Research on Knowledge, Innovation and Internationalization, Volume 4 (Progress in International Business Research)

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RESEARCH ON KNOWLEDGE, INNOVATION AND INTERNATIONALIZATION

PROGRESS IN INTERNATIONAL BUSINESS RESEARCH Series Editor: The European International Business Academy (EIBA) Recent Volumes: Volume 1:

Progress in International Business Research – Edited by Gabriel R. G. Benito and Henrich R. Greve

Volume 2:

Foreign Direct Investment, Location and Competitiveness – Edited by John H. Dunning and Philippe Gugler

Volume 3:

New Perspectives in International Business Research – Edited by Maryann P. Feldman and Grazia D. Santangelo

PROGRESS IN INTERNATIONAL BUSINESS RESEARCH VOLUME 4

RESEARCH ON KNOWLEDGE, INNOVATION AND INTERNATIONALIZATION EDITED BY

JORMA LARIMO University of Vaasa, Finland

TIIA VISSAK University of Tartu, Estonia

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2009 Copyright r 2009 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-956-1 ISSN: 1745-8862 (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

ix

PREFACE

xiii

INTRODUCTION

xv

PART I: INTERNATIONALIZATION PROCESSES THE INTERNATIONALIZATION PROCESSES OF THE MULTINATIONAL CORPORATION – A NEW RESEARCH AGENDA Desire´e Blankenburg Holm, Rian Drogendijk, Jukka Hohenthal, Ulf Holm, Martin Johanson and Ivo Zander WHY DO SOME INTERNATIONAL NEW VENTURES BECOME GLOBAL START-UPS? AN EXPLORATORY STUDY OF THE FINNISH ICT INDUSTRY Niina Nummela, Kaisu Puumalainen and Sami Saarenketo A BEHAVIOR-BASED ANALYSIS OF THE CHANGES OF THE STRUCTURE, SYSTEMS, AND CULTURE IN THE INTERNATIONALIZATION PROCESSES OVER TIME Bernhard Swoboda, Martin Jager, Dirk Morschett and Hanna Schramm-Klein

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CONTENTS

PART II: FOREIGN OPERATION METHODS GLOBAL ONLINE ENTREPRENEURSHIP: THE REVIEW OF EMPIRICAL LITERATURE Anna Morgan-Thomas, Marian V. Jones and Junzhe Ji

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INTERNATIONALIZATION PATTERNS OF CHINESE PRIVATE-OWNED SMES: INITIAL STAGES OF INTERNATIONALIZATION AND CLUSTER AS TAKE-OFF NODE Susanne Sandberg

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INTERNATIONALIZATION OF GOODS AND SERVICES: A COMPARISON OF THE INTERNATIONALIZATION OF SERVICE PROVIDERS AND MANUFACTURERS IN SWITZERLAND Ralph Lehmann

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PART III: KNOWLEDGE AND INTERNATIONAL BUSINESS DO JAPANESE INVESTORS USE THEIR JOINT VENTURES WITH EUROPEAN PARTNERS IN EUROPE AS TROJAN HORSES TO CAPTURE THEIR KNOWLEDGE? Shinichi Ishii and Jean-Franc- ois Hennart

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INNOVATION PROCESSES AT UNIT LEVEL: A STUDY OF HEADQUARTERS INVOLVEMENT, INNOVATION IMPACT, TRANSFER PERFORMANCE, AND ADOPTION SUCCESS Francesco Ciabuschi and Oscar Martı´n Martı´n

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EXTERNAL FACILITATION IN THE INTERNATIONALIZATION OF HIGH-TECH FIRMS Anita Juho and Tuija Mainela

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Contents

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PART IV: EMERGING ECONOMIES: INNOVATION AND KNOWLEDGE CREATION MARKET CONCENTRATION AND INNOVATION IN TRANSNATIONAL CORPORATIONS: EVIDENCE FROM FOREIGN AFFILIATES IN CENTRAL AND EASTERN EUROPE Liviu Voinea and Johannes Stephan

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ESCAPING THE TRAP OF LOW-COST PRODUCTION AND HIGH DEPENDENCY: A CASE STUDY OF THE INTERNATIONALIZATION NETWORKS OF SMALL SUBCONTRACTORS FROM THE BALTIC STATES Hans Jansson and Mikael Hilmersson

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INFORMATION PROVISION BY PUBLIC AUTHORITIES AND BUSINESS PARTNERS IN SOUTHEAST EUROPE: EFFECTS ON FIRM PERFORMANCE Alexandra Kaar and Alma Sˇehic´

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LIST OF CONTRIBUTORS Francesco Ciabuschi

Department of Business Studies, Uppsala University, Sweden

Rian Drogendijk

Department of Business Studies, Uppsala University, Sweden

Jean-Franc- ois Hennart

Center and Department of Organization and Strategy, Tilburg University, The Netherlands

Mikael Hilmersson

Baltic Business Research Center, Baltic Business School, University of Kalmar, Sweden

Jukka Hohenthal

Department of Business Studies, Uppsala University, Sweden

Desire´e Blankenburg Holm

Department of Business Studies, Uppsala University, Sweden

Ulf Holm

Department of Business Studies, Uppsala University, Sweden

Shinichi Ishii

Graduate School of Business, Osaka City University, Japan

Martin Jager

Faculty of Business Administration, Economics and Sociology, University of Trier, Germany

Hans Jansson

Baltic Business Research Center, Baltic Business School, University of Kalmar, Sweden

Martin Johanson

Department of Business Studies, Uppsala University, Sweden

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LIST OF CONTRIBUTORS

Marian V. Jones

Centre for Internationalisation and Enterprise Research, University of Glasgow, UK

Anita Juho

Department of Marketing, University of Oulu, Finland

Junzhe Ji

Centre for Internationalisation and Enterprise Research, University of Glasgow, UK

Alexandra Kaar

Department of International Management, Johannes Kepler University, Austria

Ralph Lehmann

University of Applied Sciences HTW Chur, Switzerland

Tuija Mainela

Department of Marketing, University of Oulu, Finland

Oscar Martı´n Martı´n

Department of Business Administration, Public University of Navarre, Spain

Anna Morgan-Thomas

Centre for Internationalisation and Enterprise Research, University of Glasgow, UK

Dirk Morschett

Department of International Management, University of Fribourg, Switzerland

Niina Nummela

Turku School of Economics, Finland

Kaisu Puumalainen

Lappeenranta University of Technology, School of Business, Finland

Sami Saarenketo

Lappeenranta University of Technology, School of Business, Finland

Susanne Sandberg

Baltic Business School, University of Kalmar, Sweden

Hanna Schramm-Klein

Department of Marketing, University of Siegen, Germany

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List of Contributors

Alma Sˇehic´

Department of International Management, Johannes Kepler University, Austria

Johannes Stephan

Chair of International Economics, Technical University Freiberg, Germany

Bernhard Swoboda

Faculty of Business Administration, Economics and Sociology, University of Trier, Germany

Liviu Voinea

National School of Political and Administrative Studies, Romania

Ivo Zander

Department of Business Studies, Uppsala University, Sweden

PREFACE This is the fourth volume in the book series Progress in International Business Research with selected papers from the annual conferences of the European International Business Academy (EIBA). It is with this title that the series was launched by the co-editors Gabriel R. G. Benito and Henrich Greve (BI Norwegian School of Management), based on papers presented during EIBA’s annual conference in December 2005 in Oslo. In their preface to the ﬁrst volume, the previous series editors Torben Pedersen and Ulf Andersson at that time wrote: ‘The aim of the serial is to have an impact on the development of the ﬁeld of international business by publishing interesting, high quality papers and research ideas that for different reasons might not reach the usual publication outlets.’ The second volume in the series Progress in International Business Research was based on the 32nd annual EIBA conference held in Fribourg, Switzerland in December 2006. The volume was given the subtitle ‘Foreign Direct Investment, Location and Competitiveness’ and was co-edited by John H. Dunning (Rutgers Univesity, USA and Reading University, UK) and Philippe Gugler (University of Fribourg). The selected papers were spread over four parts which dealt with: recent advances in the determinants and strategy of multinational business activity; determinants of location competitiveness of countries; emergent and developing countries’ competitiveness and the location of ﬁrms; and suggestions ‘towards a more coherent international policy framework on FDI fostering ﬁrms’ and locations’ competitiveness’. The papers included in the second volume of the EIBA series fully succeeded in their purpose to analyze from several angles the factors which might explain and/or inﬂuence the relationship between the competitiveness of multinational enterprises (MNEs) and the countries in which they operate. The third volume of Progress in International Business Research concentrated on ‘New Perspectives in International Business Research’. Maryann P. Feldmann (University of North Carolina, USA) and Grazia D. Santangelo (University of Catania) as co-editors selected the papers from those presented at the 33rd annual meeting of EIBA in Catania, Sicily in December 2007 with the theme ‘International Business, Local Development xiii

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and Science–Technology Relationships’. The new perspectives chosen by the editors of the third volume related to issues about differences in culture, governance, international entrepreneurship; and technology and international expansion. For this fourth volume the co-editors Jorma Larimo (Vaasa University, Finland) and Tiia Vissak (University of Tartu, Estonia) were able to rely on the papers from EIBA’s 34th annual conference hosted by Enn Listra (Tallinn School of Economics and Business Administration of Tallinn University of Technology) in Tallinn, Estonia in December 2008. The theme of the conference was ‘International Business and the Catching-Up Economies: Challenges and Opportunities’, while the subtitle chosen for this fourth volume is ‘Research on Knowledge, Innovation and Internationalization’. This new volume maintains the standards set up by its predecessors and brings together papers about the internationalization process, the modes of international operations, the relevance of knowledge for international business activities, and innovation and knowledge creation in emerging/ transition economies. The book series Progress in International Business Research over the past four years has provided access to interesting interdisciplinary papers to EIBA members and other interested parties. The volumes include both conceptually stimulating and empirically founded papers, often followed with relevant policy recommendations useful to practioners in business, government and international organizations. The authors, editors of the volumes and Emerald Group Publishing Limited should be congratulated for their efforts in preparing these valuable scientiﬁc contributions to International Business. Danie¨l Van Den Bulcke Series Editor

INTRODUCTION This volume of Progress in International Business Research comprises of a selection of 12 competitive papers from the 34th EIBA (European International Business Academy) annual conference, which was held in Tallinn, Estonia in December 2008 with the theme ‘‘International Business and the Catching-up Economies: Challenges and Opportunities’’. It addresses two main issues – (1) the internationalization process and (2) the role of knowledge and innovation for internationalization – that are important in the current economic slowdown both for catching-up and for other economies, scholars, and practitioners. The volume is divided into four parts. The contributions in the ﬁrst part concern the internationalization processes of multinationals and international new ventures, and the changes of different factors during these processes. In the second part, the main attention is paid to foreign operation methods: online internationalization, the methods used in the beginning of internationalization activities, and the comparison between internationalizing with goods and services. The third part focuses on the importance of knowledge for internationalization: how it is acquired from subsidiaries or headquarters and how the state could help ﬁrms in it. The last part of the volume discusses the importance of knowledge and innovation for the international expansion and performance of enterprises from Central, Eastern, and Southern European transition economies, but also for those entering these countries. The volume provides new theoretical, managerial, and policy insights in the ﬁeld of international business research and it should interest scholars, top managers, and policy makers, but also others intrigued by these issues. Part I starts with the chapter ‘‘The Internationalization Processes of the Multinational Corporation: A New Research Agenda,’’ which is a conceptual paper by Desiree´ Blankenburg Holm, Rian Drogendijk, Jukka Hohenthal, Ulf Holm, Martin Johanson, and Ivo Zander. The authors examine the assumptions and features of the Uppsala internationalization model (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). They state that for studying the internationalization processes of today’s multinational companies (MNCs), it is necessary to have a wider view than xv

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the one proposed by the Uppsala model as the latter still has several gaps and it neglects some important issues regarding such ﬁrms’ internationalization processes. The authors emphasize the need to study three important issues in relation to modern MNCs’ internationalization processes: (1) the opportunity-recognition process that precedes their internationalization (how managers search for, recognize, and exploit opportunities leading to their ﬁrm’s internationalization and how this depends on the company’s strategy, activities, structure, and other characteristics); (2) the internationalization of these ﬁrms’ multiple products (how the ﬁrst, second, and the following products are entered into various international markets; how entering with the following products differs from entering a market for the ﬁrst time with the ﬁrst product); and (3) the internationalization of their foreign units (how foreign subsidiaries begin their own internationalization activities, how being foreign-owned drives or restricts this, and how decisions about their internationalization are made). The second chapter ‘‘Why Do Some International New Ventures Become Global Start-Ups? An Exploratory Study of the Finnish ICT Industry’’ is an empirical paper by Niina Nummela, Kaisu Puumalainen, and Sami Saarenketo. They use the classiﬁcation developed by Oviatt and McDougall (1994) for analyzing international new ventures (INVs). The authors pay attention to three important dimensions: (1) the time dimension (at what age they entered their ﬁrst international markets), (2) the extent of these ﬁrms’ international sales (are they global or only international), and (3) the scope of their international sourcing (which resources they acquire from abroad). They deﬁne global start-ups as ﬁrms that have internationalized rapidly, obtained sales from ﬁve or more countries, and have at least two different types of international activities, compare global start-ups (also called ‘‘born globals’’ in some studies) with other types of INVs and discuss why some INVs become global start-ups, while most of others do not. Based on Web-based survey data about Finnish ICT companies’ inward and outward activities, they state that global start-ups are strongly driven by the international growth orientation of their top management, they have a higher export share and more foreign markets, they also seem to be more active in learning, they tend to perform better, and they are usually more satisﬁed with their international performance than other types of INVs. They also suggest that INVs’ managers should internationalize their value chain as a whole, but for managing the resultant global value networks, they need to obtain capabilities. The third chapter ‘‘A Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture in the Internationalization Processes over Time’’ is an empirical paper by Bernhard Swoboda, Martin Jager, Dirk

Introduction

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Morschett, and Hanna Schramm-Klein. The chapter focuses on changes in 20 partial dimensions of German family-owned ﬁrms’ internal (organizational) structures, information and strategic planning systems, and organizational culture (including leadership characteristics and cultural transfer) along with changes in their target countries (measured according to Ruzzier, Antoncic, & Hisrich, 2007) and establishment chains/operation modes (measured according to Calof & Beamish, 1995; Chang & Rosenzweig, 2001; and Manolova, Brush, Edelman, & Greene, 2002) in 10 years. Based on survey and interview data, the authors show that internationalization is not always an incremental (linear) process: over time, many companies follow periods of expansions and reductions (e.g., divestment). They conclude that changes in internationalization – quickening, stagnation, and reduction – affect ﬁrms’ internal structures relatively fast while changes in systems usually take place later and changes in leadership and culture are even slower. The authors state that this impact can be also reversed: changes in structures, systems, and culture can also lead to some changes in internationalization. Thus, if ﬁrms wish to expand abroad successfully, they should pay attention to their organizational structures, information and planning systems, growth, and risk orientation. Part II starts with the chapter ‘‘Global Online Entrepreneurship: The Review of Empirical Literature,’’ which is a conceptual paper by Anna Morgan-Thomas, Marian V Jones, and Ji Junzhe. The authors analyze 45 empirical works published in 1997–2008 in peer-reviewed academic international business, information technology, entrepreneurship, and economics journals and those containing quantitative and/or qualitative data in the ﬁeld of global online entrepreneurship (GOE). The authors deﬁne GOE by rephrasing McDougall and Oviatt’s deﬁnition (2000, pp. 903) of international entrepreneurship as a ‘‘ya combination of innovative, proactive and risk-seeking behavior that involves using e-commerce technologies to cross national boundaries and create value in organizations.’’ They compare these studies’ main objectives, theoretical frameworks, methodologies, main ﬁndings, and other characteristics and also develop research implications. The authors conclude that most of these studies have focused on US-based enterprises and those from other Englishspeaking countries; such studies are often conﬁrmatory (statistically verifying theory-driven hypotheses) and focus either on the internationalization of Internet new ventures and e-commerce corporations or on the impact of the developments in e-commerce on the internationalization of non-Internet-related ﬁrms. They also state that such studies have used different conceptual approaches and theoretical frameworks, applied a wide

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array of research methods, and used different data sources. The authors suggest that in the future, more attention should be paid to theory and methodology development and to conducting quantitative and qualitative longitudinal studies. The ﬁfth chapter ‘‘Internationalization Patterns of Chinese Private-Owned SMEs: Initial Stages of Internationalization and Cluster as Takeoff Node’’ is an empirical paper by Susanne Sandberg. The chapter analyzes the takeoff and initial stages of internationalization of Chinese SMEs and the importance of clusters and other network relationships for such ﬁrms. Based on case study data from ﬁve privately-owned ﬁrms from the Yangtze River Delta region, the author concludes that these companies follow different internationalization paths. While some of them start from domestic sales and then continue with indirect exports like the Uppsala model (see, e.g., Johanson & Vahlne, 1977) predicts (this seems to be the most dangerous path as the companies learn the least and create no direct relationships with foreign ﬁrms), some of such ﬁrms try to develop local and foreign activities in parallel, while some neglect vast domestic growth opportunities and start fast foreign expansion through clusters. So, they follow the ‘‘born global’’ route (see, for instance, Knight & Cavusgil, 1996). They can access clusters and create useful network relationships through making foreign acquisitions, creating joint ventures, attracting inward investments, participating in trade fairs, co-operating with local ﬁrms, and through other methods. The author also states that some of the network relationships built for advancing international activities in a certain market can be also useful for expanding further to other markets or increasing a ﬁrm’s market share in its domestic market. The sixth chapter ‘‘Internationalization of Goods and Services: A Comparison of the Internationalization of Service Providers and Manufactures in Switzerland’’ is an empirical paper by Ralph Lehmann. The chapter studies how the internationalization of service and manufacturing ﬁrms differs and whether service exporters need different export promotion measures than manufacturers. Based on interview materials and survey data from 132 Swiss service providers and 198 production enterprises, the author concludes that service exporters are often younger and smaller, and they sense the psychological, linguistic, and cultural distance more strongly than manufacturing ﬁrms as they have to create personal contacts with their customers. Moreover, they use direct sales forms more often and for that they need local personnel. Thus, the availability of such personnel is an important criterion for service ﬁrms’ foreign market selection. In addition, compared to manufacturing companies, service providers use direct distribution systems more often, and they also tend to enter more foreign

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markets at the same time as their internationalization is more frequently triggered by their customers. Thus, service exporters need special export promotion programs as their needs differ from the ones of manufacturers. The author suggests that special attention should be paid to marketing, information provision about different cultures and market conditions, and risk management. Part III starts with the chapter ‘‘Do Japanese Investors Use their Joint Ventures with European Partners in Europe as Trojan Horses to Capture Their Knowledge?,’’ which is an empirical study by Jean-Franc- ois Hennart and Shinichi Ishii. The chapter investigates if the partnership behavior of Japanese partners in joint ventures (JVs) with European partners is better explained by (1) the Trojan Horse Hypothesis (THH; assuming that Japanese ﬁrms establish JVs to steal their partners’ knowledge and dissolve JVs – liquidate them, buy out their European partners, or sell off their stakes to their partners or other ﬁrms – as soon as they have achieved their goal; see, e.g., Reich & Mankin, 1986) or by (2) the ‘‘cooperative specialization’’ view (CS; arguing that Japanese ﬁrms set up JVs to achieve long-term cooperative specialization; see, for instance, Zeng & Hennart, 2002). Based on the data of 38 two-partner Japanese-European manufacturing JVs in Europe in 1987 and the same JVs in 1996 (if they still existed), the authors state that the partnership behavior of Japanese ﬁrms is more consistent with the CS view as the majority of JVs have not dissolved, but there was also some evidence in support of the THH view as some JVs have ended with buyouts. Still, this does not mean that all these buyouts occurred because the Japanese partners stole their partners’ knowledge and wanted to liquidate the JVs after that: some also took place because the European partners changed their strategies and were interested in selling their stakes. The eighth chapter is ‘‘Innovation Processes at Unit Level: A Study of Headquarters’ Involvement, Innovation Impact, Transfer Performance, and Adoption Success’’ by Francesco Ciabuschi and Oscar Martı´ n Martı´ n. The chapter investigates the impact of headquarters’ (HQ) involvement in innovation development and transfer at their business units’ level (innovation is deﬁned as ‘‘putting into practice product designs and manufacturing processes that are new to the ﬁrm’’; see Nelson, 1993, while innovation development is conceptualized ‘‘as transforming an idea into a completed entity’’). The empirical part of this paper is based on face-to-face interview data about 71 innovations in 52 business units from 14 countries from Europe, Asia, and the USA, and the authors use partial least squares technique (PLS) in the data analysis. Based on the results the authors propose that higher HQ involvement in innovation development process

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may lead to a stronger innovation impact for its subsidiaries (HQ may also contribute with additional resources, their own competence and technology) and this, in turn, may increase its role in innovation transfer not only to the particular unit, but also to its other units. On the other hand, if HQ is actively involved in interunit innovation transfer, this may negatively impact the innovation transfer process performance as it may result in higher costs and lower subsidiary satisfaction. The authors suggest that HQ should be more selective in deciding which innovations they should actively transfer: this should be done only if these innovations are important and if this may increase overall MNC performance in the future, while if innovations are ‘‘marginal,’’ then HQ should not actively try to transfer them. Part III ends with the ninth chapter ‘‘External Facilitation in the Internationalization of High-Tech Firms,’’ which is an empirical paper by Anita Juho and Tuija Mainela. They study how internationalization can be facilitated through an external development program. Based on a longitudinal case study of two small high-tech Finnish ﬁrms that participated in a one-year business development program Global Clusters, the authors conclude that internationalization depends on the ﬁrm itself (e.g., its knowledge, experience, technology, relationships with other companies, and other resources), the network consisting of institutions and actors whose main task is facilitating internationalization (see, for instance, Prashantham & McNaughton, 2006; Welch, Welch, Wilkinson, & Young, 1996), and the ﬁrm’s ability to participate in such a network and beneﬁt from it, for instance, to learn and create relationships. The authors state that internationalization facilitation networks have different roles: they may participate in knowledge transferring, experience sharing, diagnosing ﬁrms’ problems, and analyzing their business concepts and potential, searching for potential partners – including customers, venture capitalists, and business experts – and helping to create and maintain such partnerships, and they should also offer different services for different companies depending on their needs and capabilities. If these issues are taken into account, then small and inexperienced ﬁrms can compensate their deﬁciencies by actively participating in such networks and, as a result, internationalize more successfully. Part IV starts with the tenth chapter ‘‘Market Concentration and Innovation in Transnational Corporations: Evidence from Foreign Afﬁliates in Central and Eastern Europe,’’ which is an empirical paper by Liviu Voinea and Johannes Stephan. The chapter studies if local market concentration impacts R&D and innovation activities of transnational companies’ foreign afﬁliates in ﬁve transition economies: Romania, Poland, Croatia, Slovenia, and East Germany. The authors investigate how the innovation activities of

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foreign afﬁliates operating in concentrated home markets (those where competition is low, e.g., where monopolies or large oligopolies exist) differ from the activities of those operating in nonconcentrated markets. Based on data from 736 manufacturing companies (most of them SMEs), they state that the ﬁrms from concentrated markets export more to their foreign owner’s network and use more of its technology, are more active in conducting basic and applied research (without spending signiﬁcantly more on it) but less active in process innovation and acquiring knowledge from outside their owner’s network. Thus, they can be considered as ‘‘implementing agents’’ (according to the term introduced by Gupta & Govindarajan, 1991) of their owners. These ﬁrms are not actively stimulating innovation; moreover, the risk of transfer pricing is higher in such afﬁliates. The authors suggest that as foreign afﬁliates operating in nonconcentrated markets are more active technologically and are more likely to transfer new technologies to ﬁrms not belonging to their foreign owner’s network, policy makers should focus their support policies on such companies. The eleventh chapter ‘‘Escaping the Trap of Low-Cost Production and High Dependency: A Case Study of the Internationalization Networks of Small Subcontractors from the Baltic States’’ is an empirical paper by Hans Jansson and Mikael Hilmersson. The authors analyze how small exporting subcontractors from emerging markets leap over the barrier of low technology and high dependency. Based on a case study of eight small and medium-sized internationalizing enterprises from the Baltic Sea Region (four of them from Western Europe exporting to Eastern Europe and four from Eastern Europe exporting to Western Europe, all in the beginning of the internationalization process as deﬁned by Johanson & Vahlne, 2003), the authors state that Baltic subcontractors have been seriously affected by the current economic crisis: it has increased their vulnerability as demand has decreased, and they are getting out-competed by new low-cost producers. For escaping the trap of low-cost production and high dependency, ﬁrms use two main strategies: (1) lowering costs and integrating themselves more into the contractors’ (customers’) production processes and (2) becoming more independent, developing their own products and moving upstream in the value chain or the vertical customer network. They also show that for small subcontractors, it is very important to learn, develop marketing competencies, participate in international business networks, and concentrate on increasing sales rather than reducing costs; in other words, the second strategy should be preferred. The ﬁnal chapter ‘‘Information Provision by Public Authorities and Business Partners in Southeast Europe: Effects on Firm Performance’’ is an

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empirical paper by Alexandra Kaar and Alma Sˇehic´. The authors study how local employees, public authorities, and local business partners (suppliers, customers, competitors, and other ﬁrms in the region) provide information about the host country environment to foreign ﬁrms investing to Southeast Europe (SEE), how this helps them to overcome the liability of foreignness (for more information about the concept, see Hymer, 1976) and affects their success in the particular foreign market. Based on their results from survey data of 80 Austrian ﬁrms operating in SEE (most of them SMEs active in several countries and getting a substantial share of their turnover from that region – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, the Kosovo, Montenegro, Romania, Serbia, and Slovenia), the authors conclude that getting information from local business partners inﬂuences ﬁrm’s performance positively and signiﬁcantly, while there was no signiﬁcant impact of information provision by public authorities on ﬁrm’s performance. The results also showed that local employees’ proactivity (their ability to suggest improvements, develop solutions, and also successfully implement them) facilitates information provision by local business partners. The authors suggest ﬁrms of all sizes to establish local networks or participate actively in them as this enhances their performance. We hope that the important topics covered in the 12 chapters of this volume will provide both enjoyable and intellectually stimulating reading and somehow have an impact on the research agenda of the participants in future EIBA conferences. To conclude, we would like to thank Dr. Huu Le Nguyen for his valuable help in the preparation of the manuscript and Matthias Baum, Jim Bell, Jarna Heinonen, Jukka Hohenthal, Pia Hurmelinna-Laukkanen, Leila Hurmerinta, Piotr S. Kaczmarek-Kurczak, Stephane Lhuillery, Krzysztof Obloj, Eriikka Johanna Paavilainen, Lucia Piscitello, Shameen Prashantham, Erik Stavnsager Rasmussen, Alex RialpCriado, Matija Rojec, To˜nu Roolaht, Sami Rumpunen, Maksim Saat, Birgitta Marianne Sandberg, Pamela Sharkey Scott, Maria Smirnova, and Marius Wehner for reviewing the articles.

REFERENCES Calof, J. L., & Beamish, P. W. (1995). Adapting to foreign markets: Explaining internationalization. International Business Review, 4(2), 115–131. Chang, S., & Rosenzweig, P. M. (2001). The choice of entry mode in sequential foreign direct investment. Strategic Management Journal, 22(8), 747–776.

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Gupta, A. K., & Govindarajan, V. (1991). Knowledge ﬂows and the structure of control within multinational corporations. Academy of Management Review, 16(4), 768–792. Hymer, S. H. (1976). The international operations of national ﬁrms: A study of direct investment. Cambridge: MIT Press. Johanson, J., & Vahlne, J.-E. (1977). The internationalisation 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. (2003). Business relationship learning and commitment in the internationalization process. Journal of International Entrepreneurship, 1(1), 83–101. Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalisation of the ﬁrm – Four Swedish cases. Journal of Management Studies, 12(3), 305–322. Knight, G. A., & Cavusgil, S. T. (1996). The born global ﬁrm: A challenge to traditional internationalization theory. In: S. T. Cavusgil & T. K. Madsen (Eds), Advances in international marketing: Export and internationalizing research – Enrichment and challenges (Vol. 8, pp. 11–26). Greenwich, CT: JAI Press. Manolova, T. S., Brush, C. G., Edelman, L. F., & Greene, P. G. (2002). Internationalization of small ﬁrms: International factors revisited. International Small Business Journal, 20(1), 9–31. McDougall, P. P., & Oviatt, B. M. (2000). International entrepreneurship: The intersection of two research paths. Academy of Management Journal, 43(5), 902–906. Nelson, R. (Ed.) (1993). National innovation systems: A comparative analysis. Oxford: Oxford University Press. Oviatt, B. M., & McDougall, P. P. (1994). Toward a theory of international new ventures. Journal of International Business Studies, 25(1), 45–64. Prashantham, S., & McNaughton, R. B. (2006). Facilitation of links between multinational subsidiaries and SMEs: The Scottish technology and collaboration (STAC) initiative. International Business Review, 15(5), 447–462. Reich, T., & Mankin, E. (1986). Joint ventures with Japan give away our future. Harvard Business Review, 64(2), 78–86. Ruzzier, M., Antoncic, B., & Hisrich, R. D. (2007). The internationalization of SMEs: Developing and testing a multi-dimensional measure on Slovenian ﬁrms, entrepreneurship and regional development. An International Journal, 19(2), 161–183. Welch, D., Welch, L., Wilkinson, I., & Young, L. (1996). Network development in international project marketing and the impact of external facilitation. International Business Review, 5(6), 579–602. Zeng, M., & Hennart, J.-F. (2002). From learning race to cooperative specialization. In: F. Contractor & P. Lorange (Eds), Cooperative strategies and alliances (pp. 189–210). London: Elsevier.

Jorma Larimo Tiia Vissak Editors

PART I INTERNATIONALIZATION PROCESSES

THE INTERNATIONALIZATION PROCESSES OF THE MULTINATIONAL CORPORATION – A NEW RESEARCH AGENDA Desire´e Blankenburg Holm, Rian Drogendijk, Jukka Hohenthal, Ulf Holm, Martin Johanson and Ivo Zander ABSTRACT Purpose – We examine the fundamental assumptions and features of the Uppsala model of internationalization and argue that we need to look beyond this model for studying internationalization processes in the multinational corporations (MNCs) of today. The purpose of our paper is to identify gaps and neglected issues regarding MNCs’ internationalization processes that demand further theoretical and empirical study. Methodology – Our approach is conceptual: based on the most cited model on internationalization, the Uppsala model, we approach the complex internationalization processes that continuously go on in modern MNCs. We use related bodies of literature, on MNC structure and Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 3–20 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004005

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strategy, headquarters–subsidiary relationships, MNC subsidiary strategy and development, and opportunity seeking and entrepreneurship, to ﬁll in the gaps and develop the emerging research themes. Findings – We identify the following three issues that need further investigation: the opportunity recognition process preceding internationalization processes in MNCs, the internationalization of multiple products within the conﬁnes of the growing MNC, and the internationalization of foreign MNC units. Research limitations – In this paper, we open up new research ﬁelds, but do not offer empirical studies to inform us about these relevant issues. Future research should study these issues empirically, preferably through case study methodologies and/or with longitudinal designs. Originality – The contribution of our paper is its identiﬁcation of three research issues in relation to internationalization processes of modern MNCs, which we argue are neglected by contemporary research.

INTRODUCTION Now more than 30 years ago, researchers at Uppsala University published two seminal papers that conceptualized the internationalization process of the ﬁrm (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). In contrast to mainstream research at that time, what became known as ‘‘the Uppsala model’’ built upon the behavioral assumptions (see Penrose, 1959; Cyert & March, 1963) that managers are boundedly rational and uncertainty avoiding. By taking small steps outside the home country, managers could work their way around limited international experience and gradually reduce their uncertainty about foreign markets. Accumulating knowledge about foreign markets allowed them to subsequently perceive new business opportunities and to act upon them by making more far-reaching commitments. Internationalization was thus perceived as an incremental process, starting with geographically and culturally closest markets and gradually extending further away from the ﬁrm’s country of origin. The Uppsala model has had a signiﬁcant impact in the ﬁeld of international business, inspiring a stream of research that has mainly supported but also challenged the original model’s assumptions and predictions (for a summary of this extensive literature, see, e.g., Johanson & Vahlne, 1990, 2006). At the same time, and perhaps because of the

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model’s broad-based success and impact, work within the conﬁnes of the original model has prevented the exploration of several conceptually and empirically relevant issues in the internationalization process of the ﬁrm. In this paper, we set out to investigate a number of gaps in our knowledge about internationalization, mapping out three areas of research that have slipped through the net cast by the original model and remaining largely ignored by contemporary research. In the following sections, we start by delineating some of the mostly implicit assumptions of the original Uppsala model to illustrate what types of issues and questions have been left unanswered in the extant literature. We place particular emphasis on the prehistory of internationalization, the internationalization of multiple products within the conﬁnes of the growing multinational corporation (MNC), and the internationalization of foreign units. We then go through each of the three unexplored areas of research in more detail, explore some emerging hypotheses to be tested in future research, and ﬁnally summarize our arguments in a new agenda for internationalization process research.

THE ORIGINAL UPPSALA MODEL IN PERSPECTIVE To understand why several conceptually and empirically relevant issues have remained unexplored in the internationalization process literature, three mostly implicit assumptions or features of the original Uppsala model need to be considered. First, the original model is based on the assumption that managers act only once entrepreneurial opportunities have been identiﬁed and proven in the domestic market. While cumulative processes play a central role in the subsequent internationalization of the ﬁrm, what precedes its ﬁrst step into foreign markets is by and large treated as a ‘‘black box’’. Indeed, how the underlying opportunity recognition process works, that is, how managers search for, recognize and act upon opportunities that lead to internationalization in the ﬁrst place is still an underdeveloped ﬁeld in the international business literature (Mathews & Zander, 2007). The lack of attention to preinternationalization processes may partly explain why internationalization process theory has only recently come to address the particular characteristics of international new ventures or the so-called ‘‘born globals’’ (Oviatt & McDougall, 1994, 1995; Bloodgood, Sapienza, & Almeida, 1996; Madsen & Servais, 1997).

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Second, the Uppsala model describes the internationalization process of a single-product ﬁrm, picturing the linear internationalization of a ﬁrm’s ﬁrst major product or ‘‘ﬁrst hit’’ as it is exploited in foreign markets. Most MNCs, however, develop into multiproduct or multibusiness ﬁrms, and any observed internationalization processes, therefore, soon become a mix of several products ﬁnding their way into various international markets. Yet, we know very little about the internationalization processes of additional products or ‘‘second hits’’ and how these relate to the ﬁrm’s ﬁrst internationalization process. Several largely unexplored questions emerge in this context. Do empirically observed internationalization processes reﬂect several products ﬁnding potentially differentiated ways into international markets? To what extent have additional products or second hits beneﬁted from commitments made and experiential knowledge gained through the initial process of internationalization? Are internationalization processes of these second hits dependent upon or in various ways dictated by the initial attempts to enter foreign markets? Third, the original model assumes incremental commitments to foreign markets and the stepwise introduction of new activities in each local market. The fundamental perspective is internationalization from one focal point and added resources and activities in a number of foreign locations. As a consequence, very little research has considered and addressed how foreign units may internationalize themselves, that is, how these units in turn expand outside the borders of the national market in which they are located. This is a highly relevant issue as current research suggests that foreign units are increasingly able to contribute to the strategic and technological development of the MNC group (Andersson, Forsgren, & Holm, 2002) and it is known that they are increasingly active in international markets themselves (Forsgren, Holm, & Johanson, 1992; Holm & Pedersen, 2000). The internationalization processes of individual foreign units introduce several questions linked to the opportunities and constraints imposed by the existing multinational organization. For instance, to what extent do internationalization processes of foreign units draw upon the accumulated experiential knowledge developed in the MNC, speciﬁcally the knowledge gained from ﬁrst, second, and additional hits (or the knowledge accumulated in other internationalizing units)? Do foreign units draw upon already established structures of the MNC when entering foreign markets, or do they design internationalization processes speciﬁcally suited for locally conceived products? To what extent does the internationalization of foreign units invoke economic, political, or other trade-offs in the internationalization of the entire multinational group?

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Paradoxically, because of these three mostly implicit assumptions that underpin the Uppsala model more than three decades of research has produced in-depth knowledge about a limited period and part of the internationalization processes of the ﬁrm. This is not to say that the approach has been mistaken or incorrect, but merely points to the fact that there are broad areas of research that have remained essentially unexplored in the international business literature. To illustrate, the shaded areas of Fig. 1 highlight the scope of the Uppsala model’s original internationalization process, starting from the home country unit and gradually extending into a number of foreign locations and units. A ﬁrst hit is manifested by its exploitation in one or several foreign markets, which can be considered established in terms of volume and acceptance among relevant business network actors (Blankenburg, 1995). The nonshaded areas indicate internationalization processes that have not been captured by the Uppsala model, but which are all common aspects of the evolving MNC. Because these processes may occur in parallel and also emanate from different parts of the established international organization, we ﬁnd it relevant to talk about the internationalization processes of the ﬁrm

FOREIGN LOCATION Foreign Unit

FOREIGN LOCATION Foreign Unit Preinternationalization activities

Fourth hit FOREIGN LOCATION Foreign Unit

HOME COUNTRY Home Country Unit

FOREIGN LOCATION

Preinternationalization activities

First hit

Preinternationalization activities

Foreign Unit Second hit

Preinternationalization activities

FOREIGN LOCATION Foreign Unit

Third hit

FOREIGN LOCATION Foreign Unit

Fig. 1.

The Internationalization Processes of the Firm.

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and in the case of internationalizing foreign units also about the internationalization of the already established MNC. Internationalization thus refers to international expansion processes initiated anytime and anywhere in the ﬁrm or the MNC and not exclusively to the path from nonexporting domestic ﬁrm to internationalized ﬁrm as described by the original Uppsala model.

THREE UNEXPLORED ISSUES IN THE INTERNATIONALIZATION PROCESS LITERATURE We now turn to a more in-depth discussion of three unexplored issues in the internationalization process literature, speciﬁcally related to opportunity seeking and the prehistory of internationalization, the internationalization of multiple products within the conﬁnes of the growing MNC, and the internationalization of foreign units. Internationalization as an Opportunity-Seeking Process Studies of internationalization processes, where the ﬁrm develops opportunities, are an unexplored research area. The roots of the concept of opportunity development can be traced back to two inﬂuential researchers in entrepreneurship, Schumpeter (1934) and Kirzner (1973). Their legacy has during the 1990s initiated an emerging research tradition where entrepreneurship is viewed as an opportunity development process. But, in the ﬁeld of international business, research on the proactive ﬁrm that develops internationalization opportunities is still missing. Traditionally, research on internationalization has viewed export and production as the main activities driving the process and internationalization has been thought to be driven by a reduction of perceived uncertainty by acquisition of experiential knowledge. However, this is a rather simplistic view of the ﬁrm, which often is a complex organization operating in a dynamic and complex environment. Therefore, we suggest a more extended deﬁnition of the ﬁrm and the internationalization of the ﬁrm (Andersen, 1993). Whereas the original Uppsala model views the ﬁrm as a reactive actor, we deﬁne it as a proactive opportunity-seeking actor that not only reacts, but also deliberately and nondeliberately acts upon and creates business opportunities. In line with Schumpeter’s and Kirzner’s conceptualization of opportunities, we view opportunities in the form of new customers, new suppliers, new products and

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production technologies, and new ways of organizing the internal operations as important means that, if recognized and acted upon, will enhance and accelerate the internationalization of the ﬁrm (Mathews & Zander, 2007). Consequently, opportunities refer to something new for the ﬁrm, but also to something that is perceived to have a positive impact on the performance of the ﬁrm. The proactivity of the ﬁrm implies that it actively searches for and tries to create opportunities. Traditionally, ﬁnding opportunities has not always been seen as a product of deliberate search; instead various scholars argue that opportunities are also a product of characteristics of the ﬁnder, like alertness (Kirzner, 1992), or events and causes that are nonpredictable and out of control for the ﬁrm, like accidents (Hayek, 1980), serendipity (Denrell, Fang, & Winter, 2003), and luck (Barney, 1986) and thereby to a large extent out of logic. Other approaches indicate that, while still viewing opportunity as something relative and perceptual, a logic how ﬁrms ﬁnd and exploit opportunities can be identiﬁed. For instance, the strategy, in terms of activities (Johanson & Johanson, 2006), or the context like the ﬁrm’s network (Andersson, Blankenburg Holm, & Johanson, 2006) or the character of the market entered (Johanson & Johanson, 2006) are observed to inﬂuence the ﬁnding of opportunities. In addition, also the ﬁrm’s and its top-management’s prior knowledge base (Shane, 2000) and social networks (Ardichvili, Cardozo, & Ray, 2003; Ellis, 2000) and the ﬁrm’s ability to make sense of an opportunity (Weick, 1995) can play a role in the internationalization of the ﬁrm. Depending on the ﬁrm’s existing body of knowledge, ﬁnding an opportunity can be ranged on a continuum from discovery to recognition (Hohenthal, Johanson, & Johanson, 2003; Shane, 2000). An opportunity that is perfectly discovered by the ﬁrm is completely unknowable ex ante, which means that discovery of opportunities is accompanied by surprise; it was not expected (Demmert & Klein, 2003). On contrary, an opportunity that is recognized is possible to deﬁne and specify in advance; the ﬁrm recognized it when it appeared. A perfect recognition of an opportunity corresponds exactly with what was expected ex ante and does not mean a surprise. We, therefore, advance that the ﬁrm ﬁnds opportunities based on what it does, what it knows and where it is. The assumption that ﬁrms are opportunity seekers and not only uncertainty reducers or cost minimizers has several consequences for theories on the internationalization of the ﬁrm. A speciﬁc ﬁeld that we identify as under-researched is the preinternationalization of the ﬁrm. We do not know enough about how and why ﬁrms begin to internationalize.

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One way of approaching preinternationalization is by viewing ﬁnding and exploiting opportunities as a driving factor. Opportunities are not found in isolation. They are not autonomous, but are more or less likely to be found and exploited dependent on the ﬁrm’s strategy, organizational structure, and knowledge bases. But, they are also contingent on the ﬁrm’s context. Thus, two critical questions that follow are: 1. How do, for instance, the ﬁrm’s strategy and performed activities inﬂuence the type of opportunities found and exploited? 2. Moreover, how do the ﬁrm’s context and organizational structure have an impact on what type of opportunities the ﬁrm is likely to ﬁnd? Most new business opportunities are found in the vicinity of existing business activities (see Cyert & March 1963) and as the ﬁrm is active in speciﬁc markets, while it is entering new foreign markets, the characteristics of these markets in terms of stability or turbulence, customers and suppliers, and institutional framework, are likely to inﬂuence both how opportunities are found and what type of opportunities are found. For instance, a stable market where the ﬁrm is able to build long-lasting relationships with other ﬁrms and where the institutions are transparent and universal is likely to offer different opportunities for the ﬁrm than those found in a dynamic market where institutions as well as relationships with other ﬁrms are opaque and where it is difﬁcult to make forecasts. Thus, it follows that internationalization is usually directed toward speciﬁc counterparts situated in speciﬁc contexts and the ﬁrm thus tends to ﬁnd opportunities connected to what it does in that speciﬁc context. However, this does not mean that all ﬁrms from a speciﬁc industry, entering the same markets, will ﬁnd and exploit the same opportunities. What type of opportunities and how the opportunities are found and exploited is also a result of the knowledge the ﬁrm possesses. The ﬁrm develops knowledge connected to the speciﬁc context as well, thus opening up new business opportunities that could not have been seen without the situated learning process connected to that speciﬁc context. These opportunities can usually only be seen from the particular viewpoint of the ﬁrm that has developed this unique knowledge conﬁguration. Opportunities are more or less opaque for ﬁrms, which makes that some opportunities can be found by many ﬁrms, while the ﬁnding of other opportunities is limited to ﬁrms with the speciﬁc resources and knowledge demanded to exploit that opportunity. The resources and knowledge of a speciﬁc ﬁrm will have been developed to handle the needs of that ﬁrm and in connection to its speciﬁc products and business counterparts. The skills and

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capabilities of the ﬁrm will thus be connected to its history and will be more or less unique. When it enters a new market the ﬁrm will see some business opportunities that are relatively opaque or difﬁcult to see for other ﬁrms. Although the entering ﬁrm is confronted with the liability of newness, it also has an advantage based on bringing a unique set of knowledge to that market. In line with this argumentation, we propose the following research question: 3. How does the ﬁrm’s knowledge conﬁguration and learning process, when entering a market, inﬂuence the type of opportunities found, and the way in which they are found and exploited? Entering a new market is usually connected to exploiting the unique set of knowledge in a new setting, but as the ﬁrm acts in that setting it expands its knowledge, thus widening its opportunity horizon. Within a wider opportunity horizon the chances of ﬁnding opportunities will increase. In large complex organizations, this opportunity horizon is inﬂuenced by both the speciﬁc knowledge set of the unit and that of other units within the organization. The chances of ﬁnding opportunities will thus be even bigger in these types of organizations.

The Internationalization of Multiple Products within MNCs According to the Uppsala model (Johanson & Vahlne, 1977, 1990), ﬁrms incrementally increase their knowledge and commitment on international markets. The original model was based on observations of the successive steps that ﬁrms make in each foreign market (Johanson & Wiedersheim-Paul, 1975). Johanson and colleagues argued that managers who operate locally learn from experience about how to do business in the local market and such speciﬁc experience is difﬁcult to transfer between markets. Another observation made is that ﬁrms may decrease the risks resulting from the lack of knowledge about foreign markets by starting their internationalization ﬁrst in markets nearby and similar to the home market, then move further away (Johanson & Wiedersheim-Paul, 1975). This suggests that knowledge about how to do business is somewhat usable across borders: apparently, having experiences in nearby markets decreases the perceived risks of markets further away. These observations made in the 1970s and the internationalization process model based on them start from the idea of a parent company in a home market deciding on internationalization: that is, a single, linear process. This assumption may hold for initial

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internationalization processes of single-business line ﬁrms starting to internationalize, but not for MNCs. MNCs are multiproduct, multibusiness, and multiexperience corporations and this complicates the processes of international expansion, but the received literature evolving from the original Uppsala model does not take this into account when studying internationalization processes. Rare exceptions to this are the studies of sequential entry processes at the level of business lines of ﬁrms by Chang (1995) and Chang and Rosenzweig (2001), though their studies are limited to entry into one market (the United States) and they do not explain potential relations between internationalization processes of different business lines within ﬁrms. Based on the original Uppsala model, we could argue that the internationalization of subsequent businesses can build upon the experiential knowledge acquired in the ﬁrst process. Market speciﬁc knowledge acquired in the ﬁrst process could be used for establishing a second business in the same market. Subsequent internationalizations (second or later ‘‘hits’’) should then be seen as expansions of the ﬁrst market entry, maybe even organized and managed by the ﬁrst generation managers. Alternatively, it is possible and even likely that subsequent internationalization is initiated and managed at a higher level in the ﬁrm; corporate or business headquarters. In that case, we need to describe and explain internationalization of the multinational as being initiated and occurring at several organizational levels, including HQ and subsidiary levels and to consider experiential knowledge among individual managers as well as other forms of organizational learning (see Forsgren, 2002). Are such subsequent internationalization processes of later hits faster, more efﬁciently executed and less incremental, that is, are prior experiences beneﬁcial and has the perceived risk related to subsequent internationalization decreased? Can we, therefore, expect that the internationalization process(es) of the MNC occur at an increasing pace, and can we expect that the gradual accumulation of market knowledge allows radical changes in foreign investment behavior (Forsgren, 2002)? A related issue is that with increasing size and resources that follow from being a MNC, the relative risk associated with a certain foreign investment will decrease in the sense that the consequence of failure has a limited impact. Further, this thinking implies that new foreign investment may occur within the multinational without substantial market experience, which would challenge the assumption on the role of experience driving decisions about foreign investments. Our paper addresses important questions including the following: where are internationalization processes initiated and organized in the multinational ﬁrm? Can we distinguish the internationalization processes of

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subsequent businesses from the ﬁrst? Are subsequent internationalization processes path dependent upon prior internationalization? What factors drive internationalization of the multinational in more than one dimension? MNCs are multiproduct, multimarket, multiunit, and multitechnology ﬁrms and we propose that initiating internationalization consists of two steps. In the ﬁrst step, the MNC commits resources toward a speciﬁc business in a foreign market, which can either be a completely new foreign market for the MNC or a market where it is already operating. In both cases, we speak of increased internationalization. The second step is when the MNC begins to exploit the fruits of committed resources and thereby integrates the business into the on-going international operations. Various units in the MNC can initiate new business, not only the HQ or units in the home market. How the MNC or speciﬁc units within the MNC act upon the new business is contingent on (i) the degree of decentralization and room of maneuver given to the respective units, (ii) how resources are allocated and used within the MNC, and (iii) to what extent the MNC and its units have prior knowledge about this type of business. These three aspects follow Hayek’s analysis (1945) of how resources and knowledge are used in a hierarchical economic organization. Regarding the ﬁrst aspect, the extent to which the various units in the MNC can act upon new businesses is dependent on the degree of decentralization in the organization: in a decentralized MNC the units enjoy a high degree of freedom to act without consulting the HQ or other units within the MNC and consequently they are likely to act quicker than units in MNCs with a more centralized structure. For MNCs and businesses operating in dynamic markets, a decentralized structure is preferred as a unit that perceives changes can also act upon the changes. However, and relating to the second aspect, in order to internationally expand units need resources, since acting implies costs; thus, the unit has to make investments in new resources like products, technologies, competence, and others. The unit can sometimes accumulate resources in order to be used when needed, but there are also resources that are allocated by the HQ or other units in the MNC. Thirdly and ﬁnally, prior knowledge of expanding business internationally, which resides in the MNC, is tightly linked to action taken upon new business, new products, and new markets, as prior knowledge is likely to have given the MNC a cause to develop organizational routines. Such routines concern, for instance, how decisions are made, communication is performed, and opportunities are evaluated. Accepting that internationalization processes in MNCs are not just linear processes initiated at HQ, but instead concern the international expansion

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processes of the complex organization that characterizes the MNC, issues like centralization–decentralization, resource allocation processes, and knowledge and knowledge transfer cannot be ignored.

The Internationalization of MNC Subsidiaries Received research on internationalization processes describes and explains how ﬁrms internationalize, not how units within a ﬁrm internationalize. However, today’s reality is that internationalization differs among units within the MNC and that many subsidiaries are internationally active (Forsgren, Holm, & Johanson, 2005). Large subsidiaries have themselves developed into multinational organizations: they coordinate activities within the MNC and they source, produce, and sell in other markets than their own. However, the internationalization processes of subsidiaries are unexplored ﬁelds of study. In the study of the MNC, most researchers have taken a ‘‘HQ-perspective’’ and devoted attention to HQ-subsidiary relations (Hedlund, 1981; Ghoshal & Nohria, 1989; O’Donnell, 2000) and subsidiary roles in MNCs (Bartlett & Ghoshal, 1986; Jarillo & Martinez, 1990; Gupta & Govindarajan, 1991). Others have taken a subsidiary point of view and studied subsidiary strategy (Taggart, 1998), subsidiary development (Araujo & Rezende, 2003; Birkinshaw & Hood, 1998; Holm & Pedersen, 2000), and subsidiary inﬂuence (power) over ﬂows of intraorganizational resources and strategic decision-making (Ghoshal & Bartlett 1990, Andersson, Forsgren, & Holm, 2007). However, the internationalization of subsidiaries themselves has not been extensively associated to these issues. Foreign subsidiaries are the actual manifestations of the MNC’s international expansion. Successively, subsidiary managers gain business experiences, take initiatives, and sometimes make resources available for internationalization beyond their national markets. Whereas the internationalization of the ﬁrm from the HQs’ domestic country has been labeled internationalization of the ﬁrst degree, the latter has been labeled internationalization of the second degree (see Forsgren et al., 1992, 2005). With a few exceptions (e.g., Araujo & Rezende, 2003), there has been no explicit investigation of how subsidiaries internationalize and what mechanisms drive internationalization processes at the subsidiary level. Research has yet to study to what extent and in what way belonging to an MNC drives or possibly restricts the internationalization of subsidiaries. It is in this context unclear how experiences collected and business opportunities created by subsidiaries themselves result in subsequent internationalization steps

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(Forsgren, 2002). Opportunities and initiatives for international expansion may arise in several subsidiaries in the MNC. However, given that subsidiaries do not exercise full control over the necessary resources and to the extent that their possibilities to inﬂuence corporate decisions are limited they cannot undertake whichever internationalization step they want. In our conception then, the MNC is likely to contain a portion of business opportunities for internationalization at the subsidiary level, which remains unrealized (or delayed) due to the inability of subsidiaries to act upon them, because of limited resources, the inability to communicate their potential, or due to limited inﬂuence on political processes within the MNC. This dilemma is contingent on the extent of separation between the units experiencing the opportunities for internationalization (the subsidiaries) and the unit(s) controlling the resources for expansion (e.g., headquarters). In a contrasting scenario, the internationalizing subsidiary more straightforwardly receives and utilizes experiences and resources of other units within the MNC. For instance, the experience from a prior internationalization process, say from an earlier ‘‘hit’’ initiated at the home-based unit or another subsidiary, can facilitate the internationalization of the subsidiary in related areas. Bartlett and Ghoshal (1989) touch upon this issue when stating that subsidiaries ‘‘may exploit parent company knowledge and capabilities through world-wide diffusion and adaptation’’; although they do not speciﬁcally stress the issue of subsidiary internationalization (see also Taggart, 1998). A subsidiary may also receive resources for development of its business, when that is in the interest of its peer units: those units that are engaged in internal business relationships with that subsidiary (Forsgren et al., 2005). Furthermore, for the purpose of reaching economies of scale, central R&D units develop new products for world-wide exploitation offering the subsidiary a possibility to exploit new business with low or reduced costs. In such ways, corporate strategic decisions can drive the internationalization of a subsidiary although it (initially) lacks relevant experiences or other resources. Internationalization of the subsidiary is in these cases based on the experience, resources, and initiatives controlled and taken by other units than the subsidiary itself. On the basis of the above discussion, we conclude that an issue that deserves attention is where in the multinational business experience is collected and decisions are made regarding internationalization of subsidiaries. This associates to the role of resource interdependencies and cooperation in the intracorporate network and political processes in the MNC. An assumption in the Uppsala model is that the locus of learning is at the business ‘‘frontline’’. In the MNC, this becomes challenging since

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hierarchical levels to some extent separate centralized resources and strategic decisions from business experience of units at the operational level. Additionally, an MNC may consist of several units with different experiences and capabilities that seek to internationalize (Araujo & Rezende, 2003; Forsgren, 2002). This complicates the making of commitment decisions at different levels in the MNC: several units at different levels will all hold experiences regarding certain product and market combinations that are not necessarily consistent, but some units are more able to act in line with their experience due to stronger control over necessary resources than others.

A NEW RESEARCH AGENDA While the theoretical underpinnings of the Uppsala model have been explored and tested in detail (for overviews see Johanson & Vahlne 1990, 2006), several of the underlying assumptions or features of the original model have remained mainly implicit and unchallenged. Three of these implicit assumptions stand out as particularly important in our paper: (1) internationalization starts with a given, original product, or business that has no prior history of search and development, (2) the internationalization process is represented by one single product or business expanding into international markets, and (3) internationalization starts in the ﬁrm’s country of origin and stops at the level of individual foreign units, that means, once a particular foreign market has been entered it represents a geographical end point in the ﬁrm’s internationalization process. Of course, the literature has not been ignorant of the resulting biases in theoretical and empirical work, but the issues of preinternationalization, the internationalization of second hits, and internationalization of foreign units of the established MNC have been largely neglected in the extant literature. While the internationalization process literature has traditionally drawn upon these simplifying assumptions, it does not accurately reﬂect the operations of ﬁrms and evolving MNCs as we know them. The implicit assumptions underpinning the Uppsala model may be applicable during a short period of initial international expansion of the ﬁrm, but relatively soon the picture becomes more complex as new products are discovered and make their ways into foreign markets and foreign units become the initiators and drivers of their own internationalization processes (e.g., Zander & Zander, 1996). While to date most empirical work has built on the

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assumptions and features of the original Uppsala model, acknowledging the complexity of the evolving MNC opens up a broad set of both theoretical and empirical issues. The overarching questions we need to investigate to create a more comprehensive picture of the internationalization processes of the ﬁrm include the opportunity-seeking processes that precede and inﬂuence internationalization, how second and additional hits of the growing ﬁrm internationalize, and how foreign units of the established MNC design and implement their own internationalization processes. Addressing and answering these questions will give us a better understanding of the evolving and ultimately complex multinational, multiproduct organizations. They are also issues of sustained managerial relevance in the growing and evolving MNC, highlighting a number of trade-offs in decisionmaking that concerns products with potentially different resource requirements and units at different organizational levels. As the MNC is associated with exceptional variance in both dimensions, sustained and broadened empirical research on the internationalization processes of the ﬁrm promises to provide unique insights and input into other domains of research (Roth & Kostova, 2003). Inspired by the calls to identify the big future questions in the wider ﬁeld of international business (Buckley, 2002; Peng, 2004), and given the scope of the issues explored in the present paper, we aim to infuse new steam into this maturing ﬁeld and open up a new agenda for research on the internationalization processes of the ﬁrm.

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WHY DO SOME INTERNATIONAL NEW VENTURES BECOME GLOBAL START-UPS? AN EXPLORATORY STUDY OF THE FINNISH ICT INDUSTRY Niina Nummela, Kaisu Puumalainen and Sami Saarenketo ABSTRACT Purpose – This study analyzes international new ventures (INVs) by means of the classiﬁcation developed by Oviatt and McDougall (1994): global start-ups (GSUs) are compared with other types of INVs. Design/methodology/approach – The empirical data for the study were collected via a Web-based survey of Finnish ICT companies. Particular emphasis was placed on the operationalization of the key constructs as well as on the sample formation, in which both the number of international markets served and the coordination of international activities were taken into consideration.

Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 21–40 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004006

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Findings – The ﬁndings of this study indicate that GSUs are particularly driven by the international growth orientation of the top management. They also seem to perform better than other types of INVs. Practical implications – From the managerial point of view, the ﬁndings of this study indicate that managers of INVs should be encouraged to internationalize their value chain as a whole, despite the risks. However, those managers making these decisions should also be aware of the capabilities needed for managing the global value networks they create. Originality/Value – This exploratory study reveals that studying INVs from a holistic perspective – including both inward and outward activities – produces interesting ﬁndings and opens new avenues for future research. This theme clearly deserves more attention. Our classiﬁcation of INVs into smaller subgroups also proved to be fruitful, not least concerning GSUs.

INTRODUCTION International entrepreneurship (IE) as a discipline has emerged at the crossroads of international business and entrepreneurship (McDougall & Oviatt, 2000), and during the last 15 years the theme has aroused increasing interest among researchers (see, e.g., Rialp, Rialp, & Knight, 2005). One of the path-breaking studies in this ﬁeld – which was also acclaimed as the 2004 JIBS article of the decade – was the one written by Oviatt and McDougall (1994). Their study has also been referred to as a ‘‘ymajor milestone in international business research’’ (Autio, 2005). Oviatt and McDougall tried to explain the phenomenon of early internationalization within a framework that combined the key elements of sustainable international new ventures (INVs). They deﬁned an INV as ‘‘a business organization that, from inception, seeks to derive signiﬁcant competitive advantage from the use of resources and the sale of outputs in multiple countries’’ (Oviatt & McDougall, 1994, p.49). The deﬁnition incorporates three dimensions: (1) time to the international market, (2) the extent of international sales, and (3) the scope of international sourcing. As the authors explicitly point out, the focus of this deﬁnition is on the ﬁrm’s age rather than its size or other characteristics. This deﬁnition of INVs is probably most commonly used in later studies, especially those of an empirical nature. However, there is considerable

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variation in operationalization, and it seems that most of the studies have classiﬁed companies as INVs only in terms of age/time to market and the number of markets served (Hurmerinta-Peltoma¨ki, 2004). Market spread has also aroused interest, that is, whether the company could be called global, or if it is just international. However, a more serious deﬁciency in earlier research is the fact that the majority of studies have completely ignored the aspect of sourcing resources from international markets (Servais, Zucchella, & Palamara, 2006). Furthermore, researchers seem to treat all companies that meet the abovementioned two criteria (age and sales) for an INV en masse (Hallba¨ck & Larimo, 2006), although Oviatt and McDougall (1994) stated that the basic elements manifested themselves in many ways, and that companies could be classiﬁed into smaller categories (see Fig. 1). In other words, there are ventures that coordinate the conversion of resources from many parts of the globe into outputs that are sold in whatever locations they are most greatly valued. On the other hand, there are also INVs that are mainly exporters, adding value by shifting outputs from where they are to locations in which they are needed. The former – labeled global start-ups (GSUs) in Oviatt and McDougall’s classiﬁcation – are the ones that are closest to the ‘‘born globals’’ of other studies (Hallba¨ck & Larimo, 2006), whereas the latter just share the time dimension of the original deﬁnition, that is, they have entered international markets quite soon after their inception.

Number of countries involved Few I

Many

II Multinational trader

Export/import Start-up

Few Number of value chain activities coordinated across countries

Many

III

IV Geographically Focused Start-up

Global Start-up

Fig. 1. Types of International New Ventures. Source: Oviatt and McDougall (1994, p. 59).

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This study represents an attempt to respond to calls for the investigation of two issues in the literature on IE. First, as Coviello and Jones (2004) have emphasized, in terms of development of the IE ﬁeld it is imperative that researchers devise a commonly understood vocabulary. This should then be used in the construct development in order to make it more rigorous, as McDougall and Oviatt (2000) demanded. We have therefore tried to take into consideration all three dimensions in the original deﬁnition put forward by Oviatt and McDougall (1994). Second, including the aspect of resources is our response to calls for further study of international sourcing (see, e.g., Servais et al., 2006). However, the focus of this study is on the process of becoming a GSU; in other words we were interested in why some INVs become GSUs, whereas others perhaps do not. So far our knowledge about the outcomes of early internationalization is limited (Zahra, 2005), and in our opinion this would be worth investigation. In line with Hallba¨ck and Larimo (2006), we attempt to analyze the rapidly internationalizing ﬁrm in accordance with Oviatt and McDougall’s (1994) typology. Using survey data from Finnish ICT ﬁrms we hope to identify not only the distinctive characteristics of GSU, but also their links to company performance.

A TYPOLOGY OF INTERNATIONAL NEW VENTURES Fig. 1 depicts Oviatt and McDougall’s (1994) classiﬁcation of different types of INVs. These different types are distinguished according to the number of value-chain activities the ﬁrm coordinates across borders, and to the number of countries entered. GSUs appear as an extreme type comprising ﬁrms that coordinate many activities across many countries, but also obtain sales from numerous markets. New international market makers (Types I and II) are the most common category of INVs, proﬁting mainly from the importing or exporting of goods to/from countries in which they are from/to countries in which they are required to import/export. Although the typology is rather static, both Oviatt and McDougall (1994) and, later, Hallba¨ck and Larimo (2006) have demonstrated that ﬁrms actually move between categories, and thus it includes a dynamic element (the arrows in the ﬁgure indicate some potential developmental paths). In fact, this movement between categories slightly resembles the traditional process model of internationalization, in which companies gradually increase their involvement on international markets (see, e.g., Johanson & Wiedersheim-Paul, 1975; Bilkey & Tesar 1977; Johanson & Vahlne, 1977;

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Luostarinen, 1979). As examples of these kinds of companies, researchers have introduced other types of rapidly internationalizing ﬁrms as extensions to the classiﬁcation, such as ‘‘born-again globals’’ (Bell, McNaughton, & Young, 2001) and ‘‘globalizing internationals’’ (Gabrielsson & Gabrielsson, 2004). Our thoughts are quite strongly in line with the arguments of other researchers who have pointed out that, in fact, the internationalization process of INVs is not that different from the process in other ﬁrms, particularly when the focus is on the longer term and not just on the time of entry to the ﬁrst foreign market (Jones & Coviello, 2005; Hashai & Almor, 2004; Moen & Servais, 2002). The decisive differentiating factor seems to be the managers’ commitment to internationalization: this international growth orientation (see Jantunen, Nummela, Puumalainen, & Saarenketo, 2008; Nummela, Puumalainen, & Saarenketo, 2005) is either there from the start or it develops incrementally. All in all, internationalization could be described as a time-based entrepreneurial process, which is steered by the strategic decisions companies make in the course of time (Jones & Coviello, 2005). These strategic decisions are discussed next.

STRATEGIC DECISIONS MADE BY INTERNATIONAL NEW VENTURES Internationalization is generally understood as an evolutionary process during which a company adapts to the international environment (e.g., Calof & Beamish, 1995). The traditional models view this as a step-by-step process with clearly distinguishable separate phases (for a review of process models, see, e.g., Leonidou & Katsikeas, 1996). It is possible to identify the different phases by following changes in operational mode, attitudes toward internationalization, information acquisition and transition, and the level of export involvement, for example. In the majority of cases, companies progress from one phase to another without an explicit strategy, although important decisions are made, such as the choice of a more complex operational mode on international markets. Thus, it could be argued that according to traditional process models the ﬁrm’s behavior is affected more by internal or external stimuli than by the deliberate development of strategies (Jones & Coviello, 2005; Moen & Servais, 2002). In the case of INVs the key strategic decision – to go international – is made very early in the company’s life cycle, possibly at the time of its

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founding (Autio, Sapienza, & Almeida, 2000) or even before it legally exists. Later strategic decisions include the choice of country and entry mode (Andersen, 1993, 1997), and the two are strongly intertwined in SMEs (Papadopoulos, 1987). According to the traditional view of internationalization, the number of served international markets evolves gradually from few to many. In contrast, the literature on IE and new ventures suggests that ﬁrms may enter multiple countries from inception (Oviatt & McDougall, 1994; Madsen & Servais, 1997). As an appealing determinant of these ﬁrms’ behavior, Autio et al. (2000) introduced the concept of ‘‘learning advantage of newness,’’ positing that ﬁrms entering international markets early on develop knowledge and routines that facilitate entry into additional foreign markets. Ventures that internationalize later on in their life cycle, on the other hand, may have developed routines within the domestic market that hinder their capability or willingness to absorb knowledge about opportunities and practices in foreign markets. It has often been argued that INVs tend to initiate their internationalization in lead markets and when they become saturated, they expand to other countries (see Rialp et al., 2005). However, according to Crick and Jones (2000), these ﬁrms often utilize a two-phase strategy in their market selection: ﬁrst, they engage in market-spreading in order to identify opportunities globally, and then they focus their resources on selected and the most promising markets. What, then, are these lead or preferred markets? Recent empirical studies among software ﬁrms indicate that market size (in terms of purchasing power), and a short geographical distance in particular, are good market-selection indicators (Ojala & Tyrva¨inen, 2007, 2008). The number of markets served, on the other hand, seems to be positively related to the company age, the nature of the products, the internationalization of the industry, and the small size of the domestic markets (McNaughton, 2003). On the other hand, researchers appear to agree that INVs choose lowcommitment entry modes in order to reduce resource constraints and risks involved (Aspelund, Madsen, & Moen, 2007). This is in line with the ﬁndings of Mullins and Forlani (2005) that high-growth successful companies are very risk-averse, particularly when investing their own money. After all, later change of entry mode may be costly, risky, and laborious (see Pedersen, Petersen, & Benito, 2002; Petersen & Welch, 2002; Petersen, Welch, & Welch, 2000; Calof & Beamish, 1995). It may be that the use of networks in the selection of entry mode and market (Crick & Jones, 2000; Crick & Spence, 2005; Mort & Weerawardena, 2006; Moen, Gavlen, & Endresen, 2004) is an attempt to decrease the risk related to these

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decisions. In this respect, INVs do not seem to differ signiﬁcantly from ﬁrms that internationalize at a slower pace. This is probably due to the fact that the choice of entry mode reﬂects the company’s resources and capabilities, which need to be adjusted if it is to pursue its growth strategy (see Bernardino & Jones, 2003). Additionally, among software ﬁrms the entrymode choice is intertwined with the product strategy and the choice of service model (Ojala & Tyrva¨inen, 2006). No decisions are made in a vacuum. In other words, the context is also of importance (on the role of industry in internationalization, see, e.g., Boter & Holmquist, 1996; Johanson & Mattsson, 1988). Prior studies note that the industry conditions in which the ﬁrm operates determine its international market strategy to a signiﬁcant extent. For example, McNaughton (2003) found in his study on Canadian micro-exporters that ﬁrms operating in international industries had larger export-market portfolios. On the other hand, knowledge-intensive ﬁrms often operate in nascent industries in which there is so far no direct competition. These industries are also quite fast moving and volatile, which often requires speedy adaptation and decisionmaking (see Crick & Spence, 2005; Andersson, 2004; Autio et al., 2000; Eisenhardt & Brown, 1998). Therefore, in order to be successful companies should select strategies that are ﬂexible and support constant opportunity recognition from the environment. However, the international activities discussed above reﬂect only one dimension of internationalization, that is, outward internationalization, and a more holistic view has often been often called for. The linkage between inward- and outward-led activities – such as buying and selling – has been addressed in particular (Korhonen, Luostarinen, & Welch, 1996; Fletcher, 2001; Servais & Jensen, 2001). Given that for an INV the international sourcing decision may be highly strategic – it has even been labeled an entrepreneurial act (Servais et al., 2006) – there is an obvious need also to consider the question of the international value chain as a whole.

THE INTERNATIONAL VALUE CHAIN OF INVS The literature provides several ways of measuring the degree of internationalization in ﬁrms, such as foreign sales as a percentage of total sales, the proportion of foreign to total assets, and that of foreign to total numbers of employees (Sullivan 1994; Geringer, Beamish, & daCosta, 1989). Given the number of other spread/diversity indices, however, these measures do not capture the essence of the degree of internationalization of the value

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chain as a whole. As Asmussen, Pedersen, and Petersen (2007) state, the renewed attention in global sourcing and off-shoring among international ﬁrms has further exposed the inadequacies of the measures, which are entirely insensitive to how ﬁrms conﬁgure their international value chains and hence fail to capture important aspects of the phenomenon. The location of a ﬁrm’s value-added activities is one indication of the extent of its globalization. According to Yip (1989), a multi-domestic strategy represents a situation in which most of the value chain is reproduced in every country, whereas with another form of international strategy – exporting – most of it is kept in one (home) nation. Finally, a global strategy represents a condition in which the value chain is splintered in order to reduce costs so that each activity may be conducted in a different country. In addition to internationalizing sales, INVs have also shifted toward a more international value chain as a whole, and have thus adopted a different business model than many traditionally internationalizing small ﬁrms (Servais et al., 2006). This development is probably most evident among GSUs, which build their international business on both international sourcing and sales. What, then, drives some INVs toward this new business model? In our opinion, the decisive differentiating characteristic of GSUs is probably the commitment of top management to internationalization, which has previously been measured among knowledge-intensive ﬁrms in terms of international growth orientation (Jantunen et al., 2008; Nummela et al., 2005). Therefore, we propose the following: P1. Global start-ups are characterized by a higher international growth orientation than other ﬁrms. Further, as mentioned earlier, we are also interested in exploring the linkage between GSUs and their performance. We aim to respond to Zahra’s (2005) call for a better understanding of performance variation in different types of INVs. However, investigating performance is never straightforward, and it is clearly a ‘‘double-edged sword’’ in the case of GSUs in that the coordination of both the international value chain and sales is taken into consideration. Namely, one might expect that because of their increased efﬁciency and the cost beneﬁts due to international sourcing, as well as increased sales from numerous markets, GSUs would enjoy greater proﬁts than other ﬁrms. On the other hand, international growth is often expensive and requires considerable investments. Furthermore, coordination of the fragmented international value chain is a laborious

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task requiring special capabilities, which these ﬁrms do not necessarily possess. Therefore, given the exploratory nature of this study, we propose the following: P2. Global start-ups differ from other ﬁrms in terms of performance.

RESEARCH DESIGN Data Collection New-venture internationalization may be subject to industry effects such as knowledge intensity, maturity, concentration, and appropriability (Fernhaber, McDougall, & Oviatt, 2007). In order to control for such effects we concentrated our analysis on a single industry, and deﬁned the population of interest as small- and medium-sized Finnish companies providing valueadded services in the ICT sector. These include content providers and software providers for service-platform and management systems. Hardware manufacturers and companies providing mainly educational or consultancy services were excluded from the study. Due to the rapid development of the ICT sector and the unsuitability of standard industry classiﬁcation codes, there was no single up-to-date sampling frame available for our purposes. Therefore, the names and contact information of the companies were sought from multiple sources, including the Kompass Finland database, The Statistical Bureau of Finland database of Finnish companies, IT magazines, and the Internet sites of the companies themselves, universities, cities, science parks, incubators, venture capitalists, and industry organizations. The data were collected by means of a structured questionnaire. Since the companies of interest were operating in the ICT sector, an Internet-based questionnaire was considered an appropriate data-collection tool. A total of 493 companies were identiﬁed, and contacted by telephone between November and December 2001. In this phase, 34 companies were found ineligible, and 74 refused to participate in the study. On the following day the 385 companies that agreed to participate received an e-mail message containing instructions for answering the web-based questionnaire. A reminder message was sent to companies that had not responded within two weeks. Of this sample, 123 companies replied, resulting in an effective response rate of 26.8 percent (123/459) of the eligible target population. This rate could be considered adequate as the questionnaire was rather extensive

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and the respondents were mainly chief executive ofﬁcers or managing directors with busy time schedules. Firms established before 1981 were eliminated from the analyses, as well as ﬁrms that did not have any international operations at the time of data collection and those whose internationalization had not started within eight years from establishment. Thus, the analyses were conducted on an effective sample of 46 INVs. The validity and reliability of the results were secured by several means. For example, the questionnaire was carefully pre-tested in a number of ﬁrms. Furthermore, it was targeted at CEOs and managing directors, who are considered the most knowledgeable informants regarding internationalization issues in SMEs. A comparison of the early and late respondents (the late respondents being assumed to be similar to non-respondents) was conducted in order to assess non-response bias (see Armstrong and Overton, 1977). No signiﬁcant differences were found between these two groups, and non-response bias was therefore not expected to have an effect on the results of the study.

Measures The GSU construct is an essential element in this study, and a lot of attention was paid to its operationalization. Thus, GSUs were deﬁned as ﬁrms obtaining sales from ﬁve or more countries, and having at least two different types of international activities. The classiﬁcation of companies according to these two dimensions is illustrated in Table 1; there were 20 GSUs in the sample. Another key concept in the study is the international growth orientation of the top management. In this case the measure was adapted from Nummela et al. (2005). The scale was based on four items, and the responses for each item were collected on a ﬁve-point Likert scale with the anchors 1 ¼ totally disagree and 5 ¼ totally agree. A composite measure was formed from an Table 1.

0–1 activities 2–6 activities Total

International Activities of the Companies Studied. 1–4 Countries

5þ Countries

Total

8 13 21

5 20 25

13 33 46

Why Do Some International New Ventures Become Global Start-Ups?

31

average of the items, and the internal consistency was good (Cronbach’s a ¼ 0.85). The items were: We will have to internationalize in order to succeed in the future. The growth we are aiming at can be achieved mainly through internationalization. The risks brought about by internationalization are too great (reversed). The domestic market still offers sufﬁcient growth potential (reversed). We were also interested in how the GSUs performed compared to the other ﬁrms in the data set. However, the operationalization of performance is never straightforward, although international performance has attracted a lot of attention among researchers during the last couple of decades. There is still no common valid operationalization of the concept, however. It appears from the literature that the two primary approaches to performance assessment are the objective and the subjective (e.g., Cavusgil & Zou, 1994; Katsikeas, Leonidou, & Morgan, 2000). As an objective indicator we applied export intensity (foreign turnover as a percentage of total turnover), and as subjective performance measures we used multiple perceptual indicators. The respondents were asked to indicate their agreement (1 ¼ totally disagree; 5 ¼ totally agree) with the following statements: We are generally satisﬁed with our performance in international markets (1). We have achieved our international-sales objectives (2). We have achieved our international-market-share objectives (3). Internationalization has enhanced our proﬁtability (4). Internationalization has improved our image (5). Internationalization has enhanced our learning (6). Our investments in internationalization seem to pay off well (7). The average of items 1, 2, 3, 4, and 7 was named subjective quantitative performance (Cronbach’s alpha ¼ 0.910), and items 5 and 6 were combined and termed subjective qualitative performance (Cronbach’s alpha ¼ 0.692). Regardless of the ﬁrm’s international growth orientation, other ﬁrmspeciﬁc factors could also have an impact on internationalization and performance. We therefore controlled for ﬁrm size and international experience in the analysis (see Jantunen et al., 2008). As larger ﬁrms have larger pools of resources to exploit and the possibility of achieving advantages of scale in international operations, ﬁrm size is assumed to have a positive effect on the scope of activities, market diversiﬁcation, and international performance. Annual sales turnover (reported in million

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euros) was used as an indicator. International experience also has a potentially positive impact, according to theories of experiential learning and stages theories of internationalization (Johanson & Vahlne, 1977; Welch & Luostarinen, 1988), and was therefore measured as the number of years that the ﬁrm had operated in international markets.

FINDINGS The International Activities of INVs Our operational deﬁnition of GSUs included the number of activities abroad and the number of countries in which the ﬁrm operated. A closer examination of the various activities in Table 2 reveals that they did, indeed, have distribution, sales, and marketing activities abroad signiﬁcantly more often (Fisher’s exact test based on a 2 2 contingency table). In general, inward activities were not as common as outward activities, and this difference was even more highlighted among the GSUs. Table 3 gives some more descriptive comparisons concerning the internationalization of INVs. GSUs were, on average, two years older than the other INVs: the average age of the companies at the time of data collection was between ﬁve and seven years. The differences in size are not statistically signiﬁcant, as there is very large variation among GSUs. The average international experience was about six years, implying that the typical time to starting international activities was less than two years from establishment. The other INVs had two or three years’ less experience. In line with our operationalization, GSUs had, on average, 10 more target countries than other INVs, and also a signiﬁcantly wider scope of activities. Table 2.

Percentages of Firms with Various Activities Abroad. Other INVs Global Start-Ups Chi Square Fisher 1-Tailed p.

Manufacturing abroad Sales and marketing abroad Distribution and retailing Delivery and logistics abroad OEM abroad Buying subcontracting abroad Purchasing abroad N

23.1% 42.3% 38.5% 15.4% 23.1% 23.1% 3.8% 26

45% 90% 70% 25% 25% 20% 15% 20

2.47 11.04 4.51 0.66 0.02 0.06 1.77

0.105 0.001 0.033 0.328 0.575 0.547 0.211

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Why Do Some International New Ventures Become Global Start-Ups?

Table 3.

Descriptive Statistics of the INVs. Other INVs

Year established Employees Turnover Years of international experience Time to start Countries Activities abroad, max 7 IGO Export intensity Subj. quantitative performance Subj. qualitative performance

GSU

T

N

Mean

S.D.

N

Mean

S.D.

26 25 24 26 26 26 26 26 26 25 25

1996.58 19.96 1.91 3.31 2.11 3.27 1.69 3.63 21.46 2.41 3.60

3.239 27.552 3.222 1.738 2.321 3.715 1.490 0.985 29.653 0.921 0.559

20 20 11 20 20 20 20 20 18 20 20

1994.20 84.00 12.80 6.00 1.80 14.10 2.90 4.10 52.64 2.85 4.20

4.819 169.163 24.395 4.401 2.118 10.290 1.165 0.670 33.594 1.104 0.594

1.90 1.68 1.48 2.59 0.47 4.49 2.99 1.79 3.25 1.46 3.48

The international growth orientation of GSUs turned out to be signiﬁcantly higher than among other INVs. In terms of international performance, GSUs scored signiﬁcantly better than other INVs on two indicators. The average international share of turnover was 53 percent among GSUs whereas other INVs received, on average, 21 percent of their sales income from abroad. GSUs had been able to enhance their image and learning very well, given the mean of subjective qualitative international performance of 4.2 (on a scale from 1 to 5). Satisfaction with more quantitative objectives such as sales, market share, and proﬁtability was generally lower, and other INVs in particular tended to show dissatisfaction.

Global Start-Ups, International Growth Orientation and Performance Simple comparisons of internationalization characteristics between GSUs and other INVs revealed many statistically signiﬁcant differences. However, a more rigorous test of our propositions required multivariate analysis in order to account for the effects of the control variables. We therefore used multiple regression analysis. The ﬁrst proposition concerned international growth orientation (IGO), and the results of the binary logistic regression are given in Table 4. The binary variable of being a GSU (coded 1) versus other INV (coded 0) was used as the dependent variable, company size and international experience as control variables, and international growth orientation was

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Table 4.

Logistic Regression Results: IGO Drives Global Start-Ups.

Model Fit

Independent Turnover Years of international experience IGO Constant

Chi Square (df)

Nagelkerke R Square

Hosmer and Lemeshow Goodness of Fit

% Correctly Classiﬁed

21.09 (3)

0.636

2.69 (7)

85.7

Coefﬁcient

Std. error

Wald (df ¼ 1)

Exp (B)

0.051 0.585

0.029 0.312

3.154 3.511

1.052 1.795

2.913 16.158

1.615 7.850

3.252 4.237

18.406 0.000

po0.10. po0.05. po0.01.

the proposed independent variable. The model turned out to be signiﬁcant at the 1-percent level according to the overall Chi square test, and the pseudo R square and Hosmer and Lemeshow tests also indicated a good ﬁt. The model correctly classiﬁed 96 percent of the other INVs and 64 percent of the GSUs, totaling 86 percent of all cases. Company size and international experience had the expected positive effects on the likelihood of being a GSU, and the effects were signiﬁcant at the 10-percent level. The IGO also showed a positive and signiﬁcant effect, implying that even when size and experience are accounted for, ﬁrms with higher IGO are more likely to pursue the GSU type of internationalization than INVs with a lower level of IGO. Thus, we received support for our ﬁrst proposition P1 ‘‘Global start-ups are characterized by higher international growth orientation than other ﬁrms.’’ The second proposition concerned the international performance of GSUs in comparison with other INVs. This time we used multiple linear regression analysis. The three international performance variables were used as dependents, and size and experience as controls. The independent variables included international growth orientation and a dummy variable indicating whether the ﬁrm was classiﬁed as a GSU (coded 1) or other INV (coded 0). The results are shown in Table 5. The ﬁrst two models turned out to be signiﬁcant with a slightly higher Rsquared for export intensity than for the subjective performance evaluations. Somewhat surprisingly, neither of the control variables had any

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Why Do Some International New Ventures Become Global Start-Ups?

Table 5.

Regression Results: The International Performance of GSUs vs. Other INVs.

Dependent

Export Intensity

Model ﬁt

Independent

Turnover Years of international experience IGO Global start-up dummy

Subjective Qualitative

Subjective Quantitative

R squared

F

R squared

F

R squared

F

0.384

4.68

0.235

2.23

0.206

1.89

Std. coefﬁcient

t

Std. coefﬁcient

t

Std. coefﬁcient

t

0.208 0.157

0.887 0.660

0.239 0.019

1.387 0.101

0.174 0.345 0.372 0.277

0.857 1.678 2.490 1.718

0.028 0.140 0.050 0.411

0.121 0.599 0.295 2.230

po0.10. po0.05. po0.01.

signiﬁcant effects on international performance. Firms that were more internationally growth-oriented performed better in terms of international sales ratio. Over and above the effects of the controls and IGO, the GSUs showed higher international sales ratios and were more satisﬁed with the qualitative aspects of internationalization. The effect on export intensity was signiﬁcant only at the 0.10 level, but given the small effective sample size and the exploratory nature of our analysis, we conclude that the proposition P2 ‘‘Global start-ups differ from other ﬁrms in terms of performance’’ is supported by empirical evidence.

DISCUSSION AND CONCLUSIONS This exploratory study reveals that studying INVs from a holistic perspective – including both inward and outward activities – produces interesting ﬁndings and opens new avenues for future research. This theme clearly deserves more attention. Our classiﬁcation of INVs into smaller subgroups also proved to be fruitful, not least concerning GSUs. Our ﬁndings support the results of previous studies in that GSUs are no longer anomalies among INVs: almost half of the ﬁrms in our study could

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be classiﬁed as such in that they had internationalized rapidly, sold their products in multiple countries, and had also at least two different valuechain activities located abroad. Our ﬁndings also imply that GSUs are by no means a homogeneous group of ventures: there was more internal variation (e.g., in ﬁrm size, experience, scale, and scope of operations) within this group than among other types of INVs. Another interesting ﬁnding that would deserve further examination is the fact that GSUs carried out relatively more outward than inward activities in comparison to other types of INVs. Obviously, this study builds on previous empirical inquiries on INVs in both emphasizing the holistic perspective on the value chain of INVs and including the number of value-chain activities explicitly in the analysis. Of particular interest is that we found only 5 out of 25 INVs that had internationalized rapidly into multiple countries but had only a few valuechain activities in those countries. This would support the frequently expressed assumption that GSUs do not differ in practice from born globals, even if deﬁnitions of the latter do not directly consider the ‘‘number of value-chain activities.’’ On the other hand, this might also indicate that the linkage between inward and outward activities in early internationalizing ﬁrms is not as strong as we might expect. With regard to our P2 we found that GSUs differed from other ventures in terms of subjective qualitative performance. This is a major ﬁnding given the emphasis in earlier research (see, e.g., Zahra, 2005) on the importance of examining the performance variations in different types of INVs, and the gap in the literature. The GSUs perceived the effects of internationalization on their image and learning as stronger than the others did. However, there were no differences in perception with regard to the more quantitative measures such as market share. This suggests that the strategic posture (GSU or other type) of the venture does not explain the stronger or ﬁnancial differences in performance, but some of the qualitative differences are noteworthy. In terms of enhanced learning, we would suggest that GSUs operating in multiple countries are more exposed to different learning opportunities that may enhance further internationalization (see, e.g., Saarenketo, Puumalainen, Kuivalainen, & Kyla¨heiko, 2004). We could also argue that the presence of the ﬁrm in multiple countries may enable it to build up a more coherent and dynamic company image. The fact that there were no differences in performance on the marketshare dimension could be attributable to the possibility that GSUs have more ambitious market-share goals in the ﬁrst place. Another rationale would be that a new venture operating in multiple countries often targets its

Why Do Some International New Ventures Become Global Start-Ups?

37

business on a niche that might be very thin in one country, and thus it may be very hard to estimate the market in terms of size and market share across competing companies. From the managerial point of view, the ﬁndings of this study indicate that managers of INVs should be encouraged to internationalize their value chain as a whole, despite the risks. However, those making these decisions should also be aware of the capabilities needed for managing the global value networks they create. In spite of the interesting results, we have to keep in mind that this study also has its limitations. It is a cross-sectional snapshot of one industry, and has a relatively small sample size. Moreover, the companies vary in their speed of internationalization. We therefore suggest that these tentative results should be tested in further studies on both quantitative and qualitative data.

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A BEHAVIOR-BASED ANALYSIS OF THE CHANGES OF THE STRUCTURE, SYSTEMS, AND CULTURE IN THE INTERNATIONALIZATION PROCESSES OVER TIME Bernhard Swoboda, Martin Jager, Dirk Morschett and Hanna Schramm-Klein ABSTRACT Purpose – This article addresses the internationalization processes focusing on changes of ﬁrms’ internal structures, systems, and culture over time. These changes are analyzed in relation to the ﬁrms’ developments in the last 10 years along a country and/or mode dimension, comparing ﬁrms with county or mode increase, two-dimensional expansions, stagnation/reduction, as well as comparing incremental one step versus multistep developments in a holistic way. Methodology/approach – Conceptually, the changes in country dimension and establishment chain form a primary level, and structure, systems, and culture a secondary level of the framework. Managers of family-owned Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 41–65 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004007

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ﬁrms, able to evaluate the past, were asked about these dimensions in terms of their situation today and 10 years ago. Findings – This study shows that internationalization causes changes in internal systems in particular, followed by changes in internal structural and slowest by changes in leadership and ﬁrm’s culture. Even if stagnations or reductions take place, they are related to changes in internal structure, systems, and culture. Research limitations/implications – Limitations are related to the retrospective design based on managerial perceptions, the use of less proven scales, as well as the analyses of family-owned ﬁrms. This exploratory study suggests more empirical insights on dynamic internationalization processes. Practical implications – The study provides insights for managers into structural, systemic, and cultural changes when future internationalization steps are planned. Originality/value of the paper – This paper shows holistic evidence of changes in 20 partial dimensions of internal structures, systems, and culture within the internationalization process over time empirically.

INTRODUCTION Internationalization of a ﬁrm is, by its very nature, a dynamic process and still one of the most critical challenges, particularly for small- and mediumsized enterprises (SMEs) (Ruzzier, Antoncic, & Hisrich, 2007). Dynamic internationalization over time is addressed by a wide body of research, spanning various theoretical, conceptual, and empirical studies (see reviews by Leonidou & Katsikeas, 1996; Ruzzier, Hisrich, & Antoncic, 2006). Some studies focus on incremental and/or revolutionary perspectives, several dimensions (such as resources, commitment, establishment chain), or determining factors. Structural, systemic, and culture changes are seldom addressed (see, e.g., the contingency analysis of environment, organization, strategy, and managers within different groups of exporters by Macharzina and Engelhard (1991)). The present study addresses this research gap. From a holistic perspective, the development of ﬁrms in the establishment chain and/or countries is linked to the changes in internal structure, systems, and culture. Thus, the main focus lies on forming a holistic picture of the overall development, as

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

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underlined by the aims mentioned in the abstract, and not on the relationships between individual variables. Conceptually, the establishment chain and country dimensions form a primary level, and structure, systems, and culture a secondary level of the framework. Its practical relevance results from the assumption that it would be a tremendous advantage for managers to be able to initiate early impulses in the shaping of internal structure, systems, or even culture in line with future internationalization steps. Based on the present research on internationalization processes along the establishment chain and the country dimension, or both of these in combination, their impact on structure, systems, and culture are conceptualized. Generally formulated basic hypotheses address the relationship between the primary and the secondary level, as well as addressing the strength of the structural, systemic, and cultural changes in isolation. Based on measurements of the relevant constructs, a large sample size questioning managers of mostly family-owned ﬁrms about their situation today and 10 years ago, the results from part of an empirical study are discussed, then leading to overall conclusions.

CONCEPTUAL FRAMEWORK AND HYPOTHESES Conceptualization of the Primary Level: Establishment Chain and Country Dimension Behavioral-based process models that describe internationalization as a selfstrengthening, cyclical, and predominantly incremental process (Johanson & Vahlne, 1977, 2003; Steen & Liesch, 2007) are well known. They are limited in terms of their original explanatory horizon (Johanson & Vahlne, 2006; Elango & Pattniak, 2007), as well as being criticized for their lack of measurability (Andersen 1993; Sousa & Bradley, 2006; Brewer, 2007). Nevertheless, some basic assumptions have been supported by empirical studies (e.g., Barkema, Bell, & Pennings, 1996; Chetty & Eriksson, 2002), while other studies provide contrary results (Sullivan & Bauerschmidt, 1990; Benito & Gripsrud, 1992). In particular, born global research challenges the assumption of incremental internationalization both conceptually (Knight & Cavusgil, 1996; McNaughton, 2003; Rialp, Rialp, & Knight, 2005) and empirically (Knight & Cavusgil, 2004; Freeman & Cavusgil, 2007). Further approaches integrate other aspects, such as internationalization in terms of evolution (incremental, internal process), episodes (decision-based, larger steps) and epochs (fundamental changes) by Kutschker, Baeurle, and Schmid (1997).

44

BERNHARD SWOBODA ET AL.

For the present study, the question of incremental and/or revolutionary development is not crucial. It focuses explicitly on primarily relevant dimensions of internationalization. Since the traditional use of foreign sales volumes as a predictor of internationalization in early export stage models can be criticized as well, the following conceptualization of the resulting dimensions is based on the patterns of internationalization mentioned by way of example in behavioral-based process models: (1) The ‘‘establishment chain,’’ with its known incremental progression of (operation) modes, no regular export activities, export via an independent agent, sales subsidiaries and production subsidiaries abroad. (2) The sequence in which international markets are entered based on the geographical/cultural assumption. Clearly, internationalization is not restricted to these two macro dimensions only. The authors argue, however, that a combination of two dimensions and the resulting matrix – integrating developments on the establishment chain and the country axis – allow analysis of speciﬁc development options (understood as speciﬁc paths) within a period of time: country market expansion, that is, developing exclusively along the country dimension; penetration, that is, developing exclusively along the establishment chain; two-dimensional expansion, that is, developing in combination along both dimensions; unchanged, which could be understood as a phase of stagnation or consolidation; and reductions/divestments in one or in both dimensions.

Conceptualization of the Secondary Level: Structure, Systems, and Culture In both behavioral-based and born global research there seems to be a gap relating to ﬁrms’ internal structure, systems, and culture. Possible theoretical backgrounds for their conceptualization are widespread. Integrating concepts may be found in conﬁgurational and contingency approaches (Galbraith, 1977; Miller & Friesen, 1984; Vorhies & Morgan, 2003), or in the international gestalt approach (Macharzina & Engelhard, 1991). The latter, for example, consider strategies, structure, and processes that have to be balanced to suit the external environment: Lawrence and

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

45

Lorsch (1967) argued that building up effective organizations involves a well-balanced package of strategy, structure, processes, and management ideology, while Ouchi (1979) examined market, bureaucratic, and informal/ social dimensions. For the present study, the assumption of ‘‘ﬁt’’ is not central. The authors try to enhance such a traditional dialectic process theory view (of unfreezing, moving, and refreezing), arguing in the sense of teleological or evolutionary theories (with continuous processes of variation, selection, and retention), as well as self-organizational theories (Van de Ven & Poole, 1995). Structure, systems, and culture are considered separately in the following discussion and they can be subject to variations, modiﬁcations, or alterations over time. This is based partly on arguments (e.g., by Hult, Cavusgil, Deligonul, Kiyak, & Lagerstro¨m, 2007) looking at global ﬁrms as an integrative set of organizational dimensions and the relationships between soft dimensions (strategy, leadership, and culture), structure, and planning. Of course, the main focus here lies on family-owned ﬁrms, and in addition to structure and systems, culture should also be considered as a dimension of (internal) dynamics (Koguth & Singh, 1988; Leung, Bhagat, Buchan, Erez, & Gibson, 2005). These are now conceptualized, while related empirical studies are discussed in the next section. Conceptually, the primary (organizational) structure is reviewed in terms of structural changes, that is, the visible structure of the ﬁrm (Mintzberg, 1979; Fredrickson, 1986). Westney and Zaheer (2005) conceptualize primary structure. In addition, centralization, formalization, and specialization are discussed (e.g., Ruekert, Walker, & Roering, 1985; Ghoshal & Nohria, 1993, or even Mintzberg, 1979). Centralization refers to the extent to which a ﬁrm is controlled centrally by its top management. Formalization relates to formal rules and standards applying to the organizational structure (e.g., Bartlett & Ghoshal, 2002). Specialization refers to the degree of functional specialization. In view of the increasing complexity in the internationalization process of SMEs, it would be reasonable to extend these formal aspects by adding a secondary organization or informal instruments, such as international project teams or cross-national work groups (Edstro¨m & Galbraith, 1977). Conceptually, ﬁrms can be considered as systems in which information is processed (Galbraith 1977). Important elements here are the reporting system and controlling (Chenhall, 2003; Mukherji, Kedia, Parente, & Kock, 2004). Since internationalization processes by SMEs are also characterized by limited knowledge of internationalization, it can be concluded that instrumental controlling or market research processes should be a part of the information system. The importance of strategic planning systems increases

46

BERNHARD SWOBODA ET AL.

as the environment becomes more dynamic within the internationalization process (Li, Li, & Dalgic, 2004). In literature and in the following discussion, various aspects of information and planning systems are analyzed, such as importance and intensity of use, formalization, centralization, and network compatibility (Papadakis, Liukas, & Chambers, 1998; Mukherji et al., 2004). Conceptually, ﬁrm’s culture is a multilayer construct that is anchored in international management, but is not clearly deﬁned (see Leung et al., 2005; Johnson, Lenartowicz, & Apud, 2006 on cross-cultural competence). Schell and Solomon (1997) generally consider culture to be the ‘‘glue’’ that holds ﬁrms together. In international ﬁrms, inﬂuence is both national and international (Tung, 2008; Makino, Isobe, & Chan, 2004). In the present context, the authors model not only the general culture of the ﬁrm and cultural transfer, but also (managerial) leadership characteristics (Acedo & Jones, 2007) – because these are relevant in SMEs – with such aspects as risk and growth orientation (Macharzina & Engelhard, 1991; Acedo & Jones, 2007), as well as managerial attitudes/commitments and perceived cultural– psychic distance (Sousa & Bradley, 2006).

Conceptual Framework Having provided a brief review of the literature and description of the authors’ understanding of the constructs used, this section concludes by setting forth a conceptual framework and the general hypotheses (see Fig. 1). For the purpose of maintaining the focus of the present analysis, the following considerations are preliminarily based on the primary level, although the authors are well aware that internationalization takes place in interdependency of both levels. Here, the authors can draw upon the studies mentioned that deal with development along the establishment chain and the country axis. The combination of both dimensions and thus, twodimensional expansion and also consolidation/stagnation are conceptualized in the framework. While the latter has barely been considered in detail in literature so far, reductions have been considered, for example, by Benito (2005). Based on these considerations, the authors argue: H1. Firms develop over time along the establishment chain and the country dimension, but also in a combination of both, or demonstrate consolidation/stagnation or reduction. To maintain the purpose of the present analysis, the ﬁrst exploratory hypothesis is not the primary focus, but it is vital for the overall context. The

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture (-) (-)

Primary Level of Change

Reduction

Changes of Modes

(0

e tri

(+)

)

(0)

s/

47

Two dimensional expansion

(+

)

un Co s of ion s g ge e Country an R expansion Ch

Penetration

Consolidation/ Stagnation

Secondary Level of Change

Alteration

Structures

Systems (Processes)

Va ria tio n

Culture Modifica

Fig. 1.

tion

A Conceptual Framework.

same can be argued for the second hypothesis. The conceptual framework makes it possible to analyze ﬁrms that have developed more or less on the country dimension and/or the establishment chain. This can be compared with assumptions from behavioral-based models and with the simultaneous evaluation of mode increases and reductions conducted by Calof and Beamish (1995). Based on this, the following can be formulated: H2a. The mode change H2b. The change in the country dimension over time take place not only in incremental steps, but also in the form of multiple steps, and in reductions. The observation relates to analysis on the secondary level and its link to the primary level. An investigation in isolation on the secondary level forms the basis of many empirical studies on organizational structure. The connection between strategy and structure is raised, for example, by Wolf and Egelhoff (2002) or by Barth (2003) or Xu, Cavusgil, and White (2006) on performance and environment. Other studies focus on the link between various organizational dimensions and performance (Meijaard, Brand, & Mosselman, 2005) or between centralization, formalization, and entrepreneurship (Caruana, Morris, & Vella, 1998).

48

BERNHARD SWOBODA ET AL.

Studies on information and planning systems deal, for example, with the relevance of market research and with more intensive (market-related) information processes for the internationalization process (Yip, Biscarri, & Monti, 2000). Furthermore, the connection between strategy formation and strategic planning is analyzed (Andersen, 2004; Upton, Teal, & Felan, 2001) or related to ﬁrm’s success (Xu et al., 2006). The same applies for formalization and standardization (Chae & Hill, 1997; Dibrell, Down, & Bull, 2007). While planning processes are rather not formalized or standardized to a large extent in the initial internationalization steps, this increases as internationalization progresses. Obviously, the question of periodicity (the planning period related to international activities) can be assessed in a similar way. Studies focusing on ﬁrms’ culture discuss (global) leadership culture (Hmieleski & Ensley, 2007), cultural transfers (Brock, Shenkar, Shoham, & Siscovick, 2008), risk orientation and growth orientation of entrepreneurs (Weber & Hse, 1998; Acedo & Jones, 2007), and their attitudes toward foreign markets (Gripsrud, 1990). The situation is similar when looking at cultural–psychic distance (Brewer, 2007). However, this relates to psychological processes, where it is assumed that changes to these processes take place over a longer period. The following hypothesis deals with the relation between the three dimensions over time: H3. Internal international changes take place overtime primarily in the ﬁrms’ systems, followed by ﬁrms’ structure, and least so in ﬁrms’ culture. Forming relations between the primary and secondary level is more difﬁcult. Basically, ﬁrms develop continuously in their structure, systems, and culture (see Mintzberg & Westley, 1992), even in the event of consolidation/ stagnation (similar to Hadjikhani, 1997, who speaks of intangible commitment). Based on the behavioral-based models, the following can be hypothesized: H4a. Firms that develop strongly/less strongly along the country dimension over time demonstrate differing extents of changes in structure, systems, and culture. H4b. Firms that develop strongly/less strongly along the establishment chain over time demonstrate differing extents of changes in structure, systems, and culture. It is more problematical to provide evidence of the effects of the ﬁve paths on primary level of the conceptual framework. Even if consolidation/

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

49

stagnation and reduction are factored out, argumentation must be done carefully. It can be assumed that exclusive country expansion evokes lower changes in structure, systems, or culture than two-dimensional expansion. The changes based on penetration could be located somewhere in between, but on the other hand, cultural aspects are related more strongly to country expansion. In this respect, the following is formulated: H5a. Firms that only develop by countries have smaller changes in structure, systems, and culture than those that develop along the establishment chain. H5b. Firms that only develop through the establishment chain have smaller changes in structure, systems, and culture than those with twodimensional expansion.

METHODOLOGY Measurement of the Primary Level The establishment chain was measured according to Calof and Beamish (1995), Chang and Rosenzweig (2001), and Manolova, Brush, Edelman, and Greene (2002), and the country dimension according to Ruzzier et al. (2007). Here, managers were asked to state which modes and country groups they used or served today and 10 years ago (see Table 1).

Measurement of the Structural, Systemic, and Cultural Dimensions Many measurements of structural, systemic, and cultural dimensions are not related to SMEs (see Meijaard et al., 2005). Nevertheless, the authors tried to apply approved measurements and scales/items adapted by face-to-face interviews and used as pretests. Cronbach’s a (each W0.6) and explorative factor analyses were calculated for constructs measured with more than one item. In order to be able to compare constructs measured on the basis of individual items (see Bergquist & Rossiter, 2007, e.g., on the acceptance of this procedure) with the factor-based constructs, arithmetical index values were formed for the latter (by summing the extent to which each activity was reported as being important and then dividing the summarized score by the total number of items). This approach seems reasonable for behavioralbased analyses and reﬂective scales.

50

Table 1.

BERNHARD SWOBODA ET AL.

Measurement of the Primary Dimensions: Today and 10 Years Ago.

Construct

Items

Establishment chaina Dichotomous question (yes–no)

Country dimensionb Dichotomous question (yes–no)

Domestic operations only Indirect exports Direct exports (without own presence) Direct exports (with own presence/ofﬁce) Sales subsidiary Owned production subsidiary Operating domestically only Operating in German-speaking neighboring countries Operating in Western Europe Operating in Eastern Europe Operating in one overseas market/region (e.g., North America, Asia) Operating all over the world (three continents)

a

Additional questions: Relevance of each mode based on seven-point Likert-type scales (1 ¼ not important at all to 7 ¼ extremely important), dominating mode, use of direct investments, number of foreign production subsidiaries. b Additional questions: Dominating mode in a region, number of countries entered, existence of a dominating country.

Organizational structure (Westney & Zaheer, 2005), centralization, and secondary structure were measured as conceptualized (Edstro¨m & Galbraith, 1977; Swoboda & Anderer, 2008) (see Table 2). Formalization was only measured in the context of the systems. Specialization was neglected because the assumption of explicitly functionally differentiated systems does not really apply to SMEs. Information gathering including reporting/controlling systems (Yip et al., 2000; Mukherji et al., 2004), and the planning dimensions (Kellermanns & Eddleston, 2006) are systemic aspects. In the planning system (Wally & Baum, 1994; Upton et al., 2001), ﬁve aspects were measured (see Table 3 and Swoboda & Anderer, 2008). The general culture, cultural transfer, and leadership characteristics were measured as conceptualized (see Table 4).

Empirical Study Design and Sample The empirical study uses a behavioral and retrospective design. This was a fundamental decision because the authors had access neither to detailed

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

Table 2.

51

Measurement of the Structural Dimension: Differences between Today and 10 Years Ago.

Construct Primary (organizational) structurea Dichotomous question (yes–no)

Secondary structureb Seven-point Likert-type scales (1 ¼ not important at all to 7 ¼ extremely important) Centralizationc Alternative question (central– decentral–jointly)

Items No/only marginal reporting Direct reporting to the headquarters in home country Responsible export manager in home country Responsible export division in home country Holding structure Resort and/or regional structure Combined structure (for example, a matrix) International project teams Cross-national work groups International groups for exchange of experiences International workshops Selection of country markets Market entry strategy to country markets Investment/ﬁnancial decisions Engagement of sales persons Allocation of executive positions Extension of customer services Reorganization of international activities

a

Interpretation of the seven items as a vertical scale (1 ¼ no/only marginal reporting to 7 ¼ combined structure). b Aggregation to an arithmetical index value, that is, by summing the extent to which each activity was reported as being important and then dividing the summarized score by the total number of items. c Interpretation of the number of mentions of ‘‘central’’ as a vertical scale (1 ¼ only marginal to 7 ¼ extremely centralized).

secondary data on SMEs, nor to panel-based options (with time and cost problems, panel availability, mortality, attrition; see Van de Ven & Huber, 1990; Solga, 2001). In spite of the shortcomings connected with the measurement of perceptions over time, this method is widespread in internationalization research (Acedo & Jones, 2007; Freeman & Cavusgil, 2007). Basic knowledge of the situation 10 years ago could be obtained by interviewing ﬁrms’ owners, who are part of the top management and who have also lived through the ﬁrm’s development in the long run. Possible recall errors in content or lack of detail in statements (Solga, 2001) were taken into account. The authors contacted every ﬁfth ﬁrm from a German address database and selected those where it was possible to identify the ﬁrm as being familyrun or having had stable management over a longer period of time. Over

52

Table 3. Construct

BERNHARD SWOBODA ET AL.

Measurement of the Systemic Dimension: Differences between Today and 10 Years Ago. Items

Information system (seven-point Likert-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Relevance of market research Systematic foreign market research Analysis of political/economic environmental factors Intensity of (foreign) market Analysis of country markets researcha Analysis of market opportunities Information about developments of customer industries Analysis of local competitive strategies Analysis of ﬁt between product and target market Relevance of controlling General relevance of (international) controlling Regularity of foreign country reports Relevance of country reportsa Reports on market developments (e.g., customer needs) Turnover Use of controlling key ﬁguresa Key ﬁgures on proﬁts Personnel key ﬁgures Planning system (seven-point Liker-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Planning of turnover/proﬁts Intensity of (foreign) planninga Financial planning Personnel planning Timing/scheduling Strategic/prospective planning Formalization Formal/written ﬁxing of planning Periodicity Existence of medium-term plans for internationalization Standardization Standardization of market planning Centralization of planning Direction of planning processes ‘‘top down’’. a

Aggregation to an arithmetical index value (see the legend in Table 2).

2,000 questionnaires were sent out (after initial contact and ex-post phone calls), resulting in 261 questionnaires available (244 with information for both points in time measured, including 50 face-to-face interviews). A further 46 (belonging to a group) and 39 (national activities only or unstable management) had to be excluded from the study. Since this was a step-bystep process of 10 weeks without real-time lag between sending out the questionnaires and their return, nonresponse bias should not be a critical issue. Nevertheless, key variables were compared between early to latest

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

Table 4. Construct

53

Measurement of the Cultural Dimension: Differences between Today and 10 Years Ago. Items

Firms culture (seven-point Likert-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Private contacts of staff members General culturea Encouragement of unconventional ideas Priority of group decision making compared to individual decisions Active communication beyond departmental borders Use of culture as management instrument Cultural transfera Transfer of culture to foreign countries Inﬂuence of foreign national cultures at headquarters Leadership characteristics (seven-point Likert-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Equality of chances/risks leads to acceptance of Risk orientationa decisions Anticipation of customer needs rather easy Readiness to assume risk compared to retention Abstinence of acquisition or displacement threats Growth orientationa Consistent growth and proﬁt orientation Consistent trust in own strength Inﬂuence of market globalization on ﬁrm Attitudesa Encouragement of international orientation Future of the ﬁrm in international markets No intentional travels abroad to get to know cultures/ Cultural–psychic distancea countries Foreignness of Asiatic/South American culture Problem of geographic distance to overseas markets a

Aggregation to an arithmetical index value (see the legend in Table 2).

responding ﬁrms, and also tests between responding and nonresponding ﬁrms (industry and if available number of employees and total sales) show insigniﬁcant (po0.05) differences (Armstrong & Overton, 1977). The ﬁrms in the sample come from highly internationalized German industries, particularly mechanical engineering (35.2 percent), chemicals (24.1 percent), textiles/clothing (23.9 percent), polymer processing (10.0 percent), and miscellaneous (7.6 percent). The ﬁrms’ size, measured in terms of current sales, was in 67.8 percent of cases under and in 32.2 percent of cases over 50 million EUR. Two hundred twelve ﬁrms speciﬁed their foreign sales: 35.2 percent with a foreign sales ratio under 30 percent, 31.1 percent with a foreign sales ratio between 30 and 50 per cent, and 33.7 over 50 per cent.

54

BERNHARD SWOBODA ET AL.

HYPOTHESES TESTING AND DISCUSSION Combined Patterns of Internationalization: Development Paths The combination of developments over mode and country dimension was tested with the full sample (see Table 5). Of the 244 ﬁrms involved, the majority achieved positive international development, while 28 ﬁrms suffered a reduction of countries or modes. The result in Table 6 goes beyond this. Twenty-two ﬁrms reduced the number of regions, 19 restricted the modes. One hundred twenty three ﬁrms demonstrated no changes in modes, 112 ﬁrms no changes in countries/ regions. In 67 ﬁrms, both dimensions remained unchanged. This lends support to many results indicating that development is not only incremental, even if this is only the initial solution for subsequent tests.

Changes in Structure, Systems, and Culture Table 7 permits a holistic view, where the patterns are of interest in horizontal and vertical comparison, but less so looking at each individual value (which is why the F-values were only shown in addition). The organizational structure changes least in the case of reductions, following by consolidation. The latter possibly indicates that there is a substantial proportion of internationally ‘‘stagnating’’ ﬁrms in this group. Structural changes resulting from country expansion are in the middle. This is particularly connected to changes in the primary structure and in centralization. The results obtained when comparing penetration and two-dimensional expansion are surprising because they contradict expectations. Structural changes are higher in penetration, with the exception of centralization. The correlations between the three dimensions should be mentioned here because they amount to approximately 70.50, which implies that there is remarkable interdependency between the changes in structural aspects. Table 5.

Total Development of the Firms in Last 10 Years.

Change of countries/regions

Change of modes Reduction 29 Unchanged Enlarged

Unchanged Stagnation/consolidation 67 Country expansion 48

Enlarged Penetration 38 Two-dimensional expansion 62

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

Table 6.

55

Partial Development of the Firms in Last 10 Years. Change of modes Reduction Unchanged One-step Two-step Multistep Total increase increase increaseb

Change of countries/ regions

a

Reduction Unchanged One-step increase Two-step increase Multistep increasea Total

12 7 – – – 19

8 67 28 11 9 123

1 18 10 8 6 43

– 4 6 6 7 23

1 16 7 3 9 36

22 112 51 28 31 244

Including ﬁve ﬁrms with stronger than three step changes. Including eleven ﬁrms with stronger than three step changes.

b

The effects in the systems are more linear (correlations between the partial systemic dimensions amount to more than 0.60, and for centralization of planning more than 0.30). In the information system, all changes increase successively from reduction to two-dimensional expansion. The differences between penetration and two-dimensional expansion are marginal. The relative change in market research in the path of country expansion, where its main application should lie, is relatively low. Intensity of controlling increases most in penetration. The ﬁndings on planning system are similarly clear. The changes in intensity, periodicity, and centralization (the latter with increasingly lower intensities) are strongest in the last path, while changes in formalization and standardization are strongest in the second last path. The results for culture are also largely according to expectations (correlations between the partial cultural dimensions mostly more than 70.30). General culture and cultural transfer changed more or less continuously – from the ﬁrst to the third and fourth path, respectively. Change in leadership characteristics took place at a low level. From the vertical-holistic viewpoint, the changes in systems are a little stronger than for structure. Cultural changes, particularly changes in leadership characteristics, are very slight, which supports the hypothesis formulated.

Speciﬁc Analysis of the Establishment Chain and of the Country Dimension The changes in structure, systems, and culture linked to change along the establishment change are shown in Table 8. The right-hand columns show

56

BERNHARD SWOBODA ET AL.

Table 7.

Structural, Systemic, and Cultural Dimensions in Analytical Paths. Reduction Consolidation Expansion Penetration Combination F-Value (5) (1) (2) (3) (4)

Sig

Na

29

67

48

38

62

Structural dimension Primary structure Secondary structure Centralization

0.48 0.88 1.17

0.70 1.07 0.81

1.15 0.71 1.57

1.61 1.89 2.20

0.73 1.50 2.34

4.06 6.72 5.27

0.003 0.000 0.000

0.07

1.19

1.00

1.82

1.89

12.70

0.000

0.16

0.87

1.27

1.73

1.86

16.23

0.000

0.17

0.91

1.47

2.05

1.92

13.13

0.000

1.93

0.85

1.51

2.32

2.00

9.19

0.000

0.07

0.57

0.84

1.32

1.43

9.67

0.000

0.28

1.05

1.08

1.77

1.83

12.61

0.000

0.38 0.76 1.00 1.75

1.12 1.30 0.90 1.31

1.32 1.43 1.34 0.91

2.05 1.74 1.61 0.95

1.78 1.98 1.49 1.41

7.51 4.55 2.62 1.42

0.000 0.001 0.036 ns

0.66 0.59

0.70 0.45

1.03 0.64

1.11 0.83

1.00 0.86

2.00 2.06

0.095 0.087

0.25 0.21

0.21 0.22

0.11 0.15

0.05 0.28

0.75 3.28

ns 0.012

0.86 0.45

1.44 0.53

1.64 1.16

1.64 1.13

7.27 2.11

0.000 0.081

Systemic dimension Information system Relevance of market research Intensity of market research Relevance of controlling Relevance of country reports Use of controlling key ﬁgures Planning system Intensity of foreign planning Formalization Periodicity Standardization Centralization of planning Cultural dimension Firms culture General culture Cultural transfer

Leadership characteristics Risk orientation 0.03 Growth 0.17 orientation Attitudes 0.85 Cultural–psychic 0.75 distance a

Differences of assessments (today and 10 years ago, seven-point Likert-type scales); marginal variation of population.

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

Table 8.

Change of Structural, Systemic, and Cultural Dimensions in Relation to the Establishment Chain. Steps No Change One-step Two-step Multi-step Decrease Increase increase Increase

Na Structural dimension Primary structure Secondary structure Centralization Systemic dimension Information system Relevance of market research Intensity of market research Relevance of controlling Relevance of country reports Use of controlling key ﬁgures Planning system Intensity of foreign planning Formalization Periodicity Standardization Centralization of planning Cultural dimension Firms culture General culture Cultural transfer

Sigb

Other Production Sigb Modesc Subsidiaryc

19

126

41

22

33

0.84 1.18 1.89

0.83 0.90 1.06

1.14 1.37 1.93

1.05 1.56 2.36

1.27 2.02 3.44

ns

0.63 1.05 1.45

1.65 2.14 3.24

0.01

1.06

1.59

2.04

2.01

1.44

2.14

0.01

0.98

1.59

1.91

2.02

1.58

1.94

0.26

1.06

1.54

2.14

2.35

1.58

2.22

0.16

0.56

1.78

2.09

2.53

1.77

2.33

0.01

0.64

1.04

1.02

2.00

0.91

1.75

0.58

0.96

1.61

1.85

2.04

1.49

2.02

0.68 1.05 1.42 2.58

1.09 1.27 1.01 1.07

1.98 1.91 1.32 1.05

1.38 1.91 1.19 0.77

2.09 1.74 2.06 1.59

1.74 1.72 1.42 1.02

1.94 1.86 1.31 1.35

1.01 0.95

0.78 0.48

0.95 0.68

0.86 0.80

1.22 1.05

ns

0.70 0.54

1.28 1.05

0.25 0.19

0.17 0.27

0.31 0.22

0.33 0.13

0.31 0.27

0.17 0.11

ns

1.06 0.42

1.50 0.94

1.77 1.00

1.70 1.33

1.72 1.07

1.50 1.06

ns ns

Leadership characteristics Risk orientation 0.57 Growth 0.13 orientation Attitudes 1.27 Cultural–psychic 1.27 distance a

57

60

51

ns

Differences of assessments (today and 10 years ago, seven-point Likert-type scales); marginal variation of population. b pr0.05; pr0.01; ns, not signiﬁcant; F-values. c Comparison of ﬁrms who established a new mode or a production subsidiary for the ﬁrst time.

58

BERNHARD SWOBODA ET AL.

initial set-up of a production subsidiary – with substantial changes to structure, information system, and planning intensity – compared to initial adoption of other modes (subgroups of the overall sample form the basis here). In change of modes, there are distinct changes in virtually all structural, systemic, and cultural dimensions. The strongest (successive) changes are found in the information system, particularly in the relevance and intensity of market research and in use of controlling key ﬁgures. In planning system, some discontinuous changes are found: for example, extent of formalization and periodicity. In the structural dimension, successive change takes place depending on mode changes. In comparison, cultural–psychic distance decreases more in reduction of modes, that is, change to a less direct mode with lower commitment obviously serves to bridge the cultural–psychic distance. Overall the effects are consistent (in stages), but with differing intensity for structure, systems, and culture, respectively. Changes in the country dimensions are shown in Table 9. Once again, the right-hand columns contrast selected crucial decisions, for example, the initial entry to an overseas market. The results show the strongest changes in the information and planning systems. Surprisingly, changes in the structural and cultural dimensions are less strong in comparison. The differences in terms of cultural–psychic distance are not signiﬁcant, although the opposite was expected here for the country dimension in particular. A glance at those ﬁrms with initial entry to an overseas market shows substantial differences, above all for change in structural and system dimensions. Centralization, in particular, drops substantially, and aspects of secondary organization gain importance. However, leadership characteristics barely change in comparison. All in all, an incremental view of development in the country dimension shows largely consistent effects (in stages), but not quite as clearly as for the establishment chain.

DISCUSSION AND IMPLICATIONS Key Results The aim of the present paper was to analyze the perceived structural, systemic, and cultural changes in relation to (1) development based on the country and/or establishment chain dimensions, (2) incremental developments in these two dimensions, and (3) selected crucial decisions, in a

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Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

Table 9.

Change of Structural, Systemic and Cultural Dimensions in Relation to the Country Dimension. Steps No Change One-step Two-step Multi-step Decrease Increase Increase Increase

Na Structural dimension Primary structure Secondary structure Centralization Systemic dimension Information system Relevance of market research Intensity of market research Relevance of controlling Relevance of country reports Use of controlling key ﬁgures Planning system Intensity of foreign planning Formalization Periodicity Standardization Centralization of planning Cultural dimension Firms culture General culture Cultural transfer

22

112

51

25

24

0.27 0.74 1.68

1.04 1.36 1.24

0.98 1.04 0.67

0.48 0.65 1.15

1.25 1.78 2.19

0.14

1.36

1.57

1.04

0.03

1.15

1.62

0.14

1.30

2.81

Europec Overseasc

Sigb

48

66

ns

0.33 0.51 0.51

1.32 1.52 2.92

1.76

1.07

1.77

1.14

2.13

1.33

1.83

1.75

1.36

2.08

1.46

1.92

1.34

1.65

1.60

2.28

1.39

2.07

0.15

0.80

1.16

0.80

1.54

0.98

1.30

ns

0.07

1.32

1.42

1.06

1.88

1.10

1.68

0.18 0.41 0.91 1.00

1.42 1.48 1.17 1.36

1.62 1.62 1.34 1.20

1.56 1.80 1.40 2.35

1.46 1.82 1.57 3.07

1.33 1.05 0.90 0.10

1.71 2.14 1.75 1.89

0.52 0.38

0.86 0.64

0.79 0.57

1.22 0.72

1.27 1.06

ns

0.64 0.33

1.27 1.00

0.15 0.03

0.01 0.30

0.64 0.14

0.39 0.33

0.24 0.52

0.05 0.30

1.13 0.71

1.67 0.99

1.67 0.68

1.56 0.56

1.44 0.71

1.76 0.94

ns ns

Leadership characteristics Risk orientation 0.33 Growth 0.23 orientation Attitudes 0.64 Cultural–psychic 0.79 distance a

Sigb

ns

ns

ns

ns

Differences of assessments (today and 10 years ago, seven-point Likert-type scales); marginal variation of population. b pr0.05; pr0.01; ns, not signiﬁcant; F-values. c Comparison of ﬁrms who entered European or overseas markets for the ﬁrst time.

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holistic way. Not surprisingly, Hypotheses 1, 2a, and 2b are supported, as is Hypothesis 3. Hypotheses 4a and 4b, as well as 5a, are slightly supported, and Hypothesis 5b must be rejected. In detail, the results indicate – not particularly surprisingly – that ﬁrms developed internationally in different ways over time: phases of consolidation/stagnation, of country expansion or establishment chain penetration take place, as well as two-dimensional expansions or reductions. From a holistic ‘‘vertical’’ perspective, the data indicate that internationalization processes result primarily in changes of systems and structure, while cultural changes take place rather slowly. The ‘‘horizontal’’ comparison of country expansion or establishment chain penetration shows stronger effects (on structure, systems, and culture) caused by mode changes. In a comparison, the paths of country expansion and establishment chain penetration show similar results. The structural, systemic, and cultural changes are not consistently stronger in the two-dimensional expansion path (compared to country expansion). Reductions and consolidation/stagnation (related to countries/regions and modes) also involve changes, which indicate an ongoing internationalization process. These holistic results, as well as the individual results, offer some initial implications for managers if they look at the change in subdimensions, such as centralization and information system, or even question their own behavioral or attitudinal aspects. Links to other studies can be suggested. Ghoshal’s (1987) assumption that there is a greater degree of centralization with increasing internationalization cannot be veriﬁed, but the increasing importance of secondary organization proposed by Caruana et al. (1998) certainly can. Decreasing centralization with increasing internationalization supports the positive inﬂuence on knowledge generating and market penetration mentioned in Cummings (2004). In the distinct changes in information and planning systems, the argumentation by Yip et al. (2000) may also be reﬂected: the more systematically and advanced the internationalization of ﬁrms, the more use is also made of systematic information and planning systems. In terms of culture, reference could be made to the changes in growth orientation and risk orientation, which have also been emphasized elsewhere (Harveston, Kedia, & Davis, 2000; Acedo & Jones, 2007).

Limitations and Further Research Methodical limitations that were known before starting the study, but which could hardly be avoided, are related to the retrospective design based on

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

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managerial perceptions, as well as the use of less proven scales that were checked in only a small number of interviews and by reliability analyses. Furthermore, possible biases from using single informants restrict the robustness and generalizability of our conclusions (see also Yip et al., 2000). In terms of content, limitation to family-owned ﬁrms and the unexplored effects of a change in management should be mentioned. Nevertheless, there are some interesting points of contact for further research. One example would be the inclusion of further dimensions on secondary level, such as changes in target systems and competitive or marketing strategy. A second example would be to consider internal and external determinants of development, which could provide a third level in the conceptual framework. This could relate to external and internal environmental variables according to Calof and Beamish (1995), as well as to success. A ﬁnal example concerns the relation to the gestalt approach, which would imply a different conceptualization of the primary level in the present framework. Modeling of individual stages (integrating modes and countries) in combination with the ﬁrm’s success in each stage would help answer the question of internationally successful structure, systems, and culture in a dynamic and integrative view.

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PART II FOREIGN OPERATION METHODS

GLOBAL ONLINE ENTREPRENEURSHIP: THE REVIEW OF EMPIRICAL LITERATURE Anna Morgan-Thomas, Marian V. Jones and Junzhe Ji ABSTRACT Purpose – To identify and systematically analyze empirical works in the emerging ﬁeld of global online entrepreneurship. Design/methodology/approach – A review of empirical articles published in peer-reviewed academic journals (1997–2008) focused on global online activities of entrepreneurial ﬁrms. The methodology purposefully compares a large number of recent studies on the main objective, type of research, theoretical framework, methodology, and main ﬁndings. Findings – The systematic analysis of 45 articles reveals the most relevant publications in the ﬁeld highlighting the collective contribution of this body of literature. The review offers insight into the state of the art of the ﬁeld, discusses the implications for future development, and provides insights into the entrepreneurial aspects of e-commerce use.

Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 69–88 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004008

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Research limitations/implications – The review is limited to empirical articles published in academic journals and does not cover important conceptual contributions, book chapters, or conference publications. Practical implications – The review highlights avenues for the future development of the ﬁeld and provides guidelines for practitioners involved in global online business. Originality/value – This paper provides a consolidation of an emerging ﬁeld and offers practical advice to ﬁrms involved in global e-commerce.

INTRODUCTION The developments in global e-commerce have redeﬁned the nature of international business in the last decade (Karavic & Gregory, 2005). By facilitating a direct link between the ﬁrm and a foreign customer, the e-commerce technologies provide new possibilities to access and service foreign markets impacting the number of ﬁrms involved in international trade and the volumes of transactions (Clarke, 2008; Etemad & Wright, 1999). The online environments have given rise to a new breed of global enterprises, the e-commerce corporations (Singh & Kundu, 2002). Entrepreneurial opportunities presented by this new trading environment have also attracted some non-Internet ﬁrms, and the engagement in global online entrepreneurship (GOE) has translated into accelerated and more widespread internationalization (Arenius, Sasi, & Gabrielsson, 2006; MorganThomas & Bridgewater, 2004). Yet, in spite of the practical relevance of online activities to international business ﬁrms, the research into GOE seems marginalized in the mainstream internationalization literature. A state-ofthe-art review of the literature is needed to highlight the cumulative contribution of the ﬁeld and move the research forward. The paper addresses this research gap by identifying and examining the current empirical research on GOE. This work is positioned at the intersection of the international business (IB), e-business, and entrepreneurship research. We deﬁne GOE by rephrasing McDougall and Oviatt’s (2000, p. 903) deﬁnition of international entrepreneurship as ‘‘ya combination of innovative, proactive and risk-seeking behavior that involves using e-commerce technologies to cross national boundaries and create value in organizations’’. The deﬁnition encompasses e-commerce initiatives of existing international businesses as well as internationalization of Internet new venture ﬁrms.

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The objective of the review is to retrieve and evaluate the most current empirical research on online activities of international ﬁrms in order to (1) identify the key contributions and weaknesses; (2) offer insight into the state of the art of the ﬁeld; (3) discuss the implications for future development of the ﬁeld; and (4) provide insights into the entrepreneurial aspects of e-commerce use. The purpose is to provide a state-of-the-art review with the hope of moving the ﬁeld forward by integrating the existing literature. The structure of this paper is as follows. A description of methodology for the systematic literature review is presented. This is then followed by a general assessment of the studies highlighting the key research objectives, theoretical frameworks, methodology, and main ﬁndings and conclusions. The analysis reveals the most relevant contributions of the ﬁeld and its drawbacks, limitations, or major discrepancies. The review concludes with suggestions and implications for further research.

METHOD The review focuses on the contemporary empirical literature in the ﬁeld of GOE. To identify the relevant articles, we conducted a systematic keyword search of titles and abstracts in articles published in scholarly (refereed) journals in Ebsco, Web of Science, and Science Direct databases. We used two sets of keywords: (1) those capturing e-commerce activity including Internet, virtual, cyberspace, marketspace, net, web, information superhighway, communications network, world wide web, electronic, on-line, networked, connected, wired, digital, digitization, web site, home page, internet site, e-marketing, e-entrepreneurship, e-business e-commerce, e-strategy, computer technology, information technology, IT, or ICT and (2) those capturing international business including global, international, world, foreign, multinational, export, or cross-cultural. Once an article was identiﬁed, the following criteria were used to assess its eligibility: (1) published in English in an academic and peer-reviewed journal; (2) empirical in nature, that is, contains empirical data of either qualitative or quantitative form; (3) closely related to international business and e-commerce; and (4) focused on ﬁrm-level activities. The review focuses on empirical studies and excludes important theoretical contributions, for example, Andersen (2005); Ekeledo and Sivakumar (2004); Hamill (1997); Karavdic and Gregory (2005); Petersen et al. (2002); Poon and Jevons, (1997); Samiee, (1998); Sharma (2005), and

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Singh and Kundu (2002). At a general level, studies eligible were those explicitly integrating theory and concepts from both international business and e-commerce. This criterion eliminates from the review single country studies not focusing on international business activity (e.g., Bollen, Hassink, & Bozic, 2006; Chung, Yam, & Chan, 2004; Hsieh, Lai, & Shi, 2006; Lal, 1996; Rao et al., 2003; Sharma, Ahmed, & Wickramasinghe, 2004) or works where the e-commerce activities do not represent the focal construct of investigation (Gabrielsson & Kirpalani, 2004). At a more speciﬁc level, the focus here is on a subset of information and communication technology (ICT) applications, that is, Internet-related e-business, and the review does not include works which examine the general effects of ICT on internationalization (e.g., Andersen & Foss, 2005; Carpano & Rahman, 1998; Chari, Devaraj, & David, 2007; Lal, 1996; Lal, 2004; Nahar, Lyytinen, Huda, & Muravyov, 2006; Santangelo, 2001). Also excluded are papers where the unit of analysis in not the ﬁrm but the consumer (e.g., Sinkovics & Penz, 2006).

RESULTS The systematic review of databases generated 37 potentially relevant articles after excluding the duplicates. The manual search of their references generated a further 8, bringing the total to 45. Table 1 presents a list of the reviewed articles. To provide a general overview of the ﬁeld, the contributions are categorized in terms of date of publication, publication type, and the research setting (country). In terms of the chronological development of the ﬁeld, the empirical research into online internationalization begins in 1997 with the seminal work by Hamill and Gregory (1997). As the popularity of the topic increases, so does the number of publications reaching the peak of interest in 2006. The majority of studies are published in years 2004 (seven articles), 2005 (six articles), and 2006 (nine articles). The articles appear in a variety of journals including, amongst others, international business outlets (Journal of International Marketing, Global Marketing Journal, International Business Review, Journal of International Business Studies, International Marketing Review); information technology (International Journal of Information Management, Journal of Organizational Computing and Electronic Commerce, The Information Society); entrepreneurship (Entrepreneurship and Regional Development, International Small Business Journal, Journal of International Entrepreneurship); and economics (International Journal of Production Economics, Information Economics

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Table 1.

Overview of the Reviewed Studies.

Author Arenius et al. (2006) Bennett (1997) Berry and Brock (2004) Cerotti and Clifton (1998) Chang and Wang (2008) Clarke (2008) Farhoomand et al. (2000) Fortune and Aldrich (2003) Gabrielsson and Pelkonen (2008) Gregory et al. (2007) Hamill and Gregory (1997) Haugh and Robson (2005) Hinson and Abor (2005) Hinson and Sorensen (2006) Houghton and Winklhofer (2004) Jaw and Chen (2006) Johnston and Wright (2000) Kim (2003) Kotha et al. (2001) Kraemer et al. (2005) Lewis and Cockrill (2002) Lituchy and Rail (2000) Loane (2006) Loane et al. (2004) Luo et al. (2005) Moen (2002) Moen et al. (2003) Moodley (2003) Moodley and Morris (2004) Moon and Jain (2007) Morgan-Thomas and Bridgewater (2004) Mostafa et al. (2006) Nguyen and Barrett (2006) Niento and Fichman (2006) Piscitello and Sgobbi (2004) Pitis and Vloksy (2000) Prasad et al. (2001) Ramsey and Ibbotson (2006) Raymond et al. (2005)

Location

Method

Finland UK Germany Australia Taiwan Eastern Europe and Central Asia Finland and Hong Kong USA Sweden and Finland Australia UK UK Ghana Ghana UK Taiwan Canada, Japan, China, and Mexico USA USA Multi-country UK Canada and USA Canada, Ireland, Australia, and New Zealand Canada, Ireland, Australia, and New Zealand USA Norway Norway South Africa South Africa USA UK

Case study Survey Survey Case study Mixed Secondary data

Secondary data Survey Case study Survey Case study Survey Survey

UK Vietnam Spain Italy USA USA Ireland Canada

Survey Survey Secondary data Case study Survey Survey Survey Survey

Case study Case study Case study Survey Survey Survey Survey Survey Case study Mixed Case study Secondary data Secondary data Survey Survey Survey Case study

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Table 1. (Continued ) Author Rothaermel et al. (2006) Saban and Rau (2005) Servais, Madsen, and Rau (2006) Tiessen et al. (2001) Yamin and Sinkovics (2006) Yip and Dempster (2005)

Location USA USA Denmark Canada UK Europe and USA

Method Secondary data Survey Case study Case study Survey

Policy, World Development). Clearly, the topic is interdisciplinary in nature and of interest to a broad spectrum of scholarly interests. In terms of geographical locus of research, GOE has been studied in a number of diverse country environments and a spectrum of cultures and languages. Although the majority of studies examine North American, UK, or other English-speaking countries (notably Australia, Ireland, and New Zealand), there is some representation of the continental Europe (Italy, Germany, Spain) and other parts of the world including Asia (Jaw & Chen, 2006; Nguyen & Barrett, 2006), Latin America (Johnston & Wright, 2000), and Africa (Hinson & Sorensen, 2005; Moodley, 2003). Closer look at the studies reveals, however, that when the new entrepreneurial ﬁrms are the subject of analysis (Kim, 2003; Kotha, Rindova, & Rothaermel, 2001; Loane, McNaughton, & Bell, 2004; Loane, 2006; Luo, Hongxin Zhao, & Du, 2005; Rothaermel, Kotha, & Steensma, 2006), the geographical focus narrows to reﬂect only the English-speaking world with a signiﬁcant bias toward US ﬁrms. To an extent, the bias might reﬂect the digital divide: the disproportionately large representation of US-based enterprises in the global e-commerce as well as ﬁrst-mover advantages which the US ﬁrms tend to enjoy. However, there is a concern that the focus on USA obscures sources of advantage that might be related to the country of origin, the use of English language, as well as certain cultural biases, notably, the distinctively Western nature of much of the GOE research. Having considered the general parameters of the reviewed articles, the remainder of the review presents the assessment of the studies. In order to evaluate the contributions, each study’s content was analyzed with particular emphasis on the type of research, main objective, theoretical frameworks, methodology, and main ﬁndings and conclusions.

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Type of Research Considering the type of research, we organized the contributions into three groups: exploratory, descriptive, and conﬁrmatory. The ﬁrst group consists of studies where the key objective is theory building where the data collection tends to involve qualitative methods. The second group of descriptive studies aims to provide a quantitative assessment of phenomenon under study by providing data on prevalence, frequency, or intensity. Lastly, there are conﬁrmatory contributions where the objective is to statistically verify a range of theory-driven hypotheses. The review sample includes 19 studies employing conﬁrmatory design, 14 exploratory studies, 9 descriptive, and 2 including both case study and hypothesis testing (Chang & Wang, 2008; Jaw & Chen, 2006). In terms of the progression of the ﬁeld, there is some evidence of evolution from descriptive and explorative studies which dominated in the early years (1997–2002) to more theoretically driven exploratory and conﬁrmatory studies.

Main Research Objective In general terms, all studies deal with the impact of e-commerce on internationalization of ﬁrms. There are, however, two distinctive themes within this research. First, there is a small group of works devoted to the internationalization of Internet new ventures and e-commerce corporations (Gabrielsson & Pelkonen, 2006; Kim, 2003; Kotha et al., 2001; Loane et al., 2004; Loane, 2006; Luo et al., 2005; Rothaermel et al., 2006). These studies focus on the activities of a new type of entrepreneurial ﬁrms – the e-commerce corporations (Singh & Kundu, 2002). Empirical research within this area addresses several speciﬁc objectives. For example, there is interest in the speed, patterns, and particular internationalization strategies of Internet new ventures (Fortune & Aldrich, 2003; Kim, 2003; Loane et al., 2004; Luo et al., 2005), degree of internationalization, and its antecedents (Kotha et al., 2001; Loane, 2006). Some authors consider market-entry decisions of e-commerce corporations and the effects of cultural distance, market conditions, or ﬁrm characteristics (Kim, 2003; Kotha et al., 2001; Luo et al., 2005; Rothaermel et al., 2006). Second, there is interest in how the developments in e-commerce affect the internationalization of non-Internet-related ﬁrms. For example, studies examine the uses of Internet in international marketing (Bennett, 1997; Cerotti & Clifton, 1998; Hamill, Lewis, & Cockril; Litchy & Rail, Moen,

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Endresen, & Gavlen, 2003, Niento & Fichman, 2006; Pitis & Vloksy, 2000; Yip & Dempster); the impact of e-commerce on barriers to internationalization (Arenius et al. 2006; Bennett, 1997; Berry & Brock, 2004; Hamill & Gregory, 1997; Hinson & Sorensen, 2006; Moodley & Morris, 2004; Yamin & Sinkovics, 2006); or the barriers to the adoption of international e-commerce (Farhoomand, Tuunainen, & Yee, 2000; Lewis & Cockrill, 2002; Piscitello & Sgobbi, 2004; Tiessen, Wright, & Turner, 2001). Several studies have focused on the question of integration between the Internet and export strategy (Nguyen & Barrett, 2006; Moon & Jain, 2007; Prasad et al., 2001; Gregory & Karavic, 2007). The objective was to show the moderating role of the Internet activities on ﬁrms’ export performance. Building on export performance research, these studies typically consider the impact of the Internet alongside a range of external and internal factors inﬂuencing export strategy. There has also been some interest in capturing and quantifying the impact of online entrepreneurship on the performance of ﬁrms. There are two different approaches to conceptualizing and measuring the impact. Some studies model the use of Internet as an intermediary variable moderating the effects of the environment on a ﬁrm’s strategy and export performance (Moon & Jain, 2007; Nguyen & Barrett, 2006; Prasad et al., 2001) or a ﬁrm’s performance (Kreamer et al., 2005). Others attempt to measure online entrepreneurship directly by quantifying the contribution of e-commerce to export performance. For example, Morgan-Thomas and Bridgewater (2004) measure the performance of online export channels and suggest a number of its antecedents. The question of e-commerce adoption and its determinants has received some attention. For example, the level of assimilation of e-commerce has been investigated (Raymond, Bergeron, & Blili, 2005; Saban & Rau, 2005). There has also been some interest in the different forms or levels of adoption and their impact on performance.

THEORETICAL FRAMEWORKS A certain number of conceptual approaches and theoretical frameworks can be found in the contemporary literature on GOE. The frameworks reﬂect the cross-disciplinary nature of the ﬁeld being derived from international business theories, entrepreneurship, management, marketing, and information technology research. However, the extent to which these frameworks

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are explicitly proposed lacks uniformity and consistency, and only a minority of studies can be considered highly theoretical. Encouragingly, the theory-grounded contributions are increasingly present in published research, and there is an upward trend toward more theory-driven analyses. Several streams of international business theory are evident in the theoretical underpinnings of the reviewed studies. Possibly most pronounced are internationalization theories of either the Scandinavian school (Johanson & Vahlne, 1997) or the born global literature (Jones, 1999; McDougall & Oviatt, 2000) and, related to the internationalization theory, the issues of barriers or stimulants to international growth (Leonidou, 1995a, 1995b). The internationalization literature seems to accompany particularly well the research questions concerning GOE’s impact of ﬁrms’ international growth (Bennett, 1997; Gabrielsson & Pelkonen, 2008; Hamill & Gregory, 1997) or the examination of the trajectories of international growth (Kim, 2003; Loane et al., 2004; Loane, 2006). In terms of speciﬁc theoretical constructs, liability of foreignness (Arenius et al., 2006) and the concept of psychic distance (Kim, 2003; Yamin & Sinkovics, 2006) have received some attention. Interestingly, there is an ongoing debate whether the patterns of online internationalization reﬂect the Scandinavian approach to internationalization or whether they are more suited to the ﬁeld of international entrepreneurship (Gabrielsson & Pelkonen, 2008; Kim, 2003). Some authors adopt the entry mode perspective either explicitly (Rothaermel et al., 2006) or implicitly (Luo et al., 2005; Morgan-Thomas & Bridgewater, 2004). For example, entry mode approach, more speciﬁcally eclectic theory (see Dunning, 1980), served as the underpinning theory for the study of internationalization patterns of e-commerce corporations (Kotha et al., 2001). Similarly, a number of antecedents originating in entry mode literature have been considered to explain entry mode choice (Rothaermel et al., 2006). The concepts of risk and uncertainty are featured in this stream (Rothaermel et al., 2006) here. In particular, there is also some consideration for the cultural distance or psychic distance in the research (Kim, 2003). Although cultural distance seems relevant, one potential drawback affecting the generality of results concerns the cultural bias inherent in the studies: all studies considered in this review and concerned with entry mode approaches focused solely on US ﬁrms and their entry mode choices. It is questionable whether results on the impact of cultural distance obtained from one country perspective, and an English-speaking country, can be extended to other ﬁrms in other cultural settings.

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Some recent works build on export performance literature (Zou & Stan, 1998). For example, Prasad et al. (2001), Gregory et al. (2007), and Moon and Jain (2007) present export-performance-derived models of Internet integration to suggest a number of antecedents of e-commerce integration as well as to show performance effect. This research is also to some extent inﬂuenced by the resource-based view as well as the marketing concepts of market orientation (Prasad et al., 2001). Entrepreneurial theories are evident in several studies (Arenius et al., 2006; Piscitello & Sgobbi, 2004; Fortune & Aldrich, 2003; Loane et al., 2004). For example, Mostafa et al. (2006) consider the effects of entrepreneurial orientation and risk taking. In a similar vein, the study of Ramsey and Ibbotson (2006) of entrepreneurial ﬁrms in Ireland examines entrepreneurial orientation, identiﬁcation of e-opportunities, and planning. Within the context of entrepreneurship, the notions of networks, social capital, and relationships are also explored (Piscitello & Sgobbi, 2004; Houghton & Winklhofer, 2004). Worth noting is a strong explorative study by Houghton and Winklhofer (2004) which frames the problem of the effects of adoption of e-commerce for conﬂict with intermediaries within the authoritative control and relationship paradigms. Studies examining the question of adoption of e-commerce and levels of adoption (Johnston & Wright, 2000; Haugh & Robson, 2005; Raymond et al., 2005) draw from innovation diffusion theories, typically Rogers (1983). There have also been some efforts to incorporate general management theories. For example, the resource-based view received some attention (Gregory et al., 2007) as does knowledge perspective to internationalization (Nguyen & Barrett, 2006). Given the widely discussed effects of online internationalization on the cost of transactions, transaction cost analysis has also been mentioned (Niento & Fichman, 2006). Overall, the question of ﬁnding and ﬁtting the phenomenon of GOE within a well-grounded theoretical framework represents a major challenge within this emerging ﬁeld. The multiplicities of theoretical frameworks that characterize the majority of contributions are but one outcome of the researcher’s struggle to establish suitable theoretical frames. An interesting dilemma is to what extent this struggle highlights the inadequacy of the existing theories to explain the phenomenon, that is, the novelty and paradigm-breaking nature of GOE. To illustrate, most of existing IB research on technology and innovation deals with product innovation and not the innovation of business processes. Consequently, there is a difﬁculty in adopting innovation perspective or entrepreneurial theories to the phenomenon of GOE.

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METHODOLOGICAL APPROACHES IN GOE A wide array of research methods have been used to capture GOE reﬂecting the complex nature of the phenomenon as well as the diverse research objectives. The reviewed papers include explorative, theory-building studies (Arenius et al., 2006; Yamin & Sinkovics, 2006); descriptive analyses (Bennett, 1997), and conﬁrmatory studies (Morgan-Thomas & Bridgewater, 2004). Although quantitative approaches prevail, these include a signiﬁcant number of descriptive studies aimed at providing an illustration for the prevalence of a phenomenon, for example, certain psychological barriers to GOE adoption (Bennett, 1997; Moodley & Morris, 2004) or the patterns or forms of GOE (Lituchy & Rail, 2001). Many of the qualitative, case-study approaches could also be considered descriptive, given the lack of underpinning theory. In essence, the overall assessment of methodological approaches highlights the emerging nature of the ﬁeld. In terms of data sources, most studies use primary data collected via surveys or interviews. An exception to this general pattern are studies where the data were collected through Web-content analysis and searches of secondary information such as ﬁrms’ reports, the press, and other sources (Kim, 2003; Luo et al., 2005). In addition, some authors relied on secondary data from panel surveys of industry and used proxy measures from the data collected for other purposes (Haugh & Robson, 2005; Niento & Fichman, 2006). Interestingly, there is not much evidence of triangulation of sources with most research relying on a single informant, interview, or questionnaire. In terms of the coverage of different industries, the reviewed literature demonstrates a degree of bias toward certain sectors. In fact, there seem to be two approaches to samples: the research samples either include a wide cross-section of industries (Moon & Jain, 2007; Morgan-Thomas & Bridgewater, 2004) or tend to focus on knowledge-intensive or high-tech sectors (Arenius et al., 2006; Kim, 2003; Loane, 2004). The cross-sectional design is rarely defended either in terms of its applicability or the choice/ formulation of industry groups. The bias toward high-tech industries can be traced to the epistemological origins of the ﬁeld and the association with born global ﬁrms and international entrepreneurship. Incidentally, these two ﬁelds are also mostly associated with these sectors (Rialp, Rialp, & Knight, 2005). A very positive aspect of the empirical research concerns the geographical distribution of studies. In terms of global online activities of traditional (non-Internet) ﬁrms, there is an encouraging spread of results. Aside of the

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usual ‘‘suspects’’ (of the English-speaking world), there is evidence from other parts of Europe (Italy, Germany, Spain, Norway, Denmark). The ﬁrms investigated have been found also in Asia (Vietnam, India, Taiwan, Japan), Latin America (Mexico), and, encouragingly and somewhat against the notion of digital divide, in Africa (Ghana, South Africa). However, the geopolitical spread of research does not seem to apply to the phenomenon of e-commerce corporations which seems to be limited to English-speaking North America, UK, Ireland, New Zealand, and Australia. Future research could devote more effort to identify cases of global e-entrepreneurship in other parts of the world. The data, either in the form of survey questions or interviews, are collected from key groups of individuals (managing directors, export managers) usually in charge of the internationalization/export processes. Mail surveys dominate. Where surveys have been used, samples tended to be small. For example, a signiﬁcant proportion of the reviewed studies has sample sizes of around 100 respondents and in only three articles did the sample exceed 500 (Jaw & Chen, 2008; Kraemer, Gibbs, & Dedrick, 2005; Morgan-Thomas & Bridgewater, 2004). The average sample size presents some concern, given the large number of variables investigated and the multivariate technique used. From the standpoint of statistical validity of results, it could be expected that larger samples are employed to allow for the estimation of the complex models. Aside of sample sizes, sampling procedures could also be improved: responding ﬁrms tend to be chosen for convenience rather than for generalization. These issues provide opportunities for future research: there is need for adoption of the probability-based approaches to sampling, large samples, and a ﬁnely deﬁned industry focus. The question of measurement represents another key concern. The extent to which the variables investigated are deﬁned and validated, as well as the number and complexity of the proposed measurement scales vary greatly between the studies. Single-indicator measures prevail upon multiple-scales, although some analyses employ scales that have been previously published and validated (Prasad et al., 2001), and there is a growing trend toward the use of multiple indicators (Gregory et al., 2007; Moon & Jain, 2007; Nguyen & Barrett, 2006). Particular concerns apply to the focal variable of use or assimilation of e-commerce, the key construct in this emerging ﬁeld. Despite the recognition that levels of adoption matter (Raymond et al., 2005), a large proportion of studies deﬁne it only in very broad terms and capture with single estimators. In the simplest format, for example, some authors use a basic distinction between users and non-users of Web sites, assuming that each group is homogeneous and that all levels of use and types of use are seen as

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uniform (Bennett, 1997). Later studies mark an important methodological development: departure from dichotomous scales of integration toward more precise ordinal measures of business models. For example, some model assimilation (Raymond et al., 2005), types of strategy, or the level of implementation (Saban & Rau, 2005). Worryingly, there is no consistency in the deﬁnition and operationalization of this focal variable, and the variations in measurement make it difﬁcult to compare and contrast the results thus undermining the collective contribution of the ﬁeld. In terms of data analysis, there is evidence of progression from descriptive approaches based on frequency analysis (Bennett, 1997; Lituchy & Rail, 2001) to comparative approaches using T-tests or ANOVAs. More recently, multivariate techniques and SEM have started to be employed on larger samples (Morgan-Thomas & Bridgewater, 2004; Moon & Jain, 2007; Nguyen & Barrett, 2006). Concerning the qualitative investigations making use of case-study based approach, interviews prevail although a certain degree of triangulation of data sources exists. There is a worry about the lack of research protocols particularly with reference to the selection of cases. The cases tend to be descriptive and presented in an exploratory and highly narrative manner. This adds to the problem of generalizability. One positive development is the use of multiple cases (Houghton & Winklhofer, 2004, Loane et al., 2004) and also longitudinal case studies (Gabrielsson & Pelkonen, 2008). In summary, it can be argued that more effort could be devoted to the design and implementation of the empirical studies. In a quantitative context, one possible avenue for improvement concerns the sampling procedures: probability sampling with an emphasis of representatives and, possibly in parallel, more speciﬁc focus on industry context would be welcome. More deliberate selection of case studies and greater emphasis on theory would enhance the qualitative contributions. Given the dynamic nature of international entrepreneurship in general (Jones & Coviello, 2004) and GOE in particular, there is a dire need for longitudinal studies both in qualitative and quantitative settings.

KEY FINDING AND IMPLICATIONS While each study provides a detailed examination of research ﬁndings, this section highlights some general patterns and commonalities. The discussion is organized around major themes and highlights conclusions as well as points of disagreement.

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The ﬁrst problem concerns the effects of GOE on the dynamics of internationalization. Many agree that for some enterprises the use of e-commerce means faster and more widespread internationalization (Kim, 2003; Morgan-Thomas & Bridgewater, 2004). The literature discusses several mechanisms that generate the acceleration in global growth. For example, e-commerce provides resource leverage in internationalization when online activities are used to replace less effective off-line practices (Arenius et al., 2006) or as a means for increasing corporate visibility (Cerotti & Clifton, 1998; Moen et al., 2003). E-commerce tools seem particularly useful for enhancing the quality of international networks and relationships (Chang & Wang, 2008; Houghton & Winklhofer, 2004); or as platforms for knowledge acquisition and learning thus alleviating the impact of psychic distance and knowledge barriers to internationalization (Nguyen & Barrett, 2006; Yamin & Sinkovics, 2006); as facilitator for network connections and platforms for enhanced relationships (Chang & Wang, 2008; Houghton & Winklhofer, 2004); and as a means for increasing corporate visibility (Cerotti & Clifton, 1998; Moen et al., 2003). In general, there seems to be some consensus that e-commerce is complementary to and not a substitute for conventional internationalization. In particular, GOE seems conducive to rapid internationalization strategies, speciﬁcally those associated with international entrepreneurship and the born global phenomenon (Gabrielsson & Pelkonen, 2008). The results concerning the relationship between the level of internationalization and the ﬁrm’s reliance on GOE are somewhat inconclusive. While some discover that the level of internationalization and e-commerce adoption go hand in hand (Clarke, 2008; Jaw & Chen, 2008; Kraemer et al., 2005), others ﬁnd no association (Niento & Fichman, 2006). The question of the strength of the relationship between a ﬁrm’s internationalization and the use of e-commerce as well as the direction of the causal link (if any) deserve more attention. In particular, there is an interesting conundrum whether internationalization precedes GOE as suggested by some (Morgan-Thomas & Bridgewater, 2004), or whether the use of technology represents one of the preconditions for rapid internationalization. The issue remains unresolved partly due to the problems inherent in the measurement and conceptualization of e-commerce. The question of ﬁtting e-commerce activities into the existing thinking in internationalization seems problematic. For example, some consider GOE to be a distinct internationalization channel and model its contribution to international performance separately, for instance, as online export performance. Others consider the Internet to be a moderator for other activities within the ﬁrm

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such as knowledge acquisition or marketing strategy. These studies do not provide a conclusive assessment of the value generated by the Internet and therefore make it difﬁcult to judge whether and how the Internet generates value. Both approaches are difﬁcult to compare and contrast making cumulative assessment hard. Another issue of contention concerns the patterns of online internationalization. The question is whether these patterns can be best described as gradual, following the Uppsala model of internationalization (Johanson & Vahlne, 1977), or whether they are better explained by international new venture patterns (Jones, 1999). There is some empirical evidence to show that foreign market entries in the virtual marketspace are much more dynamic and widespread, often being separated by months rather than years. The compression of internationalization in time as illustrated by the studies of e-commerce corporations (Kim, 2003) provides a strong support for the born global school. However, some authors argue that psychic distance still plays an important role in entry decisions, and that when considered in longer perspectives, the gradual, constraints of resource and psychic distance patterns do seem to ﬁt the Uppsala thinking (Gabrielsson & Pelkonen, 2008). More research employing longitudinal designs is required to resolve these issues. Given that language represents an important component of psychic distance and that what we know about the effects of culture is based, so far, on the English-speaking world, more research is required into the activities of ﬁrms from non-English-speaking countries. One area of disagreement concerns the antecedents of a ﬁrm’s participation in GOE. Research shows clear variations in the range and the nature of beneﬁts attained from online internationalization (MorganThomas & Bridgewater, 2004). There is a certain degree of empirical controversy and debate among the researchers concerning the variety and disparity of factors associated with adoption and success in GOE. There is some agreement that factors internal to the ﬁrm, such as product online transferability, IT capabilities, management commitment, and market orientation, play an important function in explaining online export performance (Moon & Jain, 2007; Gregory et al., 2007). Research also identiﬁes a number of factors external to the ﬁrm which are also of relevance. For example, the external demand for e-commerce seems to be a signiﬁcant moderator of adoption and effectiveness of GOE (Gregory et al., 2007). Within the context of internal factors, the length of export experience represents an interesting conundrum. A number of studies including Morgan-Thomas and Bridgewater (2004) and Moon and Jain (2007) have

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found the length of export experience to be inversely correlated with the level of reliance on GOE and its contribution to export performance. There is an interesting parallel between this ﬁnding and the notions of time compression found in international entrepreneurship literature (Jones & Coviello, 2004). It seems that advantages of newness (Autio et al., 2000) apply to the GOE too. More attention could be devoted to contrasting and comparing the dynamics of online internationalization with conventional internationalization.

CONCLUSION The purpose of this paper was to provide a review of the empirical literature in the emerging ﬁeld of online global entrepreneurship. We systematically analyzed 46 papers as the basis for surveying the state of the art of this research stream. The review of literature provided a critical assessment of the most relevant beneﬁts and potential drawbacks, and highlighted possible avenues for further research. The assessment led to the following conclusions. Consistent with the emerging nature of this ﬁeld of enquiry, much of the identiﬁed literature seems exploratory and descriptive. There has been notable absence of solid theoretical frameworks which would guide the analysis. The descriptive studies coincided with a shortage of theory-building approaches. There are further problems with measurement and the design of the research samples. Lack of longitudinal studies, both quantitative and qualitative, represents a particular shortcoming given the dynamic nature of the ﬁeld. Several directions are proposed to move the ﬁeld forward. Better application of theory and search for new theories to explain the phenomenon is called for. Promising avenues include entrepreneurship research, IT theories, as well as general management theories. The question of business process innovation might present some promise. Empirical analyses could be enhanced by adopting more deﬁned and sophisticated operational deﬁnitions of constructs. Efforts could be devoted to capturing the different forms of GOE, the levels of ﬁrms’ engagement in GOE, and the performance outcomes of this engagement. One promising direction in that quest might come from the ﬁeld of IT which has moved in that direction (Barua et al., 2005). Finally, given the dynamic nature of GOE and the unresolved issues of causality, more longitudinal studies are called for.

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INTERNATIONALIZATION PATTERNS OF CHINESE PRIVATEOWNED SMES: INITIAL STAGES OF INTERNATIONALIZATION AND CLUSTER AS TAKE-OFF NODE Susanne Sandberg ABSTRACT Purpose – To describe and analyze the situation prior to and during the initial stages of internationalization of Chinese SMEs, as well as analyzing the role of clusters as take-off nodes for such ﬁrms. Methodology – A multiple case study is conducted based on semistructured interviews with ﬁve private-owned exporting Chinese SMEs. Also, data on Chinese industrial clusters are analyzed. Findings – The ﬁndings complement the model presented with new knowledge. In the take-off situation, Chinese SMEs deviate from assumed paths due to disadvantages in the emerging Chinese market. In the initial stages of internationalization, the focus on indirect exports hinders the building of international relationships being the key for further international expansion. Cluster localization is a take-off node for individual dedicated exporters into international markets. Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 89–114 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004009

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Research limitations – Few cases, co-location of ﬁrms in the advanced Yangtze River Delta region and issues of Chinese versus Western SME deﬁnitions limits the possibility to generalize the ﬁndings of the study. Practical implications – Chinese as well as foreign ﬁrms can gain from this paper regarding, for example, that competitiveness built up abroad can be utilized for increasing the market share in an attractive domestic market, the pitfall of indirect exports can be overcome by developing direct international relationships, and cluster localization can spur the internationalization of (individual) Chinese SMEs. Originality – Empirical contribution of internationalization patterns of Chinese private-owned SMEs as well as pinpointing the importance of the domestic market as trigger for internationalization.

INTRODUCTION Major changes in the global marketplace are seen due to former closed markets opening up and entering the world economy. The liberalization and privatization of emerging markets offer huge potential markets for business, but also challenges such as enhanced international competition since ﬁrms from the emerging markets have started to enter the global marketplace in an increasing pace (Meyer, 2001; Jansson, 2007a, 2007b). The rapid economic and structural development of the emerging markets is current and continuous as they are predicted to be the main growth areas of the world for the ﬁrst two decades of the 21st century (Cavusgil, Ghauri, & Agarwal, 2002). China is the largest emerging market and the ‘‘factory’’ of the world. By bringing the demand and supply of 1.3 billion inhabitants as well as millions of ﬁrms outside its country boarders, China will for sure affect the global economy today and in the future to come. Chinese international business activities were initiated by the ‘‘Open door’’ policy in the late 1980s and were further spurred by the liberalization of the centrally planned economy in the 1990s (Du, 2003; Kanamori, Lim, & Yang, 2006). One result of the transition is a tremendous growth of smaller ﬁrms (Anderson, Li, Harrison, & Robson, 2003), reaching a number of 39.8 million SMEs in 2006, accounting for 60 percent of the country’s exports (Kanamori et al., 2006). Nevertheless, the international activities outside China are still mainly performed by larger Chinese ﬁrms, of which a majority are state-owned enterprises (SOEs) rather than privately owned enterprises (IBM, 2005). Overall, the degree of internationalization of Chinese ﬁrms is

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low (Child & Rodrigues, 2005; IBM, 2005; Jansson, So¨derman, & Zhao, 2007; Lou & Tung, 2007) and the research focus has been on Chinese MNCs and FDI (e.g., Buckley et al., 2007; Child & Rodrigues, 2005; Lou & Tung, 2007), and less on the internationalization pattern of Chinese SMEs. Note here that Chinese SME covers a range up to 3,000 employees (Natural Bureau of Statistics of China, 2003), which differs from the classiﬁcation of the European Union (250 employees) and the United States (500 employees). The rapid development of the emerging Chinese market implies that the large MNCs of today were SMEs not so long time ago, thus indicating the latter as an important ground in the global catching up of China. Thereby, the internationalization pattern of SMEs from the Chinese market is inevitably an important and current research topic. When discussing larger multinational ﬁrms, they tend to have more resources and former experience of foreign business and are therefore able to adjust to and take advantage of new business opportunities (Cavusgil et al., 2002; Meyer & Gelbuda, 2006). Smaller ﬁrms, however, are considered to have less experiential knowledge of international business, thus facing challenges in performance (Eriksson, Johanson, Majkga˚rd, & Sharma, 1997). In addition, small ﬁrms are considered to face severe managerial, ﬁnancial, and informational constraints (Zyglidopoulos, DeMartino, & Reid, 2006), which could be reduced by developing relationships and networks (Ding, 2007; Jansson & Boye, 2006; Zeng & Williamson, 2003). Yet, with a rapidly changing business world, the traditional theories on how ﬁrms internationalize are challenged (Forsgren, 2002). For example, Lou and Tung (2007) describe that ﬁrms internationalizing from emerging markets like China face a too different environment to ﬁt the traditional Western models. In addition, Liu, Xiao, and Huang (2008) declare the Chinese experience in terms of internationalization unique, and it can be only partially explained by the existing theories. Such a call for theory development and new models of internationalization is also supported, for example, by Fillis (2001), Johanson and Vahlne (2003), and Meyer and Gelbuda (2006). The purpose of this paper is to describe and analyze the take-off situation and the initial stages of internationalization of SMEs from the emerging market China. The take-off situation is when ﬁrms start international business and it is discussed whether or not ﬁrms have domestic experience prior to the take-off. Thereafter, the initial stages of the internationalization process are discussed in terms of the chosen entry mode and its effect on the ﬁrms’ experience, knowledge development, and network relationships. In addition, it is elaborated upon the inﬂuence of industrial clusters as take-off nodes in order to leverage a springboard effect on Chinese SME

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internationalization. As a framework for analyzing the empirical contributions in this paper, and also open up for theory development from the same, a model based on behavioral theories on ﬁrm internationalization is presented. Since they are challenged regarding internationalization of Chinese ﬁrms in line with the discussion above, the framework is complemented with theoretical developments made on how Chinese ﬁrms internationalize and how this relates to traditional theories. After the theoretical overview, the research method for this exploratory study is accounted for. It is followed by a description and analysis of the take-off situation, initial stages of internationalization, and cluster localization of Chinese SMEs. The main conclusions drawn concerning internationalization patterns of Chinese private-owned SMEs based on the ﬁve cases presented ﬁnalize the paper.

THEORETICAL FRAMEWORK A Behavioral Model of Internationalization of Firms The well-known Uppsala model (Johanson & Vahlne, 1977), suggests the internationalization of ﬁrms to be process driven by an interplay between learning about international business operations and commitment to international markets (Johanson & Vahlne, 2003). This traditional model comes from the behavioral research stream inﬂuenced by, for example, Cyert and March and their seminal work from 1963, which also inﬂuenced the process model by Cavusgil (1980). With this focus, other views on internationalization of ﬁrms such as the economic or evolutionary view (Coviello & McAuley, 1999) are not included in the framework of this paper. Over the years, the Uppsala model has been continuously tested, mainly for Western MNCs but to some extent also for SMEs (e.g., Hohenthal, 2001) and has shown to be valid by most empirical studies (Vahlne & Nordstro¨m, 1993 in Fillis, 2001). The model is considered especially useful when studying early stages of internationalization, while it needs complementing insights concerning the preinternationalization phase according to Tan, Brewer, and Liesch (2007). Such a phase would include domestic market activities, being where ﬁrms start their business before entering any international markets according to the traditional internationalization process model. Criticism regarding the need of domestic sales experience as well as the overall usefulness of process models is highlighted in research on small ﬁrms with a rapid, nonincremental internationalization process often driven by an entrepreneur/manager with global vision and/or a technological

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break-through, otherwise known as born globals (Bell, 1995; Blomstermo, Eriksson, & Sharma, 2004; Gabrielsson, Kirpalani, Dimitratos, Solberg, & Zucchella, 2008; Knight & Cavusgil, 1996; Oviatt & McDougall, 2005). A common deﬁnition of the born global ﬁrms is having more than 25 percent exports within 3–6 years from start (Knight & Cavusgil, 1996). For all ﬁrms going abroad, and the smaller ones in particular, network relationships are considered useful or even crucial in initiating as well as facilitating ﬁrm internationalization (Bell, 1995; Coviello & McAuley, 1999; Coviello & Munro, 1997). It connects well to the industrial network approach, which discusses internationalization of the ﬁrm in terms of establishing and developing network positions in foreign markets (Johanson & Mattsson, 1988). This branch of the Uppsala school sees relations as signiﬁcant for ﬁrm internationalization since the business network constitutes of relationships spurring international business activities (e.g., Forsgren, Holm, & Johanson, 2005; Johanson & Vahlne, 2003, 2006). Through operating in the local market and building relationships, the ﬁrm gains both network and internationalization experiential knowledge (Johanson & Vahlne, 2003), being essential for further internationalization of the ﬁrm. The industrial network theory and internationalization process theory can be integrated into a Five/Five stages model (Jansson & Sandberg, 2008). The model relates the ﬁve stages of the relationship-building model by Ford (e.g., in Ford, Gadde, Ha˚kansson, Snehota, 2003) to the ﬁve stages of Cavusgil’s (1980) internationalization process model. The relationship-building model goes through ﬁve stages, starting with a prerelationship stage followed by early/development/long term and ﬁnal stage of relationship building (see, e.g., Ford et al., 2003). It concerns how network experiential knowledge is gained in a country. The Cavusgil (1980) model of internationalization relates to the building of internationalization knowledge, and it covers domestic/ pre-export/experimental/active and committed involvement in exports. Thus, the more developed the customer relationships in a country are, the more experience the ﬁrm has in that particular foreign country market. Thereby the process is driven by relationships, for example, when building experiential knowledge through network relationships (Jansson & Sandberg, 2008). The Five/Five stages model views the internationalization process as an incremental process where ﬁrms move further along the internationalization process by establishing more and more relationships abroad. The larger the number of established relationships, the larger is the portion of a ﬁrm’s resources and capabilities that are dedicated to international business, and the larger the proportion of resources located abroad (Jansson & Sandberg, 2008). From a network approach, the entry mode of the ﬁrm becomes entry

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node, that is, how the ﬁrm plugs into the local market network (Jansson, 2007b). Alternative entry nodes for exporting ﬁrms are direct relationships (dyads) between a buyer and a seller, or indirect relationships (triads) through an intermediary (Jansson & Sandberg, 2008). In terminology of export entry modes, usage of an intermediary in the foreign markets is direct exports, while indirect exports take place via a domestic company, and cooperative exports via collaborative agreements with other ﬁrms. Additional entry modes are intermediary, for example, franchising and partnership, and hierarchal, for example, sales ofﬁce or FDI (Hollensen, 2007). While entry mode and node discuss the way ﬁrms enter a foreign market or connect into a foreign business network, this paper also discusses the takeoff of ﬁrms into foreign markets. This is seen from two angles: the usage of direct or indirect exports, and also starting from either the domestic market or directly on international markets (Jansson et al., 2007). For smaller ﬁrms, as mentioned above, network relationships are useful or even crucial in initiating ﬁrm internationalization (Bell, 1995; Coviello & McAuley, 1999; Coviello & Munro, 1997). Especially in the initial international steps, ﬁrms face different barriers (Tan et al., 2007). Reid, DeMartino, and Zyglidopoulos (2005) argue that managerial, ﬁnancial, informational, and competitive constraints met by resource poor SMEs can be reduced by cooperation and/or being part of a cluster. As a cluster member, the competitiveness of a ﬁrm can be enhanced by the external features of the cluster: for example, cost advantages due to the co-location, access to competent personnel, information and joint marketing, as well as connections to institutions and public goods (Porter, 2000). Cluster externalities are shown to enhance the competitiveness of the SMEs involved and thus giving a positive impact on the internationalization process of the same (Jansson & Boye, 2006; Zeng & Williamson, 2003).

Internationalization of Chinese Firms In research of Chinese ﬁrm internationalization, the relevance of traditional internationalization models is discussed and challenged (e.g., Du, 2003; Jansson, Hilmersson, & Sandberg, 2008; Liu et al., 2008; Lou & Tung, 2007). Since the degree of internationalization of Chinese ﬁrms in general is still low and concentrated to larger ﬁrms (Child & Rodrigues, 2005; Jansson et al., 2007), there tends to be a supportive notion of the traditional models (e.g., Buckley et al., 2007). Elango and Pattniak (2007) point out that since emerging market ﬁrms still are in their early stages of internationalization,

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the Uppsala model is a highly useful tool of research. This is partly supported by Liu et al. (2008), also ﬁnding some support of the born global/ international new venture literature. However, they strongly point out that traditional theories cannot to full extent explain internationalization of indigenous private-owned Chinese ﬁrms since they have unique characteristics. In addition, Lou and Tung (2007) describe that MNEs undertaking outward FDI from emerging markets face a too different environment to ﬁt the traditional Western models. These ﬁrms seldom follow an incremental path as suggested by traditional behavioral models. Instead, they react on, for example, late-mover positions, global competition and domestic institutional constraints (Child & Rodrigues, 2005). Notably though, Lou and Tung (2007) suggest that even if MNEs in emerging markets follow a less incremental internationalization than traditional models would suggest, the elements of organizational learning and global experience are still the key in their internationalization process. The emerging market MNEs discussed above, for example, Chinese multinational ﬁrms such as Haier, Huawei, Lenovo and ZTE (Lou & Tung, 2007) can be classiﬁed as national champions. Other types of Chinese internationalizing ﬁrms going abroad from China are competitive networks, dedicated exporters and technology upstarts as deﬁned by Zeng and Williamson (2003). Relating to the SMEs studied in this paper, they belong to at least one of the latter three types. In China, there are many competitive networks, which is a type of (industrial) clusters of hundreds of small colocated entrepreneurial and ﬂexible low-cost producers, mainly within commodity goods such as shoes, toys, and pens. Firms in these clusters are seen to be interconnected and with governmental support they manage to enter international markets (Zeng & Williamson, 2003). Many industrial clusters in China are located in the economic and export processing zones of the coastal areas. The production focus of such clusters is often standardized consumer or low-technology goods intended for mass markets. The level of innovation and R&D tends to be low (Kanamori et al., 2006). The clusters to a large extent consist of SMEs that face ﬁerce price competition within the domestic market (Ding, 2007). Kanamori et al. (2006) point out Chinese ﬁrms to face growth problems due to the speciﬁc constraints caused by the transition of China. Also, due to low levels of technology spill over, limited local entrepreneurship and less governmental support, the existing clusters tend not to adequately support SME development. For an SME belonging to a more domestic-focused competitive network or industrial cluster, internationalization can be possible through acting as a dedicated exporter. As such, the ﬁrm neglects the domestic market potential

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and expands into (mass) markets abroad, either alone or as subcontractor of MNEs. The advantages of dedicated exporters are low-cost production, manufacturing skills, and economies of scale, while they tend to lack experience of marketing and service. Even if a dedicated exporter entered the international market directly when China opened up in the late 1970s, their competitive advantages were commonly built up beforehand in the domestic market. In comparison with the dedicated exporters, technological upstart ﬁrms are small high-tech ﬁrms with origin from state-owned research institutes. Thus, they are run by researchers rather than business people. This type of ﬁrms often takes advantage of relations with overseas Chinese when and if they enter foreign markets (Zeng & Williamson, 2003). In their research on internationalizing Chinese ﬁrms, Child and Rodrigues (2005) ﬁnd three routes of internationalization: the original equipment manufacturer (OEM)/joint venture (JV) route, the acquisition route and the organic expansion route. The two latter routes both involve ‘‘outward’’ internationalization by FDI; either acquisition or greenﬁeld, and tend to be too cost-demanding for small ﬁrms with a lack of resources in their early internationalization. The ﬁrst route, however, is the partnership route, enabling ‘‘inward’’ internationalization of the Chinese ﬁrm by gaining access to knowledge and competences from the multinational partner. In OEM, the relationship is based on the cost advantage of the Chinese partner and the brand advantage of the foreign ﬁrm. According to Jansson et al. (2007), Chinese ﬁrms involved in OEM tend to be passive suppliers with an internationalization process driven by the foreign demand. This route is often used by Chinese family ﬁrms, but is also relevant for ﬁrms involved in competitive networks as well as for dedicated exporters. A more direct relation is formed through JVs, where the Chinese ﬁrm can reach into the internal network of its foreign partner (Child & Rodrigues, 2005). Though, in a JV the Chinese ﬁrm might be restrained from building its own international reputation, as possible if being an excellent OEM. According to Lou and Tung (2007), ‘‘inward’’ investments bring beneﬁts for Chinese ﬁrms stimulating their ‘‘outward’’ internationalization.

RESEARCH METHOD Due to challenges in research of Chinese ﬁrms, such as lack of access to information and case companies, as well as considerations of reliability of translated primary and ofﬁcial secondary data, an exploratory study was conducted in order to contribute to the less researched ﬁeld of

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internationalization of Chinese SMEs. A qualitative case study was conducted, being a sufﬁcient research method for theory testing (Yin, 2003) as well as for potential theory development (Merriam, 1998). In line with Eisenhardt’s (1989) recommendation of four to ten cases, ﬁve case ﬁrms were included in this holistic multiple case study. It was seen to be a reasonable number of cases in order to fulﬁll the purpose of the study. The ﬁve ﬁrms are private owned (over 50 percent owned by private investors) (IBM, 2005) exporting SMEs. They were chosen with a purposeful sampling technique (convenience sampling) (Merriam, 1998) following a replication logic (Yin, 2003). The selection was made by collaborating researchers at the Shanghai University, based on their access to suitable ﬁrms. Thereby all case ﬁrms are located in the Jiangsu province or Shanghai in the Yangtze River Delta region, which is one of the most expansive and company dense regions in China and thus a suitable area for research of international Chinese ﬁrms. In terms of size classiﬁcation, Chinese industrial SMEs can have up to 2,000 employees and construction SMEs up to 3,000 employees (Natural Bureau of Statistics of China, 2003), which differs widely from, for example, the EU SME deﬁnition of o250 employees and the US standard of o500 employees. In this paper, the case ﬁrms are manufacturing ﬁrms in mainly traditional manufacturing industries with between 80 and 2,200 employees. Thereby they are discussed as SMEs, while in fact four of them are large ﬁrms by Western measures. One reason to keeping the SME discussion is the notion of Chinese ﬁrms holding relatively more employees overall than Western ﬁrms due to lower salaries and lower efﬁciency levels so far. Also, with scarce resources and lack of knowledge, these ﬁrms act as inexperienced smaller ﬁrms. The study is a result of collaboration between researchers at the University of Shanghai, China, and the University of Kalmar and the University of Stockholm in Sweden. A semistructured questionnaire (Merriam, 1998) was developed by the Swedish researchers in spring 2006. It was based on a thorough literature review and concerned the ﬁrms’ foreign market entry process (e.g., internationalization steps, establishment, and development of new foreign business relationships). The semistructured interviews were made between July 15 and September 15, 2006 by Chinese master students led by Prof. Zhao at the University of Shanghai. The case companies were visited and at least three representatives in leading positions (e.g., CEO/founder/owner/manager) from each case company were interviewed in total for 5–20 h. The advantages of having native interviewers include less language and cultural barriers, thus the interviewer might get access to more information from the respondents than if the interviews

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would have been conducted in English or via an interpreter. Still, there are reliability issues due to the multiple translations of the questionnaire and responses to it. To counteract this, all interviews were carefully documented in both Chinese and English. Additionally, the Chinese collaborators presented the gathered material at two occasions (late July and mid-October 2006) to the Swedish researchers. Each discussion included joint interpretations lasting for about 10 h. The case material was then summarized in written form in English and the informants gave their approval concerning publication of data and conclusions, which further strengthens the reliability of the study. In addition to the primary data from the multiple case study, complementary and validating information on the cases was collected from websites and company databases. Secondary data from reports and articles concerning industrial clusters in China are also presented in the paper.

EMPIRICAL ANALYSIS Presentation of the Case Companies The ﬁve case companies are all exporting Chinese SMEs located in the expansive Yangtze River Delta region, either in the Jiangsu province or Shanghai. A brief description of the internationalization of the case companies, as well as main characteristics, is presented below. The ‘‘Far East Cable Co. Ltd.’’ (henceforth FE Cable) is a private cable and wire producing midsized ﬁrm located in Yixing. It started as a township enterprise in 1990. The ﬁrm got import and export rights endowed by the state in 1998 and started to sell to international markets in 2001. In 2002, the company Far East bought all stocks and Far East Cable became headquarters of the group. Its major export markets are Southeast Asia, West Asia, and Africa. FE Cable mainly works as a subcontractor to large Chinese SOEs in their foreign projects, however under the FE Cable brand. Active export markets for ongoing projects in 2006 were Indonesia, Pakistan, and Philippines. FE Cable also has some direct exports, for example, to the Philippines, but in total the export share was only 5 percent. Additional to the 2,200 employees in Yixing, there are more than 600 outlets and over 1,000 own salespeople covering all of China. The ‘‘Shanghai Yaselan Advertising Material Co. Ltd.’’ (henceforth Yaselan Printers) is a private ﬁrm with 80 employees situated in Shanghai. The company was established in 1993 and is producing large inkjet printers.

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In 1994, the manager attended the Canton Fair and spotted US-produced printers. The following years were dedicated to developing similar printers of a lower price. Expanding within the low-end market of inkjet equipment in the domestic market, the ﬁrst foreign sales took place in 2002. Yaselan Printers are sold under its own brand to Southeast Asia, Europe, America, Oceania, Africa, and other regions. Exports are mainly undertaken through distributors in foreign markets (one per market, e.g., in Japan, Australia, India, Turkey, Thailand, Mexico, and Pakistan), and through presence in domestic and foreign exhibitions. The ﬁrm works with the devise ‘‘going forward side by side of home and abroad, direct marketing and agents in parallel,’’ and has an export share of 60 percent. The ‘‘Yangzhou 5A Brush Industrial Co. Ltd.’’ (henceforth 5A Brush) is a private midsized ﬁrm with 1,500 employees that produces toothbrushes. It is located in Hangji – the ‘‘city of toothbrush’’ of China. The ﬁrm was a former SOE production unit that became private in 1993. The ‘‘new’’ ﬁrm started to sell 100 percent to the international market instantly due to weak competitiveness and being closed out from the sales network provided by the state-owned companies. To enter the domestic market, it had to build new distribution channels in the market that would be too costly. Therefore, they had to exploit the international market directly which was made through the Guangzhou (Canton) Trade Fair. Thus, from 1993 to 2001, 5A Brush got orders at the Canton Fair as well as undertook indirect export through middlemen at Chinese foreign trade departments. In 2000, the company acquired a Chinese ﬁrm and made it to the company’s self-run export company. It also started to promote their own brands ‘‘5A’’ in the domestic market and ‘‘CORONA’’ in the international market. In 2006, there was a 50/50 division between these markets. Of the exports, approximately 55 percent were sold via the Canton Fair, 20 percent via overseas or domestic distributors and agents, and 25 percent via own exports of CORONA. The main export markets were other emerging markets: for example, South America and Africa. The ‘‘SuZhou XingXin Knitwear Company Ltd.’’ (henceforth XX Knitwear) is a private midsized ﬁrm with 1,300 employees located in a textile and knitting machinery cluster in Suzhou. It produces apparel of wool, silk, cotton, and other products, for example, woman suits and baby clothes. The ﬁrm was established in 1986 through privatization of a SOE production unit, and until 1992 it was a township enterprise producing clothes for a foreign trade ﬁrm in Shanghai exporting to the Japanese market. The export share of the ﬁrm has always been close to 100 percent due to its heavy dependence on OEM: that means, producing for other ﬁrms

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and brands. From 2004, when the XX Knitwear gained export rights, the ﬁrm started to accept orders also from the United States (e.g., GAP), Canada, and Europe (e.g., Germany: Esprit, and Denmark: Inwear). Japan still accounts for 60 percent of the exports, but its share is decreasing. The full focus of XX Knitwear has been OEM for the international market, thereby having close to 100 percent export. In 2003, the company registered an own brand for the domestic market, which in 2006 accounted for 5 percent of the sales. The ‘‘Suntech Power Co. Ltd.’’ (henceforth Suntech) is a private ﬁrm with 2,000 employees located in Wuxi. The ﬁrm was established in 2001, ﬁrstly undertaking R&D and production of solar-cell lines (solar cells and solar modules) in China. The start-up was secured by governmental support, as well as professional management and ﬁnancing from eight SOEs. The ﬁrst production line was ready in 2002 and due to a nonexistent solar cell industry in China the ﬁrm was international from inception, selling through fairs in Europe. Starting off with a quick expansion in Germany, Suntech expanded to France, Spain, Holland, and Italy. In 2004, Europe accounted for 92 percent of total sales. The exports were undertaken via agents and to some extent also OEM. In 2005, Suntech entered the United States by registering at the New York Stock Exchange and establishing a subsidiary in Delaware. Expansion was also made in South America and Asia, where they acquired a Japanese ﬁrm in 2006. At this time, Suntech was the no. 3 silicon cell manufacturer in the world and had an export share of 90 percent. The remaining 10 percent was sold to the domestic market, being a potential market for further growth. As an overview, the main characteristics of the case ﬁrms are found in Table 1. The Take-Off Situation Traditionally ﬁrms are considered to take-off into foreign market with former experience from the domestic market, and thus rely on competitiveness built up there. This is the case of FE Cable and Yaselan Printers, having respectively 11 and 9 years of domestic experience before entering international markets. FE Cable started to export after receiving (unsolicited) orders from foreign intermediaries, while Yaselan Printers discovered the opportunities of exports via participation in domestic and foreign trade fairs. The competitive advantage from the domestic market was foremost cost competitiveness. Both ﬁrms have also established own brands to complement their low-cost production, manufacturing skills and

Firm characteristics Primary scope of business Turnover (M Yuan) 2005 Foreign sales (%) 2005 No. of employees Start year Start international business Export rightsa International spread

Entry modes

Table 1.

Firm Characteristics of Case Companies.

5

530

Production of cable wire (own brand)

80 1993 2002

60

17

Production of digital inkjet printers (own brand)

Shanghai Yaselan Adv. Mat. Co. Ltd.

1,500 1993 1993

50

Production of toothbrushes (own brand) 400

Yangzhou 5A Brush Ind. Co. Ltd.

1,300 1986 1986

95

80

Production of knitting garment and sweaters (OEM)

SuZhou Xing-Xin Knitwear Co. Ltd.

– Europe (Germany, Holland, Spain), North America (United States), Asia (Japan) (1b) Agents in foreign markets, competitors sales channels (3) Subsidiary USA, acquisition Japanese ﬁrm

2,000 2001 2003

90

Production of solar cells/modules (own brand/OEM) 2,800

SunTech Power Co. Ltd.

Company

2,200 1990 2001

2004 Asia (Japan, Taiwan) North America (United States), Europe (Germany, Denmark) (1a) Via SinoJapanese ﬁrm in China, foreign trade ﬁrms in China (main) (1b) Some foreign customers

Far East Cable Co. Ltd.

1998 Southeast and West Asia, (Indonesia, Philippines, Vietnam), Africa

– Europe (Italy, United Kingdom), Oceania (Australia), United States, Africa, Southeast Asia (1a) Chinese agents (1b) Distributors and agents in foreign markets (one/ market) (main)

2001 North and South America, Europe, Middle East, Africa, Southeast Asia (1a) Chinese trade ﬁrms: Canton Fair, agents, distributors (main: 80%) (1b) Own export company (20%) (1a) Project subcontractor to large Chinese SOE (main) (1b) Some Chinese foreign intermediaries

Internationalization Patterns of Chinese Private-Owned SMEs

1. Export modes (a) Indirect (b) Direct (c) Cooperative 2. Intermediate 3. Hierarchical

Source: Interviews made in 2006. The year of receiving export rights from the Chinese government (before that own direct exports were not allowed). a

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economies of scale (characteristics of dedicated exporters) in order to try to build a differentiation advantage. In contrast to going abroad with experience from the domestic market, some ﬁrms move directly into the global market, that is, act similarly to the born globals (Knight & Cavusgil, 1996). However, 5A Brush and XX Knitwear used to be production units during the centrally planned era and became private ﬁrms in 1993 and 1986, respectively. As a limited company, 5A Brush was forced to sell to international markets at once since it was left outside the state distribution channels in the centrally planned economy of China. Yet, the exports were passive and the company was ‘‘chosen by the market.’’ In comparison, XX Knitwear used the route of OEM when starting indirect exports to Japan via a foreign trade ﬁrm in Shanghai. Both 5A Brush and XX Knitwear managed their early internationalization due to cost advantages and their international business was built up through indirect exports from geographically concentrated (domestic) industrial clusters, that is, competitive networks, specializing in toothbrushes and textiles, respectively. In comparison to 5A Brush and XX Knitwear, Suntech is a born global in accordance with the deﬁnition by Knight and Cavusgil (1996), since it is a high-tech ﬁrm international from inception. The ﬁrm spent 2 years for R&D and production in the domestic market before entering the international markets due to a nonexistent solar cell industry in China at that time. The founder, a Chinese researcher educated in Australia, was driving the internationalization but had no former experience of international business. The competitive advantage of Suntech was its leading technology, that is, a differentiation advantage, which was built on the founder’s former knowledge and skills from research in Australia. In addition there were cost advantages in terms of production and R&D in China.

The Initial Stages of Internationalization Once the ﬁrm has taken off from the domestic market, either with former experience from it or going international from inception, the ﬁrm enters the initial stages of the internationalization process. Related to the Cavusgil (1980) internationalization process model, all the case companies have moved past the pre-export stage. With the exception of Suntech, all ﬁrms are more or less in the experimental export stage. Here the exports are said to be limited as seen in the case of FE Cable having only a 5 percent export share. The other ﬁrms have export shares exceeding 50 percent, which would

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indicate a committed involvement in exports with a high degree of international experience. However, this is not the case for Yaselan Printers, 5A Brush, and XX Knitwear – instead they mix a high export share with insufﬁcient international experience due to mainly indirect exports. In terms of stages, the indirect export mode can be seen as a stage between the preexport and the experimental (direct) export stages. In the case of Suntech, the ﬁrm leapfrogged through the stages and became an active exporter immediately without prior experience of domestic or even international sales.

Firm Experience and Knowledge Development From the initial stages, ﬁrms move on in their internationalization process through increasing their experiential knowledge and strengthening their international commitment. The ﬁrms the most involved in indirect exports are FE Cable, working as a project subcontractor to large Chinese SOEs, thus undertaking indirect exports in the form of piggybacking, and XX Knitwear, being heavily dependent on OEM. The advantage of these kinds of indirect exports is that piggybacking means an opportunity to ride on the brand and recognition of the larger Chinese ﬁrm making projects abroad while OEM provides an opportunity to gain knowledge from the foreign partner. Both ﬁrms have also managed to start some direct exports, though this seems to be more connected to overseas Chinese trade intermediaries. Thereby, a low level of experience and knowledge of the foreign country market and its domestic customers is obtained. After several years with only indirect exports, both Yaselan Printers and 5A Brush have tried to gain more direct exports. Yaselan Printers has focused on direct exports by having agents in several countries all over the world. Relations are strengthened by visiting the foreign agents and customers abroad. At the same time, the ﬁrm learns about the development in overseas markets, helps with problems, discusses future improvements of products as well as promotes new products. Thus, the ﬁrm is willing to learn from foreign intermediaries and customers, which lays ground for further international expansion. In comparison, 5A Brush learned that branding impacts proﬁts from the establishment of a global US competitor in the cluster. Thus, the ﬁrm introduced both a domestic and an international brand bringing more proﬁts and recognition to the ﬁrm. As a result of this and in addition to the opening of the Chinese domestic market, the export share of total sales has gone down from 100 to 50 percent – or the domestic sales have increased from 0 to 50 percent. To be able to handle more direct

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international contacts and gain international experience, an own self-run export company was acquired. Suntech shows a different and more rapid internationalization path than the other ﬁrms – being active from start having direct exports via agents in foreign markets as well as using the sales channels of competitors. The ﬁrm has also undertaken FDI through setting up a subsidiary in the United States as well as making an acquisition of a Japanese ﬁrm. This kind of outward internationalization has given the ﬁrm the needed experiential internationalization knowledge that it lacked from start.

Network Relationships The building of international relationships is connected to the export mode of the ﬁrm. However, through indirect exports no international relations are established since the exports are made via an intermediary in the domestic market, for example, the Canton Fair and/or domestic trade companies. Instead, FE Cable, Yaselan Printers, 5A Brush, and XX Knitwear have been able to build up domestic business networks, which they to a various extent take usage of when obtaining more direct international relationships. Both FE Cable and Yaselan Printers have built up strong relationships, however in different types of networks. FE Cable has mainly indirect exports in terms of piggybacking on large domestic SOEs. The relation and cooperation with the domestic business network of the SOEs is mature, thus being direct (dyad) and stable resulting in continuous business. Beside the domestic business network, only a few direct relations are established with foreign contacts in close-by Asian markets. Thus, the level of international relationship building is low. One possible line of action for FE Cable could be to take advantage of the reputation of the domestic business partners and try to ﬁnd own contacts in the markets served by the SOEs. At Yaselan Printers, the clients are mainly served through direct exports via distributors and agents all over the world through classical triad relations. The ﬁrm’s devise of developing markets both ‘‘home and abroad’’ with ‘‘direct marketing and agents in parallel’’ indicates an understanding of the importance of relationship building in the internationalization of the ﬁrm. As a result of being former domestic production units, in combination with the cluster localization and being involved in competitive networks, both 5A Brush and XX Knitwear have a strategy in terms of extending their networks. The business model of 5A Brush includes to take advantage of domestic networks and to use the direct international contacts established

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by the self-run export ﬁrm in order to ﬁnd further direct international relations. However in the direct contacts with international end-customers, 5A Brush has only reached the prerelationship stage. The contacts are still mainly indirect (triads) and the communication is mainly to secure orders and deliveries. In comparison, the XX Knitwear strategically uses its domestic network of business companions and friends (guanxi) to reach new direct business relationships. One key point for internationalization of the ﬁrm was when they received their ﬁrst international direct (dyad) contacts in the United States and in Europe. But still these direct relations are limited and only in the beginning of their development. Overall, the ﬁrms above relying on indirect exports do not gain any direct international relations but can use their strong domestic business networks to ﬁnd international customers. Still though, the direct relationship-building capacity of the ﬁrms above is limited. With the exception of Yaselan Printers having quite developed business relationships, the other ﬁrms are still in the prerelationship and early stages in building an international network. This implies that these ﬁrms are less internationally experienced in terms of relations than the ﬁrms having more direct export relationships or even having own subsidiaries abroad, such as Suntech. They have the most developed relations and relied heavily on both own and others’ domestic and international networks, as well as the personal network of the founder, in order to enable instant internationalization. The local contacts of a Chinese fellow researcher/friend and later also business partner, rendered governmental support for the project. When internationalizing, Suntech used international fairs, relationships with agents, and competitors’ sales channels in foreign markets. With both agents and customers, the aim was to build long-term relationships, for example, by setting up collaboration agreements. Through that, the ﬁrm has connected to a global business network and is thereby highly internationally experienced.

Export Cluster as Take-Off Node An exit or rather export cluster, as discussed by Jansson et al. (2008), is a domestic cluster (geographical base) and take-off node from where a ﬁrm could take-off into a foreign market network. Of the ﬁve cases discussed above, 5A Brush and XX Knitwear are established in industrial clusters and competitive networks, which have the potential to spur the member ﬁrms’ international take-off.

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The Case Firms and the Clusters 5A Brush is located in Hangji – the ‘‘city of toothbrush’’ in China. The manmade toothbrush production in the city started in 1827. There are more than 1,000 individual units located in Hangji producing toothbrushes, corresponding to 70 percent of the toothbrush manufacturing ﬁrms in the whole country. More than 90 percent of the ﬁrms in Hangji are small family-owned ﬁrms. Most ﬁrms in the cluster target the domestic market only, while some of the larger ﬁrms have started to sell to the international market. The annual output from Hangji is 3 billion toothbrushes (and it is growing), being the largest toothbrush production base in the world (Jian, 2003). According to the Li and Fung Research Centre (2006), the Hangji toothbrush cluster is formed as a result of expansion of a few large enterprises, stimulating the growth of other ﬁrms in the cluster. Receiving governmental support suggests the Hangji cluster to be close to a competitive network (Zeng & Williamson, 2003). XX Knitwear is situated in the city of Suzhou, a textile center concerning cotton, silk, and wool. Suzhou was beside Shanghai the largest exporting city in the Yangtze River Delta in 2005, and has industrial clusters in textiles, as well as in knitting machinery (Li & Fung Research Centre, 2006). Clothing and textiles is one of China’s pillar industries and the production accounts for more than 9 percent of the GDP and more than 25 percent of the foreign exchange revenue. The export from China in terms of knitwear is rising steadily. In 2005, it accounted for 20 percent of the world output. The main way of exports is OEM, corresponding to about 90 percent of the export. Thus, Chinese self-branded textile products only represent 10 percent of the exports. Clusters like the textiles cluster in Suzhou are often, according to Li and Fung Research Centre (2006), traditional selfinitiated clusters in which the ﬁrms are entrepreneurial and family owned. They are often labor-intensive, low technology and low threshold of entering. Thus, also Suzhou has similarities to the competitive network as discussed by Zeng and Williamson (2003).

Advantages Gained and Challenges Met Through Cluster Localization The advantages of being established in the Hangji cluster is according to the 5A Brush case description the availability to the same labor costs, manufacturing technology, and management level as other ﬁrms in the industry. Also, by being established in the cluster, 5A Brush was able to

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learn from the case of Colgate Sanxio (a JV between the US MNC Colgate and a Chinese SOE) in terms of importance of branding for performance and thus got a peak in both the international and domestic sales. An advantage is also the quality distribution system of the Hangji cluster, making it possible to get new products into the domestic market within 1 week. The overall challenges are mainly connected to proﬁts and competition of the ﬁrms, for example, the crowded domestic market, the low proﬁts of toothbrushes caused by low-price competition, and the regional battles within the industry. For XX Knitwear, the main advantage of being established in the cluster is the usage of the domestic network, including friends and business partners to obtain international orders and contacts. It is a well-known company that has long-term relationships with most of the biggest clothing trade companies in the surroundings. Since the main competitors of the ﬁrm are also established within the Suzhou cluster, the location enables the ﬁrm to keep track of these. XX Knitwear, still being a typical OEM with low returns, meets challenges in terms of lack of management expertise, limited access to export markets, and difﬁculties to conform to international operations in order to meet market demand. Coming challenges are increasing costs of raw material and labor costs. Some of the challenges mentioned above could be counteracted through more active collaboration in the competitive networks that the ﬁrms actually are part of, but not so much use. For example, access to competent management personnel, information sharing such as introduced in the Hanji cluster and joint marketing, as well as connections to institutions and public goods. Such connections could be exempliﬁed by the governmental support of the development of the 5A Brush brand. One reason for lacking cooperation between ﬁrms in the industrial clusters of China seems to be the characteristics of being a former centrally planned economy. Many ﬁrms, including 5A Brush and XX Knitwear went from a situation with a predetermined number of customers and distribution channels. Changing to a mode of cooperation is not easily done since it is costly, takes time and demands a certain level of trust. After the privatization 5A Brush was closed out from the sales channels of the state-owned ﬁrms, so the ﬁrm had to adjust to a market with free competition through entering international markets. Both ﬁrms are clearly inﬂuenced by the different features of the transition process of China. Also, both ﬁrms lack experiential international experience and should be able to identify actors within the cluster for collaboration in terms of learning and relationship building with new (direct) entry nodes into foreign markets.

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CONCLUSIONS The relevance of the traditional internationalization theories, developed from and mainly tested for larger Western ﬁrms, has been discussed and challenged in research on internationalization of Chinese ﬁrms. It seems that traditional theories need to be adjusted and complemented to be suitable frameworks for studying ﬁrms taking off from a turbulent emerging market as China. In this paper, the Five/Five stages model developed was used as a framework for analyzing the international take-off by ﬁve Chinese privateowned SMEs. It can be concluded that the reality of the Chinese ﬁrms diverged somewhat from the predicted paths of the model: for example, it faces challenges in terms of the indirect exports undertaken by four of the Chinese ﬁrms, and also by the ﬁfth ﬁrm being a born global ﬁrm. A high level of indirect exports is a pitfall for ﬁrms since it hinders the establishment of direct international relationships on which the Five/Five stages model is built. Still, however, the importance of such direct relationships for further international expansion of the Chinese ﬁrms is stressed. Concerning the operationalization of the Cavusgil (1980) model based on export shares, it is not useful for ﬁrms undertaking indirect exports since they might have a 100 percent export share but no international knowledge or experience. Since not the whole internationalization process of the case ﬁrms is studied, the Five/Five stages model as such is not tested. Rather, it is used as a framework and this study complements the model by adding more knowledge on the initial stages of the internationalization process of ﬁrms. An additional insight is the notion of the importance of the domestic market as a trigger for a ﬁrm taking off into foreign markets. In terms of the complementing theories on internationalization of Chinese ﬁrms, it has in this paper been found relevant for further understanding of the take-off by Chinese ﬁrms into foreign markets. Below, conclusions drawn concerning the take-off situation, initial stages of internationalization, as well as clusters as take-off nodes will be presented, followed by limitations of the study and ideas for further research. In the take-off situation, ﬁrms are traditionally considered to go abroad with former experience from the domestic market, thus exploiting a competitive advantage built up there. When it comes to ﬁrms from emerging markets, facing a more complex institutional context, one cannot always assume that such ﬁrms follow the paths traditionally suggested. The internationalization pattern in the take-off situation of the Chinese SMEs studied shows that they tend to either (1) start doing business on the domestic market as traditionally suggested, then go international, or

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(2) start directly on the international market without former domestic experience. These paths can at a ﬁrst glance be interpreted as following either the traditional internationalization process model or the born global models of ﬁrms international from inception. However, there are some characteristics distinguishing the international take-off by Chinese SMEs from the take-off by ﬁrms originating from mature markets. The ﬁrst path concerns Chinese SMEs that take-off from the domestic market, that is, follow a traditional internationalization process where experience is gained in the domestic market before starting with international business. Though, while ﬁrms in mature markets usually build their international take-off on some kind of differentiation advantage, the two Chinese SMEs within this path took off by exploiting a cost advantage relative to foreign competitors. Thereafter the domestic and foreign markets are developed in parallel. By learning from the international markets, the ﬁrms have been able to start developing possible future differentiation advantages such as own brand and products. The second path concerns Chinese SMEs performing international business from start. Here two kinds of ﬁrms are seen. Two ﬁrms were production units within traditional industries during the centrally planned era. They became privatized in the 1980s and 1990s and once limited companies, they both started 100 percent indirect exports to international markets. One ﬁrm was forced out since they could not enter the distribution channels of the SOEs, and one became heavily dependent on international orders (OEM). The other kind of ﬁrm is the high-tech ﬁrm, becoming international from inception. The ﬁrm had a differentiation advantage in terms of new technology but also enjoyed the cost advantages of being located in China. In addition, the domestic solar-cell market was nonexistent at the time of the take-off so there where no alternatives but to go globally directly. Thus, the main difference between ﬁrms being ‘‘born globals’’ in mature markets versus the Chinese SMEs studied in this paper is that the latter includes ﬁrms that are trigged to early internationalization by the characteristics of the emerging home market. Another common trait of the Chinese ﬁrms is that they develop the international markets ﬁrst and thereafter they tend to go back to the domestic market in order to develop it in parallel. Here the ﬁrms use their international experience in order to develop or utilize existing differentiation advantages such as own brands or high-tech products. When moving from the take-off situation into the initial stages of internationalization, most of the studied Chinese SMEs rely on indirect exports. Some of the ﬁrms even were prohibited to perform direct exports due to no export rights from the Chinese government. In terms of export share,

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the ﬁrms can mix a high export share (suggesting it to be an experienced exporter) but still have insufﬁcient experience due to the indirect exports. As a result of indirect exports, close to no international knowledge or experience is gained, and no direct relationships with international customers are built. On contrary, the ﬁrms can build up strong domestic business networks that can be used in order to ﬁnd international customers. Overall, the capacity of the studied Chinese SMEs to build direct international relations is limited since it is a process of experiential learning. The Chinese SME furthest in building international relationships was spread in more foreign markets than the other ﬁrms, thus being the most internationally oriented ﬁrm. It indicates that in order to gain international experience and knowledge, as well as more and deeper international relationships, the ﬁrms need to get past the pitfall of indirect exports. For this, building direct international relations and taking usage of the network (guanxi) seems to be the key. Firms located in cluster environments have the potential of gaining a springboard effect into foreign markets if the ﬁrm utilizes the advantages of co-location and collaboration, for example, information sharing and economies of scale. However, it seems like the clusters studied have mainly played the role of export clusters, from where the two cluster-based ﬁrms have entered the international market on their own as dedicated exporters. Then the cluster becomes a take-off node, wherefrom the ﬁrms take-off from the (domestic) local market network into a foreign market network. Thereafter, a parallel development of the international and domestic market is seen, facilitated by collaboration and learning from the cluster. Partnerships and other collaborative actions are examples on ‘‘inward’’ investments that bring beneﬁts for cluster-located ﬁrms in order to stimulate their ‘‘outward’’ internationalization, that is, FDI as urged for by the Chinese government through the ‘‘Go abroad’’ policy. By this, Chinese SMEs could move further in their internationalization and grow larger, which would spur the catching up process of China. When studying internationalization of Chinese SMEs, there are many possible aspects that can inﬂuence the ﬁrms’ take-off and initial internationalization. A limited number are discussed in this paper: for example, characteristics of the emerging Chinese market, the impact of the chosen entry mode on the ﬁrms’ experience, knowledge development and network relationships, as well as clusters as a take-off node. Many possible inﬂuencing aspects, such as the role of the manager (entrepreneur), psychic distance, and selection of foreign markets as well as the timing of internationalization in relation to performance (e.g., in Liu et al., 2008) were excluded due to the frame chosen for the study. It is an exploratory

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study aiming at describing and analyzing internationalization patterns of the Chinese SMEs studied. Even though multiple cases are studied, the few case companies limit the possibilities to draw general conclusions from the ﬁndings. Additionally, the location of ﬁrms in the more advanced areas of China (being substantially different from other areas in the country) and also the size issue in relation to Western standards of size classiﬁcations of SMEs further limit the possibility to generalize the ﬁndings of this paper. Thereby, the conclusions pointed out in the discussion above should be seen as indicators of potential areas for theory development and/or further research areas, for example, concerning the importance of an (emerging) home market as a driver of early internationalization of the ﬁrm, in order to enhance the understanding of the internationalization patterns of the unique and less researched Chinese SMEs.

ACKNOWLEDGMENTS The author wishes to thank the EIBA 2008 Conference Proceedings Editors, Prof. Jorma Larimo and Dr. Tiia Vissak for their support, as well as the EIBA 2008 Conference anonymous reviewers for helpful comments given on an earlier version of this paper. Acknowledgments are also given to collaborating research colleagues: Prof. Hans Jansson, University of Kalmar, Prof. Sten So¨derman, University of Stockholm, and Prof. Xianjin Zhao, University of Shanghai for granting the author access to the Chinese case database; as well as to the research team at the Baltic Business Research Center at the Baltic Business School, University of Kalmar, for questionnaire compilation and overall valuable and insightful comments upon this paper.

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INTERNATIONALIZATION OF GOODS AND SERVICES: A COMPARISON OF THE INTERNATIONALIZATION OF SERVICE PROVIDERS AND MANUFACTURERS IN SWITZERLAND Ralph Lehmann ABSTRACT Purpose – In the Swiss economy, the service sector has gained a great share of international trade and foreign investments. Export promotion measures, though, are mainly focused on the internationalization of manufacturing companies. From the literature it remains unclear if the internationalization behavior of service and manufacturing ﬁrms differs and if promotion measures should be adapted. The present study describes the internationalization of service ﬁrms and compares it with the internationalization of manufacturing companies. Methodology – The study is structured into two consecutive surveys: the ﬁrst one is explorative, qualitative-empirical, and examines the Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 115–135 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004010

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internationalization behavior of 12 service companies, four each from the industries of corporate consulting, engineering, and information technology. The resulting hypotheses are tested in a subsequent conﬁrmatory, quantitative-empirical survey of 443 service providers from the sectors of consulting, information technology, and education, as well as 553 production enterprises from the sectors of food, textiles, and chemical products. Findings – The results show that the psychological distance to foreign markets has a greater importance for service providers than for production companies. Service providers prefer direct distribution systems and develop foreign markets more simultaneously than production companies. Practical implications – The conclusion is that export promotion programs should be tailored to the speciﬁc needs of different segments of the economy. Originality of paper – The study offers an empirical support to the position that the internationalization behaviors of service providers and manufacturers differ, and that internationalization models which are substantially based on the examination of manufacturing companies should be veriﬁed.

INTRODUCTION The service sector has achieved a signiﬁcant position in Switzerland. More than three-quarters of corporate turnovers are generated in the tertiary sector (value added tax statistics, 2003). Service providers, however, do not only render their services in and for Switzerland, but also increasingly in and for foreign countries. In 2003, service accounted for almost 80 percent of all exports of the Swiss economy, according to the value added statistics of the Swiss tax authorities. The share of service companies in direct investments abroad amounted to approximately two-thirds according to the ﬁgures published by the Swiss National Bank (Monthly Bulletin of Banking Statistics, March 2007). Reasons for the increasing internationalization of the tertiary economic sector can be found in the international adjustment of service requirements, the increasingly complementary correlation between real assets and service, the higher mobility of employees thanks to provisions like the Act on the General Freedom of Movement, improved means of communication with remote customers, and the liberalization of service markets through a

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reduction of trade barriers (GATS) (Bruhn, 2005; Porter, 1991; Czinkota & Ronkainen, 2000; Hermanns & Wissmeier, 2001; Javalgi & White, 2002). The increasing signiﬁcance of the service sectors in international competition remained largely disregarded by economic policy. Osec Business Network Switzerland, like most export promotion organizations in Europe, focused their investigations on traditional export sectors like mechanical engineering, electronics, pharmaceuticals, and food industries. Service-providing sectors such as tourism, education and advanced vocational training, and the health care sector remained largely disregarded (Reynolds, 2005), although the World Investment Report 2004 revealed that the tertiary sector still bears a large potential for internationalization (UN, 2004, p. 114). This heaviness of the Swiss internationalization promotion organization on production is now to be corrected. Thus, the question arises as to how and to what extent internationalization of manufacturing ﬁrms is different from service-providing ﬁrms. To this day, research has not been able to conclusively answer this question for the international business sector (Javalgi & White, 2002; Vinh, 2005). The scientiﬁc interest in the internationalization of service-providing companies was generated in the late 1980s. It reached a peak in the mid-1990s and then lost momentum again (Bruhn & Stauss, 2005). Subjects of research were the signiﬁcance of services in various world regions (e.g., Kassem, 1989), internationalization processes within speciﬁc service-providing industries (e.g., Bhuian, 1997; Terpstra & Yu, 1988), and differences between the various kinds of services and their implications on marketing (e.g., Nicoulaud, 1988; Patterson & Cicic, 1995). All in all, the number of studies seems to be small in relation to the signiﬁcance of the service-providing industries; the research seems to be fragmented into noncoherent topics without having built a sufﬁcient theoretical basis, and it seems to be purely exploration-oriented, which shows that the ‘‘research on international services marketing is still very much at an early stage’’ (Knight, 1999, p. 348). Models to describe and explain the internationalization of service-providing companies are to this day mainly based on the investigation of manufacturing ﬁrms, and the question arises whether these models are able to adequately map the internationalization behavior of service-providing ﬁrms (Mo¨sslang, 1995). Services are distinguishable from commodities with regards to characteristics such as their materiality, storage and transportability, intensity of customer contact, and differentiation degree – characteristics which may have an essential inﬂuence on internationalization. The literature is divided in its opinion (Gro¨nroos, 1999). Some authors hold the view that the internationalization of the service-providing and

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manufacturing industries goes through a similar process, and there is no need to adjust the existing internationalization models: Boddewyn, Halbrich, and Perry (1986), Terpstra and Yu (1988), and Elango and Abel (2004) investigated to what extent the theoretical approaches for the explanation of direct investments in foreign markets are suitable to map the behavior of service-providing companies. They came to the conclusion that there is no need for a fundamental adaptation of the existing models, and that internationalization of service-providing ﬁrms can be explained by simple qualitative differentiations, for example, regarding the signiﬁcance of the advantage of a location. Katrishen and Scordis (1998) analyzed to what extent multinational insurance companies are in a position to gain advantage from the internationalization of their ﬁeld of business activities due to the company size and came to the conclusion that service-providing companies – similar to manufacturing companies – practice economies of scale. Javalgi, Cutler, and Winans (2001) examined the question what inﬂuence the country of origin has on the marketing of services in foreign markets and came to the conclusion that the signiﬁcance of the country of origin for a service corresponds approximately to that for the marketing of tangible goods. The second group of authors argues that there are distinct differences between the internationalization of a material product and an immaterial service: Javalgi (2003) analyzed the motives for internationalization of business-to-business service providers on the basis of Dunning’s eclectic theory (Dunning, 1980) and came to the conclusion that internationalization models that are based on the examination of manufacturing companies cannot simply be transferred to service-providing companies. ‘‘Rather, each underlying assumption from the manufacturing literature must be carefully examined (both theoretically and empirically) to determine its appropriateness for application in the service industry’’ (Javalgi, 2003, p. 195). Dunning (1993) and O’Farrell, Wood, and Zheng (1995) showed that the special characteristics of a service, like its intangibility, perishability, lack of transportability, and close customer contact exert a signiﬁcant inﬂuence on the target markets that are selected by service providers. Ekeledo and Sivakumar (2004) examined a resource-based model to explain market entry strategies of service-providing companies and showed that service providers strive for a stronger control of their foreign business than manufacturers do. The third group of authors holds the opinion that the internationalization of service-providing companies cannot be viewed generally, since a distinction must be made between different kinds of services: Erramilli (1990) and Blomstermo and Sharma (2006) showed that the entry strategies of service providers strongly vary between different sectors. The behavior of suppliers of

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the so-called hard services (like software and engineering) tends to be similar to that of manufacturers, whereas the behavior of companies offering soft services is very different. Coviello and Martin (1999) examined the internationalization behavior of engineering consulting ﬁrms. They found out that the internationalization process of these ﬁrms was signiﬁcantly determined by speciﬁc service features, such as the great importance of the personal know-how of the employees, the strong involvement of the customer in the performance process, the high capital intensity, and the projectdependent organization. Neither the direct investment theory nor the stage models or the networking approach proved to be suitable to explain the behavior of these enterprises. Moreover, it turned out that the deviations from the internationalization behavior of manufacturing ﬁrms became less when comparing the consulting ﬁrms to small manufacturing enterprises. Coviello and Martin therefore posed the question ‘‘whether industry inﬂuences are less important than those related to size’’ (Coviello & Martin, 1999, p. 60). All in all these studies present an inconsistent answer to the question: Is there a difference between the internationalization behavior of service and manufacturing ﬁrms? The results suggest that service providers tend to exert a stronger control on their foreign activities. They contradict themselves as far as the criteria and the scope of the target market selection are concerned, and they imply that the extent of the difference between the internationalization of service providers and manufacturers depends on the type of service offered. However, evaluation of these different positions remains difﬁcult. The empirical research base is still too weak in order to be able to judge whether the currently applied internationalization theories are suitable to map the behavior of service providers, or if they have to be adapted to the speciﬁc characteristics of immaterial products. The objective of the present study was to describe the motives, the process, and the challenges associated with the internationalization of service-providing ﬁrms and to compare them with those of manufacturing ﬁrms. The following paragraphs will introduce you to the research methodology applied in the project, the ﬁndings resulting herefrom, as well as their scientiﬁc and economic signiﬁcance.

METHODOLOGY The study was structured into two consecutive surveys: the ﬁrst one was explorative, qualitative-empirical. The sample consisted of 12 internationally active service companies, 4 each from the industries of corporate

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consulting, engineering, and information technology. In each company the CEOs were questioned by means of partly structured interviews for the motives, the process, and the challenges of their internationalization. The interviews were subjected to a standardized content analysis and then compared with each other. Based on the results, a focus group consisting of scientists, entrepreneurs, and export specialists formulated theses on the internationalization behavior of service providers. The following second survey was conﬁrmatory, quantitative-empirical. As the basis for the sample the Export Directory of the Osec Business Network Switzerland – the ofﬁcial state-ﬁnanced Swiss export promotion agency – was used. The sample consisted of 996 organizations: 443 service providers from the sectors of consulting, information technology, and education, as well as 553 production enterprises from the sectors of food, textiles, and chemical products. A questionnaire was developed to measure the agreement with the theses resulting from the qualitative survey. The questionnaire was written in German and French and was based on an Internet-based survey instrument (Survey Generator). Questions were subjected to a pretest: incomprehensive formulations and incomplete answer categories were re-edited. The questionnaire was ﬁnally sent to the persons responsible for the international activities of the businesses (i.e., heads of exports, marketing managers, CEOs). Nonresponding companies were contacted a second time and encouraged to answer the questionnaire. Feedback contained 330 answers (132 serviceproviding ﬁrms, 198 manufacturing ﬁrms), which is equivalent to a 33 percent response rate. The companies participating in the quantitative study had 213 employees on average (production companies 296, service providers 77). They are on average 55 years old (production companies 68, service providers 35) and generate a foreign sales volume of 47 percent of total sales (manufacturers 50 percent, service providers 42 percent). The ﬁgures illustrate that the examined service providers were considerably younger and smaller than the manufacturers. All in all, the companies achieved a large foreign market share which is probably due to the fact that, on one hand, all entries were selected from the Osec Export Directory and, on the other hand, the nonresponse effect only led internationally active companies to participate in the study. Large companies are over-represented in the study. On average, Swiss companies have 11 employees (Federal Ofﬁce for Statistics, 2005). The allocation of companies to individual industry sectors revealed that consulting agencies are heavily over-represented within the service category compared with information technology and training ﬁrms. Within the

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production sector, companies are relatively equally represented in the three sectors: chemicals, textiles, and food. The methods used for evaluating the questionnaires were cross tabulation and logistic regression analysis in SPSS. By means of the cross tabulation, answers provided by the service and manufacturing companies were compared to one another and ﬁrst hints were given concerning their signiﬁcance of difference through Pearson’s chi square test. Logistic regression analysis was then applied for testing step-by-step as to what extent the dependent variables (motives for internationalization, criteria for the selection of a foreign market, speed of market development, type of market entry, challenges associated with the internationalization) were inﬂuenced by the independent variables (age of the corporation, size of the corporation, degree of internationalization (foreign market revenue share), and industrial sector), and if the differences between service providers and manufacturers were maintained if the inﬂuence of the other independent variables was controlled. Contributions made through the independent variables are rated ‘‘signiﬁcant’’ if the value reached fell below 0.05 (asymptotic difference), and ‘‘highly signiﬁcant’’ if the value reached fell below 0.01. The signiﬁcance levels of the chi square tests are marked in the ﬁgures with asterisks (/).

RESULTS The following paragraphs illustrate the ﬁndings resulting from the surveys. Within the framework of the quantitative survey, the degree of agreement to the theses generated from the qualitative study will be illustrated, as well as to what extent service providers and manufacturers differ in their agreement.

Motives for Internationalization From the qualitative survey of service-providing companies, eight different reasons were found which had induced internationalization. The nature of these reasons is partly reactive, like the limitation of the domestic market, forcing service providers to go abroad. Partly, however, their nature is proactive, like using internationalization as a competitive reference (also see Bruhn, 2005; Meffert & Bruhn, 2003).

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RALPH LEHMANN What reasons have caused you to start serving foreign markets? (*Significance <0.05, **Significance <0.01) 0

0.1

0.2

0.3

0.40 0.63 0.30

Swissness is used as an advantage in international competition

0.48 0.38 0.11 0.07

Internationalization serves as a distribution of risks

0.35 0.25 0.02 0.13 0.14 0.25 Manufacturing firms

Fig. 1.

0.7

0.29

The domestic market is too small**

Services are becoming more mobile*

0.6

0.38

Internationalization is a reference in competition*

Customers are becoming more mobile**

0.5

0.30

We follow our customers abroad

Trade obstacles and regulations are being reduced

0.4

Service firms

Motives for Internationalizing.

The quantitative survey showed that the main motives for the internationalization of service providers of the industrial sectors included in the survey (see Fig. 1) consisted of four areas: 1. Service providers follow their customers abroad. Internationally active industrial organizations require services from one source in order to simplify procurement and to assure quality. This makes an international presence for service providers necessary as without it they would also lose their competitiveness in their domestic markets (also see Behofsics, 1998). 2. International orientation is a reference in competition. Since the market performance of a service provider is neither tangible, nor visible or veriﬁable, its sale is based on trust – which again is based on experience, recommendations, and references. International activities may be a reference to build the customer’s conﬁdence (in Switzerland, too) in the performance of a service provider (also see Mann, 1998).

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3. The domestic market is too small for focused service providers. The trend toward the differentiation and simultaneous globalization of markets leads service providers to concentrate on increasingly shrinking market segments within which they act internationally in order to justify the development costs of their services, fully use their capacities and build up the critical corporate size which is necessary to process larger orders. 4. Service providers leverage Swissness in international competition. Abroad, ‘‘Swiss’’ stands for discretion, service orientation, multiculturalism, security, punctuality, and reliability – values from which Swiss service providers beneﬁt in international competition (also see Javalgi et al., 2001). The comparison with the manufacturing companies shows that the importance of internationalization as a reference in competition is signiﬁcantly higher than it is for manufacturers. The same applies for the mobility both of customers and services. New transport and communications means are more essential for the tertiary than the secondary sector. As regards the importance of the Internet, this is mainly correlated to the fact that the service providers examined were considerably younger on average than the manufacturers participating in the survey (see Table 1). Manufacturing companies indicated signiﬁcantly more frequently that the size and the limitation of the domestic market are reasons for internationalization. Partly, this has to do with the fact that the manufacturing companies surveyed were on average larger than the service providers. The step-by-step regression analysis shows that the difference between the service providers and the manufacturers remains signiﬁcant, but the size of the company has an additional inﬂuence. The explanation for the remaining sectoral difference could be due to the fact that the production of intangible goods is mostly capital intensive, whereas the provision of services is more labor intensive. Advantages due to size are therefore more essential for manufacturing companies (which would contradict the ﬁndings by Katrishen and Scordis, 1998).

Target Market Strategy The most important criterion for the selection of foreign markets for service and manufacturing ﬁrms is sales potential. Besides this commonality, there are signiﬁcant differences (see Fig. 2): feedback of the surveyed ﬁrms shows that the criteria of cultural and linguistic similarities are more important for

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Table 1.

Results of the Logistic Regression Analysis.

Signiﬁcance of the Model

R-Square (Nagelkerkes)

Firm Age

Firm Sector Share of Foreign Size Revenues

q7: What reasons have caused you to start serving foreign markets? q7_1 0.107 0.011 0.106 Exp(B) 1.472 q7_2 0.036 0.018 0.036 Exp(B) 1.650 q7_3 0.000 0.253 0.018 0.000 Exp(B) 1.507 0.285 q7_4 0.079 0.012 0.080 Exp(B) 0.667 q7_5 0.278 0.008 0.289 Exp(B) 0.645 q7_6 0.001 0.062 0.132 Exp(B) 0.677 q7_7 0.000 0.108 0.001 Exp(B) 5.872 q7_8 0.000 0.087 0.001 0.519 Exp(B) 2.054 1.231 q8: Based on which criteria did you select foreign markets? q8_1 0.000 0.150 Exp(B) q8_2 0.000 0.138 0.017 Exp(B) 1.646 q8_3 0.000 0.147 0.052 Exp(B) 1.552 q8_4 0.000 0.159 0.022 0.000 Exp(B) 1.917 3.127 q8_5 0.051 0.039 0.013 Exp(B) 1.835 q8_6 0.234 0.015 Exp(B)

0.001 2.470 0.368 1.343 0.001 0.390 0.030 2.466 0.501 1.311 0.234 1.968

q11: How fast did you proceed when developing foreign markets? q11_1 0.000 0.073 0.018 Exp(B) 1.778 q11_2 0.000 0.073 0.018 Exp(B) 0.562 q12: In what mode do you serve foreign customers? q12_1 0.014 0.037 0.015 0.014 Exp(B) 0.654 2.024 q12_2 0.013 0.069 0.045 0.016 Exp(B) 1.699 0.318 q12_3 0.000 0.232 0.027 0.000 Exp(B) 1.454 0.220 q12_4 0.041 0.017 0.042 Exp(B) 1.597

Prediction (%)

67.0 67.0 0.000 1.019

68.8 55.5 90.6

0.001 1.012

69.1 93.6 81.8

0.000 0.448 0.000 0.981 0.001 1.016

73.9 80.9 79.4 89.1 90.909 96.061

0.000 1.013 0.000 0.987

63.0 63.0

72.1 0.034 0.988 0.000 1.013

90.3 68.5 54.5

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Internationalization of Goods and Services

Table 1. (Continued )

q12_5 Exp(B) q12_6 Exp(B) q12_7 Exp(B) q12_8 Exp(B) q12_9 Exp(B)

Signiﬁcance of the Model

R-Square (Nagelkerkes)

0.033

0.058

0.262

0.005

0.000

0.121

0.000

0.185

0.000

0.221

Firm Age

Firm Sector Share of Foreign Size Revenues

0.000 2.899 0.000 2.822 0.000 3.332

0.466 1.430 0.262 1.294 0.118 1.919 0.453 1.228 0.005 2.598

0.013 1.019

Prediction (%) 94.2 59.1 91.2

0.005 1.011 0.003 1.014

q13: What are the greatest challenges of internationalization for your company? Q13_1 0.004 0.047 0.020 0.046 Exp(B) 1.458 0.600 q13_2 0.051 0.024 0.360 0.033 Exp(B) 0.809 1.007 q13_3 0.001 0.050 0.001 Exp(B) 2.452 q13_4 0.319 0.004 0.319 Exp(B) 1.261 q13_5 0.538 0.002 0.538 Exp(B) 0.869 q13_6 0.048 0.025 0.040 0.356 Exp(B) 1.422 0.800 q13_7 0.011 0.050 0.014 Exp(B) 3.106 q13_8 0.045 0.043 0.277 0.042 Exp(B) 0.606 1.012 q13_9 0.000 0.123 0.007 0.872 0.001 Exp(B) 1.859 1.065 1.019 q13_10 0.010 0.061 0.014 Exp(B) 3.860 q13_11 0.314 0.021 0.320 Exp(B) 2.496 q13_12 0.000 0.143 0.004 0.249 0.000 Exp(B) 0.437 0.658 1.020

73.9 85.2

67.3 54.8 78.5 61.8 55.8 65.2 93.3 91.8 88.8 95.2 98.5 86.1

service providers than for manufacturers when selecting foreign markets. The provision of a service often includes personal contact with the customer. Linguistic and cultural differences are therefore signiﬁcantly more essential than they are for the production of physical goods where production and use are separated regarding both time and location. Service providers internationalize their activities primarily into markets whose language and

126

RALPH LEHMANN Based on which criteria did you select foreign markets? (*Significance <0.05, **Significance <0.01) 0

0.1

0.2

0.3

0.4

0.5

1

0.26 0.86 0.68 0.07 0.17 0.09 0.10 0.03 0.06 Manufacturing firms

Fig. 2.

0.9

0.15

Market size**

Freedom of establishment

0.8

0.34

Geografical distance**

Labor costs and productivity

0.7

0.17

Cultural and linguistical similarity**

Availability of qualified personnel**

0.6

Service firms

Criteria for the Selection of Foreign Markets.

culture are similar to the home market (also see Javalgi & White, 2002; Karmarkar, 2004; Raff & Billen, 2005). At ﬁrst sight, the geographical distance to the domestic market seems to be a considerably more essential criterion for service-providing ﬁrms when selecting foreign markets than it is for manufacturing companies. However, the more detailed step-by-step regression analysis reveals that this difference is above all generated by the age and the degree of internationalization of the companies surveyed. Younger and less internationalized corporations gave distance as a criterion signiﬁcantly more frequently than older and more internationalized companies. The inﬂuence of these two variables eliminates the signiﬁcance of difference between manufacturers and service providers. An explanation for this effect could be the fact that the younger companies have less experience in international competition and therefore restrict internationalization to foreign countries nearby (also see the stage model by Johanson & Vahlne, 1977). Another signiﬁcant difference between service providers and manufacturing companies is the criterion of availability of qualiﬁed staff when selecting

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a foreign market. Rendering services is labor intensive and the quality of the service cannot be standardized, but depends on the working method of the personnel employed abroad. Products, however, may be manufactured centrally by maintaining the same quality worldwide. Therefore, the availability of qualiﬁed personnel when selecting foreign markets is more important for service providers than for manufacturers.

Market Entry Strategy The characteristics like intangibility, simultaneousness of production and consumption, as well as close customer contact bring about the fact that services are rendered directly on the customer’s site, thus restricting service providers to direct forms of market entry. The strategy most frequently used by the companies surveyed is the direct exports (see Fig. 3). The companies’ own employees travel abroad to render the services on the customer’s site. This strategy is followed by the cooperation with foreign partners. Ranking third is the establishment of subsidiaries abroad. These three market entry forms are used in parallel by most companies. Initially, the foreign markets are catered directly from Switzerland. If there is sufﬁcient sales potential, companies turn to more intensive forms of market development. A partnership with a foreign company is suitable in cases where the cultural differences with the foreign market are huge and the foreign partner is able to contribute valuable market knowledge and relationships to the cooperation, thus accelerating the market development. Own subsidiaries are preferred if there is a signiﬁcant risk of losing know-how and the task of service quality assurance is demanding (also see Buckley, Pass, & Prescott, 1992; Pietika¨inen & Tynnila¨, 1994; Roberts, 1999). The comparison of the feedback given by service providers with those given by manufacturers shows that there are signiﬁcant differences regarding the type of exports; conﬁrming the thesis that service providers use direct sales forms signiﬁcantly more often and indirect sales forms signiﬁcantly less often than manufacturing companies. The step-by-step regression analysis makes this result even more evident by illustrating that foreign customers of service providers signiﬁcantly more often come to Switzerland to retrieve their services than those of production companies, if the age factor of the companies is eliminated. Manufacturers use indirect exports via domestic intermediaries signiﬁcantly more often, if the inﬂuence of age and the degree of internationalization is controlled; the differences concerning the operation of own foreign subsidiaries for the provision of services becomes highly

128

RALPH LEHMANN In what mode do you serve foreign customers? (*Significance <0.05, **Significance <0.01) 0

0.2

0.55 0.19 0.49

Foreign customers are served directly by Swiss personnel*

0.61 0.05 0.06

Foreign customers are served by foreign partner firms Foreign customers are served by jointventures with foreign partners Foreign customers are served by our own foreign branches Foreign customers are served by our own foreign subsidiaries

0.39 0.45 0.08 0.10 0.32 0.29 0.15 0.21 Manufacturing firms

Fig. 3.

0.8

0.12 0.06

Foreign customers are served indirectly by foreign agents**

Foreign customers are served by foreign licensees

0.6

0.25 0.33

Foreign customers are served in Switzerland Foreign customers are served indirectly by an exporter from Switzerland

0.4

Service firms

Market Entry Strategies.

signiﬁcant if the size and the degree of internationalization of the examined enterprises are taken into consideration. The second aspect examined within the framework of market entry strategies is the market development speed. The international extension of the ﬁeld of activities calls for the adjustment of capacities, which is more difﬁcult to put into practice for service providers than it is for manufacturing companies, since the provision of a service is labor intensive and the establishment of a qualiﬁed employee base, as well as a sufﬁcient reputation abroad, takes much time. Accordingly, we expected service providers to develop their foreign markets gradually, as opposed to the secondary sector, where it has been observed since the 1990s that corporations more and more

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Internationalization of Goods and Services How fast did you proceed when developing foreign markets? (*Significance <0.05, **Significance <0.01) 0

0.1

0.2

0.3

0.4

0.6

0.7

0.44

We developed foreign markets successively. one at a time*

0.34

0.56

We developed several foreign markets simultaneously*

0.66

Manufacturing firms

Fig. 4.

0.5

Service firms

Internationalizing Speed.

often tend to enter foreign markets simultaneously (Lehmann & Schlange, 2004). This expectation was not conﬁrmed in the quantitative survey (see Fig. 4). As compared to the manufacturers, the internationalization of the service providers taking part in the survey happened signiﬁcantly more often simultaneously than gradually (successively). This behavior could be explained by the fact that in many cases, service providers act as suppliers for manufacturers, forcing them to very rapidly follow the internationalization pattern of their customers. A second possible explanation assuming that the higher internationalization speed of service providers might be attributed to the fact that they were founded at a later point in time was excluded by the step-by-step regression analysis. The analysis showed that there was no correlation between the age and the internationalization speed of the enterprises surveyed.

Challenges of Internationalization The biggest challenges for the internationalization of a service-providing company are associated with the international marketing of its services (see Fig. 5). The immaterial character of services makes the analysis of foreign markets more difﬁcult. A material product by a competitor can be provided, examined, decomposed, and its characteristics can be analyzed. Services are intangible; their origin is not public in most cases, and very frequently,

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RALPH LEHMANN What are the greatest challenges of internationalization for your company? (*Significance <0.05, **Significance <0.01) 0

0.2

Foreign market analysis*

0.4

0.6

0.38

0.25

Adaptation of products to different market conditions

0.41

0.47

0.16

Foreign languages**

0.31

Different mentalities of customers

0.36 0.42

Marketing of products in foreign markets

0.57 0.54

Customer care Mobility of personnel** Quality control

0.61 0.11 0.10 0.06 0.12 0.10

Frequent absence of Swiss personnel**

0.02

Obtaining residence permits for personnel

0.01 0.02

0.09

0.16 0.11 Manufacturing firms

Fig. 5.

0.68

0.04

Recruiting qualified personnel

Protection of know how

0.8

Service firms

Internationalization Challenges.

subject to discretion. The analysis of the competitive situation in foreign markets is therefore very difﬁcult. Services must be speciﬁcally adjusted to a country. Services are rendered in close customer contact, often by even involving the customer. Services are therefore differentiated and adjusted to the various requirements in different foreign markets. In international competition, this means that good knowledge of the market and high efforts for the adjustment of services are required. The internationalization of services requires high intercultural competence. Services are rendered in close contact with the customer. Good

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language skills and a high intercultural competence of the staff are therefore central preconditions for the internationalization of services. The marketing of services abroad is based on conﬁdence. To build up trust and conﬁdence turns out to be challenging for service-providing companies, since the product cannot be demonstrated, presented, or tested. Even references may be used for marketing purposes only to a very limited degree, because the relationship to the customer is sometimes subject to discretion (for instance, for legal counseling). Customer care is both challenging for and dependent on the sales person. Customer contact is closer for the establishment of services than for the provision of tangible goods, and frequently has an emotional content (trust services). Customer relationship is therefore more intensive, plus it depends on individual employees who have established the relationship with the customer. If an employee leaves, the customer is also lost. The comparison of service providers with manufacturing companies reveals that foreign languages and the required mobility of the staff represents a signiﬁcantly greater obstacle for the employees of service providers than for manufacturers. Since the establishment and the consumption of services happens simultaneously, the staff of service providers must be present in a foreign country. This can be achieved by the staff traveling abroad, which requires high mobility; however, it is subject to limitations like entry, work, and residence permits; causes travel expenses; and impedes the exercise of business in the home market. The establishment of services is in most cases ‘‘language intensive’’ with a personal contact with the customer. Accordingly, the good command of foreign languages is important. Analyzing foreign markets for internationalization was signiﬁcantly less frequently considered a challenge by service providers than by manufacturers. According to the step-by-step regression analysis, the difference may partly be explained by the different sizes of the enterprises in the random examinations. The service surveyed providers were on an average smaller than the manufacturers; the smaller the company, the less problematic seems to be the analysis of foreign markets. This result contradicts the theses retrieved from the qualitative study. Due to their immaterial character, services seem to be more difﬁcult to access than products, and small enterprises do have fewer resources available for market analyses than large corporations, but nevertheless, analyses are less problematic for them. The result could be explained by the fact that large manufacturing companies were active in a larger number of foreign markets than the small service providers.

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CONCLUSIONS The objective of this study was to describe the internationalization of service providers and to compare it to that of manufacturing companies. The resulting ﬁndings show that the internationalization of service providers is frequently triggered by the customer, that service providers use their Swissness as a competitive advantage abroad, and at the same time use their internationality as a reference. Foreign markets are above all selected according to their sales potential and, secondly, according to their cultural and geographical proximity. Often, service providers enter several foreign markets simultaneously by preliminarily using direct sales forms. The biggest challenges of the internationalization of a service provider are presented by the marketing of the services. The comparison of the internationalization behavior of service providers and manufacturing companies showed that services are signiﬁcantly more dependent on culture and language. Service-providing companies rather tend to expand into markets that are closely related both regarding culture and language; more often than manufacturers, they consider the good command of foreign languages a challenge within the framework of internationalization. Moreover, selling services requires a stronger geographical presence than selling tangible goods. Therefore, service providers more often use direct sales forms to develop their foreign markets and a higher mobility is required of their personnel for internationalization. The results support the opinion in literature assuming that the internationalization behaviors of service providers and manufacturers differ, and that internationalization models which are substantially based on the examination of manufacturing companies must be veriﬁed. They contradict Katrishen and Scordis (1998) and illustrate that advantages resulting from the internationalization due to size are more essential for manufacturers than for service providers. They conﬁrm the opinion of Javalgi (2003), according to whom service and production ﬁrms enter international competition for different reasons. They support Dunning (1993) and O’Farrell et al. (1995), who showed that the speciﬁc characteristics of services do have an essential impact on the selection of target markets, and they agree with Ekeledo and Sivakumar (2004) that service providers seek to gain stronger control of their foreign business than manufacturers. On economic–political grounds, the results of the current study mean that export promotion organizations should differentiate their services according to economic sectors. Up to now, promotion measures of most European

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support organizations have been one-sidedly oriented toward the needs of manufacturing companies. This has been the case even though the degree of internationalization of the tertiary sector has surpassed that of the secondary sector in many countries, and the sector still shows a large internationalization potential. If this potential is to be developed and the internationalization of service providers is to be supported, export promotion services must be adjusted to their speciﬁc requirements. Assistance in ﬁnding sales partners abroad for instance – which is a central supporting service for manufacturing companies – is of little use for service providers, since the indirect export channel is not open to them. Service providers need, above all, support in mobilizing their services, for instance, through the Internet, adapting their offers to culturally different market conditions, dealing with customers from foreign language areas and the risk management of direct investment in foreign markets.

REFERENCES Behofsics, J. (1998). Globalisierungstendenzen intermedia¨rer Dienstleistungen. Wiesbaden: Deutscher Universita¨ts-Verlag. Bhuian, S. (1997). Exploring market orientation in banks. Journal of Services Marketing, 11(5), 317–328. Blomstermo, A., & Sharma, D. (2006). Choice of foreign market entry mode in service ﬁrms. International Marketing Review, 23(2), 211–229. Boddewyn, J., Halbrich, M., & Perry, A. (1986). Service multinationals. Journal of International Business Studies, 17(3), 41–57. Bruhn, M. (2005). Internationalisierung von Dienstleistungen. In: M. Bruhn & B. Stauss (Eds), Internationalisierung von Dienstleistungen (pp. 3–35). Basel: Gabler. Bruhn, M., & Stauss, B. (2005). Internationalisierung von Dienstleistungen. Basel. Buckley, P., Pass, C., & Prescott, K. (1992). The internationalization of service ﬁrms: A comparison with the manufacturing sector. Scandinavian International Business Review, 1(1), 39–56. Coviello, N., & Martin, K. (1999). Internationalization of service SMEs. Journal of International Marketing, 7(4), 42–66. Czinkota, M., & Ronkainen, I. (2000). International Marketing. Fort Worth: Cengage Learning Services. Dunning, J. (1980). Toward an eclectic theory of international production. Journal of International Business Studies, 11(1), 9–31. Dunning, J. (Ed.) (1993). Multinational enterprises and the growth of services. In: Transnational corporations in services (pp. 5–39). London. Ekeledo, I., & Sivakumar, K. (2004). International market entry mode strategies of manufacturing ﬁrms and service ﬁrms. International Marketing Review, 21(1), 68–101.

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Elango, B., & Abel, I. (2004). A comparative analysis of the inﬂuence of country characteristics on service investments versus manufacturing investments. American Business Review, 22(2), 29–39. Erramilli, M. (1990). Entry mode choice in service industries. International Marketing Review, 7(5), 50–62. Gro¨nroos, C. (1999). Internationalization strategies for services. The Journal of Services Marketing, 13(4/5), 290–297. Hermanns, A., & Wissmeier, U. (2001). Internationalisierung von Dienstleistungen. In: Bruhn, M., & Meffert, H. (Eds), Handbuch Dienstleistungsmanagement (pp. 525–545). Wiesbaden: Gabler. Javalgi, R. (2003). An empirical examination of factors inﬂuencing the internationalization of service ﬁrms. Journal of Services Marketing, 17(2), 185–201. Javalgi, R., Cutler, B., & Winans, W. (2001). At your service! Does country of origin research apply to services? Journal of Services marketing, 15(7), 565–583. Javalgi, R., & White, S. (2002). Strategic challenges for the marketing of services internationally. International Marketing Review, 19(6), 563–581. Johanson, J., & Vahlne, J. E. (1977). The internationalization process of the ﬁrm. Journal of International Business Studies, 8(Spring/Summer), 25–34. Karmarkar, U. (2004). Die revolution im Servicesektor. Harvard Business Manager, September, 23–35. Kassem, M. (1989). Strategic management of services in the Arab Gulf States. New York: Walter de Gruyter. Katrishen, F., & Scordis, N. (1998). Economies of scale in services. Journal of International Business Studies, 29(2), 305–324. Knight, G. (1999). International services marketing: Review of research. Journal of Services Marketing, 13(4), 347–360, 1980–1998. Lehmann, R., & Schlange, L. (2004). Born global. Zeitschrift fu¨r KMU und Entrepreneurship, 52(3), 206–224. Mann, T. (1998). Erfolgsfaktor Service. Strategisches service management im nationalen und internationalen Marketing. Wiesbaden: Deutscher Universita¨ts-Verlag. Meffert, H., & Bruhn, M. (2003). Dienstleistungsmarketing. Gabler: Wiesbaden. Mo¨sslang, A. (1995). Internationalisierung von Dienstleistungsunternehmen. Hohenheim: Grin Verlag. Nicoulaud, B. (1988). Problems and strategies in the international marketing of services. European Journal of Marketing, 23(6), 55–66. O’Farrell, P., Wood, P., & Zheng, J. (1995). Regional inﬂuences on foreign market development by business service companies. Regional Studies, 32, 31–48. Patterson, P., & Cicic, M. (1995). A typology of service ﬁrms in international markets. Journal of International Marketing, 3(4), 57–83. Pietika¨inen, M., & Tynnila¨, P. (1994). Obstacles to and strategies of the internationalization of Finnish service companies. Helsinki: Helsinki School of Economics and Business Administration. Porter, M. (1991). Nationale Wettbewerbsvorteile. Mu¨nchen: Droemer Knaur. Raff, T., & Billen, P. (2005). La¨nderauswahlentscheidung im Hinblick auf eine Internationalisierung von Dienstleistungsunternehmen. In: Bruhn, M., & Stauss, B. (Eds), Internationalisierung von Dienstleistungen (pp. 149–164). Basel: Gabler. Reynolds, A. (2005). Have TPOs moved on since the 1990s? International Trade Forum, 1.

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Roberts, J. (1999). The internationalisation of business service ﬁrms. The Service Industries Journal, 19(4), 68–88. Terpstra, V., & Yu, C. (1988). Determinants of foreign investments of US advertising agencies. Journal of International Business Studies, 19(Spring), 33–46. United Nations. (2004). United Nations World Investment Report 2004: The shift towards services. New York and Geneva. Vinh, Q. (2005). Determinants of export performance across service types. The Journal of Services Marketing, 19(6/7), 379–391.

PART III KNOWLEDGE AND INTERNATIONAL BUSINESS

DO JAPANESE INVESTORS USE THEIR JOINT VENTURES WITH EUROPEAN PARTNERS IN EUROPE AS TROJAN HORSES TO CAPTURE THEIR KNOWLEDGE? Shinichi Ishii and Jean-Franc- ois Hennart ABSTRACT Purpose – We investigate whether the partnership behavior of Japanese partners in joint ventures (JVs) with European partners in Europe is better explained by the Trojan Horse Hypothesis (THH) than by the cooperative specialization (CS) view. THH assumes that Japanese ﬁrms establish JVs to steal the knowledge of their partners and dissolve JVs as soon as they have achieved their goals. The CS view, however, argues that Japanese ﬁrms set up JVs to achieve CS and that these JVs will be long-lived. Methodology – We ﬁrst derive implications of both the THH and the CS views for the longevity of JVs. We make a census of all two-partner Japanese–European JVs manufacturing in Europe in 1987 and record their evolution to 1996. We count how many of these JVs have evolved in ways that are predicted by the THH and the CS view. We argue that a particular view is supported if the number of JVs following the predicted path is larger than the number of those following alternative paths. Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 139–155 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004011

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Findings – We ﬁnd that the partnership behavior of Japanese ﬁrms is more consistent with a CS than with a THH view. Limitations – This is a conservative test of THH behavior since JVs can dissolve for other reasons than the knowledge-stealing behavior of their Japanese partners. Value of the Paper – This is, as far as we know, the only study that has investigated the evolution of the population of Japanese–European JVs in Europe and has derived implications for the validity of the THH and CS views of JVs.

INTRODUCTION This paper investigates whether the behavior of Japanese partners who have joint ventured with European partners in Europe can be explained by the Trojan Horse Hypothesis (THH) or whether it is more consistent with the cooperative specialization (CS) view advanced by Hennart (1988) and Zeng and Hennart (2002). THH proponents, such as Hamel (1991) and Reich and Mankin (1986) argue that JV partners are competing to learn from each other during their collaboration. They have suggested that Japanese investors use JVs as Trojan Horses to steal the knowledge of their partners in order to capture their partners’ home market. As soon as they have learned, they dissolve the JV and go it alone. These views contrast with the ‘‘CS’’ approach of Hennart (1988) and Zeng and Hennart (2002), which emphasizes the value created in JVs by combining resources and allowing partners to specialize in their unique competences. CS proponents believe that JV partners will engage in long-term cooperation because once partners invest in the JV to create joint value they will have an incentive to continue the collaboration. Which of these two views ﬁts reality best? In one of the few explicit empirical tests of the THH hypothesis, Hennart, Roehl, and Zietlow (1999) showed that Japanese partnership behavior in Japanese–US JVs in the United States was more consistent with a CS than with a THH perspective. In this paper, we test whether this ﬁnding can be generalized by looking at the evolution of Japanese–European JVs in Europe. We ﬁrst describe the kind of scenarios for JV evolution that are implied by the THH view and compare the actual evolution of Japanese–European JVs to these scenarios. We ﬁnd that the evolution of the majority of JVs does not follow these scenarios, and hence there is little support for the view that Japanese foreign

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direct investors use JVs as Trojan Horses to steal the local market knowledge of their European partners. The next section categorizes international JV strategies according to the expected strategic context of the JV. We then brieﬂy describe the THH and CS views of JVs and derive some implications for their evolution. We develop some testable hypotheses and describe our methodology, our data, and our ﬁndings. We end with our conclusions.

JOINT VENTURE STRATEGIES In a typical foreign market entry JV, a foreign partner JVs with a local partner. The foreign partner typically contributes technology, and the local partner’s knowledge of local conditions. According to THH, the foreign partner intends to internalize market-related knowledge to enter the local market of the JV, while the local partner intends to internalize technology-related knowledge from his foreign partner to catch up with the technological capability of his partner. Table 1, modiﬁed from Ishii and Hennart (2007a, 2007b, 2008) and Hennart and Ishii (2007), presents a typology of JV partnership strategies between Japanese and European partners in Japan and Europe. This ﬁgure differs from that presented in our past studies in which we called the strategies of foreign partners foreign market entry strategies (or visiting strategies) and the strategies of local partners technology catch-up strategies (or hosting strategies). Those strategies can be treated as THH strategies, as we did in previous studies, by focusing on learning at the JVs in a broad sense. However, in this paper, we focus on strategies intended to internalize local market knowledge and so we use the term THH strategy only for foreign partners who enter foreign markets using JVs with local partners. Table 1.

Japanese–European JV Strategies.

Partner’s nationality

Market Japan

Japanese

European

(A) Japanese Hedgehog strategy (JV partnership in home market) (C) European THH strategy (JV partnership in foreign market)

Europe (B) Japanese Trojan Horse Hypothesis (THH) strategy (JV partnership in foreign market) (D) European Hedgehog strategy (European JV partnership in home market)

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In addition, we exclude from this typology JVs between partners from the same country and JVs between both partners in third countries or regions. This is because the THH and the CS views mainly discuss JVs between foreign and local partners. Table 1 categorizes the JV partnership strategies of Japanese and European partners in Japan and Europe. The vertical dimension in Table 1 indicates whether the nationality of the focal partner is Japanese or European. Its horizontal dimension indicates whether the location of the market of the JV is in a home or a foreign market for the focal partner. In cells (B) and (C), the JVs are established in a market that is foreign for the focal partner. Japanese ﬁrms form JVs in foreign markets (Europe) with local partners (European) in cell B, and we will construct operational hypotheses for ﬁrms in this cell. On the contrary, European partners establish JVs in foreign markets (Japan) with local partners (Japanese) in cell C. In both cases, the focal partner expects to obtain local market-related knowledge, such as awareness of customer demands, of human resource management, and of purchasing and distribution. This strategy allows foreign partners, the focal partners here, to exploit the local partner’s local knowledge without having to accumulate the knowledge by themselves in a newly set up wholly-owned subsidiary. Hence, we can call the JV strategy of these cells a foreign market entry strategy, which can also be a THH strategy. In cells A and D, the JV is established in the home market of the focal partner. In these cases, focal partners intend to obtain technology-related knowledge from their foreign partners who are invading their home market, a strategy we call the ‘‘Hedgehog’’ strategy.

THE THH AND CS VIEWS OF JOINT VENTURES A number of authors see JVs as mechanisms that ﬁrms can use to build up their organizational capabilities. JVs can be used to capture the knowledge that their partners contribute to the collaboration. The optimal strategy for JV partners then consists in learning from their partner faster than the partner can learn from them and then dissolve the JV and go it alone. JVs are, therefore, learning races with the winners the fastest learners (Khanna, Gulati, & Nohria 1998; Khanna, 1988). This perspective differs from the organizational learning literature (e.g., Inkpen, 2000) insofar as in learning races learning takes place without the consent of the partner.

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A speciﬁc strain of these learning race theories is what Hennart et al. (1999) have called the THH. Hamel (1991) and Reich and Mankin (1986) have argued that Japanese ﬁrms use JVs with Western ﬁrms as learning races, that they are better at learning than their partners, and that they will dissolve the JV soon after they have ﬁnished learning. There are two aspects to the THH view, learning behavior and partnership behavior. For Reich and Mankin (1986), Hamel (1991), and Pucik (1988a; 1988b), Japanese ﬁrms are faster learners than their Western rivals. Hamel (1991) has argued that three factors facilitate learning in JVs: learning is greater (1) when the ﬁrm intends to learn, (2) when it is receptive to new information, and (3) when the learning content is transparent. He shows that Japanese JV partners have greater intent to learn and are more receptive to learning than their Western counterparts, while the knowledge held by Western partners is more transparent than that of their Japanese partners. Pucik (1988a, 1988b) has noted that Japanese ﬁrms are able to learn from their JVs with foreign partners in Japan by arranging frequent exchanges of information and by rotating employees between the JV and their domestic operations. THH proponents also think that Japanese partners will prioritize learning from their partners over nurturing the relationship with them. Hamel (1991), Reich and Mankin (1986), and Hennart et al. (1999) argued that JV partners who follow a THH strategy are likely to terminate their JVs after they have internalized their partners’ competences because by then the JV is no longer necessary. Hennart et al. (1999) argued that three termination scenarios are possible: the Japanese could (1) buy out their partner’s stakes, (2) sell-off their own JV stakes, or (3) liquidate the JV. These scenarios are described in Fig. 1 in the context of European–Japanese JVs. The ﬁrst scenario (S-1) is described by straight-lined arrows. This scenario starts when the Japanese partner uses the JV to capture the local knowledge held by his European partner. Since Japanese partners are assumed to learn from their European partners more quickly than the latter learn from them, the Japanese partners can be expected to increase their bargaining power vis-a`-vis their European partners. Hence, they can persuade their European partners to sell-off their JV stakes to them and they can then exploit the knowledge thus gained in their wholly owned subsidiaries. In the second scenario (S-2), Japanese partners follow the path indicated by the dashed arrows. This leads to three possible patterns of JV termination: Japanese buyout of the JV stake, Japanese sell-off of the JV stake, and JV liquidation. The ﬁrst arrow follows the same path as S-1 in which Japanese partners increase their bargaining power vis-a`-vis their European partners by

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Fig. 1.

Japanese Trojan Horse Hypothesis (THH) Partnership Scenarios.

winning the learning race. If the Japanese partners succeed in persuading their European partners to buy out the JV stake, they follow the S-1 path. However, it is possible that the European partners will refuse to buy the Japanese partners’ stake. In that case, the JV continues for a while. The interpartner relationship may worsen because the Japanese partner can be expected to request a larger share of the JV proﬁts because their bargaining power has increased. Hence, interpartner conﬂict is likely to erupt and may persuade the partners to exit the JV. Then, buyout and sell-off of the JV stake by the Japanese partner and JV liquidation are possible paths. The third scenario, S-3, is represented by the dashed-dotted arrows. In this scenario, Japanese partners recognize that the JV will no longer be useful after they complete their learning from their European partners. At this point, they may wish to sell-off their JV stakes, and if their European partners or other companies ﬁnd the JV assets still useful, they may be able to sell them their JV stakes. If no company deems the JV assets useful, the JV will be liquidated.

HYPOTHESES If Japanese partners in Japanese–European JVs behave as predicted by THH theorists, then we would expect the majority of Japanese JV parents to buy out their European partners, to liquidate the JV, and to sell-off their stakes to their partners. Our ﬁrst hypothesis compares the number of JVs

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that have evolved in ways that are consistent with THH scenarios to those that have evolved in ways inconsistent with them. If the former is greater than the latter, then THH is supported. Note that we do not consider increases and decreases in JV ownership short of full buyout and sell-off to be consistent with a THH scenario. Many such changes in ownership result from other considerations. Our database contains, for example, a case where JV partners have changed a 50–50 percent JV into a 49–51 percent one in order to avoid disclosing information under the regulation of the country where the JV was located. Such a change cannot be seen as the result of THH strategies. Also, JV stakes have often to be adjusted to reﬂect changing conditions, so changes in the ownership percentage of the Japanese partner that stay within a range of less than 95 percent (more than that is counted as a buyout) or more than 5 percent (less than that is counted as a sell-off) cannot be seen as resulting from THH strategies. H1. THH is supported if the number of cases of Japanese–European JVs in the EU where Japanese partners buy full ownership from their European partners, where the JV is liquidated, or where Japanese partners fully divest their stakes to their European partners or to other ﬁrms, is higher than the number of JVs where the Japanese remain JV partners. Not all THH scenarios are equally likely. The most desirable strategy for Japanese ﬁrms who follow THH strategies when entering foreign markets is to buy out the JV stake of their local partner (Hennart et al., 1999). This is because they can then immediately utilize the knowledge they have acquired from their European partners by transforming the JV into their whollyowned subsidiary. In addition, Japanese partners might prefer to continue the relationship with their subsidiaries rather than completely sever it if they value long-term relationships. Moreover, Japanese ﬁrms should ﬁnd buying out their partner’s JV stake to be preferable to selling it to their European partners because if their European partners can transform the JVs into wholly-owned subsidiaries, they may be able to use some of the technology they have obtained from their Japanese partners to start competing with them. Hence, if Japanese ﬁrms use JVs as Trojan Horses, most of the Japanese–European JVs in Europe are likely to be fully acquired by their Japanese partners. This leads to the next hypothesis: H2. THH is supported if the number of cases of Japanese–European JVs in the EU where Japanese partners buy full ownership from their European partners is higher than the number of JVs where the Japanese remain JV partners.

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In addition to JV buyouts, liquidation and bankruptcy of the JV may also be an attractive option to Japanese partners. Liquidating the JV reduces the possibility that the European partner, who in the course of the JV may have obtained technology from the Japanese partner, will become a direct competitor in the future, as would be the case if the Japanese sold their JV stakes to their European partners. Liquidating the JV means that the former European partner will not be a competitor either (a) if the Japanese partners, having internalized the market knowledge obtained from their EU partners, quickly set up their own manufacturing subsidiaries in the EU, or (b) if they replace the JV by exports from Japan. Based on the above, we constructed a weaker test of THH behavior: H3. THH is supported if the number of cases of Japanese–European JVs in the EU where Japanese partners buy full JV ownership from their European partners or where the JV is liquidated is higher than the number of cases of JVs where Japanese partners remain JV partners. On the contrary, if Japanese partners do not follow THH strategies but instead choose CS strategies, they will stay in the JV. JV partners who follow CS strategies end up specializing in some of the contributions to the JV, while depending on their partners for complementary contributions. As partners specialize, they become increasingly dependent on each other, making the dissolution of the JV a costly proposition for both partners (Mowery, Oxley, & Silverman, 1996). If CS is a good way to describe the evolution of JVs, then the number of JVs where the Japanese keep a stake will be greater than the number of cases where they terminate it: H4. CS is supported if the number of cases of Japanese–European JVs in the EU where Japanese partners continue their JV ownership is higher than the number of JVs where Japanese partners buy full JV ownership from their European partners, where the JV is liquidated or where Japanese partners sell of their JV stakes to their European partners or to other ﬁrms.

METHODOLOGY We collected data on the changes in the ownership levels of Japanese partners in all Japanese–European JVs in Europe between 1987 and 1996. Japanese Multinationals, Facts and Figures published by Toyo Keizai, publishes every year the complete list of all Japanese-owned afﬁliates in Europe (Toyo Keizai, Various years). This list is widely seen as reliable and comprehensive. From

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this list, we selected JVs that met the following criteria: the JV partners had to be in manufacturing,1 the JV had to be owned by one Japanese partner and one European partner with the JV stake of each partner being more than 20 percent but less than 80 percent, the JV had to manufacture in Europe in its own plant or by outsourcing to a local ﬁrm, and it had to have more than 10 employees. There were 38 such JVs. We looked at ownership changes over a 9-year period. This should be a sufﬁciently long period to capture JV ownership changes because Kogut (1988) has shown that the instability rates of JVs peak in their sixth year. We ascertained changes in the ownership levels of Japanese partners to these 38 JVs by checking the annual lists of Japanese subsidiaries in Japanese Multinationals, Facts and Figures and directly contacting the JVs, their parent ﬁrms, and their main suppliers and customers by email and telephone. In addition, we consulted secondary sources such as newspapers and magazines, mostly searched through the LexisNexis electronic database, and the internet homepages of the JVs and of their parent ﬁrms. We also obtained information from branches of the Japan External Trade Organization (JETRO), the trade-related departments of Embassies, the Chamber of Commerce of European countries in Japan, trade publications, and local governments of the places where JVs were established.

RESULTS Table 2 compares the initial ownership levels of Japanese partners in these 38 Japanese–European JVs in Europe to that in 1996 in terms of the broad categories of ownership (0–5 percent, minority; 50/50, majority; and whollyowned, 95 percent or more). Japanese partners changed their ownership levels in 16 cases. In 13 cases, the Japanese transformed their JV into a wholly-owned subsidiary, in four Table 2. Changes in Ownership Levels of Japanese Partners in Japanese–European JVs in Europe (1987–1996). Final Level (1996)

Initial level (1987)

Minority 50% Majority Total (1996)

0–5%

5.1–49.9%

50%

50.1–94.9%

95–100%

Total (1987)

4 2 0 6 (16%)

4 0 0 4(11%)

0 7 0 7 (18%)

2 1 5 8 (18%)

4 3 6 13 (34%)

14 (37%) 13 (34%) 11 (29%) 38

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Table 3. Summary of Changes in Ownership Levels of Japanese Partners in Japanese–European JVs in Europe (1987–1996). N Japanese partner’s stake increased to 95–100% Stake bought from original European partner Japanese partner acquired original European partner Stake bought from ﬁrms other than original European partner Japanese partner’s stake increased but not to over 95% Japanese partner’s stake decreased but not to under 5% Japanese partner’s stake became zero Stake sold to original European partner Stake sold to ﬁrms other than original European partner Japanese partner was acquired by original European partner Japanese partner was acquired by ﬁrms other than original European partner Joint venture was liquidated or went bankrupt Japanese partner’s stake unchanged Cases that support THH Total A (excludes cases where Japanese partners acquired original European partners, Japanese partners were acquired by original European partners or by ﬁrms other than original European partners) Total B (all observations)

13 12 1 0 7 1 6a 1 3 0 0 3 11 18 37

38

a

One case in ‘‘Japanese partner’s stake became zero’’ is that the Japanese partner sold off its JV stake to its original European partner and a ﬁrm other than the original partner at once. This is counted as one case in each of the following three categories: (1) Japanese partner’s stake became zero; (2) stake sold to original European partner, and (3) stake sold to ﬁrms other than original European partner.

cases from a minority stake, in three cases from a 50 percent stake, and in six cases from a majority stake. In two cases Japanese parents increased their stake from a minority to a majority one, and in one case from a 50/50 to a majority one. They decreased their ownership stake to less than 5 percent in six cases, from a minority stake in four cases and from a 50 percent stake in two cases. Table 3 summarizes Japanese ownership changes in Japanese–European JVs in Europe between 1987 and 1996. Total B is the total number of JVs in our population. Total A excludes one case of JV evolution that is due to reasons that cannot be explained in terms of either a THH or a CS strategy.2 Table 3 shows that there are 13 cases where Japanese partners bought out the JV stakes of their partner: in 12 cases they bought out the stakes of their European partners and in one case they acquired the original European partner itself. In three cases, the Japanese partners sold their JV stake, in one case to its original European partner and to a ﬁrm other than the

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original partner and in two cases to ﬁrms other than their original European partners. Three JVs were liquidated or dissolved. The total number of Japanese ownership changes that can be considered reﬂecting THH strategies, that is, the total number of cases where the Japanese bought out their partners stake, sold their stake to their partners, or liquidated the JV, is 18 out of 38 cases (47.3 percent of total A). This is a slightly higher ratio than in the case of European THH strategies in Japan, where we have 32 cases out of 69 cases that are consistent with a THH scenario (46.3 percent of the total) (Ishii & Hennart, 2007b). The number of cases that do not ﬁt a THH scenario is 19: in 11 cases (out of 38 or 28.9 percent) the Japanese stake was unchanged (this rate is lower than that for European JV stakes in Japan, which is 37.8 percent, see Ishii & Hennart, 2007a); in seven cases, Japanese partners increased their JV share but not above 95 percent while in one case, the Japanese partner decreased its ownership share but not below 5 percent. Table 4 shows whether our hypotheses were conﬁrmed or not. Recall that H1 stated that THH would be supported if the number of cases where Japanese partners bought the full JV stake of their European partners plus the number of cases where JVs were liquidated and plus the number of cases where Japanese partners sold off their stake to their European partners or other ﬁrms was larger than the number of cases where their JV stakes remained unchanged. Row 2 of Table 4 shows that the number of Japanese buyouts, sell-offs, and liquidations was 18, while the number of cases where Japanese parents stayed in the JV was 19 (that is where their stakes remained unchanged, increased but stayed short of 95 percent, and Table 4.

Results of the Hypotheses. Numbers of JVs

H1 (THH)

H2 (THH) H3 (THH)

H4 (CS)

Buyoutsþsell-offsþliquidationsWownership continued ¼ stakes unchangedþstakes (increased/decreased) BuyoutsWownership continued ¼ stakes unchangedþstakes (increased/decreased) BuyoutsþliquidationsWownership continued ¼ stakes unchangedþstakes (increased/decreased) Ownership continued ¼ stakes unchangedþstakes (increased/ decreased)Wbuyoutsþselloffsþliquidations

Results

12þ3þ3o19

Not supported

12o19

Not supported

12þ3o19

Not supported

19W12þ3þ3

Supported

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decreased but remained above 5 percent). Hence, H1 is not supported. H2 also tests the THH model, but argues that in contrast to H1, cases where the JVs were liquidated and where the Japanese sold off their JV stakes to their European partners or to other ﬁrms should not be interpreted as providing support for THH. Since the number of cases where the Japanese partners bought out their European JV partner’s share was 12, while that where the Japanese remained JV partners as predicted by CS strategies is 19, H2 is also not supported. H3 provides a weaker test of THH compared to H2 because in contrast to H2 we count cases of JV liquidation as supporting THH. Since the number of cases where Japanese partners acquired full ownership of the JV by buying the JV stakes of their European partners plus that of JV liquidations add up to 15, while the number of cases where the Japanese remained JV partners add up to 19, H3 is not supported. H4 tests the hypothesis that Japanese ﬁrms follow CS strategies in their JVs with European partners. H4 sees the 19 cases where the Japanese stayed in their JV as supporting CS strategies, while the 12 cases where they bought their partner’s stake, the 3 cases where they sold their stake, and the 3 cases where the JV was liquidated as not supporting them. Because their sum is equal to 18, H4 is thus weakly supported. There are two reasons why our results may underestimate the importance of the CS view and overestimate that of THH. The ﬁrst one is because we start measuring the duration of JVs in 1987, but most JVs were already by then in existence. In fact, the average foundation year of the afﬁliates that were manufacturing in 1987, excluding two cases where the foundation year is not known, is 1980. That year roughly corresponds to the foundation year of the JV between the Japanese and European partners. However, the foundation year of the foreign afﬁliate is not necessarily that of the JV because the foreign afﬁliate may have been established as a wholly-owned subsidiary of the Japanese JV parent, the European JV parent, or another ﬁrm, or as an independent ﬁrm before becoming a JV of the present Japanese and European parents. Therefore, it is probable that most of our JVs were founded at least a few years before the start of our observation period. Since it is likely that the probability that a JV will terminate increases with its age, that fact that our observation period starts when some JVs were already old increases the probability that our results will support the THH view. Second, we have assumed that all cases of Japanese takeover of the venture are evidence of THH behavior. But the Japanese may end up taking over the venture for other reasons: for example, because their European partners choose to leave the business due to a change in strategy, or because they have to due to ﬁnancial difﬁculties. Similarly, we have assumed that

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liquidations are always instigated by the Japanese partner eager to close down the JV when they have absorbed all the knowledge of their European partners. In reality, liquidations may be due to many other causes, including miscalculation of the potential market for the venture or poor results due to an adverse economic environment (Hennart, Roehl, & Zeng, 2002).

DISCUSSION AND CONCLUSIONS An inﬂuential stream in the JV literature has argued that ﬁrms enter into JVs to acquire the knowledge of their partners (Khanna et al., 1998; Khanna, 1988). Within this literature, Reich and Mankin (1986) and Hamel (1991) have stressed that Japanese ﬁrms were systematically better at it than their Western counterparts, and also that they dissolved their JVs as soon as they had achieved their learning goals. For Japanese ﬁrms, Reich and Mankin argue, JVs are Trojan Horses used to capture the market share of their Western rivals; hence the name Trojan Horse or THH we give to their hypothesis. This THH hypothesis contrasts with the ‘‘CS’’ view of Hennart (1988) and Zeng and Hennart (2002) who argue that JVs are used to access, but not to internalize, the competencies of partners. JVs thus allow partners to specialize in what they can do best, and partners have interest in deepening their cooperation. Hence the CS view predicts that, provided that they have been set up with the right structure, JVs will be long-lived (Hennart & Zeng, 2005). In an attempt to test this theory, Hennart et al. (1999) have argued that if THH was a good description of the motives for JVs, the plurality of JVs between Japanese and American partners in the United States should be dissolved within a 9-year time frame. They found that this was not the case, and that the number of Japanese–American JVs that survived by the end of the period was signiﬁcantly larger than the number that was dissolved. In this chapter, we attempt to ﬁnd how robust this ﬁnding is by looking at another set of JVs involving Japanese parents, those set up between Japanese and European ﬁrms in Europe. From the full population of manufacturing JVs set up by Japanese manufacturing ﬁrms in Europe as of January 1, 1987, we select the JVs between a single Japanese ﬁrm and a single European ﬁrm. We then develop the implications of the THH hypothesis for the evolution of these Japanese– European JVs. Speciﬁcally, if THH theorists are right, a plurality of Japanese–European JVs in Europe should dissolve within our 9 years observation window. In fact, our results show that in the majority of cases

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Japanese parents have chosen to stay in their JVs with their European partners and have not dissolved the JV. This suggests that, as also shown in the US case (Hennart et al., 1999), Japanese ﬁrms seem to have decided to stay in their JV relationships with European partners, thus choosing a CS strategy that emphasizes joint value creation within the JV. We tentatively conclude that it does not seem that the THH hypothesis accurately describes the strategy of Japanese foreign direct investors. While these ﬁndings do not support the THH view, they are consistent with other evidence. For instance, it has been shown that Japanese automobile assemblers prefer to have long-term relationships with their parts suppliers in Japan (Asanuma, 1989; Clark & Fujimoto, 1991) and in the United States (Dyer & Nobeoka, 2000). These studies point out that Japanese auto assemblers develop an effective and efﬁcient method of collaboration with their component suppliers. In such relationships, parties learn how to utilize mutual knowledge to effectively maximize joint value creation and to avoid stealing each other’s knowledge for one’s own proﬁt. Such relationships strongly rely on the mutual trust created through longterm relationships. We infer that Japanese partners have tried to construct similar relationships with their European JV partners. Furthermore, Japanese partners also seem to have emphasized their relationship with the JV itself. Recall that the most common Japanese scenario was continuation of the JV (including increase and decrease of JV shares), and the second most common scenario was buying out the partner’s stake. Although we treated such Japanese buyouts as evidence of THH behavior, buying out a partner’s JV stake can also be seen as a way to maintain a continuous relationship with the JV. When the initial JV partner intends to exit the JV, the Japanese partner buys out his European partner’s stake to maintain the relationship with the JV. This suggests that Japanese partners emphasize value creation within their JVs. Another way to look at it is that Japanese partners may not be good at radical restructuring decisions, even if the JV business is not proﬁtable at all. We know of cases where the Western JV partners told their Japanese partners that, because of ﬁnancial reasons, they would sell-off their JV stake, and where the response of the Japanese partners was to buy the Western partner’s JV stake so as to avoid the uncertainty inherent in taking in a new JV partner. Whether Japanese buyouts are explained by a desire to appropriate the knowledge of the partner, as argued by THH proponents, or by a desire to maintain the stability of the JV and hence to foster CS, probably hinges on whether the acquisition was triggered by the Japanese partners or by the actions of their

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Western partners. This requires detailed investigations of all cases of JV evolution, a task we leave for future research. Our results suggest other areas for future research. First, it would be interesting to do a fully parallel study of Japanese partnership behavior in the same strategic context of foreign market entry but in a different market, for example, in the United States3. Second, the stability of Japanese– European partnership may also vary with the nationality of the European partner. Ishii and Hennart’s (2007b) study of JVs between European and Japanese ﬁrms in Japan shows that Japanese partners had relatively longlived JV partnerships with German ﬁrms but short ones with British ﬁrms. In this context, it is interesting to note that Hamel’s (1991) THH model was mainly based on case studies of Japanese–British collaborations. The short duration of these may have inﬂuenced the development of his theory. Third, we only measured whether Japanese ﬁrms followed THH or CS strategies. We did not compare the extent to which Japanese and Western partners follow THH strategies in the same strategic context. To do so, one would need to compare Japanese JV partnership in Europe and European JV partnership in Japan.

NOTES 1. Hence JVs owned by trading or ﬁnancial companies were excluded. 2. This is a case where the Japanese partner acquired its original European JV partner. The Japanese partner intended to expand its sales and production network in Europe and Australia by acquiring its European JV partner. The Japanese parent already owned 28 percent of the European JV partner and the president of the Japanese parent was the chairman of the European JV partner at the start of the observation period. The Japanese acquisition of the remaining stock of the European JV partner seems to have been motivated by a desire to acquire customers and facilities and not by a desire to obtain the European parent’s knowledge, which the Japanese partner could have obtained from the JV or from its European partner without acquiring the European partner itself. Hence, we think that this case is not an example of THH behavior or CS behavior. 3. Hennart et al.’s (1999) study of the evolution of Japanese–American JVs in the United States is not fully comparable to this study because of differences in the criteria used to deﬁne the population and in the time frame. Hence Hennart et al. included JVs between American ﬁrms and multiple Japanese partners (adding up their stakes) and included manufacturing subsidiaries owned by nonmanufacturing Japanese parents. Hennart et al.’s (1999) period of analysis also precedes the bursting of the Japanese bubble in 1989.

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ACKNOWLEDGMENTS Financial support from the Murata Science Foundation, the Japan Society for the Promotion of Science, Osaka City University, and the Japan Foundation is gratefully acknowledged.

REFERENCES Asanuma, B. (1989). Manufacturer-supplier relationships in Japan and the concept of relation speciﬁc skill. Journal of the Japanese and International Economies, 3(1), 1–30. Clark, K. B., & Fujimoto, T. (1991). Product development performance: Strategy, organization, and management in the world auto industry. Boston, MA: Harvard Business School Press. Dyer, J. H., & Nobeoka, K. (2000). Creating and managing a high-performance knowledgesharing network: The Toyota case. Strategic Management Journal, 21(3), 345–367. Hamel, G. (1991). Competition for competence and interpartner learning within international strategic alliances. Strategic Management Journal, 12(Summer Special Issue), 83–103. Hennart, J.-F. (1988). A transaction cost theory of equity joint ventures. Strategic Management Journal, 9(4), 361–374. Hennart, J.-F., & Ishii, S. (2007). Do Japanese ﬁrms use joint ventures to steal knowledge from their American partners? An examination of the evolution of Japanese–US joint ventures in Japan. Proceedings of the 33rd annual conference of the European International Business Association (CD-ROM), 13–15 December, Catania, Italy. Hennart, J-F., Roehl, T., & Zeng, M. (2002). Do exits proxy for a liability of foreignness? The case of Japanese exits from the United States. Journal of International Management, 8(3), 241–264. Hennart, J.-F., Roehl, T., & Zietlow, D. S. (1999). Trojan horse’ or ‘workhorse’? The evolution of US–Japanese joint ventures in the United States. Strategic Management Journal, 20(1), 15–29. Hennart, J. F., & Zeng, M. (2005). Structural determinants of joint venture performance. European Management Review, 2(2), 105–115. Inkpen, A. (2000). A note on the dynamics of learning alliances: Competition, cooperation, and relative scope. Strategic Management Journal, 21(7), 775–780. Ishii, S., & Hennart, J.-F. (2007a). Evolution of American shareholding in American–Japanese joint ventures in Japan: Design, sample and preliminary results of the THH study. Osaka City University Business Review, 18, 1–26. Ishii, S., & Hennart, J.-F. (2007b). Preliminary analysis of Japanese–European joint venture dissolution patterns in Japan. Proceeding of the 14th International Conference on Multi-Organizational Partnerships, Alliances, and Networks (CD-ROM), June 28–29, Katholieke Universiteit van Leuven, Belgium. Ishii, S., & Hennart, J.-F. (2008). Are joint ventures between Japanese and Western ﬁrms vehicles for innovation change or zero-sum learning races? A test of the Trojan Horse Hypothesis. Presented at the 15th International Conference on Multi-Organizational Partnerships, Alliances, and Networks, June 25–27, Suffolk University, USA. Khanna, T. (1988). The scope of alliances. Organization Science, 9(3), 340–355.

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Khanna, T., Gulati, R., & Nohria, N. (1998). The dynamics of learning alliances: Competition, cooperation and relative scope. Strategic Management Journal, 19(3), 193–210. Kogut, B. (1988). Joint ventures: Theoretical and empirical perspectives. Strategic Management Journal, 9(4), 319–332. Mowery, D. C., Oxley, J. E., & Silverman, B. S. (1996). Strategic alliances and interﬁrm knowledge transfer. Strategic Management Journal, 11(Winter Special Issue), 77–91. Pucik, V. (1988a). Strategic alliances with the Japanese: Implications for human resource management. In: F. Contractor & P. Lorange (Eds), Cooperative strategies and alliances (pp. 487–498). London, UK: Elsevier. Pucik, V. (1988b). Strategic alliances, organizational learning, and competitive advantage: The HRM agenda. Human Resource Management, 27(1), 77–93. Reich, T., & Mankin, E. (1986). Joint ventures with Japan give away our future. Harvard Business Review, 64(2), 78–86. Toyo Keizai. (Various years). Kaigai shinshutsu kigyo soran (Japanese multinationals, facts and ﬁgures). Tokyo, Japan: Toyo Keizai. Zeng, M., & Hennart, J.-F. (2002). From learning race to cooperative specialization. In: F. Contractor & P. Lorange (Eds), Cooperative strategies and alliances (pp. 189–210). London, UK: Elsevier.

INNOVATION PROCESSES AT UNIT LEVEL: A STUDY OF HEADQUARTERS INVOLVEMENT, INNOVATION IMPACT, TRANSFER PERFORMANCE, AND ADOPTION SUCCESS Francesco Ciabuschi and Oscar Martı´ n Martı´ n ABSTRACT Purpose – To investigate the effects of headquarters (HQ) involvement in innovation development and transfer at unit level. Methodology/approach – We develop a theoretical model that we test on a sample of 71 innovations belonging to 52 business units located throughout Europe, Asia, and the USA. The data were collected by personal interviews and analyzed using the partial least squares (PLS) technique. Findings – While HQ involvement in innovation development enhances the effects on the unit engaged in the development, it is detrimental to performance of the innovation transfer process. We also ﬁnd higher HQ involvement in the innovation development process and stronger

Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 157–183 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004012

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innovation impact on the subsidiary to be associated with higher HQ involvement in the transfer process. Research limitations/implications – There is a signiﬁcant beneﬁcial effect of HQ involvement in the development process in terms of the increased impact of the innovation in the unit, and a harmful inﬂuence on the speciﬁc performance associated to the transfer process. Practical implications – HQs will beneﬁt from improved performance if they become more involved in important innovations while limiting their direct engagement in the transfer of ‘‘marginal’’ innovations. It might also be wise for the HQs to rethink their involvement at unit level by separating the development process from the transfer process in their decision framework. Originality/value of the paper – This is one of the ﬁrst attempts to empirically connect the processes of innovation development and transfer at unit level in MNCs and to show the implications of HQ involvement in innovation projects at subsidiary level.

INTRODUCTION A multinational corporation (MNC) is recognized as an important source of innovation and competence and a vehicle for innovation transfer between countries and regional centers (see, e.g., Bartlett & Ghoshal, 1990; Hedlund & Rolander, 1990; Kogut & Zander, 1993; Cantwell & Mudambi, 2004). By internally transferring an innovation, a MNC can employ it on a larger scale and multiply the proﬁt gained from it. Thus, the capabilities needed to develop, encourage, and internally transfer innovations constitute the essence of the modern MNC and are the basis of its competitive strength (Ghoshal & Bartlett, 1990; Kogut & Zander, 1992; Doz, Santos, & Williamson, 2001; Forsgren, Holm, & Johanson, 2005). In this new context, MNC units have acquired a new role as controllers of strategic assets and sources of innovation and competence for the whole MNC (see, e.g., Birkinshaw & Hood, 1998; Pearce & Papanastassiou, 1996; Andersson & Forsgren, 2000; Rugman & Verbeke, 2001; Andersson, Forsgren, & Holm, 2007). Thus, corporate headquarters (HQs) have switched their role from decision makers and resource centers to active actors focusing on and taking part in unit-level development and coordination of the corporate network (see, e.g., Poppo, 2003; Ambos & Schlegelmilch, 2007).

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These changes pose a series of organizational and managerial questions, however, and much is still to be understood about the effects of HQ involvement on innovation activities at unit level. In fact, previous studies on control, centralization, and HQ involvement in innovation development have focused mainly on HQ’s direct inﬂuence on unit performance (see, e.g., Gatignon & Anderson, 1988; Andersson & Forsgren, 1996), and little attention has been paid to the impact on the innovation itself and its implications. As far as interunit innovation transfer is concerned, scholars have focused on the outcome of transferring innovation and competence, that is, unit performance and MNC competitive advantage (see, e.g., Holm, Holmstro¨m, & Sharma, 2005), but the performance of the process per se has been somewhat neglected. This paper aims to investigate the effects of HQ involvement on innovation development and transfer at unit level. Particularly, we emphasize the existing links between HQ involvement in the innovation development process, the effect of this on the developing unit (i.e., the unit engaged in the development), and further HQ involvement in the transfer process. We argue that higher involvement in the development process will provide HQs with more awareness of, and familiarity with, the innovation and stimulate its interest in further development and exploitation and, as a result, increase its willingness to participate also in the transfer process. In addition, the more successful the innovation at the developer site, the higher the HQ’s interest in spreading the innovation to other units. Our main ﬁndings show that HQ involvement in unit-level innovation activities has important implications. Speciﬁcally, while HQ involvement in innovation development enhances the innovation effect on the developing unit, HQ involvement in innovation transfer is detrimental to transfer performance. We also ﬁnd higher HQ involvement in the innovation development process and stronger innovation impact on the subsidiary to be associated with higher HQ involvement in the transfer process. This sheds light on the link between innovation development and transfer processes, an issue largely ignored by the literature in general and particularly in connection with control and structural implications. The contribution of this paper is fourfold. First, to the best of our knowledge, this is the ﬁrst attempt to empirically connect unit-level innovation development and transfer processes in MNCs. Earlier research has often studied the process of innovation development independently from innovation transfer, and there was extensive call for further joint analysis of these two processes (see, e.g., Holm & Pedersen, 2000; Andersson, Forsgren, & Holm, 2002; Ciabuschi & Forsgren, 2006). Second,

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it shows that HQs treat innovation development and transfer as highly interrelated processes. Third, it suggests that HQs need to balance the beneﬁt of their involvement at the innovation development stage against potential loss of performance at the speciﬁc transfer stage if their involvement continues. This apparent tradeoff can, nevertheless, be favorably solved if HQs become more selective and concentrate their involvement into transferring innovations with proven high impact on the developing unit. Last, it reveals that giving more support to adopting units might be an alternative way to enhance transfer process performance, that is, to contain transfer costs while increasing satisfaction with the process. In the next section we present the literature review and describe the model and the hypotheses. The presentation of the methods and results is followed by a discussion, and the paper concludes with some comments on managerial implications and future research issues.

LITERATURE REVIEW AND THEORETICAL BACKGROUND Innovation, which is an extensive and elusive concept (for an overview, see Tidd, Bessant, & Pavitt, 2001), is deﬁned in this paper as putting into practice product designs and manufacturing processes that are new to the ﬁrm (Nelson, 1993). In other words, innovation means a change in a process, and in the outcome of a process, related to industrial production and/or exchange (Zander, 1991). As mentioned earlier, innovation and innovation process management are recognized as core elements in shaping the MNCs’ competitive advantage (see, e.g., Bartlett & Ghoshal, 1989; Kogut & Zander, 1992; Doz et al., 2001). Unit-level innovation is a two-stage process comprising innovation development, in which a unit develops a new solution from an idea or a detected problem, and innovation transfer, which is aimed at the exploitation of the solution by different units in multiple markets (Forsgren et al., 2005). Innovation Development We conceptualize innovation development as the process of transforming an idea into a completed entity that is acceptable to potential adopters, that is, external actors (e.g., customers, suppliers, competitors, and others), the focal unit, and its sister units. Since the ability to innovate is reputedly

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important in achieving strategic competitiveness (Conner, 1991; Eisenhardt & Martin, 2000), business research has naturally devoted much effort to examining the managerial side of processes that may lead to innovation, and in particular, to investigating speciﬁc factors that may enhance or impede innovativeness (see, e.g., Ghoshal & Bartlett, 1988; Kanter, 1988; Brown & Eisenhardt, 1995). Thus, depending on what (or who) is inﬂuencing the development process, the innovation outcome will differ and, most important, so will its impact on the developing unit. Circumstances surrounding the development can affect the developing unit in a variety of ways. First, an innovation could drive its market success. This would mean increased sales and business volume as well as improved overall competitive advantage as a result of effects such as improved market share, positioning, and image (see, e.g., Ettlie, Bridges, & O’Keefe, 1984; Brown & Eisenhardt, 1995; Hitt, Hoskisson, & Hicheon, 1997; Boone, 2000). Additionally, a successful new solution may also contribute to the unit’s business also outside its local market, and it could promote its internationalization. This kind of process has been described by Forsgren, Holm, and Johanson (1992) as ‘‘internationalization of the second degree.’’ Looking at the internal organization of the unit, a new solution could improve operational efﬁciency by impacting on the production side, speciﬁcally on the cost and nature of the production process. An innovation may also inﬂuence new R&D investment decisions. On the one hand, there might be a path dependency and technological trajectory following an important breakthrough and, on the other, the unit may learn and develop routines for its development activities (Ettlie et al., 1984; Von Hippel, 1994; Ha˚kansson & Waluszewski, 2002; Atul & Srikanth, 2005). According to Forsgren et al. (2005), being innovative could provide a unit with a better position within the MNC in terms of visibility, advantage, and inﬂuence over sister units (see, e.g., Holm & Pedersen, 2000; Frost, Birkinshaw, & Ensign, 2002). Being innovative may have strong positive implications for the developing unit and at the same time beneﬁt the whole corporation. That is why interunit innovation transfer is so important for MNCs and, increasingly, a primary concern for top management.

Interunit Innovation Transfer Within the conceptualization of the MNC as a system incorporating several dispersed centers of competence (Hedlund, 1986; Bartlett & Ghoshal, 1989; Ghoshal & Nohria, 1997; Holm & Pedersen, 2000), we

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deﬁne ‘‘interunit innovation transfer’’ as speciﬁc, purposeful, directed projects delimited in time and effort, conceived with the explicit goal of making the transferred innovation available for usage by the recipient unit (see Szulanski, Cappetta, & Jensen, 2004). The larger, more diversiﬁed, and more extended an organization, the greater its potential to leverage innovations. By the same token, however, so are the potential barriers to interunit innovation transfer (Zander & Kogut, 1995; Andersson et al., 2002). This is why research efforts in recent years have focused on detecting and analyzing transfer barriers and on investigating possible improvements (see, e.g., Szulanski, 1996; Simonin, 1999; Szulanski & Jensen, 2006). Internal dynamics and integration mechanisms may have a positive inﬂuence on interunit competence and innovation transfer. For example, Ghoshal and Bartlett (1990) demonstrate that normative integration is positively associated with innovation transfer and adoption, and Birkinshaw and Hood (2001) and Bjo¨rkman, Barner-Rasmussen, and Li (2004) indicated speciﬁc practices through which HQs might foster knowledge transfer between units. Typical factors include HQ control, evaluation, and incentive systems (see, e.g., Doz & Prahalad, 1981; Roth & O’Donnell, 1996; Bjo¨rkman et al., 2004), corporate culture, values, and organizational identity (Tsai & Ghoshal, 1998; Barner-Rasmussen, 2003), and existing routines between sister units (Nelson & Winter, 1982; Grant 1996). Nevertheless, all these factors have to be properly managed in order to foster the transfer process. Further investigation is warranted since results are not univocal. Innovation transfer outcomes can be analyzed in different ways and at different points in time. This provides different perspectives on what constitutes performance with respect to innovation transfer, as highlighted by a number of previous studies (see, e.g., Szulanski, 1996; Zander & Kogut, 1995; Kostova, 1999). Another fruitful way to look at innovation transfer (and its performance) is to differentiate according to the different processes, that is, the transfer process versus the process of competitive advantage creation, and in connection with the different units involved, that is, the sender and the receiver (and the whole MNC). As a result it is possible to examine performance in relation to the different processes and from the perspective of the different units. We focus on the innovation transfer performance from the sender’s perspective. Innovation transfer performance is important since the transfer process requires commitment from the involved parties and may entail substantial costs (see, e.g., Teece, 1977; Zander & Kogut, 1995; Szulanski, 1996). Transfer costs may accrue from different sources, and they should not outweigh the transfer beneﬁts, that is, increased unit/MNC performance

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resulting from the transferred innovation. Good transfer performance should also involve satisfaction for the parties concerned (Kostova, 1999; Leonard-Barton & Sinha, 1993). This means that not only the sender but also the receiver inﬂuences transfer process performance. For instance, the receiver may be not particularly motivated, or may lack sufﬁcient resources or absorptive capacity. These and other factors will determine the success of the adoption from the receiver side and, therefore, inﬂuence overall transfer performance. Here, the distinction between mere transfer performance and successful adoption is critical: just because an innovation is transferred it does not necessarily mean that it is successfully adopted and used by the receiver (Kostova & Roth, 2002). This important distinction stresses the fact that the transfer process is not a unilateral process and its performance outcome is affected by both the sender and the receiver(s).

HQ Involvement: Model and Hypotheses The relevance of HQ involvement in unit-level activities is a central issue in international management. Authors such as Von Hippel (1988, 1994), Ghoshal and Bartlett (1990), and Birkinshaw (2001) agree that HQs may play a crucial role in the management of innovation development and transfer. In this section we distinguish between HQ involvement in the innovation development and in the innovation transfer processes. We explore the relationship between the two and how the former affects the impact of the innovation on the developing unit and the latter the performance of the transfer process. The relationships between the constructs of the model and our hypotheses about them are summarized in Fig. 1.

HQ Involvement in Innovation Development Organizational factors such as top-management support and commitment, control and incentive systems, shared values and internal communication all have a potential impact on the innovation process (Ghoshal & Bartlett, 1988; Tsai & Ghoshal, 1998; Rothwell, 1994; Brown & Eisenhardt 1995). HQ involvement can enhance the legitimacy of an innovation, and provide more structure and guidance for the unit (Quinn, 1985), and also larger resource allocation since higher HQ involvement and investment levels increase overall commitment to the project (Birkinshaw, Hood, & Jonsson,

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HQ involvement in development

H2 +

H3 + H1 + Innovation impact at developing unit

Fig. 1.

HQ involvement in transfer

H4 -

Innovation transfer performance

H5 -

H6 +

Adoption process success

Headquarters’ Innovation Development and Transfer Involvement Model.

1998). Through these means, HQ input to the innovation development process can boost unit performance (Poppo, 2003). Furthermore, we argue that when expectations for a project are high, HQs will get closer to the unit and support the process. This results in higher expected return for the unit and may affect more activities and functions of the developing unit, depending on the type of innovation. This multiplicity of returns may be visible in outcomes such as increased sales in the current markets, international expansion, increased sales to sister units, increased production efﬁciency, and/or a more inﬂuential role in R&D decisions (see, e.g., Forsgren et al., 1992; Hitt et al., 1997; Tsai, 2001). Although the literature shows that these aspects have often been examined separately, they need to be studied in conjunction in order to grasp the overall effect. Therefore, we formulate the following hypothesis: H1. Higher HQ involvement in the innovation development process will increase the impact of the innovation on the unit responsible for developing it. A second important aspect is that when HQs are involved in the development process, they gain knowledge of both the innovation and its context, which enables (and most probably encourages) them to continue their involvement during the transfer process. Therefore, we argue that the more involved HQs are in the development the more they are able and willing to be involved in the transfer as well. This leads to the formulation of our second hypothesis. H2. Higher HQ involvement in the innovation development process will lead to higher HQ involvement in the innovation transfer process.

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Another aspect that was underlined in the previous discussion on innovation development and innovation transfer was that it is often problematic to transfer an innovation, and it is necessary to decide which innovations are worth transferring (Szulanski, 1996; Subramanian & Venkatraman, 2001). An innovation that has had a positive impact on the developing unit will naturally inspire HQ to transfer it further and thus reap the beneﬁt of multiple adoption and exploitation of the same innovation at many sites (Kogut & Zander, 1993; Zander & Kogut, 1995, Doz et al., 2001). That is why we foresee that an innovation with a noteworthy impact at the developing unit site will promote HQ involvement in the transfer. In other words, we expect more HQ involvement in the transfer processes of those innovations that have already demonstrated a signiﬁcant impact in the developing unit. This leads us to the following hypothesis: H3. The greater is the impact of the innovation on the developing unit, the higher is the involvement of HQ in its transfer process.

HQ Involvement in the Transfer Process In the transfer process also, HQs may be more or less directly involved, inﬂuencing and driving the transfer of an innovation from one unit to another. On the one hand, top management may design speciﬁc mechanisms within the organization to attempt to inﬂuence and incentivate internal technology transfers (e.g., see Eisenhardt, 1989; O’Donnell, 2000). On the other hand, HQs may also participate more directly and actively in the transfer process. In general, there seems to exist some support for the importance of managerial involvement in implementation activities (see, e.g., Wedley & Ferrie, 1978; Nutt, 1986). By actively participating in the transfer process, HQs attempt to create a positive feeling toward the implementation and thus facilitate its diffusion in the organization. However, when HQ is involved in speciﬁc transfer projects, the process may lose efﬁciency as project visibility, prestige, and reporting requirements may increase (see, e.g., Bjo¨rkman et al., 2004; Birkinshaw, Bouquet, & Ambos, 2007), thus adding to the costs required to carry out the process. Subsidiary managers may also perceive increased control due to direct HQ involvement in the transfer. Hence, the working environment and thereby the process may be hampered. As a result, satisfaction with the innovation transfer process may also be eroded. We expect HQs to accept these inefﬁciencies that affect only the transfer process itself, in the hope of reproducing in the

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receiving unit the already demonstrated performance gain. These observations form the basis of our fourth hypothesis: H4. HQ involvement in the innovation transfer negatively affects transfer process performance. A related aspect (as also depicted by Szulanski, 1996, for instance) is that, when dealing with the concept of innovation transfer, we need to distinguish the success of the transfer process from the sender perspective (related to the moment from which the innovation is fully available at the receiver site) from what is considered innovation adoption at the receiver site (i.e., the outcome of the efforts to absorb and implement the innovation in the new unit). The effects of HQ involvement in the transfer process are ambiguous. The adoption process may well require substantial resource commitment, understanding (i.e., absorptive capacity), and motivation from the receiver, and HQs can potentially help by committing the necessary resources in terms of technology, expertise, and directions, for instance, and would in this case also provide legitimacy and priority to the process (see, e.g., Birkinshaw et al., 2007). However, as indicated by some research, HQ involvement may overall prove to be demotivating (see, e.g., Weick, 1979). Based on the latter argument, our hypothesis has a negative sign. H5. HQ involvement in the innovation transfer process negatively affects the success of the innovation adoption process. Concluding, we argue that if the transfer efforts meet with easy, fast, and problem-free adoption by the receiving unit, the transfer performance will also be enhanced, that is, the transfer process will be easier, less expensive, and overall more satisfactory from the sender perspective also (Ghoshal & Bartlett, 1988; Simonin, 1999; Szulanski & Jensen, 2006). We formulate this relationship between transfer and adoption as follows in this last hypothesis. H6. The more successful the innovation adoption process, the better the innovation transfer process performance.

METHODOLOGY In this section the sample, questionnaire, operationalization of variables, and data analysis techniques are presented.

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Sample Since this research focuses on innovation development and transfer at subsidiary level, our unit of analysis is, therefore, innovation. In order to build our sample, we targeted 63 business units belonging to 31 MNC divisions spread across 14 countries. The MNCs were selected mainly on the basis of their accessibility and willingness to cooperate. We nevertheless pursued innovations developed in advanced economies in order to get a more homogeneous sample in terms of economic context. The 14 countries where the innovations were developed (see Table 1) include, among others, Sweden (38.8 percent), Taiwan (18.8 percent), Italy (8.2 percent), France (7.1 percent), and the United Kingdom (7.1 percent). In all, we studied 85 innovations, but since 14 of them had not yet been transferred to other units within the corporation, the ﬁnal sample numbered 71. These 71 innovations belong to 52 business units which, in mean terms, are large (close to 637 employees and 231.94 million EUR); experienced (over 47 years old); with signiﬁcant R&D budgets (over 9 million EUR); internationalized (48.14 percent foreign sales), and proﬁtable (operating proﬁt around 20.55 million EUR). Our ﬁnal sample of innovations can be classiﬁed as affecting mainly product (73.2 percent), production process (40.8 percent), and core technology (23.9 percent).

Table 1. Country Austria Belgium Czech Republic Denmark Finland France Germany Italy Netherlands Sweden Switzerland Taiwan United Kingdom USA Total

Country of Origin of the Innovations. Frequency

Percentage

1 3 1 1 3 6 3 7 1 33 1 16 6 3 85

1.2 3.5 1.2 1.2 3.5 7.1 3.5 8.2 1.2 38.8 1.2 18.8 7.1 3.5 100.0

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Questionnaire and Data Collection Methods This research is part of a larger project on development and transfer of innovations in multinational companies. The project has a variety of objectives which required the collection of data on a diversity of aspects associated with the innovations, such as the units in which they were developed and more detailed information regarding the interrelated innovation development and transfer processes. Accordingly, the questionnaire is structured in six main sections, namely, ‘‘Unit characteristics,’’ ‘‘Innovations to investigate,’’ ‘‘Innovation characteristics,’’ ‘‘The role of your unit,’’ ‘‘The development process,’’ and ‘‘Transfer of innovation-knowledge.’’ Before administering the questionnaire, we performed a pretest with several international managers. To gain access to companies a formal letter was sent requesting their participation in the project. Follow-up calls were made a few days later, and when these were successful, arrangements were made for a ﬁrst meeting. The objective of the ﬁrst meeting was to become acquainted and present the project. This was also the time when innovation projects and potential respondents within the company were identiﬁed. Generally these people were sent an e-mail inviting them to participate as respondents. Thus, in the second stage, we administered the questionnaire through face-to-face interviews with managers and engineers in charge of innovation projects and/or extensively involved in the innovation development and/or transfer process. The ﬁeldwork was carried out between 2002 and 2005 by nine members of the project research team who visited the countries where the units were located. The interviews, some of which included a visit to the facilities and a practical demonstration of the innovation in focus, took between 2 and 4 h. The language used in all cases was English, since the managers were proﬁcient in it. The fact that the research design involved the collection of data on all variables from the same respondents raised some concern about potential common method variance bias (Lindell & Whitney, 2001; Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). We consider this potential problem to have limited inﬂuence in this study, since the questions and indicators are, in general, separated in the questionnaire and measured with two different scale intervals, limiting the possibility of bias in responses. In addition, we performed a Harman’s one-factor test as a post hoc statistical procedure to check for common method variance. The assumption of this test is that if a large amount of common method bias is present, either a single factor will emerge from the test or a ‘‘general’’ factor will account for the covariance in the independent and criterion variables (Podsakoff & Organ, 1986). We

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obtained seven factors with eigenvalues greater than 1 explaining between 26.1 and 4.6 percent of the variance. All of the above suggests that our set of indicators is free of this potential problem.

Measures Considering the lack of established scales and measures to deal with innovation development and transfer processes, our measures, which were speciﬁcally designed for the project to which this research belongs, can be considered an operative contribution of this study. Theoretical considerations and past research nevertheless guided the design of the items as far as possible. The operationalization of the nine ﬁrst-order latent variables in the model is summarized in Table 2. All of them are considered variables with reﬂective indicators and were measured either on 1–7 or 3–3 seven-point Likert scales. Previous research shows that HQs may through speciﬁc practices foster innovation and knowledge transfer (see, e.g., Birkinshaw & Hood, 2001; Bjo¨rkman et al., 2004). Typical factors also include HQ control, evaluation, and incentive systems (see, e.g., Doz & Prahalad, 1981; Roth & O’Donnell, 1996; Bjo¨rkman et al., 2004). In our study ‘‘HQ involvement in the innovation development process’’ was measured by ﬁve of the initial seven items of the scale. The items ‘‘The innovation has been developed within the facilities of the HQ-organization’’ and ‘‘HQ has fully supported your interest in developing this innovation’’ were dropped due to their low item reliability. ‘‘HQ involvement in the innovation transfer process’’ was operationalized by means of ﬁve of the six items initially considered. Only ‘‘The HQ have taken the complete responsibility for the transfer of this innovation to this counterpart’’ did not achieve high item reliability scores and was not retained. Innovation transfer process performance was measured by two reﬂective indicators, one related with satisfaction with the performance of the innovation transfer process and the other with the comparison of expected and incurred cost of the innovation transfer. The latter can be considered an indirect measurement of satisfaction. This comparison results in positive satisfaction values when the cost is lower than expected. Accordingly, this item was recoded to vary in the same way as the direct measure of satisfaction with transfer performance. Adoption process performance was operationalized by two items capturing ease and speed of adoption. Transfer performance and adoption success are two key aspects of the actual process

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Table 2. First-Order Latent Variables’ Operationalization. Construct/Indicator HQ involvement in the innovation development process HQ has participated closely in developing this innovation HQ has brought competence of use for the development of this innovation HQ has been important through specifying requests HQ has taken important initiatives for developing the innovation The cooperation with HQ has been characterized by frequent interaction HQ involvement in the innovation transfer process The HQ has formally instructed you to share this innovation with the counterpart The HQ itself has been heavily involved in conducting the actual transfer process with the counterpart The HQ has taken complete responsibility for the transfer of this innovation to the counterpart The transfer of the innovation is driven by a requirement from the HQ The transfer of the innovation is driven by HQ evaluation system Market impact of the innovation on the unit Competitive advantage on the market Business volume in your home country market International impact of the innovation on the unit Business volume in your foreign markets Entry into new foreign markets Corporate impact of the innovation on the unit Advantage within the MNC Sales to other MNC units Production efﬁciency impact of the innovation on the unit Efﬁciency in the production process Cost per unit in the production process R&D impact of the innovation on the unit Inﬂuence on decisions about investments in your R&D Cost of development of new products Innovation transfer process performance The performance of the innovation transfer process was very satisfactory The actual costs of innovation transfer were much higher than expected (reverse coded) Adoption process success The innovation has been very easy to adopt by this counterpart The counterpart adopted the innovation very quickly

Scale

Label

1 to 7 1 to 7

HQID HQID1 HQID2

1 to 7 1 to 7

HQID3 HQID4

1 to 7

HQID5

1 to 7

HQIT HQIT1

1 to 7

HQIT2

1 to 7

HQIT3

1 to 7

HQIT4

1 to 7

HQIT5

1 to 7

IMI IMI1 IMI2 III III1 III2 ICI ICI1 ICI2 IPEI IPEI1 IPEI2 IRDI IRD1 IRD2 ITPP ITPP1

1 to 7

ITPP2

1 to 7 1 to 7

APS APS1 APS2

3 to 3 3 to 3 3 to 3 3 to 3 3 to 3 3 to 3 3 to 3 3 to 3 3 to 3 3 to 3

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of innovation transfer (as examined in previous studies, e.g., Leonard-Barton & Sinha, 1993; Zander & Kogut, 1995; Szulanski, 1996; Kostova, 1999). ‘‘Impact of the innovation on the unit’’ is a reﬂective ﬁrst-order, formative second-order construct (Jarvis, MacKenzie, & Podsakoff, 2003) since its dimensions are assumed to cause the latent second-order construct rather than to reﬂect its changes. In addition, we do not expect the different aspects or dimensions of the unit (market, corporate, efﬁciency, and others) to contribute equally to innovation impact. The construct was created in two stages. First, an exploratory factor analysis with varimax rotation on the 17 items initially developed to measure this question suggested the retention of ﬁve dimensions with more than one indicator. These ﬁve theory-based dimensions accounted for the impact of the innovation on the unit in terms of: domestic (see, e.g., Ettlie et al., 1984; Hitt et al., 1997; Boone, 2000) and foreign markets, as new successful solutions may also contribute to the unit’s business outside its local market and even foster internationalization (Forsgren et al., 1992); production cost and R&D (Ettlie et al., 1984; Von Hippel, 1994; Ha˚kansson & Waluszewski, 2002; Atul & Srikanth, 2005); and, lastly, corporate effect, since being innovative could also leave a unit better positioned within the MNC in terms of visibility, advantage, and inﬂuence over sister units (Forsgren et al., 2005). ‘‘Market impact of the innovation on the unit,’’ ‘‘Corporate impact of the innovation on the unit,’’ and ‘‘Production efﬁciency impact of the innovation on the unit’’ lost one of their initial three indicators due to low individual item reliability. Latent variable scores were used as indicators of the second-order formative construct ‘‘Innovation impact on the unit’’ for computational purposes. Data Analysis Technique The data analysis technique was partial least squares (PLS) (Wold, 1982). This structural equations modeling (SEM) technique was selected mainly for reasons relating to the research design and sample characteristics. More speciﬁcally, the research objectives, the exploratory nature of the study, and the use of a second-order formative construct on the one hand, and the small sample size and the non-normal distribution of the variables on the other, were the basis for its selection.

RESULTS The estimation of the model showed that the measurement model was reliable and valid and that all the hypothesized relationships were signiﬁcant

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with the only exception of the linkage between ‘‘HQ involvement in the innovation transfer process’’ and ‘‘adoption process success’’ (H5). The model was re-estimated excluding the latter path. Table 3 presents the estimated values for the measurement model. The second column shows the indicator reliability values obtained by using PLS to compute individual loadings, that is, simple correlations between the items and their constructs. All but two values (‘‘ICI2’’ and ‘‘III1’’) are above the accepted threshold (0.70). Nevertheless, ‘‘ICI2’’ and ‘‘III1’’ have signiﬁcant t values (3.011 and 2.640, respectively) at the 99 percent conﬁdence level, and at 0.633 and 0.704, respectively, the average variance extracted (AVE) values for their constructs are considerably higher than the recommended 0.5 lower bound. In addition, the ‘‘III1’’ loading (0.691) is very close to the suggested threshold, and in certain situations, such as the initial stages of scale development, loadings between 0.5 and 0.6 can be acceptable (Chin, 1998). However, before the ﬁnal decision, an alternative model including only the ICI1 indicator reﬂecting the ‘‘corporate impact’’ construct was tested. Given that it yielded similar results for the measurement and structural model as the two-item construct solution, it was the latter that was ﬁnally deemed more reliable. As for the second-order formative construct (innovation impact on the unit), we tested multicollinearity, as required when working with formative measures (Mathieson, Peacock, & Chin, 2001). The variance inﬂation factor (VIF) (1.159, 1.193, 1.301, 1.122, and 1.322), tolerance (0.863, 0.838, 0.768, 0.892, and 0.752), condition indices, and variance proportion estimates showed the ﬁrst-order latent variable scores to be free of multicollinearity. The PLS output shows that the signiﬁcant weights for ‘‘MNC impact’’ and ‘‘production efﬁciency impact’’ (0.692 and 0.369, respectively) contribute more to the construct than ‘‘market impact,’’ ‘‘international impact,’’ and ‘‘R&D impact’’ (0.059, 0.210, and 0.006 in that order). This ﬁnding will be discussed in the next section. Column three in Table 3 presents the construct reliability assessment. PLS provides the composite reliability scores (Werts, Linn, & Jo¨reskog, 1974). All values are above the suggested reliability bounds, ranging between 0.760 for ‘‘corporate impact’’ and 0.921 for HQ involvement in innovation development. In order to measure convergent validity, we examined the AVE values (Fornell & Larcker, 1981), ﬁnding all to be above the 0.5 acceptance threshold. This statistic provides a measure of the construct variance explained by its indicators (and thereby, also the portion due to the measurement error). Table 4 uses the square root of AVE to test the discriminant validity of the reﬂective constructs, that is, to what extent they

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Table 3.

Item and Construct Reliability and Average Variance Extracted for First-Order Constructs.

Construct/Indicator

HQ involvement in the innovation development process HQID1 HQID2 HQID3 HQID4 HQID5 HQ involvement in the innovation transfer process HQIT1 HQIT2 HQIT3 HQIT4 HQIT5 Market impact of the innovation on the unit IMI1 IMI2 International impact of the innovation on the unit III1 III2 Corporate impact of the innovation on the unit ICI1 ICI2 Production efﬁciency impact of the innovation on the unit IPEI1 IPEI2 R&D impact of the innovation on the unit IRD1 IRD2 Innovation transfer process performance ITPP1 ITPP2 Adoption process success APS1 APS2

Item Reliability

Construct Reliability

Convergent Validity

Loading

Composite reliability

Average variance extracted (AVE)

0.921

0.699

0.884

0.604

0.852

0.744

0.823

0.704

0.760

0.633

0.817

0.691

0.833

0.716

0.810

0.682

0.881

0.788

0.904 0.850 0.842 0.808 0.771

0.792 0.814 0.813 0.750 0.711

0.941 0.776

0.691 0.965

0.991 0.534

0.836 0.827 0.922 0.763 0.895 0.750 0.867 0.908

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Table 4.

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Latent Variables: Correlations and Square Root of Average Variances Extracted (AVE).

Construct

HQIT

HQIT

ITPP

APS

IMI

III

ICI

IPEI

IRDI

HQIT HQIT ITPP APS IMI III ICI IPEI IRDI

0.836 0.561 0.158 0.006 0.122 0.299 0.513 0.257 0.286

0.777 0.197 0.007 0.101 0.161 0.439 0.394 0.149

0.826 0.618 0.034 0.316 0.068 0.071 0.149

0.888 0.157 0.264 0.012 0.021 0.000

0.862 0.230 0.216 0.143 0.264

0.839 0.267 0.215 0.332

0.796 0.220 0.428

0.831 0.087

0.846

Note: Diagonal values in bold are the square root of the variance shared between the reﬂective constructs and their measures. In order to achieve discriminant validity, diagonal elements must be larger than off-diagonal.

are different from one another. The values show that this requirement is largely accomplished by all the constructs employed. In brief, the measurement model showed good metric properties in our measures, including item and construct reliability and convergent and discriminant validity. In Table 5 the structural part of the model is described in three main groups of columns: effects on endogenous variables (direct, indirect, and total), variance explained (see also Fig. 2), and Stone-Geisser Q2. First, based on the results from 500 subsamples using the PLS bootstrap resampling technique, it can be stated that all hypothesized relationships are signiﬁcant in the re-speciﬁed model, with absolute path (b) values varying from 0.201 to 0.619. Of the ﬁve tested linkages, two are signiﬁcant at the 99.9 percent conﬁdence level, another two at 99 percent, and one at 95 percent. Second, variance explained ranges from 0.287 to 0.422 for the endogenous variables. The R2 statistic informs about the quantity of construct variance explained by the model. Thirdly, the Stone-Geisser Q2 measures of the predictive relevance of the dependent reﬂective constructs were estimated using a ‘‘blindfolding’’ technique with the omission distance ﬁxed at 10. The procedure involves omitting one case at a time, re-estimating the model parameters based on the remaining cases, and predicting the omitted case values on the basis of the remaining parameters (Sellin, 1989). The cross-validated redundancies Q2 over zero imply that the model has predictive relevance. Finally, a global goodness of ﬁt (GoF) criteria developed by Tenenhaus, Esposito Vinzi, Chatelin, and Lauro (2005) was estimated to assess the quality of the measurement and structural models.

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Table 5.

Endogenous Variables: Direct, Indirect, and Total Effects, Explained Variances and Stone-Geisser Q2 Test.

Effects on Endogenous Variables

Direct Effect

Effects on innovation impact H1: HQ involvement in 0.535 development Effects on HQ involvement in transfer H2: HQ involvement in 0.403 development H3: Innovation impact 0.295 Effects on transfer process performance H4: HQ involvement in 0.201 transfer H6: Adoption process 0.619 success

t Value (Bootstrap)

Indirect Effects

(6.227)

–

Total Effects

Variance Explained

StoneGeisser Q2

0.287 0.287

n.a.

0.377

0.120

0.535

(2.684)

0.158

0.561

0.226

(2.169)

–

0.295

0.151 0.422

(1.923)

–

0.201

0.040

(11.067)

–

0.619

0.382

0.166

po0.5; po0.01; po.001 (based on a Student t (499) distribution with one tail). n.a., Not applicable to formative constructs.

HQ involvement in development

.403

.295 .535 Innovation impact at developing unit

Fig. 2.

R2 = .287

HQ involvement in transfer

R2 = .377

-.201

Innovation transfer performance

.619 Adoption process success R2 = .422

Empirical Results: Variance Explained (R2) and Structural Paths.

GoF ranges between 0 and 1, and its 0.501 value for the proposed model indicates its overall satisfactory quality.

DISCUSSION AND CONCLUSIONS This paper provides valuable insights into the role of MNC HQs in the management of innovation at unit level. All our hypotheses except one were

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empirically supported, and the main results discussed below are summarized in Fig. 2. HQ involvement in the development process is shown to contribute to the impact of the innovation on the developing unit (H1). Speciﬁcally, the positive effects for the unit in terms of performance in the market, internal production efﬁciency, R&D activities, and positioning within the corporation are all enhanced. This result, which is in line with previous research (see, e.g., Ettlie et al., 1984; Brown & Eisenhardt, 1995; Hitt et al., 1997) can be explained by the fact that HQs may contribute with additional resources, as well as their own competence and technology, to the innovation development process. Our hypotheses (H2 and H3) concerning the overall relationship between the development process and the transfer process in terms of continuous HQ involvement have also been veriﬁed. First, a strong link is found between initial HQ involvement in the development process and continued involvement in the transfer (H2). In other words, if the HQ has already been involved in the development, it is likely to be involved in the transfer also. This can be interpreted as natural path-dependent behavior in a speciﬁc innovation project, whereby HQs follow up the investment (e.g., in terms of time, resources, and competence) made during the development stage. However, it could also mean that HQs perceive the innovation process as a whole and do not make such a clear distinction between development and transfer as units do. Second, it is conﬁrmed that the positive impact of the innovation on the developing unit triggers HQ involvement in the transfer process (H3). HQ’s decision to get close to the transfer project may be due to higher expected returns from the innovation once it is transferred to many other units. Hence, HQs may be protecting the fruits of their investment in the development, that is, future proﬁts from worldwide exploitation, against potential transfer failure and competition. We argued for a negative sign for the impact of HQ involvement on the speciﬁc performance of the transfer process (H4) based on the higher costs and lower subsidiary satisfaction associated with this corporate involvement. The literature had already suggested this negative relationship (see, e.g., Teece, 1977; Kogut & Zander, 1995; Szulanski, 1996; Cummings & Teng, 2003) that could be due, among other possibilities, to units behaving more cautiously when HQ is close at hand (Osterloh & Frey, 2000). Units might even feel less motivated to transfer if they feel controlled and steered. Transfer costs may easily increase if HQ transmits particular instructions and requirements to the unit. Although the negative relationship suggests

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that HQs are actually hindering transfer performance, we must insist that this is process-speciﬁc performance and therefore of limited duration. In other words, HQs will try to ensure that the innovation is transferred and that its implementation produces the expected return in the receiving units. While costly, this process is likely seen as an investment by HQs, who will try to offset the transfer cost through return and performance gains in the receiving unit. The performance gain already demonstrated in the developing unit boosts HQ’s conﬁdence that, once implemented, the innovation will have signiﬁcant impact on the receiving unit. The hypothesis that HQ involvement inﬂuences the success of the adoption process (H5) was also formulated, but the results fail to establish any link. This leaves open the question of whether it is actually possible to inﬂuence receivers, since direct involvement in the innovation transfer process does not seem to be the best mechanism through which to stimulate adoption. In contrast to this and previous ﬁndings on the effects of HQ involvement on transfer process performance, results do show that the latter is enhanced by successful adoption (H6). This situation, in line with previous studies (e.g., Szulanski, 1996), points to the fact that transfer depends not only on the sender but also on the receiver, who must be ready to invest in the relationship and be quick to adopt the innovation. The many intervening factors include the receiver’s absorptive capacity, previous cooperation between the parties, and strong motivation (see, e.g., Persson, 2006), all of which can inﬂuence ease of adoption. Therefore, besides illuminating the role of HQs, our ﬁndings also contribute to the more general debate on innovation transfer by focusing speciﬁcally on transfer process performance and by distinguishing between the transfer and adoption processes. In fact, an important point emerging is that transfer should not be seen as an isolated unidirectional process, and that units adopting the innovation may impact signiﬁcantly on transfer performance. Summing up, what this study tells us about the role played by HQs in the innovation process at unit level is that its involvement has a signiﬁcant beneﬁcial effect in terms of the increased impact of the innovation on the unit, and a harmful inﬂuence on speciﬁc transfer process performance. This situation suggests that HQ managers should be more selective. While continuing to support innovation development activities with signiﬁcant impact on the subsidiary, they should allow unit managers a greater role in the transfer of noncritical innovations. Unit managers are expected to be in a better position to transfer knowledge satisfactorily. At the same time, HQs could play a more effective role if they were to focus on

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the design of mechanisms to incentivate receivers, given that adoption success supports transfer performance. A couple of key managerial implications emerge from our study. The ﬁrst is that HQs should consider their involvement in the transfer in terms of the impact already created by the innovation at the developing unit site. This would enable them to balance the tradeoff between their potentially negative effect on the transfer process performance and their potential to spread the innovation impact over all the receiving units. The second issue is that HQ involvement in the transfer process should not be driven by the ‘‘inertia’’ generated by their participation at the development stage. In other words, it seems as if HQs might perceive the innovation process and their involvement in it as a long-term project, encompassing both development and transfer. However, as HQ involvement impacts differently on these two processes, we argue that it might be wise for them to rethink their involvement by separating the development process from the transfer process in their decision framework, that is, HQs should adjust their style and level of involvement throughout the innovation process. However, it is also true that if innovation is considered as an ongoing, long-term process, any performance loss incurred during the transfer process will be offset in the long term by increased overall MNC performance. The reasons would be both higher guarantee of transfer completion when HQ is involved and the performance gains achieved by the subsidiaries receiving the innovations. Top management therefore needs to analyze their performance targets for innovation transfer ex ante and on this basis decide whether to become involved. Future research can also capitalize on our ﬁndings regarding the positive effect of successful innovation adoption on performance at the transfer stage since the latter is not a unidirectional process and receivers play an integral and inﬂuential role in it. This is a research issue that undoubtedly deserves further attention. In addition, future research on knowledge transfer should focus increasingly on the different aspects of transfer success (see, e.g., Haas & Hansen, 2005). A natural development from this study might be investigation of the impact of the transferred innovation on the receiving unit (as done in this paper for the developing unit). Among the limitations of this study is its cross-sectional nature, which inhibits the possibility of making causal inferences between the different exogenous and dependent constructs tested in our model. Secondly, although our sample is unique and among the richest ever used to study innovation transfer and development in business units, we cannot argue in favor of its representativeness. The international validity of the ﬁndings should, therefore,

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be assessed by carrying out studies with representative samples from these and other advanced economies. Finally, the present sample is biased toward successful innovations, that is, failure is undersampled (Denrell, 2003) since respondents in general selected the innovations developed and already transferred by their units.

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EXTERNAL FACILITATION IN THE INTERNATIONALIZATION OF HIGH-TECH FIRMS Anita Juho and Tuija Mainela ABSTRACT Purpose – The study examines the roles of external facilitation in the internationalization process of high-tech ﬁrms. Methodology/approach – The study elaborates on the roles of external facilitation through a case study of two small high-tech ﬁrms that took part in a partly governmentally ﬁnanced facilitation program. Findings – The study illustrates the internationalization of a high-tech ﬁrm as a process that includes actions of both the facilitating actors and the high-tech ﬁrm. It deﬁnes the primary roles of external facilitation over the facilitated internationalization process of ﬁrms. Research limitations/implications – The internationalization was followed only during the time that the ﬁrms participated in a facilitation program. The external facilitation under study is of a program type; therefore the process followed is not a spontaneous one but the facilitation has certain planned phases. Future research should be conducted on the entire internationalization processes of these ﬁrms and on the utilization of various types of external facilitation. Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 185–204 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004013

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Practical implications – The study shows how high-tech ﬁrms can beneﬁt from external facilitation in their internationalization. It gives insight into how the type of the company and its background are related to the roles of external facilitation. Originality/value – The study extends the existing research on the internationalization of small high-tech ﬁrms by focusing on the roles of external facilitation in their internationalization. There are numerous institutions and actors who aim to facilitate the internationalization of small ﬁrms, but there is a limited amount of research on the roles of these facilitators.

INTRODUCTION Internationalization is often a necessity for growth-intensive high-tech ﬁrms. Even many of small high-tech ﬁrms take the challenge and aim entering foreign markets despite their limited experience and resources. The internationalization of small ﬁrms, in general, and of high-tech ﬁrms, in particular, has increasingly interested researchers over the last couple of decades (see, e.g., Bell, 1995; Bell, McNaughton, Young, & Crick, 2003; Coviello & McAuley, 1999; Crick & Jones, 2000; Elfring & Hulsink, 2003; Ruzzier, Hisririch, & Antoncic, 2006). These ﬁrms have been studied under different concepts, such as the international new venture (Oviatt & McDougall, 1994), the born global (e.g., Madsen & Servais, 1997; Moen, 2002) and the instant exporter (McAuley, 1999). As a whole, accelerated internationalization of small ﬁrms seems to be a global phenomenon (Madsen & Servais, 1997; Rialp, Rialp, Urbano, & Vaillant, 2005). The internationalization models of the 1970s (e.g., Johanson & Vahlne, 1977) already emphasized experience and knowledge as central determinants of the internationalization of ﬁrms. High-tech ﬁrms as specialized producers of products with short life cycles and niche markets (Bell, 1995; Crick and Jones, 2000; Crick and Spence, 2005; Madsen and Servais, 1997) can be expected to need even more experience and knowledge to manage their accelerated internationalization. To achieve this, the ﬁrms often rely on external resources in their business networks (see, e.g., Coviello and Munro, 1995; Harris and Wheeler, 2005; Komulainen, Mainela, & Ta¨htinen 2006; Sharma and Blomstermo, 2003). A speciﬁc type of a network consists of institutions and actors whose main task is to facilitate the internationalization of these ﬁrms (see, e.g., Prashantham and McNaughton, 2006; Welch, Welch,

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Wilkinson, & Young, 1996). This external facilitation has attracted only a limited amount of interest among internationalization researchers. A great deal of the success of internationalization of high-tech ﬁrms is deﬁned by external factors, like new market conditions and the technological developments in various areas (Madsen & Servais, 1997). However, also internal factors, such as capabilities of people, features of the entrepreneurial team, and international entrepreneurial orientation have been seen to have a signiﬁcant inﬂuence (Bell et al., 2003; Knight & Cavusgil, 1996; Madsen & Servais, 1997; Oviatt & McDougall, 1997, 2005; Zahra, Korri, & Yu, 2005). These internal factors are the ones that the external facilitation typically aims to develop. External facilitation may also provide possibilities for creating new networks and developing new market knowledge (Oviatt & McDougall, 2005; Welch et al., 1996). Many countries have different kinds of facilitation services for companies (Bessant & Rush, 1995) and earlier research indicates that external facilitation may have a positive impact on small- and medium-sized enterprises’ (SMEs’) internationalization and on knowledge transfer between ﬁrms (see, e.g., Albors, Hervas, & Hidalgo, 2006; Tomes, Erol, & Armstrong, 2000; Welch et al., 1996). However, there is still little research on the variety of the roles the external facilitation may have and the beneﬁts for these ﬁrms. The present paper aims to ﬁnd out what kinds of roles external facilitation can have in the internationalization process of small high-tech ﬁrms. On the basis of a literature review, we deﬁne the primary roles and contributions of the various intermediating actors who aim to facilitate the business development of small ﬁrms. We elaborate on the roles of external facilitation through a case study of two small high-tech ﬁrms that took part in a partly governmentally ﬁnanced facilitation program. As a result, we illustrate the internationalization as a process of actions of both the facilitating actors and the high-tech ﬁrm and deﬁne the roles of external facilitation over the process.

INTERNATIONALIZATION OF SMALL HIGH-TECH FIRMS AND ROLES OF EXTERNAL FACILITATION High-tech SMEs are relatively vulnerable in their internationalization compared to multinational corporations (MNCs), because they have fewer resources that can be directed to the internationalization efforts (Coviello, Brodie, & Munro, 2000; Ellis, 2000; Oviatt & McDougall, 1994). In practice, many small ﬁrms are dependent on a single product that they commercialize

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in the lead markets, regardless of where the markets are located (Weerawardena, Mort, Liesch, & Knight, 2007). Because of the lack of resources, the ﬁrms try to ﬁnd partners who would complement their own competences (Johanson & Mattsson, 1988; Oviatt & McDougall, 1994; Varis, Kuivalainen, & Saarenketo, 2005). In addition to business partners, ﬁrms may rely on actors whose main task is to provide market knowledge, assist in developing networks and evaluating technological innovations and to provide other speciﬁc services (Albors et al., 2006; McEvily & Zaheer, 1999; Vonortas, 2002; Welch et al., 1996). This external facilitation is in the focus of the present study. However, we begin with a view on the importance of networks in general in the internationalization of small high-tech ﬁrms.

Networks in the Internationalization of Small High-Tech Firms Internationalization of all ﬁrms is nowadays described primarily as a network embedded process (Johanson & Vahlne, 2009). The network embeddedness of developments in international markets is often emphasized in case of small high-tech ﬁrms, which is why research on them has stressed the role of networks (see, e.g., Coviello & Munro, 1995; Coviello & McAuley, 1999; McAuley, 1999; Sharma & Blomstermo, 2003). Building and maintaining relevant, superior and effective networks is seen as an integral part of a successful internationalization process (Liesch et al., 2002). Networks help small ﬁrms to discover opportunities by testing ideas and garnering resources for the formation of new organizational structures (Coviello & Munro, 1995; Elfring & Hulsink, 2003; Weerawardena et al. 2007). Networks provide information that contributes to a lower level of risk and uncertainty in international operations and facilitate the acquisition of knowledge and complementary resources (Madsen & Servais, 1997; Selnes & Sallis, 2003; Weerawardena et al., 2007). However, ﬁrms are not similar in their actions toward and in networks. McEvily and Zaheer (1999) showed that even though ﬁrms within a region tend to have similar resources, cost structures and competitive behavior, the ﬁrms differ from each other in their ability to acquire and maintain competitive capabilities through their networks. Nummela (2000) emphasized the differences in network action during internationalization. According to her, when a small ﬁrm initially considers internationalization, it seeks assistance from network actors that can complement the ﬁrm’s lack of resources. In the beginning, ﬁrms use networks broadly to develop internal resources but do not create long-lasting relationships. Later on, however,

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when the ﬁrms have international activities and face the turbulence of the international markets, they are more interested in creating deeper relationships in these networks. Thus, we can expect small high-tech ﬁrms to utilize networks in their accelerated internationalization. Furthermore, we can expect that different types of ﬁrms at different phases of internationalization utilize different kinds of networks in different ways. To go deeper into the roles of networks, we focus on one network type that consists of the so-called external facilitators.

The Role of External Facilitation There are social, historical, and contextual differences between communities that inﬂuence entrepreneurial economic development, technology-based startup activity, and the net of economic investments (West & Bamford, 2005). However, especially in small countries, the external consultants, research projects, governmental export programs, and support services may have a great impact on small ﬁrms’ internationalization processes (Welch et al., 1996). In fact, Nummela (2000) argues that public and semipublic organizations are the most important supporters of small ﬁrms in the beginning of their internationalization. Bessant and Rush (1995) note that regional technology centers, innovation agencies, external consultants, technology brokers, university liaison departments, and cross-national associations are central business intermediaries. External facilitation is here deﬁned to concern activities of actors engaged in consultancy and other advisory services with the intent to facilitate the business processes of ﬁrms through wide and ﬂexible interactions. The actors providing external facilitation are often primarily intermediaries between the supplying ﬁrms and their customers and possible partners. This makes them so-called third parties, bridges, brokers, information intermediaries, or superstructure organizations (Howells, 2006). In case of speciﬁc knowledge bridging, the intermediating actors have been named as KIBS, that is, knowledge intensive business services (Muller & Zenker, 2001). Millar and Ju Choi (2003) note that when intangible value of products increases the role of knowledge, the intermediaries become more important in the relationships between producers and customers. In general, the development of the facilitation and intermediary services has even been suggested as an important reason for the recent economic evolution in the industrialized countries (Muller & Zenker, 2001).

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In the internationalization of ﬁrms, special export intermediaries have for long had a role of bridging the cultural, linguistic, and geographical gaps between the parties from different countries (see, e.g., Havila, Johanson, & Thilenius, 2004; Peng & Ilinitch, 1998). The ability of intermediaries to lower information costs in the adaptation to new markets has been seen as a signiﬁcant beneﬁt (see, e.g., Popp, 2000). In addition to relationship mediation and gap closing, small ﬁrms may need support in many internal managerial areas, such as technology, human resources, ﬁnancing strategy, business strategy, and implementation of technology transfer (see, e.g., Bessant & Rush, 1995; Massa & Testa, 2008). We go deeper into these relationship- and internal capability-related roles of external facilitation through analysis of previous classiﬁcations of the roles of the intermediating actors in both innovation and internationalization-related facilitation. Bessant and Rush (1995) present four roles for intermediating actors in the development of ﬁrms’ key managerial capabilities. The ﬁrst role is direct transfer of specialized expert knowledge that has also been emphasized by McEvily and Zaheer (1999) and Welch et al. (1996). Bessant and Rush (1995) further divide the specialized expert knowledge into market knowledge, situation-speciﬁc knowledge, technological knowledge, and advice. Quite similarly, Fletcher (2007) emphasizes the need for market knowledge, general internationalization knowledge, and product/technological knowledge in the internationalization process of ﬁrms. Through knowledge transfer, the external facilitation helps ﬁrms to build capabilities and avoid failures. Secondly, intermediating actors can have a role of experience sharing, either implicitly or explicitly (Bessant & Rush, 1995). Intermediaries carry out experiences from one location or context into another. Thus, external facilitation may allow the small ﬁrm to rely on the knowledge of others instead of developing internal experiential knowledge (see Arenius & De Clercq, 2005; Kuivalainen, Kyla¨heiko, Puumalainen, & Saarenketo, 2004; Sharma & Blomstermo, 2003). Again, these actions contribute to the capability building in such small ﬁrms and help them to avoid failures. The third intermediary role by Bessant and Rush (1995) is called marriage broker. An intermediary provides a point of contacts for accessing specialist services and business partners. McEvily and Zaheer (1999) see marriage brokering as the creation of bridging ties and linkages to economic, professional, and social circles, which are not otherwise available for these ﬁrms. According to Howells (2006), intermediaries may, at a practical level, help them in identifying partners, support in decision making and facilitate contractual arrangements between parties. Moreover, the role of relationship

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mediation and network opening is emphasized in the accelerated internationalization (see, e.g., Coviello & Munro, 1995; Oviatt & McDougall, 1994; Welch et al., 1996). External facilitation as active intermediation between parties is likely to contribute to targeting of the actions of small ﬁrms and, therefore, also lowering the costs of search. Intermediaries may also act in a diagnostic role. They help small ﬁrms to deﬁne and articulate their particular innovation needs or, more directly, assist in innovation evaluation and development (Bessant & Rush, 1995; Muller & Zenker, 2001). This means activating the innovation potential of these ﬁrms (Howells, 2006; McEvily & Zaheer, 1999; Muller & Zenker, 2001), or possibly, institution building to mobilize the critical mass of knowledge and skills to support speciﬁc technologies (see Bessant & Rush, 1995). Prashantham and McNaughton (2006) emphasize that high-tech ﬁrms create knowledge and access to international markets especially through the social capital in relationship networks. Therefore, the starting point for their deﬁnition of roles of facilitation is ‘‘the barriers that prevent the formation of bridging social capital’’, that is, the lack of (1) visibility, (2) efﬁciency, and (3) intimacy within networks. Visibility refers to the ﬁrm’s awareness of actors in the potential network as well as others’ awareness of the focal ﬁrm (see also Komulainen et al., 2006; Welch et al., 1996). Efﬁciency refers to the company’s competence in carrying out business activities and the existence of processes for facilitating interactions and transactions. Intimacy refers to the existence of a deeper understanding of goals and resources in the network that is most often based on trusting relationships. In case of low levels of visibility, efﬁciency and intimacy in networks, a ﬁrm confronts signiﬁcant barriers due to the lack of information, processes, and trust for internationalization. In their role classiﬁcation, Prashantham and McNaughton (2006) especially acknowledge the processual nature of facilitation activities. Architecting takes place on the ﬁrst stage of facilitation when availability of organizations with complementary capabilities and resources is deﬁned, a set of prospective partners is identiﬁed and their trustworthiness initially evaluated. Brokering involves introducing the company to potential collaborators and facilitating the contract making in terms of operational and legal advice (see marriage brokering). Coaching aims to ensure that the complementary capabilities of partners result in successful collaboration also at team and individual levels through teamwork skills and honest communication. During the process, the facilitating actor aims to enhance the ﬁrm’s visibility, efﬁciency, and intimacy in the network by overcoming the lack of information, processes, and trust in the network.

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Table 1. Role Knowledge transferring Experience sharing Diagnosing

Architecting Brokering

Coaching

Possible Roles of External Facilitation in Internationalization of Firms. Description

Transfer of expert knowledge on, for example, markets, internationalization, product/technology aimed to contribute to capability building and failure avoiding by the target ﬁrms. Carrying out experiences and ideas from one context into another aimed to contribute to capability building and failure avoiding by the target ﬁrms. Identifying, articulating, and evaluating the speciﬁcities of an innovation to contribute to activation of innovation potentials and institution building to support speciﬁc technologies. Identifying organizations with complementary capabilities and searching potential partners to create visibility, efﬁciency, and intimacy at macrolevel. Acting as a channel for introduction to and provision of contacts aimed to contribute to targeting of networking actions of the small ﬁrms and, thus, lowering the costs of search and increasing visibility, efﬁciency, and intimacy at interorganizational level. Ensuring that collaboration with partners is harmonious and in balance with the strategy of the small ﬁrm to contribute to failure avoiding by the small ﬁrm and to increased visibility, efﬁciency, and intimacy at the team level.

Nummela (2000) divides the advantages the ﬁrms can gain from export cooperation activities to resources and intangible beneﬁts. Resources include ﬁnance, skills, knowledge, and other complementary resources. Intangible beneﬁts that companies gain are sharing experiences, learning, publicity, and credibility and increased future expectations. Intermediary roles deﬁned by Bessant and Rush (1995) can be seen to emphasize intangible beneﬁts and managerial capabilities, whereas Prashantham and McNaughton (2006) emphasize the resource development to reach a position in a network. We summarize the review of previous research to six roles of external facilitation in Table 1. In sum, small high-tech ﬁrms face many difﬁculties when targeting global markets. Limited resources, the lack of experiential knowledge of international business as well as the lack of visibility, efﬁciency, and intimacy in networks are the major challenges to overcome. There are various types of intermediating actors that especially aim to facilitate and support the international activities of small high-tech ﬁrms. This external facilitation can provide the ﬁrms a variety of beneﬁts that help to compensate their lack of managerial capabilities and to develop effective networks for internationalization.

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METHODOLOGY The study is qualitative by its nature and the phenomenon is examined through a case study in its real-life context (Yin, 1994). While there is not much research on external facilitation in the internationalization of small high-tech ﬁrms, an in-depth case study is a good research strategy for new knowledge creation. Furthermore, the external facilitation has been followed over time, and the process research setting creates further possibilities for a deep understanding (Langley, 1999). The phenomenon is holistically examined by utilizing different types of data that also allow for taking into account the speciﬁc context of the study (Langley, 1999; Yin, 1994). In addition, the longitudinal comparative case study allows examining the differences and similarities of the experiences of the two case ﬁrms and, also that way elaborating on the possible roles of external facilitation. The external facilitation under examination is a Finnish business development program called Global Clusters. The program is designed to support high-tech ﬁrms that aim to reach a critical mass of international customers and to create global market presence. The Global Clusters program is organized by the University of Oulu in cooperation with the city of Oulu and business development institutions Oulu Innovation Ltd. and Oulu Wellness Institute Foundation. The 1-year program is divided into four phases during which the ﬁrms should gradually develop unique internationalization strategies to the lead markets. The program proceeds from market positioning through tailoring of business strategy and product validation to launching the product into the target markets. The empirical data have been collected over a 1-year period using multiple methods (see Table 2). The primary data collection methods were semistructured interviews and observation during the program events. Two managers of the two companies that took part in the program were interviewed to get an insight into their personal experiences and perceptions of the facilitated internationalization through the program. Furthermore, two leaders of the program were interviewed to get the facilitating actor’s viewpoint on the aims and tasks of the program. Notes of the external consultants, as well as company and program web pages and other program materials have been used as secondary data. In the empirical analysis, the roles of the external facilitation are deﬁned from the viewpoint of the participating ﬁrms.

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Table 2. Date/Place

Empirical Data of the Study. Type of Data

March 9, 2006/ Oulu May 21–22, 2007/ Oulu May 23, 2007/Oulu May 24, 2007/Oulu June 1, 2007/Oulu October 8–13, 2007/San Jose October 11, 2007/ San Jose January 25, 2008/ Oulu January 29, 2008/ Oulu February 5, 2008/ Oulu May 29, 2008/Oulu

Interview of the project manager Observation in a program seminar on global markets, researcher’s notes Consultants’ notes Consultants’ notes Observation in a common seminar, researcher’s notes Observation in a networking event and appointments, researcher’s notes Interview of the CEO of Alpha Interview of the CEO of Beta Interview of the Program Director Interview of the CEO of Alpha Interview of the CEO of Beta

Length and Topic 1 h and 40 min, program role and contributions 8 h and 4 h, framing and market strategies 4 h, individual workshop for Alpha 4 h, individual workshop for Beta 4 h, feedback and future directions 6 days, meetings with potential partners, customers and venture capitalists 20 min, experiences of the program and networking event 50 min, background and experiences of the program 2 h and 15 min, program role and contributions 1 h and 30 min, background and experiences of the program 1 h and 20 min, experiences of the program

Source: Background information – Company internet pages, program internet pages, and program brochures.

CASE STUDY ON FACILITATED INTERNATIONALIZATION OF SMALL HIGH-TECH FIRMS Description of the Case Firms and the Facilitation Process Alpha was established in 1996 to operate in digital media and web-based communication business. In 1999, it started to develop its ﬂagship product based on customer needs. The product enhances customers’ communication with their target groups and reduces the costs of advertising. Close cooperation with customers and local partners has been distinctive for the ﬁrm throughout its history. Today, Alpha is one of the leading suppliers of electronic information channel services in Finland and provides consultation, design, and maintenance services. Alpha has grown

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moderately throughout the years and it has nine full-time employees. Financial independency and full ownership by the operative management have been key issues and it has ﬁnanced its growth and R&D only by income ﬁnancing. Beta was only established in 2004 but its management team was highly experienced both in international business and in high-tech industries of telecommunications and mobile devices. For the current CEO, the decision to become an entrepreneur was easy. The business idea had already been developing for a while, and the bankruptcy of the previous employer gave the ﬁnal push for realizing the idea. In 2004, Beta was a one-man company and the CEO did management consulting while building up the business. When the idea and funding for the company were organized, the CEO started to build a team for Beta of the experienced and talented people with whom he had worked before. The networks of the people were crucial for the new company. The ﬁrst customer relationships were created through the contacts of the CEO on the same day Beta was born. Alpha became interested in international business opportunities in 2006, when its ﬂagship product was seen as truly global and ready for international markets and, therefore, it applied to the Global Clusters program. Alpha had local customers who operated internationally but it never had international operations and there were no internationally experienced people in the ﬁrm. The business development program was expected to give insight into the possibilities of entering international markets and provide international marketing expertise. Moreover, new partnerships were hoped for in order to build global sales and market presence. Beta’s experienced management team had a clear strategy for entering international markets. The business was always seen as global because the customers and the markets were both international. In 2006, the company decided to participate in the Global Clusters program in order to enhance its international network in the US markets. At the same time, it established a sales ofﬁce in Dallas and hired an experienced person there, who had a long career in the telecommunications industry and good networks in the United States and Asia. The ﬁrms were selected to the Global Clusters program at the end of 2006. The program consisted of four phases that focused on different parts of the international market entry strategy. Phase I dealt with marketing strategy and positioning in the target markets. US consultants hired by the program gave lectures about framing strategies to emerging markets and about internationalization. In addition, the consultants evaluated the ﬁrms’ market potential, customer segments, and products in individual workshops.

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A practical, but central, part of the program was to prepare the ﬁrms for interaction with business actors in the international market (e.g., elements of elevator pitch). During the ﬁrst phase, Alpha developed its understanding of the US markets. In addition, it expanded its understanding of its product and potential customer segments and gained marketing knowledge through interaction with the consultants. Preparing the 30-s elevator pitch of the ﬁrm and its product was the most practical outcome of Phase I for Alpha. Beta, however, had already made its internationalization strategy and now it gained new ideas for developing and marketing the products and tools for innovating. In Phase II, the existing market strategy of each ﬁrm was evaluated and reﬁned in terms of a market penetration strategy model developed by the consultants. The expected outcome of the strategy evaluation was a 9-point market strategy for penetrating into the target markets. In addition, the consultants prepared the companies for the becoming visit to a networking event in the United States by giving advice on marketing material and other relevant issues. Alpha needed to focus and crystallize its internal processes and external image. With the help of the consultants, it redeﬁned its market as the new and growing markets of digital signage and segmented its customers by industry. It used various industry experts to complement its own expertise and to help in reaching the customers in each segment. Beta had a clear strategy to ﬁnance its ﬁrst years by subcontracting and management consulting. When the business grew more stable, Beta implemented full-scale projects. But the objective was to have its own products and to focus on product business. With an own product, Beta could become an international actor and grow on its own terms rather than acting as a buffer for the customers in economic cycles. Beta’s own entry strategy was not easily integrated to the consultants’ 9-point entry strategy and, thus, Phase II was not that important to Beta. In Phase III, the ﬁrms attended a networking event in Silicon Valley to meet potential partners, customers, venture capitalists, and business experts. They were supposed to gain experience, build networks, and develop interaction skills in a real-life situation. According to one consultant, the purpose was ‘‘to bring the companies into the learning process so that the companies learn how to bring their strengths visible and that way to become a known actor in the markets.’’ The week included meetings with different parties arranged by the consultants. Beta also arranged meetings through its own networks. The outcome of the networking event for Alpha was market knowledge and understanding of the business in Silicon Valley.

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Interestingly, as a result of this understanding, Alpha decided to focus its major efforts in the European markets. The expectations of growth by the US partners were seen as too high. Due to its lack of international experience, Alpha decided to acquire knowledge by hiring internationally experienced people into its board. Beta was the most satisﬁed with its new contact with an expert who later successfully managed its product launch to the US markets. The purpose of Phase IV was to support the launch of the products to the North American markets. Of the two companies, only Beta participated in this phase. The local experts were used to manage the launching process and the launch in the US markets in February 2008 was its ﬁrst step in product business. Alpha had no clear entry strategy or deﬁned target market but, instead, expected opportunities to open up in the near future through its networks.

The Role of the Global Clusters Program in the Internationalization of the Case Firms Knowledge transfer by consultants was in a key role to the case ﬁrms especially in Phases I and II. The ﬁrms were trained and evaluated by consultants who had a long experience both in managing and in consulting high-tech companies in the target markets. Both the general internationalization knowledge and target market-speciﬁc knowledge of the consultants was highly appreciated by Alpha that had no previous international experience. Alpha’s knowledge about the entry to North America, customers, as well as selling and marketing strategy all enhanced during the program. In California they really have marketing know-how. We have developed our customer processes but they clariﬁed the core of our product for marketing. (CEO, Alpha)

Beta noticed the program’s role as knowledge transferor but saw that it had gained more important market-speciﬁc knowledge from other external actors in its own networks as well as from international exhibitions. The knowledge contributions of the program centered on ideas on development of the own product from their project type of business and notice of wider industry applicability of the product. Experience sharing was a central inbuilt role of the program as its purpose was ‘‘to enable companies’ success by offering them the opportunity to learn best practices in high-tech strategy development and implementation based on proven models explained by industry professionals.’’ The consultant team of

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the program shared their experience from business making in the high-tech markets of Silicon Valley and experience of successful North American high-tech start-ups. This became concrete when evaluating and developing ﬁrm strategies. This was especially signiﬁcant for inexperienced Alpha that also learned a lot by observing other ﬁrms that participated in the program. The experience-based analyses of the consultants also helped Beta in deﬁning their product and markets. However, the process was difﬁcult, because Beta’s strategy was changing during the program and the consultants found it difﬁcult to ﬁt the company into their models. In the ﬁrst two phases, the consultants also had a diagnostic role, when they were evaluating the ﬁrms’ market potential and reﬁning and developing the market entry strategies. Both ﬁrms emphasized the diagnostic role of the consultants during the program. For Alpha, it resulted in a new understanding of the entire business, target markets, and potential customers. For Beta, the individual consulting workshops clariﬁed its business strategy especially with respect to the applicability of its product in different industries and also gave new ideas and tools to develop their product innovations. A year ago we didn’t even know what is the product and in which markets we are playing. We thought that we were providing web based communication tools but now we know that our market is about digital signage. (CEO, Alpha) We received new ideas to our offering and tools to develop industry speciﬁc applications for our product as well as assistance to developing marketing plans for different products. (CEO, Beta)

Architecting role of the program was focused on the phase III networking event. On the basis of their own target market networks and knowledge of the business of the case ﬁrms the consultants invited participants to the networking event. They chose the venture capitalists, business experts, and other actors that they believed to have common interests and complementary resources to these ﬁrms. As networking was identiﬁed as one of the key capabilities for successful internationalization by the program consultants, brokering was the theme of phase III. Both companies found contacts through the program but they also actively used other channels to ﬁnd them. As a result, Alpha established a joint venture in the United States with one of the consultants and the consultant’s networks enabled Alpha to reach a global fast food chain as its customer. For Beta, the major relationships received through the program were relationships to launching experts who successfully managed the

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product launch. The company gained expert services and macrolevel visibility during the professionally led launching process. We got a strong launch to the market with contacts and publicity. The work of the consultants included a plan for the launch, press releases and brieﬁngs of the media. (CEO, Beta)

A lot of meetings were also held in vain. Especially Beta expected to meet more potential customers through the program. The personal level chemistries are also important because development of trust is difﬁcult to be facilitated. Table 3. Perceived Roles of External Facilitation in Internationalization of the Case Firms. Role Knowledge transferring Experience sharing

Diagnosing

Architecting

Brokering

Coaching

Contents of the Role for Alpha

Contents of the Role for Beta

Internationalization, sales, marketing and Ideas for product development customer knowledge in phases I and II. and industry speciﬁc applications in phase I. New market segmentation and Mismatch of the own entry (?) international entry strategy on the basis model with the consultant’s of the consultants’ experience-based model. Target market speciﬁc and target market-speciﬁc market ideas for product and market penetration model in phases I, II, and strategy in phase II. III. Learning from the experience of other participants during the program. Consultants’ analyses of the entire Consultants’ analyses of the business concept in phases I and II business concept in phases I resulting in redeﬁnition of own and II resulting in clariﬁcation business. of product strategy. Networking event with possible partners, Networking event with possible customers, venture capitalists, and partners, customers, venture business experts in phase III resulting in capitalists, and business primarily focusing on European instead experts leading to product of US markets. launch in the United States. New relationships with actors in the US Establishment of a relationship markets resulting in establishment of a with a launching experts in joint venture with one consultant and phases III and IV. related customer relationship with a global fast food chain after the program ending. Skills in business communications in the target market in phases I and II and support in interactions in phase III networking event.

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You notice it fast if you share a common language and common goals, if that does not exist, you will look at the next one. (CEO, Alpha)

The program as well could facilitate the development of personal level skills for communications and interactions in the new business context. This kind of coaching was important to the internationally inexperienced managers of Alpha. One signiﬁcant outcome was practicing the elevator pitch. Consultants were also supporting the managers in the meetings in phase III and ensured that business opportunities were not thrown away by mistake. Alpha’s managers perceived to have gained a lot of support from the consultants during the meetings with the potential US customers and partners. To summarize, the above analysis illustrates the variety of the roles of external facilitation and the role contents from the viewpoint of the two case ﬁrms (see Table 3). The analysis especially shows how the backgrounds and speciﬁc situations of the ﬁrms inﬂuence both the expectations and the experiences of the external facilitation.

CONCLUSIONS The aim of the paper was to explore what kinds of roles the external facilitators have in the internationalization process of small high-tech ﬁrms. In the paper, we examined the phenomenon both theoretically and empirically. Our study contributes to the research on high-tech ﬁrms’ internationalization through focusing on the important, but underexamined, phenomenon of external facilitation. We studied the phenomenon longitudinally and, therefore, gained information about the change of roles of the intermediating actors, and the actions of both the facilitators and the case ﬁrms over time. The empirical study extends the theoretically deﬁned roles of external facilitation. On the basis of the study, we emphasize the inﬂuence of previous experience of the ﬁrms on how they beneﬁt from external facilitation. Companies with managers who have signiﬁcant previous experience of international business are likely to utilize external facilitation in a more straightforward way than inexperienced ﬁrms. In our study to the experienced ﬁrm, the major roles were diagnostic, architecting, and brokering that resulted in new product speciﬁcations and product launch in the target markets. To the inexperienced ﬁrm the roles of knowledge transfer and experience sharing were emphasized as the basis for any decisions with respect to their internationalization. Furthermore, the

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inexperienced managers could make use of the coaching by the facilitators to develop their international communication skills, especially. External facilitation is as well a process developing over time. The early facilitation is likely to center on knowledge transfers and experience sharing between the ﬁrms and the facilitators. It is necessary for the facilitators to get an in-depth understanding of the ﬁrms and their business concepts to allow diagnosing, architecting, brokering, and coaching in later facilitation. Effective external facilitation of the internationalization of different kinds of ﬁrms requires ﬂexibility from the facilitators and the facilitation procedures. The actions of the facilitators need to be adapted to the speciﬁc situations of the ﬁrms. Lastly, our study points to the difﬁculty of evaluating the success of external facilitation programs. The initially planned objectives of a program may easily be different than the outcomes that the managers perceive as a success to their ﬁrms. In a facilitation program whose primary target is product launch to certain selected markets, also a decision not to launch to that market can be a successful outcome. Moreover, the external facilitation may be the most effective in creating macrolevel beneﬁts and a kind of framework for activities of the ﬁrms. On the basis of this macrolevel facilitation (such as general information transfer, assistance in business processes, provision of legitimacy), it is up to the ﬁrms to create the interﬁrm relationships and act upon the opportunities. The exploratory empirical setting involves two speciﬁc limitations. The internationalization of the ﬁrms under study was followed only during the time that they participated in the facilitation program and, therefore, their whole internationalization processes were not examined. The external facilitation under study is of a program type, which means that the process followed is not a spontaneous one but the facilitation has certain planned phases. Therefore, future research should be conducted in an empirical setting, which would provide the possibility to analyze the entire internationalization processes of the ﬁrms and the utilization of various types of external facilitation.

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PART IV EMERGING ECONOMIES: INNOVATION AND KNOWLEDGE CREATION

MARKET CONCENTRATION AND INNOVATION IN TRANSNATIONAL CORPORATIONS: EVIDENCE FROM FOREIGN AFFILIATES IN CENTRAL AND EASTERN EUROPE Liviu Voinea and Johannes Stephan ABSTRACT Purpose – The main research question of this contribution is whether local market concentration inﬂuences R&D and innovation activities of foreign afﬁliates of transnational companies. Methodology/approach – We focus on transition economies and use discriminant function analysis to investigate differences in the innovation activity of foreign afﬁliates operating in concentrated markets, compared to ﬁrms operating in nonconcentrated markets. The database consists of the results of a questionnaire administered to a representative sample of foreign afﬁliates in a selection of ﬁve transition economies. Findings – We ﬁnd that foreign afﬁliates in more concentrated markets, when compared to foreign afﬁliates in less concentrated markets, export more to their own foreign investor’s network, do more basic and applied research, use more of the existing technology already incorporated in the Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 207–223 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004014

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products of their own foreign investor’s network, do less process innovation, and acquire less knowledge from abroad. Research limitations/implications – The results may be speciﬁc to transition economies only. Practical implications – The main implications of these results are that host country market concentration stimulates intranetwork knowledge diffusion (with a risk of transfer pricing), while more intense competition stimulates knowledge creation (at least as far as process innovation is concerned) and knowledge absorption from outside the afﬁliates’ own network. Policy makers should focus their support policies on companies in more competitive sectors, as they are more likely to transfer new technologies. Originality/value – It contributes to the literature on the relationship between market concentration and innovation, based on a unique survey database of foreign afﬁliates of transnational corporations operating in Eastern Europe.

INTRODUCTION: THEORY AND RELATED EMPIRICAL WORKS At the most general level of our analysis, we refer to the theory concerned with the relationship between innovation and market structure. This question is far from resolved: a positive relationship, where ﬁrms tend to innovate more when they enjoy some form of monopoly-proﬁts, and a negative one, where ﬁrms are forced to innovate by ﬁerce competition to stay aﬂoat, both coexist in the empirical and theoretical literature (see, e.g., Krap & Stephan, 2008). The prevalent theory in international literature (from Schumpeter, 1942 to Dasgupta & Stiglitz, 1980) argues that monopoly proﬁts provide incentives for companies to engage in research and development (R&D). For a more detailed literature review on this topic see Subodh (2002). Endogenous growth theory (Rosenberg, 1981; Porter, 1990) considers innovation as the most important driver of productivity growth. It also seems to argue that since R&D is expensive, only companies with large proﬁts can afford such technological development. Therefore, monopolies or large oligopolies, earning higher than normal proﬁts, are likely to invest more in R&D than ﬁrms operating in a more competitive environment. Evidence from developed

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economies supports this argument, up to a point. Most R&D-intensive sectors are international oligopolies, such as pharmaceuticals and biotechnology, technology hardware and equipment, automobiles and parts, oil and gas producers, and chemicals (European Commission, 2007). Most concentrated industries beneﬁt from high economies of scale or a high level of technology (Tohmo, Littunen, & Tanninen, 2006). A number of recent studies support the argument that a higher market concentration leads to a higher R&D intensity (Gayle, 2001; Smith, Madsen, & Diling-Hansen, 2002; Weiss, 2005; Bhattacharya & Innes, 2007). Other authors (Viscusi, Harrington, & Vernon, 2005) support the argument that the incentive to invent is greater in a competitive industry than in a monopoly industry, both for ‘‘minor’’ inventions (one that leaves the market price unaffected) and for ‘‘major’’ inventions (one that leads to price cuts). The authors also mention Tirole’s replacement effect (Tirole, 1988), which holds that a monopolist ﬁrm is less stimulated to innovate because by doing so it ‘‘replaces itself,’’ while a competitive ﬁrm is more stimulated to innovate because by doing so ‘‘it becomes a monopoly.’’ A study on the Czech economy (Medvedev & Zemplinerova, 2005) found that market concentration reduces innovation. A more comprehensive empirical study of 24 transition economies (Carlin, Schaffer, & Seabright, 2004) concluded that innovativeness of ﬁrms tended to increase with competition: a minimum number of seriously competing ﬁrms is sufﬁcient to generate competitive conduct. When the traditional concentration ratio was replaced by a network model of market competition, another study (Raider, 1998) found that markets facing competitive environments show greater R&D intensity and faster rates of innovation than markets facing less competition. Another author, also referring to more recent empirical work, observes a positive correlation between product market competition and productivity growth and innovativeness within a ﬁrm or an industry (Howitt, 2007). Our research effort differs in that it addresses innovation undertaken by foreign direct investment (FDI) afﬁliates only, in the context of their local market competition. Here, the body of the international business literature on the behavior of transnational corporations (TNCs) in different market structure settings is rather scarce. Most contributions are concerned with the behavior of TNCs and the resulting effect on the market structure of the host economy industry (see, e.g., Graham, 1998; Cowling & Sudgen, 1987; Peoples & Sudgen, 2000). These studies do not assess whether TNCs’ subsidiaries adjust their (strategic) behavior with respect to their

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technological activities (R&D and innovation) to the degree of competition they face locally. The stream of literature that is concerned with the issue of R&D and innovation activities of local afﬁliates (see, e.g., Papanastassiou & Pearce, 1999) does not consider market concentration at the sectoral level (with a focus on the transition economies of Central and Eastern Europe (CEE) (see, e.g., Damijan, Knell, Majcen, & Rojec, 2003; Manea & Pierce, 2004). There hence appears a striking gap in the literature on market structures as one determinant of TNCs’ R&D and innovation, despite the fact that this has clear implications for economic policy in general and competition policy as well as policies to attract FDI in particular. Our paper aims to ﬁll this gap. As the ﬁrst approximation of an application of the innovation–market structure relationship to TNCs, we can ﬁrst assume that TNCs’ subsidiaries are less in need of monopoly-proﬁts granted by concentrated market structures in their host economy to cover the costs of R&D and innovation. Monopoly-proﬁts may originate in other afﬁliates, as TNCs are able to transfer funds between differ locations (Papanastassiou & Pearce, 2005). This may reduce the relevance of the classical Schumpeter hypothesis in the case of TNCs. Second, FDI subsidiaries are attached to a particular investment motive of the foreign investor; hence R&D and innovative behavior of an afﬁliate may well depend on a lesser degree on the afﬁliate’s local market structure. This is particularly the case for subsidiaries that belong to TNCs: those typically form a part of an international network with multiple locations, where each location adds to increasing efﬁciency for the whole network of the TNC (Birkinshaw & Hood, 1998). Finally, the innovation–market structure relationship for TNC will also depend on the degree of local market orientation versus export orientation. In general, the distinction between domestic enterprises and foreign afﬁliates with respect to the market structure–innovation link hinges on whether FDI subsidiaries are governed as local proﬁt centers: then, their behavior will be inﬂuenced by the extent of concentration versus competition that they are confronted with on their local markets. This means that in our conceptual approach, we do not refute the possibility, for example, that at the international level one of the two relationships between innovation and market structure to hold true, while at the local level the other perspective could prevail. It is, in fact, the internalization factor speciﬁc to TNCs in Dunning’s eclectic paradigm (for an up-to-date version of the paradigm, see Cantwell & Narula, 2003) that may explain why the results of R&D undertaken in a different competitive context could be internalized by a TNC in another competitive context.

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CONCEPTUAL FRAMEWORK: RESEARCH QUESTION AND TESTABLE HYPOTHESES Our main research question is whether the level of local market concentration inﬂuences (and if it does, in which way) the R&D and innovation activity undertaken by foreign afﬁliates. We focus on the manufacturing sector, and consider ﬁve transition economies from CEE: Romania, Poland, Croatia, Slovenia, and East Germany. The selection of CEE countries should provide some insights into a still heterogeneous group of postsocialist economies. We assume that the concentration–innovation nexus is particularly robust in manufacturing FDI. We answer our overarching research question by empirically testing a set of ﬁve hypotheses: H1. Foreign afﬁliates in more concentrated markets do more foreign trade within their foreign investor’s network than foreign afﬁliates in less concentrated markets. H2. Foreign afﬁliates in more concentrated markets do more R&D than foreign afﬁliates in less concentrated markets. H3. Foreign afﬁliates in more concentrated markets do more basic and applied research than foreign afﬁliates in less concentrated markets. H4. Foreign afﬁliates in more concentrated markets transfer more technology from abroad than foreign afﬁliates in less concentrated markets. H5. Foreign afﬁliates in more concentrated markets do more product and process innovation than foreign afﬁliates in less concentrated markets (the classical Schumpeterian hypothesis). Before testing these hypotheses, it is worth mentioning that the R&D and innovation activity in transition economies started from a low base (while there were some R&D-intensive sectors developed in the transition economies before the 1990s, there were very few public investments in those sectors after 1990, which led to a fast degradation and turned most of these sectors obsolete). Therefore, if we ﬁnd conclusive evidence to support or reject our hypotheses, the relevance of our conclusions should remain with the transition economies.

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The remaining of this paper is structured as follows: the following section describes the methodology (data, method of analysis, and variables), the section after that presents the empirical results, and the ﬁnal section interprets the results and emphasizes their policy implications.

METHODOLOGY Our data are based on the results of a questionnaire applied in ﬁve transition economies: Romania, Poland, Croatia, Slovenia, and East Germany. The questionnaire was administered in the ﬁrst half of 2007 and was designed to comprise a broadly representative sample of foreign afﬁliates in each of these ﬁve economies. The sampling criteria were the type of activity within manufacturing industry and size (turnover and number of employees). To establish the total population of FDI subsidiaries, we used mainly the AMADEUS database, propped up with additional information where the AMADEUS database proved to omit a signiﬁcant number of subsidiaries. Over all the ﬁve transition economies, the ﬁeld work was able to collect some 736 valid replies (Romania 220, Poland 110, Croatia 144, Slovenia 40, East Germany 222), equivalent to a 20 percent average rate of return. The distribution of the respondent companies by size was: 5 percent micro-enterprises (between 1 and 9 employees), 27.7 percent small enterprises (between 10 and 49 employees), 41.4 percent medium enterprises (between 50 and 249 employees), and 25.9 percent large companies (more than 250 employees). The total number of employees of the respondent companies was 214,295 employees. The distribution of the respondent companies by industry was balanced, with a higher share for food and beverages (10.4 percent of total), machinery and equipments (9.8 percent), and metallic constructions (8.5 percent). Our method of analysis of the data generated is based on discriminant function analysis, which is used to classify cases into the values of a categorical dependent, usually a dichotomy. Discriminant analysis helps investigating difference between groups, and it ﬁts our research purpose to see differences in the innovation behavior of ﬁrms operating in concentrated markets compared to ﬁrms operating in nonconcentrated markets. The stepwise procedure which we implement here selects the most correlated independent variable ﬁrst, removes the variance in the dependent, then selects the second independent which most correlates with the remaining variance in the dependent, and so on, until selection of an additional independent does not increase the R-squared (in the case of discriminant analysis, this corresponds to a canonical R-squared) by a signiﬁcant amount.

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While the method is not new, it remains popular and it is more robust than regression analysis for analyzing groups’ characteristics when the classiﬁcation of groups is known in advance (otherwise, cluster analysis would have been more appropriate). The stepwise discriminant analysis was used in a recent study (Ray & Rahman, 2006) with a comparable methodological challenge – in that case, the categorical dependent variable was type of capital (foreign afﬁliates or local companies). The same analysis was also used in a number of other recent studies on innovation (including Gellynck, Vermeire, & Viaene, 2007 for the food industry; Sharma & Rai, 2003 for computer engineering; and Bozic, 2007 for a single country study). In our analysis, the dependent dichotomized variable is high market concentration, and we denote: Con_hi ¼ 0 for nonconcentrated markets; Con_hi ¼ 1 for concentrated markets We used the Herﬁndahl index as our measure of market concentration. We selected the sectors with a Herﬁndahl index higher than 10 percent (or 0.100) in each of the ﬁve transition economies analyzed. The 10 percent threshold is not arbitrary: it is taken from the European Commission’s antitrust policy, where it stands for the minimum level of concentration in a sector which blows the whistle for potential anticompetitive behavior. This threshold is explicit in a notice issued by the European Commission on guidelines for assessing mergers (European Commission, 2004). The same critical level of concentration, a Herﬁndahl index of 0.100, is used by the U.S. Department of Justice when analyzing the risk of collusion. A study of the European Commission’s merger decisions conﬁrms that companies operating on markets with a Herﬁndahl index higher than 0.100 are more likely to have an anticompetitive behavior (Bergman, Jakobsson, & Razo, 2005). The resulting sectors are similar across the ﬁve economies surveyed, as these sectors are in general international oligopolies: tobacco, coke reﬁning, metallurgy, radio–TV communication, and means of road transportation. Hence, we split our database in two groups: a larger one containing 625 ﬁrms from all sectors except for these ﬁve sectors; and a smaller one containing 111 ﬁrms from these ﬁve sectors. The independent variables tested are described in Table 1 below. There are three types of independent variables: those describing the structure of sales and supplies, those relating to business functions, and those referring to R&D. All eight variables for the type ‘‘structure of sales and supplies’’ were recoded as dichotomized variables (1 for less than 50 percent, 2 for more than 50 percent).

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Table 1. Name

Types of Independent Variables. Deﬁnition

Type of variables: Structure of sales and supplies exp_ﬁnv Foreign afﬁliate’s exports to its foreign investor’s network, as a share in total sales exp_ofor Foreign afﬁliate’s exports to other foreign buyers, as a share in total sales sal_linv Foreign afﬁliate’s sales to other domestic subsidiaries of its foreign investor, as a share in total sales sal_dom Foreign afﬁliate’s sales to other domestic buyers, as a share in total sales imp_ﬁnv Foreign afﬁliate’s imports from its foreign investor’s network, as a share in total supplies imp_ofor Foreign afﬁliate’s imports from other foreign suppliers, as a share in total supplies sup_linv Foreign afﬁliate’s supplies to other domestic subsidiaries of its foreign investor, as a share in total supplies sup_dom Foreign afﬁliate’s supplies from other domestic suppliers, as a share in total supplies Type of variables: Business functions production Production and operational management marketing Market research and management research Basic and applied research product Product development (product innovations) process Process engineering (process innovations) management Strategic management and planning investment Investment projects and ﬁnance Type of variables: R&D rdexp Expenditures on R&D and innovation, as a share in total sales know_acqa Importance of acquisition and purchase of external knowledge from abroad as a source for R&D and innovation in the foreign afﬁliate know_acqd Importance of acquisition and purchase of external knowledge from domestic suppliers as a source for R&D and innovation in the foreign afﬁliate tech_exist Importance of existing technology of your transnational corporation embodied in products already produced, as a source of technological knowledge for R&D and innovation in the foreign afﬁliate.

The business function variables were also dichotomized (1 for currently undertaken by the foreign afﬁliate, 2 for currently undertaken by the foreign investor’s network). The R&D variables were dichotomized so as to denote 1 for below average and 2 for above average for rdexp, the three variables that contain information about the ‘‘importance’’ attached to a particular R&D issue were all dichotomized as is usually done into 1 for not important and little important and 2 for important, very important, and extremely

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important. As all variables were discontinued, transforming them into dichotomized variables posed no integrity problem.

EMPIRICAL RESULTS Table 2 provides some descriptive information of the data used over all ﬁve countries. It is meant to give a ﬁrst impression of how the independent variables differ for our two groups of subsidiaries operating in either a concentrated or a competitive market structure. Table 2. Group Statistics Independent Variables According to Market Concentration Groups. Con_hi ¼ 0 Mean

Std. deviation

Con_hi ¼ 1 Mean

Std. deviation

Type of variables: Structure of sales and supplies exp_ﬁnv 1.3065 0.4618 exp_ofor 1.2032 0.4030 sal_linv 1.0290 0.1682 sal_dom 1.4097 0.4926 imp_ﬁnv 1.2129 0.4100 imp_ofor 1.2419 0.4289 sup_linv 1.0452 0.2080 sup_dom 1.4742 0.5001

1.5472 1.1132 1.0189 1.2830 1.3396 1.2264 1.0189 1.2642

0.5025 0.3199 0.1374 0.4548 0.4781 0.4225 0.1374 0.4451

Type of variables: Business functions production 1.1032 marketing 1.3903 research 1.4419 products 1.4387 process 1.3742 management 1.4097 investment 1.4645

0.3047 0.4886 0.4974 0.4970 0.4847 0.4926 0.4995

1.0755 1.5472 1.5283 1.3962 1.2075 1.4528 1.3962

.02667 0.5025 0.5040 0.4938 0.4094 0.5025 0.4938

Type of variables: R&D rdexp 1.2581 know_acqa 1.6032 know_acqd 1.4645 tech_exist 1.6290

0.4383 0.4900 0.4995 0.4838

1.2642 1.4340 1.2830 1.7925

0.4451 0.5004 0.4548 0.4094

Note: Even though, strictly speaking, a mean of an either-or dichotomized variable is not deﬁned, the mean does provide valuable information about whether a variable tends more to the concentrated or the competitive group.

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A comparison of means of variables between the less concentrated and more concentrated market groups shows signiﬁcant differences for a number of variables (such as in particular exp_ﬁnv or tech_exist) but also no differences for other variables (such as rdexp). Standard deviations are remarkably contained with little variation both among variables and between groups. While this already hints to where the largest differences emerge, the signiﬁcance of differences between means need to be validated in a model. In the ﬁrst step, signiﬁcance levels for Wilks’ lambdas are tested for each of the variables: when p-values of 0.05 are used as a criterion, signiﬁcant differences emerge for exp_ﬁnv and imp_ﬁnv for the structure of sales- and supplies-type of variables; for marketing and process in the business function-group; and know_acqa, know_acqd, and tech_exist among the R&D-type of variables (see Table 3). In a further attempt, stepwise discriminant function analysis is applied to all variables together: this allows us to test some form of dependence Table 3. Test of Equality of Group Means. Wilks’ lambda

F

Sig.

11.982 2.385 0.174 3.058 4.110 0.060 0.787 8.229

0.001 0.123 0.677 0.081 0.043 0.807 0.376 0.004

Type of variables: Business functions production 0.999 marketing 0.987 research 0.996 products 0.999 process 0.985 management 0.999 investment 0.998

0.389 4.625 1.359 0.331 5.581 0.345 0.849

0.533 0.032 0.244 0.565 0.019 0.557 0.358

Type of variables: R&D rdexp know_acqa know_acqd tech_exist

0.009 5.367 6.126 5.384

0.926 0.021 0.014 0.021

Type of variables: Structure of sales and supplies exp_ﬁnv 0.968 exp_ofor 0.993 sal_linv 1.000 sal_dom 0.992 imp_ﬁnv 0.989 imp_ofor 1.000 sup_linv 0.998 sup_dom 0.978

1.000 0.985 0.983 0.985

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between the differences of the independent variables. The development of F-values in each step suggests a stop-rule at ﬁve steps, so that the analysis results in signiﬁcant differences of variables between the two groups of concentrated versus competitive market structures for foreign afﬁliate’s exports to its foreign investor’s network (exp_ﬁnv), process innovations (process), basic and applied research (research), the importance of existing technology of the TNC as a source of technological knowledge in the foreign afﬁliate (tech_exist), and the importance of acquisition and purchase of external knowledge from abroad (know_acqa) (see Table 4). Wilks’ lambda is used to test the signiﬁcance of the discriminant function as a whole, resulting in a Chi square value of 36.085. The model is signiﬁcant at 0.01, which validates the function. The canonical correlation (a pseudo R squared) is 0.309. The log determinants are in fact relatively equal (see Table 5; a necessary criterion, since discriminant analysis assumes homogeneity of covariance matrices between groups). Moreover, the Box M test does not have signiﬁcance which supports the homogeneity assumption (or, strictly speaking, cannot reject the null hypothesis; see Table 6). We can conclude that the model generated in our stepwise discriminant analysis is hence robust.

Table 4. Step 1 2 3 4 5

Stepwise Statistics Variables Entered/Removed.

Entered

Wilks’ Lambda

Exact F

Sig.

exp_ﬁnv process research tech_exist know_acqa

0.968 0.950 0.933 0.922 0.904

11.982 9.472 8.645 7.622 7.561

0.001 0.000 0.000 0.000 0.000

Note: At each step, the variable that minimizes the overall Wilks’ lambda is entered. (a) Maximum number of steps is 38. (b) Minimum partial F to enter is 3.84. (c) Maximum partial F to remove is 2.71.

Table 5.

Log Determinants for a Rank of 5.

Concentrated vs. Competitive Groups Con_hi ¼ 0 Con_hi ¼ 1 Pooled within-groups

Nonconcentrated Concentrated

Log Determinant 7.878 8.352 7.906

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Table 6. Box’s M F

Test Results. 14.540 0.935 15 33155.817 0.524

Approx. df1 df2 Sig.

Table 7.

Canonical Discriminant and Classiﬁcation Function Coefﬁcients. Canonical Discriminant Function Coefﬁcients

exp_ﬁnv Research process know_acqa tech_exist (Constant)

Classiﬁcation Function Coefﬁcients (Fisher’s Linear Discriminant Functions)

Standardized

Unstandardized

Con_hi ¼ 0

Con_hi ¼ 1

0.442 0.585 0.758 0.466 0.474

0.946 1.175 1.598 0.947 1.000 0.978

5.274 1.832 3.514 5.120 4.894 15.964

6.143 2.911 2.045 4.250 5.813 17.162

Based on the canonical discriminant function coefﬁcients (see Table 7), we can distinguish between the relative weights of independent variables explaining the differences in behavior of FDI afﬁliates between concentrated and less concentrated markets: the largest effect can be found for the process innovation variable (1.598), followed by basic and applied research (1.175), the importance of existing technology of the TNC as a source of technological knowledge in the foreign afﬁliate (1.000), the importance of acquisition and purchase of external knowledge from abroad (0.947), and foreign afﬁliates’ exports to their foreign investor’s network (0.946). Using the unstandardized function coefﬁcients, we can hence write the resulting discriminant function of our model as follows:

more concentrated Con_hi less concentrated

¼ 0:978 þ 0:946 exp _finv þ 1:175 research 1:598 process 0:947 know_acqa þ 1:000 tech_exist

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Table 8. Case

1 2 3 4 7 8 9 10 11 13

Casewise Statistics.

Actual Group

Highest Group Predicted Group

P(DWd|G ¼ g)

df

P(G ¼ g|D ¼ d)

Mahalanobis D squares

0 0 0 0 1 0 0 0 0 0

0 0 0 0 1 0 0 0 0 0

0.523 0.523 0.523 0.829 0.850 0.759 0.523 0.386 0.523 0.758

1 1 1 1 1 1 1 1 1 1

0.733 0.733 0.733 0.650 0.562 0.535 0.733 0.772 0.733 0.535

0.409 0.409 0.409 0.047 0.036 0.094 0.409 0.751 0.409 0.095

Note: In our analysis, 68.9 percent of cases are correctly classiﬁed; the classiﬁcation accuracy is sufﬁcient (for uneven groups as well).

Similarly, we can write two discriminant functions, one for each subgroup (less concentrated and more concentrated) based on the Fisher’s coefﬁcients. As a further test of robustness, we calculate the squared Mahalanobis distance to centroid (Mahalanobis D squares) based on canonical functions for the original data. They turn out to be quite low (see Table 8), which means that the number of outlier cases is low.

INTERPRETATION OF RESULTS AND POLICY IMPLICATIONS The results generated by our stepwise discriminant analysis of signiﬁcant differences in variables of foreign subsidiary behavior between subsidiaries active in concentrated versus less concentrated market structures can be interpreted as follows: Foreign afﬁliates in more concentrated markets do export more to their parent company’s network than foreign afﬁliates in less concentrated markets. This means that H1 is partially conﬁrmed (it is valid for exports, but we found no signiﬁcant evidence for imports). Foreign afﬁliates in more concentrated markets do more basic and applied research than foreign afﬁliates in less concentrated markets.

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However, they do not spend signiﬁcantly more money on R&D. This means that H3 is conﬁrmed, but we found no signiﬁcant evidence for H2. Foreign afﬁliates in more concentrated markets do less process innovation than foreign afﬁliates in less concentrated markets. There is no signiﬁcant difference regarding product innovation. This means that H5 is rejected, but we found some support for its opposite effect (i.e., refuting the classical Schumpeter hypothesis for foreign investment subsidiaries in transition economies). This result corresponds to our initial expectation that TNCs are less in need of monopoly-proﬁts granted by concentrated market structures in their host economy to cover the costs of R&D and innovation: monopoly-proﬁts may well originate in other locations. Foreign afﬁliates in more concentrated markets acquire less knowledge from abroad than foreign afﬁliates in less concentrated markets. This means that H4 is rejected, but its opposite is conﬁrmed. Foreign afﬁliates in more concentrated markets use more of the existing technology already incorporated in the products of their foreign investor’s network. This conﬁrms that H2 is rejected, but it qualiﬁes the conclusion regarding H1, H4, and H5: foreign afﬁliates in more concentrated markets do import more technology from their own parent company’s network, but this technology is already incorporated in the ﬁnal product (it does not contribute to the creation of new products). These interesting results raise a number of important policy implications. Foreign afﬁliates in more concentrated markets seem more integrated in their foreign investor’s network: they export more within the network; they make less process innovation as they probably replicate the processes used within their global network; and they use more of the existing technology already incorporated in the products of their foreign investor’s network, as they are not under competitive pressure to upgrade. Therefore, the foreign afﬁliates in more concentrated markets act like implementing agents (using Gupta and Govindarajan’s terminology) and the risk of using transfer pricing is bigger for foreign afﬁliates operating in more concentrated markets (Gupta & Govindarajan, 1991). The fact that foreign afﬁliates in more concentrated markets do more basic and applied research, which does not appear to inﬂuence their propensity to generate product or process innovations, could mean that the research they ﬁnance is more local market related, hence not easily replicable elsewhere, and research is not product or process related. When combined to the above-mentioned conclusion of higher network involvement, one could submit that foreign afﬁliates in more concentrated markets

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are not stimulating innovation; instead, concentration is positively correlated with intranetwork knowledge diffusion. On the other hand, foreign afﬁliates in less concentrated markets do more process innovation and acquire more technology from outside their foreign investor’s network. One could submit that competition stimulates TNCs’ subsidiaries to engage into activities of innovation and knowledge creation (at least process innovation); it also stimulates knowledge diffusion (absorption) from outside their own network. The lack of a signiﬁcant result on product innovation might be linked to the limited level of product sophistication in transition economies: as a general rule, transition economies are still less active in generating product innovations. This all suggests that if policy makers in transition economies want to reap the beneﬁts of technology transfer via inward FDI (i.e., increasing R&D, innovativeness, and knowledge creation with the help of foreign investors), then any policy that relies on subsidizing foreign investments (in various ways, and in general by granting/providing some degree of market power) should target companies operating in more competitive sectors, as our results show that foreign afﬁliates in less concentrated markets are technologically more active. This ﬁnally sheds some additional light on the role of effective competition policy in securing optimal incentives for domestic as well as foreign enterprises in transition economies.

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Cowling, K., & Sudgen, R. (1987). Transnational monopoly capitalism. Brighton: Wheatsheaf. Damijan, P. J., Knell, M., Majcen, B., & Rojec, M. (2003). The Role of FDI, R&D accumulation and trade in transferring technology to transition countries: Evidence from ﬁrm panel data for eight transition countries. Economic Systems, 27(2), 189–204. Dasgupta, P., & Stiglitz, J. (1980). Industrial structure and the nature of innovative activity. Economic Journal, 90, 266–293. European Commission (2004). Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, DG COMP, 28 January 2004, Brussels. European Commission (2007). Monitoring Industrial Research: The 2007 EU Industrial R&D Investment Scoreboard, JRC-DG Research, Seville. Gayle, P. (2001). Market concentration and innovation: New empirical evidence on the Schumpeterian hypothesis. Working paper 01–14, Center for Economic Analysis, University of Colorado, Boulder. Gellynck, X., Vermeire, B., & Viaene, J. (2007). Innovation in food ﬁrms: Contributions of regional networks within the international business context. Entrepreneurship and Regional Development, 19(3), 209–226. Graham, E. M. (1998). Market structure and the multinational enterprise: A game-theoretic approach. Journal of International Business Studies, 29, 67–83. Gupta, A. K., & Govindarajan, V. (1991). Knowledge ﬂows and the structure of control within multinational corporations. Academy of Management Review, 16, 768–792. Howitt, P. (2007). Innovation, competition and growth: A Schumpeterian perspective on Canada’s economy. C.D. Howe Institute commentary. Krap, N., & Stephan, J. (2008). The Relationship between knowledge intensity and market concentration in European industries: An inverted U-shape. IWH Discussion Paper No. 3/ 2008. Manea, J., & Pierce, R. (2004). Multinationals and transition. Palgrave Macmillan. Medvedev, A., & Zemplinerova, A. (2005). Does competition improve performance? Evidence from the Czech manufacturing industries. Prague Economic Papers, 14(4), 317–331. Papanastassiou, M., & Pearce, R. (1999). Overseas R&D and the strategic evolution of MNEs: Evidence from laboratories in the UK. Research Policy, 28(1), 23–41. Papanastassiou, M., & Pearce, R. (2005). Funding sources and the strategic roles of decentralised R&D in multinationals. R&D Management, 35(1), 89–100. Peoples, J., & Sudgen, R. (2000). Divide and rule by transnational corporations. In: C. N. Pitelis & R. Sudgen (Eds), The nature of the transnational ﬁrm (2nd ed., pp. 174–192). London: Routledge. Porter, M. (1990). The competitive advantage of nations. New York: The Free Press. Raider, H. (1998). Market structure and innovation. Social Science Research, 27(1), 1–21. Ray, P. K., & Rahman, S. (2006). The propensity for local innovation and inter-ﬁrm linkages in transnational corporations versus local enterprises in India. Transnational Corporations, 15(2), 71–98. Rosenberg, N. (1981). How exogenous is science?. In: N. Rosenberg (Ed.), Inside the black box: Technology and economics. New York: Cambridge University Press. Schumpeter, J. A. (1942). Capitalism, socialism and democracy. New York: Harper. Sharma, S., & Rai, A. (2003). An assessment of the relationship between ISD leadership characteristics and IS innovation adoption in organizations. Information and Management, 40(5), 391–401.

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Smith, V., Madsen, E.S., & Diling-Hansen, M. (2002). Export performance and investment in R&D. Working Paper 2002/4, The Danish Institute for Studies in Research and Research Policy, Aarhus. Subodh, K. (2002). Market concentration, ﬁrm size and innovative activity. Discussion Paper 2002/108, WIDER (World Institute for Development Economics Research). Tirole, J. (1988). The theory of industrial organization. Cambridge, MA: MIT Press. Tohmo, T., Littunen, H., & Tanninen, H. (2006). Backward and forward linkages, specialization and concentration in Finnish manufacturing in the period 1995–1999. European Journal of Spatial Development (online journal), 00(19), 27. Viscusi, K., Harrington, J. E., & Vernon, J. M. (2005). Economics of regulation and antitrust. Cambridge, MA: MIT Press. Weiss, C. (2005). Retailer concentration and product innovation in food manufacturing. European Review of Agricultural Economics, 32(2), 219–244.

ESCAPING THE TRAP OF LOWCOST PRODUCTION AND HIGH DEPENDENCY: A CASE STUDY OF THE INTERNATIONALIZATION NETWORKS OF SMALL SUBCONTRACTORS FROM THE BALTIC STATES Hans Jansson and Mikael Hilmersson ABSTRACT Purpose – The main purpose of this paper is to analyze the major problem faced by exporting subcontractors from emerging markets on how to leap over the barrier of low technology and high dependency. The second purpose is to develop a theoretical framework for this analysis. Methodology – The paper builds on a holistic multiple case study of eight internationalizing small- and medium-sized enterprises (SMEs) in the Baltic Sea Region (BSR). Interviews were performed with managers of four West European SMEs and four East European SMEs all crossing the Baltic Sea. In addition, interviews were performed with each ﬁrm’s intermediaries/customers on foreign soil. Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 225–247 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004015

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Findings – The study identiﬁes two main international business marketing strategies for small subcontractors in emerging country markets enabling such ﬁrms to escape the trap of low-cost production and high dependency. The ﬁrst is a traditional subcontractor strategy of integrating more into the contractors’ production process. The second strategy is labeled the marketing route. Here, the subcontractor becomes more independent by moving further upstream in the value chain or the vertical customer network to develop its own products. Practical implications – How a small subcontractor in a low-cost country can learn from more experienced exporters on how to develop their international business marketing network capabilities. Originality – The study is unique in that it applies the perspective of the low-cost country subcontractors. Traditionally subcontracting is studied from the contractors’ point of view.

INTRODUCTION This research focuses on internationalization processes of small- and medium-sized enterprises (SMEs) in a region affected by major changes of their societies: from plan to market, from dependence to independence, a wave of democratization, and most recently from fast economic growth to rapid decline, namely Central and Eastern Europe. Over the last decades, the Baltic Sea has changed from moat to open sea. Trade barriers have disappeared and a common market come into force, reducing barriers for international business considerably. This has favored trade and investment among neighboring countries, in particular for SMEs that could expand internationally to new markets nearby. However, the transition is not over by far. With the deep recession, the end of the ﬁrst phase of the catch-up period mainly built on low manufacturing costs is over, at least in the former ‘‘Baltic tigers.’’ The economies of Estonia, Latvia, and Lithuania are all shrinking, and Latvia has been hardest hit by the global economic downturn. Even before the global economic crisis hit, production started to move away from the Baltic States due to rising costs, showing that competitiveness needed to be changed from low-cost advantages to more knowledge-based and specialized competitive advantages. Small international subcontractors are some of the most vulnerable exporters in this situation of increasing competition and declining demand. How do they restructure in the new situation?

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The key problem being faced by exporters from emerging country markets is how they get out of the trap of low-cost production and lowtechnology content of their products to avoid to get outcompeted by new producers of low-cost products. This subcontracting or off-shoring problem is rarely studied from the perspective of the ﬁrms from emerging markets, namely the suppliers. Rather, it has mainly been researched in mature markets, for example, off-shoring strategies, the loss of jobs due to increasing international subcontracting of products and services and the coordination of globally dispersed value chains (see, e.g., Vivek, Richey, & Dalela, 2009; Metters & Verma, 2008; Pyndt & Pedersen, 2005). This paper focuses on the subcontractors based in emerging country markets, paying attention to their dilemma of maintaining competitiveness in a situation of decreasing low-cost advantage. To put this problem into perspective, SMEs from emerging markets exporting to mature markets are compared with SMEs from such markets exporting to emerging markets. Most of the SMEs studied are in the internationalizing phase and therefore not fully internationalized, mainly being involved in trade rather than foreign direct investment. This condition is especially relevant for SMEs from emerging country markets, which usually are newcomers on the international scene. Consequently, this paper also contributes new knowledge about the beginning of the internationalization process as called for by Johanson and Vahlne (2003). The article takes up the internationalization of SMEs from a business marketing approach, which is an underrepresented area in the international marketing literature. First, most of the existing research is about MNCs. Second, there is little knowledge about such internationalization related to emerging markets, in particular about SMEs from these markets. The present research is based on the institutional network approach to internationalization, the main reason being that emerging markets are characterized as network societies and differing a lot from mature markets through another institutional environment (Jansson, 2007a, 2007b). The focus is on networks: how SMEs establish and maintain relationships in networks during the different stages of the internationalization process. This paper is structured as follows. After having accounted for the methodology of the research project, we present the theoretical framework that will be used to analyze the cases. The internationalization of SMEs from immature markets is analyzed in three steps. Initially, one representative case of an exporter from this group of ﬁrms is presented, followed by a comparative analysis of the four cases representing this group of exporters. These cases are compared to exporters from mature markets, studied in the

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same project and previously reported in Jansson and Hilmersson (2008) and Timlon and Hilmersson (2009). Key differences and similarities are identiﬁed concerning the building of international business networks in the BSR. These conclusions establish a ground to conclude on the major issue raised in the article, whereas they are followed by a discussion of two major business marketing strategies to get out of the trap of low-cost production and high dependency.

METHODOLOGY The paper reports on research being done within the EU ﬁnanced project Baltic Business Development Network (BBDN). The purpose of this project was to study how internationalizing ﬁrms from ‘‘old’’ EU countries expand their business to new EU member countries’ markets and vice versa. The research has been conducted between 2004 and 2007 with participating researchers from eight countries on the shores of the Baltic Sea. The study encompasses eight exporting ﬁrms and eight importing distributors/agents/ subsidiaries. Eight case studies have been done about the expansion of internationalizing ﬁrms from the newer member states Estonia and Lithuania to the more traditional EU country markets Germany and Finland, and from Sweden and Denmark to other new member states, namely, Latvia, Poland, and Estonia. The cases studied are introduced in Table 1. The research strategy is abductive, being a mix of deduction and induction (Alvesson & Sko¨ldberg, 2009; Dubois & Gadde, 2002; Jansson & Sandberg, 2008; Timlon & Hilmersson, 2009). The main purpose is theoretical development, where the empirical support of a theory is continuously assessed, or, inversely, a reality’s theoretical support investigated, through the matching of theories with realities (see, e.g., Merriam, 1998; Yin, 2003). The major reason is to develop a theoretical framework on internationalization in networks, which has been used in this paper to analyze the empirical results of the study. At the selected companies, about 20 tape recorded on-site interviews have been conducted. A major beneﬁt of the research project was that the interviews could be done in the local language. The informants within the ﬁrms have been export managers, market managers, CEOs, and/or business development managers for the exporting ﬁrms and sales personnel and/or CEOs representing the intermediary. The interviews followed a semistructured questionnaire (Merriam, 1998), where the questions were reordered from case to case to ﬁt the character of the ﬁrm and its particular organization

Denmark Poland 10.6

70 90 Germany

Denmark Poland 1.6

9 40 Sweden

Norfo

Degree of Experimental Committed Internationalization involvement involvement prior to entry in X Product Trawls and nets Portioning for ﬁshery machines for meat/ﬁsh

Origin Entry in Turnover (mEUR) 2006 Employees 2006 Export % 2006 Foreign main market prior to entry in X

Nexo¨ Vodbinderi

70 85 United States except for Scandinavia Committed involvement Grinding material

Waste collectors

Sweden Estonia 10

Naxoﬂex

Semiconstructions

Preexport

270 65 None

Estonia Finland 22

Viljandi Metall

The Eight Cases Studied.

130 75 United Kingdom except for Scandinavia Active involvement

Sweden Latvia 30

Norba

Table 1.

Construction details

Domestic focus

70 90 None

Estonia Finland n/a

Terg

Components

Domestic focus

45 88 None

Lithuania Germany 2

Auridos

Components

Preexport

150 95 None

Lithuania Sweden 5.2

Splitas

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of business activities. The research group, consisting of all participating nations, met on a regular basis to discuss, clarify and update the cases as well as to secure that there was a balanced compilation and description of each and every case. In total, six meetings were held. The four cases from immature markets represent a major industry of the area, namely, manufacture of basic metals and fabricated metal products. In 2005, 743 ﬁrms were operating in this industry in Estonia and 1,262 in Lithuania. The turnover was 613 million EUR and the ﬁrms had 12,091 employees in Estonia and 485 million and 17,191 employees in Lithuania. The industry grew three times in Estonia and ﬁve times in Lithuania between 2000 and 2005. Treatment and coating of metals together with general mechanical engineering are dominating in Estonia. In Lithuania, it is forging, pressing, stamping, and roll forming together with powder metallurgy and treatment plus coating of metals. Since 1989, the industry has undergone a rapid transition from being tightly integrated into the centrally planned manufacturing industry of the Soviet Union to being more and more integrated into the market economy of the European Union. Since 1995, SMEs from Sweden, Denmark, and Germany have increasingly developed subcontractors in these countries for low-cost production of metal, wood, electronics, plastic, and textile products (Pavlovs & Friedman, 2008).

INTERNATIONALIZATION THROUGH NETWORKS SMEs are assumed to be involved in internationalization processes where they gain international experience by establishing and developing relationships to business partners. This networking is assumed to follow the typical patterns found for internationalizing ﬁrms in general, that is, taking place in a stepwise manner and committing themselves through an incremental learning by doing process. Companies tend ﬁrst to establish themselves in geographically and culturally proximate markets and increase their commitment more and more, starting with agents, and passing through sales companies to manufacturing companies (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). This has mainly been studied for MNCs but also for SMEs (Hohenthal, 2001). However, ‘‘Born globals’’ or ‘‘International new ventures’’ (that are international from inception) tend to follow another pattern (Oviatt & McDougall, 1994; Madsen & Servais, 1997; Zahra, 2005).

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Entry Nodes and Five/Five Stages of Internationalization Internationalization involving emerging country markets has been found to take place by establishing and maintaining business relationships. Firms enter by establishing two-party or three-party relationships or entry nodes (Jansson, 2007b; Timlon & Hilmersson, 2009). Various entry modes such as subsidiaries, agents, and distributors are viewed as hubs for building and maintaining relationships. The local network organization is therefore deﬁned as a hub organization, which main task is to control dyads and/or triads. The relationship process is seen as an entry process, taking up how network relationships are developed with actors of importance to the ﬁrm. Jansson and Sandberg (2008) develop a Five/Five stages model of the internationalization process. It is based on an experiential knowledge process, where internationalization processes are divided into ﬁve different degrees of internationalization or stages (Cavusgil, 1980; Gankema, Snuif, & Zwart, 2000). This stage model is integrated with the ﬁve stages of the relationship process, originally developed by Ford (1980) and by Ford, Gadde, Ha˚kansson, and Snehota (1998/2002). While the former model concerns how the internationalization knowledge of the ﬁrm is developed, the latter is a good approximation of how network experiential knowledge is gained in a country (Blomstermo, Eriksson, Lindstrand, & Sharma, 2004). The more developed the customer relationships are, the more experience the ﬁrm has of the particular foreign country market. By establishing more and more relationships abroad, the ﬁrm moves further and further along the internationalization process, starting in the experimental export stage. The larger the number of relationships established, the larger the part of the ﬁrm’s resources and capabilities are dedicated to international business, inter alia meaning locating them increasingly abroad. The development of the relationships in the foreign country market starts in the early stage, when commitments and experience increase somewhat. The establishment of relationships is a mutual learning process, where the parties learn to know more and more about each other. The ﬁrst adaptations are made, but are still few. High uncertainty is experienced and high distances prevail between the parties. The early stage is followed by the development stage, during which business between the customer and the supplier starts to grow and resources are increasingly shared. The relationship settles in a stable stage of the long-term stage, where it is a matter of maintaining relationships for continuous business between the parties. The exporter and the importer have now learnt to know and trust each other, which gives high experience and that the uncertainty is perceived as being low. Distances are small and

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commitment high. The main aim with building relationships is to reach the long-term stage, to get on-going long-term relationships. Thus, relationships being at the core of the entry process follow a similar pattern as the internationalization process as a whole. In accordance with Forsgren (2002) and Eriksson, Johanson, and Majkga˚rd (1997), three types of experiential knowledge are behind the step character of the combined Five/ Five stages model. The gradual build-up of internationalization knowledge takes place through increased network experiential knowledge. The passing through the stages of the entry process is intimately connected to institutional knowledge. The more such knowledge is acquired, the easier it is to develop the customer relationships. As a consequence, the more relationships in a foreign country that have reached later stages, the more established and internationally experienced the ﬁrm becomes and the higher is its degree of internationalization. Also, the more countries the ﬁrm has established relationships with, the more internationally experienced the ﬁrm is said to be.

Main Characteristics of Networks in Internationalization The relationship stages above focus on the development of individual relationships but not how they relate to each other, that is, the totality of relationships or the network aspect. Based on Harryson, Jansson, Kliknaite´, and Dudkowski (2007), a multilevel perspective is taken to networks, where a distinction is made between two levels of networks: interpersonal or social networks, and interorganizational networks. These networks interact so that activities at one level result in consequences, which become antecedents for another level. For example, the structure of the informal social network becomes an antecedent to the interorganizational network, since it inﬂuences the pattern of cross-unit connections. Social network relationships take place between individuals and how they form networks inﬂuences the formation of organizational networks. These network ties are therefore socially embedded. The main network theories concern such social networks: for example, ‘‘social exchange theory’’ (Blau, 1964), ‘‘weak/ strong ties theory’’ (Granovetter, 1973), ‘‘social embeddedness theory’’ Granovetter (1985), ‘‘structural holes theory’’ (Burt, 2001), and ‘‘social capital theory’’ (Coleman, 1988). Research ﬁndings by Uzzi (1996), Rowley, Berens, and Krackhardt (2000), and Van Wijk, Van Den Bosch, and Volberda (2004) conﬁrm that strong ties are positively related to ﬁrm performance, when the environment demands a relatively high degree of exploitation and weak ties are beneﬁcial for exploration purposes.

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Open and Closed Networks Along the connectivity dimension of the social network, a distinction is made between open and closed networks. Based on the idea that organizations are embedded in social ties (Granovetter, 1985), the characteristics of these personal networks are assumed to be valid at the organizational level of the network. The open network is mainly about resource exchange of information, while the closed network focuses on social exchange, trust, and shared norms. An example of an open network is one in which ﬁrms through their employees have direct contacts with all their partners, but these partners do not have any direct contacts with each other. A high number of such nonconnected parties, or structural holes, means that the network consists of a few redundant contacts and is information rich, since people on either side of the hole have access to different ﬂows of information (Burt, 2001). Burt (1993) argues that to enhance network efﬁciency, an actor should focus on maintaining only primary contacts and delegate the task of maintaining all complementary contacts to the primary contacts. The major selection criterion for such partners then concerns how many contacts they have. This implies that the structure of an open network is suitable when gathering, processing, and screening of information is the primary purpose as well as identifying information sources. This kind of information network then stresses the indirect linkage, has mainly weak relationships and is loosely coupled. The opposite is the tightly coupled closed network, where all partners have direct and strong ties with each other. This network is centered on social capital, which is built through trust and shared norms and behavior (Coleman, 1988). The contradiction between open and closed networks is also stressed by Ahuja (2000). There seems to be a trade-off between a large network that maximizes information beneﬁts and a smaller network promoting trust building and more reliable information.

Trustworthiness Trustworthiness is related to the differentiation made above between the social network and interorganizational relationships. A distinction is made between organizational trust and individual trust (Jansson, 2007a). Organizational trust is a relation between an individual and an organization: that is, combining the social and organizational aspects of the network. Reputation is an expression of this trust. Individual trust regards persons

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and the friendship among them: that is, the social network. One type of individual trust is related to coalitions and concerns the individual as a representative of his or her company. This type of trust is deﬁned as professional trust, since it has to do with how tasks are completed together with other individuals, and is more instrumental than emotional. An employee can, for example, be expected to complete his or her tasks in a certain way, not being biased from undue inﬂuences. This relationship is personal and formal. The connection between the social and organizational networks becomes another than for organizational trust. Professional trust originates from the organizational network, it is established through the social network, and strengthens the organizational network. Establishing trustful relationships is thus a critical part of the internationalization process, where trustworthiness is a major norm of the social capital.

Exposure, Formation, and Sustenance Networks Based on the discussion above, three major types of networks in internationalization are distinguished (Jansson & Hilmersson, 2008). A potential exporter creates contacts of various kinds to expose itself to various parties of relevance to the business it wants to have in a new market. This ﬁrst type of network that the SME becomes part of is deﬁned as the exposure network. It consists of many general and weak ties. It is information dominated, open, and loosely coupled. The focus of the potential exporter is to ﬁnd hubs in order to expose the ﬁrm to as many networks as possible. The aim is to ﬁnd hubs to speciﬁc business networks in a certain country or countries encompassing various customers and intermediaries. If successful or lucky, new partners are found by or ﬁnd the company, to which relationships are established through the next type of network deﬁned as the formation network. Exporters develop businesses through this network and certain weak ties are gradually transforming into stronger ones. The customer development process can therefore be seen as an act of transformation from relatively open to closed networks. Strong social ties are developed with persons found through the exposure network, which are developed further with those selected as promising prospects. The social network is therefore gradually closing. The formation of this social network leads to the formation of the interorganizational network, thereby being a precedent to it. The exposure and formation networks are thereby driven by social networks, which close into the next type of network. It is deﬁned as the

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sustenance network, since relationships are becoming more permanent or integrated more permanently into the ﬁrm’s regular business. It is an organization-based network superior to the social network. The nature of internationalization of relationships at the interpersonal level is described by the social network, while its nature at the organizational level is described by the organizational network. Social trust and professional trust are developed through the social network, which later is turned into organizational trust. Interaction in social networks leads to the interunit relationship between ﬁrms. This interorganizational network seems to be mainly based on professional trust. In the exposure network, it is mainly a question of limiting the network size by linking up to certain hubs of interest. In the formation network, it is more the other way around: to use these few hubs to expand the network. Leverage effects play a critical role to get this network large enough. Agents are good examples of such hubs, from where to expand the customer network. In the sustenance network, the purpose is still another, namely to go on with partners in the formation network, with which sustainable business can be developed, or develop new partners, with which this is possible.

ANALYSIS OF THE CASES Four exporters from emerging markets are analyzed, namely, Terg OU¨ and Viljandi Metall from Estonia, plus Auridos and Splitas from Lithuania. But before these cases are compared, the experience of Viljandi Metall is described, since it is an especially interesting case on how to develop competencies by moving forward in the value chain or the vertical customer network.

Viljandi Metall AS (VM) Prior to the entry in Finland VM had no international experience. In the early days of independence in Estonia, there was a remarkable decrease of activity in the construction industry causing a major market slow down for VM. The company actively searched for new projects in the domestic market and tried to stick to its core competences of metal treatment. Nevertheless, VM was unsuccessful in ﬁnding more than marginal projects. Thanks to personal relationships and the individual network of VM’s management, contacts in Finland were initiated. Normek (N), a Finnish

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ﬁrm in the metal construction industry, had approached a professor at the Tallinn Technical University asking for information concerning potential suppliers in Estonia. The professor knew of the competences of VM and mediated the contact between VM and N. Thus, the establishment of VM’s ﬁrst international business relationship was unplanned, it was an unsolicited order. The Finnish counterpart N describes it as a more thought through strategic move: It was about 1993 or 1994, something like that, we really tried to ﬁnd some companies from Estonia that could serve as subcontractors for us. At that time I knew an Estonian gentleman, Mr. Kalju Loorits who was professor at Tallinn Technical University. I asked him if he could help us to identify some suitable companies. We visited several companies in Estonia, and ﬁnally, we found Viljandi Metall. Of course it was very important that the price level at that time was lower in Estonia compared to the price level in Finland. Previously, we had ordered the same things from Finland. – Klaus Saarikallio (KS), Managing Director, Normek

Thus, the entry of VM into Finland was initiated by the customer (N) that searched for decreased costs of production and found VM, which was in desperate need of new market opportunities. Trust and the personal relationships with the professor are described as the major reasons to why N chose VM as their partner. As VM had no prior international experience, the relationship was characterized by quite an intensive transfer of knowledge, from N to VM. VM had to learn about Western standards, requirements, and culture. In order to stay in business VM had to develop its products and production processes to ensure a certain level of quality to stay as a preferred supplier to N. Eight years after the ﬁrst contact with the Finnish market, VM decided to establish a sales ofﬁce of its own in Finland. This strategic move was in line with the development of VM’s business. Primarily by supplying N, VM had grown from 55 to 270 employees. A decision had been taken to become more independent by spreading its risks to more customers than N. At the same time, the strategic direction was to move further along the value chain from being a detail producer to also involve in the assembly of details. The decision to set up an own ofﬁce in Finland can be seen as a manifestation of the success of the latter. Setting up a local sales ofﬁce in Finland was seen as a prerequisite to develop its new position in the value chain. To succeed in this new role, VM realized that access to information and knowledge about local customers was a necessity. Interestingly, however is that it was not VM that identiﬁed the opportunity to move further along the value chain. Instead, it was the customers of N that encouraged VM to also involve in the assembly

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activities. The customers traced the products down the value chain. Initially, N was unwilling to reveal its subcontractors, but when the customers wanted to inspect the quality of the products, N was unable to hide this information. The customers soon realized that VM possessed the competences needed for the assembly, whereas they encouraged VM to move forward along the value chain. This strategic choice, however, put VM in an ethical dilemma and the manager of VM stresses that this move was purely driven by the customers, and not by VM: We did not offer our assembly services for the customers: it would be against fair business traditions in our business culture. It was the customers that repeatedly asked for them y . – Jaak Sulg, CEO, Viljandi Metall

However, once the sales ofﬁce was set up in Finland, VM was successful in establishing its own contacts in the Finnish market, and has received orders to produce details and assemble on site. As a consequence, VM has started to compete with N. The relationship that previously was described as a personal trustful relationship characterized by intensive transfer of knowledge was now ended and the former partners became ﬁerce competitors. Ever since the start of the export business, the main focus of VM has been to strengthen the position in the Finnish market. However, as a result of the success there, a few orders have also come from Sweden. But the manager means that Swedish companies generally mistrust East European ones, which causes a lot of trouble for VM to compete outside Finland and Estonia. Therefore, VM is focusing on strengthening its position in Finland ﬁrst before moving on to Sweden within a few years, when that market is ready for Estonian suppliers in the construction industry.

Comparative Analysis of Four Cases The comparative analysis of the four exporters from emerging markets is summarized in Table 2. Prior to their entries, none of VM (in Finland), Terg (in Finland), Auridos (in Germany), Splitas (in Sweden) had any experience from supplying foreign customers; all production was addressed to the domestic market. Thus, the restructured companies from the former Soviet Union had no knowledge of quality standards, business logic, or requirements of the mature markets in the EU. None of the ﬁrms were actively searching for foreign customers. Instead they were all found by the customers looking for opportunities to lower

Preentry Trigger to entry Find/found

Table 2. Viljandi Metall

Splitas

Applied for ISO certiﬁcation

Exploratory Unsolicited order Was found by customer in a web forum Customer searching for lower cost sources After the ﬁrst pilots, Splitas agreed to produce on the terms set by the Swedish partner

Slimmed organization

Auridos

Domestic market focus Unsolicited order Was found by customer

Customer searching for lower cost sources After the ﬁrst test order, Auridos became a subsupplier to its German customer and soon orders were repetitive

Pure business relationships

Focused on more efﬁcient production Mediated contacts with complementing Lithuanian suppliers

Pure business relationships

Of great importance for the ﬁrst entry as contacts were mediated by LEDA Organizational Searching for customers in Austria by exposing its services on the Internet

Invested in equipment – Started to develop products of its own

n/a

Organizational Keeping their Finnish customers

Of great importance for the ﬁrst entry as contacts were mediated by LEDA Organizational Keeping present customers and looking for opportunities with own products in Russia

Invested in equipment for automatization Focused on keeping lowcost advantage Pure business relationships

Customer searching for lower cost sources Provided by blueprints, Terg started to produce for its Finnish customer that in turn visited to ensure quality of production

Domestic market focus Unsolicited order Was found by customer

Terg

The Exporters from Emerging Markets Studied.

Domestic market focus Unsolicited order Was found by customer on recommendations Customer searching for lower cost sources Having provided the ﬁrst pilots, Viljandi was approved as a subsupplier. The customers visited Estonia to teach about quality, lead times, and general business standards of the Finnish business network Ended relationships with the original partner Moved forward in the value chain Started to compete with its former customer Of great importance as it mediated the ﬁrst foreign contacts n/a

Individual and organizational Further commitment to the Finnish market. In the future aiming for Sweden

238

Initiator Establishment of relationships

Sustainment of relationships

Social network

Organizational network

Trust Continued internationalization

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costs by ﬁnding cheaper sources of supply and by outsourcing of production. The two Lithuanian ﬁrms, Splitas and Auridos, exposed their services on a subsupplier forum on the Internet in order to be found by potential customers. This forum was hosted by the Lithuanian Enterprise Development Agency (LEDA), a state founded development agency that mediated contacts between foreign and local ﬁrms. As seen above, VM, in turn, leaned on their managerial personal network when internationalizing its business activities. Terg was also identiﬁed by its customer in Finland. As none of the ﬁrms had any prior international experience they all learned a lot from their customers in the mature markets to sustain their relationships, mainly quality, business culture, lead time, and logistics. Relating this learning to the subcontractor’s dilemma, one notices that Auridos and Terg have primarily learned to become efﬁcient subcontractors, that is, to efﬁciently ﬁt into the subsupplier network of its customers. At the same time, they have strived to spread the risks within this network by starting to supply more than one customer. Splitas and VM, however, initially had a similar development. But, after having learned a lot from their customers in EU mature markets, they started to develop their own products/projects to become more independent. This development started off in parallel to becoming more efﬁcient subcontractors. VM set up an ofﬁce in Finland of its own, thereby moving forward in the value chain by starting to compete with its former customer. Splitas, however, developed products of its own to be launched in the Russian market, whereas this exporter was actively searching for new customers. Initially the SMEs from immature markets did not actively search for new customers, and therefore they did not have to identify the needs of their customers as well solve their problems. These exporters were rather learning from the customers how to produce the products as efﬁciently as possible. Thus, they were in no need of any intermediary or triad formation to assist them in their foreign business. Instead they were directly connected to the customers, forming dyads, thereby being involved in a few networks and having a high level of dependency on a limited number of customers. To sustain business in the foreign market networks, these SMEs invested in their production facilities to become more efﬁcient and cost competitive in order to stay preferred as suppliers. The social network played a less important role, whereas they describe the networks with customers as mainly business oriented and organizational. The main factor behind this is that these exporters from emerging markets adapted to the speciﬁc circumstances of mature markets, where networks are more organizational in kind.

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Concerning the future internationalization in 2007, Splitas and Viljandi were actively searching for new foreign customers. VM was primarily committing itself further to the Finnish market by dedicating resources to its foreign sales ofﬁce, whereas Splitas was planning to enter the Russian market with its own products. In parallel, Splitas applied for ISO certiﬁcation in order to safeguard its position as a subcontractor to a couple of large customers in mature markets. Terg and Auridos were primarily focusing on strengthening their positions as preferred suppliers to the existing customers. Terg was primarily focusing on keeping its Finnish customers, while Auridos had started to pay interest to the Austrian market, being manifested by Auridos listing its services in forum of subsuppliers available to Austrian ﬁrms.

CONCLUSIONS General conclusions are drawn based on the analysis above of exporters from emerging markets, which are compared to exporters from mature markets reported in Jansson and Hilmersson (2008) and Timlon and Hilmersson (2009). Key differences and similarities are identiﬁed concerning the building of international business networks in the BSR. The conclusions are summarized in Table 3. These conclusions establish a ground to conclude on the major issue raised in the beginning of the article, whereas they are followed by a discussion of two major business marketing strategies to get out of the trap of low-cost production and high dependency. Exporters from emerging markets play a more passive role in the exposure network, as they get involved in direct contacts with the customers in the mature markets. The exposure to foreign business networks is closely inﬂuenced by the initiators’ motive of internationalization. Prior to the entry, none of the SMEs from immature markets had any international experience. They were not actively searching for international growth opportunities but were found by companies from mature markets searching for decreased costs of supply. The higher degree of international experience of ﬁrms from mature markets, however, made them actively expose themselves to international business networks around the Baltic Sea. The establishment of international business networks in the BSR is therefore initiated by ﬁrms from mature markets, either exporters searching for international growth opportunities or importers looking for lower cost supply sources. This makes the formation network of the exporters from emerging countries smaller and less complex, since it only involves developing relationships with a few large customers. The social network is

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241

Major Conclusions from the Comparative Analysis of the Cases. SMEs from Mature Markets

International experiences

Initiator Establishment of business relationships

Sustainment of business relationships Social Network

Organizational network

Extensive Primarily generated from Western Europe and the United States Supplier/customer First relationships are established with local partner/ intermediary Thereafter joint attempts to establish relationships with customers Investment of time, energy, and resources in business network entry node Of great importance for establishment of business relationships Of marginal importance

Trust

Individual between exporter and local intermediary/partner/ employees

Continued internationalization

Heading Eastwards toward Russia and/or China

SMEs from Immature Markets None

Customer Initiated and dominated by customers

Investments in production efﬁciency Of marginal importance

Of great importance for establishment of business relationships Organizational between exporter and customer. Relationships are described as pure business oriented Heading West. Deepening their commitment in present markets or searching opportunities within EU

less important and usually preceded by the organizational network. However, exporters from mature markets realized that local knowledge and a local network were of utmost importance to develop their positions in the local market. They actively searched for new customers, identiﬁed the needs of their customers and solved their problems. In this process, they needed the help of intermediaries: for example, in translating preferences of the local business network. This is a major reason behind establishing themselves in triads than in dyads. The latter was typical for exporters from immature markets, which resulted in a high level of dependency on a limited number of customers. Thus, the entry nodes connecting international business networks around the BSR generally are adapted to the needs of the customers in the network.

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Moreover, the entry mode is subordinated to the entry node as well as it varies between the networks. The exporters from emerging markets developed dyads directly with their mature market customers, while agents and distributors played a critical role in the formation network for exporters from mature markets. The exporters from emerging markets established themselves more ﬁrmly through the sustenance network by either deepening the relationship to a few customers by investing in more efﬁcient production and logistics or moving forward in the value chain by replacing the customer by the customer’s customer as illustrated for Viljandi Metall. The exporters from mature markets, however, did this through forming a joint venture or establishing a subsidiary. They invested in their entry nodes/hubs, primarily investing time and energy in educating their local partners/employees related to the products to be sold. Thus, in the sustenance network, triads are turned into dyads by the agents being replaced by subsidiaries or joint ventures. If agents are still used, their role changed to become more independent: from parallel to sequential triads. The interorganizational network is the main vehicle of internationalization of the exporters from immature markets from exposure to establishment, being the main antecedent to the structure of the social networks of the sustenance network. For the exporters from mature markets, the opposite situation prevails, since they rely more on the social network. There were different drivers of the two groups. The exporters from the Baltic States aimed at decreasing production costs to stay preferred as suppliers, while the other group aimed at increasing sales by attracting new customers. The social network played a less important role in relation to the organizational network when entering mature markets compared to vice versa. Exporters from mature markets all took advantage of social network in order to develop relationships both with intermediaries, partners and customers, thereby adapting to the high prevalence of social networks in immature markets. Therefore, the importance of social networks for SMEs from mature markets manifests itself in the greater level of trust in individuals rather than in organizations. This characterizes both the relationships with intermediaries and partners. On contrary, exporters from emerging markets adapted to the speciﬁc circumstances of mature markets, where networks are more organizational in kind. The SMEs from immature markets were searching for more subsupply partners or projects in the EU, that is, they were looking Westwards for their future internationalization process. One exception was Splitas heading for Russia with its own newly developed products. The SMEs from mature

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markets were all looking East toward Russia and China. Strengthened by their experiences from the BSR, they were about to enter more distant emerging markets, some of them in a joint parade with their BSR partners.

Business Marketing Strategies to Escape the Low-Cost Trap The overall internationalization process of the exporters from mature markets follows the normal pattern of such a process, while this process for the exporters from emerging markets is different. One reason is the difference in the type of product exported. The former type of exporter sells a product of its own that is used as an input in production, used up, or used for production. The latter type of exporter, however, is more directly engaged in the production of the customer, either participating directly in this production, or supplying semiﬁnished products for the customers’ production. But the main reason seems to be the difference in the degree of internationalization, where the exporters from emerging markets are only in the beginning of their internationalization process. The ﬁndings of this study indicate that there are two main routes out of the low-cost trap. The ﬁrst route is a traditional subcontracting strategy, where the ﬁrm aims to become a better subcontractor by lowering its costs of production and to become more integrated in the contractor’s value chain. This traditional route corresponds to previous ﬁndings on the internationalization of subcontractors as being a further commitment to existing customers (Houman-Andersen, Blenker, & Rind-Christensen, 1997). This route is accomplished by investments in the production equipment and the development of new competences in production and logistics. The subcontractor then needs to understand the preferences of its contractor. Firms following this route will still be dependent on the cost conditions in the home market, but where the risk of being replaced as subcontractor will decrease the more integrated the supplier is with the contractor. Thus, the main objective of ﬁrms following this strategy is to reduce the unbalanced relationship with the contractor being developed ﬁrst. The main challenge is to convince the contractor on such an agreement, since it may fear that a competitive situation could occur. At the same time, the subcontractor would need to show that the cost will be kept low as the contractor will commit itself stronger to the relationship. The two cases of this study were unsuccessful in becoming more integrated in the contractor’s production process, partly because of the rising costs in the home market

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and partly because of their lack of international experience. Thus, the contractor preferred to keep them at arm’s-length distance. The second strategy out of the low-cost trap is labeled the marketing route. Firms following this strategy develop their own products together with the marketing capabilities to make this possible with speciﬁc customers. They move beyond subcontracting to become less dependent on their customers by actively developing their own customer relationships and moving further upstream in the value chain. For this type of continued internationalization, there are many lessons to be learned from the more experienced exporters from mature markets. The key issues concern how to develop network experiential knowledge on customers and new products for existing and new markets. The challenges they face are therefore mainly in business marketing, since most of them are manufacturing units. They need to learn how to be more active in the markets: for example, getting know-how about how to expose themselves in various international customer networks and develop business there. The emerging market subcontractors should therefore aim to get out of the unfavorable power balance in their relationship with their contractors. By generation of more business marketing knowledge, the subcontractors can become more than low-cost production units of Western ﬁrms. In that sense they would become less dependent and vulnerable to rising costs in the home market. The ability to succeed in such a transformation process relies mostly on the dynamic capabilities found at the ﬁrm level: in this case, the ability to transform low-cost advantages into differentiation advantages based on business marketing knowledge. The key to get out of the low-cost trap is to develop marketing competences. Otherwise, there is a big risk to be outcompeted in the ongoing third wave of internationalization of ﬁrms, in particular in the prevailing situation of a deep world recession. With shrinking demand, ﬁnancial problems, and increasing shortage of resources, the ﬁrst strategy discussed above seems to be the ﬁrst choice in the short run. But, on contrary, it reduces the possibilities for growth in the long run, when the demand later picks up. The ﬁndings on the mature market exporters revealed that the key to success in further internationalization concerns the ﬁrms’ ability to match market speciﬁc knowledge with experiential marketing knowledge. This occurred when marketing knowledge was exploited, resulting in the build-up of new market knowledge. International marketing of own products is a strategic innovation enabling a greater degree of internationalization of the ﬁrm, either by developing business in established markets or developing new customer relationships in new foreign markets: for example, Russia and China. By developing more customer relationships,

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the degree of dependency is reduced. A way to begin this process for a subcontractor exempliﬁed in the paper could be to move forward in the vertical customer network through developing relationships with the customer’s customer.

ACKNOWLEDGMENTS The empirical material in this paper has been gathered by several people other than the authors. We would like to thank Joachim Timlon, Baltic Business School at University of Kalmar; Raigo Ernits, Faculty of Economics and Business Administration at University of Tartu; Indre Pikturniene, International Business School at Vilnius University; Jesper Manniche, Center for Regional and Tourism Research on Bornholm. We would also like to thank the two anonymous reviewers for the EIBA conference in Tallinn 2008 who provided valuable comments on an earlier version of this paper.

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INFORMATION PROVISION BY PUBLIC AUTHORITIES AND BUSINESS PARTNERS IN SOUTHEAST EUROPE: EFFECTS ON FIRM PERFORMANCE Alexandra Kaar and Alma Sˇehic´ ABSTRACT Purpose – This study explores the role of local employees, external partners, and public authorities in supporting and providing information to foreign ﬁrms in the context of foreign investment in Southeast Europe (SEE), and the effects on foreign market success. Methodology – This quantitative study assessed the perception of managers of Austrian companies with business activities in SEE by applying ordinary regression analysis. The hypotheses are tested using survey data of 80 Austrian ﬁrms operating in SEE countries. Findings – Results indicate that information provision by external partners has a positive and signiﬁcant inﬂuence on ﬁrm performance, while no signiﬁcant relationship between information provision by public authorities and ﬁrm performance could be found. The results also show

Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 249–271 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004016

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that proactivity of local employees facilitates information provision by external partners. Research limitations – The conclusions drawn are only preliminary as the study did not control for differences in information internalization, was focused on a narrow set of variables determining market performance, and did not control for cultural contingencies of the results. Practical implications – Western companies operating in the region have to recognize the importance of drawing on external information holders as well as the role of proactive employees in this process for market success.

INTRODUCTION A number of researchers have identiﬁed the lack of knowledge and information about foreign markets and the foreign business environment as an important obstacle to the internationalization of ﬁrms and their foreign market success (see, e.g., Belich & Dubinsky, 1995; Liesch & Knight, 1999; McAuley, 1993). Differences between home and host country markets in terms of culture, consumer tastes and preferences, economic development, political systems, business practices, and the institutional environment make operations more difﬁcult. This leads to greater perceived uncertainty and risk on the part of the investing ﬁrm. In order to overcome this liability of foreignness (Hymer, 1976), institutional theory suggests to draw on the host country environment to develop practices that are suited to the peculiarities of the foreign market environment (DiMaggio & Powell, 1983; Zucker, 1987). Contingency theory claims that organizational survival and success depend on the organization’s responses to diverse environments (see, e.g., Galbraith, 1973; Egelhoff, 1988). Hence, information provision by local entities – including employees, suppliers, customers, competitors, and institutions – should enhance a ﬁrm’s knowledge base of the host country environment, and subsequently positively inﬂuence the ﬁrm’s competitive position and market performance. In fact, research in the ﬁelds of strategic management and international business has frequently highlighted the role of information and knowledge as an important strategic resource of organizations. As Eriksson, Hohenthal, and Johanson (1999, p. 340) suggest, ‘‘the basis for learning about international business is the business network context, national or international, in which the ﬁrm is embedded and in which it performs its activities.’’ The ability to use different

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knowledge sources and internalize knowledge effectively allows companies to achieve sustainable competitive advantage in their domestic and international operations (see, e.g., Haahti, Madupu, Yavas, & Babakus, 2005; McEvily & Chakravarthy, 2002). Accessing host country knowledge sources can be complicated as knowledge holders are difﬁcult to identify and frequently reluctant to share valuable information. In addition, the way people and organizations deal with information and knowledge is contingent on cultural factors. In the context of transition economies in Europe, a number of researchers have pointed to the phenomenon of selective information sharing (Child & Markoczy, 1994; Fink & Meierewert, 2004; Pearce, 1991; Suutari & Riusala, 2001). Cyr and Schneider (1996), for instance, describe a lack of vertical information exchange in transition economies. They conclude that individuals hold on to their knowledge in order to preserve their power. Within organizations in transition economies, managers only partly share information with subordinates (Cyr & Schneider, 1996; Suutari & Riusala, 2001), while employees on their part hide information out of fear of negative consequences (Fink & Meierewert, 2004). Western ﬁrms investing in the transition economies of Southeast Europe (SEE) are thus not only confronted with a different business environment, but they also have to overcome resistance to information sharing in order to operate effectively, both within their own subsidiaries and with host country business partners. This interesting context provides the backdrop for our study. The primary purpose of this paper is to look at the relationship between external sources of information provision and market performance of Western businesses in the transition economies of SEE. Speciﬁcally, the role of host country business partners and public authorities as external sources of information provision, and the role of local employees’ proactivity as its facilitator are examined. The paper develops four factors representing the external partners and public authorities as sources of information provision, employees’ proactivity as an important supporting factor, and foreign market ﬁrm performance, develops hypotheses about the relationships, and tests them. Drawing on survey data from a sample of 80 Austrian companies, this study makes the following contributions to the literature on foreign market performance. First, prior research has examined the effects of information and knowledge on newly internationalizing ﬁrms and their market entry mode choice, limiting most of this research to an export context (see, e.g., Belich & Dubinsky, 1995; Benito, Solberg, & Welch, 1993; Cafferata & Mensi, 1995; Diamantopoulos & Souchon, 1999; Nguyen, Barrett, & Fletcher, 2006; Yeoh, 2005). This is surprising since the information and knowledge needs can be

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expected to play an important role for the subsequent international growth and survival, although the nature of the relevant information and knowledge is likely to change. We therefore also draw on ﬁrms with foreign investment in the region. This furthermore allows us to explore the role of employees in facilitating external relationships. Prior studies tend to focus on the role of managers as information and knowledge holders. However, employees also play an important role, especially when it comes to accessing dispersed information (Boisot & Child, 1996). Compared to managers from the investing companies, these local employees are already familiar with the local circumstances, and hence have less difﬁculties making sense of external information and integrating it with prior experiences. We develop and test a number of hypotheses on the basis of prior research, aimed at explaining foreign market performance as a function of information provision by local business partners and public authorities supported by the employees’ proactive behavior. Second, prior research in this ﬁeld has mainly focused on advanced economies with a stable business environment. In contrast, because of their historical and cultural heritage, transition economies are characterized by ongoing changes and developments in the institutional, political, and societal environment. This creates ambiguity and a greater level of uncertainty on the part of foreign investors, and reduces the transparency of information. Paired with a different attitude toward information sharing, access to market-speciﬁc information and knowledge can be expected to be more complex, but also valuable for the ﬁrm (Suutari & Riusala, 2001). By collecting data on ﬁrms investing in SEE, we examine the provision of information in a relatively unexplored context, which should augment our understanding of the dynamics of information provision in general. The remainder of the chapter is organized as follows. The next section brieﬂy reviews the relevant literature and develops the research hypotheses. We then describe the research method applied and continue with the presentation of the results. The last section provides a discussion of the results and the limitations of the study, and offers future research directions.

CONCEPTUAL BACKGROUND AND HYPOTHESES The Information–Performance Link in International Operations The literature on organizational behavior treats information gathering as fundamental to managerial decision making and organizational learning

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(see, e.g., Pfeffer & Salancik, 1978; Anderson, 2008). In the strategic management literature, knowledge represents a valuable resource, forming the basis for sustained competitive advantage (Dyer & Singh, 1998). Similarly, information and knowledge lie at the heart of much research in the ﬁeld of international business. Based on Johanson and Vahlne (1977), traditional internationalization process theory treats foreign market knowledge as a major determinant of internationalization and entry mode choice. International new venture theory (see, e.g., McDougall, Shane, & Oviatt, 1994) suggests that knowledge and experience form the basis for opportunity recognition in international new ventures. When going abroad, ﬁrms are not only confronted with different languages, cultures, and different local preferences, they also have to cope with different local business systems and practices as well as with a different institutional environment. In order to be effective in such an environment, ﬁrms have to acquire knowledge that is speciﬁc to the particular host country and region (Johanson & Vahlne, 1977; Inkpen & Beamish, 1997). In trying to explain the antecedents of information and knowledge acquisition, researchers have frequently drawn on social capital theory (see, e.g., Burt, 1997; Hansen, 1999; Tsai, 2000). The studies suggest that individuals and organizations draw on their intraorganizational and external network relationships to gain access to information and knowledge (Snijders, 1999). They ﬁnd that relational ties within the organization as well as with diverse external entities are especially valuable if they provide access to complementary knowledge. This broadening of the organization’s internal knowledge base positively affects international growth and performance (see, e.g., Yli-Renko & Autio, 1998). Only a few studies have examined the relationship between managerial ties with external entities and ﬁrm performance in an emerging market or transition economy context. The studies of Peng and Luo (2000) and Acquaah (2007) are notable exceptions to this. These authors examine the role of managerial social capital in the Chinese and African context, respectively. Both studies ﬁnd empirical evidence for the positive effect of relational ties with managers of other ﬁrms, government and administrative ofﬁcials, and community leaders on ﬁrm performance. This is because it allows for better knowledge access and hence opportunity recognition by the investing ﬁrms. In SEE, the dynamics are expected to be similar. Under communism, the managerial role was highly politicized, with managers frequently driven by self-interest motives. Party connections were essential for survival and success. Ofﬁcial reports often lacked the needed quality and reliability as they were prepared for outsiders. Information that served as

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the basis for decision making stayed with individual people and companies, and was passed on through informal channels (Michailova & Husted, 2003; Puffer, 1995). Managers developed their own informal networks which were valuable information sources (Martin, 1999). As suggested by Williamson (1985), networks formed an additional governance mechanism in communist systems, in addition to hierarchy and markets known from capitalist economies. In such an environment, information not only forms the basis for decision making, but rather becomes a tradable good of high value. Although communism in the region belongs to the past, the attitudes toward information sharing still prevail. Access to information is frequently restricted and information is hoarded because people fear possible negative consequences of open information sharing, not least because of the high power distance characterizing work relationships. Therefore, people continue to rely upon their established and proven networks (Michailova & Husted, 2003). Although information and knowledge are frequently used interchangeably, they are distinct constructs (Nonaka, 1994). In line with Huber (1991), this study refers to information as data reducing ambiguity, equivocality, or uncertainty. Knowledge then results from comparing and combining this information with prior experience, interpreting it, and making sense of the information. This process of integrating new information and knowledge with prior experience is facilitated whenever the parties to the exchange have some knowledge in common (see, e.g., Cohen & Levinthal, 1990). Nahapiet and Ghoshal (1998) suggest that a common language facilitates access to people and information. The special value of a local network encompassing local employees, local business partners, and local public authorities then emerges from their familiarity with the local business environment, economic and political system, as well as the habits in the region.

Local Business Partners as Information Providers Literature on MNCs increasingly treats these organizations as a network of intraorganizational relations (Malnight, 1996). More recent attempts to take a resource and network perspective of international business assume that a ﬁrm’s critical resources not only reside within the organization, but may rather span organizational boundaries (Acedo & Casillas, 2005). Hence, ﬁrms have to appreciate the importance of external relations (Borgatti & Foster, 2003). A ﬁrm’s business network encompasses formal and informal relations to stakeholders of the organization, including suppliers and customers,

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as well as other ﬁrms and competitors. The network serves as an important information source for individuals and the organization as a whole. There is empirical evidence that interorganizational network relations affect internationalization, the entry mode choice of ﬁrms, the timing of entry, and resource commitment (see, e.g., Blankenburg Holm, Eriksson, & Johanson, 1999; Welch & Welch, 1996; Zhao & Hsu, 2007). In explaining the phenomenon of small-ﬁrm internationalization, for example, studies have linked the owner-managers’ personal relationships with other businesses, and rapid internationalization (see, for instance, Chetty & Blankenburg Holm, 2000). Zhou, Wu, and Luo (2007) provide empirical evidence that the internationalization–performance link is mediated by social networks. The argument is that relationships with outside actors in the business environment create awareness of business opportunities at home and in foreign markets, provide access to relevant information and knowledge, allow for experiential learning, and help in building capabilities for international operations (see, e.g., Elango & Pattnaik, 2007; Westhead, Wright, & Ucbasaran, 2001). Consequently, it is reasonable to argue that information provision by local business partners has a positive impact on foreign market performance. Accordingly, we can formulate the following hypothesis: H1. There is a positive relation between information provision by local business partners and foreign market performance in SEE.

Public Authorities as Information Providers The institutional environment has been found to impact foreign investment decisions and mode of foreign market entry (see, e.g., Bevan, Estrin, & Meyer, 2004; Davis, Desai, & Francis, 2000; Meyer, 2001; Meyer & Peng, 2005; Peng & Heath, 1996; Svejnar, 2002; Yiu & Makino, 2002). Investors in transition economies are frequently faced with political turbulence and ambiguity, as formal institutions are still in their development stages (Iankova & Katz, 2003). In SEE, new institutions were built after the fall of communism, but informal norms persist from the socialist past. Gelbuda, Meyer, and Delios (2008) suggest that these informal norms slow down the adjustment of the new institutions to the volatile market environment, and decrease transparency. Therefore, it makes sense to consider information provision by public authorities separate from other local business partners. Public authorities – including regulatory, supporting, and industrial institutions – seem to be a

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valuable source of information as they possess ﬁrst-hand knowledge of recent developments in the legal and institutional environment. Consequently, information provision by public authorities can be expected to increase the efﬁciency with which ﬁrms can operate in the market. Accordingly, we formulate the following hypothesis: H2. There is a positive relation between information provision by local public authorities and foreign market performance in SEE.

Employee Proactivity and Inﬂuence on External Relations There is a large body of research on determinants and consequences of active employee behavior. Different researchers have used different terms in studying extra-role behavior such as initiative (Frese, Kring, Soose, & Zempel, 1996) or taking charge (Morrison & Phelps, 1999). Miron, Erez, and Naveh (2004) ﬁnd that employee initiative has positive effects on innovative performance. Thompson (2005) posits that initiative and proactivity have a direct and indirect positive effect on individual job performance. Baer and Frese (2003) on their part analyzed the phenomenon on an organizational level and presented empirical evidence for a positive relation with organizational performance. Especially dynamic environments characterized by frequent changes and great uncertainty call for employees who are willing to take action on behalf of the organization. According to social capital theory, informal personal interaction facilitates information and knowledge exchange (see, e.g., Adler & Kwon, 2002). Proactive employees are expected to foster relationships in order to generate knowledge which is of great value to the organization. Blumer (1969, p. 71) states that ‘‘the essence of society lies in an ongoing process of action – not in a posited structure of relations. Without action, any structure of relations between people is meaningless.’’ This should apply in a similar way to organizations. Proactive employees are prepared to take action by themselves. Bjo¨rkman and Kock (1995) mention visiting and gift giving as examples for relationship-enhancing activities. The behavior they refer to is more likely to go along with proactive employees than with those having a less action-oriented approach to work. In order to generate value for the organization, employees have to recognize the value of the knowledge held by external entities. They have to be aware of where to ﬁnd information, know which information is relevant in a particular context, and take initiative to access this knowledge. This

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clearly requires a certain degree of proactivity with employees initiating communication and interaction across ﬁrm boundaries. In the case of employees with a doing-attitude, foreign executives/investors can rely upon their employees for information gathering and processing in relevant contexts. Adler and Kwon (2002) posit that information is the major beneﬁt of networks. Therefore, proactivity of employees forms the basis for information provision from external sources. Relying on internal information provision rather than external information sources is easier because of the shared organizational context. Therefore, even more initiative is needed for turning to external information sources such as customers, suppliers, competing companies, or public authorities. Because of the region’s recent communist past, it seems adequate to distinguish between business partners (suppliers, customers, or competitors) anchored in the emerging market economy and the emerging public authorities that continue to carry some of the communist heritage. Acquaah (2007) points out that especially in emerging economies managers need to develop network relationships with government and administrative ofﬁcials in regulatory, supporting, investment, and industrial institutions. These entities tend to continue to have considerable power and control, for example, in terms of awarding contracts or providing operation licenses. Hence, developing ties with public authorities in SEE is likely to also positively inﬂuence performance. Therefore, we propose the following relations: H3a. There is a positive relation between employees’ proactivity and information provision by external business partners. H3b. There is a positive relation between employees’ proactivity and information provision by public authorities.

RESEARCH METHODOLOGY Sample Description and Data Gathering The study uses data collected in May and June of 2008 from Austrian ﬁrms with business activities in SEE countries. We comply with the deﬁnition of the Austrian Federal Economic Chamber for Southeast Europe, encompassing Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, the Kosovo, Montenegro, Romania, Serbia except for Turkey and Moldova. We added Slovenia in order to have

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all the countries from former Yugoslavia in the sample. Using SEE as an empirical setting seems appropriate as this region provides good growth opportunities for foreign ﬁrms. Although the growth prospects have been reduced because of the economic crisis, a February 2009 forecast suggests that it still ranges from 2 and 1 percent in 2009 and 2010 in Croatia to as much as 0 and 2 percent in Slovenia. This compares to 1.9 and 0.4 percent within the euro area (WIIW, 2009). Paired with the region’s geographic proximity to Austria, this makes the region an attractive investment destination for Austrian ﬁrms of all sizes. Taking the perspective of SEE countries, Austrian ﬁrms account for 19.9 percent of total foreign investment in the region, making it the biggest foreign investor (Gligorov, 2006). Despite these opportunities, the region also poses signiﬁcant challenges to foreign investors because of its recent past. The dynamics in the region with only three of the countries as yet being members of the European Union (EU), and Croatia and Macedonia having candidate status, provide an ideal context for assessing information provision and its effects on performance. Data collection was carried out in the form of a standardized questionnaire. The survey instrument was based on a comprehensive review of the relevant literature. In a pilot study, a preliminary version of the questionnaire was given to and critically reviewed together with Austrian trade commissioners in the region and academics from the ﬁeld of international business. They were asked to identify any ambiguous terms, concepts, or issues. The questionnaire was then adjusted based on these comments. The ﬁnal online questionnaire assessed information provision by business partners and public authorities, employees’ proactivity, as well as ﬁrm performance in SEE. The questionnaire ended with questions referring to the characteristics of the organization and demographics of the respondents. The items were mostly measured on ﬁvepoint Likert-type scales. Our sample list was drawn from a database of the Austrian Federal Economic Chamber containing approximately 8,000 e-mail addresses of Austrian ﬁrms with business activities in the region. The Austrian Federal Economic Chamber sent an e-mail containing the link to the online questionnaire to all the ﬁrms in the database, inviting managers responsible for business in the region to participate in the study. After one reminder, we received 177 complete responses, including 80 ﬁrms employing local citizens in SEE. Consistent with our hypotheses and for reasons of comparability we focus on these 80 ﬁrms. Our sample consisted of 14 micro-, 17 small-, 20 medium-sized, and 24 large companies. The remaining ﬁve did not provide the information. This overrepresentation of large ﬁrms in our sample allows

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us to control for size effects. Half of the ﬁrms are active in ﬁve or more SEE countries; 69 percent of the ﬁrms in the sample generate more than 40 percent of their total foreign sales in SEE. This suggests that our sample is biased by ﬁrms with a great strategic interest in the region. The sample is highly diversiﬁed in terms of industry. The questionnaire was mainly ﬁlled out by executives and/or owners (51 percent), and managers responsible for sales in general or speciﬁcally SEE (35 percent). Other respondents included general managers, and employees responsible for controlling, public relations and book keeping. Ninety-six percent of respondents have experience of being in SEE, gained through frequent business trips or from an expatriate assignment with supervisory function in the region. The majority (85 percent) were born in Austria; 93 percent are Austrian citizens. Therefore, the data should not be biased by nationality.

Operationalization of Key Measures Market Performance in Southeast Europe There has been much debate in the general and the international business literature regarding the adequate measurement of domestic ﬁrm performance and the performance of foreign afﬁliates, joint ventures, and strategic alliances (Glaister & Buckley, 1999; March & Sutton, 1997; Venkatraman & Ramanujam, 1988). In the literature two different ways are commonly used to measure performance. The traditional approach uses objective and accounting-based ﬁnancial measures to assess performance, such as proﬁtability, sales volume, and market share expansion. However, as Chowdhury (1992) points out, this way of assessing performance is particularly questionable when it comes to international operations because what constitutes good performance and success is contingent on the strategic objectives of the operations. Furthermore, the measures are frequently difﬁcult to obtain as ﬁrms are hesitant to share the information with outsiders. Geringer and Hebert (1991) ﬁnd that the subjective perceptual measures based on management evaluations tend to have a high correlation with the objective measures. Because of the complexities involved in collecting comparable objective performance data, researchers recommend the use of perceptual measures of performance to ensure a consistent and uniform way of measuring performance across a sample (Arino, 2003; Delios & Beamish, 2004; Geringer & Hebert, 1991; Andersson, Forsgren, & Pedersen, 2001).

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Our dependent variable of market performance in SEE thus consists of subjective measures. Speciﬁcally, we were interested in how respondents perceived the performance of their ﬁrms’ business activities in SEE. On a ﬁve-point Likert-type scale, they were asked to indicate to what extent they were satisﬁed with their performance in the region, to what extent their success was below expectations (reverse), and to what extent their experiences in the region were positive (Table 1).

Information Provision by Local Business Partners Most of the items used in measuring the information provision by local business partners were adapted from Wu (2008). The items are displayed in Table 1 and deal with the extent of information provision by the local Table 1.

Questionnaire.

Information provision by local business partners 1. In our primary market, local business partners support our company in terms of information gathering. 2. The information we get from our local business partners is relevant for decision making. 3. We can rely on our business partners. 4. Local business partners advise us on local business practices/habits. 5. Local business partners always provide us with timely information. 6. The entrepreneurs in the region recognize a lot of business opportunities. Information provision by public authorities 1. Local public authorities provide us with necessary information. 2. Local public authority support is satisfactory. 3. The requirements of local public authorities change rarely. 4. The requirements of local public authorities are clearly deﬁned. Employees’ proactivity Local employees Often suggest improvements. Often make suggestions for the improvement of organizational practices. Find solutions even if the situation seems hopeless. Successfully realize their ideas. Foreign market success in SEE 1. The success in our primary market is below our expectations. 2. We are satisﬁed with our performance in our primary market. Note: At the beginning of the questionnaire, respondents were asked to indicate their primary market, that is, the market that they focus on in their activities in the region. This was an attempt to control for potential country differences. However, statistical testing showed no signiﬁcant variance between the countries.

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business partners, the extent to which they support the organization in gathering information, the extent to which the ﬁrm can rely on the local business partners for market information, and whether the information was supplied in a timely manner. Another item assessing the business partners’ role in making the organization aware of local business practices was added. In addition, an item was introduced measuring the quality of the information provided, asking how relevant the information provided by the local business partners was for decision making. The items were formulated in such a way that both formal and informal business partnerships were included. All items were measured using a ﬁve-point Likert-type scale, ranging from (1) ‘‘entirely applies’’ to (5) ‘‘does not apply at all.’’ Information Provision by Public Authorities The information provision by institutions scale was developed to assess the extent of information provision by public authorities. The scale measured perceived support by local public authorities, to what extent they supported the organization with information, and to what extent the demands of the institutions were stable and unambiguous (Table 1). Employees’ Proactivity In order to measure employees’ proactivity, we employed the ‘‘taking charge’’ scale developed by Morrison and Phelps (1999), and the climate for initiative scale developed by Baer and Frese (2003). Employees’ proactive approach to work is characterized by a willingness to improve quality of work and process. Proactive employees not only develop solutions, but also successfully implement them. The items were chosen and combined for adjustment to the SEE context (Table 1). Control Variables We controlled for a number of factors that might have an independent effect on ﬁrm performance. The control variables were ﬁrm size, importance of the market in SEE for the ﬁrm, and degree of internationalization of the ﬁrm. Size. For measurement of size we chose to categorize ﬁrm responses based on the EU deﬁnition (EU-Commission, 2003) of small- and medium-sized enterprises, using the number of employees and sales as measures. Level of Internationalization. Sullivan (1994) suggests a measure of ﬁrms’ internationalization level which consists of ﬁnancial ﬁgures and cultural

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experience of management and the company as a whole. We only used the sum of foreign sales as a percentage of total sales and foreign assets as a percentage of total assets as our measure of a ﬁrm’s internationalization level. Anonymity of respondents did not allow an individual assessment of each company. The other elements did not ﬁt the Austrian context. SEE Market Importance. We added a third control variable which we termed SEE market importance. It assesses business activity in the region as a percentage of overall international business activity. We asked ﬁrms to provide information on their total sales, foreign sales as a percentage of total sales, and sales in SEE as a percentage of total sales. We then calculated the relative importance of the SEE region for each ﬁrm.

RESULTS Assessment of Scale Validity and Reliability Before testing the hypotheses, we assessed the validity and reliability of the survey scales used to measure the relevant constructs. To ensure content validity, we selected individual scale items for each of the constructs on the basis of a systematic literature review and a subsequent pretesting of the survey instrument. Exploratory factor analysis was conducted using varimax rotation to ensure convergent validity of the scales. For the independent predictor variables, three factors were extracted with eigenvalues above 1. Items displayed factor loadings above 0.60 and the factors explained 72 percent of the total variance. Factor 1 captured six items pertaining to partner information provision. This factor explained 22.48 percent of the total variance and had a Cronbach a coefﬁcient of 0.837. Factor 2 comprised four items and represented employees’ proactivity. It explained 19 percent of the total variance. The reliability coefﬁcient of this scale was 0.808. Four items out of the proposed seven representing the provision of information by public authorities had loadings above 0.60. The resulting factor accounted for 16.3 percent of the total variance. Cronbach’s a coefﬁcient for the scale was 0.847. Exploratory factor analysis for the foreign market performance measures revealed only one factor with a Cronbach’s a of 0.810. These reliability coefﬁcients are well above the suggested level of 0.60 (Nunnally, 1978).

0.475 0.321 0.491 0.279

Mean

2.300 1.465

0.119 0.139 0.135 0.191

S.D.

1–4 1–9 1–4

Min. –Max.

80 80 80 80 75 42 52

N

1.000 0.415 0.360 0.362 (0.138) (0.084) 0.236

1

1.000 0.432 0.479 (0.112) 0.083 0.069

2

1.000 0.186 (0.238) 0.211 0.314

3

1.000 (0.180) (0.022) (0.143)

4

1.000 0.114 (0.360)

5

1.000 0.064

6

1.000

7

Descriptive Statistics and Pearson or Spearman Correlations between the Variables Measured.

Variables

4.071 3.310

Table 2.

Employees’ proactivity (1) PartnerInfoProvision (2) InstitutionInfoProvision (3) Perceived performance (4) Sizea (5) Internationalization level (6) SEE market importance (7)

po0.05; po0.01; po0.001. As size is not a metric measure mean and S.D cannot be computed, correlation was measured with Spearman coefﬁcient. a

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Hypothesis Testing and Regression Analysis Results Table 2 provides the means, standard deviations, and a correlation matrix for the key variables. It shows positive and signiﬁcant correlations between employees’ proactivity, information provision by local business partners and public authorities, and ﬁrm performance, as well as among the explanatory variables. We used linear regression analysis to examine the hypothesized relationships. Hypothesis 1 examined the relationship between information provision by business partners and foreign market performance. Results of the regression analysis show a positive and signiﬁcant relationship, with R2 adj. ¼ 0.355 and a standardized b-coefﬁcient of 0.515. Thus, Hypothesis 1 received full support. Hypothesis 2 examined the relationship between information provision by public authorities and foreign market ﬁrm performance. The resulting R2 adj. was 0.079 and not signiﬁcant. Therefore, Hypothesis 2 was not supported. Hypotheses 3a and 3b suggested a positive relationship between the employees’ proactivity and information provision by both, local business partners and public authorities. Regression analyses show a signiﬁcant positive relationship for Hypotheses 3a and 3b with R2 adj. ¼ 0.285 and a standardized b-coefﬁcient of 0.549, and R2 adj. ¼ 0.314 with a standardized b-coefﬁcient of 0.342, respectively. Controlling for size, the degree of internationalization, and relevance of SEE market for the organization did not show an inﬂuence on the proposed relationships. Implications and limitations of these ﬁndings are discussed in the following section.

DISCUSSION Except for the hypothesis linking provision of information by public authorities to market performance, all our hypotheses were supported by the data. Information provision by local business partners including suppliers, customers, and other ﬁrms in the region displays the highest correlation with foreign market performance. This ﬁnding provides further support for international network theory and suggests that an external orientation is also beneﬁcial for ﬁrms with afﬁliates abroad. Interestingly, controlling for size did not signiﬁcantly change the correlation between the two, suggesting that even big ﬁrms with a vast internal network can beneﬁt from external information sources. Hence, a ﬁrm’s local embeddedness emerges as an important factor for ﬁrm performance with the links with

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local entities allowing for the exchange of valuable information and knowledge. Practitioners need to recognize the importance of being open, get immersed in the local business environment, and establish local networks. In contrast to information provision by business partners, information provision by public authorities did not show an effect on ﬁrm performance. Although surprising at ﬁrst glance, a number of factors may explain this. The decision to distinguish between business partners and public authorities as information sources was based on the assumption that the latter are likely to carry communist heritage, which may lead to different perceptions of the two sources for information provision. Hence, a lack of trust and a bad reputation of public authorities stemming from earlier times provide one possible explanation. It may prevent local employees as well as foreign investors to rely upon local authorities for relevant information. In fact, many authors mention a lack of institutional trust in former communist countries (Inglehart & Baker, 2000). Thus, companies might not even consider these institutions as possible sources of reliable information. Even more, this lack of trust might be transferred to foreign management which is already inﬂuenced by the Western cliche´ of perceiving institutions in former communist countries as inﬂexible and lacking transparency (Goetz & Wollmann, 2001). In addition, it is known that SEE countries want to promote their countries as foreign investment beneﬁts their economies. Hence, public authorities might not been seen as a reliable source of objective information. Apart from representing an unreliable source of information, public authorities may in fact not even have the information that is required by companies. Most importantly, they lack direct market knowledge and experience. Finally, the cooperation with public authorities may involve great effort resulting in higher costs than beneﬁts. This argument is supported by our survey results. One of the statements that did not form part of the public authority information provision scale asked to what extent the cooperation with local public authorities calls for ‘‘ﬁngerspitzengefuhl,’’ which means that cooperation with public authorities is tricky and requires discretion; 87 percent of our respondents support this statement. Another 72 percent believe that cooperation is especially difﬁcult for foreigners. Almost all (94 percent) agree that knowledge about local conventions is a prerequisite for cooperation with local institutions. In order to validate these explanations, however, further investigations contrasting business partners and public authorities are needed.

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The positive relationship found between employees’ proactivity and local business partners and public authorities also has important implications. It suggests that employees with a proactive approach are capable of enhancing information provision by external partners. This is in-line with social capital theory (Adler & Kwon, 2002). Recent research by Thompson (2005) shows similar results. Proactivity, deﬁned as a personality characteristic, positively affects job performance through network building. Future research should focus on the role of employees and their network relations rather than solely concentrating on managers.

LIMITATIONS The speciﬁc context of the study provided an interesting backdrop for studying information provision. While not conclusive, the results suggest a positive effect of information provision by external entities on ﬁrm performance. In addition, this study has not taken into account the processes of organizational learning or absorptive capacity. However, as pointed out by Szulanski (1996), knowledge transfer and its internalization is a difﬁcult endeavor and affected by a number of organizational characteristics. Therefore, information provision is only the ﬁrst step, with superior absorptive capacity possibly allowing for more effective information internalization. This study controlled for ﬁrm size, degree of internationalization, and foreign sales in SEE as a percentage of total foreign sales. However, it is important to recognize that ﬁrm performance is a more complex phenomenon where identifying causal structures is difﬁcult due to incomplete information on determinants (March & Sutton, 1997). Hence, future studies should include further variables that can be expected to moderate the direct relationships. Most importantly, the frequently identiﬁed effects of network tie strength should be included (Ellis, 2000). The proposed relationships might also be culturally contingent, requiring further studies testing the relations in other institutional contexts or different respondents such as local managers.

REFERENCES Acedo, F. J., & Casillas, J. C. (2005). Current paradigms in the international management ﬁeld: An author co-citation analysis. International Business Review, 14(6), 619–639.

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