The Role of the Internationalization

Process in the Performance of Newly

Internationalizing Firms
ABSTRACT

George S, Yip, Javier

Gomez Biscarri, and
Joseph A. Monti

Submitted Scplcmber 1998

Revispei February 1S99
December 1999
foumal of International Marketing
Vol. 8. No. :i. 21)00. pp. 10-3.5
\' n)fi9-03IX

10

A study of 68 recently internationalized U.S. firms, using structural equations, shows that newly internationaUzing firms do
not on average follow a highly systematic approach. Some firms
make use of a systematic sequence of steps, and the more systematic the approach, the better is the performance.
Newly internationalizing companies face many difficulties.
Most fail or achieve low levels of success. This is particularly
true not at the initial internationalization stage of sending out
some exports but at the next stage of real international commitment: making an international investment. Such investments take the form of sales offices, equity investments,
acquisitions, alliances, and the like. At this stage, companies
are hampered primarily by two things. First, the firms are, by
definition, inexperienced. They face the problem of "unknown unknowns." Several differences and obstacles in international markets can trip them up. Second, because they
typically are smaller companies, they lack the resources and
capabilities to deal properly with potential problems. In contrast, existing multinational companies (MNCs) can bring
both extensive experience and resources to each new international venture. Perhaps as important, many smaller companies assume that they cannot take a thorough approach to
internationalization but must make do with unsystematic, ad
hoc efforts.
We became aware of this view from our initial interviews with
the chief executive officers of 13 U.S.-based mid-sized firms
that had recently internationalized.' This view is also supported by previous studies. Karagozoglu and Lindell (1998) argue that the resource constraints and capacity limitations of
smaller firms make it harder for these firms to face the challenges of international competition. Their study of 34 small
(fewer than 999 employees], technology-based U.S. firms finds
that 44'/o cite lack of managerial experience and competence
to exploit international business opportunities, 44% had difficulties in gathering information about global markets, and
32% faced differences in resource availability in relation to
large global competitors. Van Hoorn (1979) shows that smaller
companies have informal structures; insufficiently developed
administrative procedures and techniques; and unsystematic,
often nonrational decision-making processes. But more-formal

planning seems to be associated with more success in internationalization. Baird, Lyles, and Orris (1994) find that small
firms that are internationally oriented have more-formal planning systems than those who are not.
In this article, we focus on the extent to which small and midsized (U.S.-hased) companies take a systematic approach to
new internationalization and the performance differences hetween systematic and unsystematic approaches. In this context, systematic means using formal strategic planning and
market research, considering many alternative countries and
entry modes, developing contingency plans, and having longterm objectives for foreign ventures. Unsystematic or ad hoc
means not doing these things and being generally opportunistic in decisions and behavior about foreign ventures. To address these issues, we develop and empirically test a model of
a systematic internationalization process.
This issue of systematic versus ad hoc internationalization
fits into the ongoing theoretical debate regarding deliberate
versus emergent strategies, a topic broader than internationalization. Researchers favoring a planned approach include
Kotler (1984) for marketing strategy and Root (1987) for international market entry, whereas those favoring an emergent
approach include Mintzberg (1973) for strategy in general
and Aharoni (1966) for the internationalization process. In
particular, Aharoni emphasizes the ad hoc nature of the internationalization process in small and medium-sized companies and influences the development of the classic
Uppsala view of the internationalization process (Johanson
and Vahlne 1977; Melin 1997).
However, it could be argued that MNCs, management consultants, and researchers have gained so much more experience
of internationalization in the past 20 years that their combined learning should have spilled over to newly internationalizing firms. Therefore, these firms are in a better position to
develop and apply more systematic approaches. We examine
this possibility, thereby contributing to the debate on deliberate versus emergent internationalization strategies.
Relevant studies on the internationalization process include
Hill, Hwang, and Kim (1990), Norwell, Andrus, and Gogumalla (1995), Kutscher and Baumile (1997), and Melin
(1997). But to research our two key issues, whether newly internationalizing firms use a systematic process and whether
such a process provides superior performance, we need a
model of a systematic internationalization process. Therefore, we examined two of the best-known existing models in
the academic literature (Johanson and Vahlne 1977; Root
1987) and a third, managerially oriented model (Miller 1993).
In their classic article, Johanson and Vahlne (1977) develop a

The Role of the Internationalization Process

PREVIOUS MODELS OF THE

INTERNATIONALIZATION
PROCESS

11

theory about the continuous process that takes place in firms

that enter foreign markets. On the basis of their experience
with Swedish companies, they find that these and other European companies usually develop their international operations in small steps, as a continuous process of incremental
adjustments to changing conditions in the firm and the environment. The two key terms in their article and theory are
"knowledge" and "commitment"; that is, knowledge obtained in and about foreign markets drives the decision to
commit more resources to those markets. These decisions are
implemented, and the increased commitment enables the
company to continue gathering improved knowledge that
drives posterior commitment. After these two logical steps
that feed back into each other (knowledge^commitment-*
knowledge-* ...), companies increase their international operations consistently. As such, Johanson and Vahlne's (1977)
model can be characterized as a combination of deliberate (or
systematic) and emergent (or ad hoc) approaches. However,
this theory (the Uppsala view), insightful as it is, provides
Hmited guidance for managers, because it stays at too broad a
level of generalization.
In his model. Root (1987) starts by assuming that the firm has
already decided to enter a foreign market. He develops a series of broad steps (p. 4) and then a second set of more concrete steps (p. 22) that companies should follow. His model is
comprehensive and easy to understand and implement but,
by assuming that the company is ready to enter a foreign market, omits a process of developing the motivation to go international in the first place. In addition, his model does not
readily lend itself to our intended test of a systematic
process, because it emphasizes entry activities rather than
the planning process.
Miller's (1993) model is mnch more concrete and process-oriented than Root's (1987) and specifies ten steps into which
the internationalization process should be divided. We believe, however, that some of the steps, especially the first
three, are slightly redundant and that Miller forgot to specify
the key decision of foreign market selection as a separate
step. If an explicit decision must be made after a global assessment of markets and competition (step 4), this decision
would 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 a
model of our own that more explicitly sets out a systematic
internationalization process so that we could test whether
firms apply it. This model should focus on the thoroughness,
or lack of it, of each stage in a comprehensive sequence. Accordingly, we developed our "way station" model of the internationalization process.
12

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

We developed our way station model (Figure 1) using the following methods:

THE WAY STATION MODEL

Reviewing previous models, as discussed.

Drawing on the consulting experience of Grant Thornton, a $1.3-biUion multinational, professional services
organization that is the sixth largest accounting firm in
the world.
Conducting in-depth personal interviews with the chief
executive officers of 13 U.S.-based mid-sized firms that
had recently experienced the internationalization
process (these firms had annual revenues in the $100
million to $300 million range).
Our resulting model can be combined with the insights of the
Uppsala theory to yield a more applicable model for the internationalization process (see Figure 1 for tbe correspondence of Johanson and Vahlne's [1977] steps to the way
station model). This model can also be compared with the
Johanson and
Vahlne's Model

Way
Station Model

Root's
Model

Miller's
Ten Steps
Evaluation ot company's
readiness (or foreign entry

Motivation
Assessing

and

products

strategic
Knowledge

Company analysis

Figure 1.
The Way Station Model in the
Context of Johanson and
Vahlne's (1977) Theory and
Comparison with Root's (1987)
and Miller's (1993) Models

and

planning

toreign

Reassessment ot

markets

domestic business plan

1
Market

Global assessment of

researcti

markets and competition

Market

Objectives

selection

and goals
Development of a toreign

Commitment
decisions

market entry plan

Selection ot

Entry mode

entry mode

Identitication and selection of

foreign partners

1
Compliance witti regulations

Planning for
contingencies

Selection ot service support

and problems

providers in botti markets

Actual
market
commitment

Market introduction ot the

plan

company's products

Postentry
strategic
commitment

Marketing

II

Entry
operations

Establistiment ot physical

target market

presence in foreign markets

II

II

International success

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 directly
from practitioners' experience, is an appropriate way to think
about the process of internationalization: It is a suitable operationalization of Johanson and Vahlne's (1977) theory, and it
includes the two steps that Root (1987) and Miller (1993)
overlook in their models.
According to lohanson and Vahlne (1977), when a firm is considering jumping to international markets, it first must gather
relevant knowledge and then must make a commitment of resources (see also Eriksson et al. 1997). What type of knowledge is needed in this crucial stage of the company's life?
When exactly does the commitment come? We divide the
knowledge/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. The
six way stations are motivation and strategic planning, market
research, market selection, selection of entry mode, planning
of contingencies, and postentry strategic commitment. Tbe
first two way stations deal with acquiring knowledge and getting ready for "the big jump," the first part of Johanson and
Vahlne's process. Next, firms must use this knowledge to define their strategies for commitment of resources.
We add three new way stations to capture the first decisions
that companies must take that already imply a commitment:
market selection, selection of entry mode, and planning for
contingencies. The sixth way station consists of the actual
strategic commitment of resources to the final destination.
1. Motivation and strategic planning: Firms need a motivation to go international: They are looking for external
sources 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 potential for economies of scale and scope. The conclusion
is that an initial strong motivation must trigger all subsequent processes. But motivation does not come spontaneously: The company must be alert and keep gathering
the relevant information that will indicate when the moment bas arrived (this is aiso Miller's [1993] first step).
The firm therefore must be engaged in continuous strategic planning. The key point is that not all firms will find
internationalization to be the best strategy, but all firms
must constantly question themselves whether the right
moment has arrived or is about to arrive.
2. Market research: When the motivation for internationalization has arisen, companies start doing more intense research to select the right destination. Knowledge in this

14

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

stage is key, because a fit must be obtained between the

firm's objectives and capabilities and the destination that
will be chosen. Miller (1993) also gives some broad lines
for the analysis of relevant information before firms decide on a target market.
3. Market selection: After the information gathered in the
second way station has been processed, the final destination must be chosen. This is neither a trivial choice nor a
direct consequence of the information gathered in the previous step. As Davidson (1980) points out, prior experience in a specific country makes a big difference in a
company's performance. In the case of newly internationalizing firms, this prior experience does not exist, and so
it becomes even more crucial to obtain a high degree of
knowledge about potential markets that are being considered. Then the decision of which market the company
should enter first must be made. Probably the most important consideration in this stage is the fit among the country's characteristics, the company's competencies, the
possibility of synergistic effects [Dunning 1997), and foreign market demand characteristics. That is, a country
that is the most attractive for a specific company might
not be the optimal one for another company, or a country
might present extremely convenient operational conditions but not fit the company's strategy at different levels,
such as organizational, political, or financial. This makes
the selection of the final destination a step different from
that of researching market conditions: The information
gathered in the stage of market research has to be put in
the broader context of the company's strategy. It is likely
that no market will be optimal in all dimensions of the
company's strategy, so the final decision must be taken by
comparing the overall implications of each candidate.
4. Selecting the entry mode: When a firm knows where
it wants to go, how should it go there? Major entry
modesexport strategies, licensing, franchising, marketing alliances, joint ventures, and self-sufficient subsidiariesdiffer in the degree of control a firm exerts
over foreign operations. Benito and Welch (1997), Hill,
Hwang, and Kim (1990), and Lau (1992) give general
considerations on the convenience of various types of
entry mode. But one thing must be said: No particular
mode of entry gives a higher probability of success than
another a priori. Each situation requires a thorough
analysis of the best way to enter the specific foreign market, but no general solutions can be given. Deciding factors include the firm's desire for control, resources and
capabilities, and risk preference. The decision is a real
way station. If the decision is taken lightly, the company's performance might be jeopardized. However,
The Role of the Internationalization Process

15

choosing the right way to go is usually not enough for

success. It is only a necessary condition. The international venture then must be well managed.
5. Planning for contingencies and problems: A fifth aspect
that companies must consider when getting ready for international expansion is the possibility that contingencies
and country-specific problems may arise. Being proactive
in this sense pays off, because usually a large percentage of
the problems that harm companies could have been forecast with a more thorough process of market evaluation.
6. Postentry strategy and commitment of resources: A careful assessment and implementation of the competitive
strategy that the company will follow after it has established physical presence in the foreign market will be the
last step. What is the best strategy? Again, it depends
(Baird, Lyles, and Orris 1994; Fujita 1995): Different
strategies might be suitable for different competitive environments. But all these possible strategies must share one
feature: commitment. Researchers strongly agree that
commitment is essential for the success of the process of
internationalization (Johanson and Vahlne 1977: Norwell,
Andrus, and Gogumalla 1995). When a firm has reached a
foreign market, resources must be committed to the market, and a high level of involvement is necessary to update
the knowledge that will be used for later international involvement. In addition, more-dynamic markets demand
more-dynamic and responsive strategies, and these are not
attainable without explicit commitment and almost irrevocable involvement in the reality of the market (Benito
and Welch 1997). This commitment will be manifest in
several aspects of the company: human resources, organizational structure, marketing strategies, and so on. Success will then stem from this commitment, not only in
purely economic terms but also in terms of competitive
advantage and the knowledge that will help continue the
process of internationalization.

Summary ot Model

16

Through the way station model, we try to explain the success of the initial internationalization process by examining how firms have followed six systematic steps. The
steps are presented in a sequentially logical order (see Figure 1), but some of them, especially in the knowledge-gathering stage, will overlap in time. An important feature of
this model is that it puts the stress on the thoroughness of
the planning steps (the first five way stations) and on the
actual degree of commitment to the foreign market (the
sixth way station) That is, the process of internationalization will be successful if the first five steps are carried out
thoroughly and the company commits strongly to the foreign market.
George S.Yip, Javier Gomez Biscarri, and Joseph A. Monti

We hypothesize that correct use of the way stations will result in superior performance in the internationalization
process. But we also need to consider one otber factor: Performance is affected not just by the internationalization
process but by the firm's initial competitive advantage. For
example, Microsoft's internationalization has been far more
successful than Apple's. This differential performance can be
attributed much more to the two companies' competitive advantages than to their internationalization processes. Similarly, the link from the internationalization process to
performance is mediated by competitive advantage acquired
in going international. Therefore, our complete model starts
with the initial competitive advantage of the firm, proceeds
through the six way stations and then acquired competitive
advantage, and ends in internationalization performance
(Figure 2).
The way station model enables us to formalize three hypotheses around our research issues:

Adding Competitive
Advantage and
International Performance

Resulting Hypotheses

Hj: Most newly internationalizing companies today

make significant use of a formal internationalization process.

Figure 2.
The Way Station Model
of Internationalization

Thoroughness
of motivation
and strategic
planning

Intemationalization
performance

Initial
competitive
advantage
Thorougtiness ot
entry mode
selection

The Role of the Internationalization Process

17

H2: Newly internationalizing companies that make

use of a formal internationalization process follow
a systematic sequence of steps.
H:J: The more newly internationalizing companies
follow a systematic sequence, the better will be
the performance of their international ventures.
Positive findings for these three hypotheses would support
the deliberate rather than the emergent view of internationalization.

METHODOLOGY

Data Gathering

18

Our research methodology involved designing a questionnaire, gathering data, specifying the structure of the model
tested, operationalizing the variables, and conducting the
tests. We test H^ by examining the mean scores on the way stations. We test the way station model and H^ and H3 using
structural equations. Hi will be supported if there are high levels of usage of the various way stations. H^ will be supported if
the overall model in Figure 2 shows significant paths connecting the way stations and has an overall significant fit. H, will
be supported if there is a significant path from degree of postentry commitment to internationalization performance.
We used the interviews from the model development stage
to help design a mail questionnaire. To target substantive
international experiences, this questionnaire defined international activities as "any significant cross-border venture
excluding importing or exporting" and focused on the first
foreign 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 into
six groups that corresponded to the way stations and a final
group that included questions about performance and factors
that affected performance, including some that pertained to
the company's core competencies. We mailed the questionnaire to two waves of 300 mid-sized, U.S.-based companies
each, all of which were Grant Thornton clients or potential
clients.- We received 68 responses, 31 from the first group
and 37 from the second group. To check possible differences
between the two groups, we performed a t-test of difference
of means and an F-test of difference in variances on the responses on the 120 items. Only 10 of the 120 presented significant differences in means,' a proportion that enahles us to
proceed to our analysis with little concern about the dissimilarity of the two samples. Nor does there seem to be a specific
response bias. We might fear, however, that only those companies that succeeded in their internationalization process
would have answered the questionnaire. In that sense, we
could expect a small upward bias in the measures related to
success (overall corporate performance and acquired competitive advantage). At the same time, because the sample re-

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

veals a good spread in explanatory variables (e.g., use of the

way stations) and dependent variables (e.g., performance),
the coefficients of paths betu^een explanatory and dependent
variables are unlikely to be greatly biased. Furthermore, as
discussed previously, there were few differences between
early responders and late responders. Table 1 presents the
sample characteristics of the respondent companies.
Although we have no time series data, the definition of the constructs has a built-in time dimension for most constructs.
Therefore, initial competitive advantage, postentry commitment, acquired competitive advantage, and internationalization performance follow one another in sequence by definition.
Admittedly, the five way stations (other than postentry commitment) could occur at any time relative to one another, but
each is also defined to occur before entry (i.e., we asked respondents about the extent to which they used these processes
before foreign entry).
To test our model, we used a structural equation model with
latent variables. As Roos, Yip, and Johansson (1997) rightly
point out, strategic models ask, by their very nature, for a latent variable methodology in which the data are examined
with a holistic approach (and not just with a simple linear regression that assumes independence of explanatory variables,
for example). In addition, structural equation models allow
multiple indicators to represent constructs or latent variables.

Method and Model Specified

Although our sample size of 68 is small for traditional estimation techniques, various methods of structural equation
modeling now allow for quite small sample sizes. Typically, a
Ownership
Management
Total annual revenues
Years in business
Number of employees
Percentage of revenues from international
Primary line of business
Key export markets in rank order

44% public/56% private

40% family managed
$211 million
41
1222
24%
Intermediate producer

Table 1.
Demographic Variables of the
Companies Surveyed

1. Canada
2. United Kingdom
3. Mexico
4. Germany
5. France
6. Asian countries
Industries
Industrial manufacturing 60.0%
Services 13.8%
Electronics 10.8%
Consumer products 7.7%
Distribution 4.0%
Other 3.1%,

Tbe Bole of tbe Internationalization Process

19

causal subsystem sequence of paths is estimated separately

{Anderson and Gerhing 1988). For example, LohmoUer
(1982) demonstrates examples in which a model with 27
variables is appropriately estimated with only 10 observations and a model of 96 indicators and 26 constructs is estimated on a sample of 100.
Various alternative types of structural equation modeling are
now used. We chose the Bentler-Weeks model.* In this
method, the relationships among variables are all assumed to
be linear. Even though this is a limitation, because some relationships among our variables are definitely not linear, the
intuition behind a linear relationship seems to warrant the
linear specification of most analyses (e.g., a positive correlation just means that higher values of a variable will correspond to higher values of another variable'). For software, we
used the EQS program specifically developed by Peter
Bentler to provide the tools for structural equation modeling
in the context of the Bentler-Weeks model (Bentler 1995).
The proposed model appears in Figure 3. There are two independent variables: motivation and strategic planning (MOTIVATION) and initial competitive advantage (INITIAL). The
latter variable acts as a control for company differences. The
covariance of these two variables is assumed free and is represented by the double-headed arrow.
The next five way stations appear in sequence. That is, MOTIVATION precedes market research (RESEARCH), which in
turn precedes market selection (SELECTION), and so on.
This sequence must be interpreted not as causation but as
correlation plus precedence in time. This means that the way
stations follow a sequence (precedence in time) and that if

Figure 3.
Operationalization of the
Way Station Model

MOTIVATION

RESEARCH

INITIAL

SELECTION

MODE

ACQUIRED

COMPETENCIES

PERFORMANCE

INNOVATION

TRANSFER

COMMITMENT

20

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

the company is thorough in one of them, it is likely that it

will also he thorough in tbe next one (correlation).
All way stations and INITIAL conditions are supposed
to have a direct influence on both acquired competitive
advantage (ACQUIRED) and overall corporate performance
(PERFORMANCE) as measures of success of the internationalization process.
Two paths were dropped from the model to avoid linear dependencies among the parameters. We used the Wald test feature of EQS to find out which two paths could be eliminated
without affecting the overall fit. These paths turned out to be
those going from RESEARCH to ACQUIRED and from selection of entry mode (MODE) to PERFORMANCE. That the
Wald test pointed to them as the preferred ones to be
dropped implies that they are not significantly different from
zero and that the constrained model in which they are forced
to be zero is a better depiction of reality than if they were left
free to be estimated.
Also, we specified ACQUIRED to have an effect on PERFORMANCE: This effect corresponds to the theory known in the
strategy literature as the "resource-based view of the firm."
According to this theory, it is the special characteristics of
each firm (its core competencies) or firm-specific resources,
as in Wernerfelt (1984), that determine its performance, or at
least its performance compared witb competitors in the same
industry. Thus, the process of internationalization's enhancement of these competencies implies also that it contributes to
an improved performance of the company. In a sense, this
theory is principally measured hy the path from INITIAL to
PERFORMANCE. The interpretation, then, of tbe path going
from ACQUIRED to PERFORMANCE should be the increase
in performance caused by increased competencies coming
from the process of internationalization.
To obtain measures of the five way station constructs, we did
not conduct factor analysis but derived the components of
the constructs from the initial interviews. We preferred to
test an a priori model derived from our interviews rather than
one generated by factor analysis. Then we developed the
questionnaire specifically to provide us with measures of the
five factors, some of them multiple, which is why we used latent variables. Similarly, some of the other constructs are
made up of multiple latent variables, as shown in Figure 3. In
estimating the model in Figure 3, we use composite values
for the manifest constructs (the arithmetic averages of multiple items'). In the case of latent constructs (those for which
there is no single measure but that can he indicated by other
measurahle variables), we used more than one composite indicator. Instead of confirmatory factor analysis, we use the

The Role of the Internationalization Process

Operationalization or the
Constructs and Variables

21

structural equation model to provide a test of the latent constructs through the measurement model.
INITIAL. We used the average of three measures to indicate
the initial competencies of the firm, which are possible keys
to success in the international venture: technological advantage, company's hrand name awareness, and ability to transfer capabilities to foreign markets.
MOTIVATION. Norwell, Andrus, and Cogumalla (1995) explicitly relate motivation to the level of commitment in the
foreign market and to the triggering of the selection process.
We found the measure MOTIVATION, the average of several
items that reflect motivation factors, to be the best indicator
for the motivation and strategic planning way station.
RESEARCH. We collected data on two aspects of market research: (1) use of various advisers (e.g., attorneys) and [2) the
extent to which various cost drivers were analyzed. We
found that the arithmetic average of the latter measures (RESEARCH) provided the best indicator of the market research
construct.
SELECTION. This construct measures how thorough the
planning of the internationalization process has been. We
chose two variables as indicators for this latent construct.
One of them corresponds to Yip's (1992) drivers for globalization, which in our study are loosely interpreted as drivers for
internationalization (DRIVERS), which includes the number
and extent to which market and government factors were
weighed in the final decision. The second variable,
PROCESS, measures the use of different processes for evaluating foreign market fit with the company's strategy, which
relates to the intensity of the planning process.
MODE. We collected data on two aspects of the selection of
entry mode: (1) alternative entry modes (e.g., equity joint
venture) and (2) degree to which various factors (e.g., sales
potential) were considered. As stated in the theory section,
the choice of a specific entry mode should not affect performance, for what is necessary is the fit between the entry
mode and the characteristics of the company and market
selected. We did indeed find that the choice of entry mode
did not contribute in our estimated model to the explanation of economic performance. Instead, we found the appropriate indicator of the selection of entry mode to be the
degree to which various factors were considered in the entry process.
Planning for Contingencies and Problems. We had a measure
for the fifth way station (planning for contingencies and
problems). 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 conscious decision based on the data and not on the theoretical
soundness of the variable and the construct it is measuring.
Our decision not to include this fifth way station in our
analysis does not imply that companies do not plan for possible contingencies or problems, because both the interviews
and the answers to the questionnaire reflected that this practice is a concrete stage of the internationalization process.
It seems, however, that its relation to other way stations and
its contribution to success are not relevant: Companies that
are thorough in the rest of the way stations seem not to need
to be thorough in their planning for contingencies to achieve
their goals. Also, the low correlations of the answers to this
question with the rest of the questions means that companies
probably view the planning for contingencies as the least important aspect of the process, especially if the other five have
been carefully followed.
Postentry Strategy and Commitment (COMMITMENT). The
three indicators chosen for this construct all refer to the degree to which the company commits itself to the target market: STRUCTURE refers to organizational structure changes
that come as a result of entering foreign markets. STRATECY
refers to specific strategic commitments, such as developing
cultural integration programs or providing training and updating of local labor forces. HUMAN RESOURCES refers to
human resources commitment and measures the percentage
of management of local foreign operations that is composed
of local nationals.
ACQUIRED. One of our dependent performance constructs is
the degree to which the internationalization experience has
enhanced the competitive advantage of the company. This
construct is indicated by three measures: overall contribution to core competencies (COMPETENCIES); enhanced innovativeness (INNOVATION), a key characteristic of an
international firm, as explained by Eontes and Coombs
(1997) and Eujita (1995); and increased ability to transfer
knowledge and technology within the boundaries of the firm
(TRANSFER). This last item has theoretical importance: The
ability to transfer knowledge and technology and to coordinate interdependent activities better than the market, a
"Coasian" view of the multinational firm, is considered by
many researchers as the origin and rationale for the existence
of the multinational firm (for the theoretical development of
this 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 additional indicator of acquired competitive advantage.

The Role of the Internationalization Process

23

PERFORMANCE. Our second dependent construct is overall

corporate performance that results from the process of internationalization. For this construct, we used a single measure
estimated by respondents in the context of other, more specific: performance measures such as market share, number of
international markets served, and new technology or expertise gained. Self-reported measures of performance are often
used successfnlly in strategy studies (see Venkatraman and
Ramanujam 1986).
RESULTS

Extent of Use of Systematic

Internationalization Process

Goodness of Fit

The results do not support Hi (actual use of formal process)

but cannot reject H2 (use of systematic sequence) and H3 (performance effect).
The raw data, before the model is estimated, indicate only
partial use of a systematic approach at each stage. The mean
values of tbe five way stations range from only 2.55 to 4.25 of
a possible maximum of 7.0 (Table 2). Thus, there is not strong
support for H^.
We estimated the model in Figure 3 with EQS, using robust
maximum likelihood estimation (the variables used are all
normal/ but a value of Mardia's coefficient slightly larger
than three led us to obtain robust estimates because of multivariate nonnormality). In Table 2, we provide summary statistics for the measured variables. In Table 3, we present the
correlation matrix, which shows that most of the model constructs and variables are significantly correlated with each
other, which provides an initial indication tbat the structural
equation model will work well.
Tbe overall model appears to provide a good explanation of
the data. In Table 4, we present the relevant statistics on
model fit. The value of the chi-square for the independence
model was 424.8 on 78 degrees of freedom [p < .01). The

Table 2.
Summary Statistics of
Measured Variables

24

MOTIVATION
COMPETIENCIES
INNOVATION
TRANSFER
RESEARCH
PROCESS
DRIVERS
MODE
STRUCTURE
STRATEGY
HUMAN RESOURCES
PERFORMANCE
INITIAL

Mean

Standard
Deviation

2,55
4.56
3.94
3.63
3.34
3.87
3.75
4.25
3.16
3.55
3.75
5.10
4.40

.94

,46

1.55
1.70
1.88
1.34
1.26
1,13
1.18
1,31
1.42
1.77
1.13
1.23

-.64
-.37

Skewness

.06
.04

Kurtosis
-.50
-.25
-.90
-1.07
-.60

-.37
-.62
-.39

.11

.08

-.92
-.69
-1.13

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

.77
.11

.10
.39

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

Table 3.
Correlation Matrix
of Measured Variables

eO
RE:

u
Qd
1^

bJ

Cd

en

iE

NCE

en

<
0!

O
^
UI
CL.

value of the chi-square for our proposed model with 50 degrees of freedom was 63.1, which yielded a p-value of .10
(60.4 and .15 for the Satorra-Bentler scaled chi-square in
robust estimation). This means that we cannot reject the
assumption that our model adequately explains the relationships that exist in the sample. All fit indices confirm the
excellent fit of the model. The iterative process converged
without special problems in 11 iterations. Therefore, the resnlts support H2, that newly internationalizing companies
that make use of a formal internationalization process follow
a systematic sequence of steps.

The Role of the Internationalization Process

25

Table 4.
Results of Maximum
Likelihood Estimation
of the Model

Independence chi-square
424.7fi7
Degrees of freedom
78
Model chi-square
63.984
Degrees of
freedom
51
p-Value
.104
Satorra-Bentler chi-square
61.634
p-Value
.146
Bentler-Bonnet normed fit index
,849
Bentler-Bonnet nonnormed fit index
,943
Comparative fit index
,963
Robust comparative fit index
.964
Root mean square error of approximation
.062
Number of iterations
11
Mardia's coefficient
3.23

The small size of the sample might raise doubts about the
real relevance of the results, because any logical model might
yield a good enough fit of the data with so few ohservations.
Several reasonable alternative models were run." These models tended to perform worse than our proposed one. There
was one exception: If the model was limited to explain competitive advantage {dropping overall corporate performance
as the last construct to be explained), its significance would
increase, and the p-value would approach .5. We believe,
however, that our particular model is more meaningful and
insightful. Because success seems to be a bigher-dimensional
construct, not just a function of competitive advantage, we
decided to retain our first specification.

Measurement Model

Model Paths

26

The three latent constructs are adequately measured by the

suggested indicators, which shows that the measurement
model is correct. Cronbach's alpha for the three factors SELECTION, COMMITMENT, and ACQUIRED were .75, .67, and .88,
respectively, and all the loadings are highly significant: .79 for
PROCESS and J7 for DRIVERS on SELECTION; .78 for
STRUCTURE, .75 for STRATECY, and .42 for HUMAN RESOURCES; and .79 for OVERALL, .90 for INNOVATION, and
.82 for TRANSEER on ACQUIRED. The alpha for COMMITMENT is small. It would increase, and the whole model would
fit 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 variables [except for one) are measured on a scale from one to
seven, even the unstandardized coefficients would be directly comparable. We do not believe, however, that this
comparison is meaningful, because the measurement of the
variables is somewhat arbitrary (even though a one-to-seven
scale is a standard approach, Matell and Jacoby [1971] find
that different scales yield the same qualitative results though
different coefficients). Therefore, we discuss the signs and
significance of the coefficients but not their actual values.

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

Figure 4.
Results

MOTIVATION

y^

.27

.53
RESEARCH

, .52 \^34
INITIAL

,32

SELECTION

ACQUIRED
R' = .42

PERFORMANCE
R' = .28

.85

\
MODE
\

\
\

.54

...--.'37
'^

r .22

,30

//.41

COMMITMENT

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

^Nay Stations Sequence. The different way stations are correlated with one another. All paths relevant to the sequence are
significant and positive, which shows that the companies
were consistent in either following the entire sequence or not
following it. This supports the view that there is a systematic
sequence that some smaller companies can implement. At
the same time, the paths range in value from .22 to .85, which
shows that compliance with the systematic approach is only
partial (only if ail paths had values of 1.00 could we say that
all companies completely followed the systematic approach).
We refer subsequently to the causal relevance of the paths
and their implications for an analysis of events following a
time sequence.
Determinants of Acquired Competitive Advantage. Of the
paths linking independent variables to ACQUIRED, two are
significant: those coming from MOTIVATION and COMMITMENT. The finding for MOTIVATION suggests that internationalization is a process that involves more than just
economic performance. Companies consider foreign markets
as possible sources of increased advantage over competitors
or places to catch up with a competitor that is now in an advantageous position. The more motivated tbe company is,
the more careful and well prepared the internationalization
process is and the larger the competitive advantage created
by the process. However, the strength of INITIAL does not
have a direct influence on ACQUIRED, only an indirect one
through MOTIVATION and COMMITMENT.
High commitment to the foreign market (postentry strategy)
seems to be a correct strategy for a newly internationalizing
firm. It significantly contributes to acquiring competitive advantages. 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 competitive advantage:' Are three of our way stations not related to
success? This can be understood if we interpret tbe planning
way stations as minimum requirements: If a firm has a strong
motivation, its researcb, market selection, and choice of mode
of entry will also be thorougb. But tbese steps do not ensure
final success. The firm must implement its strategy and commit to the market to obtain results. The R^ for the construct
ACQUIRED is .42. Therefore, our model seems to explain competitive advantage fairly well.
Determinants of Corporate Performance. The paths to PERFORMANCE give rise to probably tbe most interesting results. Only one of tbe paths going to tbis manifest construct
is positive and significant: the one coming from INITIAL. No
other paths are significant.'" Other variables, including postentry strategy, do not seem to be directly related to performance; not even acquired competitive advantage has a significant effect. The R^ for PERFORMANCE is .28, which is
worse than tbat for ACQUIRED but still a reasonable amount
of explained variance. An alternative model was run in
which we set the path from ACQUIRED to PERFORMANCE
fixed to zero. In that case, the coefficient going from COMMITMENT to PERFORMANCE (the dashed line in Figure 4]
became significant. This is a consequence of the structural
methodology: Wben tbe patb from ACQUIRED to PERFORMANCE is left free, even though it is not significant, it takes
away some of the variance of PERFORMANCE, and it separates the influence of COMMITMENT on PERFORMANCE
into a direct effect (the direct patb] and an indirect effect
(wbicb would correspond to the product of the paths
COMMITMENT-ACQUIRED and ACQUIRED-*PERFORMANCE]. Thus, the total influence of COMMITMENT on
PERFORMANCE is somehow blurred by the decomposition
of effects. We can conclude, however, that this effect indeed
exists and that postentry commitment has an effect in both
increasing the company's competitive advantage and providing economic performance. In conclusion, this finding supports H(, that following a systematic internationalization
approach improves performance.

Tests of Simpler Models

To check tbat the way station model makes a significant contribution to tbe explanation of performance for newly internationalizing firms, we tested four simpler models that
excluded the way stations. We wanted to test how tbese simpler models could explain PERFORMANCE compared with
the R^ of .28 achieved by the way station model (for a previous test of alternative models in international research, see
Johansson and Yip 1994].
First, we simply regressed INITIAL on PERFORMANCE. Tbe
patb is significant, and the R^ is .20. Tbis means that we get

28

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

an increase in R- of .08that is, a 40% increase in variance

explainedby including tbe way stations and the full model.
It seems, though, that INITIAL is probably the best single explanatory variable. But that is fine as it is also positively related to the way stations, so companies with high initial
competitive advantage tend to do a better job in the way stations and, because of tbe two, end up witb better overall corporate performance. Alternatively, when we regressed only
the five way station variables on PERFORMANCE, the resultant R- is .25 (but the fit is not really good, because there is a
problem in the optimization process"). Therefore, the way
stations on their own are as important or more so than the
initial competitive advantage.
Second, we regressed ACQUIRED on PERFORMANCE. The
path is significant, and R^ is .14, only half that of tbe complete model. Recall that the significance of this path disappears in the structural equation model, which means that the
relationship is coming from the common relationship of ACQUIRED and PERFORMANCE to INITIAL and the way stations (which is why when we include INITIAL and the way
stations tbe path becomes insignificant).
Third, we estimated the model INITIAL-ACQUIRED-PERFORMANCE. Both paths are significant, and the R^ is .17.
Therefore, if INITIAL is given only an indirect effect on PERFORMANCE, the R^ is less than when INITIAL is directly
linked witb PERFORMANCE (R- is .20). It seems clear that
INITIAL to PERFORMANCE is a strong relationship.
Fourth, we estimated the model INITIAL-PERFORMANCE-ACQUIRED. Now the path from INITIAL to PERFORMANCE is still significant, but the path ACQUIRED to
PERFORMANCE is not significant anymore, which is fine
considering tbat that path is not significant in tbe full model
either. R- is .19, which is much less than the full model's .28.
In conclusion, alternative, similar models that exclude the
way stations do not achieve as complete an explanation of
performance as does the full model.
In this study, we find that a sample of U.S.-based newly internationalizing firms is mixed in the extent to which the
firms take a systematic approach in the internationalization
process. Some firms behave in the ad hoc mode argued for
by Aharoni (1966) and Johanson and Vahlne (1977). But
some firms bebave in tbe more systematic mode advocated
by Root (1987) and others. In addition, when firms are systematic, they also tend to be consistent in their degree of
thoroughness at each stage of the internationalization
process. Furthermore, firms that are systematic seem to
achieve better performance.

Tbe Role of tbe Internationalization Process

^^^^^^^^^-^^^^^^^DISCUSSION

29

The summary findings need to be taken in the context of the

specific model of systematic internationalization that we
tested. Furthermore, the methodological limitations of our
studyparticularly the low response rate and small sample
size, lack of time series data, and possible bias from using
single informantsrestrict the robustness and generalizability of our conclusions. In particular, the use of a single informant in each firm can produce a bias, especially between the
reported use of a systematic internatioualizatiou approach
and suhsequeut performauce. Therefore, our results are
likely to show a stronger link thau is really the case. At the
same time, the respondents did not report particularly high
levels of the use of each way statiou (at the 3 or 4 level on our
seveu-point scale, as reported in Table 2), so there does not
seem to be prima facie evidence that the respondents were
overestimating their use of systematic planning. Despite the
limitations, the results can be viewed as highly indicative.
With these caveats, we have found that our model of a systematic internationalization processthe way station
modelis compatible with the data from our sample of 68
medium-sized U.S. companies. Assuming that our findings
are correct, the results for this model have several implications. It is important to start with an initial competitive advantage that can be leveraged abroad. The siguificauce of the
direct path from initial competitive advantage to overall corporate performance shows that there are inherent capabilities
in companies that help explain their superior performance. In
international markets, these capabilities seem to matter even
more. Furthermore, ou its own, this single variahle explained
the largest portion of variance in performance, though less
thau the way statiou variables on their own as a group. However, initial competitive advantage does not have a direct effect on acquired competitive advantage, so if a firm starts
from an advantageous position, this competitive advantage of
the firm is not enhanced by going to international markets. If
a firm is already strong, part of its motivation to go abroad is
to leverage that strength aud obtain economic returns, not so
much to improve its advantages. Many firms enhance their
overall competitive advantages by going iuternational and
find that success abroad helps enhance success at home, but
this study suggests that the sequence from advantage to internationalization is more common than from internationalization to advantage.
Conversely, acquired competitive advantage seems to be generated both by the motivation to go abroad (i.e., by a careful
planning of the objectives and consequeuces of going to foreign markets) and, after that, by a strategy of positive commitment to the international adventure. Immediate ecouomic
performance seems to be uurelated to this competitive advantage, but an enhanced competitive advantage obtained in

30

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

the foreign market should, over a longer time horizon, provide the leverage to obtain subsequent economic profit. Our
data 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 (regardless of time sequence among the first five way stations)
should enjoy hetter performance in their initial internationalization efforts. Being thorough in all the way stations means
having a clear motivation for going international, performing
market research to select the target market, selecting the
entry mode, anticipating possible problems and preparing
contingent solutions, and defining and implementing a postentry strategy of high commitment. One surprising finding is
that planning for prohlems dropped out of our final model.
Our explanation is that thoroughness in the other way stations seems to minimize the need for thoroughness in this
stage. More research needs to be done on this last point.
Thoroughness of motivation and strategic planning, at the
start of the possihle sequence, and thoroughness in postentry
commitment at the end of the sequence seem to have direct
effects on performance {as discussed previously, our measures of postentry commitment defined it to occur after the
prior way stations). The three other way stations we analyzed
{market research, market selection, and selection of entry
mode) seem to he necessary conditions for success, but they
do not have a direct linear relationship with the degree of
success, another interesting finding. They can he interpreted
as minimum requirements that seem to be triggered by the
company's prior planning and motivation.
Our results, though consistent with the model proposed, do not
provide the definitive test for its usefulness but yield insightful
conclusions that may help direct further research in international strategies and managerial practice. The use of larger samples and multiple informants will help improve the rohustness
of the results. The inclusion in a firm's demographics of target
industry characteristics and target country/country-of-origin
effects also appears to be a stream of research that should be encouraged. This would help us understand, in the context of the
way station model, the effect of a firm's strengths and weaknesses, industry factors {in the typical industrial organization
approach to strategy), and country characteristics on the prohability of success in the process of internationalization.
This article has significant implications for international managers, especially international marketing managers.

Further Research

Managerial Implications

First, the company needs a significant competitive advantage

that it can leverage abroad. The most thorough international-

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 a
systematic approach to the internationalization process.
Managers can no longer use the excuse that their company is
too small to do things the right way. That admonition also reflects the progress of the last 20 years in business education
and research. Business schools have moved from teaching actual practice to espousing best and potentially better practice. Newly internationalizing companies can do the same.
Managers also need to monitor their progress over time. Even
if they start with an unsystematic process, there will come a
point when it is time to shift to a more systematic one.
Watching for the signs of success and failure will help identify the time to change.
"
NOTES

32

1. A copy of the survey used in this study is available from

the authors.
2. However, this is not likely to have created any bias in the
initial targeted group. The operations of Grant Thornton
are wide enough to encompass a sampling frame representative of the entire business population.
3. A similar number held for the variances, though the variables for which the differences in means and variances
were significant did not overlap. All levels of confidence
in these tests and in the relations analyzed throughout the
article were set at 5%.
4. A technical appendix is available from the authors, giving
a brief explanation of the structure of the model and the
reasons we decided to use it instead of the more commonly used LISREL model.
5. Consciously, we do not make any comment ahout the validity of causal statements that come from correlations of
nonexperimental data. The causality is given by our underlying model, and all our comments about causation
must be understood in that context.
6. An analysis of principal components on the covariance
matrix of the responses to the items was done for each of
the questions to check if the arithmetic mean was a meaningful way to collapse the items. The analysis tended to
generate one single component for each of the questions
and load all items with similar weights. Thus, the use of
the arithmetic mean of the items proves adequate for the
purposes of finding a single measure for each question.
7. See Table 2 for summary statistics of the measured variables.
8. These models implied changes in the causal setup of the
variables, not just including or excluding paths from variables/residuals to variables/residuals with the objective of
improving the fit.
9. Some of the coefficients from the second, third, and fourth
way stations to the two dependent variables are negative,

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

but their standard error is so high (z-statistics less than

one in both cases) that this negative value must be taken
as obtained by chance. Any other set of data might give a
positive and still nonsignificant value for this coefficient.
10. The significance of other paths is not suppressed in structural equation modeling by correlations among explanatory variables, as these correlations are left free to be
estimated.
11. This problem sometimes arises when variables are combined with indicators. We tried other estimation methods
(not maximum likelihood but ordinary least squares and
generalized least squares), and the results are similar: R^ is
always approximately .20.
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The Role of the Internationalization Process

33

THE AUTHORS

George S. Yip is tbe

Beckwitb professor of
marketing and strategy at
Cambridge University.
Javier Gomez Biscarri is a
doctoral candidate in business
economics at tbe University of
California, Los Angeles.
Joseph A, Monti is a
partner in tbe firm
CAST Management
Consultants, Los Angeles.

ACKNOWLEDGMENTS
The authors thank Peter M.
Bentler, University of California, Los
Angeles, for his helpful comments
and the Fundacion Ramon Areces,
Madrid (Spain), and the Center for
International Business Education and
Research, Anderson School at University of California, Los Angeles, for
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The Role of the Internationalization Process

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