2005:119 shu bachelor's thesis1024033/fulltext01.p… · conducted on ab Älvsbyhus that is...

2005:119 SHU

B A C H E L O R ' S T H E S I S

SME Selection of International Marketsand Choice of Foreign Entry Modes

A Case Study of AB Älvsbyhus

Gunnar Backlund Sabrina Suikki

Luleå University of Technology

BSc and MSc Programmes in International Business Administration and Economics BSc

Department of Business Administration and Social SciencesDivision of Industrial marketing and e-commerce

2005:119 SHU - ISSN: 1404-5508 - ISRN: LTU-SHU-EX--05/119--SE

Acknowledgements This bachelor’s thesis is the result of ten weeks hard and interesting research. It could not have been done without help. First, we would like to thank Associate Professor Manucher Farhang for his guidance, assistance and above all for his great patience. Secondly, we would like thank AB Älvsbyhus and their marketing manager Roland Kjellgren for his time and effort to make this thesis possible. We are also grateful to our fellow students who have been helpful in providing feedback and useful comments on our work in process. We would also like to thank Ph.D. Candidate Tim Foster for his inspiring lectures in International Marketing. Last but not least, we would like to thank our families and friends for their support and understanding during this time and a special thanks to Assarina from Gunnar who has been reminding him of that life has its wonderful moments even when the studies are intense. Luleå Technological University, Sweden May, 2005 Gunnar Backlund Sabrina Suikki

Abstract The purpose with this thesis has been to study SMEs’ internationalization. The process, which SMEs go through when selecting international markets, and what external and internal factors influence this selection have been studied. Furthermore, SMEs’ choice of foreign entry mode has been studied and what external and internal factors influence this choice. A case study has been conducted on AB Älvsbyhus that is the market leader in the Swedish woodhouse industry. The case study is based on the theory discussed in the thesis which then is compared with AB Älvsbyhus actions. Our findings show that AB Älvsbyhus internationalization behavior does not exactly match that in theory. During our research study we also found that there has not been laid sufficiently attention on companies which proactively initiate their international activities. Our conclusion is that each and every company must be analyzed individually on the basis of their specific prerequisites and abilities, in order to gain a better understanding of the company’s internationalization.

Sammanfattning Syftet med denna uppsats har varit att undersöka hur små och medelstora företag agerar när de börjar involvera sig på den internationella marknaden. Uppsatsen undersöker den process som företagen genomgår när de väljer sina exportmarknader samt vilka externa och interna faktorer som påverkar detta val. Vidare undersöks på vilket sätt företagen väljer att gå in på de valda exportmarknaderna, samt vilka externa och interna faktorer som påverkar detta val. En fallstudie har genomförts på AB Älvsbyhus som är marknadsledare i Sverige inom trähusindustrin. Fallstudien baseras på den teori som undersökts i uppsatsen, vilket sedan har jämförts med AB Älvsbyhus agerande. Resultatet visar att AB Älvsbyhus internationella aktiviteter inte följer de mönster som teorierna visar. Under våran undersökning märkte vi också att det inte har lagts tillräkligt med vikt på företag som på egen hand initierar sina internationella aktivititeter. Varje företag måste analyseras individuellt utifrån dess specifika förutsättningar och förmåga.

Table of Contents 1 Introduction ...............................................................................1

1.1 Background....................................................................................... 1 1.2 Problem Discussion ......................................................................... 2 1.3 Research Purpose ............................................................................ 3 1.4 Research Questions ......................................................................... 3 1.5 Demarcations.................................................................................... 3

2 Literature Review ......................................................................4

2.1 Internationalization of SMEs............................................................ 4 2.2 International Market Selection of SMEs ......................................... 6

2.2.1 External factors influencing international market selection .......................6 2.2.2 Internal factors influencing international market selection ........................8

2.3 SMEs’ Choice of Foreign Entry Modes........................................... 9 2.3.1 Types of foreign entry modes......................................................................10 2.3.2 External factors influencing choice of foreign entry modes.....................12 2.3.3 Internal factors influencing choice of foreign entry modes ......................14

2.4 Conceptual Framework .................................................................. 16 2.4.1 Internationalization of SMEs ........................................................................16 2.4.2 International market selection of SMEs ......................................................16 2.4.3 SMEs’ choice of foreign entry modes .........................................................18

3 Methodology............................................................................21

3.1 Purpose of the Research ............................................................... 21 3.2 Research Approach........................................................................ 21 3.3 Research Strategy .......................................................................... 22 3.4 Data Collection Method.................................................................. 23 3.5 Sample Selection............................................................................ 24 3.6 Analysis of Data.............................................................................. 25 3.7 Quality Standards ........................................................................... 26

4 Case Study: AB Älvsbyhus ....................................................27

4.1 Company Background ................................................................... 27 4.2 Internationalization of Älvsbyhus ................................................. 28 4.3 International Market Selection by Älvsbyhus .............................. 29

4.3.1 External factors influencing international market selection .....................29 4.3.2 Internal factors influencing international market selection ......................31

4.4 Älvsbyhus’ Choice of Foreign Entry Modes ................................ 32 4.4.1 External factors influencing choice of foreign entry modes.....................32 4.4.2 Internal factors influencing choice of foreign entry modes ......................33

5 Data Analysis...........................................................................35 5.1 Internationalization......................................................................... 35 5.2 International Market Selection....................................................... 36

5.2.1 External factors influencing international market selection .....................37 5.2.2 Internal factors influencing international market selection ......................38

5.3 Choice of Foreign Entry Modes..................................................... 39 5.3.1 External factors influencing choice of foreign entry modes.....................40 5.3.2 Internal factors influencing choice of foreign entry modes ......................41

6 Findings and Conclusions .....................................................44

6.1 Conclusions .................................................................................... 44 6.1.1 How can SMEs’ internationalization process be described?....................44 6.1.2 How can the influence of external and internal factors on SMEs’

international market selection be described? ............................................45 6.1.3 How can the influence of external and internal factors on SMEs’ choice of

foreign entry mode be described? ..............................................................47 6.2 Implications and Recommendations ............................................ 48

6.2.1 Implications for theory .................................................................................48 6.2.2 Implications for practitioners.......................................................................49 6.2.3 Implications for future research ..................................................................49

References ....................................................................................51 Appendix I Interview Guide in English Appendix II Interview Guide in Swedish

List of Figures Figure 2.1: Elements of the Entry Strategy………………………………………………...10 Figure 2.2: Market Entry Methods……………………………………………………………10 Figure 2.3: Conceptual Framework………………………………………………………….20 List of Tables Table 3.1: Relevant Situations for Different Research Strategies……………………...23 Table 4.1: Facts about AB Älvsbyhus……………………………………………………….28

CHAPTER 1 INTRODUCTION

1 Introduction In this chapter background, problem discussion and purpose will be presented. Furthermore, the research purpose and research questions will be discussed. Finally the demarcations of the research area will be presented.

1.1 Background Czinkota & Ronkainen (2004) state, that participation in the international marketplace has become a reality for large, small and medium sized companies. This participation can be very rewarding for both the companies and the employees. According to Lewis III & Richardson (2001), companies that export grow faster, are more productive, and have employees that earn more. However, it has to be kept in mind that most companies do not become international overnight. New activities in a new foreign environment moreover increase the company’s risk. This leads to that companies must plan and organize their activities, as well as adjust these to the needs and opportunities of international markets, if they aim to become internationally competitive with a long-term perspective. According to Farhang (2001) the way in which some companies turn from being purely domestic companies, in terms of marketing goods and services, into international companies, has been the subject of research during the last three decades. Researchers have been trying to come up with conceptual models that would explain why companies go international, how they do it and what kind of organizational forms they adapt to be able to manage the internationalization. In other ways, researchers have searched for the motives and the determinants, as well as looked into the strategies and the methods in which companies manage and conduct operations abroad. Until recently most of the major actors on the global market have been the large 50 to 100 years old companies. Going international has been enormously expensive not only in financial terms but also in terms of top management’s time and commitment. Due to the high costs, going international must generate added value for the company beyond extra sales. In other words, the company needs to gain a competitive advantage by going international. Therefore, unless the company gains by going international, it should probably stay at home. The task of managing international marketing is also complex, especially when it has to operate in several markets. The company has to adapt its marketing programs to the needs and preferences of customers that differ in forms of culture, purchasing power and tradition. (Ibid) According to De Búrca, Fletcher & Brown (2004), the changes in the international business environment has complicated the foreign market selection. These changes, involving the formation of regional trade groupings, the creation of strategic alliances between companies, and the exponential spread of information technology, are resulting in a breakdown of barriers between countries. A marketer needs to see the world as an entity rather than as a series of national markets. As a consequence of this, it has been more difficult to choose the most appropriate international market. As markets now can stretch across national boundaries, geographic segmentation may no longer be an appropriate basis for market selection. This might still be the fact for large transnational companies who have the financial means to enter several markets at the same time. However, for small and medium sized enterprises (further referred as SMEs, which are companies with 50 to 250 employees) with generally smaller means a venture into the international market is still unlikely.

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Decisions as to the form of market entry, for example exporting, joint ventures or franchising, logically follow the decision as to the most appropriate market to enter. However, market selection and entry mode are closely linked due to the attractiveness of markets is influenced by the strategic thrust of the corporation, competitive action in those markets and government regulation relating to the possible forms of foreign entry. Deciding on the most appropriate form of market entry involves understanding each of the various modes available and the conditions under which one mode might be more suitable than others. (Ibid) Root (1994) states that to managers in SMEs, planning entry strategies may appear to be something only large companies can afford to do; these managers identify such planning with elaborate research techniques that are applied by specialists to a massive body of quantitative data. However, this is a misconception of the entry plan process. The truly important is the idea of planning entry strategies. Once management accepts this idea, it will find ways to plan international market entry; how limited the company resources ever may be. Without an entry strategy for a product or target market, a company has only a simple “sales” approach to foreign markets. A large number of problems may face SMEs when turning international. What are the major obstacles for internationalization experienced by SMEs and do this influence their choice of international target markets and foreign entry modes, has not been sufficiently studied in the past.

1.2 Problem Discussion We believe that the internationalization of SMEs is open for research on many levels. First of all, why a company should export at all and what criteria should be fulfilled before a company enters a foreign market. We also think that research could be conducted on what markets SMEs should enter depending on several different factors, such as cultural differences, company tradition, product and competitors. In addition, research could be conducted on how Internet can be used for a company’s internationalization and how an effective use of this media can help the internationalization of the company. While the literature often separates the process of internationalization from the factors that determine international market selection and choice of foreign entry mode, we consider that the factors in play for many SMEs are of a nature that creates conditions, where the process of going international and the decisions on international market selection and choice of foreign market entry mode become inseparable. In short, we believe that SMEs’ decision for going international as well as their internationalization process and the moves made by many of them, are less formal and deterministic and more natural in the context of the company’s generic growth than is often anticipated by researchers. Having said this, a combination of external and internal factors may directly or indirectly influence SMEs internationalization activities. It is in view of the above discussion and research referred earlier, the purpose of our study can be identified as that stated below.

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1.3 Research Purpose The purpose of this research is to examine how the process of SMEs’ internationalization is intertwined with the set of external and internal factors that determine international market selection and choice of foreign entry mode. To satisfy the above purpose of our study the following research questions shall be addressed.

1.4 Research Questions RQ1: How can SMEs’ internationalization process be described? RQ2: How can the influence of external and internal factors on SMEs’ international market

selection be described? RQ3: How can the influence of external and internal factors on SMEs’ choice of foreign

entry modes be described?

1.5 Demarcations Since the existing theories discuss external and internal factors influence on companies’ international market selection and choice of foreign entry modes in general for both small and medium sized companies, our literature review will also address to both small and medium sized companies. However, in our case study the external and internal factors influence on a medium sized company’s international market selection and choice of foreign entry modes will only be studied. The company selected for our case study is a Swedish medium sized company operating in the woodhouse industry, which is in a transition stage of becoming a large international enterprise, when looking at the company’s turnover and their increasing number of employees. The reader should keep in mind that the selection international markets and the choice of foreign entry modes are influenced by several factors in the company’s environment. However, in this thesis the other aspects of the internationalization process, such as setting export goals and objectives, designing the marketing plan or control system for monitoring the export activities, will not be presented in detail.

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CHAPTER 2 LITERATURE REVIEW

2 Literature Review In this chapter a selection of the literature and existing research on SMEs’ internationalization is presented. The reader should take into consideration the fact that SMEs’ international market selection and SMEs’ choice of foreign entry modes are highly connected and are often hard to separate in the literature. At the end of this chapter, some of the theories reviewed will be used to develop a conceptual framework, which then will be used as a basis for the data collection.

2.1 Internationalization of SMEs Czinkota & Ronkainen (2004) state, that the internationalization process illustrates how a company progressively becomes a global actor on the international market. In order to gain better understanding about what needs to be done and to push the company forward in the process; a deeper insight in to the level of company’s internationalization is needed. Albaum, Duerr & Strandskov (2002) points out that theories about the internationalization identify several stages in the process and although each theory uses different classification scheme, the majority of the theories portray a common view of the gradual process that can be subdivided. According to Czinkota & Ronkainen the internationalization process is in most cases a gradual process. Normally, a company starts its operations and activities in the domestic market and then gradually expands further to other markets. These authors state that companies seldom are so called initiate exporters from the very start of their business establishment, even though in some rare cases it is possible to be “born global” and start the international activities from the set up of the company. However, Albaum, Duerr & Strandskov (2002) state that companies do not necessarily always internationalize in an orderly and sequential way. Some companies may stop at a particular stage without proceeding further, skip stages or even reverse the sequential process by starting their international activities at a later stage. Moreover it is not imperative that a company goes through stages in order to be internationalized and in many cases they can proceed through these stages in any way they want. Yet, even these authors agree that it has been empirically proved that the majority of companies often follow the gradual internationalization process. Hollensen (2003) in his turn states, that in recent years an increasing number of companies do not follow the traditional pattern of internationalization process. In contrast, these “born global” companies aim at international markets or even the global market right from the start of the company. This type of companies are often SMEs with fewer than 500 employees and annual sales under 100 million US dollars. The “born globals” are also usually small, technology-orientated companies that operate in the international markets from the very start of the establishment and have unique product and process innovations, as well as a visionary management. In the traditional gradual internationalization process the development follows several different stages. According to Kotabe & Czinkota (1998), in each of these stages the company’s capabilities, problems and needs may measurably vary. Most of the companies do not show any interest for foreign activities from the very start of the process. They are in this stage so called uninterested exporters. It may be possible that an unsolicited order from abroad is ignored within the company from the management’s side, if it is just a sole one-time order. However, if these unsolicited orders become more frequent and the international stimuli continue over time, the company may become a partially interested exporter in order to fulfill the received foreign orders with the management acceptance.

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In the next stage the company becomes more interested in international activities and begins to explore international markets in detail, as well as possibilities for further exports abroad. In this exploratory stage the company becomes an experimental exporter often to culturally close countries. Though, in this stage the management is not fully committed to international export activities. In this stage, the impact which the exporting activities have had within the company will be carefully evaluated. This evaluation can lead to withdrawal from the unsatisfying export activities or to further expansion of the successful export activities. The final stage of the internationalization process is export adaptation. In this stage the company becomes an experienced exporter that exports to a particular foreign market and adjusts its activities to changing exchange rates, tariffs and other important variables that influence the exports. The management here becomes interested in to explore the possibilities to export also in to some other countries that are psychologically farther away. The adaptation level is often reached when the export transactions comprise 15 percent of the sales volume. Czinkota & Ronkainen (2004) state that when a company decides to go international unusual things can happen concerning risks and profits. In order to gain international expertise from new activities abroad, there exists always some uncertainty of the new market environment within the company and its management, which causes the management’s view of risk exposure to grow. In domestic markets the companies have gradually learned how to act on a market and known the environment during a longer period of time, and as a result of all this managed to reduce the domestic risks. When companies are expanding internationally, they face increased risks by new and unfamiliar factors that do not always occur on well-known domestic markets. International investments often are in large extent costly and the profits may slip in the beginning of the process. Although, in a longer term the increasing knowledge and experience about the international market, as well as the benefits that follow when serving diversified markets will reduce the companies augmented risks abroad, as well as increase the profits margins of the company. According to Calof & Viviers (1995), the more experienced the company becomes on the international markets, the more profitable and the less risky the business abroad turns out to be over time. However, managers of the company may face an unusual and sometimes even unacceptable short-term dilemma within the company when going international: increasing risk on a foreign market often accompanies declining profitability. When taking into consideration these factors, the managers in some cases are more likely to either not to go international at all or to discontinue their international activities according to Czinkota (2001). When looking at both the internationalization process and the behavior of the profit and risk at the same time, Czinkota & Ronkainen (2004) state that the management of the company can gain a better understanding for that high investment costs abroad and negative developments on the foreign markets in the beginning often are only short term reactions. In order to be successful, every company has to take risks and know that to get there may take some time on the international markets. A successful performance abroad can be attained by international effectiveness, efficiency and competitive strength. Effectiveness can be measured by the largeness of the international market share and augmented sales. Efficiency is characterized by increased profit margins. Competitive strength in its turn refers to the benefits gained by international activities compared with the other competitive companies within the same industry. The competitive strength is likely to grow at the same time as the international market experience of the company grows. Every company which is considering the possibility to go international has to wage the overall benefits of international activities against the high investment costs and short-term negative developments of

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going abroad. In order to be successful with long-term perspective and over come the short-term setbacks even the time and performance dimensions associated with going abroad have to be taken in to consideration.

2.2 International Market Selection of SMEs According to Johansson & Vahlne (1977) for SMEs the international market selection is often a reaction to a stimulus provided by a change agent. This agent can appear in the form of an unsolicited order. Government agencies, chambers of commerce and other change agents may also bring foreign opportunities to the company’s attention. Such cases constitute an externally driven decision in which the exporter simply responds to an opportunity in a given market. In other cases the international market selection of SMEs is based on the following criteria.

• Low psychic distance: Low uncertainty about foreign markets and low perceived difficulty of acquiring information about the market.

• Low cultural distance: Low perceived differences between domestic and destination

cultures.

• Low geographic distance: Countries nearby with cultural similarities. Lindholm & Sylvest (1997) state that using any one of these criteria often result in targeting the same foreign market. The choice is often limited to the SMEs’ immediate neighbors, due to the fact that low geographic distance often is similar to low cultural distance and low psychic distance. By limiting their consideration at a nearby country the SMEs effectively narrow their international market selection choice to a question: to utilize a neighboring country’s market or not. Research has shown that young SMEs (established in 1989 or later) enter new foreign markets much earlier than older SMEs (established before 1960). The reason that young SMEs are entering foreign markets much faster is may be their status as sub suppliers to larger companies, where they are pulled out in the international market by their large customers and the larger company’s international network. Studies from the Uppsala school on the internationalization process of the company have suggested several potential determinants of a company’s choice of foreign markets. Johansson & Vahlne (1977) classify the determinants in to two main groups:

• External factors: Environmental factors. • Internal factors: Company specific factors.

2.2.1 External factors influencing international market selection According to Hollensen (2001) the external factors influencing SMEs’ international market selection can be divided in Economic, Socio-cultural, as well Political and legal influences. Economic influences The economic factors on a potential target market include per capita income, infrastructure, stage of economic development, and exchange rate stability. A distribution and marketing system may not be justified to set up in a small market where the potential is low, due to high cost and potential

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small revenue. Depending on what type of product the SMEs are selling may a market with low per capita income not be suitable for them. The host country’s infrastructure is a factor that must be taken into serious consideration. This includes the transportation structures (roads, railways, airports), communication systems (telephone, Internet, television, the press, radio), and energy supply (electricity, gas nuclear). A poor infrastructure may limit the ability to manufacture, advertise and distribute goods. Problems with the ability to provide an adequate service back-up may also be a factor in markets with poor infrastructure. A country that has an unstable exchange rate or one that is difficult to convert to hard currencies such as the dollar or euro may be considered too risky to enter. Socio-cultural influences Social and cultural factors and their distance between countries are called psychic distance. These barriers are created by cultural differences between the home country and the host country, and the problems of communication resulting from differences in social perspectives, attitudes and language. Markets with low psychic distance are often more attractive for a company when conducting a for foreign market entry. Less time and effort is required to develop successful business relationships. Because of these factors companies often make their first foreign market entry in a market that is geographically close, like a neighbor country, and then gaining experience in these countries before expanding operations into more distant markets. Political and legal influences General attitudes of foreign governments towards imports and foreign direct investment, political stability and trade barriers must be taken into consideration when a company is examine potential target markets for their foreign market entry. Positive attitudes from the government in the host country can be reflected in the willingness to grant subsidies to overseas companies and their imports. Negative attitudes towards foreign companies by the host country’s government, may discourage imports and investment because of the threat of protectionism and expropriation of assets. Countries with a history of political instability should be avoided because of uncertainty regarding their future. Market attractiveness Jobber (2004) in his turn lifts up the external importance of Market attractiveness for the selection of international markets. This consists of several factors, such as Market size and growth rate, Competition, Costs of serving the market, Profit and market potential, as well as Market access. Market size and growth rate: Large and growing markets can often be seen as highly attractive for export target market selection. It can be stated that market growth is regularly considered as a more important factor influencing the choice of export target market than market size. The expected future demand is therefore seen more significant than the existing demand especially for the foreign direct investments. Competition: Markets where strong and well-established competitors dominate may diminish the potential attractiveness of an export target market. Moreover, the explosive nature of competition may also reduce the attractiveness of a prospective market. According to Jobber and Whitelock (1994), markets where various competitors enter and leave the market and where the market concentration is high are often highly unattractive. Costs of serving the market: Distribution and control are the two major costs of serving foreign markets. The costs rise when the geographic distance increases between the domestic and export markets, which leads to that the major export countries often are the nearby neighbor countries. The

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costs vary also dependent on the choice of entry mode. For example foreign direct investment as an entry mode is initially more expensive than using distributors. The entry can become more risky and less attractive also by the factor that the potential market is not suitable for low-cost entry option. In the same way long internal distribution channels can augment the costs, since the middlemen may demand high provisions. If using foreign direct investment, the labor costs and the supply of skilled employees have to be taken in to consideration when estimating the future costs. In some countries even the high marketing expenditures can raise the costs. Profit and market potential: The industry structure can also make some potential markets less attractive, if these markets have a poor profit potential. For instance, if the customers have a high bargaining power, they may be able to push the prices down and this way lowers the potential profit margins on the market. Market access: There may also existent informal ties between the existing suppliers and distributors, which can make it difficult for the new companies to penetrate on some foreign markets. Therefore, it can be almost impossible for the new entrants to over win these tight entry barriers, if they do not have the resources and competences to build up a wholly new distribution chain within the new potential market. In the same way, deep long-term relationships and ties between the existing suppliers and customers can create hard-overcoming entry barriers. It should as well be taken in to considerations that in some countries the national suppliers have possibilities to enjoy of preferential treatments, for example from the government’s side, and this can give them competitive advantages that can be difficult to catch up with.

2.2.2 Internal factors influencing international market selection Company capability profile Jobber (2004) takes also up the internal importance of Company capability profile for SMEs’ international market selection. This involves factors such as Skills, Resources, Product adaptation and Competitive advantage. Skills: Concerning the skills, the company has to ask themselves if they have the necessary skills to market abroad. In the case of lack of this vital capability, the company has to ensure that they have the skills needed within their sales agents or distributors abroad, in order to be able to compensate for the possible shortfalls in the potential market. The company has to also ask themselves, if they have the indispensable skills to understand the requirements of the potential export target market. Resources: The market servicing cost may vary depending on different countries. The company has to carefully calculate the potential costs for a new foreign market entry and see over if they have the necessary financial resources to compete within this market. It is also important to calculate in the human resources needed, since some foreign markets may demand for domestically supplied personnel, at least in the beginning of the establishment. Product adaptation: In some markets local preferences and regulations may require product adaptation. The company should reflect over if they have the motivation, resources, skills and competences to redesign their product in order to fit the new market requirements. Competitive advantage: The major consideration should be laid on the question: Has the company good prospects and possibilities to gain a competitive advantage on the new foreign market? The

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potential export target market has to be studied carefully in order to calculate the actual possibilities for the company to create and sustain a competitive advantage on the market. Company’s potential Dahringer & Mühlbacher (1991) state, that in order to take advantage of the environmental opportunities and to avoid the potential threats from the environment, the company has to analyze carefully its strengths and weaknesses. The company’s skills, resources and the readiness of the personnel must be examined and adjusted to the international environment. Company’s management ability, flexibility and commitment: It is highly important that the company’s management is able and willing to go international, as well as to manage the internationalization process of the company. The management must be committed to achieving and maintaining the international activities, as well as be flexible in their decision-making processes to be capable to adapt to the changing conditions abroad. Planning and control: Companies have to be managed by efficient and effective leadership, organization, communication, planning and control in order to be successful internationally. Capacity, cost structure and productivity: The company should always carefully analyze its capacity, cost structure, flexibility and productivity before going international. For the long-term substantial foreign investments it is vital that that the company management is committed to back up the strategic long-term decisions. Personnel’s motivations and qualifications: Motivations and qualifications of the personnel are important and needs to be measured before going abroad. This way the company can analyze what actions has to be taken, in order to develop further the actual human resources of the company. To be able to evaluate all the factors influencing a company’s potential success abroad, the company has to gather a lot of information put the different factors together and develop a general but still highly detailed picture of the company’s potential.

2.3 SMEs’ Choice of Foreign Entry Modes According to Root (1994), entry strategy for international markets is a comprehensive plan. It sets forth the objectives, goals, resources, and policies that will guide a company’s international business operations over a future period long enough to achieve sustainable growth in world markets. For most companies the entry strategy time horizon is from three to five years, which is the typical time period for achieving enduring market performance. Many managers see the company’s entry strategy as if it were a single plan; it is actually a composite of several individual product/market plans. Managers need to plan the entry strategy for each product in each foreign market. The product/market entry strategies require decisions, as seen in Figure 2.1, on (1) the choice of a target product/market, (2) the objectives and goals in the target market, (3) the choice of an entry mode to penetrate the target market country, (4) the marketing plan to penetrate the target market, and (5) the control system to monitor performance in the target market. The elements in Figure 2.1 are shown as a logical sequence of activities and decisions, but the design of a market entry strategy is actually interactive, with many feedback loops. Evaluation of alternative entry modes, for instance, may force a company to revise its target markets objectives or goals, and may even initiate the search for a new target market. (Ibid)

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(1) Assessing products and

foreign markets: choosing the

target product/market.

(2) Setting objectives and

goals.

(3) Choosing the entry mode:

export, contractual

arrangements or investment.

(4) Designing the marketing

plan: price, promotion,

distribution, etc.

Figure 2.1 Elements of the Entry Strategy Source: Root (1994), Entry strategies for International markets.

2.3.1 Types of foreign entry modes Brassington & Pettitt (2000) point out that the classification of market entry modes is not easy, but one possible classification can be seen in Figure 2.2. There are many relevant criteria to take into consideration. For example such as the level of investment involved and whether it is indirect or direct and whether the goods or services are produced at home or abroad. Other things to consider are if the exporter should deal directly with the buyer, as well as if the transaction involves exporting goods and services, knowledge and expertise or investment.

Figure 2.2 Market Entry Methods Source: Brassington & Pettit (2000), Principle of Marketing.

Target market

(5) Control system: monitoring operations/revising entry strategy

Entry operations

Producer

Intermediary, e.g. merchant or agent

Intermediary, e.g. merchant or agent

Customer

Transfer of expertise or ideas

- Licensing - Franchising - Contracting

Direct investment - Sales subsidiary - Manufacturing

subsidiary - Joint ventures

Strategic alliances

Direct export

Indirect export

Indirect export

International boundary

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Direct export: According to Brassington and Pettitt (2000) when an organization produces the product at home and then sells it to the foreign customer without the use of an intermediary direct exporting is conducted. The seller has to take responsibility for attracting customers, negotiations, processing of orders and arranging shipment and after sales service. The costs can be high, especially for a small company, but the seller maintains complete control by selling through its own export department and sales force. The organization either run the selling from its home base with sales representatives making trips abroad, or it can be run from a sales branch office located in a foreign country. As well as providing control over the selling process, direct exporting also has the advantage of building a clear presence on the market. It creates stronger buyer-seller relationships, which might be an important factor for buyers looking for committed suppliers. Indirect export: When an organization produces goods at home and then sells them through an intermediary, indirect exporting takes place. The intermediary can act on behalf of the seller, on behalf of the buyer or totally independently. An export agent acts on the behalf of the seller, undertaking to sell on a commission basis into a particular market. An import agent acts on the behalf on the foreign buyers and earn commission from them. An export merchant buys goods from a number of manufacturers and resells them at a profit. When using any of these market channels the producing company benefits from the intermediates knowledge and contacts on the targeted market. (Ibid) Licensing: When an organization uses licensing as a mode of entry they grant a licensee the right to manufacture a product, use patents, use particular processes or exploit trademarks in a specified market in return for a royalty payment. Licensing helps to overcome high import tariffs, but also avoids the costs and commitment of direct investment. The licensor does, however, need to be sure that the licensee can handle the necessary production and marketing. Licensing is often viewed favorably by foreign government, as it brings in new technology and helps in the training and skill of the local workforce. Licensing involves several risks, mainly, that the licensee degrades or abuses the licensor’s name or intellectual property. The licensee may also at the end of the contract period decide to start an own business and become a possible competitor instead. (Ibid) Franchising: Armstrong & Kotler (2005) point out, that a franchise organization is the most common type of contractual relationship. A channel member called a franchisor links several stages in the production and distribution process. Almost every kind of business has been franchised; from motels and fast-food restaurants to dental centers and funeral homes. There are three types of franchises. The first type is the manufacturer-sponsored retailer franchise system, for example, the car industry, and its independent franchised dealers. The second type is the manufacturer-sponsored wholesaler franchise system, for example, Coca-Cola licenses bottlers (wholesalers) in various markets who can buy Coca-Cola syrup concentrate and then bottle and sell the finished product to retailers in local markets. The third type is the service-firm-sponsored retailer franchise system, for example, fast-food services like McDonalds and motel business like Holiday Inn. Brassington & Pettit (2000) ads that it is the franchisee’s responsibility to use local knowledge and contacts to develop the network in a manner that is satisfactory to the franchisor. The franchisee earns percentage of the fees or royalties paid by individual franchisees. Contracting: A manufacturing contract means that the manufacturer contracts a company in the foreign market to produce or assemble the product on their behalf, according to Brassington & Pettitt (2000). This is both time and cost saving in comparison to physically transport the finished product abroad. Like licensing, contracting also avoids the problems of currency fluctuations and import barriers, but potentially creates a new competitor. The company awarded the contract has responsibility for operational matters such as human resource management, financial control,

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marketing and service delivery. The contractual company does not normally get involved in strategic or policy issues, nor does it have any share in the ownership of the business. Sales subsidiaries: A partner that does not play any part in producing the product, but does take responsibility for marketing, selling of distribution is considered as a sales subsidiary. The partner can be either a specially created partner or they can be developed from an existing acquired company. The advantage of selling through sales subsidiaries rather than through the domestic sales force lays in the dedicated local knowledge and expertise that builds up the closeness to the customer. In event of failure in the market, any losses can be confined to the subsidiary rather than having an extensive impact on the parent company. (Ibid) Manufacturing subsidiaries: The establishment of manufacturing subsidiaries involves assembling or manufacturing the product in foreign markets. Like sales subsidiaries can manufacturing subsidiaries be set up from scratch or be developed from an acquisition. The subsidiary becomes a part of the manufacturing base of the host country, and contributes to the local economy. Since operations like this create employment and wealth, governments in foreign countries are often keen to attract these kinds of investments. (Ibid) Joint ventures: When two organizations come together and set up a jointly owned third company a joint venture is created. Both organizations share the ownership, control and profits, as well as the risks. There are several reasons for making this decision. The organizations on their own might not have the necessary resources to develop or make an impact on a foreign market. This motivation could be especially important if they are up against larger and more powerful competitors. A joint venture can be very successful, as long as both partners plan the venture carefully and are clear about their objectives. (Ibid) Strategic alliances: Wild, Wild & Han (2003) point out that a strategic alliance arise when two or more organizations cooperate, but do not form a separate company, to achieve the strategic goals of each. Strategic alliances offer several important advantages to organizations. First, organizations use strategic alliances to share the cost of an international investment project. Second, organizations use strategic alliances to tap into competitors’ specific strengths. Finally, organizations turn to strategic alliances for many of the same reasons that they turn to joint ventures. Some use the alliance to gain access to a partner’s distribution channels in the target market. Others use them to reduce the same kind of risks from which joint ventures provide protection.

2.3.2 External factors influencing choice of foreign entry modes Socio-cultural distance: According to Hollensen (2001) countries that have similar business and industry practices, language and cultural characteristics, as well as comparable educational levels are socio-culturally close to each other. Great differences within these factors may influence greatly the company’s decision of mode of entry. The greater the differences are, the more likely it is that the company stays away from direct investments and favors joint ventures instead, for the reason that the latter enhances the company flexibility to easily withdraw from the foreign market. The companies favor entry modes that require relatively low resource commitments and high flexibility when the socio-cultural distance is high. Country risk and demand uncertainty: Foreign markets are often considered as more risky than the domestic ones. The market selected does not just create this risk by itself, but also the type of involvement there. Risks concerning investments, inventories, receivables and exchange rates have

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to be taken into consideration. A careful market analysis and method of entry analysis have to be done. However, not only economic but also political risks have to be taken in to consideration. When the country risk is high companies tend to restrict their exposure on the foreign market and they will favor entry modes with relatively low resource commitment. (Ibid) Market size and growth: The key factors in determining the mode of entry are market size and the rate of market growth. The larger the market and the higher the market growth rate, the more likely companies commit resources for this particular market and consider establishing wholly owned sales subsidiaries or majority owned joint ventures. Retaining control over operations abroad provide companies direct contact with the foreign market and the customer, as well as gives companies better possibilities to plan and direct market development more effectively. Small markets, on the other hand, can be best served by exporting or licensing, if they are geographically isolated and hard to serve directly from the neighboring country. This approach gives the company possibility to enter the market with lower resource commitment and frees resources for more lucrative potential markets. (Ibid) Direct and indirect trade barriers: Tariffs and quotas on the import products favor the establishment of local production subsidiaries or assembly operations. Product and trade regulations and standards, as well as local preferences also influence the choice of entry mode. For example preferences to by “national” and “home made” products can encourage companies to consider joint ventures or other contractual arrangements with the local companies. These local partners can provide information about local product and trade regulations and standards, negotiate sales, establish local contacts and distribution channels, as well as diffuse the foreign image. When product regulations and standards necessitate significant product adaptation and modification, companies often establish local production, assembly or finishing facilities. (Ibid) Competitive environment: If the intensity of the competition is high on a foreign market, the market becomes less profitable and do not encourage heavy resource commitments. Companies tend to avoid internationalization on this type of foreign markets. Companies favor entry modes with low resource commitments when the competitive environment is intensive. (Ibid) Small number of relevant export intermediaries available: When there is only a small number of relevant export intermediaries available on the foreign market, companies may decide to establish local production, assembly or finishing facilities in order to reduce the opportunistic behavior of the intermediaries. The small number of export intermediaries can manipulate information about the market size or competitor’s prices on the market in order to obtain lower prices from the producers. However, this kind of behavior can be avoided by paying a commission of the realized turnover for the export intermediary. (Ibid) Laws and regulations: De Búrca, Brown & Fletcher (2004) point out that in some international markets laws and regulations within the target country may prevent or restrict imports into the target market or only permit local manufacturing in less attractive geographical locations. Furthermore the form of entry mode may also be regulated or prescribed by the government of the target country. Geographical distance: When the geographical distance is great, transportation costs may become too high and make it impossible to compete against the local goods in the target market, according to Root (1994). In consequence high transportation costs favor other modes of entry, such as assembly operation, than direct and indirect exports which in this case become ineffective and expensive.

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2.3.3 Internal factors influencing choice of foreign entry modes Speed: Brassington and Pettitt (2000) point out that depending on choice of entry mode, the time of reaching the target market may vary. Some market entry modes might take months or years to implement, while others can be put into action in less time. Costs: The different types of entry modes require different investments. Some times it might be that the usage of one entry mode can justify higher costs than the usage of another due to higher benefits in the long run. (Ibid) Payback: Payback time for the company’s investment can be crucial when an organization enters a foreign market. If this is the case, acquiring an established manufacturer might be more appealing than building a new factory, if it means that revenues can be generated within one year rather than five years. (Ibid) Long-term profit objectives: The organization must know what it wants to achieve in the future and how it best can exploit the opportunities available in the foreign market. The choice of entry mode is just the first stage in a longer-term strategic plan for the international markets. (Ibid) Company size: According to Hollensen (2001) size of a company indicates the company’s resource availability. The larger the company is, the better resources it has for the foreign involvement. However, SMEs often enter foreign markets by export modes for the reason that they do not have the necessary resources for the indispensable control of the heavy investments abroad. Although, when the company grows and more resources become available, the company may start to invest more on foreign affairs and increase the level of company’s resource commitment abroad. International experience: Previous international experience of the company and managers influence highly the choice of entry mode. This kind of experience can be obtained either by operating in a particular country or in the general international environment. Previous international experience reduces the costs and uncertainty to serve a new foreign market, as well as it increases the company’s likelihood to commit additional resources abroad. (Ibid) Product complexity and differentiation: When deciding where the production should be located, the physical characteristics of a product or service are highly important to take in to consideration. For example products that have a high value or weight are generally entered foreign markets by direct exporting, when there are considerable economies of scale or management control issues to take in to consideration. On the other hand the production may be located to the foreign market in order to save in shipment costs, especially on distant markets. The characteristics, use and selling of a product may vary extensively from one product to another, which influence vastly the choice of entry mode. Some complex technical products may require before and after sales services, which sometimes can create problems if the intermediaries are not able or competent enough to handle that. This may encourage the company to use own local production, assembly or finishing facilities. By differentiating their products companies can gain higher profits, build entry barriers against new entrants, serve their customers better and thereby strengthen their competitive position. In order to protect their competitive advantages and product differentiation companies often use local production, assembly or finishing facilities. This way the distinguished details about the differentiated product in physical variation, brand name, advertising or before/after sales services

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won’t be revealed to intermediaries and will be protected in order to maintain the competitive advantage on the foreign market. (Ibid) Risks: If the company does not want to take too many risks when entering a new foreign market, it will prefer using direct and indirect export modes or an intermediate mode like licensing, for the reason that these entry modes require less financial and managerial resource commitment. The export modes of entry provide low control, low risks and high flexibility for the company. Joint ventures and other contractual intermediaries in their turn provide a way of sharing risks, financial exposure and costs of establishment for local distribution channels and hiring local personnel. Although, it should be taken in to consideration that negotiating and managing joint ventures and other intermediaries still require considerable management time and effort. These intermediate or contractual modes of entry provide the company shared control and risk, as well as split ownership. The investment modes of entry, like local production, assembly or finishing facilities, are the most expensive entry modes to use and they provide high control, high risks and low flexibility for the company. (Ibid) Control: When deciding about the entry mode, the degree of control that the company requires over international operations has to be taken in to consideration. The level of control is often highly linked to the level of resource commitment abroad. Modes of entry with minimal resource commitment, like indirect exporting, provide little or no control at all over the market conditions abroad. When using licensing or contractual manufacturing, the company needs to use more control in order to make sure that the quality standards are being met. Joint ventures in its turn can also limit the degree of control and can even create major conflict when the goals and objectives of the partners differ. The highest level of control is provided by the wholly owned subsidiaries, but they also require considerable amounts of financial and managerial resource commitment. (Ibid) Flexibility: Furthermore, the flexibility associated with each entry mode has to be weighted up. The export entry modes are the most flexible ones of the entry modes and a company using these can quickly and easily adapt to the changing market conditions or to flexibly make a withdrawal from the foreign market. Intermediate or contractual entry modes limit somewhat the company’s ability to adapt or change their strategies when the foreign market conditions are changing. The least flexible and the most costly of all entry modes are the entry modes with high resource commitments, like the wholly owned subsidiaries. (Ibid) Managerial reasons: De Búrca, Brown & Fletcher (2004) state that the previous experiences of international markets of the company’s management influence highly the choice of foreign entry mode. Country of birth, years spent abroad and frequency of international business trips affect positively on managements willingness to go international, as well as the level of commitment abroad. In addition the choice of foreign entry mode is influenced by management’s planning orientation, knowledge of international markets, business practices, transactions and different cultures, as well as of their ability and willingness to adapt to international strategic approaches, marketing orientation and long-term objectives abroad. These factors influence management objectives, international resource commitment and desired level of control abroad, which in their turn affect the choice of foreign entry mode. Relationships: According to Fredrik & Webster (1992) the different types of relationships that a company can have, among others with its suppliers and customers, are highly connected with the selection of a particular foreign entry mode. Usually, the more complex the type of entry mode is the deeper and closer the relationships, commitment, trust and adaptation will be. There exists a current trend to develop deeper and better relationships with the suppliers and customers, which creates networks between different companies. Better relationships promote improved coordination,

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cooperation and work for the companies involved. This creates for example opportunities to share resources and services.

2.4 Conceptual Framework In this part, the aim is to develop a conceptual framework based on the theories and references that were reviewed earlier on concerning internationalization of SMEs, then going more in detail into international market selection of SMEs and there especially looking at the external and internal factors influencing the choice of foreign target market. Finally, this part will be finished by the theory and references referring to SMEs’ choice of foreign entry modes, especially looking at the different types of foreign entry modes and the factors influencing the choice of specific entry mode.

2.4.1 Internationalization of SMEs According to Czinkota & Ronkainen (2004), internationalization process is a gradual process and there are very few companies that initiate exporting from the very start, even though in some rare cases it is possible to be “born global”. However, Albaum, Duerr & Strandskov (2002), state that companies do not necessarily always internationalize in an orderly and sequential way. Some companies may stop at a particular stage without proceeding further, skip stages or even reverse the sequential process by starting their international activities at a later stage. Hollensen (2003) in his turn points out, that in recent years an increasing number of companies can be identified that do not follow the traditional pattern of internationalization process. In contrast, these “born global” companies aim at international markets or the global market right from the start of the company. According to Kotabe & Czinkota (1998) in the traditional internationalization process the company goes through four different stages: Uninterested exporter → Partially interested exporter → Experimental exporter → Experienced exporter. According to Calof & Viviers (1995), the more experienced the company becomes on the international markets, the more profitable and less risky the business abroad turns out to be. Czinkota (2001) in his turn states that increasing risks on a foreign market habitually accompanies declining profitability, at least at the very beginning of the establishment of international activities. Yet, this still is often only a short-term reaction. Czinkota & Ronkainen (2004) point out that a successful performance abroad can be attained by international effectiveness, efficiency and competitive strength. However, every company has to wage overall benefits of going international against the high investment costs and short-term setbacks; in addition the time and performance dimensions have to be taken in to consideration when going abroad.

2.4.2 International market selection of SMEs According to Johansson & Vahlne (1977), the decision to select international markets is based on an external factor’s influence and the exporter simply responds to an opportunity a given market. However, in most of the cases the international market selection of SMEs is based on following three criteria:

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• Low psychic distance • Low cultural distance • Low geographic distance

Lindholm & Sylvest (1997), state that using any of these criteria regularly results the selection of the same international target market. Due to the fact that the low geographic distance is similar to the low cultural and psychic distance, the neighbor countries are often selected as the foremost foreign target markets. Research has also shown that young SMEs enter foreign markets much earlier than the old SMEs. According to Johansson & Vahlne (1977), there are two main determinants that influence the selection of foreign target markets:

• External factors • Internal factors

External factors influencing international market selection of SMEs According to Hollensen (2001), several external factors influence the selection of a foreign target market:

• Economic influences: Per capita income, Infrastructure, Stage of economic development and Exchange rate stability.

• Socio-cultural influences: Social and cultural differences, Psychic distance, Communication, Social perspectives, Attitudes and Language.

• Political and legal influences: Political stability, Trade barriers, General attitudes towards imports and direct foreign investment.

Furthermore, according to Jobber (2004) the attractiveness of a particular target market influences the selection of an international market:

• Market attractiveness: Market size and growth rate, Competition, Cost of serving the market, Profit and market potential, as well as Market access.

Internal factors influencing international market selection of SMEs According to Jobber (2004), internal factors influencing the international market selection of SMEs are connected with company capability profile.

• Company capability profile: Skills, Resources, Product adaptation and Competitive advantage.

Dahringer & Mühlbacher (1991), state that company’s potential should be examined and analyzed in detail when selecting foreign target markets. In order to take advantage of the environmental opportunities and to avoid the potential threats from the environment, the company should analyze its strengths and weaknesses.

• Company’s potential: Company’s management ability, flexibility and commitment, Planning and control, Capacity, cost structure and productivity, as well as Personnel’s motivations and qualifications.

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2.4.3 SMEs’ choice of foreign entry modes According to Root (1994), international entry strategy is a comprehensive plan and it sets forth objectives, goals, resources and policies that will guide the international business activities. The selection of an entry mode involves following decisions:

1. Choice of a target/product market 2. Objectives and goals in the target market 3. Choice of an entry mode to penetrate the target market country 4. Marketing plan to penetrate the target market 5. Control system to monitor performance in the target market

Types of entry modes The classification of foreign market entry modes is not easy and there are many relevant criteria to take in to consideration. Brassington & Pettitt (2000) present several different types of foreign entry mode:

• Direct export • Indirect export • Licensing • Franchising • Contracting • Sales subsidiaries • Manufacturing subsidiaries • Joint ventures • Strategic alliances

External factors influencing SMEs’ choice of foreign entry modes According to Hollensen (2001) there following external factors influencing company’s choice of foreign entry mode:

• Socio-cultural distance • Country risk and demand uncertainty • Market size and growth • Direct and indirect trade barriers • Competitive environment • Small number of relevant intermediaries available

De Búrca, Brown & Fletcher (2004) point out the importance of the following additional factor for the choice of foreign entry mode:

• Laws and regulations Root (1994) also takes up an additional factor that influences the choice of foreign entry modes:

• Geographical distance

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Internal factors influencing SMEs’ choice of foreign entry modes According to Brassington & Pettitt (2000), when the company has decided which markets to enter, it must then decide how to enter them. A number of factors influence the choice of foreign market entry mode:

• Speed • Costs • Payback • Long-term objectives

Furthermore according to Hollensen (2001) there are some additional factors influencing company’s choice of foreign entry modes:

• Company size • International experience • Product complexity and differentiation • Risks • Control • Flexibility

De Búrca, Brown & Fletcher (2004) take up the importance of company management influence for the choice of a specific foreign entry mode:

• Managerial Reasons Fredrik & Webster (1992) point out also the importance of the following factor for the choice of foreign entry modes:

• Relationships In order to further display the main factors influencing SMEs’ internationalization, international market selection and choice of foreign entry modes, we have summarized the factors from our conceptual framework in to Figure 2.3.

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Figure 2.3 Conceptual Framework

SMEs Internationalization

- Stage model

- Initiate exporters

- “Born globals”

Source: Authors’ construction (2005)

Factors Influencing International Market Selection

Factors Influencing Choice of Foreign Entry Modes

Internal factors

Company Capability Profile:

- Skills -Resources

-Product adaptation

- Competitive advantage

Company’s

Potential - Management

ability/flexibility/ commitment

- Planning/control - Capacity/cost

structure/ productivity - Personnel’s motivations/ qualifications

External factors Internal Factors External Factors Economic Factors: - Speed - Socio-cultural

distance - Per capita income

- Costs -Payback - Country risk/

demand uncertainty

- Infrastructure - Long-term Objectives - Stage of

economic development

- Company’s size - Market size and growth - International

experience - Exchange rate stability

- Direct/indirect trade barriers - Product

- Risks - Competitive environment - Control Social and

Cultural Factors: - Flexibility - Small number of relevant export intermediaries

available

- Socio-cultural differences

- Managerial Reasons

- Relationships - Psychic distance - Communication - Laws and

regulations - Geographical

distance

-Social perspective - Attitudes -Language

Political and

Legal Factors: - Political stability

- Trade barriers - General attitudes towards imports/

direct foreign investment

Attractiveness of

the Particular Export Target

Market: - Market size and

growth rate - Competition

- Cost of serving the market - Profit and

market potential - Market access

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CHAPTER 3 METHODOLOGY

3 Methodology In this part the methodology used for conducting this research will be presented. First the research purpose will be discussed, followed by what kind of research approach is used. After this the research strategy and data collection method is being discussed, as well as sample selection and analysis of data. Finally, the quality standards will be discussed.

3.1 Purpose of the Research According to Eriksson & Wiedersheim-Paul (2001) there are three basic purposes for scientific research: explore, describe and explain. Winter (1992) in his turn states, that when modest amounts have been written about a problem, the exploratory research purpose is used. The starting point is to find out which aspects that will fit into the research problem area, the most important and interesting aspects and the existing connections between different parts of the problem. The result is composed of a conclusion of aspects of the problem, which are considered important to work with further. The descriptive research purpose is used when a problem is well structured and there is no intention to examine the casual relationships. The researcher wants to know which aspects of a problem are relevant and wants to describe these aspects more thoroughly. The researcher gets an overview of the problem from other sources and focuses on the research around these important aspects. The researcher uses methods that often result in relatively exact and detailed facts. The conclusion of the study is derived from a conclusive description of the examined aspects or variables. (Ibid) When making assumptions on what kind of correlation exists between different variables, the explanatory research purpose is used. This kind of study aims to prove or disapprove that a relation takes place or is of a certain character, as well as it aims to find correlation between causes, by using data collection methods that give exact hard data. The result of the study confirms whether the hypothesis can be disapproved or not. (Ibid) The purpose of this thesis is to gain an understanding of how SMEs select and enter foreign markets. In this field of research there is a relatively lot of theory available. In order to develop an understanding of how both the internal and external factors influence SMEs’ choice of international market and foreign entry modes this thesis will be descriptive.

3.2 Research Approach According to Davidson & Patel (2003), the research approach can be quantitative or qualitative. By choosing one of these approaches the researcher will know how to treat and analyze the gathered information. Quantitative research is based on numerical data, which then are analyzed and presented in figures with statistics. For the reason that the quantitative research often is more structured than the qualitative one, the planning of the quantitative research is more standardized. A positive aspect of the quantitative approach is that it is rather easy to generalize from the gathered information. However, according to Holme & Solvang (1997) it must be kept in mind that the gathered information should always be relevant for the problem definition.

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Holme & Solvang (1997) state, that qualitative research approach is less formal and based on unsystematic and unstructured observations. This can be for example in-depth interviews or an interview guide with open answers. According to Davidson & Patel (2003), qualitative verbal analysis is often used in order to gain better understanding. The purpose of this approach is to understand and analyze the situation as a whole. Holme & Solvang (1997) state moreover that the qualitative research must be kept flexible and the possibilities to change the planning open during the whole research process. The qualitative approach has been used in this thesis, since deeper and broader understanding is aimed to be reached within the research area. From our point of view it is necessary to let the interview respondent freely describe the entire research area from his point of view. The reader should however keep in mind that the empirical data in this thesis is highly based on the company’s and the respondent’s attitudes and perceptions, and therefore the empirical data will be easier to demonstrate in words instead of statistics. Holme & Solvang (1997) also point out that there are two different ways to do conclusions in a research: induction and deduction. When using the inductive method, the researcher gathers information and empirical data in order to make conclusions and to formulate an own theory from them. It is important to note that there exist no previous theories to base the problem on. The deductive method is more structured and formalized and therefore easier to analyze and explain. The deductive conclusions are made down from various common principles and existing theories. The hypothesis is derived from an existing theory and the tested empirically in the actual case, according to Davidson & Patel (2003). However, it should be noted that a theory is never complete and it can be changed by testing new hypothesis and by asking “why” the theory is as it is. Through empirical research the reliability and validity of the theory can be reinforced or weakened. This thesis follows a deductive approach. The existing theories within the research area have been studied and the research problem and research questions have been drawn from these commonly recognized theories.

3.3 Research Strategy According to Yin (2003), there are five research strategies to choose among when conducting social science. These are experiment, surveys, analysis of archival information, histories and case studies. Each strategy has advantages and disadvantages and can be used for the same research purpose. The difference between the strategies is the different way of collecting and analyzing the empirical evidence. What distinguishes the strategies depends on three conditions: the type of research question, the level of control an investigator has over actual behavioral events and the focus on contemporary as opposed to historical phenomena. Relevant situations for different research strategies are illustrated in Table 3.1. However, the boundaries between the strategies or the occasions when each strategy is to be used are clear and sharp. Even though each strategy has its own distinctive characteristics there are large overlaps among them. (Ibid)

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Table 3.1 Relevant Situations for Different Research Strategies

Source: Yin (2003), Case study research: design and methods.

Form of research question

Requires control over behavioural event?

Focuses on contemporary events

Strategy

Experiment How, why Yes Yes

Who, what, where, how many, how much

Yes Survey No

Archival analysis

Who, what, where, how many, how much

No Yes/No

History How, why No No

Case study How, why No Yes

Davidson & Patel (2003) point out that an experiment is a term, which implies that only few variables are studied. Other things that might affect these variables must also be determined. Surveys are conducted with help of a questionnaire or an interview and the goal of the survey is to reach a large demarcated group. Survey researches give the possibility to gather information about a greater number of variables, as well as a lot of information about a limited number of variables. Archival analysis is based on secondary data that was developed for another purpose than helping the problem at hand. However, it does not necessarily mean that focus is given to past events. A historical strategy is not focused on contemporary events according to Yin (2003). Eriksson & Wiedersheim-Paul (2001) point out that a case study involves investigating few entities but many variables, in order to get an in-depth situational picture. A case study can be either single-case or multiple-case. The single-case study investigates on an entity, a company, a decision or a region, in-depth. In a multiple-case study, two or more entities are studied which gives the opportunity for comparisons. On the other hand, each entity will be less in-depth investigated. The case study in this thesis will be conducted on the largest woodhouse producing company in Sweden, AB Älvsbyhus, hereby only referred to as Älvsbyhus. In order to reach our purpose and answer it, the case study will go in-depth on how Älvsbyhus selects their international markets and what type of entry mode they utilize. We will also study what external and internal factors play a significant role in these decisions.

3.4 Data Collection Method According to Eriksson & Wiedersheim-Paul (2001), to be able to understand the research area more in detail, empirical data must be collected. There are two different types of empirical data that can be collected: primary and secondary. The primary data is collected for specific problems, while the secondary data is collected for a more general purpose.

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When collecting empirical data, the researcher has to choose between using question methods; like questionnaires, telephone or personal interviews; or using observations or documents according to Davidson & Patel (2003). The questions are often less structured in a questionnaire and the respondent answers to them without any explanation and without any influence from the researcher’s part. However, by using telephone or personal interviews the researcher can pose more complex questions and explain possible misunderstandings. The duration of an interview is often limited when doing telephone interviews, therefore personal interviews are from this point of view more preferable. Concerning observations the researcher can only observe ongoing processes, situations and behaviors. The positive aspect of observations is that they do not depend on the respondent’s willingness to reveal more personal information. Documents are primarily used to collect secondary data. For example statistics, registrations, official publications, letters, diaries, newspapers, journals, branch literature and brochures can be used for collecting secondary empirical data. In this thesis both the primary and secondary data have been collected. The primary data has been collected specifically for the case studied and it has been conducted through a personal interview with a person who has the greatest knowledge about the selected company’s international market selection and selection of the modes of foreign market entry. The secondary data has been collected trough various documents. The selected company’s website, information brochure and DVD, as well as the selected company’s information in the database Affärsdata have been studied in order to gain more background information about the company in question. Research reports, other scientific thesis, scientific literature, journals and articles, as well as previous marketing researches within the research area have also been studied in order to gain better understanding within the problem area for the case study.

3.5 Sample Selection When the research approach and research strategy have been chosen, the next step in a scientific research is to choose the sample company or sample companies which would be interesting to study more in detail within the case study. In this part will be described the ways in which the area of research, the country, the industry, the size and the amount of companies were chosen, as well as how the selection of one particular company was made and the respondent selected found. Selective sampling, also called as intended sampling, is used in qualitative studies according to Johansson-Lindfors (2000). When the sample is selected in order to fit the purpose of the scientific research, the sampling is purposive. If the sample fits and is relevant for the theoretical purpose, the sample can be either representative or not representative. This means that the sample can be almost anything as long as the purpose of the research is present in the sample study. In this thesis the research has been started by looking at SMEs’ internationalization and what external and internal factors influence SMEs’ international market selection. Additionally, the SMEs’ choice of foreign entry modes has been studied and in particular what external and internal factors influence these choices. This specific area of research was found interesting and selected for this reason. In order to study the external and internal factors influencing SMEs’ selection of international markets and SMEs’ choice of foreign entry mode were found especially interesting, for the reason that these explain why companies enter certain markets and why they decide to use certain foreign entry modes.

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Concerning the choice of country and industry, we have decided to look more closely at how the Swedish woodhouse industry selects its international markets and which foreign entry modes are the most frequently used. The woodhouse industry in Sweden has its own particular features and similar woodhouses are rather hard to find outside the Nordic countries, where a large part of the houses are generally made of wood and there exist a consistent demand for this kind of houses. However, the recent economic recession in Sweden has to some extent influenced the woodhouse industry and the demand has somewhat diminished during the past years. Nevertheless, the economic upswing of today (2005) in Sweden has started to influence the demand towards a more positive and upgrading direction. It should not be forgotten either that Sweden has also rich resources of wood and forests. Älvsbyhus, the largest woodhouse producing company in Sweden, was chosen as a subject for our case study. This was practical, since the company is located in the vicinity of Luleå, where the research is conducted, and Älvsbyhus is one of the largest medium sized companies in the county of Norrbotten. Älvsbyhus has in addition a very unique concept of constructing woodhouses: they build mobile woodhouses. This unique concept of Älvsbyhus drew our attention and resulted the selection of Sweden as a sample country, Swedish woodhouse industry as a sample industry, and Älvsbyhus as a sample company. One case study will be accomplished in order to study in-depth the case of Älvsbyhus and to search answers to following questions: what external and internal factors have influenced Älvsbyhus international market selection and their choice of foreign entry modes. In our case study we will also examine why a company, like Älvsbyhus, which has a great potential for larger export markets, at the moment only exports within the Nordic countries. The respondent within Älvsbyhus was chosen by various criteria. The most suitable and knowledgeable respondent, who was competent and capable to answer our interview questions within the research area of our thesis was selected. The position of the respondent selected within the company is the Marketing Manager and he was willing to contribute some of his valuable time in order to take part in the interview and our research.

3.6 Analysis of Data According to Yin (2003), data analysis involves examining, categorizing, tabulating or otherwise recombining the data. To be able to determine what and why to analyze every research should have a general analytical strategy. Yin (2003) takes up two different types of analyses: within-case analysis and cross-case analysis. In the within-case analysis the data collected from one single case compares against the frame of references, while in the cross-case analysis the data collected from several different cases compares against each other. In both types of analysis the data is compared in order to find similarities and dissimilarities. In this thesis the within-case analysis has been used, since only one specific case study has been chosen to be conducted. The data collected from the case study has been compared to the relevant frame of references, in order to find particular similarities and dissimilarities that influence the SMEs’ international market selection and their choice of foreign entry mode. Finally, findings and conclusions have been made from these analytical comparisons.

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3.7 Quality Standards Eriksson & Wiedersheim-Paul (2001) state, that reliability and validity of the information received within a research are highly important aspects of a scientific study. Reliability shows the trustworthiness of the measuring instrument. This means that another researcher with the same approach should be able to come up with the same results. Validity is the ability of the chosen instrument to measure what it is supposed to measure. According to Davidson & Patel (2003), the reliability and validity are often difficult to ensure when conducting qualitative research. The subjects and variables in a qualitative research are often abstract and the personal experiences and perceptions are involved, which makes it difficult to measure the grade of reliability and validity of the research. In order to ensure the validity of this research, the interview guide was formulated from the emerged frame of references in order to answer to the research problem and the research questions. The interview guide used was read and commented by several other persons in order to test the comprehension of the questions and in order to improve the formulation of the questions. The interview was conducted face-to-face in order to gain better understanding of the situation and to be able to explain the possible misunderstandings of the questions. The interview guide was send to the respondent by e-mail few days before the actual interview in order to let the respondent to read through the questions and prepare somewhat his answers. The aim of the personal interview was to obtain comprehensive answers from the respondent’s side and to let the respondent describe the entire research area from their point of view. Considerable efforts were made in order to find the most suitable and knowledgeable respondent, who was competent and capable to answer the interview questions within the company selected. The time aspect was also considered and a telephone interview, as a shorter type of interview, did not feel like a suitable option for this research. Careful notes were made during the whole interview and in order to ensure the validity the whole interview was recorded and both researchers made their own notes, which then later on were conducted together. Multiple sources of evidence, like the interview and other documents, were used during the data collection in order to ensure even further increased validity. The documents were furthermore used to verify the answers given by the respondent. In order to ensure the reliability of this research, Swedish was used as the interview language in order to avoid language barriers and to let the respondent freely and thoroughly answer to all of the questions. Nevertheless, it should be noted that some unintentional translation interpretations may have occurred when translating the results from Swedish to English, as the English is not the native language of either the researchers or the respondent. During the evaluation and handling the data collected the researchers have tried to be as objective as possible to ensure the reliability of the thesis. However, it should be taken in to consideration that the same interview guide and the same respondent still might not lead to the exact same result as in this thesis, for the reason that the subjectivity has always some influence in an interview and a research. Thus, subjectivity may have in some extent affected the reliability of this thesis, but it has been beyond the control of the researchers.

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CHAPTER 4 EMPERICAL DATA

4 Case Study: AB Älvsbyhus In this chapter the empirical data of the research will be presented. First the background information collected about the company of our case study will be presented and then the empirical data collected during the personal interview with Älvsbyhus’ Marketing Manager, Roland Kjellgren.

4.1 Company Background At the end of World War II a small company performing carpeting work was established in Piteå, Sweden, by two brothers, Göran and Gunnar Johansson. The company grew and moved to Älvsbyn, Sweden, in 1960 when the company started to build houses on an indoor assembly line. At this time the company changed its name to AB Älvsbyhus. The principle of building is the same even today but the production is considerably larger. In the beginning of the 1990’s the business cycle in Sweden made a considerable drop and 70 percent of the about 100 woodhouse producing companies in Sweden went out of business. Älvsbyhus was not affected until 1994 since their order stock was large at the time of the drop. In 1994 Älvsbyhus was forced to make considerable cutbacks in their workforce due to the lack of orders. The company only produced 70 houses during 1994. Two years later the market turned and Älvsbyhus grew to be the largest woodhouse producing company in Sweden. (www.alvsbyhus.se; Älvsbyhus, Från stock till stuga 60 år Älvsbyhus 1944-2004) Älvsbyhus utilizes a unique way of building their houses. There are no competitors that build houses on a similar way. Älvsbyhus has its own lumber mill where the company saw the lumber in to building material used in the house production. All the waste material in the lumber mill is used to heat the factory, in the company’s own heating power plant. The sawed lumber is used to build all the major components in the houses, such as floor, walls and ceiling. In the factory Älvsbyhus assembles the houses in five to seven different modules. In these modules craftsmen build the interior already at the factory with electrics, water and sanitation. The kitchen and the toilet are assembled before shipping. All the household appliances are placed in the modules, but are not installed. In houses intended for the Finnish market the saunas are also built at the factory. By building the houses indoors Älvsbyhus can build the houses at perfect conditions without risk for moisture damage. The modules are then transported to the building site where the modules are put together into a complete house. At the site all the groundwork is done by entrepreneurs so the company can start to assemble the house. Interior work that has not been done at the factory is completed also at the site and the customer receives a completely finished house. Älvsbyhus has the highest quality marking in both building and finances in Sweden. According to Älvsbyhus, the company can through this building process give the customers the best house to the lowest price in the market. (Älvsbyhus, Från virke till färdigt hus) At present, Älvsbyhus have sold more than 23 000 woodhouses in Sweden, Finland, Denmark and Norway. The main office is situated in Älvsbyn and there are three different production factories: one situated in Älvsbyn in Northern part of Sweden since 1960, one in Bjärnum in the Southern part of Sweden since 1998 and one in Kauhajoki in Finland since 2005. Älvsbyhus Concern consists at present of AB Älvsbyhus, Sävelyckan AB, OY Älvsbyhus AB, Älvsbyhus Norge AS and Älvsbyhus Transport AB. Älvsbyhus Concern is fully owned by Älvsbyhus Intressenter AB and is divided in two equally sized owners: Rune Andersson Family and Donald Johansson Family.

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http://www.alvsbyhus.se/


Donald Johansson is the son of Göran Johansson and the CEO of the AB Älvsbyhus and Älvsbyhus Intressenter AB, as well as the chairman of the board of directors in all of the subsidiary companies within the Älvsbyhus Concern. Rune Andersson is the chairman of the board of directors in AB Älvsbyhus and Älvsbyhus Intressenter AB. Älvsbyhus has been the biggest actors on the Swedish woodhouse market during the last seven years (2005). (www.alvsbyhus.se) Table 4.1 Facts about AB Älvsbyhus

Source: www.alvsbyhus.se

2000 2001 2002 2003 2004 Turnover (Million SEK) 693 789 817 915 1021 Profit (Million SEK) 164 201 232 267 328 Number of Employees 267 273 272 287 296

4.2 Internationalization of Älvsbyhus Älvsbyhus started exporting in 1980, when houses built in Sweden were first sold to northern parts of Finland. The Swedish market was saturated and the downturn in the Swedish economy made this step natural in order to spread the risks of the company in case of a deeper recession in the business cycle in Sweden. From the very beginning Älvsbyhus’ exports were sold through local sales representatives, which acted as intermediaries on behalf of the company in Finland. Älvsbyhus has maintained this type of entry mode for all its exports through out the years, since this entry mode makes it possible for Älvsbyhus to have full control over the whole value chain. In 1996 Älvsbyhus started also to export to Norway and in 1998 to Denmark. During 1996-1997 test deliveries were made to Estonia and Lithuania, but Älvsbyhus found that there was not enough demand for their products in those markets. At the same time, an exhibition house was built in Poland, but it has not yet been sold. Älvsbyhus believes that the tradition of building with stone and concrete diminishes the demand for the woodhouses in Poland. The price may have also been an influencing factor, as well as that the exhibition house was not adapted enough to the specific market demand in Poland. Älvsbyhus has also considered the possibility to expand into the German market but the reason given for not to do this was that other Swedish companies within their industry have already tried this, but they have been unsuccessful. In 2004 Älvsbyhus exported approximately 50 percent of their total sales. Älvsbyhus has no future plans to expand their international activities at present. An inhibiting factor has been the high transport cost: one house transported often demands three trucks, due to the high amount of empty space within the house modules on the transports. The factory in Älvsbyn serves markets in northern parts of Finland, as well as the northern and middle parts of Sweden. The factory in Kauhajoki serves the markets in middle and southern parts of Finland. The factory in Bjärnum in its turn serves the markets in southern parts of Sweden, as well as in Denmark and Norway. However, the factory in Älvsbyn is the only one to produce components. The factories in Bjärnum and Kauhajoki only set together the different components. The company’s motives for their exports have not changed since 1980 and the main reason for export activities still is to increase the market share in the Nordic markets and keep the Älvsbyhus employees working. However, Älvsbyhus is experiencing some problems at present (2004-2005) because they are loosing customers due to the long delivery times. The delivery time in 2004 on a

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woodhouse in Sweden was over one year. This situation occurred since the company’s set of sales orders is over 1000 houses and they do not have the capacity to produce faster. The production rate right now is 14 houses per week in Älvsbyn, 14 houses per week in Bjärnum and 2 houses per week in Kauhajoki. However, within 2 year the factory in Kauhajoki will also have a production rate of 14 houses per week.

4.3 International Market Selection by Älvsbyhus The main factors influencing the international market selection by Älvsbyhus are:

• Geographical closeness to the foreign markets: Älvsbyhus is highly transport dependent. It is not profitable for them to do long and expensive transports and for this reason it has been preferable to select geographically close markets. The company would not been able to conduct direct export for 20 years without the geographical closeness to their foreign markets.

• Similarities in tradition of building woodhouses: Nordic countries are closely related to one

another in the tradition of constructing houses. Only Denmark has somewhat more tradition on building houses with stone and concrete.

• Similarities in culture and language: It is easier to go into a foreign market if it is culturally

close and there are few cultural, social and language differences. The psychic distance is narrow between the Nordic countries.

4.3.1 External factors influencing international market selection Economic influences Per capita income has no significance when Älvsbyhus selects their international markets. The company considers as their primary customers the lower income class and believes that this factor do not influence them as much. Infrastructure is a key factor when Älvsbyhus selects their international markets due to the fact that the company is very dependent on transports. All houses are transported by trucks and one house transported often requires at least three trucks. The further away from the producing factory the transport goes, the more expensive the product and transport becomes for the buyer and less profitable for Älvsbyhus. Exchange rates have only average importance for the international market selection by Älvsbyhus, since the company secures the exchange rates when they are making international transactions and business. Socio-cultural influences Psychic distance is of high significance when Älvsbyhus select their international markets. Similarities in culture and language have made Älvsbyhus to choose Nordic markets and made the entry easier. However, differences in regulations and standards concerning house constructing have forced Älvsbyhus to make some product adaptations for example in Norway and Finland. At the moment, Älvsbyhus provides 16 different woodhouse models in Sweden, 16 models in Denmark,

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11 models in Finland and 10 models in Norway. For example in Sweden the buyers prefer larger kitchens, in Norway larger living rooms and in Finland there has to be a sauna in every house. Political and legal influences Political stability is not a key factor when Älvsbyhus selects their international markets. In the Nordic markets occurs very few radical political changes over time and the political changes do not affect the markets that much. However, laws and regulations affect highly the way Älvsbyhus conducts their business abroad and in a long run the political decisions may affect existing and even create additional laws and regulations concerning house constructing. Trade barriers have no importance for the international market selection by Älvsbyhus. There are no restraining trade barriers by European Union, Schengen or among the Nordic countries that affect the type of business Älvsbyhus is conducting. These institutions rather make it easier to conduct the business in the Nordic countries. Älvsbyhus factory in Finland for example was established in order to decrease the high transport costs and to better serve the growing demand in Finland, rather than to evade existing trade barriers. However, laws and regulations affect highly the way Älvsbyhus can conduct their business abroad and can be seen in some cases as restraining trade barriers. This has forced the company to make some product adaptations. For example, in Finland the sewage and water pipelines have to be covered with a plastic extra layer according to the existing Finnish regulations. Market attractiveness Market size and growth rate are very important factors for the international market selection by Älvsbyhus. Nordic markets have potential due to the similarities in traditions of building houses and due to the similar economic and cultural structure. Only Denmark differs somewhat in tradition of constructing houses with stone and concrete. Älvsbyhus believes that the demand for woodhouses will increase in the future in all Nordic markets. Young people are becoming more and more aware of the environmental issues and wood as a construction material stands a good chance when building future houses. In addition owning a house is still the dream of the most families. For instance in Sweden there are not enough houses built at the moment and there still exists an increasing demand for houses in most of the cities. Competition is of no significance when Älvsbyhus select their international markets. Älvsbyhus is the market leader in Sweden and their concept is unique. The product itself is not unique, since almost everybody can build woodhouses, but the high quality of the product with the market’s lowest price are together unique. Thus, Älvsbyhus way of constructing and producing woodhouses is unique and there is no competitors that make same kind of mobile houses. Costs of serving the market are of no importance for the international market selection by Älvsbyhus. Sweden is the least expensive market to act on from all of the Nordic markets and still the company has searched for other international markets. Thus, this factor has not influenced and driven Älvsbyhus to export. Profit and market potential are key factors when Älvsbyhus selects their international markets. The company has high fixed costs which make the profit and market potential on a foreign market very important. However, the company believes that there is no potential to gain a bigger market share on the Swedish market (7,9 percent). The biggest competitors, Myresjöhus and Trivselhus, both have 5,7 percent market share. Älvsbyhus do not see tax benefit either as important for the international market selection by Älvsbyhus. The rules concerning taxes are very similar in all

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Nordic countries and no considerable tax benefits can be received by conducting business in these markets. Market access has no significance when Älvsbyhus selects their international markets. The company does not see any substantial trade barriers between the Nordic countries and the access to the Nordic markets is rather good. The relationship ties have had some average importance for the selection of foreign markets, but Älvsbyhus has mostly build up their distribution channels on their own.

4.3.2 Internal factors influencing international market selection Company capability profile Skills within the company are of high importance when Älvsbyhus selects their international markets. The company uses an internal training system for their employees. Every employee within the company is specialist on their area of work and can therefore always give the best quality and final result of their work. It has also been a somewhat tradition to have Finnish employees within the company, which influenced and made the expansion to the Finnish market easier and natural. Resources are very important for the international market selection by Älvsbyhus. The company has had positive turnovers over a long time now and this has made it possible for the company to expand even further and search for new markets abroad. Product adaptation plays a key role when Älvsbyhus selects their international markets. The ability to change the product has made it possible to gain market shares in the Nordic markets. For example saunas were added into the houses in Finland and bigger living rooms in Norway. These adaptations made the Älvsbyhus houses more desirable and easier to sell in these markets. Competitive advantage is of high significance for the international market selection by Älvsbyhus. Älvsbyhus provides high quality woodhouses to the markets lowest price, which gives them a competitive advantage in all of their markets. No other competitors produce mobile houses in the same way. Älvsbyhus do not believe that they are building unique products since everybody can build woodhouses, but the high quality of the product combined with the market’s lowest price is unique together, which create a competitive advantage against other house manufacturers in all markets. Company’s potential Management ability, flexibility and commitment are key factors for the international market selection. Älvsbyhus is a family owned company where relationships and close family connections are essential. The family management has a great influence on everything that goes on within the company. Sometimes decisions might even be more emotional than rational due to the deep family connection and relations involved. Planning and control are highly important when Älvsbyhus selects their international markets. Älvsbyhus is a production orientated company that requires a lot of planning and control. However, this makes the company also somewhat less flexible. Excess capacity is of high importance when Älvsbyhus selects their international markets. The large amount of excess capacity affected to a great extent the start of first export activities into the Finnish market.

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Overproduction does not influence the international market selection by Älvsbyhus. This factor does not affect the company at all, since the houses are being constructed only after received sale orders. Personnel’s motivations and qualifications are of no importance when Älvsbyhus selects their international markets. The products are production orientated, highly standardized and only few adaptations are made. The employees do not get the chance to affect the international market selection decisions. However, for the product quality, it is very important to have motivated and qualified employees, so that they will do an excellent job and maintain the quality standards.

4.4 Älvsbyhus’ Choice of Foreign Entry Modes Älvsbyhus has chosen to utilize direct exports through sales representatives and direct investments through manufacturing subsidiaries as their foreign entry modes. They also have cooperation with other companies abroad, like advertising agencies and entrepreneurs that help them to set the houses together at the final site.

4.4.1 External factors influencing choice of foreign entry modes Socio-cultural distance is very significant for Älvsbyhus choice of foreign entry mode. Socio-cultural differences lead to product adaptation, when Älvsbyhus entered the markets in Finland, where houses modified with sauna, and Norway, where houses modified with larger living rooms. Although, when choosing entry modes, the socio-cultural closeness of Nordic countries has eased the market entry a great deal. The communication with the local sales representatives has also been easier from the very beginning due to the cultural and language similarities. Country risk and demand uncertainty are also important factors to take into consideration when choosing foreign entry modes for Älvsbyhus. The company acted on several foreign markets for a long time before the decisions about the new factories where determined. Good knowledge and information about the market are crucial according to Älvsbyhus in determining which entry mode to use and in what extent to involve in the foreign market both concerning level of investments and risks. Market size and growth are of high importance for Älvsbyhus’ choice of foreign entry mode. This factor has very much affected where the location of the new factories where to be placed. The more market potential, the more investments are made. Direct and indirect trade barriers do not affect the choice of foreign entry mode for Älvsbyhus. The company considers no overwhelming trade barriers to exist on the international markets where Älvsbyhus is conducting business. European Union, Schengen and other Nordic agreements rather ease the international business between the Nordic countries. However, some legislative rules and standards may affect the choice of foreign entry mode when concerning restrictions within house constructing. Competitive market does not play an important role when choosing foreign entry modes for Älvsbyhus. On the markets where Älvsbyhus is conducting export the competitive environment is not intensive. However, Älvsbyhus has still decided to utilize entry modes with low resource commitment, even though the competitive environment has not been intensive

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Small number of relevant export intermediaries available is of no importance for Älvsbyhus’ choice of foreign entry mode. The ability to gain good relationships with the sales representatives and contractors on the foreign markets has been always been of high importance for the company. Älvsbyhus has not experienced this kind of problems. The factory in Finland was only established for the reason to reduce the transport cost and to serve better the growing Finnish market. Laws and regulations have little importance when choosing foreign entry mode for Älvsbyhus. However, legal restrictions concerning building procedures affect the company and force them to make product adaptations. For example, in Finland there are different rules and standards concerning plumbing and size of doors, which demand product adaptation from the company’s side. In Norway, there are much more bureaucratic rules concerning building and selling of houses than in any of the other Nordic countries. The companies that enter these markets have to adapt for the existing laws and regulations. Geographical distance is of high significance for Älvsbyhus’ choice of foreign entry mode, since the company is production orientated and transport dependent. The direct export through sales representatives suits well to the fact that production of a house is made only after a received sale order. On the other hand manufacturing subsidiaries suits well with the fact that the company wants to reduce the transport costs.

4.4.2 Internal factors influencing choice of foreign entry modes Speed is a key factor for Älvsbyhus’ choice of foreign entry mode. It is important for the company to gain revenues and profits relatively fast when entering a new market, in order to over win the foreign investment costs. Costs were in the beginning of Älvsbyhus internationalization of high importance. This factor influenced the choice of entry mode to a high extent in the beginning of the company’s internationalization. However, with the company’s current economic state, which is excellent, it is no longer equally important. For example, the investments made to build the new factory in Finland only took two months of profits to get even. Flexibility is very important for Älvsbyhus choice of foreign entry mode. It is important to be able to see new opportunities and to be aware of the possible threats. Concerning the direct export through sales representatives the flexibility is good, but concerning the manufacturing subsidiaries the flexibility is poor. Risks are of high significance when choosing foreign entry modes for Älvsbyhus. For example long delivery times can cause extensive risks. It is important to be able to manage risks and to act in a right way when facing risk situations. The choice of mode of entry is highly connected to the level of risks taken. Payback does not play an important role at present for Älvsbyhus choice of foreign entry mode. The economic situation of the company is so good at the moment that even large investments abroad can be rapidly won back. Long-term objectives are of high importance when choosing foreign entry modes for Älvsbyhus. There is no idea of building factories in Norway and Denmark while the demand on these markets is too small to support the manufacturing facilities. At the moment, both of these markets are

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supplied sufficiently by the factory in Bjärnum. However, the company recognizes a possible threat for the factory in Älvsbyn because of its northern location, which makes the transports long and expensive if transporting further to south. From the total amount of 650 houses built in Älvsbyn factory every year about 450 are exported to Finland. The company’s major long term goal is to augment the production to 1900 houses per year. Company size highly affects Älvsbyhus’ choice of foreign entry mode. The present size and market share of the company render new and larger investments. As growing larger the company makes more investments for example on manufacturing subsidiaries. International experience is very important when choosing foreign entry modes for Älvsbyhus. The experience gained in Finland during several years made the entry in Denmark and Norway easier. After some experience it has also been easier to choose the most appropriate entry mode for the product provided. Type of product plays a key role for Älvsbyhus choice of foreign entry modes. Due to the high dependence of transports, the direct export through sales representatives and manufacturing subsidiaries has been natural choices. Planning and control are of high importance when Älvsbyhus chooses their foreign entry modes. The company is production orientated and in this way dependent of both planning and control. However, this makes the company at the same time less flexible. It is very important for Älvsbyhus to be able to control the whole value chain and plan carefully their international export activities. When choosing a specific mode of entry, planning and control aspects are carefully taken into consideration. Managerial reasons are also significant when choosing foreign entry modes for Älvsbyhus. The company is a family company and the management influence very much every choice made by the company. The preferences and old habits of the management affect highly the choice of foreign entry mode. Relationships are in general average important for Älvsbyhus’ choice of foreign entry mode. However, good contacts and relations are needed in order to find suitable sales representatives, advertising agencies and entrepreneurs in the foreign markets.

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CHAPTER 5 DATA ANALYSIS

5 Data Analysis In this chapter the data analysis will be presented. The data collected and presented in Chapter 4 will be now carefully analyzed and compared to the conceptual framework presented at the end of Chapter 2 in order to find similarities and dissimilarities within the internal and external factors influencing Älvsbyhus international market selection and choice of foreign entry mode.

5.1 Internationalization According to Czinkota & Ronkainen (2004), internationalization process is a gradual process and very few companies initiate exporting from the start, even though in some rare cases it is possible to be “born global”. Albaum, Duerr & Strandskov (2002) on the other hand, state that companies do not necessarily always internationalize in an orderly and sequential way. Some companies may stop at a particular stage, skip stages or even reverse the process. Hollensen (2003) in his turn points out, that an increasing number of companies do not follow the traditional internationalization process. These “born globals” aim at international markets or the global market right from the very start of the company. Kotabe & Czinkota (1998) state that the company goes through four different stages within the traditional and gradual internationalization process: Uninterested exporter → Partially interested exporter → Experimental exporter → Experienced exporter. According to Calof & Viviers (1995), the more experienced the company becomes on the international markets, the more profitable and less risky the business abroad turns out to be. Czinkota (2001) in his turn states that increasing risks on a foreign market habitually accompanies declining profitability, at least at the very beginning of the establishment of international activities. Yet, this is often only a short-term reaction. According to Czinkota & Ronkainen (2004), a successful performance abroad can be attained by international effectiveness, efficiency and competitive strength. Every company has to wage overall benefits of going international against the high investment costs and short-term setbacks; in addition the time and performance dimensions have to be taken under consideration when going abroad. Älvsbyhus does not follow the traditional pattern of gradual and sequential internationalization process mentioned by Kotabe & Czinkota (1998). Neither can Älvsbyhus be described as a “born global” since they have not been involved in the international nor global market from the very start of the establishment. During the first 20 years Älvsbyhus was producing and selling exclusively in the domestic Swedish market and the company did not have any aims to go international. However, in 1980, on their very own initiative, Älvsbyhus started direct exports to Finland and wanted to explore the Finnish market since the traditions in building woodhouses were similar to the Swedish ones and the Finnish market was geographically close and available for the possible transports. Furthermore, the declining Swedish economy and recession at the time made the export initiative natural for the company. Älvsbyhus never got an unsolicited order from Finland and has not been following the different stages in the traditional and gradual internationalization process. Since starting of the exports to Finland, Älvsbyhus also become interested in expanding to other Nordic markets and gradually expanded to the Norwegian and Danish markets. At present, Älvsbyhus is a successful international company that is very much export dependent and the company exports approximately 50 percent of their sales.

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It can be stated that Älvsbyhus at present is a highly experienced company within the Nordic markets in view of the fact that they have been exporting over 25 years. The more experienced Älvsbyhus has become the less risky the business abroad has turned out to be, as Calof & Viviers (1995) points out. It has been natural for Älvsbyhus to go international and export within the Nordic countries due to the geographical closeness of the markets and the similarities in traditions of house constructing, culture and language. In general Älvsbyhus considers the socio-culturally and geographically close markets as less risky to enter. Älvsbyhus has an increasing and excellent economic situation for several years now and do not see new investments abroad too risky. For example only few months profits covers up the investments made for the new factory in Finland. However, it should be noted that it took over 20 years of direct exporting to Finland before the company decided to invest in a manufacturing subsidiary abroad.

5.2 International Market Selection According to Johansson & Vahlne (1977), the decision to select international markets is based on an external factor’s influence and the exporter simply responds to an opportunity on a given market. However, in most of the cases the international market selection of SMEs is based on following criteria: Low psychic distance, Low cultural distance and Low geographic distance. Lindholm & Sylvest (1997), state that using any of these criteria often results the selection of the same market. Due to the low geographic distance is similar to low cultural and psychic distance, the neighbor countries are often selected as the primary target markets abroad. Research also shows that young SMEs enter foreign markets earlier than the old ones. According to Johansson & Vahlne (1977), there are two main determinants that influence the selection of international markets:

• External factors • Internal factors

The main factors influencing the international market selection by Älvsbyhus are:

• Geographical closeness to the foreign markets: Since the company is highly transport dependent, it is not profitable to do long transports.

• Similarities in tradition of building woodhouses: Nordic countries are closely related to one

another in this matter, only Denmark has somewhat more tradition on building with stone and concrete.

• Similarities in culture and language within Nordic countries: It is easier to go into a foreign

market, if it is culturally close and there are few cultural, social and language differences. It can be stated that Älvsbyhus way of selecting international markets is in line with the theories mentioned above.

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5.2.1 External factors influencing international market selection According to Hollensen (2001), several factors influence the selection of an international market:

• Economic influences: Per capita income, Infrastructure, Stage of economic development and Exchange rate stability.

• Socio-cultural influences: Social and cultural differences, Psychic distance, Communication,

Social perspectives, Attitudes and Language.


According to Jobber (2004), some additional external factors influence the international market selection of SMEs:

• Market attractiveness: Market size and growth rate, Competition, Cost of serving the market, Profit and market potential and Market access.

Economic influences: Älvsbyhus finds that stage of economic development, geographical distance and infrastructure have high importance for the selection of international markets. These factors are considered important also according to Hollensen (2001). The stage of economic development of a possible international target market is important in order to make the business profitable abroad and Älvsbyhus finds this very important when choosing international markets. Low geographic distance and good infrastructure, especially concerning roads, are of crucial importance for Älvsbyhus in order to be able to perform the house transports, as well as to keep the transport costs low and manageable. Exchange rates on the other hand have only an average importance for Älvsbyhus and per capita income no importance at all. In this matter Älvsbyhus way of selecting international markets differs from Hollensen’s (2001) view of point that these factors are very important for the international market selection. Exchange rates do not really influence Älvsbyhus’ selection of international markets since the company secures the exchange rates when making international transactions and business. Per capita income does not either influence the Älvsbyhus selection of international markets because the company considers the lower income class as their primary target group and believes that this factor does not influence this specific target group that much. Socio-cultural influences: Älvsbyhus claims that psychic distance is of high importance when selecting international markets. According to Älvsbyhus similarities in culture, language and attitudes make it easier to enter a foreign market and manage the market communication. The similarities affect the selection of a possible international market. In this matter Älvsbyhus and Hollensen (2001) have the same point of view. Political and legal influences: Älvsbyhus states that political stability, trade barriers and general attitudes towards imports and direct foreign investment have no importance for the selection of international markets. This conflicts with the Hollensen’s (2001) point of view whereas he sees these factors important for the selection of international markets. There occur few radical changes within the political environment in the Nordic countries, which makes the business environment rather stabile in these markets. However, laws and regulations on house constructing influence the business in a high degree and in the long run political decisions influence the outcome of these constructing regulations in each Nordic market. Despite of this fact Älvsbyhus do not consider

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political factors as imperative for the selection of international markets, as they are conducting business only in the Nordic countries at present. Älvsbyhus do not either see any trade barriers within the Nordic markets since European Union, Schengen and various other trade agreements between the Nordic countries rather eases the trade than holds it back. For example the new manufacturing subsidiary in Finland was established only in order to save transport costs and not to avoid trade barriers. However, laws and regulations may be seen as trade barriers in some cases for Älvsbyhus, when these legal imperatives highly affect and sometimes even restrain the constructing of houses. Market attractiveness: Älvsbyhus finds that, market size and growth rate, as well as profit and market potential are of high importance when selecting international markets. Since the company has high fixed costs, it is important to choose markets that are large enough and have a prospective growth rate, as well as good profit and market potential. The whole business goes out for making profits. This point of view is the same as Jobber (2004) has. However, on the other hand competition, cost of serving the market and tax benefit are not seen important for Älvsbyhus selection of international markets. The company do not se the competition as an important factor for the selection of international markets, since the company has an unique combination of constructing woodhouses with the lowest price of the market and at present no other company does this in the same way. Cost of serving the market does not either influence the choice of foreign market for the reason that Sweden still is the least expensive market to act on for Älvsbyhus. Tax benefits in the other Nordic countries are not either remarkable and do not affect the choice of international markets. Market access is not either important for Älvsbyhus’ international market selection. The access to the Nordic markets is good, since there are no substantial trade barriers in these markets. Älvsbyhus has mostly build up their distribution channels on their own and existing relationship ties have only had some average importance for the selection of international markets. However, the unimportance of these factors differs from the Jobber’s (2004) point of view, because he considers these factors as very important for the international market selection.

5.2.2 Internal factors influencing international market selection According to Jobber (2004), following internal factors influence the international market selection of SMEs: Company capability profile: Skills, Resources, Product adaptation and Competitive advantage. Dahringer & Mühlbacher (1991) considers company’s potential as an important internal factor for the selection of international markets. This includes such factors as: Company’s management ability, flexibility and commitment, Planning and control, Capacity, cost structure and productivity, as well as Personnel’s motivations and qualifications. Company capability profile: Älvsbyhus states that skills, resources, product adaptation and competitive advantage are all of high importance for the selection of international markets. This viewpoint is fully conforming to the Jobber’s (2004) opinion. Skills are very important for Älvsbyhus: every employee within the company is the specialist on their area of work, in order to be able to provide the best quality and final result on their products. The expansion to Finland was also natural for the reason that Finnish employees have been a somewhat tradition within the company during the years and competences for the expansion already existed within the company. Älvsbyhus’ resources also highly influence the selection of international markets. The good financial situation of the company has been beneficial for expansion to new markets. Product adaptation is also of high importance for Älvsbyhus’ international market selection. The ability to

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change the products for market specific needs has made it possible to Älvsbyhus to gain larger market shares abroad. Though, Älvsbyhus limits the number of different adaptation to a number of standard house models for each foreign market they are acting on. Competitive advantage in its turn is also important for Älvsbyhus international market selection. The unique concept of providing high quality woodhouses for the lowest price on the market gives the company a sustainable competitive advantage on every market Älvsbyhus is acting on at present. Company’s potential: Älvsbyhus claims that management ability, flexibility and commitment, planning and control, as well as excess capacity are of high importance when selecting international markets. This is fully conforming to the Dahringer’s & Mühlbacher’s (1991) point of view. Management ability, flexibility and commitment are of high importance for Älvsbyhus’ international market selection since the company is a family owned company where relationships and close family connections play a major role when significant and strategic decisions are made. In this way the management has a great impact on everything that goes on within the company. Since the company is production orientated planning and control also play a major role when selecting international markets. However, this makes the company also somewhat inflexible. Excess capacity in its turn influences in great extent the choice of international markets. This factor had a major influence for the start of export activities in Finland. Personnel’s motivations and qualifications are of no importance for Älvsbyhus’ international market selection. Neither has overproduction any importance for the selection of international markets. This approach differs from Dahringer’s & Mühlbacher’s (1991) viewpoint that these factors are important for the international market selection. Personnel’s motivations and qualifications within the company do not affect the strategic decisions of selecting international markets since they do not participate the decision making process. The Älvsbyhus products are production orientated, highly standardized and few adaptations are made, which demands the employees to simply work with their very specialized area. However, in order to maintain the product quality it is important to have motivated and qualified employees. Overproduction in its turn does not affect the choice of international markets since all production within the company is fulfilled only after sale orders and this way overproduction do not occur.

5.3 Choice of Foreign Entry Modes According to Brassington & Pettitt (2000), there are several different modes of foreign market entry: Direct export, Indirect export, Licensing, Franchising, Contracting, Sales subsidiaries, Manufacturing subsidiaries, Joint ventures and Strategic alliances. Älvsbyhus has used two of these modes in their foreign market entry: direct exporting and manufacturing subsidiaries. In the beginning of Älvsbyhus internationalization, the factory in Älvsbyn had the capacity to serve the Finnish and Swedish markets. The geographical closeness and infrastructure made it possible to utilize the direct export as the foreign entry mode. When the market grew a new factory was built in Bjärnum, Sweden, to serve the markets in Denmark, Norway and the southern part of Sweden. This factory serves the Danish and Norwegian markets through direct export. In 2005 a manufacturing subsidiary was established in southern Finland to serve the growing demand for Älvsbyhus products in the Finnish market.

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5.3.1 External factors influencing choice of foreign entry modes According to Hollensen (2001) there following external factors influencing company’s choice of foreign entry mode: Socio-cultural distance, Country risk and demand uncertainty, Market size and growth, Direct and indirect trade barriers, Competitive environment, and Small number of relevant intermediaries available. De Búrca, Brown and Fletcher (2004) state that also Laws and regulations have a large impact on choice of entry mode. Root (1994) ads also an important factor influencing the choice of foreign entry mode: Geographical distance. Socio-cultural distance: Countries that have similar business and industry practices, language and cultural characteristics, as well as comparable education levels are socio-cultural close to each other. In Nordic markets the socio-cultural distance is low, and the risk has due to this been minimized for Älvsbyhus. The communication with the local sales representatives has according to Älvsbyhus also been easier from the very beginning due to the cultural and language similarities. Älvsbyhus does not comply with the theory in this factor; low socio-cultural distance favors direct investments according to Hollensen (2001). Älvsbyhus committed direct export for 25 years before they committed a direct investment in Finland. Even today (2005) the company commits direct export to Denmark and Norway even though the socio-cultural distance is low. Country risk and demand uncertainty: Foreign markets are in general considered more risky than domestic. Älvsbyhus acted on several foreign markets for a long time before the decisions about the new factories where determined, just to make sure that the demand was high enough to pay of the investment of new factories. Hollensen (2001) states, that risks considering investments, inventories, receivables and exchange rates have to be taken into consideration. Älvsbyhus actions with a long period of time of direct export before using direct investments comply with this theory. Market size and growth: Hollensen (2001) claims that the larger the market and the higher the market growth rate, the more likely companies commit resources for this particular market and consider establishing wholly owned sales subsidiaries or majority owned joint ventures. Retaining control over operations abroad provide companies direct contact with the foreign market and the customer, as well as gives companies better possibilities to plan and direct market development more effectively. This factor has influenced Älvsbyhus choice on where to place their factories. As the markets grew Älvsbyhus saw more potential and built new factories on the locations where they could serve the market’s needs in the best way. Älvsbyhus have acted according to Hollensen’s (2001) theory. Direct and indirect trade barriers: Tariffs and quotas on the import products favor the establishment of local production subsidiaries or assembly operations. Products, trade regulations and standards, as well as local preferences influence also the choice of entry mode. On Älvsbyhus export markets no trade barriers exits. European Union, Schengen and trade agreements between the Nordic countries rather ease the international business for Älvsbyhus. Hollensen (2001) argues that markets with none or few trade barriers promote the usage of direct export just like Älvsbyhus has done. Competitive environment: If the intensity of the competition is high on a foreign market, the market becomes less profitable and do not encourage heavy resource commitments. Companies tend to avoid internationalization on this type of foreign markets. On the markets where Älvsbyhus is conducting export the competitive environment is not intensive. According to Hollensen (2001) companies favor entry modes with low resource commitments when the competitive environment is

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intensive. However, Älvsbyhus has utilized entry modes with low resource commitment even though the competitive environment is not intensive. This means that the company’s actions do not follow Hollensen’s (2001) theory. Small number of relevant intermediaries available: Hollensen (2001) states that when there is only a small number of relevant export intermediaries available on the foreign market, companies may decide to establish local production, assembly or finishing facilities in order to reduce the opportunistic behavior of the intermediaries. The ability to gain good relationships with the sales representatives and contractors abroad has always been of high importance for Älvsbyhus. The company claims that a small number of relevant intermediaries available have not been important for Älvsbyhus choice of foreign entry mode. For example, the factory in Finland was simply established for the reason to reduce the transport cost and to serve better the growing Finnish market. Thus, Älvsbyhus does not follow Hollensen’s (2001) theory. Laws and regulations: According to De Búrca, Brown & Fletcher (2004), laws and regulations within the target country may prevent or restrict imports into the target market or only permit local manufacturing in less attractive geographical locations. On Älvsbyhus export market no regulations of this type exists so this theory can not be adopted on Älvsbyhus. Regulations concerning building procedures have on the contrary forced Älvsbyhus to make product adaptations on their products in order to adjust them for the export markets. Geographical distance: Root (1994) states that when the geographical distance is great, transportation costs may become too high and make it impossible to compete against the local goods in the market. This theory does not comply on Älvsbyhus. The company acts on export markets that are geographically close, which has made it possible to use direct export as the company’s foreign entry mode. However, as the market grew the manufacturing subsidiary in Finland was established to meet the growing demand and to reduce the transport costs.

5.3.2 Internal factors influencing choice of foreign entry modes Brassington and Pettitt (2000) present several internal factors that influence the choice of foreign entry modes: Speed, Costs, Risks and Long-term objectives. Furthermore according to Hollensen (2001) there are some additional internal factors that influence the choice of foreign entry modes: Company size, International experience, Product complexity and differentiation, Risks, Control and Flexibility. De Búrca, Brown & Fletcher (2004) ads Managerial reasons, to the influencing internal factors. According to Fredrik & Webster (1992) the factor concerning Relationships, should also be taken into consideration. Speed: Depending on choice of entry mode, the time of reaching the target market may vary. Some market entry modes might take months or years to implement, while others can be put into action in less time, according to Brassington & Pettit (2000). For Älvsbyhus it is important to gain revenues and profits relatively fast when entering a new market, in order to overcome the foreign investment costs. The company has therefore used direct export to gain a fast access to the target markets. Thus, this theory complies with the Älvsbyhus actions. Costs: Brassington & Pettit (2000) state, that the different types of entry modes require different investments. Some times the usage of one entry mode might justify higher costs than the usage of another due to higher benefits in the long run. In the beginning of Älvsbyhus internationalization, costs were one of the major factors influencing their choice of foreign entry mode; therefore the

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company’s action complies with the theory. However, for Älvsbyhus, in its current economic state, which is excellent, costs are not that important. For example, for the investments made to build the new factory in Finland, it took only two months profits to get even. Payback: The time for the payback of the company’s investment can be crucial when selecting a foreign entry mode according to Brassington & Pettit (2000). The economic situation for Älvsbyhus is so good right now, that even large investments abroad can be rapidly won back. Therefore, this factor does not influence the company when selecting their foreign entry modes and Älvsbyhus do not follow the theory in this matter. Long-term profit objectives: Brassington & Pettit (2000) point out that the organization must know what it wants to achieve in the future and how it best can exploit the opportunities available in the foreign market. Älvsbyhus claims that there is no idea of building factories in Norway and Denmark where the demand is too small to support the manufacturing facilities. At the moment, both of these markets are supplied sufficiently by the factory in Bjärnum. However, the company recognizes a possible threat for the factory in Älvsbyn because of its northern location, which makes the transports long and expensive, if transporting further to south. When the new factory in Finland will achieve its full production, it will take market shares from the factory in Älvsbyn. At present 450 of the yearly production of 650 houses in Älvsbyn is exported to Finland. The company’s long-term objectives are well suited with Brassington & Pettit’s (2000) theory. Company size: The size of a company indicates the company’s resource availability according to Hollensen (2001). The larger the company is, the better resources it has for the foreign involvement. However, SMEs often enter foreign markets by direct export modes for the reason that they do not have the necessary resources for the indispensable control of the heavy investments abroad. The present size of Älvsbyhus and market share of the company render new and larger investments. At the beginning of Älvsbyhus internationalization the company did not have the recourses to conduct foreign direct investment, which made them to concentrate on direct export. As growing larger the company has made more and more investments, especially on manufacturing subsidiaries. Älvsbyhus has acted according to Hollensen’s (2001) theory. International experience: Hollensen (2001) states that previous international experience of the company and managers influence highly the choice of foreign entry mode. Previous international experience reduces the costs and uncertainty to serve a new foreign market, as well as it increases the company’s likelihood to commit additional resources abroad. After some experience it is also easier to choose the most appropriate entry mode for the product provided. Älvsbyhus believes that experience gained in Finland during several years made the entry in Denmark and Norway easier. Therefore, it can be stated that this theory has been utilized by Älvsbyhus. Product complexity and differentiation: Hollensen (2001) states that when deciding where the production should be located, the physical characteristics of a product or service are highly important to take in to consideration. The production may be located to the foreign market in order to save in shipment costs, especially on distant markets. The characteristics, use and selling of a product may vary extensively from one product to another, which influence vastly the choice of entry mode. By differentiating their products companies can gain higher profits, build entry barriers against new entrants, serve their customers better and thereby strengthen their competitive position. This theory complies with Älvsbyhus actions. Due to the high dependence of transports, the direct export through sales representatives and manufacturing subsidiaries has been natural choices for Älvsbyhus.

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Risks: Hollensen (2001) states that if the company does not want to take too many risks when entering a new foreign market, it will prefer using direct and indirect export modes or an intermediate mode like licensing, for the reason that these entry modes require less financial and managerial resource commitment. The investment modes of entry, like local production, assembly or finishing facilities, are the most expensive entry modes to use and they provide high control, high risks and low flexibility for the company. This theory has influenced Älvsbyhus in their choice of foreign entry modes. Direct export has been the primarily choice of foreign entry mode for the company, due to the low risk. It is important to be able to manage risks and to act in a right way when facing risk situations. The choice of mode of entry for Älvsbyhus is highly connected to the level of risks taken. Control: Hollensen (2001) points out that when deciding about a foreign entry mode, the degree of control that the company requires over international operations has to be taken in to consideration. The level of control is often highly linked to the level of resource commitment abroad. It is very important for Älvsbyhus to be able to control the whole value chain and plan carefully their international export activities. When choosing a specific mode of entry, planning and control aspects are carefully taken into consideration. Thus, Älvsbyhus is acting according to this theory. Flexibility: The export entry modes are the most flexible ones of the foreign entry modes according to Hollensen (2001). Intermediate or contractual entry modes limit somewhat the company’s ability to adapt or change their strategies when the foreign market conditions are changing. The least flexible and the most expensive of all entry modes are the entry modes with high resource commitments, like the wholly owned subsidiaries. It is important for Älvsbyhus to be able to see new opportunities and be aware of the possible threats abroad. Concerning the direct export through sales representatives the flexibility is good, but concerning the manufacturing subsidiaries the flexibility is poor. Älvsbyhus mode of foreign entry has been influenced by this theory. Managerial reasons: De Búrca, Brown & Fletcher (2004) point out that the previous experiences of international markets of the company’s management influence highly the choice of foreign entry mode. Country of birth, years spent abroad and frequency of international business trips affect positively on managements willingness to go international, as well as the level of commitment abroad. Älvsbyhus has always used Finnish employees in the company. The management has close relationships in Finland and the location of the factory in Älvsbyn made the expansion to the Finnish market natural. Consequently, it can be stated that Älvsbyhus has followed this theory. The preferences and old habits of the management affect highly the choice of foreign entry mode for the company. Relationships: Fredrick & Webster (1992) state, that the different types of relationships that a company can have, with its suppliers and customers among others, are highly connected with the selection of a particular foreign entry mode. Better relationships promote improved coordination and cooperation for the companies involved, which creates in its turn opportunities to share resources and services. This factor is in general of average importance for Älvsbyhus choice of foreign entry mode. However, good contacts and relations are needed, in order to find suitable sales representatives, advertising agencies and entrepreneurs in the foreign markets. The conclusion can be drawn that this theory has been applied only on a minor level by Älvsbyhus when selecting foreign entry modes.

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CHAPTER 6 FINDINGS AND CONCLUSIONS

6 Findings and Conclusions In this chapter the main findings and conclusions based on our research will be presented. The purpose of these conclusions is to answer our research questions. Finally, implications and recommendations for theory, practitioners and future research will be made.

6.1 Conclusions The purpose of this research is to increase our understanding of how the process of SMEs’ internationalization is intertwined with the set of external and internal factors that determine international market selection and choice of foreign entry mode. To satisfy the purpose of our study the following research questions were addressed: RQ1: How can SMEs’ internationalization process be described? RQ2: How can the influence of external and internal factors on SMEs’ international market

selection be described? RQ3: How can the influence of external and internal factors on SMEs’ choice of foreign

entry modes be described? Data collected on the company Älvsbyhus that was analyzed against existing theories brought us to certain conclusions which we present below. The fact that a single case would not allow us to generalize is not overlooked. However, in-depth analysis of the company Älvsbyhus has shed light on aspects of SMEs’ internationalization which deserve consideration.

6.1.1 How can SMEs’ internationalization process be described? According to the existing theories most authors describe SMEs’ internationalization process as a gradual and sequential process; very few companies initiate their international activities on their own. In the traditional internationalization process the company goes through four different stages: from uninterested exporter towards partially interested exporter and then further on towards experimental exporter by ending up at the stage of experienced exporter. However, in some cases the company may stop at a particular stage, skip stages or even reverse the gradual process. Moreover, it is not imperative that the company goes through all the stages in order and in many cases companies can proceed pretty much as they desire for going international. There are also some theories concerning the rather recent phenomena called “born globals”. These are the companies that aim to act on the international or global business arena from the very establishment of the company. These are often small technology orientated companies with unique product and process innovations that have a visionary management. It can be stated that the more internationally experienced the company becomes, the less risky the business abroad turns out to be. A successful performance abroad can be attained by international effectiveness, efficiency and competitive strength. Every company waging the possibility go international has to wage the overall benefits against the high investment costs and short-term negative developments of going abroad.

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The company of our case study, Älvsbyhus, follows most uncommon and according to existing theories rather unusual pattern: they initiated their very first export activities on their own. There were no unsolicited orders from abroad involved in the beginning and Älvsbyhus has not been following the gradual stage process in their internationalization. It can be stated that the decision to go international for Älvsbyhus was natural due to the economic recession in the Swedish market at the time and there were positive prospects for a future demand in the Finnish market that was similar to the Swedish one. The more experienced Älvsbyhus has become internationally, the less risky their business abroad has turned out to be. It has been natural for Älvsbyhus to go international and export within the Nordic countries due to the geographical proximity of the markets and the similarities in traditions of house constructing, culture and language. The company has had a growing and excellent economic situation for several years now and do not see foreign direct investments abroad as too risky.

Hence, our case study shows that the reality does not always follow the existing theories. This can be both for better and worse. We have found that a company can become successful by using somewhat unconventional methods in their internationalization. Yet, it should be noticed that there is not just one way of becoming internationally successful. A company’s export success or failure does not necessarily always correlate with theoretical patterns. However, by following the guidelines of existing theories the companies might achieve even better results. Our conclusion would be that each company’s specific prerequisites must be examined separately in order to gain understanding why the company does or does not follow the most common theoretical patterns.

During our research study we also found that there has not been laid sufficiently attention on

companies which proactively initiate their international activities.

6.1.2 How can the influence of external and internal factors on SMEs’ international market selection be described?

According to theories a company’s decision to select international markets is based on an external factor’s influence and the exporter simply responds to an opportunity to a given market. However, in most cases the selection of a particular foreign market is based on the following criteria: low psychic, cultural and geographic distance. Often any of these criteria results in the selection of the same market and companies’ foremost foreign target markets are habitually the neighboring countries. There exist two main determinants that influence the companies’ international market selection: External and Internal factors. The external factors influencing the international market selection can be divided in four main sections:

• Economic influences: Per capita income, Infrastructure, Stage of economic development and exchange rate stability.

• Socio-cultural influences: Social and cultural differences, Psychic distance, Communication, Social perspectives, Attitudes and Language.


• Market attractiveness: Market size and growth rate, Competition, Cost of serving the market, Profit and market potential and Market access.

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The internal factors in their turn can be divided in two main sections:


• Company’s potential: Company’s management ability, flexibility and commitment, Planning and control, Capacity, cost structure and productivity, as well Personnel’s motivations and qualifications.

The company of our case study, Älvsbyhus, does not quite follow these theoretical patterns for international market selection, since the company does not admit the imperative influence of all of these external and internal factors for their selection of international markets. However, on closer look a great influence of some of these factors can easily be identified. The company’s international market selection in our case study has been primarily influenced by following external factors:

• Economic influences: Profitable stage of economic development, Low geographical distance and Good infrastructure.

• Socio-cultural influences: Low psychic distance and Similarities in culture, language, attitudes and traditions in house constructing.

• Political and legal influences: Laws and regulations on house constructing. • Market attractiveness: Market size and growth rate, as well Profit and market potential.

Concerning the influence of internal factors, the company’s international market selection in our case study has been primarily influenced by following factors:


• Company’s potential: Management ability, flexibility and commitment, Planning and control and Excess capacity.

Since some differences between the theoretical patterns and our case study can be identified, the following can be stated:

Our case study shows that each and every company and their situation should be studied individually in order to identify the main external and internal factors that influence the company’s international market selection. In fact, this has been a point in support of conducting an in-depth case study.

A greater influence of some particular factors may vary depending on the situation of the

company studied. For example a good financial situation of a company may leave out the influence of some factors, since the company can take greater financial risks when enjoying good economic situation. When concentrating on and selecting for instance only Nordic countries as international target markets the political factors have minor influence since the political stability is high on these markets. The situation would be different in a country where the political stability is low due to a civil war for example. Furthermore, the type of products and industry the company is acting on affect the extent of different factors influencing the international market selection.

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6.1.3 How can the influence of external and internal factors on SMEs’ choice of foreign entry mode be described?

According to existing theories the international entry strategy is a comprehensive plan and it sets forth objectives, goals, resources and policies that will guide a company’s international activities. A company’s entry strategy is not a single plan; it is actually a composite of several individual product/market plans. The selection of a foreign entry mode is affected by other decisions that may include the following:

1. Choice of a target/product market 2. Objectives and goals in the target market 3. Choice of an entry mode to penetrate the target market country 4. Marketing plan to penetrate the target market 5. Control system to monitor performance in the target market

The classification of different foreign entry modes is complicated and there are many relevant criteria to take into consideration. Companies often choose to make their first exports to neighboring countries due to the similarities in the markets, this reduces risks and cultural patterns are often similar. Trade barriers influence the type of entry mode when a company is initiating export. When product regulations and standards necessitate significant product adaptation and modification, companies often establish local production, assembly or finishing facilities. Foreign governments can also favor products that are produces in the country and can therefore give advantages to companies who choose to make direct investments in the country. The distance to the chosen target market is also a factor to take into consideration. High transport costs can influence a company to conduct a foreign investment. Some market entry modes might take months to implement, while others can be put into action in less time. Some times it might be justified to use a an entry mode that costs more than another due to higher benefits in the long run, since the choice of entry mode is just the first stage in a strategic plan for the international markets. Different types of entry modes provide different types of risks, control and flexibility. Entry modes with a high involvement on the foreign market like direct investment provides a high control, but also high costs and risks. Depending on product and market the flexibility is also a factor to take into account. Entry modes with low resource commitment like direct exporting provides low costs but also low control. The company in our case study, Älvsbyhus, has utilized both direct export and direct investments. During the first years of its internationalization the company used only direct export. Due to low geographical distance, low or non existing trade barriers and low cultural distance this type of entry mode suited Älvsbyhus. The company took the initiative to start exporting in 1980 when the Swedish market became saturated. Älvsbyhus saw a growing demand for its products in Finland and an opportunity the spread the risk for the company in case of a recession in the business cycle. In 1996 the company expanded its exports to Norway and two years later an expansion to Denmark took place. A new factory was built in southern Sweden 1998 to serve the markets in Norway, Denmark and southern Sweden. In 2005 Älvsbyhus made its first direct investment when a factory was established in Southern Finland. The growing demand on the Finnish market and high transportation costs made this step natural in order to satisfy the customers. The company’s investment in Finland did not affect the company’s finances to a large extent. After two months profits the investment was paid back.

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Älvsbyhus has primarily been influenced by the following external factors in its decision on foreign entry mode.

• Socio-cultural distance, Country risk and demand uncertainty, Market size and growth, Legal restrictions and Geographical distance.

Älvsbyhus has primarily been influenced by the following internal factors in its decision on foreign entry mode.

• Speed, Costs, Flexibility, Risks, Long-term objectives, Company size, International experience, Type of product, Planning and control and Managerial reasons.

Since some differences between the theoretical patterns and our case study can be identified, the following can be stated:

Concerning the external factors the following have to be taken into consideration, when selecting an appropriate foreign entry mode. Depending on the company’s profile, economic situation and the export target market situation some factors are not evident for consideration. For example, in markets served by Älvsbyhus, trade barriers do not exist and can therefore not affect decision on foreign entry mode.

Concerning the internal factors some factors are not always relevant to be taken into

consideration while looking at different companies. For example, when conducting foreign investments, payback time might not be relevant if the company’s economic situation is satisfying. Theory does not discuss the relevance of a good economic situation to a large extent for companies and how this influence decisions on foreign entry modes. Other factors like the ability to serve the customers in the best way might on the other hand be a motivation for direct investments.

6.2 Implications and Recommendations The earlier part of this chapter presented the findings and the conclusions of this thesis. In this section we shall discuss the implications for theory, based on our analysis and conclusions. After that, implications for practitioners and for future research shall be presented.

6.2.1 Implications for theory The aim of this thesis has been to explore and describe a phenomenon in a specific area of research. Previous research has provided us with theory, from which we have formed our research problem and research questions. The purpose of this research is to examine how the process of SMEs’ internationalization is intertwined with the set of external and internal factors that determine international market selection and choice of foreign entry mode. Our case study shows that the reality does not always follow the existing theories. Our conclusion would be that each company’s specific prerequisites must be examined separately in order to gain understanding why the company does or does not follow the most common theoretical patterns concerning a company’s internationalization, international market selection and choice of foreign

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entry mode. A greater influence of some particular factors, both external and internal, may vary depending on the situation of the company studied. Furthermore, the type of products and industry the company is acting on, affect the extent of different factors influencing the international market selection. Depending on the company’s profile, economic situation and for most the export target market situation some factors are not evident for consideration. However, theory does not discuss the relevance of a good economic situation to a large extent for companies and how this influence decisions on foreign entry modes. During our research study we also found that there has not been laid sufficiently attention on companies, which proactively initiate their international activities. Our contribution to theory is based on an empirical study, which comes from the research problem that we have formed in this field of study. Our contribution can serve as a base for further research and be added to what have been examined and described in previous research.

6.2.2 Implications for practitioners This study has investigated what external and internal factors influence the medium sized company Älvsbyhus in their selection of international markets and choice of foreign entry mode. Our recommendation for companies like Älvsbyhus is to look beyond the traditional values and their traditional strategies. Älvsbyhus has the resources and capacity to act on even several other international markets, but it seems like the lack of interest and old habits is the only thing that are restraining them. An example of this is the test sales in Estonia, Lithuania and Poland where no product adaptation was made for these markets; even the price of the houses remained the same as on the Nordic markets. After unsuccessfulness in these test markets, Älvsbyhus made the conclusion that the demand for their products was too low, even though no real market research was conducted. Älvsbyhus’ economic situation makes it possible to make direct investments in these markets without any substantial risks. For example, by establishing additional manufacturing subsidiaries in these markets and by using the local somewhat low-cost workforce, the company could probably cut prices, as well as augment the demand to be higher and ease the sales for their woodhouses on these markets. However, the motivation for the company not to enter an additional international market like Germany was explained by the marketing manager at Älvsbyhus as “Other Swedish house producing companies have tried to enter the German market and they were not successful, so why should we expose ourselves for that kind of risks?” One can not but wonder if a more proactive and risk-taking approach would not have secured the company additional profitable opportunities and opened new windows to the new global market.

6.2.3 Implications for future research This thesis has provided an insight to a field of study where it still remains a great deal of areas in which to conduct additional research. The following areas could be of interest for further study:

To make the same study on a larger sample of companies.

To investigate how different types of organizational structures affect the choices for internationalization for SMEs.

To investigate how the motivational factors mentioned in this thesis affect both large and

small companies in the internationalization process.

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To investigate why and how companies come up with unconventional methods of internationalization, which do not follow the traditional sequential internationalization process.

To investigate if, in the new global business environment, there are some additional internal

and external factors that influence SMEs’ international market selection and their choice of foreign entry mode.

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REFEERENCES

References Albaum G., Duerr E. & Strandskov J. (2002), International Marketing and Export Management. Fourth edition. Financial Times Prentice Hall, Harlow, UK. 637 pages. ISBN: 0-273-655213. Armstrong G. & Kotler P. (2005), Marketing: An Introduction. Seventh edition. Prentice Hall, Upper Saddle River, New Jersey, USA. 581 pages. ISBN: 0-13-127312-4. Brassington F. & Pettitt S. (2000), Principles of Marketing. Second edition. Financial Times Management, Harlow, London, UK. 1079 pages. ISBN: 0-273-64444-0. De Búrca S., Brown L. & Fletcher R. (2004), International Marketing: An SME Perspective. First edition. Financial Times Prentice Hall, Harlow, UK. 720 pages. ISBN: 0-273-67323-8. Calof J. L. & Viviers W. (1995), Internationalization Behaviour of Small and Medium Sized South African Enterprises. Journal of Small Business Management 33. No 4. Czinkota M. R. (2001), A National Export Assistance Policy for New and Growing Businesses. Best Practices in International Business by Michel R. Czinkota and Ilkka A. Ronkainen. Cincinnati, South-Western. Czinkota M. R. & Ronkainen I. A. (2004), International Marketing. Seventh edition. Thomson Learning, Ohio, USA. 666 pages. ISBN: 0-324-28289-3. Dahringer L. D. & Mühlbacher H. (1991), International Marketing: A Global Perspective. First edition. Addison-Westley Publishing Company Inc., Reading, Massachusetts, USA. 677 pages. ISBN: 0-201-50354-9. Davidson B. & Patel R. (2003), Forskningsmetodikens grunder: att planera, genomföra och rapportera en undersökning. Third edition. Studentlitteratur, Lund, Sweden. 149 pages. ISBN: 91-44-02288-3. Eriksson L. T. & Wiedersheim-Paul F. (2001), Att utreda, forska och rapportera. Seventh edition. Liber ekonomi, Malmö, Sweden. 246 pages. ISBN: 91-47-06385-8. Farhang M. (2001), Internet and Export Marketing of SMEs: Experiences of Website Use and Perceptions among Swedish Firms. Research report, Luleå University of Technology, Sweden. 40 pages. ISSN: 1402-1528; 2001:10. Fredrick E. & Webster Jr. (1992), The Changing Role of Marketing in the Corporation. Journal of Marketing. Vol. 56, October-December. Hollensen S. (2001), Global Marketing: A Market-responsive Approach. Second edition. Financial Times Prentice Hall, Harlow, UK. 667 pages. ISBN: 0-273-64644-3. Hollensen S. (2003), Marketing Management: A Relationship Approach. First edition. Financial Times, Prentice Hall, Harlow, UK. 787 pages. ISBN: 0-273-64378-9.

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Holme I. M. & Solvang B. K. (1997), Forskningsmetodik: om kvalitativa och kvantitativa metoder. Second edition. Studentlitteratur, Lund, Sweden. 360 pages. ISBN: 91-44-00211-4. Jobber D. & Whitelock J. (1994), The Impact of Competitor Environment on Initial Market Entry in a New, Non-Domestic Market. Proceedings of the Marketing Education Group Conference. Coleraine, July. Jobber D. (2004), Principles and Practice of marketing. Fourth edition. McGraw-Hill International Ltd, Berkshire, UK. 942 pages. ISBN: 0-07-710708-X. Johansson J. & Vahlne J. E. (1977), The Internationalization Process of the Firm – A Model of Knowledge, Development and Increasing Foreign Market Commitment. Journal of International Business Studies. Vol. 8, No. 1. Johansson-Lindfors M-B. (2000), Att utveckla kunskap: om metodologiska och andra vägval vid samhällsvetenskaplig kunskapsbildning. Third edition. Studentlitteratur, Lund, Sweden. 197 pages. ISBN: 91-44-32851-6. Kotabe M. & Czinkota M. R. (1998), State Government Promotion of Manufacturing Exports: A Gap Analysis. Trends in International Business. Malden: Blackwell. Lewis III H. & Richardson J. D. (2001), Why Global Commitment Really Matters! Washington, DC: Institute for International Economics. Lindholm C. & Sylvest J. (1997), Små globale virksomheder. Ledelse & Erhvervsøkononi. Vol. 61, April. Root F. R. (1994), Entry Strategies for International markets. Revised and expanded edition. Lexington Books, New York, USA. 324 pages. ISBN: 0-02-926904-0. Svenska Språknämnden (2003), Svenska skrivregler. Second edition. Liber AB, Stockholm, Sweden. 220 pages. ISBN: 47-04974-X. Wild J. J., Wild K. L. & Han J. C. Y. (2003), International Business. Second edition. Prentice Hall, Upper Saddle River, New Jersey, USA. 528 pages. ISBN: 0-13-0-035311-6. Winter J. (1992), Problemformulering, undersökning och rapport. Third edition. Almqvist & Wiksell förlag AB, Stockholm, Sweden. 88 pages. ISBN: 91-21-13324-7. Yin R. K. (2003), Case study research: design and methods. Third edition. Sage Publications, Thousand Oaks, California, USA. 181 pages. ISBN: 0-7619-2552-X.

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REFEERENCES

Other References www.alvsbyhus.se Älvsbyhus, Från stock till stuga 60 år Älvsbyhus 1994-2004. 68 pages. (Brochure) Älvsbyhus, Från virke till färdigt hus. Production: Ling & co. (DVD) Personal interview with Älvsbyhus’ Marketing Manager Roland Kjellgren on Thursday the 14th of April 2005 at 13.00-15.00 p.m.

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APPENDIX I

Appendix I Interview Guide in English Company Background

1. Name and title of the respondent? 2. Who established the company and when? 3. How many employees do the company have? 4. The company’s total turnover? 5. What products do the company offer? 6. What is the core business of the company? 7. How much of the total sales do the company export (in percentage)? 8. What products are being exported?

History of Internationalization

9. During how many years has the company been exporting? 10. Why did the company start up their export activities? 11. How did the company start up their export activities? 12. To which countries did the company begin to export? 13. To which countries does the company export nowadays? 14. Does the company aim to extend their export activities in the future? 15. How has the export motives changed, since the very beginning of the export activities? 16. If the export motives have changed, why have they changed? 17. Which motives are the most important ones today when selecting export markets and entry

modes? Company’s Foreign Market Selection

18. How have the following external factors influenced the company’s target market selection?

- Geographical distance? - Per capita income? - Infrastructure? - Exchange rate stability? - Psychic distance? - Political stability? - Trade barriers? - Tax benefit? - Market size and growth rate? - Competition? - Costs of serving the market? - Profit and market potential? - Market access?

APPENDIX I

19. How have the following internal factors influenced the company’s target market selection?

- Skills? - Resources? - Product adaptation? - Competitive advantage? - Unique products? - Management ability, flexibility and commitment? - Planning and control? - Excess capacity? - Overproduction? - Personnel’s motivations qualifications?

Company’s Choice of Mode of Entry

20. What type of entry mode has the company utilized? - Direct export _________ - Indirect export _________ - Licensing _________ - Franchising _________ - Contracting _________ - Sales subsidiaries _________ - Manufacturing subsidiaries _________ - Joint ventures _________ - Strategic alliances _________

21. How have the following external factors influenced the company’s choice of entry modes?

- Socio-cultural distance? - Country risk and demand uncertainty? - Market size and growth? - Direct and indirect trade barriers? - Competitive environment? - Small number of relevant export intermediaries available? - Laws and regulations? - Geographical distance?

22. How have the following internal factors influenced the company’s choice of entry modes?

- Speed? - Costs? - Flexibility? - Risks? - Payback? - Long-term objectives? - Company size? - International experience?

APPENDIX I

- Type of product (complexity and differentiation)? - Planning and control? - Managerial reasons? - Relationships?

23. What type of risks did the company perceive as the largest in the initial phase of the export

activity? 24. What meaning did these risks have for the company in the beginning of the engagement? 25. How have these risks been managed?

Thank you for your time and cooperation!

APPENDIX II

Appendix II Interview Guide in Swedish Företagets bakgrund

1. Namn och titel på respondenten? 2. Vem grundade företaget och när? 3. Hur många anställda har företaget? 4. Företagets omsättning? 5. Vad är företagets huvudsakliga verksamhet? 6. Vilka produkter erbjuder företaget? 7. Hur stor del av företagets försäljning är export? (i procent) 8. Vilka produkter exporteras?

Företagets export historia 9. Under hur många år har företaget exporterat? 10. Varför började företaget exportera? 11. Hur började företaget exportera? 12. Till vilka länder började företaget exportera? 13. Till vilka länder exporterar företaget idag? 14. Är det företagets mål att utöka sin export i framtiden? 15. Har företagets motiv för att exportera förändrats sedan exporten inleddes? 16. Om motiven har ändrats, varför? 17. Vilka är de viktigaste motiven idag när företaget väljer exportmarknader och typ av inträde

på marknaden?

Företagets val av internationella marknader

18. Hur har följande externa faktorer påverkat företagets val av internationella marknader?

- Geografisk avstånd? - BNP per capita? - Infrastruktur? - Stabilitet i växelkurs? - Kunskap och information om markanden? - Politisk stabilitet? - Handels hinder? - Skattefördelar? - Marknadens storlek och tillväxt? - Konkurrens? - Kostnader att verka på marknaden? - Avkastnings och marknads potential? - Tillgänglighet till marknad

APPENDIX II

19. Hur har följande interna faktorer påverkat företagets val av internationella marknader?

- Kunskaper? - Resurser? - Produkt anpassning? - Konkurrens fördelar? - Unika produkter? - Ledningens förmåga, flexibilitet och hängivenhet? - Planering och kontroll inom företaget? - Outnyttjad kapacitet? - Överproduktion? - Anställdas motivation och förmåga?

Företagets val av typ av inträde på en internationell marknad

20. Vilken typ av inträde har företaget utnyttjat? - Direkt export _________ - Indirekt export _________ - Licensera _________ - Franchising _________ - Kontraktstillverkning _________ - Dotterbolag som sköter försäljning _________ - Tillverkande dotterbolag _________ - Samarbete med annat bolag _________ - Strategiska allianser _________

21. Hur har följande interna faktorer påverkade företagets val av typ av inträde på den

internationella marknaden?

- Tid att ta sig in på marknaden - Kostnader - Flexibilitet - Risker - Återbetalningstid av investering - Långsiktiga mål - Ledningens påverkan - Typ av produkt - Företagets storlek - Internationell erfarenhet - Relationer

22. Hur har följande externa faktorer påverkade företagets val av typ av inträde på den internationella marknaden?

APPENDIX II

- Lagar och förordningar? - Geografiskt avstånd? - Konkurrenskraftig marknad? - Sociala och kulturella skillnader? - Osäkerhet att bedöma efterfrågan? - Marknaden storlek och tillväxt? - Direkta och indirekta handelshinder? - Få eller befintliga mellanhänder för export?

23. Vilka risker upplevde företaget som de största i början av sin export? 24. Hur påverkade dessa risker företaget i början av sin export? 25. Hur har dessa risker blivit behandlande?

Tack för din tid och medverkan!