Internationalization theory: the Uppsala model
The Uppsala model, also called the U-model or the internationalization process model, proposes that levels of knowledge about and commitment to foreign markets influence decisions related to internationalization and business activities (Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977). Psychic distance, the degree of cultural and social difference between the home country and the host country, can disturb a firm’s understanding of a foreign market (Johanson and Vahlne 1977). The assumption of the Uppsala model is that lack of knowledge from the psychic distance is a major obstacle to international operations, so firms gradually increase their level of involvement to minimize the risk and uncertainty (Johanson and Vahlne 1977).
Despite its significant contributions to internationalization research, the Uppsala model has been criticized for being too deterministic and simplistic (Forsgren 2002). The first challenge is that the Uppsala model puts too much emphasis on experiential knowledge or “learning by doing” on knowledge as obtained only through ongoing activities. Apparel retailers can build their foreign market knowledge through both direct learning behaviors, such as foreign sourcing activities, and indirectly, such as through foreign networking. While the weakness of emphasizing only direct learning has been discussed (Forsgren 2002; Oviatt and McDougall 1994) and Ellis and Pecotich (2001) reported learning from networking or observations, few studies have examined whether possible indirect sources influence market knowledge. To fill this gap, SME apparel retailers’ knowledge sources are incorporated into the model.
The Uppsala model uses only two factors (i.e., market knowledge, market commitment), which may be insufficient to explain international expansion (Forsgren 2002). There is a compelling need for a more in-depth investigation of the firm-, retail-, and market-specific antecedents that may influence the international market involvement of SME apparel retailers. This study posits that the Uppsala model can better explain current international market involvement by incorporating antecedents related to SME apparel retail firms and current domestic apparel markets. In this study, firm age, product uniqueness, and domestic growth opportunity are selected as key influences. Firm age can affect international market involvement (Chen and Sternquist 1995). Unlike manufacturing firms, apparel retailers differentiate themselves largely through intangible assets (Quinn and Doherty 2000); thus, their international market involvement may depend on the product’s being sufficiently unique. Another antecedent, firms’ perceived domestic growth opportunities, can influence their international market involvement because firms that perceive limited domestic growth are more likely to expand into international markets (Lopez and Fan 2009).
As shown in Fig. 1, the study proposes a conceptual model that incorporates two sources of market knowledge (foreign sourcing experience and foreign networking) and firm-specific (firm age, market knowledge, and market commitment), retail-specific (product uniqueness), and market-specific (domestic growth opportunity) factors related to apparel retailers’ international market involvement. We examine seven hypotheses based on the relationships of these factors. The basic premise of the proposed model is that both direct and indirect sources of learning influence the level of foreign market knowledge: the firm-, retail-, and market-specific factors determine the international market involvement, and market knowledge mediates the relationship between sources of market knowledge and international market involvement.
Antecedents of market knowledge
Foreign sourcing provides the opportunity to gain detailed local knowledge at the retail level (Palmer and Quinn 2005). Because producing apparel goods requires significant labor, apparel firms in developed countries have turned to overseas sourcing for products sold in domestic markets. This overseas experience has become their primary method of learning about international markets. In a case study by Guercini and Runfola (2010), a small Italian apparel retailer entered the Chinese market for sourcing and later opened retail stores based on its newly acquired Chinese market knowledge (e.g., local consumer behavior). During the sourcing stage, the firm learned business skills in an emerging market and the importance of social bonds, such as “guanxi,” in doing business with Chinese suppliers and later applied this knowledge in its retail operations. About 97 % of apparel products sold in the US are produced overseas (American Apparel & Footwear Association 2009). The business travel that is essential for establishing and maintaining sourcing relationships results in exposure to local trends, aesthetic preferences, competitor activities, and negotiation strategies. Therefore, experiencing foreign sourcing in multiple countries helps apparel retailers gain information about international markets (e.g., consumer needs, cultural norms, languages, regulations, negotiation skills, and distribution channels). This study thus hypothesizes the following:
H1a: The greater a firm’s foreign sourcing experience, the greater its market knowledge.
Many case analyses suggest that personal relationships, both formal (e.g., clients and former employees) and informal (e.g., friends and relatives), serve as instrumental tools for obtaining foreign market information by SME firms (e.g., Ellis and Pecotich 2001; Johnsen and Johnsen 1999; Prashantham 2006). From their personal relationships with suppliers and foreign agents, four small knitwear manufacturers studied by Johnsen and Johnsen (1999) obtained informal information on foreign local customers and an awareness of foreign market opportunities. Foreign networking is also important for building market knowledge. Hutchinson et al. (2006) study of three U.K. SME clothing and accessory retailers shows that the firms’ founders or senior managers created strong social bonds with people they met while travelling in foreign countries, resulting in their becoming the first local distributors in two foreign markets. Based on the above, this study posits that foreign networking is an informal source of market knowledge and that increased personal relationships in foreign markets expand SME apparel retailers’ opportunities to develop market knowledge. Therefore, this study hypothesizes the following:
H1b: The greater a firm’s foreign networking, the greater its market knowledge.
Antecedents of international market involvement
The Uppsala model posits that before moving into international markets, firms are adequately established in their domestic market, having reduced market risks and uncertainty based on their experience (Johanson and Vahlne 1977). Traditional explanations of gradual internationalization may not apply to all sectors, such as the emerging born-global firms of the high-tech industry (Oviatt and McDougall 1994); high-tech firms tend to expand their businesses when young (Aspelund and Moen 2005; Autio et al. 2000). In contrast, retail firms may need sufficient time to build brand image and identity and increase market appeal of the company in their domestic markets before its expansion (Hutchinson et al. 2006). For example, established in 1969, Gap, Inc. opened its first international store in the UK in 1987 after 20 years of operating in the US (Gap Inc. 2015). Limited Brands Inc. (established in 1963) and J.Crew (begun in 1983) entered Canada, their first foreign market, after 44 and 28 years of operating in their domestic markets respectively (Wahba 2015; Limited Brands 2011). Comparing domestic and international retail stores, Chen and Sternquist (1995) found that international retail stores had longer histories of establishment. As retailers’ competitiveness is derived from their store name, service, or product assortment, apparel retailers may follow a traditionally gradual process with a domestic orientation. Hence, the age of the firm may be important in explaining international involvement. We therefore propose the following hypothesis:
H2: The older a firm, the higher the probability of international market involvement.
The logic of the Uppsala model asserts that developing market knowledge (e.g., about regulations, norms, distribution channels, business cultures) can reduce uncertainty and perceived risks (c.f., Johanson and Wiedersheim-Paul 1975) and thus lead to engagement in international markets. For apparel retail firms, knowledge of local history, language, religion, consumer needs, cultural aesthetic tastes, and merchandise distribution are all essential for operating in foreign markets for the following reasons: (1) the color and design of apparel goods can deliver social meanings (Roach-Higgins and Eicher 1992), (2) local consumer needs and aesthetic tastes vary widely (Jin 2004), and (3) apparel items include a wide range of inventory stock (Jin 2004). Therefore, apparel firms with a high degree of knowledge of their host markets are in a better position to overcome risks and uncertainties, which in turn increases the potential for a decision to internationalize. In sum, this study postulates that market knowledge will lead to international market involvement among apparel retailers. We thus hypothesize the following:
H3: The greater a firm’s market knowledge, the greater the probability of international market involvement.
Since entry costs and transaction risks in internationalization can be high, the decision is necessarily affected by managerial willingness to commit resources with a long-term view. Thus, an earlier entry might be prompted by high market commitments to tangible (e.g., financial investment) and intangible (e.g., time, information search, patience) resources (Navarro et al. 2010). Firms’ commitments to international activities in turbulent markets are well documented. For instance, despite an internal crisis and war between Iran and Iraq (1982–1988), Swedish firms such as Volvo did not withdraw their businesses but maintained their market commitments due to the post-war market potential (Hadjikhani 1997). In this case, firms integrated all of their tangible and intangible commitments to their focal markets.
High foreign market commitment may assist firms in overcoming foreign market uncertainty, which may in turn lead to their internationalization. In a case study of a US and UK early-internationalized apparel firm, the ambition of one of its founders was to bring his firm’s style and vibrancy to global consumers, resulting in seeking foreign market opportunities (Wigley et al. 2005). Therefore, this study postulates that strong market commitment to internationalization will lead to international market involvement:
H4: The greater a firm’s market commitment, the higher the probability of international market involvement.
Product uniqueness contributes to retail differentiation and has been identified as a key driver of the retail industry’s international expansion (Alexander 1990). Evans et al. (2008a) and Williams (1992), in investigating empirically the motives for retail internationalization, have highlighted the importance of the uniqueness of the retail offering. Treadgold (1991) found that a unique product makes entry into a foreign market much easier. In particular, product uniqueness has often been emphasized as a driver of small- and medium-sized retailers because it enables smaller firms to expand into foreign markets despite resource limitations (Hutchinson et al. 2006). Additionally, a unique product line contributes to the focus on a target market, which leads in turn to retailer confidence and differentiation for small retailers (e.g., Foscht et al. 2006). One plausible explanation is that unique features can satisfy various aesthetic preferences and local consumer needs in foreign markets. We therefore hypothesize the following:
H5: The more unique a firm’s product is, the greater the probability of international market involvement.
Domestic growth opportunity may be a crucial push factor of apparel retailers’ internationalization. Many studies have shown that apparel retail firms are encouraged to expand into foreign markets because of the maturity of their domestic markets (Lopez and Fan 2009; Wigley et al. 2005). Many cases support this finding. Gap’s struggles in the US market have accelerated its rapid expansion across the Chinese market since its 2010 entry (Lee 2010). Similarly, limited domestic market growth opportunities led Zara to expand internationally (Lopez and Fan 2009). The entry of British children’s wear retail, Adams, in Spring in the mid-1990s were attributed to imminent market saturation and increased domestic competition (Johnson and Allen 1994). Slowing domestic demand in developed countries has been found to prompt a rapid internationalization (Wigley et al. 2005). Given the weight of the empirical findings, this study posits that apparel retailers who perceive fewer domestic market growth opportunities are more likely to expand their businesses to international markets. We therefore hypothesize as follows:
H6: The smaller a firm’s perceived domestic growth opportunity, the greater the probability of international market involvement.
Market knowledge as a mediating factor
Foreign sourcing experience and foreign networking drive the international market involvement through their impact on market knowledge. The sequence from foreign sourcing experience to market knowledge to international market involvement occurs because foreign sourcing is prevalent in the fashion industry (Guercini and Runfola 2010). Similarly, foreign networking can influence international market involvement via its impact on market knowledge. For example, Ellis and Pecotich (2001) found that social networks with former employees became tools for finding foreign business partners and building local market knowledge. Therefore, small apparel retailers’ sourcing experience and foreign networking are viable sources of stock market knowledge, providing a greater opportunity to expand their businesses internationally (Alexander 1990; Guercini and Runfola 2010). This link between foreign sourcing experience and networking and international market involvement via the mediating role of market knowledge is captured in the hypotheses below:
H7a: Market knowledge will mediate the relationship between foreign sourcing experience and international market involvement.
H7b: Market knowledge will mediate the relationship between foreign networking and international market involvement.