Using networks to solve export-marketing problems of small- and

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EJM 37,5/6

728 Received September 2000 Revised May 2001 and September 2001

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Using networks to solve export-marketing problems of small- and medium-sized ®rms from developing countries Pervez Ghauri Manchester School of Management, UMIST, Manchester, UK

Clemens Lutz Faculty of Management and Organization, University of Groningen, Groningen, The Netherlands, and

Goitom Tesfom College of Business and Economics, University of Asmara, Asmara, Eritrea Keywords Networks, Export, Subcontracting, Small- to medium-sized enterprises, Developing countries Abstract The objective of this paper is to review the literature on how networks can be used in developing countries to encounter export-marketing problems. Several case studies of exportgrouping and subcontracting networks, involving small- and medium-sized enterprises in developed and underdeveloped countries, are reviewed. The paper presents a qualitative model that identi®es the determining factors for successful export network organisations: a clearly de®ned market problem or market opportunity; a willingness to respond together; development of solidarity, coherence and commitment; initiating foreign market activities. This model is useful to study similar initiatives in developing countries.

European Journal of Marketing Vol. 37 No. 5/6, 2003 pp. 728-752 q MCB UP Limited 0309-0566 DOI 10.1108/03090560310465125

Introduction A number of researchers have made an extensive effort to identify the export marketing problems of manufacturing ®rms in developing countries (Figueiredo and Almeida, 1988; Mary et al., 1991; Kaleka and Katsikeas, 1995; Weaver and Pak, 1988; Burges et al., 1999; Katsikeas and Morgan, 1994; Ghauri and Herbern, 1994). These efforts are mainly directed at exploring and describing the export problems. Although the wider application of networks in the business context is recent (Ghauri and Prasad, 1995) many companies in developing countries have used networks as a mechanism to break export-marketing barriers (Welch et al., 1996; Visser, 1996; Ceiglie and Dini, 1999; Nadvi, 1995; Sarathy, 1996; Rosenzweig, 1994). The experiences of these networks are useful to other manufacturing ®rms in developing countries. In view of this argument this paper has two basic objectives:

(1) to review the current state of knowledge on how networks can be used to solve export-marketing problems for manufacturing ®rms in developing countries; and (2) to synthesise the results in a qualitative model comprising the determining factors for successful export organisations.

Exportmarketing problems

The article focuses on export marketing problems of manufacturing ®rms in developing countries. This does not mean that only the literature on these ®rms is interesting for this survey. In particular the experiences in developed countries with networks of small and medium sized ®rms, trying to facilitate access to new export markets, provide useful insights. Although there is a growing body of knowledge that suggests that export problems are time, industry, state, and even country speci®c, most of the export problems for small and medium sized ®rms in developed and developing countries have similarities. The resemblance stems from the fact that in both cases networks are expected to enlarge the restricted capacity of individual companies to invest in the sunk costs involved in conquering export markets. Easton (1992) identi®es three types of de®nitions for networks. The ®rst set of de®nitions focuses on the exchange dimensions in two or more connected relationships (Anderson et al., 1994; Cook and Emerson, 1978). Another set of de®nitions focuses on the bond or social relationships that link loosely connected organisations (Aldrich, 1979; Lundgren, 1995). The third set of de®nitions (e.g. Hakansson, 1989; Van de Ven and Ferry, 1980) describes a network as a total pattern of relationships within a group of organisations; ®rms recognise that the best way to achieve common goals is to co-ordinate the business system in an adaptive fashion. Ghauri and Prasad (1995) give a simpli®ed version of this de®nition and claim that a network could be identi®ed as a relationship created between two organisations. According to Ghauri and Prasad (1995) if ®rm A has a relationship with ®rm B, B with C, C with D and so on, there is a simple linear chain of connection. However, a complex network relationship can be found if ®rm C is linked to A, and ®rm D is linked to B and perhaps to A. Each of these de®nitions implies a different level of analysis and has different implications. The third de®nition focuses on the overall relationship between business organisations and includes both exchange and social relationships. As social aspects are important for network formation (Beije and Groenewegen, 1992), this de®nition is suitable for this article. For the purpose of the study various groups of alliances and coalitions are grouped under networks (Ring and Van de Ven, 1994). A major distinction is made between horizontal networks (export grouping networks) and vertical networks (subcontracting networks). The paper is structured as follows. In the next section we will review the export marketing problems faced by small and medium-sized manufacturing ®rms in developing countries that want to access a new foreign market. The third section shows how networks are used to solve export-marketing

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problems. Section four outlines the procedures followed to collect and select the articles useful for the study. Section ®ve and six discuss the cases and present the results on export grouping and subcontracting networks. Finally we will wind up our discussion with a model useful to study similar experiences of manufacturing ®rms in developing countries.

730 Exports from developing countries: some marketing problems Lall (1991, p. 139) de®ned export marketing problems as ªthose gaps, which need to be ®lled before the competitive producer becomes a successful exporterº. Export marketing problems often provoke failures in foreign business operations, bringing ®nancial losses along with negative attitudes toward international activities among both current and would be exporters (Leonidou, 1995). Export marketing problems are often classi®ed as internal and external. Internal export problems are intrinsic to the ®rm and are usually associated with insuf®cient organisational resources for export marketing (Leonidou, 1995). For example, problems pertaining to meet import quality standards, and establishing the suitable design and image for the export market (Czinkota and Rocks, 1983; Kaynak and Kothtari, 1984; Rabino, 1980), problems related to the poor organisation of export departments and the ®rm’s lack of competent personnel to administer exporting activities (Yang et al., 1992), the inability to ®nance exports, insuf®cient information about overseas markets (the identi®cation of appropriate overseas distributors and communications with overseas customers). Although quite fragmented, they constitute internal issues that in¯uence export performance of manufacturing ®rms in developing countries, penetrating foreign markets. External export problems are related to the industry, the export market and the macro environment (Ramaseshan and Soutar, 1995). The intensity of exporting activities and the nature of export marketing strategies vary considerably across industries. Porter (1980) noted that, this is largely due to the varying nature of industries. Kerin et al. (1990) considered industry structure a key determinant of a ®rm’s strategy in the domestic-market context. In order to develop a proper export-marketing strategy the differences between market systems, ®rm sizes and presence of foreign competitors across markets, should be taken into account. In addition, Jain (1989) stressed that technology and intensity of price competition in the industry are important determinants of the marketing strategy. Macro environment barriers are factors beyond the ®rm’s control, such as the lack of proper trade institutions, unfavourable exchange rates, absence of a stimulating national export policy, and international agreements (Ogram, 1982; Figueiredo and Almeida, 1988; Cardoso, 1980; Ghauri and Holstius, 1996; Mary et al., 1991; Kaleka and Katsikeas, 1995 and Ortiz-Buona®na, 1984). These problems are often classi®ed as exogenous economic barriers for the ®rm.

Network organisations as potential solutions for export problems Firms in developing countries have taken different measures to alleviate the ªinternalº and/or ªexternalº export problems. Networks are often used for this purpose. The extent to which marketing systems are characterised by vertical, long term relationships or networks of ®rms clearly expresses the preference for non-market governance over market or hierarchical forms of governance (Iyer, 1997). The decision by ®rms to enter into a network relationship with other ®rms is in¯uenced by the management’s willingness to abdicate autonomy in order to acquire resources from the external environment (Campbell and Wilson, 1996). Firms that recognise the potential for joint value creation and attach less importance to preserving their own independence, are likely to link themselves to the external environment. Networks can be categorised into vertical and horizontal networks. For this study we de®ne vertical networks as co-operative relationships between suppliers, producers and buyers, aiming at a solution for marketing problems, improved production ef®ciency, or the exploitation of market opportunities. In line with this de®nition we consider subcontracting relationships as networks. Vertical networks are also termed as marketing channel networks. Marketing channels are networks that ef®ciently promote, modify and move goods to markets. In doing so the channel participant adds value to the product and shares pro®t and market risk with partners in the channel (Zerrillo et al., 1996). Lewis (1990) stressed the opportunities for co-operation among competitors: horizontal network relationships. Global competition does not exclude that some ®rms in the same business may co-operate in order to realise their marketing objectives. For this study we de®ne horizontal networks as cooperative network relationships among manufacturers who want to solve a common marketing problem, improve production ef®ciency, or exploit a market opportunity through resource mobilisation and sharing. Most of these initiatives are known as export-grouping networks. In analysing networks we distinguish the emergence of a network from the process of network development and its performance. Meulenberg et al. (1998) focused on the ®rst phase when he formulated three conditions for the emergence of a successful export marketing co-operative network. First, a common problem or opportunity should exist in the market. This usually refers to a lack of export market information, limited ®nancial capacity and trained human power or a lack of capacity to meet market requirements such as quality, and design. Second, companies should prefer to respond jointly and, ®nally, the product marketed by the co-operative should be important for the income formation of the related companies. These conditions are in line with Van de Ven’s (1976a, b) conclusion that inter-organisational relationships are formed either because of an internal need for resources or a commitment to an external problem or opportunity. Welch and Joynt (1987) focus their analysis on the second phase, the process of network development, and outline two

Exportmarketing problems 731

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Figure 1. Determinants of export performance of export grouping schemes

determinants for the successful operation and performance of export grouping networks. The ®rst determinant concerns the group’s evolution towards solidarity, cohesion and commitment. The actual number of companies involved is of some importance: Group cohesiveness tends to increase with the time members are able to spend together. However, as group size expands, interaction with all members becomes more dif®cult, as does the ability to maintain a common goal (Robbins, 1994). The composition of the group is important: ªthe greater the substitutability of different ®rms’ products the more this is likely to promote competition instead of co-operationº (Rosson and Blunden, 1985, p. 4). However it is not always true that co-operating ®rms have complementary products. To some extent the element of competition can be managed if the groups export operation is handled through a relatively independent party (Lawal, 1974). A common external threat to the group’s members may also draw them together (Lawal, 1974). The ability to make the grouping concept work also depends on the key people involved and in particular on their ability to work together (Stenburg, 1982). Outside change agents or facilitators may facilitate this process. They are individuals that may initiate the idea of co-operation to the would-be partners and help them towards its realisation. The outside change agent plays a crucial role in ensuring that the group is positively guided in its grouping activities, as well as providing a link to the support infrastructure (see Figure 1). The second determinant for success in the Welch and Joynt (1987) framework concerns the evolution of foreign market penetration activities. This factor comprises initiatives of the network to acquire foreign marketing experience and market knowledge (solving ªinternalº and ªexternalº export problems, contacts with foreign partners and support infrastructure). Welch and Joynt (1987) argue that early market activities facilitate the network’s evolution towards solidarity, commitment and cohesiveness. However they also warn that the ®rm should build a strong network relationship before it starts to penetrate foreign markets.

Based on the above-mentioned literature we identify three stages in the evolution of a network: (1) the emergence of the network; (2) the network development process; and (3) the achievement of the network. The relationship is depicted in Figure 2. By network achievement we mean the extent to which the ®rms are able to achieve their objectives. In all the cases discussed in the following sections of the article, market penetration is mentioned as the main objective of the network. Other related objectives concern improving product quality, achieving product standardisation and improvement of gross margins. Market penetration in the achievement stage should not be confused with export marketing activities in the process of network development. While the former concerns the realisation of network objectives, the latter refers to foreign market activities undertaken to attain the objective. Although Meulenberg et al. (1998), Van de Ven (1976a, b) and Welch and Joynt (1987), applied their theories to horizontal networks their contributions are also relevant to subcontracting networks. This is because there is a longterm business relationship between the principal and the subcontractor. Both work to improve the quality of the product. To achieve this objective the principal sends his staff to supervise the production process and supports the subcontractor to improve his manufacturing capability. When the product is demanded in the market the principal gets a better return and at the same time the subcontractor secures a larger order. To foster this mutual objective the existence of solidarity, cohesion and commitment is important. At the same time, the successful penetration of foreign markets is a prerequisite for a sustainable contract.


Method To collect articles relevant for the study, several information sources have been consulted. Online content, WebCat, The United Nations Industrial Development Organization (UNIDO), and EBSCO Academic service were among the electronic data bases visited[1]. The key words used for a preFigure 2. A network model to study the measures undertaken to encounter export marketing problems of manufacturing ®rms in developing countries

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selection of relevant literature were: export promotion, export marketing, export management, export marketing channel, networking, subcontracting and co-marketing alliances. The manual search, based on references made in major export marketing studies, helped us to track some relevant articles that consider export problems as a secondary importance. Three criteria were adopted to identify the relevant publications. First the network relationship should focus on solving export-marketing problems at the ®rm level. Second, the literature should focus on manufacturing ®rms. Third, the literature should describe those factors that motivated the manufacturers to establish the network relationship, the process of network development and ®nally the achievement of the network. Out of the 963 articles generated by electronic search 46 are found relevant. Only ten articles concerned experiences in developing countries and comprised ®rms involved in vertical and horizontal network relationships. In the ®rst group we found: . the Nike/Reebok and Asian footwear producers subcontracting network (Rosenzweig, 1994); . the Brazilian Sinos Valley and Mexican footwear subcontracting network (Ceiglie and Dini, 1999); . the lightening subcontracting network (Sarathy, 1996); . the networks of foreign multinationals and their Ukrainian partners (Bridgewater, 1999); and . the Korean business networks (Kienzle and Shadur, 1997). In the second group we found: . the Peruvian export grouping network (Visser, 1996); . the Nicaraguan export grouping network (Ceiglie and Dini, 1999); . the Chilean export grouping network (Humphrey and Schmitz, 1995); . the Jamaican export grouping network (Ceiglie and Dini, 1999); and . the Chinese export grouping network, (Welch et al., 1996). The information provided in the last three articles is incomplete and does not allow us to verify the relevance of the comprehensive model presented in Figure 2. For example, the articles on the Jamaican and the Chilean export grouping networks describe only the positive aspects of the networking programme. Besides, neither the role of the network members in the networking programme, nor their interaction, was properly documented. Similarly, the article on the Chinese networking programme discusses only the role of the instigators. To remedy this problem we included three welldocumented experiences with export grouping networks in developed countries. As already mentioned in the introduction, experiences in

developed countries may provide useful insights. The following cases were selected: . the Australian oaten hey processors’ export grouping network (Welch et al., 1996); . the Norwegian manufacturers’ export grouping network (Leonard, 1983); and . the Finland furniture producers’ export grouping network.


The literature indicates that networking theory is getting more popular. Most of the reviewed articles have been published in the 1990s (Figure 3). It has been adopted by international organisations, such as UNIDO, to encounter export problems. UNIDO supported networking projects have been implemented in Nicaragua, Jamaica and Chile. The Nicaraguan case will be discussed in this paper. Horizontal networks: export grouping According to Welch and Joynt (1987) the logic of export grouping schemes is that companies are able to improve their performance in foreign markets by acting together, with resources being pooled and costs, information and experiences being shared. Welch et al. (1996) pointed out that the underlying logic of the export grouping scheme is clearly network-related. Firstly, any type of export grouping scheme inevitably involves the development of a variety of linkages between the companies involved. Secondly the bene®ts that arise from grouping schemes can be interpreted in network terms. In particular the bene®ts can be understood in terms of changes resulting in the relations among ®rms within the group and with other ®rms and organisations. These changes occur in terms of three fundamental dimensions of inter-®rm relations as identi®ed by Hakansson and Snehota (1995), i.e. activity links, resource ties, and actor bonds.

Figure 3. Number of articles reviewed by year

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Five case studies of export-grouping networks are described in this section. These are: (1) the Australian oaten hay processors export grouping network; (2) the Norwegian manufactured products export grouping network; (3) the Nicaraguan export grouping network; (4) the Peruvian, Gamarra, textile producers export grouping network; and (5) the Finland’s, Lahti region, furniture producers grouping network. These cases are selected because they describe the purpose, evolution and achievement of the export grouping networks. Case 1. The Australian oaten hay processors export grouping network Welch et al. (1996) studied a co-operative network of oaten hay processors, initiated by the Australian trade commission (Austrade), a semi-government organisation that promotes and supports international operations of Australian ®rms. The vehicle in this case is called a joint action group (JAG). The network approach used here is demand driven in that JAGs are formed only when a speci®c opportunity has been located in a foreign market (Welch et al., 1996). At Austrade’s instigation, a JAG of oaten hay processors was formed in October 1992 in order to develop a more co-ordinated and market responsive organisation of exports to the Japanese market, particularly addressing the issues of quality and reliability of supply. Ten major processors ± representing about 75 per cent of Australian oaten hay exports to Japan ± contributed ®nancially to establish an export company, Australian Hay Pty. Ltd. The JAG comprises direct competitors, who jointly own a registered trademark: Australia Oaten Hay, with a distinctive logo. Welch et al. (1996) mentioned that the network enabled the hay processors to produce a better quality product and strengthen the co-operative relationship among the members. Through the network members developed personal bonds and trusting relations which did not exist before. Several joint initiatives were undertaken like the development of quality standards, sharing of information about production methods and the Japanese market, and joint promotion. Case 2. The Norwegian manufacturers export grouping network Leonard (1983) studied an initiative in 1981 in Norway, to group small ®rms in order to improve their export performance. The program re¯ected a wider concern within the government and the community, to encourage the internationalisation of Norway’s small and medium sized companies at a time when the national economy faced a booming oil sector. The initiative for the scheme came from outside change agents rather than the participating companies. The instigators were the National institute of technology and a large Norwegian management consultant with ample international experience. The gap between the parties at the outset was considerable and much time and

effort had to be put into the process of building a viable group entity. In the Norwegian case considerable emphasis was given to building a strong support infrastructure to facilitate foreign market penetration. Out of the three groups established only one actually became operational in a foreign market. In one group the main reason for failure was a high degree of interpersonal con¯ict. In the second group the members could not agree on the targeted foreign market or distributor. Case 3. The Nicaraguan export grouping network Ceiglie and Dini (1999) studied a network project, supported by UNIDO in Nicaragua, which started in 1995. During the ®rst phase a team of seven national consultants, assisted by short-term international consultants, created some 20 horizontal networks. One of the network export organisations is Ecohamaca, comprising 11 enterprises operating in the handicraft hammock production sector. What is interesting in this network relationship is that while the network members all compete with one another in the local market, they are trying to collaborate in an attempt to enter foreign markets. None of the local producers had direct exporting experience. Through the project the producers were assisted in standardising their production in order to collectively reach quantities suitable for export and, at the same time, improve the quality and design of the products and the pricing systems. The network relationship was successful since it permitted the group to export on eight different occasions to destinations such as Sweden, Finland, the USA, and Peru and over 3,000 hammocks are exported on average every month. In order to consolidate results and further common work, the group acquired a legal status and hired a manager. His tasks include the organisation of training for the workers, the search for technical and ®nancial assistance from a variety of local small- to medium-sized enterprise (SME) support institutions, and the strengthening of the marketing strategy. Case 4. The Peruvian textile producers export grouping network Visser (1996) studied the co-operative linkages between Peruvian textile producers. No outside agent was involved in establishing the group. The major objective of this group was to facilitate export. The motive for one of the entrepreneurs to take the initiative to establish a network was twofold. In 1992, he received an export order from a German importer who had favourably judged his samples. The order was far too large for his production capacity. He also observed that competition on the local market in Peru increased as a result of larger imports from Korea and China. Therefore, he took the initiative to organise ®ve local task groups of ten ®rms specialised in a particular product (sportswear, jeans, T-shirts, shirts and ties). The objective was to expand capacity and improve product quality through mutual advice, professional training and the replacement of equipment, in order to enter export markets.


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The founding of ®ve task groups involving 50 entrepreneurs only took six months. The author considered this to be a short time, as the leading actors initially could not ®nd an appropriate legal status ®tting with the groups’ purposes, whereas the objective to export sharpened selection criteria. The selection of partners was guided by past business experience, personal knowledge and relationships, and took place in two steps. First, the initiator selected the leaders of the subgroups who, subsequently, had to organise the subgroup. After the export group managed to get a special credit, a marketing specialist was hired. Initially, this person examined the domestic market for orders from public and private institutions. In one month the marketing agent had reeled in three orders, of 10,000 T-shirts each, from two breweries and an ice-cream making ®rm. These achievements were essential for generating trust between the agent and the producers. Visser (1996) mentioned that family ties have been an important factor for the network establishment and success. Case 5. The Finland furniture producers export grouping network Kautonen (1996) studied 14 export grouping networks of furniture producers of the Lahti region in Finland. According to the ®rm’s managers and the author’s estimations, these have not been all that successful. Nevertheless it would not be justi®ed to claim that these projects were of no worth at all. Kautonen explained that only three to four groups could be evaluated as total failures due to bankruptcies, personal con¯icts between ®rm managers or incompetent or even dishonest export consultants. Seven to eight of the projects were partly successful, for being a start of export activities or the entry of a new market. The member ®rms exchange information about market risk and customers. Whenever pro®table, transportation is organised jointly. The experiences of the networks also serve as lessons for building co-operative inter-®rm relationships. Discussion of results This section applies the network model (Figure 2) in order to test whether it can explain the observed failures and successes. We note that the authors of the case studies used different methodologies and focused on different problems. This explains why not all the variables, as described in the model, are discussed extensively for all the cases. Network emergence The Australian export-grouping network was established to develop the oaten hay export market in Japan. The objective was to exploit the market better by co-ordinating the export activities of the individual manufacturers. The ultimate goal of the Nicaraguan networking project was to develop exports for some particular commodities through solving problems that constrain export initiatives. Production was standardised in order to realise

the necessary quantities and the design and quality were improved to meet export market requirements. The objective of the Peruvian export-grouping network was similar to that of Nicaragua. It was initiated to expand capacity and improve product quality through mutual advice, professional training and the replacement of equipment, in order to enter export markets. The Norwegian export network was established to facilitate penetration. For this case no information is given about the ex ante identi®cation of an export market. Overall, at least four out of the ®ve network initiatives were taken to exploit an available market opportunity or to solve an existing export problem. As network membership was voluntary in all the cases, some willingness to cooperate was existent. Therefore we conclude that the results are in line with the developed model. Evolution towards group solidarity, cohesion and commitment In the Finland case, it was mentioned that personal con¯icts between ®rm managers and incompetent or even dishonest export consultants were the reasons for the failure of four groups. Besides, it was reported that two Norwegian groups failed because of the inability of two individuals in the group to work together. Personal con¯icts are mainly attributed to the lack of strong personal relationships and mutual interests. In the Peruvian case family ties are found important in strengthening the personal relationships and facilitating network establishment. However, personal or family ties are important only if they are coupled with mutual interest. The size of the ®rms involved in the network relationship can affect their interests to ward a market. In the Norwegian case large differences in ®rm sizes were observed and put forward as one of the reasons for disagreement among the group members on the targeted market. Instigators can facilitate the evolution of the network relationship by helping network members to solve their internal problems. The Norwegian, Australian, and Nicaraguan cases support this idea. In the Norwegian case the instigators of the network relationship were independent institutions, while the Australian network is initiated by a semi-government organisation. The Nicaraguan organisation that took the initiative to constitute several export groupings explicitly aims at the establishment of network relationships between enterprises and institutions that allow enterprises to overcome their isolation and reach new collective competitive advantage beyond the reach of individual small ®rms. However, the Peruvian case shows that export-marketing networks can be established and remain successful without the involvement of outside instigators. We conclude that the case studies support the model we developed by con®rming that cohesion, solidarity and commitment are crucial factors in the development of export grouping networks.


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Evolution of the networks foreign market penetration activity The literature indicates that the Norwegian network had access to a supporting infrastructure and the marketing experience of instigators. The Australian oaten hay producers also enjoyed the marketing expertise of Austrade. The Nicaraguan export grouping network was strongly assisted by a team of internal and external consultants. The Peruvian network bene®ted from the marketing expert hired by the group and he was able to generate sales. Visser (1996) indicated that the early sale was important to build trust among network partners. However, market penetration activities or access to support infrastructure may not lead to success, if the network is not based on a solid, cohesive and committed group. The Norwegian case supports this idea. Some of the ®rms were not able to adjust to the group concept and frustrated its functioning. This shows that some operational issues have to be settled before concrete activities in the export market can be undertaken: structure, composition, mode and timing of operation, and other issues representing potential sources of con¯ict. This helps the group to remain strong enough to face internal and external problems and ensure that all members have the potential to gain from the targets chosen. The Nicaraguan experience also showed the importance of standardisation in order to reduce export problems. Network achievement In the Peruvian case Visser (1996) reported that the network members were successful in penetrating the North American textile market. The Gamarra textile producers evolved into a large network of small companies. In August 1995, the organisation comprised 157 members and seven consortia. It also extended its activities towards joint market research and international marketing with Dutch development aid bringing another external agent on stage. Strong partner network relationships and family ties were mentioned as major factors contributing to the success of the group (Visser, 1996). Welch and Joynt (1987) concluded that the results of the Norwegian grouping scheme were rather bleak. Out of the three groups, only one actually became operational in a foreign market. However, also this group failed to extend its scope of operations. In the Australian case a clear positive market outcome has been generated (Welch et al., 1996). The increased sensitivity to the quality requirements of the Japanese customers shows that processors were trying to meet demand. The informal contacts among processors have been sustained, even with members no longer part of the JAG and despite personality clashes. Various joint activities have been undertaken, including the development of quality standards, sharing of information about production methods and the Japanese market, and joint promotion (Welch et al., 1996). Resources have been pooled to obtain government grants and knowledge has been developed and shared among members. These achievements contributed to the export performance of the sector in the Japanese market.

In Finland, Kautonen reported that exports of furniture have increased rapidly ranging between 500 and 600 millions of FIM in the 1980s, 643 million FIM in 1991, 706 million FIM in 1992 and in 1993 as much as 1,086 million FIM (187 MECUs). The logistic problems and quality requirements were successfully addressed by the Lahti export grouping network. Ceiglie and Dini (1999), mentioned that the network strategy in Nicaragua proved to be very successful since it permitted the group to penetrate markets in the European Union (EU), the USA, Sweden, Finland and Peru. The network also enabled partners to achieve product standardisation, better quality and improvement in pricing systems. We conclude that the experiences discussed in this section are in line with the model presented in Figure 2. The successful networks are characterised by the existence of a concrete market opportunity (threat), a willingness to cooperate, some form of early market penetration together with a process creating solidarity, cohesion and commitment among group members. Finally we note that the three identi®ed articles, not included in this analysis, do not contradict the ®ndings. The Chinese networking programme acknowledges the importance of personal relationships and the role of instigators for the success of the networking project (Welch et al., 1996). The Chilean and Jamaican cases con®rm that instigators (governments) may act as sponsors for networking projects. However, instigators should not impose their strategies, but intervene on the basis of requests for help from the network (Humphrey and Schmitz, 1995; Ceiglie and Dini, 1999). A summary of the evolution and experiences of export grouping networks in the ®ve countries is shown in Table I. Vertical networks: subcontracting Subcontracting is an opportunity for ®rms in developing countries to participate in the international market. Subcontracting networks occur when a manufacturer sells products to a speci®c buyer for a considerable period of time, while the latter speci®es the design of the products and supervises the production process. A subcontracting agreement may also specify how a commodity is distributed by a third company for a speci®c period of time: Subcontract manufacture is the process by which a subcontractor (i.e. an organisation with business objectives which is independent of those of the principal), performs all or part of the manufacture of the principal’s product, to a customised speci®cation (of varying detail) provided by the principal. Activities which support this manufacture (e.g. materials procurement, production planning, etc.) can be carried out by either party, subject to prior agreement (Webster and Alder, 1997, p. 2).

Subcontracting agreements are made for a variety of reasons. A categorisation has also been proposed which distinguishes between the ªcapacityº, ªspecialisedº or ªeconomicº subcontract (Imrie, 1994). According to Imrie the capacity subcontract, normally short-lived and unstable, is set up to meet


Group co-ordinator Group and group members members Suppliers, ®nancial, institutions, marketing organisations Gap between partners Interpersonal con¯ict Bankruptcy Disagreement market and foreign distributor

Internal-group co-ordinator

External-various sponsors

Group establishment and market penetration problems

Group co-ordinator

Key facilitator

4. Problems observed

None

Banks, export council, etc.

External contributors

High government intervention Personality clashes Strains due to growing competition

None

Austrade

Austrade

Australian JAG

Instigator/facilitator Group co-ordinator

Norwegian JAG

1. Identi®cation of and contact with prospective candidates for grouping; group formation. 2. Creation of a climate of co-operation; development of group goals; formal establishment of the group 3. Business development: foreign market penetration

Table I. Summary of the evolution and experiences of export grouping networks in the ®ve countries

Actors

Group co-ordinators

Group co-ordinators None

Finlands Lahti

Lack of punctuality in meetings Bad perception of partners on employees Tacit knowledge Risk averseness

Personal con¯icts Bankruptcy Incompetent, dishonest export consultants

Group Group co-ordinator and co-ordinators members None Government through subsidies

Group co-ordinators

Group co-ordinator Banks (loan)

Peruvian Gamarra

(continued)

UNIDO and national consultants

UNIDO

Not mentioned

UNIDO

UNIDO and national consultants UNIDO

Nicaragua EcoHamaca

742

Phases

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Authors of the articles reviewed

Australian JAG

Welch and Joynt (1987)

Welch et al. (1996)

Improved quality Personal bonds and trust Learning Two failed, one Japanese penetrated to the US market market penetration

Export support infrastructure Learning

Norwegian JAG

Visser (1996)

US market penetration

Capacity building Close personal ties Learning

Peruvian Gamarra

Nicaragua EcoHamaca

Product standardisation Quality and design improvement Improvement pricing systems Three failed, eight Market penetration penetrated foreign to EU, USA, markets Sweden, Finland and Peru Ceiglie and Dini Ceiglie and Dini (1999) (1999)

Product standardisation Learning

Finlands Lahti

Source: The literature on Norwegian, Australian, Peruvian, Finish and Nicaraguan export grouping networks

6. Authors

None economic achievement

5. Achievement

Market penetration

Actors

Phases


Table I.

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unexpected or exceptional increases in demand. Whereas the specialised subcontract, by contrast, is longer-term and enduring ± established by the principal to access specialised expertise or technology, which is not available in-house. Finally, economic subcontracting is established where cost bene®ts can be obtained by outsourcing parts of the production process. In all cases, outsourcing provides the principal with a greater degree of ¯exibility over its operations. The bene®ts to the subcontractor are rarely considered explicitly, but as subcontractors are usually small or medium sized companies, the bene®ts tend to relate to business generation and organisational survival. It is important to note that the subcontracting relationship only starts after the identi®cation of a market by the principal. Small and large companies in different countries have practised subcontracting networks[2]. The cases included in this section can be characterised as economic subcontracting. In this section we present two cases of a subcontracting network between American companies and Asian producers. The third case compares the Brazilian (Sinos Vally) network with a Mexican footwear producer’s cluster. Case 1. The lighting goods subcontracting network Sarathy (1996) studied a subcontracting relationship between an American lighting goods company and a group of producers in Asia. Catalina Lighting began importing and distribution lighting ®xtures into the USA in 1985. It specialised in the design and distribution of the commodities, while production was outsourced to factories in the Far East. Catalina’s designers visit lighting trade shows in the United States and Europe to identify new styles most likely to appeal to fashion conscious consumers. Catalina then designs similar ®xtures and provides them to factories in the Far East. Initially, Catalina bought from a few factories in Taiwan. Over time it became the largest buyer of lighting ®xtures in Taiwan, and it currently subcontracts manufacturing with over 70 factories in four countries. Using Catalina the Asian manufacturers are able to get access to the American market. Case 2. Nike/Reebok and Asian footwear producers subcontracting network In a similar study Rosenzweig (1994) investigated the subcontracting relationship between two American footwear ®rms and a group of Asian subcontractors. Nike and Reebok are specialising on product design and product marketing. They rely on a network of contractors in South Korea, Taiwan, China, Indonesia, Thailand and the Philippines who produce shoes according to the required speci®cations and precise delivery schedules. By working with subcontractors, Nike and Reebok do not have to manage the manufacturing operation, and do not have to tie up working capital in raw materials or work in process. By 1982, Nike imported 70 per cent of its shoes from South Korea, 16 per cent from Taiwan, 7 per cent from Thailand, Hong Kong and the Philippines and manufactured only 7 per cent in the USA.

Case 3. The Sinos Valley and Mexican footwear subcontracting network Nadvi (1995) studied the Sinos Valley footwear manufacturers network in Brazil. Sinos Valley comprises approximately 500 shoe producers that make up the core of the cluster. He showed that the shoe producers were successful and were able to export about 70 per cent of their produce to the USA. According to Schmitz (1995) three factors are critical to Sinos Valley’s success. First, the backward linkages that shoe producers have with local suppliers of inputs, machinery and producer services; second, the forward linkages between producers and buyers, especially export agents; and third, the strategic intervention of local support institutions in facilitating the cluster’s ability to ªshift gearº and move into higher value added product markets. Because of the importance of ®rst two factors we consider this case as a vertical network. Nadvi (1995) shows that the shoe producers were linked with suppliers of raw materials, new and second-hand machinery, shoe-component producers as well as consultants for managerial, ®nancial, technical and other business problems. The producers were also linked with the local ranching sector that supplies the footwear industry with leather. Seventy local export agents, some of them representing leading US retailers, connect the local producers to outlets in the USA and Europe, as well as Brazil. Export agents, both local and foreign, play a crucial function as intermediaries between producers and fashion conscious retailers. They are a source for technical and marketing know-how in the cluster; they inspect product quality and production schedules on site and they organise the transport and payment arrangements. In contrast to the Sinos valley the Mexican footwear manufacturing industry did not show much progress. Nadvi reviewed two groups of Mexican shoe producers in terms of the backward ties with their suppliers and the forward ties with their buyers. In contrast to Brazil (Sinos Vally), the Mexican shoe producers are largely inward oriented, and were not successful in penetrating the US market. The case study draws from Rabellotti’s (1993, 1995) work on the shoe clusters of Leon and Guadalajara in Mexico. According to Nadvi, the Mexican shoe sector, despite the advantage of being closer to the US market and operating in sectoral clusters, has not been as competitive as the network in Brazil. This raises some obvious questions: Why did the Mexican shoe sector lag behind? Why were the market opportunities, offered by clustering (improved ef®ciency and technical progress), not fully exploited by the Mexican shoe clusters? In spite of the fact that the Mexican shoe clusters consist of a larger number of shoe producers and have experience in the shoe industry for more than seventy years, neither cluster displays the dynamics as observed in the Sinos Valley. The author explains this by the weak backward ties between producers and their component suppliers and the weak forward linkages with buyers in the Mexican case.


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Discussion of results Next, we will discuss the reasons for emergence, evolution and achievement of the subcontracting relationship using our model in Figure 2. Emergence of the subcontracting network Nike and Reebok contacted the Asian subcontractors because they wanted to keep their costs down. The same applies to Catalina and the Sinos Valley footwear producers. In the latter case the network was established to get raw materials and components from domestic suppliers with the intention to produce and export shoes to the US market. All cases show that the market opportunity was clearly de®ned when the network emerged and therefore we conclude that the cases are in line with our model. Evolution towards group solidarity, cohesion and commitment The authors of the cases did not mention how the principal and the subcontractors build solidarity, cohesion and commitment. However, it was indicated that there was a common objective and in all the three cases the principal was highly involved in the network relationship. Catalina was active in searching the sample design and its staff supervised the production process. Nike and Reebok were also engaged in similar relationships with their subcontractors. In general, it can be said that both the principal and the subcontractor were eager to improve the quality of the products in order to be successful in the export markets. This objective could not be achieved without the partners solidarity, cohesion and commitment to the network relationship. Evidence from the above cases also shows that the development of backward and forward ties are critical for network success. Evolution of the networks foreign market penetration activity In the Catalina, Nike and Reebok cases, it was indicated that the subcontracting relationship evolved through time. It started with a few producers and subsequently, more producers were involved in these type of relationships. Currently, Catalina has seventy subcontractors in different Asian countries. Besides, in the course of time, Nike closed its New Hampshire and Maine plants and, nowadays, it imports all the footwear from Asian countries. These factors show that there was a gradual progress in market penetration, which ®nally led to a wider expansion. This is the result of continuous quality improvement through continuous principal and subcontractor interaction and learning. Network achievement In the Sinos Valley case, Nadvi mentioned that the ®nal outcome of the subcontracting and other network relationships were positive. The producers were able to penetrate the US market. The Catalina, Nike and Reebok cases are also examples of successful subcontracting relationships that enabled the manufacturers to access the US market. However, the Mexican shoe producers

were not successful in the foreign markets and according to Nadvi this can be explained by the lack of forward and backward ties between producers, suppliers and agents and distributors. Conclusion The paper showed that networks have been used to solve export-marketing problems of manufacturing ®rms in developing countries. It is a useful approach to solve ªinternalº export problems concerning quality, organisational, ®nancial or information problems. It may also accommodate ªexternalº export problems related to the export market or the industry. However, the role these networks played is not documented systematically and there is no agreement on the essential factors for success. Our model (Figure 4) is an effort to ®ll this gap. It captures the variables related to the emergence, the development process, and the achievement of networks. The case studies provide a lot of support for this model and complemented it with some additional variables: trust, learning, personal relationships and backward and forward linkages are critical for the network success. Network development is highly in¯uenced by two key factors. These are: (1) the evolution of the foreign marketing activity; and (2) the evolution toward solidarity, cohesion and commitment.


The network’s success in penetrating foreign markets, access to foreign marketing experience and marketing knowledge and access to support

Figure 4. A model to study the network evolution of manufacturing ®rms in developing countries

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infrastructure facilitate network development. The experiences of UNIDO show that it is possible to initiate and develop effective network relationships even if the entrepreneurs had no previous relationships with each other. However, it is worthwhile to note that incentives from outside parties will not substitute for a clearly perceived logic of relationships and bene®cial outcomes. Mutual interests and active participation of group members are preconditions for group success and are in fact presupposed by the model. Network development should be demand oriented. The model makes this explicit as it stresses the importance of a market problem or market opportunity. This means that a network must be based on a thorough analysis of the problems or market opportunities. Here we ®nd an argument for the fact that outside instigators may play an important role. Manufacturing ®rms in developing countries face ®nancial constraints and often lack a skilled labor force, therefore, network instigators can play an important role in the network emergence and the network development process. Three of the ®ve export grouping networks examined, rely heavily on the tasks performed by the outside change agent. Notes 1. Online content contains bibliographical references of articles of over 12,500 periodicals on all scienti®c ®elds published since 1992. WebCat is a large collection of full-text electronic documents, provided by libraries. The UNIDO publications Web site contains reports on network projects in different developing countries. EBSCO academic service contains bibliographical references of scienti®c periodicals in the ®eld of business, social sciences, humanities, general science, physics and education sciences. It contains about 3,000 articles. 2. In the literature there is a vast discussion about subcontracting networks in Japan and Korea. Modern Japanese subcontracting contracts rely on clustered control, in which ®rms at the top buy complete components from a limited number of ®rst-tier subcontractors, which in turn buy specialised parts from a group of second-tier subcontractors, which buy discrete parts and labour from third-tier subcontractors, and so on. The Korean subcontracting network is similar to that in Japan in that long-term grouping of companies (Chaebol) exists in a similar form as in Japan (Keiretsu). Ghauri and Prasad (1995) also contrast Keiretsu and Chaebol in terms of inter-group rivalry, the dominant type of relationship, the network functional control and the role of the lead bank. Chaebol are distinguished from Keiretsu by having less inter-group rivalry. Also, a familial type of relationship exists within Chaebol rather than having a contractual based relationship as in Keiretsu. In Chaebol, functional control is by the founding family and not by the lead ®rm. Nowadays the Japanese and Korean subcontracting networks concern mainly large established multi-national enterprises. Therefore we preferred to omit these cases from our analysis. References Aldrich, H.E. (1979), Organizations and Environments, Prentice-Hall, Englewood Cliffs, NJ. Anderson, J.C., Hakansson, H. and Johanson, J. (1994), ªDyadic business relationships within a business network contextº, Journal of Marketing, Vol. 58, pp. 1-15. Beije, P.R. and Groenewegen, I. (1992), ªA network analysis of marketsº, Journal of Economic Issues, Vol. 26 No. 1, pp. 87-104.

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Rosenzweig, P.M. (1994), ªInternational sourcing in athletic footwear: Nike and Reebokº, in Bartlett, C.A. and Ghoshal, S. (Eds), Management and Organisation Series, 2nd ed., McGraw-Hill, New York, NY, pp. 170-82. Rosson, P.J. and Blunden, R. (1985), ªNorthumberland Seafoods Limitedº, case study, Center for International Business Studies, Dalhousie University, Halifax. Sarathy, R. (1996), ªCatalina lighting: quality lightening at very affordable pricesº, in Terpestra, V. and Sarathy, R. (Eds), International Marketing, 6th ed., Harcourt College Publishers, Fort Worth, TX, pp. 685-91. Schmitz, H. (1995), ªSmall shoe makers and fordist giants: tale of super clusterº, World Development, Vol. 31 No. 4. Stenburg, T. (1982), ªSystem co-operation: a possibility for the Swedish industryº, Department of Business Administration, University of Goteborg, Gothenburg. Van de Ven, A.H. (1976a), ªOn the nature, formation and maintenance of relations among organisationsº, Academy of Management Review, pp. 24-35. Van de Ven, A.H. (1976b), ªA framework for organisation assessmentº, Academy of Management Review, pp. 64-77. Van de Ven, A. and Ferry, D.L. (1980), Measuring and Assessing Organisations, John Wiley, New York, NY. Visser, E.J. (1996), ªLocal sources of competitiveness spatial clustering and organisational dynamics in small scale clothing in Lima, Peruº, University of Amsterdam, Amsterdam. Weaver, M.K. and Pak, J. (1988), ªExport behaviour and attitudes of a small and medium sized Korean manufacturing ®rmsº, International Small Business Journal, Vol. 8 No. 4, pp. 59-68. Webster, M. and Alder, C. (1997), ªSubcontracting within the supply chain for elections assembly manufactureº, International Journal of Operations & Production Management, Vol. 17 No. 9/10, pp. 827-41. Welch, L.S. and Joynt, P. (1987), ªGrouping for export an effective solution?º, in Rosson, P.J. and Reid, S.D. (Eds), Managing Export entry and Expansion: Concepts and Practice, Praeger, New York, NY. Welch, D., (1996), ªNetwork analysis of a new export grouping scheme: the role of economic and non economic relationsº, International Journal of Research in Marketing, Vol. 13, pp. 463-77. Yang, Y.S., (1992), ªA market expansion ability approach to identify potential exportersº, Journal of Marketing, Vol. 56, pp. 84-96. Zerrillo, P.C. (1996), ªMarketing networks: a new entrant’s approach to network equityº, in Iacobucci, D. (Ed.), Networks in Marketing, Sage, London, pp. 205-20.

Further reading Anderson, J.C. and Narus, A. (1990), ªA model of distributor ®rm and manufacturer ®rm working relationshipsº, Journal of Marketing, Vol. 54, pp. 42-58. Campbell, A.J. (1996), ªThe effects of internal ®rm barriers on the export behaviour of small ®rms in a free trade environmentº, Journal of Small Business Management, pp. 50-8. Coviello, N. and Munro, H. (1997), ªNetwork relationships and the internationalization process of small software ®rmsº, International Business Review, Vol. 16 No. 4, pp. 361-86. Heide, J.B. and George, J. (1992), ªDo norms matter in marketing relationship?º, Journal of Marketing, Vol. 56, pp. 32-44.


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Jaramillo, C. (1987), ªPreparing national export promotion programmesº, International Trade Forum, Vol. 23 No. 3, pp. 24-30. Johanson, B. (1994), ªEntrepreneurial networks: some conceptual and methodological notesº, unpublished working paper, Institute of Economic Research, University of Lund, Lund. Joynt, P. (1982), ªAn empirical study of Norwegian export behaviourº, in Czinkota, M.R. and Tesar, G. (Eds), Export Management: An Empirical Context, Praeger Publishers, New York, NY, pp. 55-69. Lee, D. and Jang, J. (1998), ªThe role of relational exchange between exporters and importers evidence from small and medium sized Australian exportersº, Journal of Small Business Management, Vol. 36 No. 4, pp. 12-23. Linsu, K. and Nugent, J.B. (1997), ªTransaction costs and export channels of small scale and medium sized enterprises: the case of Koreaº, Contemporary Economic Policy, Vol. 15 No. 1, pp. 104-20. Mowrawitz, D. (1981), Why the Emperors New Clothes Are Not Made in Colombia, World Bank, Washington, DC. Thoburn, J.T. and Takashima, M. (1993), ªImproving British industrial performance: lessons from Japanese subcontractingº, National Westminster Bank Quarterly Review. Weaver, M.K., (1998), ªIncreasing the ef®ciency of national export promotion programmes: the case of Norwegian exportersº, Journal of Small Business Management, Vol. 36 No. 4, pp. 1-10.