jukka hohenthal !"#$%#& !()(*+," -./-0 1%2%3, 456"$+(7 899%" :, ;3"#)+,) !(#<"29=0 >:7? /0 @:? -0 66? AABC/? D:6&#+)E2 F -./- G"6(#23",2 :H I%9+,"99 52%J+"90 K669(7( K,+L"#9+2& M855@ -../BN-O-P !"#$%"&'(' *+", ###-*(.-//-0(1,(+2/+3 45567689 :8;8<6=> 45 ?@> !>A8B?:>=? 45 CDE6=>EE E?D!6>E 8? DAAE898 D=6F>BE6?G Jan Johanson began his academic career at the Stockholm School of Economics in the 1960s. At the time, microeconomic theory provided the prevailing understanding of the world of business. Looking through its lens often meant a birds eye view and consequently an oversimplified, serene and friction-free depiction of business as real people and firms were left out of the equation and replaced by production functions and the theoretical construct of an economic man. As Johanson moves to Uppsala University to work under the legendary Professor Sune Carlson he commences a journey that will eventually put him at odds with the theory and its proponents. This journey however will also put him in touch with a group of scholars in Uppsala and lead to the formulation of two contributions to management research that have had a lasting impact: the Uppsala Internationalization Process model and the Network Theory. by jukka hohenthal M E R C U R Y M E R C U R Y GOING BEYOND BORDERS F E A T U R E A PORTRAIT OF PROFESSOR JAN JOHANSON an Johanson has a long and successful career within academia. He started at The Stock- holm School of economics, but was lured to Uppsala by Sune Carlson, who was building a management section at Uppsala Univer- sity. Jan Johanson has worked with and in- fluenced, and been influenced by academics who have then left Uppsala to become pro- fessors all around Sweden, as well as abroad, in countries like Denmark, England, the us, France and South Korea. Living in the small town of Sigtuna be- tween Uppsala and Stockholm, with his wife and five children, several dogs and a blind cat, he never travelled much and thus his reputation was formed by what he wrote. This also meant that people interested in meeting Jan Johanson had to come to Up- psala which resulted in a series of interest- ing academics coming to discuss and present their work. The Uppsala view has slowly penetrated the academic world to become a dominant paradigm, and it has also influenced the way organizations like the Swedish trade council and consulting firms give advice to international- izing firms. Ever since the industrial revolution Sweden has been dependent on export and international trade for its riches. Firms like Ericsson had a significant international presence almost from their incep- tion. The brand Ericsson was, for example, famous enough to be used in a poem 1 written in 1923, by the revolutionary Russian poet Vladimir Mayakovsky, to depict his glowing emotions over a phone call from his lover. Other Swedish brands have also reached an iconic status in such ways that driving a Volvo signifies intellectual safety consciousness and ikea signifies both hipster culture and frustration. Today about half of the Swedish gdp comes from export and Sweden is dependent on international trade for upholding the welfare state. Swedish firms have become international out of necessity, as the home market is too small to support economies of scale in most industries. A majority of Swedish firms with more than 50 employees are involved in international business and thus have to handle the increased complexity that international trade usually leads to, and therefore a certain level of knowledge about how to conduct business across borders is vital for them. We have seen countless examples of how diffi- cult it is to transfer successful business models from one market to another. One interesting example is the us bank, Merrill Lynch 2 . During the Japanese growth period of the 80s and 90s, people in Japan became increasingly rich and in the middle of the 90s there were over 10 trillion usd in household savings. A lack of social security led people to save a high proportion of their income and this money was mainly put in savings accounts with very low inter- est rates. Merrill Lynch saw this as a tremendous opportunity. Why would not people in Japan want a return of 6 or 7% as their customers got in the us instead of the 1% they got in Japanese banks? Merrill Lynch tried to enter the Japanese mar- ket twice with very little success. The first time they wanted to build their own network of offices in Japan, but as they understood that they only had a few customers for each office, they decided to leave the market. Later when the Japanese econo- my started to slump, and after the Japanese bubble, the fourth largest broker in Japan was failing and Merrill Lynch decided to buy it to get access to their employees, offices and customers. By transferring American management and marketing methods to Japan they believed that they would be able to turn it around and capture a large chunk of the Japanese market. This, however, also failed. Merrill Lynch lost several hundred million usd in a few years by underestimating the difficulties of working in a very different cultural setting. The dependence of the Swedish economy on international trade has also led to considerable aca- demic interest for the phenomenon and both in in- ternational economics and international business, Swedish researchers have become internationally recognized. The Hecksher-Ohlin theorem and the Uppsala internationalization process model are widely used for analyzing international trade and internationalization of firms. The by far most cited article within interna- tional business research in the world is the 1977 article, The Internationalization Process of the Firm is through these connections that the firm develops new knowledge and tests the knowledge they have. In these meetings we have the moments-of-truth, when what we believe is confronted by reality, and knowledge based on experience is developed. The Uppsala internationalization process model contains several insights that were to be included in management theory later. One was the realization that firms possess several kinds of knowledge. They decided to use a division of knowledge into explicit and experiential knowledge. Explicit knowledge is formal knowledge that can easily be transferred be- tween persons, and thereby also between firms. Experiential knowledge is knowledge adapted for the specific needs of the situation and the firm. Experiential knowledge is developed by acting in a specific setting, such as a foreign market. It is hard for a firm to know what knowledge they lack as they are to do something new. Experiential knowledge is built into the way the firm acts and the relation- ships it has, and is thus hard to transfer, copy and use by other firms. The competitive advantage of firms usually resides in the experiential knowledge of a firm. ikea is an interesting example of how an incre- mental learning process can create a business mod- el that has been very hard to copy. The basic idea of Ingvar Kamprad, founder of ikea, was that he wanted to sell cheap furniture through mail order. Difficulties in finding suppliers forced him to look outside of the usual channels and start buying from firms who did not normally produce furniture, and from countries that Swedish furniture firms did not usually buy from. The development of a superior lo- gistics system to handle their novel supply system gave ikea a cost advantage that no one has yet been able to match. Another insight was that we should talk about commitment instead of investment, when firms en- ter new markets. Investments only capture parts of what firms do in new markets. Commitment captures both the financial, temporal and atten- tion aspects of what the firm does. It captures the attention and strategic intent of a firm in a way that investment does not. a Model of Knowledge Development and Increas- ing Foreign Market Commitment by Jan Johanson and Jan-Erik Vahlne. In this article they introduce two concepts to explain how firms expand into new markets: knowledge creation (learning) and com- mitment. The model was based on studies of how Swedish firms grew across borders after the Second World War. Jan Johansons view on how interna- tionalization was carried out was formed through an in depth study of Sandviks attempts to enter for- eign markets. This study of Sandvik was followed by studies of other big and small Swedish firms, mainly in the industrial sector that was, and to some extent still is, the dominant sector in Sweden. Going out and studying what managers actually do was something that Sune Carlson had emphasized. Sune Carlson, who was the first professor of Business Studies at Uppsala University, started the discipline of international business studies in Uppsala. He had a unique position in the crossroads between research, management and politics, that can only be compared to John Maynard Keynes in England or Peter Drucker in the us. Sune Carlson defended his dissertation at the University of Chicago in 1936 3 and went on to work for the un. When he returned to academia as a pro- fessor of administration, as business studies was known then, first at the Stockholm School of Eco- nomics and then at Uppsala University, he managed to get Swedish ceos to keep a journal where they wrote down what they did during their days. Based on these journals he wrote and published the first comprehensive study of what managers actually do, in the book Executive Behavior. One of his key findings was that managers spend little time on strategic or even tactical issues, and much time reacting to minor and major emergen- cies. Instead of a puppet master, managers often be- come the puppets whose strings are pulled by what others do. This book has influenced well known management researchers like Henry Mintzberg and Rosabeth Moss Kanter and through them the way we teach and develop managers at most business schools in the world. Sune Carlson saw the need to develop know- ledge about international business and also a need to make management research more relevant through studies of how firms actually act. The work on top managers that Sune Carlson did also lead the group of researchers in Uppsala to realize that if they were to understand what really goes on in firms they have to study middle managers. According to Jan Johanson, the middle manag- ers are the unsung heroes of business. These manag- ers travel around the world, meeting potential cus- tomers, and by their actions shape the development of the firm. These managers transcend the bound- aries of the firm, connecting it to other contexts. It John Maynard Keynes was one of the most influential economists of the 20th century who worked both at Cambridge University and for the British government in various positions. His work on employment, interest and money is still used by finance departments around the world. He had an impact on both academia and the world economy. Keynes past away in 1946. Peter Drucker was an influential management thinker born in Vienna in 1909 who died in the US in 2005. He consulted for many of the biggest firms in the world and influenced management theory through his 39 books and countless articles in magazines like Harvard Business Review and the Economist. M E R C U R Y M E R C U R Y To introduce a glimmer of common sense into theories can lead to all kinds of confusion firm. Cultural distance will, to some extent, work for understanding trade development between countries, but it is not very useful on a company level. Psychic distance is simply everything that hinders a firm to enter a market. According to Johanson and Vahlne, firms in- ternationalize in an incremental fashion. They start with low commitment entry modes in coun- tries with a low psychic distance. As they develop experiential knowledge of the market and of how to internationalize, they go on to higher commit- ment modes and countries with a higher psychic distance. It is usually not a question of investment decisions where firms ponder which market to en- ter, and after a rational evaluation of the various op- tions, choose one. Instead it is the middle managers who find and exploit opportunities by committing resources they control. This view also raises an interesting question about where decisions are made in firms. Accord- ing to Jan Johanson, what top managers see and un- derstand about what happens in the firm, is filtered through what the middle managers wants them to see. It is therefore very difficult for headquarters to become directly involved in an internationaliza- tion process. Successful internationalization is thus dependent on empowered middle managers, with leeway to make decisions based on their superior knowledge about the situation at hand. The Uppsala model has its roots in trying to rec- oncile the theory of the firm as it was formulated by, among others, the future Nobel laureates Ronald Coase and Oliver Williamson, with observed inter- nationalization patterns among Swedish firms. The research group in Uppsala found it impossible to use the received theory to understand the observed pattern and had to start looking for alternative ways of conceptualizing the way firms internationalized. According to Jan Johanson, they explored all lit- erature they could lay their hands on, to find expla- nations for what they saw. A key to understanding was found in the writings of another future Nobel laureate, Herbert Simon, and in an attempt to con- ceptualise a theory of the growth of the firm, by Edith Penrose. Both Penrose and Simon were con- sidered mavericks among economists. Simon, who died in 2001, not only developed management as a science, but was alsooneof thefirst researchers to use computer simulations in research on human behavior. He also founded the Carnegie Tech School of Management Research, which prob- ably is the most influential force in shaping modern management thinking. He did groundbreaking work in psychology, artificial intelligence, computer sci- ence, economics, sociology and pedagogy. Two of his most famous concepts are satisfic- ing, the idea that in choosing among alternatives we very seldom try to find the best option, and bounded A third insight was that market entry is not a ques- tion of single choices; instead we have to see it as a process. Jan spent the first fifteen years of his career coming to grips with a processual view of business. Most economic theory tends to see business as sin- gle investment decision, production, functions and demand/supply structures, and miss out on the ever changing fluidity of real business. By studying what firms do, Jan Johanson and Jan-Erik Vahlne could formulate a model in which firms commit to a market, gather experiential knowledge, increase their commitment, and thus gather more experiential knowledge. In other stud- ies over the last 35 years, this incremental process has been studied over and over again and the results seem to be rather robust. Firms tend to start with low commitment entry modes, like export, and then go on to high commitment entry modes, like subsid- iaries. Internationalization is thus a process and not a discrete investment decision for management to evaluate and decide on. Afourth insight, that was formulated earlier, but included in the model, was the concept of psychic distance. Psychic distance consists of the cultural, economic and legal differences between countries. The prediction is that firms will start their inter- nationalization in countries with a low psychic distance, and then go on to countries with a higher psychic distance. This relationship is also a robust one. Globalization has not had any great impact on where firms start their internationalization. For Jan Johanson this concept was never that interesting, but within international business research it is one of the most discussed and used concepts we have. Psychic distance is a wider concept than cultur- al distance, which is what we usually talk about in connection to international business. Cultural dis- tance is a way of looking at the difference between countries, even though countries can have several cultures, to determine how difficult it will be to in- teract between them. The more different, the hard- er it should be to establish business relationships between the countries. The most famous way to measure cultural dis- tance was developed by the Dutch psychologist Geert Hofstede. Hofstede studied the difference in how employees and managers viewed management in the various branches of ibm. These studies made it possible to divide the countries of the world ac- cording to four different criteria: power distance, in- dividualism versus collectivism, masculinity versus femininity, and uncertainty avoidance. Based on a classification of the studied coun- tries, it is possible to calculate a cultural difference between nations, thus making predictions on how difficult it will be to enter that market. But if we use the concept of psychic distance instead, we take down the aggregation level from the nation to the acute problems. This may mean that a number of partly contradictory goals have to be reached at the same time. Each decision-maker in such a situation attempts to find a satisfactory solution to his own set of problems, taking into consideration how the others are solving theirs. This replacement of a rational economic man with a satisfacing actor who is prepared to accept good enough solutions, opened up a possibility of introducing learning and dispersed knowledge into the theories and this was something that Jan Johan- son found intriguing. Even though he saw learning as a central facet of business activity, they could not use the word learning in their publications, as it was not an accepted part of the theory of the firm in the 1970s. Instead they talked about knowledge creation. To understand what knowledge was, they had to search for researchers who had used it and defined it in economic settings in a way that would capture the different facets of the concept. They found a clue in the writings of Edith Penrose. Edith Penrose 4 was another maverick econo- mist who spent a large part of her career outside of rationality - that even if we want to act rationally, in most situations we are incapable of acquiring and processing the information that we need. Both these concepts have been instrumental for research on human action. In his speech, introducing Herbert Simon at the Nobel Prize ceremony in 1978, Sune Carlson described him with the following words: Simon rejects the assumptions made in the clas- sical theory of the firm of an omniscient, rational, profit-maximizing entrepreneur. Instead, he starts from the psychology of learning, with its less com- plicated rules of choice and its more moderate de- mands on the memory and the calculating capacity of the decision-maker. He replaces the entrepreneur of the classical school with a number of cooperating decision-makers, whose capacities for rational ac- tion are limited by a lack of knowledge of the total consequences of their decisions and by personal and social ties. Since these decision-makers cannot choose a best alternative, as can the classical entre- preneur, they have to be content with a satisfactory alternative. Individual firms therefore, strive not to maximize profits but to find acceptable solutions to Ronald Coase was born in England and worked mainly in the US as an economist. He received the Nobel Prize in Economics in 1991 mainly for his work on the theory of the firm. Coase was born in 1910 in London. Oliver Williamson won the Nobel Prize in economics in 2009 for his work on transaction cost theory. He is a professor at Berkeley, California. M E R C U R Y M E R C U R Y Jan Johanson is Emeritus Professor of International Business at the Department of Business Studies (Uppsala University). He has published a plethora of books and articles including The Internationalization Process of the Firm and Business Networks. He is also the cofounder of The IMP Group. Henry Mintzberg is a prominent professor of management at McGill University in Canada. His alternative way of looking at strategy and opposition against the dominant view based on Porter has received a lot of interest both within and outside academia. Rosabeth Moss Kanter is a professor at Harvard Business School whose work on change management and management in general has been very influential. group in Uppsala tried to introduce relevance into the economic theories and as Jan Johanson says to introduce a glimmer of common sense into the theories can lead to all kinds of confusion. Much of economic theories are developed for macro levels, where individual actors are relatively unimportant, but if we are to understand the actions of individuals and firms, we have to develop theories that work for these, instead of economic theory building on simplified and unrealistic assumptions about human action, as much of the economic theory did (and does). According to Jan Johanson the relationship be- tween knowledge development and commitment is almost trivial. But for economic theory, that is not concerned with the mid level in the form of firms, it makes no sense to include these concepts. If we are to understand the actions of firms, we have to develop a theory of the mid-level, and this is where he has concentrated his efforts. This also meant that although they studied the actions of individuals, the firm was seen as a repository of individual knowl- edge to simplify the theoretical reasoning. This focus on the mid level later led Jan Jo- hanson to go on to try to understand how firms are connected. He thus worked on network theory for a long time. This focus on business relationships also stems from the empirical work done. What they saw was that firms do not compete the way theory would stipulate. Instead firms tend to emphasize cooperation with customers and suppliers and to some extent even with competitors. The focus on business relationships as the build- ing blocks of industries instead of the firm, leads us to see markets as something else than a place where firms compete against each other for each new busi- ness deal. Business is usually conducted in long last- ing relationships where repeat business is the norm and where most firms can only function against the backdrop of such business relationships. Enter- ing new markets is costly and time consuming and without a steady income from existing business it becomes much harder. Afocus on business relationships also has an im- pact on how we see international business. Entering a new market usually means finding a customer in that market to sell to, and whatever cultural dis- tance between the countries, it will be mitigated by the business relationships. Jan Johanson spent the first fifteen years trying to understand the processual aspects of business, the next fifteen trying to make sense of the inter- connected network world, and the remainder trying to put these together. Networks are basically struc- tures, and were studied as such for a long time. To introduce dynamic aspects into networks is harder, and describing them as they are always in motion makes the models difficult to understand. academia, working and living in Switzerland during the Second World War, later in Canada, and then in the us, where she started her work on The theory of the growth of the firm. The McCarthy era witch- hunts led her and her husband to leave for work abroad, and after stints in Australia, Iraq, Lebanon and Egypt, she ended up at the London School of Economics with a chair in Asian economics. She was never quite accepted into the canon of economic theory. Instead her reputation grewoutside of mainstreameconomics andtoday she is a must read for researchers and others interested instrategy, espe- cially in the various resource/knowledge based views on how firms manage to compete on markets. The Uppsala School of international business was early in discovering and using her theories for explaining how and why firms grow. According to Jan Johanson, dis- covering Penrose was a revelation because she man- agedtoexplainthe role of knowledge inthe expansion of firmactivities: Penrose managedtoconnect resourc- es to knowledge in a way that made sense. WhenPenrose startedto work onhowfirms grow, she discovered that received economic theory was too static to be able to handle change at company level. Mainstream economic theory had no companies in it, the firm was simply a set of supply and demand functions, and thus she had to search elsewhere. In her view, firms exist becausetheyarebetter at creating knowledge than markets. Since it is the growth in knowledge that makes it possible for companies to expand into new markets and new product areas, learning becomes a central driving force for development. Like Penrose and Simon, the research not per se the difference in the level of economic development, but rather the organization of economic life. In developed markets, we have invested a great deal in rules and regulations, and we have installed institutions and so on that control these. In emerging markets, the growth of this institutional environment often lags behind the growth of the market (and that is an understatement). Often, business arrangements are therefore based on less solid grounds, as we in the western world tend to see it, namely connections, social relations, or other forms of trust guarantees. To learn your way in this, for western firms unfamiliar, ambiguous and complex environment, is what makes doing business in emerging markets a struggle. A second issue that has drawn the interest of academics is the success of some companies fromemerging markets that have succeeded to challenge developed-market players. Well known examples of this are Cemex fromMexico, Hyundai from South Korea, Infosys fromIndia and Haier and Lenovo fromChina. All of these companies challenged the existing dominant multinationals in their regions, and won territory on the global market. Explanations of the success of these companies are definitely not limited to low labor cost benefits in the home market, or successful copy-cat behavior. Many of themhave actually developed some great advantages of their own, and their capacity to develop innovations is not to be underestimated. Finally, this leads into the discussion about the changing (economic) balance in the world. China feels like the place to be today if you want to keep in touch with your global competitors, and Chinese companies expand heavily abroad, also in Sweden, taking hold of some of the flagships of the Swedish economy. And if Chinas economic success will appear persistent, then the countrys business culture may perhaps set a new moral standard. Maybe Western countries will then be part of the next wave of emerging markets? This summer I visited two conferences and both of themhosted numerous sessions and panel discussions around emerging markets. These often resulted in lively debates on the question of whether we enter a new geo-political era and what that will mean for us. It is peculiar that the first country you might think of when you hear the term emerging markets is China, almost the biggest market in the world! It is also China that is mentioned in this summers conference discussions as a country that plays a determining role in todays geo-political rebalancing. It is intriguing that we label such an important country as emerging. It makes me wonder what it takes for a market to become emerging, or for a market that once was emerging to stop being so. Although there are several definitions of what an emerging market is, there appear to be no official rules for when markets stop being emerging and become, well, developed. Over time many different markets have been labeled emerging markets. In the 1970s, countries like Mexico, Thailand, Indonesia, and South Korea were markets characterized by rapid growth and industrialization. Korea, together with Hong Kong, Singapore and Taiwan were so successful that they later were referred to as the Asian Tigers. After the fall of the Iron Curtain, the countries in Central and Eastern Europe came into focus, later to be renamed as transition markets. Then the era of the BRIC markets started and most recently a number of up and coming markets in Africa are added to the family. Only a handful of these former emerging markets are now included in the lists of developed countries. So what issues do academics in international business discuss with regard to emerging markets? One issue is of course the challenges that confront firms fromdeveloped economies doing business in these emerging markets. The most important difference between developed and emerging markets is Rian Drogendijk The International Perspective Economic and Political Rebalancing and the Role of Emerging Markets Jan Johanson does not think that the influence of either the internationalization process model or net- work theory is going to go away any time soon. There have been claims that increased globalization and new tools in the form of computers, management and data analysis, have made older theories obsolete, but Jan Johanson says that There are claims that we somehow have become more rational, but reality is still elusive and complex. We are still limited in our rationality and introducing more information does not make it easier for us to handle reality. We still need to work on simplifications of real- ity to make sense of the world, and these two mod- els work. They give us a possibility to understand complex phenomena. Jan Johanson says that such steps towards adapting to an Anglo-American way to view research, has led us in Sweden to follow the stream towards more rigorous research. But we risk losing the advantage we have had in Sweden, in which companies have been open and possible to approach for researchers. By working close to reali- ty, relevance has been our thing and we have been able to take steps in understanding business, that have been harder for American researchers, where it is much harder to get access to companies. Jan Johanson was able to work on problems that interested him and develop his knowledge over long periods of time, as universities had more resources and he and his associates did not have to try to find external funding for this research, in the same way as academics have to do today. This made it pos- sible to really dig into the problem and to develop a new paradigm for how we view international busi- ness. Going against the dominant paradigm is much harder in a system where the representatives of that paradigm usually decides who will get research funding and where chances are that they would be unwilling to support research that goes against their own contributions within the field. It is also much harder to publish articles that go against the dominant logic of the field. Globalization, digitalization, migration and harmonization of laws and regulations have made Swedish companies more dependent on under- standing the threats and opportunities in a global economy. This has made the work of Jan Johanson even more relevant today than it was 35 years ago. The incorporation of network theory in the interna- tionalization model has also made it more relevant for firms working in an interconnected network economy. Jan Johanson has also worked on born globals, web based business and internationaliza- tion of services, but he claims that the basic model still holds for for these types of firms too. The con- tributions that might change our view on the inter- nationalization process come from entrepreneur- ship research rather than international business research according to Jan Johanson. I tell people that the model is based on common sense and is therefore rather trivial. This seems to upset some people who want to see it as more profound than it really is NOTES 1
The poem About That. 2
Merrill Lynch was one the financial institutions hit hardest by the 2008 crisis and it was later taken over by Bank of America. 3
Sune Carlsons thesis was later rewritten and the resulting book is still considered as a minor classic in economics. 4
The description of Penroses life is taken from Christos Pitelis introduction to the 2009 edition of Theory of the growth of the firm (Oxford University Press). M E R C U R Y M E R C U R Y