The Importance of Relationship Networks and Environmental Factors for the Internationalization Process of

Halmstad University School of Business and Engineering Master Program in International Marketing The Importance of Relationship Networks and Environmental Factors for the Internationalization Process of Born Global Companies in the Lithuanian Market A Case Study of Keback Dissertation in International Marketing, Credit point level: 15 Date of the final seminar: 31 st May, 2012 Author: Vilma Karaleviciute, 870701-T204 Supervisors: Ingemar Wictor, Svante Andersson Examiner: Gabriel Awuah

PREFACE I would like express my greatest gratitude to my supervisors Ingemar Wictor and Svante Andersson who were encouraging, inspiring and motivating me during the process of this thesis. I am thankful for the opportunity to work with a topic of high interest for me. I want to thank my supervisors that they shared their valuable knowledge and provided me with some initial ideas and tools to start and develop the research. Their guidance, support and goodwill have been much appreciated. Moreover, I would like to thank Mr. Evert Grahn, the founder of Keback, who provided me with the information of a great importance for this Master s thesis. I am thankful to Mr. Evert Grahn for his sincere communication and inspiring ideas not only for this thesis but also for future research development. I want to express my great appreciation for his truly positive attitude towards my country Lithuania and his huge interest and desire to improve the situation of international business in the Lithuanian market. Moreover, the experience which Mr. Evert Grahn shared with me is of a great importance for my personal development. Additionally, I would like to give a special thanks to my family and friends for their great support and encouragement while writing this thesis. May 2012, Halmstad Vilma Karaleviciute I

ABSTRACT As a result of the rapid globalization process and growth of competition, companies are fostered to expand in the international markets in order to maintain competitive advantages and keep on growing. The thesis focuses on the concepts of networking and environments which are perceived to be major factors for the internationalization process. The aim of this study is to examine the significance of networking and environmental issues for the internationalization process in the Lithuanian market. The study is carried out in the context of Born Global companies. The theoretical framework of this thesis focuses on three main points. The first approach considered within the literature review is the internationalization process. The following one is networking, considering formal and informal networks in particular. The last approach of importance for the thesis involves environmental factors regarding a particular country s market. This theoretical framework guides the reader through the collection and analysis of empirical data, as well as concluding thoughts for the study. The single case study of the selected company from Halmstad was carried out by employing a qualitative research method. Semi-structured personal interviews enabled the author to collect the empirical data which was supplemented with the secondary data received by using web sites, documentation and scientific articles. The results of the case study indicate that networking and environmental issues influence to a considerable extent the internationalization processes. Moreover, the significance of informal networks was emphasized in particular. However, the study has not shown the obvious evidence that environmental factors affect a company s performance within the Lithuanian market considerably. The single case study enabled me to give practical implications for a real case, considering the introduction of a particular product into the Lithuanian market. Keywords: internationalization process, Born Globals, networking, environmental factors, and the Lithuanian market. II

Table of Contents 1. INTRODUCTION...1 1.1 Background...1 1.1.1 Internationalization Process...1 1.1.2 The Relevance of Networks...2 1.1.3 The Relevance of Environmental Factors...2 1.2 Problem Discussion...3 1.3 Research Purpose and Research Questions...3 1.4 Definitions...4 1.5 Outline of the Thesis...4 2. LITERATURE REVIEW...5 2.1 Internationalization Process...5 2.1.1 Internationalization Drivers...5 2.1.2 Geographic Advantage...6 2.1.3 The Concept of Born Globals...8 2.2 Networking... 10 2.2.1 Business Network Model of the Internationalization Process... 10 2.2.2 Business Relationships... 11 2.2.3 Informal Relationships... 13 2.2.4 Institutional Networks... 15 2.3 Environmental Factors... 16 2.4 The Analytical Model... 17 3. METHODS... 20 3.1 Research Approach... 20 3.2 Research Method... 20 III

3.3 Research Strategy... 21 3.4 Data Collection... 23 3.5 Quality Standards... 24 4. THE LITHUANIAN MARKET AND THE MEC GROUP... 27 4.1. The Environment of the Lithuanian Market... 27 4.2. The MEC Group... 29 4.2.1. Keback... 31 4.2.2. Internationalization Strategy the Importance of Networking... 31 4.2.3. Internationalization in the Lithuanian Market... 32 5. ANALYSIS... 34 5.1 Internationalization Born Globals... 34 5.2 Networking... 35 5.3 Environmental Factors... 36 5.4 The Case Study Helmet... 37 5.5 Results of Analysis... 38 6 CONCLUSIONS AND IMPLICATIONS... 41 6.1 How do relationship networks influence Born Global companies internationalization process in the Lithuanian market?... 41 6.2 What is the importance of environmental issues for Swedish Born Global companies internationalization process in the Lithuanian market?... 41 6.3 Implications for Management... 42 6.3.1 Managerial Implications for Introduction of the Reflective Helmet in the Lithuanian Market... 43 6.4 Implications for Theory... 47 6.5 Implications for Further Research... 47 REFERENCES:... 49 Appendix I... 53 Appendix II... 54 IV

Table of Figures Figure 1.: Conceptual Framework... 18 List of Tables Table 1.: The factors influencing internationalization of Keback... 38 V

1. INTRODUCTION In this chapter I will introduce the research area, explain the relevance of the Lithuanian market, provide a problem discussion, explain the purpose of the research and introduce research questions. At the end of the chapter, I will explain key definitions which are substantial for this thesis. 1.1 Background Lithuania is a Northeastern European country which has an authentic combination of Northern and Eastern features such as progressive, orderly, clean, natural, rapidly developed, and at the same time is still, as yet, an undiscovered country (Invest Lithuania, 2012). Since 2004, Lithuania is a member of the European Union (EU) and NATO and since 2007, the country belongs to the Schengen area. The area ensures free unrestricted movement of goods, services, capital and dividends within the EU area. Moreover, Lithuania is recognized as the prime transport center, connecting the European Union with the East. The Lithuanian economy is one of the most rapidly recovering of the new EU member states from a sharp economic contraction in 2009. Structural reforms and an increasing private sector, which accounts for about 80 percent of Gross Domestic Product (GDP), are facilitating greater economic freedom in the country (www.heritage.org, cited in KPMG Baltics, 2011, p. 28). Thus, in terms of growing economy and private business sectors, Lithuania can be described as the market with an emerging economy and businesses. During 2011, the growth of Lithuanian s Gross Domestic Product (GDP) was approximately 6 percent compared with 2010. Moreover, the growth was observed in nearly all GDP components. Furthermore, according to the forecast of The Ministry of Finance and The Bank of Lithuania, the economy will keep growing by approximately 5 percent in 2012 (Lithuania s economy review, 2011). The Litas is Lithuanian currency which has been pegged to the Euro since 2002 at the rate of 3,4528 LT/EUR. It prevents currency fluctuations when exchanging with European markets and ensures full convertibility between the Litas and the Euro (Invest Lithuania, 2012). Lithuania has become an attractive destination for foreign business expansion. Therefore, the studies regarding internationalization processes in the Lithuanian market is a relevant topic for discussion. 1.1.1 Internationalization Process The rapid process of globalization stimulates and facilitates the process of international exchanges. International business exchanges between sellers and buyers from different countries improve international trade policies. International trade is seen as a major area of the international integration processes. The increase of international trade provides not only much wider assortments of production and services, but also decreases production costs, enables better and cheaper access to relevant resources, as well as develops the competitive economy of the countries. Moreover, it generates innovations in the country and enables technological environmental improvements. 1

Recently, international competitive advantages of large companies with long experience are decreasing (Oviatt & McDougall, 1995). The emergence of small, more narrowly specialized and rapidly internationalizing start-ups are taking place in markets on a global level. So called Born Globals seek international expansion in the first years of their existence (Aspelund & Moen, 2005). However, even though Born Globals started its internationalizing process soon after the inception, in many cases they are not likely to use similar internationalization strategies (Andersson et al., 2006). The emergence of an early internationalization provides firms with competitive advantages, which are additional experience and business timing (Zucchella, Palamara & Denicolai, 2007). However, before the internationalization, the firm should be aware of where to get relevant resources and needed information for the successful internationalization process. This process can be facilitated through the use of established contacts and networks (Zucchella et al., 2007). 1.1.2 The Relevance of Networks The company s performance and speed of internationalization highly depends on managerial decisions and organizational commitments. The sufficient factor is the source of complimentary resources and information which is received from a firm s network, including private and public institutions, customers, partners, as well as personal relationships (personal relationships/networks and informal relationships/networks will be used interchangeably within the thesis). It facilitates the conditions of internationalization (Zucchella et al., 2007). Moreover, relationships within networks motivate internationalization, influence strategically important decisions regarding market choice and entry mode, it helps to gain initial credibility, reduce risk and costs, provide better access to necessary resources, new relationships, established channels and information (Zain & Ng, 2006). These factors highly increase competitive advantage and stimulate firms which focus on the domestic market, to participate within international business arenas. However, networks separately from other internationalization strategy tools cannot determine international development. According to Andersson s and Wictor s (2003) implications, networks are seen as an opportunity to implement an entrepreneur s visions and as a tool to develop their global strategies. 1.1.3. The Relevance of Environmental Factors The market situation is changing rapidly in terms of information flows and increasingly competitive environments. Thus, companies have to take efficient decisions which lead to the competitive advantage in a particular market. Hence, the accurate and consistent market analysis on the basis of continuously renewing and increasing the amount of information and deep knowledge of a country s environmental factors is crucial for a decision making and strategy implementation for the internationalization process. It is extremely important to consider the choice of international market entry strategy accurately, otherwise if the chosen mode does not meet the expectations, it can lead to failure across a spread of markets. Moreover, it is important that the type of entry mode in internationalization processes always goes together with a company s business idea and vision, especially if there are new companies which follow a rapid internationalization strategy (Andersson, Gabrielsson & 2

Wictor, 2006). The cultural environment has become a focal issue for international business (Huettinger, 2008). Understanding cultural differences between countries is the factor which should be carefully considered while integration into the new country s market is approached. Cultural distance, defined as differences between national cultures, in many cases is playing a determining role when it comes to the choice of market and a company s performance. Adapting to local cultures, in terms of language, human behavior, customs, perceptions, buying behavior, religion, different value systems, may create an additional burden for companies operating in different countries (Hofstede, 1994). 1.2 Problem Discussion The lack of scientific researches focusing on cultural differences among former Soviet Union countries results in the fact that the three Baltic countries Estonia, Latvia and Lithuania have been ignored, by considering them as a common block from a not only historical and geographical, but also cultural perspective. As a result, many Western business corporations and international companies are likely to apply a standardized internationalization strategy across the three markets. Nevertheless, the inhabitants of Estonia, Latvia and Lithuania are described as people with Slovanic heart and a Scandinavian head, because the three countries always were able to maintain their core cultural values and close relations, especially in Scandinavia (Huettinger, 2008). According to Jansson (2007), local adaptation and integration of different strategic activities globally (e.g. standardization) are basic characteristics in emerging country markets. The gap between authors who consider business expansion into emerging markets influences the strategy of running businesses in the emerging market. Usually management decisions are taken with the experience from Western mature markets borne in mind. Hence, the lack of general business models which are valid for emerging markets often leads firms to failure in their efforts (Jansson, 2007). Therefore, the lack of updated studies and researches considering the situation in the Lithuanian market causes insufficient awareness of it. In relation with it, companies can easily fail in the decision making process and employment of an internationalization strategy, which impedes the integration process in the Lithuanian market. 1.3 Research Purpose and Research Questions The research purpose of this thesis, in view of the discussion above, is to carry out the analysis covering the significance of relationship networks and market environment factors for Born Global companies internationalization process in the Lithuanian market. Conducting the research I will focus on the following research questions: 1. How do relationship networks influence Born Global companies internationalization process in the Lithuanian Market? 2. What is the importance of environmental issues for Born Global companies internationalization process in the Lithuanian market? 3

1.4 Definitions: The Born Globals The company that has achieved a foreign sales volume of at least 25 percent within three years of its inception and that seeks to derive significant competitive advantage from the use of resources and the sales of outputs in multiple countries (Andersson & Wictor, 2003, p. 254). Networks Groups of independent organizations that are linked together to achieve a common objective (Cravens, D.W. & Piercy N.F, 2003, p. 487). Informal networks informal, personal relationships which are developed between individuals within and between the firms (Holm, Eriksson and Johanson, 1996). Institutions Comprised and regulative, normative and cultural-cognitive elements that, together with associated activities and resources, provide stability and meaning to social life (Scott, 2008, p. 48). Institutional networks The term institutional is an expression of the international dimension, which means that the different international contexts in which the firm is operating are seen to consist of institutions. It also includes the firm itself as an institutional set-up of different units around the world. ( ) The term network mainly stands for the relationship aspect ( ) (Jansson, 2007, p. 7). 1.5 Outline of the Thesis In the first chapter I have introduced the background of the research area and a problem discussion. Moreover, the research purpose and questions were outlined. The chapter is finished with the list of the major definitions relevant to the topic. In the second chapter I will introduce the literature review, which considers relevant theoretical background for this thesis s problem area. Chapter three contains the description of the methods used to conduct the study. The fourth chapter contributes with the empirical data received from conducted personal interviews and secondary data. Chapter five contains the analysis of the empirical data represented in chapter four on the basis of theory collected from the literature review. Consequently, chapter six will provide conclusions of the study by answering the research questions and building the managerial, theoretical and future research implications. 4

2. LITERATURE REVIEW The following part contains literature review considering internationalization processes which focus on the context of Born Globals, also the relevance and influence of networking and environmental issues on the market are discussed. 2.1 Internationalization Process Doole and Lowe (2001) do not suggest any universal market entry strategy which would be suitable for each or at least the majority of the companies. According to them, each method has particular advantages and disadvantages in terms of the level of risk, costs, government regulations and other factors affecting companies presence on the market (Ibid). Persinger, Civi & Vostina (2007) have described two, so called, stage models of international marketing strategy considering internationalization as a deliberate and gradual process. These are the Uppsala internationalization model and the innovation-related internationalization model. According to the authors implications the latter models are being chosen as they are striving to minimize the possible risk, as well as perceive uncertainty. A slow and incremental international integration process facilitates the acquisition of necessary knowledge about the market and enables comprehensive consideration of the choice of entry mode. Following the Uppsala internationalization model, gradual learning of the new market is considered as the basis of the internationalization strategy. Meanwhile, in the innovation-related internationalization models, the main element of entering new market strategy is innovation of the firm (Ibid). Below internationalization drivers and geographic advantage are introduced. These forces are highly influencing the choice and development of the international marketing strategy. Both factors are hardly controlled market conditions; and knowledge regarding them is important in order not to fail in the strategic decision making process (Johanson et al., 2011). 2.1.1 Internationalization Drivers Industry internationalization drivers (market, cost, government and competition conditions) are key driving forces behind successful international strategies (Johanson et al., 2011; Yip & Madsen, 1996). Internationalization drivers are introduced as follows: Market drivers These drivers rely on the presence of three factors; similar customer needs and tastes, global customers, and transferable marketing. The presence of the latter components enables the standardization of market characteristics in this way facilitating internationalization processes (Johanson et al., 2011). According to Yip and Madsen (1996) global customers are the ones, who, usually subsidiaries of multinational companies, seek to buy on a centralized basis, in order to impede incompatibility of equipment and standards and diseconomies in purchasing. Additionally, transferable marketing facilitates the management of global accounts, as a result 5

of the fact that some marketing elements, as brand names, can be successfully marketed in very similar way across the world (Ibid). Market drivers cover the variety of a market s segments existing in a new product s market place, as well as the uniqueness of the segment. The present driver considers that rapidness of the segments changes and growth; also what drivers and trends of the segment are evident (Cooper, 2001). Cost drivers Johanson et al. (2011) present the main factors which enable to reduce costs on the international level. The first factor is variations in country-specific differences. Another element refers to favorable logistics. Also, increasing supply of the production can provide scale economies. Furthermore, there is a tendency that companies from smaller countries are more likely to become international than enterprises from big countries, which have a vast market at home. This pattern exists due to the fact that volume in an international market is higher than in the national market of the small country (Ibid). Government drivers Although the World Trade Organization fosters international exchanges and greater openness between countries, yet government, trade policies, technical standards in each single country have a big influence on internationalization. Moreover, there is no government which allows complete economic openness. However, the European Union and North America Free Trade Agreement have reached significant improvements in their particular regions (Ibid). Competitive drivers Two issues determine competitive drivers. First of all interdependence between countries stimulates better management of internationalization strategies. Also another key factor defines globalised competitors that prompt companies to improve international strategy in order impede the attack from competitors (Ibid). 2.1.2 Geographic Advantage Johanson et al. (2011) measures geographic sources of advantage by exploring location advantage in a company s home country and sourcing advantages outside the home country, using the international value network. National influences on competitive advantage Porter s Diamond Usually, a new competitor who enters a new market has a lack of relationships and knowledge compared with existing market competitors. In order to overcome this disadvantage, the new comer must gain a strong competitive advantage over competitors (Ibid). Porter (1990) argues that firms gain competitive advantage not only by perceiving the demand in a new market, 6

neither by predicting the possible technological improvement, but very often their early moving and aggressive strategy to exploit the opportunities have the biggest effect on competitive advantage building. The author observed that firms from particular nations move very early and aggressively overtake competitive position from previous leaders. Thus, Porter (1990) introduced his framework for national influences on competitive advantage (i.e. location advantage). The author has examined the national environment characteristics which influence the ability of companies to create and sustain an international competitive advantage. Porter (1990) defines in his framework Diamond which four attributes are providing sustainable advantage. The attributes are: Home demand conditions refers to the nature of home demand for the product or service (Ibid). Home market demand has a great influence on the competitive advantage, since dealing with whimsical and sophisticated home customers stimulates improvement in quality of production and more effective service in foreign markets (Johanson et al., 2011). Factor conditions successful competition in a given industry requires nation s position in such production factors, such as skilled labor or infrastructure (Porter, 1990). Related and supporting industries the presence or absence in the nation of an internationally competitive supplier or other related industries (Porter, 1990, p. 71). As Johanson et al. (2011) explain, local groups of related and supporting industries can bring an important contribution to the competitive advantage. Firm strategy, structure, and rivalry the policy of the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry (Porter, 1990). Porter s diamond reflects a system where each element is related and reinforces each other. The above mentioned attributes create a national environment of the companies where they were established and learned to compete (Ibid). International value network Johanson et al. (2011) introduce international value network as another issue having a great influence on geographic advantage. Value network enables global sourcing, which enables the purchase of necessary services and components from the most appropriate suppliers regardless of their geographical location; moreover, it provides reduced labor, transportation, taxation and communication costs and stimulates more effective and efficient services and its quality. The international network also provides unique local capabilities which facilitate companies gaining competitive advantage. One more advantage of global sourcing is the ability to provide different market segments with differentiated production (Ibid). An accurate consideration regarding the mentioned forces facilitates gradual internationalization processes for the company. However, the present thesis focuses on Born Globals types of companies and their internationalization. Born Global companies are likely to internationalize rapidly and in many cases their strategy is not based on the traditional 7

internationalization models (Andersson, Gabrielsson & Wictor, 2006). Therefore, I turn, now to the nature of Born Globals and the means through which it can be approached. 2.1.3 The Concept of Born Globals The success of international new ventures is highly determined by the initial attitude and the entrepreneur s international vision for the new venture, from the very beginning. It also depends on innovativeness of the product and services marketed through a strong network, and a high-quality management of organization, focused on international sales growth. Rapid internationalization process in these types of companies occurs in the early stage of their inception, bypassing the mature process of adaptation to the domestic market (Oviatt & McDougall, 2005; Fan & Phan, 2007). Oviatt and McDougall (2005, p. 31) define international new venture as a business organization that, from the inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. However, there is no generally accepted theory explaining the phenomena of international new ventures and Born Globals. This concept still causes endless debates between researchers (Sharma & Blomstermo, 2003; Knight & Cavusgil, 1996; Oviatt & McDougall, 2005, and others) and needs more empirical studies to resolve definitional ambiguity (Oviatt & McDougall, 2005). Nevertheless, the prolonged process of research studies considering Born Globals shows that the importance and frequency of Born Globals is increasing (Andersson & Wictor, 2003). According to Andersson et al. (2006) there is no one mutually exclusive internationalization strategy which is common for all international new ventures. In one of their studies the authors examined four rapidly internationalizing new companies, the so-called Born Globals, and their choice of foreign market entry mode. Findings of the research confirmed the idea that there is no single type of foreign market entry mode choice between the companies; moreover, they found out that companies choose mixed international marketing strategies quite often. Born Globals can use very opposite strategies of market entry modes than those described in traditional theories. As Sharma and Blomstermo (2003) state, Born Globals type of companies are likely to select their foreign market entry mode on the basis of their possessing knowledge about the international market, which is provided through their relations in networks. Consequently, before entering a foreign market they already have the relevant information about it. Andersson and Wictor (2003) imply that an entrepreneurial international market entry strategy is an important part of business and it is the basis for the competitive advantage within the industry. Born Global companies tend to have a competitive advantage among other companies. These new international business enterprises are usually smaller companies; they are not likely to have a bureaucratic organizational structure, are more innovative, creative, and flexible and manage to meet customers needs in domestic and international markets more easily and rapidly (Knight, 2001; Knight & Cavusgil, 1996). Furthermore, a company s resources, entrepreneurs and their personal and global networks are the main determinants in implementation of internationalization strategy in the firm. Low trade barriers and 8

improvements in communication technology facilitate the international expansion process (Andersson & Wictor, 2003; Knight & Cavusgil, 1996). Knight and Cavusgil (1996) claim that the increasing role of niche markets is one of the important factors which is promoting the emergence of Born Globals. Increasing demand of more specialized and customized production fosters small companies to specialize on more narrow production in order to maintain competitive advantages in the global context. In comparison with other internationalizing companies, Born Globals are likely to be more niche oriented and more specialized with production which is either more custom made or more standardized. Born Globals tend to use an outsourcing strategy enabling them to receive supplementary knowledge and sources from other companies and organizations. The diverse structures such as network partners or joint ventures are more likely to be used between Born Globals in their distribution channels. Hence, the high growth of Born Globals is related to a high innovations level and ability to reach effective human capital resources and distribution channels, very often in collaboration within international relationships and partnership (Madsen & Servais, 1997). Initially, an entrepreneur with international level experience and strong production are the determinants behind the successful internationalization of Born Globals (Andersson & Wictor, 2003). Due to many differences including culture, language and market channels between countries, the entrepreneur is needed as an individual recognizing opportunities offered by international globalization and as the one implementing the global strategy within the firm (Andersson, 2000, Andersson & Wictor, 2003). According to Wictor (2006), the entrepreneur s former knowledge about the market, international experiences from the industry, motivation, different interpretation of the environment bring a great contribution to a successful international business performance. He works with a global vision and plays his role of the best practice and is building the culture where trust and common sense are important. When he is building the organization, strategic recruitment is also important. He uses his personal networks to build company networks. The entrepreneur forms a preorganization before he starts. He is a strong decision maker and does not hesitate to fire a person. Still, he is a team-worker and they all distribute and implement their knowledge. Younger entrepreneurs are more interested in the continuation of internationalization and see the world as their market place (Wictor, 2006, p. 33; Oviatt & McDougall, 1995). Participation in business and social networks favorably influences the business process (Wictor, 2006; Andersson, et al., 2006; Madsen & Servais, 2007). Wictor (2006) especially emphasizes the role of the entrepreneur and his networks in the Born Global company. Thus, according to the author, studies considering their history and following careers in different organizations would provide useful and valuable information, helping for public to understand the concept of Born Globals. While the previous section contains the theoretical background for the internationalization process generally, and the concept of Born Globals, the following part focuses on the networking approach, different kinds of networks and their role, as well as their significance in the international marketing process. 9

2.2 Networking Holm, Eriksson and Johanson (1996) annotate two possible business relationship features formal and informal. Established formal business relationships are developed only if it is profitable for both parties. Meanwhile informal networks are developed between individuals within and between the firms. Although, as Knight and Cavusgil (1996) argue, collaboration between firms starts from consolidated informal business relationships between two companies first, both formal networks and informal networks are important in a firms management process. Specific events, transactions may be formalized, but mutual understanding based on past experience of interaction between each other helps to deal with uncertainties and possible opportunism. Also, relationships with suppliers, customers, investors are crucial in order to run a business in domestic and international market levels (Ibid). However, it is very important that informal social and private relationships with family and friends exist, which are likely to be more common for new business activities in emerging markets (Johannisson, 2000). To indicate the importance of networking for the internationalization process, the business network model of the internationalization process (Johanson & Vahlne, 2003) is introduced in the following: 2.2.1 Business Network Model of the Internationalization Process Johanson and Vahlne (2003) have proposed the model of internationalization applying a networking approach. First, the importance of knowledge is emphasized. According to the authors, the lack of knowledge about foreign markets can lead to failure across a spread of markets. Knowledge can be developed through experiences from foreign markets and operations, which enable international marketing manager to see, evaluate, and exploit opportunities on the market. It reduces risk and uncertainty in implementation of an internationalization strategy in the foreign market. Johanson and Vahlne (2003) argue that knowledge development, integration, and transferring are critical aspects of international marketing strategy management. Johanson and Vahlne (2003) point out that all the relevant business information is being transferred through business network relationships. Each of the relationships differs from each other and it is determined by the properties of the relationship s characteristics and the history of the relationship. Looking at the internationalization process from a business networking perspective, foreign market problems are associated only with customer or supplier, not with country markets. Thus, the authors mean that it is crucial to focus the management strategy on relationships between customers and suppliers. Therefore, according to the authors and considering a pure network case, traditional international business issues do not determine the process. Relationships are a driving force behind internationalization; without networking, internationalization is only a general expansion of the business firm which is not affected by country borders, since all barriers are associated with relationship establishment and development (Ibid). 10

The development of relationships within the network contains gradual learning about firms related with each other, their strategies, expectations, resources, etc. The relationship partners are supposed to have a common future, thus they have to take into consideration each other s interests. Learning is a time and resources consuming process, which requires both partners to become committed to each other for stronger relationships. During the relationship learning process, firms not only get more familiar and committed to each other, but also get experience in building strong new business networks and connecting them between each other. Firms learning in relationships enable them to develop new relationships, which gives a platform to enter new markets (Ibid). In the present business network model, international expansion is a result of well developed relationships with customers, suppliers, intermediaries or other cooperating firms and establishment of new relationships with the companies related with the previous ones. The latter relationships are being strategically established as surrounding and supporting the important relationships (Chen & Chen, 1998). Companies are eager to maintain important existing relationships and they are ready to defend them, by constantly increasing the commitments to those firms which they are already doing business with. The business network model does not consider country markets as an important subject for this kind of internationalization model (Johanson & Vahlne, 2003). A deeper view into a phenomenon of business relationships and networks is represented below. 2.2.2 Business Relationships According to Ford et al (2003, p. 38) relationships are the pattern of interactions and the mutual conditioning of behaviors over time, between a company and a customer, a supplier or another organization. Particularly in emerging country markets, relationships are extremely important in business. This is because of the situation that can be characterized as everything influences everything else, importance in international business (Jansson, 2007, p. 4). The experiential knowledge in networking is increasing, together with a gradual build-up of internationalization knowledge. The movement thorough the stages of the internationalization process are closely related with the development of institutional knowledge, which helps to develop relationships with customers. Consequently, the more developed and long lasting relationships a company has built in a foreign country, the higher the international experience and the degree of internationalization is for those firms (Jansson & Sandberg, 2008). Sharma and Blomstermo (2003) distinguish three types of knowledge which are crucial during integration in the international markets process. The first type is institutional knowledge of foreign institutions, rules and regulations. Another type of knowledge is business knowledge covering knowledge about clients, their needs and decision making. Eventually, the last type of knowledge is named internationalization knowledge, which considers internal and external resources of the internationalizing firm. Through business 11

network relationships, this information is received. In addition, Holm et al. (1996) argue that the interdependence between firms enables exchange of sufficient resources, hence, creating additional value, compared with the value which would be created when a firm operates alone. Pursued collective strategy raises firms joint performance (Astley, 1984, cited in Holm, et al., 1996, p. 1037). As Jansson and Sandberg (2008) argue, the building of a relationships network is a question of finding contacts, building and maintaining them. Long-term relationship development is the final stage, which is critical. Relationships have a tremendous importance while considering the choice of the representative of the company in a foreign market. To have a local representative or a firm s own subsidiary through which the company has a presence in the market is a big advantage. A firm s loyalty with its present agents provides the benefits from these contacts and reduces the risk. Maintaining good relationships, having firm s own representative in the market and direct contacts through its own customer visits are important strengths for the firm. However, according to Jansson and Sandberg (2008) even though often companies see the lack of relevant relationships as a major weakness, it is a challenge to find influential and profitable contacts. Moreover, an insufficiently developed relationship network often reflects the inexperience in a market (Ibid). Relationships with customers highly determine the results of business. Building of good customer relationships is not enough to organize good development of the product. The marketers have to set an attractive price and make it available to target customers. Accurately planned communications blended into carefully integrated marketing communication programs is a crucial element in a company s efforts to build profitable customer relationships. Moreover, the adaptation of promotion strategy, following the rapid changes in information technologies provides the company with a competitive advantage over the competitors. Also, designing marketing programs helps to build closer relationships with customers in more narrowly defined markets (Kotler & Armstrong, 2008). Kotler and Armstrong (2008) define the promotion tools, which could be included into marketing programs. Therefore, the following part of the subchapter represents the essence of the promotion strategy and promotion tools. Promotion tools A company s total promotion mix consists of blended promotion tools, enabling the persuasive communication with customers and the building of customer relationships (Ibid). Promotion creates awareness, knowledge and understanding; also it can shape attitudes, preferences and create a desire for the product (Cooper, 2001). Kotler and Armstrong (2008) introduce five major promotion tools characterizing promotion mix (or marketing communications mix); Advertising is indicated as any paid form of nonpersonal presentation of the ideas, products or services by an identified sponsor. It includes such specific promotional tools as broadcast, print, Internet, outdoor, and etc. 12

Sales promotion refers to short-term actions such as discounts, coupons, displays and demonstrations, used to encourage the purchase or sale of the product or service. Public relations is a means to build good relations with the public. In this way a company is obtaining favorable publicity, building up a good image and handling or disposing unfavorable rumors, stories, and events. Public relations includes specific promotion tools such as press releases, sponsorships, special events and Web pages. Personal selling refers to sales presentations, trade shows, incentive programs presenting the purpose of making sales and building customer relationships. Direct marketing includes direct connections with carefully targeted individual customers. The aim of direct marketing is to obtain and immediate response and develop lasting customer relationships. The media used to communicate directly with specific customers are use of direct mail, the telephone, direct response television, e- mail, the Internet, and etc. (Ibid) In addition, rapidly developing social-media, including such popular social Web sites as Facebook, Twitter, LinkedIn, MySpace, Google+, is new promotion and communication with customers and rest of the public tools, replacing traditional mass-media channels such as TV, magazines (Chief Marketer, 2010) Mass- and social-media help to reach the smaller customer segments, with more personalized messages (Kotler & Armstrong, 2008). Nevertheless, promotion goes beyond the already mentioned specific marketing communications tools. Such product s attributes as design, price, shape, color of its package and the stores where the product is sold send an important and influencing message to buyers (Ibid). In order to reach the customer with a clear, consistent, and compelling message regarding the organization and its brand, integrated marketing communications is likely to be employed. The concept of integrated marketing communications refers to the promotion marketing strategy when many communication channels are integrated together (Kotler & Armstrong, 2008; Cooper, 2001). Although business relationships networks provide great value for businesses and the internationalization process, informal networks are emphasized nearly to the same extent. Therefore, the essence of informal relationships is outlined below. 2.2.3 Informal Relationships Håkansson and Johanson (1986) have carried out a research considering formal and informal cooperation strategies in international networks. In the study, the authors emphasize the importance and benefits of formal and informal business relationships. They introduce 13

differences between the two kinds of relationships. For instance, according to the authors, formal relationships are more visible for both actors inside the firm and external ones. Meanwhile, informal cooperation is often less visible than formal one. Informal relationships provide mutual understanding and interest between parties. However, informal relationships are based on trust and commitment; therefore it is a time and resources consuming process for both sides of the relationship. The authors also claim that informal cooperation is developed only between the ones who are directly related with the business exchange, while the formal one has a high involvement of staff. According to Morgan and Hunt (1999, 1994), commitment and trust are essential determinants in relationships and a key factor for further relationship building. Commitment in the relationship appears only when an actor in the relationship trusts another party and considers the relationship valuable enough to ensure maintenance. Due to the fact that Born Global companies are likely not to have very stable routines and processes, personal networks are their key networks, helping to develop the firms global strategies. Moreover, the entrepreneurs of Born Globals see networks as opportunities which can help implementing their visions (Andersson & Wictor, 2003). Wictor (2006) introduces the entrepreneur as having a central role in founding and running any kind of company, especially within a case of Born Globals. As the author argues, the entrepreneur brings his own previous gathered experiences and knowledge relating to markets including skills in leadership and managing a business. An entrepreneur receives new knowledge through his earlier built business and personal networks and also from his environment. Moreover, Wictor (2006) emphasizes the importance of having the right contacts in the new country, where the company is striving to be established. Therefore, earlier knowledge and contacts make a big impact and highly facilitate presence in complex situations during the business process. Moen, Sørheim and Erikson (2008) explain the importance of informal investors, which is a source providing capital, bringing relevant experience and extensive personal and business networks for the new venture at its early stage. The authors also imply the tendency that informal investors are likely to be more closely related to institutional investors, which facilitates further financing. Informal investors are likely to be actively involved in the business they invest in (as consultants or board members). They tend to make annual investments, usually in geographical proximity to their place of work/home. Informal investors usually invest in young ventures; and their most important information channels are friends and businesslike networks (Moen, Sørheim and Erikson, 2008). Zhou, Wu and Luo (2007) examined the mediating role of social networks for Born Globals and small and medium business enterprises (SMEs). The results of the authors research indicate that social networks should be considered by managers of firms going international as a key means to perform the internationalization process more rapidly and profitably. Trust, commitment, experience and knowledge of foreign market opportunities authors show as the main advantages of social networks. Constantly updating knowledge and information is crucial in business process. Networks play a determinant role in the information exchange 14

process. Granovetter (1973) carried out an analysis on interpersonal relationships, where the results have shown that whatever information is supposed to be shared, it will reach a larger number of people and be transferred to greater social distance by using an informal (social/interpersonal) network, than the formal one. In the following subchapter another type of network is defined as influencing the internationalization of companies. The awareness of the institutions in the new market can facilitate the internationalization process to a huge extent. 2.2.4 Institutional Networks Institutions and their policies and principles in the markets determine the variation in business practices across different markets; hence, different kinds of institutions are governing business networks (Jansson, Johanson and Ramström, 2007; Zucker, 1983). Jansson (2007) distinguishes the institutional network phenomenon into two concepts - institutional and network. The author considers these two phenomena as two key dimensions expressing the social aspect of international business strategy. Thus, according to Jansson (2007), the institutional dimension is referring to the fact that the environment and different international contexts where the firm is operating consists of institutions, including the firm itself. Meanwhile network is considered as an aspect of business relationships. Institutions focus on the multinational firm level as an institution itself, also on institutions surrounding the firm (i.e. product/service market, labor market, government) and on the societal institutions involving a country s overall and business culture, also its political and legal systems. Yeung (2002, p. 30) defines institutional relations as social and business networks, in which transnational entrepreneurs are embedded, political-economical structures, and dominant organizational and cultural practices in the home and host countries. Institutional structures draw rules of the game by defining legal, moral, and cultural limitations, setting legitimacy in various activities; it facilitates and empowers activities and actors, also constrains relationships in social and business levels. Institutions provide guidelines and resources for supporting new activities as well as boundaries and prohibitions on actions (Scott, 2008; Jansson, 2007; Yeung, 2002). Moreover, Jansson (2007) explains that cultural and institutional theories in many cases are close to each other. The presence in the network with international institutional structures provides the firm with a good and useful experience and knowledge going to a host market. Once different business systems are established in particular institutional contexts, they may develop closer relationships with each other and so become resistant to major changes in markets (Yeung, 2002; Zucker, 1983). However, institutions are likely to be transmitted across generations, to be maintained and restored (Zucker, 1983). The latter one and resistance to changes are meant to be distinctive properties of institutions (Scott, 2008). 15