful commentsand the Fundacion Ramon Areces,Madrid (Spain), and the Center for

International Business Education andResearch, Anderson School at Uni-

versity of California, Los Angeles, fortheir financial assistance. The au-

thors also thank Brian Gustason [Ox-ford MBA), Thao Nguyen (University

of California, Los Angeles, MBA),and Lee Alaniz (University of Califor-nia, Los Angeles, MBA) for their con-

tributions to this study.

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34 George S.Yip, Javier Gomez Biscarri, and Josepb A. Monti

Venkatraman, N. and V. Ramanujam (1986), "Measurement of Busi-ness Performance in Strategy Research," Academy of Manage-ment Review, 11 (October), 801-14.

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