International Conferences on Economics and Management of Networks – EMNet,

University of Vienna, CorvinusUniversity of Budapest, 15-17 September 2005, Budapest, Hungary

Foreign Market Entry and Internationalisation of Business Network

Dr. Emanuela Todeva

School of Management,University of Surrey, Guildford,Surrey, GU25XH

e-mail: , tel: +44(0)1483-68-2056

Keywords: International business networks; Inter-firm Co-operative relationships; Foreign market entry

Abstract

The focus in this paper is on the structure of relationships between business organisations across borders as explored in organisation science, network theory, and the theory of international business. The concept of business networks is thoroughly discussed in the context of the global operations of the firm, the formation of international alliances,the engagement in co-operative business relations, and the international procurement by governments. Conceptual models of different types of business links between firms and governments are constructed on the bases of two leading approaches: the relational approach developed by the Uppsala research group on industrial marketing, and the structural approach, established within the social network theory.

The discussions on the internationalisation of network boundaries,and on the relationships, transactions and exchanges between business partners utilises various theories of internationalisation and modes of foreign market entry.

The paper offers a review of different modes of foreign market entry as distinctive business practices and derives at four types of inter-organisational relationships that are established between firms across borders – marketrelationship, hierarchicalrelationship, representativerelationship, and inter-dependent relationship. The control and co-ordination links between firms in business networks are displayed in diagrams and analysed for each type of relationship. The paper concludes with implications for management and governance structures of international business networks.

Introduction

The discussion on networks as structures of relationships has taken place mainly in organisation science, sociology, social psychology and social anthropology. Recent developments in economics and strategy have extended the field to embrace new business related research questions such as inter-firm dependencies related to supply-chain relationships, resource exchanges and sharing between firms, inter-corporate directorship ties,strategic alliances and co-operative business strategies in highly volatile and risky environment (Scott, 1987, Johanson and Mattson, 1988, Davis, 1997).

Although there are clearly recognised fields in the International Business literature that deal with international expansion activity foreign market access strategy, and the structure of the multinational corporation (MNC) (Chandra and Newburry, 1997), much synthesis is required in relation to the impact of foreign market entry on the configuration of the multinational firm. The original work by Hedlund (1986) and Birkinshaw (1994) on heterarhy, Bartlet and Ghoshal (1989) on transnational corporations, White and Poynter (1990) on horizontal organisations, Doz and Prahalad (1991), Hammel and Prahalad (1994) on the diversified structure of the MNC, Forsgren and Johanson (1992) on international business networks,and Todeva (2005) on business network structures are some of the leading attempts to capture the network structure that facilitate international business operations. All these contributions look at international business network from the perspective of business strategy and organisation and network theory.

The bulk of the literature on international business networks however, has not recognised yet the rich conceptual apparatus of social network analysis, and remains to a large extent constrained within the boundaries of economic research on foreign direct investment (FDI),on strategic alliances, mergers, acquisitions and international joint ventures. An exception is the growing field of industrial marketing literature developed mainly at the UppsalaUniversity (Turnbull and Valla, 1987, Holm and Johanson, 1997). Part of the same stream of research is the work by Yeung (1997) who suggests that strategic and relational flows link intra-firm units with inter-firm and extra-firm resources, and as such theyembedd business activities in market relationships across borders. This literature however does not explain the nature or implications of this international embeddedness. There is very little research on the international linkages and relationships between firms that accompany international business operations in network configurations.

The aim of this paper is to start from the international business perspective, to review different modes of foreign market entry, then to utilise the explanatory power of network theory and to explain the structuring of the operations of multinational firms as part of the process ofinternationalisation and in the context of co-operative international business relationships. The paper builds upon the advancements in structural analysis (Wellman and Berkowitz, eds. 1988), network analysis (Burt, 1982, 1992, Nohria and Eccles, eds. 1992, Knoke and Guilarte, 1994), the Uppsala relational approach to networks and industrial markets (Johanson and Mattsson, 1988, 1992, Hakansson and Snehota, 1992, Hakansson and Johanson, 1992, Ford and Rosson, 1997), cooperative business strategies (Contractor and Lorange, 1988, Buchko, 1994, Gulati, et.al., 2000), the internationalisation theory and the theory of foreign market entry (Buckley and Casson, 1976,1998, Young, et al., 1989, Rugman, 1982,Dunning, 1992, Kobrin, 1995). We treat each market entry mode as a specific network configuration that facilitates international exchanges and transactions between inter-related economic actors.

Foreign Market Entry and Co-operation Between Firms Across Borders

Initially, the three leading modes of foreign market entry were considered to be exporting, licensing, and FDI. The research in the 1960s on entry-strategies had the focus on comparisons between exports, licensing, and FDI, and the advantages and disadvantages of foreign investment strategies relative to foreign trade and licensing activities. All modes of foreign market entry were treated as pure market relationships without recognising partnership agreements between firms and collaborations with governments.

Subsequently it became apparent, that the MNCs can choose between internalising (via mergers and acquisitions) and co-operating across borders. The established forms of foreign direct investment (FDI) are through mergers, acquisitions, the establishment of subsidiaries through greenfield investments that extend the structure of the multinational firm.The choices between different modes of entry are overwhelmingly discussed in terms of governance costs (Ming, et.al., 1991), complementarity of assets, barriers to full integration, opportunities for collusion, internalization costs, adaptation costs, and the costs of doing business in foreign markets, as well as cultural barriers, trust, and psychic distance (Buckley and Casson, 1988, 1996, 1998).

The forms of co-operation extended the field by introducing a range of alternative strategic options that derive from the choice of ownership mode, and the choice of organisational form for the new international business venture. Todeva and Knoke (2002) suggest a typology of inter-organisational relations and strategic alliances that includes eleven types of co-operative business formations in addition to the vertical and horizontal integration that is taking place within MNCs. This classification includes: joint ventures; equity investments; co-operatives; R&D consortia; strategic co-operative agreements; cartels; franchising; licensing; subcontractor networks; industry standards groups; and action sets (Todeva and Knoke, 2002). Buckley and Casson (1988) list seven option choices for foreign market entry – export, licensing, joint venture, wholly owned subsidiary acquisition,greenfield investment, outsourcing and franchising. Another more comprehensive typology of modes of foreign market entry is the list introduced by Young (1989). Overall 10 distinctive types of cross-border modes of business activity are suggested: 1) exporting, 2) licensing, 3) franchising, 4) management contracts, 5) turnkey contracts, 6) international subcontracting, 7) contractual joint ventures, 8) equity joint ventures, 9) wholly owned subsidiaries, and 10) industrial co-operation agreement, which may include all other listed above methods, as well as the counter-trade agreements between governments and multinational firms.

Each of these forms of FDI and foreign market entry involves specific pre-deal and post-deal relationships which frame the effectiveness of the deals and provide rationale for it. The acceleration of the technological factor in international business only enhances the conditions for standardisation of products, services and operations, and for the international expansion of production and distribution which includes the globalisation of trade, licensing, investment, lending, borrowing, financial intermediation practices, and the formation of national and international strategic alliances. The rapid increase of international strategic alliances and global production networks in many sectors of the global economy are the visible side of the globalisation of both production and distribution. The financing of the global commodity networks is based on mobile capital, controlled to a great extend by multi-national banks, corporations, and trading firms. The further expansion of the global commodity networks is through FDI, or strategic alliances and extension of business network relations with firms from foreign markets. These globalisation strategies utilise an intra- and inter-firm international division of labour with the distribution of inter-linked business functions across borders (Pennings, 1994).

Building international organisational presence takes place not only through the investment and market entry strategy, mentioned above, but also through strategic alliances and through establishing international co-operative ventures with complex network structures that spread across firms in mature and new emergent industrial sectors, and across developing and developed countries irrespective of their stage of development. The development of counter-trade agreements, international turnkey contracts and R&D consortia, the formation of business partnerships and alliances, the dynamics in partner relations, and the associated issues of guarantees, trust, commitment, learning, exchange of information and technology, sharing of experience and resources - all raise numerous questions of the nature of these partnerships. The relational approach developed by the Uppsala project on networks is a response to the domination created by the transaction cost theory in relation to collaborative business activities and long-term contractual relationships in industrial markets (Easton, 1992, Hakansson and Johanson, 1992, Ford and Rosson, 1997).

This discussion highlights at least three main issues. Firstly, the current international business literature needs to acknowledge firmly the presence of relational aspects and long-term commitments between partners. Second, the analysis of international business networks and operations need to incorporate a wider conceptual apparatus that explains relational and structural properties of interlinked business actors. Third, new conceptual models, based on specific treatment of international business relationships and network configurations that span across borders can bring more explanatory power to the analysis of complex forms of foreign market entry and international strategic operations in partnership configurations. The next section of the paper aims to introduce the main conceptual tools from network theory that can be employed for the analysis of international business networks.

Network Theory and the Analysis of International Business Operations

Although the organisational implications for foreign market entry,for FDI and for international strategic alliances have been widely recognised, their description as international business networks has been based on loose conceptual underpinning. Business networks are seen as sets of connected exchange relationships between actors controlling business activities (Forsgren and Johanson, 1992:5), or as resource flows between different organisational units based on intra-organisational and inter-organisational linkages (Schmid, et.al., 2002), or as an integrated and co-ordinated set of ongoing economic and non-economic relationships embedded within and outside business firms (Yeung, 1994: 476). These definitions ignore the structural implications of long-term resource exchanges and the strategic implications of interconnected relationships. They also do not extend our understanding of international business networks beyond the metaphorical use of the concept referring to linkages, flows and interconnectedness of firms. We define business networks in terms of their embeddedness in existing relationships between organisations and strategic business units and the repetitive nature of their exchanges.

Each network has limited resources, and different members have different access to these resources. We use the term ‘resources’ in a broad sense, including information, financial capital, human capital, social capital, organisational capabilities, technology, knowledge, and other intangibles. Each network member has different capabilities and different access to the network resources. This inequality is further enhanced by the division of labour and the specialisation pursued by each individual firm in the business network. The specialisation within networks is similar to the specialisation in organisational hierarchies. The difference between the two is in the co-ordination mechanism employed in both cases for subsequent integration of operations.

There are three main traditions in network analysis that have contributed to the evolution of theoretical thinking on networks. The earliest one is the positional (or structural-relational) approach, based on the structural paradigm in social network analysis and the work by Knoke and Kuklinski 1982, Burt, 1982, 1992, Wellman and Berkowitz, 1988, Nohria and Eccles, 1992, Krackhardt 1992, with their emphasis on social structure as a pattern of relationships. The structural/positional approach has investigated a number of network attributes such as: positionand role of actorswithin networks, multiplexity social and communication links, centrality, density, symmetry, reachability and range, cohesion and structural equivalence, structural holes and the strength of weak ties. Many of these structural attributes are formalised measures that have been applied to social network analysis only. However, there is a growing attempt that these are translated for a wider research by social scientists. One of the advancements made by the structural analysis is to recognise the embeddedness of market transactions in the structure of social relations.

Another approach is the relational one - based on the work by the International Marketing and Purchasing (IMP) group (1997) at the UppsalaUniversity. The relational approach puts emphasis on supplier networks and industrial markets, and introduces an alternative conceptual framework that is focused on the overlapping networks of actors, resource flows, and activities (or the A-R-A model, Hakansson and Johanson, 1993). The interacting parties are conceptualised as the individuals, and the organisations they work in, with the size, structure, strategy, experience, and technology employed by these organisations. The interaction process in networks is also operationalised as the relationships between interacting parties, the joint activities they participate in, the resource flows that accompany joint operations, and the episodes of interaction.All these layers of networking includeexchanges of products, services,and information, financial payments, as well as social exchanges that reduce the uncertainties, facilitate cooperationand build trust. Finally,under the relational perspectivethe environment is conceptualised as comprising of the market structure, the market dynamics, the position of each firm in the value chain,and the internationalisation of the market exposure (IMP group, 1997). The context under the relational approach is extremely important to explain both the structure and the dynamics of business relationships (Todeva, 2005).

Finally, the cultural approach is based on the work by Latour (1987), Callon (1992) and Law (1986, 1992) on heterogeneity in actor-networks. According to their methodological approach cultural artefacts such as knowledge and technology can act and exercise power within business networks, locking firms into a particular strategic choices and configuration.

Contributions under these three approaches vary in theoretical orientation and empirical robustness. The y are also based on very distinctive paradigms that do not offer an easy integration. However, common for all scientists is the emphasis on the bundle of interconnected actors, exchange relationships, and structural configurations of power and resource dependencies. Hakansson and Johanson (1992) identify four forces that bind business actors together: functional interdependence, power structure, knowledge structure, and inter-temporal dependence (or the history, memories, investments in relationships, knowledge, and routines of existing interactions). This idea fundamentally relates to the fact that strategic decisions such as foreign market entry and foreign operations are made by individual and collective actors on behalf of the entire firm. These decisions generate a sequence of activities and events in which firms participate, and multidirectional flows of resources that interlink these firms and establish a long-term resource relationship.

It is evident that both the theory of internationalisation of operations and foreign market entry of firms and the network theory can contribute to understanding of the structural and relational interdependencies between corporate units of MNCs and the linkages between international business partners. The question is how to integrate their conceptual apparatus and to employ them simultaneously in empirical research.

The conceptual model of interconnected firms in (Fig. 1.) exhibits the entire set of network characteristics of the international business networks. These include specific attributes of the actors that drive actor’s choices and decisions, relational attributes that emerge from interactions, are attributes of the network configuration. Positioning of business actors and relationships between actors in a business network are analysed further in this paper employing the same model. The network configurations that emerge from foreign market entry strategies represent essentially different types of structural formations that emerge frommarket transactions, relationships,informal interactions and formal partnership agreements.

Characteristics of the ‘nodes’

All three approaches in network theory have contributed significantly to the development of the concept of the nodes in a network, interpreted as members, actors, or agents. The structuralist approach developed the category of ‘centrality’ as a measurement of the extent to which an actor controls and has an impact on disproportionately large number of ties / relations. This centrality is further explained by the actor’s capacity to connect to others, its position and capacity to determine the minimal number of steps needed for one to connect to all other network members. In addition to these structural properties of the actors, there are a number of individual attributes that affect their behaviour, and how they engage in network relationships and transactions. These individual attributes of the economic actors are: size and history of the firm, ownership and corporate governance, assets and accumulated resources (including knowledge, capital, and market access), business interests, moral values, and relational expectations. Their capacity to connect to others to learn from partners and interactions are an important actor’s attribute that affect other actor’s characteristics such as position in the network, role, status and power over allocative decisions and resource flows.