Catherine N. Axinn Marketing Department, College of Business, Ohio University, Athens, OH, USA School of Marketing, University of Technology Sydney, Australia College of Business and Economics, Australian National University, Canberra, Australia Nottingham University Business School, The University of Nottingham, Nottingham, UK Marketing Department, College of Business, Ohio University, Athens, OH, USA Manchester Business School, The University of Manchester, Manchester, UK Groupe Sup de Co Montpellier, Montpellier, France Department of Marketing, University of Dortmund, Dortmund, Germany Nottingham University Business School, The University of Nottingham, Nottingham, UK Department of Business Administration, C ukurova University, Adana, Turkey ix

Nigel J. Barrett Stephen Chen

Thomas Chesney

Dawn R. DeeterSchmelz Pervez Ghauri

Ca Gura ˜lin ˜u Hartmut H. Holzmu ¨ller Kathryn Houghton

Bahattin Karademir



Jorma Larimo Kannika Leelapanyalert

Department of Marketing, University of Vaasa, Vaasa, Finland Department of Business and Service Sector Management, London Metropolitan University, London, UK Department of Marketing, University of Dortmund, Dortmund, Germany Department of Marketing & Management, University of Southern Denmark, Odense M, Denmark College of Business, Florida Atlantic University, FL, USA University of Economics, Ho Chi Minh City, Vietnam; and School of Marketing, University of Technology, Sydney, Australia Vietnam National University, Ho Chi Minh City, Vietnam Department of Business Economics and Management, University of Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain School of Business Administration, Wayne State University, Detroit, MI, USA Department of Business Research, University of Pavia, Pavia, Italy Department of Management, University of Valencia, Valencia, Spain

Patrick Lentz Tage Koed Madsen

Michael R. Mullen Tho D. Nguyen

Trang T. M. Nguyen Aristides Olivares-Mesa

Richard N. Osborn

Giada Palamara ´ Jose Pla Barber

List of Contributors


Ashok Ranchhod

Southampton Business School, Southampton Solent University, Southampton, UK Department of Marketing & Management, University of Southern Denmark, Odense M, Denmark Department of Business Economics, College of Economics and Business Sciences, Autonomous University of Barcelona, Barcelona, Spain Department of Business Economics, College of Economics and Business Sciences, Autonomous University of Barcelona, Barcelona, Spain Department of Management, University of Valencia, Valencia, Spain University of Applied Sciences (FHM), Department of Marketing, Bielefeld, Germany Department of Marketing & Management, University of Southern Denmark, Odense M, Denmark College of Business, Florida Atlantic University, FL, USA Brand New Era, Canfield, OH, USA Department of Business Economics and Management, University of Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain

Erik S. Rasmussen

Alex Rialp Criado

Josep Rialp Criado

´nchez Peinado Esther Sa Eric Schirrmann

Per Servais

Shirley Ye Sheng Brian T. Straley Sonia Suarez-Ortega



Heidi Winklhofer

Nottingham University Business School, The University of Nottingham, Nottingham, UK School of Business Administration, Wayne State University, Detroit, MI, USA Brand New Era, Canfield, OH, USA Department of Business Research, University of Pavia, Pavia, Italy

Attila Yaprak

Ernest J. Zavoral, Jr. Antonella Zucchella

Arild Aspelund Norwegian University of Science and Technology, Trondheim, Norway George Balabanis Cass Business School, City University, London, UK Colleen Collins-Dodd Faculty of Business, Simon Fraser University, Burnaby, BC, Canada Michael Czinkota McDonough School of Business, Georgetown University, Washington, DC, USA Richard Fletcher University of Western Sydney, Penrith South, NSW, Australia Esra Gencturk College of Administrative Sciences and Economics, Koc University, Istanbul, Turkey David Griffith The Eli Broad Graduate School of Management, Michigan State University, East Lansing, MI, USA Nukhet Harmancioglu Sawyer School of Management, Suffolk University, Boston, MA, USA

Marian V. Jones Department of Business and Management, University of Glasgow, Glasgow, Scotland, UK Gary A. Knight Department of Marketing, College of Business, Florida State University, Tallahassee, FL, USA Luis Filipe Lages Universidade Nova de Lisboa, Lisbon, Portugal Peter W. Liesch UQ Business School, The University of Queensland, St. Lucia, Queensland, Australia Paul Matthyssens Department of Marketing, University of Antwerp, Antwerpen, Belgium Oystein Moen Norwegian University of Science and Technology, Trondheim, Norway Ben Oviatt Department of Managerial Sciences, Robinson College of Business, Georgia State, Atlanta, GA, USA Piet Pauwels University of Maastricht, Maastricht, the Netherlands



´ Marisa Ramı´ rez Aleson Department of Business Economics and Management, College of Economics and Business Sciences, University of Zaragoza, Zaragoza, Spain Bernard Simonin The Fletcher School, Tufts University, Medford, MA, USA

Carl A. Solberg Norwegian School of Management, Sandvika, Norway Sharon V. Thach College of Business, Tennessee State University, Nashville, TN, USA Chris White The Eli Broad Graduate School of Management, Michigan State University, East Lansing, MI, USA

This special volume of Advances in International Marketing originated from many 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 as guest co-editors. We are delighted to feature the latest research findings and insights contributed by many authoritative colleagues from around the world. Our thanks go to Professors Alex Rialp and Josep Rialp for their efforts in creating this volume. They issued a call for papers, which then attracted a variety of submissions of high quality. We owe gratitude to them for screening and evaluating these submissions, and for preparing the final set of chapters. We are also indebted to many colleagues who assisted in the review process. The resulting selections draw from a variety of perspectives and offer rich insights. At Michigan State University, I would like to recognize the professional assistance of Ms. Kathy Waldie, editorial assistant for the Advances in International Marketing series. Kathy carries the responsibility of corresponding with the authors, guest editors as well as the staff of Elsevier Science at various phases of the publication process. Finally, the co-authors and I express appreciation to Dr. Helen Collins, Ms. Joanna Scott, Ms. Julie Walker, Mr. Philip Tite and the other staff at JAI/Elsevier Science who saw the volume through the production process. S. Tamer Cavusgil Series Editor


Alex Rialp and Josep Rialp
According to a recent and interesting revision of advances in international marketing theory and practice, the international marketing literature has grown exponentially in recent years in order to offer sufficient support to corporate and public policy makers confronting today’s hostile global business conditions (Katsikeas, 2003a). In fact, some of the most relevant academic journals in this field (Journal of International Business Studies, Journal of International Marketing, International Marketing Review, International Business Review, Advances in International Marketing, among others) can be considered highly stable and mature publications, with research articles covering a wide range of topics within the international marketing 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


2003a. Katsikeas (2003b) stands out the lack of attention afforded to examining outcomes of firms’ international marketing activities and the need of incorporating specific company performance issues in this field. 2006) some promising research avenues are still open to further academic research in this discipline. 2000. 2005. ‘‘it is essential that we begin an open and constructive dialogue about what is important. 2005). 2003. 1998. 2004. (9) comparative studies of marketing executive behavior. (4) dynamic analysis of firm expansion in international markets. In their well-known international marketing manifesto. Wu. (3) marketing engineering: performance in international marketing. (3) work with a new paradigm and new methods. Deligonul & Yaprak. Czinkota and Ronkainen (2003) postulate that the field of international marketing has already and can continue to make major contributions to the improvement of society. Malhotra. (5) maintain the dialogue with all possible constituents. Theodosiou. (6) work also with those who place or show. research traditions or earlier development. Douglas & Craig. Katsikeas. 2003b. (8) marketing’s interface with other functions. in an effort to isolate still remaining problems and issues underlying Czinkota and Ronkainen’s manifesto and suggest ways of pushing their propositions deeper. 112). Seven propositions in support of a lively debate for the sake of a renaissance of this field are provided and illuminated by these authors: (1) remember the roots and purpose of the field. how to go about adding to knowledge. Similarly. and (7) profess expertise. Cavusgil (1998) proposes the following research agenda for international marketing: (1) mainstream marketing management issues in the international context. according to some of the most outstanding critical assessments carried recently on the conceptual foundations. (6) internationalization process of firms. (4) look to the World. and (10) research methods in international marketing. & Whitelock. Cavusgil. Cavusgil et al. Czinkota & Ronkainen. For instance. (5) interfirm partnering in international markets. Also. & Katsikea. 1998. (2) resist the temptations of overspecialization. As this same author brilliantly stands out. However. and future research agenda regarding the discipline of international marketing as a field of study (Cavusgil. (2005) take into account the fundamental changes currently taking place in the business global environment and in the business enterprise itself which compel international marketing scholars to continuously re-examine the progress being made by the field’s researchers . Balabanis. (2) special challenges in international marketing. p.2 ALEX RIALP AND JOSEP RIALP high-ranking marketing journals (DuBois & Reeb. (7) government promotion of international business activity. and how to enhance best practices in international marketing’’ (Cavusgil.

they need to develop new and more creative approaches to probe the cultural underpinnings of behavior. Second. according to Balabanis et al. (2004). legislative. the high technology and connected knowledge/network economy. According to Axinn and Matthyssens (2001a. Accordingly. clearly demanding some more refinement and re-elaboration. Yet limited attention. 2001b). Third. In this way. such as the Internet. and the customer value-based economy are not only changing the shape of international business behavior. these authors come up with a portfolio of research topics worthy of further scholarly attention. has been paid to the conceptual underpinnings of research needed to guide such a foreign expansion. institutional. the range of foreign entry modes accommodated by the firm. international marketing research efforts need to be more closely aligned with market growth opportunities outside the industrialized nations. Accordingly. Finally. according to these authors. the limits of psychic distance. existing theory in internationalization is insufficient to explain the currently observed behaviors of firms in the international business marketplace (i. the increased speed of internationalization. and so on). export marketing research. technological advances. Also. economic. some new and challenging issues such as the increasing impact of the global economy. thematic. Douglas and Craig (2006) are of the opinion that international marketing research plays a vital role as firms expand globally. and attitudinal changes across the globe pose critical challenges . the service economy. these authors develop refined conceptual frameworks that are indeed capable to guide further research in the field.. and methodological perspectives. For these authors. both from the theoretical and empirical standpoint. In a previous international marketers-oriented work. 2001).e. the new knowledge-based economy. First. international marketing researchers must develop the capability to conduct and coordinate research that spans diverse research environments. rapid technological. but also casting doubt on the applicability of traditional internationalization theories. 2001) had already identified four key areas where progress at conducting international marketing research had to be made. these same authors (Craig & Douglas. Another traditional research sub-area in the field.International Marketing Research 3 in developing knowledge. is. By critically evaluating progress in international marketing as a field of study through ontological. further theory development and reframing in the field becomes particularly a must (Rialp & Rialp. also dealing with more appropriate unit of analysis selection and constructs measurement. need to be incorporated into the research process in order to facilitate and expedite research conducted across the globe.

1996. Madsen & Servais. more in particular. a new and highly related field of inquiry in which further contributions from (international) marketing scholars as well as those provided by traditional entrepreneurship researchers are expected to widely increase in the years to come is referred to the emerging discipline of international entrepreneurship (Etemad & Right. Spain on . some relevant analytic perspectives adopted in this international entrepreneurship field (basically the result of mixing entrepreneurship and international business/marketing disciplines). Rialp. & Knight. new opportunities) for the future development of export marketing research. entrepreneurship is becoming a growing phenomenon in World markets. Also. and contents of this Special Issue of Advances in International Marketing. 2003. and the ability of constantly upgrading them. Styles & Seymour. Rialp. This research should focus on the identification of the right export marketing capabilities that firms should develop or acquire. global start-ups. STRUCTURE AND CONTENTS The origin of this Special Issue of Advances in International Marketing is found in an international conference of the Consortium for International Marketing and Research (CIMaR) that took place in Barcelona. of the so-called born-global firms. and/or international new ventures (Knight & Cavusgil. of critical importance are the processes currently used to develop such capability-based international (export) marketing strategies and to manage relationships with international customers and partners. are currently referred to the emergence and consolidation. & Vaillant. structure. With this general assessment of the current status of the international marketing discipline in mind and. 1997. Rialp. in turn. Rialp. In Styles and Seymour’s (2006. taking into account the diverse challenges and opportunities that can be associated with further research in this still very promising field of scientific inquiry.’’ In particular. 2006). we describe hereon the origin.4 ALEX RIALP AND JOSEP RIALP (but also. Therefore. 2005) as well as the interface of the Internet and firm entrepreneurial behavior in international markets (Sinkovics & Bell. p. 2005. 2006). THE SPECIAL ISSUE: ORIGIN. 126) own words: ‘‘there is considerable scope for marketing academics to contribute to the nascent field of international entrepreneurship which would. Urbano. both in traditional and hightech sectors. the ability to leverage or transfer them across international markets. In addition to this. advance marketing theory.

In particular. and/or any other paper fitting the publication’s philosophy and guidelines. the conference featured about 30 accepted papers and works in progress. Sponsored and co-organized by the Center for International Business Education and Research at Michigan State University (E. a subsequent call for papers for a Special Issue of Advances in International Marketing with the title ‘‘International Marketing Challenges in the 21st Century’’ was launched in October. Although there were several other papers that could have been included in this volume. greater integration and interconnectedness of international economies and firms. more rapid pace of technological change and business internationalization processes. Both conceptual as well as empirical papers were highly welcome for publication consideration for this volume. For some CIMaR participants in the last meeting in Barcelona. Empirical papers might employ quantitative and/or qualitative (e. or works in progress). led to our final selection of the 15 papers presented in this volume which were delivered by more than . consolidation of emerging sectors. 2005 with the main objective of providing a new setting for scholars and academics around the globe to exchange and/or share their most current research interests and ideas related to this evolving and challenging scientific discipline of international marketing. In addition to this meeting research outcomes. a critical assessment and further explanatory research of the expected influences. converging buying behavior. Nevertheless. Michigan) and the Department of Business Economics at the Autonomous University of Barcelona (Spain).International Marketing Research 5 May 28–31. Lansing. but in any case submissions for this special issue had to be of high and robust academic rigor. space limitations. this meant an excellent opportunity to re-submit a revised version of their earlier submissions (papers. research proposals. in the form of both new research opportunities and challenges in the field. given some recent and important trends of change being present today in the global business sphere (for example. recent but critical advances in telecommunications and transportation facilities. and other conditions. a considerable number of submissions were received which were then submitted to a rigorous. As a result of this call for papers. associated with these phenomena in the years to come had to be newly approached.g. 2005.. case study) methodologies. among others). double-blind review process. reviewers’ evaluations (and corresponding contributors’ revisions). all other researchers in this field were also kindly invited to submit their papers for this special issue. such as achieving enough geographical dispersion of authors and appropriate balance among topics covered by the different studies.

(2) strategic internationalization process in different sectoral settings (three chapters). developing economies. AND PERFORMANCE In the opening piece of this volume. Hereon. other papers developed by researchers in many other countries in this field are also included. and finally (4) business internationalization and information technologies (five chapters). the special issue consists of 15. and the export strategy-related variables on export performance. DEVELOPMENT PROCESS. we briefly introduce the 15 selected chapters for this volume of Advances in International Marketing according to the four different parts or sections in which they have been assigned. management. or UK to Italy. firm. Germany. that we believe will become of very great interest not only for both academics and practitioners. Jorma Larimo explores past and current research related to firm export performance a topic in which many studies have been conducted to date with mixed results. or institutional behavior in a wide array of World economies ranging from Australia. PART I: EXPORT BEHAVIOR. Thus. (3) environmental influences and emerging markets for international marketers (three chapters). Denmark. and performance (four chapters). Finland or Spain. but also for policy makers in this field. and from Turkey to Vietnam. double peer-reviewed manuscripts covering very relevant topics in contemporary international marketing research. (2) the possible variation existing in the results depending on the different types of measuring this export performance dimension. but at the same time related. Accordingly. In addition to the work of scholars from the United States.and medium-sized firms in different type of sectors (including manufacturing industries and services) in both developed and emerging. apart from this introductory chapter.6 ALEX RIALP AND JOSEP RIALP 30 contributors in the discipline of international marketing from all over the World. sections which proceed from the more general issues of the export and internationalization processes toward some more specific issues and applications both at the environmental and technological levels: (1) export behavior. development process. The issue is structured in four different. This new empirical paper is aimed at analyzing (1) the impact of the selected firm. we believe that this collection represents a comprehensive treatment of the contemporary issues and problems being currently faced mostly by small. as regards to its structure and contents. among others. Most of these papers report on individual. and (3) the similarities and .

The second paper in this section. precocity. this dimension was positively impacted by firm size. This process is conceived as a sequential path along the following export stages: (1) the preengagement phase. firm size. Nigel Barrett and Tho . born international companies. the study indicates some similarities and differences depending not only on the measure selected for export performance. in terms of export intensity. Finally. in the following contriArıstides Olivares and Sonia Sua bution of this section. where firms export by means of an agent. by Antonella Zucchella and Giada Palamara. The international expansion of such niche-oriented firms is based on a horizontal microsegmentation of the global market: they move internationally following global customers. Results indicate that the development of product or process innovations becomes the most significant motivation for an early entry in the initial and advanced phases of the export development process. regardless the psychic/geographical distance in play. The study is based on a survey conducted among Finnish SMEs in early 2002.M. product/service quality.International Marketing Research 7 differences in the results depending on the type of SME – traditional exporters vs. but also on the type of the exporting SME. international orientation. where firms do not export. and (3) the advanced phase. conceives that small firms can approach foreign markets and reach high levels of export intensity combined with a broad geographic scope in spite of their limited resources just by adopting a niche strategy. a broader scope of products. and the operationalization being used for the born international companies. and compete mostly on a non-price basis. This study is then focused on the type of factors which can accelerate or decelerate the decision to entry in and/or change across these phases.478 firms in 2002. and foreign ownership participation are also key factors in accelerating entries in this process. among other factors. in this case. In addition. authored by Trang T. Event history analysis is applied to a data set comprised by 1. speed. and market diversification along five measures. Additionally. and market scope. (2) the initial phase. Such a global niche approach also help explain. where firms export via a sales subsidiary. the issue of entry timing in the export development process of. Spanish manufacturing firms. While none of the hypotheses were fully supported by all of the six measures of export performance being employed. why and how new firms can become international or even global since their inception. this paper shows a positive relation between niche strategy and high international performance. By means of applying case study analysis. network ties. ´ ´rez investigate. the paper ending this first section focused on export behavior and performance. Nguyen.

export performance. Accordingly. these authors contextualize this phenomenon in relation with the specific characteristics for various market environments and industrial sectors. by means of a comparative analysis of the internationalization processes of UK and US biotech SMEs. both from an academic and a practitioner perspective. Nguyen. firm ownership structure does not seem to moderate the relationships between learning orientation. outlining also the similarities and the differences that can be observed between these two countries. 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. such internationalization process shows major implications for the strategic orientation of small firms. Ca Gura and Ashok Ranchhod. and export performance. However. Actually. examines the roles played by market and learning orientations in relationship quality between exporters in transition economies and their foreign importers and subsequently. their results suggest the importance of including strategic variables and the specific nature of services to understand such a complex phenomenon. relationship quality. In addition. high-tech ones. Esther Sa Pla stand out that. PART II: STRATEGIC INTERNATIONALIZATION PROCESS IN DIFFERENT SECTORAL SETTINGS The following contributors. few studies have undertaken to empirically analyze the factors influencing foreign entry mode choice in this context. market orientation. ´nchez and Jose ´ Focusing on non-traditional economic activities. examine how ˜lin ˜u the accelerated globalization of World markets in the last three decades has dramatically increased the importance of internationalization models even more. despite the increasing importance of the service sector in developed economies and the growth of foreign investments in this sector during the last decade. A random sample of 283 export firms in Vietnam provides enough evidence to support the hypothesized main effects. thus. this study shows the impact of the domestic market profile on this process. traditional explanations of international entry mode choice in manufacturing sectors may need to be complemented by other moderating influences. the special characteristics of services increase the complexity of the analysis and. which is not always associated just with efficiency and value-based considerations but also with strategic issues and industry characteristics.8 ALEX RIALP AND JOSEP RIALP D. For these authors. as for instance. Based on 174 entry decisions of service firms.

but transferring it to new and unexplored context. Holzmu ¨ller. Accordingly. Hartmut H. and by Marks & Spencer (M&S) in Hong Kong. By fully examining these two business experiences. Michael R. these have not been able to fully identify the factors that influence the process of retail internationalization. Mullen and Shirley Ye Sheng complement and extend a growing body of work developing and using overall market opportunity indexes (OMOIs) to rank the attractiveness of potential foreign markets. Thus. Conjoint analysis and structural equations results based on a sample of consumers from three neighboring cities in . The modified OMOI is shown to be a flexible. Patrick Lentz. PART III: ENVIRONMENTAL INFLUENCES AND EMERGING MARKETS FOR INTERNATIONAL MARKETERS In the paper that introduces the third section of this volume. the index developed in this paper assesses countries’ market potential beyond the traditional measures of market size and economic development also by including political risk. the authors provide a current and detailed analysis of market attractiveness and opportunity for the largest set of countries indexed and ranked to date. the authors provide insights into the type of factors influencing the foreign market entry process and how other firms can manage it. Assuming that firms in most industries must look to expand into international markets to survive and thrive. Kannika Leelapanyalert and Pervez Ghauri acknowledge that numerous studies have focused on retailing firms and their activities abroad.International Marketing Research 9 Also in the context of international market entry strategies for service providers. however. telecommunications as well as physical infrastructure and geographic distance. which is then used to analyze two case studies: the entry strategies followed by IKEA in China. and fairly stable tool for preliminary analysis of foreign market opportunity. The validity of the index is also assessed by comparing the ranking of market opportunity to actual subsequent trade flows from the US. Acknowledging the popularity of country-of-origin research in international marketing. In this study. economic freedom. valid. insights from country-of-origin research as well as exploratory qualitative studies are used to model determinants of preference for local products. their paper examines the factors that influence the foreign market entry process in retailing firms and develops a conceptual model. and Eric Shrirrmann focus on the lack of attention usually been paid to effects which stem from the declaration of a product’s local origin.

and medium-sized firms (SMEs) aimed at internationalizing. offering services related to their products. a categorization of different local and international firms is presented. and Richard N. facilitating product development. Accordingly. Bahattin Karademir. First. also relevant for small. With e-business and the Internet solutions. borders between countries are becoming less relevant. In the paper introducing this last section. which is taken as an illustration of one emerging country market. and building and maintaining relations to foreign customers. According to the results of this study. and Erik S. Evidence on such business groups evolution in Turkey. among other information technologies. Instead. Thus. Osborn approach the issue of how do business groups function and evolve in emerging markets by analyzing the case of Turkish business groups. PART IV: BUSINESS INTERNATIONALIZATION AND INFORMATION TECHNOLOGIES The last section of this volume is more specifically devoted to the high degree of impact that the emergence and consolidation of the Internet. such as exporting. According to these authors. business groups have not received sufficient attention in the international marketing literature. Finally. Internet help them support already existing actions by also describing their products on web pages. though they have become a significant phenomenon in the evolution and functioning of emerging markets. and then the level of Internet usage by the so-called born global firms as compared to the usage of this tool by other types of firms is analyzed. the authors unravel the use of the Internet by different types of firms. Per Servais. is presented and discussed in detail by these authors. Attila Yaprak. They also provide important local partnership opportunities to international marketers. Tage Koed Madsen. this paper provides a general overview of the theories that explain how business groups function and evolve in these markets with the aim of generating subsequent propositions from that theory. Rasmussen conceive e-business as a very important and revolutionary business tool. In this chapter. born globals make use of the Internet to convey their market presence. but only to a limited extent they sell their products electronically abroad.10 ALEX RIALP AND JOSEP RIALP Germany confirm the importance of local origin for product preference as well as of the mechanism of such city-of-origin effects. and more direct interaction between separate businesses becomes possible. is currently having on small firm internationalization and international marketing strategies. this .

the research paper that closes this section and the volume. has a reciprocal effect on it. is focused on the drivers and inhibitors determining how advanced websites of SME exporters are. a combination of early-mover advantages. and born global firms in particular. by means of conducting several interviews with senior managers of an industrial distributor. Stephen Chen’s chapter examines to what extent Internet-based firms have indeed globalized and the key factors that have enabled some firms to globalize more than others. Brian T. despite the much . technology standards. Interestingly. Contrary to arguments that Internet-based firms automatically benefit from a global market. and then to internalize it for their internationalization purposes. It is also found that such a process underlies international orientation and foreign sales intensity which in turn. these findings suggest that internationalizing firms should promote and value this process in order to mitigate their common lack of foreign market knowledge. Further. Finally. Nguyen and Nigel Barrett. In a similar vein. starts from the assumption that the Internet is a crucial source of information that can be transformed into knowledge. and Ernest J. The following paper is jointly authorized by Catherine N. Deeter-Schmelz. Axinn. coauthorized by Heidi Winklhofer. According to the authors. Kathryn Houghton. co-authorized again by Tho D. though much more research on this issue is expected by these authors. In particular.International Marketing Research 11 article sheds some prior light on the key question of how small firms in general. a number of key insights and implications for future research regarding the impact of the Internet on buyer–supplier interactions and the importance of global sourcing are revealed in this chapter. these authors make use of the exploratory case study approach to explore the impact of the Internet and internationalization on today’s industrial procurement processes. Drawing from seminal research on organizational buying behavior. in these cases. Zavoral Jr. Dawn R. unique product. However. and complementary products and services seem to have created what this author calls a ‘winner-takes-all’ market in which a few firms dominate markets worldwide. The following selected paper. this study shows that most Internet firms serve regional markets. the author finds a few notable exceptions. to assess its relevance. learning orientation also facilitates the Internet-based knowledge internalization process. will continue to adapt the Internet technology in practice. The authors of this study develop an Internet-based knowledge internalization process in which internationalizing firms in transition markets utilize the Internet to search for information about foreign markets. Straley. According to these authors’ opinion. and Thomas Chesney.

3–11). i.e. However. The results of this empirical study identify export diversity and environmental pressure as the key determinants of perceived advantage of a website which in turn is a good predictor of website sophistication. at least as much as we enjoyed composing it! ACKNOWLEDGMENTS As the guest co-editors of this volume. also determine small. Once we have briefly introduced the different research articles selected for this Special Issue of Advances in International Marketing as a way of identifying and discussing emerging opportunities and challenges in this current century for academics and practitioners in the international marketing field. The literature is prone to discuss website establishment and development simultaneously. & Matthyssens. N. splitting firms into adopters and non-adopters. we would like to especially acknowledge the series editors of Advances in International Marketing. as well as the factors which inhibit or stimulate exporting SMEs to develop their website beyond a basic level of sophistication. or be continually developed. are still unknown. pp. the level of website sophistication. yet websites may be established and then neglected. from Michigan State University. 11. . (Vol. P. S. Reframing internationalization theory: An introduction. we sincerely hope that you will enjoy reading and reflecting on the work presented in this volume. Tamer Cavusgil and Kathy Waldie. In: C. (2001a).12 ALEX RIALP AND JOSEP RIALP publicized advantages of a website for SME exporters. but also with their great effort and talents. the firm’s internal resources. Reassessing the internationalization of the firm. C.and medium-sized exporting firm’s website sophistication level. Amsterdam: JAI/ Elsevier. and leadership they have always provided to us as well as all of the authors and reviewers involved in this volume for having played an excellent role contributing not only with their precious time. Accordingly. N. Advances in international marketing. Axinn & P.. in conjunction with entrepreneurship orientation. and proposes and empirically tests a model that depicts factors impacting on perceived advantages of a website and its sophistication levels.. continued guidance. for the inspiration. Matthyssens (Eds). information and communication technology (ICT) knowledge and time. REFERENCES Axinn. their paper introduces an instrument for measuring website sophistication within an export marketing context.

3(4). A. 689–704. 22(4). (1998). 13(4). Amsterdam: JAI/Elsevier. 14(2). An overview of the first 21 years of research in the international marketing review. D. T. S. pp. C. & Seymour. Internationalization of SMEs: Toward a new paradigm.. Rialp. 391–398.. A. P. 8. S. New York: JAI Press. A. A. International Marketing Review. E. (1997). & Douglas. Journal of International Entrepreneurship. (2003). Balabanis. Knight. Advances in international marketing theory and practice. Reflections on Czinkota and Ronkainen’s international marketing manifesto: A perspective from Europe. (2004). 3(2). J. (2006). W. Journal of International Marketing... What do we know after a decade (1993–2003) of scientific inquiry? International Business Review. Export internationalization research – enrichment and challenges.. Journal of International Marketing. T. 11(1). In: S. Rialp. R. A. 147–166.. I. 247–249. 21(4/5). & Rialp. Current perspectives on international entrepreneurship and the internet. C. 20. Advances in international marketing. DuBois. 12(2). Styles. 353–377. G. Introduction. 6(2). Conceptual frameworks on SMEs’ internationalization: Past. (2005). Rialp. H. Cavusgil & T. Cavusgil. S. Douglas. & Whitelock. The phenomenon of early internationalizing firms. M. The born global firm: A challenge to traditional internationalization theory. International Marketing Review. T. J. Theodosiou. 11. L. S. G. Urbano. Cavusgil. Rialp. S. T. & Matthyssens. Madsen.. Madsen (Eds). & Vaillant.. J. pp. S. Craig. (2000). 14(1). 1–27. International Marketing Review. Etemad. Perspectives. S.. S. Ranking the international business journals. N. S. C. Katsikeas. 11–26).International Marketing Research 13 Axinn. Guest editorial.. Czinkota. International Marketing Review. S. and future trends of research. (2001). D. 135–140. K. 49–78). . Axinn & P. Export marketing: Developments and a research agenda. 561–583. Sinkovics. S. & Yaprak. & Right.... & Katsikea.. Advances in international marketing.. Reassessing the internationalization of the firm. K. 80–90. An international marketing manifesto. 19(5). 1–4. 6(6). Limits of internationalization theories in an unlimited World. Opportunities for marketing researchers in international entrepreneurship. J. A... G. C. Katsikeas. On improving the conceptual foundations of international marketing research.. Journal of International Marketing. Matthyssens (Eds). 13–27. C. Knowledge development in international marketing. P. International marketing as a field of study: A critical assessment of earlier development and a look forward. The internationalization of born globals: An evolutionary process? International Business Review. Wu. (2005). In: C.. N. & Knight. 18(1). (2005). D. present. The born-global phenomenon: A comparative case study research. M. Small Business Economics.. 1983–2003. & Ronkainen. R. Journal of International Marketing. Y. Journal of International Business Studies. K. 11(1). (1996). (2001b). G. T. (2005). Conducting international marketing research in the twenty-first century. 126–145. & Cavusgil. Journal of International Entrepreneurship. R. (Vol. A. & Reeb. 103–112. 31(4). 23(2). R. R. Malhotra. (Vol. 1–22. (2003). Deligonul. N. Rialp. 28–34. (2001). (2003a). Journal of International Marketing. 436–449. (2003b). (2006). International Marketing Review. International Business Review. P. (2006). 133–171.. & Servais. J. L. C. F. P.. & Bell. & Craig.

and market diversification along five measures. and the export strategy-related variables on the export performance. The export performance was analyzed using six different types of performance measures. the export performance was positively impacted by firm size.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. Based on a literature review. international orientation. ever since many studies have been conducted with mixed results. 17–62 Copyright r 2007 by Elsevier Ltd. management. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. The three main goals of the present study were to analyze (1) the impact of the selected firm. born international companies. Consequently. 14 hypotheses were developed to be tested. and (3) the similarities and differences in the results depending on the type of SME – traditional exporters vs. None of the 14 hypotheses were fully supported by all employed measures of performance. (2) the possible variation in the results depending on the measure of export performance. product/service quality. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. Volume 17. However. the empirical part of the study is based on a survey conducted among Finnish SMEs in early 2002.1016/S1474-7979(06)17001-5 17 .

and other resources. the study indicated some similarities. cultural differences. Wheeler. management. and the export strategyrelated variables to the export performance. 1. more research related to export performance needs to be undertaken. and allows for greater structural and strategic flexibility in the foreign markets than most other forms of operation (see e. Research into firms export performance dates back to the early 1960s. However.and medium-sized companies (SMEs) has been export. To analyze: (1) the impact of the selected firm.. human.. samples. Based on the results. involves less financial risks. INTRODUCTION The intensification of the global-scale competition has led an increasing number of firms to look for opportunities in the international markets in order to achieve their objectives as well as to safeguard their market positions and survival. Young. the results are also of great interest to marketing researchers for the development of theory building in international marketing. 1990. management implications and proposals for future research are presented. type of the exporting SME. with the pioneering study of Tookey (1964) as the first one attempting to analyze the factors associated with successful exporting. not so easy because of e. and the operationalizations used for the born international companies. The empirical results related to variables of superior export performance have been relatively mixed. and increasing dynamics in the market. To be successful in the foreign markets is. The results concerning the links between various firm. Luostarinen & Welch. 1989). Furthermore. and export strategy-related variables. management. and export strategy-related variables and export performance are of significant importance from the point of view of both business managers and public policy makers. and operationalizations used for various firm. Hamill. however. numerous studies have been conducted trying to analyze the determinants of export performance.18 JORMA LARIMO Additionally. Compared to other types of foreign operations. management. The most common mode of foreign operation of the small. fierce competition. time periods. demands less investments.g. There are three main goals with the present paper. the export usually requires less financial. . The differences are apparently caused at least partly by the differences in the measures of performance.g. Subsequently. & Davies. but also some differences depending on the measure of export performance.

the previous studies have mainly analyzed the differences in SME export performance based on the size of the reviewed companies. operationalizations of variables. . and suggestions based on the study. and Section 6 summarizes the main findings and conclusions. Finally. and export strategy-related variables and the export performance. and finally. Section 4 in the paper includes the methodology.g. and (3) the similarities and differences in the results depending on the type of SME – traditional exporters vs. to the time frame of starting exports/foreign operations. the level of exports within that time frame and later on have been very different. Furthermore.. management. our analysis attempts to provide a comprehensive view of the export performance of the reviewed companies. based on the reviews the hypotheses are developed for the empirical part of the study. The structure of the paper is as follows: In Section 2. the speed of internationalization has been of greater interest in only very few studies so far.Different Types of Exporting SMEs 19 (2) the possible variation in the results depending on the measure of export performance. born international companies. the classification is usually made by classifying firms into the traditional exporters or born global companies but the conditions regarding e. For the measurement of performance. In Section 3. This concerns especially the analysis of export performance using several different performance measures. Related to the speed of internationalization. Although there is an increasing number of studies including analysis of results based on several performance measures. there has been mixed results in earlier studies. although there have been numerous studies focusing on various aspects of export and internationalization behavior in the Nordic countries. The contribution of the paper to the present stock of knowledge related to SME export performance is mainly in the following issues. Furthermore. The impact on export performance of some of the variables at work in the present study has been only limitedly assessed in previous analyses. a review of the types of exporting SMEs focusing on traditional exporters and the so-called born global firms is presented. first a review of the measures of export performance is made followed by an analysis of the relation between the firm. Section 5 presents the main results of the study. six different variables representing both objective and subjective measures have been employed in this study. and sample description. there are very few larger-scale empirical studies focusing on the SME export performance. Two different bases are used to classify the companies into traditional exporters and born globals in order to analyze the impact of both looser and tighter definitions for born global companies on the results.

Dominguinhos and Simoes (2004) found that two criteria were more commonly used in those definitions: (1) the time frame from establishment to start of exports/foreign operations and (2) the share of exports within that time frame.20 JORMA LARIMO 2. 1996. to describe long-established firms that used to focus on their domestic markets. 1997. 1997). 1992). 1995. some relatively few studies used a time frame of one to two years from the establishment to the start of export. and even more limitedly the type of target countries. (4) the inherent advances of small companies. Rialp. and (6) the increasing amounts and use of international networks. Rialp. 1995. Looking at the operational definitions used in various studies focusing on the born globals. (5) the means of internationalization that have become more accessible to all firms and increasing support activities for the greater international contacts and cooperation. The past 10 years witnessed an increasing interest toward firms which do not try first to grow and get strong market positions in their home countries and after that start foreign operations but rather are involved in foreign operations in their first years of operations or even straightaway start their foreign sales. The main driving forces for the existence of these new types of companies are (see Knight & Cavusgil. Alahuhta. (3) the advances in communication technology. More recently.g. the reviewed companies in export marketing and performance studies were often divided into exporting and non-exporting. international new ventures (INVs) (Oviatt & McDougall. 1997. Madsen & Servais. & Jeanet. McNaughton. limitedly exporting companies. BORN INTERNATIONALS Until mid-1990s. or to highly vs. & Knight. 2001). (2) the advances in process technology. but in several studies also a longer time frame of six years has been used. TYPES OF EXPORTING SMEs: TRADITIONAL EXPORTERS VS. 2005): (1) the increasing role of niche markets. the number of export target countries. Less used criteria were the timing of founding of the company. apparently influenced significantly by the pioneering studies by Oviatt and McDougall (1994. & Young. In some studies only the reference ‘‘in the first years’’ is .. 1994). global start-ups (Oviatt & McDougall. or high-technology start-ups (Jolly. 1997). Concerning the time frame. Some studies have used a time frame of three years. several reviews indicate clearly that there has been a lot of variation. but suddenly opt for rapid internationalization (see e. These firms have been labeled quite differently in various studies: born globals (Knight & Cavusgil. Aspelund & Moen. 2001). 1994. 1996. Madsen & Servais. Based on an analysis of 55 studies dealing with born globals. Bell. the term born-again global firm has also been proposed.

Rialp et al. (2) the share of exports within three years: whether the share of exports had reached the 25% limit of the total sales within the agreed time frame. but several studies do not include any limitations. Based on the definitions and operationalizations presented above.. it means that the company has to take the international operations seriously and that internationalization is not sporadic anymore. use a period of 15 years). Sasi. As the earlier discussion indicates. or 25%.g. the requirement of at least 50% share of foreign sales was set to indicate the continuous and increasing/significant role of foreign sales. possibly based on an unsolicited inquiry. two different classifications were agreed upon for the present study: (1) a looser classification and (2) a tighter classification. 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. a firm which has started its foreign sales within three years from the establishment (share from total sales may even exceed 25%). the companies are divided into two sub-groups only based on the time frame and the existence of exports: no exports vs.. the demand of at least three target countries of exports has been used. some studies do not impose any specific share. The subgroups are labeled as truly traditional exporters and born internationals.Different Types of Exporting SMEs 21 at work. & Darling. and export performance. 2004. some studies have focused on companies founded in 1976 or more recently. exports within three years from the establishment. because there is evidence that there has been born globals also before mid1970s. Furthermore. Regarding foundation. In the second classification. Furthermore. a key feature of the operation should be that the foreign sales should be continuous and significant for the company (mainly increasing role). In the looser classification. in some studies. e. without any additional conditions. see Dominguinhos & Simoes. 15. 2004. Concerning the role of exports. in some studies 5. (For the reviews. or in some studies in 1989 or more recently. there has been a great variation in the definitions used for born globals. three conditions were taken into consideration: (1) the time frame and the existence of exports: no exports vs. but which . exports within three years from the establishment. The cutoff rate of 25% was based on the earlier studies and on the fact that if the foreign sales reach that level. but only after a rather long time since establishment (Gabrielsson. The sub-groups are labeled as traditional exporters and truly born internationals. Without this type of additional conditions. strategies. even more demanding condition like exports/operations in two continents. 2005). In some studies. respectively has been used as the minimum share for exports. The differences may be expected to have an impact also on the results related to the behavior.

2002. In a study by Moen (2002).2 of the study. The results from Denmark indicate a similar situation (see Knight. or field of industry. the majority of both French and Norwegian exporting firms established in the 1990s could be classified as born internationals. the share of foreign sales in Danish born internationals was on average 71%... (b) they expand their export/foreign operations rapidly into several markets. Madsen. . Several features are considered to define the born international firms (see e.. (d) they may proceed very rapidly along the steps of internationalization. would be classified as a born global.) The expected differences e. & Servais. Therefore. According to a recent study. 2002).g. Madsen & Servais. Moen & Servais.. (For a recent study modeling the forces influencing the speed of internationalization see Oviatt & McDougall. Madsen & Servais.g. Several authors argue that the existence of this kind of companies is focused on hi-tech sectors. whereas the respective share in US-based born internationals was 47% (Knight et al.g. 2004). Additionally there are born international companies outside hi-tech sectors. 1997). However. This seems to be the case especially in smaller developed countries with small domestic markets. it was decided not to make any limitations for born international companies based on the time frame of establishment. there is clear evidence that there have been born international companies also before 1990s. in export strategy between traditional exporters and born internationals and relation with export performance is discussed more in Section 3.. 2002. (e) they may use leap-frogging in their operation strategy development. 2005. Madsen & Servais. in the study by Aspelund and Moen (2005) the oldest born international company in their sample was established already in 1874. 1997. in the consumer goods and the service sectors (see e. 2004).g. 1996. Knight & Cavusgil. and (f) they use more networking and alliances than the ‘‘traditional’’ firms. (c) they enter their lead markets more quickly than the ‘‘traditional’’ firms. Rialp et al. Moen & Servais. As discussed above.22 JORMA LARIMO stops mainly or totally the exports after those three years. Because these conditions were not set – as it has also been the case in most earlier studies although the term is used – it was decided that the term ‘‘born international’’ will be employed in this study to define better the nature of these SMEs.g. The term ‘‘born global’’ indicates operations in several different countries which are located on various continents.. for instance. 2005): (a) they focus on highly specialized global market niches. 1997). their number has clearly increased in the 1990s (see Moen. e.. but there is evidence that these type of companies are not limited only to hi-tech sectors (see e. In fact.

export sales volume (20/17). export sales growth (41/16 studies).Different Types of Exporting SMEs 23 3. The results indicated that 50 different measures for export performance had been applied in those studies. (2000) indicated that in about one-third (in 33 cases) of the studies only one single measure of performance was used. all the most commonly used measures were economic measures and four of the five were sales-related measures. number of export countries/markets. Thus the number of measures has clearly increased in more recent studies. 43 export performance studies made in 1998–2004 were covered. Several measures were used in only one study (22/20 measures). and some generic measures (5/6). perceived export success. The review by Leonidou et al. However. The use of this measure – at least as the . the review by Sousa (2004) indicated that in only 3 of the 43 studies one single measure was considered and that in half of the studies four or more performance measures were in use. export market share. In a more recent review made by Sousa (2004). In these 93 studies. export profitability (20/20). and strategic export performance. overall export performance. The most frequent single measures were export sales ratio (in 57/16 studies). Several different measures can be used and have been utilized to measure export performance. Katsikeas. some even in more than 10 studies (5/6). and Morgan (2000) identified in their extensive analysis of previous export performance studies over 100 articles of which they included 93 into their more detailed investigation of key issues related to export performance measurement. whereas in almost two-thirds (60 cases) two or more measures of performance were utilized. Most of the measures used were in both studies economic (23/27 measures). Thus. and growth of the export sales ratio (12/9). but there were also several non-economic measures (14/17). LITERATURE REVIEW OF EXPORT PERFORMANCE STUDIES AND DEVELOPMENT OF HYPOTHESES 3. The Measurement of Export Performance The concept of export performance is rather complicated and multidimensional. The next most commonly utilized measures were export profitability growth. export market share growth. The above results indicate that the export sales ratio has been used earlier in well over half and more recently in about half of the studies as the measure of export performance. 42 different performance measures had been used. but an increasing amount of measures had been employed at least in five studies (11/13). Leonidou.1. achievement of export objectives.

2000).. instead of using the number of export markets as the measure of performance it would be better to use this variable in the analysis of various export strategy decisions on export performance. 1987) because it can be affected by several other issues than competitiveness/successful export operations. for instance. However. secondarily one single country (17/15). and in very rare cases some region (1/0 study). Their advantage is that the evaluation is based on the goals and measures of performance utilized by the company itself. Also the other often-utilized sales-related export performance measure – export sales growth – has received criticism. the number of export countries has been commonly employed as a measure of export performance. From the measures in this category. Kirpalani & Balcome. or on a combination of both (45 studies). especially if the firms utilize marginal cost pricing (Samiee & Anckar 1998. Among the non-economic measures. As stated above. the companies seem to be less willing to reveal export profitability information partly because of the fact that the companies do not necessarily know exactly their export-related profits. but increasingly in the export performance studies. Profitability in exports and growth in export profitability has been cited as the ultimate goals of the companies (Aaby & Slater. or understate performance because of the experience curve effects and deteriorating demand (see ibid and Katsikeas et al. The results by Katsikeas et al. The scope of the analysis has usually covered all export markets by the firm (83/28 studies). although they can be regarded only as crude measures of performance since they cannot adequately capture the domain of the construct (Katsikeas et al. as Piercy (1982) has stated. and marketing factors. the number of foreign markets is not an end in itself but is contingent on the specific company. 1989). The unit of analysis was usually at the corporate level (in 84/28 studies).24 JORMA LARIMO single measure of export performance has been criticized (see e. Katsikeas et al. perceived export success and achievement of export objectives were among the most commonly used measures. (2000) indicated that the analysis of export performance is mainly based on current export performance (in 82 studies). product. the generic measures were taken into consideration rather seldom. Almost all studies have been based on primary data . market. only seldom on export venture (12/15) and rarely product/product line level (4/0). because the measure may overstate performance based on price escalation and market growth.g.. and only in very few cases on anticipated future performance (the review by Sousa does not include this piece of information). However.. 2000). 2000).. Thus. secondarily on historical performance (56).

mainly the manager directly responsible for exports (commonly the CEO or the export manager). whereas about one-third in the latter review). management characteristics. Sousa (2004). 3. (2) there should be both objective and subjective measures. the management characteristics (5. including market concentration vs. 20% of the studies. international . domestic market characteristics. and Export Strategy and the Export Performance A review of export performance studies indicates that special attention was given to the impact of over 50 different firm characteristics and competencies. the analysis will focus on the relationships between 11 variables and the export performance. firm size. The results by Katsikeas et al. including basic firm characteristics and strategy (1. (2000). the key sales object issues (product/service strengths). industry characteristics. thus there should be at least two or more measures for export performance. the standardization of the marketing mix elements. clearly indicate that the export performance is a complex phenomenon. export age). and export marketing strategy-related variables on export performance.Different Types of Exporting SMEs 25 (96/43) usually collected via mail questionnaire based on the views of a single key informant. market spreading. product/service quality. Also a combination of both types of measures seems to have increased clearly in more recent studies (in the earlier review in ca. management attitudes and perceptions. the export marketing strategy. Management. The Relationships between the Firm. target markets and their characteristics. The earlier evaluations were more often based on objective (80 studies) than on subjective (51) assessment. but the situation has changed to the opposite recently (54 vs. 3. and (5) variation in the time dimension should be considered – current and historical. however. Furthermore. Of interest in several studies has been the impact of the firm size. The selected variables represent the firm characteristics. Based on the reviews it can be concluded that: (1) any single measure of export performance is not enough. and the international experience. niche product/ service. 2. Noteworthy is.2. (4) the measurement should usually cover both all export markets and main product or/and main target marketrelated measures. (3) there should be both economic and noneconomic or/and generic measures. 151). several different measures of export performance have been used in those studies. that no study examined the relationship between objective and subjective export performance in more detail. In this study. and Diamantopoulos (1999). and 4.

product adaptation. 2000). 1998. and 50 empirical export performance studies made between mid-1960s and late 1980s. Nakos. As shown in Table 1 the results related to the impact of most variables on export performance have been very mixed. 1998. and Manolova and Manev (2004) analyzed 21 articles published between 1996 and 2001. Piercy. and (3) the articles had to be cross-sectional in nature (i. and 7. & Wagner. and the perception of risk in the international activity (see Bonaccorsi. Piercy et al. 6. Katsikeas. communication adaptation. 1996). three eligibility criteria were at work for the selected studies: (1) the articles had to be empirical in nature. 1998. The reviews by Madsen (1987). and perceive lower levels of risks about foreign markets. Preece. international experience). other studies seem to indicate a positive relation (e. the economies of scale.2. Chadee & Mattsson. 1996). As the results in Table 1 indicate.. price adaptation. Aaby and Slater (1989). the case studies were excluded). Large exporting manufacturers are widely considered to possess more financial and human resources. Firm Characteristics and Basic Strategy-Related Variables Firm size. Although there are counter arguments. 1993. Chetty & Hamilton. 1998. 1992. 55. 3. and some studies confirm that the positive relation was found among both manufacturing and service ..e. and the export marketing strategy (8.. Brouthers. Miles. international commitment. They will be discussed in more detail below. & Brouthers. Table 1 includes a summary of the results presented by five review articles of various export performance studies. However. and 11. & Ioannidis. There are three fundamental factors supporting the expectation of a positive relationship between firm size and export performance: the organizational resources. & Baetz. in connection to the single variables selected for this study. Zou and Stan (1998) had in their review 50 export performance-related studies made between 1987 and 1997. reporting data analysis and statistical tests. In all the aforementioned works.26 JORMA LARIMO orientation. and Gemunden (1991) included 17. 10. these size-related advantages seem not only to facilitate understanding of foreign market characteristics.. market diversification). (2) the articles had to use some kind of export performance measure as a dependent variable. 9.1. but also to enhance a firm’s ability to respond effectively to the requirements of foreign customers thus potentially leading to better export performance. Cravens. enjoy higher levels of scale economies. Baldauf.g. Several studies seem to indicate no relation between firm size and export performance (Katsikeas et al. the impact of the firm’s size has been the most frequently reviewed variable in export performance studies.

NON-SIGNIFICANT. 27 . IMP. NS IMP. NS IMP. IMP. POSITIVE IMPACT. NEG. NS IMP. POS. NEG. NEGATIVE IMPACT. NEG.Different Types of Exporting SMEs Table 1. NS IMP. 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) POS. IMP. POS. IMP. POS. a Not included in any reviews.. The Relationships between Reviewed Variables and Export Performance in Various Review Studies. Firm size/firm resources Product/service quality/strength Niche product/service Export agea/firm age International orientation International commitment International experience Product adaptation Price adaptation Communication adaptation Market diversification 4 7 – – – – – 4 – – 3 2 0 – – – – – 1 – – 1 5 2 – – – – – 1 – – 2 5 1 3 – 5 7 3 1 1 – 3 7 0 0 – 0 0 0 1 0 – – 3 1 0 – 0 0 0 4 0 – – 7 4 – – 3 – – 4 2 0 – 1 0 – – 0 – – 0 0 0 – 10 2 – – 2 – – 4 2 2 – 9 13 – 6 10 15 15 12 7 3 b 5 2 – 2 0 0 1 2 1 3 b 23 27 – 3 6 2 10 13 6 2 b 5 – – 0 5 8 5 1 – – 5 3 – – 3 0 0 0 0 – – 0 8 – – 3 0 0 1 0 – – 0 30 25 3 6 23 30 23 22 10 3 11 18 2 0 5 0 0 1 4 1 3 1 49 32 0 6 8 2 11 22 8 4 2 Note: In one study more than one export performance measures may have been used. IMP. NEG. IMP.. IMP POS. NS IMP. NEG. POS. b Not specified in the review. included into the firm general export strategy results. NEG IMP. NS IMP. NS. TOTAL POS NEG.

Recent support for the positive relation between firm size and export performance was given by Majocchi. 1998. 1998. (1998) found a positive relation between firm size and export performance based both on export ratio and profitability of exports. A quality emphasis can be expensive and have a negative impact on product standardization. 1998). the non-significant relation with export performance has usually been found. 1997). and Mayrhofer (2005) based on Italian SMEs. However. As buyers have more alternatives to choose from. buyers can access a greater volume and variety of product choices. More often quality has been linked to improved competitiveness and to superior organizational performance (see Buzzell & Gale. Concerning this aspect. often quality refers to how well the perceived fundamental characteristic of a product or service meet the expectations of the customers (Mohr-Jackson. their expectations of product/service quality may grow. Thus. 1990). Chadee & Mattsson. Quality can be defined in several ways. Knight et al. On the other hand. However. leading to pressure on companies to improve their product/service quality (Knight.g. There is a positive relation between firm size and export performance. when the relation between product strength and export performance has been analyzed. 1998). when exactly the relation between product quality and export performance has been reviewed (see e. for the empirical part of the study we expect that: Hypothesis 1... 1987. 2004). whereas a positive relation has been identified mostly. In an increasingly global economy. It seems that the positive relation has been identified more often when the size of the firm was measured based on the number of employees. research has also shown that higher quality does not necessarily incur substantial extra costs.. High quality offers also an opportunity to differentiate the product/service from those of competitors (Calantone & Knight. than when other measures for the firm size and/or export performance has been used although e. Mohr-Jackson. a recent study focused on British and Spanish exporters clearly indicated that product and/ or service quality was the key antecedent of export performance in both . and the performance measured using export ratio to total sales.28 JORMA LARIMO companies (e. and by Voerman (2004) based on an European multicountry SME sample. Griffith & Ryans. 2000). the empirical results are mixed (see Table 1). Nakos et al. Bacchiocchi.. Product/service quality. White. 1998. Furthermore.g. Both results by Calantone and Knight (2000) and Knight et al. Thirkell & Dau. (2004) indicated a very strong support for the positive impact of quality on export performance in US-based industrial companies. Porter.g.

1991). Their review was based on the analysis of 36 export performance studies. Export age. Lages. There is a positive relation between product/service quality and export performance.Different Types of Exporting SMEs 29 samples (see Lages. The technical development has facilitated greater specialization in SMEs and therefore increased the possibility to concentrate on niche markets. for the empirical part of the study we expect that: Hypothesis 2. Katsikeas. The niche may be even very small in one country. The results by Leonidou et al. and Samiee (2002). the impact appears to be mainly positive.g.. As the results in Table 1 indicate. & Lages. Because of the resource limitations. particularly in the case of export proportion of sales. Thus. Niche product/service. but via expanding the operations to several countries the company may reach economies of scale (see e.. Table 2 includes the results of the marketing strategy – export performance summary review by Leonidou. There is a positive relation between niche product/service focus and export performance. for the empirical part of the study we expect a positive relation between niche focus and export performance. 2006). The results offer additional information about the relation between various variables and export performance adding the type of export performance measures used to the analysis. Knight. However. the impact of niche product/service or product/service uniqueness has been analyzed only to a limited degree so far. the operations of SMEs have to be more concentrated than those of their larger competitors in order to be competitive in the foreign markets. 2004) indicated the positive impact of product differentiation on export performance in the US sub-sample. which in turn might adversely affect their perceptions of . (2002) clearly indicate that export product uniqueness has in general had a significant positive impact on performance. With heightened competition in many industries. 1997). covering the period from early 1970s to the end of 1990s. Hypothesis 3. Less experienced exporters are likely to perceive considerable uncertainty. The argumentation for an assumption of a positive relationship between export age (exporting experience) and export performance lies in the issue of uncertainty and the way various firms cope with it (Erramilli. Based on the above. there is a growing pressure on SMEs to concentrate on niche markets in order to serve market segments that are small enough to avoid the competition of large rivals. The results in a recent study (Knight et al. whereas in the Danish subsample a non-significant relation was found.

009 0.000 0.197 0.000 0.000 0.000 0.002 0.001 0.344 0.100 0.013 0.004 0. .002 0. Export Performance Indicator Time of Study 1980s Geographic Focus Product Type Both Overall Export Export Export Profit Other Composite 1970s Export Sales Profits Contribution Performance Performance Performance Intensity Level Measure Measure Targeting Market concentration Market spreading Product Quality New/unique product(niche) Product adaptation Price Price adaptation Promotion Promotion adaptation 1990s America Europe Other Industrial 0.30 Table 2.099 0.003 0.000 0.000 0.100 0.000 0.325 0.002 0.004 0.004 0.000 0.100 0.000 0.000 0.004 0.019 0.099 0.000 0.031 0.000 0.100 0.001 0.001 0.000 0.084 0.000 0.010 0.049 0.100 0.100 0.007 0.004 0.122 0.000 0.001 0.001 0. Export Strategy Area Summary of Marketing Strategy – Export Performance Relationship (p-Values) in Various Empirical Studies.000 0.000 0.004 0.001 0. (2002).007 0.000 0.361 0.000 0.000 0.000 0.004 0.000 0.038 0.001 0.000 0.063 0.001 0.003 0.000 0.049 0.011 0.059 0.003 JORMA LARIMO Source: Leonidou et al.000 0.049 0.100 0.000 0.057 0.004 0.049 0.019 0.003 0.

Majocchi et al.2.. 1993. Consequently. 1998) and some studies indicate even a negative relation (e. 2000.. we expect that: Hypothesis 4. Nevertheless.g. Kundhu & Renko. whereas a positive relation was identified in the Indian sub-sample (and also in the Finnish sub-sample when performance was measured employing export intensity as the measure).Different Types of Exporting SMEs 31 potential risks and returns about foreign sales.g.. in some studies the impact has been dependent on a sub-sample like in the study by Kundhu and Renko (2005).. export growth (Contractor et al. Kundhu & Renko. Piercy et al.. Kaynak & Kuan.g. 2005 in the Indian sample). Cavusgil & Zou. 2005. Kaynak & Kuan. 1998). the number of export ventures in which the firm has been involved. Contractor et al. 1998). 2005).2. 1993). Some studies do not indicate any relation between international/export experience and performance (see Nakos et al. related to foreign sales based on increased market and customer knowledge and networks. 1996). 1998). Francis & Collins-Dodd.. 2000. Higher export age/export experience is likely to determine the firms to be less uncertain.. the empirical evidence is mixed. 2005). This has also been the case when using various measures for export performance. There is a positive relation between the length of export experience of the company and the export performance. Leonidou & Kaleka. Finally. In summary. Katsikeas et al. 2005. 1988. where a negative relation was found in the Finnish software exporter sub-sample when the performance was measured using export growth. or the time frame of firm’s export involvement (Diamantopoulos & Inglis. 3.. Kundhu & Renko. 2000).. & Kundhu. 1994. 2005. or export ratio/intensity (Baldauf et al. This has been the case whether the experience has been operationalized using the age of the company in general (Contractor. There should also be a learning curve or experience effect that reduces the foreign operating and coordination costs. 1998. 2005. support for a positive relation has been found clearly more often than for a negative relation. 1989. but it slightly tends to support a positive relation between export experience and performance. Francis & Collins-Dodd. or using a composite measure (Thirkell & Dau. leading to more effective export sales planning and strategies (Madsen. An internationally oriented firm can better identify and benefit from emerging international opportunities and avoid threats . or export market knowledge (e. In this case as well the empirical results are very mixed (see Table 1).. Leonidou & Kaleka. like export sales (e. Hsu. Management Characteristics Related Variables International orientation.

Therefore for the empirical part of the study we expect that: Hypothesis 6. for the empirical part of the study we expect that: Hypothesis 5. As such. 1998)... . In highly internationally oriented firms the advantages of exports outperform the barriers of exporting. The results in Table 1 indicate that there is a wide empirical support for the positive impact of international orientation on export performance. Thus. Support for the positive relation has been found both in manufacturing and service firms (although greater among the latter ones) (Chetty & Hamilton. (1998) based on the US origin business-to-business service firms. and pursue effective export marketing strategies that improve export performance (Cavusgil & Zou. Chadee & Mattsson. but results in the Taiwanese and Finnish sub-samples gave support for the expected positive relation. 1998). (1998) and Calantone and Knight (2000). The empirical evidence also indicates that there has been a positive relation when both financial measures and composite measures for export performance have been used (see Zou & Stan.g. 1998) and using both export ratio and export profitability as the measure of performance (e. Among the studies indicating support for the positive relation can be mentioned those by Preece et al. 1994). More recently the results in the studies by Contractor et al. The empirical support for the positive impact of international commitment on export performance is very wide (see Table 1). 1998). There is a positive relation between the international orientation of the management and the export performance.32 JORMA LARIMO (Zou & Stan. The market building in exports is usually long-term oriented requiring high commitment to these markets. International commitment. (2005) and Kundhu and Renko (2005) indicated no relation between international orientation and export performance in the Indian software sub-sample. The high commitment of the management toward exports allows a firm to aggressively go after the export market opportunities. Based on the above. There is a positive relation between the international commitment of the management and the export performance. Therefore a positive relation between the international orientation and the export performance could be expected. 1993. a positive relation between international commitment and export performance could be expected. the latter results support the earlier findings by White et al. whereas in the highly domestically oriented firms the situation is expected to be the opposite. Nakos et al.

1998. First. There is a positive relation between the international experience of the management and the export performance. 3. in general. a positive relation between the international experience of the management and the export performance could be expected. Recently also Contractor et al. The assumption of a positive relation between product/service adaptation and export performance is based on three key benefits related to adaptation (see Leonidou et al. The results in the Finnish and Taiwanese sub-samples indicated no relation between international experience and export performance. as they can reach out to foreign buyers in the target countries through a combination of internet and formal/informal networks. (2005) and Kundhu and Renko (2005) found a negative relation between international experience and export performance. international experience of the management seems to have had either a non-significant or – in a majority of cases – a positive impact on export performance whether the performance was measured based on export sales. 2002).. Export Strategy-Related Variables Product/service adaptation. p. but only in their Indian sub-sample and only when performance was measured based on export growth. The results by Das (1994) indicated that the managers of successful exporting firms had less experience in exporting and in foreign settings as compared to the managers of unsuccessful firms. Second. 1995).2. 349). Thus. The proponents of a positive relation between standardized product/service and export performance refer to the cost savings and to the similarities in buyer behavior in several markets (Keegan.Different Types of Exporting SMEs 33 International experience. export growth. Therefore we expect that: Hypothesis 7. or based on a composite measure (see results in Table 1 and Zou and Stan. the better product–market match can result in greater buyer satisfaction. One possible explanation for the unexpected finding may be that Das focused on firms operating in highly turbulent environments and the unique context explains the findings. export profits. However. The international experience of the manager(s) helps a firm to identify and leverage on the international opportunities. The authors explain their findings that given the nature of the industry of the sample – software industry – the entrepreneurs do not have to possess significant international experience.3. 1987). adaptation reflects customerorientation based on a more or less systematic analysis of buyer behavior and target market characteristics (Douglas & Wind. which . while avoiding or at least having a more realistic view of the threats of exports to foreign countries.

price control. or even a negative relation (e. 1988). Japanese. the results of the . political–legal. Also the results in the review by Leonidou et al. Shoham. price adaptation enhanced performance. 2002). Schmidt. differences in distribution and transportation arrangements and costs. 1999. Third. 2002). 1998. 1994. Koh and Robicheaux (1988) reported inconclusive findings. Price adaptation. the majority of studies seem to indicate support for a positive relation (e. Nakos et al. & Cavusgil. Based on the findings in several earlier studies and on the expectation that the benefits of customer-orientation and better product/service match outweigh the benefits of costs savings in the standardized strategy. 1998). Cavusgil and Kirpalani (1993) found that high product adaptation was not so important in enhancing export performance at entry as it was in subsequent penetration. Fenwick & Amine. we expect that: Hypothesis 8. Additionally. Similarly. Some empirical studies indicate no relation at all (Diamantopoulos & Inglis. which translates into better export performance. This diversity of foreign market pricing determinants makes price adaptation more or less necessary for the firms to survive and remain competitive in export markets (see Leonidou et al.g. but only when it was higher than domestic prices. Whereas Shoham (1995) reported that price adaptation enhanced profitability. and other barriers. Baldauf et al. in a recent study (Calantone. taxes.. which may result in additional products both for the domestic and foreign markets (Czinkota & Ronkainen. Kim. There is a positive relation between product adaptation and export performance. and South Korean. tariffs. he later reported first a negative impact (1996). However.. but only in studies using export sales-based performance measures. (2002) clearly indicated that product adaptation was positively correlated with superior export performance.g. The results seemed to be valid across all time frames and geographic contexts... and later on a nonsignificant impact (Shoham. the results indicate a positive relation between product adaptation and export performance in all three reviewed samples: US. 1996. However. pressures to meet specific host market requirements often demand creative and innovative thinking. 2006). 2002. In an examination of exporters along the internationalization process..34 JORMA LARIMO can lead to greater sales volumes or to greater pricing freedom in comparison to competitors. market structures. etc. 2000). The adaptation of pricing in export marketing is grounded on several reasons: economic. 1979) between product adaptation and export performance. Cavusgil & Zou.

There is a positive relation between price adaptation and export performance. (see Keegan. Leonidou et al. export profits. while its impact on export profit contribution was limited. 2002). Although the empirical results have been mixed it is expected that the benefits related to adaptation of communication outweigh the benefits of standardization and therefore we expect that: Hypothesis 10. They found that the relation between those variables is apparently more complex. . 1996. and to the existence of international market segments – as in the case of product standardization – and to the cost savings based on the use of standardized communication strategy. 1999) indicated support for a positive impact of promotion adaptation on export performance along various parameters: export sales. irrespective of the time. Communication adaptation. that adaptation of advertising/promotion had a strong positive impact on overall export performance. competitive practices.. or promotion mix. Whereas in one study (Shoham. The results in various studies by Shoham have also been mixed. Proponents of the positive relationship between standardized communication refer to the similarities in buyers consumption patterns. communication infrastructures. 2002) no relation between adaptation of advertising and export performance was found. place. or growth herein. In contrast. Thus. Here is a positive relation between communication adaptation and export performance. the results in his two other studies (Shoham. 1995. (2002) indicated support for a strong positive link between price adaptation and both overall and individual export performance measures with the exception of export sales volume (see Table 2).Different Types of Exporting SMEs 35 review by Leonidou et al. poor judgment in altering of the positioning. etc. and products focused on in the studies reviewed (see Table 2). Cavusgil and Zou (1994) discovered a negative relation between promotion adaptation and export performance. Therefore. Noteworthy is. however. we expect that: Hypothesis 9. The results in the review by Leonidou et al. those referring to the positive relationship between adapted communication and export performance cite the differences in government restrictions. (2002) indicated. that his more detailed analysis uncovered a strong positive effect only on export sales growth and export intensity. the diversity of foreign market pricing determinants seems to make price adaptation necessary for firms to survive and remain competitive in the host markets. The identified negative relation may be caused by the universal appeal of some products.

The unexpected negative result was explained by the fact that the focus in those studies was on software industry where to concentrate solely on the US market seemed to be more appealing to some Taiwanese software exporters. when compared to standardization. Based on these findings and considering factors like the risk spreading advantages. One key question in exports is to decide whether to concentrate.36 JORMA LARIMO Market diversification. There is a positive relation between market diversification and export performance. we expect that: Hypothesis 12. and the market turbulence we expect that: Hypothesis 11. or to diversify the sales in several target countries. Therefore the impact on export performance could be expected to be more dependent of the measure on export performance in the case of adaptations than related to the other variables of interest in this study. as the results in several earlier studies indicate (see above). As the results in Table 2 indicate. the different types of adaptation – product/ service. rather than to scatter the sales across several target countries. those proposing a positive relation between market spreading and export performance refer to risk spreading and market coverage (see Dean et al. but support for a positive relation in the Finnish sub-sample. that there has been much more support for the positive impact of market diversification on export performance than the opposite. and/or communication adaptation – usually increase the costs. there has been support for both the positive impact of market concentration and for market diversification on export performance. Support for the positive relation between market diversification and export performance is indicated in Diamantopoulos and Inglis (1988).. however. In contrast. 2000). However. Hence. in the Taiwanese sub-sample even a negative relation based on export intensity. Those favoring a positive relation between concentration and export performance. price. The results in Table 1 indicate. refer to the better possibilities for bigger market shares based on the more targeted and possibly bigger marketing efforts. Adaptation of the marketing mix elements to the target country conditions could be expected to increase competitiveness of the company in those markets and therefore increase sales. and Cavusgil and Zou (1994). More recently. The positive relation between adaptation of marketing mix variables and export performance is more significant when the export performance is measured using subjective export performance measures . (2005) and Kundhu and Renko (2005) found no relation. the developments in information technology. Contractor et al.

4. and a higher degree of standardization of the marketing mix elements like product. 1992). The rapid expansion also demands great international orientation and commitment. AND OPERATIONALIZATIONS OF THE MEASURES The data for the study was collected as a part of a larger survey analyzing the export behavior. the born internationals had performed better than the other sub-groups.2 software. traditional type of exporters the results showed that based on perceived international performance. traditional exporters vs. Therefore. and international commitment with export performance is greater in born international companies than in traditional exporting companies. SAMPLE. but taking into account the objective financial measures (ROI and ROE) no significant differences in export performance between sub-groups was found. As discussed earlier the survey method has been the clearly dominating method of data collection in export performance studies. international orientation. Therefore. a large number of target markets. and communication than in traditional exporting firms. In a study by Aspelund and Moen (2005) focusing on Norwegian born internationals vs.2 engineering.Different Types of Exporting SMEs 37 and export sales intensity.3 advertising) having 10–500 employees. price. The target group was manufacturing (NACE 15-36) and service firms (NACE 72. Based on the discussion in Section 2 of the paper.. 74. and performing exports according to the Yritys Suomi . in order to be able to expand rapidly into several target countries (see Jolly et al. and 74. born international were discussed. for the empirical part of the study is expected that: Hypothesis 13. and performance of the Finnish SMEs. strategies. price. The positive relation between product. METHODOLOGY. Hypothesis 14. than when the performance is measured using profitability-based export performance measure. we may expect that key aspects of the successful performance in foreign markets are a niche focus. The questionnaire was five pages long. and communication adaptation and export performance is lower in born international companies than in traditional exporting companies. The positive relation between niche focus. In Section 2 of the paper. the key features of these born international companies seem to be rapid expansion into several markets soon after the establishment of the company.

the total target group consisted of 2. The . Menon. 27 basic metals and fabricated metal products. and the remaining were independent limited liability companies. Moreover. Furthermore. The response rates in the review by Sousa (2004) in studies focusing on SME export performance varied from 9. Bharadwaj. Only extremely few companies had more than 250 employees. and the mode was h1. response rates in largescale surveys targeted to the top management ending to response rates between 14 and 20% seem to be rather common (see e. In companies having less than 50 employees the questionnaire was directed to the managing directors. from which 386 were usable in this study resulting in a response rate of 14.67 million.8 to 51. About half of the companies were family-owned companies. In 48 cases the companies were in bankruptcy or the address was wrong and the new address could not be identified.7% were manufacturing. no greater differences were found between early. even though the response rate was not very high. almost onefourth was a part of a larger group.and late-responding companies. and 15. The mean year of establishment was 1974.654. The first year of export was on average 1985. in 154 cases the companies were not performing any exports.3% service companies. mainly industrial goods producers (NACE 29 machinery and equipment. The mean annual turnover was in 2001 h8. and 26 non-metallic mineral products as the main fields of industries). The respondents were dominantly managing directors. In general. Based on the number of employees. As such. and in 2001. whereas in larger companies it was directed to the export/international business manager. there were no significant differences between responding and non-responding companies.38 JORMA LARIMO 2000 database. Also the reviews by Zou and Stan (1998) and Manolova and Manev (2004) reveal that in about half of the studies analyzed the sample size was 100–200 firms.. the participating companies had an average of 64 employees. One explanation for the rather low response rate was very evidently the length of the used questionnaire. and in very few cases more than 300 companies. Regarding the participating companies. 84. export or financial managers of the companies. and the mode value 1992.8% and the median sample size was 181 and the mean 232 companies. Excluding these companies the final target group was totaled 2.g.856 companies. 489 answers were received (18. and field of industry. On the basis of these sources. annual turnover. & Howell. had more than 500 employees or were operating in fields not included in this study.5%.7 million.4%). The survey took place between November 2001 and March 2002. the sample size in this study was clearly over the average in export performance studies made during the years. In total. 1996).

The most common and most important target countries for exports were Sweden. Almost 60% of the sample was industrial goods manufacturers.2%. Therefore. except between international orientation. The variance inflation factor (VIF) was analyzed to study the potential multicollinearity problems. All the VIF values were below 3. Export Performance along Different Measures The results related to the performance along the five measures of export performance used in this study are presented in Table 3. A VIF value of less than 10 is considered indicative of the data having no such problems (see e. this group was selected as the base to which consumer goods manufacturers (consumer) and service companies (service) were compared.. Thus. Germany. The results in the whole sample indicate that using a 1–5 scale for the measures. the performance was in the middle class (scale value 3) except in the case of using . and international experience of the management. Therefore also in this study cross-sectional OLS-regression analysis was decided to be employed in the data analysis. The correlations between various variables were usually quite low (see Appendix C). Instead. The descriptive statistics of the sample did not indicate any statistically significant differences between truly traditional exporters and born internationals. an industry dummy is included in the analysis.1. among the traditional exporters and truly born international companies the export age was higher in the first group. Hill.Different Types of Exporting SMEs 39 mean share of exports in 2001 was 39.g. Because the sample included both manufacturing firms and service companies. 1993). RESULTS OF THE STUDY 5. 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. no multicollinearity problems existed in the data. 5. whereas international commitment and international experience of management were higher in the latter group. & Judge. Griffiths. The descriptive statistics of independent variables are presented in Appendix B. In almost two-thirds of the 25 empirical export performance made in 1996–2001 reviewed by Manolova and Manev (2004) regression analysis was employed as the statistical tool. and on average the companies had exports to 9. and Russia.4 foreign markets. international commitment.

The composite performance measure yielded a mean value of 3. The highest performance evaluation ratio was related to the performance of the main product.96 3.29 3.09 3. NEG.78d 1. shareX25%. Truly Born Traditional Truly Born Traditional Internationals Exporters Internationals Exporters (N ¼ 194) (N ¼ 287) (N ¼ 77) (N ¼ 164) 3.13 2. The mean objective financial performance indicated that in general the operational profit of the companies has been between 0 and 4% in 1999– 2001. Level of statistical significance: a ¼ 0.02 3.00 3.58c 67.01.24 3. Performance in SME Exports.1.17 3. 2 ¼ Exports within 3 years.09.28 3. objective financial total performance during the last three years (scale value 2). FSALES in 2001X50%.05. As discussed earlier.33 3. to X20%) Composite performance 3.40 Note: 1 ¼ Exports within 3 years.62 Total Sample (N ¼ 358) Performance related to main goals (scale: 1–5) General foreign operation performance (scale: 1–5) Performance of the main product (scale: 1–5) Foreign sales ratio (0–100) Objective financial total performance during the last 3 years (scale: 5 alternatives.57 2. whereas using the tighter definition some 21% of the sample companies were born internationals.02 3. The more detailed mean performances based on the three subjective measures were very close to each other with the variation from only 3.10d 3. The two classifications used indicated clear differences in the sub-sample sizes.46 47.35d 1. The mean foreign sales ratio was 40. Using the looser definition for born international companies almost 55% of the sample was classified as born internationals. and that the variable correlated negatively with the share of foreign sales variable.58 indicating clearly a higher mean ratio than in several other studies focusing on SME exports.’’ The performance results based on classification 1 – between truly traditional exporters and born international companies – indicated to rather .25 3. the latter definition indicates which firms can be regarded as really born internationals and therefore this sub-group was also labeled as ‘‘truly born internationals.24 3.41 40.47b 3.34 32.58 2. A more detailed analysis of the performance results indicated that those based on the net results were clearly different. d ¼ 0.23 3.40 JORMA LARIMO Table 3. no share limits.001.39 3.36 33.04 3. c ¼ 0.41.33 3. b ¼ 0.28 to 3.

The born international companies have performed more poorly in the case of the objective performance. which was clearly higher in the born international company group. although even in this case the performance was better in the born international group. whereas based on the objective financial performance. All models. Results in the Total Sample The results of the cross-sectional OLS regression in the total sample are presented in Table 4. 5. hopefully. In the tight classification category. Apparently. . the faster and more intensive international expansion had demanded a significantly higher level of financial resources that the results based on this will be. better in the born international group at least after five years when the foreign operations should be on a more stable basis (the truly born international companies were younger than the companies in the other subgroups). except for the objective financial performance. also the results based on two subjective performance measures. also the composite performance indicated statistically higher performance in the born international subgroup.1.Different Types of Exporting SMEs 41 small differences between the two groups when the looser definition of born international companies was used. the foreign sales ratio was clearly higher in the born international group (based on the operational definition this could also be expected). the performance was somewhat poorer than in traditional exporter companies.25). As in the case of the looser definition. However. When considering the three subjective measures evaluations and composite measure mean. were significant with quite good explanatory power (with R2 in several models higher than 0. namely on general foreign operation performance and performance of the main product. the values were somewhat higher in the born international group.2. Classification 2 – where a tighter operational definition of born international companies was employed – indicated more differences in the performance between the traditional exporters and the truly born internationals. The only case where a statistically significant difference was found was based on foreign sales ratio. Relationships between Reviewed Variables and Various Export Performance Measures 5. the results indicated clearly better performance in the born international companies than in the traditional exporter group.2. Only in the case of performance related to the main goals no statistically significant difference could be found.

185 6. 2.186 6. Performance Related to Main Goals Firm size Product/service quality Niche product/service Export age International orientation International commitment International experience Product adaptation Price adaptation Communication adaptation Market diversification Consumer Service R2 Adjusted R2 F-ratio +d +d NS +b +c NS NS NS NS NS +a NS NS 0.279 10. Performance of the Main Product +b +c NS NS +d NS NS +a NS NS +b NS NS 0. d ¼ 0.310 0.000 JORMA LARIMO Note: NS ¼ Non-significant. . General Foreign Performance +d +d NS NS +d NS NS NS NS NS +b NS NS 0.370 NS NS NS NS +c NS NS +a NS NS +c NS NS 0.295 11.05.013 0.400 +b +d NS NS +d NS NS NS NS NS +d NS NS 0.325 0. Composite 1.01.221 0.220 0.142 3.42 Table 4.247 8. Performance in SME Exports (Total Sample). c ¼ 0.750 4.001.030 0.705 6. Foreign Sales Ratio 5.1. Objective Financial Performance +a +c NS NS NS NS –b NS NS NS NS NS NS 0. Level of statistical significance: a ¼ 0.279 0. b ¼ 0.

01 level. a significant positive relation was found using five different performance measures. However. Analyzing the former case. Product adaptation was significant.. As stated before (see Table 1). Additionally. whereas in the former case the results have been more mixed. product/service quality. international commitment. In the case of product/service quality and international orientation there were strong impacts independent of the measure of performance. and export age along one measure. The impact of niche focus and communication adaptation on export performance has been so far analyzed only to a limited extent. e. in turn the fifth measure which was objective was the objective financial performance in the first two. The greatest surprise was the non-significance of international experience. based on one subjective and one objective measure while the export age was significant. and market diversification. but only mildly. In addition. Cavusgil and Zou (1994) and Nakos et al. In four cases – niche product/service. All four variables were significant using the three subjective measures of export performance and composite measure. the results give support to the earlier findings by e. (1998) about the role of commitment on export performance. but against expectation – a mild negative impact on export performance was found. The relatively low importance of product adaptation and total .g. The impact of price adaptation and international commitment of the management have also been reviewed rather intensively and the especially concerning the latter variable the results have in a majority of studies indicated a positive relation.. price adaptation. In the case of firm size. earlier studies have indicated a strong positive impact of international experience on export performance. international orientation. seven variables had a significant relationship with export performance at least once. Knight et al. Product adaptation had significantly impacted along two.g. the results have in all cases supported a positive impact on performance. (2006) about the key role of quality and those by. Thus.Different Types of Exporting SMEs 43 The results in the total sample indicated that no variable had significantly impacted on the export performance along all six measures (see Table 4). international experience was once significant. (2004). and foreign sales ratio in the latter two cases. and Lages et al. and communication adaptation – the variables did not have any significant impact along any of the six export performance measures. Knight and Calantone (2000). but they have been more mixed when considering the communication adaptation. on one subjective measure. noteworthy is that both product/service quality and international orientation were along all five measures significant at least at the 0. whereas related to firm size and market diversification the level of the relation depended much more on the measure of performance.

6. In the two sub-groups. in the truly traditional and born international samples are presented in Table 5. In addition. i. price and communication adaptation were insignificant using all six measures. Thus. Only product adaptation had the expected positive impact on performance – although only mildly – in two cases. In addition to the non-significance of those four variables. In hypothesis 12. market diversification was in total significant in four cases. As discussed above.2. In the case of hypotheses 4 and 8 the support is only partial. As expected from the analysis of the total results. these three variables seemed to be the most important ones in both sub-groups. and the rest of the hypotheses (3. 7. In conclusion.. however. and 11 were validated because those variables indicated statistically significant support using five measures of performance. it was expected that the relationships between adaptation of marketing mix variables and export performance to be more significant when the export performance is interpreted in terms of subjective performance measures and export sales intensity than when the performance is measured using objective profit measures. firm size. Also a third variable. but in the born international sub-group the quality variable was significant when this measure was employed. countryspecific adaptation is not necessary for success. 5. but three of those situations concerned traditional exporter sub-group.e. Interesting to note was that international orientation did not have any statistically significant influence when objective financial performance was used. . Thus the market diversification variable seems to be more important only in this sub-group. of which one was a subjective measure and the other one the foreign sales ratio.2. it can be argued that the hypotheses 1. and 10) did not receive any support in the total sample. as also concluded by Styles and Ambler (1994). was significant in all seven cases. both international orientation and product/service quality had a statistically significant influence using five and respectively four different performance measures. 2. 9. In the other cases. the results give mild support to the hypothesis but only in the case of product adaptation. Thus. the clearly lowest explanatory powers were also found now when objective financial performance was used as the measure of performance. 5. Born Internationals The results based on the looser definition of born internationals. the models’ explanatory powers ranged between satisfactory and good. Classification 1: Truly Traditional Exporters vs. the results indicated that there were no significant differences in the results depending on the field of industry of the sample firms.44 JORMA LARIMO non-significance of advertising adaptation may be explained by the fact that if a firm offers a high-quality product that meets customers needs.

353 0.368 0.491 NS +a +c NS NS +b NS NS NS NS NS +a NS NS 0.101 0.258 NS NS NS NS NS NS 0. Objective 6. 2.148 3.310 8. Objective 6. Foreign Sales Ratio Àb NS NS NS NS +a NS NS NS NS NS NS NS NS 0. Performance in SME Exports Based on Classification 1: Truly Traditional Exporters vs.021 1.252 0.028 1.501 NS NS +b NS NS +b NS NS NS NS NS NS NS NS 0. Foreign Sales Ratio Àb NS NS NS NS +b NS NS NS NS NS +b NS NS 0. b ¼ 0.251 +a +b +b NS NS +c NS NS NS NS NS +a NS NS 0.238 0. General 3.262 0.521 NS +d +c NS NS +c NS NS NS NS NS NS NS NS 0.323 0.1. Truly Traditional Exporters (N ¼ 164) 1.316 0.312 0.196 3. Performance Foreign Performance Related to Performance of the Main Main Goals Product 4. General 3.195 4.767 Born Internationals (N ¼ 194) 4. 45 .251 0.Different Types of Exporting SMEs Table 5.185 3.265 6.170 3.413 Note: NS ¼ non-significant. Level of statistical significance: a ¼ 0.01. d ¼ 0.312 6.146 NS NS +c NS NS NS NS À b +a +a +c NS NS +a NS NS NS NS NS NS NS NS 0. Financial Composite Performance Performance 5.230 NS NS Àa NS NS NS 0.001.05. Financial Composite Performance Foreign Performance Performance Performance Related to Performance of the Main Main Goals Product +c NS NS NS NS NS NS À a Constant Firm size Product/service quality Niche product/ service Export age International orientation International commitment International experience Product adaptation Price adaptation Communication adaptation Market diversification Consumer Service R2 Adjusted R2 F-value NS +b +d NS NS +b NS NS NS NS NS NS NS NS 0.223 3.095 0.197 +c +d NS NS NS +a NS NS NS NS NS NS NS NS 0. c ¼ 0. 2.528 5.261 6.206 0.966 +b +c +c NS NS +b NS NS NS NS NS +d NS NS 0. Born Internationals. 1.

Similarly. In the born international sub-groups. the variable was once statistically significant in both sub-groups. international orientation. the results gave additional support of the great impact of these four variables. Having in mind that the above findings were identified when the objective financial performance variable was at work. but the sign was against expectations negative. In the total results six of the eleven variables had at least once a statistically significant impact. This was the case when employing the foreign sales ratio as the measure of performance and in both cases the impact was opposite to the negative expectations (in the born international sub-group somewhat greater than among traditional exporters). Also in all other models the explanatory power is at least rather good. Thus. 5. but using the tight classification altogether. firm size and international orientation were significant in three cases and the other two in fewer cases. the results indicated that the industry variable did not have any greater impact using any of the performance measures. Finally. Price adaptation had a significant positive impact on the truly born international sub-group three times. it can be argued that the real costs of the adaptation of communication have been greater than the increase in sales. what concerns communication adaptation. It is difficult to explain the finding. Similarities in the results between the sub-groups were that both product adaptation and niche focus were – against expectations – insignificant using all of the six performance measures. All of them were significant in using five different measures of performance in the traditional exporter sub-group. most often had a positive impact on export performance. In the case of international experience. firm size. Price adaptation was once important also in the traditional exporter sub-group. especially in the traditional exporter group. nine of the variables had a statistically significant impact at least once. international commitment. and export age were all insignificant in both sub-groups using all six measures of performance.3. In the truly born international sub-group model. and market diversification. Truly Born Internationals The results based on the tighter classification of the born international companies are presented in Table 6. whereas among traditional exporters the variable had once a significant negative impact. price adaptation. the variable was all the time insignificant in the born international sub-group. but only in the traditional exporter sub-group. especially why such a result was . In general. the explanatory power is much higher.46 JORMA LARIMO Product adaptation. niche focus.2. Classification 2: Traditional Exporters vs. The explanatory power of the objective financial performance model is again low. product/service quality.

241 0.084 1.340 0.163 NS NS +b NS +b NS +c Àb NS +a NS NS NS NS 0.345 0. Financial Composite Performance Foreign Performance Performance Performance Related to Performance of the Main Main Goals Product +d +b +b NS NS NS NS NS NS NS Àa NS NS +a 0.203 6.05. 1.001.240 Truly Born Internationals (N ¼ 77) 5. Level of statistical significance: a ¼ 0. Performance in SME Exports Based on Classification 2: Traditional Exporters vs.352 4.245 0. Foreign Sales Ratio NS NS NS NS NS +b NS NS NS NS +b Àa NS NS 0.099 5. b ¼ 0.236 2.360 NS +c +d NS NS +b NS +a NS NS NS +c NS NS 0.266 0.476 NS +b +c NS NS +b NS NS NS NS NS +b NS NS 0. c ¼ 0. Traditional Exporters (N ¼ 281) 1. General 3. 2.310 5.310 5.759 4. Objective 6.199 2.417 +b NS NS NS NS NS NS NS NS +c NS NS NS NS 0. 47 .206 2.299 7.01. Foreign Sales Ratio Àb NS NS NS +c +a NS NS NS NS NS +d NS NS 0. d ¼ 0. Performance Foreign Performance Related to Performance of the Main Main Goals Product 4.202 NS +b +c NS NS +b NS NS NS NS NS +b NS NS 0.099 0.358 0.1.373 0. Truly Born Internationals. Financial Composite Performance Performance Constant Firm size Product/service quality Niche product/ service Export age International orientation International commitment International experience Product adaptation Price adaptation Communication adaptation Market diversification Consumer Service R2 Adjusted R2 F-value +b +d +d NS Àb +b NS NS NS Àb NS +b NS NS 0. General 3.254 8.373 0.370 0.054 2.326 11.466 0. 2.138 +b +a +c NS NS +b NS NS NS NS NS +c NS NS 0.Different Types of Exporting SMEs Table 6.864 +b +b NS NS NS NS NS NS NS +b NS NS NS NS 0.864 Note: NS ¼ non-significant.523 +b +b NS NS NS +b NS NS NS NS NS NS NS NS 0.290 0. Objective 6.

export age was significant in three cases. As such. In the traditional exporter sub-group. only one was according to the expectations positive. the hypothesis receives only a mild support. 5. and 11 mainly receive support in the traditional exporter sub-group. two times in the traditional exporter and once in the truly born international sub-group. the sign was positive using general foreign operation performance measure. From those two cases in the latter group. the export age did not have any significant impact in the other analyses. in this case the traditional exporters having long export experience had definitely not reached the goals set for the export operations. Hypotheses 1. the results based on the tight definition of born internationals do not give full support to any of the hypotheses 1–11. in this sub-group the sign and measure were different compared to the findings using the loose definition. The variable was significant in both sub-groups once but using different measures and the sign differed from one group. In two cases. the expected positive impact was found but in the traditional exporter group the results indicated against expectations once a negative impact. in . Because the positive relation was found only in one of the twelve possibilities. Thus those truly international companies which had diversified very widely do not seem to have gained such strong positions. A third difference between the sub-groups was related to the international experience. when the performance was evaluated using objective financial performance. whereas only twice in the truly born international sub-group. A second clear difference between the sub-groups was found in relation to the impact of market diversification. In this case service companies had performed better than industrial (and consumer) goods companies. Furthermore. In the truly born international sub-group. and every time using different measures. Finally. Therefore. the result was similar to that found using the loose definition of born internationals.48 JORMA LARIMO obtained when performance was measured using the main goals of the firm. 2. whereas one – although mild – was negative (using foreign sales ratio). a negative sign was found using objective financial performance. those having concentrated somewhat more their operations had succeeded better and therefore also the role of foreign sales among the total sales was higher. the results indicated the only case when the industry of the sample firms had somewhat more influence on the results. A difference from the earlier results was also a finding that international commitment was in the truly born international subgroup once (using objective financial measure) significant and the results indicated also the expected positive sign. In summary. As discussed earlier. The variable had the expected positive impact four times in the traditional exporter sub-group. Thus.

and 7 receive partial support.1 level) and/or the results are mixed. the term ‘born international’ was used because the term refers better to the nature and operations of these firms). Furthermore. Furthermore. As discussed above. and 10 receive limited support. However. hypotheses 2. 6. Thus the other hypotheses are rejected. born international companies. To analyze: (1) the impact of the selected firm. and the export strategy-related variables to the export performance. Consequently. several of them have employed only one or two measures of export performance. there was limited support for the opposite results. there have been very mixed results and the general view is that more carefully planned research is needed in order to analyze the export performance. In fact. and (3) the similarities and differences in the results depending on the type of SME – traditional exporters vs. In hypothesis 14. There are a lot of studies focusing on export performance. but using the tight classification. it was more often significant in the traditional exporter sub-group than in truly born internationals. it was expected that the positive relation between niche focus. However. In hypothesis 13. International commitment had the expected positive impact only in one situation in the truly born international sub-group. 5. However. SUMMARY AND CONCLUSIONS Export performance has received a lot of attention since the pioneering studies of the early 1960s. The present paper had three main goals. . In the other cases either the support is so mild (once at the 0. 4. As mentioned before. International orientation was significant in both sub-groups several times. the results did not give support to this hypothesis. management. international orientation. Thus hypothesis 14 is rejected. especially from the late 1990s there have been several studies reviewing the export and internationalization behavior of the so-called INVs or born globals (in this study. it was expected that the positive impact of adaptation of various marketing mix elements on export performance would be lower among born internationals than among traditional exporters. the niche focus variable was insignificant in both sub-groups using both classifications and all six performance measures. it may be said that the hypothesis 13 receives only extremely mild support and only in the case of international commitment.Different Types of Exporting SMEs 49 turn in the truly born international sub-group hypotheses 1. (2) the possible variation in the results depending on the measure of export performance. and international commitment with export performance is greater in born international companies than in traditional exporting companies.

(2005) about the positive impact of firm size on export performance. international commitment of the management. 2. especially based on empirical evidence from smaller Organization for Economic Cooperation and Development (OECD) countries. The results indicated some variation depending on the measure of performance. (2006) of the positive impact of quality and those by Voerman (2004) and Majocchi et al. Thus. 5. none received support in all reviewed situations. niche focus. and export strategy-related variables. and market diversification seemed to be in general the main reviewed variables having positive impact on export performance. two additional hypotheses were developed in relation to the expected differences in the impacts of various variables between traditional exporters and born internationals. 12 hypotheses were developed regarding the relationships between various firm. product/service quality. and export performance. two variables had positive impact – product/service adaptation and export age – but more limited. Thus. Thus the results of this study coincide in this respect well with earlier findings. discriminating in the analysis between traditional exporter vs. The OLS regression was employed for the analysis. Against expectations. The results of the study are summarized in Table 7. hypotheses 1. and price and communication adaptation were not found to have . e. based on large-scale samples. and 11 received all support using five measures of performance. What concerns the impact of product/service quality and especially firm size. Results in the majority of earlier studies have also indicated positive impact of international orientation and market diversification on export performance. In addition to these. In these conditions. it can be concluded that also the results of this study give support to the view that the performance should be analyzed using several measures of export performance. the firm size.50 JORMA LARIMO several of those studies have been case or very small-scale survey studies. other types companies – referred to as born internationals in this study – is much more scarce. the results have been much more mixed. the empirical evidence from export performance along several performance measures.. Furthermore. The results in this study coincide with the recent findings. management. The export performance was interpreted using six different measures for export performance and the sample companies were distributed into two subgroups first using a looser definition and then a tighter definition born international companies.g. international orientation of the management. (2006) and Lages et al. However. by Calantone et al. Departing from the presented literature review. The empirical part of the study was based on the answers of 386 Finnish SMEs in a survey study conducted in early 2002. Among the hypotheses 1–11.

Truly Traditional Exporters Partially supported Born Internationals Traditional Exporters Truly Born Internationals Partially supported H1 H2 H3 H4 H5 H6 H7 Firm size Product/service quality Niche product/service Export age International orientation International commitment International experience + + + + + + + Mainly supported Mainly supported Not supported Limitedly supported Mainly supported Not supported Not supported/ limitedly opposite Partially supported Not supported Not supported Mainly supported Mainly supported >————————Mainly supported————————o >————————Not supported————————o >————————Not supported————————o >————————Mainly supported————————o Limitedly supported Partially supported >————————Not supported————————o >————————Not Supported/limitedly opposite————————o H8 H9 H10 Product adaptation Price adaptation Communication adaptation Market diversification Performance of the main product intensity & composite Niche. price & communication + + + >————————Not supported————————o >————————Not supported————————o Partially supported >————————Not supported————————o H11 H12 + Stronger relationships Mainly supported Not supported Partially supported Limited support for composite Limitedly supported Limited support for main product & composite Not supported Mainly supported Limited support for composite Limitedly supported Not supported H13 Stronger in BGs À À À Not supported H14 Stronger in traditional exporters À Not supported À Not supported À 51 . Expected Sign Total Summary of the Results. international orientation & international communication Product adaptation of product.Different Types of Exporting SMEs Table 7.

Some of the main target countries in this study. The less significant impact of the quality issue in latter case is more difficult to explain. Additionally. the product/ service quality and market diversification had clearly more often a positive impact on export performance among traditional exporters. The insignificant role of the product/service and communication adaptation may be partly explained by the fact that in the case of high-quality products there may be less pressure toward local adaptation than in the case of poorer quality products/services. price. An unexpected result was that in the truly born international sub-group the price adaptation had a positive impact on export performance using three different measures of performance (included both subjective and objective measures). and communication along any of the six measures of performance.g. Among both traditional exporters and truly born international companies. The results evidenced also some similarities and differences depending on the type of the SME. Finally. The earlier findings have given strong support for the positive impact of management commitment on export performance. born internationals. using both looser and tighter classifications. whereas the market diversification issue is at least partly justified by the fact that truly born international firms were in general more diversified than traditional exporters. Sweden and Germany – are also culturally close . Furthermore. the results related to the impact of adaptation are similar to those found by Shoham (2002). International commitment was also significant in only one case. the industry (manufacturers of industrial goods or consumer goods or service field companies) of the reviewed companies had only once influenced the results. thus culturally rather similar areas/countries to the UK. adaptation of product/service. Moreover. e.52 JORMA LARIMO a positive impact along any of the six performance measures. The mean level of commitment was high in this study. The results among traditional exporters vs. once (based on objective performance) the results indicated surprisingly a negative relation between international experience of the management and export performance. indicated no impact of the niche focus. than in the case of truly born internationals. the firm size and international orientation had the greatest positive impact on export performance. no differences could be found depending on the industry of the sample companies. A similar finding was also made in the study focusing on UKbased export award winners by Styles and Ambler (1994). Thus. They assumed that the result may have been influenced by the fact that the most important export markets for the sampled firms were Western Europe and USA. even management in poorly performing firms was highly committed to exports. which explains the non-significant impact on export performance.. Furthermore.

Especially the relation between the types of exporting SME – traditional exporters vs. (3) there are some similarities. the results of the study indicate that: (1) the export performance is influenced by the firm. especially among traditional exporters companies. when compared to Finland. but also some differences in the variables influencing export performance among traditional exporters and born internationals. and (4) the differences depend on the operationalization of the born international company. this study provided with more detailed information about the influence of various operationalizations of the born international company on the export performance. born internationals – has been analyzed very limitedly so far. among born internationals the product adaptation did not seem to be as important as price adaptation. the market spreading seemed to lead to better performance than the market concentration.Different Types of Exporting SMEs 53 to Finland. In conclusion. thus the same argument may be valid at least partially also in this study. management. However. The results give also basis for some important managerial implications. more standardized products are also . the product adaptation seemed to be more important than the price or communication adaptation in the total sample. Furthermore.000 employees for the SMEs in some studies). This explained mainly by the high quality of the products/services provided by the born internationals why country-specific adaptation of the product offering is not necessary for success. and also the sample companies have usually been bigger (maximum limit of 1. Most foreign studies have focused on companies having bigger domestic markets. (2) the results are at least partly dependent on the measure of export performance. one has to remember that the companies in this study were rather small (all SMEs) but the foreign sales usually had a very significant role at least partly based on the small size of the Finnish domestic market. there has been a lot of variation in the operationalizations used for born internationals. Thus. If the results of this study are compared with those of earlier studies. Finally. Furthermore. Furthermore. the results evidenced the importance of the international orientation of the management for the export performance. but the best performing exporters had given even more weight to the quality of the product/service than the lower performing exporters. The reliance on quality as a competitive strategy was great in the whole sample. and export strategy-related variables. The results also showed that good export performance usually demands at least somewhat bigger size from the company in order to have enough financial and managerial resources for the successful export entry and expansion. Moreover. but the role of foreign sales has not been as significant as in the sample of this study.

the present study has several limitations. it would be worth taking into account that the relationships between the various independent variables and the export performance are not necessarily linear but curvilinear. e.. ACKNOWLEDGMENTS The study is a part of the ‘‘Finnish Companies and Challenges of Globalization’’ (LIIKE) – research project in Finland. key issues are how to develop the export systems to fit to support the increasing amount of born internationals and also to the increasingly diversified types of born international companies. Therefore. Finally. The author expresses his .g. This would give more detailed information. competition. about the possible differences in the impact of product/ service. The study did not include any information about. this may have possibly been a problem only in those cases where the foreign sales had a much smaller role in the total sales.54 JORMA LARIMO expected to be typical for born internationals in order to be able to expand sales rapidly to several target countries. Consequently. these aspects could be added in future analyses in order to have a more comprehensive view of the export-related variables and export performance. In truly born international companies this was no problem because of that. and type of customers and/or distribution arrangements. Additionally. on average almost 70% of the total sales in our sample was generated abroad and it seems that they do not separate between domestic and foreign profitability. and in the case of various export age and market diversification groups. of the motives for exports.. this study analyzed only the direct impact of reviewed variables on export performance. From the government policy point of view. Nevertheless. for instance. the financial performance concerned the total operation of the company. This avenue of research requires further consideration as well. In this light. main export markets. born international firms. There was no analysis of the so-called born-again global firms (see Bell et al. One possibility for further research would be to concentrate more on this sub-group of exporters. standardization issues were analyzed only at a very general level. the adaptation vs. foreign sales could be analyzed separately in future studies. in the future research more developed methods of analysis should be used to review also the indirect effects of various variables on export performance. Furthermore. 2001). and price adaptation on performance in different fields of industries. This study focused on traditional exporters vs. and the profitability of domestic vs. communication. Additionally. Thus a more detailed analysis is needed.

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Because it may be expected that the influence is not linear. Performance of the main product. The management was asked to inform the level of the operating profit of the company in 1999–2001 on a 5-point scale where 1 ¼ negative. Foreign sales intensity. Independent variables Firm size (FSIZE). Product adaptation (PRODUCTADP). the second category included cases where the total score was from 8 to 12 y and the fifth group included cases where the total score was from 22 to 25. a share of 20–39% as 2 y and a foreign sales share of 80–100% was rated as 5. whereas 5 meant very significant adaptation. The firm size was measured based on the total sales of the company in 2001 in million euros. The management was asked to rate their degree of satisfaction with the export performance of their main export product on a 5-point Likert scale where 1 ¼ very disappointed y 5 ¼ very satisfied. Composite export performance. The product/service adaptation was measured on a scale from 0 to 5 where 0 indicated that there was no adaptation at all. The management was asked to rate their degree of satisfaction with the export performance related to the goals set in the main markets of the company on a 5-point Likert scale where 1 ¼ very disappointed y 5 ¼ very satisfied. 5 ¼ 20% or more. The composite export performance was built using the answers related to the above five export performance measures. 3 ¼ 5–9%. 4 ¼ 10–19%. The foreign sales intensity was measured asking the exact share of foreign sales from total sales of the company in 2001. For the total scale. a logarithmic version was used. . 2 ¼ 0–4%.Different Types of Exporting SMEs 59 APPENDIX A. General foreign performance. The management was asked to rate their degree of satisfaction with the export performance in all foreign markets on a 5point Likert scale where 1 ¼ very disappointed y 5 ¼ very satisfied. Five groups were built: the first group included cases where the total score was from 5 to 7. Objective financial performance. 1 that there was only extremely limitedly adaptation. the export sales intensity was transferred to five categories where a foreign sales share below 20% was rated as 1. OPERATIONALIZATIONS OF DEPENDENT AND INDEPENDENT VARIABLES Dependent variable: Export performance Performance related to the main goals.

The level of international commitment was measured based on the evaluations of the international commitment of the management on a scale from 1 ¼ very low/ poor y 5 ¼ very high/good. The level of price adaptation was measured based on a scale from 0 to 5 where 0 indicated that there was no adaptation at all. 1 that there was only extremely adaptation. 1 that there was only extremely adaptation. The level of international experience was measured based on the evaluations of the international experience of management on a scale from 1 ¼ very limited y 5 ¼ very extensive. Communication adaptation (COMADAPT). The level of market diversification was measured based on the amount of target countries of exports in 2001. International orientation (INTORIENT). The level of international orientation was measured based on the evaluations of the international orientation of the management on a scale from 1 ¼ very low/ poor y 5 ¼ very high/good. The level product/service quality was measured based on the evaluations of the competitiveness of the company based on the level of product/service quality on a scale from 1 to 5 where 1 ¼ very low/poor y 5 ¼ very high/good. Export age (EXPORT AGE). Market diversification (MARDIV). Price adaptation (PRIADAPT). The level of communication adaptation was measured on a scale from 0 to 5 where 0 indicated that there was no adaptation at all. whereas 5 meant very significant adaptation. International experience (INTEXP). . International commitment (INTCOMMIT). The level of niche focus in the operations was measured on the evaluations how well the following statement described the company: our product/service serves some special need that the competitors have problems to offer on a scale from 1 to 5 where 1 ¼ describes extremely poorly y 5 ¼ describes very well. whereas 5 meant very significant adaptation. Niche product/service (NICHE).60 JORMA LARIMO Product/service quality (QUALITY). The export age was measured based on the length of time the company has been exporting in years.

41 116 28 20 Born Internationls N ¼ 194 Traditional Exporters N ¼ 281 Truly Born Internationls N ¼ 77 Firm size (log) Firm size Product/service quality Niche product/service Export age International orientation International commitment International experience Market diversification (log) Market diversification Product adaptation Price adaptation Promotion adaptation Industrial Consumer Service 3. .49 1.Different Types of Exporting SMEs 61 APPENDIX B.53b 3.41 3.09 2.19 2.14 3. no share limits.28 3.86 3.73 3.05.96 15.79 1.97 2. c ¼ 0.01.84 13.16 59.6 4.6 3.43 4.9 3.29 3.2 3.0 3.91 3.94 3.89 12. DESCRIPTIVE SAMPLE INFORMATION Total Sample N ¼ 358 Truly Traditional Exporters N ¼ 164 3.75 8. Level of statistical significance: a ¼ 0.14 57.82 3.83 9.40 2.88 3.6 3.03 4.25 2.18 64.77b 1.75 3.93 3.02 2.83 3.81 8.57b 3.001. d ¼ 0.44 123 41 30 3.22 3. b ¼ 0.5 4.11 3.99 2.33 2. FSALES in 2001X50%.91 15.1.16 60.43 239 69 50 3.53 47 23 7 Note: 1 ¼ Exports Within 3 years.96 2.38 192 46 43 3.85 3.84 14. shareX25%.89 15.46 1. 2 ¼ Exports within 3 years.34 3.53 1.14 56.13b 3.56 1.89 10.76 3.

01 Export age 15.94 0.13 0.31 1 Product/service quality 3.10 0.11 0.18 0.82 0.62 APPENDIX C.72 0.16 International commitment 3.25 0.18 1 0.00 0.22 Communication 2.09 1 0.98 0.29 1.08 0.42 0.11 adaptation Market diversification 1.17 1 0.23 0.05 0.01 1 0.06 0.27 1.74 0.10 0.27 0.066 0.31 0.19 0.85 1.18 Product adaptation 3.33 0.12 0.15 0.34 0.19 0.04 0.23 0.17 1 0.44 0.33 0.69 0.09 À0.17 1.23 Price adaptation 3.12 1 0.12 Niche product/service 2.93 14.18 0.26 0.18 À0.93 1. CORRELATION MATRIX Mean STDV Firm size Product/ service quality Niche product/ service Export International International Inter-national Product age orientation commitment experience adaptation Price adaptation Communication Market adaptation diversification Firm size 3.32 0.11 0.36 0.98 0.05 0.13 1 0.32 0.21 International experience 3.46 1.30 0.01 0.10 0.98 0.11 0.50 0.14 À0.17 1 0.21 0.67 0.37 International orientation 3.10 1 JORMA LARIMO .31 1 0.

63–87 Copyright r 2007 by Elsevier Ltd. independently from the psychic/geographical distance. 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. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17002-7 63 . and compete mostly on a non-price basis. precocity. and scope. The case studies analysis shows a positive relation between niche strategy and high international performance. Focusing on a narrow market segment through the offer of specialised goods or International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. Volume 17. in terms of export intensity. INTRODUCTION Small firms have frequently approached international markets adopting a niche strategy. may reach a sustainable competitive positioning in global markets. which are traditionally described as constrained in terms of financial and managerial resources. This permits to understand how SMEs can reach high levels of export intensity and broad geographic scope. The latter can explain how small firms. speed.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. The international expansion of niche firms is based on an horizontal micro-segmentation of the global market: they move internationally following global customers.

since they focus on global customers wherever they are located. i. In markets dominated by economies of scale and scope in production.. i. niche firms perform better in terms of foreign sales to total sales ratios. an offer of customised goods.  Path of internationalisation. Moreover.. small firms would not be able to compete. which proved able of entering both small market niches. with special emphasis on its main outcome. In market niches. research and design. and  Scope of internationalisation. the smaller the niche. in particular strong orientation to global customers. step by step) one. the existence of market niches permits the survival and prosperity of small firms in the world economic systems. and marketing. niche firms are born international or start international activity from their first years of life.. Building on these premises.and after-sale service.e.e. the stronger the need to reach a global scope in order to break even.e. through theoretical survey and 17 case studies research. and mass markets. impose on a dynamic strategic approach to small firms in their niches. but it entails entrepreneurial proactivity and innovativeness in ‘‘shaping’’ market niches (and not just discovering them). and not on foreign markets.  Intensity of internationalisation. The adoption of a niche strategy protects small firms from the competition of large multinationals. a customised pre. SMALL FIRMS AND NICHE STRATEGY The academic literature has widely explored SMEs internationalisation. typically represented by the . a number of authors recognise that the adoption of a niche strategy is not just a defensive move of firms looking for protected market spaces. niche firms show a prevailing serial (simultaneous and fast) internationalisation process and not a sequential (incremental. the hypotheses that the adoption of a niche strategy enables small firms to better perform their export activity – when compared to other SMEs – according to the following dimensions:  Precocity of internationalisation. As Penrose (1959) suggested. i.e. niche firms show a broader geographic scope. the present contribution aims at verifying. i. the dynamism of global competition and the behaviours of large MNEs. Moreover. Actually.64 ANTONELLA ZUCCHELLA AND GIADA PALAMARA services enables small firms to compete globally.. small firms can deploy the resources and capabilities which characterise their organisations. wherever they are located.

Wright. notwithstanding the small dimension of firms. Wolff & Pett. Cavusgil. 1980). At the same time. the industry. Audretsch. 2000). 1984. and wide scope (Oviatt & McDougall.and countryspecific issues and the different stages of the internationalisation process have been widely studied (Miesenbock. 2002. 1988. Issues regarding the decision maker and the entrepreneurial aspect. 2005). 1986. Venkatraman & Ramanujam. 1994). 2001. Global niche strategy can guarantee a leading position not only in the regional market. 1998).Niche Strategy and Export Performance 65 exporting activity. the literature about niche positioning as an important driver of the internationalisation strategy of SMEs is still scarce. Shane & Venkataraman. Madsen & Servais. SMEs are able to offer an attractive offering in terms of differentiation. but also in the global one. 1988). outlining the path followed by firms facing international markets (Johanson & Vahlne. the relationship between business strategy and export performance is not adequately explored. Even though in the . the drivers and the dimensions of SMEs international success have been studied quite extensively. According to the above-mentioned developments.  the construct of export performance that represents one of the most meaningful indicators of international performance. characterised by high precocity. which for some authors lie in the experience. Rialp. Kundu & Katz. 2000). & Thurik. Westhead. & Knight. The internationalisation process for SMEs is primarily represented by the export strategy that still constitutes the most common foreign-market entry mode (Leonidou & Katsikeas. and in particular. 1994. which leads to the identification of new patterns of international expansion. 1997. 2003). due to technology and know-how protection. Sullivan. and  the emerging field of international entrepreneurship (Venkataraman. 1998. while for others in business and industry specific factors (Tesar & Moini. Shoham.  the strategic approach to internationalisation. Among the different issues considered we find the following ones:  the drivers of export activity. and the related debate on born global firms. especially in the case of small firms (Dess & Robinson. 2000. attitudes. McDougall & Oviatt. 1997. speed. and through the continuous attention to the client’s needs. 1996. & Ucbasaran. 1977. and traits of the entrepreneur and of the management team. moving the focus from ‘‘why’’ do small firms export to ‘‘how’’ they perform this activity successfully (Audretsch. Prince. which can be obtained only through the continuous improvement of the product. Rialp.

On the other side. Wheeler. the smallest firms are not necessarily hindered from being strong exporters. 1994. 1985.e. In this case. Hamill. Small firms can directly compete with large companies in narrow segments. exporting still represents the main way through which these firms sell abroad. Gomes Casseres. competing in a mass market is not sustainable for SMEs. 1979). . technological. i.  scarcity.e. appeared to be leaders in their market segment on a global scale (Maleksadeh & Nahavandi. a quality/innovativeness perception that the customer feels as exclusive to the firm’s offering. 1977. and firms need to sell in multiple countries to survive. entrepreneurial. 1994. Mattiacci. inside the world of SMEs. Kohn. Calof.e. managerial. 1989). 1992. Porter. Wolff & Pett. 2005). A niche strategy involves (Dalgic & Leeuw. 2000)  specialisation.  strong customer orientation. mostly represented by the need of relevant financial.66 ANTONELLA ZUCCHELLA AND GIADA PALAMARA last two decades small firms have diversified the avenues of their international growth paths and entry modes. evidencing that ¨ the competitiveness of small firms in global markets depends actually also on their capacity to find the needed resources and capabilities in different markets and/or to be strategic units in international value chains. 1997). a production that is not quantitatively adequate for a potential mass market. although small in size. there is no actual substitutive product. because of the high entry barriers. Calof. and strategic elements. and can reach a high share in international markets by choosing a niche strategy (Porter & Caves.. 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.  competitive isolation. 2005). Luthje & Servais. 1991). Competition in global markets and scale advantages of large firms tend to push firms into niche markets (Christensen. the domestic market can be too small in terms of customer base. It indeed offers a greater degree of flexibility and an effective means for firms to achieve an international positioning without overextending their capabilities or resources (Young. 1997. 1994. i. both endogenous (supply-side niche) and exogenous to the business (demand-side niche). and  originality. Simon.. 1991. 1996. and that export capabilities are more correlated with the firms’ organisational. Schmalensee (1985) argues that market share and profitability are strictly correlated: some contributions have been devoted to the emerging case of niche firms that. Exporting is frequently coupled with importing (Monczka & Trent. & Richard. i. This shows that. and managerial resources (La Marca & Palamara. 2000)..

& Keong Leong. The global niche approach does not in fact imply that there are any stable niches protected from competition (Maccarini. thanks to non-price competition and the absence of direct competitors. typical of SMEs. where the niche is the result of the segmentation of the market. Scabini. The strategic approach to niche market assumes that no traditional barriers exist in entering a niche (as in the defensive approach): barriers exist in surviving and building a competitive advantage. Bickford. means selecting a competitive system based on intangible and competence-based barriers. 2003). 1978. competences. it reduces the complexity in the competitive environment. and abilities. and the recently acquired ability of large firms to respond with flexible strategies and penetrate the market at niche level (also by acquiring small firms) create a continual challenge for small enterprises. 1980) – where the niche is considered as a protected area – it has developed into a truly ‘‘strategic’’ concept. Niche competitors generally select market segments characterised by nonprice competition. The underlying goal is to reach a better and faster product adaptation to foreign customer needs. and service for customers. and adaptation to customers’ needs are considered the fundamental competences that build new barriers to survival. . Born as a sort of ‘‘defensive reaction’’ (Newman. 1993). Caves & Pugel. Choosing to compete on a niche market. in terms of knowledge and control of the segment created. to a strategic answer (entrepreneurial action) to the complexity of the global competitive arena. 1996). it reduces the degree of organisational complexity. 1990). and to learn from the foreign context in order to improve their technology to meet local customers’ objectives and conditions.Niche Strategy and Export Performance 67 The concept of niche strategy has assumed different meanings in the literature. since they orient their products towards high levels of quality. & Zucchella. the transversality of new technologies. This strategy reduces the degree of complexity of the international market. From a reactive strategy to compensate SMEs size disadvantage (Acs & Audretsch. innovation. in a certain way. technology content. The dynamism of markets. It is a mix of unique resources. Even in the case of manufacturing activities the ‘‘cost competitive capability’’ is not crucial (Ward. which create a favourable competitive environment for SMEs. Niche strategy is a key competitive strategy for SMEs. in order to anticipate customers’ value functions. A niche market is characterised by non-price competition: quality. thanks to the centralised organisational structure. allowing them to maintain a long-term competitive advantage also with reference to bigger firms (Kotler & Scott.

and global scope are thus expected elements characterising export performance of small firms. which have opted for a niche strategy. These are fundamental characteristics both of a ‘‘demand-based’’ niche strategy – where the niche is born from a specific and explicit need of the market – and of a ‘‘supply-based’’ niche strategy – determined by the research of a potential market of implicit needs. i. starting from the closest and gradually moving the more distant ones. focus on narrow global market segments and are strongly customer-oriented. they engage in ‘‘widening’’ processes as well. in order to break even. Both widening and the deepening processes are supposed incremental. precocity. The need of quickly reaching a relatively small number of customers dispersed across the globe. niche firms share some fundamental similarities: they possess unique assets. In addition to the ‘‘deepening’’ of their presence in foreign countries. in the next phases. both in terms of timing and in terms of entry markets. leads these firms to follow a simultaneous and fast international growth. more ‘‘committed’’ forms are deployed. High export intensity. The first step of the international process consists in exporting towards those countries that are physically and culturally the nearest.. grounded on the issue of commitment building. NICHE STRATEGY AND SMALL FIRMS’ INTERNATIONALISATION Operating within a narrowly defined market niche leads to an international market horizon in order to break even. slowly and gradually. Moreover. turned to interpreting its complexity and variety. since the domestic one – at a small niche level – does not permit adequate sales volumes to be reached – even for small enterprises.e. while other firms more frequently adopt an incremental process of internationalisation. 2003). The Uppsala model is based on the concepts of experience and knowledge: the internationalisation process is conceived as a gradual process of .68 ANTONELLA ZUCCHELLA AND GIADA PALAMARA The niche approach implies a non-generic vision of the market. when compared to the one of non-niche small firms. firms move gradually from ‘‘closest’’ to more distant countries. we can expect that their internationalisation path shows different features.. Johanson and Vahlne (1977) describe internationalisation as a process that begins and develops in incremental stages. and to orienting the entrepreneurial action to the proactive client’s service (Maccarini et al. then. All over the world.

focus on product quality. the sequential model was challenged by the evolution of global markets and of firms’ strategies and did not always fit internationalisation processes of small and infant firms. The global market. this path leads to dimensional growth. offers new chances to create and gain value. Niche strategy frequently characterises born global firms as well as the ones that internationalise quickly and intensely. Larimo. Miles. Hordes. According to Johanson and Vahlne. & Servais. It is an approach to the international market that suits the characteristics of SMEs: dynamism. integration. & Baddaley. which are international from their inception (Oviatt & McDougall. indeed. In the long run. centralised governance. flexibility. In terms of approach to internationalisation. characterised by a serial process: a simultaneous internationalisation in different markets.Niche Strategy and Export Performance 69 acquisition. 1997. Kuemmerle. Researchers and practitioners have started to study the phenomenon of the so-called born global firms. This psychic distance is the sum of factors that disturb or. & Baetz. and SMEs started to develop a new approach to internationalisation. 2002). hamper the flow of information between the firms and the markets in which they intend to operate. Madsen & Servais. The adoption of a niche strategy can explain why small firms are international from their inception. 1996). to the increase of management know-how. they are based on personal contacts and gradual commitment is built at the customer relationship level. The latter issues help in explaining why they can quickly reach a global scope and also why they typically show a more widening attitude rather than a deepening one in foreign markets: their global customers are too much dispersed and each single market usually does not make increase in commitment economically and strategically convenient for these small firms.. Relationships are kept with customers and not with countries. 1998. and reach high export performances in terms . the main impact of a niche strategy is a shift towards a market vision in terms of clusters of homogeneous clients and no longer of countries. 2001. 2000. Clancy. Madsen. to the constant growth of knowledge and to the increase of financial resources. Rasmussen. sometimes. 1994. the psychic distance that separates the home country from the foreign market causes the cautious attitude (grounded on the risk aversion hypothesis) at the beginning of the international process. 1995. and utilisation of knowledge concerning markets and externally performed transactions (experience accumulation). and specialised production (Ward et al. frequently independent of both from the age of the firm and from psychic distance. Preece. In the last two decades.

49) describe the born global firm as ‘‘a business organization that from inception seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. According to a recent European survey. particularly for SMEs. Wolff & Pett.e. 1997. 2005) and supports 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. Zucchella. speed. joint ventures. Matthyssens. etc. IDE.). the contemporary existence of import flows is quite common in SMEs (Servais. Export intensity has widely been used in international business literature as an indicator of SMEs international performance (Czinkota & Johnson. 1993). The recent debate on international new ventures leads us to assume that international performance can be explained also through other dimensions. precocity. 1). viz. export strategy is still the primary foreign-market entry mode used by small businesses in their internationalisation efforts (Leonidou & Katsikeas. Calof. Audretsch.. and the ratio of exports to total sales.. & Pauwels. through which kind of process (notably a serial one. as opposed to the sequential process). Kroeck. They are export precocity. Measuring export performance is not easy because export performance is a multidimensional construct (Shoham. 1988). Westhead et al. Lommelen. 1998. 1996). 2000). international sourcing. and scope. (Madsen & Servais. & Palamara. 2002. 2003). speed. it represents also the predominant international activity of small firms (Tesar & Moini. 2002) and scope (Tallman & Li. i. & Renforth. is a typical measure of the degree of internationalisation (Ramaswamy. 1996). 1983. Kundu & Katz. international agreement. 1996.’’ Madsen and Servais (1997) speak about born globals as ‘‘firms that adopt an international or even global approach right from their birth or very shortly thereafter’’. Oviatt and McDougall (1994. It also explains how small firms internationalise. . PRECOCITY. 2001.70 ANTONELLA ZUCCHELLA AND GIADA PALAMARA of intensity and scope. SPEED. THE DIMENSIONS OF THE EXPORT PERFORMANCE: INTENSITY. it is possible to define three additional dimensions that contribute to better specify this measure and to explain its level (see Fig. Even if export intensity is the most accepted measurement. p. AND SCOPE Even if internationalisation of an enterprise can cover different aspects of a firm’s life (export.

1984). just like to a number of EU countries. For an Italian firm. depending on the choice to operate on a macro-regional area – that usually correspond to the home country – or on the global market. 1977. Servais et al. & Zucchella. the higher its export intensity is supposed to be. They have a broader scope. like precocity and speed.. which is crucial to maintaining competitive advantage in a global market. some authors divide firms in regional and global players (Maccarini et al. The former are firms competing on a macro-regional market – in our case the UE – where natural and artificial barriers have weakened. Gabrielsson & Gabrielsson. is something different than exporting to extra-European markets. these firms are operationalised as having a narrow scope. Palamara. new supranational and integrated spaces can be considered as the new domestic market. as some empirical studies demonstrate (Denicolai. 2005). The global player shows a global commitment. or between international and global players (Loustarinen & Gabrielsson. 1. 2005). The sooner and the broader a firm goes international. geographic scope.. In these cases. exporting to France. In our research model. i. Moreover. 2004). 2003. Research Model. which means that they have different customers in one or more continents other than Europe. and contribute to determining its level. precocity and speed are positively correlated to export performance. According to the fourth dimension of export performance. . Kolb. based on a strategic search of global customers..e. where a different currency and barriers to trade are present. Precocity and speed influence intensity because both are connected with the accumulation of experiential learning (Johanson & Vahlne. 2002.Niche Strategy and Export Performance 71 Export intensity Export performance dimensions Export precocity and speed Export scope Fig. Literature on born global firms argues that precocity matters in international competition and that temporal dimensions of internationalisation. are important as much as the quantitative (export intensity) and geographic ones (scope) for a thorough understanding of export performance.

72 ANTONELLA ZUCCHELLA AND GIADA PALAMARA Fig. the selection made is representative of the population of small. strategic positioning. 1994). and entrepreneurship. All of them are SMEs according to UE parameters. RESEARCH DESIGN AND METHODOLOGY The empirical section of this work is based on the case study research (Yin. and is useful in investigations of interpretations and meanings of events. The questionnaire is part of a wider research project going on in our department on the process of internationalisation of small firms and contains five different sections: business activities and governance. international activities. Our sample is a group of 17 manufacturing firms headquartered in Italy. 1 illustrates the research model developed through the aboveoutlined literature review on niche strategy and export performance dimensions. action and behaviour.and medium-sized international firms of Piedmont region (North West Italy). According to this methodological approach. We have directly interviewed the entrepreneur of each firm. entrepreneurs and top management usually coincide.1 According to this dataset. which define small firm as an independent organisation with a number of employees ranging between 10 and 49. According to Marshall and Rossman (1998). ownership and relations with other firms. due to their small scale. and we use a matrix positioning approach to summarise the main results. we use a qualitative scale to measure all the variables. All the firms in the sample have in fact less than 250 employees. In these firms. total revenues and assets below the mentioned ceilings. The model is tested in the following section though an exploratory empirical study on 17 case studies. if an export manager exists. the medium-sized firm is defined as an organisation with a number of employees ranging between 50 and 249. Table 1 summarises the relevant information about the surveyed group. The methodology of investigation adopted is a structured interview. and revenues less than h10 millions. qualitative research is appropriate for understanding phenomena such as entrepreneur’s and firm’s orientation. The group of firms was selected from a database reported by the Chambers of Commerce. he/she was interviewed about the international activity. submitted through a questionnaire. and sales volume less than h50 millions. and are independent (not belonging to national/ multinational groups). Each interview lasted on an average 1 hour and a half. .

Firm Product Year of Foundation The Sample.Niche Strategy and Export Performance Table 1. Time to Export Precocity Export Intensity Scope Approach to International Market Serial Serial Sequential Sequential Sequential Serial Serial Serial Serial Sequential Serial Serial Sequential Sequential Serial Serial Sequential Niche Strategy Employees 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Ring for mechanic pad Toys Car components Wine Lever for steering gear Informatics for banking Printed circuits Injection systems Cosmetics Steel tubes Machinery for jewellery Laser machineries Car components Valves and engines Cages for champagne and sparkling wine Diamonds threads Numeric controls 1882 1968 1968 1963 1925 1980 2004 1999 2000 1930 1945 2001 1990 1953 1956 1984 1996 63 60 210 9 142 220 90 30 12 114 104 7 26 64 80 35 130 88 2 29 17 21 0 0 0 0 43 3 0 1 13 0 0 0 Low High Low Low Low High High High High Low High High High Low High High High High Low Low High Low High High Low Low Low High High Low High High High Low Broad Broad Narrow Broad Broad Broad Broad Broad Broad Narrow Broad Broad Narrow Broad Broad Broad Narrow Yes Yes No No No Yes Yes No No No Yes Yes No No Yes Yes No 73 .

and we are also aware of the limitations involved in adopting cut-off values in operationalising the variables. and scope. and the share on global market (Kotler & Scott. viz. but we also took into consideration the recent literature on born global firm. speed. In addition to these measures we also distinguished firms according to the kind of internationalisation process. 2005). and scope. The serial approach to international market corresponds to a broad (global) scope and high growth rate from inception in international markets. and speed (Zucchella. combining the constructs of scope. We grouped the interviewed firms according to export performance indicators. and entrepreneurs. Dalgic & Leeuw. global players). 1993. gradually internationalising from ‘‘closest’’ markets in terms of geographic and psychic distance). on the basis of the following operationalisation criteria:  low export performance (domestic share>export share on total sales) versus high export performance (export share>domestic share on total sales). 1988.74 ANTONELLA ZUCCHELLA AND GIADA PALAMARA The questionnaire was designed after a review of the literature on international business. we accepted the theoretical framework that considers export performance as an indicator of the international performance (Czinkota & Johnson. 1994). researchers. Calof. Measuring international performance is complex because its operationalisation may refer to different aspects of the organisational effectiveness of the firms (Dess & Robinson.  fast internationalising (export sales ratioX25% in the first three years) versus slow internationalisation (export sales ratioo25% in the first three years). This was further integrated by the structured interviews in order to verify the effective niche orientation of the firms. Sullivan.  early internationalising (time to exportp3 years) versus late internationalising (time to export >3 years). speed. while the sequential one corresponds to a narrow scope (international players. precocity. as mentioned before. intensity. and  narrow scope (international players) versus broad scope (more than one continent. Shoham. In this work. We are aware that there could be a number of borderline situations in terms of precocity. 1986. 1994). markets variety. Venkatraman & Ramanujam. 1993). 1984. . the target customer description. precocity. Some problems stem from operationalising the concept of niche firm. and through discussions and focus groups with practitioners. 1983. In order to identify the niche competitors we analysed some key variables suggested by the above-mentioned literature: the specialised product. defining three more dimensions of export performance.

Intensity Fig.Niche Strategy and Export Performance 75 Some of them are based on the literature. 2 shows the distribution of the case studies according to three static indicators of export performance (intensity. a preliminary case study research grounded on qualitative information should help in defining better quantitative criteria and in refining research hypotheses. 2. Maccarini et al. viz. The Three Static Dimensions of Export Performance.. 1997. early internationalising and speed (Madsen & Servais. 2005).. . Others are the results of an arbitrary choice. and based on a meaningful representation of the Italian business market. 2003. 2004. and scope). Rialp et al. inspired from the necessity of simple and clear representative measures. precocity. Servais et al.. RESEARCH FINDINGS Fig. 2005) and scope (Gabrielsson & Gabrielsson. For this reason.

according to the above-mentioned speed criteria. and scope (Tallman & Li. but characterised by late internationalisation (two are niche-oriented). 3 considers the dynamic dimension of export performance. 2004) are positively linked. 3. Gabrielsson & Gabrielsson. precocity (Madsen & Servais.76 ANTONELLA ZUCCHELLA AND GIADA PALAMARA (Czinkota & Johnson. Fig. The other one corresponds to three firms with high export intensity and broad scope. In particular. serial versus sequential. since the firms all share this strategic option. Niche Strategy – Approach to International Market Matrix. 1997). 1983. broad scope. . There are two minor groups in this representation: one is in an area where three firms show precocity and broad scope but they do not perform well in terms of intensity (only one is niche-oriented). coupled with an analysis of the simultaneity of entry in different and distant foreign markets. This group portrays the international performance of the typical (and successful) niche firms. 1993). as described by the features of the internationalisation process. there is a cluster of firms in the area corresponding to high precocity (born global). Calof. Fig. and high export intensity. One of these cases is described in the box below. 1996.

Madsen & Servais. A niche approach does not coexist with a narrow scope of export activities. independent from the country. Country matters only rarely when we need to adapt our product to some different foreign technical standards y when we deal with local bureaucracy y that’s all!’’ . niche and customer orientation represent a core strategy for international new ventures. Empirical evidence shows that in different business context.Niche Strategy and Export Performance 77 Niche firms. the firm overcomes the psychic distance problem and the difficulty of dealing with the diversity of foreign markets. 1994. In some cases it depends on their very short life. following global customers. In the global niche approach. but not all of them have reached high export intensity ratios. firms that compete in these markets have a broader scope. this being the strategic model that permits to address narrow segments of clients wherever they are localised. In addition to this. 3). Our results confirm that niche strategy is strictly linked with the serial approach to internationalisation: the international expansion is based on a horizontal micro-segmentation of the global market. Other empirical evidences (Rennie. their problems. and firms move internationally following global customers. An entrepreneur said ‘‘Why do you ask me in how many and which countries I sell my products? I have no idea y I can tell you how many customers I have. the serial approach is typical of firms which internationalise from the inception (Oviatt & McDougall. regardless the geographic or cultural distance: the case studies show that a sequential approach does not coexist with the niche strategy (Fig. and. 5). a niche positioning is positively linked with a high speed of internationalisation. has underlined the relevance of niche strategy in explaining the early and fast internationalisation processes. have had a fast internationalisation process. 2001). their names. showing that the niche strategy is typical of born global firms (Fig. obviously I know where they live but that is not a primary issue for us. 1997). following their clients wherever they are located (Fig. According to the recent literature on international business. in other cases it seems to depend on the adoption of a sequential internationalisation strategy. and the psychic/geographical distance. Literature on born global firms. 4). indeed. 1993) argue that the niche orientation is a critical factor for born global firms. It is interesting that more than the half of our firms (8 out of 17) are international from their inception. indeed. Our findings confirm the above-mentioned results. according to the typical customer orientation of the niche strategy (Aspelund & Moen.

direct contact with global industrial customers supports customer orientation. It is interesting to notice that all the other (performing) niche firms belong to the business-to-business market. and scope – contribute in determining high export intensity for niche firms. Other studies seem to confirm the role of network embeddedness for niche firms performance (Echols & Tsai. High export intensity ratios are the result of such a strategy and yield on early and fast internationalisation and broad scope. nearly all the niche firms interviewed show high export intensity ratios. which is struggling to survive in a business (toys) where marketing investments and distribution channels tend to favour large firms. In such markets. 1996). speed. problem solving. According to Fig. Global networks are deemed crucial for the development of born global firms (Knight & Cavusgil. all the above-mentioned items – precocity. Finally. 6. Niche Strategy/Precocity Matrix. which permitted to . 4. and strengthens client relationships without the need of large investments in marketing and promotion. except one.78 ANTONELLA ZUCCHELLA AND GIADA PALAMARA Fig. 2005) and underline the importance of building a system of embedded ties together with the selection of product/market segment strategy.

quickly cumulate experiential learning about different foreign customers. which were . Shortly after foundation our firm was selling products both in Germany and India. According to Fig. through business contacts and participating in international trade fairs. 4.Niche Strategy and Export Performance 79 Fig. beyond the European market. but without reaching high export intensity: this may appear contradictory. An export manager describes the serial process as ‘‘y discovery of our global customers. and they all show a serial internationalisation process. but it could be explained with the young age of these firms. both close and distant – in geographic and in psychic terms. 5. On the other hand. Niche Strategy and Geographic Scope Matrix. There are two non-niche firms which show a serial internationalisation process and broad scope. but we didn’t make any country analysis to plan this entry y we established a contact with customers and met their requests. All the niche firms have a broad geographic scope. with a growth rate of foreign sales around 20% per year. no niche firm shows a sequential pattern of international growth. the niche firms interviewed are more frequently early international than others (six niche firms out of eight). because they went international quickly and with simultaneous entries in different markets.

are out of question. regardless of their country differences. This is what we mean by global customer.’’ The interviewed firms did not consider the possibility to move from export to more committed entry modes. basically similar. 6.’’ This outcome is confirmed by other studies which revealed that firms – especially . Niche Strategy and Export Performance Matrix. which enable the offer of highly specialised and customised goods. Producing at home and exporting is for many firms still the main international competitive strategy. as an entrepreneur declares ‘‘y for our firm FDIs and JVs. derive from a unique combination of domestic (notably local) unique resources (human capital. for two main reasons:  The distinctive competences.80 ANTONELLA ZUCCHELLA AND GIADA PALAMARA Fig. social capital. no matter where he/she is. It is not a matter of costs. it is a matter of nonreproducibility of our product uniqueness in foreign contexts. and especially the manufacturing oriented ones. apart from a couple of cases of ‘‘light’’ investments in sales and assistance subsidiaries in the main macro-regions. specialised suppliers y). someone who needs something you can sell.

independently from their location’’. Our profit margin is highly indebted to long term relationships with customers: they are our main assets. It is a born global firm: export and import started in same the year of foundation. that operate on more market segments and product lines. The firm had a serial approach to the global market ‘‘We were the only producer of diamonds threads. This firm has all the characteristics of Italian SMEs: a strong role of the entrepreneur. and it does not belong to any group. family business. regularly visiting these people. ‘‘when we start a customer relationship. 2001). networks) which are typical of the cluster they belong to (Servais & Rasmussen.  Commitment building is not made at the country level but at the customer relationship level. for such reason we have always looked at global customers. while geographic or cultural distance where not considered a problem at all. services. Initially it was the only producer of diamonds threads to cut granite. according to the global customer orientation characterising these firms (Aspelund & Moen. One entrepreneur declared. 1999) and develop competences and competitive offers which are rare and difficult to imitate. a turnover of h12 million. talking with them on the phone weekly. but they are big firms. understanding their needs and sometimes anticipating their needs. design and technical assistance. it operates in the granite mining and refining industry.Niche Strategy and Export Performance 81 during their founding period – tend to rely on resources (skills. and among the top 10 in the world market. Investing in long term relationships means travelling a lot. International Activities and Performance The enterprise is the leader in the domestic market. and a percentage of export .’’ CASE NUMBER 16 It is a small firm with 35 employees. our natural market is the world. even though later on other enterprises began to imitate the technology. USA). we know it is there we have to invest in order to build a long term and profitable relationship. even if it has some minority share in other Italian SMEs. Born in 1984. in research. Barriers in the international activities were found only in tariffs and protectionism. The latter is divided with other four direct foreign competitors. with a broad scope (UE. It is an investment in time and human resources.

the ability to create a global and local network. to specialise production and to ‘‘have a development in line with the demands of the market and with an immediate adjustment to the particular demands of the client’’. The entrepreneur thinks that the competitive advantages of his firm are quality. while it has representatives and agents in the other countries. an extra UE share of 70%. customer adaptation. India. The firm is aware that its technology is not well known yet: the enterprise sells the machinery to the client. The customer orientation is very strong. Portugal. and only a 5% on the national market. The entrepreneur himself is the manager of the international activity and of the strategic choices. The firm sells mostly in Spain. with a EU share on total sales of 25%. The firm tries to solve the problem of the technological risk that could derive from the introduction of an innovation. and to explore markets. Brazil. innovation. Price is not considered an influential element for competing in this business. The firm develops continuous research and aims at leading the innovation in stone cutting over time. with a dynamic attitude and proactivity. China. France. In a few years. The entrepreneur has travelled a lot. commercial relationship. . He has driven his production to a global market from the inception. of 33%. and assists him/her/them to correctly use the diamond thread.82 ANTONELLA ZUCCHELLA AND GIADA PALAMARA on total sales. Niche Orientation The firm has focused its business only on the production of diamond threads. in the first 3 years form inception. with the purpose to reach a critical mass of clients. and in USA with a sales subsidiary. because ‘‘the local one has never been considered as the only market’’. are fundamental to develop an international commitment’’. its products were present all over the world. in order to learn from his customers. The strong customer orientation is the reason why the enterprise – besides the activity of production – also offers services to clients. and assistance. He thinks ‘‘an open mind. the strategic approach is more customer than country oriented: the product can vary according to the demands of the clients. and the ability to have dialogue with other firms. also of other businesses.

and supported by the interviews made. the frequency of a niche strategy in small firms represents an issue to be considered for designing appropriate services to support their internationalisation. speed. The main limitation of this study is that the findings of the case studies research cannot be generalised and they need to be tested through quantitative analysis with a significant number of observations. and firms move quickly following global customers. The niche strategy is strictly linked with a serial approach to internationalisation: the international expansion is based on an horizontal microsegmentation of the global market. and scope. The exploratory research permits to better refine the criteria of operationalisation of the variables: it is confirmed that export intensity is a significant measure. From the first perspective. but export performance is made of (depends from) precocity. the joint effect of precocity and speed in internationalisation. The value of this qualitative research lies with the possibility it gives to build testable research hypotheses as well as with its capacity to highlight behaviour and strategic issues that are difficult to test quantitatively. which permitted to improve its definition. Managerial implications of the study are also relevant. The serial internationalisation path is a complex construct depending on all the above-mentioned variables. while accessing to foreign countries information is not so important. and scope. which characterise many of the niche firms. Among the niche firms. In addition to this. which appear important indicators for nicheoriented firms. independent of the country and the psychic/geographical distance. and compete mostly on a non-price basis. The actual arena of competition requires a global dimension of niche market: global niche allows firms to maximise opportunities in terms of experiential learning and segmentation. precocity. involve some rethinking about a system of public (but also private) support services where start-up assistance is coupled with foreign trade support. Getting in touch with global customers is a core issue for niche-oriented firms. and broad geographic scope. early and fast internationalisation. The niche strategy requires for firms’ management an .Niche Strategy and Export Performance 83 CONCLUSIONS This contribution shows through case studies research that there is a positive relation between niche strategy and high international performance. in terms of export intensity. The findings have both policy and managerial implications. most reveal what we consider the ‘‘typical’’ expected traits of successful niche firms: high export intensity. speed.

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where firms export via a sales subsidiary. a broader scope of products. which can accelerate or decelerate the decision to change phases. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. where firms export via an agent. This study explores factors. where firms do not export. 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.478 firms in 2002. Event history analysis is applied to our dataset. firm size and foreign ownership participation are also key factors in accelerating entries. Data are taken from the Spanish Survey on Business Strategies that comprises 1. 89–105 Copyright r 2007 by Elsevier Ltd. We interpret this process as a sequential path which allows us to identify the following export stages: (I) the pre-engagement phase. (II) the initial phase. Network ties. and (III) the advanced phase.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.1016/S1474-7979(06)17003-9 89 . Volume 17.

nature and content of the stages. paradoxically almost all models are static in nature (Leonidou & Katsikeas. 1998). Wiedersheim-Paul. it could be said that the impact of time has been overlooked (HurmerintaPeltomaki. 1997. & Knight. 1999). INTRODUCTION Internationalization is one aspect of strategic behavior that is considered of great importance regarding the growth of businesses. although variations in technological intensity. those selling their goods solely in the domestic market. Although researchers agree that the export development process is highly dynamic and time-dependent. 2003). and are unable to cope with the demands of exporting. that is.g. and cross-sectional data ultimately limits the depth of our understanding of that process (Coviello & McAuley. Only Berra. Coviello & Munro. & Young. & Welch. Johanson & Wiedersheim-Paul. even though there are an increasing number of studies on rapid internationalization (see Rialp. 1997. Another time-related issue is the velocity at which the firm moves between stages. where firms are regularexporters with extensive overseas experience. Although there are differences among the various models as to the number. it can be concluded that the export development process comprises three broad phases: (a) the pre-engagement phase. and other factors can affect a firm’s progress along the internationalization path (Young. which includes two types of firms. 1996. Luostarinen. Cavusgil. Korhonen. & van Dijken. 1996). 1994. Gankema. Bell. where firms are involved in sporadic export activity and can be classified as having the potential to increase their overseas involvement. This factor has been ignored by almost all models. (b) the initial phase. Snuit. Also. those that exported in the past but no longer do so. & Welch. and Vitali (1995) and Gankema et al. and frequently consider more committed forms of international business (Leonidou & Katsikeas. This condition is a concern given that internationalization is defined to be a process occurring over time. Hyvaerinen. many empirical models have been proposed to describe and explain the export development process of manufacturing firms (see e. First. Olson. 1987). leading to marginal export behavior or withdrawal from selling abroad altogether. Ali. Rialp.90 ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA 1. 1996). (1997) specifically analyze longitudinal patterns. In this sense. 1997. Piatti. product life cycles. those firms involved in the domestic market with no interest in exporting. 2005 for a literature review). 1978. research and development costs.. and finally (c) the advanced phase. Zafarullah. 1995. ¨ . Fontes & Coombs. 1975. and second. 1982.

Survival analysis also allows us to overcome the difficulties due to the lack of information about the age of transition from one phase to another. Westhead. & Young. we avoid the bias produced when studying the speed of internationalization by looking exclusively to exporting firms and discarding information from domestic firms. Matherne. Aspelund & Moen. 2. finally. Zahra. We then highlight the study’s contribution and limitations and. These technical problems are solved in the context of the doubly censored models of duration. as we will see further on. Peteraf. 1991. We use event history analysis (also called survival analysis) in the research.g. McNaughton. 2001. followed by an exposure of the main results. This methodology allows us to take into account not only firms that have entered into foreign markets but also domestic firms. 1991. these resources and capabilities can influence decisions about whether the firm internalizes its exports or not. which offers details on the firm’s situation at the moment of the survey but does not date relevant events. FACTORS AFFECTING THE SPEED OF THE EXPORT DEVELOPMENT PROCESS The Uppsala model and other stage approaches to internationalization are the basis for the idea of internationalization as a process of acquiring international knowledge and accumulating tangible and intangible resource ´ stocks (Fernandez & Nieto. & Ucbasaran. Using the Survey on Business Strategies. 2001. Similarly. the strategic decisions taken depend on the characteristics of the resources and capabilities controlled by the firm (Barney.Factors Affecting the Timing of the Export Development Process 91 This paper investigates entry timing by Spanish manufacturing firms into foreign markets. draw some conclusions from the study. 1993). & Carleton. The paper is organized in the following way. as previous studies do (e. The methodology of the empirical study is then set out. Bell. 2001). 2003). 2005. Foreign investment decisions by firms are partly influenced by unique . we analyze how different factors identified in the literature affect the transition between stages. Grant. In the next section we present a review of the literature on the process and the factors affecting internationalization according to a resource-based view of the firm. the mode of internationalization chosen and the control of distribution channels abroad (Campa & Guillen. According to the resource-based view of the firm. This approach provides the basis for stating several hypotheses about the influence of these factors on the speed of the export development process.. Wright. In this way. 1999).

provides the firm with unique technological know-how.g. a review of the literature can help identify several factors associated with the firm’s resources that can affect the speed of the internationalization process. Size. From a resource-based view. typically indicated by high R&D expenditures. Dunning. high technological intensity. This success is seen despite the scarce resources typical of young firms. and this mode of entry does not require a large amount of tangible and financial resources. the earlier the firm will proceed to advanced stages of internationalization. however. Concretely. from a resource-based view of the firm. human and tangible resources.. R&D expenditures lead to . firm size is often an indicator of its financial. 1976). while resource scarcity limits smaller firms’ ability to reach advanced stages of internationalization requiring foreign direct investment (e. These competencies emphasize the role of foreign market knowledge needed by the firm to successfully undertake international expansion. has not examined the potential relationship between size and timing of the export development process. Hypothesis1b. physical. Technological resources. 1994). On the one hand. The large size of a firm reflects its capacity to absorb the high costs and risks involved in internalizing international expansion (Buckley & Casson. Although there is numerous research on the topic. Timing for the firm to enter into export activities is independent of firm size. The relationship between firm size and export behavior has been one of the most widely analyzed relationships in international marketing literature. which often promotes the expansion of the firm overseas (Dhanaraj & Beamish.92 ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA competencies developed from their founding. 1992. It should also be highlighted that entering into export activities usually occurs through the use of intermediaries in the domestic market (Leonidou & Katsikeas. Calof. 1996). Thus. little consensus exists concerning the actual impact of size on export behavior. the exception being the positive association with propensity to export and the negative one with export intensity (Bonaccorsi. These factors are described in the following paragraphs. 2004). smaller size typical of young firms appears to confer a sort of flexibility that provides key benefits for succeeding in foreign markets (Knight & Cavusgil. 1988). On the other. Hypothesis1a. Past research. 1980. The larger the firm. 2003).

in a cross-national study into the export behavior of small computer software firms in Finland. and Ireland (1994). According to Hitt. network members can help a firm by identifying areas where changes in its product are desirable. Network members can also help by identifying export potential markets. economic. making foreign market penetration easier (Zahra et al. personnel and information resources that are less available. 1997): (1) the information that is available to the firm. 1996). The greater the amount of network ties. as networks are a source of information about what goes on in the market. found evidence that contacts with foreign suppliers to obtain hardware. Thus. the earlier the firm will enter into export activities and proceed to advanced stages of internationalization. Firms with foreign ownership participation are more likely to obtain technical. Hoskisson. such as knowledge related to new product and process technologies (Kogut & Chang. 1991). at the right time. and it is unclear whether exporting would have occurred without these relationships. Bell (1995).. and have consequences along three dimensions (Burt. In this respect.Factors Affecting the Timing of the Export Development Process 93 the creation of valuable rent-yielding intangible assets. Networks include the formal and informal relationships that develop among firms as they interact (Johanson & Mattsson. Network ties are resources that are firm specific and difficult to imitate. that imply that firms’ interests are represented in a positive light. firms will internationalize their operations to obtain higher returns on their innovations and reduce the risk of selling a product in a single market. and (3) referrals. especially when they are established in foreign markets. this may influence the internationalization process of firms. In relation with the export development process. Thus. as a particular piece if information could reach the firm earlier through its network ties. Network ties. Hypothesis 2. In accordance with Sharma and Blomstermo (2003). Ireland and Norway. (2) its timing. local software distribution rights or production licenses led to export initiation. and in the right place. The author is convinced that these contacts accelerated the decision to export. Internationalization also safeguards firms against rapid imitation (Zahra. Hypothesis 3. The greater the amount of technological resources possessed by the firm. 2003). 1987). . the earlier the firm will enter into export activities and proceed to advanced stages of internationalization.

a better chance of providing the right product to the foreign market. Axinn. firms with a broader strategic scope are better prepared to handle the uncertainty about the types of product that are needed in the foreign market (Kerin. product line extension. Reddy. Taken together. Thus. the impact of economies of scope on internalization timing comes from two sources. These resources allow firms to take advantage of capital flow increases. vertical . if exporting requires new product design and other forms of technical assistance. the earlier the firm will enter into export activities and proceed to advanced stages of internationalization. Holak. experience. and develop the internationalization process. to firms without such participation (Fernandez & Nieto. & Bhat. Also. Product diversification can bring benefits to the firm because it takes advantage of economies of scope in common resources (Grant. The broader the scope of products. and Ungson (2002). Human capital resources include training. 1987. Pan. 2002). Following Gaba. In this case. Barclay. judgment. intelligence. 1974). relationships. Secondly. Thus. 1995. Varadarajan. and insight of individual managers and workers in a firm (Barney. production. firms with a broader product scope have a greater likelihood of early entry into a foreign market. thus. 1992). The greater the amount of foreign ownership participation in the firm. Mitchell. 2002). 2005. & Thach. 1997). Hypothesis 5. Education. 2002). a broader scope of products and services means a wider portfolio of offerings to choose from and. 1988. the earlier the firm will enter into export activities and proceed to advanced stages of internationalization. distribution and market support (Lambkin. Firstly. The quality of the workforce can be positively related to entry into foreign markets if the goods for export are of higher quality. & Yeung. a broader scope of products enables the firm to develop synergy across different product sectors (Shaver. training and experience of employees determine the skills available to the firm (Grant. Green. Simpson & Kujawa.94 ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA ´ or even unavailable. & Peterson. This synergy gives rise to both efficiency and quality in product development. Several studies indicate a positive relationship between the main decision makers’ education and internationalization (Cavusgil & Naor. Rialp. Hypothesis 4. & Ryans. 1994). a highly skilled staff can be considered a sign of quality. 1991).

478 firms breaks down into 602 non-exporter firms. The higher the educational. Thus. & Sanchis. if a firm answers ‘yes’ to option 1 (own channel). we consider it exports indirectly and is in the initial phase. 3. according to one of the following five options: (1) own channel – agents or sales subsidiary. This information allowed us to classify firms in two groups: exporters and non-exporters. which has been carried out annually by the Spanish Ministry of Science and Technology since 1990. we consider it exports directly and is in the advanced phase. (4) export collaborative agreement – exporters association. technical and professional qualification of employees. the firm is asked to indicate the means employed to access foreign markets in that year. Regarding entry modes.1. (2) parent company in a foreign country – foreign-owned firms. the last data available. Database The database to investigate the timing of the export development process of Spanish manufacturing firms was obtained from the Survey on Business Strategies (henceforth SBS). This classification from our sample size of 1. 2002). 330 which export indirectly and 546 direct exporters. that is. we decided to exclude all foreign-owned firms. where they do not export.2.Factors Affecting the Timing of the Export Development Process 95 differentiation and a measure of the firm’s level of production skills (Manez. if it answers ‘no’ to option 1 and ‘yes’ to options 3 (export intermediary located in Spain) or 4 (export collaborative agreement). sectorial agreement or export consortium. Method of Analysis A sequential process with three phases is assumed: firms begin with a preengagement phase. those that exported through a parent company located in a foreign country (option 2 from the prior paragraph). We have used the SBS for the year 2002. (3) export intermediary located in Spain. The firm must indicate if it has exported in 2002. the earlier the firm will enter into export activities and proceed to advanced stages of internationalization. Hypothesis 6. Given that the purpose of this paper is to analyze the export development process of the Spanish firms. and (5) others – specify. METHODOLOGY 3. Moreover. followed by an initial phase. 3. ˜ Rochina. .

One solution to this problem is to make the dependent variable the length of time between the foundation of the firm and the time of the first export (indirect or direct. depending on what we are studying). For right-censored cases. that is. In right. this analysis ignores information on the timing of exports. and then estimate a conventional linear regression model (let T be this dependent variable). Two events are of interest to us: the first time a firm exports indirectly.and left-censored cases. but they differ in how the information is incorporated into the likelihood function. the probability that first export occurred at some time before the firm’s age [P(Tpt) ¼ F(t)]. But what do we do with the firms that are non-exporters when they are surveyed? Such cases are referred to as right censored. Information for left-censored cases is incorporated using their cumulative distribution function values at the firm’s age. Or what do we do with the firms that are exporters. One possibility to analyze such data using conventional methods is to perform a logit analysis with a dichotomous-dependent variable: exporter or non-exporter. the time of censoring is the firm’s age. and ending with an advanced phase. The aim is to determine how the occurrence and timing of exports depend on several predictor variables (covariates). and the first time a firm exports directly. where firms export directly. the natural logarithm of the likelihood function is X X ln L ¼ ln Sðti Þ þ ln F ðti Þ right-censored left-censored where ti is the age of firm i.and left-censored cases in a way that produces consistent estimates of the parameters of interest. that is. but we do not know the duration T. Thus. However. The Weibull distribution is a two-parameter distribution that is particularly flexible and used in this study.96 ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA where firms export indirectly. we know the age of the firm (let t be the age of the firm). such information is incorporated into the estimates using their survival function values at the firm’s age. Survival analysis devises a procedure that combines the information of the right. In both cases. but we do not know the exact date of the first export? Such cases are referred to as left censored. the probability that first export will occur at some time beyond the firm’s age [P(T>t) ¼ S(t)]. The survival function for this distribution is Sðti Þ ¼ exp½ðÀlti Þ1=s Š and F ðti Þ ¼ 1 À Sðti Þ . A specification of the distribution for the survival time is required.

0 otherwise Ratio of import expenditures to the purchases of the firm Percentage of foreign capital participation in the firm Let pj be the ratio of sales of product j to total sales. Once the survival function is specified.0 version in our analyses. respectively. A positive (negative) coefficient implies that the covariate exercises a positive (negative) influence on waiting time. Name Name and Definition of Independent Variables. independent variables affect the l parameter in the following way: l ¼ expðÀb0 À b0 X i Þ where Xi is the vector of covariates associated with the ith firm and b the vector of coefficients associated with each independent variable. In our model. b0 and s are referred to as INTERCEPT and SHAPE by the LIFEREG procedure. We use the LIFEREG procedure from SAS 8. Thus. estimation proceeds by maximizing the log-likelihood for the censored data. . a unit increase in the covariate is interpreted as a firm delaying (hastening) entry into a more advanced phase in the export development process. Then we use a Berry-Herfindhal P5 2 pj index:DIVERSIF ¼ 1 À P j¼1 2 5 Size of firm (EMPLOY) Technological resources Research and development intensity (R&DINT) Number of patents (PATENTS) Innovations (INNOVAT) Network ties (IMPINT) Foreign ownership (FORCAP) Product diversification (DIVERSIF) p j¼1 j 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. Definition Number of employees Ratio of research and development expenditures to the sales of the firm Number of patents and utility models registered by the firm in Spain or abroad Dummy variable equal to 1 if the firm has obtained product or process innovations. This ratio is available for the five core products.Factors Affecting the Timing of the Export Development Process 97 Table 1. A definition of the independent variables based on the questions available in the SBS is given in Table 1.

24 0.14) 0. The magnitudes of the correlations among variables are not large enough to pose a serious threat of multicollinearity.27) 11.24 0.01 (13.60 (1.10 0.80) 0. Table 3.53 11. indirect exporters and direct exporters.66) 0.00 0.02 0.11 0.04 1.06 (6.80) 0.06 (0.26 1.07 0.20 0.17 0.16 Correlation Matrix (All Firms).15) 9.24 0.14 À0. Non-Exporters 55.62) 3.86 (364.21) 8.00 0.24 (0.43 (3.36 (2.86 (8.01 0.36) 0. Note that as commitment with international activities deepens.19) 0.13 0.09 0.31 (0.06 À0.52 (4.32) 1.23) 7. Table 2.05 0.15 (38.44 (171.00 0.31 (26.02) 602 Indirect Exporters 170.56) 0. (1) (1) (2) (3) (4) (5) (6) (7) (8) EMPLOY R&DINT PATENTS INNOVAT IMPINT FORCAP DIVERSIF HUMANCAP 1.75 (13.20 2.56 (567.18) 0.71) 546 All firms 207.53) 20.00 0. (2) (3) (4) (5) (6) (7) (8) 1.87 (14.01 0. mean values of variables are greater.17 0.98 ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA 4.27) 11.96) 1.78 (28.41 7.29) 0.00 0.83) 0.00 0.478 Standard deviation in brackets.10) 0.71 (2. for non-exporters.04 0.97 (13.00 . RESULTS Table 2 shows means and standard deviations of variables.10 1.16 1.00 0.81) 330 Direct Exporters 389.06 0.39 (12.37 7.16 1.76) 1.98 (828. except for dummy variables.14 (2.80) 0.11 0. Table 3 shows correlations between the independent variables.15 (0.19) 0.11 (16.28 (0.84) 0.13 1.95 (12.97 (13. Variable EMPLOY R&DINT PATENTS INNOVAT IMPINT FORCAP DIVERSIF HUMANCAP Number of firms a Mean and Standard Deviationa of Variables.27) 13.14 0.

68 À3.831) À787.668ÃÃ 4. ÃÃ po0.001. and reject Hypothesis H1b.10ÃÃÃ 602 876 1.004 (1.36 À0. Factors Affecting Entry Timing.05 À0.969ÃÃÃ 7. we fit a null model that includes no covariates. * po0.9 À966. w 2 Advanced Phase Coefficient w 2 +8.003ÃÃÃ 7.Factors Affecting the Timing of the Export Development Process 99 Table 4 shows the results of our model estimates for entry timing in the initial and advance phases of the export development process.89 À0. This test is analogous to the F-test that is routinely reported for linear regression models.90 À0.034ÃÃ À6. These results support Hypothesis H1a. With eight degrees of freedom (the number of covariates excluded from the null model).26 À0.88 À0.04 À0.009 0.93 5.070 0.70 À0. ÃÃÃ po0.06 À0.024 0. The statistic is then twice the positive difference in the two log-likelihoods.387ÃÃÃ 21.01.156ÃÃÃ 8.711ÃÃÃ 9.10 +0. Event History Analysis: Weibull Distribution 2002. which relates early entry with the technological resources of the firm. especially in the advance phase (po0. The results indicate that firm size has an impact on the speed of the export development process.566 (1. so we reject the null hypothesis and conclude that at least one of the coefficients is nonzero. we found that registering patents and utility Table 4.95 358. To calculate this statistic.478 +10.28 6.256) À810. the p-value is less than 0.83 262.503ÃÃÃ 8.49 À2.05.091ÃÃÃ 9.478 .029ÃÃÃ 7. Initial Phase Coefficient INTERCEPT EMPLOY (H1) R&DINT (H2) Technological resources PATENTS (H2) INNOVAT (H2) Network ties IMPINT (H3) Foreign ownership FORCAP (H4) Product diversification DIVERSIF (H5) Human resources HUMANCAP(H6) Shape parameter (standard error) Log-likelihood No-covariate log-likelihood Log-likelihood w2 Right censored observations Left censored observations Number of observations Size Note: Negative coefficients indicate early entry.01) where mustering resources is more necessary.6 À941.46ÃÃÃ 932 546 1.68 À0. In relation to Hypothesis H2.22 À0.15 4.019 0.1.344ÃÃÃ 23.006 0.003ÃÃÃ 8.49 À3. We have added a likelihood-ratio test of the null hypothesis that all the covariates have zero coefficients.713ÃÃÃ 9.

as firms that have not yet decided to internationalize are not included in the studies (e.. we found that contact with foreign suppliers is an important factor for foreign market entry decisions. Hypothesis H6. The operationalization of the construct can be improved by generating specific indicators. Hypotheses H3. 2001. A higher qualified labor force can contribute to the skills available to the firm. H4 and H5 relate early entry with network ties. Our results support these three hypotheses. and broader scope of products. Thus. the paper has several limitations. Bell et al. as shown by the significance of the variable IMPINT (po0. The most significant variable in our study is INNOVAT. we use R&D spending as a proxy for tangible technological resources. It does not allow us to use all the richness of the resource-based view of the firm. Other potential . Timing as the dependent variable in a study of export behavior is an important contribution as the time concept has a crucial role in today’s appraisal of internationalization research (Hurmerinta-Peltomaki. The results of this type of research have a bias problem. 5. it allows us to measure the length of each stage of the export development process including firms that have not yet evolved to a particular stage. while obtaining product or process innovations are actions that accelerate entry timing in both phases. Event history analysis is the ap¨ propriate methodological tool to approach this subject. Specifically. which relates early entry with human capital of the firm. although these skills may be better captured by other variables included in the analysis. is not supported. 2003). CONTRIBUTION AND LIMITATIONS This paper deals with the timing stages of the export development process. However. this does not necessarily mean that a higher quality labor force will not help accelerate entry into international markets. The data were collected from a survey that was not carried out for the specific purpose of the paper. Despite these significant contributions. Aspelund & Moen.01).g. This econometric technique has an important advantage.100 ARISTIDES OLIVARES-MESA AND SONIA SUAREZ-ORTEGA models accelerate entry timing only in the initial phase of the export development process. Prior research on firm’s internationalization has reviewed multinational firms that have already gone through the whole process. 2001). higher foreign ownership participation. an aspect that has been neglected in the literature.. This bias problem is especially relevant when the purpose is to analyze entry timing into foreign markets.

we use import intensity to operationalize network ties. In addition. One such common observation is that internationalization is the process of increasing the accumulation of knowledge in markets and institutions abroad. Firms that operate in an international network may enjoy a ‘‘learning advantage’’ and find it ‘‘easier’’ to go abroad than firms whose exchange partners are domestic firms. The results offer some evidence about the key factors affecting the speed of the internationalization process. Therefore. Network ties that firms have may help them to go international by supplying information about clients and markets. which would provide us with a more accurate estimation of the duration of the stages in the export development process. Basile (2001) also found that innovation capabilities are very important competitive factors and help explain heterogeneity in export behavior among Italian manufacturing firms in the 1990s. Another limitation of the data concerns the lack of information about the age of transition between phases. the initial phase (a firm exports indirectly. This is an important technical problem that affects the estimation procedure and. although asking directly about the relationships developed by the company could be more appropriate. However. On the same lines. and R&D facilities and equipment.Factors Affecting the Timing of the Export Development Process 101 measures of this construct include a firm’s manufacturing facilities and equipment. can be overcome by applying doubly censored models of duration. CONCLUSIONS We study the export development process of Spanish manufacturing firms and postulate that such a process follows a sequential path which can be divided into three general phases: the pre-engagement phase (when a firm does not export). it has been acknowledged that left censoring can be a problem unless cases are negligibly small (Tuma & Hannan. Our findings point out the importance of network ties in the timing of the internationalization process of firms. 6. as we saw. plays a significant role in accelerating entry timing in foreign markets. which is a factor not usually included in previous studies . We have measured network ties through import intensity. This study explores the factors which can accelerate or decelerate the decision to switch from one phase to another. In this sense. involving the introduction of new products or the improvement of a firm’s existing product range. capacity to innovate. future surveys should include date of transitions. 1979). exerting little or no control over the marketing of its product) and the advanced phase (a firm exports directly through sales branches or subsidiaries).

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However. M. 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.1016/S1474-7979(06)17004-0 107 . export performance. 107–133 Copyright r 2007 by Elsevier Ltd. Volume 17. The results further indicate that learning orientation plays a role in building high-quality relationships for both new and mature relationships.THE ROLE OF MARKET AND LEARNING ORIENTATIONS IN RELATIONSHIP QUALITY: EVIDENCE FROM VIETNAMESE EXPORTERS AND THEIR FOREIGN IMPORTERS Trang T. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. Nigel J. A random sample of 283 export firms in Vietnam provides evidence to support the hypothesized main effects. the impact of market orientation on relationship quality is found only in the new relationship. Nguyen. In addition. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.

Fahey.. M. 2005). 2001). Sanzo. Bigne & Blesa. to copy. & Lages. As a result. e. economic. Vietnam’s total value of exports surged to US$ 31. develop. Srivastava.108 TRANG T. Research has shown that firms’ competitive advantage can be created through keeping long-term relationships with customers and that many firms are moving from transactional discrete exchanges to relational ones (Ganesan. INTRODUCTION It is impossible for firms not to have relationships with other firms as they cannot operate in isolation (e. or to displace (Day. 2003. The emergence of this trend indicates that firms realize the importance of relationship quality between them and their customers. Lages. it has been recommended by several researchers that additional research is required (e. and other environmental factors (Lages. 2000. 1982). Consequently.5 billion from US$ 2. Siguaw. This is because loyal customers will bring more profits to firms than the price-sensitive and deal-prone switcher (Reicheld. & Alvarez. the role of market relationships has emerged as a top priority for most business firms around the world. 2006). Therefore. 2006). 1998). one of Asia’s fastest growing and export-led economy. 1994). Little research has been undertaken in developing and transition economies like Vietnam. Frazier. however. unlike relationships in domestic markets. & Christensen. In an export setting. Simpson. Vazquez. particularly research on relationship quality.. Research on inter-firm relationships in export markets. 1994). In addition. Owing to nearly becoming . market orientation. relationship quality. 1996). and maintain highquality buyer–seller relationships in international markets is critical to successful export involvement (Styles & Ambler. understanding how to initiate. has largely focused on the developed world. which has remained at about 7% in recent years (Field.. and export performance. NGUYEN ET AL. & Baker. committed relationships are among the most durable advantages because they are difficult for competitors to understand.g.g. 1999. 2003. In 2005. 2001).4 billion in 1990 (Saigon Tiepthi. Santos. relationships developed with partners in international markets are more complex due to the difference in cultural.g. North American and European economies (Leonidou & Kaleka. The export sector accounts for nearly 50% of the country’s gross domestic product in 2004 and plays a key role in Vietnam’s economic growth. Hakansson. firm-ownership structure does not moderate the relationships between learning orientation.

Subsequently. 2005). Recently. the trade ministry has decided to use US$ 60 million for export promotion programs and Vietnam’s export markets have expanded to 127 countries in the world (Hieu Long. data analysis. The trade ministry of Vietnam has projected that Vietnam’s exports will increase US$ 38 billion in 2006. although market and learning orientations have been widely studied (e. we review the literature and propose the hypotheses. this study investigates the role of market and learning orientations through internal capabilities of the firm. we present the method. Learning orientation and market orientation are expected to have direct impacts on relationship quality.. & Noordewier. Sinkula.Role of Market and Learning Orientations in Relationship Quality 109 a member of the World Trade Organization. 1997).g. We conclude the article by discussing a number of implications. 2006). Therefore. Vietnam expects that its exports will grow rapidly in 2006. In addition. most previous research examines the competitive value of market and learning orientations under the lens of the operating environment condition. Drawing on the resource-based view of the firm (Wernerfelt. export performance is the outcome of relationship quality. limitations. Baker. 1 depicts a conceptual model that presents the role of market and learning orientations in building high-quality business relationships. Further. Finally. and subsequently export performance. 1984). Relationship Quality Relationship quality is an important aspect in maintaining and evaluating buyer–seller relationships. Slater & Narver. LITERATURE REVIEW AND HYPOTHESES Fig. 1995. The rest of the article is organized as follows: first. Learning orientation is also hypothesized to be an antecedent of market orientation. and directions for future research. it views market and learning orientations as forms of organizational culture and explores their impacts on the quality of business relationships between exporters in developing economies and their foreign importers. Specifically. research on export relationships in Vietnam will enhance our understanding of business-to-business relationships in such an under-investigated economy (Tsang. little attention has been paid to the role of these two organizational factors in the quality of business-to-business relationships. and the results. It can be defined as ‘‘an overall assessment of the strength of a relationship and the extent to which it meets the needs or .

1987. Market Orientation H1 H4 H3 Relationship Quality Export Performance Learning Orientation H2 Fig. willingness to invest. 78).. 1990). Anderson & Narus. enabling the firm not only to work together with other firms more effectively but also to reduce perceived uncertainty and complexity in the future. Swanson..g.. commitment. 1990). This definition of trust reflects two essential dimensions – honesty and benevolence. expectation of continuity (e. Trust plays a central role in inter-firm relationships and is essential for the development of enduring partnerships (Morgan & Hunt. 1998. 2004). Smith. It is central to successful relationship marketing because it enables independent channel members to work together to serve customers better and to achieve a higher . 1995). & Steenkamp.g. 1987). 1. commitment. M. Dorsch.. Scheer. & Kelly. p. and minimal opportunism (e.g. Kumar.g. Trust can be defined as the willingness of an export firm to be vulnerable to the actions of another party based on the expectations that the other party will behave in a ‘right’ (good) way toward the firm (Kumar et al. Several conceptualizations of relationship quality have been proposed. Dwyer & Oh. NGUYEN ET AL... fulfills promised role obligations. Nguyen. and is sincere (Dwyer & Oh. 1994) because it facilitates constructive dialogue and cooperative problem-solving. conflict. A Conceptual Model. and satisfaction (e. minimal opportunism. 1998. Barrett. 1987). trust.g. such as trust. and satisfaction are widely accepted as the dimensions of relationship quality because they have received strong empirical support (e. However.110 TRANG T. & Nguyen. expectations of the parties based on a history of successful or unsuccessful events’’ (Smith. Honesty is based on the belief that the firm stands by its words (Anderson & Narus. and will not take unexpected actions that would have a negative impact on the partner (e. 1995). 1998). Benevolence is the belief that the firm is interested in its partner’s welfare. Dwyer & Oh. Commitment is another dimension of relationship quality.

Kim & Frazier. behavioral. 1992). Opportunism is defined in general terms. Affective commitment is the attitudinal aspect of an exporter’s business ties to its foreign customer. and affective (e. The third dimension of relationship quality is satisfaction. The exporter not only performs its pre-agreed roles but also provides extra help for its foreign customer as required under various situations. 1997). 1990). Three main types of commitment have been found in the literature. It can be defined as the extent of a partner’s overall affective evaluation of the relationship (Anderson & Narus. p. 1997). and Mentzer (1995) note that remaining in a relationship and compliance with contractual stipulations indicate behavioral commitment. High behavioral commitment is indicated by the exporter’s expressive behavior that shows it cares about the importer. Satisfaction is also a key aspect of successful buyer–seller relationships as it motivates satisfied parties to commit more to beneficial exchange relationships (Leuthesser. which brings the exchange partners closer together (Anderson & Weitz. Achrol. 1994). 1995). Satisfaction is considered to be an indicator of how a firm assesses some of the other costs and benefits of its relationship beyond economic performance and conflict levels (Cullen. Behavioral commitment is reflected in the actual behavior of an exporter toward an importer.. Opportunistic behavior refers to the taking of unexpected actions that will generate negative outcomes for a firm that is involved in a transaction or relationship. Continuance commitment is reflected in the stability of a relationship and is defined as an exporter’s desire to continue the relationship with foreign customers. continuance. Johnson. Behavioral commitment is realized in the concrete behavior through which the partners become committed. Gundlach. Highly affective commitment means that the exporter feels a strong unity of interests and goals with the importer and can work with the importer in harmony (Anderson & Narus. 1990).e. It is defined as the extent to which an exporter provides special assistance to its foreign customer in times of need. and a willingness to sacrifice short-term benefits to maintain stability in a long-term relationship (Anderson & Weitz.Role of Market and Learning Orientations in Relationship Quality 111 level of performance (Morgan & Hunt.g. as ‘‘self-interest seeking with guile’’ (Williamson. The final dimension of relationship quality is minimal opportunism. i. 1992). & Sakano. 1997). 6). Commitment to a relationship entails a desire to develop a stable relationship. Any firms interested in ongoing exchange relationships with their customers would have a propensity for relation continuity. Successful business relationships provide enhanced efficiencies for both buyers and sellers (Kalwani & . Affective commitment refers to the sense of unity binding an exporter to its importer (Kim & Frazier.. 1975.

112 TRANG T. an exporter works with its foreign importers in far distance in terms of geography and culture. Relationship quality is considered to be the essence of relationship marketing (Jap. 1990). 1995). 1993). Dwyer and Oh (1987) found that the quality of channel relationships is affected adversely by the degree of partners’ bureaucratization. Teece. a salesperson’s expertise and relational selling behavior have been found to have positive impacts on relationship quality between salespersons and customers in the life insurance industry (Crosby et al. Narayandas. Accordingly. Procedural fairness has been examined to have a positive impact on relationship quality. the firm can achieve sustainable competitive advantage (e. 2004). the development of satisfying relational exchange also requires minimal opportunism (Dwyer & Oh. 1999) and serves as an indicator of the health and future well-being of long-term relationships (Crosby. allowing international channel members to easily engage in opportunistic behavior (Cavusgil. inimitable. p.. NGUYEN ET AL. while environmental uncertainty has a negative effect on relationship quality (Kumar et al. 1984) posits that when a firm owns valuable. 2000. rare. Following this stream of research. 1995). In spite of such benefits.. & Weitz. both market and learning orientations are viewed as . The valuable. & Zhang. this study examines the impact of two key organizational factors – market and learning orientations – on relationship quality. Smith (1998) found that relational bonds have a positive effect on relationship quality. Evans. & Cowles. Deligonul. The consequences of opportunistic behavior include the failure of exchange partners to fulfill promises and obligations. 33).. rare. Market and Learning Orientations The resource-based view of the firm (Wernerfelt. and non-substitutable attributes of resources form the basis of unique valuecreating strategies (Eisenhardt & Martin. For example. Though divergent long-term goals can be used for explaining these failures. Barney. Manolis. In this study. 1991. several researchers have attempted to investigate possible predictors of relationship quality. it has been revealed that business relationships between buyers and sellers have a high failure rate (Parkhe. Eisenhardt & Martin. In an international context. and non-substitutable resources and is able to implement value-creating strategies that cannot be easily duplicated by competitors.g. and the possible termination of the relationship. 1993. a primary reason for the ‘‘failure of many alliances is the inability to check opportunism by the alliance partners’’ (Bucklin & Sengupta. & Shuen. 1997). M. 2000). 1990). 1987). inimitable. Therefore. Pisano. This means that opportunistic behavior decreases the possibility of achievement of common goals.

1999). & Peruvemba. Sinkula et al. Therefore. 2005.’’ These researchers propose three behavioral dimensions: customer orientation. and. both market and learning orientations are related to specific and routine processes that create superior values to customers. and then utilize this information to continuously create superior customer value (Slater & Narver. Hult. 1997). The firm continuously promotes the organizational learning process.g. which direct a firm to create and encourage a learning environment throughout the firm (Sinkula et al.. inter-functional coordination. dissemination. which are sources of sustainable competitive advantage (Barney. 1994. Narver and Slater (1990.. 1986. 2004. 1995). 1995. (1997) argue that learning orientation causes a set of organizational values that influence the propensity of firms to create and use knowledge. and thus. 2002. learning orientation has also been considered as another organizational culture that assists a firm in achieving competitive advantage because it plays a key role in the creation of knowledge (e. Hurley & Hult. Learning orientation is comprised of three dimensions – commitment to learning. p. thus. Slater & Narver. .. & Hult. Learning orientation refers to ‘‘organization-wide activity of creating and using knowledge to enhance competitiveness’’ (Calantone. information acquisition. Yaprak. 21) define market orientation as ‘‘the organizational culture that most effectively and efficiently creates the necessary behaviors for the creation of a superior value for buyers and. Yeniyurt. shared vision.. Sinkula et al. Slater & Narver. 2002. Together with market orientation. Sinkula. 1995). Cavusgil. Slater & Narver. 1995). The firm endlessly creates and uses new knowledge about customers and competitors that has the potential to influence the firm’s performance (Emden. assist a firm in gaining sustainable competitive advantage (Baker & Sinkula. Cavusgil. and open-mindedness. Sinkula et al. employees to constantly question the organizational norms that guide organization actions (Sinkula. Celuch. Baker & Sinkula. or even require. that is. and responsiveness to the collected information. & Cavusgil. 1994. Each of these dimensions plays its role in intelligence generation. Hult et al. than firms which have not yet learned to learn. 1994). information dissemination. & Zhao. continuous superior performance for the business. and shared interpretation (Sinkula. Menguc & Auh. p. Learning-oriented firms are better equipped to manage their organizational knowledge. Hurley. Market-oriented firms continuously collect information about target customers’ needs and competitors’ capabilities.Role of Market and Learning Orientations in Relationship Quality 113 forms of organizational culture and are firm-level resources. Kasouf. 1997). 516). 1998. 2006. Firms with strong learning orientation encourage. 2004. 1997. & Knight. 1999.. 2005). competitor orientation.

1996).114 TRANG T. Simpson. There are two approaches. H1. which is reflected in its market orientation (Jaworski & Kohli. objective and subjective. 1998). Deshpande. Farley. In addition. 1995. which discourage opportunistic behaviors (Stern & Reve. A key component of learning orientation is a firm’s ability to engage in adaptive as well as generative learning (Slater & Narver. A number of performance measures have been proposed in the literature. 2005). which are used to measure export performance. Siguaw. learning orientation can foster market-oriented behavior in an organization (Jaworski & Kohli. Relationship Quality and Export Performance Performance in international marketing channels is defined as ‘‘the accomplishments – real and perceived – that have resulted from the manufacturer– distributor relationship’’ (Rosson & Ford. process. 2005. 1996).. 61). Giunipero. This enables the firm to acquire. Thus. In addition. Market. 1982. Hult. & Hurley. Both orientations are related to customer interface behaviors (Celuch et al.. H2. In export markets. Nichols. 2002) and assist exporters to achieve competencies in foreign market knowledge (Yeniyurt et al. 1995. which . 1995). Kalwani & Narayandas. and subsequently use market intelligence. The objective approach is based on financial indicators. NGUYEN ET AL. 1999). A positive relationship between learning orientation and market orientation is expected. and to satisfy these needs more effectively and efficiently than their competitors. sustainable competitive advantage created by market and learning orientations can be obtained through exporters’ capabilities of building high-quality relationships with their foreign importers.and learning-oriented exporters are willing to understand the needs and wants of their partners. H3. the learning-oriented firm is more likely to leverage the use of all resources. These capabilities will stimulate exporters to join efforts with their partners in order to achieve mutual and individual goals successfully. A positive relationship between learning orientation and relationship quality is expected. p. 1980). M. A positive relationship between market orientation and relationship quality is expected. Slater & Narver.. 2000. & Webster. These exporters value the benefits of exporter–importer relationships and will seek to put their partners’ needs as a priority in the organizational concerns (Emden et al. 1993. including the behaviors that accompany a market orientation (Baker & Sinkula. & Baker.

A highquality relationship leads to efficient transactions. METHOD The Sample A systematic sample of 283 Vietnamese export firms in Ho Chi Minh City. sales growth. was surveyed.Role of Market and Learning Orientations in Relationship Quality 115 include such measures as return on investment. When conditions required for a high-quality relationship are met. A high level of relationship quality is likely to have positive consequences for the relationship.’’ Suppliers who develop better relationships with their foreign customers are likely to enjoy superior performance in terms of ultimate outcomes such as sales and share of customer business (Leuthesser & Kohli. & Nevin. the major business center of Vietnam. employed the latter approach (Madsen. sales. margins. This study focuses largely on the firm’s performance in dealing with its specific partner and. Research has shown that longterm partnerships lead to increased mutual profitability (Anderson & Weitz. The benefits of a high level of relationship quality should translate into the economic performance for both partners. 1998). and asset turnover. These. such as market share and new product development. therefore. profits. and marketing programs that contribute to the firm’s efficiency and effectiveness in serving its market. and such relationships can be expected to continue in the future. The subjective approach is employed to measure a firm’s absolute and relative performance on tasks. John. 1990). which will be reflected in the firm’s performance. 1995). and mutual dependence should increase. Likewise. agreement on such matters as decision-making. in turn. Kalwani and Narayandas (1995. H4. Moreover. such as shortened response time. Therefore. 14) found that ‘‘maintaining close relationships with customers in the long-run lead to high profitability through better understanding and servicing of customer needs. can create a strong market position. p. Geringer and Hebert (1991) found that objective and subjective measures of performance correlate highly. . advantages in logistics management. A positive relationship between relationship quality and export performance is expected. 1992) and enhance the performance outcomes in buyer–seller relationships (Noorderwier. moving the relationship closer to long-term partnership. The sampling frame. As a result. the exporter or its foreign importer (or both) is more likely to be attracted to an existing relationship.

. This suggests that the sample and population profiles (based on these two key variables) are not significantly different. Trust had two dimensions: honesty and benevolence. . commitment to learning (measured by four items). 37 were found invalid because these respondents were not members of management in charge of export activities. The single-key informant approach.’s (1997) scale. and two first-order constructs (satisfaction and minimal opportunism). was employed in this study. NGUYEN ET AL. the remaining 283 valid completed questionnaires comprised the sample for this research. 1993). Stern.3%) firms had business relationships with their business partners more than five years. consisted of about 5.116 TRANG T. Among 320 completed questionnaires.7%) firms had business relationships with their partners less than five years and 117 (41. Partial self-administered surveys.1%) firms were in business less than 10 years and 93 (30. Honesty was measured by 12 items and benevolence was measured by 10 items.8%) firms were in business from 11 to 20 years. 166 (58. Respondents were export managers of the firms. and open-mindedness (three items). Relationship quality was a high-order construct comprising two second-order constructs (trust and commitment). These measures were developed by Kumar et al. Only 17 (6.8%) firms with other types of ownership (joinstock. It comprised three dimensions: customer orientation (seven items). in which questionnaires are mailed to the target respondents and are collected by interviewers. based on the Business Directories in Ho Chi Minh City.1%) firms were in business more than 30 years. Follow-up telephone calls to remind respondents to complete the questionnaires prior to collection were also utilized. shared vision (four items). were used for this study. Using w2 tests with respect to firm ownership and firm age we found that no significant difference between the population percentages and the sample percentages. In terms of firm age.e. M. Market orientation was also a second-order construct and was measured using Narver and Slater’s (1990) scale. It was a second-order construct consisting of three dimensions.2%) stateowned firms and 138 (48. In terms of relationship duration. i. and inter-functional coordination (five items). competitor orientation (four items). the most commonly used method in organizational research (Kumar. Measurements Learning orientation was measured based on Sinkula et al. Consequently.000 firms in all industries. 173 (61. & Anderson. limited-proprietary. Three hundred and twenty completed questionnaires were collected from 400 distributed questionnaires. and private-owned firms). The sample was comprised of 145 (51. yielding a response rate of 80%.

The modifications were based on the financial and strategic dimensions of the scale developed by Zou. behavioral commitment (10 items). commitment. export performance was measured by seven items. 1985). The Cronbach’s alphas of all measures of the first-order constructs and the dimensions of the second-order constructs were high (X. and satisfaction and minimal opportunism were first-order constructs. Trust and commitment were second-order constructs. and export performance was a first-order construct. Taylor. all factor loadings were high and substantial (the lowest loading was . 1991). In addition. The questionnaire was initially prepared in English and then translated into Vietnamese by an academic who is fluent in both languages. This scale was based on Raven.86) (Table 1). Commitment was measured by using Kim and Frazier’s (1997) scale. and Tansuhaj (1994) scale with some modifications. satisfaction. and minimal opportunism. Finally. Market and learning orientation were also second-order constructs. . Satisfaction was measured based on the scale (seven items) developed by Gaski and Nevin (1985). and was comprised of three dimensions: continuance commitment (six items). and. all univariate kurtoses and skewnesses were within the range of [À1. As discussed previously. Therefore. affective commitment (seven items). Back translation was undertaken to ensure the equivalence of meanings. The screening process shows that the data exhibited slight deviations from multinormality. DATA ANALYSIS AND RESULTS Measurement Validation All measures used were first refined via Cronbach’s alpha and then tested by confirmatory factor analysis (CFA).Role of Market and Learning Orientations in Relationship Quality 117 (1995). relationship quality was a high-order construct comprising four dimensions: trust. 1]. the maximum likelihood estimation method was used (Muthen & Kaplan. These results indicate that the measures of all first-order constructs and all dimensions of second-order constructs were unidimensional and their convergent validity was achieved (Steenkamp & van Trijp. The CFA results indicate that these measurement models of these constructs fit the data well. however.59) (see the appendix for the standardized factor loadings). and Osland (1998). Minimal opportunism was measured using Lee’s (1998) scale (13 items). The CFA results also indicate that their measurement models fit the data well (Table 1). McCullough.

NGUYEN ET AL.87 0.091) 0. GFI ¼ 0.083) 0.68 0. Minimal opportunism: w2 ¼ 77. M.93 0.23). RMSEA ¼ 0.997.976.05 (p ¼ 0.048 (14) 2 Export performance: w(27) ¼ 33. composite reliability.94 0.085) 0. GFI ¼ 0. GFI ¼ 0.96 0.077) 0.968.929.956.991.89 0.023 Commitment: w2 (227) ¼ 270.79(.921.68(.91 0. rc.86 0.94 0. CFI ¼ 0. Cronbach’s alpha.63(084) 0.71(.60 0.70 0.996. RMSEA ¼ 0. GFI ¼ 0.62 Dimensions Customer orientation (mcs) Competitor orientation (mcm) Interfunctional coordination (mco) Commitment to learning (lcm) Shared vision (lsv) Open mindedness (lop) Honesty (hon) Benevolence (ben) Continuance (con) Behavioral (beh) Affective (aff) con con aff ! ! ! beh aff beh 0. Correlations mcs mcm mco lcm lsv lop hon ! ! ! ! ! ! ! mcm mco mcs lsv lop lcm ben r(se) 0. GFI ¼ 0.989.67 0.93 rc 0.88 0.06 (41) (p ¼ 0.94 rvc 0.62 (p ¼ 0.87 0. RMSEA ¼ 0. RMSEA ¼ 0.45 0. CFI ¼ 0.101) a 0.89 0. CFI ¼ 0. RMSEA ¼ 0.88 0.135).026 (65) Satisfaction: w2 ¼ 23.118 Table 1. CFI ¼ 0.43 0.94 0.057).194).92 0.024).83 (p ¼ 0.56 0.78 0.075).02 (p ¼ 0.65(. RMSEA ¼ 0.91 0.974.96 0. a.095) TRANG T. CFI ¼ 0. RMSEA ¼ 0. Constructs Market orientation: ¼ 96.028 Note: r(se). correlation (with standard error).64 0.53(.92 0.996.74(. GFI ¼ 0.75 0.086) 0.15).996.93 0.91 0.92 0. average variance extracted. GFI ¼ 0.74(.58(.019 Learning orientation: w2 ¼ 50.96 0. rvc. CFI ¼ 0.960.028 Trust: w2 (208) ¼ 238.86 0.89 0.16 (p ¼ 0.09 (p ¼ 0.097) 0.60(.94 0.026 w2 (87) Summary of Scale Validation.73 0.089) 0. .96 0.996.67 0.89 0. CFI ¼ 0.70 0.

074) Final measurement model: w2 (125) ¼ 176.038 Note: r(se). The correlations between constructs together with their standard errors indicate that they were significantly different from unity. Table 2. GFI ¼ 0.091) 0.80(0. 1991) (Table 2).50(0. 1991) (Table 2). The CFA results of the measurement model of relationship quality fit the data well.30(0.035 Trust Commitment Minimal opportunism Satisfaction Satisfaction Satisfaction Market orientation Learning orientation Learning orientation Relationship quality Market orientation Market orientation Correlation ! ! ! ! ! ! ! ! ! ! ! ! Commitment Minimal opportunism Trust Trust Minimal opportunism Commitment Learning orientation Relationship quality Export performance Export performance Export performance Relationship quality r(se) 0. the discriminant validity between the dimensions of relationship quality was also achieved.51(0.38(0.071) 0.35(0.996. GFI ¼ 0. It is noted that two summates were used for minimal opportunism and satisfaction. and each group was represented by one indicator.082) 0. the within-construct discriminant validity was achieved (Steenkamp & van Trijp. Because the measures of all firstorder constructs and the dimensions of all second-order constructs were unidimensional. RMSEA ¼ 0.986. These summates were formed by randomly summing the indicators in each scale into groups. 1998).078) 0. and three summates was used for export performance. correlation (with standard error). The use of two and three summates (instead of one) makes the model identified without using additional constraints and is referred to as partial disaggregation (Bagozzi & Edwards. CFI ¼ 0. Therefore.080) 0.936.978.079) 0.002). Finally. .22(0.082) 0.07 (p ¼ 0.070) 0.073) 0. the final measurement model also received a good fit to the data.77(0. Correlations between Constructs.68(0. These findings support the across-construct discriminant validity (Steenkamp & van Trijp.61 (p ¼ 0.138). (21) CFI ¼ 0. The correlations (with standard errors) between the dimensions of relationship quality indicate that they were significantly different from unity.54(0.076) 0.52(0. summates were used to the measurement model of relationship quality and the final measurement model. Therefore. Measurement Models Relationship quality: w2 ¼ 28.58(0.Role of Market and Learning Orientations in Relationship Quality 119 The correlations (with standard errors) between the dimensions of the second-order constructs indicate that they were significantly different from unity.069) 0. RMSEA ¼ 0.

M. positive impacts of both market and learning orientation on relationship quality were found: b ¼ 0.002). and.92 Eperf3 Eperf2 Eperf1 0.23 (p = 0.05.82 ben mop1 mop2 hon χ 2(127) = 179. [127] RMSEA ¼ 0.99 0.28**(H1) 0.84 0.120 TRANG T. Finally.18S Relationship quality 0.85 Trust 0. CFI = 0. Table 3 shows the unstandardized structural paths and Fig.72 (p ¼ 0.82 0. Structural Results (Standardized Estimates). po0. with regard to H4.01) and g ¼ 0.99 0.58.64 lop Satisfaction 0.91 0.001). Concerning H3.043.986. 2 shows the standardized structural paths of the model.038 *: significant at p < 0. **: significant at p < 0.54**(H3) 0 . CFI ¼ 0.20*(H2) Learning orientation 0 . For example.91 0.58**(H4) 0.935. relationship quality was positively related to export performance (b ¼ 0.65 0.001) (see Fig.94 Commitment 0. In addition.67 0.72 aff beh con sat2 sat1 0. Palmer. respectively. consistent with H1 and H2.59 Minimal opportunism 0. .54. learning orientation was positively related to market orientation (g ¼ 0.20 (po0. Multigroup Analysis The duration of a relationship is a factor that may affect relationship quality.91 0. S : squared multiple correlations Fig. 2). Specifically.80 0.981. Test of Hypotheses Structural Results The SEM results indicate that the hypothesized model received an acceptable fit to the data: w2 ¼ 194.28 (po0.94 0. Wray.91 0. and Bejou (1994) found that duration of a mcs mcm mco 0.001.81 lcm lsv 0. po0.929.05).29S Market orientation 0. 2. NGUYEN ET AL. GFI ¼ 0.34S Export performance 0. GFI = 0. all hypotheses were supported.82 0.91 0. RMSEA = 0.000).

Role of Market and Learning Orientations in Relationship Quality 121 Table 3. 2004). and Gassenheimer (1991) found no impact of relationship duration on any dimensions of relationship quality. First. Unstandardized Structural Paths.000 Structural Paths H1 H2 H3 H4 Market orientation Learning orientation Learning orientation Relationship quality Relationship quality Relationship quality Market orientation Export performance relationship affect trust. constraints were imposed on the structural paths in both groups – new and more mature relationship groups. This was done by setting the hypothesized structural paths – between learning orientation and market orientation. between market orientation and relationship quality.051 p-value 0. the results of the multigroup analysis show that Model . It is noted that we measured firm-ownership structure by a nominal scale (1: stateowned firms and 2: others) and duration of relationship by a ratio scale (number of years engaged in the relationship). The more mature relationship group included relationships that had lasted for more than five years. Griffith. 2004). Second. and on the structure of firm ownership (stateowned and other types of ownership). Luo. In addition.072 0. However. The new relationship group consisted of relationships that were less than or equal to five years.31 0. these two samples were used to estimate the structural paths in the model with no structural paths constrained (Model A). & Shi. firm-ownership structure has been considered an important factor that affects firm performance (e. It is also noted that no constraints were set for the measurement models (partial invariance).095 0.23 0. In order to compare the structural paths in the model between these groups (new versus more mature relationships and state-owned versus other types of ownership). based on the duration of the relationship (new and more mature). Lagace. a median split was used to bifurcate the sample into new and more mature relationships. the multigroup analysis in SEM was utilized.000 0. Two steps of analysis were conducted. between learning orientation and relationship quality.48 Standard Error 0. It is argued that the private sector has more idiosyncratic behaviors than the state-owned sector (Friedman. Aulakh & Kotabe.g.. the private sector has only recently been present in Vietnam. Therefore. if any. and between relationship quality and export performance – to be equal for both groups (Model B). Moreover. Estimate 0. This procedure was also utilized for firm-ownership structure.56 0. Dahlstrom. Liu.091 0.000 0. 1997.015 0. In terms of relationship duration. Therefore. an additional purpose of the research is to examine the difference.

substantially adding to the literature on the importance of adopting market and learning orientations. Table 4.000 0.21(0.457 0.49(0.80) was selected over Model B (w2 ¼ 401.57(0.000 0. Structural Paths New Relationships Est(se)a More Mature Relationships Est(se) 0. A (w2 ¼ 390. Table 4 presents the structural paths of new and more mature relationships. export performance. especially in the export–import relationship in developing economies.068) Estimate (standard error). it has been found that market and learning orientations are influential forces driving exporters to build and maintain strong relationships . In terms of firmownership structure. IMPLICATIONS.000 p-value 0. Unstandardized Structural Paths of New and More Mature Relationships. M. Following the resource-based view of the firm and extant research on market and learning orientations. and subsequently.090) 0.119) 0.64(0.10(0.156) 0. DISCUSSION. we developed a model that explains the role of market and learning orientations in relationship quality.05).053 0. This result indicates that [Ddf the structure of firm ownership did not moderate the relationships hypothesized in the model.35(0.11). First.115) 0.11 (p>0.11) because it [254] [258] received a better fit: Dw2 ¼ 4] ¼ 10.134) 0. The empirical findings support all of the hypotheses.31 (po0.43) was selected over Model A (w2 ¼ 343.000 0.42(0.109) 0.002 0.122 TRANG T. NGUYEN ET AL.02) because it [258] [254] received a better fit: Dw2 ¼ 4] ¼ 7.078) p-value 0.45(0. the results of the multigroup analysis show that Model B (w2 ¼ 350. AND CONCLUSIONS The major objective of this study is to investigate key antecedents of the quality of business relationship between developing-economy exporters and their foreign importers. This result confirms the [Ddf moderating effect of the duration of relationship.000 H1 H2 H3 H4 a Market orientation Learning orientation Learning orientation Relationship quality - Relationship quality Relationship quality Market orientation Export performance 0.

Consistent with the results found in advanced economies (e. Yeniyurt et al. market and learning orientations are firm-level resources and are related to specific and routine processes that enable exporters to become competent in understanding and responding to their partners’ needs. should dedicate themselves to learning orientations. Adopting and nurturing these orientations are important for exporters in developing economies who aim to strengthen business ties with foreign partners in competitive environments because these orientations are firm-level resources that create sustainable competitive advantage. Moreover. tend to adopt new ways of looking at the market.. Therefore... A superior learning environment will leverage the use of all firm resources. the results of this study indicate that the role of market and learning orientations in relationship quality is not limited to advanced economies. the importance of market and learning orientations for export firms is so crucial that managers should promote the culture of such orientations. exporters in developing economies. These competencies will create superior values to their foreign partners (Celuch et al. such as Vietnam. This will strengthen the quality of relationships between them and their import partners. involving a market-oriented approach. the import partner is likely to trust and commit to the working relationship with the exporter. 2005). the multigroup analysis results indicate that no significant difference between stated-own firms and firms with other types of ownership .... 2002. including the behaviors that accompany a market orientation (Baker & Sinkula. 2002. and thus. Therefore.g. 2003). which have become embedded in its previous business approach. who wish to enhance relationship quality with their foreign partners. Calantone et al.. As forms of organizational culture. enhancing their export performance.Role of Market and Learning Orientations in Relationship Quality 123 with their foreign partners. In short. 1999). Further. a transition economy where business values are still affected by a centrally planned approach).e. leading to high export performance. The values and norms of such philosophy must be translated into specific actions in order to attain sustainable competitive advantage. The exporter is likely to withdraw from its routine ways of doing business. Hult et al. 2004. Sanzo et al. The effort of an exporter to understand and to satisfy its partner will also result in the partner’s beliefs that the exporter is an expert in performing its obligations and behaves in the best interests of its import partner. learning-oriented exporters in developing economies like Vietnam (i. The results also indicate that learning orientation facilitates a marketoriented approach. market and learning orientations will smooth the exporter–importer relationships and enhance the quality of these relationships. As such.

the exporters. However. creating an open economy in Vietnam. 1999. limitations relate to the examination of the relationship from only one side of the dyad. a developing and transition economy. Nevertheless. other factors. in their efforts to establish high-quality relationships with their foreign importers.. NGUYEN ET AL. Vietnamese firms are now required to find their own export markets for their products. Second. generalizability of the findings to other settings must be undertaken with the utmost caution because only one city in one developing economy was sampled. As such. Further research should examine possible mediators. Further. 1998). This study has a number of limitations. all export activities of Vietnamese firms had been arranged by the Vietnamese government with other socialist governments within the Soviet trading block. Export managers should take this into consideration. Therefore. Establishment of the validity of the hypotheses is limited by the single model viewed from only the exporter side. creating a learning-oriented environment can assist export managers in building and fostering the relationships with their foreign importers. the results show that learning orientation plays its role in building high-quality relationships for both new and mature relationships. Instead of focusing on production and relying primarily on the government. Hult et al.124 TRANG T. First. This required Vietnamese firms to find new import partners because the Soviet trading block could no longer provide outlets for exports (Griffin. Future research should consider the use of dyadic information. 2004) may be more important. Replication and extension to other developing economies is a direction for future research. can mediate this impact. such as asset specificity and innovativeness. was found. Prior to the transformation into a market-oriented economy. the cross-sectional design employed inhibits strong . This may be a particular characteristic of Vietnam. Finally. market orientation plays an important role in the early stage of their relationships with foreign importers because market orientation facilitates an understanding between two parties. This implies that adopting and nurturing market and learning orientations are equally important for exporters in both sectors. M.g. the impact of market orientation on relationship quality is significant only at the early stage of the relationship. the results of this study show that the impact of market orientation on relationship quality is not significant at the more mature stage of the relationship. and market orientation may support these investments rather than directly enhances their relationships. When their relationships are more mature. At whatever stage of their business relationships.. Haugland. other investments such as asset specificity and innovativeness (e. The break-up of the Soviet trading block led to the liberalization of foreign trade by the Vietnamese government in 1989.

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International Business Review.Role of Market and Learning Orientations in Relationship Quality 129 Yeniyurt.87 0. M. (2005). APPENDIX: CFA FACTOR LOADINGS OF ITEMS (STANDARDIZED) Items Market orientation (second-order.85 0. S. our sales people share information about competitors We respond rapidly to competitor actions Top management regularly discuss competitors’ strengths and weaknesses Customers are targeted when we have an opportunity for competitive advantage Interfunctional coordination Our top managers from each business function regularly visit customers Business functions within our firm are integrated to serve our target market needs Our managers understand how employees can contribute to customers’ value We share resources with other business units Loading t-value 0. 6(3).85 13. Journal of International Marketing.. 7-point Likert scale) Customer orientation We closely monitor and assess our level of commitment in serving customers’ needs Business strategies are driven by the goal of increasing customer value Our competitive advantage is based on understanding customers’ needs Our business objectives are driven by customer satisfaction We pay close attention to after-sales service We respond quickly to customer needs We rapidly adapt our products in response to customers’ needs Competitor orientation In our firm. R.82 0. T.81 0. 14(1).87 0. & Hult.44 16.79 0.84 0.86 0.76 À 14.96 18.43 17. 1–19.10 18. A global market advantage framework: The role of global market knowledge competencies..44 . Taylor. (1998).83 0. G.62 15. Cavusgil.80 0.80 0.81 0.. Zou. E. G. 37–58. The EXPERF scale: A cross-national generalized export performance measure.84 0. & Osland.27 0.54 17. S.26 14. S.78 À À 15. T.79 16. C.45 16..

84 0.81 À 14.87 0. functions.66 À 11.130 TRANG T.89 0.69 0.49 17.51 18.80 0.87 18.17 11.33 13.71 0.87 À 16.22 0.74 0. 7-point Likert scale) Honesty Our firm has often provided importer A information that has later proven to be accurate Importer A has often provided us information that has later proven to be accurate Our firm usually keeps the promises we make to importer A Importer A usually keeps the promises they make to our firm Whenever our firm gives importer A advice on business operations. not an expense Learning in our firm is seen as a key commodity necessary to guarantee organizational survival Shared vision There is a commonality of purpose in our firm There is total agreement on our organizational vision across all levels.82 0. they know we are sharing our best judgment Whenever importer A gives us advice on business operations.59 12.81 0.75 0.98 17.67 12.66 .32 10.59 0.87 À 18. employee learning is an investment.76 0. NGUYEN ET AL.76 0.85 0. APPENDIX (Continued ) Items Learning orientation (second-order.51 0.66 0. 7-point Likert scale) Commitment to learning Managers basically agree that our firm’s ability to learn is the key to our competitive advantage The basic values of our firm include learning as a key to improvement In our firm.84 0. M.84 0.03 10.70 14. we know they are sharing their best judgment Our firm can count on importer A to be sincere Our firm think that importer A can count on us to be sincere Our managers feel that the importer A offers our firm reliable recommendations Our firm offers to importer A reliable recommendations Loading t-value 0.88 0.15 12.94 13. and divisions All employees are committed to the goals of our firm Employees view themselves as partners in charting the direction of our firm Open mindedness We are not afraid to reflect critically on the shared assumptions we have made about our markets Personnel in our firm realize that the very way they perceive the marketplace must be continually questioned We always collectively question our own biases about the way we interpret market information Trust (second-order.

76 0. they would take them on even if it meant dropping us If another importer offered us a better deal.59 0.65 0.81 t-value 13.60 À 9.90 0.80 . we know that they will respond with understanding Though circumstances change. we can depend on importer A’s support When we share our problems with importer A.11 0. importer A can depend on our firm’s support We can count on importer A’s decisions and actions which will be favorably affect us in the future Importer A can count on our firm’s decisions and actions which will be favorably affect them in the future Commitment (second-order. 7-point Likert scale) Continuance commitment We are going to continue the relationship with importer A for many years We think that importer A is going to continue the relationship with our firm for many years We expect the business relationship with importer A to last for a long time Our firm is certain that our relationship with importer A will last a long time Our firm believes that if another exporter offered importer A a better deal.79 À 15.82 14. we would take them on even if it meant dropping importer A Loading 0. we will respond with understanding When it comes to things that are important to us.41 10.13 9.63 0.51 14.19 16.Role of Market and Learning Orientations in Relationship Quality 131 APPENDIX (Continued ) Items Our firm deals fairly and sincerely with importer A Our firm feels that importer A deals fairly and sincerely with our firm Benevolence Though circumstances change.72 9.15 13.34 0.77 0.68 0.05 0.69 0.98 10.89 0. our firm is concerned about importer A’s welfare When importer A share their problems with our firm. our firm believes that importer A will be ready and willing to offer us assistance and support When making important decisions. importer A is concerned about our firm’s welfare When it comes to things that are important to us.71 0.91 11.69 0.77 9.81 0.84 0. our firm will be ready and willing to offer importer A an assistance and support When making important decisions.36 16.70 0.61 10.76 10.

56 14.95 14.54 13.70 0. APPENDIX (Continued ) Items Behavioral commitment We respond quickly to importer A’s requests for help We think that the importer A responds quickly to our firm’s requests for help We devote more time to importer A when they need help We adjust our marketing program for importer A when necessary We provide special aid to importer A when they are in trouble We provide customized product or services as requested by importer A We give advice and suggestions when importer A has problems We think that importer A devoted more time when we need help We think that importer A provided special aid to us when we were in trouble Importer A has given advice and suggestions when we have problems Affective commitment A high sense of unity exists between importer A and us Our relationship with importer A is a long-term alliance We have a strong business link with importer A We want to remain a member of importer A’s network because we genuinely enjoy our relationship with them 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 We think importer A has developed a close business relationship with us Importer A and our firm share common business interests Minimal opportunism (7-point Likert scale) We have always provided importer A with a completely truthful picture of our business Importer A has always provided our firm with a completely truthful picture of their business We carry out the duties of our relationships even if importer A does not check up on us Our firm think that importer A carries out the duties of relationships even if our firm does not check up on them We have never promised importer A that we would do things.16 9. NGUYEN ET AL. that we actually had no intention of following through Loading t-value 0.81 0.69 15.24 15.73 À 9.67 0.61 10.79 0.36 13.22 À 14.70 0.54 0.79 0.59 8.68 0.132 TRANG T.21 .78 0.67 0.22 10.63 0.82 0.81 0.81 0.47 9.39 12.75 À 14.40 10.23 10. M.21 0.07 0.78 0.77 0.35 11.81 14.60 0.69 0.62 0.

.58 12.83 0. we have rarely changed the facts On rare occasions.73 0.g.77 0.87 0. and market share).67 16. we have had to lie to importer A about certain things in order to protect our interests Satisfaction (7-point Likert scale) Overall.87 20. we would still choose to use the importer A Export Performance (7-point Likert scale) Profitability Sales revenue stability/growth Improvement in market share Competitive advantage over other firms Economies of scale Overall survival of the firm Reputation Market development Product development Loading 0.85 0. sales volume.00 21.54 16.87 11.81 0.88 0.91 0.82 0.87 0.33 20. they always conscientiously perform their duties to us In order to get what importer A needs from our firm.39 14.73 À 0.10 0.86 0. profitability.81 À 13.85 0. that they actually had no intention of following through To get the necessary support from importer A.09 15.16 0.87 0. I believe we are both quite satisfied with our working relationship This is among the best importer relationships that our managers have experienced Our firm’s relationship with importer A has been a happy one Our firm’s relationship with importer A has fully met our firm’s expectations Our firm is proud of having this working relationship with importer A We are very pleased with what this importer A does for us If we had to do it all over again.81 0.41 14.89 0.99 .Role of Market and Learning Orientations in Relationship Quality 133 APPENDIX (Continued ) Items Importer A has never promised us that they would do things. importer A rarely masks the true nature of their needs Regardless of its impact on importer A’s business (e.65 22.68 0.28 13.83 0. importer A rarely changed the facts In order to get what we need from importer A.44 20.74 0. we rarely mask the true nature of our needs To get the necessary support from our firm.64 15.79 13.65 16.85 t-value 15.97 13.98 22.91 0.81 16.

The academic research has developed three main International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. However. 137–157 Copyright r 2007 by Elsevier Ltd. THE INTERNATIONALISATION MODELS The accelerated globalisation of world markets in the last 30 years has increased the importance of internationalisation theories for both academics and practitioners.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 academics and practitioners. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. Volume 17. with major implication for the strategic orientation of small firms.1016/S1474-7979(06)17005-2 137 . outlining the similarities and the differences between these two countries. This study attempts to analyse the impact of the domestic market profile on the internationalisation process of biotech SMEs in US and UK. this phenomenon has to be considered in relation with the specific characteristics for various market environments and industrial sectors. The internationalisation process of SMEs is one of the newest developments in this area.

1993. 1982. the systematic planning models and the contingency models (Li. culture. developed by Johanson and Wiedersheim-Paul (1975). There are two experiential learning models: the Uppsala model. The original model created by Bilkey and Tesar (1977) emphasises the evolution of a firm’s internationalisation through a series of successive learning stages. outlining that many firms do not follow a consistent path to internationalisation (Anderson. and the Management Innovation model. 1990) and Johanson and Mattsson (1986).. described in the works of Bilkey and Tesar (1977). 1993. Root. 1977. with numerous scholars advancing various criticisms of their validity and assumption (Anderson. the Innovation model (Cavusgil. The evolution of the company from a mainly domestic activity to a fully international profile is described as a slow. Welch & Luostarinen. 1982. that correspond to an increasing foreign involvement of the company. 1988). The experiential learning models have been extensively challenged over the years. & Dalgic. 1980. 1987. 1987). Fillis. 1990). 2001. The model also predicts that a firm will first target the markets that are most familiar in terms of language. Turnbull. in order to reduce the perceived risk of international operations and to increase the efficiency of information flows between the firm and the target market (Johanson & Vahlne. 1983. 1996. 1981) tends to explain the initiation of the internationalisation process through a series of management innovations implemented within the firm. business practice and industrial development. Reid. Both of them describe the internationalisation process as a gradual evolution of the firm through a series of stages. 2002. incremental process. Welch & Luostarinen. Knight & Cavusgil. 2004). Reid. The Uppsala model explains the internationalisation process considering two main strategic dimensions: the market knowledge possessed by the firm about different foreign markets and the commitment of firm’s resources to those markets. On the other hand. 1988). Many studies have found that the management of internationalising firm considers a variety of strategic approaches (Douglas et al. which involves the gradual acquisition. integration and the use of knowledge concerning the characteristics of foreign markets as well as an increasing commitment of the company’s resources towards international activities. Cavusgil (1980). Czinkota.138 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD categories of models to describe the process of internationalisation: the experiential learning models. Some authors questioned the deterministic nature of the Uppsala and the Innovation models. Li. The systemic approach of these two models is almost similar. Czinkota (1982) and Reid (1981). the internationalisation process representing a strategic answer to the . and then refined by Johanson and Vahlne (1977. Axinn & Matthyssens.

but one of several alternative international activities. Nordstrom. Reid. They may apply cutting-edge technology to developing an unique product idea or to a new way of doing business. such as the operating environment and the industry structure (Turnbull. 1982/ ˚ 1983. 1983. and Boter and Holmquist (1996). 2. such as licensing. 1979. 1984. 1987). Management views the world as its marketplace from the outset of the firm’s founding. franchising. and then refined by Roberts (1999). which argue that the internationalisation process is influenced by a series of contextual factors. 1987). . 1987. 1982. 4. unlike traditional companies. 1984). Garnier. Roux. and the contingency models. & Monti (2000). The majority of Born Globals are formed by active entrepreneurs and tend to emerge as a result of a significant breakthrough in some process or technology. 1991. Other critics demonstrated that the first step in the internationalisation process may not be exporting. Varaldo. Born Globals begin exporting one or several products within two years of their establishment and tend to export at least a quarter of total production. They tend to be small manufacturers. joint-venture or network relationships (Carstairs & Welch. & Thurwell. Based on a study conducted in Australia. These criticisms show that it is difficult and even dangerous to draw a unique recipe for the internationalisation process (Buckley. Miller (1993) and Yip. 1996. Welch and Luostarinen (1993). which claim that systematic planning based on a careful analysis of competitive factors and circumstantial conditions can significantly increase the success of the internationalisation process. proposed by Knight and Cavusgil (1996) is another important contribution to the contingency perspective. 3. These criticisms have been crystallised in two additional orientations: the strategic planning models. 5.The Internationalisation of Biotech SMEs 139 evolving market conditions (Reid. 18): 1. The products that Born Globals sell typically involve substantial value adding. Hakansson. 1987). the majority of such products may be intended for industrial uses. The Born Global model. they do not see foreign markets as simple adjuncts to the domestic market. Root. 1982. and that the firm’s stage of internationalisation is largely determined by the operating environment. Newbould. industry structure and its own marketing strategy (Turnbull. Biscarri. Jones (1999). 1979. with average annual sales usually not exceeding $100 million. 1987). based on the research published by Root (1987). 6. Root. the Born Global companies are defined by the following specific characteristics (Knight & Cavusgil. p. developed by Turnbull (1987).

1994).. regardless of their size or activity sector (Czinkota & Ronkainen. determined by increased demand for specialised or customised products. technology. Nordstrom. 5. 1990). 1992. 2004). Finland (Gabrielsson. The increasing role of niche markets. 1985. Moen. flexibility. Norton. 2. adaptability and direct customer relations facilitate the international operations of Born Global companies. Madsen. The recent advances in process technology that have created the possibility of flexible. 6. The inherent advantages of small companies such as quicker response time. very few studies have been conducted at the transnational level (Knight. 1992). low-scale and low-cost production. The results of this study indicate that the international performance of firms is enhanced by the managerial focus on foreign customer and marketing competence. 1982). 4. Knight et al. & Darling. especially in the countries of the developed world (Holstein. 1997. 3. 2004. the United Kingdom (Buckley et al. 1986). tools and facilitating institutions have become more accessible to all firms. The Born Global model is supported by numerous studies that show that these types of companies are emerging in many national economies including France (Roux. 1991).140 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD Knight and Cavusgil (1996) argued that this phenomenon was facilitated by series of recent trends that have increased the capacity of many companies to initiate early international activities: 1. Thorelli. The recent advances in communication technologies have reduced the costs of information transmission between distant markets. and offer them an important competitive edge in comparison with the larger multinationals (McKinsey and Co. Moen (2002) has analysed the export behaviour of SMEs from France and Norway identifying the global orientation of the manager and the market conditions as important factors for a quick . Rasmussan. 1992. Hakansson. The recent emergence of complex transnational networks of strate˚ gic alliances (Coviello & Munro. 1979) and the United States (Holstein. Madsen. The means of internationalisation such as knowledge. Robinson.. 1982. 1995.and survey-based studies in Denmark and the USA. 1993). Taiwan (Chang & Grub. & Servais. Sassi. Canada (Denis & Depelteau. Despite the growing interest in the internationalisation process of SMEs. 1979). 2001). 2002. & Evangelista. (2004) have investigated the phenomenon of Born Global firms based on data from case. Garnier.

as well as a highly responsive demand. 1996. this article compares some aspects (speed. (2001) have studied the founding process of Born Globals in Denmark and Australia. 1987). this study attempts to refine the existing internationalisation models. market size and sector development will determine a specific pattern of the internationalisation process: the firms from rich. Moen. 2002. Finally. Turnbull. 1983. the start-ups emerging in countries with more limited facilities and resources may attempt a quicker internationalisation in order to obtain the necessary assets for their survival and development. demonstrating that in the case of biotech SMEs. because they can find locally the necessary resources for product development. four times smaller than the UK market (Table 1).4 billion dollars 588 million dollars 36 US 1830 172. In order to verify this assumption. However.400 1. This research project starts from the assumption that the differences among various countries in terms of resource availability. large markets will have no reason to become international at an early stage of their corporate life. degree and main reasons) of the internationalisation process of biotech SMEs in two countries that have a different domestic market profile: US – the world’s largest biotech market and UK – comparatively. UK 455 22. Many authors emphasised that the internationalisation of SMEs has to be considered specifically in relation to the industry sector and the local market profile (Boter & Holmquist. . On the other hand.The Internationalisation of Biotech SMEs 141 internationalisation. there are yet no transnational studies concerning the particular influence of the domestic market profile on the internationalisation of SMEs from a specific industry.400 224 5.2 billion dollars 83 Indicators (2003) Number of companies People employed Dew drugs in clinical development or expecting approval Generated revenues Equity raised New start-ups Source: DTI (2003). Reid. The choice of the biotech sector was determined by its specific international Table 1. outlining the importance of networking and sensemaking. Through this methodological approach. Rasmussan et al.110 52 billion dollars 9. A Comparison of the Main Indicators Defining UK and the US Biotech Market in 2003. 1984. the internationalisation process is significantly influenced by the profile of the domestic market.

Oakey. Russel.  the competition in the biotechnology sector is international (Acharya. Considering the internationalisation process of biotech firms. outlining their relevance for the development of academic models.  the marketing of biotechnology products and services is international (Acharya.) (Acharya. and the differences between various world regions in terms of bio-entrepreneurship. as well as for the management and government practice. THE INTERNATIONALISATION OF BIOTECH SMES Biotechnology is the systematic industrial use of biological processes and organisms to manufacture medical. 1986). 1998. Cooper. speed and main reasons of internationalisation for the UK and US biotech SMEs. The research methodology and the research findings are then discussed and analysed. 1995. Faulkner.142 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD characteristics (Gurau & Ranchhod. Russel.e. extraction processes. and  the international community (Acharya. After this discussion of the internationalisation theory. 1999. & Walsh. Nelkin. agricultural and consumer products (Biobox. healthcare products. 1999. three research hypotheses are formulated. Bauer. 1999. 1988). Russel. it is important to present the reasons that explain the SMBEs’ need to initiate and develop international operations: 1. 2. Daly. waste and pollution treatment. many food and drink products. finance. and agriculture (Mantegazzini. . 1985). Biotechnology is a global sector (Daly. legal advice. etc. 1990). 1999): ˘  the sources fuelling the biotechnology industry are international (i. 1998. 1999. the paper presents the specific conditions of internationalisation for biotech SMEs. 1988) closely scrutinises the scientific or industrial developments in biotechnology. 1988). 1985). 1988). The range of biotechnology applications includes bulk and specialty chemicals. Based on these elements. knowledge. which attempt to outline the influence of the domestic market profile on the level. 1995. All the industries that use biotechnology applications are highly internationalised or globalised (Russel. The paper concludes with a summary of the findings.

Considering the limited size of some national markets (the Netherlands or Switzerland – compared with the large US market). 151) wrote: y the evidence strongly suggests that the minimum size of markets needed to support technological development in industries such as aerospace. Once these firms have developed a final product or a service platform. 1997. 150). 1996). many biotech SMEs are developing a final product. the number of customers within the national market might be too small to ensure a proper return on investment. semiconductors. technology or specialised services. In the first few years of activity. & Cartwright. technological and financial resources available on the domestic market may force a company to search abroad the necessary inputs for the development of biotechnology activities (Fontes & Coombs. This is especially true for the European biotechnology firms. The limited human. they attempt to commercialise it in order to obtain a quick return on investment. Only by integrating potential customers from many different countries into a global market segment with a homogeneous demand. in some cases. information. On the other hand. 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. even globalised. 1997). and pharmaceuticals is now larger than the largest national markets.The Internationalisation of Biotech SMEs 143 3. Persidis. 1998. 4. 1997). the local biotech firms are obliged to expand their activities abroad and became internationalised. Lumley. or. a project that requires time and complex ressources (Dorabjee. such as money. especially when the investment is large. In some cases. 5. p. . their international activities will not consist in product exports. The complexity and high risks of innovation and technological development within the biotechnology sector determine the development of an integrated system of transnational strategic alliances – ‘‘it appears that even the global integration of markets by a single firm may no longer be sufficient to offset the huge costs and risks of technological development in a number of strategic industries’’ (Kobrin. The domestic market is often too small in number of customers or purchasing power in order to allow a rapid return on investments (Kobrin. Regarding this aspect Kobrin (1997. a domestic business environment with excessive safety standards and regulations may encourage SMBEs to search abroad for more permissive markets. p. is a company able to compete and to efficiently develop its activities. therefore. but rather in contacts and collaboration with foreign organisations that can supply them with necessary resources.

many authors emphasised that the phenomenon of Born Global firms has to be considered specifically in relation to the industry sector and the local market profile. Senker. regulatory conditions. The United States leads in bio-entrepreneurship. 1999. concentrating their resources on the process of research and development (Briggs. which have either created their own firm in order to develop promising research discoveries. 1995). In this respect. . Cromie. Witholt. the SMBEs have limited resources. The biotechnology activities usually require a high level of technological expertise. 1983. Senker.  high mobility of individuals between academic institutions and private industry. The entrepreneurial model of marketing activities also applies to SMBEs.  the availability of private wealth as a source of seed capital for the start-up of new ventures. Most of these companies are managed by biotechnology specialists (Briggs. the United States are characterised by (Rothwell & Zegveld. with Europe significantly behind but closing the gap.  a prevailing attitude (in society at large) which encourages entrepreneurship. 1998). 1999). 1995. As most of the SMEs. Saviotti. BIO-ENTREPRENEURSHIP: AN INTERNATIONAL PERSPECTIVE The SMBEs have many common characteristics with the general profile of SMEs (Carson. 1998). universities) in order to enjoy the independence of entrepreneurial activity (Acharya. Euromonitor. or have abandoned their positions in large hierarchical structures (big companies. However. Joly. 1998.144 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD Considering the specific characteristics of biotechnology. McGowan. scientific base and government support favour such companies in the United States (Persidis. 1996. and Japan a very distant third. social response.  a fiscal framework which encourages the flow of private risk capital into new ventures. and the SMBEs tend to ignore the importance of marketing operations. 1988. 1994). & Reinhard. 1994. business environment (financial and legal). it may be expected that some of the biotech firms can be defined as Born Global firms. The market conditions. McKelvey. Bullock & Dibner. 1998):  a large domestic market conducive to rapid growth and development. & Hill.

 the level of government research and development expenditures was low.. 1997). 2000. For example. Magnien & de Nettancourt. In comparison. The European market environment has become more favourable for biotechnology firms in the recent years (Ewing. which provides significant opportunities for the new high-technology firms. scientists and research institutions have been unfavourable towards technological entrepreneurship. 1998) in some industrial areas. but the market environment is comparatively four times smaller than the US biotech market (see Table 1). 1995). government. which might impact on the capacity of British SMBEs to find . 2000. & Michael. 1996). particularly through government procurement programmes. Germany and the UK have the biggest number of biotechnology firms (Ernst & Young. the European markets in the past were disadvantaged because (Rothwell & Zegveld.. the level of biotechnology regulation is still perceived to be stricter than in the USA (Davidson. and  the geographical and social mobility had low levels. Green. Among the West European nations. the clinical trials and their evaluation are already considered to be quicker and cheaper in Europe than in the USA (Ward. Senker et al.  the availability of venture capital was limited. Senker. and  a large and active government expenditure programme. In spite of these improvements. diversification and available resources.  the systems of taxation were unfavourable for the development of new high-technology firms.The Internationalisation of Biotech SMEs 145  the behavioural and attitudinal character of American scientists. 1998. 1998). On the other hand. It can be reasonably expected that the different market profile of the UK and US biotechnology sector will impact on the internationalisation process of SMBEs. many of whom are willing to establish their own business in order to exploit their technical knowledge. 1998. 1993). 1998):  they were more fragmented. in terms of size. US is presently considered to be the major biotechnology market in the world. Plant. 1983. Senker et al. The national governments have created better facilities for the assistance of SMBEs (Lahteenmaki. the venture capital market has ex¨ ¨ panded and the European Union programmes have offered new opportunities for joint research and development projects (Ernst & Young.  the cultural and attitudinal factors among academics. UK has a successful biotechnology sector.

1993).hum-molgen. the extreme variability of SMBEs regarding the market share. exclusively on the domestic market.146 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD the necessary resources. On the basis of these assumptions. http://www. the number of staff was taken into H2.bioindustry. The level of internationalisation of US SMBEs is lower than the level of internationalisation of UK SMBEs. Owing to the biotechnology sector and hardcopy databases (The UK BioCommerce Data Compendium. the international expansion may be a necessary condition for their survival and development. 2001). In order to classify the biotechnology companies into small. 1985).com. On the other hand. RESEARCH METHODOLOGY A list of all UK and US biopharmaceutical SMEs was compiled using the Internet (http://bio.and mediumsized firms. http://www. three research hypotheses have been formulated: H1. the turnover and profitability has indicated the choice of the staff number as the most suitable criteria to be used. The Born Global phenomenon is more prevalent in the UK biotechnology sector in comparison with the US. 1997). From this perspective it can be assumed that for the British SMBEs. This is also the most common definitional basis used in the OECD countries (OECD. the categories defined by the UK Centre for Exploitation of Science and Technology (CEST) were used to classify the firms with up to 50 employees as small. http://www. and the companies employing 51–500 people as medium sized (Keown. the internationalisation may be just one of the possible alternatives of development. The reasons for internationalisation will differ between the US and the UK SMBEs: most UK SMBEs will start international operation to access resources. biotechanalytics. while most US firms will become international following a strategy of market expansion. . The biotechnology companies have been defined as any UK or US firm involved either directly (product development) or indirectly (platform technology) in the development of new products or processes using biotechnology methods (Daly. business partners and customers.wisi. while in the case of US SMBEs.

Only independent companies have been selected for analyses because the integration in a multinational group is likely to considerably affect the international marketing strategy implemented by the SMBEs and the level of resources available at corporate level. in order to collect information about their business profile.The Internationalisation of Biotech SMEs 147 A structured questionnaire was sent to 463 UK and 1. bioinformatics. Mantegazzini. The conditions required to consider a firm as Born Global are defined differently by various authors. agriculture/food. The level of internationalisation was defined as a composite dimension (Table 2). and (c) the competitive model faced by the company. After the analyses of responses.334 US SMBEs (which represent all the biotech firms that were identified using the sources presented above). representing a response rate of 29. allowing a delimitation of the specific characteristics of each industry. being consistent with the previous classifications used in the specialist literature (Euromonitor. This classification provides a rather clear distinction among different biotechnology applications. environmental biotechnology. which closely corresponds to the proportion between the size of the UK and the US biotech sectors. The data collected have permitted the identification of the business profile of the selected companies. etc. (b) the number of international operations in different regions or countries. The SMBEs have been classified into five distinct sectors:      healthcare. One hundred and thirty-six UK and 464 US completed questionnaires were returned. either directly or indirectly. speed and level of internationalisation.37% for the UK survey and 34. 1988.78 for the US survey. 122 companies were selected as representing UK-independent biopharmaceutical companies and 444 as independent US SMBEs. taking into consideration the criteria established and applied by OECD (1997): (a) the proportion of the SMBEs’ outputs and inputs (including capital) that are traded across national boundaries.). main reasons for internationalisation. and supporting services (such as consulting. 1986). foreign market entry strategies and presence in global regions. especially in what concerns the time period . bio-reagents and instruments.

23). Single establishment. . and >10% but o40% of revenue from across borders. o10% of inputs sourced across borders. Description The Dimensions of SME Globalisation. Barriers to entry to outside markets and to local market (for competitors) are significant and amount to more than 50% of costs. Majority of inputs of any establishment sourced across borders. Barriers to entry are noticeable.148 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD Table 2. >40% of revenue from outputs traded across borders. Source: OECD (1997. >10% but o40% of inputs sourced internationally. Barriers to entry to international markets are not significant impediment for firm or competitors. and o10% revenue from across borders. across all major international regions. Traded Inputs and Outputs No globalisation ‘‘Domestic’’ All inputs sourced from local area. usually across two major international regions. Establishments and Affiliations Market Opportunities and Competition No market outside local area. competition likely to be present or come from any international region. no establishments or affiliations outside local area. make up less than 5% cost disadvantage. but can be overcome fairly easily. Limited globalisation ‘‘Mainly domestic’’ Major globalisation ‘‘Internationalised’’ Establishments or close affiliates in at least four different nations and in two major international regions. p. Complete globalisation ‘‘Fully globalised’’ Multiple establishments or affiliates in many countries and in all major international regions. no potential competition from outside local area. Extensive globalisation ‘‘Globalised’’ Establishments or close affiliates in at least one country in all three major international regions. usually within a limited span of nations. Markets in all major international regions. large majority of outputs traded across borders. make up to 10% of cost disadvantage. At least one establishment or affiliate outside local area or outside national area. >40% of inputs sourced internationally. all outputs sold in local area.

1996.2) 126 Supporting Services Total Sector of Activity UK US Total N (%) N (%) 46 (37. PRESENTATION AND INTERPRETATION OF DATA The Profile of Respondent Firms As it can be seen from Table 3.8) 30 (6.’’ where the respondent was expected to write down any different reasons of the company internationalisation. new markets. information. & Jeannet. and the extent of firm’s international involvement (Jolly. The data have been processed using the SPSS software package. The larger differences are in the healthcare sector. Health Care Environmental Food and Agribiotech Bioreagents and Instruments 32 (26. which allows the quick application of statistical tests to large volumes of data. 1999). and technology. Knight & Cavusgil.7%).8) 54 (12. McAuley. the distribution of UK and US SMBEs on various sectors of activity is almost similar.The Internationalisation of Biotech SMEs 149 considered necessary for firm’s internationalisation. 1997. where the US companies have the largest percentage (48.6% in comparison with 37. 1999): ˘     access access access access to to to to sources of funding. Madsen & Servais. 1992. (2001).8) 42 20 (16. allowing also an open.3) 70 12 (9. Considering the specific characteristics of the biopharmaceutical sector (highly globalised market). Nationality Cross-Tabulation between the Nationality of the Firms and Their Sector of Activity. under the category of ‘‘other reasons.7) 216 (48.2) 94 (21. Alahuhta.4) 50 (11.6) 262 12 (9. a period of time that is also used by Rasmussan et al. the criteria for defining Born Global companies was the initiation of any form of international operation in the first three years of firm’s life.2) 66 122 (100) 444 (100) 566 . direct response. The main reasons for starting the international activities have been classified into the following categories (Gurau & Ranchhod. Table 3.

On the other hand.2) 358 Medium 58 (47.3) 44 (9.9) 115 (25.9) 132 Internationalised Globalised Fully Globalised 15 (12.9% of the US firms are mainly domestic. The US market is very developed for biotechnology products and services.3%.5) 150 (33. the US respondent companies are predominantly small (66. the percentages of globalised (24. 25. This situation can be explained by differences in the market size and structure between the two countries. 2 The proportion of small.038. These findings confirm the research Hypothesis 1. Therefore.5) 294 (66. Nationality Cross-Tabulation between the Nationality of the Firms and Their Level of Internationalisation. being considered at present as the main global market for this industrial sector.8) 175 (39.9%).and medium-sized biotechnology firms is almost similar for the UK and US respondent companies (Table 4).4) 226 39 (32) 110 (24.8) 208 Total 122 (100) 444 (100) 566 Table 5.9) 59 Total Level of Internationalisation N (%) N (%) UK US Total 51 (41. Nationality UK US Total Cross-Tabulation between the Nationality of the Firms and Their Size. respectively).416. while for the UK firms the proportion of small. Size N (%) N (%) Small 64 (52.150 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD Table 4.8%) and fully globalised (9. The Level of Internationalisation The results presented in Table 5 show that the level of internationalisation of UK-based and US SMBEs is radically different. while in the same category there are only 17 UK-based firms (13. Mainly Domestic 17 (13. the US firms can obtain fairly easily on their local market the necessary resources and a high level of demand for their products/services.2%). the UK . These differences are statistically significant at a level of P ¼ 0.9%) US firms is lower than the percentages of the same categories in UK (32 and 12.and medium-sized respondent companies is almost equal.038. However. P ¼ 0. On the other hand.8) 149 122 (100) 444 (100) 566 Note: w ¼ 8.

Born Global Firms Table 6 shows that Hypothesis 2 is confirmed by the findings of this study.0001. Main Reasons of Internationalisation Table 7 presents the findings related with the main reason of SMBEs’ internationalisation. for the UK SMBEs. The UK Born Global SMBEs are the majority among the respondent firms (83. These results confirm Hypothesis 3.0001.8%). while in the US most of the respondent firms cannot be considered Born Global (71. Born Global N (%) N (%) Born Global 102 (83. Po0. The limitations of the UK market in terms of size. a smaller size and cannot offer the same level of business opportunities to the UK-based companies.6) 125 (28. On the other hand.4) 319 (71. The differences between the UK and the US Born Global SMBEs are statistically relevant to a level of Po0. 2 market has.2) 227 Not Born Global 20 (16. This pressure is much lower on the US-based biotechnology firms. . the UK SMBEs are forced to become international and develop overseas operations.8) 339 Total 122 (100) 444 (100) 566 Note: w ¼ 122. comparatively.The Internationalisation of Biotech SMEs 151 Table 6. who can activate successfully on the large US biotech market.6%). the majority of US biotechnology firms are starting international operations to access new overseas markets for their finalised products and services. These differences are logical when considering the profile of the US and UK biotechnology markets and business environments. As it can be seen. available resources and level of demand force the UK SMBEs to initiate quickly international operations. Owing to these differences. Nationality UK US Total Cross-Tabulation between the Nationality of the Firms and Their Speed of Internationalisation.515. the access to new markets is the main reason for a quite small percentage of the respondent firms (18%). the major reasons for the internationalisation of these companies being the access to information and technology.

products. In order to identify and analyse these differences.2) 129 41 (33. Nationality Cross-Tabulation between the Nationality of the Firms and Their Main Reason for Internationalisation. The situation is not similar in the UK market. Reason for Internationalisation N (%) N (%) Funding New Markets 22 (18) 307 (69. the US SMBEs have the necessary time to develop and finalise a product or service. CONCLUDING REMARKS The present paper attempted to investigate the differences between the internationalisation process of the US and the UK SMBEs. There is an important difference between the level. These firms do not need to access complementary resources on a global basis.6) 97 122 (100) 444 (100) 566 11 2 Note: w ¼ 126. A possible explanation of this situation can be developed considering the corporate lifecycle of the biotech SMEs: starting their internationalisation process later in their corporate life. determined by the specific characteristics of each national market.and the US-based biotechnology firms.0001.6) 56 (12.1) 329 Information Technology Total UK US Total 11 (9) 48 (39. The size and the level of resources available on each national market . The findings of this study indicate that the internationalisation process may be influenced by the characteristics of the domestic market in the case of biotech SMEs. and only in a later stage will penetrate overseas market for marketing and commercialisation.152 ˘ ˘ CALIN GURAU AND ASHOK RANCHHOD Table 7. because the US market offers a diversified and complex range of raw materials. the three research hypotheses were formulated. at a level of Po0. These findings complement well the results presented in Table 5. speed and main reason of internationalisation of the UK. The UK SMBEs will initiate international operations to access the necessary resources for their product/process development. However. which can be easily accessed by local firms. that can be offered in overseas markets.3) 81 (18. The research results have strongly confirmed these hypotheses.0001. the validity of this explanation must be verified in future empirical studies. Po0. The statistical significance of the relationship between variables is very strong. which is comparatively smaller and cannot provide all the necessary resources for the UK-based biotechnology firms.353. services and resources.

However. Biotechnology and competitive advantage (pp. depending on the local market profile.and low-tech firms in their internationalisation process. offering good opportunities for the development of local firms and attracting many foreign companies.The Internationalisation of Biotech SMEs 153 represent good explanations for these differences. . REFERENCES Acharya. R. 156–163). Cheltenham: Edward Elgar.  the management team of the biotech SMEs can use this study to identify the need to internationalise or not in the early stages of the corporate life. depending on their specific need to internationalise. Acharya. The UK offers good opportunities for the creation of innovative biotech firms. Cheltenham: Edward Elgar. demonstrating that.). In: J. (1999). but the business environment cannot sustain these firms through all the stages of growth. or to distribute their product overseas. 2000). it refines the existing internationalisation models. in order to verify the validity of these particular research findings in other industrial and/or national environments. the profile of the domestic market significantly influences the internationalisation process of SMEs. The emergence and growth of biotechnology. future studies should also consider the differences between high. future studies can be designed to compare the Born Global phenomenon in various countries and industries. R. its results are not directly generalisable to other industries or countries. On the other hand. The present study presents importance on three levels:  at academic level. Conclusions: Biotechnology and European competitiveness. 1996. Senker (Ed. and  the governmental agencies of various countries can provide specific support for the local SMBEs in order to increase their competitive advantage and provide effective help for their survival and development. From this perspective. Considering that the focus of this article has been on the biotech SMEs from two countries (UK and US). (1998). a problem already emphasised by some researchers (Boter & Holmquist. the findings indicate that the propensity of biotech SMEs to become Born Global and the main reasons of their internationalisation may be influenced by the characteristics of their domestic market. the UK SMBEs initiate international operations in order to access complementary resources. In this situation. in a specific industrial sector. Fillis. The US is the world’s major market for biotechnology products and services.

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International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing.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.1016/S1474-7979(06)17006-4 159 . Volume 17. 159–192 Copyright r 2007 by Elsevier Ltd. Based on 174 entry decisions of service firms. thus. which is not always associated just with efficiency and valuebased considerations but also with strategic issues and industry characteristics. few studies have undertaken to empirically analyze the factors influencing entry mode choice. The special characteristics of the service sector increase the complexity of the analysis and. traditional explanations of entry mode choice in manufacturing sectors may need to be complemented by other moderating influences. our results suggest the importance of including strategic variables and the specific nature of services to understand a complex phenomenon. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.

the research. 1992. 1999. Kim & Hwang. ¨ 2004). Goldberg & Saunders. Wheeler. Despite the importance of the service sector in world markets and the growth of foreign investments in this area during the last decade. & Smith. Samiee. services have become a driving force in the global economy. Improvements in technology and reductions in trade barriers have had a unifying effect. Bouquet. among others).. firms offering public services (such as energy. In the current competitive environment.g. 1992. Bagchi-Sen & Sen.. which analyzes services in an international context is largely fragmented. 1991. The existing literature has not reached an agreement on which theoretical framework should be used to explain a firm’s foreign market entry mode. both theoretical and empirical. they have analyzed some specific sectors and. & Davies. These facts demand that a more in-depth study of the driving forces behind entry mode choice in the internationalization processes of service firms be undertaken. We propose an integrative theoretical approach in which not only traditional variables from transaction cost theory (TCT) and organizational capability perspective (OCP) are analyzed. making national boundaries less significant and creating new forms of internationalization. representing the most dynamic sector in international commerce. thus. among others) but the question of whether findings from these studies are applicable to the service sector has not been widely empirically investigated. Hill. 1998. 1999. Ball & Tschoegl. Nowadays. 1982. 2001. fail to deal with the heterogeneity problem of the service sector. 1995.g. 1993. telecommunications. 1992. Kennedy. banks and firms offering information-based services have increased their overseas investments in recent years. Hennart. 2004. Agarwal & Ramaswami. Li & Guisinger. Madhok. entry mode choice is not a . 1981. exploratory and still limited in comparison with research focused on the manufacturing sector (Patterson & Cicic.160 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER One of the most critical issues in international market entry strategy is the selection of an appropriate entry mode (Young. ´ Erramilli & Rao. Gronroos. which have not been considered in conventional studies. & Delios. 2004. y). and Kim (1990) have emphasized the need for a unifying theoretical framework within which different factors can be analyzed. Much of the literature about entry mode choice is focused exclusively on the process followed by the manufacturing sector (e. Hebert. Rajaratnam. Clark. 1996. 1989). 1997. Hwang. Although there are some important studies that have analyzed entry mode choice in the service context (see. This paper examines the applicability of the traditional factors determining the entry mode choice of manufacturing firms to service firms. Hamill. Moreover. but also strategic variables and some industry characteristics. e. are included. Lommelen & Matthyssens. Chang & Rosenzweig.

the antecedent factors to the entry mode choice of manufacturing firms are analyzed for the service sector context.Mode of Entry in Service Firms 161 decision based only on efficiency (transaction costs minimization) and valuebased considerations (development of capabilities) and thus existing theory may be insufficient to explain the currently observed behaviors of firms in the international business marketplace (Axinn & Matthyssens. thus. Subsequently. 1993). 1997. in order to contribute to a better understanding of the internationalization processes within the ser vice sector. Next.. 1990. we present the empirical results of the study and discuss the most relevant implications for future research. To achieve these objectives. Finally. . BACKGROUND Conventional Theories In explaining the internationalization of business firms. we present the specific hypotheses of this study.. Aulakh & Kotabe. In dynamic environments. such as professional services. i.e. the switching costs may be comparatively small because valuable assets rest more in human capital than in physical assets. in this paper. various authors have proposed and used numerous theories. Additionally. For many service firms. the high costs of integration stipulated by economic theories may not be strictly true for many service firms. The purpose of this study is to complement prior studies by introducing such new considerations in the entry mode analysis. 2002). 2002). 1980). investment patterns observed in the manufacturing sector could be different in the service sector (Carman & Langeard. We aim to provide evidence about which of the underlying principles observed in the manufacturing sector are directly applicable to the service sector and which may be modified by the specific characteristics of services. we have structured the paper as follows. the strategic perspective and the specific characteristics of services. The following sections provide a short overview of the conventional theories explaining the entry mode choice and introduce the need to consider new influences on the internationalization process of service firms. which diverge in their rationale. we provide detailed information about the research design and methodology used. characterized by low capital intensity (Erramilli & Rao. Harzing. which have been developed from our theoretical framework. Additionally. aspects such as strategic motives of internationalization or the firm’s competitive position in the global environment may also have an impact on the entry mode choice (Hill et al.

. inherent in a firm’s knowledge base (Kogut & Zander. TCT stresses the efficiency of using high control modes when foreign market attractiveness is high. and tacit know-how. 1987) and organizational capabilities perspective (Kogut & Zander. international experience. market imperfections increase the associated costs of transacting with a partner. 1998). The key issue in the entry mode choice is the compatibility between the firm’s existing capabilities and those needed to be successful in a particular market (Madhok. 1975. 1976). Larger and more experienced firms have the confidence and competence to manage the uncertainties of operating in international markets. 2001). 2001). Teece. an operation motivated by value-based considerations (the development of capabilities to create future value) will result in a greater proclivity toward collaboration. Buckley & Casson. Anderson & Gatignon. 1993. 1981. As Madhok (1997) proposed. ‘‘why do firms internationalize?’’ and ‘‘how do firms internationalize?’’ (internationalization process). 1997). firms possessing a rent-yielding specific advantage are motivated to enter foreign markets in order to exploit this advantage in the most efficient manner.162 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER purpose. under conditions of high cultural distance and country risk markets and in the presence of intangible assets (Anderson & Gatignon. the decision about entry mode choice has been widely analyzed from two traditional theories: transaction cost theory (Williamson. 1986. and assumptions. 1976. 2001). which results in a preference for internalizing the transaction within the firms’ own boundaries (Buckley & Casson. Luo. In TCT. 1977. while others focus predominantly on the second question (Weisfelder. 1993). firm-specific capabilities are commonly linked to firm size. These circumstances increase the efficiency of resource utilization and the effectiveness of its transfer in-house (Madhok. 1975). some of them focus predominantly on the first question. Erramilli & Rao. Others see internationalization as an incremental process of increasing international involvement. the OCP broadens the focus from minimizing the transaction costs to also incorporate the managing of value. Although. 1981. 1993. 1988. 1993. Madhok. According to theory. 1991). On the other hand. and the tacitness of know-how increases the transaction costs but it also limits the transferability of the know-how to another firm without loss of value (Kogut & Zander. Luo. For example. some authors have viewed internationalization as a series of static rational decisions (Dunning. However. Under the assumption of opportunistic behavior and bounded rationality by economic agents. Johanson & Wiedersheim-Paul. 1998). all these approaches analyze the internationalization as two questions. 1986. Hennart. Anderson & Coughlan. as firms acquire more experience and gain foreign market knowledge (Johanson & Vahlne.

achieving economies of scale by concentrating the important activities in a limited number of locations. firms often have other additional motives to integrate such as to retain control to better coordinate strategies in multinational corporations (Hill et al. Madhok. In fact. which have not been considered in studies focused on conventional theories (TCT and OCP). in business practice. These incentives to integrate should be incorporated into conventional theories in order to reflect the current competitive conditions and to manage the multiplicity of pressures that manufacturing and service firms face in their businesses. This is even more important in the analysis of the globalization of services because some service industries have shown different internationalization patterns depending on their motives for entry (Dunning. However. Gronroos. etc. in this paper we include the analysis of these variables. Moreover. the actions taken by a firm in one market often have repercussions in other national markets (Kim & Hwang. Therefore. this study analyzes the service sector. 1992). Alternatively. Dunning (1993) highlighted the need to introduce the strategic dimension into the analysis of determinants of international production because this has become an important component of competitive success in a world characterized by the growing plurality of forms of globalization and the growth of cross-border collaborative alliances. to extend market power by entering new markets (Teece. 2002). Nowadays. since new competitive conditions can determine entry mode choices due to strategic considerations. 1993). 1980.. TCT and OCP. 1999). setting up a global sourcing site. ¨ . favor high control types of entry modes (Harzing. among others (Erramilli & Rao. Li & Guisinger. 1993. 1981). to exploit market knowledge following the national clients or competitors to foreign countries. These theories consider market-contracting or low control modes as the default choice for situations of low-asset specificity and as an alternative to complement firm capabilities through knowledge gained from the experience of other firms (Gatignon & Anderson.. empirical studies have tried to analyze the impact that the transaction and firm’s organizational capability factors have on entry mode choice. Moreover.Mode of Entry in Service Firms 163 A Framework for Service Firms From both theoretical perspectives. 1988. 1998). 1992). strategic motivations such as setting up a strategic outpost for future expansion. multinational firms are competing in global rather than national markets and when global competitive interdependence exists. Some researchers suggest that service firms differ from manufacturing firms and face unique challenges in their foreign market entry and expansion process (Carman & Langeard. Erramilli & Rao. 1990). 1990.

Lovelock. 1995). in the case of goods. In such situation. 1993. in the international expansion.. Another distinctive feature of services is the inseparability of production from consumption.e. or lifted (Dahringer. seen. and consumption. 1999). 1998). the subjective nature of service quality perception implies that service process may need some adaptation to attract customers in foreign markets. 1990) and high levels of customization to meet the needs of local clients. so the latter is merely buying the right to a service process (Palmer. they cannot be stored for use after production like manufactured goods. this characteristic increases customer risk perceptions and makes more difficult to asses service quality than for manufactured goods (Edgett & Parkinsson. transported. inseparability. Moreover. whereas. exchange. heterogeneity. the cultural distance between home country and host country becomes a critical aspect that must be analyzed before crossing national boundaries (Lovelock. & Perry. 1994). Services are also perishable. In the literature about services. Halbrich. This fact makes harder to control the output of service firms than it is to control the output of those producing tangible products (Edgett & Parkinsson. firms may be forced to operate with excess capacity at each international market (Sarathy. i. The important role of personnel in providing services produces a high variability in the performance of services. the special characteristics addressed as the factors that distinguish services from goods are intangibility. Hence. As Sarathy (1994) points out. The intangibility means that services are experiences which cannot be touched. Perishability implies the need of direct contact with the client and presents special challenges for balancing supply and demand (Nicolaud. and perishability. Katrishen & Scordis. when a service is performed. Many service firms need to have a local presence in a foreign market because they require direct involvement from the client (Erramilli.e. 1991).164 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER others contend that many of the underlying principles observed in the manufacturing sector are directly applicable to the service context (Boddewyn. 1998). there is a simultaneous association between the acts of production.. these are normally separate and discrete activities. heterogeneity means that services are difficult to standardize so they are never the same from one consumption experience to another (Dahringer. 1986. For any company trying to market services internationally. no ownership is transferred from the seller to the buyer. 1993. 1991). The intangibility of services also presents some challenges in going abroad. i. 1989). Winsted & Patterson. . And finally. We contend that some of the underlying principles observed in the manufacturing sector are directly applicable to the service sector but some others may be moderated by the specific characteristics of services.

. This characteristic also increases the difficulty of achieving success with new services because variability in performance implies that past performance may not be a valid indicator of future success (Campbell & Verbeke. advertising. Variability depends on the extent to which services can be customized to meet the specific needs of individual customers. services that are closely associated with employees who are embedded in their own cultural and social contexts are difficult to standardize and produce in the same way abroad as in the home market (Palmer.. 1978). 1993).g. the level of capital intensity is different in manufacturing and service sectors. 2003). telecommunications. some service firms are capital intensive (e. Second. 1995). legal services. the heterogeneous nature of services is closely linked to variability in production standards and usually requires that service providers tightly control the quality of the service production process (Sasser. hotels. & Wyckoff. these service firms will respond quite differently from manufacturing ones because differences in switching costs allow service firms to relocate activities more easily if risk conditions become too great. hence. Some service firms are people intensive (e. To offer these services: (i) employees must possess high levels of analytical and technological skills in order to cope with customers’ needs. Therefore. .. Olsen. y) and thus high control entry modes involve low expense (Erramilli & Rao. 1978).g. 1993. In the literature about entry modes. First. it is important that all service providers are trained to provide equivalent delivery and firms should take into account that cultural distance affects the nature of the workforce employed and the standardization of the service delivery (Sarathy. The need for local adaptation to customer needs. two characteristics have been acknowledged by researchers as determinants of the different responses in the internationalization process of service firms: the level of capital intensity and the degree of customization (Erramilli & Rao. Brouthers & Brouthers. Services that are produced for a large number of customers simultaneously may offer little scope for customization. The establishment of a new subsidiary abroad entails large fixed-investments and. However. airlines. 1994). the importance of controlling the firm’s quality standards. 1994). and (ii) service providers must control the quality of the service production process (Sasser et al. y) and they are more likely to show the same investment patterns as the manufacturing sector.Mode of Entry in Service Firms 165 1992). On the other hand. However. Given similar risk perceptions. consulting. Manufacturing frequently requires large commitments for plants and equipment. accounting. firms will prefer flexibility (low control modes) to enter into countries with changing environmental conditions. energy. the level of capital intensity varies among different services within the service sector.

Prahalad & Doz. 1 summarizes the theoretical framework that will be used to develop the hypotheses. which extends conventional theories. the degree of capital intensity and customization. 1986. and the difficulty in transferring know-how to local partners to offer services with a high degree of customization will increase the propensity to use highintegration entry modes in culturally distant markets. Determinant Factors of Entry Mode Analysis. Offensive motives Asset exploration vs. may moderate the relationship between firm’s investment risk perception (country risk and cultural distance) and the level of control and resource commitments in the host country. Fig. Both specific characteristics of services. Inherent differences in manufacturing and service firms necessitate a context-specific approach. 1987). we can distinguish two types of international strategies: global . analyzed in prior studies focused on transaction cost and resource-based theories.166 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER NEW INFLUENCES Strategic considerations International strategy Defensive vs. to understand a service firm’s internationalization. Asset exploitation Entry mode analysis Industry characteristics Capital intensity Degree of customization Control variables Transaction cost variables Organizational capabilities variables Fig. HYPOTHESES DEVELOPMENT Strategic Factors Type of International Strategy From the integration-responsiveness paradigm (Porter. In this paper. will be considered as control variables in the empirical study. 1. we will focus on the examination of these new influences whereas traditional variables.

resources. The international delivery of services will require the use of sophisticated recruitment and training techniques to ensure and control the selection and development of service providers whose competence will lie in projecting the right image. 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. and transfers of assets between units. From this perspective. a multidomestic strategy emphasizes the differences between national markets and firms compete predominantly on a domestic level (Harzing. Hymer. Therefore. Since personal selling plays an important part in the offer of services. we hypothesize that H1. some authors have distinguished between defensive motives. 1986). (1990) and Kim and Hwang (1992) suggested that firms pursuing a global strategy tended to adopt high control modes. A global strategy is based upon the centralization of the main assets. possible synergy effects. These companies think in terms of creating products for a world market and manufacturing/servicing them on a global scale in a few highly efficient plants located in countries with cost advantages. This approach is focused on efficiency and requires central coordination and control. Internalization facilitates centralized decision-making to manage activity interdependencies because a firm’s competitive position in one market is affected by its competitive position in other national markets (Aulakh & Kotabe. This need will be particularly acute when the firm attempts to follow a global approach. Service firms pursuing a global strategy are more likely to select high control and resource commitment modes. The subsidiaries become more independent and their managers become more host-country oriented. 1976). Products or services are differentiated to meet different local demands and policies are differentiated to conform to different governmental and market demands (Porter. 2002). Hill et al. Defensive vs. these plants may not necessarily be located at the corporate center. Offensive Strategic Motives of Entry Traditionally. and responsibilities in the head office. due to the necessity of tight coordination. Therefore. On the other hand. However. service providers are generally encouraged to take great care in selecting and training contact personnel. firms pursuing a multidomestic strategy should select low control modes because they are more focused on the costs–resources of the relationship and adaptation to local conditions than on the level of control.Mode of Entry in Service Firms 167 and multidomestic strategies. 1997). 1971. based on the protection of current .

Exploitation vs. 1982. 1995). consulting. 1992). 1995). service firms lack market knowledge and knowledge of local needs. based on the exploitation of new markets (Dunning. however. seeking growing market potential countries. On the other hand. so service firms are more likely to select a full-control mode. researchers have suggested a necessary dynamic balance between exploitation and the development of capabilities for the continued success of . 1990. 1993). in oligopolistic markets. and overcome the liability of foreignness (Erramilli & Rao. Li & Guisinger. competitors react to overseas expansion of service firms in order to proactively achieve a global market power position and head off potential competitors (Terpstra & Yu. Defensive motives most commonly cited in the literature are following the national client and following the competitors or leaders (Li & Guisinger. Wholly owned subsidiaries (WOS) allow firms to give a faster response to competitors’ actions than collaborative modes. Thus. are related to the purpose of serving new foreign clients. and offensive motives. insurance.’’ so firms are more likely to select collaborative agreements such as contractual agreements or joint ventures in order to obtain external resources. gain access to local customers.. According to these statements H2. Ball & Tschoegl. They initially followed their goodsproducing clients to the countries where they set up their factories in order to gather necessary information and prepare for and facilitate their home clients’ expansion in the new market.g. or locating in specific geographical areas (e. 1981. it is necessary to balance the risks and benefits of being the ‘‘first mover. and other professional service industries are examples of this type of internationalization motive (Goldberg & Sanders. 1992. Offensive motives. Dunning. Many service firms follow internationalizing manufacturing companies abroad in order to offer their services to these companies also in overseas markets. Dunning. 1990.168 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER markets. accounting. More defensive entry motives will increase the likelihood of service firms choosing high control and resource commitment modes. Dunning. Banking. legal services. 1988). Exploration Strategic Motives of Entry Recently. This international pattern has been empirically demonstrated in some studies focused on service firms (Erramilli & Rao. banks locating in major financial districts). Under such circumstances. 1993). Client followers can be expected to select a high integration mode in order to protect their competitive advantage based on the knowledge of specific customer needs.

airline. to high levels in hotel. retain flexibility. The asset-seeking motivation consists of experimentation of new alternatives. Makino. Levinthal & March. 1993. Therefore H3. which allows firms to enhance competitive advantages through complementary assets acquired in host markets (Vermeulen & Barkema. other resources such as host market knowledge. 2002). Ownership of high capital-intensive service facilities entails large-scale investments and thus. 1995. Some resources. Although service firms are generally less capital intensive than manufacturing firms. This inverse relationship between country risk and control proposed by conventional theories has been also supported by studies focusing on service firms (see. 1992. from the asset-seeking perspective. Traditionally.. Therefore. management expertise y) available in host markets. firms facing high country risk tend to seek local knowledge. However. or technology would be costly to obtain through replication or acquisition and as such firms are more likely to collaborate with local firms (Hennart. the low resource . Contractor & Kundu.. But. 1991. Li & Guisinger. and energy firms. Specific Characteristics of Services and Risk Investment Variables Capital Intensity and Country Risk An important source of uncertainty identified in the international business context is associated with the political instability and economic fluctuations in foreign countries. e. Country risk determines both the need for local knowledge and the exposure of assets. Agarwal & Ramaswami. Kim & Hwang. 1991). Chang. architecture. engineering firms. More asset-seeking entry motives will decrease the likelihood of service firms choosing high control and resource commitment modes. Erramilli & Rao. and shift the risk to local firms through agreements or joint ventures (Aulakh & Kotabe. firms engage in direct investment when they intend to acquire strategic assets (technology. 1998). 1992). FDI is viewed as the transfer of a firm’s proprietary assets across borders (asset exploitation). investment patterns in volatile environments may be moderated by some specific factors related to the specific characteristics of services. & Yeh. However. electricity. 1997. 1992. marketing. 1993. such service firms will prefer to minimize the risk exposure and resource commitments in high country risk markets. can easily be obtained through markets. However. telecommunication. capital intensity varies across service industries: from low levels in consulting. 2001).Mode of Entry in Service Firms 169 the firm (March. local contacts. such as capital or labor resources.g. Lau. etc.

. 1992. we propose the main effect of country risk. the quality of a service may vary. However. This fact is especially relevant in most services characterized by a low degree of separability and a high degree of customization (Domke-Damonte. The inverse relationship. Empirical evidence supporting a positive relationship between cultural distance and the desire to establish collaborative modes has been found in several studies focusing on the service sector (among others. due to difficulties in resource transfer across firm boundaries and the expense of incurring ex ante costs of evaluating the local collaborator (Anand & Delios. Country risk in the host market will decrease the likelihood of service firms choosing high control and resource commitment modes. 1997). 2000). Specifically. Traditional TCT arguments consider that firms minimize the high information costs associated with operating in culturally unfamiliar countries by using collaborative modes of entry (Gatignon & Anderson. 2004). Erramilli. Thus.170 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER commitments and switching costs for less capital-intensive services may induce firms to invest in unstable countries where competitive conditions are more favorable than in other international markets and where it is easier to overcome local firms’ advantages and achieve a better market share. Li & Guisinger. If firms use local partners in countries with a high cultural distance. Customized businesses have to conduct face-to-face transactions with their customers. Fladmoe-Lindquist & Jacque. Thus. and the moderating influence of a service’s capital intensity over such a relationship to be: H4a. Furthermore. However. there is some controversy over its exact influence. foreign investors share the risk with local partners and avoid costly mistakes in the new market. supported by conventional theories and most commonly observed in empirical studies. Degree of Customization and Cultural Distance Several studies have considered that the cultural distance between the home country and the intended foreign market is a powerful determinant of entry mode choice. recent research suggests that high cultural distance could provide investors with the incentive to internalize. between country risk and a service firm’s propensity for high control and resource commitment modes. creating significant risks for the firm. raising an overall problem of consistency for the foreign investor (Bouquet et al. 1988). the cross-cultural transfer of services requires communicating with foreign . 1991. the performance of employees who deal directly with customers is important for the maintenance of a firm’s quality standards (and the resulting competitive advantage). H4b. will become weaker with the decreasing capital intensity of services. 1995).

we hypothesize first the conventional relationship which proposes that information costs in unfamiliar foreign cultures will diminish the firm’s desire for high control and resource commitment modes. However. The survey instrument consisted of an extensive mail questionnaire. 1995). will become weaker with an increasing degree of customization of services. the importance of controlling the firm’s quality standards. Each respondent was asked to provide data on up to two foreign market entry decisions in which he/she was involved or had enough information about to answer. keeping transactions within the context of the firm’s organizational boundaries could solve this problem. Hence. and the difficulty in transferring know-how to local partners to offer services with a high degree of customization will increase the propensity to use high integration entry modes. Given the evidence that highly customized service firms favor high control modes. Cultural distance between home and host market will decrease the likelihood of service firms choosing high control and resource commitment modes. METHODS Sample Dun and Bradstreet (2002) compiled an international database providing information on Spanish companies with subsidiaries outside Spain in the year 2002. As such. H5b. From October 2002 until February 2003. Finally. The questionnaire was mailed to senior-level managers who were most likely to be involved in the market entry decision process in their firms. This amounted to 660 multinational service companies. the need for local adaptation to customer needs. which was pretested through personal interviews with Spanish executives responsible for international operations and with academics specialized in international management. The inverse relationship. Two weeks later. including CEOs and directors in charge of international operations.Mode of Entry in Service Firms 171 employees whose work ethics are embedded in different languages and cultural traditions (Fladmoe-Lindquist & Jacque. we received 113 questionnaires and firms . H5a. each firm received a phone call in order to encourage managers to participate in the study. between cultural distance and service firms’ propensity for high control and resource commitment modes. a reminder was sent to non-respondents with a copy of the questionnaire.

56 12.48%). We did not provide a list of markets. The response rate of 17% compares favorably with rates reported in other surveys involving CEOs (Samiee & Walters.64 2. More information about firm characteristics is listed in Table 2.06 12. Each respondent provided detailed data on at least one decision and some of them provided information about two entry decisions. Firm Characteristics (N ¼ 113) Sample Characteristics.43 9. value 2 (25–50%). the midpoint of the data collection period (October 2002 until February 2003) was used as the cutoff .27%).478. followed by Latin America (34.98 Standard Deviation 0. In our paper. Mean 1.19%). Sectors Transport Distribution Public services Financial services Commercial services (standardized) Professional services (customized) Total Service Sectors.172 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER Table 1.32 14.26 4.54 Median 2 1 105 8 2 2.50 0 Foreign sales Foreign assetsa Number of employees Number of foreign countries (exports) Number of foreign countries (investments) Export experience (number of years) Investment experience (number of years) a a Intervals: value 1 (o25%).28 9. 1991.50 9.14 14.92 1. The highest number of entries was in the European Union (48.41 17. value 4 (o75%). provided data on a total of 174 entry decisions that were deemed usable for our analyses. OCDE-Non European Union (9. value 3 (50–75%). so respondents chose countries in which they were operating.8 100 Table 2.06%). Questionnaires were analyzed using the time trend procedure proposed by Armstrong and Overton (1977). representing a wide variety of service industries (see Table 1). This investment pattern has also been shown by Spanish statistics.31 3.06 25. Chang & Taylor.24 23.27 871. and the rest of the world (8. 1999).20 4. Percentage 17.98 0.

these two groups of respondents were compared on their demographic data.5%) and 107 full-ownership modes (61. No significant differences were found (po0. A joint venture entails direct investment in the target country and is defined as a joint partnership in which . and international experience in investments. the study focused on the influence of the same independent variables over specific entry modes. Finally. coded ‘‘1’’ for the full-ownership control mode (Greenfield investments and full acquisitions) and ‘‘0’’ for the shared-ownership control mode (contractual agreements. where possible. foreign assets. We used independent samples t-tests to check for equality of means. and joint ventures). and ‘‘3’’ for WOS (61. A high degree of correspondence between published data and survey responses was found. 62% of the responses (70 out of 113) were from early respondents and the remaining 38% were from late respondents (43 out of 113). Entries were made up of 67 shared-control modes (38. To ensure that the early and late respondents did not systematically differ. A WOS is a 100% investment in which decisions are made solely by the investor. the study is focused on the influence of independent variables over ownership control decisions. The dependent variable represents the three options included in our study: ‘‘1’’ for contractual agreements (a total of 19. was represented by a dichotomous variable.Mode of Entry in Service Firms 173 point for distinguishing between early and late respondents. The dependent variable. number of employees. partial acquisitions.5%). In the first one. Dependent Variable Measure The hypothesized relationships were examined using two analyses. those variables from the survey responses were cross-checked against company reports and published data.5%). responding firms were compared to a random sample of 20 non-respondents regarding size (sales volume) and experience (years since foundation). supporting the veracity of the survey responses.5% of entries). In the second analysis.05). including foreign sales. international experience in exports. The parameters estimated are interpreted in reference to the wholly owned control subsidiaries. Analysis indicated no significant differences in the variables of interest between late and early respondents. the parent company has full ownership and sole responsibility for the management of operations. providing no evidence for non-response bias. number of countries in terms of subsidiaries. ‘‘2’’ for shared-control subsidiaries (19%). Additionally. Thus. number of countries in terms of exports. degree of control and resource commitments.

and risk of the new venture. Li and Guisinger (1992) and Kim and Hwang (1992). We asked about managers’ perceptions about the importance of the following motives (‘‘1’’ very low. We constructed a composite index with these items. ‘‘5’’ very high): (a) three items related to defensive motives: to overcome the rapid overseas expansion of other service firms. Strategic Motives Strategic motives related to defensive motives and offensive motives was measured using a multiple-item scale based on Weinstein’s (1977) scale. (b) competitive position is defined in worldwide terms and markets are closely linked and interconnected. ‘‘5’’ strongly agree): (a) firm’s desire to achieve economies of scale by concentrating the important activities in a limited number of locations. Hence. Table 3 provides detailed information about the goodness of fit indices. to follow the clients. Erramilli and Rao (1990). High values indicate global strategic approaches. . joint ventures entail a resource commitment that is greater than a licensing arrangement. management. to establish the company name in markets that will be important in the future. contractual agreements involve lower resource commitments than joint ventures and WOS. but less than a WOS. to follow the competitors (Cronbach’s alpha ¼ 0. Independent Variable Measures International Strategy The type of international strategy has been constructed from Harzing’s (2002) measure.174 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER major decisionmaking is shared with the foreign partner. and to capture new clients (Cronbach’s alpha ¼ 0. We asked respondents to assess the following statements (‘‘1’’ strongly disagree.8539).7537) and (b) three items related to offensive motives: to take advantage of a market with a large and growing potential. Contractual agreements can be broadly defined as coalignments between two or more firms in which the partners acquire production technologies and marketing skills from each other with little equity ownership. Thus. (c) each subsidiary competes on a domestic level as markets are too different (reverse) and (d) firm responds to national differences by adapting products to the local market (reverse) (Cronbach’s alpha ¼ 0. Partners share the ownership.6959).

COMPARATIVE FIT INDEX ¼ 0. LISREL AGFI ¼ 0. Goodness of Fit Indices. offensive motives were reverse coded and then we constructed an index with both defensive and offensive motives (high values indicate more defensive motives).951. Items were significant (t-value >1.Mode of Entry in Service Firms 175 Table 3. BENTLER–BONETT NONNORMED FIT INDEX ¼ 0.902. LISREL AGFI ¼ 0.948.950 Motives Market Seeking: defensive vs. LISREL GFI ¼ 0. .952. Strategic Variables (Independent Variables) International strategy Goodness of fit indices: BENTLER–BONETT NORMED FIT INDEX ¼ 0. COMPARATIVE FIT INDEX ¼ 0.956. Goodness of fit indices are: BENTLER–BONETT NORMED FIT INDEX ¼ 0.959. COMPARATIVE FIT INDEX ¼ 0.906. LISREL AGFI ¼ 0.840 Two-factor confirmatory factor analysis confirms the existence of two groups of motives.947.969.985.042 Transaction Cost Variables (Control Variables) Marketing intensity Goodness of fit indices: BENTLER-BONETT NORMED FIT INDEX ¼ 0. BENTLER–BONETT NONNORMED FIT INDEX ¼ 0.940.878. LISREL GFI ¼ 0.970.956.822 Firm’s Organisational Capabilities (Control Variables) Tacit know-how Goodness of fit indices: BENTLER–BONETT NORMED FIT INDEX ¼ 0. LISREL GFI ¼ 0.944. LISREL GFI ¼ 0. (2002). BENTLER–BONETT NONNORMED FIT INDEX ¼ 0. STANDARDIZED RMR ¼ 0. LISREL AGFI ¼ 0.937. BENTLER-BONETT NONNORMED FIT INDEX ¼ 0. We asked about managers’ perceptions about the importance of the following statements (‘‘1’’ very low. offensive motives We conducted a two-factor confirmatory factor analysis. The exploitation motive was reverse coded and then we constructed an index with both exploitation and exploration items (high values indicate exploration motives).832. With an aim to assessing the strategic nature of the entry. COMPARATIVE FIT INDEX ¼ 0. ‘‘5’’ very high): (a) firm orientation toward assets and capabilities seeking in the entry decision and (b) firm orientation toward asset exploitation in the entry decision. Asset seeking and asset exploitation motives were captured from Chang (1995) and Makino et al.96) and the analysis confirms the existence of two groups of motives: defensive and offensive motives. Table 3 provides detailed information about the goodness of fit indices of these strategic motives.

This index measures the deviation along each of the four cultural dimensions identified by Hofstede (1980) (uncertainty avoidance. This publication presents annual ratings of countries based on composite measures of both political and economic risks. Oviatt. power distance.g. & McDougall..176 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER Risk Investment Variables and the Characteristics of Services Country Risk This variable was derived from the host country risk index published in Euromoney the year before each entry. e. Delios & Beamish. and the other one related to the degree of customization of the service (degree of customization index (DCI)). Shrader. 2000). The index varies from 0 to 100: the value ‘‘0’’ represents instability of political and economic conditions. and masculinity–femininity) from the score of a given focal country for each country. Specific Characteristics of the Service We construct two indices which moderate the influence of the risk investment variables (country risk and cultural distance) on entry mode decisions: one index related to the capital intensity of the service sector (capital intensity index (CII)). and CDSpain/j the cultural difference of country j from Spain. Cultural Distance This variable was computed according to the composite index used by Kogut and Sing (1988) and data contained in Hofstede (1980). Each respondent had to assess (a) Capital intensity: Two items that capture the degree to which the service is provided by machines and the degree to which the service is provided . 1999. Cultural distance between the country of origin (Spain) and host country (j) is hence calculated as: "À Á2 # 1 X I iSpain À I ij CDSpain=j ¼ 4 Vi where Iij is the index value for the cultural dimension i of country j. IiSpain the index value for the cultural dimension of Spain. individuality. This measure has been used by previous studies (see. Both indices were constructed from managers’ perceptions about the characteristics of the service. Vi the variance of the index dimension i. The deviations were corrected for differences in the variances of each dimension and arithmetically averaged. while the value ‘‘100’’ represents stability of such conditions.

1992. 1991. ‘‘5’’ very high). . we control the influence of market potential and intangible assets. Li & Guisinger. Erramilli and D’Souza (1995) and Pan and Tse (2000). The people-intensive service item was reverse coded and then we constructed an index with both items (high values indicate capital-intensive services). Erramilli & Rao. Size is a categorical variable that takes three values: 1 (small firms). market potential was measured as a single-item scale based on managers’ perceptions about the potential growth of the new market (‘‘1’’ none.. Prior research has also used the sales volume as an indicator of firm size (see. Detailed information about goodness of fit indices of this variable is presented in Table 3. and 3 (large firms). (ii) international recognition of brand name. On the other hand. From TCT. and (iii) advertising investment (‘‘1’’ very low. Control Variables We control the influence of traditional variables which have been considered in previous studies based on TCT and OCP. Erramilli. ‘‘5’’ very high) (Cronbach’s alpha ¼ 0. we distinguish two variables to capture a firm’s intangible assets: (a) R+D intensity: A single-item scale based on managers’ perceptions about R+D expenses. international experience.. 1992).g. e. 1992.Mode of Entry in Service Firms 177 by people (‘‘1’’ very low.g. (b) Marketing intensity: A three-item scale based on managers’ perceptions about: (i) firm reputation with respect to design and quality. From OCP. Firm size was measured as intervals of a firm’s sales volume the year before the entry. e.7486). 1993). This variable is based on prior studies (see.g. This variable was constructed based on Erramilli and Rao (1993). we control the impact of firm size. following Kim and Hwang (1992). Agarwal & Ramaswami. Based on prior studies (see. Country risk and cultural distance were examined in the independent variables section because we have hypothesized the main effect of these variables and the moderating influence of service characteristics. 2 (medium firms). and tacit know-how. ‘‘5’’ very high). e. 1992). Agarwal & Ramaswami. ‘‘5’’ high). This last item was reverse coded and then we constructed an index with both items (high values indicate customized services). Erramilli.. (b) Degree of customization: Two items that represent the degree to which firms offer different services adapted to customer’s preferences or they offer similar services to customers (‘‘1’’ very low.

Agarwal. The difficulty in remembering the exact sales volume led us to ask this question in terms of intervals. (b) the difficulty in assessing the proper price of the service. higher than h40 million (large).178 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER These categories have been constructed according to managers’ responses. also based on prior studies (see. The construct was based on managers’ perceptions about (a) the difficulty in transferring capabilities and knowledge. shared-control). e. 2002. A positive coefficient indicates that the independent variable increases the probability of choosing full-ownership control. We analyzed the sign of the coefficients that were significant. Domke-Damonte. One-tailed tests were used because they are more appropriate to assess directionality. (c) the difficulty in copying the skills and knowledge. Further. and Dev (2002).058. following European Union Commission recommendations: a sales volume lower than h7 million (small). Tatham.. 1999). Fladmoe-Lindquist & Jacque. while a negative sign suggests a preference for shared-control modes. ‘‘5’’ very high) (Cronbach’s alpha ¼ 0.g. Detailed information about the goodness of fit indices of this variable is presented in Table 3. where z is a linear function of the independent variables. the correlation matrix was examined. . A logistic regression was carried out to analyze the influence of the independent variables in each of the groups defined by the first dependent variable (full-ownership control vs. RESULTS Prior to running the statistical analyses. Harzing. And. 1995). 2000. (‘‘1’’ very low. Results are interpreted in reference to the last interval. between h7 and 40 million (medium). Anderson. finally. This evidence reduces concerns about multicollinearity problems. The largest VIF value is 3. International experience was measured as the number of years from the first investment abroad. and (d) the difficulty in understanding the know-how.8396). Table 4 shows the correlation matrix and some descriptive statistics. Most of the correlations among the variables are small. tacit know-how is a four-item scale derived from Kim and Hwang (1992) and Erramilli. We asked them to indicate the firm’s sales volume for the year of the entry. the variance-inflation factor (VIF) reveals that most of these are close to 1. & Black. The model was specified as follows: expðzÞ=ð1 þ expðzÞÞ. The model estimates the probability of choosing the entry modes defined by the dependent variable. which is well below the cutoff at 10 (Hair.

Market potential 3. Exploitation–exploration motives 2.020 0.129Ã 0.437ÃÃ 1.5311 8. Offensive–defensive motives 3.05 level of significance.000 À0.145 À0.588 0.133 1.090 À0.103 0.Mode of Entry in Service Firms Table 4.027 1.090 1. Marketing intensity 3.030 À0.000 0.000 0.028 ÃÃ 0.066 0.351ÃÃ À0. Capital intensity index (CII) 2.101 0.079 0.029 À0. R+D intensity 2.000 0.399ÃÃ À0. Degree customization index (DCI) 2.000 0.376ÃÃ 1. Size 1.02 9.106 0.286ÃÃ À0.92 7.045 0.083 À0.092 À0.01 level of significance.016 À0.517ÃÃ 1.17 0.058 À0. 3 4 5 6 7 8 9 10 11 12 13 1.01 1.081 0. 179 . Ã 0.14 1.139* 0.047 0.000 0.7492 0.000 ÃÃ 0.198 0.42 3.536ÃÃ 0.080 0.12 6.009 ÃÃ À0.165Ã 1.000 0.016 0.100 0.049 1.103 À0.095 0.54 12.235ÃÃ 0.111Ã 1.030 0.94 1.037 0.042 0.7066 1.316ÃÃ 0.97 0.062 0.088 0.84 13.000 À0.129 À0. Tacit know-how 3.089 À0.04 24.012 1.102 0.100 0.095 À0.000 À0.167Ã À0.9584 4.228ÃÃ 1.26 5.025 À0. International experience 5.128 À0.153ÃÃ 0.000 À0.269ÃÃ À0.153 0.258ÃÃ 1.127 ÃÃ0.000 À0.547ÃÃ 0.119 À0.019 À0. Mean Standard Deviation 1.255ÃÃ 0.451ÃÃ 0.074 0.170ÃÃ 0.524ÃÃ À0.004 À0.41 1 2 Correlation Matrix.224 0.000 0.027 À0.94 1.13 10.02 1.219ÃÃ 0. Country risk 72.39 1. International strategy 3.87 2.44 0.97 11. Cultural distance 0.214ÃÃ 0.005 À0.21 11.010 À0.

the addition of the strategic perspective and the characteristics of services to the regression along with variables from conventional theories resulted in a significant improvement in Chi-square at po0. summarized in Table 6 Model 4. a global international strategy in foreign markets (po0. Our results from the final binary logistic regression confirm the high explanatory power of these variables. and H3. shared-control subsidiary.001) and a firm’s strategic motivations related to the following of clients or competitors (po0. we analyzed the impact of the independent variables on the probability that each of the three-entry mode options would be chosen (WOS.01 and classifies a higher number of cases (see Tables 5 and 6). the models present satisfactory indicators of significance. The inclusion of strategic variables allows us to extend the explanations of entry mode choice to a new research area. However. However. international experience. cultural distance.10) increase the probability of selecting a full-ownership control mode. and contractual agreements). . and tacit know-how). Both regressions introduce two alternative models. we shall extend our comments on the results of the models to include the strategic variables and the characteristics of services. and intangible assets) and the contribution of those traditionally analyzed by OCP (size. and defensive motives are associated with full control when equity modes are compared. allow us to confirm the relationship between international strategy and entry modes. there is empirical support for H1. In general. Results from the multinomial regression. which enhances the robustness of the conclusions. H2. country risk.10) and to asset exploitation (po0. This analysis allows us to confirm the results obtained from the logistic regression and to assess the consistency of the results by means of different statistical methods. These results indicate that these new influences add to the predictive ability of conventional theories. As we predicted. As such. A positive coefficient indicates that the probability of adopting an entry mode rather than WOS increases as increments of the independent variables occur. exploration motives are only associated with shared control when equity and non-equity modes are compared.180 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER Subsequently. these variables were entered in the first regression. As Table 5 Model 2 shows. The second regression also includes the influence of strategic variables and the moderating influences of the characteristics of services on the relationship between risk investment variables (country risk and cultural distance) and entry mode decisions. We carried out a multinomial regression and took WOS as reference (greenfield investments and full acquisitions). In order to examine the contribution of factors traditionally analyzed by TCT (market potential.

857Ãà (0. CII.518) 0.3 Note: Standard errors in parenthesis. the negative sign of the main effect indicates that service firms entering unstable environments (low values of the country risk index) prefer full-control modes (a high value of the dependent variable).478ÃÃà (0.444) 152.618y (0.010 85.311) 0.078y (0.758) 1. y po0.988Ãà (0.020) À0.324) 0.004 (0.803à (1. Model 1 (Control Variables: TCP and OCP) À10.044) À2.01.160ÃÃà 113.333) À0.454) 0.037) 0.928ÃÃà (0.055 (0.289) 0.637ÃÃà 72. full control (1).016 (0.250 (1.046 (0.230 (0. capital intensity index.284 (0. Variables Logistic Regression.633) 0. the empirical results from the logistic regression show that specific characteristics of services moderate the relationships of investment risk variables (country risk and cultural distance) and entry modes (see Table 5 Model 2). DCI. Ãà po0. Considering that high values of the country risk index represent stability of political and economic conditions and low values represent instability conditions.481) 0. the highest interval. The main effect of country risk is statistically significant (po0.Mode of Entry in Service Firms 181 Table 5.565 90.399y (0.801 (1.10 (one-tailed). + reference category.028y (0.348) À0. Additionally.728 (0.766y (0. dependent variable: shared control (0).1) but contrary to the relationship proposed by conventional theories and thus contrary to our H4a.130) 1.199à (0.266) 0.369) À0.028) À0.155 (0.343 (0.584Ãà (0.268à (3.452 (0.5 Constant Market potential Country risk (H4a) Cultural distance (H5a) R+D intensity Marketing intensity International experience Size (1)+ Size (2)+ Tacit know-how International strategy (H1) Offensive–defensive motives (H2) Exploitation–exploration motives (H3) Capital intensity Degree of customization Country risk  CII (H4b) Cultural distance  DCI (H5b) w2 À2 log likelihood Overall classification rate (%) 113.001. degree of customization index.227) 0.015) 0. The main effect of capital intensity is also significant .549) 1. ÃÃà po0.05.010) À0.236) À2.001) À0.739ÃÃà (0. à po0.325ÃÃà (2.491) 0.347) Model 2 (Complete Model) À7.992) À0.

382 (0.077 (1.805 74.901 (0.851 (3.704 (0. WOS.586) À0. SCS: shared control subsidiary. contractual agreements.01.785) À0.451ÃÃÃ(0.034 (1.185) 0.422) À0.335Ãà (0.111ÃÃÃ(0.257) À0.101ÃÃà (0.397) 126.748à (0.929) À2.685à (1.034) À1.339 (0.349) À0.106) À0.016) À0.835) 8.921à (1.032) 1.866y (0.1.367) À1.902) 0.042ÃÃ(0.034 (0.725y (1.528) 170.080) À0. y po0.023) À0.266) 0.05. Variables Multinomial Regression.013 (0.744Ãà (.355) À1.546) À0.001 (0.386) 0.182 Table 6.261) À0.459ÃÃà 189.394 (0.510 (0.073) 2.569) À0.027) 1.142 (0. ÃÃÃpo0.501) À1. wholly owned subsidiary (reference category).483ÃÃÃ(0.454y (0. capital intensity index.056 (0.788y (1.485) À1.035à (0.228) À0.402) À0. DCI.817ÃÃà 144.011) 0.302 (0.391) 2.459) 0.418) À0. CA.528 (0.318 (0.123 (0. .370) À0.050) 2. ÃÃpo0.232à (4.315 (0.308) À0.8 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER Note: Standard errors in parenthesis.377 (1.016) À0.524) 0.303) À0.261) À1.053 (0. WOS Model 3b SCS vs.756ÃÃà (0.136) 0. degree of customization Index.745 (1.049) 0.359) À0.036) À0.175) 1.336ÃÃà (2.252) 1.011) 0.892 (0.172 (0.483) À1.394) 0.486) À0.420) À0.006 (0.016 (0.975à (0. WOS Model 3: TCT and OCP Variables Model 3a CA vs. WOS Model 4b SCS vs. CII.706y (0. WOS 11.957ÃÃà (2.677 (0.464) Intercept Market potential Country risk Cultural distance R+D intensity Marketing intensity International experience Size (1)+ Size (2)+ Tacit know-how International strategy Offensive–defensive motives Exploitation–exploration motives Capital intensity Degree of customization Country risk  CII Cultural distance  DCI w2 À2log likelihood Overall classification rate (%) 7. Model 4: Complete Model Model 4a CA vs. à po0.314ÃÃà (0.979Ãà (0. + reference category: the highest interval.420 (0.639 (1.024) À0.129ÃÃà (0.478 82.1 4.020 (0.001.

confirming H4b. the tacit nature of know-how does significantly increase the probability of choosing high control and resource commitment modes (po0.1). One of the control variables from TCT was statistically significant (see Table 5 Model 2). other TCT variables (technological and marketing intensity) do not significantly affect entry mode decisions. as determinants of the entry decision into foreign markets. which indicates that the preference of service firms to use full-control modes in high-risk markets will become weaker with increasing capital intensity. As we expected. With regard to OCP control variables.1). Hence. . Additionally.Mode of Entry in Service Firms 183 (po0. However. DISCUSSION This paper intends to offer new explanations to entry mode choice in the service sector.01). our results do not allow us to confirm the influence of size and international experience on entry mode decisions (see Table 5 Model 2). The results of this paper provide new insights about international strategy because they show the importance of some variables. not considered in conventional theories. However. and determinant factors have been linked to transaction characteristics or the firm’s organizational capabilities. as we have stated in H5b. Results from the multinomial regression (presented in Table 6 Model 4) confirm the main effect and the moderating influence only when non-equity and equity modes are compared (contractual agreements vs.05). The moderating influence of capital intensity shows a positive sign (po0. The results are consistent in the four models (see Tables 5 and 6). our results suggest that firms are likely to adopt high control and resource commitment modes when they enter high market potential countries (po0. Results from the multinomial regression (summarized in Table 6 Model 4) allow us to confirm the main effect and the moderating influence only when equity modes are compared (joint ventures vs. the results from the logistic regression (Table 5 Model 2) show that shared-control modes are preferable when service firms enter high cultural distance markets (po0. confirming H5a.05) and presents a negative relationship with control and resource commitment modes.01). Generally. the moderating influence of the degree of a service’s customization makes this relationship weaker (po0. choice of entry mode studies has been developed in manufacturing sectors. WOS). WOS). With regard to cultural distance. propensity to control and commitment is lower when capital intensity increases.

lower resource commitments mitigate service firms’ perceptions of international risks and enhance the incentives for firms to integrate in countries where opportunities to achieve a better market position are higher than in more stable and competitive locations. On the other hand. 1981. As a result. our results show that the high information costs associated with high cultural distance markets increase the probability of . our study suggests that determinant factors of entry mode choice in manufacturing firms cannot be directly transferred to service firms. These results are consistent with other studies focused on the service sector (Weinstein. the capital intensity of services weakens this relationship. 1977. Goldberg & Saunders. Li & Guisinger. showing that following the client abroad to capitalize on pre-established business relationships and following the leader in international investment are important defensive driving forces in developed economies. Our evidence suggests that firms with asset seeking and offensive motivations are more likely to choose shared-control entry modes as a means of gaining market knowledge and overcoming the liability of foreignness. 1992). Under such circumstances. However. Service firms are typically more labor intensive than capital-intensive firms. Second. Moreover. even in areas of high international risks. Lower switching costs allow service providers to more easily relocate operations if the risk becomes too great. how firms compete in international markets is a determining factor in control decisions. 1988. The efficiency requirements of a global approach can easily be achieved if firms choose high control entry modes because they ensure coordination among functional and geographically dispersed units and deal with clients’ needs on a global level. 1982. favoring lower control and resource commitment modes. the need for flexibility becomes more important. Some variables which were generally analyzed as determinant factors of control decisions in the manufacturing sector are not significant or present different results in the service sector. so they do not require large investments in fixed assets as in the manufacturing sector. while firms with exploitation and defensive motivations prefer entry modes with a higher degree of control in order to better preserve their competitive advantage based on their knowledge of customers’ needs. Terpstra & Yu. Ball & Tschoegl.184 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER First. service firms tend to select more integrated entry modes because control can be acquired with comparatively little expense. We have observed that. some firms’ strategic motives are linked to a number of control orientations. The switching costs of capital-intensive service firms are higher and thus the risks may outweigh the benefits of proximity. and therefore propositions originated in TCT and OCP perspectives are not universally applicable.

1996. Other studies which also focused on service firms have pointed out the non-influence of service firms’ size on entry mode decisions. introduce some challenges that should be considered in traditional frameworks. As expected according to TCT. labor intensive and their main strategic assets lie in employees’ knowledge. Lopez-Duarte & Garcı´ aCanal. The heterogeneity problem of such services and the necessity for close and personal interaction enhance the importance of cultural distance. Capital requirements for initial establishment are lower than in manufacturing firms. This fact may reflect. 1991). However. However. do not significantly affect entry mode decisions. The fixed setup costs of internalization can be spread across wider markets. As a result. thus pushing the benefits associated with the investments to a higher level. the benefits of internalization will also increase. These unique characteristics of services. To overcome cultural distance in service offers. as sug´ gested by other authors (Campa & Guillen. Service firms are. But this relationship is weakened by the degree of customization of the services. so tacitness results in difficulties in valuing know-how and its transfer through contractual processes. hierarchical coordination through full-ownership control modes are more efficient given the dissemination risk. other TCT variables. 2002). our results show that the tacit know-how does significantly increase the probability of choosing high control and resource commitment modes. Erramilli. With regard to OCP control variables. firms show a higher tendency to enter into culturally distant markets through high control entry modes in order to control the quality standards of customized services and the performance of employees. our results indicate no significant effect for size and international experience. several other factors proposed by conventional theories present similar results in service firms. Therefore. in general. When the market potential increases. that the competitive advantages of Spanish firms in international markets are not based on technological and marketing capabilities. mainly the capital intensity and the degree of customization of the service. according to OCP theory. 1988. Additionally. .Mode of Entry in Service Firms 185 choosing shared-control entry modes. our results suggest that firms are likely to adopt high control and resource commitment modes when they enter high market potential countries. such as technological and marketing intensity. This type of knowledge is difficult to codify and be patented. based on transaction cost analysis and the resource-based perspective. firms need to place greater emphasis on effective communication skills and workforce training to provide high-quality services according to the preferences and needs of the clients in foreign markets. thus size is not a determining factor in choosing FDI modes (Terpstra & Yu.

Additionally. managers of service firms should evaluate the characteristics of the service that will be offered in international markets and assess the international potential that they present. Additionally. and incorporate new determinants derived from the strategic approach and the specificity of the service sector. Specifically. future research could provide insight into the applicability of our results in different settings. To solve this problem.186 ´ ´ ESTHER SANCHEZ PEINADO AND JOSE PLA BARBER The results obtained from this paper provide evidence as to the importance of adopting an integrative approach to obtain the most realistic descriptions of strategic movements. thus they may invest in high country risk markets where it is easier to achieve a better position than in other international markets with harder competitive conditions. firms’ international approach and the specific characteristics of the sector in which they operate. In this paper we draw on the entry mode literature. Therefore. The choice of this approach is essential since the international environment presents multiple pressures that manufacturing and service firms may face in their businesses. The empirical analysis is based on the general managing director’s opinion (a single respondent) but entry mode decisions are usually taken by several decision makers. this must be acknowledged as a limitation. these approaches provide greater explanatory power and provide new insights into the complex phenomenon that entry mode choice is. The use of multiple respondents would have significantly increased the validity of the data and reduced concerns about potential response bias. We should be cautious when generalizing the results because the study is focused on Spanish service firms. although the effective response rate to the survey (17%) is comparable to other surveys of CEOs. 1993). managers should take into account that for many service firms the switching costs may be comparatively small because valuable assets rest more on human capital than in physical assets (Erramilli & Rao. Limitations and Further Research Areas This study has several limitations. This study also provides guidelines for management about how to match control and resource requirements not only with host country conditions and firms’ existing capabilities but also with strategic objectives. Industrial characteristics therefore should be viewed as facilitators or restrictions to international commerce. . Collectively. based on transaction cost analysis and the organizational capabilities perspective. we have selected well-informed respondents by mailing the questionnaire to senior managers who had been involved in the internationalization decision.

Future studies should include successful and unsuccessful prior experiences with entry types as a determinant of the choice. level of capital intensity. Case studies could add more in-depth evidence about the reliability of our measurements and the necessity to assess the impact of some other factors. However. We control for the influence of international experience in the choice between different entry modes. Therefore. which are intensified when the international dimension is included. the intangibility. we consider that this variable does not significantly affect entry mode choice in our study because many entries have been located in European and Latin American countries where legal restrictions to foreign investment are not important barriers. 1985.Mode of Entry in Service Firms 187 Consistent with other studies focused on entry mode choice. all of them are basically theoretical. heterogeneity. To obtain a representative sample. Tallman. and specially. but some researchers have also suggested that prior experience with specific entry modes may also influence entry mode decisions (Davidson & McFetridge. inseparability. Some factors identified in the literature as determinants of entry mode choice have not been considered in this study. legislative and fiscal barriers could influence the openness of the host country to FDIs and may force firms to choose certain entry modes because of the regulations by host governments. future studies should test specific service-related hypotheses to enhance our understanding about entry mode choice in service firms. Furthermore. Although there are classifications of services according to some of the characteristics mentioned in the paper. the lack of a general and empirically accepted classification scheme of services is one of the reasons that hinder the study of entry mode choice in the service sector and explains why there are few empirical studies about the internationalization process of service firms. the unit of study is an individual foreign market entry decision made by the firm. it would be necessary to identify all foreign market entry decisions made by target firms. such action is also linked to measure reliability problems because it is difficult that managers can still remember details of all those entries. perishability. On the other hand. 1999). So. researchers should conduct more detailed examinations of possible interaction effects between industry characteristics and other determinant factors to better understand how the industry sector can facilitate or impede FDI. so some responses are likely to be exposed to the ex post or retrospective rationalizations of managers. Studies which include entries into different international markets should incorporate this influence. 1992. However. or customization of services present some marketing problems. about . Padmanabhan & Cho. Moreover. This study was conducted post hoc.

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The entry strategies of IKEA in China. The conceptual model is used to analyse two case studies. Firms planning to enter foreign markets would greatly benefit from our analysis.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. these have not been able to fully identify factors that influence the process of retail internationalisation. N*Vivo was used to encode data and corroborate the analysis. and Marks & Spencer (M&S) in Hong Kong are examined. The case data were collected through in-depth interviews.1016/S1474-7979(06)17007-6 193 . are forcing companies to restructure and seek new International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. Volume 17. This paper examines the factors that influence the foreign market entry process in retailing firms and develops a conceptual model. We provide insights into factors influencing the foreign market entry process and how firms can manage this process. particularly in the European Union. 193–215 Copyright r 2007 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. INTRODUCTION Globalisation and the increasing pace of regionalisation. however.

1990) but no attempt has been made to study market orientation and its impact on international activities of retailing firms. & George. A number of studies on internationalisation of manufacturing firms are available and there are several established theories on the internationalisation of these firms (Buckley & Casson. The changing nature of environment – political forces. The intensity of competition has led retailers to seek new ways of expanding their business (Brown & Burt. A company faces the uncertainty of uncontrollable factors in both home and foreign markets during internationalisation process (Ghauri & Cateora. Treadgold. economic climate and cultural issues – amplify uncertainty in international retailing expansion (Salmon & Tordjman. 2000. However. Consequently. The knowledge of operating environment in the target country . The existing literature is mainly concerned with how major retailing firms achieve geographic expansion and which strategies they use while entering foreign markets (Whitehead. 1992). & Webster Jr. 1990. Dunning. This can be achieved through market research and corresponding design of decisionmaking processes (Craig & Douglas. firms have to develop strategies to respond quickly to different customers’ needs and become market-orientated. 1989. especially in the last decade. Dawson. Market information helps a company identify factors that may influence its entry strategy. 1993. Nevertheless. Narver & Slater. 1994. market positioning and the level of adaptation to the local market. which should include the nature of the decision-making process for the companies intending to enter the international arena and how the internationalisation process is managed. 2003. The retailer has become the superior party in business. Market orientation is thus considered extremely important while designing marketing strategies (Deshpande & Farley. it is important to address the organisational dimension of the processes as well. Johanson & Vahlne.194 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI markets. 1976. these have not been able to fully identify factors that influence the market entry strategies and process. retailing firms have been extremely active in establishing foreign operations and seeking new markets (Rogers. 1981. More recently. 1992). 1990. 2004). McGoldrick & Davies. 1988). Ghauri. 1995) and motives for their international expansion (Alexander. 2005). Dawson. The global market development and increasing sophistication of customer demand.. have made the world a more complex place (Brown & Burt. 2006). Quinn. Deshpande. 1992). while the manufacturer has become the subordinate who has to bid for contracts with the retailer (PBS Frontline. 1999. Williams. Farley. 1992). Kohli & Jaworski. 2001). Several studies focus on retailing firms (Alexander & Myers. 1998. 1977).

Root. Holstius. In this study thus. 1986. The success rate of foreign retailers in this market is. 1987). we aim to answer the following research questions: 1. It can be observed that previous research on internationalisation often emphasises the result of the internationalisation strategy. our study will lead to a better understanding of internationalisation of retailing firms. 1990. 1976. that is the nature of decision-making process and the relationship between company behaviour and entry strategies. What are the factors that influence the foreign market entry process of retailing firms? 2. a model is developed to study the above questions. These include factors such as commitment and learning orientation (Ghauri. 2005). Gatignon & Anderson. it is crucial to identify factors that influence firms’ international activities and performance. 1981.Managing International Market Entry Strategy 195 diminishes uncertainty. not very high. Table 1 summarises the literature used in this study. the retailing sector has been recently opened for foreign firms in China. Elg. matching (Ghauri & Holstius. & Sinkovics. 2003. Do retailing firms use market orientation while entering foreign markets? 3. Hence. 1991) and market orientation (Elg. 2004). 1992). Dunning.. Kohli & Jaworski. and a number of foreign retailers have entered this market. By exploring in this area further. Rogers et al. Narver & Slater. How does networking and relationship building impact on international retailing operations? We have chosen to study retailing firms in China mainly because China is considered to be the most promising market for retailing firms. but fails to address the management of the process (Whitehead. EARLIER RESEARCH AND THE CONCEPTUAL MODEL Based on the literature on internationalisation process and entry strategies (Buckley & Casson. 1990. Commitment of a company to internationalisation is defined by how much the firm is prepared to invest and how much risk to accept to achieve a . however. 1996. Moreover. Firm Characteristics Firm characteristics play an important role during the retail internationalisation process.

1994. Vida & Fairhurst. 1994) . Rogers et al. 2001. ˚ Hakansson. Main Aspect Example of Studies Logic Understanding of how to facilitate the development of successful business relationships abroad Network theory Relationship of two or more independent companies that take advantage of mutual resources and sharing of information Processes that facilitate the development of business relationship between firms in dissimilar countries. macro and micro level A network approach involves three factors: actors. Ghauri & Prasad. 1991. 1987. 1999. & Srivastava. & ˚ Hakansson. Gummesson..196 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI Table 1. Gilbert. Harris. Hakansson & Snehota. 2004. Johanson & Mattsson. Slater & Narver. ¨ & Ozsomer. 2002) (Ghauri et al. Coviello & McAuley. Narver & Slater.. 1998) (Clark. (Anderson. Gadde. 2004. 2000. Meyer & Skak. Jaworski & Kohli. Han. at a global. 1987. 1998. competitor orientation. 1996. Theory and Concept Matching Literature Review Summary. 1998. & Johanson. 1990. Kohli & Jaworski. Kim. Rogers et al. 1989. 2002. Holstius. Matsuno. 1994. 1990. 2002. Mentzer. Houston. 2005) Firm characteristic Firm characteristic includes firm’s commitment and learning orientation Firm characteristic has impact on decision-making process and entry strategies These comprise all activities in obtaining customers’ and competitors’ information in the target market and disseminate it throughout the organization. 1986. Ghauri & Holstius. and inter-functional coordination. resources and activities (Ghauri et al.. The strategies are then formulated in response to this information Market orientation It involves customer orientation. aiming to create value for customers and maximise company’s longrun profits. Senge. 1990. 1993. Lings.. 1999. ˚ 1995. 2005. Hofstede. Ford.

For example. 1998. Lusch. open-mindedness and shared vision (Kandemir. An increase in the level of commitment to a foreign market. Pedersen & Petersen. the higher the level of relationship commitment to local parties (O’Reilly & Chatman. 1997). companies with scarce resources tend to form alliances with local partners while entering overseas markets. 1986). resource commitment is something that a company builds gradually as the market knowledge increases (Johanson & Vahlne 1977. There are various types of commitment. & Cavusgil. Effectively. Thus. 2002. 1990. (Continued ) Theory and Concept Performance Logic Main Aspect Example of Studies Performance involves three key fields: annual revenue growth. the accumulation of knowledge and experiences facilitates further internationalisation as companies become more confident and commit more resources (Williams. It is an evaluation of the perceived performance Business performance can be measured by two different approaches: judgmental/ subjective and objective measurement (Clark. Dunne. Jaworski & Kohli. Han et al.Managing International Market Entry Strategy 197 Table 1. instead of investing in these markets (Cavusgil. Katsikeas & Morgan. Kohli & Jaworski. retailing companies can be more effective and efficient if they gain more knowledge about the market and disseminate this knowledge throughout the organisation to formulate and adapt their strategies. Baker. & Gable. Ghauri. 1998). & Agarwal. 1997) successful entry into a foreign market (Anderson & Weitz. For the same reasons. Learning orientation is a concept describing an organisation’s learning capability (Sinkula. 1990. will enhance the level of investment in a foreign market (Johanson & Vahlne. Jennings & Young. 1992. 1997). 1993. 1990). & Noordewier. Sinkula et al. accompanied by more local experience. 1992). Commitment to learning enhances market understanding as a firm proactively collects information on a particular market. 2000. Ghauri. Organisational learning and information flows within the organisation could thus enhance . 1990.. 1998. Previous studies suggest that the more a company is committed to the host market. annual profit growth and average return on total assets. Day. 2002. 2006). Lings. 1995. 2002). It consists of three core values: commitment to learning. March & Sutton.. Ghauri & Cateora.

In this paper. It is enormously important for western companies to develop and manage relationships with the host country’s government. 1996).. can be initiated and planned/arranged by firms. 2002).g. although seeming to be beyond the control of the organisation. Matching at these two levels. relationships and trade facilitation in certain countries. It has been emphasised that building. Institutions establish relationships through membership in global organisation such as World Trade Organisation (WTO) and International Bank of Reconstruction and Development (IBRD) and by working together to develop mutual benefits for member countries. as these are considered more relevant for retailing firms entering China. matching relates to the level of support provided by governments (home and host) for business activities. Matching at the global level relates to global-level actors such as international organisations involved in trade agreements. It includes international activities that could assist the international operations in different countries. we focus on matching at macro and micro level. macro and micro levels (Holstius. Local government plays an important role during internationalisation process and has an immense influence on the way businesses are run. through trade delegations and involvement of Ministers and Embassies in foreign countries. customers and other actors in the environment. 1991). 1996). 1990).. This level of matching is thus quite similar to the network approach. Matching is a process that facilitates the development of business relationships between companies in dissimilar countries at global. suppliers. . At the macro level. At the micro level.. by providing credit guarantees.g. Matching Matching is a fundamental concept which allows an understanding of how the development of successful business relationships can be facilitated (Ghauri & Holstius. subsidised loans and other financial support (Ghauri & Holstius. local partners. Matching at the micro level is closely related to networking with competitors. Sinkula (1994) suggested that successful learning orientation and market orientation can lead to significant competitive advantage. e. matching refers to the activities the company needs to carry out in order to achieve a successful market entry. Therefore. e. developing and managing business relationships are crucial issues for western companies investing in emerging markets (Cavusgil et al. local customers and even local communities.198 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI market orientation and performance (Kohli & Jaworski.

supporting local sports and cultural activities. analysis and communication of market information throughout the organisation and adapting products and strategies accordingly. competitor orientation and coordinating information within the organisation (Narver & Slater. Kohli & Jaworski. . (2002) suggest approaches such as training both employees and their families about the culture and background of the foreign country. 1). Narver & Slater. Relationship with local communities could be managed through investing in human resources. Different studies provide different definitions of market orientation (Clark. 1990). having environmentally friendly policies and showing respect towards the local communities’ culture. 1993. Kohli and Jaworski (1990) explain the method that companies use to achieve market orientation as following: companies create intelligence by conducting market research to understand what consumers need. The above discussion helped us to develop the conceptual model used in this study (see Fig. Many studies found that profitability is an outcome of market orientation (Deshpande et al... Slater & Narver. they generally agree that it includes collection. It has been previously defined as understanding customer orientation. Responsiveness means designing an implementation plan that corresponds to the customer’s needs in a particular market. such as joint venture partners. Cavusgil et al. Market Orientation Narver and Slater (1990) explain market orientation as all activities related to obtaining customers’ and competitors’ information from the target market as well as disseminating it throughout the organisation in order to create value for customers by developing responsive strategies. 1990. distributors and suppliers. 1990). 1990. however. Dissemination means communicating the information throughout the organisation by using information exchange systems between departments. The benefits from such a relationship could improve the company image and reputation as well as attract more support from actors involved. franchisees. 1994). Companies need to build and maintain relationships with local partners. and motivating people through appropriate rewards. 2002. 1993. Narver & Slater. It is also necessary to create and manage good relationship with local customers and create a positive image in a foreign market. Managing relationships with employees (locals as well as expatriate) has proved to be crucial for retaining valuable workforce and ensuring successful relocation. Deshpande et al. communicating effectively between the head office and subsidiary.Managing International Market Entry Strategy 199 Hence managing relationships with the local government is a crucial task.

. activities. 1. resources Firm Characteristics • Macro Level • Micro Level Host Market Performance • Commitment to host market • Learning orientation Market Orientation • • • Fig. (2004). Source: Based on Ghauri et al. Intelligent Generation Intelligent Dissemination Responsiveness The Role of Market Orientation and Matching in International Retailing.200 Corporate Host Market KANNIKA LEELAPANYALERT AND PERVEZ GHAURI Matching of actors.

We try to understand how firms handle different factors that influence their activities while entering a foreign market. Case studies are intended to point out detailed and valuable insights and understanding of the retail internationalisation process. the model includes market orientation in the retail industry. a total of twenty-four interviews were conducted at the M&S head office and their Hong Kong subsidiary. leading to better performance in a foreign market. As we want to answer ‘how’ and ‘why’ questions and are conducting inductive research. 1994). We have full access to managers and documents of these two companies. This includes frontline employees. This paper is a part of a bigger project where we are studying international activities of IKEA and M&S in several markets. macro and micro levels. We also collected data through various sources such as follow-up telephone interviews. For this study. Furthermore. Case studies examine similarities and differences in the strategies used by M&S and IKEA to enter China. Validity of the research is reinforced by the fact that various in-depth interviews have been conducted. In this paper. The same questions have been posed to different managers at the different levels. 1994). which could not have been achieved by a survey method (Ghauri & Grønhaug.Managing International Market Entry Strategy 201 The model includes the matching concept (Ghauri & Holstius. middle-level and senior managers. The model allows us to explore the impact of matching and market orientation on the internationalisation process of retailing firms. Data has been analysed using pattern matching method (Miles & Huberman. case study method is considered most appropriate. RESEARCH METHODOLOGY Our research approach is mainly based on case studies and semi-structured interviews. which suits the objective of this study. 2005. Data is collected through a series of indepth. 1994. semi-structured interviews with head office managers as well as company representatives in the host country. It is assumed that marketing orientation and matching factors can be affected by firm characteristics and allow retailing companies to better understand consumers and facilitate business activities. 1996) which clarifies how successful business relationships could be facilitated at global. Yin. however. we present their entry into China. Yin. document analysis and observations. Twelve interviews were conducted in IKEA head office and their subsidiaries and suppliers in China. Information was also drawn from . This approach is also suitable for theory development.

2000. Company decided to focus on its home market rather than on the international markets as part of the ‘‘getting fit for growth’’ concept. innovation and trust M&S has expanded to food. It is a useful instrument for the management of enormous amount of interview transcripts. M&S strategy is based on its vision. M&S closed its operations in a number of European markets in order to rationalise its operations. home furnishing and financial services. beauty products. These approaches allowed us to cross-check the accuracy of data and ensure internal validity and reliability of data.000 employees in head office. MARKS & SPENCER IN HONG KONG M&S is one of the leading clothing retail companies in the UK. service. It is a large organisation. . encoding of data and management of themes in order to analyse qualitative data (Richards. 2001. The company was founded as a partnership between Michael Marks and Tom Spencer in 1894. with 3.202 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI secondary sources such as articles and news. One of the outcomes of the restructuring plan was a focus on UK retail market and improvement of capital structure to leverage benefits through return of value to shareholders. The focus of this research is on its subsidiary in Hong Kong. Europe and the Middle East (Company Report. Penz.000 employees. In 1926. M&S announced a restructuring strategy on March 29. M&S expanded to Hong Kong in 1980s by franchise. 2005). Sinkovics. Similar questions were raised from each case and common outcomes led us to draw conclusions (Miles & Huberman. mission and values (Company Report. & Ghauri 2005). Marks and Spencer Limited became a public company. The company operates more than 400 stores in 29 countries across Asia. which was later turned into a wholly owned subsidiary. 2005). which comprises 70. 1994). As a result. N*Vivo software was used to code the data and corroborate the analysis. which are: Vision: The standard against which all others are measured Mission: Making inspirational quality accessible to all Values: Quality. Firm Characteristics After a number of bad years in several markets and the Asian crisis.

By 2002. M&S recognises the importance of using and building micro-level matching to gather knowledge of the local market. positioning M&S brand in country clusters. Research consists of analysing M&S international brand strategy. which happened in March 2003. had an adverse effect on Hong Kong’s economic conditions and performance of all retailers in the market.Managing International Market Entry Strategy 203 In 1999. They also use secondary data and country visits to identify potential new markets. Landlords are very important actors to have relationships with in Hong Kong because having the prime location is crucial. However. Generating Information M&S uses a global strategy consulting company which works mainly on M&S brand strategy. Admiralty and Time Square – in order to guarantee success and reasonable exposure to the market. developing a brand strategy in each country and suggesting marketing tools in order to increase sales and profitability. Severe acute respiratory syndrome (SARS) outbreak. some systematic market research has recently been introduced in some foreign markets. Central. Matching ‘‘We make all of our profits and revenues from all three stores located only in prime locations. We need to be in the main shopping malls in Hong Kong’’ (Managing Director. International consulting companies such as PriceWaterHouseCoopers (PWC) and Ernst & Young also provide local information on trading environment. Market Orientation The company does not systematically gather customer. Some managers follow their intuition based on their own experience and entrepreneurship skills in doing business. It recognises the importance of having the right contacts in retail business. Hong Kong subsidiary recently conducted . M&S is a member of the Hong Kong Retail Association that negotiated a decrease in rent with landlords due to the SARS outbreak. it became apparent that M&S’s global ambitions had failed so the company decided to return to its home market. competitor and market information. M&S had failed to sell its 10 Hong Kong stores to a local franchisee and acquired direct ownership of the stores. M&S Hong Kong). Major retailers need to be in the prime location – Tsim Sha Tsui.

M&S Hong Kong). which resulted in limited local adaptation and less successful performance. Host Market Performance M&S focuses more on the UK market and has less commitment to its Hong Kong market. In the past. M&S aims to shift a greater volume of products by cutting costs through improvement of their logistics systems. The Mainland Chinese tourists represent as much as 25–30% of M&S customers. The Hong Kong office and head office communicate regularly via email and country visits. Major attention is paid to logistics as efficiency is imperative in retail operations. Responsiveness The company made small adaptations to the local market in sizes. . the weak market orientation which is reflected in unattractive products and high prices is the main concern to securing the brand reputation in the market. the Hong Kong subsidiary worked mainly independently from head office at the beginning. e. we developed a range of short sleeves T-shirts to fill in the longer summer period in Hong Kong’’ (Merchandising Manager. The company turned loss into profit in 2004 by cutting cost. Disseminating Information M&S communicate through regular meetings within departments as well as between departments. leading M&S to cut unnecessary positions and become a lean organisation. However.. The sales performance and important issues are brought up to the weekly meetings amongst management teams in order to discuss potential solutions and improvements. ‘‘We have two inches shorter sleeves shirt for Asian men. They now deliver products directly from far-east manufacturers to the east Asia shipping hub in order to reduce costs and time of transport. There are no systematic communication tools and there is little evidence of sharing best practices and experiences. We also have unique products for proper climate.204 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI their own market research to understand Mainland Chinese people and their buying behaviour. Hierarchy structure in Hong Kong had slowed down decisionmaking process. as operations were run by UK expatriates using somewhat standardised strategies from the head office. colours and styles of products. Hong Kong office finally turned loss into profit in 2004. The Asian crisis in 1998 affected the financial performance dramatically.g.

The company has 224 IKEA stores in 33 countries across Europe. IKEA opened a store in Beijing in 1998 and a flagship store. is particularly interested in Chinese market and shows long-term commitment to it. with 32. Networking with the right people could reduce legal and regulation barriers. Firm Characteristic Ingvar Kamprad. International retailers also expand into China to take advantage of low cost production suppliers and increasing purchasing power of local consumers. The rest operate as franchises in 15 countries such as Hong Kong. in Shanghai in 2003. the founder of IKEA. The IKEA Group itself owns 200 stores in 24 countries.Managing International Market Entry Strategy 205 IKEA IN CHINA IKEA is a Swedish furniture company. In terms of learning orientation. Matching Macro matching is very important to IKEA’s Chinese operations. management structure and how to transfer their knowledge to the local market. shop. It is important to establish relationships with local stakeholders as property and human resource managers.000 square metres. There is a competence centre set up in Shanghai for training new employees and there are regular training workshops for existing workers. North America. Experienced expatriates work on establishing an IKEA store. 2005). Taiwan and Australia (Company Corporate Website.1% indicating the growth of consumer demand (Central Intelligence Agency. Company needs to build relationships with central government and local authorities. 2005). which was founded by Ingvar Kamprad. the loosening up of Chinese regulation. which includes training in infrastructure. IKEA also learns lessons from the local market and uses its experience in new stores. the company expects the local people to move up and take management roles in the near future. The company expands mainly by wholly owned subsidiaries. Company also needs to be up to date on government policies towards retail . China is an increasingly attractive market because of a large population. However. 2005). IKEA transfers the experience and knowledge to the local offices. China is the top purchasing country for IKEA as 19% of IKEA products are sourced from China (Company Corporate Website. the Middle East and Asia-Pacific. Company needs those people to set up more IKEA stores for further expansion in other cities. cheap labour and the GDP growth rate of 9.

IKEA also uses micro matching and strong network relationships with media and suppliers. Suppliers also provide information about local product needs such as Chinese wok and knife that were introduced on their suggestion. ‘‘We had stores in Shanghai before we opened this one. In the early stages of entry process. sales records. and acceptable working environment in order to become IKEA’s supplier. Management also makes store visits and cashier surveys at the store level. day-to-day operational issues and solutions. IKEA China). ‘‘We rely very heavily on government in China when it comes to our retail operations: District governments.206 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI and foreign direct investment. The customer information generated through keeping records of customers’ most frequent questions. IKEA helps suppliers to adopt higher factory standards. The evidence of this unique entry strategy is also found in China. municipal government and obviously also the central government’’ (President of IKEA China). while IKEA relies on low prices and assistance with distribution. IKEA opened small stores to test the market before making commitment to building big stores in Beijing and Shanghai. which includes environmental responsibility. IKEA emphasises generating market intelligence. but it has also enabled IKEA to test the market before deciding to enter fully. transforming that and addressing the issues. ‘‘We hire ‘customer’s best friend’ customer service. Example of issues . Suppliers also give IKEA recommendations about new product ideas and local customer needs. Kamprad travelled to China and had several meetings with regional and local government officials. IKEA thus works with the government on all levels. IKEA educates suppliers about production techniques and factory standards and provides financial assistance. So we are getting information. Mr. Main market research and compilation of customer satisfaction index have been conducted at the corporate level in order to measure brand recognition and customer satisfaction. There is a two-way supporting relationship between IKEA and its suppliers. no child labour. Suppliers need to follow ‘‘I-way’’ standard. The competitive shopping and competitor visits have been conducted in order to gain information about copying products and benchmark prices. customer requirements. what we call small shops to test the market’’ (Expansion manager. Steed (1985) explains the successes of IKEA internationalisation through their unique entry strategy. The company’s strategy is to enter initially through small investment and gain experience before entering fully in the market. That was smaller. Market Orientation Conducting market research has not only allowed an understanding of the local market.

‘‘Although Europe is still the main market. does not neglect the importance of local customers and has some local solutions. Host Market Performance The company expects aggressive growth in Asia. IKEA uses the concept of standardisation of the brand all over the world. there is a language barrier to using intranet and managers always spend time in the store to get the required information. The company. So we focus on ‘low price offer’ commercial theme in china because the IKEA products are still perceived as expensive’’ (Head of bedroom department. It is accepted that the brand image must be consistent. Contact and discussion happens only in training sessions. store meetings. IKEA made small adjustments to the local market. email and intranet. The company takes advantage of being market-orientated to understand local consumers and especially local market environment. However. particularly in China. We have new local marketing manager in each store working with me’’ (Marketing manager. through store posters. Information is disseminated through department meetings. and plans to open several stores in the near future. some managers do communicate with others because of previous contact and it is easier for them to communicate and share experiences. however. It will not work in china because Chinese only have one child according to one child policy. however. we see enormous growth in Asia. Company introduced the ‘‘do-it-yourself’’ concept to Chinese market and explained to customers how and why IKEA maintains its low prices.Managing International Market Entry Strategy 207 could be difficulties to shop. Intranet is often used at management level. North America. local brochure written in Chinese characters and use of local language in advertising campaigns and media. Several IKEA products and prices are adapted to local market and local customers’ needs. although some managers feel that managers in other countries might face similar problems and are desperate to find solutions. customer do not understand the system and concept. In terms of responsiveness. ‘‘Children and living with kids was a key priority for global IKEA 2003 campaign. The store look must be the same in every country. Japan and . It makes use of its market research and market information in order to educate people in the market about IKEA concept. IKEA China). There is. little cooperation between IKEA China and IKEA in other countries. We are close to customers and aim to get information from customers and we immediately worked on it to make necessary adaptations and changes. At the store level. such as having small space living showroom. or long hallway to walk. management meetings. IKEA Shanghai).

Dalian. IKEA management style also encourages the company to use matching concept and build the strong relationships with local authorities and suppliers. The other subsidiaries. while stores in other countries are run as franchise operations. IKEA currently searches for new store locations in 14 cities including Chengdu. to be different from its competitors and to expand to lower-income cities in China in the future. Marketing manager points out that IKEA’s key success factor is to maintain IKEA position and present what IKEA is to the market in a consistent manner. IKEA shows long-term commitment through investment and future expansion and its ability to learn from the local market. performance improved. 2004). The similarity in the two cases is the role played by the expatriates. The problem for M&S was that expatriates stayed in Hong Kong for too long and did not let local people operate the business. were not successful and were closed down. particularly in Europe. This is not the case for M&S. IKEA would like to be the leading home furnishing company which offers affordable products and affordable solutions for better living at home. DISCUSSION Our cases reveal that firm characteristics. This is consistent with Jackson and Sparks (2005) study that concluded that expatriates are normally less inclined to adapt as they normally follow the head office’s standardised strategies. which has only one subsidiary office in Hong Kong. the combination of a flat structure and its modern organisational culture has lead IKEA to become market orientated. to change its image to an affordable price brand. IKEA China). IKEA has internationally experienced people who move around to help set up new operations in different countries. Also. Companies need expatriates to build up the organisation in new markets. Nanjing and Qingdao (China Daily. IKEA has also increased the number of products sourced from local suppliers. learning orientation and organisational culture impact host market performance. Price is a priority issue that IKEA is working on. For example.208 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI particularly in China’’ (Business Development Manager. IKEA needs to focus more on local sourcing in order to increase volume and revenue. In Chinese market. the expansion manager has experience in introducing IKEA in Poland. . France and Germany before coming to China. When the local people took over. It is the same concept as globally but adds ‘‘affordable solution’’. including host market commitment.

however. As far as performance is concerned. IKEA has responded to the local needs through adaptation of its products. This confirms Ghauri and Holstius (1996) and Rogers et al. 1990). Moreover. landlord was the most important actor for M&S because of the limited access to prime retail locations. As suggested by our conceptual model and earlier studies (Rogers et al. The market research was conducted systematically and the company made appropriate use of it. This was reflected in their market performance and was consistent with our conceptual model and earlier studies on market orientation (Slater & Narver. M&S wanted to sell its operations in Hong Kong but it did not succeed. prices and local sourcing. 1994. The product’s prices are still too high for Chinese market. (2005) findings that matching activities with local governments can facilitate the market entry by a foreign firm. thus being more responsive to local market conditions. At the micro level. The company plans to open several more stores by 2010. Both IKEA and M&S still face the price issue in China.Managing International Market Entry Strategy 209 Matching is a crucial element for doing business in China. In case of . At the macro level. IKEA in the Chinese market is a huge success mainly because of its efficient matching and market-orientation activities. they can open doors to other useful organisations. the central government and local government played an important role because they are decision makers in policy and regulation and issue permits and permissions. IKEA. it has therefore led to a less successful market performance. M&S started as a successful British company using common sense and entrepreneurship in business operations. 2005). M&S recently began conducting market research but there is still no systematic research and dissemination of information in the Hong Kong subsidiary. As a result. Managers from different markets meet occasionally to share experience and best practice. is more consistent in focusing on lower prices and is using more and more local suppliers to achieve that. those factors have influenced IKEA operations to become one of the most successful foreign companies in the Chinese market. Suppliers play a significant role in reducing the production cost and maintaining good quality in China as in case of IKEA.. Kohli & Jaworski. Communication within organisation was effectively used among all levels of the management. Market Orientation This research points out that IKEA was more market orientated. It worked in the past and they assume that it will always work.

210 KANNIKA LEELAPANYALERT AND PERVEZ GHAURI Table 2. The Influencing Factors in International Retailing: The Cases of IKEA China vs..e. size and colour to local needs  Cherry-picking standard product by experience local buying and merchandising staff  Direct delivery not based on market research  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 Hong Kong. improve brand image  Retail Association – rarely share information due to business competition  Feedback from sales assistant  Competitor shopping  Store visits  No systematic market research Macro matching Micro matching Market orientation: intelligence generation Market orientation: intelligence dissemination  Department meetings and management meetings but no information from local markets is exchanged  E-mail used in management Market orientation: responsiveness Host market performance  Some adaptation of products’ style. Mainland Chinese entry to Hong Kong boost sales  Landlord – money talk. database and intranet used at all management levels to share information on local markets  E-mail  Regular meeting at all levels  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  Successful entry to China  Plan for further expansion – to open 14 stores by 2010  Challenge on lower the price to respond to further expansion M&S Hong Kong  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 Government support tourism. i. IKEA China 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 Central and district government are crucial actors in retail operations  Long-term relationship with suppliers help IKEA lowprice purchasing  Suppliers provide local and product knowledge  Extensive market research at headquarter level. country level and store level  Customer satisfaction index  Cashier survey  Competitor visits  Store visits  Information system.

Matching activities with landlords in Hong Kong are crucial because of the competition for prime locations. Table 2 summarises our findings. Therefore the company does not have the ability to respond quickly to local needs and thus loses competitiveness. It has been found that market-orientated company has ability to better understand market environment. first time since 1998. the market orientation – host market performance link appears to be strong while comparing the M&S and IKEA operation. therefore leading to significant success in the host market. Our studies agree with Ghauri and Holstius (1996) that matching facilitates market entry and operational efficiency. From theoretical perspective.g. regular market research and intelligence dissemination results in achieving local responsiveness and adaptation of products and strategies to the local markets. It has been found from both cases that firm characteristics play an important role in driving market orientation strategy. which could influence the successful . which is in line with earlier studies (e. our study reveals that market orientation plays a significant role in international operations of retailing firms.. this paper takes the matching and market orientation concepts further by applying it in international retailing context. The study provides a conceptual framework for further development of theory within an international retailing context. It showed a profit first in 2004. Western retailers by applying market orientation in the Chinese market and by using matching through developing relationship with local government and other actors can improve their performance. there is no evidence of market orientation and thus its performance is not so good. Hence. its competitors. The company needs to rebuild the brand image to make the brand attractive to customers and the landlords in order to regain its market share and maintain stores in prime locations. which can only be achieved through market orientation and matching. 1994). customer needs and competition. In case of market orientation. Different companies however apply different levels of market orientation depending on firm characteristics. CONCLUSION To answer the research question. M&S is still slow to react to the environment.Managing International Market Entry Strategy 211 M&S. this research is useful for practitioners and retailers in terms of highlighting the key factors. customers and to be more responsive to local customer needs. but there is hardly any interaction with local customers or understanding of local competitors and other conditions. Compared with IKEA. Slater & Narver. From the managerial point of view. intelligence generation.

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economic freedom. The modified OMOI is shown to be a flexible. telecommunications as well as physical infrastructure and geographic distance. 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. Furthermore. 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. including 24 countries not in previous OMOI studies. The validity of the OMOI is also so assessed for the first time by comparing the ranking of market opportunity to actual subsequent trade flows from the US. 219–249 Copyright r 2007 by Elsevier Ltd. Volume 17. samples and results from three of Cavusgil and colleague’s previous studies and the two conducted herein. variables.1016/S1474-7979(06)17008-8 219 . The choice of sample and. 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. to a lesser degree. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. weights are shown to directly affect the OMOIs and rankings. valid and fairly stable tool for preliminary analysis of foreign market opportunity. We provide a current analysis of market attractiveness and opportunity for the largest set of countries indexed and ranked to date.EXTENDING AND COMPARING CAVUSGIL’S OVERALL MARKET OPPORTUNITY INDEXES Michael R. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. we compare the dimensions.

Kumar et al. ‘‘a business executive can be overwhelmed with the diversity and complexity of alternative market opportunities. seizing international opportunities require careful research of foreign markets and their potential (Czinkota & Ronkainen. However. ‘‘the most frequent objective of international market research is that of foreign market opportunity analysis. an important area of international market research. Developing research methods to facilitate the choice of markets is. political and economic liberalization have created tremendous business opportunities and challenges for international marketers (Kotabe.’’ (Cavusgil. 2004). Cavusgil.’’ (Czinkota & Ronkainen. With more than 200 potential markets. Kiyak & Yeniyurt. 2001). 1980) rather than through a proactive. 1996. Russow & Okoroafo. 2004. entry decisions constitute an especially critical first step on the path to internalization. Therefore.220 MICHAEL R. 1988. A multi-stage selection process is an appropriate approach to selecting a market(s) and/or making mode of entry decisions (Papadopoulos & Denis. 1978). 1997). MULLEN AND SHIRLEY YE SHENG INTRODUCTION Global. Kumar. Papadopoulos and Denis (1988) stress the importance and necessity for systematically evaluating the potential of foreign market opportunities. then. Cavusgil. Those foreign opportunities and intense competition in domestic markets have caused firms to consider entering international markets. 1997). Douglas & Craig. 1978. 1992. 1997. Cavusgil (1997) proposes a three-step process for choosing overseas markets. 1988. 1994. Cavusgil. For small and medium-size businesses that have not yet entered international markets. strategic research analysis. Antonie. Many scholars agree that a firm’s initial market selection is the first building block on which a firm’s entire internationalization strategy depends. 1994. The imperatives of globalization are clear across many industries. rarely or never do any research in this area (Kothari. One of the most important strategic determinations when deciding to export or to establish operations in foreign countries is the selection of the ‘‘right’’ market (Papadopoulos & Denis. p. 607). especially small and medium firms. Bilkey. Businesses just starting international marketing typically choose their first markets based on reaction to unsolicited orders or other stimulation (Bilkey & Tesar. p. 191). evidence indicates that many firms. He suggests a preliminary screening to determine the overall attractiveness of . Nonetheless. Entering new markets require a major commitment of financial and managerial resources. Choosing the wrong markets can lead to substandard financial performance or failure. 2004. & Joachimsthaler.. firms must look to expand into international markets to survive and thrive.

We also seek to validate our modified OMOI and to compare the measures. samples and the analysis. we discuss those results compared with the others. The first step in the market selection process is a preliminary market assessment aimed at reducing the total number of available countries in the world to a more manageable set of high-potential markets (Czinkota & Ronkainen. it is important to emphasize that in-depth market analysis must follow the preliminary screening before making a final choice of market(s) to enter (Green & Allaway. While this approach to preliminary screening and ranking does not identify the final ‘‘right’’ market. LITERATURE REVIEW Papadopoulos and Denis (1988) reviewed the literature on the international market selection process identifying qualitative and quantitative as two . To better understand the sensitivity of this modeling technique. Regardless of the number of stages in the market selection process. to be followed by an assessment of industry market potential to estimate aggregate demand. Papadopoulos & Denis. 1984). dimensions and sample. Cavusgil et al. an analysis of sales potential particularly unique to a company’s products. Then. 1988) and the subsequent decision on the mode of entry (Root. and to examine the sensitivity of the linear compensatory models used in these analyses. saving firms time and money in the final selection process. 1985. it does reduce the world to a set of high-potential markets for further in-depth evaluation. Cavusgil uses 13 indicators of market potential to form his OMOI which he uses to rank the attractiveness of 23 emerging markets. The following section provides a selective literature review followed by a discussion of our modified index including the data. The results of our modified index and resultant rankings for 108 countries are presented and compared to Cavusgil’s previous studies. holding constant the variables. The purpose of this study is to modify and extend Cavusgil’s OMOI into a modified OMOI covering a majority of the countries in the world representing 96 percent of world gross domestic product (GDP). the limitations and directions for future research opportunities before concluding. (2004) updated the OMOI and applied it to 89 countries. Cavusgil (1997) provides insights into measuring the potential of emerging markets through development of an OMOI.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 221 potential markets for further investigation. samples and results across studies. Most recently. and finally. while varying the weights. 2004). we conducted a second study.

one of the problems is that too often managers start with assumptions or prejudices that rule out certain countries (or certain regions) as possible target markets. and (3) they make it possible to screen a large number of markets’’ (p.’’ Using better data available in the late 1980s.. According to Root. Boddewyn and Falco (1986) study the size of the ‘‘market’’ sector around the world. Douglas & Craig.. This preliminary screening/analysis allows firms to identify prospective target countries worthy of further investigation. Their study addresses the questions of . During the preliminary screening of all countries. Cavusgil’s (1997) OMOI and its extension in this study. Root (1994) recommends using direct estimates of market size and market-size indicators. The issue of ‘‘quantifying’’ foreign market opportunity has always been a primary concern for decision makers (e. fall into the quantitative category of market estimation. Boddewyn and Falco replicated the survey covering 124 countries and classified 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 further evaluation. and points out that the purpose of preliminary screening is to identify country markets whose size warrants further investigation.222 MICHAEL R. 2004). Russow and Okoroafo (1996) propose a method to screen global markets based on theoretical considerations.g. 1976) and may lead to discrepancies between perceived and objective reality (Johansson & Moinpour. He suggests that to minimize the first error. Preliminary screening tries to minimize two errors: (1) ignoring countries that offer good prospects for a company’s generic product and (2) spending too much time investigating countries that are poor prospects. They reexamine research by an economic geographer who concluded that in 1960 ‘‘perhaps only 10 percent of the world’s population lived in fully commercial countries. Root (1994) recommends conducting preliminary screening to identify prospective target countries without regard to entry mode. 1983. preliminary screening should be applied to all countries. Also.g. 45). Papadopoulos and Denis divide quantitative approaches into market grouping and market estimation methods. Market grouping methods cluster countries based on their similarity while estimation methods aim to differentiate countries based on market potential. Cavusgil et al.. Vogel. They argue that qualitative approaches are more subjective (e. Papadopoulos and Denis note that ‘‘quantitative methods have three main advantages: (1) they reduce subjectivity. which is by far the most common. 1977). (2) they allow the firm to consider markets beyond its immediate neighbors. MULLEN AND SHIRLEY YE SHENG general approaches to analyzing international markets.

Cavusgil argues that a formal and systematic analysis of aggregate market potential can be particularly fruitful.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 223 how to order screening relative to the assessment process. However. and the relative importance of each criterion. Weights for each dimension were chosen through a Delphi decision process. While acknowledging that each step in foreign market expansion is critical. political and social variables to characterize seven dimensions of a market’s attractiveness from the Western management point of view (see Table 1 for details). Australian marketing managers used to evaluated markets. as it only measures a set of Latin American countries. which of the 39 countries in the cluster ‘‘pumps for liquids’’ offer the best opportunity). The raw values of these 13 variables were standardized.e. in-depth investigation. infrastructure. with the principal advantage of the study being its coverage of a large set of social and economic indicators. these emerging markets have tremendous growth potential such that sufficient consideration must be given to evaluating their potential. A liner compensatory model was used to create the OMOI as the . and product-specific market size and growth. what criteria to use to screen countries. They present an initial screening technique to identify markets that are suitable for further assessment. its major disadvantage resides in its limited coverage of countries. Ivanova et al. However. The technique the authors propose measures demand and selected macro-environmental conditions. Cavusgil (1997) first developed the OMOI to measure and rank the market potential for the 23 countries identified by The Economist as emerging markets. As industrialized countries continue to mature. the level of economic development. (1998) developed a technique to evaluate the potential of Latin American countries. The standardized data were then used to form the seven dimensions. Their study falls into the category of ‘‘market grouping’’ methods with its strength being its product specificity. putting them in a scale of 1 to 100.. The screening criteria used are the costs and availability of the factors of production. Russow and Okoroafo’s analysis tries to identify the relative importance of the criteria and uses them in screening for potential markets of five randomly selected products. He used surveys across industries to arrive at a factor-analyzed set of macro-economic indicators useful for Australian firms. The study uses principal component and cluster analysis along with multiple discriminant analysis to identify clusters of countries that have high market potential by product category. Cavusgil selected 13 economic. leaving the selection of entry method to a subsequent. a limitation of their grouping techniques is their failure to rank the markets (i. Moreover. Rahman (2000) sought to understand what market indicators.

For instance.’’ (p. from time and money perspectives. Since the publication of his index in 1997. Since the analysis of Boddewyn and Falco (1986). 1997) and more recent (globalEdge. 1981. Next. 1988) at the neglect of specific-product/service market indicators’’ (Cavusgil et al.224 MICHAEL R. The globalEdge (2004) OMOI identifies Hong Kong and Singapore as the current first and second-ranked emerging markets. Additionally. Product. Eighty-nine countries were indexed and ranked (see Table 4 for the list of countries and their rank). Luqmani. and Quaraeshi (1994) argue that international markets should be seen as a continuum rather than distinct and mutually exclusive clusters. Yavas. 1983. we suggest that it is more appropriate to conduct a market opportunity ranking at the preliminary market assessment stage. globalEdge at Michigan State University has continued to annually update and publish the OMOI on its web site. The ranking of the potential markets within each cluster are compared to help identify the best market(s) within each cluster.. Such primary research is more feasible. macro indicators (Cavusgil & Nevin. The indexing approach proposed by Cavusgil provides a systematic tool for reducing the complexity of evaluating emerging markets. after the potential set of countries and territories has been reduced from a total topping 208 to a smaller number of prospective markets for further investigation in a later stage of analysis. (2004) modified Cavusgil’s (1997) OMOI using 16 variables to form seven dimensions1 as outlined in Table 1. and consumer related market indicators are typically gathered through primary research that is both expensive and time consuming. Table 4 lists the original (Cavusgil. MULLEN AND SHIRLEY YE SHENG basis for ranking the emerging markets. (2004) combine country clustering and country ranking into a preliminary foreign market assessment and selection process. Cavusgil et al. the world economy has witnessed tremendous change. Therefore. market clustering can be an extremely useful method for segmentation of markets at a later stage of market opportunity assessment when marketing executives can afford to use primary research to attain product/service specific information. situation. 2004. Papadopoulos & Denis. 2004) emerging markets and their OMOI based rankings. They reduce 29 macro level variables using principal component analysis to seven factors for input into a cluster analysis. This ‘grouping’ process identified 10 clusters of ‘‘markets in terms of macro similarities. The major drawback of country clustering for market segmentation ‘‘has been repeatedly identified as an exclusive reliance on aggregate. p. . Douglas & Craig. Cavusgil et al. 608). They demonstrate the potential for using these two methods in combination. 614). Nonetheless. The transaction of Communist countries to market economies has opened new market opportunities.

Market indexc Dimensions. Cavusgil et al. % of population 12%  GDP real growth rate  Growth commercial energy use 16%  Telephones/capita (mainline only)  TVs/capita  Radios/capita  Internet Hosts/capita  Paved road density  Total urban population 15%  GDP/capita PPP  Energy consumption/capita  Electric consumption/capita 10%  GDP annual growth rate  Secondary school enrollment ratio 10%  Telephones/capita (includes wireless)  TVs/capita  PCs/capita  Internet connections/capita  Paved road density  Merchant shipping fleet  Railway freight net ton km 15%  Economic freedom index 10% Political rights and civil liberties  Total imports of goods and services % of GDP  Total merchandise imports  Geographic distance 10% 15% 5% 10% 5% 10% 10% 15% 25% Market growth–future market potential Commercial infrastructure Freedom (economic and political) and risk 10%  Economic freedom index Market receptivity –market accessibility 10%  US imports/capita (40%)  Growth rate of US imports 20%  Size of the middle class 10% 100% 12%  Economic freedom index  Survey of political freedom 12% Euromoney country risk ratings 12%  US imports/capita  Trade as % GDP 12% 15% 20% Market construction capacity Weights 225 100% 100% 100% . (2004) Studies One and Two One Two Cavusgil (1997)  Total population 20%  GNP/capita PPP  Private consumption/capita 15%  Growth rate industry (annual average) 15%  Telephones/capita (mainline only)  Homes with color TV  Paved road density  Trucks and busses/capita  Population/retail outlet Market intensity–economic intensity  Urban population  Electricity production kwh 24%  GDP/capita  Urbanization. Market size Dimensions and Indicators of Market Attractiveness.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes Table 1.

specifically Cavusgil’s (1997) OMOI. The different weights used in the liner compensatory models to form the modified OMOIs in Study One and Study Two are in the last two columns of Table 1. which will give Western firms better access to over 1. Most of the 13 variables and the data used in Cavusgil’s (1997) OMOI were from 1994. there are very few studies in the marketing literature that quantitatively analyze and rank the attractiveness of markets around the world.3 billion potential consumers. we broaden the dimension of commercial infrastructure by emphasizing two aspects: telecommunications and physical infrastructure. For instance.226 MICHAEL R. (2004)2 and this study both seek to amend and extend Cavusgil’s (1997) OMOI. 3 and 4 as well as in the discussion. and its entry into the World Trade Organization (WTO) will help cut import barriers for foreign products. Study Two explores the sensitivity of this market modeling approach to the choice of weights. MULLEN AND SHIRLEY YE SHENG China’s economy is becoming one of the world’s largest markets. Dimensions of Market Attractiveness and Opportunity First. In a linear compensatory model. We added wireless phones and Internet connections per capita as indicators of . (2004) are in Table 1: Secondly. a weight is assigned to each dimension reflecting its relative importance compared to the other dimensions. we conducted a primary (Study One) study ranking all the countries on each dimension developing our modified OMOI to use as the basis for an overall ranking of market attractiveness. indicators and weights as shown in Table 1 are worth noting. quality data available over the Internet has increased markedly since 1994 making it easier to find appropriate indicators for a large sample of countries. The variety of free. we clarify the similarities and differences between the three studies in Tables 1. Given that Cavusgil et al. the differences in dimensions. by updating and validating the index and using it to assess and rank the largest sample of countries to date. Our dimensions and indicators along with those used in Cavusgil (1997) and Cavusgil et al. Cavusgil (1997) developed his OMOI to quantify and rank the market potential of emerging markets. The seven dimensions and indicators we use have considerable overlap with Cavusgil and colleagues. While the need for market opportunity assessment is great. We suggest some modifications in the number and choice of variables to update the dimensions of market attractiveness. Those weights must total 100 percent in order to calculate the overall index (as discussed below). more than a decade ago. Nonetheless. This study seeks to compliment and extend those studies.

5 million. Electricity production has most often been used as a measure of industrialization and is more appropriate as an indicator of market intensity. Table 1 outlines the dimensions and indicators we use in our studies as discussed next. We also use a secondary school enrollment ratio to indicate ‘‘future market potential’’ rather than relying on current GDP growth as an indicator of the ‘‘market growth rate. the percent of the population that lives in urban areas) as their second indicator of market intensity. sales. and we also added the merchant shipping fleet and railway freight as indicators of physical infrastructure. It represents the per capita GDP in terms of ‘‘international dollars’’ in order to account for real buying power. after sale service. distribution. Therefore the percent of the population living in urban areas. Market size has a relative weight of 15 percent in our total index for Study One and 25 percent in Study Two. which combines several indicators of production per capita to indicate a nation’s economic output per person.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 227 telecommunications infrastructure.e. however. Market Size The total population of a country gives us important information about the size of a nation’s markets.). For instance. Economic Intensity We use three variables as indicators of the intensity of economic output. a country’s urban population is most accessible for marketing (i. Instead.e... However. However. We differ from Cavusgil et al. called ‘‘urbanization. etc. This dimension parallels Cavusgil’s (2004) market intensity but is different enough to label it as economic rather than market intensity.e. we do utilize both energy and electric consumption as additional indicators of economic . PPP). we use geographic distance as an indicator of market access for the first time in an OMOI. we chose two additional indicators of economic activity that are free of potential distortion due to concerns over comparability of dollar based measures of GDP and concerns over the strict comparability and the theoretical nature of ‘‘international dollars’’ (i. Cavusgil and colleagues use urbanization (i. India has a total population of just over 1 billion people but only 28 percent live in urban areas.. we focused on economic activity rather than urban population (used in Cavusgil’s studies to calculate market size).’’ In addition. Both studies use GDP per capita adjusted for purchasing power parity (PPP) as an indicator.’’ is multiplied times the total population to indicate the accessible or market population. The effective market population is only 289. advertising. (2004) in that they combined the size of the urban population with electricity production to estimate market size.

both of which are critical for modern commerce. London. Bollen.000 and Cavusgil uses Internet hosts per capita to capture this effect on trade. etc. 1993) and as indicators of the relative industrialization of nations (Bornschier & Chase-Dunn. In addition. We differed from their use of growth in commercial energy use as a second indicator and chose the secondary school enrollment ratio as an indicator of the longer term future of potential and opportunity. 1985). Cavusgil et al. Stokes & Anderson. 1993). Mullen. 1990.g.. MULLEN AND SHIRLEY YE SHENG activity.e. we added cell phones (i. 1979. wireless) to our list of indicators since wireless communication is becoming increasingly popular and even necessary for modern commerce. which per capita have been used as reliable indicators of economic development (Sofranko. 1975. (2004) use telephone mainlines/capita.. 1985).) and has been shown to be a reliable and valid indicator of economic development (Mullen. & Bealer.. Economic output has a relative weight of 10 percent in our total index for Study One and 15 percent in Study Two.228 MICHAEL R. Commercial Infrastructure As noted above. 1971. Jaffee. We use the number of Internet users per 10. While Cavusgil et al. The GDP annual growth from 1998 to 2002 and secondary school enrollment ratio are combined as equal indicators of future market potential with relative weights of 10 percent in our total index for Study One and 10 percent in Study Two. the percentage of school age children completing secondary education) is used in a number of studies (Douglas. The secondary school enrollment ratio (i. we added the number of computers per 100 as a third measure of telecommunications infrastructure that enables Internet usage and embodies infrastructure necessary for modern commerce.e. There has been substantial evidence that the Internet has a growing positive impact on international trade. we broaden the dimension of commercial infrastructure by emphasizing two aspects: telecommunications and physical infrastructure. Both studies also use televisions per capita. To that we added measures of the gross registered tonnage of the countries merchant shipping . Education also provides an indicator of market readiness for advanced products and services. Nolan. Future Market Potential Cavusgil et al. (2004) use one indicator of physical infrastructure – paved road density. 1987. Education has often been shown to be a cause of economic growth (e. (2004) and our study both use GDP annual growth rates to reflect a market’s recent economic growth. Freund and Weinhold (2000) found only weak evidence of the effect of the Internet on trade in 1995–1996 but found a significant and increasing impact of the Internet on trade flows from 1997 to 1999.

the smooth functioning of free markets. and protection of person and property. freedom to compete. Political Freedom is included as an important factor in ranking potential foreign markets because it reflects the risk of doing business in a particular country. According to the 2002 Freedom in the World survey there are 85 ‘‘free’’ countries in which basic political rights and civil liberties are recognized. and people’s propensity to consume. measured by net ton kilometers. Karatnycky’s (2002) Freedom in the World survey calculates political freedom as an average of each country’s ratings for political rights and civil liberties. However. Market Accessibility In line with Boddewyn and Falco (1998). Political freedom and civil rights increase the prospects for stability and reduce the long-terms risks of operating in a market. Political Freedom and Risk. Political freedom and risk has a relative weight of 10 percent in our total index for Study One and 12 percent in Study Two. ‘‘The key ingredients of economic freedom are personal choice. voluntary exchange. and necessary for.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 229 fleet and railway freight traffic.’’ The 2003 Fraser Institute’s annual report ranks 123 countries representing according to the extent to which they allow their citizens economic freedom. Rahman (2000) and Cavusgil et al. and 59 ‘‘partly free’’ countries with limited respect for political rights and civil liberties. By focusing only on national wealth. companies ignore the costs and risks of doing business in foreign countries. voluntary exchange. (2004). Economic Freedom. government expenditures. consumer income. According to Gwartney and Lawson (2003). as three indicators of physical infrastructure. our focus is from a US firm’s perspective. These six measurements are combined to assess commercial infrastructure and have a relative weight of 15 percent in our total index for Study One and 10 percent in Study Two. Freedom and Risk Economic and political freedoms are anatomical to. Economic freedom has a relative weight of 10 percent in our total index for Study One and 12 percent in Study Two. Thirty-five percent of the global population is living in 48 ‘‘not free’’ countries in which a broad range of freedoms are systematically denied. and market coordination. Economic freedom is reduced when taxes. and regulations are substituted for personal choice. we deviate from .

Their results further show that greater physical distance reduces people’s willingness to cooperate with others and also makes people more willing to deceive business partners. Cavusgil’s studies use seven dimensions to calculate OMOIs while our analysis subdivides market accessibility into two separate dimensions. both of which will lead to increased transaction costs (Williamson. the harder it will be to conduct business due to aspects like increased transportation and communications costs. Therefore. imports and geographic distance. These eight dimensions of market attractiveness are used as the basis for forming our modified OMOI to rank the worldwide market opportunities in the next section. 2001). reducing the opportunity for new business. we add geographic distance5 as an additional dimension/indicator of market access. They argue that the further the physical distance.000 miles apart is only 20 percent of the amount of trade that would be predicted to take place if the same countries were 1. 1981).000 miles apart’’ (p. Total imports have a relative weight of 15 percent in our modified OMOI index for Study One and 10 percent for Study Two. (2004) by not including US imports as an indicator of a market’s receptivity. Geographic Distance4 Distance still matters and firms must explicitly consider the effects of distance when they make decisions about entering international markets (Ghemawat. Therefore. Bradner and Mark (2002) demonstrated that geographic distance negatively affects a person’s willingness to be persuaded by others. followed by a validity analysis. reserving that measure to validate the study as a whole nor do we use total trade as an indicator of market openness. we address the face validity of our modified OMOI index by . We combine that measure of import intensity with total merchandise imports as indicators of market openness/access from an exporting firm’s perspective.3 Total Imports The OECD uses total imports of goods and services as a percent of GDP to indicate open markets. MULLEN AND SHIRLEY YE SHENG Cavusgil (1997) and Cavusgil et al. 138). regardless of where those imports come from. Model Validity The model and modified index we develop are created from the perspective of a firm operating in the US and looking for foreign market opportunities.230 MICHAEL R. ‘‘The amount of trade that takes place between countries 5. Geographic distance has a relative weight of 15 percent in our total index for Study One and 20 percent in Study Two.

United Nations’ statistics division and the World Bank statistics division. shows the year of the data. While this is admittedly a convenience sample.g. RESEARCH METHODS AND RESULTS Sample One hundred and eight countries are included in our sample because their full.g. that have not been previously indexed and ranked. the data are updated annually and cover a large variety of economic and social variables. we explicitly exclude the US from the sample. primarily African nations. As Cavusgil explains in his study. Haiti. Quantitative Analysis Following Cavusgil (1997). Rwanda. They also provide wide coverage of countries and are frequently used. Iraq and North Korea) or size or lack of development and insufficient resources (e. The Data Data for analysis in this research are collected from three international organizations: the IMF. in bold.6 Three years of trailing imports from the US were averaged and used as the basis to compare our ranking of market attractiveness with actual subsequent trade from the US to those countries. standardization is a statistical process .7 The sample contains 24. Afghanistan. The first line of Table 2. the 108 countries in the sample are listed alphabetically in the first column of Table 2. Most of the data are from 2001 to 2003. although some indicators of market intensity are as old as 1998. Because we are doing our study from a US firm’s perspective. Burma. These sources are considered among the most respectable and reliable with uniform terminology and methodology. Importantly. Somalia). Cuba... Equatorial Guinea. Also. the index was created from the raw values of the 18 variables by standardizing the items and placing them into a scale of 1 to 100. Andorra. the countries account for 92 percent of the balance of the world’s population and 96 percent of the balance of the world’s GDP. current data sets are available.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 231 comparing it with the trade flows from the US. Other countries are unfortunately not included because of insufficient data because of aspects like political unrest (e.

MULLEN AND SHIRLEY YE SHENG .232 Table 2. Rank Market Growth Rate Rank Commercial Rank infrastructure Freedom and Risk market accessibility Mod. Countries Market Rank Size Market– Econom intensity Extended Overall Market Opportunity Index and Rank: Study One. HK Colombia Costa Rica Croatia Czech Republic Denmark Ecuador Egypt El Salvador Estonia Ethiopia Finland France Georgia 2001 1 5 8 1 5 2 8 3 1 2 31 2 1 1 2 6 1 4 100 2 7 1 1 2 2 3 7 2 1 3 2 10 1 97 31 19 86 32 54 18 41 72 54 3 59 86 86 45 24 86 35 1 47 23 86 81 45 63 44 21 67 103 41 72 13 81 1998–2001 8 107 40 55 31 90 49 42 90 3 70 17 32 85 79 9 33 81 27 100 36 67 48 43 30 96 36 69 33 81 101 2 41 53 44 49 44 50 61 27 32 87 37 65 46 46 64 24 72 15 38 59 34 77 30 93 60 29 39 58 84 5 75 13 37 63 1998–2002 68 27 59 52 47 79 73 6 72 7 64 42 50 68 65 37 38 95 55 60 57 55 71 12 30 103 40 91 41 89 71 16 42 88 62 47 83 1 60 51 49 72 45 81 65 34 72 9 66 30 54 62 65 37 41 89 72 7 42 87 67 29 69 22 66 31 51 59 58 41 24 58 20 62 46 69 66 51 51 18 40 100 42 62 32 23 87 89 53 59 62 81 42 90 57 28 59 63 44 53 31 35 68 86 35 93 24 60 14 16 53 53 98 72 1 65 24 79 10 7 50 31 24 12 65 6 40 81 31 21 64 28 27 27 29 32 45 48 20 50 25 32 36 38 24 20 19 61 22 38 46 51 32 39 37 45 50 32 24 36 45 20 48 51 30 74 72 62 53 19 12 97 6 78 52 41 37 79 100 102 1 90 36 15 4 51 35 38 18 7 50 80 42 16 99 10 5 60 MICHAEL R. OMOI Overall index rank Economic Rank Political Rank imports Rank geographic Rank distance 2000–2002 12 62 14 57 18 47 21 33 54 6 54 6 3 97 46 12 5 88 6 84 17 50 31 19 16 53 4 92 4 92 56 2 4 92 22 31 40 16 56 2 12 62 20 39 35 18 41 15 68 1 11 67 10 72 11 67 36 17 3 97 56 2 53 8 25 26 2003 31 27 23 42 58 54 18 51 24 43 31 32 27 36 20 56 22 57 20 70 31 40 31 47 60 20 27 50 61 26 56 42 29 61 72 87 32 9 17 98 18 83 30 61 57 72 49 90 13 90 12 90 2 61 36 61 26 7 90 72 20 5 77 13 32 69 2001–2002 49 59 21 88 57 53 42 70 85 3 85 3 49 59 78 15 64 42 71 34 57 53 71 34 42 70 21 88 14 99 85 3 21 88 71 34 7 103 99 1 42 70 78 15 71 34 78 15 85 3 57 53 14 99 64 42 78 15 28 82 85 3 78 15 42 70 2001–2003 12 55 7 89 4 107 14 49 12 62 23 22 6 100 44 4 7 89 7 93 8 82 20 28 6 100 21 26 7 89 34 10 17 39 10 70 32 11 69 1 6 98 14 49 18 36 24 19 15 45 9 80 7 93 13 54 27 14 9 78 11 64 39 6 12 55 Year(s) of Datac Albania Algeria Argentina Armenia Australia Austria Bangladesh Belgium Benin Bolivia Brazil Bulgaria Burkina Cambodia Cameroon Canada Chad Chile China China.

South Kuwait Laos Republic Latvia Lebanon Lithuania Madagascar Malawi Malaysia Mali Mauritius Mexico Mongolia Morocco Mozambique Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama 16 2 2 2 1 2 2 60 21 10 1 2 9 1 21 2 3 9 1 1 1 2 1 2 1 4 2 1 17 1 4 2 2 4 2 1 1 13 2 1 11 1 8 47 53 54 81 67 51 2 6 15 86 54 17 97 5 63 40 16 86 103 97 72 81 59 97 35 67 106 7 97 32 54 72 34 72 81 86 9 72 86 12 97 70 32 62 30 28 30 54 36 32 46 83 57 66 35 72 37 23 60 88 35 51 39 51 34 16 41 23 47 35 28 40 51 33 77 77 31 34 31 112 73 33 33 19 88 25 95 98 94 37 66 86 46 6 32 21 72 16 63 103 28 4 72 38 57 40 74 106 53 102 44 70 99 55 38 81 12 11 91 74 92 1 14 78 81 63 43 72 34 30 49 71 57 49 53 77 60 68 59 70 64 31 32 40 45 79 57 76 72 28 31 56 64 49 50 62 53 48 66 71 71 50 29 70 70 57 50 44 86 9 99 104 72 16 55 72 63 3 50 28 53 19 40 101 100 92 80 2 55 4 9 106 102 59 40 75 70 47 64 76 31 12 12 70 105 18 19 54 68 50 8 42 9 4 7 30 14 12 15 48 46 51 28 55 23 4 8 20 8 19 18 21 3 3 15 3 19 10 2 11 3 5 23 18 3 2 6 27 14 9 19 10 76 14 74 92 79 21 57 62 55 11 12 9 23 5 29 92 76 39 76 44 47 33 97 97 55 97 44 72 104 67 97 89 29 47 97 104 84 24 57 74 44 55 25 38 30 28 22 42 22 17 6 61 48 50 38 44 39 28 99 40 2 48 31 51 31 24 30 26 34 36 36 35 27 22 55 62 35 24 13 48 38 25 37 15 79 41 67 70 90 32 90 100 105 5 23 20 41 29 39 70 1 36 106 23 61 18 61 83 67 77 55 49 49 52 72 90 15 4 52 83 102 23 41 79 46 78 64 71 49 21 57 78 64 49 14 85 71 78 64 78 28 21 99 35 7 78 21 78 56 49 28 64 78 64 64 28 49 49 85 85 57 42 35 85 21 21 78 15 42 34 59 88 53 15 42 59 99 3 34 15 42 15 82 88 1 78 103 15 88 15 58 59 82 42 15 42 42 82 59 59 3 3 53 70 78 3 88 88 15 58 18 10 8 7 17 26 8 11 7 30 17 30 18 36 22 9 24 11 8 18 12 18 8 12 38 10 18 25 26 11 11 8 39 10 15 6 12 10 10 6 20 3 32 70 82 89 40 16 82 64 93 12 40 12 36 9 25 80 21 64 86 36 55 32 86 55 8 70 32 18 17 64 69 82 6 70 48 98 55 70 70 100 28 60 49 50 91 57 92 55 18 6 37 69 41 58 95 46 41 22 38 35 18 57 42 57 11 19 12 55 1 100 36 63 15 23 63 32 89 50 46 64 26 28 89 58 56 5 40 87 4 44 98 107 74 14 68 35 3 60 68 90 73 77 98 40 65 40 104 95 103 44 108 1 75 21 102 87 21 79 7 56 60 19 85 81 7 54 28 40 31 21 34 41 33 22 22 53 40 48 41 50 30 16 41 30 14 40 26 40 23 17 23 27 28 41 27 30 23 21 48 39 36 24 22 47 28 22 39 2 67 30 56 95 46 22 48 89 88 3 32 11 25 8 58 105 24 57 106 31 76 27 85 104 83 73 65 23 71 59 86 96 13 34 43 81 87 14 68 92 33 Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 233 .Germany Ghana Greece Guatemala Guinea Honduras Hungary India Indonesia Iran Ireland Israel Italy Jamaica Japan Jordan Kenya Korea.

MULLEN AND SHIRLEY YE SHENG . (Continued ) Countries Market Rank Size Market– Econom intensity Rank Market Growth Rate Rank Commercial Rank infrastructure Freedom and Risk market accessibility Mod.Table 2. OMOI Overall index rank 234 Economic Rank Political Rank imports Rank geographic Rank distance 78 76 67 31 37 24 24 49 83 55 44 22 65 12 61 65 24 42 81 83 107 96 34 98 94 5 44 19 83 97 34 93 108 11 5 7 17 20 14 17 29 6 21 20 21 7 25 16 12 27 21 5 2 20 6 13 11 2 24 21 31 22 7 7 12 67 89 79 50 39 57 50 22 84 33 39 33 79 26 53 62 24 33 89 104 39 84 61 67 104 28 33 19 32 79 79 62 25 37 32 38 47 19 24 32 34 64 46 39 38 49 32 58 59 14 27 37 18 35 25 40 23 42 60 43 8 13 23 79 46 57 41 26 97 83 57 55 3 28 39 41 22 57 9 9 101 72 46 98 52 79 36 87 32 7 30 104 102 87 49 71 64 78 85 71 28 0 49 28 78 78 78 78 49 85 85 0 42 64 28 21 35 21 42 21 78 85 42 7 35 14 59 34 42 15 3 34 82 106 59 82 15 15 15 15 59 3 3 106 70 42 82 88 78 88 70 88 15 3 70 103 78 99 12 5 18 13 15 13 11 9 12 62 27 19 10 23 13 2 17 20 10 7 24 15 16 12 7 17 22 41 6 5 20 8 5 55 106 32 51 45 51 64 78 62 2 15 31 70 22 51 108 40 28 77 93 19 45 44 55 93 40 24 5 100 104 27 86 104 62 77 23 58 66 53 54 35 60 7 55 58 20 64 7 36 60 59 41 21 16 46 54 48 27 53 28 66 54 86 19 22 19 24 13 87 35 16 50 47 77 28 105 44 35 93 19 105 75 28 31 68 92 101 60 47 59 84 50 81 16 47 11 95 90 95 29 32 27 37 41 33 34 27 28 34 40 40 28 43 21 45 43 18 23 26 21 29 24 20 37 32 49 33 28 22 20 63 54 75 40 26 47 45 70 66 44 29 28 64 20 94 17 21 103 84 77 93 61 82 98 39 55 9 48 69 91 101 Paraguay Peru Philippines Poland Portugal Romania Russia Saudi Senegal Singapore Slovak Republic Slovenia South Africa Spain SriLanka Sudan Sweden Switzerland Syrian Arab Republic Tanzania Thailand Togo Tunisia Turkey Uganda Ukraine United Arab Emirat United Kingdom Uruguay Venezuela Vietnam Zambia Zimbabwe 2 5 11 6 2 3 23 5 2 2 2 1 6 7 2 4 2 2 3 3 4 1 2 10 2 8 1 12 2 5 5 2 2 72 28 11 26 50 37 4 28 59 63 72 103 25 22 63 63 47 59 43 39 37 86 52 14 67 20 86 10 72 27 30 67 67 36 27 33 43 54 47 62 65 34 57 56 65 50 54 20 38 80 67 35 70 38 29 43 21 46 78 81 58 31 38 59 33 6 67 101 80 51 36 45 26 23 74 33 34 22 41 35 105 61 8 20 70 17 59 97 52 104 48 10 7 31 89 61 30 78 108 47 48 51 66 65 69 69 61 44 57 63 69 52 71 54 52 69 64 45 44 24 36 65 35 38 74 63 70 44 35 65 39 20 MICHAEL R.

Jamaica and Venezuela) and from Central America (i. market size.. We multiply the weights by the indexes for each of the eight dimensions and add the results together to figure the OMOI for each country. Canada and Mexico are naturally closest geographically to the US followed by nations from the Caribbean basin (i.. Honduras.e. There are two columns beneath each dimension. This index is sorted from largest to smallest in order to rank the 108 countries on each dimension as summarized in Table 2. This is undoubtedly due to its strategic position as the gateway to mainland China. The rankings of the eight separate dimensions in Table 2 indicate that China is ranked number one. Our modified OMOI from Study One is then used to rank the other 106 country’s overall market attractiveness. we conducted a second . For instance. Table 2 shows that Canada is ranked second in economic intensity and commercial infrastructure and third in political risk taken together with no physical distance to yield an overall first place in the OMOI assessment of market attractiveness for US firms. a linear compensatory model is used to calculate our modified OMOI. The next column is the rank order of the markets attractiveness on that dimension. The first is the standardized index for each country. 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 to changes in the weights used to calculate OMOIs. reflecting its high economic output per capita. Study One Finally. Table 2 shows the OMOI for the 106 countries in the second to last column and the rank order of market attractiveness in the last column. The original data are first transformed into standardized data. market/economic intensity. for size and market potential/ growth but drops to 90th and 10third for economic freedom and political risk.) are listed across the top of the table.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 235 enabling us to directly compare variables with very different measures and distributions. Denmark is shown to have the best ranking for commercial infrastructure and Hong Kong has the highest ranking for imports. Sudan and Zimbabwe had data to form indexes for six of the eight dimensions and are ranked on those dimensions. relative to the other countries in the study. that are used to form an index for each dimension.e. etc. or z-scores. The dimensions (i. as expected.e. Guatemala and Costa Rica). Norway is the top ranked market for economic intensity.. but they are not included in the calculations for the OMOI and overall rankings because they are missing data on the other two dimensions.

Because the weight is the only variable in the analysis that is changed. the weights for commercial infrastructure. The only variable that is changed is the weight assigned to each dimension. and imports are reduced to 5 percent each to keep the total equal to 100 percent. For Study One. Brazil. all benefiting by the increased emphasis on size. the US is not in the sample). The rank order of the dollar volume of three years of subsequent US exports to the 106 countries is compared to the rankings derived from OMOI values. The resulting rankings from Study Two are reported in Table 3 along with Cavusgil (1997). We increased the weights for market size to 25 percent and for market/ economic intensity to 15 percent following Cavusgil (1997) and colleagues (2004). both statistically significant at the 0. (2004) and Study One. Seven countries (and Hong Kong) fell by 10 or more ranks lead by Mauritius. Venezuela. dimensions and countries as in Study One. Eleven countries improved their rankings by 10 or more – led by Russia. As can be seen in Table 3. 12 countries showed no change in ranking between Studies One and Two.05) demonstrating reasonable validity for our modified OMOIs.61 and 0. The results provide some insight into the sensitivity of liner compensatory models to different weights. MULLEN AND SHIRLEY YE SHENG study using the same indicators. rho. both aspects of freedom and risk. it is possible to isolate differences due strictly to changes in the weights. Validity It is important to address the face validity of the modified OMOI by comparing it to subsequent trade flows. China improved from 15th to 2nd overall with the increased weight for size given that almost a half billion of their 1. For data sets in which both rows and columns contain ordered values. Singapore and South Korea due to increased emphasis on size and distance and a reduced weight for imports.e. The weights used to calculate the modified OMOI for Study Two are shown in the last column of Table 1 above. Spearman’s correlation coefficient. Consequently. Just over two-thirds (68 of 106) moved up or down by five or less ranks in the market attractiveness ratings.000 level (a ¼ 0..63 for Study Two. Iran. The modified OMOI is used to evaluate and rank the attractiveness of 106 foreign markets from a US perspective (i. Spearman’s rho is 0.8 . and Venezuela by its geographic proximity to the US. is most appropriate as a measure of association between rank orders and is proposed as a validity coefficient for OMOIs. globalEdge (2004).236 MICHAEL R. Further we increased the weight for geographic distance from 15 to 20 percent to improve the fit of the model to the validity coefficient. China and India. Cavusgil et al.3 billion population live in urban areas.

Countries Cavusgil (1997) globaledge (2004) Cavusgil et al. Countries and Rankings by Study.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 237 Table 3. HK Colombia Costa Rica Croatia Czech Republic Denmark Dominican Republic Ecuador Egypt El Salvador Estonia Ethiopia Finland France Georgia Germany Ghana Greece Guatemala Guinea Honduras Hungary 10 19 74 72 62 53 19 12 97 6 78 52 41 37 79 100 102 1 90 36 15 4 51 35 38 18 7 50 80 42 16 99 10 5 60 2 67 30 56 95 46 22 75 61 62 57 21 14 99 8 83 56 25 42 84 102 97 1 86 38 2 18 47 32 46 17 10 48 73 41 19 98 11 5 67 3 70 30 50 88 45 28 15 20 1 13 2 3 10 4 1 23 25 2 12 61 38 44 34 16 74 65 55 28 9 14 49 7 76 32 65 65 34 18 7 54 16 7 14 6 . (2004) 80 80 39 61 6 22 70 85 76 9 49 29 65 Study One Study Two Albania Algeria Argentina Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Benin Bolivia Brazil Bulgaria Burkina Cambodia Cameroon Canada Chad Chile China China.

238 MICHAEL R. MULLEN AND SHIRLEY YE SHENG Table 3. (Continued ) Countries Cavusgil (1997) 12 20 globaledge (2004) 8 17 Cavusgil et al. (2004) 21 76 5 24 22 3 58 88 17 43 39 44 Study One Study Two India Indonesia Iran Ireland Israel Italy Jamaica Japan Jordan Kenya Korea. South Kuwait Lao Republic Latvia Lebanon Lithuania Madagascar Malawi Malaysia Mali Mauritius Mexico Moldavia Mongolia Morocco Mozambique Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama Paraguay Peru Philippines Poland Portugal Romania Russia 5 5 4 3 8 14 33 11 11 34 73 81 65 59 88 11 20 48 89 88 3 32 11 25 8 58 105 24 57 106 31 76 27 85 104 83 73 65 23 71 59 86 96 13 34 43 81 87 14 68 92 33 63 54 75 40 26 47 45 36 89 74 4 40 12 22 7 66 105 42 53 104 34 71 33 96 106 94 69 85 15 78 55 92 100 13 39 37 77 80 6 65 87 31 64 51 76 44 26 49 29 84 15 86 46 70 55 52 34 25 74 27 23 16 9 22 21 18 9 12 .

65 without the first two outliers. & Welsch. Peru and Columbia. the validity coefficient improved from 0. (Continued ) Countries Cavusgil (1997) globaledge (2004) Cavusgil et al. (2004) 53 81 4 41 29 47 17 70 12 17 103 47 57 49 61 55 9 41 60 76 87 Study One Study Two Saudi Arabia Senegal Singapore Slovak. Standardized DfBeta and covariance ratio statistics to identify influential outliers (for a full discussion of outlier detection and analysis (see Belsley.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 239 Table 3. so we ran a simple regression of OMOI on US imports and examined DfBeta. & Doney. 1980. For Study One. Portugal and Venezuela and added Egypt. The validity coefficients . Visual examination of the results indicated several unusual cases. Ethiopia and Malaysia were identified as especially influential outliers followed by Thailand and Slovenia. Republic Slovenia South Africa Spain SriLanka Sudan Sweden Switzerland Syrian Arab Republic Tanzania Thailand Togo Tunisia Turkey Uganda Ukraine United Arab Emerates United Kingdom Uruguay Venezuela Vietnam Yemen Zambia Zimbabwe Sample size 1 2 19 22 83 6 13 21 15 31 7 17 70 66 44 29 28 64 20 94 6 of 8 17 21 93 84 77 93 61 82 98 39 52 9 48 69 91 101 6 of 8 60 68 63 35 26 72 20 103 16 23 79 91 90 58 82 95 24 59 54 81 101 108 23 23 89 108 Country changes from Cavusgil (1997) to globalEdge (2004): dropped Greece.61 to 0. Kuh. and further to 0. 1995). Milne.67 by holding out all four from the correlation analysis. Mullen.

All three studies rank Canada as #1 in overall attractiveness for US firms in line with its status as the number one market for US exports. Germany. they are somewhat off the mark for America’s second largest export market. UK and Ireland. Therefore closer evaluation of those markets is necessary before concluding that they are or are not high prospect export markets. It is worth noting that among our top 30. compared to 39 in Study One and a distant 61st place in Cavusgil et al. DISCUSSION The modified OMOIs developed.63 to 0. For comparison purposes. the 0. especially Study Two without the four outliers. Japan. Comparative Results The 30 best prospect markets for American firms (based on Study Two because of the high 0. without the two and then four outliers.70. The Ukraine has the greatest deviation from its 24th rank in Study Two. However. only eight do not match and four of those mismatches are very close (i.67 and from 0. the ranking of those markets from Study One and Cavusgil et al. MULLEN AND SHIRLEY YE SHENG for Study Two improved from 0. the Check Republic and Hungary at 34). Please note that we do not drop the four countries from the rankings but caution that their status as influential outliers indicates the need for further analysis before accepting their rankings at face value. and compared here add to the growing literature on ranking the best prospect foreign markets in order to .70 validity coefficient provides some evidence of the external (face) validity of these modified OMOIs and the resultant rankings of attractive markets. it appears that the rankings of the Ukraine are less than reliable.65 to 0. there is substantial correspondence across the three studies on the top 30 prospective markets. all three studies include the following six countries in the list of the top 10 most attractive markets for US firms: Canada. rank Greece at 32 and tie Russia. at 34. For the remaining 102 countries. Estonia and Slovenia are outliers indicating that there is a substantial difference between their ranks and their actual imports from the US. Cavusgil et al.. With 90 (30 Â 3) potential ‘‘top 30’’ rankings. validated.240 MICHAEL R.70 validity coefficient) are listed in Table 4. with Study Two ranking it at 15. (2004) are also shown. Belgium. Furthermore.e. Nonetheless. Furthermore. The modified OMOIs developed in Studies One and Two demonstrate reasonable validity. Mexico. Study One at 23 and Cavusgil et al.

. Study One 1 15 2 3 5 14 8 6 9 7 10 11 13 12 23 17 18 4 16 20 19 25 21 39 41 26 28 22 45 30 Study Two 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Cavusgil et al.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 241 Table 4. it behooves managers considering entering new markets to focus scarce resources to further analyze the top 10 or top 30 markets. HK Estonia Spain Australia Jamaica Switzerland Ukraine Brazil Portugal Slovenia Hungary Russia Greece The 30 Most Attractive Markets for US Firms. Country Canada China Germany Ireland France Norway Japan Belgium United Kingdom Denmark Finland Italy Netherlands Austria Mexico Sweden Czech Republic China. depending on firm resources and constraints. that are not in the current . For firms already in foreign markets.g. (2004) analyzed 84 of the same countries as those in our studies making comparisons possible. Nonetheless. (2004)* 1 2 7 5 14 15 3 9 7 16 9 22 11 22 34 12 34 12 28 17 6 17 61 29 25 29 34 27 32 help firms in the process of identifying the ‘‘right’’ markets to enter. Given the reasonable external validity and the overlap in the top 30 rankings from all three studies. there are five countries (e. the Dominican Republic) in Cavusgil et al. comparison with the list of the top 30 markets may give insights to those that warrant further investigation for future expansion. Cavusgil et al.

33. substantial differences in the samples render direct comparison of the results subjective. we rely on total imports for goods and services as a percent of GDP rather than just those form the US. used urban population plus electricity production. there are large differences for countries such as Venezuela that ranked 17th in Cavusgil (1997). primarily African countries. Also they rank South Korea fourth and third compared to our rankings of 24th and 42nd. Furthermore. making direct comparison of the results problematic. As a result. it is interesting to note in Table 3 that emerging markets near the top in Cavusgil (1997) and globalEdge (2004) are moderately positioned in our research. The most pronounced differences in variables are those used to assess market receptivity or accessibility. 76. For instance. In addition. 65. Because we used imports from the US to validate the studies. So while the comparisons between different studies are interesting. Cavusgil (1997) and globalEdge (2004) rank Singapore 2nd and 1st while our Studies One and Two rank it 44th and 63rd. 80–73). For instance. firms cannot afford to overlook the market opportunities in neighboring countries and other wealthy OECD member countries.242 MICHAEL R. While there is a substantial overlap in variables and the weights for some dimensions such as economic freedom. the dimensions are somewhat different (Cavusgil: 7 with 16 indicators versus ours: 8 with 18 indicators) with different weights in the three studies. variables or weights. Egypt (16. (2004) and 69th and 54th in Studies One and Two. As this discussion of the results demonstrates. (2004) and Studies One and Two (see Table 3). there are substantial differences in indicators and weights for other dimensions making it difficult to identify the cause of the variation in the rankings (see Table 1 for details). There are very substantial differences in the make up and numbers of countries in the emerging market samples from Cavusgil (1997) and globalEdge (2004) compared to Cavusgil et al. Nonetheless. at best. we used total urban population as the indicator of market size and Cavusgil et al. 83–94) show similar patterns in Table 3 to that of Venezuela where the rankings suffer when included in the larger sample of countries representing 96 percent of the worlds net GDP. it is hard to know whether the source of variation in country rankings is due to the differences in samples. Further. Cavusgil et al. most of the data are from different years. 60th in Cavusgil et al. Indonesia (20–17. in our studies that are not in Cavusgil et al. We also used geographic distance as an additional (inverse) indicator of market accessibility. Nonetheless. . used imports from the US per capita and total trade as a percent of GDP as their indicators. 89–89) and Malaysia (8–14. MULLEN AND SHIRLEY YE SHENG analyses and there are 24. an important implication is that no matter how important the emerging markets are for the future.

93) those of the number nine US importer. Other researchers have used straight-line sea and land distances but multiply the land distances by a factor of two (e. Dutch (#8) and French (#9) US imports combined. 2001). The UK’s imports are almost twice (1. Where trade flows are significantly higher than predicted. the model may need to be modified to account for the discrepancy. For instance. The validity coefficients showed a reasonable fit of the model to the market and provide a baseline for future research. possibly requiring FDI to enter. Where there are significant differences between the OMOI rankings and the actual US imports. unless research demonstrates idiosyncratic cause(s). South Korean (#7). 2001. Ghemawat. Canada’s imports of US products and services are about equal to Japanese (#3).Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 243 The geographic distance measure was added as an important indicator of market accessibility for the first time in an OMOI improving the face and predicative validity of the index. Colonial ties. . We compared the average of three years of subsequent US imports by country to the OMOIs and their rankings with Spearman’s rho to assess the validity of our modified OMOIs. In addition. have found it to be an important predictor of trade flows. Ghemawat. 1985). German (#5).e. 1985. FTAs) and land borders have all been shown to be positively related to bi-lateral trade flows (Bergstrand. Britain and the US share common colonial ties. additional thought and research is necessary to sort out the cause before firms make market entry decisions. Chinese (#6). As noted above. Canada. 1985. 2002). including this one. studies that include geographic distance (Bergstrand.. (2004) but is clearly the number two importer of US goods and services. The face or external validity of OMOIs has not been adequately addressed in the literature. preferential trade arrangements (i. Mexico is ranked 23rd and 15th most attractive markets by our studies and 34th by Cavusgil et al. Bergstrand. Frankel & Rose. Bradner & Mark. Canada. America’s number one and two trading partners share long land borders with the US and preferential trade arrangements through NAFTA. Canada and Mexico.g. if the ranking indicates much higher potential than actual US imports. We use straight-line distance from the closest of one of three major US port cities to measure distance in our analysis. 2000. While Canada is ranked number one in all studies. Mexico and the UK deserve such further consideration from a US perspective. there may be untapped market opportunity or markets closed to trade. its OMOIs understate its importance as a US market (see Table 1). The UK is the USA’s fourth largest export market while our OMOIs ranked it ninth. France. Future international marketing models need to address preferential trade arrangements.. Regardless.

tax evasion.. For instance. this modeling approach assumes that ‘‘one size fits all. . from just under two to more than eight people per household. data are not available on many nations. Lastly. Nonetheless. Further. it cannot be assumed that relative population size is a fair proxy for the relative number of households. Limitations There are several limitations of the modified OMOI as applied here.e. the question raised is whether a car in Brazil is the same as one in Germany or the US).’’ so to speak. there is no attempt to measure the differences in quality and no consistent standard to compare product features (i. First. The World Bank currently lists 208 countries and/or territories and we only evaluated 108. the rank and the index of the countries are not permanent and are expected to vary over time with changes in the national world economies. As the size of households varies widely by country (i.. Nonetheless. Product and service specific analysis would likely identify alternative solutions (see Russow & Okoroafo. Further. firms selling consumer durables to households may need to adjust population figures by the number of people per household. United Nations. MULLEN AND SHIRLEY YE SHENG land borders and colonial ties along with the other issues raised in these analyses. PPP data for China relies on a study done more than 20 years ago by two academics with a different methodology then currently in use.244 MICHAEL R.’’ The intention is to try to eliminate some of the well-known distortions of money-based GDP figures caused by fluctuating exchange rates and underreported national income due to non-cash and black markets. there are very substantial problems with the lack of uniform estimation procedures and time frames used to develop PPP data. 1996). 2004). While an advantage of this study is that it looks at world markets from the perspective of firms from one particular country. a weakness of the analysis for firms located in other domestic markets is that it excludes the US from the analysis. Limitation and Future Research The quantitative analyses exemplified in these studies provide a valuable tool to reduce the overall uncertainty associated with the preliminary identification of high-potential foreign markets. In both of Cavusgil’s OMOIs and the modified version developed here. For instance.e. These and other limitations are discussed next. GDP numbers are adjusted for PPP to convert them to ‘‘international dollars. etc.

Given that the US has about one-third of the world’s GDP and a high level of economic and technical development.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 245 ‘‘international dollars’’ are theoretical and do not exist to actually buy products or services from any countries’ firms. The sample excluded the US. While it is always appropriate for firms based in another market to add the US to the analysis. Only one country ranking study. Therefore. 2004 and current studies as outlined Table 1. Firms within an industry could easily tailor such an industry index into one fitting its own circumstances. has done quantitative measurement analysis using CFA and it was only for one construct/dimension. an industry focus might facilitate the necessary funding. Future Research Economy development is a dynamic process that may result in a necessary periodic updating of appropriate market indicators. indicators. While we tried to be clear about our motivations for variable selection. Clear definitions of constructs could lead to improved measurement analysis and standards that might provide a common ‘‘language’’ for marketing scientists studying foreign market opportunity analysis. the indicators used to measure the dimensions of the OMOI should be improved and modified over time. Rahman (2000). This results in making it more difficult to realize . These limitations. and the other limitations discussed above. Industry and eventually firm-specific models/indexes/ rankings would be very useful to marketing managers seeking practical international marketing research techniques for making a critical international marketing decision. These OMOI analyses can be reproduced and or extended in the future with new data. Industry specific foreign market opportunity analysis leading to industry by IMOI and rankings could make a valuable contribution to international marketing research as well. The number of factors and indicators varied considerably across the 1997. greater attention might be paid in future research to theoretical definitions of constructs/dimensions leading to more consensus on appropriate indicators. While primary or expensive secondary data may be required. it tends to swamp other markets when it is included in an analysis. it is sometimes more helpful to do the analysis with and without the US. samples and/or weights to reflect trends and observed changes in international markets. so firms in other nations may want to modify this approach to add the US back in and to drop their domestic market from the analysis. provide ample opportunity for future research into this most important area of international marketing enquiry.

including 24 countries not in previous OMOI studies. CONCLUSION The imperatives of globalization are clear.e. Firms must look to expand into international markets to survive and thrive. While we introduced geographic distance. The market attractiveness rankings in our analyses demonstrate reasonable external validity based on the validity coefficient and on the fact that the top 10 and top 30 ranked markets overlap considerably across our studies and Cavusgil et al. samples and results from three of Cavusgil and colleague’s previous studies and the two conducted herein. rendering the approach to that choice an important area of international market research. we have to differentiate between having a geographically common land border compared to measuring a physical distance separating countries. dynamic. 2001). . The choice of sample. failure to internationalize may eventually threaten a firm’s domestic dominance since not going international incurs severe competitive risks (Tallman & Yip. The ‘‘short list’’ of most attractive countries will help firms focus scarce resources and avoid the common errors of wasting time and money on low prospect markets.. Together with more precise distance measures. models that include FTAs and colonial ties may help future international market researchers attain better predictive validity of market attractiveness with fewer outliers. Nonetheless. Those rankings help firms choose the right markets to enter by allowing them to focus scarce resources on a limited set of best prospect countries.246 MICHAEL R. Our analyses provides a current analysis of market attractiveness and opportunity for the largest set of countries indexed and ranked to date. OMOIs are shown to be a flexible. variables. efficient and reasonably valid tool for preliminary analysis of foreign market opportunity. Furthermore. various measures (i. (2004). MULLEN AND SHIRLEY YE SHENG important differences in the indexes among the other markets under consideration. Choosing the ‘right’ market(s) has been identified as a critical decision. there are important differences between the outcomes. while or overlooking less visible high potential markets thereby helping firms efficiently identify the right foreign markets to enter. Indeed. from economic activity centers) and methods may improve the fit of the model. variables and weights are shown to directly affect the OMOIs and rankings. This research complements and extends a growing body of work developing OMOIs and using them to rank the attractiveness of potential markets. it compares the dimensions. For example.

J. it is the sum of exports and imports over GDP. (2004). The USA’s population and GDP are not included in the totals.. Regression diagnostics: Identifying data and sources of collinearity. We thank two anonymous reviewers for suggesting that we validate the results by comparing actual trade flows from the US to our modified OMOI. New York: Wiley. The gravity equation in international trade: Some microeconomic foundations and empirical evidence. We did not assess the validity of Cavusgil et al. 4. The Review of Economics and Statistics. 8. and an Associate Professor of Marketing and International Business at Florida Atlantic University. 2. Cavusgil et al. A. E. six of these variable and 10 are to form seven different dimensions for the OMOI rankings. 5. (2004) differentiate by calling one set factors and the other dimensions. Spain for their helpful comments and suggestions and Cynthia Lyles-Scott for her professional editing. Universitat Automoma de Barcelona. ACKNOWLEDGMENT The authors wish to thank two anonymous reviewers and the participants of ´ the 13th Annual CIMaR Seminar. D. E. R. where long land borders eliminate physical distance between countries. 7. Geographic distance is measured from the closer of Los Angles. Michael Mullen is the 2005 Fulbright Scholar in International Business at the Dublin Institute of Technology. & Welsch.’s (2004) rankings by correlating them with US imports because that is one of their measures of market attractiveness. but in this case we are only interested in a nation’s receptivity to imports rather than its ability to export. New York City or Miami with the exception of Canada and Mexico. REFERENCES Belsley. Ireland. The argument would be tautological.Extending and Comparing Cavusgil’s Overall Market Opportunity Indexes 247 NOTES 1. Kuh. 67(3). Bergstrand. Only six of those variables overlap with the 19 used to form the PCA factors. We gratefully acknowledge the reviewer that recommended that we consider distance as an important dimension in identifying foreign markets. 3.. We independently completed our data collection and analysis in 2004 before we became aware of Cavusgil et al. (1985). (1980). While total trade as a percentage of GDP has been used by Cavusgil and others as an indicator of market openness. Seven factors with 19 variables are used in the cluster analysis. H. Shirley Ye Sheng is a marketing doctoral student at Florida Atlantic University. 6. . 474–481.

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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. 251–274 Copyright r 2007 by Elsevier Ltd. In this study. like ‘‘Made in City X’’. Structural equation analysis sheds first light on the mechanism of city-of-origin effects. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(06)17009-X 251 . insights from country-of-origin research as well as exploratory qualitative studies are used to model determinants of preference for local products. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. Conjoint analysis results based on a sample of consumers from three neighboring cities in Germany show the importance of local origin for product preference. no attention has been paid to effects which stem from the declaration of a product’s local origin. Holzmuller and ¨ Eric Schirrmann ABSTRACT Irrespective of the popularity of country-of-origin research in international marketing. Volume 17.

and cities have been largely neglected. or Rome. The same applies to intra-national geographic units like federal states or specific sub-regions (e. would benefit because they are better able to assess mechanisms export or international markets which shape the competitive environment. from a managerial perspective a deeper understanding of different kinds of origin effects would help to make use of or deal with these market-relevant phenomena better. Steenkamp. & Janin. Lagrange. Candel. are commonly used to signal a certain quality of . 2005). meat. as well as smaller cities known for a certain specific expertise such as Solingen for knives. & Meulenberg. 2002. 2005). 1996. 2004. However. Paris. In addition to that. INTRODUCTION Traditionally. intra-national areas. Specifically. intra-national units have traditionally been used for agricultural products like wine. 1). On the one hand. origin effects that stem from other geographical units like trade zones. & ¨ Meulenberg. Strong city-of-origin effects in specific industries would for instance lead to higher entrance barriers in those markets.g.g. large cosmopolitan cities such as New York. Verlegh. the country of origin of goods is a wellresearched topic in the international marketing literature. Trognon. On a more aggregate level a group of countries (e. 2003. EU. a better knowledge of city-of-origin effects would help local marketers to refine their strategies against national or international competitors. International marketers. In their seminal review of the field. costal area) within a country. Specifically.252 PATRICK LENTZ ET AL. Tokyo. 1999. van Ittersum. it was the only category that has received significant attention in origin research. van Ittersum. mountain range. Nijssen & Douglas. and corresponding strategies allowing for a successful entry have to be developed. Consequently. and Edam for cheese.. Acquisition of existing companies or brands instead of exporting or starting greenfield operations as well as using more localized promotional messages are examples of more suitable and appropriate approaches. respectively. which might finally lead to a quicker penetration of the target market by avoiding or using city-of-origin effects. Although the country is only one of many possible geographical entities (see Fig. Heslop and Papadopoulos (1993) identified more than 400 studies in the respective field and the phenomenon still attracts prominent scholars (Agrawal & Kamakura. NAFTA) or even a continent could be used to denominate a product’s or a service’s heritage. and vegetables to signify product quality (Muller & Kesselmann. Ceski Budejovice for beer. Verlegh et al.. on the other hand. the places of production of a good as well as the location where a service is provided are important attributes by which customers assess their quality.. 1999.

2000) and a different set of affective re¨ actions. the origin effect is characterized by more firsthand experience. And even individual neighborhoods in bigger cities such as Montmartre in Paris. the frame of reference from the customer’s perspective is quite different and typically reflects less firsthand experience. products designed. psychic closeness. and emotional attachment. SoHo in New York City. higher psychic distance (Dow. more or less personal involvement. or Schwabing in Munich are widely known for fine art products and thus are used to carry a distinct image which reflects a certain level of product quality. it is interesting to see that the country level is well researched. In the case. as well as . Stottinger & Schlegelmilch. The extensive literature covers the investigation of customers’ reactions to country of origin in a national setting. 1. goods made or services offered at a certain location could be marketed to national or international customers. If we consider all the origin fields provided in Fig. 1.City-of-Origin Effects in the German Beer Market 253 Geographic Focus International Continent Trade Zones Examples NAFTA EU USA France Germany Rockies Champagne Bavaria New York City Paris Munich SoHo Montmartre Schwabing Customer National International National Countries States/ Sub-Regions Intranational Cities Neighborhoods Fig. From a managerial perspective it is also important to take the specific target group into consideration. manufactured or offered there. quite typically the assessment of different imported products. When products are aimed at customers in the home country or a sub-region thereof. 2000. customers from abroad are the target group. Generally speaking. Typology of Origin Effects.

The core problem of shifting the focus in research from one geographic level to another lies in the fact that the major origin mechanisms are placed in very different sets of contingencies and antecedents. which needs theoretical as well as methodological caution and rigor when being approached. and findings from country-of-origin research to different geographic domains is. no work has been done on city and neighborhood origin effects. level and type of expertise. More or less positive connotations related to its origin lead to more or less positive preferences for respective products or services. emotional and motivational drivers. using localization as a unique selling proposition seems to be a valid strategy especially for smalland medium-sized companies to fight global competition in their immediate home markets. neither on national nor on international audiences. Some research deals with regional origin with respect to national target groups. whether these approaches are suitable. these research gaps need more attention. Can we assume that the same mechanisms are at work when we focus on a region as carrier for product image? Would the antecedents of and consequences from region of origin be identical or not? From a conceptual point of view. It seems worthwhile to extend the current research on country of origin to geographic entities with a smaller focus like cities and neighborhoods. From a managerial perspective it pays off to know how . Take for example. With respect to antecedents of attitudes to and preferences for local products the psychological frame might also vary significantly. a positive product–country image which enhances the perceived quality for a product originating from this country. political and legal aspects. the different environmental forces that determine country. cross-cultural comparisons. are not the same. and different players that are at work to promote certain geographic units as well as economic relevance might be significantly different. origin mechanisms presumably work the same way irrespective of the geographic entity under investigation. Thus the transferability of concepts from country-of-origin research to cityof-origin is in itself a valuable research question. The use of geographic units for specific propositions cannot be easily copied by competitors from outside the respective geographic unit and thus seems to be an attractive pathway to fight national or even international players. But to the best of our knowledge.or city-related origin effects.g. evoked sets. Consider.254 PATRICK LENTZ ET AL. The core question when moving research practices. underlying concepts. as well as affective patterns such as personal attachment to geographic entities. and attitudinal reactions. for example. The institutional background. Chances are high that cognitive structures of customers (e. schemas). From a conceptual as well as a managerial perspective. In addition to conceptual and theoretical issues.

we discuss our results and give implications for future research. assuming that an origin effect on a city level exists. Next. Both the results from the literature review and the qualitative fieldwork are combined in a conceptual model which aims at explaining preferences for local products. Following this approach might in a next step also lead to a distinct positioning outside the local market and could even carry the potential to use city of origin on an international scale when exporting products. If we are able to better understand how city-of-origin mechanisms work. . international marketers might use city-of-origin insights to better assess the competitive environment in foreign markets. using both descriptive and confirmatory methods. with a focus on the German beer market. In other words. APPROACHES TO COUNTRY OF ORIGIN Drawing from previous literature on consumers’ attitudes and preferences toward ‘‘foreign’’ products. local companies could develop stronger competitive advantages using more refined localized branding strategies. we specifically analyze how and through which mechanisms it is able to affect consumers’ preferences with respect to buying products that originate from their own city of residence. and thus make possible premium prices for goods with a certain origin (Agrawal & Kamakura. we first review the country-of-origin literature in order to provide a theoretical basis. To accomplish that. how they increase brand equity. the remainder of our work would be highly questionable. First. we present results from qualitative research that identifies relevant aspects of city-of-origin effects. Our research is a first step in the investigation of city-of-origin effects which deals with two central questions. This model as well as the measurement employed is empirically tested with data from residents in three large cities in the Ruhr area in the north-west of Germany. customer preferences related entry barriers into international markets as well as intranational differences with respect to the affective attachment of customers to local brands. we investigate how a city-of-origin effect is able to influence consumers’ buying behavior. 1999). Information of that kind is highly relevant for the development of promising entry strategies in foreign markets. Finally.City-of-Origin Effects in the German Beer Market 255 origin mechanisms work with respect to possible geographic entities. Second. two main research streams can be identified. Without providing evidence for its existence. In similar ways. we want to establish the existence of origin effects on the city level.

Douglas. Next. Johansson & Thorelli. a halo effect and a summary effect. 1989). 2003). the country’s . These experiences can also be based on word of mouth through other consumers as well as through mass media.e. analyze shortcomings. i. country of assembly. the product-specific image of a country influences product evaluation based on certain product attributes. on the other hand. the other stream investigates factors that might influence consumers’ attitudes toward ‘‘foreign’’ products as well as possible effects on repurchase intentions and corresponding behaviors. customers use information about a product’s origin (and thus about the image of the corresponding country of origin) and transfer these to relevant product attributes. Johansson. when focusing no longer on the country. In other words. When conceptualizing country-of-origin effects by a summary effect. the term ‘‘country of origin’’ has been found to be more complex and more ambiguous than initially assumed. i. In his work. which can relate to both intrinsic and extrinsic cues.. products are perceived as consisting of a large number of information cues. which is then used to facilitate product evaluation (Han. price. and discuss limitations in transferring these approaches to a more local level. 1984. or the country of origin (Bilkey & Nes. ‘‘Country of origin’’ may consist of different components such as country of manufacture. or country of design (Han & Terpstra. how the product’s country of origin is taken into consideration for a product’s evaluation. it is of central interest whether. In other words. Han (1989) developed and empirically investigated two different working mechanisms of country-of-origin effects. the extrinsic cues relate to a product’s brand. An extensive body of more than 600 studies exists that focuses on country-of-origin effects (Papadopoulos & Heslop.e.256 PATRICK LENTZ ET AL. consumers summarize their experiences with and perceptions of corresponding products from a particular country to form a country image. 1982). and.. Within this research stream. In the presence of a halo effect. 1985. From an information theory perspective. While intrinsic cues contain product characteristics such as taste or design. but on the region or city of origin. & Chao. we will briefly address each of these two streams. 1988). & Nonaka. Johansson. if so. This causal chain has been both theoretically and empirically examined by several studies (Erickson. However. While one stream focuses on the impact of a product’s country of origin on making inferences about or evaluating foreign products. information about the image or similar characteristics of the product’s country of origin is used to infer about product attributes that are not directly available to the consumer. 1985). which finally determines the attribution toward country-specific brands and products. Consequently.

25). Nijssen & Douglas. 1989. In many cases. Hence. & Scherer. the latter defined as when ‘‘the symbols and values of one’s own ethnic or national group become objects of pride and attachment. 2001). Javalgi. Diamantopoulos. Khare. 1986).e. they use a product’s origin as a basis for their reasoning (i. 2004). In his empirical study. 1989) so that an evaluation of a product based on this summary effect will be preferred if the consumer has the strong wish to facilitate buying decision. Johansson & Nebenzahl. Johansson. several studies have concluded that information about a product’s country of origin was only used ‘‘in the absence of other information on which to evaluate products’’ (Nijssen & Douglas. 2005. 1988. a concept which is closely related to LeVine and Campbell’s (1972) conceptualization of ethnocentrism. while consumers with a high level of product familiarity use information about a product’s origin in summary for the overall evaluation of a product. 2000. 1989. a consumer necessarily needs to possess sufficient knowledge about a product’s country of origin. Johansson et al. 2001). 2004. consumers’ perceptions about country-specific product attributes directly influence their attitude toward country-specific brands or products.City-of-Origin Effects in the German Beer Market 257 image influences consumers’ attitude toward this particular product/brand (Crawford & Garland. Jaffe & Nebenzahl. However. While most studies have used negative attitudes toward foreign products in general. whereas symbols of other groups may become objects . Gross. Han (1989) found that the mechanism underlying country-of-origin effects depends on the consumer’s product familiarity. a limited number of studies have also investigated attitudes toward specific countries (Balabantis. Thus. p. and that is a key issue for all preceding approaches. a widely studied construct focuses on consumer ethnocentrism. this cannot be assumed and may lead to incorrect assumptions about a product’s respective origin (Ettenson & Gaeth. which was found to be superior over either model used separately (Jaffe & Nebenzahl. Thus. halo effect). Howard. & MacLachlan. & Melewar. 1985. Mueller.. Hong & Wyer. other studies report only very weak and marginally significant correlations (Heimbach. 1991). When consumers possess only a low level of familiarity with the respective product. The second stream of research relevant for our investigation focuses on consumer attitudes toward foreign or imported products and brands. 1989. Knight and Calanton (2000) recommend using a combination of both summary and halo effects in a flexible model.. However. if the country of a product’s origin is assumed to play a central role in the evaluation process. Within this type of research. while several studies exist that found a positive correlation between product familiarity and usage of information about a product’s country of origin (Johansson.

. . Consequently. the analysis of effects stemming from the fact that services or products have their origin near the consumer’s place of residence. The second relevant stream of research discussed previously (i.e.g. Ettenson. e. a stream of research which already begins to focus on an intra-domestic level (Hinck. cities. 2000). It is highly plausible to assume that in certain product categories (e. consumers’ attitudes toward foreign products) is captured through the concept of customers’ attitude toward buying local. might cause loss of jobs (Nijssen & Douglas. based on the preceding discussion. regions. as antecedents to attitudes and preferences toward local products.g. Knight & Calanton.. 2001. those with strong local and historical ties). we take up both streams of research and include them in our conceptual model. Drawing from Papadopoulos (1993). halo and summary effects. can contribute to a better understanding of processes which lead to product preferences. knowledge about product origin represents the halo effect facet of product origin concepts.. or even neighborhoods. research exists that specifically investigates the influence of negative attitudes toward a particular country on consumers’ attitudes toward products from that country (Klein. as highlighted by previous studies (e.e. of contempt.. In addition to consumer ethnocentrism. since the geographical focus is much narrower than when focusing on countries.. 1998).g. Ethnocentric consumers share a common belief that buying products which have been manufactured in foreign countries is unpatriotic and wrong since it has the potential to harm one’s own domestic economy and. While attitude toward city of residence focuses on the summary effect component. These smaller units may lead to an increased level of information diagnosticity.’’ Shimp and Sharma (1987) extended this concept to the domain of consumer behavior and conceptualized it as beliefs held by consumers about the appropriateness and/or morality of purchasing products made in or imported from a foreign country. Jaffe & Nebenzahl. namely halo and summary effects in the product evaluation process and ethnocentrism/ animosity aspects in product evaluation. First. Looking at the theoretical concepts that evolved in country-of-origin research. research in both streams has so far been limited to larger geographical/political entities. further geographical units appear plausible and need to be taken into consideration. Both facets are expected to influence customers’ attitude and corresponding preference toward local products. we use different types of origin conceptualizations.258 PATRICK LENTZ ET AL. However. 2004). Those aspects have not been investigated with respect to a product’s city of origin. 2004). i. they seem suited to be used in analogy in research targeted to the influence of smaller geographical/political units. & Morris. consequently.

. Since we agree on the arguments brought forward regarding the importance of this facet. Herein. nonetheless influential attributes about. cognitive dimensions that are employed during the process of buying goods. The test used as reference products 10 German beer brands that can be easily distinguished through origin. the city of origin or consumer ethnocentrism. We focused on consumers who had just purchased beer. with the distinctions being collected in a data matrix (Bannister & Mair. Qualitative Studies To the best of our knowledge. The test procedure is based on an advancement of the ‘‘Role Construct Repertory Test’’ by Kelly (1955) and basically involves the task that consumers should distinguish certain elements. but also more general. a simple transfer of existing theories and models will not necessarily be appropriate. we embark on exploratory qualitative research. so they did not have to report on an imaginary or previous buying decision. because of the completely different setting. market position. previous research has also stressed the importance of including consumers’ ethnocentric tendencies as well as their negative attitudes toward particular countries or regions in explaining consumers’ preferences toward specific types of products. The major aim of a repertory-grid test is to identify relevant. we carried out 21 personal interviews in a supermarket. we concentrate on identifying attributes that are considered relevant for purchase decisions about beer in particular. However. and price. We therefore undertake extensive exploratory research in order to assess the viability of using country-of-origin research insights in an intra-country context. we capture relevant aspects through a conceptualization of consumers’ attitudes toward buying local in influencing their attitude toward products from certain cities. In order to generate new insights and to assess the suitability of certain concepts from country-of-origin research for our field of investigation. no studies exist that investigate the cityof-origin effect on consumers’ buying decision.g. More than 90% of the consumers identified ‘‘good taste’’ as the most important product characteristic. To accomplish that.City-of-Origin Effects in the German Beer Market 259 Here. we used a two-step procedure which consists of a repertory-grid test followed by two separate focus groups. For our test procedure. The advantage of this two-step procedure is that we can include the results from the repertory-grid test within the discussion during our focus groups so that we are able to generate a deeper insight of the corresponding topics. e. followed by ‘‘local origin’’ (87%) and . 1968).

focus groups embody the advantages that spontaneous reactions can be triggered more easily and that salient characteristics and opinions can be made transparent. for example. the consumers did not know each other in advance. In contrast to single interviews. focus groups are well suitable as pre-analytical techniques for subsequent quantitative studies. we use these very preliminary insights as key discussion points in our focus groups.1 Sum of Ratings 106 79 52 47 39 66 33 40 39 No. we invited 16 beer-consuming men. since they allow for generation of a rather large number of relevant attributes/factors (Gordon & Langmaid. 1998). This allows for an investigation of different dynamics within the ongoing discussion.1 47. Percentage of Choice 90. such as a change of opinion or rather weak judgments within the discussion (Bellenger. Also. of Choice 19 18 16 16 16 15 12 10 8 ‘‘brand awareness’’ (71%). Construct Good taste Local origin Brown bottle Appealing label design Bottle design High brand awareness Bottle cap Good reputation Reasonable price Most Important Product Cues. opinions.6 38. and motives as well as attitudes toward the process of buying beer. Through this exploratory character.5 86. income. Only less than half of all consumers think that a ‘‘reasonable price’’ and a ‘‘good brand image’’ represent salient characteristics (see Table 1). & Goldstucker. Focus groups are able to identify relevant topics and aspects of buying decisions related to beer and thus they can complement to the results from both the literature review as well as the repertory-grid test. aged 25–60 and living in the Ruhr-Rhine area. Next. a characteristic that facilitates and intensifies an ongoing discussion within the . to participate in one of the discussion groups. We carried out two separate and independent focus groups to identify further information. A focus group consists of interviews that are carried out by a moderator with a small group of interviewees with largely different backgrounds (Morgan. Therefore. marital status. With respect to demographic criteria like. 1976). level of education. Table 1. 1988). These results already show that the beer’s origin is an important factor in a customer’s buying decision. we generated a mixture so as to achieve a focus group as heterogeneous as possible.2 76.260 PATRICK LENTZ ET AL. Bernhardt.7 76.4 57.2 76.2 71. and professional position.

we used content analysis to identify relevant topics. Interestingly. those participants who showed a high level of knowledge about different brands’ regions or cities of origin place less importance on a beer’s origin for their buying decision. arguments. participants identified the quality of different beers as a salient criterion. 1998). we additionally developed a protocol. participants revealed difficulties in naming different beers’ cities or regions of origin as long as they originate from cities or regions different from the participants’ residence. This additionally supports our arguments that the beer’s city of origin is an important factor in a consumer’s buying decision. Importantly. the different categories of bitter and mild beers. all participants agreed that a focus on the region or city of origin is necessary since the country level is much too general when it comes to the assessment of a beer’s quality with respect to its origin. the most important criterion in both focus groups has been identified as the beer’s origin. if possible. an ordered set of questions already formulated in complete sentences. All participants agreed that the region or city in which a beer is brewed has major implications on both taste and quality and thus is used as a major determinant of a customer’s preference for different brands of beer. which in last consequence leads to a positive attitude toward these local products. that is. most participants report to buy brands from preferably rural areas. Since both focus groups have been audio taped and thus could be transcribed completely. and thus pride in their local products. from their own city of residence in order to support local industries. 1998). in both focus groups. Further. most of the participants revealed a high level of local orientation and patriotism. There seems to exist an effect that carries over both positive and negative attitudes which exist toward the city on products having their origin in this particular city. In other words. They demonstrated pride in living in that particular region or city. that is. Results from both focus groups reveal that the beer’s taste is a dominant criterion related to buying beer. Significantly. Also.City-of-Origin Effects in the German Beer Market 261 group (Morgan. . participants revealed a strong relation between their attitude toward local products and their corresponding attitude toward their city of residence. However. Additionally. and typical expressions of the participants (Krueger. they buy products. the less important this knowledge becomes for their decision process. although they had major problems in objectively rating a beer’s quality. Since the aim of this focus group is to identify relevant attributes and characteristics that are related to the decision of buying beer. This protocol helps us to compare the outcome of both focus groups and thus facilitates the later analysis. the more our participants know about the origin of different products within different categories. that is. Only if no local brands exist.

Altogether. which played a major role in the preliminary research undertaken for this project. 1992) as well as our qualitative research. Papadopoulos. we obtained some interesting insights into consumers’ buying decisions related to local products. 1984. Schaefer. and freshness as well as intentions to offer this product to friends and family (e. Attitude towards city of residence + + Attitude towards local products Preference for local products Attitude towards “Buy Local” Knowledge of product origin + + + Fig. but both the concepts as well as the operationalizations have to be adopted when focusing on city-of-origin effects. we find that the same mechanisms seem to be present as with country-of-origin effects. is labeled attitude toward local products. Overall. & Bamossy. a theoretical model to investigate and explain preferences for products produced in the city of residence is developed and shown in Fig. Preference for local products is conceptualized as a construct with behavioral character. Heslop. Parameswaran & Pisharodi.262 PATRICK LENTZ ET AL. Next. 1986. which came up in both previous studies of countryof-origin effects (Forgas & O’Driscoll. 2. It is defined as local products’ rank order of preference according to the perceived attractiveness for the buyer. DEVELOPMENT OF A CONCEPTUAL MODEL On the basis of country-of-origin research as well as our qualitative studies. 1994. 1990. Another concept. we combine the results from both the literature review as well as from our qualitative studies so as to develop research propositions and a conceptual model. taste. 2. This construct is defined as subjective perceptions of local brewery products and captures beers’ quality. Pisharodi & Parameswaran. Ofir & Lehmann. Conceptual Model.g. A key construct in explaining preference for local products. . 1997)..

Shimp & Sharma. 1997). Attitude toward ‘‘Buy Local’’ is very closely related to consumer ethnocentric tendencies and thus conceptualized as a representation of consumers’ beliefs and attitudes about the appropriateness of purchasing nonlocal products (Nijssen & Douglas. cleanliness. H3. located at a . H2.. & Lichtenstein. 2004. and depicts several characteristics of this city. 1985..g. Methodology To test our hypotheses and the resulting research model. 1989. H4. friendliness. 1992).. e. modernity. H1. 1987).000 inhabitants). using a standardized questionnaire in combination with personal interviews. This concept captures subjective opinions and views about the city of residence. Pecotich. 1987). and 106 in Duisburg (510. 1985). 1998. i. The level of knowledge about goods’ local origin in a product category has a negative impact on the preference of products made in the consumer’s city of residence.. is knowledge of product origin. 1997) as well as halo effects (Erickson et al. Schaefer.e. and trustworthiness. general attitudinal research (Allen. 1987. we formulate the following hypotheses. Consumer knowledge about the origin of a product should be regarded as a multidimensional construct. the higher the attitude toward local products. Pecotich et al.000 inhabitants). & Roth. 1996. A final concept identified in previous investigations as well as in our qualitative study. and results from our qualitative work. Based on country-of-origin research with a focus on the level of product knowledge (Darling.. 106 in neighboring Bochum (380. Netemeyer. consumer ethnocentric tendencies (Klein et al. 1996. Shimp & Sharma. Pressley. The more positive the attitude toward local products the higher the preference for (the willingness to buy) products with local origin. A more positive attitude toward ‘‘Buy Local’’ leads to a more positive attitude toward products produced in the city of residence. Han.000 inhabitants). Johansson & Thorelli. 1984. 104 persons participated in supermarket intercept interviews in Dortmund (a city of 590. it should capture both objective and subjective components (Schaefer. Durvasula.City-of-Origin Effects in the German Beer Market 263 is related to the attitude toward the city of residence. we collected data from 316 participants in three major cities in the Ruhr-Rhine area.. The more positive the attitudes toward the city of residence. & Schultz Kleine. Machleit. 1991. Johansson et al.

i. and high-priced beer. choosing brand names that are mostly unknown to study participants likely weakens the effect that a particular brand might have. medium. Taste is captured by two major facets that relate to the taste of beer. city of origin. we employed both conjoint analysis and structural equation modeling.’’ It is a highly controversial issue whether to choose brand names that are mostly known or mostly unknown to the respondents..e.’’ ‘‘Lakefront. mild. the participants reflected a variety of different demographical types. 8h. Price also consists of three different facets. In analyzing these data. and 10h. and brand name. we decided to include brand names that are mostly unknown to participants. ‘‘Harpoon.e. this part also addresses issues of measurement reliability and validity as well as goodnessof-fit tests for the overall structural model.. The final brand names chosen represent existing American beer brands. among others. we subsequently analyze the conjoint data both for the pooled sample as well as separately within each of the three cities. i. distance of 40 miles from Dortmund. Cities of origin included in the design represent the same three major cities in which the data has been collected. with no significant differences in age. The price levels have been chosen in alignment with the standard prices on the German beer market. price. and we fear that wellknown and familiar brand names could unjustifiably capture participants’ attention. while structural equation modeling identifies a causal structure between attitudes toward local products. respectively. taste. Weighing these arguments. i. with actual memory values of 6h. Altogether. buying local.’’ and ‘‘Acadian. and income levels found between the three cities.264 PATRICK LENTZ ET AL. education. However. low. In addition. since we are also very interested in the remaining three factors of our study. We operationalized our measures . Conjoint measurement helps us determining the relative importance of a product’s local origin. so that biases are unlikely. which diminishes the importance of other characteristics that might be of relevance. In order to infer about the importance..e. The second methodological section focuses on a structural equation model in order to test the set of hypotheses. The conjoint measurement design consists of four different factors. and preference for local products. since marketing communication related to specific brands largely differs in both quality and quantity.e. Finally. brand name represents three different brands.and bitter-tasting beer. most familiar brands ‘‘earn’’ their reputation through advertisements and related marketing communications.. i. which however should be mostly unknown to German consumers. Also. Including familiar and well-known brands could lead to overemphasizing the importance of a brand name factor. since many respondents possibly choose the brand that they like or that they are mostly familiar with.

1987). i. and a few additional items created through exploratory qualitative research. Papadopoulos et al. the corresponding city of origin shows the largest relative importance for making a buying decision. we first focus on descriptive results obtained from conjoint analyses for the pooled sample. either mild or bitter tasting) shows a relatively weak importance for a consumer’s buying decision. The taste of beer (i. (1990) to capture ‘‘Attitude toward City of Residence. brand names do not show any strong importance (16. we employed 11 items from.e. since we used brands that are most likely unfamiliar to study participants. While the subjective knowledge component was derived from our qualitative research and consists of three items.e. 1993. In detail.City-of-Origin Effects in the German Beer Market 265 based on a combination of existing scales adapted from the literature. as reflected by results taken from a conjoint analysis. when making a buying decision.75%).11%. with a smaller. RESULTS Before testing our hypotheses.’’ 8 items to measure ‘‘Attitude toward Buy Local’’ (Shimp & Sharma. ‘‘knowledge of product origin’’ consists of four items. Here we also find that. The level of ‘‘knowledge of product origin’’ is operationalized through two different facets. In detail. 1993). a beer’s city of origin yields an average relative importance of 32. Finally. This facet is further emphasized when concentrating on the three sub-samples. with a diverse content. one measuring the objective component. among others.69%. An overview of the items employed in this study can be found in the appendix.. namely. the remaining three focusing on subjective knowledge. This is even more than is attributed to the price of beer. Not surprisingly. and 6 items to operationalize ‘‘Attitude toward local products’’ (Tse & Gorn. with a value of 21. the objective knowledge is measured by an indicator which captures the number of different beers’ cities and regions of origin participants were able to identify. the third item shows estimated utilities of local brands. While two items capture the rank order from experiments. Consequently.45%. Tse & Lee. specifically when focusing on different brands of beer. with values ranging . on the samples collected in the three different cities. as expected. but still high relative importance of 29. objective and subjective knowledge. Overall. this underlines the attention that should be paid to communicating a product’s city of origin. where participants were asked to rank different brands of beer as well as different cities as origins of local beer.. These results show that the city of a product’s origin evidences a strong importance for a consumer’s buying decision. ‘‘preference for local products’’ is operationalized through three items.

123 À0.236 À0.469 À0. Second. in an exploratory factor analysis.390 À0.513 À0.324 27. Additionally. Furthermore. yielding support for convergent validity (Morrison.94.32.136 À0.55% 1. In addition. ‘‘brewed in Bochum’’ and ‘‘brewed in Duisburg’’) show large negative values of À.11% 0./Util. 18. Sample Results from Conjoint Analysis. First. Following these more descriptive insights.028 30.99% À0.4%.333 1.11% À0. respectively.24).194 0. & Black.469 Pooled Imp./Util. we find strong positive utilities for the corresponding cities in its respective sub-sample. we conducted analyses into the validity and reliability of our measures.63 and 0. with factor reliabilities larger than 0.018 0.96% À0.96 to 34.002 À0. 1994).031 0..066 22./Util. in the Dortmund sample we find a strong positive utility for the facet ‘‘brewed in Dortmund’’ (1.e.547 1. 1991.016 0..068 À0.446 À0.250 Duisburg Imp. Tatham.060 31.321 À0. 1978). based on both eigenvalue criterion and scree plot (Hair. we find that all item loadings are significantly different from zero (po0. hence yielding additional support for the measurement properties of our scale (De Vellis.919 À0.020 32.77% 0.75% À0..072 À0. Dortmund Imp.1 and 69.04% À0. with extracted variances between 58.122 À0.43% À0. we find one factor extracted for each of the five constructs. Nunnally.308 0./Util. Cronbach reliabilities are estimated between 0.208 21. Table 2. Brand name Harpoon Lakefront Acadian City of origin Dortmund Duisburg Bochum Price 6.h per box 10. while the other two facets (i.255 0.92 and À.25% 0.55%.75% À0.266 PATRICK LENTZ ET AL. the overall measurement model is clearly supported. in a confirmatory factor analysis.h per box Taste Bitter tasting Mild tasting 16.042 19.068 34.154 32. 13.044 À0.25% 0..243 À0. For example. In detail.45% À0.28% 0. Anderson.390 from 30. and average variances extracted exceeding highest variance shared.739 29.034 21.002 29.001).446 Bochum Imp.68.63% À0. Details about results from the conjoint study can be found in Table 2.5) on this factor.516 0. all items without exception exhibit relatively large loadings (>0. indicating . 1998).250 À0.69% 0. 18.h per box 8.323 0.289 0.124 0.

07 Attitude toward ‘‘buy local’’ Attitude toward city of residence 0. RMSEA ¼ 0.12(0. CFI ¼ 0.001). Similarly. Furthermore.053 . Next.09(. 1981). CFI ¼ 0. we aggregate our original set of items so that finally we employ three aggregated items for each construct. we investigate the structural part of the model. sRMR ¼ 0. model fit indices are also indicative of good model fit (w2 ¼ 531. NFI ¼ 0.933. again using confirmatory factor analysis.48). Owing to the large number of items per construct and the relatively complex structure of our model. sRMR ¼ 0.52 Knowledge of product origin Attitude toward local products Attitude toward ‘‘buy local’’ Attitude toward city of residence À0.958. NNFI ¼ 0.16(. We therefore aggregate our set of items and re-analyze the aggregated data.81(07) — — À2.08 — — — — 0. Based on Bagozzi and Heatherton.052.933. we use a partially disaggregated model for further analyses.970.68).961.40 (d. R2 b(e) Direct Effects T R2 Indirect Effects b(e) T Independent Variable Attitude toward local products 0.18 2. The results from a maximum likelihood estimation using LISREL 8. NFI ¼ 0.056. NNFI ¼ 0.881. RMSEA ¼ 0.f. we yield highly acceptable estimates for indicator loadings (all po0.63 0.13(0.06) — — 2.05) 0. after confirming measurement properties of the scales employed in our study. NFI ¼ 0. CFI ¼ 0.City-of-Origin Effects in the German Beer Market 267 discriminant validity (Fornell & Larcker. ¼ 287).049.20(0. ¼ 80). NNFI ¼ 0.58 (d. with all indices supporting high quality measurement (w2 ¼ 146. RMSEA ¼ 0.6(po0.001). Dependent Variable Results of Structural Equation Model. and thus focus particularly on the hypotheses developed above..25 11. factor reliabilities (>0. and variances extracted (>0. yielding strong support for our proposed measurement.049). this is a legitimate procedure once acceptable measurement properties of the completely disaggregated model have been confirmed (Bagozzi & Heatherton.54 can be found in Table 3. 1994).66 — — — — Preference for local products Overall Model Fit Indices: w2 ¼ 156.e.941. 83 sRMR ¼ 0.07) 2.938.f.06) 0.967. i. Table 3.20 2.069).04) 0.

2004). For the management of local products. Building on research by Knight and Calantone (2000) it is safe to conclude that both halo effects and summary effects shape city-oforigin effects at the same time.13. our hypotheses are strongly confirmed. while customers’ level of knowledge about local product origin. and we therefore advocate putting more emphasis on research with regard to origin effects of different geographic and political entities. the city-of-origin effect provides a basis to stress the local attachment and thus either fight competitors from outside. knowledge of city-of-origin effects may be used to assess customer-related affective mechanisms in export or international markets which lead to more or less harsh competitive . Our qualitative as well as our quantitative results clearly show that such an effect exists. stressing the local origin in the city and at the same time playing it down in the outside market). Following up on the results obtained there is strong evidence that cityof-origin effect mechanisms are very similar to the well-researched countryof-origin effects.05) and 0. the trade-off between higher costs on the one hand and potential benefits on the other has to be considered. In more general terms. as they are all supported by the data. DISCUSSION AND CONCLUSION The present paper for the first time empirically focuses on city-of-origin mechanisms.268 PATRICK LENTZ ET AL. We also could show that consumers’ attitude toward buying local functions in a similar way as attitudes toward foreign products on the national level (e. Generally speaking.05). In detail. Furthermore. with a large path coefficient of 0. with estimated standardized path coefficients of 0. po0. The managerial implications of our research are twofold. as expected.. Nijssen & Douglas.20 (po0. or to develop a unique selling proposition based on the local competence in a larger market.001).01).. but our results provide no evidence that other theoretical concepts might be necessary when trying to capture the mechanisms of origin effects with respect to different entities or loci of origin. We caution against overgeneralization.g.g. From an international marketer’s perspective. focusing on differentiated marketing activities (e. respectively.12 (po0. we find that both attitude toward buying local products and attitude toward the city of residence exert significant and positive effects on a consumer’s attitude toward local products. exerts a negative effect on customers’ preference for products with local origin (b ¼ À0.81 (po0. attitude toward local products dominantly and positively affects customers’ preference for locally produced products.

for example. Is it justified to assume that we see very homogenous reactions with respect to the city of origin. Although we do not expect largely different results for these different entities. does the effect hold across countries and cultures? Are there societal differences (e.g. in contrast. they need to be investigated before conclusions regarding the generalization of our findings can be drawn. Consider. Certain products are by themselves more origin bound than others. important questions are whether in addition to the limited conceptualization we used. Our results are exploratory and probably raise more questions than they answer. The higher the city-of-origin effects in particular industries the higher the entrance barriers in those markets and hence more localized entry strategies like acquisition of local firms and brands. First of all. it obviously provides several avenues for future research. since we exclusively focused on cities as geographic entities. intra-cultural differences within a country. as well as in the transfer of theoretical and conceptual ideas – albeit done in a very cautious way – from quite a different level of abstraction. to trade zones on the one end of the spectrum or neighborhoods on the other.. like for example food and beverage products or. but they provide a strong proof of the basic effects. From a research perspective. In general. for example. Another aspect concerns the type of customer involved. Closely related to that question is the generalizability of the city-of-origin effect across industries or product categories. Considering city-of-origin effects may also help to understand why some products or service providers are more successful in certain parts of a country. but not in others. it seems worthwhile to expand our ideas to other entities as well. or is there a considerable difference between segments in the market? Finally. the higher mobility of citizens in the US as opposed to Europe) that lead to less city-of-residence identification and pride and thus to less propensity to prefer products from the near surroundings? Since our research is highly exploratory. or interregional differences in economic and welfare development as sources for like and dislike of products within or outside a city. Specifically. and close co-operation with local distribution channels are effective for increasing market penetration. The core limitations lie in the specific product category used. localized advertising messages. further research on the effect of products’ or services’ . the field work in only one region in one country. a completely different set of antecedents to the preference of local products exists. it seems likely that product categories differ with respect to the importance of the effect. cosmetic products. more or less homogeneous national institutional backgrounds. regional rivalry.City-of-Origin Effects in the German Beer Market 269 environments.

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a ¼ 0. safeguard our jobs It is not right buying products from different cities whenever it is possible to buy products from oCity>.27 oCity> is y y sympathetic y friendly y pleasant y peaceful y attractive y clean y trustworthy y competent y modern y successful y close to my heart Attitude toward buying local 6-point scale. whenever possible.75. a ¼ 0. Strongly Agree/Strongly Disagree. AVE ¼ 0.City-of-Origin Effects in the German Beer Market 273 APPENDIX: OPERATIONAL MEASURES OF STUDY CONSTRUCTS Attitude toward city of residence 6-point scale.51.94. since people from oCity> could become unemployed A real inhabitant of oCity> should always. Strongly Agree/Strongly Disagree. a ¼ 0.48.32 Inhabitants of oCity> should always. AVE ¼ 0. I always buy products from oCity> in order to support the local economy I would always prefer food from oCity> to others I am proud of our local products Knowledge of product origin 6-point scale. Strongly Agree/Strongly Disagree. when possible. buy products produced in oCity> We should only buy those products from different cities which are not produced in oCity> Whenever possible. HVS ¼ 0.30 .74. HVS ¼ 0. HVS ¼ 0.83. AVE ¼ 0. buy products from oCity> instead of buying products from different cities Buy products from oCity>.

42 Beer from oCity> is sympathetic I enjoy offering beer from oCity> to friends Beer from oCity> is of highest quality Beer from oCity> is guaranteed fresh Beer from oCity> is enjoyable Beer from oCity> tastes very good Preference for local products a ¼ 0. I know which beers are produced in oCity> I know in which cities most beers from my region are brewed For most German beer.68.74.) Attitude toward local products 6-point scale.42 Rank order from experiment 1 Rank order from experiment 2 Relative importance of local origin for buying beer taken from conjoint analysis . I know where they are brewed Knowledge index (Number of correctly specified regions and cities of origin for different beers.44. Strongly Agree/Strongly Disagree. AVE ¼ 0.274 PATRICK LENTZ ET AL. a ¼ 0.89. HVS ¼ 0. HVS ¼ 0. AVE ¼ 0.

They also provide important partnership opportunities to foreign firms when they enter these markets. 275–294 Copyright r 2007 by Elsevier Ltd. Volume 17. business groups have not received sufficient attention in the international marketing literature. In this paper. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. Our work should inspire research questions for future study. We also present evidence on business group evolution from one emerging market. Yet. we provide an overview of the theories that explain how business groups function and evolve in emerging markets and generate propositions from that theory. Osborn ABSTRACT Business groups have become a significant phenomenon in the evolution and functioning of emerging markets. Turkey. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing.HOW DO BUSINESS GROUPS FUNCTION AND EVOLVE IN EMERGING MARKETS? THE CASE OF TURKISH BUSINESS GROUPS Attila Yaprak.1016/S1474-7979(06)17010-6 275 . Bahattin Karademir and Richard N.

operate in. e. which have been able to develop capabilities that are valuable. India. the evolution of the context in which firms evolve and strive for high performance has become even more significant with the accelerated pace of technological change and globalization.. scholars who study the international dimensions of business have not yet focused sufficient attention on the emergence and functioning of business groups in emerging markets. In fact. and Brazil. A key ingredient in this evolution has been the development and success of business groups. Second. and regulatory mechanisms in those markets. distribution systems. such as rapid diversification into unrelated product lines and repeated industry entry (Guillen. . 2005). Nowhere is this evolution more pronounced than in the world’s rapidly transforming economies. indeed. First. Chang. Third. Day and Montgomery (1999) projected that the functioning and evolution of markets would be a significant issue that would require special attention from marketing scholars in the first decades of the 21st century. rare. and inimitable in these contexts. the Academy of Management Journal dedicated an entire issue to the topic in 2000 and has dedicated considerable publication space to studies examining this issue since then (see. 2000). such as China. studies of these groups could unearth important insights about the cultural norms governing exchanges. where firms are evolving with fascinating patterns of development.g. often conglomerated family firms. whether with prospective foreign partners who are seeking market access or knowledge.276 ATTILA YAPRAK ET AL. They also identified firms’ relations to their markets as another significant issue. and expand from. this ought to be a significant question for international marketing scholars to examine for a number of reasons. 2003). This fascinating pattern of evolution has generated considerable interest in the management literature recently. Yet. since business groups are typically significant players in the economic functioning of emerging markets (Khanna & Yafeh. especially in those markets that are less familiar to them. and projected that firms would increasingly relate to their markets through collaborative arrangements and partnerships to improve their performance. INTRODUCTION In their seminal review of marketing in the New Millennium Issue of the Journal of Marketing. their study could provide valuable insights about the nature and functioning of the markets international marketers will penetrate. In the short span since that review. such studies could provide a better understanding of the partnering behavior by indigenous firms in those markets. marketing infrastructures.

How do Business Groups Function and Evolve in Emerging Markets?


or with other networks in their markets who might be pursuing economic gains (Khanna & Palepu, 2000; Guillen, 2000; Kock & Guillen, 2001). Yet, we know very little about the behavior of these groups in emerging economies (Khanna & Yafeh, 2005), such as China and India, even as these economies have been growing as important consumer markets and international expansion platforms recently (Prahalad & Lieberthal, 1998; Prahalad, 2005). We hope to contribute to a better understanding of business groups with our current paper. In response to Day and Montgomery’s (1999) call, we hope to examine why business groups develop and prosper in emerging economies, how they might help prospective multinational businesses enter and expand from an emerging economy, and how they might help emerging markets develop and prosper economically. We believe our work is significant on, at least, two grounds. First, we bring insights from the literature on business groups in organizational theory to understand their role more fully in an international business context. Second, we present a discussion of business groups in Turkey as an example of the types of groups that multinational firms might want to embed themselves into in other emerging economies as they operate in these markets and evaluate foreign market expansion opportunities from them. Finally, we offer questions for future research. Our paper is organized as follows. We present the relevant theory of business groups and derive propositions about the evolution and role of business groups from that theory. We then present a brief discussion of the evolution and functioning of business groups in Turkey to underscore the significance of our propositions. We then offer questions that future researchers might address to enhance knowledge about business groups.

A growing literature on the evolution and role of business groups in emerging economies has surfaced recently (see, e.g., the Academy of Management Journal, 2000, Special Issue). This literature has defined business groups as collections of firms pulled and bound together in formal and informal ways in an intermediate sense (i.e., excluding strategic alliances and firms that are legally consolidated into a single entity) to achieve an economic purpose (Granovetter, 1994), and as coalitions of organizations that go beyond those created by temporary alliances among two or more otherwise independent firms that do not constitute a legally consolidated or integrated company



(Guillen, 1997). Business groups are said to be more diversified and generate greater economic impact in their respective markets and invest more heavily and in greater numbers of industries when compared to their independent counterparts in their markets (Kim, Kandemir, & Cavusgil, 2004). Granovetter (1994) suggests that the existence and development of business groups should be viewed through essentially four separate lenses: (1) resource dependence (firms routinely depend on other firms for resources they do not possess); (2) need for strategic partnerships (it is in the nature of markets and consumer demand to change, and the pace of change has accelerated recently due to globalization and the technological revolution); (3) desire to extract rents from the economy or the government through coalitions over and above those which can be gotten in a properly competitive economy; and (4) need to form coalitions of capitalists against social interests (the Marxist explanation). That is, transaction costs theory, institutional theory, and political economy theory should all play a part in explaining the existence of business groups in emerging markets (Guillen, 2000; Khanna & Palepu, 2000). Economists explain the existence of business groups as microeconomic responses to conditions of market failure, especially imperfect markets in capital and 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 for entrepreneurial talent, product markets, labor markets, and cross-border markets for technology as well, which lead to preferential access, for instance, to capital (Khanna & Palepu, 2000; Chang & Choi, 1988), and as responses to agency problems in the market, whereby firms are able to secure intermediate goods with lower costs and less uncertainty by joining or forming groups rather than procuring them through the market or integrating vertically (Granovetter, 1994). Business groups exist in this view only in the absence of a well-functioning market, i.e., they enhance value by serving as functional substitutes for allocation failures in the markets for production inputs (Khanna & Palepu, 2000). There are many market failures in emerging markets such as India, in sharp contrast to advanced economy markets, such as the United States. Khanna and Palepu (2000) argue that these imperfections typically include an inadequate marketing infrastructure, lack of regulatory discipline or frequent changes in the regulatory environment, political and economic instability, and poor dissemination of market information. In markets like the United States, where there is relatively efficient intermediation in markets, entrepreneurs are not as likely to seek association with firms that are

How do Business Groups Function and Evolve in Emerging Markets?


diversified across unrelated industries, while in an emerging market such as India, where market intermediation is relatively inefficient, firms will prefer to be associated with other firms that are diversified into many industries to extract potential benefits they otherwise could not extract by themselves (Khanna & Palepu, 2000). Further, as Khanna and Palepu (2000) underscore, there is typically inadequate disclosure or opaque governance and control mechanisms; financial intermediaries such as investment banks are not fully evolved; and the enforcement of securities regulations is typically erratic. Thus, in light of the accumulating transaction costs these imperfections place upon them, independent firms will find it more profitable to pursue business opportunities when associated with a large, diversified business group that will act as an intermediary between them and imperfect markets (Khanna & Palepu, 2000). Given that these firms can access a variety of other benefits in labor, product, and technology market intermediation as well through their association with business groups, they will prefer association over nonaffiliation. Therefore, business groups present benefit opportunities to unaffiliated firms to overcome market imperfections (Guillen, 2000). In suggesting a curvilinear relationship between enhanced performance effects through affiliation with a diversified business group, Khanna and Palepu (2000) argue that there are also costs to this affiliation that need to be considered for a completer picture of business group benefits. For example, governance costs might rise due to conflict of interest among the affiliated firms; economically inefficient decisions may continue due to weak disclosure requirements, ineffective governance mechanisms, and underdeveloped corporate control mechanisms; and fixed costs may accelerate in enforcing intra-group contracts. While these cost effects will undoubtedly surface, all things considered, business groups should provide a market intermediation opportunity to firms operating in imperfect capital, product, labor, and technology markets, especially in the earlier phases of a market’s development. 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 of business groups will be in those markets. Sociologists, for their part, explain business group formation by the gains realized through social solidarity and social structure among component firms that are identifiable by such things as region, ethnicity, kinship, or religion, 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 business group formation in the Korean chaebols; kinship and ethnic bonding in Chinese business groups in Thailand and Indian groups in East Africa; geographic region and ethnicity-based solidarities in the ethnic enclaves of Cuban business groups in Southern Florida, and in the multiple axes of solidarity based on government, local business, and capital elites found in the grupos in Brazil (Granovetter, 1994). Indeed, as Khanna and Palepu (2000) underscore, some sociologists argue that business groups provide a special kind of kinship in which economic and kinship bonds become inextricably intertwined, and where a moral community is created within which the likelihood of opportunistic behavior, a core component of transaction cost economics, is lessened. They further argue that through their encouragement of information dissemination among group members, by reducing the possibilities of contractual disputes, and by providing a mechanism for efficient dispute resolution, business groups provide mechanisms for 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 structure needs of component firms in a market, the greater the importance of business groups will be to the functioning of that market. Some sociologists also feel that firms are by-products of the social and institutional contexts surrounding them, and therefore, different social and cultural patterns will spawn different types of organizations (Guillen, 2000; Kock & Guillen, 2001; Kim et al., 2004). Therefore, as Guillen (2000) suggests, the value-creation potential of business groups will change as their ambient institutional context changes. Further, they will likely flourish in markets with vertical relationships, such as in South Korea, but not in societies where reciprocal or horizontal relationships are the norm, such as Taiwan (Guillen, 2000). This sociological rationale is supported by economic reasoning. For example, Chang and Hong (2000) argue that the economic performance of group-affiliated firms are likely to be higher when compared to independent firms as group-affiliated firms benefit from group membership through the sharing of both intangible (social solidarity) and tangible (financial resources, intra-corporate trade) ties with other member firms, specifically as a result of the cross-subsidization of various intragroup transactions. Chang (2003) underscores the performance benefits of this cross-subsidization view through evidence that shows that controlling shareholders in South Korean chaebols typically use insider information to

How do Business Groups Function and Evolve in Emerging Markets?


take direct and indirect equity stakes in promising firms and transfer profits to affiliates primarily through intra-group trade. Thus, we propose that: Proposition 2b. The more vertical the pattern of relationships are in a society, the greater the importance of business groups will be to the functioning of that market. Management scholars explain the performance effects of business groups on value creation in certain industry sectors and national economies, and suggest 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 investment environments typically found in emerging economies (Guillen, 1997, 2000). For example, Ghemawat and Khanna (1998) view business groups as socially counterproductive rent seekers that are able to absorb disproportionate amounts of rent in an economy to the detriment of the majority of the population. In the same vein, Guillen (2000) theorizes that autonomous states with the ability to allocate capital and other resources at will, will encourage a few favored entrepreneurs to enter new industries, and will seek the political support of these entrepreneurs by enabling them to exploit rentseeking opportunities. Thus, the greater the autonomy of the state, the greater the importance of business groups will be in that economy. Thus, we propose that: Proposition 3a. The greater the opportunities for favored rent-creation in a market, the more business groups will flourish in that market. An extension of this reasoning, offered by Guillen (2000), stipulates that business groups will develop and flourish in economies where asymmetries in inward and outward trade and investment flows, typical of emerging economies, persist long enough to allow chosen entrepreneurs and firms to develop and maintain an inimitable capability to combine foreign (i.e., capital, technology, know-how, access to foreign markets) and domestic resources (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 context will only be sustainable to the extent that asymmetries in trade and investment persist over time, making their capability inimitable. Otherwise, any entrepreneur, including foreign multinationals, will be able to enter new



industries, currently the province of privileged entrepreneurs. Thus, we propose, in line with this reasoning, that: Proposition 3b. The greater the asymmetries in foreign trade and investment in an economy, the more important the business groups will be in that market. Marketing scholars also comment on the significance of business groups in emerging economies. They study these groups through the lenses of exchange theory and market evolution. For example, in the context of exchange theory, Hitt, Dacin, Levitas, Arregle, and Borza (2000) suggest that business groups in emerging markets will be viewed by developed country firms as owners of unique competencies, such as local market knowledge and market access gateways, and thus as opportunities for partnership with which to enter markets, while emerging market firms will seek financial assets, technical capabilities, and intangible assets such as marketing expertise in partnerships with their developed market counterparts; these needs will provide the bases for efficient utility exchanges between developed country firms and emerging market business groups. Others propose in the context of market evolution that business groups will evolve through life cycle-like trajectories in emerging markets. For example, Kim et al. (2004) suggest that family conglomerates will evolve through three distinct stages. In the introduction stage, these firms will create an enterprise that responds to marketplace opportunities and fulfills unmet needs of consumers. Easy access to favored capital such as government contracts, lack of viable competition, and various early mover advantages will facilitate the enterprise’s growth in this phase. In the growth stage, these firms will diversify into related as well as unrelated businesses, fueled by the transfer of foreign technology and know-how through alliances with foreign firms, 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 will slow down or cease, giving way to international expansion opportunities, even through wholly owned subsidiaries and joint ventures in globally competitive markets. Others propose that business groups will evolve through a trajectory, much like the wheel of retailing in marketing, where as one type of business group reaches maturity and starts to decline in importance, another type will emerge to take its place, and following a similar trajectory, will eventually give way to yet another type of business group in response to the changes in the market environment. In their study of the evolution of Turkish business

How do Business Groups Function and Evolve in Emerging Markets?


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 superseded by two new types of groups, which they label encouraged (government favored), and loosely connected, export oriented, regional OEM supplier networks. Each of these prototypes appears to possess a different portfolio of characteristics and serve a particular purpose in economic development in response to the prevailing market imperfections of its time. This is in line with Khanna and Palepu’s (2000) findings on Chilean business groups which showed that the evolution of a group’s ambient institutional context alters its value-creating potential. For instance, paralleling Guillen’s (1997, 2000) rationale, the dominant groups, which flourished in the 1960s to the 1980s in Turkey, appear to have been the by-product of the populist/nationalist era in Turkey’s economic development which was characterized by protectionism, import substitution manufacturing, government focus on natural assets, and local ownership development (Yaprak et al., 2004). Emergent networks, by-products of Turkey’s turn to foreign investment attraction and opening of its markets to global competition in the 1980s, appear to have evolved from the natural institutional frameworks that were congruent with inward economic stability at home coupled with foreign direct investment attraction from abroad. Encouraged networks and regional networks, byproducts of Turkey’s rapid transformation into an emerging economy in the 1990s, appear to have been the result of export-led growth in created, not extracted, assets, coupled with a gradually opening external economy. To complete this life cycle, Turkish business groups would have to evolve through one more phase, much like those in Spain in the 1980s and 1990s, that would involve export-led growth based on created assets, but also pragmatic, internal stability that would help attract foreign direct investment (Guillen, 1997, 2000; Yaprak et al., 2004). While the empirical evidence we present here comes primarily from the Turkish context, we feel that our arguments that underscore this evidence will likely apply in other emerging market contexts, as well. Thus, we offer the following proposition: Proposition 4. Business groups will follow life cycle-like trajectories inspired by the ambient institutional context of their economies, such that one type of group will grow, mature, and decline as others will start to emerge, 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 a foreign market (e.g., Johansson, 1997). This literature has focused on



recommendations for expansion matched to the strengths and weaknesses of various firm characteristics, national factors, and specific strategic motives (Dunning, 1995). Studies in this stream have also suggested that any entry into a foreign market will tie the entering firm, implicitly or explicitly, to one of a number of business networks in that market; networks that are themselves embedded within the unique socio-political and economic context of that market (e.g., Guillen, 2000). The appropriate selection of such a network during entry will provide the firm not only with specialized opportunities, but also with substantial consequences on the performance of the foreign entry attempt (e.g., Larson, 1992; Lorenzoni & Loipparoni, 1999). Thus, these studies suggest that such network positioning and the type of network entered through a business group can be a significant ingredient in the success of the entry, particularly when entering emerging markets. The partner selection literature suggests that when entering a foreign market, the firm should seek a local partner with enriched capabilities, such as a track record of successful international cooperation (e.g., Geringer & Hebert, 1991). The firm is also warned about the problems it might face in foreign entry, such as likely opportunism on the part of the local partner and 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 its network of alliances (Ahuja, 2000; Osborn & Hagedoorn, 1997). Hitt et al. (2000), for example, suggest that prospective partners need to match their motives to one another. The motives typically associated with emerging market firms center on the need for financial assets, transfer of technical capabilities and competencies, and a willingness to share their expertise in local market access and knowledge. Conversely, firms from developed economies often seek access to market opportunities and knowledge, distribution channels, stimuli for new products and lower cost entry in return for their unique competencies and knowledge. Thus, we propose, consistent with Hitt et al. (2000) that:

Proposition 5. When entering emerging markets, entering firms and their business group partners must see benefits, including those that might accrue to the entering firm from the host partner’s willingness to embed the foreign partner in its local network of independent firms and ready access to its markets, and those that might accrue to the host partner from the foreign partner’s willingness to embed the host partner in its global network of affiliated firms and ready access to its markets.

the political and economic . albeit declining. establishing free trade zones. and the continuing. however. These reforms have promoted a unique pattern of business group formation into allied firms. Asia.How do Business Groups Function and Evolve in Emerging Markets? 285 We now turn to an examination of the evolution of business groups in Turkey. It has undergone a prolonged and sustained program of economic reform under a series of secular governments. implementing a flexible exchange rate policy. THE EVOLUTION OF BUSINESS GROUPS IN TURKEY With its unique geographical location. and deregulating financial markets. First. First. minimizing state intervention. if the evolutionary pattern we are proposing here is universal. Turkey has been implementing an open-market economic program since 1983. foreign firms have shied away from investing directly in Turkey during this period for precisely the reasons the theory we discussed earlier would suggest. state involvement in the national economy. Finally. 1994). our examination will help underscore the validity of the propositions we offered earlier for each of the business group types we have identified. The reform program has faced numerous difficulties until recently. The program has liberalized the Turkish economy and integrated it into the larger world economic system. Chile. Second. This is worthy for several reasons. an emerging market in Southeastern Europe. After abandoning protectionist economic policies. Turkey suffered through two consecutive economic crises in the last two decades. and later through such mechanisms as the Customs Union Agreement with the European Union (1996 to present). such as in Brazil. These reforms have included reducing the state’s involvement in the economy. this could help shed light on the development and progression of business groups in other markets. increasing imports. South Korea. encouraging foreign capital investment. The sustained problems in this context have been high inflation. and the Middle East. and Taiwan. Turkey is a natural gateway for simultaneous entry into Western Europe. the sizable public deficit. Implementation of these economic reforms has created significant structural changes in the Turkish economy (Bugra. liberalizing import regulations. Although Turkey opened up its economy to the world. the analysis of the nature and extent of market activity of each of these groups will help emphasize the role that each type might play in market entry of foreign firms into the Turkish market. initially in the 1980s through the Ozal reforms.

strategy. direct foreign investment by multinationals has remained very low. government red tape and the legal procedures governing foreign investment have remained archaic. new groups also emerged. and (4) regional networks. and Zorlu Holding). scope. technological concentration. We further argue that each type provides a distinct combination of costs and benefits and is involved in a different set of relationships with different sets of firms and institutions (Hoskisson et al. family-based holding companies dominate the business scene in Turkey (e. Sabanci Holding. Alarko Holding. environments. (3) encouraged networks. On top of all of this. and internationalization patterns. Holding Company Business Groups (HCBGs) A small number of highly diversified. structure. This gave the opportunity for these groups to profit greatly from diversifying into areas that were outside of their traditional business areas. 2000).. Besides the traditional business groups. 1. These groups share many common features with multi-activity firms found in other late-industrializing . Koc Holding. we suggest that there are four types of business groups in Turkey: (1) holding company business groups. Third. 2000). diversified their investments into the various sectors of the domestic economy and increased their cooperative arrangements and partnerships with foreign firms. the demand for most consumers’ goods has remained low. such as size. (2) emergent business groups. We now discuss the costs and benefits involved in partnering with each of these in entry into the Turkish market. Different from the traditional groups along several dimensions. marred by successive crises.286 ATTILA YAPRAK ET AL. Those that have invested chose to do so by using the major Turkish business groups as gateways to this promising emerging market. management philosophy. Second. alliance linkages. which gained a significant role in the Turkish economy during this period. Business groups. underscoring the similarities and differences among them. with unreasonable bureaucracies surrounding taxes and conflict resolution through the courts.. For all these market imperfections. due primarily to successive economic crises the country has experienced. these emerging groups started playing significant roles in attracting international businesses into Turkey and in expanding Turkey’s export effort abroad. the consumer market has remained shallow because of these economic and political crises. Based on research we conducted in Turkey (Karademir.g. have not been very attractive.

banking and finance in the recent past and retailing. most recently). they tend to be clustered networks with strong direct ownership ties that are reinforced by strong social ties based on kinship within a given industry. While the multinational firm bringing technology and access to capital and to foreign markets may well see an alliance with the HCBGs as consistent with a cost minimization strategy. one dominant strategy. indirect ties across industries (Ahuja. they are more likely structured. 1997). Walker. rather than conforming to a unified corporate form (Nohria & GarciaPont.. and operate as. Human & Provan. 1994). access to the national government. & Shan. a partnership with a multinational enterprise represents a way of internalizing an organizational form in place of the market (Williamson. As the business group literature suggests. Kock & Guillen. all seem to involve a mix of family control and less traditional corporate governance systems focused on sectors where they have major capital investments (Bugra. and control benefits from the partnership HCBG managers can make the links with the market directly. While the formal governance mechanisms of these groups seems to vary. and substantial local market experience in addition to a low-cost production platform for export and access to sophisticated managerial infrastructures.How do Business Groups Function and Evolve in Emerging Markets? 287 countries (Amsden & Hikino. Turkish HCBGs tend to be highly diversified with 60–100 companies present in their network. In these cases. networks of firms than single hierarchies. or even a singular managerial philosophy. Kogut. in other industries. 1991. 2001). 1991). 2000. While in industry sectors where they dominate they tend to be tightly integrated and coordinated. e-business. and technology. but comparatively weak. and show rapid diversification in a short period of time paralleling the transformation of the Turkish economy from import substitution manufacturing to export expansion liberalization after 1983 (Bugra. coordination. 1994.e. from the perspective of the HCBG. Partnerships with HCBGs typically involve investment projects where the HCBG provides local knowledge. It is apparent that this transformation was fueled by government incentives provided these firms to invest in underdeveloped but high-growth potential sectors and/or regions of the economy (i. the HCBG is likely to view its alliance with the foreign enterprise as a way of filling ‘‘structural holes’’ in its enterprise network. their structural patterns tend to follow trends that are consistent with their industry and/or technology and size. the textile and tourism sectors initially. This is because HCBGs do not tend to be singular organizational hierarchies with a single mode of organization. Thus. 1994). While for the multinational enterprise there is always the risk that once this gap is filled when the HCBG internalizes the knowhow. this is unlikely to occur . 1997).

with networks of subsidiaries composed primarily of small. EBGs have become attractive enterprises for foreign partnerships. tourism. They enter businesses faster than their HCBG counterparts and their foreign rivals. These groups appear to have followed growth paths similar to the HCBGs. EBGs’ limited international experience and managerial talent as well as their entrepreneurial approach to business pose major difficulties. however. Thus. due almost exclusively to their locations. Multinational enterprises that attempt to embed themselves into these networks face risks and challenges. such as advanced technology. primarily to the Turkic republics in Central Asia and Eastern Europe. such as foods and cereals. as do their tendency to be undercapitalized and over-diversified. machinery. While some are suppliers to the HCBGs. and are willing to cope with these challenges. Emergent Business Groups (EBGs) EBGs are closely diversified businesses in target industries.and medium-sized enterprises. 2. Like their more dominant counterparts. hence. they tend to enter international alliances to overcome economic uncertainties and their needs for capital and other resources. many seek to turn their local market knowledge into an important competitive advantage. but also to advanced economies. governmental agencies and customers as well as to suppliers and economic agents in labor . Most EBGs do not possess fully developed closed networks. which are targeted by the government for export-led growth. Like their more dominant counterparts in the first group. EBGs offer an excellent opportunity for local market development as well as international expansion.288 ATTILA YAPRAK ET AL. In addition to the lower costs and flexibility they offer. They typically enjoy cost economies. leather products. energy and drive. some have had a tendency to overdiversify into unrelated industries. they owe their extensive growth to government efforts to liberalize the economy. and so on. and managerial know-how. For those enterprises that are looking for partners with initiative. as long as the multinational firm is able to keep some of these assets proprietary and continues to innovate and thus preserve its superiority in know-how and other competencies. They tend to be entrepreneurial firms that enjoy very high growth rates. They tend to be connected via social ties to local financial institutions. automotive products. they tend to realize that an exclusive focus on serving these larger HCBGs in the form of Original Equipment Manufacturer (OEM) supply might be a disadvantage in the long run.

What these business groups provide are economies of scale and scope. but their readiness for international expansion remains suspect. As the ENs are chartered under government legislation and are exempt from antitrust provisions. The degree to which they have the internal capabilities to effectively promote exports is sometimes questioned. Encouraged Networks (ENs) With the development of Turkey’s Customs Union agreement with the EU in 1996. they are exempt from antitrust legislation. but are regional exemplars with a growing national presence (Baum & Oliver. kinship. as they appear to be connected to one another as well as to the central body through common social ties. down and/or across their initial value-added chains and industry sectors. Much like the entities legislated into being through the Export Trading Company Act in the United States in 1983. 1991). As their potential as productive partners comes not only from their location and internal competencies but also from their advantageous positions in regional networks.How do Business Groups Function and Evolve in Emerging Markets? 289 markets. and in some cases. 1995). the government has embarked on a number of initiatives to strengthen the international competitiveness of its small. typically. EBGs represent an important future for the Turkish economy. and as such. and specialization in those areas where they possess a comparative advantage. From a contractual standpoint. Many ENs have evolved into loose confederations of firms where only selected members participate in the international expansion of any one project. ENs are groups of local and regional firms producing similar products that are encouraged to cooperate in their international involvement efforts. economic interests. Those that are likely to be the most effective in internationalization are likely to be the ones that view themselves not as mere production platforms. not completely institutionalized within the national economic fabric. 3. They are. When viewed from a network perspective. Thus. but as centers of networks linking the East with the West (Lorenzoni & Fuller. these groups present an interesting picture. they appear to operate as an integrated entity when exporting and dealing with governmental . 2000). they represent excellent opportunities to multinational enterprises for productive partnerships. however (see Karademir. One of these initiatives has been the encouragement of sectoral foreign trade companies. the purpose of this initiative was to encourage Turkish SMEs into export and international investment involvement.and medium-sized enterprises. they are allowed to expand up.

They engage in contractual arrangements around specific projects through which they produce parts or products for original equipment manufacturers. While generally resource poor. Most appear to go outside their membership groups for key resources. each with a specific specialty. Social ties appear to be used to compensate for the lack of formal coordination and control. such as financial needs and foreign experience. ENs present promising opportunities. however. 1999). Internally. and qualified key personnel (Dyer & Nobeka. which are connected loosely through supplier arrangements. export abroad. however. 2000). as potentially productive alliance partners. Kogut. However. Regional Networks (RNs) Regional networks (RNs) are collaborating enterprises composed of smalland medium-sized firms. . higherquality products.290 ATTILA YAPRAK ET AL. and its ability to coordinate the often difficult operations of the members (Gulati. they are not as closely coordinated as industrial districts in more developed countries and often lack the sophisticated technology needed to compete in the international scene. They also provide to participating firms access to financial resources which individual firms cannot otherwise gain access to as easily. While we observe legal coordination among the members of these groups. In many respects. particularly those that involve the use of Turkey as a production platform for export into the EU and the Turkic republics in Central Asia and Eastern Europe. co-production. 2000). and the information systems necessary for effective linkage to their members. especially to smaller multinational firms. the multinational partner would have to be concerned about the willingness of the EN members to accept centralized strategic and technical guidance from the foreign partner. managerial direction for consistent strategic implementation. 4. and manufacture goods for final sale in the domestic market. agencies. These networks are formed to generate more advanced technological and marketing knowledge. technical tie-ups and the like in industrial districts with a focus on selected industries (textiles in the Denizli. they appear to be loose confederations of independent suppliers. automotive components in the Kocaeli regions). 1999. most appear to lack a defined strategy. these are similar to the industrial networks of third-tier suppliers in the more advanced economies (see Lorenzoni & Loipparoni. better knowledge of government incentives and controls. The critical element here is the presence of trust that keeps their loose arrangement together. Beyond the challenges of effective partnering.

India. and international marketing. We then presented a broad-brush picture of the evolution of business groups in one emerging market. research could probe the similarities and differences. studies should explore how such theories as social exchange in anthropology. 1995). . and specific strategic motives (Dunning. First. say Chile vs. Using Turkey’s economy and her business networks as a backdrop. they have not received sufficient research attention in the international marketing literature. We first presented the relevant literature on why business groups exist and how they evolve in emerging markets through five sets of propositions we derived from economics. For example. sociology. Turkey. In this paper. or South Korea vs. scholars could question why certain types of groups are more effective while others are not even within the same environmental context.How do Business Groups Function and Evolve in Emerging Markets? 291 CONCLUSIONS AND FUTURE RESEARCH QUESTIONS Although business groups have emerged recently as significant forms of industrial organization. their role in the functioning and evolution of their ambient environments has not been studied extensively. Turkey. especially in emerging markets. Finally. resource dependence in sociology. this literature has not considered the role that business groups in emerging markets might play as local networks in the international expansion of developed country firms or their expansion from emerging markets. and complexity in organizational behavior might explain the roles of business groups. Our work led to a number of questions that could be explored by other researchers. We showed that entry into an emerging market might involve explicit or implicit ties to a number business networks that are themselves typically embedded within a sociopolitical and economic context. we described four distinct types of business networks and derived a rationale for how each might be used by prospective foreign investors as platforms into other markets. Third. much more theory development is needed to better understand how business groups function and evolve in emerging economies. we attempted to contribute to filling this void. investment site alternatives. Further. While extant entry mode literature suggests that foreign market expansion is a function of the match between firm needs. while their significance in market entry has been known for some time. Brazil vs. management. China. both contextual and corporate culture based. among the compositions and functioning of different types of groups in different emerging markets. international markets. Second. marketing. environmental factors. and the antecedents and metrics of successful market entry through partnerships with business groups.

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their internet offers some advantages. but only to a limited extent do they sell their products via the internet. with e-business. Rasmussen ABSTRACT E-business is an important business tool. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. we unravel the use of internet usage of different types of firms.and medium-sized firms (SMEs) interested in internationalizing. In this article. we focus on the internet usage by born global firms compared to the other types of firms. borders between countries are becoming less relevant. second. and the increasing presence on the internet reflects this fact. offering services related to their products via International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. because. First. 297–317 Copyright r 2007 by Elsevier Ltd. Instead. We conclude that born global firms use the internet to convey their market presence. and more direct interaction between business entities is made possible. Tage Koed Madsen and Erik S.SMALL MANUFACTURING FIRMS’ INVOLVEMENT IN INTERNATIONAL E-BUSINESS ACTIVITIES Per Servais. we present a categorization of different local and international firms.1016/S1474-7979(06)17011-8 297 . For small. Volume 17. they use the internet to support the already existing relationships by describing their products on web pages. and.

Quelch and Klein (1996) stress that the usage of e-business tools fosters the emergence of instant international companies having immediate access to potential customers. Ireland. 1997) and compare their e-business behavior with that of other types of firms which are more nationally oriented in their sales and sourcing activities. The overall purpose of this article is to explore the e-business usage among ‘‘instant international firms’’ (Hamill. Such an integrated market environment. local requirements within particular foreign markets. facilitating product development via the internet. including both businessto-business customers and end users. and experience needed to operate on distant international markets from early on in their development. 2004). .000 Danish manufacturing companies in which it is possible to explore differences between such different types of firms. however.and medium-sized firms (SMEs) with foreign customers. INTRODUCTION Several studies have underpinned that the interaction and communication of small. We also stress the importance of further research on how born global firms adapt to the internet in practice.. 1997. lowering costs and quickening responses in globally expanded supply chains).298 PER SERVAIS ET AL. 2000). Smith. often possess the competence. the e-business revolution is transforming organizations and organizational processes and creating new opportunities and challenges for international marketers as many markets are becoming borderless and globally integrated (Hitt. Others argue that e-business enables greater integration of businesses across national and organizational borders creating new opportunities for SMEs and their supply chains (Lancioni. also levers more potential challenges to the SMEs’ ability to maintain global efficiency (i.. capability. & Oliva. The main contribution of the article is an empirical study among more than 1. the internet. Crick and Jones (2000) furthermore argue that some small firms. Coviello & McAuley. 1999. and building and maintaining relations to foreign customers. 2000. Indeed. while attempting to fulfill fast-changing. Ellis. and other network actors is a central issue in the internationalization of such firms (Coviello & Munro. especially in the high-tech business.e. & Hoskisson. 1999). Saarenketo et al. partners. The reason for this focus is that we expect highly internationally oriented firms to behave differently with regard to ebusiness activities.

Since the late 1980s. services. servicing. This finding is further stressed by Lye and Hamilton (2000). such as licensing. 1997) reveals a striking imbalance while one side of the coin. and resources across borders. Cavusgil (1998) highlights perspectives on some fundamental questions in the field of international marketing and points out some promising research avenues. the firm transfers products. Korhonen and Welch (1996) found that the vast majority of Finnish firms began international activities on the inward side rather than with export. stressing the importance of this phenomenon on the firms’ success (Scully & Fawcett.SME’s Involvement in International E-Business Activities 299 MANUFACTURING FIRMS’ INTERNATIONAL EXPANSION According to Melin (1992). firms’ internationalization can be perceived as a part of an ongoing strategy process of the firm. the other side. The dovetail has been identified primarily through studies on specific business operations. This implies that the company has to select in which country or countries the transaction should be performed. In a study of a large number of Finnish industrial firms. 1994). 1997). In a review of the academic literature (Liang & Parkhe. The connection between import and export activities within a firm and how it affects the internationalization process of the firm has received only scattered interest in the literature (Korhonen & Welch. testing. have largely been neglected. but also imported services like installation. thus pointing to the potential importance of inward activities as a jumping-off ground for outward activities. e.. the exporter side. 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 . subcontracting. has been extensively studied. however. the importer side and the associated motives. although at a low level compared to physical products. not confined to export activities alone. 1996). In a similar vain. and components. Korhonen and Welch (1996) stress that import–export connections could be found at different stages of the internationalization process. First. a growing concern for manufacturing firms’ international sourcing (inward) activities has emerged. and countertrade. inward and outward internationalization.g. the firm has to choose how to enter foreign markets (Andersen. Typical inward operations were imports of physical products like raw materials. Second. Firms’ international expansion is. machinery. The main difference between internationalization and other types of growth strategy processes can be found in two dimensions. and maintenance. Among the mentioned avenues is the analysis of firm expansion in international markets.

Such a time horizon may balance the quest for a short time horizon due to market conditions often being highly globalized and the tradition of entrepreneurship research in which firms are often treated as ‘new’ up to six years after their inception (Oviatt & McDougall. We suggest defining three categories with regard to sourcing as well as selling.300 PER SERVAIS ET AL. . output should be important dimensions in the categorization of International New Ventures. Classification of Firms According to Sales/Sourcing Activities. One nationally oriented group of firms with no foreign activities. The cutoff point (25%) is somewhat arbitrary. which also follows the definition by Knight (1997). a group of the most globally oriented firms having more than 25% of activities outside own continent. 1. we suggest collapsing them into five types in the subsequent analyses of our empirical data. We suggest adopting the name ‘born global firms’ to the firms whose combined sourcing and selling activities are most internationally oriented. we advocate three years. and a group in between with foreign activities. In order to limit the number of types of firms.’ whereas firms that only internationalize their sourcing side or selling side are called ‘born international sourcers’ or ‘born Classification of New Ventures No foreign sourcing after three years Domestic New Ventures /Born Local Firms Born International Seller Less than 25% of foreign sourcing outside Europe within three years Born International Sourcer More than 25% of foreign sourcing outside Europe within three years Born International Sourcer No foreign sales after three years Less than 25% of foreign sales outside Europe within three years More than 25% of foreign sales outside Europe within three years Born European Firm Born Global Firm Born International Seller Born Global Firm Born Global Firm Fig. 1. Firms having no foreign activities within three years are domestic new ventures or ‘born local firms. this results in a 3 Â 3 matrix. but less than 25% outside its own continent. As regards the time horizon within which a firm should attain the level of sourcing and selling abroad. but in order to limit the number of types of firms we have collapsed them into five types in the subsequent analyses of our empirical data. 1997). but for North American firms it follows the definition suggested by Knight (1997). As shown in Fig.

adapt to new information technology in general and e-business tools in particular. and deliver goods and services via computer technology has spawned as virtual revolution (Zinkhan & Watson.’ respectively. mainly motivated by the fear of missing an opportunity or of damaging their image by not doing so. in their business activities. Indeed. particular for small. Some researchers even mention the term ‘revolution’ (Zinkhan & Watson. firms all over the world have started extending their internet-related activities following a ‘goldrush’ model. and we will explore to what extent the different types. 1996). E-business is particularly appealing for SMEs. According to several surveys. and market entry risks. e-business offers some advantages since borders between countries become less relevant because more direct interaction between business entities is made possible. long distances. unsupported by a clear strategy (Angehrn. 1996) as a description for the recent development. Prior to the internet. most small companies only had access to the local markets. New information technology may serve as a vehicle for the phenomenon of instant internationalization. E-BUSINESS AND INTERNATIONALIZATION E-business is an important business tool. and the increasing presence on the internet reflects this fact. 1997) and without any specific knowledge about the consequences for their network relationships. As shown above. regardless of how one prefers to describe the situation. However. 1996). we will give a short review of the issues discussed in the literature about the use of e-business in internationally oriented firms. including firms that may have limited international involvement. giving the . some have argued that the internet has reduced the difference between SMEs and MNCs. but also firms that are highly international at a European scale. sell. The ability to promote. For internationally oriented firms. 6). we operate with several types of such firms in our empirical study. 1995. Before establishing hypotheses.SME’s Involvement in International E-Business Activities 301 international sellers. now on the internet every business is a multinational business in a global marketplace (Ellsworth & Ellsworth. removing or reducing some of the traditional barriers they faced in doing business overseas. 1996).and medium-sized enterprises. it is a fact that the usage of the internet has increased dramatically during the 1990s (Zinkhan & Watson. such as communications costs. The born European firms constitute a quite diverse group. others are more moderate and claim that The internet is the single most significant new tool for business. This rapid penetration of the internet has led firms to embrace the internet at a remarkable pace (Cockburn & Wilson. p.

1997). Their third hypothesis predicts that a gradual contraction will emerge as geographically diversified firms experience the serious cost disadvantage of foreignness in certain markets. and this gives many opportunities for the SME to learn more about the interests of visitors. In a recent paper. e. attempts to penetrate foreign markets more thoroughly will reveal the ‘‘borderless marketplace’’ to be illusory. In contrast. through the adaptation of the displayed information to local visitor needs. in pdf format). Foreign visitors interact with the information provided on the web pages. it provides an opportunity for the SME to be ‘local’ in many different markets. price transparency.g. which remains largely unaffected by the internet. However. their second hypothesis is one of the faster foreign market expansion as a result of the ‘‘borderless marketplace’’ induced by the internet. ordering procedures (direct or through resellers). password protected). electronic payment methods.. Petersen et al. The hypothesis maintains that the internet will allow firms to undertake faster international expansion than has been seen until now. the result being gradual contraction.. Web sites can incorporate substantial amounts of information. through which it may send and search information. indicating the complexity of the effect that the internet has on the internationalization process of firms. delivery options. and (3) as a tool of customer care. and . At the same time. which gives the firm a global presence. The first hypothesis is that the effect of the internet on firms’ foreign market expansion will be very modest. E-business provides the possibility of carrying out transactions. including. (2002) discuss three hypotheses regarding the effect of e-business on the internationalization process of firms. suppliers. Such comprehensive information will attract the interest of competitors as well as potential buyers.302 PER SERVAIS ET AL.g. This expectation is based on the notion that an important limiting factor in the internationalization process is the accumulation of experiential knowledge. but is also an option for the SME to facilitate much interaction with customers and partners. yet access to some areas of the site can be restricted (e. that is up to date and easy to access. and they are an efficient and low-cost way of distributing materials (e. One advantage of the e-business as a marketing tool is that a web page is available 24 h a day all over the world.g. former a possibility for presence in different international markets as well as easy contact with actual and potential customers. to collect specific information directly. SMEs can use the e-business to support their export operations in three ways: (1) as a global marketing tool. and partners abroad (Hamill. (2002) maintain that firms with similar products may be affected in different ways.. and to involve the visitor in a continuing interaction. (2) as a cost-efficient transaction medium. Petersen et al.

and commitment through access to global information sources. e-business technology permits SMEs to offer their products and services worldwide. The third barrier is organizational: the internet provides solutions to the problem of this barrier by offering lowcost market research. The impact of e-business solutions in general and of the internet is particularly interesting for small businesses as their resources are limited (Poon & Swatman. confidence. For example. effective use of the internet can provide a low-cost access to international markets (both import and export markets) and may help to overcome many of the barriers to internationalization commonly experienced by such firms. The fourth barrier is related to products/markets: in this respect. Quelch and Klein (1996) list four barriers to SME internationalization and suggest how the internet can be useful in overcoming these barriers. but of course they have to observe the possible drawbacks. they have a local servicing capability. whereas in others they assist with access to the customers. 1998). Intermediaries such as foreign agents and distributors may become superfluous. Many companies publish a newsletter that is electronically distributed to interested persons. but they may also retain their position in international business. and listing answers to frequently asked questions. including developing web site contents that will help buyers install and use the product. payments. which may cause channel conflict if distributors have historically been involved in sales. The e-business readily lends itself to customer-care activities. Another vehicle for staying in touch with customers is online questionnaires that invite visitors to give feedback on the company and its offerings. and reduced dependence on traditional intermediaries. 1997). competitors may observe their strategies and types of relationships with customers. So. while others enable return-visitors to quickly access relevant material rather than sending it out through mail. etc.SME’s Involvement in International E-Business Activities 303 security. E-business effectively promotes direct trading between sellers and buyers. Hence they seek solutions in which entry barriers and costs are low (O’Keefe et al. improved international knowledge. and servicing of the products. the internet facilitates the country/market . In some cases. A variety of tools could be implemented. if they are able to provide services that are valued by the parties. For SMEs. marketing. The second barrier is operational: the internet simplifies operations because export documentation can be handled through electronic data transfers.. providing information on new and complementary products. and a small firm has to be realistic as to what extent it is able to customize information and interaction features in different languages. The first barrier is psychological: the internet can decrease this barrier by increasing international awareness.

video conferencing. also for newly established firms with resource constraints. The consequence is that large firms to a lesser extent have the competitive advantage in terms of the expensive information systems needed to coordinate geographically disperse operations (Knight & Cavusgil. and in-between consumers). Another model is offered by von Versen (1998) in which it is proposed that the internet . Furthermore. due to effective and low-cost information technology. it can. etc. compensate for this by obtaining more information from other sources. The first one is information space (use of the internet simply as a global billboard).. because low information costs allow for a more extensive environmental scanning. even with limited resources. ideas. integration of e-business in a firm’s international business model can reduce the complexity of running a geographically disperse organization. especially for new firms that lack market-specific knowledge. Angehrn (1997) presents a model with four elements. to a certain extent. the internet and other sources of electronic information can be a great source of information about relevant international market opportunities. are likely to rely on information from more sources than firms not using e-business. etc. 1996). The realization of exports to more markets can also be the result of unsolicited contact from customers due to internet presence or as a result of matchmaking in virtual communities such as electronic markets (Klein & Quelch. and the adoption of a global niche strategy rather than a country-centered strategy. virtual market places. the exploitation of these opportunities is increasingly feasible. The third element is distribution space (products are actually distributed via the internet). international client feedback. regardless of firm age. between businesses and consumers. e-business-intensive firms. In any case. In the process of seeking foreign opportunities. advances in e-business have made a broad range of tools (i. 1996). the firm needs to develop an effective market strategy for each specific market. ERP-systems. while the second is communication space (interactions occur between businesses and customers as they exchange information. selection. extranets. intranets. If the firm lacks experiential market knowledge. and the last one is transaction space (formal transactions occur in-between businesses. Other researchers have implied that the adoption or embracing of internet practices is an evolutionary process. electronic mail services. Moreover. For example. experiences. making it possible to serve many markets. a systematic investigation of foreign market information can lead the firm to identify opportunities in more markets.). Once international markets have been identified.304 PER SERVAIS ET AL. From the perspective of competitive advantage. in order to develop market strategies.) available for small firms at low costs. Hence. opinions.e.

but also actually exchanged between the parties. Thus. as such. whereas a market space implies that it is a driver and facilitator of interaction and integration. demanders form virtual communities. In the ensuing we will explore four dimensions of e-business. performs three basic functions. However. Many companies (and even consumers) first utilize the internet as a way to provide information about the organization. The interaction is often one to one. and integration (suppliers form virtual companies. A medium implies that it is simply a tool for providing information. an integrated model might include a medium/ market continuum within both consumer and business environments. but does not yet involve actual transactions. integrated. 1998). competitors. These firms may also utilize the internet to access information on competitors. namely contact (demanders and suppliers exchange information). one-to-many information dissemination models to more sophisticated. its products. depending on the purpose of the activity: (1) Information. Firms may go further and utilize the internet to actually interact with customers. most of the models reveal a pattern of development from simple. and/or establish a business image. the internet has been defined as both a medium and a market space. etc. distributors. who interact with each other. Additionally. This interaction may be in the form of customer support or service. The four dimensions attempt to span the main aspects of e-business discussed above. They categorize e-business activities into types of usage. Businesses will find themselves at various locations along the continuum.SME’s Involvement in International E-Business Activities 305 is both a market and a medium and. they are in many respects passive in their communication form. . (2) Interaction. depending on their internal strategic considerations as well as on external factors. Firms may simply put product catalogues onto web pages without offering an option of interaction or transactions (similar to the one-to-many mass communication models involving television or radio). or delivery status. contact and distribution (demanders and suppliers perform transactions in a global shopping center). Although a number of other models exist (Timmers. Thus. the models have implications both for end-use consumers and/or businessto-business customers. and perhaps customers. This category can be referred to as interaction space. As we have seen. at one end of the continuum we will find information and at the other end integration. Information is not only provided and sought. the industry. price inquiries. suppliers. and they all merge into internet conglomerates). and cooperative models.

and services between and among each other. Instead. as firms no longer view themselves as stand-alone firms. different firms in a supply-chain share processes. (4) Integration. 2000). services. and the born global firm with respect to the following four areas: (1) Providing information. . electronically (Simchi-Levi. an emerging category involves the use of the internet for integration of firms and customers. but also often distribution arrangements as well. (3) Transaction. This involves the flow of information between multiple parties for multiple purposes and for the establishment of relationships. all of whom are sharing and exchanging value. money. the transactions not only involve product and price decisions. etc. an extensive English web page. This is probably the fastest-growing example of e-business today. and to flash news to interested parties. we will analyze the use of the internet in the five different types of firms categorized earlier. What emerges is almost a living organism. Finally. In this stage. This category can be referred to as transaction space. many firms first utilize the internet as a way to display information about the organization. payments. not just data. firms and consumers actually exchange products. the born international sourcer. & Simchi-Levi. Moreover. its products. Here. In the following section we formulate hypotheses about the association between the type of new ventures and the usage of e-business. the born international seller. A third category involves actual economic transactions. whether it describes its products on the web page and has a newsletter on the web. HYPOTHESES In the following section. We have operationalized this aspect by the extent to which the firm has an extensive Danish web page. the born European firm. the born local firm. This category of usage can be referred to as integration space where the impact of e-business on a network orientation for market entry can be maximized. Kaminsky. We hypothesize that born global firms in particular are active information providers. As stated earlier.306 PER SERVAIS ET AL. The transactions are often sustained through barter. as more and more organizations desire to actually sell products and services on the internet. they become part of an international supply chain with other firms and potentially even customers.

right from the establishment of the firm. conduct product developments via the internet. new distributors. This interaction is measured by the extent to which firms communicate with customers. Born global firms perceive to have obtained better results by the use of the internet to a higher extent than other types of firms. distributors. Integration could have been an interesting topic. Born global firms use the internet for interaction purposes to a higher extent than other types of firms. We have asked the firms whether they have obtained new customers because of the use of the internet. quantitative empirical study. Since born global firms are dependent of reaching out for new business opportunities.SME’s Involvement in International E-Business Activities 307 H1. (3) Interaction. (4) Transaction. but in order to concentrate on the first three issues we have omitted the integration aspect from the present. As stated earlier. Also in this respect. firms can utilize the internet to interact with customers. whether they have reduced the importance of their intermediates. create and maintain relationships to customers and even use the internet as a platform for activities to access customers in distant markets. Born global firms use the internet for information providing purposes to a higher extent that other types of firms. The internet offers the possibility to search for new customers. it is expected that: H2. Born global firms sell or offer products/services via the internet to a higher extent than other types of firms. and information about competitors as well as market opportunities in an efficient and costless way. we expected that: H5. We expected that: H3. We have measured transactions defined as selling of products and services via the internet as well as offering services via the internet. suppliers. competitors. H4. and whether they regard the internet to be an asset. In accordance with the previous hypotheses. Instead. we have explored the perceived achievements resulting from using the internet. Born global firms use the internet for active information search to a higher extent than other types of firms. (5) Integration/results. . (2) Active search of information. etc. we propose that born global firms are the heavy users of the internet.

0 1988 33. same firm registered at two addresses or two firms being mother and daughter registered at the same address) were identified.1 (high-tech firms).0 29. by far.3 0. leading to a revised population of 2.0 1971 0.21 (development of software). The population of the business firms was identified by means of CD-Direct.308 PER SERVAIS ET AL. METHODOLOGY The empirical study was carried out in 2004/2005.0 1. most of the firms are small and medium sized which is very characteristic of the Danish business community in general. Table 1 shows some basic characteristics of these firms. a total of Table 1.048 firms in Denmark met the criteria. A total of 3.1 . 91 duplicates (e. average (percentage of total purchasing) 45 25 24 Born European Firm 38 Born Global Firm 11 58 19 12 23 12 1959 0.81. 72. Bakeries (NACE 15. Main Characteristics of the Classification. 2004. we selected business firms from the CD-Direct according to the criteria mentioned above.20) and the graphic industry (NACE 22) were excluded as in Denmark they are primarily very small and locally oriented businesses.0 3..8 1979 2. The population includes Danish manufacturing firms in the industries with NACE codes 15-37 (manufacturing). In total. As it appears.8 0. Born Local Born Born Firm International International Sourcer Seller Number of firms with less than 50 employees Number of firms with more than 50 employees Year of establishment (mean) Sales outside Europe after three years. the unit of analysis being the business firm. In the process.957 firms. and 73. On February 1. average (percentage of total sales) Purchases outside Europe after three years.0 1984 7. published by Købmandstandens Oplysnings-Bureau and listing all Danish private business firms.g.

between 284 and 286 firms answered the 17 questions concerning the firm’s use of the internet. Most of these firms.7%. born international sellers. and industry membership. which corresponds to a response rate of 48. Out of the 385 firms who completed the CEO questionnaire.2%. etc. If it was not possible to reach the CEO after five phone calls. firms with wrong NACE code.4%. A total of 791 CEOs promised to answer the CEO questionnaire during a telephone interview.048 firms. and born international sellers and born global firms in the 1980s (1984. return on assets.527 firms is representative of the total population of 3. When it comes to purchasing and sales outside Europe. Born local firms seems to have a larger proportion of larger firms (>50 employees) where as born international sources. pretax profits. classified according to the pervious mentioned categories. which lead to the final population size of 2. the distribution is nearly equal. 7 ¼ to a high extent). This was the case of a total of 381 firms (defined as ‘unreachable firms’ below). The response rate for the CEO questionnaire is 15. 1988. Out of the final population of 2. three years after the establishment. One thousand seventy one firms participated in the survey.527 firms. one can observe large differences between born global firms and . All questions related to a 7-point scale (1 ¼ not at all. who answered the questions regarding internet activities. however.). Born local firms seems to be the oldest firms (on average established in 1959) where born international sourcers and born European firms were established in the 1970s (1971. if calculated on the basis of the 2. The conclusion is that the final population of 2. Lack of time was by far the most common reason for not participating. geographical location in Denmark. further duplicates. Because of budget and time constraints. only answered seven questions attached to an initial letter to the CEO (these questions asked for information about the activities during the first three years after inception of the firm).SME’s Involvement in International E-Business Activities 309 49 wrong registrations were identified (closed firms. hence the sample in this survey. This corresponds to a response rate of 42. It was tested whether the respondents were representative for the population with respect to founding year. but only 385 CEOs actually returned a usable questionnaire. In the case of born global firms. Table 1 shows the distribution of firms.527 firms. the firm was defined as unreachable and thus as not belonging to the final population. respectively).908 firms. which reduced the population to 2.527 firms in the final population. 1979. it was decided to contact each firm only five times. and born European firms have a higher proportion of smaller firms (o50 employees). 1.456 firms refused to participate in the survey. number of employees. respectively).

97 Born European Firm 65 4. born international sources.95 2.01 44 2.88 2.64 65 2.71 2.80 2. It is.29 1.36 2.61 38 4.83 1. When it comes to a web page in English.90 Born Global Firm 24 2.03 115 3.13 2.30 1. many firms initially utilize the internet as a way to provide information about the organization.21 1. in percentages of total purchasing/sales – the born global firms being much more active in both selling and buying from abroad very early after the establishment of the firm. FINDINGS As stressed earlier.56 Born Born International International Sourcer Seller 44 4.29 2. Born Local Firm We have an extensive Danish web page We have an extensive English web page Our products are well described on the web page We have an extensive newsletter on our homepage N Mean SD N Mean SD N Mean SD N Mean SD 115 4. Table 2 shows that born local firms.08 1.88 24 5.85 114 2. to what extent they had a product description on a web page and to what extent they used e-mail to distribute news.61 1. interesting to notice that both born international seller and born European firms are quite heavy users of web pages in Danish.32 2.10 65 3.81 38 2.24 38 3.310 PER SERVAIS ET AL.41 65 5.11 1.23 1. its products. and to flash news to interested parties. the situation is reversed so that born global firms uses web pages in English to a Table 2.31 2.45 38 5. the other categories. A Waller–Duncan test reveals that the difference is significant (0. and born European firms to a much higher degree use a Danish web page compared to born global firms which not surprisingly are given the definition of born global firms.05 level).72 24 2.80 1.71 .35 114 4. born international seller.67 1.66 1.322 44 4. however. Firms’ Usage of the Internet as an Information Tool.80 44 2.42 24 5. We specifically asked whether the firms had a Danish web page or an English web page.

followed by general search of market opportunities. Born Local Firm We search for new customers via the internet We search for new distributors via the internet We search for information about competitors via the internet We search for new market opportunities via the internet N Mean SD N Mean SD N Mean SD 112 2. To conclude.67 1.05 level according to Dunnett T3 test.00 65 2. Firms’ Active Use of Internet Search. and information about competitors as well as market opportunities.11 1. screening activities.78 Born Born International International Seller Sourcer 43 3. Table 3.03 24 2.42 1. and participation in trade fairs. with a slightly overweight toward that the more international selling firms. and significantly more than the other types of firms (at the 0.71 Born Global Firm 24 3.93 38 3.91 24 5. not equal variances). Describing the firm’s products on the internet applies to all groups of firms.72 65 3. As it appears from Table 3.23 1.57 115 4.13 1.92 1.00 .42 38 5.69 1.03 1.38 2.66 1.89 1.58 Born European Firm 65 3.71 2.79 1.74 1. The more active usage of the internet involves the search of new customers.89 43 2.60 1.77 115 2. new distributors.92 24 4.35 2. The involvement in searching for new distributors via the internet is even lower. H1 is only partially supported with respect to the usage of web pages in Danish and English.95 38 1.08 1.95 1.49 1.SME’s Involvement in International E-Business Activities 311 very high extent.82 44 3. and therefore only more general news are posted on the web pages.45 1. This could be explained by the fact that more detailed news are sent directly to interested parties.90 38 4. all groups use the internet to some extent. This may partially be due the fact that finding distributors is a delicate task demanding several personal meetings. but not as much as was the case for previously mentioned searching activities. When it comes to search for new customers. the most widespread use of the internet is related to the search of competitor information.77 N Mean SD 115 3.64 65 5. None of the firms use their homepages very much to host extensive newsletters.72 44 4.

14 38 2. 0.02 115 3.53 2.50 2.23 24 5.57 2.50 1. Overall. H2.00 2.19 44 3.18 44 3.09 2.77 .27 2. however. stating that born globals were expected to be more involved in active search via the internet. Born Local Firm We communicate with existing customers via the internet We conduct product development with existing customers via the internet We use the internet to build and maintain relations with customers We us the internet actively to access customers in distant markets N Mean SD N Mean SD N Mean SD N Mean SD 115 4. Born global firms differ significantly from all other groups (Waller–Duncan test.08 2.40 1.87 38 4. So. born European firms and born global firms.02 2.84 1.05 level).03 65 3.08 65 3. is only partially supported in this study.05 level) with regard to the extent to which they build and maintain relationships via the internet and accesses more distant markets.03 115 3. As previously stressed. all firms are heavily involved in communication with their customers via the internet. Also with respect to search for new distributors. A Waller– Duncan test explains this significance by the large difference between born local firms and born global firms.80 115 2.05 level or better) are only seen in regard to search activities related to competitor information. Table 3 reveals some similarities between international sellers.86 38 2.99 38 3.312 PER SERVAIS ET AL. with born global firms being the most active. in general.15 44 2. one of the advantages of the internet is that it establishes a platform for interaction much more simultaneous and cost efficient than other platforms.42 1.72 2. Interaction with Customers via the Internet.00 24 4.27 2. significant differences in the use of the internet (at the 0.50 1.74 Born Born International International Sourcer Seller 44 4. with the latter being the most active.89 2.88 2.00 24 4. Table 4.19 Born Global Firm 23 5. In Table 3.08 Born European Firm 65 4.68 2. Table 4 reveals that.11 65 2.48 1. Again. the born global firms constitute the most active group.01 2. the Waller–Duncan test shows significant differences between the two groups of firms (at 0.

we conclude that H3 is specifically supported when it comes to building and maintaining relationships and accessing more distant markets.04 1. Perhaps this is not surprising. In Table 5. taking into account that the firms are manufacturing firms producing complex products that are very difficult to sell as stand-alone products. we observe that born global firms to a significant higher degree offer services via the internet.SME’s Involvement in International E-Business Activities 313 Table 4 shows no significant differences when it comes to communication with existing customers or product development via the internet.88 Born European Firm 65 1. but has the internet really become an asset to the firm? Table 6 shows significant differences between the different groups of firms. Sales and Services via the Internet.99 . many buyer–seller relationships on industrial markets are typically closely based on interaction and only a few are more temporally in nature. Finally.08 1.02 65 1. since born global firms differ from all other firms. Born Local Firm We sell our products/ services via the internet We offer service on our products via the internet N Mean SD N Mean SD 113 1. a Waller–Duncan test reveals that born global firms and born local firms differ significantly (0. Hence.69 1. Therefore. A Waller–Duncan test further explains that the born global firms are significantly different from all other groups in regard to having reduced the importance of intermediates.47 Born Global Firm 24 2.05 level).73 38 1. whereas they are only significantly different from the born local firms in Table 5.85 1.64 44 1.63 1. Hence.51 Born Born International International Sourcer Seller 44 1.93 1. The firms do report that they have obtained new customers and have reduced the importance of distributors by using the internet.79 1. H4 is supported only in the case of offering services via the internet. Closely associated with the interaction dimension is the transaction dimension. If the products themselves cannot be sold via the internet.20 115 1.40 38 2.74 1. At a first glance. some supporting elements like service could be offered via internet.91 1. it is interesting to observe the low degree of involvement in sales via the internet among all types of firms.08 1. we have attempted to look into the results from using the internet.61 24 3. However.

08 1.72 24 3.33 Born European Firm 65 5. they are heavy users of the internet.29 1.78 38 5.64 Born Global Firm 24 5.23 1. or to match local business practices and available distribution channels. however.83 1.80 1.63 44 4. but this article seems to suggest.64 65 2.314 PER SERVAIS ET AL.80 43 2.08 65 5.52 115 4.79 Born Born International International Seller Sourcer 44 4. Hence we regard H5 as supported.81 38 2.62 38 5. Table 6. conducting product development. Foreign market success requires adjustments in terms of product. and. etc.55 1.85 115 2. in order to meet the customer needs.06 24 5. 2002). CONCLUSION The survey has revealed that born global firms to a high extent have English web pages. that born global firms are proactive firms that seek new ways of conducting business internationally. In many respects. they consider the internet as an important asset to the firm. Internet presence.26 1. Such adjustments need a local physical presence and .58 2. generally. and that they are using the internet actively for communicating with customers. to comply with government regulations. and their level of satisfaction is high.71 1. therefore. appropriate after sales service. & Liesch. Welch.33 1.35 1. cannot give the firm a sustainable competitive advantage alone. Born Local Firm We have obtained new customers via the internet We have reduced the importance of intermediates by the use of the internet Use of the internet is a large active to our firm N Mean SD N Mean SD N Mean SD 114 4.15 1. Results Obtained from Using the Internet.50 1.95 2. Only a few foreign markets can be covered and penetrated by exporting firms alone by using the internet (Petersen. the internet and e-business is not a goal per se to these firms but just a new media offering new challenging opportunities.50 respect to finding new customers and viewing the internet as an asset for the firm.21 1. Born global firms also more often than other types of firms offer product services via the internet. and building relationships – also to customers in distant markets.

Management International Review. customers. and competitors in international markets. the cultural content employed at the website. and by building and maintaining relations to foreign customers. the person-to-person contact is needed. they use the internet to support already existing relationships by describing their products on web pages. this article has demonstrated and provided empirical evidence that born global firms are highly active users of the internet in many activities related to customers. Instead. Research that brings about understanding of the opportunities and weaknesses resulting from the heavy use of the internet will be of great value for many managers in internationally oriented firms. more information is needed on the impact of such issues. the success of exporting firms often depends on the acquisition of experiential on-site knowledge.. (1997). 37(2). As a concluding remark. but only to a limited extent do they sell their products via the internet. Particularly for firms planning to sell complex products on foreign markets. Therefore. 27–42. For this reason. because it deals with explicit. and. distributors. the quality of the telecommunication infrastructures in various markets. O. REFERENCES Andersen. Internationalization and market entry mode: A review of theories and conceptual frameworks. A major obstacle that may limit the usefulness of the internet concerns the language spoken. facilitating product development via internet. e.SME’s Involvement in International E-Business Activities 315 local insight. more research is needed to point down how this is done in reality.g. how this is supplemented by other sources of information. building and maintenance of relationships are necessary. access to computer systems. codified rather than tacit knowledge. . Especially in the early stages of a relationship. how these relations were established at first hand. and computer skills. Such knowledge cannot be developed through the internet. it could be extremely interesting to find out how they validate the information. offering services related to their products via the internet. Much information may simply be false. Another concern is the information available through the internet. when born global firms heavily use the internet in the search of information about markets. Hence. above all. and competitors. As we have seen. distributors. however. It is beyond doubt that other firms will follow their example. born global firms use the internet to convey and vehicle their market presence. it is advisable that future research study these firms in more detail. In fact. However.

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& Servais.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. 319–345 Copyright r 2007 by Elsevier Ltd. unique product. 2002). Contrary to arguments that Internet-based firms automatically benefit from a global market. One of the many claims was that the Internet would facilitate globalization of firms worldwide (e. Volume 17. consistent with Rugman’s (2000) findings for firms in the FT500. & Liesch. Welch. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. Madsen. In these cases a combination of early mover advantages. Rasmussen. 1996. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. technology standards and complementary products and services have created a ‘winner-takes-all’ market in which a few firms dominate markets worldwide. Implications for globalization theories are discussed.g. Petersen. there are a few notable exceptions. With the instant worldwide reach of the Internet it is sometimes claimed that Internet-based firms are the epitome of ‘born global’ firms (Knight & Cavusgil. However. this study shows that most Internet firms serve regional markets. 2000) that internationalize early in their life.1016/S1474-7979(06)17012-X 319 . INTRODUCTION Undoubtedly one of the most significant developments to affect marketing worldwide in the 21st century has been the development of the Internet.

Gandal.320 STEPHEN CHEN Several arguments have been advanced why the Internet should increase globalization. Kotha et al. it is argued. Wider access to the Internet will. one of the arguments for increased globalization among Internet-based firms is that digital goods have certain features that favor globalization. However. some of the key factors that have enabled or hindered globalization and implications for current theories of globalization. Nike and IBM can be seen as both drivers and outcomes of this phenomenon.. & Rothaermel. despite the extensive theoretical arguments. Arguments for Globalization One of the earliest arguments predicting globalization of markets was made by Levitt (1983) who predicted globally converging demands as international travel and global communication increased. Borenstein & Saloner.g. For example. 2001). the increase in recognition of certain global brands such as Coke. GLOBALIZATION THEORIES AND PREDICTIONS Although much has been written about the development of global markets. The increasing importance of global standards in certain industries such as software is also seen as a key driver. low degradability and low cost of distribution across a digital network (e. with a few exceptions (e. there are differing arguments about the extent to which globalization of firms is in fact happening or will happen and the relative importance of different drivers and constraints of globalization. Rindova. Bakos. This paper examines the extent of globalization in a sample of leading Internetbased firms. bring about a greater commonality in tastes and demand for certain products as exchange of ideas and information increases across borders. 2001. 2001). there is still little empirical research on the globalization of Internet firms. Finally. Another early argument in favor of globalization was the . distribution and marketing would lead to standardized products produced and sold in the same manner worldwide. Levitt argued that the search for economies of scale in production.g. 2001) have found that the level of reputation and brands are key factors in the internationalization of Internet firms. namely low cost of reproduction. Computer hardware and software are examples – a PC bought in one country is similar in most respects to a PC bought in any other. Previous studies (Kotha. and the extent of globalization has not been critically examined. 2001.

2000) or the white goods industry (Baden-Fuller & Stopford. it is also easier to coordinate activities. These include firms with unique products for which there is a strong global demand and well-developed global distribution networks. Rugman and Brain (2003) and Rugman and Verbeke (2004) have shown that the extent of globalization has in most cases been overstated and that firms have generally pursued a regional rather than a global strategy. regional markets are located at a more proximate distance.g. Staged Internationalization Arguments Other researchers argue that a regionalization strategy is merely a stage toward a full globalization strategy. Perhaps the most familiar models of staged internationalization are Vernon’s (1966) product life cycle and . who observed a bandwagon effect in FDI in which US firms in the same industry react to entry by a competitor into a foreign market by likewise entering the market in order to prevent the competitor from gaining a competitive advantage. there are exceptions and some firms are truly global. 1990). markets in the same region are also likely to be part of the same trade blocs and so benefit from reduced market entry barriers. Regionalization Arguments Recently. Guillen. Another factor that could encourage regionalization strategies is the need to localize some products. as Millar. This reduces transportation costs. As described by Prahalad and Doz (1987) in their well-known integration–responsiveness framework. Evidence of this can be seen in the automobile industry (Schlie & Yip. and Chen (2005) found. Similar arguments were made later by Haveman (1993) from an institutional theory perspective in which firms mimic other firms in order to gain legitimacy and examples have been found in other studies of foreign market entry by firms (e. However. Third. Choi. 2003). First. MNCs must balance the twin demands of integration and responsiveness. as they are in the same time zone.Are Internet Firms Global? 321 ‘oligopolistic reaction’ argument made by Knickerbocker (1973). Second. the view of ever-increasing globalization has come under attack from a number of quarters. Researchers such as Rugman (2000). allowing MNCs to obtain some of the benefits of globalization while remaining responsive to local market needs. There are several reasons why a regional strategy is likely to be less costly and risky compared to a global strategy. A regional strategy may allow a balance between the two.

Johanson and Vahlne (1977) explained that the firm learned and increased its foreign market knowledge over time primarily through experience. The typical process of firm internationalization in the latter half of the 20th century was described by Vernon (1966) as a product cycle consisting of domestic product development. Madsen & Servais. Analogous arguments can be made regarding the globalization of Internet-based firms and the impact of the Internet on globalization of firms in general. 1996. Moen & Servais.. 1996. These models are based on an assumption of incremental learning and development. 1997. industry conditions. Born Global Arguments The staged internationalization model. has recently been challenged by researchers who have noted that some new venture firms skip stages and/ or have been international virtually from inception (Knight & Cavusgil. Among the technological changes. Oviatt & McDougall. followed by exporting. communication and transportation technology. As the brief review above shows. 1994. in turn.322 STEPHEN CHEN Johanson and Vahlne’s (1977) incremental internationalization model. A number of possible scenarios . Rialp-Criado et al. Based on their studies of Swedish manufacturing firms. there are a number of different theoretical arguments about the extent to which globalization of firms in general is taking place or will take place. Some factors that have been suggested as contributing to the increase in born global firms include rapidly changing computer. Madsen et al. 2000. 1994). firm effects and management (Oviatt & McDougall. Johanson and Vahlne’s (1977) model showed that initial internationalization activities were targeted to psychically close markets and used modes of entry that require less commitment. 1994). and then by foreign production. and only then did it increase its foreign market commitments and later expand to more psychically distant markets. such as exporting. 2002) and ‘global start-ups’ (Oviatt & McDougall. These firms have sometimes been referred to as ‘born global firms’ (Knight & Cavusgil. 2002). and changes in the political economy.. the widespread adoption of the Internet worldwide is seen by many as key and Internet firms are often regarded as the epitome of born global firms. The Internet as a Driver of Globalization The increasing adoption of the Internet has reignited the debate about globalization.

2002. 2000).Are Internet Firms Global? 323 are possible depending on the effects of the drivers and constraints of globalization (Petersen et al. Zaheer and Manrakhan (2001) found .g. educational level.g. Despite the efforts of many governments and international agencies. Hamill. global standards and global purchasing systems that encourage demand for a common product or service worldwide (Yip. This is supported by some studies that confirm the distinctiveness of Internet markets in different countries (Lynch & Beck. Sprano & Zakak. Evans & Wurster. 2001). 1975) still appears to be significant. availability of venture capital. some researchers (e. availability of credit. facilitating feedback from customers and reducing the importance of intermediaries. there also remain stark differences between the level of Internet usage in developed and less-developed countries (Bridges. 2000). Constraints to Globalization of Internet Firms On the other hand. Leamer & Storper. 2000. 2002) argue that this increasing globalization in Internet markets will have significant implications for international marketing including standardization of prices. perceptions and buying behavior (Lynch & Beck. 2000). culture. Internet markets may remain local in nature owing to differences in language. Singh and Kundu (2002) proposed that Dunning’s (1973) eclectic paradigm of internationalization needs to be extended to incorporate network-based advantages in ecommerce corporations. Arguments in support of increased globalization among Internet firms are that the Internet directly affects a number of globalization drivers such as global convergence of tastes. ‘‘Liability of foreignness’’ (Hymer. Lituchi & Rail. 2001). 2002). Zaheer. population size. global branding.. Some marketers (e. income. 2002. 2001). Many have also argued that the Internet lowers global transactions costs and that the global reach of the Internet enables Internet-based firms to benefit from a global market (e. Even in developed countries. These include stronger relationships between firms and their customers or between firms and their partners. some of the key factors that have been shown to affect both the uptake and the usage of the Internet in different countries include language. taxation. government policy and level of telecommunications infrastructure development (Guillen. 2001) argue that the Internet will not diminish the importance of location-specific factors.g. Stevenson & Hamill. Kshetri & Report. For instance. 1976. For example. 1997. reconfiguration of the industry value chain and network externalities. This may require a re-examination of traditional marketing paradigms.

Data was gathered from .324 STEPHEN CHEN that locational clusters remain important in B2B trading markets while Zaheer and Zaheer (2001) found that despite the supposed threat to local banks posed by the Internet. information services and Internet retail (Barua. although there are clear instances of Internet firms that have successfully globalized. Keser. Shutter. In short. Given the conflicting theoretical arguments and predictions about the globalization of Internet firms. METHODOLOGY In order to answer the first research question. and Shachat (2003) found in their study of Internet adoption worldwide. Pinnell. Leland. Internet firms were defined as firms that derive most of their income from one or more Internet-related activities. local banks are still able to compete successfully with global competitors. so a sample of companies in each layer was identified from the following rankings of leading Internet companies:  Ranking of ISPs by size (available at www. 1999). & Whinston. The first aim is to determine to what extent Internet firms have in fact globalized and which arguments are supported or disproved. hardware. As Huang. Customers are still wary of foreign firms with whom they may be unfamiliar and seek the security of firms with a local physical presence even though they may perform many transactions online. the motivation for this paper was twofold. Companies that were subsidiaries of larger companies were excluded unless separate financial reports were available. The second aim is to identify the key factors that have enabled or prevented globalization of Internet firms and what the implications are for theories about globalization of firms in general. other studies suggest that Internet firms seem to exhibit limited the extent of globalization among a sample of Internet firms was measured. of which the key activities include search engines. These can be divided into a number of layers. software. trust appears to be a significant factor. It was assumed that the largest firms in each layer would show the greatest degree of internationalization and provide the most easily accessible data.  Internet Retailer magazine’s ranking of the top 300 retail websites ranked by Internet sales and  USA Today’s ranking of the Top 50 Internet companies based on market capitalization. Internet service providers (ISPs).

Second. (d) Global: firms that have sales of 20% or more in each of the three parts of the triad. This discrepancy is particularly relevant where the cost of foreign entry is relatively low as in the case of Internet websites. Possible reasons for this will be discussed later.. Kotha et al. Other studies that have examined internationalization of Internet firms (e. ISPs and information providers that operated on a global scale. However. (For comparison. as Sullivan (1994) found in his study of US manufacturing firms. Europe. (b) Bi-regional: firms with at least 20% of their sales in each of two regions. this study measured globalization in terms of revenues. It was difficult to identify many other search engines. it also reflects to some extent the concentration of firms in each market. presence in foreign markets and the extent of international revenues may not necessarily be strongly correlated. Those firms that had foreign sales of 25% or more (the cut off figure used by Knight & Cavusgil (1996) to identify born global firms) were highlighted. 2001) have measured this in terms of number of international websites. the percentage of foreign sales/total sales was determined for each company.g. (c) Host triad region oriented: firms that have more than 50% of their sales in a triad market other than the home triad region. South America and Africa) was determined. Asia Pacific. This measures more directly the extent to which firms are actually capturing a share of the market globally as opposed to the potential market. but less than 50% in any one region. These data were then used to classify companies according to Rugman’s (2000) classification of globalization: (a) Home triad region oriented: firms that have at least 50% of their sales in their home region of the triad. not in terms of revenues. the percentage of each company’s sales by region (North America.      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. First. the number of country-specific websites was also determined for each company.Are Internet Firms Global? 325 annual reports and other sources available via the Internet.) . However. Therefore. The final sample comprised 63 companies for which geographic sales data was available.

in the FT500 firms examined by Rugman and Verbeke (2004) and confirms that the extent of globalization has been greatly exaggerated. RESULTS Extent of Globalization Table 1 shows the breakdown of sales by region for each of the companies examined. since the majority of North American revenues can be assumed to be of US origin in US firms. Using Rugman’s (2000) classification. only 29% of the firms had foreign sales of 25% or more.326 STEPHEN CHEN In the second phase. Information on the company history and strategy was collected from company websites. it is possible to go even further and state that not only are US Internet firms primarily home triad based but domestic market based. so the extent of internationalization is likely to be higher than that in a sample of firms less than 3 years old. The discrepancy is possibly even greater in the case of websites since the marginal cost of adding a new website is considerably lower than that of establishing a sales office or store in a new country. the time period used by Knight and Cavusgil. (All firms in the sample were considerably older than 3 years. Furthermore. the firms that were most globalized were then examined in more detail in order to determine how and why they had globalized more than the other firms. 55 out of the 63 (87%) firms are home triad region oriented. 10% and 3%. Table 2 shows the percentages in each of Rugman’s (2000) categories and the percentage of born global companies according to Knight and Cavusgil’s (1996) criteria. 6 companies (10%) are bi-regional and only 2 companies (3%) are truly global. despite some predictions. most Internet firms are home region oriented and domestically oriented. The Global Companies Although the sales data show quite clearly that. company annual reports. respectively. These findings based on revenues contrast sharply with globalization as measured by the presence of international sites (Tables 3 and 4) and is consistent with the findings of Rugman (2000) who found in his study of FT500 firms that the presence of global offices does not necessarily equate with global revenues.) As Table 2 shows. press reports and other publications. even among leading Internet firms. . These percentages are identical to the percentages of 87%.

9% 5.9% H H H H H H H H H 9.0% 100.0% 100.0% H H H H H H H H H 34.0% 8. Core Comm.0% 83.0% 100.0% 100.0% Yahoo ISP Alltel Charter Comm.0% 90. Europe Asia South America Unknown Global Orientation International Foreign Sales>25% SEARCH Ask Jeeves Findwhat Google Infospace Looksmart Pricegrabber Primedia Shopping.0% 100.Are Internet Firms Global? Table 1. Covad Cox Comm.0% 100.0% 100.0% Y N Y N N N N N N ISP ISP ISP ISP ISP ISP ISP ISP ISP 1983 1993 1999 1996 1997 1994 1998 1988 1999 100.0% 30.0% 89.0% 11.0% 8.5% 100. Company Activity Year Founded North America Breakdown of Sales by Region.3% 100.7% 28.0% 9.0% 100.5% 4.9% N N N N N N N N N Internet news Women’s ezine Market research Market research 1992 1995 1986 1997 79.0% 17.0% 20.0% N N N N Online stock trading 1975 100.0% 17.0% 100.9% 5% H H H H 20.2% 28.1% 100.0% H N 327 .0% 11.0% 92.1% 100% 95. Earthlink Everyone’s Internet SBC United Online INFORMATION CNET IVillageà Jupitermediaà Marketwatchà RETAIL Digital goods Ameritrade Search Search Search Search Search Search Search Search Search 1996 1998 1998 1996 1996 1996 1989 1999 1995 65.

1% 18.0% 78.Table 1.4% 44.7% 65.2% 0.3% 35.0% 100.6% H H H H H H H H H H 21.6% H 4.1% 13.4% 100.0% 21.0% 100.0% 92.4% 4.5% 1976 95.0% 40.0% 2.5% 55.0% 97.0% 99.6% N N N N N N N N N N STEPHEN CHEN CONSUMER INFRASTRUCTURE SERVICES 24/7 Real Software 2003 Media Net2phone Communications 2003 service 60.5% 2.0% 100.0% Y Y .0% 50.0% 100.9% Europe Asia South America Unknown Global Orientation H H H H H H H H H 2.7% International Foreign Sales>25% N N N N N N N N N 328 Charles Schwab Checkfree Ebay Etrade Netbank Priceline Sabre Skillsoft University of Phoenix online USA Interactive Physical goods 1800-Flowers Alloy Amazon Drugstore Ecost Freshdirect FTD Netflixà Overstockà Peapodà Online stock trading Electronic commerce only Auction site Online stock trading Bank Retail Travelocity E-learning Online education 0.0% 7.3% 100.0% 4.0% 2.0% 100.0% 100.8% 100.3% 0.0% H H 40.0% 50.0% 100.5% 44.9% 84.6% N Flower delivery Clothing Retail Drugstore Discount store Groceries Flower delivery Video rental Unsold stock Groceries 1976 1996 1994 1998 1999 1999 1910 1997 1999 1989 100.3% 35.0% 50. (Continued ) Company Activity Year Founded 1963 1981 1995 1995 1996 1998 1989 1998 1989 North America 100.

1% 60.3% B H B H H G H B B H 45.9% 22.8% 48.1% 26.8% 7.4% 0.1% 20.8% 10.9% 9.8% 58.0% 23.4% Y Y Y N Y Y N Y Y N 57.7% 7.5% 42.4% H 27.9% 15. à 2004 data.2% 81.9% 61.5% 7.5% 5.3% 65.6% 13.8% 19.7% 34.6% 16.5% Y Y Y Y N N Y 27.3% 16.2% 42.9% 27.6% 16.8% 57.5% 74.7% 26.8% 15.1% 38.0% 19.0% 29.6% 38.6% 23. 329 .9% 79.4% 30.Are Internet Firms Global? Real Network Software 2003 72.6% 20.2% 1.9% 31.9% 41.1% 38.1% Y BUSINESS INFRASTRUCTURE SERVICES BEA Systems Infrastructure 2003 software Broadcom Communication 2003 systems Cisco Network systems 2003 Doubleclick Advertising 2003 JDS Uniphase Fiber optic cable 2003 Juniper Network systems 2003 Networks Level 3 Communication 2003 Macromedia Software 2003 Mercury Systems 2003 NetIQ Systems.8% 1.5% 25.4% 70.2% 55.4% 63.2% 41.8% 10.7% 3.2% 89. security 2003 and web analytics Network Storage solutions 2003 appliance Netratings Advertising rating 2003 Openwave Software 2003 Siebel Software 2003 Tibco Software 2003 Verisign TTP service 2003 Verityà 2004 Knowledge management software 54.1% 31.3% Note: All data for the year 2003 except where marked otherwise.6% 17.1% 58.6% 76.9% 47.6% 29.2% H G B H H B 42.8% 16.2% 83.9% 29.5% 16.

Cisco held a commanding position in the router market worldwide (80% of high-end router market.330 STEPHEN CHEN Table 2. Eight of the firms that have globalized more extensively (i. The . By 1998. Breakdown of Companies by Sales.e. These are Cisco. it still remains the dominant supplier in the router market with a market share of 81% of the enterprise router market and 42% of the service provider router market in 2006. This global strategy enabled the company to achieve international sales of 39% by 1993. Internet-Based Startups Four of the eight companies have always focused on Internet-related activities and have expanded globally as the Internet market has taken off worldwide. Initally the company focused on the domestic US market. Juniper was a late entrant in the market. which was and still is the largest in the world.000 computers connected to it. are not home region oriented) are examined below and some key elements in their globalization strategies are identified in Table 5. but unlike Cisco. John Chambers was appointed as senior VP for worldwide operations and under his direction Cisco followed a global network supply strategy. as the demand for Internet routers increased dramatically from late 1988 onwards. at the time Cisco was founded. outsourcing most of the other work to partners to whom they were closely linked in IT networks. Juniper. 70% of the mid-range market and 64% of the low-end market). Cisco is the dominant player in the market for Internet routers and was one of the earliest movers in the market. Cisco. Juniper. Second. While it has lost some ground since then to competitors such as Juniper. the company embarked on a string of acquisitions in related markets worldwide (41 between 1993 and 1999) to enable the company to provide end-to-end network solutions as well as routers. Juniper is Cisco’s biggest competitor in the market for Internet routers. In 1984. Home triad oriented Bi-regional Global Total 55 (87%) 6 (10%) 2 (3%) 63 (100%) Domestic market oriented International market oriented 45 (71%) 18 (29%) 63 (100%) there are some interesting exceptions. Openwave and Macromedia. First. the company focused on product design and software development. However. the Internet had only 1. the company increasingly looked to international markets. In 1991.

Breakdown of Sites by Region. Company North America Europe Asia Pacific South and Central America Africa Number of Regions served SEARCH Ask Jeeves Findwhat Google Infospace Looksmart Pricegrabber Primedia Yahoo ISP Alltel Charter Communications Core communications Covad Cox communications Earthlink Everyone’s Internet SBC United online INFORMATION CNET Ivillage Jupitermedia Marketwatch RETAIL Digital goods Ameritrade Charles Schwab Checkfree Ebay Etrade Netbank Priceline Sabre Skillsoft University of Phoenix online USA interactive Physical goods 1800-Flowers Alloy 1 (8) 1 3 3 1 (8) 2 (3) 1 1 3 (7) 1 39 1 1 1 9 20 22 17 2 2 1 1 5 1 1 1 1 2 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 (3) 1 (5) 1 8 1 2 2 1 1 1 1 1 3 2 1 1 2 1 1 1 11 3 1 5 1 2 2 1 1 1 3 3 1 2 2 2 1 1 1 1 (4) 1 1 .Are Internet Firms Global? 331 Table 3.

Companies Companies Companies Companies Companies Total with with with with with Breakdown by Presence of International Sites.332 STEPHEN CHEN Table 3.5%) (1. Table 4.5%) websites websites websites websites websites 63 (100%) . in in in in in one region two regions three regions four regions five regions 42 12 7 1 1 (67%) (19%) (11%) (1. (Continued ) Company North America Europe Asia Pacific South and Central America Africa Number of Regions served Amazon Drugstore Ecost Freshdirect FTD Netflix Overstock Peapod 2 1 (3) 1 1 1 1 1 1 5 1 1 1 1 1 1 1 1 CONSUMER INFRASTRUCTURE SERVICES 24/7 real media 1 Net2phone 1 Real network 1 BUSINESS INFRASTRUCTURE SERVICES BEA Systems 2 16 Broadcom 1 Cisco 2 15 Doubleclick 1 4 JDS Uniphase 1 Juniper Networks 1 Level3 1 12 Macromedia 2 7 Mercury 1 NetIQ 1 5 Network appliance 1 4 Netratings 1 8 Openwave 1 Siebel 3 13 Tibco 1 7 Verisign 2 4 Verity 1 3 1 1 1 2 2 1 1 2 1 3 2 1 2 2 1 1 2 1 1 3 2 3 1 4 2 3 3 Note: Figures in brackets indicate number of languages where the site is multilingual.

the company’s proprietary operating system. as the Internet was beginning to be widely adopted by businesses. This consisted of two key elements: a custom-built ASIC (application-specific integrated circuit) and JUNOS. Key Elements of Globalization Strategy                    Pioneer and market leader in Internet routers Global acquisitions in related areas Develop and market leading high performance product worldwide Target large telcos worldwide that require high performance routers Pioneer in establishing global mobile telephony software standard Target large telcos worldwide Pioneer and market leader in professional web design software Product localization using local vendors Pioneer and market leader in CRM Develop and market Integrated applications suite (‘‘Siebel everywhere’’) Develop web-based product to integrate with existing applications 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 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 Market leader in systems testing Develop product for applications based on emerging Windows standard Product localization using local vendors BEA Systems Verity Mercury Interactive    company was only established in 1996. high-reliability products routers that are needed by the major ISPs and telecommunications companies and using alliances with strategic partners to . The founders correctly identified that traffic on the Internet was being held up by routers that could not transmit packets fast enough for the network demand. the company clearly targeted the market for high-performance.Are Internet Firms Global? 333 Table 5. which adopted a broad market strategy. much faster than Cisco’s. Company Cisco Juniper Openwave Macromedia Siebel Systems Key Elements in the Strategies of the Highly Global Companies. Using the latest technology they designed a router. Unlike Cisco. from the beginning Juniper has focused on specialized markets where it has clear firm-specific advantages over Cisco. Avoiding direct competition with Cisco in the general corporate market.



gain international presence. For instance, the company entered into a marketing alliance with French telecommunication equipment manufacturer Alcatel in order to boost sales in Europe and Asia where Alcatel had a strong presence. This strategy enabled the company to increase its international 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% of the enterprise router market, 31% of the service provider core router market and 25% of the service provider edge router market in 2006. Openwave. As in the cases of Cisco and Juniper, Openwave has grown by following a growing market. However, in the case of Openwave, it was by focusing on open standards software products and services for the emerging mobile communications industry. The company has benefited both from the rapid growth in the mobile communications market and from the increasing preference for open source software among customers. As one of the early innovators in mobile data and messaging services since 1993, the company has established a strong presence in the market and followed a global strategy early on. In 1997, just 4 years after its founding, international sales accounted for 45% of revenues. As in the case of Juniper one of the key elements of the company’s internationalization strategy has been partnering with leading computing and telecommunications companies worldwide. The company has formed partnerships with leading computing firms such as HP, Siemens and IBM, and customers include four of the top five mobile operators in the United States – AT&T Wireless, Verizon Wireless, Sprint PCS and Nextel – as well as global companies such as KDDI in Japan and BT Genie in the UK. Currently its products are used by more than 70 operators and more than 47 handset manufacturers worldwide. These include wireless application protocol, or WAP, gateways, which provide the underlying infrastructure to enable data services on mobile phones, and wireless and wireline applications, such as e-mail and multimedia messaging and related services. Macromedia. While in the previous cases the companies have focused on delivering a standardized product or establishing a technology standard, the key feature of Macromedia’s internationalization strategy is product localization. The company develops software that enables the development of a wide range of Internet solutions including websites, rich media content and Internet applications across multiple platforms and devices. Like Cisco, the company was founded in the early days of the Internet boom in 1992 and quickly established itself as a leader in the market for website design with its

Are Internet Firms Global?


key web design product Dreamweaver. In 2000, Dreamweaver had a market share of 80% among professional web developers in the US. While the company initially focused on the domestic US market, with the global diffusion of the Internet, the market for non-English web development has grown rapidly and the company has responded by increasing its international sales. International sales accounted for 26% of revenues in 1994 but this figure has grown to 44% in 2004. One of the reasons why the product has been adopted so widely worldwide has been product localization (Ramdas, Terwiesch, & Lehmbeck, 2001). As well as English, Dreamweaver is available in Spanish, Japanese, French, German, Italian, Swedish, Portuguese, Korean and Chinese. The company uses three approaches to localization. Full localization involves modifying the product so that it has functionality that matches that of the English version. Of the current versions, European English, French, German and Japanese have been fully localized. Partial localization involves localizing some parts of the product, such as manuals. The third form of localization is to outsource the localization to local vendors for a fee ranging from $80,000 to $200,000. The company supplies a localization kit and instructions and the local vendor is expected to translate the code, convert screenshots, redo the help menus and movies, 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 have taken advantage of the new market opportunities offered by the Internet to expand globally. In all four cases, the same factors that have facilitated the globalization of Internet-focused firms, such as unique resource advantages and market dominance, also apply. However, another factor has been the ability 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 complementary assets in the success of incumbents in markets undergoing technological change. The incumbent firms here have been able to leverage their existing competencies and relationships in existing markets to rapidly globalize their Internet products and services. Siebel Systems. As in the case of Cisco, Siebel Systems was one of the early movers in its market. In 1993, when the company was founded by Tom Siebel, the market for integrated ‘‘back office’’ software systems was maturing. Large competitors such as SAP and PeopleSoft had successfully



created and marketed what became to be known as enterprise resource planning (ERP) systems. These software applications automated processes such as finance, accounting, manufacturing and distribution, allowing companies to link and streamline their internal business processes. In contrast, Siebel Systems’ focused on automating ‘‘front office’’ sales processes and managing customer information. In 1997, Siebel first released products that incorporated a web browser interface, which allowed the client to access and navigate through Siebel’s applications from any standard Web browser. This shift to web-focused applications also broadened the company’s international reach. International sales accounted for just 10% of revenues in 1996 but this figure jumped to 27% the following year. Since then the company has increasingly focused on web-related products. This was followed in 1998 with Siebel 98, which incorporated a web browser interface into all of its products. In December 1999, the company launched Siebel 99, a fully web-based version of the Siebel product line. Like Cisco, during this time, the company also launched an initiative called ‘‘Siebel Everywhere,’’ with the goal of making Siebel applications ubiquitously available so that any device connected to the Internet or a client’s Intranet would be able to access Siebel’s applications. By 2002, Siebel Systems offered the industry’s most comprehensive suite of customer relationship management (CRM) applications, enabling organizations to deploy sales, marketing and customer service systems across multiple channels, including the Web, call centers, resellers and dealer networks. BEA Systems. When BEA systems was founded in 1993, distributed computing was well on the way to replacing mainframe computing. However, the founder Bill Coleman realized that many companies still used earlier applications running on different operating systems and that this created the opportunity for building ‘‘an operating system for the network’’ that would allow effective and efficient interoperability of all these information technology components and processes. These insights formed the seed for the idea of what would eventually become an ‘‘application server.’’ The company’s second product was Tuxedo, a transaction processing monitor bought from networking company Novell, Inc. As part of its strategy to rapidly build an international presence, the company also acquired sales and support organizations in France, South Africa, Finland and Australia. By 1998, it had become clear that the Internet was going to transform the computer industry and that the Java standard was going to be important in this emerging environment. Alfred Chuang, who was one of the co-founders

Are Internet Firms Global?


and head of product development at the time, identified a company called WebLogic in San Francisco that was developing an application server to support 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 $160 million. By the end of 1998, it was estimated that BEA was the market leader in distributed transaction processing with 51% market share against IBM’s estimated 20%. A large proportion of this growth in revenues (42% in 1998) came from international sales. Although the direct sales force provided most of the company’s sales (69% in 2003), an important factor in the company’s rapid growth worldwide has been its use of indirect sales channels, especially in Asia. Sales partners include systems integrators and consultants such as Accenture, HP, EDS, Cap Gemini, KPMG, Deloitte, Price Waterhouse Coopers and Schlumberger, that included BEA products in their custom solutions for clients; system platform companies such as Sun Microsystems that acted as resellers of BEA products, often integrated with their own products; application service providers, such as System SpA, Digex and eBreviate, that provided the hardware, software and support for businesses that did not wish to buy and maintain the system themselves and, finally, distributors that supplement the efforts of the sales force. The third critical element of BEA’s strategy was to establish itself as a platform technology provider. As companies were increasingly using the new e-business technologies to streamline its operations internally and integrate with partners’ systems, there was an increasing demand for systems based on technology standards that allowed compatibility with other vendors’ products. BEA responded with the launch in June 2002 of the first unified application infrastructure product that combined application server, integration server and portal product functionality. Verity. Verity is one of the leading suppliers of content management systems including paper-to-electronic and Web-based document capture, electronic forms and process automation. The company was founded by Mike Pliner, co-founder and former CEO of Silicon Valley network vendor Sytek Inc. He was asked by his friend, Dick Wishner, president of Advanced Decision Systems (ADS), a developer of artificial intelligence programs, to review technologies in the R&D lab that could be commercialized and he saw the potential of Topic, a concept-based text-retrieval program, for intelligence gathering. Pliner convinced the Strategic Air Command to become a beta test user. Topic was able to cut report-generation time from 2 days to 2 hours. Following this success, a spin-off company Verity was established



in 1988 with ADS providing the technology and seed capital and Pliner as CEO. Within a year, the company signed joint marketing agreements with 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 software to analyze real-time data such as news feeds from Dow Jones and PR Newswire. In 1993, the company shifted its focus to the fast-growing Internet and intranet marketplace, and its products are now used by more than 600 corporations worldwide. International sales accounted for 29% of revenues in 1994. As in the case of Macromedia, one of the factors behind the company’s worldwide growth has been localization of its products. The company’s products are available in more than 70 languages, many developed with local software companies such as NEC in Japan and 3Soft in Korea. The company also uses a mix of international sales channels. It has an extensive worldwide sales organization including offices in the United States, United Kingdom, The Netherlands, Germany, France, Sweden, Singapore, Australia, Japan, Mexico, Brazil and South Africa and it also works with a variety of partners, including value-added resellers, OEM customers, independent software vendors and system integrators. Mercury Interactive. Mercury Interactive was founded in 1989 and initially focused on testing and quality assurance of computer systems. The company targeted large clients worldwide early on and international sales have been significant from an early stage (26% in 1994). However, as in the case of Siebel Systems and BEA Systems, international sales have grown significantly following the introduction of web-related products. In 1999, the company shifted its focus to website testing. By using the company’s Automated Software Quality products, corporate IT departments, system integrators and independent software vendors can identify software bugs more quickly and efficiently than with traditional methods. Two technological drivers can be identified for the company’s shift. The first is the widespread adoption of networks, which often mix and match many types of hardware and software, unlike traditional highly standardized mainframe and minicomputer systems typically supplied and maintained by a single vendor. The second is the widespread adoption of Microsoft’s Windows, which initiated a new style of programming in which the sequence of user responses is unpredictable. Unlike traditional systems that forced the user to pursue a rigid series of keyboard commands to achieve a given task, such as printing the file, this new style allows much more spontaneity on the part of the user.

Are Internet Firms Global?


As a result the complexity and need for systems testing has increased significantly and the company has benefited from the increased demand worldwide. Today Mercury Interactive is the major player in the market for testing of websites with 45% of the market and supplies over 450 major corporations worldwide including Bell Atlantic, Chemical Bank, General Electric, IBM, Lufthansa, the National Association of Securities Dealers, Siemens and Texaco.

The findings from the assessment of the sample of 63 Internet firms and the eight cases of highly global firms shed some light on the various theoretical arguments 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 the case of leading traditional bricks and mortar firms, the extent of globalization of Internet-based firms has been greatly exaggerated. Less than 30% of firms have foreign sales of 25%, even those that have been operating in Internet markets for more than 10 years. The majority of firms are still heavily domestically and regionally based. The exceptions are mainly firms that supply global infrastructure services. Despite some predictions, the evidence 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 the findings of Rugman (2000) who found that regionalization rather than globalization was more common strategy for firms in the FT500. This study’s finding that B2C firms were generally less globalized than B2B firms is consistent with other studies that have identified that factors such as Internet access, consumer familiarity with the Internet, trust in conducting commercial transactions over the Internet, language and culture can be barriers in consumer adoption of electronic commerce. It was mentioned earlier that in compiling the sample of firms it was difficult to find many examples of search engines, ISPs and information providers that had an a priori global presence, and in fact an initial review indicated that in most cases these firms operated locally. In the case of ISPs, the need to gain access to the local network could clearly be a barrier to globalization, while in the case of search engines and information providers there are clearly linguistic and cultural barriers to overcome.



The barriers appear to be less significant in the case of B2B firms. For instance, Openwave’s largest international market is not Europe but Japan, which is more culturally distant. Two reasons can be advanced. First, the most global B2B firms often have unique products and brands for which there is less direct competition. Second, business buyers are generally better informed about Internet technology so language and culture are less of a problem. In the case of a few highly globalized firms, other reasons can also be identified, which are discussed below.

The Oligopolistic Reaction/Mimetic Market Entry Argument There was no evidence of mimetic market entry or oligopolistic reaction as motives for internationalizing in the case of the eight most global firms. Seven out of the eight most global firms (Cisco, Openwave, Macromedia, Siebel Systems, BEA Systems, Verity and Mercury Interactive) were early movers in their respective product markets. As such they were able to benefit from early mover advantages (Lieberman & Montgomery, 1988; Kerin, et al., 1992) such as reputation building, an established customer base and established distribution networks. Only in the case of Juniper could reaction to a competitor (in this case Cisco) be seen as a possible motive for internationalization. However, the fact that the company has generally adopted a strategy of avoiding direct competition with Cisco would suggest that this is unlikely to have been a key motive for internationalization.

The Staged Internationalization versus Born Global Debate The cases clearly support the born global model rather than the staged internationalization model. All the eight highly global firms examined can be classified as ‘born global’ firms in the sense that they internationalized from an early stage. There was no evidence that gradual learning about international markets was a significant consideration in their internationalization strategy. Rather, the cases indicate that the main constraint was the state of development of the Internet worldwide and learning by users. The companies have generally entered countries where the Internet market was growing fastest, regardless of psychic distance, as most clearly demonstrated in the case of Openwave, where Japan is the largest foreign market.

Are Internet Firms Global?


The Network Effect Argument There was some evidence that supports the arguments that Internet firms may benefit from network advantages. A factor that is clearly significant in all of the cases is a global technology standard. First, a standard lowers the cost of local product adaptation. For instance, Macromedia and Verity were both able to offer local versions of their software at low cost, by using modular designs that allow the required parts of the product to be adapted at low cost and by outsourcing some of this work to local partners. Second, technology standards also allow greater compatibility of products from different suppliers or different products from the same supplier and allow network externality effects to take place. The cases also highlight the important role played by complementary products and services in enabling the firm to globalize rapidly. Both Cisco and Siebel Systems were able to quickly dominate the market by offering an integrated suite of applications and services; BEA Systems and Verity were able to globalize rapidly by forming partnerships with firms that supplied complementary products and services globally; Openwave was similarly able to globalize rapidly by forming partnerships with leading computing companies that already had a global presence and major mobile communication companies in key markets. This confirms the importance of complementary products in the case of markets for systems-based products (Katz & Shapiro, 1994; Farrell, Monroe, & Saloner, 1998) and suggests that complementary products not only may increase local demand but may also facilitate entry into new markets globally.

Winner Takes All The cases also suggest something else. Another common factor that is evident from the cases is that all of the most global firms are the first or the second leading players in their respective markets. This suggests a ‘‘winner takes all’’ effect that has been highlighted by other research in technologyintensive markets (Arthur, 1996; Schilling, 2002; Chen, 2003; Noe & Parker, 2005), in which the leading firms capture a disproportionate share of the market. As Arthur (1996) has argued, technology markets often exhibit this effect as they require a high upfront investment to enter the market but once products catch on in the market, marginal costs of production are relatively low. Combined with first-mover advantages and network externalities, this

the firms in the sample examined were leaders in their particular market so a priori they would be expected to show the greatest internationalization activity and show the greatest effects of the Internet in facilitating globalization. how relevant are the findings for non-Internetbased firms? . where local market barriers appear to outweigh any network effects. there are some exceptions and a few firms operating in B2B markets are highly globalized. This confirms the importance of considering network externality effects resulting from technology standards and complementary products in theories and practice of internationalization strategy in Internet firms or in firms using the Internet as a component of their globalization strategy. However. However.342 STEPHEN CHEN often leads to a situation where firms that gain a slight lead win an increasing share of the market worldwide. and that the effects seem much less significant in the case of B2C firms. for different types of product or service. how do drivers and barriers to globalization vary in different geographic markets. but as a communications network based on a global standard. as noted earlier. In these cases. language and culture may be significant in B2C markets. The results suggest that the main impact of the Internet on firms in global markets has not been as a global sales or distribution channel for firms. first mover advantages and network effects that created a winner takes all effect that extended to markets globally. it should be added that these effects appear to be significant only in certain cases. particularly in B2C markets. Factors that facilitated their globalization include the presence or establishment of a global standard. as some have claimed. Barriers to globalization such as local brands. this study shows that the Internet has had limited impact on the globalization of most Internet firms. the constraint on internationalization has not been market learning by the firm but rather learning of the technology by customers in the markets in which the firm operates. CONCLUSIONS In conclusion. for example. The fact that extensive globalization was not observed except in a few cases should raise some questions for further research on internationalization of firms. Admittedly this paper has only examined a small number of firms and the results need to be confirmed in a larger sample or other cases. mainly B2B firms. The firms that have benefited most as regards internationalization have been firms that supply the components necessary to access and utilize that network. However.

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Deeter-Schmelz. Brian T. Dawn R. 1. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. Volume 17. 1979. Johnston & Bonoma. Based on these exploratory findings. 1979. 347–368 Copyright r 2007 by Elsevier Ltd. we use a case study format to explore the impact of the Internet and internationalization on today’s industrial procurement processes. Johnston & Bonoma. Zavoral.HOW DO THE INTERNET AND INTERNATIONALIZATION AFFECT THE BUYING CENTER? AN EXPLORATORY CASE STUDY Catherine N. INTRODUCTION Research published more than 25 years ago transformed the way in which purchasing was viewed (Johnston. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing. Straley and Ernest J. 1981). implications for future research are offered. ABSTRACT Drawing from seminal research on organizational buying behavior (Johnston.1016/S1474-7979(06)17013-1 347 . 1981). Jr. Axinn. 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.

1996). and industrial purchasing and procurement processes. This research will benefit business by creating a basis for evaluating the continuing relevance of the buying center in the current operating environment. . & Trow. the relevance of the established structure. Because neither factor was dominant at the time of the seminal work in this area (e. Two dynamic drivers demand researching potential changes in the ways in which businesses’ purchasing entities communicate and operate: the Internet and internationalization.348 CATHERINE N. Sheth. Webster & Wind. little business literature has evaluated or built upon the original reported framework. The primary goal of this research is to combine exploration of the impact of internationalization on industrial sourcing with an assessment of the impact of Internet use on the buying center. While current business literature proposes that both factors have had an effect on business. 1979. In addition. 1956. 1981. Mapping the interaction between purchasers and sellers may provide knowledge allowing sales professionals to better utilize the Internet as a marketing tool.g. This is followed with a brief examination of the literature pertaining to two environmental forces increasingly affecting the organizational buying process: (1) the Internet. & Wind. function. However. A better understanding of the effects of these phenomena may create an updated framework for understanding the ways in which industrial companies of the 21st century are operating. 1973. It became the basis for sales training in universities and for selling professionals to determine how and with whom to communicate their sales efforts. and (2) internationalization and global sourcing. Johnston. Johnston & Bonoma. Simon. 1967. the research may provide a clearer framework by which to understand the utility of global sourcing. AXINN ET AL. Faris. BRIEF LITERATURE REVIEW We begin by taking a look at the literature related to the classical concepts of the buying center. Robinson. and the more recent move toward formalized buying teams.. specifically. 2. none materially measures the effect on the purchasing behaviors of industrial organizations in the context of the buying center. 1972. Cyert. Evaluating the effects of internationalization and the Internet on purchasing behaviors will benefit both buyers and sellers by allowing more efficient and effective exchanges due to developing a clearer understanding of who the players involved are and how they are interacting with one another. and interaction processes concern us here. in general.

1968). (2) formalization. i.e.e. Venkatesh. Robinson et al. 1996). organizational buying theory has characterized the buying function as a complex process involving multiple individuals rather than the single act of one person. Lateral involvement was affected by formalization along with the importance and novelty . Cyert et al.e. the degree to which authority. 1956..e. 1996).g. i. The Buying Center Research conceptualizing the buying center as a network of connected individuals spans almost 40 years (e. the extent to which buying center activity is formally defined by rules. Sheth. Beginning with the seminal work of Cyert et al. 1967.. Among the key findings reported by Johnston (1979) and Johnston and Bonoma (1981) was that the extensivity of the buying center was affected by the degree of formalization. responsibility. Buckles & Ronchetto. 1993. (2) lateral involvement. 1995. in his dissertation. i. (4) connectedness.. (3) complexity.. the strength of the linkages between members of the buying center. As prescribed by organizational buying theory. Johnston (1979). (4) organization size. i. the authors explored five structural variables: (1) centralization. the authors adopted a communication network approach to study the buying decision process. and (5) participation. and procedures. Johnston and Bonoma (1981) identified five buying center dimensions: (1) vertical involvement. In addition. i.1.e. Webster and Wind (1972. the level of buying center member involvement in the decision-making process. policies. Johnston & Bonoma. Bristor. and (5) the centrality of the purchasing manager in the buying center network.e.e. Since this early work was conducted. with the goal of identifying the structure and interaction patterns occurring in the buying center. 1973. (1967). and later Johnston and Bonoma (1981) provided evidence of the buying center structure that has received little subsequent attention.. the number of people involved in the buying network. i. 1972. 1996. Webster & Wind. (3) extensivity... the number of levels in the organization’s hierarchy exerting influence in buying center decisions.. most literature has focused on the decision-making processes and the methodologies have focused on a specific buying decision (Sheth.. (1956). Among the earliest studies to empirically test the buying center concept. i. 1981. i.. the extent to which the company pursues functional specialization.e. the number of different departments and divisions involved in buying center decisions. & Zaltman. and Sheth (1973). Robinson et al.. the complexity and importance of the purchase decision. and power are concentrated in the buying center. Kohli. and the purchase class (industrial versus service).How Do the Internet and Internationalization Affect the Buying Center? 349 2. Weigand.

formalization and the importance of the purchase situation had the greatest impact on the buying center dimensions. Vertical involvement was most heavily influenced by purchase class. Research has also shown that the change in organizational buying behaviors shifts it from a transaction-centered and domestic practice to a relational-centered and global practice (Sheth. The use of technology has also affected the buying center with electronic data interchange (EDI) and computer networks. suggesting that additional research is warranted. Yet a shift in the general way that marketers are selling to industrial customers has changed with a shift to understanding and influencing these customers (Sheth. In fact. Team Buying The more a company transitions to a relational-centered and global procurement process. and the use of information technologies. which will replace the buying center structure and . the business literature proposes that organizational buying behaviors have been changing since the 1970s due to globalization. in his review of the state of organizational buying research. and platforms (Dadzie. Organizational restructuring and outsourcing are affecting organizational buying behavior. 1996. Johnston. Wilson. Quester. 1996). 2001. total quality management (TQM) philosophies. industry consolidation through mergers and acquisitions. of the purchase situation. procurement has shifted from a decentralized administrative function to a centralized strategic function (Sheth. Dzever. there has been much research about industrial organization buying behavior. whereas organization size had no effect. & Yoo. but little has challenged the structure outlined by Johnston (1979) and Johnston and Bonoma (1981). and complexity. it seems appropriate to revisit Johnston and Bonoma’s (1981) early work. importance. 1996). processes. 1999. Given these environmental changes affecting the buying function. & Chetty. Because of global mergers and acquisitions and alliance activities.350 CATHERINE N. 1997).2. Dadzie. 1996). 1996). which in turn have restructured the procurement philosophy. 2. updated for today’s buying organizations. Thus a primary goal of this case study is to evaluate the potential for replicating their earlier research in today’s procurement environment. while connectedness was affected by formalization and centralization. Stump & Sriram. the more it will have to create cross-functional teams dedicated to suppliers. As noted by Sheth (1996). AXINN ET AL. Over the 25 years since the seminal work was published. which in turn affects the decisions made (Lewin & Johnston.

Team buying is. the appropriate team is activated for resolution of the problem. During this time. Leading executives are focusing their attention on business-to-business Internet ventures. Team involvement with purchasing most commonly takes place in situations involving problem solving with suppliers. Wenninger. The goal of working in a team setting for making purchasing decisions is to coordinate efforts to best match the specifications of different departments that are affected. Buying team members typically have a functional interdependence on one another based on cross-functional expertise (Blau. supplier selection. it must align its goals with the overall goals of the organization (Johnston & Bonoma. The Internet is radically changing the communication among those involved in purchasing. 1972). other organizational areas may provide members that support the function (Deeter-Schmelz & Ramsey.3. 1995). 1995). and decisions to make or buy. Essig & Arnold. 2001. 2002. an extension of the buying center concept. Defined as the process of making purchasing decisions through cross-functional experts cooperating to quickly and effectively make a purchase (Deeter-Schmelz & Ramsey. and interaction between different functional departments of an organization (Ellram & Pearson. Current business literature suggests that unlike the buying center with its fluid membership. Internet The impact of the Internet on purchasing activities has changed substantially over the past 25 years. and experts have predicted that by the year 2010. Deeter-Schmelz & Kennedy. 2. members in formalized buying team structures have specific functions and roles and can be clearly identified through their team membership (Deeter-Schmelz & Ramsey. reverse auctions. team buying reflects a higher level of formalization as compared to the traditional buying center model. 2000. In order for the buying team to be successful. 1993). 1999). awareness. 1993). a more strategic decision process is created (Ellram & Pearson. and intranets (Croom. 1995). 1981). 1996). essentially. 2004. Talluri & Ragatz.How Do the Internet and Internationalization Affect the Buying Center? 351 process (Sheth. Companies are currently taking advantage of the ease in communicating and attaining information at growing speeds. the Internet has become a significant influencer of many business initiatives. and facilitates improved communication. Although a core purchasing team exists. the Internet will be the backbone of electronic . When a need surfaces. Because purchasing teams allow additional personnel to participate in a purchasing decision that otherwise would not have been included.

2001). At this point. 2001). As many companies are focusing their efforts on creating relationships with foreign suppliers and re-evaluating their budgeting of promotional dollars. research suggests that the Internet is used regularly for communication and for gathering information on suppliers and customers (Kennedy & Deeter-Schmelz. 2000). Early on. Slaight. A study reported by Deeter-Schmelz and Kennedy (2002) reveals the importance of gathering and sharing information through the use of e-mail. purchasing) tool (Kennedy & Deeter-Schmelz. bulletin boards. those involved must develop a sense of awareness and a knowledge base that will facilitate easier and. Likewise. and personal activity (Hoffman & Novak. therefore. while noncommercial use comes in the form of newsletters. Monczka. Commercial use includes interactive websites. Hoffman. Carter. and maintain inventory levels through materials requirements planning (MRP) and just-in-time (JIT) acquisition processes. One factor influencing the use of the Internet is experience. It was used only as a channel for exchanging information both commercially and noncommercially. 2001. diversity of information sources. As industrial buyers search for a more efficient channel for carrying out the various functions involved in a purchase. it is inevitable that the Internet will come into play. and list serves. and train employees.352 CATHERINE N. In particular. greater use of the Internet. AXINN ET AL. gather supplier information. although it is worth noting that current research suggests industrial buyers are using the Internet more frequently as an information-gathering tool than as a transaction (i.. 1996). Novak. understanding the role of the Internet is critical to the effective allocation of time and effort by international marketers. More recent use of the Internet has shown it to be helpful as a conduit for personal communication and as a source of information for organizational buyers. & Swan. monitor. develop customer relationship management processes. 2000).e. buyers might be more likely to engage in online purchasing under the conditions of a straight rebuy (Deeter-Schmelz & Kennedy. One of the first formal analyses of the use of the Internet as a communication device revealed it to be extremely versatile on the dimensions of symmetry of information flow. One can imagine that the Internet might be more useful during the prepurchase information stage. communication timing. media content. the Internet was perceived to be an impersonal form of communication. 2002). industrial purchasing (Carter. The Internet has been used to compile competitor information. & Yung. Researchers have argued that those buyers lacking the skills to use the Internet are less likely to do so (Kennedy & Deeter-Schmelz. .

In addition. firms has increased from 9 percent of total annual dollar purchases in 1993 to over 25 percent in 2000. Trent and Monczka (2002.4. sources by larger U. practices. firms have internationalized. Research by Servais and Jensen (2001) revealed that less than 15% of the small Danish manufacturers who were studied had no foreign suppliers. Internationalization and Global Sourcing The dominant change in the world economy since Johnston’s original research is the globalization of markets (Levitt.How Do the Internet and Internationalization Affect the Buying Center? 353 Not only is the Internet disrespectful of national boundaries and national jurisdiction. 1992. which differs from international purchasing in scope and complexity. p.S. 1977. European research reinforces the perception that purchasing has become highly internationalized. Trent and Monczka (2002. the location of the parties may be unknown (Grant & Bakhru. the percentage of U. Yip. involves proactively aggregating volumes and coordinating common items. firms making purchases internationally grew dramatically from 21% in 1975. 2004). while others have offered a more interactive view of both the inward and outward internationalization processes. those involved will have to re-examine its function to determine any changes that may occur during the purchasing process. it seems that the pace and extent of globalization have been fairly swift. p. Although definitions of global sourcing vary. 68) posit the following: Global sourcing. it renders geography irrelevant.S. to 56% in 1982. 2. in online transactions. Some scholars have posited gradual models for internationalizing both the marketing activities of firms (Johanson & Vahlne. 1990) and the global sourcing activities of firms (Monczka & Trent. 1991). According to Trent and Monczka (2002). As markets have globalized. which could speed up both processes (Welch & Luostarinen. while over 25% spent more than half of their procurement budgets with foreign suppliers. most authors agree that there is a significant strategic component to global sourcing that is absent in international purchasing. Based on their development of a five-level model of internationalizing procurement. As the Internet becomes more prevalent in purchasing situations. 1984. 2000). to 71% in 1987. . 69) further assert that: The average amount of total purchases from non-U. 1993). Bartlett & Ghoshal.S.

181). technologies. parts or finished products worldwide. (1995. processes. p. Kearney. or buying and assembling components. and that sourcing strategies may need to change over time to reflect changes in the dynamics of supply markets. defines global sourcing in terms of both what it is. 18) of A. p. Improved sales and financial performance is a major objective of a global sourcing strategy. and what it is not: Primarily. design. Kotabe.354 CATHERINE N. p. AXINN ET AL. Less-expensive labor. 182).T. and operating locations. 21) acknowledges the initial role of costs: Traditionally. and lower land and facility costs have enticed companies to foreign suppliers. designs. Alguire. Kohn (1993. depending on the product being sourced. Motives for global sourcing can be as varied as definitions. p. reduced product cost remains the main attraction for perhaps one third to one half of those companies currently pursuing global sourcing. p. less restrictive work rules. Murray. Factor analysis reveals two major motives (competitive advantage and comparative advantage) and two major types of barriers (internal and external). Their analyses reveal that a variety of sourcing methods may be effective. and Wildt (1995. Frear. and Metcalf (1994. According to Murray et al. in conducting their contingency analysis of the performance implications of global sourcing strategy. . the most widely recognized benefit of global sourcing has been lower costs. and suppliers across world-wide procurement. define global sourcing as involving. setting up production operations in different countries to serve various markets. This study examines both motives for global sourcing and barriers to global sourcing. y Global sourcing is not an exercise in finding cheap sources of supply or suppliers of questionable quality y 50 to 60 percent of savings in global sourcing programs are the result of existing suppliers improving their price to world-class levels. 73) examine the determinants of global sourcing strategy and conclude that global sourcing strategies should be driven at least as much by technology and quality considerations as by cost concerns. Fagan (1991. 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. Inc.

As mentioned previously. (2) involving the right individuals as participants or team members. This paper reports the first of three exploratory case studies. he goes on to detail additional benefits from global sourcing. and experts predict that within the next decade the Internet will become the interface of choice for supply chain management. 2004). Partly because communication is so important in successful global sourcing. Servais and Jensen (2001) compared motives for choosing foreign suppliers to those for choosing domestic suppliers and found lower prices to be the primary factor for both sources of supply. 3.. the industrial marketplace is undergoing tremendous changes. The top three factors found to indicate greater success were: (1) following a well-defined process or approach to global sourcing. since the original research essentially comprised an analysis across 31 case studies. and structure of. While some sectors are dominated by multinational players. The international face of e-commerce reveals that national markets have only partly succumbed to the onward march of globalization. Electronic commerce is considered to represent the ultimate manifestation of the globalization of business (Grant & Bakhru. we modified the instruments used by Johnston (1979) in his seminal research. Trent and Monczka’s (2002) research examined factors contributing to more versus less successful applications of global sourcing. Therefore. including availability of supply. and (3) having well-established communication methods among participants. including the procurement process (Carter et al. and quality and technical supremacy. Case study method was deemed the most appropriate technique to achieve this goal. a key goal was to evaluate the potential for replicating the research originally conducted by Johnston (1979) in order to ascertain how the Internet and global sourcing might affect the communication relationships inherent in. in part due to the effects of the Internet and internationalization. although the secondary factors varied with better quality being a motive for selecting foreign suppliers and better lead time being a motive for selecting domestic suppliers. 2000). uniqueness of products. 2004). the Internet has become increasingly vital. EXPLORATORY CASE STUDY Clearly. and to this framework the questions necessary to facilitate our expanded .How Do the Internet and Internationalization Affect the Buying Center? 355 However. most of the major businessto-business e-commerce hubs are dominated by global players (Grant & Bakhru. the buying center.

1. Our subject firm. the CEO cautioned: I ask you to really think about the bigger thing. but because of Internet communication and travel. a representative of the parent company. Four industrial distributors had been among the original 31 firms which formed the sample for Johnston’s (1979) earlier research. 4. as we soon found ourselves unable to fit this organization’s purchasing behavior into the frameworks of our carefully designed surveys. who stated in the opening interview: We will help you in any way we can.g. who is permanently assigned to work with the subject firm. Shaped by the Subject Firm At the close of the same interview. Interviewees were all the senior managers who were identified as playing a role in the organization’s purchasing and procurement processes. we were able to interview one manager who played a principal role in the purchase of a piece of capital equipment. AXINN ET AL. which is purchasing in multi-divisional environments. supplying equipment to mechanics in a wide variety of industries. we spoke with numerous people involved in procuring products critical to its business operations. The subject firm in this case study is an industrial distributor. but were unable to build from that point a map of all the communication relevant to the buying center for . is a major player in the global automotive aftermarket. purpose were added. but had difficulty identifying people who had made purchases like those studied by Johnston (1979) in his original research (e. what does the organization look like and how can it be more efficient? y I encourage to you keep an open mind. y I think that the world has changed radically. and five other managers. and it may be due to the specific business model of the firm as a distributor. be due to the multidivisional structure of the organization. This comment turned out to be somewhat prophetic. In the end. the Global Procurement Leader.. This may. Some of the questions regarding Internet use were drawn from Deeter-Schmelz and Kennedy (2002). These managers included the CEO. Because of the distributor business model.356 CATHERINE N. global multidivisional environments. headquartered in the Midwestern United States. in part. capital equipment and industrial services). We will give you access to as many people as you need access to. We were very fortunate to have the complete support of the CEO. Not just globally because of globalization. FINDINGS 4.

‘‘passing orders back and forth. but soon it will be 8 7 6 8 No use CEO CFO Director of Merchandising Director of Supply Chain and Inventory Category Manager Director of Information Technology Parent Company’s Global Procurement Leader . each (except the CEO) was given a short survey drawn from the work of Deeter-Schmelz and Kennedy (2002).’’ To gain a more detailed view of the respondents’ Internet-based behaviors. He said. He emphasized the importance of direct system-to-system connections. However. who said that with respect to the purchase of a very large and specialized printer (capital equipment purchase). ‘‘we use the Internet heavily to compare features and benefits.5 5 Now it is 2. 4. it is not surprising that the respondents in our sample report Table 1. about How Important is the Internet in Your Relationships with Suppliers? 8. For instance. below. ‘‘y all the new products will come through this webpage. On a Scale of 1–10. we were still able to uncover some aspects of how the Internet and internationalization/global sourcing affect the purchasing practices of this firm. their rating scores varied widely. At the other end of the spectrum.’’ The Director of Merchandising noted that the company was only a few months away from launching a vendor-oriented webpage. we asked each manager to rate the importance of the Internet.2. and were often accompanied with various comments. the CFO noted that there was a tendency to rely more on EDI than online purchasing. due in part to his more strategic role in the firm.’’ The parent company’s Global Procurement Leader reported not using the Internet in his purchasing activities. as discussed below. Respondent Role Importance of Internet in Buyer–Supplier Relationship. as shown in Table 1. Internet Impact on Interactions with Suppliers To begin. With respect to the Internet use (Table 2). Interestingly. not surprisingly. is the Director of Information Technology.How Do the Internet and Internationalization Affect the Buying Center? 357 that purchase. The results of the two questions posed in this survey are compared with the results obtained in the previous study in Tables 2 and 3.



Table 2.

Comparison with Findings from Deeter-Schmelz and Kennedy (2002): Frequency of Internet Use.
Deeter-Schmelz and Kennedy Mean Case Study Mean

Question: Please Rate the Frequency with Which You Use the Internet in Each of the Following Ways:(1 ¼ Never, 5 ¼ Always) E-mail Searching for new suppliers Electronic data interchange Online customer support Online ordering Online order status checks Online payments Conducting reverse auctions Just-in-time inventory planning Discussion groups with other customers Gathering information regarding current suppliers Gathering product/component information Gathering competitive information for your company Accessing supplier documents (specs, order policies, etc.) Providing information to suppliers (specs, order policies, etc.) Gathering external customer information for your company

3.96 3.24 2.21 2.29 2.47 2.45 1.41 1.18 1.51 1.55 2.94 3.28 2.56 2.37 2.61 2.32

4.20 2.20 3.40 3.00 1.80 3.00 2.60 2.40 2.00 1.40 3.40 3.00 4.00 2.60 2.60 2.60

greater e-mail use, given that availability of the Internet technology has increased over time. Our respondents also indicate greater use of the Internet for EDI, online customer support, and online order status checks in payments. Our respondents also report more use of the Internet for reverse auctions, just-in-time inventory planning, and gathering information on suppliers as well as competitive information for the firm. Although the significance of these findings is not clear, given our small sample size, the results do provide preliminary evidence that organizational buyers may be using the Internet with greater frequency, and for a wider range of activities. Interestingly, our respondents reported less use of the Internet for online ordering as compared to the results reported by Deeter-Schmelz and Kennedy (2002), i.e., 1.80 versus 2.47, respectively.

How Do the Internet and Internationalization Affect the Buying Center?


Table 3.

Comparison with Findings from Deeter-Schmelz and Kennedy (2002): Importance of Internet Attributes.
Deeter-Schmelz and Kennedy Mean Case Study Mean

Question: How Important Are the Following Practices for Your Job: (1 ¼ Not Important, 5 ¼ Very Important) Easy online ordering Ability to ask questions online Easy movement around Internet sites Availability of current information Increasing speed of information from suppliers Increasing speed of information to suppliers Ability to customize content of supplier Internet sites Ability to obtain a lower price for products purchased Reducing order processing time Reducing paper flow Ability to connect to a live person when using an Internet site Ability to compare prices from several suppliers easily Ability to compare products from several suppliers easily Ability to offer feedback regarding Internet sites Ability to obtain information that educates me on product uses Ability to exchange information with colleagues

3.92 3.78 4.31 4.44 4.30 4.04 3.22 4.09 4.31 4.34 3.21 3.92 3.87 2.93 3.71 3.40

2.40 2.80 4.20 4.00 4.20 4.20 3.00 3.60 3.80 3.80 2.60 3.80 3.80 2.60 3.60 3.60

Table 3 reveals the findings relative to the importance of Internet attributes. As shown, respondents in the Deeter-Schmelz and Kennedy (2002) study placed greater importance on easy online ordering and the ability to ask questions online. Likewise, the Deeter-Schmelz and Kennedy (2002) sample placed greater importance on the ability to obtain lower prices for products 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 attribute on which respondents in our sample placed greater importance than the Deeter-Schmelz and Kennedy (2002) sample was increasing the speed of



information to suppliers. Still, results from both studies suggest this attribute is of importance to industrial buyers (4.04 and 4.20 for the two samples). 4.3. Internationalization and the Impact of Global Sourcing Once again, each manager was asked to rate the importance of global sourcing to the firm. There was much more agreement across all relevant managers on this topic than there was on the topic of the Internet, as can be seen 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 United Kingdom, and Japan. According to the CEO, ‘‘We probably do 70% of our business in the U.S. and 30% in the others.’’ We also learned that the parent company’s global sourcing activities were broader than this subsidiary’s activities. According to the parent company’s Global Procurement Leader, ‘‘Purchasing to us is tactical, procurement and sourcing is strategic. So we are looking at more of a strategic global standpoint y through utilizing preferred suppliers, qualified suppliers, and basically consolidating our volume where we can. y Our global team consists of 16 or 18 people.’’ One theme that was quite recurrent was the idea that global sources provided high-quality, innovative products, rather than just low-cost products. These comments were typical:  You are starting to see innovation overseas. y Right now a lot of the ideas are coming out of Asia and from Europe. (Director of Merchandising). Table 4.
Respondent Role

The Importance of Global Sourcing.
On a Scale of 1–10, about How Important Is Global Sourcing to Your Firm? 9 7 10 8 7 8

CEO CFO Director of Merchandising Director of Supply Chain & Inventory Category Manager Parent Company’s Global Procurement Leader

How Do the Internet and Internationalization Affect the Buying Center?


China is a big source of products right now. Taiwan is a big source of product for us. y India tends to be a place where you get more y technologically advanced products. y Probably 10 years ago, people viewed Asian source products as lower quality y over the years, the quality has definitely improvedya lot of times now their standard and quality of work coming out of Asia is changing dramatically. (CFO).  It used to be, you buy foreign, you [would] sacrifice something. y The world has changed y in many cases there is a lot more innovation coming from overseas than in our own back yard. (Category Manager). On the other hand, several people shared their concern that customers expected their products to be ‘‘Made in the USA.’’  There are many cases y [where] our customers insist on made in the USA y (Category Manager).  You have a huge population of people that are very proud of American made products and are willing to pay for American made products. (CFO). However, as noted by the Category Manager, ‘‘The customer really does not have a problem with offshore products, as long as they’re sharing in the savings. And we weren’t looking at it quite that way when we started. y they really don’t care where it comes from, as long as it stays in one piece and [we] stand behind it with a warranty.’’ And, the Director of Supply Chain Management observed that, ‘‘y global sourcing is really key to us y it has a competitive advantage.’’ Thus it appears that the sourcing of products sold by this industrial distributor will continue to be a blend of products ‘‘Made in the USA’’ and products, especially high-quality, innovative products, made throughout the world. Throughout this discussion we have heard echoes of points made earlier in the literature review. Global sourcing has grown in strategic importance. In this firm the physical manifestation of this is the Global Procurement Leader who is a corporate employee, but is permanently stationed at the subsidiary to assist its global procurement efforts. In addition, we also hear repeated emphasis on the quality and technology benefits of global sourcing, in addition to the cost benefits. 4.4. Learning about the Buying Center Although our original goal was to replicate Johnston’s (1979) seminal research on the structure and function of the buying center, taking into



account the Internet and internationalization, this proved impossible, as noted in Section 4.1, above. However, we were able to glean some interesting insights into the aspect of formalization of the purchasing process. Table 5 reports our findings on this topic. The range of answers on this question is quite startling. One aspect on which there was consensus was the existence of a procedure called ‘‘Delegation of Authority.’’ This process mandates how much money each person can spend on a purchase without higher approval. According to the CFO, ‘‘We have a delegation of authority that specifically lays out, based on type of purchase y where people have different approval levels. y A direct manager can approve something $2500 or less y but anything over $2500 comes to me for $2500 to $50,000 and then goes to [the CEO] for $50,000 to $250,000. And above $250,000, one single expense over $250,000, we have to get corporate approval.’’ The most diverse views were held on the perceived presence or absence of a formal purchasing manual. Three managers reported awareness of a paper manual while two said there was none. Online availability was also in doubt, although this was the point at which all respondents mentioned the delegation of authority. An unexpected result was comments made regarding the positive impact of the Sarbanes-Oxley legislation in formalizing the purchasing processes. According to the CFO, ‘‘y you are forced to create processes and procedures for everything. Last year we went through pretty extensive exercises y’’ The Director of Merchandising expanded on this point: ‘‘A lot of people tell you its been miserable, but the reality of it is it forced [you] y to document how you currently do everything y the big eye opener was you would see everything mapped out that we’ve been doing for years and suddenly go, ‘Boy, that doesn’t really make sense when you see it laid out on Table 5.
Respondent Role

Formalization of Purchasing Policies and Procedures.
On a Scale of 1–10, about How Formalized Would You Say Your Company’s Purchasing Policies/Procedures Are in Comparison to Other Companies? 7 9.5 5 4.5 5 7

CEO CFO Director of Merchandising Director of Supply Chain and Inventory Category Manager Parent Company’s Global Procurement Leader

How Do the Internet and Internationalization Affect the Buying Center?


paper like that.’ So there have probably been more changes in the last two years y you’ll look back in ten years and say, ‘That Sarbanes-Oxley changed corporate America!’ more than anybody even realizes right now. Because it’s forcing companies to look at how they operate, there should be huge improvement in efficiency y’’

5.1. Limitations in Researching the Buying Center As mentioned earlier, a key goal of this study was to evaluate the potential for replicating Johnston’s (1979) seminal research in the context of today’s industrial procurement environment. We were frustrated in this endeavor in several ways, and subsequent case studies involving a nationally recognized service firm and a Fortune 200 global manufacturer have provided some additional explanatory insight. One key tool used to construct diagrams of buying centers was a question asking respondents to identify other members of the buying center and quantify their communications with them, specifying the percentage of communication that was oral or written. In our attempt to examine how the Internet influences the buying center, we expanded this question to include communication via the Internet, e-mail, and company intranets. This expansion rendered this question nearly impossible for the respondents to answer, due to both increased complexity and the sheer volume of communications implied. While on one hand, this provides some evidence that the Internet does indeed impact the buying center; on the other hand, it leaves us seeking alternative means of assessing this impact. Additional limitations stem, in part, from our fairly narrow goals for this research. Because of our focus on the buying center, we did not broadly explore the internationalization of the subject firm. We did not examine their outward internationalization nor did we explore possible connections between their inward and outward internationalization. In addition, we did not consider the impact of cultural distance on the respondents, although some culturally related biases may be seen in some comments. Further, we did not consider the network of potential supplier/buyer relations or the possible existence of reciprocity. Finally, we are quite limited in the conclusions we can meaningfully draw since we only examined one industrial distributor. 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 internationalization, 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 is using the Internet more for EDI purposes rather than online purchasing, thereby suggesting that the Internet is being used by this firm more frequently in straight rebuy situations. In addition, as suggested by the Director of Information Technology, the sample firm is using the Internet as an information-gathering tool, collecting information on the features and benefits of various products. Finally, as noted by the Director of Merchandising, the firm is turning to the Internet as a way to provide product information to its customers. Interestingly, these findings are similar to those reported by Kennedy and Deeter-Schmelz (2001) and Deeter-Schmelz and Kennedy (2002), who found that industrial buyers were more likely to use the Internet as an information-gathering tool as well as a purchasing tool in straight rebuy situations. One key difference is the emphasis our sample firm placed on EDI via the Internet. We also gained insight regarding the effects of internationalization, and global sourcing in particular. Several themes became apparent. First, our sample firm was using a wide variety of global sources when purchasing products. Second, global sources were associated with innovative, quality products, rather than just cost savings. Third, there is evidence that the global sourcing activities of this firm are increasingly strategic, although they have not become as centrally controlled as might be expected by Trent and Monczka (2002) to be categorized as a Level V organization (having integration and coordination of global sourcing strategies with other functional groups). Indeed, in this organization we find that procurement activities are quite diffuse among senior managers. This may be attributed, in part, to the customer-driven distributor business model prevailing in the firm. However, it is possible that such diffuse procurement responsibility could be associated with a responsibility-based budgeting process, and/or the shift to flatter organizational 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 believe that longitudinal studies are needed to continually monitor changes in

How Do the Internet and Internationalization Affect the Buying Center?


the usefulness of the Internet to industrial buyers and sellers, and to examine its effects on the purchasing process. This might be especially fruitful if done from the perspective of buyer/supplier networks, in the context of examining both inward and outward internationalization. One construct that researchers might investigate is formalization. Formalization 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 formalization. As organizations move toward more formalized buying teams (Sheth, 1996), as well as more formalized selling teams, it seems appropriate to investigate the effects of formalization in greater detail. Will the advent of the Internet and internationalization lead to more formalization? Does that formalization add necessary structure to the procurement process, or does it inhibit organizational processes? Additional research is needed to explore these ideas more fully. Our research also revealed something of a paradox, with some trends pushing firms to place procurement responsibility in the hands of more individuals (in parallel with their operational responsibilities) and other trends pushing procurement responsibility to a more centralized unit to facilitate true global sourcing. Further research will be needed to resolve this apparent paradox. Finally, it is quite likely that categorizing the purchases made by industrial buyers may be helpful in actually mapping the purchasing process. Bunn (1993) identified buying activities (search for information, use of analysis techniques, proactive focusing, and procedural control), buying situational characteristics (purchase importance, task uncertainty, extensiveness of choice set, and perceived buyer power), and buying decision approaches (casual purchase, routine low priority, simple modified rebuy, judgmental new task, complex modified rebuy, and strategic new task). Just as Robinson et al. (1967) proposed that the buying center would vary by purchase situation it seems likely that the effects of the Internet and internationalization might vary depending on the buying activity, situational characteristics, and buying decision approaches. Researchers might use Bunn’s (1993) taxonomy as a starting point for empirical investigations of effects of the Internet and internationalization on the purchase decision process.

The authors would like to thank the Sales Centre at Ohio University for supporting this research.

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to internalize it for their internationalization. learning orientation facilitates the IBKInternalization process. Volume 17. has a reciprocal effect on IBKInternalization. Nguyen and Nigel J. These findings suggest that internationalizing firms should promote and value the IBK-Internalization process in order to mitigate their lack of foreign market knowledge.1016/S1474-7979(06)17014-3 369 . Barrett ABSTRACT Realizing that the Internet is a source of information and the possibility to transform it into knowledge. It is found that IBK-Internalization underlies international orientation and foreign sales intensity. 369–394 Copyright r 2007 by Elsevier Ltd. International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing.INTERNET-BASED KNOWLEDGE INTERNALIZATION AND FIRM INTERNATIONALIZATION IN TRANSITION MARKETS Tho D. to assess its relevance. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. Further. which in turn. and then. this study develops an IBK-Internalization process in which internationalizing firms in transition markets utilize the Internet to search for information about foreign markets.

because they lack resources for undertaking foreign market research such as foreign market experiments and foreign market visits (Nguyen & Barrett. p. 2001). commercial applications of the Internet have proliferated (Hamill.. 2005. 2005). especially for firms in transition economies. political. Firms conducting business in foreign markets are confronted with greater risks than they face in their home markets because foreign markets tend to be characterized by heterogeneity.. BARRETT INTRODUCTION In an economy where the only certainty is uncertainty. the differences in cultural. 1980. Drucker. economic. When markets shift. Rialp & Rialp.g. As a result. successful companies are those that consistently create new knowledge. Ling-yee. 2004. Cavusgil. and turbulence. sophistication. Pendleton. such as Vietnam. national. Davenport & Prusak. 1977. In the literature on internationalization. 2000.370 THO D. obtaining foreign market knowledge is not an easy task. Moreover. 1997. Javalgi. & Scherer. disseminate it widely through the organization. With the inception of the World Wide Web. Morgan-Thomas & and MeetChina. Johanson & Vahlne. & Du. social. NGUYEN AND NIGEL J. and for firm internationalization in particular. and products become obsolete almost over night. Knowledge is an invaluable asset that enables firms to remain competitive or even to survive. Several firms around the world. The Internet has received a high level of attention by firms in the last decade because it offers several commercial applications for firms around the world (Bennett. 1999. 2000).. There are also a number of e-trade providers in transition markets such as MeetVietnam.g. knowledge has also been posited to be a key factor that affects firms’ internationalization behavior (e. Hamill. Zhao. technologies proliferate. and other environmental influences have made it more complex and difficult to conduct foreign market research (Craig & Douglas. and transition economies such as China and Vietnam. . 1991. domestic and multinational. and quickly embody it in new technology and products (Nonaka. 2006). The Internet’s low-cost communication may permit firms with limited capital to become global marketers at an early stage of their development (Luo et al. 2004). are establishing their presence on the Internet. 96). 2000). 1997. Radulovich. Liesch & Knight. developing. Luo. especially in the knowledge society (e. competitors multiply. The Internet may provide a different environment for international marketing in general. the one sure source of competitive advantage is knowledge. legal. both in developed. 1988).com that provide firms in these countries with online tools for their internationalization (Asia Today International. 1997.

. Hamill & Gregory. 2001). & Yip. Bennett.g. less attention has been paid to the transformation of data and information obtained from the Internet for firm internationalization. 2005).g. . Using various Internet tools such as e-mails. 1997. 2003. Akbar. they have been found to be largely conceptual (e. Tatoglu. Quench & Klein. 2000). especially in transition economies (Chao. Sheth & Sharma. 1995. both internal and external to the firm (Hamill. Lescher. Models of knowledge creation help explain how the firm develops knowledge. this study examines the process in which a firm searches for data and information on the Internet. Morgan-Thomas & Bridgewater. 2005). 1997. assesses their relevance for internationalization. Nonaka. it does not cater for how the firm develops the knowledge. More importantly..IBK-Internalization and Firm Internationalization 371 2005.g. and distributors. search engines. 1997. The Internet becomes a powerful tool for supporting networks. This source of information is very promising because it is cost effective and speedy (e. 2004. 1985). Moreover. It is the innovation of information and communications technologies that has given an opportunity for information acquisition that is substantially more efficient for firms all around the world (Porter & Millar. Internet connection can substantially improve communications with existing foreign customers. Luo et al. This process is termed Internet-based knowledge internalization. internalizes them with the existing foreign market knowledge in the firm. Reedy & Schullo. Hamill. 2003). 1996). or simply.. the theory of knowledge in internationalization posits that the knowledge for a firm’s international expansion is mainly experiential or tacit. However. which can mainly be obtained during its international operations (e. Sørensen & Buatsi. 2004). suppliers. as well as on the latest technology. The antecedent is learning orientation and the outcomes are international orientation and foreign sales intensity.. Little has been undertaken in the developing world. Weible & Wallace. 1997. 1994. & Kula. and online surveys.. In an attempt to bridge the above gap. Morgan-Thomas & Bridgewater. 1997. agents. 2000. An antecedent and outcomes of IBKInternalization are also examined.g. 2004). Several studies have been conducted to explore the usefulness of the Internet for international marketing (e. and technical development (Hamill & Gregory.. Lam. It can also identify new customers and distributors and generate a wealth of information on market trends. internationalizing firms can collect a variety of data and information about foreign markets. Johanson & Vahlne. and then.g. 1977). Kaynak. research. Davenport & Prusak. It is also a new and efficient medium for conducting market research (e. 2002. Nevertheless. 2005. however. most research in this area has been conducted primarily in advanced economies. Samiee. IBK-Internalization.

1 depicts a conceptual model of IBK-Internalization. We. It is argued that using computers and access to the Internet are unlikely to be a source of sustainable competitive advantage in internationalization because these are imitable (Barney. Samiee. intangible resources including knowledge are the key factors contributing to a firm’s competitive advantages (Barney. although tangible resources are determinants of performance. Firms utilize the IBK-Internalization to obtain foreign market knowledge for their internationalization. BARRETT The rest of the article is structured as follows: first. 1984). discuss the results and implications. . sustainable H1 Foreign Sales Intensity Learning Orientation H4 IBKInternalization H3 International H2 Orientation Fig. we propose a conceptual model of IBK-Internalization and firm internationalization and hypotheses. and results. 1991. nevertheless.372 THO D. We conclude the article by addressing a number of limitations and directions for future research. Every firm can access the Internet to collect data and information about foreign markets. Conceptual Model. This will lead to a greater degree of their international orientation and foreign sales. Wernerfelt. then. data analysis. NGUYEN AND NIGEL J. IBK-Internalization According to the resource-based view of the firm. It is also postulated that learning orientation is a key antecedent of the IBK-Internalization process. IBK-INTERNALIZATION AND FIRM INTERNATIONALIZATION Fig. we present the method. 1991. Subsequently. 1998). 1.

The Internet operates as a ‘virtual library’ which can be accessed by users everywhere around the world (Ancel. 1998). This implies that firms not only search for relevant and purposive data but also. used for firm internationalization. The dynamic theory of knowledge creation. assessed. Internet Information Relevance Internet information relevance refers to the level of usefulness of information obtained from the Internet for firm internationalization. 2002).. and compared with other sources. use suitable tools for obtaining information) and efficiently (i. Internet Utilization Internet utilization assists firms in collecting data and information on the Internet.e. 2002. Sørensen & Buatsi. Nonaka & Takeuchi. 2002). Webb and Sayer (1998) believe that due to the Internet’s interactive characteristic of the Internet. 1994). and absorbing both tacit and explicit information and translating it into knowledge which is then applied to some purpose’’ (Liesch & Knight. Frequently utilizing Internet tools such as search engines and e-mails. 1995) offers an explanation of how a firm obtains information and then transforms it into knowledge. use those tools skillfully). 1997.’ However. assessment of information relevance (Davenport & Prusak. Internet utilization assists firms in collecting data and information on the Internet. in practice. 2004. 2002.IBK-Internalization and Firm Internationalization 373 competitive advantage in the form of knowledge resources can only be gained by firms if they are capable of creating knowledge based on the Internet. . However. Nonaka. 385). 2006. interpreted collectively.. categorize. to obtain relevant and purposive information for internationalization. Sørensen & Buatsi. Reedy & Schullo. properly utilized (Webb & Sayer. acquiring. 1994. 2005). 1999). This is made possible due to the wide range of data and information about foreign markets on the Internet (Hamill. especially the internalization process (Nonaka. internationalizing firms are able to collect a considerable amount of data and information about foreign markets (Bennett. 1997. Nguyen & Barrett. and information internalization (Knight & Liesch. Kaynak et al. it can in fact function as much more than a ‘virtual library. Three important features of IBK-Internalization are Internet utilization (Sørensen & Buatsi. firms should use it effectively (i. In this study. 1999.. IBK-Internalization is defined as the process in which data and information collected from the Internet are acquired.e. and then. Internalization is ‘‘the process of searching for. p. the opportunity given by the Internet has not been. 2000).

1999). Internet information internalization refers to the interaction between information obtained from the Internet with other sources of information and knowledge within the firm. Leonidou & Adam-Florou. This process can enhance the level of usefulness of information. foreign market knowledge is a convincing explanation for the incremental manner of internationalization in which firms gradually acquire. firms in transition markets like Vietnam lack resources for obtaining foreign market information and knowledge through such traditional modes (Nguyen & Barrett. is likely to transform it into higher levels of knowledge to satisfy its knowledge need for internationalization. NGUYEN AND NIGEL J. 2000). and export intelligence (Leonidou & Adam-Florou.e. 1995).’’ Therefore. compared to firms in advanced economies. The interaction relates to the process of information comparison and interpretation. information and knowledge are perhaps the most critical to the expansion of SMEs into foreign markets. 2006.g. the firm. market characteristics. to transform data into information (Davenport & Prusak. integrate. export assistance. i. and the use of information for making business decisions (Davenport & Prusak. It is knowledge. BARRETT correct. relevant information for their internationalization (information about the environment. However.. In addition. This can be achieved through international marketing research. IBK-Internalization and Firm Internationalization As discussed previously. 2002). where various types of data and information about foreign markets are available. p. Internet Information Internalization Access to the Internet.e. therefore. 1999). Nguyen & Barrett. however. There are a number of ways that firms can acquire information and knowledge about foreign markets. 1977). and use knowledge about foreign markets to successively increase their commitment to foreign markets (Johanson & Vahlne. i.. 385) argue that ‘‘[of] all resources. When acquiring relevant information from the Internet. 2006). 2000. not information per se. is a promising source of information (e..374 THO D. systematic acquisition of information and knowledge about foreign markets is critical for firms’ success during their internationalization. Nonaka & Takeuchi. firms in transition . 1977). and summarize them. that is a significant factor that affects a firm’s internationalization behavior (Johanson & Vahlne. Sørensen & Buatsi. and the marketing mix. Liesch and Knight (1999.

The greater the degree of IBK-Internalization of a firm. and internationalization behavior are well documented in the literature on internationalization (Haahti. Nguyen & Nguyen. . Firms must find foreign markets for their products rather than relying on governments’ arrangements.e.. Johnston & Czinkota. When these markets have been transformed into a new system. 1998). The IBK-Internalization process may offer those firms an opportunity for obtaining foreign market knowledge.e.IBK-Internalization and Firm Internationalization 375 markets are short of international experience. a transition market. Firms pursue IBK-Internalization to solve the problem of the lack of knowledge about foreign markets. preference. which reflect a firm’s international orientation. A recent study of exporting firms in China. i. Accordingly. ‘‘[i]n the information age. and willingness to commit to international expansion (Barrett. Bilkey. and diffuse it rapidly throughout the company’’ (Bartlett & Ghoshal. Stump.. IBK-Internalization is not a static process. transform it into usable knowledge. 1998).. p. 1987. 1982. Madsen. The relationships between knowledge. international business activities of those firms have been arranged by their governments. H1. provided that they are fully aware of this possibility and are prepared to exploit it.g. 2004. 141). it is important that those firms should find alternatives to obtain knowledge in order to enhance their internationalization. 1986. Firms that are capable of employing the IBK-Internalization process can significantly enhance its ‘knowledge bank’ for their internationalization. internationalization attitudes.. This is because in the last several years. it is a dynamic process in which internalized knowledge about foreign markets is created. Madupu. several studies have found that internationalization attitudes play a vital part in firms’ development and performance in foreign markets (e. 1995. 1978. Francis & Collins-Dodd. Stump et al. 2005. Athaide. Yavas. its belief. In addition. by Ling-yee (2004) also reveals that knowledge about foreign markets plays a key role in export intensity. 1998). embed it as organizational learning. 1977). In short. the greater is the degree of its foreign sales. & Axinn. Consequently. a market-oriented system. In so doing. knowledge about foreign markets is perhaps a critical factor for their success and a reasonable explanation for their internationalization (Ling-yee. 2000. Johanson & Vahlne. 2001). arrangements between governments have almost ceased. a company’s survival depends on its ability to capture intelligence. & Babakus. i. which can provide international advantages for firms that utilize it. International business activities are no longer conducted in the ‘traditional’ way (Griffin.

’’ Based on this. This gives rise to the ability to adopt and implement new ideas. the firm will be more comfortable in dealing with innovations. information dissemination. H4. The greater the degree of IBK-Internalization of a firm. BARRETT H2. i. processes. we will have greater confidence in the internal validity of the rival hypotheses.. Bagozzi (1984. NGUYEN AND NIGEL J. This will lead to the need for acquisition. 2005). are held constant. 16) argues that ‘‘[i]t is important to stress that tests of rival hypotheses should not be reserved for separate studies but should be performed whenever possible within the context of an on-going study. Sia. learning-oriented firms are more likely to create a learning culture. & Lee. Wei. 2005. Learning Orientation and IBK-Internalization Learning orientation is an organizational factor that influences the propensity of a firm to create and use knowledge (Sinkula. including the Internet.e. 2000. settings. the greater is the degree of its international orientation. In this way. Wang. This means that learningoriented firms will never be satisfied with its existing level of knowledge. and transformation of information and knowledge from all accessible sources (Lam. & Noordewier. & Zhao. 2002). Rival Model Rival models play an important role in theory construction. 1997. information acquisition. and shared interpretation (Sinkula.. Accordingly. instruments. A learning-oriented firm creates and encourages a learning environment throughout the firm.. The firm endlessly creates and uses new knowledge that has the potential to influence the firm’s performance (Teo. which can initiate. etc. The firm continuously promotes the organizational learning process. 1994). because subjects. Teo et al. support. 1997). Consequently. 1995. Sinkula et al. the greater is the degree of its IBK-Internalization. and maximize the IBK-Internalization process within the firm. p. assessment. Nonaka & Takeuchi. the greater is the degree of its foreign sales. 1995). Baker. a . The greater the degree of learning orientation of a firm. to produce innovative capacity for the firm (Calantone. i. Therefore.376 THO D.. or products. Cavusgil. The greater the degree of international orientation of a firm. H3.e. Slater & Narver.

and Internet information internalization. knowledge required for its internationalization will amplify. Webb. comprising three dimensions: market feasibility information. Fourteen items were used to measure the three dimensions of information relevance. visits to websites of foreign distributors.. Adaptation information was measured by five items addressing information on . Internet information relevance was a second-order construct. adaptation information. it is proposed that Hc. it could be expected that. The greater the degree of foreign sales of a firm. when the firm has a greater degree of commitment to foreign markets.IBK-Internalization and Firm Internationalization 377 rival model is proposed. As discussed previously. Therefore. In turn. competitors. Market feasibility information was measured by three items covering information on potential distributors. a discussion with managers of a research firm in the market showed that these tools had not been widely used in the market to date. 1994). The second indicator was the frequency of using e-mail for international business purposes. Lescher. the greater is the degree of its IBK-Internalization. this tool was included in the measure of Internet utilization as part of the e-mail tool. The first indicator was a measure of time spent searching the Internet. comprising three dimensions: Internet utilization. & Jones. and. This leads to an increase in IBK-Internalization.e. such as using search engines. thus leading to an improvement of its performance in foreign markets. METHOD Measurement IBK-Internalization IBK-Internalization was conceptualized as a high-order construct. Even though the electronic survey is an important tool for research on the Internet (e. Internet information relevance. asking respondents how many hours per week the firm uses the Internet to search for information on foreign markets. Internet utilization was measured by two indicators. background information (Hart. when a firm acquires appropriate knowledge about foreign markets the firm tends to enhance its commitment to foreign markets.g. Therefore. suppliers. It was measured by asking respondents how many times per week the firm receives and sends e-mail related to international business activities. buyers.. i. and customers. and suppliers in foreign markets. 1995).

relating. Ling-yee. political forces. background information was measured by six items covering general information such as socio-economic information. and infrastructure. (1997). only instrumental and conceptual uses are of importance for knowledge internalization because these types of information use assist the firm in generating knowledge.e. Learning Orientation The conceptualization and measurement of learning orientation in this study were borrowed from Sinkula et al.. 1992). 2000. Instrumental use of information relates to the direct application of information obtained to solve a marketing problem. indirect use of information. Internet information internalization was also a second-order construct. and open-mindedness. Symbolic use is the use of information mainly for supporting an opinion or. i. i. based on the types of usable information on foreign markets that the firm can obtain from the Internet). 1992). and fusing information collected from the Internet with information and knowledge obtained from other sources. The literature on information utilization conceptualizes three forms of information use. justifying a decision. market size.e. such as buyers’ preferences. shared vision. Shared vision was also measured by four items embodying .. rather than using it in a manner consistent with the intended purpose of the firm (Menon & Varadarajan. Menon & Varadarajan. These items were adapted from Hart et al.’s (1994) scale with modifications to suit the setting of this study (i. and symbolic use (e. including experience of members of the firm (Davenport & Prusak. BARRETT characteristics of markets. to promote and nourish a learning culture within the firm. NGUYEN AND NIGEL J. instrumental use.g. Finally. conceptual use. Information transformation was measured by five items addressing the process of comparing. Among three types of information use.378 THO D. and comprised three dimensions: commitment to learning. and growth. comprising two dimensions: information transformation and information use. 1995. 2004). Research has found that these two types of information use are unidimensional (Diamantopoulos & Souchon. Commitment to learning was measured by four items reflecting the degree that a firm is willing to commit to learning. 1999).. i. Nonaka & Takeuchi. legal issues.. Conceptual use refers to the use of information to develop a managerial knowledge base..e. Foreign Sales Intensity Foreign sales as a percentage of total sales (fsts) was used to measure foreign sales intensity (Moini.e. competition. Information use was measured by five items based on the scale developed by Diamantopoulos and Souchon (1999). 1995).

A quantitative pilot survey followed to refine the measures. All other items were measured by a 5-point rating scale (anchored by 1: strongly disagree and 5: strongly agree). comprising two dimensions: international conviction and international intention (Barrett. This survey was conducted using faceto-face interviews with 89 firms in Ho Chi Minh City. and purpose among all members of the firm. Accordingly.. respectively) and exploratory factor analysis (EFA). and was then recoded by values varying from 1 to 10 for analysis. 10 ¼ 91–100%). Principal axis factoring with promax rotation was used because it accurately reflects the underlying structure of the data than that provided by an orthogonal solution such as varimax (Gerbing & Anderson. International intention reflects the managers’ willingness to commit resources to international business activities. and was measured by four items. A systematic sample .70) and factor loadings (l>0. The results indicate that these measures achieved a satisfactory level of reliability (a>0. Internet utilization was measured at ratio level. The Sample Vietnam was selected to empirically test the model because it represents an under-investigated transition economy (Tsang. which were measured by one and two indicators.e. open-mindedness was measured by three items mirroring the unlearning process of the firm. these measures were used in the main survey. It was measured by eight items. i. Finally. y . this step is important because of the difference in the research setting. International Orientation International orientation was also a second-order construct.IBK-Internalization and Firm Internationalization 379 the focus of the firm on learning that fosters energy. 1988).50). Even though most of the scales have been used widely in the past. Foreign sales as a percentage of total sales (fsts) was measured within a range of 1–10 (1p10%. 2 ¼ 11–20%. Measurement Refinement A focus group was undertaken with six managers who were responsible for international business activities of firms that had used the Internet for their internationalization. 2005). commitment. in the context of a transition market. 1986). International conviction refers to the belief of managers that international business activities would contribute to the achievement of a firm’s goals and competitiveness and its preference for international expansion (as opposed to other strategies). Vietnam. The scales were assessed via Cronbach’s alpha (except for foreign sales intensity and Internet utilization.

4%) firms involved in contract modes. 248 (81%) firms involved in direct exporting. BARRETT of 306 firms in Ho Chi Minh City. based on the Business Directories in Ho Chi Minh City. This English version was translated into Vietnamese because English is not well understood by managers in this market. 80 (30%) had a website. The single key informant approach. which might not be given by senior managers. due to nonqualified respondents. and four firms (1. respondents not being members of top management responsible for international business activities. 60 (19. all firms had used e-mail and search engine tools. the interviewers were instructed to reach relevant people in the organization in order to request specific information. and 76 (24. The results indicate that all the scales satisfied the . Partial self-administered surveys. 21 were found to be invalid. the remaining 306 valid completed questionnaires comprised the sample for this research. respectively. the most commonly used method in organizational research (Kumar. Consequently. were used for this study. NGUYEN AND NIGEL J. which used the Internet for their international business activities. 170 (55. The sample comprised 264 (83.000 internationalizing firms in all industries.6%) had from 100 to 300 employees. DATA ANALYSIS AND RESULTS Measurement Models The measures were first assessed via Cronbach’s alpha. which were measured by two and one items.3%) involved in foreign direct investment.380 THO D. the major business center of Vietnam. 44 (14. Stern.. consisted of about 5.6%) firms involved in indirect exporting.6) firms had more than 300 employees. was used in this study. The original questionnaire was in English. & Anderson. 1993). such as Internet usage.8%) firms had fewer than 100 employees. However. The sampling frame. was surveyed. Back translation was used to ensure the equivalence of meanings. Four hundred questionnaires were distributed to firms in the chosen sample and 327 completed questionnaires were collected yielding a response rate of 82%. e. and only 3 (1%) had used the Internet as a channel of distribution. except for Internet utilization and foreign sales intensity. Follow-up telephone calls to remind respondents to complete the questionnaires prior to collection were also conducted.g. Among these completed questionnaires. In terms of Internet applications. In terms of firm size. in which questionnaires are mailed to the target respondents and are collected by interviewers. Respondents were senior executives of the firms.

e. were 0. i. The CFA results of these second-order constructs are shown in Table 1. IBK-Internalization was a high-order construct comprising two secondorder constructs (Internet information relevance and Internet information internalization) and one first-order construct (Internet utilization). It is noted that because foreign sales intensity was measured by a single item (fsts). Nonetheless. Also. respectively. and 0.65). it was assumed to have a reliability of . The factor loadings of all ¨ ¨ items were high and substantial (the lowest loading was 0. the Cronbach’s alphas of the two dimensions of international orientation. Internet information relevance.92 and 0. 1985).e. commitment to learning.93. market feasibility information. The screening process shows that the data exhibited slight deviations from normality. i.001). were 0.e. respectively. information transformation and information use. The Cronbach’s alphas of three dimensions of learning orientation. The correlations between three dimensions of IBK-Internalization (Internet utilization. 0. adaptation information.978. The Cronbach’s alphas of three dimensions of Internet information relevance. all univariate kurtoses were nonsignificant and all skewnesses were within the range of [À1.. The saturated model (final measurement model) also received a good fit to the data: w2 (p ¼ 0. and Internet information internalization) were also significantly different from unity (po0. These scales were then assessed via confirmatory factor analysis (CFA).88. 1982). Therefore. all average variances extracted were equal to or greater than .80...000).001). the within-construct discriminant validity of IBK-Internalization was also achieved (Steenkamp & van Trijp. and all were significant (po0. were 0. The findings indicate that the measurement models of these constructs fit the data well. Learning orientation and international orientation were also second-order constructs. the within-construct discriminant validity was achieved (Steenkamp & van Trijp.87.623 [(1Àa) s2(fsts)] (Joreskog & Sorbom. were 0. 1991). the Cronbach’s alphas of the two dimensions of Internet information internalization. shared vision and open mindedness.84. [1062] ¼ 1233. Finally.977. respectively. the error-term variance of this item was fixed at 0.82. and background information. maximum likelihood estimation was used (Muthen & Kaplan.023.80). Therefore. Consequently.e. respectively. i. 1991). TLI ¼ 0.85. i.. Specifically. CFI ¼ 0. 0.87.IBK-Internalization and Firm Internationalization 381 requirement for reliability (a>0. To make the model identified. The correlations (with standard errors) between the dimensions of these second-order constructs indicate that they were significantly different from unity (po0. and 0.83 and 0.81.84 RMSEA ¼ 0. international conviction and international intention.001) (see the appendix for the standardized factor loadings of items). 1].

27) intention (intent) Internet information Market feasibility relevance: information w2 ¼ 91.59 inad"inbak infea"inbak 0. relevance (IIR) CFI ¼ 0.13) Dimensions rc 0.55(0.38(0. 1991). 1991). Measurement Validation.85 rvc 0. thus.64(0.53(0.54 0. BARRETT Table 1.65 inad"infea 0.74 (IUT) [291] (p>0. rc.58(0. Constructs Learning orientation: w2 ¼ 51.022 internalization (INT) 0. Internet information TLI ¼ 0. 1981.60 0.94 0.88 0.989.50 À À IUT"IIR IIR"INT IUT"INT 0. composite reliability.87 0. rvc. The correlations between constructs together with their standard errors are shown in Table 2.64 0.082) 0. supporting the across-construct discriminant validity (Steenkamp & van Trijp.990.58(0. Internet information RMSEA ¼ 0.67 À À 0.17) Information use (inuse) IBI-internalization: Internet utilization w2 ¼ 334.. Fornell & Larcker.7 (infea) [74] (p>0.55(0.82 0.078) Correlation lcom"lsv Lcom"lop lsv"lop inco"intent r(se) 0.65 0. correlation (standard error).4 (intra) [34] (p>0.112) 0.382 THO D. These findings indicate that they were significantly different from unity.50(0.2 [41] (p>0.76 0.58 0.083) 0.g. average variance extracted.084) Commitment to learning (lcom) Shared vision (lsv) Open mindedness (lop) International International orientation: conviction (inco) w2 ¼ 38.68 International [34] (p>0.92 0.08) Adaptation information (inad) Background information (inbak) Internet information Information internalization: transformation w2 ¼ 41. NGUYEN AND NIGEL J.63(0.57 0.83 0.092) 0.086) 0.84 0. 0.091) 0. . These findings indicate that the scales were unidimensional and convergent validity (within-method) was achieved (e.51(0.90 0.50 intra"inuse 0. Steenkamp & van Trijp.110) Note: r(se).03).092) 0.50.079) 0.82 0.48(0.

Furthermore.131) 0. The results show that the stability index was 0.023).212) H3: International orientation-Foreign sales intensity 0.978.00ÃÃ Ã Estimate (with standard error).093) Hr: Foreign sales intensity -IBK-Internalization 0. TLI ¼ 0.12 (p ¼ 0. the additional path hypothesized in the rival model was significant (see Table 3 for the unstandardized estimates and Fig.38(. RMSEA ¼ 0. More importantly.000 0.04(0.023.000 0. ÃÃ Fixed at 0. 2 for the standardized estimates). Consequently.35(0. indicating that the model was stable (Bentler & Freeman. CFI ¼ 0. 0.47(0.000). It is noted that no improper solution was .591) 1.100. 1983). falling within the range of (À1.000).00(0. Structural Paths Unstandardized Regression Weights in the Proposed and Rival Models.000 Structural Models The proposed model received a good fit to the data: w2 [1064] ¼ 1240.080) 0. the existence of a feedback loop (formed by IBK-Internalization. CFI ¼ 0.05). +1).089) 0. and foreign sales intensity) in the rival model (a nonrecursive model) can cause the system to become unstable.023 H1: IBK-Internalization -Foreign sales intensity 2.450 0.33(0.087) 0.559) H2: IKB-Internalization -International orientation1.25 [Ddf (po0. Proposed Model Est(se)Ã p-value Rival Model Est(se) p-value 1. TLI ¼ 0.143) 0.49(0. The rival model also fit the data well: w2 [1063] ¼ 1235.022) 0.976.62(0. and RMSEA ¼ 0.977.110) Learning orientation"IBK-Internalization Learning orientation"International orientation Learning orientation"Foreign sales intensity IBK-Internalization"International orientation International orientation"Foreign sales intensity IBK-internalization"Foreign sales intensity Table 3.075) 0.05(0.977.29(0.22(0.000 0.262) H4: Learning orientation -IBK-Internalization 0. 1988).000 0.21(0. Correlations Correlation (r) with Standard Error (se) between Constructs. international orientation.270 0.IBK-Internalization and Firm Internationalization 383 Table 2.272) 0.53(0. A chi-square difference test shows that the rival model did contribute to a better overall model fit: Dw2 ¼ 1] ¼ 4.87 (p ¼ 0.71(0. the rival model was selected (Anderson & Gerbing.020 0.05(0. r(se) 0.218) 0.

the impact of foreign sales intensity and IBKInternalization hypothesized in the rival model (Hr) was significant.76 0.000). BARRETT inem insea infea inad inbak intra inuse 0.68 0. CFI = 0.08ns(H3) 0.023 *: significant at p < 0. all error-term variances were significant.33S 0. 2003).05.977. Kaynak et al.73 0. Realizing that the Internet provides a promising source of data and information about foreign markets (Hamill. 2002). ns: non-significant Hr: hypothesized in the rival model. although it was in the same hypothesized direction.76 Learning Orientation 0. Consistent with H1 and H2.69 INT fsts 0.54 0. IBK-Internalization had positive impacts on both international orientation and foreign sales intensity.83 inco International Orientation 0. Sørensen & Buatsi. supporting H4.76 intent 0.74 IUT lop lsv lcom 0.76 0. 1994. NGUYEN AND NIGEL J. However. RMSEA = 0.92 0.28*(H1) IIR 0.58|. we focus on IBK-Internalization.59S 0. and the possibility to transform data and information into knowledge (Nonaka.24*(Hr) 0.001.56**(H2) 0. Akbar. S: squared multiple correlations Fig.978. A positive relationship between learning orientation and IBK-Internalization was also found to be high and significant. and all standardized residuals were less than|2. Structural Results (Standardized Estimates). 2. It is a .87 (p = 0. DISCUSSION AND IMPLICATIONS The objective of this study is to explore the possibility of the Internet as a source of foreign market knowledge for firm internationalization.24S Foreign Sales Intensity 0. 1997.71 0.63**(H4) IBKInternalization χ2[1063] = 1235.76 0. found in any of the CFA or structural models: Heywood cases were absent. In addition. TLI = 0. the relationship between international orientation and foreign sales intensity was not significant. 2005. inconsistent with H3.82 0.384 THO D. **: significant at p < 0.75 0..73 0.

This role of learning orientation has also been confirmed. 1992. We have found that learning orientation motivates firms to utilize the IBKInternalization process. attitudes and behavior are positively related (Frazier & Sheth. with an increase in foreign sales. it must be noted that although knowledge is a key factor. In turn. Nonaka. and performance. and then.. This dynamic process enhances and extends firms’ knowledge about foreign markets. i. reflected in foreign sales intensity. However. This may be the case of Vietnamese internationalizing firms. The results indicate that the IBK-Internalization process is a useful source of foreign market knowledge for firm internationalization. to assess the relevance of data and information. We also examine a key antecedent (learning orientation) and outcomes (international orientation and foreign sales intensity) of IBK-Internalization. The resource-based view of the firm recognizes that knowledge is a key resource contributing to firms’ competitive . will be made. which has been confirmed in this study. and use (Sinkula et al. The findings of this study suggest a number of implications for managers in internationalizing firms. processing. 1977) as well as the theory of knowledge creation and use (Davenport & Prusak. In general. It is also noted that the relationship between international orientation and foreign sales intensity was not significant. 2000. These findings are consistent with the literature on internationalization. Furthermore.. learning orientation has been found to be a key organizational culture that influences firms’ attitudes and behaviors (Slater & Narver. This stimulates firms to utilize the IBKInternalization process to a greater extent. 1985). i. 1995).e.IBK-Internalization and Firm Internationalization 385 process in which internationalizing firms utilize the Internet to search for data and information about foreign markets. to internalize them for their internationalization.e. it is not the only one that assists firms in translating internationalization attitudes into internationalization performance. The findings show that the impact of IBK-Internalization on international orientation is much higher than that of on foreign sales intensity. reflected in international orientation. knowledge creation. Nevertheless. When firms utilize this source of knowledge. 1998). This is because learning orientation facilitates innovation as well as stimulates the process of information acquisition.. 1997). some firms lack resources to translate their committed attitudes to committed behavior (Stump et al. firms would require more knowledge about foreign markets to facilitate their internationalization. experiential or tacit knowledge is more meaningful in explaining firms’ international performance (Johanson & Vahlne. Menon & Varadarajan. This implies that foreign market knowledge is a key determinant of firm international orientation.. an improvement of internationalization attitudes. 1994).

Consequently. 1959. It is recommended that future research should use several other measures such as foreign sales growth and profits in foreign markets (Cavusgil & Zou. 1991. political. Second.. It is expected that the results of this research will encourage managers to utilize this possibility to increase their level of knowledge about foreign markets. a comparison between the utilization of the IBK-Internalization process by different types of internationalizing firms. and critical evaluation within similar and/or different markets are required. In addition. used for firm internationalization. Firms should therefore invest in physical resources such as computers and Internet access.g. e. Managers should keep in mind that access to the Internet to obtain data and information about foreign markets is only one part of the IBKInternalization process. assessed. LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH This study has a number of limitations. In addition. 1994). 1984). although the proposed model received support in a transition market (Vietnam). First. and the Internet is one source of knowledge. BARRETT advantage (Penrose. such as indirect. which has been addressed in the following. the measures of IBK-Internalization dimensions should be modified and extended in future research. interpreted collectively. IBK-Internalization involves a process in which data and information from the Internet are acquired. full utilization of IBK-Internalization requires firms to create a learning environment that promotes and values the knowledge creation process. and then. although the study investigates internationalizing firms in a transition market – Vietnam. NGUYEN AND NIGEL J. firms should be aware that the use of computers or access to the Internet is not sufficient to achieve sustainable competitive advantage because these are imitable (Barney. Third. 1998). However.386 THO D. the use of online surveys. particularly in markets that have different economic. the Internet is a relatively recent innovation and its potential as an effective and efficient source of data and information about foreign markets has not yet been fully exploited. franchising. and foreign direct investment firms will be of interest . extension. Further. and compared with other sources. Samiee. further replication. and cultural backgrounds. foreign sales intensity was the only measure of internationalization performance in this study. Wernerfelt. it is expected that the findings of this study would be of value for firms in other transition markets and other internationalizing firms around the world. direct exporting.

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IBK-Internalization and Firm Internationalization 391 APPENDIX: CFA FACTOR LOADINGS OF ITEMS (STANDARDIZED) Items Loading t-value Learning orientation (second-order.65 11.21 0.05 0.76 commodity necessary to guarantee organizational survival Shared vision There is a commonality of purpose in our firm There is total agreement on our organizational vision across all levels. 5-point Likert scale) Commitment to learning Managers basically agree that our firm’s 0. not an expense Learning in our firm is seen as a key 0. employee learning is an 0. and divisions All employees are committed to the goals of our firm Employees view themselves as partners in charting the direction of our firm Open mindedness We are not afraid to reflect critically on the shared assumptions we have made about our markets Personnel in our firm realize that the very way they perceive the marketplace must be continually questioned We often collectively question our own biases about the way we interpret market information 0.86 12.75 ability to learn is the key to our competitive advantage The basic values of our firm include 0.76 10.78 0.74 investment.63 12.38 .70 0.17 12.77 learning as a key to improvement In our firm.71 À 0. functions.06 0.74 11.58 À 12.81 À 12.

77 À with staff involved in international business activities about foreign market information obtained from the Internet Information use Decisions based on information obtained from the Internet are more accurate than wholly intuitive ones Confidence in making international business decisions increases as a result of information obtained from the Internet Uncertainty associated with international business activities is greatly reduced by information obtained from the Internet Information obtained from the Internet is used to keep updated with international business knowledge Information obtained from the Internet plays an important role in making international business decisions 0.56 market information obtained form the Internet Top management spend time discussing 0.67 11.79 12.91 0.392 THO D.12 0.15 0.76 obtained from the Internet to discover its implication for decision-making Spend time sharing foreign market 0. NGUYEN AND NIGEL J.66 10.72 À .74 12.82 0.12 information obtained from the Internet Spend time discussing about foreign 0.71 11.79 12.97 obtained from the Internet with information collected from other sources Interpret the foreign market information 0.74 12.70 11. 5-point Likert scale) Information transformation Compare foreign market information 0. BARRETT APPENDIX (Continued ) Items Loading t-value Internet information internalization (second-order.

86 À Buyer’s preference 0.41 Price trends 0.87 Background information: The Internet can provide information about Exchange rate fluctuations Legal requirements for entry Potential barriers to entry Social/political background Economic background Transport infrastructure Internet utilization Hours per week the firm uses the Internet to search for foreign market information Times per week the firm receives and sends e-mail related to international business activities 0.70 0.60 .16 7.73 À Foreign sales intensity (10-point scale: 1p10%.69 À 11.88 20.36 Market size 0.81 À Potential buyers of products 0.75 0.86 19.80 0. y .63 Potential suppliers of raw materials 0.91 13.88 20.52 12. 5-point Likert scale) International conviction International business activities are an 0.56 12.70 12.IBK-Internalization and Firm Internationalization 393 APPENDIX (Continued ) Items Loading t-value Internet information relevance (second-order.79 0.85 0.79 0.37 Market growth 0.78 13.77 essential part contributing to our firm’s competitive advantage 14.71 0.92 À Percentage of the firm’s foreign sales compared to total sales for the last financial year International orientation (second-order. 5-point Likert scale) Market feasibility information: The Internet can provide information about Potential distributors of products 0. 2 ¼ 11–20%.88 20.83 14.97 Adaptation information: The Internet can provide information about Competitors 0. 10 ¼ 91– 100%) 0.

74 À .394 THO D. BARRETT APPENDIX (Continued ) Items International business activities enhance our firm’s competitiveness by acquiring market knowledge International business activities increase the prestige of our firm in the Vietnamese market International business activities contribute to our firm’s long-term expansion International business activities represent an opportunity for our firm to exploit an expanded market International business activities reduce our firm’s risks by selling to diverse markets International intention Formal planning is a necessity for international business activities International business activities are a necessity whether or not Vietnamese market sales come up to expectation International business activities should be considered whether or not opportunities in Vietnam are completely exhausted International business activities are so important to the national interest that every Vietnamese firm should commit its resources to the international business drive Loading 0.83 0.73 0.79 À 0.16 0.81 t-value 15. NGUYEN AND NIGEL J.57 0.81 13.80 0.67 14.80 15.39 0.80 15.86 16.30 0.83 13.

All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10. as well as the factors which inhibit or stimulate exporting SMEs to develop their website beyond a basic level of sophistication. The results identify export diversity and environmental pressure as key determinants of perceived advantage of a website which in turn is a good predictor of website sophistication. are still unknown. or be continually developed. Information and Communication Technology (ICT) knowledge and time. in International Marketing Research: Opportunities and Challenges in the 21st Century Advances in International Marketing.1016/S1474-7979(06)17015-5 395 .e. Kathryn Houghton and Thomas Chesney ABSTRACT Despite the much publicised advantages of a website for SME exporters. This paper introduces an instrument for measuring website sophistication within an export marketing context. The literature is prone to discuss website establishment and development simultaneously. i. 395–426 Copyright r 2007 by Elsevier Ltd. The firm internal resources.HOW ADVANCED ARE WEBSITES OF SME EXPORTERS? AN INVESTIGATION INTO DRIVERS AND INHIBITORS Heidi Winklhofer. Volume 17. the level of website sophistication. yet websites may be established and then neglected. splitting firms into adopters and non-adopters. and proposes and empirically tests a model that depicts factors impacting on perceived advantages of a website and website sophistication levels.

For instance. & Myers. whereby more features equate to higher sophistication levels (see Karakaya & Khalil. previous studies have taken Internet adoption as a dichotomous variable. Sauer. Thelwell. and then neglected or continually developed. it has been claimed that the Internet will ‘accelerate the internationalisation of small. 2004). 1996). some writers have investigated adoption as a series of stages of maturity (e. 670) has suggested that it will create a ‘level playing field’ for SMEs in relation to their larger competitors. we define website sophistication as the variety of relevant website features included on a website. Prasad. effective marketing and better communication’’ (1&1 Internet Limited. Ritchie & Brindley. Although not specifically focusing on exporting.g.and medium-sized enterprises’ (Quelch & Klein.396 HEIDI WINKLHOFER ET AL. with 94% believing that their site had contributed to a growth in their business in the 12 months following its launch (1&1 Internet Limited. splitting firms into adopters and non-adopters (e.g. 2000. In line with previous work focusing on website sophistication. INTRODUCTION The benefits of the Internet have been much publicised. & Associates. 2004). Kotler (2000. growth. Wilson. Alternatively. as website adoption is a process in which sophistication can be increased (Daniel. conjunction with entrepreneurship orientation also determine an SME exporter’s website sophistication level. In general. This ignores the Internet’s extent of use in the organisation. German and US SMEs (with websites) confirms the benefits of websites for SMEs. 2004). and are deemed to be particularly relevant for exporting SMEs (Samiee. 1998. found little evidence that such a stages of growth model is appropriate.000 UK. or assessed firms’ intention to adopt. Ramamurthy. 1999. 2001). yet websites may be established. Premkumar & Roberts. Levy and Powell (2003). as it reduces the traditional importance of scale economies which makes global advertising more affordable and extends smaller firms’ market reach globally. on the other hand. the literature is prone to discuss website establishment and development simultaneously. 2002). p. With a few exceptions. 2000. DTI. a recent survey of 25. The report concluded that ‘‘websites have contributed to increases in small business’ sales revenue. Willcocks. A growing body of literature highlights the range . 2000) through which a business must progress to achieve whatever level of sophistication is required. 2005). 1. & Naidu.

based on a literature review and interviews with SME exporters. Although descriptive reports on website sophistication are useful. an instrument for measuring website sophistication within an export marketing context. These factors are empirically tested and the results discussed. based on existing literature. ‘website maturity stage 1’).How Advanced are Websites of SME Exporters? 397 of features available to website developers and especially firms operating in international markets (e. Nielsen. 2002) are mainly descriptive and there is a notable lack of knowledge on website sophistication. Firstly it proposes. The analysis starts with a description of the popularity of the various website features among SME exporters and then tests the conceptual model using LISREL. the use of foreign languages (Mousley & Simintiras. The current paper makes two contributions to work in this area. research among UK. the few empirical studies undertaken in this area (e. 1994. Next. While the current study includes cost as a potential barrier. 2004). the literature presented later on in this paper would suggest that further development of a website is influenced by a range of factors. Dou. Despite the much publicised advantages of a website for SME exporters. Also. German and US SMEs showed that 65% spend less than £300 a year on creating and maintaining their website (1&1 Internet Limited. it proposes. made up of a combination of different website elements.g. The paper concludes with a discussion of the results and some avenues for future research. & Cowling. and as a function of export activity. post-adoption. & Tan. 2002). we introduce measurements and the data collection process. Secondly. 1999). Howorth. 2001)). Means.g. 2005). This allows for a more comprehensive measure of sophistication. Commercial research in this area concluded that perceived cost is a key obstacle (1&1 Internet Limited. followed by a proposed conceptual model which incorporates the factors suggested to impact on website sophistication. than merely classifying organisations as adopters or non-adopters. In this context. While it has been stressed that the level of adoption is important (Palvia. and website relevance may vary with different types of SMEs. Karahanna. they fail to provide conceptual understanding of the factors inhibiting or driving further developments. Straub. . & Chervany. SMEs have so far been treated as a homogenous entity when in practice they are not (Westhead. a series of factors that may determine their website’s sophistication.g. The paper continues with an overview of the literature on website sophistication. & Jackson. the level of website sophistication. and develop it beyond a basic level of sophistication are still unknown. as well as the factors which inhibit or stimulate exporting SMEs to actively use their website as an export marketing tool. or as a group (e.

to the authors’ best knowledge. links to other companies. 2. This context deserves its own instrument as the needs of export customers and overseas intermediaries will require different website features than websites of a firm operating only in the domestic market. To measure website sophistication they used 10 elements. they lack the specific focus of a website as an export marketing tool.398 HEIDI WINKLHOFER ET AL. Levy & Powell. The instrument for measuring website sophistication of exporters presented here is specific to marketing and to exporters. Likewise. Internet use for marketing support and Internet use for marketing intelligence. Bauer & Scharl. no instrument is currently available that focuses specifically on website sophistication within the context of export marketing. The following briefly reviews the generic instruments discussed in the literature and then introduces the website sophistication index for SME exporters. online transactions.. & Goodhue. 2000). based on 12 case studies. advertisements of other company products and advertisement of own company products/services. 2003. Although it is recognised that website sophistication can be attributed to technical adeptness such as ease of navigation and quality of links (Loiacono. The most obvious difference is that the website will probably need to be available in other languages (Dou et al. WEBSITE SOPHISTICATION This study examines the factors that impact on website sophistication in an exporting context. the absence or presence of each made up the website sophistication score. Similarly. differentiates between various uses of the Internet within the firm. product/service information. website used to interact with customers and website used for e-commerce with customers. Watson. 2002). e-commerce activities were excluded. Although many of these features can be of use to SMEs as a general marketing tool. Their list was: company information. stock/inventory status. 1998). customer service area. technical elements are only included when they will affect the marketing capability of the site.g. Levy and Powell’s (2003) work. website sophistication. 2004). in their study of factors related to Internet adoption. Karakaya and Khalil’s (2004) survey examined e-mail use. They distinguish between e-mail. and may also have to serve the needs of local agents and distributors (Ghose & Dou. Karakaya & Khalil. 2002. website with brochureware. online catalogue. While a website that allows customers to buy products will be considered more sophisticated than one that does . that differentiate between various uses of the Internet (e. company financial data. While several instruments measuring website sophistication were examined. as this study is concerned with the marketing potential of a website.

In turn. Mayer. Lynn. 2004) and included instead. Chaffey.. They were adapted and expanded to specifically examine marketing practices of exporting SMEs. we added elements which were discussed in the literature as components of website marketing: Thelwall (2000) argues that websites offer SMEs the opportunity to adopt a ‘pull’ strategy which requires high visibility through search engines. we included ‘website details are regularly submitted to search engines’ as a further component of the sophistication index. we felt that this is inappropriate for the context of SMEs. Finally. which if used correctly. Thelwall. Leong. 2002. The 17 elements that make up the website sophistication score for this study are shown in Table 1. Although Karakaya and Khalil (2004) included ‘company financial data’ as an element in the sophistication index. To ensure the features selected were relevant to SME exporters. ‘online transactions’ was excluded. A great deal of normative advice is available in this area directed specifically at SMEs (e. the instrument captures whether the website has marketing content specifically designed for it and whether the website content is regularly updated. but. ‘websites has links to export distributors/agents/ retailers/wholesalers’ websites’ and ‘websites displays contact details of . Ewing. as both have been suggested to improve the marketing communication role of a website (Bickerton et al.g. Based on Ghose and Dou’s (1998) Visibility or awareness efficiency can be measured through website hits. Akgun. Consequently. Johnston. we included ‘website is written in languages other than English’. as this will impact on user’s perceptions of the site. empirical studies are scarce. Lipp. & Pitt. To capture the export-specific nature of this study. 2000. 1998). The elements included in our sophistication index are based on Karakaya and Khalil’s (2004) sophistication measure which was described earlier. 2000). & Cortez.How Advanced are Websites of SME Exporters? 399 not. We also excluded advertisement of own and other company products as the product/service range was already covered by three other items. Table 1 details the origin of the elements. Thus we included ‘visitor information is used for marketing purposes’. as they are usually not prepared to disclose such information. We also added whether the website domain has been registered other than as co. the instrument to measure sophistication came from a critical review of relevant literature and an analysis of features that exporting SMEs currently have on their websites. 1999). as mentioned earlier. Finally. we expanded the element ‘links’ to other companies’ (Karakaya & Khalil. as justified earlier. & Ellis-Chadwick. e-commerce activities fall outside of the scope of this study as the factors driving e-commerce are likely to be different from those impacting on website sophistication. 2002. provide a wealth of information for marketing and prospecting (Sterne.

Bickerton. and Simpson-Holley (1998) Strauss and Frost (1999) Webb (2002) Quelch and Klein (1996) 1 2 3 4 5 6 7 8 9 10 11 Website includes recent press releases about our company Website includes an online product catalogue Website displays product prices Visitors can download demonstrations of the product or product manuals Website allows visitors to check the availability of our products Website has links to export distributors/agents/ retailers/wholesalers’ website(s) Website displays contact details of export distributors/agents/ retailers/ wholesalers Website provides ways for export customers to contact the firm directly (for example by email or telephone) Website has segregated password protected areas for export customers Website has segregated password protected areas for export distributors/ agents/retailers/ wholesalers Website has a feedback form(s) for customers to complete Not included Not included Not included Online catalogue Product/service information Stock/inventory status Quelch and Klein (1996) Links to other companies Ghose and Dou (1998) Customer service area Ghose and Dou (1998) Dutta and Biren (2001) Not included Company financial data Advertisements of other company products Advertisement of own company products/ services Online transactions . Table 1. Element Elements Comprising the Website Sophistication Index. This Study Karakaya and Khalil (2004) Company information Examples of Other Supporting References Bickerton.400 HEIDI WINKLHOFER ET AL.

2004). all 17 elements are equally weighted and summed. and in line with previous work on sophistication indices (Karakaya & Khalil. 1993. Bennett. is therefore defined as a linear function of the indicators. we included whether such passwordprotected areas are installed. since password-protected areas can aid communication flows between an exporter and an intermediary (Dutta & or . communication) are captured by the index. DTI. Furthermore. . ‘Website sophistication’. (1998) 12 13 14 15 16 17 Website has marketing content specifically designed for it The website content is regularly updated Website details are regularly submitted to search engines Visitor information (for example hit rates) is used for marketing purposes Website is written in languages other than English Website domain(s) other than . for the purpose of this have been registered (for to obtain an overall sophistication index or . (2002) export distributors/agents/retailers/wholesalers’. the latent variable.How Advanced are Websites of SME Exporters? 401 Table 1. Although one could argue that several themes (e. Not included Not included Bickerton et al. (2002) Not included Dou et al. 1993). 2005). thus they act as causal indicators (MacCallum & Browne. plus a disturbance term1 (MacCallum & Browne.g. The sophistication index is intended to provide a more comprehensive measure of adoption than employed in previous studies on website and Internet use of SMEs (e. (Continued ) Element This Study Karakaya and Khalil (2004) Not included Examples of Other Supporting References Bickerton et al. The 17 elements should be viewed as causing website sophistication rather than being caused by it. (1998) Thelwall (2000) Not included Sterne (1999) Not included Dou et al. 1999.g. 1997. 533). an overall index is used to provide some initial insights into what type of firms have invested in a larger number of website features and consequently score higher on the sophistication index. Premkumar & Roberts. Accordingly. All but one of the elements in Table 1 (element 15) are objective and the sophistication score could be calculated largely without . 2001).

1989) and Diffusion of Innovation Theory (Rogers. 746).1. 1999). The main determinants of technology acceptance behaviours are the belief constructs: perceived usefulness (i. & Scazzero. an individual. each individual feature included on a website could be regarded as an adoption decision. p. & Hulland. research on IT adoption can draw on the Technology Acceptance Model (TAM) (Davis. . However. Premkumar & Roberts. CONCEPTUALISATION 3. has the advantage of being well grounded in established social psychology theory. 985). Plouffe. or organisation. 2001. originally developed by Davis (1989) to predict user acceptance of computer technology in the workplace.e. forms a judgment about an innovation based on these perceived characteristics. Doll. 1989. Conceptually. Moore & Benbasat.402 HEIDI WINKLHOFER ET AL. trialability and observability to adoption decision. Several authors have used the Rogers model and amended. Hendrickson. Thong. p. TAM. sophistication levels of post-adoption and their antecedents are somewhat neglected. The effects of external variables such as individual differences or situational constraints are also expected to impact on user acceptance only as far as they are mediated by the two key belief constructs of perceived usefulness and perceived ease of use. Against this background we will briefly review the key conceptual models within the IT adoption literature in order to assess their suitability to predict website sophistication among exporting SMEs. ‘the prospective user’s subjective probability that using a specific application system will increase his or her job performance within an organizational context’) and perceived ease of use (i. the firm’s cooperation. ‘the degree to which the prospective user expects the target system to be free of effort’) (Davis. from a company perspective. Thus.e. Rogers’ (1962) conceptual model links the belief constructs: relative advantage. Vandenbosch. intentions and adoption behaviour. Key linkages are specified between these two key belief constructs and users’ attitudes. compatibility. 1980). although their input will probably be needed to answer whether their website has marketing content specifically designed for it (element 12) and how often the content is updated (element 13). Adoption Models As outlined earlier. 1994. It is based on the Theory of Reasoned Action (TRA) (Ajzen & Fishbein. 1999. diversity.g. or complimented it with additional constructs (e. 3. 2005. 1995). and is described as ‘an analytical simplification of how functionality and interface characteristics relate to adoption decisions’ (Deng.

Premkumar & Roberts. there is evidence that the importance of widely used beliefs and attitudes towards usage of IT. Mehrtens et al. company age (Dandridge & Levenbury. 1999). 2000). IT knowledge. 1989.2. 2001) and technology readiness of other parties (Holmes & Srivastava. competition-related factors in ICT supply (Gatignon & Robertson. generic firm characteristics relating to a variety of resources (e. 1989. & Mills. the focus is on further development of it (i. 2000. past research included company characteristics. Regarding postadoption. 2001). government influence (Corbitt. we conducted qualitative longitudinal interviews with multiple respondents from 25 SME exporters. 1997.How Advanced are Websites of SME Exporters? 403 These models are based on well-researched attitude and/or believe structures and have been shown to explain adoption as a dichotomous variable (yes/no). staff workload (Corbitt. external pressure (Premkumar & Roberts. A longitudinal approach . 1999. 3. Igbaria & Zinatelli. 2000. and distinguishes between internal and external factors. Lee & Cheung. & Wedel. Gatignon & Robertson. Cragg.. A brief summary of the factors studied is provided in the following section. 1999. 1999). 2000). 2000. 1999. 2004. website sophistication level). Interview Phase To gain further insight into the factors stimulating or hindering website sophistication.g. there are several weaknesses: firstly.e. Although adoption of a website is a prerequisite for our study. Sultan & Chan. Despite the rich empirical literature on Internet and website adoption. it is not specifically applicable to exporters. Thong. Barkema. or intention to adopt (e. 1999. In terms of external factors the key predictor variables studied were external Information and Communication Technology (ICT) support (Premkumar & Roberts. Cragg & King. Frambach. 1998). the literature review resulted in an unparsimonious set of factors.g. Plouffe et al. 2001) and top management support (Premkumar & Roberts. Among the internal factors influencing adoption. Nooteboom. financial support restrictions (Premkumar & Roberts. such as firm size (Dandridge & Levenbury. In summary. Cragg & King... top management support) have also been found to explain adoption of IT within organisations. Hamill & Gregory. IT knowledge and exposure (Premkumar & Roberts. Although beliefs and attitudes about the innovation are good predictors of adoption or intention to adopt. Mehrtens. and secondly it deals overwhelmingly with adoption. 1999. organisational readiness (Lee & Cheung. change from pre. 1993). 1999).to post-adoption (Karahanna et al. 1993). size. 2000). 1997). 1999). 2004. Corbitt.



was regarded necessary as website development is a dynamic process and a cross-sectional approach would be strongly influenced by informants’ memory of events rather than capturing events as they occur. Therefore, for the purpose of theory development we conducted between two and three semistructured interviews over a period of 12 months, resulting in a total of 51 interviews. The interviewees were owner/managers and senior managers, or whoever the companies regarded as most knowledgeable concerning the firm’s website development. It should be mentioned that this study was part of a larger project that also examined e-commerce adoption within SME exporters. As part of the semi-structured nature of the interviews, an interview guide was developed which covered a series of questions pertaining to a company’s website development. The key focus was on establishing how it has changed over time and for what reason; identifying who was involved in development of the website and what role it plays in export marketing activities. The interviews lasted from 35 minutes to 2 hours and were taperecorded and transcribed. Within-case followed by cross-case analysis was performed. Within-case analysis began through coding of the transcripts using a combination of codes developed prior to the analysis, using the literature and codes drawn from the interviews (Miles & Huberman, 1994). To facilitate the analysis we used data displays, which compress information and aid the analyst in drawing warranted conclusions (Miles & Huberman, 1994). This was followed by cross-case analysis which enables deeper understanding and explanation than that derived from studying isolated cases (Miles & Huberman, 1994). The objective was to identify drivers and obstacles of website development. For this purpose, we used the standardised displays derived from the within-case analysis in conjunction with the original transcripts. The following conceptualisation draws together the previously reviewed literature and findings from the interviews. We propose a two-stage model, with a firm’s export profile and its external environment impacting on their perception of a website’s relative advantage. This in turn, in conjunction with resource constraints, and general entrepreneurship orientation, is linked to website sophistication. The model is shown in 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. Export enthusiasm, i.e. the management’s view that exporting is a worthwhile endeavour and the desire to enter new export markets (Diamantopoulos,

How Advanced are Websites of SME Exporters?


(+) Export characteristics: Export enthusiasm (H1) Export dependence (H2) Export diversity (H3) (+) External: Environmental pressure (H4)
Perceived relative advantage of website


Resources-drivers: ICT knowledge (H6) Personal contact network (H7) Perceived awareness and use of supplier services (H8) Resources – obstacles: Staff workload (H9) Perceived cost of website development (H10)



Website sophistication

General firm characteristics:
Entrepreneurship orientation (H5)


Time since website established


Fig. 1. Conceptual Model.

Schlegelmilch, & Allpress, 1990), emerged as a potential driving factor. Interview data indicated that new export expansion programmes served as an impetus for further website development to better suit export markets. For example, a firm that has seen its export sales decline from 40% to 5% over the last two years has launched an export expansion programme which also included revamping the website.
I think the entire site is more internationally flavoured now, rather than just a couple of pages on the site y 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 how the website facilitated and simplified communication for firms operating with export customers and intermediaries dispersed around the globe (see also Samiee, 1998; Ritchie & Brindley, 2000; Prasad et al., 2001). In line with this argument, we found some indication that exporters more dependent on export sales, appear to be more enthusiastic about the benefits offered by their website. Illustrative of this attitude is the following quote from a



Managing Director whose company is highly enthusiastic and dependent on export 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 strategy y

This led to the first three hypotheses. H1. Export enthusiasm is positively related to a website’s perceived relative advantage. H2. Export dependence is positively related to a website’s perceived relative advantage. H3. Export diversity is positively related to a website’s perceived relative advantage. With regards to company external factors, environmental pressure, resulting from competitors’ actions and customers’ demands, as well as a sense of fatalism, especially among consumer-goods firms, acted as a strong incentive to further develop the website, which is in line with the work by Mehrtens et al. (2001). Several participating firms emphasised the increasing expectations of their customers. For example, one interviewee after discussing several features on their website, mentioned:
some companies already have that. So we are playing catch up with some of our competitors y . 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 on y . Which was really just doing a bit of advertising on the Internet about the company. And I would say that was primarily 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.

How Advanced are Websites of SME Exporters?


This illustrates that customers expect to communicate with their suppliers via their website, and consequently such firms are likely to perceive their website as more advantageous. We therefore propose the following: H4. Environmental pressure is positively related to a website’s perceived relative 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 distinguishing between more reactive and proactive adoption of the full potential of Internet technology. Indications of this were also found in the interviews. Firms with a high entrepreneurship orientation are innovative, willing to take 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 is early in adopting new ideas relative to the other members of a system (Rogers, 1995). It also captures the need to take risks in resource allocation when developing a website, where return on investment is uncertain. As expected, entrepreneurship was exhibited within most participants’ website activity. In line with this, we suggest a positive link between level of entrepreneurship orientation and website sophistication. H5. The level of website sophistication of SME exporters is positively related to the firm’s level of entrepreneurship orientation. 3.4.2. Company Resources Company resources appear to be a key determinant of website sophistication levels and their presence or absence can act as stimulant of obstacle respectively. 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 developing the website by the firms sampled, which confirms findings in related adoption studies (e.g. Hamill & Gregory, 1997; Premkumar & Roberts, 1999; Thong, 1999; Hamill & Gregory, 1997; Corbitt, 2000). This was partly due to lack of resources to pay external parties and partly because owner managers have been shown to resist external assistance because of a reluctance to compromise 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 personal contact networks, which include people who help the SME remain committed to the use and development of the innovation (McGowan & Durkin, 2002; Carson, Cromie, McGowan, & Hill, 1995). Illustrative of this is the following quote of a marketing manager of a highly experienced exporting firm with 100 employees:
My assistant will be taking over the website development y 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 is likely to positively impact on website sophistication. We also found support for indications that website development could be linked to the level of awareness of the services offered by technology vendors and website developers (i.e. level of perceived supplier service, see also Igbaria and Zinatelli, 1997). Several of the interviewees appeared to have only a vague understanding of what is available in terms of technical support and incentives for SMEs in terms of website development which appeared to be negatively reflected in their website. Although the SMEs interviewed had plans to add further features to their site or change its current format, work commitments meant that they had to prioritise, and other activities were seen as more important than website development. Thus, staff workload was seen as a major impediment in developing the website (see also Corbitt, 2000; Cragg & King, 1993). Finally, if in-house expertise is not available, the perceived cost of additional features appeared to act as an impediment to further developments (see also 1&1 Internet Limited, 2005; Premkumar & Roberts, 1999), given that SMEs, by their nature, are resource constrained (Westhead et al., 2002). We therefore propose: H6. The level of website sophistication of SME exporters is positively related to the firm’s level of ICT knowledge. H7. The level of website sophistication of SME exporters is positively related to the firm’s personal contact network. H8. The level of website sophistication of SME exporters is positively related to the level of perceived supplier service. H9. The level of website sophistication of SME exporters is negatively related to the firm’s staff workload.

How Advanced are Websites of SME Exporters?


H10. The level of website sophistication of SME exporters is negatively related 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 be highly selective in their website construction. There was a need to see a tangible relative advantage (compared to traditional communication channels) in spending more effort on their website. Thus, perceived relative advantage is likely to impact on website sophistication. In other words, SMEs are more likely to use their website for a certain function if it gives them an advantage, relative to some other means of achieving the same function. For example, some participants considered an up-to-date website with an online product catalogue to be superior to distributing paper catalogues. Another participant developed a password-protected area from which authorised parties can download high-quality product images, the relative advantage over printing and posting the images being savings in time and money. We therefore propose: H11. The level of website sophistication of SME exporters is positively related to its perceived relative advantage. Given the longitudinal nature of the interviews, we observed that many of the case study firms had developed their websites further over time. We therefore included time since website established as a control variable. Fig. 1 depicts the linkages proposed. To summarise, the extensive interview process partly confirmed the potential relevance of factors identified in more general IT or Internet-related adoption research. On the other hand, it also demonstrated that TAM and Innovation Diffusion Theory are not well suited to capture website sophistication. Apart from perceived relative advantage (Rogers, 1962, 1995), the other belief constructs or attitudes appear to be less critical in the decision to further develop the website, i.e. add extra features to a website (see also Premkumar & Roberts, 1999). It seems that once the decision of adopting a website has been made, the key focus is on the perceived advantages of the website (which is related to ‘‘perceived usefulness’’ in TAM). Several general firm characteristics previously shown to impact on ICT adoption, such as firm size, had little impact when focusing on SME exporters. Moreover, government initiatives did not appear to be of any relevance. The interviews further highlighted additional factors such as: export enthusiasm and personal contact networks. The qualitative work also suggested replacing top management support (e.g. Premkumar & Roberts, 1999) with



entrepreneurship orientation. The following section will outline the methodology employed.

4.1. Measures Employed The measurements of the constructs discussed above were mainly based on adaptations of previously developed scales (see Appendix A). ICT knowledge comprises a five-item scale by Grewal, Comer, and Mehta (2001), while Entrepreneurship orientation is based on a nine-item refined measure reported in Covin (1991), Premkumar and Roberts’ (1999) measurements were adapted for the constructs environmental pressure (three items), and the innovation characteristic perceived relative advantage (four items). To capture a firm’s perception of supplier service (three items), as well as to measure perceived cost of website development (two items), adaptations of the scales reported in Premkumar and Roberts (1999) were used. Export enthusiasm is an adaptation of the scale by Diamantopoulos et al. (1990) (six items). In line with previous work, we used the number of export regions as an indicator of export diversity (e.g. Schlegelmilch, Diamantopoulos, & Tse, 1993), and percentage of sales derived through exports as a measure of export dependence (e.g. Souchon et al., 2003). Measurements for the personal contact network and staff workload constructs were developed based on the qualitative interviews preceding the survey. The degree to which people rely on friends, family and for website development is represented by three items reflecting the new construct personal contact network. The construct staff workload was captured by two items relating to the difficulty of finding time to work on website development. The dependent variable, website sophistication was captured using the measure discussed in Section 2 (see Table 1). The respondents were presented with the items listed in Table 1 and asked to tick all those that applied to them. As was stated earlier, all features were equally weighted and summed to give their website sophistication score. 4.2. Data Collection The measures were incorporated into a mail questionnaire, which was extensively pre-tested. For the main survey, a random sample of 1,000 UK SME exporters in the manufacturing field was targeted, derived from a Dun

How Advanced are Websites of SME Exporters?


and Bradstreet database. We conducted telephone interviews with 100 nonrespondents, which revealed that the main reasons for non-response were ineligibility (e.g. the firm did no longer export) or time pressure. After adjusting for ineligibles, the 130 usable responses represented an effective response rate of 16.5%. We conducted further non-response analysis by comparing early and late responses (see Armstrong & Overton, 1977) on the key variables. T-tests for independent samples revealed no significant differences (5% significance level) between the two groups. Consequently, nonresponse error was unlikely to be a problem in this study. The size of the firms ranged from 2 to 250 employees, who had been exporting for an average of 29.5 years. The majority exported to the European Union, followed by North America and Asia. The firms derived an average of 39.7% of their sales from exporting and represented a range of exporting diversity.

5.1. Scale Development and Validation In order to purify the scales measuring the constructs, we used a combination of (1) item inter-correlations, (2) item-total correlations, (3) exploratory factor analysis and (4) confirmatory factor analysis (CFA). Based on this, poorly performing items were identified and eliminated (see Appendix A 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 CFA simultaneously. We have therefore broken it down into three sets of CFAs. Set 1 includes export and general firm-specific constructs, i.e. export enthusiasm and entrepreneurship orientation. Set 2 contains resource-specific constructs, i.e. ICT knowledge, personal contact network, perceived awareness and use of supplier service, while Set 3 comprises of perceived relative advantage and environmental pressure. Table 2 details the fit indices obtained. The items display adequate convergent validity as each indicator’s estimated pattern coefficient is significantly related to its underlying construct (Anderson & Gerbing, 1988). Discriminant validity of the constructs was assessed by constraining the correlation between each pair of constructs (across all three sets) equal to 1 and comparing the w2 values of the original with the constraint model (see Anderson & Gerbing, 1988). The w2 differences obtained exceeded the value of 3.84 (5% critical value for the w2

The least prevalent features were segregated passwordprotected areas and the display of prices. personal contact network. 5. while website marketing unique features are considerably more common. Regular up-dating and on-line product catalogues were available in two-thirds of the respondents’ websites.47 (13) p ¼ 0.980 0. Set 2 contains ICT knowledge.941 0. distribution with 1 d. 1994. Composite reliabilities are above their thresholds of 0. The vast majority of websites also included marketing content that was specifically designed for the website.f. Model Estimation Owing to a combination of limited sample size and complexity of the model.045 0. RMSEA 0. The perceived cost of website development (two items). . and the possibility of checking product availability.5%) included e-mail addresses/telephone numbers.996 63.941 0. were less common.994 CFI 0.149 15. Cadogan. Inspection of the frequency of each feature (Table 3) showed that almost all (98.412 HEIDI WINKLHOFER ET AL.26 (32) p ¼ 0.985 0.910 0.99 (34) p ¼ 0.) for each pair. Not surprisingly. the results demonstrate that the inclusion of specific export marketing features is underdeveloped. Table 2.001 40.279 Notes: Set 1 contains export enthusiasm. Set 3 contains perceived relative advantage. On a more aggregated level. and staff workload (two items) constructs performed poorly in the CFA and we had to reduce them to single-item measurements. we set out to identify a pattern of website sophistication among the SME exporters.) Fit Indices for Measurement Models.082 0. environmental pressure. more resource intensive components such as websites written in languages other than English. entrepreneurship orientation.3. consequently the construct measurements demonstrate discriminant validity.967 NNFI 0. so that export customers could contact firms directly. Pattern of Website Sophistication Initially.f. On average. we calculated single indicants for each multi-item scale by averaging across the items (Bagozzi & Heatherton. the respondents reported that their websites include 7 out of 17 features. perceived awareness and use of supplier service. (Bagozzi & Yi. 1988) for all but one of the multi-item constructs (see Appendix A).038 GFI 0. Model Set 1 Set 2 Set 3 w2 (d.2.958 0. Sundqvist. albeit in varying combinations. 5.6.

6 16.8 98.8 40.3 11 12 13 14 15 16 17 47 105 84 71 55 22 31 36. & Puumalainen.9 30.9 41. All elements were equally weighted and summed to give a website’s overall sophistication score. We employed LISREL 8. 1993).2 or . The modelling is based on a covariance matrix + + and maximum likelihood estimation procedure (Joreskog & Sorbom. .6 12.6 have been registered (for example.54 to simultaneously test all hypotheses.3 16.8 Notes: Respondents were presented with a list of these elements and asked to tick all those that applied to their 42. Elements Comprising the Website Sophistication Index – Descriptive Analysis. .How Advanced are Websites of SME Exporters? 413 Table or .8 64. Element 1 2 3 4 5 6 7 8 Website Sophistication Index Website includes recent press releases about our company Website includes an online product catalogue Website displays product prices Visitors can download demonstrations of the product or product manuals Website allows visitors to check the availability of our products Website has links to export distributors/agents/ retailers/wholesalers’ website(s) Website displays contact details of export distributors/agents/retailers/ wholesalers Website provides ways for export customers to contact the firm directly (for example by email or telephone) Website has segregated password protected areas for export customers Website has segregated password protected areas for export distributors/ agents/retailers/ wholesalers Website has a feedback form(s) for customers to complete Website has marketing content specifically designed for it The website content is regularly updated Website details are regularly submitted to search engines Visitor information (for example hit rates) is used for marketing purposes Website is written in languages other than English Website domain(s) other than . 2005). Appendix B shows the final measurement results and the correlation matrix.5 16.9 Frequency 61 84 22 54 22 40 53 128 % 46.9 64. Salminen.5 9 10 6 16 4.

p ¼ sophistication H10: Perceived cost of website development .541 3.perceived relative advantage H3: Export diversity .000 À0. b ¼ 0.05).website sophistication Time since website established (control variable) Estimate 0. CFI ¼ 0. The model fit indices obtained indicate a good fit (w2 ¼ 13. only diversity of export markets leads firms to more strongly appreciate the advantages of a website (H3.10 .013 À2.984.05 ns 0.168 À0. This is followed by the positive impact of ICT knowledge (H6. with regards to website sophistication. respectively. Standardised Parameter Estimates.05). The estimates (Table 4) confirm that perceived environmental pressure.05 0.263. The findings reveal that the key factor positively impacting on website sophistication is perceived relative advantage (H11. H9 (staff workload).05 0. po0. Somewhat smaller is the negative effect of high levels of staff workload (H9) on website sophistication (g ¼ À0. exercised by customers and competitors. Proposition: Path H1: Export enthusiasm .05). as well as export enthusiastic firms do not appear to perceive their websites as more advantageous than their less export enthusiastic or dependent counterparts.167.567 0. po0.05 0.861 0. ¼ 11.211 À0.993).46.211. In terms of export characteristics.05 ns ns 0.414 HEIDI WINKLHOFER ET AL. our findings support propositions H6 (ICT knowledge). GFI ¼ 0.perceived relative advantage H4: Environmental pressure .website sophistication H6: ICT knowledge .154 t-value 0.05). Website sophistication is also positively related to a firm’s entrepreneurship orientation (H5. H5 (entrepreneurship Table 4.05).567.154. g ¼ sophistication H11: Perceived relative advantage .922 2.05) as well as the age of the website (g ¼ 0.067 0.486 1.951.167 0.132 0.05 0.01).230 0. g ¼ 0. In summary.230. g ¼ 0. thus refuting propositions H2 and H1.888 Significance ns ns 0. d. while more export dependent. NNFI ¼ 0. RMSEA ¼ 0.054 À0. po0.042 0.340 À0. g ¼ 0. po0.645 À1.168.343 sophistication H7: Personal contact network .f.438 7. po0. po0. is positively linked to perceived relative advantage of a website (H4.perceived relative advantage H2: Export dependence .266 0. po0.perceived relative advantage H5: Entrepreneurship orientation .website sophistication H8: Perceived awareness and use of supplier service website sophistication H9: Staff workload .363 2.266.150 À0.

age of a website. and H11 (perceived relative advantage). have an influence on the SME . Against expectations. an external factor. entrepreneurship orientation demonstrates a positive effect on website sophistication (H5). 1997. also shows a significant impact. personal contact networks (H7). Our results reveal ‘environmental pressure’ (H4) as the strongest factor impacting on perceived relative advantage of a website. risk taking. it also appears that website sophistication is only partly an evolutionary process which develops over time. This is of particular relevance when considering the effect to which the Internet replaces or supplements existing marketing channels. As expected. Hence. As anticipated. confirming findings from earlier qualitative research (e. Our findings also show that export diversity (H3) has a positive impact on perceived advantages of a website. Thus. 6. there is a need for future studies to employ measures of website adoption which capture the level of sophistication rather than just treat it as a dichotomous variable. 2000) which focused on adoption. SMEs develop different levels of sophistication depending on how beneficial they perceive their website. it appears that firms are predominantly reactive in their appreciation of the benefits of a website. Thong. and. explaining 38. autonomous and proactive the company is in their business activities. We have introduced an index of website sophistication and shown that the level of website sophistication varies greatly among SME exporting firms.g. Characteristics of individuals. DISCUSSION AND CONCLUSION This study has examined website sophistication among SME exporters with the aim of finding key influencing factors.How Advanced are Websites of SME Exporters? 415 orientation).6% of the variation in perceived relative advantage of a website and 31. our control variable. Corbitt. Moreover. of the 11 propositions tested six were supported. ICT knowledge has already been shown to impact on initial adoption (Hamill & Gregory. The strongest resource driver for website sophistication is ICT knowledge (H6). particularly owner managers. Hence. 1999) but appears to be equally crucial in further development.6% in website sophistication. the higher the level of website sophistication. perceived supplier service (H8) and perceived cost associated with website development (H10) were not significant influences on website sophistication. the more innovative. staff workload was negatively related to website sophistication (H9). comprises of competitive pressure and increased customer expectations. Environmental pressure. As can be seen from Table 4.

g. links to websites of export intermediaries and segregated passwordprotected areas for export intermediaries. In other words. export diversity appears to be the only export-related factor that impacts on a firm’s perception of a website’s advantages over traditional communication channels. Although in-house resources (i.416 HEIDI WINKLHOFER ET AL. as lack of ICT knowledge and time can be . Implicit in sophistication levels is the extent to which websites supplement traditional marketing activities. decision-making process. Thus. Only 30. suggesting that many SME exporters continue to operate in traditional ways with intermediaries. thus it is therefore not surprising that export-specific features were among the least prevalent features. This is in contrast to the findings by commercial research which identified perceived cost a key obstacle (1&1 Internet Limited. are not necessarily more positive about the perceived advantages of a website. our findings show that one needs to differentiate between the types of resources required. staff workload and ICT knowledge) impact on website sophistication. one could conclude that the potential of a website as an export marketing tool is so far only appreciated by firms with a more widely spread customer base.8% of the sample linked their website to those of their export intermediaries. Disappointingly. marketing content specifically designed for the website) are widely used. 2005). websites are still fairly underdeveloped in terms of export marketing features. Where there is a greater degree of entrepreneurialism. SMEs were more likely to risk allocating assets to website development. This includes websites being written in languages other than English. the potential offered by websites to SME exporters has not yet been fully exploited and it does not appear that websites are considering replacing traditional export marketing channels.e. However. As found in this study. It is encouraging that website marketing features (e. meeting external demands against resource constraints is an eternal struggle for many SMEs. Particularly. Indeed. The findings also illustrate the importance of considering both internal and external factors in website sophistication. Different factors provide opposing inhibiting and stimulating factors. perceived relative advantage of a website is the key driver for website sophistication. financial resources (i. The measure of entrepreneurialism employed may also capture an increased tendency towards innovation per se. which the SME must balance and respond to accordingly. registration with international website domains. Instead. The fact that perceived cost of further developing the website is not seen as an obstacle is intriguing. the perceived cost of further website development) have not been found to hamper further development.e. firms highly dependent on exports or those enthusiastic about exporting.

their awareness of potential firms who could undertake such a task (i. Indeed. there are many fruitful avenues for future work. Future research may wish to examine how the sophistication level changes across time and as technology advances. Clearly website sophistication is a moving target and even those who score highly against the criteria used here now. including the impact or influence of marketing channels or relationships with intermediaries. 2001. Bennett & Robson.e. TAM and Innovation Diffusion Theory) are only partly suited for predicting post-adoption sophistication levels.e. In addition. Thus. Research in this area is still in the early stages. For many. Time constrained SMEs should be aware of taking a short-sighted view because they are busy satisfying the demands of a full order book. A particularly fruitful avenue for further research would be a study that links exporters’ website sophistication to export performance. Unlike in the interview phase. may find that as technology develops. personal contacts do not appear to be influential in further developing a website. firms should look at ways of easing the time constraints to developing this media. An alternative explanation is that SMEs tend to prefer developing their websites in-house. or to consider its development. This is in line with claims that owner managers are reluctant to compromise their independence and therefore resist external assistance (Curran & Blackburn. However. It is therefore doubtful that personal contacts are capable of developing a website beyond a basic level of sophistication. the priority was to deal with current orders and fulfill customers’ needs. a number of SME owners interviewed developed their firms’ websites in their ‘spare’ time. 1999). Even respondents who worked with external website developers found it difficult to give time to their information requests. The implications of this research are that policy makers should be aware that export active SMEs vary greatly in their appreciation of a website as a marketing tool which is reflected in their websites’ sophistication levels. This is partly due to the variety of markets the SMEs are operating in as well as the pressure exerted by their competitors and the expectations of their customers. comments received from the qualitative study highlighted that time to develop websites was very limited. . Work undertaken by personal contacts would overcome resource constraints and unwanted involvement of ICT suppliers. however the present study highlighted that traditional adoption models (i.How Advanced are Websites of SME Exporters? 417 overcome by outsourcing further website development. they slip behind their competitors. In terms of implications for SMEs. perceived supplier services) is not an obstacle.

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Changes in product or service lines have been mostly of a minor nature/changes in product or service lines have usually been quite dramatic. How many new lines of products or services has your firm marketed in the past 5 years (or since its establishment)? 2. etc. Our company needs to grow existing export markets.Ã 5.Ã 5.. MEASUREMENTS 1.. In dealing with its competitors. technological leadership and innovations.422 HEIDI WINKLHOFER ET AL. administrative techniques. the top managers in my firm favour y 1. Exporting is likely to expand in our business. We commit a lot of resources to finding new export markets. A strong emphasis on the marketing of tried and tested product