Exporting

Exporting means production of the goods/services in the company's domestic market (or in the third country/region) and selling them in the target foreign market. Exporting does not require high resource investment from the firm, it provides a lower risk/return ratio and it is more flexible than other forms of entry. It gives a company operational control and may provide an opportunity to reach economy of scales when manufacturing products in the home country for both local and foreign markets. Furthermore, firm broadens its customer base and gain international connections by going international through exporting as well as decrease the level of dependence on the demand in the home market. For these reasons many companies prefer to start their international activities with exporting and switch to another mode later on if expansion is successful. Exporting is a good way to learn about the target country, customer behavior, ways of doing business, competitors and other information.

Another side of exporting is that it can be that the foreign market offers more affordable environment for the manufacturing (lower costs for production process, labor force, materials, etc.). Moreover, marketing control can be lacking as marketing activities are often delegated to the foreign agent. To say more, exporting is not the most suitable option if the transportation costs and tariffs barriers are high.

It is important to note that for service companies the situation is different: due to business characteristics the motivation for internationalization of such companies differ from the ones that manufacturing firms undertake. For example, services cannot be transported or stored due to their intangibility.

Besides, in most cases services should be produced at the same place where they are going to be consumed. When it comes to scalability for service firms, only marketing activities can achieve economies of scale (Campbell & Verbeke, 1994) as otherwise, the main tasks of companies offering professional services are planning, thinking, and combining different solutions to a problem (Sharma's, 1988). Thus, internal characteristics, available resources, existing network of the company, not the external factors, are the main drivers for internalization (Coviello, 1999; Majkgård & Sharma, 1998). Other driving forces include professional knowledge and experience of the company, international

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experience of the workers and desire of the company to have better control of the service delivery (Bell, 1995; Oviatt, 1994, Coviello, 1999). Client requirements may be the only external factor that can influence company's decision on international environment. Campbell & Verbeke, 1994 also found important question that service firms ask themselves before deciding on the entry mode: whether to create knowledge in the home market and relocate it to the target market or initially start creating knowledge in the foreign markets.

Many service firms use exporting as a way to enter new market. Coviello (1999) stated that obtaining another than exporting mode is a result of client or government requirements. Thus, if project requires “resources that are outside the capabilities of the case firm, the firm forms temporary alliances to enable it to complete the project” (Coviello, 1999).

In his research Blomstermo (2006) argues that service firms can be divided into hard-service (linked with physical products) or separable services (when production and consumption are decoupled; Sampson and Snape, 1985) and soft-service (delivered in real time, requires presence from both customer and seller) companies. Sampson and Snape (1985) suggest that separable services can be exported to foreign markets just like manufactured goods while companies that offer inseparable or soft-services need another approach.

If the company chooses exporting as an entry mode it has to decide what level of control it will have over the operations and this functions it will delegate to the firm from the target market. There are three possible types of export: direct, indirect and cooperative export.

Direct exporting refers to the situation when the internationalizing company takes on the duties of an intermediary and takes care of all the operations (documentation, delivery, pricing, etc.). It also makes contact to the customers in the target market directly. There are several forms of direct exporting such as: own representative office or a branch, foreign agent, foreign distributor (Hirsch, 2012). The difference between agent and distributor is that foreign agent is acting in behalf of internationalizing company and its name but foreign distributor acts on his own behalf.

Specifically for Russian market the easiest, fastest and less risky way (especially in case if company does not have knowledge and experience from the Russian market) is to find a Russian professional to act on behalf of the foreign firm as there is no need to register a company in the Russian authorities.

It suits best to the companies making first steps into Russian market. The main idea is that the firm chooses the local representative and hires him as a contractor with the terms that two parties mutually agree. Hiring this person as a consultant rather than employee gives company flexibility towards such aspects as salary, termination of the contract, overtime, etc.; besides, this will allow the company to avoid the mandatory rules of Russian labor law (Danske, 2015). In order to create a service contract, this individual must be registered as an entrepreneur. One more benefit of service contract is that company is not eligible for paying taxes and social fees of the contractor.

As it comes to the question about the office, foreign firm can rent a working space without registering the branch or representative office in Russia.

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Another option is for the hired individual to rent an office himself and get reimbursement from the company. Important to notice that if such person has permanent/long-term (longer than one months) working space, the foreign enterprise is recommended to register in the tax entity in case if in the future this individual will be representing the firm in negotiations, signing contracts and so on (Danske, 2015).

If a SME decides to open a representative office or a branch, both are considered as subdivisions of the foreign company located in the other country than a head office (Russian Civil Code). However, there are differences between these two. A representative office is only eligible to represent company's interests, meaning that it can perform only certain activities - that have non-commercial nature, e.g. marketing or market research (Deloitte, 2017). Thus, representative office is not a subject to income tax.

In contrast, branches are engaging in commercial activities (sales processes, payments) and thus, are eligible for paying income taxes. Branch has to keep and maintain financial records and is responsible for its debts and obligations, while in the case of representative office, the foreign company is taking care of office´s debts and obligations (Danske, 2015).

In order to become “fully operative a representative office and a branch office must carry out a post-accreditation procedure, which includes obtaining registration documents from the tax authorities, the State Statistics Service and the Russian social security funds” (Danske, 2015). The accreditation process of a representative office and a branch tend to be time-consuming procedure although such entities are not regulated in much detail by Russian law (MK-law, 2018) The reason behind it is that the documents needed for the accreditation process are “usually issued outside of Russia and verified by foreign notaries, which means that the documents are often different from corresponding documents in Russia and executed in a manner that does not necessarily correspond to the way in which a corresponding document would be executed in Russia” (MK-law, 2018). Russian authorities are handling the execution of these documents with much detail and eve small disparity may cause rejection of the application.

Indirect exporting implies participation of other domestic company (agent and trading company) in certain activities. A firm becomes dependent on these middleparties as they help a firm to find potential sellers and customers in the target market, providing consulting services, proceeding payments, organising shipping etc.

There are several consulting firms in Finland that support Finnish companies in international activities. These companies help SMEs to find partners, experts and networks all over the world as well as offer legal, translation and administrative support. Moreover, in Finland SMEs play very important role in economy development that's why government aims to help them not only by providing useful information about different markets but also by offering financial support. Some examples of such organisations are:

Business FInland, which was created by the merger of two organisations in 2018 and found by Finnish Ministry of Employment and the Economy; Finnvera

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(financing against risks arising from exports), ELY centres (Centre for Economic Development, Transport and the Environment) and others.

- Cooperative export refers to making collective agreements with other companies in producing product or service to export. SMEs normally do not have sufficient resources to achieve economies of scale, thus, such cooperation may help them to be able to scale the product and achieve broader product concept.

It has been concluded in the study conducted by Agarwal &

Ramaswami (1992) that SMEs tend to avoid picking up exporting when there is a possibility of gaining high potential returns through other entry modes in the market, but they tend to choose exporting mode when the potential risks are higher for other entry modes.

Coviello, N. E. (1999) found that when service firms undertake the process of internalization and make a decision on the entry mode to proceed with, they most commonly choose exporting. There are some exceptions due to requirements that can arise from the customer or government in the target country; another reason can be when a project has a need for resources that are outside the capabilities of the internationalizing service company - in this case temporary alliances are settled. Javalgi et al. (2004) and Holmlund & Kock (1998) add that when choosing exporting, companies tend to send experts to the target market or actively do online activities, for example in such sectors as training and consulting. However, sending own salesman is more demanding than choosing to export through an agent which is a more resource saving approach as the agent has already a business network in the target country.

Thus, salesman needs to establish business relationships with all the parties (e.g. customers, government, partners, etc.) in the target country. However, in engineering consultancy the “export projects” - occasional travelling to other markets are dominating in internalization process (Léo & Philippe, 2001).