Relationship Development: A Micro-Foundation for the Internationalization Process of the Multinational Business Enterprise.

Author:Vahlne, Jan-Erik

1 Introduction

The Uppsala model continues to evolve into a paradigmatic framework applicable to studies of the multinational business enterprise (MBE) (Hakansson and Kappen 2017; Vahlne and Johanson 2013, 2017). There is still scope for improvements and scrutiny of critical assumptions and micro-foundations (Coviello et al. 2017). This article serves the purpose, detailed below, of investigating the micro-foundation of relationship development, a critical element of the process of MBE internationalization and evolution.

The Uppsala model is located at the micro-level, and the firm as a whole is the unit of analysis. In early versions of the model, the focal firm acted in a faceless market; later, with the introduction of the network view of markets (Hakansson 1982; Johanson and Vahlne 2009 and sources given therein), the model was developed into one of interaction between, formally independent, parties performing exchange in the market: The processes of knowledge development and commitments were and are seen as occurring at both ends of the relationship between, for example, a supplier and a customer. Developments of relationships, development of relationship knowledge and mutual commitments are accordingly critical elements of internationalization.

The latest version of the Uppsala model attempts to widen the performance dimension of the change variables from internationalization to evolution (Vahlne and Johanson 2017). Internationalization is of course seen as a dimension of evolution. The widening has meant that commitments to other strategic behaviors improving on the firm-specific advantages (FSAs) are paid attention to (Dunning and Lundan 2008). Such behaviors include strategy making, technology development, and organizational development, e.g., development of entrepreneurial capabilities. One more such advantage is access to relationships that is membership of relevant networks. Liability of outsidership is consequently a disadvantage (Johanson and Vahlne 2009). To enjoy an advantage, by exploiting an operating capability, the capability/advantage has to be built. This happens via dynamic capabilities possessed by the focal firm (Teece et al. 1997). The Uppsala model, focusing on change processes constituting internationalization, was consequently enriched by the inclusion of the dynamic capabilities perspective. Operating and dynamic capabilities are integrated into the model (cf. Fig. 1) (Vahlne and Johanson 2013,2017).

Dynamic capabilities research has tended to concentrate on the product- and technology-related aspects. However, product-focused organizations, which have conventionally focused their competitiveness on product qualities and patents, are progressively shifting their attention toward solution offering (Kindstrom et al. 2013). Still, there are no empirical studies of the dynamic capability of developing relationships, knowledge development (Aykol and Leonidou 2018; Eriksson 2014; Jonsson 2007). Hence, the research question for this paper is to shed light on the relationship development micro-foundation of the Uppsala model. As has been shown above, this micro-foundation has been only assumed to exist, but not explicitly studied empirically. Hence, if we can show the importance of this micro-foundation empirically, we have indeed moved the research field forward as relationship building and development is at the heart of the internationalization process. To conclude, the contribution of this paper is that, in one important aspect, so far missing, the Uppsala model rests on solid ground. Now, our study includes only two case studies, and regardless of the nature of our findings, empirical studies have to be continued.

Against the background of the research question and attempted contribution, our objective is to empirically study relationship building processes and the subsequent change of commitments between the two parties of a supplier-customer relationship. Consistent with the process ontology on which the Uppsala model is based, the approach is to perform, longitudinal, detailed case studies of relationship development.

The paper continues with a summary of the theoretical background, outlining the essential building blocks: the Uppsala model, the capabilities approach, relationship knowledge development and a final section on relevant differences between large and small companies. A section on methodology is followed by a description and analysis of the empirical findings. Concluding remarks and ideas for future research finalize the paper.

2 Theoretical Background

In this section, we will focus on three phenomena, namely the evolutionary process of the MBE, dynamic capabilities and relationship knowledge development, which we try to interconnect in this work. This serves the purpose of providing the theoretical base for our empirical study.

2.1 The Uppsala Model

The earlier version of the Uppsala model explained the internationalization process as an interplay between the processes of knowledge development and commitments (Johanson and Vahlne 1977, 2009). The latest version still relies upon those mechanisms, but the phenomenon explained is the evolutionary process of the MBE. The intention is to focus not only on the internationalization process but also on the development of the firm-specific advantages (FSAs), such as processes of developing new technology or strategic change (Vahlne and Johanson 2017). However, these processes are cumulative, and causal relationships are seen as relationships between state and change variables (Fig. 1). Knowledge development affects the status of the capabilities, which in turn impacts on ongoing knowledge development and commitments. A commitment decision, such as an investment in a local organization of the focal firm, will, of course, change the degree of commitment and performance, but most probably also the need for knowledge development. The supplier relationship development model as depicted in Fig. 1 is a version of the Uppsala model 2017 adjusted to fit the paper's objective of applying the process view to the development of individual relationships that is the relationship between the focal firm as a supplier and an individual customer. Typically such a relationship is handled by particular departments at the respective companies and some designated individuals.

As follows from Fig. 1, we see the Uppsala model as being completely applicable at the level of the evolution of the individual relationship. The operational capability of the relationship (upper left-hand box of the figure) is the ability to serve the customer in an at least satisfactory manner. The dynamic capability is the ability to change the operational capability, for example by adjusting the product or services offered. The commitment decisions (upper right-hand box) may, for example, concern investments to adjust the product to the changing needs of the customer. An implementation may take the shape of a trial and error process in developing a new version of the product. The performance dimension (lower left-hand box) can be profitability and sales growth, while commitments could formally and/or informally state that the customer will be serviced when needed, even at a high cost. Relationship knowledge development (lower right-hand box) includes learning about the customer's needs, building a trusting relationship and, often in cooperation with the customer, creating a better product and service offering. Increased commitments constitute internationalization.

Relationship development is characterized by uncertainty, as the focal firm has to cope with contexts characterized by many unknowns, often implying that the process proceeds incrementally in line with the interplay between knowledge development and commitments, with the firm deciding to proceed if what it learns is promising for the future (Johanson and Vahlne 1977, 2006, 2009). Johanson and Vahlne (2003) conclude that an organization's international expansion is initially the result of developing its existing relationships. However, existing relationships may serve to open up new such relationships through the dissemination of knowledge of opportunities.

The driving force in the internationalization process is the organizations' experiential knowledge of opportunities (Johanson and Vahlne 1977) acquired from market operations and inter-organizational relationships, e.g., relationships with customers. Creative efforts lead to continuous learning from network parties and increased resource commitments in the international marketplace (Johnson et al. 2009). Opportunities must concern not only the potential concerning the focal relationship but also similar relationships in the same or new markets. The network by its nature serves as an extended knowledge base: knowledge of other relevant parties may be transmitted via the focal customer (Johanson and Vahlne 2009). Moreover, it should be mentioned that such privileged knowledge is by no means public, but is instead confined to the parties involved. The knowledge development process as Johanson and Vahlne (2006) posit, is subject to interrelated mechanisms about and commitment to identified opportunity. Identified opportunity exploitation carries the incremental internationalization process through relationship interaction (Johanson and Vahlne 2006).

Organizations learn and gain experience through relationship knowledge development. The network is a broader web of connected relationships operating as a knowledge sharing system. The inter-organizational relationships provide the participating organizations with an opportunity to learn and share from the knowledge hub (Evers and Knight 2008) or act as gatekeepers (Guercini and Runfola 2010) or as channels of information flow (Cano-Kollmann et al. 2016). Knowledge is gained not only through organizational relationships (Guercini and Runfola 2010) but also through social relationships between...

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