Uppsala has been enlarged. This incremental way of internationalization

Uppsala model

As an explanatory
introduction of the independent variable, this thesis brings the Uppsala model
to the table, which helps to explain the underlying arguments and the eventual
hypothesis. According to Johanson and Vahlne (1977), firms
internationalize on a deliberate pace. The model states that foreign market
investments only increase if the host market knowledge has been increased on
forehand. In other words, host countries with a distinctive market environment
will at first receive smaller amounts of investments from an internationalizing
firm, compared with countries with a similar market environment as the home
country. In later stages, the internationalizing firm increases its investments
in the dissimilar host environment, when the market knowledge has been
enlarged. This incremental way of internationalization is extremely suitable
for corporate risk management.

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CBAs, which represent a
predominant share of China’s inward FDI, may also follow the path of
incremental internalization. According to the Uppsala model and in order to
reduce risks, the acquiring firms may adopt various strategies to decrease
their investments in host environments that stand institutional wise far away
from the home environment. To illustrate, an example in which China receives an
investment in two of its companies. One investment originates from Russia (relatively
low institutional distance with China) and the other from Switzerland
(relatively high institutional distance with China).

According to the Uppsala
model, the initial investment that originated from the environment with a low
psychic distance (here Russia), is assumed to be higher than the investment from
the environment with a high psychic distance (here Switzerland). Due to the
acquaintance with China’s institutional environment, the Russian acquirer faces
less uncertainty and is therefore more willing to make a large initial
investment, while the internationalization from Switzerland incorporates
incremental steps and smaller investments at a time.

One strategy that firms
can pursue in unfamiliar host environments according to the model is the
acquirement of smaller firms that ask for smaller investments. This initial
investment may not directly achieve the ultimate goal of the acquiring firm,
but can help to increase market knowledge, before further conquering the host
country’s market. Acquiring solely a sales agency firm instead of a new
production factory including sales departments can be one example of how the
Uppsala model influences the height of foreign investment (Forsgren & Kinch, 1970).

A second practice to reduce investment
commitment in a dissimilar host country environment is the acquirement of
minority control shares in a foreign firm (Demirbag,
Glaister, & Tatoglu, 2007; Xu, Pan, & Beamish, 2014). This strategy might be favourable in
situations with high risks, i.e. unknown and dissimilar market environments. In
this case, a firm can easily observe the practices of the target firm, in order
to get acquainted with the host environment, before fully acquiring the target
firm in a later phase. This practice mitigates both 


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