Uppsala haier Can Uppsala Model Explain the Internationalisation Process of Emerging economy Firms? The Case of Haier China

EAMSA 2015
Track: Interactive Session
S.Zhao et. al.

Can Uppsala Model Explain the Internationalisation Process of Emerging-economy
Firms? The Case of Haier China

Shasha Zhao, Middlesex University
Hui Tan, Royal Holloway College
Marina Papanastassiou, Middlesex University
Lynne Butel, Plymouth University

Abstract
Topic on advance-economy firm internationalisation is well researched while little is
empirically known of how emerging-economy firms internationalise. Internationalisation
process of Uppsala Model argues that firms from small economies (e.g. EU) characterised by
limited locational and internal resources tend to internationalise incrementally (both in terms
of psychic distance and entry modes) which is different from firms from large economies
characterised by rich resources (e.g. USA) and keen makers of large foreign direct
investments (irregular patterns). This study extends current understanding of Uppsala Model
by examining its power of interpretation of a detailed historical case study of a firm from
China – Haier Corporation. This study finds that the Model does not only explain the detailed
process a small-economy firm goes through when internationalise as we know it, but can
largely apply the process to the emerging-economy context. Furthermore, this study finds
that, based on data collected so far, the emerging-economy as the home location to be a
unique context in the sense that emerging-economy firms tend to lack significant amount of
management resources for handling more effective and fast-pace direct foreign investments
like the America firms in the old days. Hence, the incremental and careful risk-averse steps
taken by Haier can be best explained by the model. This model is further appropriated by the
fact that Haier case reveals factors of psychic distance and availability of experiential
knowledge are important for emerging-economy firms in the process, in terms of both

location and entry mode choices, i.e. from nearby to distant regions, and from irregular
exports to establishment of own subsidiaries.

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Introduction
Firm internationalisation has been a long-discussed topic in the area of international business
research. Partly due to the rapid technological and transportation developments, the speed of
globalization has fastened. Advance-economy firms have benefited from this phenomenon in
the way of internationalising their target markets and organizational operations for the reason
of global competitiveness. In capturing this development, a number of scholars conducted
relevant studies (e.g. Vernon 1966, Johanson and Vahlne 1977, Dunning 2000). Among them
is the well-established Uppsala Model (UM) which explains the internationalisation process
of firms from small advance economies. The Model was first developed by Johanson and
Vahlne in a longitudinal study of four Swedish firms in the 1970s. The resulted Model made
two sets of propositions to explain the process: one, location choices - firms tended to start
the internationalisation process by first entering neighbouring countries with minimum
psychic distance, i.e. similar national cultures and business systems, then gradually moving to
more distant locations as experiential knowledge of the firm accumulates; two, entry mode
choices – firms tended to enter a selected foreign market in the form of lowest investment
possible to minimise risks, e.g. irregular exports, to gradually deepen their involvement to the
ultimate establishment of subsidiaries (Johanson and Vahlne 1977).
Over the past few decades, international business witnessed a surge in the outward
flows of investments from advance economies made by firms for strategic and operational
purposes, such as global production and innovation (Vernon 1965, Ronstadt 1977, Porter

1989, Pearce and Papanastassiou 1997, Buckley 2014). In recent time, while the global stage
is seen to be largely dominated by Multinational Enterprises from advanced economies
(MNEs), many are witnessing the emergence of a new group of firms coming onto the stage,
i.e. the internationalisation of emerging-economy firms with home markets such as Brazil,
Russia, India, and China (EMNEs). This is evidenced in a recent World Investment Report
published by United Nations Conference on Trade and Development (2006) which suggests
that Foreign Direct Investments (FDIs) from the ‘South’ (i.e. emerging economies) surged to
$133 billion by 2005 and represents 17% of world outward flows. These statistics largely
question our traditional view of MNE FDIs.
Hence, for the first time, it is fair to argue that international business is no longer
limited to global investors from the ‘North’ (i.e. advance economies), but opening up to new
players from the ‘South’ (emerging economies). This recent phenomenon invites questions on
how EMNEs really internationalise. Yet, despite the significance of this international
business development, research interests and detailed studies exploring and/or explaining it
have been extremely scarce to date.
The purpose of this study is to conduct an in-depth study of the internationalisation of
an EMNE. More specifically, it attempts to take a historical case-study approach to review,
analyse, and discuss the internationalisation process undertaken by Haier China since its
establishment in 1984. Whilst our understanding of the internationalisation process of MNEs
from different home countries is well-established, in comparison, we know much less about
the process which EMNEs have taken to internationalise, considering the different home and
global markets they are presented with. Without empirical evidence, it is inappropriate to
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assume that EMNEs go through the same or different process as most established theories or

models developed to explain firm internationalisation are in the context of advance
economies (Dunning 2000, Johansson and Vahlne 1977). Hence, the recent phenomenon of
emerging-economy firm internationalisation needs to be better understood. Against this
background, the paper aims to make valuable and timely contributions by addressing three
key research questions: How is the internationalisation process of Haier developed across a
number of key global regions? Whether and how can the Uppsala Model explain the case of
Haier China? What are the practical lessons which can be learned from the case of Haier?
The structure of this proposal is as follows: first, a theoretical review of the existing
literature on firm internationalisation, which is followed by a description of research
methodology. Then, some pilot interview data collected to date is presented and discussed.

A theoretical review of the internationalisation process
UM has been widely recognised as a strong ‘explanator’ of firm internationalisation process.
Not only that the Model was developed based on solid empirical data from a longitudinal
study of four Swedish companies in the 1970s, its applicability to similar home contexts (i.e.
small advanced economies from Europe) was generally supported. It is generally found that
the Model explains the internationalisation process in two related ways (i.e. location and
entry mode choices) and based on two organisational conditions (i.e. level of overseas
experiential knowledge and psychic distance between home and overseas) (Johanson and
Valhne 1977). The proposition of the Model is that when a domestic firm with no or limited
experiential knowledge, decision makers tend to opt for nearby locations where psychic
distance is the shortest, and least costly investments – exports – as the favoured entry mode
for risk minimisation. As time passes, accumulated experiential knowledge of the nearby
market enables the firm to further its internationalisation in two directions: one, follow-on
investments shift towards more committed and intensive activities to sales office, production
site, and finally to fully-operational subsidiaries; two, expansion to more psychically distant
locations becomes less of a challenging task comparing to previously and this expansion
continues to ever more distant locations. An illustrative figure is presented below.

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Step 1:
location
choice
Step 5:
operational
subsidiary

experiential
knowledge

Step 4:
production
site

Step 2:
(irregular)
export

Step 3:
sales office

Against the proposition of the UM, a number of studies observed many American MNEs to
be less of a follower of this pattern; instead, the pattern of MNE internationalisation has been
long debated by various researchers for its diverse nature. Some studies have noted MNEs to

have expanded in either very rapid or slow pace to diverse geographical locations, depending
on their internal and external factors (Hutzschenreuter, Voll, and Verbeke 2011; Penrose
1959), instead of going through the predictable stages as per the UM. The various causes for
differing patterns of internationalisation process are discussed in details next.
Modes of entry
For a variety of reasons such as abundant resources, new markets and technologies, and
governmental policies, the international business sphere has witnessed the emergence,
development, and success of many EMNEs in recent time (Ghauri and Santangelo 2012).
Research interests on how they have become so globalised have grown rapidly over the past
few decades (Chuan and Orr 2009; Luo and Tung 2007; Parmentola 2011; Zahra,
Abdelgawad, and Tsang 2011). As extensive studies have been conducted on various aspects
regarding their developments, one research stream has played a particularly important role in
contributing to the understanding of MNEs, i.e. firms’ choices of modes of expansion into
foreign markets.
In international business literature, there are a number of foreign market entry modes
a MNE can choose from when internationalising their presence from their home countries.
Successful examples include service provider Starbucks, finance provider Citi Group,
manufacturer General Motors, and many more. Many of these MNEs have adapted a
selection of entry modes in different or the same foreign markets whilst others have chosen to
focus on one mode in particular. In general, there are three main types of expansion modes:
export, hybrid, and wholly-owned subsidiaries (Ahsan and Musteen 2011; Kogut and Singh
1988). Terminologically, export refers to basic trading to another country without much
resource commitments, and can be on an more ad hoc basis; hybrid refers to longer-term
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partnerships such as alliance and joint ventures; and wholly-owned subsidiaries are direct
investments in building a more complete operation which is legally held by parent company
(Ahsan and Musteen 2011; Kogut and Singh 1988). Each of these types entails a different
level of resource commitment, managerial governance, risk exposure, and performance
expectations (Anderson and Gatignon 1986; Buckley and Casson 1998). These different
levels have been categorised into ‘low VS high control’, ‘equity VS non-equity, or ‘shared
VS full control’ (Ahsan and Musteen 2011; Anderson and Gatignon 1986; Datta, Herrmann,
and Rasheed 2002).
Drawing on the view of transaction cost economies, MNEs’ decisions to choose a
particular mode are seen as the result of assessment of these categories, with the key intention
to minimise any potential transaction costs involved. Previous studies argue that what
fundamentally influences MNEs’ assessment to choose one mode over the other is influenced
by a number of internal and external factors. Among these factors, the level of culture
distance between home and host locations is seen as one of the more influential and critical
considerations (Cheong et al. 2009; Datta, Herrmann, and Rasheed 2002; Kogut and Singh
1988).
Culture distance
Successful foreign market entry has always been a critical topic in the field of international
business (Anderson and Gatignon 1986; Kogut and Singh 1988; Tsai and Cheng 2002). How
a firm decides to enter a foreign market is determined by a range of factors and amongst
which culture distance has long been recognised as a key one. In other words, ‘culture effect’
plays a significant role in influencing MNEs’ foreign market developments (Cheong et al.
2009; Kogut and Singh 1988). Most of previous studies and scholarly interests laid in the
context of western or advanced economy MNEs and much less attention has been paid to the
growing MNEs from emerging or less advanced economies, such as China. On the other
hand, recent rise of those new MNEs on the world stage calls for urgent attention in
understanding how they have achieved such success so far – in particular, what role ‘culture
effect’ plays in relation to their decision-making to enter foreign markets has attracted little
research interests (Cheong et al. 2009; Farrell and Xiaohua 2011; Luo and Tung 2007). While
there has been a long and common consensus and extensive findings suggesting that culture

distance can have significant effect on Western MNEs’ decisions to internationalise, there is
yet detailed convincing empirical evidence to suggest the same for emerging-market MNEs
(Rugman 1996, Ghauri and Santangelo 2012). This identified knowledge gap is made even
more important by Rugman (1996) who stated that the international expansion of emerging
market firms challenges the validity of the traditional theories of the MNE.
Cultural distance and psychic distance are often referred interchangeably in
international business literature and both are generally used to describe the level of national
differences in terms of a variety of factors including language, work ethics, values and social
structures between the home and host country (Ahsan and Musteen 2011). There is extensive
literature on culture distance but in a fairly fragmented and vague manner of existence. Xxxx

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was one of the first to establish a systematic view of culture distance by providing a more
valid and integrated definition.
There has been two conflicting set of past empirical findings whereby one set
suggests that the greater the culture distance between home and host, the more likely that the
firm would choose wholly-owned subsidiaries as a means to achieve greater control and
another set argues that the greater the culture distance, the more likely that the firm would
choose least investments, e.g. export, as a means to avoid costs and risks associated with high
uncertainly.
Specifically, Kogut and Singh (1988) explored the relationship between culture
distance and choices of entry modes in a systematic and empirical manner. They claim that
characteristics and therefore distance of national cultures perceived by MNEs have direct
effect on their decisions. Findings of their study suggest that due to the difficulty to integrate

an already existing foreign management, culture differences are especially important in the
case of hybrid modes of entry. This is due to the fact that post-acquisition costs are often
substantial and influenced by the organisational fit of the two firms. In contrary, they find
that a joint venture often serves the purpose of assigning management tasks to local partners
who are better at managing the local workforce and relationships with local counterparts.
Therefore, they argue that this mode of entry eliminates many of the problems caused by
cultural factors, though at the cost of sharing governance and ownership. The explanation for
the argument is that while joint ventures are affected by cultural distance between partners,
such conflicts do not obscure the original intention to choose this mode because the
alternative mode of acquisition is more disruptive than delegating management tasks to a
local partner. The most ideal modes which avoid the issue of sharing in joint venture or costly
acquisitions are either export or wholly owned subsidiaries.
On a similar note, Hill, Hwang and Kim (1990), Tsai and Cheng (2002), and Ahsan
and Musteen (2011) have found supporting evidence showing that when a MNE perceives a
target foreign market to be high in cultural distance in relation to their own, to reduce
transaction costs involved, they tend to opt for either exports or joint ventures rather than
wholly-owned subsidiaries. This is because high culture distance is perceived as a huge
uncertainty for MNEs. Hence, their desire to make high levels of resource commitment is
reduced. Instead, export mode is much more straightforward and joint ventures allow
contribution from local partner to manage some of the operations as they are much more
familiar with local business practices, languages, and values, which in turn reduces
transaction costs involved in comparison to acquisition or greenfield, which come with
extensive learning. On contrast, when a foreign market’s culture is perceived to be similar to
the MNE’s home country, low uncertainty and therefore low transaction costs tend to create
opportunities for investing in wholly-owned subsidiaries. This is because high transaction
costs and uncertainty associated with two firms with highly diverse national culture
backgrounds do not exist in large in the context of low culture-distance countries. MNEs’
desire and ability to retain more management power in a foreign market is facilitated by their
familiarity with the market in terms of language, value, and practice. Hence, in this case, the
mode of wholly-owned subsidiary is perceived to be much more attractive to MNEs.

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Research methodology
Research design
For research in general, there are two approaches to choose from: Qualitative and
Quantitative. For the purpose of this paper which is to investigate the emerging trend of
EMNE internationalisation, a qualitative approach is chosen for a number of reasons: One, as
literature shows research in the area of EMNE internationalisation is still at a very early
stage, existing knowledge on the topic is not sufficient to provide any viable theoretical
frameworks for quantitative examination. Instead, there lacks more exploratory studies at this
stage, which should better capture the topic in a more systematic, holistic and revealing way
to triangulate and enrich existing understanding. Against this background, qualitative
research approach is more appropriate for this study as the research question is specifically
concerned with ‘how’. This type of questions cannot be fully captured by quantitative
approach using statistical data. More importantly, given that firm internationalisation is a real
life event which takes place over a number of years rather than a one-off incident, the whole
process must be fully captured. Hence, a longitudinal approach must be called for.
Data collection methods
For the purpose of this study, case study method is chosen as it “allows investigators to
retain the holistic and meaningful characteristics of real life events” (Yin 2003). Two
sources of case data will be collected, both primary and secondary.
In terms of the former, this study uses face-to-face interview as the primary channel
while using documents as a complimentary. In terms of the former, semi-structure interview
format and guideline are used. This helps to put the interviewer and interviewee in the right

direction whilst allowing for open responses and capturing potential new data (Denscombe,
2000). The design of the guideline and formation of questions are based on previous studies
of Ahsan and Musteen (2011), Buckely and Casson (1998), and Caves and Mehra (1986), and
adjusted slightly for the purpose of this study. Documents are provided by the respondents
containing information relevant to the company, its strategy, developments etc. In terms of
the latter, while interviews allow researchers to obtain primary information about one’s
experience and knowledge relating to matters concerning the investigation (Creswell 2007;
Ghauri and Gronhaug 2003), they somewhat have some limitations as firm
internationalisation is generally considered an on-going development which spans across a
number of years, as per the study by Johanson and Vahlne (1977). Hence, short-lived
interviews cannot fully capture the developmental process over a longer period of time;
rather, this method can only generate data to reveal partial of the internationalisation process
(Yin 2009). Therefore, related publications are considered to complement interviews for two
important reasons: One, secondary publications can be more comprehensive in terms of
historical information covering the internationalisation process concerned, enabling the

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subsequent analysis to be specific and holistic; two, information from these publications are
factual and bias-free, providing objectivity and credibility to the analysis.
In terms of sampling to obtain representative information, there are two matters to
consider: first, China is chosen as the emerging economy context to focus on as the World
Investment Report noted the country as having the largest outward FDIs in comparison to any
other emerging economies; second, Haier Corporation is chosen as the case sample. The
reason behind choosing this case is not simply due to the fact that the company is widely

recognised worldwide as one of the most successful Chinese MNEs in modern time,
according to Forbes (www.forbes.com [accessed 10/07/2012]), but the fact that while many
state-owned MNEs have internationalised successfully, such as Geely Group from China,
who acquired Volvo, these firms represent a different group of firm characteristics in
comparison to the privately-owned EMNE. For the purpose of examining UM, Haier, being
the first privately-owned Chinese company to internationalise and therefore has the longest
history in terms of overseas operations (Liu and Li 2002, Bouyoucef and Chung 2015), is
selected as the more appropriate case. The group was founded in China in 1984 to produce
and sell consumer appliances. Now, the group is made of more than 70,000 employees with
worldwide reach of 24 key markets including UK, USA, UAE, Germany and Japan
(www.haier.com [accessed 10/07/2012]).
Pilot study
As this study is still at its developmental stage, the first two-hour pilot personal interview was
conducted with the subsidiary’s manager who has been with the company for a number of
years, a number of interview questions were discussed where the respondent who was able to
provide some initial information on the topic investigated. To pilot, the respondent was able
to ask for clarification of each interview question before providing appropriate answer. This
minimised any potential issues relating to validity of collected data.

The internationalisation of Haier: a regional perspective
The internationalisation process of Haier will be examined by three world regions: Asia,
Middle East and Africa, and Europea and America. As data collection is at an early stage,
some example findings from the pilot study conducted recently with the UK manager are
summarised below:
Perception on China-UK culture distance
The manager commented, when asked about the company’s view on the culture distance
between China and UK before coming to the UK, that:
“China and UK cultural difference is highly significant where corporate brand has to be
rebuilt with a European-centric approach.”
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This comment is in line with the suggestion of Ahsan and Musteen (2011). Interview further
reveals that the specific cultural aspects of language difference, values, work ethics, and
social structures were viewed differently in terms of their importance. For example, work
ethics was ranked as the most important consideration for the company, while values and
social structures are equally important in the second place, and language was the least of their
concern. This could be interpreted as the group itself is highly English-language centred and
majority of employees and managers chosen to be located overseas are English-competent.
On the other hand, work ethics was a key issue due to the significant difference between the
countries, and the manager revealed:
“It is because we have worked with UK partners for ten years previously when exporting that
now we are able to manage this issue better. Otherwise, we would have had many more
problems. And hence, we have recruited a number of British employees.”
Culture distance and choice of market entry modes
When the manager was asked about what are the key concerns the company had when
choosing among different modes to enter the UK, findings supported suggestion made by
Johanson and Vahlne (1977) and Buckely and Casson (1998) on perceived level of
uncertainty, management control/ownership, resource commitment, risk exposure, future
performance expectations, to be managerial concerns in choosing entry modes. The manager
recalled that irregular exports were the only mode used by the company for the UK market.
Following a number of years of initial export operations, the firm started to establish a sales
subsidiary in the country since 2010, this could be explained by further response from the
manager:
“Culture is not really an issue for us then because we already felt we were already partly in
the UK through exporting”.

Emerging economies, such as China, Brazil, and India, each represents highly unique
national cultures. EMNEs from these countries can find many foreign markets to be highly
culturally distant from their own. For instance, when a target market is a developed Western
country such as the U.K., EMNEs from China will find language, value, and business
practices to be extremely unfamiliar to them. This can create uncertainty in their perception
of this destination. Hence, in order to internationally expand, they are likely to choose exports
or joint venture depending on whether a suitable partner is available and local governmental
policies permit. This is because unfamiliarity with the foreign culture leads to the perception
of high uncertainty, in spite of the different characteristics of EMNEs and MNEs. Hence, to
avoid potential high transaction costs involved as a result of acquisition and greenfield
investments, EMNEs are mostly likely to opt for the less resource-committed and safer
modes. This conceptual argument is in line with the studies of Hill, Hwang and Kim (1990),
Tsai and Cheng (2002), and Ahsan and Musteen (2011). In spite of the fact that EMNEs and
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MNEs are potentially two groups of firms representing distinctive characteristics, the effect
of culture distance on EMNEs’ choices of foreign market entry modes remains largely the
same to MNEs.
(Further data collection continues)

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