XLIII Encontro da ANPAD - EnANPAD 2019 São Paulo/SP - 02 a 05 de outubro
Foreign Market Selection: Reducing The Uncertainties Caused By Distance Dimensions Through Strategic Objectives
Autoria Narayana de Oliveira - [email protected] Prog de Pós-Grad em Admin/Cursos de Mestr Acad em Admin e Dout em Admin e Turismo/UNIVALI - Universidade do Vale do Itajaí
Wouter Niels de Vries - [email protected] Master in Strategic Entrepreneurship/Halmstad University
Dinorá Eliete Floriani - [email protected] Prog de Pós-Grad em Admin/Cursos de Mestr Acad em Admin e Dout em Admin e Turismo/UNIVALI - Universidade do Vale do Itajaí
Svante Andersson - [email protected] Master of Strategic Entrepreneurship/Halmstad University
Resumo Organizations inserted on the international business automatically deal with the perceptions of distance that result in differences and similarities between countries. Therefore, the aim of this paper is to analyze the strategic objectives of a firm balancing the uncertainties caused by the perceived distances at the moment of foreign market selection. Through an in-depth cross-country single case study methodology, this study analyzed a Swedish company with subsidiaries in different countries and highlighted the distance symmetry mainly focused on the Swedish and German markets. This research contribute for the international business studies by presenting the importance of the distance dimensions aligned with strategic objectives for foreign market selection. Moreover, this research contributes by proposing that the (lower) level of both objective and subjective (cultural, administrative, geographic, economic, psychic) distances contribute for distance being symmetric. XLIII Encontro da ANPAD - EnANPAD 2019 São Paulo/SP - 02 a 05 de outubro
Foreign Market Selection: Reducing The Uncertainties Caused By Distance Dimensions Through Strategic Objectives
ABSTRACT Organizations inserted on the international business automatically deal with the perceptions of distance that result in differences and similarities between countries. Therefore, the aim of this paper is to analyze the strategic objectives of a firm balancing the uncertainties caused by the perceived distances at the moment of foreign market selection. Through an in-depth cross- country single case study methodology, this study analyzed a Swedish company with subsidiaries in different countries and highlighted the distance symmetry mainly focused on the Swedish and German markets. This research contribute for the international business studies by presenting the importance of the distance dimensions aligned with strategic objectives for foreign market selection. Moreover, this research contributes by proposing that the (lower) level of both objective and subjective (cultural, administrative, geographic, economic, psychic) distances contribute for distance being symmetric.
KEY WORDS - Distance dimensions, Strategic Objectives, Foreign Market Selection
1 INTRODUCTION On the international business (IB) literature, internationalization is a well-researched concept that have been approached through different views, theories and models. It can be described as the sum of strategies and managerial decisions that result in business cross border (Ellis, 2007). The questions that permeate this strategical phenomenon are usually Why, Where and How. Therefore, the reasons why a company should internationalize is the most important question to be asked, since having a good reason to perform business in an international market is a key factor in order to succeed in the operation (Floriani; Fleury, 2010). Even though having a good and clear reason to internationalize is important, the reason by itself is not synonymous of success. Among with the managerial strategies and decisions that permeate the internationalization process, an extremely important question to be discussed is the ‘where’, by the choice of foreign market for internationalization. This question become important in order to analyze and decide which international market fits better the proposed operation resulting in a better performance cross border (Andersson, 2004; Cui; Walsh; Zou, 2014; Magnani; Zucchella; Floriani, 2018). Even tough innovational factors tend to increasingly provide a better global communication and result in countries approximation, the distance between countries still exists and affect business performances (Ellis, 2007). Therefore, distance is defined as a multidimensional construct approached, perceived and measured through different dimensions, not barely by the geographical distance between countries, but by the cultural, administrative, economic and psychic distances as well (Ghemawat, 2001; Ojala, 2015). Literature divide these different dimensions of distance in two main approaches, which are objective and subjective. While the objective approach includes for example the geographic and administrative distances, that are perceived without the influences of personal backgrounds, the subjective approach takes the personal opinion and point of view in consideration, as for example in the psychic distance (Magnani et al., 2018). Researches concerning the influences of distance in the foreign market selection have been performed and controversial findings have been presented (Ambos; Håkanson, 2014). Some of these studies found that the selection of an international target market relies on the analysis of the impacts of the different dimensions of distance in order to select close countries to obtain success on the operations (Ghemawat, 2001). These results are based on the multicultural challenges faced by organizations that involve the differences mainly on language, consumer
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behavior and culture (Tanure; Barcellos; Fleury, 2009). Still, despite the importance of analysis of the distance dimensions, some researchers found that organizations that aim to enter high potential markets may ignore this importance and enter the foreign market anyhow (Malhotra; Sivakumar; Zhu, 2009), while others argue that the distances should be analyzed in combination to other variables, as for example the transactional costs (He; Lin; Wei, 2016). In this meaning, Magnani et al. (2018) proposed that the combination of distances and strategic objectives influence the selection of a foreign market for internationalization. Moreover, that these distances can contribute for asymmetry and relativity. In response to their call for contributions, this study is characterized as a deductive descriptive research, adopting a qualitative approach with a cross-country in-depth single case study strategy. Therefore, this research aims to analyze the strategic objectives of a firm balancing the uncertainties caused by the distance perceived at the moment of foreign market selection.
2 THEORETICAL FRAMEWORK 2.1 Strategic Objectives For Foreign Market Selection The internationalization process of a firm requires an engagement between financial and managerial resources through strategic decisions. In this process, the foreign market selection is considered one of the most important strategic analysis and decision an organization should assume (Mitra; Golder, 2002). Selecting the right foreign market for internationalization may lead the organization to achieve a better performance on the international market (Cui, Walsh; Zou, 2014) and in order to make the right choice, organizations should set clear strategic objectives (Magnani et al., 2018). In order to explain how an organization should strategically choose a foreign market for internationalization, Cui et al., (2014) suggested a combination of approaches considering the distance perceptions as an important variable. The first one is based on Johanson and Vahlne (1977) and assumes that in order to reduce the risks and possibly have a better performance on the international market, organizations should select countries through the psychic distance perspective, where countries should have similarities when it comes to cultural and social aspects. While the other approach adopts the transaction cost analysis based on Erramilli and Rao (1993). In this perspective, organizations should strategically choose markets considering the economic and geographic distances, in order to reduce the possible transactional costs of the operation. Therefore, in order to choose a foreign country to perform business abroad, an organization should consider the similarities between countries and analyze how the similarities would affect the internationalization process (Ghemawat, 2001). Still, researches have been considering not only the perceptions of distance, but the firm-specific factors for foreign market selection as well, in the meaning that even though distance can create barriers in business through different countries, strategic objectives for foreign market selection may enable distant markets to relate and perform business (Oviatt; Mcdougall, 1994). He and Wei (2011) analyzed the foreign market selection for internationalization through the market orientation perspective. According to the authors, organizations aiming to reach the international market while selecting a foreign market should allocate their resources in order to emphasize the market orientation, because high levels of market orientation would facilitate the exploration of cultural distant markets. Nevertheless, there are researches that analyze the combination of the construct of distance with other variables in order to select a foreign market. He, Lin and Wei (2016), for example, analyzed the perspective of the transactional costs and suggested that considering only the distances to select a foreign market for internationalization may not lead the organization to a great performance. However, when the distances are analyzed in combination with the transaction costs, the performance may be increased generating good outcomes. Withal, Magnani et al., (2018) suggested that despite those approaches that consider the perception of distance an important variable to succeed on the foreign market selection, the strategic
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objectives of an organization may also lead a company to strategically choose a foreign market allowing a good performance abroad even with distant countries. In this meaning, companies willing to achieve a distant international market can also build strategies in order to succeed on this operation. 2.2 Distance Dimensions Distance is a multidimensional construct that have been presented and gained much attention on the IB literature as a crucial topic (Magnani et al., 2018; Zahreer et al., 2012). Zahreer et al. (2012, p. 19) explained that “international management is management of distance” and in this context, to deal with companies within the international area means to automatically deal with the distances between them. But how can distance be defined anyway? A simple approach to the definition of distance would be to define it as a multidimensional construct that makes a country different from another (Campbell et al., 2012). Therefore, Ghemawat (2001) suggested the CAGE distance framework, where the construct of distance comprehended the cultural, administrative, geographic and economic dimensions. Although the term culture presents more than one consistent definition, this research agrees with the classic definition of culture from Hofstede (2001, p. 9) as “the collective programming of the mind that distinguishes the members of one group or category of people from another” and the definition of Ghemawat (2007, p. 8) as “the attributes of a society that are sustained mainly by interactions among people, rather than by the state”. In this meaning, culture is considered a key player on the international business, because it creates a distance between markets that can interfere on business in different manners (Ghemawat, 2001). Cultural distance can be easily perceived in different markets through language differences (Campbell et al., 2012), religion, customs (Drogendijk & Martín, 2015), social norms and values. However, it can be also perceived in deeper manners, as for example customer behavior (Ghemawat, 2001). Therefore, it is possible to affirm that the cultural dimension of distance is extremely important (Kogut & Zou, 2018) and cannot be ignored by managers while developing strategies to enter and perform in the international market (Ghemawat, 2001). IB literature also considers geographic distance as a key player for international business (Tanure, Barcellos & Fleury, 2009), however even though it has been well researched, its conceptualization generates discussion in regard to its measurement (Beckerman, 1956). Geographic distance can be understood as the distance between home country capital to foreign country capital (Cyert & March, 1963) and in this case, the geographic distance between Sweden and Germany would be the distance between Stockholm and Berlin, for example. It can also be described through the costs to perform business abroad (Clark, Dollar & Micco (2004); Ellis (2007), or through the distance between geographic centers of countries (Berry et al., 2010). Nevertheless, it can be described through a broader aspect, including the differences on accesses and infrastructures presented on each country, as well as the demography and the sizes of the countries (Ghemawat, 2001; Campbell et al., 2012). Moreover, the institutional distance can be defined as the differences on the institutional profiles between different countries (Ferner, Almond & Colling, 2005). In time, country institutional profile refers to the institutional environment in which the countries are inserted, in the meaning that organizations should be affected by the external environment in which they are inserted, regarding regulatory, cognitive and normative aspects (Kostova, 1997). Therefore, institutional distance is an important dimension to be considered on the internationalization process, especially on the foreign market selection and entry mode. While the economic distance can be characterized by the differences on level of economic development between two countries (Ghemawat, 2001). In later research on a broader context, Ghemawat (2007, p. 13) defined it as “the differences that affect cross-border economic activity through economic mechanisms distinct from the cultural, administrative, or geographic ones”. Finally, usually associated or even confused with cultural distance, the concept of psychic distance is a very researched
XLIII Encontro da ANPAD - EnANPAD 2019 São Paulo/SP - 02 a 05 de outubro
concept on the IB literature (Sousa & Bradley, 2006), especially in concern to the foreign market selection (Brewer, 2007). Early on research, Johanson & Wiedersheim‐Paul (1975, p. 308) defined psychic distance as “factors preventing or disturbing the flows of information between firm and market”, these factors could be characterized for example through language differences, education levels and differences on business behavior (Johanson & Vahlne, 1977). After some years, the concept was updated as “factors preventing or disturbing firm’s learning about and understanding a foreign environment” Vahlne & Nordström (1992, p. 42).
3 METHODOLOGY This study is a deductive descriptive research, adopting a qualitative approach using an in-depth single case study as a research strategy. Selecting the case study to perform the research is a key step in order to guarantee the efficiency of the analysis and results (Ghauri, 2004). The first criterion used to select the case was the company profile. It was important to search for a company characterized per the number of employees as small and medium-sized enterprise (SME), due to the economic dependence that Sweden presents in regard to SMEs. Besides being characterized as a SME per the number of employees, the company should present a high international outreach with at least commercial subsidiaries in more than one country. These variables would allow the authors to analyze the strategic objectives adopted regarding the uncertainties caused by the different dimensions of distance from the countries in which the companies work and have subsidiaries. With that established, the other criterion was analyzed in regard to the informant’s availability. It was important to have contact with informants that were responsible for the internationalization decision, especially the foreign market selection, in order to get valuable information about their perception of the distances between markets, as well as strategic objectives.
3.1 Analysis’ Object: Axelent AB Axelent AB is a family owned company, founded in 1990 and located in the city of Hillerstorp, Sweden. It has two main areas of operation, which are Axelent software and Axelent engineering. The company develops, manufactures and sells a variety of products focused on storage and guarding, with safety, speed and quality in its highest regard. After ten years of establishment, the company had a turnover of five million euro and was present in ten countries around the world. In 2018, the turnover increased for eighty million euro and the countries in which the company has business increased to sixty countries around the world.
Table 1 – Case Details: Biggest Countries in Revenue Size (= Number of Country Year of Constitution Employees) Turnover in £ in 2018 Sweden 1990 218 29.8 million Germany 1993 20 11.5 million United States 2001 9 4.7 million Japan 2010 2 2.4 million France 1993 22 Unknown Belgium 2001 10 9.4 Spain 1996 15 4.7 Finland 1993 0 Included in Sweden Netherlands 1992 3 Included in Belgium Australia 1999 5 1.5
Denmark 1993 1 Included in Sweden Source: Research Data (2019)
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As seen in Table 1, the Swedish market is still the most dominant market for Axelent. With a turnover of 29.8 million euro a year, it is almost triple compared to its runner up, Germany. Partially this is because the Swedish market has an extra product on sale. Another reason is the more saturated market in Germany. Over more than 30 direct competitors in Germany makes business more competitive. However, according to our second interviewee, Axelent GmbH is among the top three for turnover in the German Market. 3.2 Data Collection and Analysis Our empirical work combines two main sources of data: semi-structured interviews and secondary data. Therefore, the first step for data collection of this research was dedicated to the construction of the interview script, designed to address our research purpose. To achieve them, the script first included general questions regarding the responded international experiences, as well as the company history, size, international outreach and main international markets in revenue. The script was then followed by questions focused on the internationalization process of the company, such as how the process was, the sequence in chronological order of countries, as well as the entry modes strategies and barriers to enter the countries. Afterwards, the dimensions of distance were approached focusing on the three main markets in revenue. The script included questions in regard to similarities, market complexity, institutional, cultural, geographic, economic and psychic dimensions of distance. Overall, the authors were able to conduct two in-depth interviews with the responsible for the internationalization of both the Swedish and German offices. Accordingly to the table presented below, the informants’ will be found in the analysis as Export Manager (Sweden) and Director (Germany).
Table 2 - Details of The Interview Number of Country Informant Interview duration Interviews Sweden Export & Marketing Manager 1 01:09:25 Germany Director 1 00:45:56 Source: Research Data (2019)
The interviews took place in April of 2019 and were held in both in person and online. The interview performed with the Swedish headquarter lasted one hour and ten minutes in person, while the interview with the German subsidiary lasted forty-five minutes through Skype, accordingly to the table presented below. Both the interviews were recorded with the consent of the participants for posterior transcription and afterwards. In order to triangulate the primary and secondary datasets, the information collected on the in-depth interviews was organized, along with all the secondary data collected thought Xnews publications from Axelent. In regard to the analysis, it made necessary to perform a single case analysis for the main market, accordingly to the internationalization process, the distance perceptions and the strategic objectives perceived thought both Swedish and German informants. Moreover, in order to identify the similarities and differences in regard to the different countries that Axelent operates, a cross-country comparison was performed with information collected from both informants from the other markets.
3.3 Research Context This section presents the research context of the study. It does so by presenting the comparison of the countries in analysis concerning the dimensions of distance measured by objective indices, as economic, institutional, administrative and cultural distances.
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Table 3 - Sweden and Germany: Comparison of countries by dimensions of distance Literature/Data Variable Operationalization Source Economic Distance Sweden: 53.442,01 Economic distance GDP per capita (2017, US$) Germany: 44.469,91 - Income GDP per Ellis (2008) capita (US$) Magnani et al., Sweden: 2.3 Inflation (2017, annual %) - Inflation: GDP (2018) Germany: 1.5 deflator (% GPD) Worldbank - Exports of goods and 2017 World Exports of goods and Services (2017, Sweden: 45.346 services (% GDP) Development % of GDP) Germany: 47.047 - Imports of goods and Indicators services (% GDP) Imports of goods and services (2017, % Sweden: 41.661 of GDP) Germany: 39.486 Institutional/Administrative Distance
The governance indicators are presented in six dimensions provided by the World Bank. The data is Worldbank collected from a variety of sources. Ranking is from 0 – 100.
Cultural Distance Sweden: 31 Power Distance Germany: 35 The Hofstede model of Sweden: 71 national culture consists Individualism Germany: 67 of six dimensions. The cultural dimensions Hofstede Sweden: 5 Masculinity represent independent (1980) Germany: 66 preferences for one state Hofstede et al., of affairs over another (2010) Insights, Sweden: 29 Uncertainty Avoidance that distinguish H. (2018) Germany: 65 countries (rather than individuals) from each Sweden: 53 Long Term Orientation other. Germany: 83
Sweden: 78 Indulgence Germany: 40 Cyert & March (1963) Geographic distance Ghemawat measured as the (2001) Geographic Distance Stockholm - Berlin: 982 km distance in kilometers Geographic between countries' coordinates capitals collected from Google Maps Source: Research Data (2019)
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In Table 3, statistical information of both countries is presented. If we look at the economic distance of both countries, we can see that they are relatively equal. Both the inflation and the export and import of goods and services are close to equal, with insignificant difference among them. It is interested to see that the GDP per capita in Sweden about 18% higher is than Germany (Worldbank, 2017). When we look at the institutional distance, we can see that the governance indicators, presented by the Worldbank (2017), also don't change significantly. The diverse cultural distance is interesting to see. To analyze the data the six differentiations in cultural differences presented by Hofstede (2010) are used. If we look at masculinity, we can clearly see that Sweden scores exceptionally low compared to Germany. This means that in Sweden, competition, achievements and success are not of high priority. Also, the uncertainty avoidance and long-term orientation show significant difference between the countries.
4 RESULTS AND DISCUSSION Axelent’s internationalization activities dates back to its establishment year, in 1990. According to the Export Manager (2019), the company aimed to reach international market ever since it started the operations in Sweden, and the goals was primarily to reach the European market before expanding the business to other continents. Thus, at the same year of its establishment, Axelent entered the Dutch market with a local partner through the export entry mode. After ten years of establishment, Axelent was present in ten countries around the world and in 2018 its international outreach increased to activities to over 60 countries. Table 4 presents information concerning Axelent’s internationalization process in regard to their ten main countries in revenue in the year of 2018.
Table 4 - Case Details: Internationalization Process of the Ten main markets in revenue
Country Entry Mode Germany Export United States Office Japan Office/Own Warehouse France Agent Belgium Office Spain Agent Finland Export Netherlands Export Australia Agent Denmark Export Source: Research Data (2019)
It is possible to analyze that Axelent’s international outreach increase was developed through the geographical distance, in the meaning that the first markets the company reached were geographically close to Sweden. In 2019, 90% of Axelent’s international operations remain in the exportation mode. As presented in Table 5, from the ten main markets in revenue, Germany, Finland, Netherlands, Denmark, had their operations initiated through this market entry mode. On the other hand, the Spanish market was first reached through an agency activity. In time, Axelent prioritized to find small agents that do not hold a large portfolio and will “live on your product and do their best to sell it” (Export manager, 2019). Axelent worked with the Spanish
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market through this single agent and given the good results and outcomes reached, the company decided to acquire the agency and established Axelent Spain S.A.. Unlike the other countries, the American, Japanese and Belgium markets had their operations already initiated through commercial subsidiaries. Therefore in 2019, Axelent Group is formed by companies established in sixteen different countries around the world. These countries include Sweden, Finland, Denmark, Norway, Italy, Spain, France, Germany, The United Kingdom, Belgium, the Netherlands, Luxembourg, Japan, United States of America, Australia and Brazil. Until today, the whole production line of Axelent remains in Hillerstorp, a small Swedish city geographically located 384,9 km away from Stockholm and 1084,3 km away from Berlin (Cyert; March, 1963, Ghemawat, 2001). Due to the well-automated production line and the desire to maintain the high Swedish quality in production process, the Swedish factory in Hillerstorp supplies all the subsidiaries, warehouses and clients around the world (Export Manager, 2019). When it comes to the strategic objectives, that may help companies to reach distant markets (Oviatt; Mcdougall, 1994), the decision to enter a foreign market is individually analyzed by Axelent. Every country presents a different attractiveness and for this reason, a different strategy is established. According to the Export Manager (2019), when selecting a new foreign market, Axelent tries to have a first contact from Sweden to the new country, with the intention to grab initial information and analyze the possibilities concerning the market potential, competitors and risk. After this first contact and analysis, the export manger, which is responsible for the foreign market selection, visits the country to receive a deeper understanding in the market. One of the strategic reasons to internationalize to a given country is a market potential exploitation (Cui et al., 2014). Taking this into account, Axelent first decided to enter the United State of America due to its huge market potential in sales, accordingly to the German Director (2019) “The United States is a huge country”. Still, not only presented the country the potential of growth on sales and revenue, but also the opportunity to act as a hub connecting Axelent to other North American markets as well. In this case, Axelent established a logistic center in the city of Chicago (Export Manager, 2019). For the same reasons as the American market, Axelent also decided to enter Brazil due to its potential as a huge market presenting many opportunities. According to Axelent do Brazil (2019), one of the biggest advantages of representing the company in Brazil is that they have full support from the Swedish head office to open and explore such a potential market as Brazil. The country is characterized as a strong producing country and the Export Manager believed that Axelent could benefit not only from the potential on sales, but also from the geographic location of the country. Brazil works as a hub for other potential South American countries such as Argentina, Chile, Uruguay and Paraguay. The same attractiveness was perceived in other countries such as Japan and Australia, where Axelent has logistic centers where full containers are sent for posterior distribution to other countries around. Following the same line of strategy, Axelent decided to first enter the Thai market in order to set up a warehouse in the city of Bangkok. According to the Export Manager (2019), to establish a warehouse in Bangkok means to be included in a custom free zone, acting as a hub for the South East Asian market, without paying import taxes. Although all the production from Axelent remains in Sweden, the company is aware that possibly in the future due to volume growths this operation will not be financially advantageous anymore. Therefore, Axelent strategically considers two main markets where the production could possibly be installed, which are Japan and the United States of America. Still according to the export manager, due to financial resources it would probably be cheaper to build a production subsidiary in the United States of America. Even though countries have differences among each other, they all have something in common when it comes to Axelent: The way you reach and deal with each one of those market with the same need is different, according to the distance perceptions related below.
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Culture is an important and challenging player in the IB (Hofstede, 2001; Ghemawat, 2001). From the markets that presented cultural barriers, while the German Director (2019) considers the American market challenging, the Export Manager (2019) mentioned Japan as a cultural distant market. From his perspective Japan is a totally different culture and how to sell and meet people is different. Therefore, it takes a long time to get through the barriers of the sales people. Still, according to his perspective, once the barrier is broken, the Japanese market reacts really well to the Swedish way of doing business. According to the Export Manager (2019) perspective and going according to Ghemawat (2001), the barriers can be found while entering a foreign market, but also in the daily negotiations after the first business relation is established. As an example, the Export Manager (2019) mentioned negotiations in Dubai. This is concerning the barriers Axelent faces when customers refuse to work with female employees. Moreover, according to his perceptions, the barriers can also be found especially in business trips and visitations. As an example, the export manager mentioned the business trips to Korea, where negotiations are always followed by huge celebrations that distance themselves from the Swedish way of doing and celebrating business, which is more conservative. When it comes to cultural distances concerning language barriers, the Swedish Export Manager (2019) mentioned that most of the countries in which Axelent is present worldwide work well in English. His perception is that in Europe, for example in the Netherlands or in Sweden, people are good in English and it is quite easy to find people speaking English not only in business situations but also on the streets. Still, even in countries where the English language is not that evolved, as for example Thailand, most of the companies deal well with the English language while performing business meetings, calls or witting emails. However, language barriers can be found in different markets. Axelent first faced it while entering the Brazilian market, when a Brazilian company contacted them in Portuguese aiming to establish a commercial partnership. According to the Swedish export manager, the first negotiations were hardworking and time demanding. Axelent first used Google Translate as a tool to communicate with the Brazilian company by emails. Given the potential growth they believed the country could have. Axelent hired an employee that could speak both Portuguese and Swedish to facilitates the negotiations between the countries. Moreover, according to the Swedish export manager’s perspective, geographic and cultural closeness may not be the only variables considered when selecting a foreign market. From his perspective, the easiest country a Swedish company can negotiate with is the United States of America. On the contrary, one of the most difficult countries Axelent is dealing with is surprisingly the Danish market. Despite the fact that Sweden and Denmark are geographic, administrative, institutional and cultural close countries, the Swedish export manager perceive a high difficulty while dealing and negotiating with a Danish company. Even though from the Swedish perspective the geographic distance is not the only variable to be considered, it also affects business attractiveness and performance. As an example the export manager mentioned the South American market, where even though countries like Columbia and Chile have been growing significantly, and present themselves as import friendly, the logistics it takes to get the products in their final destination makes the business impracticable due to the high cost and long transit times. Besides the influence of the geographical distance, some countries also become less attractive by the administrative and economic distance. Brazil is an example given by the export manager from Axelent, whom says that the Brazilian market has a huge potential, but its taxes and bureaucracy reduce its attractiveness and creates uncertainties during market exploitation and growth. This is also observed in the Italian and Thai markets. Italy has its own producers and in order to protect them, the government applies a high level of bureaucracy and taxes, significantly reducing the markets attractiveness. Whereas for the Thai market, the Thai law writes that Axelent can only own 48% of the company. As per explained by the Export Manager (2019), it is possible to own 100%, however
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there is a need to fulfill different categories and one of them is to have 30 million Swedish crowns in a Thai bank. In this context, due to the current dictatorial political system, having 30 million Swedish Krona in an unstable country is not safe. Despite the bureaucratic system, Thailand’s government provides an important support for international companies concerning application, investments, interviews and procedures, reducing the barriers of administrative distance between the countries. Following the same line, the American market also has a private institute called the Swedish American Chamber of Commerce (SACC), providing support to Swedish companies and people.
4.1 Axelent Sweden vs. Axelent Germany The German market have been a huge, important and growing player for Axelent AB for a long time, according to (Axelent GmbH, a German pearl, 2016) “Our goal is to grow step by step and when needed. We plan to increase our workforce by two or three when we enter the next phase of the company’s development.” The company first decided to enter Germany due to its geographical closeness and machine building industry potential (Export Manager, 2019). The German Capitol is located 982 km away from the Swedish Capitol, which from the economic and logistics point of sight, facilitates the business between the countries (Director, 2019). Moreover, Germany is known as one of the world leading countries in machine building industries, especially in the car’s industry. According to the High-technological X-marked center (2016), the German free state of Bavaria is known all over the world for its car and machine manufacture and in 2001 the Bavarian government launched an offensive to become a high-tech center. In this meaning and according to the Export Manager (2019), the Swedish company benefits from the reputation linked to the German machine building leading potential market and the presence on the German market results in worldwide recognition for the Swedish company. Therefore, close to Axelent’s establishment in Sweden back in 1990, the company analyzed the German market and found a huge potential to be exploited through its products concerning storage and guarding for industries. Given the exposed, the first time Axelent entered the German market dates back to three years after its establishment in Sweden, in 1993. The internationalization process happened first through the exportation mode with a few customers that imported directly from the Swedish company. Still in the same year, Axelent established a commercial subsidiary including a single employee in the city of Bochum, Germany. Given the relevant growth that came after the establishment of the commercial subsidiary there, Axelent decided to move the operations to the city of Stuttgart and established Axelent GmbH, a subsidiary managed only by Germans nowadays. From the Export Manager (2019) perspective, the distance perceived between Sweden and Germany is relatively small. The similarities found between the countries make the business seem quite natural, and Swedish products are very well accepted in Germany. Still, although the distances may be gently perceived, they affect the business between the countries and can be identified in different dimensions, as per explained below. When it comes to cultural distances, according to the Export Manager (2019), the distance can be easily and mainly perceived through the German conservatism, in the meaning that Germany presents more conservative characteristics than Sweden. In his perspective, it is harder to build a business relationship with Germans and to implement a change after this relation have been built, it even seems as “Everything is forbidden in Germany” (Export Manager, 2019). Given the exposed, Axelent GmbH is managed by Germans and has freedom to build their own strategies concerning costumers’ relation and marketing approaches. As an example, the Swedish export manager mentioned a marketing campaign used by Axelent for over a year that
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explains not only the product offered, but also the production and the process as a whole through animation movies with a mascot called Axel. The mascot is a huge success in different markets, however regardless the success, Axelent GmbH does not include the campaign in their strategy. According to the German Director (2019) “Germans are stricter, have more rules, as you see I have no tie on and that is not typical for Germany. It is becoming more and more that you have business meetings without a tie, but sometimes I have the feeling that in Sweden it is forbidden to wear a tie”. Concerning language aspects from the Swedish perspective, the languages present similarities that facilitate the understanding between countries. He even mentioned that he speaks a little bit of German as well. Still, although the Swedish informant may be able to speak a little bit of German, from the beginning all the negotiations and meetings between the companies happen in the English language.
4.2 Axelent Germany vs. Axelent Sweden Even tough from the Swedish perspective to be inserted in the German market means to be recognized by the operations in one of the world leading countries in machine building industries, the German market also benefits from the Swedish reputation. According to the German Director (2019) and agreeing with the exposed by the Swedish Export Manager (2019), Sweden is well recognized in the German market as a high-quality production country. Given the huge success companies such as Volvo, Scania and Ikea present in the market, Germans see the Swedish product as a product with high quality, standard, reliability, durability and security. Therefore, from the German perspective, the Swedish reputation result in a high acceptance of the Swedish product among the German market. Moreover, according to the German director, Axelent GmbH benefits from the geographical, administrative and economic small distances between Germany and Sweden. When purchasing from Axelent GmbH, costumers not only expect to receive a high quality and secure product, but they also expect to receive the product fast. Due to the fact that the countries present a geographical closeness and are also benefited from commercial trades, the products are delivered from Axelent Sweden to Axelent Germany in less than a week. Therefore, accordingly to the German Managing Director: “From the economic point of sight, the logistics is so optimized that it makes no sense to build a warehouse here in Germany.” In accordance with the exposed by the Swedish export manager, the German director stated that working with Sweden is quite easy and the business flow from the similarities found between the countries. Still, differences are found, and distances can be perceived, especially in cultural aspects, as per detailed hereafter. From the German point of view, working with a Swedish company means working with a flat organization, not as in Germany where organizations are very hierarchical. Therewithal, the cultural distance between the countries can be easily perceived through the differences on business profile. Concerning language aspects from the German perspective, there are similarities and closeness between Swedish and German languages. As mentioned by the German managing director “When you read some Swedish text, it is not far away from German. If I read a text, I sometimes understand the meaning, but if they are talking to each other I have no idea”. Still, regardless the similarities found between the languages, the German director reinforced that “English is the language of the company” (German Director, 2019). Moreover, from the German perspective, even though the countries are culturally close from each other, they present a low but significant social distance that affects the business relation between them. In his perspective, Swedish people are more open for relationships, while Germans are more strict and harder to get in touch. In this meaning, he believes that Germans are harder to build a close relationship and according to his perspective and despite the similarities found, German people may react better to the business relation performed by their
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own people. Axelent GmbH values the relation with customer in the first place. They want to deliver not only a high-quality product produced in Sweden, but also deliver the service and build a confident and good relation between the company and the costumer. Given the exposed concerning the better acceptance of Germans dealing with their own market, according to the German director, Axelent GmbH took the most important decision in 2009 and became a wholly owned German subsidiary assisted by Handelskammer (the German Chamber of Commerce). In this meaning, Axelent GmbH promote itself benefiting from the Swedish reputation on quality, but do not use the Swedish background in order to perform their business. Therefore, Axelent GmbH is considered a German sales organization for the Swedish factory. As an example of background disconnection and despite the fact that the Swedish company has a department focused on it, the German director mentioned the different marketing actions performed by the companies. Axelent GmbH values the close relation with the customer and focus their efforts to reach the target market using a marketing mix, where exhibitions and especially sports sponsoring are an important player to reach and build a relationship with their clients. Despite the fact that the marketing campaign using Axel may be a huge success in different markets, Axelent GmbH believes that their clients, usually male engineers around 35 and 55 years old, would not be touched by the mascot.
4.3 Analysis Given the exposed highlights concerning Axelent’s Swedish head office perceptions towards the international market and pair country perceptions from both Sweden and Germany countries, it is possible to proceed with the main findings and results of this research. Primarily, the internationalization defined as a process with a gradual commitment by strategical steps proposed by Johanson and Vahlne (1977) in the Uppsala Model is validated in our case. Even though Axelent is present in sixty countries around the world and has subsidiaries established in sixteen countries, the company entered almost all the international markets through exportation mode, which is characterized as a primary, low risk and commitment mode of entry (Pan; Tse, 2000). Our study reveals that despite the effects and uncertainties caused by the different dimensions of distance while entering an international market (Ghemawat, 2001), the foreign market attractiveness and potential of growth may affect a foreign market selection decision (Malhotra; Sivakumar; Zhu, 2009) and therefore, the strategic objectives have an important role in this process. As illustrated in the previous section, Axelent would not have entered Brazil, Japan or Thailand barely by the analysis of both objective and subjective distances. Still, regardless the geographic, cultural, administrative, institutional, economic and psychic distances between the countries, Axelent analyzed and strategically entered the markets by the market potential and attractiveness they presented concerning the possibility to act as a hub to other countries around. This research also agrees with the strategical combination of the use of the distance dimensions combined with other variables for foreign market selection (He; Lin; Wei, 2016). The results show that Axelent combined the market potential and attractiveness from Germany with both objective and subjective low distances perceived. Therefore, this research confirms the proposition from Magnani et al., (2018, p. 16) which says that “The selection of a given target country is influenced by a combination of objective dimensions of distance, individual perceptions of distance, and firm-specific strategic objectives”. Moreover, the use of Sweden and Germany as pair countries enabled us to analyze and highlight the distance asymmetry. Our results show that Sweden and Germany present similarities and lack a high distance from each other concerning objective and subjective distances (Magnani, et al., 2018). In regard to economic distance, the similarities emerge from the fact that both countries are considered developed, with almost no difference in inflation levels, as well export and import index (Ellis, 2008; (Worldbank, 2017).
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Geographically, Sweden and Germany are considered close countries by the 982 km that separate them (Cytert; March, 1963; Ghemawat, 2001). Still, although the countries present some differences on cultural levels concerning masculinity and uncertainty avoidance (Hofstede, 1980; 2010), our study reveals that the perception from Sweden to German culture and from German to Sweden culture is similar. Therefore, the use of these countries with low objective and subjective distances as a pair of countries for analysis made also possible to confirm Magnani et al., (2018, p. 16) proposition which says that “The three distance dimensions (objective, perceptual, and strategic) contribute to distance being asymmetric and relative”. However, this research complements this proposition by saying and revealing that the distance dimensions contribute to distance being asymmetric, but the results can be different when the objective distances are similar. This complement is based on the symmetry found between the perceptions from Axelent Sweden to Axelent Germany, and from Axelent Germany to Axelent Sweden, as explained above. Given the exposed so far, this study characterized as in-depth single case study that analyzed the role of the strategic objectives to reduce the uncertainties caused by the different dimensions of distance lead us to complement literature by proposing the following: Proposition - The (lower) level of both objective and subjective (cultural, administrative, geographic, economic, psychic) distances contribute for distance being symmetric.
5 CONCLUSION AND RECOMMENDATIONS The aim of this chapter is to present the theoretical and managerial implications of this research, as well as the limitations and the recommendations for future research. In order to succeed in operations on the international market, companies must be aware of the importance of the foreign market selection for internationalization (Cui; Walsh; Zou, 2014; Magnani et al., 2018). This research presented the foreign market selection through the lens of the effects of the different dimensions of distance (Ghemawat, 2001) as well as the strategic objectives (Magnani et al., 2018). Aiming to analyze the strategic objectives of a firm balancing the uncertainties caused by the distance perceived at the moment of foreign market selection, this research was designed to contribute to the IB literature by analyzing the internationalization of a single company with high international outreach and with subsidiaries in different countries around the world. In this meaning, this research complemented literature by being characterized as a cross-country analysis, since it evaluates country specific results, as well focus in Sweden and Germany as a pair of countries characterized as developed countries. Our study confirmed two of Magnani et al., (2018) propositions, which says that the selection of a given target country is influenced by a combination of objective dimensions of distance, individual perceptions of distance, and firm- specific strategic objectives. Moreover, it also confirms the proposition which says that the three distance dimensions (objective, perceptual, and strategic) contribute to distance being asymmetric and relative. Still, our research offers new theoretical insights by revealing that the distance dimensions contribute to distance being asymmetric, but the results can be different when the objective distances are similar. Therefore, our main conclusion is that the (lower) level of both objective and subjective (cultural, administrative, geographic, economic, psychic) distances contribute for distance being symmetric. Two major takeaways are found. First the objective dimensions of distance, as well as the individual perception of distance and firm specific strategic objectives are influencing a company’s decision during the selection of a new foreign market. Furthermore, Concerning managerial implications, this research provided managerial contribution for international companies, especially SMEs, by showing that distance considerations and strategic objectives need to be strongly aligned while selecting a foreign market for
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internationalization. Moreover, it helps companies inserted in develop countries to outreach other developed countries strategically. Although this research contributed for literature by revealing important insights concerning the foreign market selection for internationalization, it presents certain limitations. Despite our efforts to analyze the distance asymmetry through the use of a cross-country single case study, this study considers the number of pair countries analyzed a limitation. Our first recommendation for future research would be to analyze a single company through the perspective of more than one subsidiary, aiming to get different perspectives and deeply analyze the distance asymmetry. Moreover, while Magnani et al., (2018) analyzed Italy and Brazil (one developed and one emergent country) as the pair of countries with high objective and subjective distances, our research complemented literature by analyzing Germany and Sweden (both developed countries) as a pair of countries with low similarities. In this meaning, our main recommendation for future researches would be to analyze Magnani et al., (2018) propositions, as well to validate our complementary proposition by analyzing a pair of countries presenting low objective and subjective distances, through a pair of countries where both countries are characterized as emergent countries.
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