The internationalisation process: case-studies of Swedish small and medium sized enterprises entering the German market

Lena Goldkuhl

The Internationalisation Process

2001:123

EXAMENSARBETE

Ekonomprogrammet C-nivå

Institutionen för Industriell ekonomi och samhällsvetenskap Avdelningen för Industriell marknadsföring

2001:123 • ISSN: 1404-5508 • ISRN: LTU-SHU-EX--01/123--SE

The Internationalisation Process

- Case-studies of Swedish Small and Medium Sized Enterprises Entering the German Market

Lena Goldkuhl

Bachelor of Science in Industrial Marketing

Department of Business Administration and Social Sciences Division of Industrial Marketing

BACHELOR’S THESIS

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P ^REFACE

Normally, I work with exports to Germany, in a small Swedish enterprise, but now I am on leave for studies, since I wanted to learn more about marketing. So, what could be more suitable than to investigate how Swedish small and medium sized enterprises internationalise to Germany?

However, this thesis would not have been completed without the help of some wonderful people.

First of all, I would like to thank my supervisor, Lars Bäckström, who has helped me with guidance and many wise advises.

Further, I would like to thank the respondents, that is, marketing director Arto Brushane at Antenna, Kalix, and managing director, Bill Svensson at Svalson, Öjebyn. Thank you for being so co-operative and helpful.

Finally, a special thanks to Peter, for his understanding and enormous support during my studies and this Bachelor’s thesis.

Luleå 29-05-2000

Lena Goldkuhl

Wisdom is not a product of schooling, but of the lifelong attempt to acquire it.

/A. Einstein (1879-1955)

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S ^UMMARY

The internationalisation literature tends to rely on large multinational enterprises as the traditional unit of analysis, despite the fact that SMEs are active in international markets. In a Nordic study, SMEs experienced the choice of distribution channel as the largest barrier to exports. Further, Germany is Sweden’s most important export market. Therefore, the purpose of this thesis was to investigate how the internationalisation process of Swedish SMEs when entering the German market can be characterised. The research was conducted by personal interviews in two case-study firms in the engineering industry. The conclusion is that the internationalisation process of these SMEs did not correspond to most of the accepted theory models, which seems to support the criticism of these models that some researchers have presented. I recommend the management of SMEs to appreciate the importance of planning, and also to evaluate the enterprise’s future economical abilities, before choosing mode of entry.

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I ^NDEX

1 INTRODUCTION ...1

1.1 BACKGROUND...2

1.2 PROBLEM AREA...3

2 THE INTERNATIONALISATION PROCESS...4

2.1 CHANGE AGENT...4

2.1.1 INTERNAL CHANGE AGENT...4

2.1.2 EXTERNAL CHANGE AGENT...4

2.2 MOTIVES FOR FOREIGN EXPANSION...5

2.2.1 PROACTIVE MOTIVATIONS FOR SMES...5

2.2.2 REACTIVE MOTIVATIONS FOR SMES...6

2.3 MARKET SELECTION...7

2.4 FOREIGN MARKET MODE OF ENTRY...7

2.4.1 INDIRECT EXPORT...9

2.4.1.1 Trading Firm ... 9

2.4.1.2 Export Through an Export Agent... 9

2.4.1.3 Export Through an Export Merchant ... 10

2.4.2 DIRECT EXPORT...10

2.4.2.1 Export Directly to the Final Customer ... 10

2.4.2.2 Export Through a Representative... 10

2.4.2.2.1 Finding the Most Suitable Representative ... 12

2.4.2.3 Export Through an Own Establishment ... 14

2.4.3 ALTERNATIVES TO EXPORT...14

2.4.3.1 Licence Manufacturing ... 15

2.4.3.2 Franchising... 15

2.4.3.3 Manufacture ... 15

2.4.3.4 Joint Venture ... 16

2.5 CULTURE...16

3 PROBLEM DISCUSSION ...17

3.1 PURPOSE AND RESEARCH QUESTIONS...19

4 RESEARCH METHODOLOGY ...20

4.1 RESEARCH APPROACH...20

4.1.1 INDUCTION OR DEDUCTION...20

4.1.2 QUALITATIVE OR QUANTITATIVE METHOD...20

4.2 RESEARCH STRATEGY...20

4.3 LITERATURE SEARCH...21

4.4 DATA GATHERING...22

4.4.1 SECONDARY DATA...22

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4.4.2 PRIMARY DATA...22

4.4.3 INTERVIEW GUIDE...22

4.5 SELECTION OF CASE-STUDY FIRMS...23

4.6 METHOD OF ANALYSIS...24

4.7 IS MY DATA TRUSTWORTHY? ...24

4.7.1 VALIDITY...25

4.7.2 RELIABILITY...25

5 EMPIRICAL FINDINGS ...27

5.1 SVALSON AB...27

5.2 ANTENNA AB...30

6 ANALYSIS...33

6.1 WITHIN-CASE ANALYSIS OF SVALSON AB ...33

6.1.1 SVALSON AB ...33

6.1.2 CHANGE AGENT...33

6.1.3 MOTIVES FOR FOREIGN EXPANSION...33

6.1.4 MARKET SELECTION...33

6.1.5 FOREIGN MARKET MODE OF ENTRY...34

6.1.6 CHANGING THE CHANNEL OF DISTRIBUTION...34

6.1.6.1 Finding the Most Suitable Representatives ... 35

6.2 WITHIN-CASE ANALYSIS OF ANTENNA AB...38

6.2.1 ANTENNA AB ...38

6.2.2 CHANGE AGENT...38

6.2.3 MOTIVES FOR FOREIGN EXPANSION...38

6.2.4 MARKET SELECTION...38

6.2.5 FOREIGN MARKET MODE OF ENTRY...39

6.2.5.1 Finding the Most Suitable Representatives ... 39

6.2.6 CHANGING THE CHANNEL OF DISTRIBUTION...41

6.3 CROSS-CASE ANALYSIS...42

6.3.1 SVALSON AB AND ANTENNA AB ...42

6.3.2 CHANGE AGENTS...42

6.3.3 MOTIVES FOR FOREIGN EXPANSION...42

6.3.4 MARKET SELECTION...42

6.3.5 FOREIGN MARKET MODE OF ENTRY...43

6.3.5.1 Finding the Most Suitable Representatives ... 44

6.3.6 THE FUTURE CHANNEL OF DISTRIBUTION...47

7 CONCLUSIONS...48

7.1 PURPOSE AND RESEARCH QUESTIONS...48

7.1.1 WHY DID SWEDISH SMES CHOOSE TO ENTER THE GERMAN MARKET? ...48

7.1.2 WHAT MODES OF ENTRY HAVE SWEDISH SMES CHOSEN? ...49

7.1.3 WHY DID SWEDISH SMES CHOOSE THE MODE OF ENTRY THAT THEY HAVE CHOSEN? . ...49

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7.1.4 HOW CAN THE SELECTION PROCESS OF SWEDISH SMES’CHOICE OF MODE OF ENTRY

BE DESCRIBED? ...49

7.1.5 WHAT PROS AND CONS HAVE SWEDISH SMES EXPERIENCED WITH THEIR CHOSEN MODE OF ENTRY? ...50

7.1.6 DID SWEDISH SMES PLAN FOR A FUTURE CHANGE OF THE CHANNEL OF DISTRIBUTION, AND IF SO, HOW? ...50

7.1.7 WHY AND HOW DID SWEDISH SMES CHANGE THEIR CHANNEL OF DISTRIBUTION?..50

7.1.8 WHAT PROS AND CONS HAVE SWEDISH SMES EXPERIENCED WITH THEIR CHANGE OF CHANNEL OF DISTRIBUTION?...50

7.1.9 HOW ARE SWEDISH SMES PLANNING TO CHANGE THEIR CHANNEL OF DISTRIBUTION IN THE FUTURE? ...51

7.2 RECOMMENDATIONS TO MANAGERS OF SMES...51

7.3 CONTRIBUTION TO THEORY...52

7.4 FUTURE RESEARCH...52

REFERENCES ...53

APPENDICES

APPENDIX I: ENGLISH VERSION OF INTERVIEW GUIDE

APPENDIX II: SWEDISH VERSION OF INTERVIEW GUIDE

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1 I NTRODUCTION

In the introduction I will present some introductory information regarding the importance of international operations of small and medium sized enterprises. Then, I will continue with a background concerning Swedish small and medium sized enterprises’ exports. The chapter will end with a definition of the problem area.

he Single European Act of 1993 has created a union of western European countries, allowing free movement of products, capital, and labour. One of the major aims of this union is to develop the economic potential of Europe, so that it can compete as a world power, with USA and Asia. The small and medium sized enterprises¹ (SMEs) are considered crucial to European competitive development, since they employ the majority of the European labour force. (Mulhern, 1995)

Also Holmlund and Kock (1998) state that SMEs are important, as they always have played an important role in providing possibilities for, among others, employment and innovations.

Yet, they proceed by asserting that not much is known about the international activities of SMEs, as they do not receive the same kind of attention as large enterprises do.

Only a minor part of the larger Swedish enterprises’ production is sold on the domestic market, which brings that the enterprises’ dependence of the global economic development is large (Alvstam, 1986). For instance, industries like engineering, minerals and forestry export about half of their production, while the car and paper industry export at least three-quarters (Palm, 1991). This has contributed to Swedish enterprises’ internationalisation² in different foreign markets, which has occurred by growing exports³, acquisitions and new business starts abroad (Rundh, 1993).

The Swedish export is dominated by a couple of large enterprises. Nevertheless, the exporting SMEs are great in number, even though they do not contribute that much to the Swedish balance of trade. (SCB, 1994) Accordingly, getting SMEs to expand their export activities would, among other things, reduce the trade deficits, and more jobs would be created (Hise, 1997).

Once the exporter has made clear that a market for the product exist, he or she has to develop a market entry strategy (Hörnell & Wollroth, 1988). The market entry strategy consists of an entry mode and a marketing plan. The mode of entry is what is used to penetrate a target country, and the marketing plan is used to penetrate a target market. The choice of mode of entry is important, since it decides the degree of an enterprise’s control over the marketing activities in the target market. Implementing an entry strategy for the market is analogous to establishing a channel of distribution. The channel of distribution is a system composed of marketing organisations that connect the producer to the final customers of the enterprise’s product in a foreign market. (Albaum, Strandskov & Duerr, 1998)

1 A definition of Swedish small and medium sized enterprises (SMEs) is provided under the heading 1.1 Background.

2 Serve a market across the national boundaries, either by exporting, or by production facilities in the market itself (Jain, 1996).

3 The company’s final or intermediate products are manufactured outside the target country and then transferred to it (Root, 1994b).

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1.1 B

ccording to Hedman (1993), three main alternatives for distributing the enterprise’s products exist, that is, indirect export, direct export and alternatives to export. When distributing indirectly, the different distribution activities are assigned to one or several intermediaries in the home market. When distributing directly, the producer itself conducts the distribution activities, such as distribution to a foreign importer, which in his turn forward the products to another intermediary or the end customer. (Molnár, 1990) The third alternative, alternatives to export, can take place through, for instance, own production in the target country, or licensing (Hedman, 1993).

Exporting, is the most popular way that enterprises become international (World Bank, 1998).

This, mainly since exporting requires minimum resources, while allowing high flexibility, and it also offers substantial financial, marketing, technological, and other benefits to the enterprise (Root, 1994b; Terpstra & Sarathy, 1997).

Western Europe dominates the world export, as almost half the world export is distributed from this part of the world (Palm, 1991). Today, over half of the foreign trade of the West European countries takes place within that region (Root, 1994a). Germany is the worlds largest exporter, but also one of the largest importers (Palm, 1991). Sweden and Germany have a developed trade since a long time, and today Sweden’s most important export market is Germany, as almost 12 percent of the exports go there (SCB, 1999).

In 1998, the total Swedish exports amounted to 675 billion SEK⁴, which was about 36 percent of the Swedish GNP (SCB, 2000). Raw materials and semi-manufactured products were dominant in the Swedish export until around 1960, when processed goods took over (Palm, 1991). The engineering industry is being predominant, as it accounts for more than half of the export share (SCB, 1999). Within that industry a tremendous amount of various products are being produced, that are often based on Swedish inventions (Palm, 1991). The mechanical engineering industry and the vehicle industry answer for large parts of the engineering industry. The electronic industry was for a long time less important, but has grown considerably during the last years. (Gozzo, Palm & Palmstierna, 1996) A fourth of the Swedish SMEs exports comes from the engineering industry (NUTEK, 1994). The export share for each industry is presented below (see Table 1): (SCB, 1999)

Table 1. The Export Share for each Industry in Swedish Exports (SCB, 1999)

A couple of large enterprises dominate the Swedish export; that is, the 50 largest export businesses account for 43 percent of the total export value (SCB, 1994). However, in 1993 the

4 Swedish crowns

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INDUSTRY

% OF TOTAL EXPORTS ENGINEERING

FORESTRY CHEMISTRY OTHER GOODS MINERALS ENERGY

54.4 13.7 11.4 9.9 8.4 2.2

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number of Swedish exporting enterprises were almost as many as 42 000. The exports value for the major part of these enterprises, that is 33 000, were below 1 million SEK, and they only accounted for 1,2 percent of the total exports value. (SCB, 1994) Still, the remaining enterprises account for a rather large share of the Swedish exports. In 1991, for instance, there were approximately 28 000 SMEs with maximum 200 employees, who direct exported goods for a total value of 61 billion SEK. This amounted to a fifth of the Swedish exports that year.

(NUTEK, 1994)

The most common definition of SMEs is to state the number of employees (Lundström, Boter, Kjellberg & Öhman, 1998). Therefore, I will use EU’s definition, without regarding turnover etc. That is, SMEs are defined as having fewer than 250 employees (Commission of the European Communities, 1996). Still, other definitions exist. For instance the national statistical bureau of Sweden (SCB), classifies Swedish SMEs as enterprises having fewer than 200 employees.

In 1999, there were 797 340 businesses in Sweden. Only 1712 of these employ more than 200 workers, that is, about 795 000 of these businesses were SMEs. (SCB, 2000) Even though SMEs do not export that much, they are great in number and account for a large share of the employees in the industry (Moen, 1999). Accordingly, getting SMEs to expand their export activities would achieve a number of benefits. At the national level, it would mean that the trade deficits could be reduced, and more jobs would be created. At the enterprise level, exporting diversifies risk, and the life cycles of products nearing the end of their usefulness can be extended. However, one of the most important arguments is, that it has been found that enterprises that export are less likely to experience financial trouble than non-exporters. (Hise, 1997)

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ermany is, as said, Sweden’s most important export market (SCB, 1999). Yet, the amount of literature dealing with Swedish enterprises’ international operations in, or to Germany is very limited. Further, according to Coviello and McAuley (1999), among others, the internationalisation literature tends to rely on large multinational enterprises as the traditional unit of analysis. This, in spite of the fact that SMEs are active in international markets. This emphasis on larger enterprises is of additional concern, given the argument that smaller enterprises differ from larger enterprises in terms of their managerial style, independence, ownership and operations. (Hultman, Gunnarsson & Prenkert, 1998; Coviello and McAuley, 1999)

Still, the nature of the enterprise’s operations in the target country depends on its choice of mode of entry. This decision is one of the most critical strategic decisions for the enterprise, since it affects all the future decisions and operations of the enterprise in that country. This, since each mode of entry entails an accompanying level of resource commitment, and therefore, it is difficult to change from one channel of distribution to another without considerable loss of time and money. (Root, 1994b) In a Nordic study, SMEs experienced the choice of channel of distribution as the largest barrier to exports (Lindmark, Eskelinen &

Forsström, 1994). Furthermore, after some time many enterprises change their channel of distribution (Brady & Bearden, 1979). Therefore, it is interesting to increase the knowledge of internationalisation efforts performed by Swedish SMEs on the German market.

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2 T ^HE I NTERNATIONALISATION P ^ROCESS

The literature overview relates to the problem area presented in chapter one. First, I will discuss why enterprises start international operations. Further, I will present theories regarding the market selection. Then, I will present different kinds of channels of distribution, and the process for choosing a representative in the foreign market. Finally, I will end the chapter with the cultural environment.

The internationalisation efforts of an enterpries, that is, servicing a market across national boundaries, can be described as a gradual process, moving over different stages of development. This process Vernon, and Johansson and Vahlne (referred to in Boter and Holmquist (1997)) has defined as the internationalisation process.

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egardless of which motives the enterprise has for internationalisation, someone or something inside or outside the enterprise must initiate the export process, and guide this change through to implementation. This intervening person or variable is called the change agent. (Czinkota & Ronkainen, 1995)

2.1.1 INTERNAL CHANGE AGENT

Internal change agents affect the enterprise from within. One scenario could be that members of the management have lived abroad and gained experiences, which make them more positive towards change and international environments. Another scenario could be that an enterprise hires a person who has experience from international business. This person could facilitate the process of internationalisation for an enterprise. The new employee can also see the possibilities of prolonging the life cycle for a product via internationalisation. (Czinkota &

Ronkainen, 1995)

2.1.2 EXTERNAL CHANGE AGENT

External change agents are those that have an influence on the enterprise from the outside.

Demand could be such a factor, if the order comes from abroad. (Czinkota & Ronkainen, 1995) Another reason could be that other enterprises start to export and thereby influence the enterprise to go international (Czinkota & Ronkainen, 1995; Holmlund & Kock, 1998).

Requests of importing could come from foreign distributors and thus, serve as external change agents. Banks and accountants can also serve as change agents if they point to the possibility of exporting. Chambers of commerce and Trade councils can also be heavy influencers, as they often have established contacts with foreign enterprises and can serve as mediators between two enterprises in different countries. Export agents can also serve as a mediator in the way that they can go into a domestic enterprise and influence them to start exporting.

Finally, government measures should be noted, since, for example, tax benefits can serve as an external change agent. (Czinkota & Ronkainen, 1995)

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any reasons for going international exist. Most of them are market related, but one key factor is not, the type and quality of the management. Managers of exporting enterprises show a higher degree of education and foreign language fluency than those of non-exporting enterprises (Burton & Schlegelmilch, 1987) and are more dynamic when the enterprise take the first international step (Bilkey & Tesar, 1977).

The major market related motivations for going international could be divided into two groups, proactive motivations and reactive motivations. Proactive motives are motives that the enterprises themselves are responsible for, whereas reactive motivations are motives which enterprises have no influence over. In other words, proactive enterprises go international because they want to, reactive because they have to. (Czinkota & Ronkainen, 1995)

Operations in a foreign market bring some disadvantages, compared to the domestic competitors. Therefore, an enterprise trying to get established in a new market must have some kind of advantage compared to the domestic ones. (Rundh, 1993) A basic assumption has often been that large enterprises are better able to compete in international markets than small enterprises, due to, for instance, larger financial, technological and personnel resources (Bonaccorsi, 1992; Calof, 1993). However, small exporting enterprises are just as successful in international markets as larger exporting enterprises are; this due to the competitive advantage in their products and technology (Moen, 1999).

It should be noted that if the first export order comes on one’s own initiative, the enterprise becomes more motivated and positive towards an internationalisation (Czinkota & Ronkainen, 1995).

2.2.1 PROACTIVE MOTIVATIONS FOR SMES

Many Swedish enterprises with a relatively small home market have found export to be a natural way to find new markets, and to expand their earlier activities (Rundh, 1993).

Enterprises conducting export operations are less dependent on the home market, and not so vulnerable to changes (Abrahamsson & Bergström, 1993; Hise, 1997). Sales to different countries may therefore contribute to a more stable use of capacities and a more uniform employment level (Abrahamsson & Bergström, 1993). Accordingly, proactive, or active exporting, occurs since the enterprise decides to expand their operations into foreign markets (Ross, 1995). The proactive motivations are defined as:

• Profit Advantage

• Products

• Exclusive Information

• Managerial Urge

• Tax Benefits

• Economies of Scale

An enterprise’s management may feel that going international provides a great opportunity of increasing profits, which also is the most prominent reason for international operations

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(Czinkota & Ronkainen, 1995). Of course, the actual profitability is often lower than the expected, in the initial stages, due to high start up costs etc. (Kotabe & Czinkota, 1992).

Also, an enterprise could produce a product or service, which is not readily available in other markets. The products may also be attractive on the foreign market, due to technological advantages in the production process, which gives the enterprise a competitive advantage over domestic enterprises. (Czinkota & Ronkainen, 1995) Another reason for export is that many enterprises can not afford to develop products only for the home market, since it is too small (Abrahamsson & Bergström, 1993).

An enterprise may also possess knowledge about a specific market that other enterprises do not have, or managers may see it as having greater status if they are working in an international enterprise, and therefore initiate steps towards internationalisation. Further, tax benefits from the domestic government may be given if the enterprises start to export.

(Czinkota & Ronkainen, 1995)

Finally, through export activities the enterprises can better take advantage of economies of scales (Abrahamsson & Bergström, 1993). This since larger volumes decrease the cost per unit produced. It also leads to a faster climb on the learning curve. (Czinkota & Ronkainen, 1995)

2.2.2 REACTIVE MOTIVATIONS FOR SMES

When the domestic industry outlook of enterprises is not attractive, decision-makers tend to favour foreign market entry modes, which allow them to reduce their resource commitments at home (Ali & Camp, 1994). In this reactive, or passive strategy, the first export order is often involuntary, which leads to less commitment among the employees (Czinkota &

Ronkainen, 1995). The reactive motivations are defined as:

• Competitive Pressures

• Overproduction

• Declining Domestic Sales

• Saturated Domestic Market

• Excess Capacity

• Relationships

• Unsolicited Order

Increased competition on the domestic market, or overproduction during economic recession, might affect an enterprise’s profitability, and thus, force the enterprise to seek new markets abroad. Also, declining domestic sales, because of a product reaching the declining stage of the product life cycle, or a saturated domestic market, may influence an enterprise to export, in order to prolong the lifetime of a certain product. Furthermore, if the enterprise has excess capacity, internationalisation can aid the enterprise in reaching the desired production level in order to reduce the fixed cost per unit produced. (Czinkota & Ronkainen, 1995)

Also, an enterprise may be forced to become international, if it wants to maintain, or defend, its position in a particular business network (Holmlund & Kock, 1998), and finally, the enterprise may engage in exporting in response to an unsolicited order (Ross, 1995).

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sychic distance is a key concept in most export development models. It is defined as the sum of factors preventing or disturbing the flow of information between the enterprise and a specific foreign market. Accordingly, enterprises initially tend to target psychologically close countries, which are less risky to enter. The psychic distance to the markets will then be gradually reduced over time, due to increasing market-specific knowledge. (Leonidou &

Katsikeas, 1996) Dow (2000) states that the influence of psychological distance on market selection declines significantly between the first and second decisions of market entry.

Consequently, the enterprise can progressively extend its activities to other more psychologically distant countries. With this procedure, the enterprise approaches foreign markets cautiously, thereby minimising uncertainty and operating costs, and avoiding serious and lasting mistakes. (Leonidou & Katsikeas, 1996)

However, despite its usefulness, the concept of psychic distance has been criticised as being too limited to explain the nature of the export development process. For example, an enterprise may reject several psychologically close countries because their size does not justify the amount of investments required to initiate export operations. Also, small enterprises are more likely to choose low-risk countries with relatively low entry barriers, while larger enterprises are more likely to be found in high-risk markets where entry possibly is more difficult. (Leonidou & Katsikeas, 1996)

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foreign market mode of entry is an institutional arrangement, which enables the enterprise’s products, technology, human skills, management, or other resources, to enter into a foreign country. To managers in SMEs, planning mode of entry strategy may seem to be something that only large enterprises can afford to do. Still, no matter how limited resources the enterprise has, the management has to think systematically about its future in foreign markets. (Root, 1994b) A number of definitions of different modes of entry exist.

Root (1994b), for instance, classifies the modes of entry as export entry modes, contractual entry modes, and investment entry modes. Hedman (1993), on the other hand, classifies the modes of entry as indirect, direct and alternatives to export, (see figure 1):

EXPORTER

INDIRECT EXPORT

DIRECT EXPORT

ALTERNATIVES TO EXPORT

EXPORT THROUGH:

TRADING FIRM, EXPORT AGENT EXPORT MERCHANT

EXPORT DIRECTLY TO

THE FINAL CUSTOMER

EXPORT THROUGH A REPRESENTATIVE

EXPORT THROUGH AN OWN ESTABLISHMENT

LICENSE MANUFACTURING,

FRANCHISING, MANUFACTURE

AGENT DISTRIBUTOR COMMISSIONER

OFFICE BRANCH SUBSIDIARY

Figure 1. The Modes of Entry. (Revised from Hedman, 1993, p.8).

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However, Hedman’s model (1993) does not consider joint venture, which other authors (for instance Jeannet & Hennessey, 1988; Root, 1994b; Ross, 1995) define as an entry mode. Joint ventures will be presented under heading 2.4.3.4.

It is important to remember that SMEs are not smaller versions of big businesses. They deal with unique size-related issues as well. (Shuman & Seeger, 1986) For instance, large enterprises usually have resources to handle export activities in-house, while most SMEs do not (Ilinitch & Peng, 1994). Most models of foreign market mode of entry are based on this assumption, that is that, due to limited resources, enterprises initially engage in foreign operations via indirect export methods (Leonidou & Katsikeas, 1996). Molnár (1990) defines indirect export as different distribution activities that are assigned to one or more middlemen in the home market. The middleman can, for instance, be an export merchant or a trading firm (Leonidou & Katsikeas, 1996).

As the enterprise becomes more involved in international business, it switches to direct export methods, such as distributors, agents, and sales branches (Brady & Bearden, 1979). Direct export means that the producer himself conducts the distribution activities, for example, distribution to the end customer directly, or to a foreign agent or importer, which in their turn forward the products to another middleman or end-customer (Molnár, 1990). In other words, direct export modes allow greater control over the foreign marketing effort, than indirect export (Root, 1994b).

However, many authors have described this stage approach as fundamentally misleading, since it denies the enterprise’s ability to make strategic choices regarding appropriate modes of entry in foreign markets (for example Root, 1987; Johanson & Vahlne, 1990; Coviello &

Munro, 1995). Root (1994b), for instance, is of the opinion that the present and projected size of the target country market has an important influence on the choice of entry mode. Turnbull (1987) has made empirical evidence, which supports this criticism. He found that enterprises use a combination of organisational modes to enter a foreign market, and also occasionally move in an inverse way, that is, from direct to indirect distribution methods (ibid.).

Furthermore, the present models of the internationalisation process do not take the importance of relationships into account. Still, it is through established long-term relationships that SMEs gain access to, and mobilise, external resources. These are vital, since many SMEs lack resources needed for their international operations. (Holmlund & Kock, 1998) Further, foreign market selection and choice of mode of entry emerge from opportunities created through network contacts, rather than solely from strategic decisions within the enterprise (Coviello & Munro, 1995).

Selecting the channel of distribution is a long-term strategic decision, which is not easily changed. The chosen channel will affect the enterprise’s effectiveness and efficiency for as long as it is operating. (Doyle, 1994) Therefore, before choosing distribution channel, the manufacturer should establish a long-term strategy, as well as evaluate the own enterprises’

future economical abilities. When selecting whether to use direct- or indirect channels, the exporting enterprises usually studies the intermediary’s criteria, concerning, for instance, promotion, delivery, pricing and after sale service at the lowest possible cost. (Terpstra, 1984) But, what plays the largest role is the transaction costs, that is, the costs of managing and running a specific channel (Williamson, 1981).

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2.4.1 INDIRECT EXPORT

Indirect export is seen as a chain that links together the exporting enterprise with a domestic middleman, a middleman in the target country, and finally the end customer (Akhter, 1996).

The intermediaries possess extensive knowledge about the local market, and also have the ability to provide good marketing services (Clasen, 1991).

Indirect exporting is the most common way for an enterprise to begin exportation.

Consequently, most of the world trade is handled this way. (Young, Hamill, Wheeler, &

Davies, 1989) This, since indirect export is seen as an easy way to introduce products into new, foreign markets (Clasen, 1991). Root (1994b) adds, that by using indirect channels, an enterprise can start exporting without large investments, with low start up costs, and few risks.

Accordingly, if the present and projected size of the target country market is small, indirect exporting is favoured (ibid.).

However, as the middlemen handle the contacts with the foreign buyers (Clasen, 1991), the exporter does not gain much market knowledge, since he or she is insulated from the foreign market (Root, 1994b). As many SMEs practice a policy of product improvements, it is important that they keep closely in touch with customers in foreign markets. This makes indirect exporting less viable as a way to win and hold a favourable position in a foreign market. (Varaldo, 1987)

According to Hedman (1993), indirect export may work in three ways: through (1) a trading firm, (2) an export agent or (3) an export merchant.

2.4.1.1 Trading Firm

An export trading firm is an association of small and medium sized enterprises who have joined together to export more easily. Instead of developing and penetrating a foreign market one-by-one, they do it together. Co-operation means lowered costs for storage, service training of staff and so forth. A trading firm is independent in its form of operation.

(Hoagland, 1996) Some major functions of trading firms include trading and distributing, risk hedging in exchange rates, marketing in the foreign market, and so on. Normally, they do not perform production and retailing, but they may become involved even in these activities through joint ventures. (Jain, 1996)

2.4.1.2 Export Through an Export Agent

An export agent buys products from an enterprise, and thereafter they sell the products abroad, that is, the export agent takes care of the whole export process. Because of this, the manufacturer gets access to a larger market at a minimum cost and risk. (Young et al., 1989) The export agent receives a commission as compensation for his or her work. The contractual relationships are only short-term, and sometimes only apply to a particular transaction. (Jain, 1996)

The largest risk when choosing export agent, is the manufacturer’s reputation. By putting the whole export business into the hands of another enterprise, the manufacturer totally looses control of the export activities. (Young et al., 1989)

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2.4.1.3 Export Through an Export Merchant

An export merchant acts as a kind of international wholesaler (Ross, 1995). A buyer, looking for a special product, contacts the export merchant. The export merchant thereafter seeks and negotiates with a manufacturer in a foreign market. Then, the goods are exported to the waiting buyer. This makes the manufacturer an exporter without having a representative based in the foreign market. (Young et al., 1989) The export merchants assume all the risks, and sell in their own name. Their compensation consists of a percentage of the sales. (Jain, 1996) The export merchants are most often specialised in a foreign country or region where they have been operating during a longer period (Young et al., 1989) Still, they rarely have facilities located in the foreign market. Instead, they mostly deal with foreign intermediaries in the foreign country. (Ross, 1995)

2.4.2 DIRECT EXPORT

Direct export may be conducted in three ways: (1) directly to the final customer, (2) with the help of a representative or (3) through the exporting enterprise’s own establishment in the foreign market (Hedman, 1993).

By choosing to conduct export through direct links, the enterprise will suffer from higher investment risks. But, on the other hand, the profit margin rises and the transaction costs drop.

(Kotler & Armstrong, 1994)

2.4.2.1 Export Directly to the Final Customer

When conducting direct export without any intermediaries, the exporting enterprise takes hold of all exporting activities without the interference of any middlemen. The exporting enterprise manages all the contacts with the foreign market on their own. Therefore, they have to conduct their own marketing research, investigations, transportation and documentation.

(Young et al., 1989) This is the least used kind of direct export, which normally is used only for speciality items sold to foreign governments, institutions, and so on (Ross, 1995).

2.4.2.2 Export Through a Representative

Historically, representatives have played a large role in the expansion of global trade (Peng &

Ilinitch, 1998). A representative is a middleman, who is based in the foreign market, and has a market organisation separated from the exporting enterprise (Lavestam, 1993). When using a representative, the export chain is built up by the exporting enterprise, a middleman based in the foreign market and finally the end customer (Akhter, 1996). As Cosimano (1996) establishes, intermediaries are important because they are the ones linking organisations and individuals together. Root (1994a) defines export intermediaries as specialist firms that function as the export department of a number of manufacturers in non-competitive lines.

Those SMEs that are interested in, but afraid of, export activities, may find it easier to start with the help of an experienced middleman, since they may efficiently locate and negotiate with foreign customers (Peng, 1998).

Bello and Lothia (1995) have found that the average duration for an agent relationship is 9 years and for distributor relationship 13 years. Why is this? The authors state that intermediary use is a great training for the exporting enterprise to gain foreign market

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experience and knowledge. Katsikeas and Piercy (1990) continue by asserting that with more experience, the enterprise has a tendency to gain more control over the marketing mix elements. In other words, when the time is right, it is a short step to establish a foreign subsidiary (Bello & Lothia, 1995).

This brings that the middleman has a dilemma concerning sales volumes. If he sells too little, the exporter will quit using him. On the other hand, if he sells too much, the exporter will go into business him self. Therefore, it is suggested that the exporter, together with the middleman, already from the beginning develop a marketing strategy for starting a joint venture within five years. (Gozzo et al., 1996)

Agent

An agent is an independent middleman who acts on behalf of the exporter, representing the exporting enterprise in the foreign market. The agent does not take title of the exporters goods, and he or she seldom holds any inventory. (Root, 1994b) As the agent is working on behalf of the exporter, he or she is usually paid on commission basis. But, the exporter is usually responsible for the customer risks. (Peng, 1998) An agent is preferably chosen when the product is highly customer adapted, but also when the exporter feels that it is not necessary to have extensive or local distribution resources (Lavestam, 1993). Still, contacting and selecting the most efficient agent might be difficult for the manufacturer, since it requires foreign market knowledge (Anderson, 1985). The advantages of using an agent is that he or she is already member of a business network, and usually has the needed relationships in the foreign market. Further, exporting SMEs can compensate the lack of resources, as well as minimise risks, by using an agent. (Holmlund & Kock, 1998)

However, the exporter has little or no control over the agent. The exporter has to rely on the agent’s honesty and loyalty. (Peng, 1998) If co-operation problems arise, this may be a major drawback. The agent has all the vital information about customers and end-users, which the exporting enterprise lacks. (Holmlund & Kock, 1998)

Distributor

A distributor is someone who buys the exporters’ goods, re-label them with his or her own name, brand or trademark and thereafter sell them as his own products. Usually, when using a distributor, he or she is the only sales channel into a foreign market. The distributor is responsible for the customer risks that may occur. (Lavestam, 1993) The profit margin is the distributor’s compensation (Root, 1994b). The distributor will help the exporting enterprise by managing processing orders, stock foreign inventories, grant buyer credit and delivery. The exporter has little or no influence over the distributor, and neither has knowledge about the end-customer, nor the end-price. (Shipley, Cook & Barnett, 1989)

A distributor is most often used when the product is standardised and sold to a large number of end-customers (Lavestam, 1993). Distributors are also preferred when there is a high environmental diversity, that is, if the manufacturer wishes to enter a market with many competitors and lot of intermediate customers or end users, which have different buying habits (Bello & Lothia, 1995).

Since many SMEs are inexperienced in exporting, they might find it facilitating to choose middlemen who takes title of their product (Bergen, Shantanu & Orville, 1992).

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Compared with using an agent, the use of distributors is less risky, since the exporter gets paid directly. The main disadvantage is that the exporter has less chance to build up its own circle of customers. (Lavestam, 1993) In general, the distributor is more difficult to control than an agent (Root, 1994b).

Commissioner

A commissioner is an independent middleman, who acts on behalf of an exporter as an intermediary in a transaction (Hedman, 1993). He negotiates and signs contract in his own name, and thereafter get paid by the exporter. That is, the more closed contracts the commissioner generates, the more money he earns. (Lavestam, 1993; Hedman, 1993)

The end customer usually does not know that he is signing a contract with a commissioner instead of an exporter. The commissioner is responsible towards the end-customer, for fulfilling the agreements, and the end-customer is to speak to the commissioner in case of complaints. The exporter has no control over the commissioners’ actions. However, the exporting enterprise knows who the end-customer is, and can thereby pose demands upon him. (Hedman, 1993)

2.4.2.2.1 Finding the Most Suitable Representative

Once the enterprise has decided that a representative is the most suitable entry mode, it must initiate a screening process to find one or several competent ones (Hedman, 1993; Root, 1994b). Finding good representatives is a major problem for enterprises, which therefore demands substantial attention and effort (Root, 1994b).

The Representative Profile

The representative should have the customer contact that the exporter is striving for, and have to take charge of the exporters interests in a satisfactory way (Hedman, 1993). Some of the specifications that have to be fulfilled are presented below:

• Trading Area Covered (Hedman, 1993; Root, 1994b). It is common that the exporter chose to contract several different representatives, where each is active in a clearly defined part of the market (Hedman, 1993).

• Other Lines of Products (Hedman, 1993; Root, 1994b). Should the representative be allowed to mediate or sell competing products? (Hedman, 1993)

• Experience with Manufacturer’s Products, or similar Product Line (Root, 1994b).

• Size of the Enterprise

• Physical Facilities

• Sales Organisation and Quality of Sales Organisation (ibid.).

• Willingness to carry Inventories. Some products require to be kept in stock, to make rapid deliveries possible. (Hedman, 1993; Root, 1994b).

• After-sales Service Capability (Hedman, 1993; Root, 1994b).

• Knowledge and use of Promotion (Root, 1994b).

• Fairs. An important part of the marketing efforts are fairs, where the products are exhibited, and connections to, among others, customers are established. The extent of each party’s responsibilities has to be regulated. (Hedman, 1993).

• Reputation with Suppliers, Customers, and Banks (Root, 1994b).

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• Record of Sales Performance (Hedman, 1993; Root, 1994b).

• Information on Competition (Hedman, 1993).

• Cost of Operations (Root, 1994b).

• Financial Strength and Credit Rating

• Overall Experience

• Relations with local Governments

• Knowledge of relevant Languages

• Knowledge of Business Methods in Manufacturer’s Country

• Willingness to co-operate with Manufacturer (ibid.).

Information Sources

Many enterprises accidentally get in touch with a representative in the foreign market (Hedman, 1993), for instance, through an unsolicited inquiry (Root, 1994b). However, information on possible middlemen in the target country may be obtained from a number of sources (Root, 1994b). Some of these are presented below:

• Existing Connections

• Advertisements

• Trade Fairs

• Databases

• Consultants

For instance, a representative, who already represents the enterprise in another market, may be willing to expand its operations into a new market (Hedman, 1993). Also, manufacturers exporting complementary lines, banks, transportation agencies, freight forwarders, and advertising agencies, may pass on information on possible middlemen (Root, 1994b). Another common way to find representatives is through advertisements. The enterprise can advertise or answer to advertisements in, for instance, trade publications in the foreign country.

(Hedman, 1993; Root, 1994b)

Furthermore, trade fairs are arranged in large numbers in Europe each year. There, enterprises have the possibility to present their products, and establish connections with customers, and representatives. Another means to locate representatives is databases, which is increasing in importance. Finally, consultants, and many organisations, provide enterprises with the service of finding representatives. Some of these are trade associations, the Swedish Trade Council, and the Swedish Chamber of Commerce. (Hedman, 1993)

Screening Possible Representatives

Information from the information sources should be used to develop a list of possible representatives. Then, the manufacturer needs to obtain more information for a second screening. This can be handled by writing a letter to each prospective representative, asking about their interest in representing the enterprise, and also for information relating to the items in the representative profile. (Root, 1994b)

Generally, the result of the export investment is dependent of offensive marketing of the exporter’s products (Hedman, 1993). Therefore, a second letter should be written to the remaining prospects, asking them to outline the marketing plan he or she would use for the

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manufacturer’s product line, expected sales volume, and so on. From these responses, the manufacturer can develop a list of “best” prospects. The final choice should be made only after a round of personal interviews with the possible representatives. (Root, 1994b)

2.4.2.3 Export Through an Own Establishment

When exporting through a manufacturers own establishment, the enterprise has full control over the export activities. The exporter most often seeks to win a large market share directly.

This is an expensive, but effective, way of conducting business. (Hedman, 1993)

A foreign enterprise, which intends to perform business activities in Germany, has to be aware of the differences in taxation between a subsidiary and a branch. The tax burden for subsidiaries is significantly lower than the one for the German branch of a foreign corporation. (Borstell & Watermeyer, 1999)

Sales Office

By entering a foreign market with a sales office, the enterprise shows that they care and put effort into the market (Young et al., 1989; Holmlund & Kock, 1998). Start of a sales office requires that new relationships have to be established in the foreign business network (Holmlund & Kock, 1998). This way of conducting business is very money- and time consuming, but probably the best way to reach the target market. When establishing a number of sales offices in the foreign market, the exporter has created a branch of sales offices.

(Young et al., 1989) Branch

A branch office is not a separate entity, but an extension of the domestic enterprise. The branch may conduct a full range of activities on behalf of the domestic enterprise. Its key disadvantage is the exposure of all the assets of the domestic enterprise to claims made internationally. (Stonecipher, 1998)

Subsidiary

According to Root (1994a), export activities performed through a subsidiary is the most efficient way to conquer a foreign market. The subsidiary will take care of marketing, storage, installation, and service activities (Engdahl, 1990).

By being established directly in the foreign market, the enterprise has full control over marketing and business contacts. But, this is also a costly way to perform exporting because it is very money consuming, and also demands storage facilities. To be profitable, a relatively large market share is needed. (Hörnell & Wollroth, 1988)

2.4.3 ALTERNATIVES TO EXPORT

Most enterprises recognise the importance of expanding internationally. Sometimes they lack money and knowledge to export directly or, they consider these strategies to be inappropriate.

In such cases licensing, or franchising, might be the right choice. (Czinkota & Ronkainen, 1995) Investment in foreign production is another alternative to export. However, these

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modes of entry do not offer the advantages of exporting as a first learning experience. (Root, 1994b)

2.4.3.1 Licence Manufacturing

Licensing occurs when an enterprise within the foreign market, the licensee, buys the rights to production, the brand, patent and so forth. By using a licensee, the producing enterprise finds an easy way to enter a foreign market at a minimum of risk. (Kotler & Armstrong, 1994) Still, the matter of maintaining trade secrets has to be handled. Root (1994b) recommends that the licensor should take contractual safeguard measures to prevent the unveiling of trade secrets by a licensee before, during, and after a licensing agreement. The main reason to use licence manufacturing is to penetrate a foreign market with the use of the licensee’s technical competence. The producing enterprise hereby escapes expensive tolls and other trade barriers, exchange fluctuations, high transportation costs and political risks. (Root, 1987) Another reason for licensing may be that, if an enterprise’s product requires substantial physical adaptation to meet the needs of the market, the costs can be transferred to the licensee (Root, 1994b).

Although licensing is easy to initiate with low start up cost, it is only available to those enterprises who have technology or trademarks desired by foreign markets (ibid.). By licensing, the enterprise also looses control over marketing, with potential harm to trademarks and the enterprise’s reputation (Stonecipher, 1998; Root, 1994b). Also, if the producing enterprise seeks to enter the market by themselves after a few years, they will have competition from the licensee (Root, 1987).

2.4.3.2 Franchising

When the exporting enterprise sells a licence to conduct business in a prescribed manner it is called franchising. The licence gives the franchising enterprise the right to use the franchisers’

name, production- and marketing techniques, but also to sell their products. (Hackett, 1979;

Root 1994b) The franchisee adopts a proven concept, which thereby reduce risks for them (Hackett, 1979). In return, the franchiser receives fees, royalties, and other compensation from the franchisee (Root, 1994b) The main reason to approach a foreign market by franchising is market expansion, financial gain, and saturated domestic market (Hackett, 1979).

The primary advantage is that the manufacturer can rapidly expand into a foreign market, without large capital investments (Root, 1994b). The main problem is the level of standardisation. Without a standardisation there might be a risk of loosing transferred know- how. (Hackett, 1979)

2.4.3.3 Manufacture

Foreign production is seldom used by manufacturers new to international business (Root, 1994b). But, under some conditions a manufacturer decides to locate a production unit abroad. The main reason is raised demand and rapid growth in the domestic market. Another reason may be if production in a foreign country is much cheaper than producing domestically. (Jeannet & Hennessey, 1988)

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2.4.3.4 Joint Venture

Joint venture entry takes place when an international enterprise, and a local private or public enterprise in the target country, shares the ownership (Root, 1994b). According to Hyder and Ghauri (2000), joint ventures are often used in order to acquire complementary resources and know-how. Root (1994b) agrees with this, since he declares that the local partner has knowledge of the foreign country’s environment and business practices, as well as contacts with local suppliers, customers, banks and government officials, etc. Also, the local partner contributes with local capital, which reduces both the investment and the risk exposure of the foreign enterprise (ibid.). Another reason for an enterprise to enter a joint venture may be to gain access to the physical distribution system possessed by a foreign partner (Ross, 1995).

However, an international enterprise has less control over a joint venture than over an own establishment, especially if it only is a minority joint owner. Consequently, if the local partner has a different strategy than the international enterprise, it may lead to conflicting interests.

(Root, 1994b)

2.5 C

Persons brought up in different environments have different beliefs, values and norms, which compose their culture (Samli, Grewal & Mathur, 1988). Therefore, personality norms vary from one culture to another, even though not all people from a country have the same personality. Generic inheritance and individual life experience also influence the creation of the personality. Nevertheless, the representative personality type differs from one culture to another. (Root, 1994b)

When conducting international business, culture can be a large problem (Root, 1994b).

However, the European countries can be divided into two groups, that is, the Latin countries and the Northern countries. Germany and Sweden both belong to the Northern countries, and both countries rate the cultural affinity between the countries as very high. (Hallén &

Johansson, 1985)

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3 P ^ROBLEM D ^ISCUSSION

In the problem discussion I will present different motives for enterprises to start international operations. Furthermore, problems with the internationalisation of the enterprise will be discussed. The problem discussion will end in the purpose of the thesis, which will be divided into research questions.

MEs are increasingly active in international markets, thus contributing to economic growth and wealth (Reynolds, 1997). Accordingly, many people have great expectations of the export industry, since they believe it to be the solution to the Swedish financial problems (Gozzo et al., 1996). However, existing theories can not be taken for granted as valid tools for understanding marketing in SMEs. Many scholars argue that the special conditions in SMEs are so different from the conditions in large enterprises, from which most of the theoretical marketing knowledge is generated, that the validity of existing marketing theories for SMEs should be questioned. (Hultman et al., 1998)

An enterprise’s internationalisation efforts, that is, servicing a market across national boundaries, can be described as a gradual process, moving over various stages of development. Vernon, and Johansson and Vahlne (referred to in Boter and Holmquist (1997)) define this process of development, as the internationalisation process. However, for an internationalisation to take place, someone or something inside or outside the enterprise, that is, the change agent, must initiate the export process, and guide this change through to execution. (Czinkota & Ronkainen, 1995) Accordingly, without the change agent the enterprise would not be exporting at all.

Nevertheless, many reasons to why the enterprise internationalises exist. However, starting international operations in a passive way, where the first export order often is involuntary, leads to less commitment among the employees. On the other hand, if the first export order comes since the enterprise has decided to conduct exports they become more motivated, and positive, towards an internationalisation. (Czinkota & Ronkainen, 1995) Hence, it follows that it is interesting to investigate if the enterprises have decided to start international operations in an active or a passive way.

Still, a basic assumption has often been that, due to larger resources, large enterprises are better able to compete in international markets than small enterprises (Bonaccorsi, 1992;

Calof, 1993). Nevertheless, Moen (1999) states that, due to the competitive advantage in their products and technology, small exporting enterprises are just as successful in international markets as larger exporting enterprises are. Therefore, it could be interesting to investigate how competitive the Swedish SMEs’ products are in the foreign market. However, due to the limited period of time I have at my disposal, I will not consider this subject in my research.

Psychic distance, that is, the sum of factors preventing or disturbing the flow of information between the enterprise and a specific foreign market, is a key concept in most export development models (Leonidou & Katsikeas, 1996). However, the influence of psychological distance on market selection declines significantly between the first and second decisions of market entry (Dow, 2000).

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Once the enterprise has decided that a market for their product exists, it is important that they analyse what requirement and criteria a suitable channel of distribution should fulfil. This will serve as the base for their choice of entry mode. (Persson, 1987) A well functioning channel of distribution between the producer and the end customer is one of the most important factors for export success (Root, 1994b; Holmvall, 1995). Therefore, before choosing channel of distribution, the manufacturer should establish a long-term strategy, as well as evaluate the own enterprise’s future economical abilities (Terpstra, 1984). However, managers in SMEs, often thinks that planning the mode of entry strategy is something that only large enterprises can afford to do (Root, 1994b). In a study, Nordic SMEs experienced the choice of channel of distribution as the largest barrier to exports (Lindmark et al., 1994). Hence, it is interesting to investigate how this selection process could be described.

An enterprise can organise a variety of entry modes, such as export modes, contracts, joint ventures, and wholly owned subsidiaries, to implement its product market strategies in foreign countries. Each of these arrangements brings decisions about the marketing operations, the location of production facilities, and what type of ownership these operations should have.

(Sharma, 1996) Therefore, the enterprise has to compare the different alternatives’ advantages and disadvantages with each other (Holmvall, 1995).

Most models of foreign market mode of entry are based on the assumption that, due to limited resources, enterprises initially engage in foreign operations via middlemen in the home market (Leonidou & Katsikeas, 1996), and later on switches to distributors, agents, and sales branches (Brady & Bearden, 1979). However, many authors have criticised this approach, since it denies the enterprise’s ability to make strategic choices regarding appropriate modes of entry in foreign markets (e.g. Root, 1987; Johanson & Vahlne, 1990; Coviello & Munro, 1995). Also, the importance of relationships is not taken into account. Yet, network contacts, rather than strategic decisions within the enterprise, influence the choice of mode of entry.

(Coviello & Munro, 1995)

Still, it is important to remember that SMEs are not smaller versions of big businesses. They deal with unique size-related issues as well. (Shuman & Seeger, 1986) That is, most SMEs do not have resources to handle export activities in-house, which large enterprises usually have.

Then intermediaries can be a solution. (Ilinitch & Peng, 1994) However, selecting good representatives is a major problem for enterprises, which demands substantial attention and effort (Root, 1994b).

Furthermore, research has shown that the average duration for an agent relationship is 9 years, and for a distributor relationship 13 years, probably since the exporting enterprise gains foreign market experience and knowledge. Therefore, the exporter finds it rather easy to establish a foreign subsidiary. (Bello & Lothia, 1995) Since this is the case, I find it interesting to investigate if the enterprises have a developed plan for managing a take over.

For instance, is a future take over regulated in the contracts with the representatives?

When conducting exports, culture can be a large problem (Root, 1994b). However, research has shown that the European countries can be divided into two groups, that is, the Latin countries and the Northern countries. Germany and Sweden both conform to the Northern countries, and Germany as well as Sweden rates the cultural affinity between the countries as very high. (Hallén & Johansson 1985)

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3.1 P

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he main purpose of this thesis is to investigate how the internationalisation process of Swedish SMEs when entering the German market can be characterised.

This purpose is then divided into the following research questions:

1. Why did Swedish SMEs choose to enter the German market?

2. What modes of entry have Swedish SMEs chosen?

3. Why did Swedish SMEs choose the mode of entry that they have chosen?

4. How can the selection process of Swedish SMEs’ choice of mode of entry be described?

5. What pros and cons have Swedish SMEs experienced with their chosen mode of entry?

6. Did Swedish SMEs plan for a future change of the channel of distribution, and if so, how?

7. Why and how did Swedish SMEs change their channel of distribution?

8. What pros and cons have Swedish SMEs experienced with their change of channel of distribution?

9. How are Swedish SMEs planning to change their channel of distribution in the future?

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