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As part of the Center for International Business Studies on Emerging Markets (CIBEM) at the Linnaeus School of Business and Economics, Kalmar, Sweden, my research concerns small and medium-sized enterprises (SMEs) entering and taking off from emerging markets. This note is based on a recent publication in International Marketing Review, where the aim was to conceptualize “entry node”, describe the entry node pattern of SMEs entering emerging market business networks, and determine how network nodes are associated with experiential knowledge.

The global marketplace has changed drastically during the last decades due to the opening up of formerly closed markets – such as China, India, former Soviet Union countries and several countries in Central and Eastern Europe. For Swedish firms, this has meant new business opportunities geographically close-by, but also in more distant emerging markets. As a result, increasing trade figures have been seen with emerging markets overall, and in Southern Sweden the EU-enlargement in 2004, when the Baltic States and Poland entered the EU, created a remarkable upswing in the number of registered importers and exporters.

Studying 203 small and medium sized enterprises (SMEs) in Southern Sweden that have entered the emerging markets of the Baltic States, Poland, Russia and China, it is seen that the entrance into these markets was made primarily during the last two decades, after these markets opened up. The firms tend to be traditional manufacturing firms that entered emerging markets in the later stages of their internationalization, following on domestic market experience and international sales to less distant market in terms of culture and language, for example, the Nordic countries, Western Europe and the USA. These mature markets are still the main export markets for the studied firms, even if the emerging markets are given increasing attention.

When entering foreign markets, knowledge is seen to be a key ingredient. It is acquired by learning by doing as a way to decrease uncertainty in a market and thus spur further commitment. Such experiential knowledge is either general internationalization knowledge that is applicable across markets, or market specific knowledge regarding the society, business network or customers in a specific foreign market. For emerging markets, being turbulent and different, prior research has shown that general internationalization knowledge is less useful as it has been accumulated in mature markets. Thus, the market-specific knowledge becomes more valuable for establishment and further internationalization in emerging markets.

Studies on foreign market establishments have focused foremost on the structural organization of the firm, in the form of the entry mode. For example, exports through an intermediary (agent or distributor) or through sales office in the foreign market. However, viewing foreign market entry from a network perspective, the establishment point into foreign market networks is defined as an entry node. This acknowledges recommendations to focus on the process of entry through relationship-building activities, rather than examining the entry as an isolated event, as is done when studying entry modes. In relation to the concept of entry node, the following assumptions are made regarding the entry situations of firms entering foreign markets:

(1)   Triad via the home market is the least committed entry situation, using an intermediary located in the domestic market as the entry node. Here, the firm has an indirect connection to the customer and thus no direct relationship with the foreign market. This means that no or very little market- or customer-specific experience and knowledge is gained.

(2)   Triad via the host market is a more committed entry situation, since, even if the exporter still has an indirect relationship with the foreign customer, it now holds a direct relationship to the market through a foreign intermediary. Depending on how this triad is organized, a varying degree of access to market-specific and possibly also customer-specific knowledge is gained.

(3)   Dyad from the home market is an even more committed entry situation since it permits a direct connection to the foreign customer from the home market. Experiential learning in the market and knowledge about the customer is gained directly to the extent allowed by the customer.

(4)   Dyad at the host market is the most committed entry situation, since the firm has committed itself to foreign customer relationships both by having direct relationships and by having invested resources in forming an establishment of its own in the foreign market, which then constitutes the entry node. The opportunities for experiential knowledge accumulation are the greatest in this entry situation.

When looking at the entry pattern of the studied SMEs, the main choice of initial entry situation was a triad via the host market, thus using an intermediary in the host market (113 firms). The second choice was a dyad directly linked to the host market (61 firms). Less used was the dyad in the host market, which includes the entry node of a foreign subsidiary (16 firms), or the indirect relationship of a triad via a domestic intermediary (13 firms). Thereby, 92 percent of the firms initially entered the emerging markets via nodes that correspond to the mode of exports, showing them to be trade, rather than investment, driven. After the initial entry, 70 percent did not change their entry node. These firms have an average of 10.3 years of market experience. But 30 percent did change their node between the time of entry and of the study. These firms have an average of 15.8 years of market experience. When making a change of node, 66 percent changed to a more committed network node, while 34 percent de-internationalized, taking a step back from the foreign customer.

The entry node pattern of the Swedish multinational SMEs then indicates a traditional internationalization pattern and supports previous findings regarding entry into emerging markets. Still, the sufficient number of direct relationships with foreign customers is surprisingly large, considering that the host markets are emerging and were entered under somewhat unstable conditions since the 1980s. However, this is in line with previous research into SMEs from this part of Sweden trading with emerging Baltic markets. A very small share of firms used the dyad in the host market, involving FDI, which supports the premise that SMEs tend to be more trade than investment driven in their internationalization. The smallest share of firms was found to use the low-committed entry node of home market triad, which is a fairly uncommon way to enter foreign markets today, as there are few trading houses left in the mature Swedish market. Regarding changed node connections after the initial entry the SMEs foremost adapted a more committed and direct node, which is also in line with traditional internationalization process theory. Most firms, however, continued to use indirect connections via an intermediary, which tend to be preferred in uncertain markets as it involves less risk and resources.

The type of entry node is confirmed to associate with the level of market-specific experiential knowledge held by the firms; more knowledge goes hand in hand with a higher commitment node. Thus, firms holding a dyad on the host market, in the form of a sales office or production unit, also had the highest level of knowledge. But as it is also the most resource-demanding type of node, it is seldom the initial entry node of SMEs. Instead, it is a preferred node when a firm wants to increase its commitment to the emerging market by changing node. When comparing the types experiential market-specific knowledge held by the SMEs, the highest levels concerned the business network, followed by societal and customer-specific knowledge. Thereby the business network knowledge is the most acquired and is suggested to be the most valuable kind of knowledge when operating in a foreign market.

The present findings have managerial implications in terms of how some entry nodes are better providers of experiential knowledge than others. As international relationship building drives internationalization, firms need to find the right international setup and connection to a counterpart that they trust and with which they can build a long-term and committed relationship. When Swedish SMEs entered the complex emerging markets of the Baltic States, Poland, Russia, and China in their later stages of internationalization, they could not apply prior experience gained from other international markets to these new emerging market contexts. Accordingly, a low-commitment node was the main choice for entry. However, SMEs should be aware that a direct customer relationship through a subsidiary in the foreign market is superior in terms of knowledge accumulation. When aiming for experiential knowledge, it should be acknowledged that, according to this study, the host market triad and the home market dyad do not differ significantly in terms of knowledge accumulation. This should be considered when taking the first step into a foreign market network. In addition, although it may be too demanding in terms of resources for the initial entry, a dyad relationship in the host market would be a preferable step for further internationalization in order to become an insider in the emerging market business network.

Source: Sandberg, S. (2013) SME node pattern and experiential knowledge in emerging markets. International Marketing Review. 30(2): 106-129.

The article is part of a special issue on SME internationalization and can be accessed via International Marketing Review:

http://www.emeraldinsight.com/journals.htm?issn=0265-1335&volume=30&issue=2

 

 

 

 

 

 

Susanne Sandberg
PhD International Marketing, Linnaeus University

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