Focus
The study “A review of various approaches/theories that SME’s adopt to establish a network in international business” focuses on understanding the processes that may link an SME to a network relevant to its internationalization. The study discusses various approaches and analyses each approach and finally, the advantages and disadvantages of each approach are discussed.
Introduction
The advent of the Internet and the ensuing “new economy” has opened up a plethora of new business opportunities – and an “inevitable” number of business casualties. Shapiro and Varian (1999) argue that while technology changes – economic laws do not. Internet firms with non-profitable business models have been forced to shut down. According towebmergers.com a total of 135 companies in the US had shut down by December 2000, on the other hand, these were out of an estimated 7,000 to 10,000 private or public Internet firms (Businessweek 2000).
Although share prices have fallen and the current value of Internet firms can be said to be closer to their true potential, the Internet will still play an important part in world business. It is important to remember that despite overvaluation, Internet companies have made a strong impact and probably will continue to do so into the future. The online retailer Amazon.com has only after 6 years of business grown to have sales of nearly $ 3 billion. Furthermore, both the portal yahoo.com and the auction site ebay.com are reporting profits and growth rates of up to 90% per year. All three companies have expanded internationally and are now among the world’s best-known brands (The Economist 2001b).
Given the growing importance of both international trade and the Internet, this paper will discuss the emergence of born global Internet companies. A born global Internet firm is a company that can be said to fulfill three distinct characteristics.
- The firm takes advantage of Internet technology to develop new and innovating products and/or services,
- the firm conducts a major part of its core business functions online and finally
- the firm is international already from inception. SME’s have taken the Internet as the safest route to internationalization.
Various approaches/theories of establishing a network
Network Approach
A network is regarded as a potential means to facilitate an SME’s internationalization. Based on indications from a previous ESRC-funded project (Child, Rodrigues and Frynas 2006a), SMEs are likely to have a “core” relationship with a partner or agent in a given foreign and/or their domestic country which then links them into a wider “secondary” network relevant to doing business with the focal foreign country.
For example, Bell (1995) observed that the network approach does not explain the internationalization patterns and processes of some firms which do not have any close connections or contacts with foreign suppliers or distributors. It also ignores the importance of decision-maker and firm characteristics in taking up opportunities for international penetration, extension, and integration that emerge from the networks (Chetty & Holm 2000). However, networks seem to have considerable significance for SME internationalization and their process aspects remain poorly charted.
Internalization approach
Transaction cost economics (TCE) has strongly informed the internalization approach to the internationalization of MNEs, especially concerning the choice of foreign markets to enter and of entry modes (Buckley & Casson 1976, Rugman & Verbeke 2003). Its assumption that environmental conditions (uncertainty and number of competitors) and conditions internal to the firm or its transactional relationships (asset specificity, opportunism) are the main factors bearing on the choice of transaction governance can be extended to the choice of an internationalizing SME
- whether or not to enter into a given network relationship and
- if it does, the basis on which it seeks to govern and nurture the relationship.
An issue that has interested students working with a TCE perspective is whether and how trust can lower transaction costs. The reasoning is that trust reciprocated between two transacting parties may compensate for the incompleteness of contracts (or other formal governance mechanisms) and reduce the likelihood of opportunism (Zaheer & Harris 2006). However, transaction costs alone are not enough to explain cooperation (Granovetter 1985). There is also a need to examine the processes of how such relations are built and maintained.
Trust and contract
Relationships in networks can be regulated by contracts, inter-personal trust, or both. Contracts are based on price mechanisms and penalties for lack of compliance (Hendrischke 2004). The willingness to commit to a contract may itself be influenced by the reputation of the prospective entrant, and/or by the fact that the newcomer is already known to an existing network member, both attributes implying trustworthiness. The respective roles of contracts and trust in SME network relations deserve more investigation because there is considerable uncertainty in the literature concerning the relationship of contract and trust in the management of inter-organizational relationships (Woolthuis, Hillebrand and Nooteboom 2005: 814). These authors offer tentative conclusions based on four Dutch case studies which can serve as hypotheses for further study.
Factor approach to Internationalization
According to Oviatt and McDougall (1994), valuable unique assets should permit companies with scarce resources to enter international markets. A shorter internationalization process should also be possible based on the homogenization of markets and the developments in technology related to communication and transportation. This means that companies may skip stages of international development or that internationalization may not occur in stages at all (Oviatt and McDougall 1994).
Knight and Cavusgil (1996) mention six factors that have contributed to the rise of born global companies. The first factor is related to the importance of niche markets that have followed the growing demand for specialized and customized products.
A second important is the recent advances in process technology that have made small-scale production economically viable. Knight and Cavusgil (1996) further mention the recent advances in communication as a third trend. The fourth factor is related to small companies’ advantage of quicker response time, flexibility, and adaptability. This means that small companies may be more flexible and quicker to adapt to foreign tastes and international standards. A fifth factor concerns that knowledge, technology, tools, facilitating institutions, and so forth are becoming more accessible for all companies. Finally, the last factor relates to the trend of global networks and the importance of partnerships that facilitate international commerce. By building long-term alliances with foreign partners inexperienced managers may improve their chances for success.
Analysis of the Network approach
According to the network approach (Johanson and Mattson 1988) internationalization is seen as a process in which relationships are continuously established, developed, maintained, and dissolved to achieve the objectives of the company. Relationships are developed through interaction in which the parties build mutual trust and knowledge. These relationships are connected by networks that consist of several companies including customers, competitors, supplementary suppliers, suppliers, distributors, agents, and consultants as well as regulatory and other public agencies (Johanson and Vahlne 1990).
It is assumed that without a good network in international markets the company will have problems with future growth. According to Johansson and Mattson (1988), the internationalization of the company begins with the company being initially engaged in a primarily domestic network. The company then internationalizes by developing relationships in networks in other countries.
The main purpose of these networks particularly for born global – is related to reducing the uncertainty at the beginning of the cooperation with new partners (Solberg 1999). The network approach can according to Johanson and Vahlne be seen as an extension of the internationalization process. They state that an extension to take into account the network perspective should make the concepts “commitment, knowledge, current activities and commitment decisions” multilateral rather than unilateral as in the original model. This means that the process is also inter-organizational and not just intra organizational (Johansson and Vahlne 1990: 19).
The importance of company and personal relationships varies related to different industries and countries. It is indicated by Johanson and Vahlne (1990) that networks are especially important in turbulent, high technology industries.
Conclusion
A study by Lindqvist (1988) of the internationalization process of small high tech companies shows that some do not follow the traditional internationalization pattern, but go directly to more distant markets and more rapidly set up their subsidiaries. One reason for this seems to be that the entrepreneurs behind these companies have international networks of colleagues dealing with the new technology. Literature on Internet-enabled internationalization Internet’s applications includes both being a vehicle that enables more efficient processes of conducting international business and a tool for promotion, information, and communication (Hamill and Gregory 1997, Samiee 1998).
Samiee (1998) argues that the use of the Internet may enable business processes that traditionally have been performed manually to be automated. Bidding, purchasing, inventory management, and order/shipment tracking are examples of processes that have the potential of being automated through the Internet in an international setting. The Internet can also be deployed as a vehicle for revenue enhancement, for example, direct sales, promotion, and as a communications tool (Samiee 1998).
Putting up a website can according to Hamill and Gregory (1997) provide an attractive, low-cost method of sales promotion and advertisement to global customers, including brand name recognition, public relations, press releases, corporate sponsorship, direct sales, customer support, and technical assistance. According to Quelch and Klein (1996), the internet will revolutionize the dynamics of international commerce and in particular lead to more rapid internationalization of small companies.
Several factors point in that direction. In particular, they expect the competitive advantage of scale economies to be reduced as a consequence of the Internet, making it easier for small companies to compete internationally. Global advertising costs, as a barrier to entry, are also expected to be reduced given the global customer reach at a lower cost of the Internet. Furthermore, companies offering specialized niche products will be able to find the critical mass of customers necessary to succeed through the worldwide reach of the Internet.
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