Reassessing the Internationalization of the Firm (Advances in International Marketing)

LIST OF CONTRIBUTORS Arild Aspelund

Norwegian University of Science and Technology, Trondheim, Norway

Catherine N. Axinn

Department of Marketing, Ohio University, USA

Antonio Barretto

BNDES, Av. Republica do Chile, Brazil

Mark V. Cannice

School of Business, University of San Francisco, USA

Roger (Rongxin) Chen

School of Business, University of San Francisco, USA

John D. Daniels

School of Business Administration University of Miami, USA

Angela da Rocha

COPPEAD, Uni. De Fed. Do Rio de Janeiro, Brazil

Jan Moiler Jensen

University of Southern Denmark, Odense, Denmark

Mingfang Li

Department of Mangement California State University, USA

Paul Matthyssens

Limburgs Universitair Centrum, Belgium

¢~ystein Moen

Norwegian University of Science and Technology, Trondheim, Norway vii

viii Pieter Pauwels

University of Maastricht, The Netherlands

Alex Rialp

Autonomous University of Barcelona, Spain

Josep Rialp

Autonomous University of Barcelona, Spain

Philip M. Rosenzweig

International Institute for Management Development, Lausanne, Switzerland

Per Servais

University of Southern Denmark, Odense, Denmark

Janet Shaner

International Institute for Management Development, Lausanne, Switzerland

Christine J. Weisfelder

Great Lakes Consortium for International Training and Development, Ohio, USA

PREFACE

This special volume of Advances in International Marketing is devoted to exploring new perspectives on the internationalization of firms. It is guest edited by Catherine N. Axinn of Ohio University and by Paul Matthyssens of Limburgs Universitair Centrum, Diepenbeek, Belgium and Erasmus Universiteit, Rotterdam, The Netherlands. While the idea for devoting a whole issue to exploring this topic arose at a symposium of the Consortium for International Marketing Research (CIMaR) held at Tennessee State University in 1999, a call for papers was widely distributed and as a result the contributions to this volume come partly from CIMaR members and partly from other scholars. Thus the papers here draw from a wide variety of perspectives - all of which push the envelope of traditional theory. Our thanks to Dr. Axinn and Dr. Matthyssens for their collaborative efforts in creating this volume. Finally, we express our appreciation to the staff at JAI/Elsevier Science who saw the volume through the production process. S. Tamer Cavusgil Series Editor

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REFRAMING INTERNATIONALIZATION THEORY: AN INTRODUCTION Catherine N. Axinn and Paul Matthyssens

WHY

REASSESS

THE INTERNATIONALIZATION OF THE FIRM?

Firms are internationalizing in greater numbers than ever before; they are internationalizing faster than ever before. Therefore, internationalization theories are more critical than ever before. However, companies are internationalizing in more different ways than ever before, often using combinations of entry strategies. Smaller, often high tech companies practice advanced entry modes from their outset. Services and know-how are traded across the globe. In Europe, deregulation has provoked the expansion of previously nation-bound utilities and government agencies into neighboring countries. Emerging and transitional economies are opening up at an unprecedented pace and companies from these countries are entering international business. This volume is conceived as an exploration of the evolving nature of internationalization in the context of shifting environmental forces. The articles that follow this introduction will both answer some key questions and raise new ones. Our hope is to stimulate continuing theoretical development and an ongoing discussion on the foundations of the internationalization phenomenon. So, why are more firms internationalizing faster than ever before? Well, we have some ideas; but none of our traditional theories fully explain observed

Reassessing the Internationalization of the Firm, Volume 11, pages 3-11. 2001 by Elsevier Science Ltd. ISBN: 0-7623-0795-1

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CATHERINE N. AXINN AND PAUL MAIqT-IYSSENS

behavior. In fact, the more we research emerging phenomena, the clearer it becomes that our existing theories neither explain nor predict the behavior that we are observing in firms today. Why not? Has the behavior changed so much? Perhaps it has. ENVIRONMENTAL

CHANGES

The context within which the firm acts has changed considerably over the past 40 to 50 years and firms have had to change their behavior to survive and prosper in their changing, hyper-competitive, global environment. Therefore, theories also have to evolve to account for the new behaviors. In order to ascertain the direction that new theories will have to go, it is necessary to identify and understand the nature of the contextual changes that have stimulated or even forced firms to change market approaches. We note particularly the birth and adolescence of the global economy, the new economy, the service economy, high technology markets and the network economy.

Global Economy Of course, the dominant change in the world economy over recent decades is the globalization of markets (Levitt, 1984; Yip, 1992; Bartlett & Ghoshal, 2000). This phenomenon is the result of the convergence of numerous other changes that individually might not have been as potent as they are collectively. From the domain of technology we've gained: (1) advances in telecommunications, enabling speedier and more effective communication within and between firms; (2) advances in transport (containers, air travel, super-tankers) - facilitating speedier and more efficient movement of goods and people within and between continents; and (3) production process advances (such as flexible production systems) - facilitating cost-effective product adaptation. Simultaneously we've experienced a significant reduction in trade barriers through the creation of market agreements like NAFTA and MERCOSUR (building on the experience of the EU) and through continued tariff reductions negotiated via the GATT and more recently the WTO. Also, authors have pinpointed the internationalization of life styles as a globalization driver (Douglas & Craig, 1995). The economic developments - in general - have been opening up global trade as well, with the birth of the EURO, the opening up of Central and Eastern European economies, and the economic boom of the last five years (with one notable exception, i.e. the recession in Asia).

ReframingInternationalizationTheory

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As a result, we have increasing global mergers and acquisitions, increasing investment activity, and increasing trade within and between trading regions. The value of annual merger and acquisition activity has risen from $72.8 billion in 1981 to $141.9 billion in 1991 to over $1.4 trillion in 1999 (A 35-Year Profile of M&A, 2000). Simultaneously, global merchandise exports rose from $1.9 trillion in 1980 to nearly 5.4 trillion in 1998 (Structure of Merchandise Exports, 2000). We also have increasing information availability; increasing technological availability (through technology development and technology transfer); increasing financial availability and flexibility, and increasing worldwide competition.

New Economy Regardless of the recent shakeout, E-business is changing the shape of marketing and managing. It seems apparent that the revolution in information technology calls into question the basic tenets of many marketing, management and internationalization theories. Hamill (1997) has pleaded for 'a fundamental reassessment of the results of past research' and for the development of new international marketing paradigms. The Internet allows international marketers to achieve cost savings, faster market penetration, and product/service transformation and improvement (Hamill, 1997; Bishop, 1999). Further, marketers can now gain access to actual customer databases and market research information and connect with available trading partners more easily. With these tools many SMEs might overcome traditional barriers to export or to advanced international business participation (e.g. global business).

Service Economy Services take a huge share of the Gross Domestic Product of developed nations (over 70% for the USA) and of world trade (over 30%). The growing practice of international trade in services, however, stands in contrast to its relative conceptual and empirical neglect in the international business/marketing literature. Patterson and Cicic (1995) argue for a classification of services along two dimensions: degree of intangibility and need for face-to-face contact in order to understand internationalization paths. Their research shows differences along the categories of their classification scheme, but it also allows for the generation of general conclusions. First, managerial commitment to the internationalization of service providers is moderate to high. Second, client 'chasing' and unsolicited

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CATHERINE N. AXINN AND PAUL MAq'THYSSENS

orders are hardly considered as key drivers. Third, the costs of internationalization are considered low relative to the perceived benefits. Fourth, diverse entry modes are used, such as direct representation, local branches and agency relations. Finally, all service providers foresee further internationalization.

High Technology and the Connected Knowledge~Network Economy Technology is a driving force of economic progress. According to the Committee on Civilian Industrial Technology high tech markets grow much faster than the growth rate of the U.S. economy in general (Technology in the National Interest, 1996). High technology markets are characterized by substantial levels of scientific and technological know-how, complexity and speed of change, market and 'advances' uncertainties, demand-side increasing returns, network compatibility issues, tradability problems and so on (John et al., 1999; M611er & Rajala, 1999). These characteristics challenge traditional marketing approaches and concepts in the following ways. The knowledge intensity leads to the creation of complex knowledge networks among global suppliers, customers, universities and internal knowledge workers. Flexible product/process architectures and increased speed to market (Sanchez, 1999) necessitate an intensified dialogue with innovative national and international customers. High-tech companies must also assist their customers in migrating from 'old' to 'new' product types (John et al., 1999), which necessitates careful planning and service assistance in an international context. Finally, in such industries, smaller pioneering companies will often face the challenge of quickly building scale and seeking returns on their creativity and R&D investments as product life cycles are short and domestic markets are often limited in size. Research on the internationalization paths of such companies is rather limited. Based on case-study research, Crick and Jones (2000) argue that, although the internationalization paths of such high tech SMEs differ somewhat among each other, in general they all feel an urgent need to internationalize quickly. Hence, they argue the Calof and Beamish (1995) model has to be adapted to accommodate a more dynamic model of internationalization in which entrepreneurial (key decision maker's profile and experience), internal (company) and external (market and industry) factors influence the internationalization pattern and process simultaneously. Existing, linear theories are inadequate. Further, internationalization was much more planned and deliberate (with global vision) than traditional theories suggest for small and medium-sized players.

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A LOOK AT TRADITIONAL THEORIES In addition to the challenges offered by these significant environmental changes, it is also possible that the traditional theories have always been burdened with significant limitations. Let us consider this possibility briefly: Whose behavior were the traditional theories designed to explain? MNCs? SMEs? Developed country firms? Manufacturing firms? All firms? Clearly, several key theories have been applied to the internationalization process primarily to explain the international production operations of MNCs, e.g. Industrial-Organization Theory (Hymer, 1960; Kindleberger, 1969; Caves, 1971; Agmon & Lessard, 1977), Internalization Theory (Coase, 1937; Penrose, 1959; Buckley & Casson, 1976; Rugman, 1981), Transaction Cost Theory (Williamson, 1970, 1975; Hennart, 1982). Going a step further, Dunning's Eclectic Theory expanded its scope to incorporate consideration of trade as an alternative to investment in reaching foreign markets (Dunning, 1977, 1979). In the preceding theories, the environment is taken as a given. In the Nordic theories, it is seen as an important determinant of behavior. The Nordic School has provided both the Uppsala Model of Internationalization (Johanson & Vahlne, 1977, 1990; Johanson & Weidersheim-Paul, 1975) and Network Theory (Penrose, 1959; Johanson & Mattsson, 1988). Both were built on observations of Nordic multinationals, but have been applied widely (and rather successfully) to explain the behavior of SMEs in many other regions as well. In retrospect, it appears that these theories focus on explaining the international behavior of large manufacturing firms from developed countries that expand internationally on a gradual basis from psychologically close to psychologically more distant countries. The fact that each theory, in some circumstances, can be meaningfully used to explain the international behavior of small firms or service firms or firms from developing countries is more often an unexpected (and somewhat unintended) consequence than a planned one. Each theory was developed within a specific environmental context to explain a fairly specific set of observed firm behaviors. Each, within its context, may be fairly adequate at explaining those behaviors. But the context has changed, and the ability of each theory to explain behaviors observed today is considerably diminished. The basic premises and tenets of each theory have to be evaluated in the face of the new economic realities described in the preceding section. In Table 1 some preliminary thoughts have been formulated regarding some major theories. However the table is not meant to be exhaustive. We consider the stages models (Johanson & Vahlne, 1977; Cavusgil, 1980), the core theory of international business (Buckley, 1990) and the eclectic theory of the firm

8

C A T H E R I N E N. A X I N N A N D P A U L M A T T H Y S S E N S T a M e 1.

S o m e T r a d i t i o n a l T h e o r i e s vs. t h e N e w R e a l i t i e s . 'Environmental' challenges

Internationalization theory (selection)

Global economy

Stages models

• psychic distance • linear, gradual • diversity of entry • firm specific less important in process cannot modes vs. view, no network global world experience be 'upheld' in perspective • life cycle model focuses on e-world thinking outdated. psychic distance export which is • not relevant in not possible: and market highly internaneed for higher knowledge tionalized order entry mode irrelevant industries not considered here • role of theory too static • cost of • theory too static management • not relevant to international• not relevant to underestimated SMEs which ization SMEs which rely • not enough rely on cooperaon cooperative attention to tive agreements agreements resources leading • firm specific to global view, no network competitive perspective advantage • marketing and R&D costs not integrated • role of management underestimated

Core theory

Eclectic theory

• narrow conception of FDI

New economy

Service economy High tech, network economy

• discusses use of • theory too static • 'production' advantages, not oriented theory sale through (intangibles not contractual accounted for) arrangement • firm-specific view, not network

( D u n n i n g , 1988). I n this p r e l i m i n a r y e n d e a v o r w e b u i l d p a r t l y o n M a t t h y s s e n s and Pauwels (1998). The table shows how the three theories considered here a r e c h a l l e n g e d b y t h e f o u r t e n d e n c i e s d i s c u s s e d p r e v i o u s l y . I n g e n e r a l this b r i e f and preliminary assessment illustrates that of the three traditional theories c o n s i d e r e d , n o n e c a n a c c o m m o d a t e t h e n e w r e a l i t i e s fully. T h e r e f o r e , i n t e r n a t i o n a l i z a t i o n t h e o r y h a s to b e r e f r a m e d . T h i s s p e c i a l i s s u e o f Advances in International Marketing is a n e f f o r t in this d i r e c t i o n .

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CONTRIBUTIONS TO THEORY DEVELOPMENT AND REFRAMING The following articles aim at contributing to revitalizing internationalization theories. Weisfelder's paper examines fifty years of international theory development. Using Laudan's criteria, it evaluates the status of the theories. This critical analysis is more than a review and synthesis. It is also an invitation to 'improve' theories. Rialp and Rialp offer a holistic perspective in order to accommodate the explanation of internationalization by SMEs while integrating mode of entry concepts. Barretto and da Rocha focus on entry strategies of companies from an emerging player in the global economy. Their rich cases lead to a proposed integrative framework. Chen et al focus on the link between market entry and technology transfer by high tech firms operating in the Pacific Rim. Their findings challenge the traditional theories on many fronts. Rosenzweig and Shaner highlight the differences between the conventional view of internationalization and the so-called contemporary view that is characterized by versatility of entry modes, short windows of opportunity and the participation in international trade by SMEs with limited resources. They highlight the drivers and suggest new motivations for foreign investment. The connection between degree of internationalization and performance is studied in Li's paper. Is the relationship linear or curvilinear? This study indicates that Chinese firms need to reach a threshold in order to benefit fully from positive effects on performance. Incremental gains cannot always be expected from the outset. One of the major challenges to the traditional theories comes as a result of the speed with which some firms - even and especially newly-formed firms are internationalizing. Thus we have a series of studies recently on what has come to be called the born-global firm, A born-global is "[a] company which, from or near its founding, seeks to derive a substantial portion of its revenues from the sale of its products in international markets" (Knight, 1997, 1). It has a strong international vision from the start and appears to internationalize in a manner that seems contrary to established internationalization theories stated above. The Aspelund and Moen paper identifies 'key success factors' for such endeavors and illustrates that there are types ("generations") of firms with different characteristics. Servais and Jensen stimulate theory development in a neglected area: industrial procurement. Their paper draws attention to the high level of involvement in international sourcing by SMEs. Inward internationalization and its link to outward internationalization deserves future research attention.

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In the final paper, Pauwels and Matthyssens use the international market withdrawal decision as a stepping-stone to illustrate the inherent lack of dynamic qualities in traditional internationalization theories. And although it struggles with inherent paradigmatic incompatibilities, the global strategy framework is deemed most promising for explaining international business in its modern,

dynamic context. With this volume, we are confident of offering a stimulating mix of papers that address internationalization theory in the new environment. We hope and trust that the ideas presented here will stimulate significant further development of internationalization theories that can capture the impact and nuances of the dynamic global business environment of the twenty-first century. REFERENCES A 35-Year Profile of M & A. (2000). Mergers & Acquisitions. September, 31. Agmon, T., & Lessard, D. R. (1977). Investor Recognition of Corporate International Diversification. Journal of Finance, 32(September), 1049-1055. Bartlett, C. A., & Ghoshal, S. (2000). Transnational Management. Boston: Irwin McGraw Hill. Bishop, B. (1999). Global Marketing for the Digital Age. Chicago: NTC Business Books. Buckley, P. (1990). Problems and Developments in the Core Theory of International Business. Journal of lnternational Business Studies, 21(Fourth Quarter), 657-665. Buckley, P., & Casson, M. (1976). The Future of Multinational Enterprise. London: Macmillan. Calof, J. L., & Beamish, P. W. (1995). Adapting to Foreign Markets: Explaining Internationalization. International Business Review, 4(2), 115-131. Caves, R. E. (1971). International Corporations: The Industrial Economics of Foreign Investment. Economica, 38(February), 1-27. Cavusgil, S. T. (1980). On the International Process of the Firm. European Research, 8(6), 273-281. Coase, R. H. (1937). The Nature of the Firm. Economica, 4(November), 386--405. Crick, D., & Jones, M. V. (2000). Small High-Technology Firms and International High-Technology Markets. Journal of lnternational Marketing, 8(2), 63-85. Douglas, S., & Craig M. (1995). Global Marketing Strategy. New York: McGraw-Hill, Inc. Dunning, J. H. (1977). Trade, Location of Economic Activity and the Multinational Enterprise: a Search for an Eclectic Approach. In: B. Ohlin, P. O. Hesselborn & P. J. Wijkman (Eds), The International Allocation of Economic Activity. London: Macmillan. Dunning, J. H. (1979). Explaining Changing Patterns of International Production: In Defense of Eclectic Theory. Oxford Bulletin of Economics and Statistics, 41(4), 269-296. Dunning, J. H. (1988). The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies, 19(Spring), 1-31. Hamill, J. (1997). The Internet and International Marketing. International Marketing Review, 14(5), 300-323. Hennart, J-F. (1982). A Theory of Multinational Enterprise. Ann Arbor: University of Michigan Press. Hymer, S. A. (1960). The International Operations of National Firms: A Study of Foreign Direct Investment. Ph.D. Dissertation, Department of Economics, Massachusetts Institute of Technology, 1960. Published in 1976 by MIT Press.

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Johanson, J., & Mattsson, L-G. (1988). Internationalization in Industrial Systems-A Network Approach. In: N. Hood & J.-E. Vahlne (Eds), Strategies in Global Competition (pp. 287-314). New York: Croom Helm. Johanson, J., & Vahlne, J. E. (1977). The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitment. Journal of International Business Studies, 8(1), 23-32. Johanson, J., & Wiedersheim-Paul, F. (1975). The Internationalization of the Firm-Four Swedish Case Studies. The Journal of Management Studies, •2(3). John, G., Weiss, A .M., & Dutta, S. (1999). Marketing in Technology-Intensive Markets: Toward A Conceptual Framework. Journal of Marketing, 63(special issue), 78-91. Kindleberger, C. P. (1969). American Business Abroad: Six Essays on Direct Investment (pp. 1-36). New Haven, CT: Yale University Press. Knight, G. A. (1997), Emerging Paradigm for International Marketing: The Born Global Firm. Ph.D. Dissertation, Department of Marketing and Supply Chain Management, Michigan State University. Levitt, T. (1984). The Globalization of Markets. Harvard Business Review, 6•(3), 92-102. Matthyssens, P., & Pauwels, P. (1998). Dogmas and Paradoxes in Internationalization and Globalisation Theories: A Portfolio Perspective. ITEO Research Paper 98/01, Limburg University (Belgium). Moiler, K., & Rajala, A. (1999). Organizing Marketing in Industrial High-Tech Firms: The Role of Internal Marketing Relationships. Industrial Marketing Management, 28(5), 521-535. Patterson, P. G., & Cicic, M. (1995). A Typology of Service Firms in International Markets: An Empirical Investigation. Journal of International Marketing, 3(4), 57-83. Penrose, E. (1959). The Theory of the Growth of the Firm (lst ed.). London: Basil Blackwell. Rugman, A. M. (1981). Inside the Multinationals: The Economics of Internal Markets. New York: Columbia University Press. Sanchez, R. (1999). Modular Architectures in the Marketing Process. Journal of Marketing, 63(special issue), 92-111. Structure of Merchandise Exports (2000). 2000 World Development Indicators. Washington D.C.: World Bank, 200. Technology in the National Interest (1996). Washington D.C.: NSTC Committee on Civilian Industrial Technology. Williamson, O. (1971). The Vertical Integration of Production: Market Failure Considerations. American Economic Review, 61(May). Williamson, O. (1975). The Economics of Internal Organization: Exit and Voice in Relation to Markets and Hierarchies. American Economic Review: Papers and Proceedings, 66(May). Yip, G. S. (1992), Total Global Strategy. Englewood Cliffs: Prentice Hall.

INTERNATIONALIZATION A N D THE MULTINATIONAL ENTERPRISE: D E V E L O P M E N T OF A R E S E A R C H TRADITION 1 Christine J. Weisfelder

ABSTRACT This paper analyzes theory development over the last fifty years. It identifies strands of research, the origins of theories and the ways in which theories complement and conflict with each other. Using the framework of Larry Laudan's model of scientific method, it questions to what extent this theory development process is rational and has led to scientific progress. It concludes that, since the research tradition has enabled scientists to find solutions to problems, there has indeed been progress. Thus, according to Laudan's criteria, this construction of a foundation of solved problems is a rational process.

INTRODUCTION International trade and investment have grown tremendously in the last fifty years. As a consequence, the multinational enterprise (or firm) has taken on an important role in international business. 2 The importance of the multinational

Reassessing the Internationalization of the Firm, Volume 11, pages 13--46. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1

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CHRISTINE J. WEISFELDER

enterprise has led to much theorizing about its existence and growth. To this day, these theories have not been fully reconciled nor integrated. The purpose of this paper is to analyze this postwar research tradition in order to answer the following questions: (1) What are the various strands within the international business research tradition and where do these strands come from? (2) How do they clash with and/or complement each other? (3) Has the process of research led to scientific progress and has it been rational? This paper will contribute to the literature on international business by analyzing the process of theory development and contrasting various strands of research; it will enrich the theory of scientific progress and rationality by providing a case study of theory development within a particular research tradition. The conceptual framework for this study comes from the work of Laudan (1977, pp. 78-80, 105, and 199) who has developed a model of scientific progress and rationality that can be applied to social as well as natural sciences. 3 International business clearly belongs to the social sciences. In contrast to a natural science, such as physics, the study of foreign production and of the international enterprises that engage in foreign direct investment cannot occur in laboratories with controlled experiments. International business needs to be viewed from a perspective that acknowledges this reality.

E L E M E N T S OF L A U D A N ' S M O D E L OF SCIENTIFIC P R O G R E S S AND R A T I O N A L I L T Y 4 Laudan (1977, p. 12) views science as a system that evolves through the resolution of problems. This model of scientific progress and rationality can be used to analyze the flow of groundbreaking research in international business. This section presents and defines the key elements of Laudan's model: problem and anomaly, theory and research tradition, progress and rationality. According to Laudan (1977, pp. 13-18), problems are the focal points of scientific thought. An empirical problem is anything that strikes the scientist as in need of an explanation within the context of the theories that he or she employs. An empirical problem may not be a concern for scholars working within a research tradition until rival scholars in the same research tradition have found a solution to it (and thereby created an empirical anomaly). The existence of an empirical anomaly counts against any theory in the research tradition that has not solved it. A theory is a proposed solution to an empirical problem. In conjunction with other theories, it offers empirically testable predictions about how objects in the domain behave. According to Laudan (1977, pp. 5 and 13-14), a theory's

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job is to "resolve ambiguity, reduce irregularity to uniformity, and to show that what happens is somehow intelligible and predictable." A conceptual problem is a "higher-order question about the well-foundedness of the conceptual structures" of the theory (that solves the empirical problem). The classification of problems as empirical or conceptual is somewhat arbitrary; many issues appear to lie somewhere in what Laudan (1977, p. 48) calls the "continuous shading" between empirical and conceptual problems. Conceptual problems are particularly important because they present obstacles to the synthesis of theories and they make it difficult for scholars who work in different theoretical frameworks to communicate with each other. Theories exist in networks which Laudan (1977, pp. 97-98) calls research traditions. Rather than predict or explain, the research tradition provides the context (or framework) for theories. A research tradition has room for mutually inconsistent theories; and a theory can be part of more than one research tradition. While theories are often short-lived, research traditions have a history of evolving through different (and perhaps contradictory) formulations. This evolution occurs through "modifications of boundary conditions, revisions of constants of proportionality, minor refinements in terminology and expansion of the classificatory network of a theory to encompass newly discovered processes or entities." These are the elements of Laudan's model of scientific progress and rationality. The core questions are "how does the scientist evaluate cognitive progress and is science a rational process?" Solved empirical problems are the basic unit of progress with respect to the intellectual goals of science. Progress occurs through the expansion of the domain of solved empirical problems and through the modification of theory in order to eliminate empirical anomalies and/or resolve conceptual problems. Problems are solved when, by means of a theory, scientists believe they understand why the situation put forward by a problem is the way that it is. The inadequate confirmation of theories and the eventual truth or falsity of theories are irrelevant as long as scientists believe they have the answer to the question. However, solutions are not permanent, and the threshold for an acceptable solution becomes higher over time (Laudan, 1977, pp. 22-26). At the heart of the concept of rationality is the idea of choice among competing theories. According to Laudan (1977, pp. 6 and 108), a scientist is rational when he or she makes "progressive" theory choices, that is, chooses the theory with the better record of solving problems (or the more impressive rate of progress in solving problems) and applies it as if it were true. 5 In summary, an analysis of a research tradition must begin by examining the theories that solve empirical problems in its domain and are the source of

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conceptual problems. These steps lay the foundation for evaluating the progress and rationality of the process of theory development. This task will begin with examining strands of research in a rough chronological order. They include: (1) industrial-organization theory, (2) internalization theory, (3) the eclectic theory of international production, (4) transaction-cost theory, and (5) the internalization model and network theory of Nordic research. 6 The emphasis here is on the process of theory development in international business, because Dunning (1993 and 1998) and others have covered the content of that research. 7 Later this research process will be evaluated in the context of Laudan's model.

INDUSTRIAL-ORGANIZATION THEORY Barriers to competition and their effect on the structure of competition within an industry lie at the core of industrial-organization theory. Where barriers to competition are important, neoclassical economic assumptions of perfect markets no longer hold because new firms cannot enter the market at low cost. Firms with capabilities that rivals cannot duplicate at low cost derive market power from the lack of competition. In the neoclassical tradition of the late 1950s, the movement of all capital was explained as a response to interest rate differentials caused by temporary market segmentation. Foreign direct investment was viewed as an equilibrating capital flow, as well as a transitory phenomenon that would cease when returns to a given level of risk were again the same (Calvet, 1981, pp. 13 and 45). The empirical problem was that the theory was inadequate; it could not explain the observed behavior of some firms headquartered in the United States (Dunning, 1958). These finns borrowed overseas to finance the foreign investment (Hymer, 1960, pp. 12-13) and forsook simple exporting to invest in foreign sales or operating subsidiaries for motives that did not include taking advantage of interest rate differentials (Southard, 1931, pp. 113-132). Hymer's (1960, p. 1) solution was to demonstrate why control (which he defined as a percentage of ownership) over the foreign assets was important for some investors. For that purpose, Hymer applied Bain's (1956) industrialorganization theory of domestic barriers to competition to the international investments of firms. Control over foreign assets would allow the foreign investor to change the competitive environment in his favor, because he could now fully exploit the return on his skills and abilities to offset the inherent disadvantages of operating in a foreign market (an important implicit assumption in his theory). Hymer's (1960) challenge to the inner core of the research tradition of capital movements changed it so fundamentally that one could say that his work brought

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a new research tradition into being, one based on the distinction between the behavior of foreign direct and portfolio investors (Fig. 1). 8 In abandoning the neoclassical assumption of perfect markets and demonstrating how foreign direct investment flourished in imperfect markets, Hymer made the problem of "why investors want to control foreign affiliates" so important that any other theory of foreign direct investment now had to provide an answer to that question or be weakened by an important empirical anomaly. Hymer's dissertation was not published until 1976 - over 15 years after its writing. Thus Hymer's ideas reached many in the academic community through the work of other scholars, such as Kindleberger (1969), Johnson (1970), Aliber (1970), Ragazzi (1973) Agmon and Lessard (1977) and Caves (1971). The common thread is the search for means by which an international firm could create and exploit barriers to entry and thus compensate for the higher costs of operating in a foreign environment. Kindleberger (1969, pp. 23-26) identified specific intangible assets which create a monopolistic advantage, particularly in the markets for knowledge and capital (Dunning, 1993, p. 71). The effect was to improve the clarity of Hymer's theory and thus reduce conceptual problems. Johnson (1970, pp. 35-39) argued that imperfections in factor markets for knowledge or capital could explain the foreign direct investment process. In the context of a firm's controlling its technology and thereby being able to price as a discriminating monopolist, he brought the concept of market failure into the literature. However, he used the concept to explain a firm's pricing strategy when it has market power (an industrial-organization perspective) rather than when it is efficient relative to other forms of economic organization (a transaction-cost perspective). Aliber (1970), Ragazzi (1973) and Agmon and Lessard (1977) analyzed capital markets as potential sources of monopolistic advantage due to market imperfections in pricing and information available to the investor. Aliber (1970, pp. 15-17) argued that this price discrepancy could explain the pattern of foreign direct investment within a restrictive environment of time and nationality. Ragazzi (1973, p. 33) explained how portfolio and direct investments might be substitutes for each other. Agmon and Lessard (1977) contributed to theoretical development by integrating the economic theory of industrial organization and the finance theory of investor portfolio diversification and anticipated the direction of future research by emphasizing the multinational firm. Caves (1971, pp. 6-7) went beyond factor inputs to analyze product market imperfections. Drawing upon Johnson's work, he considered knowledge to be a public good that could be "transferred to other national markets at little or no cost" and would enable the firm with a differentiated product to earn excess

18

CHRISTINE J. WEISFELDER

Southard (1931) (motivesforoverseasdirectInvemmt)

Bain (1956)

(do,...tlcb.,d.mmco~) Dunning Hymer

(1960) (tMmaUomdIwrim to compeU~m) v Kindleberger (1969) (daniflca~. of n..t~ impedVctions, rentst h n ~ ama pomr)

j

AJiber (1970) ~ (k)reign~d.mgo ml c~tal ~ U

(1958) (foreigndirKt ImiMmit j in Europe)

inmmlVcU~)

Johnson (1970) (mrketbilure in Imov~l~)

Caves (1971) (productdlfkrmtJa~n,

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hortzontadinVoraUon)

0973) immtl~)

1 Agmon & Leuard 11977) (r~kdlv,rsm~tio.) Industrial-Organization Theory. Sources: The literature shown in this figure. Fig. 1.

profits. Caves' theoretical analysis extended the domain of the research tradition to include the multinational firm's use of its product-knowledge asset in foreign markets and to view explicitly foreign direct investment as an alternative to exporting and licensing.

Internationalization and the Multinational Enterprise

19

To summarize, industrial-organization theory is based on the assumption that operating overseas is more costly than doing business at home. To be successful, the multinational enterprise operating overseas through direct investment has to create offsetting advantages for itself. Imperfections in factor (knowledge and capital) and product markets are offered as partial explanations of why firms are able to exploit market power in order to own affiliates overseas. Industrialorganization theory explains success in foreign markets, but not necessarily why the firm should attain that success through foreign direct investment (Lizondo, 1991, p. 139). While the domain of this early phase of the research tradition was the decision of firms based in the United States to invest (or not invest) in foreign subsidiaries, the research contained the seeds of a shift in focus from the investment decision to the firm making the decision. Foreign direct investment was also coming to be seen not only as an alternative to portfolio investment but also to other means of entering foreign markets (such as exporting or licensing). The common foundation of the transaction-cost theories that followed Hymer and Kindleberger's industrialorganization based theories has been Coase's (1937, pp. 386-387) observation that economists and people in the "real world" use the term "finn" differently. In an effort to bring these two groups into congruence, he concluded that firms exist because there are costs to using the price mechanism to allocate resources. When the costs of discovering the price and negotiating the contract are too high, the transaction is brought into the firm. THEORIES

DEVELOPED IN THE LATE E A R L Y 1980s

1970s AND

The eclectic theory (or paradigm) of international production and internalization theory were both developed at The University of Reading in the later 1970s. The two share many of the same theoretical antecedents in the literatures of industrial organization, international trade, and market imperfections and failure. Internalization theory will be discussed first, because Buckley and Casson (1976) preceded the formal introduction of Dunning's (1977, 1979) eclectic theory of international production. However, Casson (1979) and Rugman (1981) clarified and focused the initial presentation of internalization theory, so that one can argue that the two theories developed interdependently at much the same time. Internalization Theory Internalization theory is rooted in the general equilibrium theory of classical economics. More specifically, it is a product of tensions of the 1930s when Hayek

20

CHRISTINE J. WEISFELDER

(1937), Lange, and Taylor debated whether economic activity should be organized in the public or private sector (central•planning versus markets) (Casson, correspondence, 22 and 28 October, 1998). A central concern in internalization theory literature is the conditions when it is more efficient to organize economic activity in an internal market (central planning within a firm) or in an external market (trade among autonomous entities) (Casson, 1979, Ch. 3). Robinson (1931), Kaldor (1934), Coase (1937), and Penrose (1959) provide the theoretical foundation for internalization theory (Buckley & Casson, 1976, pp. 36-37; Casson, 1985, p. 1) (Fig. 2). Robinson (1931, pp. 36-37 quoted in Casson, 1983, pp. 4--5) asserted that the function of management is to restore an organization toward an equilibrium at times of change; an increase in the pace of change creates the need for more managers to maintain the stability of the system. Coordination of decisions is required when demand conditions in product markets and supply conditions in factor markets change frequently, unpredictably and by large amounts, but coordination must pass through one brain; it is a fixed, indivisible and dynamic factor (Kaldor, 1934, p. 75, quoted in Casson, 1983, p. 4). Firms can coordinate economic activity through use of administrative fiat to set internal prices, but there are costs (Coase, 1937). The objective of Buckley and Casson (1976, p. 2) was to provide a theory that would predict conditions of multinational firm growth. In her theory of growth, Penrose (1959) demonstrated that a firm's boundaries are determined by the 'area of administrative coordination' (Penrose, 1995, p. xi). The fundamental question of internalization theory is "under what conditions should the interdependent activities be coordinated by the management of a firm rather than externally by market forces?" (Buckley & Casson, 1976, p. 36). Coordination through external market forces depends on assumptions of profit maximization and perfect competition. Buckley and Casson (1976, pp. 32-33) maintained the assumption of profit maximization but relaxed assumptions of perfect competition (that trade occurs among many buyers and sellers all of whom have complete knowledge of prices). This allowed them to analyze imperfect competition in markets for intermediate products (semi-processed goods and knowledge embodied in patents and human capital). In imperfect markets, tradeoffs in relative (measurable) costs explain whether a multinational enterprise services a foreign market through exports, licensing or foreign direct investment. Trade in the external market occurs up to the margin where the gains from additional trade are less than the transaction costs incurred. At that point, economic agents have a mutual interest in reducing transaction costs by means of employment contracts, ownership of real assets and common ownership of complementary assets which are linked by means of flows of intermediate products (Casson in Rugman, 1981, p. 15).

Internationalization and the Multinational Enterprise

21

Kaldor (t934) {cooRIim~ a Ilxmlandbe~rlsil~favor)

Robinson {t931) (minim m oq,mbdm)

I I.laytk (1937) (wl~ vas~ um,I planninll)

. Coue (t937) ( m ol fmmtlm m momdUdut Um raRIms)

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/~lanmamn1197661 (lxt~ fdlm I..wlm~ Informtlona . ~ good)

• lchlan & Damml2/t 9"/21 ---(~,~/dglm-"-----) . . . . . .

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,, Bucldey & Canon (1978) (Internalization of marklD for knowledge & Intwmedlllte products)

/

/

(Intm'mdlzatlon)

l

Rugman 11981) (Internalization within the MNE)

Fig. 2.

Internationalization Theory of the Multinational Enterprise.

Sources: Bucldey and Casson (1976, Ch. 2, Fn. 2); Casson 0979, Ch. 3, Fn. 1); Casson (1983, pp. 2-8) and Casson 0998).

In time, the internalization process represents the multinational firm's attempt to perfect an imperfect market as well as a reaction to market imperfections in final goods markets through the exploitation of rent-seeking opportunities (Buckley, correspondence, 9 November, 1998). Thus, internalization is "the process of making a market within the firm" (Rugman, 1981, pp. 28, 50-51). A multinational firm is the consequence of internalization across national boundaries.

22

CHRISTINE J. WEISFELDER

Eclectic Paradigm of International Production Dunning's research has woven together an eclectic (that is, carefully selected yet diverse) collection of economic theories. He took on the problem of explaining why firms produce overseas. 9 At the heart of Dunning's work is the analysis of the competitive advantages of countries and firms in terms of two determinants, locational and ownership advantages. Influenced by the work of Buckley and Casson (1976), Dunning extended his theory to explain the use of locationai and ownership advantages within the firm (as contrasted to selling them in their own right to foreign firms). This third determinant which he called internalization advantages was intended to complement the location and ownership determinants (Dunning, 1991, pp. 122-123). Dunning's contribution was not to refute a previous theory, but rather to synthesize what others had done, based on his own extensive first-hand understanding of multinational firms (for instance, Dunning, 1958 and 1973). Industrial-organization theory, theory of the firm (Coase, 1937) and neoclassical theories of trade (Heckscher, 1919; Ohlin, 1933; Samuelson, 1948; Mundell, 1957) are at the foundation of Dunning's work (Fig. 3). Vernon's (1966) product cycle and Hirsch's (1976) model influenced Dunning and others through their recognition of trade and investment as alternative ways of reaching foreign markets. Vernon recognized the importance of technological capacity in the form of the ability to upgrade natural endowments and human resources in a differentiated product. A decade later Hirsh analyzed the relative costs of exports and foreign investment to explain the timing of a firm's entry into a foreign market and the conditions that would govern the choice of exports versus direct investment (or the location of investment). Horst's (1972) finding that size of firm explained both trade and trade plus investment was an antecedent that never integrated both concepts into a single theory as Dunning has done (Dunning, 1977, p. 398). Consideration of trade and investment as alternative ways of reaching foreign markets is at the core of Dunning's work in determinants of locational advantage. The capability for foreign production, such as size, monopoly power, and better ability to obtain and use resources, determine which firms have advantages over other firms producing in the same location (Dunning, 1977, p. 401). These ownership advantages were taken from industrial-organization theory (see Fig. 1). Internalization advantages explain the desire and ability of enterprises to allocate resources through their own control procedures (rather than through market mechanisms). Building on the theory of the firm (Coase, 1937), Dunning (1977, p. 402) argued that firms internalize activities in order "to avoid disadvantages

23

Internationalization and the Multinational Enterprise Iniiltutloln llddno Invlitmlint

Fixllkln I n v ~

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s (SeeFlgureI)

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(rddw botorpdcm)

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Fig. 3.

Eclectic Theory o f International Production.

Sources: Dunning (1977, pp. 3 9 6 - 4 0 2 ; 1979, pp. 2 7 0 - 2 7 4 ) .

or capitalize on the advantages of imperfections in external mechanisms of resource allocation." In common with internalization theory and transactioncost theory (to be discussed below), Dunning relied on the work of Williamson (1971 and 1975a) and McManus (1972) to analyze the relative costs and benefits of internal mechanisms. The implications of failure in the market for knowledge influenced Dunning's theory through Magee (1977) who related the observed behavior of multinational firms to research on property fights and the 'appropriability' of private

24

CHRISTINE J. WEISFELDER

returns from investment in information (Arrow, 1962, 1969; Demsetz, 1969; Johnson, 1970; Alchian & Demsetz, 1972). Magee attributed the success of multinational enterprises to their ability to obtain for themselves the return representing the value of their technology to society. Buckley, Casson and Dunning worked in close proximity at The University of Reading and influenced each other. For example, Buckley and Casson's (1976) work on internal versus external markets took Dunning (1977) beyond trade and industrial-organization theory, and Casson's (1979) refinement of internalization theory incorporated the insights of Arrow (1969 and 1975), Alchian and Demsetz (1972) and Williamson (1975b) which Dunning had used. In contrast, while transaction-cost theory shares many theoretical antecedents with the internalization and eclectic theories, it was developed independently of The Reading School.

Transaction-cost Theory With transaction-cost theory, the emphasis shifted from why firms grow (by exploiting a monopolistic advantage in foreign markets or by bringing an imperfect market into the firm) to the choice of using spot markets (contracts) or hierarchy (firms) to organize economic activity in foreign markets. At the heart of transaction-cost theory is the institutional organization of economic activities, especially the choice between markets and firms. An underlying assumption is that this choice is based on the relative costs of organizing economic activity within the two forms. Transaction-cost theory predicts when firms will exist through identification of the kinds of transactions in which firms are more efficient institutions (in terms of net costs) than markets (trade and licensing) (Hennart, 1982, p. 5). By implication, transaction-cost theory also predicts when markets, franchising or long-term contracts are more efficient forms of "enterprise" than firms (Hennart, correspondence, 1 June 1998). In common with scholars at The University of Reading, Hennart's work is based on Coase (1937), Arrow (1962), Alchian (1969), Williamson (1970 and 1975b), McManus (1972), Alchian and Demsetz (1972), and Arrow (1974). However, these insights into institutional governance, interdependence, property fights, and market failure have been applied to a framework of social organization (Fig. 4). Hennart's (1982) emphasis on the importance of contractual relationships is taken from Williamson (1970, 1975b) who integrated contract-law theory with Coase's (1937) groundwork on transactional costs. Williamson analyzed the relationships among forms of institutional governance and conditions of uncertainty and dissemination. He concluded that firms are more efficient than markets under certain conditions: (1) a large volume of

Internationalization and the Multinational Enterprise

25

co=== (t ~7) (==iNN¢=~ tl~t sm

Hennmri (1982)

(tmnuctlon-co~theory) Fig. 4. Transaction-CostTheory. Sources: Hannart (1982, p. 28).

information, (2) a small number of engaged parties, (3) recurrent long-term exchanges, and (4) conditions of uncertainty (especially when significant dedicated assets needed to be acquired). McManus' (1972, pp. 90--91) argument that there are economic reasons to internalize the activity within the firm when producers have the ability to impose uncompensated losses or benefits on other producers brought interdependence into transaction costtheory. ~° However, property rights must be honored if firms are to be efficient (Alchian & Demsetz, 1972). Arrow's (1974, p. 20) analysis of failure in the

26

CHRISTINE J. WEISFELDER

market for information was also incorporated into transaction-cost theory. 11 Market prices are used as the basis of decisions only for goods that are traded frequently enough to justify high startup costs. Characteristics of the goods and services traded will determine whether markets or firms are the more efficient institution (Hennart, 1982, p. 36). Hennart's contribution has been to bring these insights together into a unified international framework. His theory now explained the vertical as well as horizontal expansion of multinational finns and the decision of firms to acquire their own production facilities overseas rather than have licensees or foreign imitators produce for them (Hennart, 1982, pp. 21-22). In summary, transaction-cost theory is a predictor of institutional choice that views firms and markets as alternative means of organizing economic activities. It rests on an assumption that social organization is needed because the interests of the individual and society may diverge. The organization of society requires communication, a means of curbing bargaining and methods to reward individuals, but these activities impose costs. The relative costs of these activities in differing environments determine the institutional choice (Hennart, 1982, pp. 28-30). Internalization theory also addresses the problem of where to draw the line between markets and firms, but its emphasis is on the need to replace an inefficient external market with an internal market - the firm. By the late 1970s, the core of the international business research tradition had shifted away from industrial-organization theory. The eclectic paradigm, internalization theory and transaction-cost theory were competitors in explaining international business activity. Transaction-cost theory was developed independently but in response to similar perceived empirical problems, notably the inability of industrial-organization theory to explain the existence and growth of multinational enterprises. ~2 These new approaches were demonstrating a greater rate of progress by predicting the conditions for the existence of multinational enterprises as well as explaining the effects of market imperfections (a solved problem, for the time being at least). Nordic School

Some research traditions grow by extending into the domain of competing theories. An example is the explicit recognition that theories of foreign production and the multinational enterprise must address problems of strategic behavior if they are to be dynamic. The Nordic school has looked for solutions not to problems of why firms go overseas but rather to problems of how foreign direct investment takes place in terms of the underlying forces of a process. (Dunning, of course, also addressed the why, where and how - but differently.) The Nordic

27

Internationalization and the Multinational Enterprise

research tradition questions some of the basic assumptions of the particular theories presented above - for example, that the multinational enterprise is efficient and that production is the most important activity (Bjtirkman & Forsgren, 1997, pp. 16-17). The historical antecedents of Nordic research emphasize sequential growth, behavior and the context of decisions (Fig. 5). At the foundation of this work is Sune Carlson's observation that "it is against human nature to do international business" because operating overseas involves tentative steps into unknown ¢mbon (1951,1914)

Aharon1119e6)~~ ( - , . , w ~ d,d,~ m.~)

\

\ Johanson& Wekkwzhdm,Paul (I~S) For~ren & Johanson (lm) (w~dhmw c ~ . )

Johanson& Vahlne(1977) (Woamd~)

Pfeffer& 8alancik(t978) (mowced m m ~ fJ,:a,dy,rod codem d , h i ~ Inm,,,'poWe)

1

Johmson & ~ (1988) (complz~yofe~amp zad.m~k dnW~n)

( ~

lat~lqmd~n~)

Johammn& Vahlne(1990) (Rpw~,,U knovd.~k ~ force

pnmma~kal ~

~

avoidam~)

Nordic Research. Sources: Johanson and Vahlne (1977), Johanson and Mattsson (1988), Forsgren (1989), BjOrkman and Forsgren (1997), Petersen and Pedersen (1997). Fig. 5.

28

CHRISTINE J. WEISFELDER

territory rather than a preliminary rational choice based on economic analysis (Bj0rkman & Forsgren, 1997, p, 12). Penrose's (1959) theory of knowledge and change in organizations established the assumption that only direct experience provides knowledge of foreign operations (Bj6rkman & Forsgren, 1997, p. 13). Cyert and March (1963) introduced concepts to define the firm as a behavioral (rather than economic) entity, namely, bounded rationality, uncertainty avoidance, organizational learning, quasi-resolution of conflict and sequential attention to goals in its domain (Bj0rkman & Forsgren, 1997, p. 13)) 3 The work of Aharoni (1966) pointed to the relevance of behavioral research in international business through his observations of how decisions to go international were actually made. Pfeffer and Salancik (1978) placed explanations of a firm's behavior into a framework where organizational effectiveness is the consequence of meeting an external standard (rather than meeting standards of internal efficiency) - a resource-dependence approach. The organization's environment (or context) is an important determinant of behavior because it is the source of constraints. This approach contrasts with theories presented above where the firm's environment is taken as a given rather than brought into the model. The initial methodology involved case studies (often of Swedish firms) at the level of subsidiaries as well as headquarters (Carlson, 1951, 1974). For this reason, the perspective of Nordic scholars tended to shift to lower management (instead of top executives) and to affiliates at the periphery (instead of headquarters) (Bj6rkman & Forsgren, 1997, p. 14). The Nordic tradition has two, closely related, branches - the Uppsala internationalization model and network theory. The theoretical antecedents discussed above are common to both approaches. The differences come from the assumed characteristics of firms engaged in the internationalization process. In the Uppsala model, the firm is small (or medium-sized) and lacks experience in foreign markets; in network theory, either the firm or its markets (or both) are internationalized (Johanson & Mattsson, 1988, pp. 475--484).

The Uppsala Internationalization Model The Uppsala School emphasizes that market knowledge acquired through experience is the driving force of international investment. At its core are assumptions of psychic distance (Johanson & Wiedersheim-Paul, 1975) and establishment chains (Forsgren & Johanson, 1975). Psychic distance refers to factors that disturb the flow of information between a firm and its market, such as differences in language, culture and political systems (Johanson & Vahlne, 1977, p. 24). Establishment chains were observed in case studies where firms over time made successively greater commitments to a foreign market, beginning with occasional export and sometimes arriving at sales and/or production

Internationalization and the Multinational Enterprise

29

subsidiaries (Johanson & Vahlne, 1977, p. 24). Investment decisions are viewed as an incremental process wherein commitment to a foreign market increases with reduction in psychic distance over time. Managers are characterized as risk avoiders rather than risk takers, and knowledge is perceived as an asset acquired through individual action rather than as an abstract resource (Bj6rkman & Forsgren, 1997, pp. 12-13). Network Theory While network theory and the Uppsala internationalization model share common theoretical antecedents, the former emphasizes the firm as a coalition of interest groups using a "loose coupling" image (Cyert & March, 1963). The multinational enterprise is assumed to have a history of specific relationships with other companies and, as a consequence, a position in a network of interdependencies in the exchange of resources. As an organization, the multinational enterprise needs resources that are often controlled by other institutions; its survival is dependent on outsiders (Pfeffer & Salancik, 1978, pp. 2-5). This view of the multinational enterprise requires that "market" be defined in a different way. No longer is it the external and autonomous "market" of economics; instead, it is an environment where parties are mutually dependent upon each other. In network theory, investments in relationships are valuable assets because the resources controlled by one company differ from those created by any other company, even another company in the same industry. Thus, links with suppliers, customers, and competitors are emphasized, because collectively they determine the strength of the network (Forsgren, 1989, pp. 34-35). A firm's position in the network defines its opportunities (and restrictions) for future strategic development; it is an intangible "market asset" partially controlled by the firm (Johanson & Mattsson, 1988, p. 474). The theory's emphasis on linkages as assets reflects its roots in industrial marketing, purchasing and distribution, where long-term customer-supplier relationships are critical. The assumption is that suppliers and customers need to know each other well if they are to carry on significant business with each other (Johanson & Mattsson, 1988, pp. 469--471). The sharp "market-versus-firm" distinction of internalization and transactioncost theory is now challenged by a model of a network of organizations linked by reciprocal transactions and relations (trust). The distinction between "firms" and "markets" has become blurry - that is, relationships within the coalition might be more "market-like" than assumed in transaction-cost theory, and relationships with the external economic environment might be less "market-like" (Bj6rkman & Forsgren, 1997, pp. 15-16).

30

CHRISTINE J. WEISFELDER

The realization in network theory that the competitive advantage of a multinational firm comes from the governance of a network of units has tied this research tradition to Dunning (1988), but the process has been viewed through another lens. In network theory, foreign investment (by means of acquisitions) can be made to enhance a firm-specific advantage, such as the firm's ability to cope with interdependencies within the network. It might not be a form of market entry but rather a means for subsidiaries to enhance their operations in local markets. In fact, it might be initiated and carded out at the subsidiary level even if the official recording is made on the books of the parent company (Forsgren, 1989, pp. 4-5; and correspondence, 14 October, 1998). TO WHAT EXTENT DOES THE RESEARCH TRADITION OF INTERNATIONAL BUSINESS CONFORM TO LAUDAN'S MODEL? Laudan's (1977) model analyzes the process of scientific inquiry through examination of the empirical and conceptual problems and theories of a research tradition. He uses domain and methodology to define the boundaries of a research tradition. The methodology of how a theory is formulated and proven determines in part whether proposed theories are taken seriously by other scholars in the research tradition. Empirical Problems and Domain As the multinational enterprise evolved, the empirical problems to be solved changed over time. In an introspective discussion of his research Dunning (1991, pp. 118-1120) notes how the questions addressed by earIy theories have differed. In the Hymer-Kindleberger tradition, the initial act of investment is the focus of research to understand the growth of foreign direct investment from the United States into Canada and Europe. Industrial-organization theory explains why some key factors of production are transferred overseas (as an alternative to trade) and emphasizes the critical role of control through ownership of assets overseas. Hymer's production is foreign production wherein part of a country's GDP is under the ownership (and control) of foreigners. Through the concept of ownership advantages, the eclectic paradigm of international production has incorporated this insight and gone on to explain the level and pattern of foreign-value activities of firms and/or countries. With internalization theory showing why firms choose to extend their boundaries across borders instead of relying on cross-border markets, the focus has shifted to the institution engaging in foreign direct investment. Later theories also ask different

Internationalization and the Multinational Enterprise

31

questions. Hennart (1994b, p. 193) examined institutional choice by means of mechanisms that minimize organizing costs. In the Nordic school, a small firm's initial decision to enter foreign markets and the firm's role in a web of relationships have been the focus of interest. Today, a firm can be a multinational enterprise without owning assets overseas (Wilson & Dobrzynski, 1986). Throughout this process, the United Nation's (1982, 9) definition of a multinational enterprise has held: "an enterprise . . . in which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of o t h e r s . . . " Current empirical problems (and thus also the domain) of the research tradition have shifted to understanding more fully non-equity forms of international business acknowledged by this definition. The boundaries of the domain are not consistently defined among those who work in the research tradition, and the actual domain of the research tradition is determined at the level where theories are tested empirically. Historical antecedents, such as the roots of internalization theory in the debate of central planning versus markets, shape the limits. The internalization perspective holds that: (1) private enterprise (rather than the state) should decide where the boundaries between firms and markets should be drawn, and (2) competition (through entry and exit) will select the more efficient scale and scope of the firm within a given environment. The domain of internalization theory includes both central planning (within the firm) and market-based prices (between firms), It is larger than that of the other theories presented in this paper; because it includes the organization of all economic activity - not just that of multinational enterprises (Casson correspondence, 22 and 28 October, 1998). Casson (correspondence, 19 June, 1998) has noted that he (and possibly Buckley) view international business as a field of applied economics (that would include public-sector institutions), while Dunning and Rugman view international business as a legitimate self-contained field. The range of empirical problems addressed in the research tradition is wide, but hypotheses have been tested in the context of smaller special theories nested in the theories of industrial organization, international production, internalization, transaction costs, internationalization and/or networks. In the special theories, restrictions are imposed through careful specification of the variables. Because each general theory explains the existence of foreign production and multinational enterprises somewhat differently, each test of a special theory within it solves different empirical problems. Indeed, the general theories have been like small research traditions within a larger one. As the scope of empirical problems grew, the boundaries of the research tradition's domain have grown as well, a consequence of the changing characteristics

32

CHRISTINE J. WEISFELDER

of international institutions and of the generalization of theories to include problems that have been addressed by rivals. Shifts in the core have occurred not through revolution but rather through the combination of existing theories in new ways. The implication is that social scientists who want to break new ground benefit from understanding the work done outside their immediate research traditions, and that international business, at least, has a diverse set of interdisciplinary roots. The eclectic theory illustrates this process of boundary growth. Although Dunning called his work a "theory" at its formal introduction in 1977, his explanation resembles a complex of theories or a conceptual framework at several levels of analysis (both macro and micro). While the constituent parts have been subjected to empirical tests (e.g. Dunning, 1993, Ch. 6), the framework itself has been too complex to test as a whole. The implication is that the solved problems, empirical anomalies and conceptual problems of Dunning's work exist at the level of the constituent theories. Over the span of his research, Dunning's (1993, pp. 67-68) work has moved from a theory to a paradigm that strives to set "out a conceptual framework a n d . . , identify clusters of variables relevant to an explanation of all kinds [emphasis added] of foreign-owned output" (Dunning, 1993, pp. 67-68). This shift is significant because it acknowledges that theories in the domain must address the existence and growth of post-industrial multinational firms, whose activities span borders by means of contracts rather than ownership (Penrose, 1995, pp. xviii-xx; and Wilson & Dobrzynski, 1986).

Conceptual Problems Within theories, lack of conceptual clarity is a symptom of conceptual problems often caused by generality and imprecisely defined terms. Among theories, external conceptual problems often reflect the differing historical antecedents.

Generality and Imprecisely Defined Terms To the extent that a theory is too general to be tested, it presents a conceptual problem. Internalization theory and the eclectic paradigm have been attacked on these grounds. Internalization theory has been criticized for lacking enough restrictions to say anything incontrovertible (Buckley, 1983, p. 42). Dunning (1988, pp. 5-6; and 1991, p. 125) has noted that the eclectic paradigm lacks a consistent level of analysis and is accused of being a "shopping list" of variables. For both the solution has been an acknowledgement that the models are general theories and that only partial or special theories (under the general theory) can to be tested with specific restrictions (Dunning, 1991, p. 125;

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Buckley, 1991, pp. 16--18). Theories of differing levels of generality co-exist in a research tradition. Tautological definitions are a source of imprecisely defined terms. One example is Dunning's use of the term "internalization advantages." If multinational enterprises "internalize because they have internalization advantages, and they have internalization advantages because they internalize!" one has used a circular definition (Hennart, correspondence, 1 June 1998). Unmeasured determinants are also imprecisely defined terms. Transactioncost theory has been criticized for having unmeasured determinants since no one has quantified the importance of information, bargaining, enforcement and governance costs relative to transportation, production, marketing or distribution costs (Buckley, 1988a, p. 184). Thus, the term "transaction cost" as used in transaction-cost theory cannot be compared with "transaction costs" that determine the Pareto-efficient allocation of resources in the internalization model.

Inconsistent Definitions of Terms A source of confusion in comparing theories of international business is encountering common terminology but finding that words have been defined in different ways. Each definition reflects the underlying assumptions that a particular scientist brings to his or her research. "Transaction cost" (discussed above) is one example of a term that changes meaning from one theory to another. Another example is "firm." In orthodox neoclassical economic theory, the firm is a "black box" that transforms inputs into outputs of greater economic value. In Dunning's work, the firm is the entity that engages in foreign value-added activities; in his early research the activity was production (Dunning, 1988, p. 25, endnote 1; 1991, p. 117). Buckley and Casson (1976, p. 1) define the firm as "an enterprise which owns and controls activities in different countries," an approach that has been consistent in their work (Casson 1998, p. 1). Rugman (1981, p. 28) defines the firm as an institution that replaces the missing external market with an internal one. This is consistent with Buckley and Casson's (1976, pp. 36-37) view that the internal organization of a multinational firm is an approximation to a perfect market. In contrast, Hennart (1982, p. 28) views firms (and markets) as organizations that attempt to organize economic activities and defines the firm as a "set of [internal] contractual relationships" (1985, p. 794). Nordic research also deviates from traditional economic theory in its characterization of the firm as a learning organization. It is a heterogeneous unit where affiliates control different portfolios of resources and represent different interests that exert influence on strategy (Bjtrkman & Forsgren, 1997, pp. 12-13). In the Uppsala model, the firm develops its collective knowledge as it

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gains experience in international markets (Johanson & Mattsson 1988, p. 483). In network theory, a firm is a counterpart in a network that coordinates complementary interaction among all counterparts. Coordination does not occur through a central plan or the price mechanism of the traditional market model (although price can be an influence) (Johanson & Mattsson, 1988, pp. 470-471). The market surrounding the firm is as important as the firm itself to the analysis (Bj6rkman & Forsgren, 1997, p. 15). A last example of a term whose meaning changes across theories is the "rationality" of those who make decisions. In neoclassical economics, rational decisions are purposive in the sense that the firm (as the decider) always pursues the most efficient course of action (Mazzolini, 1981, pp. 85-86). In internal markets, a central shadow pricing system alters incentives to individuals (Bucldey, 1988b, p. 130). The public-good nature of information is a determinant of international expansion (Buckley, correspondence, 3 June, 1998). This purposive rationality is assumed in the theories with the strongest ties to neo-classical economics - industrial-organization theory, the eclectic paradigm, and internalization theory. In transaction-cost theory and Nordic research, the purposive rationality of neoclassical economics is set aside; decisions are made by agents who have the human attribute of bounded rationality - but for different reasons. In transaction-cost theory, decisions are made in the absence of complete information because the value of goods and services can never be measured perfectly. In such an environment, a tendency to opportunism can tempt agents to alter the terms of trade to their advantage. Since bargaining can be profitable for agents when prices are determined outside the market, activity is organized within a firm in order to protect it from such opportunistic behavior. Now incentives to individuals are altered by means of directives that supercede flawed market prices (Hennart, 1991, pp. 83-84). In Nordic research, those who make decisions work in an environment where knowledge about foreign markets and the alternatives available to them is incomplete. People in subsidiaries (as well as headquarters) are presumed to decide on the basis of psychic distance, risk aversion, and the impact of the decision on the exchange of resources among organizations in the network (Bj6rkman & Forsgren, 1997, pp. 12-13). Thus, bounded rationality motivates decision-makers to protect the network from the risks inherent in an unknown environment. Disagreement over Determinants

Although Dunning, Buckley, Casson and Rugman shared a common association with The University of Reading in the 1970s, the historical antecedents

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of their theories differ. Their disagreements enlivened the literature of the 1980s, both sides benefiting from critiques of their ideas. Points of contention centered on ownership and location advantages and the role of structural and transactional market distortions. 14 Dunning's work is rooted in traditional trade theory which (as noted above): (1) views the firm as merely a production unit that transforms inputs into more valuable outputs, and (2) predicts trade patterns by observing locational factors exogenous to firms. Drawing on industrial-organization theory, foreign firms are assumed to have ownership advantages (not possessed by indigenous firms) which existed before foreign investment was made. The creation of ownership advantages is not part of the theory. The firm's use of its advantages (the internalization or firm-specific advantage) came into the theory later as a consequence of Buckley and Casson's influence (Dunning, 1991, pp. 120-123). Rugman (1981, pp. 68-69) fueled the debate by asserting that the sources of Dunning's ownership assets were given (or exogenous) market imperfections that caused the internal market to develop in the first place. Moreover, he contended that in Dunning's work the firm-specific advantage had become locked into the multinational firm (or endogenized) in the form of an asset and a barrier to entry. He concluded that because an ownership asset is merely an endogenized firm-specific asset, internalization theory is more general than Dunning' s theory. Rugman's arguments forced Dunning to improve the conceptual clarity of his work and to argue for the importance of ownership advantages. Dunning (1980, pp. 9-10) began by distinguishing between inputs that all firms at a given location could use (such as natural resources, labor, market structure and government policies) and inputs that the enterprise created or purchased for itself only (such as technology and organizational skills - proprietary assets that could be used at different locations to create additional proprietary assets). Conceptually, Dunning found a relationship between location and ownership advantages, and because they are interdependent, he argued that one could not analyze one without considering the ramifications on the other. This conceptual progress also made the theory dynamic, since a firm's current ownership advantages are a reflection of previous location advantages of the countries where local production had taken place. This dynamic view foreshadowed the importance of networks. Later in the ongoing debate, Dunning (1988, pp. 2-5) responded to critics by distinguishing explicitly between: (1) ownership assets (Oa) derived from the proprietary ownership of specific intangible income generating assets in an environment of structural market distortions, and (2) ownership assets (Ot) used to capture transactional benefits (or lessen their costs) from the common

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governance of a network of assets at different locations in an environment of transactional market distortions. In a dynamic situation, Dunning argued that Oa and Ot are interrelated, and that successful multinational enterprises are often able to develop both. Furthermore, the capability of a multinational enterprise to use internal markets is distinct from its willingness to do so, and both aspects need to be a part of any explanation of their existence. Dunning's (1988, pp. 2-5) analysis demonstrated that both structural and transactional market distortions can be country specific, and thereby determine location. Multinational enterprises can gain by locating production in different countries in the absence of structural market distortions, but the characteristics of the countries themselves are not as important as the benefits obtained through risk diversification and transfer-pricing opportunities. The implication is that governments (through their political and economic policies) have a role in determining the pattern of international production. 15 After at least a decade of debate on ownership advantages, Dunning (1991, p. 117) stated clearly that the intent of his model is to explain the level and pattern of the foreign value-added activities of firms and/or countries. It was never intended to be an explanation of the multinational enterprise. Thus, variables that are exogenous in one model may be endogenous in others. Theories, as well as research traditions, have domains whose boundaries change; theories that appear to be similar may in fact be different but complementary. Over time, a theory that becomes more general through the absorption of other theories may evolve into a research tradition. The existence of a history and the establishment of a context for specific theories with testable propositions distinguish a research tradition from a theory, but the demarcation between these concepts may be less precise than Laudan's work would suggest.

Synthesis of Theories One goal of scholars has been to synthesize theoretical approaches by arguing for the generality of their own theoretical approaches and the categorization of a competitor's theory as less general (and thereby a special case of the general theory). Hennart (1994a, p. 193) has changed the name for his ideas to the "theory of institutional choice" to emphasize its core idea of minimizing organizing costs. He also has synthesized his work with strategic management literature to include explanations of hybrid institutional forms of organization within the framework of his approach (Hennart, 1991, 1994a). Casson (1998, pp. 27-28) has extended his analysis of the boundaries of firms to consider alternative institutional arrangements for the coordination of linkages. The growing importance of the Nordic school means that scholars have had to reconcile Scandinavian theory with their own ideas, and vice versa. Buckley

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(1988b, pp. 129-138) reconciled the internalization approach with markets and hierarchies and the Uppsala internationalization model. For the former, he noted how they complement each other in their emphasis on minimization of transaction costs. For the latter, he noted the limitations in its scope that applied to smaller companies investing abroad for the first time. In the same year, Johanson and Mattsson (1988, pp. 481-484) reconciled network theory with internalization theory and the Uppsala internationalization model by means of a system that classified situations according to the degree of internationalization of: (1) the firm, and (2) the market environment of the firm. They concluded that both internalization and internationalization theories leave out characteristics of the firm and market that are important and can be explained by networks. Casson (1994, pp. 16 and 40-42) evaluated the Scandinavian approach through analyzing the distinction between sequential and simultaneous market entry, defined in terms of exploiting economies of scope in knowledge and exploiting profitable market opportunities without delay, respectively. He reconciled the theories by adjusting for subjective beliefs about the similarity (or dissimilarity) of foreign markets. Experience that has value (when one can apply what is learned in one market to investments in another market) is emphasized in the internalization model. Experience overseas has less value when one assumes that foreign markets are dissimilar. Pre-empting competitors before technological knowledge leaks or expires is also supported by the internalization approach. Casson's analysis shows the importance of understanding a theory's underlying assumptions about the environment and goals of those who make decisions. On a more ambitious scale, Dunning (1998, especially pp. 1 and 27-31) has synthesized international business literature into his paradigm, now called the "dominant analytical framework for accommodating a variety of operationally testable economic theories of the determinants for foreign investment . . . and the foreign activities of multinational enterprises." He has argued that: (1) the content of most theories can be organized and interpreted by means of his eclectic paradigm, (2) the components complement each other, and (3) they are also context specific. Dunning's taxonomy is drawn from the determinants of international production - location, ownership and internalization advantages defined early in his work. Throughout, scientists appear to be locked into theoretical commitments made at early stages of their careers. While they stretch their theories to accommodate the findings of other scholars, they remain rooted in their earlier work and their historical antecedents (e.g. Dunning, 1998; Casson, 1994; and Hennart, 1991). They explain theoretical differences in terms of the goals and context of the research supporting competing theories - rather than show competing theories to be false - and they appear to accept these differences. After stating

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for the record the strengths of their positions (and the weaknesses of their competitors), they get on with other work.

Progress and Rationality of Science Has this research tradition of international business been rational in the sense of making progressive theory choices? For Landan, this is the bottom line. If choices among competing theories are made irrationally, how can one talk about progress or accept the solutions offered by scientific theories? According to Landan (1977, Ch. 1), the goal of the scientific process is to solve empirical and conceptual problems. The outcome of this process is theory that resolves ambiguity, reduces irregularity to uniformity and shows that events follow a somewhat predictable path. The research analyzed above appears to constitute a problem-solving activity. Over the years, the dominant questions have shifted from the foreign investment decision to the conditions conducive to the existence and growth of multinational firms and finally to the firm's role in a network of interdependent entities. The perceived greater rate of progress in solving problems, rather than the demonstrated falsification of theories, has induced researchers to abandon one question and take on another. Refutation of a theory would be difficult, since a theory is really a composite product of many solutions that have been taken as true in the past (Landan, 1977, pp. 27, 41). To the extent that a core of general theories, methodologies and a domain of research are now accepted as the basis for empirical research into more specific questions (Buckley, 1997, p. 221), there has been cognitive progress. According to Landan's (1977, p. 6) definition of rationality as the choosing of theories that provide solutions to problems, this has been a rational process. However, in fairness to Kuhn (1970), who argued that scientific decisions are irrational (or at least not fully rational) since they are strongly influenced by external factors (such as politics and propaganda), sociological and psychological factors have also played a role in theory choice. Laudan's view understates the importance of networking and personal relationships in theory development. For instance, the networking center of international business research was at Harvard University until the mid-1960s when it moved to The University of Reading where Dunning, Buckley, Casson and Rugman were all working. The "Reading School" became the academic equivalent of a brand name. Hennart's different approach to theory development is a consequence of working outside this group, and he has had to market his ideas to the academic community forcefully - in effect, develop his own brand. 16

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Without such a brand, important contributions to the literature can be overlooked. One can take the work of Coase (1937) or McManus (1972) as examples of ideas that were not fully recognized at the time they were published. Even with a brand, the seeds of important ideas can be seen in the work of scholars (such as Dunning), but credit has gone elsewhere because the idea was not developed at the time. Furthermore, relative status and power have been important in theory choice. The junior status of Buckley and Casson made their theory a challenge to the establishment at The University of Reading. To gain support of the "Reading School," some incisive (but provocative) insights o f internalization theory had to be muted. On the other hand, the theory benefited from Dunning's synthesizing efforts, and controversy in the early years did much to create interest in both internalization theory and the eclectic paradigm (Casson, correspondence, 19 June, 1998). Yet, the traditional rational model holds, at least on the surface. As a consequence of the blind review of research for inclusion in journals and conferences, work appears to be evaluated on the theory itself and the evidence supporting it (internal factors). Theories build on each other rather than supplant each other, as a non-rationalist model of scientific process would predict. Still, rationality (and non-rationality), as defined by the relative use of internal and external factors in making scientific choices, may be a matter of degree rather than an "either-or" concept. By making rationality contingent on progress rather than the decision process, Laudan turns the definition of rationality around and avoids this dilemma. CONCLUSIONS In both the philosophy of science and in intemational business, the process of decision making is a central problem. In the former, the decision is made in the context of developing a research agenda; in the latter it is made in the context of acquiring and managing resources for an organization. In both fields, underlying assumptions about the rationality of this process have been challenged (Laudan, 1977, p. 3; Aharoni, 1966, pp. 30-31). However, in both areas of inquiry, the traditional model of decision making seems to miss the point. In organizations, decisions are not made by perfectly informed, value-maximizing managers (or teams of managers) who can speak for the "central mind" (Mazzolini, 1981, p. 86). Rather, an entrepreneur, defined as "behavioral man," must decide with restricted information and limited individual (or group) talent in an environment where alternatives are not neatly laid out. He or she must deal with multidimensional goals and sell the

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decision to the organization. The weapon of survival is the ability to "satisfice" or settle for an acceptable alternative instead of maximizing the goal; and the maker of the decision tries to avoid (or at least minimize) uncertainty (Aharoni, 1966, pp. 30--31). In the same spirit, international-business scholars appear to gather evidence rather than strive to refute theories. In fact, no theories have been abandoned because they were proven to be f a l s e . 17 Neither scholars nor entrepreneurs make decisions in a vacuum. The perceived problems, potential courses of action and likely consequences of decisions are all products of the social system in which the decision maker operates. One implication is that analysis of decisions cannot be divorced from the history of the theory (or organization), from the personalities and roles of the participants in the system, nor from the continuous stream of activities that provide feedback to the decision maker and redefine problems (Aharoni, 1966, p. 45). At the end of the day, it may not matter whether internal or external factors determined the choice among competing theories as long as the choice is progressive. If the choice has provided a solution without creating undue new empirical or conceptual problems, then it is rational. Thus, what is rational may be contingent on time, place and context. These insights have other implications for scholars engaged in international business research. The first is that the goal of their research endeavors will continue to be solving problems rather than searching for an absolute truth, because the environment of what is studied is unstable and because one can never prove that a theory is true, only that some part of it is false. Another implication is that the distinction between a research tradition and a theory will remain blurred as advocates synthesize the insights of other disciplines and argue that other theories are merely special cases of their more general approach. The challenge continues to be to develop theories that are general enough to explain new forms of post-industrial organization made possible by technological advances. It is remarkable that the insights of Robinson (1931), Kaldor (1934) and Coase (1937), who analyzed the implications of the changing environment of the 1930s, continue to hold today when change takes place at an even more rapid pace. Today's research is progressive in the sense that it builds upon a foundation of solutions constructed by those who came before.

NOTES 1. Actually, according to the United Nations definition of a transnational corporation, the multinational enterprise needs not engage in foreign production but rather be "an enterprise, comprising activities in two or more locations, regardless of the legal form and fields of activity of these entities, which operates under a system of decision making,

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permitting coherent policies and a common strategy through one or more decisionmaking centres, in which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of others, and, in particular, to share knowledge, resources and responsibilities with the others." This key theoretical distinction of "linked by ownership or otherwise" will be discussed later in the text (United Nations Economic & Social Council, E/C 10/1982/6. 5 June 1982, p 9). 2. For the purposes of this paper, intemational business is defined as investment that crosses international borders. 3. There is some indication in the literature that scholars were thinking explicitly about the elements discussed above when they derived solutions to problems. Work that considers explicitly problems of scientific method include Casson's introduction in Rugman (1981, pp. 15-17), Grosse (1986), Buckley (1988a and 1990) as well as the debate about whether internalization theory is a general or predictive theory (Buckley, 1983, p. 42; Casson, 1982, p. 26). 4. Evaluating Laudan's model is outside the scope of this paper, but a thoughtful critique can be found in Newton-Smith (1981, pp. 185-195). Laudan's critics attack the weaknesses of his critical assumptions that: (1) one can judge the problem-solving capacity of a theory without making a judgment about its truth (or degree of verisimilitude), and (2) the problem-solving effectiveness of a theory can be assessed by weighing the empirical problems solved by the theory against the anomalies and conceptual problems generated by the theory. 5. Laudan's approach parts ways with other rationalists (such as Popper & Lakatos) and non-rationalists (such as Kuhn & Feyerabend) in two ways. First, the goals of the scientific process differ. According to Laudan (1977, p. 18) the goal is to transform anomalous and unsolved problems into solved ones. According to other rationalists, the goal is to approximate the truth. According to non-rationalists, the effect is merely to supplant one theory with another one. Second, the principles of comparison differ. In Laudan's framework, theories are evaluated rationally when allegiance to them leads to solutions to scientific problems; a rational process is the consequence of choosing over time the theories with better records of solving problems. In contrast, other rationalists make progress contingent upon rational choice; when theories are evaluated according to internal factors that relate solely to the theory in question and its relationship to available evidence, this rational choice leads to progress. For their part, non-rationalists argue that sociological and psychological factors external to the theory play such an important role in theory choice that the process cannot be rational (Newton-Smith, 1981, Ch. 1). 6. To accomplish this objective, the domain of the research tradition had to be restricted. While the five strands of theory presented in this paper are representative of work in international business, they are by no means a complete presentation of research in international business. As a consequence, the contributions of some important scholars, such as those of Jean Boddewyn, Gunnar Hedlund, F. T. Knickerbocker, Bruce Kogut, Kiyoshi Kojima and David Teece, have received less attention than they deserve. 7. Some recent work includes Cantwell (1991), Lizondo (1991), Corley (1992), and Caves (1996). 8. Buckley (correspondence, 3 June 1998) has pointed out that before 1960, many isolated pieces of work contained the germs of this insight. An example is Dunning (1958, pp. 285-381).

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9. Dunning defined international production as "that financed by foreign direct investment " (Dunning, 1988, p. 25, endnote 1). Following Hymer (1960, p. 1), foreign direct investment is investment overseas made for the purposes of control. A multinational enterprise is "a multi-activity firm that engages in direct investment" (Dunning, 1993, p. 66). Multinational finns own and control foreign production facilities (and may trade with them). The term "eclectic paradigm" came into Dunning's work in the late 1980s (Dunning, 1988, p. 1). 10. This notion of interdependency foreshadows network theory (Forsgren, 1989) which will be discussed later. 11. In Johnson (1970, pp. 36-39) market failure is the consequence of the public good characteristics of knowledge assets, in the sense that its use by one party does not preclude its use by someone else. Yet this process of dissemination discourages the development of more technology because the developer reaps no reward unless he becomes a temporary monopolist. In transaction-cost and internalization theory market failure explains a firm's exploitation of a knowledge asset within its own organization rather than within a market, where prices do not reflect marginal income. These divergent perspectives raise the question of whether foreign direct investment restrains competition or enhances efficiency (Forsgren, 1989, pp. 20-25). 12. Both Casson (correspondence, 19 June 1998) and Hennart (correspondence, 1 June 1998) emphasize the development of transaction-cost theory outside The University of Reading network. 13. Kogut's (1983, pp. 38--44) analysis of foreign direct investment as a sequence of decisions provided a bridge between network theory, international financialdiversification theory, and the eclectic theory of foreign production. His focus on flexibility to transfer resources as the primary advantage of the multinational firm fits in with the emphasis on the value of links within the network. This flexibility would allow the multinational firm to arbitrage institutional restrictions such as those imposed by tax codes, overcome informational (or learning cost) externalities by having experienced personnel, and achieve joint production economies in global manufacturing and marketing. 14. Had internalization theory and Dunning's eclectic paradigm been completely incommensurable, this debate could not have taken place. Instead, Rugman and Dunning would have talked past each other without conflicting because the meanings of their words would have shifted to the point where they were not talking about the same thing. (For a fuller discussion of the incommensurability of theories, see Newton-Smith, 1981, pp. 9-13.) 15. See Boddewyn (1988) for an elaboration of this argument. 16. This insight came from Mark Casson. 17. Buckley (1988a, pp. 186--187) has listed ways that a theory of multinational activity could be refuted: a random pattern of multinational activity, a pattern of foreign direct investment that is contrary to expectations, a macro explanation, perfect diversification and risk avoidance, and a pattern of foreign market entry contrary to prediction.

ACKNOWLEDGMENTS I want to thank Jean B o d d e w y n for his encouragement and constructive comments. I also appreciate the suggestions made by Peter Buckley, Mark

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Casson, Mats Forsgren, Jean-Frangois Hennart, Jorma Larimo, Conti Meehan, D i c k W e i s f e l d e r , D a v i d W i l s o n a n d several a n o n y m o u s r e v i e w e r s .

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Calvet, A. L. (1981). A Synthesis of Foreign Direct Investment Theories and Theories of the Multinational Firm. Journal of International Business Studies, 12, 43~0. Cantwell, J. (1991). A Survey of Theories of International Production. In: C. N. Pitselis & R. Sugden (Eds), The Nature of the Transnational Firm (pp. 117-136). London and New York: Routledge. Carlson, S. (1951). Executive Behavior: A Study of the Work Load and the Working Methods of Managing Directors. Stockholm: Str6mberg. Carlson, S. (1974). Investment in Knowledge and the Cost of Information. Uppsala: Acta Academiae Regiae Scientiarum Upsaliensas. Casson, M. (1979). Alternatives to the Multinational Enterprise. London: Macmillan. Casson, M. (1982). Transaction Costs and the Theory of the Multinational Enterprise. In: A. M. Rugman (Ed.), New Theories of the Multinational Enterprise (pp. 24--43). London: Croom Helm. Casson, M. (1983). Introduction: the Conceptual Framework. In: M. Casson (Ed.), The Growth of International Business (pp. 1-33). London: George Allen & Unwin. Casson, M. (1985). The Theory of Foreign Direct Investment. In: P. Buckley & M. Casson (Eds), The Economic Theory of the Multinational Enterprise. London: Macmillan. Casson, M. (1994). Internationalization as a Learning Process: A Model of Corporate Growth and Geographical Diversification. In: V. N. Balasubramanyam & D. Sapsford (Eds), The Economics of International Investment (Ch. 3). Hants, UK: Edward Elgar. Casson, M. (1998). The Boundaries of Firms: A Global Systems Perspective. Unpublished working paper, The University of Reading, revised 20 December 1998. Caves, R. E. (1971). International Corporations: The Industrial Economics of Foreign Investment. Economica, 38(Febrnary), 1-27. Caves, R. E. (1996). Multinational Enterprise and Economic Analysis (2nd ed.). Cambridge, U.K.: Cambridge University Press. Coase, R. H. (1937). The Nature of the Firm. Economica, 4(November), 386~05. Corley, T. A. B. (1992). John Dunning's Contribution to International Business Studies. In: P. J. Buckley & M. Casson (Eds), Multinational Enterprises in the Worm Economy: Essays in Honour of John Dunning (Ch. 1). Hants, England: Edward Elgar, Cyert, R. M. & March, J. G. (1963). The Behavioral Theory of the Firm. Englewood Cliffs, N.J.: Prentice-Hall. Demsetz, H. (1969). Information and Efficiency. Journal of Law and Economics, 12, 1-22. Dunning, J. H. (1958). American Investment in British Manufacturing. London: George Allen & Unwin, Ltd. Dunning, J. H. (1973). The Determinants of International Production. Oxford Economic Papers, 25(3), 289-336. Dunning, J. H. (1977). Trade, Location of Economic Activity and the Multinational Enterprise: a Search for an Eclectic Approach. In: B. Ohlin, P. O. Hesselborn & P. J. Wijkman (Eds), The International Allocation of Economic Activity. London: Macmillan. Dunning, J. H. (1979). Explaining Changing Patterns of International Production: in Defense of Eclectic Theory. Oxford Bulletin of Economics and Statistics, 41(4), 269-296. Dunning, J. H. (1980). Towards an Eclectic Theory of International Production: Some Empirical Tests. Journal of International Business Studies, (Spring/Summer), 9-31. Dunning, J. H. (1988). The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies, 19, 1-31. Dunning, J. H. (1991). The Eclectic Paradigm of International Production: A Personal Perspective. In: C. N. Pitselis & R. Sugden (Eds), The Nature of the Transnational Firm. London and New York: Routledge, 117-136.

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Dunning, J. H. (1993). Multinational Enterprise in the Global Economy. Wokingham, England: Addison-Wesley Publishing Company. Dunning, J. H. (1998). The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity. Working Paper, Rutgers and Reading Universities, August. Forsgren, M. (1989). Managing the Internationalization Process. New York: Routledge. Forsgren, M., & Johanson, J. (1975). Internationell Fi~retagsekonomi. Stockholm: Norstedts. Grosse, R. (1986). On International Business as a Social Science Discipline. Working Paper Number 86-9, The University of Miami International Business & Banking Institute (October). Published later in Robert Grosse and Jack N. Behrman, Transnational Corporations, 1 (1 February, 1992), 93-126. Hayek, F. A. von. (1937). Economics and Knowledge. Economica, 4, 33-54. Reprinted In: F. A. yon Hayek (1949). Individualism and Rconomic Order. London: Routledge and Kegan Paul. Heckscher, E. F. (1919). The Effect of Foreign Trade on the Distribution of Income. Ekonomisk Tidskrift, 21. Hennart, J.-F. (1982). A Theory of Multinational Enterprise. Ann Arbor: University of Michigan Press. Hennart, J.-F. (1991). The Transaction Cost Theory of the Multinational Enterprise. In: C. N. Pitelis & R. Sugden (Eds), The Nature of the Transnational Firm (pp. 81-116). London and New York: Routledge. Hennart, J.-F. (1994a). International Financial Capital Transfers: A Transaction Cost Framework. Business History, 36(1 January), 51-70. Hennart, J.-F. (1994b). The Comparative Institutional Theory of the Firm: Some Implications for Corporate Strategy. Journal of Management Studies, (Spring), 193-207. Horst. T. (1972). Firm and Industry Determinants of the Decision to Invest Abroad: An Empirical Study. Review of Economics and Statistics, 54(August). Hirsch, Seev. (1976). An International Trade and Investment Theory of the Firm. Oxford Economic Papers, (July), 258-270. Hymer, S. A. (1960). The International Operations of National Firms: A Study of Foreign Direct Investment. Ph.D. Dissertation, Department of Economics, Massachusetts Institute of Technology. Published in 1976 by MIT Press. Johanson, J. & Vahlne, J.-E. (1977). The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8(1), 23-32. Johanson, J. & Vahlne, J.-E. (1990). The Mechanism of Internationalization. International Marketing Review, 7(4), 11-24. Johanson, J. & Mattsson, L.-G. (1988). Internationalization in Industrial Systems - A Network Approach. In: N. Hood & J.-E. Vahlne (Eds), Strategies in Global Competition. (pp. 287-314). New York: Croom Helm. Johanson, J. & Wiedersheim-Paul, F. (1975). The Internationalization of the Firm - Four Swedish Case Studies. The Journal of Management Studies, •2(3). Johnson, H. G. (1970). Efficiency and Welfare Implications of the International Corporation. In: C. P. Kindleberger (Ed.), The International Corporation (Ch. 2. pp. 35-56). Cambridge, MA: MIT Press. Kaldor, N. (1934). The Equilibrium of the Firm. Economic Journal, 44(March), 60-76. Kindleberger, C. P. (1969). American Business Abroad: Six Essays on Direct Investment (pp. 1-36). New Haven, CT: Yale University Press. Kogut, B. (1983). Foreign Direct Investment as a Sequential Process. In: C. P. Kindleberger & D. B. Audretsch (Eds), The Multinational Corporation in the 1980s (pp. 38-56). Cambridge, MA: MIT Press,

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Kulm, T. S. (1970). The Structure of Scientific Revolutions (2nd ed.). International Encyclopedia of Unified Science, 2(2). Chicago: The University of Chicago Press. Laudan, L. (1977). Progress and its Problems: Towards a Theory of Scientific Growth. Berkeley, CA: University of California Press. Lizondo, J. S. (1991). Foreign Direct Investment. In: Determinants and Systemic Consequences of International Capital Flows (pp. 68-82). Washington DC: International Monetary Fund. Magee, S. P. (1977). An Appropriability Theory of Foreign Direct Investment. In: J. S. Bhagwati (Ed.), The New International Economic Order. Cambridge, MA: MIT Press. Mazzolini, R. (1981). How Strategic Decisions are Made. Long-Range Planning, (June), 85-96. McManus, J. (1972). The Theory of the Multinational Firm. In: G. Pacquet (Ed.), The Multinational Firm and the Nation State. Don Mills, Ontario: Collier-Macmillan Canada. Mundell, R. A. (1957). International Trade and Factor Mobility. American Economic Review, 47(June), 321-325. Newton-Smith, W. H. (1981). The Rationality of Science. Boston, London and Henley: Routledge & Kegan Paul. Ohlin, B. (1933). Interregional and International Trade. Cambridge, MA: Harvard University Press. Pertrose, E. (1959). The Theory of the Growth of the Firm (lst ed.). London: Basil Blackwell. Penrose, E. (1995), The Theory of the Growth of the Firm (3rd ed.). Oxford and New York: Oxford University Press. Petersen, B. & Pedersen, T. (1997). Twenty Years After - Support and Critique of the Uppsala Internationalisation Model. In: I. Bjtrkman & M. Forsgren (Eds), The Nature of the International Firm (Ch. 6). Copenhagen Studies in Economics and Management, No. 11. Copenhagen: Handelshojskolens Forlag. Pfeffer, J., & Salancik, G. (1978). The External Control of Organization: A Resource Dependence Perspective. New York: Harper and Row. Ragazzi, G. (1973). Theories of the Determinants of Direct Foreign Investment. IMF Staff Papers, (July), 471-498. Robinson, E. A. G. 1931. The Structure of Competitive Industry. London: Nisbet. Rugman, A. M. (1981). Inside the Mmultinationals: The Economics of Internal Markets. New York: Columbia University Press. Samuelson, P. (1948). International trade and equalization of factor prices. Economic Journal, 58. Southard, F. A. (1931). American Industry in Europe. Boston: Houghton Mifflin Company. Vernon, R. (1966). International Investment and International Trade in the Product Cycle. Quarterly Journal of Economics, 80(May), 190-207. United Nations. Economic and Social Council. E/C 10/1982/6. (June 1982), 9. Williamson, O. (1970). Corporate Control and Business Behavior. Englewood Cliffs, NJ: PrenticeHall. Williamson, O. (1971). The Vertical Integration of Production: Market Failure Considerations. American Economic Review, 61(May). Williamson, O. (1975a). The Economics of Internal Organization: Exit and Voice in Relation to Markets and Hierarchies. American Economic Review: Papers and Proceedings, 66(May). Williamson, O. (1975b). Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press. Wilson, J. W. & Dobrzynski, J. H. (1986). And Now, the Post-industrial Corporation. Business Week, (March 3), 64-71. Boddewyn, Jean J. and Gopalkrsrishoan Iyer. Forthcoming in mid-1999. International-business Research: Beyond Ddjt~ vu. Management International Review.

CONCEPTUAL FRAMEWORKS ON SMEs' INTERNATIONALIZATION: PAST, PRESENT AND FUTURE TRENDS OF RESEARCH Alex Rialp and Josep Rialp

ABSTRACT This study attempts to facilitate the future development of a more general theory relative to the nature of small business internationalization and provides a step toward a more holistic understanding of this process. More concretely, its general goal is to draw attention to this potential: the possibility of better examining this process - and developing a more accurate explanation of it - by encouraging future writers to consider the consolidated contributions of four major streams of research in the international business literature: FDI theories, the stage models, entry-mode research and the network approach. Some relevant conclusions and implications are derived from this holistic approach.

Reassessing the Internationalization of the Firm, Volume 11, pages 49-78. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1

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ALEX R/ALP AND JOSEP RIALP INTRODUCTION: THE INTERNATIONALIZATION PHENOMENON AND SMEs

Business internationalization is a very complex issue to conceptualize. So far, there is not even a general agreement on its definition beyond one indicating the growing involvement of a firm in a variety of operations of international character (Turnbull, 1987; Welch & Loustarinen, 1988; Andersen, 1993). Thus, a single, universally accepted definition of the term "internationalization" remains elusive. This fact has logically led to a number of alternative interpretations of this concept being found in the literature. For instance, several researchers have conceived of internationalization as a pattern of investment in foreign markets basically explained by rational economic analysis (Buckley & Casson, 1993; Dunning, 1988). A second traditional perspective seems to consider this phenomenon as an on-going process of evolution whereby the firm increases its international involvement as a function of increased knowledge and market commitment (Bilkey & Tesar, 1977; Johanson & Vahlne, 1977; Cavusgil, 1980): this is a sequential learning process of increased international involvement and gradual resource commitment. Still more recently, another [strategic] process-based view of internationalization has emerged (Melin, 1992; Root, 1994), which sees this process of increasing involvement in international operations not necessarily as a "smooth, immutable path of development," and including both "outward" and "inward" patterns of international expansion (Welch & Loustarinen, 1988, 1993). In this context, Calof and Beamish (1995, 116) have suggested the following definition of internationalization: "the process of adapting firm's operations (strategy, structure, resources, etc,) to international environments." In the same line, Andersen (1997, 29) conceptualizes it as "the process of adapting exchange transaction modality to international market (characteristics)." In our opinion, any accurate definition of internationalization should be wide and specific enough to simultaneously focus on complex decision-making processes that can be empirically observable. Consequently, it is worthwhile at the outset of this paper to indicate that, business internationalization is here to be understood as a set of operations that facilitate the establishment of more stable relationships between a firm and the international markets throughout a learning process of growing international involvement and patterns of development that may be simultaneously inward and outward. It is, then, a highly complex process that continuously redefines the degree of international involvement and commitment adopted by an organization (Welch & Loustarinen, 1988; Root, 1994).

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Our conceptualization of the internationalization issue can be considered to be holistic in the following sense. First, it integrates the behavioral, learningbased issues in play with the economic components affecting any large or small organization. Second, this process-based definition of internationalization is intrinsically dynamic and evolutionary in nature, i.e. a time-dependent process. Third, it admits both inward and outward patterns of activities abroad; and fourth, this definition also implies that relationships established through international transactions might influence the firm's growth and expansion to other countries. In spite of this general view of the internationalization phenomenon, it is not very difficult to see that much literature in this field has tended to rely basically on the large multinational firm as the traditional unit of (economic) analysis. However, one can also easily observe that Small and Medium-sized Enterprises (SMEs) are increasingly active in international markets, due mostly to the recent but unstoppable effects of globalization. In other authors' opinion (Coviello & McAuley, 1999), this historical emphasis on larger firms is of additional concern given the argument that smaller firms seem to differ from larger ones in terms of their managerial style independence, ownership structure and scale/scope of operations. Consequently, their structures and processes are generally seen to be less rigid, sophisticated and complex compared to those typically existing in larger firms. Although in the context of internationalization size issues do not seem to be so a relevant barrier after all (Bonaccorsi, 1992; Calof, 1994), it has been generally argued that SMEs usually face internal and external constraints when pursuing international development. This could be due, among other factors, to their more limited capital and management system, lack of time, experience, and information resources, some environmental restrictions, and so on, which lead one to expect that the internationalization phenomenon of SMEs would differ from that of larger firms. Many of these aspects have been particularly stressed in the extensive SME export literature. This really vast stream of research encompasses general and specific studies focusing basically on the behavior and strategies associated with exporting, on the relationship existing between size and export behavior, and on the organizational and managerial determinants of exporting (Leonidou, 1998; Leonidou et al., 1998). However, the concept of internationalization is not necessarily synonymous with export activity, and beyond this extremely dispersed amount of export-related literature, the analysis of internationalization among SMEs, as a wider and intrinsically meaningful stream of research, has only begun to emerge. Consequently, a rather limited number of papers are available that provide a systematic consolidation of the increasing body of literature in this area. 2

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Thus, this paper presents a more integrated framework from which to study the phenomenon of internationalization mainly, but not exclusively, among SMEs. The main purpose of this paper is therefore to identify the evolutionary trends of theoretical research focused on small business internationalization in recent decades in order to consolidate the extant literature and identify further research avenues. In this sense, the state of the art will be widely examined by means of a systematic review and objective assessment of the most traditional as well as contemporary conceptual frameworks that have successively emerged in this field. After this brief discussion of the internationalization concept in the context of SMEs, this paper proceeds as follows: a brief theoretical description of the two most orthodox schools of internationalization research: the multinationalrelated and economic approach labeled as Foreign Direct Investment (FDI) theory (e.g. Hymer, 1976; Buckley, 1990; Dunning, 1979), and the behavioral school of the stage models of the internationalization process or "gradualist approach" (e.g. Johanson & Valhne, 1977; Cavusgil & Godiwalla, 1982, among others). Then other contemporary contributions resulting from the increasing foreign entry modes literature (e.g. Anderson & Gatignon, 1986; Root, 1994) and the relationship school of the international network perspective (Johanson & Mattsen, 1988) are also taken into account. Finally, as a result of our review and assessment, a more integrative and synthethic approach to the nature of SME internationalization is presented, leading to a further discussion of future research issues as well as to some managerial implications.

TRADITIONAL EXPLANATIONS OF FOREIGN DIRECT INVESTMENT The predominant branch of interest in the literature on the international finn has traditionally focused on the analysis of the foreign operations of the socalled multinational corporations (MNCs) and, more specifically, their direct investment activities abroad. Thus, the main explanations of these direct investments and/or of the existence itself of the multinational finn constitute a set of interpretations notably overlapping among themselves without yet being able to constitute a single theoretical approach in this field (Calvet, 1981; McDougall et al., 1994). Such explanations analyze foreign direct investment (FDI) from the perspective of the theory of the firm and industrial organization theory, both sharing the same initial assumption: the potential investment capacity of a business abroad is based upon its control or possession of some type of asset and/or finn-specific advantage, generally of an intangible character. Such firm-specific

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advantages would tend to compensate the firm for possible disadvantages of a localized nature resulting from the greater knowledge that local firms have regarding the conditions of their own markets, allowing the multinational to exploit its own advantage in other markets outside its home market. The following discussion presents some recent contributions that have been developed in two different directions: one that is more tied to the effect of market imperfections, and the other, more related to the analysis (though of a static character) of transaction costs. Thus, according to monopolistic advantage theory, associated with interpretations of the emergence of multinationals proposed by Kindleberger (1969) and Hymer (1976), the existence of such companies is due to the fact that they have some type of knowledge or competitive advantage (of a productive, technological, organizational, managerial and/or commercial origin) whose nearly monopolistic nature permits them to compete with the local finns which, in spite of being better established and having a greater familiarity with their own markets, would become obliged to assume the cost of developing this advantage, so they cannot really compete with the foreign firm. Furthermore, so that such advantages do in fact lead to a direct investment decision, they should truly be specific to the investing firm, as well as easily transferable across national borders and/or of sufficient magnitude and durability so as to withstand the competitive erosion coming from rival firms. In this way, Kindleberger and Hymer describe the specific advantages of the firm as a manifestation of the structural imperfections of the market and of the existence of oligopolistic profits. Hence, the motive for the establishment of FDI appears related to the capacity of the multinational company to take advantage of certain market imperfections of an endogenous nature, reinforcing the already existing levels of inefficiency: the specific advantages of the multinational finn are related to the exercise of market power, revealing the characteristics of a quasi-monopolistic advantage (Alonso, 1993b). Nevertheless, this oligopolistic concept of direct investments is not able to completely explain why firms choose FDI as the mechanism of operation abroad. Why not pursue a strategy of licensing? In this way (by means of a license) the licensor can provide the technical know-how, while the licensee provides the market knowledge. Theorists focusing on "internalization advantages" address this issue. The possession of quasi-monopolistic advantage based upon structural imperfections of the market might not be enough to explain the existence of multinationals. MNCs could also emerge from the frequent "market failures," or imperfections of a more natural character, related to the market's relative incapacity to monitor some transactions, with the MNC then becoming an

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alternative and more efficient mechanism for serving the marketplace. Although the idea that the market could show itself to be inefficient in carrying out determinate transactions was initially proposed to explain the origin of the integrated firm with multiple plants (Coase, 1937; Williamson, 1975, 1985), it also appears to fit pretty well in the case of the multinational. It is toward the analysis of this type of imperfection that a new approach emerges, conferring a significant role to the transaction costs derived from the mobilization of intangible assets beyond national borders. Following this line of thought we have the theory of internalization and the eclectic paradigm. According to the approach known as internalization theory (Buckley & Casson, 1976, 1985; Rugman, 1981, 1986; Caves, 1982; Hennart, 1982; Buckley, 1988, 1990; or Casson, 1986, 1992), the internationalization of the firm is based upon two basic axioms: "in the first place, the firm locates its activities wherever costs are fewer (locality advantages); second, the firm grows by internalizing markets to the point in which the profits from such internalization compensate its costs (internalization advantages)" (Buckley, 1988, 181-182). Hence, this theory emphasizes the importance of market failures in the transactions of certain intangible and specific assets before the presence of high transaction costs inherent in the use of the market mechanism. In order to avoid them, the firm should exploit those assets under its control if it intends to keep their value, at least as long as the transaction costs of the market overcome the administrative costs associated with the organizational form itself. These cases would tend to occur more, the more intensive the knowledge and the more specific the assets of the company were. 3 This would not depend, in principle, upon whether the market in which this asset was exploited was domestic or foreign. However, if the market were foreign, then the existence of transportation costs and other commercial barriers would encourage FDI. Therefore, it appears that the internalization approach was developed with the aim of becoming a general theory of the multinational although, given its own theoretical generalness, it ends up operating at a very high conceptual level, which makes giving it greater empirical content difficult (Buckley, 1990). The eclectic paradigm (Dunning, 1979, 1980, 1988)attributes to firm-specific advantages, as well as to location and internalization advantages, the explanation of the capacity and willingness of the firm to internationalize its activities of production in the form of FDI. Thus, the firm should possess, in the first place, a specific advantage associated with some intangible asset, which was as least temporarily inaccessible for local competitors. With such advantage being supposed, the firm should decide whether to opt for internalizing it in foreign markets, by means of the mechanism of export and/or investment, or

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decide whether it cedes such advantage to another firm by contract or license. When preferring the investment formula, it should be more profitable to exploit such advantage together with some other location factor unique to the target market; otherwise the company would prefer to export instead of investing. As its own name indicates, this last paradigm attempts to link, in one single proposal, the specific firm-based advantages with those of internalization and those derived from the cost conditions of the market receiving the investment. Although it has been used as a reference framework in several empirical studies on the choice among different modes of entry in foreign markets (Agarwal & Ramaswami, 1992; Woodcock et al., 1994), it has not remained free from receiving some criticisms addressed, basically, toward the justification given to some of the distinct types of advantages cited (Buckley, 1988; Itaki, 1991; Piggot & Cook, 1993). In general terms, the several explanations concerning FDI are characterized, principally, by being based upon economic analysis. Hence, they tend to base their main explanatory variables in transaction costs as well as in factor costs, starting from the assumption of rational decision making on behalf of the investing firm abroad. Nevertheless, all of these proposals seem to suffer from a lack of dynamic considerations and from a limited application to SMEs. 4 Moreover, they do not appear to adequately distinguish between firms that initiate their process of internationalization and those others already located in more advanced stages of this process. They have, otherwise, a notoriously static character on investigating the reasons that motivate such direct investments without making special emphasis in the time dimension of the investing phenomenon. Consequently, all of these classical theories focusing on FDI usually focus on firms of very large size and/or considerable presence abroad, typically multinationals, as their only valid empirical reference, without analyzing the evolution followed by SMEs in their internationalizing process, nor investigating the choice of other alternative modes of entry which these specific firms usually use (Welch & Loustarinen, 1988; Forsgren, 1989; Alonso, 1993b, 1994). THE STAGE (PROCESS) MODELS OF INTERNATIONALIZATION: THE "GRADUALIST" APPROACH An alternative and well-known theoretical framework in this field, the internationalization process or stage models, is based upon a purely behaviorist view of the organization (Cyert & March, 1963), thus making several assumptions related to the lack of complete information and the importance of the risk or uncertainty in managerial decision making. This quite traditional explanation,

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more directly related to SMEs, has usually been labeled as the "incrementalist or gradualist approach," as it considers the internationalization of the firm as a learning process based upon a gradual accumulation of experiential (foreign) market knowledge. The highly innovative nature that seems to characterize the first steps of the internationalization process, mainly those which constitute the adoption of the export activity, allows one to assume a more incremental logic in the decision making process and a more gradual pattern in the firm's behavior through time. In this sense, the scarce initial knowledge that SMEs in particular usually have regarding foreign markets, as well as the uncertainties that they associate with the decision of going international, clearly influence the process (Cavusgil & Godiwalla, 1982; Andersen, 1993). A focus on the initial steps of the export process is thus expected to be critical as these steps might form the foundation for all future international activity. In fact, the main reason to focus on the exercise of export activity by SMEs is due to the fact that this mechanism constitutes, in its multiple facets, their first and most frequent mode of operating abroad, principally during the early stages of their internationalization processes (Miesenbrck, 1988). Frequently, the export method is considered as the most favorable mode of entry at the beginning, since it permits the firm to adjust its exporting effort as it achieves more or less positive results abroad. In this way, exporting becomes, generally before any other method, a learning experience in the international arena (Root, 1994). A certain consensus exists when considering export as the basis of an experiential learning process through which the firm gradually increases its level of foreign knowledge, implication and commitment. During the development of export activity through time, this mechanism converts itself into a key determinant factor: the slow, although increasing, accumulation of experience resulting from such performance abroad originates a learning process which augments (market) knowledge as well as the capabilities of the exporting firm (Alonso & Donoso, 1994). In this sense, the abundant empirical research carried out about the exporting behavior of SMEs proposes, basically, to determine how and in which manner they engage in export activities, by identifying the motives and exporting strategies of these firms, their capabilities for exporting and the type of interaction which they establish with their environment (Miesenbtick, 1988; Aaby & Slater, 1989). Although the majority of empirical work related to the decision to export does not explicitly break down the existing stages in the adoption of this international activity, a few studies do conceive of the participation of the finn in export operations as a process of gradual development which takes place in several phases or stages and during a relatively long period of time. Thus, many

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57

empirical models have emerged which offer a certain conceptualization (though highly descriptive and partial) of the dynamic nature of the exporting process of small firms. Although the number of proposals developed from this incremental view of the exporting process is certainly considerable, the Uppsala model of the internationalization process (U-Model) stands out as the most significant contribution. In fact, a wide variety of empirical work attempting to establish levels of the firm's exporting development relies on the U-Model as a general framework. So, it should be considered the pioneer model in the interpretation of the internationalizing phenomenon as a process of gradual development over time. In this sense, the U-Model places special emphasis in the sequential nature of the learning obtained by means of a series of steps which reflect a growing commitment to foreign markets. In the Model's original empirical version, authors Johanson and WiedersheimPaul (1975) cited the lack of knowledge and/or resources, and the resulting uncertainty to the firm, as the principal obstacle to internationalization. This problem would be reduced by means of an incremental process of learning and decisions related to foreign markets and operations. Hence, the development of activity abroad would take place through a series of successive stages that represent a greater degree of involvement of the firm in its international operations. This sequence, generally known as the "chain of establishment," was limited for each specific country or market. 5 At the same time, in terms of the international extension of such operations, the proponents of this approach resorted to the concept of "psychic or psychological distance," according to which a firm's entry abroad would tend to occur first for the country psychologically nearest to the firm's home market, given that it would show a lesser degree of uncertainty for it. From there, the organization would gradually proceed extending its foreign activities toward other new markets, each time a little more distant from a psychological point of view. In this way, new foreign markets would slowly be taken on whose psychic distance from the firm's country of origin would be greater and greater. Later, Johanson and Vahlne (1977, 1990) reformulated a dynamic conception of the firm's internationalization process in terms of a more permanent interaction between the development of knowledge about markets and foreign operations, on the one hand, and a growing commitment of resources toward international markets, on the other hand. The basic structure of the U-Model is represented by the distinction made by these authors between the "state aspects" and "change aspects" of the internationalization variables (Fig. 1). They assert that the "current state of internationalization is an important explanatory factor of the course which this will follow in the future" (Johanson & Vahlne, 1977, 26).

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Conceptual Frameworks on SMEs' Internationalization

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So, from the U-Model, business internationalization is considered as a gradual learning process based upon experiential knowledge and capable of generating new opportunities by means of relaxing part of the uncertainty present in foreign markets. 6 Thus, accumulated experience becomes a driving force in the internationalization process. Nevertheless, such experience is, to a great degree, specific for each market in the sense that "it cannot be generalized to other markets or countries easily" (Johanson & Vahlne, 1990, 12). For this reason, as a general rule, additional commitments in the foreign market will develop in the form of small, increasing steps. As the most representative version of such evolutionary-behaviorist approaches, the U-Model constitutes one of the main contributions existing in the analysis of the firm's international activities and, perhaps, the most cited reference from the perspective of the export behavior models. However, results have usually been mixed when trying to empirically validate its two principal assumptions: the concepts of establishment chain and psychological distance (Hedlund & Kverneland, 1985; Turnbull, 1987; Welch & Loustarinen, 1988). In spite of this, the U-Model's focus on gradualism is particularly useful in describing the export behavior of SMEs placed in the initial stages of their internationalization process, as demonstrated through empirical research (Forsgren, 1989; Johanson & Vahlne, 1990; Alonso, 1993a). Thus confirming the importance of the gradual and/or incremental accumulation of experience for explaining the international behavior of the exporting SMEs. Other behavioral models also argue that SME internationalization is incremental, with various stages reflecting changes in the attitudinal and behavioral commitment of managers and the firm resulting international orientation (Bilkey & Tesar, 1977; Reid, 1981; Cavusgil, 1980; Cavusgil & Godiwalla, 1982). These models argue that the perceptions and beliefs of managers both influence and are shaped by incremental involvement in foreign markets. As a consequence, their firms gradually pursue active expansion into more unknown markets and become increasingly committed to international growth. As summarized by Thomas and Araujo (1986) and Andersen (1993), this pattern explains internationalization in terms of the innovation-adoption of export behavior. Thus, according to the different stage models, the internationalization process shows a cumulative character, given that the firm tends to ascend toward greater levels of commitment once it accumulates experience in the previous steps. Hence, this process is supposed to be evolutionary in nature, mostly when it affects SMEs and/or firms with rather limited experience abroad. This is because of the expected effect of the learning process followed by the firm on the reduction of the levels of uncertainty with which it operates in international markets. More concretely, such experiential knowledge, gained through undertaking

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activities directly in these markets, should mitigate the conditions of uncertainty in which decisions tied to the commitment of resources abroad will be adopted. In summary, this gradualist approach does not seem to conceive of business internationalization as a rational and/or deliberately planned sequence, but rather as a pattern of slow and evolutionary development in time, where the incremental nature of learning becomes a key factor through the course (apparently predetermined) of a sequence of successive stages. The central feature of this approach lies, therefore, in assuming that a large part of the capabilities required by firms for internationalizing their activities are acquired through a process of sequential and accumulative learning, in the form of a series of phases that reflect a higher commitment to foreign markets (Melin, 1992). An additional contribution of this model lies in emphasizing the importance of the perception of opportunities and risks on behalf of the firm's managers and, thus, establishing their leading role in international decision making (Dichtl et al., 1990). However, the excessively descriptive nature of this proposal does not fully explain the decision dynamics that lead the firm to move from one level of international commitment to another. Thus, the U-Model, as well as other related behavioral approaches, describes the path followed by the firm throughout its exporting trajectory, but; collectively, these approaches show themselves to be somewhat weak in identifying the explanatory causes of such a progression along the phases or stages considered. In addition, its "dynamic" view of the process neither reflects the growing proliferation of mixed formulas of a contractual nature (licenses and/or franchises) nor other more recent mechanisms for the international extension of the firm such as international joint ventures. Even in the same area of export activity, some authors, such as Reid (1983, 1984), point out that the structures that are finally adopted are highly specific, basically depending upon the heterogeneity of the transactions performed. Hence, the structural arrangement finally chosen for organizing this activity constitutes a relevant strategic choice, which makes the diversity of the firm's export behavior stand out. Thus, to enhance the explanatory power of the stage process model in the contemporary international business environment, its assumptions must be revised. Greater flexibility is needed, given the apparently indeterminate and eminently selective nature of the firm's strategic options in the international context. Upon freeing it of its excessively deterministic view of the internationalization process, these models could be empowered to explain both the emergence of new, more adaptable, flexible and innovative modes of entry, and simultaneously, the acceleration of the international involvement of firms (Alonso, 1993a, b, 1994).

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CONTEMPORARY MODELS OF INTERNATIONALIZATION: THE FOREIGN ENTRY MODES LITERATURE AND THE NETWORK APPROACH This section's main intention is to present and discuss some current streams of literature: (1) strategic mode of entry choices - firmly based on the transaction cost approach; and (2) the network perspective (as applied to the international context). This review and assessment of several contemporary models of internationalization is intended to better inform our understanding of the strategic decisions and the kind of relationships established by the firm throughout its international projection. Foreign Entry-mode Research Focusing on an extremely critical dimension of the internationalization process, the (foreign) market entry mode issue, several studies facilitate some additional refinement and a more successful accommodation of a variety of earlier frameworks about firm internationalization. Accordingly, a wide range of institutional arrangements or alternative ways of penetration in foreign markets are becoming integrated within this emerging stream of research. 7 These mechanisms are believed to be susceptible to change over time as the firm itself redefines its levels of international presence. Such a recent approach in the field of international business, labeled as the entry-mode literature, also seems to be grounded on the existence of some finnspecific advantage/s (of a productive, technological, organizational, managerial and/or commercial character) capable of being exploited, at least temporarily, in foreign markets by means of a variety of foreign modes of entry and/or generic international trajectories among which firms can strategically choose (Calof, 1993; Albaum et al., 1994; Bradley, 1995). Hence, a firm could serve the foreign markets by means of exporting from its own domestic context, understood as a mechanism of international activity that could be internalized to a greater or lesser degree. Also, it could try to exploit specific advantages by investing directly in foreign markets when some factors (advantages of location, commercial barriers and/or high transport costs) seem to favor such local exploitation, by locating productive capacities abroad by means of the setting up of its own manufacturing subsidiaries (FDI). Additionally, an international firm could co-invest with other firms (international joint ventures). Finally, the possibility also exists of transferring this advantage to another entity (generally, a foreign firm) through a contractual arrangement, in exchange for

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some type of royalty or economic compensation (international licenses, franchises, etc.). Thus, internationalizing firms are supposed to select among a number of different modes available to penetrate foreign markets that have been usually classified based on the corresponding level of risk, return characteristics, and/or degree of control and resource commitment each mode provides the entrant firm (Anderson & Gatignon, 1986; Kumar & Subramaniam, 1997). These various strategic options, and the different levels of commitment which these alternative entry modes usually imply, can be seen in Fig. 2. The existence of a certain trade-off between the degree of control and operational risk desired in foreign operations and the volume of resources committed by the firm at any specific moment is also shown. We must recognize here that the upper right-hand corner of Fig. 2, the establishment of production facilities abroad, does not necessarily represent the highest level of internationalization. In fact, a finn whose activities were distributed across all nodes should be considered even more internationalized. 8 However, in general terms, moving toward higher levels of internationalization involves obtaining a greater degree of experiential knowledge on an international scale, due to the cumulative learning process followed by the firm throughout its international evolution (Root, 1994; Alonso & Donoso, 1994; Rialp & Rialp, 1996). Each one of these generic, potentially overlapping, paths of international development (export entry mode, contractual agreements, and foreign direct investment), represents a continuum of increasing international involvement with diverse levels of control, risk, flexibility and commitment of assets and resources on behalf of the firm going international. Hypothetically, movement along this "continuum" is expected to be driven by the degree of foreign market knowledge that the firm acquires abroad. However, it is also important to point out the fundamentally strategic nature of the deliberate choice between these alternative trajectories of internationalization, even though such decisions usually come highly conditioned - though not totally predetermined - by the sequence that the firm has created and followed throughout its internationalization. So, one must acknowledge that managers, in making strategic decisions, are continually faced with situations shaped by the specific and dynamic resources and capacities of their firm and its environment. Such a view of the phenomenon of business internationalization describes a process of growing international involvement which admits not only one, but a wide variety of institutional forms or paths of penetration abroad. These forms reflect, in turn, distinct degrees of commitment and, hence, different levels of control and/or operative risk for the firm. Additionally, the process is eminently

63

Conceptual Frameworks on SMEs ' Internationalization

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strategic and dynamic per se, in the sense that such modes of operation vary in time as the firm increases and consolidates its presence in the international arena. Thus, at least theoretically, the choice of foreign market entry mode should be based on several trade-offs between risks and returns, the desirability of control over foreign operations, resource availability and the interrelationship existing among these several factors. Consequently, a number of studies have appeared that try to establish different models and analytical frameworks for investigating the selection among all the available modes of entry abroad (Anderson & Gatignon, 1986; Nicholas, 1986; Hennart, 1989; Hill et al., 1990;

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ALEX RIALP A N D JOSEP RIALP

Agarwal & Ramaswami, 1992; Erramilli & Rao, 1993; Alonso, 1993b, 1994; Root, 1994; Driscoll, 1995). Each one of these studies introduces strategic selection criteria preceeding the options that the firm is facing at the moment of exploiting its specific advantage/s beyond national borders. Some of the most important contributions in this line of inquiry are summarized and also systematically compared in Table 1. Many of these theoretical and empirical frameworks have been amply reinforced by the abundant literature based upon transaction costs analysis (TCA) (Coase, 1937; Williamson, 1975, 1979, 1981). Also according to Andersen (1997), in the last decade applications of TC approach have become fairly common in the entry-mode research. In fact, this approach contributes to the formulation of the firm's international strategy, and more specifically to predicting entry mode, to the degree that an adequate analytical framework where exploring the relative advantages in terms of the relative costs of the Table 1.

Author/s

Selection models of the foreign mode of entry based on the Transaction Cost Approach. Main objective

Operationalization

Results/conclusion

Anderson & To explain the choice Gatignon (1986) between joint ventures and foreign (production) subsidiaries.

The structure of ownership associated with the exercise of control over each mode of entry is fully determined.

The factors which tend to increase transaction costs are positively associated with the degree of control obtained over the mode of entry.

Nicholas (1986)

To elaborate a dynamic model of the choice of the foreign mode of entry.

Starting from the "structure" or organizational forms for the performance of international transactions and from the "process" or possible changes between them, the firm's transition between such alternative modes in function of the costs they generate is considered.

The variables frequency of transaction, nature of the product - especially if it requires the performance of specific investments - and the presence of scale economies constitute the factors which most determine the cost associated with the distinct alternatives.

Hennart (1989)

To explain the principal traits associated with the distinct types of contractual arrangements, which do not involve property new forms - as opposed to the realization of FDI traditional forms.

Identification of the transaction costs linked to these new and traditional forms for organizing international exchanges.

The new contractual forms can be more efficient than FDI for conducting some of them, but they are seen to be highly inefficient for the acquisition of specific types of technological knowledge and/or access to foreign markets.

Conceptual Frameworks on SMEs' Internationalization Table 1.

65

Continued.

Author/s

Main objective

Operationalization

Hill et al. (1990)

To establish an "eclectic framework" for the choice among foreign entry modes.

To know how the distinct modes differ with respect to resources commitment, the level of control inherent in each mode and the risk that finn-specific advantages (particularly knowledge) disseminate abroad.

The interaction, which is produced between determined variables of a strategic, environmental and transactional nature with the requirement of resources, levels of control and risk of dissemination of the business knowledge attributable to each mode of entry, determines its final selection.

Alonso (1993b, 1994)

To analyze the selection Submitting transaction process among the firm's costs to an evolutionary mode of entry in interna- dynamics in such a way tionai markets by that their perception varies applying a dynamic view depending on previously of transaction costs, accumulated experience by the finn.

The apparentlyindeterminate nature of the diverse concurring forces in the selection process of the paths of penetration abroad necessitates a more detailed analysis of the finn's core competencies and its environment.

Root (1994)

To list the variables that will help managers to decide about the most appropriate mode of entry in each case.

Definition and application of criteria for the identification of relevant factors for the selection of the mode of entry abroad.

The main critical factors seem to be: those of the market, environment and production in the target country; those in the country of origin and those factors related to the product, resources and the finn's degree of commitment.

Driscoll (1995)

To determine the theoreti- The different methods of cally expected impact of entry abroad (FDI, contracthe variables which tual modes and mecharegulate the selection nisms for exporting) are between the desired and defned, characterized and observed levels of the related in terms of the distinct characteristics degree of control, risk, relative to each mode of commitment of resources, entry, strategic flexibility and level of ownership which each one has.

The selection of the most appropriate institutional arrangement for entry in international markets is an extremely critical decision due to its impact on the success or failure of the firm's international operations, mainly in the initial phases of its internationalization.

different

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Moreover, most of the studies on foreign market entry modes have had to introduce some modifications of TC theory to include non-transaction cost benefits derived from increased control or integration, such as coordination strategies in multinational firms (Hill et al., 1990). This rather modified TC approach generally predicts a positive relationship between asset specificity and propensity for high-control entry modes. The strength of this relationship is contingent upon the influence of moderating factors, such as external or internal uncertainty and firm size (Anderson & Gatignon, 1986; Erramilli & Rao, 1993). However, concerning this explanatory framework, at least a couple of problems still limit its possibilities of further empirical testing. First, the unit of analysis should be, according to the TC theory, the transaction in play; while most TCA studies on entry mode decision widely concerned about other issues affecting a firm's decisions have used the firm-level as their unit of empirical interest. Second, too often relevant transaction costs in consideration of entry modes can be only indirectly assessed by means of indicators such as degree of asset specificity and internal or external uncertainty level. Consequently, more efforts should be made in reaching the necessary fit between the theoretical and operational levels in these kinds of studies (Andersen, 1997). International Network-related Research In order to study the internationalization of a firm we need to understand the context in which it operates, such as, environmental conditions and the firm's relationships with other entities (Madsen & Servais, 1997). More concretely, how do firms - especially smaller ones - make use of business networks and/or collaborations when they internationalize? Referred to as the network perspective, an emerging area of SME internationalization research focuses on non-hierarchical systems where firms invest to strengthen and monitor their position in international networks. This contemporary approach draws on theories of social exchange and resource dependence, and focuses on firm behavior in the context of a network of inter-organizational and interpersonal relationships. Moreover, researchers of networking have transposed the social exchange perspective of social networks to business networks. There is "a set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors" (Chetty & Blankeburg Holm, 2000, 79). Thus, business takes place in a network setting, where different business actors are linked to each other through direct and indirect relationships. Johanson and Mattson's (1988) network approach to internationalization is preferentially chosen here as a relevant theoretical framework because it

Conceptual Frameworks on SMEs" Internationalization

67

includes a dynamic element by focusing on network relationships. This model uses social exchange theory to illustrate and also explain how firms develop networks organically to internationalize. More concretely, these authors consider business networks as the relationships a firm has with its customers, distributors, suppliers, competitors and government, i.e. the actors in a business network. They argue that as the firm internationalizes, the number and strength of the relationships between different parts of the business network increases. By internationalizing, the firm creates, develops and maintains business relationships with counterparts in other countries. This occurs in different ways: first, by forming relationships with counterparts in countries that are new to the firm (international extension). Second, by increasing commitment in already established foreign networks (penetration). Third, by integrating their positions in networks in various countries (international integration). However, internationalization in all of these cases implies "an exploitation of the advantage this network constitutes" (Johanson & Vahlne, 1990, 20). Clearly, the network perspective provides valuable insight into the dynamics of internationalization in that a network-based approach is linked to strategic decision making. More specifically, developing and managing business and social relationships can help reduce the smaller firms' dependence to their own internal resources and, consequently, increase their propensity to internationalize. Thus, by means of these network relationships, SMEs are able to overcome the size-related constraints so often identified as limiting their growth. In this sense, "smallness" (measured in terms of physical resource availability) might be irrelevant when examining internationalization. Also, the generally considered less rigid and more fluid managerial processes in the smaller firm, as compared to larger ones, may be driven very often by the strong influence of the owner/manager of the SME and his/her personal contact network. As we have seen, the activities in the network allow the firm to form relationships, which help it to gain access to resources and markets. An assumption in this model is that a firm requires resources controlled by other firms, which can be obtained through its network positions. Johanson and Mattson also use the term net to specify certain sections of a network. For instance, national net refers to networks in other countries, and production net refers to a firm's relationships that revolve around activities in a specific product area. Furthermore, and precisely depending upon the degree of internationalization of the market (production net) and the degree of internationalization of the firm itself, these authors theoretically identify four categories of international firms (see Table 2): the Early Starter, the Lonely International, the Late Starter and the International Among Others, whose characterization has been largely discussed elsewhere (Johanson & Mattson, 1988; Chetty & Blankenburg Holm, 2000).

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ALEX RIALP AND JOSEP RIALP

Tab/e 2.

Johanson and Mattsson's Network Approach to Internationalization. Degree of internationalization of the market

(production net)

Degree of internationalization of the film

Source:

Low

High

Low

The Early Starter

The Late Starter

High

The Lonely International

The International Among Others

Reproduced from Johanson and Mattsson (1988, 298).

Precisely by inquiring what network relationships drove internationalization for the firms in each of these four theoretical categories, Chetty and Blankenburg's (2000) case-based research illustrates the dynamics of how firms interact with their network partners to extend, penetrate and integrate their international markets. In their opinion, networks can help firms expose themselves to new opportunities, obtain knowledge, learn from experiences, and benefit from the synergistic effect of pooled resources. However, they also identify from their findings several weaknesses of this model, the most relevant one being that the cases under analysis illustrated that there are other dimensions to the network - such as customers and governments - that drive firms to internationalize rather than just the production net which Johansson and Mattson emphasized in their model. 9 These flaws should be removed to advance the network related literature.

CONCLUDING REMARKS AND IMPLICATIONS OF INTEGRATING PAST AND CONTEMPORARY CONCEPTUAL FRAMEWOKS This study has attempted to facilitate the future development of knowledge about the nature of small business internationalization and to provide a step toward a more holistic understanding of this process. More concretely, it has been the general goal of this paper to encourage future writers to consider the consolidated contributions of four major streams of research in the international business literature: FDI theories, the stage models, the entry-mode research, and the network approach. Although generally considered in an isolated, non-related way, all of them have been empirically applied in SME internationalization research. However, this segmented approach, using only one theoretical frame-

Conceptual Frameworks on SMEs' Internationalization

69

work at a time, does not seem to be the most appropriate research strategy to capture the internationalization issue. Thus, more integrative approaches to the study of internationalization will undoubtedly benefit our understanding of the overall concept. Consequently, this article's main contribution lies in the following general assumption: none of the traditional approaches (FDI's classical explanations and the gradualist approach), individually considered, provides a truly complete explanation of the complex nature of the SME internationalization process. However, it is our belief that by viewing past contributions more integratively, and incorporating new research findings from the growing literature on foreign modes of entry and the network perspective, significant progress can be achieved in terms of theory development in this field. In our opinion, the reviewed theoretical frameworks provide complementary views of the internationalization concept. Hopefully, such a theoretical refinement and better combination of the extant approaches would critically help other researchers, and also managers, to obtain a more advanced comprehension of this highly challenging phenomenon. Figure 3 graphically illustrates the evolutionary pattern of research focusing on internationalization that has been presented in this paper. Also, some future directions for promoting further theory development in light of our review and critical assessment of the literature in this field are also addressed. As discussed previously, the general theory of FDI has developed from neoclassical and industrial trade theory and supports internalization of a firm's activities in international expansion. This view explains internationalization with the argument that firms choose the organizational form and location for which overall transaction costs are minimized. In other words, firms choose their optimal structure to perform foreign production by evaluating the cost of economic transactions. Transactions perceived to be high risk and requiring significant resource commitment are more likely to be internalized as part of a hierarchically structured organization. However, critics of this theory argue that research in this area is used primarily to explain a pattern of investment in terms of its extent, form, and location of international production, something that is rather applicable to already established MNCs, and not a long-term process of international expansion. Contrarily, the several stage models draw on organizational growth, behavior, and learning theory to capture internationalization and are generally argued to be more "dynamic" than FDI theory (Melin, 1992; Johanson & Vahlne, 1990). These models suggest that internationalization activities tend to occur incrementally and are influenced by increased market knowledge and commitment. By emphasizing managerial learning, business internationalization is described

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Conceptual F r a m e w o r k s on S M E s ' Internationalization

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in terms of market selection and the mechanisms used for market entry. Over time and through experience, firms increase their foreign market commitment and this, in turn, enhances market knowledge leading to further commitment in more distant markets. Thus, the finn is eventually expected to internalize its activities by moving over time from purely domestic operations to establishing host country operations, based on a process of managerial learning. This is perhaps the reason why some authors acknowledge that the stage models, in spite of their several limitations, also appear to reflect the essence of FDI (Coviello & McAuley, 1999). On the other hand, the contemporary schools of research also reviewed here stress some relevant issues that have been "forgotten" or remained misunderstood in previous research programs, many of which deal with some factors affecting SME internationalization. Hence, by adopting a more dynamic perspective of the transactions costs in play and the non cost-related issues affecting any firm's international expansion, several entry-mode studies seem to relate them more successfully to the development of more efficient strategies of penetration in foreign markets. Moreover, these strategies become capable, by themselves, of making the sequence followed by any type of organization - either large or small - more flexible than normally assumed in previous theoretical explanations, i.e. FDI theories and the stage models of internationalization. In a similar vein, the international network perspective offers a complementary view to FDI theory because the latter does not account for the role and influence of social relationships in business transactions. Internationalization decisions and activities in the network perspective emerge as patterns of behavior influenced by various network members, while FDI theory merely assumes rational strategic decision making applied by the firm's management system. Also, when compared with the "unilateral" process of internationalization suggested by the stage models, the network approach conveniently introduces a more "multilateral" and interactive view of this phenomenon. Thus the process is not merely intra-organizational but also inter-organizational. In relation to the U-model, it can be assumed that market (i.e. network) knowledge is based on experience obtained from current business activities, or current business interactions. Recent studies of the internationalization issue in the context of exchange networks have found that, although foreign market entry can be considered to be a gradual process (thus partly supporting the stage models), it results basically from interaction, development, and maintenance of lasting business relationships with other business actors or parties over time (Johanson & Vahlne, 1990). Organizational boundaries therefore should incorporate both business (formal) and social (informal) relationships. Such

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relationships can involve customers, suppliers, competitors, private and public support agencies, family, friends, and so on. Thus, according to our assessment of the theoretical evolution in this field, we can affirm that the internationalization literature, even that one focused on SMEs, has evolved to actually encompass: (1) the analysis of transaction cost and structural market imperfections in the context of FDI; (2) the examination of managerial learning and organizational commitment in the process of international expansion; (3) the consideration of multiple forms of foreign market entry available to the firm; and (4) a more recent approach that recognizes the potential influence of formal and informal networks relationships on internationalization. In other words, by further interrelating all these approaches as Fig. 3 attempts to do - a more holistic view of the process of business internationalization emerges. Its main traits are only being introduced here. Due to its holistic character, this more integrated perspective seems capable of interweaving a certain degree of gradualism, based upon a learning process (absolutely critical during the initial phases), with a highly dynamic conception of the modes of entry abroad in following stages. At the same time, managers are highly influenced by the amount of international experience acquired according to the previously chosen trajectories. In this way, the internationalization process provides an open and quite flexible path due to the wide range of modes of entry available to the firm throughout its international involvement. The strategic selection among all of these possible forms will depend, consequently, upon the already acquired levels of commitment on behalf of the firm, as well as upon the volume and/or quality of the resources and assets that it is willing to move to the target markets at any one moment. However, according to the network view, internationalization also depends on the organization's set of network relationships that result from interaction with other counterparts rather than solely on a firm-specific advantage. Such different networks may be more or less international to the extent that the connections between them in different countries are more or less developed. It also can be expected that the international extension of these networks has strong implications for the internationalization of the firm (Johanson & Vahlne, 1990). Therefore, by integrating these several lines of inquiry, it is possible to derive a more general conceptualization of the internationalization process, a more sophisticated view that becomes relevant to both small and large firms, not a single model which is limited by the size and/or resources of the firm whose behavior it is designed to explain. But, what would the main characteristics of this perspective be? This research question could open an interesting debate theme from an academic perspective in the future. However, any further development of such an integrated and multidisciplinary framework would hold -

Conceptual Frameworks on SMEs' Internationalization

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the potential to mend the rift in international business theory that has arisen de facto from the different starting points of individual researchers whose primary interest has been explaining the behavior of a particular type of firm - that is, MNC-oriented research versus SME-oriented research. Contrarily, future researchers in the general field of international business should focus on improving the integration of these extant views of internationalization, recognizing that no single view may be considered valid, and also that internationalization is a dynamic and longitudinal process, thus it must be empirically investigated in this way too. Moreover, this holistic perspective of internationalization also offers relevant managerial implications as it holds the potential, if examined properly, to enhance the operating performance of any firm. Those managers and decision makers involved in international affairs could benefit from this more consolidated approach which basically stresses the more universal concerns of knowledge-based development, business network relationships, and strategic management, rather than focusing on the obvious differences in internal resources between large and small firms. Certainly, some of the concerns of managers of MNCs firms and SMEs are unique to their structural conditions. However, other issues extensively covered in this paper, such as the access to foreign market knowledge and other external resources, could not depend so much on size and structure dimensions.

NOTES 1. Related bodies of literature referring to the explanatory causes of trade between countries, as well as international competitiveness at a specific country-sector level (Porter, 1990), are conceived of as alternative approaches to the internationalizing phenomenon though of a rather macroeconomic nature. So, they are explicitly excluded from this study, which is directly linked to the (micro) organizational approaches to internationalization. 2. For very useful summaries of theoretical and empirical research examining the smaller firm and export-related issues see Bilkey (1978); Dichtl et al. (1984); Thomas and Araujo (1986); Miesenb6ck (1988); Aaby and Slater (1989); Andersen (1993); Leonidou and Katsikeas (1996); or Rialp (1997). See CovieUo and McAuley (1999) for a study examining how integrative the empirical literature on internationalization of SMEs is. This clearly demonstrates the current regency of the SME internationalization literature. 3. The examples that are typically associated with this internalization process would be the factor markets and/or intermediate goods of a rather more specific and intangible nature, such as technological assets, managerial, marketing or production skills, human capital, etc., due to the "public good" character attributable to such knowledge (Buckley & Casson, 1976). This internalization, nevertheless, cannot be done gratuitously and usually creates problems - and, consequently, costs - of communication, coordination and control.

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4. In terms of SME-related research using this theoretical framework, a rather limited number of studies seem to be available (Newbould et al., 1978; Buckley, 1989). Among the most relevant ones, Newbould et al. (1978) found FDI to be a managerial process. By means of several interviews with managers of UK manufacturing firms, an evolutionary approach to internationalization was indeed suggested, reflecting incremental investment resulting from a process of ongoing managerial learning. 5. Specifically, the following phases are considered: (i) irregular exports; (ii) regular exports via independent agents and/or distributors; (iii) the establishment of foreign sales subsidiaries; and (iv) (eventually) the establishment of production facilities abroad. 6. Penrose (1959) is followed here in the distinction of two types of knowledge: an objective and generic one, which can be codified, acquired and/or transmitted quite easily; and a specific one, which is rather tacit, idiosyncratic and directly linked to experience, which can only be acquired by means of an eminently practical learning process. It would basically be the prominence of this last type of knowledge that would condition the gradual sequence of the process. Later on, Eriksson et al. (1997) have gone into this question in depth, clearly distinguishing between different classes of knowledge based upon experience - i.e. experiential k n o w l e d g e - and establishing their relations with the costs to be perceived during the internationalization process. 7. Given its condition of "frontier research issue" (Hill et al., 1990), it would be simply interminable to try to enumerate and fully discuss here all the conceptual frameworks that have been put forward concerning the foreign entry mode decision making. Thus, within this section the number of perspectives for assessing the mode of entry issue is restricted somewhat. Other recent and quite helpful contributions are available elsewhere (Sarkar & Cavusgil, 1996; Andersen, 1997). 8. The authors gratefully acknowledge this pertinent comment made by one of the reviewers. 9. Other weaknesses of this network model were related to some of the following issues: (i) The criteria used to differentiate each category in the matrix are not distinctive and thus overlap, (ii) The importance of decision-makers' attitudes and firm characteristics in taking up opportunities for international extension, penetration, and integration that emerge from the networks is not fully addressed, (iii) The model does not discuss how the firms overcome the problems experienced in internationalization through their network relationships, (iv) It also excludes the influence of certain external and uncontrollable factors that propel a firm toward internationalization, (v) The network model does not address how firms shift positions in the matrix. And finally, (vi) the model only considers relationships that evolve organically (Chetty & Blankenburg Holm, 2000, 89-90).

ACKNOWLEDGMENTS W e thank Dr. Catherine N. Axinn, from Ohio University, and the anonymous reviewers from A I M for their useful comments to earlier versions of this paper. Also support from the Direcci6n General de Ensefianza Superior (PB-95-0616) is gratefully acknowledged.

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Hymer, S. H. (1976). The International Operations of National Firms: A Study of Direct Foreign Investment. Cambridge, MA: MIT Press. Itaki, M. (1991). A Critical Assessment of the Eclectic Theory of the Multinational Enterprise. Journal of International Business Studies, 22(3), 445-460. Johanson, J., & Mattsson, L-G. (1988). Internationalization in Industrial Systems - A Network Approach. In: N. Hood & J. E. Vahlne (Eds), Strategies in Global Competition (pp. 287-314). London: Croom Helm. Johanson, J., & Vahlne, J. E. (1977). The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Markets Commitments. Journal of International Business Studies, 8(1), 23-32. Johanson, J., & Vahlne, J. E. (1990). The Mechanism of Internationalization. International Marketing Review, 7(4), 11-24. Johanson, J., & Wiedersheim-Paul, F. (1975). The Internationalization of the Firm: Four Swedish Cases. Journal of Management Studies, 12(3), 305-322. Kindleberger, C. P. (1969). American Business Abroad: Six Lectures on Direct Investment. New Haven: Yale University Press. Kumar, V., & Subramaniam, V. (1997). A Contingency Framework for the Mode of Entry Decision. Journal of World Business, 32(1), 53-72. Leonidou, L. C., & Katsikeas, C. S. (1996). The Export Development Process: An Integrative Review of Empirical Models. Journal of International Business Studies, (3rd quarter), 517-551. Leonidou, L. C. (1998). Organizational Determinants of Exporting: Conceptual, Methodological, and Empirical Insights. Management International Review, 38(Special Issue 1), 7-52. Leonidou, L. C. et al. (1998). Identifying Managerial Influences on Exporting: Past Research and Future Directions. Journal of International Marketing, 6(2). 74-102. Madsen T. G., & Servais, P. (1997). The Internationalization of Born Globals: An Evolutionary Process? International Business Review, 6(6), 561-583. McDougall, P. et al. (1994). Explaining the Formation of International New Ventures: the Limits of the Theories From International Business Research. Journal of Business Venturing, 9, 469-487. Melin, L. (1992). Internationalization as a Strategy Process. Strategic Management Journal, 13, 99-118. MiesenbOck, K. J. (1988). Small Business and Exporting: a Literature Review. International Small Business Journal, 6(2), 42-61. Nicholas, S. (1986). The Theory of Multinational Enterprises as a Transactional Mode. In: P. Heitner & G. Jones (Ed.), Multinationals: Theory and History (pp. 64-79). Gower Publishing Ltd., England. Newbould, G. D. et al. (1978). Going International: The Experience of Smaller Companies Overseas. London: Associated Business Press. Penrose, E. T. (1959). The Theory of Growth of the Firm. London: Basil Blackwell. Piggott, J., & Cook, M. (1993). International Business Economic: A European Perspective. London: Longman. Porter, M. E. (1990). The Competitive Advantage of Nations. New York: The Free Press. Reid, S. D. (1981). The Decision maker and Export Entry and Expansion. Journal of International Business Studies, •2(2), 101-112. Reid, S. D. (1983). Firm Internationalization, Transaction Costs and Strategy Choice. International Marketing Review, 1(2), 44-56. Reid, S. D. (1984). Market Expansion and Firm Internationalization. In: E. Kaynak (Ed.), International Marketing Management (pp. 197-206). New York: Praeger.

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Rialp, A. (1997). Las fases iniciales del proceso de internacionalizaci6n de las empresas industriales catalanas: una aproximaci6n empfrica. Unpublished doctoral dissertation. Universitat Autbnoma de Barcelona. Rialp, A., & Rialp, J. (1996): El papel de los acuerdos de cooperaci6n en los procesos de internacionalizaci6n de la empresa espafiola: un an~lisis empfrico. Papeles de Economfa Espaf~ola, 66, 248-266. Root, F. R. (1994). Entry Strategies for International Markets. New York: Lexington Books. Rugman, A. M. (1981). Inside the Multinationals: the Economics of Internal Markets. New York: Columbia University Press. Rugman, A. M. (1986). New Theories of the Multinational Enterprises: An Assessment of Internalization Theory. Bulletin of Economic Research, 2, 101-118. Sarkar, M., & Cavusgil, S. T. (1996). Trends in International Business Thought and Literature: A Review of International Market Entry Mode Research: Integration and Synthesis. The International Executive, 38(6), 825-847. Thomas, M. J., & Araujo, L. (1986). Export Behavior: Directions for Future Research. In: P.W. Turnbull & S. J. Paliwoda (Eds), Research in International Marketing (pp. 138-161). Londres: Croom Helm. Turnbull, P. W. (1987). A Challenge to the Stages Theory of the Internationalization Process. In: P. J. Rosson & S. D. Reid (Eds), Managing Export Entry and Expansion (pp. 21--40). New York: Praeger. Welch, L. S., & Loustarinen, R. (1988). Internacionalization: Evolution of a Concept. Journal of General Management, 14(2), 34-55. Welch, L. S., & Loustarinen, R. (1993). Inward and Outward Connections in Internationalisation. Journal of lnternational Marketing, 1(1), 46-58. Williamson, O. E. (1975). Markets and Hierarchies. New York: The Free Press. Williamson, O. E. (1979). Transaction Cost Economics: The Governance of Contractual Relations. Journal of Law and Economics, 22, 233-261. Williamson, O. E. (1985). The Economic Institutions of Capitalism. New York: The Free Press. Woodcock, C. P. et al. (1994). Ownership-based Entry Mode Strategies and International Performance. Journal of International Business Studies, 25(2), 253-274.

PATTERNS OF INTERNATIONALIZATION OF BRAZILIAN FIRMS AND THE DECISION TO ESTABLISH SUBSIDIARIES ABROAD Antonio Barretto and Angela da Rocha

ABSTRACT The internationalization process of Brazilian firms was examined using the case study method of research, in order to determine whether existing theories could explain the Brazilian experience. Ten in-depth case studies were conducted. All companies studied were involved in foreign direct investment (FDI) at the time of data collection, and, with the exception of one, had started their internationalization by exporting. Motives to internationalize and to establish subsidiaries abroad were investigated. Typical patterns of motives to invest abroad and common sequences of entry modes were identified. The choice of foreign markets for FD1 seemed to be associated with perceived psychic distance as postulated in the literature. The ownership structure, however, did not seem to follow the patterns identified in other studies. The study confirmed the proposition that inspired leaders play a major role in the initial steps of the internationalization process. Following network theory, personal and professional networks were determined to be of paramount importance in this process.Concluding, a framework is proposed for the study of the FDI decision of firms from emerging countries.

Reassessing the Internationalization of the Firm, Volume 11, pages 79-131. 2001 by Elsevier Science Ltd. ISBN: 0-7623-0795-1

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ANTONIO BARRET'I'O AND ANGELA DA ROCHA ~TRODUCTION

Brazilian companies have been late in internationalizing. Except for a small number of very large finns who became active exporters or established subsidiaries abroad, many of them state companies, the majority of Brazilian companies, even large ones, did not enter foreign markets, except through exporting. Even in this case, only a few companies became truly dedicated to the export activity; most of them considered exporting as an alternative to diminishing demand in the domestic market or as an outlet for excess production (Da Rocha, 1987). During the 1990s, however, a different trend emerged, as a number of finns, including small and medium-sized manufacturers, decided to enter the international arena through licensing, franchising or foreign direct investment. New challenges and opportunities precipitated these changes. On one side, the opening of Brazilian markets to foreign products and investments in the early 1990s attracted competitors that were often much more powerful than companies traditionally operating in the domestic market. Declining margins, increased rivalry, and price wars were some of the challenges that local companies had to face. Foreign competitors tended to be a real threat, even to multinational companies already operating in Brazil, since these companies had also been involved in oligopolistic practices such as price agreements among competitors and many of them were not competitive with the new entrants. The threat was increased by the eagerness of local consumers to have access to foreign products, perceived as of superior quality, independently of brands or national origin (De Carvalho, 1993; Chong, 1993; V~izquez, 1994). New entrants thus posed a formidable challenge to the complacent local industry. On the other side, the creation of Mercosur - the Southern Common Market permitted many Brazilian companies to internationalize in an environment that was, to some extent, protected. Because of trade advantages shared by Mercosur members, Brazilian products were competitive in other Mercosur markets, at least until the overvalued Brazilian currency changed the trade balance in favor of other Mercosur partners. A hospitable environment to foreign investments and a successful initial launch through exports encouraged a number of Brazilian companies to establish subsidiaries in other Mercosur countries. The entry of foreign competitors in the Brazilian market seemed, as well, to stimulate domestic companies to go abroad, in search for new opportunities. The globalization of certain industries, such as the automotive industry, also had its effects in promoting company internationalization. In summary, Brazilian companies were both pushed and pulled to international markets by challenges and opportunities presented in the early 1990s. -

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Yet the response of Brazilian companies to the challenges of globalization was not as broad or effective as one would expect. Of a total of US$8.4 billion in foreign investments by Latin American countries within the region from 1995 to 1998, Brazilian companies accounted for only $0.5 billion, compared to Chile, with $3.15 billion (38% of total intra-regional investments) and Argentina, with almost $2 billion (24%). Comparing the size, population, resources and GDP of these countries, one can see that the low Brazilian share in Latin American investments is a symptom of, at the least, a lack of interest in foreign markets. This lack of interest does not describe, however, some leading Brazilian companies. In fact, as the external environment reduced its limitations to Brazilian foreign direct investment, certain companies daringly initiated such a process. This paper reports some research findings on the internationalization of Brazilian firms and their foreign direct investment decisions. It is the initial step of a larger research project financed by the Brazilian government in order to study such processes. The study aimed to answer the following research questions: • What were the companies' motivations to establish subsidiaries abroad? • Which markets and modes of entry were chosen in the internationalization process, in what sequence, and what was the rationale behind such choices? • To what extent do existing models of internationalization apply to the Brazilian case?

METHODOLOGY This exploratory research was based on ten in-depth case studies of Brazilian companies that had established subsidiaries abroad. The case method of research was considered most appropriate for this study because of its adequacy to exploratory studies. In fact, with very few exceptions (e.g. Grael & Da Rocha, 1987; Machado-da-Silva, Casali & Fernandes, 2000), there is almost no relevant research on the recent Brazilian foreign direct investment (FDI) experience. Qualitative research, of which the case study is one methodological approach, is generally considered appropriate to investigate realities, facts and issues that are not well known (Kirk & Miller, 1986). Yin (1989) suggests that the case study is especially appropriate when the research questions are of the type "why" and "how" and when the frontiers between the phenomenon under study and the context are not clearly defined. An initial list of 69 internationalized Brazilian companies was identified, based on research in newspapers and business magazines. Since the case method does not require that specific cases chosen be representative of the universe

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studied (Yin, 1989), case selection was based on how "interesting" a specific case was in terms of wealth of details and experiences. Nine of the companies interviewed were manufacturers and one was a service company. The cases selected did not include commercial firms or producers of commodities. On one side, export commercial finns or trading companies are usually companies that were started with the purpose of operating in a foreign market and had specific legislation to support such activities. Even commercial firms without any tradition of exporting present different characteristics in terms of their internationalization process. On the other side, most producers of commodities have to operate in international markets because of the nature of their products. Both situations present very specific problems and it was decided that they should not be included in this study. All the companies studied were firmly established in foreign markets and committed to internationalization. All of them had a leading position in their industries in Brazil either in terms of market share, product quality or innovative practices and were in the initial stages of establishing subsidiaries abroad. The ten companies selected for the study agreed to participate in the study. Personal interviews were conducted with top executives of each company. The in-depth interview is considered the most important research tool in case studies (Yin, 1989; Fetterman, 1989). In most companies, the chief executive officer was interviewed. Secondary sources were also studied although they did not provide much relevant information on the internationalization of the selected firms. They included company web sites, company reports and articles from newspapers and business magazines. A semi-structured questionnaire was used to conduct the interviews. This questionnaire included a general section on company characteristics and relevant data on their internationalization process such as foreign markets, modes and time of entry. Then specific questions were asked covering the main research topics, such as motivations involved in each step of the internationalization process, reasons associated to the choice of markets and entry modes, intervening events associated with the internationalization process, networking, etc. Interviewees were asked to speak freely about suggested and related topics. Interviews required between one and four hours, depending on how much time the interviewee had available. All interviews were taped and a transcription made of each one. The analysis was divided into two steps. In order to get a better understanding of the sequences involved in the internationalization process of each firm, the first step consisted of the organization of the data into tables, including foreign markets, motives, time of entry, mode of entry, location, type of facilities and ownership. The second step consisted of a more qualitative analysis of the inter-

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views. For each interview, the transcription was divided into parts according to the issues examined and each part was codified. Then, all parts of each interview under the same code were compared and analyzed. LITERATURE

REVIEW

According to Welch and Luostarinen (1988, p. 37), internationalization can be defined as "the process of increasing involvement in international operations." Because of the growing involvement of firms with inward internationalization and the interconnection between inward and outward internationalization, the authors suggest that this definition is broad enough to encompass both sides of international operations. Inward internationalization is seen as the mirror face of outward (Welch & Luostarinen, 1993). An international enterprise is defined as "a firm which services foreign markets (Dunning, 1980, p. 9)." Decision Processes and Motives to Internationalize

What factors are associated with the firm's decision to go abroad? This question has been extensively examined in the literature, although results are by no means convergent. Two types of explanations compete: on one side, "objective" or "rational" motives exist and on the other, the reasons are of a "subjective" or "non-rational" nature. The first set of motivations is strongly supported by economists such as Hymer (1976), who identified three reasons why companies would invest in international production: to neutralize competitors, to exploit unique competitive advantages and to diversify. Transaction-cost theorists also claim that business decisions are rational even if all possible alternatives are not necessarily considered in the decision-making process, which tends to be limited to a certain subset. Such "bounded rationality" would result from cognitive limitations of the decision makers in their information processing and communications capabilities, even if they intended to be fully rational (Williamson, 1975). Transaction-cost analysis sees firms and markets as governance structures, with different transaction costs (Coase, 1937). Investment decisions result from a favorable position in terms of transaction costs when using a firm's own structure. Some scholars in the area of international business have developed theories and models to explain the internationalization process using elements of the transaction-cost framework, such as Buckley and Casson (1993, 1998), Rugman (1981) and Dunning (1980, 1988, 1997). These theories are known in the international business field as internalization theories (or, in the case of Dunning's

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contribution, as the "eclectic paradigm"), suggesting that foreign direct investments occur when the benefits of internalization overcome the costs (Fina & Rugman, 1996). Internalization advantages refer to the ability and desire of a finn to transfer assets to another country using its own hierarchy instead of market mechanisms (Dunning, 1988). Market failures, such as information costs, opportunism and assets specificity, would stimulate decision makers to consider foreign direct investment as a more attractive alternative. A number of empirical studies, however, have indicated that companies do not make foreign investment decisions in a rational and systematic way. Early research (Aharoni, 1966) on foreign direct investment processes found that the FDI decision-making process could not be described by a careful and rational consideration of alternatives but rather as isolated decisions based on whether a given alternative was considered satisfactory. Yet the decision-making process was influenced by a number of elements external to the rationale for the decision but that would strongly impact the outcome. For example, Aharoni proposed that the perspective of profitability did not seem to be enough to move a potential foreign investor from inertia but that "a strong initiating force" was necessary to start the decision-making process and this force was often extraneous to the investment decision itself. The School of Uppsala offered a similar view of the reasons why companies internationalize. According to this view, internationalization was not " . . . the result of a strategy for optimum allocation of resources to different countries . . . " but rather " . . . the consequence of a process of incremental adjustments to changing conditions of the finn and its environment" (Johansson & Vahlne, 1977, p. 26). Managers would consider each problem as unique and make decisions based on the specific problem's context. When faced with a given foreign market opportunity, " . . . commitments to other markets are not explicitly taken into consideration, resource allocations do not compete with each other" (Johansson & Vahlne, 1977, p. 26). The evolutionary model of internationalization proposed by the School of Uppsala and its followers sees internationalization as a gradual process by which a company increases its commitment to foreign markets based on ongoing influences and learning effects, as well as other situational influences (Welch & Luostarinen, 1988). Authors such as Bilkey and Tesar (1977), Cavusgil (1980), Reid (1981) and Czinkota (1985), among others, constitute another stream of research on the internationalization process of the firm. Andersen (1993), in a literature review on internationalization models, classified the contribution of these authors as the "I-Model," because of their common view of internationalization under the perspective of innovation. A common characteristic underlining these models is the belief that internationalization proceeds in stages, starting with uncom-

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mitted exports to active exporting and, finally, to the establishment of subsidiaries abroad. Kutschker and B~iurle (1997, p. 110) affirmed that " . . . the degree to which internationalization is driven by deliberate elements or by muddling through can vary extremely." In some cases, internationalization would actually follow a plan and be subjected to rigorous analytical assessment; in others, it would be " . . . more incremental and accidental piece-meal engineering" (p. 110). This is supported by Maignan and Kukas (1997) who observed that managers in two international companies " . . . did not rely on sophisticated processes to choose their entry modes in foreign countries; rather, perceptions and past experiences seemed to guide their actions in the international scene (p. 8)." Researchers on decision-making processes, such as Mintzberg, Raisinghani and Thror~t (1976), have also indicated that rarely are decisions made under rigorous rationality, but that events, facts, perceptions, values and affinities of decision makers have much more importance than would otherwise be considered. Furthermore, the study of motivations has inherent difficulties, particularly when such decisions were taken a long time before the moment when they are investigated. Motives can be suppressed, repressed, rationalized or simply forgotten. A positive or negative outcome may also influence the way decisions are perceived ex-post facto. In fact, according to attribution theory (Oliver, 1997), people tend to attribute to their own actions positive outcomes, but to attribute to external causes actions whose outcomes were negative. A more recent approach to internationalization theory is the one that studies the "born global" firms, those that are started already prepared to act in the global market (Knight & Cavusgil, 1995; Madsen & Servais, 1996). These have also been referred in the literature as "global start-ups" or "international new ventures" (Oviatt & McDougall, 1994). This seems to be, in certain European countries, a very common trend, as the European Community increases its integration and companies in every member country in their context of reference take into consideration the European market as a whole. As such, the "born global" phenomenon seems to be associated mostly to the broadening of European managers' cognitive maps from the domestic to the European market. Another important issue in the internationalization process is the question of how firms decide to enter foreign markets. The Uppsala internationalization model proposes that firms will tend to start by choosing markets that are psychologically or culturally closer and as they mature in their internationalization process they will enter more distant markets. Johanson and Vahlne (1977, p. 24), in their classic article on the internationalization process of the firm, defined psychic distance as " . . . the sum of factors preventing the flow of information from and to the market." It has also

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been defined as "the perceived importance of cultural similarities" (Reid, 1986, p. 18), as "a finn's degree of uncertainty about a foreign market resulting from cultural differences and other business difficulties..." (O'Grady & Lane, 1996, p. 330) and as a "marketing disturbance component" (Halltn & WiederscheimPaul, 1993, p. 293). Nordstr/Sm and Vahlne (1992) pointed out that cultural and psychic distance are different concepts, the second encompassing the first. The following factors responsible for psychic distance have been indicated in the literature: differences in language, education, business practices, culture and industrial development (Johanson & Vahlne, 1977, p. 24); differences in the legal environment (Reid, 1986); differences in the communication infrastructure (Klein & Roth, 1990); differences in administrative systems (Nordstr~m & Vahlne, 1992); differences in business language (Halltn & Wiederscheim-Paul, 1993); and differences in industry structure and competitive environment (O'Grady & Lane, 1996). Although the concept of psychic distance has been supported by a number of studies (Bilkey, 1978; Dichtl et al., 1986; Gripsrud, 1990), others did not find support for the proposed relationship between psychic distance and choice of foreign markets (StiSttinger & Schlegelmilch, 1998) or between psychic distance and performance (Zou & Stan, 1998). Others have questioned its applicability to international market strategy (O'Grady & Lane, 1996).

Modes of Entry in International Markets In a seminal work, Anderson and Gatignon (1986) suggested that choice of entry mode in foreign markets was a "frontier issue in international marketing." Although since then this issue has been the object of many studies, there are still many questions as to why companies choose one entry mode and not another. In entering a foreign market, a company can choose between a greenfield investment and an acquisition, and in terms of ownership structure from a wholly-owned subsidiary to a minority joint venture, a licensing agreement or exporting. The choice of entry modes has been studied in the literature from various perspectives. One such perspective is proposed by the Uppsala internationalization theory and the innovation-model theorists, which defend an incremental pattern where a firm moves from lower-commitment entry modes (such as exporting) to higher-commitment entry modes (for example, a whollyowned production subsidiary) as it acquires more experience in international markets. Others, such as Okoroafo (1997), suggested a non-incremental or zigzag pattern, where a firm would choose the most appropriate pattern according to the specific situation.

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Another perspective is the one that utilizes transaction-cost theory to explain why a company would choose a certain mode instead of another. According to this perspective, environmental uncertainty, unpredictability of the results to be obtained or the difficulty to verify compliance to agreements (Rindfleisch & Heide, 1997) would affect the choice of entry modes. The entry mode decision is seen as involving questions associated to risk, return and control. Higher levels of control imply higher resource commitment and thus higher risk. On the other side, low-control modes can affect return, although they do not require the same resource commitment. Thus, firms have to balance control, risk and return issues when choosing an entry mode (Anderson & Gatignon, 1986). Kumar and Subramaniam (1997) add integration aspects as a factor (besides control, risk and return) in the entry mode decision. Anderson and Gatignon (1986) proposed a framework to analyze the efficiency of entry modes under the perspective of transaction-cost analysis, including four constructs: transaction-specific assets, external uncertainty, internal uncertainty and free-riding potential. These constructs would determine the optimum degree of control in entering a foreign market. Transaction-cost theorists see uncertainty as a major determinant of mode of entry. Two types of uncertainty are recognized: external uncertainty, defined as the "unpredictability of the entrant's external environment" (Anderson & Gatignon, 1986, p. 7), including factors such as political and economy instability, currency fluctuations, lack of adequate infrastructure or labor problems (Mascarenhas, 1992); and internal uncertainty which is characterized by a lack of "market-related knowledge in a particular entry situation" (Erramilli & D'Souza, 1995, p. 50) or "the entrant's inability to determine its agents' performance by observing output measures" (Anderson & Gatignon, 1986, p. 7). Erramilli and D'Souza (1995) empirically tested the impact of uncertainty in the choice of entry modes by service firms. They found that higher external uncertainty seemed to be related to low-control FDI modes when capital intensity was higher and for smaller firms; however, the probability to use high-control entry modes actually increased when external uncertainty increased, with low capital intensity and for very large firms. It was also determined by the study that firms moved to lower-control entry modes responding to increasing internal uncertainty. Hill, Hwang and Kim (1990) and Kim and Hwang (1992) claimed that previous research considered the entry mode decision as isolated from other similar decisions taken by a multinational firm and suggested that global strategic considerations also had an important role as a mediator of a multinational company's entry mode decision. The basis for such a claim was the verification that multinational companies take decisions based on the overall

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well-being of the group and not to optimize the performance of individual subsidiaries. The authors suggested three sets of variables as determinants of the entry mode choice: strategic, environmental and transaction-specific variables. The strategic variables proposed were three: industry concentration, global synergies and global strategic motivations. High levels of concentration in the global industry, the potential for global synergies among business units, and global strategic motivations (such as tight coordination across business units in different countries, the establishment of an outpost for future expansion, or the need to confront a mighty competitor) should play an important role in the choice of higher-control entry modes. Four environmental variables were also identified: country risk, location unfamiliarity, demand uncertainty and intensity of competition. It was proposed that when country risk is low, demand uncertainty is high, locations unfamiliar and the greater the intensity of competition in the host market, multinational firms would tend to choose low-control modes. Finally, the authors proposed two transaction-specific variables. They advanced that the greater the value of firm-specific know-how and the greater the tacit component of such know-how, the higher the probability of choosing higher-control entry modes. All the nine variables tested by Kim and Hwang (1992) were found to have a significant relationship with the choice of entry mode. Other authors, such as Gomes-Casseres (1989), looked at the entry mode decision from a strategic perspective assuming that if managers are free to decide the ownership structure when entering a new international market, their choice "should depend on their strategies for managing the firm's capabilities and geographic scope" (p. 19). Madhoc (1997) combined the transaction-cost approach with the organizational capabilities perspective in order to explain why companies choose one entry mode over another. He proposed that internalization would be preferred when a firm's know-how could be easily copied, and when the probability of the know-how being imitated was perceived as larger than the difficulties to adapt to the host country. Cooperative modes of entry would be preferred if company advantages were country-specific and could not easily be transferred and when the motivation for entry was the development of future capabilities that could be better achieved by combining with a partner. Barkema and Vermeulen (1998), using an organizational learning perspective, investigated whether multinational diversity, that is, the "diversity of the national markets in which the firm operates" (p. 10) and product diversity (breadth of the firm's product line) would affect the choice between start-ups and acquisitions as an entry mode. Results indicated that multinational diversity was associated to more start-ups, while product diversity showed a curvilinear effect

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(inverted U-shape form): both in lower and higher product diversity companies would tend to use fewer start-ups and more acquisitions. Finally, culture seems to be a major determinant of the choice of entry mode. In fact, some studies have established the existence of an association between modes of entry and psychic distance. For example, Kogut and Singh (1988) found that the larger the cultural distance, the higher the probability of choosing a joint-venture instead of a wholly-owned subsidiary as an entry mode; and that the larger the uncertainty avoidance (or risk aversion), the larger the probability of choosing a joint venture or greenfield investments rather than an acquisition. Barkema, Bell and Pennings (1996) determined that when cultural distance was smaller, new entrants tended to remain longer in the market. Morosini, Shane and Singh (1998) indicated that the larger the cultural distance to the acquirer, the better the performance of cross-border acquisitions. Internationalization of Firms in Emergent Markets It appears that foreign direct investment by firms from less developed countries is a new phenomenon and has not been much studied. In fact, very little is known about how companies from emerging economies enter international markets by foreign direct investment since most of the literature comes from developed countries. Dawar and Frost (1999), analyzing survival strategies for local companies in emerging markets, indicated that although multinational companies from developed countries have "a rich body of work to advise them on how to enter emerging markets . . . . managers of local companies in these markets have had little guidance" (p. 120). Drawing their evidence from case studies, the authors argue that if the firm's competitive assets are transferable abroad, a local firm in an emerging market should go international. However, depending on whether the pressures of globalization in their specific industry are low or high, internationalization strategies should be directed towards expanding into similar foreign markets (low pressures) or finding market niches in global scale (high pressures). Bartlett and Ghoshal (2000) have also examined, using case studies, how "aspiring multinationals from peripheral countries" can become global players. Psychological factors could be a major deterrent to internationalization, including inferiority complexes, blindness to the international market or fear of failure. As a company moved away from those "liabilities of origin," it would have to face the choice of a strategy to enter foreign markets. The authors argue that successful firms from emergent economies exploit late-mover advantages, either by finding niches or exploring opportunities deriving from the rigidities of their competitors' business models. It was also found that strong leaders that

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believed in their companies' future in international markets characterized those companies. Machado-da-Silva, Casali and Fernandes (2000), who suggested that the institutional context of reference of a company seemed to have a major impact on the internationalization process and the consequent changes in the organization, also discussed certain "liabilities of origin". Empirical evidence from case studies of Brazilian firms indicated that when managers' cognitive maps prioritized the national environment, the internationalization of the firm did not seem to result in important changes in the organization's philosophy, values or strategy. However, when the firm's management perceived the company as competing in a broader international context, the changes seemed to be quite profound. RESULTS

AND DISCUSSION

The results discussed in this section are based on the ten case studies. Appendix 1 presents some general information about the companies, Appendix 2 lists markets, year and entry modes for each company, and Appendix 3 presents location, type of facilities, and ownership structure of the firms studied. The internationalization process of the ten companies is summarized in Appendix 4. Motivations to Internationalize Brazilian Firms

Multiple motives appear during the internationalization process and they vary according to time, markets and modes of entry. In three cases, the motive to initiate exports was unsolicited foreign orders, but in another six cases exporters themselves initiated the exporting process. Their motives were in some cases opportunistic, such as the desire to sell excess production in other markets, but often proactive, such as a desire to go international or to expand the business. As companies decided to further commit themselves to exporting, other motives appeared such as to increase the firm's competitiveness, to reach new customers, to overcome the saturation of domestic markets, to explore new opportunities or to follow a network to a new market. Finally, when deciding to invest in another country, perceived motives could be to diversify risks, to explore an opportunity, to search for dominance in the regional market, to follow a network and to better serve customers, among others. Such a list suggests that motives to internationalize are contingent on industry, type of business, characteristics of decision makers, stage and degree of internationalization, as well as other factors which, in fact, seems to be the case.

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Despite the variety of motives at different moments of a company's international development, certain dominant patterns of motivations seem to be associated with the foreign direct investment decision. Five patterns of motivations to establish subsidiaries abroad were identified in this study: growth, consolidation, survival, opportunity and strategic intent. Growth This pattern of motivation was found in those companies with high market shares in the domestic market. Four among the ten companies in the study were classified in this category: Company A had market shares between 42% and 60%; Company B between 70 and 80%; Company D varied between 30% and 70% in its three business units and Company H had 60% of its market. The four companies were leaders in their industries and did not perceive much growth opportunity in the domestic market. International expansion was seen therefore by managers as the best way to sustain growth. This motivation usually appears later in the company's history when it arrives to a leadership position in the domestic market. Commonly, the first steps in internationalization are not inspired by a goal of growth, and it is interesting to note that two of these companies started to export because they received unsolicited foreign orders. Following Liang's (1995) insightful analysis, such orders may have been placed by foreign buyers exactly because early in their development these companies already displayed the excellence that would later guarantee their market leadership. Later, however, and often still as exporters, companies actively engaged in the search for new markets for their products. A natural extension of such movements was to establish subsidiaries abroad. Consolidation For some companies, the motivation to FDI seemed to be to better serve customers' needs in certain foreign markets. Three companies were classified in this category: E, G and B. 1 Two of them decided to establish subsidiaries in the U.S. market in order to better serve their customers. Managers believed that the export structure in Brazil was unable to adequately attend the needs of such customers, and the consolidation of these relationships demanded a presence in the U.S. market. For another company, the timing between the receipt of orders and the delivery of products to their European customers was so crucial that FDI became an imperative to consolidate its position in certain foreign markets. Serving customers' needs may be translated in different ways. Sometimes it means assembling or producing in the local market in order to be able to respond to orders just-in-time. Other times it may consist of warehousing, technical

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assistance, or after sale service so as to respond faster to local customers' demands. It is often associated with characteristics of the business. In any case, those companies saw themselves as deepening their relationship with international customers as they moved from exporting to foreign direct investment.

Survival In some cases, to establish a subsidiary abroad is not a choice but a requirement for survival. Two of the companies studied can be classified in this category: C and F. Both supplied the automotive industry, one with parts and another one with paints. Company C had an original technology agreement with a multinational company, who later became a minority shareholder. At the moment of the study, C was part of a global network of companies. All of them were linked to this multinational company, which was one of the two world suppliers of paints to one of the largest automobile producers in the world. Company C's managers believed that the strong position of C in the Brazilian and South American markets was the result of such arrangements. Otherwise, the company would probably not even have continued to exist. The formation of this global network in the automobile paint industry left Company C with two subsidiaries in other South American countries, as South America became a reserved market, within the network, for Company C. Company F started very early in its history to supply one of the largest world car manufacturers established in Brazil, and since then was able to acquire technology and know-how within this customer's network, but was invited to sell part of its capital to the supplier of technology. Company F opened subsidiaries abroad either to be closer to the large customer in its existing markets or to establish itself in a new market where the large customer intended to invest. It is a classical case of dependent internationalization. One characteristic of these companies' internationalization process is that internationalization was not a strategic choice and not even desired. In fact, the imposition to internationalize was resented; they neither wanted to go international nor felt this was at the time the best decision for the company. Yet managers were keenly aware of the rules of the game and knew that refusal to follow the leader of the network meant probable loss of contracts and ultimate failure in the long tenn. In this regard, survival motives differ substantially from consolidation, since in the last case companies have chosen FDI as a natural evolution of their previous strategies.

Opportunity Some companies may be pushed to internationalization by the desire to exploit a given opportunity that is considered attractive. Company I was the only one

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in the sample to fall in this category. The company founder and president strongly established in the company's culture the value of being open to opportunities and to cultivate relationships that could eventually be conducive to new opportunities. The successful implementation of such a business philosophy shaped a large conglomerate in the energy and telecommunications industry. The establishment of the first subsidiary abroad was the result of an opportunity offered to the company's president by some businessmen from another country. By the time of the study, Company I took part in a large number of joint ventures abroad and in Brazil with participation varying from 3% to 90% and had more than 30 strategic alliances and technology agreements with multinational companies from major developed countries such as the U.S., Germany and Japan, and with other leading Brazilian companies.

Strategic Intent Finally, the opening of subsidiaries abroad may be the result of a company's strategic intent or strategic vision. Top management may have a strong desire to internationalize the company even if the opening of subsidiaries abroad is not an imperative for company's growth, consolidation or survival. This was certainly the case of Company J. The firm moved directly from domestic operations to FDI, since its type of product was not easily exported. Early in the 1990s, top management foresaw the domestic market becoming extremely competitive with the massive entry of mighty foreign competitors. Top managers concluded that to become more competitive, the company needed to get international experience and to learn the operational methods of its competitors - in their own market. This was the basis for entering the U.S. market by creating new companies in the state of Nevada and, later, in Texas and Florida. The entry in the U.S. market was also seen as an opportunity to have access to capital markets in the United States. At the same time, it was decided that other Mercosur countries, especially Argentina, presented new opportunities to the company and permitted country risk diversification. Since these were smaller markets, the new entrants in Brazil would not be interested in exploiting them, at least for a certain period of time. Besides, Company J had been extremely successful in applying modem marketing tools to the selling of health care services in Brazil which permitted a very high growth rate during the previous decade. Executives believed that smaller and more conservative firms in Argentina did not have the marketing know-how to compete effectively with them. More important than all other considerations was probably the fact that the president and founder of Company J had long expressed the desire to have his company go international. When the moment came and the company seemed

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ready to move towards internationalization, the company's president and founder became the champion of the process. Such leadership was of paramount importance when the company had to face difficult moments and challenges in certain foreign markets. In this case, there is no question that the desire of the CEO to internationalize the company played a major role in the process. In fact, the competitive challenges foreseen in the beginning of the 90s did happen, but other actions could as well have protected Company J. Internationalization might not have been the best immediate response for increased rivalry and new entrants, since it represented a drain in the company's resources for a number of years. But it was the one that best fitted the strategic vision of top managers. Reflections on Motivations

This analysis of company motivations to move to FDI suggests that although many motives exist during the internationalization process, certain motives seem to be specifically associated to this mode. In fact, the patterns of motivations here examined suggest new issues to be examined. Growth and consolidation were the most common motives to move from exporting to the opening of subsidiaries abroad; six out of the ten companies studied perceived such motives as strongly associated with their decisions to establish subsidiaries abroad. These two motives are also consistent with the stages theories of internationalization. As companies expanded their activities in international markets, the opening of subsidiaries abroad appeared as a natural step with increased commitment to international operations. The other three motivations - survival, opportunity and strategic intent - are however of a very different nature. Survival as a motivation for FDI has not been considered by the theories of internationalization, at least under the form identified in this study. Both companies included in this category did not have a choice of whether they wanted to internationalize or not. As companies developed their ties to a large network in the automotive industry, neither the decision to go international or to open subsidiaries abroad nor the choice of markets was, in a sense, theirs. Refusal to follow the network would most probably imply exclusion from the network, which means, in a global industry, the company's failure. In our study, top managers of the two companies in this category were acutely aware of the potential implications of their decisions but felt there were no other viable alternatives, and they bitterly resented the absence of choice. This is presently occurring in global industries, such as the automotive industry, where suppliers serve very large global customers. As the supplier industries become more concentrated with the reduction in the number of companies serving large assemblers, suppliers are faced with the decision

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of whether to follow their customers and establish subsidiaries in those countries where the assemblers are located or intend to locate. If the supplier decides not to follow the network, the most probable result is its exclusion from the network, which typically means the end of the company. Occasionally, if it is a smaller company, it may be forced to subcontract to other suppliers and descend to the lower tiers of the supply chain. In these industries, therefore, a large domestic supplier, in order to survive, needs to go international. Global customers require their suppliers' presence in foreign markets where they have their assembling facilities. This situation shows a connection between inward and outward internationalization, as proposed by Welch and Luostarinen (1993). As the large assemblers went global, some decades ago, they were often served by domestic suppliers in each of the countries where their production facilities were established. To supply a multinational company in the domestic market implied a need to have access to foreign technology to remain competitive, which opened the door to establishing joint ventures with the licensing company. Globalization and the increased competition in these industries changed the nature of relationships between assemblers and suppliers. As assemblers moved to global platforms, suppliers were required to serve them in a large number of markets. Supplier industries were thus pulled to internationalization by assemblers. Opportunistic behavior2 of firms is another possibility to be explored when studying reasons to internationalize. When a company opens a subsidiary abroad or enters a joint venture because an opportunity appears, the situation looks very similar to the acceptance of unsolicited orders in exporting and probably should not receive further attention. But when a pattern of opportunistic motivation can be identified - when a company systematically considers such opportunities in foreign markets - then a different model emerges and should also be considered as an alternative to the traditional approach to internationalization. A company that is moved by opportunistic considerations may not have considered internationalization as a strategic alternative and may not do so even after moving into it. Yet top managers of such firms must not have cognitive barriers to international markets in order to be able to see such opportunities as deserving consideration. The opportunistic international firm does not see the borders of the domestic market as an impediment to its activities. Managers' perceptions in such a firm might be better described as covering a broader context of reference, which includes opportunities within the limits of the industry or industries where the company operates, rather than the country's borders. It is possible that born global firms share this same characteristic.

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Finally, strategic intent was another pattern of motivation identified. Critics of the Uppsala internationalization model suggest that this theory does not encompass the strategic behavior of companies (e.g. Melin, 1992). Managers of one of the companies in this study clearly saw internationalization as part of a strategy that changed it from a small local company to a large national firm and in a later stage leading to an international company. Its internationalization process was not the result of increased commitment through learning, fortuitous events or chance, but rather an intentional choice where decision makers knew exactly what they wanted for their company and proceeded to implement it as the external conditions seemed appropriate. Sequence of Entry Modes In this study, four sequences of entry modes were identified. Inward internationalization movements seemed to be inextricably linked to outward internationalization in at least one case and were thus included. Sequence: "Exporting ~ F o r e i g n Direct I n v e s t m e n t " - T h e most common sequence of entry modes was found in seven of the ten cases studied (Companies A, B, C, E, G, H, I). Companies started their internationalization process by exporting and later moved to foreign direct investment by establishing production facilities, warehouses or distribution centers abroad. Sequence: "Exporting -* Foreign Direct Investment --* Licensing" - One company (Company D) moved from exporting to FDI and then to licensing. This company saw licensing as a way to introduce its products in one foreign market. As these markets became interesting enough, the company intended to establish production facilities. Sequence: "Inward Internationalization -* Exporting -} Foreign Direct Investment" - One company (Company F) started its internationalization by acquiring technology to serve the domestic market. The licensing company later acquired a stake in the company. The company started to export using the partner's network and finally established subsidiaries abroad under the form of joint venture. Sequence: "Only Foreign Direct Investment" - One company (Company J) made its first international move by foreign direct investment, since its product was not very suitable to exporting. Reflections on Sequence A number of considerations should be made about the sequence of entry modes. First, the decision to invest abroad doesn't usually mean that a company will

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not continue with its export activities but rather that different markets may be served by different modes. As the complexity of international operations increases, companies will employ a variety of modes depending on the market served, its importance to the company, its size, potential, distance and other factors. In some cases, the company may use a subsidiary to export to markets geographically close rather than exporting from the mother company. Second, although different modes may be used simultaneously, the idea of sequential moves from less to more committed entry modes stands for all the companies studied with the exception of Company J. Even in this case, product specificities probably explain why the company did not start by exporting to foreign markets. In all other cases, exporting preceded foreign direct investment and in one case, licensing followed exporting and foreign direct investment. These sequences are predicted in the literature (e.g. Johanson & Vahlne, 1977, 1990; Welch & Luostarinen, 1988; Rugman, 1981). Yet, when considering specific markets, some companies did not follow the sequential approach. For example, without having previously exported to those markets, Company A opened a subsidiary in Argentina, Company B in Germany, Company D in Portugal, and Company H in Chile. This suggests that, at least in the Brazilian experience, the sequential model works in most cases for the company as a whole, but not for each company in every market. Third, the connection between inward and outward internationalization discussed in the literature (Welch & Luostarinen, 1993; Korhonen, Welch & Luostarinen, 1996) proved to exist in two of the cases studied. In both cases inward internationalization paved the path for outward internationalization, although in one case the company was already exporting and had made a first foreign investment. Moreover, most other companies studied were also involved in some sort of international technology transfer and these experiences were very much connected with their internationalization path.

Timing and Entry Modes Another interesting consideration refers to the timing of the move from exporting to foreign direct investment. Table 1 shows the years when the companies studied made these decisions. The foreign direct investment decision was divided in two categories. The first category was called "first FDI" and refers to the first chronological decision to establish a subsidiary abroad. However, a further examination of the data suggested that in a number of cases the companies had made an initial investment in a foreign market because of an unexpected opportunity, but this investment had no sequence or was totally deactivated, while the company

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ANTONIO BARRETrO AND ANGELA DA ROCHA Tab/e 1.

Timing of Initiation of Exports and Foreign Direct Investment.

Company

Year No. of Years

Exporting

First FDI

"Committed" from Exporting to FDI "Committed" FDI

A

1972

1976

1992

20 years

B C D E F G H I J

1969 1950 1961 1979 1983 1989 1965 1972 --

1986 1981 1991 1991 1988 1990 1977 1976 1991

1986 1993 1991 1991 1988 1990 1997 1992 1991

17 years 43 years 30 years 12 years 05 years 01 year 32 years 20 years --

restrained itself from other foreign direct investments until a later time. Because of the opportunistic nature of such investments and their discontinuity, it was decided to look into the time when the company reactivated the desire to establish foreign subsidiaries. The date when FDI was reactivated appears under the title "Committed FDI" in the table. Differences between dates in "First FDI" and "Committed FDI" indicate four cases where companies had an initial investment abroad but discontinued this entry mode for a number of years. Company A, for example, invested in warehousing and technical assistance facilities to support a major export boom to Iraq, Angola and Algeria, but two years later closed these facilities and stopped to export to these countries, because of political problems. It was not until 15 years later that the company decided to open a subsidiary abroad. Company C bought a small company in Uruguay in the early 80s to benefit from certain tax advantages offered by the local government. Little processing was done in the Uruguayan manufacturing plant, only enough to justify exporting products to Argentina under the label "Made in Uruguay." As tariffs changed, the Uruguayan company was not used anymore to export to Argentina but those exports were made again by the parent company. Company C did not divest because it was unable to find buyers for the old plant, but this subsidiary became meaningless to the parent company. Twelve years later the company engaged itself in a more committed effort to internationalize via FDI. Company H acquired a small company in Paraguay in the 70s because of an opportunity offered by local businessmen. There was not much planning or

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systematic analysis of local markets. In fact, the company did not expand its foreign investments during the next 20 years, until it felt that its position in the Brazilian market was solid enough to permit diverting resources to other markets. Finally, in the mid-70s, Company I was asked by a group of Chilean businessmen to participate in a joint venture, where the Brazilian firm would bring technology and local partners would enter with market knowledge. Because of his continuous interest in new opportunities, the president of Company I considered the offer attractive and acquired a stake in the company. Later the company divested and only reinitiated foreign direct investments in the early 1990s, more than 15 years later.

Reflections on Timing The number of years from exporting to "committed" FDI was, for most companies, quite long. Except for companies F, G and J, the number of years between exporting and committed FDI varied from a minimum of 12 to a maximum of 43. Further observation of the table shows that in 8 out of the 10 cases, "committed" foreign direct investment occurred during the 90s. Of the two companies that did not follow this pattern, one was a producer of auto parts, and its internationalization process followed the timing of the automobile industry. Furthermore, six of those companies chose to start their FDI between 1990 and 1992. This concentration of FDI in such a small period of time suggests that the major environmental force to push Brazilian companies towards internationalization was the opening of Brazilian markets to foreign products and investments, starting in 1990, and not the creation of Mercosur, which actually only became effective in 1995, or the economic stabilization that has taken place since 1994. It could be argued that the substantial reduction of tariff barriers to imports in the early 1990s could be seen by management as an early sign of further liberalization and deregulation of the economy, requiring fast changes in their companies' strategies. These results suggest that macro environmental factors play a major role in the decision of companies in emerging economies to internationalize, whatever the mode of entry in a foreign market. The decision to invest in facilities abroad, specifically, seems to be extremely sensitive to the macro environment, as shown in the Brazilian case. Choice of Foreign Markets for FDI and Psychic Distance Appendix 2 shows the location, ownership structure, year of creation and type of facilities of each foreign investment decision made by the companies studied.

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These companies made a total of 34 foreign investment decisions, and another five possibilities were under study. Seven of the 34 ventures did not exist anymore at the time of the study. The location of such investments was studied, and interesting patterns were observed that seem to support the concept that psychic distance to foreign markets is an important mediator in the FDI decision, at least during the first steps. Table 2 shows the distribution of FDIs by country and cultural cluster: Latin countries received 23 out of the 34 investments, or almost 70%. Another 24% of the investments went to the United States and Germany. Except for countries of the Latin and the Anglo-Germanic cultural clusters, only three other countries appeared (Iraq, Algeria, and Angola) and in a very specific situation, already discussed in this chapter. All future investments being considered by the companies studied were also in Latin countries. This is further indication of the impact of psychic distance on FDI decisions. A comment seems necessary on the "psychic distance paradox" discussed by O'Grady and Lane (1996) who noted that apparent similarities could obscure critical differences between cultures. Despite the perception of cultural Table 2.

Distribution of FDIs by Country and Cultural Cluster.

Cultures/Countries

Number o f Investments

Investments Under Study

Latin Cultures

23

• Argentina

10

1

• Portugal

3

-

• Chile

3

1

• Venezuela

2

1

• Paraguay

2

-

• Uruguay

1

_

• Mexico

1

1

• Italy

1

-

5

• Colombia

-

1

Anglo-Germanic Cultures

8

-

• U.S.

7

-

• Germany

1

-

Others

3

-

• Iraq

1

-

• Algeria

1

-

• Angola

1

-

Total

34

5

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proximity, managers would often point out differences between Brazil and Argentina which could jeopardize the firm's efforts to successfully establish a subsidiary in that market.

Ownership Structure of FD1 An analysis of the ownership structure employed by Brazilian firms in foreign markets is quite revealing and shows a strong preference by Brazilian companies for wholly-owned subsidiaries. In fact, 22 of the 34 ventures (or 65% of all FDIs) were wholly-owned subsidiaries, seven were joint ventures where the Brazilian company was the dominant shareholder. The Brazilian company held a minority stake in only five cases. Moreover, four of the 22 wholly-owned subsidiaries started as joint ventures but were converted into wholly-owned subsidiaries at a later time (between two and six years later), and two joint ventures were established with partners that already owned a share of the parent company in Brazil. 3 Furthermore, the five cases where there was a minority participation in a joint venture involved the same company (Company I). This company is an outlier among the firms studied. Because of its opportunistic view of internationalization, Company I was open to new opportunities that would increase its involvement with international markets. "Our vision," said a top executive, "is to operate through joint ventures in every area within the scope of our operations, with regional and intemational partners, mixing global technological cultures with regional cultures." In every other company studied, however, a strong preference among Brazilian companies for higher control modes of entry was found, which is consistent with the research on the equity structure of Brazilian companies (e.g. Valadares, 1998). In fact, the proportion of preferred to common shares in Brazilian firms is much larger than the usual proportion in developed countries. Other research (Da Rocha & Christensen, 1985) indicated that Brazilian companies have often sacrificed growth for control. The founder and president of one of the companies commented on this preference for not sharing power and control as follows: "Up to now we have had 100% control of our foreign investments. But this is not necessarily a preference. We are open to strategic alliances. But we do not want to lose control. I would enter an alliance only if we had the control in our hands. At least this has been all the time in my mind." A related issue concerns the relationship between entry modes and psychic distance. The proposition that the larger the cultural distance, the higher the probability of choosing a joint venture instead of a wholly-owned subsidiary

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as an entry mode, was not supported by this study's results. The three countries that presented larger psychic distance to Brazil in our study, Germany, Iraq and Algeria, received wholly-owned subsidiaries. The only other non-Latin country in the study, the United States, had six investments in wholly-owned subsidiaries a and one in a joint venture. All investments in joint ventures with a minority stake were in Latin countries, but these, of course, were done by the same company, which has previously been portrayed as an outlier. Other investments in joint ventures with a majority stake were in Portugal, Argentina, Chile, and Venezuela, countries that are considered culturally close to Brazil.

Reflections on Ownership The hypothesized preference for more control over foreign subsidiaries among Brazilian companies does not seem, therefore, to be conducive to choosing joint ventures. It looks like the impact of psychic distance on the choice of ownership structure in international investments of Brazilian firms does not follow the relationship proposed in the literature, that is, when psychic distance is high, companies tend to choose joint ventures instead of wholly-owned subsidiaries. If psychic distance does not explain the choice of higher-control entry modes by Brazilian firms, what other variables might help to understand such a choice? Strategic variables, as those proposed by Kim and Hwang (1992), do not apply to the situation examined, since these companies are not yet multinationals whose choices of entry modes could be mediated by strategic considerations such as global synergies or strategic global motivations. Environmental variables (such as country risk, demand uncertainty and intensity of competition) did not seem to play a role in the decisions studied, since this pattern of choice among Brazilian firms did not seem to be associated to specific countries but rather appeared to be of a more general nature. In one case at least transaction-costs variables seemed to interfere. One company (Company J) indicated that their entry into Argentina with a whollyowned subsidiary was more appropriate since the company had specific marketing know-how that no other potential partner in that country shared and there were no other important capabilities to be acquired from local partners. Yet all other four investments of this company were in the U.S. and all of them were also wholly-owned subsidiaries. It is hypothesized here that the preference for higher-control modes among Brazilian companies might be associated with specific aspects of the Brazilian culture, particularly its relational aspects, since in a relational culture, power and control are not easily shared with strangers. Furthermore, since in such cultures trust is necessary to establish long-term relationships, and trust can only be acquired over a long period of time, it is possible that in relational

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cultures the relationship between psychic distance and entry modes is inverse: the higher the cultural distance, the higher the probability of choosing a whollyowned subsidiary. Yet, as psychic distance is reduced over time, companies may choose to move to lower-control modes.

Value-Added in Foreign Markets The extent of value added in foreign markets was also examined. Of the 34 foreign investments, 25 were assembly/production/operations facilities, four were distribution facilities, three were warehousing and technical assistance facilities, one was a trading company, and one was in the restaurant business. It is generally considered that a company that invests in production facilities in foreign markets has a higher degree of international involvement than a company that establishes a distribution center or a warehousing operation (Kutschker & Biiurle, 1997). This logic suggests that a full production plant in a foreign market is indicative of a higher degree of involvement than an assembly operation. Of the ten companies studied, eight had invested at least in one foreign market in production facilities and two in assembly facilities.

Leadership in the Internationalization Process The role of top executives in leading a company to international operations has long been discussed in the literature (e.g. Bilkey, 1978; Cavusgil, 1984; Aaby & Slater, 1988; Wood & Robertson, 1997; Zou & Stan, 1998). In the cases studied, the role of the CEO as a leader was a very important factor in the internationalization process. In eight of the ten companies studied, the chief executive had an extremely important role in the international expansion of the firm. These chief executives were described by their subordinates using terms such as "charismatic," "talented," "courageous," "daring," "visionary," or "conqueror," among others. In one company, the premature death of the leader halted the internationalization process for a long period of time. These results support the contention made by Bartlett and Ghoshal (2000) that companies that succeed in internationalization have inspired leaders that believe in their company's future in the global marketplace. There was also some support for the affirmation in the literature that previous international experience of the CEO might influence the choice of foreign markets. Chief executives also tended to give a lot of time to the cultivation of personal relationships that could generate new businesses for the company or create goodwill. Some executive interviewed considered this an important asset for the company's internationalization process. In two cases, such relationships were

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considered to be of paramount importance to entering foreign markets and for the success of businesses abroad. In fact, one company went so far as to consider deliberate networking as a first step to a successful entry in an international market. In another case, the company's founder entered the U.S. market through a joint venture with a former classmate in a U.S. Executive Program. In yet another case, relationships established in a golf club were determinant in getting rather confidential information that probably made the difference between the company's success or failure. There were, in fact, a very large number of situations reported in the study where personal contacts made the difference in a very important decision for the company during its internationalization process. This evidence suggests that in relational cultures, businessmen give high importance to the establishment of personal relationships even when those relationships are established in an international context. International expansion made more sense when based on a network of relationships.

FINAL CONSIDERATIONS This exploratory study investigated patterns of internationalization among Brazilian companies. Although extensive research has been conducted on the internationalization process of firms, particularly in Scandinavian countries, very few studies have been carried on in emerging economies such as Brazil. 5 The present study intended to help fill this gap by analyzing in depth ten cases of Brazilian companies that have recently established subsidiaries abroad. The study's results support, on general lines, the propositions of the Uppsala internationalization model (Johanson & Vahlne, 1977, 1990), which has been suggested to be more appropriate to describe the first steps of internationalization rather than the behavior of the multinational or global corporation (Young, 1990). The companies studied, although in the process of becoming multinationals, are still regiocentric corporations (Perlmutter, 1969) when it comes to considering the scope of their foreign investments and their location mainly in the Americas. Inward internationalization played a major role in the internationalization process of some of the firms studied. Although inward operations appeared to be determinant to promote outward internationalization only in one case, in most of the other cases these two sides of internationalization were inextricably linked with both processes increasing the probability of further commitment to international operations. Despite the general support for the Uppsala model provided by the study, interesting differences and singularities have been suggested in this research. Some of these specifics are probably associated to the unique characteristics of each country as pointed out by Welch and Luostarinen (1988, p. 163) who

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noted that " . . . it should be expected that observed patterns of internationalization will vary from country to country and over time, because of environmental differences at the outset, as well as the inevitable changes in the environment" but others could be shared by firms in other emerging economies.

Proposed Framework for the Study of the Foreign Direct Investment Decision of Firms from Emerging Economies The present research results suggest that although firms from developing countries may follow similar patterns in their internationalization processes, some differences exist that deserve to be studied further. Drawing from the findings of this study and, to some extent, from the literature review, 6 Fig. 1 summarizes the factors intervening in the FDI decision of firms from emerging economies. Two patterns of internationalization were identified; one was called strategic internationalization and the other dependent internationalization. Factors were divided into four groups: precipitating factors, cognitive filters, company motivations and accelerating factors. Precipitating factors are characterized by changes in the macro environment, domestic or external, or in the operating environment of the firm (the industry where it operates). Cognitive filters are composed of managers' perceptions and beliefs used to interpret environmental changes and their impact on the firm's future. Cognitive filters interfere with managers' ability to respond to change and thus can have a major impact in the firm's growth and survival. Rational motives express the rational aspects of the FDI decision making process while cognitive filters express the psychological elements involved in the process. Finally, accelerating factors may stimulate (or deter) the final FDI decision.

The Strategic Internationalization Pattern Strategic internationalization occurs when firms elect to go to foreign markets based on their strategic choices. Changes in the macro environment, domestic or international, may precipitate the internationalization decision. The opening of protected markets to foreign competition and deregulation, because of the threats they pose to local firms in emerging economies, can precipitate the decision to invest abroad. The impact on local companies of the opening of emerging markets to foreign competitors has been commented on by Dawar and Frost (1999, p. 120), indicating that because of the superior resources and capabilities of the new entrants, "the very survival of local companies in emerging markets is at stake." Yet, the imposition of globalization on emerging economies is a force that is difficult to resist especially when combined with internal and external pressures to open these economies. The process of

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opening emerging markets to foreign competitors, however, is not frequently characterized by a smooth transition but more often can be described as a shock. The formation of trade blocs or major trade agreements may also stimulate companies to go abroad because of the opportunities such agreements present. Also manager's perceptions of their operating market are often broadened. It is one of the contentions of this paper that the establishment of free-trade zones, trade blocs or common markets among countries expands managers' cognitive maps, stimulating them to include other countries in their perceived served market. The timing of foreign direct investment in this study was strongly influenced by the external and domestic environments. When the Brazilian environment became favorable to FDI, a number of companies that were already committed to exporting moved to this next stage of internationalization. Theories of the internationalization of firms have not explored the role of the external macro environment in the internationalization process although they have considered the host country's environment as affecting such decisions. However, earlier research in Spain (Jarillo & Martinez, 1991) and the present movement towards "born global firms" in Europe suggest that changes in the macro environment may have more importance than suggested in existing theories in defining the extent to which managers of local firms incorporate portions of the international environment into their cognitive maps. This is also supported by a study by Globerman and Shapiro (1999), who found that in the case of Canada, the NAFTA agreement seemed to significantly increase the levels of both inward and outward investments. Chetty (1999) also indicated that Anzcerta, the Australia - New Zealand trade agreement, seemed to propel the internationalization of New Zealand firms. In the Brazilian case, there is strong evidence derived from this study that the establishment of Mercosur broadened managers' mental maps to incorporate Argentina, Uruguay and Paraguay as an extension of the Brazilian market, and, subsequently, Chile, Venezuela and other South American countries. Yet, for the company to proceed in its internationalization process, there are certain cognitive filters that have to be considered. The first one is "liabilities of origin," as indicated by Bartlett and Ghoshal (2000). Inferiority complexes, fear of failure or blindness in interpreting environmental signs may impede the internationalization of finns from emerging economies or not even permit it to be considered. Other filters are the anticipation of risks in the domestic market and the perception of opportunities in foreign markets associated with the precipitating factors or other events. Evidence from this research suggests that the anticipation of competitive threat, rather than the present levels of competitive action, might stimulate a company to go international. At least some Brazilian

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companies seem to have been pushed to FDI by the need to get prepared to face fierce competition in the domestic market, whether this was explicit or not. This observation is suggested by the fact that most companies initiated their FDI in the early 1990s, exactly when the opening of Brazilian markets to foreign products and investments started, but before they could actually feel the impact of such changes. Although the literature on internationalization recognizes high levels of competitive action as a motive to internationalize, the findings of this research show that in emerging economies, when moving from protected to freer markets, anticipation of changes in competitive rivalry can be a major factor in the internationalization process. The ability to extend their operating market beyond national boundaries may play a major role in this process. As managers broaden their view of what their potential served market is to incorporate other countries, the probability of the company going international increases as well as the probability of succeeding on the internationalization path (Machado-da-Silva, Casali & Fernandes, 2000). Because of its large domestic market, high trade barriers and institutional limitations to foreign direct investments, most Brazilian managers developed a rather limited perception of their operating market. At least some of the companies that participated in this study, however, showed an ability to define their markets in broader terms than the domestic market. This might be the result of previous experience with exporting, or of managers' international experience. Also, top managers' desire to go international could bring the necessary commitment for internationalization to succeed. Many authors have indicated the role of a strong leader in the internationalization process. In emerging countries, however, the idea of a company turning multinational is often seriously limited by managers' vision and their "liabilities of origin." Local companies often do not see themselves as capable of competing with their stronger competitors in the global marketplace (Bartlett & Ghoshal, 2000). This is why the role of a corporate leader, a champion in the internationalization process, becomes much more important in firms in emerging countries than in developed countries; he has to overcome those fears of inferiority or lack of confidence in their own abilities to compete in global markets and instill energy and enthusiasm in his subordinates. In the cases studied, the leader was the president himself, whose authority often went beyond the CEO position because of his role as the company's founder. At this point, a company's motivations to internationalize can play a role in the process, whether they are associated to growth, consolidation, opportunity, strategic intent or a combination of these. These motives are, of course, rational, and they did in fact play a role in the internationalization of the firms studied here. Yet it seems that they would not be sufficient to move companies to internationalize if other factors were not present.

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Finally, other factors such as company competencies and resources, managers' international experience and the availability of qualified managers to send abroad can accelerate or halt the internationalization process of firms in emerging markets. The last two factors can be a major deterrent to FDI since in protected economies very few managers have had the chance to acquire international experience, either in the inward or outward side of internationalization. Evidence from other research in Brazil (Magalhaes & Da Rocha, 2000) suggests that even the emerging Brazilian multinationals basically do not invest in the development of human resources for the international market. An exception is the growing number of Brazilian managers that are being expatriated by foreign multinational corporations, which may constitute the seeds for a future pool of Brazilian international managers. The Dependent Internationalization Pattern The "dependent internationalization" pattern does not seem to be affected by the previous factors. The precipitating factor seems to be industry globalization with its correlates of concentration of suppliers and network formation. The logic of internationalization for satellite firms from emerging countries that belong to a global network is the logic of the industry's globalization: it will define extent, direction, timing, location, and possibly the specific mode of entry. Cognitive filters are managers' perceptions of the network pressures and the inevitability of the outcome as well as "liabilities of origin." In fact, a study of the impacts of globalization in the auto parts industry in Brazil showed that for many suppliers of the automotive industry, globalization meant selling the company to foreign competitors rather than competing in the international marketplace. These were companies that were controlled by their "liabilities of origin," making them unable to face the competitive threat posed by foreign entrants (Da Rocha & Arkader, 2000). Once managers accept the impositions of their role in the network as a satellite firm and realize this is the only alternative available, survival becomes the motive to internationalize via FDI. No accelerating factors are involved: the network again, determines the speed of the process. The internationalization of satellite firms in globalized industries can be seen as a recent phenomenon that has not received enough attention in the international marketing literature. Yet the concentration process of many industries suggest that these global networks will become more and more common, not only within the automotive industry, but in many other industries. Examining network internationalization, Johanson and Mattson (1993) observed that "the strategic discretion is constrained by the character of the

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network in which the firm is operating . . . " (p. 319). In emerging economies, a dependent pattern of internationalization may be seen more often as firms from those countries move to international markets because of their subordinate positions in these networks, with very little ability to determine if, when and where the foreign investment decision will take place. In such a situation, existing theories of internationalization do not apply. A network theory of internationalization, where the leader of the network determines the extent, direction, location, timing, and often the ownership structure of foreign investment and internationalization is not a matter of choice by the satellite firm, needs to be developed, and more research is needed in order to understand the specificities of satellite firms in developing countries.

Choice of Foreign Markets and Modes of Entry Another issue examined in this research was how firms decided on which foreign markets to go into and which modes of entry to use. Choice of foreign markets seemed to be strongly mediated by the psychic distance effect, as proposed in the traditional literature on internationalization (e.g. Johanson & Vahlne, 1977; Dichtl et al., 1986), although not always identified in some of the most recent studies (e.g. StSttinger & Schlegelmilch, 1998).It is possible that as companies move forward in their internationalization process, psychic distance becomes a less important factor in the decision to choose a foreign market. Yet for companies in emerging markets, in the first steps of internationalization, it seems that psychic distance still explains a large amount of the choice of markets in the FDI decision. Some variables were identified in this study as interfering in the foreign market entry decision that could moderate the impact of psychic distance. Some of them have been identified in previous studies but others may be more typical of the specific situation described in this study. Table 3 shows the variables identified as moderators of psychic distance. Some of the factors identified can reduce the perception of psychic distance to a foreign market, such as managers' and companies' international experience and managers' cultural background. Among those, personal connections were considered of paramount importance in choosing a foreign country for FDI since they allow for the help of an insider that could be trusted. This is certainly typical of relational cultures, such as Brazil. Other factors, however, seemed to reduce the importance of psychic distance in the foreign market entry decision. For companies whose motivations for internationalization were consolidation and opportunity, psychic distance was less relevant when choosing foreign markets. Also, in some companies, the desire

Patterns of Internationalization of Brazilian Firms Table 3.

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Moderators of Psychic Distance to Foreign Markets in FDI Decisions of Brazilian Companies.

Factors Reducing Psychic Distance • Managers' international experience • Company's intemational experience • Existence of personal contacts or friends in a foreign market • Managers' cultural background

Factors Reducing the Importance of Psychic Distance • Interesting new opportunities • Important customers in a foreign market • Managers' desire to compete in "difficult" markets • Managers' desire to learn in foreign markets

to learn in First-World markets or the desire to compete in "difficult" markets, sometimes a question of pride, would be considered. Culture seemed to play a major role in the way companies approached foreign markets. Networking was considered by some companies as a major initial step in a foreign market. The importance of networking in internationalization has been established in previous empirical studies, such as Bonaccorsi (1992), Coviello and Munro (1995) and Chetty (1999), and discussed in the literature by Welch et al. (1998) and Johanson and Mattson (1993), among others. Most companies in this study benefited at various moments in their internationalization process from ties to a network, formal or informal. These networks ranged from informal connections of top managers to local export cooperative groups or supply chain arrangements. Yet, top executives indicated that the establishment of personal relationships and informal ties was one of the most important elements in their companies' internationalization processes, more important than other types of networking. Deliberate networking was considered by some as a first step necessary to enter foreign markets. Only after personal connections were established was further commitment to the market considered acceptable. It is thus proposed here that in relational cultures, personal networks are major facilitators of FDI. Further research seems to be necessary to incorporate informal network arrangements and personal relationships in the internationalization theories of the firm, not only as a support to internationalization, as in joint export groups (Welch et al., 1998), but also as deliberate management action to prepare the conditions necessary to establish and manage a subsidiary abroad. Another issue relates to the choice of ownership structure in FDI. Existing theories do not explain why Brazilian firms in this study had a strong bias towards higher-control entry modes even in situations where the literature would expect a lower-control mode. It is suggested here that culture plays an

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important role in the choice of ownership structure but not necessarily in the ways predicted in the literature (e.g. Kogut & Singh, 1988). It is a contention of this paper that in relational cultures, the need to establish long-term relationships before engaging in joint venture may cause companies to start with higher-control entry modes in foreign markets. This suggestion, however, has not been empirically verified in this study because the internationalization processes studied were still very recent. These research results and potential propositions need to be further tested, preferably in other emerging markets and relational cultures, in order to verify to what extent they describe a specific Brazilian situation or whether they can be extended to firms from other, developing countries aspiring to become multi-

nationals.

NOTES 1. Company B was classified both in "internationalization for growth" and "internationalization for consolidation," since it was interpreted that both classifications correctly applied to this case. 2. The term "opportunistic behavior" is used here without negative connotations. It expresses the practice of exploiting new opportunities as they present themselves to managers. 3. It could be argued that these ventures should be considered as wholly-owned subsidiaries since the parent company itself was a joint-venture between the same partners. 4. Two of those ventures started as joint venture but were later changed into whollyowned subsidiaries. 5. Exceptions are the work by Fonfara and Collins (1990) on the internationalization of Polish firms and the one by Young, Huang and McDermott (1996) on the internationalization of Chinese firms. 6. The concept of "liabilities of origin" is borrowed from Bartlett and Ghoshal (2000).

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Liang, N. (1995). Soliciting Unsolicited Export Orders. Are Recipients Chosen at Random? European Journal of Marketing, 29(8), 37-59. Machado-da-Silva, C. L., Casali, A. M., & Fernandes, B. H. R. (2000). Internationalization and Organizational Change: a Multi Case Study of Brazilian Organizations. Latin American Business Review, forthcoming. Madhoc, A. (1997). Cost, Value and Foreign Market Entry: the Transaction and the Firm. Strategic Management Journal, 18, 39-61. Madsen, T. K., & Servais, P. (1996). The Internationalization of "Born Globals" ~ An Evolutionary Process? Proceedings of the Fourth CIMaR Symposium. San Diego, California, 1996. Magalh~es, F., & Da Rocha, A. (2000). Formaq~o de Executivos Internacionais por Empresas Brasileiras Internacionalizadas. Anales de la Asamblea Anual del Consejo Latinoarnericano de Escuelas de Administraci6n. Barcelona, Sept. 25-29. Maignan, I., & Lukas, B.A. (1997). Entry Mode Decisions: the Role of Managers' Mental Models. Journal of Global Marketing, •0(4), 7-22. Mascarenhas, B. (1982, Autumn). Coping with Uncertainty in International Business. Journal of International Business Studies, 13, 87-98. Melin, L. (1992). Internationalization as a Strategy Process. Strategic Management Journal, 13, 99-118. Mintzberg, H., Raisinghani, D., & Th~or~t, A. (1976). The Structure of Unstructured Decision Processes. Administrative Science Quarterly, 21(2), 151-61. Morosini, P., Shane, S., & Singh, H. (1998). National cultural distance and cross-border acquisition performance. Journal of International Business Studies, 29(I), 137-158. NordstrSm, K. A., & Vahlne, J. E. (1992). Is the Globe Shrinking? Psychic Distance and Establishment of Swedish Sales Subsidiaries During the Last 100 Years. Paper presented at the International Trade and Finance Association's Annual Conference, Laredo, Texas, 22-25, April. O'Grady, S., & Lane, H. (1996). The Psychic Distance Paradox. Journal of International Business Studies, 27(2), 22-29. Okoroafo, S. C. (1997). Strategic and Performance Issues Associated with Mode of Entry Substitution Patterns. International Marketing Review, 14(1), 20-38. Oliver, R. L. (1997). Satisfaction: a Behavioral Perspective on the Consumer. Boston, Mass.: McGraw-Hill. Oviatt, B. M., & McDougall, P. P. (1994). Toward a Theory of International New Ventures. Journal of International Business Studies, (First Quarter), 45-64. Pedmutter, H. V. (1969). The Tortuous Evolution of the Multinational Corporation. Columbia Journal of World Business, (Jan.-Feb.), 9-18, Reid, S. (1981, Fall). The Decision Maker and Export Entry and Expansion. Journal oflnternational Business Studies, 101-112. Reid, S. (1986). Migration, Cultural Distance and International Market Expansion. In: P. W. Turnbull & S. J. Paliwoda (Eds), Research in International Marketing (pp. 22-34). London: Croom Helm. Rindfleisch, A., & Heide, J. B. (1997). Transaction Cost Analysis: Past, Present and Future Applications. Journal of Marketing, 61, (October), 30-54. Rugman, A. M. (1981). Inside the Multinationals: the Economics of Internal Markets. New York: Columbia University Press. St/~ttinger, B., & Schlegelmilch, B. B. (1998). Explaining Export Development Through Psychic Distance: Enlightening or Elusive? International Marketing Review, 15(5), 357-372.

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Patterns of Internationalization of Brazilian Firms

117

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118

ANTONIO

A P P E N D I X 2. Company A

Sequence,

Timing

Countries (by entry order)

BARRE'Iq'O

and Mode

AND ANGELA

of Entry

in Foreign

DA ROCHA Markets.

Sequence of Entry Modes

1. Uruguay

1972 - exports (unsolicited orders)

2. Paraguay

1972 - exports (unsolicited orders)

3. Iraq

1975 - exports 1976 - FDI 1980 - deactivated FDI

4. Algeria

1975 - exports 1976 - FDI 1986 - deactivated FDI

5. Angola

1976 - exports 1977 - FDI 1981 - deactivated FDI, continued to export

6. Other Africa/Middle East

1976 and after - exports (representatives)

7. Chile

1980s - exports (agent)

8. Bolivia, USA, Europe

1980s - (agents and representatives)

9. Argentina

1992 - FDI

10. Portugal

1993 - FDI 1997 - divestment

11. South Africa

under study - exports (agent)

1. Chile

1969 - exports (unsolicited orders, representative)

2. Uruguay/Paraguay

early 70s - exports (unsolicited orders, representative)

3. Argentina

mid-70s - exports (distributors, wholesalers)

4. Mexico

70s - exports (commissioned agent) 1997 - FDI

5. Other countries

70s and 80s - exports (representatives and distributors)

6. USA

70s - exports (importers and later representatives) 1986 - FDI

7. Germany

1995 - FDI

8. Canada

1996 - exports (from the U.S. subsidiary) + third-party warehousing

1. 2. 3. 4.

1950 1981 1993 1996

South America Uruguay Chile Argentina and Venezuela

- exports -FDI - FDI -FDI

Patterns of lnternationalization of Brazilian Firms Company

Countries (by entry order) 1. Uruguay

E

119

Sequence of Entry Modes 1961 - exports (representative)

2. Paraguay

1962 - exports (representative)

3. Chile

1964 - exports (representative)

4. Peru

1966 - exports (representative)

5. Bolivia

1968 - exports (representative)

6. Ecuador

1970 - exports (partnership with local assembler)

7. Venezuela

1970 - exports (partnership with local assembler)

8. Angola, Nigeria, Mozambique

70s - exports (partnership with local assembler)

9. USA

1988 - exports (directly to customer)

10. Portugal

1991 - FDI

11. Argentina

1992 - exports 1995 - FDI

12. Mexico

1992 - exports (partnership with local assembler)

13. South Africa

1995 - exports (representatives)

14. Cuba

1997 - exports (representatives)

15. Nigeria

1998 - exports (partnership with global assembler)

16. China

1998 - exports (partnership with global assembler)

17. India

under study - exports (partnership with global assembler)

18. Ecuador or Colombia

under study - FDI

1. Paraguay

late 70s - exports (representatives) 1997 - home office

2. Uruguay

late 70s - exports (representatives)

3. Bolivia

early 80s - exports (representatives) 1997 - home office

4. Chile

late 70s - exports (representatives) 1997 - exports (representative home office) under study - FDI

5. USA

80s - exports (representative) 1991 - FDI

6. Canada

80s - exports (representative) early 90s - exports (from the U.S. subsidiary)

7. Other South American countries 80s and early 90s - exports (representatives)

120

ANTONIO

BARRETI'O

APPENDIX 2. Company

Countries (by entry order)

H

DA ROCHA

Continued. Sequence of Entry Modes

8. Argentina

80s- exports (representative) 1997 - exports (representative home office) under study - FDI

9. Australia

80s - exports (representative)

10. Central America and the Caribbean

G

AND ANGELA

90s - exports (from the U.S. subsidiary)

1. USA

1983 - exports (to U.S. partner) 1988 - FDI

2. Korea

1990 - exports (to local assembler)

3. Argentina

1994 - FDI 1997/98 - downsizing

1. Germany

1989 - exports (representative)

2. Chile

1989 - exports (representative)

3. Argentina

1989 - exports (representative) 1993 - FDI

4. Portugal

1990 - FDI 1996 - divestment

1. Paraguay

1965 - exports 1977 - F D I

2. Argentina

90s - exports 90s - F D I 1998 - F D I

3. Chile

1997 - F D I

4. Other South American countries

90s - exports

1. Paraguay

1972 - exports (directly to customer) 1977 - exports (representatives) 1994 - FDI

2. Uruguay

early 70s - exports (directly to customer)

3. Chile

early 70s - exports (directly to customer) 1976 - FDI 1984 - divestment

4. Argentina

early 70s - exports (directly to customer) 1992 - FDI 1993 - FDI

5. Angola, Mozambique, Togo

mid-70s - exports (in partnership with engineering companies and trading companies)

Patterns of Internationalization of Brazilian Firms Company

Countries (by entry order)

Sequence of Entry Modes

6. Other countries in Latin America late 70s - exports (representatives) 7. Philippines

early 80s - exports (representative)

8. Pakistan

early 80s - exports (representative)

9. Italy

1992 - FDI

10. Venezuela 1. U S A

1995 - FDI 1991 - FDI 1993 - FDI 1995 - FDI 1997 - FDI

2. Argentina

1993 - FDI 1994 - FDI 1997 - divestment of first c o m p a n y

3. Venezuela

1998 - FDI

4. Colombia

under study - FDI

121

122

ANTONIO BARRETTO AND ANGELA DA ROCHA

A P P E N D I X 3. Country

Argentina

Mode of Entry Company Type of Ownership A C

D E F G

H I J

Portugal

A D

G Chile

C

E H I

Venezuela

Location, Type of Facilities and Ownership Structure in FDI

C

wholly-owned subsidiary joint venture, majority (with the same partner in Brazil) wholly-owned subsidiary wholly-owned subsidiary (under study) wholly-owned subsidiary joint venture, majority (51% in 1993; moved to 91% in 1995) wholly-owned subsidiary

Year

Type of Facilities

1994 1996

assembly & distribution production

1995 2000

production distribution

1994 1993

production production

1990

joint venture, majority (90%) joint venture, minority wholly-owned subsidiary (divested in 1997) wholly-owned subsidiary

1992 1993 1993

initially distribution; production in 1998 production production operations

1994

operations

wholly-owned (divested in 1997) joint venture (initially 66%; changed into whollyowned subsidiary in 1997) joint venture, majority (divested in 1996)

1993 1991

assembly and distribution production

1990

production

joint venture, majority 1993 (changed into whoUy-owned subsidiary in 1995) wholly-owned subsidiary 2000 (under study) joint venture, majority 1997 joint venture, minority 1976 (changed to majority in 1980 and divested in 1984)

production

joint venture, majority (with the same partner in Brazil)

1996

production production production

operations

Patterns of Internationalization of Brazilian Firms Country

Venezuela

Mode of Entry Company Type of Ownership I J

joint venture, minority (17%) wholly-owned subsidiary (under study)

123

Year

Type of Facilities

1995

production

2000

operations

Paraguay

H I

wholly-owned subsidiary joint venture, minority

1986 1994

production production

Uruguay

C

wholly-owned subsidiary

1981

production

Mexico

B D

wholly-owned subsidiary wholly-owned subsidiary

1997 2002

distribution assembly and distribution

Italy

I

joint venture, minority

1992

trading company

Colombia

J

wholly-owned subsidiary (under study)

USA

B

joint venture, majority 1986 (changed to wholly-owned subsidiary in 1988) joint venture, majority (80%) 1991 wholly-owned subsidiary 1988 joint venture, majority 1991 (changed to wholly-owned in 1997) wholly-owned subsidiary 1993 wholly-owned subsidiary 1995 wholly-owned subsidiary 1997

E F J

2000 operations

assembly and distribution

distribution distribution retailing

operations operations operations

Germany

B

wholly-owned subsidiary

1995

distribution

Iraq

A

wholly-owned subsidiary (divested in 1980)

1976

warehousing and technical assistance

wholly-owned subsidiary (divested in 1986)

1976

warehousing and technical assistance

wholly-owned subsidiary (divested in 1981)

1977

warehousing and technical assistance

Algeria

Angola

A

A

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ANTONIO BARRETTO AND ANGELA DA ROCHA

APPENDIX 4 A Summary of the Ten Internationalization Processes Studied Company A was founded in 1949 and started its international operations as a passive exporter of trailers and semi-trailers in 1972, accepting unsolicited orders from foreign customers from Uruguay and Paraguay. The company had participated in a trade fair in Chile, subsidized by the Brazilian government, with other companies from the same and complementary industries, which permitted it to make some foreign sales. In 1974, the company licensed technology from two Swedish firms to manufacture special trucks for heavy construction and mining and a specialized semi-trailer for the cement industry. But it was not until a few years later, after a major increase in production capacity, that Company A decided that exporting could be an interesting alternative since the new plant had excess capacity when compared with the potential demand in the Brazilian market. When the company successfully achieved a high market-share in the domestic market (between 40 and 60% in the main product lines), exports became even more an imperative for growth. Often, entry into a given export market resulted from indications of customers in other countries. As its activities in certain markets (Iraq, Algeria and Angola) increased substantially, Company A opened commercial, distribution and technical assistance facilities in these countries to serve customers but continued to use intermediaries in others. The facilities in these three countries were later deactivated as serious political and economic problems were faced by these countries. Inward internationalization through joint venture in Brazil and the establishment of assembly subsidiaries abroad were the next step. The company entered a number of joint venture arrangements in Brazil, by which it gained access to the technology necessary to compete in other foreign markets. These joint ventures with multinational companies, in which Company A had a majority stake, permitted the company to have access to advanced technologies in different aspects of its businesses, such as brakes and air-conditioning equipment. Also, the joint venture opened new opportunities to serve customers of its partners in other countries as well as in Brazil. In the early 1990s Company A decided to establish two assembling units in foreign markets: one in Argentina (1992) and another in Portugal (1993). In 1997, Company A divested from Portugal. The Portuguese subsidiary was sold to a local group, which became the local assemblers and distributors of Company A. In 1998, the company was increasing its investment in Argentina.

Patterns of Internationalization of Brazilian Firms

125

Company B, founded in 1911, was a manufacturer of cutlery products. It also started as a passive exporter attending to unsolicited orders from Chile, Uruguay and Paraguay during the early 70s, followed by Argentina a few years later. During the 70s and 80s the company expanded substantially its export activities using agents and representatives in each export market; by 1998 it had around 60 representatives all over the world. The choice of representatives was often based on whether they served other Brazilian companies in the local market. At this point, the perceived motivations to move from passive to proactive exporter were the possibility of serving new groups of customers and the saturation of the domestic market (Company B's market share in Brazil for some of its product lines was between 70 and 80%). Proactive exporting meant the need for increased control of its operations which took the company to develop teams of product specialists to visit representatives and distributors in every foreign market it served. As time passed and exports increased, management felt that this indirect approach to exporting was not adequate given the growing share of the company's sales to certain markets. Foreign direct investment was done by the establishment of distribution centers in certain countries in order to better serve existing customers and to have a presence in more demanding and sophisticated markets. The markets chosen for FDI were the U.S., Germany and Mexico. The investment in the U.S. was in 1986, as a joint venture. In 1988, the U.S. operation became a wholly-owned subsidiary. The entry into Canada was a result of the international expansion of the firm's most important customer in the U.S., one of the largest retailing companies in the world. As this customer expanded its operations to Canada, Company B was forced to follow. This time, however, the arrangement was to outsource warehousing to a third party while the control of operations in Canada was done by the American subsidiary. In 1995 the company established an assembly and distribution operation in Germany and in 1997 the same was done in Mexico. Both were wholly-owned subsidiaries. In 1998, Company B was considering opening a distribution center in Singapore, but delayed such investment until the situation in Southeast Asia became more stable. Also, the company was expanding its facilities in the U.S., planning for future production of certain items to serve the American market. Company C was the largest paint supplier to the automotive industry (around 50% market share), as well as to other industries, such as cans and printing, and to the home paint market. The company started to export its products to South America during the 50s, but the type of product it sold did not permit much growth in this area. Because of its location in the far South of Brazil, it was in many ways easier to serve the markets of Uruguay and Argentina than to sell to the Northern Brazilian states.

126

ANTONIO BARREq'I'O AND ANGELA DA ROCHA

Company C's first experience with FDI came with the acquisition of a plant to produce home paint products in Uruguay in 1981 in order to benefit from certain trade agreements between Uruguay, Argentina and Brazil. Management did not see it, however, as an experience with foreign direct investment but rather as taking advantage of an opportunity to increase its exports from Brazil. Some years later, in 1993, Company C acquired a subsidiary in Chile with a majority stake; this company later became a wholly-owned subsidiary. In 1986, a leading multinational company had acquired a minority stake (23%) of Company C. This association was considered inevitable by Company C because of the concentration and globalization of the paint industry. Ten years later, in 1996, both partners decided to change the previous arrangement. At this point, Company C was divided in two; one company served the automobile industry and the other concentrated its activities in the home painting market. While the multinational company remained as a minority partner (46%) in the first, the latter was totally under Company C's control. When the group was reorganized in 1996, Company C's joint venture for the automotive paints market stayed with two plants that previously belonged to the multinational, one in Argentina and another in Venezuela, in exchange for shares. Under this new agreement, the South American market became reserved to Company C in the global system of subsidiaries and alliance partners of the multinational company. In the home paints market, as previously noted, Company C had two subsidiaries, one in Uruguay and another in Chile. Company C had interests in four other companies. Because these companies' served markets that were also under a process of concentration and globalization, Company C's management decided to repeat the same experience that led to the first joint venture, searching for strong multinational partners for strategic alliances that would permit the acquisition of technology and the survival of the company. Indeed, Company C was the only large Brazilian national private company to survive in the paints industry.

Company D is the largest world producer of bus bodies and also one of the largest assemblers of buses. In Brazil, it has 40% of the total bus market with market shares varying from 30% to 70% in various product categories. It was founded in 1949 and had its first exports to Uruguay as early as 1961 when it contacted a potential customer. During the 60s and 70s the company exported successfully to Latin American and African markets. Representatives were used in some of these countries but in others, Company D established partnerships with local assemblers and exported parts since freight costs for this type of product were prohibitively high. In 1991 Company D acquired a majority stake (66%) in a bus assembler in Portugal with the purpose of establishing itself in Europe. Portugal was chosen

Patterns of lnternationalization of Brazilian Firms

127

because there was a trend to concentrate the assembly of buses in Southern European countries, which had lower labor costs. In 1997, Company D acquired the remaining portion of the Portuguese subsidiary's capital. The presence in the European market gave Company D access to new products and technologies as well as contacts with foreign producers which permitted it to bring innovations to the Brazilian market, transferring know-how to local suppliers. Argentina was the second country where Company D established a subsidiary by acquisition, this time with total control, in 1995. Other international activities involved a partnership with a local assembler in Mexico through a licensing arrangement in 1992; partnerships in Nigeria and China with global assemblers in 1998; and a partnership under study with a global assembler in India. In 1998, the company had representatives in 14 countries and the two foreign subsidiaries. It was a public company with shares negotiated in the Brazilian and the U.S. capital markets. Company E was started in 1977 to produce ceramic tiles. It belongs to a diversified group, which includes the production and exporting of sugar and civil construction, among other activities. Because of the group's experience with the exporting of sugar, Company E started to export almost immediately after its creation. During the 70s and 80s the company exported regularly to various countries in the Americas. Exports went first to Paraguay, Uruguay and Chile, followed by the U.S. and Canada. An unusual export market was Australia, where Company E had a representative that also served other Brazilian companies and offered to represent Company E in that country. This experience was so successful that Company E was still one of the leading companies in market share in Australia. The European market was also approached and served through representatives but the leadership of Italian and Spanish manufacturers, combined with lower transportation costs, did not leave much ground for Brazilian products. The same held for Africa and the Middle East where the European competitors had cost advantages selling their lower quality product lines. Company E thus saw the Americas as its natural home market where it could compete effectively in terms of cost. The first experience with FDI was in 1991 in the U.S., when Company E started a warehousing operation. Company E had 80% of the shares and the other 20% belonged to two American partners. These two partners were located in different geographic areas, one in the East Coast and the other in the West Coast, and were in charge of operations in these areas. This subsidiary also covered Canada, Central America and the Caribbean. In 1998, Company E was studying the possibility of creating subsidiaries in Argentina and Chile. To acquire some experience in these markets, it had sent four employees in 1997 to prospect the market. These employees were respon-

128

ANTONIO BARRETI~O AND ANGELA DA ROCHA

sible for sales and operated in their home offices. The same experience was replicated in Bolivia and Paraguay although there was no intention to invest directly in these two markets at that point. Other international experiences involved strategic alliances with large foreign firms to acquire technology and to complement Company E's product lines with non-competitive products including a joint venture with an American multinational to produce grout in Brazil (1994), a strategic alliance with an Italian manufacturer of gr~s porcellanato (1992) to sell their products in Brazil and to acquire technology, and a similar arrangement with an American company to sell in Brazil a complete line of bathroom fixtures to complement its tiles lines (1997).

Company F was founded in 1967 to supply parts to the automotive industry. In the late 70s, Company F lost its main customer, a Brazilian company that went bankrupt, and started to supply General Motors in Brazil. In 1980, GM informed Company F that an upgrading of its technology would be necessary for the new models or it would lose the contract. With the participation of GM, Company F contacted a very large American supplier of the same parts and made a licensing arrangement to produce these parts in Brazil with this supplier's technology. In 1986 this arrangement ceased and a joint venture was formed with Company F (51%) and the American company (49%). Company F started to export certain parts to its partner in the U.S. These parts were non-competitive with the partner's product lines and were sold to the partner's customers. In 1988, the joint venture established a subsidiary in the U.S. with the purpose of being closer to its American customers that were supplied at this point with the intervention of the American partner. The subsidiary was also an easy way for Company F to have access to cheaper credit in the U.S. for the Brazilian operations and to facilitate importing of certain components from the U.S. In 1994, Company F acquired a manufacturing company in Argentina, which became a wholly-owned subsidiary. The purpose was to serve the assemblers in Argentina with parts. The investment was not working very well at the time of the study because of higher production costs in Argentina compared to Brazil and managerial problems. Company F was a supplier of Daewoo Motors in South Korea since 1990. The company also established a "desk office" in the facilities of its American partner in Paris and had permanent personnel attending the office. This close contact with the European operations of the American partner permitted Company F to have access to the European network served by this partner which generated much new business. Company G started in 1980 to manufacture industrial valves and other foundry products. In 1987 the company approached the German market and two years

Patterns of Internationalization of Brazilian Firms

129

later initiated exporting. At the same time, Company G started to export to Argentina and Chile. In 1990, the company started a "greenfield" investment in Portugal with a local minority partner. The start-up was expected to serve the European market but the growing competition of Asiatic products at lower prices forced it to deactivate the plant in 1996. The European market continued to be served by a German representative. The second FDI experience was in Argentina. Company G bought 51% of a local firm in 1993 while 40% remained with the previous owner and 9% with two other local partners. Two years later Company G acquired another 40% from the previous owner. This experience was highly successful; the Argentinian company increased its sales volume four times in the next two years. The Argentinian subsidiary also helped to establish a position in the Chilean market. In 1993 Company G's management decided to acquire foreign technology to expand the business. Two leading companies in two different business areas were contacted, one in the Silicon Valley, U.S. and another in Spain. The first was a licensing agreement and the second included both technology licensing and a commercial agreement. In this last case, Company G also imported some products from the partner to complement its product line. In 1996 Company G negotiated a joint venture with a Venezuelan partner to establish a subsidiary in that country but withdrew because of strategic divergence between partners. By 1998 the company was trying to enter the Mexican market through exports.

Company H was created in 1941 and had 60% of the Brazilian market for PVC pipes and connectors. Exports of PVC connectors were started in the 60s to neighbor countries but this activity could not be expanded without direct investment in the foreign market because of the high transportation cost of pipes. The company exported to Paraguay since 1965 and in 1977 acquired a majority stake in a manufacturing company in that country. The acquisition was considered interesting by the company's president but the internationalization process was halted afterwards because of serious problems the company had to face in the domestic market coupled with succession problems. It was not until 1997 that the company re-started its foreign direct investment, by acquiring a majority stake in a Chilean company. Management believed at this point that internationalization was an imperative and that the best strategy to establish the company in a foreign market was to manufacture pipes locally and export connectors from Brazil. The next step was to establish a manufacturing subsidiary in Argentina, where the company already had a reputation. This time it was a greenfield investment totally controlled by Company H. In Uruguay the

130

ANTONIO BARREI~O AND ANGELA DA ROCHA

company decided to continue with local representatives and export from Brazil, Argentina or Paraguay.

Company I was a large diversified conglomerate in the energy, telecommunications and construction businesses. Exports started in 1972 to Paraguay because of connections between a Brazilian customer and the Paraguayan company. Up to 1975, however, most exports were a spot market business using trading companies or through Brazilian engineering and heavy construction companies involved in projects abroad. After 1975, Company I created an export department and started to consider seriously the activity. The first countries where the company established representatives were geographically close: Paraguay, Uruguay, Argentina and Chile. Between 1977 and 1979, it had already established a complete network of representatives in South and Central America and was entering other markets such as Mexico, the Philippines and Pakistan. In other markets Company I continued to use Brazilian and Japanese trading companies as well as to sell through heavy construction companies. Exports were seen as a way to reduce the impact of oscillations in the domestic demand and to have access to low-cost credit. During the 70s, the company acquired technology through licensing from German, Japanese, English and American companies. Anticipating the impact of globalization on these industries, the company's founder very early considered strategic alliances and partnerships as a natural part of its activities. The first joint venture outside the country was in 1976 with a Chilean group. The company acquired a majority stake but this investment was not successful and it was divested in 1984. The experience was, however, considered important because of the learning involved. Other experiences with FDI followed: Argentina (1992 and 1993), Italy (1992), Paraguay (1994), and Venezuela (1995). During the 90s, management's preferences in terms of ownership structure of joint venture, in Brazil or abroad, was changed. The new policy stated a preference for minority positions. Company G's participation in various joint venture ranged from 3 to 90% but was most often less than 30%. In 1998, the company had strategic alliances and partnerships with 18 leading companies and technology agreements with other 17 in the areas of energy and telecommunications. Company J was founded in 1979 and had become one of the leading competitors in the Brazilian health care industry. In the early 1990s, the perception of high political risk in the Brazilian environment coupled with the threat of new entrants stimulated top management to consider internationalization. In 1991, the president and owner of Company J acquired a participation in a restaurant

Patterns of Internationalization of Brazilian Firms

131

chain in the U.S. in order to get acquainted with the business environment and practices in this market. The operation was initially a joint venture but later became wholly-owned (1997). In 1993, top management felt it was time to enter the highly competitive U.S. health care market in order to acquire know-how, learn to compete and prepare the company to the entry of foreign competitors in the Brazilian market. A first subsidiary was established in the state of Nevada, followed by another one in Texas, in 1995, and two years later, in Florida. All subsidiaries were wholly-owned and Company J was the first foreign company to compete in the U.S. health care market. At the same time it entered the U.S. market, Company J also established a wholly-owned subsidiary in Argentina but operating in a different business, the selling of food coupons which is a benefit offered by some companies to their employees. This experience was not successful and the subsidiary was deactivated in 1997. However, in 1994, Company J opened another subsidiary in Argentina, this time in the health care business. The opening of other subsidiaries in Venezuela and Colombia in the year 2000 was under consideration.

MARKET ENTRY A N D INTERNATIONAL TECHNOLOGY TRANSFER: A CASE ANALYSIS OF TEN U.S. HIGH-TECH FIRMS IN CHINA A N D SOUTHEAST ASIA Roger (Rongxin) Chen, Mark V. Cannice and John D. Daniels

ABSTRACT This research analyzes two issues: (1) MNCs' foreign entry process, and (2) the relationship between foreign entry strategy and international technology transfer. The study is based on a comparative case analysis of ten U.S. high-tech manufacturers operating in the Asian Pacific Rim. We analyzed firms' foreign entry processes and compared them with the predictions of internationalization theory. We also studied the causal relationship between a firm's international technology transfer policy and its foreign entry strategy. We found support for companies' incremental Asian commitment in terms of operating mode; however, their reasons were different from those professed in internationalization theory. We also found that foreign entry process varies with the purpose and nature offoreign business activities. The stage theory is less applicable to firms that follow customers into foreign Reassessing the Internationalization of the Firm, Volume 11, pages 133-155. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1 133

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markets, firms whose foreign expansion is to improve customer service, and firms that must produce abroad to sell abroad. Finally, host government policies also tend to limit the applicability of the stage process model. In addition, we found that companies' desire to sell abroad was the overriding consideration to enter foreign markets. As such, they accepted operating modes to maximize their sales, even at the risk that collaborative partners could more easily appropriate the technologies they transferred. However, the danger of technology loss was mitigated by a belief that their core competency was the ability to develop ever-newer technologies rather than the product and process technologies they transferred.

INTRODUCTION As foreign direct investment has increased, academic researchers have paid growing attention to multinational companies' (MNCs') strategies and processes of entering foreign markets. Internationalization process theory holds that firms change their foreign operating modes through incremental stages of foreign commitment (i.e. from exports to foreign production). They do so because they want to use excess domestic capacity by exporting, wish to delay heavy foreign commitments until they learn more about the foreign operating environment, and desire to determine if there is a sufficient foreign market before investing abroad (McDonald & Parker, 1962; Luostarinen, 1970; Daniels, 1971; Johanson & Wiedersheim-Paul, 1975; Johanson & Valhne, 1977). Nevertheless, MNCs sometimes leapfrog stages suggested by internationalization process theory (Luostarinen, 1979; Welch & Luostarinen, 1993; Luostarinen & Hellmann, 1994; Millington & Baylis, 1997). Although international process theory gives logical reasons why firms should expand their international operations incrementally, there is no overarching theory to explain why some do not. A possible explanation for companies leapfrogging their selections of foreign operating modes may lie in their technology transfer practices. Foreign market entry is nearly always associated with technology transfer. The technology may be in a firm's product, in the design or assembly of its foreign-produced goods, or embodied in its foreign sales and service force. Because the foreign operating mode and international technology transfer are both key components of companies' strategies, previous studies have called upon researchers to focus more attention on the relationship between these two. For example, Zahra and Covin (1993, 451) indicate that "the relationship between business strategy and technology policy has not, in general, been well documented empirically in the literature." Even though researchers argue that a company's technology transfers and its modes of operating abroad should both fit its business strategy,

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the literature is not clear whether a finn's choice of a foreign operating mode guides its choice of international technology transfer or vice versa. Thus, more empirical studies can help clarify the relationship between these two strategies. This study examines why companies chose their foreign operating modes and the relationship of their operating modes to their international technology transfers. We collected data through in-depth interviews with managers in ten U.S. high-tech firms in the computer industry that have operations in China and South East Asia. We examined why they chose different foreign entry modes: distribution (export), licensing, joint venture manufacturing facility, or a wholly-owned subsidiary for sales or manufacture. Therefore, the modes we examined correspond to the different levels of resource commitments covered in internationalization process theory. This study focuses on two types of technology transfers - product and process. Product technology is the information specifying a product's characteristics and uses. Process technology is the knowledge used in production to organize the inputs and operate the machinery. Given our focus, we do not include technology that is encompassed strictly in an exported product because the MNC does not transfer any know-bow about the design or manufacture of the product to a foreign country activity.

LITERATURE REVIEW AND RESEARCH QUESTIONS Foreign Entry Process Although internationalization process theory holds that a minimum international commitment is a necessary prerequisite to a substantial commitment, the existence of a minimum commitment does not guarantee that a company will move to foreign investment abroad. For example, if a company is able to continue exporting because of cost advantages, it is likely to do so. In fact, some shift in conditions may be necessary to trigger a company to consider producing abroad, whether by license, joint venture, or controlled foreign operation. These shifts could include import restrictions, changes in cost structures, the reaching of domestic capacity, or shift in market location such as over the product's life cycle (Vernon, 1966). If foreign production becomes necessary, the choice of operating mode may be affected by the company's characteristics, such as its planning capability, resources, and corporate experience (Turnbull, 1993; Millington & Bayliss, 1990; Sullivan & Bauerchmidt, 1990). Furthermore, Luostarinen (1979) extended the stage process model by considering more factors. He theorized that the internationalization process should consider product (P), operation (O) and market (M) strategies - the so-called POM posture. In sum, these studies argue

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that a firm's foreign entry process is affected by target/host country related factors, home-country related factors, firm-related factors, and decision-making related factors (Luostarinen, 1970; Young et al., 1996). The preceding discussion suggests that different factors affect a firm's choice of operating mode, and more studies are needed to analyze these effects. In this study, we attempt to identify the factors influencing a firm's foreign entry mode choice. We also examine whether firms in our study follow the internationalization process theory, and, if not, what causes the differences. The following summarizes this research question.

Research Question 1: What are the determinants of MNCs' choice of foreign operating mode, and how does foreign entry vary with the nature and purpose of a firm's foreign business activities?

The Relationship between Foreign Entry Strategy and International Technology Transfer One view is that firms should use an optimal entry mode (e.g. licensing, joint venture, or wholly-owned subsidiary) when transferring technology to foreign entities in order to minimize the transaction costs (TC) of the transfer (Anderson & Gatignon, 1986; Gatignon & Anderson, 1988; Contractor, 1990). These transaction costs are presumed to be a function of the technology's tacitness, its value, and its appropriability (Hill et al., 1990; Kim & Hwang, 1992). Kogut and Zander (1993) also argue that technologies being transferred can be tacit or explicit, complex or simple. They contend that these technological characteristics help determine how a firm enters a foreign market (licensing, JV or wholly-owned subsidiary). Madhok (1997) uses an organizational capability perspective to reach the same conclusion. However, he argues that it is a firm's ability to exploit its own tacit technologies better than international partners to create greater value which leads to the entry choice, rather than the minimization of transaction costs. In sum, these perspectives purport that it is the nature of the technology being transferred to foreign markets that influences the ways MNCs employ operating modes in those markets. Recent research supports this argument. Tsang (1997) examined MNCs that are motivated to transfer and exploit their technologies in foreign markets. He analyzed the impact of this strategic intent on MNCs' entry modes into foreign markets. He studied the resources required to transfer a technology, the resource constraints of the transferor, the protection and the importance of the technology in the host country, and the impact of these factors on firms' preferences for operating modes.

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In sum, the above discussion suggests that the desire to exploit and protect technology in foreign countries influences the modes MNCs use to operate in foreign markets. Figure 1 illustrates this process. Foreip OppoSites M,~

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Another view is that international technology transfer mainly follows, rather than influences, a MNC's foreign operating mode. This view suggests that a MNC's operating mode in a foreign market is affected mainly by operating conditions in the host country. For example, Mascarenhas (1986) concluded that foreign operating modes are mainly chosen because of competitive and foreign opportunity factors. Kim and Hwang (1992) found firms' global strategic considerations had a significant impact on their choice of operating mode. Bartlett and Ghoshal (1989) and Flowers (1976) also indicate the important role that a foreign market environment plays in encouraging a firm to integrate its operations transnationally or to respond to a competitor's earlier investment. Zou and Ozsomer (1999) found that a firm's global emphasis (firm-wide focus on success in the global market) influences its coordination of international R&D activities which in turn affects its global strategic position (competitiveness in the global market). In short, these authors argue that it is the strategic consideration of exploiting foreign markets and/or resources, not technological transfer, that mainly determines a firm's operating mode. This relationship, opposite to what is shown in Fig. 1, is summarized in Fig. 2. Foreign

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In addition, there are other factors that influence companies' choice of operating mode, such as the availability of potential collaborators who can easily assimilate transferred technology, whether a technology is core or peripheral to the transferor, whether there is excess capacity in a market, whether there are legal barriers to certain operating modes, the extent of barriers for foreign companies to gain location-specific assets in a host country, and companies' perceptions of countries' economic and political risk for their operations (Daniels & Radebaugh, 1998.) Given the conflicting evidence on the relationship between international technology transfer and MNCs' operating mode, this paper provides more insights and evidence into their dynamic relationships. This constitutes the second research question of the paper:

Research Question 2: What is the relationship between international technology transfer and a firms' foreign operating modes ? Which one influences or leads the other?

METHODS We argue that the need to develop a better theoretical grounding on the relationship between operating mode and international technology transfer necessitated a rigorous multi-case analysis to collect in-depth views of respondents. In essence, our study not only collects data based on existing theory, but it also seeks to expand theory by exploring other relationships between operating mode and technology transfer. We decided to study high-tech manufacturers because of their likelihood of transferring product or process technologies. Given this criterion and our travel constraints, we chose the Silicon Valley for in-person interviews with executive respondents. We further narrowed our study to include only computer/ telecommunication-related finns because of their high density in the area. We located firms by cross-listing those in the "Bay Area 500"and the Corptech Directory of high technology firms. We then contacted companies by phone to determine the names of current senior executives who would be familiar with foreign entry decisions, sent letters to them describing the purpose and scope of the study and promising anonymity if they would participate, and then phoned them to set up appointments. The ten companies that we discuss in this paper are a sub-set of a larger sample of respondents because these ten specifically reported on their technology transfers to a common area - China and Southeast Asia and they first entered these markets in a similar time-frame - 1988 to 1996. Seven

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of the entities we examined are in China, one in Singapore, one in Taiwan, and one in Malaysia. Firm size varied from $330 million to over $10 billion in sales. We collected data by following the recommendations of Yin (1994): (1) using multiple sources of evidence, (2) creating a case study data base (assembly of evidence), and (3) establishing a chain of evidence to link the research questions, the data, and the conclusions. The items most pertinent to this investigation included: (1) Interviews - These were the most important for insightful first hand information. We used three segments of interviews - open ended, focused interview questions, and a structure survey; (2) Archival records - Company annual reports, 10Ks, press releases, and financial data; (3) Documentation - Company internal administrative notes and outside newspaper articles. These data mainly serve to corroborate and augment evidence from other sources. We asked respondents to reflect upon a particular foreign entity and the related technology transfer issues, and we tried not to influence the respondents' answers at this juncture. After the respondents completed their recollections, we asked them another script of questions concerning topics not yet covered. These varied by company depending on what had already been reported and covered a gamut from foreign entry strategies to government relationships. We concluded by asking structured questions to validate the open-ended responses given in the initial part of the interview. We followed Eisenhardt's (1989) recommendation for collection and analysis. We used a multiple-case process to provide a more holistic understanding of the entry mode strategy and technology transfer issues. We completed withincase analyses by writing a summary of each interview discussion, as well as our observations and analyses of the discussion. We included pertinent background information from each company's annual reports, 10Ks, and press releases in each case summary. Our intent was to become intimately familiar with each case as a stand-alone entity. This case database allowed more coherent analysis and better access for replication or re-analysis, thus it increased the reliability of the findings. We triangulated data (qualitative summary, questionnaire responses, and background information) from each company and summarized these data to a common format to better permit cross case comparisons. The survey responses in each of the cases served primarily to help validate the data from the respondents' open-ended discussions. For example, if the respondent said the venture's primary motive was to sell in the country, we checked related questionnaire

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ROGER CHEN, MARK V. CANNICE AND JOHN D. DANIELS

items to verify consistency. We found a high degree of convergence between the data sources for each case. Each author also coded each case to determine inter-rater reliability. The inter-rater reliability surpassed 90% for the cases en mass. The analysis within and across cases allowed new insights to emerge which we used to develop a new framework of international technology transfer and business strategy. Table 1 summarizes the information collected for our analysis. It contains background information and foreign market entry and technology transfer activities of the ten firms in this study.

FINDINGS As one would expect, most of our respondents (nine) entered the Asian market primarly to develop sales in Asia and only one primarily to gain resources mainly low-cost labor. One company that initially entered to develop sales in China has since transformed the operation so that the output goes almost entirely to export markets. These motivations and increased commitment determine the foreign entry process of MNCs, which leads MNCs to establish certain value chain activities to these countries. This establishment of value chain activities directly affects each firm's international technology transfer. This process is summarized in Fig. 3, and we discuss it in the following sections. We divide our following discussion into two parts. In the first, we look a firm's foreign entry process and the factors influencing the process. We also examine whether or not firms in our study follow the stepwise entry model proposed by internationalization or stage theory, and, if not, what causes the differences. In the second part, we analyze the relationship between foreign entry strategy and international technology transfer.

Foreign Entry Process Seeking Emerging International Markets The predominance of market seeking operations was influenced by Asian growth rates during respondents' entries into the region. The average annual growth in private consumption in the low and middle income economies of east Asia between 1990 and 1995 was 8.5%, more than four times the rate of consumption growth in the world's high income economies (World Bank, 1997). First, MNCs increased their efforts to aggressively penetrate or push their products into the Asian markets (we call this a push effect to penetrate foreign markets). This is especially true for China. For example, Firm 2, a maker of programmable logic

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devices, stated that China has huge market opportunities and "if we are not there now it is too late." Firm 3, a maker of personal computers, has made a great effort to penetrate the China market. The firm intends to significantly increase its market share so as to make its products a standard in China. The company states that its main objective in China is to "increase the sales of our products under any brand name." With this aim, and after several product launch failures in the 1980s, the company began selling its products through a Hong Kong distributor in 1992. Two years later, it opened representative offices in Beijing and Shanghai. Recently, it established a manufacturing joint venture

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with a U.S. and Chinese partner, which will enable it to further penetrate the Chinese market. Firm 4's sales in Asia Pacific grew nearly 200% in 1995, making the region an important area in its global strategy. This company needs to have a presence in China so that it can learn about customer requirements. China requires that it manufacture there if it is to hire employees to act as a liaison with customers. Similarly, Finn 6, a manufacturer of integrated circuits and line cards, made repeated efforts to push into the China market, first by distributing through Hong Kong and later by forming three manufacturing joint ventures in China. Both Firm 6 and Firm 3 established manufacturing entities to meet Chinese governmental demands to locate production in China in order to sell there. There is a second group of market seeking companies (Firms 5, 8, 9, and 10) that entered for what we call a pull effect. We use the term pull effect to refer to those situations in which the stimulus for companies' foreign expansion comes from outside their organizations. As Asia has attracted more sophisticated production, producers require more complex components and equipment supplies and better customer services in Asia. They often require their suppliers to produce nearby in order to institute just-in-time production systems, reduce the risk of supply-outages that would more likely occur with dependence on distant supply sources, and to tailor products to the needs of specific customers. They are also concerned about after sales servicing because of the high price and technical complexity of their products. Thus, they sometimes also require that their suppliers establish a local presence to assist in sales and servicing. If an industrial supplier does not respond to the request to locate an investment in Asia, it will likely not sell to that industrial customer in Asia. If the requestor also happens to be a company's domestic customer, then the company stands an additional risk of losing domestic business as well by not complying. This was a factor for Finn 5 (along with low labor costs). It built two Malaysian plants to manufacture thin film to sell to companies making mediadisks in Asia and indicated that "being close to customers" is one of the major reasons for its expansion into Malaysia. Firm 8 moved its Asia regional office from Hong Kong to Beijing in 1995 because northern China makes up over 50% of the market for their products sold in Greater China; the company felt this move will enable it to better serve customers. Finn 9 recently set up a wholly-owned manufacturing facility in China to provide original equipment manufacturers with various services such as product designing, component assembly, testing, repair and upgrades. The company indicates that "customers had wanted us to produce in China for 3 years and we finally are putting the facility in place." Similarly, Finn 10 replaced a manufacturer's representative

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(third party distribution) with a wholly-owned sales/service office in Taiwan to provide better services to new and existing customers' fabrication facilities. The firm pointed out that "customers sense a deeper commitment from the vendor finn when they see a technician in its uniform giving advice rather than our reps". The above examples are consistent with considerable evidence that companies follow their customers into foreign markets. For example, Terpstra and Yu (1988) and Miracle (1966) found this pattern for advertising agencies. Erramilli and Rao (1990) categorize this "service-oriented" motive as client following rather than market seeking.

Seeking Resources Only in the case of Firm 1 can we say that the initial motive was entirely one of resource seeking rather than market seeking. Firm 1 established a manufacturing facility in Singapore in 1988 because of "good local sourcing capability," high skilled labor, and tax benefits provided by the government. This replaced a subcontractor arrangement and saved the company 10% in procurement costs. Although Firm 7 initially entered China with a local joint venture partner to manufacture disk drives for the Chinese market because the company could not be price competitive by exporting into China, the purpose of this operation later became resource seeking. The reasons for the change were that the local partner built insufficient Chinese demand and the Chinese government restricted the joint venture's Chinese sales even further. Finn 7 bought out its partner's interest and developed a successful export strategy. It has since opened another manufacturing plant in China as a second resource base for export. It has "no big hope for the China market" but thinks China has "a lot of well qualified people who can do the job, many with a college education," and these are a "good labor force for the company's large labor requirements for manufacturing." Asian Operations in the Value Chain Companies' foreign operations may be integrated with those in the home country, such as producing in one country and selling in another, or they may duplicate those in the home country, such as producing and selling in both countries. For the most part, the companies we studied duplicate the links that are handled in the home country, albeit on a smaller scale and with fewer links. As the companies have increased the size of their Asian operations they have added more value chain links to their Asian operations. These links include product design, manufacturing, sales, or customer service and support. Among the ten finns included in our study, four finns (Finns 1, 4, 8, and 10) have placed some R&D activities in the Asian facilities, while seven finns (1, 3, 4,

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5, 6, 7, 9) have placed certain manufacturing activities. Nine firms have placed significant sales activities in Asia. The exception is Firm 7, whose output is exported and not sold directly by its own personnel. MNCs place value chain activities in foreign markets primarily to better penetrate foreign markets or to better serve existing customers that have transplanted their operations overseas. We shall discuss various levels of presence in the following section.

Establishing Direct or Indirect Presence in Foreign Markets In general, there are three types of presence in foreign countries. The first two are direct presence, namely manufacturing and non-manufacturing such as sales, liaison or service offices in foreign markets. This direct presence may be either wholly or partly owned. The third type is a non-direct presence such as using sales distributors, manufacturing representatives, or a licensing agreement. Among the ten firms we studied, only one (Firm 2, a maker of logic devices) does not have direct presence in the market it intended to penetrate. Two firms (Firms 9, 10) have sales/service offices in the respective foreign markets and seven firms (Firms 1, 3, 4, 5, 6, 7, 9) have manufacturing facilities, either wholly or jointly owned. Different types of foreign presence require varying amounts of resource investment. The amount of resources a MNC invests in a foreign market corresponds with its level of commitment to that market. Generally, a direct presence is a higher commitment than an indirect presence. They make the higher commitment when expected sales reach some threshold. For example, Firm 2 sells its latest products in China. But, its sales are not yet high enough to warrant a direct sales presence. Instead, Firm 2 relies on a Hong Kong distributor. Firm 10 echoes this point. When its export sales to Taiwan became large enough so that the fixed plus variable costs of having a direct sales presence were lower than paying commissions through an indirect sales presence, Firm 10 established a sales/service office in Taiwan. Comparison with Internationalization Stage Theory So far, our discussion of findings is consistent with the internationalization process theory because we have shown examples of companies moving from an indirect to a direct presence. For example, Firm 10 moved from indirect distribution to direct foreign sales. Although the internationalization process theory is geared toward market seeking operations, one can logically extend it to resource seeking operations as well. For example, Firm 1 first contracted its manufacturing, and in the process, learned a great deal about manufacturing in Singapore. Later it replaced the contract by manufacturing on its own behalf.

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Further, a direct manufacturing presence is generally a higher commitment than a direct sales presence. The direct manufacturing commitment most likely comes after there is evidence of sales growth and because future growth is threatened without the direct manufacturing. For example, before adding manufacturing facilities in China, Firm 3 had sales offices in Beijing, Shanghai, and Shenzen, and felt the ability to continue growing would be limited without a Chinese manufacturing base. Similarly, Firm 6 had three liaison offices in China before adding manufacturing facilities in China; the firm felt that this would enable it to further penetrate the market by satisfying host government constraints. In total, seven of the ten companies moved incrementally, although the seven leapfrogged over some intermediate modes. Four of the firms which began foreign manufacture had earlier established liaison offices (Firms 3, 4, 6, 8). However, Firms 5, 7, and 9 proceeded directly to foreign manufacture without going through any intermediate steps. Exceptions and leapfrogging in the incremental internationalization process occur for three reasons. First, when domestic production costs are high compared with those in the target sales country, there may be little opportunity to test the market by first exporting to it. Second, when companies followed customers into the market (the pull effect), they assumed they would have sales to those customers. Thus, they had no need to test the market by first exporting to it. Third, in some cases, government restrictions on imports prevented companies from moving incrementally by first exporting to the market. This was especially the case for China. What we don't know is whether Chinese government regulations prevented them from leapfrogging as much as they might have wanted, such as going first to joint ventures rather than to wholly-owned operations. Of the companies that did follow an incremental internationalization process, some did so for a different reason than is usually given for the theory. Theory says that companies export to determine if the market is large enough to justify a manufacturing facility. This implies a growing export market. However, some firms in our sample were so unsuccessful at exporting that they assumed the problem was their mode of tapping the market, rather than the potential size of the market. For example, Firm 2 was planning to replace its current distributor with a wholly-owned sales office due to the distributor's unsatisfactory performance.

Relationship Between Foreign Entry and Technology Transfer In most cases (seven out of ten), companies transferred their latest technologies into their Asian operations; however, eight of the companies indicated that the

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technologies they transferred were not core ones. Interestingly, in both cases where companies transferred core technologies, they transferred them to their wholly-owned subsidiaries in Asia (Firms 8 and 9). This is consistent with appropriability theory and with evidence that companies are reluctant to share core competencies in joint ventures (Daniels & Magill, 1991). Nevertheless, most companies indicated that their current state-of-the art technology is not their core competency. Rather, their core competency is their ability to continue to develop ever-changing products and processes. Thus, if a technology is appropriated by a partner, that partner is unlikely able to move it as quickly to the next stage. Therefore, what is new becomes old and non-competitive very quickly. Our findings overwhelmingly indicated that companies do not choose an operating mode to fit their technology. Rather, they pick an operating mode that will fit their strategic objectives and then decide how and what technology they will transfer. Our data show that MNCs transfer technologies mainly to conduct two types of value chain activities. The first is manufacturing. For example, Firm 6 established a manufacturing joint venture in China to produce line cards. This caused the firm to transfer its IC board manufacturing technology to the joint venture. Similarly, Firm 3 transferred some PC assembly technology to China in order to manufacture and sell its products in the country. The second type of value chain activity that results in technology transfer is customer support. Three firms (Firms 4, 8 and 10) indicated that they need their foreign subsidiaries to interact with foreign customers to collect product information, modify products to fit local needs and advise and serve customers in foreign markets. This requires MNCs to transfer technologies to enable their foreign entities to fulfill these duties. For example, Firm 8 opened an R&D center in Beijing in 1995. It hired 5 local Ph. D.engineers and let them join headquarters staff on some basic research as well as product development. Similarly Firm 10 opened a wholly-owned sales and service office in Taiwan. Since this office is responsible for modifying products for local customers, the firm transferred some technologies so that its employees in Taiwan are able to develop software specifications for the foreign customers. Firm 4 wished to place its own engineers in China to service its existing customers. In order to gain permission from the Chinese government, it formed a joint venture in China to manufacture components for its semiconductor processing equipment. This caused the firm to transfer the component technology to the foreign entity and, in turn, enabled it to train its foreign customers. Technology transfer decisions must be considered in relationship to the companies' total performance in the foreign countries. Here, there may be tradeoffs. For example, Firm 6 agreed to share IC board manufacturing technology (a new but non-core technology) with its Chinese joint venture partner in order

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to gain Chinese government permission to import its IC chips, which embodied a core technology. DISCUSSION

AND FUTURE

RESEARCH

This research analyzes MNCs' foreign entry process and the relationship between foreign entry strategy and international technology transfer. Based on a case analysis on ten U.S. high-tech firms, the study has two major findings. On the one hand, seven of the ten companies in our study made incremental Asian commitments in terms of their operating modes. On the other hand, they did so for different reasons than those given in internationalization theory. Specifically, internationalization theory explains incremental commitments as risk-avoidance behavior. In other words, companies must be successful with lower commitments in terms of foreign operating mode (such as exporting) before they are willing to make higher commitments in terms of foreign operating modes (such as foreign direct investment). In contrast, the companies we studied made higher commitments because they were unsuccessful with lower commitments. For example, disillusionment with distributors or with joint venture partners led them to internalize their Asian operations. Further, those companies needing to manufacture in Asia in order to sell in Asia leapfrogged directly to foreign manufacturing. For others, pull effects from following customers into the market negated the need for incremental commitments. In summary, our data offered very little support for internationalization theory. Second, technology transfer enables MNCs to operate some value chain activities abroad, which support a MNC's market and/or resource seeking global strategies. This suggests that technology transfer policy is driven by MNCs' strategies to enter foreign markets. Companies are not apt to choose an operating mode to protect their technologies.

Implications These findings improve our understanding of the market entry process and the relationship between global strategy and international technology transfer. It appears clear that market-seeking firms may be advised to use different operating modes, depending on whether they are following existing customers or seeking new customers. Following existing customers suggests a higher initial commitment (in terms of operating mode) to the foreign market as these customers typically will require closer customer support. Further, the risk of market entry is lessened because of guaranteed sales, and the risk of lost domestic sales is heightened if companies fail to follow their customers into the markets. A probing strategy may be well suited by the traditional stage

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theory where export and third party distribution can test the market demand before a higher commitment strategy is required. Previous studies have not clearly identified the relationship between market entry and technology transfer. Some studies indicate that the motivation of exploiting technologies influences MNCs' foreign entry strategy. Internalization theory also contends that it is the nature of the technologies being transferred abroad (e.g. tacit or explicit) which influences how firms want to set-up their business entities in the foreign country. However, our findings do not support this. We find that business considerations relating to foreign markets (market penetration, customer service, or resource acquisition) determine what operating modes MNCs establish in a foreign country. The value chain links handled by their new business entities (sales support, R&D, manufacturing) then determines whether and what technology they transfer abroad. Therefore, a firm's foreign objectives and choice of operating mode lead its technology transfer decision, not the reverse. Additionally, product life cycle theory suggests that MNCs transfer the production of maturing products to foreign markets. We found companies transferring both maturing and new products to foreign markets. This is perhaps due to a combination of rapid obsolescence with China's import restrictions that prevent exporting to the market. This suggests that, though product life cycle theory is a factor, MNCs' technology transfer policies are mainly driven by their global strategies. Relatedly, Giddy (1978) suggested that high tech products with rapid obsolescence would not go through the international production shifts predicted by the product life cycle theory. He reasoned that there would be no time to achieve cost reductions abroad, thus markets would be served by exporting from the originating country. Our findings did not support this. A possible explanation is that the combination of China's large market and its import restrictions were a push effect, causing companies to move rapidly into that market for fear of losing opportunities there altogether. But what of companies that entered China because of the pull effect? Their customers may have gone in because of the push effect, and suppliers were forced to follow suit. Future Research

This research has opened up new issues that need to be addressed in the future. First, this study has paid inadequate attention to another type of international technology transfer: technology transfer associated with international sales of products. Because technologies and skills are frequently embodied in products, selling them in foreign markets directly causes some technologies to be transferred to these markets. Current research has not paid adequate attention to this

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type of technology transfer. Second, this study focuses on Asia (mainly China) and is based on ten high-tech firms in computer-related manufacturing industry. It is not clear if our findings can be applied to different geographic and industry settings. Further, we looked only at companies that are moving into those markets by transferring technologies. It would be useful to examine high tech companies that have not transferred technologies abroad to understand their reasons and compare their performance with companies that have. Although we had only one observation, that observation showed that a resource seeking company followed an incremental stage of foreign commitment. Perhaps this is not an isolated example. Logically, one might assume that companies could follow an incremental pattern by first importing from foreign contractors and later owning the production of foreign supplies. This could occur as companies' supply needs become large enough to justify the ownership and as they become more familiar with operating conditions in the supplying countries. This is certainly an avenue worth exploring in future research. Although import substitution policies are now out of favor, our evidence indicates that such policies may be enticing high tech companies to locate production in China. More research may be warranted to determine whether and under what circumstances import restrictions are attracting foreign investment that might otherwise not be forthcoming. We conclude that more attention must be paid to the analysis of foreign entry process, the dynamics of operating modes over time, and the application of appropriate technology transfer management strategies related to operating modes. Further research should explore the relative efficacy of various technology management strategies and their applicability across various industries.

REFERENCES Anderson, E., & Gatignon, H. (1986). Modes of Foreign Entry: A Transaction Cost Analysis and Propositions. Journal of International Business Studies, 17(Fall), 1-26. Bartlett, C. A., & Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution. London: Hutchinson Business Books. Cannice, M. V. (1997). Linking Foreign Operating Mode Decisions to Performance: A Theoretical Integration and Comparative Case Analysis of U.S. 'High-Tech' Ventures in China and other Asia~Pacific Rim Countries, unpublished Ph.D. Dissertation.

Contractor, F. J. (1990). Contractual and Cooperative Forms of International business: Towards a Unified Theory of Modal Choice. Management International Review, 30, 31-54. Daniels, J. D. (1971). Recent Foreign Direct Manufacturing Investment in the United States: An Interview Study of the Decision Process. New York: Praeger Publishers. Daniels, J. D., & Magill, S. L. (1991). The Utilization of Joint Ventures by United States Firms in High Technology Industries. Journal of High Technology Management Research, 2(1), 113-131.

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Daniels, J. D., & Radebaugh, L. H. (1998). International Business: Environments and Operations. Reading, MA: Addison Wesley Publishing. Eisenhardt, K. M. (1989). Building The.odes from Case Study Research. Academy of Management Review, 14, 532-550. Erramilli, M. K., & Rao, C. P. (1990). Choice of Foreign Market Entry Modes by Service Firms: Role of Market Knowledge. Management International Review, 30(2), 135-150. Flowers, E. B. (1976). Oligopolistic Reaction in European and Canadian Direct Investment in the United States. Journal of International Business Studies, 7(2), 43-55. Gatignon, H., & Anderson, E. (1988). The Multinational Corporation's Degree of Control Over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation. Journal of Law, Economics and Organization, 42, 425--440. Giddy, I. H. (1978). The Demise of the Product Life Cycle in International Business Theory. Columbia Journal of World Business (Spring), 90--97. Hill, C. W., Hwang, P., & Kim, W. C. (1990). An Eclectic Theory of the Choice of International entry Mode. Strategic Management Journal, 11, 117-128. Johanson, J., & Vahlne, J. E. (1977). The Internationalization Process of the Firm: A Model of Knowledge Development of Increasing Foreign Market Commitments. Journal of International Business Studies, 8(1), 23-32. Johanson, H. G., & Wiedersheim-Panl, F. (1975). The Internationalization of the Finn - Four Swedish Cases. Journal of Management Studies, 12(3). 305-322. Kim, W. C., & Hwang, P. (1992). Global Strategy and Multinational's Entry Mode Choice. Journal of International Business Studies (First Quarter), 29-52. Kogut, B., & Zander, U. (1993). Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation. Journal of International Business Studies (Fourth Quarter), 625--645. Luostarinen R. K. (1970). Foreign Operations. Helsinki: Heisinki School of Economics. Loustacinen R. K. (1979). Internationalization of the Finn. Acta Acadamie Oeconomicae. Helsinki: Helsinki School of Economics. Loustarinen R. K., & Hellmann, H. (1994). The Internationalization Process and Strategies of Finnish Family Finns, CIBR Research Papers. Helsinki: Helsinki School of Economics. Madhok, A. (1997). Cost, Value and Foreign Market Entry Mode: The Transaction and the Firm. Strategic Management Journal, 18, 39-61. Mascarenhas, B. (1986). International Strategies of Non-Dominant Firms. Journal of International Business Study, 17(1), 1-26. McDonald, J. G., & Parker, H. (1962). Creating a Strategy for International Growth. International Enterprise, A New Dimension of American Business. New York: McKiusey and Company. MiUington A. I., & Bayliss, B. T. (1990). The Process of Internationalization: U.K. Companies in the EC. Management International Review, 30, 151-161. Millington A. I., & Bayliss, B. T. (1997). The Strategy of Internationalization and the Success of U.K. Transnational Manufacturing Operations in the European Union. Management International Review, 37(3), 199-222. Miracle, G. E. (1966). Management of International Advertising. Ann Arbor, MI: Bureau of Business Research, Graduate School of Business Administration University of Michigan, 1966. Sullivan, D., & Bauerchmidt A. (1990). Incremental Internationalization: A Test of Johanson and Vahlne's Thesis. Management International Review, 30(1), 19-30. Terpstra, V., & Yu, C.-M. (1988). Determinants of Foreign Investment of U.S. Advertising Agencies. Journal of International Business Studies (Spring) 33-46. Tsang, E. W. (1997). Choice of International Technology Transfer Mode: A Resource-Based View. Management International Review, 37(2), 151-160.

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Tumbull, P. W. (1993). A Challenge to the Stages Theory of the Internationalization Process. In: P. Buckley & P. N. Ghauri (Eds), The Internationalization of the Firm: A Reader. London: Academic Press. Vernon, R. (1966). International Investment and International Trade in the Product Cycle. Quarterly Journal of Economics, 80, 190-207. Welch, L. S., & Loustarinen, R. K. (1993). Inward-Outward Connections in Internalization. Journal of International Marketing, 1(I), 46-58. World Bank Publication (1997). World Development Indicators. New York: Oxford University Press. Young, S. Huang C.-H., & McDermott, M. (1996). Internationalization and Competitive Catch-up Process: Case Study Evidence on Chinese Multinational Enterprises. Management International Review, 36(4), 295-314. Yin, R. K. (1994). Case Study Research: Design and Methods (2nd Edition). Thousand Oaks: Sage Publications. Zou, S., & Ozsomer, A. (1999). Global Product R&D and the Finn's Strategic Position. Journal of International Marketing, 7(1), 57-76.

INTERNATIONALIZATION RECONSIDERED:NEW IMPERATIVES FORSUCCESSFULGROWTH Philip M. Rosenzweig and Janet L. Shaner

ABSTRACT Internationalization has usually been depicted as an incremental process of limited commitment in the face of high uncertainty. Yet in recent years, a number of major changes - ranging from industry deregulation to newly opened markets to the revolution in information technology - have transformed the context for international growth. The result is two-fold: on one hand, firms face lower barriers to international growth, meaning that more firms, smaller in size and fewer in resources, can expand internationally; yet precisely becauseof the resulting surge in international growth, j?rms face a need to internationalize more rapidly than before. The result is a new set of imperatives for successfulinternationalization stressing entry mode versatility and the simultaneoususe of resources.

INTRODUCTION The process by which firms expand their activities internationally - often called internationalization - has long been a central topic of research in business and management. Important questions include the choice of which markets to enter,

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modes of market entry including trade and direct investment, patterns of multiple entries over time, and resulting organizational forms. These and other questions are not only of interest to the theorist but have major consequences for the management of multinational firms. In recent years, the context of internationalization has changed dramatically. The result is a need to reconsider long-standing views. In this article, we take a fresh look at the nature of internationalization and the management challenges associated with it. We argue that for most firms today, two major changes have occurred: first, barriers to foreign expansion have been dramatically reduced, making internationalization easier and less risky than before; yet at the same time, competitive pressures have intensified, making rapid expansion more important than before. The combination of these two forces results in a new set of imperatives for successful internationalization.

A LOOK BACK: P R E V I O U S

VIEWS INTERNATIONALIZATION

OF

Research into internationalization has addressed a number of important questions, including motivations for foreign investment (e.g. Dunning, 1980; Beamish & Banks, 1987; Kogut, 1988; Tallman & Shenkar, 1994; Moon, 1997); patterns of geographic expansion (Johanson & Vahlne, 1977); and the choice of entry mode, explained by transaction cost theory (Anderson & Gatignon, 1986; Gatignon & Anderson, 1988) or organizational capabilities theory (Madhok, 1997; Aulakh & Kotabe 1997). 1 Many of these studies have used cross-sectional data from a large set of firms to examine the choice of which market to enter, or the choice of entry mode, but have not examined the process of international expansion by a single firm. Our interest in this chapter is on research about the process by which a single firm expands its activities across borders over time. For that aspect of internationalization, we find three perspectives to be most instructive and we describe them below. A first perspective on internationalisation at the firm level was followed by Aharoni (1966) when he examined the decision process by which firms undertake foreign investment. Given the many advantages of doing business domestically - including everything from familiarity with local culture and customer habits to access to capital to ease of attracting talent - firms tended to focus on their domestic markets. Foreign investment was highly risky, with uncertainties including receptivity of host country customers, government regulation, particularities of financial markets and financial systems, differences in local culture and unique management practices. Together, these disadvantages

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confronted entering finns with a "liability of foreignness". Firms that decided, in spite of these risks, to expand abroad did so as the result of a complex mix of external forces, internal organizational factors and often the personal vision and commitment of key managers. A second perspective, initiated in the 1970s, examined how firms stepped up their commitments in a given host country. Some of the most influential work, undertaken by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977), showed that MNCs tend to expand from lesser to greater commitment. Firms usually started with exports sold through sales and marketing organizations and gradually established fully integrated manufacturing positions by way of foreign direct investment. Fundamental in this model is that international expansion is a risky endeavor and that finns limit their risk by making progressive commitments. A range of subsequent studies has tested this model, often refining it, but tending usually to affirm the basic notion of development in stages (Forsgren, 1989; Forsgren, Holm and Johanson, 1995). An example of this incremental approach is provided by Heineken, the Dutch-based brewer that operates in more than one hundred countries worldwide. A Heineken company history explained: The sequence to be applied in an "ideal" market approach can be described as follows: Heineken starts by exporting to a market, thereby establishing brand familiarity and an image of high quality. If this strategy is successful, the follow-up step is to enter into a licensing agreement in order to expand the volume on the market. The final step consists of becoming active in the local brewing industry, either by means of participating in an existing brewery or by setting up a new brewery owned by Heineken. Which means are applied depends on the local situation, such as the market conditions, any existing import restrictions, the possibility of entering into a joint venture with other interested parties and the investment required. But the Heineken company has never been afraid of deviating from this "ideal" sequence: a type of opportunism, in the best sense of the word, usually determines the policy to be applied (Jacobs & Maas, 1992).

By the 1980s a third perspective emerged, with the focus shifting from a single host country and toward the finn's global strategy. Kogut (1983) described foreign direct investment as a sequential process, with a finn's initial investments providing the basis for subsequent investments. The result was a new organizational complexity, referred to as heterarchies (Hedlund, 1986) or differentiated networks (Bartlett & Ghoshal, 1989; Ghoshal & Nohria, 1989), where roles and responsibilities were distributed unevenly throughout the global network. Multinationals were no longer understood as a series of country subsidiaries, each standing on its own and handling roughly the same set of activities, but rather as networks.

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Implications for Internationalization The perspectives described above differ in a few obvious ways. They were developed in different decades and are concerned with the specific issues of their respective times. They examine internationalization at different levels of analysis, moving from intra-organizational to host country to global networks. The concern with different levels of analysis reflects, in part, improvements in information technology, which allowed firms in the 1980s to coordinate dispersed activities in a way unimaginable two decades earlier. Yet for all their differences, they share a number of features. Each sees internationalization as the progressive geographic expansion of activities performed in the home country. Each understands internationalization to be, at its core, a complex and risky undertaking. Successful internationalization is in large measure a matter of prudent risk taking. Firms that succeeded at internationalization were those that accurately assessed the challenges and opportunities in foreign markets, correctly managed risks and minimized their total exposure. To summarize, through the 1980s successful internationalization involved a number of common features, listed on Table 1. Firms embarking on international expansion tended to be large, having first established a strong domestic position and perhaps even exhausting prospects for continuing rapid domestic growth. Supporting international expansion called for abundant resources - financial, commercial and human. A firm needed the financial capacity to withstand a long wait until foreign investments were profitable. It also needed deep pockets because most country subsidiaries tended to perform similar activities and often the full range of activities in the business model. Abundant human resources were required because expatriates were often needed to staff foreign ventures.

Table 1.

Changing Imperatives for Internationalizing Firms. Conventional View

Size: Markets for entry: Timing: Mode of growth: Mode of entry: Subsidiary role: Staffing:

Large Firms, abundant financial resources Radiating from home Measured, incremental Organic Export to direct investment Integrated, often similar Expatriates with local hires

Use of resources:

Sequential

Contemporary View Firms of varied size,resources Opportunistic, global search Pressure for rapid entry Alliances as well as organic Versatility among modes Differentiated Immediate localization or newly hired expats. Simultaneous or compressed

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The choice of new markets was an incremental process, moving from closer and more similar, to farther away and increasingly different from the home market. Thus, American firms often ventured first to Canada and other English speaking countries; British firms expanded to their colonies and former colonies; European firms to their neighbors and colonies. International expansion was a logical, measured process, with success in one market established before additional resources were committed in the next one. Growth was often pursued organically and many firms relied on a single mode of entry - often moving first from exports to finally greenfield expansion - setting up subsidiaries that were largely similar, often performing most functions of the value chain. Staffing often involved sending expatriate managers from the home country to the newly founded subsidiary, where firms would transfer expertise and hire local employees to handle most activities. Finally, given the measured and incremental nature of internationalization, resources could be deployed successively. A team of expatriates might start one country subsidiary and move on to another when the first country was operating successfully. Successful companies selected strategies that allowed them to manage risky international ventures; that is, they made sequential investments to gain experience, build on internally controlled financial and human resources and limit the total risk exposure at any one time. A Few Examples A few examples will help illustrate these conventional views. Colgate-Palmolive, the U.S.-based consumer products company, initially expanded abroad in the early decades of the 20th century, first to Canada and Mexico, then to Englishspeaking countries including Great Britain and Australia and only later to industrialized European countries. In each country, its local subsidiary performed a full range of activities except basic research - procurement, manufacturing and marketing. It entered solely by greenfield investment. To staff these newly formed subsidiaries, Colgate-Palmolive dispatched expatriates who hired local employees. Consistent with conventional views, the process was incremental, unfolding over decades and at a measured rate. Hewlett-Packard, the U.S.-based electronics and computer firm, also internationalized in a measured, incremental manner. Founded in 1939, HP set up its first manufacturing plant in Germany in the 1950s, then France in the 1960s and Singapore in the 1970s. It relied solely on greenfield entries - the only exception for decades was in Japan, where regulations forbade majority ownership and HP established a joint venture with Yokogawa Electrical Works. Japanese firms, too, followed this same general approach. Sony relied entirely on exports throughout the 1960s, then undertook its first direct investment in

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the United States, where it set up a television final assembly plant near San Diego in 1972. Two years later, it stepped up its U.S. investments with new business lines in magnetic tape and audio equipment. Over the next years, Sony expanded into the U.K., setting up a television plant in 1975 and then established magnetic tape and audio equipment manufacturing in Europe. Again, the approach to international expansion was measured and incremental. Heineken, Colgate-Palmolive, Hewlett-Packard and Sony nicely illustrate the conventional view of internationalization, but their experience is becoming the exception rather than the rule. Today, a very different picture of international expansion is emerging, with more and more firms expanding abroad and doing So in a much more compressed manner than before. Why are we observing these changes now? There are several reasons, which we describe below. A. Changes in Public Policy 1. Trade and Investment Deregulation. Tariff reductions combined with simpler and more transparent trade and foreign investment regulations make internationalization easier and more profitable for firms, allowing them to enter and invest in new markets, achieve greater economies of scale, and eliminate functional duplication among subsidiaries. To illustrate, since the completion of the Uruguay round of GATT trade negotiations in 1995, weighted average tariff rates on all industrial products have declined from 6.3% pre-round to 3.8% post-round (Smeets, 1995). As a result, trade grew by 6.5% annually during the years 1990 to 1998, and foreign direct investment surged by 15% compounded annually. The entire climate for investment has changed, as many developing countries now actively attract foreign investment and trade to stimulate their economies and replace declining foreign aid sources. 2. Opening of new markets. Geographic patterns of foreign investment have been transformed over the last decade. Following the fall of communism, countries in central and eastern Europe have opened for foreign investment, setting off a major rush by western companies. In other regions, ranging from Latin America, where trade and investment regulations have been liberalized, to South Africa, where apartheid was discarded after decades, the climate for inward investment has similarly improved. Southeast Asia, India, and other regions have begun both to receive inward investment and also invest abroad to a greater extent than before. To capitalize on these opportunities, many western companies, large and small, have entered many new markets in a short period of time. Indeed, FDI inflows

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to developing countries have increased more than five-fold in a decade, from $29 billion in 1989 to $166 billion in 1998 (UNCTAD, 1995, 1999). Concerned about losing first-mover advantage or failing to partner with the most desirable firms, companies can no longer take a protracted incremental approach, appraising success of a first entry before moving ahead into additional countries.

3. Deregulation of Industry. A number of industries that were historically regulated have been deregulated. Most prominent are telecommunications and financial services. Deregulation of these key industries has touched off another major wave of internationalization. Seeking the most advanced technology, scores of countries in all parts of the world - developed as well as developing - have offered licenses for bid such as those for mobile telephones. Given the finite number of licenses in each market, firms must tender when these licenses are offered or run the risk of being shut out by competitors. A careful process of sequential entry is not possible; compressed or accelerated entry is necessary. Deregulation allows firms in these industries to shift from a multidomestic strategy to a more global business structure - creating global product offerings for business clients while retaining the local requirements for individual customers.

B. Improvements in Technology 1. Improvements in Information Technology. A sweeping change affecting internationalization is the revolution in information technology. The current obsession with the Internet and mobile telephony is only the most recent step in this revolution. Previously, the emergence of global IT architectures, with common operating environments to facilitate communication among members of far-flung firms, has transformed the ability to coordinate activities on a global basis. Information technology allows firms to connect electronically to any location around the world, allowing them to manage globally integrated activities in a way unimaginable just a few years ago, with instantaneous information sharing on operating activities and knowledge sharing among employees. In addition, Bishop (1999) described how even the smallest business may do business globally using Internet based marketing tools.

2. Improvements in Transportation. Transportation costs and shipment times have dropped dramatically over the past decades, increasing the economic benefits of producing goods far from the markets where they are sold. Container shipments have increased scale efficiencies and driven down prices. Over the past 20 years, nominal

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unit-transport costs on the key Asia-US route have fallen by one-third, or approximately two-thirds in inflation-adjusted terms, and today shipping costs represent only 1% of total merchandise costs (Taggart, 1999). While 95% of world cargo volume still moves by ship, air freight companies such as DHL and Federal Express provide air express services to speed time sensitive shipments. In addition, trade management systems have been developed to communicate shipment status information in real-time over the Internet to improve shipment efficiency, reduce the time to clear customs, and reduce paperwork costs (Boscheck, 1993). The combined effect of improvements in communication and transportation means that firms can now decouple their value chains by establishing each piece in the most economical location. For example, in the production of a particular car manufactured by one U.S. firm, nine countries are involved in some aspect of production, marketing and selling. The value chain starts with design in Germany, contributing 7.5% of the car's value. Additional valued is added for components and advanced technology in Japan (17.5%), assembly in Korea (30%), minor parts in Taiwan and Singapore (4%), advertising and marketing services in the United Kingdom (2.5%), and data processing in Ireland and Barbados (1.5%). Only 37% of the production value of this "American" car is generated in the United States (David, 1997).

C. Economic Convergence 1. Quality and Productivity. A few decades ago, wodd class manufacturing was restricted to industrialized countries; while less developed countries often handled labor intensive production of relatively simple products. Today, high technology products are manufactured in Mexico, China, Malaysia, and other countries once mainly attractive for low wages. As an example, one of the most sophisticated products in the world, Intel's microprocessors, with their extreme precision and extraordinary sensitivity to contamination, are now produced in wafer lab shops on four continents. Even products usually associated with low sophistication and low wages - such as toys - are now made in Asia with sophisticated molds engineered in cooperation with the factory.

2. Consumer Demand and Preferences Whereas many products retain important local adaptations - notably in food, fashion, construction, and a variety of other industries - other products cater to an increasingly standardized set of tastes. Until recently, examples like Coca-Cola and McDonalds were among the few "global brands." Now they have

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been joined by many others, ranging from software (Microsoft) to clothing (Benetton) and more. Anglo-Dutch giant Unilever's recent shedding of hundreds of brands, followed by its acquisition in 2000 of Best Foods in order to gain its global brands, is testimony to this trend toward convergence in consumer demand.

D. Competitive Momentum The factors described above have not only stimulated firm internationalization; they have led to a fourth element, which we term competitive momentum. That is, in some industries, international expansion by some firms has made it all but necessary for others to follow suit. For example, shortly after B M W set up a manufacturing plant in South Carolina, Daimler Benz announced a plant in Alabama. In cigarettes, competition for the newly opened Russian market has led all leading companies - Philip Morris, BAT, and Japan Tobacco - to establish plants in Russia despite sizable risks. None can afford not to respond to a move by rivals into a potentially vital market. The discussion above can be summarized on Fig. 1. The opening of national markets and industry deregulation, improvements in technology, and economic convergence, all contribute to more rapid internationalization. Furthermore, as

Changes in Publie Policy

• Trade and investmentderegulation • Openingof new markets • Deregulationof industry Competitive Momentum

Improvements in Technology

• improvedinformationtechnology • Reducedtransportationcosts

Firm Internationalization Economic Convergence

• Qualityand productivity • Consumerdemandand preferences

Fig. 1.

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more and more firms internationalize more and more rapidly, they provide a competitive climate, which adds a further impetus to internationalization.

NEW PATTERNS OF INTERNATIONALIZATION The result of trends described above is clear: foreign investments of all kinds have increased. The surge in foreign investment includes firms of all sizes. While much recent attention has been given to cross-border mega-mergers such as DaimlerChrysler in 1998, British Petroleum with Amoco also in 1998, and Vodafone AirTouch with Mannesmann in 2000, much of the surge in foreign investment is the result of a groundswell of activities by small and mid-sized firms, as well as large firms. Firms in a wider range of industries have undertaken internalization. As noted above, deregulation has allowed industries such as telecommunications, electricity, banking and insurance to capitalize on global economies of scale. But other industries that were not regulated, such as retailing, are also rapidly expanding abroad. Wal*Mart, Ahold, and Carrefour are leading a transition of retailing into a global industry. For example, Wal*Mart had only 14 stores in Mexico in 1994 but, by 1999 generated 25% of its total revenues from international operations. Even cement, an industry traditionally local in nature, has become dominated by MNCs - Holderbank, Lafarge and Cemex - that are able to build advantage by sharing technology and knowledge on a globally integrated basis. But it is not just a greater amount of foreign investment that is now extended to new markets and to new industries. It is also foreign investment of a markedly different kind, undertaken with different motivations. As reviewed by Dunning (1988), most foreign investment historically has been undertaken for a few main motivations: resource seeking, market seeking, and most recently cost seeking. To these three basic motivations, we add three more, which we call knowledge

seeking, MNC market seeking, and global network optimization. 1. Knowledge Seeking Historically, much foreign expansion has been aimed at offering existing products or services to new markets. In recent years, thanks to the growing importance of knowledge or intellectual capital in a wide range of industries, firms are internationalizing in an effort to tap the leading know-how wherever it may be found. Consequently, firms must locate operations or build strategic networks to capture these advantages, for instance, by locating automobile design in California, software development in India, or pharmaceutical research in the United Kingdom.

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2. MNC Market Seeking As companies internationalize, their suppliers and service providers are drawn to do likewise. The result is a variant of "market seeking" - the sought market is not the local client base but MNCs that have already invested in the local market. Manufacturing firms demand that their suppliers establish businesses locally, often with consistent product quality and pricing worldwide. For example, Daimler-Benz's new plant for sport utility vehicles in Alabama prompted a number of key European-based suppliers to locate nearby. Packaging companies such as Huhtamaki Van Leer, which provides containers for Unilever and paper packaging for McDonalds and Amcor Rentsch, which supplies packaging for major cigarette and food companies, understand that serving major accounts depends on being able to supply them globally with efficient delivery at consistent prices and quality worldwide. The same holds for service firms that provide key activities for businesses. Banks, consulting firms, accounting firms, package delivery companies and more have expanded abroad not according to their timetable, but in rapid fashion to serve their rapidly expanding clients. At first glance, this phenomenon may seem like another form of market seeking and a less risky one at that, since the customer is known in advance. But firms must conform to the timetable and scope requirements of their customers and hence greater speed requires rapid internationalization and developing network management skills to coordinate not only their own global needs but also those of their customers. 3. Global Network Optimizers Global strategy as the creation of differentiated networks produces a final motivation for foreign investment. Rather than seeking to derive returns from activities in any one country, the business model is precisely to add value through the optimization of the overall network. One example is provided in the energy industry, where national deregulation in electricity is a major trend in many European countries, as well as in the United States. Firms like Enron, PowerGen, Texas Utilities and Scottish Power are not merely looking to earn a profit by matching electricity generation and distribution in a given country, or even to match generation and delivery across countries, but to engage in trading of upstream and downstream activities among a portfolio of countries. Their business model is one of managing risk and optimizing long and short positions among countries, something possible only for firms with an array of these assets in multiple markets.

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NEW IMPERATIVES FOR SUCCESSFUL INTERNATIONALIZATION Changes in the global economic and competitive environment have a direct bearing on firm strategies and tactics for accelerating international growth. If Colgate-Palmolive, Hewlett-Packard, Sony and many other firms could undertake international expansion in a measured and organic fashion, the management imperatives today are strikingly different. We highlight them on the right hand column of Table 1.

1. Smaller Firms International expansion is no longer the domain of primarily large firms. Lower resource requirements, lower information costs and the multiplicity of investment objectives, have all made it possible for firms of all sizes to contemplate foreign expansion. 2. Younger Firms Correlated with firm size, but a distinct factor, is firm age. Knight and Cavusgil (1996) describe firms which are "born global" in the sense that their assets and employees are in multiple countries from the outset. More common is the situation where firms begin with assets and employees in one country while their ambitions are explicitly global from their founding and they look for ways to exploit foreign markets from the outset. Furthermore, these companies are not restricted to adjacent or similar countries, whether linguistically or culturally or in terms of level of economic development. They can scan for and take advantage of opportunities wherever they may be. 3. Emphasis on Speed Along with smaller size is an imperative on speed, in some cases long before initial overseas ventures are profitable. The toy e-tailer, eToys*, provides an example: it was on-line for the Christmas shopping season in the U.S. in 1998; it had built a position in the U.K. for Christmas 1999; and it planned to be on-line in a number of European countries for Christmas 2000. Never mind that it has yet to turn a profit! With barriers to international expansion low and the perceived need to be present in many countries high, eToys can hardly wait until it has secured its position in one country before expanding into others.

* N o w bankrupt.

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4. Versatility in Entry Mode With the opportunity for foreign expansion comes a pressure to expand rapidly. One implication is that for many firms, reliance on organic growth is no longer possible. Rather, joining with existing firms - whether through joint ventures, non-equity alliances, or even acquisitions - is critical for success. Indeed, a key imperative for international growth is versatility in entry mode. Firms must be able to enter unfamiliar markets with limited human and capital resources before a competitor closes a market opportunity. While an acquisition or joint venture is often more difficult to implement than a greenfield investment, it may be the only way to establish a strategic position, gain access to key knowledge, or secure an installed base. The best firms today do not rely on a single entry mode, but are adept at greenfield entry, alliances and acquisitions. As an example, Cisco Systems' rapid international growth has used greenfield ventures, alliances and a large number of acquisitions. In a little more than a decade, Cisco has purchased 55 companies and suggested it would buy another 20 in the year 2000 (Serwer, 2000). 5. Compressed Use of Resources. Firms confront financial and human resource constraints as they expand internationally. Whereas capital markets go a long way toward overcoming financial constraints, finding the right people can be a much greater challenge. Versatility in entry mode demands a breadth of experienced people able to manage very different relationships and confront sharply different challenges. Leveraging expertise across entries is all about learning and knowledge exchange in a multinational context. Global success is a matter of human capital: building a first-class workforce and leveraging its expertise on a global basis. Robert Corti, chief financial officer at Avon, the cosmetics giant, explains Avon's outstanding record this way: "Avon can draw on its human capital to solve crises and seek opportunities half a world away. And it can do it fast" (Leander & Thurston, 1998). Staffing requirements have changed as well. Companies that are rapidly expanding abroad - or "born global" - typically don't have enough experienced people within the organization, so they hire from outside, using some combination of a local workforce, expatriates, or external supply networks. For example, in Poland, Amcor Rentsch, a multinational packaging supplier, hired a completely local work force from the beginning to staff its expansion into central and eastern Europe. Workers were trained in Switzerland and France for three weeks to learn production techniques and technical assistance was provided on-site by corporate experts. Four months later, a new plant was in production. When Rentsch committed to build a Russian plant to follow its

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customers, Rentsch Polska led the entry efforts by providing management, training and technical expertise. No permanent expatriates were used in either expansion. Still others may use external suppliers for key operations, requiring both companies to develop skills in network management. In all cases, firms must have a corporate culture nimble enough to capture and embrace the talents of new people and outside organizations while retaining the heritage and product quality of the existing company.

A few current examples Some firms exhibit one or another of the features listed above. But many exhibit most or all of them. These firms internationalize while young, small and do so quickly, with versatility in entry mode and simultaneous use of key resources. We offer two examples of such firms here: DHL, the express package delivery finn founded in the United States and Mobile Telephone Networks, or MTN, the South African mobile phone operator.

1. DHL Founded in 1969, DHL created the first door-to-door express service between San Francisco and Honolulu. The company started small and internationalized early. Initially, DHL's international expansion radiated from its San Francisco home. Within two years of its founding, DHL expanded from Hawaii to the Philippines followed by other Asian markets such as Japan, Hong Kong, Singapore and Australia. DHL shifted to a more opportunistic, global expansion strategy as it entered Europe in 1973, followed by the Middle East in 1976, Latin America in 1977 and Africa in 1978. In addition, DHL tried to enter new markets as soon as they opened. For example, the company was the first air express company in eastern Europe in 1983, the first in China in 1986 and the first to reestablish service to Kuwait after the gulf war. By 2000, DHL was a global company with headquarters in San Francisco and Brussels, operating 3,002 stations in 80,000 cities in 228 countries with 63,552 employees around the world. DHL has used a variety of entry modes as it has expanded worldwide. While it often relied on greenfield investments, DHL also used agents and joint ventures in countries where greenfield investment wasn't possible. For example, the company entered Czechoslovakia through an agent in 1986, but set up a greenfield subsidiary as soon as the market opened. Also in 1986, DHL formed a joint venture to enter China. An agent still operated DHL's office in Korea in 2000. The firm also made use of alliances to grow abroad. In 1990 Japan Airlines, Lufthansa, Nissho Iwai trading purchased equity in DHL with the strategy to complement the airport-to-airport service of the airlines with DHL's

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door-to-door service. To illustrate this alliance in action, DHL helps Russian car producers to document and transport cargo to and from the airport and Lufthansa carries the cargo on its international routes. In addition, DHL formed an equity alliance with Deutsche Post in 1998 and a non-equity alliance with the U.S. Postal Service in 1999 to leverage the international skills of DHL and the local delivery access of the posts. Versatility in entry mode has been a key reason why DHL has internationalized so far and so fast. DHL relies on consistent service delivery worldwide, making staffing and training of the highest importance. Yet given its rapid global growth, sequential assignments of expatriates hasn't been possible. Thus, when entering new markets, DHL brought in a few key expatriates to set up the operations, but quickly hired and trained local managers to allow the expats to leave within months. In recruiting, DHL has looked for flexible people with a customer-focused attitude who thrive in the constantly changing local environments. Then, DHL has invested heavily in training programs and international job assignments to teach customer service and business skills to new employees. In summary, DHL's new business comes from opemng new markets and from responding to opportunities based on customer needs, sometimes on short notice. This opportunistic growth pattern requires the company to execute international expansion simultaneously and rapidly instead of in a sequential, carefully planned time frame.

2. Mobile Telephone Networks (MTN) Founded in 1993 as a joint venture between Cable & Wireless and local South African telecommunications authorities, Mobile Telephone Networks (MTN) is an independently owned and managed firm with the second largest mobile phone network in its home country. While it continues to grow rapidly at home, with annual revenues increasing at 40% per year, MTN has already begun to expand rapidly throughout the African continent. In 1998, it secured licenses to operate mobile networks in Uganda, Rwanda and Swaziland. In 1999, it was on the verge of winning a license in Nigeria and in early 2000 acquired the privatized network in Cameroon. MTN's Business Development Unit is in active negotiation with governments and local partners in numerous other African countries - and some outside the African continent - to prepare bids or consider acquisitions. MTN is decidedly not undertaking incremental international growth, consolidating its home market and then moving progressively abroad in small steps. The reason is clear: globalization of the telecom market is moving with breathtaking speed and firms must either participate immediately or miss out

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on the limited number of licenses available. Thus, we see industry deregulation, improvements in technology and a convergence in economic demand, all playing a role in rapidly increasing competitive pressure. To enter new markets, M T N uses entry modes ranging from licensing to joint ventures to greenfield investments to acquisitions o f private networks. Most of its international entries are joint ventures with local investors and fixed line companies like Telia to extend its resources, build its market knowledge and meet country requirements for local ownership. Moreover, given the speed with which it must expand abroad, M T N uses its scarce resources of managerial talent simultaneously, leveraging its home country managers to contribute to local success. D H L and M T N are just two examples o f the current wave of internationalizing firms. Both stand in sharp contrast to the firms of previous generations. A n d if anything, the pace o f change has quickened. Today's Internet start-ups are the extreme - very small, very young and in very competitive markets that require a global presence from the outset. To take one example, iMediation is a recently-founded provider of e-commerce solutions for cross-selling, co-marketing and distribution, with head offices in Pads and Palo Alto (Balu, 2000). As described by iMediation CEO Didier Benchimol: The old, restricted view that you can start in your domestic market and then progressively expand, taking countries one by one, is completely obsolete ... [W]e launched the company simultaneously in Germany, the United Kingdom, France and the United States. Of course, that approach is a little more costly: you have to provide sales, marketing and personnel services in many places. On the other hand, it forces you to be much more aggressive from a business and marketing standpoint, because investors insist on seeing revenue right away. We started to sell and market our product six months earlier than a Silicon Valley company would. There's a new wave of managers and leaders who can quickly build a company and take that company global. They start up in many countries at once, so that after 12 months the company has a balanced business in Europe, the United States and Asia. One could hardly imagine a quote that more emphatically describes the new context o f internationalization. Until recently, careful incremental growth, as described by Heineken, was accepted as the norm. Now, in the an age o f open borders, economic convergence and the Internet, Heineken's story is leisurely and quaint - perhaps even, as Didier Benchimol says, "completely obsolete."

CONCLUSION The changes brought about by the new context of internationalization are dramatic. As we have seen, reduced information costs, deregulation, open markets

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and reduced barriers of capital, all contribute to making internationalization easier than ever before. On the other hand, the information and capital is available to all competitors worldwide, applying greater pressure for firms to enter new markets quickly and stay ahead of the competition. Foreign expansion is often driven more by the imperatives of competition and technology than a firm's internal readiness. There are important implications both for practice and for research. In terms of practice, firms must develop entry mode versatility, a flexible organization skilled in transferring knowledge quickly throughout the world, employees with an international mindset who can work with global customers and are willing to move when opportunities arise, skills in managing alliances and networks and expertise in risk management to balance the increased risks assumed by multiple compressed market entries. Firms must be first movers instead taking the "safe, sequential approach," or they risk missing opportunities and potential returns. Yet equally important are the implications for research. We propose two promising streams of research. The first would employ cross-sectional research design, but using a different set of variables than those frequently encountered in empirical research. The variables described on Fig. 1 would be important to integrate within empirical studies, probing, for instance, the relationship between changes in industry deregulation, open markets and economic convergence on the extent and modes of foreign investment. The second stream of research - and in our view the more exciting one - is longitudinal, looking at the ways that individual firms navigate the journey of rapid internationalization, employing entry modes flexibly and applying resources in a compressed and simultaneous fashion. Among the questions for study would be the ways that firms leverage knowledge from one entry to another, use human resources simultaneously across entries and compress expansion across multiple countries. These and other questions are best examined by looking at the patterns of entry and resource deployment by specific firms over time rather than in a cross-sectional design. The rapidly changing economic and competitive environment provides challenging but exciting new opportunities for firms in practice and for academics in research. As we have described, the days when a measured incremental approach was satisfactory are gone. In more and more industries, the intensity of competition is pushing firms to show greater versatility in entry mode and the ability to compress their use of resources. Companies like Cisco, DHL, iMediation, MTN and many more, are responding to a different set of forces than leading companies of just a generation ago. Focusing on the imperatives they face and incorporating these imperatives into empirical research, is the next frontier for our understanding of internationalization.

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REFERENCES Aharoni, Y. (1966). The foreign investment decision process. Boston: Division of Research, Graduate School of Business Administration, Harvard University. Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17(3), 1-26. Andersen, O. (1997). Internationalization and market entry mode: A review of theories and conceptual frameworks. Management International Review, 37(2), 27--42. Aulakh, P.S., & Kotabe, M. (1997). Antecedents and performance implications of channel integration in foreign markets. Journal of International Business Studies, 28(1), 145-175. Balu, R. (2000). Starting your startup. Fast Company, 31(January-February), 81. Bartlett, C. A., & Ghoshal, S. (1989). Managing across borders: The transnational solution. Boston: Harvard Business School Press. Beamish, P. W., & Banks. J. C. (1987). Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(Summer), 1-16. Bishop, B. (1999). Global marketing for the digital age. Lincolnwood, 1L: Contemporary Books. Boscheck, R. (1993). Encompass and the Logistical Service Industry. IMD Case GM544. David, D. (1997). Dossier on globalization. The Courier, 164(July-August). Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. Journal of International Business Studies, 11(1), 9-31. Dunning, J. H. (1988). Explaining international production. London and Boston: Unwin Hyman. Forsgren, M. (1989). Managing the internationalization process: The Swedish case. London: Routledge. Forsgren, M., Holm U., & Johanson. J. (1995). Division headquarters go abroad - A step in the internationalization of the multinational corporation. Journal of Management Studies, 32(4), 475-491. Gatignon, H., & Anderson, E. (1988). The multinational corporation's degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation. Journal of Law, Economics and Organization, 4(2), 305-336. Ghoshal, S., & Nohria. N. (1989). Internal differentiation within multinational corporations. Strategic Management Journal, 10, 323-337. Hedlund, G. (1986). The hypermodern MNC - A heterarchy? Human Resource Management, 25, 9-35. Jacobs, M. G. P. A., & Maas. W. H. G. (1992). Heineken History. Amsterdam. Johanson, J., & Vahlne. J. E. (1977). The internationalization process of the finn: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23-32. Johanson, J., & Wiedersheim-Paul. F. (1975). The internationalization of the firm - Four Swedish cases. Journal of Management Studies, 12, 305-322. Knight, G. A., & Cavusgil, S. T. (1996). The born global finn: A challenge to traditional internationalization theory. Advances in International Marketing, 8, 11-26. Kogut, B. (1983). Foreign direct investment as a sequential process. In: C. Kindleberger & D. Audretsch (Eds), The multinational corporation in the 1980s. Cambridge, MA: MIT Press. Kogut, B. (1988). Joint ventures: Theoretical and empirical perspectives. Strategic Management Journal, 9(4), 319-332. Leander, T. & Thurston. C. (1998). Companies with global muscle. Global Finance, 12(10), 24-27.

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Madhok, A. (1997). Cost, value and foreign market entry mode: The transaction and the finn. Strategic Management Journal, 18, 39~il. Moon, H. C. (1997). The choice of entry modes and theories of foreign direct investment. Journal of Global Marketing, 11(2), 43-64. Serwer, A. (2000). There's something about Cisco. Fortune, 15 May, 114-138. Smeets, M. (1995). Tariff issues in the Uruguay Round: Features and remaining issues. Journal of World Trade, 29(3), 91-105. Taggart, S. (1999). The 20-ton packet. Wired, October, 246-255. Tallman, S. B., & Shenkar. O. (1994). A managerial decision model of international cooperative venture formation. Journal of International Business Studies, 25(1), 91-113. UNCTAD. (1995). World investment report. New York and Geneva: United Nations. UNCTAD. (1999). World investment report. New York and Geneva: United Nations.

FIRM INTERNATIONALIZATION AND ECONOMIC PERFORMANCE: A CONCEPTUAL SYNTHESIS AND AN EMPIRICAL ASSESSMENT OF THE CHINESE EXPERIENCE Mingfang Li

ABSTRACT Firm internationalization or the degree of internationalization (DOI) has both been viewed as a critical dimension of company strategy and linked with enhanced firm performance. This research reports a theoretical postulation based on a conceptual synthesis and an empirical assessment, of this relationship among Chinese firms. Based on the economies of scale, market seeking, risk reduction and experiential learning benefits and possible threshold effects due to learning and accumulation, it is hypothesized that there is a curvilinear relationship between DOI and firm performance and furthermore firms in open or more marketized regions of China will benefit more from their internationalization efforts because of the supportive institutional environment. Multiple regression models employing a large data set of Chinese firms provided supportive empirical evidence. Theoretical and practical implications and research directions are considered. Reassessing the Internationalization of the Firm, Volume 11, pages 179--196. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1 179

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As economic activities become global and more and more firms large and small compete in a global market, firm internationalization or the degree of internationalization (DOI) has become an essential dimension of company strategy and is believed to help improve firm performance (Dunning, 1993; Johanson & Vahlne, 1977; Melin, 1992; Perlmutter, 1969). The large body of literature on the DOI/performance relationship reflects the importance of this nexus (Geringer, Beamish & daCosta, 1989; Grant, 1987; Grant, Jammine & Thomas, 1988; Hitt, Hoskisson & Kim, 1997; Johansson & Yip, 1994; Kim, Hwang & Burgers, 1989; Michel & Shaked, 1986; Tallman & Li, 1996). Despite its importance there has been limited attention to this relationship among firms in China (Peng et al., 2001). This study intends to fill that void. This research direction is important since China's business activities are increasingly becoming integrated with the world economy. China's transformation from a centrally planned economy to a market oriented one presents a valuable research setting for theory development and testing. Also, knowledge of Chinese firms' experience may be important to managers in China as well as elsewhere. Research insights obtained from such studies should prove to be useful for managers of firms in other transitional and emerging economies. Following a review and synthesis of the theoretical literature, the section below proposes the central hypotheses to be tested. The research setting and methodology discussion then follow, finally the research results and discussion conclude this research report. LITERATURE

REVIEW

AND HYPOTHESES

The stage model of internationalization (e.g. Johanson & Vahlne, 1977; Melin, 1992) represents a useful basis for us to understand how firms pursue the international dimension of their company strategy. The stage model suggests four major options in sequence: export, licensing and franchising, joint ventures and finally foreign direct investments (FDI). Clearly firms in many countries may have gone through all the stages. Those in many developed economies have, over the years, been engaged in wholesale globalization through merger and acquisition and FDI as well. This is clear from discussions assessing the degree of internationalization. While some might use foreign sales revenue over total revenue as an indicator of firm internationalization, others would look into the extent of geographical expansion, distribution of key functions and lines of business all over the world to gauge the degree of firm internationalization. Still others would consider top management team mentality, corporate board origins

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and sources of equity as part of firm internationalization. The situation in China is different. For most Chinese firms, the legacy of the decades-old central planning economy lingers on. Export appears to have been a predominant mode of internationalization even though a small number of firms have been involved in foreign direct investments (Kang, 1996). Therefore the theoretical formulation in this study will focus on exporting and will not integrate other benefits and challenges primarily due to FDIs (e.g. Buckley, 1988; Dunning, 1993; Porter, 1986) and top management and board globalization. The literature generally suggests four benefits of internationalization. These are respectively: (1) economies of scale, (2) market seeking, (3) risk reduction and finally (4) experiential learning benefits. First of all, firms may be able to realize and enjoy greater economies of scale with greater DOI (Chandler, 1990; Grant, 1987). Scale advantage is crucial to many firms as investments in fixed assets increase. Under the centrally planned economy, business activities did not necessarily follow basic economic principles such as economies of scale. Once gradually becoming free of central planning and having to deal with market forces, Chinese firms may quickly recognize the importance of achieving economies of scale in order to improve cost efficiency. Second, domestic markets may be too small for firms to utilize their full capacities (Kim et al., 1989). While the Chinese market is often considered vast and gigantic, careful assessments would lead to quite the opposite conclusion - supporting the basic statement above. In the Chinese case, state owned enterprises (SOEs) grew under central planning without considering market conditions. As a direct result, there has been widespread chronic under-utilization of capacity. In addition, regional protectionism, summed up vividly with the expression "Dukedom economy," and heterogeneity in market and ecological conditions in different regions, may further limit the size of domestic markets for companies, making internationalization an attractive and important alternative. As a third benefit, internationalization may help reduce potential risks (Grant, 1987; Kim et al., 1989). By selling to a diverse range of geographic markets finns will be able to reduce their dependence on a limited number of regions. The fourth benefit relates to experiential learning. This is perhaps a more important benefit for Chinese finns (as well as those in transitional economies or emerging economies in general). Internationalization represents a unique opportunity to be exposed to market economies and to learn how to adapt to a competitive global business environment (Johanson & Vahlne, 1977). Certainly, as China opens up its markets, more global competitors will enter China and transform China into a more market-like economy. But due to the lack of a strong institutional environment conducive to market competition and governmental interventions, firms in China may not be able to gain full exposure

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to competitive environments by competing domestically alone. Being involved in the international market will enable firms to develop products according to customer tastes and preference, collect competitive intelligence and respond to dynamic market conditions more effectively. The knowledge gained from these sources will in turn enable finns to develop their competitive advantage and better respond to both domestic and international markets. This experiential learning benefit is especially important for Chinese firms as they may have had limited experience dealing with various competitive forces that are crucial in market economies (e.g. Porter, 1985). While these benefits of internationalization go hand in hand, the experiential learning benefit can only be achieved through greater efforts under supportive environments. Top managers and employees with a competitive mentality may react to market conditions with more effective responses than those with a central planning mentality. Institutional environments that encourage competition and strategic flexibility would support companies that initiate creative strategies and effective responses. The experiential learning benefit may enable a firm to utilize fully other attending benefits of internationalization, namely, scale advantage, market seeking and risk reduction. It is therefore important to discuss further the experiential learning benefit. We may identify four aspects of experiential learning that are important for effective firm performance. First, responsiveness to competitive forces is an important requirement for success in a market economy. Firms conditioned in a central planning culture generally have no need to respond to changing market conditions, varying customer demands, the emergence of alternative suppliers and such. Their production quotas are usually set by governmental agencies and, customers are arranged in advance as well. In market oriented economies firms do need to deal with such dynamic forces and alter their own strategic responses accordingly. When Chinese firms begin their internationalization effort, they will certainly face the need to respond to these market conditions. In general, the more these firms get involved internationally, the more they will learn to respond to market conditions effectively and promptly. While export intermediaries may help firms by selecting appropriate target markets when the degree of international involvement is minimal, firms with a greater commitment to global markets may gain greater exposure to the market forces themselves. Second, efficient resource utilization is important in a market economy. Firms in a central planning economy assume a lot of social objectives in addition to utilizing resources. Efficient resource utilization may therefore become less important as a business objective. Furthermore, governmental agencies do not necessarily initiate disciplinary actions against those firms that under-utilize resources for they may not have accurate information and/or may need these

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firms to fulfill other obligations such as providing employment and enhancing social stability. On the other hand, firms in market economies are subject to market discipline. Those firms that under-utilize resources will face grave consequences as investors and creditors will not be willing to support them. When competing on a global basis firms in China will not only face competitors from their own country but competitors from other countries and regions as well. Certainly they will learn to appreciate the competitive advantage other companies possess and find the need to develop and enhance their own. Part of firm competitive advantage relates clearly to the efficient utilization of resources. Third, effective managerial process is important for ensuring better firm performance. Under central planning economies, educational systems for managerial cadres are lacking and managers have little opportunity to gain managerial skills and expertise through actually dealing with dynamic environmental forces and complex internal issues. By being involved in global economies firms will have an opportunity to develop their managers through hands-on training and become more effective at initiating managerial actions. An effective managerial process within a firm will not only enhance the responsiveness and resource efficiency advantage we identified above but also build and sustain such advantage. Finally, strategy formation, so important in market based economies, is not central in firms in a centrally planned economy. Hence, top managers in such firms may not possess the conceptual skills and environmental scanning and monitoring abilities to develop vision and articulate strategies for their firms. They however will gain such skills and ability and start to develop effective strategies the more their firms engage in global competition. Thus we argue that firms, through their internationalization, will gain greater responsiveness, resource efficiency, managerial effectiveness and more strategy formation acumen. These improvements in turn will enhance organizational performance. Theoretically, on the basis of these factors, internationalization will improve firm performance. However, it is important to note that for these benefits to actually produce an impact on firm performance, firms need to go beyond a certain threshold DOI level. Firms gain economies of scale only when they are able to achieve a certain level of production quantity. Incremental increases in product quantity before that point would have relatively minimal impact on cost efficiency. Their markets need to be large enough in order to fully utilize their capacity at the most efficient level possible. The risk reduction impact will only manifest itself when firms get involved in a sufficient number of different markets. Furthermore, the experiential learning benefit would only begin to manifest itself when a finn engages in internationalization on such a level that

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key business activities and majority of employees in the firm would fully benefit from being exposed to the international competitive environment. Otherwise, responsiveness to competitive forces, efficient utilization of resources, effective managerial processes and strategy formation acumen will not develop at all, hence no experiential learning will take place until and unless the firm internationalization reaches that critical threshold. Hence it is reasonable to hypothesize that the degree of internationalization will need to reach a certain threshold level in order for it to produce greater impact on firm performance. This threshold concept can be operationalized as a curvilinear relationship between DOI and performance in the sense that before this theoretical threshold level, increases in DOI will not lead to manifested increases in firm performance and only after this threshold level can increases in DOI lead to greater firm performance. Therefore: There exists a curvilinear relationship between the degree of internationalization and firm performance. If the degree of internationalization is relatively small, the resultant benefit to firm performance is limited; only when a firm reaches a critical threshold of internationalization will firm performance experience a marked increase. HI:

In addition, the Chinese setting exhibits a great deal of heterogeneity. A key dimension of interest is the relative economic and policy openness or marketization of specific geographic regions. China's historical central planning has had strong influences on businesses. The economic reform initiated in 1978 permitted more market oriented governance mechanics first in coastal areas such as Guangdong, Tianjing and Shanghai (cf., Tan & Li, 1996). Furthermore, other coastal locations such as Zhejing and Jiangsu have historically been richer in entrepreneurship than other areas and have been more able to take advantage of the economic reform benefits. These areas have more small and medium businesses than other places. In a sense, the economic reform and historical condition may have created positive externalities in these areas. This environmental characteristic will no doubt help the fi.rms in open regions to benefit more from strategic initiatives such as internationalization. This supportive environment is important for firms to truly utilize the experiential learning benefit of internationalization more effectively. On the other hand, those regions of China where the central planning mentality has had a dominant influence may not be conducive for experiential learning even if firms attempt to internationalize. As stated before, while achieving scale advantage, market seeking and risk reduction is important, it is the experiential learning that will enable firms to compete more effectively and efficiently and truly benefit from the scale advantage, market size and diversity condition obtained. Being located

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in the open regions of the country will therefore enable those firms there to benefit more effectively from their internationalization effort. Therefore: H2: Firms in open or more marketized regions will experience greater perfor-

mance gains via internationalization than those in other regions. Figure 1 depicts the two hypotheses. METHODS The current study is based on a selection of the largest 1684 firms in China that have international revenues. The data source is the Wan Fang Chinese Enterprises and Companies Database (Wanfang Data, 1997). This database provides information about various Chinese companies, their basic financial data and product market scope, the current data set is comprised of 1996 data. The central independent variable of this study, DOI, is operationalized as the ratio of foreign revenue generated over the total sales revenue. The debate on the measurement of DOI notwithstanding (Ramaswamy, 1995; Ramaswamy, Kroeck & Renforth, 1996; Sullivan, 1994; Tallman & Li, 1996), this measure appears to adequately capture DOI in Chinese firms. Clearly firms in different countries tend to pursue internationalization differently because of historical conditions (Bartlett & Ghoshal, 1989) and exporting appears to be the predominant method of internationalization for Chinese firms, at least at the current stage of economic reform (Kang, 1996). The square of DOI was created in order to test the curvilinear relationship hypothesized.

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Hypothesized Relationship between DOI and Performance.

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The dependent construct, firm performance, is commonly recognized as multidimensional in nature (Chakravarthy, 1986), no single indicator can therefore adequately capture this construct. Consistent with the business literature this study selected multiple indicators. This study selected four measures: return on assets, return on sales, sales by fixed assets and sales by employees. The former two represent return on firm assets and sales and the latter two represent firm efficiency. There are, of course, other possible indicators of performance. Because of database limitation, however, this study was unable to incorporate growth related measures. In addition, performance measures may be region dependent. For example, Shoham (1999) suggests that Israeli managers used profit margins instead of ROA and ROI to assess profitability. On the other hand, since return related measures have been widely used in the business literature and using the same measures would facilitate cross-study comparisons, it is suggested that the selected measures of performance are meaningful and useful. For the Chinese data sample, firm size (measured as the total number of employees) was used as a control variable. Firm size may indicate economies of scale and scope effects (Chandler, 1990) and possible bureaucratic costs (Jones & Hill, 1988) and therefore is an important control variable. Many activities of strategic importance will influence firm performance. This current study focused on the impact of internationalization on firm performance. Research design, methodology and data availability would most likely prevent any researcher from including all desirable variables into a single study. What is important is to include crucial control variables so as to avoid mis-specifying statistical models. For this reason, this study included size as a control. To capture the impact of the proposed region effect (open vs. less open regions or areas), this study used a dummy variable open. The dummy variable is coded 1 (open) for firms located in the following areas: Guangdong, Fujian, Hainan, Shanghai, Zheijiang, Jiangsu, Beijing, Tianjin. These regions, as reasoned earlier, were allowed to experiment with the first open door and economic reform policy and in addition, many of these regions historically enjoyed greater entrepreneurial activities than other regions. Other studies support this assessment as well. For example, Li (1998) reports that these regions are ranked top of all regions on mainland China along a measure of attractiveness for foreign investments (ratio of foreign capital over domestic investments). Finally this study created two interaction terms between the area dummy and the DOI and DOI squared respectively for testing Hypothesis 2 (Open*DOI and Open*DOF). Table 1 provides descriptive statistics and correlation coefficients.

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Two sets of regression equations were used to test the hypotheses advanced earlier. Each set consists of four equations, with four dependent variables. The first set tested the DOI/performance relationship without introducing the open region effect. The second set added two interaction terms (open area and DOI and open area and DOI squared) in order to test the moderating effect of open regions (Aiken & West, 1991). We discuss the research results in turn. Table 2 presents the four regression equations for the first set of tests. For all four regression equations in Table 2, the F statistics indicate that the regression equations are significant. We therefore focus on each individual regression coefficient. We reported unstandardized regression coefficients as one of the variables is a squared term. As can be seen from Table 2, the regression coefficients for DOI are statistically significant and negative and those for DOI squared are statistically significant and positive across all four equations. These results are consistent with the Hypothesis 1 that there exists a curvilinear relationship between the DOI and firm performance. Furthermore, it is interesting to note that the explanatory power of these equations is relatively small. That is, only 1% to 2% of performance variations has been explained by these models. We will speculate on the reasons in the discussion section. We now turn our attention to the second set of regression equations that would combine both Hypotheses 1 and 2 in the empirical assessment. Table 3 presents the regression results that incorporate the impact of area and moderating effects of areas on the relationship between DOI and performance. The regression results from Table 3 require more elaboration. First of all, note that according to the F statistics all four regression equations are statistically significant. We now turn to each regression equation. For the model with ROA as the dependent variable, there is clearly the indication that the curvilinear relationship between DOI and performance is moderated by the area the firms are in. As stated earlier, we created a dummy variable to denote more economically open and marketized region (as 1) and other places (as 0). We believe that firms in such open areas will enjoy greater performance gains from their internationalization efforts. If we use the regression equation (Model 1) to create two sub-equations for two regions (dropping the impact of size for simplicity), we will get: ROA = 0.21 - 1.12*DOI + 1.23"DOI 2 for other regions and ROA = 0.34 - 2.65*DOI + 5.01*DOI 2 for open/marketized regions. These two sub-equations can be depicted as in Fig. 2.

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For firms in marketized areas, with more economic and policy openness, internationalization does appear to have a considerably greater impact on firm performance when measured in terms of ROA. It is interesting to note that for firms in other areas, the DOI has a weaker impact on ROA. For the model with ROS as the dependent variable, the two interaction terms are statistically significant and with the predicted signs. We can again create two sub-equations according to the two areas: ROS = 0.06 -

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threshold level, this finding supports Hypothesis 1. In addition, there is some preliminary evidence that firms in open regions do experience greater benefit of internationalization than their counterparts in other areas, this finding supports Hypothesis 2 as far as the ROA and ROS equations are concerned. DISCUSSION

AND CONCLUSIONS

Clearly internationalization represents one important direction for Chinese firms to transform themselves into competitive entities. The present study provides some preliminary evidence of the positive impact of internationalization. The research findings also suggest the need for firms to reach a critical threshold in order to benefit from this strategic option. In addition, it appears that firms in open regions do gain greater performance benefit from their internationalization effort than those in other areas. Thus it is important for the Chinese government to speed up reforms in other areas and to create competitive environments for firms there. In addition, a number of Chinese firms have begun to internationalize using the FDI mode. As these firms truly become part of the global competitive landscape, international business community will also benefit from the insights identified in this study. As noted earlier, the first set of regression equations has limited explanatory power, accounting for one to two percent of the performance variance. The second set of regression equations seems to have improved somewhat, accounting for two to four percent of the performance variance. Several factors

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might be at play. First, this study used a relatively large data set in order to assess the overall pattern of internationalization and firm performance. This might be a useful direction as there has been much literature on how internationalization will improve firm performance and indeed we also uncovered some confirming evidence. By adopting a coarse-grained approach, we stressed general patterns rather than rich details that an alternative research design might offer. Revealing general patterns with this coarse-grained approach is important in itself. Of course, case-based research and carefully selected more homogeneous study samples might offer very interesting insights to complement this study. Second, note that when we included the region effect, the explanatory power increased somewhat. Note also that the threshold effect remains and more importantly, firms in open regions tend to benefit more from their internationalization effort than those in other regions. There are several lessons we can learn here. First, only those firms in open regions benefit more from their internationalization effort. A supportive institutional environment is important. Second, those in other regions may not reap the benefit of their internationalization efforts, even if they are able to reach a certain level of threshold. A third consideration in explaining the low explanatory power of the equations tested here might be that firms in China are still caught between the legacy of central planning and the emerging force of markets. Transformation takes time. This study captured the situation in China around 1996. Its results become meaningful when compared with those in other settings and when compared with Chinese cases over time. Finally, we believe that the use of a dummy variable for the effect of different areas or regions is limiting. Future studies may create a more elaborate variable to tap how economically open and marketized a region is. For example, the number of new firm start-ups, the flexibility of government policies and incentives, infrastructure development and competitiveness of the local economies might all bear some relevance on this aspect. In the final analysis, the strengths of effect sizes and the strengths of study results do not necessarily go hand in hand. By identifying a pronounced pattern for the DOI/performance relationship using a large database and by revealing the impact of region - a proxy for institutional environment support - this study offered a number of interesting and useful lessons for both theory development and practical guidance. The current study is cross-sectional in nature and the data set is limited to one year only. To deepen our understanding of Chinese firms' internationalization processes, future research may pursue longitudinal studies

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and trace the internalization of firms in China over time. Another important question is if and when the costs of internationalization (such as those related to set-up, administration and coordination of internationalization effort) may offset the benefits of it. The research community needs to consider this issue. Clearly there will be costs and benefits at various levels of internationalization. Initially firms may need to set up international operations and invest in various international operations. When a firm engages primarily in international markets, coordination and administrative costs may become a major portion of the total cost of internationalization. Perhaps different degrees of internationalization will involve different costs. From a broader perspective, costs and benefits must be considered from a holistic point of view as well. Furthermore, internationalization seems to be only one of the key dimensions in a firm's strategic arsenal. Diversification might be an equally important sidekick. Researchers have begun to pay attention to both aspects simultaneously. Future studies may wish to incorporate both internationalization and diversification in a comprehensive theoretical framework (Hitt et al., 1997; Tallman & Li, 1996). Finally much of the internationalization literature seems to focus on outward looking internationalization. Firms may also engage in internationalization using an inward looking approach. For example, Chinese firms may wish to import products, become a licensee or franchisee of an international firm, form joint ventures with international firms, or become subsidiaries of MNCs. To what extent would the inward looking internationalization influence firm performance? Theoretical developments and empirical assessments along this direction will be important as well. From a practical point of view, the notion of threshold is informing. Top managers in China need to consider internationalization as an important aspect of their long-term strategic orientation but should not expect incremental gains as they increase their internationalization effort. Instead, they need to evaluate carefully the level at which their firm will benefit from their internationalization effort. Several factors are important. They include optimal level of economies of scale, acceptable market size and scope. It is important to create a company environment that is fully exposed to the competitive global environment and a corporate culture conducive to learning from other players and to be supportive of creative strategic initiatives. Only through such efforts can a company develop responsiveness to market forces, utilize resources efficiently, enhance its managerial effectiveness and nurture its strategy formation acumen. Furthermore, only through such efforts can a company fully utilize its internationalization advantage. There are policy-making implications as well. Governmental officials in China must seek to open up their local areas further to competition - global as well

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as d o m e s t i c - perfect institutional support m e c h a n i c s to enable creative c o m p e t i t i v e actions and reactions f r o m all players and facilitate the d e v e l o p m e n t o f managerial talents so as to enable their local firms to deal m o r e effectively with c o m p e t i t i v e environments. T h e s e are long t e r m winning approaches o f sustainable regional d e v e l o p m e n t . L o c a l p r o t e c t i o n i s m o v e r the long haul can only spell regional e c o n o m i c decay.

REFERENCES Aiken, L. S., & West, S. G. (1991). Multiple Regression: Testing and Interpreting Interactions. Newbury Park, CA: Sage Publications. Bartlett, C. A., & Ghoshal, S. (1989). Managing Across Borders. Boston, MA: Harvard Business School Press. Buckley, P. J. (1988). The Limits of Explanation: Testing the Internalization Theory of the Multinational Enterprise. Journal of International Business Studies, 19, 181-193. Chakravarthy, B. S. (1986). Measuring Strategic Performance. Strategic Management Journal, 7, 437-458. Chandler, A. D. Jr. (1990). Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, MA: The Belknap Press of Harvard University Press. Dunning, J. H. (t993). The Globalization of Business. London: Routledge. Geringer, J. M., Beamish, P. W., & daCosta, R. C. (1989). Diversification Strategy and Internationalization: Implications for MNE Performance. Strategic Management Journal, 10, 109-119. Grant, R. M. (1987). Multinationality and Performance among British Manufacturing Companies. Journal of International Business Studies, 18, 79-89. Grant, R. M., Jammine, A. P., & Thomas, H. (1988). Diversity, Diversification and Profitability among British Manufacturing Companies, 1972-1984. Academy of Management Journal, 31, 771-801. Hitt, M. A., Hoskisson, R. E, & Kim, H. (1997). International Diversification: Effects on Innovation and Firm Performance in Product-diversified Firms. Academy of Management Journal, 40, 767-798. Johanson, J., & Vahlne, J.-E. (1977). The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8, 23-32. Johansson, J. K., & Yip, G. S. (1994). Exploiting Globalization Potential: U.S. and Japanese Strategies. Strategic Management Journal, 15, 579~01. Jones, G. R., & Hill, C. W. L. (1988). Transaction Cost Analysis of Strategy-Structure Choice. Strategic Management Journal, 9, 159-172. Kang, R. (Ed.), (1996). Zhongguo Qiye De Kuaguo Jinyin: Anli Fengxi Lilung Tansou (Multinational Operations of Chinese Enterprises: Case Analyses and Theoretical Exploration). Beijing: Economic Science. Kim, W. C., Hwang, P., & Burgers, W. P. (1989). Global Diversification Strategy and Corporate Profit Performance. Strategic Management Journal, 10, 45-57. Li, S. (1998). Location Choice of Foreign Firms in China. Working paper, City University of Hong Kong.

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Melin, L. (1992). Internationalization as a Strategy Process. Strategic Management Journal, 13, 99-118. Michel, A., & Shake& I. (1986). Multinational Corporations vs. Domestic Corporations: Financial Performance and Characteristics. Journal of International Business Studies, 17, 89-100. Peng, M. W., Lu, Y., Shenkar, O., & Wang, D. Y. L. (2001). Treasures in the China House: A Review of Management and Organizational Research on Greater China. Journal of Business Research, 52, 95-110. Pedmutter, H. V. (1969). The Tortuous Evolution of the Multinational Corporation. Columbia Journal of World Business, 4(1), 9-18. Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Porter, M, E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press. Porter, M. E. (Ed.) (1986). Competition in Global Industries. Boston, MA: Harvard Business School Press. Ramaswamy, K. (1995). Multinationality, Configuration and Performance: A Study of MNEs in the U.S. Drug and Pharmaceutical Industry. Journal of International Management, 1, 231-253. Ramaswamy, K. Kroeck, K. G., & Renforth, W. (1996). Measuring the Degree of Internationalization of a FLrm: A Comment. Journal of International Business Studies, 27, 167-177. Shoham, A. (1999). Bounded Rationality, Planning, Standardization of International Strategy and Export Performance: A Structural Model Examination. Journal of International Marketing, 7, 24-50. Sullivan, D. (1994). Measuring the Degree of Internationalization of a Firm. Journal of lnternational Business Studies, 25, 325-342. TaUman, S., & Li, J. (1996). Effects of International Diversity and Product Diversity on the Performance of Multinational Firms. Academy of Management Journal, 39, 179-196. Tan, J. J., & Li, M. (1996). Effects of Ownership Types on Environment-Strategy Configuration in China's Emerging Transitional Economy. In: S. B. Prasad (Ed.), Advances in International Comparative Management 11, 217-250. Greenwich, CT: JAI Pess. Wanfang Data (1997). Chinese Enterprises and Companies Database [CD-ROM]. Beijing: Wanfang Data Corporation.

A GENERATION PERSPECTIVE ON SMALL FIRM INTERNATIONALIZATION: FROM TRADITIONAL EXPORTERS AND FLEXIBLE SPECIALISTS TO BORN GLOBALS Arild Aspelund and Oystein Moen

ABSTRACT This paper deals with the effects of firm age on export behavior and performance for small exporters. Using market and technology trends from the last decades, we have classified three generations of small exporters: the traditional, the flexible specialists, and the Born Globals. Building upon a sample of Norwegian exporters these three generations of exporting firms are compared using competitive advantage, manager orientation, export motives, and export strategy. The results revealed several significant distinguishing features between the generations. Important differences were the strong technological competitiveness, niche focus and widespread use of advanced communication technology in the two groups of recently established exporters compared to the older, traditional exporters. The study also showed that the various generations of firms had different export Reassessing the Internationalization of the Firm, Volume 11, pages 197-225. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1

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performance antecedents. Key factors for the Born Globals were found to be technological advantage and niche focus combined with strong customer orientation. Among both the other groups - traditional exporters and flexible specialists - marketing advantage, product quality, and various manager orientation factors were important performance determinants. It seems that firm behavior and performance are partly contingent upon the environmental context in existence during the firm's year of establishment, which results in systematic differences between the generations of exporting firms. As the firm's year of establishment has often been a neglected variable in international marketing research, these results suggest we should pay more attention to firm age in future studies, as both export behavior and performance determinants vary between different generations of exporting firms. This study further concludes that we can now distinguish a new generation of exporters; the Born Global firms. One of the most important characteristics of these firms is their speed of internationalization; just a few years after establishment the Born Global firms achieve considerable sales in a number of export markets. INTRODUCTION The ongoing internationalization in most industries over the last decades has changed the environment for exporting firms. The developments in transport and communication technology, along with the constant and systematic reduction of export barriers as a result of international trade agreements, have made it easier for smaller firms to start exporting. This shift in international trade conditions has resulted in an increasing number of firms that are international from their inception. Researchers have identified such firms in most parts of the developed world. They have been termed Born Globals by Rennie (1993), Knight and Cavusgil (1996) and Madsen and Servais (1997), Instant Internationals (Preece et al., 1999), Global Start-Ups by Jolly et al. (1992) and International New Ventures by Oviatt and McDougall (1994). The name Born Global will be adopted in this study. The Born Global firm is defined as a company which, from or near its founding, seeks to derive a substantial portion of its revenues from the sale of its products in international markets (Knight, 1997, p. 1). These firms distinguish themselves by having a strong international vision fight from their inception (Rennie, 1993; Oviatt & McDougall, 1994; Knight & Cavusgil, 1996) and internationalize in a manner that seems contrary to established internationalization theories (McDougall et al., 1994; Knight & Cavusgil, 1996).

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Both McDougall et al. (1994) and Knight and Cavusgil (1996) called for more research on Born Global firms in order to establish better models to explain their existence and behavior. It should be noted that though firm age is a key construct in Born Global research, the effects of finn age have not been thoroughly examined in international marketing research. As described by Oviatt and McDougall (1994), the effect of firm age has been infrequently visited and often been considered an unimportant demographic characteristic or side issue. Two perspectives emerge. The first assumes that a firm develops and adjusts to the external factors, independent of its year of establishment - implying that firm age is of little importance. This is an assumption implicitly made in many export performance studies which treat samples of firms as one homogenous group with regard to firm age. Another perspective would be that firms are heavily influenced by their age, indicating that systematic differences between exporting firms will exist depending on the predominant technology and market trends present during their period of establishment. In such a perspective, the history of a firm (decisions, experience, competence) has an impact on its current priorities and export behavior as well as performance. Considering the ever-changing environment for small exporters, we can imagine the emergence of generations of firms, where each generation has different characteristics. As the Born Global firms have been found in large numbers during the last decade, they may be deemed a new generation of exporters. Another shift in the behavior of small firms was described in the mid-seventies (Skorstad, 1999; Piore & Sable, 1984; Sengenberger et al., 1990) as a change from mass production to flexible specialization resulting in the increased importance of the small business sector. Sengenberger et al. (1990) have presented empirical evidence of this change from several countries across three continents. The purpose of this study is to investigate whether differences exist between small and medium sized exporting firms based upon the time period within which they were established, by comparing different generations of Norwegian exporters. Historical changes and developments in the firm's external environment provide a basis for separating the generations of firms. The conceptual basis is the Aaby and Slater (1989) model for assessing export performance, including firm competencies, manager orientation, export strategy and external market conditions. The study includes both a comparison of firm generations using factors that are normally related to export performance, as well as an investigation into whether firms of different generations have different export performance antecedents.

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ARILD ASPELUND AND OYSTEIN MOEN From Mass Production to Flexible Specialists and Born Globals?

Over the last three decades we have seen large changes in market conditions as well as advances in many technologies which have influence on SME behavior. In this section we look at some of the factors contributing to the increased employment share in the SME sector and facilitating factors for the emergence of Born Global firms. Before the 1970s, SMEs were a marginal subject in economics and the social sciences. The focus was on the large-scale, vertically integrated units of production and employment (Sengenberger et al., 1990). However, the economic growth in Europe slowed down in the beginning of the 1970s primarily due to saturated Industrial markets and the fact that mass production, as a production form, was too rigid to meet the growing demand for specialized and customized products (Skorstad, 1999). This situation has been called the second crisis of mass production (Skorstad, 1999) and the European response to the crisis was flexible specialization and cooperation in industrial districts. An elaborated discussion is found in Piore and Sable (1984). The characterizing features of flexible specialization are small firms cooperating in networks with qualified workers and flexible technology. The study performed by Sengenberger et al. (1990) showed that after a decline in small firm employment share in the late 1960s and early 1970s, the 1980s followed with a "V-pattern" and growing employment share in small firms. The results were consistent in countries such as France, Germany, Italy, Japan, the United Kingdom and the United States. Sengenberger et al. called the report "the re-emergence of small enterprises," reflecting the vital new role of SMEs in industry innovation and job creation. Sengenberger et al.'s study showed that changes in the external factors might lead to the emergence of a new generation of firms. Today, SMEs account for 60% to 70% of the jobs in most OECD countries and they also account for a disproportionately large share of new jobs (OECD, 1998). Another important trend of the post-war economy was the increasing globalization of markets. There was growth in the trade of goods and services, increased foreign investments, development of multinational companies often including cross-national mergers and acquisitions, and an increased exchange of information (Julien, 1996). World trade was facilitated by a continuous reduction of trade and investment barriers by international trade agreements like the WTO (Samtid, 1997; WTO, 1999). The trend has been accelerated by the development of free trade areas such as ASEAN, NAFrA, APEC and the European Union (Knight, 1997). Since resource poverty is a nearly universal association of new ventures (Oviatt & McDougall, 1994) the reduction of export barriers has made it possible for more newly established firms to go abroad.

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The growth in the SME sector and the increasing globalization of markets do not solely provide an adequate explanation of the growing number of newly established exporters, although it is a good starting point. The main reason for the second industrial crisis was, as mentioned, the growing demand for specialized and customized goods. In a word where product life cycles are shrinking and consumer tastes change quickly, a small company holds an advantage with higher flexibility, adaptability, and quicker response time (Knight & Cavusgil, 1996; Rennie, 1993). Small companies also hold a low-cost advantage, unfettered by bureaucracy and expensive existing information systems (Knight, 1997). Another direct consequence of the described development is the increasing role, and hence the increasing number, of niche markets seen in the developed world (Madsen & Servais, 1997; Servais & Rasmussen, 1999). Because of the ongoing globalization, competition from large firms using their advantages of scale pushes small firms into niche markets. The domestic market may not be sufficiently large and accordingly the small firms may have to rely on sales in multiple countries to survive; they are pushed into internationalization. These forces, which are driving an increasing number of small firms rapidly into international markets while they have limited resources and experience, have been called the "SME exporters' squeeze" by Christensen (1991). An important trend adding to SME competitiveness is recent advances in process technology. Electronic process technology and new machine tools make production of sophisticated, specialized parts and products economical also in low scale production. (Rennie, 1993; Knight & Cavusgil, 1996; Knight, 1997; Madsen & Servais, 1997; Servais & Rasmussen, 1999). Four case studies preformed by Jolly et al. (1992) show that Born Globals often rely on innovative products rooted in an industry shift. Such industry shifts often occur when new technologies are introduced. Recent developments in communication and transportation technology also make exporting easier and less resource demanding (Rennie, 1993; Oviatt & McDougall, 1994; Knight & Cavusgil, 1996; Knight, 1997; Madsen & Servais, 1997; Servais & Rasmussen, 1999). This applies to both the exporting firm's internal and external communication. Widespread diffusion and use of telephone services, fax, e-mail, Internet, Intranet, databases and videoconferences have strongly reduced the costs of exporting activities. Large vertically integrated companies no longer hold the advantage of an expensive system for sharing information. Small companies can now easily and at low costs, distribute and acquire information from foreign activities, customers, agents, partners, markets, and public information. In depth discussion of how the Internet reduces the obstacles for small firm exporting, and the new

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opportunities this creates for such firms have been presented by Hamill (1997) as well as Bennett (1997). The globalization of technology, through joint research and development platforms and international technology transfers, makes new and innovative approaches widely known and available for small firms. It also represents an important facilitating factor for cross border communication as it becomes more standardized. International financial opportunities are increasingly available for the funding of new projects and international activities (Oviatt & McDougall, 1994). The OECD concludes that in its member countries the expansion of private equity markets, including informal markets, has greatly improved the access to venture capital for start-ups and SMEs (OECD, 2000). It also seems that this trend is especially favorable for the newly established firms. A study of 425 Norwegian informal investors showed that more than 50% of the informal investments included in the study were made within two years after the first sale (Reitan & S6rheim, 2000). Human resources are also increasingly available, as more business managers, entrepreneurs, and students have gained international experience (Madsen & Servais, 1997; Servais & Rasmussen, 1999). With more people handling several languages and being familiar with foreign cultures it is easier for companies to find qualified personnel for handling their international business. Another trend facilitating the emergence of Born Global firms is the development of global networks (Knight & Cavusgil, 1996). A widespread strategy in response to the ongoing globalization is that of joining business networks or subcontracting for large international firms to make the most out of international opportunities (Julien, 1996). Research on Danish Born Globals has revealed that several firms during their founding period had to rely on resources which they only had access to in a particular industrial district (Servais & Rasmussen, 1999). In addition Oviatt and McDougall (1994) found in their study of 24 international new ventures that the firms often rely on hybrid structures to perform their international activities. The existence of Born Global firms has been reported in Europe, North America, South America, the Middle East, Asia and the South Pacific (see e.g. Granitsky, 1989; Jolly et al., 1992; Knight, 1997; Madsen & Servais, 1997; McDougall et al., 1994; Moen, 2001; Rennie, 1993). The Born Global phenomenon neither seems to limit itself to certain technologies nor sectors of the economy (Rennie, 1993; Oviatt & McDougall, 1994). It should be remembered that the Born Global firm is not an exclusively new phenomenon. Oviatt and McDougall (1994) state that international new ventures have existed for centuries and there is evidence of similar firms in studies performed as early as the 1970s (Knight & Cavusgil, 1996). However, it is evident from a number of recent studies stemming from several countries, that Born Global firms began

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to appear in large numbers in the late 1980s (Knight, 1997). In fact, a study by Moen (2001) including 405 French and Norwegian exporters showed that the majority of both French and Norwegian exporting firms established in the 1990s could be classified as Born Globals; i.e. they were exporting more than 25% of total sales within two years of the start-up. The study of Born Global firms has primarily been confined to conceptual work or case studies, which is natural for an emerging field of research. Only a few empirical studies assess the Born Global phenomenon and within these the conceptualization of Born Globals has not been uniform. Knight (1997) used two variables, age and export share, to classify the Born Global firms (more precisely 20 years old or younger and exporting at least 25% of total production). Moen (2001) used a narrower definition because the criterion was that the firm be exporting more than 25% of total sales within two years of start-up. A different approach is taken in this study, as we have chosen to divide the firms into three different firm generations. The first group is that of the traditional exporters, from now on referred to as group 1. This group comprises the exporters established prior to 1976. We chose to separate the first and second generation in the mid-1970s for the two afore-mentioned reasons: the saturation of the industrial market led to a decrease in European economic growth reaching its bottom in the mid-1970s (Skorstad, 1999), and it was during this same period that Sengenberger et al. (1990) found broad evidence for what they called the re-emergence of small enterprises. We argue that small finns established after this period found better business environments because of the increased demand for specialized and customized goods. We have chosen to limit the second generation to firms established between 1976 and 1988, from now on referred to as group 2. Group 3 is comprised of the firms established in or after 1989. The partition in 1989 is motivated by the results of the new stream of research focusing upon Bom Globals, as represented by Knight and Cavusgil (1996), Knight (1997), Madsen and Servais (1997) and McDougall et al. (1994). This study limits itself to firms exporting more than 15% of total annual sales. This limitation was used to focus the study on firms where export commitment plays a considerable role in management and firm strategy. We wanted to minimize the influence of sporadic exporting firms that are domestically focused for the most part and maintain infrastructures geared towards their mainstream domestic business (Samiee, 1998). Research Questions

As we have seen, there is extensive documentation of Born Global existence and it is in the last decade that the development of Born Global firms has been

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most notable. Additionally, a possible difference between firms established while mass production was the focus and what have been termed "flexible specialists" does exist. Therefore, two general hypotheses are presented: (a) There is a difference between generations of small exporters with regard to their score on factors often focused upon in international marketing research. (b) There is a difference between generations of small exporters with regard to key export performance antecedents. Since the main point of this study is the investigation of the relevance of a firm generation perspective in export behavior and performance studies, more specific hypotheses have not been developed. The Aaby and Slater (1989) framework is used for classifying groups of variables. Subsequently the hypotheses stated above are tested. An important characteristic of the Born Global firm is the way it seems to leapfrog several of the stages found in the traditional internationalization theories. Knight and Cavusgil (1996) argue that this seems to contradict both the "Uppsala Internationalization Model" (see e.g. Johanson & Vahlne, 1977; Johanson & Vahlne, 1990; Johanson & Wiedersheim-Paul, 1975) and the "Innovation-Related Internationalization Model" (see e.g. Cavusgil, 1980). These models explain the internationalization of the firm as a slow, incremental learning process where the firm internationalizes "like rings in the water." Further, McDougall et al. (1994) investigated the ability of five generally accepted international business theories to explain the formation of international new ventures: namely monopolistic advantage theory, product cycle theory, stage theory of internationalization, oligopolistic reaction theory, and internalization theory. Based on case studies, none of these theories provided an adequate explanation of the behavior of Born Global firms. Then, if a new generation of exporters does exist, it may possess characteristics and behave in a manner that questions one of the key conclusions in international marketing research - the existence of a gradual internationalization process. In fact, several important theories seem to have a limited ability to explain the behavior of such firms. METHODOLOGY Data Collection

Data were collected from exporting firms in Norway. Located in northern Europe with 4.5 million citizens, Norway has twice rejected membership in the

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European Union via national elections, yet still has access to the European Free Trade Area through the European Economic Area (EEA) agreement. Sample firms were identified using the Kompass Europe database. Firms with less than 250 employees, classified as exporters and manufacturers were randomly selected and sent a mail questionnaire. The letters were addressed to top level managers. The survey obtained a 23% response rate, yielding 335 valid responses. It was evident early on that many firms had a limited export involvement, so we decided to exclude firms with an export share less than 15%. This insured that only firms with a significant export activity, from the perspective of the firm, were included in the analysis. A total of 127 firms were removed, leaving 208 in the analysis. Table 1 gives a description of the sample. The sample's average annual turnover is 69.0 million NOK, the average number of employees is 54. Further, the average year of establishment is 1957, with an export share of 53.5%, exporting to 13 countries. Dividing the firms as described in previous sections (the traditionals established before 1976, the flexible specialists from between 1976-1988, and the Born Globals established later than 1988) yields three groups as described in Table 2. Examining the differences between the three groups, the oldest firms are considerably larger in terms of employees, while the differences when examining annual turnover is limited. The turnover/employee ratio is markedly different, with the highest ratio amongst the Born Global firms. All three groups have a strong position in the domestic market, while the oldest firms have the lowest export share. Moreover, these older firms have had much longer in the national markets prior to exporting, compared with the two younger groups.

Measures Building on the Aaby and Slater (1989) framework, the main variable groups include firm competencies, export strategy, firm characteristics including manager orientation, market and environment, as well as export performance. The manager's international orientation and other firm characteristics such as size and market share are divided into two separate groups. Of specific importance in the development of the items were the questionnaire used by Knight (1997) in his Ph.D. thesis at Michigan State University.

Firm Competencies (Competitive Advantages) The items included were based on Porter (1980), Day and Wensley (1988), Dess and Davis (1984), Namiki (1988) and Knight (1997). Performing a factor analysis suggested three distinct advantages linked to price, marketing and technology. Cronbach alphas ranged from 0.62 to 0.89.

A Generation Perspective on Small Firm Internationalization Table 1. Employees (percentage) 1-10 11-30

31-100 101-250

207

D e s c r i p t i o n o f S a m p l e (n = 208).

24.2% 29.0% 33.3% 13.5%

Annual turnover (Mill NOK) 1-10 10.1-30 30.1-100 100.1 ~

18.8% 24.4% 36.6% 20.2%

Year of establishment 1975 1976-1988 1989 ~"

56.7% 26.0% 17.3%

Market share in domestic market ,-- 14% 15-25% 26-50% 51-75% 76-100%

23.2% 13.8% 31.9% 13.8% 17.4%

Export sales share 15-25% 26-50% 51-75% 76-100%

18.0% 35.0% 18.4% 28.6%

Number of export markets 1-2 3-4 5-9 10-20 21 ~

6.2% 16.3% 27.3% 34.4% 15.8%

Export Strategy T h e s e c t i o n o f the q u e s t i o n n a i r e f o c u s i n g o n e x p o r t strategy w a s a d a p t e d p r i n c i p a l l y f r o m K n i g h t (1997). A s his m e a s u r e m e n t m o d e l g e n e r a t e d h i g h scores o f suitability in a C F A - a n a l y s i s t h e i n d e x e s u s e d in this s t u d y are b a s e d o n t h e s a m e items. F i v e e x p o r t strategy i n d e x e s w e r e c o m p u t e d b a s e d u p o n the

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ARILD ASPELUND AND OYSTEIN MOEN

Table 2.

Description of the Three Groups of Finns.

Employees Annual turnover (Mill NOK) Turnover/employee ratio Year of establishment Market share in domestic market Export sales share Time to first export

1

2

3

The traditional exporters (n = 118)

The flexible specialists (n = 54)

The Born Globals (n = 36)

69

41

26

77.9 1.13 1934 42.5 49.5 27

55.7 1.35 1984 43.7 59.3 2

63.1 2.42 1991 38.2 59.5 1

factor analysis (distributor effectiveness, niche focus, market based differentiation, product quality and personal selling). An index comprising the contact frequency with the export markets, including number of travels to and meetings in the export markets measured per employee was also computed. Cronbach alpha values vary from 0.66 to 0.87 for these constructs.

Psychic Distance Firms were questioned about the number of export markets served and were asked to identify which country represented their most important export market. The intention was to find out whether there are any differences between the groups based on the psychic distance to their most important export market and if this distance has any affect on the export performance for any of the groups. Psychic distance is defined as the sum of factors preventing the flow of information from and to the market (Johanson & Vahlne, 1977, p. 24). Examples are differences in language, education, business practices, culture, and industrial development. The concept has been widely accepted in the export behavior literature (St6ttinger & Schlegelmilch, 1998). We chose to use a scale for psychic distance from one to four. One - contains the closest neighbor countries (the Nordic countries), two - the rest of the countries in the European Union, three - western industrialized countries, and four - the rest of the world.

International Orientation In the Aaby and Slater (1989) framework, manager orientation is an important part of the firm characteristics. Building on Knight (1997), seven indexes were developed: international commitment, vision, proactiveness, customer

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209

orientation, responsiveness, marketing competence, and use of advanced communication technology. Cronbach alpha values ranged from 0.66 to 0.87. Other Firm Characteristics

The other firm characteristics examined were: the firm's size measured as number of employees, market share in the home market (%), manager openness towards moving the firm measured by the possibility of moving the firm to another township or region (alpha=0.84), and growth potential (alpha = 0.61). The growth potential was measured by asking the managers whether they thought that the firm would be substantially larger or if they found it likely that they would purchase other finns within the next several years. Export Motives

The managers were asked for export motives connected to the domestic market. Inquiries regarded whether they exported because of a stagnation/recession on the domestic market, found the domestic market to small, and whether they exported to reduce their dependency of the domestic market (alpha = 0.53). The managers were also asked about other export motives such as domestic and export market attractiveness, whether external factors made exporting a necessity, and whether the export decision was motivated by extensive demand on international markets. These variables are based on single questions from the questionnaire. Export Performance

The composite scale of export performance is also directly derived from Knight's (1997) study. The scale quantifies responses as to whether the managers are satisfied with the export work with respect to market share in most important export market, export profit, and all-in-all satisfaction with the export work. The scale also reflects how the firm has performed compared to competitors and to what degree they have been able to exploit the full potential of the most important export market (alpha = 0.67). Performance is also measured using other constructs. These include the firm's profit, measured by the firm's accounted profit before extraordinary posts. Further, there are three measures of firm growth: sales growth, employment growth, and export growth. These measures are calculated as growth in percentages based on figures for 1995 and 1997. The survey questions predominantly used a 7-point Likert type scale, where 1 was strongly negative and 7 strongly positive. Computing the mean value of the selected questions formed the measuring indexes. Table 3 gives a summary of the items used in the indexes and their Cronbach's alphas.

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Table 3. Dimension Competitive advantages

Export strategy

International orientation

Description of the Measuring Indexes. Indexes (items)

Marketing advantage (service/training, management and planning, marketing, finance, distribution) Price advantage (delivering reliability, production, purchase and access to raw material) Technology advantage (Product performance, technology, uniqueness, advanced technology) Distributor effectiveness (local shipping, local pricing, local advertising, local PR, after sale service and support, collecting market information, cultivating new business/expansion, delivering, distribution) Niche focus strategy (specialized product, targeting special need, small market, unique technology) Market-based differentiation (unique design, marketing and performance, emphasizes new and innovative marketing, marketing differentiation) Product and product-service quality (Customers rating of performance, efficiency, service and support) Personal selling (personal selling important for finn's international performance, most important sales channel) Contact frequency with export markets (number of travels to and meetings in export markets per employee) International commitment (sufficiency of human resources, sufficiency of financial resources) International vision (employees made aware of export importance, developing resources contributing to export, view the world as the market, actively seeking new export possibilities) Export proactiveness (bold international strategy, fast internationalization) International customer orientation (customer service, customer need and situation knowledge, focus on satisfaction of customer needs, emphasize service and follow-up) International responsiveness (widespread information on customer reactions within the firm, employees made aware of own export contributions, fast reaction on negative customer reactions) International marketing competence (knowledge of customers and competitors, ability to product adaptation, setting the right prices, efficient commercials, efficient distribution, marketing differentiation) Use of advanced communication technology (E-mail used for communication with distributors, Internet to gather data, E-mall important for export activity)

a 0.78 0.62 0.89

0.87

0.82 0.70

0.66 0.71 0.79

0.66 0.76

0.76 0.67

0.73

0.69

0.87

A Generation Perspective on Small Firm Internationalization Table 3. Dimension Firm characteristics

Export motives

211

Continued.

Indexes (items)

ct

Mobility (probability to move to another township, another region of the country) Growth potential (Probability of substantial growth, probability of buying up other companies)

0.84

Export decision motivated by the development in the domestic market (stagnation/recession on home market, too small home market,

0.53

0.61

reduce dependency of home market) Performance

Composite scale (satisfaction with achieved market share on most important export market, export profit, compared with competitors, exploitation of export market potential, general scale of satisfaction with export work)

0.67

Of the 20 factors presented in Table 3, 19 have Cronbach's alpha scores higher than 0.60. In total it seems that the validity of the measures is adequate. This is not unexpected considering that many have of them have proven their usability in the U.S. study as presented by Knight (1997).

ANALYSIS This section includes a description of the analysis and the results. The analysis was carried out in two parts. First, a comparison analysis is presented, where the three generations of firms are compared. Second, a regression analysis is presented regarding the export performance antecedents for the three groups of firms. The Comparison Analysis The comparison was performed using a one-way analysis of variance. Bonferroni tests were used to investigate the significant group differences. The three generations of firms were compared to see if there are any differences in terms of competitive advantage, export strategies, international orientation, firm characteristics, market and environmental factors, and performance. Among the variables labeled competitive advantages, a high score denotes a strong advantage relative to the firm's competitors. For export strategy, international orientation, and export motives, a high score signifies the degree to which the

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ARILD ASPELUND AND 13YSTEIN MOEN

factor in question describes the firm's strategy, management, and external conditions respectively. The results are presented in Table 4. Table 4 shows that there is strong evidence of significant differences due to firm age in all the dimensions, with the exception of the export motives. In terms of competitive advantages recently established exporters hold a stronger technological advantage than older firms. This is true for exporters established after 1975. The results also point to a significant variance in price advantage between the groups. The mean values indicate that the oldest and the newest firms hold the strongest competitive advantage, but the group differences are not significant according to the Bonferroni test. The results further suggest that exporters established after 1975 are more devoted to a niche focus strategy than older firms. In addition, more recently established exporters visit and meet customers in their export markets more frequently than older exporters do. The exporters established after 1975 have a more widespread use of advanced communication technology in their export activities than older firms do, and there is a significant difference in international customer orientation. The firm size and firm age had a positive coherence as the firm grows in time, but this growth is not associated with market share in the domestic market since there is no significant difference in that factor between the groups. None of the groups found it likely that the firm will move within the next ten years (all mean values inferior of 4), but the firms in group 2 found it more likely than the older firms. The firms in the two last groups also seem to have the greatest growth potential. There are no significant differences in terms of export motives between the groups. The performance measures also yield important differences. The youngest firms have the lowest score on the composite scale. On the other hand, the youngest exporters perform better in terms of export and employment growth. The results will be the subject of a more profound discussion later. For now we conclude that there are identifiable differences for the variables of the Aaby and Slater model based on firm age in all the dimensions, with the exception of export motives.

The Regression Analysis The second analysis performed was a regression analysis that tested whether the groups of firms had different performance antecedents. One regression analysis was performed for each dimension of independent variables in Table 5, using the stepwise entering variable method. The analyses were repeated

A Generation Perspective on Small Firm Internationalization

Table 4.

Results from the Comparison Analysis.

Dimension 1

Competitive advantages

Marketing advantage Price advantage Technology advantage

Export strategy

Distributor effectiveness Niche focus strategy Marketing-based differentiation Product and product-service quality Personal selling Contact frequency with export markets Number of export countries Psychic distance

International orientation

International commitment International vision Export proactiveness International customer orientation International responsiveness International marketing competence Use of advanced communication technology

Firm characteristics

Firm size Market share in domestic market Mobility Growth potential

Export motives

Performance

213

Mean 2

3

ANOVA F-value (sign.)

4.39 4.56 4.96 4.62 4.522.3 5.181

4.27 5.00 5.12 j

1.569 3.215" 7.472***

4.48 4.42 3.842,3 4.631 3.59 4.02 5.43 5.70 5.58 5.82 0.953 1.63 13.54 14.93 2.00 2.31

4.38 4.641 3.83 5.38 5.77 2.771 10.56 2.06

0.153 8.526*** 2.917 2.705 1.014 6.948*** 1.107 1.614

4.11 5.47 4.38 5.66 5.22 4.55 3.831

3.88 5.50 4.14 5.29 5.10 4.32 3.801

0.431 2.055 0.497 3.197" 1.309 1.668 7.057***

68.503 42.52 1.482 3.96

40.52 43.74 2.311 4.52

26.001 38.28 1.94 4.42

5.478** 0.211 10.134* * * 3.477**

Domestic market attractiveness Export market attractiveness Export decision motivated by the development in the domestic market Export decision motivated by extensive demand on international markets External factors making exporting a necessity

4.48 4.80 4.24

4.66 5.04 4.30

4.76 5.17 4.11

1.028 2.017 0.232

4.96

5.30

5.22

1.202

5.33

5.39

5.31

0.029

Profit Composite scale Sales growth Employment growth Export growth

5.10 4.733 1.07 0.092`3 0.293

4.21 4.74 0.37 0.231 0.583

1.78 4.311 1.76 0.521 5.091'2

4.06 5.16 4.17 5.35 4.95 4.34 2.862.3

* p <0.05, * * p < 0.01, * * * p <0.001. 1, 2, 3: denotes significant group differences, Bonferroni test.

0.668 3.317" 0.352 20.212"** 11.887"**

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ARILD ASPELUND AND I~YSTEIN MOEN

for each of the three groups of firms. The composite scale was chosen as the dependent performance variable. Table 5 shows the results from the regression analyses (adjusted Beta coefficients, significance and adjusted R2). Significant variables were found in all of the dimensions of variables. Moreover no dimension yields the same significant export performance antecedents for all three groups. For the first two dimensions, competitive advantage and export strategy, we can see that group 1 and 2 resemble each other, as both groups have marketing advantage, product and product-service quality, and market selection as important export performance antecedents. The latter is quite interesting since it is a positive correlation. That is, export performance increases for the firms with greater psychic distance to their most important export market (this result is also significant for group 3 on the 0.10 level). Distribution effectiveness is a strong performance antecedent for the firms in group 1, but not for the more recently established firms. This result can be explained by the findings of McDougall et al. (1994) which indicated that international new ventures more often rely on hybrid structures for their international activities. These structures may not be the most effective, but are the only possible ones given the resources available. Group 3 distinguishes itself from the others by having particular "niche focus factors" among its performance antecedents: namely possessing a technological advantage as compared to its competitors, following a niche export strategy, and having a strong international customer orientation. It is among the international orientation variables where one can find the most differences between the groups. The oldest firms profit by having a bold and fast internationalization strategy, having a strong customer orientation and possessing high international marketing competence. Success for the export work of the firms in group 2 depends upon providing sufficient human and financial resources to the export work and letting the international vision of the firm pervade the organization. For group 3 international customer orientation is the only significant performance antecedent in this group of variables. No significant variables were found among the firm characteristics for group 2 and 3, implying that among the recently established firms, neither firm size nor market share in the domestic market are preconditions for successful export. However, in group 1 market share in the domestic market was found to have a positive influence on the export performance. Among the variables labeled export motives, the most striking feature is that in all the groups the managerial perception of export necessity yields a positive effect on export performance. It is interesting to note the generally negative effect of domestic market attractiveness and the positive effect of the most important export market attractiveness. The latter is rather natural, but the first

215

A Generation Perspective on Small Firm Internationalization Table 5.

Results from the Regression Analysis.

Dimension

Composite scale 1

Competitive Advantages

Export strategy

International orientation

0,414"** 0.120 0.102

0.499*** 0.067 0.067

0.092 0.019 0.589***

R~j

0.163

0.232

0.324

Distributor effectiveness Niche focus strategy Marketing-based differentiation Product and product-service quality Personal selling Contact frequency with export markets Number of export countries Psychic distance

0.394** 0.042 -0.042 0.346** 0.023 0.131 -0.057 0.338*

0.031 0.001 0.027 0.445** 0.088 0.070 0.160 0.494*

R2j

0.528

0.380

Intemational commitment International vision Export proactiveness International customer orientation Intemational responsiveness International marketing competence Use of advanced communication technology

0.123 0.057 0.209* 0.268** 0.081 0.339***

0.260* 0.563*** 0.124 0.168 0.221 0.194

Firm size Market share in domestic market Mobility Growth potential R~j

Export motives

3

Marketing advantage Price advantage Technology advantage

R2j Fillll characteristics

2

Domestic market attractiveness Export market attractiveness Export decision motivated by the development in the domestic market Export decision motivated by extensive demand on international markets External factors making exporting a necessity Difficulties in finding qualified labor R~j

*p<0.05, **p<0.01, ***p<0.001. NMG = No Model Generated.

0.448 0.613"* 0.114 0.300 0.197 0.086 -0.013 0.390 0.397 -0.143 0.324 0.273 0.536** 0.107 0.224

-0.138

0.060

0.042

0.328

0.307

0.261

-0.081 0.242* -0.125 -0.093 0.046 -0.068 0.343*** 0.014

NMG

NMG

-0.355** 0.226 -0.026

-0.150 0.303 0.154

0.075

0.108

0.188

0.103"

0.121"

0.542***

-0.085

0.138

-0.088

0.165

0.256

0.271

216

ARILD ASPELUND AND OYSTEIN MOEN

seems to imply that a recession on the domestic market leads to better export performance among SMEs. In conclusion we can say that the regression analyses show that not only are there differences in the variables of the Aaby and Slater model based on firm age, as shown in the comparison analysis, there are also different factors influencing export performance for the three groups of firms. This result is supported in all of the dimensions of export performance antecedents.

DISCUSSION This study addresses two main research questions. First, the study investigated whether there are significant differences between generations of small exporters on factors expected to influence their export performance. The results indicate that there are differences between the generations considering competitive advantages, strategies, international orientation, and firm characteristics as growth potential. Important differences are connected to technology, niche focus, contact frequency with the market, and use of advanced communication technology. The second question addressed was whether generations of small exporters have different key export performance antecedents. Examining the results, the existence of such differences between the generations of firms is supported. The main trend is that old firms' export performance is related to traditional factors like marketing and product quality. For the newest generation of firms this has changed towards niche and customer-oriented factors and technology. These results deserve more elaborate discussion with respect to their possible causes and implications. The survey offers a snapshot description of the current situation among small exporting firms. It offers little information about the path that the firm has followed up to this point. The study gives strong indications that the more recently established firms have a stronger niche focus than older firms. Concerning the first research question, the comparison analysis showed significant differences in typical "niche focus strategy factors" such as technological advantages, niche focused export strategy, and international customer orientation between the groups. Those were also the distinguishing export performance antecedents found from research question two, for the group of "Born Global firms." This result has two possible explanations that are not mutually exclusive. One, the niche focus strategy is a general feature of all newly established exporters. The firms of group 2 and 3 may have followed a niche focus strategy in their start-up phase, but as the firms evolved they gained a broader product range and left the risky niche strategy. Two, the niche focus strategy is more

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217

important for the recently established exporters. This is a fair assumption considering the increasing role of the niche markets, the globalization of markets, and the increasing competition from foreign firms as described in the literature review earlier. The small exporter may also benefit from its inherent advantage of higher flexibility, adaptability, and quicker response time by following a niche focus strategy. A technology that is very likely to have facilitated the trade of highly niche-focused goods and services is the Internet. The Internet has the ability to link manufacturers of special merchandise with potential customers all over the world. For instance, if a manufacturer sets up a web site for a special product, any potential customer connected to the Internet can, with relative ease, find the site through a net search. This development might have made the niche strategy more attractive as it has made the market more accessible and increased the number of reachable, potential customers. However, it is worth mentioning that the niche focus strategy is not the only way of leading a successful international new venture. Jolly et al.'s (1992) case study of four Born Global firms concluded that their key success factor was standardized products. However, empirical studies like Moen (2000) and Rennie's (1993) Australian study show that the niche focus strategy is the most prevalent. Another finding in the case study of Jolly et al. (1992) is that the high-tech start-ups rely on success in the lead markets of their industry. They seek to find the country that represents the leading market, and then commercialize the product there first unaffected by the distance to the market. On the other hand, the internationalization stage theories' explanation of the market selection problem is that the firm internationalizes "like rings in the water" from its country of origin. That is, they first target neighboring countries and gradually spread to countries of greater psychic distance. One intuitive consequence of this theory is that older firms, to a greater extent, serve psychologically more distant markets than younger firms do. This study has not made an attempt to map each firm's market selection relative to their industry nor the way the firm has spread throughout the world. This study focused on each firm's number of export countries and the psychic distance to the firm's most important export market. No significant group differences occur when comparing the exporter's generations by number of export countries and market distance. However, we did find a relationship between the psychic distance to the most important export market and the firm's export performance for groups 1 and 2. This indicates that it may actually pay off to take on the challenge of attacking a psychologically distant market. The results show that lengthy international experience is neither a requirement nor necessarily an advantage to performing well in distant markets.

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ARILD ASPELUND AND OYSTEIN MOEN

As the recently established firms are increasingly seeking niche markets, they are likely to meet the problem of insufficient market size in their home country, especially in small countries like Norway. Those firms will also be more vulnerable to negative developments in the domestic market, and for that reason aim for an early export start. This study shows that the time lag between firm establishment and first export sale is decreasing for the most recently established firms. The time lag was an average 27 years for the oldest firms, 2 years for the firms in the second group, and only 1 year for the last group. The reduction of the time lag represents an additional burden for the start-up firms. On top of the resource-demanding start-up process, the firms must consider their international possibilities, strategy and priorities early on in their life cycle to a greater extent now than before. To go abroad seems a great challenge for generally resource-poor start-up firms with limited experience with international business activities. The advances in transportation and communication technology have lowered the costs of internationalization and made the required information for market expansion increasingly portable across borders. The financial means and human resources needed for the internationalization process have also become increasingly available. These factors have without a doubt made the process easier. However, the time period between start-up and international introduction is probably in most cases too short to build up a self-owned, competitive distribution system. Madsen and Servais (1997) argue that Born Global firms often rely on hybrid governance structures because the firms often lack the internal competence and routines to achieve the desired developments. A likely solution to the distribution problem is to join a business network or subcontract for a larger firm. According to Julien's (1996) typology of small business responses to globalization, nearly one fourth of exporting SMEs follow this strategy to make the most of international resources and possibilities. If a firm joins a business network it might to a greater extent use hybrid structures for its international activities. On the other hand, a firm that subcontracts for a larger firm may become a part of a vertically integrated supply chain. In any case, the firm will probably not benefit from the freedom and control of totally self-owned distribution channels. This development is reflected in the results of this study. For group 1 and 2 it was the marketing advantage that influenced export performance the most. For group 3, the most recently established firms, it was the technological advantage. This may be the result of young firms having less control over their distribution channels, thus losing control over vital tools for an effective marketing strategy. If young firms choose to distribute their goods and services through a business network or by becoming a part of a larger firm's supply chain, they are likely to compete

A Generation Perspective on Small Firm Internationalization

219

using a technological advantage rather than a marketing advantage. In fact, the technological advantage may be a key element in building a position in the distribution channel. Obviously, a firm having advanced, competitive products may be considered more attractive for agents or distributors than firms with less competitive products. Speculating further, the increased use of advanced communication technology may have changed the way the start-up firms perform their distribution activities. Modern information technology systems can in many cases increase the efficiency of the distribution activities. This is a factor that may have influenced the recently established firms in the study. Implications for Managers

Two results from this study represent a considerable challenge for managers. The first is the increased speed of internationalization. According to the findings of Moen (2001), it seems the future export involvement of a firm is largely dependent on its priorities during the first few years post establishment. Industry and market conditions, as well as the decision-maker's international vision and experience, are important factors explaining why some firms are "born as globals." Following this logic, the founder may know right from the start if the firm is going global or not. This knowledge is valuable as firms may start considering their international possibilities, strategies and priorities very early in the life cycle. There are at least three major advantages to an early export start. One is that the firm avoids the path dependency on domestic competencies and does not have to go through a difficult process of strategic change when international expansion becomes necessary (McDougall et al., 1994). Another is that the battle against international competitors can be fought in other markets, which differs from a defensive battle on the home market. Third, Li (1999) found that an international orientation in the product development process significantly improved product performance. This is most likely to also be true for newly established firms. The second challenge is related to the shift towards technology and niche focused firms. There is a risk that high-tech firms will get too technologically driven. High-tech entrepreneurs may develop "technological myopia" and overinvest in developing technological competencies (Zahra & Covin, 1993), resulting in managerial tasks like cost control and marketing not getting the necessary attention. Roberts (1992) concluded in an empirical study of high-tech firms within the greater Boston area that establishing a market orientation early in a firm's life bodes well for its future performance (p. 10). It is of vital importance that entrepreneurs seek key competence not only in their technological niche, but also the competence to plan and execute the international business

220

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operations. Examining the regression results, the key performance antecedents for Born Global firms are technological advantage, niche focus, and international customer orientation. This stresses the importance of combining technology with knowledge and attention to customer needs. The fact that there are so many differences between firms of different ages should be alarming for the traditional firms, especially in light of the fact that this study indicates that newly established firms hold a stronger technological advantage than the older firms. The trend seems to be a "gradual technological depletion" with firm age. It is a managerial challenge and responsibility to see to it that this does not occur and that the firm stays up to date with technology advances.

Implications for Policy Makers Strong and prosperous exporting SME sectors are vital, not only because of their added value and the value brought back to the country of origin, but because the SMEs also represent a disproportionately large share of new jobs (OECD, 1998). With their innovative nature they add to the country's technology base. The challenge for the policy makers is first, how to educate and encourage the entrepreneurs of new global firms and second, how to arrange favorable conditions for the firms to prosper. An approach to solving the first challenge is to encourage the entrepreneurial spirit within the technology milieus of universities and research foundations. Normally there are more potentially profitable technologies available in these milieus than people to make them into profitable businesses. An example of a program with the intention of changing that is Venture Cup. Venture Cup is a competition targeting potential entrepreneurs in universities and state colleges in Germany, Switzerland, the Netherlands, Norway and Sweden. The administrators offer professional evaluations of business ideas and seed capital for the most promising business ideas. Interestingly, the concept of Venture Cup was developed by McKinsey & Co., and they are heavily involved in the competition in all countries. One of the first studies focusing on Born Globals was performed by McKinsey & Co., and published in the McKinsey Quarterly (Rennie, 1993). In fact, it is possible to follow this firm's attention to the Born Global issue beginning in the early nineties and continuing with ongoing attempts to stimulate high-tech entrepreneurship in several European countries. For public policy, this stresses the importance of having strong, technologically focused universities as they play a important role in fostering the new entrepreneurs who may be able to establish the new generation of exporters - the Born Global firms.

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An effort to meet the second challenge might start with public support programs for exporting SMEs. In Norway most export support programs are coordinated by the NTC (Norwegian Trade Council). The main objective for this type of organization is to reduce the risk and increase the possibilities for small exporters. Typical tasks are obtaining international market information, organizing trade fairs and finding suitable business partners for the entrepreneurial client. These programs should also be designed for recently established firms, which have different needs and export performance antecedents. Implications for Research

Three implications for further research are deserving of ftLrther remarks. First, international marketing research has to a great extent neglected firm age as a variable. This is illustrated by the literature reviews of Bilkey (1978), Madsen (1987), Aaby and Slater (1989), and Chetty and Hamilton (1993), which do not refer to studies focusing on the firm age subject - although many studies have included age as one of many variables. Zou and Stan (1998) refer to six studies that analyze the effects of firm age on export performance. Among those, three found a negative effect and three studies found the variable insignificant. This study has shown that firm age has an effect on several factors in the Aaby and Slater model (1989) and on export performance antecedents. The result may explain some of the contradictory results in the literature reviews of export determinants. As an example, in the review of Zou and Stan (1998) about studies of export determinants between 1987 and 1997, the variable domestic market was found to have a positive effect in 2 studies, negative effect in 2 and no effect in 6. In this study only the firms in group 2 yielded a negative significant effect from this variable. No significant effect was found in the other groups. It is likely that the composition of firm age in the sample will have an effect on the result. Actually, only one performance antecedent (managerial perception of export necessity) was found to be significant in all of the groups in this study. Based on the evidence from this study we argue that the firm age variable has been unfairly neglected in international marketing research. The second remark is addressed to international research in general. Li and Cavusgil (1995) point to the relationship between international marketing studies and managerial practice. The research should be directed towards managerial relevance to justify the broad activity. In order to produce the models demanded by management, international marketing studies should be performed on more homogenous samples of cases. Homogenous samples may give more reliable models and greater relevancy to managerial problems. This recommendation is

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consistent with the conclusion of Andersen's (1993) critical analysis of internationalization models. He criticizes internationalization models for not amplifying theoretical boundaries, ensuring the explication of assumptions, which bound the theory. As an example, this study has shown that a neglected factor in international marketing actually gives rise to several differences in export behavior. The generation of models for specific categories of firms will probably facilitate the work of constructing general models of firm internalization. Third, this study has shown that the speed of internationalization has increased considerably for the recently established firms. The firms in group 3 serve the same number of export countries as the firms in groups 1 and 2. They serve export markets of the same psychic distance and they have the same export sales share as their older counterparts. Based on these results we can say that today the groups of firms have reached approximately the same level of internationalization. The difference is that group 1 used, on average, 60 years to get there, group 3 used 6 years. The Born Global firm does not seem to have the time to build up the internal knowledge and competence in the slow and incremental manner that is described in the internationalization stage models (see e.g. Johanson & Vahlne, 1990). More effort should be placed on explaining the time aspect of the internationalization process. Special attention should be placed on how the Born Global firms handle the SME exporter's squeeze as described by Christensen (1991), the need of rapid internationalization combined with limited resources and experience.

CONCLUSIONS The main conclusions from this study are: (1) There is clear evidence of differences between firms of different ages in factors of the Aaby and Slater model. (2) There is clear evidence of different export performance antecedents for different generations of firms. (3) The main feature of the most recently established exporters is their technological competitiveness and niche focus. This feature is characterized by their technological advantage as compared to their competitors, their niche focused export strategy, and the strong international customer orientation. (4) The three variables mentioned above are also identified as the distinguishing, positive export performance antecedents for the "Born Global" firms.

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(5) The speed of the internationalization has increased for the recently established firms. The time lag between firm establishment and international introduction has decreased considerably over the last few decades. (6) Older firms have marketing advantage as their key export performance antecedent among the competitive advantages. For recently established firms technology is the most important competitive advantage. This may indicate that firms often loose their technological strength as they grow older. This study has shown that there are generations of firms with distinguishing features. A firm is apparently influenced by its year of establishment, in that the export behavior is strongly related to the environmental context present during its year of establishment. It does not seem that SMEs have the ability or willingness to change all the time to accommodate to their environment, as they are bound in part by history. It seems a new generation of exporting firms has emerged over the last decade, the Born Globals, and the implications are considerable for business management, policy makers, and research. The emergence of Born Global firms is founded on the development of certain economic, technological and market trends that are not likely to be reversed. On the contrary, some trends like globalization of markets, technological innovations facilitating information exchange, and improvements of process technology are likely to increase in their importance, and thereby increase the number of Born Global firms in the future (Madsen & Servais, 1997). A consequence of this notion of firm generations is that the year of establishment becomes a central variable if one seeks knowledge through research. We suggest that international marketing researchers in the future use more homogenous firm samples with respect to firm age, in order to develop models of greater value for Born Global managers. This may also facilitate the construction of more general models for firm internationalization.

REFERENCES Aaby, N.-E., & Slater, S. F. (1989). ManagementInfluenceson Export Performance:A Review of the Empirical Literature 1978-88. International Marketing Review, 6(4), 7-26. Andersen, O. (1993). On the InternationalizationProcess of Firms: A Critical Analysis.Journal of International Business Studies, (Second Quarter), 209-231. Bennett, R. (1997). Export Marketing and the Internet - Experiences of Web Site Use and Perceptions of Export Barriers among UK Businesses. International Marketing Review, •4(5), 323-344. Bilkey, W. K. (1978). An AttemptedIntegrationof the Literature on the Export Behavior of Firms. Journal of International Business Studies, (Spring/summer), 33-46.

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Cavusgil, S. T. (1980). On the Internationalization Process of Firms. European Research, (November), 273-281. Chetty, S. K., & Hamilton, R. T. (1993). Firm-level Determinants of Export Performance: A Meta-analysis. International Marketing Review, 10(3), 26-34. Christensen, P. R. (1991). The Small and Medium Sized Exporters' Squeeze: Empirical Evidence and Model Reflections. Entrepreneurship and Regional Development, (3), 49-65. Day, G. S., & Wensley, R. (1988). Assessing Advantage: A Framework for Diagnosing Competitive Superiority. Journal of Marketing, 52(April), 1-20. Dess, G. G., & Davis, P. S. (1984). Porter's (1980) Generic Strategies as Determinants of Strategic Group Membership and Organizational Performance. Academy of Management Journal, 27(3), 467-488. Granitsky, J. (1989). Strategies for Innate and Adoptive Exporters: Lessons from Israel's Case. International Marketing Review, 6(5), 50---65. Hamill, J. (1997). The Internet and International Marketing. International Marketing Review, •4(5), 300-323. Johanson, J., & Vahlne, J.-E. (1977). The Internationalization Process of the Firm - A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8, 23-32. Johanson, J., & Vahlne, J.-E. (1990). The Mechanism of Internationalization. International Marketing Review, 7(4), 11-24. Johanson, J., & Wiedersheim-Paul, F. (1975). The Internationalization of the Firm - Four Swedish Cases. Journal of Management Studies, 12, 305-322. Jolly, V. K., Alahutha, M., & Jeannet, J.-P. (1992). Challenging the Incumbents: How High Technology Start-ups Compete Globally. Journal of Strategic Change, 1, 71-82. Julien, P.-A. (1996). Globalization: Different Types of Small Business Behavior. Entrepreneurship & Regional Development, 8(1), 54-74. Knight, G. A. (1997). Emerging Paradigm for International Marketing: The Born Global Firm. Ph.D.-thesis. Department of Marketing and Supply Chain Management, Michigan State University. Knight, G. A., & Cavusgil, S. T. (1996). The Born Global Firm: A Challenge to Traditional Internationalization Theory. Advances in International Marketing, 8, 11-26. Li, T. (1999). The Effect of Marketing-R&D Interface on New Product Export Performance: A Contigency Analysis. Journal of International Marketing, 7(1), 10-33. Li, T., & Cavusgil, S. T. (1995). A Classification and Assessment of Research Streams in International Marketing. International Business Review, 4(3), 251-277. Madsen, T. K. (1987). Empirical Export Performance Studies: A Review of Conceptualizations and Findings. Advances in International Marketing, 2, 177-198. Madsen, T. K., & Servais, P. (1997). The Internationalization of Born Globals: An Evolutionary Process? International Business Review, 6(6), 561-583. McDougall, P. P., Shane, S., & Oviatt, B. M. (1994). Explaining the Formation of International New Ventures: The Limits of Theories from International Business Research. Journal of Business Venturing, 9, 469-487. Moen, D. (2000). SMEs and International Marketing: Investigating the differences in Export Strategy Between Firm of Different Size. Forthcoming, Journal of Global Marketing, 13(4). Moen, ¢1. (2001). Born as Global: the New Generation Small European Exporters. International Marketing Review. Forthcoming. Namiki, N. (1988). Export Strategies for Small Business. Journal of Small Business Management, 26(April), 32-37.

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OECD (2000). Small Businesses, Job Creation and Growth: Facts, Obstacles and Best Practices. Report. Accessed at http://www.oecd.org. Access date: 11.02.00. OECD (1998). Industrial Performance and Competitiveness in an Era of Globalization and Technological Change. Pads: OECD, Industry Committee. Oviatt, B. M., & McDougall, P. P. (1994). Toward a Theory of International New Ventures. Journal of lnternational Business Studies, 25(1), 45~34. Piore, M. J., & Sable, C. F. (1984). The Second Industrial Divide, Possibilities for Prosperity. New York: Basic Books, Inc. Porter, M. E. (1980). Competitive Strategy. New York: The Free Press. Preece, S. B., Miles, G., & Baetz, M. C. (1999). Explaining the International Intensity and Global Diversity of Early-Stage Technology-Based Firms. Journal of Business Venturing, 14(3), 259-282. Reitan, B., & SOrheim, R. (2000). The Informal Venture Capital Market in Norway - Investor Characteristics, Behavior and Preferences. Venture Capital (2), Forthcoming. Rennie, M. W. (1993). Global Competitiveness: Born Global. The McKinsey Quarterly (4), 45-52. Roberts, E. B. (1992). The Success of High-Technology Firms: Early Technological and Marketing Influence. Interfaces, 22(4), 3-12. Samiee, S. (1998). Exporting and the Internet: A Conceptual Perspective. International Marketing Review, 15(5), 416-426. Samtid (1997). GATT og WTO, derfor ble GAT1? omdannet til WTO, Accessed at http:// www.samtid/avisen. Access date: 28.08.99. In Danish. Sengenberger, W., Loveman, G., & Piore, M. J. (1990). The Re-emergence of Small Enterprises: Industrial Restructuring in Industrial Countries. Geneva: International Institute for Labor Studies. Servais, P., & Rasmussen, E. S. (1999). Born Globals - Connectors between Various Industrial Districts? London: RENT XIII Conference on Entrepreneurship. Skorstad, E. J. (1999). Produksjonsformer i det Tyvende/~rhundre: Organisering, Arbeidsvilk~ og Produktivitet. Oslo, Ad Notam Gyldendal. In Norwegian. St6ttinger, B., & Schlegelmilch, B. B. (1998). Explaining export development through psychic distance: enlightening or elusive? International Business Review, 15(5), 357-372. Zahra, S. A., & Covin, J. G. (1993). Business Strategy, Technological Strategy and Firm Performance. Strategic Management Journal, 14, 451-478. Zou, S., & Start, S. (1998). The Determinants of Export Performance: A Review of the Empirical Literature between 1987 and 1997. International Marketing Review, 15(5), 333-356.

THE INTERNATIONALIZATION OF INDUSTRIAL PURCHASING: THE EXAMPLE OF SMALL DANISH MANUFACTURERS Per Servais and Jan Moiler Jensen

ABSTRACT Throughout the last decades a growing concern for international marketing has been reflected in the leading journals. The preponderance of the articles has, however, been oriented towards firms' sales and export (outward) activities. Since the late 1980s a growing concern for manufacturing firms' international sourcing (inward) activities has arisen, stressing the importance of this phenomenon on firms' success. However, research in firms' internationalization of purchasing activities is still limited. This article focuses upon international purchasing. Through a literature review of mainly U.S. empirical surveys, research topics requiring further exploration are identified. Hence this article addresses four major issues, using results from a large Danish survey: (1) To what extent are Danish firms involved in international purchasing? (2) What are the reasons for choosing or not choosing a foreign supplier? (3) What is the decision process regarding the choice of supplier?, and (4) What problems are experienced in the relationship? Results from firms

Reassessing the Internationalization of the Firm, Volume 11, pages 227-254. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1 227

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with foreign suppliers and firms with domestic suppliers are compared. It is revealed that international purchasing is not confined to large firms, but also small manufacturing firms are very much involved in this internationalization of their sourcing activities. It is also stressed that the main reasons for choosing a foreign supplier, apart from availability, was to obtain products of a better quality at a lower price. The firms also find international purchasing important to their competitiveness. However, in order to better understand international purchasing as an internationalization process further research is needed, especially cross-national studies clarify the process. INTRODUCTION In a seminal article Cavusgil (1998) highlights perspectives on some fundamental questions in the field of international marketing and some promising research avenues. Among the mentioned avenues this article will embrace the analysis of finn expansion in international markets, e.g. inward and outward internationalization. Throughout the 1980s and 1990s the growing concern for international marketing has been reflected in the leading journals, the preponderance of the articles has, however, been oriented towards finns' sales and export (outward) activities. Since the late 1980s a growing concern for manufacturing finns' international sourcing (inward) activities has arisen, stressing the importance of this phenomena on firms' success (Min & Galle, 1991). However, research in firms' internationalization of procurement activities is still limited compared to research in internationalization of marketing activities. Articles, surveys and studies dealing with industrial companies internationalization of procurement activities are, in general, sparse. This is somewhat surprising since the understanding of industrial firms' ability to and motivation for making their purchases internationally is crucial to the local suppliers, especially when operating in a relatively small and open economy. If finns do not adapt their behavior to accommodate this knowledge about their customers' behavior, they might adopt a less effective marketing strategy and hence be endangered. Both domestic and foreign suppliers have as such a natural interest in a more profound insight into industrial customers' buying behavior in order to strengthen their marketing activities. For domestic suppliers, the mapping of customers' motives for searching internationally for potential suppliers might improve their ability to compete against the international competition. Foreign suppliers, on the other hand, would have an interest in learning about the problems their customers experience, the barriers customers perceive, and customer anticipation of international purchasing, in order to improve their export activities.

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As to the procuring firm, the lack of knowledge about international purchasing is often a factor of uncertainty which leads to a narrow focus on the domestic market leaving the firm with potentially lower competitiveness compared to competitors who source or consider sourcing internationally. Knowledge about other companies' experiences with international sources might lead to placing keener attention on the possibilities in respect to the performance of their own purchasing function, and hence contribute to a possible overall improvement of firms' competitiveness. This article focuses on industrial firms' international purchases through a descriptive analysis of the results from a survey among small and medium sized industrial firms in Denmark. The purpose of this article is to explore the extent to which small and medium sized industrial firms in Denmark are engaged in international purchasing, including identifying the motives for choosing foreign suppliers. We begin with a review of some research reports on the phenomena commonly referred to as international purchasing which covers finns' activities concerning the search for or the actual purchase from suppliers outside the domestic market. The review constitutes the basis for the formulation of the specific survey used in this study and defines the framework in which it is possible to make some comparison between the results of foreign versus domestic purchases, and also to make comparisons with other research results from international purchasing.

RESEARCH ON INTERNATIONAL PURCHASING Reviewing the literature on international purchasing reveals the fact that most empirical research has been concentrated largely on North American firms or MNCs from the United States. In this article, however, the focus will be on small industrial firms operating in a smaller and open economy. The review also reveals that the research areas previously covered are somewhat scattered. Some researchers focus upon international purchases of different types of firms e.g. retailing companies (Liu & McGoldrick, 1996; Reichel, 1989) and service companies (Murray & Kotabe, 1999; Kotabe & Murray, 1998). In the area of sourcing strategies of multinational corporations, a research tradition seems to have been established (Kotabe, 1989, 1992; Murray & Kotabe, 1995). Other researchers have been dealing with different aspects of international purchasing like the country-of-origin effect (Cavusgil & Yavas, 1985; Gtidtim & Kavas, 1996; Thorelli & Glowacka, 1995; Zhan Li & Murray, 2000) or the perceived risk in foreign purchases (H~tkansson & Wootz, 1975) and the finn's ability to conduct international purchases (Hall6n, 1982). Still others have

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focused more upon the outcome of the purchasing process (Arnold, 1989; Murray, Kotabe & Wildt, 1995; Petersen, Frayer & Scannell, 2000). In the following discussion, emphasis will be placed on descriptive surveys having a more general approach. It will thereby not focus on certain types of firms and types of products, or specific buying situations but emphasize a description of the purchasing process itself. Monczka & Giunipero (1984) made one of the first more general surveys on firms' internationalization of procurement activities. In a survey consisting of a questionnaire and interviews with the persons solely in charge of purchasing activities in 26 large American firms, they dealt with the following research questions: • What are the firms' motives for purchasing abroad? • What advantages did the firms consider to be connected with purchasing abroad? • What problems or barriers did the firms experience in connection with purchasing abroad? • What regions were the most important one for different types of products? The survey showed that the most important motives for choosing a foreign supplier were (in order of priority): Lower prices abroad, international orientation, only foreign products were available, better quality abroad, technology only available by foreign suppliers, countertrade agreements. Of advantages experienced when choosing a foreign supplier the firms mentioned (in order of priority): Lower prices, more options, increased competition among suppliers, better quality, access to world market technology. The firms mentioned the following problems/barriers in connection with foreign purchases (in order of priority): Physical distance, nationalism, lack of knowledge about foreign markets and suppliers, language problems, fluctuations in foreign exchange rates, trade regulations. Furthermore, it appeared that certain types of product purchases were assembled in specific geographical regions, for example purchasing of electronic components was concentrated in the Far East. Carter and Narasimhan (1990), who made a survey of 80 large U.S. firms, followed Monczka & Giunipero's (1984) survey. In the survey they uncovered, among other things, motives for international purchasing. These were (in order of priority): Lower costs, quality improvements, access to new technology, better terms of delivery, creating competition among domestic suppliers. Carter and Narasimhan (1990) go beyond the more descriptive level as they establish a normative model containing five global purchasing strategies, their advantages and problems.

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Min & Galle (1991) could be considered as a follow-up on Carter and Narasimhan's (1990) study as they focus on U.S. companies' international procurement strategies, in a completely descriptive survey, including motives for and the establishing and implementation of international purchasing relations. The survey was framed as a questionnaire and sent to 800 U.S. finns. Only finns with international purchasing relations were asked to answer the questionnaire and 141 finns did. The most frequent reasons for international purchases mentioned by respondents were: Better quality, lower prices, products not being available on the domestic market, more advanced technology, willingness to solve problems, reliability of delivery. The following problems in connection with import were mentioned: Delays in transportation, fluctuations in exchange rates, quality assurance, language and administrative problems. Min and Galle's (1991) results are very much similar to those found in Monczka and Giunipero's (1984) survey. Both surveys framed a kind of model for two new surveys. Birou and Fawcett (1993) examined a random sample of 1000 persons in charge of purchases in American manufacturing finns. The aim was to establish a "benchmark" for the evaluation of competitive advantages and potentials by international purchasing. Among the reasons why they began to purchase abroad were: (1) quality, (2) presence, and (3) price. Scully and Fawcett (1994) examined intemational purchases in 72 small and medium-sized American manufacturing finns. These 72 finns were divided into two groups: small finns with less than 500 employees (44% of the answers) and large finns with more than 500 employees (the rest). The aim of the survey was, among other things, to demonstrate the connection between the experienced competitive situation and the tendency to make international purchases. Small finns are less internationally orientated compared to large finns. Small finns have a shorter time of experience with international purchases than large have and large finns planned their activities more. The firms were asked to choose between nine different reasons for their international purchases. Lower prices were important in both categories, where small finns often emphasized service and large finns often emphasized counter trade. The conclusion was that small finns often are more reactive. Numerically seen, the large finns represent the largest part of the international purchasing, but as a whole the purchasing amount of the small firms actually makes up the largest share. The size of the finn does not influence the regions from which the finns choose their suppliers. Concerning the advantages achieved, the small finns differed from the large ones in three ways: Access to better quality, access to world market quality and opportunities for counter trade. Generally, the small finns estimated the outcome to be lower than the large finns did. However, small finns do not find international

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purchasing more difficult than large firms, apart from managing logistics. No significant difference was found between small and large companies regarding their demands for achievements in international purchases. Scully and Fawcett (1994) point out that in the future both small and large firms will be involved more quickly in international purchasing and to a larger extent. From the above discussion it appears that the interest in finns' international purchases has been concentrated on three main areas: (1) motives for and experienced barriers in connection with choice or rejection of foreign supplier alternatives; (2) the decision process for choosing foreign suppliers particularly including mapping important sources of information and criteria of choices; and (3) the firm's relations to the foreign supplier. The Appendix sums up important results from the review. This has, to a large extent, functioned as a framework for the following empirical analysis of small and medium sized Danish companies' international procurement activities and will also be used as comparative basis for the reporting of the results from the Danish survey. INTERNATIONAL

PURCHASING

IN DANISH

FIRMS

Research Objectives The purpose of the survey is to explore to international purchase activities among small and medium sized industrial firms in Denmark. More precisely the survey addresses four major issues: (1) To what extent are Danish firms involved in international purchasing?, (2) What are the reasons for choosing or not choosing a foreign supplier?, (3) What is the decision process regarding the choice of supplier, and (4) What problems are experienced in the relationship?

Measurement Instrument As measurement instrument a self-administered questionnaire was constructed. Appendix 1 has, to a large extent, functioned as a framework for setting up the questionnaire. As unit of analysis, the decision process concerned with the firm's most recent choice of foreign supplier is chosen, though with the restriction that the choice of supplier should have been made within the last five years due to seeking reliability in responses. For firms which did not choose a new foreign supplier during this time period, the unit of analysis is the choice of a new domestic supplier, however this unit of analysis will only be used as a means for comparison to the main unit of analysis: the firm's choice of foreign suppliers. For each of the two units of analysis a questionnaire was prepared.

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Before the collection of data started the questionnaire was pre-tested in four manufacturing finns in the area.

Sample and Data Collection The population was chosen on the basis of criteria regarding their geographical location, size and legal organization. Firms were selected within three geographical areas in Denmark; the island of Funen, West Zealand and the "Triangular Area" of Jutland (consisting of the area between the towns of Vejle, Fredericia and Herning). All incorporated finns with limited liability were selected (A/S and Aps). These finns are obliged by law to report their annual financial results. Subsidiary companies of other firms were excluded from the population. All firms with 10-499 employees within the geographical area were included in the survey. The size of the finns corresponds to the commonly used definitions of small and medium sized enterprises. Two thousand two hundred seventy seven (2277) finns complied with the mentioned criteria and they make up the total survey population out of which a total sampling is done. With respect to the research on the firms' purchasing situation, the research population is, however, confined to manufacturing firms (1229 finns) and only to the finns with a person solely in charge of purchasing. This restriction was enforced to improve the response rate and reliability because it would be impossible for the managing director to answer all the questions concerning the finn's purchasing. Hence, all the questions regarding purchasing were addressed to the person in the finn responsible for the purchasing and who is considered to be able to give the most valid and reliable answers to questions concerning purchasing. This person was identified in each finn by an introductory telephone survey, carried out for all 1229 manufacturing finns and in which the finns were asked whether they had a person solely in charge of purchasing. In order to ensure a relatively high attention to the research program, a conference was held on the situation of small and medium sized enterprises and introductory letters were sent out to all finns, including the 1229 manufacturing firms. These were subsequently contacted on the phone and asked the questions of the telephone questionnaire. The main topics of this questionnaire were to establish if the firm had a person solely responsible of purchases and whether the finn had chosen a new foreign or domestic supplier of any goods within the last five years. Among the 1229 manufacturing finns 263 finns (21.4%) had an employee solely responsible for the firms' purchases, 3 of the people responsible purchasing persons could not be reached by phone and 70 did not want to participate in the survey. The remaining 190 finns received two slightly different questionnaires. One hundred fifty six finns received a

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questionnaire concerning their latest choice of a new foreign supplier within the last five years. Thirty-four firms received a questionnaire concerning their latest choice of a new domestic supplier within the last five years (since they had responded that they had not chosen a foreign supplier within the last five years). After a telephone reminder the number of usable responses rose to 139, which gives a response rate of 52.9%. An analysis of the data collection and of the non-response by following Eriksen (1998) concluded that the survey was representative of the whole population.

RESULTS Data Description The distribution of answers in Table 1 shows that nine out of ten companies (89.2%) have made purchases in foreign countries and nearly all of these companies are still engaged in purchasing from abroad. Three out of four companies (75.5%) have chosen a new foreign supplier within the last five years. The table also reveals that in some cases the decision for making foreign purchases is not a new phenomenon and in other cases the firm has decided to withdraw its purchases from foreign sources (de-internationalization). As mentioned earlier the selection criterion for participation in the survey was whether or not the company had a person solely responsible for purchasing in the company. However, this is not tantamount to the existence of a purchasing department in the company. Out of the interviewed companies with foreign suppliers, 75.2% had a purchasing department and out of those 89.9% had between one and four persons employed in the function. In companies with domestic suppliers only, 41.2% had a purchasing function and typically with only one or two persons employed. What might be concluded from these data is that companies with foreign suppliers do have, to a much larger extent, a purchasing function - and typically with more employees. In companies with Tab/e 1.

Distribution of Answers in the Study.

N = 139 New foreign supplier has been selected within the last 5 years Purchase internationally but the actual choice was made more than 5 years ago Has previously conducted purchases internationally but do now only purchase domestically Has never purchased internationally

Frequency

%

105

75.5

14

10.1

5 15

3.6 10.8

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foreign suppliers 54.2% had a formal purchasing policy, whereas in companies with domestic suppliers only 29.4% had a formal purchasing policy. None of the firms had a policy on using only domestic suppliers. On the basis of the above, one could assume that companies' formal policies include more or less explicit demands for searching for foreign supplier alternatives. The age of the person responsible for the company's purchasing (purchasing manager) was on average 42.8 years in the survey, in case of domestic suppliers the purchasing manager was on average 46.5 years, but in the case of foreign suppliers it was 41.5 years. Viewing the number of years of employment in the case of domestic suppliers, the purchasing manager had on average been employed 14.4 years but in the case of foreign suppliers the purchasing manager had been employed 7.8 years. This information indicates that the purchasing manager involved in international purchasing is not only younger but he has also been employed for a shorter period of time. The manager would typically have a newer and more internationally-oriented education and may, to a small extent, be willing to pursue established routines in the company.

Extent of Involvement in International Purchasing This section deals with the companies' choice of foreign/domestic suppliers as viewed from the following questions: • • • • • •

To what extent are the companies involved in international purchasing? How many countries/regions does the company source from? From where does the company actually purchase? What were the reasons (barriers) for not choosing a foreign supplier? What were the motives for choosing a foreign supplier? What problems were experienced in the relationship?

Table 2 shows that more than a quarter of the companies use over half of their purchasing budget on international purchases.

Table 2.

Percentage of International Purchases of the Total Purchasing Budget.

N = 139 Has no foreign supplier 1-25% international purchases 26-50% international purchases 51-75% international purchases 76-100% international purchases

Frequency 20 62 21 21 15

Percentage 14.4 44.6 15.1 15.1 10.8

Cumulative % 14.4 59.0 74.1 89.2 100

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On the basis of Tables 1 and 2 it can be concluded that international purchasing is a frequent phenomenon in the studied industrial finns and in a quarter of the cases it stands for more than 50% of the total purchases. Table 3 Clearly shows that companies engaged in international purchasing typically are involved in more than one country; only 9.2% of the companies have limited their purchases to only one foreign country. It is also shown that nine out of ten companies (90.8%) purchase from two or more countries and the cumulative frequency indicates that half of the interviewed companies purchase from more than five countries. This indicates that when companies once have decided to purchase from a foreign supplier, they will relatively quickly search for other possibilities in different countries. A pivotal point is with which countries do the companies report to be dealing. Table 4 displays the companies' distribution of engagement in different regions. Nearly all companies involved in international purchasing have contacts to suppliers in the Nordic countries and/or Germany. The strong representation of these countries is not surprising since they are neighboring countries and the cultural/language differences are relatively small. More surprising is perhaps the fact that nearly half of the interviewed companies (42.9%) also have suppliers from countries outside Europe that indicates a relatively high internationalization of their purchases. Table 5 reveals from which country the companies mainly make their purchases. Nearly half of the finns (44.9%) conduct most of their purchases in Germany, while surprisingly only Sweden (15.3%) represents the Nordic countries; this tendency is consistent with Table 4. The short physical distance to Germany combined with the large industrial economy and ease of transportation makes it easy both to export and to import from this country. Other large European economies, like United Kingdom, the Netherlands and Italy, are mentioned by 7.6%, 6.8% and 5.9% of the companies. In general one has to conclude that the studied firms are much engaged in sourcing from the European region and they might be searching and evaluating alternatives outside Europe, whereas they are not so much involved in actual purchases outside this region. Table 3.

Number of Countries the Companies' Sources From.

N = 119 1 Country 2 Countries 3 Countries 4 Countries 5 Countries More than 5 Countries

Frequency 11 13 10 18 7 60

Percentage 9.2 10.1 8.4 15.1 5.9 50.4

Cumulative % 9.2 20.2 28.6 43.7 49.6 100

The Internationalization of lndustrial Purchasing

Table 4. N = 119

Nordic Countries Germany United Kingdom Rest of Europe Outside Europe

237

Companies' Contact to Suppliers in Different Regions. Has supplier in this region

Has been in contact with potential supplier in this region but do not purchase

Do not know any potential supplier in this region,

78.9% 84.8% 56.3% 70.6% 42.9%

14.3% 8.4% 21.8% 13.5% 26.0%

4.3% 3.4% 13.5% 6.7% 22.7%

No response in respect to the region 1

2.5% 3.4% 8.4% 9.2% 8.4%

1 This section contains the cases where the respondent has stated to have or have been in contact with suppliers from other regions but has not stated which region. This could imply that the company does not know of any supplier in this region.

Motives for Choosing or Not Choosing Foreign Suppliers Table 6 shows to what extent the mentioned conditions were among the reasons for the companies not to choose a foreign supplier, even though one should be careful not to draw conclusions on a small number of replies (n = 18). The most prevalent reason for not choosing a foreign supplier is the lack of knowledge of foreign cultures, etc. Every third company replies that the distance to foreign suppliers might cause a problem and only one out of ten companies regards fluctuations on foreign exchange rates as a problem. When comparing Table 6 with Table 12 on perceived problems with the supplier, it is interesting to observe that only one out of ten firms has experienced those problems which are among the factors that hold firms back from choosing a foreign supplier. When dealing with companies' motives for choosing a foreign supplier, a main topic is the presence (availability) of the products on the Danish market. Asked about availability, 57% answered that the product, or a similar product, was available on the market, whereas 43% of the companies have been "forced"

Table 5. Countries that are Most Important to the Firms' Purchasing. Valid Case = 118 Germany Sweden United Kingdom Netherlands Italy Other countries

Missing = 1

Frequency

Percentage

53 18 9 8 7 23

44.9 15.3 7.6 6.8 5.9 19.5

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Table 6.

Motives for Not Choosing a Foreign Supplier.

N= 181

Negotiations in foreign cultures Lack of knowledge of trade regulations Negotiations in a foreign language Lack of knowledge of foreign customs Distance to foreign suppliers Fluctuations in foreign exchange rates Possible problems in own organization

To a very high/ To a high extent

To some extent

To a lesser extent/not at all

44.4% 38.9% 38.9% 38.9% 33.3% 11.1% 11.1%

44.4% 38.9% 33.3% 33.3% 33.3% 50.0% 16.7%

11.1% 22.2% 27.8% 27.8% 33.3% 38.9% 72.2%

l Two missing cases are companies who previously have purchased intemationally but have stopped doing so. to search for suppliers internationally because of the "lack" of presence in the Danish market. In other words, nearly half of the companies are involved in an active search process for suppliers but have not found a domestic supplier who satisfies their demands. One solution could have been to redefine their demands, but instead the companies have chosen to search internationally for acceptable solutions to their demand. Apart from availability, knowledge about alternative suppliers plays an important role in the efforts of choosing a supplier. When asked about knowledge of supplier alternatives, nine out of ten companies answered that they had knowledge about alternative suppliers when they chose the actual supplier. Perhaps the most interesting factor was the existence of a domestic alternative in one fourth of the cases. Table 7 states to what extent the mentioned factors were reasons for their choice of supplier. A lower price and a better quality are among the most prevalent reasons (a-value on 2.19 and 2.18); this fact strongly supports other international findings for companies that source internationally. Compared to the choice of domestic suppliers it is interesting to notice that these motives are significantly lower, whereas geographic distance and lead-time are significantly higher when choosing a domestic supplier.

The Decision Process Regarding the Choice of Supplier One of the first steps in the decision process regarding the choice of suppliers is of course that the purchasers know about the existence of supplier alternatives, hence how the first contact was established is very interesting. The possibilities in this respect are multifarious. Table 8 shows that most of the contacts are established by a visit from the supplier (31%) or through participation at a trade fair (31%).

The Internationalization of Industrial Purchasing Table 7. Factor I

239

M o t i v e s for C h o o s i n g the A c t u a l Supplier. Foreign Supplier N = 103 Missing = 2

Lower price than alternative suppliers Better quality than alternative suppliers Better supply assurance than alternative suppliers Better lead time than alternative suppliers More negotiable than alternative suppliers Better for the environment than the alternatives Better geographical location

3.76# 3.18" 2.71 2.65 2.61 1.80 1.76

Domestic Supplier N = 28 Missing = 6 3.43 2.39 3.00 3.14 ¢ 2.78 1.61 2.39¢

Measured by the average of answers on a 5-point Likert-scale, 1 = "not at all a contributing factor" 5 = "to a very high extent a contributing factor." * One-tailed t-test, significant at p < 0.01. :~ One-tailed t-test, significant at p < 0.05. # One-tailed t-test, significant at p < 0.10. I f o n e c o m p a r e s the c i r c u m s t a n c e s c o n n e c t e d w i t h the c h o i c e o f d o m e s t i c suppliers, it is i n t e r e s t i n g to o b s e r v e that the d o m e s t i c D a n i s h s u p p l i e r s are m u c h m o r e a c t i v e in e s t a b l i s h i n g c o n t a c t s to the local c u s t o m e r s . T h i s s e e m s logical c o n s i d e r i n g t h e fact that D a n i s h suppliers h a v e m u c h e a s i e r a c c e s s to i n f o r m a t i o n a b o u t p o t e n t i a l c u s t o m e r s a n d it is e a s i e r to c o n d u c t p e r s o n a l calls at the c u s t o m e r ' s site. A n o t h e r i m p o r t a n t a s p e c t o f the d e c i s i o n p r o c e s s r e g a r d i n g the c h o i c e o f s u p p l i e r is the p e r c e p t i o n o f the p u r c h a s i n g situation. I n the f o l l o w i n g d i s c u s s i o n w e a d o p t the a n a l y s i s o f the p u r c h a s i n g situation as d e s c r i b e d b y M c Q u i s t o n

Table 8.

Factor

H o w d i d the C o m p a n y get in C o n t a c t w i t h the S u p p l i e r t h e First T i m e ? Foreign Supplier N = 87 Missing = 18

The contact was made at a visit to a fair/trade show The supplier initiated contact The contact was made through another supplier The contact was made through a purchaser in another company The contact was made through an export salesman/agent The contact was made on the basis of information from a trade directory Other means of contact than listed above

Domestic Supplier N = 25 Missing = 9

31.0% 31.0% 9.2% 6.9%

8.0% 76.0% 0.0% 4.0%

5.7% 3.4%

0.0% 0.0%

12.6% 100.0%

12.0% 100.0%

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PER SERVAIS AND JAN MOLLER JENSEN

(1989). Hence the decision process regarding the choice of supplier will be described by factors like product type, perceived risk and anticipated consequences o f the choice. Table 9 reflects the perceived complexity in relation to a number of product specific factors whether the purchase was made from foreign or domestic suppliers. In general, the findings indicate that products purchased from foreign suppliers are more difficult to specify/describe than products sourced from local suppliers. This finding might fit very well with the previously mentioned fact that the products were not available in the Danish market and at the same time the products sourced from abroad were more technologically complex as they demanded further tests before usage and were harder to adapt to the production process than products purchased domestically. Table 10 reveals the significance (importance) of the purchase. In general it can be seen that the purchases are evaluated to be of relatively large importance to the company. It is worthwhile noticing that international purchases are perceived as having large influence on the competitiveness of the firm, closely followed by the perceived influence on the quality of the end-product. This is supported by the companies' motives for choosing a foreign supplier and it is important to stress that international purchasing is perceived to have relatively large influence on the competitiveness of the firm by the interviewed firms. Table 11 indicates the perception of the consequences of the purchase. The data reveal no large differences in the perception of consequences in relation to purchases from foreign suppliers versus domestic suppliers, but in general foreign purchases are evaluated to have a potential higher degree of negative

Table 9. Statement1

To What Extent do you Agree in the Following Statements Regarding the Purchased Product? Foreign Supplier N= 100 Missing = 5

The product is difficult to specify/describe The product consist of different parts The product demands further tests or training before usage The product is difficult to adapt to the production process The product is difficult to handle in the production process

DomesticSupplier N= 27 Missing -- 7

2.04t 2.20 2.95* 1.88'

1.59 1.96 1.92 1.37

1.63t

1.37

Measured by the average of answers on a 5-point Likert-scale, 1 -- "not at all", 5 -- "to a very high extent.'" * One-tailed t-test, significant at p < 0.01, t One-tailed t-test, significant at p < 0.05,

The Internationalization of Industrial Purchasing

Table 10.

241

Perceived Importance of the Purchase.

Dimensions t

Importance for the economic performance of the company Importance for the quality of our end-products Importance for effectiveness of the production Importance for our competitiveness

Foreign Supplier N = 100 Missing = 5

Domestic supplier N = 2 7 Missing = 7

2.52 2.81 1.85 2.94 t

2.51 2.7 2.19 2.52

i Measured by the average of answers on a 5-point Likert-scale, 1 = "not at all", 5 = "to a very high extent." t One-tailed t-test, significant at p < 0.05.

consequences to the company than domestic purchases. Especially the potential risk of a decreased end-product quality is estimated higher for foreign supplies than for domestic supplies. Problems Experienced in the Relationship The last issue in the survey is identifying the problems experienced in relationships with foreign suppliers. From the literature review one could expect problems to occur in the relationship due to differences in culture, language and customs. The vast majority of companies did not, however, experience any major problems when purchasing from a foreign supplier. Both the availability of Table 11.

Perceived Consequences of the Purchase.

Dimensions 1

The purchase could imply negative economic consequences The quality of the end-product could be reduced The purchase could imply loss of production effectiveness The purchase could imply a deterioration of the logistical conditions The costumed service could be diminished

Foreign supplier N = 97 Missing = 8

Domestic Supplier N = 27 Missing = 7

1.20

1.03

1.59*

1.11

1.41

1.07

1.67 1.57

1.44 1.33

i Measured by the average of answers on a 5-point Likert-scale, 1 = "not at all", 5 = "to a very high extent." * One-tailed t-test, significant at p < 0.10.

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PER SERVAIS AND JAN MOLLER JENSEN

Tabk 12. N = 100*

Perceived Problems in the Relationship with the Foreign Supplier. To a very high extent/ to a high extent

Negotiations in a foreign culture Lack of knowledge of trade regulations Negotiations in a foreign language Lack of knowledge of foreign customs The distance to the supplier Fluctuations in currency exchange rates Problems in own organization

1.0% 0.0% 0.0% 0.0% 3.0% 9.0% 2.0%

To some extent 6.0% 6.0% 10.0% 7.0% 12.0% 23.0% 4.0%

To a lesser extent/ not at all 93.0% 94.0% 90.0% 93.0% 85.0% 68.0% 94.0%

*Two missing cases are the companies who previously purchased internationally but have stopped doing so. suppliers in the Danish market and the perception of complexity and importance of the purchase might influence this. This indicates that when experiencing such circumstances the buyer would be prepared to try to avoid the possible problems. This is not to say that relations are unproblematic. As it appears from Table 12, changing exchange rates are considered to be one of the main problems, followed by the distance to the supplier. Within Europe the Common European Currency (EURO) will partly solve the problems with currency, whereas problems with distance, particularly, are prevalent when dealing with bulky items or when having close developmental relations with the supplier.

CONCLUSIONS Research in international marketing has often been criticized for neglecting conditions concerned with international purchasing and the adjunct process of internationalization, not to mention spillover effects between marketing and purchasing. An intensive literature review has revealed the need for further research efforts in this area. This article contributes to the research in international purchasing, primarily by presenting descriptive data from a fairly large European survey carded out among small and medium sized manufacturing companies in Denmark. Compared to other studies, which have typically been comprised of relatively large finns in a large economy and carried out in a North American setting, this study focuses on small companies in a small and open economy. However, the main research questions are, to a large extent, the same. Consequently the analysis is centered on the four research questions stressed in the introduction.

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243

The first research question focused on the level of international purchasing in small and medium-sized Danish companies. The results show that international purchasing is widely used in manufacturing companies; no less than 85% of the interviewed companies state that they presently are doing purchasing abroad. International purchasing holds a relatively large share of the companies' purchasing budget and is normally spread out among several countries, mainly in Europe. Nearly half of the firms (44.9%) report that they conduct most of their purchases in Germany while the Nordic countries, surprisingly, are only represented by Sweden (15.3%); this tendency is consistent with the results in Table 5. The short physical distance to Germany, combined with the large industrial economy and ease of transportation, make it easy both to export to and import from this country. Other large European economies like the United Kingdom, the Netherlands and Italy are mentioned by 7.6%, 6.8% and 5.9% of the companies. In general, one has to conclude that the studied firms are much engaged in sourcing from the European region and they might be searching and evaluating alternatives outside Europe, whereas they are not so much involved in actual purchases outside the region. Nearly all companies involved in international purchasing have contacts to suppliers in the Nordic countries and/or Germany. The strong representation of these countries is not surprising since they are neighboring countries and the cultural/linguistic differences are relatively small. Perhaps more surprising is the fact that nearly half of the companies examined (42.9%) also have suppliers from countries outside Europe, which indicates a relatively high internationalization of their purchases. Compared to surveys in the United States, this study clearly stresses that international purchasing is not only confined to large manufacturing firms. Nearly half of the companies replied that the main reason for choosing a foreign supplier was the absence of an alternative supplier in the domestic market. However, in more than half of the cases a domestic supplier was available but a foreign supplier was chosen. The reason for this was a lower price abroad or a better quality. These facts support findings from the surveys mentioned previously; however, the study seems to point out some internal and external factors, which facilitate the internationalization process of the purchases. It is noticeable that the person in charge is younger and is recently educated and that the size of the firm is not an obstacle for international purchasing; however some work specialization within the firm seem to facilitate the process. The second question focused on motives and reasons for choosing or not choosing foreign suppliers. The lack of knowledge about foreign customs and practices was among the main reasons for not choosing a foreign supplier. In contrast to this, nearly half of the companies replied that the main reason for

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choosing a foreign supplier was the absence of an alternative supplier in the domestic market; however, in more than half of the cases a domestic supplier was available, but a foreign supplier was chosen. The reason for this was a lower price abroad or a better quality. This fact supports findings from other surveys. The third research question highlighted the decision process regarding the supplier. The foreign supplier choices are characterized by the fact that the first contact is often made at trade fairs and a whole variety of other means are also employed. In contrast, in the case of domestic suppliers three out of four supplier choices are initiated by the supplier visiting the customer. Purchases involving foreign suppliers are often perceived to have a larger influence on the competitiveness of the company, primarily due to the technological content in the product. This finding is underlined by the fact that price and quality are weighted significantly higher when choosing a foreign supplier. Factors like distance to the supplier and lead-time are naturally weighted higher when choosing a domestic supplier. Finally, the problems experienced in relationships with foreign suppliers are not those anticipated by firms who choose domestic suppliers exclusively. In fact, the primary problem, fluctuations in currency exchanges, is endemic to most cross-border transactions. But this is also a problem which will disappear with the implementation of Europe's single currency, suggesting even more growth in foreign sourcing in the future. Further Research Directions

Mentioning external factors, the smallness and openness of the Danish economy, the open European market and the removal of many trade barriers and restrictions may have eased the process of international purchasing, still the study seems to pinpoint the effects of distance, both physical and psychological, even within the European Union. Clearly this study calls for further research and similar surveys in other countries in order to make proper comparative studies, e.g. as to the influence of different economic and cultural settings. This study might also lead to some reflections as to whether the firms are involved in an internationalization process with respect to their purchases. Since the survey is a cross sectional study it is difficult to portray such a process, but there is some circumstantial evidence of a process. One piece of evidence is the discovery of firms that have previously purchased internationally, but have ceased to do so. This is a potential indication of de-internationalization but nevertheless is part of a process. Another factor is the awareness of suppliers in other regions of the world and the search for new suppliers in more distant

The Internationalization of lndustrial Purchasing

245

regions. In terms of a process, Monczka and Trent (1991) suggest a stage model for international purchases in which the firm's purchasing pattern gradually develops from only domestic purchasing to foreign purchasing, e.g. purchases based on needs, on to international purchasing, e.g. proactive inclusion of international sourcing possibilities. Ending up with global purchasing, e.g. integration and coordination of global sourcing systems. In an experimental study of the perceived risk in industrial purchasing HAkansson and Wootz (1975) indicate that supplier choice is affected by supplier characteristics, such as location and size and bid characteristics such as price and quality. Similarly Hall6n (1982) finds that, in general, buyers have a more positive attitude toward local domestic suppliers than toward foreign suppliers when both of them are potential suppliers. When the buyers experience a high uncertainty situation, they perceive supplier characteristics more important than bid characteristics and the firms enter those markets which are geographically, culturally and economically close, i.e. markets with short business distance. Carter and Narasimhan (1990), who observed that buyers seem to select a supplier who minimizes supply failures, also support this. Regarding the first contacts between the buyer and the foreign supplier the initial contact was either by the efforts of the supplier (buyer reactive) or by visiting a trade fair (buyer active), which is similar to what happens in connection with the first export order, according to the export marketing literature. As the firm becomes more experienced, it will search more distant markets and more complex products. It is also indicated in the survey that the small firms are involved in a gradual search pattern and the relations to the foreign suppliers also involve customized products and even product development in cooperation with the foreign supplier. Setting up foreign purchasing offices is normally too capital intensive for small firms alone, however shared purchasing institutions (like supplier associations) among small industrial firms may find this possible and the increasing use of the Internet may facilitate international purchasing directly among the parties and render intermediaries superfluous. However, further research is needed on international purchasing as part of the internationalization process. The salient question in firms' internationalization is the question about foreign production. International purchasing could lead to a firm taking over it foreign supplier. This action might be consistent with the late phase in the Uppsala internationalization model (Johanson & Vahlne, 1990) and contract manufacturing, licensing or owning manufacturing units abroad might evolve. However, in the case of international purchasing, products from these units must return to the domestic production unit. In the case of small manufacturing firms, setting up production abroad may be an unlikely undertaking, but again not impossible even though one would expect joint ventures to be more feasible.

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From the survey it seems that many of the firms are moving into the later phases of the internationalization model and are preparing themselves to operate in markets outside the European Union. Regarding the development of foreign purchases it must be stressed that in reality the key question to many firms is to find the balance between domestic and foreign purchases, since as many purchases as possible abroad is not a goal in itself. Another related aspect is the overall internationalization of the firm. That is, not only the internationalization of inward activities or outward activities, Welch & Loustarinen (1993), but also the balance or interplay between these activities. This article has been focused on the status of international purchasing in industrial companies in a small and open economy and some hints in direction of understanding this very complex process are given. Both from a managerial and a theoretical point of view, it is of vital interest to have better insight into this process and to the interconnectedness of this process in and between companies. Korhonen (1999) finds in her study only limited support for synchronous international development in the studied firms. As a matter of fact she find only little interconnectedness between the marketing and purchasing areas, partly because of the lack of attendance on international purchasing and the possible strategic impact, also stressed by Arnold (1989). The companies themselves reply that international purchasing has a large influence on their competitiveness and it would be of great interest to them and to academia to develop better understanding of the details of international purchasing as a process and the coupling of marketing and purchasing.

REFERENCES Arnold, U. (1989). Global Sourcing - An Indispensable Element in Worldwide Competition. International Management Review, 29(4), 14-28. Birou, L. M., & Fawcett, S. E. (1993). International Purchasing: Benefits, Requirements and Challenges. International Journal of Purchasing and Materials Management, (Spring), 28-37. Carter, J., & Narasimhan, R. (1990). Purchasing in the International Marketplace: Implication for Operations. Journal of Purchasing and Materials Management, (Summer), 2-11. Cavusgil, S. T. (1998). Perspectives: Knowledge Developmentin International Marketing. Journal of International Marketing, 6(2), 103-112. Cavusgil, S. T., & Yavas, U. (1985). Supplier Selection in International Markets; A Study of Saudi Importers. Journal of Industrial Marketing and Purchasing, 2(2), 19-28. Edksen, B. (1998). Data Collection Procedure, Response Rates and Analysis of Non-respondents, Working paper No. 3, Department of Management, Odense University. Gtidtirn, A., & Kavas, A. (1996). Turkish industrial purchasing managers' perception of foreign and national suppliers. European Journal of Marketing, 30(8), 10-21. Hall6n, L. (1982). International Purchasing in a Small Country. Journal of International Business Studies, 99-112.

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H~tkansson, H., & Wootz, B. (1975). Supplier Selection in an International Environment - An Experimental Study. Journal of Marketing Research, (February), 46-51. Korhonen, H. (1999). Inward-Outward Internationalization of Small and Medium Enterprises. Acta Universitatis Oeconomicae Helsingiensis A-147, Helsinki. Kotabe, M. (1989). Hollowing-out of U.S. Multinationals. Journal of Business Research, 19(1), 1-15. Kotabe, M. (1992). Global Sourcing Strategy: R&D, Manufacturing and Marketing Interfaces. New York: Quorum Books. Kotabe, M., & Murray, J. (1998). Global Sourcing of Services and Market Performance - An Empirical Investigation. Journal of International Marketing, 6(4), 10-31. Liu, H., & McGoldrick, P. (1996). International Retail Sourcing: Trend, Nature and Process. Journal of International Marketing, 4(4), 9-33. Johanson, J., & Vahlne, J.-E. (1990). The Mechanism of Internationalization. International Marketing Review, 7(4), 11-24. McQuiston, D. H. (1989). Novelty, Complexity and Importance as Causal Determinants of Industrial Buyer Behavior. Journal of Marketing, (April), 66-79. Min, H., & Galle, W. P. (1991). International Purchasing Strategies of Multinational U.S. Firms. International Journal of Purchasing and Materials Management, (Summer), 9-18. Monczka, R., & Giunipero, L. C. (1984). International Purchasing; Characteristics and Implementation. Journal of Purchasing and Materials Management, (Fall), 2-9. Monczka, R., & Trent, R. (1991). Global Sourcing: A Development Approach. International Journal of Purchasing and Materials Management, 27(2), 2-8. Monczka, R., & Trent, R. (1992). Worldwide Sourcing: Assessment and Execution. International Journal of Purchasing and Materials Management, (Fall), 9-21. Murray, J., Kotabe, M., & Wildt, A. (1995). Strategic and Financial Performance Implications of Global Sourcing. Journal of International Business Studies, 26(1). Murray, J., & Kotabe, M. (1995). Global Sourcing Strategies of U.S. Subsidiaries of Foreign Multinationals. International Management Review, 35(4). Murray, J., & Kotabe, M. (1999). Sourcing Strategies of U.S. Service Companies - A Modified Transaction-Cost Analysis. Strategic Management Journal, 20(9), 791--809. Petersen, K., Frayer, D., & Scannell, T. (2000). An Empirical Investigation of Global Sourcing Strategy Effectiveness. Journal of Supply Chain Management, 36(2), 29-36. Reichel, J. (1989). The Internationalization of Importing Companies. European Journal of Marketing, 22(10), 31-40. Scully, J., & Fawcett, S. (1994). International Procurement S strategies: Challenges and Opportunities for the Small Firm. Production and Inventory Management Journal, (Second Quarter), 39-46. Thorelli, H., & Glowacka, A. E. (1995). Willingness of American Industrial Buyers to Source Internationally. Journal of Business Research, 32, 21-30. Welch, L., & Loustarinen, R. (1993). Inward-Outward Connections in Internationalization. Journal of International Marketing, 1(1), 44-56. Zhan, L., & Murray, W. (2000). Global Sourcing, Multiple Country-of-Origin Facets and Consumer reactions. Journal of Business Research, 47(2), 121-133.

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TOWARD A (MORE) DYNAMIC THEORY OF INTERNATIONALIZATION: INTERNATIONAL MARKET WITHDRAWAL AS EMPIRICAL EXTREME Pieter Pauwels and Paul Matthyssens

ABSTRACT Although built to explain an inherently dynamic process, current theories of internationalization are criticized for having limited dynamic qualities. To come to this conclusion, we adopt international market withdrawal as an empirical extreme. We expect dynamic theories of internationalization to be able to accommodate and explain international market withdrawal within the scope of the internationalization process of the firm. An integrated global strategy framework is presented as a promising point of departure toward this aim. To assess this framework' s dynamic qualities, we compare it with the 'stages' models of internationalization and the transaction-cost based international business theory. Although this integrated global strategy framework - and especially the resource-based part of it - seems to outperform these two established theories, the framework is not capable of fully explaining the dynamics in the internationalization process of the

Reassessing the Internationalization of the Firm, Volume 11, pages 255-275. Copyright © 2001 by Elsevier Science Ltd. All rights of reproduction in any form reserved. ISBN: 0-7623-0795-1 255

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firm. Moreover, the integrated global strategy framework struggles with the paradigmatic incompatibilities among its fundamental explananda. Adopting the resource-based perspective as a pivotal point, we propose an (emergent) resource-based evolutionary theory of the firm as a dynamic framework that is capable of explaining international market withdrawal and the internationalization process of the firm.

INTRODUCTION Since the beginning of the 1990s, the call for more dynamic (i.e. nonequilibrium) theories of internationalization has only increased in volume. From many different theoretical perspectives, eminent scholars such as Porter (1991), Bartlett and Ghoshal (1991), and recently Buckley and Casson (1998) have explicitly called for more theoretical work on the dynamic growth process of the multinational firm. Focusing on complex, non-unitary progression, 1 which is due to pro-active managerial decision making, these authors concur in their conclusion that extant theoretical frameworks of internationalization are not capable of lifting the veil of the process which underlies internationalization (Strandskov, 1986; Melin, 1992). This paper contributes to this discussion as it proposes international market withdrawal as an empirical extreme and assesses extant theories of internationalization on their capability of explaining this phenomenon. The structure of this paper is as follows. First, international market withdrawal is presented as an empirical extreme. It is argued that a dynamic theory of internationalization should be able to accommodate and explain this extreme yet observable phenomenon. Next, we present an integrated global strategy process perspective on the internationalization of the firm. At first sight, the integration of an industrial organization perspective on business strategy with the resource-based view promises to be a powerful and dynamic framework for the explanation of internationalization. In the subsequent section, we assess the dynamic qualities of this framework against two established frameworks of internationalization - the 'stages' models and the transaction cost-based theory of international business. We come to the conclusion that the integrated global strategy framework and more in particularly the resource-based part of it - holds potential for contributing to a (more) dynamic theory of internationalization. Nevertheless, important anomalies remain in the framework, not in the least due to paradigmatic incompatibilities in the integration of the fundamental explananda. From this discussion, we come to understand that an inherently dynamic theory of

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the finn is needed on which a dynamic theory of the internationalization process can be built. In the final section, we present an emerging resource-based evolutionary theory of the firm, which holds great potential for the explanation of international market withdrawal and the development of a truly dynamic theory of the internationalization of the firm. INTERNATIONAL

MARKET

WITHDRAWAL

International market withdrawal is defined as a firm's voluntary action to partially reduce its engagement in market-related activities in a foreign productmarket. This definition refers to 'de-internationalization, 'z a concept introduced by Welch and Luostarinen (1988, p. 37) while arguing that: "[I]t should be stressed that once a company has embarked on the [internationalization] process, there is no inevitability about its continuance. In fact, the evidence indicates that [...] 'de-internationalization' can occur at any stage." International market withdrawal is a strategic instrument, which fits within the logic of international market portfolio management. Assuming that a multinational firm is optimizing its performance within the constraints of a permanently changing inner (i.e. a limited but changing stock of resources) and outer context (i.e. a limited set of temporally relevant threats and opportunities), the finn will manage and balance its portfolio of (international) product market combinations through expansion, extension and withdrawal decisions (Douglas & Craig, 1996). International market withdrawal is more than a theoretical issue. Recent studies have clearly illustrated that it is an important phenomenon, which deserves more academic attention. Padmanabhan (1993), Calof and Beamish (1995), Barkema, Bell and Pennings (1996), Benito (1997), and Pauwels and Matthyssens (1999), among others, have identified and studied foreign divestments, many of which are examples of international market withdrawal. Although they rarely are covered in the business press, international market withdrawals are an underestimated instrument of pro-active global strategy. For this study, we adopt international market withdrawal as an extreme form of (recursive) strategic progression within the scope of international market portfolio management and the internationalization of the firm. The underlying thesis is that an international market withdrawal may increase the degree of internationalization of the firm (Lamb & Liesch, 1998; Pauwels, 2000). We develop this thesis throughout this paper. We expect truly dynamic theories of internationalization to go beyond modeling unitary progression and to capture more complex types of progression (see Appendix), including the

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extreme of recursive progression represented by international market withdrawal (Andersen, 1993).

POINT OF DEPARTURE: A GLOBAL STRATEGY FRAMEWORK One of the most influential works on global strategy is Porter's (1986) framework of industry globalization. In this framework, Porter develops a logic to explain why industries become global in their competitive scope. Competition becomes global when firms create competitive advantages through the integration of value chain activities across borders. The degree of globalization is measured at the industry level and is defined by structural national, market and industry characteristics, which impede globalization (e.g. government policies, heterogeneous local conditions, organizational complexity) or encourage it (e.g. scale economies, comparative advantages of locations). In fact, Porter's (1986) framework explains why an industry evolves from multi-domestic competition (i.e. no competition across borders) to global competition. Building on Porter's (1986) globalization framework at the industry level, Yip (1989) presents a globalization framework at the firm level. In this framework, the costs and benefits of a global strategy eventually result from weighing the externally determined globalization drivers, which create the potential for an industry to achieve the benefits of global strategy, and the organization's ability to establish strategic fit and implement the appropriate setting for global strategy levers. The ideal strategy matches the degree of internationalization of the firm with the globalization dynamics of the industry. Although it holds much explanatory power over the drivers of globalization, the industrial organization foundation of Porter's global strategy perspective is criticized for being overly static and externally determinated (e.g. Seth & Thomas, 1994; Foss, 1996a). As if it were a reaction to this drawback, a resource-based view of strategic management emerged in the literature. From this resource-based perspective, a limited number of studies have been published that focus on how global competition develops (e.g. Collis, 1991; Tallman, 1991) and less than a handful of studies was found that investigate the internationalization process of the firm (e.g. Andersen & Kheam, 1998). Analyzing the global competition in the bearings industry, Collis (1991) built his analysis on a resource-based framework. He clearly illustrated the importance of history and complex social phenomena to be affecting global strategy choice and outcome. As the resource-based view mainly focuses on

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heterogeneity in factor markets, Collis (1991, p. 65) concludes that: "because domestic factor markets are the easiest and cheapest to access, firms primarily accumulate resources from those factor markets [...]. The nature of those markets will therefore profoundly affect the development of core competencies." As such, Collis (1991) adopts a resource-based perspective to explain how firms compete and grow in a global context. Andersen and Kheam (1998) assess the power of the resource-based view to explain the internationalization of the finn. Within the framework of Ansoff's (1965) product-market expansion matrix, these authors assess whether particular capabilities in production, marketing and management result in the adoption of one of the four growth paths defined in Ansoff's (1965) matrix. Their exploratory study moderately supports the thesis that the firm's resource profile influences a firm's international growth strategy. Given the external orientation of Porter's globalization framework and the internal orientation of the resource-based perspective on global strategy, an integration of both seems to be desirable. Using Foss' (1996a) metaphor: with the integration of Porter's perspective and the resource-based view, the scissors would be complete. In an interesting empirical study, Hansen and Wernerfelt (1989) decompose the inter-firm variance in profit rates into external and internal components. Building and testing a model from both an industrial organization and a resource-based perspective on the same data, their results confirm the importance and independence of both sets of factors in explaining performance. A scarce endeavor to conceptually integrate Porter's external perspective and the resource-based perspective within the framework of global strategy is Zou and Cavusgil's (1996) tentative global strategy framework (Fig. 1). This integrated conceptual frame is founded upon two key propositions: (1) "Global strategy is an organization's response to external industry globalization. (2) Internal organizational factors constrain an organization's ability to conceive global strategy and its ability to implement the chosen strategy." (Zou & Cavusgil, 1996, p. 61). Zou and Cavusgil's (1996) integrative framework lends strength to the idea that the integration of the industrial organization and the resource-based perspective is a valuable path toward fully capturing the drivers of internationalization and global business performance. However, the clear lack of integrative models in the literature may point at some fundamental inconsistencies between the two perspectives and the potential of integration remains unrealized (Bartlett & Ghoshal, 1991).

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~.~ization Drivers Fig. 1.

An Integrated Global Strategy Framework (Zou & Cavusgil, 1996).

Foss (1996a) states that the two perspectives are almost antagonistic because the (Bain-type) industrial organization (IO) based theory places exclusive emphasis on (structural) product market imperfections whereas the resourcebased theory places exclusive emphasis on factor market imperfections. We endorse Seth and Howard (1994), though, who argue that these emphases are not contradictory but rather complementary. In fact, combining product market imperfection with factor market imperfection and the finn's drive for market power with the firm's drive for efficiency approaches economic reality better than each of the perspectives separately. Nevertheless, we do not underestimate the remaining tensions that exist between the roots and fundamental assumptions of the IO-perspective and those of the resource-based perspective. First, both IO-based theories and resourcebased theories allow firm heterogeneity to exist. In IO-based theories, however, this heterogeneity is caused by characteristics of the industry structure, which result in restraints on output through monopolistic or collusive action as well as through entry deterrence. To the contrary, in the resource-based view heterogeneity accrues from the ability of the firm to acquire, combine and deploy resources in a more rent generating way than its competitors and from the inability of these competitors to copy this effective conduct due to causal ambiguity (see Conner, 1991 for a more profound discussion). Second, in contrast to the resource-based perspective, IO-based theories adopt economic Darwinism (Seth & Howard, 1994). As IO-based theories are theories of comparative statics, it is (implicitly) assumed that firms that deviate from this optimal state will tend toward extinction. Economic Darwinism indicates

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that the environment is an immutable given, and finns merely react to environmental forces (Seth & Thomas, 1994). Third, orthodox IO-based theories presume managerial rationality, free information and no uncertainty. The resource-based perspective, to the contrary, explicitly integrates bounded rationality under uncertainty (Conner & Prahalad, 1996). As a logical consequence, IO-researchers are not interested in unveiling the 'black box' of the firm, which they capture in mathematical optimization functions under stable and exogenous constraints. Scholars adopting a resourcebased perspective refute this representation of a 'maximizing' firm. Building upon the work of Simon (1957), Penrose (1959) and Cyert and March (1963), the resource-based perspective conceives the finn as a collection of productive resources managed by conscious agents, albeit it under conditions of bounded rationality and uncertainty. As a consequence, Simon (1957) argued that 'satisricing' behavior is to be expected instead of optimizing decision-making. In sum, "There are clearly thematic complementarities between the industry analysis framework of Porter and the resource-based approach (Foss, 1996a, p. 19)." The resource-based approach is more oriented toward the internal management of assets and skills within the boundaries of the firm and, building a more profound understanding of the conditions for sustained competitive advantage, it addresses corporate strategy issues more explicitly. The IOperspective, on the other hand, adds an understanding of the constraining external environment. For the time being, however, a full integration seems unlikely and even undesirable. ASSESSMENT INTEGRATED

OF THE DYNAMIC QUALITIES OF THE FRAMEWORK OF GLOBAL STRATEGY

In a dynamic perspective, Porter's (1986) globalization drivers may change and impact upon the optimal degree of globalization. As a consequence, firms may have to change the cross-border configuration of and coordination between its value chain activities, leading to changes in the firm's global market oriented strategy. This may or may not have implications for the degree of internationalization of a firm, As Porter (1986) refers to a structural market imperfections theory to explain the mere existence of internationally operating firms, it is the actual oligopolistic advantage a firm can exploit, which directly defines the degree of internationalization of the firm. In terms of Porter's (1986) framework, a decrease in the degree of globalization of a firm is either a result of the firm's inability to reach the optimal equilibrium position, or a result of changes in the structural parameter scores of the industry. Whereas the former is sub-optimal (cf. economic Darwinism),

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the latter points at a decrease of industry globalization, not at a strategic decision of one particular finn to cope with industry dynamics by reducing its degree of globalization. Being fundamentally a theory of comparative statics, Porter's (1986) framework of global competition has only limited dynamic qualities. Only the optimal degree of globalization of the finn vis-a-vis the industry optimum is at stake. This is merely an equilibrium position, which is defined by the industry globalization drivers and the firm's ability to match this optimal point strategically (Yip, 1989). Although the resource-based view of global strategy is still in its infancy, its dynamic qualities are more promising. Especially a resource-based perspective on international diversification presents itself as a fruitful path toward dynamic modeling on global strategy. Studies, such as Grant, Jammine and Thomas (1988), Kim, Hwang and Burgers (1989), and Robins and Wiersema (1995) point at the potential of a resource-based diversification theory of the finn to be developed toward an explanatory framework for a dynamic internationalization process, including international market withdrawal. Generally stated, diversification theory goes as follows. Assuming a nonstatic (competitive) environment, limited resources and bounded rationality, the optimization of a finn's diversification policy is subject to the current stock of excess resources and to the requirements for additional resources in the current ventures (e.g. foreign product/market-combinations). On the one hand, it may be expected that current activities produce excess resources as well as require new resources in order to hold or develop a sustainable competitive advantage in a particular venture. On the other, new business opportunities may emerge. If management claims that these new ventures would fit better into the portfolio of the diversified finn than some other venture because: (1) the current excess resources can be employed in a better way in this new venture than in any other venture, and (2) the employment of all resources over the new portfolio is Pareto optimal over the old portfolio, a venture may be left in favor of this new one. Although this reasoning highly simplifies the dynamic diversification process - for instance, we did not include mobility barriers - it is a promising path for the explanation of a dynamic internationalization process of the finn, including expansions and retractions to optimize a finn's global market portfolio. In summary, an integrated global strategy framework presents itself as an elegant holistic global strategy framework. However, in our search for a receptive framework for a dynamic perspective on internationalization (including international market withdrawal), we remain with the poor dynamic qualities of the industrial organization part of the model and with paradigmatic anomalies of the integrated model. Nevertheless, a resource-based explanation of a finn's international diversification strategy and international market portfolio

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management turns out to be a promising path toward a dynamic explanation of the internationalization of the firm. COMPARATIVE ANALYSIS WITH THEORETICAL FRAMEWORKS INTERNATIONALIZATION

EXTANT

OF

In this section, we confront the integrative global strategy framework with two dominant theoretical frameworks of internationalization: the 'stages' models, represented by Johanson and Vahlne's (1977, 1990) so-called Uppsala model of internationalization and the transaction cost based theory of international business (e.g. Buckley & Casson, 1998). Since the tenets and roots of both have been presented earlier in this volume (Weisfelder, 2001), we choose not to present them here. For an introduction to and a critical analysis of the 'stages' models, we refer to Andersen (1993). For an elaboration of international business theory, we refer to Dunning (1993). The aim of this section is to compare the power of the three frameworks to explain a dynamic internationalization process and to accommodate international market withdrawal. The Global Strategy Framework versus the 'Stages' Models of Internationalization At the operational level, the 'stages' models of internationalization show a typical predetermined, irreversible and linear-cumulative progression of events (cf. Appendix A). The trajectory to the final stage occurs in a prescribed order and each stage of development is seen as a necessary precursor of succeeding stages. No condition internal or external to the firm can influence or stop this process. Hence, at this operational level, there seems to be no room for proactive strategizing or for a contingency perspective on the internationalization process. For these reasons, both Reid (1984) and Andersen (1993) are pessimistic on the possibility of a further extension of the 'stages' models toward a general theory of internationalization. Trying to build a deterministic model that incorporates all kinds of contingencies seems doomed to failure. At the theoretical level, however, the Uppsala model of internationalization (Johanson & Vahlne, 1977, 1990) - a dominant model in the 'stages' framework - seems to be a powerful theory that builds upon the development of experiential knowledge as its prime explanatory construct. Together with Andersen (1997), Madhok (1997) and Andersen and Kheam (1998), it is argued that the underlying argumentation of the Uppsala model rests upon a truly dynamic perspective of organizational resources. Therefore, it is no surprise that

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Andersen and Kheam (1998) succeeded in setting up a resource-based study of internationalization, which they built upon the Uppsala model of internationalization. Madhok (1997) and Andersen (1997) too have succeeded in integrating the logic of the Uppsala model into a resource-based theory of international operation. Recently, Liesch and Knight (1999, p. 385) concluded that: "A common thread in these theories [of internationalization] is the importance of acquiring beneficial information and knowledge to support foreign expansion." In this perspective, the issue of knowledge internalization - instead of the internalization of external markets - becomes the pivotal focus for future theory building on the internationalization of the firm. In sum, the 'stages' theories of internationalization are a promising point of departure for the development of a resource-based theory of internationalization, which is rooted into a dynamic theory of the firm (e.g. Foss, 1996b, c; Madhok, 1997). The Global Strategy Framework versus TC-based International Business Theory

Some scholars confirm the explanatory power of transaction cost (TC) based theory as a general theory of foreign direct investment3 within the present globalization context (e.g. Rugman, 1986; Rugman & Verbeke, 1992). Others, however, point to the limitations of intemational business theory and its problems for future development, indicating the integration of dynamic factors into the theory as a major challenge (Buckley, 1988, 1990). Dunning (1993, p. 93-94) argues that "[t]he widening strategic options open to firms require a reappraisal of the received theory of MNE activity in a number of ways. [...] Any future modeling of MNE activity must also pay more attention to strategicrelated variables." In the recent literature, two directions are apparent: (1) attempts to integrate pro-active management into theory of international business, and (2) endeavors in which a resource-based view is set against a transaction cost perspective. Next, we briefly discuss these two paths. First, Buckley (1993, 1996) assesses the possibility of integrating pro-active (i.e. 'strategizing') management into international business theory. In the author's perspective, an integration of a theory of management in the international business framework would yield important synergies since the robustness of international business theory would strengthen the flexibility of international strategic management theory and vice versa. However, "To incorporate a theory of management, it is essential to move away from a comparison of states to a comparison of processes" (Buckley, 1996, p. 21). We would argue, however,

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that exactly these key dichotomies - i.e. state versus process and 'economizing' versus 'strategizing' (Williamson, 1991) - affect the core propositions of both frameworks and erect (insurmountable?) barriers to integration. Whereas the purpose of theory of international business is to explain "under what conditions should the interdependent activities be coordinated by the management of a firm rather than externally by market forces?" (Bucldey & Casson, 1976, p. 36), the aim of strategic management theory on internationalization is to analyze how agents decide on particular issues with respect to the international operations and market servicing activities of the multinational in the short run (Calof & Beamish, 1995). TC-based international business theory is a long run equilibrium theory of comparative states. Studying strategizing management requires a change in the fundamental time perspective of the theory. Doz and Prahalad (1991, p. 148) state that: "Transaction cost analysis, by its very assumptions [...], prohibits itself from addressing managerial issues." This, however, firmly limits the dynamic qualities of a TC-based international business theory. Second, the conflict between a transaction cost perspective and a resourcebased perspective for the explanation of the (international) growth of the firm is at stake (Kogut, 1989; Kogut & Zander, 1993, 1995; Conner & Prahalad, 1996; Madhok, 1997). Notwithstanding some endeavors, which confirmed the power of a (refined) transaction cost perspective to explain strategic decision within the context of the internationalization process of the firm (e.g. Jones & Hill, 1988; Rugman & Verbeke, 1992), most recent studies concur in their conclusion that "[a transaction cost] logic, with its narrow focus on (transaction) cost minimization under the assumption of opportunism, is inadequate in and of itself in explaining multinational firm behavior and offers at best a partial lens on the foreign market entry decisions of firms (Madhok, 1997, p. 54)." Kogut and Zander (1993) argue that the assumption of opportunistic behavior of agents - which is central in TC-based theory - is not needed to explain the international growth of the multinational. To the contrary, Kogut and Zander (1993, p. 637) conclude that: "The emphasis on the internalization of failed markets has curiously obscured the fact the primary explanation for direct investment is the possession of an ownership advantage." It is not the failure of the market, as a transaction cost theorist would assume, but the firm's efficiency in transforming knowledge into valuable assets and capabilities relative to other firms, which determines why a firm grows across borders (Kogut & Zander, 1993). We refer to Conner and Prahaiad (1996) for a more profound discussion of knowledge-based transaction costs in absence of opportunism. In sum, all three frameworks of internationalization clearly illustrate that their explanatory power over dynamic issues of the internationalization process is

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limited by the scope and fundamental assumptions of their underlying theory of the firm. As we came across fundamental barriers of dynamism while assessing these frameworks, we can only conclude that we need a fundamentally (new) dynamic theory of the firm from which a new theory of internationalization is to be developed. Nevertheless, we recognize the explanatory power of each of the aforementioned frameworks for particular aspects of the internationalization process of the firm. Taken together, these three frameworks capture the internationalization phenomenon to a great extent. However, just because these frameworks are all rooted into a mutually exclusive theory of the firm - with different fundamental assumptions on the existence and the growth of the firm - we agree with Buckley (1996, p. 47) that "[c]ross-fertilization rather than merger seems the most fruitful way to proceed." Currently, a 'new' theory of the firm is being developed, which builds upon an evolutionary knowledge-based logic (Montgomery, 1995; Conner & Prahalad, 1996; Foss, 1996b, c). TOWARD

A MORE DYNAMIC THEORY INTERNATIONALIZATION

OF

While the progress in theorizing on the internationalization of the firm since the mid-1950s can only be applauded, we have argued that at least two major shortcoming remains throughout major internationalization theories: their static and/or pre-determined nature and their powerlessness in integrating managerial, discretion that induces strategic dynamism. In this final section, we shortly present an emergent resource-based evolutionary theory of the firm, which holds great potential as a platform for the development of more dynamic models of internationalization as well as for the accommodation of international market withdrawal. A new theory of the firm is emerging. This theory stands in contrast to the TC-based theory of the firm as it is rooted into a resource-based perspective of strategy and evolutionary economics.4 In this new framework, the firm is considered as a dynamic but coherent bundle of capabilities and routines (Langlois, 1995; Winter, 1995). This coherent structure possesses pathdependent knowledge bases, which allow it to diversify itself in the market. Scholars such as Kogut & Zander (1993, 1995), Montgomery (1995), Barnett and Burgelman (1996), Spender (1996), and Madhok (1997) have recently contributed to this emerging framework, of which the impact in the management literature is exponentially growing. Although convergence into a well-defined and parsimonious theoretical logic is still to be expected, the high degree of epistemological coherence between the two roots of this framework is promising

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for the development of a robust integrated framework in the near future (Foss, 1996b, c). Foss, Knudsen and Montgomery (1995) point out the main commonalities and differences between the resource-based view and the evolutionary approach. As the resource-based view focuses upon the rent-creating difference between firms with respect to their deployment and development of resources into distinctive competencies and, ultimately in a sustainable competitive advantage, an evolutionary approach goes precisely to the question of where the differences come from, placing the analysis of organizational capabilities center-stage in understanding finn behavior. Therefore, an evolutionary perspective incorporates a process of selection, variation, and retention (Barnett & Burgelman, 1996). Although, they point at some remaining points of potential friction between the two roots, Foss, Knudsen & Montgomery (1995, p. 9) conclude that an integration of the two founding perspectives seems evident as "[B]oth the resource-based and evolutionary approaches share a common doctrinal antecedent in Edith Peurose's work of the 1950s, [...]. [O]ne may see an evolutionary approach as having developed the dynamic aspects of Penrose's theory (her view of the process of firm growth as a continuous and cumulative "unfolding" process), while the resource-based approach has been more pertinent to the analysis of the resources themselves." For the time being, though, the pioneers of this framework are still busy developing its tenets. As variation, retention and selection underlie an evolutionary process at the firm level, we expect searching, learning and choosing to be the managerial actions that drive this process (Levinthal, 1995). As a consequence, we expect this framework to be built upon behavioral assumptions and pro-active managerial decision making. Although the behavioral foundations of a synthesis between a resource-based and an evolutionary approach remain an open issue until today, we can hardly imagine that the new framework would bypass the role of discretionary management.

Knowledge and an Evolutionary Theory of Internationalization Within the scope of this emergent theory of the firm, Madhok (1997) builds upon Kogut and Zander (1993, 1995) to develop an organizational capability (OC) perspective on internationalization. In the OC perspective, international growth is driven by the management and creation of value through the balancing of development and deployment of a firm's capabilities instead of through minimization of (transaction) costs. Madhok (1997, p. 46) comments: "Critical in the OC perspective is that the knowledge market does not fail due to opportunism but, rather, due to superior capabilities of the multinational in deploying

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its know-how and limitations to the capabilities of the other firm in efficiently and effectively acquiring and integrating the particular knowledge into functioning." The existing stock of a firm's resources and capabilities and the requirements of the operational context both direct and limit its strategic evaluation of a particular market entry. Madhok's (1997) framework accommodates an explanation of why firms cross borders in search of product-markets as well as for how they implement this decision, i.e. the entry strategy. Both decisions result from the interplay between the 'ownership effect' - the relative embeddedness of knowledge into the organization - and the 'locational effect' - the relative difficulty of exploiting the firm's existing know-how due to differences between home and host contexts. While a high 'ownership effect' leads a firm to internalize, a high 'locational effect' makes firms choose collaborative strategies. When the potential for erosion in the future value of a firm's know-how due to the 'ownership effect' is greater than that due to the 'locational effect', i.e. when know-how loses its value more through its embeddedness than through the relative difference between contexts, then a firm will prefer to internalize a market. In the opposite case, a firm will prefer collaboration with other firms.

The Dynamic Qualities of an Evolutionary Theory of Internationalization We firmly believe that this framework holds potential as an explanatory platform for the internationalization process of the firm. More specifically, we would suggest a re-evaluation of Johanson and Vahlne's (1977, 1990) theoretical model of the internationalization process of the firm and a further development of its explanatory constructs - market commitment and market knowledge - within this new framework. In an exploratory study, Lamb and Liesch (1998) concluded that an evolutionary model of internationalization encapsulates the full extent of the internationalization process. The changing nature of the constructs of the Uppsala model and their interaction can be conceptualized in an evolutionary model by reorganizing and reformulating the relationships between market commitment, market knowledge and market involvement. Only recently, scholars such as Benito and Welch (1993), Welch and Welch (1996) and Lamb and Liesch (1998) have illustrated how non-unilinearity in the internationalization process of the firm, such as market portfolio rebalancing and, at the extreme, international market withdrawal can be understood within this newly developed theoretical framework. For instance, the evolutionary notion of inter-firm selection of strategic development paths (Nelson & Winter, 1982; Levinthal, 1995; Burgelman, 1996) holds great potential as an explanatory dimension for international market withdrawal. Furthermore, Benito and Welch

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(1993, p. 12) suggest that, "although greater international experience and knowledge normally empower a company to expand its international activities, it may also act in seemingly perverse ways to constrain forward steps at some stages of the overall process." In other words, it is proposed that international market withdrawal can be understood as a decision that results from increased experiential knowledge and, as a consequence, may result in a higher degree of internationalization of the firm. Case study research on international market withdrawal (Pauwels, 2000) reinforces this thesis. In sum, this newly developed framework holds great potential as a platform for the explanation of the emergence of different stages, of a dynamic portfolio of product-market entry modes and of the temporal boundaries of the multinational enterprise throughout its internationalization process.

CONCLUSION The aim of this paper was to assess current theoretical frameworks on their power to explain a dynamic perspective of the internationalization of the firm. More particularly, we were eager to find a framework that would be capable of accommodating international market withdrawal as an empirical extreme. In search for an appropriate theoretical platform, we started the paper with the presentation of an integrated global strategy framework. Moreover, we compared this framework with two well-established framework of internationalization: the 'stages' models and the TC-based theory of international business. While comparing these frameworks, however, we pinpointed the lack of a dynamic orientation as a major weakness of all three. It was concluded that a new theory of the firm is required as a foundation for a more dynamic internationalization theory. An emergent resource-based evolutionary theory of the firm was presented as a promising path toward future theorizing on nonunilinear internationalization processes. In an effort to operationalize empirical research within this new framework, a strategy process approach seems appropriate. This approach adds a welldeveloped epistemological and methodological framework to an emergent knowledge-based evolutionary theory of the firm. Scholars, such as Pettigrew (1992), Van de Ven (1992) and many more have developed the strategy process approach as a successful framework for mid-range theory development on the basis of ideographic analysis. Scholars who adopt a strategy process perspective consider the decisionmaking behavior of the individual manager as a point of departure for the analysis and explanation of a strategy process (e.g. internationalization) which

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itself is characterized by a high degree of complexity, variability and heterogeneity (Melin, 1992). In a strategy process study of internationalization, the following interrelated questions are central issues: "What internal forces impel change in multinationals, regarding strategies, organizational forms, and coordination mechanisms? And how do internal and external forces interplay in the strategic processes of multinationals?" (Melin, 1992, p. 113). This process perspective implies a need for research on strategic and structural changes in multinationals based on a more reciprocal, dynamic and complex process view than the (implicit) simple unilinear conception of progression of earlier theories (Doz & Prahalad, 1991). Longitudinal process studies on the internationalization process have been applauded for bringing above-average insights into how and why strategic decision making led to particular steps in the internationalization process of firms. One of the first to do so was Aharoni (1966) who analyzed the foreign investment decision process. Although later studies are scarce, exceptions such as Doz and Prahalad (1987) and Pauwels (2000) illustrate the potential of this approach, even in a more complex theoretical framework such as the knowledgebased evolutionary theory.

NOTES 1. We refer to Van den Daele (1969) for a typology of progression, which is graphically presented in the Appendix. Whereas most process theories do not go beyond the explanation of unilineair progression, Van den Daele (1969) proposes more complex types of progression: multiple, cumulative, conjunctive and recursive progression. As most real-life processes do not behave in a simple unilinear way, Van de Ven and Poole (1995), among others, argue that a process theory should accommodate these more complex types of progression. 2. Benito and Welch (1997, p. 9) define de-internationalization as "any voluntary or forced actions that reduce a company's engagement in or exposure to current crossborder activities." Although it fits in this definition, international market withdrawal is defined more narrowly. In particular, we exclude: (1) full de-internationalization - a company's full de-internationalization is only symptomatic of corporate failure and organizational decline (cf. Whetten, 1980; Kharbanda & Stallworthy, 1989; McKinley, 1993), (2) forced de-internationalization - i.e. the seizure of foreign-owned property due to nationalization, expropriation, and confiscation or to a political decision to forbid the sales of certain products (Akhter & Choundry, 1993), and (3) operations-related deinternationalization - e.g. de-localization in the textile and automobile industry. 3. Earlier in this issue, Weisfelder (2001) discusses internalization theory of international business (e.g. Buckley & Casson, 1976; Rugman, 1986) and transaction-cost (TC) based theory of international business (e.g. Hennart, 1982) separately. While focusing on how science has progressed in international business throughout the years, this distinction is appropriate. For the purpose of our study, however, we do not distinguish between

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these two theories as we believe that the fundamental explananda of both theories are the same - i.e. transaction cost industrial organization economics. In fact, both theories differ only in their conception of the firm. In the internalization theory, internalization is fundamentally conceived as "the process of making a market in the market (Rugman, 1981, p. 28)." In the TC-based theory of international business, to the contrary, a finn is fundamentally defined as: "a set of contractual relationships (employment contracts) by which a group of agents delegates to a central party the right to constrain their behavior (Hennart, 1986, p. 794)." Although this difference is substantial, both theories refer to a TC-based apparatus for the explanation of internalization. 4. Evolutionary models of economic change seek to explain the dynamic processes of adjustment of firms, rather than the behavior of firms in equilibrium. We refer to Nelson and Winter (1982) for an elaborate introduction to this theory.

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APPENDIX

Unitary

progression

Multiple

U --~

progression

U

Parallel

-----'~

U' ~

V --~

W

V

W

-----~

V' ~

U" ~

V "---~

Divergent

V

7 ~..~

W"

W" W W'

U V,.t

Convergent

[j,......~

V

U" ~

V' "

-q"

~

W'" ~ ....

W

U '' ' ' " ~ Cam ulative progression E.g., a multiple, p a r a l l e l , p a r t i a l l y cumulative model

Conjunctive

Addition

[l ~ a ~

V ~ a.b

~

W ~ a.b.c

Substitution

U ~ a ~

V ~ b

~

W ~ c

Modification

U D a ~

V ~ a"

~

W D a'"

progression U~a------~

E.g., a multiple, parallel, p a r t i a l l y cumulative, conjunctive model

V2a.b

~-.........~ U Da------~

~

W ~a.b.c

f/--'--*

V~a'

~

~~ W ~a "

Probabilistic

= trajectories of multiple paths intersect

Inclusive

= outcomes

Mediative

= a n e a r l i e r e v e n t in o n e ( s u b ) p r o c e s s is a s t e p p i n g b r i d g e t o a l a t e r e v e n t in an o t h e r ( s u b ) p r o c e s s

Recurrent

progression

of earlier events become

U ~a-----~

V ~a"

i n c o r p o r a l e d in l a t e r o n e s

~

W ~ a'"

~

,*

Fig. A1.

X ~ c. a "

/

A Typology of Progression (Van den Daele, 1969).

X ~ a""

f