Chetty 2007

Social Capital and Its Influence on Changes in Internationalization Mode among Small and
Medium-Sized Enterprises
Author(s): Sylvie Chetty and Henrik Agndal
Source: Journal of International Marketing, Vol. 15, No. 1 (2007), pp. 1-29
Published by: American Marketing Association
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Social and Its Influence on
Capital
Changes in Internationalization Mode
Among Small and Medium-Sized
Enterprises
This article explores how social capital influences a firm to ABSTRACT

its internationalization mode. The authors use an
change
in-depth qualitative study to identify 36 internationalization
mode changes in tenNew Zealand and ten Swedish small and
medium-sized enterprises. This article contributes to the inter
nationalization mode literature by focusing on relationships
and mode change. Using the network approach, the authors
develop three categories of social capital and discuss their role

in influencing mode change. The roles include the efficacy role,
the serendipity role, and the liability role of social capital.
These three roles incorporate both the positive and the negative
aspects of social capital. The liability role is themost frequently

observed form of social capital to influence mode change. The
most frequent type of mode change is toward a high-control
internationalization mode.
The internationalization of firms has gained increasing atten

tion from both academics
the main reasons for this
and public policy makers.
is that the environment
One of
has
Sylvie Chetty and
trading
from imports has eroded the domestic
Henrik Agndal
changed; competition
market for firms, and new opportunities have emerged for
these firms in foreign markets. The term "internationaliza
tion process" denotes how firms expand into new markets,
become involved in progressively more international rela
and use more resource-consuming
tionships, increasingly
structures over time. Various attempts have
organizational
been made in the literature to explain why certain firms
exhibit specific patterns of internationalization. In particu
lar, the focus has been on internationalization mode, which
refers to the organization structure a firm uses to conduct
business in its international markets. Various internationali
zation models have been proposed. Extant research has
tended to focus on initial choices of foreign market entry
mode and, to a lesser extent, on how firms change interna
tionalization modes over time (Calof and Beamish 1995; Ped
ersen, Petersen, and Benito 2002). Consequently, Pedersen,
Petersen, and Benito (2002) conclude that the current litera
ture on foreign operation modes is static because scholars
Submitted October 2005
have paid scant attention to the changes in initial entry Accepted September 2006
mode. In addition, Petersen and Welch (2002) and Calof and Journal of International Marketing
Beamish (1995) conclude that to improve understanding of ? 2007, American Marketing Association
Vol. 15, No. 1, 2007, pp. 1-29
how firms more research needs to be
develop internationally, ISSN 1069-031X (print)
done on the changes in modes that firms use. 1547-7215 (electronic)
Some of the models used in the extant literature explore
"rationalistic" aspects, such as market access and market
penetration over the product life cycle (Vernon 1966) or costs
of setting up and conducting international activities (Ander
son and Gatignon 1986). Anderson and Gatignon (1986) use a
transaction cost framework to study the entry mode decision,
and they conclude that the most efficient entry mode
emerges when there is an optimal trade-off between control
and resource commitment. Although they
use the transaction
cost framework, they acknowledge the contribution that can
be made from research that uses other theoretical frame
works, such as Hakansson's (1982) framework, which
focuses on and networks. Anderson and
relationships
Gatignon mention that this area of long-term stable relation
ships, in which both parties involved in a particular mode

develop certain codes of conduct, has received scant
research attention. In particular, they argue that other ways
of control, such as relational contracts (Hakansson 1982),
could make useful contributions to the knowledge of how
entry modes are changed. Anderson and Gatignon
Although
called for this research 20 years ago, the entry mode litera
ture continues to be dominated by the transaction cost
approach (TCA). This article attempts to fill this gap by

on social influences on mode
focusing change.
Although there are some researchers who have focused on

the firm's network positions and connections and how these
affect internationalization (Axelsson and Johanson 1992),
mode selection has been
neglected. One perspective on inter
nationalization focuses on which is
organizational learning,
based on Penrose's (1959) ideas. For example, scholars such
as Johanson and Vahlne (1977) focus on the issues of knowl
as a resource and mode selection. argue that as
edge They
firms become more with interna
experienced conducting
tional activities, they become more willing to commit addi
tional resources to these activities. Over time, these firms
become involved in greater resource-consuming modes.
These firms may progress from direct exporting to setting up
a subsidiary abroad. As the internationalizing firm engages
in more resource-consuming modes, it acquires more control
over its international activities.
One of the major constraints for small and medium-sized
enterprises (SMEs) as they go through the internationaliza

tion process is that they lack resources (Chetty and
Campbell-Hunt 2003). According to Chetty and Campbell
Hunt (2003), away to overcome this limitation is for firms to
these resources their business networks.
acquire through
The ability to acquire resources from this business network
is referred to as social capital, and it plays
an important role
in influencing international mode selection. Several
researchers on social define this concept as the sum
capital
Sylvie Chetty and Henrik Agndal
of resources a firm acquires from its network of relationships
(Bourdieu 1986; Bourdieu and Wacquant 1992; Woolcock
and Narayan 2000). However, Woolcock and Narayan (2000)
incorporate both the benefits and the costs of social capital in
on
their research the topic. They view the positive aspects of
social as assets but the negative aspects of social capi
capital
tal as liabilities.
A firm can access resources through its internal relationships

within the firm and through its external relationships with
other firms. The internationalization process itself can be
viewed as a process of developing and accessing social capi
tal, as firms initiate, establish, and deepen international
relationships (Johanson and Vahlne 2006). Although social

an
important in influencing
role internationali
capital plays
zation mode selection, it has yet to be explored in any great
detail. In particular, both the positive and the negative
of social can influence internationalization
aspects capital
mode change. Although this is an important issue, surpris
ingly little research adopts a structured approach to identify
how various forms of social capital influence internationali
zation mode change. Therefore, the overall purpose of this
article is to study how social capital influences SMEs to
change internationalization modes.
In the next section, we review the literature. Then, we pres

ent our method of research, followed by
case
study data on
mode and a discussion. The article ends with a sec
changes
tion on conclusions and implications.
This section focuses on the concepts we use. This

key
includes the TCA, the network approach, and a
comparison A Review of the
between the two approaches. It also includes a discussion on Literature on
social capital and the impact of social capital on choice of Internationalization
internationalization mode. The section ends with the devel
Mode Change and
opment of three roles of social capital and how they influ of
Development
ence mode, as well as three
propositions. Propositions
The most common framework used in the literature on inter
nationalization modes is the TCA, which considers the firm The TCA toMode Selection
a governance structure. The TCA assumes that a firm has dif
ferent transaction costs (Rindfleisch and Heide 1997), such
as the direct costs of managing and the oppor
relationships
tunity costs of making the wrong decision (Williamson 1975,
1985), which determine how the firm conducts business. In
the TCA focuses on costs related to setting up
particular,
international ventures, such as costs of seeking partners, and
the costs related to running international ventures. The latter
costs include the costs of monitoring partners and of sanc
tioning poorly performing partners. Some examples of using

the TCA as a framework include the following: Anderson
and Weitz (1992) focus on the level of manufacturer and dis
Social Capital and Changes in Internationalization Mode Among SMEs 3
tributor commitment to the relationship, Dutta and George
(1995) study single versus dual channel distribution systems,
and Erramilli and Rao (1993) study shared versus full
control modes of market entry. However, according to Rind
fleisch and Heide (1997, p. 51), the use of the TCA has its
limitations, and "the basic theory is still in need of further
development (Rangan, Corey, and C?spedes 1993)." As an
alternative to the TCA, Achrol (1997) proposes new thinking
in marketing toward a network He argues that suc
paradigm.
cessful organizations increasingly resemble networks, in
which alliances and partnerships progressively replace tradi
tional, vertically integrated firms.
An alternative model of mode selection finds its origins in

The Network Approach to the writings of some of the early internationalization
Mode Selection researchers. identified an incremental sequence of
They
mode usage referred to as the "establishment chain" in four
large Swedish firms (Johanson and Wiedersheim-Paul 1975).

The chain starts with the firm having a strong domestic mar
ket but no exports. The firm then proceeds incrementally to
export through independent representatives, to direct
exports, to using sales subsidiaries, and, in the final stage, to

have production subsidiaries in its international markets. As
the firm progresses through each
stage, it increases its
resource commitments. Johanson and Vahlne (1977) extend
this framework into the "internationalization process
model," on the between market
focusing interplay expanding
knowledge and increasing market commitment. The central
argument in the latter model is that when the firm acquires

more market as it progresses these stages,
knowledge though
it will commit more resources to the market and thus obtain
even more firms that have pro
knowledge. Consequently,
duction subsidiaries in international markets have more mar
ket and have committed more resources than
knowledge
firms that export an agent.
through
In a further development of the 1977 model, Johanson and

Vahlne (2003) integrate the internationalization process
model with the network approach. They view the establish
ment and the changing of relationships as critical to the
internationalization process of the firm. Several articles have
already been written about how networks influence the

internationalization process. Wong and Ellis (2002) find that
social ties are important in helping identify partners in Sino
Hong Kong international joint ventures. Blankenburg Holm,
Eriksson, and Johanson (1999) find that firms that are mutu
ally committed to business relationships and have inter
activities are able to create more value than if
dependent
they work independently. Chetty and Campbell-Hunt (2003)
illustrate how networks are used to manage explosive
growth.
4 Sylvie Chetty and Henrik Agndal
Various researchers have also focused on the types of net
works firms use during various stages of their growth or the
networks that differ in their of cooperation. For exam
degree
ple, Hite and Hesterly (2001) study how firm networks
evolve from inception to early growth of the firm. They iden
two types of networks. First, there are
tify identity-based
networks, which they define (p. 278) as "egocentric networks
that have a high proportion of ties where some type of per
sonal or social identification with the other actor motivates
or influences economic actions." Second, there are calcula
tive networks, which as "egocentric net
they define (p. 278)
works where the focal actor's ties are motivated
primarily by
economic benefits." argue that as the firm
expected They
progresses from inception to early growth, the networks
move from based to calculative based. Lechner and
identity
Dowling (2003) identify five different types of networks that
firms use at different stages: social networks;
development
networks; with com
reputational "coopetition" (cooperating
petitors); marketing networks; and knowledge, innovation,
and technology. Varamaki and Vesalainen (2003) provide five
different types of networks that differ in their degree of coop
eration; ranging in order from loosest to tightest cooperation,
these are development circle, loose cooperative circle, proj
ect group, joint venture, and a joint unit.
Both the TCA and the network approach offer insights into
the selection of internationalization modes. also be can A Comparison Between the
They
on several dimensions. in terms of frequency
First, TCA and the Network
compared
of interactions, the TCA's unit of analysis is the single trans
Approach
action (Rindfleisch and Heide 1997). However, the network
which uses social as a frame
approach, exchange theory
work, considers a series of transactions over a
long period,
and prior interactions determine the nature of future inter
actions (Hakansson and Snehota 1995). In a comparison of
the TCA and the network approach, Johanson and Mattsson
(1987) argue that the TCA views firms as markets and hierar
chies, whereas the network approach views firms as social
units. According to Johanson and Mattsson, the important
difference between the TCA and the network approach is the
nature of the relationship. In the network approach, relation
are can reduce and
ships long lasting because they exchange
production costs. In addition, relationships contribute to the
development of knowledge and change. These long-term

enable firms to have some control over each
relationships
other and to gain indirect access to assets of third parties.
However, Williamson (1975) views as existing
relationships
in hierarchies.
Second, an of the TCA is opportunism ("self

assumption
interest seeking with guile"; Williamson 1985, p. 47), which
is considered a fundamental problem (Ghoshal and Moran
1996; Rindfleisch and Heide 1997). In the network approach,
however, the focus is on building long-term, mutually satis
fying relationships (Achrol 1997). In the TCA, the focus is on
controlling opportunistic partners, whereas in the network
approach, the assumption is that exchange is a constructive
relationship and should be nurtured. In the network

approach, trust and social norms of behavior are important
(Achrol 1997). It also considers trust between partners more
important than opportunistic behavior, which is the focus in

the TCA (Johanson and Mattsson 1987).
Third, another assumption in the TCA is bounded rational

ity, which views decision makers as constrained
being by
their cognitive ability and rationality because of their limited
ability to process information and communicate (Rindfleisch
and Heide 1997). According to Johanson and Mattsson
(1987), whereas bounded rationality assumes that the firm
has limited knowledge, the network approach views the
firm's interactions with its partners as a way to broaden its
thinking and knowledge.
Fourth, regarding the dimension of asset specificity in the

TCA, Johanson and Mattsson (1987) disagree with
Williamson (1985) that increasing asset specificity results in
vertical integration and that it is internal. Johanson and
Mattsson argue (p. 45) that the network approach views asset
as a result of firms "using each other's assets in a
specificity
mutual adaptation process." Thus, asset specificity is mainly
the result of external relationships that a firm has with other
organizations.
We contribute to the change in internationalization mode lit

erature the network as a framework. In
by using approach
we focus on the resources that a firm acquires
particular,
through its network, which is referred to as social capital,
and how this influences the change in internationalization
mode.
In the business literature, various definitions of social capital

Social are many of which can be traced to Bourdieu
Capital proposed,
(1986). These definitions emphasize the value of the social
context social to study social net
by using exchange theory
works and business networks (Johanson and Vahlne 2003).
We use Nahapiet and Ghoshal's (1998, p. 243) definition of
social capital, which is "the sum of the actual and potential
resources embedded within, available through, and derived
from the network of relationships an individual
possessed by
or social unit.... [S]ocial capital comprises both the network
and the assets that may be mobilized through the network."
An resource that these scholars emphasize is the

important
access to other sources of knowledge. Indeed, in a review of
the literature, Nahapiet and Ghoshal (1998, p. 250) conclude
that knowledge is socially embedded, residing in situations
and relationships. Therefore, combining and exchanging
are social processes. This contrasts with
knowledge
Williamson's (1985) concept of opportunism as self-interest
seeking with guile, which Buckley and Carter (2004) con
sider an obstacle to knowledge and Carter
sharing. Buckley
argue that business partners need to transfer their knowledge
to others rather than to withhold information for their own
strategic advantage.
A useful way to structure the concept of social capital is to

divide it into internal and external social capital. Yli-Renko,
Autio, and Tontti (2002) view internal social capital as the
quality of relationships between individuals and depart
ments within a firm and external social as manage
capital
ment contacts, customer involvement, and supplier involve
ment. They conclude that social capital contributes to the
firm's acquisition of knowledge, its competitive advantage,
and its international growth. According toWoolcock (1998),
it is problematic to distinguish between the elements of
social capital, the ways it is created, and the benefits derived
from it. Nevertheless, three important overall observations
can be made. First, social has an inherent value
capital
because it can be beneficial for economic or other gains. Sec
ond, social presumes some kind of antecedent rela
capital
a strong tie or a weak tie between actors.
tionship?either
Third, social capital encompasses both internal and external
relationships. The internal relationships include those

among people who work in the firm, and the external rela
are those a firm needs with distributors, customers,
tionships
suppliers, competitors, government agencies, and other
organizations to conduct business.
The key concepts of market knowledge and market commit

ment in Johanson and Vahlne's (1977) model can be linked to
the literature on social In another article
capital. follow-up
on the 1977 internationalization process model, Johanson
and Vahlne (2006, p. 1) emphasize that "opportunity devel
opment is an important outcome of commitment." They
view the concept of social capital that Nahapiet and Ghoshal
(1998) propose as being similar to the concept of commit
ment in the internationalization process model. Johanson
and Vahlne (2006) explain that Nahapiet and Ghoshal's claim
that social capital encourages cooperative behavior implies
commitment. Thus, Johanson and Vahlne consider the con
cepts of social capital and mutual commitment similar. How

ever, Johanson and Vahlne's (1977) previous version of the
internationalization process model focuses on the individual
firm's commitment, not on mutual commitment as it pro
ceeds through its internationalization path. Mutual commit
ment encourages firms to interact and thus enables them to
learn and create new knowledge. This knowledge helps
firms develop and recognize opportunities for conducting
business that others cannot see and develop (Johanson and
Vahlne 2006). They are privileged to have prior knowledge
about each other that other firms do not have. Building these
relationships takes time, is costly, and is risky. This is one
reason firms without prior in forming networks
experience
take a time to internationalize. These may
long relationships
begin serendipitously or strategically through searching for
the ideal
partner. However, the born-global literature shows
that one of the reasons for early internationalization and
rapid growth is that the decision maker has prior experience

in forming networks or uses established networks that were
formed beforeinception of the current business (Chetty and
Campbell-Hunt 2004).
Prior experience in forming social capital also enables the

firm to build future relationships to increase its social capi
tal. Founders of born-global firms have greater social capital
because they have more prior experience in creating it
(Chetty and Campbell-Hunt 2004; Hakansson 1982). The less

social a firm has, however, the more it is to
capital exposed
opportunistic behavior, and thus it becomes difficult to build
long-term collaborative relationships. Such firms need to
more time and resources to monitor their relation
spend
ships than firms with more social capital, which need fewer
resources to maintain their existing Conse
relationships.
quently, the more social capital
a firm has, the more it can
invest in forming new (Walker, and
relationships Kogut,
Shan 1997).
The existing social capital of a firm determines the opportu

nities that are available in a particular (Johanson and
period
Vahlne 2006). Decision makers' contacts can
personal help
identify new opportunities for the internationalizing firm in
new markets Shane, and Oviatt 1994). Some of
(McDougall,
these opportunities occur unexpectedly through serendipi
tous events. The knowledge that firms acquire through their
business relationships enables them to recognize these
events as the more relation
opportunities. Consequently,
ships a firm has, the more diverse is the knowledge it
acquires and the more opportunities
are created.
Social capital can also be a liability because it has a down

side pertaining to the risks involved and the investment in
time and costs associated with forming, monitoring, and sus
taining social capital (Yli-Renko, Autio, and Tontti 2002). In

some cases, the of relationships and the conflict
quality
within them can
be problematic. According to Walker,
and Shan (1997), in a "closed network," members are
Kogut,
connected to one another, have access to social and
capital,
have norms that govern the code of conduct. In an "open net
work," however, firms have no access to social they
capital,
are not connected, and the norms and information about
behavior are disseminated In such a situation, it is
slowly.
difficult to keep opportunistic behavior in check. Indeed,
Nahapiet and Ghoshal (1998) argue that some aspects of
social can hinder interaction and thus constrain
capital
rather than enhance learning. They argue though social that
norms and have a positive effect on group
identity perform
ance, these attributes can also hinder the group's receptive
ness to new information and to seek other methods of doing
things. The firm can also suffer from being in what Uzzi
(1997) refers to as an "overembedded network." According to
Uzzi, these close relationships block out external informa
tion from other sources. This shows that the firm in such a
closed network fails to recognize new and better opportuni
ties. Indeed, these "ties that bind" can lead to "ties that
blind" (Grabher 1993, p. 24). In this situation, it is important
for the firm to have weak ties so that it can enter other net
works and thus expose itself to new knowledge and opportu
nities (Granovetter 1973). Furthermore, when firms exit a
there are costs, inactivity, and the
relationship, switching
on other interconnected to consider
impact relationships
(Johanson and Vahlne 2006).
We use the terms mode" and "low-control

"high-control
mode" to represent the degree of control that a firm has over The Impact of Social Capital
its internationalization mode. The more international activi on Choice of
ties that are externalized (i.e., managed by
someone else), the Internationalization Mode
less control the firm has over its internationalization mode.
The more activities that are internalized (i.e., managed by the
firm), the greater is the firm's control over its international
activities, and thus the greater is its control over its interna
tionalization mode. A change in internationalization mode
focuses on a from to lower-control modes,
change higher-
and vice versa. control entails from
Increasing switching
agent, distributor) to direct or
intermediary (e.g., exporting
from direct exporting to subsidiary (or joint venture).
Decreasing control entails switching from subsidiary (or joint
venture) to direct exporting or from direct exporting to the
use of an intermediary. Therefore, the focus is on the direc
tion of change in control.
On the basis of the foregoing discussion of social capital and

internationalization mode, we three roles of
develop possible
social capital in influencing changes in mode: efficacy,
and The reason we focus on these three
serendipity, liability.
roles is that they include both the positive and the negative
aspects of social capital, thus capturing the tension between
these two aspects of social In addition, we study the
capital.
opportunities that emerge serendipitously through a firm's
social These roles are not mutually exclusive,
capital.
because or roles of social could influ
single multiple capital
ence a mode we differentiate
specific change. Although
between these roles, we
three realize that many of the roles
we illustrate are
interrelated. In addition, rather than review
the roles of social we focus on what we
capital exhaustively,
perceive as the three most roles of social
important capital
that influences changes in mode. The three roles of social
capital are discussed in detail below and three propositions

are
developed.
The Efficacy Role of Social Capital. The efficacy role of

social capital refers to the usefulness of the firm's social capi
tal and how this enables the firm to make a mode
change.
The value of relational assets, such as knowledge, informa
tion, and access to resources, highlights the efficacy of social
capital. It is important for a firm to have frequent social inter

actions so that it can access its partner's (Yli
knowledge
Renko, Autio, and Sapienza 2001). For young and small
firms, it is useful to tap into the social capital of the founder
managers and their customer and supplier relationships.
Social capital encourages cooperative behavior and, thus,

new forms of associations. The concept of social is
capital
also important to understand value creation and innovation
(Nahapiet and Ghoshal 1998). Through frequent interaction

and can information and
joint activities, partners exchange
learn from each other to create new
knowledge (Nahapiet
and Ghoshal 1998). The more interaction there is between
partners in a network, the more social capital is accumu
lated. When a firm this new
acquires knowledge, opportuni
ties open up for the firm (Penrose 1959). In a study of prod
uct innovations, Tsai and Ghoshal (1998) also emphasize the
importance of informal social interactions in encouraging the
exchange and combination of resources to create innovative
products. A network that has strong linkages, trust, reci
procity, and mutual commitment creates the foundation for

such interaction to occur and for social capital to increase.
This mutual dependence in relationships helps in value
creation (Blankenburg Holm, Eriksson, and Johanson 1999).
When a firm acquires this knowledge, it opens up new
opportunities for the firm (Penrose 1959). In a study of inter
national joint venture partners, Wong and Ellis (2002) find
that a firm's social reduces its search costs for part
capital
ners because the time taken to do so is shorter, and the firm's
social a strong foundation to find partners.
capital provides
Consequently, in its efficacy role, social capital enables
change. This involves the firm exploiting its network (and

that of its employees) to identify new business opportunities
or to obtain information about new and existing markets. For
contacts
partners or business
might recog
example, personal
nize opportunities for the firm in new markets. To enter these
markets, the firm will need to change its internationalization
mode. The firm might also collaborate with another firm to
benefit from its knowledge and financial resources. For
example, a firm might "piggyback" on another firm that
already distributes its products in a particular market. The
firm might also its social to generate new
exploit capital
social capital; for example, itmight choose to export directly
to its customers so that it can tap into their information and
To summarize, we propose that the usefulness of
knowledge.
a firm's social initiates a mode Thus:
capital change.
Pa: A firm's relationships and the assets to which it pro

vides access can be used to enable an internationali
zation mode change.
The Serendipity Role of Social Capital The serendipity role

refers to the unexpected events arising from a firm's social
capital that trigger a mode change. Thus, the mode change is

not initiated by the firm but rather by serendipity.
According to Nahapiet and Ghoshal (1998), the literature

pertaining to life in organizations provides many examples
of the importance of conversations that take place in various
social contexts. They argue (p. 258) that "these meetings and
social events provide the unplanned and unstructured
opportunities for the accidental coming together of ideas that

may lead to the serendipitous development." In addition, the
social capital literature emphasizes the importance of Gra
novetter's (1973) conceptualization of weak ties from direct
and indirect relationships, which provide access to uncon
nected networks that can provide
resources
the firm. for
to Granovetter, weak ties enable new information,
According
new ideas, new innovations, and new to enter
opportunities
the group. In addition, Burt (1997) and McEvily and Zaheer
(1999) show how weak ties act as brokers, bringing in new
information from other networks to the focal firm. Weak ties
are efficient because they sift out redundant information
(Burt 1997; Nahapiet and Ghoshal 1998).
These events occur through direct or

serendipitous might
indirect weak ties, such as former of
employees, employees
business partners, or unsolicited from
existing approaches
third parties. Whereas the efficacy role refers to how social
capital enables change, the serendipity role refers to how

social capital triggers change. In this context, social capital
for what management as a
provides opportunities perceives
positive change. As McEvily and Zaheer (1999) indicate, we
should also consider what the firm does to exploit the oppor
tunities to benefit from them. When firms get this trigger for
some may have the social to enable them to
change, capital
use this information so that can benefit from it, whereas
they
others may not have the social capital.
Social Capital and Changes in Internationalization Mode Among SMEs
The are some of the serendipity role: The
following examples
firm's reputation might be strong enough to attract new,
business partners that are not part of its
potential existing
network but are informed about the firm through third par
ties or brokers. A business partner the firm
might provide
with information, such as a about someone to contact or
tip
information about an market opportunity. A
unexploited
third party, such as a government agency, a customer, or a
distributor, might take a brokering role to introduce the firm
to someone else. This type of introduction through a broker
could lead to an opportunity for a mode change and the for
mation of a new business partnership. To summarize, we
propose that the more resources a firm from its net

acquires
work, the more opportunities it has for unexpected events to
initiate a mode Thus:
change.
P2: The firm's social capital provides opportunities for

events to trigger an internationaliza
serendipitous
tion mode change.
The Liability Role of Social Capital. The liability role of

social refers to the for change that occurs as a
capital trigger
result of the high costs and amount of time required to mon
itor and sustain social capital and poorly performing partner
ships that do not accomplish the expected sales. As we men
tioned the current literature on social
previously, capital
focuses on the benefits of social capital but neglects the risks
associated with social capital. Nahapiet and Ghoshal (1998,
p. 245) state that it is not a beneficial resource."
"universally
The reason for this is that a close network can limit the
group's
access to new information and new ways of doing
which can reduce its performance. In addition, cer
things,
tain group norms may be opposed to cooperation and sharing
with others and to change. Uzzi (1997) highlights the prob
lems of overembeddedness, which he views as a
liability
because this can block new information from entering the
network.
a in time
Social capital requires large amount of investment
and resources to develop and maintain relationships. This
investment may not be an efficient use of resources, because
it might be too expensive to maintain and the risks might
exceed the benefits. Indeed, an unexpected loss of a core net
work can turn social from an asset into a lia
player capital
bility (Uzzi 1997). For example, a firm can become highly
skilled at working with a particular distributor, but if this
distributor decides to retire, the relationship that originally
benefited the firm will put the firm at risk of failing. The firm
lack the resources to find a new distributor or to make
might
the transition to work with a new one.
In addition, there are feelings of obligations among members
in the network to help those who are weaker, which can be a
drain on resources (Uzzi 1997). In a study on ethnic entre
preneurs, Portes and Sensenbrenner (1993) describe how

their networks facilitate access to resources, but these bene
fits also create
obligations to the network. This makes it diffi
cult for the entrepreneurs to leave these relationships, which
hinders rather than them follow up on new
helps
opportunities.
Consequently, the liability role of social capital forces the

firm to react to these situations a mode
negative by making
Thus, the role of social acts as a
change. liability capital
trigger for a mode change. Although a firm might need to
bear the switching costs and other associated consequences
of making such mode changes, the outcome of this change
could be positive for the firm. For example, in the case of a
highly specialized product for which service is a major part

of the augmented product, the firm might need to change
modes to be able to work directly with the customer;
otherwise, the customer might switch to another supplier.
Another example is the termination of a distributor agree
ment because the distributor lacks commitment to the
or because the distributor becomes a To
product competitor.
summarize, the more and a firm's
problematic costly
relationships, the more likely they
are to initiate a mode
change. Thus:
P3: The liabilities from a firm's relationships may trigger

an internationalization mode change.
We use a case study method similar to Eisenhardt's (1989)

and Yin's (1989) approaches. We use
multiple
cases rather Method of Research
than a case. Strauss and Corbin (1990) and Yin men
single
tion multiple cases, but Eisenhardt writes in detail about
their properties. cases allow
theory-building Multiple repli
cation logic to be used, enabling researchers to identify the
subtle similarities and differences within a group of cases as
well as intergroup similarities and differences (Eisenhardt
1989; Yin 1989).
We collected data from 20 SMEs, which we defined as firms

with fewer than 250 employees at the time of the study, cor
responding to the European Union definition of an SME in

terms of number of employees (European Commission 1996).
We used the following criteria to select these firms: First,
they had less than 250 employees. Second, they were suc
cessful on the basis of their history of survival and growth.
Third, were manufacturing firms
that represented a
they
range of low- to high-tech products. To maintain anonymity,
we do not disclose the real names of these firms.
We study the phenomenon of social capital in the context of
SMEs because it is more transparent in such firms. Their
resources are more on their
limited, and they must often rely
business partners to acquire knowledge and other resources.
Thus, we follow Yin's (1989) suggestion that cases should be
selected in which the phenomenon under study is transpar
ently observable. Ten of these firms were from Sweden, and

ten were from New Zealand. Sweden and New Zealand share
some characteristics because both countries are
important
small in size, with a population of nine million in Sweden
and four million in New Zealand. Because of these small
domestic markets, both countries are highly dependent on
export sales. An important difference is that New Zealand is
remote from its main export markets, whereas Sweden is
located close to its main trading partners.
In the New Zealand economy, as elsewhere (Simon 1996),

many firms are owned, so the
exemplary privately project
was guided in its selection by an advisory panel of industry
leaders, policy advisors, business support agencies, and
business who are familiar with a wide range of
journalists
firms. The guidance given to the panel to help select the New
Zealand firms was that they needed to be successful firms
with exemplary histories of long survival and growth. The
panel's task was feasible because of the small size of the
economy and a relatively small number of firms with exem
plary histories of long survival and

growth. Because
of the
access to public data in Sweden, however, a database
greater
information about all exporting organizations was
containing
used to identify the Swedish firms with histories of long sur
vival and growth for this study.
We used multiple sources of information to gather data from

each firm, with the main form of data gathering being the
semistructured interview. We used a list of topics to guide
the discussion. Each interview lasted between one and two
hours. 50 respondents were interviewed in the 20
Altogether,
SMEs. To obtain the long historical coverage, the respon
dents in each organization typically held the roles of chief
executive officer (CEO) and international business or market
(sometimes the same these
ing manager person performed
roles). In organizations in which the founder was no
longer
the CEO, this person was also interviewed. Retired CEOs and
some sales staff were also interviewed. We strengthened the
reliability of the accounts from respondents by using the

techniques that Huber and Power (1985) suggest. For exam
we factual information related to prior events, in
ple, sought
addition to their construction of them, in an attempt to
our recall. We used written documents
improve respondents'
that the firms made available whenever possible, and we
conducted a search for material in the public domain. Thus,
we carried out triangulation of information through compari
sons of information among interviewees and through docu
ments. We combined the interview results with documentary
evidence a detailed case history of each firm. Pet
to produce
tigrew (1990) suggests that this is an important step in case
study analysis because the incoherent aspects of recollected
experience must be organized into a chronology to highlight

the causal links between events
in the history and the phe
nomena of interest. We then sent these interview transcripts
and case histories to the respondents for confirmation of
their accuracy.
The unit of analysis for this study is the change in interna

tionalization mode that these firms made. Therefore, we ana
lyzed the 20 case studies to identify mode changes that were

specifically influenced by social capital and occurred
throughout the firms' internationalization processes. Alto
we identified 36 such mode
gether, changes.
We carried out the data in several steps. First, we

analysis
systematically searched the 20 case studies for changes in
internationalization mode. Second, we reexamined each of
these changes to select those in which relationships influ
enced change. Third, we constructed detailed word tables
(for an overview, see Tables 1 and 2) of these changes, and we
then analyzed each change according to the three roles of
social capital used in this study (i.e., efficacy, serendipity,
and liability roles). To maintain analytical rigor and to iden
across and across firms, we "counted"
tify patterns changes
findings, thus establishing frequencies of observations.
The details of how social capital influences changes in inter

nationalization mode for each firm appear in Table 1. When Case Study Data on Mode
selecting which role social capital played in a particular Changes
mode we considered whether these were
change, changes
due to positive or stimuli. In addition, we differen
negative
tiated whether the firm initiated the change because of the
usefulness of its social or whether it reacted to an
capital
unexpected event or to problems with its social For
capital.
example, if a firm piggybacked into a new market with a
business partner, we considered this the role. If the
efficacy
firm had problems with a distributor, we considered this the
role. If the firm an event,
liability experienced unexpected
such as an approach from a third party to manufacture its
products, we considered this the serendipity role. As Tables

1 and 2 show, each mode can involve either or
change single
multiple roles of social capital. Table 3 summarizes the mode
changes and the different roles of social capital in these

changes for both the New Zealand and the Swedish firms.
As Table 3 illustrates, 36 mode changes occurred because of

the influence of a firm's relationships. Most changes (19 of
36) occurred because of the influence of a role of social
single
Circumstances Role of
Table 1. Surrounding the Mode Social
Firm Type of Mode Change Change
Overview of Changes in Capital
NZl control mode: TradeNZ
Internationalization Mode and Decreasing (government Serendipity
Distributors replace direct agency for exports) acted as
the Influence of Social Capital exports. the broker and helped
on New Zealand Firms identify distributors.
NZ2 Increasing control mode: NZ2 wanted to maintain Efficacy

Direct exports replaces control of its distribution
agent. and to be close to its

customer.
NZ3 Increasing control mode: Thechange in the United Serendipity

Sales subsidiary replaces States
occurred an
through
distributors. meeting with a
unexpected
third party in a store.
NZ4 Increasing control mode: To provide "a greater Efficacy

Joint venture replaces marketing base in the USA
distributor. and access to the European
and Japanese markets."
NZ5 Increasing control mode: NZ5 wanted to be close to Efficacy

Sales office replaces its customers because of its
distributor. specialized product.
NZ6 control mode: Distributor was its

Increasing pushing Liability
Direct exports own and
replaces products
distributor. neglecting NZ6's products.
NZ7 Decreasing control mode: There was an

unexpected Efficacy
Distributor replaces direct opportunity from a former Serendipity
exports. employee to enter the
Chinese market.
Increasing control mode: The U.S. distributor Liability

Direct exports acquired a new senior
replaces
distributor. management team with
which NZ7 was
unhappy.
Increasing control mode: This distributor failed to Liability

Direct exports replaces sell the product.
distributor.
NZ8 Increasing control mode: This joint venture was Liability

Joint venture replaces formed because clients in Serendipity
agent. the United Kingdom
wanted direct contact with
NZ8 staff in the United
Kingdom.
NZ9 Decreasing control mode: There were unsolicited Serendipity

Distributors replace direct approaches from European
exports. distributors to distribute

NZ9's products in Europe.
Increasing control mode: NZ9's French distributor Liability

was ineffective, so when
Manufacturing subsidiary Serendipity
replaces distributor. NZ9 was approached by
GEF to manufacture in
France, it took the
opportunity.
Surrounding the Mode Social Table 1.
Firm Type of Mode Change Change Capital Continued
Decreasing control mode: The business partner's Liability
Distributor parent company was
replaces
manufacturing subsidiary. nationalized and started
losing money. NZ9 then
sought out distributors.
NZ10 Increasing control mode: When another company Liability

Direct exports replaces acquired the U.S.
distributor in the United distributor, the new
States. company had no interest in
NZlO's product.
Increasing control mode: Distributors and licensees Liability

Direct exports replaces became NZlO's competitors Serendipity
distributors and licensing. when they started to pirate
its products.
Firm Type of Mode Change Change Capital Overview of Changes in
SWl control mode: When the U.S. distributor Liability
Increasing Internationalization Mode and
Subsidiary replaces went bankrupt, SWl's Efficacy
distributor in the United manager wanted to remain the Influence of Social Capital
States. in the market and use the on Swedish Firms
distributor's staff.
Increasing control mode: SWl was a sister

using Efficacy
Subsidiary replaces company to distribute its
distributor. products in the United
Kingdom. As turnover grew,

SWl started its own
subsidiary.
was
SW2 Decreasing control mode: This triggered by a Serendipity
Agent replaces direct potential agent.
sales.
Increasing control mode: SW2 had knowledge about Efficacy

Direct exports replaces customers and could not Liability
agents. justify the costs involved
with using agents.
SW3 Decreasing control mode: Decision was taken to close Efficacy

Distributors replace joint down joint ventures because Liability
ventures. of the time and costs. The
former joint venture
partners act as distributors.
SW4 Increasing control mode: Sales subsidiary in United Efficacy

Sales subsidiary replaces States started after Serendipity
direct exports. encouragement from a
potential customer in the

United States.
Increasing control mode: Sales subsidiary in Germany Efficacy

Sales subsidiary replaces replaced the agent on whom Liability
agent. the firm had become very
reliant. Good knowledge of
customers made this change
possible.
Table 2. Surrounding the Mode Social
Firm Type of Mode Change Change Capital
Continued
SW5 Decreasing control mode: The business network of Efficacy
Agent replaces direct SW5 was used to find an
sales. agent when the market
expanded.
SW6 Increasing control mode: After the owner of German, Liability

Sales subsidiaries replace Danish, and Polish
distributors. distributors wanted to stop
running his firms, SW6's
management believed that it

needed to acquire the
distributor.
Decreasing control mode: Initially, SW6 made Serendipity

Distributors replace direct occasional sales directly to Efficacy
sales. foreign customers. When
SW6 was acquired, however,
the firm was given access to
the parent firm's network of
distributors.
Decreasing control mode: The German sales subsidiary Efficacy

Distributor sales did not as well as
replaces perform Liability
so sales did not
subsidiary. expected,
justify maintaining it. Parent
firm's distributor was used
instead.
SW7 Increasing control mode: Good relations developed Efficacy

Direct sales replaces with a large customer. SW7 Serendipity
distributors. began selling directly to
subsidiaries and affiliated
firms around the world.
SW8 Increasing control mode: SW8 was approached by

an Serendipity
Sales joint venture employee of the existing
replaces distributor. distributor who suggested

that they start a sales joint
venture.
Increasing control mode: When the owner of the U.S. Efficacy

Sales subsidiary replaces distributor decided to sell Liability
distributor. his firm, SW8 recruited a
former as manager
employee
and started a wholly owned
subsidiary.
Decreasing control mode: When the sales joint venture Efficacy

Distributor in the Netherlands was
replaces joint
venture. viable without support from
SW8, the Dutch partner was
offered the opportunity to
buy SW8's share and to

become a distributor.
SW9 control mode: SW9 was at a Serendipity

Decreasing approached
Distributors replace sales trade fair in 1995 by three
subsidiary. separate firms that wanted

to sell SW9's products in the
United States.
Firm Type of Mode Change Change Capital Continued
SW10 Increasing control mode: The German distributor was Efficacy
Sales so when
subsidiary replaces performing poorly, Liability
distributor. the manager offered to leave
and work a
only for SW10,
decision was made to start a
sales subsidiary.
Increasing control mode: The distributor was

Liability
Joint venture replaces performing poorly. When Serendipity
distributor. two of the distributor's
employees offered to leave

and focus on SWlO's
products, it was decided to

start a joint venture.
Increasing control mode: The distributor in Spain had Liability

Joint venture replaces financial difficulties, so
distributor. SW10 a share of
acquired
the firm so that it did not
lose the market.
Decreasing control mode: Two of the subsidiary's Serendipity

Distributor replaces salespeople wanted to Liability
subsidiary. become distributors in the
United States. SWlO's
management accepted their

offer because the sales
subsidiary failed to become
profitable.
Decreasing control mode: After the sales subsidiary failed Efficacy

Distributor replaces to become profitable, SWlO's Liability
subsidiary. management decided that it
should be closed. One of the
subsidiary's customers became

the distributor.
capital, whereas the other changes (17 of 36) occurred

because of the influence of multiple roles of social capital.
The most frequently observed influence, in the form of single
role and multiple roles, was the liability role of social capi
tal; this occurred in 20 of the 36 changes. Again, in the form
of single and multiple roles, the influence of the efficacy role
occurred in 18 of the 36 mode changes, and the serendipity
role occurred in 15 of the 36 mode changes. As Tables 1 and
2 show, each firm can experience several of these roles influ
encing its mode changes during the internationalization

process. The type of mode change is most likely to be to a
high-control mode; this occurred in 23 of the 36 changes
compared with 13 of the 36 changes to a low-control mode.
We provide more details about how social influences
capital
mode We use from the case
change subsequently. examples
studies to illustrate certain points.
Efficacy Serendipity Liability
Table 3. Role Role Role Total
Summary of Mode Changes Increasing control NZ firms 4 73 14

and the Influence of Social m?de 8 820 4
SW firms
Capital All firms 11 1534 8
Decreasing control NZ firms 3 151

m?de SW firms 6 414 4
All firms 75 197
Total NZ firms 4 819 7

SW firms 14 12
8 34
All firms 18 1520 53
Notes: Because multiple roles of social capital may have been relevant for each change, the
number of times the influence of social capital was observed (53) exceeds the number of mode
changes (36).
The efficacy role of social capital refers to the usefulness of a

Discussion firm's social capital and how this influences a mode
change.
Tables 1 and 2 provide 18 observations of how the efficacy
The Efficacy Role of Social role of social capital enables a mode
change. The evidence in
Capital Tables 1 and 2 confirm the importance of the social context,

as in the social literature. The more these
emphasized capital
firms interact with their partners, the more resources
they
acquire from the partnership. Consistent with Johanson and
Vahlne's (2006) and Buckley and Carter's (2004) studies,
information sharing and
knowledge were fre
development
mentioned as resources that were from the
quently acquired
network. When these firms recognized the value of interact
ing with their customers, they changed to a high-control

mode. Another reason for wanting to be close to their cus
tomers is their perceptions that distributors behave oppor
tunistically and thus filter and distort information from cus
tomers and the market. Buckley As and Carter note, such
opportunism is an obstacle to knowledge sharing. Thus, the

firm can miss out on opportunities. The sharing of informa
tion and the value creation these cus
subsequent through
tomers are because these firms a
important typically produce
highly specialized product that requires a significant amount
of input from their customers. As Johanson and Vahlne
(2006) suggest, by interacting with their customers, firms cre
ate new knowledge and develop opportunities. A firm's need
to access its customer's knowledge about the product and the
market influences it to make a mode This supports
change.
recent internationalization research (Ellis 2000; Wong and
Ellis 2002) that information exchanged through networks
facilitates international business. It also supports the net
work approach that firms increase their knowledge through
their business partners (Johanson and Mattsson 1987). In
addition, as Johanson and Mattsson (1987) note, the firm and
its customer use each other's assets in mutual adaptation.
The findings related to the efficacy role of social capital con
firm the value of the firm's network of relationships, as high
lighted in the social capital literature (Nahapiet and Ghoshal
1998; Yli-Renko, Autio, and Tontti 2002). Consistent with
the work of Achrol (1997), these findings confirm the rele
vance of trust, commitment, social norms of behavior, build
ing and mutually satisfying relationships, and

long-term
nurturing relationships. Indeed, the significance of social
interaction and social activities was often as a
emphasized
useful way to acquire information. The founder and owner of
NZ5 said the following about the value of social interaction:
"There's a lot of 'bar talk'.... That's how are sold....
things
They're not just sold out of a brochure." The founder of NZ5
also noted, a large proportion of the bar talk
"Undoubtedly,
that goes on also involves the reputation of certain compa
nies." The CEO of NZ3 had a similar view about the value of
social interactions: "If you're not there every four weeks sit
ting, eating, drinking, and socializing with these guys and
convincing them you can do more, you don't get anywhere."
the information a firm acquires from these

Consequently,
networks extends its boundaries and thus creates new oppor
tunities. This contradicts the TCA's view of bounded ration
ality that firms are constrained by their limited cognitive

abilities. Thus, the 18 observations in this study related to
the efficacy role of social capital in mode change support Pa.
The serendipity role of social capital refers to unexpected

opportunities for mode change that transpire through the The Serendipity Role of Social
firm's network of relationships. Tables 1 and
2 provide 15
Capital
observations of how the serendipity role a mode
triggers
we discuss some of these in greater detail
change;
subsequently.
The serendipity role of social capital was important when

new high-control modes in the form of subsidiaries and joint
ventures were at the of partners or
implemented suggestion
As Yli-Renko, Autio, and Tontti
prospective employees.
(2002) suggest, acquiring information from networks pro
vides access to new opportunities that were unimaginable
for the firm. Consistent with the work of Johanson and
Vahlne (2006), these findings show that the existing social
capital determines the
opportunities that are available. This
can be observed in the cases of SW4, SW8, and SW10. With
out these events, the firms would not have
unexpected
implemented these high-control modes.
In addition, arose through the

unexpected opportunities
firms' weak ties, thus illustrating the serendipity role. Often,
these weak ties play a brokering role in helping some firms
break into overembedded networks in new foreign markets.
One such example is NZ3, which initially experienced some
difficulty in entering the U.S. market because it could not
break into the existing distributor network. Through a
chance meeting in a store, a third party advised NZ3 about
the best distributor it could use, and so it approached this
distributor to form a Then, NZ3 established an
partnership.
alliance with this U.S. distributor, which had strong net
works that helped it enter the market. Other examples of
weak ties paving the way formode changes include SW3 and
SW4. In these two firms, suggestions from trustworthy third
parties led to the formation of new business partnerships.
Consistent with the work of Hakansson and Snehota (1995),
this confirms the importance of trust in building relation
ships, which is an important aspect of the network approach.
The findings related to weak ties can be supported by the
work of Granovetter (1973), who shows that weak ties help
firms break into new networks and them with new
provide
information and new opportunities. In addition, the findings
support the work of Yli-Renko, Autio, and Tontti (2002), who

show that social presumes an antecedent
capital relationship
that could be a strong or weak tie. Thus, the 15 observations
in this study related to the serendipity role of social capital
in mode change support P2.
The liability role of social capital refers to the mode changes

The Liability Role of Social that a firm undertakes because it experiences some
problems
with its business partners. Tables 1 and 2 provide 20 obser
Capital
vations of how the liability role of social capital triggers a
mode change, and they illustrate that it is the most fre
quently observed influence of social capital in all the firms.
For business partners might not be committed to
example,
the product and thus do not achieve sales, or the
expected
costs and time associated with maintaining their relation
ships with customers and distributors or a joint venture

fail. In addition, firms are compelled to make a mode
might
change when they realize that they have become overreliant
on their business partners. This supports Yli-Renko, Autio,
and Tontti's (2002) contention that social has a down
capital
side related to the risks, time, and costs involved with nur
it. Whereas the and roles exem
turing efficacy serendipity
plify the positive aspects of social capital, the liability role
illustrates its negative aspects.
The negative aspects of social capital that these firms experi

enced include opportunistic behavior from business part
ners, lack of commitment, and failed relationships that
needed to be ended. However,
poor-performing relationships
provide firms with the opportunity to change internationali
zation mode, and sometimes this can lead to a positive out
come. One of this is when NZ4's alliance with a
example
U.S. company failed because of a lack of commitment; it
established a wholly owned sales subsidiary in the United
States because it believed that it needed to have more control
over this market. Because the firm had some knowledge
about its customers, this transition was Another
possible.
example is when the distributor lacks commitment and thus
the firm's as NZ6 NZ6
neglects product, experienced.
changed its mode by replacing the distributor with direct
exports. Sometimes distributors behave opportunistically
and become of their as was the case
competitors suppliers,
with NZ10. Its distributors pirated NZlO's products and
started to compete with them, so NZ10 its interna
changed
tionalization mode to export directly to the customer, thus
circumventing the distributors.
Another example of the liability role of social capital can be

observed in SW2 when the firm decided to stop using agents.
Costs were and the firm no longer considered an
high, agents
efficient way to manage its markets. SW4 illustrates how a
firm can become overreliant on a partner and thus feel vul
nerable. SW4 decided to stop using an agent because this
agent handled two-thirds of the firm's business. Because
SW4 delivered directly to its end customers while the agent
handled commercial aspects, there was already some level of
social capital established. This shows how both the liability
and the efficacy roles of social capital influenced SW4 to ter
minate the agent's contract and to begin a
selling through
wholly owned subsidiary. The former general manager of
SW4 explained, "[I] built a parallel organization under cover,
you might say, and sort of solved all problems with hiring
recruitment, and so on. And then, on the same day
people,
that we cancelled the contract [with the agent], we went over
into our own organization."
Sometimes the firm needed to make mode changes that

more investment in social than the firm was
required capital
initially willing to commit. This included customers request
ing closer contact with the firm to receive a better of
quality
service. SW10 experienced this in the Danish market when
customers expressed dissatisfaction with receiving invoices
from Sweden. Another example is NZ8, which needed to
form a joint venture in the United Kingdom in response to a
request from customers in that market to have direct contact
with NZ8.
Other liability effects of social capital are fears of losing mar

kets when partners decided to retire or sell their firms. The
firm might become too dependent on its distributors in cer
tain markets. As Hakansson and Snehota (1995) note, the
firm's with one
partner influences its relation
relationship
with another partner, which can create tension. For
ship
the firm's customers believe that are
example, might they
being disadvantaged because the firm is too closely associ
ated with its distributors. Consistent with the work of Uzzi
(1997), new entrants found some markets difficult to pene
trate because they were overembedded. In the case of SW6,
the firm was compelled to acquire a distribution company
when the owner wanted to retire and thus reluctantly ended
up with a foreign sales subsidiary. When SW8's distributor
decided to retire, it feared losing the U.S. market, which was
an one, and thus was forced to start a sales sub
important
sidiary. This subsidiary was formed at the of an
suggestion
employee of the distributor who decided to retire. This
employee also ended up managing the subsidiary. This
shows that when a firm loses a partner, it also loses
example
the social capital attached to this partner. In addition, it
emphasizes the
significance long-term of
relationships
(Hakansson and Snehota 1995), such as the one with the dis
tributor's employee and this person's prior knowledge.
These findings highlight the problems that occur within a

network, an area that is often in the social
neglected capital
literature. They accentuate the importance of trust, mutual
commitment, control, and power balance in a relationship
and illustrate what when these are absent.
happens They
also show how can behave
partners opportunistically by
a to acquire and then turn
forming relationship knowledge
into competitors. This behavior is consistent with
Williamson's (1985) assumption of opportunism. The current
study provides evidence that when partners do not conform

to acceptable norms of behavior and social conduct, this cre
ates problems and decreases the value of the relationship.
Firms learned from these experiences, and respondents fre
quently mentioned the importance of prior experience in
forming future relationships (Hakansson and Snehota 1995).

Thus, the 20 observations in this study related to the liability
role of social capital in mode change support P3.
This article contributes to the literature on internationaliza

Conclusions and tion mode by using the network approach to highlight the
Implications of relational influences on mode In par
importance change.
ticular, it examines how social acts as a trigger and an
capital
enabler of mode a firm's internationalization
change during
process. We developed the notion of three social capital
roles: efficacy, serendipity, and liability. Of these, the most
frequent influence on mode change was the liability role. If

dealt with effectively, the mode changes influenced by the
liability role of social capital have resulted in positive out
comes for the firm.
The most form of change was toward a

frequent high-control
mode, which occurred mainly because firms wanted to be
close to their customers. Through frequent interactions,
firms were able to develop knowledge and acquire informa
tion from their customers, thus increasing their social capi
tal. This was useful for New Zealand firms,
particularly
whose isolation and specialized products in narrow niche
markets meant that to rely on their customers
they needed to
create their competitive The firms and their cus
advantage.
tomers combined knowledge and other assets to adapt to
each other's needs. This supports the network approach's
view that asset specificity is due to external relationships
(Johanson and Mattsson 1987).
As firms in international markets, rec

gain experience they
the value of social as to progres
ognize capital they begin
sively accumulate it. Consequently, they become proactive in
managing social capital by seeking relationships that benefit

them and terminating ineffective ones.
by
Although the network approach considers trust an important

part of a relationship, we found evidence of opportunistic
behavior, thus confirming that not all partners behave coop
eratively. The social capital literature neglects the liability
role, but this article reinforces its significance. Consequently,
an implication for further research is that the liability role is
an area in which the TCA and the network approach could
be integrated to develop the literature pertaining to the nega
tive aspects of social capital.
Several managerial implications emerge from this study. One
implication is that social capital should be developed and

managed because it could be used to enable mode
changes.
For example, a firm's social capital may enable it to make
mode changes despite its limited experience. Because inter
nal accumulation of market is an important
knowledge deter
minant of the
pace of internationalization
(Pedersen and
Petersen 1998), information acquired through social capital
may also enable firms to modes more A
change quickly.
firm's social capital may also reduce switching costs between
modes. For
example, the costs and risks involved in setting
up or down subsidiaries may be reduced if relation

closing
with reliable partner firms are established.
ships already
Social capital may also reduce information asymmetries
between parties, which Petersen, Benito, and Pedersen
(2000) claim is an important impediment tomode change.
Another managerial implication is that many opportunities

for mode occur because social
change serendipitously capital
plays an important part in triggering this change. By devel
oping and maintaining relationships, the firm increases its
chances of being exposed to such triggers for change. How
ever, managers should be cautious about the potential down
side of social capital. They need to monitor their relation
ships because what was an asset at one time could

constantly
transform into a liability. Developing relationships with
alternative business partners might help the firm avoid
locked in to a particular mode or with a
becoming poorly
performing partner.
In addition, managers need to have regular social interaction
with their partners in the network because this builds trust
and, thus, more social However, managers need to
capital.
realize that effective organization of social capital means a
constant balancing act between the positive and the negative
aspects of social capital. Managers need to evaluate the bene
fits, costs, and risks associated with their investment in
social capital. Weak ties should not be dismissed, because
they could play an important serendipity role for mode
change. Managers need to be cautious about overembedded
networks and be willing to have diverse networks so that
they are open to new ideas, new information, and new
opportunities. Thus, consistent with the work of Johanson

and Mattsson (1987), we propose that social capital helps
reduce transaction costs, such as relational and opportunity
costs, and that it develops knowledge and provides opportu
nities for change.
The findings from this study could also be tested in a quanti

tative study to make statistical generalizations. Furthermore,
both qualitative and quantitative studies could be conducted
in different industry and cultural contexts to test and
develop the findings from this study.
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Social Capital and Its Influence on Changes in Internationalization Mode among Small and

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This article explores how social capital influences a firm to ABSTRACT

develop three categories of social capital and discuss their role

aspects of social capital. The liability role is themost frequently

The internationalization of firms has gained increasing atten

ships, in which both parties involved in a particular mode

approach (TCA). This article attempts to fill this gap by

Although there are some researchers who have focused on

One of the major constraints for small and medium-sized

enterprises (SMEs) as they go through the internationaliza

Sylvie Chetty and Henrik Agndal

A firm can access resources through its internal relationships

relationships (Johanson and Vahlne 2006). Although social

In the next section, we review the literature. Then, we pres

This section focuses on the concepts we use. This

tioning poorly performing partners. Some examples of using

Social Capital and Changes in Internationalization Mode Among SMEs 3

An alternative model of mode selection finds its origins in

large Swedish firms (Johanson and Wiedersheim-Paul 1975).

exports, to using sales subsidiaries, and, in the final stage, to

argument in the latter model is that when the firm acquires

In a further development of the 1977 model, Johanson and

already been written about how networks influence the

4 Sylvie Chetty and Henrik Agndal

development of knowledge and change. These long-term

Second, an of the TCA is opportunism ("self

Social Capital and Changes in Internationalization Mode Among SMEs 5

approach, the assumption is that exchange is a constructive

relationship and should be nurtured. In the network

important than opportunistic behavior, which is the focus in

Third, another assumption in the TCA is bounded rational

thinking and knowledge.

Fourth, regarding the dimension of asset specificity in the

We contribute to the change in internationalization mode lit

In the business literature, various definitions of social capital

An resource that these scholars emphasize is the

6 Sylvie Chetty and Henrik Agndal

A useful way to structure the concept of social capital is to

relationships. The internal relationships include those

organizations to conduct business.

The key concepts of market knowledge and market commit

cepts of social capital and mutual commitment similar. How

Social Capital and Changes in Internationalization Mode Among SMEs 7

rapid growth is that the decision maker has prior experience

Prior experience in forming social capital also enables the

(Chetty and Campbell-Hunt 2004; Hakansson 1982). The less

The existing social capital of a firm determines the opportu

Social capital can also be a liability because it has a down

taining social capital (Yli-Renko, Autio, and Tontti 2002). In

Sylvie Chetty and Henrik Agndal

We use the terms mode" and "low-control

On the basis of the foregoing discussion of social capital and

Social Capital and Changes in Internationalization Mode Among SMEs 9

capital are discussed in detail below and three propositions

The Efficacy Role of Social Capital. The efficacy role of

capital. It is important for a firm to have frequent social inter

Social capital encourages cooperative behavior and, thus,

(Nahapiet and Ghoshal 1998). Through frequent interaction

exchange and combination of resources to create innovative

products. A network that has strong linkages, trust, reci

procity, and mutual commitment creates the foundation for

Consequently, in its efficacy role, social capital enables