BUSI 607 Week 2 DB Forum 2 Example

Discussion Board Forum 2: Key Concept Report and Replies

BUSI 607 Developing Global Markets, Discussion Board Forum 2 (key concept thread and 3 replies)

Thread by [Student Name]

The key concept and the three classmates' reports are composites written for this sample; the research cited is real, page numbers for the textbook depend on the edition a student uses and are left to the student, and the requirements follow Liberty's public course guide for BUSI 607.

Key Concept Report

Psychic distance is the sum of factors that prevent or disturb the flow of information between a firm and a foreign market, such as differences in language, culture, education, business practices and political systems. Geringer et al. (2016) present it as one of the considerations in assessing foreign markets, alongside market size and growth. The concept is central to the Uppsala model of internationalization developed by Johanson and Vahlne (1977), who observed that Swedish firms tended to enter foreign markets in a regular pattern.

The model makes two predictions. First, firms enter psychically close markets before distant ones, because close markets are easier to understand. Second, within each market, firms increase their commitment step by step, beginning with occasional exports, moving to independent agents, then to their own sales subsidiaries and finally to local production. The driving force is experiential knowledge: firms learn about a market by operating in it, and that knowledge reduces uncertainty and justifies further commitment.

Three decades later, Johanson and Vahlne (2009) updated their own model. In the revision, a foreign market is less a territory than a web of business relationships, and an entrant's real handicap is lacking a place in that web, which they named the liability of outsidership. Expansion then becomes a matter of earning trust and commitment from partners one relationship at a time. Because relationships can cross borders, the revised model allows a firm to enter a distant country early if a customer or supplier it already knows is active there. The revision also stresses that learning and trust building happen within relationships, so a firm's next market may be chosen by where its partners lead it rather than by a map of cultural similarity.

Measured properly, psychic distance is not one gap but several, and they do not always move together. Dow and Karunaratna (2006) developed measures of the specific differences that create psychic distance, including language, education, industrial development, political systems and religion, and found that these components predicted international trade flows better than a single composite of cultural distance. Their work suggests that managers should look at which differences matter for their business rather than assuming that a culturally similar country is easy in every respect.

Consider a Midwestern maker of agricultural equipment that has sold successfully in Canada and is choosing its next market between Australia and Brazil. Brazil is a larger agricultural market, but its language, legal system and distribution networks are less familiar. Australia is smaller but closer in language and business practice. The Uppsala model predicts Australia, and the network revision adds a question: does the firm have customers, dealers or partners with relationships in either country? The firm should also consider which of Dow and Karunaratna's components matter most for selling machinery: language and legal differences affect contracts and service manuals, while differences in industrial development affect how farms buy and finance equipment. If a Canadian dealer group already operates in Brazil, the network may reduce the effective distance enough to justify starting there. Either way, the model recommends a modest first commitment, such as selling through an established dealer, with larger investments following as the firm learns how the market works.

Reply to Melissa

Melissa, your report on born-global firms was a good counterpoint to my report, since born globals seem to contradict the gradual path the Uppsala model predicts. Oviatt and McDougall (1994) defined international new ventures as firms that, from their inception, seek competitive advantage from using resources and selling outputs in multiple countries, and they argued that falling communication and transport costs and the international experience of founders make such firms possible. Knight and Cavusgil (2004) found that born-global firms rely on innovation and on distinctive organizational capabilities, such as an international entrepreneurial orientation and strong marketing competence, to succeed in many markets early.

Your example of a software company that sold in 20 countries in its first year fits these findings. I would add that the revised Uppsala model and the born-global research may be less opposed than they look: born globals often rely on networks, such as founders' prior contacts or platforms like app stores, which give them insider positions in many markets at once. Do you think born-global firms are mainly a software and technology phenomenon, or can manufacturers follow the same path? Some specialized manufacturers of scientific instruments and medical components have done so, usually by selling to a narrow set of expert customers who are already international, which suggests the path depends more on the customer base than on the product.

Reply to Carlos

Carlos, your report on market screening explained how firms narrow a list of countries using indicators such as population, income, growth and import levels. Cavusgil (1985) offered guidelines for export market research that remain useful: start with a broad screen on general indicators, then examine industry-specific potential, and finally assess the firm's own sales potential through more detailed research and visits. One strength of your approach was weighting the indicators by their importance to your industry rather than treating them equally, which keeps a large but irrelevant market from rising to the top of the list simply because of its population.

I would add psychic distance as a screening factor, as in my report, because two countries with similar market size may differ greatly in how costly they are to enter. A screen that ranks markets only by size and growth may favor large, distant markets where the firm lacks knowledge and relationships. Combining market potential with a measure of distance, or with the firm's existing network, might produce a more realistic shortlist. Which indicators did you find most predictive for the medical supply company you analyzed? For medical supplies, the share of health spending that flows through public hospitals might matter more than income per person, since public tenders follow their own rules and timelines.

Reply to Jenna

Jenna, your report argued that entering an emerging market first gives a company a lasting advantage. Lieberman and Montgomery (1988) reviewed the sources of first-mover advantage, such as a lead in technology, early capture of scarce resources and the cost buyers face in changing suppliers, and also its disadvantages, including the risk of entering before demand is clear and the opportunity for later entrants to imitate at lower cost. Studying first movers in international business, Frynas et al. (2006) found that political resources, such as relationships with host governments, could be an important source of first-mover advantage in emerging markets.

Your example of an early mobile phone network in East Africa fits their argument well, since early licenses and government relationships created advantages later entrants could not easily match. But the same research suggests caution: advantages built on political ties can disappear if governments change, and a first mover also bears the cost of educating customers and building infrastructure that later entrants can use without paying for it. Would you recommend that a first mover build relationships across political parties and with civil society to protect its position? Investing in customers' loyalty through service quality might be a sturdier advantage than any license, since it survives a change of government.

References

Cavusgil, S. T. (1985). Guidelines for export market research. Business Horizons, 28(6), 27-33. https://doi.org/10.1016/0007-6813(85)90082-5

Dow, D., & Karunaratna, A. (2006). Developing a multidimensional instrument to measure psychic distance stimuli. Journal of International Business Studies, 37(5), 578-602. https://doi.org/10.1057/palgrave.jibs.8400221

Frynas, J. G., Mellahi, K., & Pigman, G. A. (2006). First mover advantages in international business and firm-specific political resources. Strategic Management Journal, 27(4), 321-345. https://doi.org/10.1002/smj.519

Geringer, J. M., McNett, J. M., & Ball, D. A. (2016). International business. McGraw-Hill Education.

Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23-32. https://doi.org/10.1057/palgrave.jibs.8490676

Johanson, J., & Vahlne, J.-E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9), 1411-1431. https://doi.org/10.1057/jibs.2009.24

Knight, G. A., & Cavusgil, S. T. (2004). Innovation, organizational capabilities, and the born-global firm. Journal of International Business Studies, 35(2), 124-141. https://doi.org/10.1057/palgrave.jibs.8400071

Lieberman, M. B., & Montgomery, D. B. (1988). First-mover advantages. Strategic Management Journal, 9(S1), 41-58. https://doi.org/10.1002/smj.4250090706

Oviatt, B. M., & McDougall, P. P. (1994). Toward a theory of international new ventures. Journal of International Business Studies, 25(1), 45-64. https://doi.org/10.1057/palgrave.jibs.8490193