intenalization from a small to medium.pdf

International Business Review 9 (2000) 77–93

www.elsevier.com/locate/ibusrev

Internationalisation of small to medium-sized

manufacturing ﬁrms: a network approach

Sylvie Chetty

a,* , Desiree Blankenburg Holm

School of Business and Public Management, Victoria University of Wellington, PO Box 600,

Wellington, New Zealand

Uppsala University, Uppsala, Sweden

Abstract

How do ﬁrms use business networks when they internationalise? To answer this question,

a longitudinal case study of four manufacturing ﬁrms in a small open economy such as New

Zealand is used. This paper includes a dynamic element in the study of internationalisation

by using Johanson and Mattsson’s (1988) model [Internationalization in industrial systems —

a network approach. In P. J. Buckley, & P. N. Ghauri, The internationalization of the ﬁrm:

a reader (pp. 303–321). London: Academic Press]. This model uses social exchange theory

to illustrate how ﬁrms develop network relationships organically to internationalise. In New

Zealand, however, government export promotion programmes encourage formal structured net-

works. This paper identiﬁes the theoretical gap in the literature, which is the focus on organi-

cally developed networks rather than formal structured ones. The study’s ﬁndings illustrate

the dynamics of how ﬁrms interact with their network partners to extend, penetrate and inte-

grate their international markets. Networks can help ﬁrms expose themselves to new opport-

unities, obtain knowledge, learn from experiences, and beneﬁt from the synergistic effect of

pooled resources. Another contribution of this paper is that it identiﬁes weaknesses and various

other factors that inﬂuence the model, thus advancing the literature.

2000 Elsevier Science

Keywords: Business networks; Internationalisation; Manufacturing ﬁrms; Small to medium-sized ﬁrms

* Corresponding author. Tel.:

+64-4-495-5233; fax:

+64-4-495-5231.

E-mail address: sylvie.chetty@vuw.ac.nz

(S. Chetty)

0969-5931/00/$ - see front matter

PII: S 0 9 6 9 - 5931(99)00030-X

S. Chetty, D. Blankenburg Holm / International Business Review 9 (2000) 77–93

1. Introduction

Collaboration in business is becoming common practice amongst ﬁrms, and these

collaborations can range from informal relationships to more formal ones such as

joint ventures (Gomes-Casseres, 1994). According to Madhok (1996) the ﬁrm’s capa-

bilities and competitive forces are the main factors forcing ﬁrms to collaborate. Firms

with advanced collaborative capabilities tend to acquire trust and reputation by colla-

borating with other ﬁrms continuously (Gulati, 1995). Various terms are used for

these collaborations: production nets, networks, clusters, constellations or virtual cor-

porations. Normann and Ramirez (1993) argue that successful ﬁrms are moving away

from strategic positions in the value chain to a value creating system. These ﬁrms

add value by collaborating with suppliers, business partners, allies and customers.

This paper is based on a longitudinal case study of four small- to medium-sized

manufacturing ﬁrms in the electrical industrial machinery and timber processing

industries in New Zealand. New Zealand is a small open economy, which is highly

dependent on exporting but is geographically distant from major world markets. In

recent years, the New Zealand government has been making concerted efforts to

improve both the country’s trading performance and its international competitiveness.

To do this, the government made major structural changes to New Zealand’s econ-

omy, introducing, in 1984, the most comprehensive economic programme undertaken

by any Organisation of Economic Co-operation and Development (OECD) country

this half-century. The programme included abolishing import controls (licenses and

quotas), substantially reducing tariffs, abandoning export subsidies, and ﬂoating the

exchange rate. Although New Zealand is highly dependent on exporting, a number

of small- to medium-sized ﬁrms do not export. In New Zealand 92% of ﬁrms, employ

less than 100 employees but only 25% of such ﬁrms export (Kompass New Zea-

land, 1997).

The initiatives taken by Trade New Zealand, which is the partially government

funded export promotion organisation in New Zealand, to encourage exporting by

small- to medium-sized ﬁrms is to encourage collaboration through three kinds of

association. The ﬁrst kind, joint action groups, encourage ﬁrms in the same industries

to co-operate with one another in export markets. The second kind of association,

hard business networks, typically include ﬁve or six ﬁrms from similar or different

industries which combine their resources to achieve results that also would not be

possible individually. By long-term collaboration, members gain competitive advan-

tage through beneﬁts of size and through working on common projects such as joint

export marketing, manufacturing, and research and development. The third kind of

association, industry clusters, consist of similar, related ﬁrms in the same geographi-

cal area, thereby achieving synergy.

This paper aims to provide insight into the dynamics of how ﬁrms internationalise

in a small open economy such as New Zealand where government export promotion

programmes encourage collaboration. Leonidou and Katsikeas (1996), in their review

of the export development literature, conclude that existing models provide a limited

explanation of the export development process. In their conclusion, however, they

state that models such as that of Johanson and Mattsson (1988) should be included

S. Chetty, D. Blankenburg Holm / International Business Review 9 (2000) 77–93

in future research to contribute towards advancing knowledge in this area. Johanson

and Mattsson’s (1988) model, is chosen as a framework for this paper because it

includes a dynamic element by focusing on network relationships. It uses social

exchange theory to explain how ﬁrms develop networks organically. In New Zealand,

however, government export promotion programmes encourage formal structured

networks. The key question in this research is: what network relationships drove

internationalisation for the ﬁrms in each of the four categories of Johanson and Matts-

son’s (1988) model? These four categories of ﬁrms namely: Early Starter, Lonely

International, Late Starter and International Among Others, are explained in detail

later and presented in Table 1.

Including the introduction, this paper has seven sections. The second section

reviews the related literature, whereas the third section discusses the method of

research. The fourth provides a discussion of the four ﬁrms and the ﬁfth highlights

some of the weaknesses in the model, which emerged when analysing the cases in

this study. The sixth discusses the managerial implications of this study. Finally, the

paper ends with some general conclusions and suggestions for future research.

2. Literature review

2.1. Deﬁnition of business networks as used in this study

Researchers on business networks (e.g. Ford, 1990; Gadde & Mattsson, 1987;

Hakansson & Johanson, 1993) have transposed the social exchange perspective of

social networks (e.g., Cook & Emerson, 1978; Emerson, 1972) to business networks

(Anderson, Hakansson & Johanson, 1994). The present study uses social exchange

theory to deﬁne business networks as, “a set of two or more connected business

relationships, in which each exchange relation is between business ﬁrms that are

conceptualised as collective actors” (Emerson, 1981) (see Anderson et al., 1994, p.

2; Blankenburg Holm, Eriksson & Johanson, 1997, p. 1036). These actors include

competitors, suppliers, customers, distributors and government (Axelsson & Johan-

son, 1992; Sharma & Johanson, 1987).

A basic assumption in this paper is that business takes place in a network setting,

Table 1

Internationalisation and the network model: where do ﬁrms ﬁt in the matrix? a

Degree of internationalisation of the market (production net)

Low

High

Degree of

Low

The Early Starter

The Late Starter

internationalisation

EARLY

LATE

of the ﬁrm

High

The Lonely International

The International Among Others

LONELY

INTERNATIONAL

Reproduced from Johanson and Mattsson (1988).

S. Chetty, D. Blankenburg Holm / International Business Review 9 (2000) 77–93

where different business actors are linked to each other through direct and indirect

business relationships. The social exchange perspective of business networks stresses

the importance of their informal character as the networks evolve between individuals

in the ﬁrms (Granovetter, 1985). This informal character is one important distinction

between business networks on the one hand and formal groups and associations on

the other. In the latter, independent ﬁrms can have common strategic goals.

2.2. Johanson and Mattsson’s (1988) network approach to internationalisation

In order to study the internationalisation of a ﬁrm we need to understand the

context in which it operates, such as, environmental conditions and the ﬁrm’s

relationships (Madsen & Servais, 1997). Johanson and Mattsson (1988) consider

business networks as the relationships a ﬁrm has with its customers, distributors,

suppliers, competitors and government — the actors in a business network. They

argue that as the ﬁrm internationalises, the number and strength of the relationships

between different parts of the business network increases. By internationalising the

ﬁrm creates and maintains relationships with counterparts in other countries. This

occurs in different ways: ﬁrst, by forming relationships with counterparts in countries

that are new to the ﬁrm (international extension). Second, by increasing commitment

in already established foreign networks (penetration). Third, by integrating their pos-

itions in networks in various countries (international integration).

The activities in the network allow the ﬁrm to form relationships, which help it

to gain access to resources and markets. An assumption in the network model is that

a ﬁrm requires resources controlled by other ﬁrms, which can be obtained through

its network positions (Johanson & Mattsson, 1988). Johanson and Mattsson use the

term net to specify certain sections of a network. For example, national net refers

to networks in other countries, and production net refers to a ﬁrm’s relationships

that revolve around activities in a speciﬁc product area. Further, Johanson and Matts-

son identify four categories of ﬁrms: the Early Starter , the Lonely International , the

Late Starter and the International Among Others . The four different situations that

these categories of ﬁrms operate in are presented in Table 1.

The ﬁrst category, the Early Starter , is the ﬁrm with few international relationships

and whose competitors and suppliers are also in the same position. Consequently,

the Early Starter has little knowledge of foreign markets and has little opportunity

to acquire this knowledge from its relationships in the domestic market. To acquire

this knowledge the ﬁrm uses agents to enter foreign markets. By using an agent in

the foreign market, the Early Starter ﬁrm can reduce cost and uncertainty, as it

beneﬁts from the agent’s previous knowledge and investments in that market. These

ﬁrms might be encouraged to internationalise by distributors or customers in the

foreign market.

The second category of ﬁrm, the Lonely International , is the one which is highly

internationalised, but in a market environment with a domestic focus. In fact, it is

the Lonely International, which alone has the capabilities to promote internationalis-

ation of the market (the production net). This ﬁrm has acquired prior knowledge and

experience with foreign markets, so it has the capabilities to succeed. Indeed, a ﬁrm

S. Chetty, D. Blankenburg Holm / International Business Review 9 (2000) 77–93

operating in diverse foreign markets is exposed to various ideas and experiences,

which advance the ﬁrm’s knowledge development (Barkema & Vermeulen, 1998).

The Lonely International ﬁrm has an edge over its domestic competitors, as it has

already established a position in the business network.

The third category, the Late Starter , is in a market environment that is already

internationalised. Consequently, the ﬁrm has indirect relationships with foreign busi-

ness networks through its suppliers, customers, and competitors. Having such

relationships drives the ﬁrm to internationalise. Markets with close psychic distance

(psychic distance means the amount of difference in language, culture and political

systems; Vahlne & Wiedersheim-Paul, 1973), however, might be difﬁcult to enter,

so the ﬁrm might start its internationalisation by entering more distant markets. The

Late Starter is at a disadvantage because its competitors have more knowledge and

because it is hard for new entrants to break into an existing network.

The fourth category, the International Among Others , focuses on a highly inter-

nationalised ﬁrm that operates in an environment, which is also highly international-

ised. Since the International Among Others has acquired international knowledge, it

is quick at setting up sales subsidiaries, as it needs to co-ordinate activities in differ-

ent markets. The International Among Others is connected to various international

networks that provide opportunities for obtaining external resources.

3. Method of research

This study uses the case study method according to Yin’s (1989) and Eisenhardt’s

(1989) approach. Multiple-cases are used rather than a single case. Yin (1989) and

Strauss and Corbin (1990) mention multiple-cases but it is Eisenhardt (1989) who

has written in detail about their theory-building properties. She found that the mul-

tiple-case approach encourages the researcher to study patterns common to cases and

theory and to avoid chance associations (Eisenhardt, 1991). Eisenhardt (1989) states

that in the multiple-case approach there is no ideal number of cases, but recommends

between four and 10 cases. With fewer than four cases, theory is difﬁcult to generate,

and with more than 10 cases, the volume of data is difﬁcult to cope with.

This paper is based on a longitudinal case study conducted in 1992 and 1995 of

four manufacturing ﬁrms. These ﬁrms were selected because they have different

characteristics, as Eisenhardt (1989) recommends. They have different industry and

market characteristics and are at varying levels of internationalisation. In addition,

they show different ways of internationalisation according to each of the four cells

in Johanson and Mattsson’s (1988) model. Each ﬁrm was chosen by replication logic

rather than by sampling logic. In other words, the sample was chosen because the

ﬁrms could be used for literal and theoretical replication, rather than because they

were representative of the population.

By choosing small- to medium-sized ﬁrms, access to decision-makers became

feasible. Each case was carefully selected so that it predicts different results for

expected reasons (theoretical replication). Since each ﬁrm was selected to ﬁt into

each category of Johanson and Mattsson’s (1988) model it is predicted that the inter-

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