_9c1oYVCprfT

LIST OF CONTRIBUTORS

Catherine N. Axinn Marketing Department, College ofBusiness, Ohio University, Athens, OH,USA

Nigel J. Barrett
School of Marketing, University ofTechnology Sydney, Australia
Stephen Chen
College of Business and Economics,Australian National University,Canberra, Australia
Thomas Chesney
Nottingham University Business School,The University of Nottingham,Nottingham, UK
Dawn R. Deeter-Schmelz

Marketing Department, College ofBusiness, Ohio University, Athens, OH,USA

Pervez Ghauri
Manchester Business School, TheUniversity of Manchester, Manchester,UK
Calin Gurau
Groupe Sup de Co Montpellier,Montpellier, France
Hartmut H. Holzmuller
Department of Marketing, University ofDortmund, Dortmund, Germany
Kathryn Houghton
Bahattin Karademir
Department of Business Administration,C- ukurova University, Adana, Turkey
ix

LIST OF CONTRIBUTORSx

Jorma Larimo
Department of Marketing, University ofVaasa, Vaasa, Finland
Kannika Leelapanyalert
Department of Business andService Sector Management,London Metropolitan University,London, UK
Patrick Lentz
Department of Marketing, University ofDortmund, Dortmund, Germany
Tage Koed Madsen
Department of Marketing &Management, University of SouthernDenmark, Odense M, Denmark
Michael R. Mullen
College of Business, Florida AtlanticUniversity, FL, USA
Tho D. Nguyen
University of Economics, Ho Chi MinhCity, Vietnam; and School of Marketing,University of Technology, Sydney,Australia
Trang T. M. Nguyen
Vietnam National University,Ho Chi Minh City, Vietnam
Aristides Olivares-Mesa
Department of Business Economics andManagement, University of Las Palmasde Gran Canaria, Las Palmas de GranCanaria, Spain
Richard N. Osborn
School of Business Administration,Wayne State University, Detroit, MI,USA
Giada Palamara
Department of Business Research,University of Pavia, Pavia, Italy
Jose Pla Barber
Department of Management, Universityof Valencia, Valencia, Spain

List of Contributors xi

Ashok Ranchhod
Southampton Business School,Southampton Solent University,Southampton, UK
Erik S. Rasmussen
Alex Rialp Criado
Department of Business Economics,College of Economics and BusinessSciences, Autonomous University ofBarcelona, Barcelona, Spain
Josep Rialp Criado
Department of Business Economics,College of Economics and BusinessSciences, Autonomous University ofBarcelona, Barcelona, Spain
Esther Sanchez Peinado
Department of Management, Universityof Valencia, Valencia, Spain
Eric Schirrmann
University of Applied Sciences (FHM),Department of Marketing,Bielefeld, Germany
Per Servais
Shirley Ye Sheng
College of Business, Florida AtlanticUniversity, FL, USA
Brian T. Straley
Brand New Era, Canfield, OH, USA
Sonia Suarez-Ortega
Department of Business Economics andManagement,University of Las Palmas de GranCanaria, Las Palmas de Gran Canaria,Spain

LIST OF CONTRIBUTORSxii

Heidi Winklhofer
Attila Yaprak
School of Business Administration,Wayne State University, Detroit, MI,USA
Ernest J. Zavoral, Jr.
Brand New Era, Canfield, OH, USA
Antonella Zucchella
Department of Business Research,University of Pavia, Pavia, Italy

LIST OF REVIEWERS

Arild AspelundNorwegian University of Science and

Technology,

Trondheim, Norway

George BalabanisCass Business School,

City University,

London, UK

Colleen Collins-DoddFaculty of Business, Simon

Fraser University, Burnaby,

BC, Canada

Michael CzinkotaMcDonough School of Business,

Georgetown University,

Washington, DC, USA

Richard FletcherUniversity of Western Sydney,

Penrith South, NSW, Australia

Esra GencturkCollege of Administrative Sciences

and Economics, Koc- University,

Istanbul, Turkey

David GriffithThe Eli Broad Graduate School

of Management, Michigan

State University, East Lansing, MI,

USA

Nukhet HarmanciogluSawyer School of Management,

Suffolk University,

Boston, MA, USA

xiii

Marian V. JonesDepartment of Business and

Management, University of

Glasgow, Glasgow, Scotland, UK

Gary A. KnightDepartment of Marketing,

College of Business,

Florida State University,

Tallahassee, FL, USA

Luis Filipe LagesUniversidade Nova de Lisboa,

Lisbon, Portugal

Peter W. LieschUQ Business School,

The University of Queensland,

St. Lucia, Queensland,

Australia

Paul MatthyssensDepartment of Marketing,

University of Antwerp, Antwerpen,

Belgium

Oystein MoenNorwegian University of Science and

Technology, Trondheim, Norway

Ben OviattDepartment of Managerial Sciences,

Robinson College of Business,

Georgia State, Atlanta,

GA, USA

Piet PauwelsUniversity of Maastricht,

Maastricht, the Netherlands

LIST OF REVIEWERSxiv

Marisa Ramırez AlesonDepartment of Business

Economics and Management,

College of Economics and

Business Sciences,

University of Zaragoza,

Zaragoza, Spain

Bernard SimoninThe Fletcher School,

Tufts University, Medford,

MA, USA

Carl A. SolbergNorwegian School of Management,

Sandvika, Norway

Sharon V. ThachCollege of Business, Tennessee

State University, Nashville,

TN, USA

Chris WhiteThe Eli Broad Graduate School

of Management, Michigan State

University, East Lansing, MI, USA

PREFACE

This special volume of Advances in International Marketing originated frommany interesting papers that were presented at the 2005 Annual Meeting of
our CIMaR (Consortium for Internatinal Marketing Research) network.The hosts of this meeting, Professors Alex Rialp and Josep Rialp served asguest co-editors. We are delighted to feature the latest research findings andinsights contributed by many authoritative colleagues from around theworld.
Our thanks go to Professors Alex Rialp and Josep Rialp for their effortsin creating this volume. They issued a call for papers, which then attracted avariety of submissions of high quality. We owe gratitude to them forscreening and evaluating these submissions, and for preparing the final set ofchapters. We are also indebted to many colleagues who assisted in the re-view process. The resulting selections draw from a variety of perspectivesand offer rich insights.

At Michigan State University, I would like to recognize the professionalassistance of Ms. Kathy Waldie, editorial assistant for the Advances in

International Marketing series. Kathy carries the responsibility of corre-sponding with the authors, guest editors as well as the staff of ElsevierScience at various phases of the publication process. Finally, the co-authorsand I express appreciation to Dr. Helen Collins, Ms. Joanna Scott, Ms. JulieWalker, Mr. Philip Tite and the other staff at JAI/Elsevier Science who sawthe volume through the production process.

S. Tamer CavusgilSeries Editor

xv

INTERNATIONAL MARKETING

RESEARCH: OPPORTUNITIES

AND CHALLENGES IN

THE 21ST CENTURY

Alex Rialp and Josep Rialp

INTRODUCTION: STATE-OF-THE-ART AND

OPPORTUNITIES AND CHALLENGES FOR

INTERNATIONAL MARKETING RESEARCH

IN THE 21ST CENTURY

According to a recent and interesting revision of advances in internationalmarketing theory and practice, the international marketing literature hasgrown exponentially in recent years in order to offer sufficient support tocorporate and public policy makers confronting today’s hostile global busi-ness conditions (Katsikeas, 2003a). In fact, some of the most relevantacademic journals in this field (Journal of International Business Studies,Journal of International Marketing, International Marketing Review, Inter-national Business Review, Advances in International Marketing, amongothers) can be considered highly stable and mature publications, with re-search articles covering a wide range of topics within the internationalmarketing domain and usually authorized by leading contributors to other

International Marketing Research: Opportunities and Challenges in the 21st Century

Advances in International Marketing, Volume 17, 1–13

Copyright r 2007 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17019-2

1

ALEX RIALP AND JOSEP RIALP2

high-ranking marketing journals (DuBois & Reeb, 2000; Malhotra, Wu, &Whitelock, 2005).

However, according to some of the most outstanding critical assessmentscarried recently on the conceptual foundations, research traditions or earlierdevelopment, and future research agenda regarding the discipline of inter-national marketing as a field of study (Cavusgil, 1998; Czinkota &Ronkainen, 2003; Katsikeas, 2003a, 2003b; Balabanis, Theodosiou, &Katsikea, 2004; Cavusgil, Deligonul & Yaprak, 2005; Douglas & Craig,2006) some promising research avenues are still open to further academicresearch in this discipline. For instance, Cavusgil (1998) proposes the fol-lowing research agenda for international marketing: (1) mainstream mar-keting management issues in the international context; (2) special challengesin international marketing; (3) marketing engineering: performance ininternational marketing; (4) dynamic analysis of firm expansion in interna-tional markets; (5) interfirm partnering in international markets; (6) inter-nationalization process of firms; (7) government promotion of internationalbusiness activity; (8) marketing’s interface with other functions; (9) com-parative studies of marketing executive behavior; and (10) research methodsin international marketing. As this same author brilliantly stands out, ‘‘it isessential that we begin an open and constructive dialogue about what isimportant, how to go about adding to knowledge, and how to enhance bestpractices in international marketing’’ (Cavusgil, 1998, p. 112).

In their well-known international marketing manifesto, Czinkota andRonkainen (2003) postulate that the field of international marketing hasalready and can continue to make major contributions to the improvementof society. Seven propositions in support of a lively debate for the sake of arenaissance of this field are provided and illuminated by these authors:(1) remember the roots and purpose of the field, (2) resist the temptations ofoverspecialization, (3) work with a new paradigm and new methods, (4) lookto the World, (5) maintain the dialogue with all possible constituents,(6) work also with those who place or show, and (7) profess expertise. Also,in an effort to isolate still remaining problems and issues underlyingCzinkota and Ronkainen’s manifesto and suggest ways of pushing theirpropositions deeper, Katsikeas (2003b) stands out the lack of attentionafforded to examining outcomes of firms’ international marketing activitiesand the need of incorporating specific company performance issues in this field.

Similarly, Cavusgil et al. (2005) take into account the fundamentalchanges currently taking place in the business global environment and in thebusiness enterprise itself which compel international marketing scholars tocontinuously re-examine the progress being made by the field’s researchers

International Marketing Research 3

in developing knowledge. By critically evaluating progress in internationalmarketing as a field of study through ontological, thematic, and method-ological perspectives, these authors come up with a portfolio of researchtopics worthy of further scholarly attention.

In this way, further theory development and reframing in the field be-comes particularly a must (Rialp & Rialp, 2001). According to Axinnand Matthyssens (2001a, 2001b), existing theory in internationalization isinsufficient to explain the currently observed behaviors of firms in the in-ternational business marketplace (i.e., the increased speed of internation-alization, the limits of psychic distance, the range of foreign entry modesaccommodated by the firm, and so on). Accordingly, some new and chal-lenging issues such as the increasing impact of the global economy, theservice economy, the new knowledge-based economy, the high technologyand connected knowledge/network economy, and the customer value-basedeconomy are not only changing the shape of international business be-havior, but also casting doubt on the applicability of traditional interna-tionalization theories.

Also, Douglas and Craig (2006) are of the opinion that international mar-keting research plays a vital role as firms expand globally. Yet limitedattention, according to these authors, has been paid to the conceptual under-pinnings of research needed to guide such a foreign expansion. Accordingly,these authors develop refined conceptual frameworks that are indeed capableto guide further research in the field, also dealing with more appropriateunit of analysis selection and constructs measurement. In a previous interna-tional marketers-oriented work, these same authors (Craig & Douglas, 2001)had already identified four key areas where progress at conducting interna-tional marketing research had to be made. First, international marketingresearch efforts need to be more closely aligned with market growth oppor-tunities outside the industrialized nations. Second, international marketingresearchers must develop the capability to conduct and coordinate researchthat spans diverse research environments. Third, they need to develop new andmore creative approaches to probe the cultural underpinnings of behavior.Finally, technological advances, such as the Internet, need to be incorporatedinto the research process in order to facilitate and expedite research conductedacross the globe.

Another traditional research sub-area in the field, clearly demanding somemore refinement and re-elaboration, both from the theoretical and empiricalstandpoint, is, according to Balabanis et al. (2004), export marketing re-search. For these authors, rapid technological, institutional, legislative,economic, and attitudinal changes across the globe pose critical challenges


(but also, new opportunities) for the future development of export marketingresearch. This research should focus on the identification of the right exportmarketing capabilities that firms should develop or acquire, the ability toleverage or transfer them across international markets, and the ability ofconstantly upgrading them. Also, of critical importance are the processescurrently used to develop such capability-based international (export) mar-keting strategies and to manage relationships with international customersand partners.

In addition to this, entrepreneurship is becoming a growing phenomenonin World markets. Therefore, a new and highly related field of inquiry inwhich further contributions from (international) marketing scholars as wellas those provided by traditional entrepreneurship researchers are expectedto widely increase in the years to come is referred to the emerging disciplineof international entrepreneurship (Etemad & Right, 2003; Styles & Seymour,2006). In Styles and Seymour’s (2006, p. 126) own words: ‘‘there is con-siderable scope for marketing academics to contribute to the nascent field ofinternational entrepreneurship which would, in turn, advance marketingtheory.’’ In particular, some relevant analytic perspectives adopted in thisinternational entrepreneurship field (basically the result of mixing entrepre-neurship and international business/marketing disciplines), are currentlyreferred to the emergence and consolidation, both in traditional and high-tech sectors, of the so-called born-global firms, global start-ups, and/orinternational new ventures (Knight & Cavusgil, 1996; Madsen & Servais,1997; Rialp, Rialp, & Knight, 2005; Rialp, Rialp, Urbano, & Vaillant, 2005)as well as the interface of the Internet and firm entrepreneurial behavior ininternational markets (Sinkovics & Bell, 2006).

With this general assessment of the current status of the internationalmarketing discipline in mind and, more in particular, taking into accountthe diverse challenges and opportunities that can be associated with furtherresearch in this still very promising field of scientific inquiry, we describehereon the origin, structure, and contents of this Special Issue of Advances inInternational Marketing.

THE SPECIAL ISSUE: ORIGIN, STRUCTURE AND

CONTENTS

The origin of this Special Issue of Advances in International Marketing isfound in an international conference of the Consortium for InternationalMarketing and Research (CIMaR) that took place in Barcelona, Spain on


May 28–31, 2005. Sponsored and co-organized by the Center for Interna-tional Business Education and Research at Michigan State University(E. Lansing, Michigan) and the Department of Business Economics at theAutonomous University of Barcelona (Spain), the conference featuredabout 30 accepted papers and works in progress.

In addition to this meeting research outcomes, a subsequent call for pa-pers for a Special Issue of Advances in International Marketing with the title‘‘International Marketing Challenges in the 21st Century’’ was launchedin October, 2005 with the main objective of providing a new setting forscholars and academics around the globe to exchange and/or share theirmost current research interests and ideas related to this evolving and chal-lenging scientific discipline of international marketing. In particular, givensome recent and important trends of change being present today in theglobal business sphere (for example, consolidation of emerging sectors,more rapid pace of technological change and business internationalizationprocesses, greater integration and interconnectedness of international econ-omies and firms, converging buying behavior, recent but critical advances intelecommunications and transportation facilities, among others), a criticalassessment and further explanatory research of the expected influences, inthe form of both new research opportunities and challenges in the field,associated with these phenomena in the years to come had to be newlyapproached.

Both conceptual as well as empirical papers were highly welcome forpublication consideration for this volume. Empirical papers might employquantitative and/or qualitative (e.g., case study) methodologies, but in anycase submissions for this special issue had to be of high and robust academicrigor. For some CIMaR participants in the last meeting in Barcelona, thismeant an excellent opportunity to re-submit a revised version of their earliersubmissions (papers, research proposals, or works in progress), and/or anyother paper fitting the publication’s philosophy and guidelines. Neverthe-less, all other researchers in this field were also kindly invited to submit theirpapers for this special issue.

As a result of this call for papers, a considerable number of submissionswere received which were then submitted to a rigorous, double-blind reviewprocess. Although there were several other papers that could have been inclu-ded in this volume, reviewers’ evaluations (and corresponding contributors’revisions), space limitations, and other conditions, such as achieving enoughgeographical dispersion of authors and appropriate balance among topicscovered by the different studies, led to our final selection of the15 papers presented in this volume which were delivered by more than


30 contributors in the discipline of international marketing from all over theWorld. In addition to the work of scholars from the United States, otherpapers developed by researchers in many other countries in this field are alsoincluded. Most of these papers report on individual, firm, or institutionalbehavior in a wide array of World economies ranging from Australia,Denmark, Germany, or UK to Italy, Finland or Spain, and from Turkey toVietnam, among others. Accordingly, we believe that this collection repre-sents a comprehensive treatment of the contemporary issues and problemsbeing currently faced mostly by small- and medium-sized firms in differenttype of sectors (including manufacturing industries and services) in bothdeveloped and emerging, developing economies.

Thus, as regards to its structure and contents, apart from this introduc-tory chapter, the special issue consists of 15, double peer-reviewedmanuscripts covering very relevant topics in contemporary internationalmarketing research, that we believe will become of very great interest notonly for both academics and practitioners, but also for policy makers in thisfield. The issue is structured in four different, but at the same time related,sections which proceed from the more general issues of the export andinternationalization processes toward some more specific issues and applica-tions both at the environmental and technological levels: (1) export be-havior, development process, and performance (four chapters); (2) strategicinternationalization process in different sectoral settings (three chapters);(3) environmental influences and emerging markets for international mar-keters (three chapters); and finally (4) business internationalization and in-formation technologies (five chapters). Hereon, we briefly introduce the15 selected chapters for this volume of Advances in International Marketing

according to the four different parts or sections in which they have beenassigned.

PART I: EXPORT BEHAVIOR, DEVELOPMENT

PROCESS, AND PERFORMANCE

In the opening piece of this volume, Jorma Larimo explores past and currentresearch related to firm export performance a topic in which many studieshave been conducted to date with mixed results. This new empirical paperis aimed at analyzing (1) the impact of the selected firm, management, andthe export strategy-related variables on export performance; (2) the possi-ble variation existing in the results depending on the different types ofmeasuring this export performance dimension; and (3) the similarities and


differences in the results depending on the type of SME – traditional ex-porters vs. born international companies. The study is based on a surveyconducted among Finnish SMEs in early 2002. While none of the hypoth-eses were fully supported by all of the six measures of export performancebeing employed, this dimension was positively impacted by firm size, prod-uct/service quality, international orientation, and market diversificationalong five measures. Additionally, the study indicates some similarities anddifferences depending not only on the measure selected for export perform-ance, but also on the type of the exporting SME, and the operationalizationbeing used for the born international companies.

The second paper in this section, by Antonella Zucchella and Giada

Palamara, conceives that small firms can approach foreign markets andreach high levels of export intensity combined with a broad geographicscope in spite of their limited resources just by adopting a niche strategy.Such a global niche approach also help explain, among other factors, whyand how new firms can become international or even global since theirinception. By means of applying case study analysis, this paper shows apositive relation between niche strategy and high international performance,in terms of export intensity, precocity, speed, and market scope. Theinternational expansion of such niche-oriented firms is based on a horizon-tal microsegmentation of the global market: they move internationallyfollowing global customers, regardless the psychic/geographical distance inplay, and compete mostly on a non-price basis.

Arıstides Olivares and Sonia Suarez investigate, in the following contri-bution of this section, the issue of entry timing in the export developmentprocess of, in this case, Spanish manufacturing firms. This process is con-ceived as a sequential path along the following export stages: (1) the pre-engagement phase, where firms do not export; (2) the initial phase, wherefirms export by means of an agent; and (3) the advanced phase, where firmsexport via a sales subsidiary. This study is then focused on the type offactors which can accelerate or decelerate the decision to entry in and/orchange across these phases. Event history analysis is applied to a data setcomprised by 1,478 firms in 2002. Results indicate that the development ofproduct or process innovations becomes the most significant motivation foran early entry in the initial and advanced phases of the export developmentprocess. In addition, network ties, a broader scope of products, firm size,and foreign ownership participation are also key factors in acceleratingentries in this process.

Finally, the paper ending this first section focused on export behavior andperformance, authored by Trang T.M. Nguyen, Nigel Barrett and Tho


D. Nguyen, examines the roles played by market and learning orientations inrelationship quality between exporters in transition economies and their for-eign importers and subsequently, export performance. A random sample of283 export firms in Vietnam provides enough evidence to support the hy-pothesized main effects. The results further indicate that learning orientationplays a role in building high-quality relationships for both new and maturerelationships. However, the impact of market orientation on relationshipquality is found only in the new relationship. In addition, firm ownershipstructure does not seem to moderate the relationships between learning ori-entation, market orientation, relationship quality, and export performance.

PART II: STRATEGIC INTERNATIONALIZATION

PROCESS IN DIFFERENT SECTORAL SETTINGS

The following contributors, Calin Gurau and Ashok Ranchhod, examine howthe accelerated globalization of World markets in the last three decades hasdramatically increased the importance of internationalization models evenmore, both from an academic and a practitioner perspective. Actually, suchinternationalization process shows major implications for the strategicorientation of small firms. However, these authors contextualize this phe-nomenon in relation with the specific characteristics for various marketenvironments and industrial sectors, as for instance, high-tech ones. Ac-cordingly, by means of a comparative analysis of the internationalizationprocesses of UK and US biotech SMEs, this study shows the impact of thedomestic market profile on this process, outlining also the similarities andthe differences that can be observed between these two countries.

Focusing on non-traditional economic activities, Esther Sanchez and Jose

Pla stand out that, despite the increasing importance of the service sector indeveloped economies and the growth of foreign investments in this sectorduring the last decade, few studies have undertaken to empirically analyzethe factors influencing foreign entry mode choice in this context. For theseauthors, the special characteristics of services increase the complexity of theanalysis and, thus, traditional explanations of international entry modechoice in manufacturing sectors may need to be complemented by othermoderating influences. Based on 174 entry decisions of service firms, theirresults suggest the importance of including strategic variables and the spe-cific nature of services to understand such a complex phenomenon, which isnot always associated just with efficiency and value-based considerationsbut also with strategic issues and industry characteristics.


Also in the context of international market entry strategies for serviceproviders, Kannika Leelapanyalert and Pervez Ghauri acknowledge thatnumerous studies have focused on retailing firms and their activities abroad;however, these have not been able to fully identify the factors that influencethe process of retail internationalization. Thus, their paper examines thefactors that influence the foreign market entry process in retailing firms anddevelops a conceptual model, which is then used to analyze two case studies:the entry strategies followed by IKEA in China, and by Marks & Spencer(M&S) in Hong Kong. By fully examining these two business experiences,the authors provide insights into the type of factors influencing the foreignmarket entry process and how other firms can manage it.

PART III: ENVIRONMENTAL INFLUENCES AND

EMERGING MARKETS FOR INTERNATIONAL

MARKETERS

In the paper that introduces the third section of this volume, Michael

R. Mullen and Shirley Ye Sheng complement and extend a growing body ofwork developing and using overall market opportunity indexes (OMOIs) torank the attractiveness of potential foreign markets. Assuming that firms inmost industries must look to expand into international markets to surviveand thrive, the index developed in this paper assesses countries’ marketpotential beyond the traditional measures of market size and economic de-velopment also by including political risk, economic freedom, telecommu-nications as well as physical infrastructure and geographic distance.Accordingly, the authors provide a current and detailed analysis of mar-ket attractiveness and opportunity for the largest set of countries indexedand ranked to date. The validity of the index is also assessed by comparingthe ranking of market opportunity to actual subsequent trade flows from theUS. The modified OMOI is shown to be a flexible, valid, and fairly stabletool for preliminary analysis of foreign market opportunity.

Acknowledging the popularity of country-of-origin research in interna-tional marketing, but transferring it to new and unexplored context, PatrickLentz, Hartmut H. Holzmuller, and Eric Shrirrmann focus on the lack ofattention usually been paid to effects which stem from the declaration of aproduct’s local origin. In this study, insights from country-of-origin researchas well as exploratory qualitative studies are used to model determinants ofpreference for local products. Conjoint analysis and structural equationsresults based on a sample of consumers from three neighboring cities in


Germany confirm the importance of local origin for product preference aswell as of the mechanism of such city-of-origin effects.

Finally, Attila Yaprak, Bahattin Karademir, and Richard N. Osborn ap-proach the issue of how do business groups function and evolve in emergingmarkets by analyzing the case of Turkish business groups. According tothese authors, business groups have not received sufficient attention in theinternational marketing literature, though they have become a significantphenomenon in the evolution and functioning of emerging markets. Theyalso provide important local partnership opportunities to internationalmarketers. Accordingly, this paper provides a general overview of thetheories that explain how business groups function and evolve in thesemarkets with the aim of generating subsequent propositions from thattheory. Evidence on such business groups evolution in Turkey, which istaken as an illustration of one emerging country market, is presented anddiscussed in detail by these authors.

PART IV: BUSINESS INTERNATIONALIZATION AND

INFORMATION TECHNOLOGIES

The last section of this volume is more specifically devoted to the highdegree of impact that the emergence and consolidation of the Internet,among other information technologies, is currently having on small firminternationalization and international marketing strategies, such as exporting.In the paper introducing this last section, Per Servais, Tage Koed Madsen,and Erik S. Rasmussen conceive e-business as a very important and rev-olutionary business tool, also relevant for small- and medium-sized firms(SMEs) aimed at internationalizing. With e-business and the Internet so-lutions, borders between countries are becoming less relevant, and moredirect interaction between separate businesses becomes possible. In thischapter, the authors unravel the use of the Internet by different types offirms. First, a categorization of different local and international firms ispresented, and then the level of Internet usage by the so-called born globalfirms as compared to the usage of this tool by other types of firms is analy-zed. According to the results of this study, born globals make use of theInternet to convey their market presence, but only to a limited extent theysell their products electronically abroad. Instead, Internet help them supportalready existing actions by also describing their products on web pages,offering services related to their products, facilitating product development,and building and maintaining relations to foreign customers. Thus, this


article sheds some prior light on the key question of how small firms ingeneral, and born global firms in particular, will continue to adapt theInternet technology in practice, though much more research on this issue isexpected by these authors.

In a similar vein, Stephen Chen’s chapter examines to what extent Inter-net-based firms have indeed globalized and the key factors that have enabledsome firms to globalize more than others. Contrary to arguments that In-ternet-based firms automatically benefit from a global market, this studyshows that most Internet firms serve regional markets. However, the authorfinds a few notable exceptions. Interestingly, in these cases, a combination ofearly-mover advantages, unique product, technology standards, and com-plementary products and services seem to have created what this authorcalls a ‘winner-takes-all’ market in which a few firms dominate marketsworldwide.

The following paper is jointly authorized by Catherine N. Axinn, Dawn

R. Deeter-Schmelz, Brian T. Straley, and Ernest J. Zavoral Jr. Drawing fromseminal research on organizational buying behavior, these authors make useof the exploratory case study approach to explore the impact of the Internetand internationalization on today’s industrial procurement processes. Inparticular, by means of conducting several interviews with senior managersof an industrial distributor, a number of key insights and implications forfuture research regarding the impact of the Internet on buyer–supplier in-teractions and the importance of global sourcing are revealed in this chapter.

The following selected paper, co-authorized again by Tho D. Nguyen andNigel Barrett, starts from the assumption that the Internet is a crucial sourceof information that can be transformed into knowledge. The authors of thisstudy develop an Internet-based knowledge internalization process in whichinternationalizing firms in transition markets utilize the Internet to searchfor information about foreign markets, to assess its relevance, and then tointernalize it for their internationalization purposes. It is also found thatsuch a process underlies international orientation and foreign sales intensitywhich in turn, has a reciprocal effect on it. Further, learning orientation alsofacilitates the Internet-based knowledge internalization process. Accordingto the authors, these findings suggest that internationalizing firms shouldpromote and value this process in order to mitigate their common lack offoreign market knowledge.

Finally, the research paper that closes this section and the volume, co-authorized by Heidi Winklhofer, Kathryn Houghton, and Thomas Chesney, isfocused on the drivers and inhibitors determining how advanced websites ofSME exporters are. According to these authors’ opinion, despite the much


publicized advantages of a website for SME exporters, the level of websitesophistication, as well as the factors which inhibit or stimulate exportingSMEs to develop their website beyond a basic level of sophistication, arestill unknown. The literature is prone to discuss website establishment anddevelopment simultaneously, splitting firms into adopters and non-adopters,yet websites may be established and then neglected, or be continually de-veloped. Accordingly, their paper introduces an instrument for measuringwebsite sophistication within an export marketing context, and proposesand empirically tests a model that depicts factors impacting on perceivedadvantages of a website and its sophistication levels. The results of thisempirical study identify export diversity and environmental pressure as thekey determinants of perceived advantage of a website which in turn is agood predictor of website sophistication. However, the firm’s internal re-sources, i.e., information and communication technology (ICT) knowledgeand time, in conjunction with entrepreneurship orientation, also determinesmall- and medium-sized exporting firm’s website sophistication level.

Once we have briefly introduced the different research articles selected forthis Special Issue of Advances in International Marketing as a way of iden-tifying and discussing emerging opportunities and challenges in this currentcentury for academics and practitioners in the international marketing field,we sincerely hope that you will enjoy reading and reflecting on the workpresented in this volume, at least as much as we enjoyed composing it!

ACKNOWLEDGMENTS

As the guest co-editors of this volume, we would like to especially ac-knowledge the series editors of Advances in International Marketing,S. Tamer Cavusgil and Kathy Waldie, from Michigan State University,for the inspiration, continued guidance, and leadership they have alwaysprovided to us as well as all of the authors and reviewers involved in thisvolume for having played an excellent role contributing not only with theirprecious time, but also with their great effort and talents.

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Axinn, C. N., & Matthyssens, P. (2001b). Limits of internationalization theories in an unlimited

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Balabanis, G., Theodosiou, M., & Katsikea, E. S. (2004). Guest editorial. Export marketing:

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DIFFERENT TYPES OF EXPORTING

SMEs: SIMILARITIES AND

DIFFERENCES IN EXPORT

PERFORMANCE

Jorma Larimo

ABSTRACT

Research related to firm export performance dates back to the early

1960s, ever since many studies have been conducted with mixed results.

The three main goals of the present study were to analyze (1) the impact

of the selected firm, management, and the export strategy-related var-

iables on the export performance; (2) the possible variation in the results

depending on the measure of export performance; and (3) the similarities

and differences in the results depending on the type of SME – traditional

exporters vs. born international companies. Based on a literature review,

14 hypotheses were developed to be tested. Consequently, the empirical

part of the study is based on a survey conducted among Finnish SMEs in

early 2002. The export performance was analyzed using six different

types of performance measures. None of the 14 hypotheses were fully

supported by all employed measures of performance. However, the export

performance was positively impacted by firm size, product/service quality,

international orientation, and market diversification along five measures.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17001-5

17

JORMA LARIMO18

Additionally, the study indicated some similarities, but also some differ-

ences depending on the measure of export performance, type of the ex-

porting SME, and the operationalizations used for the born international

companies. Based on the results, management implications and proposals

for future research are presented.

1. INTRODUCTION

The intensification of the global-scale competition has led an increasingnumber of firms to look for opportunities in the international markets inorder to achieve their objectives as well as to safeguard their market po-sitions and survival. The most common mode of foreign operation of thesmall- and medium-sized companies (SMEs) has been export. Compared toother types of foreign operations, the export usually requires less financial,human, and other resources, demands less investments, involves less finan-cial risks, and allows for greater structural and strategic flexibility in theforeign markets than most other forms of operation (see e.g., Luostarinen &Welch, 1990; Young, Hamill, Wheeler, & Davies, 1989). To be successful inthe foreign markets is, however, not so easy because of e.g., cultural differ-ences, fierce competition, and increasing dynamics in the market. The resultsconcerning the links between various firm, management, and export strat-egy-related variables and export performance are of significant importancefrom the point of view of both business managers and public policy makers.Furthermore, the results are also of great interest to marketing researchersfor the development of theory building in international marketing.

Research into firms export performance dates back to the early 1960s,with the pioneering study of Tookey (1964) as the first one attempting toanalyze the factors associated with successful exporting. Subsequently, nu-merous studies have been conducted trying to analyze the determinants ofexport performance. The empirical results related to variables of superiorexport performance have been relatively mixed. The differences are appar-ently caused at least partly by the differences in the measures of perform-ance, samples, time periods, and operationalizations used for various firm,management, and export strategy-related variables. However, more researchrelated to export performance needs to be undertaken.

There are three main goals with the present paper. To analyze:

(1)
the impact of the selected firm, management, and the export strategy-related variables to the export performance;

Different Types of Exporting SMEs 19

(2)
the possible variation in the results depending on the measure of exportperformance; and
(3)
the similarities and differences in the results depending on the type ofSME – traditional exporters vs. born international companies.
The contribution of the paper to the present stock of knowledge related toSME export performance is mainly in the following issues. The impact onexport performance of some of the variables at work in the present study hasbeen only limitedly assessed in previous analyses. Furthermore, there hasbeen mixed results in earlier studies. For the measurement of performance,six different variables representing both objective and subjective measureshave been employed in this study. Although there is an increasing number ofstudies including analysis of results based on several performance measures,our analysis attempts to provide a comprehensive view of the export per-formance of the reviewed companies. Furthermore, the previous studieshave mainly analyzed the differences in SME export performance based onthe size of the reviewed companies, the speed of internationalization hasbeen of greater interest in only very few studies so far. Related to the speedof internationalization, the classification is usually made by classifying firmsinto the traditional exporters or born global companies but the conditionsregarding e.g., to the time frame of starting exports/foreign operations, thelevel of exports within that time frame and later on have been very different.Two different bases are used to classify the companies into traditional ex-porters and born globals in order to analyze the impact of both looser andtighter definitions for born global companies on the results. Finally, al-though there have been numerous studies focusing on various aspects ofexport and internationalization behavior in the Nordic countries, there arevery few larger-scale empirical studies focusing on the SME export per-formance. This concerns especially the analysis of export performance usingseveral different performance measures.

The structure of the paper is as follows: In Section 2, a review of the typesof exporting SMEs focusing on traditional exporters and the so-called bornglobal firms is presented. In Section 3, first a review of the measures ofexport performance is made followed by an analysis of the relation betweenthe firm, management, and export strategy-related variables and the exportperformance, and finally, based on the reviews the hypotheses are developedfor the empirical part of the study. Section 4 in the paper includes themethodology, operationalizations of variables, and sample description. Sec-tion 5 presents the main results of the study, and Section 6 summarizes themain findings and conclusions, and suggestions based on the study.

JORMA LARIMO20

2. TYPES OF EXPORTING SMEs: TRADITIONAL

EXPORTERS VS. BORN INTERNATIONALS

Until mid-1990s, the reviewed companies in export marketing and per-formance studies were often divided into exporting and non-exporting, or tohighly vs. limitedly exporting companies. The past 10 years witnessed anincreasing interest toward firms which do not try first to grow and get strongmarket positions in their home countries and after that start foreign op-erations but rather are involved in foreign operations in their first years ofoperations or even straightaway start their foreign sales. These firms havebeen labeled quite differently in various studies: born globals (Knight &Cavusgil, 1996; Madsen & Servais, 1997; Aspelund & Moen, 2001), inter-national new ventures (INVs) (Oviatt & McDougall, 1994, 1995, 1997),global start-ups (Oviatt & McDougall, 1994), or high-technology start-ups(Jolly, Alahuhta, & Jeanet, 1992). More recently, the term born-again globalfirm has also been proposed, to describe long-established firms that used tofocus on their domestic markets, but suddenly opt for rapid internation-alization (see e.g., Bell, McNaughton, & Young, 2001).

The main driving forces for the existence of these new types of companiesare (see Knight & Cavusgil, 1996; Madsen & Servais, 1997; Rialp, Rialp, &Knight, 2005): (1) the increasing role of niche markets, (2) the advances inprocess technology, (3) the advances in communication technology, (4) theinherent advances of small companies, (5) the means of internationalizationthat have become more accessible to all firms and increasing support ac-tivities for the greater international contacts and cooperation, and (6) theincreasing amounts and use of international networks.

Looking at the operational definitions used in various studies focusing onthe born globals, several reviews indicate clearly that there has been a lot ofvariation. Based on an analysis of 55 studies dealing with born globals,Dominguinhos and Simoes (2004) found that two criteria were more com-monly used in those definitions: (1) the time frame from establishment tostart of exports/foreign operations and (2) the share of exports within thattime frame. Less used criteria were the timing of founding of the company,the number of export target countries, and even more limitedly the type oftarget countries. Concerning the time frame, some relatively few studies useda time frame of one to two years from the establishment to the start ofexport. Some studies have used a time frame of three years, but in severalstudies also a longer time frame of six years has been used, apparentlyinfluenced significantly by the pioneering studies by Oviatt and McDougall(1994, 1995, 1997). In some studies only the reference ‘‘in the first years’’ is


at work. Concerning the role of exports, some studies do not impose anyspecific share, in some studies 5, 15, or 25%, respectively has been used asthe minimum share for exports. Regarding foundation, some studies havefocused on companies founded in 1976 or more recently, or in some studiesin 1989 or more recently, but several studies do not include any limitations,because there is evidence that there has been born globals also before mid-1970s. In some studies, the demand of at least three target countries ofexports has been used; in some studies, even more demanding condition likeexports/operations in two continents, but only after a rather long time sinceestablishment (Gabrielsson, Sasi, & Darling, 2004, use a period of 15 years).Furthermore, a key feature of the operation should be that the foreign salesshould be continuous and significant for the company (mainly increasingrole). (For the reviews, see Dominguinhos & Simoes, 2004; Rialp et al.,2005).

As the earlier discussion indicates, there has been a great variation in thedefinitions used for born globals. The differences may be expected to havean impact also on the results related to the behavior, strategies, and exportperformance. Based on the definitions and operationalizations presentedabove, two different classifications were agreed upon for the present study:(1) a looser classification and (2) a tighter classification. In the looser clas-sification, the companies are divided into two sub-groups only based on thetime frame and the existence of exports: no exports vs. exports within threeyears from the establishment, without any additional conditions. The sub-groups are labeled as truly traditional exporters and born internationals. Inthe second classification, three conditions were taken into consideration:(1) the time frame and the existence of exports: no exports vs. exports withinthree years from the establishment, (2) the share of exports within threeyears: whether the share of exports had reached the 25% limit of the totalsales within the agreed time frame, and (3) the continuous and important/extensive role of exports: if the share of foreign sales had reached the 50%limit of the total sales. The sub-groups are labeled as traditional exportersand truly born internationals. The cutoff rate of 25% was based on theearlier studies and on the fact that if the foreign sales reach that level, itmeans that the company has to take the international operations seriouslyand that internationalization is not sporadic anymore. Furthermore, therequirement of at least 50% share of foreign sales was set to indicatethe continuous and increasing/significant role of foreign sales. Without thistype of additional conditions, e.g., a firm which has started its foreignsales within three years from the establishment (share from total salesmay even exceed 25%), possibly based on an unsolicited inquiry, but which

JORMA LARIMO22

stops mainly or totally the exports after those three years, would be clas-sified as a born global. The term ‘‘born global’’ indicates operations inseveral different countries which are located on various continents. Becausethese conditions were not set – as it has also been the case in most earlierstudies although the term is used – it was decided that the term ‘‘borninternational’’ will be employed in this study to define better the nature ofthese SMEs.

As discussed above, there is clear evidence that there have been borninternational companies also before 1990s. In fact, e.g., in the study byAspelund and Moen (2005) the oldest born international company in theirsample was established already in 1874. However, their number has clearlyincreased in the 1990s (see Moen, 2002; Moen & Servais, 2002). In a studyby Moen (2002), the majority of both French and Norwegian exportingfirms established in the 1990s could be classified as born internationals. Theresults from Denmark indicate a similar situation (see Knight, Madsen, &Servais, 2004). Additionally there are born international companies outsidehi-tech sectors, for instance, in the consumer goods and the service sectors(see e.g., Madsen & Servais, 1997). This seems to be the case especially insmaller developed countries with small domestic markets. Therefore, it wasdecided not to make any limitations for born international companies basedon the time frame of establishment, or field of industry.

Several features are considered to define the born international firms (seee.g., Knight & Cavusgil, 1996; Madsen & Servais, 1997; Moen & Servais,2002; Rialp et al., 2005): (a) they focus on highly specialized global marketniches, (b) they expand their export/foreign operations rapidly into severalmarkets, (c) they enter their lead markets more quickly than the ‘‘tradi-tional’’ firms, (d) they may proceed very rapidly along the steps of inter-nationalization, (e) they may use leap-frogging in their operation strategydevelopment, and (f) they use more networking and alliances than the‘‘traditional’’ firms. Several authors argue that the existence of this kind ofcompanies is focused on hi-tech sectors, but there is evidence that thesetype of companies are not limited only to hi-tech sectors (see e.g., Madsen &Servais, 1997). According to a recent study, the share of foreign salesin Danish born internationals was on average 71%, whereas the respectiveshare in US-based born internationals was 47% (Knight et al., 2004). (Fora recent study modeling the forces influencing the speed of international-ization see Oviatt & McDougall, 2005.) The expected differences e.g., inexport strategy between traditional exporters and born internationalsand relation with export performance is discussed more in Section 3.2 ofthe study.


3. LITERATURE REVIEW OF EXPORT

PERFORMANCE STUDIES AND DEVELOPMENT OF

HYPOTHESES

3.1. The Measurement of Export Performance

The concept of export performance is rather complicated and multidimen-sional. Several different measures can be used and have been utilized tomeasure export performance. Katsikeas, Leonidou, and Morgan (2000)identified in their extensive analysis of previous export performance studiesover 100 articles of which they included 93 into their more detailed inves-tigation of key issues related to export performance measurement. In these93 studies, 42 different performance measures had been used. In a morerecent review made by Sousa (2004), 43 export performance studies made in1998–2004 were covered. The results indicated that 50 different measures forexport performance had been applied in those studies. Most of the measuresused were in both studies economic (23/27 measures), but there were alsoseveral non-economic measures (14/17), and some generic measures (5/6).

Several measures were used in only one study (22/20 measures), but anincreasing amount of measures had been employed at least in five studies(11/13), some even in more than 10 studies (5/6). The review by Leonidou etal. (2000) indicated that in about one-third (in 33 cases) of the studies onlyone single measure of performance was used, whereas in almost two-thirds(60 cases) two or more measures of performance were utilized. However, thereview by Sousa (2004) indicated that in only 3 of the 43 studies one singlemeasure was considered and that in half of the studies four or more per-formance measures were in use. Thus the number of measures has clearlyincreased in more recent studies.

The most frequent single measures were export sales ratio (in 57/16 stud-ies), export sales growth (41/16 studies), export sales volume (20/17), exportprofitability (20/20), and growth of the export sales ratio (12/9). Thus, all themost commonly used measures were economic measures and four of the fivewere sales-related measures. The next most commonly utilized measureswere export profitability growth, overall export performance, perceived ex-port success, export market share, export market share growth, achievementof export objectives, number of export countries/markets, and strategic ex-port performance.

The above results indicate that the export sales ratio has been used earlierin well over half and more recently in about half of the studies as themeasure of export performance. The use of this measure – at least as the

JORMA LARIMO24

single measure of export performance has been criticized (see e.g., Kirpalani& Balcome, 1987) because it can be affected by several other issues thancompetitiveness/successful export operations. Also the other often-utilizedsales-related export performance measure – export sales growth – has re-ceived criticism, because the measure may overstate performance based onprice escalation and market growth, or understate performance because ofthe experience curve effects and deteriorating demand (see ibid andKatsikeas et al., 2000). Profitability in exports and growth in export profit-ability has been cited as the ultimate goals of the companies (Aaby & Slater,1989). However, the companies seem to be less willing to reveal exportprofitability information partly because of the fact that the companies donot necessarily know exactly their export-related profits, especially if thefirms utilize marginal cost pricing (Samiee & Anckar 1998; Katsikeas et al.,2000).

Among the non-economic measures, for instance, the number of exportcountries has been commonly employed as a measure of export perform-ance. However, as Piercy (1982) has stated, the number of foreign markets isnot an end in itself but is contingent on the specific company, product,market, and marketing factors. Thus, instead of using the number of exportmarkets as the measure of performance it would be better to use this var-iable in the analysis of various export strategy decisions on export per-formance.

As stated above, the generic measures were taken into considerationrather seldom, but increasingly in the export performance studies. From themeasures in this category, perceived export success and achievement of ex-port objectives were among the most commonly used measures. Their ad-vantage is that the evaluation is based on the goals and measures ofperformance utilized by the company itself, although they can be regardedonly as crude measures of performance since they cannot adequately capturethe domain of the construct (Katsikeas et al., 2000).

The results by Katsikeas et al. (2000) indicated that the analysis of exportperformance is mainly based on current export performance (in 82 studies);secondarily on historical performance (56), or on a combination of both(45 studies), and only in very few cases on anticipated future performance(the review by Sousa does not include this piece of information). The unit ofanalysis was usually at the corporate level (in 84/28 studies), only seldom onexport venture (12/15) and rarely product/product line level (4/0). The scopeof the analysis has usually covered all export markets by the firm (83/28studies), secondarily one single country (17/15), and in very rare casessome region (1/0 study). Almost all studies have been based on primary data


(96/43) usually collected via mail questionnaire based on the views of asingle key informant, mainly the manager directly responsible for exports(commonly the CEO or the export manager). The earlier evaluations weremore often based on objective (80 studies) than on subjective (51) assess-ment, but the situation has changed to the opposite recently (54 vs. 151).Also a combination of both types of measures seems to have increasedclearly in more recent studies (in the earlier review in ca. 20% of the studies,whereas about one-third in the latter review). Noteworthy is, however, thatno study examined the relationship between objective and subjective exportperformance in more detail.

The results by Katsikeas et al. (2000), Sousa (2004), and Diamantopoulos(1999), clearly indicate that the export performance is a complex phenom-enon. Based on the reviews it can be concluded that: (1) any single measureof export performance is not enough, thus there should be at least two ormore measures for export performance; (2) there should be both objectiveand subjective measures; (3) there should be both economic and non-economic or/and generic measures; (4) the measurement should usuallycover both all export markets and main product or/and main target market-related measures; and (5) variation in the time dimension should be con-sidered – current and historical.

3.2. The Relationships between the Firm, Management, and Export

Strategy and the Export Performance

A review of export performance studies indicates that special attention wasgiven to the impact of over 50 different firm characteristics and competen-cies, management characteristics, management attitudes and perceptions,industry characteristics, domestic market characteristics, target markets andtheir characteristics, and export marketing strategy-related variables on ex-port performance. Furthermore, several different measures of export per-formance have been used in those studies. Of interest in several studies hasbeen the impact of the firm size, the key sales object issues (product/servicestrengths), the export marketing strategy, including market concentrationvs. market spreading, the standardization of the marketing mix elements,and the international experience. In this study, the analysis will focus on therelationships between 11 variables and the export performance. The selectedvariables represent the firm characteristics, including basic firm character-istics and strategy (1, firm size; 2, product/service quality; 3, niche product/service; and 4, export age), the management characteristics (5, international

JORMA LARIMO26

orientation; 6, international commitment; and 7, international experience),and the export marketing strategy (8, product adaptation; 9, communicationadaptation; 10, price adaptation; and 11, market diversification).

Table 1 includes a summary of the results presented by five review articlesof various export performance studies. The reviews by Madsen (1987), Aabyand Slater (1989), and Gemunden (1991) included 17, 55, and 50 empiricalexport performance studies made between mid-1960s and late 1980s. Zouand Stan (1998) had in their review 50 export performance-related studiesmade between 1987 and 1997, and Manolova and Manev (2004) analyzed21 articles published between 1996 and 2001. In all the aforementionedworks, three eligibility criteria were at work for the selected studies: (1) thearticles had to be empirical in nature, reporting data analysis and statisticaltests; (2) the articles had to use some kind of export performance measure asa dependent variable; and (3) the articles had to be cross-sectional in nature(i.e., the case studies were excluded). As shown in Table 1 the results relatedto the impact of most variables on export performance have been verymixed. They will be discussed in more detail below, in connection to thesingle variables selected for this study.

3.2.1. Firm Characteristics and Basic Strategy-Related Variables

Firm size. There are three fundamental factors supporting the expectation ofa positive relationship between firm size and export performance: the or-ganizational resources, the economies of scale, and the perception of risk inthe international activity (see Bonaccorsi, 1992; Katsikeas, Piercy, &Ioannidis, 1996).

Large exporting manufacturers are widely considered to possess morefinancial and human resources, enjoy higher levels of scale economies, andperceive lower levels of risks about foreign markets. Although there arecounter arguments, these size-related advantages seem not only to facilitateunderstanding of foreign market characteristics, but also to enhance a firm’sability to respond effectively to the requirements of foreign customers thuspotentially leading to better export performance.

As the results in Table 1 indicate, the impact of the firm’s size has been themost frequently reviewed variable in export performance studies. Severalstudies seem to indicate no relation between firm size and export perform-ance (Katsikeas et al., 1996). However, other studies seem to indicate apositive relation (e.g., Chetty & Hamilton, 1993; Chadee & Mattsson, 1998;Nakos, Brouthers, & Brouthers, 1998; Piercy et al., 1998; Preece, Miles, &Baetz, 1998; Baldauf, Cravens, & Wagner, 2000), and some studies confirmthat the positive relation was found among both manufacturing and service

Table 1. The Relationships between Reviewed Variables and Export Performance in Various Review Studies.

Madsen (1987)

(N ¼ 17)

Aaby and Slater

(1989)

Gemunden (1991) Zou and Stan

(1998) (N ¼ 50)

Manolova and

Manev (2004)

(N ¼ 25)

TOTAL

POS

IMP.

NEG.

IMP

NS POS.

IMP.

NEG.

IMP.

NS POS.

IMP.

NEG.

IMP.

NS POS.

IMP.

NEG.

IMP.

NS POS.

IMP.

NEG.

IMP.

NS POS.

IMP.

NEG.

IMP.

NS

Firm size/firm

resources

4 2 5 5 7 3 7 1 10 9 5 23 5 3 8 30 18 49

Product/service

quality/strength

7 0 2 1 0 1 4 0 2 13 2 27 – – – 25 2 32

Niche product/service – – – 3 0 0 – – – – – – – – – 3 0 0

Export agea/firm age – – – – – – – – – 6 2 3 0 3 3 6 5 6

International

orientation

– – – 5 0 0 3 0 2 10 0 6 5 0 0 23 0 8

International

commitment

– – – 7 0 0 – – – 15 0 2 8 0 0 30 0 2

International

experience

– – – 3 0 0 – – – 15 1 10 5 0 1 23 1 11

Product adaptation 4 1 1 1 1 4 4 0 4 12 2 13 1 0 0 22 4 22

Price adaptation – – – 1 0 0 2 0 2 7 1 6 – – – 10 1 8

Communication

adaptation

– – – – – – 0 0 2 3 3 2 – – – 3 3 4

Market diversification 3 1 2 3 – – – – – b b b 5 0 0 11 1 2

Note: In one study more than one export performance measures may have been used.

POS. IMP., POSITIVE IMPACT; NEG IMP., NEGATIVE IMPACT; NS, NON-SIGNIFICANT.aNot included in any reviews.bNot specified in the review, included into the firm general export strategy results.

Differen

tTypes

ofExportin

gSMEs

27

JORMA LARIMO28

companies (e.g., Chadee & Mattsson, 1998; White, Griffith & Ryans, 1998).It seems that the positive relation has been identified more often when thesize of the firm was measured based on the number of employees, and theperformance measured using export ratio to total sales, than when othermeasures for the firm size and/or export performance has been used al-though e.g., Nakos et al. (1998) found a positive relation between firm sizeand export performance based both on export ratio and profitability ofexports. Recent support for the positive relation between firm size andexport performance was given by Majocchi, Bacchiocchi, and Mayrhofer(2005) based on Italian SMEs, and by Voerman (2004) based on anEuropean multicountry SME sample. Thus, for the empirical part of thestudy we expect that:

Hypothesis 1. There is a positive relation between firm size and exportperformance.

Product/service quality. Quality can be defined in several ways. However,often quality refers to how well the perceived fundamental characteristic of aproduct or service meet the expectations of the customers (Mohr-Jackson,1998). A quality emphasis can be expensive and have a negative impact onproduct standardization. On the other hand, research has also shown thathigher quality does not necessarily incur substantial extra costs. More oftenquality has been linked to improved competitiveness and to superior or-ganizational performance (see Buzzell & Gale, 1987; Mohr-Jackson, 1998;Porter, 1990). In an increasingly global economy, buyers can access a greatervolume and variety of product choices. As buyers have more alternatives tochoose from, their expectations of product/service quality may grow, lead-ing to pressure on companies to improve their product/service quality(Knight, 1997). High quality offers also an opportunity to differentiate theproduct/service from those of competitors (Calantone & Knight, 2000).

Concerning this aspect, the empirical results are mixed (see Table 1).However, the non-significant relation with export performance has usuallybeen found, when the relation between product strength and export per-formance has been analyzed, whereas a positive relation has been identifiedmostly, when exactly the relation between product quality and export per-formance has been reviewed (see e.g., Thirkell & Dau, 1998; Knight et al.,2004). Both results by Calantone and Knight (2000) and Knight et al. (2004)indicated a very strong support for the positive impact of quality on exportperformance in US-based industrial companies. Furthermore, a recent studyfocused on British and Spanish exporters clearly indicated that product and/or service quality was the key antecedent of export performance in both


samples (see Lages, Lages, & Lages, 2006). Thus, for the empirical part ofthe study we expect that:

Hypothesis 2. There is a positive relation between product/service qualityand export performance.

Niche product/service. With heightened competition in many industries,there is a growing pressure on SMEs to concentrate on niche markets inorder to serve market segments that are small enough to avoid the com-petition of large rivals. The niche may be even very small in one country, butvia expanding the operations to several countries the company may reacheconomies of scale (see e.g., Knight, 1997). The technical development hasfacilitated greater specialization in SMEs and therefore increased the pos-sibility to concentrate on niche markets.

As the results in Table 1 indicate, the impact of niche product/service orproduct/service uniqueness has been analyzed only to a limited degree sofar. However, the impact appears to be mainly positive. Table 2 includes theresults of the marketing strategy – export performance summary review byLeonidou, Katsikeas, and Samiee (2002). The results offer additional in-formation about the relation between various variables and export per-formance adding the type of export performance measures used to theanalysis. Their review was based on the analysis of 36 export performancestudies, covering the period from early 1970s to the end of 1990s. The resultsby Leonidou et al. (2002) clearly indicate that export product uniquenesshas in general had a significant positive impact on performance, particularlyin the case of export proportion of sales. The results in a recent study(Knight et al., 2004) indicated the positive impact of product differentiationon export performance in the US sub-sample, whereas in the Danish sub-sample a non-significant relation was found. Because of the resource lim-itations, the operations of SMEs have to be more concentrated than those oftheir larger competitors in order to be competitive in the foreign markets.Based on the above, for the empirical part of the study we expect a positiverelation between niche focus and export performance.

Hypothesis 3. There is a positive relation between niche product/servicefocus and export performance.

Export age. The argumentation for an assumption of a positive relation-ship between export age (exporting experience) and export performancelies in the issue of uncertainty and the way various firms cope with it(Erramilli, 1991). Less experienced exporters are likely to perceive consid-erable uncertainty, which in turn might adversely affect their perceptions of

Table 2. Summary of Marketing Strategy – Export Performance Relationship (p-Values) in VariousEmpirical Studies.

Export Strategy Area Export Performance Indicator Time of Study Geographic Focus Product Type

Overall

Export

Performance

Export

Sales

Intensity

Export

Profits

Level

Export Profit

Contribution

Other

Performance

Measure

Composite

Performance

Measure

1970s 1980s 1990s America Europe Other Industrial Both

Targeting

Market concentration 0.000 0.000 0.057 0.100 0.100 0.019 0.000 0.004 0.000 0.010 0.000 0.000 0.000

Market spreading 0.000 0.000 0.063 0.100 0.100 0.000 0.004 0.003 0.002 0.003 0.001

Product

Quality 0.000 0.049 0.049 0.049 0.059 0.049 0.001 0.100 0.099 0.001 0.100 0.099 0.001

New/unique

product(niche)

0.000 0.002 0.013 0.038 0.000 0.019 0.007 0.000 0.011 0.000

Product adaptation 0.000 0.000 0.122 0.100 0.325 0.007 0.009 0.000 0.000 0.000 0.001 0.001 0.000 0.084

Price

Price adaptation 0.000 0.001 0.031 0.004 0.004 0.000 0.004 0.344 0.004 0.004

Promotion

Promotion adaptation 0.000 0.002 0.361 0.197 0.000 0.003 0.001 0.004 0.000 0.003

Source: Leonidou et al. (2002).

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potential risks and returns about foreign sales. Higher export age/exportexperience is likely to determine the firms to be less uncertain, related toforeign sales based on increased market and customer knowledge and net-works, leading to more effective export sales planning and strategies(Madsen, 1989; Katsikeas et al., 1996). There should also be a learning curveor experience effect that reduces the foreign operating and coordinationcosts.

In this case as well the empirical results are very mixed (see Table 1). Somestudies do not indicate any relation between international/export experienceand performance (see Nakos et al., 1998) and some studies indicate even anegative relation (e.g., Kaynak & Kuan, 1993). Nevertheless, support for apositive relation has been found clearly more often than for a negativerelation. This has been the case whether the experience has been opera-tionalized using the age of the company in general (Contractor, Hsu, &Kundhu, 2005; Kundhu & Renko, 2005; Majocchi et al., 2005), the numberof export ventures in which the firm has been involved, or the time frame offirm’s export involvement (Diamantopoulos & Inglis, 1988; Kaynak &Kuan, 1993; Cavusgil & Zou, 1994; Piercy et al., 1998), or export marketknowledge (e.g., Leonidou & Kaleka, 1998). This has also been the casewhen using various measures for export performance, like export sales (e.g.,Francis & Collins-Dodd, 2000), or export ratio/intensity (Baldauf et al.,2000; Francis & Collins-Dodd, 2000; Contractor et al., 2005; Kundhu &Renko, 2005), export growth (Contractor et al., 2005; Kundhu & Renko,2005 in the Indian sample), or using a composite measure (Thirkell & Dau,1998; Leonidou & Kaleka, 1998). Finally, in some studies the impact hasbeen dependent on a sub-sample like in the study by Kundhu and Renko(2005), where a negative relation was found in the Finnish software exportersub-sample when the performance was measured using export growth,whereas a positive relation was identified in the Indian sub-sample (and alsoin the Finnish sub-sample when performance was measured employing ex-port intensity as the measure). In summary, the empirical evidence is mixed,but it slightly tends to support a positive relation between export experienceand performance. Consequently, we expect that:

Hypothesis 4. There is a positive relation between the length of exportexperience of the company and the export performance.

3.2.2. Management Characteristics Related Variables

International orientation. An internationally oriented firm can better identifyand benefit from emerging international opportunities and avoid threats

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(Zou & Stan, 1998). In highly internationally oriented firms the advantagesof exports outperform the barriers of exporting, whereas in the highly do-mestically oriented firms the situation is expected to be the opposite. There-fore a positive relation between the international orientation and the exportperformance could be expected.

The results in Table 1 indicate that there is a wide empirical support forthe positive impact of international orientation on export performance.Among the studies indicating support for the positive relation can be men-tioned those by Preece et al. (1998) and Calantone and Knight (2000). Morerecently the results in the studies by Contractor et al. (2005) and Kundhuand Renko (2005) indicated no relation between international orientationand export performance in the Indian software sub-sample, but results in theTaiwanese and Finnish sub-samples gave support for the expected positiverelation. Thus, the latter results support the earlier findings by White et al.(1998) based on the US origin business-to-business service firms. The em-pirical evidence also indicates that there has been a positive relation whenboth financial measures and composite measures for export performancehave been used (see Zou & Stan, 1998). Based on the above, for the em-pirical part of the study we expect that:

Hypothesis 5. There is a positive relation between the international ori-entation of the management and the export performance.

International commitment. The high commitment of the management to-ward exports allows a firm to aggressively go after the export market op-portunities, and pursue effective export marketing strategies that improveexport performance (Cavusgil & Zou, 1994). The market building in exportsis usually long-term oriented requiring high commitment to these markets.As such, a positive relation between international commitment and exportperformance could be expected.

The empirical support for the positive impact of international commit-ment on export performance is very wide (see Table 1). Support for thepositive relation has been found both in manufacturing and service firms(although greater among the latter ones) (Chetty & Hamilton, 1993; Chadee& Mattsson, 1998) and using both export ratio and export profitability asthe measure of performance (e.g., Nakos et al., 1998). Therefore for theempirical part of the study we expect that:

Hypothesis 6. There is a positive relation between the international com-mitment of the management and the export performance.


International experience. The international experience of the manager(s)helps a firm to identify and leverage on the international opportunities,while avoiding or at least having a more realistic view of the threats ofexports to foreign countries. Thus, a positive relation between the interna-tional experience of the management and the export performance could beexpected.

The results by Das (1994) indicated that the managers of successful ex-porting firms had less experience in exporting and in foreign settings ascompared to the managers of unsuccessful firms. One possible explanationfor the unexpected finding may be that Das focused on firms operating inhighly turbulent environments and the unique context explains the findings.Recently also Contractor et al. (2005) and Kundhu and Renko (2005) founda negative relation between international experience and export perform-ance, but only in their Indian sub-sample and only when performance wasmeasured based on export growth. The results in the Finnish and Taiwanesesub-samples indicated no relation between international experience and ex-port performance. The authors explain their findings that given the natureof the industry of the sample – software industry – the entrepreneurs do nothave to possess significant international experience, as they can reach out toforeign buyers in the target countries through a combination of internet andformal/informal networks. However, in general, international experience ofthe management seems to have had either a non-significant or – in a ma-jority of cases – a positive impact on export performance whether the per-formance was measured based on export sales, export profits, exportgrowth, or based on a composite measure (see results in Table 1 and Zouand Stan, 1998, p. 349). Therefore we expect that:

Hypothesis 7. There is a positive relation between the international ex-perience of the management and the export performance.

3.2.3. Export Strategy-Related Variables

Product/service adaptation. The proponents of a positive relation betweenstandardized product/service and export performance refer to the cost sav-ings and to the similarities in buyer behavior in several markets (Keegan,1995). The assumption of a positive relation between product/service ad-aptation and export performance is based on three key benefits related toadaptation (see Leonidou et al., 2002). First, adaptation reflects customer-orientation based on a more or less systematic analysis of buyer behaviorand target market characteristics (Douglas & Wind, 1987). Second, thebetter product–market match can result in greater buyer satisfaction, which

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can lead to greater sales volumes or to greater pricing freedom in compar-ison to competitors, which translates into better export performance. Third,pressures to meet specific host market requirements often demand creativeand innovative thinking, which may result in additional products both forthe domestic and foreign markets (Czinkota & Ronkainen, 1998).

Some empirical studies indicate no relation at all (Diamantopoulos &Inglis, 1988), or even a negative relation (e.g., Fenwick & Amine, 1979)between product adaptation and export performance. However, the major-ity of studies seem to indicate support for a positive relation (e.g., Cavusgil& Zou, 1994; Nakos et al., 1998; Shoham, 1996, 1999, 2002; Baldauf et al.,2000). Also the results in the review by Leonidou et al. (2002) clearly in-dicated that product adaptation was positively correlated with superior ex-port performance. The results seemed to be valid across all time frames andgeographic contexts, but only in studies using export sales-based perform-ance measures. Additionally, in a recent study (Calantone, Kim, Schmidt, &Cavusgil, 2006), the results indicate a positive relation between productadaptation and export performance in all three reviewed samples: US,Japanese, and South Korean. In an examination of exporters along theinternationalization process, Cavusgil and Kirpalani (1993) found that highproduct adaptation was not so important in enhancing export performanceat entry as it was in subsequent penetration.

Based on the findings in several earlier studies and on the expectation thatthe benefits of customer-orientation and better product/service match out-weigh the benefits of costs savings in the standardized strategy, we expect that:

Hypothesis 8. There is a positive relation between product adaptation andexport performance.

Price adaptation. The adaptation of pricing in export marketing is groundedon several reasons: economic, political–legal, price control, differences indistribution and transportation arrangements and costs, market structures,tariffs, taxes, and other barriers, etc. This diversity of foreign market pricingdeterminants makes price adaptation more or less necessary for the firms tosurvive and remain competitive in export markets (see Leonidou et al.,2002).

Whereas Shoham (1995) reported that price adaptation enhanced profit-ability, he later reported first a negative impact (1996), and later on a non-significant impact (Shoham, 2002). Similarly, Koh and Robicheaux (1988)reported inconclusive findings; price adaptation enhanced performance, butonly when it was higher than domestic prices. However, the results of the


review by Leonidou et al. (2002) indicated support for a strong positive linkbetween price adaptation and both overall and individual export perform-ance measures with the exception of export sales volume (see Table 2). Thus,the diversity of foreign market pricing determinants seems to make priceadaptation necessary for firms to survive and remain competitive in the hostmarkets. Therefore, we expect that:

Hypothesis 9. There is a positive relation between price adaptation andexport performance.

Communication adaptation. Proponents of the positive relationship betweenstandardized communication refer to the similarities in buyers consumptionpatterns, and to the existence of international market segments – as in thecase of product standardization – and to the cost savings based on the use ofstandardized communication strategy. In contrast, those referring to thepositive relationship between adapted communication and export perform-ance cite the differences in government restrictions, competitive practices,communication infrastructures, etc. (see Keegan, 1995; Leonidou et al., 2002).

Cavusgil and Zou (1994) discovered a negative relation between promo-tion adaptation and export performance. They found that the relation be-tween those variables is apparently more complex. The identified negativerelation may be caused by the universal appeal of some products, poorjudgment in altering of the positioning, or promotion mix. The results invarious studies by Shoham have also been mixed. Whereas in one study(Shoham, 2002) no relation between adaptation of advertising and exportperformance was found, the results in his two other studies (Shoham, 1996,1999) indicated support for a positive impact of promotion adaptation onexport performance along various parameters: export sales, export profits,or growth herein. The results in the review by Leonidou et al. (2002) in-dicated, however, that adaptation of advertising/promotion had a strongpositive impact on overall export performance, irrespective of the time,place, and products focused on in the studies reviewed (see Table 2). Note-worthy is, that his more detailed analysis uncovered a strong positive effectonly on export sales growth and export intensity, while its impact on exportprofit contribution was limited.

Although the empirical results have been mixed it is expected that thebenefits related to adaptation of communication outweigh the benefits ofstandardization and therefore we expect that:

Hypothesis 10. Here is a positive relation between communication adap-tation and export performance.

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Market diversification. One key question in exports is to decide whether toconcentrate, or to diversify the sales in several target countries. Those fa-voring a positive relation between concentration and export performance,refer to the better possibilities for bigger market shares based on the moretargeted and possibly bigger marketing efforts. In contrast, those proposinga positive relation between market spreading and export performance referto risk spreading and market coverage (see Dean et al., 2000).

As the results in Table 2 indicate, there has been support for both thepositive impact of market concentration and for market diversification onexport performance. Support for the positive relation between market di-versification and export performance is indicated in Diamantopoulos andInglis (1988), and Cavusgil and Zou (1994). More recently, Contractor et al.(2005) and Kundhu and Renko (2005) found no relation, in the Taiwanesesub-sample even a negative relation based on export intensity, but supportfor a positive relation in the Finnish sub-sample. The unexpected negativeresult was explained by the fact that the focus in those studies was onsoftware industry where to concentrate solely on the US market seemed tobe more appealing to some Taiwanese software exporters, rather than toscatter the sales across several target countries. The results in Table 1 in-dicate, however, that there has been much more support for the positiveimpact of market diversification on export performance than the opposite.Based on these findings and considering factors like the risk spreading ad-vantages, the developments in information technology, and the market tur-bulence we expect that:

Hypothesis 11. There is a positive relation between market diversificationand export performance.

Adaptation of the marketing mix elements to the target country condi-tions could be expected to increase competitiveness of the company in thosemarkets and therefore increase sales, as the results in several earlier studiesindicate (see above). However, the different types of adaptation – product/service, price, and/or communication adaptation – usually increase thecosts, when compared to standardization. Therefore the impact on exportperformance could be expected to be more dependent of the measure onexport performance in the case of adaptations than related to the othervariables of interest in this study. Hence, we expect that:

Hypothesis 12. The positive relation between adaptation of marketingmix variables and export performance is more significant when the exportperformance is measured using subjective export performance measures


and export sales intensity, than when the performance is measured usingprofitability-based export performance measure.

In Section 2 of the paper, traditional exporters vs. born international werediscussed. In a study by Aspelund and Moen (2005) focusing on Norwegianborn internationals vs. traditional type of exporters the results showed thatbased on perceived international performance, the born internationals hadperformed better than the other sub-groups, but taking into account theobjective financial measures (ROI and ROE) no significant differences inexport performance between sub-groups was found.

Based on the discussion in Section 2 of the paper, the key features of theseborn international companies seem to be rapid expansion into several mar-kets soon after the establishment of the company. Therefore, we may expectthat key aspects of the successful performance in foreign markets are a nichefocus, a large number of target markets, and a higher degree of standard-ization of the marketing mix elements like product, price, and communi-cation than in traditional exporting firms, in order to be able to expandrapidly into several target countries (see Jolly et al., 1992). The rapid ex-pansion also demands great international orientation and commitment.Therefore, for the empirical part of the study is expected that:

Hypothesis 13. The positive relation between niche focus, internationalorientation, and international commitment with export performance isgreater in born international companies than in traditional exportingcompanies.

Hypothesis 14. The positive relation between product, price, and com-munication adaptation and export performance is lower in born inter-national companies than in traditional exporting companies.

4. SAMPLE, METHODOLOGY, AND

OPERATIONALIZATIONS OF THE MEASURES

The data for the study was collected as a part of a larger survey analyzingthe export behavior, strategies, and performance of the Finnish SMEs. Asdiscussed earlier the survey method has been the clearly dominating methodof data collection in export performance studies. The questionnaire was fivepages long. The target group was manufacturing (NACE 15-36) and servicefirms (NACE 72.2 software, 74.2 engineering, and 74.3 advertising) having10–500 employees, and performing exports according to the Yritys Suomi

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2000 database. On the basis of these sources, the total target group consistedof 2,856 companies. The survey took place between November 2001 andMarch 2002. In companies having less than 50 employees the questionnairewas directed to the managing directors, whereas in larger companies it wasdirected to the export/international business manager. In 48 cases the com-panies were in bankruptcy or the address was wrong and the new addresscould not be identified. Moreover, in 154 cases the companies were notperforming any exports, had more than 500 employees or were operating infields not included in this study. Excluding these companies the final targetgroup was totaled 2,654.

In total, 489 answers were received (18.4%), from which 386 were usablein this study resulting in a response rate of 14.5%. One explanation for therather low response rate was very evidently the length of the used ques-tionnaire. The response rates in the review by Sousa (2004) in studies fo-cusing on SME export performance varied from 9.8 to 51.8% and themedian sample size was 181 and the mean 232 companies. Also the reviewsby Zou and Stan (1998) and Manolova and Manev (2004) reveal that inabout half of the studies analyzed the sample size was 100–200 firms, and invery few cases more than 300 companies. In general, response rates in large-scale surveys targeted to the top management ending to response rates be-tween 14 and 20% seem to be rather common (see e.g., Menon, Bharadwaj,& Howell, 1996). As such, even though the response rate was not very high,the sample size in this study was clearly over the average in export per-formance studies made during the years. Based on the number of employees,annual turnover, and field of industry, there were no significant differencesbetween responding and non-responding companies. Furthermore, nogreater differences were found between early- and late-responding compa-nies. The respondents were dominantly managing directors, export or fi-nancial managers of the companies.

Regarding the participating companies, 84.7% were manufacturing,mainly industrial goods producers (NACE 29 machinery and equipment,27 basic metals and fabricated metal products, and 26 non-metallic mineralproducts as the main fields of industries), and 15.3% service companies.About half of the companies were family-owned companies, almost one-fourth was a part of a larger group, and the remaining were independentlimited liability companies. The mean year of establishment was 1974, andthe mode value 1992. The first year of export was on average 1985; and in2001, the participating companies had an average of 64 employees. Themean annual turnover was in 2001 h8.67 million, and the mode was h1.7million. Only extremely few companies had more than 250 employees. The


mean share of exports in 2001 was 39.2%, and on average the companieshad exports to 9.4 foreign markets. The most common and most importanttarget countries for exports were Sweden, Germany, and Russia.

In almost two-thirds of the 25 empirical export performance made in1996–2001 reviewed by Manolova and Manev (2004) regression analysis wasemployed as the statistical tool. Therefore also in this study cross-sectionalOLS-regression analysis was decided to be employed in the data analysis.

Appendix A includes the operationalizations for the dependent variable –six different types of measures for export performance used in the study –and for the 11 independent variables. Because the sample included bothmanufacturing firms and service companies, an industry dummy is includedin the analysis. Almost 60% of the sample was industrial goods manufac-turers. Therefore, this group was selected as the base to which consumergoods manufacturers (consumer) and service companies (service) were com-pared.

The descriptive statistics of independent variables are presented inAppendix B. The descriptive statistics of the sample did not indicate anystatistically significant differences between truly traditional exporters andborn internationals. Instead, among the traditional exporters and truly borninternational companies the export age was higher in the first group,whereas international commitment and international experience of man-agement were higher in the latter group.

The correlations between various variables were usually quite low (seeAppendix C), except between international orientation, international com-mitment, and international experience of the management. The varianceinflation factor (VIF) was analyzed to study the potential multicollinearityproblems. A VIF value of less than 10 is considered indicative of the datahaving no such problems (see e.g., Griffiths, Hill, & Judge, 1993). All theVIF values were below 3. Thus, no multicollinearity problems existed in thedata.

5. RESULTS OF THE STUDY

5.1. Export Performance along Different Measures

The results related to the performance along the five measures of exportperformance used in this study are presented in Table 3. The results in thewhole sample indicate that using a 1–5 scale for the measures, the perform-ance was in the middle class (scale value 3) except in the case of using

Table 3. Performance in SME Exports.

Total Sample

(N ¼ 358)

Truly

Traditional

Exporters

(N ¼ 164)

Born

Internationals

(N ¼ 194)

Traditional

Exporters

(N ¼ 287)

Truly Born

Internationals

(N ¼ 77)

Performance related to main

goals (scale: 1–5)

3.28 3.23 3.33 3.25 3.39

General foreign operation

performance (scale: 1–5)

3.29 3.24 3.33 3.24 3.47b

Performance of the main product

(scale: 1–5)

3.41 3.34 3.46 3.36 3.58c

Foreign sales ratio (0–100) 40.58 32.57 47.35d 33.13 67.78d

Objective financial total

performance during the last 3

years (scale: 5 alternatives;

NEG. to X20%)

2.00 2.04 1.96 2.10d 1.62

Composite performance 3.09 3.02 3.17 3.02 3.40

Note: 1 ¼ Exports within 3 years, no share limits; 2 ¼ Exports within 3 years, shareX25%,

FSALES in 2001X50%.

Level of statistical significance: a ¼ 0.1; b ¼ 0.05; c ¼ 0.01; d ¼ 0.001.

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objective financial total performance during the last three years (scale value2). The more detailed mean performances based on the three subjectivemeasures were very close to each other with the variation from only 3.28 to3.41. The highest performance evaluation ratio was related to the perform-ance of the main product. The mean foreign sales ratio was 40.58 indicatingclearly a higher mean ratio than in several other studies focusing on SMEexports. The mean objective financial performance indicated that in generalthe operational profit of the companies has been between 0 and 4% in 1999–2001. The composite performance measure yielded a mean value of 3.09. Amore detailed analysis of the performance results indicated that those basedon the net results were clearly different, and that the variable correlatednegatively with the share of foreign sales variable.

The two classifications used indicated clear differences in the sub-samplesizes. Using the looser definition for born international companies almost55% of the sample was classified as born internationals, whereas using thetighter definition some 21% of the sample companies were born interna-tionals. As discussed earlier, the latter definition indicates which firms can beregarded as really born internationals and therefore this sub-group was alsolabeled as ‘‘truly born internationals.’’

The performance results based on classification 1 – between truly tradi-tional exporters and born international companies – indicated to rather


small differences between the two groups when the looser definition of borninternational companies was used. When considering the three subjectivemeasures evaluations and composite measure mean, the values were some-what higher in the born international group; whereas based on the objectivefinancial performance, the performance was somewhat poorer than in tra-ditional exporter companies. The only case where a statistically significantdifference was found was based on foreign sales ratio, which was clearlyhigher in the born international company group.

Classification 2 – where a tighter operational definition of born interna-tional companies was employed – indicated more differences in the per-formance between the traditional exporters and the truly borninternationals. As in the case of the looser definition, the foreign sales ra-tio was clearly higher in the born international group (based on the oper-ational definition this could also be expected). However, also the resultsbased on two subjective performance measures, namely on general foreignoperation performance and performance of the main product, the resultsindicated clearly better performance in the born international companiesthan in the traditional exporter group. Only in the case of performancerelated to the main goals no statistically significant difference could befound; although even in this case the performance was better in the borninternational group. The born international companies have performedmore poorly in the case of the objective performance. Apparently, the fasterand more intensive international expansion had demanded a significantlyhigher level of financial resources that the results based on this will be,hopefully, better in the born international group at least after five yearswhen the foreign operations should be on a more stable basis (the truly borninternational companies were younger than the companies in the other sub-groups). In the tight classification category, also the composite performanceindicated statistically higher performance in the born international sub-group.

5.2. Relationships between Reviewed Variables and Various Export

Performance Measures

5.2.1. Results in the Total Sample

The results of the cross-sectional OLS regression in the total sample arepresented in Table 4. All models, except for the objective financial per-formance, were significant with quite good explanatory power (with R2 inseveral models higher than 0.25).

Table 4. Performance in SME Exports (Total Sample).

1. Performance

Related to

Main Goals

2. General

Foreign

Performance

3. Performance

of the Main

Product

4. Foreign

Sales Ratio

5. Objective

Financial

Performance

6. Composite

Firm size +d +d +b NS +a +b

Product/service quality +d +d +c NS +c +d

Niche product/service NS NS NS NS NS NS

Export age +b NS NS NS NS NS

International orientation +c +d +d +c NS +d

International commitment NS NS NS NS NS NS

International experience NS NS NS NS –b NS

Product adaptation NS NS +a +a NS NS

Price adaptation NS NS NS NS NS NS

Communication adaptation NS NS NS NS NS NS

Market diversification +a +b +b +c NS +d

Consumer NS NS NS NS NS NS

Service NS NS NS NS NS NS

R2 0.220 0.310 0.279 0.221 0.030 0.325

Adjusted R2 0.185 0.279 0.247 0.186 0.013 0.295

F-ratio 6.370 10.142 8.750 6.400 0.705 11.000

Note: NS ¼ Non-significant.


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The results in the total sample indicated that no variable had significantlyimpacted on the export performance along all six measures (see Table 4).However, seven variables had a significant relationship with export per-formance at least once. In the case of firm size, product/service quality,international orientation, and market diversification, a significant positiverelation was found using five different performance measures. In the case ofproduct/service quality and international orientation there were strong im-pacts independent of the measure of performance, whereas related to firmsize and market diversification the level of the relation depended much moreon the measure of performance. All four variables were significant using thethree subjective measures of export performance and composite measure; inturn the fifth measure which was objective was the objective financial per-formance in the first two, and foreign sales ratio in the latter two cases.Additionally, noteworthy is that both product/service quality and interna-tional orientation were along all five measures significant at least at the 0.01level. Thus, the results give support to the earlier findings by e.g., Knightand Calantone (2000), Knight et al. (2004), and Lages et al. (2006) about thekey role of quality and those by, e.g., Cavusgil and Zou (1994) and Nakoset al. (1998) about the role of commitment on export performance.

Product adaptation had significantly impacted along two, and export agealong one measure. Product adaptation was significant, based on one sub-jective and one objective measure while the export age was significant, butonly mildly, on one subjective measure. In addition, international experiencewas once significant, but against expectation – a mild negative impact onexport performance was found.

In four cases – niche product/service, international commitment, priceadaptation, and communication adaptation – the variables did not have anysignificant impact along any of the six export performance measures. Thegreatest surprise was the non-significance of international experience. Asstated before (see Table 1), earlier studies have indicated a strong positiveimpact of international experience on export performance. The impact ofprice adaptation and international commitment of the management havealso been reviewed rather intensively and the especially concerning the lattervariable the results have in a majority of studies indicated a positive relation,whereas in the former case the results have been more mixed. The impact ofniche focus and communication adaptation on export performance has beenso far analyzed only to a limited extent. Analyzing the former case, theresults have in all cases supported a positive impact on performance,but they have been more mixed when considering the communication ad-aptation. The relatively low importance of product adaptation and total

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non-significance of advertising adaptation may be explained by the fact thatif a firm offers a high-quality product that meets customers needs, country-specific adaptation is not necessary for success, as also concluded by Stylesand Ambler (1994). In addition to the non-significance of those four var-iables, the results indicated that there were no significant differences in theresults depending on the field of industry of the sample firms.

In conclusion, it can be argued that the hypotheses 1, 2, 5, and 11 werevalidated because those variables indicated statistically significant supportusing five measures of performance. In the case of hypotheses 4 and 8 thesupport is only partial, and the rest of the hypotheses (3, 6, 7, 9, and 10) didnot receive any support in the total sample.

In hypothesis 12, it was expected that the relationships between adap-tation of marketing mix variables and export performance to be more sig-nificant when the export performance is interpreted in terms of subjectiveperformance measures and export sales intensity than when the performanceis measured using objective profit measures. As discussed above, price andcommunication adaptation were insignificant using all six measures. Onlyproduct adaptation had the expected positive impact on performance –although only mildly – in two cases, of which one was a subjective measureand the other one the foreign sales ratio. Thus, the results give mild supportto the hypothesis but only in the case of product adaptation.

5.2.2. Classification 1: Truly Traditional Exporters vs. Born Internationals

The results based on the looser definition of born internationals, i.e., in thetruly traditional and born international samples are presented in Table 5. Asexpected from the analysis of the total results, the clearly lowest explanatorypowers were also found now when objective financial performance was usedas the measure of performance. In the other cases, however, the models’explanatory powers ranged between satisfactory and good.

In the two sub-groups, both international orientation and product/servicequality had a statistically significant influence using five and respectively fourdifferent performance measures. Interesting to note was that internationalorientation did not have any statistically significant influence when objectivefinancial performance was used, but in the born international sub-group thequality variable was significant when this measure was employed. Also a thirdvariable, firm size, was significant in all seven cases. Thus, these three var-iables seemed to be the most important ones in both sub-groups. In addition,market diversification was in total significant in four cases, but three of thosesituations concerned traditional exporter sub-group. Thus the market diver-sification variable seems to be more important only in this sub-group.

Table 5. Performance in SME Exports Based on Classification 1: Truly Traditional Exporters vs. BornInternationals.

Truly Traditional Exporters (N ¼ 164) Born Internationals (N ¼ 194)

1.

Performance

Related to

Main Goals

2. General

Foreign

Performance

3.

Performance

of the Main

Product

4.

Foreign

Sales

Ratio

5. Objective

Financial

Performance

6.

Composite

Performance

1.

Performance

Related to

Main Goals

2. General

Foreign

Performance

3.

Performance

of the Main

Product

4.

Foreign

Sales

Ratio

5. Objective

Financial

Performance

6.

Composite

Performance

Constant NS NS NS �b +c +b +c NS +a

�b NS +a

Firm size +b +a NS NS NS +c +d +d +b NS NS +a

Product/service

quality

+d +c +b NS NS +c NS +c +b NS +c +c

Niche product/

service

NS NS NS NS NS NS NS NS NS NS NS NS

Export age NS NS NS NS NS NS NS NS NS NS NS NS

International

orientation

+b +b +b +b NS +b +a +c +c +a NS +a

International

commitment


International

experience

NS NS NS NS �a NS NS NS NS NS �

b NS

Product

adaptation


Price adaptation NS NS NS NS NS NS NS NS NS NS NS NS

Communication

adaptation

NS NS NS NS �a NS NS NS NS NS NS NS

Market

diversification

NS +a NS +b NS +d NS NS +a NS NS NS

Consumer NS NS NS NS NS NS NS NS NS NS NS NS

Service NS NS NS NS NS NS NS NS NS NS NS NS

R2 0.238 0.368 0.262 0.252 0.101 0.353 0.206 0.316 0.312 0.251 0.095 0.323

Adjusted R2 0.170 0.312 0.196 0.185 0.021 0.310 0.148 0.265 0.261 0.195 0.028 0.223

F-value 3.491 6.501 3.966 3.767 1.258 8.197 3.521 6.251 6.146 4.528 1.413 3.230

Note: NS ¼ non-significant.


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JORMA LARIMO46

Product adaptation, niche focus, price adaptation, international commit-ment, and export age were all insignificant in both sub-groups using all sixmeasures of performance. In the case of international experience, the var-iable was once statistically significant in both sub-groups. This was the casewhen employing the foreign sales ratio as the measure of performance and inboth cases the impact was opposite to the negative expectations (in the borninternational sub-group somewhat greater than among traditional export-ers). Similarly, the results indicated that the industry variable did not haveany greater impact using any of the performance measures. Finally, whatconcerns communication adaptation, the variable was all the time insignifi-cant in the born international sub-group, whereas among traditional ex-porters the variable had once a significant negative impact. Having in mindthat the above findings were identified when the objective financial per-formance variable was at work, it can be argued that the real costs of theadaptation of communication have been greater than the increase in sales.

5.2.3. Classification 2: Traditional Exporters vs. Truly Born Internationals

The results based on the tighter classification of the born internationalcompanies are presented in Table 6. The explanatory power of the objectivefinancial performance model is again low, but only in the traditional ex-porter sub-group. In the truly born international sub-group model, the ex-planatory power is much higher. Also in all other models the explanatorypower is at least rather good.

In the total results six of the eleven variables had at least once a statis-tically significant impact, but using the tight classification altogether, nine ofthe variables had a statistically significant impact at least once. In general,firm size, product/service quality, international orientation, and market di-versification, most often had a positive impact on export performance. Allof them were significant in using five different measures of performance inthe traditional exporter sub-group. In the born international sub-groups,firm size and international orientation were significant in three cases and theother two in fewer cases. Thus, especially in the traditional exporter group,the results gave additional support of the great impact of these four var-iables. Similarities in the results between the sub-groups were that bothproduct adaptation and niche focus were – against expectations – insignifi-cant using all of the six performance measures.

Price adaptation had a significant positive impact on the truly born in-ternational sub-group three times. Price adaptation was once important alsoin the traditional exporter sub-group, but the sign was against expectationsnegative. It is difficult to explain the finding, especially why such a result was

Table 6. Performance in SME Exports Based on Classification 2: Traditional Exporters vs. Truly BornInternationals.

Traditional Exporters (N ¼ 281) Truly Born Internationals (N ¼ 77)

1.

Performance

Related to

Main Goals

2. General

Foreign

Performance

3.

Performance

of the Main

Product

4.

Foreign

Sales

Ratio

5. Objective

Financial

Performance

6.

Composite

Performance

1.

Performance

Related to

Main Goals

2. General

Foreign

Performance

3.

Performance

of the Main

Product

4.

Foreign

Sales

Ratio

5. Objective

Financial

Performance

6.

Composite

Performance

Constant +b NS +b�

b +d NS +b +b +b NS NS NS

Firm size +d +c +a NS +b +b +b +b NS NS NS +b

Product/service

quality

+d +d +c NS +b +c NS NS NS NS +b +c

Niche product/

service


Export age �b NS NS +c NS NS NS NS NS NS +b NS

International

orientation

+b +b +b +a NS +b NS +b NS +b NS +b

International

commitment

NS NS NS NS NS NS NS NS NS NS +c NS

International

experience

NS +a NS NS NS NS NS NS NS NS �b NS

Product

adaptation


Price adaptation �b NS NS NS NS NS +b NS +c NS +a NS

Communication

adaptation

NS NS NS NS �a NS NS NS NS +b NS NS

Market

diversification

+b +c +c +d NS +b NS NS NS �a NS +b

Consumer NS NS NS NS NS NS NS NS NS NS NS NS

Service NS NS NS NS +a NS NS NS NS NS NS NS

R2 0.241 0.358 0.290 0.266 0.099 0.373 0.245 0.340 0.370 0.466 0.345 0.373

Adjusted R2 0.203 0.326 0.254 0.299 0.054 0.310 0.084 0.199 0.236 0.352 0.206 0.310

F-value 6.360 11.138 8.163 7.240 2.202 5.864 1.523 2.417 2.759 4.099 2.476 5.864

Note: NS ¼ non-significant.


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JORMA LARIMO48

obtained when performance was measured using the main goals of the firm.A second clear difference between the sub-groups was found in relation tothe impact of market diversification. The variable had the expected positiveimpact four times in the traditional exporter sub-group, whereas only twicein the truly born international sub-group. From those two cases in the lattergroup, only one was according to the expectations positive, whereas one –although mild – was negative (using foreign sales ratio). Thus those trulyinternational companies which had diversified very widely do not seem tohave gained such strong positions; those having concentrated somewhatmore their operations had succeeded better and therefore also the role offoreign sales among the total sales was higher.

A third difference between the sub-groups was related to the internationalexperience. The variable was significant in both sub-groups once but usingdifferent measures and the sign differed from one group. In the truly borninternational sub-group, a negative sign was found using objective financialperformance. Thus, the result was similar to that found using the loosedefinition of born internationals. In the traditional exporter sub-group, thesign was positive using general foreign operation performance measure. Assuch, in this sub-group the sign and measure were different compared to thefindings using the loose definition. Furthermore, export age was significantin three cases, two times in the traditional exporter and once in the trulyborn international sub-group, and every time using different measures. Intwo cases, the expected positive impact was found but in the traditionalexporter group the results indicated against expectations once a negativeimpact. Therefore, in this case the traditional exporters having long exportexperience had definitely not reached the goals set for the export operations.As discussed earlier, the export age did not have any significant impact inthe other analyses. A difference from the earlier results was also a findingthat international commitment was in the truly born international sub-group once (using objective financial measure) significant and the resultsindicated also the expected positive sign. Because the positive relation wasfound only in one of the twelve possibilities, the hypothesis receives only amild support. Finally, when the performance was evaluated using objectivefinancial performance, the results indicated the only case when the industryof the sample firms had somewhat more influence on the results. In this caseservice companies had performed better than industrial (and consumer)goods companies.

In summary, the results based on the tight definition of born interna-tionals do not give full support to any of the hypotheses 1–11. Hypotheses 1,2, 5, and 11 mainly receive support in the traditional exporter sub-group; in


turn in the truly born international sub-group hypotheses 1, 5, and 7 receivepartial support. Furthermore, hypotheses 2, 4, and 10 receive limited sup-port. In the other cases either the support is so mild (once at the 0.1 level)and/or the results are mixed. Thus the other hypotheses are rejected.

In hypothesis 13, it was expected that the positive relation between nichefocus, international orientation, and international commitment with exportperformance is greater in born international companies than in traditionalexporting companies. As discussed above, the niche focus variable wasinsignificant in both sub-groups using both classifications and all sixperformance measures. International orientation was significant in bothsub-groups several times, but using the tight classification, it was more oftensignificant in the traditional exporter sub-group than in truly born inter-nationals. International commitment had the expected positive impact onlyin one situation in the truly born international sub-group. Consequently, itmay be said that the hypothesis 13 receives only extremely mild support andonly in the case of international commitment.

In hypothesis 14, it was expected that the positive impact of adaptation ofvarious marketing mix elements on export performance would be loweramong born internationals than among traditional exporters. As mentionedbefore, the results did not give support to this hypothesis. In fact, there waslimited support for the opposite results. Thus hypothesis 14 is rejected.

6. SUMMARY AND CONCLUSIONS

Export performance has received a lot of attention since the pioneeringstudies of the early 1960s. However, there have been very mixed results andthe general view is that more carefully planned research is needed in order toanalyze the export performance. The present paper had three main goals. Toanalyze: (1) the impact of the selected firm, management, and the exportstrategy-related variables to the export performance; (2) the possible var-iation in the results depending on the measure of export performance; and(3) the similarities and differences in the results depending on the type ofSME – traditional exporters vs. born international companies. There are alot of studies focusing on export performance. However, several of themhave employed only one or two measures of export performance. Further-more, especially from the late 1990s there have been several studies review-ing the export and internationalization behavior of the so-called INVs orborn globals (in this study, the term ‘born international’ was used becausethe term refers better to the nature and operations of these firms). However,

JORMA LARIMO50

several of those studies have been case or very small-scale survey studies.Thus, the empirical evidence from export performance along several per-formance measures, based on large-scale samples, discriminating in theanalysis between traditional exporter vs. other types companies – referred toas born internationals in this study – is much more scarce, especially basedon empirical evidence from smaller Organization for Economic Cooperationand Development (OECD) countries.

Departing from the presented literature review, 12 hypotheses were de-veloped regarding the relationships between various firm, management, andexport strategy-related variables, and export performance. Furthermore,two additional hypotheses were developed in relation to the expected differ-ences in the impacts of various variables between traditional exporters andborn internationals. The empirical part of the study was based on the an-swers of 386 Finnish SMEs in a survey study conducted in early 2002. Theexport performance was interpreted using six different measures for exportperformance and the sample companies were distributed into two sub-groups first using a looser definition and then a tighter definition borninternational companies. The OLS regression was employed for the analysis.The results of the study are summarized in Table 7.

Among the hypotheses 1–11, none received support in all reviewed sit-uations. However, hypotheses 1, 2, 5, and 11 received all support using fivemeasures of performance. In these conditions, the firm size, product/servicequality, international orientation of the management, and market diversi-fication seemed to be in general the main reviewed variables having positiveimpact on export performance. In addition to these, two variables had pos-itive impact – product/service adaptation and export age – but more limited.The results indicated some variation depending on the measure of perform-ance. Thus, it can be concluded that also the results of this study givesupport to the view that the performance should be analyzed using severalmeasures of export performance. Results in the majority of earlier studieshave also indicated positive impact of international orientation and marketdiversification on export performance. Thus the results of this study coin-cide in this respect well with earlier findings. What concerns the impact ofproduct/service quality and especially firm size, the results have been muchmore mixed. The results in this study coincide with the recent findings, e.g.,by Calantone et al. (2006) and Lages et al. (2006) of the positive impact ofquality and those by Voerman (2004) and Majocchi et al. (2005) about thepositive impact of firm size on export performance.

Against expectations, niche focus, international commitment of the man-agement, and price and communication adaptation were not found to have

Table 7. Summary of the Results.

Expected Sign Total Truly Traditional

Exporters

Born Internationals Traditional Exporters Truly Born

Internationals

H1 Firm size + Mainly supported Partially supported Mainly supported Mainly supported Partially supported

H2 Product/service quality + Mainly supported >————————Mainly supported————————o

H3 Niche product/service + Not supported >————————Not supported————————o

H4 Export age + Limitedly supported >————————Not supported————————o Limitedly supported

H5 International orientation + Mainly supported >————————Mainly supported————————o Partially supported

H6 International commitment + Not supported >————————Not supported————————o

H7 International experience + Not supported/

limitedly opposite

>————————Not Supported/limitedly opposite————————o

H8 Product adaptation + Partially supported >————————Not supported————————o

H9 Price adaptation + Not supported >————————Not supported————————o Partially supported

H10 Communication

adaptation

+ Not supported >————————Not supported————————o

H11 Market diversification + Mainly supported Partially supported Limitedly supported Mainly supported Limitedly supported

H12 Performance of the main

product intensity &

composite

Stronger

relationships

Not supported Limited support for

composite

Limited support for

main product &

composite

Limited support for

composite

Not supported

H13 Niche, international

orientation &

international

communication

Stronger in BGs � � Not supported � Not supported

H14 Product adaptation of

product, price &

communication

Stronger in

traditional

exporters

� Not supported � Not supported �

Differen

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JORMA LARIMO52

a positive impact along any of the six performance measures. The earlierfindings have given strong support for the positive impact of managementcommitment on export performance. The mean level of commitment washigh in this study. Thus, even management in poorly performing firms washighly committed to exports, which explains the non-significant impact onexport performance. Furthermore, the results related to the impact of ad-aptation are similar to those found by Shoham (2002). Furthermore, once(based on objective performance) the results indicated surprisingly a neg-ative relation between international experience of the management and ex-port performance. Finally, the industry (manufacturers of industrial goodsor consumer goods or service field companies) of the reviewed companieshad only once influenced the results.

The results evidenced also some similarities and differences depending onthe type of the SME. Among both traditional exporters and truly borninternational companies, the firm size and international orientation had thegreatest positive impact on export performance. Additionally, the product/service quality and market diversification had clearly more often a positiveimpact on export performance among traditional exporters, than in the caseof truly born internationals. The less significant impact of the quality issuein latter case is more difficult to explain, whereas the market diversificationissue is at least partly justified by the fact that truly born international firmswere in general more diversified than traditional exporters. An unexpectedresult was that in the truly born international sub-group the price adap-tation had a positive impact on export performance using three differentmeasures of performance (included both subjective and objective measures).

The results among traditional exporters vs. born internationals, usingboth looser and tighter classifications, indicated no impact of the nichefocus, adaptation of product/service, price, and communication along anyof the six measures of performance. International commitment was alsosignificant in only one case. Moreover, no differences could be found de-pending on the industry of the sample companies. The insignificant role ofthe product/service and communication adaptation may be partly explainedby the fact that in the case of high-quality products there may be lesspressure toward local adaptation than in the case of poorer quality prod-ucts/services. A similar finding was also made in the study focusing on UK-based export award winners by Styles and Ambler (1994). They assumedthat the result may have been influenced by the fact that the most importantexport markets for the sampled firms were Western Europe and USA, thusculturally rather similar areas/countries to the UK. Some of the main targetcountries in this study, e.g., Sweden and Germany – are also culturally close


to Finland, thus the same argument may be valid at least partially also inthis study.

In conclusion, the results of the study indicate that: (1) the export per-formance is influenced by the firm, management, and export strategy-relatedvariables, (2) the results are at least partly dependent on the measure ofexport performance, (3) there are some similarities, but also some differ-ences in the variables influencing export performance among traditionalexporters and born internationals, and (4) the differences depend on theoperationalization of the born international company. Especially the rela-tion between the types of exporting SME – traditional exporters vs. borninternationals – has been analyzed very limitedly so far. Furthermore, therehas been a lot of variation in the operationalizations used for born inter-nationals. Thus, this study provided with more detailed information aboutthe influence of various operationalizations of the born international com-pany on the export performance.

If the results of this study are compared with those of earlier studies, onehas to remember that the companies in this study were rather small (allSMEs) but the foreign sales usually had a very significant role at least partlybased on the small size of the Finnish domestic market. Most foreign studieshave focused on companies having bigger domestic markets, when com-pared to Finland, and also the sample companies have usually been bigger(maximum limit of 1,000 employees for the SMEs in some studies), but therole of foreign sales has not been as significant as in the sample of this study.

The results give also basis for some important managerial implications.The reliance on quality as a competitive strategy was great in the wholesample, but the best performing exporters had given even more weight to thequality of the product/service than the lower performing exporters. Further-more, the results evidenced the importance of the international orientation ofthe management for the export performance. The results also showed thatgood export performance usually demands at least somewhat bigger size fromthe company in order to have enough financial and managerial resources forthe successful export entry and expansion. Moreover, the market spreadingseemed to lead to better performance than the market concentration, espe-cially among traditional exporters companies. Finally, the product adapta-tion seemed to be more important than the price or communicationadaptation in the total sample. However, among born internationals theproduct adaptation did not seem to be as important as price adaptation. Thisexplained mainly by the high quality of the products/services provided by theborn internationals why country-specific adaptation of the product offering isnot necessary for success. Furthermore, more standardized products are also

JORMA LARIMO54

expected to be typical for born internationals in order to be able to expandsales rapidly to several target countries. From the government policy point ofview, key issues are how to develop the export systems to fit to support theincreasing amount of born internationals and also to the increasingly diver-sified types of born international companies.

Nevertheless, the present study has several limitations. The study did notinclude any information about, for instance, of the motives for exports, mainexport markets, competition, and type of customers and/or distribution ar-rangements. In this light, these aspects could be added in future analyses inorder to have a more comprehensive view of the export-related variables andexport performance. Additionally, the adaptation vs. standardization issueswere analyzed only at a very general level. Thus a more detailed analysis isneeded. Furthermore, the financial performance concerned the total oper-ation of the company. In truly born international companies this was noproblem because of that, on average almost 70% of the total sales in oursample was generated abroad and it seems that they do not separate betweendomestic and foreign profitability. Therefore, this may have possibly been aproblem only in those cases where the foreign sales had a much smaller rolein the total sales, and the profitability of domestic vs. foreign sales could beanalyzed separately in future studies. This study focused on traditional ex-porters vs. born international firms. There was no analysis of the so-calledborn-again global firms (see Bell et al., 2001). One possibility for furtherresearch would be to concentrate more on this sub-group of exporters.

Finally, this study analyzed only the direct impact of reviewed variableson export performance. Consequently, in the future research more devel-oped methods of analysis should be used to review also the indirect effects ofvarious variables on export performance. This would give more detailedinformation, e.g., about the possible differences in the impact of product/service, communication, and price adaptation on performance in differentfields of industries, and in the case of various export age and market di-versification groups. Additionally, it would be worth taking into accountthat the relationships between the various independent variables and theexport performance are not necessarily linear but curvilinear. This avenue ofresearch requires further consideration as well.

ACKNOWLEDGMENTS

The study is a part of the ‘‘Finnish Companies and Challenges of Global-ization’’ (LIIKE) – research project in Finland. The author expresses his


sincere thanks to Johanna Pulkkinen, Jukka Harju, and Huu Le Nguyen fortheir help in various states of the data collection and treatment. Furthermore,the author acknowledges for the financial support provided by the Academyof Finland and the Foundation for Economic Education in Finland.

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http://www.amsreview.org/articles/sousa09-2004.pdf

http://www.amsreview.org/articles/sousa09-2004.pdf


APPENDIX A. OPERATIONALIZATIONS OF

DEPENDENT AND INDEPENDENT VARIABLES

Dependent variable: Export performancePerformance related to the main goals. The management was asked to rate

their degree of satisfaction with the export performance related to thegoals set in the main markets of the company on a 5-point Likert scalewhere 1 ¼ very disappointedy 5 ¼ very satisfied.

General foreign performance. The management was asked to rate their degreeof satisfaction with the export performance in all foreign markets on a 5-point Likert scale where 1 ¼ very disappointedy 5 ¼ very satisfied.

Performance of the main product. The management was asked to rate theirdegree of satisfaction with the export performance of their main exportproduct on a 5-point Likert scale where 1 ¼ verydisappointedy 5 ¼ very satisfied.

Foreign sales intensity. The foreign sales intensity was measured asking theexact share of foreign sales from total sales of the company in 2001.

Objective financial performance. The management was asked to inform thelevel of the operating profit of the company in 1999–2001 on a 5-pointscale where 1 ¼ negative, 2 ¼ 0–4%, 3 ¼ 5–9%, 4 ¼ 10–19%, 5 ¼ 20%or more.

Composite export performance. The composite export performance was builtusing the answers related to the above five export performance measures.For the total scale, the export sales intensity was transferred to fivecategories where a foreign sales share below 20% was rated as 1, a shareof 20–39% as 2y and a foreign sales share of 80–100% was rated as 5.Five groups were built: the first group included cases where the total scorewas from 5 to 7, the second category included cases where the total scorewas from 8 to 12y and the fifth group included cases where the totalscore was from 22 to 25.

Independent variablesFirm size (FSIZE). The firm size was measured based on the total sales of

the company in 2001 in million euros. Because it may be expected that theinfluence is not linear, a logarithmic version was used.

Product adaptation (PRODUCTADP). The product/service adaptation wasmeasured on a scale from 0 to 5 where 0 indicated that there was noadaptation at all, 1 that there was only extremely limitedly adaptation,whereas 5 meant very significant adaptation.

JORMA LARIMO60

Product/service quality (QUALITY). The level product/service quality wasmeasured based on the evaluations of the competitiveness of the companybased on the level of product/service quality on a scale from 1 to 5 where1 ¼ very low/poory 5 ¼ very high/good.

Niche product/service (NICHE). The level of niche focus in the operationswas measured on the evaluations how well the following statementdescribed the company: our product/service serves some special need thatthe competitors have problems to offer on a scale from 1 to 5 where1 ¼ describes extremely poorlyy 5 ¼ describes very well.

Price adaptation (PRIADAPT). The level of price adaptation was measuredbased on a scale from 0 to 5 where 0 indicated that there was noadaptation at all, 1 that there was only extremely adaptation, whereas 5meant very significant adaptation.

Communication adaptation (COMADAPT). The level of communicationadaptation was measured on a scale from 0 to 5 where 0 indicated thatthere was no adaptation at all, 1 that there was only extremely adaptation,whereas 5 meant very significant adaptation.

International orientation (INTORIENT). The level of internationalorientation was measured based on the evaluations of the internationalorientation of the management on a scale from 1 ¼ very low/poory 5 ¼ very high/good.

International commitment (INTCOMMIT). The level of internationalcommitment was measured based on the evaluations of the internationalcommitment of the management on a scale from 1 ¼ very low/poory 5 ¼ very high/good.

International experience (INTEXP). The level of international experiencewas measured based on the evaluations of the international experience ofmanagement on a scale from 1 ¼ very limitedy 5 ¼ very extensive.

Export age (EXPORT AGE). The export age was measured based on thelength of time the company has been exporting in years.

Market diversification (MARDIV). The level of market diversification wasmeasured based on the amount of target countries of exports in 2001.


APPENDIX B. DESCRIPTIVE SAMPLE

INFORMATION

Total

Sample

N ¼ 358

Truly

Traditional

Exporters

N ¼ 164

Born

Internationls

N ¼ 194

Traditional

Exporters

N ¼ 281

Truly Born

Internationls

N ¼ 77

Firm size (log)
3.16 3.18 3.14 3.16 3.14
Firm size
60.0 64.6 56.2 59.6 57.5
Product/service quality
3.99 4.02 3.97 3.96 4.09
Niche product/service
2.89 2.96 2.84 2.91 2.84
Export age
15.11 15,41 14,86 15,57b 13,43
International orientation
3.79 3.76 3.82 3.73 4.03
International commitment
1.91 3.88 3.93 3.85 4.13b
International experience
3.53 3.49 3.56 3.46 3.77b
Market diversification (log)
1.83 1.75 1.89 1.81 1.89
Market diversification
9.75 8.83 10.6 8.94 12.9
Product adaptation
3.29 3.22 3.34 3.14 3.53b
Price adaptation
3.28 3.33 3.25 3.19 3.40
Promotion adaptation
3.43 2.41 2.44 2.38 2.53
Industrial
239 116 123 192 47
Consumer
69 28 41 46 23
Service
50 20 30 43 7
Note: 1 ¼ Exports Within 3 years, no share limits; 2 ¼ Exports within 3 years, shareX25%,

FSALES in 2001X50%.


APPENDIX C. CORRELATION MATRIX

Mean STDV Firm

size

Product/

service

quality

Niche

product/

service

Export

age

International

orientation

International

commitment

Inter-national

experience

Product

adaptation

Price

adaptation

Communication

adaptation

Market

diversification

Firm size 3.17 1.31 1

Product/service quality 3.98 0.67 0.12 1

Niche product/service 2.93 1.18 �0.01 0.10 1

Export age 15.93 14.05 0.37 0.10 0.11 1

International orientation 3.72 0.98 0.16 0.26 0.18 0.08 1

International commitment 3.85 1.00 0.21 0.30 0.12 0.11 0.69 1

International experience 3.50 0.98 0.18 0.25 0.18 0.14 0.74 0.066 1

Product adaptation 3.29 1.19 0.23 0.23 0.11 �0.01 0.33 0.36 0.33 1

Price adaptation 3.27 1.10 0.22 0.04 0.06 0.09 0.23 0.19 0.21 0.42 1

Communication

adaptation

2.46 1.32 0.11 0.15 0.13 �0.05 0.31 0.32 0.27 0.44 0.34 1

Market diversification 1.82 0.94 0.31 0.01 0.17 0.18 0.09 0.17 0.17 0.13 0.12 0.10 1

JORMA

LARIM

O62

NICHE STRATEGY AND

EXPORT PERFORMANCE

Antonella Zucchella and Giada Palamara

ABSTRACT

Small firms can approach foreign markets notwithstanding their limited

resources by adopting a niche strategy. This permits to understand how

SMEs can reach high levels of export intensity and broad geographic

scope. Moreover, a global niche approach permits to explain – among

other factors – why and how infant firms can be international or even

global since their inception. The case studies analysis shows a positive

relation between niche strategy and high international performance, in

terms of export intensity, precocity, speed, and scope. The international

expansion of niche firms is based on an horizontal micro-segmentation of

the global market: they move internationally following global customers,

independently from the psychic/geographical distance, and compete

mostly on a non-price basis.

INTRODUCTION

Small firms have frequently approached international markets adopting aniche strategy. The latter can explain how small firms, which are tradition-ally described as constrained in terms of financial and managerial resources,may reach a sustainable competitive positioning in global markets. Focusingon a narrow market segment through the offer of specialised goods or





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17002-7

63

ANTONELLA ZUCCHELLA AND GIADA PALAMARA64

services enables small firms to compete globally. Moreover, the smaller theniche, the stronger the need to reach a global scope in order to break even.In market niches, small firms can deploy the resources and capabilitieswhich characterise their organisations, in particular strong orientation toglobal customers, wherever they are located, an offer of customised goods, acustomised pre- and after-sale service.

The adoption of a niche strategy protects small firms from the competitionof large multinationals. In markets dominated by economies of scale andscope in production, research and design, and marketing, small firms wouldnot be able to compete. As Penrose (1959) suggested, the existence of marketniches permits the survival and prosperity of small firms in the world eco-nomic systems. Actually, a number of authors recognise that the adoption ofa niche strategy is not just a defensive move of firms looking for protectedmarket spaces, but it entails entrepreneurial proactivity and innovativeness in‘‘shaping’’ market niches (and not just discovering them). Moreover, thedynamism of global competition and the behaviours of large MNEs, whichproved able of entering both small market niches, and mass markets, imposeon a dynamic strategic approach to small firms in their niches.

Building on these premises, the present contribution aims at verifying,through theoretical survey and 17 case studies research, the hypotheses thatthe adoption of a niche strategy enables small firms to better perform theirexport activity – when compared to other SMEs – according to the follow-ing dimensions:

�
Precocity of internationalisation, i.e., niche firms are born international orstart international activity from their first years of life;
�
Path of internationalisation, i.e., niche firms show a prevailing serial (si-multaneous and fast) internationalisation process and not a sequential(incremental, step by step) one;
�
Intensity of internationalisation, i.e., niche firms perform better in termsof foreign sales to total sales ratios; and
�
Scope of internationalisation, i.e., niche firms show a broader geographicscope, since they focus on global customers wherever they are located, andnot on foreign markets.
SMALL FIRMS AND NICHE STRATEGY

The academic literature has widely explored SMEs internationalisation,with special emphasis on its main outcome, typically represented by the

Niche Strategy and Export Performance 65

exporting activity. Among the different issues considered we find the fol-lowing ones:

�
the drivers of export activity, which for some authors lie in the experience,attitudes, and traits of the entrepreneur and of the management team,while for others in business and industry specific factors (Tesar & Moini,1998; Westhead, Wright, & Ucbasaran, 2001; Audretsch, 2002; Kundu &Katz, 2003);
�
the strategic approach to internationalisation, outlining the path followedby firms facing international markets (Johanson & Vahlne, 1977;Cavusgil, 1980);
�
the construct of export performance that represents one of the mostmeaningful indicators of international performance, especially in the caseof small firms (Dess & Robinson, 1984; Venkatraman & Ramanujam,1986; Shoham, 1988; Sullivan, 1994); and
�
the emerging field of international entrepreneurship (Venkataraman,1997; Shane & Venkataraman, 2000; McDougall & Oviatt, 2000), and therelated debate on born global firms, which leads to the identification ofnew patterns of international expansion, characterised by high precocity,speed, and wide scope (Oviatt & McDougall, 1994; Madsen & Servais,1997; Rialp, Rialp, & Knight, 2005).
According to the above-mentioned developments, the drivers and the di-mensions of SMEs international success have been studied quite extensively,moving the focus from ‘‘why’’ do small firms export to ‘‘how’’ they performthis activity successfully (Audretsch, Prince, & Thurik, 1998). Issues regardingthe decision maker and the entrepreneurial aspect, the industry- and country-specific issues and the different stages of the internationalisation process havebeen widely studied (Miesenbock, 1988). At the same time, the relationshipbetween business strategy and export performance is not adequately explored,and in particular, the literature about niche positioning as an important driverof the internationalisation strategy of SMEs is still scarce.

SMEs are able to offer an attractive offering in terms of differentiation,which can be obtained only through the continuous improvement of theproduct, due to technology and know-how protection, and through thecontinuous attention to the client’s needs. Global niche strategy can guar-antee a leading position not only in the regional market, but also in theglobal one, notwithstanding the small dimension of firms.

The internationalisation process for SMEs is primarily represented by theexport strategy that still constitutes the most common foreign-market entrymode (Leonidou & Katsikeas, 1996; Wolff & Pett, 2000). Even though in the


last two decades small firms have diversified the avenues of their interna-tional growth paths and entry modes, exporting still represents the main waythrough which these firms sell abroad. It indeed offers a greater degree offlexibility and an effective means for firms to achieve an international po-sitioning without overextending their capabilities or resources (Young,Hamill, Wheeler, & Richard, 1989). Exporting is frequently coupled withimporting (Monczka & Trent, 1991; Luthje & Servais, 2005), evidencing thatthe competitiveness of small firms in global markets depends actually alsoon their capacity to find the needed resources and capabilities in differentmarkets and/or to be strategic units in international value chains.

Some studies have demonstrated that a firm’s size and export intensity –as measured by the ratio of exports to sales – are not correlated (Bonaccorsi,1992; Calof, 1994; Wolff & Pett, 2000). This shows that, inside the world ofSMEs, the smallest firms are not necessarily hindered from being strongexporters, and that export capabilities are more correlated with the firms’organisational, entrepreneurial, managerial, and strategic elements.

Schmalensee (1985) argues that market share and profitability are strictlycorrelated: some contributions have been devoted to the emerging case ofniche firms that, although small in size, appeared to be leaders in their mar-ket segment on a global scale (Maleksadeh & Nahavandi, 1985; Simon, 1996;Calof, 1994; Gomes Casseres, 1997; Kohn, 1997). Small firms can directlycompete with large companies in narrow segments, and can reach a highshare in international markets by choosing a niche strategy (Porter & Caves,1977; Porter, 1979). On the other side, competing in a mass market is notsustainable for SMEs, because of the high entry barriers, mostly representedby the need of relevant financial, technological, and managerial resources (LaMarca & Palamara, 2005). Competition in global markets and scale advan-tages of large firms tend to push firms into niche markets (Christensen, 1991).In this case, the domestic market can be too small in terms of customer base,and firms need to sell in multiple countries to survive.

A niche strategy involves (Dalgic & Leeuw, 1994; Mattiacci, 2000)

�
specialisation, both endogenous (supply-side niche) and exogenous to thebusiness (demand-side niche);
�
scarcity, i.e., a production that is not quantitatively adequate for a po-tential mass market;
�
competitive isolation, i.e., there is no actual substitutive product; � strong customer orientation; and � originality, i.e., a quality/innovativeness perception that the customer feelsas exclusive to the firm’s offering.


erature. Born as a sort of ‘‘defensive reaction’’ (Newman, 1978; Caves &
The concept of niche strategy has assumed different meanings in the lit-
Pugel, 1980) – where the niche is considered as a protected area – it hasdeveloped into a truly ‘‘strategic’’ concept, where the niche is the result ofthe segmentation of the market, in order to anticipate customers’ valuefunctions. From a reactive strategy to compensate SMEs size disadvantage(Acs & Audretsch, 1990), to a strategic answer (entrepreneurial action) tothe complexity of the global competitive arena.

Niche strategy is a key competitive strategy for SMEs, allowing them tomaintain a long-term competitive advantage also with reference to biggerfirms (Kotler & Scott, 1993). It is a mix of unique resources, competences,and abilities, which create a favourable competitive environment for SMEs.This strategy reduces the degree of complexity of the international market,in terms of knowledge and control of the segment created; it reduces thecomplexity in the competitive environment, thanks to non-price competitionand the absence of direct competitors; it reduces the degree of organisationalcomplexity, thanks to the centralised organisational structure, typical ofSMEs.

Niche competitors generally select market segments characterised by non-price competition, since they orient their products towards high levels ofquality, technology content, and service for customers. Even in the case ofmanufacturing activities the ‘‘cost competitive capability’’ is not crucial(Ward, Bickford, & Keong Leong, 1996).

The strategic approach to niche market assumes that no traditional bar-riers exist in entering a niche (as in the defensive approach): barriers exist insurviving and building a competitive advantage. A niche market is char-acterised by non-price competition: quality, innovation, and adaptation tocustomers’ needs are considered the fundamental competences that buildnew barriers to survival. Choosing to compete on a niche market, in acertain way, means selecting a competitive system based on intangible andcompetence-based barriers.

The global niche approach does not in fact imply that there are any stableniches protected from competition (Maccarini, Scabini, & Zucchella, 2003).The dynamism of markets, the transversality of new technologies, and therecently acquired ability of large firms to respond with flexible strategies andpenetrate the market at niche level (also by acquiring small firms) create acontinual challenge for small enterprises. The underlying goal is to reach abetter and faster product adaptation to foreign customer needs, and to learnfrom the foreign context in order to improve their technology to meet localcustomers’ objectives and conditions.


The niche approach implies a non-generic vision of the market, turned tointerpreting its complexity and variety, and to orienting the entrepreneurialaction to the proactive client’s service (Maccarini et al., 2003). These arefundamental characteristics both of a ‘‘demand-based’’ niche strategy –where the niche is born from a specific and explicit need of the market – andof a ‘‘supply-based’’ niche strategy – determined by the research of a po-tential market of implicit needs.

NICHE STRATEGY AND SMALL FIRMS’

INTERNATIONALISATION

Operating within a narrowly defined market niche leads to an internationalmarket horizon in order to break even, since the domestic one – at a smallniche level – does not permit adequate sales volumes to be reached – even forsmall enterprises.

All over the world, niche firms share some fundamental similarities: theypossess unique assets, focus on narrow global market segments and arestrongly customer-oriented.

High export intensity, precocity, and global scope are thus expected el-ements characterising export performance of small firms, which have optedfor a niche strategy. Moreover, we can expect that their internationalisationpath shows different features, when compared to the one of non-niche smallfirms. The need of quickly reaching a relatively small number of customersdispersed across the globe, in order to break even, leads these firms to followa simultaneous and fast international growth, while other firms more fre-quently adopt an incremental process of internationalisation, both in termsof timing and in terms of entry markets, starting from the closest andgradually moving the more distant ones.

Johanson and Vahlne (1977) describe internationalisation as a processthat begins and develops in incremental stages, slowly and gradually,grounded on the issue of commitment building. The first step of the inter-national process consists in exporting towards those countries thatare physically and culturally the nearest; then, in the next phases, more‘‘committed’’ forms are deployed. In addition to the ‘‘deepening’’ of theirpresence in foreign countries, firms move gradually from ‘‘closest’’ to moredistant countries, i.e., they engage in ‘‘widening’’ processes as well. Bothwidening and the deepening processes are supposed incremental.

The Uppsala model is based on the concepts of experience and knowl-edge: the internationalisation process is conceived as a gradual process of


acquisition, integration, and utilisation of knowledge concerning marketsand externally performed transactions (experience accumulation). In the longrun, this path leads to dimensional growth, to the increase of managementknow-how, to the constant growth of knowledge and to the increase offinancial resources.

According to Johanson and Vahlne, the psychic distance that separatesthe home country from the foreign market causes the cautious attitude(grounded on the risk aversion hypothesis) at the beginning of the inter-national process. This psychic distance is the sum of factors that disturbor, sometimes, hamper the flow of information between the firms and themarkets in which they intend to operate.

In the last two decades, the sequential model was challenged by the ev-olution of global markets and of firms’ strategies and did not always fitinternationalisation processes of small and infant firms. The global market,indeed, offers new chances to create and gain value, and SMEs started todevelop a new approach to internationalisation, characterised by a serialprocess: a simultaneous internationalisation in different markets, frequentlyindependent of both from the age of the firm and from psychic distance.

Researchers and practitioners have started to study the phenomenon ofthe so-called born global firms, which are international from their inception(Oviatt & McDougall, 1994; Hordes, Clancy, & Baddaley, 1995; Madsen &Servais, 1997; Preece, Miles, & Baetz, 1998; Madsen, Rasmussen, & Servais,2000; Larimo, 2001; Kuemmerle, 2002).

Niche strategy frequently characterises born global firms as well as theones that internationalise quickly and intensely. It is an approach to theinternational market that suits the characteristics of SMEs: dynamism,flexibility, centralised governance, focus on product quality, and specialisedproduction (Ward et al., 1996). In terms of approach to internationalisation,the main impact of a niche strategy is a shift towards a market vision interms of clusters of homogeneous clients and no longer of countries. Thelatter issues help in explaining why they can quickly reach a global scopeand also why they typically show a more widening attitude rather than adeepening one in foreign markets: their global customers are too muchdispersed and each single market usually does not make increase in com-mitment economically and strategically convenient for these small firms.Relationships are kept with customers and not with countries, they arebased on personal contacts and gradual commitment is built at the customerrelationship level.

The adoption of a niche strategy can explain why small firms are inter-national from their inception, and reach high export performances in terms


of intensity and scope. It also explains how small firms internationalise, i.e.,through which kind of process (notably a serial one, as opposed to thesequential process).

THE DIMENSIONS OF THE EXPORT

PERFORMANCE: INTENSITY, PRECOCITY,

SPEED, AND SCOPE

Even if internationalisation of an enterprise can cover different aspectsof a firm’s life (export, international sourcing, international agreement,IDE, joint ventures, etc.), export strategy is still the primary foreign-marketentry mode used by small businesses in their internationalisation efforts(Leonidou & Katsikeas, 1996; Wolff & Pett, 2000); it represents also thepredominant international activity of small firms (Tesar & Moini, 1998;Westhead et al., 2001; Audretsch, 2002; Kundu & Katz, 2003). Accordingto a recent European survey, the contemporary existence of import flowsis quite common in SMEs (Servais, Zucchella, & Palamara, 2005) andsupports the hypothesis that export growth and competitiveness depend –among others – on the capacity of the firm to access the best (optimal price–quality combination) resources worldwide.

Measuring export performance is not easy because export performance isa multidimensional construct (Shoham, 1988). Even if export intensity is themost accepted measurement, it is possible to define three additional dimen-sions that contribute to better specify this measure and to explain its level(see Fig. 1). They are export precocity, speed, and scope.

Export intensity has widely been used in international business literatureas an indicator of SMEs international performance (Czinkota & Johnson,1983; Calof, 1993), and the ratio of exports to total sales, is a typical meas-ure of the degree of internationalisation (Ramaswamy, Kroeck, & Renforth,1996), particularly for SMEs.

The recent debate on international new ventures leads us to assume thatinternational performance can be explained also through other dimensions,viz. precocity, speed, (Madsen & Servais, 1997; Lommelen, Matthyssens, &Pauwels, 2002) and scope (Tallman & Li, 1996). Oviatt and McDougall(1994, p. 49) describe the born global firm as ‘‘a business organization thatfrom inception seeks to derive significant competitive advantage from the useof resources and the sale of outputs in multiple countries.’’ Madsen andServais (1997) speak about born globals as ‘‘firms that adopt an internationalor even global approach right from their birth or very shortly thereafter’’.

Export intensity

Export precocity and speed

Export scope

Exportperformancedimensions

Fig. 1. Research Model.


Literature on born global firms argues that precocity matters in interna-tional competition and that temporal dimensions of internationalisation, likeprecocity and speed, are important as much as the quantitative (export in-tensity) and geographic ones (scope) for a thorough understanding of exportperformance. Moreover, precocity and speed are positively correlated toexport performance, and contribute to determining its level, as some empir-ical studies demonstrate (Denicolai, Palamara, & Zucchella, 2005). Thesooner and the broader a firm goes international, the higher its export in-tensity is supposed to be. Precocity and speed influence intensity because bothare connected with the accumulation of experiential learning (Johanson &Vahlne, 1977; Kolb, 1984), which is crucial to maintaining competitive ad-vantage in a global market.

According to the fourth dimension of export performance, i.e., geographicscope, some authors divide firms in regional and global players (Maccariniet al., 2003; Servais et al., 2005), or between international and global players(Loustarinen & Gabrielsson, 2002; Gabrielsson & Gabrielsson, 2004), de-pending on the choice to operate on a macro-regional area – that usuallycorrespond to the home country – or on the global market. The former arefirms competing on a macro-regional market – in our case the UE – wherenatural and artificial barriers have weakened. In these cases, new suprana-tional and integrated spaces can be considered as the new domestic market.For an Italian firm, exporting to France, just like to a number of EUcountries, is something different than exporting to extra-European markets,where a different currency and barriers to trade are present. In our researchmodel, these firms are operationalised as having a narrow scope.

The global player shows a global commitment, based on a strategic searchof global customers. They have a broader scope, which means that they havedifferent customers in one or more continents other than Europe.


Fig. 1 illustrates the research model developed through the above-outlined literature review on niche strategy and export performance dimen-sions. The model is tested in the following section though an exploratoryempirical study on 17 case studies.

RESEARCH DESIGN AND METHODOLOGY

The empirical section of this work is based on the case study research (Yin,1994). According to this methodological approach, we use a qualitative scaleto measure all the variables, and we use a matrix positioning approach tosummarise the main results.

According to Marshall and Rossman (1998), qualitative research is ap-propriate for understanding phenomena such as entrepreneur’s and firm’sorientation, action and behaviour, and is useful in investigations of inter-pretations and meanings of events.

Our sample is a group of 17 manufacturing firms headquartered in Italy.All of them are SMEs according to UE parameters, which define small firmas an independent organisation with a number of employees ranging be-tween 10 and 49, and revenues less than h10 millions; the medium-sized firmis defined as an organisation with a number of employees ranging between50 and 249, and sales volume less than h50 millions. All the firms in thesample have in fact less than 250 employees, total revenues and assets belowthe mentioned ceilings, and are independent (not belonging to national/multinational groups).

The group of firms was selected from a database reported by the Cham-bers of Commerce.1 According to this dataset, the selection made is rep-resentative of the population of small- and medium-sized international firmsof Piedmont region (North West Italy). In these firms, entrepreneurs andtop management usually coincide, due to their small scale.

Table 1 summarises the relevant information about the surveyed group.The methodology of investigation adopted is a structured interview, sub-

mitted through a questionnaire. We have directly interviewed the entrepreneurof each firm; if an export manager exists, he/she was interviewed about theinternational activity. Each interview lasted on an average 1 hour and a half.

The questionnaire is part of a wider research project going on inour department on the process of internationalisation of small firms andcontains five different sections: business activities and governance; strategicpositioning; ownership and relations with other firms; international activ-ities; and entrepreneurship.

Table 1. The Sample.

Firm Product Year of

Foundation

Employees Time to

Export

Precocity Export

Intensity

Scope Approach to

International

Market

Niche

Strategy

1 Ring for mechanic pad 1882 63 88 Low High Broad Serial Yes

2 Toys 1968 60 2 High Low Broad Serial Yes

3 Car components 1968 210 29 Low Low Narrow Sequential No

4 Wine 1963 9 17 Low High Broad Sequential No

5 Lever for steering gear 1925 142 21 Low Low Broad Sequential No

6 Informatics for banking 1980 220 0 High High Broad Serial Yes

7 Printed circuits 2004 90 0 High High Broad Serial Yes

8 Injection systems 1999 30 0 High Low Broad Serial No

9 Cosmetics 2000 12 0 High Low Broad Serial No

10 Steel tubes 1930 114 43 Low Low Narrow Sequential No

11 Machinery for jewellery 1945 104 3 High High Broad Serial Yes

12 Laser machineries 2001 7 0 High High Broad Serial Yes

13 Car components 1990 26 1 High Low Narrow Sequential No

14 Valves and engines 1953 64 13 Low High Broad Sequential No

15 Cages for champagne and

sparkling wine

1956 80 0 High High Broad Serial Yes

16 Diamonds threads 1984 35 0 High High Broad Serial Yes

17 Numeric controls 1996 130 0 High Low Narrow Sequential No

Nich

eStra

tegyandExport

Perfo

rmance

73


The questionnaire was designed after a review of the literature oninternational business, and through discussions and focus groups withpractitioners, researchers, and entrepreneurs.

Some problems stem from operationalising the concept of niche firm. Inorder to identify the niche competitors we analysed some key variablessuggested by the above-mentioned literature: the specialised product, thetarget customer description, and the share on global market (Kotler & Scott,1993; Dalgic & Leeuw, 1994). This was further integrated by the structuredinterviews in order to verify the effective niche orientation of the firms.

Measuring international performance is complex because its operation-alisation may refer to different aspects of the organisational effectiveness ofthe firms (Dess & Robinson, 1984; Venkatraman & Ramanujam, 1986;Shoham, 1988; Sullivan, 1994). In this work, as mentioned before, we ac-cepted the theoretical framework that considers export performance asan indicator of the international performance (Czinkota & Johnson, 1983;Calof, 1993), but we also took into consideration the recent literature onborn global firm, defining three more dimensions of export performance,viz. precocity, speed, and scope.

We grouped the interviewed firms according to export performance in-dicators, on the basis of the following operationalisation criteria:

�
low export performance (domestic share>export share on total sales) ver-sus high export performance (export share>domestic share on total sales);
�
early internationalising (time to exportp3 years) versus late internation-alising (time to export >3 years);
�
fast internationalising (export sales ratioX25% in the first three years)versus slow internationalisation (export sales ratioo25% in the first threeyears); and
�
narrow scope (international players) versus broad scope (more than onecontinent, markets variety, global players).
In addition to these measures we also distinguished firms according to thekind of internationalisation process, combining the constructs of scope,precocity, and speed (Zucchella, 2005). The serial approach to internationalmarket corresponds to a broad (global) scope and high growth rate frominception in international markets, while the sequential one corresponds to anarrow scope (international players, gradually internationalising from‘‘closest’’ markets in terms of geographic and psychic distance).

We are aware that there could be a number of borderline situations in termsof precocity, speed, intensity, and scope; and we are also aware of the lim-itations involved in adopting cut-off values in operationalising the variables.


Some of them are based on the literature, viz. early internationalising andspeed (Madsen & Servais, 1997; Rialp et al., 2005) and scope (Gabrielsson &Gabrielsson, 2004; Maccarini et al., 2003; Servais et al., 2005). Others arethe results of an arbitrary choice, inspired from the necessity of simple andclear representative measures, and based on a meaningful representation ofthe Italian business market. For this reason, a preliminary case study re-search grounded on qualitative information should help in defining betterquantitative criteria and in refining research hypotheses.

RESEARCH FINDINGS

Fig. 2 shows the distribution of the case studies according to three staticindicators of export performance (intensity, precocity, and scope). Intensity

Fig. 2. The Three Static Dimensions of Export Performance.


(Czinkota & Johnson, 1983; Calof, 1993), precocity (Madsen & Servais,1997), and scope (Tallman & Li, 1996; Gabrielsson & Gabrielsson, 2004) arepositively linked. In particular, there is a cluster of firms in the area cor-responding to high precocity (born global), broad scope, and high exportintensity. This group portrays the international performance of the typical(and successful) niche firms, since the firms all share this strategic option.One of these cases is described in the box below. There are two minor groupsin this representation: one is in an area where three firms show precocity andbroad scope but they do not perform well in terms of intensity (only one isniche-oriented). The other one corresponds to three firms with high exportintensity and broad scope, but characterised by late internationalisation(two are niche-oriented).

Fig. 3 considers the dynamic dimension of export performance, as de-scribed by the features of the internationalisation process, serial versus se-quential, according to the above-mentioned speed criteria, coupled with ananalysis of the simultaneity of entry in different and distant foreign markets.

Fig. 3. Niche Strategy – Approach to International Market Matrix.


Niche firms, indeed, have had a fast internationalisation process, regardlessthe geographic or cultural distance: the case studies show that a sequentialapproach does not coexist with the niche strategy (Fig. 3).

Our results confirm that niche strategy is strictly linked with the serialapproach to internationalisation: the international expansion is based on ahorizontal micro-segmentation of the global market, and firms move inter-nationally following global customers, independent from the country, andthe psychic/geographical distance. In the global niche approach, the firmovercomes the psychic distance problem and the difficulty of dealing withthe diversity of foreign markets.

According to the recent literature on international business, the serialapproach is typical of firms which internationalise from the inception(Oviatt & McDougall, 1994; Madsen & Servais, 1997), following globalcustomers. Empirical evidence shows that in different business context,niche and customer orientation represent a core strategy for internationalnew ventures. Literature on born global firms, indeed, has underlined therelevance of niche strategy in explaining the early and fast international-isation processes. Other empirical evidences (Rennie, 1993) argue that theniche orientation is a critical factor for born global firms, this being thestrategic model that permits to address narrow segments of clients whereverthey are localised.

Our findings confirm the above-mentioned results, showing that the nichestrategy is typical of born global firms (Fig. 4). It is interesting that morethan the half of our firms (8 out of 17) are international from their inception,but not all of them have reached high export intensity ratios. In some casesit depends on their very short life, in other cases it seems to depend on theadoption of a sequential internationalisation strategy.

In addition to this, a niche positioning is positively linked with a highspeed of internationalisation, and, according to the typical customer ori-entation of the niche strategy (Aspelund & Moen, 2001), firms that competein these markets have a broader scope, following their clients whereverthey are located (Fig. 5). A niche approach does not coexist with a narrowscope of export activities. An entrepreneur said ‘‘Why do you ask me inhow many and which countries I sell my products? I have no ideay I cantell you how many customers I have, their names, their problems, obviouslyI know where they live but that is not a primary issue for us. Countrymatters only rarely when we need to adapt our product to some differentforeign technical standardsywhen we deal with local bureaucracyy that’sall!’’

Fig. 4. Niche Strategy/Precocity Matrix.


Finally, all the above-mentioned items – precocity, speed, and scope –contribute in determining high export intensity for niche firms. Accordingto Fig. 6, nearly all the niche firms interviewed show high export intensityratios, except one, which is struggling to survive in a business (toys)where marketing investments and distribution channels tend to favour largefirms.

It is interesting to notice that all the other (performing) niche firms belongto the business-to-business market. In such markets, direct contact withglobal industrial customers supports customer orientation, problem solving,and strengthens client relationships without the need of large investments inmarketing and promotion. Other studies seem to confirm the role of net-work embeddedness for niche firms performance (Echols & Tsai, 2005) andunderline the importance of building a system of embedded ties togetherwith the selection of product/market segment strategy. Global networksare deemed crucial for the development of born global firms (Knight &Cavusgil, 1996).

High export intensity ratios are the result of such a strategy and yield onearly and fast internationalisation and broad scope, which permitted to

Fig. 5. Niche Strategy and Geographic Scope Matrix.


quickly cumulate experiential learning about different foreign customers.According to Fig. 4, the niche firms interviewed are more frequently earlyinternational than others (six niche firms out of eight). All the niche firmshave a broad geographic scope, beyond the European market, and they allshow a serial internationalisation process, because they went internationalquickly and with simultaneous entries in different markets, both close anddistant – in geographic and in psychic terms. There are two non-niche firmswhich show a serial internationalisation process and broad scope, but with-out reaching high export intensity: this may appear contradictory, but itcould be explained with the young age of these firms. On the other hand, noniche firm shows a sequential pattern of international growth.

An export manager describes the serial process as ‘‘y discovery of ourglobal customers, through business contacts and participating in interna-tional trade fairs. Shortly after foundation our firm was selling productsboth in Germany and India, with a growth rate of foreign sales around 20%per year, but we didn’t make any country analysis to plan this entryyweestablished a contact with customers and met their requests, which were

Fig. 6. Niche Strategy and Export Performance Matrix.


basically similar, regardless of their country differences. This is what wemean by global customer, someone who needs something you can sell, nomatter where he/she is.’’

The interviewed firms did not consider the possibility to move from ex-port to more committed entry modes, apart from a couple of cases of ‘‘light’’investments in sales and assistance subsidiaries in the main macro-regions,for two main reasons:

�
The distinctive competences, which enable the offer of highly specialisedand customised goods, derive from a unique combination of domestic(notably local) unique resources (human capital, social capital, specialisedsuppliersy). Producing at home and exporting is for many firms still themain international competitive strategy, as an entrepreneur declares‘‘y for our firm FDIs and JVs, and especially the manufacturing orientedones, are out of question. It is not a matter of costs, it is a matter of non-reproducibility of our product uniqueness in foreign contexts.’’ This out-come is confirmed by other studies which revealed that firms – especially


during their founding period – tend to rely on resources (skills, services,networks) which are typical of the cluster they belong to (Servais &Rasmussen, 1999) and develop competences and competitive offers whichare rare and difficult to imitate.

�
Commitment building is not made at the country level but at the customerrelationship level, according to the global customer orientation charac-terising these firms (Aspelund & Moen, 2001). One entrepreneur declared,‘‘when we start a customer relationship, we know it is there we have toinvest in order to build a long term and profitable relationship. Our profitmargin is highly indebted to long term relationships with customers: theyare our main assets. Investing in long term relationships means travellinga lot, regularly visiting these people, talking with them on the phoneweekly, understanding their needs and sometimes anticipating their needs.It is an investment in time and human resources, in research, design andtechnical assistance.’’
CASE NUMBER 16

It is a small firm with 35 employees, a turnover of h12 million. Born in1984, it operates in the granite mining and refining industry. This firmhas all the characteristics of Italian SMEs: a strong role of the entre-preneur, family business, and it does not belong to any group, even if ithas some minority share in other Italian SMEs.Initially it was the only producer of diamonds threads to cut granite,even though later on other enterprises began to imitate the technology.

International Activities and Performance

The enterprise is the leader in the domestic market, and among the top10 in the world market. The latter is divided with other four directforeign competitors, but they are big firms, that operate on more mar-ket segments and product lines.The firm had a serial approach to the global market ‘‘We were the onlyproducer of diamonds threads, our natural market is the world, forsuch reason we have always looked at global customers, independentlyfrom their location’’. Barriers in the international activities were foundonly in tariffs and protectionism, while geographic or cultural distancewhere not considered a problem at all.It is a born global firm: export and import started in same the year offoundation, with a broad scope (UE, USA), and a percentage of export


on total sales, in the first 3 years form inception, of 33%. In a few years,its products were present all over the world, with a EU share on totalsales of 25%, an extra UE share of 70%, and only a 5% on the nationalmarket.The firm sells mostly in Spain, Portugal, France, Brazil, China, India,and in USA with a sales subsidiary, while it has representatives andagents in the other countries.

Niche Orientation

The firm has focused its business only on the production of diamondthreads, with the purpose to reach a critical mass of clients, to specialiseproduction and to ‘‘have a development in line with the demands of themarket and with an immediate adjustment to the particular demands ofthe client’’.The customer orientation is very strong; the strategic approach is morecustomer than country oriented: the product can vary according to thedemands of the clients. The strong customer orientation is the reasonwhy the enterprise – besides the activity of production – also offersservices to clients. The firm is aware that its technology is not wellknown yet: the enterprise sells the machinery to the client, and assistshim/her/them to correctly use the diamond thread.The entrepreneur thinks that the competitive advantages of his firm arequality, innovation, customer adaptation, and assistance. Price is notconsidered an influential element for competing in this business.The entrepreneur has travelled a lot, in order to learn from his cus-tomers, and to explore markets. He thinks ‘‘an open mind, the abilityto create a global and local network, commercial relationship, and theability to have dialogue with other firms, also of other businesses, arefundamental to develop an international commitment’’.The entrepreneur himself is the manager of the international activityand of the strategic choices. He has driven his production to a globalmarket from the inception, because ‘‘the local one has never been con-sidered as the only market’’.The firm tries to solve the problem of the technological risk that couldderive from the introduction of an innovation, with a dynamic attitudeand proactivity. The firm develops continuous research and aims atleading the innovation in stone cutting over time.


CONCLUSIONS

This contribution shows through case studies research that there is a positiverelation between niche strategy and high international performance, in termsof export intensity, precocity, speed, and scope. Among the niche firms,most reveal what we consider the ‘‘typical’’ expected traits of successfulniche firms: high export intensity, early and fast internationalisation, andbroad geographic scope.

The niche strategy is strictly linked with a serial approach to interna-tionalisation: the international expansion is based on an horizontal micro-segmentation of the global market, and firms move quickly following globalcustomers, independent of the country and the psychic/geographical dis-tance, and compete mostly on a non-price basis.

The exploratory research permits to better refine the criteria of opera-tionalisation of the variables: it is confirmed that export intensity is a sig-nificant measure, but export performance is made of (depends from)precocity, speed, and scope, which appear important indicators for niche-oriented firms. The serial internationalisation path is a complex constructdepending on all the above-mentioned variables, and supported by the in-terviews made, which permitted to improve its definition.

The main limitation of this study is that the findings of the case studiesresearch cannot be generalised and they need to be tested through quan-titative analysis with a significant number of observations. The value of thisqualitative research lies with the possibility it gives to build testable researchhypotheses as well as with its capacity to highlight behaviour and strategicissues that are difficult to test quantitatively.

The findings have both policy and managerial implications. From the firstperspective, the frequency of a niche strategy in small firms represents anissue to be considered for designing appropriate services to support theirinternationalisation. Getting in touch with global customers is a core issuefor niche-oriented firms, while accessing to foreign countries information isnot so important. In addition to this, the joint effect of precocity and speedin internationalisation, which characterise many of the niche firms, involvesome rethinking about a system of public (but also private) support serviceswhere start-up assistance is coupled with foreign trade support.

Managerial implications of the study are also relevant. The actual arenaof competition requires a global dimension of niche market: global nicheallows firms to maximise opportunities in terms of experiential learningand segmentation. The niche strategy requires for firms’ management an


entrepreneurial drive through the discovery or creation of market niches,which can be viewed as business opportunities – and the exploitation of theirpotentialities in terms of learning from customers and profitable interna-tional growth. The niche positioning involves a strong customer orientation,which unfolds many opportunities of product/service improvement and in-novation through customer needs understanding. This valuable experientiallearning process is predominantly customer based and not country basedand may lead to higher margins due to the lower competitive pressures inniche markets. A global niche is, on the other hand, a dynamic concept, andnot a safe refuge from global competition. It involves the monitoring ofpotential competition and customer needs evolution (Maccarini et al., 2003):niche orientation not only requires a continuous customer orientation, butalso continuous efforts in research and development, in product, process,marketing and organisational innovation, and in actual and potential cus-tomers monitoring.

NOTES

1. According to the Italian regulation, in each province a Chamber of Commerceis established by law and is a public institution. They represent the local system offirms and each firm has to apply for registration to this institution, providing dataand paying an annual fee. They receive from the Chambers of Commerce a numberof services, including foreign trade support services.

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FACTORS AFFECTING THE

TIMING OF THE EXPORT

DEVELOPMENT PROCESS IN

SPANISH MANUFACTURING

FIRMS

Aristides Olivares-Mesa and Sonia Suarez-Ortega

ABSTRACT

We study entry timing in the export development process of Spanish

manufacturing firms. We interpret this process as a sequential path which

allows us to identify the following export stages: (I) the pre-engagement

phase, where firms do not export; (II) the initial phase, where firms

export via an agent; and (III) the advanced phase, where firms export via

a sales subsidiary. This study explores factors, which can accelerate or

decelerate the decision to change phases. Data are taken from the Spanish

Survey on Business Strategies that comprises 1,478 firms in 2002. Event

history analysis is applied to our dataset. Obtaining product or process

innovations is the most significant motivation for an early entry in the

initial and advanced phases of the export development process. Network

ties, a broader scope of products, firm size and foreign ownership par-

ticipation are also key factors in accelerating entries.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17003-9

89

ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA90

1. INTRODUCTION

Internationalization is one aspect of strategic behavior that is consideredof great importance regarding the growth of businesses. In this sense, manyempirical models have been proposed to describe and explain the exportdevelopment process of manufacturing firms (see e.g., Johanson &Wiedersheim-Paul, 1975; Wiedersheim-Paul, Olson, & Welch, 1978;Cavusgil, 1982; Hyvaerinen, 1994; Bell, 1995; Korhonen, Luostarinen, &Welch, 1996; Coviello & Munro, 1997; Fontes & Coombs, 1997; Gankema,Snuit, & van Dijken, 1997; Zafarullah, Ali, & Young, 1998). Although thereare differences among the various models as to the number, nature andcontent of the stages, it can be concluded that the export developmentprocess comprises three broad phases: (a) the pre-engagement phase, whichincludes two types of firms. First, those selling their goods solely in thedomestic market; that is, those firms involved in the domestic market withno interest in exporting, and second, those that exported in the past butno longer do so; (b) the initial phase, where firms are involved in sporadicexport activity and can be classified as having the potential to increase theiroverseas involvement, and are unable to cope with the demands of export-ing, leading to marginal export behavior or withdrawal from selling abroadaltogether; and finally (c) the advanced phase, where firms are regularex-porters with extensive overseas experience, and frequently considermore committed forms of international business (Leonidou & Katsikeas,1996).

Although researchers agree that the export development process ishighly dynamic and time-dependent, paradoxically almost all models arestatic in nature (Leonidou & Katsikeas, 1996). Only Berra, Piatti, andVitali (1995) and Gankema et al. (1997) specifically analyze longitudinalpatterns. This condition is a concern given that internationalization is de-fined to be a process occurring over time, and cross-sectional data ulti-mately limits the depth of our understanding of that process (Coviello &McAuley, 1999). Another time-related issue is the velocity at which thefirm moves between stages. This factor has been ignored by almost allmodels, although variations in technological intensity, product life cycles,research and development costs, and other factors can affect a firm’sprogress along the internationalization path (Young, 1987). Also, eventhough there are an increasing number of studies on rapid international-ization (see Rialp, Rialp, & Knight, 2005 for a literature review), it couldbe said that the impact of time has been overlooked (Hurmerinta-Peltomaki, 2003).

Factors Affecting the Timing of the Export Development Process 91

This paper investigates entry timing by Spanish manufacturing firms intoforeign markets. Using the Survey on Business Strategies, which offers de-tails on the firm’s situation at the moment of the survey but does not daterelevant events, we analyze how different factors identified in the literatureaffect the transition between stages. We use event history analysis (alsocalled survival analysis) in the research. This methodology allows us to takeinto account not only firms that have entered into foreign markets but alsodomestic firms. In this way, we avoid the bias produced when studying thespeed of internationalization by looking exclusively to exporting firmsand discarding information from domestic firms, as previous studiesdo (e.g., Bell, McNaughton, & Young, 2001; Aspelund & Moen, 2001;Zahra, Matherne, & Carleton, 2003). Survival analysis also allows us toovercome the difficulties due to the lack of information about the age oftransition from one phase to another. These technical problems are solvedin the context of the doubly censored models of duration, as we will seefurther on.

The paper is organized in the following way. In the next section wepresent a review of the literature on the process and the factors affectinginternationalization according to a resource-based view of the firm. Thisapproach provides the basis for stating several hypotheses about the influ-ence of these factors on the speed of the export development process. Themethodology of the empirical study is then set out, followed by an exposureof the main results. We then highlight the study’s contribution and limi-tations and, finally, draw some conclusions from the study.

2. FACTORS AFFECTING THE SPEED OF THE

EXPORT DEVELOPMENT PROCESS

The Uppsala model and other stage approaches to internationalization arethe basis for the idea of internationalization as a process of acquiring in-ternational knowledge and accumulating tangible and intangible resourcestocks (Fernandez & Nieto, 2005; Westhead, Wright, & Ucbasaran, 2001).According to the resource-based view of the firm, the strategic decisionstaken depend on the characteristics of the resources and capabilities con-trolled by the firm (Barney, 1991; Grant, 1991; Peteraf, 1993). Similarly,these resources and capabilities can influence decisions about whether thefirm internalizes its exports or not, the mode of internationalization chosenand the control of distribution channels abroad (Campa & Guillen, 1999).Foreign investment decisions by firms are partly influenced by unique


competencies developed from their founding. These competencies emphasizethe role of foreign market knowledge needed by the firm to successfullyundertake international expansion. Concretely, a review of the literature canhelp identify several factors associated with the firm’s resources that canaffect the speed of the internationalization process. These factors are de-scribed in the following paragraphs.

Size. The relationship between firm size and export behavior has been oneof the most widely analyzed relationships in international marketing liter-ature. Although there is numerous research on the topic, little consensusexists concerning the actual impact of size on export behavior, the exceptionbeing the positive association with propensity to export and the negative onewith export intensity (Bonaccorsi, 1992; Calof, 1994). Past research, how-ever, has not examined the potential relationship between size and timing ofthe export development process.

On the one hand, firm size is often an indicator of its financial, physical,human and tangible resources. The large size of a firm reflects its capacity toabsorb the high costs and risks involved in internalizing international ex-pansion (Buckley & Casson, 1976), while resource scarcity limits smallerfirms’ ability to reach advanced stages of internationalization requiringforeign direct investment (e.g., Dunning, 1980, 1988).

Hypothesis1a. The larger the firm, the earlier the firm will proceed toadvanced stages of internationalization.

On the other, from a resource-based view of the firm, smaller size typicalof young firms appears to confer a sort of flexibility that provides keybenefits for succeeding in foreign markets (Knight & Cavusgil, 2004). Thissuccess is seen despite the scarce resources typical of young firms. It shouldalso be highlighted that entering into export activities usually occursthrough the use of intermediaries in the domestic market (Leonidou &Katsikeas, 1996), and this mode of entry does not require a large amount oftangible and financial resources. Thus,

Hypothesis1b. Timing for the firm to enter into export activities is inde-pendent of firm size.

Technological resources. From a resource-based view, high technologicalintensity, typically indicated by high R&D expenditures, provides the firmwith unique technological know-how, which often promotes the expansionof the firm overseas (Dhanaraj & Beamish, 2003). R&D expenditures lead to


the creation of valuable rent-yielding intangible assets, such as knowledgerelated to new product and process technologies (Kogut & Chang, 1991).According to Hitt, Hoskisson, and Ireland (1994), firms will internationalizetheir operations to obtain higher returns on their innovations and reduce therisk of selling a product in a single market. Internationalization also safe-guards firms against rapid imitation (Zahra, 1996). Thus,

Hypothesis 2. The greater the amount of technological resources pos-sessed by the firm, the earlier the firm will enter into export activities andproceed to advanced stages of internationalization.

Network ties. Networks include the formal and informal relationshipsthat develop among firms as they interact (Johanson & Mattsson, 1987).Network ties are resources that are firm specific and difficult to imitate,and have consequences along three dimensions (Burt, 1997): (1) the infor-mation that is available to the firm, as networks are a source of informationabout what goes on in the market, (2) its timing, as a particular pieceif information could reach the firm earlier through its network ties, and(3) referrals, that imply that firms’ interests are represented in a positivelight, at the right time, and in the right place. In accordance with Sharmaand Blomstermo (2003), this may influence the internationalization processof firms.

In relation with the export development process, network members canhelp a firm by identifying areas where changes in its product are desirable,making foreign market penetration easier (Zahra et al., 2003). Networkmembers can also help by identifying export potential markets, especiallywhen they are established in foreign markets. In this respect, Bell (1995), in across-national study into the export behavior of small computer softwarefirms in Finland, Ireland and Norway, found evidence that contacts withforeign suppliers to obtain hardware, local software distribution rights orproduction licenses led to export initiation. The author is convinced thatthese contacts accelerated the decision to export, and it is unclear whetherexporting would have occurred without these relationships. Thus,

Hypothesis 3. The greater the amount of network ties, the earlier the firmwill enter into export activities and proceed to advanced stages of inter-nationalization.

Firms with foreign ownership participation are more likely to obtain tech-nical, economic, personnel and information resources that are less available,


or even unavailable, to firms without such participation (Fernandez &Nieto, 2005; Rialp, Axinn, & Thach, 2002). These resources allow firms totake advantage of capital flow increases, and develop the internationaliza-tion process. Thus,

Hypothesis 4. The greater the amount of foreign ownership participationin the firm, the earlier the firm will enter into export activities and proceedto advanced stages of internationalization.

Product diversification can bring benefits to the firm because it takes ad-vantage of economies of scope in common resources (Grant, 2002). Fol-lowing Gaba, Pan, and Ungson (2002), the impact of economies of scope oninternalization timing comes from two sources. Firstly, a broader scope ofproducts and services means a wider portfolio of offerings to choose fromand, thus, a better chance of providing the right product to the foreignmarket. In this case, firms with a broader strategic scope are better preparedto handle the uncertainty about the types of product that are needed in theforeign market (Kerin, Varadarajan, & Peterson, 1992). Secondly, a broaderscope of products enables the firm to develop synergy across differentproduct sectors (Shaver, Mitchell, & Yeung, 1997). This synergy gives rise toboth efficiency and quality in product development, product line extension,production, distribution and market support (Lambkin, 1988; Green,Barclay, & Ryans, 1995; Reddy, Holak, & Bhat, 1994). Taken together,firms with a broader product scope have a greater likelihood of early entryinto a foreign market. Thus,

Hypothesis 5. The broader the scope of products, the earlier the firm willenter into export activities and proceed to advanced stages of interna-tionalization.

Human capital resources include training, experience, judgment, intelli-gence, relationships, and insight of individual managers and workers in afirm (Barney, 1991). Education, training and experience of employees de-termine the skills available to the firm (Grant, 2002). Several studies indicatea positive relationship between the main decision makers’ education andinternationalization (Cavusgil & Naor, 1987; Simpson & Kujawa, 1974).The quality of the workforce can be positively related to entry into foreignmarkets if the goods for export are of higher quality. Also, if export-ing requires new product design and other forms of technical assist-ance, a highly skilled staff can be considered a sign of quality, vertical


differentiation and a measure of the firm’s level of production skills (Manez,Rochina, & Sanchis, 2002). Thus,

Hypothesis 6. The higher the educational, technical and professionalqualification of employees, the earlier the firm will enter into export ac-tivities and proceed to advanced stages of internationalization.

3. METHODOLOGY

3.1. Database

The database to investigate the timing of the export development process ofSpanish manufacturing firms was obtained from the Survey on BusinessStrategies (henceforth SBS), which has been carried out annually by theSpanish Ministry of Science and Technology since 1990. We have used theSBS for the year 2002, the last data available.

The firm must indicate if it has exported in 2002. This information al-lowed us to classify firms in two groups: exporters and non-exporters.Moreover, the firm is asked to indicate the means employed to access for-eign markets in that year, according to one of the following five options:(1) own channel – agents or sales subsidiary; (2) parent company in a foreigncountry – foreign-owned firms; (3) export intermediary located in Spain;(4) export collaborative agreement – exporters association, sectorial agree-ment or export consortium; and (5) others – specify.

Given that the purpose of this paper is to analyze the export developmentprocess of the Spanish firms, we decided to exclude all foreign-owned firms,that is, those that exported through a parent company located in a foreigncountry (option 2 from the prior paragraph).

Regarding entry modes, if a firm answers ‘yes’ to option 1 (own channel),we consider it exports directly and is in the advanced phase; if it answers ‘no’to option 1 and ‘yes’ to options 3 (export intermediary located in Spain) or 4(export collaborative agreement), we consider it exports indirectly and is inthe initial phase. This classification from our sample size of 1,478 firmsbreaks down into 602 non-exporter firms, 330 which export indirectly and546 direct exporters.

3.2. Method of Analysis

A sequential process with three phases is assumed: firms begin with a pre-engagement phase, where they do not export; followed by an initial phase,


where firms export indirectly; and ending with an advanced phase, wherefirms export directly. Two events are of interest to us: the first time a firmexports indirectly, and the first time a firm exports directly. The aim is todetermine how the occurrence and timing of exports depend on severalpredictor variables (covariates).

One possibility to analyze such data using conventional methods is toperform a logit analysis with a dichotomous-dependent variable: exporter ornon-exporter. However, this analysis ignores information on the timing ofexports. One solution to this problem is to make the dependent variable thelength of time between the foundation of the firm and the time of the firstexport (indirect or direct, depending on what we are studying), and thenestimate a conventional linear regression model (let T be this dependentvariable). But what do we do with the firms that are non-exporters whenthey are surveyed? Such cases are referred to as right censored. Or what dowe do with the firms that are exporters, but we do not know the exact dateof the first export? Such cases are referred to as left censored. In both cases,we know the age of the firm (let t be the age of the firm), but we do not knowthe duration T. Survival analysis devises a procedure that combines theinformation of the right- and left-censored cases in a way that producesconsistent estimates of the parameters of interest.

In right- and left-censored cases, the time of censoring is the firm’sage, but they differ in how the information is incorporated into the like-lihood function. For right-censored cases, such information is incorporatedinto the estimates using their survival function values at the firm’s age, thatis, the probability that first export will occur at some time beyond the firm’sage [P(T>t) ¼ S(t)]. Information for left-censored cases is incorporatedusing their cumulative distribution function values at the firm’s age, that is,the probability that first export occurred at some time before thefirm’s age [P(Tpt) ¼ F(t)]. Thus, the natural logarithm of the likelihoodfunction is

ln L ¼X

right-censoredln SðtiÞ þ

Xleft-censored

ln F ðtiÞ

where ti is the age of firm i. A specification of the distribution for thesurvival time is required. The Weibull distribution is a two-parameter dis-tribution that is particularly flexible and used in this study. The survivalfunction for this distribution is

SðtiÞ ¼ exp½ð�ltiÞ1=s

� and F ðtiÞ ¼ 1� SðtiÞ

Table 1. Name and Definition of Independent Variables.

Name Definition

Size of firm (EMPLOY) Number of employees

Technological resourcesResearch and development intensity

(R&DINT)

Ratio of research and development

expenditures to the sales of the firm

Number of patents (PATENTS) Number of patents and utility models

registered by the firm in Spain or abroad

Innovations (INNOVAT)

Dummy variable equal to 1 if the firm has

obtained product or process innovations; 0

otherwise

Network ties (IMPINT)Ratio of import expenditures to the purchases

of the firm

Foreign ownership (FORCAP)Percentage of foreign capital participation in

the firmProduct diversification (DIVERSIF) Let pj be the ratio of sales of product j to total

sales. This ratio is available for the five core

products. Then we use a Berry-Herfindhal

index:DIVERSIF ¼ 1�

P5

j¼1p2j

P5

j¼1pj

� �2

Human capital (HUMANCAP) Ratio of employees with a university degree

to total employees of the firm


where l is the scale parameter and s the shape parameter. In our model,independent variables affect the l parameter in the following way:

l ¼ expð�b0 � b0XiÞ

where Xi is the vector of covariates associated with the ith firm and bthe vector of coefficients associated with each independent variable. Apositive (negative) coefficient implies that the covariate exercises a positive(negative) influence on waiting time. Thus, a unit increase in the covariateis interpreted as a firm delaying (hastening) entry into a more advancedphase in the export development process. A definition of the inde-pendent variables based on the questions available in the SBS is givenin Table 1. Once the survival function is specified, estimation proceedsby maximizing the log-likelihood for the censored data. We use theLIFEREG procedure from SAS 8.0 version in our analyses. b0 and s arereferred to as INTERCEPT and SHAPE by the LIFEREG procedure,respectively.


4. RESULTS

Table 2 shows means and standard deviations of variables, for non-exporters,indirect exporters and direct exporters. Note that as commitment with in-ternational activities deepens, mean values of variables are greater.

Table 3 shows correlations between the independent variables. The mag-nitudes of the correlations among variables are not large enough to pose aserious threat of multicollinearity.

Table 2. Mean and Standard Deviationa of Variables.

Variable All firms Non-Exporters Indirect Exporters Direct Exporters

EMPLOY 207.56 55.44 170.86 389.98

(567.80) (171.66) (364.29) (828.32)

R&DINT 0.71 0.36 0.60 1.14

(2.36) (2.14) (1.84) (2.76)

PATENTS 0.52 0.06 0.43 1.06

(4.19) (0.56) (3.83) (6.10)

INNOVAT 0.37 0.20 0.41 0.53

IMPINT 7.39 2.86 7.95 11.97

(12.15) (8.62) (12.21) (13.53)

FORCAP 9.78 3.11 8.31 20.15

(28.80) (16.19) (26.18) (38.80)

DIVERSIF 0.24 0.15 0.28 0.31

(0.27) (0.23) (0.27) (0.27)

HUMANCAP 11.01 7.75 11.87 13.97

(13.96) (13.02) (14.81) (13.71)

Number of firms 1,478 602 330 546

aStandard deviation in brackets, except for dummy variables.

Table 3. Correlation Matrix (All Firms).

(1) (2) (3) (4) (5) (6) (7) (8)

(1) EMPLOY 1.00

(2) R&DINT 0.24 1.00

(3) PATENTS 0.11 0.24 1.00

(4) INNOVAT 0.17 0.24 0.10 1.00

(5) IMPINT 0.20 0.14 0.06 0.14 1.00

(6) FORCAP 0.09 �0.02 �0.01 0.01 0.05 1.00

(7) DIVERSIF 0.13 0.06 0.04 0.17 0.11 0.07 1.00

(8) HUMANCAP 0.16 0.26 0.10 0.16 0.16 0.04 0.13 1.00


Table 4 shows the results of our model estimates for entry timing in theinitial and advance phases of the export development process. We haveadded a likelihood-ratio test of the null hypothesis that all the covariateshave zero coefficients. This test is analogous to the F-test that is routinelyreported for linear regression models. To calculate this statistic, we fit a nullmodel that includes no covariates. The statistic is then twice the positivedifference in the two log-likelihoods. With eight degrees of freedom (thenumber of covariates excluded from the null model), the p-value is less than0.001, so we reject the null hypothesis and conclude that at least one of thecoefficients is nonzero.

The results indicate that firm size has an impact on the speed of the exportdevelopment process, especially in the advance phase (po0.01) where mus-tering resources is more necessary. These results support Hypothesis H1a,and reject Hypothesis H1b.

In relation to Hypothesis H2, which relates early entry with the techno-logical resources of the firm, we found that registering patents and utility

Table 4. Factors Affecting Entry Timing. Event History Analysis:Weibull Distribution 2002.

Initial Phase Advanced Phase

Coefficient w2 Coefficient w 2

INTERCEPT +8.387�� 21.36 +10.344�� 23.06

Size EMPLOY (H1) �0.003�� 7.10 �0.003�� 8.68

R&DINT (H2) +0.019 0.04 �0.070 0.70

Technological resources PATENTS (H2) �0.668�� 4.68 �0.024 0.49

INNOVAT (H2) �3.711�� 9.22 �2.713�� 9.89

Network ties IMPINT (H3) �0.156�� 8.93 �0.091�� 9.26

Foreign ownership FORCAP (H4) �0.034�� 5.88 �0.029�� 7.49

Product diversification DIVERSIF (H5) �6.503�� 8.05 �3.969�� 7.90

Human resources HUMANCAP(H6) �0.009 0.28 �0.006 0.15

Shape parameter (standard error) 6.004 (1.831) 4.566 (1.256)

Log-likelihood �787.9 �810.6

No-covariate log-likelihood �966.95 �941.83

Log-likelihood w2 358.10�� 262.46��

Right censored observations 602 932

Left censored observations 876 546

Number of observations 1,478 1,478

Note: Negative coefficients indicate early entry.*po0.1.��po0.05.��po0.01.


models accelerate entry timing only in the initial phase of the export de-velopment process, while obtaining product or process innovations are ac-tions that accelerate entry timing in both phases. The most significantvariable in our study is INNOVAT.

Hypotheses H3, H4 and H5 relate early entry with network ties, higherforeign ownership participation, and broader scope of products. Our resultssupport these three hypotheses. Specifically, we found that contact withforeign suppliers is an important factor for foreign market entry decisions,as shown by the significance of the variable IMPINT (po0.01).

Hypothesis H6, which relates early entry with human capital of the firm,is not supported. However, this does not necessarily mean that a higherquality labor force will not help accelerate entry into international markets.A higher qualified labor force can contribute to the skills available to thefirm, although these skills may be better captured by other variables in-cluded in the analysis.

5. CONTRIBUTION AND LIMITATIONS

This paper deals with the timing stages of the export development process,an aspect that has been neglected in the literature. Timing as the dependentvariable in a study of export behavior is an important contribution as thetime concept has a crucial role in today’s appraisal of internationalizationresearch (Hurmerinta-Peltomaki, 2003). Event history analysis is the ap-propriate methodological tool to approach this subject. This econometrictechnique has an important advantage; it allows us to measure the length ofeach stage of the export development process including firms that have notyet evolved to a particular stage. Prior research on firm’s internationaliza-tion has reviewed multinational firms that have already gone through thewhole process. The results of this type of research have a bias problem, asfirms that have not yet decided to internationalize are not included in thestudies (e.g., Bell et al., 2001; Aspelund & Moen, 2001). This bias problem isespecially relevant when the purpose is to analyze entry timing into foreignmarkets.

Despite these significant contributions, the paper has several limitations.The data were collected from a survey that was not carried out for thespecific purpose of the paper. It does not allow us to use all the richness ofthe resource-based view of the firm. The operationalization of the constructcan be improved by generating specific indicators. Thus, we use R&Dspending as a proxy for tangible technological resources. Other potential


measures of this construct include a firm’s manufacturing facilities andequipment, and R&D facilities and equipment. In addition, we use importintensity to operationalize network ties, although asking directly about therelationships developed by the company could be more appropriate.

Another limitation of the data concerns the lack of information about theage of transition between phases. This is an important technical problemthat affects the estimation procedure and, as we saw, can be overcome byapplying doubly censored models of duration. However, it has been ac-knowledged that left censoring can be a problem unless cases are negligiblysmall (Tuma & Hannan, 1979). Therefore, future surveys should includedate of transitions, which would provide us with a more accurate estimationof the duration of the stages in the export development process.

6. CONCLUSIONS

We study the export development process of Spanish manufacturing firmsand postulate that such a process follows a sequential path which can bedivided into three general phases: the pre-engagement phase (when a firmdoes not export), the initial phase (a firm exports indirectly, exerting little orno control over the marketing of its product) and the advanced phase (a firmexports directly through sales branches or subsidiaries). This study exploresthe factors which can accelerate or decelerate the decision to switch fromone phase to another.

The results offer some evidence about the key factors affecting the speedof the internationalization process. In this sense, capacity to innovate, in-volving the introduction of new products or the improvement of a firm’sexisting product range, plays a significant role in accelerating entry timing inforeign markets. On the same lines, Basile (2001) also found that innovationcapabilities are very important competitive factors and help explain heter-ogeneity in export behavior among Italian manufacturing firms in the 1990s.

One such common observation is that internationalization is the processof increasing the accumulation of knowledge in markets and institutionsabroad. Network ties that firms have may help them to go international bysupplying information about clients and markets. Firms that operate in aninternational network may enjoy a ‘‘learning advantage’’ and find it ‘‘easier’’to go abroad than firms whose exchange partners are domestic firms. Ourfindings point out the importance of network ties in the timing of the in-ternationalization process of firms. We have measured network ties throughimport intensity, which is a factor not usually included in previous studies


even though international business transactions involve both exporters andimporters. In our research, firms seem to start their internationalization bypurchasing machinery, raw materials and components from abroad, andonly then do they move on to the outward side. This result demonstratesthat inward and outward internationalization are interrelated processesthrough which companies become involved, step-by-step, in more demand-ing product, operation and market strategies.

In line with previous studies (e.g., Katsikeas, Piercy, & Leonidou, 1996),our results show that firm size has a statistically significant association withearly entry into both phases of the export development process. Therefore,this study gives support to the postulate that resource scarcity limits smallerfirms capacity to reach foreign markets, while rejecting the idea that ‘‘thesmaller size typical of young firms appears to confer a sort of flexibilitythat provides key benefits for succeeding in foreign markets’’ (Knight &Cavusgil, 2004, p. 125).

A broader scope of products and services also provides the firm withgreater opportunities to find, in a wider portfolio of offerings, the rightproduct for the foreign market. Finally, another early-entry incentive isforeign ownership participation, as firms with such participation are morelikely to obtain technical, economic, personnel and information resourcesthat give rise to an advantage that the firm can use to accelerate the exportdevelopment process.

In summary, this study highlights the resources of the firm that lead toearly internationalization. The most significant resources are product inno-vation and network ties. The ability to develop new products and formal andinformal relationships is an important managerial skill that should be de-veloped by the manager in ways that give the firm a competitive advantage.

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THE ROLE OF MARKET AND

LEARNING ORIENTATIONS IN

RELATIONSHIP QUALITY:

EVIDENCE FROM VIETNAMESE

EXPORTERS AND THEIR FOREIGN

IMPORTERS

Trang T. M. Nguyen, Nigel J. Barrett and

Tho D. Nguyen

ABSTRACT

This study examines the roles of market and learning orientations in

relationship quality between exporters in transition economies and their

foreign importers and subsequently, export performance. A random sam-

ple of 283 export firms in Vietnam provides evidence to support the hy-

pothesized main effects. The results further indicate that learning

orientation plays a role in building high-quality relationships for both

new and mature relationships. However, the impact of market orientation

on relationship quality is found only in the new relationship. In addition,





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17004-0

107

TRANG T. M. NGUYEN ET AL.108

firm-ownership structure does not moderate the relationships between

learning orientation, market orientation, relationship quality, and export

performance.

INTRODUCTION

It is impossible for firms not to have relationships with other firms as theycannot operate in isolation (e.g., Hakansson, 1982). Research has shownthat firms’ competitive advantage can be created through keeping long-termrelationships with customers and that many firms are moving from trans-actional discrete exchanges to relational ones (Ganesan, 1994). This is be-cause loyal customers will bring more profits to firms than the price-sensitiveand deal-prone switcher (Reicheld, 1996). In addition, committed relation-ships are among the most durable advantages because they are difficult forcompetitors to understand, to copy, or to displace (Day, 2000; Srivastava,Fahey, & Christensen, 2001). Consequently, the role of market relationshipshas emerged as a top priority for most business firms around the world. Theemergence of this trend indicates that firms realize the importance of re-lationship quality between them and their customers. In an export setting,unlike relationships in domestic markets, relationships developed with part-ners in international markets are more complex due to the difference incultural, economic, and other environmental factors (Lages, Lages, & Lages,2005). Therefore, understanding how to initiate, develop, and maintain high-quality buyer–seller relationships in international markets is critical to suc-cessful export involvement (Styles & Ambler, 1994). As a result, it has beenrecommended by several researchers that additional research is required(e.g., Bigne & Blesa, 2003; Frazier, 1999; Sanzo, Santos, Vazquez, & Alvarez,2003; Simpson, Siguaw, & Baker, 2001).

Research on inter-firm relationships in export markets, particularly re-search on relationship quality, however, has largely focused on the devel-oped world, e.g., North American and European economies (Leonidou &Kaleka, 1998). Little research has been undertaken in developing and tran-sition economies like Vietnam, one of Asia’s fastest growing and export-ledeconomy. In 2005, Vietnam’s total value of exports surged to US$ 31.5billion from US$ 2.4 billion in 1990 (Saigon Tiepthi, 2006). The exportsector accounts for nearly 50% of the country’s gross domestic product in2004 and plays a key role in Vietnam’s economic growth, which has re-mained at about 7% in recent years (Field, 2006). Owing to nearly becoming

Role of Market and Learning Orientations in Relationship Quality 109

a member of the World Trade Organization, Vietnam expects that itsexports will grow rapidly in 2006. The trade ministry of Vietnam has pro-jected that Vietnam’s exports will increase US$ 38 billion in 2006. Recently,the trade ministry has decided to use US$ 60 million for export promotionprograms and Vietnam’s export markets have expanded to 127 countries inthe world (Hieu Long, 2006). Therefore, research on export relationships inVietnam will enhance our understanding of business-to-business relation-ships in such an under-investigated economy (Tsang, 2005).

Further, although market and learning orientations have been widelystudied (e.g., Slater & Narver, 1995; Sinkula, Baker, & Noordewier, 1997),little attention has been paid to the role of these two organizational factorsin the quality of business-to-business relationships. In addition, most pre-vious research examines the competitive value of market and learningorientations under the lens of the operating environment condition. Draw-ing on the resource-based view of the firm (Wernerfelt, 1984), this studyinvestigates the role of market and learning orientations through internalcapabilities of the firm. Specifically, it views market and learning orientat-ions as forms of organizational culture and explores their impacts on thequality of business relationships between exporters in developing economiesand their foreign importers, and subsequently export performance. The restof the article is organized as follows: first, we review the literature andpropose the hypotheses. Subsequently, we present the method, data anal-ysis, and the results. We conclude the article by discussing a number ofimplications, limitations, and directions for future research.

LITERATURE REVIEW AND HYPOTHESES

Fig. 1 depicts a conceptual model that presents the role of market andlearning orientations in building high-quality business relationships. Learn-ing orientation and market orientation are expected to have direct impactson relationship quality. Learning orientation is also hypothesized to be anantecedent of market orientation. Finally, export performance is the out-come of relationship quality.

Relationship Quality

Relationship quality is an important aspect in maintaining and evaluatingbuyer–seller relationships. It can be defined as ‘‘an overall assessment of thestrength of a relationship and the extent to which it meets the needs or

LearningOrientation

MarketOrientation

RelationshipQuality

ExportPerformance

H1

H2

H3H4

Fig. 1. A Conceptual Model.


expectations of the parties based on a history of successful or unsuccessfulevents’’ (Smith, 1998, p. 78). Several conceptualizations of relationshipquality have been proposed, such as trust, commitment, and satisfaction(e.g., Smith, 1998), willingness to invest, conflict, expectation of continuity(e.g., Kumar, Scheer, & Steenkamp, 1995), and minimal opportunism (e.g.,Dwyer & Oh, 1987). However, trust, commitment, minimal opportunism,and satisfaction are widely accepted as the dimensions of relationship qual-ity because they have received strong empirical support (e.g., Dorsch,Swanson, & Kelly, 1998; Dwyer & Oh, 1987; Nguyen, Barrett, & Nguyen,2004).

Trust can be defined as the willingness of an export firm to be vulnerableto the actions of another party based on the expectations that the otherparty will behave in a ‘right’ (good) way toward the firm (Kumar et al.,1995). This definition of trust reflects two essential dimensions – honesty andbenevolence. Honesty is based on the belief that the firm stands by its words(Anderson & Narus, 1990), fulfills promised role obligations, and is sincere(Dwyer & Oh, 1987). Benevolence is the belief that the firm is interested inits partner’s welfare, and will not take unexpected actions that would have anegative impact on the partner (e.g., Anderson & Narus, 1990). Trust playsa central role in inter-firm relationships and is essential for the developmentof enduring partnerships (Morgan & Hunt, 1994) because it facilitates con-structive dialogue and cooperative problem-solving, enabling the firm notonly to work together with other firms more effectively but also to reduceperceived uncertainty and complexity in the future.

Commitment is another dimension of relationship quality. It is central tosuccessful relationship marketing because it enables independent channelmembers to work together to serve customers better and to achieve a higher


level of performance (Morgan & Hunt, 1994). Commitment to a relation-ship entails a desire to develop a stable relationship, and a willingness tosacrifice short-term benefits to maintain stability in a long-term relation-ship (Anderson & Weitz, 1992). Three main types of commitment havebeen found in the literature, i.e., continuance, behavioral, and affective (e.g.,Kim & Frazier, 1997). Continuance commitment is reflected in the stabilityof a relationship and is defined as an exporter’s desire to continue the re-lationship with foreign customers, which brings the exchange partners closertogether (Anderson & Weitz, 1992). Any firms interested in ongoing ex-change relationships with their customers would have a propensity for re-lation continuity. Behavioral commitment is reflected in the actual behaviorof an exporter toward an importer. It is defined as the extent to which anexporter provides special assistance to its foreign customer in times of need.High behavioral commitment is indicated by the exporter’s expressive be-havior that shows it cares about the importer. The exporter not only per-forms its pre-agreed roles but also provides extra help for its foreigncustomer as required under various situations. Behavioral commitment isrealized in the concrete behavior through which the partners become com-mitted. Gundlach, Achrol, and Mentzer (1995) note that remaining in arelationship and compliance with contractual stipulations indicate behavi-oral commitment. Affective commitment is the attitudinal aspect of an ex-porter’s business ties to its foreign customer. Affective commitment refers tothe sense of unity binding an exporter to its importer (Kim & Frazier, 1997).Highly affective commitment means that the exporter feels a strong unity ofinterests and goals with the importer and can work with the importer inharmony (Anderson & Narus, 1990).

The third dimension of relationship quality is satisfaction. It can bedefined as the extent of a partner’s overall affective evaluation of the re-lationship (Anderson & Narus, 1990). Satisfaction is also a key aspect ofsuccessful buyer–seller relationships as it motivates satisfied parties to com-mit more to beneficial exchange relationships (Leuthesser, 1997). Satisfac-tion is considered to be an indicator of how a firm assesses some of the othercosts and benefits of its relationship beyond economic performance andconflict levels (Cullen, Johnson, & Sakano, 1995).

The final dimension of relationship quality is minimal opportunism. Op-portunism is defined in general terms, as ‘‘self-interest seeking with guile’’(Williamson, 1975, p. 6). Opportunistic behavior refers to the taking ofunexpected actions that will generate negative outcomes for a firm that isinvolved in a transaction or relationship. Successful business relationshipsprovide enhanced efficiencies for both buyers and sellers (Kalwani &


Narayandas, 1995). In spite of such benefits, it has been revealed that busi-ness relationships between buyers and sellers have a high failure rate (Parkhe,1993). Though divergent long-term goals can be used for explaining thesefailures, a primary reason for the ‘‘failure of many alliances is the inability tocheck opportunism by the alliance partners’’ (Bucklin & Sengupta, 1993,p. 33). This means that opportunistic behavior decreases the possibility ofachievement of common goals. The consequences of opportunistic behaviorinclude the failure of exchange partners to fulfill promises and obligations,and the possible termination of the relationship. In an international context,an exporter works with its foreign importers in far distance in terms ofgeography and culture, allowing international channel members to easilyengage in opportunistic behavior (Cavusgil, Deligonul, & Zhang, 2004).Therefore, the development of satisfying relational exchange also requiresminimal opportunism (Dwyer & Oh, 1987).

Relationship quality is considered to be the essence of relationship mar-keting (Jap, Manolis, & Weitz, 1999) and serves as an indicator of the healthand future well-being of long-term relationships (Crosby, Evans, & Cowles,1990). Accordingly, several researchers have attempted to investigate possiblepredictors of relationship quality. For example, a salesperson’s expertise andrelational selling behavior have been found to have positive impacts on re-lationship quality between salespersons and customers in the life insuranceindustry (Crosby et al., 1990). Dwyer and Oh (1987) found that the quality ofchannel relationships is affected adversely by the degree of partners’ bureau-cratization. Procedural fairness has been examined to have a positive impacton relationship quality, while environmental uncertainty has a negative effecton relationship quality (Kumar et al., 1995). Smith (1998) found that rela-tional bonds have a positive effect on relationship quality. Following thisstream of research, this study examines the impact of two key organizationalfactors – market and learning orientations – on relationship quality.

Market and Learning Orientations

The resource-based view of the firm (Wernerfelt, 1984) posits that when afirm owns valuable, rare, inimitable, and non-substitutable resources and isable to implement value-creating strategies that cannot be easily duplicatedby competitors, the firm can achieve sustainable competitive advantage (e.g.,Barney, 1991; Eisenhardt & Martin, 2000). The valuable, rare, inimitable,and non-substitutable attributes of resources form the basis of unique value-creating strategies (Eisenhardt & Martin, 2000; Teece, Pisano, & Shuen,1997). In this study, both market and learning orientations are viewed as


forms of organizational culture and are firm-level resources, which aresources of sustainable competitive advantage (Barney, 1986; Hult, Hurley,& Knight, 2004; Menguc & Auh, 2006; Slater & Narver, 1995).

Market-oriented firms continuously collect information about targetcustomers’ needs and competitors’ capabilities, and then utilize this infor-mation to continuously create superior customer value (Slater & Narver,1995). Narver and Slater (1990, p. 21) define market orientation as ‘‘theorganizational culture that most effectively and efficiently creates the nec-essary behaviors for the creation of a superior value for buyers and, thus,continuous superior performance for the business.’’ These researchers pro-pose three behavioral dimensions: customer orientation, competitor orien-tation, and, inter-functional coordination. Each of these dimensions playsits role in intelligence generation, dissemination, and responsiveness to thecollected information. Together with market orientation, learning orienta-tion has also been considered as another organizational culture that assistsa firm in achieving competitive advantage because it plays a key role in thecreation of knowledge (e.g., Hurley & Hult, 1998; Sinkula, 1994; Slater &Narver, 1995). Learning orientation refers to ‘‘organization-wide activity ofcreating and using knowledge to enhance competitiveness’’ (Calantone,Cavusgil, & Zhao, 2002, p. 516). Learning-oriented firms are betterequipped to manage their organizational knowledge, than firms which havenot yet learned to learn. Sinkula et al. (1997) argue that learning orientationcauses a set of organizational values that influence the propensity of firmsto create and use knowledge. Firms with strong learning orientation en-courage, or even require, employees to constantly question the organiza-tional norms that guide organization actions (Sinkula, 1994; Sinkula et al.,1997; Baker & Sinkula, 1999). Learning orientation is comprised of threedimensions – commitment to learning, shared vision, and open-mindedness,which direct a firm to create and encourage a learning environmentthroughout the firm (Sinkula et al., 1997). The firm continuously promotesthe organizational learning process, that is, information acquisition, infor-mation dissemination, and shared interpretation (Sinkula, 1994). The firmendlessly creates and uses new knowledge about customers and competitorsthat has the potential to influence the firm’s performance (Emden, Yaprak,& Cavusgil, 2005; Sinkula et al., 1997). Therefore, both market and learn-ing orientations are related to specific and routine processes that createsuperior values to customers, and thus, assist a firm in gaining sustain-able competitive advantage (Baker & Sinkula, 1999; Celuch, Kasouf, &Peruvemba, 2002; Hult et al., 2004; Slater & Narver, 1995; Yeniyurt,Cavusgil, & Hult, 2005).


In export markets, sustainable competitive advantage created by marketand learning orientations can be obtained through exporters’ capabilities ofbuilding high-quality relationships with their foreign importers. Bothorientations are related to customer interface behaviors (Celuch et al.,2002) and assist exporters to achieve competencies in foreign market knowl-edge (Yeniyurt et al., 2005). These capabilities will stimulate exporters to joinefforts with their partners in order to achieve mutual and individual goalssuccessfully, which discourage opportunistic behaviors (Stern & Reve, 1980).Market- and learning-oriented exporters are willing to understand the needsand wants of their partners, and to satisfy these needs more effectively andefficiently than their competitors. These exporters value the benefits of ex-porter–importer relationships and will seek to put their partners’ needsas a priority in the organizational concerns (Emden et al., 2005; Deshpande,Farley, & Webster, 1993; Hult, Nichols, Giunipero, & Hurley, 2000; Kalwani& Narayandas, 1995; Slater & Narver, 1995; Siguaw, Simpson, & Baker,1998). In addition, learning orientation can foster market-oriented behaviorin an organization (Jaworski & Kohli, 1996). A key component of learningorientation is a firm’s ability to engage in adaptive as well as generativelearning (Slater & Narver, 1995). This enables the firm to acquire, process,and subsequently use market intelligence, which is reflected in its marketorientation (Jaworski & Kohli, 1996). In addition, the learning-oriented firmis more likely to leverage the use of all resources, including the behaviors thataccompany a market orientation (Baker & Sinkula, 1999). Thus,

H1. A positive relationship between market orientation and relationshipquality is expected.

H2. A positive relationship between learning orientation and relationshipquality is expected.

H3. A positive relationship between learning orientation and marketorientation is expected.

Relationship Quality and Export Performance

Performance in international marketing channels is defined as ‘‘the accom-plishments – real and perceived – that have resulted from the manufacturer–distributor relationship’’ (Rosson & Ford, 1982, p. 61). A number ofperformance measures have been proposed in the literature. There are twoapproaches, objective and subjective, which are used to measure export per-formance. The objective approach is based on financial indicators, which


include such measures as return on investment, profits, margins, sales, salesgrowth, and asset turnover. The subjective approach is employed to measurea firm’s absolute and relative performance on tasks, such as market share andnew product development. This study focuses largely on the firm’s perform-ance in dealing with its specific partner and, therefore, employed the latterapproach (Madsen, 1998). Moreover, Geringer and Hebert (1991) found thatobjective and subjective measures of performance correlate highly.

A high level of relationship quality is likely to have positive consequencesfor the relationship. The benefits of a high level of relationship qualityshould translate into the economic performance for both partners. A high-quality relationship leads to efficient transactions, such as shortened re-sponse time, advantages in logistics management, and marketing programsthat contribute to the firm’s efficiency and effectiveness in serving its market.These, in turn, can create a strong market position, which will be reflected inthe firm’s performance. When conditions required for a high-quality rela-tionship are met, the exporter or its foreign importer (or both) is more likelyto be attracted to an existing relationship, and such relationships can beexpected to continue in the future. As a result, agreement on such matters asdecision-making, and mutual dependence should increase, moving the re-lationship closer to long-term partnership. Research has shown that long-term partnerships lead to increased mutual profitability (Anderson & Weitz,1992) and enhance the performance outcomes in buyer–seller relationships(Noorderwier, John, & Nevin, 1990). Likewise, Kalwani and Narayandas(1995, p. 14) found that ‘‘maintaining close relationships with customers inthe long-run lead to high profitability through better understanding andservicing of customer needs.’’ Suppliers who develop better relationshipswith their foreign customers are likely to enjoy superior performance interms of ultimate outcomes such as sales and share of customer business(Leuthesser & Kohli, 1995). Therefore,

H4. A positive relationship between relationship quality and export per-formance is expected.

METHOD

The Sample

A systematic sample of 283 Vietnamese export firms in Ho Chi Minh City,the major business center of Vietnam, was surveyed. The sampling frame,


based on the Business Directories in Ho Chi Minh City, consisted ofabout 5,000 firms in all industries. The single-key informant approach, themost commonly used method in organizational research (Kumar, Stern, &Anderson, 1993), was employed in this study. Respondents were exportmanagers of the firms. Partial self-administered surveys, in which question-naires are mailed to the target respondents and are collected by interviewers,were used for this study. Follow-up telephone calls to remind respondents tocomplete the questionnaires prior to collection were also utilized.

Three hundred and twenty completed questionnaires were collected from400 distributed questionnaires, yielding a response rate of 80%. Among 320completed questionnaires, 37 were found invalid because these respondentswere not members of management in charge of export activities. Conse-quently, the remaining 283 valid completed questionnaires comprised thesample for this research. The sample was comprised of 145 (51.2%) state-owned firms and 138 (48.8%) firms with other types of ownership (join-stock, limited-proprietary, and private-owned firms). In terms of firm age,173 (61.1%) firms were in business less than 10 years and 93 (30.8%) firmswere in business from 11 to 20 years. Only 17 (6.1%) firms were in businessmore than 30 years. In terms of relationship duration, 166 (58.7%) firms hadbusiness relationships with their partners less than five years and 117(41.3%) firms had business relationships with their business partners morethan five years. Using w2 tests with respect to firm ownership and firm age wefound that no significant difference between the population percentages andthe sample percentages. This suggests that the sample and population pro-files (based on these two key variables) are not significantly different.

Measurements

Learning orientation was measured based on Sinkula et al.’s (1997) scale. Itwas a second-order construct consisting of three dimensions, i.e., commit-ment to learning (measured by four items), shared vision (four items), andopen-mindedness (three items). Market orientation was also a second-orderconstruct and was measured using Narver and Slater’s (1990) scale. It com-prised three dimensions: customer orientation (seven items), competitororientation (four items), and inter-functional coordination (five items). Re-lationship quality was a high-order construct comprising two second-orderconstructs (trust and commitment), and two first-order constructs (satis-faction and minimal opportunism). Trust had two dimensions: honesty andbenevolence. Honesty was measured by 12 items and benevolence wasmeasured by 10 items. These measures were developed by Kumar et al.


(1995). Commitment was measured by using Kim and Frazier’s (1997) scale,and was comprised of three dimensions: continuance commitment (sixitems), behavioral commitment (10 items), and, affective commitment (sevenitems). Satisfaction was measured based on the scale (seven items) developedby Gaski and Nevin (1985). Minimal opportunism was measured usingLee’s (1998) scale (13 items). Finally, export performance was measured byseven items. This scale was based on Raven, McCullough, and Tansuhaj(1994) scale with some modifications. The modifications were based on thefinancial and strategic dimensions of the scale developed by Zou, Taylor,and Osland (1998). The questionnaire was initially prepared in English andthen translated into Vietnamese by an academic who is fluent in both lan-guages. Back translation was undertaken to ensure the equivalence ofmeanings.

DATA ANALYSIS AND RESULTS

Measurement Validation

All measures used were first refined via Cronbach’s alpha and then testedby confirmatory factor analysis (CFA). The Cronbach’s alphas of all mea-sures of the first-order constructs and the dimensions of the second-orderconstructs were high (X.86) (Table 1). The screening process shows that thedata exhibited slight deviations from multinormality, however, all univari-ate kurtoses and skewnesses were within the range of [�1, 1]. Therefore, themaximum likelihood estimation method was used (Muthen & Kaplan,1985). As discussed previously, relationship quality was a high-order con-struct comprising four dimensions: trust, commitment, satisfaction, andminimal opportunism. Trust and commitment were second-order con-structs, and satisfaction and minimal opportunism were first-order con-structs. The CFA results indicate that these measurement models of theseconstructs fit the data well. Market and learning orientation were alsosecond-order constructs, and export performance was a first-order con-struct. The CFA results also indicate that their measurement models fit thedata well (Table 1). In addition, all factor loadings were high and sub-stantial (the lowest loading was .59) (see the appendix for the standardizedfactor loadings). These results indicate that the measures of all first-orderconstructs and all dimensions of second-order constructs were unidimen-sional and their convergent validity was achieved (Steenkamp & van Trijp,1991).

Table 1. Summary of Scale Validation.

Constructs Dimensions Correlations r(se) a rc rvc

Market orientation: w2(87) ¼ 96.02

(p ¼ 0.23); CFI ¼ 0.997; GFI

¼ 0.956; RMSEA ¼ 0.019

Customer orientation (mcs) mcs ! mcm 0.53(.077) 0.94 0.94 0.70

Competitor orientation (mcm) mcm ! mco 0.74(.091) 0.89 0.89 0.68

Interfunctional coordination (mco) mco ! mcs 0.65(.085) 0.87 0.87 0.64

Learning orientation: w2(41) ¼ 50.06

(p ¼ 0.15); CFI ¼ 0.996;

GFI ¼ 0.968; RMSEA ¼ 0.028

Commitment to learning (lcm) lcm ! lsv 0.71(.086) 0.92 0.92 0.75

Shared vision (lsv) lsv ! lop 0.58(.083) 0.91 0.92 0.73

Open mindedness (lop) lop ! lcm 0.63(084) 0.86 0.86 0.67

Trust: w2(208) ¼ 238.05 (p ¼ 0.075);

CFI ¼ 0.991; GFI ¼ 0.929;

RMSEA ¼ 0.023

Honesty (hon) hon ! ben 0.74(.101) 0.94 0.94 0.56

Benevolence (ben) 0.89 0.89 0.45

Commitment: w2(227) ¼ 270.83

(p ¼ 0.024); CFI ¼ 0.989;

GFI ¼ 0.921; RMSEA ¼ 0.026

Continuance (con) con ! beh 0.60(.089) 0.93 0.93 0.70

Behavioral (beh) con ! aff 0.79(.097) 0.88 0.88 0.43

Affective (aff) aff ! beh 0.68(.095) 0.91 0.91 0.60

Minimal opportunism: w2(65) ¼ 77.62 (p ¼ 0.135); CFI ¼ 0.996; GFI ¼ 0.960; RMSEA ¼ 0.026 0.96 0.96 0.67

Satisfaction: w2(14) ¼ 23.16 (p ¼ 0.057); CFI ¼ 0.996; GFI ¼ 0.976; RMSEA ¼ 0.048 0.96 0.96 0.78

Export performance: w2(27) ¼ 33.09 (p ¼ 0.194); CFI ¼ 0.996; GFI ¼ 0.974; RMSEA ¼ 0.028 0.93 0.94 0.62

Note: r(se), correlation (with standard error); a, Cronbach’s alpha; rc, composite reliability; rvc, average variance extracted.

TRANG

T.M.NGUYEN

ET

AL.

118


The correlations (with standard errors) between the dimensions of thesecond-order constructs indicate that they were significantly different fromunity. Therefore, the within-construct discriminant validity was achieved(Steenkamp & van Trijp, 1991) (Table 2). Because the measures of all first-order constructs and the dimensions of all second-order constructs wereunidimensional, summates were used to the measurement model of rela-tionship quality and the final measurement model. It is noted that twosummates were used for minimal opportunism and satisfaction, and threesummates was used for export performance. These summates were formedby randomly summing the indicators in each scale into groups, and eachgroup was represented by one indicator. The use of two and three summates(instead of one) makes the model identified without using additional con-straints and is referred to as partial disaggregation (Bagozzi & Edwards,1998). The CFA results of the measurement model of relationship quality fitthe data well. The correlations (with standard errors) between the dimen-sions of relationship quality indicate that they were significantly differentfrom unity. Therefore, the discriminant validity between the dimensions ofrelationship quality was also achieved. Finally, the final measurement modelalso received a good fit to the data. The correlations between constructstogether with their standard errors indicate that they were significantlydifferent from unity. These findings support the across-construct discrimi-nant validity (Steenkamp & van Trijp, 1991) (Table 2).

Table 2. Correlations between Constructs.

Measurement Models Correlation r(se)

Relationship quality:

w2(21) ¼ 28.07 (p ¼ 0.138);

CFI ¼ 0.996; GFI ¼ 0.978;

RMSEA ¼ 0.035

Trust ! Commitment 0.80(0.091)

Commitment ! Minimal opportunism 0.50(0.073)

Minimal

opportunism

! Trust 0.51(0.078)

Satisfaction ! Trust 0.68(0.082)

Satisfaction ! Minimal opportunism 0.52(0.071)

Satisfaction ! Commitment 0.77(0.080)

Final measurement model:

w2(125) ¼ 176.61 (p ¼ 0.002);

CFI ¼ 0.986; GFI ¼ 0.936;

RMSEA ¼ 0.038

Market orientation ! Learning orientation 0.54(0.082)

Learning orientation ! Relationship quality 0.35(0.076)

Learning orientation ! Export performance 0.22(0.070)

Relationship quality ! Export performance 0.58(0.079)

Market orientation ! Export performance 0.30(0.069)

Market orientation ! Relationship quality 0.38(0.074)

Note: r(se), correlation (with standard error).


Test of Hypotheses

Structural Results

The SEM results indicate that the hypothesized model received an acceptablefit to the data: w2[127] ¼ 194.72 (p ¼ 0.000); CFI ¼ 0.981; GFI ¼ 0.929; and,RMSEA ¼ 0.043. In addition, all hypotheses were supported. Specifically,consistent with H1 and H2, positive impacts of both market and learningorientation on relationship quality were found: b ¼ 0.28 (po0.01) andg ¼ 0.20 (po0.05), respectively. Concerning H3, learning orientation waspositively related to market orientation (g ¼ 0.54, po0.001). Finally, withregard to H4, relationship quality was positively related to export performance(b ¼ 0.58, po0.001) (see Fig. 2). Table 3 shows the unstandardized structuralpaths and Fig. 2 shows the standardized structural paths of the model.

Multigroup Analysis

The duration of a relationship is a factor that may affect relationship qual-ity. For example, Wray, Palmer, and Bejou (1994) found that duration of a

mcs mcm mco

mop1 mop2

conbehaff

Eperf1Eperf2Eperf3

lcm lsv lop

sat1sat2

hon ben

0.91

0.94

0.910.80 0.67

0.910.910.92

0.82

0.99

0.640.81.82

0.54**(H3)

.20*(H2)

.58**(H4)

χ2(127) = 179.23 (p = 0.002); CFI = 0.986; GFI = 0.935; RMSEA = 0.038

*: significant at p < 0.05; **: significant at p < 0.001; S : squared multiple correlations

Marketorientation

Relationshipquality

0.18S

0.29S

Learningorientation Minimal

opportunismTrust

0.91

0.850.59

0.84

Exportperformance

0.34S

SatisfactionCommitment

0.65 0.72

0.28**(H1)

0

0

0

0.94

0.99 0.82

Fig. 2. Structural Results (Standardized Estimates).

Table 3. Unstandardized Structural Paths.

Structural Paths Estimate Standard Error p-value

H1 Market orientation - Relationship quality 0.31 0.091 0.000

H2 Learning orientation - Relationship quality 0.23 0.095 0.015

H3 Learning orientation - Market orientation 0.56 0.072 0.000

H4 Relationship quality - Export performance 0.48 0.051 0.000


relationship affect trust. However, Lagace, Dahlstrom, and Gassenheimer(1991) found no impact of relationship duration on any dimensions of re-lationship quality. In addition, firm-ownership structure has been con-sidered an important factor that affects firm performance (e.g., Aulakh& Kotabe, 1997; Luo, Griffith, Liu, & Shi, 2004). Moreover, the privatesector has only recently been present in Vietnam. It is argued that the pri-vate sector has more idiosyncratic behaviors than the state-owned sector(Friedman, 2004). Therefore, an additional purpose of the research is toexamine the difference, if any, based on the duration of the relationship(new and more mature), and on the structure of firm ownership (state-owned and other types of ownership).

In order to compare the structural paths in the model between thesegroups (new versus more mature relationships and state-owned versus othertypes of ownership), the multigroup analysis in SEM was utilized. It is notedthat we measured firm-ownership structure by a nominal scale (1: state-owned firms and 2: others) and duration of relationship by a ratio scale(number of years engaged in the relationship). Therefore, a median split wasused to bifurcate the sample into new and more mature relationships. Thenew relationship group consisted of relationships that were less than orequal to five years. The more mature relationship group included relation-ships that had lasted for more than five years. Two steps of analysis wereconducted. First, these two samples were used to estimate the structuralpaths in the model with no structural paths constrained (Model A). Second,constraints were imposed on the structural paths in both groups – new andmore mature relationship groups. This was done by setting the hypothesizedstructural paths – between learning orientation and market orientation, be-tween learning orientation and relationship quality, between market orien-tation and relationship quality, and between relationship quality and exportperformance – to be equal for both groups (Model B). This procedure wasalso utilized for firm-ownership structure. It is also noted that no constraintswere set for the measurement models (partial invariance). In terms of re-lationship duration, the results of the multigroup analysis show that Model

Table 4. Unstandardized Structural Paths of New and More MatureRelationships.

Structural Paths New Relationships More Mature

Relationships

Est(se)a p-value Est(se) p-value

H1 Market

orientation

- Relationship

quality

0.42(0.115) 0.000 0.10(0.134) 0.457

H2 Learning

orientation

- Relationship

quality

0.21(0.109) 0.053 0.49(0.156) 0.002

H3 Learning

orientation

- Market

orientation

0.45(0.090) 0.000 0.64(0.119) 0.000

H4 Relationship

quality

- Export

performance

0.57(0.068) 0.000 0.35(0.078) 0.000

aEstimate (standard error).


A (w2[254] ¼ 390.80) was selected over Model B (w2[258] ¼ 401.11) because itreceived a better fit: Dw2[Ddf ¼ 4] ¼ 10.31 (po0.05). This result confirms themoderating effect of the duration of relationship. Table 4 presents thestructural paths of new and more mature relationships. In terms of firm-ownership structure, the results of the multigroup analysis show that ModelB (w2[258] ¼ 350.43) was selected over Model A (w2[254] ¼ 343.02) because itreceived a better fit: Dw2[Ddf ¼ 4] ¼ 7.11 (p>0.11). This result indicates thatthe structure of firm ownership did not moderate the relationships hypoth-esized in the model.

DISCUSSION, IMPLICATIONS, AND CONCLUSIONS

The major objective of this study is to investigate key antecedents of thequality of business relationship between developing-economy exporters andtheir foreign importers. Following the resource-based view of the firm andextant research on market and learning orientations, we developed a modelthat explains the role of market and learning orientations in relationshipquality, and subsequently, export performance. The empirical findings sup-port all of the hypotheses, substantially adding to the literature on theimportance of adopting market and learning orientations, especially in theexport–import relationship in developing economies.

First, it has been found that market and learning orientations are influ-ential forces driving exporters to build and maintain strong relationships


with their foreign partners. As forms of organizational culture, market andlearning orientations are firm-level resources and are related to specific androutine processes that enable exporters to become competent in under-standing and responding to their partners’ needs. These competencies willcreate superior values to their foreign partners (Celuch et al., 2002; Hultet al., 2004; Yeniyurt et al., 2005). The effort of an exporter to understandand to satisfy its partner will also result in the partner’s beliefs that theexporter is an expert in performing its obligations and behaves in the bestinterests of its import partner. Therefore, the import partner is likely to trustand commit to the working relationship with the exporter. As such, marketand learning orientations will smooth the exporter–importer relationshipsand enhance the quality of these relationships, leading to high export per-formance. Consistent with the results found in advanced economies (e.g.,Calantone et al., 2002; Sanzo et al., 2003), the results of this study indicatethat the role of market and learning orientations in relationship quality isnot limited to advanced economies. Adopting and nurturing these orientat-ions are important for exporters in developing economies who aim tostrengthen business ties with foreign partners in competitive environmentsbecause these orientations are firm-level resources that create sustainablecompetitive advantage.

The results also indicate that learning orientation facilitates a market-oriented approach. A superior learning environment will leverage the use ofall firm resources, including the behaviors that accompany a market ori-entation (Baker & Sinkula, 1999). Moreover, learning-oriented exporters indeveloping economies like Vietnam (i.e., a transition economy where busi-ness values are still affected by a centrally planned approach), tend toadopt new ways of looking at the market, involving a market-orientedapproach. The exporter is likely to withdraw from its routine ways of doingbusiness, which have become embedded in its previous business approach.Therefore, exporters in developing economies, such as Vietnam, who wishto enhance relationship quality with their foreign partners, should dedicatethemselves to learning orientations. In short, the importance of market andlearning orientations for export firms is so crucial that managers shouldpromote the culture of such orientations. The values and norms of suchphilosophy must be translated into specific actions in order to attain sus-tainable competitive advantage. This will strengthen the quality of rela-tionships between them and their import partners, and thus, enhancingtheir export performance.

Further, the multigroup analysis results indicate that no significantdifference between stated-own firms and firms with other types of ownership


was found. This implies that adopting and nurturing market and learningorientations are equally important for exporters in both sectors, in theirefforts to establish high-quality relationships with their foreign importers.Nevertheless, the results show that learning orientation plays its role inbuilding high-quality relationships for both new and mature relationships.Export managers should take this into consideration. At whatever stage oftheir business relationships, creating a learning-oriented environment canassist export managers in building and fostering the relationships with theirforeign importers. However, the impact of market orientation on relation-ship quality is significant only at the early stage of the relationship. This maybe a particular characteristic of Vietnam, a developing and transition econ-omy. Prior to the transformation into a market-oriented economy, all ex-port activities of Vietnamese firms had been arranged by the Vietnamesegovernment with other socialist governments within the Soviet tradingblock. The break-up of the Soviet trading block led to the liberalization offoreign trade by the Vietnamese government in 1989, creating an openeconomy in Vietnam. This required Vietnamese firms to find new importpartners because the Soviet trading block could no longer provide outletsfor exports (Griffin, 1998). Instead of focusing on production and relyingprimarily on the government, Vietnamese firms are now required to findtheir own export markets for their products. As such, market orientationplays an important role in the early stage of their relationships with foreignimporters because market orientation facilitates an understanding betweentwo parties. When their relationships are more mature, other investmentssuch as asset specificity and innovativeness (e.g., Haugland, 1999; Hultet al., 2004) may be more important, and market orientation may supportthese investments rather than directly enhances their relationships.

This study has a number of limitations. First, generalizability of thefindings to other settings must be undertaken with the utmost caution be-cause only one city in one developing economy was sampled. Replicationand extension to other developing economies is a direction for future re-search. Second, limitations relate to the examination of the relationshipfrom only one side of the dyad, the exporters. Establishment of the validityof the hypotheses is limited by the single model viewed from only the ex-porter side. Future research should consider the use of dyadic information.Further, the results of this study show that the impact of market orientationon relationship quality is not significant at the more mature stage of therelationship. Therefore, other factors, such as asset specificity and innova-tiveness, can mediate this impact. Further research should examine possiblemediators. Finally, the cross-sectional design employed inhibits strong


inference regarding the direction of the causal relationships of the con-structs. Longitudinal research designs would better enable researchers tomake inferences about the causal sequence.

ACKNOWLEDGMENTS

The authors would like to thank the special issue editors, Alex Rialp andJosep Rialp, the two anonymous reviewers, and the participants of theCIMaR 2005 at the Autonomous University of Barcelona, Spain, for theirconstructive and insightful comments on the previous version of the article.

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APPENDIX: CFA FACTOR LOADINGS OF ITEMS

(STANDARDIZED)

Items
Loading t-value
Market orientation (second-order, 7-point Likert scale)

Customer orientation

We closely monitor and assess our level of commitment in

serving customers’ needs

0.81
16.45
Business strategies are driven by the goal of increasing customer

value

0.81
16.43
Our competitive advantage is based on understanding

customers’ needs

0.85
17.96
Our business objectives are driven by customer satisfaction
0.86 18.10
We pay close attention to after-sales service
0.87 18.44
We respond quickly to customer needs
0.82 16.78
We rapidly adapt our products in response to customers’ needs
0.84 �
Competitor orientation

In our firm, our sales people share information about

competitors

0.84
�
We respond rapidly to competitor actions
0.80 15.54
Top management regularly discuss competitors’ strengths and

weaknesses

0.87
17.62
Customers are targeted when we have an opportunity for

competitive advantage

0.79
15.27
Interfunctional coordination

Our top managers from each business function regularly visit

customers

0.79
�
Business functions within our firm are integrated to serve our

target market needs

0.80
14.26
Our managers understand how employees can contribute to

customers’ value

0.83
14.85
We share resources with other business units
0.76 13.44

APPENDIX (Continued )

Items Loading t-value


Learning orientation (second-order, 7-point Likert scale)

Commitment to learning

Managers basically agree that our firm’s ability to learn is the

key to our competitive advantage

0.85
�
The basic values of our firm include learning as a key to

improvement

0.87
18.51
In our firm, employee learning is an investment, not an expense
0.88 18.87
Learning in our firm is seen as a key commodity necessary to

guarantee organizational survival

0.87
18.59
Shared vision

There is a commonality of purpose in our firm
0.82 �
There is total agreement on our organizational vision across all

levels, functions, and divisions

0.84
16.49
All employees are committed to the goals of our firm
0.89 17.98
Employees view themselves as partners in charting the direction

of our firm

0.87
17.51
Open mindedness

We are not afraid to reflect critically on the shared assumptions

we have made about our markets

0.81
�
Personnel in our firm realize that the very way they perceive the

marketplace must be continually questioned

0.84
14.70
We always collectively question our own biases about the way

we interpret market information

0.81
14.22
Trust (second-order, 7-point Likert scale)

Honesty

Our firm has often provided importer A information that has

later proven to be accurate

0.71
�
Importer A has often provided us information that has later

proven to be accurate

0.69
11.15
Our firm usually keeps the promises we make to importer A
0.75 12.17
Importer A usually keeps the promises they make to our firm
0.74 11.94
Whenever our firm gives importer A advice on business

operations, they know we are sharing our best judgment

0.84
13.59
Whenever importer A gives us advice on business operations, we

know they are sharing their best judgment

0.76
12.32
Our firm can count on importer A to be sincere
0.66 10.67
Our firm think that importer A can count on us to be sincere
0.76 12.33
Our managers feel that the importer A offers our firm reliable

recommendations

0.80
13.03
Our firm offers to importer A reliable recommendations
0.66 10.66




Our firm deals fairly and sincerely with importer A
0.81 13.15
Our firm feels that importer A deals fairly and sincerely with our

firm

0.81
13.11
Benevolence

Though circumstances change, our firm will be ready and

willing to offer importer A an assistance and support

0.69
�
When making important decisions, our firm is concerned about

importer A’s welfare

0.59
9.13
When importer A share their problems with our firm, we will

respond with understanding

0.65
9.98
When it comes to things that are important to us, we can depend

on importer A’s support

0.68
10.41
When we share our problems with importer A, we know that

they will respond with understanding

0.69
10.61
Though circumstances change, our firm believes that importer A

will be ready and willing to offer us assistance and support

0.71
10.91
When making important decisions, importer A is concerned

about our firm’s welfare

0.77
11.76
When it comes to things that are important to us, importer A

can depend on our firm’s support

0.70
10.72
We can count on importer A’s decisions and actions which will

be favorably affect us in the future

0.63
9.77
Importer A can count on our firm’s decisions and actions which

will be favorably affect them in the future

0.60
9.34
Commitment (second-order, 7-point Likert scale)

Continuance commitment

We are going to continue the relationship with importer A for

many years

0.76
�
We think that importer A is going to continue the relationship

with our firm for many years

0.84
15.19
We expect the business relationship with importer A to last for a

long time

0.89
16.36
Our firm is certain that our relationship with importer A will

last a long time

0.90
16.51
Our firm believes that if another exporter offered importer A a

better deal, they would take them on even if it meant

dropping us

0.79
14.05
If another importer offered us a better deal, we would take them

on even if it meant dropping importer A

0.82
14.80




Behavioral commitment

We respond quickly to importer A’s requests for help
0.69 �
We think that the importer A responds quickly to our firm’s

requests for help

0.63
9.61
We devote more time to importer A when they need help
0.70 10.59
We adjust our marketing program for importer A when

necessary

0.54
8.40
We provide special aid to importer A when they are in trouble
0.67 10.16
We provide customized product or services as requested by

importer A

0.62
9.47
We give advice and suggestions when importer A has problems
0.60 9.23
We think that importer A devoted more time when we need help
0.67 10.22
We think that importer A provided special aid to us when we

were in trouble

0.68
10.35
Importer A has given advice and suggestions when we have

problems

0.73
11.07
Affective commitment

A high sense of unity exists between importer A and us
0.77 �
Our relationship with importer A is a long-term alliance
0.82 14.54
We have a strong business link with importer A
0.79 13.95
We want to remain a member of importer A’s network because

we genuinely enjoy our relationship with them

0.81
14.36
We think that importer A wants to remain a member of the our

firm’s business network because they genuinely enjoy their

relationship with us

0.75
13.21
We think importer A has developed a close business relationship

with us

0.81
14.39
Importer A and our firm share common business interests
0.70 12.22
Minimal opportunism (7-point Likert scale)

We have always provided importer A with a completely truthful

picture of our business

0.78
�
Importer A has always provided our firm with a completely

truthful picture of their business

0.78
14.56
We carry out the duties of our relationships even if importer A

does not check up on us

0.79
14.69
Our firm think that importer A carries out the duties of

relationships even if our firm does not check up on them

0.81
15.24
We have never promised importer A that we would do things,

that we actually had no intention of following through

0.81
15.21




Importer A has never promised us that they would do things,

that they actually had no intention of following through

0.82
15.54
To get the necessary support from importer A, we rarely mask

the true nature of our needs

0.87
16.65
To get the necessary support from our firm, importer A rarely

masks the true nature of their needs

0.87
16.67
Regardless of its impact on importer A’s business (e.g.,

profitability, sales volume, and market share), they always

conscientiously perform their duties to us

0.85
16.10
In order to get what importer A needs from our firm, importer

A rarely changed the facts

0.85
16.09
In order to get what we need from importer A, we have rarely

changed the facts

0.83
15.64
On rare occasions, we have had to lie to importer A about

certain things in order to protect our interests

0.81
15.16
Satisfaction (7-point Likert scale)

Overall, I believe we are both quite satisfied with our working

relationship

0.87
20.33
This is among the best importer relationships that our managers

have experienced

0.88
20.98
Our firm’s relationship with importer A has been a happy one
0.91 22.44
Our firm’s relationship with importer A has fully met our firm’s

expectations

0.86
20.00
Our firm is proud of having this working relationship with

importer A

0.89
21.65
We are very pleased with what this importer A does for us
0.91 22.73
If we had to do it all over again, we would still choose to use the

importer A

0.87
�
Export Performance (7-point Likert scale)

Profitability
0.74 �
Sales revenue stability/growth
0.77 13.28
Improvement in market share
0.81 13.97
Competitive advantage over other firms
0.81 13.87
Economies of scale
0.68 11.58
Overall survival of the firm
0.73 12.41
Reputation
0.83 14.39
Market development
0.85 14.79
Product development
0.81 13.99

THE INTERNATIONALISATION OF

BIOTECH SMES: A COMPARATIVE

ANALYSIS OF UK AND US FIRMS

Calin Gurau and Ashok Ranchhod

ABSTRACT

The accelerated globalisation of world markets in the last 30 years has

increased the importance of internationalisation models for both academ-

ics and practitioners. The internationalisation process of SMEs is one of

the newest developments in this area, with major implication for the

strategic orientation of small firms. However, this phenomenon has to be

considered in relation with the specific characteristics for various market

environments and industrial sectors. This study attempts to analyse the

impact of the domestic market profile on the internationalisation process

of biotech SMEs in US and UK, outlining the similarities and the differ-

ences between these two countries.

THE INTERNATIONALISATION MODELS

The accelerated globalisation of world markets in the last 30 years hasincreased the importance of internationalisation theories for both academ-ics and practitioners. The academic research has developed three main





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17005-2

137

CALIN GURAU AND ASHOK RANCHHOD138

categories of models to describe the process of internationalisation: the ex-periential learning models, the systematic planning models and the contin-gency models (Li, Li, & Dalgic, 2004).

There are two experiential learning models: the Uppsala model, developedby Johanson andWiedersheim-Paul (1975), and then refined by Johanson andVahlne (1977, 1990) and Johanson and Mattsson (1986); and the Manage-ment Innovation model, described in the works of Bilkey and Tesar (1977),Cavusgil (1980), Czinkota (1982) and Reid (1981). The systemic approach ofthese two models is almost similar. Both of them describe the internation-alisation process as a gradual evolution of the firm through a series of stages,that correspond to an increasing foreign involvement of the company.

The Uppsala model explains the internationalisation process consideringtwo main strategic dimensions: the market knowledge possessed by the firmabout different foreign markets and the commitment of firm’s resources tothose markets. The evolution of the company from a mainly domestic ac-tivity to a fully international profile is described as a slow, incrementalprocess, which involves the gradual acquisition, integration and the use ofknowledge concerning the characteristics of foreign markets as well as anincreasing commitment of the company’s resources towards internationalactivities. The model also predicts that a firm will first target the marketsthat are most familiar in terms of language, culture, business practice andindustrial development, in order to reduce the perceived risk of internationaloperations and to increase the efficiency of information flows between thefirm and the target market (Johanson & Vahlne, 1977, 1990).

On the other hand, the Innovation model (Cavusgil, 1980; Czinkota,1982; Reid, 1981) tends to explain the initiation of the internationalisationprocess through a series of management innovations implemented within thefirm. The original model created by Bilkey and Tesar (1977) emphasises theevolution of a firm’s internationalisation through a series of successivelearning stages.

The experiential learning models have been extensively challenged over theyears, with numerous scholars advancing various criticisms of their validityand assumption (Anderson, 1993; Axinn & Matthyssens, 2002; Fillis, 2001;Knight & Cavusgil, 1996; Welch & Luostarinen, 1988). Some authors ques-tioned the deterministic nature of the Uppsala and the Innovation models,outlining that many firms do not follow a consistent path to internation-alisation (Anderson, 1993; Reid, 1983; Turnbull, 1987). Many studies havefound that the management of internationalising firm considers a variety ofstrategic approaches (Douglas et al., 1982; Root, 1987; Welch & Luostarinen,1988), the internationalisation process representing a strategic answer to the

The Internationalisation of Biotech SMEs 139

evolving market conditions (Reid, 1983, 1984). Other critics demonstratedthat the first step in the internationalisation process may not be exporting,but one of several alternative international activities, such as licensing,franchising, joint-venture or network relationships (Carstairs & Welch, 1982/1983; Hakansson, 1982; Nordstrom, 1991; Reid, 1984; Root, 1987). Thesecriticisms show that it is difficult and even dangerous to draw a unique recipefor the internationalisation process (Buckley, Newbould, & Thurwell, 1979;Garnier, 1982; Root, 1987; Roux, 1979; Varaldo, 1987), and that the firm’sstage of internationalisation is largely determined by the operating environ-ment, industry structure and its own marketing strategy (Turnbull, 1987).

These criticisms have been crystallised in two additional orientations: thestrategic planning models, based on the research published by Root (1987),Miller (1993) and Yip, Biscarri, & Monti (2000), which claim that systematicplanning based on a careful analysis of competitive factors and circumstan-tial conditions can significantly increase the success of the internatio-nalisation process; and the contingency models, developed by Turnbull (1987),and then refined by Roberts (1999), Jones (1999), Welch and Luostarinen(1993), and Boter and Holmquist (1996), which argue that the internation-alisation process is influenced by a series of contextual factors, such as theoperating environment and the industry structure (Turnbull, 1987).

The Born Global model, proposed by Knight and Cavusgil (1996) isanother important contribution to the contingency perspective. Based on astudy conducted in Australia, the Born Global companies are defined by thefollowing specific characteristics (Knight & Cavusgil, 1996, p. 18):

1.
Management views the world as its marketplace from the outset of thefirm’s founding; unlike traditional companies, they do not see foreignmarkets as simple adjuncts to the domestic market.
2.
Born Globals begin exporting one or several products within two years oftheir establishment and tend to export at least a quarter of total pro-duction.
3.
They tend to be small manufacturers, with average annual sales usuallynot exceeding $100 million.
4.
The majority of Born Globals are formed by active entrepreneurs andtend to emerge as a result of a significant breakthrough in some processor technology.
5.
They may apply cutting-edge technology to developing an unique pro-duct idea or to a new way of doing business.
6.
The products that Born Globals sell typically involve substantial valueadding; the majority of such products may be intended for industrial uses.


Knight and Cavusgil (1996) argued that this phenomenon was facilitated byseries of recent trends that have increased the capacity of many companies
to initiate early international activities:
1.
The increasing role of niche markets, especially in the countries of thedeveloped world (Holstein, 1992; Robinson, 1986), determined by in-creased demand for specialised or customised products.
2.
The recent advances in process technology that have created the possi-bility of flexible, low-scale and low-cost production.
3.
The recent advances in communication technologies have reduced thecosts of information transmission between distant markets.
4.
The inherent advantages of small companies such as quicker responsetime, flexibility, adaptability and direct customer relations facilitate theinternational operations of Born Global companies, and offer them animportant competitive edge in comparison with the larger multinationals(McKinsey and Co., 1993).
5.
The means of internationalisation such as knowledge, technology, toolsand facilitating institutions have become more accessible to all firms,regardless of their size or activity sector (Czinkota & Ronkainen, 1995;Nordstrom, 1991).
6.
The recent emergence of complex transnational networks of strate-gic alliances (Coviello & Munro, 1997; Hakansson, 1982; Thorelli,1990).
The Born Global model is supported by numerous studies that show thatthese types of companies are emerging in many national economies includ-ing France (Roux, 1979), Canada (Denis & Depelteau, 1985; Garnier, 1982),Taiwan (Chang & Grub, 1992), Finland (Gabrielsson, Sassi, & Darling,2004), the United Kingdom (Buckley et al., 1979) and the United States(Holstein, 1992; Norton, 1994).

Despite the growing interest in the internationalisation process of SMEs,very few studies have been conducted at the transnational level (Knight,Madsen, & Servais, 2004; Moen, 2002; Rasmussan, Madsen, & Evangelista,2001). Knight et al. (2004) have investigated the phenomenon of BornGlobal firms based on data from case- and survey-based studies in Denmarkand the USA. The results of this study indicate that the international per-formance of firms is enhanced by the managerial focus on foreign customerand marketing competence. Moen (2002) has analysed the export behaviourof SMEs from France and Norway identifying the global orientation ofthe manager and the market conditions as important factors for a quick


internationalisation. Finally, Rasmussan et al. (2001) have studied thefounding process of Born Globals in Denmark and Australia, outlining theimportance of networking and sensemaking.

Many authors emphasised that the internationalisation of SMEs has to beconsidered specifically in relation to the industry sector and the local marketprofile (Boter & Holmquist, 1996; Moen, 2002; Reid, 1983, 1984; Turnbull,1987). However, there are yet no transnational studies concerning the par-ticular influence of the domestic market profile on the internationalisationof SMEs from a specific industry. This research project starts from theassumption that the differences among various countries in terms of re-source availability, market size and sector development will determine aspecific pattern of the internationalisation process: the firms from rich, largemarkets will have no reason to become international at an early stage oftheir corporate life, because they can find locally the necessary resources forproduct development, as well as a highly responsive demand. On the otherhand, the start-ups emerging in countries with more limited facilities andresources may attempt a quicker internationalisation in order to obtain thenecessary assets for their survival and development.

In order to verify this assumption, this article compares some aspects(speed, degree and main reasons) of the internationalisation process of bio-tech SMEs in two countries that have a different domestic market profile:US – the world’s largest biotech market and UK – comparatively, four timessmaller than the UK market (Table 1). Through this methodological ap-proach, this study attempts to refine the existing internationalisation mod-els, demonstrating that in the case of biotech SMEs, the internationalisationprocess is significantly influenced by the profile of the domestic market. Thechoice of the biotech sector was determined by its specific international

Table 1. A Comparison of the Main Indicators Defining UK and theUS Biotech Market in 2003.

Indicators (2003) UK US

Number of companies 455 1830

People employed 22,400 172,400

Dew drugs in clinical development

or expecting approval

224 1,110

Generated revenues 5.4 billion dollars 52 billion dollars

Equity raised 588 million dollars 9.2 billion dollars

New start-ups 36 83

Source: DTI (2003).


characteristics (Gurau & Ranchhod, 1999):

�
the sources fuelling the biotechnology industry are international (i.e.finance, knowledge, legal advice, etc.) (Acharya, 1998, 1999; Russel,1988);
�
the marketing of biotechnology products and services is international(Acharya, 1999; Daly, 1985);
�
the competition in the biotechnology sector is international (Acharya,1999; Russel, 1988); and
�
the international community (Acharya, 1999; Bauer, 1995; Nelkin, 1995;Russel, 1988) closely scrutinises the scientific or industrial developments inbiotechnology.
After this discussion of the internationalisation theory, the paper presentsthe specific conditions of internationalisation for biotech SMEs, and thedifferences between various world regions in terms of bio-entrepreneurship.Based on these elements, three research hypotheses are formulated, whichattempt to outline the influence of the domestic market profile on the level,speed and main reasons of internationalisation for the UK and US biotechSMEs. The research methodology and the research findings are then dis-cussed and analysed. The paper concludes with a summary of the findings,outlining their relevance for the development of academic models, as well asfor the management and government practice.

THE INTERNATIONALISATION OF BIOTECH SMES

Biotechnology is the systematic industrial use of biological processes andorganisms to manufacture medical, agricultural and consumer products(Biobox, 1998; Oakey, Faulkner, Cooper, & Walsh, 1990). The range ofbiotechnology applications includes bulk and specialty chemicals, health-care products, many food and drink products, extraction processes, wasteand pollution treatment, and agriculture (Mantegazzini, 1986).

Considering the internationalisation process of biotech firms, it is impor-tant to present the reasons that explain the SMBEs’ need to initiate anddevelop international operations:

1.
Biotechnology is a global sector (Daly, 1985). 2. All the industries that use biotechnology applications are highly inter-
nationalised or globalised (Russel, 1988).


3.
The limited human, technological and financial resources available on thedomestic market may force a company to search abroad the necessaryinputs for the development of biotechnology activities (Fontes &Coombs, 1997). On the other hand, a domestic business environmentwith excessive safety standards and regulations may encourage SMBEs tosearch abroad for more permissive markets.
4.
The domestic market is often too small in number of customers or purchas-ing power in order to allow a rapid return on investments (Kobrin, 1997).
In the first few years of activity, many biotech SMEs are developing a finalproduct, a project that requires time and complex ressources (Dorabjee,Lumley, & Cartwright, 1998; Persidis, 1996); therefore, their internationalactivities will not consist in product exports, but rather in contacts andcollaboration with foreign organisations that can supply them with neces-sary resources, such as money, information, technology or specialised ser-vices. Once these firms have developed a final product or a service platform,they attempt to commercialise it in order to obtain a quick return on in-vestment. In some cases, the number of customers within the national mar-ket might be too small to ensure a proper return on investment, especiallywhen the investment is large. Only by integrating potential customers frommany different countries into a global market segment with a homogeneousdemand, is a company able to compete and to efficiently develop its ac-tivities. Regarding this aspect Kobrin (1997, p. 151) wrote:

y the evidence strongly suggests that the minimum size of markets needed to support

technological development in industries such as aerospace, semiconductors, and phar-

maceuticals is now larger than the largest national markets. In an emerging global

economy international integration is a requisite of a competitive R&D budget; national

markets are fused transnationally rather than linked through cross-border transactions.

This is especially true for the European biotechnology firms. Consideringthe limited size of some national markets (the Netherlands or Switzerland –compared with the large US market), the local biotech firms are obliged toexpand their activities abroad and became internationalised, or, in somecases, even globalised.

5.
The complexity and high risks of innovation and technological develop-ment within the biotechnology sector determine the development of anintegrated system of transnational strategic alliances – ‘‘it appears thateven the global integration of markets by a single firm may no longer besufficient to offset the huge costs and risks of technological developmentin a number of strategic industries’’ (Kobrin, 1997, p. 150).


Considering the specific characteristics of biotechnology, it may be ex-pected that some of the biotech firms can be defined as Born Global firms.However, many authors emphasised that the phenomenon of Born Globalfirms has to be considered specifically in relation to the industry sector andthe local market profile.

BIO-ENTREPRENEURSHIP: AN INTERNATIONAL

PERSPECTIVE

The SMBEs have many common characteristics with the general profile ofSMEs (Carson, Cromie, McGowan, & Hill, 1995). As most of the SMEs, theSMBEs have limited resources. The biotechnology activities usually requirea high level of technological expertise, and the SMBEs tend to ignore theimportance of marketing operations, concentrating their resources on theprocess of research and development (Briggs, 1994).

The entrepreneurial model of marketing activities also applies to SMBEs.Most of these companies are managed by biotechnology specialists (Briggs,1994; Bullock & Dibner, 1995; Euromonitor, 1988; Saviotti, 1998), whichhave either created their own firm in order to develop promising researchdiscoveries, or have abandoned their positions in large hierarchical struc-tures (big companies, universities) in order to enjoy the independence ofentrepreneurial activity (Acharya, 1999; McKelvey, 1996; Witholt, 1999).

The United States leads in bio-entrepreneurship, with Europe significantlybehind but closing the gap, and Japan a very distant third. The marketconditions, business environment (financial and legal), social response,regulatory conditions, scientific base and government support favour suchcompanies in the United States (Persidis, 1998). In this respect, the UnitedStates are characterised by (Rothwell & Zegveld, 1983; Senker, 1998;Senker, Joly, & Reinhard, 1998):

�
a large domestic market conducive to rapid growth and development; � the availability of private wealth as a source of seed capital for the start-upof new ventures;
�
a fiscal framework which encourages the flow of private risk capital intonew ventures;
�
a prevailing attitude (in society at large) which encourages entrepreneur-ship;
�
high mobility of individuals between academic institutions and privateindustry;


�
the behavioural and attitudinal character of American scientists, many ofwhom are willing to establish their own business in order to exploit theirtechnical knowledge; and
�
a large and active government expenditure programme, which providessignificant opportunities for the new high-technology firms, particularlythrough government procurement programmes.
In comparison, the European markets in the past were disadvantaged be-cause (Rothwell & Zegveld, 1983; Senker, 1998; Senker et al., 1998):

�
they were more fragmented; � the cultural and attitudinal factors among academics, government, scien-tists and research institutions have been unfavourable towards techno-logical entrepreneurship;
�
the level of government research and development expenditures was low; � the systems of taxation were unfavourable for the development of newhigh-technology firms;
�
the availability of venture capital was limited; and � the geographical and social mobility had low levels.
The European market environment has become more favourable for bio-technology firms in the recent years (Ewing, 1996). The national govern-ments have created better facilities for the assistance of SMBEs(Lahteenmaki, Plant, & Michael, 1997), the venture capital market has ex-panded and the European Union programmes have offered new opportu-nities for joint research and development projects (Ernst & Young, 2000;Magnien & de Nettancourt, 1993). For example, the clinical trials and theirevaluation are already considered to be quicker and cheaper in Europe thanin the USA (Ward, 1995). Among the West European nations, Germanyand the UK have the biggest number of biotechnology firms (Ernst &Young, 2000; Green, 1998). In spite of these improvements, the level ofbiotechnology regulation is still perceived to be stricter than in the USA(Davidson, 1998; Senker et al., 1998) in some industrial areas.

It can be reasonably expected that the different market profile of the UKand US biotechnology sector will impact on the internationalisation processof SMBEs. US is presently considered to be the major biotechnology marketin the world, in terms of size, diversification and available resources. On theother hand, UK has a successful biotechnology sector, but the market en-vironment is comparatively four times smaller than the US biotech market(see Table 1), which might impact on the capacity of British SMBEs to find


the necessary resources, business partners and customers, exclusively on thedomestic market. From this perspective it can be assumed that for the Brit-ish SMBEs, the international expansion may be a necessary condition fortheir survival and development, while in the case of US SMBEs, the inter-nationalisation may be just one of the possible alternatives of development.On the basis of these assumptions, three research hypotheses have beenformulated:

H1. The level of internationalisation of US SMBEs is lower than the levelof internationalisation of UK SMBEs.

H2. The Born Global phenomenon is more prevalent in the UK bio-technology sector in comparison with the US.

H3. The reasons for internationalisation will differ between the US andthe UK SMBEs: most UK SMBEs will start international operation toaccess resources, while most US firms will become international followinga strategy of market expansion.

RESEARCH METHODOLOGY

A list of all UK and US biopharmaceutical SMEs was compiled usingthe Internet (http://bio.com, http://www.bioindustry.org, http://www.biotechanalytics.com, http://www.hum-molgen.de/companies/, http://pro-files.wisi.com) and hardcopy databases (The UK BioCommerce Data Com-pendium, 2001). The biotechnology companies have been defined as any UKor US firm involved either directly (product development) or indirectly(platform technology) in the development of new products or processesusing biotechnology methods (Daly, 1985).

In order to classify the biotechnology companies into small- and medium-sized firms, the number of staff was taken into account. This is also the mostcommon definitional basis used in the OECD countries (OECD, 1997). Onthe other hand, the extreme variability of SMBEs regarding the marketshare, the turnover and profitability has indicated the choice of the staffnumber as the most suitable criteria to be used. Owing to the biotechnologysector characteristics, the categories defined by the UK Centre for Exploi-tation of Science and Technology (CEST) were used to classify the firmswith up to 50 employees as small, and the companies employing 51–500people as medium sized (Keown, 1993).

http://bio.com

http://www.bioindustry.org

http://www.biotechanalytics.com

http://www.biotechanalytics.com

http://www.hum-molgen.de/companies/

http://profiles.wisi.com

http://profiles.wisi.com


A structured questionnaire was sent to 463 UK and 1,334 US SMBEs(which represent all the biotech firms that were identified using the sourcespresented above), in order to collect information about their business profile,speed and level of internationalisation, main reasons for internationalisation,foreign market entry strategies and presence in global regions. One hundredand thirty-six UK and 464 US completed questionnaires were returned, rep-resenting a response rate of 29.37% for the UK survey and 34.78 for the USsurvey. After the analyses of responses, 122 companies were selected as rep-resenting UK-independent biopharmaceutical companies and 444 as inde-pendent US SMBEs, which closely corresponds to the proportion between thesize of the UK and the US biotech sectors. Only independent companies havebeen selected for analyses because the integration in a multinational groupis likely to considerably affect the international marketing strategy imple-mented by the SMBEs and the level of resources available at corporate level.

The data collected have permitted the identification of the business profileof the selected companies. The SMBEs have been classified into five distinctsectors:

�
healthcare; � environmental biotechnology; � agriculture/food; � bio-reagents and instruments; and � supporting services (such as consulting, bioinformatics, etc.).
This classification provides a rather clear distinction among different bio-technology applications, allowing a delimitation of the specific characte-ristics of each industry, being consistent with the previous classificationsused in the specialist literature (Euromonitor, 1988; Mantegazzini, 1986).

The level of internationalisation was defined as a composite dimension(Table 2), taking into consideration the criteria established and applied byOECD (1997):

(a)
the proportion of the SMBEs’ outputs and inputs (including capital)that are traded across national boundaries, either directly or indirectly;
(b)
the number of international operations in different regions or countries;and
(c)
the competitive model faced by the company.
The conditions required to consider a firm as Born Global are defineddifferently by various authors, especially in what concerns the time period

Table 2. The Dimensions of SME Globalisation.

Description Traded Inputs and

Outputs

Establishments and

Affiliations

Market

Opportunities and

Competition

No globalisation

‘‘Domestic’’

All inputs sourced

from local area, all

outputs sold in

local area.

Single establishment,

no establishments

or affiliations

outside local area.

No market outside

local area, no

potential

competition from

outside local area.

Limited

globalisation

‘‘Mainly domestic’’

o10% of inputs

sourced across

borders, and

o10% revenue

from across

borders, usually

within a limited

span of nations.

At least one

establishment or

affiliate outside

local area or

outside national

area.

Barriers to entry to

outside markets

and to local

market (for

competitors) are

significant and

amount to more

than 50% of costs.

Major globalisation

‘‘Internationalised’’

>10% buto40% of

inputs sourced

internationally,

and >10% but

o40% of revenue

from across

borders, usually

across two major

international

regions.

Establishments or

close affiliates in

at least four

different nations

and in two major

international

regions.

Barriers to entry are

noticeable, make

up to 10% of cost

disadvantage, but

can be overcome

fairly easily.

Extensive

globalisation

‘‘Globalised’’

>40% of inputs

sourced

internationally,

>40% of revenue

from outputs

traded across

borders, across all

major

international

regions.

Establishments or

close affiliates in

at least one

country in all

three major

international

regions.

Barriers to entry to

international

markets are not

significant

impediment for

firm or

competitors, make

up less than 5%

cost disadvantage.

Complete

globalisation

‘‘Fully globalised’’

Majority of inputs of

any establishment

sourced across

borders, large

majority of

outputs traded

across borders.

Multiple

establishments or

affiliates in many

countries and in

all major

international

regions.

Markets in all major

international

regions,

competition likely

to be present or

come from any

international

region.

Source: OECD (1997, p. 23).



considered necessary for firm’s internationalisation, and the extent of firm’sinternational involvement (Jolly, Alahuhta, & Jeannet, 1992; Knight &Cavusgil, 1996; Madsen & Servais, 1997; McAuley, 1999). Considering thespecific characteristics of the biopharmaceutical sector (highly globalisedmarket), the criteria for defining Born Global companies was the initiationof any form of international operation in the first three years of firm’s life, aperiod of time that is also used by Rasmussan et al. (2001).

The main reasons for starting the international activities have been clas-sified into the following categories (Gurau & Ranchhod, 1999):

�

Na

UK

US

To

access to sources of funding;
� access to new markets; � access to information; and � access to technology,
allowing also an open, direct response, under the category of ‘‘other rea-sons,’’ where the respondent was expected to write down any different rea-sons of the company internationalisation.

The data have been processed using the SPSS software package, whichallows the quick application of statistical tests to large volumes of data.

PRESENTATION AND INTERPRETATION OF DATA

The Profile of Respondent Firms

As it can be seen from Table 3, the distribution of UK and US SMBEs onvarious sectors of activity is almost similar. The larger differences are in thehealthcare sector, where the US companies have the largest percentage(48.6% in comparison with 37.7%).

Table 3. Cross-Tabulation between the Nationality of the Firms andTheir Sector of Activity.

tionality Sector of

Activity

Health

Care

Environmental Food and

Agribiotech

Bioreagents

and

Instruments

Supporting

Services

Total

N (%) 46 (37.7) 12 (9.8) 20 (16.4) 32 (26.2) 12 (9.8) 122 (100)

N (%) 216 (48.6) 30 (6.8) 50 (11.3) 94 (21.2) 54 (12.2) 444 (100)

tal 262 42 70 126 66 566

Table 4. Cross-Tabulation between the Nationality of the Firms andTheir Size.

Nationality Size Small Medium Total

UK N (%) 64 (52.5) 58 (47.5) 122 (100)

US N (%) 294 (66.2) 150 (33.8) 444 (100)

Total 358 208 566

Table 5. Cross-Tabulation between the Nationality of the Firms andTheir Level of Internationalisation.

Nationality Level of

Internationalisation

Mainly

Domestic

Internationalised Globalised Fully

Globalised

Total

UK N (%) 17 (13.9) 51 (41.8) 39 (32) 15 (12.3) 122 (100)

US N (%) 115 (25.9) 175 (39.4) 110 (24.8) 44 (9.9) 444 (100)

Total 132 226 149 59 566

Note: w2 ¼ 8.416; P ¼ 0.038.


The proportion of small- and medium-sized biotechnology firms is almostsimilar for the UK and US respondent companies (Table 4). However, theUS respondent companies are predominantly small (66.2%), while for theUK firms the proportion of small- and medium-sized respondent companiesis almost equal.

The Level of Internationalisation

The results presented in Table 5 show that the level of internationalisation ofUK-based and US SMBEs is radically different. 25.9% of the US firms aremainly domestic, while in the same category there are only 17 UK-basedfirms (13.9%). On the other hand, the percentages of globalised (24.8%) andfully globalised (9.9%) US firms is lower than the percentages of the samecategories in UK (32 and 12.3%, respectively). These differences are sta-tistically significant at a level of P ¼ 0.038. These findings confirm the re-search Hypothesis 1.

This situation can be explained by differences in the market size andstructure between the two countries. The US market is very developed forbiotechnology products and services, being considered at present as themain global market for this industrial sector. Therefore, the US firms canobtain fairly easily on their local market the necessary resources and a highlevel of demand for their products/services. On the other hand, the UK

Table 6. Cross-Tabulation between the Nationality of the Firms andTheir Speed of Internationalisation.

Nationality Born Global Born Global Not Born Global Total

UK N (%) 102 (83.6) 20 (16.4) 122 (100)

US N (%) 125 (28.2) 319 (71.8) 444 (100)

Total 227 339 566

Note: w2 ¼ 122.515; Po0.0001.


market has, comparatively, a smaller size and cannot offer the same level ofbusiness opportunities to the UK-based companies. Owing to these differ-ences, the UK SMBEs are forced to become international and developoverseas operations.

Born Global Firms

Table 6 shows that Hypothesis 2 is confirmed by the findings of this study.The UK Born Global SMBEs are the majority among the respondent firms(83.6%), while in the US most of the respondent firms cannot be consideredBorn Global (71.8%).

These differences are logical when considering the profile of the US andUK biotechnology markets and business environments. The limitations ofthe UK market in terms of size, available resources and level of demandforce the UK SMBEs to initiate quickly international operations. Thispressure is much lower on the US-based biotechnology firms, who can ac-tivate successfully on the large US biotech market. The differences betweenthe UK and the US Born Global SMBEs are statistically relevant to a levelof Po0.0001.

Main Reasons of Internationalisation

Table 7 presents the findings related with the main reason of SMBEs’ in-ternationalisation. As it can be seen, the majority of US biotechnology firmsare starting international operations to access new overseas markets fortheir finalised products and services. On the other hand, for the UK SMBEs,the access to new markets is the main reason for a quite small percentage ofthe respondent firms (18%), the major reasons for the internationalisationof these companies being the access to information and technology. Theseresults confirm Hypothesis 3.

Table 7. Cross-Tabulation between the Nationality of the Firms andTheir Main Reason for Internationalisation.

Nationality Reason for

Internationalisation

Funding New

Markets

Information Technology Total

UK N (%) 11 (9) 22 (18) 48 (39.3) 41 (33.6) 122 (100)

US N (%) 307 (69.1) 81 (18.2) 56 (12.6) 444 (100)

Total 11 329 129 97 566

Note: w2 ¼ 126.353; Po0.0001.


The statistical significance of the relationship between variables is verystrong, at a level of Po0.0001. These findings complement well the resultspresented in Table 5. A possible explanation of this situation can be de-veloped considering the corporate lifecycle of the biotech SMEs: startingtheir internationalisation process later in their corporate life, the US SMBEshave the necessary time to develop and finalise a product or service, that canbe offered in overseas markets. These firms do not need to access comple-mentary resources on a global basis, because the US market offers a diver-sified and complex range of raw materials, products, services and resources,which can be easily accessed by local firms. The situation is not similar in theUK market, which is comparatively smaller and cannot provide all thenecessary resources for the UK-based biotechnology firms. The UK SMBEswill initiate international operations to access the necessary resources fortheir product/process development, and only in a later stage will penetrateoverseas market for marketing and commercialisation. However, the validityof this explanation must be verified in future empirical studies.

CONCLUDING REMARKS

The present paper attempted to investigate the differences between the in-ternationalisation process of the US and the UK SMBEs, determined by thespecific characteristics of each national market. In order to identify andanalyse these differences, the three research hypotheses were formulated.

The research results have strongly confirmed these hypotheses. The find-ings of this study indicate that the internationalisation process may be in-fluenced by the characteristics of the domestic market in the case of biotechSMEs. There is an important difference between the level, speed and mainreason of internationalisation of the UK- and the US-based biotechnologyfirms. The size and the level of resources available on each national market


represent good explanations for these differences. The US is the world’smajor market for biotechnology products and services, offering good op-portunities for the development of local firms and attracting many foreigncompanies. The UK offers good opportunities for the creation of innovativebiotech firms, but the business environment cannot sustain these firmsthrough all the stages of growth. In this situation, the UK SMBEs initiateinternational operations in order to access complementary resources, or todistribute their product overseas.

The present study presents importance on three levels:

�
at academic level, it refines the existing internationalisation models, de-monstrating that, in a specific industrial sector, the profile of the domesticmarket significantly influences the internationalisation process of SMEs;
�
the management team of the biotech SMEs can use this study to identifythe need to internationalise or not in the early stages of the corporate life,depending on the local market profile; and
�
the governmental agencies of various countries can provide specific sup-port for the local SMBEs in order to increase their competitive advantageand provide effective help for their survival and development, dependingon their specific need to internationalise.
Considering that the focus of this article has been on the biotech SMEs fromtwo countries (UK and US), its results are not directly generalisable to otherindustries or countries. However, the findings indicate that the propensity ofbiotech SMEs to become Born Global and the main reasons of their in-ternationalisation may be influenced by the characteristics of their domesticmarket. From this perspective, future studies can be designed to comparethe Born Global phenomenon in various countries and industries, in orderto verify the validity of these particular research findings in other industrialand/or national environments. On the other hand, future studies should alsoconsider the differences between high- and low-tech firms in their interna-tionalisation process, a problem already emphasised by some researchers(Boter & Holmquist, 1996; Fillis, 2000).

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MODE OF ENTRY IN SERVICE

FIRMS: STRATEGIC VARIABLES

AND CHARACTERISTICS OF

SERVICES INFLUENCING THE

INTERNATIONALIZATION

PROCESS

Esther Sanchez Peinado and Jose Pla Barber

ABSTRACT

Despite the importance of the service sector in developed economies and

the growth of foreign investments in this sector during the last decade, few

studies have undertaken to empirically analyze the factors influencing

entry mode choice. The special characteristics of the service sector in-

crease the complexity of the analysis and, thus, traditional explanations

of entry mode choice in manufacturing sectors may need to be comple-

mented by other moderating influences. Based on 174 entry decisions of

service firms, our results suggest the importance of including strategic

variables and the specific nature of services to understand a complex

phenomenon, which is not always associated just with efficiency and value-

based considerations but also with strategic issues and industry charac-

teristics.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17006-4

159

ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER160

One of the most critical issues in international market entry strategy is theselection of an appropriate entry mode (Young, Hamill, Wheeler, & Davies,1989). Much of the literature about entry mode choice is focused exclusively onthe process followed by the manufacturing sector (e.g., Hennart, 1991; Kim& Hwang, 1992; Madhok, 1998; Chang & Rosenzweig, 2001, among others)but the question of whether findings from these studies are applicable to theservice sector has not been widely empirically investigated.

Nowadays, services have become a driving force in the global economy,representing the most dynamic sector in international commerce. Improve-ments in technology and reductions in trade barriers have had a unifyingeffect, making national boundaries less significant and creating new forms ofinternationalization. Moreover, firms offering public services (such as en-ergy, telecommunications,y), banks and firms offering information-basedservices have increased their overseas investments in recent years.

Despite the importance of the service sector in world markets and thegrowth of foreign investments in this area during the last decade, the re-search, both theoretical and empirical, which analyzes services in an inter-national context is largely fragmented, exploratory and still limited incomparison with research focused on the manufacturing sector (Patterson &Cicic, 1995; Clark, Rajaratnam, & Smith, 1996; Bagchi-Sen & Sen, 1997;Gronroos, 1999; Samiee, 1999; Kennedy, 2004; Lommelen & Matthyssens,2004). Although there are some important studies that have analyzed entrymode choice in the service context (see, e.g., Goldberg & Saunders, 1981;Ball & Tschoegl, 1982; Agarwal & Ramaswami, 1992; Li & Guisinger, 1992;Erramilli & Rao, 1993; Bouquet, Hebert, & Delios, 2004, among others),they have analyzed some specific sectors and, thus, fail to deal with theheterogeneity problem of the service sector.

These facts demand that a more in-depth study of the driving forces behindentry mode choice in the internationalization processes of service firms beundertaken. This paper examines the applicability of the traditional factorsdetermining the entry mode choice of manufacturing firms to service firms.

The existing literature has not reached an agreement on which theoreticalframework should be used to explain a firm’s foreign market entry mode. Hill,Hwang, and Kim (1990) have emphasized the need for a unifying theoreticalframework within which different factors can be analyzed. We propose anintegrative theoretical approach in which not only traditional variables fromtransaction cost theory (TCT) and organizational capability perspective(OCP) are analyzed, but also strategic variables and some industry charac-teristics, which have not been considered in conventional studies, are in-cluded. In the current competitive environment, entry mode choice is not a

Mode of Entry in Service Firms 161

decision based only on efficiency (transaction costs minimization) and value-based considerations (development of capabilities) and thus existing theorymay be insufficient to explain the currently observed behaviors of firms in theinternational business marketplace (Axinn & Matthyssens, 2002). In dynamicenvironments, aspects such as strategic motives of internationalization or thefirm’s competitive position in the global environment may also have an im-pact on the entry mode choice (Hill et al., 1990; Aulakh & Kotabe, 1997;Harzing, 2002). Additionally, the high costs of integration stipulated by eco-nomic theories may not be strictly true for many service firms, such as pro-fessional services, characterized by low capital intensity (Erramilli & Rao,1993). For many service firms, the switching costs may be comparativelysmall because valuable assets rest more in human capital than in physicalassets, thus, investment patterns observed in the manufacturing sector couldbe different in the service sector (Carman & Langeard, 1980).

The purpose of this study is to complement prior studies by introducingsuch new considerations in the entry mode analysis, i.e., the strategic per-spective and the specific characteristics of services, in order to contribute toa better understanding of the internationalization processes within the service sector. Additionally, in this paper, the antecedent factors to the entrymode choice of manufacturing firms are analyzed for the service sectorcontext. We aim to provide evidence about which of the underlying prin-ciples observed in the manufacturing sector are directly applicable to theservice sector and which may be modified by the specific characteristics ofservices. To achieve these objectives, we have structured the paper as fol-lows. The following sections provide a short overview of the conventionaltheories explaining the entry mode choice and introduce the need to con-sider new influences on the internationalization process of service firms.Next, we present the specific hypotheses of this study, which have beendeveloped from our theoretical framework. Subsequently, we provide de-tailed information about the research design and methodology used. Fi-nally, we present the empirical results of the study and discuss the mostrelevant implications for future research.

BACKGROUND

Conventional Theories

In explaining the internationalization of business firms, various authorshave proposed and used numerous theories, which diverge in their rationale,


purpose, and assumptions. For example, some authors have viewed inter-nationalization as a series of static rational decisions (Dunning, 1981, 1988;Teece, 1981; Hennart, 1991). Others see internationalization as an incre-mental process of increasing international involvement, as firms acquiremore experience and gain foreign market knowledge (Johanson & Vahlne,1977; Johanson & Wiedersheim-Paul, 1975). Although, all these approachesanalyze the internationalization as two questions, ‘‘why do firms interna-tionalize?’’ and ‘‘how do firms internationalize?’’ (internationalization proc-ess), some of them focus predominantly on the first question, while othersfocus predominantly on the second question (Weisfelder, 2001).

However, the decision about entry mode choice has been widely analyzedfrom two traditional theories: transaction cost theory (Williamson, 1975;Buckley & Casson, 1976; Anderson & Gatignon, 1986; Anderson & Coughlan,1987) and organizational capabilities perspective (Kogut & Zander, 1993;Madhok, 1997).

In TCT, firms possessing a rent-yielding specific advantage are motivatedto enter foreign markets in order to exploit this advantage in the mostefficient manner. Under the assumption of opportunistic behavior andbounded rationality by economic agents, market imperfections increase theassociated costs of transacting with a partner, which results in a preferencefor internalizing the transaction within the firms’ own boundaries (Buckley& Casson, 1976). TCT stresses the efficiency of using high control modeswhen foreign market attractiveness is high, under conditions of high culturaldistance and country risk markets and in the presence of intangible assets(Anderson & Gatignon, 1986; Erramilli & Rao, 1993; Luo, 2001).

On the other hand, the OCP broadens the focus from minimizing thetransaction costs to also incorporate the managing of value, inherent in a firm’sknowledge base (Kogut & Zander, 1993). The key issue in the entry modechoice is the compatibility between the firm’s existing capabilities and thoseneeded to be successful in a particular market (Madhok, 1998). As Madhok(1997) proposed, an operation motivated by value-based considerations (thedevelopment of capabilities to create future value) will result in a greater pro-clivity toward collaboration. According to theory, firm-specific capabilities arecommonly linked to firm size, international experience, and tacit know-how.Larger and more experienced firms have the confidence and competence tomanage the uncertainties of operating in international markets, and the tac-itness of know-how increases the transaction costs but it also limits the trans-ferability of the know-how to another firm without loss of value (Kogut &Zander, 1993; Luo, 2001). These circumstances increase the efficiency of re-source utilization and the effectiveness of its transfer in-house (Madhok, 1998).


A Framework for Service Firms

From both theoretical perspectives, TCT and OCP, empirical studies havetried to analyze the impact that the transaction and firm’s organizationalcapability factors have on entry mode choice. These theories consider mar-ket-contracting or low control modes as the default choice for situations oflow-asset specificity and as an alternative to complement firm capabilitiesthrough knowledge gained from the experience of other firms (Gatignon &Anderson, 1988; Madhok, 1998). However, in business practice, firms oftenhave other additional motives to integrate such as to retain control to bettercoordinate strategies in multinational corporations (Hill et al., 1990), to ex-tend market power by entering new markets (Teece, 1981), to exploit marketknowledge following the national clients or competitors to foreign countries,among others (Erramilli & Rao, 1990; Li & Guisinger, 1992). These incen-tives to integrate should be incorporated into conventional theories in orderto reflect the current competitive conditions and to manage the multiplicityof pressures that manufacturing and service firms face in their businesses.

In fact, Dunning (1993) highlighted the need to introduce the strategicdimension into the analysis of determinants of international productionbecause this has become an important component of competitive success ina world characterized by the growing plurality of forms of globalization andthe growth of cross-border collaborative alliances. Nowadays, multinationalfirms are competing in global rather than national markets and when globalcompetitive interdependence exists, the actions taken by a firm in one mar-ket often have repercussions in other national markets (Kim & Hwang,1992). Moreover, strategic motivations such as setting up a strategic outpostfor future expansion, setting up a global sourcing site, achieving economiesof scale by concentrating the important activities in a limited number oflocations, etc., favor high control types of entry modes (Harzing, 2002). Thisis even more important in the analysis of the globalization of services be-cause some service industries have shown different internationalization pat-terns depending on their motives for entry (Dunning, 1993).

Therefore, since new competitive conditions can determine entry modechoices due to strategic considerations, in this paper we include the analysisof these variables, which have not been considered in studies focused onconventional theories (TCT and OCP).

Moreover, this study analyzes the service sector. Some researchers suggestthat service firms differ from manufacturing firms and face unique chal-lenges in their foreign market entry and expansion process (Carman &Langeard, 1980; Erramilli & Rao, 1993; Gronroos, 1999). Alternatively,


others contend that many of the underlying principles observed in the man-ufacturing sector are directly applicable to the service context (Boddewyn,Halbrich, & Perry, 1986; Katrishen & Scordis, 1998).

We contend that some of the underlying principles observed in themanufacturing sector are directly applicable to the service sector but someothers may be moderated by the specific characteristics of services. In theliterature about services, the special characteristics addressed as the factorsthat distinguish services from goods are intangibility, inseparability, heter-ogeneity, and perishability.

The intangibility means that services are experiences which cannot betouched, seen, transported, or lifted (Dahringer, 1991). Moreover, when aservice is performed, no ownership is transferred from the seller to thebuyer, so the latter is merely buying the right to a service process (Palmer,1995). The intangibility of services also presents some challenges in goingabroad. For any company trying to market services internationally, thischaracteristic increases customer risk perceptions and makes more difficultto asses service quality than for manufactured goods (Edgett & Parkinsson,1993; Winsted & Patterson, 1998). As Sarathy (1994) points out, the sub-jective nature of service quality perception implies that service process mayneed some adaptation to attract customers in foreign markets.

Another distinctive feature of services is the inseparability of productionfrom consumption, i.e., there is a simultaneous association between the actsof production, exchange, and consumption, whereas, in the case of goods,these are normally separate and discrete activities. Many service firms needto have a local presence in a foreign market because they require directinvolvement from the client (Erramilli, 1990) and high levels of customizat-ion to meet the needs of local clients. In such situation, the cultural distancebetween home country and host country becomes a critical aspect that mustbe analyzed before crossing national boundaries (Lovelock, 1999). Servicesare also perishable, i.e., they cannot be stored for use after production likemanufactured goods. Perishability implies the need of direct contact with theclient and presents special challenges for balancing supply and demand(Nicolaud, 1989). Hence, in the international expansion, firms may be forcedto operate with excess capacity at each international market (Sarathy, 1994).

And finally, heterogeneity means that services are difficult to standardizeso they are never the same from one consumption experience to another(Dahringer, 1991). The important role of personnel in providing servicesproduces a high variability in the performance of services. This fact makesharder to control the output of service firms than it is to control the outputof those producing tangible products (Edgett & Parkinsson, 1993; Lovelock,


1992). This characteristic also increases the difficulty of achieving successwith new services because variability in performance implies that pastperformance may not be a valid indicator of future success (Campbell &Verbeke, 1994). Therefore, it is important that all service providers aretrained to provide equivalent delivery and firms should take into accountthat cultural distance affects the nature of the workforce employed and thestandardization of the service delivery (Sarathy, 1994).

In the literature about entry modes, two characteristics have been acknowl-edged by researchers as determinants of the different responses in the inter-nationalization process of service firms: the level of capital intensity and thedegree of customization (Erramilli & Rao, 1993; Brouthers & Brouthers, 2003).

First, the level of capital intensity is different in manufacturing and serv-ice sectors. Manufacturing frequently requires large commitments for plantsand equipment. However, the level of capital intensity varies among differ-ent services within the service sector. Some service firms are people intensive(e.g., consulting, legal services, accounting, advertising,y) and thus highcontrol entry modes involve low expense (Erramilli & Rao, 1993). Givensimilar risk perceptions, these service firms will respond quite differentlyfrom manufacturing ones because differences in switching costs allow serv-ice firms to relocate activities more easily if risk conditions become toogreat. On the other hand, some service firms are capital intensive (e.g.,telecommunications, energy, airlines, hotels,y) and they are more likely toshow the same investment patterns as the manufacturing sector. The estab-lishment of a new subsidiary abroad entails large fixed-investments and,hence, firms will prefer flexibility (low control modes) to enter into countrieswith changing environmental conditions.

Second, the heterogeneous nature of services is closely linked to variabilityin production standards and usually requires that service providers tightlycontrol the quality of the service production process (Sasser, Olsen, &Wyckoff, 1978). Variability depends on the extent to which services can becustomized to meet the specific needs of individual customers. Services thatare produced for a large number of customers simultaneously may offer littlescope for customization. However, services that are closely associated withemployees who are embedded in their own cultural and social contexts aredifficult to standardize and produce in the same way abroad as in the homemarket (Palmer, 1995). To offer these services: (i) employees must possesshigh levels of analytical and technological skills in order to cope with cus-tomers’ needs; and (ii) service providers must control the quality of theservice production process (Sasser et al., 1978). The need for local adaptationto customer needs, the importance of controlling the firm’s quality standards,

Entry mode

analysis

Control variables Transaction costvariables Organizational capabilities variables

NEW INFLUENCES

Strategic considerationsInternational strategyDefensive vs. OffensivemotivesAsset exploration vs.Asset exploitation

Industry characteristics Capital intensityDegree of customization

Fig. 1. Determinant Factors of Entry Mode Analysis.


and the difficulty in transferring know-how to local partners to offer serviceswith a high degree of customization will increase the propensity to use high-integration entry modes in culturally distant markets.

Both specific characteristics of services, the degree of capital intensity andcustomization, may moderate the relationship between firm’s investment riskperception (country risk and cultural distance) and the level of control andresource commitments in the host country. Inherent differences in manufac-turing and service firms necessitate a context-specific approach, which extendsconventional theories, to understand a service firm’s internationalization.

In this paper, we will focus on the examination of these new influenceswhereas traditional variables, analyzed in prior studies focused on trans-action cost and resource-based theories, will be considered as controlvariables in the empirical study. Fig. 1 summarizes the theoretical frame-work that will be used to develop the hypotheses.

HYPOTHESES DEVELOPMENT

Strategic Factors

Type of International Strategy

From the integration-responsiveness paradigm (Porter, 1986; Prahalad &Doz, 1987), we can distinguish two types of international strategies: global


and multidomestic strategies. A global strategy is based upon the cen-tralization of the main assets, resources, and responsibilities in the headoffice. These companies think in terms of creating products for a worldmarket and manufacturing/servicing them on a global scale in a few highlyefficient plants located in countries with cost advantages. Therefore, theseplants may not necessarily be located at the corporate center. This approachis focused on efficiency and requires central coordination and control. Onthe other hand, a multidomestic strategy emphasizes the differences betweennational markets and firms compete predominantly on a domestic level(Harzing, 2002). The subsidiaries become more independent and their man-agers become more host-country oriented. Products or services are differ-entiated to meet different local demands and policies are differentiated toconform to different governmental and market demands (Porter, 1986).

Hill et al. (1990) and Kim and Hwang (1992) suggested that firms pur-suing a global strategy tended to adopt high control modes, due to thenecessity of tight coordination, possible synergy effects, and transfers ofassets between units. Internalization facilitates centralized decision-makingto manage activity interdependencies because a firm’s competitive positionin one market is affected by its competitive position in other national mar-kets (Aulakh & Kotabe, 1997). However, firms pursuing a multidomesticstrategy should select low control modes because they are more focused onthe costs–resources of the relationship and adaptation to local conditionsthan on the level of control.

Since personal selling plays an important part in the offer of services,service providers are generally encouraged to take great care in selecting andtraining contact personnel. The international delivery of services will requirethe use of sophisticated recruitment and training techniques to ensure andcontrol the selection and development of service providers whose compe-tence will lie in projecting the right image. This need will be particularlyacute when the firm attempts to follow a global approach. Therefore, wehypothesize that

H1. Service firms pursuing a global strategy are more likely to select highcontrol and resource commitment modes.

Defensive vs. Offensive Strategic Motives of Entry

Traditionally, foreign direct investment (FDI) has been explained by‘‘market seeking’’ strategic motivations which transfer and exploit firms’competitive advantages and therefore overcome the liability of foreignness(Caves, 1971; Hymer, 1976). From this perspective, some authors have dis-tinguished between defensive motives, based on the protection of current


markets, and offensive motives, based on the exploitation of new markets(Dunning, 1995).

Defensive motives most commonly cited in the literature are following the

national client and following the competitors or leaders (Li & Guisinger, 1992;Dunning, 1995). Many service firms follow internationalizing manufactur-ing companies abroad in order to offer their services to these companies alsoin overseas markets. Client followers can be expected to select a high in-tegration mode in order to protect their competitive advantage based on theknowledge of specific customer needs. Banking, insurance, consulting, legalservices, accounting, and other professional service industries are examplesof this type of internationalization motive (Goldberg & Sanders, 1981; Ball& Tschoegl, 1982; Dunning, 1993). They initially followed their goods-producing clients to the countries where they set up their factories in orderto gather necessary information and prepare for and facilitate their homeclients’ expansion in the new market.

On the other hand, in oligopolistic markets, competitors react to overseasexpansion of service firms in order to proactively achieve a global marketpower position and head off potential competitors (Terpstra & Yu, 1988).Wholly owned subsidiaries (WOS) allow firms to give a faster response tocompetitors’ actions than collaborative modes, so service firms are morelikely to select a full-control mode. This international pattern has beenempirically demonstrated in some studies focused on service firms (Erramilli& Rao, 1990; Li & Guisinger, 1992).

Offensive motives, however, are related to the purpose of serving newforeign clients, seeking growing market potential countries, or locating inspecific geographical areas (e.g., banks locating in major financial districts).Under such circumstances, service firms lack market knowledge and knowl-edge of local needs. Thus, it is necessary to balance the risks and benefits ofbeing the ‘‘first mover,’’ so firms are more likely to select collaborativeagreements such as contractual agreements or joint ventures in order toobtain external resources, gain access to local customers, and overcome theliability of foreignness (Erramilli & Rao, 1990; Dunning, 1993). Accordingto these statements

H2. More defensive entry motives will increase the likelihood of servicefirms choosing high control and resource commitment modes.

Exploitation vs. Exploration Strategic Motives of Entry

Recently, researchers have suggested a necessary dynamic balance betweenexploitation and the development of capabilities for the continued success of


the firm (March, 1991; Levinthal & March, 1993; Chang, 1995; Makino,Lau, & Yeh, 2002).

Traditionally, FDI is viewed as the transfer of a firm’s proprietary assetsacross borders (asset exploitation). However, from the asset-seeking per-spective, firms engage in direct investment when they intend to acquirestrategic assets (technology, marketing, management expertisey) availablein host markets. The asset-seeking motivation consists of experimentation ofnew alternatives, which allows firms to enhance competitive advantagesthrough complementary assets acquired in host markets (Vermeulen &Barkema, 2001). Some resources, such as capital or labor resources, caneasily be obtained through markets. But, other resources such as host mar-ket knowledge, local contacts, or technology would be costly to obtainthrough replication or acquisition and as such firms are more likely tocollaborate with local firms (Hennart, 1991). Therefore

H3. More asset-seeking entry motives will decrease the likelihood ofservice firms choosing high control and resource commitment modes.

Specific Characteristics of Services and Risk Investment Variables

Capital Intensity and Country Risk

An important source of uncertainty identified in the international businesscontext is associated with the political instability and economic fluctuationsin foreign countries. Country risk determines both the need for local knowl-edge and the exposure of assets. Therefore, firms facing high country risktend to seek local knowledge, retain flexibility, and shift the risk to local firmsthrough agreements or joint ventures (Aulakh & Kotabe, 1997; Erramilli &Rao, 1993; Kim & Hwang, 1992). This inverse relationship between countryrisk and control proposed by conventional theories has been also supportedby studies focusing on service firms (see, e.g., Li & Guisinger, 1992; Agarwal& Ramaswami, 1992; Contractor & Kundu, 1998).

However, investment patterns in volatile environments may be moderatedby some specific factors related to the specific characteristics of services.Although service firms are generally less capital intensive than manufactur-ing firms, capital intensity varies across service industries: from low levels inconsulting, architecture, engineering firms, etc., to high levels in hotel, air-line, telecommunication, electricity, and energy firms. Ownership of highcapital-intensive service facilities entails large-scale investments and thus,such service firms will prefer to minimize the risk exposure and resourcecommitments in high country risk markets. However, the low resource


commitments and switching costs for less capital-intensive services may in-duce firms to invest in unstable countries where competitive conditions aremore favorable than in other international markets and where it is easier toovercome local firms’ advantages and achieve a better market share. Thus,we propose the main effect of country risk, supported by conventionaltheories and most commonly observed in empirical studies, and the mod-erating influence of a service’s capital intensity over such a relationship to be:

H4a. Country risk in the host market will decrease the likelihood ofservice firms choosing high control and resource commitment modes.

H4b. The inverse relationship, between country risk and a service firm’spropensity for high control and resource commitment modes, will becomeweaker with the decreasing capital intensity of services.

Degree of Customization and Cultural Distance

Several studies have considered that the cultural distance between the homecountry and the intended foreign market is a powerful determinant of entrymode choice. However, there is some controversy over its exact influence.

Traditional TCT arguments consider that firms minimize the high infor-mation costs associated with operating in culturally unfamiliar countries byusing collaborative modes of entry (Gatignon & Anderson, 1988). Thus,foreign investors share the risk with local partners and avoid costly mistakesin the new market. Empirical evidence supporting a positive relationshipbetween cultural distance and the desire to establish collaborative modes hasbeen found in several studies focusing on the service sector (among others,Erramilli, 1991; Li & Guisinger, 1992; Fladmoe-Lindquist & Jacque, 1995).

However, recent research suggests that high cultural distance could pro-vide investors with the incentive to internalize, due to difficulties in resourcetransfer across firm boundaries and the expense of incurring ex ante costs ofevaluating the local collaborator (Anand & Delios, 1997). This fact is es-pecially relevant in most services characterized by a low degree of separa-bility and a high degree of customization (Domke-Damonte, 2000).Customized businesses have to conduct face-to-face transactions with theircustomers, creating significant risks for the firm. Specifically, the perform-ance of employees who deal directly with customers is important for themaintenance of a firm’s quality standards (and the resulting competitiveadvantage). If firms use local partners in countries with a high culturaldistance, the quality of a service may vary, raising an overall problem ofconsistency for the foreign investor (Bouquet et al., 2004). Furthermore, thecross-cultural transfer of services requires communicating with foreign


employees whose work ethics are embedded in different languages and cul-tural traditions (Fladmoe-Lindquist & Jacque, 1995). As such, keepingtransactions within the context of the firm’s organizational boundariescould solve this problem.

Given the evidence that highly customized service firms favor high controlmodes, we hypothesize first the conventional relationship which proposesthat information costs in unfamiliar foreign cultures will diminish the firm’sdesire for high control and resource commitment modes. However, the needfor local adaptation to customer needs, the importance of controlling thefirm’s quality standards, and the difficulty in transferring know-how to localpartners to offer services with a high degree of customization will increasethe propensity to use high integration entry modes. Hence,

H5a. Cultural distance between home and host market will decrease thelikelihood of service firms choosing high control and resource commit-ment modes.

H5b. The inverse relationship, between cultural distance and servicefirms’ propensity for high control and resource commitment modes, willbecome weaker with an increasing degree of customization of services.

METHODS

Sample

Dun and Bradstreet (2002) compiled an international database providinginformation on Spanish companies with subsidiaries outside Spain in theyear 2002. This amounted to 660 multinational service companies. The sur-vey instrument consisted of an extensive mail questionnaire, which was pre-tested through personal interviews with Spanish executives responsible forinternational operations and with academics specialized in internationalmanagement. The questionnaire was mailed to senior-level managers whowere most likely to be involved in the market entry decision process in theirfirms, including CEOs and directors in charge of international operations.Each respondent was asked to provide data on up to two foreign marketentry decisions in which he/she was involved or had enough informationabout to answer. Two weeks later, each firm received a phone call in orderto encourage managers to participate in the study. Finally, a reminder wassent to non-respondents with a copy of the questionnaire. From October2002 until February 2003, we received 113 questionnaires and firms

Table 1. Service Sectors.

Sectors Percentage

Transport 17.24

Distribution 23.56

Public services 12.06

Financial services 12.06

Commercial services (standardized) 25.28

Professional services (customized) 9.8

Total 100

Table 2. Sample Characteristics.

Firm Characteristics (N ¼ 113) Mean Standard Deviation Median

Foreign salesa 1.92 0.98 2

Foreign assetsa 1.27 0.64 1

Number of employees 871.32 2,478.41 105

Number of foreign countries (exports) 14.31 17.26 8

Number of foreign countries (investments) 3.50 4.14 2

Export experience (number of years) 9.20 14.43 2.50

Investment experience (number of years) 4.98 9.54 0

aIntervals: value 1 (o25%), value 2 (25–50%), value 3 (50–75%), value 4 (o75%).


provided data on a total of 174 entry decisions that were deemed usablefor our analyses, representing a wide variety of service industries (see Ta-ble 1). The response rate of 17% compares favorably with rates reported inother surveys involving CEOs (Samiee & Walters, 1991; Chang & Taylor,1999).

Each respondent provided detailed data on at least one decision and someof them provided information about two entry decisions. We did not pro-vide a list of markets, so respondents chose countries in which they wereoperating. The highest number of entries was in the European Union(48.27%), followed by Latin America (34.48%), OCDE-Non EuropeanUnion (9.19%), and the rest of the world (8.06%). This investment patternhas also been shown by Spanish statistics. More information about firmcharacteristics is listed in Table 2.

Questionnaires were analyzed using the time trend procedure proposed byArmstrong and Overton (1977). In our paper, the midpoint of the datacollection period (October 2002 until February 2003) was used as the cutoff


point for distinguishing between early and late respondents. 62% of theresponses (70 out of 113) were from early respondents and the remaining38% were from late respondents (43 out of 113).

To ensure that the early and late respondents did not systematically differ,these two groups of respondents were compared on their demographic data,including foreign sales, foreign assets, number of employees, number ofcountries in terms of exports, number of countries in terms of subsidiaries,international experience in exports, and international experience in invest-ments. We used independent samples t-tests to check for equality of means.Analysis indicated no significant differences in the variables of interest be-tween late and early respondents.

Additionally, responding firms were compared to a random sample of 20non-respondents regarding size (sales volume) and experience (years sincefoundation). No significant differences were found (po0.05), providing noevidence for non-response bias. Finally, those variables from the surveyresponses were cross-checked against company reports and published data,where possible. A high degree of correspondence between published dataand survey responses was found, supporting the veracity of the surveyresponses.

Dependent Variable Measure

The hypothesized relationships were examined using two analyses. In thefirst one, the study is focused on the influence of independent variables overownership control decisions. The dependent variable, degree of control andresource commitments, was represented by a dichotomous variable, coded‘‘1’’ for the full-ownership control mode (Greenfield investments and fullacquisitions) and ‘‘0’’ for the shared-ownership control mode (contractualagreements, partial acquisitions, and joint ventures). Entries were made upof 67 shared-control modes (38.5%) and 107 full-ownership modes (61.5%).

In the second analysis, the study focused on the influence of the sameindependent variables over specific entry modes. The dependent variablerepresents the three options included in our study: ‘‘1’’ for contractualagreements (a total of 19.5% of entries), ‘‘2’’ for shared-control subsidiaries(19%), and ‘‘3’’ for WOS (61.5%). The parameters estimated are interpretedin reference to the wholly owned control subsidiaries.

A WOS is a 100% investment in which decisions are made solely by theinvestor. Thus, the parent company has full ownership and sole responsi-bility for the management of operations. A joint venture entails direct in-vestment in the target country and is defined as a joint partnership in which


major decisionmaking is shared with the foreign partner. Partners share theownership, management, and risk of the new venture. Thus, joint venturesentail a resource commitment that is greater than a licensing arrangement,but less than a WOS. Contractual agreements can be broadly defined as co-alignments between two or more firms in which the partners acquire pro-duction technologies and marketing skills from each other with little equityownership. Hence, contractual agreements involve lower resource commit-ments than joint ventures and WOS.

Independent Variable Measures

International Strategy

The type of international strategy has been constructed from Harzing’s(2002) measure. We asked respondents to assess the following statements(‘‘1’’ strongly disagree, ‘‘5’’ strongly agree): (a) firm’s desire to achieveeconomies of scale by concentrating the important activities in a limitednumber of locations, (b) competitive position is defined in worldwide termsand markets are closely linked and interconnected, (c) each subsidiarycompetes on a domestic level as markets are too different (reverse) and(d) firm responds to national differences by adapting products to the localmarket (reverse) (Cronbach’s alpha ¼ 0.6959). We constructed a compos-ite index with these items. High values indicate global strategic ap-proaches. Table 3 provides detailed information about the goodness of fitindices.

Strategic Motives

Strategic motives related to defensive motives and offensive motives wasmeasured using a multiple-item scale based on Weinstein’s (1977) scale,Erramilli and Rao (1990), Li and Guisinger (1992) and Kim and Hwang(1992). We asked about managers’ perceptions about the importance of thefollowing motives (‘‘1’’ very low, ‘‘5’’ very high):

(a)
three items related to defensive motives: to overcome the rapid overseasexpansion of other service firms, to follow the clients, to follow thecompetitors (Cronbach’s alpha ¼ 0.7537) and
(b)
three items related to offensive motives: to take advantage of a marketwith a large and growing potential, to establish the company name inmarkets that will be important in the future, and to capture new clients(Cronbach’s alpha ¼ 0.8539).

Table 3. Goodness of Fit Indices.

Strategic Variables (Independent Variables)

International strategy Goodness of fit indices: BENTLER–BONETT NORMED FIT

INDEX ¼ 0.956; BENTLER–BONETT NONNORMED FIT

INDEX ¼ 0.937; COMPARATIVE FIT INDEX ¼ 0.969;

LISREL GFI ¼ 0.985; LISREL AGFI ¼ 0.950

Motives Market Seeking: defensive vs. offensive motives

We conducted a two-factor confirmatory factor analysis. Items were

significant (t-value >1.96) and the analysis confirms the existence

of two groups of motives: defensive and offensive motives.

Goodness of fit indices are: BENTLER–BONETT NORMED

FIT INDEX ¼ 0.948; BENTLER–BONETT NONNORMED

FIT INDEX ¼ 0.906; COMPARATIVE FIT INDEX ¼ 0.956;

LISREL GFI ¼ 0.959; LISREL AGFI ¼ 0.878;

STANDARDIZED RMR ¼ 0.042

Transaction Cost Variables (Control Variables)

Marketing intensity Goodness of fit indices: BENTLER-BONETT NORMED FIT

INDEX ¼ 0.940; BENTLER-BONETT NONNORMED FIT



Firm’s Organisational Capabilities (Control Variables)

Tacit know-how Goodness of fit indices: BENTLER–BONETT NORMED FIT

INDEX ¼ 0.947; BENTLER–BONETT NONNORMED FIT




Two-factor confirmatory factor analysis confirms the existence of twogroups of motives. With an aim to assessing the strategic nature of the entry,offensive motives were reverse coded and then we constructed an index withboth defensive and offensive motives (high values indicate more defensivemotives). Table 3 provides detailed information about the goodness of fitindices of these strategic motives.

Asset seeking and asset exploitation motives were captured from Chang(1995) and Makino et al. (2002). We asked about managers’ perceptionsabout the importance of the following statements (‘‘1’’ very low, ‘‘5’’ veryhigh): (a) firm orientation toward assets and capabilities seeking in the entrydecision and (b) firm orientation toward asset exploitation in the entry de-cision. The exploitation motive was reverse coded and then we constructedan index with both exploitation and exploration items (high values indicateexploration motives).


Risk Investment Variables and the Characteristics of Services

Country Risk

This variable was derived from the host country risk index published inEuromoney the year before each entry. This publication presents annualratings of countries based on composite measures of both political andeconomic risks. The index varies from 0 to 100: the value ‘‘0’’ representsinstability of political and economic conditions, while the value ‘‘100’’represents stability of such conditions. This measure has been used byprevious studies (see, e.g., Delios & Beamish, 1999; Shrader, Oviatt, &McDougall, 2000).

Cultural Distance

This variable was computed according to the composite index used byKogut and Sing (1988) and data contained in Hofstede (1980). This indexmeasures the deviation along each of the four cultural dimensions identifiedby Hofstede (1980) (uncertainty avoidance, individuality, power distance,and masculinity–femininity) from the score of a given focal country for eachcountry. The deviations were corrected for differences in the variances ofeach dimension and arithmetically averaged. Cultural distance between thecountry of origin (Spain) and host country (j) is hence calculated as:

CDSpain=j ¼1

4

X I iSpain � I ij� �2

Vi

" #

where Iij is the index value for the cultural dimension i of country j, IiSpainthe index value for the cultural dimension of Spain, Vi the variance of theindex dimension i, and CDSpain/j the cultural difference of country j fromSpain.

Specific Characteristics of the Service

We construct two indices which moderate the influence of the risk invest-ment variables (country risk and cultural distance) on entry mode decisions:one index related to the capital intensity of the service sector (capital in-tensity index (CII)), and the other one related to the degree of customizationof the service (degree of customization index (DCI)). Both indices wereconstructed from managers’ perceptions about the characteristics of theservice. Each respondent had to assess

(a)
Capital intensity: Two items that capture the degree to which the serviceis provided by machines and the degree to which the service is provided


by people (‘‘1’’ very low; ‘‘5’’ very high). The people-intensive serviceitem was reverse coded and then we constructed an index with bothitems (high values indicate capital-intensive services). This variable wasconstructed based on Erramilli and Rao (1993), Erramilli and D’Souza(1995) and Pan and Tse (2000).

(b)
Degree of customization: Two items that represent the degree to whichfirms offer different services adapted to customer’s preferences or theyoffer similar services to customers (‘‘1’’ very low; ‘‘5’’ very high). Thislast item was reverse coded and then we constructed an index with bothitems (high values indicate customized services). This variable is basedon prior studies (see, e.g., Erramilli & Rao, 1993).
Control Variables

We control the influence of traditional variables which have been consideredin previous studies based on TCT and OCP. From TCT, we control theinfluence of market potential and intangible assets. Country risk and cul-tural distance were examined in the independent variables section becausewe have hypothesized the main effect of these variables and the moderatinginfluence of service characteristics.

Based on prior studies (see, e.g., Agarwal & Ramaswami, 1992; Erramilli,1992), market potential was measured as a single-item scale based on man-agers’ perceptions about the potential growth of the new market (‘‘1’’ none;‘‘5’’ high). On the other hand, following Kim and Hwang (1992), we dis-tinguish two variables to capture a firm’s intangible assets:

(a)
R+D intensity: A single-item scale based on managers’ perceptionsabout R+D expenses.
(b)
Marketing intensity: A three-item scale based on managers’ perceptionsabout: (i) firm reputation with respect to design and quality; (ii) inter-national recognition of brand name; and (iii) advertising investment(‘‘1’’ very low; ‘‘5’’ very high) (Cronbach’s alpha ¼ 0.7486). Detailedinformation about goodness of fit indices of this variable is presented inTable 3.
From OCP, we control the impact of firm size, international experience,and tacit know-how. Firm size was measured as intervals of a firm’s salesvolume the year before the entry. Prior research has also used the salesvolume as an indicator of firm size (see, e.g., Erramilli, 1991; Agarwal &Ramaswami, 1992; Li & Guisinger, 1992). Size is a categorical variable thattakes three values: 1 (small firms), 2 (medium firms), and 3 (large firms).


These categories have been constructed according to managers’ responses.We asked them to indicate the firm’s sales volume for the year of the entry.The difficulty in remembering the exact sales volume led us to ask thisquestion in terms of intervals, following European Union Commission rec-ommendations: a sales volume lower than h7 million (small), between h7and 40 million (medium), higher than h40 million (large). Results are in-terpreted in reference to the last interval.

International experience was measured as the number of years from thefirst investment abroad, also based on prior studies (see, e.g., Harzing, 2002;Domke-Damonte, 2000; Fladmoe-Lindquist & Jacque, 1995).

And, finally, tacit know-how is a four-item scale derived from Kim andHwang (1992) and Erramilli, Agarwal, and Dev (2002). The construct wasbased on managers’ perceptions about (a) the difficulty in transferring ca-pabilities and knowledge, (b) the difficulty in assessing the proper price ofthe service, (c) the difficulty in copying the skills and knowledge, and (d) thedifficulty in understanding the know-how. (‘‘1’’ very low, ‘‘5’’ very high)(Cronbach’s alpha ¼ 0.8396). Detailed information about the goodness offit indices of this variable is presented in Table 3.

RESULTS

Prior to running the statistical analyses, the correlation matrix was exam-ined. Most of the correlations among the variables are small. Further, thevariance-inflation factor (VIF) reveals that most of these are close to 1. Thelargest VIF value is 3.058, which is well below the cutoff at 10 (Hair,Anderson, Tatham, & Black, 1999). This evidence reduces concerns aboutmulticollinearity problems. Table 4 shows the correlation matrix and somedescriptive statistics.

A logistic regression was carried out to analyze the influence of the in-dependent variables in each of the groups defined by the first dependentvariable (full-ownership control vs. shared-control). The model estimatesthe probability of choosing the entry modes defined by the dependentvariable. The model was specified as follows: expðzÞ= 1þ expðzÞð Þ; where z is alinear function of the independent variables. We analyzed the sign of thecoefficients that were significant. A positive coefficient indicates that theindependent variable increases the probability of choosing full-ownershipcontrol, while a negative sign suggests a preference for shared-control modes.One-tailed tests were used because they are more appropriate to assessdirectionality.

Table 4. Correlation Matrix.

Mean Standard Deviation 1 2 3 4 5 6 7 8 9 10 11 12 13

1. Market potential 3.87 1.04 1.000

2. Country risk 72.42 24.44 0.090 1.000

3. Cultural distance 0.9584 0.7066 0.042 0.111� 1.000

4. R+D intensity 2.26 1.17 �0.058�0.016 0.027 1.000

5. Marketing intensity 3.12 0.97 �0.004�0.214�� 0.129� 0.228�� 1.000

6. International experience 5.92 11.97 �0.019�0.079 0.020 0.062 0.049 1.000

7. Size 1.5311 0.7492 0.025�0.047 0.089 �0.066 0.153�� 0.258�� 1.000

8. Tacit know-how 3.02 0.94 0.027�0.100 0.074 0.224�� 0.536�� 0.010 �0.012 1.000

9. International strategy 3.13 1.01 �0.092�0.103 0.139* 0.102 0.524��0.028 0.170�� 0.437�� 1.000

10. Offensive–defensive motives 3.21 1.14 0.080 0.081 0.198�� 0.009 0.588��0.095 �0.045 0.547�� 0.517�� 1.000

11. Exploitation–exploration motives 2.54 1.39 �0.106 0.219�� 0.153 0.016 �0.101 0.005 �0.090 �0.129 �0.103 �0.165� 1.000

12. Capital intensity index (CII) 2.84 1.02 0.030 0.167� �0.029 �0.119 �0.255�� 0.095 0.030 �0.399��0.269��0.235�� 0.133 1.000

13. Degree customization index (DCI) 2.94 1.41 0.128�0.088 0.037 0.100 0.286��0.145 �0.127 0.451�� 0.316�� 0.351��0.083�0.376��1.000

��0.01 level of significance.�0.05 level of significance.

ModeofEntry

inService

Firm

s179


Subsequently, we analyzed the impact of the independent variables on theprobability that each of the three-entry mode options would be chosen(WOS, shared-control subsidiary, and contractual agreements). We carriedout a multinomial regression and took WOS as reference (greenfield in-vestments and full acquisitions). A positive coefficient indicates that theprobability of adopting an entry mode rather than WOS increases as in-crements of the independent variables occur. This analysis allows us toconfirm the results obtained from the logistic regression and to assess theconsistency of the results by means of different statistical methods, whichenhances the robustness of the conclusions.

Both regressions introduce two alternative models. In order to examinethe contribution of factors traditionally analyzed by TCT (market potential,country risk, cultural distance, and intangible assets) and the contribution ofthose traditionally analyzed by OCP (size, international experience, andtacit know-how), these variables were entered in the first regression. Thesecond regression also includes the influence of strategic variables and themoderating influences of the characteristics of services on the relationshipbetween risk investment variables (country risk and cultural distance) andentry mode decisions.

In general, the models present satisfactory indicators of significance.However, the addition of the strategic perspective and the characteristics ofservices to the regression along with variables from conventional theoriesresulted in a significant improvement in Chi-square at po0.01 and classifiesa higher number of cases (see Tables 5 and 6). These results indicate thatthese new influences add to the predictive ability of conventional theories.As such, we shall extend our comments on the results of the models toinclude the strategic variables and the characteristics of services.

The inclusion of strategic variables allows us to extend the explanations ofentry mode choice to a new research area. Our results from the final binarylogistic regression confirm the high explanatory power of these variables. AsTable 5 Model 2 shows, there is empirical support for H1, H2, and H3. Aswe predicted, a global international strategy in foreign markets (po0.001)and a firm’s strategic motivations related to the following of clients orcompetitors (po0.10) and to asset exploitation (po0.10) increase theprobability of selecting a full-ownership control mode. Results from themultinomial regression, summarized in Table 6 Model 4, allow us to confirmthe relationship between international strategy and entry modes. However,exploration motives are only associated with shared control when equityand non-equity modes are compared, and defensive motives are associatedwith full control when equity modes are compared.

Table 5. Logistic Regression.

Variables Model 1 (Control

Variables: TCP and OCP)

Model 2 (Complete

Model)

Constant �10.325�� (2.037) �7.268� (3.481)

Market potential 0.928�� (0.266) 0.988�� (0.333)

Country risk (H4a) 0.004 (0.010) �0.078y (0.044)

Cultural distance (H5a) �0.452 (0.348) �2.803� (1.289)

R+D intensity �0.055 (0.227) 0.155 (0.324)

Marketing intensity 0.857�� (0.311) 0.728 (0.518)

International experience 0.016 (0.020) 0.046 (0.028)

Size (1)+ �0.230 (0.633) �0.801 (1.001)

Size (2)+ 0.284 (0.758) �0.250 (1.130)

Tacit know-how 1.739�� (0.347) 1.584�� (0.549)

International strategy (H1) 1.478�� (0.454)

Offensive–defensive motives (H2) 0.618y (0.369)

Exploitation–exploration motives (H3) �0.399y (0.236)

Capital intensity �2.199� (0.992)

Degree of customization �0.343 (0.491)

Country risk � CII (H4b) 0.028y (0.015)

Cultural distance � DCI (H5b) 0.766y (0.444)

w2 113.160�� 152.637��

�2 log likelihood 113.010 72.565

Overall classification rate (%) 85.3 90.5

Note: Standard errors in parenthesis; dependent variable: shared control (0); full control (1);

CII, capital intensity index; DCI, degree of customization index; + reference category, the

highest interval.��po0.001;��po0.01;�po0.05;ypo0.10 (one-tailed).


Additionally, the empirical results from the logistic regression show thatspecific characteristics of services moderate the relationships of investmentrisk variables (country risk and cultural distance) and entry modes (seeTable 5 Model 2). The main effect of country risk is statistically significant(po0.1) but contrary to the relationship proposed by conventional theoriesand thus contrary to our H4a. Considering that high values of the countryrisk index represent stability of political and economic conditions and lowvalues represent instability conditions, the negative sign of the main effectindicates that service firms entering unstable environments (low values ofthe country risk index) prefer full-control modes (a high value of the de-pendent variable). The main effect of capital intensity is also significant

Table 6. Multinomial Regression.

Variables Model 3: TCT and OCP Variables Model 4: Complete Model

Model 3a Model 3b Model 4a Model 4b

CA vs. WOS SCS vs. WOS CA vs. WOS SCS vs. WOS

Intercept 7.336�� (2.261) 11.957�� (2.261) 4.851 (3.835) 8.232� (4.106)

Market potential �0.744�� (.228) �1.129�� (0.303) �0.748� (0.355) �1.314�� (0.386)

Country risk �0.001 (0.011) �0.006 (0.011) 0.053 (0.049) 0.101�� (0.050)

Cultural distance 0.420 (0.394) 0.528 (0.422) 2.921� (1.391) 2.725y (1.486)

R+D intensity 0.142 (0.257) �0.123 (0.308) �0.172 (0.359) �0.315 (0.420)

Marketing intensity �0.979�� (0.370) �0.706y (0.402) �0.892 (0.569) �0.510 (0.023)

International experience �0.016 (0.027) �0.013 (0.024) �0.056 (0.036) �0.034 (0.032)

Size (1)+ 1.394 (0.902) �0.704 (0.785) 1.639 (1.185) 0.077 (1.175)

Size (2)+ 0.745 (1.034) �0.901 (0.929) 1.034 (1.349) �0.377 (1.367)

Tacit know-how �1.451��(0.397) �2.111��(0.464) �1.042��(0.501) �1.483��(0.483)International strategy �1.335�� (0.485) �1.756�� (0.546)

Offensive–defensive motives �0.302 (0.418) �0.975� (0.459)

Exploitation–exploration motives 0.454y (0.252) 0.318 (0.266)

Capital intensity 1.788y (1.073) 2.685� (1.136)

Degree of customization 0.339 (0.524) 0.382 (0.586)

Country risk�CII �0.020 (0.016) �0.035� (0.016)

Cultural distance�DCI �0.866y (0.080) �0.677 (0.528)

w2 126.459�� 170.817��

�2log likelihood 189.805 144.478

Overall classification rate (%) 74.1 82.8

Note: Standard errors in parenthesis; CA, contractual agreements, SCS: shared control subsidiary; WOS, wholly owned subsidiary (reference

category); CII, capital intensity index; DCI, degree of customization Index; + reference category: the highest interval.��po0.001;��po0.01;�po0.05;ypo0.1.

ESTHER

SANCHEZ

PEIN

ADO

AND

JOSE

PLA

BARBER

182


(po0.05) and presents a negative relationship with control and resourcecommitment modes. Hence, propensity to control and commitment is lowerwhen capital intensity increases. The moderating influence of capital inten-sity shows a positive sign (po0.1), which indicates that the preference ofservice firms to use full-control modes in high-risk markets will becomeweaker with increasing capital intensity, confirming H4b. Results from themultinomial regression (summarized in Table 6 Model 4) allow us to con-firm the main effect and the moderating influence only when equity modesare compared (joint ventures vs. WOS).

With regard to cultural distance, the results from the logistic regression(Table 5 Model 2) show that shared-control modes are preferable whenservice firms enter high cultural distance markets (po0.05), confirming H5a.Additionally, as we have stated in H5b, the moderating influence of thedegree of a service’s customization makes this relationship weaker (po0.1).Results from the multinomial regression (presented in Table 6 Model 4)confirm the main effect and the moderating influence only when non-equityand equity modes are compared (contractual agreements vs. WOS).

One of the control variables from TCT was statistically significant (seeTable 5 Model 2). As we expected, our results suggest that firms are likelyto adopt high control and resource commitment modes when they enterhigh market potential countries (po0.01). The results are consistent in thefour models (see Tables 5 and 6). However, other TCT variables (tech-nological and marketing intensity) do not significantly affect entry modedecisions.

With regard to OCP control variables, our results do not allow us toconfirm the influence of size and international experience on entry modedecisions (see Table 5 Model 2). However, the tacit nature of know-how doessignificantly increase the probability of choosing high control and resourcecommitment modes (po0.01).

DISCUSSION

This paper intends to offer new explanations to entry mode choice in theservice sector. Generally, choice of entry mode studies has been developed inmanufacturing sectors, and determinant factors have been linked to trans-action characteristics or the firm’s organizational capabilities. The results ofthis paper provide new insights about international strategy because theyshow the importance of some variables, not considered in conventionaltheories, as determinants of the entry decision into foreign markets.


First, how firms compete in international markets is a determining factorin control decisions. The efficiency requirements of a global approach caneasily be achieved if firms choose high control entry modes because theyensure coordination among functional and geographically dispersed unitsand deal with clients’ needs on a global level.

Moreover, some firms’ strategic motives are linked to a number of controlorientations. Our evidence suggests that firms with asset seeking and offensivemotivations are more likely to choose shared-control entry modes as a meansof gaining market knowledge and overcoming the liability of foreignness,while firms with exploitation and defensive motivations prefer entry modeswith a higher degree of control in order to better preserve their competitiveadvantage based on their knowledge of customers’ needs. These results areconsistent with other studies focused on the service sector (Weinstein, 1977;Goldberg & Saunders, 1981; Ball & Tschoegl, 1982; Terpstra & Yu, 1988; Li& Guisinger, 1992), showing that following the client abroad to capitalize onpre-established business relationships and following the leader in internationalinvestment are important defensive driving forces in developed economies.

Second, our study suggests that determinant factors of entry mode choicein manufacturing firms cannot be directly transferred to service firms, andtherefore propositions originated in TCT and OCP perspectives are notuniversally applicable. Some variables which were generally analyzed asdeterminant factors of control decisions in the manufacturing sector are notsignificant or present different results in the service sector.

We have observed that, even in areas of high international risks, servicefirms tend to select more integrated entry modes because control can beacquired with comparatively little expense. Service firms are typically morelabor intensive than capital-intensive firms, so they do not require largeinvestments in fixed assets as in the manufacturing sector. Lower switchingcosts allow service providers to more easily relocate operations if the riskbecomes too great. As a result, lower resource commitments mitigate servicefirms’ perceptions of international risks and enhance the incentives for firmsto integrate in countries where opportunities to achieve a better marketposition are higher than in more stable and competitive locations. However,the capital intensity of services weakens this relationship. The switchingcosts of capital-intensive service firms are higher and thus the risks mayoutweigh the benefits of proximity. Under such circumstances, the need forflexibility becomes more important, favoring lower control and resourcecommitment modes.

On the other hand, our results show that the high information costsassociated with high cultural distance markets increase the probability of


choosing shared-control entry modes. But this relationship is weakened bythe degree of customization of the services. The heterogeneity problem ofsuch services and the necessity for close and personal interaction enhancethe importance of cultural distance. To overcome cultural distance in serviceoffers, firms need to place greater emphasis on effective communicationskills and workforce training to provide high-quality services according tothe preferences and needs of the clients in foreign markets. Therefore, firmsshow a higher tendency to enter into culturally distant markets through highcontrol entry modes in order to control the quality standards of customizedservices and the performance of employees.

These unique characteristics of services, mainly the capital intensity andthe degree of customization of the service, introduce some challenges thatshould be considered in traditional frameworks, based on transaction costanalysis and the resource-based perspective.

However, several other factors proposed by conventional theories presentsimilar results in service firms. As expected according to TCT, our resultssuggest that firms are likely to adopt high control and resource commitmentmodes when they enter high market potential countries. When the marketpotential increases, the benefits of internalization will also increase. Thefixed setup costs of internalization can be spread across wider markets, thuspushing the benefits associated with the investments to a higher level. How-ever, other TCT variables, such as technological and marketing intensity, donot significantly affect entry mode decisions. This fact may reflect, as sug-gested by other authors (Campa & Guillen, 1996; Lopez-Duarte & Garcıa-Canal, 2002), that the competitive advantages of Spanish firms in interna-tional markets are not based on technological and marketing capabilities.

With regard to OCP control variables, our results indicate no significanteffect for size and international experience. Other studies which also focusedon service firms have pointed out the non-influence of service firms’ size onentry mode decisions. Capital requirements for initial establishment arelower than in manufacturing firms, thus size is not a determining factor inchoosing FDI modes (Terpstra & Yu, 1988; Erramilli, 1991).

Additionally, according to OCP theory, our results show that the tacitknow-how does significantly increase the probability of choosing highcontrol and resource commitment modes. Service firms are, in general, laborintensive and their main strategic assets lie in employees’ knowledge. Thistype of knowledge is difficult to codify and be patented, so tacitness resultsin difficulties in valuing know-how and its transfer through contractualprocesses. As a result, hierarchical coordination through full-ownershipcontrol modes are more efficient given the dissemination risk.


The results obtained from this paper provide evidence as to the importanceof adopting an integrative approach to obtain the most realistic descriptionsof strategic movements. The choice of this approach is essential since theinternational environment presents multiple pressures that manufacturingand service firms may face in their businesses. In this paper we draw on theentry mode literature, based on transaction cost analysis and the organiza-tional capabilities perspective, and incorporate new determinants derivedfrom the strategic approach and the specificity of the service sector. Collec-tively, these approaches provide greater explanatory power and provide newinsights into the complex phenomenon that entry mode choice is.

This study also provides guidelines for management about how to matchcontrol and resource requirements not only with host country conditionsand firms’ existing capabilities but also with strategic objectives, firms’ in-ternational approach and the specific characteristics of the sector in whichthey operate. Specifically, managers of service firms should evaluate thecharacteristics of the service that will be offered in international markets andassess the international potential that they present. Industrial characteristicstherefore should be viewed as facilitators or restrictions to internationalcommerce. Additionally, managers should take into account that for manyservice firms the switching costs may be comparatively small becausevaluable assets rest more on human capital than in physical assets (Erramilli& Rao, 1993), thus they may invest in high country risk markets where it iseasier to achieve a better position than in other international markets withharder competitive conditions.

Limitations and Further Research Areas

This study has several limitations. The empirical analysis is based on thegeneral managing director’s opinion (a single respondent) but entry modedecisions are usually taken by several decision makers. The use of multiplerespondents would have significantly increased the validity of the data andreduced concerns about potential response bias. To solve this problem, wehave selected well-informed respondents by mailing the questionnaire tosenior managers who had been involved in the internationalization decision.

We should be cautious when generalizing the results because the study isfocused on Spanish service firms. Therefore, future research could provideinsight into the applicability of our results in different settings. Additionally,although the effective response rate to the survey (17%) is comparable toother surveys of CEOs, this must be acknowledged as a limitation.


Consistent with other studies focused on entry mode choice, the unit ofstudy is an individual foreign market entry decision made by the firm. Toobtain a representative sample, it would be necessary to identify all foreignmarket entry decisions made by target firms. However, such action is alsolinked to measure reliability problems because it is difficult that managerscan still remember details of all those entries.

This study was conducted post hoc, so some responses are likely to beexposed to the ex post or retrospective rationalizations of managers. Casestudies could add more in-depth evidence about the reliability of our meas-urements and the necessity to assess the impact of some other factors.

Moreover, researchers should conduct more detailed examinations ofpossible interaction effects between industry characteristics and other de-terminant factors to better understand how the industry sector can facilitateor impede FDI. Therefore, future studies should test specific service-relatedhypotheses to enhance our understanding about entry mode choice in ser-vice firms.

Some factors identified in the literature as determinants of entry modechoice have not been considered in this study. We control for the influenceof international experience in the choice between different entry modes, butsome researchers have also suggested that prior experience with specific entrymodes may also influence entry mode decisions (Davidson & McFetridge,1985; Tallman, 1992; Padmanabhan & Cho, 1999). Future studies shouldinclude successful and unsuccessful prior experiences with entry types as adeterminant of the choice. Furthermore, legislative and fiscal barriers couldinfluence the openness of the host country to FDIs and may force firmsto choose certain entry modes because of the regulations by host govern-ments. Studies which include entries into different international mar-kets should incorporate this influence. However, we consider that thisvariable does not significantly affect entry mode choice in our study becausemany entries have been located in European and Latin American countrieswhere legal restrictions to foreign investment are not important barriers.

On the other hand, the intangibility, inseparability, perishability, het-erogeneity, level of capital intensity, or customization of services presentsome marketing problems, which are intensified when the internationaldimension is included. Although there are classifications of services accordingto some of the characteristics mentioned in the paper, all of them are basicallytheoretical. So, the lack of a general and empirically accepted classificationscheme of services is one of the reasons that hinder the study of entry modechoice in the service sector and explains why there are few empirical studiesabout the internationalization process of service firms, and specially, about


entry modes in foreign markets. Future research should measure the dimen-sions that characterize each service in order to obtain a valid classification ofservices and to reduce the heterogeneity problem of this sector.

Finally, determinant factors and entry mode choice should be linked tofirm performance in order to provide insights into whether the properalignment of entry modes with such factors actually leads to better results.

ACKNOWLEDGMENT

Authors acknowledge the financial support from the Ministry of Scienceand Technology (research project: SEC 2003/06466).

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MANAGING INTERNATIONAL

MARKET ENTRY STRATEGY:

THE CASE OF RETAILING

FIRMS

Kannika Leelapanyalert and Pervez Ghauri

ABSTRACT

Numerous studies have focused on retailing firms and their activities in

foreign markets; however, these have not been able to fully identify factors

that influence the process of retail internationalisation. This paper examines

the factors that influence the foreign market entry process in retailing firms

and develops a conceptual model. The conceptual model is used to analyse

two case studies. The case data were collected through in-depth interviews.

N*Vivo was used to encode data and corroborate the analysis. The entry

strategies of IKEA in China, and Marks & Spencer (M&S) in Hong Kong

are examined. Firms planning to enter foreign markets would greatly ben-

efit from our analysis. We provide insights into factors influencing the

foreign market entry process and how firms can manage this process.

INTRODUCTION

Globalisation and the increasing pace of regionalisation, particularly in theEuropean Union, are forcing companies to restructure and seek new





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17007-6

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KANNIKA LEELAPANYALERT AND PERVEZ GHAURI194

markets. A number of studies on internationalisation of manufacturingfirms are available and there are several established theories on the inter-nationalisation of these firms (Buckley & Casson, 1976; Dunning, 1981;Johanson & Vahlne, 1977). More recently, retailing firms have been ex-tremely active in establishing foreign operations and seeking new markets(Rogers, Ghauri, & George, 2005). The intensity of competition has ledretailers to seek new ways of expanding their business (Brown & Burt, 1992).The retailer has become the superior party in business, while the manufac-turer has become the subordinate who has to bid for contracts with theretailer (PBS Frontline, 2004).

Several studies focus on retailing firms (Alexander & Myers, 2000; Dawson,2003; McGoldrick & Davies, 1995) and motives for their internationalexpansion (Alexander, 1990; Dawson, 1994; Quinn, 1999; Williams, 1992).However, these have not been able to fully identify factors that influencethe market entry strategies and process. The existing literature is mainlyconcerned with how major retailing firms achieve geographic expansion andwhich strategies they use while entering foreign markets (Whitehead, 1992).Nevertheless, it is important to address the organisational dimension of theprocesses as well, which should include the nature of the decision-makingprocess for the companies intending to enter the international arena and howthe internationalisation process is managed.

The changing nature of environment – political forces, economic climateand cultural issues – amplify uncertainty in international retailing expansion(Salmon & Tordjman, 1989; Treadgold, 1988). The global market develop-ment and increasing sophistication of customer demand, especially in thelast decade, have made the world a more complex place (Brown & Burt,1992). Consequently, firms have to develop strategies to respond quicklyto different customers’ needs and become market-orientated. This can beachieved through market research and corresponding design of decision-making processes (Craig & Douglas, 2001). Market information helpsa company identify factors that may influence its entry strategy, marketpositioning and the level of adaptation to the local market. Market orien-tation is thus considered extremely important while designing marketingstrategies (Deshpande & Farley, 1998; Deshpande, Farley, & Webster Jr.,1993; Kohli & Jaworski, 1990; Narver & Slater, 1990) but no attempt hasbeen made to study market orientation and its impact on internationalactivities of retailing firms.

A company faces the uncertainty of uncontrollable factors in both homeand foreign markets during internationalisation process (Ghauri & Cateora,2006). The knowledge of operating environment in the target country

Managing International Market Entry Strategy 195

diminishes uncertainty. Hence, it is crucial to identify factors that influencefirms’ international activities and performance. In this study thus, we aim toanswer the following research questions:

1.
What are the factors that influence the foreign market entry process ofretailing firms?
2.
Do retailing firms use market orientation while entering foreign markets? 3. How does networking and relationship building impact on international
retailing operations?

We have chosen to study retailing firms in China mainly because China isconsidered to be the most promising market for retailing firms. Moreover,the retailing sector has been recently opened for foreign firms in China, anda number of foreign retailers have entered this market. The success rate offoreign retailers in this market is, however, not very high.

EARLIER RESEARCH AND THE CONCEPTUAL

MODEL

Based on the literature on internationalisation process and entry strategies(Buckley & Casson, 1976; Dunning, 1981; Gatignon & Anderson, 1986;Root, 1987), matching (Ghauri & Holstius, 1996; Holstius, 1991) and mar-ket orientation (Elg, 2003; Kohli & Jaworski, 1990; Narver & Slater, 1990;Rogers et al., 2005), a model is developed to study the above questions.Table 1 summarises the literature used in this study.

Firm Characteristics

Firm characteristics play an important role during the retail internationali-sation process. These include factors such as commitment and learningorientation (Ghauri, Elg, & Sinkovics, 2004). It can be observed that pre-vious research on internationalisation often emphasises the result of theinternationalisation strategy, but fails to address the management of theprocess (Whitehead, 1992), that is the nature of decision-making processand the relationship between company behaviour and entry strategies. Byexploring in this area further, our study will lead to a better understandingof internationalisation of retailing firms.

Commitment of a company to internationalisation is defined by how muchthe firm is prepared to invest and how much risk to accept to achieve a

Table 1. Literature Review Summary.

Theory and

Concept

Logic Main Aspect Example of Studies

Matching Understanding of

how to facilitate the

development of

successful business

relationships

abroad

Processes that

facilitate the

development of

business

relationship

between firms in

dissimilar

countries, at a

global, macro and

micro level

(Ghauri et al., 2004;

Ghauri & Holstius,

1996; Holstius,

1991; Rogers et al.,

2005)

Network theory Relationship of two

or more

independent

companies that

take advantage of

mutual resources

and sharing of

information

A network approach

involves three

factors: actors,

resources and

activities

(Anderson,

Hakansson, &

Johanson, 1994;

Coviello &

McAuley, 1999;

Ford, Gadde, &

Hakansson, 1998;

Ghauri & Prasad,

1995; Hakansson &

Snehota, 1989;

Johanson &

Mattsson, 1987;

Meyer & Skak,

2002)

Firm characteristic Firm characteristic

includes firm’s

commitment and

learning orientation

Firm characteristic

has impact on

decision-making

process and entry

strategies

(Ghauri et al., 2004;

Hofstede, 1994;

Matsuno, Mentzer,

& Ozsomer, 2002;

Senge, 1990; Vida

& Fairhurst, 1998)

Market

orientation

It involves customer

orientation,

competitor

orientation, and

inter-functional

coordination,

aiming to create

value for customers

and maximise

company’s long-

run profits.

These comprise all

activities in

obtaining

customers’ and

competitors’

information in the

target market and

disseminate it

throughout the

organization. The

strategies are then

formulated in

response to this

information

(Clark, 2002; Gilbert,

1999; Gummesson,

1987; Han, Kim, &

Srivastava, 1998;

Harris, 2001;

Houston, 1986;

Jaworski & Kohli,

1993; Kohli &

Jaworski, 1990;

Lings, 2000; Narver

& Slater, 1990;

Rogers et al., 2005;

Slater & Narver,

1994)


Table 1. (Continued )

Theory and

Concept

Logic Main Aspect Example of Studies

Performance Performance involves

three key fields:

annual revenue

growth, annual

profit growth and

average return on

total assets. It is an

evaluation of the

perceived

performance

Business performance

can be measured by

two different

approaches:

judgmental/

subjective and

objective

measurement

(Clark, 2002; Day,

1990; Dunne,

Lusch, & Gable,

1995; Han et al.,

1998; Jaworski &

Kohli, 1993;

Jennings & Young,

1990; Katsikeas &

Morgan, 1998;

Kohli & Jaworski,

1990; Lings, 2000;

March & Sutton,

1997)


successful entry into a foreign market (Anderson & Weitz, 1992; Ghauri& Cateora, 2006). There are various types of commitment. For example,resource commitment is something that a company builds gradually asthe market knowledge increases (Johanson & Vahlne 1977; Pedersen &Petersen, 1998). Previous studies suggest that the more a company is com-mitted to the host market, the higher the level of relationship commitmentto local parties (O’Reilly & Chatman, 1986). An increase in the level ofcommitment to a foreign market, accompanied by more local experience,will enhance the level of investment in a foreign market (Johanson &Vahlne, 1990). For the same reasons, companies with scarce resources tendto form alliances with local partners while entering overseas markets,instead of investing in these markets (Cavusgil, Ghauri, & Agarwal, 2002).

Learning orientation is a concept describing an organisation’s learningcapability (Sinkula, Baker, & Noordewier, 1997). It consists of three corevalues: commitment to learning, open-mindedness and shared vision(Kandemir, Ghauri, & Cavusgil, 2002; Sinkula et al., 1997). Commitmentto learning enhances market understanding as a firm proactively collectsinformation on a particular market. Effectively, retailing companies canbe more effective and efficient if they gain more knowledge about the marketand disseminate this knowledge throughout the organisation to formulateand adapt their strategies. Thus, the accumulation of knowledge and experi-ences facilitates further internationalisation as companies become moreconfident and commit more resources (Williams, 1992). Organisationallearning and information flows within the organisation could thus enhance


market orientation and performance (Kohli & Jaworski, 1990). Therefore,Sinkula (1994) suggested that successful learning orientation and marketorientation can lead to significant competitive advantage.

Matching

Matching is a fundamental concept which allows an understanding of howthe development of successful business relationships can be facilitated(Ghauri & Holstius, 1996). Matching is a process that facilitates the deve-lopment of business relationships between companies in dissimilar countriesat global, macro and micro levels (Holstius, 1991). Matching at the global

level relates to global-level actors such as international organisationsinvolved in trade agreements, relationships and trade facilitation incertain countries. It includes international activities that could assist theinternational operations in different countries, e.g., by providing creditguarantees, subsidised loans and other financial support (Ghauri &Holstius, 1996). Institutions establish relationships through membership inglobal organisation such as World Trade Organisation (WTO) and Inter-national Bank of Reconstruction and Development (IBRD) and by workingtogether to develop mutual benefits for member countries. At the macro

level, matching relates to the level of support provided by governments(home and host) for business activities. Matching at these two levels,although seeming to be beyond the control of the organisation, can beinitiated and planned/arranged by firms, e.g., through trade delegationsand involvement of Ministers and Embassies in foreign countries. At the

micro level, matching refers to the activities the company needs to carryout in order to achieve a successful market entry. Matching at the microlevel is closely related to networking with competitors, customers and otheractors in the environment. This level of matching is thus quite similar tothe network approach. In this paper, we focus on matching at macroand micro level, as these are considered more relevant for retailing firmsentering China.

It has been emphasised that building, developing and managing busi-ness relationships are crucial issues for western companies investing inemerging markets (Cavusgil et al., 2002). It is enormously important forwestern companies to develop and manage relationships with the hostcountry’s government, local partners, suppliers, local customers and evenlocal communities.

Local government plays an important role during internationalisationprocess and has an immense influence on the way businesses are run.


Hence managing relationships with the local government is a crucial task.Managing relationships with employees (locals as well as expatriate) hasproved to be crucial for retaining valuable workforce and ensuring success-ful relocation. Cavusgil et al. (2002) suggest approaches such as trainingboth employees and their families about the culture and background of theforeign country, communicating effectively between the head office andsubsidiary, and motivating people through appropriate rewards. Companiesneed to build and maintain relationships with local partners, such as jointventure partners, franchisees, distributors and suppliers. Relationship withlocal communities could be managed through investing in human resources,supporting local sports and cultural activities, having environmentallyfriendly policies and showing respect towards the local communities’ cul-ture. The benefits from such a relationship could improve the companyimage and reputation as well as attract more support from actors involved.It is also necessary to create and manage good relationship with local

customers and create a positive image in a foreign market.

Market Orientation

Narver and Slater (1990) explain market orientation as all activities relatedto obtaining customers’ and competitors’ information from the target mar-ket as well as disseminating it throughout the organisation in order to createvalue for customers by developing responsive strategies. It has been pre-viously defined as understanding customer orientation, competitor orienta-tion and coordinating information within the organisation (Narver & Slater,1990; Slater & Narver, 1994). Kohli and Jaworski (1990) explain the methodthat companies use to achieve market orientation as following: companiescreate intelligence by conducting market research to understand what con-sumers need. Dissemination means communicating the information through-out the organisation by using information exchange systems betweendepartments. Responsiveness means designing an implementation plan thatcorresponds to the customer’s needs in a particular market. Different studiesprovide different definitions of market orientation (Clark, 2002; Deshpandeet al., 1993; Kohli & Jaworski, 1990; Narver & Slater, 1990), however, theygenerally agree that it includes collection, analysis and communication ofmarket information throughout the organisation and adapting products andstrategies accordingly. Many studies found that profitability is an outcomeof market orientation (Deshpande et al., 1993; Narver & Slater, 1990). Theabove discussion helped us to develop the conceptual model used in thisstudy (see Fig. 1).

Host Market Performance


• Commitment to host market

• Learning orientation

Market Orientation

• Intelligent Generation

• Intelligent Dissemination

• Responsiveness

Matching of actors, activities, resources

• Macro Level

• Micro Level

Host MarketCorporate

Fig. 1. The Role of Market Orientation and Matching in International Retailing. Source: Based on Ghauri et al. (2004).

KANNIK

ALEELAPANYALERT

AND

PERVEZ

GHAURI

200


The model includes the matching concept (Ghauri & Holstius, 1996)which clarifies how successful business relationships could be facilitated atglobal, macro and micro levels. Furthermore, the model includes marketorientation in the retail industry. It is assumed that marketing orienta-tion and matching factors can be affected by firm characteristics and allowretailing companies to better understand consumers and facilitate businessactivities, leading to better performance in a foreign market. The modelallows us to explore the impact of matching and market orientation on theinternationalisation process of retailing firms.

RESEARCH METHODOLOGY

Our research approach is mainly based on case studies and semi-structuredinterviews. Case studies are intended to point out detailed and valuableinsights and understanding of the retail internationalisation process, whichcould not have been achieved by a survey method (Ghauri & Grønhaug,2005; Yin, 1994). We try to understand how firms handle different fac-tors that influence their activities while entering a foreign market. As wewant to answer ‘how’ and ‘why’ questions and are conducting inductiveresearch, case study method is considered most appropriate. This approachis also suitable for theory development, which suits the objective of thisstudy.

Case studies examine similarities and differences in the strategies used byM&S and IKEA to enter China. Data is collected through a series of in-depth, semi-structured interviews with head office managers as well ascompany representatives in the host country. This includes frontline em-ployees, middle-level and senior managers. This paper is a part of a biggerproject where we are studying international activities of IKEA and M&S inseveral markets. We have full access to managers and documents of thesetwo companies. In this paper, however, we present their entry into China.For this study, a total of twenty-four interviews were conducted at the M&Shead office and their Hong Kong subsidiary. Twelve interviews were con-ducted in IKEA head office and their subsidiaries and suppliers in China.We also collected data through various sources such as follow-up telephoneinterviews, document analysis and observations. Data has been analysedusing pattern matching method (Miles & Huberman, 1994; Yin, 1994). Va-lidity of the research is reinforced by the fact that various in-depth inter-views have been conducted. The same questions have been posed to differentmanagers at the different levels. Information was also drawn from


secondary sources such as articles and news. These approaches allowed us tocross-check the accuracy of data and ensure internal validity and reliabilityof data. Similar questions were raised from each case and common out-comes led us to draw conclusions (Miles & Huberman, 1994). N*Vivo soft-ware was used to code the data and corroborate the analysis. It is a usefulinstrument for the management of enormous amount of interview tran-scripts, encoding of data and management of themes in order to analysequalitative data (Richards, 2000; Sinkovics, Penz, & Ghauri 2005).

MARKS & SPENCER IN HONG KONG

M&S is one of the leading clothing retail companies in the UK. The com-pany was founded as a partnership between Michael Marks and TomSpencer in 1894. In 1926, Marks and Spencer Limited became a publiccompany. M&S strategy is based on its vision, mission and values (CompanyReport, 2005), which are:

Vision: The standard against which all others are measuredMission: Making inspirational quality accessible to allValues: Quality, service, innovation and trust

M&S has expanded to food, beauty products, home furnishing and finan-cial services. It is a large organisation, which comprises 70,000 employees,with 3,000 employees in head office. The company operates more than 400stores in 29 countries across Asia, Europe and the Middle East (CompanyReport, 2005). The focus of this research is on its subsidiary in Hong Kong.M&S expanded to Hong Kong in 1980s by franchise, which was later turnedinto a wholly owned subsidiary.


After a number of bad years in several markets and the Asian crisis, M&Sannounced a restructuring strategy on March 29, 2001. One of the outcomesof the restructuring plan was a focus on UK retail market and improvementof capital structure to leverage benefits through return of value to share-holders. Company decided to focus on its home market rather than on theinternational markets as part of the ‘‘getting fit for growth’’ concept. As aresult, M&S closed its operations in a number of European markets in orderto rationalise its operations.


In 1999, it became apparent that M&S’s global ambitions had failed sothe company decided to return to its home market. By 2002, M&S had failedto sell its 10 Hong Kong stores to a local franchisee and acquired directownership of the stores.

Matching

‘‘We make all of our profits and revenues from all three stores locatedonly in prime locations. We need to be in the main shopping malls inHong Kong’’ (Managing Director, M&S Hong Kong). M&S recognises theimportance of using and building micro-level matching to gather knowledgeof the local market. It recognises the importance of having the right contactsin retail business. International consulting companies such as PriceWater-HouseCoopers (PWC) and Ernst & Young also provide local informationon trading environment. Landlords are very important actors to have re-lationships with in Hong Kong because having the prime location iscrucial. Major retailers need to be in the prime location – Tsim ShaTsui, Central, Admiralty and Time Square – in order to guarantee successand reasonable exposure to the market. Severe acute respiratory syndrome(SARS) outbreak, which happened in March 2003, had an adverse effecton Hong Kong’s economic conditions and performance of all retailersin the market. M&S is a member of the Hong Kong Retail Associationthat negotiated a decrease in rent with landlords due to the SARS out-break.

Market Orientation

The company does not systematically gather customer, competitor andmarket information. Some managers follow their intuition based on theirown experience and entrepreneurship skills in doing business. They also usesecondary data and country visits to identify potential new markets. How-ever, some systematic market research has recently been introduced in someforeign markets.

Generating Information

M&S uses a global strategy consulting company which works mainly onM&S brand strategy. Research consists of analysing M&S internationalbrand strategy, positioning M&S brand in country clusters, developing abrand strategy in each country and suggesting marketing tools in order toincrease sales and profitability. Hong Kong subsidiary recently conducted


their own market research to understand Mainland Chinese people and theirbuying behaviour. The Mainland Chinese tourists represent as much as25–30% of M&S customers.

Disseminating Information

M&S communicate through regular meetings within departments as well asbetween departments. The sales performance and important issues arebrought up to the weekly meetings amongst management teams in order todiscuss potential solutions and improvements. There are no systematiccommunication tools and there is little evidence of sharing best practicesand experiences. The Hong Kong office and head office communicate regu-larly via email and country visits. Hong Kong office finally turned loss intoprofit in 2004.

Responsiveness

The company made small adaptations to the local market in sizes, coloursand styles of products. ‘‘We have two inches shorter sleeves shirt for Asianmen. We also have unique products for proper climate, e.g., we developed arange of short sleeves T-shirts to fill in the longer summer period in HongKong’’ (Merchandising Manager, M&S Hong Kong).

Major attention is paid to logistics as efficiency is imperative in retailoperations. M&S aims to shift a greater volume of products by cutting coststhrough improvement of their logistics systems. They now deliver productsdirectly from far-east manufacturers to the east Asia shipping hub in orderto reduce costs and time of transport.


M&S focuses more on the UK market and has less commitment to itsHong Kong market. In the past, the Hong Kong subsidiary worked mainlyindependently from head office at the beginning, as operations were runby UK expatriates using somewhat standardised strategies from the headoffice, which resulted in limited local adaptation and less successfulperformance. The Asian crisis in 1998 affected the financial performancedramatically. Hierarchy structure in Hong Kong had slowed down decision-making process, leading M&S to cut unnecessary positions and become alean organisation. The company turned loss into profit in 2004 by cuttingcost. However, the weak market orientation which is reflected in unattrac-tive products and high prices is the main concern to securing the brandreputation in the market.


IKEA IN CHINA

IKEA is a Swedish furniture company, which was founded by IngvarKamprad. The company has 224 IKEA stores in 33 countries across Eu-rope, North America, the Middle East and Asia-Pacific. The company ex-pands mainly by wholly owned subsidiaries. The IKEA Group itself owns200 stores in 24 countries. The rest operate as franchises in 15 countries suchas Hong Kong, Taiwan and Australia (Company Corporate Website, 2005).China is an increasingly attractive market because of a large population, theloosening up of Chinese regulation, cheap labour and the GDP growth rateof 9.1% indicating the growth of consumer demand (Central IntelligenceAgency, 2005). International retailers also expand into China to take ad-vantage of low cost production suppliers and increasing purchasing powerof local consumers. IKEA opened a store in Beijing in 1998 and a flagshipstore, with 32,000 square metres, in Shanghai in 2003. China is the toppurchasing country for IKEA as 19% of IKEA products are sourced fromChina (Company Corporate Website, 2005).

Firm Characteristic

Ingvar Kamprad, the founder of IKEA, is particularly interested in Chinesemarket and shows long-term commitment to it. In terms of learning ori-entation, IKEA transfers the experience and knowledge to the local offices.Experienced expatriates work on establishing an IKEA store, which includestraining in infrastructure, shop, management structure and how to transfertheir knowledge to the local market. Company needs those people to set upmore IKEA stores for further expansion in other cities. However, the com-pany expects the local people to move up and take management roles in thenear future. There is a competence centre set up in Shanghai for trainingnew employees and there are regular training workshops for existing work-ers. IKEA also learns lessons from the local market and uses its experiencein new stores. It is important to establish relationships with local stake-holders as property and human resource managers.

Matching

Macro matching is very important to IKEA’s Chinese operations. Companyneeds to build relationships with central government and local authorities.Networking with the right people could reduce legal and regulation barriers.Company also needs to be up to date on government policies towards retail


and foreign direct investment. IKEA thus works with the government on alllevels. ‘‘We rely very heavily on government in China when it comes to ourretail operations: District governments, municipal government and obvi-ously also the central government’’ (President of IKEA China). In the earlystages of entry process, Mr. Kamprad travelled to China and had severalmeetings with regional and local government officials.

IKEA also uses micro matching and strong network relationships withmedia and suppliers. There is a two-way supporting relationship betweenIKEA and its suppliers. IKEA educates suppliers about production tech-niques and factory standards and provides financial assistance. Suppliers needto follow ‘‘I-way’’ standard, which includes environmental responsibility, nochild labour, and acceptable working environment in order to become IKEA’ssupplier. IKEA helps suppliers to adopt higher factory standards, whileIKEA relies on low prices and assistance with distribution. Suppliers also giveIKEA recommendations about new product ideas and local customer needs.

Market Orientation

Conducting market research has not only allowed an understanding of thelocal market, but it has also enabled IKEA to test the market before de-ciding to enter fully. Steed (1985) explains the successes of IKEA interna-tionalisation through their unique entry strategy. The company’s strategy isto enter initially through small investment and gain experience before en-tering fully in the market. The evidence of this unique entry strategy is alsofound in China. IKEA opened small stores to test the market before makingcommitment to building big stores in Beijing and Shanghai. ‘‘We had storesin Shanghai before we opened this one. That was smaller, what we call smallshops to test the market’’ (Expansion manager, IKEA China).

IKEA emphasises generating market intelligence. Main market research andcompilation of customer satisfaction index have been conducted at the cor-porate level in order to measure brand recognition and customer satisfaction.Management also makes store visits and cashier surveys at the store level. Thecompetitive shopping and competitor visits have been conducted in order togain information about copying products and benchmark prices. The cus-tomer information generated through keeping records of customers’ most fre-quent questions, sales records, customer requirements, day-to-day operationalissues and solutions. Suppliers also provide information about local productneeds such as Chinese wok and knife that were introduced on their suggestion.

‘‘We hire ‘customer’s best friend’ customer service. So we are gettinginformation, transforming that and addressing the issues. Example of issues


could be difficulties to shop, customer do not understand the system andconcept, or long hallway to walk. We are close to customers and aim to getinformation from customers and we immediately worked on it to makenecessary adaptations and changes. We have new local marketing managerin each store working with me’’ (Marketing manager, IKEA China).

Information is disseminated through department meetings, store meetings,management meetings, email and intranet. Intranet is often used at mana-gement level. At the store level, there is a language barrier to using intranetand managers always spend time in the store to get the required informa-tion. There is, however, little cooperation between IKEA China and IKEAin other countries. Contact and discussion happens only in training sessions,although some managers feel that managers in other countries mightface similar problems and are desperate to find solutions. However, somemanagers do communicate with others because of previous contact and it iseasier for them to communicate and share experiences.

In terms of responsiveness, IKEA uses the concept of standardisation ofthe brand all over the world. It is accepted that the brand image must beconsistent. The store look must be the same in every country. The company,however, does not neglect the importance of local customers and has somelocal solutions. Several IKEA products and prices are adapted to localmarket and local customers’ needs. The company takes advantage of beingmarket-orientated to understand local consumers and especially local mar-ket environment. It makes use of its market research and market informa-tion in order to educate people in the market about IKEA concept.Company introduced the ‘‘do-it-yourself’’ concept to Chinese market andexplained to customers how and why IKEA maintains its low prices,through store posters. IKEA made small adjustments to the local market,such as having small space living showroom, local brochure written inChinese characters and use of local language in advertising campaigns andmedia. ‘‘Children and living with kids was a key priority for global IKEA2003 campaign. It will not work in china because Chinese only haveone child according to one child policy. So we focus on ‘low price offer’commercial theme in china because the IKEA products are still perceived asexpensive’’ (Head of bedroom department, IKEA Shanghai).


The company expects aggressive growth in Asia, particularly in China, andplans to open several stores in the near future. ‘‘Although Europe is still themain market, we see enormous growth in Asia, North America, Japan and


particularly in China’’ (Business Development Manager, IKEA China).IKEA currently searches for new store locations in 14 cities includingChengdu, Dalian, Nanjing and Qingdao (China Daily, 2004).

Price is a priority issue that IKEA is working on. IKEA has also increasedthe number of products sourced from local suppliers. IKEA needs to focusmore on local sourcing in order to increase volume and revenue, to changeits image to an affordable price brand, to be different from its competi-tors and to expand to lower-income cities in China in the future. Market-ing manager points out that IKEA’s key success factor is to maintainIKEA position and present what IKEA is to the market in a consistentmanner. In Chinese market, IKEA would like to be the leading home

furnishing company which offers affordable products and affordable solutions

for better living at home. It is the same concept as globally but adds‘‘affordable solution’’.

DISCUSSION

Our cases reveal that firm characteristics, including host market commit-ment, learning orientation and organisational culture impact host marketperformance. IKEA shows long-term commitment through investment andfuture expansion and its ability to learn from the local market. Also, thecombination of a flat structure and its modern organisational culture haslead IKEA to become market orientated. IKEA management style alsoencourages the company to use matching concept and build the strong re-lationships with local authorities and suppliers.

IKEA has internationally experienced people who move around to helpset up new operations in different countries. For example, the expansionmanager has experience in introducing IKEA in Poland, France andGermany before coming to China. This is not the case for M&S, which hasonly one subsidiary office in Hong Kong, while stores in other countries arerun as franchise operations. The other subsidiaries, particularly in Europe,were not successful and were closed down.

The similarity in the two cases is the role played by the expatriates. Com-panies need expatriates to build up the organisation in new markets. Theproblem for M&S was that expatriates stayed in Hong Kong for too longand did not let local people operate the business. When the local people tookover, performance improved. This is consistent with Jackson and Sparks(2005) study that concluded that expatriates are normally less inclined toadapt as they normally follow the head office’s standardised strategies.


Matching is a crucial element for doing business in China. At the macrolevel, the central government and local government played an importantrole because they are decision makers in policy and regulation and issuepermits and permissions. Moreover, they can open doors to other usefulorganisations. At the micro level, landlord was the most important actor forM&S because of the limited access to prime retail locations. Suppliers play asignificant role in reducing the production cost and maintaining good qual-ity in China as in case of IKEA. As a result, those factors have influencedIKEA operations to become one of the most successful foreign companies inthe Chinese market. This confirms Ghauri and Holstius (1996) and Rogerset al. (2005) findings that matching activities with local governments canfacilitate the market entry by a foreign firm.

Market Orientation

This research points out that IKEA was more market orientated. The mar-ket research was conducted systematically and the company made appro-priate use of it. Communication within organisation was effectively usedamong all levels of the management. IKEA has responded to the localneeds through adaptation of its products, prices and local sourcing. Thiswas reflected in their market performance and was consistent with our con-ceptual model and earlier studies on market orientation (Slater & Narver,1994; Kohli & Jaworski, 1990).

M&S recently began conducting market research but there is still nosystematic research and dissemination of information in the Hong Kongsubsidiary. Managers from different markets meet occasionally to shareexperience and best practice. M&S started as a successful British companyusing common sense and entrepreneurship in business operations. It workedin the past and they assume that it will always work. As suggested by ourconceptual model and earlier studies (Rogers et al., 2005), it has thereforeled to a less successful market performance. M&S wanted to sell its oper-ations in Hong Kong but it did not succeed.

Both IKEA and M&S still face the price issue in China. The product’sprices are still too high for Chinese market. IKEA, however, is more con-sistent in focusing on lower prices and is using more and more local sup-pliers to achieve that, thus being more responsive to local marketconditions.

As far as performance is concerned, IKEA in the Chinese market is a hugesuccess mainly because of its efficient matching and market-orientation ac-tivities. The company plans to open several more stores by 2010. In case of

Table 2. The Influencing Factors in International Retailing: The Casesof IKEA China vs. M&S Hong Kong.

IKEA China M&S Hong Kong

Firm characteristic � Long-term commitment in

China by investing in

supplier training� Flat structure helps two-way

communication and share

knowledge� Motivating people to share

knowledge by training and

education

� Company wanted to sell Hong

Kong subsidiary in 2001 but

did not succeed� Hierarchy structure leads to

slow decision-making

process� Company tried to get rid of

hierarchy and give power to

local people

Macro matching Central and district government

are crucial actors in retail

operations

Government support tourism,

Mainland Chinese entry to

Hong Kong boost sales

Micro matching � Long-term relationship with

suppliers help IKEA low-

price purchasing� Suppliers provide local and

product knowledge

� Landlord – money talk,

improve brand image� Retail Association – rarely

share information due to

business competition

Market orientation: intelligence

generation

� Extensive market research at

headquarter level, country

level and store level� Customer satisfaction index� Cashier survey� Competitor visits� Store visits

� Feedback from sales assistant� Competitor shopping� Store visits� No systematic market

research

Market orientation: intelligence

dissemination

� Information system, i.e.,

database and intranet used

at all management levels to

share information on local

markets� E-mail� Regular meeting at all levels

� Department meetings and

management meetings but

no information from local

markets is exchanged� E-mail used in management

Market orientation:

responsiveness

� Adaptation of product and

prices� Product is too expensive for

the Chinese market to

handle price issue more and

more local production� Creating Chinese brochure to

respond to Chinese life style

� Some adaptation of products’

style, size and colour to

local needs� Cherry-picking standard

product by experience local

buying and merchandising

staff� Direct delivery not based on

market research

Host market performance � Successful entry to China� Plan for further expansion –

to open 14 stores by 2010� Challenge on lower the price

to respond to further

expansion

� Turn loss into profit in 2004� Well establish in Hong Kong

but brand damage from UK

situation� Challenge to stay in prime

location and build up M&S

brand



M&S, there is no evidence of market orientation and thus its performance isnot so good. It showed a profit first in 2004, first time since 1998. Matchingactivities with landlords in Hong Kong are crucial because of the compe-tition for prime locations, but there is hardly any interaction with localcustomers or understanding of local competitors and other conditions. Thecompany needs to rebuild the brand image to make the brand attractive tocustomers and the landlords in order to regain its market share and main-tain stores in prime locations, which can only be achieved through marketorientation and matching. Table 2 summarises our findings.

CONCLUSION

To answer the research question, our study reveals that market orientationplays a significant role in international operations of retailing firms. Westernretailers by applying market orientation in the Chinese market and by usingmatching through developing relationship with local government and otheractors can improve their performance. In case of market orientation, in-telligence generation, regular market research and intelligence disseminationresults in achieving local responsiveness and adaptation of products andstrategies to the local markets. Different companies however apply differentlevels of market orientation depending on firm characteristics. It has beenfound from both cases that firm characteristics play an important role indriving market orientation strategy. Compared with IKEA, M&S is stillslow to react to the environment, customer needs and competition. There-fore the company does not have the ability to respond quickly to local needsand thus loses competitiveness. Our studies agree with Ghauri and Holstius(1996) that matching facilitates market entry and operational efficiency.It has been found that market-orientated company has ability to betterunderstand market environment, its competitors, customers and to be moreresponsive to local customer needs, therefore leading to significant success inthe host market. Hence, the market orientation – host market performancelink appears to be strong while comparing the M&S and IKEA operation,which is in line with earlier studies (e.g., Slater & Narver, 1994).

From theoretical perspective, this paper takes the matching and marketorientation concepts further by applying it in international retailing context.The study provides a conceptual framework for further development oftheory within an international retailing context. From the managerial pointof view, this research is useful for practitioners and retailers in terms ofhighlighting the key factors, which could influence the successful


international operations. Businesses planning to enter foreign market wouldgreatly benefit from processes and models, which deliver insights into localmarkets and trends as shown in our study.

It has been assumed that marketing orientation and matching could beaffected by firm characteristics, allowing retailing companies to better un-derstand consumers and facilitate business activities, leading to a betterperformance. Moreover, it is clear that a firm’s learning orientation andcommitment to a particular market are the main characteristics that enableit to be more market oriented. Further studies of this research would be totest the model in other company cases and other countries to establish itsexternal validity.

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EXTENDING AND COMPARING

CAVUSGIL’S OVERALL MARKET

OPPORTUNITY INDEXES

Michael R. Mullen and Shirley Ye Sheng

ABSTRACT

The imperatives of globalization are clear across many industries: firms

must look to expand into international markets to survive and thrive. This

study complements and extends a growing body of work developing and

using overall market opportunity indexes (OMOIs) based on Cavusgil

(1997) to rank the attractiveness of potential foreign markets. The index

developed in this paper assesses countries’ market potential beyond the

traditional measures of market size and economic development by also

including political risk, economic freedom, telecommunications as well as

physical infrastructure and geographic distance. We provide a current

analysis of market attractiveness and opportunity for the largest set of

countries indexed and ranked to date, including 24 countries not in pre-

vious OMOI studies. The validity of the OMOI is also so assessed for the

first time by comparing the ranking of market opportunity to actual sub-

sequent trade flows from the US. Furthermore, we compare the dimen-

sions, variables, samples and results from three of Cavusgil and colleague’s

previous studies and the two conducted herein. The choice of sample and,

to a lesser degree, weights are shown to directly affect the OMOIs and

rankings. The modified OMOI is shown to be a flexible, valid and fairly

stable tool for preliminary analysis of foreign market opportunity.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17008-8

219

MICHAEL R. MULLEN AND SHIRLEY YE SHENG220

INTRODUCTION

Global, political and economic liberalization have created tremendous busi-ness opportunities and challenges for international marketers (Kotabe,2001). Those foreign opportunities and intense competition in domesticmarkets have caused firms to consider entering international markets. Theimperatives of globalization are clear across many industries; firms mustlook to expand into international markets to survive and thrive. However,seizing international opportunities require careful research of foreign mar-kets and their potential (Czinkota & Ronkainen, 2004).

One of the most important strategic determinations when deciding to ex-port or to establish operations in foreign countries is the selection of the‘‘right’’ market (Papadopoulos & Denis, 1988; Douglas & Craig, 1992;Kumar, Antonie, & Joachimsthaler, 1994; Cavusgil, 1997). Entering newmarkets require a major commitment of financial and managerial resources.Choosing the wrong markets can lead to substandard financial performanceor failure. Therefore, ‘‘the most frequent objective of international marketresearch is that of foreign market opportunity analysis,’’ (Czinkota &Ronkainen, 2004, p. 191). Developing research methods to facilitate thechoice of markets is, then, an important area of international market research.

Papadopoulos and Denis (1988) stress the importance and necessity forsystematically evaluating the potential of foreign market opportunities.With more than 200 potential markets, ‘‘a business executive can be over-whelmed with the diversity and complexity of alternative market opportu-nities,’’ (Cavusgil, Kiyak & Yeniyurt, 2004, p. 607).

For small and medium-size businesses that have not yet entered interna-tional markets, entry decisions constitute an especially critical first step onthe path to internalization. Many scholars agree that a firm’s initial marketselection is the first building block on which a firm’s entire international-ization strategy depends. Nonetheless, evidence indicates that many firms,especially small and medium firms, rarely or never do any research in thisarea (Kothari, 1978). Businesses just starting international marketing typ-ically choose their first markets based on reaction to unsolicited orders orother stimulation (Bilkey & Tesar, 1997; Bilkey, 1978; Cavusgil, 1980) ratherthan through a proactive, strategic research analysis.

A multi-stage selection process is an appropriate approach to selecting amarket(s) and/or making mode of entry decisions (Papadopoulos & Denis,1988; Kumar et al., 1994; Russow & Okoroafo, 1996; Cavusgil, 1997).Cavusgil (1997) proposes a three-step process for choosing overseas markets.He suggests a preliminary screening to determine the overall attractiveness of

Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 221

potential markets for further investigation, to be followed by an assessment ofindustry market potential to estimate aggregate demand, and finally, ananalysis of sales potential particularly unique to a company’s products.

The first step in the market selection process is a preliminary marketassessment aimed at reducing the total number of available countries in theworld to a more manageable set of high-potential markets (Czinkota &Ronkainen, 2004). Regardless of the number of stages in the market selec-tion process, it is important to emphasize that in-depth market analysis mustfollow the preliminary screening before making a final choice of market(s) toenter (Green & Allaway, 1985; Papadopoulos & Denis, 1988) and the sub-sequent decision on the mode of entry (Root, 1984).

Cavusgil (1997) provides insights into measuring the potential of emerg-ing markets through development of an OMOI. Cavusgil uses 13 indicatorsof market potential to form his OMOI which he uses to rank the attrac-tiveness of 23 emerging markets. Most recently, Cavusgil et al. (2004) up-dated the OMOI and applied it to 89 countries.

The purpose of this study is to modify and extend Cavusgil’s OMOI into amodified OMOI covering a majority of the countries in the world repre-senting 96 percent of world gross domestic product (GDP). We also seek tovalidate our modified OMOI and to compare the measures, samples andresults across studies, and to examine the sensitivity of the linear compen-satory models used in these analyses. While this approach to preliminaryscreening and ranking does not identify the final ‘‘right’’ market, it doesreduce the world to a set of high-potential markets for further in-depthevaluation, saving firms time and money in the final selection process.

The following section provides a selective literature review followed by adiscussion of our modified index including the data, samples and the anal-ysis. The results of our modified index and resultant rankings for 108 coun-tries are presented and compared to Cavusgil’s previous studies. To betterunderstand the sensitivity of this modeling technique, we conducted a sec-ond study, holding constant the variables, dimensions and sample, whilevarying the weights. Then, we discuss those results compared with theothers, the limitations and directions for future research opportunities be-fore concluding.

LITERATURE REVIEW

Papadopoulos and Denis (1988) reviewed the literature on the internationalmarket selection process identifying qualitative and quantitative as two


general approaches to analyzing international markets. They argue thatqualitative approaches are more subjective (e.g., Vogel, 1976) and may leadto discrepancies between perceived and objective reality (Johansson &Moinpour, 1977). The issue of ‘‘quantifying’’ foreign market opportunity hasalways been a primary concern for decision makers (e.g., Douglas & Craig,1983; Cavusgil et al., 2004). Papadopoulos and Denis note that ‘‘quantitativemethods have three main advantages: (1) they reduce subjectivity, (2) theyallow the firm to consider markets beyond its immediate neighbors, and(3) they make it possible to screen a large number of markets’’ (p. 45).Papadopoulos and Denis divide quantitative approaches into market group-ing and market estimation methods. Market grouping methods cluster coun-tries based on their similarity while estimation methods aim to differentiatecountries based on market potential. Cavusgil’s (1997) OMOI and its ex-tension in this study, fall into the quantitative category of market estimation.

Boddewyn and Falco (1986) study the size of the ‘‘market’’ sector aroundthe world. They reexamine research by an economic geographer who con-cluded that in 1960 ‘‘perhaps only 10 percent of the world’s population livedin fully commercial countries.’’ Using better data available in the late 1980s,Boddewyn and Falco replicated the survey covering 124 countries and clas-sified them into mutually exclusive categories along a spectrum of ‘‘market’’versus ‘‘non market’’ economies and classified countries into ‘‘go/no-go’’categories thereby reducing the number of countries in need of furtherevaluation.

Also, Root (1994) recommends conducting preliminary screening to iden-tify prospective target countries without regard to entry mode, and pointsout that the purpose of preliminary screening is to identify country marketswhose size warrants further investigation. Preliminary screening tries tominimize two errors: (1) ignoring countries that offer good prospects for acompany’s generic product and (2) spending too much time investigatingcountries that are poor prospects. He suggests that to minimize the firsterror, which is by far the most common, preliminary screening should beapplied to all countries. According to Root, one of the problems is that toooften managers start with assumptions or prejudices that rule out certaincountries (or certain regions) as possible target markets. During the pre-liminary screening of all countries, Root (1994) recommends using directestimates of market size and market-size indicators. This preliminaryscreening/analysis allows firms to identify prospective target countries wor-thy of further investigation.

Russow and Okoroafo (1996) propose a method to screen global marketsbased on theoretical considerations. Their study addresses the questions of


how to order screening relative to the assessment process, what criteria touse to screen countries, and the relative importance of each criterion. Theypresent an initial screening technique to identify markets that are suitablefor further assessment, leaving the selection of entry method to a subse-quent, in-depth investigation. The technique the authors propose measuresdemand and selected macro-environmental conditions. The screening crite-ria used are the costs and availability of the factors of production, the levelof economic development, and product-specific market size and growth.Russow and Okoroafo’s analysis tries to identify the relative importance ofthe criteria and uses them in screening for potential markets of five ran-domly selected products. The study uses principal component and clusteranalysis along with multiple discriminant analysis to identify clusters ofcountries that have high market potential by product category. Their studyfalls into the category of ‘‘market grouping’’ methods with its strength beingits product specificity. However, a limitation of their grouping techniques istheir failure to rank the markets (i.e., which of the 39 countries in the cluster‘‘pumps for liquids’’ offer the best opportunity).

Moreover, Ivanova et al. (1998) developed a technique to evaluate thepotential of Latin American countries, with the principal advantage of thestudy being its coverage of a large set of social and economic indicators.However, its major disadvantage resides in its limited coverage of countries,as it only measures a set of Latin American countries. Rahman (2000)sought to understand what market indicators, Australian marketing man-agers used to evaluated markets. He used surveys across industries to arriveat a factor-analyzed set of macro-economic indicators useful for Australianfirms.

Cavusgil (1997) first developed the OMOI to measure and rank the mar-ket potential for the 23 countries identified by The Economist as emergingmarkets. As industrialized countries continue to mature, these emergingmarkets have tremendous growth potential such that sufficient considera-tion must be given to evaluating their potential. While acknowledging thateach step in foreign market expansion is critical, Cavusgil argues that aformal and systematic analysis of aggregate market potential can be par-ticularly fruitful. Cavusgil selected 13 economic, infrastructure, political andsocial variables to characterize seven dimensions of a market’s attractivenessfrom the Western management point of view (see Table 1 for details). Theraw values of these 13 variables were standardized, putting them in a scale of1 to 100. The standardized data were then used to form the seven dimen-sions. Weights for each dimension were chosen through a Delphi decisionprocess. A liner compensatory model was used to create the OMOI as the


basis for ranking the emerging markets. The indexing approach proposed byCavusgil provides a systematic tool for reducing the complexity of evalu-ating emerging markets. Since the publication of his index in 1997, global-Edge at Michigan State University has continued to annually update andpublish the OMOI on its web site. The globalEdge (2004) OMOI identifiesHong Kong and Singapore as the current first and second-ranked emergingmarkets. Table 4 lists the original (Cavusgil, 1997) and more recent (global-Edge, 2004) emerging markets and their OMOI based rankings.

Additionally, Cavusgil et al. (2004) combine country clustering andcountry ranking into a preliminary foreign market assessment and selectionprocess. They reduce 29 macro level variables using principal componentanalysis to seven factors for input into a cluster analysis. This ‘grouping’process identified 10 clusters of ‘‘markets in terms of macro similarities,’’(p. 614). Next, Cavusgil et al. (2004) modified Cavusgil’s (1997) OMOI using16 variables to form seven dimensions1 as outlined in Table 1. Eighty-ninecountries were indexed and ranked (see Table 4 for the list of countries andtheir rank). They demonstrate the potential for using these two methods incombination. The ranking of the potential markets within each cluster arecompared to help identify the best market(s) within each cluster.

The major drawback of country clustering for market segmentation ‘‘hasbeen repeatedly identified as an exclusive reliance on aggregate, macro in-dicators (Cavusgil & Nevin, 1981; Douglas & Craig, 1983; Papadopoulos &Denis, 1988) at the neglect of specific-product/service market indicators’’(Cavusgil et al., 2004, p. 608). Product, situation, and consumer relatedmarket indicators are typically gathered through primary research that isboth expensive and time consuming. Luqmani, Yavas, and Quaraeshi (1994)argue that international markets should be seen as a continuum rather thandistinct and mutually exclusive clusters. Therefore, we suggest that it is moreappropriate to conduct a market opportunity ranking at the preliminarymarket assessment stage. Nonetheless, market clustering can be an ex-tremely useful method for segmentation of markets at a later stage ofmarket opportunity assessment when marketing executives can afford to useprimary research to attain product/service specific information. Such pri-mary research is more feasible, from time and money perspectives, after thepotential set of countries and territories has been reduced from a totaltopping 208 to a smaller number of prospective markets for further inves-tigation in a later stage of analysis.

Since the analysis of Boddewyn and Falco (1986), the world economy haswitnessed tremendous change. The transaction of Communist countries tomarket economies has opened new market opportunities. For instance,

Table 1. Dimensions and Indicators of Market Attractiveness.

Market indexc Cavusgil (1997) Cavusgil et al. (2004) Studies One and Two One Two

Dimensions.

Market size � Total population � Urban population� Electricity production kwh

� Total urban population

20% 24% 15% 25%

Market intensity–economic

intensity

� GNP/capita PPP� Private consumption/capita

� GDP/capita� Urbanization, % of population

� GDP/capita PPP� Energy consumption/capita� Electric consumption/capita

15% 12% 10% 15%

Market growth–future market

potential

� Growth rate industry (annual

average)

� GDP real growth rate� Growth commercial energy use

� GDP annual growth rate� Secondary school enrollment

ratio

15% 16% 10% 10%

Commercial infrastructure � Telephones/capita (mainline

only)� Homes with color TV� Paved road density� Trucks and busses/capita� Population/retail outlet

� Telephones/capita (mainline

only)� TVs/capita� Radios/capita� Internet Hosts/capita� Paved road density

� Telephones/capita (includes

wireless)� TVs/capita� PCs/capita� Internet connections/capita� Paved road density� Merchant shipping fleet� Railway freight net ton km

10% 12% 15% 10%

Freedom (economic and political)

and risk

� Economic freedom index � Economic freedom index� Survey of political freedom

� Economic freedom index

12% 10% 5%

Euromoney country risk ratings Political rights and civil liberties

10% 12% 10% 5%

Market receptivity –market

accessibility

� US imports/capita (40%)� Growth rate of US imports

� US imports/capita� Trade as % GDP

� Total imports of goods and

services % of GDP� Total merchandise imports

15% 10%

20% 12% � Geographic distance 15% 20%

Market construction capacity � Size of the middle class

10%

Weights 100% 100% 100% 100%

Exten

dingandComparin

gCavusgil’s

Overa

llMarket

Opportu

nity

Indexes

225


China’s economy is becoming one of the world’s largest markets, and itsentry into the World Trade Organization (WTO) will help cut import bar-riers for foreign products, which will give Western firms better access to over1.3 billion potential consumers. While the need for market opportunityassessment is great, there are very few studies in the marketing literature thatquantitatively analyze and rank the attractiveness of markets around theworld. This study seeks to compliment and extend those studies, specificallyCavusgil’s (1997) OMOI, by updating and validating the index and usingit to assess and rank the largest sample of countries to date. Given thatCavusgil et al. (2004)2 and this study both seek to amend and extendCavusgil’s (1997) OMOI, we clarify the similarities and differences betweenthe three studies in Tables 1, 3 and 4 as well as in the discussion.

Dimensions of Market Attractiveness and Opportunity

First, Cavusgil (1997) developed his OMOI to quantify and rank the marketpotential of emerging markets. Most of the 13 variables and the data used inCavusgil’s (1997) OMOI were from 1994, more than a decade ago. Wesuggest some modifications in the number and choice of variables to updatethe dimensions of market attractiveness. The variety of free, quality dataavailable over the Internet has increased markedly since 1994 making iteasier to find appropriate indicators for a large sample of countries. Ourdimensions and indicators along with those used in Cavusgil (1997) andCavusgil et al. (2004) are in Table 1:

Secondly, we conducted a primary (Study One) study ranking all thecountries on each dimension developing our modified OMOI to use as thebasis for an overall ranking of market attractiveness. In a linear compen-satory model, a weight is assigned to each dimension reflecting its relativeimportance compared to the other dimensions. Those weights must total 100percent in order to calculate the overall index (as discussed below). StudyTwo explores the sensitivity of this market modeling approach to the choiceof weights. The different weights used in the liner compensatory models toform the modified OMOIs in Study One and Study Two are in the last twocolumns of Table 1.

The seven dimensions and indicators we use have considerable overlapwith Cavusgil and colleagues. Nonetheless, the differences in dimensions,indicators and weights as shown in Table 1 are worth noting. For instance,we broaden the dimension of commercial infrastructure by emphasizingtwo aspects: telecommunications and physical infrastructure. We addedwireless phones and Internet connections per capita as indicators of


telecommunications infrastructure, and we also added the merchant ship-ping fleet and railway freight as indicators of physical infrastructure. Wealso use a secondary school enrollment ratio to indicate ‘‘future marketpotential’’ rather than relying on current GDP growth as an indicator of the‘‘market growth rate.’’ In addition, we use geographic distance as an in-dicator of market access for the first time in an OMOI. Table 1 outlines thedimensions and indicators we use in our studies as discussed next.

Market Size

The total population of a country gives us important information about thesize of a nation’s markets; however, a country’s urban population is mostaccessible for marketing (i.e., advertising, sales, distribution, after sale serv-ice, etc.). Therefore the percent of the population living in urban areas,called ‘‘urbanization,’’ is multiplied times the total population to indicatethe accessible or market population. For instance, India has a total pop-ulation of just over 1 billion people but only 28 percent live in urban areas.The effective market population is only 289.5 million. We differ fromCavusgil et al. (2004) in that they combined the size of the urban populationwith electricity production to estimate market size. Electricity productionhas most often been used as a measure of industrialization and is moreappropriate as an indicator of market intensity, which combines severalindicators of production per capita to indicate a nation’s economic outputper person. Market size has a relative weight of 15 percent in our total indexfor Study One and 25 percent in Study Two.

Economic Intensity

We use three variables as indicators of the intensity of economic output. Thisdimension parallels Cavusgil’s (2004) market intensity but is different enoughto label it as economic rather than market intensity. Both studies use GDPper capita adjusted for purchasing power parity (PPP) as an indicator. Itrepresents the per capita GDP in terms of ‘‘international dollars’’ in order toaccount for real buying power. Cavusgil and colleagues use urbanization (i.e.,the percent of the population that lives in urban areas) as their second in-dicator of market intensity. However, we focused on economic activity ratherthan urban population (used in Cavusgil’s studies to calculate market size).Instead, we chose two additional indicators of economic activity that are freeof potential distortion due to concerns over comparability of dollar basedmeasures of GDP and concerns over the strict comparability and the the-oretical nature of ‘‘international dollars’’ (i.e., PPP). However, we do utilizeboth energy and electric consumption as additional indicators of economic


activity, which per capita have been used as reliable indicators of economicdevelopment (Sofranko, Nolan, & Bealer, 1975; London, 1987; Bollen, 1979;Mullen, 1993) and as indicators of the relative industrialization of nations(Bornschier & Chase-Dunn, 1985). Economic output has a relative weight of10 percent in our total index for Study One and 15 percent in Study Two.

Future Market Potential

Cavusgil et al. (2004) and our study both use GDP annual growth rates toreflect a market’s recent economic growth. We differed from their use ofgrowth in commercial energy use as a second indicator and chose the sec-ondary school enrollment ratio as an indicator of the longer term future ofpotential and opportunity. Education has often been shown to be a cause ofeconomic growth (e.g., Jaffee, 1985). The secondary school enrollment ratio(i.e., the percentage of school age children completing secondary education)is used in a number of studies (Douglas, 1971; Stokes & Anderson, 1990;etc.) and has been shown to be a reliable and valid indicator of economicdevelopment (Mullen, 1993). Education also provides an indicator of mar-ket readiness for advanced products and services. The GDP annual growthfrom 1998 to 2002 and secondary school enrollment ratio are combined asequal indicators of future market potential with relative weights of 10 per-cent in our total index for Study One and 10 percent in Study Two.

Commercial Infrastructure

As noted above, we broaden the dimension of commercial infrastructure byemphasizing two aspects: telecommunications and physical infrastructure,both of which are critical for modern commerce. While Cavusgil et al. (2004)use telephone mainlines/capita, we added cell phones (i.e., wireless) to ourlist of indicators since wireless communication is becoming increasinglypopular and even necessary for modern commerce. There has been substan-tial evidence that the Internet has a growing positive impact on internationaltrade. Freund and Weinhold (2000) found only weak evidence of the effectof the Internet on trade in 1995–1996 but found a significant and increasingimpact of the Internet on trade flows from 1997 to 1999. We use the numberof Internet users per 10,000 and Cavusgil uses Internet hosts per capita tocapture this effect on trade. In addition, we added the number of computersper 100 as a third measure of telecommunications infrastructure that enablesInternet usage and embodies infrastructure necessary for modern commerce.Both studies also use televisions per capita. Cavusgil et al. (2004) use oneindicator of physical infrastructure – paved road density. To that we addedmeasures of the gross registered tonnage of the countries merchant shipping


fleet and railway freight traffic, measured by net ton kilometers, as threeindicators of physical infrastructure. These six measurements are combinedto assess commercial infrastructure and have a relative weight of 15 percentin our total index for Study One and 10 percent in Study Two.

Freedom and Risk

Economic and political freedoms are anatomical to, and necessary for, thesmooth functioning of free markets. Political freedom and civil rights in-crease the prospects for stability and reduce the long-terms risks of oper-ating in a market.

Economic Freedom. According to Gwartney and Lawson (2003), ‘‘The keyingredients of economic freedom are personal choice, voluntary exchange,freedom to compete, and protection of person and property. Economicfreedom is reduced when taxes, government expenditures, and regulationsare substituted for personal choice, voluntary exchange, and market coor-dination.’’ The 2003 Fraser Institute’s annual report ranks 123 countriesrepresenting according to the extent to which they allow their citizens eco-nomic freedom. Economic freedom has a relative weight of 10 percent in ourtotal index for Study One and 12 percent in Study Two.

Political Freedom and Risk. Political Freedom is included as an importantfactor in ranking potential foreign markets because it reflects the risk ofdoing business in a particular country. By focusing only on national wealth,consumer income, and people’s propensity to consume, companies ignorethe costs and risks of doing business in foreign countries. Karatnycky’s(2002) Freedom in the World survey calculates political freedom as an av-erage of each country’s ratings for political rights and civil liberties.According to the 2002 Freedom in the World survey there are 85 ‘‘free’’countries in which basic political rights and civil liberties are recognized, and59 ‘‘partly free’’ countries with limited respect for political rights and civilliberties. Thirty-five percent of the global population is living in 48 ‘‘notfree’’ countries in which a broad range of freedoms are systematically de-nied. Political freedom and risk has a relative weight of 10 percent in ourtotal index for Study One and 12 percent in Study Two.

Market Accessibility

In line with Boddewyn and Falco (1998), Rahman (2000) and Cavusgil et al.(2004), our focus is from a US firm’s perspective. However, we deviate from


Cavusgil (1997) and Cavusgil et al. (2004) by not including US imports as anindicator of a market’s receptivity, reserving that measure to validate the studyas a whole nor do we use total trade as an indicator of market openness.3

Total Imports

The OECD uses total imports of goods and services as a percent of GDP toindicate open markets. We combine that measure of import intensity withtotal merchandise imports as indicators of market openness/access from anexporting firm’s perspective, regardless of where those imports come from.Total imports have a relative weight of 15 percent in our modified OMOIindex for Study One and 10 percent for Study Two.

Geographic Distance4

Distance still matters and firms must explicitly consider the effects of dis-tance when they make decisions about entering international markets(Ghemawat, 2001). ‘‘The amount of trade that takes place between countries5,000 miles apart is only 20 percent of the amount of trade that would bepredicted to take place if the same countries were 1,000 miles apart’’(p. 138). They argue that the further the physical distance, the harder it willbe to conduct business due to aspects like increased transportation andcommunications costs. Bradner and Mark (2002) demonstrated that geo-graphic distance negatively affects a person’s willingness to be persuaded byothers, reducing the opportunity for new business. Their results furthershow that greater physical distance reduces people’s willingness to cooperatewith others and also makes people more willing to deceive business partners;both of which will lead to increased transaction costs (Williamson, 1981).Therefore, we add geographic distance5 as an additional dimension/indica-tor of market access. Geographic distance has a relative weight of 15 percentin our total index for Study One and 20 percent in Study Two.

Cavusgil’s studies use seven dimensions to calculate OMOIs while ouranalysis subdivides market accessibility into two separate dimensions, im-ports and geographic distance. These eight dimensions of market attractive-ness are used as the basis for forming our modified OMOI to rank the world-wide market opportunities in the next section, followed by a validity analysis.

Model Validity

The model and modified index we develop are created from the perspectiveof a firm operating in the US and looking for foreign market opportunities.Therefore, we address the face validity of our modified OMOI index by


comparing it with the trade flows from the US.6 Three years of trailingimports from the US were averaged and used as the basis to compare ourranking of market attractiveness with actual subsequent trade from the USto those countries.

RESEARCH METHODS AND RESULTS

Sample

One hundred and eight countries are included in our sample because theirfull, current data sets are available. Other countries are unfortunately notincluded because of insufficient data because of aspects like political unrest(e.g., Afghanistan, Burma, Cuba, Haiti, Iraq and North Korea) or size orlack of development and insufficient resources (e.g., Andorra, EquatorialGuinea, Rwanda, Somalia). Because we are doing our study from a USfirm’s perspective, we explicitly exclude the US from the sample. While thisis admittedly a convenience sample, the countries account for 92 percent ofthe balance of the world’s population and 96 percent of the balance of theworld’s GDP.7 The sample contains 24, primarily African nations, that havenot been previously indexed and ranked. Also, the 108 countries in thesample are listed alphabetically in the first column of Table 2.

The Data

Data for analysis in this research are collected from three internationalorganizations: the IMF, United Nations’ statistics division and the WorldBank statistics division. These sources are considered among the most re-spectable and reliable with uniform terminology and methodology. Theyalso provide wide coverage of countries and are frequently used. Impor-tantly, the data are updated annually and cover a large variety of economicand social variables. Most of the data are from 2001 to 2003, although someindicators of market intensity are as old as 1998. The first line of Table 2, inbold, shows the year of the data.

Quantitative Analysis

Following Cavusgil (1997), the index was created from the raw values of the18 variables by standardizing the items and placing them into a scale of 1 to100. As Cavusgil explains in his study, standardization is a statistical process

Table 2. Extended Overall Market Opportunity Index and Rank: Study One.

Countries Market

Size

Rank Market–

Econom

intensity

Rank Market

Growth

Rate

Rank Commercial

infrastructure

Rank Freedom and Risk market accessibility Mod. OMOI

index

Overall

rank

Economic Rank Political Rank imports Rank geographic

distance

Rank

Year(s) of Datac 2001 1998–2001 1998–2002 2000–2002 2003 2001–2002 2001–2003

Albania 1 97 8 107 68 27 12 62 31 61 49 59 12 55 51 53 27 74

Algeria 5 31 40 55 59 52 14 57 27 72 21 88 7 89 59 31 27 72

Argentina 8 19 31 90 47 79 18 47 23 87 57 53 4 107 58 35 29 62

Armenia 1 86 49 42 73 6 21 33 42 32 42 70 14 49 41 68 32 53

Australia 5 32 90 3 72 7 54 6 58 9 85 3 12 62 24 86 45 19

Austria 2 54 70 17 64 42 54 6 54 17 85 3 23 22 58 35 48 12

Bangladesh 8 18 32 85 50 68 3 97 18 98 49 59 6 100 20 93 20 97

Belgium 3 41 79 9 65 37 46 12 51 18 78 15 44 4 62 24 50 6

Benin 1 72 33 81 38 95 5 88 24 83 64 42 7 89 46 60 25 78

Bolivia 2 54 27 100 55 60 6 84 43 30 71 34 7 93 69 14 32 52

Brazil 31 3 36 67 57 55 17 50 31 61 57 53 8 82 66 16 36 41

Bulgaria 2 59 48 43 71 12 31 19 32 57 71 34 20 28 51 53 38 37

Burkina 1 86 30 96 30 103 16 53 27 72 42 70 6 100 51 53 24 79

Cambodia 1 86 36 69 40 91 4 92 36 49 21 88 21 26 18 98 20 100

Cameroon 2 45 33 81 41 89 4 92 20 90 14 99 7 89 40 72 19 102

Canada 6 24 101 2 71 16 56 2 56 13 85 3 34 10 100 1 61 1

Chad 1 86 41 53 42 88 4 92 22 90 21 88 17 39 42 65 22 90

Chile 4 35 44 49 62 47 22 31 57 12 71 34 10 70 62 24 38 36

China 100 1 44 50 83 1 40 16 20 90 7 103 32 11 32 79 46 15

China, HK 2 47 61 27 60 51 56 2 70 2 99 1 69 1 23 10 51 4

Colombia 7 23 32 87 49 72 12 62 31 61 42 70 6 98 87 7 32 51

Costa Rica 1 86 37 65 45 81 20 39 40 36 78 15 14 49 89 50 39 35

Croatia 1 81 46 46 65 34 35 18 31 61 71 34 18 36 53 31 37 38

Czech Republic 2 45 64 24 72 9 41 15 47 26 78 15 24 19 59 24 45 18

Denmark 2 63 72 15 66 30 68 1 60 7 85 3 15 45 62 12 50 7

Ecuador 3 44 38 59 54 62 11 67 20 90 57 53 9 80 81 65 32 50

Egypt 7 21 34 77 65 37 10 72 27 72 14 99 7 93 42 6 24 80

El Salvador 2 67 30 93 41 89 11 67 50 20 64 42 13 54 90 40 36 42

Estonia 1 103 60 29 72 7 36 17 61 5 78 15 27 14 57 81 45 16

Ethiopia 3 41 39 58 42 87 3 97 26 77 28 82 9 78 28 31 20 99

Finland 2 72 84 5 67 29 56 2 56 13 85 3 11 64 59 21 48 10

France 10 13 75 13 69 22 53 8 42 32 78 15 39 6 63 64 51 5

Georgia 1 81 37 63 66 31 25 26 29 69 42 70 12 55 44 28 30 60

MIC

HAELR.MULLEN

AND

SHIR

LEY

YE

SHENG

232

Germany 16 8 70 19 63 44 50 10 55 15 78 15 58 3 60 58 54 2

Ghana 2 47 32 88 43 86 8 76 25 79 64 42 18 32 49 56 28 67

Greece 2 53 62 25 72 9 42 14 38 41 71 34 10 70 50 5 40 30

Guatemala 2 54 30 95 34 99 9 74 30 67 49 59 8 82 91 40 31 56

Guinea 1 81 28 98 30 104 4 92 28 70 21 88 7 89 57 87 21 95

Honduras 2 67 30 94 49 72 7 79 22 90 57 53 17 40 92 4 34 46

Hungary 2 51 54 37 71 16 30 21 42 32 78 15 26 16 55 44 41 22

India 60 2 36 66 57 55 14 57 22 90 64 42 8 82 18 98 33 48

Indonesia 21 6 32 86 49 72 12 62 17 100 49 59 11 64 6 107 22 89

Iran 10 15 46 46 53 63 15 55 6 105 14 99 7 93 37 74 22 88

Ireland 1 86 83 6 77 3 48 11 61 5 85 3 30 12 69 14 53 3

Israel 2 54 57 32 60 50 46 12 48 23 71 34 17 40 41 68 40 32

Italy 9 17 66 21 68 28 51 9 50 20 78 15 30 12 58 35 48 11

Jamaica 1 97 35 72 59 53 28 23 38 41 64 42 18 36 95 3 41 25

Japan 21 5 72 16 70 19 55 5 44 29 78 15 36 9 46 60 50 8

Jordan 2 63 37 63 64 40 23 29 39 39 28 82 22 25 41 68 30 58

Kenya 3 40 23 103 31 101 4 92 28 70 21 88 9 80 22 90 16 105

Korea, South 9 16 60 28 32 100 8 76 99 1 99 1 24 21 38 73 41 24

Kuwait 1 86 88 4 40 92 20 39 40 36 35 78 11 64 35 77 30 57

Laos Republic 1 103 35 72 45 80 8 76 2 106 7 103 8 86 18 98 14 106

Latvia 1 97 51 38 79 2 19 44 48 23 78 15 18 36 57 40 40 31

Lebanon 2 72 39 57 57 55 18 47 31 61 21 88 12 55 42 65 26 76

Lithuania 1 81 51 40 76 4 21 33 51 18 78 15 18 32 57 40 40 27

Madagascar 2 59 34 74 72 9 3 97 31 61 56 58 8 86 11 104 23 85

Malawi 1 97 16 106 28 106 3 97 24 83 49 59 12 55 19 95 17 104

Malaysia 4 35 41 53 31 102 15 55 30 67 28 82 38 8 12 103 23 83

Mali 2 67 23 102 56 59 3 97 26 77 64 42 10 70 55 44 27 73

Mauritius 1 106 47 44 64 40 19 44 34 55 78 15 18 32 1 108 28 65

Mexico 17 7 35 70 49 75 10 72 36 49 64 42 25 18 100 1 41 23

Mongolia 1 97 28 99 50 70 2 104 36 49 64 42 26 17 36 75 27 71

Morocco 4 32 40 55 62 47 11 67 35 52 28 82 11 64 63 21 30 59

Mozambique 2 54 51 38 53 64 3 97 27 72 49 59 11 69 15 102 23 86

Nepal 2 72 33 81 48 76 5 89 22 90 49 59 8 82 23 87 21 96

Netherlands 4 34 77 12 66 31 23 29 55 15 85 3 39 6 63 21 48 13

New Zealand 2 72 77 11 71 12 18 47 62 4 85 3 10 70 32 79 39 34

Nicaragua 1 81 31 91 71 12 3 97 35 52 57 53 15 48 89 7 36 43

Niger 1 86 34 74 50 70 2 104 24 83 42 70 6 98 50 56 24 81

Nigeria 13 9 31 92 29 105 6 84 13 102 35 78 12 55 46 60 22 87

Norway 2 72 112 1 70 18 27 24 48 23 85 3 10 70 64 19 47 14

Oman 1 86 73 14 70 19 14 57 38 41 21 88 10 70 26 85 28 68

Pakistan 11 12 33 78 57 54 9 74 25 79 21 88 6 100 28 81 22 92

Panama 1 97 33 81 50 68 19 44 37 46 78 15 20 28 89 7 39 33

Exten

dingandComparin

gCavusgil’s

Overa

llMarket

Opportu

nity

Indexes

233


Countries Market

Size

Rank Market–

Econom

intensity

Rank Market

Growth

Rate

Rank Commercial

infrastructure

Rank Freedom and Risk market accessibility Mod. OMOI

index

Overall

rank

Economic Rank Political Rank imports Rank geographic

distance

Rank

Paraguay 2 72 36 67 47 78 11 67 25 79 49 59 12 55 62 24 29 63

Peru 5 28 27 101 48 76 5 89 37 46 71 34 5 106 77 13 32 54

Philippines 11 11 33 80 51 67 7 79 32 57 64 42 18 32 23 87 27 75

Poland 6 26 43 51 66 31 17 50 38 41 78 15 13 51 58 35 37 40

Portugal 2 50 54 36 65 37 20 39 47 26 85 3 15 45 66 16 41 26

Romania 3 37 47 45 69 24 14 57 19 97 71 34 13 51 53 50 33 47

Russia 23 4 62 26 69 24 17 50 24 83 28 82 11 64 54 47 34 45

Saudi 5 28 65 23 61 49 29 22 32 57 0 106 9 78 35 77 27 70

Senegal 2 59 34 74 44 83 6 84 34 55 49 59 12 62 60 28 28 66

Singapore 2 63 57 33 57 55 21 33 64 3 28 82 62 2 7 105 34 44

Slovak Republic 2 72 56 34 63 44 20 39 46 28 78 15 27 15 55 44 40 29

Slovenia 1 103 65 22 69 22 21 33 39 39 78 15 19 31 58 35 40 28

South Africa 6 25 50 41 52 65 7 79 38 41 78 15 10 70 20 93 28 64

Spain 7 22 54 35 71 12 25 26 49 22 78 15 23 22 64 19 43 20

SriLanka 2 63 20 105 54 61 16 53 32 57 49 59 13 51 7 105 21 94

Sudan 4 63 38 61 52 65 12 62 2 108 36 75

Sweden 2 47 80 8 69 24 27 24 58 9 85 3 17 40 60 28 45 17

Switzerland 2 59 67 20 64 42 21 33 59 9 85 3 20 28 59 31 43 21

Syrian Arab

Republic

3 43 35 70 45 81 5 89 14 101 0 106 10 77 41 68 18 103

Tanzania 3 39 70 17 44 83 2 104 27 72 42 70 7 93 21 92 23 84

Thailand 4 37 38 59 24 107 20 39 37 46 64 42 24 19 16 101 26 77

Togo 1 86 29 97 36 96 6 84 18 98 28 82 15 45 46 60 21 93

Tunisia 2 52 43 52 65 34 13 61 35 52 21 88 16 44 54 47 29 61

Turkey 10 14 21 104 35 98 11 67 25 79 35 78 12 55 48 59 24 82

Uganda 2 67 46 48 38 94 2 104 40 36 21 88 7 93 27 84 20 98

Ukraine 8 20 78 10 74 5 24 28 23 87 42 70 17 40 53 50 37 39

United Arab

Emirat

1 86 81 7 63 44 21 33 42 32 21 88 22 24 28 81 32 55

United Kingdom 12 10 58 31 70 19 31 19 60 7 78 15 41 5 66 16 49 9

Uruguay 2 72 31 89 44 83 22 32 43 30 85 3 6 100 54 47 33 48

Venezuela 5 27 38 61 35 97 7 79 8 104 42 70 5 104 86 11 28 69

Vietnam 5 30 59 30 65 34 7 79 13 102 7 103 20 27 19 95 22 91

Zambia 2 67 33 78 39 93 12 62 23 87 35 78 8 86 22 90 20 101

Zimbabwe 2 67 6 108 20 108 14 99 5 104 19 95

MIC

HAELR.MULLEN

AND

SHIR

LEY

YE

SHENG

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enabling us to directly compare variables with very different measures anddistributions. The original data are first transformed into standardized data,or z-scores, that are used to form an index for each dimension. This index issorted from largest to smallest in order to rank the 108 countries on eachdimension as summarized in Table 2. The dimensions (i.e., market size,market/economic intensity, etc.) are listed across the top of the table. Thereare two columns beneath each dimension. The first is the standardized indexfor each country. The next column is the rank order of the markets attrac-tiveness on that dimension.

The rankings of the eight separate dimensions in Table 2 indicate thatChina is ranked number one, as expected, for size and market potential/growth but drops to 90th and 10third for economic freedom and political risk.Canada and Mexico are naturally closest geographically to the US followedby nations from the Caribbean basin (i.e., Jamaica and Venezuela) and fromCentral America (i.e., Honduras, Guatemala and Costa Rica). Denmark isshown to have the best ranking for commercial infrastructure and Hong Konghas the highest ranking for imports. This is undoubtedly due to its strate-gic position as the gateway to mainland China. Norway is the top rankedmarket for economic intensity, reflecting its high economic output per capita.

Study One

Finally, a linear compensatory model is used to calculate our modifiedOMOI. We multiply the weights by the indexes for each of the eight di-mensions and add the results together to figure the OMOI for each country.Sudan and Zimbabwe had data to form indexes for six of the eight dimen-sions and are ranked on those dimensions, but they are not included in thecalculations for the OMOI and overall rankings because they are missingdata on the other two dimensions. Our modified OMOI from Study One isthen used to rank the other 106 country’s overall market attractiveness,relative to the other countries in the study. Table 2 shows the OMOI for the106 countries in the second to last column and the rank order of marketattractiveness in the last column. For instance, Table 2 shows that Canada isranked second in economic intensity and commercial infrastructure andthird in political risk taken together with no physical distance to yield anoverall first place in the OMOI assessment of market attractiveness for USfirms, corresponding to its role as America’s leading trading partner.

A Comparative Analysis: Study Two

In order to sort out the sensitivity of the linear compensatory model tochanges in the weights used to calculate OMOIs, we conducted a second


study using the same indicators, dimensions and countries as in Study One.The only variable that is changed is the weight assigned to each dimension.We increased the weights for market size to 25 percent and for market/economic intensity to 15 percent following Cavusgil (1997) and colleagues(2004). Further we increased the weight for geographic distance from 15 to20 percent to improve the fit of the model to the validity coefficient. Con-sequently, the weights for commercial infrastructure, both aspects of free-dom and risk, and imports are reduced to 5 percent each to keep the totalequal to 100 percent. The weights used to calculate the modified OMOI forStudy Two are shown in the last column of Table 1 above. Because theweight is the only variable in the analysis that is changed, it is possible toisolate differences due strictly to changes in the weights. The results providesome insight into the sensitivity of liner compensatory models to differentweights. The resulting rankings from Study Two are reported in Table 3along with Cavusgil (1997), globalEdge (2004), Cavusgil et al. (2004) andStudy One.

As can be seen in Table 3, 12 countries showed no change in rankingbetween Studies One and Two. Just over two-thirds (68 of 106) moved up ordown by five or less ranks in the market attractiveness ratings. Elevencountries improved their rankings by 10 or more – led by Russia, Brazil,Venezuela, Iran, China and India, all benefiting by the increased emphasison size, and Venezuela by its geographic proximity to the US. China im-proved from 15th to 2nd overall with the increased weight for size given thatalmost a half billion of their 1.3 billion population live in urban areas. Sevencountries (and Hong Kong) fell by 10 or more ranks lead by Mauritius,Singapore and South Korea due to increased emphasis on size and distanceand a reduced weight for imports.

Validity

It is important to address the face validity of the modified OMOI by com-paring it to subsequent trade flows. The modified OMOI is used to evaluateand rank the attractiveness of 106 foreign markets from a US perspective(i.e., the US is not in the sample). The rank order of the dollar volume ofthree years of subsequent US exports to the 106 countries is compared to therankings derived from OMOI values. For data sets in which both rows andcolumns contain ordered values, Spearman’s correlation coefficient, rho, ismost appropriate as a measure of association between rank orders and isproposed as a validity coefficient for OMOIs. For Study One, Spearman’srho is 0.61 and 0.63 for Study Two; both statistically significant at the 0.000level (a ¼ 0.05) demonstrating reasonable validity for our modified OMOIs.8

Table 3. Countries and Rankings by Study.

Countries Cavusgil

(1997)

globaledge

(2004)

Cavusgil et al.

(2004)

Study One Study Two

Albania 80 74 75

Algeria 80 72 61

Argentina 10 19 39 62 62

Armenia 61 53 57

Australia 6 19 21

Austria 22 12 14

Azerbaijan 70

Bangladesh 85 97 99

Belarus 76

Belgium 9 6 8

Benin 78 83

Bolivia 49 52 56

Brazil 15 20 29 41 25

Bulgaria 65 37 42

Burkina 79 84

Cambodia 100 102

Cameroon 102 97

Canada 1 1 1

Chad 90 86

Chile 13 10 25 36 38

China 2 4 2 15 2

China, HK 3 1 12 4 18

Colombia 23 61 51 47

Costa Rica 38 35 32

Croatia 44 38 46

Czech Republic 18 7 34 18 17

Denmark 16 7 10

Dominican Republic 54

Ecuador 74 50 48

Egypt 16 65 80 73

El Salvador 55 42 41

Estonia 28 16 19

Ethiopia 99 98

Finland 9 10 11

France 14 5 5

Georgia 49 60 67

Germany 7 2 3

Ghana 76 67 70

Greece 7 32 30 30

Guatemala 65 56 50

Guinea 95 88

Honduras 65 46 45

Hungary 14 6 34 22 28



Countries Cavusgil

(1997)

globaledge

(2004)

Cavusgil et al.

(2004)

Study One Study Two

India 12 8 21 48 36

Indonesia 20 17 76 89 89

Iran 88 74

Ireland 5 3 4

Israel 5 5 24 32 40

Italy 22 11 12

Jamaica 25 22

Japan 3 8 7

Jordan 58 58 66

Kenya 88 105 105

Korea, South 4 3 17 24 42

Kuwait 43 57 53

Lao Republic 106 104

Latvia 39 31 34

Lebanon 76 71

Lithuania 44 27 33

Madagascar 85 96

Malawi 104 106

Malaysia 8 14 33 83 94

Mali 73 69

Mauritius 65 85

Mexico 11 11 34 23 15

Moldavia 73

Mongolia 81 71 78

Morocco 65 59 55

Mozambique 59 86 92

Nepal 88 96 100

Netherlands 11 13 13

New Zealand 20 34 39

Nicaragua 43 37

Niger 81 77

Nigeria 84 87 80

Norway 15 14 6

Oman 68 65

Pakistan 86 92 87

Panama 46 33 31

Paraguay 70 63 64

Peru 21 55 54 51

Philippines 23 18 52 75 76

Poland 16 9 34 40 44

Portugal 9 25 26 26

Romania 74 47 49

Russia 22 12 27 45 29



Countries Cavusgil

(1997)

globaledge

(2004)

Cavusgil et al.

(2004)

Study One Study Two

Saudi Arabia 53 70 60

Senegal 81 66 68

Singapore 1 2 4 44 63

Slovak, Republic 41 29 35

Slovenia 29 28 26

South Africa 19 22 47 64 72

Spain 17 20 20

SriLanka 70 94 103

Sudan 6 of 8

Sweden 12 17 16

Switzerland 17 21 23

Syrian Arab Republic 83 103 93

Tanzania 84 79

Thailand 6 13 47 77 91

Togo 93 90

Tunisia 57 61 58

Turkey 21 15 49 82 82

Uganda 98 95

Ukraine 61 39 24

United Arab Emerates 31 55 52

United Kingdom 7 9 9

Uruguay 41 48 59

Venezuela 17 60 69 54

Vietnam 76 91 81

Yemen 87

Zambia 101 101

Zimbabwe 6 of 8

Sample size 23 23 89 108 108

Country changes from Cavusgil (1997) to globalEdge (2004): dropped Greece, Portugal and

Venezuela and added Egypt, Peru and Columbia.


Visual examination of the results indicated several unusual cases, so weran a simple regression of OMOI on US imports and examined DfBeta,Standardized DfBeta and covariance ratio statistics to identify influentialoutliers (for a full discussion of outlier detection and analysis (see Belsley,Kuh, & Welsch, 1980; Mullen, Milne, & Doney, 1995). Ethiopia andMalaysia were identified as especially influential outliers followed byThailand and Slovenia. For Study One, the validity coefficient improvedfrom 0.61 to 0.65 without the first two outliers, and further to 0.67 byholding out all four from the correlation analysis. The validity coefficients


for Study Two improved from 0.63 to 0.67 and from 0.65 to 0.70, withoutthe two and then four outliers. The modified OMOIs developed in StudiesOne and Two demonstrate reasonable validity, especially Study Two with-out the four outliers. For the remaining 102 countries, the 0.70 validitycoefficient provides some evidence of the external (face) validity of thesemodified OMOIs and the resultant rankings of attractive markets. Pleasenote that we do not drop the four countries from the rankings but cautionthat their status as influential outliers indicates the need for further analysisbefore accepting their rankings at face value.

Comparative Results

The 30 best prospect markets for American firms (based on Study Twobecause of the high 0.70 validity coefficient) are listed in Table 4. For com-parison purposes, the ranking of those markets from Study One andCavusgil et al. (2004) are also shown. All three studies rank Canada as #1 inoverall attractiveness for US firms in line with its status as the number onemarket for US exports. However, they are somewhat off the mark forAmerica’s second largest export market, Mexico, with Study Two ranking itat 15, Study One at 23 and Cavusgil et al. at 34. Nonetheless, there issubstantial correspondence across the three studies on the top 30 prospec-tive markets. With 90 (30� 3) potential ‘‘top 30’’ rankings, only eight do notmatch and four of those mismatches are very close (i.e., Cavusgil et al. rankGreece at 32 and tie Russia, the Check Republic and Hungary at 34). Fur-thermore, all three studies include the following six countries in the list ofthe top 10 most attractive markets for US firms: Canada, Germany, Japan,Belgium, UK and Ireland.

The Ukraine has the greatest deviation from its 24th rank in Study Two,compared to 39 in Study One and a distant 61st place in Cavusgil et al. It isworth noting that among our top 30, Estonia and Slovenia are outliersindicating that there is a substantial difference between their ranks and theiractual imports from the US. Furthermore, it appears that the rankings ofthe Ukraine are less than reliable. Therefore closer evaluation of thosemarkets is necessary before concluding that they are or are not high prospectexport markets.

DISCUSSION

The modified OMOIs developed, validated, and compared here add to thegrowing literature on ranking the best prospect foreign markets in order to

Table 4. The 30 Most Attractive Markets for US Firms.

Country Study One Study Two Cavusgil et al. (2004)*

Canada 1 1 1

China 15 2 2

Germany 2 3 7

Ireland 3 4 5

France 5 5 14

Norway 14 6 15

Japan 8 7 3

Belgium 6 8 9

United Kingdom 9 9 7

Denmark 7 10 16

Finland 10 11 9

Italy 11 12 22

Netherlands 13 13 11

Austria 12 14 22

Mexico 23 15 34

Sweden 17 16 12

Czech Republic 18 17 34

China, HK 4 18 12

Estonia 16 19 28

Spain 20 20 17

Australia 19 21 6

Jamaica 25 22

Switzerland 21 23 17

Ukraine 39 24 61

Brazil 41 25 29

Portugal 26 26 25

Slovenia 28 27 29

Hungary 22 28 34

Russia 45 29 27

Greece 30 30 32


help firms in the process of identifying the ‘‘right’’ markets to enter. Giventhe reasonable external validity and the overlap in the top 30 rankings fromall three studies, it behooves managers considering entering new markets tofocus scarce resources to further analyze the top 10 or top 30 markets,depending on firm resources and constraints. For firms already in foreignmarkets, comparison with the list of the top 30 markets may give insights tothose that warrant further investigation for future expansion.

Cavusgil et al. (2004) analyzed 84 of the same countries as those in ourstudies making comparisons possible. Nonetheless, there are five countries(e.g., the Dominican Republic) in Cavusgil et al. that are not in the current


analyses and there are 24, primarily African countries, in our studies that arenot in Cavusgil et al. making direct comparison of the results problematic.

While there is a substantial overlap in variables and the weights for somedimensions such as economic freedom, there are substantial differences inindicators and weights for other dimensions making it difficult to identifythe cause of the variation in the rankings (see Table 1 for details). Forinstance, we used total urban population as the indicator of market size andCavusgil et al. used urban population plus electricity production. The mostpronounced differences in variables are those used to assess market recep-tivity or accessibility. Cavusgil et al. used imports from the US per capitaand total trade as a percent of GDP as their indicators. Because we usedimports from the US to validate the studies, we rely on total imports forgoods and services as a percent of GDP rather than just those form the US.We also used geographic distance as an additional (inverse) indicator ofmarket accessibility. In addition, the dimensions are somewhat different(Cavusgil: 7 with 16 indicators versus ours: 8 with 18 indicators) withdifferent weights in the three studies. Further, most of the data are fromdifferent years. So while the comparisons between different studies areinteresting, it is hard to know whether the source of variation in countryrankings is due to the differences in samples, variables or weights.

Nonetheless, it is interesting to note in Table 3 that emerging marketsnear the top in Cavusgil (1997) and globalEdge (2004) are moderately po-sitioned in our research. For instance, Cavusgil (1997) and globalEdge(2004) rank Singapore 2nd and 1st while our Studies One and Two rank it44th and 63rd. Also they rank South Korea fourth and third compared toour rankings of 24th and 42nd. There are very substantial differences in themake up and numbers of countries in the emerging market samples fromCavusgil (1997) and globalEdge (2004) compared to Cavusgil et al. (2004)and Studies One and Two (see Table 3). As a result, there are large differ-ences for countries such as Venezuela that ranked 17th in Cavusgil (1997),60th in Cavusgil et al. (2004) and 69th and 54th in Studies One and Two.Furthermore, Egypt (16, 65, 80–73), Indonesia (20–17, 76, 89–89) andMalaysia (8–14, 33, 83–94) show similar patterns in Table 3 to that ofVenezuela where the rankings suffer when included in the larger sample ofcountries representing 96 percent of the worlds net GDP. As this discussionof the results demonstrates, substantial differences in the samples renderdirect comparison of the results subjective, at best. Nonetheless, an impor-tant implication is that no matter how important the emerging markets arefor the future, firms cannot afford to overlook the market opportunities inneighboring countries and other wealthy OECD member countries.


The geographic distance measure was added as an important indicator ofmarket accessibility for the first time in an OMOI improving the face andpredicative validity of the index. We use straight-line distance from theclosest of one of three major US port cities to measure distance in ouranalysis. Other researchers have used straight-line sea and land distances butmultiply the land distances by a factor of two (e.g., Bergstrand, 1985).Regardless, studies that include geographic distance (Bergstrand, 1985;Ghemawat, 2001; Bradner & Mark, 2002), including this one, have found itto be an important predictor of trade flows.

The face or external validity of OMOIs has not been adequately ad-dressed in the literature. We compared the average of three years of sub-sequent US imports by country to the OMOIs and their rankings withSpearman’s rho to assess the validity of our modified OMOIs. The validitycoefficients showed a reasonable fit of the model to the market and providea baseline for future research.

Where there are significant differences between the OMOI rankings andthe actual US imports, additional thought and research is necessary to sortout the cause before firms make market entry decisions. For instance, if theranking indicates much higher potential than actual US imports, there maybe untapped market opportunity or markets closed to trade, possibly re-quiring FDI to enter. Where trade flows are significantly higher than pre-dicted, the model may need to be modified to account for the discrepancy,unless research demonstrates idiosyncratic cause(s). Canada, Mexico andthe UK deserve such further consideration from a US perspective. Colonialties, preferential trade arrangements (i.e., FTAs) and land borders have allbeen shown to be positively related to bi-lateral trade flows (Bergstrand,1985; Frankel & Rose, 2000; Ghemawat, 2001). Canada and Mexico,America’s number one and two trading partners share long land borderswith the US and preferential trade arrangements through NAFTA. In ad-dition, Canada, Britain and the US share common colonial ties. The UK isthe USA’s fourth largest export market while our OMOIs ranked it ninth.The UK’s imports are almost twice (1.93) those of the number nine USimporter, France. As noted above, Mexico is ranked 23rd and 15th mostattractive markets by our studies and 34th by Cavusgil et al. (2004) but isclearly the number two importer of US goods and services. While Canada isranked number one in all studies, its OMOIs understate its importance as aUS market (see Table 1). Canada’s imports of US products and services areabout equal to Japanese (#3), German (#5), Chinese (#6), South Korean(#7), Dutch (#8) and French (#9) US imports combined. Future interna-tional marketing models need to address preferential trade arrangements,


land borders and colonial ties along with the other issues raised in theseanalyses.

Limitation and Future Research

The quantitative analyses exemplified in these studies provide a valuabletool to reduce the overall uncertainty associated with the preliminary iden-tification of high-potential foreign markets. Nonetheless, the rank and theindex of the countries are not permanent and are expected to vary over timewith changes in the national world economies. These and other limitationsare discussed next.

Limitations

There are several limitations of the modified OMOI as applied here. First,data are not available on many nations. The World Bank currently lists208 countries and/or territories and we only evaluated 108. While anadvantage of this study is that it looks at world markets from the perspectiveof firms from one particular country, a weakness of the analysis forfirms located in other domestic markets is that it excludes the US from theanalysis.

Further, this modeling approach assumes that ‘‘one size fits all,’’ so tospeak. Product and service specific analysis would likely identify alternativesolutions (see Russow & Okoroafo, 1996). For instance, firms selling con-sumer durables to households may need to adjust population figures by thenumber of people per household. As the size of households varies widely bycountry (i.e., from just under two to more than eight people per household,United Nations, 2004), it cannot be assumed that relative population size isa fair proxy for the relative number of households.

In both of Cavusgil’s OMOIs and the modified version developed here,GDP numbers are adjusted for PPP to convert them to ‘‘international dol-lars.’’ The intention is to try to eliminate some of the well-known distortionsof money-based GDP figures caused by fluctuating exchange rates and un-derreported national income due to non-cash and black markets, tax eva-sion, etc. Nonetheless, there are very substantial problems with the lack ofuniform estimation procedures and time frames used to develop PPP data.For instance, PPP data for China relies on a study done more than 20 yearsago by two academics with a different methodology then currently in use.Further, there is no attempt to measure the differences in quality and noconsistent standard to compare product features (i.e., the question raised iswhether a car in Brazil is the same as one in Germany or the US). Lastly,


‘‘international dollars’’ are theoretical and do not exist to actually buyproducts or services from any countries’ firms. These limitations, andthe other limitations discussed above, provide ample opportunity for fu-ture research into this most important area of international marketing en-quiry.

Future Research

Economy development is a dynamic process that may result in a necessaryperiodic updating of appropriate market indicators. Therefore, the indica-tors used to measure the dimensions of the OMOI should be improved andmodified over time. These OMOI analyses can be reproduced and or ex-tended in the future with new data, indicators, samples and/or weights toreflect trends and observed changes in international markets.

The number of factors and indicators varied considerably across the 1997,2004 and current studies as outlined Table 1. While we tried to be clearabout our motivations for variable selection, greater attention might be paidin future research to theoretical definitions of constructs/dimensions leadingto more consensus on appropriate indicators. Only one country rankingstudy, Rahman (2000), has done quantitative measurement analysis usingCFA and it was only for one construct/dimension. Clear definitions ofconstructs could lead to improved measurement analysis and standards thatmight provide a common ‘‘language’’ for marketing scientists studying for-eign market opportunity analysis.

Industry specific foreign market opportunity analysis leading to industryby IMOI and rankings could make a valuable contribution to internationalmarketing research as well. While primary or expensive secondary data maybe required, an industry focus might facilitate the necessary funding. Firmswithin an industry could easily tailor such an industry index into one fittingits own circumstances. Industry and eventually firm-specific models/indexes/rankings would be very useful to marketing managers seeking practical in-ternational marketing research techniques for making a critical internationalmarketing decision.

The sample excluded the US, so firms in other nations may want tomodify this approach to add the US back in and to drop their domesticmarket from the analysis. While it is always appropriate for firms basedin another market to add the US to the analysis, it is sometimes morehelpful to do the analysis with and without the US. Given that the UShas about one-third of the world’s GDP and a high level of economicand technical development, it tends to swamp other markets when it isincluded in an analysis. This results in making it more difficult to realize


important differences in the indexes among the other markets under con-sideration.

While we introduced geographic distance, various measures (i.e., fromeconomic activity centers) and methods may improve the fit of the model.For example, we have to differentiate between having a geographicallycommon land border compared to measuring a physical distance separatingcountries. Together with more precise distance measures, models that in-clude FTAs and colonial ties may help future international market re-searchers attain better predictive validity of market attractiveness with feweroutliers.

CONCLUSION

The imperatives of globalization are clear. Firms must look to expand intointernational markets to survive and thrive. Indeed, failure to internationalizemay eventually threaten a firm’s domestic dominance since not going inter-national incurs severe competitive risks (Tallman & Yip, 2001). Choosing the‘right’ market(s) has been identified as a critical decision, rendering the ap-proach to that choice an important area of international marketresearch. This research complements and extends a growing body of workdeveloping OMOIs and using them to rank the attractiveness of potentialmarkets. Those rankings help firms choose the right markets to enter byallowing them to focus scarce resources on a limited set of best prospectcountries. Our analyses provides a current analysis of market attractivenessand opportunity for the largest set of countries indexed and ranked to date,including 24 countries not in previous OMOI studies. Furthermore, it com-pares the dimensions, variables, samples and results from three of Cavusgiland colleague’s previous studies and the two conducted herein. The marketattractiveness rankings in our analyses demonstrate reasonable external va-lidity based on the validity coefficient and on the fact that the top 10 and top30 ranked markets overlap considerably across our studies and Cavusgil et al.(2004). Nonetheless, there are important differences between the outcomes.The choice of sample, variables and weights are shown to directly affect theOMOIs and rankings. OMOIs are shown to be a flexible, dynamic, efficientand reasonably valid tool for preliminary analysis of foreign market oppor-tunity. The ‘‘short list’’ of most attractive countries will help firms focusscarce resources and avoid the common errors of wasting time and money onlow prospect markets, while or overlooking less visible high potential marketsthereby helping firms efficiently identify the right foreign markets to enter.


NOTES

1. Seven factors with 19 variables are used in the cluster analysis, six of thesevariable and 10 are to form seven different dimensions for the OMOI rankings. Onlysix of those variables overlap with the 19 used to form the PCA factors. Cavusgilet al. (2004) differentiate by calling one set factors and the other dimensions.2. We independently completed our data collection and analysis in 2004 before we

became aware of Cavusgil et al. (2004).3. While total trade as a percentage of GDP has been used by Cavusgil and others

as an indicator of market openness, it is the sum of exports and imports over GDP,but in this case we are only interested in a nation’s receptivity to imports rather thanits ability to export.4. We gratefully acknowledge the reviewer that recommended that we consider

distance as an important dimension in identifying foreign markets.5. Geographic distance is measured from the closer of Los Angles, New York City

or Miami with the exception of Canada and Mexico, where long land borders elim-inate physical distance between countries.6. We thank two anonymous reviewers for suggesting that we validate the results

by comparing actual trade flows from the US to our modified OMOI.7. The USA’s population and GDP are not included in the totals.8. We did not assess the validity of Cavusgil et al.’s (2004) rankings by correlating

them with US imports because that is one of their measures of market attractiveness.The argument would be tautological.

ACKNOWLEDGMENT

The authors wish to thank two anonymous reviewers and the participants ofthe 13th Annual CIMaR Seminar, Universitat Automoma de Barcelona,Spain for their helpful comments and suggestions and Cynthia Lyles-Scottfor her professional editing. Michael Mullen is the 2005 Fulbright Scholar inInternational Business at the Dublin Institute of Technology, Ireland, andan Associate Professor of Marketing and International Business at FloridaAtlantic University. Shirley Ye Sheng is a marketing doctoral student atFlorida Atlantic University.

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CITY-OF-ORIGIN EFFECTS IN

THE GERMAN BEER MARKET:

TRANSFERRING AN

INTERNATIONAL CONSTRUCT TO

A LOCAL CONTEXT

Patrick Lentz, Hartmut H. Holzmuller and

Eric Schirrmann

ABSTRACT

Irrespective of the popularity of country-of-origin research in interna-

tional marketing, no attention has been paid to effects which stem from

the declaration of a product’s local origin, like ‘‘Made in City X’’. In this

study, insights from country-of-origin research as well as exploratory

qualitative studies are used to model determinants of preference for local

products. Conjoint analysis results based on a sample of consumers from

three neighboring cities in Germany show the importance of local origin

for product preference. Structural equation analysis sheds first light on

the mechanism of city-of-origin effects.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17009-X

251

PATRICK LENTZ ET AL.252

INTRODUCTION

Traditionally, the places of production of a good as well as the locationwhere a service is provided are important attributes by which customersassess their quality. Consequently, the country of origin of goods is a well-researched topic in the international marketing literature. In their seminalreview of the field, Heslop and Papadopoulos (1993) identified more than400 studies in the respective field and the phenomenon still attracts prom-inent scholars (Agrawal & Kamakura, 1999; Nijssen & Douglas, 2004;Verlegh, Steenkamp, & Meulenberg, 2005). However, origin effects thatstem from other geographical units like trade zones, intra-national areas,and cities have been largely neglected. Specifically, from a managerial per-spective a deeper understanding of different kinds of origin effects wouldhelp to make use of or deal with these market-relevant phenomena better.On the one hand, a better knowledge of city-of-origin effects would helplocal marketers to refine their strategies against national or internationalcompetitors. International marketers, on the other hand, would benefit be-cause they are better able to assess mechanisms export or internationalmarkets which shape the competitive environment. Strong city-of-origineffects in specific industries would for instance lead to higher entrance bar-riers in those markets, and corresponding strategies allowing for a successfulentry have to be developed. Acquisition of existing companies or brandsinstead of exporting or starting greenfield operations as well as using morelocalized promotional messages are examples of more suitable and appro-priate approaches, which might finally lead to a quicker penetration of thetarget market by avoiding or using city-of-origin effects, respectively.

Although the country is only one of many possible geographical entities(see Fig. 1), it was the only category that has received significant attention inorigin research. On a more aggregate level a group of countries (e.g., EU,NAFTA) or even a continent could be used to denominate a product’s or aservice’s heritage. The same applies to intra-national geographic units likefederal states or specific sub-regions (e.g., mountain range, costal area)within a country. Specifically, intra-national units have traditionally beenused for agricultural products like wine, meat, and vegetables to signifyproduct quality (Muller & Kesselmann, 1996; van Ittersum, Candel, &Meulenberg, 2003; Trognon, Lagrange, & Janin, 1999; van Ittersum, 2002;Verlegh et al., 2005). In addition to that, large cosmopolitan cities such asNew York, Paris, Tokyo, or Rome, as well as smaller cities known for acertain specific expertise such as Solingen for knives, Ceski Budejovice forbeer, and Edam for cheese, are commonly used to signal a certain quality of

CustomerGeographic Focus Examples National International

International Continent

Trade ZonesNAFTA

EU

National CountriesUSA

FranceGermany

States/Sub-Regions

RockiesChampagne

Bavaria

CitiesNew York City

Paris Munich

Intranational

NeighborhoodsSoHo

MontmartreSchwabing

Fig. 1. Typology of Origin Effects.

City-of-Origin Effects in the German Beer Market 253

products designed, manufactured or offered there. And even individualneighborhoods in bigger cities such as Montmartre in Paris, SoHo inNew York City, or Schwabing in Munich are widely known for fine artproducts and thus are used to carry a distinct image which reflects a certainlevel of product quality.

From a managerial perspective it is also important to take the specifictarget group into consideration. Generally speaking, goods made or servicesoffered at a certain location could be marketed to national or internationalcustomers. In the case, customers from abroad are the target group, theframe of reference from the customer’s perspective is quite different andtypically reflects less firsthand experience, higher psychic distance (Dow,2000; Stottinger & Schlegelmilch, 2000) and a different set of affective re-actions. When products are aimed at customers in the home country or asub-region thereof, the origin effect is characterized by more firsthand ex-perience, more or less personal involvement, psychic closeness, and emo-tional attachment.

If we consider all the origin fields provided in Fig. 1, it is interesting to seethat the country level is well researched. The extensive literature covers theinvestigation of customers’ reactions to country of origin in a national set-ting, quite typically the assessment of different imported products, as well as


cross-cultural comparisons. Some research deals with regional origin withrespect to national target groups. But to the best of our knowledge, no workhas been done on city and neighborhood origin effects, neither on nationalnor on international audiences. From a conceptual as well as a managerialperspective, these research gaps need more attention. It seems worthwhile toextend the current research on country of origin to geographic entities with asmaller focus like cities and neighborhoods. The core question when movingresearch practices, underlying concepts, and findings from country-of-originresearch to different geographic domains is, whether these approaches aresuitable. Take for example, a positive product–country image which en-hances the perceived quality for a product originating from this country.Can we assume that the same mechanisms are at work when we focus on aregion as carrier for product image? Would the antecedents of and conse-quences from region of origin be identical or not?

From a conceptual point of view, origin mechanisms presumably workthe same way irrespective of the geographic entity under investigation. Moreor less positive connotations related to its origin lead to more or less positivepreferences for respective products or services. The core problem of shiftingthe focus in research from one geographic level to another lies in the factthat the major origin mechanisms are placed in very different sets of con-tingencies and antecedents. Consider, for example, the different environ-mental forces that determine country- or city-related origin effects. Theinstitutional background, political and legal aspects, and different playersthat are at work to promote certain geographic units as well as economicrelevance might be significantly different. With respect to antecedents ofattitudes to and preferences for local products the psychological framemight also vary significantly. Chances are high that cognitive structures ofcustomers (e.g. evoked sets, schemas), level and type of expertise, as well asaffective patterns such as personal attachment to geographic entities, emo-tional and motivational drivers, and attitudinal reactions, are not the same.Thus the transferability of concepts from country-of-origin research to city-of-origin is in itself a valuable research question, which needs theoretical aswell as methodological caution and rigor when being approached.

In addition to conceptual and theoretical issues, using localization as aunique selling proposition seems to be a valid strategy especially for small-and medium-sized companies to fight global competition in their immediatehome markets. The use of geographic units for specific propositions cannotbe easily copied by competitors from outside the respective geographic unitand thus seems to be an attractive pathway to fight national or even in-ternational players. From a managerial perspective it pays off to know how


origin mechanisms work with respect to possible geographic entities, howthey increase brand equity, and thus make possible premium prices forgoods with a certain origin (Agrawal & Kamakura, 1999). If we are able tobetter understand how city-of-origin mechanisms work, local companiescould develop stronger competitive advantages using more refined localizedbranding strategies. Following this approach might in a next step also leadto a distinct positioning outside the local market and could even carry thepotential to use city of origin on an international scale when exportingproducts.

In similar ways, international marketers might use city-of-origin insightsto better assess the competitive environment in foreign markets, customerpreferences related entry barriers into international markets as well as intra-national differences with respect to the affective attachment of customers tolocal brands. Information of that kind is highly relevant for the developmentof promising entry strategies in foreign markets.

Our research is a first step in the investigation of city-of-origin effectswhich deals with two central questions. First, we want to establish the ex-istence of origin effects on the city level. Without providing evidence for itsexistence, the remainder of our work would be highly questionable. Second,we investigate how a city-of-origin effect is able to influence consumers’buying behavior. In other words, assuming that an origin effect on a citylevel exists, we specifically analyze how and through which mechanisms it isable to affect consumers’ preferences with respect to buying products thatoriginate from their own city of residence.

To accomplish that, we first review the country-of-origin literature inorder to provide a theoretical basis. Next, we present results from quali-tative research that identifies relevant aspects of city-of-origin effects, with afocus on the German beer market. Both the results from the literature re-view and the qualitative fieldwork are combined in a conceptual modelwhich aims at explaining preferences for local products. This model as wellas the measurement employed is empirically tested with data from residentsin three large cities in the Ruhr area in the north-west of Germany, usingboth descriptive and confirmatory methods. Finally, we discuss our resultsand give implications for future research.

APPROACHES TO COUNTRY OF ORIGIN

Drawing from previous literature on consumers’ attitudes and preferencestoward ‘‘foreign’’ products, two main research streams can be identified.


While one stream focuses on the impact of a product’s country of origin onmaking inferences about or evaluating foreign products, the other streaminvestigates factors that might influence consumers’ attitudes toward ‘‘for-eign’’ products as well as possible effects on repurchase intentions and cor-responding behaviors. Next, we will briefly address each of these twostreams, analyze shortcomings, and discuss limitations in transferring theseapproaches to a more local level, i.e., when focusing no longer on thecountry, but on the region or city of origin.

An extensive body of more than 600 studies exists that focuses on coun-try-of-origin effects (Papadopoulos & Heslop, 2003). Within this researchstream, it is of central interest whether, and, if so, how the product’s countryof origin is taken into consideration for a product’s evaluation. From aninformation theory perspective, products are perceived as consisting of alarge number of information cues, which can relate to both intrinsic andextrinsic cues. While intrinsic cues contain product characteristics such astaste or design, the extrinsic cues relate to a product’s brand, price, or thecountry of origin (Bilkey & Nes, 1982). However, the term ‘‘country oforigin’’ has been found to be more complex and more ambiguous thaninitially assumed. ‘‘Country of origin’’ may consist of different componentssuch as country of manufacture, country of assembly, or country of design(Han & Terpstra, 1988).

In his work, Han (1989) developed and empirically investigated two dif-ferent working mechanisms of country-of-origin effects, i.e., a halo effect

and a summary effect. In the presence of a halo effect, customers use in-formation about a product’s origin (and thus about the image of the cor-responding country of origin) and transfer these to relevant productattributes. In other words, information about the image or similar charac-teristics of the product’s country of origin is used to infer about productattributes that are not directly available to the consumer. Consequently, theproduct-specific image of a country influences product evaluation based oncertain product attributes, which finally determines the attribution towardcountry-specific brands and products. This causal chain has been both the-oretically and empirically examined by several studies (Erickson, Johansson,& Chao, 1984; Johansson, Douglas, & Nonaka, 1985; Johansson & Thorelli,1985). When conceptualizing country-of-origin effects by a summary effect,on the other hand, consumers summarize their experiences with and per-ceptions of corresponding products from a particular country to form acountry image, which is then used to facilitate product evaluation (Han,1989). These experiences can also be based on word of mouth through otherconsumers as well as through mass media. In other words, the country’s


image influences consumers’ attitude toward this particular product/brand(Crawford & Garland, 1988; Hong & Wyer, 1989; Howard, 1989) so that anevaluation of a product based on this summary effect will be preferred if theconsumer has the strong wish to facilitate buying decision. Hence, consum-ers’ perceptions about country-specific product attributes directly influencetheir attitude toward country-specific brands or products.

In his empirical study, Han (1989) found that the mechanism underlyingcountry-of-origin effects depends on the consumer’s product familiarity.When consumers possess only a low level of familiarity with the respectiveproduct, they use a product’s origin as a basis for their reasoning (i.e., haloeffect), while consumers with a high level of product familiarity use infor-mation about a product’s origin in summary for the overall evaluation of aproduct. However, while several studies exist that found a positive corre-lation between product familiarity and usage of information about a prod-uct’s country of origin (Johansson, 1989; Johansson et al., 1985; Johansson& Nebenzahl, 1986), other studies report only very weak and marginallysignificant correlations (Heimbach, Johansson, & MacLachlan, 1989; Jaffe& Nebenzahl, 2001). Thus, Knight and Calanton (2000) recommend usinga combination of both summary and halo effects in a flexible model, whichwas found to be superior over either model used separately (Jaffe &Nebenzahl, 2001). However, and that is a key issue for all preceding ap-proaches, if the country of a product’s origin is assumed to play a centralrole in the evaluation process, a consumer necessarily needs to possess suf-ficient knowledge about a product’s country of origin. In many cases, thiscannot be assumed and may lead to incorrect assumptions about a product’srespective origin (Ettenson & Gaeth, 1991). Thus, several studies haveconcluded that information about a product’s country of origin was onlyused ‘‘in the absence of other information on which to evaluate products’’(Nijssen & Douglas, 2004, p. 25).

The second stream of research relevant for our investigation focuses onconsumer attitudes toward foreign or imported products and brands. Whilemost studies have used negative attitudes toward foreign products in gen-eral, a limited number of studies have also investigated attitudes towardspecific countries (Balabantis, Diamantopoulos, Mueller, & Melewar, 2000;Javalgi, Khare, Gross, & Scherer, 2005; Nijssen & Douglas, 2004). Withinthis type of research, a widely studied construct focuses on consumer eth-nocentrism, a concept which is closely related to LeVine and Campbell’s(1972) conceptualization of ethnocentrism, the latter defined as when ‘‘thesymbols and values of one’s own ethnic or national group become objects ofpride and attachment, whereas symbols of other groups may become objects


of contempt.’’ Shimp and Sharma (1987) extended this concept to the do-main of consumer behavior and conceptualized it as beliefs held by con-sumers about the appropriateness and/or morality of purchasing productsmade in or imported from a foreign country. Ethnocentric consumers sharea common belief that buying products which have been manufactured inforeign countries is unpatriotic and wrong since it has the potential to harmone’s own domestic economy and, consequently, might cause loss of jobs(Nijssen & Douglas, 2004). In addition to consumer ethnocentrism, researchexists that specifically investigates the influence of negative attitudes towarda particular country on consumers’ attitudes toward products from thatcountry (Klein, Ettenson, & Morris, 1998), a stream of research which al-ready begins to focus on an intra-domestic level (Hinck, 2004).

However, based on the preceding discussion, research in both streams hasso far been limited to larger geographical/political entities. Drawing fromPapadopoulos (1993), further geographical units appear plausible and needto be taken into consideration, e.g., regions, cities, or even neighborhoods.These smaller units may lead to an increased level of information diagnos-ticity, since the geographical focus is much narrower than when focusing oncountries. It is highly plausible to assume that in certain product categories(e.g., those with strong local and historical ties), the analysis of effectsstemming from the fact that services or products have their origin near theconsumer’s place of residence, can contribute to a better understanding ofprocesses which lead to product preferences. Those aspects have not beeninvestigated with respect to a product’s city of origin. Looking at the the-oretical concepts that evolved in country-of-origin research, namely haloand summary effects in the product evaluation process and ethnocentrism/animosity aspects in product evaluation, they seem suited to be used inanalogy in research targeted to the influence of smaller geographical/polit-ical units.

Consequently, we take up both streams of research and include them inour conceptual model. First, as highlighted by previous studies (e.g., Jaffe &Nebenzahl, 2001; Knight & Calanton, 2000), we use different types of originconceptualizations, i.e., halo and summary effects, as antecedents to atti-tudes and preferences toward local products. While attitude toward city ofresidence focuses on the summary effect component, knowledge aboutproduct origin represents the halo effect facet of product origin concepts.Both facets are expected to influence customers’ attitude and correspondingpreference toward local products. The second relevant stream of researchdiscussed previously (i.e., consumers’ attitudes toward foreign products) iscaptured through the concept of customers’ attitude toward buying local.


Here, previous research has also stressed the importance of including con-sumers’ ethnocentric tendencies as well as their negative attitudes towardparticular countries or regions in explaining consumers’ preferences towardspecific types of products. Since we agree on the arguments brought forwardregarding the importance of this facet, we capture relevant aspects through aconceptualization of consumers’ attitudes toward buying local in influencingtheir attitude toward products from certain cities.

However, because of the completely different setting, a simple transfer ofexisting theories and models will not necessarily be appropriate. We there-fore undertake extensive exploratory research in order to assess the viabilityof using country-of-origin research insights in an intra-country context.

Qualitative Studies

To the best of our knowledge, no studies exist that investigate the city-of-origin effect on consumers’ buying decision. In order to generate new in-sights and to assess the suitability of certain concepts from country-of-originresearch for our field of investigation, we embark on exploratory qualitativeresearch.

Herein, we concentrate on identifying attributes that are considered rel-evant for purchase decisions about beer in particular, but also more general,nonetheless influential attributes about, e.g., the city of origin or consumerethnocentrism. To accomplish that, we used a two-step procedure whichconsists of a repertory-grid test followed by two separate focus groups. Theadvantage of this two-step procedure is that we can include the results fromthe repertory-grid test within the discussion during our focus groups so thatwe are able to generate a deeper insight of the corresponding topics.

The major aim of a repertory-grid test is to identify relevant, cognitivedimensions that are employed during the process of buying goods. The testprocedure is based on an advancement of the ‘‘Role Construct RepertoryTest’’ by Kelly (1955) and basically involves the task that consumers shoulddistinguish certain elements, with the distinctions being collected in a datamatrix (Bannister & Mair, 1968). For our test procedure, we carried out21 personal interviews in a supermarket. We focused on consumers who hadjust purchased beer, so they did not have to report on an imaginary or previousbuying decision. The test used as reference products 10 German beer brandsthat can be easily distinguished through origin, market position, and price.

More than 90% of the consumers identified ‘‘good taste’’ as the mostimportant product characteristic, followed by ‘‘local origin’’ (87%) and

Table 1. Most Important Product Cues.

Construct No. of Choice Percentage of Choice Sum of Ratings

Good taste 19 90.5 106

Local origin 18 86.7 79

Brown bottle 16 76.2 52

Appealing label design 16 76.2 47

Bottle design 16 76.2 39

High brand awareness 15 71.4 66

Bottle cap 12 57.1 33

Good reputation 10 47.6 40

Reasonable price 8 38.1 39


‘‘brand awareness’’ (71%). Only less than half of all consumers think that a‘‘reasonable price’’ and a ‘‘good brand image’’ represent salient character-istics (see Table 1). These results already show that the beer’s origin is animportant factor in a customer’s buying decision. Next, we use these verypreliminary insights as key discussion points in our focus groups.

Focus groups are able to identify relevant topics and aspects of buyingdecisions related to beer and thus they can complement to the results fromboth the literature review as well as the repertory-grid test. A focus groupconsists of interviews that are carried out by a moderator with a small groupof interviewees with largely different backgrounds (Morgan, 1998). Incontrast to single interviews, focus groups embody the advantages thatspontaneous reactions can be triggered more easily and that salientcharacteristics and opinions can be made transparent. This allows for aninvestigation of different dynamics within the ongoing discussion, such as achange of opinion or rather weak judgments within the discussion(Bellenger, Bernhardt, & Goldstucker, 1976). Through this exploratorycharacter, focus groups are well suitable as pre-analytical techniques forsubsequent quantitative studies, since they allow for generation of a ratherlarge number of relevant attributes/factors (Gordon & Langmaid, 1988).

We carried out two separate and independent focus groups to identifyfurther information, opinions, and motives as well as attitudes toward theprocess of buying beer. Therefore, we invited 16 beer-consuming men, aged25–60 and living in the Ruhr-Rhine area, to participate in one of the dis-cussion groups. With respect to demographic criteria like, for example,marital status, income, level of education, and professional position, wegenerated a mixture so as to achieve a focus group as heterogeneous aspossible. Also, the consumers did not know each other in advance, a char-acteristic that facilitates and intensifies an ongoing discussion within the


group (Morgan, 1998). Since the aim of this focus group is to identifyrelevant attributes and characteristics that are related to the decision ofbuying beer, we additionally developed a protocol, that is, an ordered set ofquestions already formulated in complete sentences. This protocol helps usto compare the outcome of both focus groups and thus facilitates the lateranalysis. Since both focus groups have been audio taped and thus could betranscribed completely, we used content analysis to identify relevant topics,arguments, and typical expressions of the participants (Krueger, 1998).

Results from both focus groups reveal that the beer’s taste is a dominantcriterion related to buying beer, that is, the different categories of bitter andmild beers. Additionally, participants identified the quality of different beersas a salient criterion, although they had major problems in objectively ratinga beer’s quality. However, the most important criterion in both focus groupshas been identified as the beer’s origin. All participants agreed that theregion or city in which a beer is brewed has major implications on both tasteand quality and thus is used as a major determinant of a customer’s pref-erence for different brands of beer. Importantly, all participants agreed thata focus on the region or city of origin is necessary since the country level ismuch too general when it comes to the assessment of a beer’s quality withrespect to its origin. Further, most of the participants revealed a high level oflocal orientation and patriotism, that is, they buy products, if possible, fromtheir own city of residence in order to support local industries. They dem-onstrated pride in living in that particular region or city, and thus pride intheir local products, which in last consequence leads to a positive attitudetoward these local products. Only if no local brands exist, most participantsreport to buy brands from preferably rural areas. This additionally supportsour arguments that the beer’s city of origin is an important factor in aconsumer’s buying decision. Also, participants revealed a strong relationbetween their attitude toward local products and their corresponding at-titude toward their city of residence. There seems to exist an effect thatcarries over both positive and negative attitudes which exist toward the cityon products having their origin in this particular city.

Significantly, in both focus groups, participants revealed difficulties innaming different beers’ cities or regions of origin as long as they originatefrom cities or regions different from the participants’ residence. Interest-ingly, those participants who showed a high level of knowledge about dif-ferent brands’ regions or cities of origin place less importance on a beer’sorigin for their buying decision. In other words, the more our participantsknow about the origin of different products within different categories, theless important this knowledge becomes for their decision process.


Altogether, we obtained some interesting insights into consumers’ buyingdecisions related to local products. Overall, we find that the same mech-anisms seem to be present as with country-of-origin effects, but both theconcepts as well as the operationalizations have to be adopted when focus-ing on city-of-origin effects. Next, we combine the results from both theliterature review as well as from our qualitative studies so as to developresearch propositions and a conceptual model.

DEVELOPMENT OF A CONCEPTUAL MODEL

On the basis of country-of-origin research as well as our qualitative studies,a theoretical model to investigate and explain preferences for products pro-duced in the city of residence is developed and shown in Fig. 2.

Preference for local products is conceptualized as a construct with be-havioral character. It is defined as local products’ rank order of preferenceaccording to the perceived attractiveness for the buyer. A key construct inexplaining preference for local products, which played a major role inthe preliminary research undertaken for this project, is labeled attitude to-

ward local products. This construct is defined as subjective perceptions oflocal brewery products and captures beers’ quality, taste, and freshness aswell as intentions to offer this product to friends and family (e.g., Schaefer,1997). Another concept, which came up in both previous studies of country-of-origin effects (Forgas & O’Driscoll, 1984; Ofir & Lehmann, 1986;Papadopoulos, Heslop, & Bamossy, 1990; Parameswaran & Pisharodi,1994; Pisharodi & Parameswaran, 1992) as well as our qualitative research,

Attitudetowards cityof residence

Knowledgeof product

origin

Attitudetowards

“Buy Local”

Attitudetowards local

products

Preferencefor local

products

++

++++

--

Fig. 2. Conceptual Model.


is related to the attitude toward the city of residence. This concept capturessubjective opinions and views about the city of residence, and depicts severalcharacteristics of this city, e.g., friendliness, cleanliness, modernity, and trust-worthiness. Attitude toward ‘‘Buy Local’’ is very closely related to consumerethnocentric tendencies and thus conceptualized as a representation of con-sumers’ beliefs and attitudes about the appropriateness of purchasing non-local products (Nijssen & Douglas, 2004; Shimp & Sharma, 1987).A final concept identified in previous investigations as well as in our qual-itative study, is knowledge of product origin. Consumer knowledge about theorigin of a product should be regarded as a multidimensional construct, i.e., itshould capture both objective and subjective components (Schaefer, 1997).

Based on country-of-origin research with a focus on the level of productknowledge (Darling, 1987; Pecotich, Pressley, & Roth, 1996; Schaefer, 1997)as well as halo effects (Erickson et al., 1984; Han, 1989; Johansson et al.,1985; Johansson & Thorelli, 1985), consumer ethnocentric tendencies (Kleinet al., 1998; Netemeyer, Durvasula, & Lichtenstein, 1991; Pecotich et al.,1996; Shimp & Sharma, 1987), general attitudinal research (Allen, Machleit,& Schultz Kleine, 1992), and results from our qualitative work, we formu-late the following hypotheses.

H1. The level of knowledge about goods’ local origin in a product cat-egory has a negative impact on the preference of products made in theconsumer’s city of residence.

H2. A more positive attitude toward ‘‘Buy Local’’ leads to a more pos-itive attitude toward products produced in the city of residence.

H3. The more positive the attitudes toward the city of residence, thehigher the attitude toward local products.

H4. The more positive the attitude toward local products the higher thepreference for (the willingness to buy) products with local origin.

Methodology

To test our hypotheses and the resulting research model, we collected datafrom 316 participants in three major cities in the Ruhr-Rhine area, using astandardized questionnaire in combination with personal interviews.104 persons participated in supermarket intercept interviews in Dortmund(a city of 590,000 inhabitants), 106 in neighboring Bochum (380,000inhabitants), and 106 in Duisburg (510,000 inhabitants), located at a


distance of 40miles from Dortmund. Altogether, the participants reflected avariety of different demographical types, with no significant differences inage, education, and income levels found between the three cities.

In analyzing these data, we employed both conjoint analysis and struc-tural equation modeling. Conjoint measurement helps us determining therelative importance of a product’s local origin, while structural equationmodeling identifies a causal structure between attitudes toward local prod-ucts, buying local, and preference for local products, among others.

The conjoint measurement design consists of four different factors, i.e.,city of origin, price, taste, and brand name. Cities of origin included in thedesign represent the same three major cities in which the data has beencollected, so that biases are unlikely. In order to infer about the importance,we subsequently analyze the conjoint data both for the pooled sample aswell as separately within each of the three cities. Price also consists of threedifferent facets, i.e., low, medium, and high-priced beer, with actual memoryvalues of 6h, 8h, and 10h, respectively. The price levels have been chosen inalignment with the standard prices on the German beer market. Taste iscaptured by two major facets that relate to the taste of beer, i.e., mild- andbitter-tasting beer. Finally, brand name represents three different brands,i.e., ‘‘Harpoon,’’ ‘‘Lakefront,’’ and ‘‘Acadian.’’ It is a highly controversialissue whether to choose brand names that are mostly known or mostlyunknown to the respondents. Including familiar and well-known brandscould lead to overemphasizing the importance of a brand name factor, sincemany respondents possibly choose the brand that they like or that they aremostly familiar with. Also, since marketing communication related to spe-cific brands largely differs in both quality and quantity, most familiarbrands ‘‘earn’’ their reputation through advertisements and related mar-keting communications, which diminishes the importance of other charac-teristics that might be of relevance. However, choosing brand names that aremostly unknown to study participants likely weakens the effect that a par-ticular brand might have. Weighing these arguments, we decided to includebrand names that are mostly unknown to participants, since we are also veryinterested in the remaining three factors of our study, and we fear that well-known and familiar brand names could unjustifiably capture participants’attention. The final brand names chosen represent existing American beerbrands, which however should be mostly unknown to German consumers.

The second methodological section focuses on a structural equationmodel in order to test the set of hypotheses. In addition, this part alsoaddresses issues of measurement reliability and validity as well as goodness-of-fit tests for the overall structural model. We operationalized our measures


based on a combination of existing scales adapted from the literature, and afew additional items created through exploratory qualitative research. Indetail, we employed 11 items from, among others, Papadopoulos et al.(1990) to capture ‘‘Attitude toward City of Residence,’’ 8 items to measure‘‘Attitude toward Buy Local’’ (Shimp & Sharma, 1987), and 6 items tooperationalize ‘‘Attitude toward local products’’ (Tse & Gorn, 1993; Tse &Lee, 1993). The level of ‘‘knowledge of product origin’’ is operationalizedthrough two different facets, namely, objective and subjective knowledge.While the subjective knowledge component was derived from our qualitativeresearch and consists of three items, the objective knowledge is measured byan indicator which captures the number of different beers’ cities and regionsof origin participants were able to identify. Consequently, ‘‘knowledge ofproduct origin’’ consists of four items, one measuring the objective com-ponent, the remaining three focusing on subjective knowledge. Finally,‘‘preference for local products’’ is operationalized through three items, witha diverse content. While two items capture the rank order from experiments,where participants were asked to rank different brands of beer as well asdifferent cities as origins of local beer, the third item shows estimated utilitiesof local brands, as reflected by results taken from a conjoint analysis. Anoverview of the items employed in this study can be found in the appendix.

RESULTS

Before testing our hypotheses, we first focus on descriptive results obtainedfrom conjoint analyses for the pooled sample. These results show that the cityof a product’s origin evidences a strong importance for a consumer’s buyingdecision. In detail, a beer’s city of origin yields an average relative importanceof 32.69%, when making a buying decision. This is even more than is at-tributed to the price of beer, with a smaller, but still high relative importanceof 29.45%. The taste of beer (i.e., either mild or bitter tasting) shows arelatively weak importance for a consumer’s buying decision, with a value of21.11%. Not surprisingly, brand names do not show any strong importance(16.75%), since we used brands that are most likely unfamiliar to study par-ticipants. Overall, this underlines the attention that should be paid to com-municating a product’s city of origin, specifically when focusing on differentbrands of beer. This facet is further emphasized when concentrating on thethree sub-samples, i.e., on the samples collected in the three different cities.Here we also find that, as expected, the corresponding city of origin shows thelargest relative importance for making a buying decision, with values ranging

Table 2. Results from Conjoint Analysis.

Sample Pooled Dortmund Duisburg Bochum

Imp./Util. Imp./Util. Imp./Util. Imp./Util.

Brand name 16.75% 18.25% 18.04% 13.99%

Harpoon �0.002 0.136 �0.016 �0.123

Lakefront �0.018 �0.068 0.044 �0.031

Acadian 0.020 �0.068 �0.028 0.154

City of origin 32.69% 34.55% 30.96% 32.63%

Dortmund 0.122 1.243 �0.333 �0.513

Duisburg �0.124 �0.919 1.072 �0.547

Bochum 0.002 �0.324 �0.739 1.060

Price 29.45% 27.43% 29.75% 31.11%

6,- h per box �0.323 �0.194 �0.516 �0.255

8,- h per box 0.289 0.236 0.308 0.321

10,- h per box 0.034 �0.042 0.208 �0.066

Taste 21.11% 19.77% 21.25% 22.28%

Bitter tasting 0.390 0.250 0.446 0.469

Mild tasting �0.390 �0.250 �0.446 �0.469


from 30.96 to 34.55%. In addition, we find strong positive utilities for the cor-responding cities in its respective sub-sample. For example, in the Dortmundsample we find a strong positive utility for the facet ‘‘brewed in Dortmund’’(1.24), while the other two facets (i.e., ‘‘brewed in Bochum’’ and ‘‘brewed inDuisburg’’) show large negative values of �.92 and �.32, respectively. Detailsabout results from the conjoint study can be found in Table 2.

Following these more descriptive insights, we conducted analyses into thevalidity and reliability of our measures. First, in an exploratory factoranalysis, we find one factor extracted for each of the five constructs, basedon both eigenvalue criterion and scree plot (Hair, Anderson, Tatham, &Black, 1998), with extracted variances between 58.1 and 69.4%. Further-more, all items without exception exhibit relatively large loadings (>0.5)on this factor, yielding support for convergent validity (Morrison, 1994).Additionally, Cronbach reliabilities are estimated between 0.63 and 0.94,hence yielding additional support for the measurement properties of ourscale (De Vellis, 1991; Nunnally, 1978).

Second, in a confirmatory factor analysis, the overall measurement modelis clearly supported. In detail, we find that all item loadings are significantlydifferent from zero (po0.001), with factor reliabilities larger than 0.68, andaverage variances extracted exceeding highest variance shared, indicating


discriminant validity (Fornell & Larcker, 1981). Furthermore, model fit in-dices are also indicative of good model fit (w2 ¼ 531.58 (d.f. ¼ 287),NFI ¼ 0.881, NNFI ¼ 0.933, CFI ¼ 0.941, RMSEA ¼ 0.049, sRMR ¼

0.069), yielding strong support for our proposed measurement. Owing to thelarge number of items per construct and the relatively complex structure ofour model, we use a partially disaggregated model for further analyses, i.e.,we aggregate our original set of items so that finally we employ three ag-gregated items for each construct. Based on Bagozzi and Heatherton, this isa legitimate procedure once acceptable measurement properties of the com-pletely disaggregated model have been confirmed (Bagozzi & Heatherton,1994).

We therefore aggregate our set of items and re-analyze the aggregateddata, again using confirmatory factor analysis. Similarly, we yield highlyacceptable estimates for indicator loadings (all po0.001), factor reliabilities(>0.68), and variances extracted (>0.48), with all indices supporting highquality measurement (w2 ¼ 146.40 (d.f. ¼ 80), NFI ¼ 0.938, NNFI ¼ 0.961,CFI ¼ 0.970, RMSEA ¼ 0.052, sRMR ¼ 0.049). Next, after confirmingmeasurement properties of the scales employed in our study, we investigatethe structural part of the model, and thus focus particularly on the hy-potheses developed above. The results from a maximum likelihood estima-tion using LISREL 8.54 can be found in Table 3.

Table 3. Results of Structural Equation Model.

Dependent Variable Independent Variable R2 Direct Effects R2 Indirect Effects

b(e) T b(e) T

Attitude toward

local products

0.07

Attitude toward ‘‘buy

local’’

0.12(0.05) 2.20 — —

Attitude toward city

of residence

0.20(0.07) 2.66 — —

Preference for local

products

0.52

Knowledge of product

origin

�0.13(0.06) �2.25 — —

Attitude toward local

products

0.81(07) 11.08 — —

Attitude toward ‘‘buy

local’’

— — 0.09(.04) 2.18

Attitude toward city

of residence

— — 0.16(.06) 2.63

Overall Model Fit Indices: w283 ¼ 156.6(po0.001), NFI ¼ 0.933, NNFI ¼ 0.958, CFI ¼ 0.967,

sRMR ¼ 0.056, RMSEA ¼ 0.053


Generally speaking, our hypotheses are strongly confirmed, as they are allsupported by the data. In detail, we find that both attitude toward buyinglocal products and attitude toward the city of residence exert significant andpositive effects on a consumer’s attitude toward local products, with esti-mated standardized path coefficients of 0.12 (po0.05) and 0.20 (po0.01),respectively. Furthermore, while customers’ level of knowledge about localproduct origin, as expected, exerts a negative effect on customers’ preferencefor products with local origin (b ¼ �0.13, po0.05), attitude toward localproducts dominantly and positively affects customers’ preference for locallyproduced products, with a large path coefficient of 0.81 (po0.001).

DISCUSSION AND CONCLUSION

The present paper for the first time empirically focuses on city-of-originmechanisms. Our qualitative as well as our quantitative results clearly showthat such an effect exists, and we therefore advocate putting more emphasison research with regard to origin effects of different geographic and politicalentities.

Following up on the results obtained there is strong evidence that city-of-origin effect mechanisms are very similar to the well-researched country-of-origin effects. Building on research by Knight and Calantone (2000) it issafe to conclude that both halo effects and summary effects shape city-of-origin effects at the same time. We also could show that consumers’ attitudetoward buying local functions in a similar way as attitudes toward foreignproducts on the national level (e.g., Nijssen & Douglas, 2004). We cautionagainst overgeneralization, but our results provide no evidence that othertheoretical concepts might be necessary when trying to capture the mech-anisms of origin effects with respect to different entities or loci of origin.

The managerial implications of our research are twofold. For the man-agement of local products, the city-of-origin effect provides a basis to stressthe local attachment and thus either fight competitors from outside, or todevelop a unique selling proposition based on the local competence in alarger market. In more general terms, focusing on differentiated marketingactivities (e.g., stressing the local origin in the city and at the same timeplaying it down in the outside market), the trade-off between higher costs onthe one hand and potential benefits on the other has to be considered. Froman international marketer’s perspective, knowledge of city-of-origin effectsmay be used to assess customer-related affective mechanisms in export orinternational markets which lead to more or less harsh competitive


environments. The higher the city-of-origin effects in particular industriesthe higher the entrance barriers in those markets and hence more localizedentry strategies like acquisition of local firms and brands, localized adver-tising messages, and close co-operation with local distribution channels areeffective for increasing market penetration. Considering city-of-origin ef-fects may also help to understand why some products or service providersare more successful in certain parts of a country, but not in others.

Our results are exploratory and probably raise more questions than theyanswer, but they provide a strong proof of the basic effects. The core lim-itations lie in the specific product category used, the field work in only oneregion in one country, as well as in the transfer of theoretical and conceptualideas – albeit done in a very cautious way – from quite a different level ofabstraction.

From a research perspective, important questions are whether in additionto the limited conceptualization we used, a completely different set of an-tecedents to the preference of local products exists. Consider, for example,intra-cultural differences within a country, more or less homogeneous na-tional institutional backgrounds, regional rivalry, or interregional differ-ences in economic and welfare development as sources for like and dislike ofproducts within or outside a city. Closely related to that question is thegeneralizability of the city-of-origin effect across industries or product cat-egories. First of all, it seems likely that product categories differ with respectto the importance of the effect. Certain products are by themselves moreorigin bound than others, like for example food and beverage products or,in contrast, cosmetic products. Another aspect concerns the type of cus-tomer involved. Is it justified to assume that we see very homogenous re-actions with respect to the city of origin, or is there a considerable differencebetween segments in the market? Finally, does the effect hold across coun-tries and cultures? Are there societal differences (e.g., the higher mobility ofcitizens in the US as opposed to Europe) that lead to less city-of-residenceidentification and pride and thus to less propensity to prefer products fromthe near surroundings?

Since our research is highly exploratory, it obviously provides severalavenues for future research. Specifically, since we exclusively focused oncities as geographic entities, it seems worthwhile to expand our ideas toother entities as well, for example, to trade zones on the one end of thespectrum or neighborhoods on the other. Although we do not expect largelydifferent results for these different entities, they need to be investigatedbefore conclusions regarding the generalization of our findings can bedrawn. In general, further research on the effect of products’ or services’


origin from different geographic entities could serve as a basis to betterunderstand the interplay between place of residence on the one hand andbuying and consumption behaviors on the other, and thus could lead tomore differentiated marketing activities with respect to the place of origin innational as well as international marketing contexts. Additionally, since welimited our investigation to one industry and one region, both an analysis ofintra-national and international differences with respect to city-of-origineffects across industries should be pursued.

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APPENDIX: OPERATIONAL MEASURES OF STUDY

CONSTRUCTS

Attitude toward city of residence6-point scale, Strongly Agree/Strongly Disagree, a ¼ 0.74, AVE ¼ 0.48,

HVS ¼ 0.27 oCity> isyy sympatheticy friendlyy pleasanty peacefuly attractivey cleany trustworthyy competentymoderny successfuly close to my heart

Attitude toward buying local6-point scale, Strongly Agree/Strongly Disagree, a ¼ 0.94, AVE ¼ 0.83,

HVS ¼ 0.32Inhabitants of oCity> should always, when possible, buy products from

oCity> instead of buying products from different citiesBuy products from oCity>, safeguard our jobsIt is not right buying products from different cities whenever it is possible to

buy products from oCity>, since people from oCity> could becomeunemployed

A real inhabitant of oCity> should always, whenever possible, buyproducts produced in oCity>

We should only buy those products from different cities which are notproduced in oCity>

Whenever possible, I always buy products from oCity> in order tosupport the local economy

I would always prefer food from oCity> to others

I am proud of our local products

Knowledge of product origin6-point scale, Strongly Agree/Strongly Disagree, a ¼ 0.75, AVE ¼ 0.51,

HVS ¼ 0.30


I know which beers are produced in oCity>I know in which cities most beers from my region are brewedFor most German beer, I know where they are brewedKnowledge index (Number of correctly specified regions and cities of origin

for different beers.)

Attitude toward local products6-point scale, Strongly Agree/Strongly Disagree, a ¼ 0.89, AVE ¼ 0.74,

HVS ¼ 0.42Beer from oCity> is sympatheticI enjoy offering beer from oCity> to friendsBeer from oCity> is of highest qualityBeer from oCity> is guaranteed freshBeer from oCity> is enjoyableBeer from oCity> tastes very good

Preference for local productsa ¼ 0.68, AVE ¼ 0.44, HVS ¼ 0.42Rank order from experiment 1Rank order from experiment 2Relative importance of local origin for buying beer taken from conjoint

analysis

HOW DO BUSINESS GROUPS

FUNCTION AND EVOLVE IN

EMERGING MARKETS? THE CASE

OF TURKISH BUSINESS GROUPS

Attila Yaprak, Bahattin Karademir and

Richard N. Osborn

ABSTRACT

Business groups have become a significant phenomenon in the evolution

and functioning of emerging markets. They also provide important part-

nership opportunities to foreign firms when they enter these markets. Yet,

business groups have not received sufficient attention in the international

marketing literature. In this paper, we provide an overview of the theories

that explain how business groups function and evolve in emerging markets

and generate propositions from that theory. We also present evidence on

business group evolution from one emerging market, Turkey. Our work

should inspire research questions for future study.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17010-6

275

ATTILA YAPRAK ET AL.276

INTRODUCTION

In their seminal review of marketing in the New Millennium Issue of theJournal of Marketing, Day and Montgomery (1999) projected that thefunctioning and evolution of markets would be a significant issue that wouldrequire special attention from marketing scholars in the first decades of the21st century. They also identified firms’ relations to their markets as anothersignificant issue, and projected that firms would increasingly relate to theirmarkets through collaborative arrangements and partnerships to improvetheir performance, especially in those markets that are less familiar to them.In the short span since that review, the evolution of the context in whichfirms evolve and strive for high performance has become even more sig-nificant with the accelerated pace of technological change and globalization.Nowhere is this evolution more pronounced than in the world’s rapidlytransforming economies, such as China, India, and Brazil, where firms areevolving with fascinating patterns of development. A key ingredient in thisevolution has been the development and success of business groups, oftenconglomerated family firms, which have been able to develop capabilitiesthat are valuable, rare, and inimitable in these contexts, such as rapid di-versification into unrelated product lines and repeated industry entry(Guillen, 2000).

This fascinating pattern of evolution has generated considerable interestin the management literature recently; indeed, the Academy of Management

Journal dedicated an entire issue to the topic in 2000 and has dedicatedconsiderable publication space to studies examining this issue since then(see, e.g., Chang, 2003). Yet, scholars who study the international dimen-sions of business have not yet focused sufficient attention on the emergenceand functioning of business groups in emerging markets. In fact, this oughtto be a significant question for international marketing scholars to examinefor a number of reasons. First, since business groups are typically significantplayers in the economic functioning of emerging markets (Khanna & Yafeh,2005), their study could provide valuable insights about the nature andfunctioning of the markets international marketers will penetrate, operatein, and expand from. Second, studies of these groups could unearth impor-tant insights about the cultural norms governing exchanges, marketing in-frastructures, distribution systems, and regulatory mechanisms in thosemarkets. Third, such studies could provide a better understanding of thepartnering behavior by indigenous firms in those markets, whether withprospective foreign partners who are seeking market access or knowledge,

How do Business Groups Function and Evolve in Emerging Markets? 277

or with other networks in their markets who might be pursuing economicgains (Khanna & Palepu, 2000; Guillen, 2000; Kock & Guillen, 2001). Yet,we know very little about the behavior of these groups in emerging econ-omies (Khanna & Yafeh, 2005), such as China and India, even as theseeconomies have been growing as important consumer markets and interna-tional expansion platforms recently (Prahalad & Lieberthal, 1998; Prahalad,2005).

We hope to contribute to a better understanding of business groups withour current paper. In response to Day and Montgomery’s (1999) call, wehope to examine why business groups develop and prosper in emergingeconomies, how they might help prospective multinational businesses enterand expand from an emerging economy, and how they might help emergingmarkets develop and prosper economically. We believe our work is signif-icant on, at least, two grounds. First, we bring insights from the literature onbusiness groups in organizational theory to understand their role more fullyin an international business context. Second, we present a discussion ofbusiness groups in Turkey as an example of the types of groups that mul-tinational firms might want to embed themselves into in other emergingeconomies as they operate in these markets and evaluate foreign marketexpansion opportunities from them. Finally, we offer questions for futureresearch.

Our paper is organized as follows. We present the relevant theory ofbusiness groups and derive propositions about the evolution and role ofbusiness groups from that theory. We then present a brief discussion of theevolution and functioning of business groups in Turkey to underscore thesignificance of our propositions. We then offer questions that futureresearchers might address to enhance knowledge about business groups.

RELEVANT THEORY AND PROPOSITIONS

A growing literature on the evolution and role of business groups in emerg-ing economies has surfaced recently (see, e.g., the Academy of Management

Journal, 2000, Special Issue). This literature has defined business groups ascollections of firms pulled and bound together in formal and informal waysin an intermediate sense (i.e., excluding strategic alliances and firms that arelegally consolidated into a single entity) to achieve an economic purpose(Granovetter, 1994), and as coalitions of organizations that go beyond thosecreated by temporary alliances among two or more otherwise independentfirms that do not constitute a legally consolidated or integrated company


(Guillen, 1997). Business groups are said to be more diversified and generategreater economic impact in their respective markets and invest more heavilyand in greater numbers of industries when compared to their independentcounterparts in their markets (Kim, Kandemir, & Cavusgil, 2004).

Granovetter (1994) suggests that the existence and development of busi-ness groups should be viewed through essentially four separate lenses:(1) resource dependence (firms routinely depend on other firms for resourcesthey do not possess); (2) need for strategic partnerships (it is in the nature ofmarkets and consumer demand to change, and the pace of change hasaccelerated recently due to globalization and the technological revolution);(3) desire to extract rents from the economy or the government throughcoalitions over and above those which can be gotten in a properly com-petitive economy; and (4) need to form coalitions of capitalists against socialinterests (the Marxist explanation). That is, transaction costs theory, insti-tutional theory, and political economy theory should all play a part inexplaining the existence of business groups in emerging markets (Guillen,2000; Khanna & Palepu, 2000).

Economists explain the existence of business groups as microeconomic re-sponses to conditions of market failure, especially imperfect markets in capitaland intermediate products that plague emerging markets (Granovetter, 1994).Proponents of this position see business groups as responses to transaction

costs primarily in capital markets (Williamson, 1991), but in markets forentrepreneurial talent, product markets, labor markets, and cross-bordermarkets for technology as well, which lead to preferential access, for in-stance, to capital (Khanna & Palepu, 2000; Chang & Choi, 1988), and asresponses to agency problems in the market, whereby firms are able to secureintermediate goods with lower costs and less uncertainty by joining orforming groups rather than procuring them through the market or inte-grating vertically (Granovetter, 1994). Business groups exist in this viewonly in the absence of a well-functioning market, i.e., they enhance value byserving as functional substitutes for allocation failures in the markets forproduction inputs (Khanna & Palepu, 2000).

There are many market failures in emerging markets such as India, insharp contrast to advanced economy markets, such as the United States.Khanna and Palepu (2000) argue that these imperfections typically includean inadequate marketing infrastructure, lack of regulatory discipline or fre-quent changes in the regulatory environment, political and economic insta-bility, and poor dissemination of market information. In markets like theUnited States, where there is relatively efficient intermediation in markets,entrepreneurs are not as likely to seek association with firms that are


diversified across unrelated industries, while in an emerging market such asIndia, where market intermediation is relatively inefficient, firms will preferto be associated with other firms that are diversified into many industries toextract potential benefits they otherwise could not extract by themselves(Khanna & Palepu, 2000). Further, as Khanna and Palepu (2000) under-score, there is typically inadequate disclosure or opaque governance andcontrol mechanisms; financial intermediaries such as investment banks arenot fully evolved; and the enforcement of securities regulations is typicallyerratic. Thus, in light of the accumulating transaction costs these imperfec-tions place upon them, independent firms will find it more profitable topursue business opportunities when associated with a large, diversifiedbusiness group that will act as an intermediary between them and imperfectmarkets (Khanna & Palepu, 2000). Given that these firms can access avariety of other benefits in labor, product, and technology market interme-diation as well through their association with business groups, they willprefer association over nonaffiliation. Therefore, business groups presentbenefit opportunities to unaffiliated firms to overcome market imperfections(Guillen, 2000).

In suggesting a curvilinear relationship between enhanced performanceeffects through affiliation with a diversified business group, Khanna andPalepu (2000) argue that there are also costs to this affiliation that need tobe considered for a completer picture of business group benefits. Forexample, governance costs might rise due to conflict of interest among theaffiliated firms; economically inefficient decisions may continue due to weakdisclosure requirements, ineffective governance mechanisms, and under-developed corporate control mechanisms; and fixed costs may accelerate inenforcing intra-group contracts. While these cost effects will undoubtedlysurface, all things considered, business groups should provide a marketintermediation opportunity to firms operating in imperfect capital, product,labor, and technology markets, especially in the earlier phases of a market’sdevelopment. Thus, in parallel with Guillen (2000) and Khanna and Palepu(2000), we propose that:

Proposition 1. The deeper the imperfections in capital, product, labor,and technology markets, the greater the intermediation importance ofbusiness groups will be in those markets.

Sociologists, for their part, explain business group formation by the gainsrealized through social solidarity and social structure among componentfirms that are identifiable by such things as region, ethnicity, kinship, orreligion, i.e., firms are linked by relations of interpersonal trust developed on


the bases of personal, ethnic, and communal backgrounds (Granovetter,1994). For example, kinship is found to be a strong correlate of businessgroup formation in the Korean chaebols; kinship and ethnic bonding inChinese business groups in Thailand and Indian groups in East Africa;geographic region and ethnicity-based solidarities in the ethnic enclaves ofCuban business groups in Southern Florida, and in the multiple axes ofsolidarity based on government, local business, and capital elites found inthe grupos in Brazil (Granovetter, 1994). Indeed, as Khanna and Palepu(2000) underscore, some sociologists argue that business groups provide aspecial kind of kinship in which economic and kinship bonds becomeinextricably intertwined, and where a moral community is created withinwhich the likelihood of opportunistic behavior, a core component of trans-action cost economics, is lessened. They further argue that through theirencouragement of information dissemination among group members, byreducing the possibilities of contractual disputes, and by providing a mech-anism for efficient dispute resolution, business groups provide mechanismsfor solidarity and for the lowering of intra-group transaction costs (Khanna& Palepu, 2000). Thus, we propose that:

Proposition 2a. The deeper the social solidarity and the social structureneeds of component firms in a market, the greater the importance ofbusiness groups will be to the functioning of that market.

Some sociologists also feel that firms are by-products of the social andinstitutional contexts surrounding them, and therefore, different social andcultural patterns will spawn different types of organizations (Guillen, 2000;Kock & Guillen, 2001; Kim et al., 2004). Therefore, as Guillen (2000) sug-gests, the value-creation potential of business groups will change as theirambient institutional context changes. Further, they will likely flourish inmarkets with vertical relationships, such as in South Korea, but not insocieties where reciprocal or horizontal relationships are the norm, such asTaiwan (Guillen, 2000). This sociological rationale is supported by eco-nomic reasoning. For example, Chang and Hong (2000) argue that theeconomic performance of group-affiliated firms are likely to be higher whencompared to independent firms as group-affiliated firms benefit from groupmembership through the sharing of both intangible (social solidarity) andtangible (financial resources, intra-corporate trade) ties with other memberfirms, specifically as a result of the cross-subsidization of various intra-group transactions. Chang (2003) underscores the performance benefits ofthis cross-subsidization view through evidence that shows that controllingshareholders in South Korean chaebols typically use insider information to


take direct and indirect equity stakes in promising firms and transfer profitsto affiliates primarily through intra-group trade. Thus, we propose that:

Proposition 2b. The more vertical the pattern of relationships are in asociety, the greater the importance of business groups will be to thefunctioning of that market.

Management scholars explain the performance effects of business groupson value creation in certain industry sectors and national economies, andsuggest that these groups emerge as a result of entrepreneurs’ and firms’enhanced capabilities in emerging markets for repeated industry entry(Khanna & Palepu, 2000) and asymmetric foreign trade and investmentenvironments typically found in emerging economies (Guillen, 1997, 2000).For example, Ghemawat and Khanna (1998) view business groups as so-cially counterproductive rent seekers that are able to absorb disproportion-ate amounts of rent in an economy to the detriment of the majority of thepopulation. In the same vein, Guillen (2000) theorizes that autonomousstates with the ability to allocate capital and other resources at will, willencourage a few favored entrepreneurs to enter new industries, and will seekthe political support of these entrepreneurs by enabling them to exploit rent-seeking opportunities. Thus, the greater the autonomy of the state, thegreater the importance of business groups will be in that economy. Thus, wepropose that:

Proposition 3a. The greater the opportunities for favored rent-creation ina market, the more business groups will flourish in that market.

An extension of this reasoning, offered by Guillen (2000), stipulates thatbusiness groups will develop and flourish in economies where asymmetriesin inward and outward trade and investment flows, typical of emergingeconomies, persist long enough to allow chosen entrepreneurs and firms todevelop and maintain an inimitable capability to combine foreign (i.e., cap-ital, technology, know-how, access to foreign markets) and domestic re-sources (access to home market labor, capital, and product markets,government favoritism) that encourages them to enter multiple industries.Guillen (2000) suggests that the advantages they will enjoy in this contextwill only be sustainable to the extent that asymmetries in trade and invest-ment persist over time, making their capability inimitable. Otherwise, anyentrepreneur, including foreign multinationals, will be able to enter new


industries, currently the province of privileged entrepreneurs. Thus, wepropose, in line with this reasoning, that:

Proposition 3b. The greater the asymmetries in foreign trade and invest-ment in an economy, the more important the business groups will be inthat market.

Marketing scholars also comment on the significance of business groupsin emerging economies. They study these groups through the lenses ofexchange theory and market evolution. For example, in the context ofexchange theory, Hitt, Dacin, Levitas, Arregle, and Borza (2000) suggestthat business groups in emerging markets will be viewed by developedcountry firms as owners of unique competencies, such as local marketknowledge and market access gateways, and thus as opportunities for part-nership with which to enter markets, while emerging market firms will seekfinancial assets, technical capabilities, and intangible assets such as mar-keting expertise in partnerships with their developed market counterparts;these needs will provide the bases for efficient utility exchanges betweendeveloped country firms and emerging market business groups. Otherspropose in the context of market evolution that business groups will evolvethrough life cycle-like trajectories in emerging markets. For example, Kimet al. (2004) suggest that family conglomerates will evolve through threedistinct stages. In the introduction stage, these firms will create an enterprisethat responds to marketplace opportunities and fulfills unmet needs ofconsumers. Easy access to favored capital such as government contracts,lack of viable competition, and various early mover advantages will facil-itate the enterprise’s growth in this phase. In the growth stage, these firmswill diversify into related as well as unrelated businesses, fueled by thetransfer of foreign technology and know-how through alliances with foreignfirms, creation or acquisition of financial institutions to meet capital needs,and the transformation of the enterprise through professional management.In the maturity stage, they suggest, the diversification of the enterprise willslow down or cease, giving way to international expansion opportunities,even through wholly owned subsidiaries and joint ventures in globallycompetitive markets.

Others propose that business groups will evolve through a trajectory,much like the wheel of retailing in marketing, where as one type of businessgroup reaches maturity and starts to decline in importance, another type willemerge to take its place, and following a similar trajectory, will eventuallygive way to yet another type of business group in response to the changes inthe market environment. In their study of the evolution of Turkish business


groups, for example, Yaprak et al. (2004), hypothesize that traditionally

dominant holding groups might have given way to a new type, emergent

(regional/ethnic solidarity) groups, which currently appear to be supersededby two new types of groups, which they label encouraged (government fa-vored), and loosely connected, export oriented, regional OEM supplier net-works. Each of these prototypes appears to possess a different portfolio ofcharacteristics and serve a particular purpose in economic development inresponse to the prevailing market imperfections of its time. This is in linewith Khanna and Palepu’s (2000) findings on Chilean business groups whichshowed that the evolution of a group’s ambient institutional context altersits value-creating potential. For instance, paralleling Guillen’s (1997, 2000)rationale, the dominant groups, which flourished in the 1960s to the 1980s inTurkey, appear to have been the by-product of the populist/nationalist erain Turkey’s economic development which was characterized by protection-ism, import substitution manufacturing, government focus on natural as-sets, and local ownership development (Yaprak et al., 2004). Emergentnetworks, by-products of Turkey’s turn to foreign investment attraction andopening of its markets to global competition in the 1980s, appear to haveevolved from the natural institutional frameworks that were congruent withinward economic stability at home coupled with foreign direct investmentattraction from abroad. Encouraged networks and regional networks, by-products of Turkey’s rapid transformation into an emerging economy in the1990s, appear to have been the result of export-led growth in created, notextracted, assets, coupled with a gradually opening external economy. Tocomplete this life cycle, Turkish business groups would have to evolvethrough one more phase, much like those in Spain in the 1980s and 1990s,that would involve export-led growth based on created assets, but alsopragmatic, internal stability that would help attract foreign direct invest-ment (Guillen, 1997, 2000; Yaprak et al., 2004). While the empirical evi-dence we present here comes primarily from the Turkish context, we feelthat our arguments that underscore this evidence will likely apply in otheremerging market contexts, as well. Thus, we offer the following proposition:

Proposition 4. Business groups will follow life cycle-like trajectoriesinspired by the ambient institutional context of their economies, such thatone type of group will grow, mature, and decline as others will start toemerge, grow, mature, and decline.

This literature in marketing has been paralleled by studies in international

marketing on the entry modes firms will, and should, use when entering aforeign market (e.g., Johansson, 1997). This literature has focused on


recommendations for expansion matched to the strengths and weaknesses ofvarious firm characteristics, national factors, and specific strategic motives(Dunning, 1995). Studies in this stream have also suggested that any entryinto a foreign market will tie the entering firm, implicitly or explicitly, to oneof a number of business networks in that market; networks that are them-selves embedded within the unique socio-political and economic context ofthat market (e.g., Guillen, 2000). The appropriate selection of such a net-work during entry will provide the firm not only with specialized oppor-tunities, but also with substantial consequences on the performance of theforeign entry attempt (e.g., Larson, 1992; Lorenzoni & Loipparoni, 1999).Thus, these studies suggest that such network positioning and the type ofnetwork entered through a business group can be a significant ingredient inthe success of the entry, particularly when entering emerging markets.

The partner selection literature suggests that when entering a foreignmarket, the firm should seek a local partner with enriched capabilities, suchas a track record of successful international cooperation (e.g., Geringer &Hebert, 1991). The firm is also warned about the problems it might face inforeign entry, such as likely opportunism on the part of the local partnerand the high probability of failure (e.g., Gulati, Nohria, & Zaheer, 2000).Some emphasis has also been placed in the literature on the receptivity,ability, and willingness of the local partner to embed its foreign partner in itsnetwork of alliances (Ahuja, 2000; Osborn & Hagedoorn, 1997). Hitt et al.(2000), for example, suggest that prospective partners need to match theirmotives to one another. The motives typically associated with emergingmarket firms center on the need for financial assets, transfer of technicalcapabilities and competencies, and a willingness to share their expertise inlocal market access and knowledge. Conversely, firms from developedeconomies often seek access to market opportunities and knowledge, dis-tribution channels, stimuli for new products and lower cost entry in returnfor their unique competencies and knowledge. Thus, we propose, consistentwith Hitt et al. (2000) that:

Proposition 5. When entering emerging markets, entering firms and theirbusiness group partners must see benefits, including those that mightaccrue to the entering firm from the host partner’s willingness to embedthe foreign partner in its local network of independent firms and readyaccess to its markets, and those that might accrue to the host partner fromthe foreign partner’s willingness to embed the host partner in its globalnetwork of affiliated firms and ready access to its markets.


We now turn to an examination of the evolution of business groups inTurkey, an emerging market in Southeastern Europe. This is worthy forseveral reasons. First, the analysis of the nature and extent of marketactivity of each of these groups will help emphasize the role that each typemight play in market entry of foreign firms into the Turkish market. Second,our examination will help underscore the validity of the propositions weoffered earlier for each of the business group types we have identified.Finally, if the evolutionary pattern we are proposing here is universal, thiscould help shed light on the development and progression of businessgroups in other markets, such as in Brazil, Chile, South Korea, and Taiwan.

THE EVOLUTION OF BUSINESS GROUPS

IN TURKEY

With its unique geographical location, Turkey is a natural gateway forsimultaneous entry into Western Europe, Asia, and the Middle East. It hasundergone a prolonged and sustained program of economic reform under aseries of secular governments. These reforms have promoted a unique pat-tern of business group formation into allied firms. After abandoning pro-tectionist economic policies, Turkey has been implementing an open-marketeconomic program since 1983. The program has liberalized the Turkisheconomy and integrated it into the larger world economic system. Thesereforms have included reducing the state’s involvement in the economy,minimizing state intervention, implementing a flexible exchange rate policy,liberalizing import regulations, increasing imports, encouraging foreigncapital investment, establishing free trade zones, and deregulating financialmarkets. Implementation of these economic reforms has created significantstructural changes in the Turkish economy (Bugra, 1994).

The reform program has faced numerous difficulties until recently, how-ever. Turkey suffered through two consecutive economic crises in the lasttwo decades. The sustained problems in this context have been high infla-tion, the sizable public deficit, and the continuing, albeit declining, stateinvolvement in the national economy. Although Turkey opened up itseconomy to the world, initially in the 1980s through the Ozal reforms, andlater through such mechanisms as the Customs Union Agreement with theEuropean Union (1996 to present), foreign firms have shied away frominvesting directly in Turkey during this period for precisely the reasons thetheory we discussed earlier would suggest. First, the political and economic


environments, marred by successive crises, have not been very attractive.Second, the consumer market has remained shallow because of these eco-nomic and political crises. Third, government red tape and the legal pro-cedures governing foreign investment have remained archaic, withunreasonable bureaucracies surrounding taxes and conflict resolutionthrough the courts. On top of all of this, the demand for most consumers’goods has remained low, due primarily to successive economic crises thecountry has experienced. For all these market imperfections, direct foreigninvestment by multinationals has remained very low. Those that haveinvested chose to do so by using the major Turkish business groups asgateways to this promising emerging market. This gave the opportunity forthese groups to profit greatly from diversifying into areas that were outsideof their traditional business areas.

Business groups, which gained a significant role in the Turkish economyduring this period, diversified their investments into the various sectors ofthe domestic economy and increased their cooperative arrangements andpartnerships with foreign firms. Besides the traditional business groups, newgroups also emerged. Different from the traditional groups along severaldimensions, such as size, scope, technological concentration, managementphilosophy, strategy, alliance linkages, structure, and internationalizationpatterns, these emerging groups started playing significant roles in attractinginternational businesses into Turkey and in expanding Turkey’s exporteffort abroad.

Based on research we conducted in Turkey (Karademir, 2000), we suggestthat there are four types of business groups in Turkey: (1) holding companybusiness groups, (2) emergent business groups, (3) encouraged networks,and (4) regional networks. We further argue that each type provides a dis-tinct combination of costs and benefits and is involved in a different set ofrelationships with different sets of firms and institutions (Hoskisson et al.,2000). We now discuss the costs and benefits involved in partnering witheach of these in entry into the Turkish market, underscoring the similaritiesand differences among them.

1. Holding Company Business Groups (HCBGs)

A small number of highly diversified, family-based holding companiesdominate the business scene in Turkey (e.g., Sabanci Holding, Koc Holding,Alarko Holding, and Zorlu Holding). These groups share many commonfeatures with multi-activity firms found in other late-industrializing


countries (Amsden & Hikino, 1994; Kock & Guillen, 2001). TurkishHCBGs tend to be highly diversified with 60–100 companies present in theirnetwork, and show rapid diversification in a short period of time parallelingthe transformation of the Turkish economy from import substitution man-ufacturing to export expansion liberalization after 1983 (Bugra, 1994). It isapparent that this transformation was fueled by government incentivesprovided these firms to invest in underdeveloped but high-growth potentialsectors and/or regions of the economy (i.e., the textile and tourism sectorsinitially, banking and finance in the recent past and retailing, e-business, andtechnology, most recently). While the formal governance mechanisms ofthese groups seems to vary, all seem to involve a mix of family control andless traditional corporate governance systems focused on sectors where theyhave major capital investments (Bugra, 1994). While in industry sectorswhere they dominate they tend to be tightly integrated and coordinated; inother industries, they are more likely structured, and operate as, networks offirms than single hierarchies. In these cases, their structural patterns tend tofollow trends that are consistent with their industry and/or technology andsize, rather than conforming to a unified corporate form (Nohria & Garcia-Pont, 1991; Human & Provan, 1997).

Partnerships with HCBGs typically involve investment projects where theHCBG provides local knowledge, access to the national government, andsubstantial local market experience in addition to a low-cost productionplatform for export and access to sophisticated managerial infrastructures.While the multinational firm bringing technology and access to capital andto foreign markets may well see an alliance with the HCBGs as consistentwith a cost minimization strategy, the HCBG is likely to view its alliancewith the foreign enterprise as a way of filling ‘‘structural holes’’ in itsenterprise network. This is because HCBGs do not tend to be singularorganizational hierarchies with a single mode of organization, one dominantstrategy, or even a singular managerial philosophy. As the business groupliterature suggests, they tend to be clustered networks with strong directownership ties that are reinforced by strong social ties based on kinshipwithin a given industry, but comparatively weak, indirect ties across indus-tries (Ahuja, 2000; Walker, Kogut, & Shan, 1997). Thus, from the perspec-tive of the HCBG, a partnership with a multinational enterprise representsa way of internalizing an organizational form in place of the market(Williamson, 1991). While for the multinational enterprise there is alwaysthe risk that once this gap is filled when the HCBG internalizes the know-how, coordination, and control benefits from the partnership HCBG man-agers can make the links with the market directly, this is unlikely to occur


as long as the multinational firm is able to keep some of these assetsproprietary and continues to innovate and thus preserve its superiority inknow-how and other competencies.

2. Emergent Business Groups (EBGs)

EBGs are closely diversified businesses in target industries, such as foodsand cereals, leather products, automotive products, machinery, tourism, andso on, with networks of subsidiaries composed primarily of small- andmedium-sized enterprises. They tend to be entrepreneurial firms that enjoyvery high growth rates. These groups appear to have followed growth pathssimilar to the HCBGs. Like their more dominant counterparts, they owetheir extensive growth to government efforts to liberalize the economy. Theytypically enjoy cost economies, due almost exclusively to their locations,which are targeted by the government for export-led growth, primarilyto the Turkic republics in Central Asia and Eastern Europe, but also toadvanced economies. They enter businesses faster than their HCBG coun-terparts and their foreign rivals; hence, some have had a tendency to over-diversify into unrelated industries. While some are suppliers to the HCBGs,they tend to realize that an exclusive focus on serving these larger HCBGs inthe form of Original Equipment Manufacturer (OEM) supply might be adisadvantage in the long run. In addition to the lower costs and flexibilitythey offer, many seek to turn their local market knowledge into an impor-tant competitive advantage. Thus, EBGs have become attractive enterprisesfor foreign partnerships. Like their more dominant counterparts in the firstgroup, they tend to enter international alliances to overcome economicuncertainties and their needs for capital and other resources, such asadvanced technology, and managerial know-how.

Multinational enterprises that attempt to embed themselves into thesenetworks face risks and challenges, however. EBGs’ limited internationalexperience and managerial talent as well as their entrepreneurial approachto business pose major difficulties, as do their tendency to be under-capitalized and over-diversified. For those enterprises that are looking forpartners with initiative, energy and drive, and are willing to cope with thesechallenges, EBGs offer an excellent opportunity for local market develop-ment as well as international expansion.

Most EBGs do not possess fully developed closed networks. They tend tobe connected via social ties to local financial institutions, governmentalagencies and customers as well as to suppliers and economic agents in labor


markets. They are, typically, not completely institutionalized within the na-tional economic fabric, but are regional exemplars with a growingnational presence (Baum & Oliver, 1991). Thus, EBGs represent an impor-tant future for the Turkish economy, but their readiness for international ex-pansion remains suspect. Those that are likely to be the most effective ininternationalization are likely to be the ones that view themselves not as mereproduction platforms, but as centers of networks linking the East with the West(Lorenzoni & Fuller, 1995). As their potential as productive partners comes notonly from their location and internal competencies but also from their advan-tageous positions in regional networks, they represent excellent opportunitiesto multinational enterprises for productive partnerships.

3. Encouraged Networks (ENs)

With the development of Turkey’s Customs Union agreement with the EUin 1996, the government has embarked on a number of initiatives tostrengthen the international competitiveness of its small- and medium-sizedenterprises. One of these initiatives has been the encouragement of sectoralforeign trade companies. Much like the entities legislated into being throughthe Export Trading Company Act in the United States in 1983, the purposeof this initiative was to encourage Turkish SMEs into export and interna-tional investment involvement.

ENs are groups of local and regional firms producing similar productsthat are encouraged to cooperate in their international involvement efforts,and as such, they are exempt from antitrust legislation. What these businessgroups provide are economies of scale and scope, and specialization in thoseareas where they possess a comparative advantage. As the ENs arechartered under government legislation and are exempt from antitrust pro-visions, they are allowed to expand up, down and/or across their initialvalue-added chains and industry sectors. Many ENs have evolved into looseconfederations of firms where only selected members participate in theinternational expansion of any one project. The degree to which they havethe internal capabilities to effectively promote exports is sometimes ques-tioned, however (see Karademir, 2000).

When viewed from a network perspective, these groups present an inter-esting picture, as they appear to be connected to one another as well as tothe central body through common social ties, economic interests, and insome cases, kinship. From a contractual standpoint, they appear to operateas an integrated entity when exporting and dealing with governmental


agencies. Internally, however, they appear to be loose confederations ofindependent suppliers, each with a specific specialty. While we observe legalcoordination among the members of these groups, most appear to lack adefined strategy, managerial direction for consistent strategic implementa-tion, and the information systems necessary for effective linkage to theirmembers. Social ties appear to be used to compensate for the lack of formalcoordination and control. Most appear to go outside their membershipgroups for key resources, such as financial needs and foreign experience.

While generally resource poor, ENs present promising opportunities,especially to smaller multinational firms, as potentially productive alliancepartners, particularly those that involve the use of Turkey as a productionplatform for export into the EU and the Turkic republics in Central Asiaand Eastern Europe. Beyond the challenges of effective partnering, however,the multinational partner would have to be concerned about the willingnessof the EN members to accept centralized strategic and technical guidancefrom the foreign partner, and its ability to coordinate the often difficultoperations of the members (Gulati, 1999; Kogut, 2000).

4. Regional Networks (RNs)

Regional networks (RNs) are collaborating enterprises composed of small-and medium-sized firms, which are connected loosely through supplierarrangements, co-production, technical tie-ups and the like in industrialdistricts with a focus on selected industries (textiles in the Denizli, automo-tive components in the Kocaeli regions). These networks are formed togenerate more advanced technological and marketing knowledge, higher-quality products, better knowledge of government incentives and controls,and qualified key personnel (Dyer & Nobeka, 2000). They also provide toparticipating firms access to financial resources which individual firms can-not otherwise gain access to as easily. They engage in contractual arrange-ments around specific projects through which they produce parts orproducts for original equipment manufacturers, export abroad, and man-ufacture goods for final sale in the domestic market. The critical elementhere is the presence of trust that keeps their loose arrangement together. Inmany respects, these are similar to the industrial networks of third-tiersuppliers in the more advanced economies (see Lorenzoni & Loipparoni,1999). However, they are not as closely coordinated as industrial districts inmore developed countries and often lack the sophisticated technologyneeded to compete in the international scene.


CONCLUSIONS AND FUTURE RESEARCH

QUESTIONS

Although business groups have emerged recently as significant forms ofindustrial organization, especially in emerging markets, they have notreceived sufficient research attention in the international marketing litera-ture. Further, while their significance in market entry has been known forsome time, their role in the functioning and evolution of their ambientenvironments has not been studied extensively. While extant entry modeliterature suggests that foreign market expansion is a function of the matchbetween firm needs, investment site alternatives, environmental factors,international markets, and specific strategic motives (Dunning, 1995), thisliterature has not considered the role that business groups in emergingmarkets might play as local networks in the international expansion ofdeveloped country firms or their expansion from emerging markets.

In this paper, we attempted to contribute to filling this void. We firstpresented the relevant literature on why business groups exist and how theyevolve in emerging markets through five sets of propositions we derivedfrom economics, sociology, management, marketing, and internationalmarketing. We then presented a broad-brush picture of the evolution ofbusiness groups in one emerging market, Turkey. We showed that entry intoan emerging market might involve explicit or implicit ties to a numberbusiness networks that are themselves typically embedded within a socio-political and economic context. Using Turkey’s economy and her businessnetworks as a backdrop, we described four distinct types of business net-works and derived a rationale for how each might be used by prospectiveforeign investors as platforms into other markets.

Our work led to a number of questions that could be explored by otherresearchers. First, much more theory development is needed to better un-derstand how business groups function and evolve in emerging economies.For example, studies should explore how such theories as social exchange inanthropology, resource dependence in sociology, and complexity in organ-izational behavior might explain the roles of business groups. Second,research could probe the similarities and differences, both contextual andcorporate culture based, among the compositions and functioning ofdifferent types of groups in different emerging markets, say Chile vs. India,Brazil vs. China, or South Korea vs. Turkey. Third, scholars could questionwhy certain types of groups are more effective while others are not evenwithin the same environmental context, and the antecedents and metrics ofsuccessful market entry through partnerships with business groups. Finally,


researchers could also examine whether affiliation with business groups leadto productive benefits for multinational firms as well as for the groupsthemselves when compared to independent entry into, and expansion from,emerging markets. We hope that our paper will inspire work on thesequestions as we believe that expansion of the existing and creation of newknowledge in this area should also enhance our understanding of businessgroups and their role in effective international marketing practice.

ACKNOWLEDGMENTS

The authors are indebted to the two anonymous reviewers and theco-editors of this volume for their constructive comments on an earlierdraft of this article. Their careful reading and suggestions improved ourwork immensely.

REFERENCES

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SMALL MANUFACTURING

FIRMS’ INVOLVEMENT

IN INTERNATIONAL

E-BUSINESS ACTIVITIES

Per Servais, Tage Koed Madsen and

Erik S. Rasmussen

ABSTRACT

E-business is an important business tool, and the increasing presence on

the internet reflects this fact. For small- and medium-sized firms (SMEs)

interested in internationalizing, their internet offers some advantages,

because, with e-business, borders between countries are becoming less

relevant, and more direct interaction between business entities is made

possible. In this article, we unravel the use of internet usage of different

types of firms. First, we present a categorization of different local and

international firms, and, second, we focus on the internet usage by born

global firms compared to the other types of firms. We conclude that born

global firms use the internet to convey their market presence, but only to a

limited extent do they sell their products via the internet. Instead, they use

the internet to support the already existing relationships by describing

their products on web pages, offering services related to their products via





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17011-8

297

PER SERVAIS ET AL.298

the internet, facilitating product development via the internet, and build-

ing and maintaining relations to foreign customers. We also stress the

importance of further research on how born global firms adapt to the

internet in practice.

INTRODUCTION

Several studies have underpinned that the interaction and communication ofsmall- and medium-sized firms (SMEs) with foreign customers, partners,and other network actors is a central issue in the internationalization of suchfirms (Coviello & Munro, 1997; Coviello & McAuley, 1999; Ellis, 2000;Saarenketo et al., 2004). Crick and Jones (2000) furthermore argue thatsome small firms, especially in the high-tech business, often possess thecompetence, capability, and experience needed to operate on distant inter-national markets from early on in their development. Indeed, the e-businessrevolution is transforming organizations and organizational processes andcreating new opportunities and challenges for international marketers asmany markets are becoming borderless and globally integrated (Hitt,Ireland, & Hoskisson, 1999). Quelch and Klein (1996) stress that the usageof e-business tools fosters the emergence of instant international companieshaving immediate access to potential customers, including both business-to-business customers and end users. Others argue that e-business enablesgreater integration of businesses across national and organizational borderscreating new opportunities for SMEs and their supply chains (Lancioni,Smith, & Oliva, 2000). Such an integrated market environment, however,also levers more potential challenges to the SMEs’ ability to maintain globalefficiency (i.e., lowering costs and quickening responses in globally ex-panded supply chains), while attempting to fulfill fast-changing, local re-quirements within particular foreign markets.

The overall purpose of this article is to explore the e-business usageamong ‘‘instant international firms’’ (Hamill, 1997) and compare theire-business behavior with that of other types of firms which are more na-tionally oriented in their sales and sourcing activities. The main contributionof the article is an empirical study among more than 1,000 Danish man-ufacturing companies in which it is possible to explore differences betweensuch different types of firms. The reason for this focus is that we expecthighly internationally oriented firms to behave differently with regard to e-business activities.

SME’s Involvement in International E-Business Activities 299

MANUFACTURING FIRMS’ INTERNATIONAL

EXPANSION

According to Melin (1992), firms’ internationalization can be perceived as apart of an ongoing strategy process of the firm. The main difference betweeninternationalization and other types of growth strategy processes can befound in two dimensions. First, the firm transfers products, services, andresources across borders. This implies that the company has to select inwhich country or countries the transaction should be performed. Second,the firm has to choose how to enter foreign markets (Andersen, 1997).Firms’ international expansion is, however, not confined to export activitiesalone. In a review of the academic literature (Liang & Parkhe, 1997) revealsa striking imbalance while one side of the coin, the exporter side, has beenextensively studied, the other side, the importer side and the associatedmotives, have largely been neglected. This finding is further stressed by Lyeand Hamilton (2000). In a similar vain, Cavusgil (1998) highlights perspec-tives on some fundamental questions in the field of international marketingand points out some promising research avenues. Among the mentionedavenues is the analysis of firm expansion in international markets, e.g.,inward and outward internationalization.

Since the late 1980s, a growing concern for manufacturing firms’ inter-national sourcing (inward) activities has emerged, stressing the importanceof this phenomenon on the firms’ success (Scully & Fawcett, 1994). Theconnection between import and export activities within a firm and how itaffects the internationalization process of the firm has received only scat-tered interest in the literature (Korhonen & Welch, 1996). The dovetail hasbeen identified primarily through studies on specific business operations,such as licensing, subcontracting, and countertrade. In a study of a largenumber of Finnish industrial firms, Korhonen and Welch (1996) found thatthe vast majority of Finnish firms began international activities on the in-ward side rather than with export, thus pointing to the potential importanceof inward activities as a jumping-off ground for outward activities. Typicalinward operations were imports of physical products like raw materials,machinery, and components, but also imported services like installation,testing, servicing, and maintenance, although at a low level compared tophysical products. Korhonen and Welch (1996) stress that import–exportconnections could be found at different stages of the internationalizationprocess.

These observations are in accordance with Oviatt and McDougall (1994)whose original idea was that the sourcing of input as well as the selling of


output should be important dimensions in the categorization of Interna-tional New Ventures. We suggest defining three categories with regard tosourcing as well as selling. One nationally oriented group of firms with noforeign activities, a group of the most globally oriented firms having morethan 25% of activities outside own continent, and a group in between withforeign activities, but less than 25% outside its own continent. The cutoffpoint (25%) is somewhat arbitrary, but for North American firms it followsthe definition suggested by Knight (1997). As regards the time horizonwithin which a firm should attain the level of sourcing and selling abroad,we advocate three years, which also follows the definition by Knight (1997).Such a time horizon may balance the quest for a short time horizon due tomarket conditions often being highly globalized and the tradition of entre-preneurship research in which firms are often treated as ‘new’ up to six yearsafter their inception (Oviatt & McDougall, 1997). In order to limit thenumber of types of firms, we suggest collapsing them into five types in thesubsequent analyses of our empirical data.

As shown in Fig. 1, this results in a 3� 3 matrix, but in order to limit thenumber of types of firms we have collapsed them into five types in thesubsequent analyses of our empirical data.

We suggest adopting the name ‘born global firms’ to the firms whosecombined sourcing and selling activities are most internationally oriented.Firms having no foreign activities within three years are domestic new ven-tures or ‘born local firms,’ whereas firms that only internationalize theirsourcing side or selling side are called ‘born international sourcers’ or ‘born

Classification of NewVentures

No foreign sourcingafter three years

Less than 25% offoreign sourcingoutside Europe withinthree years

More than 25% offoreign sourcing outsideEurope within threeyears

No foreign sales after three years

Domestic NewVentures

/Born Local Firms

Born InternationalSourcer

Born InternationalSourcer

Less than 25% of foreignsales outside Europewithin three years

Born InternationalSeller

Born European Firm Born Global

Firm

More than 25% of foreignsales outside Europe withinthree years

Born InternationalSeller

Born Global

Firm

Born GlobalFirm

Fig. 1. Classification of Firms According to Sales/Sourcing Activities.


international sellers,’ respectively. The born European firms constitute aquite diverse group, including firms that may have limited internationalinvolvement, but also firms that are highly international at a European scale.

New information technology may serve as a vehicle for the phenomenonof instant internationalization. As shown above, we operate with severaltypes of such firms in our empirical study, and we will explore to what extentthe different types, in their business activities, adapt to new informationtechnology in general and e-business tools in particular. Before establishinghypotheses, we will give a short review of the issues discussed in the lit-erature about the use of e-business in internationally oriented firms.

E-BUSINESS AND INTERNATIONALIZATION

E-business is an important business tool, and the increasing presence on theinternet reflects this fact. For internationally oriented firms, e-business offerssome advantages since borders between countries become less relevant be-cause more direct interaction between business entities is made possible.Some researchers even mention the term ‘revolution’ (Zinkhan & Watson,1996) as a description for the recent development; others are more moderateand claim that The internet is the single most significant new tool for business,

particular for small- and medium-sized enterprises. Prior to the internet, most

small companies only had access to the local markets, now on the internet

every business is a multinational business in a global marketplace (Ellsworth &Ellsworth, 1995, p. 6). However, regardless of how one prefers to describethe situation, it is a fact that the usage of the internet has increased dra-matically during the 1990s (Zinkhan & Watson, 1996). The ability to pro-mote, sell, and deliver goods and services via computer technology hasspawned as virtual revolution (Zinkhan & Watson, 1996). This rapid pen-etration of the internet has led firms to embrace the internet at a remarkablepace (Cockburn & Wilson, 1996), mainly motivated by the fear of missingan opportunity or of damaging their image by not doing so. According toseveral surveys, firms all over the world have started extending their inter-net-related activities following a ‘goldrush’ model, unsupported by a clearstrategy (Angehrn, 1997) and without any specific knowledge about theconsequences for their network relationships. E-business is particularly ap-pealing for SMEs, removing or reducing some of the traditional barriersthey faced in doing business overseas, such as communications costs, longdistances, and market entry risks. Indeed, some have argued that theinternet has reduced the difference between SMEs and MNCs, giving the


former a possibility for presence in different international markets as well aseasy contact with actual and potential customers, suppliers, and partnersabroad (Hamill, 1997).

In a recent paper, Petersen et al. (2002) discuss three hypotheses regardingthe effect of e-business on the internationalization process of firms. The firsthypothesis is that the effect of the internet on firms’ foreign market expan-sion will be very modest. This expectation is based on the notion that animportant limiting factor in the internationalization process is the accumu-lation of experiential knowledge, which remains largely unaffected by theinternet. In contrast, their second hypothesis is one of the faster foreignmarket expansion as a result of the ‘‘borderless marketplace’’ induced by theinternet. Their third hypothesis predicts that a gradual contraction willemerge as geographically diversified firms experience the serious cost disad-vantage of foreignness in certain markets. The hypothesis maintains that theinternet will allow firms to undertake faster international expansion than hasbeen seen until now. However, attempts to penetrate foreign markets morethoroughly will reveal the ‘‘borderless marketplace’’ to be illusory, the resultbeing gradual contraction. Petersen et al. (2002) maintain that firms withsimilar products may be affected in different ways, indicating the complexityof the effect that the internet has on the internationalization process of firms.

SMEs can use the e-business to support their export operations in threeways: (1) as a global marketing tool, through which it may send and searchinformation, (2) as a cost-efficient transaction medium, and (3) as a tool ofcustomer care. One advantage of the e-business as a marketing tool is that aweb page is available 24 h a day all over the world, which gives the firm aglobal presence. At the same time, through the adaptation of the displayedinformation to local visitor needs, it provides an opportunity for the SME tobe ‘local’ in many different markets. Foreign visitors interact with the in-formation provided on the web pages, and this gives many opportunities forthe SME to learn more about the interests of visitors, to collect specificinformation directly, and to involve the visitor in a continuing interaction.Web sites can incorporate substantial amounts of information, that is up todate and easy to access, and they are an efficient and low-cost way ofdistributing materials (e.g., in pdf format). Such comprehensive informationwill attract the interest of competitors as well as potential buyers, yet accessto some areas of the site can be restricted (e.g., password protected).

E-business provides the possibility of carrying out transactions, but is alsoan option for the SME to facilitate much interaction with customers andpartners, including, e.g., ordering procedures (direct or through resellers),price transparency, delivery options, electronic payment methods, and


security. E-business effectively promotes direct trading between sellers andbuyers, which may cause channel conflict if distributors have historicallybeen involved in sales, marketing, and servicing of the products. Interme-diaries such as foreign agents and distributors may become superfluous, butthey may also retain their position in international business, if they are ableto provide services that are valued by the parties. In some cases, they have alocal servicing capability, whereas in others they assist with access to thecustomers. So, e-business technology permits SMEs to offer their productsand services worldwide, but of course they have to observe the possibledrawbacks. For example, competitors may observe their strategies and typesof relationships with customers, and a small firm has to be realistic as towhat extent it is able to customize information and interaction features indifferent languages.

The e-business readily lends itself to customer-care activities. A variety oftools could be implemented, including developing web site contents that willhelp buyers install and use the product, providing information on new andcomplementary products, and listing answers to frequently asked questions.Many companies publish a newsletter that is electronically distributed tointerested persons, while others enable return-visitors to quickly accessrelevant material rather than sending it out through mail. Another vehiclefor staying in touch with customers is online questionnaires that invite vis-itors to give feedback on the company and its offerings.

The impact of e-business solutions in general and of the internet is par-ticularly interesting for small businesses as their resources are limited (Poon& Swatman, 1997). Hence they seek solutions in which entry barriers andcosts are low (O’Keefe et al., 1998). For SMEs, effective use of the internetcan provide a low-cost access to international markets (both import andexport markets) and may help to overcome many of the barriers to inter-nationalization commonly experienced by such firms. Quelch and Klein(1996) list four barriers to SME internationalization and suggest how theinternet can be useful in overcoming these barriers. The first barrier is psy-chological: the internet can decrease this barrier by increasing internationalawareness, confidence, and commitment through access to global informa-tion sources. The second barrier is operational: the internet simplifies op-erations because export documentation can be handled through electronicdata transfers, payments, etc. The third barrier is organizational: the inter-net provides solutions to the problem of this barrier by offering low-cost market research, improved international knowledge, and reduceddependence on traditional intermediaries. The fourth barrier is related toproducts/markets: in this respect, the internet facilitates the country/market


selection, international client feedback, and the adoption of a global nichestrategy rather than a country-centered strategy.

In the process of seeking foreign opportunities, the internet and othersources of electronic information can be a great source of information aboutrelevant international market opportunities, especially for new firms thatlack market-specific knowledge. Moreover, the exploitation of these oppor-tunities is increasingly feasible, also for newly established firms with re-source constraints, due to effective and low-cost information technology.Furthermore, regardless of firm age, a systematic investigation of foreignmarket information can lead the firm to identify opportunities in moremarkets, because low information costs allow for a more extensive envi-ronmental scanning. The realization of exports to more markets can also bethe result of unsolicited contact from customers due to internet presence oras a result of matchmaking in virtual communities such as electronic mar-kets (Klein & Quelch, 1996). In any case, integration of e-business in a firm’sinternational business model can reduce the complexity of running a geo-graphically disperse organization, making it possible to serve many markets,even with limited resources.

Once international markets have been identified, the firm needs to developan effective market strategy for each specific market. If the firm lacks expe-riential market knowledge, it can, to a certain extent, compensate for this byobtaining more information from other sources. Hence, e-business-intensivefirms, in order to develop market strategies, are likely to rely on informationfrom more sources than firms not using e-business. From the perspective ofcompetitive advantage, advances in e-business have made a broad range oftools (i.e., intranets, extranets, electronic mail services, video conferencing,virtual market places, ERP-systems, etc.) available for small firms at lowcosts. The consequence is that large firms to a lesser extent have the com-petitive advantage in terms of the expensive information systems needed tocoordinate geographically disperse operations (Knight & Cavusgil, 1996).

Other researchers have implied that the adoption or embracing of internetpractices is an evolutionary process. For example, Angehrn (1997) presents amodel with four elements. The first one is information space (use of theinternet simply as a global billboard), while the second is communication

space (interactions occur between businesses and customers as they exchangeinformation, ideas, experiences, opinions, etc.). The third element is distri-

bution space (products are actually distributed via the internet), and the lastone is transaction space (formal transactions occur in-between businesses,between businesses and consumers, and in-between consumers). Anothermodel is offered by von Versen (1998) in which it is proposed that the internet


is both a market and a medium and, as such, performs three basic functions,namely contact (demanders and suppliers exchange information), contact anddistribution (demanders and suppliers perform transactions in a global shop-ping center), and integration (suppliers form virtual companies, demandersform virtual communities, and they all merge into internet conglomerates).

Although a number of other models exist (Timmers, 1998), most of themodels reveal a pattern of development from simple, one-to-many infor-mation dissemination models to more sophisticated, integrated, and coop-erative models.

As we have seen, the internet has been defined as both a medium and amarket space. A medium implies that it is simply a tool for providing in-formation, whereas a market space implies that it is a driver and facilitatorof interaction and integration. Thus, at one end of the continuum we willfind information and at the other end integration. Businesses will findthemselves at various locations along the continuum, depending on theirinternal strategic considerations as well as on external factors. Additionally,the models have implications both for end-use consumers and/or business-to-business customers. Thus, an integrated model might include a medium/market continuum within both consumer and business environments.

In the ensuing we will explore four dimensions of e-business. The fourdimensions attempt to span the main aspects of e-business discussed above.They categorize e-business activities into types of usage, depending on thepurpose of the activity:

(1)
Information. Many companies (and even consumers) first utilize the in-ternet as a way to provide information about the organization, itsproducts, and/or establish a business image. Firms may simply putproduct catalogues onto web pages without offering an option of in-teraction or transactions (similar to the one-to-many mass communica-tion models involving television or radio). These firms may also utilizethe internet to access information on competitors, the industry, andperhaps customers. However, they are in many respects passive in theircommunication form.
(2)
Interaction. Firms may go further and utilize the internet to actuallyinteract with customers, distributors, suppliers, competitors, etc. Thisinteraction may be in the form of customer support or service, priceinquiries, or delivery status. Information is not only provided and sought,but also actually exchanged between the parties, who interact with eachother. The interaction is often one to one, but does not yet involve actualtransactions. This category can be referred to as interaction space.


(3)
Transaction. A third category involves actual economic transactions.Here, firms and consumers actually exchange products, payments, andservices between and among each other. The transactions are oftensustained through barter, money, services, etc. Moreover, the transac-tions not only involve product and price decisions, but also often dis-tribution arrangements as well. This is probably the fastest-growingexample of e-business today, as more and more organizations desire toactually sell products and services on the internet. This category can bereferred to as transaction space.
(4)
Integration. Finally, an emerging category involves the use of the inter-net for integration of firms and customers. This involves the flow ofinformation between multiple parties for multiple purposes and for theestablishment of relationships. What emerges is almost a living organ-ism, as firms no longer view themselves as stand-alone firms. Instead,they become part of an international supply chain with other firms andpotentially even customers, all of whom are sharing and exchangingvalue. In this stage, different firms in a supply-chain share processes, notjust data, electronically (Simchi-Levi, Kaminsky, & Simchi-Levi, 2000).This category of usage can be referred to as integration space where theimpact of e-business on a network orientation for market entry can bemaximized.
In the following section we formulate hypotheses about the associationbetween the type of new ventures and the usage of e-business.

HYPOTHESES

In the following section, we will analyze the use of the internet in thefive different types of firms categorized earlier; the born local firm, theborn international sourcer, the born international seller, the bornEuropean firm, and the born global firm with respect to the following fourareas:

(1) Providing information. As stated earlier, many firms first utilize theinternet as a way to display information about the organization, its products,and to flash news to interested parties. We have operationalized this aspectby the extent to which the firm has an extensive Danish web page, anextensive English web page, whether it describes its products on the webpage and has a newsletter on the web. We hypothesize that born global firmsin particular are active information providers.


H1. Born global firms use the internet for information providing pur-poses to a higher extent that other types of firms.

(2) Active search of information. The internet offers the possibilityto search for new customers, new distributors, and information aboutcompetitors as well as market opportunities in an efficient and costlessway. Since born global firms are dependent of reaching out for new busi-ness opportunities, right from the establishment of the firm, it is expectedthat:

H2. Born global firms use the internet for active information search to ahigher extent than other types of firms.

(3) Interaction. As stated earlier, firms can utilize the internet to interactwith customers, distributors, suppliers, competitors, etc. This interaction ismeasured by the extent to which firms communicate with customers, con-duct product developments via the internet, create and maintain relation-ships to customers and even use the internet as a platform for activities toaccess customers in distant markets. We expected that:

H3. Born global firms use the internet for interaction purposes to ahigher extent than other types of firms.

(4) Transaction. We have measured transactions defined as selling ofproducts and services via the internet as well as offering services via theinternet. Also in this respect, we propose that born global firms are theheavy users of the internet.

H4. Born global firms sell or offer products/services via the internet to ahigher extent than other types of firms.

(5) Integration/results. Integration could have been an interesting topic,but in order to concentrate on the first three issues we have omitted theintegration aspect from the present, quantitative empirical study. Instead,we have explored the perceived achievements resulting from using the in-ternet. We have asked the firms whether they have obtained new customersbecause of the use of the internet, whether they have reduced the importanceof their intermediates, and whether they regard the internet to be an asset. Inaccordance with the previous hypotheses, we expected that:

H5. Born global firms perceive to have obtained better results by the useof the internet to a higher extent than other types of firms.


METHODOLOGY

The empirical study was carried out in 2004/2005, the unit of analysis beingthe business firm. The population includes Danish manufacturing firms inthe industries with NACE codes 15-37 (manufacturing), 72.21 (developmentof software), and 73.1 (high-tech firms). Bakeries (NACE 15.81.20) and thegraphic industry (NACE 22) were excluded as in Denmark they are prima-rily very small and locally oriented businesses. The population of the busi-ness firms was identified by means of CD-Direct, published byKøbmandstandens Oplysnings-Bureau and listing all Danish private busi-ness firms.

On February 1, 2004, we selected business firms from the CD-Directaccording to the criteria mentioned above. A total of 3,048 firms inDenmark met the criteria. Table 1 shows some basic characteristics of thesefirms. As it appears, by far, most of the firms are small and medium sizedwhich is very characteristic of the Danish business community in general. Intotal, 91 duplicates (e.g., same firm registered at two addresses or two firmsbeing mother and daughter registered at the same address) were identified,leading to a revised population of 2,957 firms. In the process, a total of

Table 1. Main Characteristics of the Classification.

Born Local

Firm

Born

International

Sourcer

Born

International

Seller

Born

European

Firm

Born Global

Firm

Number of firms with

less than 50

employees

45 25 24 38 11

Number of firms with

more than 50

employees

58 19 12 23 12

Year of establishment

(mean)

1959 1971 1984 1979 1988

Sales outside Europe

after three years,

average (percentage

of total sales)

0.0 0.0 7.8 2.0 33.3

Purchases outside

Europe after three

years, average

(percentage of total

purchasing)

0.0 1.8 0.0 3.0 29.1


49 wrong registrations were identified (closed firms, further duplicates, firmswith wrong NACE code, etc.), which reduced the population to 2,908 firms.Because of budget and time constraints, it was decided to contact each firmonly five times. If it was not possible to reach the CEO after five phone calls,the firm was defined as unreachable and thus as not belonging to the finalpopulation. This was the case of a total of 381 firms (defined as ‘unreachablefirms’ below), which lead to the final population size of 2,527 firms.

Out of the final population of 2,527 firms, 1,456 firms refused to par-ticipate in the survey. Lack of time was by far the most common reason fornot participating. One thousand seventy one firms participated in the sur-vey. This corresponds to a response rate of 42.4%. Most of these firms,however, only answered seven questions attached to an initial letter to theCEO (these questions asked for information about the activities during thefirst three years after inception of the firm). A total of 791 CEOs promised toanswer the CEO questionnaire during a telephone interview, but only385 CEOs actually returned a usable questionnaire, which corresponds to aresponse rate of 48.7%. The response rate for the CEO questionnaire is15.2%, if calculated on the basis of the 2,527 firms in the final population.

It was tested whether the respondents were representative for the pop-ulation with respect to founding year, number of employees, pretax profits,return on assets, geographical location in Denmark, and industry member-ship. The conclusion is that the final population of 2,527 firms is repre-sentative of the total population of 3,048 firms.

Out of the 385 firms who completed the CEO questionnaire, between 284and 286 firms answered the 17 questions concerning the firm’s use of theinternet, hence the sample in this survey. All questions related to a 7-pointscale (1 ¼ not at all, 7 ¼ to a high extent).

Table 1 shows the distribution of firms, classified according to the per-vious mentioned categories, who answered the questions regarding internetactivities. Born local firms seems to have a larger proportion of larger firms(>50 employees) where as born international sources, born internationalsellers, and born European firms have a higher proportion of smaller firms(o50 employees). In the case of born global firms, the distribution is nearlyequal.

Born local firms seems to be the oldest firms (on average established in1959) where born international sourcers and born European firms wereestablished in the 1970s (1971, 1979, respectively), and born internationalsellers and born global firms in the 1980s (1984, 1988, respectively). When itcomes to purchasing and sales outside Europe, three years after the estab-lishment, one can observe large differences between born global firms and


the other categories, in percentages of total purchasing/sales – the bornglobal firms being much more active in both selling and buying from abroadvery early after the establishment of the firm.

FINDINGS

As stressed earlier, many firms initially utilize the internet as a way to pro-vide information about the organization, its products, and to flash news tointerested parties. We specifically asked whether the firms had a Danish webpage or an English web page, to what extent they had a product descriptionon a web page and to what extent they used e-mail to distribute news.

Table 2 shows that born local firms, born international sources, borninternational seller, and born European firms to a much higher degree use aDanish web page compared to born global firms which not surprisingly aregiven the definition of born global firms. A Waller–Duncan test reveals thatthe difference is significant (0.05 level). It is, however, interesting to noticethat both born international seller and born European firms are quite heavyusers of web pages in Danish. When it comes to a web page in English, thesituation is reversed so that born global firms uses web pages in English to a

Table 2. Firms’ Usage of the Internet as an Information Tool.

Born

Local

Firm

Born

International

Sourcer

Born

International

Seller

Born

European

Firm

Born

Global

Firm

We have an

extensive

Danish web

page

N 115 44 38 65 24

Mean 4.31 4.36 4.13 4.32 2.88

SD 2.03 2.01 2.24 2.10 2.42

We have an

extensive

English web

page

N 115 44 38 65 24

Mean 3.71 2.95 3.29 3.80 5.29

SD 2.35 2.322 2.45 2.41 1.88

Our products are

well described

on the web page

N 114 44 38 65 24

Mean 4.83 4.80 5.08 5.23 5.21

SD 1.85 1.80 1.81 1.64 1.72

We have an

extensive

newsletter on

our homepage

N 114 44 38 65 24

Mean 2.11 2.30 2.61 2.66 2.67

SD 1.56 1.61 1.97 1.90 1.71


very high extent, and significantly more than the other types of firms (at the0.05 level according to Dunnett T3 test; not equal variances). Describing thefirm’s products on the internet applies to all groups of firms, with a slightlyoverweight toward that the more international selling firms. None of thefirms use their homepages very much to host extensive newsletters. Thiscould be explained by the fact that more detailed news are sent directly tointerested parties, and therefore only more general news are posted on theweb pages. To conclude, H1 is only partially supported with respect to theusage of web pages in Danish and English.

The more active usage of the internet involves the search of new cus-tomers, new distributors, and information about competitors as well asmarket opportunities. As it appears from Table 3, the most widespread useof the internet is related to the search of competitor information, followedby general search of market opportunities. When it comes to search for newcustomers, all groups use the internet to some extent, but not as much aswas the case for previously mentioned searching activities. The involvementin searching for new distributors via the internet is even lower. This maypartially be due the fact that finding distributors is a delicate task demand-ing several personal meetings, screening activities, and participation in tradefairs.

Table 3. Firms’ Active Use of Internet Search.

Born

Local

Firm

Born

International

Sourcer

Born

International

Seller

Born

European

Firm

Born

Global

Firm

We search for new

customers via

the internet

N 112 43 38 65 24

Mean 2.95 3.67 3.08 3.35 3.71

SD 1.77 1.89 1.95 2.00 2.03

We search for new

distributors via

the internet

N 115 43 38 65 24

Mean 2.23 2.60 1.92 2.69 2.79

SD 1.57 1.72 1.42 1.64 1.91

We search for

information

about

competitors via

the internet

N 115 44 38 65 24

Mean 4.49 4.89 5.13 5.11 5.42

SD 1.78 1.93 1.58 1.71 1.77

We search for new

market

opportunities

via the internet

N 115 44 38 65 24

Mean 3.45 3.66 4.03 3.74 4.38

SD 1.82 1.90 1.72 1.92 2.00


In Table 3, significant differences in the use of the internet (at the 0.05level or better) are only seen in regard to search activities related to com-petitor information, with born global firms being the most active. A Waller–Duncan test explains this significance by the large difference between bornlocal firms and born global firms. Also with respect to search for new dis-tributors, the Waller–Duncan test shows significant differences between thetwo groups of firms (at 0.05 level). So, H2, stating that born globals wereexpected to be more involved in active search via the internet, is only par-tially supported in this study. Overall, however, Table 3 reveals some sim-ilarities between international sellers, born European firms and born globalfirms, with the latter being the most active.

As previously stressed, one of the advantages of the internet is that itestablishes a platform for interaction much more simultaneous and costefficient than other platforms. Table 4 reveals that, in general, all firms areheavily involved in communication with their customers via the internet.Again, the born global firms constitute the most active group. Born globalfirms differ significantly from all other groups (Waller–Duncan test; 0.05level) with regard to the extent to which they build and maintain relation-ships via the internet and accesses more distant markets.

Table 4. Interaction with Customers via the Internet.

Born

Local

Firm

Born

International

Sourcer

Born

International

Seller

Born

European

Firm

Born

Global

Firm

We communicate with

existing customers

via the internet

N 115 44 38 65 23

Mean 4.72 4.27 4.50 4.88 5.57

SD 2.02 2.18 2.14 2.11 2.00

We conduct product

development with

existing customers

via the internet

N 115 44 38 65 24

Mean 3.01 3.09 2.84 2.89 4.08

SD 2.03 2.19 1.99 2.08 2.23

We use the internet to

build and maintain

relations with

customers

N 115 44 38 65 24

Mean 3.40 3.27 3.42 3.68 5.00

SD 1.80 2.15 1.86 2.03 2.00

We us the internet

actively to access

customers in distant

markets

N 115 44 38 65 24

Mean 2.50 2.48 2.53 3.02 4.50

SD 1.74 1.87 2.08 2.19 1.77


Table 4 shows no significant differences when it comes to communicationwith existing customers or product development via the internet. However,a Waller–Duncan test reveals that born global firms and born local firmsdiffer significantly (0.05 level). Hence, since born global firms differ fromall other firms, we conclude that H3 is specifically supported when it comesto building and maintaining relationships and accessing more distantmarkets.

Closely associated with the interaction dimension is the transaction di-mension. At a first glance, it is interesting to observe the low degree ofinvolvement in sales via the internet among all types of firms. Perhaps this isnot surprising, taking into account that the firms are manufacturing firmsproducing complex products that are very difficult to sell as stand-aloneproducts. Therefore, many buyer–seller relationships on industrial marketsare typically closely based on interaction and only a few are more tempo-rally in nature.

If the products themselves cannot be sold via the internet, some sup-porting elements like service could be offered via internet. In Table 5, weobserve that born global firms to a significant higher degree offer servicesvia the internet. Hence, H4 is supported only in the case of offering servicesvia the internet.

Finally, we have attempted to look into the results from using the in-ternet. The firms do report that they have obtained new customers and havereduced the importance of distributors by using the internet, but has theinternet really become an asset to the firm? Table 6 shows significantdifferences between the different groups of firms. A Waller–Duncan testfurther explains that the born global firms are significantly different from allother groups in regard to having reduced the importance of intermediates,whereas they are only significantly different from the born local firms in

Table 5. Sales and Services via the Internet.

Born

Local

Firm

Born

International

Sourcer

Born

International

Seller

Born

European

Firm

Born

Global

Firm

We sell our products/

services via the

internet

N 113 44 38 65 24

Mean 1.69 1.91 1.63 1.74 2.08

SD 1.20 1.64 1.40 1.02 1.61

We offer service on

our products via the

internet

N 115 44 38 65 24

Mean 1.79 1.93 2.08 1.85 3.04

SD 1.51 1.73 1.88 1.47 1.99

Table 6. Results Obtained from Using the Internet.

Born

Local

Firm

Born

International

Sourcer

Born

International

Seller

Born

European

Firm

Born

Global

Firm

We have obtained new

customers via the

internet

N 114 44 38 65 24

Mean 4.83 4.80 5.08 5.23 5.21

SD 1.85 1.80 1.81 1.64 1.72

We have reduced the

importance of

intermediates by the

use of the internet

N 115 43 38 65 24

Mean 2.33 2.35 2.26 2.95 3.58

SD 1.52 1.63 1.62 2.08 2.06

Use of the internet is a

large active to our

firm

N 115 44 38 65 24

Mean 4.71 4.55 5.29 5.15 5.50

SD 1.79 1.78 1.33 1.64 1.50


respect to finding new customers and viewing the internet as an asset for thefirm. Hence we regard H5 as supported.

CONCLUSION

The survey has revealed that born global firms to a high extent have Englishweb pages, and that they are using the internet actively for communicatingwith customers, conducting product development, and building relationships– also to customers in distant markets. Born global firms also more oftenthan other types of firms offer product services via the internet, and, gen-erally, they consider the internet as an important asset to the firm. In manyrespects, they are heavy users of the internet, and their level of satisfaction ishigh. Internet presence, however, cannot give the firm a sustainable com-petitive advantage alone, but this article seems to suggest, that born globalfirms are proactive firms that seek new ways of conducting business inter-nationally; therefore, the internet and e-business is not a goal per se to thesefirms but just a new media offering new challenging opportunities.

Only a few foreign markets can be covered and penetrated by exportingfirms alone by using the internet (Petersen, Welch, & Liesch, 2002). Foreignmarket success requires adjustments in terms of product, appropriate aftersales service, etc. in order to meet the customer needs, to comply withgovernment regulations, or to match local business practices and availabledistribution channels. Such adjustments need a local physical presence and


local insight. Particularly for firms planning to sell complex products onforeign markets, building and maintenance of relationships are necessary.Especially in the early stages of a relationship, the person-to-person contactis needed. In fact, the success of exporting firms often depends on the ac-quisition of experiential on-site knowledge. Such knowledge cannot be de-veloped through the internet, because it deals with explicit, codified ratherthan tacit knowledge. As we have seen, born global firms use the internet toconvey and vehicle their market presence, but only to a limited extent dothey sell their products via the internet. Instead, they use the internet tosupport already existing relationships by describing their products on webpages, offering services related to their products via the internet, facilitatingproduct development via internet, and by building and maintaining rela-tions to foreign customers. However, more research is needed to point downhow this is done in reality, e.g., how these relations were established at firsthand.

Another concern is the information available through the internet. Muchinformation may simply be false. Therefore, when born global firms heavilyuse the internet in the search of information about markets, customers,distributors, and competitors, it could be extremely interesting to find outhow they validate the information, and, above all, how this is supplementedby other sources of information. A major obstacle that may limit theusefulness of the internet concerns the language spoken, the cultural con-tent employed at the website, the quality of the telecommunicationinfrastructures in various markets, access to computer systems, andcomputer skills. Hence, more information is needed on the impact of suchissues. As a concluding remark, however, this article has demonstrated andprovided empirical evidence that born global firms are highly active users ofthe internet in many activities related to customers, distributors, andcompetitors in international markets. It is beyond doubt that other firmswill follow their example. For this reason, it is advisable that future researchstudy these firms in more detail. Research that brings about understand-ing of the opportunities and weaknesses resulting from the heavy use ofthe internet will be of great value for many managers in internationallyoriented firms.

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ARE INTERNET FIRMS GLOBAL?

Stephen Chen

ABSTRACT

This study examines to what extent Internet firms have globalized and the

key factors that have enabled some firms to globalize more than others.

Contrary to arguments that Internet-based firms automatically benefit

from a global market, this study shows that most Internet firms serve

regional markets, consistent with Rugman’s (2000) findings for firms in

the FT500. However, there are a few notable exceptions. In these cases a

combination of early mover advantages, unique product, technology

standards and complementary products and services have created a ‘win-

ner-takes-all’ market in which a few firms dominate markets worldwide.

Implications for globalization theories are discussed.

INTRODUCTION

Undoubtedly one of the most significant developments to affect marketingworldwide in the 21st century has been the development of the Internet. Oneof the many claims was that the Internet would facilitate globalization offirms worldwide (e.g. Petersen, Welch, & Liesch, 2002). With the instantworldwide reach of the Internet it is sometimes claimed that Internet-basedfirms are the epitome of ‘born global’ firms (Knight & Cavusgil, 1996;Madsen, Rasmussen, & Servais, 2000) that internationalize early in their life.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17012-X

319

STEPHEN CHEN320

Several arguments have been advanced why the Internet should increaseglobalization. Wider access to the Internet will, it is argued, bring about agreater commonality in tastes and demand for certain products as exchangeof ideas and information increases across borders. For example, the increasein recognition of certain global brands such as Coke, Nike and IBM can beseen as both drivers and outcomes of this phenomenon. Previous studies(Kotha, Rindova, & Rothaermel, 2001; Gandal, 2001) have found that thelevel of reputation and brands are key factors in the internationalization ofInternet firms. The increasing importance of global standards in certainindustries such as software is also seen as a key driver. Computer hardwareand software are examples – a PC bought in one country is similar in mostrespects to a PC bought in any other. Finally, one of the arguments forincreased globalization among Internet-based firms is that digital goodshave certain features that favor globalization, namely low cost of repro-duction, low degradability and low cost of distribution across a digital net-work (e.g. Bakos, 2001; Borenstein & Saloner, 2001). However, despite theextensive theoretical arguments, with a few exceptions (e.g. Kotha et al.,2001), there is still little empirical research on the globalization of Internetfirms, and the extent of globalization has not been critically examined. Thispaper examines the extent of globalization in a sample of leading Internet-based firms, some of the key factors that have enabled or hindered global-ization and implications for current theories of globalization.

GLOBALIZATION THEORIES AND PREDICTIONS

Although much has been written about the development of global markets,there are differing arguments about the extent to which globalization offirms is in fact happening or will happen and the relative importance ofdifferent drivers and constraints of globalization.

Arguments for Globalization

One of the earliest arguments predicting globalization of markets was madeby Levitt (1983) who predicted globally converging demands as interna-tional travel and global communication increased. Levitt argued that thesearch for economies of scale in production, distribution and marketingwould lead to standardized products produced and sold in the same mannerworldwide. Another early argument in favor of globalization was the

Are Internet Firms Global? 321

‘oligopolistic reaction’ argument made by Knickerbocker (1973), who ob-served a bandwagon effect in FDI in which US firms in the same industryreact to entry by a competitor into a foreign market by likewise entering themarket in order to prevent the competitor from gaining a competitive ad-vantage. Similar arguments were made later by Haveman (1993) from aninstitutional theory perspective in which firms mimic other firms in order togain legitimacy and examples have been found in other studies of foreignmarket entry by firms (e.g. Guillen, 2003).

Regionalization Arguments

Recently, the view of ever-increasing globalization has come under attackfrom a number of quarters. Researchers such as Rugman (2000), Rugmanand Brain (2003) and Rugman and Verbeke (2004) have shown that theextent of globalization has in most cases been overstated and that firms havegenerally pursued a regional rather than a global strategy. There are severalreasons why a regional strategy is likely to be less costly and risky comparedto a global strategy. First, regional markets are located at a more proximatedistance. This reduces transportation costs. Second, as they are in the sametime zone, it is also easier to coordinate activities. Third, markets in thesame region are also likely to be part of the same trade blocs and so benefitfrom reduced market entry barriers.

Another factor that could encourage regionalization strategies is the needto localize some products. As described by Prahalad and Doz (1987) in theirwell-known integration–responsiveness framework, MNCs must balance thetwin demands of integration and responsiveness. A regional strategy mayallow a balance between the two, allowing MNCs to obtain some of thebenefits of globalization while remaining responsive to local market needs.Evidence of this can be seen in the automobile industry (Schlie & Yip, 2000)or the white goods industry (Baden-Fuller & Stopford, 1990). However, asMillar, Choi, and Chen (2005) found, there are exceptions and some firmsare truly global. These include firms with unique products for which there isa strong global demand and well-developed global distribution networks.

Staged Internationalization Arguments

Other researchers argue that a regionalization strategy is merely a stagetoward a full globalization strategy. Perhaps the most familiar models ofstaged internationalization are Vernon’s (1966) product life cycle and

STEPHEN CHEN322

Johanson and Vahlne’s (1977) incremental internationalization model.These models are based on an assumption of incremental learning and de-velopment. The typical process of firm internationalization in the latter halfof the 20th century was described by Vernon (1966) as a product cycleconsisting of domestic product development, followed by exporting, andthen by foreign production. Based on their studies of Swedish manufactur-ing firms, Johanson and Vahlne’s (1977) model showed that initial inter-nationalization activities were targeted to psychically close markets and usedmodes of entry that require less commitment, such as exporting. Johansonand Vahlne (1977) explained that the firm learned and increased its foreignmarket knowledge over time primarily through experience, and only thendid it increase its foreign market commitments and later expand to morepsychically distant markets.

Born Global Arguments

The staged internationalization model, in turn, has recently been challengedby researchers who have noted that some new venture firms skip stages and/or have been international virtually from inception (Knight & Cavusgil,1996; Oviatt & McDougall, 1994; Rialp-Criado et al., 2002). These firmshave sometimes been referred to as ‘born global firms’ (Knight & Cavusgil,1996; Madsen & Servais, 1997; Madsen et al., 2000; Moen & Servais, 2002)and ‘global start-ups’ (Oviatt & McDougall, 1994). Some factors that havebeen suggested as contributing to the increase in born global firms includerapidly changing computer, communication and transportation technology,and changes in the political economy, industry conditions, firm effects andmanagement (Oviatt & McDougall, 1994). Among the technologicalchanges, the widespread adoption of the Internet worldwide is seen bymany as key and Internet firms are often regarded as the epitome of bornglobal firms.

The Internet as a Driver of Globalization

The increasing adoption of the Internet has reignited the debate about glo-balization. As the brief review above shows, there are a number of differenttheoretical arguments about the extent to which globalization of firms ingeneral is taking place or will take place. Analogous arguments can be maderegarding the globalization of Internet-based firms and the impact of theInternet on globalization of firms in general. A number of possible scenarios


are possible depending on the effects of the drivers and constraints of glo-balization (Petersen et al., 2002).

Arguments in support of increased globalization among Internet firms arethat the Internet directly affects a number of globalization drivers such asglobal convergence of tastes, global branding, global standards and globalpurchasing systems that encourage demand for a common product or serv-ice worldwide (Yip, 2000). Many have also argued that the Internet lowersglobal transactions costs and that the global reach of the Internet enablesInternet-based firms to benefit from a global market (e.g. Evans & Wurster,2000; Lituchi & Rail, 2000). Some marketers (e.g. Hamill, 1997; Stevenson& Hamill, 2002) argue that this increasing globalization in Internet marketswill have significant implications for international marketing includingstandardization of prices, facilitating feedback from customers and reducingthe importance of intermediaries. This may require a re-examination oftraditional marketing paradigms. For instance, Singh and Kundu (2002)proposed that Dunning’s (1973) eclectic paradigm of internationalizationneeds to be extended to incorporate network-based advantages in e-commerce corporations. These include stronger relationships between firmsand their customers or between firms and their partners, reconfiguration ofthe industry value chain and network externalities.

Constraints to Globalization of Internet Firms

On the other hand, some researchers (e.g. Leamer & Storper, 2001) arguethat the Internet will not diminish the importance of location-specific fac-tors. This is supported by some studies that confirm the distinctiveness ofInternet markets in different countries (Lynch & Beck, 2001). For example,some of the key factors that have been shown to affect both the uptake andthe usage of the Internet in different countries include language, educationallevel, income, population size, availability of credit, availability of venturecapital, taxation, government policy and level of telecommunications infra-structure development (Guillen, 2002; Kshetri & Dholakia, 2002; Sprano &Zakak, 2000). Despite the efforts of many governments and internationalagencies, there also remain stark differences between the level of Internetusage in developed and less-developed countries (Bridges.org Report, 2001).

Even in developed countries, Internet markets may remain local in natureowing to differences in language, culture, perceptions and buying behavior(Lynch & Beck, 2001). ‘‘Liability of foreignness’’ (Hymer, 1976; Zaheer,1975) still appears to be significant. Zaheer and Manrakhan (2001) found

STEPHEN CHEN324

that locational clusters remain important in B2B trading markets whileZaheer and Zaheer (2001) found that despite the supposed threat to localbanks posed by the Internet, local banks are still able to compete successfullywith global competitors. As Huang, Keser, Leland, and Shachat (2003) foundin their study of Internet adoption worldwide, trust appears to be a signifi-cant factor. Customers are still wary of foreign firms with whom they may beunfamiliar and seek the security of firms with a local physical presence eventhough they may perform many transactions online. In short, although thereare clear instances of Internet firms that have successfully globalized, otherstudies suggest that Internet firms seem to exhibit limited globalization.

Given the conflicting theoretical arguments and predictions about theglobalization of Internet firms, the motivation for this paper was twofold.The first aim is to determine to what extent Internet firms have in factglobalized and which arguments are supported or disproved. The secondaim is to identify the key factors that have enabled or prevented global-ization of Internet firms and what the implications are for theories aboutglobalization of firms in general.

METHODOLOGY

In order to answer the first research question, the extent of globalizationamong a sample of Internet firms was measured. Internet firms were definedas firms that derive most of their income from one or more Internet-relatedactivities. These can be divided into a number of layers, of which the keyactivities include search engines, Internet service providers (ISPs), hardware,software, information services and Internet retail (Barua, Pinnell, Shutter, &Whinston, 1999).

It was assumed that the largest firms in each layer would show the greatestdegree of internationalization and provide the most easily accessible data, soa sample of companies in each layer was identified from the following ran-kings of leading Internet companies:

�
Ranking of ISPs by size (available at www.jetcafe.org), � Internet Retailer magazine’s ranking of the top 300 retail websites rankedby Internet sales and
�
USA Today’s ranking of the Top 50 Internet companies based on marketcapitalization.
Companies that were subsidiaries of larger companies were excludedunless separate financial reports were available. Data was gathered from

http://www.jetcafe.org


annual reports and other sources available via the Internet. The final samplecomprised 63 companies for which geographic sales data was available.

�
Search engines (9) � ISPs (9) � Information providers (4) � Infrastructure (hardware and software) (20) � Retail (21)
The final sample was biased toward infrastructure and retail firms. How-ever, it also reflects to some extent the concentration of firms in each market.It was difficult to identify many other search engines, ISPs and informationproviders that operated on a global scale. Possible reasons for this will bediscussed later.

Other studies that have examined internationalization of Internet firms(e.g. Kotha et al., 2001) have measured this in terms of number of inter-national websites, not in terms of revenues. However, as Sullivan (1994)found in his study of US manufacturing firms, presence in foreign marketsand the extent of international revenues may not necessarily be stronglycorrelated. This discrepancy is particularly relevant where the cost of foreignentry is relatively low as in the case of Internet websites. Therefore, thisstudy measured globalization in terms of revenues. This measures moredirectly the extent to which firms are actually capturing a share of themarket globally as opposed to the potential market.

First, the percentage of foreign sales/total sales was determined for eachcompany. Those firms that had foreign sales of 25% or more (the cut offfigure used by Knight & Cavusgil (1996) to identify born global firms) werehighlighted. Second, the percentage of each company’s sales by region(North America, Europe, Asia Pacific, South America and Africa) was de-termined. These data were then used to classify companies according toRugman’s (2000) classification of globalization:

(a)
Home triad region oriented: firms that have at least 50% of their sales intheir home region of the triad.
(b)
Bi-regional: firms with at least 20% of their sales in each of two regions,but less than 50% in any one region.
(c)
Host triad region oriented: firms that have more than 50% of their salesin a triad market other than the home triad region.
(d)
Global: firms that have sales of 20% or more in each of the three partsof the triad. (For comparison, the number of country-specific websiteswas also determined for each company.)

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In the second phase, the firms that were most globalized were then ex-
amined in more detail in order to determine how and why they had glo-balized more than the other firms. Information on the company history andstrategy was collected from company websites, company annual reports,press reports and other publications.
RESULTS

Extent of Globalization

Table 1 shows the breakdown of sales by region for each of the companiesexamined. Table 2 shows the percentages in each of Rugman’s (2000) cat-egories and the percentage of born global companies according to Knightand Cavusgil’s (1996) criteria. (All firms in the sample were considerablyolder than 3 years, the time period used by Knight and Cavusgil, so theextent of internationalization is likely to be higher than that in a sample offirms less than 3 years old.)

As Table 2 shows, only 29% of the firms had foreign sales of 25% ormore. Using Rugman’s (2000) classification, 55 out of the 63 (87%) firms arehome triad region oriented, 6 companies (10%) are bi-regional and only2 companies (3%) are truly global. These percentages are identical to thepercentages of 87%, 10% and 3%, respectively, in the FT500 firms exam-ined by Rugman and Verbeke (2004) and confirms that the extent of glo-balization has been greatly exaggerated, even among leading Internet firms.Furthermore, since the majority of North American revenues can be as-sumed to be of US origin in US firms, it is possible to go even further andstate that not only are US Internet firms primarily home triad based butdomestic market based.

These findings based on revenues contrast sharply with globalization asmeasured by the presence of international sites (Tables 3 and 4) and isconsistent with the findings of Rugman (2000) who found in his study ofFT500 firms that the presence of global offices does not necessarily equatewith global revenues. The discrepancy is possibly even greater in the case ofwebsites since the marginal cost of adding a new website is considerablylower than that of establishing a sales office or store in a new country.

The Global Companies

Although the sales data show quite clearly that, despite some predictions,most Internet firms are home region oriented and domestically oriented,

Table 1. Breakdown of Sales by Region.

Company Activity Year

Founded

North

America

Europe Asia South

America

Unknown Global

Orientation

International Foreign

Sales>25%

SEARCH

Ask Jeeves Search 1996 65.3% 30.5% 4.2% H 34.7% Y

Findwhat Search 1998 100.0% H N

Google Search 1998 72.0% 28.0% H 28.0% Y

Infospace Search 1996 92.0% 8.0% H 8.0% N

Looksmart Search 1996 100.0% H N

Pricegrabber Search 1996 100.0% H N

Primedia Search 1989 100.0% H N

Shopping.com Search 1999 89.0% 11.0% H 11.0% N

Yahoo Search 1995 83.0% 17.0% H 17.0% N

ISP

Alltel ISP 1983 100.0% H N

Charter Comm. ISP 1993 100.0% H N

Core Comm. ISP 1999 100.0% H N

Covad ISP 1996 100.0% H N

Cox Comm. ISP 1997 100.0% H N

Earthlink ISP 1994 100.0% H N

Everyone’s

Internet

ISP 1998 100.0% H N

SBC ISP 1988 90.1% 9.9% H 9.9% N

United Online ISP 1999 100.0% H N

INFORMATION

CNET Internet news 1992 79.1% 20.9% H 20.9% N

IVillage� Women’s ezine 1995 100% H N

Jupitermedia� Market research 1986 95.5% 5% H 5.0% N

Marketwatch� Market research 1997 100.0% H N

RETAIL

Digital goods

Ameritrade Online stock

trading

1975 100.0% H N

Are

Intern

etFirm

sGlobal?

327


Company Activity Year

Founded

North

America

Europe Asia South

America

Unknown Global

Orientation

International Foreign

Sales>25%

Charles

Schwab

Online stock

trading

1963 100.0% H N

Checkfree Electronic

commerce only

1981 97.7% 2.3% H 2.3% N

Ebay Auction site 1995 65.0% 35.0% H 35.0% N

Etrade Online stock

trading

1995 92.3% 4.3% 0.5% 2.9% H 7.7% N

Netbank Bank 1996 100.0% H N

Priceline Retail 1998 99.5% 0.4% H 0.5% N

Sabre Travelocity 1989 55.9% 44.1% H 44.1% N

Skillsoft E-learning 1998 84.8% 13.0% 2.2% H 18.5% N

University of

Phoenix

online

Online education 1989 100.0% H N

USA

Interactive

1976 95.4% 4.6% H 4.6% N

Physical goods

1800-Flowers Flower delivery 1976 100.0% H N

Alloy Clothing 1996 100.0% H N

Amazon Retail 1994 78.4% 21.6% H 21.6% N

Drugstore Drugstore 1998 100.0% H N

Ecost Discount store 1999 100.0% H N

Freshdirect Groceries 1999 100.0% H N

FTD Flower delivery 1910 100.0% H N

Netflix� Video rental 1997 100.0% H N

Overstock� Unsold stock 1999 100.0% H N

Peapod� Groceries 1989 100.0% H N

CONSUMER INFRASTRUCTURE SERVICES

24/7 Real

Media

Software 2003 60.0% 40.0% H 40.0% Y

Net2phone Communications

service

2003 50.0% 50.0% H 50.0% Y

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CHEN

328

Real Network Software 2003 72.9% 15.9% 9.8% 1.4% H 27.1% Y

BUSINESS INFRASTRUCTURE SERVICES

BEA Systems Infrastructure

software

2003 54.5% 29.5% 16.0% B 45.5% Y

Broadcom Communication

systems

2003 74.2% 5.9% 19.6% 0.3% H 25.8% Y

Cisco Network systems 2003 55.9% 27.6% 16.6% B 48.9% Y

Doubleclick Advertising 2003 79.4% 20.6% H 22.9% N

JDS Uniphase Fiber optic cable 2003 70.2% 16.7% 13.1% H 29.8% Y

Juniper

Networks

Network systems 2003 42.2% 26.6% 31.2% G 57.8% Y

Level 3 Communication 2003 81.1% 17.1% 1.8% H 19.9% N

Macromedia Software 2003 58.4% 26.0% 15.5% B 41.6% Y

Mercury Systems 2003 63.6% 29.5% 7.0% B 38.6% Y

NetIQ Systems, security

and web

analytics

2003 76.6% 23.4% H 23.4% N

Network

appliance

Storage solutions 2003 57.9% 42.1% 42.1% Y

Netratings Advertising rating 2003 61.9% 38.1% H 38.1% Y

Openwave Software 2003 47.8% 20.4% 31.8% G 60.2% Y

Siebel Software 2003 58.2% 30.9% 7.7% 3.3% B 41.8% Y

Tibco Software 2003 83.2% 16.8% H 16.8% N

Verisign TTP service 2003 89.3% 10.7% H 10.7% N

Verity� Knowledge

management

software

2004 65.5% 27.3% 7.2% B 34.5% Y

Note: All data for the year 2003 except where marked otherwise.�2004 data.

Are

Intern

etFirm

sGlobal?

329

Table 2. Breakdown of Companies by Sales.

Home triad oriented 55 (87%) Domestic market oriented 45 (71%)

Bi-regional 6 (10%) International market oriented 18 (29%)

Global 2 (3%)

Total 63 (100%) 63 (100%)

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there are some interesting exceptions. Eight of the firms that have globalizedmore extensively (i.e. are not home region oriented) are examined below andsome key elements in their globalization strategies are identified in Table 5.

Internet-Based Startups

Four of the eight companies have always focused on Internet-related ac-tivities and have expanded globally as the Internet market has taken offworldwide. These are Cisco, Juniper, Openwave and Macromedia.

Cisco. Cisco is the dominant player in the market for Internet routers andwas one of the earliest movers in the market. In 1984, at the time Cisco wasfounded, the Internet had only 1,000 computers connected to it. Initally thecompany focused on the domestic US market, which was and still is thelargest in the world. However, as the demand for Internet routers increaseddramatically from late 1988 onwards, the company increasingly looked tointernational markets. In 1991, John Chambers was appointed as senior VPfor worldwide operations and under his direction Cisco followed a globalnetwork supply strategy. First, the company focused on product design andsoftware development, outsourcing most of the other work to partners towhom they were closely linked in IT networks. Second, the company em-barked on a string of acquisitions in related markets worldwide (41 between1993 and 1999) to enable the company to provide end-to-end network so-lutions as well as routers. This global strategy enabled the company toachieve international sales of 39% by 1993. By 1998, Cisco held a com-manding position in the router market worldwide (80% of high-end routermarket, 70% of the mid-range market and 64% of the low-end market).While it has lost some ground since then to competitors such as Juniper, itstill remains the dominant supplier in the router market with a market shareof 81% of the enterprise router market and 42% of the service providerrouter market in 2006.

Juniper. Juniper is Cisco’s biggest competitor in the market for Internetrouters, but unlike Cisco, Juniper was a late entrant in the market. The

Table 3. Breakdown of Sites by Region.

Company North

America

Europe Asia Pacific South and

Central

America

Africa Number of

Regions served

SEARCH

Ask Jeeves 1 (8) 1 1

Findwhat 1 1

Google 3 39 20 22 17 5

Infospace 3 1 1

Looksmart 1 (8) 1

Pricegrabber 2 (3) 1 2 1

Primedia 1 1

Shopping.com 1 1 2

Yahoo 3 (7) 9 2 3

ISP

Alltel 1 1

Charter

Communications

1 1

Core

communications

1 1

Covad 1 1

Cox communications 1 1

Earthlink 1 1

Everyone’s Internet 1 1

SBC 1 1 1

United online 1 1

INFORMATION

CNET 1 8 2

Ivillage 1 (3) 1 2

Jupitermedia 1 (5) 1

Marketwatch 1 1

RETAIL

Digital goods

Ameritrade 1 1

Charles Schwab 1 1

Checkfree 1 1

Ebay 3 11 2 3

Etrade 2 3 2 3

Netbank 1 1

Priceline 1 1 2

Sabre 2 5 2

Skillsoft 1 1 2

University of

Phoenix online

1 1

USA interactive 1 1

Physical goods

1800-Flowers 1 1

Alloy 1 (4) 1



Company North

America

Europe Asia Pacific South and

Central

America

Africa Number of

Regions served

Amazon 2 5 1

Drugstore 1 (3) 1

Ecost 1 1

Freshdirect 1 1

FTD 1 1

Netflix 1 1

Overstock 1 1

Peapod 1 1

CONSUMER INFRASTRUCTURE SERVICES

24/7 real media 1 1

Net2phone 1 1

Real network 1 1

BUSINESS INFRASTRUCTURE SERVICES

BEA Systems 2 16 2

Broadcom 1 1

Cisco 2 15 2

Doubleclick 1 4 2

JDS Uniphase 1 1

Juniper Networks 1 1

Level3 1 12 2

Macromedia 2 7 2 1

Mercury 1 1

NetIQ 1 5 2 3

Network appliance 1 4 2

Netratings 1 8 1 3

Openwave 1 1

Siebel 3 13 1 3 4

Tibco 1 7 2

Verisign 2 4 2 3

Verity 1 3 1 3

Note: Figures in brackets indicate number of languages where the site is multilingual.

Table 4. Breakdown by Presence of International Sites.

Companies with websites in one region 42 (67%)

Companies with websites in two regions 12 (19%)

Companies with websites in three regions 7 (11%)

Companies with websites in four regions 1 (1.5%)

Companies with websites in five regions 1 (1.5%)

Total 63 (100%)

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Table 5. Key Elements in the Strategies of the Highly GlobalCompanies.

Company Key Elements of Globalization Strategy

Cisco � Pioneer and market leader in Internet routers� Global acquisitions in related areas

Juniper � Develop and market leading high performance product worldwide� Target large telcos worldwide that require high performance routers

Openwave � Pioneer in establishing global mobile telephony software standard� Target large telcos worldwide

Macromedia � Pioneer and market leader in professional web design software� Product localization using local vendors

Siebel Systems � Pioneer and market leader in CRM� Develop and market Integrated applications suite (‘‘Siebel

everywhere’’)� Develop web-based product to integrate with existing applications

BEA Systems � Develop and market integrated application suite� Establish company as platform provider� Develop web-based product using emerging Java standard� International partnerships with complementary service providers

Verity � Target niche in intelligence and publishing industries in markets

worldwide� Develop product for analysis of information from the Internet� Product localization using local vendors� Alliances with leading database vendors that offer complementary

products

Mercury Interactive � Market leader in systems testing� Develop product for applications based on emerging Windows

standard� Product localization using local vendors


company was only established in 1996, as the Internet was beginning to bewidely adopted by businesses. Unlike Cisco, which adopted a broad marketstrategy, from the beginning Juniper has focused on specialized marketswhere it has clear firm-specific advantages over Cisco. The founders cor-rectly identified that traffic on the Internet was being held up by routers thatcould not transmit packets fast enough for the network demand. Using thelatest technology they designed a router, much faster than Cisco’s. Thisconsisted of two key elements: a custom-built ASIC (application-specificintegrated circuit) and JUNOS, the company’s proprietary operatingsystem. Avoiding direct competition with Cisco in the general corporatemarket, the company clearly targeted the market for high-performance,high-reliability products routers that are needed by the major ISPs andtelecommunications companies and using alliances with strategic partners to

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gain international presence. For instance, the company entered into a mar-keting alliance with French telecommunication equipment manufacturerAlcatel in order to boost sales in Europe and Asia where Alcatel had astrong presence. This strategy enabled the company to increase its interna-tional sales from zero in 1998 to 22% in 1999, just 3 years after its founding,and achieve the No. 2 position in the router market after Cisco with 18% ofthe enterprise router market, 31% of the service provider core router marketand 25% of the service provider edge router market in 2006.

Openwave. As in the cases of Cisco and Juniper, Openwave has grown byfollowing a growing market. However, in the case of Openwave, it was byfocusing on open standards software products and services for the emergingmobile communications industry. The company has benefited both from therapid growth in the mobile communications market and from the increasingpreference for open source software among customers. As one of the earlyinnovators in mobile data and messaging services since 1993, the companyhas established a strong presence in the market and followed a globalstrategy early on. In 1997, just 4 years after its founding, international salesaccounted for 45% of revenues. As in the case of Juniper one of the keyelements of the company’s internationalization strategy has been partneringwith leading computing and telecommunications companies worldwide. Thecompany has formed partnerships with leading computing firms such as HP,Siemens and IBM, and customers include four of the top five mobile op-erators in the United States – AT&T Wireless, Verizon Wireless, Sprint PCSand Nextel – as well as global companies such as KDDI in Japan and BTGenie in the UK. Currently its products are used by more than 70 operatorsand more than 47 handset manufacturers worldwide. These include wirelessapplication protocol, or WAP, gateways, which provide the underlying in-frastructure to enable data services on mobile phones, and wireless andwireline applications, such as e-mail and multimedia messaging and relatedservices.

Macromedia. While in the previous cases the companies have focused ondelivering a standardized product or establishing a technology standard, thekey feature of Macromedia’s internationalization strategy is product local-ization. The company develops software that enables the development of awide range of Internet solutions including websites, rich media content andInternet applications across multiple platforms and devices. Like Cisco, thecompany was founded in the early days of the Internet boom in 1992 andquickly established itself as a leader in the market for website design with its


key web design product Dreamweaver. In 2000, Dreamweaver had a marketshare of 80% among professional web developers in the US. While thecompany initially focused on the domestic US market, with the globaldiffusion of the Internet, the market for non-English web development hasgrown rapidly and the company has responded by increasing its interna-tional sales. International sales accounted for 26% of revenues in 1994 butthis figure has grown to 44% in 2004. One of the reasons why the producthas been adopted so widely worldwide has been product localization(Ramdas, Terwiesch, & Lehmbeck, 2001). As well as English, Dreamweaveris available in Spanish, Japanese, French, German, Italian, Swedish, Por-tuguese, Korean and Chinese. The company uses three approaches to lo-calization. Full localization involves modifying the product so that it hasfunctionality that matches that of the English version. Of the current ver-sions, European English, French, German and Japanese have been fullylocalized. Partial localization involves localizing some parts of the product,such as manuals. The third form of localization is to outsource the local-ization to local vendors for a fee ranging from $80,000 to $200,000. Thecompany supplies a localization kit and instructions and the local vendor isexpected to translate the code, convert screenshots, redo the help menus andmovies, test the product and translate all documentation and packaging.

Incumbent Firms

The other four global firms in the sample (Siebel Systems, BEA Systems,Verity and Mercury Interactive) all pre-date the Internet boom but havetaken advantage of the new market opportunities offered by the Internet toexpand globally. In all four cases, the same factors that have facilitated theglobalization of Internet-focused firms, such as unique resource advantagesand market dominance, also apply. However, another factor has been theability to utilize complementary assets (Hu, 1995; Teece, Pisano, & Shuen,1997) in globalization. Studies in other industries such as biotechnology(Rothaermel, 2001) have demonstrated the importance of complementaryassets in the success of incumbents in markets undergoing technologicalchange. The incumbent firms here have been able to leverage their existingcompetencies and relationships in existing markets to rapidly globalize theirInternet products and services.

Siebel Systems. As in the case of Cisco, Siebel Systems was one of the earlymovers in its market. In 1993, when the company was founded by TomSiebel, the market for integrated ‘‘back office’’ software systems was ma-turing. Large competitors such as SAP and PeopleSoft had successfully

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created and marketed what became to be known as enterprise resourceplanning (ERP) systems. These software applications automated processessuch as finance, accounting, manufacturing and distribution, allowing com-panies to link and streamline their internal business processes. In contrast,Siebel Systems’ focused on automating ‘‘front office’’ sales processes andmanaging customer information.

In 1997, Siebel first released products that incorporated a web browserinterface, which allowed the client to access and navigate through Siebel’sapplications from any standard Web browser. This shift to web-focusedapplications also broadened the company’s international reach. Interna-tional sales accounted for just 10% of revenues in 1996 but this figurejumped to 27% the following year. Since then the company has increasinglyfocused on web-related products. This was followed in 1998 with Siebel 98,which incorporated a web browser interface into all of its products. InDecember 1999, the company launched Siebel 99, a fully web-based versionof the Siebel product line. Like Cisco, during this time, the company alsolaunched an initiative called ‘‘Siebel Everywhere,’’ with the goal of makingSiebel applications ubiquitously available so that any device connected tothe Internet or a client’s Intranet would be able to access Siebel’s applica-tions. By 2002, Siebel Systems offered the industry’s most comprehensivesuite of customer relationship management (CRM) applications, enablingorganizations to deploy sales, marketing and customer service systemsacross multiple channels, including the Web, call centers, resellers and dealernetworks.

BEA Systems. When BEA systems was founded in 1993, distributed com-puting was well on the way to replacing mainframe computing. However,the founder Bill Coleman realized that many companies still used earlierapplications running on different operating systems and that this created theopportunity for building ‘‘an operating system for the network’’ that wouldallow effective and efficient interoperability of all these information tech-nology components and processes. These insights formed the seed for theidea of what would eventually become an ‘‘application server.’’ The com-pany’s second product was Tuxedo, a transaction processing monitorbought from networking company Novell, Inc. As part of its strategy torapidly build an international presence, the company also acquired sales andsupport organizations in France, South Africa, Finland and Australia.

By 1998, it had become clear that the Internet was going to transform thecomputer industry and that the Java standard was going to be important inthis emerging environment. Alfred Chuang, who was one of the co-founders


and head of product development at the time, identified a company calledWebLogic in San Francisco that was developing an application server tosupport the emerging Java standards and in spite of initial board opposition,persuaded BEA to buy WebLogic in a stock deal valued at the time at $160million.

By the end of 1998, it was estimated that BEA was the market leader indistributed transaction processing with 51% market share against IBM’sestimated 20%. A large proportion of this growth in revenues (42% in 1998)came from international sales. Although the direct sales force provided mostof the company’s sales (69% in 2003), an important factor in the company’srapid growth worldwide has been its use of indirect sales channels, especiallyin Asia. Sales partners include systems integrators and consultants such asAccenture, HP, EDS, Cap Gemini, KPMG, Deloitte, Price WaterhouseCoopers and Schlumberger, that included BEA products in their customsolutions for clients; system platform companies such as Sun Microsystemsthat acted as resellers of BEA products, often integrated with their ownproducts; application service providers, such as System SpA, Digex andeBreviate, that provided the hardware, software and support for businessesthat did not wish to buy and maintain the system themselves and, finally,distributors that supplement the efforts of the sales force. The third criticalelement of BEA’s strategy was to establish itself as a platform technologyprovider. As companies were increasingly using the new e-business tech-nologies to streamline its operations internally and integrate with partners’systems, there was an increasing demand for systems based on technologystandards that allowed compatibility with other vendors’ products. BEAresponded with the launch in June 2002 of the first unified application in-frastructure product that combined application server, integration serverand portal product functionality.

Verity. Verity is one of the leading suppliers of content management systemsincluding paper-to-electronic and Web-based document capture, electronicforms and process automation. The company was founded by Mike Pliner,co-founder and former CEO of Silicon Valley network vendor Sytek Inc. Hewas asked by his friend, Dick Wishner, president of Advanced DecisionSystems (ADS), a developer of artificial intelligence programs, to reviewtechnologies in the R&D lab that could be commercialized and he saw thepotential of Topic, a concept-based text-retrieval program, for intelligencegathering. Pliner convinced the Strategic Air Command to become a betatest user. Topic was able to cut report-generation time from 2 days to2 hours. Following this success, a spin-off company Verity was established

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in 1988 with ADS providing the technology and seed capital and Pliner asCEO. Within a year, the company signed joint marketing agreementswith leading database vendors such as Oracle, Relational Technology,Sybase and Informix and also distributors in England, Belgium and France.The company rapidly established itself as a leading provider of softwareto analyze real-time data such as news feeds from Dow Jones and PRNewswire.

In 1993, the company shifted its focus to the fast-growing Internet andintranet marketplace, and its products are now used by more than 600corporations worldwide. International sales accounted for 29% of revenuesin 1994. As in the case of Macromedia, one of the factors behind the com-pany’s worldwide growth has been localization of its products. The com-pany’s products are available in more than 70 languages, many developedwith local software companies such as NEC in Japan and 3Soft in Korea.The company also uses a mix of international sales channels. It has anextensive worldwide sales organization including offices in the UnitedStates, United Kingdom, The Netherlands, Germany, France, Sweden,Singapore, Australia, Japan, Mexico, Brazil and South Africa and it alsoworks with a variety of partners, including value-added resellers, OEMcustomers, independent software vendors and system integrators.

Mercury Interactive. Mercury Interactive was founded in 1989 and initiallyfocused on testing and quality assurance of computer systems. The companytargeted large clients worldwide early on and international sales have beensignificant from an early stage (26% in 1994). However, as in the case ofSiebel Systems and BEA Systems, international sales have grown signifi-cantly following the introduction of web-related products. In 1999, thecompany shifted its focus to website testing. By using the company’s Au-tomated Software Quality products, corporate IT departments, system in-tegrators and independent software vendors can identify software bugs morequickly and efficiently than with traditional methods. Two technologicaldrivers can be identified for the company’s shift. The first is the widespreadadoption of networks, which often mix and match many types of hardwareand software, unlike traditional highly standardized mainframe and mini-computer systems typically supplied and maintained by a single vendor. Thesecond is the widespread adoption of Microsoft’s Windows, which initiateda new style of programming in which the sequence of user responses isunpredictable. Unlike traditional systems that forced the user to pursue arigid series of keyboard commands to achieve a given task, such as printingthe file, this new style allows much more spontaneity on the part of the user.


As a result the complexity and need for systems testing has increased sig-nificantly and the company has benefited from the increased demand world-wide. Today Mercury Interactive is the major player in the market fortesting of websites with 45% of the market and supplies over 450 majorcorporations worldwide including Bell Atlantic, Chemical Bank, GeneralElectric, IBM, Lufthansa, the National Association of Securities Dealers,Siemens and Texaco.

DISCUSSION

The findings from the assessment of the sample of 63 Internet firms and theeight cases of highly global firms shed some light on the various theoreticalarguments about globalization posed earlier in the paper.

The Globalization versus Regionalization Debate

First, the findings from the sample of 63 Internet firms show that, as in thecase of leading traditional bricks and mortar firms, the extent of global-ization of Internet-based firms has been greatly exaggerated. Less than 30%of firms have foreign sales of 25%, even those that have been operating inInternet markets for more than 10 years. The majority of firms are stillheavily domestically and regionally based. The exceptions are mainly firmsthat supply global infrastructure services. Despite some predictions, the ev-idence shows that Internet-based firms are no more global than other firms,at least based on the extent of foreign sales. This is consistent with thefindings of Rugman (2000) who found that regionalization rather than glo-balization was more common strategy for firms in the FT500. This study’sfinding that B2C firms were generally less globalized than B2B firms isconsistent with other studies that have identified that factors such as In-ternet access, consumer familiarity with the Internet, trust in conductingcommercial transactions over the Internet, language and culture can bebarriers in consumer adoption of electronic commerce. It was mentionedearlier that in compiling the sample of firms it was difficult to find manyexamples of search engines, ISPs and information providers that had an apriori global presence, and in fact an initial review indicated that in mostcases these firms operated locally. In the case of ISPs, the need to gain accessto the local network could clearly be a barrier to globalization, while in thecase of search engines and information providers there are clearly linguisticand cultural barriers to overcome.

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The barriers appear to be less significant in the case of B2B firms. Forinstance, Openwave’s largest international market is not Europe but Japan,which is more culturally distant. Two reasons can be advanced. First, themost global B2B firms often have unique products and brands for whichthere is less direct competition. Second, business buyers are generally betterinformed about Internet technology so language and culture are less of aproblem. In the case of a few highly globalized firms, other reasons can alsobe identified, which are discussed below.

The Oligopolistic Reaction/Mimetic Market Entry Argument

There was no evidence of mimetic market entry or oligopolistic reactionas motives for internationalizing in the case of the eight most globalfirms. Seven out of the eight most global firms (Cisco, Openwave, Macro-media, Siebel Systems, BEA Systems, Verity and Mercury Interactive)were early movers in their respective product markets. As such they wereable to benefit from early mover advantages (Lieberman & Montgomery,1988; Kerin, et al., 1992) such as reputation building, an establishedcustomer base and established distribution networks. Only in the case ofJuniper could reaction to a competitor (in this case Cisco) be seen as apossible motive for internationalization. However, the fact that the com-pany has generally adopted a strategy of avoiding direct competition withCisco would suggest that this is unlikely to have been a key motive forinternationalization.

The Staged Internationalization versus Born Global Debate

The cases clearly support the born global model rather than the stagedinternationalization model. All the eight highly global firms examinedcan be classified as ‘born global’ firms in the sense that they internation-alized from an early stage. There was no evidence that gradual learningabout international markets was a significant consideration in their inter-nationalization strategy. Rather, the cases indicate that the main constraintwas the state of development of the Internet worldwide and learning byusers. The companies have generally entered countries where the Internetmarket was growing fastest, regardless of psychic distance, as mostclearly demonstrated in the case of Openwave, where Japan is the largestforeign market.


The Network Effect Argument

There was some evidence that supports the arguments that Internet firmsmay benefit from network advantages. A factor that is clearly significant inall of the cases is a global technology standard. First, a standard lowers thecost of local product adaptation. For instance, Macromedia and Verity wereboth able to offer local versions of their software at low cost, by usingmodular designs that allow the required parts of the product to be adaptedat low cost and by outsourcing some of this work to local partners. Second,technology standards also allow greater compatibility of products fromdifferent suppliers or different products from the same supplier and allownetwork externality effects to take place. The cases also highlight the im-portant role played by complementary products and services in enabling thefirm to globalize rapidly. Both Cisco and Siebel Systems were able to quicklydominate the market by offering an integrated suite of applications andservices; BEA Systems and Verity were able to globalize rapidly by formingpartnerships with firms that supplied complementary products and servicesglobally; Openwave was similarly able to globalize rapidly by forming part-nerships with leading computing companies that already had a global pres-ence and major mobile communication companies in key markets. Thisconfirms the importance of complementary products in the case of marketsfor systems-based products (Katz & Shapiro, 1994; Farrell, Monroe, &Saloner, 1998) and suggests that complementary products not only mayincrease local demand but may also facilitate entry into new markets glo-bally.

Winner Takes All

The cases also suggest something else. Another common factor that is ev-ident from the cases is that all of the most global firms are the first or thesecond leading players in their respective markets. This suggests a ‘‘winnertakes all’’ effect that has been highlighted by other research in technology-intensive markets (Arthur, 1996; Schilling, 2002; Chen, 2003; Noe & Parker,2005), in which the leading firms capture a disproportionate share of themarket. As Arthur (1996) has argued, technology markets often exhibit thiseffect as they require a high upfront investment to enter the market but onceproducts catch on in the market, marginal costs of production are relativelylow. Combined with first-mover advantages and network externalities, this

STEPHEN CHEN342

often leads to a situation where firms that gain a slight lead win an in-creasing share of the market worldwide.

CONCLUSIONS

In conclusion, this study shows that the Internet has had limited impact onthe globalization of most Internet firms, particularly in B2C markets. Bar-riers to globalization such as local brands, language and culture may besignificant in B2C markets. However, there are some exceptions and a fewfirms operating in B2B markets are highly globalized.

Factors that facilitated their globalization include the presence or estab-lishment of a global standard, first mover advantages and network effectsthat created a winner takes all effect that extended to markets globally. Inthese cases, the constraint on internationalization has not been marketlearning by the firm but rather learning of the technology by customers inthe markets in which the firm operates. The results suggest that the mainimpact of the Internet on firms in global markets has not been as a globalsales or distribution channel for firms, as some have claimed, but as acommunications network based on a global standard. The firms that havebenefited most as regards internationalization have been firms that supplythe components necessary to access and utilize that network. This confirmsthe importance of considering network externality effects resulting fromtechnology standards and complementary products in theories and practiceof internationalization strategy in Internet firms or in firms using the In-ternet as a component of their globalization strategy. However, it should beadded that these effects appear to be significant only in certain cases, mainlyB2B firms, and that the effects seem much less significant in the case of B2Cfirms, where local market barriers appear to outweigh any network effects.

Admittedly this paper has only examined a small number of firms andthe results need to be confirmed in a larger sample or other cases. However,as noted earlier, the firms in the sample examined were leaders in theirparticular market so a priori they would be expected to show the greatestinternationalization activity and show the greatest effects of the Internetin facilitating globalization. The fact that extensive globalization was notobserved except in a few cases should raise some questions for further re-search on internationalization of firms, for example, how do drivers andbarriers to globalization vary in different geographic markets, for differenttypes of product or service; how relevant are the findings for non-Internet-based firms?


Finally, it should be noted that one of the problems with studying In-ternet markets is the relative immaturity and fast-changing nature of themarkets so some other caveats should be added. It may be that as Internettechnology becomes more widely adopted and as consumers gain greaterconfidence in its use, the importance of the Internet as a global sales channelwill increase and global sales of Internet firms will also increase. Therefore,more research needs to be done to determine if, and how, the nature andextent of globalization changes as Internet markets mature.

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HOW DO THE INTERNET AND

INTERNATIONALIZATION AFFECT

THE BUYING CENTER?

AN EXPLORATORY CASE STUDY

Catherine N. Axinn, Dawn R. Deeter-Schmelz,

Brian T. Straley and Ernest J. Zavoral, Jr.

ABSTRACT

Drawing from seminal research on organizational buying behavior

(Johnston, 1979; Johnston & Bonoma, 1981), we use a case study for-

mat to explore the impact of the Internet and internationalization on

today’s industrial procurement processes. Interviews with senior managers

of an industrial distributor reveal several key insights regarding the

impact of the Internet on buyer–supplier interactions and the importance

of global sourcing. Based on these exploratory findings, implications for

future research are offered.

1. INTRODUCTION

Research published more than 25 years ago transformed the way in whichpurchasing was viewed (Johnston, 1979; Johnston & Bonoma, 1981).





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17013-1

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CATHERINE N. AXINN ET AL.348

It became the basis for sales training in universities and for selling profes-sionals to determine how and with whom to communicate their sales efforts.However, little business literature has evaluated or built upon the originalreported framework. Two dynamic drivers demand researching potentialchanges in the ways in which businesses’ purchasing entities communicateand operate: the Internet and internationalization. Because neither factorwas dominant at the time of the seminal work in this area (e.g., Cyert,Simon, & Trow, 1956; Johnston, 1979; Johnston & Bonoma, 1981;Robinson, Faris, & Wind, 1967; Sheth, 1973; Webster & Wind, 1972,1996), the relevance of the established structure, function, and interactionprocesses concern us here.

While current business literature proposes that both factors have had aneffect on business, none materially measures the effect on the purchasingbehaviors of industrial organizations in the context of the buying center.The primary goal of this research is to combine exploration of the impact ofinternationalization on industrial sourcing with an assessment of the impactof Internet use on the buying center, specifically, and industrial purchasingand procurement processes, in general. A better understanding of the effectsof these phenomena may create an updated framework for understandingthe ways in which industrial companies of the 21st century are operating.

Evaluating the effects of internationalization and the Internet on pur-chasing behaviors will benefit both buyers and sellers by allowing moreefficient and effective exchanges due to developing a clearer understandingof who the players involved are and how they are interacting with oneanother. This research will benefit business by creating a basis for evaluatingthe continuing relevance of the buying center in the current operating en-vironment.

Mapping the interaction between purchasers and sellers may provideknowledge allowing sales professionals to better utilize the Internet as amarketing tool. In addition, the research may provide a clearer frameworkby which to understand the utility of global sourcing.

2. BRIEF LITERATURE REVIEW

We begin by taking a look at the literature related to the classical conceptsof the buying center, and the more recent move toward formalized buyingteams. This is followed with a brief examination of the literature pertainingto two environmental forces increasingly affecting the organizational buyingprocess: (1) the Internet, and (2) internationalization and global sourcing.

How Do the Internet and Internationalization Affect the Buying Center? 349

2.1. The Buying Center

Research conceptualizing the buying center as a network of connected in-dividuals spans almost 40 years (e.g., Bristor, 1993; Buckles & Ronchetto,1996; Cyert et al., 1956; Johnston & Bonoma, 1981; Robinson et al., 1967;Sheth, 1973; Venkatesh, Kohli, & Zaltman, 1995; Webster & Wind, 1972;Weigand, 1968). Beginning with the seminal work of Cyert et al. (1956),Robinson et al. (1967), Webster and Wind (1972, 1996), and Sheth (1973),organizational buying theory has characterized the buying function as acomplex process involving multiple individuals rather than the single act ofone person.

Since this early work was conducted, most literature has focused on thedecision-making processes and the methodologies have focused on a specificbuying decision (Sheth, 1996).

Among the earliest studies to empirically test the buying center concept,Johnston (1979), in his dissertation, and later Johnston and Bonoma (1981)provided evidence of the buying center structure that has received littlesubsequent attention. As prescribed by organizational buying theory, theauthors adopted a communication network approach to study the buyingdecision process, with the goal of identifying the structure and interactionpatterns occurring in the buying center. Johnston and Bonoma (1981) iden-tified five buying center dimensions: (1) vertical involvement, i.e., thenumber of levels in the organization’s hierarchy exerting influence in buyingcenter decisions; (2) lateral involvement, i.e., the number of different de-partments and divisions involved in buying center decisions; (3) extensivity,i.e., the number of people involved in the buying network; (4) connected-ness, i.e., the strength of the linkages between members of the buying center;and (5) the centrality of the purchasing manager in the buying center net-work. In addition, the authors explored five structural variables: (1) cen-tralization, i.e., the degree to which authority, responsibility, and power areconcentrated in the buying center; (2) formalization, i.e., the extent to whichbuying center activity is formally defined by rules, policies, and procedures;(3) complexity, i.e., the extent to which the company pursues functionalspecialization; (4) organization size; and (5) participation, i.e., the level ofbuying center member involvement in the decision-making process.

Among the key findings reported by Johnston (1979) and Johnston andBonoma (1981) was that the extensivity of the buying center was affected bythe degree of formalization, the complexity and importance of the purchasedecision, and the purchase class (industrial versus service). Lateral involve-ment was affected by formalization along with the importance and novelty


of the purchase situation. Vertical involvement was most heavily influencedby purchase class, importance, and complexity, while connectedness wasaffected by formalization and centralization. In fact, formalization and theimportance of the purchase situation had the greatest impact on the buyingcenter dimensions, whereas organization size had no effect.

Over the 25 years since the seminal work was published, there has beenmuch research about industrial organization buying behavior, but little haschallenged the structure outlined by Johnston (1979) and Johnston andBonoma (1981). Yet a shift in the general way that marketers are selling toindustrial customers has changed with a shift to understanding and influ-encing these customers (Sheth, 1996), suggesting that additional research iswarranted.

As noted by Sheth (1996), in his review of the state of organizationalbuying research, the business literature proposes that organizational buyingbehaviors have been changing since the 1970s due to globalization, totalquality management (TQM) philosophies, industry consolidation throughmergers and acquisitions, and the use of information technologies. Becauseof global mergers and acquisitions and alliance activities, procurement hasshifted from a decentralized administrative function to a centralized stra-tegic function (Sheth, 1996). Organizational restructuring and outsourcingare affecting organizational buying behavior, which in turn affects the de-cisions made (Lewin & Johnston, 1996). The use of technology has alsoaffected the buying center with electronic data interchange (EDI) and com-puter networks, which in turn have restructured the procurement philos-ophy, processes, and platforms (Dadzie, Johnston, Dadzie, & Yoo, 1999;Dzever, Quester, & Chetty, 2001; Stump & Sriram, 1997). Research has alsoshown that the change in organizational buying behaviors shifts it from atransaction-centered and domestic practice to a relational-centered and glo-bal practice (Sheth, 1996; Wilson, 1996). Given these environmental changesaffecting the buying function, it seems appropriate to revisit Johnston andBonoma’s (1981) early work, updated for today’s buying organizations.Thus a primary goal of this case study is to evaluate the potential forreplicating their earlier research in today’s procurement environment.

2.2. Team Buying

The more a company transitions to a relational-centered and global pro-curement process, the more it will have to create cross-functional teamsdedicated to suppliers, which will replace the buying center structure and


process (Sheth, 1996). Team buying is, essentially, an extension of the buy-ing center concept. Defined as the process of making purchasing decisionsthrough cross-functional experts cooperating to quickly and effectivelymake a purchase (Deeter-Schmelz & Ramsey, 1995), team buying reflects ahigher level of formalization as compared to the traditional buying centermodel. Current business literature suggests that unlike the buying centerwith its fluid membership, members in formalized buying team structureshave specific functions and roles and can be clearly identified through theirteam membership (Deeter-Schmelz & Ramsey, 1995).

Buying team members typically have a functional interdependence on oneanother based on cross-functional expertise (Blau, 1972). When a need sur-faces, the appropriate team is activated for resolution of the problem. Al-though a core purchasing team exists, other organizational areas mayprovide members that support the function (Deeter-Schmelz & Ramsey,1995). Because purchasing teams allow additional personnel to participatein a purchasing decision that otherwise would not have been included, amore strategic decision process is created (Ellram & Pearson, 1993). Thegoal of working in a team setting for making purchasing decisions is tocoordinate efforts to best match the specifications of different departmentsthat are affected. In order for the buying team to be successful, it must alignits goals with the overall goals of the organization (Johnston & Bonoma,1981). Team involvement with purchasing most commonly takes place insituations involving problem solving with suppliers, supplier selection, anddecisions to make or buy, and facilitates improved communication, aware-ness, and interaction between different functional departments of an or-ganization (Ellram & Pearson, 1993).

2.3. Internet

The impact of the Internet on purchasing activities has changed substan-tially over the past 25 years. During this time, the Internet has become asignificant influencer of many business initiatives. Companies are currentlytaking advantage of the ease in communicating and attaining information atgrowing speeds. The Internet is radically changing the communicationamong those involved in purchasing. Leading executives are focusing theirattention on business-to-business Internet ventures, reverse auctions, andintranets (Croom, 2000; Deeter-Schmelz & Kennedy, 2002; Essig & Arnold,2001; Talluri & Ragatz, 2004; Wenninger, 1999); and experts have predictedthat by the year 2010, the Internet will be the backbone of electronic


industrial purchasing (Carter, Carter, Monczka, Slaight, & Swan, 2000). Asmany companies are focusing their efforts on creating relationships withforeign suppliers and re-evaluating their budgeting of promotional dollars,understanding the role of the Internet is critical to the effective allocation oftime and effort by international marketers.

Early on, the Internet was perceived to be an impersonal form of com-munication. It was used only as a channel for exchanging information bothcommercially and noncommercially. Commercial use includes interactivewebsites, while noncommercial use comes in the form of newsletters, bulletinboards, and list serves. One of the first formal analyses of the use of theInternet as a communication device revealed it to be extremely versatile onthe dimensions of symmetry of information flow, media content, diversity ofinformation sources, communication timing, and personal activity (Hoffman& Novak, 1996).

More recent use of the Internet has shown it to be helpful as a conduit forpersonal communication and as a source of information for organizationalbuyers. A study reported by Deeter-Schmelz and Kennedy (2002) reveals theimportance of gathering and sharing information through the use of e-mail.In particular, research suggests that the Internet is used regularly for com-munication and for gathering information on suppliers and customers(Kennedy & Deeter-Schmelz, 2001). The Internet has been used to compilecompetitor information, gather supplier information, monitor, and main-tain inventory levels through materials requirements planning (MRP) andjust-in-time (JIT) acquisition processes, develop customer relationship man-agement processes, and train employees. One can imagine that the Internetmight be more useful during the prepurchase information stage. Likewise,buyers might be more likely to engage in online purchasing under the con-ditions of a straight rebuy (Deeter-Schmelz & Kennedy, 2002), although it isworth noting that current research suggests industrial buyers are using theInternet more frequently as an information-gathering tool than as a trans-action (i.e., purchasing) tool (Kennedy & Deeter-Schmelz, 2001).

One factor influencing the use of the Internet is experience. Researchershave argued that those buyers lacking the skills to use the Internet are lesslikely to do so (Kennedy & Deeter-Schmelz, 2001; Novak, Hoffman, &Yung, 2000). As industrial buyers search for a more efficient channel forcarrying out the various functions involved in a purchase, it is inevitable thatthe Internet will come into play. At this point, those involved must develop asense of awareness and a knowledge base that will facilitate easier and,therefore, greater use of the Internet.


Not only is the Internet disrespectful of national boundaries and nationaljurisdiction, it renders geography irrelevant; in online transactions, the lo-cation of the parties may be unknown (Grant & Bakhru, 2004). As theInternet becomes more prevalent in purchasing situations, those involvedwill have to re-examine its function to determine any changes that mayoccur during the purchasing process.

2.4. Internationalization and Global Sourcing

The dominant change in the world economy since Johnston’s original re-search is the globalization of markets (Levitt, 1984; Yip, 1992; Bartlett &Ghoshal, 2000). As markets have globalized, firms have internationalized.Some scholars have posited gradual models for internationalizing both themarketing activities of firms (Johanson & Vahlne, 1977, 1990) and the glo-bal sourcing activities of firms (Monczka & Trent, 1991), while others haveoffered a more interactive view of both the inward and outward interna-tionalization processes, which could speed up both processes (Welch &Luostarinen, 1993). In addition, it seems that the pace and extent of glo-balization have been fairly swift. According to Trent and Monczka (2002),the percentage of U.S. firms making purchases internationally grew dra-matically from 21% in 1975, to 56% in 1982, to 71% in 1987. Trent andMonczka (2002, p. 69) further assert that:

The average amount of total purchases from non-U.S. sources by larger U.S. firms has

increased from 9 percent of total annual dollar purchases in 1993 to over 25 percent in

2000.

European research reinforces the perception that purchasing has becomehighly internationalized. Research by Servais and Jensen (2001) revealedthat less than 15% of the small Danish manufacturers who were studied hadno foreign suppliers, while over 25% spent more than half of their pro-curement budgets with foreign suppliers.

Although definitions of global sourcing vary, most authors agree thatthere is a significant strategic component to global sourcing that is absent ininternational purchasing. Based on their development of a five-level modelof internationalizing procurement, Trent and Monczka (2002, p. 68) positthe following:

Global sourcing, which differs from international purchasing in scope and complexity,

involves proactively aggregating volumes and coordinating common items, practices,


processes, designs, technologies, and suppliers across world-wide procurement, design,

and operating locations.

Murray, Kotabe, and Wildt (1995, p. 181), in conducting their contingencyanalysis of the performance implications of global sourcing strategy, defineglobal sourcing as involving,

setting up production operations in different countries to serve various markets, or

buying and assembling components, parts or finished products worldwide.

Kohn (1993, p. 18) of A.T. Kearney, Inc. defines global sourcing in terms ofboth what it is, and what it is not:

Primarily, global sourcing is re-examining purchasing strategies for the majority of a

company’s purchased material cost base to determine whether the sourcing should

change in light of global supply economics and a global supply base.yGlobal sourcing

is not an exercise in finding cheap sources of supply or suppliers of questionable qual-

ityy 50 to 60 percent of savings in global sourcing programs are the result of existing

suppliers improving their price to world-class levels.

Motives for global sourcing can be as varied as definitions. According toMurray et al. (1995, p. 182),

Improved sales and financial performance is a major objective of a global sourcing

strategy.

Their analyses reveal that a variety of sourcing methods may be effective,depending on the product being sourced, and that sourcing strategies mayneed to change over time to reflect changes in the dynamics of supply mar-kets.

Alguire, Frear, and Metcalf (1994, p. 73) examine the determinants ofglobal sourcing strategy and conclude that

global sourcing strategies should be driven at least as much by technology and quality

considerations as by cost concerns.

This study examines both motives for global sourcing and barriers to globalsourcing. Factor analysis reveals two major motives (competitive advantageand comparative advantage) and two major types of barriers (internal andexternal).

Fagan (1991, p. 21) acknowledges the initial role of costs:

Traditionally, the most widely recognized benefit of global sourcing has been lower

costs. Less-expensive labor, less restrictive work rules, and lower land and facility costs

have enticed companies to foreign suppliers; reduced product cost remains the main

attraction for perhaps one third to one half of those companies currently pursuing global

sourcing.


However, he goes on to detail additional benefits from global sourcing,including availability of supply, uniqueness of products, and quality andtechnical supremacy.

Servais and Jensen (2001) compared motives for choosing foreign sup-pliers to those for choosing domestic suppliers and found lower prices to bethe primary factor for both sources of supply, although the secondary fac-tors varied with better quality being a motive for selecting foreign suppliersand better lead time being a motive for selecting domestic suppliers.

Trent and Monczka’s (2002) research examined factors contributing tomore versus less successful applications of global sourcing. The top threefactors found to indicate greater success were: (1) following a well-definedprocess or approach to global sourcing, (2) involving the right individuals asparticipants or team members, and (3) having well-established communi-cation methods among participants.

Partly because communication is so important in successful global sour-cing, the Internet has become increasingly vital. Electronic commerce isconsidered to represent the ultimate manifestation of the globalization ofbusiness (Grant & Bakhru, 2004), and experts predict that within the nextdecade the Internet will become the interface of choice for supply chainmanagement, including the procurement process (Carter et al., 2000). Theinternational face of e-commerce reveals that national markets have onlypartly succumbed to the onward march of globalization. While some sectorsare dominated by multinational players, most of the major business-to-business e-commerce hubs are dominated by global players (Grant &Bakhru, 2004).

3. EXPLORATORY CASE STUDY

Clearly, the industrial marketplace is undergoing tremendous changes, inpart due to the effects of the Internet and internationalization. This paperreports the first of three exploratory case studies. As mentioned previously,a key goal was to evaluate the potential for replicating the research orig-inally conducted by Johnston (1979) in order to ascertain how the Internetand global sourcing might affect the communication relationships inherentin, and structure of, the buying center. Case study method was deemed themost appropriate technique to achieve this goal, since the original researchessentially comprised an analysis across 31 case studies. Therefore, wemodified the instruments used by Johnston (1979) in his seminal research,and to this framework the questions necessary to facilitate our expanded


purpose were added. Some of the questions regarding Internet use weredrawn from Deeter-Schmelz and Kennedy (2002).

The subject firm in this case study is an industrial distributor. Four in-dustrial distributors had been among the original 31 firms which formed thesample for Johnston’s (1979) earlier research. Our subject firm, headquar-tered in the Midwestern United States, is a major player in the global au-tomotive aftermarket, supplying equipment to mechanics in a wide varietyof industries. Interviewees were all the senior managers who were identifiedas playing a role in the organization’s purchasing and procurement proc-esses. These managers included the CEO, a representative of the parentcompany, the Global Procurement Leader, who is permanently assigned towork with the subject firm, and five other managers.

We were very fortunate to have the complete support of the CEO, whostated in the opening interview:

We will help you in any way we can. We will give you access to as many people as you

need access to.y I think that the world has changed radically. Not just globally because

of globalization, but because of Internet communication and travel.

4. FINDINGS

4.1. Shaped by the Subject Firm

At the close of the same interview, the CEO cautioned:

I ask you to really think about the bigger thing, which is purchasing in multi-divisional

environments, global multidivisional environments, what does the organization look like

and how can it be more efficient?y I encourage to you keep an open mind.

This comment turned out to be somewhat prophetic, as we soon foundourselves unable to fit this organization’s purchasing behavior into theframeworks of our carefully designed surveys. This may, in part, be due tothe multidivisional structure of the organization, and it may be due to thespecific business model of the firm as a distributor. Because of the distrib-utor business model, we spoke with numerous people involved in procuringproducts critical to its business operations, but had difficulty identifyingpeople who had made purchases like those studied by Johnston (1979) inhis original research (e.g., capital equipment and industrial services). In theend, we were able to interview one manager who played a principal role inthe purchase of a piece of capital equipment, but were unable to build fromthat point a map of all the communication relevant to the buying center for


that purchase. However, we were still able to uncover some aspects of howthe Internet and internationalization/global sourcing affect the purchasingpractices of this firm, as discussed below.

4.2. Internet Impact on Interactions with Suppliers

To begin, we asked each manager to rate the importance of the Internet, asshown in Table 1. Interestingly, their rating scores varied widely, and wereoften accompanied with various comments. For instance, the CFO notedthat there was a tendency to rely more on EDI than online purchasing. Heemphasized the importance of direct system-to-system connections, ‘‘passingorders back and forth.’’ The Director of Merchandising noted that the com-pany was only a few months away from launching a vendor-oriented web-page. He said, ‘‘y all the new products will come through this webpage.’’

The parent company’s Global Procurement Leader reported not using theInternet in his purchasing activities, due in part to his more strategic role inthe firm. At the other end of the spectrum, not surprisingly, is the Directorof Information Technology, who said that with respect to the purchase of avery large and specialized printer (capital equipment purchase), ‘‘we use theInternet heavily to compare features and benefits.’’

To gain a more detailed view of the respondents’ Internet-based be-haviors, each (except the CEO) was given a short survey drawn from thework of Deeter-Schmelz and Kennedy (2002). The results of the two ques-tions posed in this survey are compared with the results obtained in theprevious study in Tables 2 and 3, below. With respect to the Internet use(Table 2), it is not surprising that the respondents in our sample report

Table 1. Importance of Internet in Buyer–Supplier Relationship.

Respondent Role On a Scale of 1–10, about How Important is

the Internet in Your Relationships with

Suppliers?

CEO 8.5

CFO 5

Director of Merchandising Now it is 2, but soon it will be 8

Director of Supply Chain and Inventory 7

Category Manager 6

Director of Information Technology 8

Parent Company’s Global Procurement

Leader

No use

Table 2. Comparison with Findings from Deeter-Schmelz and Kennedy(2002): Frequency of Internet Use.

Question: Please Rate the Frequency

with Which You Use the Internet in

Each of the Following

Ways:(1 ¼ Never, 5 ¼ Always)

Deeter-Schmelz and

Kennedy Mean

Case Study Mean

E-mail 3.96 4.20

Searching for new suppliers 3.24 2.20

Electronic data interchange 2.21 3.40

Online customer support 2.29 3.00

Online ordering 2.47 1.80

Online order status checks 2.45 3.00

Online payments 1.41 2.60

Conducting reverse auctions 1.18 2.40

Just-in-time inventory planning 1.51 2.00

Discussion groups with other

customers

1.55 1.40

Gathering information regarding

current suppliers

2.94 3.40

Gathering product/component

information

3.28 3.00

Gathering competitive information

for your company

2.56 4.00

Accessing supplier documents (specs,

order policies, etc.)

2.37 2.60

Providing information to suppliers

(specs, order policies, etc.)

2.61 2.60

Gathering external customer

information for your company

2.32 2.60


greater e-mail use, given that availability of the Internet technology hasincreased over time. Our respondents also indicate greater use of the In-ternet for EDI, online customer support, and online order status checks inpayments. Our respondents also report more use of the Internet for reverseauctions, just-in-time inventory planning, and gathering information onsuppliers as well as competitive information for the firm. Although thesignificance of these findings is not clear, given our small sample size, theresults do provide preliminary evidence that organizational buyers may beusing the Internet with greater frequency, and for a wider range of activities.Interestingly, our respondents reported less use of the Internet for onlineordering as compared to the results reported by Deeter-Schmelz andKennedy (2002), i.e., 1.80 versus 2.47, respectively.

Table 3. Comparison with Findings from Deeter-Schmelz and Kennedy(2002): Importance of Internet Attributes.

Question: How Important Are the

Following Practices for Your Job:

(1 ¼ Not Important, 5 ¼ Very

Important)

Deeter-Schmelz and

Kennedy Mean

Case Study Mean

Easy online ordering 3.92 2.40

Ability to ask questions online 3.78 2.80

Easy movement around Internet sites 4.31 4.20

Availability of current information 4.44 4.00

Increasing speed of information from

suppliers

4.30 4.20

Increasing speed of information to

suppliers

4.04 4.20

Ability to customize content of

supplier Internet sites

3.22 3.00

Ability to obtain a lower price for

products purchased

4.09 3.60

Reducing order processing time 4.31 3.80

Reducing paper flow 4.34 3.80

Ability to connect to a live person

when using an Internet site

3.21 2.60

Ability to compare prices from several

suppliers easily

3.92 3.80

Ability to compare products from

several suppliers easily

3.87 3.80

Ability to offer feedback regarding

Internet sites

2.93 2.60

Ability to obtain information that

educates me on product uses

3.71 3.60

Ability to exchange information with

colleagues

3.40 3.60


Table 3 reveals the findings relative to the importance of Internet at-tributes. As shown, respondents in the Deeter-Schmelz and Kennedy (2002)study placed greater importance on easy online ordering and the ability toask questions online. Likewise, the Deeter-Schmelz and Kennedy (2002)sample placed greater importance on the ability to obtain lower prices forproducts purchased online, reduced order processing times and paper flows,and the ability to connect to a live person when using an Internet site.The remaining findings seem relatively comparable. The only attributeon which respondents in our sample placed greater importance than theDeeter-Schmelz and Kennedy (2002) sample was increasing the speed of


information to suppliers. Still, results from both studies suggest this at-tribute is of importance to industrial buyers (4.04 and 4.20 for the twosamples).

4.3. Internationalization and the Impact of Global Sourcing

Once again, each manager was asked to rate the importance of globalsourcing to the firm. There was much more agreement across all relevantmanagers on this topic than there was on the topic of the Internet, as can beseen in Table 4.

Through the managers’ comments on the firm’s global sourcing activities,we learned that there were ‘‘sourcing operations in Shenzhen and Shanghai,’’in addition to Taiwan, while sales operations exist in Canada, the UnitedKingdom, and Japan. According to the CEO, ‘‘We probably do 70% of ourbusiness in the U.S. and 30% in the others.’’

We also learned that the parent company’s global sourcing activities werebroader than this subsidiary’s activities. According to the parent company’sGlobal Procurement Leader, ‘‘Purchasing to us is tactical, procurement andsourcing is strategic. So we are looking at more of a strategic global stand-pointy through utilizing preferred suppliers, qualified suppliers, and ba-sically consolidating our volume where we can.yOur global team consistsof 16 or 18 people.’’

One theme that was quite recurrent was the idea that global sourcesprovided high-quality, innovative products, rather than just low-cost prod-ucts. These comments were typical:

�

Re

CE

CF

D

D

Ca

Pa

You are starting to see innovation overseas.yRight now a lot of the ideasare coming out of Asia and from Europe. (Director of Merchandising).

Table 4. The Importance of Global Sourcing.

spondent Role On a Scale of 1–10, about How Important Is

Global Sourcing to Your Firm?

O 9

O 7

irector of Merchandising 10

irector of Supply Chain & Inventory 8

tegory Manager 7

rent Company’s Global Procurement

Leader

8


�
China is a big source of products right now. Taiwan is a big source ofproduct for us.y India tends to be a place where you get morey tech-nologically advanced products.yProbably 10 years ago, people viewedAsian source products as lower qualityy over the years, the quality hasdefinitely improvedya lot of times now their standard and quality ofwork coming out of Asia is changing dramatically. (CFO).
�
It used to be, you buy foreign, you [would] sacrifice something.yTheworld has changedy in many cases there is a lot more innovation comingfrom overseas than in our own back yard. (Category Manager).
On the other hand, several people shared their concern that customersexpected their products to be ‘‘Made in the USA.’’

�
There are many casesy [where] our customers insist on made in theUSAy (Category Manager).
�
You have a huge population of people that are very proud of Americanmade products and are willing to pay for American made products. (CFO).
However, as noted by the Category Manager, ‘‘The customer really doesnot have a problem with offshore products, as long as they’re sharing in thesavings. And we weren’t looking at it quite that way when westarted.y they really don’t care where it comes from, as long as it staysin one piece and [we] stand behind it with a warranty.’’ And, the Director ofSupply Chain Management observed that, ‘‘y global sourcing is really keyto usy it has a competitive advantage.’’

Thus it appears that the sourcing of products sold by this industrial dis-tributor will continue to be a blend of products ‘‘Made in the USA’’ andproducts, especially high-quality, innovative products, made throughout theworld. Throughout this discussion we have heard echoes of points madeearlier in the literature review. Global sourcing has grown in strategic im-portance. In this firm the physical manifestation of this is the Global Pro-curement Leader who is a corporate employee, but is permanently stationedat the subsidiary to assist its global procurement efforts. In addition, we alsohear repeated emphasis on the quality and technology benefits of globalsourcing, in addition to the cost benefits.

4.4. Learning about the Buying Center

Although our original goal was to replicate Johnston’s (1979) seminal re-search on the structure and function of the buying center, taking into


account the Internet and internationalization, this proved impossible, asnoted in Section 4.1, above. However, we were able to glean some inter-esting insights into the aspect of formalization of the purchasing process.Table 5 reports our findings on this topic. The range of answers on thisquestion is quite startling. One aspect on which there was consensus was theexistence of a procedure called ‘‘Delegation of Authority.’’ This processmandates how much money each person can spend on a purchase withouthigher approval. According to the CFO, ‘‘We have a delegation of authoritythat specifically lays out, based on type of purchaseywhere people havedifferent approval levels.yA direct manager can approve something $2500or lessy but anything over $2500 comes to me for $2500 to $50,000 andthen goes to [the CEO] for $50,000 to $250,000. And above $250,000, onesingle expense over $250,000, we have to get corporate approval.’’

The most diverse views were held on the perceived presence or absence ofa formal purchasing manual. Three managers reported awareness of a papermanual while two said there was none. Online availability was also in doubt,although this was the point at which all respondents mentioned the dele-gation of authority.

An unexpected result was comments made regarding the positive impactof the Sarbanes-Oxley legislation in formalizing the purchasing processes.According to the CFO, ‘‘y you are forced to create processes and proce-dures for everything. Last year we went through pretty extensive exer-cisesy’’ The Director of Merchandising expanded on this point: ‘‘A lot ofpeople tell you its been miserable, but the reality of it is it forced [you]y todocument how you currently do everythingy the big eye opener wasyou would see everything mapped out that we’ve been doing for years andsuddenly go, ‘Boy, that doesn’t really make sense when you see it laid out on

Table 5. Formalization of Purchasing Policies and Procedures.

Respondent Role On a Scale of 1–10, about How Formalized

Would You Say Your Company’s

Purchasing Policies/Procedures Are in

Comparison to Other Companies?

CEO 7

CFO 9.5

Director of Merchandising 5

Director of Supply Chain and Inventory 4.5

Category Manager 5

Parent Company’s Global Procurement

Leader

7


paper like that.’ So there have probably been more changes in the last twoyearsy you’ll look back in ten years and say, ‘That Sarbanes-Oxleychanged corporate America!’ more than anybody even realizes right now.Because it’s forcing companies to look at how they operate, there should behuge improvement in efficiencyy’’

5. LIMITATIONS, INSIGHTS AND FUTURE

RESEARCH

5.1. Limitations in Researching the Buying Center

As mentioned earlier, a key goal of this study was to evaluate the potentialfor replicating Johnston’s (1979) seminal research in the context of today’sindustrial procurement environment. We were frustrated in this endeavor inseveral ways, and subsequent case studies involving a nationally recognizedservice firm and a Fortune 200 global manufacturer have provided someadditional explanatory insight. One key tool used to construct diagrams ofbuying centers was a question asking respondents to identify other membersof the buying center and quantify their communications with them, spec-ifying the percentage of communication that was oral or written. In ourattempt to examine how the Internet influences the buying center, we ex-panded this question to include communication via the Internet, e-mail, andcompany intranets. This expansion rendered this question nearly impossiblefor the respondents to answer, due to both increased complexity and thesheer volume of communications implied. While on one hand, this providessome evidence that the Internet does indeed impact the buying center; on theother hand, it leaves us seeking alternative means of assessing this impact.

Additional limitations stem, in part, from our fairly narrow goals for thisresearch. Because of our focus on the buying center, we did not broadlyexplore the internationalization of the subject firm. We did not examinetheir outward internationalization nor did we explore possible connectionsbetween their inward and outward internationalization. In addition, we didnot consider the impact of cultural distance on the respondents, althoughsome culturally related biases may be seen in some comments. Further, wedid not consider the network of potential supplier/buyer relations or thepossible existence of reciprocity. Finally, we are quite limited in the con-clusions we can meaningfully draw since we only examined one industrialdistributor. However, there are some insights that came from this work.These are discussed below.


5.2. Insights

With respect to our goal of exploring the effects of the Internet and inter-nationalization, focused on global sourcing, on the Johnston and Bonoma(1981) model, we did gain some insights.

Regarding the effects of the Internet, we learned that our sample firm isusing the Internet more for EDI purposes rather than online purchasing,thereby suggesting that the Internet is being used by this firm more fre-quently in straight rebuy situations. In addition, as suggested by the Di-rector of Information Technology, the sample firm is using the Internet asan information-gathering tool, collecting information on the features andbenefits of various products. Finally, as noted by the Director of Merchan-dising, the firm is turning to the Internet as a way to provide productinformation to its customers. Interestingly, these findings are similar tothose reported by Kennedy and Deeter-Schmelz (2001) and Deeter-Schmelzand Kennedy (2002), who found that industrial buyers were more likely touse the Internet as an information-gathering tool as well as a purchasingtool in straight rebuy situations. One key difference is the emphasis oursample firm placed on EDI via the Internet.

We also gained insight regarding the effects of internationalization, andglobal sourcing in particular. Several themes became apparent. First, oursample firm was using a wide variety of global sources when purchasingproducts. Second, global sources were associated with innovative, qualityproducts, rather than just cost savings. Third, there is evidence that the globalsourcing activities of this firm are increasingly strategic, although they havenot become as centrally controlled as might be expected by Trent and Mon-czka (2002) to be categorized as a Level V organization (having integrationand coordination of global sourcing strategies with other functional groups).

Indeed, in this organization we find that procurement activities are quitediffuse among senior managers. This may be attributed, in part, to thecustomer-driven distributor business model prevailing in the firm. However, itis possible that such diffuse procurement responsibility could be associatedwith a responsibility-based budgeting process, and/or the shift to flatterorganizational structures which are becoming common in the 21st century.

5.3. Suggestions for Future Research

The insights discussed above have implications for future research. We be-lieve that longitudinal studies are needed to continually monitor changes in


the usefulness of the Internet to industrial buyers and sellers, and to examineits effects on the purchasing process. This might be especially fruitful if donefrom the perspective of buyer/supplier networks, in the context of examiningboth inward and outward internationalization.

One construct that researchers might investigate is formalization. For-malization was identified as a key influencing variable by Johnston (1979)and Johnston and Bonoma (1981), affecting extensivity, lateral involvement,and connectedness. Likewise, our sample firm reported high levels of for-malization. As organizations move toward more formalized buying teams(Sheth, 1996), as well as more formalized selling teams, it seems appropriateto investigate the effects of formalization in greater detail. Will the advent ofthe Internet and internationalization lead to more formalization? Does thatformalization add necessary structure to the procurement process, or does itinhibit organizational processes? Additional research is needed to explorethese ideas more fully.

Our research also revealed something of a paradox, with some trends push-ing firms to place procurement responsibility in the hands of more individuals(in parallel with their operational responsibilities) and other trends pushingprocurement responsibility to a more centralized unit to facilitate true globalsourcing. Further research will be needed to resolve this apparent paradox.

Finally, it is quite likely that categorizing the purchases made by industrialbuyers may be helpful in actually mapping the purchasing process. Bunn(1993) identified buying activities (search for information, use of analysistechniques, proactive focusing, and procedural control), buying situationalcharacteristics (purchase importance, task uncertainty, extensiveness ofchoice set, and perceived buyer power), and buying decision approaches(casual purchase, routine low priority, simple modified rebuy, judgmentalnew task, complex modified rebuy, and strategic new task). Just as Robinsonet al. (1967) proposed that the buying center would vary by purchase sit-uation it seems likely that the effects of the Internet and internationalizationmight vary depending on the buying activity, situational characteristics, andbuying decision approaches. Researchers might use Bunn’s (1993) taxonomyas a starting point for empirical investigations of effects of the Internet andinternationalization on the purchase decision process.

ACKNOWLEDGEMENTS

The authors would like to thank the Sales Centre at Ohio University forsupporting this research.


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INTERNET-BASED KNOWLEDGE

INTERNALIZATION AND FIRM

INTERNATIONALIZATION IN

TRANSITION MARKETS

Tho D. Nguyen and Nigel J. Barrett

ABSTRACT

Realizing that the Internet is a source of information and the possibility to

transform it into knowledge, this study develops an IBK-Internalization

process in which internationalizing firms in transition markets utilize the

Internet to search for information about foreign markets, to assess its

relevance, and then, to internalize it for their internationalization. It is

found that IBK-Internalization underlies international orientation and

foreign sales intensity, which in turn, has a reciprocal effect on IBK-

Internalization. Further, learning orientation facilitates the IBK-

Internalization process. These findings suggest that internationalizing

firms should promote and value the IBK-Internalization process in order

to mitigate their lack of foreign market knowledge.





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17014-3

369

THO D. NGUYEN AND NIGEL J. BARRETT370

INTRODUCTION

In an economy where the only certainty is uncertainty, the one sure source of competitive

advantage is knowledge. When markets shift, technologies proliferate, competitors mul-

tiply, and products become obsolete almost over night, successful companies are those

that consistently create new knowledge, disseminate it widely through the organization,

and quickly embody it in new technology and products (Nonaka, 1991, p. 96).

Knowledge is an invaluable asset that enables firms to remain competitive oreven to survive, especially in the knowledge society (e.g., Davenport &Prusak, 2000; Drucker, 1988). In the literature on internationalization,knowledge has also been posited to be a key factor that affects firms’ in-ternationalization behavior (e.g., Cavusgil, 1980; Johanson & Vahlne, 1977;Liesch & Knight, 1999; Ling-yee, 2004; Rialp & Rialp, 2001). Firms con-ducting business in foreign markets are confronted with greater risks thanthey face in their home markets because foreign markets tend to be char-acterized by heterogeneity, sophistication, and turbulence. Moreover, thedifferences in cultural, national, economic, political, legal, social, and otherenvironmental influences have made it more complex and difficult to con-duct foreign market research (Craig & Douglas, 2000). As a result, obtainingforeign market knowledge is not an easy task, especially for firms in tran-sition economies, such as Vietnam, because they lack resources for under-taking foreign market research such as foreign market experiments andforeign market visits (Nguyen & Barrett, 2006).

The Internet has received a high level of attention by firms in the lastdecade because it offers several commercial applications for firms aroundthe world (Bennett, 1997; Hamill, 1997; Morgan-Thomas & Bridgewater,2004). With the inception of the World Wide Web, commercial applicationsof the Internet have proliferated (Hamill, 1997; Javalgi, Radulovich,Pendleton, & Scherer, 2005; Luo, Zhao, & Du, 2005). Several firms aroundthe world, domestic and multinational, both in developed, developing, andtransition economies such as China and Vietnam, are establishing theirpresence on the Internet. There are also a number of e-trade providers intransition markets such as MeetVietnam.com and MeetChina.com thatprovide firms in these countries with online tools for their internationali-zation (Asia Today International, 2000).

The Internet may provide a different environment for international mar-keting in general, and for firm internationalization in particular. The In-ternet’s low-cost communication may permit firms with limited capital tobecome global marketers at an early stage of their development (Luo et al.,

IBK-Internalization and Firm Internationalization 371

2005; Quench & Klein, 1996). The Internet becomes a powerful tool forsupporting networks, both internal and external to the firm (Hamill, 1997;Morgan-Thomas & Bridgewater, 2004). Internet connection can substan-tially improve communications with existing foreign customers, suppliers,agents, and distributors. It can also identify new customers and distributorsand generate a wealth of information on market trends, as well as on thelatest technology, research, and technical development (Hamill & Gregory,1997; Kaynak, Tatoglu, & Kula, 2005). It is also a new and efficient mediumfor conducting market research (e.g., Lescher, 1995; Weible & Wallace,2001). Using various Internet tools such as e-mails, search engines, andonline surveys, internationalizing firms can collect a variety of data andinformation about foreign markets. This source of information is verypromising because it is cost effective and speedy (e.g., Hamill, 1997; Luoet al., 2005; Reedy & Schullo, 2004). It is the innovation of information andcommunications technologies that has given an opportunity for informationacquisition that is substantially more efficient for firms all around the world(Porter & Millar, 1985).

Several studies have been conducted to explore the usefulness of the In-ternet for international marketing (e.g., Bennett, 1997; Hamill & Gregory,1997; Morgan-Thomas & Bridgewater, 2004; Sørensen & Buatsi, 2002;Sheth & Sharma, 2005). However, less attention has been paid to the trans-formation of data and information obtained from the Internet for firminternationalization. Moreover, the theory of knowledge in international-ization posits that the knowledge for a firm’s international expansion ismainly experiential or tacit, which can mainly be obtained during its in-ternational operations (e.g., Johanson & Vahlne, 1977). Nevertheless, it doesnot cater for how the firm develops the knowledge. Models of knowledgecreation help explain how the firm develops knowledge, however, they havebeen found to be largely conceptual (e.g., Akbar, 2003; Lam, 2000; Nonaka,1994; Davenport & Prusak, 2000). More importantly, most research in thisarea has been conducted primarily in advanced economies. Little has beenundertaken in the developing world, especially in transition economies(Chao, Samiee, & Yip, 2003). In an attempt to bridge the above gap, thisstudy examines the process in which a firm searches for data and informa-tion on the Internet, assesses their relevance for internationalization, andthen, internalizes them with the existing foreign market knowledge in thefirm. This process is termed Internet-based knowledge internalization, orsimply, IBK-Internalization. An antecedent and outcomes of IBK-Internalization are also examined. The antecedent is learning orientationand the outcomes are international orientation and foreign sales intensity.


The rest of the article is structured as follows: first, we propose a conceptualmodel of IBK-Internalization and firm internationalization and hypotheses.Subsequently, we present the method, data analysis, and results. We, then,discuss the results and implications. We conclude the article by addressing anumber of limitations and directions for future research.

IBK-INTERNALIZATION AND FIRM

INTERNATIONALIZATION

Fig. 1 depicts a conceptual model of IBK-Internalization. Firms utilize theIBK-Internalization to obtain foreign market knowledge for their interna-tionalization. This will lead to a greater degree of their international ori-entation and foreign sales. It is also postulated that learning orientation is akey antecedent of the IBK-Internalization process.

IBK-Internalization

According to the resource-based view of the firm, although tangible re-sources are determinants of performance, intangible resources includingknowledge are the key factors contributing to a firm’s competitive advan-tages (Barney, 1991; Wernerfelt, 1984). It is argued that using computersand access to the Internet are unlikely to be a source of sustainablecompetitive advantage in internationalization because these are imitable(Barney, 1991; Samiee, 1998). Every firm can access the Internet to collectdata and information about foreign markets, nevertheless, sustainable

Learning

Orientation

Foreign Sales

Intensity

IBK-

Internalization

H4

H1

H2

H3

International

Orientation



competitive advantage in the form of knowledge resources can only begained by firms if they are capable of creating knowledge based on theInternet.

The dynamic theory of knowledge creation, especially the internalizationprocess (Nonaka, 1994; Nonaka & Takeuchi, 1995) offers an explanation ofhow a firm obtains information and then transforms it into knowledge.Internalization is ‘‘the process of searching for, acquiring, and absorbingboth tacit and explicit information and translating it into knowledge whichis then applied to some purpose’’ (Liesch & Knight, 1999, p. 385). In thisstudy, IBK-Internalization is defined as the process in which data and in-formation collected from the Internet are acquired, assessed, and comparedwith other sources, interpreted collectively, and then, used for firm inter-nationalization. Three important features of IBK-Internalization are Inter-net utilization (Sørensen & Buatsi, 2002; Kaynak et al., 2005), assessment ofinformation relevance (Davenport & Prusak, 2000), and information inter-nalization (Knight & Liesch, 2002; Nonaka, 1994).

Internet Utilization

Internet utilization assists firms in collecting data and information on theInternet. This is made possible due to the wide range of data and infor-mation about foreign markets on the Internet (Hamill, 1997; Sørensen &Buatsi, 2002). The Internet operates as a ‘virtual library’ which can beaccessed by users everywhere around the world (Ancel, 1999). Webb andSayer (1998) believe that due to the Internet’s interactive characteristic ofthe Internet, it can in fact function as much more than a ‘virtual library.’However, the opportunity given by the Internet has not been, in practice,properly utilized (Webb & Sayer, 1998). Frequently utilizing Internet toolssuch as search engines and e-mails, internationalizing firms are able to col-lect a considerable amount of data and information about foreign markets(Bennett, 1997; Nguyen & Barrett, 2006; Reedy & Schullo, 2004; Sørensen &Buatsi, 2002).

Internet Information Relevance

Internet information relevance refers to the level of usefulness of informa-tion obtained from the Internet for firm internationalization. Internet uti-lization assists firms in collecting data and information on the Internet.However, to obtain relevant and purposive information for international-ization, firms should use it effectively (i.e., use suitable tools for obtaininginformation) and efficiently (i.e., use those tools skillfully). This implies thatfirms not only search for relevant and purposive data but also, categorize,


correct, and summarize them, i.e., to transform data into information(Davenport & Prusak, 2000). This process can enhance the level of useful-ness of information, i.e., relevant information for their internationalization(information about the environment, market characteristics, and the mar-keting mix; Leonidou & Adam-Florou, 1999).

Internet Information Internalization

Access to the Internet, where various types of data and information aboutforeign markets are available, is a promising source of information (e.g.,Nguyen & Barrett, 2006; Sørensen & Buatsi, 2002). It is knowledge, how-ever, not information per se, that is a significant factor that affects a firm’sinternationalization behavior (Johanson & Vahlne, 1977). When acquiringrelevant information from the Internet, the firm, therefore, is likely totransform it into higher levels of knowledge to satisfy its knowledge need forinternationalization. Internet information internalization refers to the in-teraction between information obtained from the Internet with othersources of information and knowledge within the firm. The interaction re-lates to the process of information comparison and interpretation, and theuse of information for making business decisions (Davenport & Prusak,2000; Nonaka & Takeuchi, 1995).

IBK-Internalization and Firm Internationalization

As discussed previously, foreign market knowledge is a convincing expla-nation for the incremental manner of internationalization in which firmsgradually acquire, integrate, and use knowledge about foreign markets tosuccessively increase their commitment to foreign markets (Johanson &Vahlne, 1977). Liesch and Knight (1999, p. 385) argue that ‘‘[of] all re-sources, information and knowledge are perhaps the most critical to theexpansion of SMEs into foreign markets.’’ Therefore, systematic acquisitionof information and knowledge about foreign markets is critical for firms’success during their internationalization.

There are a number of ways that firms can acquire information andknowledge about foreign markets. This can be achieved through interna-tional marketing research, export assistance, and export intelligence(Leonidou & Adam-Florou, 1999). However, firms in transition marketslike Vietnam lack resources for obtaining foreign market information andknowledge through such traditional modes (Nguyen & Barrett, 2006). Inaddition, compared to firms in advanced economies, firms in transition


markets are short of international experience. This is because in the lastseveral years, international business activities of those firms have been ar-ranged by their governments. When these markets have been transformedinto a new system, i.e., a market-oriented system, arrangements betweengovernments have almost ceased. International business activities are nolonger conducted in the ‘traditional’ way (Griffin, 1998). Firms must findforeign markets for their products rather than relying on governments’ ar-rangements. In so doing, knowledge about foreign markets is perhaps acritical factor for their success and a reasonable explanation for their in-ternationalization (Ling-yee, 2004; Nguyen & Nguyen, 2001). Consequently,it is important that those firms should find alternatives to obtain knowledgein order to enhance their internationalization.

The IBK-Internalization process may offer those firms an opportunity forobtaining foreign market knowledge, provided that they are fully aware ofthis possibility and are prepared to exploit it. Firms that are capable ofemploying the IBK-Internalization process can significantly enhance its‘knowledge bank’ for their internationalization. IBK-Internalization is not astatic process; it is a dynamic process in which internalized knowledge aboutforeign markets is created, which can provide international advantages forfirms that utilize it. In short, ‘‘[i]n the information age, a company’s survivaldepends on its ability to capture intelligence, transform it into usableknowledge, embed it as organizational learning, and diffuse it rapidlythroughout the company’’ (Bartlett & Ghoshal, 1995, p. 141).

Firms pursue IBK-Internalization to solve the problem of the lack ofknowledge about foreign markets. The relationships between knowledge,internationalization attitudes, which reflect a firm’s international orienta-tion, i.e., its belief, preference, and willingness to commit to internationalexpansion (Barrett, 1986; Stump, Athaide, & Axinn, 1998), and interna-tionalization behavior are well documented in the literature on internation-alization (Haahti, Madupu, Yavas, & Babakus, 2005; Johanson & Vahlne,1977). A recent study of exporting firms in China, a transition market, byLing-yee (2004) also reveals that knowledge about foreign markets plays akey role in export intensity. In addition, several studies have found thatinternationalization attitudes play a vital part in firms’ development andperformance in foreign markets (e.g., Bilkey, 1978; Francis & Collins-Dodd,2000; Johnston & Czinkota, 1982; Madsen, 1987; Stump et al., 1998). Ac-cordingly,

H1. The greater the degree of IBK-Internalization of a firm, the greater isthe degree of its foreign sales.


H2. The greater the degree of IBK-Internalization of a firm, the greater isthe degree of its international orientation.

H3. The greater the degree of international orientation of a firm, thegreater is the degree of its foreign sales.

Learning Orientation and IBK-Internalization

Learning orientation is an organizational factor that influences the propen-sity of a firm to create and use knowledge (Sinkula, Baker, & Noordewier,1997; Slater & Narver, 1995). A learning-oriented firm creates and encour-ages a learning environment throughout the firm. The firm continuouslypromotes the organizational learning process, i.e., information acquisition,information dissemination, and shared interpretation (Sinkula, 1994). Thefirm endlessly creates and uses new knowledge that has the potential toinfluence the firm’s performance (Teo, Wang, Wei, Sia, & Lee, 2005; Sinkulaet al., 1997). Consequently, the firm will be more comfortable in dealingwith innovations. This gives rise to the ability to adopt and implement newideas, processes, or products, i.e., to produce innovative capacity for thefirm (Calantone, Cavusgil, & Zhao, 2002). This means that learning-oriented firms will never be satisfied with its existing level of knowledge.This will lead to the need for acquisition, assessment, and transformation ofinformation and knowledge from all accessible sources (Lam, 2000; Nonaka& Takeuchi, 1995; Teo et al., 2005), including the Internet. Therefore,learning-oriented firms are more likely to create a learning culture, whichcan initiate, support, and maximize the IBK-Internalization process withinthe firm. Accordingly,

H4. The greater the degree of learning orientation of a firm, the greater isthe degree of its IBK-Internalization.

Rival Model

Rival models play an important role in theory construction. Bagozzi (1984,p. 16) argues that ‘‘[i]t is important to stress that tests of rival hypothesesshould not be reserved for separate studies but should be performed when-ever possible within the context of an on-going study. In this way, becausesubjects, settings, instruments, etc. are held constant, we will have greaterconfidence in the internal validity of the rival hypotheses.’’ Based on this, a


rival model is proposed. As discussed previously, when a firm acquires ap-propriate knowledge about foreign markets the firm tends to enhance itscommitment to foreign markets, thus leading to an improvement of itsperformance in foreign markets. In turn, it could be expected that, when thefirm has a greater degree of commitment to foreign markets, knowledgerequired for its internationalization will amplify. This leads to an increase inIBK-Internalization. Therefore, it is proposed that

Hc. The greater the degree of foreign sales of a firm, the greater is thedegree of its IBK-Internalization.

METHOD

Measurement

IBK-Internalization

IBK-Internalization was conceptualized as a high-order construct, compris-ing three dimensions: Internet utilization; Internet information relevance;and Internet information internalization.

Internet utilization was measured by two indicators. The first indicatorwas a measure of time spent searching the Internet, i.e., asking respondentshow many hours per week the firm uses the Internet to search for infor-mation on foreign markets, such as using search engines, visits to websites offoreign distributors, competitors, suppliers, and customers. The second in-dicator was the frequency of using e-mail for international business pur-poses. It was measured by asking respondents how many times per week thefirm receives and sends e-mail related to international business activities.Even though the electronic survey is an important tool for research on theInternet (e.g., Lescher, 1995), a discussion with managers of a research firmin the market showed that these tools had not been widely used in themarket to date. Therefore, this tool was included in the measure of Internetutilization as part of the e-mail tool.

Internet information relevance was a second-order construct, comprisingthree dimensions: market feasibility information; adaptation information;and, background information (Hart, Webb, & Jones, 1994). Fourteen itemswere used to measure the three dimensions of information relevance. Marketfeasibility information was measured by three items covering information onpotential distributors, buyers, and suppliers in foreign markets. Adaptationinformation was measured by five items addressing information on


characteristics of markets, such as buyers’ preferences, competition, marketsize, and growth. Finally, background information was measured by sixitems covering general information such as socio-economic information,legal issues, political forces, and infrastructure. These items were adaptedfrom Hart et al.’s (1994) scale with modifications to suit the setting of thisstudy (i.e., based on the types of usable information on foreign markets thatthe firm can obtain from the Internet).

Internet information internalization was also a second-order construct,comprising two dimensions: information transformation and informationuse. Information transformation was measured by five items addressing theprocess of comparing, relating, and fusing information collected from theInternet with information and knowledge obtained from other sources, in-cluding experience of members of the firm (Davenport & Prusak, 2000;Nonaka & Takeuchi, 1995). Information use was measured by five itemsbased on the scale developed by Diamantopoulos and Souchon (1999). Theliterature on information utilization conceptualizes three forms of informa-tion use, i.e., instrumental use, conceptual use, and symbolic use (e.g.,Menon & Varadarajan, 1992). Instrumental use of information relates to thedirect application of information obtained to solve a marketing problem.Conceptual use refers to the use of information to develop a managerialknowledge base, i.e., indirect use of information. Symbolic use is the use ofinformation mainly for supporting an opinion or, justifying a decision,rather than using it in a manner consistent with the intended purpose of thefirm (Menon & Varadarajan, 1992). Among three types of information use,only instrumental and conceptual uses are of importance for knowledgeinternalization because these types of information use assist the firm ingenerating knowledge. Research has found that these two types of infor-mation use are unidimensional (Diamantopoulos & Souchon, 1999).

Foreign Sales Intensity

Foreign sales as a percentage of total sales (fsts) was used to measure foreignsales intensity (Moini, 1995; Ling-yee, 2004).

Learning Orientation

The conceptualization and measurement of learning orientation in this studywere borrowed from Sinkula et al. (1997), and comprised three dimensions:commitment to learning; shared vision; and open-mindedness. Commitmentto learning was measured by four items reflecting the degree that a firm iswilling to commit to learning, i.e., to promote and nourish a learning culturewithin the firm. Shared vision was also measured by four items embodying


the focus of the firm on learning that fosters energy, commitment, and pur-pose among all members of the firm. Finally, open-mindedness was measuredby three items mirroring the unlearning process of the firm.

International Orientation

International orientation was also a second-order construct, comprising twodimensions: international conviction and international intention (Barrett,1986). International conviction refers to the belief of managers that inter-national business activities would contribute to the achievement of a firm’sgoals and competitiveness and its preference for international expansion (asopposed to other strategies). It was measured by eight items. Internationalintention reflects the managers’ willingness to commit resources to interna-tional business activities, and was measured by four items.

Foreign sales as a percentage of total sales (fsts) was measured within arange of 1–10 (1p10%, 2 ¼ 11–20%, y , 10 ¼ 91–100%). Internet utili-zation was measured at ratio level, and was then recoded by values varyingfrom 1 to 10 for analysis. All other items were measured by a 5-point ratingscale (anchored by 1: strongly disagree and 5: strongly agree).

Measurement Refinement

A focus group was undertaken with six managers who were responsible forinternational business activities of firms that had used the Internet for theirinternationalization. Even though most of the scales have been used widelyin the past, this step is important because of the difference in the researchsetting, i.e., in the context of a transition market. A quantitative pilot surveyfollowed to refine the measures. This survey was conducted using face-to-face interviews with 89 firms in Ho Chi Minh City, Vietnam. The scaleswere assessed via Cronbach’s alpha (except for foreign sales intensity andInternet utilization, which were measured by one and two indicators, re-spectively) and exploratory factor analysis (EFA). Principal axis factoringwith promax rotation was used because it accurately reflects the underlyingstructure of the data than that provided by an orthogonal solution such asvarimax (Gerbing & Anderson, 1988). The results indicate that these meas-ures achieved a satisfactory level of reliability (a>0.70) and factor loadings(l>0.50). Accordingly, these measures were used in the main survey.

The Sample

Vietnam was selected to empirically test the model because it represents anunder-investigated transition economy (Tsang, 2005). A systematic sample


of 306 firms in Ho Chi Minh City, the major business center of Vietnam,was surveyed. The sampling frame, based on the Business Directories in HoChi Minh City, consisted of about 5,000 internationalizing firms in all in-dustries, which used the Internet for their international business activities.The single key informant approach, the most commonly used method inorganizational research (Kumar, Stern, & Anderson, 1993), was used in thisstudy. Respondents were senior executives of the firms. However, the in-terviewers were instructed to reach relevant people in the organization inorder to request specific information, such as Internet usage, which mightnot be given by senior managers. The original questionnaire was in English.This English version was translated into Vietnamese because English is notwell understood by managers in this market. Back translation was used toensure the equivalence of meanings. Partial self-administered surveys, inwhich questionnaires are mailed to the target respondents and are collectedby interviewers, were used for this study. Follow-up telephone calls to re-mind respondents to complete the questionnaires prior to collection werealso conducted.

Four hundred questionnaires were distributed to firms in the chosensample and 327 completed questionnaires were collected yielding a responserate of 82%. Among these completed questionnaires, 21 were found to beinvalid, due to nonqualified respondents, e.g., respondents not being mem-bers of top management responsible for international business activities.Consequently, the remaining 306 valid completed questionnaires comprisedthe sample for this research. The sample comprised 264 (83.6%) firms in-volved in indirect exporting, 248 (81%) firms involved in direct exporting, 44(14.4%) firms involved in contract modes, and four firms (1.3%) involved inforeign direct investment. In terms of firm size, 60 (19.6) firms had morethan 300 employees; 170 (55.6%) had from 100 to 300 employees; and 76(24.8%) firms had fewer than 100 employees. In terms of Internet appli-cations, all firms had used e-mail and search engine tools; 80 (30%) had awebsite; and only 3 (1%) had used the Internet as a channel of distribution.

DATA ANALYSIS AND RESULTS

Measurement Models

The measures were first assessed via Cronbach’s alpha, except for Internetutilization and foreign sales intensity, which were measured by two and oneitems, respectively. The results indicate that all the scales satisfied the


requirement for reliability (a>0.80). Specifically, the Cronbach’s alphas ofthe two dimensions of Internet information internalization, i.e., informationtransformation and information use, were 0.83 and 0.87, respectively. TheCronbach’s alphas of three dimensions of Internet information relevance,i.e., market feasibility information, adaptation information, and back-ground information, were 0.80, 0.93, and 0.87, respectively. The Cronbach’salphas of three dimensions of learning orientation, i.e., commitment tolearning, shared vision and open mindedness, were 0.84, 0.82, and 0.81,respectively. Finally, the Cronbach’s alphas of the two dimensions of in-ternational orientation, i.e., international conviction and international in-tention, were 0.92 and 0.88, respectively. These scales were then assessed viaconfirmatory factor analysis (CFA). The screening process shows that thedata exhibited slight deviations from normality. Nonetheless, all univariatekurtoses were nonsignificant and all skewnesses were within the range of[�1, 1]. Therefore, maximum likelihood estimation was used (Muthen &Kaplan, 1985).

IBK-Internalization was a high-order construct comprising two second-order constructs (Internet information relevance and Internet informationinternalization) and one first-order construct (Internet utilization). Learningorientation and international orientation were also second-order constructs.The CFA results of these second-order constructs are shown in Table 1. Thefindings indicate that the measurement models of these constructs fit thedata well. The correlations (with standard errors) between the dimensions ofthese second-order constructs indicate that they were significantly differentfrom unity (po0.001). Therefore, the within-construct discriminant validitywas achieved (Steenkamp & van Trijp, 1991). The correlations betweenthree dimensions of IBK-Internalization (Internet utilization, Internet in-formation relevance, and Internet information internalization) were alsosignificantly different from unity (po0.001). Consequently, the within-con-struct discriminant validity of IBK-Internalization was also achieved(Steenkamp & van Trijp, 1991).

The saturated model (final measurement model) also received a good fit tothe data: w2[1062] ¼ 1233.84 (p ¼ 0.000); CFI ¼ 0.978; TLI ¼ 0.977;RMSEA ¼ 0.023. It is noted that because foreign sales intensity was meas-ured by a single item (fsts), it was assumed to have a reliability of .85. Tomake the model identified, the error-term variance of this item was fixed at0.623 [(1�a) s2(fsts)] (Joreskog & Sorbom, 1982). The factor loadings of allitems were high and substantial (the lowest loading was 0.65), and all weresignificant (po0.001) (see the appendix for the standardized factor loadingsof items). Also, all average variances extracted were equal to or greater than

Table 1. Measurement Validation.

Constructs Dimensions rc rvc Correlation r(se)

Learning

orientation:

w2[41] ¼ 51.2

(p>0.13)

Commitment to

learning (lcom)

0.84 0.57 lcom"lsv 0.64(0.092)

Shared vision (lsv) 0.82 0.54 Lcom"lop 0.53(0.086)

Open mindedness

(lop)

0.82 0.60 lsv"lop 0.58(0.091)

International

orientation:

w2[34] ¼ 38.68

(p>0.27)

International

conviction (inco)

0.92 0.65 inco"intent 0.63(0.084)

International

intention (intent)

0.88 0.64

Internet information

relevance:

w2[74] ¼ 91.7

(p>0.08)

Market feasibility

information

(infea)

0.85 0.65 inad"infea 0.58(0.078)

Adaptation

information (inad)

0.94 0.76 inad"inbak 0.55(0.079)

Background

information

(inbak)

0.90 0.59 infea"inbak 0.55(0.083)


internalization:

w2[34] ¼ 41.4

(p>0.17)

Information

transformation

(intra)

0.83 0.50 intra"inuse 0.51(0.082)

Information use

(inuse)

0.87 0.58

IBI-internalization:

w2[291] ¼ 334.74

(p>0.03);

TLI ¼ 0.989;

CFI ¼ 0.990;

RMSEA ¼ 0.022

Internet utilization

(IUT)

0.67 0.50 IUT"IIR 0.38(0.092)


relevance (IIR)

� � IIR"INT 0.50(0.112)


internalization

(INT)

� � IUT"INT 0.48(0.110)

Note: r(se), correlation (standard error); rc, composite reliability; rvc, average variance ex-

tracted.


0.50. These findings indicate that the scales were unidimensional andconvergent validity (within-method) was achieved (e.g., Fornell & Larcker,1981; Steenkamp & van Trijp, 1991). The correlations between constructstogether with their standard errors are shown in Table 2. Thesefindings indicate that they were significantly different from unity, thus,supporting the across-construct discriminant validity (Steenkamp & vanTrijp, 1991).

Table 2. Correlation (r) with Standard Error (se) between Constructs.

Correlations r(se)

Learning orientation"IBK-Internalization 0.71(0.143)

Learning orientation"International orientation 0.33(0.087)

Learning orientation"Foreign sales intensity 0.22(0.075)

IBK-Internalization"International orientation 0.62(0.131)

International orientation"Foreign sales intensity 0.35(0.080)

IBK-internalization"Foreign sales intensity 0.53(0.110)

Table 3. Unstandardized Regression Weights in the Proposed andRival Models.

Structural Paths Proposed Model Rival Model

Est(se)� p-value Est(se) p-value

H1: IBK-Internalization -Foreign sales intensity 2.00(0.559) 0.000 1.38(.591) 0.020

H2: IKB-Internalization -International orientation1.05(0.212) 0.000 1.04(0.218) 0.000

H3: International orientation-Foreign sales intensity 0.29(0.262) 0.270 0.21(0.272) 0.450

H4: Learning orientation -IBK-Internalization 0.49(0.093) 0.000 0.47(0.089) 0.000

Hr: Foreign sales intensity -IBK-Internalization 0.00�� 0.05(0.022) 0.023

�Estimate (with standard error).��Fixed at 0.


Structural Models

The proposed model received a good fit to the data: w2[1064] ¼ 1240.12(p ¼ 0.000); CFI ¼ 0.977; TLI ¼ 0.976; and RMSEA ¼ 0.023. The rivalmodel also fit the data well: w2[1063] ¼ 1235.87 (p ¼ 0.000); CFI ¼ 0.978;TLI ¼ 0.977; RMSEA ¼ 0.023). A chi-square difference test shows that therival model did contribute to a better overall model fit: Dw2[Ddf ¼ 1] ¼ 4.25(po0.05). More importantly, the additional path hypothesized in the rivalmodel was significant (see Table 3 for the unstandardized estimates andFig. 2 for the standardized estimates). Consequently, the rival model wasselected (Anderson & Gerbing, 1988). Furthermore, the existence of a feed-back loop (formed by IBK-Internalization, international orientation, andforeign sales intensity) in the rival model (a nonrecursive model) can causethe system to become unstable. The results show that the stability index was0.100, falling within the range of (�1, +1), indicating that the model wasstable (Bentler & Freeman, 1983). It is noted that no improper solution was

fsts

inuseintrainbakinadinfeainseainem

lcomlsvlop

.28*(H1)

.56**(H2)

.920.76

0.73 0.690.750.73

2[1063] = 1235.87 (p = 0.000); CFI = 0.978; TLI = 0.977; RMSEA = 0.023

*: significant at p < 0.05; **: significant at p < 0.001; ns: non-significantHr: hypothesized in the rival model; S: squared multiple correlations

Foreign SalesIntensity

InternationalOrientation

inco

intent

0.83.08ns(H3)

.24*(Hr)

LearningOrientation

IUT INT

.24S

.33S

IIR

IBK-Internalization

.59S

0.68 0.76 0.74

0.71 0.82 0.760.54 0.76

0 0

0

0

0

0

0

0

0.76

0.63**(H4)

χ

Fig. 2. Structural Results (Standardized Estimates).


found in any of the CFA or structural models: Heywood cases were absent;all error-term variances were significant; and all standardized residuals wereless than|2.58|.

Consistent with H1 and H2, IBK-Internalization had positive impacts onboth international orientation and foreign sales intensity. A positive rela-tionship between learning orientation and IBK-Internalization was alsofound to be high and significant, supporting H4. However, inconsistent withH3, the relationship between international orientation and foreign salesintensity was not significant, although it was in the same hypothesizeddirection. In addition, the impact of foreign sales intensity and IBK-Internalization hypothesized in the rival model (Hr) was significant.

DISCUSSION AND IMPLICATIONS

The objective of this study is to explore the possibility of the Internet as asource of foreign market knowledge for firm internationalization. Realizingthat the Internet provides a promising source of data and information aboutforeign markets (Hamill, 1997; Kaynak et al., 2005; Sørensen & Buatsi,2002), and the possibility to transform data and information into knowledge(Nonaka, 1994; Akbar, 2003), we focus on IBK-Internalization. It is a


process in which internationalizing firms utilize the Internet to search fordata and information about foreign markets, to assess the relevance of dataand information, and then, to internalize them for their internationalization.We also examine a key antecedent (learning orientation) and outcomes (in-ternational orientation and foreign sales intensity) of IBK-Internalization.

The results indicate that the IBK-Internalization process is a useful sourceof foreign market knowledge for firm internationalization. When firms uti-lize this source of knowledge, an improvement of internationalization at-titudes, reflected in international orientation, and performance, reflected inforeign sales intensity, will be made. In turn, with an increase in foreignsales, firms would require more knowledge about foreign markets to facil-itate their internationalization. This stimulates firms to utilize the IBK-Internalization process to a greater extent, which has been confirmed in thisstudy. This dynamic process enhances and extends firms’ knowledge aboutforeign markets. These findings are consistent with the literature on inter-nationalization, i.e., experiential or tacit knowledge is more meaningful inexplaining firms’ international performance (Johanson & Vahlne, 1977) aswell as the theory of knowledge creation and use (Davenport & Prusak,2000; Menon & Varadarajan, 1992; Nonaka, 1994).

Furthermore, learning orientation has been found to be a key organiza-tional culture that influences firms’ attitudes and behaviors (Slater &Narver, 1995). This role of learning orientation has also been confirmed. Wehave found that learning orientation motivates firms to utilize the IBK-Internalization process. This is because learning orientation facilitates in-novation as well as stimulates the process of information acquisition,processing, and use (Sinkula et al., 1997), i.e., knowledge creation. It is alsonoted that the relationship between international orientation and foreignsales intensity was not significant. In general, attitudes and behavior arepositively related (Frazier & Sheth, 1985). Nevertheless, some firms lackresources to translate their committed attitudes to committed behavior(Stump et al., 1998). This may be the case of Vietnamese internationalizingfirms. The findings show that the impact of IBK-Internalization on inter-national orientation is much higher than that of on foreign sales intensity.This implies that foreign market knowledge is a key determinant of firminternational orientation. However, it must be noted that although knowl-edge is a key factor, it is not the only one that assists firms in translatinginternationalization attitudes into internationalization performance.

The findings of this study suggest a number of implications for managersin internationalizing firms. The resource-based view of the firm recognizesthat knowledge is a key resource contributing to firms’ competitive


advantage (Penrose, 1959; Wernerfelt, 1984), and the Internet is one sourceof knowledge. Firms should therefore invest in physical resources such ascomputers and Internet access. However, firms should be aware that the useof computers or access to the Internet is not sufficient to achieve sustainablecompetitive advantage because these are imitable (Barney, 1991; Samiee,1998). Managers should keep in mind that access to the Internet to obtaindata and information about foreign markets is only one part of the IBK-Internalization process. IBK-Internalization involves a process in whichdata and information from the Internet are acquired, assessed, and com-pared with other sources, interpreted collectively, and then, used for firminternationalization. In addition, full utilization of IBK-Internalization re-quires firms to create a learning environment that promotes and values theknowledge creation process. It is expected that the results of this researchwill encourage managers to utilize this possibility to increase their level ofknowledge about foreign markets. In addition, although the study inves-tigates internationalizing firms in a transition market – Vietnam, it is ex-pected that the findings of this study would be of value for firms in othertransition markets and other internationalizing firms around the world.

LIMITATIONS AND DIRECTIONS FOR

FUTURE RESEARCH

This study has a number of limitations, which has been addressed in thefollowing. First, although the proposed model received support in a tran-sition market (Vietnam), further replication, extension, and critical evalu-ation within similar and/or different markets are required, particularly inmarkets that have different economic, political, and cultural backgrounds.Second, the Internet is a relatively recent innovation and its potential as aneffective and efficient source of data and information about foreign marketshas not yet been fully exploited, e.g., the use of online surveys. Conse-quently, the measures of IBK-Internalization dimensions should be mod-ified and extended in future research. Further, foreign sales intensity was theonly measure of internationalization performance in this study. It is rec-ommended that future research should use several other measures such asforeign sales growth and profits in foreign markets (Cavusgil & Zou, 1994).Third, a comparison between the utilization of the IBK-Internalizationprocess by different types of internationalizing firms, such as indirect, directexporting, franchising, and foreign direct investment firms will be of interest


in future research. Fourth, the IBK-Internalization process involves dy-namic interactions between different organizational members as well as be-tween different levels of knowledge. Therefore, using a more appropriatemethod of investigation, such as action research, to explore the process ofinformation and knowledge acquisition and conversion within internation-alizing firms is worthy of investigation in future research. Finally, althoughthe key informant approach is commonly used in organizational research(Kumar et al., 1993), collecting data from multiple informants is an alter-native method recommended for future research, particularly for researchthat involves several members of the firm.

ACKNOWLEDGMENTS

The authors would like to thank the special issue editors, Alex Rialp andJosep Rialp, the two anonymous reviewers, and the participants of theCIMaR 2005 at the Autonomous University of Barcelona, Spain, for theirconstructive and insightful comments on the previous version of the article.

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APPENDIX: CFA FACTOR LOADINGS OF ITEMS

(STANDARDIZED)

Items
Loading t-value
Learning orientation (second-order, 5-point Likert scale)Commitment to learning

Managers basically agree that our firm’sability to learn is the key to ourcompetitive advantage

0.75
�
The basic values of our firm includelearning as a key to improvement

0.77
12.63
In our firm, employee learning is aninvestment, not an expense

0.74
12.17
Learning in our firm is seen as a keycommodity necessary to guaranteeorganizational survival

0.76
12.58
Shared vision

There is a commonality of purpose in ourfirm

0.70
�
There is total agreement on ourorganizational vision across all levels,functions, and divisions

0.81
12.05
All employees are committed to the goalsof our firm

0.78
11.76
Employees view themselves as partners incharting the direction of our firm

0.65
10.06
Open mindedness

We are not afraid to reflect critically onthe shared assumptions we have madeabout our markets

0.71
�
Personnel in our firm realize that the veryway they perceive the marketplace mustbe continually questioned

0.86
12.21
We often collectively question our ownbiases about the way we interpretmarket information

0.74
11.38




Internet information internalization (second-order, 5-point Likert scale)Information transformation

Compare foreign market informationobtained from the Internet withinformation collected from othersources

0.66
10.97
Interpret the foreign market informationobtained from the Internet to discoverits implication for decision-making

0.71
11.76
Spend time sharing foreign marketinformation obtained from the Internet

0.67
11.12
Spend time discussing about foreignmarket information obtained form theInternet

0.70
11.56
Top management spend time discussingwith staff involved in internationalbusiness activities about foreign marketinformation obtained from the Internet

0.77
�
Information use

Decisions based on information obtainedfrom the Internet are more accuratethan wholly intuitive ones

0.74
12.15
Confidence in making internationalbusiness decisions increases as a resultof information obtained from theInternet

0.79
12.82
Uncertainty associated with internationalbusiness activities is greatly reduced byinformation obtained from the Internet

0.74
12.12
Information obtained from the Internet isused to keep updated with internationalbusiness knowledge

0.79
12.91
Information obtained from the Internetplays an important role in makinginternational business decisions

0.72
�




Internet information relevance (second-order, 5-point Likert scale)Market feasibility information: The Internet can provide information about

Potential distributors of products
0.81 �
Potential buyers of products
0.83 14.63 Potential suppliers of raw materials 0.78 13.97
Adaptation information: The Internet can provide information about

Competitors
0.86 �
Buyer’s preference
0.88 20.36 Market size 0.88 20.37 Market growth 0.88 20.41 Price trends 0.86 19.87 Background information: The Internet can provide information about
Exchange rate fluctuations
0.70 �
Legal requirements for entry
0.71 11.56 Potential barriers to entry 0.80 12.91 Social/political background 0.85 13.52 Economic background 0.79 12.70 Transport infrastructure 0.75 12.16
Internet utilization
Hours per week the firm uses the Internet
to search for foreign marketinformation

0.69
7.79
Times per week the firm receives andsends e-mail related to internationalbusiness activities

0.73
�
Foreign sales intensity (10-point scale: 1p10%, 2 ¼ 11–20%,y , 10 ¼ 91–100%)

Percentage of the firm’s foreign salescompared to total sales for the lastfinancial year

0.92
�
International orientation (second-order, 5-point Likert scale)International conviction

International business activities are anessential part contributing to our firm’scompetitive advantage

0.77
14.60




International business activities enhanceour firm’s competitiveness by acquiringmarket knowledge

0.81
15.57
International business activities increasethe prestige of our firm in theVietnamese market

0.80
15.30
International business activitiescontribute to our firm’s long-termexpansion

0.86
16.73
International business activities representan opportunity for our firm to exploitan expanded market

0.80
15.39
International business activities reduceour firm’s risks by selling to diversemarkets

0.79
�
International intention

Formal planning is a necessity forinternational business activities

0.80
13.67
International business activities are anecessity whether or not Vietnamesemarket sales come up to expectation

0.83
14.16
International business activities should beconsidered whether or notopportunities in Vietnam arecompletely exhausted

0.81
13.83
International business activities are soimportant to the national interest thatevery Vietnamese firm should commitits resources to the internationalbusiness drive

0.74
�

HOW ADVANCED ARE WEBSITES

OF SME EXPORTERS? AN

INVESTIGATION INTO DRIVERS

AND INHIBITORS

Heidi Winklhofer, Kathryn Houghton and

Thomas Chesney

ABSTRACT

Despite the much publicised advantages of a website for SME exporters,

the level of website sophistication, as well as the factors which inhibit or

stimulate exporting SMEs to develop their website beyond a basic level of

sophistication, are still unknown. The literature is prone to discuss website

establishment and development simultaneously, splitting firms into adop-

ters and non-adopters, yet websites may be established and then neglected,

or be continually developed. This paper introduces an instrument for

measuring website sophistication within an export marketing context, and

proposes and empirically tests a model that depicts factors impacting on

perceived advantages of a website and website sophistication levels. The

results identify export diversity and environmental pressure as key de-

terminants of perceived advantage of a website which in turn is a good

predictor of website sophistication. The firm internal resources, i.e. In-

formation and Communication Technology (ICT) knowledge and time, in





ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17015-5

395

HEIDI WINKLHOFER ET AL.396

conjunction with entrepreneurship orientation also determine an SME

exporter’s website sophistication level.

1. INTRODUCTION

The benefits of the Internet have been much publicised, and are deemed tobe particularly relevant for exporting SMEs (Samiee, 1998; Ritchie &Brindley, 2000; Prasad, Ramamurthy, & Naidu, 2001). For instance, it hasbeen claimed that the Internet will ‘accelerate the internationalisation ofsmall- and medium-sized enterprises’ (Quelch & Klein, 1996). Kotler (2000,p. 670) has suggested that it will create a ‘level playing field’ for SMEs inrelation to their larger competitors, as it reduces the traditional importanceof scale economies which makes global advertising more affordable andextends smaller firms’ market reach globally. Although not specifically fo-cusing on exporting, a recent survey of 25,000 UK, German and US SMEs(with websites) confirms the benefits of websites for SMEs, with 94% be-lieving that their site had contributed to a growth in their business in the 12months following its launch (1&1 Internet Limited, 2004). The report con-cluded that ‘‘websites have contributed to increases in small business’ salesrevenue, growth, effective marketing and better communication’’ (1&1 In-ternet Limited, 2004).

With a few exceptions, previous studies have taken Internet adoption as adichotomous variable, splitting firms into adopters and non-adopters (e.g.Premkumar & Roberts, 1999; DTI, 2005), or assessed firms’ intention toadopt. This ignores the Internet’s extent of use in the organisation, as web-site adoption is a process in which sophistication can be increased (Daniel,Wilson, & Myers, 2002). Alternatively, some writers have investigatedadoption as a series of stages of maturity (e.g. Thelwell, 2000; Willcocks,Sauer, & Associates, 2000) through which a business must progress toachieve whatever level of sophistication is required. Levy and Powell (2003),on the other hand, found little evidence that such a stages of growth modelis appropriate. In general, the literature is prone to discuss website estab-lishment and development simultaneously, yet websites may be established,and then neglected or continually developed.

In line with previous work focusing on website sophistication, we definewebsite sophistication as the variety of relevant website features included ona website, whereby more features equate to higher sophistication levels (seeKarakaya & Khalil, 2004). A growing body of literature highlights the range

How Advanced are Websites of SME Exporters? 397

of features available to website developers and especially firms operating ininternational markets (e.g. the use of foreign languages (Mousley &Simintiras, 2001)). While it has been stressed that the level of adoption isimportant (Palvia, Means, & Jackson, 1994; Karahanna, Straub, &Chervany, 1999), the few empirical studies undertaken in this area (e.g.Dou, Nielsen, & Tan, 2002) are mainly descriptive and there is a notablelack of knowledge on website sophistication, post-adoption. Although de-scriptive reports on website sophistication are useful, they fail to provideconceptual understanding of the factors inhibiting or driving further devel-opments. Commercial research in this area concluded that perceived cost is akey obstacle (1&1 Internet Limited, 2005). In this context, research amongUK, German and US SMEs showed that 65% spend less than £300 a yearon creating and maintaining their website (1&1 Internet Limited, 2004).While the current study includes cost as a potential barrier, the literaturepresented later on in this paper would suggest that further development of awebsite is influenced by a range of factors. Also, SMEs have so far beentreated as a homogenous entity when in practice they are not (Westhead,Howorth, & Cowling, 2002), and website relevance may vary with differenttypes of SMEs, and as a function of export activity.

Despite the much publicised advantages of a website for SME exporters,the level of website sophistication, as well as the factors which inhibit orstimulate exporting SMEs to actively use their website as an export mar-keting tool, and develop it beyond a basic level of sophistication are stillunknown. The current paper makes two contributions to work in this area.Firstly it proposes, based on existing literature, an instrument for measuringwebsite sophistication within an export marketing context. This allows for amore comprehensive measure of sophistication, made up of a combinationof different website elements, than merely classifying organisations as adop-ters or non-adopters, or as a group (e.g. ‘website maturity stage 1’). Sec-ondly, it proposes, based on a literature review and interviews with SMEexporters, a series of factors that may determine their website’s sophisti-cation. These factors are empirically tested and the results discussed.

The paper continues with an overview of the literature on website so-phistication, followed by a proposed conceptual model which incorporatesthe factors suggested to impact on website sophistication. Next, we intro-duce measurements and the data collection process. The analysis starts witha description of the popularity of the various website features among SMEexporters and then tests the conceptual model using LISREL. Thepaper concludes with a discussion of the results and some avenues for fu-ture research.


2. WEBSITE SOPHISTICATION

This study examines the factors that impact on website sophistication in anexporting context. While several instruments measuring website sophistica-tion were examined, that differentiate between various uses of the Internet(e.g. Levy & Powell, 2003; Karakaya & Khalil, 2004), to the authors’ bestknowledge, no instrument is currently available that focuses specifically onwebsite sophistication within the context of export marketing. This contextdeserves its own instrument as the needs of export customers and overseasintermediaries will require different website features than websites of a firmoperating only in the domestic market. The most obvious difference is thatthe website will probably need to be available in other languages (Dou et al.,2002), and may also have to serve the needs of local agents and distributors(Ghose & Dou, 1998). The following briefly reviews the generic instrumentsdiscussed in the literature and then introduces the website sophisticationindex for SME exporters.

Levy and Powell’s (2003) work, based on 12 case studies, differentiatesbetween various uses of the Internet within the firm. They distinguish be-tween e-mail, website with brochureware, website used to interact with cus-tomers and website used for e-commerce with customers. Similarly, in theirstudy of factors related to Internet adoption, Karakaya and Khalil’s (2004)survey examined e-mail use, website sophistication, Internet use for mar-keting support and Internet use for marketing intelligence. To measurewebsite sophistication they used 10 elements, the absence or presence ofeach made up the website sophistication score. Their list was: companyinformation, product/service information, company financial data, links toother companies, online transactions, stock/inventory status, online cata-logue, customer service area, advertisements of other company products andadvertisement of own company products/services. Although many of thesefeatures can be of use to SMEs as a general marketing tool, they lack thespecific focus of a website as an export marketing tool.

The instrument for measuring website sophistication of exporters pre-sented here is specific to marketing and to exporters. Although it is recog-nised that website sophistication can be attributed to technical adeptnesssuch as ease of navigation and quality of links (Loiacono, Watson, &Goodhue, 2002; Bauer & Scharl, 2000), as this study is concerned with themarketing potential of a website, technical elements are only included whenthey will affect the marketing capability of the site. Likewise, e-commerceactivities were excluded. While a website that allows customers tobuy products will be considered more sophisticated than one that does


not, e-commerce activities fall outside of the scope of this study as thefactors driving e-commerce are likely to be different from those impactingon website sophistication.

The 17 elements that make up the website sophistication score for thisstudy are shown in Table 1. To ensure the features selected were relevant toSME exporters, the instrument to measure sophistication came from a criticalreview of relevant literature and an analysis of features that exporting SMEscurrently have on their websites. A great deal of normative advice is availablein this area directed specifically at SMEs (e.g. Lynn, Lipp, Akgun, & Cortez,2002; Leong, Ewing, & Pitt, 2002; Thelwall, 2000; Chaffey, Mayer, Johnston,& Ellis-Chadwick, 2000), but, as mentioned earlier, empirical studies arescarce. The elements included in our sophistication index are based onKarakaya and Khalil’s (2004) sophistication measure which was describedearlier. They were adapted and expanded to specifically examine marketingpractices of exporting SMEs. Table 1 details the origin of the elements. Al-though Karakaya and Khalil (2004) included ‘company financial data’ as anelement in the sophistication index, we felt that this is inappropriate for thecontext of SMEs, as they are usually not prepared to disclose such informa-tion. We also excluded advertisement of own and other company products asthe product/service range was already covered by three other items. Finally,‘online transactions’ was excluded, as justified earlier. In turn, we added el-ements which were discussed in the literature as components of website mar-keting: Thelwall (2000) argues that websites offer SMEs the opportunity toadopt a ‘pull’ strategy which requires high visibility through search engines.Consequently, we included ‘website details are regularly submitted to searchengines’ as a further component of the sophistication index. Visibility orawareness efficiency can be measured through website hits, which if usedcorrectly, provide a wealth of information for marketing and prospecting(Sterne, 1999). Thus we included ‘visitor information is used for marketingpurposes’. Finally, the instrument captures whether the website has marketingcontent specifically designed for it and whether the website content is reg-ularly updated, as both have been suggested to improve the marketing com-munication role of a website (Bickerton et al., 1998).

To capture the export-specific nature of this study, we included ‘website iswritten in languages other than English’. We also added whether the websitedomain has been registered other than as co.uk, as this will impact on user’sperceptions of the site. Based on Ghose and Dou’s (1998) work, we ex-panded the element ‘links’ to other companies’ (Karakaya & Khalil, 2004)and included instead, ‘websites has links to export distributors/agents/retailers/wholesalers’ websites’ and ‘websites displays contact details of

Table 1. Elements Comprising the Website Sophistication Index.

Element This Study Karakaya and Khalil

(2004)

Examples of Other

Supporting References

1 Website includes recent press

releases about our

company

Company information Bickerton, Bickerton, and

Simpson-Holley (1998)

2 Website includes an online

product catalogue

Online catalogue Strauss and Frost (1999)

3 Website displays product

prices

Product/service

information

Webb (2002)

4 Visitors can download

demonstrations of the

product or product

manuals

Quelch and Klein (1996)

5 Website allows visitors to

check the availability of

our products

Stock/inventory status Quelch and Klein (1996)

6 Website has links to export

distributors/agents/

retailers/wholesalers’

website(s)

Links to other companies Ghose and Dou (1998)

7 Website displays contact

details of export

distributors/agents/

retailers/ wholesalers

8 Website provides ways for

export customers to

contact the firm directly

(for example by email or

telephone)

Customer service area Ghose and Dou (1998)

9 Website has segregated

password protected areas

for export customers

10 Website has segregated

password protected areas

for export distributors/

agents/retailers/

wholesalers

Dutta and Biren (2001)

11 Website has a feedback

form(s) for customers to

complete

Not included Company financial data

Not included Advertisements of other

company products

Not included Advertisement of own

company products/

services

Not included Online transactions



Element This Study Karakaya and Khalil

(2004)

Examples of Other

Supporting References

12 Website has marketing

content specifically

designed for it

Not included Bickerton et al. (1998)

13 The website content is

regularly updated

Not included Bickerton et al. (1998)

14 Website details are regularly

submitted to search

engines

Not included Thelwall (2000)

15 Visitor information (for

example hit rates) is used

for marketing purposes

Not included Sterne (1999)

16 Website is written in

languages other than

English

Not included Dou et al. (2002)

17 Website domain(s) other

than .com or .co.uk have

been registered (for

example, .je or .de)

Not included Dou et al. (2002)


export distributors/agents/retailers/wholesalers’. Furthermore, since pass-word-protected areas can aid communication flows between an exporter andan intermediary (Dutta & Biren, 2001), we included whether such password-protected areas are installed.

The sophistication index is intended to provide a more comprehensivemeasure of adoption than employed in previous studies on website and In-ternet use of SMEs (e.g. Bennett, 1997; Premkumar & Roberts, 1999; DTI,2005). The 17 elements should be viewed as causing website sophisticationrather than being caused by it; thus they act as causal indicators (MacCallum& Browne, 1993, p. 533). ‘Website sophistication’, the latent variable, istherefore defined as a linear function of the indicators, plus a disturbanceterm1 (MacCallum & Browne, 1993). Accordingly, and in line with previouswork on sophistication indices (Karakaya & Khalil, 2004), to obtain an overallsophistication index score, all 17 elements are equally weighted and summed.

Although one could argue that several themes (e.g. communication) arecaptured by the index, for the purpose of this study, an overall index is usedto provide some initial insights into what type of firms have invested in alarger number of website features and consequently score higher on thesophistication index. All but one of the elements in Table 1 (element 15) areobjective and the sophistication score could be calculated largely without


the firm’s cooperation, although their input will probably be needed toanswer whether their website has marketing content specifically designed forit (element 12) and how often the content is updated (element 13).

3. CONCEPTUALISATION

3.1. Adoption Models

As outlined earlier, sophistication levels of post-adoption and their anteced-ents are somewhat neglected. However, from a company perspective, eachindividual feature included on a website could be regarded as an adoptiondecision. Against this background we will briefly review the key conceptualmodels within the IT adoption literature in order to assess their suitability topredict website sophistication among exporting SMEs. Conceptually, re-search on IT adoption can draw on the Technology Acceptance Model(TAM) (Davis, 1989) and Diffusion of Innovation Theory (Rogers, 1995).

TAM, originally developed by Davis (1989) to predict user acceptance ofcomputer technology in the workplace, has the advantage of being wellgrounded in established social psychology theory. It is based on the Theory ofReasoned Action (TRA) (Ajzen & Fishbein, 1980), and is described as ‘ananalytical simplification of how functionality and interface characteristics relateto adoption decisions’ (Deng, Doll, Hendrickson, & Scazzero, 2005, p. 746). Themain determinants of technology acceptance behaviours are the belief con-structs: perceived usefulness (i.e. ‘the prospective user’s subjective probabilitythat using a specific application system will increase his or her job performancewithin an organizational context’) and perceived ease of use (i.e. ‘the degree towhich the prospective user expects the target system to be free of effort’) (Davis,1989, p. 985). Key linkages are specified between these two key belief constructsand users’ attitudes, intentions and adoption behaviour. The effects of externalvariables such as individual differences or situational constraints are also ex-pected to impact on user acceptance only as far as they are mediated by the twokey belief constructs of perceived usefulness and perceived ease of use.

Rogers’ (1962) conceptual model links the belief constructs: relative ad-vantage, compatibility, diversity, trialability and observability to adoptiondecision. Thus, an individual, or organisation, forms a judgment about aninnovation based on these perceived characteristics. Several authors haveused the Rogers model and amended, or complimented it with additionalconstructs (e.g. Moore & Benbasat, 1994; Plouffe, Vandenbosch, &Hulland, 2001; Premkumar & Roberts, 1999; Thong, 1999).


These models are based on well-researched attitude and/or believe struc-tures and have been shown to explain adoption as a dichotomous variable(yes/no), or intention to adopt (e.g. Plouffe et al., 2001). Regarding post-adoption, there is evidence that the importance of widely used beliefs andattitudes towards usage of IT, change from pre- to post-adoption(Karahanna et al., 1999). Although beliefs and attitudes about the innova-tion are good predictors of adoption or intention to adopt, generic firmcharacteristics relating to a variety of resources (e.g. size; IT knowledge, topmanagement support) have also been found to explain adoption of IT withinorganisations. A brief summary of the factors studied is provided in thefollowing section, and distinguishes between internal and external factors.

Among the internal factors influencing adoption, past research includedcompany characteristics, such as firm size (Dandridge & Levenbury, 2000;Premkumar & Roberts, 1999), company age (Dandridge & Levenbury,2000), staff workload (Corbitt, 2000; Cragg & King, 1993), financial supportrestrictions (Premkumar & Roberts, 1999), IT knowledge and exposure(Premkumar & Roberts, 1999; Thong, 1999; Hamill & Gregory, 1997;Corbitt, 2000), organisational readiness (Lee & Cheung, 2004; Mehrtens,Cragg, & Mills, 2001) and top management support (Premkumar & Robe-rts, 1999; Sultan & Chan, 2000; Cragg & King, 1993).

In terms of external factors the key predictor variables studied were ex-ternal Information and Communication Technology (ICT) support (Prem-kumar & Roberts, 1999; Igbaria & Zinatelli, 1997), competition-relatedfactors in ICT supply (Gatignon & Robertson, 1989; Frambach, Barkema,Nooteboom, & Wedel, 1998), government influence (Corbitt, 2000), externalpressure (Premkumar & Roberts, 1999; Gatignon & Robertson, 1989; Lee &Cheung, 2004; Mehrtens et al., 2001) and technology readiness of otherparties (Holmes & Srivastava, 1999).

Despite the rich empirical literature on Internet and website adoption,there are several weaknesses: firstly, it is not specifically applicable to ex-porters, and secondly it deals overwhelmingly with adoption. Althoughadoption of a website is a prerequisite for our study, the focus is on furtherdevelopment of it (i.e. website sophistication level). In summary, the liter-ature review resulted in an unparsimonious set of factors.

3.2. Interview Phase

To gain further insight into the factors stimulating or hindering websitesophistication, we conducted qualitative longitudinal interviews withmultiple respondents from 25 SME exporters. A longitudinal approach


was regarded necessary as website development is a dynamic process and across-sectional approach would be strongly influenced by informants’ mem-ory of events rather than capturing events as they occur. Therefore, for thepurpose of theory development we conducted between two and three semi-structured interviews over a period of 12 months, resulting in a total of51 interviews. The interviewees were owner/managers and senior managers,or whoever the companies regarded as most knowledgeable concerning thefirm’s website development. It should be mentioned that this study was partof a larger project that also examined e-commerce adoption within SMEexporters. As part of the semi-structured nature of the interviews, an in-terview guide was developed which covered a series of questions pertainingto a company’s website development. The key focus was on establishing howit has changed over time and for what reason; identifying who was involvedin development of the website and what role it plays in export marketingactivities. The interviews lasted from 35 minutes to 2 hours and were tape-recorded and transcribed.

Within-case followed by cross-case analysis was performed. Within-caseanalysis began through coding of the transcripts using a combination ofcodes developed prior to the analysis, using the literature and codes drawnfrom the interviews (Miles & Huberman, 1994). To facilitate the analysis weused data displays, which compress information and aid the analyst indrawing warranted conclusions (Miles & Huberman, 1994). This was fol-lowed by cross-case analysis which enables deeper understanding and ex-planation than that derived from studying isolated cases (Miles &Huberman, 1994). The objective was to identify drivers and obstacles ofwebsite development. For this purpose, we used the standardised displaysderived from the within-case analysis in conjunction with the original tran-scripts. The following conceptualisation draws together the previously re-viewed literature and findings from the interviews.

We propose a two-stage model, with a firm’s export profile and its externalenvironment impacting on their perception of a website’s relative advantage.This in turn, in conjunction with resource constraints, and general entrepre-neurship orientation, is linked to website sophistication. The model is shownin Fig. 1 and is detailed and justified in the following sections.

3.3. Factors Impacting on a Website’s Perceived Relative Advantage

The interviews highlighted the importance of export characteristics. Exportenthusiasm, i.e. the management’s view that exporting is a worthwhile en-deavour and the desire to enter new export markets (Diamantopoulos,

Perceived relative advantageof website

Resources-drivers:ICT knowledge (H6)Personal contact network (H7)Perceived awareness anduse of supplier services (H8)

Websitesophistication

Time since website established

General firm characteristics:Entrepreneurship orientation (H5)

Resources – obstacles:Staff workload (H9)Perceived cost of websitedevelopment (H10)

Export characteristics:Export enthusiasm (H1) Export dependence (H2)Export diversity (H3)

External:Environmental pressure (H4)

(+)

(+) (H11)(+)

(+)

(+)

(+)

(-)



Schlegelmilch, & Allpress, 1990), emerged as a potential driving factor. In-terview data indicated that new export expansion programmes served as animpetus for further website development to better suit export markets. Forexample, a firm that has seen its export sales decline from 40% to 5% overthe last two years has launched an export expansion programme which alsoincluded revamping the website.

I think the entire site is more internationally flavoured now, rather than just a couple of

pages on the sitey a telecommunications case study for Abu [Dhabi] and one for

Dubai. Brewing can be offensive in the Middle East obviously, so we now have a water

case study instead.

Not surprisingly, a common theme emerging from the interviews was howthe website facilitated and simplified communication for firms operatingwith export customers and intermediaries dispersed around the globe (seealso Samiee, 1998; Ritchie & Brindley, 2000; Prasad et al., 2001). In line withthis argument, we found some indication that exporters more dependent onexport sales, appear to be more enthusiastic about the benefits offered bytheir website. Illustrative of this attitude is the following quote from a


Managing Director whose company is highly enthusiastic and dependent onexport sales:

At this stage all of our resources, all of our profit has gone into the development of the

product itself the Internet site we have is very basic. We’ve already made the decision

that we need a professional Website developer. That’s going to be one of the next things

on the marketing strategyy

This led to the first three hypotheses.

H1. Export enthusiasm is positively related to a website’s perceivedrelative advantage.

H2. Export dependence is positively related to a website’s perceivedrelative advantage.

H3. Export diversity is positively related to a website’s perceived relativeadvantage.

With regards to company external factors, environmental pressure, result-ing from competitors’ actions and customers’ demands, as well as a sense offatalism, especially among consumer-goods firms, acted as a strong incentiveto further develop the website, which is in line with the work by Mehrtens etal. (2001). Several participating firms emphasised the increasing expectationsof their customers. For example, one interviewee after discussing severalfeatures on their website, mentioned:

some companies already have that. So we are playing catch up with some of our com-

petitorsy . People we work with expect us to have a certain level of presence.

A marketing manager highlighted:

I think [a website] is actually fundamental. I think we’ve taken a very sort of active

approach to the Internet. We started off quite early ony . Which was really just doing a

bit of advertising on the Internet about the company. And I would say that was pri-

marily driven from the export markets. Not so much from the UK. Because what had

happened over the years, [company], X is a medium sized business but when you actually

go out selling international projects, companies that you are selling to, their perception

of you is quite different, particularly if they’ve never actually been to your home base.

And our competitors in the marketplace are big companies like [names of competitors]

and we were seen in the Middle East and certain parts of the Far East as being exactly

the same size as they were. And we were getting comments from our export guys ‘well

these companies have got websites so you know we need a website because people need

to have the same sort of feel’. So to a certain extent although we were keen on driving it

there was quite a push from the export market place. Probably more so than from the

UK and I think that was quite important. The website is a very good communication

tool, it’s very efficient. It’s very effective. It actually means that you can get immediate

responses.


This illustrates that customers expect to communicate with their suppliersvia their website, and consequently such firms are likely to perceive theirwebsite as more advantageous. We therefore propose the following:

H4. Environmental pressure is positively related to a website’s perceivedrelative advantage.

3.4. Factors Impacting on Website Sophistication

3.4.1. Entrepreneurship Orientation

Regarding general company characteristics, previous work (Poon & Swatman,1997) suggested entrepreneurship orientation as the factor distinguishingbetween more reactive and proactive adoption of the full potential of In-ternet technology. Indications of this were also found in the interviews.Firms with a high entrepreneurship orientation are innovative, willing totake risks, are proactive and are aggressive in competition (Lumpkin &Dess, 1996). Entrepreneurship orientation encompasses innovativeness,which in this context refers to the degree to which an individual or group isearly in adopting new ideas relative to the other members of a system(Rogers, 1995). It also captures the need to take risks in resource allocationwhen developing a website, where return on investment is uncertain. Asexpected, entrepreneurship was exhibited within most participants’ websiteactivity. In line with this, we suggest a positive link between level of en-trepreneurship orientation and website sophistication.

H5. The level of website sophistication of SME exporters is positivelyrelated to the firm’s level of entrepreneurship orientation.

3.4.2. Company Resources

Company resources appear to be a key determinant of website sophistica-tion levels and their presence or absence can act as stimulant of obstaclerespectively. Stimulating company resources seem to be (1) ICT knowledge,(2) personal contact network and (3) perceived awareness and use of supplier

service. In-house ICT knowledge was seen as pivotal in further developingthe website by the firms sampled, which confirms findings in related adop-tion studies (e.g. Hamill & Gregory, 1997; Premkumar & Roberts, 1999;Thong, 1999; Hamill & Gregory, 1997; Corbitt, 2000). This was partly dueto lack of resources to pay external parties and partly because owner man-agers have been shown to resist external assistance because of a reluctance tocompromise their independence (e.g. Curran & Blackburn, 2001; Bennett &Robson, 1999). Firms sampled also suggested that a lack of resources, such


as ICT knowledge, can be compensated for or supplemented by personalcontact networks, which include people who help the SME remain com-mitted to the use and development of the innovation (McGowan & Durkin,2002; Carson, Cromie, McGowan, & Hill, 1995). Illustrative of this is thefollowing quote of a marketing manager of a highly experienced exportingfirm with 100 employees:

My assistant will be taking over the website developmenty and a lot of his friends have

designed their own websites. All their ideas are kind of pooled. So I think he has

consulted but not on a professional level.

We therefore propose that the extent of the personal contact network islikely to positively impact on website sophistication. We also found supportfor indications that website development could be linked to the level ofawareness of the services offered by technology vendors and website devel-opers (i.e. level of perceived supplier service, see also Igbaria and Zinatelli,1997). Several of the interviewees appeared to have only a vague under-standing of what is available in terms of technical support and incentives forSMEs in terms of website development which appeared to be negativelyreflected in their website.

Although the SMEs interviewed had plans to add further features to theirsite or change its current format, work commitments meant that they had toprioritise, and other activities were seen as more important than websitedevelopment. Thus, staff workload was seen as a major impediment in de-veloping the website (see also Corbitt, 2000; Cragg & King, 1993). Finally, ifin-house expertise is not available, the perceived cost of additional featuresappeared to act as an impediment to further developments (see also 1&1Internet Limited, 2005; Premkumar & Roberts, 1999), given that SMEs, bytheir nature, are resource constrained (Westhead et al., 2002). We thereforepropose:

H6. The level of website sophistication of SME exporters is positivelyrelated to the firm’s level of ICT knowledge.

H7. The level of website sophistication of SME exporters is positivelyrelated to the firm’s personal contact network.

H8. The level of website sophistication of SME exporters is positivelyrelated to the level of perceived supplier service.

H9. The level of website sophistication of SME exporters is negativelyrelated to the firm’s staff workload.


H10. The level of website sophistication of SME exporters is negativelyrelated to the perceived cost of website development.

In line with the findings on IT and Internet adoption (Premkumar &Roberts, 1999; Thong, 1999; Rogers, 1995), SME exporters appeared to behighly selective in their website construction. There was a need to see atangible relative advantage (compared to traditional communication chan-nels) in spending more effort on their website. Thus, perceived relative ad-vantage is likely to impact on website sophistication. In other words, SMEsare more likely to use their website for a certain function if it gives them anadvantage, relative to some other means of achieving the same function. Forexample, some participants considered an up-to-date website with an onlineproduct catalogue to be superior to distributing paper catalogues. Anotherparticipant developed a password-protected area from which authorisedparties can download high-quality product images, the relative advantageover printing and posting the images being savings in time and money. Wetherefore propose:

H11. The level of website sophistication of SME exporters is positivelyrelated to its perceived relative advantage.

Given the longitudinal nature of the interviews, we observed that many ofthe case study firms had developed their websites further over time. Wetherefore included time since website established as a control variable. Fig. 1depicts the linkages proposed.

To summarise, the extensive interview process partly confirmed the po-tential relevance of factors identified in more general IT or Internet-relatedadoption research. On the other hand, it also demonstrated that TAM andInnovation Diffusion Theory are not well suited to capture website sophis-tication. Apart from perceived relative advantage (Rogers, 1962, 1995), theother belief constructs or attitudes appear to be less critical in the decision tofurther develop the website, i.e. add extra features to a website (see alsoPremkumar & Roberts, 1999). It seems that once the decision of adopting awebsite has been made, the key focus is on the perceived advantages of thewebsite (which is related to ‘‘perceived usefulness’’ in TAM). Several generalfirm characteristics previously shown to impact on ICT adoption, such asfirm size, had little impact when focusing on SME exporters. Moreover,government initiatives did not appear to be of any relevance. The interviewsfurther highlighted additional factors such as: export enthusiasm andpersonal contact networks. The qualitative work also suggested replac-ing top management support (e.g. Premkumar & Roberts, 1999) with


entrepreneurship orientation. The following section will outline the meth-odology employed.

4. METHODOLOGY

4.1. Measures Employed

The measurements of the constructs discussed above were mainly based onadaptations of previously developed scales (see Appendix A). ICT knowl-edge comprises a five-item scale by Grewal, Comer, and Mehta (2001), whileEntrepreneurship orientation is based on a nine-item refined measure re-ported in Covin (1991), Premkumar and Roberts’ (1999) measurements wereadapted for the constructs environmental pressure (three items), and theinnovation characteristic perceived relative advantage (four items). To cap-ture a firm’s perception of supplier service (three items), as well as to meas-ure perceived cost of website development (two items), adaptations of thescales reported in Premkumar and Roberts (1999) were used. Export en-thusiasm is an adaptation of the scale by Diamantopoulos et al. (1990) (sixitems). In line with previous work, we used the number of export regions asan indicator of export diversity (e.g. Schlegelmilch, Diamantopoulos, & Tse,1993), and percentage of sales derived through exports as a measure ofexport dependence (e.g. Souchon et al., 2003).

Measurements for the personal contact network and staff workload con-structs were developed based on the qualitative interviews preceding the sur-vey. The degree to which people rely on friends, family and for websitedevelopment is represented by three items reflecting the new construct per-sonal contact network. The construct staff workload was captured by twoitems relating to the difficulty of finding time to work on website development.

The dependent variable, website sophistication was captured using themeasure discussed in Section 2 (see Table 1). The respondents were pre-sented with the items listed in Table 1 and asked to tick all those that appliedto them. As was stated earlier, all features were equally weighted andsummed to give their website sophistication score.

4.2. Data Collection

The measures were incorporated into a mail questionnaire, which was ex-tensively pre-tested. For the main survey, a random sample of 1,000 UKSME exporters in the manufacturing field was targeted, derived from a Dun


and Bradstreet database. We conducted telephone interviews with 100 non-respondents, which revealed that the main reasons for non-response wereineligibility (e.g. the firm did no longer export) or time pressure. After ad-justing for ineligibles, the 130 usable responses represented an effective re-sponse rate of 16.5%. We conducted further non-response analysis bycomparing early and late responses (see Armstrong & Overton, 1977) on thekey variables. T-tests for independent samples revealed no significant differ-ences (5% significance level) between the two groups. Consequently, non-response error was unlikely to be a problem in this study.

The size of the firms ranged from 2 to 250 employees, who had beenexporting for an average of 29.5 years. The majority exported to theEuropean Union, followed by North America and Asia. The firms derivedan average of 39.7% of their sales from exporting and represented a range ofexporting diversity.

5. ANALYSIS AND FINDINGS

5.1. Scale Development and Validation

In order to purify the scales measuring the constructs, we used a combi-nation of (1) item inter-correlations, (2) item-total correlations, (3) explor-atory factor analysis and (4) confirmatory factor analysis (CFA). Based onthis, poorly performing items were identified and eliminated (see AppendixA for a listing of the purified scales).

To comply with minimum sample size to parameter ratios (e.g. Bentler &Chou, 1987), we were unable to test the full measurement model with CFAsimultaneously. We have therefore broken it down into three sets of CFAs.Set 1 includes export and general firm-specific constructs, i.e. export enthu-siasm and entrepreneurship orientation. Set 2 contains resource-specific con-structs, i.e. ICT knowledge, personal contact network, perceived awarenessand use of supplier service, while Set 3 comprises of perceived relative ad-vantage and environmental pressure. Table 2 details the fit indices obtained.

The items display adequate convergent validity as each indicator’s esti-mated pattern coefficient is significantly related to its underlying construct(Anderson & Gerbing, 1988). Discriminant validity of the constructs wasassessed by constraining the correlation between each pair of constructs(across all three sets) equal to 1 and comparing the w2 values of the originalwith the constraint model (see Anderson & Gerbing, 1988). The w2 differ-ences obtained exceeded the value of 3.84 (5% critical value for the w2

Table 2. Fit Indices for Measurement Models.

Model w2 (d.f.) RMSEA GFI NNFI CFI

Set 1 63.99 (34) p ¼ 0.001 0.082 0.910 0.941 0.958

Set 2 40.26 (32) p ¼ 0.149 0.045 0.941 0.980 0.985

Set 3 15.47 (13) p ¼ 0.279 0.038 0.967 0.994 0.996

Notes: Set 1 contains export enthusiasm, entrepreneurship orientation. Set 2 contains ICT

knowledge, personal contact network, perceived awareness and use of supplier service. Set 3

contains perceived relative advantage, environmental pressure.


distribution with 1 d.f.) for each pair, consequently the construct measure-ments demonstrate discriminant validity. Composite reliabilities are abovetheir thresholds of 0.6, (Bagozzi & Yi, 1988) for all but one of the multi-itemconstructs (see Appendix A). The perceived cost of website development(two items), and staff workload (two items) constructs performed poorly inthe CFA and we had to reduce them to single-item measurements.

5.2. Pattern of Website Sophistication

Initially, we set out to identify a pattern of website sophistication among theSME exporters. Inspection of the frequency of each feature (Table 3)showed that almost all (98.5%) included e-mail addresses/telephone num-bers, so that export customers could contact firms directly. The vast ma-jority of websites also included marketing content that was specificallydesigned for the website. Regular up-dating and on-line product catalogueswere available in two-thirds of the respondents’ websites. Not surprisingly,more resource intensive components such as websites written in languagesother than English, and the possibility of checking product availability, wereless common. The least prevalent features were segregated password-protected areas and the display of prices. On a more aggregated level, theresults demonstrate that the inclusion of specific export marketing featuresis underdeveloped, while website marketing unique features are considerablymore common. On average, the respondents reported that their websitesinclude 7 out of 17 features, albeit in varying combinations.

5.3. Model Estimation

Owing to a combination of limited sample size and complexity of themodel, we calculated single indicants for each multi-item scale by aver-aging across the items (Bagozzi & Heatherton, 1994; Cadogan, Sundqvist,

Table 3. Elements Comprising the Website Sophistication Index –Descriptive Analysis.

Element Website Sophistication Index Frequency %

1 Website includes recent press releases about our

company

61 46.9

2 Website includes an online product catalogue 84 64.6

3 Website displays product prices 22 16.9

4 Visitors can download demonstrations of the

product or product manuals

54 41.5

5 Website allows visitors to check the availability of

our products

22 16.9

6 Website has links to export distributors/agents/

retailers/wholesalers’ website(s)

40 30.8

7 Website displays contact details of export

distributors/agents/retailers/ wholesalers

53 40.8

8 Website provides ways for export customers to

contact the firm directly (for example by email or

telephone)

128 98.5

9 Website has segregated password protected areas

for export customers

6 4.6

10 Website has segregated password protected areas

for export distributors/ agents/retailers/

wholesalers

16 12.3

11 Website has a feedback form(s) for customers to

complete

47 36.2

12 Website has marketing content specifically designed

for it

105 80.8

13 The website content is regularly updated 84 64.6

14 Website details are regularly submitted to search

engines

71 54.6

15 Visitor information (for example hit rates) is used

for marketing purposes

55 42.3

16 Website is written in languages other than English 22 16.9

17 Website domain(s) other than .com or .co.uk have

been registered (for example, .je or .de)

31 23.8

Notes: Respondents were presented with a list of these elements and asked to tick all those that

applied to their website. All elements were equally weighted and summed to give a website’s

overall sophistication score.


Salminen, & Puumalainen, 2005). Appendix B shows the final measurementresults and the correlation matrix. We employed LISREL 8.54 to simulta-neously test all hypotheses. The modelling is based on a covariance matrixand maximum likelihood estimation procedure (J +oreskog & S +orbom, 1993).


The model fit indices obtained indicate a good fit (w2 ¼ 13.46, d.f. ¼ 11,p ¼ 0.263; RMSEA ¼ 0.044; GFI ¼ 0.984; NNFI ¼ 0.951; CFI ¼ 0.993).

The estimates (Table 4) confirm that perceived environmental pressure,exercised by customers and competitors, is positively linked to perceivedrelative advantage of a website (H4, g ¼ 0.567, po0.05). In terms of exportcharacteristics, only diversity of export markets leads firms to more stronglyappreciate the advantages of a website (H3, g ¼ 0.230, po0.05), while moreexport dependent, as well as export enthusiastic firms do not appear toperceive their websites as more advantageous than their less export enthu-siastic or dependent counterparts, thus refuting propositions H2 and H1,respectively.

The findings reveal that the key factor positively impacting on websitesophistication is perceived relative advantage (H11, b ¼ 0.266, po0.05). Thisis followed by the positive impact of ICT knowledge (H6, g ¼ 0.211,po0.05). Somewhat smaller is the negative effect of high levels of staffworkload (H9) on website sophistication (g ¼ �0.168, po0.05). Website so-phistication is also positively related to a firm’s entrepreneurship orientation(H5, g ¼ 0.167, po0.05) as well as the age of the website (g ¼ 0.154, po0.01).In summary, with regards to website sophistication, our findings supportpropositions H6 (ICT knowledge), H9 (staff workload), H5 (entrepreneurship

Table 4. Standardised Parameter Estimates.

Proposition: Path Estimate t-value Significance

H1: Export enthusiasm - perceived relative advantage 0.054 0.645 ns

H2: Export dependence - perceived relative advantage �0.132 �1.363 ns

H3: Export diversity - perceived relative advantage 0.230 2.438 0.05

H4: Environmental pressure - perceived relative

advantage

0.567 7.343 0.05

H5: Entrepreneurship orientation - website

sophistication

0.167 1.922 0.05

H6: ICT knowledge - website sophistication 0.211 2.340 0.05

H7: Personal contact network - website sophistication �0.067 �0.861 ns

H8: Perceived awareness and use of supplier service -website sophistication

0.000 0.013 ns

H9: Staff workload - website sophistication �0.168 �2.150 0.05

H10: Perceived cost of website development - website

sophistication

�0.042 �0.541 ns

H11: Perceived relative advantage - website

sophistication

0.266 3.486 0.05

Time since website established (control variable) 0.154 1.888 0.10


orientation), and H11 (perceived relative advantage), and, our control var-iable, age of a website, also shows a significant impact.

As can be seen from Table 4, of the 11 propositions tested six weresupported, explaining 38.6% of the variation in perceived relative advantageof a website and 31.6% in website sophistication. Our results reveal ‘en-vironmental pressure’ (H4) as the strongest factor impacting on perceivedrelative advantage of a website. Environmental pressure, an external factor,comprises of competitive pressure and increased customer expectations.Thus, it appears that firms are predominantly reactive in their appreciationof the benefits of a website. Our findings also show that export diversity (H3)has a positive impact on perceived advantages of a website.

The strongest resource driver for website sophistication is ICT knowledge(H6). ICT knowledge has already been shown to impact on initial adoption(Hamill & Gregory, 1997; Thong, 1999) but appears to be equally crucial infurther development. As anticipated, staff workload was negatively relatedto website sophistication (H9), confirming findings from earlier qualitativeresearch (e.g. Corbitt, 2000) which focused on adoption. As expected, en-trepreneurship orientation demonstrates a positive effect on website sophis-tication (H5). Hence, the more innovative, risk taking, autonomous andproactive the company is in their business activities, the higher the level ofwebsite sophistication. Against expectations, personal contact networks(H7), perceived supplier service (H8) and perceived cost associated withwebsite development (H10) were not significant influences on websitesophistication.

6. DISCUSSION AND CONCLUSION

This study has examined website sophistication among SME exporters withthe aim of finding key influencing factors. We have introduced an index ofwebsite sophistication and shown that the level of website sophisticationvaries greatly among SME exporting firms. Hence, there is a need for futurestudies to employ measures of website adoption which capture the levelof sophistication rather than just treat it as a dichotomous variable. This isof particular relevance when considering the effect to which the Internetreplaces or supplements existing marketing channels. Moreover, it alsoappears that website sophistication is only partly an evolutionary processwhich develops over time. SMEs develop different levels of sophisticationdepending on how beneficial they perceive their website. Characteristics ofindividuals, particularly owner managers, have an influence on the SME


decision-making process. Where there is a greater degree of entrepreneur-ialism, SMEs were more likely to risk allocating assets to website develop-ment. The measure of entrepreneurialism employed may also capture anincreased tendency towards innovation per se.

Implicit in sophistication levels is the extent to which websites supplementtraditional marketing activities. It is encouraging that website marketingfeatures (e.g. marketing content specifically designed for the website) arewidely used. Disappointingly, websites are still fairly underdeveloped interms of export marketing features. This includes websites being written inlanguages other than English, registration with international website do-mains, links to websites of export intermediaries and segregated password-protected areas for export intermediaries. Only 30.8% of the sample linkedtheir website to those of their export intermediaries, suggesting that manySME exporters continue to operate in traditional ways with intermediaries.Particularly, firms highly dependent on exports or those enthusiastic aboutexporting, are not necessarily more positive about the perceived advantagesof a website. Instead, export diversity appears to be the only export-relatedfactor that impacts on a firm’s perception of a website’s advantages overtraditional communication channels. Thus, one could conclude that thepotential of a website as an export marketing tool is so far only appreciatedby firms with a more widely spread customer base. As found in this study,perceived relative advantage of a website is the key driver for website so-phistication, thus it is therefore not surprising that export-specific featureswere among the least prevalent features. In other words, the potentialoffered by websites to SME exporters has not yet been fully exploited and itdoes not appear that websites are considering replacing traditional exportmarketing channels.

The findings also illustrate the importance of considering both internaland external factors in website sophistication. Different factors provide op-posing inhibiting and stimulating factors, which the SME must balance andrespond to accordingly. Indeed, meeting external demands against resourceconstraints is an eternal struggle for many SMEs. However, our findingsshow that one needs to differentiate between the types of resources required.Although in-house resources (i.e. staff workload and ICT knowledge) im-pact on website sophistication, financial resources (i.e. the perceived cost offurther website development) have not been found to hamper further de-velopment. This is in contrast to the findings by commercial research whichidentified perceived cost a key obstacle (1&1 Internet Limited, 2005).

The fact that perceived cost of further developing the website is not seenas an obstacle is intriguing, as lack of ICT knowledge and time can be


overcome by outsourcing further website development. In addition, theirawareness of potential firms who could undertake such a task (i.e. per-ceived supplier services) is not an obstacle. However, comments receivedfrom the qualitative study highlighted that time to develop websites wasvery limited. Even respondents who worked with external website devel-opers found it difficult to give time to their information requests, or toconsider its development. For many, the priority was to deal with currentorders and fulfill customers’ needs. An alternative explanation is thatSMEs tend to prefer developing their websites in-house. This is in line withclaims that owner managers are reluctant to compromise their independ-ence and therefore resist external assistance (Curran & Blackburn, 2001;Bennett & Robson, 1999). Unlike in the interview phase, personal contactsdo not appear to be influential in further developing a website. Workundertaken by personal contacts would overcome resource constraints andunwanted involvement of ICT suppliers. It is therefore doubtful that per-sonal contacts are capable of developing a website beyond a basic level ofsophistication.

The implications of this research are that policy makers should be awarethat export active SMEs vary greatly in their appreciation of a website as amarketing tool which is reflected in their websites’ sophistication levels.This is partly due to the variety of markets the SMEs are operating in aswell as the pressure exerted by their competitors and the expectations oftheir customers. In terms of implications for SMEs, firms should look atways of easing the time constraints to developing this media. Indeed, anumber of SME owners interviewed developed their firms’ websites intheir ‘spare’ time. Time constrained SMEs should be aware of taking ashort-sighted view because they are busy satisfying the demands of a fullorder book.

Research in this area is still in the early stages, however the present studyhighlighted that traditional adoption models (i.e. TAM and InnovationDiffusion Theory) are only partly suited for predicting post-adoption so-phistication levels. Thus, there are many fruitful avenues for future work,including the impact or influence of marketing channels or relationshipswith intermediaries. A particularly fruitful avenue for further researchwould be a study that links exporters’ website sophistication to export per-formance. Clearly website sophistication is a moving target and even thosewho score highly against the criteria used here now, may find that as tech-nology develops, they slip behind their competitors. Future research maywish to examine how the sophistication level changes across time and astechnology advances.


NOTES

1. It should be noted that the instrument for measuring website sophisticationdoes constitute a formative measure (Bollen & Lennox, 1991) and as such conven-tional tests for reliability and validity are not suitable (Diamantopoulos &Winklhofer, 2001).

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APPENDIX A. MEASUREMENTS


1. Export Characteristics

Export enthusiasm (H1): based on Diamantopoulos et al. (1990)
1. Our company needs to enter new export markets.�
2.
Our company needs to grow existing export markets. 3. Exporting is a vital part of our business. 4. We commit a lot of resources to growing existing export markets.�
5.
We commit a lot of resources to finding new export markets.�
6.
Exporting is likely to expand in our business. Composite reliability ¼ 0.817
Export diversity (H3): Number of key export regions (e.g. Schlegelmilchet al., 1993)

Export dependence (H2): Percentage of sales derived through exports (e.g.Souchon et al., 2003)

2. General Firm Characteristics

Entrepreneurship orientation (H5): based on Covin (1991)In general, the top managers in my firm favoury

1.
A strong emphasis on the marketing of tried and tested productsor services/a strong emphasis on R&D, technological leadershipand innovations.
How many new lines of products or services has your firm marketed in thepast 5 years (or since its establishment)?
2. No new lines of products or services/very many new lines of
products or services.�

3.
Changes in product or service lines have been mostly of a minornature/changes in product or service lines have usually beenquite dramatic.
In dealing with its competitors, my firmy

4.
Typically responds to actions which competitors initiate/typicallyinitiates actions which competitors then respond to.�
5.
Is very seldom the first business to introduce new products/services, administrative techniques, operating technologies,etc./is very often the first business to introduce new products/services, administrative techniques, operating technologies, etc.

APPENDIX A (Continued)


6.
Typically seeks to avoid competitive clashes, preferring a‘‘live-and-let-live’’ strategy/typically adopts a very competitive‘‘undo-the-competitors’’ strategy.
In general, the top managers of my firm havey
7. A strong tendency for low-risk projects (with normal and certain
rates of return)/a strong tendency for high-risk projects (withchances of very high returns).

In general, the top managers of my firm believe thaty
8. Owing to the nature of the environment, it is best to explore it
gradually via timid, incremental behaviour/owing to the natureof the environment, bold, wide-ranging acts are necessary toachieve the firm’s objectives.

When confronted with decision-making situations involving uncertainty, myfirm
9. Typically adopts a cautious, ‘‘wait-and-see’’ strategy in order to
minimise the probability of making costly decisions/typicallyadopts a bold, aggressive strategy in order to minimise theprobability of exploiting potential opportunities.

Composite reliability ¼ 0.868

General firm characteristics: Resources

ICT knowledge (H6): based on Grewal et al. (2001)Our company:

1.
has strong information technology planning capabilities. 2. has very capable technical support staff. 3. has an adequate in-house knowledge about information
technology.
4. gives high importance to the strategic use of technology.�
5.
is experienced with information technology. Composite reliability ¼ 0.914
Personal contact network (H7): Newly developed scale
1. Advice from friends and family is extremely useful for developing
our website(s).
2. We often sought advice and help from family on website
development.



3.
We often sought advice and help from friends on websitedevelopment.

Perceived supplier service (H8): based on Premkumar and Roberts (1999)
1. We have always developed the website(s) in-house, without any
external assistance. (Recoded)
2. There are businesses, that (could have) provided effective technical
support of websites(s).
3. External website developers are essential to providing us with a
professional website.
Staff workload (H9): Newly developed scale
1. Although we have ideas to improve the website(s) we do not have
sufficient time to undertake these.
2. There are many other important business tasks that distract us
from developing the website(s).�

Perceived cost of website development (H10): based on Premkumar andRoberts (1999)
1. The costs of employing external consultants to develop our
website(s)are far greater than the benefits obtained.�

2.
Further development of our website(s) would take significantresources.
Relative advantage (H11): based on Premkumar and Roberts (1999)Our company website(s):

1.
allows us to better communicate with our international customers. 2. allows us to cut costs in our international marketing
communications.
3. is more effective than our traditional marketing communication
methods.
4. allows us to better communicate with potential international
customers.



Environmental pressure (H4): based on Premkumar and Roberts (1999)
1. Export customers expect us to continue to develop our website(s). 2. We feel it is a strategic necessity to continue to develop our
website(s) to compete in the export market place.
3. We believe we will lose our export customers to our competitors if
we do not continue to develop our website(s).
�Item removed during measure purification.

APPENDIX B. CORRELATION MATRIX

Measure Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13

1. Export enthusiasma 5.78 1.38 1.00

2. Export dependenceb 39.67 28.54 0.437 1.000

3. Export diversityc 5.72 2.72 0.425 0.623 1.000

4. Entrepreneurship orientationa 4.40 1.06 0.097 0.096 0.147 1.000

5. ICT knowledgea 4.70 1.47 �0.023 �0.027 0.115 0.416 1.000

6. Personal contact networka 2.55 1.64 �0.057 0.042 0.009 0.100 �0.085 1.000

7. Perceived awareness and use of supplier servicea 4.94 1.39 0.082 0.052 �0.113 �0.051 �0.345 0.006 1.000

8. Staff workloada 4.54 1.78 0.049 �0.098 0.012 �0.176 �0.272 0.119 0.059 1.000

9. Perceived cost of website developmenta 4.34 1.60 �0.006 0.049 0.011 �0.108 �0.116 0.240 0.019 0.150 1.000

10. Perceived relative advantage a 4.54 1.45 0.251 0.217 0.293 0.169 0.131 0.006 �0.081 �0.149 0.040 1.000

11. Environmental pressurea 4.79 1.48 0.278 0.321 0.215 0.185 0.181 0.030 �0.079 �0.081 0.157 0.588 1.000

12. Time since website established d 4.20 1.63 0.170 0.340 0.300 0.360 0.273 0.010 �0.112 �0.174 �0.011 0.267 0.340 1.000

13. Website sophisticatione 6.93 3.18 0.144 0.125 0.239 0.379 0.409 �0.094 �0.129 �0.332 �0.115 0.382 0.408 0.368 1.000

a7-point Likert scale (1 ¼ strongly disagree; 7 ¼ strongly agree).bPercentage.cNumber of export regions (1–9).d7-point scale (1 ¼ less than 1 year; 7 ¼ more than 10 years).eIndex (1 ¼ 1 feature; 17 ¼ 17 features).

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