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Drivers of Internationalization

ACKNOWLEDGEMENT

The purpose of this research ie to identify the drivers of globalisation and their role to

motivate the decision makers i.e entrepreneurs or executive management. Its natural

desire of small firms or businesses to explore the new markets overseas to become global

exporters. Generally it is supposed that internationalization is the strategy of the larger

firms. As it seems to be challenge for small firms to enter into world market. Thats the

reason most SMEs are mainly operating in their home markets. It is a craze of every type

of firm to enter into world market for specific objectives behind i.e. profit, competitive

advantage etc. There is need of experiential practice for firms to enter in global market.

Past experience of global markets, forign scoiety relations, skills of relation

building.active management and knowledge about market location, competitors, pricesand technology have a profound impact on how the firm is seen to approach foreign

markets. Actually these are the actual drivers. Firms which intend to go abroad suffer

from lack of knowledge about how to conduct a business in a foreign market. So the

firms tend to handle this risky problem by trial and error and by the gradual acquisition of

information about foreign markets. While practicing in foreign activities firms gain

confidence in performing abroad. Knowledge assets behave as both push and pull forces

for SMEs into international markets. The push dimension pertains to the importance of

managers previous international experience and related management capacity factors

including R&D investment, innovation capabilities, unique product or technology,

and language skills; and firm resource base, as indicated by such proxies as size,

age, and experience. This experience can surely be counted as knowledge.Another

stimuli for moving ahead into overseas markets is the excessive working capital,It has

been observed that those firms which have excess of capital they proceed, It is not only

the knowledge, capital and experience but another important factor is of skillful

management which is capable of handling the foreign country branches of their organisation. only the active management can cope up with the varied customer demand

and social requirements, The whole credit of expanding the foreign business goes to the

active members of managements, If the management lacks these skills then the capital is

of no use.Moreover there are network/social ties and supply chain links in triggering

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SMEs first internationalisation step and extending their internationalisation processes.

Technology has its uniqe value for approaching massive and standardised production. It

is the knowledge (information; either technological or managerial/entrepreneurial) with

the help of which firms gain competitive advantage from their competitors. Knowledge

includes unique information about production, market research, information of foreign

market, information of foreign country and its environment. This market specific

knowledge becomes the motivational driver for the firm to go abroad. Firms overseas

venturing decision also seems to be motivated by a need for business growth, profits,

an increased market size, a stronger market position, and to reduce dependence on

a single or smaller number of markets.

The drivers just have to attract the decision makers.the entrepreneur is there to tke the

risk of forward steps.these motivators are just involved in decision making before they

have triggered. Once the action ha sbeen taken t hen its upto business how it survives

otherwis ethe motivators were jus t to stimulate the business desire to be globalised. In

other words we can say that availabilty of one or more than one driving ersources is

actually the motivator. Sometimes many drivers are involved together to lead the

entrepreneur. Its up to decision maker how he links these stimulis and utilizes them.

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INTRODUCTION

Research question

In this global context many firms want to be internationalised themselves by exporting

and opening their manufacturing units abroad.

Among the other important issues, in this project we want to find the answer for the

following question:

What are the forces that drive firm in its process of internationalisation?

We know from our understanding that a small firm adopts the process of

internationalisation for becoming big one and the different type of factors drives it duringthis process, for this we are interested in knowing what actually motivates a firm in this

process of internationalisation.

In order to solve our research question we have chosen among the other theories of

internationalisation, the Uppsala model of internationalisation of the firm. We want to

understand the internationalisation process of this firm and the factors motivating it in its

internationalisation process.

Structure

The paper follows a logical sequence of thought. Firstly, the key drivers of

internationalisation are identified and discussed. The motivators motivating the

entrpreneurs for globalized business.

Background

The history of trade shows began during the early medieval era when two major trading

unions were founded in Europe; one in the southern parts of Europe and the second in the

northern parts of Europe. The most common goods sold in the southern parts of Europe

were jewelry, ivory, gold and textiles from the Far East, whereas in the north, trade

included necessities such as fish, wool, tar, salt and iron. This new way of trade

constituted the foundation for international trade shows. During the trade shows, buyers

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and sellers would meet for a few weeks every year to present new products but also to

look at what competitors had to offer. A further reason was to exchange experiences

among the traders. Since the participants of trade shows came from different countries, a

special currency was needed and consequently developed (Flodhammar, 1990).

The last decades have been characterized by a significant growth in the number of firms

which start internationalizing at their inceptioninternational new ventures, INV

(McDougall, Shane, & Oviatt, 1994 ; Oviatt & McDougall, 1994, 1997 ), or in their first

years of activityearly internationalizing firms, EIF ( Knight, Madsen, & Servais, 2004 ).

The phenomenon has been extensively studied both from a conceptual and an empirical

perspective, giving rise and substantial improvement to the recent field of studies on the

socalled born global firms ( Rialp, Rialp, & Knight, 2005 ). The processes of early

internationalization are the result of complex interactions among changes in the

international markets environment ( Evans & Wurster, 1999 ) and diffusion of a

managerial and entrepreneurial class, characterized by stronger international vision

(Andersson, 2003 ; Sahlman & Stevenson, 1992 ). This paper focuses on early

international firms(EIFs), i.e. firms which become international, through export or any

other entry mode, in their first three years of life ( Madsen & Servais, 1997 ). EIFs thus

comprise INVs, and maybe born global firms too (but not necessarily) according to the

Oviatt and McDougall (1994) definition: in fact, the aim of this paper is to propose an

analysis of the drivers of precocity in internationalization but not of the modes, activities

or scope of early international firms.We want to discover the forces behind a firm in its

process of internationalisation and for this we have chosen a very famous model in this

field: Uppsala model developed in 1977 by Johansson and Vahlne at Uppsala university.

Among the other theories in the field of internationalisation, Uppsala model (Stage

theory) is the most well developed one. The theory considers that firm in its

internationalisation process proceeds in four sequential stages (of course firms are not sorigid in following these stages), with every step the experiential knowledge of the

manager/entrepreneur increases. This experiential knowledge is the major driving force

behind its internationalisation process. The existing theories of the internationalisation

are mainly concerned with external factors and therefore Uppsala model was developed

at Uppsala University, which focuses on the internal factors for motivating the firms to

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go abroad.

Drivers of Internationalisation

There are many drivers towards internationalisation, but collectively they can be divided

into two areas, internal factors and external factors. The internal factors include

unsolicited foreign orders, managerial influence, excess capacity and product life cycle

issues. External factors include awareness of opportunities, competitor activity, physical

closeness, and government activity. Companies rarely decide to enter new markets

without careful planning or some internal and external stimuli, which influence a firms

decision to export (Jatusripitak 1986, p. 9). Within these internal and external factors,

firms can be influenced by both push and pull factors. Jatusripitak (1986) and

Hollensen (1998) outline that many export push or proactive motives encourage globaltrade.Hollensen (2007) explains that internationalization occurs when a company has

decided to expand some of its business activities into an international market. Activities

that can be internationalized for example are R&D, production as well as selling. For

SMEs the internationalization process often is discrete, which means that the

management regards each internationalization undertaking as distinct and individual

(ibid). Coviello and Munro (1997, p.115) define internationalization as: *+ the

process by which firms both increase their awareness of direct and indirect influences of

international transactions on their future, and establish and conduct transactions with

other countries. Firms which have decided to internationalize usually do so to make

money according to Hollensen (2007). This alone, seldom is the only reason as a lot of

other factors have to be taken into account when making such a decision. A lot of

internationalization motives exist and are divided into proactive and reactive motives.

Proactive objectives focus on implementing a strategy change to exploit new market

opportunities. Reactive motives show that the firm is reacting on pressures or threats in

its home market or foreign market and in relation to this changes its activities over time

(ibid). The major proactive objectives for internationalization of a business involve profit

and growth goals, a managerial urge to start the firms internationalization, technology

competence or the possession of a unique product. Moreover, foreign market

opportunities and economies of scale as well as tax benefits are included in the category

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of proactive motives. Reactive motives, on the other hand, are about that the firm feels

pressure from its competitors who have succeeded in their internationalization or that the

domestic market has become saturated and growth opportunities thereby limited.

Furthermore, overproduction and unexpected foreign orders can be included to reactive

objectives. A seasonal demand in products could also be a reason for exporting as well as

the physical and psychological closeness to the foreign markets (Hollensen, 2007).

Chetty and Campbell-Hunt (2003) further describe that the attitude of the decision

makers, the managements expectations on growth as well as the managers commitment

towards internationalization are important influences when the firm desires to expand its

business to foreign markets. The authors argue that it is not enough for a firm to have the

right product, the firm also needs to have the right attitude (ibid). On the other hand, non-

driving forces for internationalization are present, which include insufficient knowledgeabout foreign markets, a lack of international experience as well as inadequate language

skills. Other firms may not have any intentions at all to expand their business abroad

(Chetty & Campbell-Hunt, 2003).

Internal Stimuli:

A firm who is in receipt of unsolicited foreign orders may commence internationalisation

strategies (Hollensen 1998). However, where the importance of unsolicited export orders

has been found in studies, it is usually not enough to push a firm into exporting. Factors

such as adverse home market conditions and management attitudes may be key drivers of

global trade (Jatusripitak 1986).

Attitude of Internal Managers

Jatusripitak (1986) outlines the findings from various research studies on internal drivers

towards export markets. He concludes that the attitude and orientation of the key

strategic decision makers is a key internal driver towards global or international

strategies. Langston and Teas (1976, as cited in Jatusripitak 1986, p. 9) conducted a study

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to determine the origins of this international orientation and found several drivers of an

international attitude. These include a period of time spent living abroad, whether a

foreign experience was considered an attractive prospect or whether the manager had

studied a foreign language. Further, Simpson and Kujawa (1974, as cited in Jatusripitak

1986) found a significant difference in the level of education between decisions makers

in exporting and non-exporting firms, where the export oriented decision makers had a

higher level of education.

Since the publication of Stephen Hymer's thesis in 1960, the economic theory of foreign

direct investmenht as beend rivenn ot by country-levevl ariables,s ucha s differences in

interest rates, but by industry- and firm-level variables [Hymer 1960]. Industry-levevl

ariablesr eflectb arrierst o entrya nd patternso f oligopolistic behavior.F irm-levelv

ariablesa re relatedt o the concepto f transactionco sts, wherebyt he transfero f

specializeda ssetsb etweenf irmsi s mpededb y market failures,t hus necessitatingt he

expansiono f the firm (in some cases across bordersi)n ordert o internalizteh e transferT.

o the extentt hatt he samev ariables influencew hethert o enterb y foreignd irecti

nvestmentl,i censing,o r exporting, the choice of the mode of entryi s jointly and

simultaneousldy etermined.

Need to Utilise Excess Capacity

Other internal factors include the need to utilise excess capacity or other in-house

competencies that lend themselves to international exploitation (Jatusripitak 1986,

Hollensen 1998) A firm may have a competitive advantage due to some core competency

or first mover advantage that may be equally effective in many markets. These factors

may act as push factors, driving the firms decision to export for reasons of efficiency.

There are, however, many benefits of internationalisation that can act as pull factors.

Marketers may have access to customers with higher quality standards than in the home

country, for example the Japanese market (Cateora & Graham, 2002). Tougher targets

can allow a company to perform to its maximum potential. Having a diversity of markets

may also bring additional financial benefits, as increasing the portfolio of a firm

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encourages stability of revenues and operations (Cateora & Graham, 2002).

Product Life Cycle Theory

Product life cycle theory offers key reasons for internationalisation. A firm may need to

extend the product lifecycle of products that may have reached the saturation level in the

domestic market share. A firms proficiency in producing the product can be exploited

for longer durations by exploring new markets. Similarly, a firm can extend their sales of

seasonal products by exporting to foreign markets (Hollensen 1998).

External Stimuli

Opportunity Recognition

The drive towards export markets may be stimulated by either problem recognition or an

awareness of opportunities (Jatusripitak 1986). The firms environment has been found

to be an important factor stimulating export (Jatusripitak 1986, p. 9). Tesar (1975, as

cited in Jatusripitak 1986) found that the exporting performance of competing firms plays

an integral part in motivating a firm to export themselves. The decision by longstandingcompetitors to engage in international marketing may spur similar actions. The increase

in profits earned by competitors can have domestic market implications as they may re-

invest the earnings into domestic endeavours.

Competitor Activity

One of the most important drivers towards new markets is the saturation of domestic

markets due to competitor activity (Pavord and Bogart 1975, Hollensen 1998; Jatusripitak

1986). Some firms in relatively small markets may be unable to sustain sufficient

economies of scale unless they include foreign markets in their marketing strategy

(Hollensen 1998). Certain firms may have invested heavily in new technologies, and

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may export in order to take advantage of economies of scale (Hollensen, 1998).

Johansson (1997) suggests because customers in different countries have the same basic

needs, exposed to similar messages and diverse cultures, there is a compulsion to supply

to this wider market, as many products can be standardised and still acceptable in foreign

markets. Further, marketing practises are basically the same in each country making the

sale of the product easier once it has actually entered the market (Johansson 1997).

Closeness to Market

Physical and psychological closeness to the international market may push a decision to

export (Hollensen 1998). European firms may easily consider exporting to their

neighbouring countries due to the relative proximity of these markets.

Government Support

Foreign Governments may offer assistance and incentives through favourable trade

policies, acceptance of foreign investment, compatible technical standards (Johansson

1997), and tax benefits (Hollensen 1998).

A number of surveys examining the drivers of SME internationalisation have become

available from private and public sources across OECD and APEC member economies

and some of the countries involved in the OECD enlargement or enhanced engagement

process have been undertaken since the completion of the 2007 OECD-APEC study.

The specific OECD economies covered in these recent studies include Australia,

Belgium, Canada, France, Germany, Greece, Ireland, Italy, Netherlands, Poland,

Portugal, Spain, Sweden, UK and USA . The non-OECD member economies investigated

are Chile, India and Indonesia. A few of these studies provided sub-national and sectoral

insights on motivations for SME internationalisation.

Table below, outlines the countries covered, the main motivations identified, and the

authors involved.

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Table . Recent Research Findings on SME Internationalisation Drivers

Country Motive/stimulus Author

Australia Grow market; control supply

chain, reduce cost

EFIC, 2008

Belgium, France, Germany,

Greece, Italy, Netherlands,

Poland, Spain, Sweden, and

UK

Market position; knowledge

and relationship search

Kocker and Buhl, 2007

Canada Growth, management capacity

factors, social capital,

immigrant links, R&Dinvestment, firm

size/age/experience, limited

domestic market

Orser et al ., 2008

Ireland and India Knowledge resources Garvey and Brennan, 2006

Portugal (Azores Islands) Social networks/ties Camara and Simoes, 2008

Spain Managers previous

international experience, firmsize/age; regional location;

country/regional image

Lopez, 2007

Spain (Catalan region) Managers previous

international experience,

growth and profit expectations,

social and business networks,

and domestic marketsaturation/stagnation

Stoian, 2006

Sweden Growth, managers previous

international experience,

unique product or technology,

Rundh 2007

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limited domestic market

UK Growth, profits, market size Barnes et al., 2006

UK Growth, profit, to reduce

dependence on a single or smaller number of markets

Reynolds, 2007

USA Profits UPS, 2007

Growth Motives

Growth opportunities associated with international markets were identified as a key

driver of firm internationalisation in several recent studies. Orser et al. (2008), for example, reported that after allowing for the impacts of firm size and sector, Canadian

firms whose owners had expressed growth intentions were more than twice as likely to

export, than those whose owners did not indicate growth ambitions. The possibility of

growth in other markets and increased profit opportunities from international expansion

were highlighted as key stimuli for exporting among the Australian, British, Spanish,

Swedish, and US firms investigated in recent studies. Firms overseas venturing decision

also seems to be motivated by a need for business growth, profits, an increased market

size, a stronger market position, and to reduce dependence on a single or smaller number

of markets.

Knowledge-related Motives

Firms which intend to go abroad suffer from lack of knowledge about how to conduct a

business in a foreign market. So the firms tend to handle this risky problem by trial and

error and by the gradual acquisition of information about foreign markets. While

practicing in foreign activities firms gain confidence in performing abroad. Recent

research findings suggest that knowledge assets both push and pull SMEs into

international markets. The push dimension pertains to the importance of managers

previous international experience and related management capacity factors, as observed

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in studies among Canadian firms, Spanish firms, and Swedish firms. There are also

related findings from a number of OECD countries (Canada, Ireland, and Sweden) and

non-OECD economies (Chile, India and Indonesia) on the internationalisation triggering

effects of knowledge aspects, including R&D investment, innovation capabilities, unique

product or technology, and language skills; and firm resource base, as indicated by such

proxies as size, age, and experience. Search for knowledge assets may also pull SMEs

into international markets, as suggested by Kocker and Buhl s findings that firms

internationalise to obtain missing know-how required to maintain their lead in

technological development.

Experience and Market Selection

From a normative standpoint, several factors are considered to be important in assessing

the potential attractiveness of a foreign market: market size and market growth [Stobaugh

1969; Davidson 1980a], competition [Knickerbocker 1973], servicimg costs [Davidson

1982], and the host country's social, political and economic environment [Root 1987;

Toyne and Walters 1989]. Papadopoulos and Denis [1988] provide an excellent review of

numerous qualitative and quantitative market-selection techniques incorporating these

variables. They conclude, however, that there is little evidence firms (small, medium or

large) use any such methods on a systematic basis to choose target markets in practice. In

fact, empirical research on actual business practices has consistently highlighted only one

major determinant of market selection: market similarity, i.e., similarity of the foreign

market to the firm's home market or to markets it is currently serving. As apadopoulos

and Denis [1988: 44] conclude: in an overwhelming number of cases ..[choices of

markets].. are still based on such nonsystematic criteria as 'psychic' distance... 'cultural'

distance..., and geographic distance. Several studies show that U.S. exporters have astrong bias for markets such as Canada and U.K. (see Bilkey [1978]: Reid [1981]).

Investigations involving U.S. multinational corporations, too, found sharp preferences for

Englishspeaking countries, preferences that were not warranted on economic grounds

alone [Davidson 1980b, 1982, 1983]. Parallel findings have been reported in studies on

service firns, such as banks [Khoury 1979] and advertising agencies [Weinstein 1977].

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Firms prefer entry into similar markets because it facilitates transfer of technology and

managerial resources, assures ready demand for their products, and helps reduce

uncertainty [Davidson 1983]. This last reason is particularly relevant to the present study.

Davidson [1982: 118] argues that when "the firm has little confidence in its ability to

estimate or predict costs, demand, competition or environmental conditions in various

markets it can minimize uncertainty in its selection decisions by choosing markets about

which it has best information."

Preference for similar markets, however, appears to be conditioned by the firm's

international experience. Reviewing patterns of foreign activity by U.S. multinational

corporations, Vernon [1966] noticed a "gradual fanning out from geographically and

culturally familiar to the geographically and culturally remote areas of the world."

Likewise, Uppsala School researchers insist that exporting begins with "psychologically

close" countries and extends incrementally to "psychologically distant" countries as the

firm gains experience [Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne

1977; Wiedersheim-Paul, Olson and Welch 1978]. Explaining the relationship between

preference for similar markets and experience, Davidson [1980a] argues that with

increasing experience, firms

acquire greater confidence in their ability to gauge customer needs, to estimate costs and

returns, and to assess the true economic worth of foreign markets. Thus market selection,

dominated by concerns of uncertainty in the early phases of international expansion,

increasingly becomes a function of economic opportunity as the firm gains experience.

The basis for relating uncertainty reductions to experience originates in Johanson and

Vahlne's [1977] argument that uncertainty in international markets is reduced only

through actual operations in the relevant markets and not through acquisition of

"objective" information. Davidson [1983: 453] supports this contention by concluding

that "direct experience and not market research activities now provides the principal

inputs in market selection decisions." In his studies of the foreign direct investment

practices of U.S. MNCs, Davidson [1980a, 1980b, 1983] made several important

discoveries. First,

American MNCs' attraction for countries such as Canada, U.K. and Australia, very high

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in their early forays into foreign markets, declined perceptibly over time. Second, firms

with extensive experience exhibited less preference for near, similar and familiar

markets. Markets that were initially perceived as less attractive because of high

uncertainty were given increased priority as the firm's experience rose. Finally, the

presence of existing manufacturing facilities in a particular market had a positive impact

on subsequent entries into the same country. Davidson concluded from these findings that

both general and country-specific experience factors played a role in market selection. In

the service sector too, Weinstein [1977] found investments made by U.S. multinational

advertising agencies in the late 1950s and the early 1960s were primarily in highly

developed, culturally familiar areas of the world. He discovered, however, that "as the

agencies grew in size and overseas experience, their investments switched from Canada

and Europe to Latin America and the Far East" [Weinstein 1977: 86]. Terpstra and Yu[1988] investigated the FDI behavior of U.S. multinational advertising agencies after

1970 (by which time, presumably, most of these agencies were highly experienced in

foreign markets) and, indeed, found support for their hypothesis that geographic

proximity (and hence "similarity') had no significant impact on an agency's decision to

invest in a certain country. The literature is not, however, entirely free of discord.

Maclayton, Smith and Hair [1980] found overseas business experience, measured in

number of years, to have no relationship with firms' evaluation criteria of foreign

markets. Based on evidence drawn from case studies, Sharma and Johanson[1987]

likewise concluded that the concept of "psychic" distance did not explain the

international expansion of technical consultancy firms. Experience and Entry Mode

Choice Once a firm decides to enter a certain foreign market it has to choose a mode of

entry, i.e. select an institutional arrangement for organizing and conducting international

business transactions [Anderson and Gatignon 1986; Root 1987]. As entry modes have a

major impact on the firm's overseas business performance, their choice is regarded as a

critical international business decision [Wind and Perlmutter 1977; Anderson and

Gatignon 1986; Root 1987; Terpstra 1987; Hill et al. 1990]. Firms can often choose from

a variety of entry modes. For example, exporting firms have two alternative modes:

exports through independent intermediaries, and exports via integrated (company-owned)

channels [Anderson and Coughlan 1987]. Alternately, firms can produce their products

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overseas, either through contractual modes (e.g., licensing and franchising) or via foreign

direct investment (joint ventures and wholly owned subsidiaries). Entry modes differ

from each other on several dimensions, one of which is the degree of control they allow

the foreign market entrant [Root 1987]. Traditionally, control has been perceived by

researchers as flowing from ownership.1 Thus the greater the firm's level of ownership,

the greater the control it enjoys over its international transactions [Anderson and

Gatignon 1986]. For this reason, company-owned channels, wholly owned foreign

subsidiaries and branches are designated asfull- control modes. There is some evidence to

indicate that international experience may have not have any effect on degree of control.

Kogut and Singh [1988] observed that experience (as measured by the firm's pre-entry

presence in the host country, and degree of multinationality) played no significant role in

explaining why foreign entrants into the United States used joint ventures in preference towholly owned acquisitions. Similarly, Sharma and Johanson [1987] could see no

evidence of "incremental"in ternationalizationin their case studies of Swedish technical

consultancy firms, suggesting experience may not be a determinant of entry mode choice.

Some writers suggest even a negative relationship between the firm's international

experience and its desire for control. Daniels et al. [1976] observed a tendency among

companies investing overseas to start with complete control and share it after the

operation became established. Taking a comparative perspective, Shetty [1979] argued

that European MNCs were more agreeable to joint ventures than their American

counterparts because their longer overseas experience made them more adept at dealing

with foreign partners. Davidson and McFetridge [1985] found the probability of using a

wholly owned affiliate by U.S. MNCs decreased with increasing number of prior

technology transfers. Stopford and Wells [1972] analyzed the first five manufacturing

investments outside the U.S. and Canada by American MNCs to determine if these

companies preferred joint ventures in the early stages of their international evolution. Totheir surprise, the authors found almost three-fourths of these initial ventures were wholly

owned. Two theoretical explanations may be advanced to explain the observed negative

relationship between experience and desire for control. One is the ethnocentric argument.

It has been suggested that many international neophytes tend to be ethnocentric in their

orientation demanding to have their own nationals in key positions in foreign ventures

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[Weichmann and Pringle 1979; Anderson and Gatignon 1986]. Since these demands can

be rarely satisfied in shared-control arrangements, novices may decide to assume full

ownership and control. Experienced firms, on the other hand, grow more polycentric in

their orientation and, consequently, more confident of their ability to advantageously

exploit local expertise [Shetty 1979]. As such, they may be more eager to accept shared

ownership and control. Alternately, transaction cost analysis suggests that when internal

uncertainty is high (say, due to lack of experience), the firm may find it difficult to

accurately assess the performance (output) of agents or partners [Williamson 1985]. The

firm may, therefore, find it easier to monitor the effort (input) of its employees, making

fully integrated operations more desirable. In short, the findings reported in the literature

on entry mode selection are conflicting and confusing. Below, we attempt to reconcile the

divergent viewpoints and make predictionsc oncerningt he relationship betweenexperience and entry mode choice.

Network/Social Ties and Supply Chain Links

A number of recent studies have highlighted the importance of network/social ties and

supply chain links in triggering SMEs first internationalisation step and extending

internationalisation processes. These include research among American, Australian,

Canadian and Portuguese businesses. Both North American studies particularly reported

the stimulating effect on export activity of firms soft assets, including social and

network capital, some of which may have accrued through managers immigrant

background and associated links. The study among fish exporters from the Azores

Islands, an autonomous Portuguese archipelago in the North Atlantic, some 900 miles

from the European mainland, highlighted the importance of family and social ties with

emigrant communities in global markets in driving SME internationalisation (see Boxes 3and 4). Kocker and Buhl also observed that taking advantage of collaborative links is a

common motive among the firms they investigated across ten OECD countries.

Finally, it is important to mention the value of the linkages back to their birth countries

that migrants can bring in arranging exporting opportunities [OECD

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CFE/SME(2008)5/PART1/REV1].

Domestic/Regional Market Drivers. There is also support from recent relevant research

on the push effects of firms limited or stagnating domestic market on

internationalisation behaviour. For example, both Rundh and Orser and colleagues foundthis to be the case based on their respective studies of Swedish and Canadian firms. A

regional, or sub-national, dimension was reported by Lopez, who found that Spanish

firms from different regions differed significantly in their export tendency, with export

propensity increasing in regions with less favourable domestic conditions, local

incentives to export and good export infrastructure. The Spanish study also identified the

favourable country/region of origin image enjoyed by Spanish agricultural products in

international markets as an additional stimulus for the internationalisation of the firms

investigated. Recent evidence from Chile and Indonesia further suggests a greater

tendency to export among firms from sectors characterised by high levels of export

intensity and presence of foreign buyers. The Indonesian finding on the importance of

foreign buyers presence is significant as it reinforces the earlier observed need to boost

SMEs role in global value chains through facilitating their integration into

production/supply systems of foreign affiliates of larger firms (OECD, 2008).

AVAIABILITY OF WELL MANAGEMENT:

With continued globalizationo f the world'se conomies,j oint ventures( JVs) have

becomea n importante lemento f many firms' internationals trategies.

These ventures involve two or more legally distinct organizations (the parents), each of

which actively participates in the decisionmaking activities

of the jointly owned entity [Geringer 1988]. If at least one parent organizationi s

headquarteredo utside the JV's country of operation, or

if the venture has a significant level of operations in more than one country, then it is

considered to be an international joint venture (IJV).

An alternativet o wholly-owneds ubsidiaries,I JVs are commonly used by firms as a

means of competing within multidomestic or global competitive

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arenas [Porter & Fuller 1986; Harrigan 1988]. Increasingly, they are perceived strategic

weapons,a s one of the elementso f an organization's business units network [Harrigan

1987].

To the extent that scholars have devoted attention to control in IJVs, the ultimateobjective should not be limited to the study of the control concept

itself. Rather, the underlying rationale should be improved understanding of the

relationship of control to IJV performance. Thus, this section will

review the approaches that have been employed in examining this critical relationship, as

well as the studies' findings. Tomlinson [1970], often considered the first scholar to

empirically study the control-performance relationship of or IJVs, did not directly

examine parent control, but rather the "attitude of parents toward control." From a sample

of seventy-one IJVs in India and Pakistan, Tomlinson found that IJVs evidenced higher

levels of profitability when theirU .K.parents assumed a more relaxed attitude towards

control.However, the validity of these results may be questionable, since Tomlinson used

return on investment as the measure of profitability. Utilization of this measure for a

multi-industry sample does not appear adequate and may have produced bias in the

results. Variations in the financial performance of IJVs could be caused, for example, by

industry differences rather than differences in the attitude toward control.

To evaluate control, he relied on the importance given by MNC parent firms to

standardization and to the centralization

of decisionmaking, particularly for marketing policy issues. Furthermore, the author's

dependent variable, changes in JV ownership structure, fails

to provide a clear sense of the JV's absolute or relative success or of the achievement of

the JV's objectives, and therefore of the performance of

the JVs. Because ownership may also be a control mechanism, utilization of this

constructm ay resulti n confusion regardingt he meaningo f ownership

changes. It is open to conjecture whether these changes are indicative of modificationsin

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the controlo f the JV,o r of its poor performanceD. espite

these concerns, Franko made a significant contribution by examining the JV control-

performanceli nk using the "strategy-structure"co nceptual

framework.W ithin this perspectivet, he degreeo f parentalc ontrol as well as the JV's

performance (or its stability) is presumed to be contingent on

the MNC's strategy and structure. Unfortunately, despite the potential insightsf rome

mployingt his frameworkn, o researcherhs avey et attempted

to extend Franko's work in studying the control-performance relationship for IJVs.

The studies that constitute the "mainstream" of research on control and performance of

IJVs have adopted a different, but not necessarily incompatible,

approach than that employed by Franko [1971]. For example, Killing [1983] asserted

that, among his three JV categories, dominant partner JVs are more likely to be

successful, at least compared to shared management ventures. His argument was

essentially as follows: since the presence of two (or more) parents constitutes the major

source of management difficulties in JVs, dominant partner JVs, in which the venture's

activities are dominated by a single parent, will be easier to manage and consequently

more successful. This argument is especially easy to interpret within a transactionc ost

analytical framework.

To justify use of these variables rather than financial indicators, Killing [1983], like Rafii

[1978], explained that the profitability of the JV for a

parent firm is not based solely on the JV's profits, but also on transfer prices, royalties

and management fees not included in traditional financial

performancem easuresD. ue to this deficiencyt, raditionafl imanciaml easures were,

consequently,j udged to be inadequatef or use within a JV context.

Consistent with his hypothesis, Killing found that dominant partner JVs tended to be

more successful, on both measures, than were shared management

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ventures. Independent JVs also exhibited superior levels of performance. In this latter

case, Killing suggested that the JVs' autonomy was more

a resultt han a cause of theirp erformanceH. owevert, he evidencep resented in support of

this assertion was inconclusive. It did not completely rule

out that autonomy, or the absence of parental control, was the stimulus rathert han the

responset o higherJ V performanceF. urthermoren, o formal

statistical tests were used to support the assertion. Similar to Killing [1983], Anderson

and Gatignon [1986] proposed that entry modes offeringg reaterc ontrol, as measuredv ia

the relativel evel of ownership, wouldb e more efficient for highlyp roprietaryp roductso r

processes. However,t he work of other researchersh as not providedm uch evidence to

support Killing's [1983] contention that JVs dominated by one parent exhibited

superiority in performance. For instance, Janger [1980] used a classification schema

similar to Killing's, yet did not find that one type of JV tended to be more successful than

another. Similarly, Awadzi, et al., [1986]f ailed to find any relationshipb etweene xtento f

parentc ontrol and the performance of IJVs. Beamish [1984] also attempted to test

Killing's hypothesis. Using Killing's [1983] data, he used a chi-square test to examine the

relationship between type of JV and its performance, but found no significant

relationships evident at the 0.05 level. Beamish subsequently utilized Killing's control

scale and performance measures for twelve JVs in less developed countries (LDCs).

Unsatisfactory IJY performance was found to be correlated. Using the notion that parent

firms seek control over specific activities as a conceptual starting point, Schaan [1983]

extended that argument as well as identifying several subtleties regarding the

phenomenon. In particular, Schaanc oncludedt hat ventures uccess,o r the extentt o

whichp arentale xpectations for the IJV were met, was a function of the fit among three

variables: the parent's criteria for success, the activities or decisions it controlled and thecontrol mechanisms which were utilized. He concluded that IJVs in which parents

achieved this "fit" would evidence better performance. Schaan failed to provided etails

regardingt he underlyingr ationalef or his conclusions. However, one can imagine that a

parent firm not adequately exercisingc ontrol over activitiesj udged as critical for the

achievemento f its objectives could ultimately suffer from ineffective strategy

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implementation and strategic inflexibility.

Thus, despite its conceptual appeal, the relationship between dominant controla nd IJV

performancea ppearst o be far morec omplexa nd less direct

than scholars may have originally perceived. Janger [1980] suggested that the

organization of a JV has only a small direct influence on its performance.

According to him, it would not be "the structure alone that makes for a successful

organization, but how well the structure fits the strategy

and power situation in the venture" (p. 32). Despite such comments, most prior research

has been limited to a direct test of the IJV controlperformancer

elationshipw ithoutt akinga ccounto f or controllingf or other variables such as the

parents' strategy and structure, as Franko [1971] did.

Subsequenti nconsistenciesin resultsm ay thereforeb e an outgrowtho f this situation.

Furthermoret, he tendencyo f prior researcht o evidenced ifferencesb oth in the object of

study and in the operationalizationo f performancem ay also help explaint he conflictingr

esultsf ound in the literatureO. n one hand, scholars have focused either on developed

country JVs [Killing 1983; Geringer 1988], on less developed country JVs [fomlinson1970; Friedman & Beguin 1971; Renforth 1974; Raveed 1976; Dang 1977; Rafli 1978;

Schaan 1983; Beamish 1984], or on both types of JVs [Franko 1971; Janger 1980]. As

demonstratedb y Beamish [1985],l ess developedc ountryJ Vs typically have purposes

and dynamics quite different from those of developed country JVs. For instance, the

motives underlying their formation have often been tactical in nature, or limited to the

desire either to obtain knowledge about the local environment or respond to foreign

ownership legislation. On the other hand, no consensus on the appropriate definition of

IJV performance has yet emerged. A variety of objective measures for IJY performanceh

aveb een used, rangingf rom financiali ndicators[ omlinson 1970; Good 1972; Dang

1977; Renforth 1974], to the survival or liquidation of the venture [Franko 1971; Raveed

1976; Killing 1983], its duration [Harrigan 1988; Kogut 1988a], and instability of (or

significant changes in) its ownership [Franko 1971; Gomes-Casseres 1987]. However,

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these objectivem easuresm ayn ot adequatelyr eflectt he extenta n IJV has achieved its

objectives. Despite poor financial results, liquidation, or instability, an IJV may

nevertheless have attained the objectives of its parents-for example,o f transferrinag

technology-and thus be considered" successful" by one or all of the parents. Likewise,

IJVs may be viewed as "unsuccessful," despite achieving good financial results or

continued stability in ownership or governance structures. Because of such concerns,

Killing [1983], and later Schaan [1983] and Beamish [1984] used a perceptual measure

based on a single-item scale measuring the parent's satisfaction vis-a-vis the performance

of an IJV. The main advantage of this type of measurei s its ability to providei

nformationr egardingt he extentt o which the IJV has achievedi ts objectives.M oreoverb,

y collectingd ata from each parentr egardingt heir level of satisfaction,a s done by Schaan

[1983]a nd Beamish[ 1984],r esearchercs an help overcomem ethodologicall imitationsassociated with the use of such perceptual measures. The measure's reliability may also

be enhanced if data is collected from multiple time periods, or from more than one

respondent per firm, although such efforts may confront a myriad of logistical and cost

barriers. In short, the above review suggests that the empirical evidence regarding the

control-performancer elationshipi n IJVs is still limited. The importance and direction of

this relationship have yet to be established, tested, and clarified.

Global Market Entry Modes

Having decided on the country or market that it wishes to enter, a firm must consider the

implementation of its global marketing strategy. A company committing itself to foreign

market entry must consider carefully which entry mode is most appropriate for the

market (Keegan and Schlegelmilch, 2001). Areas of concern for the company are the

level of control they want in the market, the finances they are willing to submit and theknowledge attainable through the venture (Keegan and Schlegelmilch, 2001). Entry

modes are commonly referred to as direct and indirect exporting (McAuley, 2001 and

Jeannet & Hennessey, 2001). Direct entry modes are active forms of entry that are

comprised of domestic and international based intermediaries (McAuley, 2001). Indirect

entry modes are those that are considered to be passive forms of entry into a foreign

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market (McAuley, 2001).

Direct Market Entry Modes

Direct exporting is a more active form of exporting with a heightened commitment on

behalf of the company (McAuley, 2001).

Sales Subsidiary

Setting up a sales subsidiary in a foreign market requires a direct involvement and

commitment of the company to the foreign market (Jeannet and Hennessey, 2001). The

company must set up a sales subsidiary and employ staff in the country to manage the

sales in the market. The company has a wide degree of control, as they employ all those

involved with the product or service. The cost of the sales subsidiary is considered to be

higher than indirectly exporting (Jeannet and Hennessey, 2001). The wholly owned sales

subsidiary is most appropriate for a company that has a large sales volume in the foreign

market (Jeannet and Hennessey, 2001).

Strategic Alliances

Strategic alliances are increasingly being used as a method to gain entry into a foreign

market. (Jeannet and Hennessey, 2001). Two or more firms embark on an alliance in

which each firm bring the benefit of a skill or experience to the relationship (Jeannet and

Hennessey, 2001). The companies skills are usually complimentary to each others goals

and each is expecting to benefit finically form the other company (Jeannet and

Hennessey, 2001). The alliance does not necessitate the formation of a separate company

and goes beyond the boundaries of a joint venture (Jeannet and Hennessey, 2001). A

problem relating to SAs is the loss of control and the company know how (Johansson,

1997). The following are the most common types of alliances:

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Technological or R&D Alliances are the most common reasons for embarking on a

technological alliance are the access to markets, the exploitation of complementary

technology and a need to reduce the time of innovation within a firm (Jeannet and

Hennessey, 2001). Such an alliance may give a company their competitive edge

(Johansson, 1997). A technological or a biotechnological-based company would be best

suited to such an arrangement (Jeannet and Hennessey, 2001).

Production-Based Alliances-A production-based alliance is used primarily for two

reasons. Firstly, companies may source key components in a bid to gain increased

efficiencies (Jeannet and Hennessey, 2001). Secondly, a joint production or

development venture for companies that are producing similar products (Jeannet andHennessey, 2001). This type of alliance is particularly evident in the car manufacturing

industry (Jeannet and Hennessey, 2001). The alliance saves money and time in that they

do not have to set up their own production facility (Johansson, 1997). Problems may

occur if the partners alter their strategic direction in a manner that the other is unwilling

to follow (Jeannet and Hennessey, 2001).

Distribution Alliances-Distribution alliances are becoming more prominent in the

business environment (Jeannet and Hennessey, 2001). Companies are beginning to set up

alliances with others that have a good distribution network in a perspective market

(Johansson, 1997). In this manner the company does not have to carryout as much

ground work into the distribution systems within the potential markets, as the new partner

has already the competencies in this area (Johansson, 1997). A drawback is that the

partners may limit their growth through this strategy, as they may wish to produce a

product that competes with the others product line (Johansson, 1997). Therefore if the

goal is for product expansion, the alliance is not expected to last long (Johansson, 1997).

In return the company may offer the distribution partner remuneration or a sharing of

their capabilities.

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Joint Ventures

Under a Joint Venture (JV) the company undertakes an arrangement with a separate

company to share stock ownership in the new unit (Jeannet and Hennessey, 2001). A JV

involves the transfer of capital, manpower and technology from the company to anexisting firm in the foreign country (Johansson, 1997). The participation of each partner

varies each time depending on the cost, stock needs and control needs of the partners

involved (Jeannet and Hennessey, 2001). A JV is normally undertaken as a means of

providing a competitive advantage for each of the firms involved (Doole and Lowe,

2001). A company may choose a JV to enter the foreign market as a method of

minimising the risk in foreign entry (McAuley, 2001). With a JV the risk is shared

among the partners (Jeannet and Hennessey, 2001). The foreign partner will be aware of

the cultural norms and political barriers and this is a method of overcoming them

(McAuley, 2001). The companies may also be able to benefit from the skills and

experience of each other (Jeannet and Hennessey, 2001). The additional partner may

have good contacts within the chosen country that the company may benefit from

(Jeannet and Hennessey, 2001). Tensions may arise between the companies that may

cause a potential conflict, which should be monitored closely (McAuley, 2001).

Conflicts often arise in JVs and the companies involved will find greater success if they

share similar goals (Jeannet and Hennessey, 2001).

Manufacturing Subsidiaries

A consideration of market entry modes is manufacturing within the chosen country

(Jeannet and Hennessey, 2001). This entry mode requires a high level of commitment on

behalf of the company as it will require a time and resource commitment (McAuley,

2001). The company may choose the mode due to cost savings or as a means to

overcome restrictions in the foreign market (Jeannet and Hennessey, 2001). The

company may decide to manufacture in a foreign country solely for the benefits of cost

saving that may be realised in the country (Jeannet and Hennessey, 2001). A company

may choose to hire manufacturer representatives in order to arrange shipping and

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handling of goods (Ceteora, 1993).

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Contract manufacturing-A company arranges to have their products manufactured by a

company in the market they wish to penetrate (Jeannet and Hennessey, 2001). The

manufacturer is solely in control of production and takes no responsibility for anyadditional services. The products are passed back to the company who use them for the

international market. This concept of contract manufacturing differs from licensing in

the contract terms. The manufacturer is given no guarantee as to the amount of orders or

the quantity. It is taken on an order-by-order basis (Jeannet and Hennessey, 2001). This

method of manufacturing is best suited to countries with low volumes or high tariff

protection (Jeannet and Hennessey, 2001).

Assembly-A method of gaining access to a foreign market is assembly in a foreign

market (Jeannet and Hennessey, 2001). A company may choose to have the final stages

of manufacture in the foreign country (Jeannet and Hennessey, 2001). Larger companies

generally abide by this method (McAuley, 2001). The company does not have to embark

in a large financial outlay but it opens up an otherwise guarded market (Jeannet and

Hennessy, 2001). The transportation cost would be greatly reduced through this method

(McAuley, 2001). The company has also the opportunity to take advantage of lower

labour costs (Jeannet and Hennessey, 2001).

Full Scale Integrated Production -This method of entry into a foreign market is one that

requires a great commitment from the company (Jeannet and Hennessey, 2001). The

company is required to invest in the building of a plant and so the initial financial outlay

is significant (Jeannet and Hennessey, 2001). The entry mode is best applicable to acompany that has a guaranteed market in the country (Jeannet and Hennessey, 2001).

The company may be able to take advantages of lower cost production or eradicate high

transportation costs (Jeannet and Hennessey, 2001).

Mergers and Acquisitions

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A company seeking to expand to a foreign market may decide that a merger or an

acquisition may be the best option available to them, depending on the availability of

such a firm (Doole and Lowe, 2001). This from of market entry assumes that growth will

be easier to achieve in an established firm than waiting for it to grow organically (Doole

and Lowe, 2001). The foreign company will have already an established distribution

network that the company can take advantage of (Johanessen, 1997). The disadvantages

include re-educating the employees (Johansson, 1997). It may also be difficult to find a

company that fits the companys needs (Johansson, 1997). The company may encounter

resistance to the takeover, which may result in a poor company image (Doole and Lowe,

2001).

Marketing Subsidiary

A company may decide to carryout their own marketing activities if the believe that the

agents are not sufficient to cover the market (McAuley, 2001). The method would allow

the company to have contact with the end customer (McAuley, 2001).

Freight Forwarders

A company may decide to use freight forwarders if they do not possess the necessary

skills internally to carryout the appropriate paperwork for the exportation (McAuley,

2001). The freight forwarder provides all the appropriate information on shipping,

routing, schedules, charges, labelling, certification, and customer requirements

(McAuley, 2001). The freight forwarder has the benefits of economies of scale and can

therefore offer a more cost effective price (McAuley, 2001).

Consortium Exporting

A group of companies may come together and combine their skills and resources in order

to bid for contracts, while remaining independent (McAuley, 2001). This form of foreign

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market entry is particularly relevant to the construction industry (McAuley, 2001).

Export Department

A large company may have the resources to have an export department based in their

own company that have the direct responsibilities for setting up foreign sales (McAuley,

2001).

Indirect Market Entry Modes

Indirect market entry has been referred to as passive exporting, as it has the result of thefirm beginning exporting activities due to a pull from the customers (McAuley, 2001).

It can take many forms, such as those outlined below:

Unsolicited Orders

A company may begin their initial exporting through customers seeking the product. It

demonstrates that there are potential markets for the company that may be profitable(McAuley, 2001). Problems may occur if this is a once off activity for the company, as it

may be deemed costly due to low economies of scale (McAuley, 2001).

Licensing

Licensing is a form of exportation involving a company to assigning their patents or

trademarks to another company in return for royalties (Jeannet and Hennessey, 2001).

The royalty would be based on a percentage of sales or profits (McAuley, 2001). The

exporting company does not have the commitment of a financial investment in the

foreign market (Jeannet and Hennessey, 2001). The licence is signed for a designated

time after which time the licence is reviewed (Jeannet and Hennessey, 2001). If the cost

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of the licence is substantial the time length of the contract must also be large, as the

licensee must have the sufficient time to regain the initial cost of investment (Jeannet and

Hennessey, 2001).

The advantages of licensing include a time and resource saving on behalf of the licensing

company (Jeannet and Hennessey, 2001). The licenser does not require the heightened

amount of market research or knowledge (Johansson, 1997). The licenser avoids the

complications of any political unrest in the chosen country and they overcome barriers to

entry, which may come in the form of restrictions on foreign company set-ups (Jeannet

and Hennessey, 2001). The licenser avoids any tariffs or levies that may have otherwise

been imposed (Johansson, 1997). The disadvantages of licensing include the dependenceof the licenser on a local licensee (Jeannet and Hennessey, 2001). The licenser must

ensure that their technologies are not passed on to competitors and this requires a

supervision cost (McAuley, 2001). The success of the licensing is dependent on the

performance, the skill and the product quality of the licensee (Jeannet and Hennessey,

2001). The threat of training a potential competitor is also a pertinent concern for the

licenser as the licensee may develop new technologies that cause a threat to the company

(McAuley, 2001).

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Franchising

Franchising is a heightened form of licensing in that it is the transfer of the companys

total marketing programs including brand name, logo, operations and products (Jeannet

and Hennessey, 2001). The franchising agreement is usually much more comprehensive

than a license agreement due to the nature of the transfer of all operations. It allows a

higher degree of control than licensing (Johansson, 1997). Franchising of the companys

operations does not require a direct investment in the foreign market be the company

(McAuley, 2001). Franchising is one of the fastest growing modes of exporting

(Johanessen, 1997). Franchising is a low cost entry method and it aids the brand

recognition of the company (McAuley, 2001). Many companies have benefited from this

type of agreement such as McDonalds and Kentucky Fried Chicken (Jeannet andHennessey, 2001). The customers are aware of the company and are expecting the same

quality from each of the outlets, which can be a danger as it is difficult to maintain the

same quality in lots of outlets (Johansson, 1997). They are also control problems

pertinent to franchising, which arise when the goals of the companies do not match

(McAuley, 2001).

Independent Distributor

An independent distributor is a method a company can use to pass their products on to a

distributor in order for them to distribute in a foreign market (Jeannet and Hennessey,

2001). The production company is not involved in the foreign market, but they get the

benefit of increased sales. A disadvantage of this form of exportation is the cost incurred

by the producer as the distributor earns a margin of the sales (Jeannet and Hennessey,

2001). The production company will also suffer from a loss of control, as they are not

directly involved in the foreign market (Jeannet and Hennessey, 2001). The use of an

independent distributor is best advised when a company is expecting a low sales volume

of the foreign market (Jeannet and Hennessey, 2001).

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Middlemen

Assuming a company does not wish to set up a subsidiary in a foreign market there are

some choices of middlemen that facilitate the selling of goods in a foreign market.

Agent Middlemen-Agent middlemen are selected as a means to sell goods in a

foreign market (Cateora, 1993). They do not take title to the goods and the company sets

out pricing and policy guidelines. The agent must report sales and customers information

to the company (Cateora, 1993). The agents are paid in the form of commission on sales

(Cateora, 1993). The advantage of this form of exporting is that the agent will have

expertise in the area and access to the markets (McAuley, 2001). The company has a

relatively high degree of control over the agent. An important consideration for the

company is relationship with the agent. Bad agents exist and if a company has signed an

agreement it may be difficult to get out of it (McAuley, 2001). The type of agent

middlemen can include the following:

Export Management Company (EMC) EMCs are specialist companies that act

as an export department for the company (Doole & Lowe, 2001). The EMC contacts

potential customers and negotiates sales (Cateora, 1993). The EMC are a home country

based middleman (Cateora, 1993). This is a form of indirect market entry (McAuley,

2001). The EMC is particularly appropriate for small companies that have a small

volume or do not want to involve their personnel in international trade. The EMCs offer

a personal service for the manufacturer (McAuley, 2001). This method requires little

investment and little effort on behalf of the producer (Cateora, 1993). The EMC can

rarely establish long-term distribution for the products, as they require an immediate payout to remain sustainable (Cateora, 1993).

Manufacturers Export Agent (MEA) The MEA is a short-term agent for the

company. The selling arrangement is for a limited scope, in time or products and is based

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on a straight commission basis (Ceteora, 1993). The MEA trade in their own name and

not that of the exporting company (Ceteora, 1993).

Home Country Broker A broker specialises in bringing buyers and sellers

together (McAuley, 2001). They facilitate relationship building but rarely maintain

contact with the parties, with the exception of some of the large producers (Ceteora,

1993).

Buying Offices Buying offices have a role in sourcing and buying products for

principals (Ceteora, 1993). The buying office organises the exports of the goods on behalf of the principal buying the goods (McAuley, 2001). They do not provide a

continuous service or representation to the principals and they source from different

vendors but they do not provide a selling function as such (Ceteora, 1993). Additionally

there are separate selling groups (Ceteora, 1993).

Export Jobbers Export jobbers take title to the goods but they do not take

procession of the goods (McAuley, 2001). They deal mainly in commodities goods

(Ceteora, 1993). They arrange the transportation of the goods and work on a job lot basis

(Ceteora, 1993).

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A major advantage to the above types of exporting is that they tend to be low costing, and

by using the expertise of others it is expected that the deal will run smoothly. However,

it does not allow the company to develop any skills in the field and they do not have any

customer involvement (McAuley, 2001).

Merchant Middlemen -Merchant middlemen take title to the goods (Cateora, 1993). They

are involved in the buying and reselling of the goods in foreign countries, and because of

this the company has little control over the merchant middlemen (Cateora, 1993).

Merchant middlemen are used due to the minimised credit risk, the ease of contact and

the eradication of problems in dealing with a foreign market (Cateora, 1993). The major

advantage of this type of exporting for the company is the fact that the exporter isguaranteed a cash flow (McAuley, 2001). The merchant is highly concerned with profit

maximisation and is criticised for being a poor ambassador for the companys goods

(Cateora, 1993). The company receives no information as to who the end user of the

product is or what it is being charged at (McAuley, 2001).

The following are types of merchant middlemen:

Trading Companies - Trading companies accumulate, transport and distribute

goods from many countries (Ceteora, 1993, p.448). They are home country middlemen

(Ceteora, 1993). This is a form of indirect market entry (McAuley, 2001). Trading

companies can cover a large geographical area, which is beneficial to the exporting

company (Ceteora, 1993). The trading companys main functions include importing and

exporting goods, they offer assistance and advice, manufactures goods, financing and the

development of joint ventures (Ceteora, 1993). The companies generally have a large product range (McAuley, 2001). The companies have extensive contacts, which allow

them to trade in difficult areas (Doole and Lowe, 2001). The company does not directly

deal with the customers and so are losing out on valuable market knowledge (Doole and

Lowe, 2001). The company also suffers from a lack of control with this method (Doole

and Lowe, 2001).

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Piggybacking/Complementary Marketers A company with a wide distribution

network and marketing facilities may wish to widen their product portfolio and seek

additional product lines (McAuley, 2001). Additionally an existing customer of thedistributing company may request the product (McAuley, 2001). When such an

arrangement is made it is referred to as piggybacking (Ceteora, 1993). This is an indirect

market entry method (McAuley, 2001). Agent or merchant middlemen can use the

method, but it is generally through merchant middlemen (Ceteora, 1993). The

arrangement is usually between companies that have complementary product ranges, so

as to avoid any competitive dilemmas within the distributing company (Ceteora, 1993).

Problems may occur if a contract was poorly considered so companies often try trial runs

(Doole and Lowe, 2001). If either company changes their strategic track it may cause

conflict for the company (Doole and Lowe, 2001).

Distributors A foreign distributor often has exclusive rights in a particular

country or region (Ceteora, 1993). They have a high degree of dependence on the

manufacturer so the relationship is usually long term with the manufacturer having a

large degree of control over the agent (Ceteora, 1993).

Dealers Dealers are middlemen that have a long-term relationship with a

supplier (Ceteora, 1993). They are involved in the distribution of goods and act as the

last notch in the distribution channel. They often have exclusive dealer relationships

within a certain geographic location. The most successful dealerships tend to be in the

automotive industries (Ceteora, 1993).

Import Jobbers, Wholesalers and Retailers Import Jobbers purchase goods

directly from the manufacturer and sell to wholesalers and retailers (Ceteora, 1993). The

wholesalers are then involved in the redistribution to smaller sellers (Ceteora, 1993). The

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wholesaling method is more common in non-US companies (Cateora, 1993).

In addition to this, Ceteora (1993) notes that government agencies are becoming

increasingly important in the establishment of entry modes for companies. Merchant

middlemen are rarely involved in the selling of goods to government agencies (Ceteora,1993). Companies should be aware of this change in perspective in some countries.

LITERATURE REVIEW

Most of the frameworks developed so far have tended to focus on the firm passing

through a number of stages as it develops from the small omestic based firm to the

multinational enterprise.Results will show that for industry sectors dominated by the

smaller firm, together with the impact of product and lifestyle issues, this progression is

not necessarily observed. Attempts to apply existing theory to such firm behaviour

therefore tends to break down. In addition to adaptation of existing internationalisation

frameworks, alternative visualisations are needed in order to portray behaviour more

accurately.

This paper builds on literature review in order to propose a theoretical framework of the

causes driving the early internationalization of the firms. A deeper understanding of the

causes of internationalization and of their inter-relationships could enable policy makers

to establish under which conditions SMEs are likely to flourish and thus to concentrate

their intervention selectively on their support in order to favor the transition from early to

rapid internationalization. Internationalisation has been used to describe the outward

movement or increasing involvement in a firms or larger groupings international

operations [1, 2]. With more and more smaller firms now internationalising, Yakhlef and

Maubourguet [3] focus on the reasons for this, such as gaining access to increasing

amounts of tangible and intangible resources in order to establish firm-specific global

advantages.

Internationalisation Theory_The Uppsala internationalization model:

The Swedish researchers, Johanson and Wiedersheim-Paul (1975) and Johanson and

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Vahlne (1977) from the University of Uppsala conducted a lot of research during the

1970s on the internationalization process. The researchers studied the internationalization

of Swedish manufacturing firms and in connection to this they implemented a model of

the firms market choice and foreign entry mode. One of the first observations they made

was that firms tended to internationalize towards nearby foreign markets and stepwise,

with growing experience, entered 14 more distant markets. The second observation made

by the researchers, was that companies had a tendency to enter new markets through

exports. Very few firms entered new markets with their own sales organizations or

production plants (Hollensen, 2007). According to Armario, Ruiz and Armario (2008)

firms develop their business in domestic markets and internationalization occurs in line

with incremental decisions, which are limited by two factors, namely resources as well as

insufficient information. This means that the two factors constitute a major barrier for expanding to foreign markets. Nevertheless, SMEs can overcome these barriers by

joining business networks as this will give them access to more resources at the same

time as the firm will benefit from being larger in size through the network (Chetty &

Campbell-Hunt, 2003). Johanson and Wiedersheim-Paul (1975) have recognized four

different international entry modes for a firm; each stage representing a higher experience

and higher degree of market commitment. The following model illustrates the Uppsala

internationalization model, which is followed by a description of the four stages:

Time

Stage 1: No regular export activities, meaning that the firm does not have enough

resources or information about the foreign market.

Stage 2: Export occurs through independent representatives.

Stage 3: The firm establishes a foreign sales subsidiary.

Stage 4: Foreign production or manufacturing units are being established (ibid).

Companies start their international business on markets with low uncertainty (Armario,

Ruiz & Armario, 2008). According to Johanson and Wiedersheim-Paul (1975) firms tend

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to internationalize their business towards close markets which are easily understood and

which have a low degree of psychic distance. Psychic distance refers to differences in

language, culture and political systems; factors that can influence the communication

between the firm and the foreign market. Only gradually, firms will enter markets with a

greater psychic distance (ibid). Armario, Ruiz and Armario (2008) explain that as soon as

the firm has gained sufficient international experience, further decisions on entering new

markets will be based upon factors such as market size or the global economic climate.

The Uppsala model is an incremental internationalization process, accelerated by a

stronger commitment and experience of the foreign market (ibid). Johanson and Vahlne

(1977) 15

argue that market knowledge and market commitment are closely related. According to

the authors, knowledge can be seen as a resource, which means that the more knowledge

the firm has about a market, the more valuable become the resources. This leads to that

the firms commitment to the market gets stronger (ibid). The Uppsala model has

nevertheless encountered critique according to Nordstrm (1991). Not every firm is

following the concept of the model, as some firms tend to leapfrog certain stages of it.

This means that companies enter markets with a greater psychic distance in an early

stage. Nevertheless, it is claimed that internationalization processes of firms generally

occur in a faster pace today (ibid). Born globals are emerging on the market; firms that

have the ability to internationalize much faster than firms with a long experience from

their home market. It is common for born globals to be established in international

networks before the company has been founded. This means that the companys

internationalization process is eased due to their earlier experience and knowledge from

foreign markets (Johanson, Blomstermo & Pahlberg, 2002).

The various theories of internationalisation seek to illustrate the configurations which

companies adopt, while also prescribing a normative approach to internationalisation

decision making. Tookey [28] and Wind et al . [29] were some of the earliest proponents

of the stages approach, while Johanson and Wiedersheim-Paul [5], Johanson and Vahlne

[1] and Bilkey and Tesar [6] produced works which still form the basis for much research

today. However, there have been various criticisms made regarding the theoretical

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validity of the concept while empirical evidence from other studies has also tended to

contradict these findings [30]. Hurmerinta- Peltomaki [31] senses that the days of stages

theory are numbered and that there is a moving away from its linear time based approach

to a more primitive concept of cyclical time with no fixed direction. Bell et al. [32] also

review the criticisms of the stages approach while Moen et al. [33] provide a useful

critique of the process models of internationalisation

in a study of internationalising small computer software firms. Westhead et al. [34]

examine the internationalisation strategies of SMEs in rural and urban areas. This has

particular relevance to the craft sector discussed later in this paper where many

internationalising firms are rurally based. Difficulties arise when endeavouring to derive

a general definition of internationalisation and also when trying to classify the various

stages of the process [35]. A number of studies focus on internationalisation through

export activity and export orientation and, although they are related, they

are not identical. Turnbulls research of British companies show that the

internationalisation stage is determined by the operating environment, the industry

structure and the marketing strategy of the company. The stages concept should therefore

only be used as a classification framework and not as a means of learning how firms

internationalise. Bilkey [14] undertook a review of the literature concerning export

behaviour of the firm, covering areas such as export initiation,motivations for exporting,

firm size effect and export models. He concluded that exporting is a developmental

process and that export profiles should be used together with export behaviour models to

achieve meaningful results. This procedure is adopted in the investigation of smaller craft

firm internationalisation detailed later in this paper.

Exporting as a Path to Internationalisation

Key research themes relating to the exporting SME include the investigation of the

process itself [36, 37], market entry and the role of the entrepreneur [38], SMEs and

globalisation [39], exporting stimuli [40], export problems and barriers [41, 42], the link

between firm/managerial characteristics and exporting competencies [43] and export

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stimulation measures [44]. Other issues investigated include comparisons of non-

exporters versus exporters [45], networking and the entrepreneurial exporter [15, 46], the

impact of the internet on SME domestic and export behaviour [47], export market

information gathering [48] and the use of creativity to overcome resource constraints

[49]. A growing related

field is that of international entrepreneurship which acknowledges changing patterns in

internationalisation behaviour and connects with born global and instant international

phenomena [50].

Exports through outside intermediaries, contractual transfers and joint ventures are

termed shared-control modes. Much of the literature investigates entry mode hoice in

terms of the degree of control desired by firms [Stopford and Wells 1972; Anderson andGatignon 1986; Gatignon and Anderson 1988]. The pertinent question here is: Does

experience have positive, negative or no effect on the degree of control a firm takes? The

literature is somewhat ambiguous on this question and provides support (in different

degrees) for all three options. Gatignon and Anderson [1988] found that the

manufacturing MNC's propensityt employ wholly owned subsidiarieisn creasedw ith

increasingc umulative international experience (measured as number of foreign market

entries to date). Similarly, Davidson [1980a, 1982] noticed that aggregate experience (as

measured by the number of market entries or product transfers already executed), and

prior manufacturing experience in the recipient country increased the firm's relative

preference for wholly owned subsidiaries. The theoretical explanation for a positive

relationship between experience and degree of control centers on uncertainty and how

firms cope with it. Less experienced firms perceive considerable uncertainty, overstate

risks

and understate returns [Davidson 1982], and, consequently, shy away from makingsignificant resource commitments and assuming control [Johanson and Vahlne 1977].

With increasing experience, however, firms acquire knowledge of foreign markets,

perceive less uncertainty, and become more confident of their ability to correctly estimate

risks and returns and manage foreign operations [Johanson and Vahlne 1977; Davidson

1982]. As a result, they become more aggressive in committing resources and assuming

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control [Anderson and Gatignon 1986].

It is commonly accepted assumption that firms can improve their profitability by entering

in to international expansion (Mintzberg, 1989). As (Varmeluen and Barkama, 2002)

mentions

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