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A study of international market selection of Swedish SMEs in the knowledge-intensive service sector
Master’s Thesis 30 credits Department of Business Studies Uppsala University
Spring Semester of 2017
Date of Submission: 2017-05-30
Rosalita Collazos Nieves Alexander Pers
Supervisor: Anna Bengtson
Acknowledgements
This Master of Science thesis has been written by the undersigned parties at the department of business studies at Uppsala University, Sweden, during the spring semester of 2017.
First and foremost, we would like to thank our supervisor, Anna Bengtson, for her constant presence and great source of knowledge when we needed consultancy and help in the writing process of the thesis. In addition, we would like to thank professor Oscar Martín Martín for his time taken to meet us. We really appreciated the discussion regarding different possible angles to view our research problem in order to ensure the reliability of results and conclusions reached in this thesis. Moreover, we would like to thank regional export advisor Jan Claesson from Business Sweden for providing us with information concerning his practical experience and knowledge as well as assisting us by advising us on the empirical findings which were used in this master thesis. An extra recognition to all of the participants from the interviewed companies: Andreas Sjölund, Anders Båth, Leif Breitholtz, Oscar Sehlberg Westergård and Anna Edward. Without their collaboration, this thesis would not have been possible to complete. We would also like to acknowledge our gratitude to all of our family members for guidance and encouragement throughout this journey.
Last but not least we would like to extend our sincerest thankfulness to each other, for the patience and support we given and effort we put into this research because “teamwork makes the dream work”.
Rosalita Collazos Nieves Alexander Pers
Uppsala, Spring 2017
Abstract
Problem Small and medium enterprises (SMEs) and the service sector have gained highly important roles in the strive for growth and economic welfare. World economy changes creates both international business opportunities and pressure for small and medium enterprises to internationalise. International market selection (IMS) is considered the most vital decision when creating an internationalisation strategy. Nevertheless, the lack of both research attention and empirical insights has created a knowledge gap.
Purpose Investigate how Swedish SMEs in the knowledge-intensive service sector perform their IMS. By answering the research question, this study will contribute to greater understanding in both theory and practice. The purpose is to add to theory in the field as well as contribute with an additional IMS model for this specific firm type.
Theory Through examination of previous research, three main approaches to IMS have been identified: systematic, non-systematic and relationship.
Method The research was assessed through a qualitative design, using semi- structured interviews with five representatives from different companies.
Conclusion The results demonstrates the importance of maintaining and creating relationships for the IMS-process. Combining previous research, insights from practitioners and empirical findings, a size and industry specific IMS- model was developed named the Boarding Step Model.
Keywords Internationalisation, IMS, SME, service sector, KIS, KIBS, psychic distance
Abbreviations
This list serves as an introduction to the most used terms and aims to enhance and to simplify the understanding for the reader by explaining certain abbreviations.
SME Small and medium sized enterprises
IMS International market selection
KIS Knowledge-intensive service
KIBS Knowledge-intensive business services
B2B Business to business
EMS Entry mode selection
STE Steps to Export
MNC Multinational corporation
Product Includes both goods and services
BSM Boarding Step Model
Table of content
1. Introduction
11.1 Background and rationale 1
1.1.1 Business Sweden 2
1.2 Problem discussion 4
1.3 Purpose 5
1.4 Thesis outline 5
2. Theory
62.1 Theoretical framework overview 6
2.2 Key concepts of international business 7
2.3 The systematic approach 8
2.3.1 A conceptualised systematic model 9
2.4 The non-systematic approach 11
2.5 The relationship approach 11
2.6 IMS in knowledge-intensive service sector SMEs 13
2.6.1 Distance matters 14
2.6.2 Relationships in focus 14
2.7 Summary 16
3. Method
173.1 Philosophy of research 17
3.2 Research approach 17
3.3 Research design 17
3.4 Research strategy 18
3.5 Research operationalisation 18
3.5.1 Interview structure 19
3.5.2 Research sample 20
3.5.3 Preparation 21
3.5.4 Data collection 22
3.5.5 Conducting the interviews 22
3.5.6 Data analysis 24
3.6 Trustworthiness and authenticity 24
3.7 Critical reflection 25
3.8 Ethical considerations 25
3.9 Summary 26
4. Empirical findings
274.1 Quinyx 27
4.1.1 Background information 27 4.1.2 Internationalisation & market selection 27
4.2 eBuilder 29
4.2.1 Background information 29
4.2.2 Internationalisation & market selection 29
4.3 FVB 30
4.3.1 Background information 30
4.3.2 Internationalisation & market selection 31
4.4 Universal Avenue 33
4.4.1 Background information 33
4.4.2 Internationalisation & market selection 33
4.5 Edward Lynx 35
4.5.1 Background information 35
4.5.2 Internationalisation & market selection 35
4.6 Summary 37
5. Analysis & Discussion
385.1 Identifying the IMS-process 38
5.1.1 The systematic approach in practice 38
5.1.2 The non-systematic approach in practice 39
5.1.3 The relationship approach in practice 40
5.1.4 Concluding on the approaches 41
5.2 Key factors & common denominators 42
5.2.1 Factors influencing the IMS-process 42
5.2.2 Denominators of the IMS-process 43
5.3 Findings connected to Steps-to-Export 44
5.4 Summary 47
6. Conclusion
486.1 Concluding remarks on findings 48
6.2 Theoretical and managerial implication 49
6.3 Limitation & further research 49
References
51Appendix 1
56Appendix 2
59Appendix 3
60Appendix 4
61List of figures
Figure 1 - Steps to Export as illustrated in Business Sweden 4
Figure 2 - Theoretical framework overview 7
Figure 3 - The six core activities of the systematic approach 8 Figure 4 - A systematic model to international market selection 9 Figure 5 - A general overview of the chosen scope 21
Figure 6 - The Boarding Step Model 46
List of tables
Table 1 – Interview guide sections linked to purpose and selected questions 19 Table 2 – Description of participants and interview 23
Table 3 – Overview of the methodological plan 26
Table 4 – Overview of the chosen approaches 38
1
1. Introduction
“...it is possible to fly without motors, but not without knowledge and skill.”
- Wilbur Wright1
Due to a new economical landscape during the past couple of years an increased number of entrepreneurial opportunities have started for small and medium sized enterprises (SMEs), mainly by going abroad to foreign markets (Wankel, 2009). The explanation to this can to a large extent be found in political changes and market deregulations as well as changes in technology, which all have contributed to a new world order (Törnroos, 2002). Ongoing structural changes in the world economy creates an ever-increasing competition in companies local, regional and national markets (Raymond et al., 2014). The pressure imposed by globalisation force many SMEs to internationalise their activities, exporting their products or services (Raymond et al., 2014). At the same time, most firms have however realised the potential of expanding their business, with arguments such as gaining higher profitability and corporate performance to distribution of risk (Wankel, 2009). This requires an internationalisation strategy, hence imposing a revising of the present business model (Raymond et al., 2014). When formulating an internationalisation strategy, international market selection (IMS) is being considered the most vital of all decisions (Musso & Francioni, 2012).
The multitude of international markets that firms can select from implies a thorough commitment from companies and the process is not always an easy or straight-forward task (He
& Wei, 2016). Despite internationalisation not being a new concept (Törnroos, 2002) as well as the fact that there today exist many theoretical frameworks, it still imposes a critical challenge, especially for SMEs (Olejnik & Swoboda, 2012).
1.1 Background and rationale
The role of SMEs in the economic system cannot be underestimated since it is perceived as the backbone of the European economy. Representing 99 percent of all European Union businesses, SMEs have created 85 percent of all new jobs over the past five years (European Union, 2016a).
Thus, SMEs are considered a key factor for achieving economic growth, job creation and innovation as well as social integration (European Union, 2016a). In line with this, internationalisation can, in the long-run, augment the performance, competitiveness and sustainable growth of SMEs and their country (European Union, 2016b).
1 Wilbur Wright to Octave Chanute, May 13, 1900 as quoted in Miller et al. (2012, p.107)
2 The global knowledge-based economy has changed the role of the service industry, which has gone from being considered peripheral to the industry of manufacturing, becoming a dynamic key component and essential for development and value creation (Raymond et al., 2014). The service sector in general is one of the major industries constituting more than two- thirds of both developed as well as emerging markets and still counting (Javalgi & Grossman, 2014). The European economies efforts to remain competitive have shown to coincide with an increased demand for so called knowledge-intensive services (KIS) (European Commission, 2012). KIS refers to the use of high knowledge components as the main factor of production (European Commission, 2012). A subcategory of KIS is knowledge intensive business services (KIBS), referring to firms providing knowledge-intensive and client-customised services to other businesses (European Commission, 2012), hence business to business (B2B). Both KIS and KIBS include services within the categories of research and development, computer and related services, education and health, advertisement and technical and legal issues (European Commission, 2012).
With regards to growth, KIS has been surpassing other service industries and manufacturing industries (Javalgi & Grossman, 2014). This surpass is believed to be due to a combination of improved international trade policies and advances in technology, hence the need to grasp the operationalisation of such firms becomes even more critical (Javalgi &
Grossman, 2014). The economic and social importance of this specific type of services is so profound that the European Commission (2012) consider KIBS a main growth engine of the future, where living standard improvements in Europe will be dependent on the productivity made in business services. Apart from being a well-discussed topic in general in the European Union, KIS is also considered to be a highly current matter specifically in Sweden (Almega, 2009). The Swedish service export has grown rapidly, increasing in a pace faster than most countries, constituting about one third of the total export (Rentzhog, 2012; Jordahl, 2012;
Sellgren et al., 2016). Since the 1990s, the increasing employment rates in the Swedish service sector has predominantly been concentrated to the KIS sector (Bergström, 2012) with almost half of the workforce being employed by such firms (Almega, 2009; Bergström, 2012).
1.1.1 Business Sweden
Business Sweden is an organisation with the purpose of assisting both Swedish companies in internationalising as well as foreign companies to make investments and expand their business in Sweden (Business Sweden, 2017a). Business Sweden was approached to get insight on how the IMS-process is performed by professional practitioners. Regional Export Advisor, Jan
3 Claesson presented Business Sweden’s course of action with the Steps to Export (STE) programme, which for decades have been helping Swedish companies to start their international export journey (Business Sweden, 2017b).
STE’s process is illustrated with 13 steps (see figure 1). However, this study is only focusing on investigating the first step of this model, the selecting export market. The first step commits to the choice of countries, hence where to conduct export (Business Sweden, 2017b).
Selecting export market, i.e. the IMS decision, has three main building blocks: external factors;
industry specific factors and internal factors. The external factors include the following areas:
political, economical, socio-cultural, technological, legal and environmental. Regarding industry specific factors, depending on type of business, one can for instance consider the number of relevant industry specific actors. When all the external factors and industry specific factors, respectively have been listed, one should reflect upon which of the external and which of the industry specific factors that have the biggest impact on the possibilities to succeed with the export. Based on this, one should contemplate if some markets can be eliminated from further considerations. Looking at the internal factors one could consider factors such as economic and personnel resources, knowledge and experience about the market, language skills and patents as well as permissions. After considering all appropriate internal factors, it is vital to reflect upon their importance for one’s possibilities to succeed with the targeted export, as well as whether or not the company possess it (Claesson, 2017).
Empirically successful internationalisation programmes such as the STE model, has however, been less successful when it comes to the internationalisation of SMEs in the service sector (Claesson, 2017). Understanding this becomes even more important when one considers the case of Sweden, a country that is very dependent on the trade with services, which is a factor that is constantly increasing (Rentzhog, 2012; Sellgren et al., 2016).
4
Figure 1 - Steps to Export as illustrated by Business Sweden (Business Sweden, 2017c)
1.2 Problem discussion
Despite the above-mentioned proof of importance, SMEs have been given less attention, in comparison to large multinational corporations, when it comes to the process of internationalisation (Musso & Francioni, 2014). Considering internationalisation, there is one part of the concept that perhaps deserves particular attention. As discussed by Musso and Francioni (2014) a SMEs selection of which foreign markets to conduct its business in, i.e.
international market selection (IMS) is part of the most important decision in the internationalisation process. Further they emphasised that IMS-decisions are one of the most vital aspects for a firm to obtain success abroad. Although IMS is viewed as a key decision in internationalisation strategy, it has just as in the case with SMEs, received surprisingly little attention in previous research (Musso & Francioni, 2014). This is highlighted by the scarcity of empirically made studies in the IMS field, as roughly 20 studies using primary data have
5 been identified (Ozturk et al., 2015). As emphasised above, internationalisation programmes, such as the STE model, have been less successful with regard to service sector SMEs (Claesson, 2017). This can be connected to Raymond et al. (2014, p. 232) interesting observation: “very little is known about the behaviour or success factors of SMEs in the service industry”.
Considering the vital role of SMEs and KIBS, it not only becomes critical from an academic as well as professional career perspective, but also from a socioeconomic perspective. Creating an understanding for the opportunities and challenges related to the internationalisation of KIBS SMEs therefore becomes increasingly important.
1.3 Purpose
IMS and SMEs in the service sector, have one particular thing in common that makes them especially interesting and important to study, which is the lack of attention provided given their relative importance. Taking this into consideration, the following research question can be formulated:
“How does Swedish small and medium sized enterprises in the knowledge-intensive service sector perform their international market selection?”
By answering the research question, this study will contribute to greater understanding both theoretically and empirically. The final ambition is to develop a theoretical, industry-specific IMS model, which can assist managers and internationalisation programme practitioners in the IMS-decision, as well as provide guidance to scholars with regards to future research.
1.4 Thesis outline
Chapter one serves as a presentation of the subject in order to provide context to the theoretical and empirical problem. It further explains the purpose of the thesis with the research questions along with a brief description of the theoretical framework and chosen research method.
Chapter two provides a thorough review of the chosen literature as well as connections to the firm type in focus, i.e. SMEs in the knowledge-intensive service sector. Chapter three outlines the research process and the layers of the design for the thesis. Chapter four analyses and scrutinises the empirical findings. Chapter five is the analysis and discussion of the collected data with connection to theory and presents a conceptualised model. Chapter six finally summarises the whole thesis with a conclusion and suggestions for future research.
6
2. Theory
The purpose of this chapter is to create a theoretical foundation which can provide a deeper understanding of the main building blocks constituting this study. First an overview of the theoretical framework presented in the chapter will be illustrated. Then the key concepts of international business are reviewed. Further, the three main approaches of IMS will be described. Moreover, there will be an emphasis on how the IMS process is performed by the firm type in focus, according to previous research.
2.1 Theoretical framework overview
In an attempt to increase the graspability, the theoretical framework has been divided into five sections. The first section introduces the key concepts of international business and distinguishes IMS from other concepts in the field. The following sections, until section five, will describe the different IMS approaches. The second section presents the systematic approach as discussed by Andersen and Buvik (2002), referring to a structured and formalised decision-making process to analyse target market potential (Andersen & Buvik, 2002; Musso
& Francioni, 2014). In addition to this, a conceptualised systematic model will follow based on various researchers’ guidelines on how to perform a systematic approach. Furthermore, divergent results from previous studies have led authors to search for alternative frameworks concerning the process of IMS in SMEs (Bell et al., 2004). For this reason, previous researchers suggest two other approaches. The third section presents the non-systematic approach focussed on having a rational decision making process, which is a disjointed incremental method (Andersen & Buvik, 2002). The fourth section describe, the relationship approach which is based on bounded rationality (Andersen & Buvik, 2002). The fifth and last section presents what previous research has found regarding how IMS can be applied to SMEs in the knowledge- intensive service sector. The outline of the theoretical framework is illustrated in figure 2 below.
7
Figure 2 - Theoretical framework overview
2.2 Key concepts of international business
This study refers to internationalisation as the action of companies going abroad, whereas IMS refers to the act of deciding between which markets to select for expansion. According to Brewer (2001) IMS is considered a process that firms undertake in order to select the foreign countries that eventually will constitute their geographical target markets. IMS therefore relates to the question of how to decide which countries to select for global business expansion (Ragland et al., 2015). Companies who seek to go abroad encounter the complex task of screening and evaluating foreign markets (Cavusgil et al., 2004). As emphasised by Papadopoulos and Denis (1988) the essence of IMS lies in the possibility to develop an effective and efficient method for foreign target market selection. However, due to the high amount of countries in the world there is neither needed nor advised for companies to research them all (Inglehart, 2006; Cavusgil, 1985).
Nevertheless, it is important to make a clear distinction concerning the concepts of IMS and entry mode selection (EMS). Wankel (2009) stated that entry mode is distinguished as an approach companies undertake when having made the decision of entering a market. There are further five main descriptions of how to enter a foreign market, which are through licensing, exporting, foreign direct investment, joint ventures and franchising. Although the IMS- and EMS-processes are highly interconnected they are strongly referred to as separate decisions
8 (Wankel, 2009). It is further suggested that these two processes could be performed simultaneously as well as consecutively of each other (Musso & Francioni, 2014).
2.3 The systematic approach
Brouthers and Nakos (2005) emphasised a systematic market selection to include activities such as: researching markets in a formalised and systematic manner, pre-entry visits in the considered foreign markets and gathering information from external sources.
According to Andersen and Buvik (2002) the use of this approach is dependent on the decision-maker’s ability to perform six core activities (see figure 3): The first activity is about defining, structuring and isolating the IMS task from other matters such as internationalisation decision and entry mode selection; the second refer to choice criteria identification, i.e.
identifying all appropriate criterions used to evaluate the alternatives. Once identified, the criterions should be organised in a goal hierarchy, resulting in for instance the overall attractiveness of the considered markets; thirdly, the decision-maker should therefore, based on the firm’s objectives, assign the criterions different weight or value depending on their importance; the fourth activity, alternative generating, contains the identification of potential countries and country-market portfolios; after this, activity five requires the decision-maker, based on each criterion, to rate the alternatives including careful assessment of the possible consequences. Moreover, the long-term characteristic of IMS also requires information about forthcoming events, explaining why this is often considered the most challenging of the IMS stages; the sixth and last activity is about computing the ideal decision. For this purpose, two models have been suggested, a compensatory and one non-compensatory. The former requires balancing different criterions against each other, hence making trade-offs between them. When this is not possible the latter can be applied. This includes sorting prospective markets into acceptable and non-acceptable country clusters or solely considering countries fulfilling stipulated levels of certain criterions (Andersen & Buvik, 2002).
Figure 3 - The six core activities of the systematic approach (Andersen & Buvik, 2002)
9 2.3.1 A conceptualised systematic model
Combining the different guidelines suggested by Cavusgil (1985), Musso and Francioni (2012) and Gaston-Breton and Martín Martín (2011), regarding how to perform a systematic IMS approach, the following steps have been composed.
Figure 4 - A systematic model to international market selection
In the first step the company should do an internal analysis in order to get to know itself and identify firm specific factors. To evaluate the foreign country-markets that will be subject for investigation, the adequate criterions from which this can be done must be determined. The criterions are then assigned different weight based on their importance and put into a goal hierarchy – all according to the firm’s objectives (Andersen & Buvik, 2002). Identifying the objectives of the firm thus becomes a crucial task to perform activity two and three in the above mentioned activities (see figure 3). Kumar et al. (1994) argued that firm-specific information can be used to perform the most suitable market selection. These include for instance product adaption and profitability (Kumar et al., 1994). When firms apply a systematic approach, they tend to consider primary IMS influencers such as the following firm specific factors: the type of product offered, the size of the firm and the international experience residing in the company (Musso & Francioni, 2012).
Step two, external analysis, is about screening and identifying countries. To perform activity four (i.e. alternative generating) in figure 2, identification of potential countries and country-market portfolios should be done. This process is described as a preliminary screening of the company’s sought after market with an in-depth view of the external factors consisting of the physical environment as well as the political, economic and socio-cultural (Cavusgil, 1985). The physical environment includes for instance size of the population, climate and natural resources. The political environment for example includes the governmental system, political stability and attitudes towards businesses of foreign origin. Furthermore, the economic environment includes aspects such as economic development, disposable income, and currency related issues. Finally, the socio-cultural environment refers to for instance education levels, language as well as other cultural aspects. (Cavusgil, 1985).
According to Cavusgil et al. (2004) country differences and similarities, concerning for instance language, culture, size and infrastructure, are crucial for the selection of appropriate markets.
10 When the preliminary screening process is completed, the firm should find itself having selected one or a few particularly attractive country-markets for further investigation (Cavusgil, 1985). When screening countries, Gaston-Breton and Martín Martín (2011) suggested the use of a macro-segmentation process focused on market attractiveness, i.e. size, potential and development of the market, which goes in line with the next step.
Step three is therefore to do a market analysis, where one can use the industry market potential as well as the firm’s sales potential (Cavusgil, 1985; Musso & Francioni, 2012).
Market potential is a vital part of the IMS-process, acknowledged as an essential element of foreign market evaluation (Ozturk et al., 2015). The size and growth of the market as well as the product potential and market access are all indicators of market potential (Cavusgil et al., 2004; Cavusgil, 1985). This assists in determining both present and future cumulative demand for the firm’s specific industry in the markets that have been selected (Cavusgil, 1985).
Considering aspects such as trade limitations and regulations, local practices and standards, one can assess the level of access to the market. Furthermore, factors like offerings from competitors, desires and needs of customers, attitudes towards both the product itself and its country of origin are determinants of the products level of potential (Cavusgil, 1985). When assessing a country’s market potential, it can further be valuable to consider aspects such as availability of transportation, intermediaries, and manpower (Cavusgil, 1985). Regarding the firm’s sales potential in the considered country-markets, Cavusgil (1985) identified several key influencers such as forecasting the firm’s volumes of sales and the customer segments concentration. The pressure of competition is also important. Further, cost related aspects such as distribution expenditures, tariffs and insurances should be examined (Cavusgil, 1985).
Step four is about making a customer analysis in the considered markets. Gaston- Breton and Martín Martín (2011) presented a micro-segmentation process, looking from a consumer point of view to general characteristics and central values. Focusing on these enduring beliefs is also a way of clustering consumers sharing the same attitudes and attributes (Inglehart, 2006). The most frequently used framework concerning market segmentation is Hofstede’s cultural model (Gaston-Breton & Martín Martín, 2011), unpacking culture into dimensions of power distance, individualism-collectivism, masculinity-femininity and uncertainty avoidance (Minkov & Hofstede, 2011).
Step two, three and four provide the insights needed to perform activity five, i.e.
alternative rating (see figure 3). When the different alternatives are rated, it is time for Step five, final choice making i.e. selection of country market. This enables the performance of the sixth activity in figure 3, ideal decision computing.
11 2.4 The non-systematic approach
The non-systematic approach is characterised by a process of steps lacking the use of formal methods (Papadopoulos & Martín Martín, 2011). As discussed by Andersen and Buvik (2002) the non-systematic approach uses experiential knowledge as its primary information source, focusing on the perceived psychic distance. The concept of psychic distance is referred to selecting and entering those markets that are perceived easier to understand because of similarities in for instance political system and industrial development and choosing markets of further distance later on (Andersen & Buvik, 2002). Additionally, culture and language differences as well as varieties in business practices and education are factors that together comprises barriers to and from the market (Johanson & Vahlne, 1977). Applying this approach of experiential knowledge and perceived psychic distance when performing market selection, decision-makers will use a strategy to avoid uncertainty by selecting markets with low psychic distance (Andersen & Buvik, 2002). This concludes the reasoning that firms expand to either geographically near countries or to those countries that have similar cultures to their own (Khojastehpour & Johns, 2014; Andersen & Buvik, 2002). Taken together, there is a consistent resemblance between the non-systematic approach and the Uppsala model of internationalisation (Andersen & Buvik, 2002). The Uppsala model is essentially a model which highlights a learning curve way of thinking based on experiential learning as a gradual and cumulative process of gaining information of the selected markets to enter (Johanson &
Vahlne, 2009).
2.5 The relationship approach
The relationship approach is characterised by having relationships in the centre of attention, were country-market selection is substituted by the identification and selection of international exchange partners (Andersen & Buvik, 2002). The network of the firm's relationships constitutes the main information source, were trust, comparability of goals, and performance are key factors of the selection process. In a situation where the environmental uncertainty is high a local partner can assist in interpreting both political and cultural signals, inform the company about changes in the local market and about the conditions of competition and developments in technology (Andersen & Buvik, 2002). In line with this Sharma and Johanson (1987) emphasised the importance of business relationship network as a foundation from which the firm operates and develops by functioning as a provider of information about business opportunities. Therefore, the choice of internationalisation may be brought about as a result of the firms’ relationship network characteristics, as relationship ties to international networks can
12 provide channels into foreign markets (Sharma & Johanson, 1987). This is important, since Yamin and Sinkovics (2006) argued that internationalisation to a large extent is believed to be dependent on the understanding of the business and targeted markets. An absence in that matter is instead associated with poor performance in the internationalisation process (Yamin &
Sinkovics, 2006). Accordingly, a relationship approach implies that international business expansion may follow as a result from interaction with the firm's relationship network, such as when a foreign buyer takes the initiative of interaction (Andersen & Buvik, 2002). It is moreover crucial to emphasise that relationships are not limited to one single form (Andersen
& Buvik, 2002) and can involve relationships with suppliers, customers, competitors and family-members (Coviello & McAuley, 1999). Thus, ”Organisational boundaries therefore incorporate both business (formal) and social (informal) relationships” (Coviello & McAuley, 1999, p. 227).
As argued by Forsgren (2001) such deep and long-lasting relationships lead to a network of business that further on can provide the opportunity of added tacit knowledge. He suggests that firms might act in different ways from what previous theories might state and consequently pursues internationalisation abroad based on sometimes logical and non-structured reasons.
Forsgren (2001) referred to this behaviour as “following-the-herd” which is when firms imitate other organisations that are part of their network. However, such relationships require a lot of work and are therefore an investment in time, money and effort, which is built over a long period of time and does not occur instantly (Madsen & Servais, 1997; Wilkinson & Young, 2002). Additionally, cohesive data from Sharma and Johanson (1987) and Madsen and Servais (1997) showed that networks essentially become like bridges to other foreign markets, which incentives them to take the opportunity to internationalise. The importance of business relationships was further highlighted by Khojastehpour and Johns (2014) as well as Johanson and Vahlne (2009) claimed that through deepened integration of business activities and creating a level of interaction between two parties allows for added value. Khojastehpour and Johns (2014) further argued that the success of internationalisation largely depends on the capacity of transferring their specific knowledge abroad. Building on the importance of relationships, Mutinelli and Piscitello (2001) elaborated on the notion of following the customers when investigating Italian banks in the 90s. These banks were observed to follow their clients to foreign markets by establishing branch offices. Firms able to establish such relationships and be part of networks are moreover seen as “insiders” and part of the elements of the internationalisation process (Johanson & Vahlne, 2009). However, any firm that does not obtain such position is viewed as an “outsider” and may suffer from the liability of foreignness that
13 serves partially as an impediment to the internationalisation process (Johanson & Vahlne, 2009). In conclusion, one could say that a strong support of interaction with networks is imperative (Tseng & Johnsen, 2011).
2.6 IMS in knowledge-intensive service sector SMEs
“Smaller business are not smaller versions of big business. Although both sizes of companies deal with many of the same issues, smaller businesses
also deal with unique size related issues as well, and they behave differently in their analysis of, and interaction with, their environments.”
Shuman & Seeger2
There is a need for systematic IMS approaches, at least if one believes Brouthers and Nakos (2005), who argued that SMEs use of the IMS approach tend to be a determinant for its international market success. The importance of following a systematic IMS path was further highlighted by Papadopoulos and Martín Martín (2011), considering it a key element in shaping the international performance, particularly with regard to the initial internationalisation process stages. In line with this, Cavusgil (1985) and Cavusgil et al. (2004) emphasised the need for a methodical and systematic analytical market research in order to guide managers through the process and essentially create successful international business involvements.
Despite this strongly emphasised need and importance for SMEs to use a systematic approach to IMS, implementing it in practice has proved to be more uncommon. Earlier studies were supported by Musso and Francioni (2012) about the fact that a majority of SMEs, contrary to multinational corporations (MNCs), did not use systematic approaches for their IMS. Musso and Francioni (2012) concluded that there exists a relationship between firm size and the use of a systematic IMS approach. Further, the use of such an approach does also depend on the period in the life cycle of the firm, since it is suggested that the strategic planning activity becomes more sophisticated over time (Bell et al., 2004).
Previous IMS models have proved to be problematic due to reasons such as not being industry specific, lacking user simplicity hence being too complex to implement in practice (Musso & Francioni, 2012; Papadopoulos et al. 2002). Axinn and Matthyssens (2002) rejected the idea of having a standardised approach asserting that a regional fine-tuning is necessary when confronting internationalisation. Evidence confirmed that firms in general and SMEs in
2 Shuman & Seeger (1986, p. 8)
14 particular based their choices on highly unsolicited forms (Papadopoulos et al., 2002; Musso &
Francioni, 2012). This is supported in O’Farrell et al. (1998) study of internationalisation of SMEs in the business service sector, which showed that 86 percent of the investigated firms did not apply a systematic screening process in order to decide which country to internationalise to. They therefore concluded that the IMS-process of SMEs in the business service sector are ad hoc and profoundly unsystematic. Furthermore, SMEs are found to operate based on opportunistic and reactive reasons largely due to their development in administrative procedures as well as monetary boundaries (Musso & Francioni, 2012; Bell et al., 2004). Other described reasons were due to limitations in experiential knowledge of managers handling export matters (Papadopoulos et al., 2002; Johanson & Vahlne, 1977). Further, Andersen and Buvik (2002) emphasised the fact that firms, for reasons such as limitations in their information- processing capacity, do not use a systematic approach.
2.6.1 Distance matters
Papadopoulos and Denis (1988) emphasised that SMEs tend to base their selection of target markets on criterions that are non-systematic, such as psychic distance, geographical distance and cultural distance. They argued that the result of using any of these three criterions tend to be that the firms select neighbouring countries for their expansion, due to proximity of geography often coinciding with cultural similarities but also increased market knowledge and ease of information gathering. In a similar way, Krishna Erramilli (1991) argued that various research results suggest that service firms tend to follow a market selection pattern similar to the one described in the non-systematic approach, hence focusing on reduction of uncertainty.
As inexperience is causing the firm high levels of perceived uncertainty, their market selection is likely to focus on the country-markets that they possess the best information about, i.e. the one being most familiar to their home market. Following the uncertainty reduction path, the market selection will thus become more geographically diversified only as experience increase, which indicates that psychic distance is playing a highly vital role in the service firms’ IMS- process (Krishna Erramilli, 1991).
2.6.2 Relationships in focus
O’Farrell et al. (1998) found that a majority of the investigated business service sector SMEs, had their IMS processes directed by clients and orders rather than selecting which country to enter. Khojastehpour and Johns (2014) argued that the importance of having relationships, as well as maintaining and developing them, is emphasised by the customer following aspect in
15 the process of internationalisation. According to Hellman (1996) client following is a dominant feature in service company internationalisation. This can be labelled customer-driven internationalisation, which occur when the service company internationalise, out of a desire to serve its incumbent domestic customers in their foreign operations (Hellman, 1996; Engwall &
Wallenstål, 1988). Another type of internationalisation among service companies occur when the companies are market seekers, entering international markets to serve the foreign customers (Hellman, 1996). Coviello and Martin (1999) examined the internationalisation of SMEs in the knowledge-intensive service sector and found factors speaking in favour of an implementation of a relationship approach to IMS. Hence, concluding that relationships residing in the firms’
networks can provide business opportunities that drives the market selection (Coviello &
Martin, 1999). A network contact therefore represents a foreign location tied asset that the firm can use to exploit location-specific advantages. Moreover, the use of such network contacts as well as the employment of personnel with experience from the selected market, proved to enable a reduction of the psychic distance. Coviello and Martin (1999) concluded that the location of network contacts and clients proved to be the main driver of both initial as well as subsequent market selections. Relationship development among SMEs was also discussed by Tseng and Johnsen (2011) who asserted through findings that the importance of relations made through networks were an important key success factor for SMEs and were required for them to thrive in a competitive and changing international surrounding. Others have also stated that the network perspective is believed to be the most useful approach in order to try to grasp the internationalisation of SMEs (Coviello & McAuley, 1999; Coviello & Munro, 1997). In line with this, Bell et al. (2004) found that KIS SMEs were more likely to be influenced by their relationships rather than due to geographic or psychic distance factors, hence arguing against Papadopoulos and Denis (1988) discussion above. Thus, internationalisation can be seen as a result of the characteristics in the network where it operates (Sharma & Johanson, 1987).
Nonetheless, Andersen and Buvik (2002) further reasoned that the relationship approach should be seen as a separate division from other traditional approaches such as the systematic- and non-systematic approach, since they were found to be used in different periods in time. Elaborating on that, they stressed that the relationship approach was found to be used in the first phase of the company’s endeavour to internationalise rather than at a further stage.
Andersen and Buvik (2002) stated that although a relationship approach is implemented there might anyhow exist elements from some of the more traditional approaches (Andersen &
Buvik, 2002).
16 Andersen and Buvik (2002) found that firms are more prone to use a relationship approach in the IMS-process rather than the systematic- and non-systematic approach when customers are within the manufacturing and service industries. They did however enhance the fact that their findings suggested that different approaches could serve as complements to each other. Hence, agreeing on the fact that internationalisation constitutes of broad and dynamic concepts, which prevents it from being explained or defined by one single theoretical school (Andersen & Buvik, 2002; Coviello & McAuley, 1999). This further indicates that there is a need to view IMS as part of a holistic approach and by that, integrating major theoretical frameworks (Bell et al., 2004).
2.7 Summary
This chapter firstly presented the key theoretical concepts of internationalisation. This was followed by a presentation of the theoretical approaches of IMS, i.e. systematic, non-systematic and relationship. Lastly, IMS was applied to SMEs in the knowledge-intensive service sector.
This thereby provides an insight from previous research on how the focused scope of this study perform their IMS-process. This will together with the empirical findings presented in the forthcoming chapter, set the foundation for a new industry-specific IMS model.
17
3. Method
This chapter reviews the chosen research paradigm with an elaboration of why it was chosen as the preferred method. There will also be a presentation of the collected instruments of the operationalisation along with the main features. Moreover, a critical section will follow overviewing the limitations of the method and questioning the thesis trustworthiness and authenticity.
3.1 Philosophy of research
The purpose of this research is to find out how IMS theories can be applied in practice for the scope of Swedish knowledge-intensive SMEs in the service sector. The chosen inductive approach along with the exploratory framework and qualitative strategy are main features of what permits an assessment of the research subject to be made (Bryman & Bell, 2015).
Moreover, the semi-structured interviews were a way of accumulating personal attitudes on the topic and therefore represent an interpretivist nature (Bryman & Bell, 2015).
3.2 Research approach
When one’s empirical findings constitute the base from which one creates theories and further on make sense of complex and interactive processes, induction is applied (Saunders et al., 2009). By the nature of the purpose of this thesis there is an emphasis on intricate understanding, hence a discovery process of collecting data in order to comprehend a phenomenon (Saunders et al., 2009). In this approach, theory results from research, having a process of research consisting of three steps: observations, findings and theory building. An inductive research approach is most commonly related to a qualitative research design (Ghauri & Grønhaug, 2010) which is why an inductive approach was selected as most suitable for the research at hand.
3.3 Research design
When collecting and analysing data, Bryman and Bell (2005) argued that the research design determinates the framework for how to proceed. In line with this Ghauri and Grønhaug (2010) emphasised that a study’s research design is the plan for how to construct a research that is empirically feasible, i.e. being a roadmap for the collection of data and the related analysis.
Considering what was emphasised about the objective of this research in the introducing chapter, the research design of this paper will be of an exploratory nature. The choice of which
18 design to use is a question about balancing the effectiveness of information obtainment and the researcher’s constraints, in such a way that the research problem at hand can be solved in the best achievable manner (Ghauri & Grønhaug, 2010). An exploratory design is most appropriate when the research problem is unstructured and poorly understood (Ghauri & Grønhaug, 2010).
3.4 Research strategy
According to Ghauri and Grønhaug (2010) the chosen strategy or method of a research serves as an indicative constituent for the data collection technique to obtain the information needed to answer the research question. The role of knowledge in internationalisation of the focused scope is what mainly led to the decision of method, a qualitative method is ideal because of the required contextual understanding of the subject (Bryman & Bell, 2015). The decision about which method to use should be based on the research problem identified, i.e. considering the study’s purpose and focus. A qualitative strategy is focused on understanding by using an orientation that is explorative and taking an approach based on rational interpretation (Ghauri
& Grønhaug, 2010; Bryman & Bell, 2015). By using a qualitative data it is possible to gain a holistic perspective of this research’s phenomenon which as of today, is still considered to be little known (Ghauri & Grønhaug, 2010; Musso & Francioni, 2014; Raymond et al., 2014).
3.5 Research operationalisation
The preparation and construction of the semi-structured interview guide questions (see appendix 1) was central to the foundation of this study, namely linking the questions to theory.
As displayed in table 1 below, the questions of the interview guide section were divided in categories of pre-IMS, IMS and post-IMS. Each category had different purposes as explained in the table, the overall aim was to capture the accumulated IMS-processes of the interviewed companies.
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Table 1 – Interview guide sections linked to purpose and selected questions
Interview guide sections
Purpose Questions
Pre-IMS Gain knowledge concerning the firms’ experience, background and motives to foreign expansion. Other aspects such as the type of presence they have in the selected markets and how they gather their information will also be taken into account. This will provide an overview of the underlying elements that influenced the IMS-process.
1-3
IMS Investigate how the actual selection process was performed as well as emphasise the key factors considered when selecting markets. This will assist in determining which of the three IMS approaches resembling the process described by the firms.
4-7
Post-IMS This section identifies the firms’ learned lessons from previous international expansions. It will additionally answer the question of how future IMS processes would be performed. Combining knowledge and previous experience will provide insight about what the firms’
believe could be an optimal IMS process.
8-10
3.5.1 Interview structure
Interviews are a way of seeing through the eyes of the interviewee and interpret the social world from their perspective rather than one’s own (Bryman & Bell, 2015). The semi-structured interviewer has a clear research topic and uses guidelines and directions to pose relatively similar questions to all interviewees with room for modification and flexibility depending on the situation and context. This research aims to investigate the IMS-approach used among Swedish SMEs in the knowledge-intensive service sector, thus the method needs to incorporate an interpretation while simultaneously remaining loyal to the guidelines in order to stay on- topic. One of the key principles regardless of the choice of interviews is to always remain focused towards the objective, leading the interviewee to answer accordingly (Bryman & Bell, 2015). This justifies the choice of a semi-structured interview, whereas a non-structured interview would imply the risk of going too far off topic and the structured would limit the findings (Saunders et al., 2009). Furthermore, the posed questions consisted of open questions
20 with the ambition to incentive the interviewees to define and describe situations based on their own experience and encourage an extensive answer with their personal opinions and attitudes (Saunders et al., 2009).
3.5.2 Research sample
Bryman and Bell (2015) argued that the sample is an important and inevitable part of any implementation of any research examination and could be presented as a subgroup of the population. This research used a specific population, hence SMEs in the knowledge-intensive service sector, in order to be able to compile data within a specific area and reach an attainable sample size for the scope (Bryman & Bell, 2015). The sampling used in most qualitative research, as well as in this one, is purposive sampling or also known as judgemental sampling (Saunders et al., 2009). What explains this approach and notion is that sampling is conducted with a purpose to gather the correct information, therefore a selected number of organisations are chosen on the basis of their ability to contribute to the subject of the thesis (Bryman & Bell, 2015).
The population was purposively selected along five key parameters: firm type; firm sector; physical presence; commercial transaction and geographical area. Regarding type, firms having maximum 250 employees with an annual turnover of € 50 million represents the criterions for being a SME according to the European Union (2015). Considering the type of sector, SMEs within the industry of the knowledge-intensive service sector were selected. The industry of knowledge-intensive firms stretches among hi-tech-, market-, financial- and healthcare services, to name a few (Almega, 2009). Moreover, Skatteverket’s (The Swedish Tax Agency) designations were used in order to obtain a legitimate distinction between goods and a service. Goods refers to material things, meanwhile everything else is considered a service. Further, tailor-made software programs, i.e. programs produced and customised in accordance with the purchaser’s order are always considered a service (Skatteverket, 2017).
The choice was limited to the commercial transaction between business to business (B2B) since KIBS companies are regarded as a main growth engine of the future (European Commission, 2012). Ultimately, the sample was narrowed down to the geographical area of Mälardalen in Sweden as well as with the requirement of having at least one physical office allocated abroad.
Narrowing down the scope has therefore implied the need for fewer respondents (Bryman & Bell, 2015). There was a strategic collection of participants for the interviews who had relevant positions in the targeted companies and several years of experience in relation to internationalisation. However, since this type of sampling does not augment the possibilities of
21 generalising the findings it is thereby considered a non-probability sampling technique (Saunders et al., 2009; Bryman & Bell, 2015). Although there was a clear set of requirements to be fulfilled when searching for participants there was also room for varieties based on their backgrounds in terms of experience, key characteristics and industries since the area of knowledge-intensive services include a broad selection of specialities as mentioned above.
Figure 5 provides an overview of the selected research sample, hence describing how the firm type and sector are interconnected.
Figure 5 - A general overview of the chosen scope
3.5.3 Preparation
Any successful interview requires a cautious and meticulous preparation beforehand. This includes the level of knowledge of the interviewers as well as the amount of time they used for obtaining this knowledge, when for example practicing their communication skills (Saunders et al., 2009). When conducting an interview, it is key to know the subject in detail through both research and theory, which consequently will lead to a in-depth discussion and enhanced interaction during the interview (Saunders et al., 2009). The preparation consisted of having the semi-structured interview guide overlooked by subject relevant academic scholars and by
22 regional export advisor and key informant Jan Claesson from Business Sweden, to comment on the representativeness as well as the suitability of the written questions.
Pilot interviews was also conducted a few days before the first real interview on two individuals with relevant background for the study at hand. This test was crucial for the understanding of the questions from an objective point of view and to test how the respondents interpreted them. There was thereafter a possibility to make adjustments in wording, in the order of questions as well as exploring any responses that might be significant for the research topic (Saunders et al., 2009). There was moreover an e-mail send-out to all participants pre-interview with a short description about the subject and purpose of research together with an introduction of the content that would be discussed. This made it possible for the respondents to appropriately prepare for the topic and thereby be more focused and predisposed on how to engage in the conversation (Saunders et al., 2009).
3.5.4 Data collection
The contextual approach of collecting data in a qualitative study entails assembling what is known as rich and deep data (Bryman & Bell, 2015). For this research, the data was gathered selecting firms according to the criterions of the European Union (2015) regarding the previously mentioned factors in the section of research sample. Relevant data and lists of companies of around fifteen hundred examples were collected mainly through online websites such as LinkedIn and Almega, this facilitated the pursuit of finding appropriate firms for the research. The second screening of the companies was made through Swedish business search engine Alla bolag. The search for potential respondents was extended for a period of three weeks in total, whereas all interviews were completed during a period of four weeks in total.
Furthermore, the following organisations were contacted: Svenskt Näringsliv (Confederation of Swedish enterprises), Municipalities of Uppsala and Gävle and Tillväxtverket (The Swedish agency for economic and regional growth) in order to obtain additional lists of companies.
Moreover, all of the interviews except for one were conducted in-person whereas one of the interviews had to be administered through the application Zoom for conference calls. Hence, since all of the data for this research was retrieved through interviews it is considered a collection of primary data.
3.5.5 Conducting the interviews
The conducted interviews lasted for approximately one hour and it started with a short presentation of the researchers, the topic and the purpose. The audio recording of the interview
23 did ensure that no important information was lost, which is an important aspect (Bryman &
Bell, 2015). Furthermore, the personal information about the individual and general information about the organisations were read out-loud in order for the interviewee to confirm that the gathered information was correct. The previous steps were used as a way of creating a safe zone for the respondent together with small talk, in order to promote credibility and make sure that the procedure was as comfortable as possible, as it is regarded as an important part of the process (Saunders et al., 2009). The interview questions were divided in three sections: pre- IMS, during IMS and post-IMS and by posing questions regarding the process allows for an extensive collection of the IMS process rather than one single event (see table 1). Moreover, the inquiry was in Swedish since it was the preferred language of the respondents and the interviewee is supposed to feel comfortable with the vocabulary to express themselves more accurately (Bryman & Bell, 2015), see appendix 1 for questions. During the interview both interviewers were present, but one focused on posing the questions and the development of the interview and the other could focus on taking detailed notes and pitch in when needed. This is a preferred method when doing a semi-structured interview since it enhances the flow of conversation as well as the compilation of data (Saunders et al., 2009). Table 2 below contains information about the respondents in the order that the interviews were conducted.
Table 2 – Description of participants and interview
Name Position Firm Date
Andreas Sjölund Global Sales Director Quinyx 03.10.17
Anders Båth Senior Vice President in charge of Sales for Travel Procurement and Customised
eBuilder 03.15.17
Leif Breitholtz Chief Executive Officer FVB 03.28.17
Oscar Sehlberg Westergård
Vice President of Clients & Growth Universal Avenue
04.07.17
Anna Edward Managing Director & Founder Edward Lynx 04.10.17
24 3.5.6 Data analysis
The section of analysis refers to the interpretation of data and need to manage the raw collected data in order to draw any conclusions from it (Bryman & Bell, 2015). For this specific research, the qualitative method was used and therefore implies both taking notes and audio-recordings of the interviews to later do an extensive process of assessing the data. It starts with transcribing the data, which includes processing the audio-recorded information into script, and coding, which refers to breaking down the script into components or categories with given labels (Saunders et al., 2009; Bryman & Bell, 2015). For this study, the coding was completed through the analyse of each transcript finding key factors and denominators that could make it possible to categorise and reveal the choice of approach. After the coding was made it was possible to make sense of the data and start linking it to the research question.
3.6 Trustworthiness and authenticity
In broad terms trustworthiness concerns the credibility and transferability of the research.
Whereas authenticity concerns the wider impact of the research, such as the matter of obtaining fairly representation in the study. The assessments of the interview guide by academic scholars did mainly enable the credibility and confirmability and consequently the pursuit to collect the correct data prior to the interviews (Saunders et al., 2009). In order to attain the highest possible transferability and dependability of this study, several criterions were listed that the companies had to fulfil in order to qualify as suitable for the research at hand. These criterions included as previously mentioned theoretical distinctions and discussions on services in general and knowledge-intensive services in particular. Moreover, the credibility is increased when supplying the interviewee with relevant information before the set interview (Saunders et al., 2009) as done with the send-outs by e-mail to all participants. Nonetheless, it might negatively affect the confirmability and objectivity of the study. Denscombe (2012) further emphasised that it is impossible to achieve total objectivity in qualitative studies, since the collection and analysis of the data will to an extent vary and be affected by the beliefs and values of the researcher and the respondent. Furthermore, actions were undertaken to increase the authenticity of the study keeping in mind the importance of receiving input from the respondent in order to make adjustments. Having the transcription revised by the respondent before adding it to the paper enhances the fairness towards the interviewee and adds credibility to the facts stemmed from the interviews (Bryman & Bell, 2015).
25 3.7 Critical reflection
Ghauri and Grønhaug (2010) pointed out the importance of conducting and informing about the research in an accurate and honest manner, this includes to communicate the weaknesses of the research. Denscombe (2012) highlighted one main drawback of qualitative research related to the issue of dependability, namely that it is not possible to use replication as a tool for determining the quality of the research and its findings. Moreover, as already mentioned the most common criticism within this method relates to the subjective embrace (Bryman & Bell, 2015). This is due to the fact that observations are conducted in natural settings and are therefore seen as highly impressionistic (Saunders et al., 2009; Bryman & Bell, 2015). Moreover, one of the interviews was conducted through conference calls, which could limit the interpretation of the response due to decreased visibility (Saunders et al., 2009). There are also considerable insecurities to take into account in regards to the source ascertaining the European Union (2015) criterions mentioned in the research sample. The reason lies in the form that it was obtained through the search engine Alla bolag. An additional limitation of this research was that the primary data was collected from Swedish interviews, which consequently required translation for the thesis. This might have influenced the way the text was perceived, captured and expressed.
3.8 Ethical considerations
The ethical aspect brings forward the role of values in the research process and refers to how the researchers acts towards the respondents in relation to the research study (Saunders et al., 2009). First and foremost, all interviews started with asking the participant for their consent to audio-record the interviews, which prevented any misinterpretations. Occasionally ethical dilemmas in qualitative studies occur when bias is present (Bryman & Bell, 2015). For instance, when there was a need to clarify questions with examples during the interview. This could be seen as leading the respondent to answer in a certain way, despite the intentions of avoiding it.
Similarly, the semi-structured interview gives the respondent the possibility to express themselves as they wish, which might lead to the revealing of confidential information about the company. The researchers prevented that no classified facts were published when allowing the respondents to review the transcription from their interview. The information regarding number of employees was posed to the interviewees for verification in order to control that the necessary criteria for being an SME was fulfilled. However, due to ethical considerations the turnover was not asked to be verified, hence only relying on the official information available through Alla bolag’s database.
26 3.9 Summary
This chapter’s purpose was to increase transparency through being clear and open about the qualitative procedure for this thesis. There was moreover a comprehensive account of the used method in the above sections along with a critical section of the thesis. Table 3 below illustrates a summary of the findings from this chapter.
Table 3 – Overview of the methodological plan
Methodological plan
Research approach Induction
Research design Exploratory
Research strategy Qualitative
Interview structure Semi-structured
Research sample Swedish SMEs in the knowledge-intensive service sector in Mälardalen
