Theme : Firms & Networks
The Role of Business Networks in the Internationalisation of Manufacturing Firms: A Longitudinal Case Study Sylvie Chetty1, Victoria University of Wellington, New Zealand and Desiree Blankenburg Holm, Uppsala University, Sweden
Address for all correspondence: Sylvie Chetty Marketing Group Victoria University of Wellington PO Box 600 Wellington NEW ZEALAND Fax: (04)471 2200 Email:
[email protected]
1
Address all correspondence to Sylvie Chetty, Marketing Group, Victoria University of Wellington, P.O.Box 600, Wellington, New Zealand, Fax (04) 471-2200. Email
[email protected].
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The Role of Business Networks in the Internationalisation of Manufacturing Firms: A Longitudinal Case Study ABSTRACT This paper aims to contribute towards the internationalisation literature by using the network approach. Johanson and Mattson’s (1988) network model is used to describe the internationalisation of 12 manufacturing firms in New Zealand. It shows how the internationalisation characteristics of both the firm and market influence the firm’s internationalisation. A longitudinal case study is used to understand the causal relationships and process in internationalisation. Managers need to networks should be an important part of their international strategy. Firms can obtain knowledge, learn from the experiences and share resources with other actors in their business networks. KEY WORDS BUSINESS NETWORKS INTERNATIONALISATION LONGITUDINAL CASE STUDY MANUFACTURING FIRMS
INTRODUCTION This paper discusses how a firm’s business networks influence its internationalisation. Recent empirical studies (Chetty, 1994; Gray, 1994; Coviello, 1995) conducted in New Zealand report the importance of business networks in internationalisation. Gray (1994) in his study of New Zealand firms concluded that one of the greatest perceived barriers to internationalisation is a lack of business networks. Sharma and Johanson (1987) suggest that a firm’s relationships with its competitors, customers and banks may propel it into international markets. Bonaccorsi (1992) argues that firms do not operate independently but maintain networks with comparable firms. Styles and Ambler (1994) emphasise the importance of a firms business networks in providing information and resources to the firm. Coviello (1995) found that business networks are of particular importance in the early stages of internationalisation.
Despite the importance of business networks in a firm’s internationalisation there is a shortage of research in this area (Chetty,1994; Blankenburg et al., 1996).
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Forsgren and Johanson (1992) lament that the dominant approach in the business literature remains the single firm as the unit of analysis which is isolated from its environment. They support the network approach in studying internationalisation as it considers the interactions between the firm and environment and the influence this has on both. This research is based on a longitudinal case study of 12 small to medium-sized manufacturing firms in the electrical industrial machinery and timber processing industry in New Zealand. In recent years, the New Zealand government has been making concerted efforts to improve the country’s trading performance and international competitiveness. To do this the government made major structural changes to New Zealand’s economy. In 1984, the most comprehensive economic programme undertaken by any OECD country in recent decades was introduced. This included abolishing import controls (licenses and quotas), reducing tariffs substantially, abandoning export subsidies, and allowing the exchange rate to float. Between 1986 and 1990, the most significant change in New Zealand business activity was that enterprise-level import strategies were executed more often than export strategies. This response to deregulation suggested the importance of understanding ‘how’ and ‘why’ firms internationalise. The aim of this paper is to contribute towards the internationalisation literature by using the network approach to internationalisation. An attempt is made to understand the internationalisation of firms and how the firm’s relationships in business networks influence this process. Johanson and Mattson’s (1988) network model is used to show how the internationalisation characteristics of both the firm and market influence its internationalisation. This paper is divided into six sections which includes the introduction. The second section of this paper includes a review of the related literature and details about the network model used in this study. The third section discusses the method of research. The fourth section discusses the findings, which starts with a general discussion of the 12 firms and then focuses on four firms, one from each category in Johanson and Mattson’s (1988) matrix. The fifth section discusses the managerial implications of this study. Finally, the paper ends with some general conclusions. LITERATURE REVIEW The need to conduct international business research within a broader framework has been identified by researchers such as, Toyne (1989, p.13) who recommends that research on international business; ”should encompass all social, industrial, market, and government activities (economic and political) that lead to, or directly influence in some way, international exchange”. Definition of Business Networks in the Literature
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Researchers on business networks (e.g. Ford 1990; Gadde and Mattsson 1987; Hakansson and Johanson 1993) have transposed the social exchange perspective on social networks (e.g., Cook and Emerson, 1978; Emerson 1972) to business networks (Anderson, Hakansson and Johanson, 1994). This study uses social exchange theory to define business networks which is as follows; “as a set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualised as collective actors (Emerson 1981)” (Anderson et al. 1994, p.2, Blankenburg Holm, 1997, p. 1036). These actors include competitors, suppliers, customers, distributors and government (Axelsson and Johanson, 1992 ; Sharma and Johanson, 1987). A basic assumption in this paper is that international business takes place in a network setting where different business actors are linked to each other through direct and indirect business relationships. The social exchange perspective on business networks stresses their informal character as an important feature as they evolve between individuals in the firms (Granovetter, 1985). The informal character is one important distinction between business networks and formal groups and associations where independent firms can share strategic goals. Another important feature of business networks is resource dependence that evolves between business actors. Firms cooperating by exchanging resources need to coordinate and adapt their activities and resources, thus making them become dependent on each other. Two firms coordinating their activities and adapting to each other must also take into consideration the other relationships that they are involved in. This means that interdependence in a relationship will also be contingent on the interdependence in the network (Blankenburg, et.al. 1996). This kind of network is not the foundation for formal associations but such a network may eventually develop amongst the members. Indeed, there are various definitions of business networks. Some researchers consider networks to be formal cooperation, while others emphasise informal everyday business relationships (Axelsson and Easton, 1992). The following definitions refer to informal everyday business relationships. Astley (1984) and Blankenburg Holm et. al. (1997) in their definitions of business networks state that it enables a group of independent firms to improve their joint performance by creating additional value in the chain and by having a collective strategy. The firm acquires knowledge about business opportunities through its business networks (Sharma and Johanson, 1987). Sharma and Johanson (1987) view the relationships within these business networks as the most important asset of the firm.
Bonaccorsi (1992) also uses informal business relationships in his definition of business networks. He uses Italian industrial districts to explain how business networks function. These industrial districts have a high concentration of one or two industries. Bonaccorsi (1992) proposes that small firms make their decision
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to internationalise or to further their internationalisation according to the experiences of the group to which they belong. While the above studies consider business networks as informal relationships that evolve organically, other studies such as Yanagida (1993) focuses solely on formal associations as a form of business network. He argues that formal associations are a form of business networks that can provide a means of exchanging information and acquiring knowledge. These type of business networks offer business people an opportunity for personal development as well as development in their businesses. Chetty (1994) and Achrol (1997) include both formal associations and informal relationships in their definition of business networks. Chetty (1994) shows how firms use their informal relationships with customers, suppliers, competitors, government and universities, and their relationships in formal associations to improve their performance by cooperating to share their knowledge and skills. Definition of Business Networks as used in this Paper In this paper business networks will include both formal associations and informal everyday business relationships. The reason for this is that in New Zealand organisations such as Tradenz (export promotion organisation in New Zealand) recognise the importance of business networks in internationalisation and seek to create conditions which encourage and expedite their formation by formalising the process rather than waiting for them to evolve organically. The process is formalised through joint action groups, hard business networks and industry clusters. Through trust and commitment they aim to create interdependencies amongst members within the group. The aim of a joint action group (JAG) is to encourage firms within industries to cooperate with one another in export markets. By cooperating, they create opportunities that would be unavailable to individual companies. A hard business network typically includes 5 to 6 businesses from similar and/or different industries who combine their resources to achieve results that would not be possible individually. With long term collaboration members gain competitive advantage through benefits of size, and working on common projects such as joint export marketing, manufacturing and research and development. Industry clusters consist of similar, related firms in the same geographical area which can achieve synergy.
Network Approach to Internationalisation As mentioned earlier this study uses Johanson and Mattson’s (1988) network model to describe the internationalisation of a firm. Johanson and Mattson (1988) use informal everyday business relationships in their definition of business
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networks. They consider business networks as the relationships a firm has with its customers, distributors, suppliers, competitors and government which are the actors in a business network. Welch and Luostarinen’s (1988) definition of the term internationalisation will be used, which they define as: “the process of increasing involvement in international operations” (p.36). As the firm internationalises the number and strength of the relationships between different parts of the business network increases (Johanson and Mattson, 1988). According to Johanson and Mattson (1988) the internationalisation of a firm is influenced by its current network positions. At a certain point in time a firm has a specific position in the network which ascertains its relationships with other firms in the network. These positions result from earlier activities by the firm and other firms in the network. The position a firm has in the network determines the opportunities and constraints it confronts within the network. The internationalisation characteristics of both the firm and market influence its internationalisation. The degree of structuring of the network depends on the interdependence of the network positions of the firms. Firms in tightly structured networks have high interdependence, strong bonds, and clearly defined positions. The activities in the network allow the firm to form relationships which help it to gain access to resources and markets. An assumption in the network model is that a firm requires resources controlled by other firms which can be obtained through its network positions (Johanson and Mattson, 1988). Johanson and Mattson (1988) consider the internationalisation of firms according to their network positions in ‘national nets’ and ‘production nets’. Production nets relate to relationships between firms which are involved in the same product. Production nets include the value chain such as manufacturing, distribution, marketing and services for a specific product. They include firms with complementary activities which they refer to as an ‘industrial branch’ and firms with similar and competing activities which they refer to as ‘individual branch’ in their production net. National nets refer to the relationships of firms according to national borders.
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Johanson and Mattson (1988) identify four types of firms; the early starter, the lonely international, the late starter and the international-among others. In their matrix production net includes the internationalisation of both domestic and foreign markets, and firms with complementary activities (industrial branch), and firms with similar and competing activities (individual branch). However, in this paper production net refers to the internationalisation of the domestic production net only, and on firms with similar and competing activities (individual branch). The four different situations that these four categories of firms operate in are presented in Table 1 below. Table 1. Internationalisation and the network model: the situations to be analysed
DEGREE OF INTERNATIONALISATION OF THE FIRM
Low
High
DEGREE OF INTERNATIONALISATION OF THE MARKET (PRODUCTION NET) Low High The Early Starter The Late Starter
The Lonely International (reproduced from Johanson and Mattsson ,1988)
The International Among Others
The first of these, the early starter, is the firm which has competitors, suppliers and other firms in the domestic market that have few international relationships. The firm has little knowledge about foreign markets and cannot expect to get this knowledge from its relationships in the domestic market. In this situation firms use agents to enter foreign markets. This can be interpreted as an attempt to minimise the need for knowledge development, minimise demands for adjustments and to use network positions in the market occupied by established firms. By using an agent in the foreign market the firm can benefit from the agent’s previous market investments. In this way the firm can minimise its own investment and risk taking. The second, the lonely international, is the firm which is highly internationalised in a market environment that is not so characterised. Initiatives for increasing internationalisation do not come from suppliers, customers or competitors as they are not internationalised. In fact, it is the lonely international which has the capabilities to promote internationalisation of the market it is in (the production net). This firm has acquired knowledge and experience with foreign markets so failures are rare. Lonely international firms have an edge over their competitors especially in tightly structured business networks, as they have developed business network positions before their competitors.
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The third type, the late starter, has indirect relations with foreign business networks, through its suppliers, customers and competitors who are already internationalised. These relationships might be driving forces to propel firms into foreign markets. Markets that have a close psychic distance might be tightly structured and have competitors present so the firm might start its internationalisation by entering more distant markets. The late starter has a disadvantage as it has less knowledge than its competitors and it is difficult to enter a tightly structured net. Late starters are probably more specialised and have to adapt their products for customers or influence the product needs of the customer. The fourth type, the international-among-others, describes the situation where both the firm and its environment are highly internationalised. Sales subsidiaries are established rapidly as they have the international knowledge, and there is a great need to coordinate activities in different markets. The positions that international among others occupies in international networks gives it access to external resources. Thus sub-contracting increases and this may be a requirement of foreign governments. Through its customers or joint venture partners in foreign markets the firm has the opportunity to enter third countries. METHOD OF RESEARCH This paper is based on a longitudinal case study conducted in 1992 and 1995 with 12 manufacturing firms. Two industries were chosen which were comparable in their concentration ratios (relatively low) but different in their technological sophistication. The industries selected were the "Planing, Preserving, and Seasoning Timber" industry (NZSIC number 33112) and the “Electrical Industrial Machinery and Apparatus" industry (NZSIC number 38310). The different degrees of internationalisation were measured by the ratio of exports to total sales within and between industries. Firms were selected where these degrees of internationalisation were known to be different (see Yin, 1989, p. 105). The first is a traditional resource-based New Zealand industry with a "high" export industry, exporting 60% of its total sales in 1987. Using Johanson and Mattson’s (1988) characterisation of markets this means that its market is highly internationalised. In contrast, the "Electrical Industrial Machinery and Apparatus" industry is not based on an indigenous resource, and in 1987 its exports were only 20% of total sales. According to Johanson and Mattson’s (1988) characterisation of markets this means that its market is not highly internationalised. Six firms in each of these industries (12 in all) were selected in order to build sufficient replication opportunity into the study. The firms were divided evenly among the following three categories:
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1. Successful international firms: those with a ratio of exports to total sales greater than or close to the industry's average; referred to as average or betterthan-average exporters, 2. International firms with a ratio of exports to total sales strictly below the industry's average; referred to as ‘below-average exporters’, and 3. Firms which are not internationalised; referred to as non-exporters. Candidate firms with activities confined to one or other of the chosen industries were selected solely on the basis of their export to total sales ratio. This information was obtained from responses to a small-scale postal survey and from contacts provided by the local Chamber of Commerce, Trade Development Board, and other respondents. Data was collected as follows. Structured interviews were tape-recorded with all 12 firms in 1992 and 1995. As the same questions were asked in both years these interviews were the basis for a longitudinal case study. Interviews were conducted in 1992 and 1995 to form the basis for a longitudinal case study. The financial figures, however, cover the financial year ending 1991 and 1994. The main reason for conducting a longitudinal case study is to understand the causal relationships and process in internationalisation. In two firms the original respondents were seriously ill so other major decision makers had to be interviewed. In the 12 firms, each firm provided either one or two respondents. Where there were two, they were interviewed separately. In every case, at least one interviewee was a part-owner of the business, a consequence of focusing on smaller firms. Initial interviews with exporting firms (categories 1 and 2) lasted between two to three hours, that is, up to six hours for each firm. The interview duration for firms who have not internationalised (category 3) was less. Interviews conducted in 1995 were of a similar duration. The interview results were then combined with other documentary evidence provided by the firm to produce a detailed case study report on each one. These reports were then sent back to the interviewees to be checked for accuracy. When accuracy was confirmed, the case evidence was deemed suitable for analysis. Individual firms were given codes for anonymity. Firms A through F are in Timber Processing; firms G through L are in Electrical Industrial Equipment. Firms in the first three categories (average or better - than - average international firms) are given the prefix 'H'. Those in the second category, 'L'; and those in the third group, 'N'. So, for example, HA and HB are the superior international firms in timber processing and NK and NL are firms which are not internationalised in the electrical industrial machinery industry. Table 2 reports the 1991 and 1994 exports as a percentage of sales for each of these companies.
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Table 2 Export Performance of Selected Companies for the Period 1991-1994
Timber Processing (NZSIC 33112)
Company
Exports ($m)
Electrical Industrial Machinery (NZSIC 38310)
Exports/sales(%)
1991
1994
1991
1994
HA
17.4
15
58
50
HB
6.5
20
54
LC
1.7
0.45
LD
0.15
NE NF
Company
Exports ($m)
Exports/Sales(%)
1991
1994
1991
1994
HG
7
8
55
60
67
HH
N/A
5
25
30
15
15
LI
0.3
0.3
6
7
2.56
10
80
LJ
0.2
0.3
15
20
0
0
0
0
NK
0
0
0
0
0
0
0
0
NL
0
0
0
0
DISCUSSION OF FINDINGS In Table 3 below the 12 firms in this study are categorised according to Johanson and Mattsson’s (1988) matrix. Although firms LD,LI,LJ and NF attempted to increase international sales during the period 1991-1994 only LD succeeded. In addition, of the 12 firms only LD shifted positions in the matrix during the period 1991-1994, as it moved from late starter to international among others status. Table 3. Internationalisation and the Network Model: Where do Firms Fit in the Matrix in 1991 and 1994?
DEGREE OF INTERNATIONALISATION
Low
DEGREE OF INTERNATIONALISATION OF THE MARKET (PRODUCTION NET) Low High The Early Starter The Late Starter 1991 1991 NE,NF,LC, LI,LJ,NK,NL LD 1994 LI,LJ,NK,NL The Lonely International 1991 HG,HH
1994 NE,NF,LC
1994 HG,HH (reproduced from Johanson and Mattsson ,1988)
1994 HA,HB,LD
OF THE FIRM
High
The International Among Others 1991 HA,HB
Firms with a below-average export intensity and firms with no international sales in the electrical industrial machinery industry fall into The Early Starter category as they have little or no internationalisation and their competitors, suppliers and other firms in the domestic market also have few international relationships. Non-exporters NK and NL are having difficulties entering tightly structured networks in the domestic market to increase their sales. NK plans to join a Canterbury Development Corporation programme so that it can cooperate with other firms in a business network to internationalise. LJ has received an unsolicited order from Malaysia through its links with the Canterbury Development programme. This shows how a formal association such as a hard business network and a regional development agency can be used by new entrants to enter tightly structured networks. LI and LJ started to internationalise in the 1970’s and 1960’s respectively which was before deregulation in 1984. This means that they had a protected domestic market and export incentives when they started to internationalise. Both need to adapt their products to customer
requirements so they have to work closely with the customer when designing the product. A competitive domestic market has forced LJ to find new markets. The two firms HG and HH in the electrical industrial machinery industry who have an above average export performance are in The Lonely International category, as they have a high degree of internationalisation but their competitors, suppliers and other firms in the domestic market have few international relationships. These two firms started to internationalise in 1962 and 1985 respectively. When they started to internationalise they had a strong domestic market and needed to expand the firm, so had to seek new markets. The two firms with no international sales which are NE and NF, and LC a firm with a below-average export intensity are in The Late Starter category, as these firms have a low degree of internationalisation while their competitors, suppliers and other firms in the domestic market have several relations with foreign networks. While NF has made some efforts to internationalise, NE chose a diversification strategy rather than internationalisation. LC started to internationalise in 1975 to get rid of surplus production as there was no real growth in the domestic market. The two firms with an above- average export intensity HA, HB and one firm (LD) with a below- average export intensity in 1991 but above-average in 1994 are in the International Among Others category. The reason for this is that their degree of internationalisation is high and their competitors, suppliers and other firms in the domestic market also have several relations with foreign networks. All three started to internationalise as they wanted to expand. HA started to internationalise in 1967, HB in the 1920’s and LD in 1977. When they started to internationalise all three benefited from government export incentives which were available then. Both HA and HB are involved in a network of five firms which cooperate to expand sales in the United Kingdom market. These firms share information about markets, freight companies, suppliers and customers. To become successful internationally all the exporters and one non-exporter NF, built and maintained relationships with their suppliers, customers, joint action groups, regional development agencies and Tradenz (export promotion organisation in New Zealand). Some of these firms, for example, HA and HB cooperate with competitors in international markets. HA, HB and LD belong to joint action groups to increase their international sales. The study found that those with an above-average export intensity had more resources to invest in establishing relationships with customers, suppliers and intermediaries than those with a below-average or no international sales. Firms with a below-average export intensity who wanted to increase their international sales tried to get more out of their limited resources, and were more committed to establishing and developing these relationships. Senior management visited these markets regularly because they believed that their international customers wanted
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direct contact with decision makers. Firms which operated in a wide range of markets believed that relationship building and trust were more important in Southeast Asia than in their Australian, European or United States markets. The firm can cooperate with customers, suppliers, universities and research and development institutes in product development. All exporters were producing customised products and, by working closely with other actors in the network in product development, they were able to manufacture products that were of mutual benefit. The discussion now focuses on four firms, one from each category in Table 3, to explain how they internationalised and why the internationalisation for each one differs. The four firms chosen are; first, The Early Starter, LJ which has a belowaverage export intensity in the electrical industrial machinery industry. Second, The Lonely International, HG electrical industrial machinery industry which has an above- average export intensity. Third, The Late Starter, NF in the timber processing industry which has no international sales. Fourth, The International Among Others, LD a below average exporter turned above average in the timber processing industry. The Internationalisation Process of the Four Firms (LJ,HG,NF,LD) This section provides a more detailed account of the relationships within the business networks of four firms, one from each matrix. These cases illustrate how business networks are used to enter new markets, develop new products, acquire resources and market knowledge, and develop competencies. These networks take time to build, but once they are established can greatly benefit the organisation and thus be an important factor in determining the firms’s intenationalisation. The Early Starter (LJ) LJ is a firm in the electrical industrial machinery industry with a low degree of inernationalisation in a market (production net) which also has few relationships in foreign markets. Not surprisingly LJ describes its weakness as a lack of relationships in foreign business networks. LJ planned to increase its international sales during the period 1991-1994 but did not succeed. LJ has little knowledge about international markets, and so uses agents in these markets. LJ only produces according to customer order and adapts products to customer needs. It chooses markets that have a close psychic distance (For the purposes of this study, psychic distance means the amount of difference in language, culture and political systems. (Vahlne and Wiedersheim-Paul, 1973)) to New Zealand and these are Australia, United States and Canada. LJ uses Tradenz (New Zealand’s export promotion organisation) to conduct market research in potential markets.
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LJ’s relationship with its customers illustrates how a firm can use its existing relationships to develop new ones. LJ has formed a relationship with Air New Zealand the national airline which is one of its customers, to work on their maintenance projects which Air New Zealand is selling worldwide. In 1993 LJ was approached by Air New Zealand to do sub-contracting work on its maintenance projects by producing machinery and aircraft components. Air New Zealand provided the technical support of its quality assurance department for LJ to work towards ISO 9000 accreditation. This shows that through its customer (Air New Zealand) LJ has the opportunity to increase its international sales in more diverse markets. LJ uses its networks with Tradenz (New Zealand’s export promotion organisation) and Canterbury Development Corporation the regional development agency to gain access to knowledge, new customers and new markets. It was through these relationships that it obtained an order from its Malaysian customer and thus entry into a new market and one that has a greater psychic distance than its current markets. LJ now plans to make two visits a year to Malaysia to develop and maintain this relationship with a new customer, and hopes it can expand within this market. The Lonely International (HG) HG started to internationalise in 1962 as an early starter as its market (production net) was not internationalised, but has now developed into the Lonely International by increasing its degree of internationalisation in a market environment which is not. HG adapts to the needs of the customer by producing a customised product. HG set up its first assembly plant outside New Zealand in Malaysia in 1977, to take advantage of incentives offered to foreign investors by the government there. This was a joint venture with two other firms, one an Australian and the other a British one. In addition, at that time the Malaysian government required that they give ownership to the local Malay in order to be able to have a joint venture in Malaysia. This joint venture failed because of conflicting interests. HG exports worldwide and now has sole ownership of two factories in Malaysia. Although it has sales worldwide its main market remains Australia which takes about 70% of its products. Through its relationships with customers in Australia and Britain, HG is increasing its sales within these markets, thus using existing relationships to develop new ones. HG has had a good relationship for 12 years with its major Australian customer. HG has the policy of seeking customers who will purchase a large amount of products. HG’s future plans are to form more strategic alliances with its existing customers and suppliers to expand its markets. HG’s top management make frequent visits to markets abroad to gain knowledge about products and markets, to build and maintain relationships, and to participate in about 6 trade fairs a year.
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The Late Starter (NF) NF a non-exporter in the timber processing industry is a small firm which attempted to internationalise in the 1991-1994 period. NF explored the feasibility of exporting to the Pacific Islands in 1992 but shelved the idea as it did not have enough financial and human resources to internationalise. It found it had spread its resources too thinly to cope with the additional resources required to internationalise. In order to enter international markets NF started doing market research, improved its product quality, and gathered a group of marketing consultants and investors to form a network to enter the Japanese market. NF’s owner expected this group of people to provide him with the finances and knowledge he needed to enter international markets. After a year the group dismantled as they spent a large amount of time at meetings making trivial decisions, which NF felt was a waste of time. NF is not a member of any formal association. NF received a huge order from Japan which it was unfortunately unable to fill as it lacked finance, knowledge and experience about internationalisation. One of NF’s suppliers is HA which is in the International Among Others stage, thus it has indirect access to foreign markets through this relationship. However, NF has not yet managed to use this relationship in its attempt to internationalise. One of the explanations for this could be that NF is a new entrant, and it is hard to enter tightly structured networks where other actors are entrenched. Another explanation could be that the relationship between NF and HA has to be of mutual benefit and if NF has nothing to offer HA then there is no incentive for HA to cooperate in such a relationship. NF attributes one of the reasons for its failure to start internationalisation as a lack of relationships in business networks. When it made the attempt to enter the Japanese market NF learnt about a new product. It now designs this product for the domestic market in New Zealand. So this failure to enter the Japanese market has led to the development of a new product that can be sold successfully in the domestic market. The International Among Others (LD) LD, the only firm to shift its position in the matrix in Table 3 was a below-average exporter in the timber industry in 1991 but has become an above average exporter in 1994. LD made an entry, an exit, and a re-entry into international markets. Its initial international market was Australia, which it considered to be an extension of the domestic market. When it first started exporting, LD wanted to increase its export intensity but it could not do so by depending solely on the Australian market. It therefore decided to diversify its markets by entering the Japanese market. LD had been exporting 10% of its sales to the Australian market but stopped exporting in 1985 for seven years because the exchange rate was unfavourable. At the same time LD’s domestic market was changing, with some of its domestic
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customers closing down or reducing in size. Up to this time LD had been focusing on building timbers but, with the changes in its domestic market, decided to diversify into packaging timbers. LD decided that the only way to survive in the new, uncertain, domestic environment was to re-enter exporting and to have a higher export intensity than previously. It looked at markets around the world and decided that Japan was the best because that country has a strong economy, a stable government, and is a heavy user of packaging timber. LD believed it could profit in Japan. Before entering that market, the firm conducted market research both through Tradenz and through a New Zealand market research company (although it did not take such a formal approach to research when re-entering the Australian market). LD's owner also visited Japan to obtain more knowledge about the market. He asked his customers in Japan if they wanted to invest in his company, and also got ideas on what LD should be doing. The firm, however, did not have the resources to produce the quantities of the processed timber needed in Japan so, to increase production, it had to opt for multiple ownership. In 1991 LD managed to form a joint venture with two Japanese trading houses who were his distributors, and a New Zealand firm. With this formation LD expected its export intensity to increase from 10% to 70%. To achieve this, LD expanded its production capacity and invested in new production equipment. From 18 employees in 1992, LD increased to 65 in 1995 and by 1994 the actual export intensity had reached 80%. Through the contacts formed with this Japanese joint venture, LD is entering new markets such as Thailand, thus using its business networks to enter third countries. In addition, one of LD’s competitor’s in the domestic market has introduced it to an agent in Taiwan. This also illustrates how existing relationships in a business network are used to form new ones. AN OVERVIEW OF THE LONGITUDINAL CASE STUDY WITH A FOCUS ON CASES (LJ, HG,NF,LD) Reid (1981, p105) stresses the lack of foreign market knowledge as the main obstacle to internationalisation. The corollary of this is that the best-known market, the one closest in ‘psychic distance’ is most likely to be entered first. In this study with the exception of HG which had its first international sales in the Pacific Islands, the rest of the exporters had their first international sale in Australia. When firms start exporting to Australia they do not really see it as an international market but an extension of the domestic market. This reduces the perceived risk of internationalisation. Exporting to Australia does not need investment in additional resources. When deciding to enter the Australian market formal market research is not conducted to the extent that it is in other markets. As the Australian economy becomes more deregulated and open to international competition these firms may need to enter markets with a greater psychic distance.
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To become successful internationally, they built and maintained relationships with their suppliers, customers, distributors, competitors and government organisations such as, Tradenz and the regional development boards. Existing relationships with customers are used to form new relationships in order to expand in international markets. This strategy of developing foreign markets through customer relationships is also illustrated by Blackenburg Holm (1996). The four cases show how a firm’s internationalisation is influenced by the internationalisation of the actors in its business network. The internationalisation of these firms can be seen as a “set of connected learning processes” (Axelsson and Johanson, 1992 p.208). The learning process involves other actors in the network such as competitors, suppliers, customers, and government. According to Sharma and Johanson (1987) the firm’s relationships with these various actors are the most important assets of the firm. Through their joint action groups these firms were learning to cooperate to gain competitive advantage. They were cooperating with their competitors to gain from the advantages of size to enter markets abroad. As these are small to medium sized firms attempting to enter international markets which are tightly structured and dominated by large firms they have to produce customised products to succeed. Their customers are actively involved in the research and design of their products. Through the relationships with their customers firms are learning about new products, and as the case of NF shows these new products can also be used in the domestic market. The cases in this study confirm that internationalisation is a process that takes time (Axelsson and Johanson,1992). The longitudinal case study shows how intent to increase international sales may not eventuate. The case of NF shows that it is hard to break into tightly structured business networks whether in the domestic or international market. Although intense competition in the domestic market is driving NF into internationalisation it does not have relationships in the market (production net) to do so. Entry into international markets many not happen for some time and only after personal knowledge and credibility have been built up by time (and money) invested in prospective markets. The question to be raised here is; does the firm have to achieve a minimum level of profitable domestic business, sufficient to fund the necessary investment in overseas markets, or can it internationalise because of its network position. Final entry will not be made any easier by the fact that its competitors in this study were themselves intent on increasing their own international sales. This shows that NF has to enter a tightly structured business network where competitors have an advantage as they have more knowledge and established relationships. However, when the first international sale is made, it is likely to involve relatively small shipments if only to permit the customer(s) to test the credentials of their new supplier. It will therefore take time for NF to build relationships and trust.
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This longitudinal case study illustrates how a firm like LD uses its relationships in business networks to shift from a below-average export intensity firm to one with above-average status. The firm was a proactive exporter motivated to re-enter internationalisation by external factors, such as decreasing demand in the domestic market, as it lost its existing relationships when customers went out of business. Although it made an exit from its international markets at the experimental stage, it identified the limitations in the domestic market and realised it had to re-enter international markets. To do this, LD had to form new relationships in new business networks as it tried to enter new markets. It realised that it would have to increase production capacity and to raise the necessary finance opted for multiple ownership. Through the relationships formed with its joint venture, LD is entering new markets such as Thailand, thus using customers and business partners in its existing business networks to enter third countries. This firm is obtaining knowledge about business opportunities through its networks, a phenomenon that is highlighted by other researchers such as, Hakansson (1982) Hagg and Johanson (1982) and Sharma and Johanson (1987). A firm’s current business networks can be used as a bridge to enter new markets (Sharma and Johanson 1987, Blankenburg Holm et al. 1996). One example of this is, LJ’s relationships with its customers, Air New Zealand and the Malaysian customer which are driving it to enter new international markets. Another example of this is, LD which has the New Zealand Dairy Board (a highly internationalised firm) as a customer, and is using this relationship to enter new markets. Firms with a high degree of internationalisation such as HG and LD are using their existing relationships in business networks in various countries for further international expansion. While the case of NF shows that with limited business network relationships in its domestic market, and no international market it is hard to break into tightly structured networks. This supports Axelsson and Johanson’s (1992) suggestion that an important issue for research is how existing business networks in the domestic market, in third country markets and the entry market are used for further international expansion.
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MANAGERIAL IMPLICATIONS Managers need to realise that establishing and maintaining relationships in business networks should be an important part of their international strategy. The cooperative relationships a firm has with its customers, suppliers, competitors or other business partners have important implications for foreign market entry (Blankenburg Holm et al, 1996). Through trust and commitment they create interdependencies amongst members within the business network. Firms can obtain knowledge, learn from the experiences and share resources with other actors in their business networks. Since most New Zealand firms are small to medium-sized they can take advantage of pooling their resources in these business networks and thus benefit from size. The main managerial task should be to coordinate the interaction of the various actors in the business network (Forsgren and Johanson, 1992). The firm’s network position is important as this is a market asset that allows a firm access to other firm’s internal assets. Managers need to realise that their firm and the environment are not separate entities but that by interacting with other firms they are shaping their environment (Forsgren and Johanson, 1992). In this study all eight firms with international sales have relationships with either one or more of the formal business associations such as, joint action groups, hard business networks and industry clusters. New Zealand firms can participate in these formalised relationships to actively seek ones that can be useful for them in their internationalisation. In order for these formal business networks to become successful it is important for the informal relationships to develop, and to exchange knowledge and share other resources. Johanson and Vahlne (1977) argue that a lack of and difficulty of obtaining market knowledge, which they consider to be a resource, is a constraint on internationalisation. Thus formal business networks can be used to gain market knowledge to overcome this constraint on internationalisation. Madhok (1997, p.43) supports collaboration to acquire knowledge; “Collaborations are a useful vehicle for enhancing knowledge in critical areas of functioning where the requisite level of knowledge is lacking and cannot be developed within an acceptable timeframe or cost”. Firms can consider how they can use their existing relationships to enter new markets and to form new relationships in new business networks. They have to be selective in their choice of relationships in these formal business associations. These formal business associations could ease the way for new entrants to break into tightly structured business networks. Each member of the group wants the formal business association to be of mutual benefit. New entrants need to identify and be innovative about what benefits they can offer other actors in the network. Members of these formal business associations may consider focusing on the opportunities that can arise from the group rather than the obstacles. CONCLUSIONS
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The findings in this study indicate that a firms internationalisation is influenced by the internationalisation of the actors such as suppliers, customers, competitors and government in its business network. Firms can use their existing relationships to enter and expand into new markets. Business networks also allow firms to benefit from the advantages of size. The firm can benefit from the resources such as finance, knowledge and experience of the other actors in the business network. Firms learn from each others’ experiences, and business networks disseminate information about opportunities in international markets, thus expediting a firm’s internationalisation. The longitudinal case study highlighted the fact that it was difficult for the firms which were not internationalised to break into tightly structured domestic and foreign business networks. Indeed, a lack of relationships in business networks was frequently mentioned as the main obstacle to enter new markets or to expand within existing ones. Being part of a business network is of strategic importance as firms are exposed to opportunities in new markets (Axelsson and Johanson, 1992). Some of these difficulties might be alleviated by the formalised business associations created by Tradenz to promote the internationalisation of firms. These formal business associations allow a group of independent firms to improve their joint performance by sharing their resources and by having a collective strategy. These formal business associations can be successful if the informal relationships within them are allowed to develop. SUGGESTIONS FOR FUTURE RESEARCH Further research could be done on how existing relationships are used to form new relationships. Longitudinal studies will help to understand how these new relationships develop over a period of time. Another suggestion for future research is to evaluate the success of the formalised business networks that have been introduced in New Zealand and elsewhere, and the development of informal relationships within these formalised networks.
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