NETWORKING AND EXPORT CHALLENGES: A QUALITATIVE RESEARCH ON MANUFACTURING FINNISH SMEs
International Business and Sales Management Master’s Thesis
Nguyen Phuong Dung 285310
dungph@uef.fi
FOREWORD
This master’s thesis has been created during 2019 and 2020, at the University of Eastern Finland.
Personally, I would like to send acknowledgement to several people who took part in the process.
Firstly, I want to thank the academic instructor of this master’s thesis, Professor, Doctor Andrea Fürst, for all the comments and advices during the seminar thesis course. I also want to thank Professor Mika Gabrielsson and Associate Professor, Doctor Saara Julkunen for their comments helping me narrow down the topic and advices how to advance in conducting the study. Secondly, I want to thank the case companies and especially the firms’ sales managers for participating this study. Lastly, I want to thank my family and friends, particularly my dearest husband – Sampsa Wulff, for supporting and encouraging me to complete the thesis.
Without you all this process would have been more challenging!
Nguyen Phuong Dung Business School
University of Eastern Finland
ABSTRACT
UNIVERSITY OF EASTERN FINLAND Faculty of Social Sciences and Business Studies Business School
International Business and Sales Management
Nguyen, Phuong Dung: Networking and Export Challenges: A Qualitative Research on Manufacturing Finnish SMEs
Instructor: Prof. Dr. Andrea Fürst
Export barriers have been studied for more than five decades by researchers around the world.
Networking topic has followed a little behind when internationalization becomes a norm and then a must to firms where their local markets’ demands are insufficient to grow bigger businesses. Both topics have been widely documented but only a small quantity of researches have approached the relationship between networking and export challenges.
Export barriers including affecting factors, categories; networks with types, relation with SMEs are discussed in literature review of this master’s thesis. Followed by is theoretical part which presents a theoretical framework and propositions for a later empirical part. Next, a case study method and qualitative research approach are explained before the empirical part. The study is based on a multiple case study of three Finnish manufacturing SMEs. The empirical part shall contribute to the existing literature by strengthening its earlier findings and providing new insights.
Implications for future research and managers can also be found in the final chapter of this thesis.
The case firms have been selected carefully to provide most neutral and qualified outcomes. These firms are all machinery manufacturers, operating in a variety of industries and their customers range from multinational corporations to small firms. The empirical data has been collected by interviewing salespeople of these three firms. The data is synthesized and analysed separately and together with cross-case analysis to avoid repetition.
This master’s thesis provides several findings. First, networking is significant in internationalization and helps minimizing some export challenges especially knowledge and experience problems. Second, that networking plays a big or small role in marketing challenges depends on how firms operate their business. Lastly, key elements of a networking success towards individual firms might differ from networking in groups.
Key words: SMEs, networking, export challenges, network development
Tables of Contents
1. INTRODUCTION ... 5
1.1. Background ... 5
1.2. Research gap, goals and research question ... 6
1.3. Study Structure ... 7
2. LITERATURE REVIEW ... 10
2.1. Export challenges ... 10
2.2. Networks ... 18
2.3. Previous research: networks and export challenges... 22
2.4. Theoretical framework ... 24
2.5. Propositions for empirical study ... 28
3. METHODOLOGY, DATA AND ANALYSIS METHOD ... 30
3.1. Research approach and method ... 30
3.2. Data collection and analysis ... 33
3.3. Research Validity and Reliability ... 37
3.4. Limitations ... 38
4. EMPIRICAL ANALYSIS AND RESULTS... 39
4.1. Background ... 39
4.2. Networking and export challenges ... 41
4.3. Network development ... 52
4.4. Empirical findings and proposition assessment ... 56
5. CONCLUSIONS ... 61
5.1. Summary of the study ... 61
5.2. Implications and limitations ... 62
SOURCES & REFERENCES ... 64
APPENDICES ... 71
1. INTRODUCTION
This introduction chapter aims at creating a general picture of this master’s thesis for you as a reader. In the beginning of this introduction part, we will study background and motives for this research, then followed by the research gap and research problem of this study. After that the study objectives and research questions will be presented. Lastly a brief explanation of the study structure will be demonstrated.
1.1. Background
The export-focused studies have received a great attention from scholars over the past six decades after the Second World War’s end opened a bright era for economic development domestically and cross countries. Internationalization process and how firms perform in international business have been noticed; numerous theories relating to firms’ internationalization have been created and developed during the last 40 years (See e.g. Johanson & Vahlne 1977; 1990; 2009; 2017) along with the development of business environments. The factors such as constrained domestic markets, increasing foreign demand and gaining benefits from free trade agreements are encouraging and opening more opportunities for firms in international business.
Nowadays, more open economic policies have enabled the creation of small and medium-sized enterprises (SMEs) of less than 250 employees, defined by European Commission. Accordingly, SMEs plays a crucial role since SMEs represents 99,8% of all businesses in the European Union in which Finland is no exception (Annual report on European SMEs 2017/2018, Enterprise Finnish Statistics 2017). Beside the clearly seen characteristic as of firm size, SMEs are also known of resource constraints such as financial and personnel resources, that are likely to influence their decisions to penetrate foreign markets, how they deal with risks in the host countries, their performance and levels of control.
Previous researches have demonstrated the connection between export barriers and internationalization. Particularly, barriers can (1) discourage non-exporters from internationalizing, (2) prevent internationalization expansion, (3) incite de-internationalization, and (4) deter ex- exporters from re-engaging international markets (Kahiya, 2018). In the past, internationalization of firms had to cope with a lot of difficulties, for example, of transportation and market knowledge accumulation, especially for SMEs which are usually known as lack of different resources. It cannot be denied that development of machinery technology has promoted the speed of transportation, internet expansion has made the whole world much easily reached and so on;
however, drawbacks such as languages, cultural characteristics, law codes, etc. remain diversely across countries. To adapt to the modern international trade, many governments have attempted to support their SMEs in doing international business by financial funding, free consulting and support offices in both domestic and foreign markets. Many SMEs, however, indicate barriers to impede their export or not contemplate exporting, i.e. complicated administrative procedures, dealing with foreign taxation issues (Annual Report on European SMEs 2017/2018).
The choice of entry mode to foreign markets is considered as the key to firms’ exporting activities since it determines the degree of resource commitment to the foreign markets, challenges they can eliminate or their level of control (Hill, Hwang & Kim, 1990). However, Lu and Beamish (2001) also implies that SMEs should not be discouraged by initial difficulties in the internationalization process; and partner relationships have the capability of helping overcome challenges firms encounter when entering markets. Regarding network approach by Johanson and Vahlne (2009), internationalization is resulted from firms’ actions to form and develop relationships or networks by consolidating network positions. It is stated that relationship learning helps gain knowledge which reduces uncertainty and create business opportunities. In previous SMEs studies, academics have managed to find out which factors affect and support firms’ internationalization; and that networks play a very important role in their international growth.
1.2. Research gap, goals and research question
It cannot be denied that SMEs and export barriers have been long studied in the internationalization context (Ruzzier, Hisrich & Antoncic 2006); however, there are not many adequate SMEs studies of business relationships’ influence on export barriers (Kahiya 2018). Several earlier studies (Ghauri et al., 2003; Freeman et al., 2006; Milanzi 2012) state that having structured relationships could help manage risks in foreign markets. Also, previous studies (Kahiya 2018) called for more analysis on the connection between business relationship and export barriers.
Therefore, networks seem to be vital for SMEs in international business to influence firms’
performance, strategies, and general growth but little has been studied on how relationship between firms and their initial partners influences challenges. The primary research focus of this study is on how relationships between SMEs and their partners in the initial stage of exporting affect firms’
challenges in foreign markets. Here is the interesting part of this master’s thesis and the research gap while we focus on SMEs’ network relationships and challenges’ change. Additionally, the research is also for finding how knowledge is accumulated or learned in relationships of the initial
stage. The theoretical framework adopts two theoretical models of internationalization process and network approach.
From a network perspective, the purpose is to study influence of network composition and tie strength on export barriers and the development of the relationships. Barriers are studied as the most important element in firms’ internationalization and primarily in choosing export entry mode;
however, barriers are stated not necessarily to disappear across export stages (Kahiya 2018). Thus, this master’s thesis is aimed to find out the link between export challenges or their changes and business relationships or their development. The thesis is studied using case-study method of Finnish SMEs’ internationalization activity in developing markets in South-East Asia. It should be repeated that there are around 99,8% SMEs in Finland and the studies of Finnish SMEs are limited and have inspected different questions and from a different point of view (See e.g. Phusavat, Kess
& Torkko 2008; McGrath & O’Toole 2010).
The significance of networks or relationships has been generally argued above and now it would be more interesting to see how these networks influence export challenges and then might have effects on firms’ export strategies. Previous studies stated that relationships could bring on several benefits such as reducing transaction costs, enhancing market power, sharing risks and having better access to resources; and help dealing with the difficulties SMEs might experience when entering foreign markets (see Lu 2001, Gulati, Nohria & Zaheer 2000).
Theoretical framework of this master’s thesis is based on a concept of network nodes which represents which relationships SMEs have with their partners and categories of challenges SMEs experience when entering the foreign markets. Consequently, the study will be addressed and focussed on the following research questions:
RQ1: How business relationships of a manufacturing small & medium-sized firm influence its knowledge learning & challenges after initial market entry? How these relationships have developed in time?
RQ2: How those business relationships play a role in overcoming export barriers in foreign markets?
1.3. Study Structure
In order to find the answers for the selected research questions, this master’s thesis will start with Literature review chapter of an overall view of the SMEs’ internationalization research field. The chapter 2.1.1 will present the background and history of internationalization and chapter 2.1.2
defines what SMEs and internationalization are. Chapter 2.1.3 will explain the internationalization process theory; discuss about challenges and opportunities that emerge at each stage. Chapter 2.1.4 discusses about SMEs’ internationalization in Finland.
After that, the study will proceed with export challenges. Chapter 2.2.1 presents previous research on export challenges; then followed by chapter 2.2.2 of how export barriers in this thesis are categorized. The section will close with challenges encountered by SMEs in Finland.
Networks will continue the literature review and chapter 2.3.1 begins with a brief history of network research in international business literature. Chapter 2.3.2 will depict the design of the original network approach model. Then, chapter 2.3.3 reviews how network approach literature have been studied and chapter 2.3.4 present different network relationship types. Lastly, the literature review chapter presents previous SMEs’ network studies in relation with export challenges and the study framework of this master’s thesis with propositions for an empirical part.
The third chapter is about methodology and it explains how this study has explored the research question in practice. Hence, the chosen qualitative study method and analysis will be explained in more details. Chapter 3.1 will argue about the chosen research approach, a multiple-case analysis;
chapter 3.2 clarifies how and why the chosen case firms were selected; summarizes the data gathering process and explain how the interviews were organized. Chapter 3.3 displays how the empirical data was processed. The rest of this chapter presents validity, reliability and limitations of the chosen research method.
Followed is Empirical results and synthesis chapter that consists of four case firms which have qualified the internationalization requirements of SMEs. The chapter aims at displaying export challenges, from a network perspective, that have been impacted by firms’ relationship development; hence, how that influence would result in an effect on market-specific export strategies. In this chapter the in-depth case analysis are presented and discussed. In addition, this chapter also presents firms’ background, characteristics, general internationalization and challenges in internationalization; depicts the firms’ behaviours in networking and their reactions in terms of market strategies.
Next, chapter Discussion will illustrate main findings and lastly followed by conclusion chapter that summarises both theoretical and managerial implications, and the research’s limitations. This study contributes to academic research and business life. For SME’s internationalization research, this study provides requisite augmentation for the existing network approach and export challenges
as well as new insights for the SME research with the case study of Finnish firms. The findings are beneficial to managers; explicitly, firms’ managers could expectably find favourable ways to tackle export challenges in internationalization.
2. LITERATURE REVIEW 2.1.Export challenges
2.1.1. Previous research a. Background
Firms’ failures in operating international business might often lead to export challenge perceptions which hinder firms even more from expanding business in foreign markets. Plus, export barriers are said exist at all phases of the internationalization process, from the preliminary stage of being not interested in exporting and initial stage of having exporting orders, to more advanced stages in foreign markets (Bilkey and Tesar 1977). Therefore, to remove or minimize export barriers plays a significant role in both academic or practical context to achieve better business performance in foreign markets and engender an effective framework for firms to go international.
According to Leonidou (1995), all export constraints including attitudinal, structural, operational and other factors are challenges to hold firms’ ability back from initiating, developing and maintaining international business. Export barriers are also known as barriers to exporting, export challenges, export obstacles, export constraints, export problems, export hindrances, or export impediments. Groke & Kreidle (1967) was one of the very first studies of export barriers, stating that there are a lot of uncertainty such as market-knowledge of how to reach documentation or product adaptation when entering foreign markets. Briefly, export barriers affect firms’
internationalization in four ways (1) to dissuade non-exporters from internationalization, (2) to impede current exporters from international expansion, (3) to instigate de-internationalization, and (4) to deter ex-exporters from re-engaging in internationalization (Kahiya 2018).
Barriers to exporting have received considerable research attention from both conceptual and empirical approaches. Morgan & Katsikeas (1997) presented four (4) barriers to exporting including strategic, operational, informational and process-based ones. Challenges were also discussed to be differently experienced by non-exporters and exporters; and ability to communicate with customers or distributors in foreign markets would facilitate firms’ business performance.
Leonidou (1995) also stated that export barriers differ among firms’ organizational size, export involvement, international experience, and information seeking ability. Additionally, export challenges were found to be usually identified among firms currently engaging in international
business; and not having enough information or market knowledge represented as the biggest negative influence on firms’ ability to establish or expand exporting.
Export barriers have been found to be various towards firms from countries of different economic developments. From an emerging economy perspective, financial obstacles, most outstandingly in lending activity to expand overseas business, and technical/adaption difficulties are perceived the most concerns from studied firms (see Ahmed, Julian, Mahajar 2008). From a developed exporter perspective, Trimeche (2003) demonstrated that Japanese exporters perceived political stability as the most significant barrier, followed by legal and technical regulations and other obstacles such as currency fluctuation, infrastructure, lack of information about distributors and so on, which negatively impacted their export performance in the Arab countries. From a developing economy perspective, the study Koksal & Kettaneh (2011) of Turkish and Lebanese manufacturing firms pointed out that the external barrier of tariff/non-tariff imposition represented as the primary problem, and among internal barriers, insufficient production capacity and packaging and exporting process impacted most negatively on firms export sales performance.
b. Export barriers and SMEs
In Khalil, Ghazi & Muhammed (2012), exporting barriers encountered by manufacturing firms in developed and developing countries are highly similar. Accordingly, economic, political/legal and governmental barriers, financial and information factors are said to have the biggest negative impact on SMEs’ internationalization. Governments or public policy makers are considered as an important determinant to support SMEs in overcoming barriers. Altintas, Tokol & Harcar (2007) implied that government assistance could support firms to overcome perceived export barriers. It is also stated that procedural barriers and competition in foreign market cause effective impacts on export performance.
Tesfom, Lutz & Ghauri (2006) suggested that some export challenges can be solved by SMEs through individual actions; but not with many important matters such as lack of market information, preparation of proper designs and fulfilment of minimum quantity requirements. In contrast, Pinho & Martins (2010) study of Portuguese SMEs demonstrated that biggest hindrances are knowledge of potential markets, qualified personnel for exporting, technical adaption/standards and competition in foreign markets. However, major challenges encountered by exporters were
costs of warehousing and controlling physical product flow in foreign market, payment risks from foreign buyers and lack of physical space or industrial area.
Alonso et. al. (2014) researched SMEs’ exporting in wine industry and found that currency exchange, issues of trust, or entry barriers are primary challenges many of SMEs encounter.
Roy, Sekhar and Vyas (2016) studying barriers to Indian manufacturing SMEs discovered that language and culture are the huge entry barriers which hinder firms from more deeply penetrating foreign markets and communicating more effectively with their customers to understand their needs and business processes. They also found a moderate connection between external and internal factors; and among external barriers, procedural and currency impediments demonstrated the most negative influence on SMEs’ internationalization. In addition, the research specified that SMEs faced difficulties in handling foreign exchange variations due to their lack of knowledge in the field, and in collecting payment on time from intermediate agents which caused more anxiety and uncertainty in their international business operation. Accordingly, researchers called for the government’s interference to guide firms’ operation. Within internal factors, financing, marketing and managerial obstacles are perceived as the most notable. Specifically, firms found challenges in accessing low cost capital from financial institutions which adhered to firms’ export activities relating to product adaptions in foreign markets. Moreover, SMEs indicated their difficulties in finding suitable representatives in foreign establishing and in controlling their supply chain personnel which affected firms’ relationship development with partners in foreign markets.
In Neupert, Bauhn & Dao (2006), export barriers to SMEs in transitional (Vietnam) and developed (USA) economies are examined, which indicates difference in export challenges encountered by SMEs from the two studied sample economies, and by firms’ export operation status (initial exporting or current exporting SMEs). Correspondingly, firms at early export stage found difficulties in understanding logistics, international measurement standards and customs documentation while current exporters experienced obstacles with intermediates, foreign government bureaucracy, cultural differences, international competitiveness and other business risks. In terms of the economy characteristics, SMEs from the transitional economy demonstrated problems relating to product quality adaption while SMEs from the developed economy reported such challenges as cultural and government differences, lack of representation in foreign markets.
Leonidou (1995) called for more attention from researchers to smaller and inexperienced firms due to their likeliness to be more vulnerable to export challenges and their limits in marketing, financial, production and personnel resources.
c. Factors affecting export barriers
Industry sector has proven its impact on export barriers through the industry competitiveness in foreign markets; accordingly, more competitive or regulated sectors shall reveal more export challenges. Bilkey (1977) reports that perceived obstacles tend to vary by industry. Al-Aali (1995) researching obstacles encountered by Saudi Arabian food and chemical exporters found that fierce competition in foreign markets was the most significantly perceived and the export barriers differed among trade sectors. In Crick et. al. (1998), competition in export markets was discovered in the group of major obstacles in non-oil products industry in Saudi Arabia. Leonidou (2000) supported the hypothesis that there is a link between industry type and export barriers. It was demonstrated that consumer goods could experience more difficulties and challenges in international business due to greater sensitivity towards possible cultural differences. Silva, Fanco and Magrinho (2016) found a connection between industry type and export barriers. Particularly, the results indicated that service and retail trade sectors encountered higher export barriers, especially external obstacles of demand, competition, financing and export credit insurance, than manufacturing, construction and other industries.
Firm demographic factors such as firm age, firm size, ownership structure, home market share and firm profitability are studied to impose negative impact on export barriers. Bennett (1997) demonstrated a reverse relationship between firm’s age (as well as firm’s export experience measured by number of years) and export barriers that smaller firms struggled more in obtaining foreign representation and exposed lack of export skills than larger firms. A positive relation between firm size and internal export barriers was unexpectedly found in the study by Adu-Gyamfi and Korneliussen (2013), which was explained due to human resource barriers and limitations of various resources and capability required to perform export task. For instance, when a firm grows and expands international business, it demands more qualified personnel which may not be available or difficult to access. Correspondingly, the larger firms are with higher demand for export personnel, the higher internal export barriers firms might encounter. However, Radojevic et. al.
(2014) studying Serbian exporters found that firm’s size had an inverse impact on several export
barriers of capital restrains for financing exports, procedures and costs of loan for financing exports, domestic currency exchange rate, and association of exporters.
Miravitlles, Mora and Achcaoucaou (2018) demonstrated the inverse relationship between firms’
ownership structure and export barriers that SMEs with medium level of ownership concentration perceived lower barriers than those with no large-block shareholders (less than 25 per cent as the base category). However, the study also found that a high ownership concentration in small firms discerned higher barriers since risks arising from internationalization were great and required share with other partners. In addition, Neville et. al. (2014) discovered that firms which exposed to immigrant ownership tended to perceive lower risks in favour of immigrant owners/founders’
knowledge of customs and culture of their original countries, or their network with other expatriates in other countries. Regarding firm profitability and home market share, it is demonstrated in Leonidou (2000) that small and less profitable business firms show greater vulnerability to export barriers, specifically in resource constraints, environmental distinction, and operating difficulties in foreign markets. A reciprocal explanation for the effect of firm profitability was that non-or limited profitability might cause firm difficulties in raising funds for effectively researching, entering and sustaining business in foreign markets; and severity of export problems could result in firms having poor business performance overall. In addition, it is indicated that firms’ home market shares also generated a serious inverse correlation with such export barriers as corporate resource constraints, environmental differences and foreign-market entry/operating difficulties.
Accordingly, firms with a limited home market share exposed to these export challenges more than firms with a leading market position.
Export venture characteristics of export orientation and international experience have a negative impact on export barriers. Many studies support the hypothesis that firms with longer international experience perceive lower barriers and performe better export operation. Leonidou (2000) demonstrated that manufacturing firms with only a few years in business were more vulnerable to export obstacles than experienced firms. This finding also conforms with Rocha, Freitas & Silva (2008) which indicated that firms with longer international business experience perceived lower export barriers over time. Correspondingly, studied firms pertaining to export operation reportedly recognized lower product competitiveness and confirmed no difficulties in foreign market orientation or barriers to access markets. Regarding export orientation, the Annual report on
European SMEs 2017/2018 implies that lack of awareness of potential opportunities in foreign markets, lack of interest in foreign markets due to sufficient domestic opportunities or lack of interest in expanding business activities are reported reasons why SMEs do not export.
Additionally, Bagchi-Sen (1999) analysing Canadian manufacturers implied a significant difference between SMEs with high and low export orientation as to how they evaluate external and internal barriers to export market development. Particularly, firms with high export orientation finds ways to overcome challenges by developing new products and improve existing manufacturing methods.
Information technology (IT) has been studied in the link with export barriers. Bennett (1997) discovered that firms with higher IT involvements (web site business) perceived lower difficulties such as export expenditures, knowledge of markets, languages and cultures and so on. It is suggested that integrating IT into the international marketing communication could generate many benefits in communicating with international customers. In Awan (2011) studying the relationship between Internet use and perceptions of export barriers in a developing economy context, the author found that there was no significant difference in perceptions of organizational, operational, psychological, product and market barriers among exporters using electronic commerce and not using it. However, psychic distance barriers (Johanson and Vahlne 1990) were perceived significantly higher in firms with websites.
Network composition and tie strength are also demonstrated to have a negative impact on export barriers. Accordingly, networks help mitigate export barriers. In Coviello and Munro (1997), it was discovered that network of formal and informal relationships generated significant influence on how firms would make international decisions, grow their business in market selection and mode of entry. Thus, it can be said that networks have reverse relationship with export barriers, which strengthens internationalization.
2.1.2. Categories of export challenges
Export barriers can be classified as internal and external, in which internal barriers relate to the firms’ innate characteristics and are usually connected with available organizational resources or approach to export marketing (e.g., lack of financial resource), while external barriers come from environments within firms operate (e.g., high tariffs at foreign market, red tape (Leonidou 1995).
Khalil, Ghazi & Muhammed (2012) study of Jordan SMEs and Arranz & Arroyabe (2009) study
of Spanish SMEs both discovered that external barriers had more influence than internal barriers.
Also, Koksal (2006) studying Turkish firms found that barriers associated with macro environment in why firms operate (e.g. continuously changing rate of the Turkish lira, demanding export documentation requirements from governmental agencies, economic instability and inadequate government export incentives) would largely hinder firms’ performance in foreign markets. Rocha, Freitas & Silva (2008) study of how perceived obstacles seen by Brazilian manufacturing exporters change over time found that external factors such as competition in foreign markets and institutional barriers remained stable and even growing along with years. It also indicated that internal impediments such as lack of foreign market orientation were seen less challenging due to controllable by management.
Leonidou also improved this classification scheme by combining two typologies of internal/external and domestic/foreign factors. There are, accordingly, four (4) categories of export barriers: internal-domestic (e.g., barriers stemming from within the firm and relating to the home country), external-domestic (e.g., challenges involving with the domestic environment, but beyond the firm’s control), internal-foreign (e.g., problems relating to the firm’s marketing strategy in foreign markets), and external-foreign (e.g., uncontrollable obstacles encountered in foreign markets). This type of classification was applied in Kaleka & Katsikeas (1995) which demonstrated that regular exporters faced more difficulties relating to transportation, risks involving selling abroad and lack of competition prices while interval exporters perceived challenges in making contacts in foreign markets, export documentation requirements, capital resource to finance exports and transportation costs as well.
Leonidou (2004) stated that export barriers could be identified in three (3) groups of firms: non- exporters, current exporters, and ex-exporters. This type of classification also conforms with many studies (See Bilkey & Tesar (1977), Pinho & Martins (2010)). The impact of these barriers emphasizes the need for different treatment by export promotion programs for firms at dissimilar levels of exporting. Nevertheless, Ahmed, Julian and Mahajar (2008) indicated no significant distinctions in the perceptions of exporters and non-exporters from an emerging market (Malaysia) towards export barriers.
Suarez-Ortega (2003) integrated export barriers into four (4) groups: (1) knowledge barriers referring to lack of information and knowledge in export activities, (2) resource barriers pertaining
to firms’ need to operate exports (e.g., financial issues), (3) procedural barriers (e.g., transportation
& shipping cost, language & cultural barriers), and (4) exogenous barriers resulting from uncertainty of international markets (e.g., competition in foreign markets, exchange rates’
fluctuations). The study indicates the impact of barriers shall vary with the level of export development, and procedural barriers would challenge initial exporters more than experience exporters. Arteaga-Ortiz and Fernandez-Ortiz (2010) also used the same scales to group export barriers which was statistically proven to support the suitability and validity of the used scale. The research also indicated that export managers did not feel that there were any other significant barriers than the 26 proposed construct barriers that prevent or hinder firms’ initiation, maintenance or development of export operations.
Ahmed, Julian and Mahjar (2008) also studied export barriers with functional grouped categories:
(1) marketing barriers, (2) procedural barriers, (3) general knowledge of export practices, (4) financial barriers, and (5) technical/adaption barriers. The research demonstrated financial and technical/adaption difficulties as the primary export barriers encountered by studied Malaysian manufacturing firms; followed by competition in foreign markets, confusing foreign import regulations, currency/payment risks, after-sale service, and language and cultural difficulties.
2.1.3. Finnish SMEs’ challenges
As said in the Introduction, SMEs in Finland accounts up to 99,8% in which the number of micro enterprises is 93% (Source: Statistics Finland 2018). According to the report by Ministry of Foreign Affairs in 2013, 86 percent of barriers encountered by Finnish SMEs come from export trade; and 30 percent in trade with Russia which is explained by the fact that Russia is Finland’s most important trading partner. Next, Finnish SMEs experience many problems in exporting within EU’s internal market. After Russia, Chinese market has caused the most challenges outside EU region to Finnish enterprises. Reportedly, mostly encountered challenges by Finnish SMEs are technical barriers, customs tariffs levels and tax, public procurement (which is experienced as burdensome, bureaucratic and language challenges) and many other barriers.
Clearly, enterprises in different industries would encounter different export challenges excluding common problems of SMEs such as lack of financial resources and human resources which are part of their corporate characteristics. Among sectors, machinery and equipment was reported to have most challenges. For example, main barriers recorded in food industry by Finnish companies
were “ability to identify buyers in international markets, unawareness of exported products in foreign markets, lack of internationally recognized brand names, lack of knowledge about export”
(Lehtinen, Ahokangas & Lu 2016). One solution given was to find a local contact when exporting which again would experience financial challenges. The study found out that Finnish SMEs in food industry prefers direct exporting and/or using intermediaries from target markets rather than Finnish local service ones. In another study regarding wood industry, Mäkinen & Selby (2006) pointed out that global business change had challenged Finnish woodworking SMEs in restructuring their international markets. Increasing networking was considered as a very effective solution to exchange information, skills, export experience and so on especially when they met severe price competition from emerging economic countries.
In addition to frequently known limits of SMEs such as financial capabilities, personnel, international business skills are regarded as a significant role, which include clear strategy, market understanding, marketing and management. Encountered challenges are evidently dependent on target markets. According to Peter and Sergei (2012), Finnish SMEs targeting to enter Russian market experienced several typical knowledge-and-skills-related barriers: managerial attitude and motivation which could be partially fixed by their actual trips to Russia; negotiation skills which could be considered as a cross-cultural issue and fixed with flexibility in communication; sales and market understanding.
Finnish SMEs has encountered many challenges so far in their businesses. However, Finnish government has initiated many agencies and organizations to support SMEs in expanding their business internationally, for example Business Finland, Finnvera, Finpro; and many by European Union such as Enterprise Europe network, Confederation of Finnish industries (EK) and so on. Via such organizations, Finnish SMEs not only receive financial funding but expertise knowledge on management, business models and market knowledge.
2.2.Networks
Internationalization is the natural outcome from network relationships with foreign individuals and firms (Johanson and Mattson, 1988). Chetty and Holm (2000) and Mtigwe (2006) underlined the important role of networks as a “bridging mechanism” which smooths and advance internationalization under the eye of network approach. Inter-person and inter-firm networking have been widely recognized and studied in different context with different perspectives. However,
by adopting a network approach is not enough to describe the perspective of the study and the chosen viewpoint. Therefore, this chapter is designed to support readers to have a general view of networks, starting with network approach in internationalization process, followed by network types to present forms of networking, the main characteristics of network relationships. This thesis is interested in network ties between exporters and importers that how they establish, maintain, strengthen and utilize the relationships.
The network theory has been approached and developed since Johanson & Mattsson (1988) to explain SMEs’ in international business. Notably, the network approach is one of many other theories that strive to describe firms’ internationalization and export obstacles they encounter in foreign markets (e.g. Uppsala model, Resource-based view, Knowledge-based view or Incremental internationalization theory). Regarding to SMEs internationalization, the most known theories are Uppsala model, network approach, (Paul, Parthasarathy and Gupta 2017). The Uppsala model proposes firms experience a gradual internationalization process and firms select foreign markets fulfilling “psychic distance” criterion which means the less psychic distance chosen foreign markets meet, the less uncertainty firms would face in their internationalization (Johanson and Vahlne 1977). The model has been revisited with the role of relationships and network in firms’
gaining international business knowledge (Johanson and Vahlne 2009), which links to the network approach.
2.2.1. Network approach
Regarding to internationalization, Johanson and Mattsson (1988) developed network approach by using social exchange theory to demonstrate how firms develop network relationships to internationalize. Coviello and Munro (1997) found that internationalization of studied firms was largely enforced by existing network relationships, as an outcome from their involvement in international networks, with partners’ advice on picking foreign markets and providing mechanism for market entry.
Johanson and Mattsson (1988) argue that other players are holding requisite resources and to get an access to these resources, the firm must develop its position inside the network and establish exchange relationships. Relationships could lower costs and time for production and advance knowledge development to get better results in business operations. The authors consider firms’
networks as the relationships with customers, contributors, suppliers, governments and even
competitors – the actors of a business network. In the network approach, internationalization is an incremental process by which network positions are established and changed; generally, internationalization corresponds with the increase of the number and strength of relationships in business networks. Accordingly, relationship position development in foreign networks can be achieved in three ways: (1) international extension by establishing relationship positions with its counterparts in national networks that are new, (2) penetration by developing the positions and increasing resource commitments in current networks abroad, and (3) international integration by enhancing coordination between positions in different national networks.
The scholars analyse the four situations of internationalization concerning three dimensions, extension, penetration and integration, which can be explained by reference to network approach.
Early starters are firms with few international relationships. Their counterparts are in the same position thus the early starters possess little knowledge about foreign markets and little possibility to acquire such knowledge from relationships in the domestic market. Therefore, the early starters begin internationalization in nearby markets by using agent (s) who help utilize market investments and facilitate market entry by lowering cost and uncertainty with their own foreign market experience. The second situation of the lonely international happens when firms have experience of relationships with and in foreign countries. These firms already acquire knowledge and experience with diverse foreign markets that advances their knowledge development providing capabilities to succeed. When comparing with domestic competitors, these firms have an advantage of having developed a position in the business network. Thirdly comes the late starters who possess indirect relationship with foreign business networks through customers, suppliers and competitors in the domestic market. In this situation, the competition level can be very challenging, and internationalization makes no advantageous difference between nearby markets and distant markets. Meanwhile, the Late Starters have a comparative disadvantage in term of lesser market knowledge than competitors. Consequently, the Late Starters will have to prove their greater ability to adapt or influence customers’ need when they go international. The last situation of internationalization is the International among others. These firms with already international experience could respond fast to changing environments and use positions to extend or penetrate in further internationalization. Internationally linked network of the International Among Others give firms access to, and influence over external resources. One driving force for further
internationalization is to enhance firms’ ability to adjust to geographical reallocation of activities in the production networks.
Johanson and Vahlne (2009) state that successful internationalization requires mutual commitment between firms and their counterparts, and internationalization is seen as the outcome of firms’
strengthening network positions in business operations. Relationships are based on mutual trust, knowledge, and commitment between firms and other players. They also declare that learning and commitment facilitate opportunities identification and exploitation, and internationalization is more about developing opportunities than overcoming uncertainties. The authors thus imply internationalization should happen in two cases: (1) when firms’ important partners are committed to developing business internationally; and (2) when relationship partners who are going abroad, or already is abroad, want firms to follow. Psychic distance is considered as an important factor in their model since short psychic distance could facilitate the establishment and development of relationships.
2.2.2. Network types
Networks can be categorized into vertical and horizontal networks. Vertical networks are defined as cooperative relationships between suppliers, producers and buyers such as subcontracting relationships to gain benefits in market opportunities, production efficiency. Horizontal networks are defined as cooperative network relationships among manufacturers who want to solve a common market problem, improve production efficiency or utilize a market opportunity through resource mobilization and sharing, also known as export-grouping networks. (Ghauri, Lutz and Tesfom, 2003)
Regarding nature of relationships, networks can be divided into two categories: (1) formal relationship including all business relationships firms possess, and (2) informal relationship involving friends and family relationships (Coviello & Munro 1995, 1997). Intermediates (dealers or agents) are objects to connect buyers and sellers, which constructs another category as intermediary relationship (Oviatt and McDougall 2005). This type of network sometimes plays purely as a bridge to provide necessary information to both sides; or could take a main role in operating business and get most benefits out of the triangle.
2.2.3. Networks and SMEs
Networks have received a lot of attentions from researchers in studying its role in internationalization and networks have been widely accepted to have positive influence on international business. Coviello and Munro (1997) studying network relationships in the software industry indicated that formal and informal relationships supported firms in internationalization and shaped their business in market selection, product development and mode of entry. Network relationships stated their appearance in firms’ development over time.
Chetty and Holm (2000) studying four manufacturing SMEs in New Zealand state that networks play a significant role in supporting firms’ exposure to new opportunities, obtain knowledge, learn from experiences, and benefit from the synergic effect of abundant resources. It is stated that firms’
learning process involves all kinds of players such as competitors, suppliers, customers, distributors, government and organizations. Network relationships influence which foreign markets firms enter and thus determine the shape of internationalization in the beginning. However, they point out that Johanson and Mattsson’s (1988) model does not illustrate how firms overcome problems experienced in internationalization through their network relationships.
Loane and Bell (2006) investigating networks of internationalizing firms in Australia, Canada, Ireland and New Zealand found that existing networks were used to develop firms’ international market knowledge and improve their competitiveness in international business. They also found that firms exploited intra-firm networks, personal networks and social networks to gain contacts in target firms and gather knowledge and resources. Thus, networks are considered as one of many components forming firms’ knowledge and resource. The study also stated that network acquisition and network leverage represent only one measure undertaken by firms strategically to gain deeper knowledge of new markets.
2.3.Previous research: networks and export challenges
Korhonen et al. (1996) found that over half of Finnish SMEs started their internationalization process with “inward” foreign operations, mainly through the import of physical goods or services.
Thus, the study reaches a conclusion that such inward operations allow international network connections to be established, which is supported by Welch and Luostarinen (1993).
As reviewed before, networks play an influential position in internationalization, especially in market entry. In the meantime, not knowing who to contact or locating distributors/agents is one of initial challenges and export barriers exist in every stage of international business. Thus, the impact of networking in eliminating specific export problems is very practical and inspiring, which has received attention from few scholars. Ghauri, Lutz and Tesfom (2003) are of the first researchers in explicitly detecting how to apply networks in export marketing problem-solving.
The authors focused on grouping and subcontracting networks tested on a network model to discover how effective networks are in foreign market activities. The results show that networks have helped to solve manufacturing firms’ export-marketing problems concerning internal issues of quality, organizational or information, and external issues relating to export market and industry.
Correspondingly, studied export grouping networks demonstrated their positive influences on foreign market penetration, accessibility to knowledge of production methods, foreign markets and so on. Meanwhile, subcontracting networks revealed supportive outcomes for firms such as reducing costs, foreign market penetration and market knowledge sources. The authors emphasize important elements of solidarity, cohesion and commitment in the process of network development and how they impact the stability and credibility of the networks. It is also highly noted that network development succeeds in penetrating foreign markets, access to foreign marketing experience/knowledge and access to support infrastructure.
Freeman, Edwards and Schroder (2006) testing how managers applied networks to eliminate perceived constraints and achieve rapid internationalization state that personal networks and partnership are identified to support firms in handling with lack of financial and knowledge resources, market extension or penetration. The authors emphasize the importance of personal networks in providing the basis for establishing or deepening partnerships and alliances. Moreover, networks are built on the basis of commitment among firms and their suppliers and distributors;
and developed with the adaptation overtime to relationships’ changing needs.
Milanzi (2012) studying how social networks (dissected in network size, network composition and network tie) matter in Tanzanian manufacturing firms’ overcoming export barriers states that the more firms engage in exploiting networks, the fewer the export barriers perceptions. Tested perceived export barriers include: (1) internal barriers – foreign market knowledge, internal capacity/competence and finance barriers: (2) external barriers – regulatory institutions.
Correspondingly, he reveals that weak ties show weak influences on perceived knowledge and regulatory barriers while strong ties support fewer export market knowledge and capacity/competence barriers. However, he found out no evidence to support the bigger the network size the fewer export perceptions. Regarding network composition of business and institutional ties, the study shows that institutional ties impact on perceptions of export knowledge, capacity/competence and financing barriers while business ties show their impact on export market knowledge and capacity/competence barriers only. Additionally, one finding reveals that social networks have no significant influence on regulatory barriers which are exogenous ones tested with tax, institutional support and export procedure barriers, and usually controlled by the governments and the economy status (Kahiya, 2016).
2.4.Theoretical framework
Framework of this master’s thesis is based on the literature review presented above. The following empirical part will concentrate on relationships of Finnish exporters and their importers who could be distributors or customers, and the how perceptions of export barriers may change; and research problem and questions will guide the study of the case firms.
This study focuses mainly on business ties built by owners/managers aiming to solve business problems and develop their business. The relationship may involve owner/managers of firms and buyers, suppliers, distributors or competitors. Business ties equip firm managers with opportunities for collective learning, collaboration and knowledge exchange which can strengthen economic scale in marketing, reduce marketing costs in foreign markets and more smoothly penetrate new markets (Ghauri, Lutz and Tesfom, 2003). The decision by firms to enter a network relationship with other firms bears the influence from the management’s willingness to renounce autonomy in order to acquire resources from the external environment (Campbell and Wilson, 1996). The network model is modified from the one presented in Ghauri, Lutz and Tesfom (2003) to fit the objectives of the study – networks in overcoming export barriers.
Networks will be analysed with their emergence, development process and achievement along with their impacts on export barriers perceived by selected firms. The emergence of a successful export marketing cooperative network should arouse from existing common problems or opportunities in the market which refer to lack of export market information, trained human power and other restraints. Subsequently, the networks should operate and develop towards firms’ commitment and
learning. Relationships develop when firms gradually learn from interaction with each other and commit themselves more strongly to the relationship (Anderson and Weitz, 1992). Thus, during this process relationship partners gradually learn about each other’s needs, resources, strategies and business contexts which requires commitments from both partners and mutuality as a fundamental feature (Johanson and Vahlne, 2003).
Business network learning can be acquired in three ways. First is to learn specific and basic things of partners’ adaptation willingness and ability, how to coordinate their activities to achieve further commitment in the relationships. Secondly through business network, firms can learn skills which may transferred to and used in other relationships. Business customs vary among countries, thus in international business, those skills would be taken into consideration as part of their learning process. Different business practices are emphasized to have an important role in networks and relationships in firms’ internationalization process (Li, 2005). Thirdly, firms can achieve how to coordinate activities in relationship with those in another relationship. As a result, firms can learn how to build new business networks and connect them to others (Johanson and Vahlne, 2003) Networks have been widely studied and accepted among academics that networks have influential impacts on market entry by helping firms climb over initial country market barriers in internationalization. However, export challenges are firmly perceived and vary among any stages of internationalization. This study will focus on how networks establishment and development process influence export challenges perceived by selected firms.
Based on the above-mentioned literature, the network model is built along with export challenges encountered by manufacturing firms (See Figure 1). Network achievement means the extent to which objectives or goals are somehow accomplished or fulfilled. In all cases discussed in the empirical part of the thesis, defeat or elimination of export challenges is mentioned as the main objective of the networking process. Other related objectives concern market penetration opportunities and networks expansion.
Figure 1: A network model to study measures undertaken to encounter export challenges of manufacturing firms
Challenges that SMEs encountered especially after entering foreign markets can be categorized as the previous literature (see i.e. Suarez-Ortega 2003) as internal and external barriers. Internal barriers considered for the purpose of the study were measured with four dimensions of managerial, resource-based, marketing factors, and knowledge and experience problems, and 17 items. External barriers are listed with four dimensions of governmental and political/legal obstacles, economic, procedural, and sociocultural barriers; and 12 items. Given items included in the dimension lists are further modified to suit the present research from studies by Kahiya and Dean (2015), Arteaga- Ortiz and Fernandez-Ortiz (2010), Roy, Sekhar and Vyas (2016), Al-Hyari et al. (2012) and Leonidou (2004).
Table 1: Export barriers scale and constructs
Factor Barrier Items
1
Internal Barriers
Managerial Lack of management focus and time -Export barriers/ opportunities
-Willingness to respond
Evolution of foreign market activity
Evolution towards commitment and learning
Network achievement Export barriers overcome/eliminated
Emergence Process Achievement
2 Low perception of export profitability 3
4 5 7
Resource-based Insufficient productive capacity Lack of skilled and flexible labour High cost of labour
Financing exports (working capital) 8
9 10 11 12 13
Marketing Product adaption to overseas markets Product quality/standards
Offering technical/after-sales service Locating foreign distributors
Pricing and promotion in overseas markets High transportation/shipping costs
14 15 16 17
Knowledge and
experience problems
Knowing how to market overseas Knowing foreign business practices Inability to identify foreign opportunities Lack of overseas marketing experience
18 19 20 21
External Barriers Governmental and political/legal restraints
Lack of government assistance and incentives Foreign tariff and non-tariff barriers
Political stability
Unfamiliarity with foreign laws/ restrictions 22 Economic factors High cost of overseas travel
23 24
Inflation and interest rates Currency exchange fluctuation 25
26 27
Procedural factors Knowing export procedures Handling export documentation
Slow collection of payments from abroad 28
29
Sociocultural factors Language difference Cultural difference
2.5.Propositions for empirical study
Previous literature review with the theoretical framework of this study has helped in creating study propositions for the empirical part of this master’s thesis. Previous literature has noticed that the role of networks is significant in debilitating the strength of export barriers (Ghauri, Lutz and Tesfom, 2003; Milanzi, 2012). Therefore, the first proposition will be the following:
Study proposition 1: The importance of networks is high in weakening export barriers.
As it is interesting to study how relationships have been developed over time, the second proposition has been selected from the same study. Milanzi (2012) found that strong network ties with business managers benefit firms in overcoming knowledge and capacity barriers. This finding conforms with Freeman, Edwards and Schroder (2006) that relationships with managers provide pathway to collective learning, helping to pool resources to realize economies of scale in production and marketing in horizontal manufacturing network groups. We will test this in the empirical part and therefore the second study proposition will be the following:
Study proposition 2: Resource-based and knowledge/experience problems are weakened when firms have strong business ties
Milanzi (2012) found that external barriers show no correlation with networks as those barriers are exogenous. Besides, Kahiya and Dean (2016) also demonstrated that economic obstacles and
governmental and political/legal restraints are constantly perceived by firms across any stage of internationalization. The combined analysis leads to the third study proposition:
Study proposition 3: Networks have light impacts on economic factors, governmental and political/
legal barriers encountered by firms in internationalization.
Coviello and Munro (1995) found that as firms undergo internationalization, they gradually develop their own marketing capabilities and rely less on their business networks. This finding has been proved and accepted by later empirical researches (see e.g. Manolova, Manev, Gyoshev, 2010; Jeong, Jin and Jung, 2019). Thus, the third study proposition will be following:
Study proposition 4: Business networks have an insignificant influence on marketing barriers in international business.
3. METHODOLOGY, DATA AND ANALYSIS METHOD
This chapter will explain a research paradigm of this master’s thesis and arguments behind the decisions of a chosen research methodology. Therefore, the next sections will describe and discuss the chosen research methodology thoroughly to prepare you as readers to continue with an empirical part of this thesis.
The following section shall present the selection of the empirical research approach and the study method. Besides, a process of data source selection involved in this research will be introduced and potential challenges discussed. At the end, we will take a look at limitations and possible ethical issues relating to this study and discuss about validity and reliability of the findings.
Many studies about export barriers are found to use quantitative methodology by using survey questionnaires and analysing data with ANOVA tools, CFA, etc. (confirmatory factor analysis) or (see Rocha, Freitas & Silva (2008), Roy, Sekhar & Vyas (2016)); and use of qualitative methodology remains relatively rare depending on research topics, status, purposes and so on. The qualitative method and case study research are used in this master thesis due to several reasons that are found in this chapter.
3.1. Research approach and method
Two reasoning methods in research been widely identified and applied are deductive and inductive approaches. Using the deductive approach, scholars design research strategies to develop or test theories, hypotheses, propositions. Meanwhile, in the inductive approach, scholars would collect data, and then develop theory as a result of data analysis. To combine both of the methods within the same research is regarded as possible and often advantageous (Saunders et al. 2003). Thus, elements from both approaches can be identified in this master’s thesis.
It has been mentioned in the introduction and literature review chapters that there are not many studies on export barriers perceived by SMEs from the network perspective and thus there are relatively little data from this research area (See e.g. Freeman et al. 2006; Milanzi 2012, Ghauri et al. 2003). Different types of export barriers encountered by SMEs and roles of networks have been identified in these studies. However, there have been a call for more studies the relationship between networks and export barriers (Kahiya 2018).
Empirical data of this study is gathered to support or discredit the study propositions that have been deduced from previous studies. Therefore, this study uses mainly the deductive approach to test
these hypotheses upon empirical data. On the other hand, this master’s thesis strives to use the empirical data to create a new theory; then elements from inductive approach are adopted as well.
However, a theoretical framework of this master’s thesis has been created by combining previous findings of export barriers and network perspective, the deductive approach may contribute larger parts.
Regarding research paradigms, there are three known methods: quantitative, qualitative and mixed methods. Quantitative research is widely popular in social sciences by surveys, statistical tools, etc.
which brings to readers’ minds a more structured and standardized data collection and analysis.
Meanwhile, qualitative method is one common way to use in business research aiming to provide a better understanding of issues that have remained unclear in quantitative studies (Eriksson and Kovalainen 2016). As mentioned earlier, this thesis represents the qualitative method research.
Thus, the purpose of this study is to provide in-depth findings from cases that have numerous features that differ one from each other (e.g. size, age, type of business, etc.). The thesis shall focus on four separate cases thus it is a multiple-case study. About the case study research, Yin (2009) states that the method provides little basis for scientific generalization towards populations or universes, but it is generalizable to theoretical propositions. Thus, the upcoming empirical part and its study results will not aim at generalization; and the findings cannot be generalized to all firms, even in the same industry or business. Despite of that, the chosen methodology provides tools for testing current research propositions and finding answers for research questions, that might be more inappropriate to examine with other methods. Last but not least, the writer desires to have direct interactions with local enterprises to better understand their business backgrounds and international business activities via business cases that interviewees are more likely to share by in-person talks.
Accordingly, it expects to more solidly test the propositions and the framework under master thesis’s scale.
The empirical part with the four case examples aims at presenting valuable information for future studies. One identified advantage of the multiple case studies method is ability to provide more conclusive evidence thanks to possible comparations among cases that will influence on the credibility of the entire research. No specific rules are given regarding the minimum number of cases selected for a multiple-case research which is more influenced by study aims and research question (Eriksson and Kovalainen 2016). Under this master thesis scale, four cases are selected.
