INTERNATIONALIZATION PROCESSES IN THE NEW EU ... - SNEE

INTERNATIONALIZATION PROCESSES
IN THE NEW EU:
MARKET GROWTH, RELOCATION, AND
OUTSOURCING
Hans Jansson, professor of international marketing
Baltic Business Research Institute
Baltic Business School, Kalmar University
391 82 KALMAR, Sweden
Tel: +46 480 497180, Mobile: +46 733 107339
E-mail: hans.jansson@hik.se
Abstract
The rapid growth of emerging country markets and their integration into the world economy
creates a double effect of a strong global pull from growing demand and a push from growing
competition. This double effect seems to lead to a third wave of internationalization involving
market growth, re-location and outsourcing of production as well as shifting of supplier bases
from Western Europe eastwards. This is seen as a main factor behind the erosion of the
industrial base of the Swedish economy and an increasing separation between firm-specific
competitive advantages and country-specific comparative advantages. The responses differ
between key types of firms: the domestic firm, the internationalizing firm and the fully
internationalized firm. The latter type is divided into the Ethnocentric MNC, the Polycentric
MNC and the Geocentric MNC. These types are mainly developed from internationalization
process theory through a methodology based on abduction. Illustrations are given of responses
in the form of internationalization processes of internationalizing firms and Ethnocentric
MNCs to the new Eastern part of the EU and of restructuring of production of Polycentric and
Geocentric MNCs.
Paper to be presented at the 7 th Annual Conference on European Integration, Mölle, May 24-
27, 2005, organized by the Swedish Network for European Studies in Economics and Business
(SNEE).
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INTRODUCTION
The rapid growth of emerging country markets and their integration into the world economy is
drastically re-arranging the competitive forces for firms and economies. Almost every day we
are learning about Swedish firms moving their production or outsourcing it to Central and
Eastern Europe (CEE), China, or India. One major consequence is that the strong industrial
base of the Swedish economy seems to diminishing rapidly as new jobs are not created at the
same pace as jobs are lost. 1 Swedish firms seem to create more jobs abroad than in Sweden at
the same time as more jobs are exported than imported. R&D investments and the number of
new companies are going down. The Swedish economy does not seem to be able to sustain its
comparative advantages built on capital/knowledge intensive industries, not being able any
longer to gain from globalization to the same extent as before. One reason is that major
markets in CEE have been integrated into the common European market. Another reason is the
rapidly growing markets in China and India as well as intensified competition from companies
in these countries. China has emerged as the “factory of the world” and India as the “global
software centre”. This has created new low cost production bases. But most importantly, India
and China in particular, have upgraded their competitive advantages to industries, where
Western mature industrial countries traditionally have comparative advantages, e.g. hi tech
industries. This creates a double effect of a strong global pull from growing demand and a push
from growing competition that dramatizes the competitive situation in Northern Europe
considerably, increasing the risk of Swedish firms being outperformed by foreign firms, both
large and small. However, there seem to be a contradiction between country-specific
advantages and firm-specific advantages. The Swedish economy might be losing competitive
strength but not necessarily the Swedish companies. An indication of this is the decreasing
number of jobs in Sweden in comparison with the increasing number of jobs at Swedish
companies abroad and for these companies as a whole.
This contradiction and new competitive situation is not enough to study at the macro level,
treating the firm as a black box. In opening this box, it is found that the double effect
mentioned above seems to result in a third wave of internationalization of firms with a low
degree of internationalization, particularly small and medium-sized enterprises (SMEs), and to
a new phase of re-structuring of already internationalized firms. Due to how far they have
come in the internationalization process, firms respond differently to this new situation. At one
extreme is found firms that have completed the internationalization process and now are truly
global firms or multinational corporations (MNCs). Such a company needs to restructure on a
global basis, innovating new products and businesses, being less dependent on the Swedish
home base. Here, there might be a difference between the firm-specific competitive advantage
and the country-specific advantage of the Swedish economy. At the other extreme is found the
still non-internationalized firm: the domestic market oriented SME. Firms at the early
internationalization stages are slower to respond, because they lack resources for and
experience of international trade and investment and have a traditional home-market focus,
being late comers on the international scene. For such firms there is less difference between
firm-specific competitive advantage and country-specific advantage, since Sweden is their
strategic base. This means that their competitive advantage in international markets is highly
dependent upon how competitive Sweden is as a nation. This competitiveness might also vary
between regions in a country, where some regions are more competitive than others, being a
kind of region-specific advantage.
Some general trends in how firms respond to this internationalization challenge seem to be:
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* More home-market oriented SMEs are internationalizing their business operations.
* Internationally experienced companies change their internationalization behaviour.
Traditional internationalization processes take place on mature markets: European firms first
went to mature markets in Europe and later to North America, and finally to emerging markets
in Latin America and Asia. The new situation implies a more mixed internationalization
process.
* Internationalization processes are becoming more complex. Traditional internationalization
processes are sales based and concern exports and foreign direct investment (FDI) in new
markets. The growing importance of outsourcing results in increasing reliance on foreign
supplier markets, imports and the internationalization of supplies. This has earlier been a vital
issue in certain industries and regions since the 1970’s, e.g. for clothing and electronic industry
in Asia. But it is now diffused to many more industries and firms. Traditionally, the location of
production is a consequence of the gradual build-up of the foreign customer market. Such
internationalization processes are still valid due to the rapidly growing markets in CEE and
Asia. But lower costs for both blue and white collar workers increase internationalization of
production, even making firms to only internationalise production without any direct linkage to
sales.
* Increased international competition. More competitors from emerging markets in Eastern
Europe, China and India make internationalization processes more difficult, e.g. home-market
oriented SMEs are facing a larger risk of being put out of business due to re-location of
production.
ISSUES
Responses to environmental changes vary between the firms. The accession of ECE countries
to the EU, e.g., creates opportunities for going international for many European SMEs. For the
internationalizing firm, it could involve a re-positioning of its international marketing efforts,
while it might lead to restructuring of production for the internationalized firm, or it being able
to take advantage of lower production costs in Europe rather than Asia and therefore outsource
there. To characterize these types of firms more, it is necessary to look closer at how they
internationalize or have been internationalized, the key factor being how they build
international experience. This is done by developing internationalization process theory
further. This implies that such processes are mainly seen to be knowledge-based, and where
innovation strength and organizational learning are critical for future growth.
This paper is built on the assumption derived from earlier IB research that how firms respond
to changes in international markets largely depends on where in the internationalization
process they are found, i.e. their degree of internationalization. To know more about the
response to the new situation discussed above, internationalization process theory is developed
in four major ways:
1. Since re-location and restructuring of production plays a key role in this third wave of
internationalization and new phase of global restructuring, it is important to clarify and develop
the role of this activity in the internationalization process.
2. This increased importance of production in internationalization is part of a more complex
internationalization process, which is better understood if it is disaggregated into the different
activities of the value chain, e.g. production, sales, and purchasing.
3. Fixing an end to the internationalization process. A lot of research has been devoted to the
beginning of the process, while very little has been said about its end. It is reasonable to
establish a finish line for this process, which is about how firms are internationalizing from
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scratch to some final stage. The idea of a fully internationalized firm is developed in the
paper. This does not mean the end of internationalization process theory. Quite the contrary of
that. It is developed to be valid for a broader range of internationalization issues including
both internationalizing and internationalized firms.
4. As indicated above, internationalizing issues today largely involve emerging markets, where
Western firms face a very different context and the critical importance of doing business in
networks. These aspects are integrated into the internationalization process theory below. Even
if there are numerous studies on internationalization processes, the new situation of
internationalizing to emerging markets has not been much studied.
METHODOLOGY
The methodological strategy behind this research is mainly abductive, being a mix of
deduction and induction (Alvesson & Sköldberg, 1994; Jansson, 1994a). It rests on the limited
possibilities of generalization of various theories in time and space. The purpose is theoretical
development, where the empirical support of a theory is continuously assessed, or, inversely, a
reality’s theoretical support investigated, through the matching of theories with realities. Such
a process either has a deductive or an inductive starting-point. The deductively angled
processes are theory-led, while inductive approaches are characterized by the continuous
abstraction of empirical realities. The results presented in this paper come from a research
process, which started from a more preliminary frame of reference, using the case-study
approach (e.g. Merriam, 1998; Yin, 1991). This framework has been continuously refined
through changing perspectives between deductive and inductive approaches. The final aim is to
create a solid theoretical and empirical base at the same time as strengthening the practical
validation of the research, by making the results relevant for organizations and society. Inter
alia, embedded case study methods are used to integrate qualitative and quantitative knowledge
(Scholz & Tietje, 2002).
THE THEORETICAL FRAMEWORK
Based on their international experience, firms are grouped into five major categories. This
grouping is based on research on internationalization processes and MNCs.
* The Domestic firm. This is a company operating in the home market that has not yet started
to internationalize and therefore is no MNC.
* The Internationalizing firm. This firm is internationalizing its activities in the value chain and
is found somewhere in-between the home market and the fully internationalized firm, being an
immature MNC. The internationalization process model is mostly relevant for this type of firm,
as it passes through its various stages. In Sweden today, these firms are SMEs that either have
a potential to internationalize further or start to internationalize. They will be illustrated below
based on a recent study of internationalizing SMEs in Kalmar county.
* The Internationalized firm. This is a grown-up MNC that has reached the end of the
internationalization process and can therefore be considered to be a fully internationalized
firm. There are three major types of such firms:
- The Ethnocentric MNC, which spatial focus is the home base, being its strategic base. There
this MNC has most of its key activities, including production, R&D and HQ. The
organizational infrastructure of this firm is characterized as a global organization or
multinational organization (Barlett & Ghoshal, 1989). Many small and medium-sized MNCs
located in the Kalmar county fall under this category, which will be discussed further below.
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- The Polycentric MNC, which has strategic bases spread over the globe, still having the major
base in the home country: production, R&D activities and Group HQ. But major business areas
are often located to other parts of the world. The international organization of the MNC
approximates the organizational infrastructure of this firm. For this firm, the value chain is
often disaggregated and reengineered on a global basis. Volvo, SAAB, Scania, or other big
MNCs in the vehicle industry are good examples of this kind of firm, which will be developed
more below.
- The Geocentric MNC, which is global in the true meaning of the word, since there is no
strategic base left in the home country. It is not traditionally bound to any particular place,
looking at the world as one big market, therefore being located in the most suitable place in
relation to its activities. That includes its headquarters. This type of firm can be said to
represent the end of internationalization in the way that it strategically has left its original
home base and is a fully global firm. It coincides with the arise of “the Regioncentric MNC”.
It operates on a global basis for all business activities and has a global firm infrastructure,
which is best characterized to follow the principles of the transnational organization. There is
either a continentally based headquarters or one virtual global headquarters for the worldscale
operations. Home is everywhere or in no particular place.
Internationalization Processes
Internationalization processes take place in a stepwise manner (Jansson, 1989; 1994b; 2005).
Companies commit themselves through a gradual learning process. Learning is incremental
and takes place by doing. Firms learn about doing business abroad, e.g. about the conditions in
particular markets. Companies tend first to establish themselves in geographically and
culturally proximate markets and increase their commitment more and more, starting with
agents, and passing through sales companies to manufacturing companies (Johanson &
Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). This has mainly been studied for MNCs
but also for SMEs (Hohenthal, 2001). Research on the export of mainly North American both
small and large companies have reached similar results (Bilkey, 1978; Cavusgil (1980); Reid
(1981), Czinkota (1982). However, ‘Born globals’ or ‘International new ventures’ (that are
international from inception) tend to follow another pattern (Oviatt & McDougall, 1994;
Madsen & Servais, 1997, Sharma & Blomstermo, 2003a). A basic assumption in
internationalization process theory is that knowledge accumulation is continuous and
dependent upon the duration of foreign operations (Forsgren, 2002; Sharma & Blomstermo,
2003b). The longer the firm has been involved in foreign operations, the more knowledge firms
accumulate about such operations. There is a relation between knowledge accumulation and
risk so that the more knowledge the firm has, the less uncertain it perceives the foreign market
to be. Firms that lack knowledge about foreign markets even tend to overestimate risks. This
corresponds to what Jansson (1989, 1994b) found about establishment processes in a regional
emerging market perspective, namely that the pace of investments in Southeast Asian countries
accelerated the more experienced the firms became of this area, at the same time as the mode
of establishment became slightly more direct for the later establishments.
Internationalization through Network Relationship Development
Traditional internationalization processes are mainly about marketing activities. This aspect
is, however, not very much developed, especially when it comes to industrial marketing in
emerging markets, which is a matter of building and handling network relationships.
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According to another branch of the Uppsala School, relationships constitute the core of the
internationalization process (Axelsson & Johanson, 1992; Hammarkvist, Håkansson, &
Mattsson, 1982; Jansson, 1994, 2004a,b; Håkansson, ed., 1982; Håkansson & Snehota, 1995;
Jansson, 1989; Johanson & Vahlne, 2003; Majkgård & Sharma, 1998). Internationalization
takes place through establishing and maintaining network relationships in foreign
environments. An exporter/importer network is a temporary set of units, which has been
formed out of different units in the organizations of the buyer and the seller, i.e. a value
constellation established for the task of marketing/purchasing a product/service package
involving a certain combination of competences from the units of these organizations. A value
constellation is a group of actors representing different units at the buyer and the seller that
work together to create value for the customer (Norman & Ramirez, 1993), implying that
interdependent marketing and purchasing activities link actors and their competences together.
This international marketing and purchasing of products and know-how through this direct
exporter/importer network means that a vertical network in the exporting region (e.g. a
supplier’s supplier network) is indirectly connected to another vertical network in the
importing region (e.g. a buyer’s buyer network). This larger vertical network, in its turn, is
embedded in other regional and national networks, e.g. a financial network (Jansson, 2005).
The exporter/importer network is then part of a larger value constellation consisting of a
supplying export network connected to a buying network in the emerging market.
Stages of Internationalization
Based on the experiential knowledge process, internationalization processes are often divided
into different degrees of internationalization or stages. According to Johanson & Mattsson
(1991) inexperienced firms follow the traditional slow and gradual pattern (e.g. the “late
starter”), while the internationalization of the more experienced company is less gradual and
slow (e.g. the “international among others”). A classical grouping of firms is made by Cavusgil
(1980), which has been found to be valid also for exporting small and medium-sized
enterprises (Gankema, Snuif & Zwart, 2000). According to their study, the internationalization
of SMEs takes place in five stages. During the first stage, firms have a domestic market focus.
Next follows the pre-export stage, when the firm evaluates the possibilities to start exporting.
The third stage is experimental involvement, when exporting is a marginal activity. The fourth
stage is active involvement, when international business is a normal activity, e.g. an important
share of the turnover is exported. A suitable organization structure is also in place for this
activity. The fifth and last stage involves committed involvement in exporting. The firm can
now be called international, since it is heavily dependent on foreign markets.
The internationalization process is normally divided up into two parts: an external part dealing
with the geographical spread to the international country markets and one internal part
focussing on types of establishments or entry modes in a country. Strangely enough, the
aspects of foreign markets are underrepresented in this theory, particularly since the
international experience largely concerns such aspects. Two external factors are developed
further in this article, namely the customer and the context. The first is developed by looking at
how relationships are established with customers. Establishment points in networks are defined
as entry nodes, e.g. directly with the customer or indirectly through an intermediary. In the
latter case, the entry node is also an entry mode.
The development of international buyer/seller relationships tends to follow a certain pattern
(Ford, 1980, 1997, 1998), being separated into five stages. Each stage in the entry node is
described according to a number of relationship factors, e.g. how the experience, commitment
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and adaptations of the parties increase and how the distance and uncertainty between them are
reduced. The first stage takes up marketing/purchasing activities before the relationship begins.
The next three stages show how direct buyer-seller relationships within networks are
established: their beginning and deepening. This development can be described according to a
number of relationship factors, e.g. how the experience, commitment and adaptations of the
parties increase and how the distance and uncertainty between them are reduced. The variable
experience indicates the amount of experience the respective parties have of each other. Both
parties will judge their partner’s commitment to the relationship. Commitment is to a large
extent shown by the willingness to make adaptations. The variable distance is multifaceted and
can be split into the following types of distance: social, cultural, technological, time and
geographical distance. Uncertainty deals with the fact that at the initial stages, it is difficult to
assess the potential rewards and costs of the relationship.
Ford’s model complements Cavusgil’s model. While the latter concerns how the international
experience of the firm is developed, the former is a good approximation of how international
experience is gained in a country. The more developed the customer relationships, the more
experience the firm has of the particular foreign country market. During the pre-relationship
stage, the experience of the customers/suppliers is none or very low, uncertainty high,
distances large and commitment and adaptations zero. According to Cavusgil’s five-stages
model, for a SME that has a domestic market focus and starts to internationalize its
relationships to a foreign country, the pre-relationship stage corresponds to the pre-export or
pre-import stage for the first foreign market (Gankema, Snuit & Zwart, 2000). The
development of the relationships in the foreign country market starts in the early stage, when
commitments and experience increase somewhat. In the five-step model, this is similar to the
experimental export stage or import stage for an internationally inexperienced firm. This
establishment of relationships is a mutual learning process, where the parties learn to know
more and more about each other. The first adaptations are made, but are still few. High
uncertainty is experienced and high distances prevail between the parties. The early stage is
followed by the development stage, during which business between the customer and the
supplier starts to grow and resources are increasingly shared. In this stage, there is a further
development of the buyer/seller relationship signified by a delivery build-up and the signing of
contracts. Intensive mutual learning results in increased experience on both sides, as well as in
reduced uncertainty and distances. Trust and commitments increase, which are signified by
both formal and informal adaptations as well as cost savings. Relationships change character
and become entirely focused on the dyad, in that way becoming deeper and broader. Next, after
several major purchases or deliveries, the relationship is developed and settles in a stable stage
of the long term stage with continuous business going on between the parties. The exporter and
the importer have now learnt to know and trust each other, which gives high experience and
that the uncertainty is perceived as being low. Distances are small and commitment high.
Adaptations are extensive and cost-savings considerable. The main aim with building
relationships is to reach the long term stage, to get an on-going long-term relationship. If this is
not accomplished, the relationship may retract to an earlier stage, even to the pre-relationship
stage. In the latter case the relationship building may start all over again, perhaps this time with
a new buyer/supplier. In the final stage, the relationship is extensively institutionalized and
habitual with commitment being taken for granted. The downside is that the relationship might
get stuck and become hard to adapt to on-going environmental changes. The high trust, low
distances and uncertainty might also lead the parties to become complacent. Despite the high
degree of institutionalization, this makes the relationship sensitive to being broken, due to
environmental changes and attacks by competitors.
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Thus, relationships being at the core of the internationalization process of SMEs follow a
similar pattern as the internationalization process as a whole as showing how the gradual build
up of international experience takes place. The more relationships in a foreign country that
have reached later stages, the more internationally experienced and the higher the degree of
internationalization of the SME. Further, the more countries with established relationships, the
more internationally experienced the firm is.
Internationalization of Production
According to the internationalization process, production is moved abroad rather late, being the
last establishment form in a country market. In today’s global world this might still be true for
the internationalizing firm, especially when entering the first foreign countries. But with the
increasing possibilities to take advantage of global economies of scale and low labour costs,
this simple idea is only part of the picture. For the internationalized firm, the situation is
different and production mainly a matter of concentration/restructuring production on a global
basis. According to Farrell (2004) internationalization of production, being the core of the
foreign direct investment process, takes place in five stages. At first, when being less global
and entering markets the firm’s domestic production is ‘cloned’ abroad. This fits with the
internationalization process model. At the second stage, being an internationalized firm beyond
the internationalization process, whole production processes are re-located to take advantage of
cost differentials world wide. At the next stage, the value chain is disaggregated worldwide and
individual product components manufactured in different locations or regions. At the fourth
stage, companies reengineer the now global value chain by redesigning their production
processes to maximize efficiencies and cost savings. At the last and now highly global stage,
new markets are created due to the lower costs caused by globalization. Here, production is
wholly integrated globally both geographically and with the other activities in the value chain.
Internationalization of Purchasing
Internationalization of purchasing activities or inputs takes place through expansion to new
supplier markets, either through replacing domestic production with imports or shifting from
domestic suppliers to foreign suppliers. The first is the make or buy situation or the
outsourcing issue. The second is a supplier selection situation or where to outsource, e.g. with
the intention to shift the supplier base from high cost to low cost countries. This process is
cost driven or market driven. In the latter case, the customer moves production abroad and the
supplier follows. It could also happen that the customer faces cost pressures from customers
abroad and to avoid being replaced by cheaper sources, the supplier moves production to keep
the customer. Global sourcing is an example of highly internationalized purchasing.
Internationalization of the Organization
The multinational organization or the mother-daughter organization is an early type of
worldwide organisation for the internationalized firm and has primarily been in operation in
the early MNCs. It promotes local responsiveness and has little global integration between
various units throughout the world. The interwar period, for example, favoured a multidomestic
pattern of competition developed on a country-by-country basis, where little
coordination and multinational control was required (Dunning, 1993). MNCs were not very
diverse and were not divisionalised, e.g. along product lines, but functionally organised.
Subsidiaries were loosely coupled and more controlled through informal means by 'the
mother'. The multi-divisional organization or international organization is a later form of
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world-wide organisation structure. The change to more global competition from multidomestic
competition affected the long-term competitive positions of MNCs and as a
consequence of that, their goals. The global integration of local market activities has become
more essential for international competitiveness. With a rising international commitment and
a growing interest to increase the control of international operations, an international division
is sometimes created within the group. Later on, when international business has outgrown
domestic business, the whole organizational infrastructure of the group changed to be based
on the international operations, and a global divisional structure took form (Stopford & Wells,
1972; Bartlett, 1986). The idea of a poly-centric MNC is based on the organization being
centred on these product/business divisions. Later, in the 1970’s, the global organization
appeared on the world scene represented by the Japanese keiretsus. This is a highly
centralized form, where the global value chain in the form of first mostly sales subsidiaries
and later production units abroad are run from Japan, where key production, R&D, and the
top of the pyramid are located. This global organization is traditionally not based on divisions
but on functions. At that time, the world was more integrated, which also made it possible to
integrate on a world scale. From the 1980’s onwards, global competitiveness originates more
and more from such coordination of inter-related activities worldwide. With an established
market position in most local markets of interest to the MNC and a rising global competition,
growth comes from an increased international involvement of the whole MNC than from
initial entries in new geographic markets. It is vital to utilise synergistic advantages and to
rationalise production and marketing, for instance. The competitive advantage achieved from
integration through this organization is more sophisticated than is possible to achieve through
the earlier types of global organization. Coordination is based on both the global interest and
the local interest and not only on the global interest. This has resulted in that many MNCs
have changed their organization into a 'glocalised' transnational or differentiated organisation
that is both global and local at the same time (Bartlett & Ghoshal, 1989; Jansson 1994b). This
type of organization fits with trans-institutional business management. An MNC having a
transnational organisation is closest to the geocentric firm. It is a kind of uninational firm,
where the world is seen as one entity in the same way as a nation is. The company meets
different demands in the world market, even having global customers. It employs the best
people for a certain job irrespective of their nationality. The best location is found for the
different units depending upon actual worldwide needs and not because of the origin of the
company. For instance, where a product company, that represents the global interest, is
located depends on the worldwide interest of the company. However, few MNCs have
reached this ideal state of the true transnational firm. They are still bound by historically and
geographically based institutional ties like the differentiated group network. The main point is
that its organization is globally based and does not have one regional strategic base, e.g. in
either Europe, Asia, or North America. Rather, it is equally big in each of these continents,
having a multi-centered organization based on all three continents.
A most important aspect of the internationalization of the organization concerns the
ownership structure. Due to the globalization of financial markets and the M&A wave of the
1990’s the ownership structure of the MNCs has been internationalized. Together with the
increasing ‘cross-hauling’ of FDIs between countries, this has resulted in that most economies
today contain a mix of companies from many countries.
Cycles of Organizational Learning in Internationalization
Experiential knowledge is the key factor of the internationalization process, being the major
factor behind the stage character of the process. This implies a focus on the resource base of
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the firm, e.g. its capabilities or rather dynamic capabilities. Since the theory concerns
knowledge processes, organizational learning becomes important. Firms gradually build up
their knowledge about foreign operations through operating in foreign markets. They learn
from past experience by transforming this experience to useful knowledge. This experiential
knowledge about foreign markets is developed in networks (Blomstermo, Eriksson, Lindstrand
& Sharma, 2004; Johanson & Vahlne, 2003). This experiential knowledge is path-dependent
and unique for every firm, often being defined as a ‘theory in use’ (Eriksson, Johanson,
Majkgård & Sharma, 1997). There are two types of such knowledge: institutional knowledge
and technical knowledge (Jansson & Samuelsson, 1996). The former concerns knowledge
about the foreign markets, while the latter is defined as knowledge about how to operate in
these markets. The organizational learning of experiential knowledge is twofold: operational
learning that occurs within an existing organizational routine and conceptual learning that is
more strategic or path breaking (Timlon, 2005), more similar to explorative learning (Forsgren,
2002). This division builds on Sharma & Blomstermo’s (2003b), who mean that the existing
knowledge structure/state is rather restructured discontinuously or intermittently. The idea is
further based on results from research on the internationalization of Western firms in emerging
markets. Viewed from the institutional network approach developed in Jansson (2005) a
thought style or ‘thinking routine’ is found behind a theory-in-use. This thought style is
embedded in other institutional factors that make the organizational process a routine, mainly
social norms and values. Incremental learning or operational learning then takes place
according to a specific thought style, where knowledge is accumulated following a theory-inuse.
This type of learning process is broken when the thought style is changed, and the current
experiential state of knowledge, thought style (theory-in-use) of the organizational routine is
reformed. According to the thought style characterized by incremental learning new knowledge
is interpreted and evaluated within the existing theory-in-use. Restructuring then takes place
when this framework no longer is workable, through conceptual learning.
One possible instance is when firms that have a domestic market focus start to export or
import. According to Sharma & Blomstermo (2003a) firms with long domestic experience may
have a cemented knowledge platform that takes time to change. Another instance is when the
company moves from one type of market to another, e.g. from mature markets in the West to
emerging markets in the East. As generally found, firms tend to internationalize to culturally
similar markets, thereby building exports as much as possible on the experience from the
domestic market. Cavusgil’s (1980) stage theory is built on a similar idea, since each
subsequent stage is viewed as an innovation for the firm. Such an innovation is now possible to
view as a break with the current thought style and operational learning process. Behind such an
innovation is a new thought style together with new norms and possibility new values. The
new organizational routine is discovered, learned through conceptual learning, and
institutionalized into a new knowledge platform, setting off a new operational learning and
business process from this base. Each stage of the internationalization process is represented by
such a platform, which is formed through an institutionalization cycle, where conceptual
learning is important. This fits with institutional theory, since organizational routines are so
rigid that changes can be viewed as innovations.
Institutional Distance
New stages of internationalization are established with the firm extending its business from one
major type of market to another major type or from one type of foreign environment to another.
These foreign country market environments or contexts are defined as institutional settings.
The internationalization process is therefore determined by the institutional distance between
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country markets. This concept involves major differences between how societies are organized.
It is a broader concept than psychic distance (Johanson & Wiedersheim-Paul, 1975) or cultural
distance (Majkgård, 1998). Rather, it improves cultural distance as a concept for international
business research along the lines suggested by Shenkar (2001), being changed from a countrylevel
characteristic to a country institutional profile based on institutional theory (Kostova,
1997). The institutional distance is assumed to be large when internationalization processes
take place from old EU countries to new members as well to Asian countries. It is based on the
institutional network approach (Jansson, 2005). There is an inter-play between network
relationships and institutions on the regional emerging market, where institutions are seen as
constituting the framework for different relationships. Institutions represent broad categories of
conditions according to which marketing and purchasing relationships are organised. Networks
are influenced by institutional structures (”macro rules”), e.g. systems of property rights
(”relationships rights”) and other legal rules such as judicial and penal systems. Other
examples of institutional complexes of importance are family, clan, ethnicity, religion, culture,
political system in general, trade unions, business associations, and business mores and
conventions. The state holds a special position, since it participates both as a collective
network actor, being in direct contact with the value constellation, and is seen as an
institutional structure outside the network, influencing relationships indirectly. In a similar
vein, religious norms might encourage or inhibit incentives for innovation and entrepreneurial
activities. Hence, the norms, values, cognitive factors, and regulations inherent in such
institutional complexes impact networks. This is also true of more proximate institutional
structures in which market actors and government actors are embedded, i.e. market institutions.
The institutional context of a specific emerging market might facilitate or hinder
internationalization moves to be implemented. Thus, internationalization concern activities in
relationship marketing processes with the purpose to bridge gaps at three levels: organisations,
organisational fields and societal sectors.
EMPIRICAL ILLUSTRATIONS
Internationalizing Firms: Swedish SMEs to Emerging Markets in the Baltic Sea Region
The empirical results build directly on (Jansson & Boye, 2004) 2 and somewhat on SIF (2004).
These studies are representative for internationalizing firms in various stages of the
internationalization process as well as for small ethnocentric MNCs. Relationships were found
to be critical for doing business in the East Baltic countries: finding contacts, maintaining, and
developing them either directly or indirectly through own companies or middlemen.
Consequently, those companies having such relationships saw them as strengths, while
companies not having them considered this to be a weakness. Other relationship linked
strengths, on which the competitiveness rest are experience and reputation, market presence, a
good assortment of unique high-quality products built on a high technical competence, and
flexibility. Among the weaknesses are noted too high prices, lack of resources, knowledge and
time. The major opportunity lies in growing markets and lower costs, while a major threat
comes from gradually rising local costs, which risks to make the area uncompetitive in
comparison with certain Asian countries. Another threat is increasing competition from
domestic and foreign firms.
An unexpected large share of the regional trade is direct taking place through dyads between
small customers and suppliers on either side of the Southern Baltic Sea. This is especially true
for imports to the Kalmar County, while export relationships are shared almost equally
between dyads and triads. The higher importance of indirect relationships through distributors
11

and agents (i.e. triads) compared to FDI fits with the general expectation based on earlier
research that indirect trade accounts for a larger share of SMEs international business activities
in high-risk countries. However, the high importance of direct trade between customers and
suppliers on either side of the Baltic Sea is more unexpected. One reason is that imports are
included. The other major reason is the geographical proximity of these markets. An indication
of this is that triads dominate for the more remote Russia, especially for the export trade. The
low importance of FDI of SMEs is also demonstrated by the fact that the subsidiaries are
spread out between the countries of the region with only one MNC having subsidiaries in most
countries. The international activities almost entirely concern marketing and purchasing. Very
little own production has been established abroad, as well as little outsourcing of production.
Few examples of firms starting to shift their supplier base eastwards were detected. A follow
up of some firms during the last year show that they have started to outsource, beginning with
the most labour-intensive parts.
So, the more marketing and purchasing relationships that have been established in the each
East Baltic country, the higher is the degree of internationalization of the SME. In addition, the
more countries with established relationships, the more internationally experienced is also the
firm. The regional internationalization process is limited to a few destinations, usually one or
two. A small number of companies have a deep regional internationalization process as they
cover a larger part of the region. Still, about two thirds of the number of firms is experienced in
international business, being classified to have either an active or a committed involvement in
export and/or import activities. Evaluated according to this stage theory (see below), the global
internationalization process has reached the higher stages. A comparison of the regional and
global internationalization processes shows that the East Baltic export markets are usually of
marginal importance, these having more similarities with far-off markets in other parts of CEE
and in Asia than with the more near and larger volume EU markets. This concentration of the
internationalization process to more traditional Swedish foreign trade markets is obvious for
imports, particularly because of the dominance by the woodwork industry.
Internationalization processes are influenced by characteristics of the firms and the markets
where they trade. Only a lesser part of the foreign trade turnover of these SMEs goes to this
region. Among the institutional factors in the local markets influencing internationalization
processes, the economic and political environment are still important as well as infrastructure,
particularly communications across the Baltic Sea. Essential barriers exist such as culture
(mainly language) and corruption. Internationalization processes tend to vary with type of
industry. Engineering industry is the dominating export cluster, while woodwork industry is
the dominating import cluster. Still, compared to the Swedish trade with these countries certain
key industries are missing, chiefly IT, telecommunications, and service industries such as
banking. This mainly explains why no “Born globals” are found among the firms studied.
Industry structures are different in different regions. Regions dominated by SMEs and
production subsidiaries of MNCs in mature industries are handicapped. One may assume that
certain regions will be ill-favoured by the increase in trade between firms along both sides of
the Baltic Sea rim.
Although the short geographical distances prevailing in the Baltic Sea area would benefit trade,
this potential seems to be hard to take advantage of, especially by resource poor SMEs acting
in an environment characterized by great differences in business environments. However,
another study of SMEs and larger firms from South Sweden (Småland) going abroad during
the last five years indicates that geographical distance is not important. China is namely the
leading country for outsourcing, re-location of own production, as well as for the establishment
12

of new business ventures, far ahead of the Baltic countries and Poland in the former case and
the Nordic countries in the latter case (SIF, 2004). This also indicates that institutional distance
is less important than expected. The reason for this might be that these countries are perceived
as equally risky, since most of them are transition countries, the main difference being with
Western country markets. Another reason could be that the economic gains are of such a
magnitude to be worth the risk. A conclusion from the pilot study is that the SMEs’ potential
internationalization possibilities may be prevented by the inability to change from domesticlike
markets to foreign markets, particularly if there are large differences between these
markets, making the current business knowledge is less relevant.
The reasoning above is valid for on-going established firms, since no “Born globals” were
found in the pilot study. This indicates that few new internationally oriented firms have been
created in the region so far.
The Internationalized Firm: Relocation of Production in the New EU
As discussed above, production is restructured and relocated on a big scale within the new EU.
Are there any differences here between the three major types of the internationalized firm, i.e.
the Ethnocentric MNC, the Polycentric MNC and the Geocentric MNC?
The Ethnocentric MNC
Six of the smaller MNCs included in the study mentioned above are typical examples of the
ethnocentric MNC. Even if they are small (around 200-300 employees), they are resource rich,
since they belong to a larger group, normally another MNC. These are highly specialized niche
MNCs that are members of a larger group of companies, which will make final decisions on
big strategic issues. The strategic base of these MNCs is in the Southern part of the Kalmar
county, where the major strategic units, sales, production and main sub-suppliers are located.
The foreign operations are mainly a sales organization, which consists of a few sales centres
(e.g. local engineering offices) and sales subsidiaries but mostly of agents and distributors
(indirect relationships). A few of them have a small part of their production abroad. An
exception is the company that outsourced production to Eastern Europe already in the
beginning of the 1990s and now has a value added structure that makes present and future
adaptations easier to the increasing specialization of the production chain in the Baltic Sea
area. Despite a manly foreign supplier base, one firm in electronics industry was struggling
with a biased cost structure for some years. It has just been closed down and moved to another
Nordic country. These MNCs are becoming more global by growing in present markets and
expanding to new country markets. However, as discussed above, only a small but growing
part of their business is done in emerging markets, whereas there are good expansion
possibilities there. Their strategic production base is more or less intact in the region and is not
undergoing any major shift to Eastern Europe or China.
Most other MNCs in the Kalmar county are small highly specialized production centres within
a multinational group, e.g. Scania or sub-suppliers in an internationally specialized valueadded
chain within vehicle industry, e.g. Fourencia and Kendrion springs. They produce for all
three types of internationalized firms, defined above.
13

The Polycentric MNC
The case of whether General Motors should locate the production of its new standard car
model with Opel in Russelheim, Germany or with Saab Automobile in Trollhättan, Sweden is
good example of a location problem on an EU basis within a polycentric MNC. Here, one
established production centre (originally an acquired company) was competing with another
established centre (originally also acquired). The HQ of this U.S. corporation set the rules and
made the final decision, which to a large extent was determined by the global situation in the
industry, e.g. over-capacity and increased on-going concentration in an oligopolistic world
market structure. The decision was of high strategic significance for the countries involved,
since the outcome could result in a close down of either of these factories. A major condition
for these Western European sites to compete for this production was a considerable reduction
of their relatively very high labour costs and other costs, which could not be achieved without
government involvement.
The Volvo group is another good example of a polycentric MNC, having its HQ and most
business areas located to Sweden, but where there are also vital centres in other parts of
Europe, in the Americas and in Asia.
The Geocentric MNC
This illustration is mainly about moving production abroad from a factory in a small town in
Central Sweden. 3 This re-location took place within a company belonging to a large U.S.
company, and which had been bought from a big Swedish MNC a few years earlier. After
being acquired, this company has gradually been phased out of Sweden and integrated with
other group businesses in the world, mainly in Europe. In a couple of years, it was changed
from a company with most of its strategic base in Sweden to having left the country. The main
reason for this disappearing act was lower labour costs, in this case in Slovakia, where they
amount to about 10 % of the costs in Sweden. Overhead costs are also lower, roughly by 20 %.
In addition, material costs are been reduced by continuously shifting the supplier base out of
Western Europe to Eastern Europe. How the restructuring was done is determined very much
by the already established global business structure of the MNC. This is a good illustration of
how a geocentric MNC responds to global developments, in this case a region-centred MNC. It
shows that restructuring in the geocentric firm is much more complex than to close down a
factory in one country and setting it up in another. The case demonstrates that it was only the
most modern part of the factory that was moved abroad (to Slovakia). Production of parts that
were at the end of their product life cycle were kept in Sweden, either being outsourced to
Sweden or abroad to Eastern Europe. Some products were finished. The close down of the
factory was part of the continuous disaggregating and reengineering of the value chain on
primarily an EU basis. It involved a larger part of the production system and was a response to
the geographical spread of the customer structure within the EU as well as increasing price
pressures in this highly competitive and dynamic global industry. Production was moved closer
to the now major customers in Central and Southern Europe as well as in the Middle East and
North Africa. Close relationships with large customers are a key strategic factor in the industry.
In addition, products are heavy and expensive to transport. Thus, the location disadvantage of
Swedish production in relation to the customers plus price pressures were increasing to a
certain point, which made changes necessary. Some customer related operations were also
jointly moved out of another unit (in Stockholm) to Slovakia, namely equipment and
knowledge that are required to customize and service products. The part of production kept in
Sweden was mainly related to the main customer and former owner there. A major reason for
14

moving production to another EU country and not China is that the company has a regioncentric
organization in Europe as well in other parts of the world. Still, these relocations were
influenced by the production situation in China, since some parts for the product moved were
already made there. There are also plans to outsource call centre activities for customer service
to the Philippines, which is an important centre for the group in Asia. Due to an on-going reorganization
of the group, the production moved was integrated with another product division
in Slovakia, enlarging the country as a centre for production in Europe for the MNC. This was
not planned in advance but an adaptation to the evolving competitive situation in this hi-tech
and dynamic industry. For the same reason, there was not only a transfer of knowledge from
Sweden to Slovakia but also an upgrading of it at the same time. Due to increasing costs,
labour turnover and high inflation in Slovakia, studies are already being done within the MNC
about moving some production from Slovakia to Rumania to take advantage of even lower
labour costs.
CONCLUSIONS
Internationalization within the new EU context varies with the degree of internationalization of
the firm. In a time of increasingly diminishing institutional distances within Europe, it opens
up possibilities for domestic firms to internationalize to the new EU neighbours in ECE. These
are mostly SMEs, which will follow the ‘shining path’ in the form of the traditional
internationalization process. As indicated by earlier research, this is difficult and critical
strategic move, since it is involves a transformation to a new theory-in-use or thought style
based on a knowledge platform concerning international business instead of domestic business.
However, with increasing demand and lowering institutional barriers opportunities grow and
threats are reduced for all firms, inexperienced as well as experienced. A third wave of
internationalization of firms seems to be underway.
A study of the regional internationalization processes to the emerging markets in the Baltic Sea
region by SMEs from Southeast Sweden between 1989 and 2004 confirms the picture of SMEs
being bound to the home market or even to a specific region. Rather few firms took advantage
of the gradual liberalization of these markets at close geographical distance by
internationalizing their business. Those that did already had an international experience or
firm-specific advantages also coming from other countries than the home country or sometimes
the home region. Thus, internationalization mainly took place by internationalizing firms or
ethnocentric MNCs. Internationalization of sales and purchasing or the start of trade takes
place through establishing network relationships, mainly through exporting and importing, and
where international marketing and purchasing are the key activities. Exporting/importing then
takes place through establishing or developing relationships. Network relationships are the core
of the internationalization process and where there are either direct (customer) or indirect entry
nodes, e.g. distributors or agents.
The regional internationalization process is when the SME spreads its foreign activities to a
nearby country from the home base. Relationships and production are established and
maintained in e.g. ECE countries and in various sequences between them. In addition, entries
are organized in different nodes and modes.
Thus, ways to internationalize in the new Europe mainly vary with how much experience firms
have in operating in foreign markets, i.e. with how far they have come in the global
internationalization process. Internationally experienced firms are in a better position to take
advantage of business opportunities in the ECE, both to sell more, relocate production and shift
15

the supplier base eastwards. But there are other types of threats for the Ethnocentric MNC. A
major issue is how the traditional MNC structure of such firms can be kept in a more
globalized world. Is it possible to sustain the competitive advantage that originates from its
present regional base, e.g. when production costs are only fraction of those in adjacent
countries and when the supplier base in general seems to be moving to the new EU countries in
Eastern Europe or to China/India? Are their owners willing to keep investing? This seems to
vary with type of industry and which type of MNC that dominates the global industry: the
polycentric or the geocentric MNC. As indicated by examples above, production in the
electronics industry seems to be leaving Sweden for ECE and Asia. This internationalization
takes place within the geocentric MNC, where the combined and complex processes of relocation,
outsourcing and shifting of the supplier base were illustrated above. For the
geocentric firm, there is a clear difference between the firm-specific competitive advantage and
the country-specific advantage in the way that competitive advantages are based on the
comparative advantages of many countries than on the particular home country. This difference
is smaller for the poly-centric MNC. The structure of this MNC in the Swedish vehicle
industry seems to be largely intact, at least for the nearest future, which, inter alia, benefits
local production units and sub-suppliers in the Kalmar county. The key factor behind this is the
strong strategic base of these MNCs in Sweden, the major factor for the future being how to
sustain it through combined efforts by firms and government. The challenges involved
regarding for example cost reductions in the ongoing restructuring of the global production
structure were discussed above.
For the types of firms mentioned above, this means that companies either internationalize own
production by moving it abroad or establishing new production units in foreign locations.
Relocation of production within the company takes place by rationalizing, thereby increasing
efficiency. The internationalization of production is part of the disaggregation and
reengineering of the value chain on a global basis. It takes place both internally when
products are made within the firm abroad instead of at home or externally when production is
outsourced or the supplier base restructured.
Internationalization of the organization of firms has taken place in different forms over the
years, where the transnational organization is the latest form, and being a major characteristic
of the geocentric MNC. Its organization is region centric in contrast to the polycentric MNC,
which is typified by the international organization. This organization is centred on product
divisions rather than geographical centres. The geocentric MNC is signified by the
globalization of the headquarters, either having continentally based headquarters or one virtual
global headquarters for the world-scale operations. This MNC operates on the global basis for
all business activities and has a global firm infrastructure.
16

NOTES
1. This is a hot issue at present, on which a number of more or less ambitious studies have been
made, mostly by interest organizations such as ‘Svenskt näringsliv’ or ‘Svenska
Industritjänstemannnaförbundet’. They all try to describe the present situation and its causes
and debate what can be done to improve, mainly seen from the perspective of their members.
2. The pilot study mainly consists of a survey of SMEs in the Kalmar county trading with East
Baltic Sea countries. A questionnaire was sent by mail to the firms containing a number of
questions about their export and import trade in the area. 184 out of 277 firms (66 %) answered
the questionnaire. 116 firms were found to be involved with trade across the Baltic Sea (70 %
are exporters and 30 % importers), while the remaining 68 answered that they did not have any
trade with these countries at present. An analysis of the 93 missing firms using the Swedish
trade statistics diminished the actual number to 26 firms.
To what extent are the results of the pilot study valid for other regions in Southern Sweden
included in project I? Even if official trade statistics overrate the number of trading firms from
Kalmar county, this official statistics still constitute the basis of defining the population of the
present study. Thus, the number of firms in this county involved in such trade is 335. They
amount to 22% of the number of firms having foreign trade or 1% of the total number of firms
in the county. Corresponding figures for Sweden as a whole is 17% and 1%. For counties close
to Kalmar, the figures are 27% and 1% for the Kronoberg County, 20% and 2% for the
Blekinge County, and 8% and 1% for Scania. Thus, these figures indicate that three counties in
Southeast Sweden have a similar foreign trade structure, which departs from Scania’s, the latter
having less trade with the Eastern Baltic Sea region. The reason does not seem to be less
foreign trade, since the share of firms with foreign trade of the total number of firms is 11% for
Scania, while they are 7 and 8% for the three counties.
In addition to the survey, the Kalmar county and partly the Kronoberg county have been
scanned for networks of cooperation in exports and imports. Only a few such clusters have
been found. Many of these clusters have been formed for other reasons, and have not yet got
started with international business, e.g. the Kingdom of Crystal, the woodwork industry
cluster, and the Kingdom of Aluminium.
3. This case is taken from an on-going study at the Baltic Business Research Institute, Baltic
Business School, University of Kalmar about current internationalization processes of
Swedish SMEs and MNCs to ECE and China.
17

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