Management DecisionTheories of international trade, foreign direct investment and firm internationalization: a critiqueRobert E. Morgan Constantine S. Katsikeas

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Management Decision35/1 [1997] 68–78

© MCB University Press [ISSN 0021-1747]

Theories of international trade, foreign direct investment and firm internationalization: a critique

Robert E. MorganCardiff Business School, University of Wales, UKConstantine S. KatsikeasCardiff Business School, University of Wales, UK

It has been suggested thatthere is a lack of consensusregarding the conceptualdomain of cross-nationalstudies. That said, the theo-retical focus of such scholarlyactivities has tended toreflect the multidisciplinarynature of the field. By far themost significant contributionsto knowledge in the area canbe sourced to the interna-tional economics, interna-tional finance and interna-tional business literatures.The proliferation in focusesand the diversity of empiricalstudies to be found withinthese literatures demon-strates the wealth of under-standing which can be attrib-uted to the research of cross-national commercial activitiesand operations. Attempts toexplicate many of the domi-nant theories within theseliteratures. Contributions tothe macro level of analysiscan be found in the form oftheories of internationaltrade. Alternatively, microtheories engage the organiza-tion, as the level of analysisand consideration is given toboth the foreign direct invest-ment decision process andthe pattern pursued by firmsin internationalization. Discusses the nature andemphasis of these theories inthe form of a critique.

Introduction

At its most basic, economic exchange acrossnational boundaries has taken place for sev-eral centuries. Furthermore, one of the mostremarkable aspects of economic life nowa-days is the manner in which all countriesincreasingly find themselves an intrinsic partof the global economy (Auerbach, 1996). Suchinterdependence means that the concepts ofthe global village and spaceship earth arereflections of the fact that the contemporarymarketplace is inherently international.Moreover, this new world order with its inter-national competition, economic trading blocs(e.g., Association of South East AsianNations, North American Free Trade Agree-ment and the Single European Market) andglobal emphasis, is forcing firms towards a“new reality” (Lazer, 1993, p. 93) whichdemands a global marketing imperative.Czinkota et al. (1995) have described this sce-nario as follows:

The global imperative is upon us! No longermerely an inspiring exhortation, thinkingand acting globally is the key principle forbusiness success. Both the willing and theunwilling are becoming participants inglobal business affairs. No matter how largeor small your business, ready or not, herecomes the world (p. 1).

In attempting to explain cross-national com-mercial activities, the international econom-ics, international finance and internationalbusiness literatures have, over the last threedecades, witnessed significant advances.However, such intellectual developmentshave fostered a diversity in knowledge whichis evident from the range of extant theories.This article will endeavour to explore manyof these theories and provide an understand-ing of the mechanics and processes witnessedin cross-national trading activities at bothmacro and micro levels of analysis. The dis-cussion is presented by way of an expositionof international trade and economic theory,which is followed by a review and assessmentof international trade theories, foreign directinvestment (FDI) theories and international-ization theories of the firm. The majority ofthe presentation is given to a discussion ofthe third set of theories which is believed tobe an area where most contemporary

theoretical controversy exists. Furthermore,significant renewed interest in patterns offirm internationalization has recently arisen,which suggests a review and assessment ofcurrent knowledge may be timely.

International trade and economic theoryThe importance of international trade to anation’s economic welfare and developmenthas been heavily documented in the econom-ics literature since Adam Smith’s (1776) pio-neering inquiry into the nature and causes ofthe wealth of nations. The rationale underly-ing this relationship suggests that economiesneed to export goods and services in order togenerate revenue to finance imported goodsand services which cannot be producedindigenously (Coutts and Godley, 1992;McCombie and Thirlwall, 1992).

Probably one of the broadest indicators of anation’s economic strength can be gaugedfrom its gross domestic product (GDP), as thismeasure is an estimate of the value of goodsand services produced by an economy in agiven period (Tayeb, 1992). The notion thatinternational trade can influence GDP hasbeen explored by several economic theorists(Marin, 1992; Meier, 1984) and culminated inthe export-led growth thesis. The tenet under-lying this volume of research is that as exportsales increase, other things being equal, theGDP of a nation will rise and provide a stimu-lus to improved economic well-being andsocietal prosperity. The way in which thisrelationship can be interpreted suggests thatexport performance has a stimulating effectthroughout a country’s economy in the formof technological spillovers and other relatedfavourable externalities (Marin, 1992). Exportactivities may exert these influences becauseexposure to international markets demandsimproved efficiency, and supports productand process innovation activities, whileincreases in specialization encourage prof-itable exploitation of economies of scale(Temple, 1994). Thus, the export-led growththesis predicts export growth will cause economy-wide productivity gains in the formof enhanced levels of GDP.

Another mechanism through whichexports are connected with sustainable rates

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of economic growth is the balance of pay-ments. The balance of payments constraintcan be expressed as follows. In general, eco-nomic growth creates a variety of demandswhich cannot be satisfied solely by domesticoutput. Therefore, beyond a certain level, thefaster the rate of domestic demand, the moreaccelerated the growth of imports (Abdel-Malek, 1969). However, any excess of importsover and above exports requires the tradedeficit to be financed by either governmentborrowing from overseas or drawing on theeconomy’s stock of assets. If this situation issustained, it becomes vital for the home gov-ernment to address the issue of such a tradeimbalance (de Jonquieres, 1994; Hornby,1994).

International trade theoriesInternational trade issues generally posethree types of questions for economists. Thefirst is based on explanations of trade flowsbetween at least two nations. The secondrefers to the nature and extent of gains orlosses to an economy. Finally, the third issueconcerns the effects of trade policies on aneconomy. Most theories of international tradeare dedicated to the first question, and atten-tion will now turn to theoretical responses tosuch an issue in the form of: classical tradetheory; factor proportion theory; and productlife cycle theory.

Classical trade theory dictates that the extentto which a country exports and importsrelates to its trading pattern with othernations. That is, countries are able to gain ifeach devotes resources to the generation ofgoods and services in which they have aneconomic advantage (Ricardo, 1817; Smith,1776). Therefore, classical trade theory effec-tively describes the scenario where a countrygenerates goods and services in which it hasan advantage, for consumption indigenously,and subsequently exports the surplus. Conse-quently, it is sensible for countries to importthose goods and services in which they havean economic disadvantage. Economic advan-tages/disadvantages may arise from countrydifferences in factors such as resourceendowments, labour, capital, technology orentrepreneurship. Thus, classical trade theory contends that the basis for interna-tional trade can be sourced to differences inproduction characteristics and resourceendowments which are founded on domestic

differences in natural and acquired economicadvantages. However, over and above such ageneral insight into international trade, clas-sical trade theory is unable to offer any expla-nation as to what causes differences in rela-tive advantages.

The factor proportion theory, in contrast toclassical trade theory, is able to provide anexplanation for the differences in advantageexhibited by trading countries. According tothis theory, countries will tend to generateand export goods and services that harnesslarge amounts of abundant production fac-tors that they possess, while they will importgoods and services that require largeamounts of production factors which may berelatively scarce (Hecksher and Ohlin, 1933).Therefore, this theory extends the concept ofeconomic advantage by considering theendowment and costs of factors of production.

Both of these theories have been shown tobe deficient in explaining more recent pat-terns of international trade. For example, the1960s witnessed significant technologicalprogress and the rise of the multinationalenterprise, which resulted in a call for newtheories of international trade to reflectchanging commercial realities (Leontief,1966). At that time, the product life cycle theory of international trade was found to bea useful framework for explaining and pre-dicting international trade patterns as wellas multinational enterprise expansion. Thistheory suggested that a trade cycle emergeswhere a product is produced by a parent firm,then by its foreign subsidiaries and finallyanywhere in the world where costs are attheir lowest possible (Vernon, 1966, 1971;Wells, 1968, 1969). Furthermore, it explainshow a product may emerge as a country’sexport and work through the life cycle toultimately become an import (Table I). Theessence of the international product life cycleis that technological innovation and marketexpansion are critical issues in explainingpatterns of international trade. That is, tech-nology is a key factor in creating and develop-ing new products, while market size andstructure are influential in determining theextent and type of international trade.

While these theories are insightful (TableI), a number of modern international tradetheories have emerged recently which takeaccount of other important considerationssuch as government involvement and regula-tion. However, it remains that these theoriesmake several assumptions which detractfrom their potential significance and contri-bution to international business. Forinstance, they assume that: factors of produc-tion are immobile between countries; perfectinformation for international trade opportu-nities exists; and, traditional importing and

‘…classical trade theory effectively describes the scenario where a country generates goods and services in which it has an advantage, for consumption indigenously…’

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exporting are the only mechanisms for trans-ferring goods and services across nationalboundaries (Bradley, 1991).

Foreign direct investment theories

Certain theorists have attempted to addresslimitations of international trade theoriesunder the rubric of FDI. A selection of these will now be discussed which concernmarket imperfections theory, internationalproduction theory and internalization theory(Table I).

The market imperfections theory statesthat firms constantly seek market opportuni-ties and their decision to invest overseas isexplained as a strategy to capitalize on cer-tain capabilities not shared by competitors inforeign countries (Hymer, 1970). The capabili-ties or advantages of firms are explained bymarket imperfections for products and fac-tors of production. That is, the theory of per-fect competition dictates that firms producehomogeneous products and enjoy the samelevel of access to factors of production. How-ever, the reality of imperfect competition,which is reflected in industrial organizationtheory (Porter, 1985), determines that firmsgain different types of competitive advan-tages and each to varying degrees. Nonethe-less, market imperfections theory does notexplain why foreign production is consideredthe most desirable means of harnessing thefirm’s advantage. Dunning (1980) and

Fayerweather (1982) have addressed this issueand developed what can be described as inter-national production theory.

International production theory (Table I)suggests that the propensity of a firm to initi-ate foreign production will depend on thespecific attractions of its home country com-pared with resource implications and advan-tages of locating in another country. Thistheory makes it explicit that not only doresource differentials and the advantages ofthe firm play a part in determining overseasinvestment activities, but foreign governmentactions may significantly influence the piece-meal attractiveness and entry conditions forfirms. A related aspect of this foreign invest-ment theory is the concept of internalizationwhich has been extensively investigated byBuckley (1982, 1988) and Buckley and Casson(1976, 1985).

Internalization theory (Table I) centres onthe notion that firms aspire to develop theirown internal markets whenever transactionscan be made at lower cost within the firm.Thus, internalization involves a form of verti-cal integration bringing new operations andactivities, formerly carried out by intermedi-ate markets, under the ownership and gover-nance of the firm. Much of this research,however, adopted the multinational enter-prise as the unit of analysis and excluded theprocess that preceded that level of interna-tional development. In response, a moredynamic, process-based perspective was

Table ISelected theories of international trade and foreign direct investment

Theory type Theoretical emphasis Credited writers

International trade theories

Classical trade theory Countries gain if each devotes resources to the production of goods and services Ricardo (1817)in which it has an advantage Smith (1776)

Factor proportion theory Countries will tend to specialize in the production of goods and services that Hecksher and Ohlin (1933)utilize their most abundant resources

Product life cycle theory The cycle follows that: a country’s export strength builds; foreign production Vernon (1966, 1971)(for international trade) starts; foreign production becomes competitive in export markets; and Wells (1968, 1969)

import competition emerges in the country’s home market

Foreign direct investment theories

Market imperfections theory The firm’s decision to invest overseas is explained as a strategy to capitalize on Hymer (1970)certain capabilities not shared by competitors in foreign countries

International production theory The propensity of a firm to initiate foreign production will depend on the specific Dunning (1980)attractions of its home country compared with resource implications and Fayerweather (1982)advantages of locating in another country

Internalization theory Internalization concerns extending the direct operations of the firm and bringing Buckley (1982, 1988)under common ownership and control the activities conducted by intermediate Buckley and Casson markets that link the firm to customers. Firms will gain in creating their own (1976, 1985)internal market such that transactions can be carried out at a lower cost within the firm

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called for which demanded recognition of theinternationalization of the firm. Nowadays,published research on internationalizationforms a significant part of the internationalbusiness literature.

Internationalization theories of the firmConcept of internationalizationAs was recorded in a seminal article by Hayesand Abernathy (1980), the trade deficit perfor-mance of a nation cannot always be explainedby macro-economic phenomena. It needs tobe recognized that the role of the entrepre-neur plays a part in explaining the interna-tional trading activities of a nation. Giventhat an economy may comprise several indus-tries accommodating an array of firms, itappears reasonable that the role of decisionmakers within such organizations can, collec-tively, provide a substantial contribution toeconomic performance. In contrast to theinternational trade and FDI theories, out-lined above, internationalization theoriesendeavour to explain how and why the firmengages in overseas activities and, in particu-lar, how the dynamic nature of such behav-iour can be conceptualized.

Even though the term internationalizationhas been used extensively, few real attemptshave been made to provide an operationaldefinition of its meaning. Piercy (1981) andTurnbull (1985) describe internationalizationas the outward movement of a firm’s opera-tions. However, this expression could beembellished on to describe internationaliza-tion as “…the process of increasing involve-ment in international operations” (Welch andLuostarinen, 1988, p. 36). This latter definitiontakes account of both the inward and outwardgrowth of international firms. For example,the growth of countertrade, in the form ofbarter or buy-back arrangements, clearlyillustrates the way in which outward growthis related to inward growth (Huszagh andHuszagh, 1986; Khoury, 1984). The merits ofWelch and Luostarinen’s (1988) definitionhave been recognized by others (Young, 1990)because it is a working explanation which isconcise and readily interpretable. Further-more, it is sufficiently holistic to take accountof the multiple factors associated with inter-national expansion.

The internationalization process of firmshas been subject to widespread researchattention and empirical investigation

(Anderson, 1993). Welch and Luostarinen(1988) have comprehensively reviewed thisliterature and concluded that “…there is awide range of potential paths any firm mighttake in internationalisation” (p. 43). An arrayof approaches and perspectives have con-tributed to the contemporary understandingof firm internationalization. For example,economic, econometric, organizational, marketing and managerial models have beenformulated which help to explain the struc-tural and behavioural issues underlyinginternationalization theory (Dalli, 1994).However, despite such a profusion of interestfrom such scholars one approach has devel-oped a significant body of literature on thesubject of internationalization: export devel-opment.

Given that export activities of the firmperpetually change, the mode of exportbehaviour, quite naturally, tends to be devel-opment (Albaum et al., 1989) and a large number of studies have adopted this frame ofreference in studying firms’ dynamic andevolutionary process of internationalization.It has been contended that the literature con-cerned with internationalization, from anexport development perspective, is probablyone of the most advanced and mature areas ofknowledge in international business (Haarand Ortiz-Buonafina, 1995). This is primarilybecause these studies synthesize many of thedisaggregated concepts in the area anddevote their attention to challenging ques-tions such as: what factors determine theadvancement of the firm along the path ofinternationalization; what are the phaseswhich characterize the exporting process;and what are the ingredients of a typicalexport behaviour pattern.

In order to appreciate the particularresearch efforts in this area, the followingsections will review two prominentapproaches for describing internationaliza-tion theory in the context of exporting. Thesetwo approaches have been characterized as:the Uppsala internationalization model andrelated hybrid models; and innovation-related internationalization taxonomies.

Uppsala internationalization model andrelated hybrid modelsMuch of the extant literature on internation-alization has been inspired by the work ofScandanavian researchers who are collec-tively referred to as the Uppsala School (e.g.Johanson and Vahlne, 1977; Johanson andWiedersheim-Paul, 1975). This literaturegenerally suggests that the process of inter-nationalization is founded on an evolutionaryand sequential build-up of foreign commit-ments over time.

‘…the growth of countertrade, in the form of barter or buy-backarrangements, clearly illustrates the way in which outwardgrowth is related to inward growth…’

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Johanson and Wiedersheim-Paul (1975)studied the establishment chains of four largeSwedish multinationals and found that thegrowth patterns of these firms were distin-guished by a number of small incrementalchanges which could be described as an inter-nationalization process. They identified foursteps within this process which were distin-guished by those firms with: no regularexport activities; export activities via independent representatives or agents; theestablishment of an overseas subsidiary; andoverseas production/manufacturing units.To explain the concept of incremental inter-nationalization further, Johanson and Vahlne(1977) refined this work and formulated adynamic model. The contention implicitwithin this model is that the firm proceedsalong the internationalization path in theform of logical steps, based on its gradualacquisition and use of intelligence from for-eign markets and operations, which deter-mine successively greater levels of commit-ment to those overseas destinations. Johan-son and Vahlne (1977) have postulated thatinternationalization is based on learningthrough the development of experientialknowledge about foreign markets, which isgained so as to reduce their “psychicdistance” (p. 30). Consequently, the firm isable to enter further overseas markets,previously characterized by greater levels of psychic distance, and thereby commitgreater levels of resources to international-ization.

This evolutionary model, which is based onthe behavioural theory of the firm (Cyert andMarch, 1963), has been endorsed by theFinnish research of Luostarinen (1980) andLarimo (1985), the Swedish research of Hor-nell and Vahlne (1982), Swedenborg (1982) andGandemo and Mattsson (1984), the Norwegianresearch of Juul and Walters (1987), as well aswork in other, non-Scandinavian, settings(Yoshihara, 1978). This reinforces a previousconclusion by Wilkins (1974) who identified agradual process of firms’ internationalinvolvement from his longitudinal study ofAmerican firms’ internationalization pat-terns. Furthermore, British researchers havefound that a number of intermediate stagesare experienced by firms in the build-up toforeign involvement activities (Buckley et al.,1979, 1981).

Innovation-related internationalizationtaxonomiesAn extensive volume of research has exam-ined the way in which firms progress alongthe internationalization continuum and sug-gests that a sequence of discrete stages existswhich proxy the “stop and go” (Dalli, 1994, p. 92), stepwise process exemplifying theevolution of international involvement.Implicit between each set of stages is thenotion that fairly stable periods exist inwhich firms consolidate and generate anappropriate resource base to respond to fortuitous environmental conditions whichallow them to proceed to the next internation-alization stage. Tables II and III illustrateselected innovation-related internationaliza-tion taxonomies, all of which follow a similarsequence based on organizational learningand derive, in part, from Rogers’ (1962) stagesof the innovation adoption process.

Innovation adoption describes the selectionof an innovation as the most acceptable alter-native, among a series of options, at a givenpoint in time (Zaltman and Stiff, 1973). Theutilization of the innovation adoption frame-work in export decision making was firstconsidered by Simmonds and Smith (1968)but significant advances were made by Bilkeyand Tesar (1977). These authors concludedthat the process of export development wasdepicted by several distinct stages and thatvarious different factors affected decisionmaking at each stage.

The taxonomies highlighted in Tables IIand III share many of the same characteris-tics. However, the main differences includethe number of stages in each model. Forexample, Bilkey and Tesar (1977) andCzinkota (1982) recognized six stages, whileRao and Naidu (1992) were only able to iden-tify four stages in their research. A briefdiscussion will now follow for each of thetaxonomies presented in Tables II and III.

Bilkey and Tesar (1977) conceptualized theprocess of export development on the basis offirms’ increasing involvement in exporting topsychologically more distant markets. Theirtaxonomy was composed of six export devel-opment stages with the extremes rangingfrom firms whose management had no inter-est in exporting to those whose managementexplored the feasibility of exporting to perpet-ually greater psychologically more distantcountries.

Cavusgil (1980) proposed a taxonomy withfive stages which were described as firms’activities in: domestic marketing; pre-exportinvolvement; active export involvement; andcommitted export involvement. This exportdevelopment process was founded on man-agement’s successive decisions regardingexporting over a period of time. Furthermore,

‘…the firm proceeds along the internationalization path in the form of logical steps, based on its gradual acquisition and use of intelligence from foreign markets and operations, whichdetermine successively greater levels of commitment to those overseas destinations…’

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it was suggested, on the basis of empiricalevidence, that several firm-specific charac-teristics and managerial factors acted asdeterminants in the process of facilitating orinhibiting the progress of firms from oneinternationalization stage to the next.

Reid (1981) purported an explicit innova-tion adoption sequence of exporting. Heconceived the innovation to follow the stagesof a firm’s: export awareness; export inten-tion; export trial; export evaluation; andexport acceptance. In this context, exportadoption was believed to require afavourable management attitude to export-ing, an available foreign market opportunityand the presence of spare resource capacitywithin the firm.

Wortzel and Wortzel (1981) were able toidentify five stages of international marketentry and expansion. Each of these stageswas distinguished by the extent of controlexercised by the exporter concerning itsactivities in overseas markets. That is, eachsuccessive stage was signified by a greaterinternalization of marketing, production andadministrative functions previouslyperformed by foreign market-based interme-diaries. Underlying this taxonomy is thesignificance of contingency issues whichinfluence the determination of appropriateand desirable levels of international involvement.

Czinkota (1982) attempted to segment firmson the basis of an internationalization

taxonomy so as to be able to target govern-ment export assistance requirements effec-tively. Six distinct groups of firms emerged,which ranged from those completely uninter-ested in exporting, and restricted to thedomestic market, to those that could bedescribed as experienced large exporters. Anempirical investigation revealed that firms,at various stages, significantly differed interms of their organizational and managerialcharacteristics.

Lim et al. (1991) expanded on the work ofReid (1981) and identified four levels of exportinnovation, these being: export awareness;export interest; export intention and exportadoption. Strong evidence of support for thisframework was found which suggested thatinnovation adoption does have considerableapplicability in the context of export decisionmaking.

Rao and Naidu (1992) analysed groups offirms according to an a priori assignment offirms classed as: non-exporters; export inten-ders; sporadic exporters; and regularexporters. This taxonomy was empiricallytested and validated on the basis that eachstage captured the distinct attributes of firms’internationalization activities.

All of these taxonomies possess a commontheme in which they attempt to introduce aclassification of export behaviours whichgenerate heterogeneous profiles of firms thatreflect different degrees of development alonga reference line of internationalization.

Table IISelected innovation-related internationalization taxonomies

Bilkey and Tesar (1977) Cavusgil (1980) Reid (1981)

Stage 1Management is not interested in exporting Domestic marketing: the firm sells only to Export awareness: problem of opportunity

the home market recognition, arousal of needStage 2Management is willing to fill unsolicited orders, Pre-export engagement: the firm searches Export intention: motivation, attitude, beliefs but makes no effort to explore the feasibility for information and evaluates the feasibility and expectancy about exportof active exporting of undertaking exporting

Stage 3Management actively explores the feasibility Experimental export involvement: the firm Export trial: personal experience from limited of active exporting starts exporting on a limited basis to some exporting

psychologically close countryStage 4The firm exports on an experimental basis to Active export involvement: exporting to Export evaluation: results from engaging in some psychologically close country more new countries – direct exporting exporting

– increase in sales volumeStage 5The firm is an experienced exporter Committed export involvement: management Export acceptance: adoption

constantly makes choices in allocating of exporting/rejection of exportinglimited resources between domestic and foreign markets

Stage 6Management explores the feasibility of exporting to other more psychologically distant countries

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Robert E. Morgan and Constantine S. KatsikeasTheories of internationaltrade, foreign direct investment and firm internationalization: a critique

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Incremental internationalization:contradictory evidenceBoth the Uppsala internationalization model(and related hybrid models) and the innova-tion-related internationalization taxonomiesconfirm the fundamental tenet that a firm’sinternationalization is largely attributed totwo key elements: the amount of knowledgethe firm possesses, particularly experientialknowledge; and uncertainty regarding thedecision to internationalize. Despite thewidespread recognition and general accep-tance of these models in the extant literature,they have been recently subject to criticismregarding their theoretical foundation(Anderson, 1993) and generalizability (Sulli-van and Bauerschmidt, 1990).

Furthermore, others have subsequentlyfound that the incremental internationaliza-tion thesis fails to explain fully the natureand character of firms’ international involve-ment (Gripsrud, 1990; Grønhaug andKvitastein, 1993; Millington and Bayliss, 1990;Sharma and Johansson, 1987; Turnbull, 1987).A number of reasons account for this.

First, Millington and Bayliss (1990) paidparticular attention to the role of strategic

planning in the process of internationaliza-tion and found that the incremental stepwisedevelopment of firms was the exceptionrather than the rule. They concluded that, inthe early part of international involvement,firms rely on market experience and therebymake incremental adjustments. However, asthe degree of international experienceincreases, planning systems are implementedwhich formalize strategic analysis and infor-mation search. International involvementcontinues to increase to the extent that experience may be translated across differentmarkets and between various product groups,thus, enabling firms to leapfrog the incremen-tal process within markets. Similar argu-ments of leapfrogging have been proposed byresearchers in other contexts. For example,international involvement patterns bySwedish (Hedlund and Kverneland, 1983) andAustralian (Bureau of Industry Economics,1984) firms have found this to be the case.

Second, an important issue of intra-stageevolution is not considered within these models. Commonly referred to as “micro-internationalization” (Dalli, 1994, p. 95), this issue can have significantimplications for the development of small andmedium-sized firms because a number ofsubtle changes regarding systems, proce-dures and other internal and external phe-nomena may influence their outlook onexporting (Bonaccorsi and Dalli, 1990).

Third, it is largely considered that firmsadvance along the path of internationalization

Table IIIFurther selected innovation-related internationalization taxonomies

Wortzel and Wortzel (1981) Czinkota (1982) Lim et al. (1991) Rao and Naidu (1992)

Stage 1Importer pull The completely uninterested firm Export awareness Non-exporters: the firm has no

current export activity nor any future interest

Stage 2Basic production capacity marketing The partially interested firm Export interest Export intenders: the firm is a

current non-exporter, but would like to explore future export opportunities

Stage 3Advanced production capacity marketing The exporting firm Export intention Sporadic exporters: the firm

exports, but in a sporadic fashion

Stage 4Product marketing – channel push The experimental firm Export adoption Regular exporters: the firm

exports on a regular basis

Stage 5Product marketing – consumer pull The experienced small exporter

Stage 6The experienced large exporter

‘…International involvement continues to increase to the extentthat experience may be translated across different markets andbetween various product groups, thus, enabling firms to leapfrogthe incremental process within markets…’

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rather than the reverse. Some internationalfirms may encounter the situation where theaggregate disadvantages of internationalinvolvement outweigh the potential advan-tages of such a strategy. Given this scenario,it is possible that firms may undergo aprocess of “de-internationalization” (Welchand Luostarinen, 1988, p. 37) and therebyreverse the sequence of international expan-sion through divestment and other similartactics (Boddewyn, 1989).

The final issue has been addressed by Sul-livan and Bauerschmidt (1990) whoattempted to test the incremental interna-tionalization hypothesis. Although theseresearchers acknowledged a number ofmethodological shortcomings in their study,no significant differences were revealedwith regard to barriers and incentives tointernationalize among firms at variouslevels of international involvement. Thus, nofindings were evident to support the incre-mental fashion of a firm’s path to interna-tionalization.

Despite the controversy surrounding theincremental internationalization thesis, itseems reasonable to suggest that the conceptof a sequential process of internationalinvolvement does not imply that such a tran-sition is either consistent or uniform. Thelikelihood is that some general evolutionarypattern of international involvement can bepursued which could be irregular and ad hoc.To illustrate this, Mintzberg and McHugh(1985) intimate that most strategies forgrowth are characterized by peaks andtroughs of commitment which are related tothe discontinuous emergence of opportuni-ties and threats in the firm’s environment.Consequently, the outcome of internationalinvolvement may be the result of a combina-tion of deliberate and emergent strategiesover time.

One of the key problems that will likely con-found further progress in internationaliza-tion research will be the precise method ofmeasuring and determining the degree ofinternationalization. For instance, Sullivan(1994) considered that the reliability of mea-suring the degree of internationalization ofa firm remains almost completely specula-tive. In consequence, attempts at theorybuilding may lack the evidence to ensurethat comparison between different conceptu-alizations of internationalization are suit-able. Therefore, future research should nec-essarily take account of these anomalies in

internationalization measures, in order todraw more precise conclusions underlyingthe nature of international involvement andexpansion.

ConclusionsThis critique was based on the premiss thatthe function of a theory “is that of preventingthe observer from being dazzled by the full-blown complexity of natural or concreteevents” (Hall and Lindzey, 1957, p. 9). There-fore, theoretical statements have two pur-poses: to organize parsimoniously; and com-municate clearly (Bacharach, 1989). Despitethe fact that sophisticated frameworks havebeen advanced to assess the rigour of theories(e.g., Blalock, 1969; Dubin, 1976; Nagel, 1961;Popper, 1959), the approach taken hereadopted the stance of a broad review of themajor extant theories of international trade,foreign direct investment and firm interna-tionalization.

Many of the theories detailed in this arti-cle can be considered laudable (Bradley,1987) and satisfy the general criteria oftheoretical parsimony and communicability.In demonstrating this, illustration was givento the issues underlying each theory andcertain contrasts were drawn between thetheory types in an effort to frame them inrelation to their intellectual biases ofinternational economics, internationalfinance and international business. Whileno specific attempt was made to compare thetheories, the discussion emphasised theirparticular focus, accredited writers andgeneral conclusions.

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Application questions

1 How well does the body of theory on inter-national trade inform actions in inter-national trade in your experience? How useful is it?

2 Look again at the article, and compare andsynthesize the various theories presentedby the authors. Where is the discussionleading? What further research would youadvise?

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