A view on reasons for Swedish SMEs to change or not to change export modes in the internationalisation process

Table of Contents

1. INTRODUCTION
1.1 BACKGROUND
1.2 PROBLEM DISCUSSION
1.3 PROBLEM FORMULATION
1.4 PURPOSE
1.5 LIMITATIONS
1.6 THEORETICAL RELEVANCE
1.7 PRACTICAL RELEVANCE

2. THEORY
2.1 INTERNATIONALISATION PROCESS OF A FIRM
2.1.1 Internationalisation process of SMEs
2.1.2 Internationalisation process theory: Uppsala Model
2.1.3 Internationalisation process theory: Network Model
2.2 THE TWO DIFFERENT WAYS OF EXPORTING
2.2.1 Indirect export
2.2.2 Direct Export
2.3 CHANGE WITHIN EXPORT MODES
2.3.1 Influencing factors putting forward to change exporting mode
2.3.2 Influencing factors putting forward not to change exporting mode
2.4 CONCLUSIVE THEORETICAL REMARKS

3. METHODOLOGY
3.1. SCIENTIFIC APPROACH
3.2 PREUNDERSTANDING
3.2.1 General Knowledge, Specific one and Personal attributes
3.3 RESEARCH APPROACH
3.4 TYPE OF RESEARCH
3.5 QUALITATIVE VERSUS QUANTITATIVE RESEARCH
3.6 DATA COLLECTION
3.7 SELECTION METHOD
3.8 EVALUATION CRITERIA
3.9 SUMMARY OF METHODOLOGY

4. EMPIRICAL DATA
4.1 GALVIN GREEN
4.1.1 Internationalisation process
4.1.2 Influencing factors putting forward to change exporting mode
4.1.3 Influencing factors putting forward not to change exporting mode
4.2 HAMMARPLAST AB
4.2.1 Internationalisation process
4.2.2 Influencing factors putting forward to change exporting mode
4.2.3 Influencing factors putting forward not to change exporting mode
4.3 LINDER AB
4.3.1 Internationalisation process of the company
4.3.2 Influencing factors putting forward to change exporting mode
4.3.3 Influencing factors putting forward not to change exporting mode
4.4 BERGKVIST-VÄXJÖ KB
4.4.1 Internationalisation process
4.4.2 Influencing factors putting forward to change exporting mode
4.4.3 Influencing factors putting forward not to change exporting mode
4.5 FLÄKT WOODS AB
4.5.1 Internationalisation process
4.5.2 Influencing factors putting forward to change exporting mode
4.5.3 Influencing factors putting forward not to change exporting mode
4.6 ACKURAT AB
4.6.1 Internationalisation process
4.6.2 Influencing factors putting forward to change exporting mode
4.6.3 Influencing factors putting forward not to change exporting mode
4.7 ABSTRACTA AB
4.7.1 Internationalisation process
4.7.2 Influencing factors putting forward to change exporting mode
4.7.3 Influencing factors putting forward not to change exporting mode
4.8 COMPILING SUMMARY OF THE EMPIRICAL DATA

5. ANALYSIS
5.1. INTERNATIONALISATION PROCESS
5.1.1 Internationalisation process of SMEs
5.1.2 Uppsala model
5.1.3 Network Model
5.2 THE TWO DIFFERENT WAYS OF EXPORTING
5.2.1 Indirect Export
5.2.2 Direct Exporting
5.3 CHANGE WITHIN EXPORT MODES
5.3.1 Influencing factors putting forward to change exporting mode
5.3.2 Influencing factors putting forward NOT to change exporting mode
5.3.3 Additional Comments on other influencing factors

6. CONCLUSION
6.1 INFLUENCING FACTORS PUTTING FORWARD TO CHANGE EXPORTING MODE
6.2 INFLUENCING FACTORS PUTTING FORWARD NOT TO CHANGE EXPORTING MODE

7. RECOMMENDATIONS

8. FINAL REMARKS
8.1 CRITICISM TO OUR WORK
8.2 SUGGESTIONS FOR FURTHER RESEARCH

9. REFERENCES
9.1 ARTICLES:
9.2 BOOKS:
9.3 WEBSITES
9.4 INTERVIEWS

APPENDIX 1: BOSS MEDIA AB

APPENDIX 2: SÖRMAN AB

APPENDIX 3: QUESTIONNAIRE

Abstract

Nowadays, the internationalisation process of companies is moved more and more in the core of daily business life. This process is eased by reduced costs facilitated by less tariff barriers among Europe, faster ways of communications like the Internet and appealing emerging markets. These days, nearly every company is involved in the internationalisation process.

When we have considered the internationalisation process of Swedish SMEs, we found it interesting to have a close look at their decision to change from an indirect exporting mode to a direct exporting mode within their internationalisation process. Our research shall point out the important factors which influence their decision to change or not to change from an indirect exporting mode to a direct exporting mode.

Therefore, in our research we have compared theories with empirical findings of seven conducted interviews in order to fulfil our purpose which is to increase the understanding of the internationalisation process of Swedish SMEs, especially the reasons why firms change or do not want to change from indirect to direct export modes. According to that we came up with the following problem formulation:

What are the influencing factors for Swedish SMEs to change or not to change their exporting modes?

By evaluating possible influencing factors concerning their value of similarity among case companies and their value of consistency between theories and empirical findings we could identify a couple of factors which influence a company’s export decision. We could develop a model for each case whether to change or not to change exporting mode. By that we could classify influencing factors by the value of consistency and similarity in order to identify the most valuable influencing factors.

Acknowledgements

While working on our thesis we have met a couple of helpful persons. During our interviews we made valuable experiences by talking to ten business persons. We are indebted to them for giving us an insight into their exporting business.

We would like to thank our tutor and examiner Anders Pehrsson and of course our classmates in the seminar group of international marketing strategy. A special thank is dedicated to our Swedish friend, Anja Andersson, who helped us to work with some Swedish books.

Last but not least we would like to thank each other for great teamwork, all the good moments and the high spirits despite many long sessions in our living-corridor.

Tack!

Växjö, May 28, 2004

Tobias Brüggemann Christophe Gence Sören Lassek

Table of Figures

Figure 1: Steps in the Uppsala-model; own creation, p.10

Figure 2: Degree of internationalisation f the firm & network, Hertz & Mattson, 1994, p.12

Figure 3: Factors influencing the change of export channel according to Rameseshan & Patton, 1994; own creation, p.24

Figure 4: Compiling model about influencing factors putting forward to change or not to change export mode; own creation, p.27

Figure 5: Empirical Matrix; influencing factors putting forward to change or not to change exporting mode; own creation, p.54

Figure 6: Application of the Network-model from our seven case-companies; own creation, p.64

Figure 7: Analytical Matrix; influencing factors putting forward to change and not to change exporting mode, own creation, p.62

Figure 8: Analytical Matrix; influencing factors putting forward NOT to change exporting mode, own creation, p.66

Figure 9: Influencing factors putting forward to change exporting mode; own creation, p.75

Figure 10: Influencing factors putting forward NOT to change exporting mode; own creation, p.77

1. Introduction

In this chapter, we will first describe the background of our chosen problem area and why we have decided to have a closer look into this topic. Further on, this will be followed by the problem discussion that defines the base of the thesis. This chapter will end with the problem formulation, purpose, limitations, theoretical and practical relevance of our thesis.

1.1 Background

Almost four decades ago, Sune Carlson a famous researcher within the area of firm internationalisation, stated that firms intending to go abroad especially suffer from lack of knowledge about how to conduct a business in a foreign market. In 1966, Carlson argued that besides foreign risk, the desire to keep control over foreign operations of a firm need to be included in a firm’s internationalisation model. Such an internationalisation model of a firm is mainly characterised by an incremental decision-making process in order to build up knowledge of how to conduct business in different foreign markets and to keep control over a firm’s foreign ventures. By gathering information in one phase of foreign investment the information are applied to take further steps in the next phase of foreign investment in order to handle the risk problem (Forsgren, 2002). Carlson’s rationale was the stimulus for Johanson & Vahlne to develop a model which also incorporates the essence of knowledge acquisition. This model is familiarly known as the Uppsala model.

The Uppsala model was developed by among others Johanson & Wiedersheim-Paul and Johanson & Vahlne at Uppsala University in the mid-1970s. The model describes the different steps of a firm’s internationalisation. By examining the internationalisation of Swedish manufacturing firms, they developed a model of the firm’s market selection and entry modes used when they went abroad (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977 in Nordström, 1991).

Moreover, Johanson & Vahlne state that firms develop their international-activities over time based on the firm’s knowledge development. The experiential knowledge is considered to be essential. Experiential knowledge embraces knowledge which can be gained through personal experience in contrast to objective knowledge which can be taught (Whitelock, 2002). Further internationalisation depends on the level of experiential knowledge in firms knowledge bases. Next, gradual steps of the firms’ international involvement are facilitated through learning from experiences made in foreign markets. Development of knowledge is explained by the concept of psychic distance. According to Johanson & Vahlne psychic distance describes why firms expand first into markets which are psychically close and expand later into more distant markets after their knowledge has developed (Johanson & Vahlne, 1977). The concept of psychic distance is a key aspect within their interpretation why and how firms go abroad. Therefore the definition of psychic distance covers “factors preventing or disturbing the flow of information between the firm and target nations, including linguistic, institutional, cultural and political factors” (Clark & Pugh, 2001, p.286).

The concept of psychic distance is situated in the core of one of two main aspects within the Uppsala model. In terms of psychic distance the expansion of firms across national markets is explained, whereas the step-by-step pattern of institutional development within a particular market is the core of the second aspect, which is explained and predicted by the Uppsala model. With regard to the Uppsala model, the step-by-step pattern of institutional development describes the so-called establishment chain of an internationalising firm. Foreign investments start in just one or in a few neighbouring countries and the investments are carried out sequentially, cautiously and concurrently with the learning of the firm’s employees acting in that foreign markets (Forsgren, 2002). Beginning with exporting, finally establishing a production facility, meaning that the firms’ institutional-process of foreign involvement is covered by this term (Clark & Pugh, 2001). The Uppsala model is built up on three important assumptions and four core concepts to explain the internationalisation process of a firm.

More recently in 1990 another variable, the relationships to other bodies as customers, suppliers, competitors in the foreign market, was added by the Johanson & Vahlne as an influential feature (Whitelock, 2002). As this supplement shows, developments in research and developments within the general internationalisation processes demand re-considerations of underlying implications of the Uppsala model.

Applications of organisational learning allow the firm to be guided through the “establishment chain” of export through independent intermediary, export through sales subsidiary and finally manufacture within the market (Whitelock, 2002). Different entry modes for business development exist to target markets in which to expand. Besides Joint Ventures and full ownership often the previous mentioned modes of export are named. The second step within the establishment chain of the Uppsala model, namely export through independent intermediaries, is also known as “indirect export” when firms participate in international business through an intermediary and do not deal with foreign customers or firms (Czinkota et. al., 1994). Therefore, Albaum states that “indirect export occurs when the exporting manufacturer uses independent organizations located in the producer’s country” (Albaum, 2002, p. 275). The following step within the Uppsala model, namely export through sales subsidiary, can be summarised under the term of “direct export” which means that the enterprise works with foreign customers or markets. According to Albaum, “direct exporting occurs when a manufacturer or exporter sells directly to an importer or buyer located in a foreign market area” (Albaum, 2002, p. 292).

As the implications of the Uppsala model show, the development from indirect exporting to direct exporting demands mainly the acquisition of knowledge, i.e. learning (Forsgren, 2002). However, during the last decades the shape of organisations changed and findings of collective learning within organisations offer new valuable contributions to explain the path of a firm through the typical establishment chain or a changed version of the establishment chain nowadays. One influencing factor for companies to change its export mode is Collective Learning. Firms gather information about the foreign market in order to apply it for their knowledge development. Collective learning takes place and enables firms to develop in foreign markets. Due to latest developments in terms of researches in the field of collective learning and simultaneously the adaptation in the Uppsala model, new paths for internationalising companies are possible.

However, the internationalisation of Small and Medium-sized Enterprises (SME) business has moved to more crucial importance for the success of SMEs. Developer of the Uppsala model strived to explain and predict internationalisation processes especially of Nordic firms in the 1970s. Changes of competitive situations in international business environments have taken place after the creation of the model. Promising opportunities like non-tariff barriers within the EU as well as possible obstacles like not participating at the fiscal unification (€) in Europe mean changed internationalisation prerequisites for Swedish SMEs since the mid 1970s.

When we had a first look to our topic we considered at first collective learning, resources, and profitability of markets as important factors which need to be taken into considerations by SMEs when they move from indirect to direct exporting modes. The previously noted factors imply that there exist different aspects which influence the internationalisation process of Swedish SMEs.

This thesis is supposed to give the reader valuable recommendations related to the changes of exporting modes. Already exporting Swedish SMEs and enterprises which intend to go abroad are objectives of our findings.

1.2 Problem Discussion

As the criticism, pointed out by several authors from different point of views, has shown, the Uppsala model cannot fulfil the demands to be valid in that broad scope the authors formerly depicted it. Moreover, changes within the business environment and the company-structures call the Uppsala model into question in how far it is really valid as a pattern to explain and predict the internationalisation process of a firm (Forsgren, 2002). Weaknesses of the Uppsala-model such as its lack of knowledge development and increasing foreign market commitment of a firm’s internationalisation process were the motivation for researchers to develop the network-model (Hertz & Mattson, 1994).

Many articles and books concerning the international strategies of firms have been written during the past decades. The research has mostly been focused on larger US firms (Buckley et al., 1999). The internationalisation process of the Multinational Enterprises (MNE) has been heavily studied, but the one of the SME has only received a limited amount of studies (Forsman et. al., 2002). The research related to the MNEs internationalisation’s process might be useful to some extent to the SMEs. According to Forsman, SMEs often have to cope with resource-based constraints. Therefore he proposes to adapt more developed theory to SMEs internationalisation process which embraces the development from indirect to direct exporting (Forsman et. al., 2002). We agree to Forsman’s point of view that already existing theory needs to be more adapted to SMEs because as he states a lack of studies about SMEs in comparison to MNEs concerning their internationalisation process exists.

Therefore, we found it interesting to learn more about the rationale for taking different steps within the internationalisation process of Swedish SMEs nowadays (Czinkota & Ronkainen, 1988). In our thesis, we will look closer into one specific part of this process, namely how a company moves from indirect to direct export. At this stage particularly influencing factors raise interest in order to explain the rationale of Swedish SMEs to change or not to change their indirect exporting mode (Rameseshan & Patton, 1994). So we come up with the following problem formulation:

1.3 Problem Formulation

What are the influencing factors for Swedish SMEs to change or not to change their exporting modes?

1.4 Purpose

The purpose of this thesis is to increase the understanding of the internationalisation process of Swedish SMEs. Therefore, it is aimed to identify the influencing factors of the internationalisation process of Swedish SMEs; particularly to reveal the impact of influencing factors which determine exporting decisions of already exporting Swedish SMEs.

1.5 Limitations

Because a lot of researches have been realised on MNEs we will not consider these larger companies in our thesis. Thus, our study is focused on Swedish SMEs having already started doing international business by sporadic direct exports or indirect exporting. We concentrate on export modes, especially on agents, distributors and sales subsidiaries.

1.6 Theoretical Relevance

We strive to contribute to already existing theories about influencing factors concerning their export mode by investigating what influence Swedish SMEs to change or not to change their indirect exporting mode to a direct one. We claim that existing theories about influencing factors do not cover SMEs in a broad extent; hence we aim to fill this gap.

1.7 Practical Relevance

This thesis will be useful for Swedish SMEs which currently use indirect exporting and are faced the question to change or not to change their indirect exporting mode within their internationalisation process. Therefore, we will present two applicable models covering the value of the different influencing factors whether to change or not to change their indirect exporting mode. These models are supposed to be valid for Swedish SMEs.

2. Theory

In the following chapter the core theoretical implications about the background of the thesis are presented. After introducing the reader to the internationalisation process of SMEs, differences between indirect and direct exporting are shown, before different factors influencing the change of export channels are presented. The theory chapter ends up with a conclusive discussion and model of the theory used.

2.1 Internationalisation process of a firm

As a matter of fact, often many firms develop their export business gradually. Several authors have defined the export development process or the internationalisation process. According to Albaum internationalisation can be seen as a process, an end result or a way of thinking (Albaum, 2002). Supposing that firms become more committed to and involved in serving markets that are outside the home country, a firm’s degree of internationalisation increases. This can be a planned process or it may arise from perceived new opportunities or threats. When the internationalisation is developed as a plan for increasing penetration of international markets the internationalisation process is most effective. Traditionally companies have entered a target market by exporting; later on they have developed sales subsidiaries abroad and finally developed production facilities abroad. Thus the terms international, multinational and global are sometimes used to refer to international operations in general (Albaum, 2002).

2.1.1 Internationalisation process of SMEs

It is core to identify the right market before entering any market. It is a major determination of success or failure because it is especially important in the early stage of the internationalisation process. The geographic location of the foreign market as well as the foreign market influence the nature of foreign marketing programmes and the ability of co- ordinating foreign operations is affected (Hollensen, 2001). The faster entrance of many SMEs might depend on their common status as sub-suppliers to larger firms. Therefore they are pulled out to foreign markets by the international networks and the customers. The selection of a certain market and the choice of an agent are often the stimulus for staring the internationalisation process. When it comes to a SME, the decision is based by external driven factors and Johanson and Vahlne identified three criteria for the international market selection of SMEs which are “low psychic distance, low cultural distance and low geographic distance” (Hollensen, 2001, p.188).

The concept of psychic distance is defined as factors such as political systems, language or level of education, which may disturb or prevent the flows of information between firms and market (Johansson & Wiedersheim-Paul, 1975). Supposing that a “low psychic distance leads to low certainty and low distinguished difficulty of acquiring information of the foreign market and a low cultural distance perceives low differences between the countries”

(Hollensen, 2001, p.188).

SMEs often start to operate on the domestic market and build up company resources that later might be useful in international markets. The competitive advantage of a company should be based on its core competence and the product-market segment in order to develop the company strategy. The internationalisation process should be taken in learning and step-by- step from one market and one niche before entering another one (Hollensen, 2001).

The degree of internationalisation determines how international the firm is now, how it can be and how it wants to be. There have been a couple of attempts to measure internationalisation. Sullivan came up with the following criteria for determining the degree of internationalisation, namely foreign sales as a percentage of total sales, foreign assets as a percentage of total assets, overseas subsidiaries as a percentage of total subsidiaries, physic dispersion of international operations and top managers’ international experience (Sullivan, 1994 in Albaum, 2002).

A firm’s export performance is affected by the firm itself, the markets and the industry of the firm and the export strategy that the firm has chosen. The export strategy has two major components, which are strategy product policy (deciding the extent of product adaptation) and market selection (which countries to export to and the nature and the level of segmentation) (Albaum, 2002).

2.1.2 Internationalisation process theory: Uppsala Model

With the ending of the sixth decade in the 20th century there has been a growing interest in the study of internationalisation of firms, and the focus has shifted from the decision to export to a wider approach, namely the internationalisation process (Buckley and Ghauri, 1999). Welch and Luostarinen state that internationalisation is a process of increasing involvement in international operations whereas Aharoni conducted a study from a more longitudinal view (Welch & Luostarinen, 1988 in Laine & Kock, 2000). Aharoni´s conclusions have been a source of inspiration for other studies because it has paved the way of the firm’s internationalisation process (Aharoni, 1966 in Laine & Kock, 2000).

A number of Swedish researchers at the University of Uppsala developed during the 1970s studies of internationalisation in Swedish firms a step further. The original model, namely the Uppsala-model, was developed by among others Johanson and Wiedersheim-Paul and Johanson and Vahlne. The Uppsala model describes the different steps of the firms’ level of internationalisation. By examining the internationalisation of Swedish manufacturing firms, the authors developed a model of the firm's choice of market and form of entry when going abroad.

At the beginning a firm often begins its internationalisation process by direct but sporadic exporting to a foreign country. Afterwards, the firm starts exporting abroad via independent representatives such as domestic agents for instance. This process is also named indirect exporting. The next stage is to develop sales subsidiaries in a foreign market. Last but not least the fourth and last stage of the model is the establishment of a production and respectively or manufacturing facility abroad (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977 in Nordström 1991).

Following graph illustrates the previously mentioned steps within the Uppsala model:

illustration not visible in this excerpt

Figure 1: Steps in the Uppsala-model; own creation.

A basic supposition of the model is that conclusions drawn from one cycle of events help to the entry of the next cycle. That is why the current state of internationalisation is a main factor in explaining the direction of further internationalisation (Laine & Kock, 2000).

Johanson and Wiedersheim-Paul have also found out that a gradual internationalisation is characteristic of the internationalisation process of most Swedish firms rather than wide, spectacular foreign investments. Their basic supposition is that the firm first develops their activities in the national market and then a series of decision lead to internationalisation. Lack of knowledge and resources are viewed as the most important obstacles to internationalisation. By learning about the foreign market and dealing with business operations obstacles are reduced or even disappear (Johanson & Wiedersheim-Paul, 1975). Johanson and Wiedersheim-Paul believe that because of lack of knowledge about foreign markets and a propensity to avoid uncertainty, the firm exports first to neighbouring countries or countries that are comparatively similar concerning business culture and practices. Therefore they expect that firms start selling abroad from independent representatives. This means smaller resources are needed in comparison to setting up a sales subsidiary (Johanson & Wiedersheim-Paul, 1975).

According to the criticism about the Uppsala-model, several authors have claimed for different reasons that the theory of the internationalisation process needs to be developed and updated. Often following aspects are noted when discussing about critical, unstable features of the model. First, when firms, for instance MNEs, have surplus resources, they can be expected to do deeper internationalisation steps. Second, when market conditions are homogeneous and stable, it is possible that important market knowledge can be acquired in other ways than through experience. Third, a firm may have high experience from markets with close characteristics and, in this situation, it could be possible that they generalise this experience to enter a market (Johanson & Vahlne, 1993). Another important aspect is the claim by several authors such as Porter or Levitt that the world generally has moved towards homogenisation, especially within the business community (Porter, 1980 & Levitt, 1983 in Nordström, 1991). According to Levitt, technology is the force that drives the world toward convergence and to a more homogenise business world. The reduction of the distances between countries and the acceleration of communication flows is the consequence of the development of information technology and transport (Levitt, 1983 in Nordström, 1991). Furthermore, Turnbull and Valla claim that the choice of entry mode is independent of a firm’s first experience in export markets. Their study even contradicts the concepts of Uppsala-model. The authors underline that firms do not follow any specific rules or pattern when they internationalise (Turnbull & Valla, 1986 in Laine & Kock, 2000).

2.1.3 Internationalisation process theory: Network Model

Knowledge development and increasing foreign market commitments of a firm are supposed to be explained by the network model. During the 1980s, the internationalisation of industrial firms has been explained through networks and relationships between firms which are broadly called the Network mode. The model states that firms internationalise because other firms in their national network internationalise. According to the export literature foreign expansion of firms is depicted as a part of a generalised view of deepening international commitment, with foreign direct investment as a final stage in an evolutionary process beginning with the pre export phase ( Johanson, 1988 & Ghauri, 1989 in Buckley et al.,1999)

Taking the network approach itself into consideration, internationalisation is viewed as a process in which relationships in a network are continuously created, developed, maintained and dissolved in a way to reach the firm’s goals. Therefore, four stages of internationalisation have been identified, namely the early starter, the later starter, the lonely international and the international among others. With regard to their study, the internationalisation strategy of a firm is characterised by the need to minimise the need for knowledge development, to lower the need for adjustment and to exploit the established network (Johanson & Mattson, 1988).

The following model shows four different stages of internationalisation of the firm and its network:

illustration not visible in this excerpt

Figure 2: Degree of internationalisation f the firm & network, Hertz & Mattson, 1994.

For the early starter, it could be hard to fulfil the previously mentioned three needs because the firm is among the first to develop a network. In this case, advantages might be overweighed by costs. If both the degree of the network and that of the internationalisation of the firm are low, Hertz and Mattson recommend in turn the Uppsala model (Hertz & Mattson, 1994 in Laine & Kock, 2000).

Concerning the lonely international difficulties to co-ordinate its international activities might occur. Through the low degree of international of the network the lonely international is hampered by its underdeveloped international business environment. Agents and distributors, for instance, are not available in that extent it would be ideal.

The late starter (when degree of internationalisation of the network is high and degree of internationalisation of the firm is low) is too dependent of the other actors that already exist within the network. Such actors might try to hamper the entrance of the firm into a foreign market. Access to distribution-channels and profitable agents are quite difficult since a lot of international actors are already present on the market.

Finally, the international among others works in an international network. The best option to expand its foreign activities could be the utilisation of external resources (Johanson & Mattson, 1988).

2.2 The two different ways of exporting

Indirect and direct exporting are the two distribution channels offered to a manufacturer who wants to introduce a product in a foreign market without involving in joint ventures, strategic alliances or completely owned foreign subsidiaries. Root stated in 1964 that the most distinguishing feature between the two channel choices is where the second channel is located. A second channel in the producer’s country means indirect exporting and a second channel in the buyer’s country means direct exporting (Root, 1964). Indirect exporting channels are independent and non-integrated but provide little or no control over the marketing of the product. On the other hand, direct exporting offers an integrated channel and affords the manufacturer more control over the distribution process. Hence, more resources are required and thus the direct exporter is faced higher responsibility and risks (Ahmed, 1977).

2.2.1 Indirect export

In terms of indirect exporting outside specialists are employed to manage the firms export business. Such outside specialists are viewed as “independent organisations located in the producer’s country” and not in the importing country (Albaum, 2002, p. 274). The manufacturing firm which exports does not take care of exporting activities. Generally, a method like the indirect exporting of products is appropriate for companies with limited international expansion objectives (Johansson, 2000). Hence the indirect export mode is also suitable for firms with minimal resources and showing the willingness to enter international markets gradually. Indirect Exporting allows a firm to test out the necessary effort for developing an own export organisation and to test out foreign markets without committing major resources too early (Hollensen, 2001).

SMEs can benefit from indirect exporting because resources of other already exporting companies are utilized and thus own rare resources can be applied for other domestic activities. Therefore indirect exporting shows a firm the advantages to save money and to reduce the risk by going abroad but on the other hand manufacturing firms cannot build up a direct relationship to customers in foreign countries which can lead to completely lost potential opportunities (Hollensen, 2001). It results because manufacturing firms often do not have any clue how products or services are marketed in foreign countries. Such missing control faces the advantages of lower risks and lower costs.

International Marketing Organisations & Cooperative Organisations

Albaum et al. distinguish between two broad alternatives to export indirectly. They mention international marketing organisations and exporting through a cooperative organisation as possible opportunities to expand a firms business to other countries (Albaum, 2002).

International Marketing Organisations are divided into two basic types of marketing intermediaries, namely merchants and agents. Home-country based merchants cover export merchants, trading companies and export desk jobber. Six distinct types of home-country based agents are covered by the term agents. When choosing any type of agents the manufacturer has to bear the whole financial risk and not the agent. Export commision house respectively known as export buying agent, confirming house, resident buyer, broker, export Management Company (EMC) and manufacturers export agents are noted by Albaum et al. in terms of agents. Cooperative Organisations as a special case of indirect exporting respectively viewed as a mixture of direct and indirect exporting cover piggyback marketing and exporting combinations (Albaum, 2002).

In contrast to Albaum, Hollensen identifies only five main entry modes of indirect exporting at all and does not emphasises to distinguish between cooperative organisations and international marketing organisations. Therefore, Hollensen mentions export buying agent, broker, EMC, trading company and piggyback as indirect exporting modes to enter foreign markets (Hollensen, 2001). According to Albaums and Hollensens consensuses in viewing different types of indirect exporting, main characteristics of broker, export buying agent, EMC and piggyback marketing are discussed in turn.

Four Types of indirect exporting

Brokers are a special type of agents. Export brokers are based in the home country of the manufacturing firm. A broker’s daily business is concerned with bringing a buyer and a seller together. The broker fulfils this contractual function but does not handle the products which are going to be bought or sold. In case of a successful deal between buyer and seller, a commision of about 5% percent is paid the broker by the foreign buyer (Hollensen, 2001). The broker itself often does not represent a practical alternative channel of distribution for many export marketers because often the broker concentrates only one or a few products and especially in basic commodities (Albaum, 2002).

Export buying agents respectively export commision houses are representatives of foreign buyers but reside in the exporter’s home country. The export agent acts in the interests of the buyer. Therefore the buyer pays the fee for the export agent. Terms of purchase are worked out between the overseas buyer and export agent whereas the exporting manufacturer is not directly involved in the deal. For realising a deal the export agent scans the market for products or goods it is requested to buy. The lowest bid by contacted domestic manufacturers gets the order (Albaum, 2002). SMEs as manufacturing firms especially can benefit from the very little credit risk and the little demands to realise the complete deal. On the other hand, exporters really have little control over their marketed products abroad (Hollensen, 2001).

EMC respectively export houses are defined as “an international sales specialist who functions as the exclusive export department for several allied but noncompeting manufacturers” (Albaum, 2002, p. 285). EMCs are viewed as independent agents who work for the firm in overseas markets. EMCs go to fairs, contact distributors, organise services and conduct business in the name of each manufacturer it represents. These independent agents are equipped with high knowledge of government regulations and local purchasing practices (Johansson, 2000). By the use of EMCs particularly SMEs can gain wider exposure of own products because overhead costs and administrative burden are avoided. However, disadvantages in terms of dispersed know-how and skills through EMCs and the potential wrong choice of foreign outlets by EMCs devitalise the advantages (Hollensen, 2001).

Piggyback marketing occurs when one large manufacturer, herby called carrier, deals with an inexperienced exporting SME, herby called rider. The carrier acts on behalf of the rider and utilizes it’s own sales subsidiaries and foreign distribution for exporting the rider’s products (Hollensen, 2001). Both different companies are non-competitive but related, allied or completely unrelated. The carrier is either acting as an agent or as an independent distributor (Albaum, 2002).

2.2.2 Direct Export

In contrast to the indirect export, the direct export is another opportunity for companies to go abroad. Direct exporting means that the company sells directly to a dependent importer or buyer located in a foreign market area. The responsibility for performing international sales activities is in the hand of the producer. The firm works with foreign customers or markets with the opportunity to develop the relationships (Kotler, 2001). Direct Export is more effective when specialised knowledge or tasks were involved in the product or sales relationship because firms can have a better control about their distribution agents. As exporters have increased more confidence, they may decide to undertake their own exporting task and take more risk with investments (Ramaseshan, 1994). The direct mode involves choosing an agent or a distributor, or establishing a branch or subsidiary to represent the company in the foreign market directly (Darling & Seristö, 2004).

Export Sales Subsidiary

The company that wants to choose another type in direct exporting will most likely have to establish some type of export sales subsidiary which is a dependent department (Albaum, 2002). This type is often chosen if the export marketing activities should be separated from the domestic operations. The subsidiary company is a quasi independent enterprise although it is owned and controlled by the parent company. A subsidiary can be accomplished by merging or acquiring of an existing foreign company but the company can also build up new facilities in the foreign market to get a subsidiary (Robinson & Lundstrom, 2003).

The subsidiary has all authority and responsibility for the export operations. With this type of export organisation the parent company can control the profitability of the foreign business. Therefore, the possibility of conflicting pressures arising from domestic departments to the subsidiary is minimized. The major difference to the separate export department is that the subsidiary has to buy from the parent company the products that it sells in overseas markets. Because of this an internal pricing system is needed. Possible reasons for the export sales subsidiary can be unified control, cost and profit control, more complete line of products or tax advantages. At least, it depends on the factors like the size of the company and the environments which type of the three export modes the company will choose (Albaum, 2002).

In order to complete the overview of possible direct exporting modes, theoretical implications about agents and distributors follow. However, as the practical experience and statements of researchers show agents and distributors are rarely used in terms of direct exporting in contrast to indirect exporting, where it is quite common (Hollensen, 2001).

Agents and Distributors

If the companies do not want to build up departments the direct exporters also make frequently use of intermediaries who can assist with troublesome yet important details such as documentation, financing, and transportation. The intermediaries may also identify foreign suppliers or customers. “Distributors” and “agents” are the most used forms of intermediaries (Kotler, 2001). The terms distributor and agent are often used synonymously which is unfortunate because there are some differences. A distributor is a trader and as such is a purchaser of the exporter. On the other hand, an agent is a representative who handles on behalf of the exporter’s goods while the agent does not. The distributor imports the products involved whereas an agents leaves importation to the purchasers whose orders have been passed on to the principal. The advantage of distributors and agents is that they know the local market and have existing business contacts there but they are more costly and it needs more time to act on this market (Hollensen, 2001).

The distributors work exclusive as representatives for the companies and are generally the sole-importers of the company’s product in their markets (Kotler, 2001). They take title to the goods, and are paid according to the difference between the buying and selling prices rather than by commission in contrast to agents. Distributors are often used by the companies when after-sales service is required, as they are more likely than agents to posses the necessary resources. Distributors usually seek exclusive rights for a specific sales territory and generally represent the return for the substantial capital investment that may be required on the part of the distributor in handling and selling products (Hollensen, 2001).To sum up, distributors are merchants and as such are customers of the exporter (Albaum, 2002).

On the other side, there exist agents. An agent is a representative of the company who trades on behalf of the exporter. He deals not as a customer and does not take title to the exporter’s goods. Agents leave importing to the customers whose orders have been passed on to the principal (Albaum, 2002). The exclusive agent has exclusive rights to specified sales territories. They are widely used to for entering international markets and can cover rare geographical markets and have sub-agents assisting them (Hollensen, 2001).

The agents represent an exporting company and sell to wholesalers and retailers in the importing country. The exporter ships the merchandise directly to the customers, and all arrangements on financing, credit, promotion are made between the exporter and the buyers (Hollensen, 2001). The disadvantage of this type is that there can be a conflict in the relationship between the agent and the company how to do the export most efficiently (Bello & Williamson, 1985).

Opportunities and Obstacles

Companies that export directly have a lot of opportunities. They can learn much quicker the competitive advantages of their products than in comparison to indirect exporters and therefore they can expand more rapidly. In their international activities the companies also have more control about it and can build up the relationships to trading partners faster and deeper, which can lead to further international growth and success if they go directly abroad (Czinkota, 1994).

But the companies also have to deal with obstacles which include identifying and targeting foreign suppliers and customers and finding retail space which can be very costly and time consuming. Some companies are overcoming these hurdles through the use of mail-order catalogues or video advertising in the television. After companies have a lot of experiences in this way, they may carry out all export transactions on their own (Hollensen, 2001).

2.3 Change within export modes

Supposing that a firm has formerly chosen to entry a foreign market by indirect exporting problems can occur. Exporting Management Companies (EMC) for instance, are often characterised by small personal staffs and their lack of broad product knowledge. In this case, little attention to the products and insufficient marketing effort within foreign markets for suppliers’ products are the dissatisfying results (McNaughton, 2001). Bello and Williamson concluded already in 1984 that EMCs overcommit their limited resources and endanger the exporting endeavour of the supplier. Moreover, sometimes EMCs sell primarily through mail correspondence and neglect foreign visits in the targeted markets (Bello & Williamson, 1984). In addition to that, several analysts conclude that indirect export middlemen in general fail to satisfy the needs of the manufacturers. Indirect export middlemen tend to underestimate the competitive situation of the marketed products by serving inadequate resources and ineffective marketing (Cao, 1981).

In order to stay competitive in foreign markets, exporting companies are faced the situation to reconsider their previous taken decision in penetrating a foreign market. For companies having identified such a dissatisfying relationship with an independent intermediary (indirect export), the change to a direct export mode is a possible solution. However, weaknesses in such a middleman-supplier relationship are one of several influencing factors for exporting companies to reconsider and change their exporting modes (Rameseshan & Patton, 1994).

2.3.1 Influencing factors putting forward to change exporting mode

Beyond the previous delineated disrupted relationship between intermediary and manufacturer other influencing factors exist which lead to a change of export mode. Small businesses are influenced by a host of factors which can be viewed as critical either to the export channel selection or the change of export channel. Different proposals exist to structure the influencing factors or even to view potential factors as influencing factors of change (Czinkota & Ronkainen, 1988).

Considering the model, labelled “Eleven Cs”, developed by Czinkota and Ronkainen, eleven elements respectively factors are identified which determine the channel design an exporter uses. Stimuli for developing the model are the unique features of different international markets and the broad product range offered to customers abroad.

Customer characteristics, culture, competition, company objectives, character, capital, cost, control, continuity and communication are noted. The eleven factors are viewed as crucial to both the development of new marketing channels and to the modification of those already in existence, meaning the change of export channels. It is suggested to use the “Eleven Cs” as a checklist to determine the proper approach in order to target customers most effectively (Czinkota & Ronkainen, 1988).

According to Forsgren, Collective Learning has an impact on the change of export mode. Collective Learning affects the change within export modes in different ways. Two quite obvious ways are derived by the development of organisations knowledge and the focus on competences. Increasing the organisations knowledge about possible alternatives covers the information aspect of learning. The other perspective respectively way highlights the meaning of competences as crucial ingredients of a company’s collective learning. Operations are repeated over time and the organisation is able to improve its effectiveness by doing so. Benefits, often summarised under the term “learning curve” can motivate the organisation to overcome impediments that had hampered the company to change their previously chosen export mode (Forsgren, 2002).

Regarding the findings of Rameseshan and Patton ten influencing factors are identified as crucial to influence the decision to choose and to change an export channel. Changes both mainly within the exporting companies and outside the companies affect the influencing factors. Seven intern-influencing factors are faced three extern-influencing factors of choice and change (Rameseshan & Patton, 1994).

Intern-influencing factors

Export experience influences the channel selection of a company. If multinational enterprises have experience abroad, they will prefer to decide for entry modes providing greater control and requiring more commitment (Gatingnon and Andersson, 1986). Klein and Roth (1990) found out that companies with a low asset, which have greater experience in foreign markets, will also integrate more the direct export channel in their business.

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