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The impact of relationships on changes in internationalisation strategies of SMEs

Henrik Agndal
Centre for Marketing, Distribution and Industry Dynamics, Stockholm School of Economics, Stockholm, Sweden, and

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Received August 2005 Revised August 2006

Sylvie Chetty
Department of Commerce, Massey University, Auckland, New Zealand
Abstract
Purpose The purpose of this paper is to study how existing relationships inuence changes in SMEs internationalisation strategies in terms of markets and modes. Design/methodology/approach This paper provides a detailed examination of the dynamics of 116 strategy changes, which are inuenced by a rms relationships in 20 New Zealand and Swedish internationalising SMEs. It uses the qualitative research method to develop theory. A conceptual model with eight categories relating to relationships and strategic change during the internationalisation process of the rm is developed. Findings Using the conceptual model as a framework to analyse the data, it was found that existing relationships play an important role in 59 market strategy changes and 57 mode strategy changes. The main ndings are that business relationships are more inuential in internationalisation strategy changes than social relationships, especially with regard to mode changes in foreign markets. Most mode changes are reactive. Market strategy changes, however, are evenly balanced between proactive and reactive changes. Overall, more changes can be attributed to direct relationship inuences than indirect third party inuences. The ndings from this study are used to develop seven propositions. Originality/value The paper focuses on strategic change and highlights the importance of relationships, in particular their inuence in market and mode changes. Keywords International business, Channel relationships, Strategic change, Small to medium-sized enterprises, New Zealand, Sweden Paper type Research paper

Introduction In most countries small to medium-sized enterprises (SMEs) represent the majority of rms. For instance, in New Zealand 97 per cent of businesses employ 19 or less full-time employees (Ministry of Economic Development, 2004) and in Sweden 98 per cent of all rms have less than 250 employees (Statistics Sweden, 2005). SMEs, therefore, play an important role in the economic growth of these countries. In small economies such as New Zealand and Sweden, however, the only way for SMEs to grow is often to establish and expand sales in foreign markets. Typically, this is referred to as the internationalisation process of rms, a phenomenon that has received signicant attention from scholars. The fact that internationalisation is a process implies that rms international activities are dynamic and that during this process the rms internationalisation

European Journal of Marketing Vol. 41 No. 11/12, 2007 pp. 1449-1474 q Emerald Group Publishing Limited 0309-0566 DOI 10.1108/03090560710821251

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strategies may change in various ways. To a large extent the extant literature focuses on two aspects of internationalisation strategy, namely the foreign markets a rm chooses to conduct business in and the modes it uses to do so. The term foreign market often refers to the country in which a rm conducts business. Internationalisation mode refers to the organisational structure used to enter and penetrate a foreign market. Often, modes are organised according to the resource commitments they require and the level of control over international operations that the rm can afford (Johanson and Vahlne, 1977). Internationalisation modes include: indirect exporting (i.e. via domestic intermediary); direct exporting; exporting via foreign intermediary; sales and/or manufacturing joint venture; sales and/or manufacturing subsidiary; and licensing and franchising (Calof and Beamish, 1995; Petersen and Welch, 2002). In terms of the rms commitment of resources, exporting modes are lower commitment modes, while foreign joint ventures and subsidiaries are higher commitment modes. A rm internationalises incrementally in stages of increasing commitment, starting with exporting, distributor/agent, foreign joint ventures, foreign sales subsidiary and nally foreign direct manufacturing (Johanson and Wiedersheim-Paul, 1975). According to Ellis (2000) and Reid and Rosson (1987) the decisions pertaining to which foreign market to enter and expand in and, according to Root (1987), which entry mode to use are considered to be the most crucial for a rms success. Although there has been signicant theorising about market selection, for example, the importance of psychic distance in market selection (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977), according to Ellis (2000) scholars have neglected to examine in detail the actual process rms undergo when choosing foreign markets. A similar assertion is made by Pedersen et al. (2002) about the state of research on operating modes. According to them the current literature on foreign operation modes is static and scholars have paid scant attention to the changes in initial entry mode. In addition, Petersen and Welch (2002) and Calof and Beamish (1995) conclude that more research needs to be done on the changes in modes used by rms in order to improve our understanding of how rms develop internationally. Most research on a rms internationalisation process considers it to be an expansion of activities, i.e. entry into new markets and use of increasingly resource intensive internationalisation modes (Johanson and Vahlne, 1977). We add to this by considering that rms may also divest or de-internationalise (see Fletcher, 2001; Welch and Luostarinen, 1988; Benito and Welch, 1997; Pauwels and Matthyssens, 1999; Crick, 2004), i.e. withdraw from markets and use lower resource commitment modes. Part of the research on SME internationalisation has attempted to identify patterns in market entry and mode usage, and part of it has been concerned with trying to nd explanations for these patterns (Bjorkman and Kock, 1997). The extant research often concludes that SMEs internationalise in unforeseeable ways, often determined by serendipitous and uncontrollable events (Meyer and Skak, 2002; Spence, 2003; Brush, 1995; Li et al., 2004). While much of the research on SME internationalisation touches on these events, studies on how they actually shape SMEs internationalisation strategies are relatively scarce (Hohenthal et al., 2003). Several scholars have lamented that much of the research on SMEs internationalisation processes has neglected the aspect of change (Nummela, 2004; Petersen and Welch, 2002; Pedersen et al., 2002; Calof and Beamish, 1995), as research

has tended to focus on the rms initial internationalisation strategy. This paper aims to address this concern by focussing on the changes that occur in internationalisation strategies after the rst foreign market entry. An important factor that determines SMEs internationalisation strategies is the relationships rms have with other rms (Wilson et al., 2004; Davenport, 2005; Belso-Martinez, 2006). While relationships can inuence the direction that an internationalising SME takes in a variety of ways (Chetty and Campbell-Hunt, 2003; Zain and Ng, 2006; Crick and Jones, 2000; Ellis, 2000; Ellis and Pecotich, 2001; Lindqvist, 1997), the amount of research focusing on the impact of existing relationships on changes in SMEs internationalisation strategies is limited. This paper aims to make two contributions to the literature: rst, it develops a conceptual model of the impact of different types of relationships on changes in internationalisation strategy; and second, it provides empirical evidence for how relationships inuence foreign market entries and exits and how relationships inuence changes between different types of internationalisation modes. The overall purpose of this paper is, therefore, to study how existing relationships inuence changes in SMEs internationalisation strategies in terms of markets and modes. The paper is divided into six sections including this one. The following section presents a framework on the impact of relationships on changes in internationalisation strategy. This is followed by a section on research methodology. The subsequent two sections present empirical data and discussions regarding changes in market and mode strategy, and develop propositions. The nal section of the paper presents conclusions and implications of the study, and provides some directions for future research. The impact of relationships on changes in internationalisation strategy a framework Changes in internationalisation strategy In this paper we consider internationalisation strategy to be what rms actually do, as opposed to considering strategy to be the same as rms stated formal plans (see Mintzberg et al., 1998). The key aspect of this strategy as behaviour perspective is that strategies are formed regardless of strategic intent. That is, strategies can emerge over time and do not have to be formed deliberately (Mintzberg and Waters, 1985; Mintzberg, 1991). In this paper rms internationalisation strategies are, therefore, considered to be the foreign markets in which they conduct business and the modes they use to do so. A change in strategy, thus, occurs when a rm changes in which markets it conducts business, or when it changes which modes are used. More specically, we identify four main types of changes: (1) Market expansion, i.e. entry into a new market or connected entries into several new markets (in the latter case entries occurring through a single decision or through a single relationship). (2) Market contraction, i.e. withdrawal from one market or several connected market withdrawals (in the latter case multiple withdrawals occurring through a single decision or relating to a single relationship). (3) New high commitment mode, i.e. the use of a high commitment entry mode which is new to the rm or new to one or several markets. (4) New low commitment mode, i.e. the use of a low commitment entry mode which is new to the rm or new to one or several markets.

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The impact of existing relationships on change In this paper we propose that existing relationships may have an impact on, or generate any one of the four types of changes in internationalisation strategy outlined above. In order to succeed internationally rms have to learn about their foreign markets, for example, the cultures and institutions of these markets (Wilson et al., 2004; Majkgard and Sharma, 1998; Hofstede, 1980). SMEs, in particular, tend not to have adequate internal resources to mobilise relevant knowledge. They are, therefore, dependent on external sources. Several studies have found that rms acquire resources, in particular market knowledge, through their relationships (Johanson and Vahlne, 1990; Chetty and Campbell-Hunt, 2003; Hadjikhani, 1997; Zain and Ng, 2006). Moller and Svahn (2003) and Holm et al. (1999) highlight the value creation that occurs in these networks as rms gain value through mutual commitment. Some rms are more experienced at developing capabilities and acquiring resources through their networks than others. Indeed, this capability is important as, according to Gulati et al. (2000), these relationships can provide opportunities as well as constraints for the rm. They propose that, due to time and resource constraints, a rm can only form a limited number of relationships. Firms can, therefore, become locked into poorly performing relationships and, thus, miss out on opportunities to create new and more valuable ones. Because of the long-term nature of these relationships, as rms develop they may outgrow the usefulness of a particular relationship. Consequently, a relationship that might have been very valuable could soon become a liability and may have to be terminated. There are many different types of relationships, however, and they may have an impact on or generate changes in strategy in different ways. We identify three pairs of concepts relating to relationships and change, namely business and social relationships, direct and indirect relationships, and proactive and reactive change (i.e. the reasons for which change involving relationships was undertaken or strategic orientation to change). (1) Business and social relationships. Since relationships are a multidimensional concept, one way of distinguishing between relationships is to look at who is the actor in the relationships. In this paper we refer to a business relationship as a relationship at the level of the organisation. The actor in a business relationship is an organisation. This type of relationship is institutionalised and does not depend on specic individuals. These relationships consist of the long-term business relationships that the rm has with its customers, distributors, suppliers, competitors and government contacts (Johanson and Mattsson, 1988). Such relationships have frequently been reported to inuence international market and mode selection (Johanson and Mattsson, 1988; Axelsson and Johanson, 1992; Blankenburg Holm, 1996; Zain and Ng, 2006). In a social relationship, however, the individual is the actor and the relationship would not exist without the involvement of this individual. Indeed, an increasing number of studies focus on the impact of social networks in the internationalisation process (Agndal and Axelsson, 2002; Ellis, 2000; Chetty and Patterson, 2002). For example, in a study of Hong Kong toy manufacturers Ellis (2000) found employees social relationships played important roles in the rms acquisition of market knowledge, identication of market opportunities and market entries.

(2) Direct and indirect relationships. A rms relationships with its customers, distributors and suppliers can instigate its entry into new markets (Johanson and Mattsson, 1988; Chetty and Blankenburg Holm, 2000; Majkgard and Sharma, 1998) and may also inuence mode changes (Petersen et al., 2000; Petersen and Welch, 2002). This can occur in different ways, depending on the type of relationship between the parties involved. A distinction may be made between direct and indirect relationships. A direct relationship may be said to exist between two parties who are involved in some form of direct exchange with each other. For example, this may generate a new market entry when a customer coerces a rm to start supplying them in an additional market. Firms also have indirect relationships, such as relationships with rms with which they do not have direct exchange. These may be referred to as third parties. This has usually been discussed in the literature in the form of weak ties, which are often argued to be of crucial importance to rms (Granovetter, 1973). A third party may, for example, through the provision of information, bring buyers and sellers together and be instrumental in a new market entry or mode change. A third party, such as an owner or a powerful customer, may also create difculties by exerting pressure on a relationship between two rms, thus instigating changes in market or mode strategies. (3) Reactive and proactive change. As the above discussion shows relationships may be used when rms want to instigate changes. Changes may, however, also arise without being initiated by the rm, such as when a rm experiences pressure from a customer to enter a new market. Changes in internationalisation strategy, whether deliberate or emergent, can therefore also be dened along a continuum of reactive versus proactive change. By reactive change we mean a change in strategy that occurs because of pressure from the rms internal or external environment. In this context, pressure relates specically to relationships with rms and individuals. This encompasses everything from the rms response to unsolicited orders to pressure from a parent rm such that the rm undertakes a change in internationalisation strategy. On the other hand, by proactive change we mean [. . .] an active search for new strategic options and strategic steps taken in new directions, although neither the internal nor the external situation obviously requires new strategic actions (Melin and Hellgren, 1994, p. 254). Proactive and reactive changes are, therefore, seen from the perspective of the rm. In both cases, the rm may exploit or nd useful relationships with other rms or individuals. Framework for analysis The above discussions relate to three pairs of concepts that are used in this paper to analyse changes in internationalisation strategy. These include business-social relationships, direct-indirect relationships, and proactive-reactive change. When combined into a conceptual model, they generate eight potential categories for analysing the impact of relationships on changes in internationalisation strategy (see Table I). Based on this framework (Table I), the rest of the paper sets out to explore the impact of existing relationships on changes in internationalisation strategy.

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Relationship actor level and type of change Social relationship Proactive change

Direct

Direct and indirect use Indirect The rm initiates a change through an indirect relationship with a third party individual The change is triggered by an indirect relationship with a third party individual The rm initiates a change through an indirect relationship with a third party organisation The change is triggered by an indirect relationship with a third party organisation

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Reactive change

The rm initiates a change, using an established, direct relationship with an individual known to someone in the rm to carry out the change The change is triggered by an individual outside the rm who is known to someone in the rm The rm initiates a change, using an established relationship with a rm to carry out the change The change is triggered by another rm with which the focal rm has a direct relationship

Business relationship Proactive change Table I. Conceptual model showing examples of relationship-related change scenarios Reactive change

Method of research Study design In this paper, qualitative research is used according to Eisenhardts (1989) and Yins (1989) approaches. The unit of analysis is the change in internationalisation strategy. Multiple changes in multiple rms are studied, in what may be referred to as a multiple-case approach. Both Strauss and Corbin (1990) and Yin (1989) mention this as an important approach, but it is Eisenhardt (1989, 1991) who has written in detail about the theory-building properties of multiple case studies. She suggests the multiple-case approach encourages the researcher to study patterns common to cases and theory and avoids chance associations. Sampling of rms Each rm was chosen using replication rather than sampling logic. In other words, the rms were chosen because they could be used for literal and theoretical replication rather than because they were a proportional representation of the population. The ndings from this study can, therefore, only be used for theoretical generalisation not statistical generalisation. In addition, selecting a sample from two countries allows for cross-country theoretical generalisation. In both the New Zealand and Swedish samples, rms were selected on the basis of their ability to provide rich descriptions. Consequently, the focus was on successful and highly internationalised rms. According to Pettigrew (1990), by studying extreme situations and polar types, items of interest will become more apparent. When identifying the New Zealand rms for the study, the project was guided by an advisory panel of industry leaders, policy advisors, business support agencies and business journalists familiar with a wide range of rms. The panels task was feasible because of the limited size of the New Zealand economy, and the relatively small number of rms with exemplary histories of long survival and growth. Because of greater access to public data in Sweden, a database containing information about all exporting organisations was used to identify Swedish rms with histories of long survival and

international growth. After a list of suitable candidates was created, websites of these rms were searched and rms were organised according to their perceived potential contribution to the study. Subsequently, nearly 30 Swedish rms were contacted but ten were selected for inclusion in this study. A total of 20 rms were included in this study and, as Table II shows, they belong to diverse industries. Since the unit of analysis is the change in strategy, the data obtained from these rms were analysed to identify market and mode changes that were specically inuenced by the rms relationships. This process yielded information on a total of 116 changes in internationalisation strategy. Of these, 59 were for changes in market and 57 for changes in mode strategies. Data collection Multiple sources of information were used for each rm, which included interviews and secondary data. The main form of data gathering, however, was semi-structured interviews with predominantly managing directors, chief executive ofcers, export managers and marketing managers. The number of respondents in each rm varied between one and six and they were typically interviewed more than once. Altogether 50 respondents were interviewed in the 20 SMEs. Interviews lasted between 30 minutes and three hours with an average of two hours. Initial interviews were tape recorded and transcribed. Follow-up interviews typically focused on important issues requiring further clarication. Respondents were involved in framing the topics and questions used for this study. They also provided feedback on the analysis and interpretation of results through follow-up interviews, discussions and seminars. This helped to clarify ambiguities that occurred during analysis of the data. A drawback of our method of data collection is reliance on the memories of those involved. This is particularly obvious in situations such as this where the businesses are small and privately held, and where there is little publicly available information that can be used to support individuals accounts. The reliability of the case histories was strengthened using techniques suggested by Huber and Power (1985). Factual information relating to past events was sought in an attempt to improve respondents recall. Written documents made available by the rms were used whenever possible, and a full search for material in the public domain was conducted. Triangulation of information was obtained by comparing information between interviewees, as well as with documents. Transcripts of interviews and documentary evidence provided by the companies were combined to produce detailed case histories of each rm. Drafts of the case studies, which on average numbered 20 single spaced pages, were sent to respondents for their feedback. In case of inconsistencies between respondents and/or written material, respondents were again contacted to clear up these issues. Data analysis The data analysis was carried out in several steps. First, the case histories were systematically searched for changes in mode and market strategies. Second, word tables of these changes were constructed, which were then analysed according to the dimensions presented in Table I, and inuences on each change were recorded. Third, each of these changes were then re-examined to select those where relationships inuenced change. These selected changes were subsequently subjected to further

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Firm 1982 1972 1988 1978 1973 1996 1987 2000 1967 1980 1981 C. 1978 Mid-1970s C. 1950 C. 1985 C. 1982 1972 1984 1975 1977 Mid-1960s 1976 1978 80 180 230 250 95 120 77 105 120 98 75 91 94 46 113 164 96 97 14 19 145 158 8

NZ1 NZ2 NZ3 NZ4 NZ5

NZ6 NZ7

NZ8 NZ9 NZ10 Median NZ SW1 SW2 SW3 SW4 SW5 SW6 SW7 SW8 SW9 SW10 Median SW Median All

Table II. A prole of the rms in this study Started exporting Main product Empl. Sales euro (M) 5.5 3.1 22.0 13.2 1.8 12.0 16.5 8.8 55.0 16.5 12.6 16.7 22.8 15.0 17.2 12.4 15.6 10.8 5.5 25.0 38.0 16.2 14.1 Exports (%) 80 90 95 100 99 95 95 15 80 98 95 72 75 65 85 85 87 67 37 50 63 75 83 Orthotic soles Lighthouse beacons Navigation equipment Hi-tech modular production systems Equipment for crushing, pulverising and analysing rock Wireless radio telecommunications equipment Equipment for cellular and mobile communication networks Software Electric fencing Rock crushers n/a Reclining chairs Plastic packaging for the food industry Heat regulating valves Wire furniture Brackets for radiators Garbage compactors Latching and hinging systems Products for patient hygiene and rehabilitation Ergonomic ofce chairs Outdoor play equipment and street furniture n/a n/a

Founded

1982 1972 1988 1913 1968

1996 1977

1992 1938 1972 1975 1969 1967 1939 1982 1955 1971 1981 1945 1975 1948 1968 1972

analysis using our conceptual model as a framework. In order to maintain analytical rigour and to identify patterns across changes and across rms, ndings were counted, thus establishing frequencies of observations (see Miles and Huberman, 1984) Researchers in both countries categorised these changes separately and then worked jointly to compare and cross check their categorisation of these changes. By initially working independently on this analysis, researchers in each country were able to: . . . compare, challenge and synthesise insider and outsider perspectives to provide cross country comparisons (Marschan-Piekkari and Welch, 2004). The researchers dealt with ambiguities and variations in categorisation by clarifying the denition of terms used and the dimensions used in Table I. Overview of the 20 rms in the study As mentioned earlier, a total of 20 rms were included in the study, ten from New Zealand (NZ1 to NZ10) and ten from Sweden (SW1 to SW10). The rms year of inception varies greatly (from 1913 to 1988), as does the year when they started selling internationally (c. 1950 to 2000). The number of employees ranges from eight to 250, with a median of 97. Turnover is between Euro 1.8 and 55 million. For all 20 rms, export sales ranged from 15 to 100 per cent, with a median of 83 per cent (see Table II). Table II shows the 20 rms are fairly homogeneous, although there are some minor differences between the Swedish and New Zealand rms. In particular, the New Zealand rms acquire a greater share of sales from foreign markets and are slightly larger in terms of employee numbers. The Swedish rms, however, have greater turnover, both in relation to the number of employees and in absolute terms. Changes in market strategy Analysis of the case studies reveals a total of 59 changes in market strategy where relationships played an important role. Of these changes, 36 were identied in New Zealand rms, with 23 in Swedish rms. See Table III for an overview. The 59 changes in market strategy were categorised using the three pairs of analytical concepts shown in Table I. As Table III shows, business relationships inuenced 42 changes and social relationships 17 changes. Direct and indirect relationship inuences were observed in 30 and 29 cases respectively (e.g. see Table IV). While 36 changes were largely reactive, 23 could be considered to be mainly proactive in nature. Overall, as Table V shows, the number of reactive changes based on indirect inuence of business relationships was 25, the largest single group. The number of proactive changes based on direct inuence of business relationships was ten, while the number of proactive changes based on direct social relationships was ten. There were no proactive changes based on indirect inuence by social relationships. New Zealand rms used business relationships more proactively than Swedish rms with only one occurrence recorded in the ten Swedish rms studied Of the 59 changes in market strategy 56 were entries into new markets, and three were withdrawals from markets. The reasons for withdrawals were that the market was not protable and that they underestimated the complexity of the project. Similar to McDougall et al. (1994) and Belso-Martinez (2006) rms identied opportunities in these new markets through their business relationships. In addition, as Johanson and Vahlne (1990) and Hadjikhani (1997) state, many rms learned about

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Firm

NZ1

NZ2

NZ3

NZ4

NZ5

NZ6

NZ7

NZ8

NZ9

Table III. The inuence of relationships on changes in market strategy Relationship level Social Business Relationship type Direct Indirect Orientation to change Proactive Reactive (continued)

Market strategy change

Entry into UK Connected entries into European markets Withdrawal from US Entry into Australia Entry into US Connected entries into several markets Connected entries into several markets Entry into US Connected entries into European markets Connected entries into European markets Entry into Australia Entry into US Connected entries into several markets Entry into US Entry into Canada Entry into Australia Connected entries into several markets Connected entries into several markets Entry into South Africa Connected entries into several markets Withdrawal from UK Connected withdrawals from several markets Entry into China Entry into Thailand Connected entries into several markets Entry into UK Entry into Portugal Entry into Thailand and Taiwan Entry into Australia Connected entries into European markets Entry into South Africa Connected entries into African markets

Firm 17 42 30 29 23 36

Market strategy change

Relationship level Social Business

Relationship type Direct Indirect

Orientation to change Proactive Reactive

NZ10

SW1

SW2

SW3

SW4

SW5

SW6

SW7

SW8

SW9

SW10

Entry into Australia Entry into Canada Entry into Chile Connected entries into several markets Connected entries into European markets Entry into Malaysia Entry into Israel Entry into Bahrain Entry into Poland Entry into US Connected entries into Lat. American markets Entry into US Connected entries into European markets Connected entries into European markets Entry into Cyprus Entry into Japan Connected entries into European markets Connected entries into Lat. American markets Entry into USA Connected entries into Australia and N. Zeeland Connected entries into European markets Connected entries into several markets Connected entries into European markets Entry into Australia Entry into US Connected entries into European markets Entry into Former Yugoslavia No evidence found of changes in market strategy where existing relations were important

Total

Note: Sometimes several new market entries or exits are connected in the sense that they were inuenced by the same relationship. Such cases are denoted as connected entries or connected exits in the table

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Table III.

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Firm

Type of change

Specic inuences of business and social relationships The manager learnt about these markets through personal contacts with distributors in Europe, contacts that were established during his professional skiing days. Consequently, direct social relationships were proactively used to enter these markets A Polish subsidiary of an existing Danish customer started buying SW2s products after being prompted by the parent rm, i.e. here an existing business relationship (with the Danish customer) impacted indirectly (i.e. via the Polish rm), leading to reactive new market entry The founder of NZ3 had previously worked in the same industry and had got to know a number of people in US and European companies. NZ3 used these direct social relationships in a proactive effort to tap into the US market SW4 sold via an agent who had contacts with other agents. SW4 was contacted by several of these rms, wanting to become agents for SW4 in their respective markets. Thus SW4s entries were reactive, triggered by indirect business relationships At a trade show in Australia an old business contact was revitalised. i.e. a direct business relationship was used to proactively enter this market. When the owner of the German, Danish and Polish distributors wanted to stop running his rms, the German rm was acquired by SW6. Shortly afterwards SW6 also acquired Danish and Polish distributors, because these were all seen as important markets that SWs management did not want to risk losing. A business relationship thus directly prompted the reactive involvement in a new mode A former employee from China returned to China and wanted to act as NZ7s distributor there. A direct social relationship thus led to a reactive change in modes The existing distributor in the Netherlands had nancial difculties and also took on competing products. When SW8 was approached by an employee of the existing distributor who suggested that they start a sales joint venture, SW8s management decided to accept the offer. The relationship may be described as social relationship (since the employee was not a rm and did not have his own rm at the time), although the impact on change was reactive but direct from the point of view of SW8 To enable entry into Argentina, South Africa and India, rms previously known there were approached in a proactive effort to expand NZ9s foreign business. Direct business relationships were thus used Customers in Denmark were not pleased with placing orders and receiving invoices from Sweden. Therefore a decision was taken that a sales subsidiary should be set up in Denmark. Direct business relationships thus prompted this reactive decision

Changes in market strategy NZ1 Connected entries into European markets

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SW2

Entry into Poland

NZ3

Entry into USA

SW4

Connected entries into European markets Entry into Australia

NZ5

Changes in mode strategy SW6 From distributors to sales subsidiaries

NZ7 SW8

From direct sales to distributor From distributor to sales joint venture

NZ9

Manufacturing subsidiaries From distributor to sales subsidiary

SW10 Table IV. Some examples of changes in market and mode strategy

Note: These examples (one per rm, ve market changes, ve mode changes) are included only to illustrate what a change might entail

Type of change Proactive change based on direct inuence by social relationship Proactive change based on indirect inuence by social relationship Proactive change based on direct inuence by business relationship Proactive change based on indirect inuence by business relationship Reactive change based on direct inuence by social relationship Reactive change based on indirect inuence by social relationship Reactive change based on direct inuence by business relationship Reactive change based on indirect inuence by business relationship

Observed in rms NZ1 (3 times), NZ2, NZ3, NZ5, NZ7, SW3, SW6, SW9

Number of observations NZ SW Total 7 0 3 0 10 0

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NZ2 (twice), NZ3 (twice), NZ5, NZ8, NZ9 (twice), NZ10 (twice) NZ4, NZ7, SW5

10

10

NZ7, NZ8, SW1 (twice), SW7, SW9 SW6

2 0

4 1

6 1

NZ8, SW3, SW4, SW5

NZ2, NZ4 (twice), NZ5 (3 times), NZ6 (4 times), NZ8, NZ9, NZ10 (twice), SW1, SW2 (3 times), SW4, SW6 (twice), SW7, SW8 (3 times)

14

11

25 Table V. Summary of changes in market strategy

their markets from their distributors then subsequently identied opportunities and made strategic changes. For example, while doing business in its foreign markets, NZ7 learnt about the importance of reputation and proactively pushed its products by visiting US and European big industry players, such as Motorola, Nokia and Ericsson, to convince them to use the New Zealand rms products. These visits paid off as it was a report from Motorolas head ofce to their ofce in Thailand that opened the doors for the rm in Thailand. Other examples include NZ8, which entered new markets through an alliance with a major customer and leveraged off the reputation asset of this customer. Similarly, NZ2 used the reputation asset of their customers to enter new markets. These ndings are consistent with Larsons (1992) ndings that a good reputation reduces risk and uncertainty and creates the basis for mutual trust. In fact, reputation assets of relationships were mentioned frequently in this study, thus, highlighting the importance of such for the rm when expanding in existing markets or entering new markets. Similar examples of relationships and strategic change were observed in the Swedish rms. In nine out of the ten Swedish rms existing business relationships inuenced single or multiple changes. Often, contacts between existing customers and

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the rm in question inuenced these changes, mainly indirectly and reactively. The lower inclination for Swedish rms, compared to New Zealand rms, to be proactive could be a consequence of Swedens closer geographic location to large markets such as Germany. Consequently, there is a greater likelihood of Swedish companies coming into contact with foreign businesses. Furthermore, compared to New Zealand, Sweden has a larger number of multinationals to which SMEs can subcontract. Many respondents in the Swedish rms commented on their rms overall reactive approaches to entry into new markets. For example, the SW7 general manager reecting on how his rms international business had expanded over the years and how this reactive market expansion was inuenced by opportunities arising from existing relationships said:
I never planned to build a company that exported. My initial plan was to take care of the Swedish or Scandinavian market [. . .]. The export business was not planned. These people [i.e. foreign customers] came to me and said You have this and that, cant you ship us some?

This provides empirical support for Johanson and Vahlnes (2006) proposition that a rms relationships can open up new opportunities for the rm and thus inuence its internationalisation. Such unexpected opportunities can generate emergent changes in strategy. Existing social relationships, consisting of former employees, new employees, and social relationships developed during previous occupation have also induced many market-related changes. Social relationships can provide access to new markets as NZ7 and SW9 illustrate. NZ7 expanded its Chinese market through the efforts of a former employee who was originally from China. In the case of SW9, an employee from the former Yugoslavia left the rm to become SW9s distributor in that market. These ndings relating to social relationships are consistent with Ellis (2000) and Belso-Martinez (2006) who argue that social relationships are an important means of providing the rm with information about markets and, thus, helping them to determine foreign market strategies. New staff appointments also resulted in changes in rms market strategies, such as when a new CEO started at NZ7, and a new marketing manager at NZ1. SW1s markets expanded when a new manager with extensive European contacts used his social relationships to set up distributors in that area. A similar situation occurred for SW7. These ndings are consistent with Pedersen et al. (2002) and Calof and Beamish (1995) who made similar ndings relating to a change in management and its impact on strategy. These managers brought in a new set of skills, networks and a change in attitude and, thus, as Belso-Martinez (2006) found in Spain, they inuence the internationalisation process of the rm. There was also evidence from the case studies that serendipitous meetings are important for SME internationalisation processes. Such meetings usually occurred indirectly through a third party, thus, conrming the importance of weak ties as proposed by Granovetter (1973). As the marketing manager of NZ2 notes:
Oddly enough, and its just by coincidence, those two jobs came to us. Those two customers were referred to NZ2 by the US Coastguard because theyd been talking to the US Coastguard about this problem and what could they do . . . One of the trends that weve noticed in this last year is the increase in the number of projects that [have] come to us [that] are quite large in our terms . . . by referral.

This substantiates Petersen et al.s (2000) ndings that rms frequently enter foreign markets as a result of unsolicited approaches. In addition, individuals social relationships provided them with information that led to the discovery of new opportunities and subsequent mode changes. For example, NZ5s employees social relationships with a mining company employee made them aware of the importance of using such companies to distribute their products. All of the New Zealand rms, except NZ5, made proactive decisions to foster social relationships between their employees and their distributors employees to enhance product and after sales service. The rms did not want to be remote from their customers as they realised the value of such relationships in acquiring market and other knowledge and to identify new opportunities. The Swedish rms are less proactive than New Zealand rms in this respect. These ndings lead us to develop the following propositions pertaining to changes in market strategy: P1. Change in the form of expansion into new markets is more likely to be reactive when rms have close proximity to foreign markets and foreign customers, because proximity increases the likelihood of unsolicited approaches from the rms potential customers. Since rms have greater knowledge about their direct relationships these are proactively exploited for change, while indirect business relationships are more likely to inuence reactive changes to market strategy. Business relationships are more likely than social relationships to inuence changes in market strategy, as they provide a stronger impetus for change. Firms are less likely to have a proactive change in market strategy based on indirect social relationships, as meeting third parties who instigate a market change tends to occur unexpectedly.

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P2.

P3. P4.

Changes in mode strategy An analysis of the case studies revealed a total of 57 changes in mode strategy where relationships were an important inuence. Of these changes, 25 were in the New Zealand rms, and 32 in the Swedish rms (see Table VI). Most of these mode changes were gradual in terms of commitment of resources rather than leaps in forms of multiple steps at once, thus supporting Johanson and Vahlne (1977) that internationalisation occurs incrementally. As the rms gained more knowledge and experience in their international markets they often switched to a higher commitment mode, which was often a change from a distributor to a sales subsidiary. Seven of these mode changes could, however, be described as de-internationalisation, as rms reduced their investment and commitment to a mode. Reasons for this were; partners went bankrupt, partners were performing poorly, the mode had served its purpose, and the mode needed too much effort to justify its purpose. In several cases respondents reported that they were initially reluctant to become involved in high commitment modes. Firms in this situation changed back to lower commitment modes once the high commitment modes they had changed to were no longer useful. Established relationships seemed to play an important role during the process of

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Firm

NZ1

NZ2 NZ3

NZ4

NZ5 NZ6

NZ7

NZ8

NZ9

NZ10

SW1

SW2 SW3

Table VI. The inuence of relationships on changes in mode strategy Relationship level Social Business Relationship type Direct Indirect Orientation to change Proactive Reactive (continued)

Mode strategy change

Multiple modes (distributor and direct exports) From direct sales to distributor Multiple modes (agent and direct exports) Cessation of foreign manufacturing From distributors to sales subsidiaries From distributor to sales subsidiary From direct sales to distributor From distributor to joint venture From joint venture to subsidiary From distributor to direct sales From distributor to direct sales From distributor to direct sales From agents to distributors From direct sales to distributor From distributor to direct sales From distributor to direct sales From distributor to joint venture From distributor to sales subsidiary From distributor to licensing From licensing to distributor Manufacturing subsidiaries Joint ventures From distributor to direct sales From licensing to distributors From independent distributors to sales through parent From direct sales to sales subsidiary Manufacturing subsidiary From agent to direct sales Joint venture From joint venture to distributor From joint venture to distributor

Firm

Mode strategy change

Relationship level Social Business

Relationship type Direct Indirect

Orientation to change Proactive Reactive

SW4

SW5

SW6

SW7 9 48

SW8

SW9

SW10

Sales subsidiary Sales joint venture Licensing Agent From direct sales to contract manufacturing From distributors to sales subsidiaries From direct sales to distributors From sales subsidiary to distributor From direct sales to sales subsidiary Multiple modes (direct sales and distributor) From distributor to sales joint venture From distributor to sales subsidiary From joint venture to distributor From distributors to sales subsidiaries From direct sales to sales subsidiary From sales subsidiary to distributor Multiple modes (direct sales and distributor) From distributor to licensing From direct sales to sales subsidiary From distributor to sales subsidiary From joint venture to sales subsidiary From distributor to joint venture From sales subsidiary to sales joint venture From distributor to sales joint venture From sales subsidiary to distributor From agent to sales subsidiary 47 10 17

Total

40

Notes: Some mode strategy changes entail switching between two modes in specic markets, while other mode strategy changes entail the use of a mode that is new to the rm in a new market; in some instances mode changes across several markets were triggered by the same factors

1465

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Table VI.

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de-internationalisation. For example, they provided a support structure that allowed rms to close down sales subsidiaries and to start selling through distributors. A mode change also meant that long-term successful relationships had to be abandoned, for example, when NZ10 was acquired by a multinational it had to start selling through the new parent rm rather than using its independent distributors. Sometimes distributor relationships which used to be effective in the past, later transformed into problematic ones. For example, when distributors acquired a new management team, when the partners parent company was nationalised, and when distributors started to pirate the rms products. This coincides with Gulati et al. (2000) observation that relationships can constrain as well as provide opportunities. Firms had to have the capability and resources to terminate poorly performing relationships and to avoid becoming locked into a particular mode. Under these circumstances the rms existing network of relationships is very important. Table VI indicates that while business relationships were inuential in 48 mode strategy changes, social relationships were only inuential in nine changes. Direct inuences were more frequent than indirect inuences with 47 and ten observations respectively. Reactive changes in mode strategy were observed in 40 cases, with proactive changes in 17 cases. Proactive changes were more common in New Zealand rms (11) than in the Swedish rms (six). Social relationships were more likely to inuence mode changes in the Swedish rms (six). Overall, as Table VII shows, the number of reactive changes based on direct inuence of business relationships was 26 the largest single group. Of these most (18) were Swedish rms. There were 13 proactive changes based on direct inuence of business relationships. There were no proactive mode changes based on indirect inuence by social relationships. When rms change operating modes in existing markets, or use new operating modes in new markets, such changes may be proactive but are more commonly reactive. For example, as NZ4 illustrates, the failure of the partner rm in a business relationship can trigger reactive changes. When NZ4s alliance with a US company failed, it established a wholly-owned US sales subsidiary as it wanted direct control of that market. The Swedish rms, SW3, SW4, SW6 and SW10, provide several examples of how companies can be compelled to establish foreign sales subsidiaries or joint ventures when faced with the risk of losing their important markets. Consistent with Calof and Beamish (1995) and Gomes-Casseres (1987) we found a variety of reasons for this change. Some of these included that the mode was no longer effective, the initial mode choice was inappropriate, poor performance of partner rms, changing perceptions of decision makers and improved knowledge about the market. Some rms made reactive changes to their foreign market distribution channels and there were several reasons for this. Sometimes the rms distributors might become their competitors, as occurred with both NZ10 and SW10. NZ10 was forced to make a reactive change when its distributors pirated its products and became a competitor. NZ10 subsequently made strategic mode changes to eliminate the distributor and export directly to its customers. A similar situation occurred when SW10 began selling through distribution channels controlled by its foreign competitors. Other distributor dynamics include the distributor neglecting the rms product, as NZ6 and SW10 experienced. This situation prompted the latter rms to make reactive changes. NZ6 resolved this issue by making a mode change and replacing the distributor with its

Type of change Proactive change based on direct inuence by social relationship Proactive change based on indirect inuence by social relationship Proactive change based on direct inuence by business relationship Proactive change based on indirect inuence by business relationship Reactive change based on direct inuence by social relationship Reactive change based on indirect inuence by social relationship Reactive change based on direct inuence by business relationship

Observed in rms NZ5

Number of observations NZ SW Total 1 0 0 0 1 0

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NZ2, NZ3, NZ4, NZ6, NZ7, NZ8, NZ9 (twice), SW3 (twice), SW5, SW8, SW10 NZ1, NZ6, SW6

13

NZ7 (twice), SW8, SW10 (4 times) SW4

2 0

5 1

7 1

NZ1, NZ3, NZ4 (twice), NZ6, NZ8, NZ10 (twice), SW1 (twice), SW2, SW4 (twice), SW5, SW6, SW7 (twice), SW8, SW9 (5 times), SW10 (3 times) NZ4, NZ9 (twice), NZ10, SW3, SW6

18

26

Reactive change based on indirect inuence by business relationship

Table VII. Summary of changes in mode strategy

own sales representative. In fact, the ndings in this study support Petersen et al. (2000) that rms often change to high control modes, such as from foreign distributor to sales subsidiary, because of the poor performance of local operators. They also argue that when the rm responds to an unsolicited approach it makes foreign market and mode decisions hastily without much foresight and planning. Furthermore, as rms learn about their markets and gain experience, their perception of risk and uncertainty is reduced and they want to have more control of their operation modes. As the nature of business relationships change it induces strategic changes in modes. Quite frequently there are major changes in distributorships, such as changes in ownership, mergers and acquisitions of distribution companies. When there is a change in distributor ownership the new owners might not be interested in distributing the previous rms products. As a result of the latter situation, NZ4, NZ7, and NZ10 had to make strategic mode changes. Not all mode changes identied in the case studies, however, were reactive. Several proactive mode strategy changes were identied, especially amongst the New Zealand rms, where mode changes and existing business relationships were inuential. For instance, a rm might decide to circumvent the distributor and sell directly to

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customers in order to benet from their customers product and market knowledge. One such case is NZ2 which, in order to maintain more control over their distribution and be closer to customers, changed from using an agent to direct exporting through their own salespeople. This was also observed amongst a few of the Swedish rms. These changes would not have occurred if the rms had not established direct relationships with their customers earlier. These ndings lead us to develop the following propositions pertaining to mode strategy: P5. Changes in mode strategy where relationships play an important role are more likely to be reactive than proactive in nature, because rms are generally reluctant to change to a higher commitment mode. Direct relationships are more likely than indirect relationships to have an impact on mode changes, as they provide a stronger impetus for change. Firms are more likely to de-internationalise, i.e. replace a high commitment mode with a low commitment mode, if they have already established relationships to facilitate this process. Firms are more likely to proactively change modes if they have already established direct relationships in these markets to ensure that their sales are not adversely affected. Firms are less likely to have a proactive change in mode strategy based on indirect social relationships, as meeting third parties who instigate a mode change tends to occur unexpectedly.

P6. P7.

P8.

P9.

Conclusion This paper answers a request in the literature for a detailed breakdown of market (Ellis, 2000) and mode changes (Petersen and Welch, 2002). It does this by focusing on the dynamics of 116 changes in internationalisation strategies of 20 SMEs. One contribution of this paper is that it develops a conceptual framework with eight categories of market and mode changes that a rm may experience as it internationalises, although this may be rened to seven categories given the complete absence of reactive, indirect social change for both market and mode strategy changes. An additional contribution is that the paper provides a detailed examination of changes in market and mode strategies, and the inuences from multiple dimensions of a relationship. These dimensions include the relationship level, relationship type and strategic orientation to change. The ndings conrm that rms do not get locked into their initial market and mode strategies but make several strategic changes as they internationalise. In addition, these ndings help to improve our understanding of how and why these market and mode changes are made and how the rms relationships inuence these changes. Social relationships play a stronger role in inuencing market changes compared to mode changes. This is consistent with Ellis (2000) that social ties play an important role in entering foreign markets. Mode changes tend to be reactive, and are also more likely to be inuenced by direct network relationships compared to market strategy changes. One explanation for this could be that rms are in direct contact with their

distributors and can constantly monitor their performance. They can, therefore, react to continuous poor performance by terminating their distributors contracts. Interestingly, reactive change tends to result from different relationship types for market and mode strategy changes. Indirect relationships are more inuential for reactive market changes, while direct relationships are observed more for reactive mode changes. In addition, indirect relationships, while evident in market strategy changes, are less consequential for strategic mode changes. Perhaps these results indicate that rms, while in the uncertain phase of whether or not to commit to a market, keep all of their contact options open in order to conrm their go/no-go decision. Then, having committed to the market, these same rms concentrate their focus more on direct ties to help them to develop their understanding and experience in the market. Furthermore, the results show that business relationships are more important than social relationships in inuencing change. It is not always easy, however, to make a clear distinction between business and social relationships. They are often intertwined. For example, in some instances a relationship that starts as a social relationship can be transformed into a business relationship. When employees leave an organisation, relationships at the level of the individual (social relationships) often survive in the rm as they have been transformed into business relationships (institutionalisation, see Agndal and Nilsson, 2006). As our ndings illustrate, business relationships with distributors can turn into social relationships. Firms even foster social relationships because they value distributors and customers knowledge and resources. Thus, social relationships help create closer business relationships. As rms gain more experience and acquire more knowledge from these relationships, risk and uncertainty about foreign markets is reduced. The rms experience and capabilities in forming relationships, its choice of partners and commitment to these partners emerged as important determinants of how these relationships inuenced the rms internationalisation strategies. These relationships helped rms to enter new markets that were initially difcult for the rms. One point to highlight here is the relevance of relational reputation assets in determining market and mode changes. This reputation asset could also be acquired through a weak tie. Thus, one managerial implication arising from this study is that internationalising rms should not underestimate the importance of relationships. Similar to Yli-Renko et al. (2002) we suggest that rms should consider relationships as a resource to be tapped and actively managed instead of leaving it to providence. Future research could aim to deepen our understanding of how and why a rm uses its resources from its relationships, such as reputation assets. This study provides empirical support for Petersen and Welchs (2002) conceptualisation that rms use multiple modes and combinations of modes in their international markets. In addition, similar to Petersen et al. (2000) this study substantiates that rms need to have routines for strategic exibility that will allow them to make strategic changes quickly as they internationalise. They need to be able to take advantage of unforeseen opportunities that emerge from their relationships. Firms need to avoid becoming stuck with a particular mode because they feel comfortable with it, even though it may not be protable, or to block out a mode, such as licensing, because they have had a negative experience with it in the past. Firms also need to be aware that they might be coerced into making a quick decision about a

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higher commitment mode, such as from a distributor to a sales subsidiary when they are unprepared for it in terms of capabilities and nancial resources. Some suggestions for future research direction include testing the studys ndings quantitatively so that statistical generalisations can be made. Alternatively, the nine propositions developed in this paper could be tested in a quantitative survey. Finally, a similar qualitative study could be done in other geographical, cultural and industry contexts to extend the theoretical generalisability of these ndings.
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Spence, M. (2003), International strategy formation in small Canadian high-technology companies a case study approach, Journal of International Entrepreneurship, Vol. 1 No. 3, pp. 277-96. Statistics Sweden (2005), available at: www.scb.se Strauss, A. and Corbin, J. (1990), Basics of Qualitative Research: Grounded Theory Procedures and Techniques, Sage, Beverly Hills, CA. Welch, L. and Luostarinen, R. (1988), Internationalization: evolution of a concept, Journal of General Management, Vol. 14 No. 2, pp. 34-55. Wilson, H.I.M., Chetty, S.K. and Shergill, G.S. (2004), International expansion of New Zealand rms, in Dana, L.-P. (Ed.), Handbook of Research on International Entrepreneurship, Edward Elgar, Cheltenham, pp. 549-63. Yin, R. (1989), Case Study Research: Design and Methods, Sage Publications, Newbury Park, CA. Yli-Renko, H., Autio, E. and Tontti, V. (2002), Social capital, knowledge, and the international growth of technology-based new rms, International Business Review, Vol. 11 No. 3, pp. 279-304. Zain, M. and Ng, S.I. (2006), The impact of network relationships on SMEs internationalization process, Thunderbird International Business Review, Vol. 48 No. 2, pp. 183-205.

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Further reading Agndal, H. (2004), Internationalisation as a Process of Strategy and Change. A Study of 16 Swedish Industrial SMEs, JIBS Dissertation Series No. 023, Jonkoping International Business School, Jonkoping, published doctoral dissertation. Andersen, O. (1993), On the internationalisation process of rms: a critical review, Journal of International Business Studies, 2nd Quarter, pp. 209-31. Beamish, P. (1990), The internationalisation process for smaller Ontario rms: a research agenda, in Rugman, A. (Ed.), Research in Global Strategic Management International Business Research for the Twenty-rst Century: Canadas New Research Agenda, JAI Press, Greenwich, CT, pp. 77-92. Hallen, L. (1992), Infrastructural networks in international business, in Forsgren, M. and Johanson, J. (Eds), Managing Networks in International Business, Gordon and Breach, Philadelphia, PA, pp. 77-92. Li, T. and Cavusgil, T. (1995), A classication and assessment of research streams in international marketing, International Business Review, Vol. 4 No. 3, pp. 251-77. McKiernan, P. (1992), Strategies of Growth Maturity, Recovery and Internationalization, Routledge, London. Porter, M. (2000), Location, competition, and economic development: local clusters in a global economy, Economic Development Quarterly, Vol. 14 No. 1, pp. 293-317. Rajagopalan, N. and Spreitzer, G. (1997), Toward a theory of strategic change: a multi-lens perspective and integrative framework, Academy of Management Review, Vol. 22 No. 1, pp. 48-79.

About the authors Henrik Agndal is Assistant Professor at Stockholm School of Economics, Sweden. His main research interests include the internationalisation of small and medium-sized rms, business relationships, business networks and purchasing. Henrik Agndal received his PhD from

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Jonkoping International Business School, Sweden. He has published in Journal of International Marketing. Sylvie Chetty is Professor of Marketing at Massey University, New Zealand and a Visiting Professor at Uppsala University in Sweden. Her research interests are in the internationalisation process of rms, business networks, export performance and industry clusters. Some of the journals she has published in include: Journal of International Business Studies, European Journal of Marketing, Journal of International Marketing, International Business Review, International Marketing Review and International Small Business Journal. Sylvie Chetty is the corresponding author and can be contacted at: s.chetty@massey.ac.nz

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