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Foreign Market Entry and Internationalization: Research Avenues and Selected Implications for Central and Eastern European Firms

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Foreign Market Entry and Internationalization: Research Avenues and Selected Implications for Central and Eastern European Firms Foreign market entry and internationalization: research avenues and selected implications for Central and Eastern European firms Soňa Ferenčíková Abstract: The research front in the international business area has begun to face the following issue: are existing internationalization theories relevant to the companies from Central and Eastern Europe that have started the internationalization process differently from the Western companies, with different experience, resources, in different time and under different conditions? Or is the Central and Eastern European situation so unique that we can form some new theoretical perspective? These are the major research questions - in order answer them, we must first analyze major internationalization theories. Therefore the aim of this paper is to analyze these theories and discuss their implications for Central and Eastern European companies. Based on that, we suggest the future avenues of the research in this area. Key words: Internationalization, foreign market entry, Central and Eastern Europe 1. Introduction After the fall of the Iron Curtain the internationalization process of Slovak companies started at an incredible pace. Before the Velvet Revolution there was a foreign-trade monopoly imposed on export and import operations, and only those few companies that were granted permission from the socialist state could perform foreign trade operations. After the first months of building a market economy, any start-up and any state-owned or freshly privatized company could enter foreign markets, and export and import their products and services. The research front in the international business area has begun to face the following issue: are existing internationalization theories relevant to the companies from Central and Eastern Europe that have started the internationalization process differently from the Western companies, with different experience, resources, in different time and under different conditions? Or is the Central and Eastern European situation so unique that we can form some new theoretical perspective? These are the major research questions in our area of study. In order answer then, we must first analyze major internationalization theories and explain their implication for CEE companies. This paper is a humble attempt to do so. Second step in our research will be the choice of a sample of the Slovak SMEs - we plan to test existing theories on them. We assume that the specific feature of the newly-born market economies are newly- born companies, entrepreneurial companies, SMEs and if we should bring some novelty to the existing internationalization theories, the SMEs sample is the most appropriate one. 2. The Uppsala Model The Uppsala internationalization process model presented by Johanson and Vahlne (Johanson and Vahlne 1977) is based on empirical observations but has an important theoretical base in the “behavioral theory of the firm” (Cyert & March, 1963) and in the “knowledge-based theory of the growth of the firm” (Penrose’s 1959). (Similarly to the Uppsala model, the behavioral theory describes how companies, during their internationalization process, gradually increase their international involvement). According to Uppsala model, the internationalization is “usually a long, slow and incremental process (from exporting to neighbouring markets to investing in farther countries)” and “it is driven by (graual and relatively slow) experiental market knowledge acquisition.” (Vissak et al., 2008, p. 38) The model is based on four assumptions: 1. The firm rationally tries to increase its long-term profit 2. The firm is risk-averse 100 3. The firm has limited knowledge 4. Market knowledge is acquired through experiential learning (learn-by-doing) To explain how a company expands within a country, the model uses the concept of “establishment chain”, a sequence of stages that a company has to take during its evolution, each of them corresponding to a higher level of commitment. The inexperienced firms are more afraid of the output of their investments and therefore try to limit their risk by committing few resources. As soon as they gain experience in the market, they are more willing to become more involved. The four main stages recognized are: 1. No regular export activities 2. Export via independent representatives (agent) 3. Sales subsidiary and 4. Production/manufacturing Furthermore, Johanson and Vahlne introduce the concept of “psychic distance” to explain how the firms decide where their expansion will take place: according to the theory, companies initially move to countries that are close to their home base in terms of geographical and cultural distance, simply because their knowledge of those markets is higher. The internationalization process of the firm can be pictured in the following way: State aspects Change aspects Figure 1. The basic mechanism of internationalization state and change aspects (Johanson et al., 1977). The model is based on state aspects (market knowledge and market commitment) and change aspects (commitment decisions and current activities) Market knowledge is the amount of knowledge about foreign markets possessed by the firm; it can be divided in general knowledge and market-specific knowledge. Market commitment is composed of the amount of resources and the degree of commitment. The amount of resources refers to the factors allocated to a specific market; the degree of commitment defines the difficulty of finding alternative uses for these resources (Johanson and Vahlne 1990). Commitment decisions are decisions to commit resources to a foreign market. Current activities are the business activities of the firm at a given time; they are the prime source of experience. The central idea of the model is that firms initially gain experience from the domestic market and later, in order to maximize profits, gradually increase their international commitment. An important aspect is the fact that market knowledge and commitment are considered directly related; in fact, at the beginning, the firm has a limited knowledge of the market and has, at the same time, a limited involvement of resources (it is in the first of the four stages mentioned before). The firm will gain more knowledge by being present in the market and performing there its activities, as a result, the degree of commitment to that foreign market will also be higher (and the company will progressively move to the other three stages of internationalization). Internationalization is presented as a gradual process linked with learning; higher market knowledge and commitment will reflect into commitment decisions and into a higher degree of business activities in the foreign market. The main obstacle to internationalization is, therefore, the uncertainty deriving from the lack of knowledge; the more a firm becomes familiar with a specific market, the lower the perceived market risk will be and the higher the actual investment will be. Even though the model is still considered actual and often used as a theoretical base for many studies, it is also criticized for three main reasons: Firstly, the model was based on observations of four large manufacturing Swedish companies in the 1970s, and it could not have a sufficient explanatory value today in different contexts. Secondly, the internationalization is described as an irreversible and pre-defined process linked with incremental learning. Thirdly, the model suffers from a tautological explanation of the learning process, where more knowledge brings more commitment and more commitment brings more knowledge, without describing exactly where the cycle begins; “Thus, the model expects that the internationalization 101 process, once it has started, will tend to proceed regardless of whether strategic decisions in that direction are made or not.” (Johanson & Vahlne, 1990, p. 12.) Implications of the model for CEE companies Before transition, the typical model of the activity of the CEE companies on the foreign markets was based on so-called “foreign-trade monopoly” i.e. exporting was possible only through few, usually commodity- oriented, foreign-trade organizations. Local companies had very limited knowledge and access to the foreign markets and if it existed in the case of the biggest local companies, it was typically focused on the COMECON markets. After the change of the political and economic systems at the beginning of the 90’s the local companies (state-owned, state-owned prepared for privatization, new start-ups) faced many challenges including lack of know-how in operations on foreign markets, lack of personal and foreign language capabilities, and lack of finance. The natural consequence was the concentration of the foreign activities on the neighboring countries (relatively known environment, easiness in contacting the partners) and the tendency to start with low- commitment entry mode, typically exporting. From that period, many things have changed, but we assume that in the classical industries this model is prevalent: local CEE companies enter agricultural sector in the neighboring countries, the local companies place manufacturing in the close countries, provide services (e.g. construction, retail) on the neighboring markets, etc. If we study the territorial structure of the export of the CEE countries and deduct the share of intra-company trade of big multinationals, we assume that the majority of the exports are placed in the neighboring or close countries. This is also supported by the political history of CEE – many
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