Managing International Relations May 8, 2008 Tuija Mainela D.Sc., Professor Department of Marketing

Lecture theme: Network approaches to internationalization How network theory helps to understand the internationalization of firms?

Network approach to internationalization  Network theory  Markets-as-networks  Different national networks are always connected to each other  Companies are always dependent on each other  Network relationships and knowledge  Long term relationships needed for extensive knowledge creation  Price and Quality  Deliveries  Services before, during and after delivery  Resources and Organization of the counterpart  Development possibilities

Questions of interest in network approaches  International interdependence between firms and within industries  How the surrounding business network context influences internationalization?  How a firm can use existing relationships when creating a new relationship in international markets?  How the internationalization of the firm takes place concurrently with internationalization of customers, suppliers and competitors?

 Internationalization of the production net (market of interest)  Firms whose activities, both complementary and competing, are linked on the basis of product areas  e.g. a heavy truck net = firms manufacturing, distributing, repairing and using heavy trucks  Number and strength of relationships between different national production nets  Internationalization of the firm  Extent to which the firm occupies positions in different national nets  Ways to establish and develop positions  Extension = establishment of a position in new national nets  Penetration = increase in resource commitments in those networks in which a firm already has a position  Integration = increasing co-ordination between positions in different national nets Network model of internationalization (Johanson and Mattsson 1988)

Network model of internationalization Johanson J. and Mattsson L-G. (1988). Internationalisation in industrial systems – A network approach. In Ford (1997) (2 nd ed.) Understanding Business Markets: Interaction, Relationships and Networks, 194–213. London: Dryden Press.

Case exercise  Read the story of the entry to Polish market by KWH Group (20 min).  Answer the following questions (25 min): 1. Describe the international experience of KWH. Would you consider its degree of internationalization as high or low? Why? 2. Describe the internationalization of the Polish market. Would you consider the degree of internationalization as high or low? Why? 3. Who were the actors involved in the initial planning of the modernization of district heating pipelines in Poland? 4. Which other relationships of KWH were of benefit in its selection as the technology partner to SPEC? 5. Draw a figure of the network for joint venture entry to Polish market.

Early Starter Little knowledge of markets and adaptation Export agents used to compensate new internal knowledge creation own inexperience of adaptation lack of position in the market Also customers inexperienced agents are the legitimacy creators Foreign direct investments for big firms International Among Others Makes use of current network position for market penetration and expansion Quick establishment of sales units typical Investments in one market serve as bridges to others Joint ventures, acquisitions, mergers Lonely International Easy to get access to new networks Suppliers, customers and competitors not international yet Lonely international pulling also them? Lonely international a bridge builder? Foreign direct investments typical Coordination of different networks Low Degree of internationalization of the market /net High Low Degree of inter- nationali- zation of the firm High Late Starter The firm is pulled to international markets Makes use of home market relationships Often sales units abroad R&D units also typical

international joint venture supplier customer potential customer government/authority parent firm parent firm/financier headquarters sister company competitor part-time existing relationship occasional contact important but less intensive interaction intensive interaction financier distributor university/other expert Explanations: Mainela, T. and Puhakka, V. (2008). Embeddedness and networking as drivers in developing an international joint venture. Scandinavian Journal of Management, 24(1), 17–32.

Ways of Negotiating and Acting to Develop Market Position  Convincing  actions of the managers to persuade the critical stakeholders to a favorable decision  via third parties  via personal trust creation  Compromising  acting to achieve a win-win solution in situations of disagreement  via personally trusted intermediaries  Resourcing  resource acquisition through interaction  via friends and acquaintances  via normal contractual channels

 Internal organizing  strategic decisions to  change the organizational structures  improve quality  add new products or  change e.g. the logistics of the firm to better serve the customers  Adding weak ties  Strengthening existing ties  Legitimizing  gaining external approval and credibility for the venture  Venture-based  Lobbying to influence political decision making

 Network relationships and internationalization  Entering a new market = establishing a position in a network new to the firm and its current counterparts  Micro-position = relationships with a specific counterpart  Role the firm has for the other firm  e.g. a secondary supplier of fine paper and of know-how for printing purposes  Importance to the other firm  e.g. the share of seller of the total purchases of buyer  other transfers between them  Strength of the relationship  e.g. strength of knowledge and social bonds Network approach to internationalization

 Network relationships and internationalization  Macro-position = relations to a network as a whole  Identity of other firms  e.g. lists of customers, suppliers, etc.  Role of the firm  e.g. a full line distributor of fine paper in southern Sweden  Importance of the firm  e.g. 50 per cent market share and market leader  Strength of relationships  e.g. strength of bonds

Network approach to internationalization  Network relationships and competitive advantage  Company-specific i.e. difficult to copy  Relationships influence  availability of information: what is going on in the market?  timing of information: when does the information reach the firm?  spread of information: e.g. reference customers/ partners take care that the company is on view in positive way in the right place Basically, network theory suggests that internationalization process is more complex and less structured than earlier internationalization theories claimed