Relationship Between Exporters and Their Foreign Sales and Marketing Intermediaries (Advances in International Marketing, Volume 16)

Citation preview

RELATIONSHIP BETWEEN EXPORTERS AND THEIR FOREIGN SALES AND MARKETING INTERMEDIARIES

i

ADVANCES IN INTERNATIONAL MARKETING Series Editor: S. Tamer Cavusgil Recent volumes: Volume 5: Industrial Networks Volume 6: Export Marketing: International Perspectives Volume 7: Volume 8: Volume 9:

Marketing in Asia Pacific and Beyond Parts I & II International Marketing and Purchasing

Volume 10:

Globalization, the Multinational Firm, and Emerging Economies Reassessing the Internationalization of the Firm New Directions in International Advertising Research

Volume 11: Volume 12: Volume 13:

Study Abroad: Perspectives and Experiences from Business Schools Volume 14: Reviving Traditions in Research on International Market Entry Volume 15: Research on International Service Marketing: A State of the Art

ii

ADVANCES IN INTERNATIONAL MARKETING VOLUME 16

RELATIONSHIP BETWEEN EXPORTERS AND THEIR FOREIGN SALES AND MARKETING INTERMEDIARIES GUEST EDITED BY

CARL ARTHUR SOLBERG BI Norwegian School of Management, Norway

Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo iii

ELSEVIER B.V. Radarweg 29 P.O. Box 211 1000 AE Amsterdam, The Netherlands

ELSEVIER Inc. 525 B Street, Suite 1900 San Diego CA 92101-4495 USA

ELSEVIER Ltd The Boulevard, Langford Lane, Kidlington Oxford OX5 1GB UK

ELSEVIER Ltd 84 Theobalds Road London WC1X 8RR UK

r 2006 Elsevier Ltd. All rights reserved. This work is protected under copyright by Elsevier Ltd, and the following terms and conditions apply to its use: Photocopying Single photocopies of single chapters may be made for personal use as allowed by national copyright laws. Permission of the Publisher and payment of a fee is required for all other photocopying, including multiple or systematic copying, copying for advertising or promotional purposes, resale, and all forms of document delivery. Special rates are available for educational institutions that wish to make photocopies for non-profit educational classroom use. Permissions may be sought directly from Elsevier’s Rights Department in Oxford, UK: phone (+44) 1865 843830, fax (+44) 1865 853333, e-mail: [email protected]. Requests may also be completed on-line via the Elsevier homepage (http://www.elsevier.com/locate/permissions). In the USA, users may clear permissions and make payments through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; phone: (+1) (978) 7508400, fax: (+1) (978) 7504744, and in the UK through the Copyright Licensing Agency Rapid Clearance Service (CLARCS), 90 Tottenham Court Road, London W1P 0LP, UK; phone: (+44) 20 7631 5555; fax: (+44) 20 7631 5500. Other countries may have a local reprographic rights agency for payments. Derivative Works Tables of contents may be reproduced for internal circulation, but permission of the Publisher is required for external resale or distribution of such material. Permission of the Publisher is required for all other derivative works, including compilations and translations. Electronic Storage or Usage Permission of the Publisher is required to store or use electronically any material contained in this work, including any chapter or part of a chapter. Except as outlined above, no part of this work may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the Publisher. Address permissions requests to: Elsevier’s Rights Department, at the fax and e-mail addresses noted above. Notice No responsibility is assumed by the Publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. Because of rapid advances in the medical sciences, in particular, independent verification of diagnoses and drug dosages should be made. First edition 2006 British Library Cataloguing in Publication Data A catalogue record is available from the British Library. ISBN-10: 0-7623-1286-6 ISBN-13: 978-0-7623-1286-3 ISSN: 1474-7979 (Series)

∞ The paper used in this publication meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper). Printed in The Netherlands.

Working together to grow libraries in developing countries www.elsevier.com | www.bookaid.org | www.sabre.org

iv

CONTENTS LIST OF CONTRIBUTORS

ix

LIST OF REVIEWERS

xiii

PREFACE S. Tamer Cavusgil

xv

INTRODUCTION Carl Arthur Solberg

xvii

FACTORS AFFECTING SME EXPORT CHANNEL CHOICE IN FOREIGN MARKETS Kent Eriksson, Jukka Hohenthal and Jessica Lindbergh

1

BEYOND TRANSACTION COST DETERMINANTS: AN INTEGRATED FRAMEWORK FOR EXPORT INTERMEDIARY SELECTION IN EMERGING ECONOMIES Xufei Ma

23

LEGAL VERSUS RELATIONAL ORDERING IN CHANNEL GOVERNANCE: THE CASE OF THE MANUFACTURER AND ITS FOREIGN DISTRIBUTOR Seyda Deligonul and S. Tamer Cavusgil

49

RELATIONAL DRIVERS, CONTROLS AND RELATIONSHIP QUALITY IN EXPORTER–FOREIGN MIDDLEMAN RELATIONS Carl Arthur Solberg

81

v

vi

CONTENTS

DELIVERING VALUE: MARKET ORIENTATION AND DISTRIBUTOR SELECTION IN EXPORT MARKETS Andre Beaujanot Q., Larry Lockshin and Pascale Quester

107

THE EFFECT OF INFORMATION COLLECTION BEHAVIOUR ON MARKET PERFORMANCE: THE ROLE OF PARTNER RELATIONSHIPS Geir Gripsrud, Carl Arthur Solberg and Arne M. Ulvnes

135

UTILIZING RELATIONAL GOVERNANCE IN EXPORT RELATIONSHIPS: LEVERAGING LEARNING AND IMPROVING FLEXIBILITY AND SATISFACTION Anthony S. Roath and Rudolf R. Sinkovics

157

MANAGING CHANNEL RELATIONS IN CHINA: AN EXPLORATORY STUDY Paul Matthyssens and Wouter Faes

187

BUYER TOLERANCE OF CONFLICT IN CROSSNATIONAL BUSINESS RELATIONSHIPS: AN EMPIRICAL STUDY Inger Beate Pettersen and Aksel I. Rokkan

213

IDENTIFYING DIFFERENCES IN FOREIGN CUSTOMERS’ RELATIONAL BEHAVIOR: AN EXPLORATORY STUDY USING MULTIDIMENSIONAL SCALING Bjo¨rn Sven Ivens

245

AN EXPLORATORY EXAMINATION OF THE FACTORS INFLUENCING DISTRIBUTOR SELFPERCEIVED POWER IN CHANNEL RELATIONSHIPS: A SEVEN-COUNTRY STUDY Goksel Yalcinkaya and David A. Griffith

267

Contents

TIMING AND SEQUENCING OF STRATEGIC ACTIONS IN INTERNATIONALIZATION PROCESSES INVOLVING INTERMEDIARIES: A NETWORK PERSPECTIVE Per Andersson and Lars-Gunnar Mattsson THE TERMINATION DILEMMA OF FOREIGN INTERMEDIARIES: PERFORMANCE, ANTISHIRKING MEASURES AND HOLD-UP SAFEGUARDS Bent Petersen, Torben Pedersen and Gabriel R.G. Benito EXPORTER GOVERNANCE OF INTEGRATED AND INDEPENDENT MARKETING CHANNEL MEMBERS IN INTERNATIONAL MARKETS: MODERATING EFFECTS OF STAGE OF RELATIONSHIPS AND OPERATION MODE Carl Arthur Solberg

vii

287

317

341

This page intentionally left blank

viii

LIST OF CONTRIBUTORS Per Andersson

Stockholm School of Economics, Stockholm, Sweden

Andre Beaujanot Q.

School of Marketing, University of South Australia, Adelaide, Australia

Gabriel R.G. Benito

Department of Strategy and Logistics, BI Norwegian School of Management, Oslo, Norway and Department of International Economics and Management, Copenhagen Business School, Copenhagen, Denmark

S. Tamer Cavusgil

The Eli Broad Graduate School of Management, Michigan State University, MI, USA

Seyda Deligonul

Bittner School of Business, St. John Fisher College, USA

Kent Eriksson

CEFIN, the Centre for Banking and Finance, School of Architecture and the Built Environment, KTH – The Royal Institute of Technology, Stockholm, Sweden

Wouter Faes

Hasselt University (former Limburg University Center), Belgium

David A. Griffith

The Eli Broad Graduate School of Management, Michigan State University, MI, USA

Geir Gripsrud

Department of Marketing, BI Norwegian School of Management, Sandvika, Norway ix

x

LIST OF CONTRIBUTORS

Jukka Hohenthal

Department of Business Studies, Uppsala University, Uppsala, Sweden

Bjo¨rn Sven Ivens

Friedrich-Alexander-University, ErlangenNuremberg, Germany

Jessica Lindbergh

CEFIN, the Centre for Banking and Finance, School of Architecture and the Built Environment, KTH – The Royal Institute of Technology, Stockholm, Sweden

Larry Lockshin

School of Marketing, University of South Australia, Australia

Xufei Ma

Department of Business Policy, NUS Business School, National University of Singapore, Singapore

Paul Matthyssens

Department of Management, Antwerp University, Belgium and Department of Marketing Management, Erasmus University, Rotterdam, The Netherlands

Lars-Gunnar Mattsson

Stockholm School of Economics, Stockholm, Sweden

Torben Pedersen

Department of International Economics and Management, Copenhagen Business School, Frederiksberg, Denmark

Bent Petersen

Department of International Economics and Management, Copenhagen Business School, Frederiksberg, Denmark

Inger Beate Pettersen

Institute for Research in Economics and Business Administration, Bergen, Norway

Pascale Quester

School of Commerce, The University of Adelaide, Australia

Anthony S. Roath

The University of Oklahoma, OK, USA

Aksel I. Rokkan

Bodø Graduate School of Business, Bodø Regional University, Norway

xi

List of Contributors

Rudolf R. Sinkovics

The University of Manchester, Manchester Business School, UK

Carl Arthur Solberg

Department of Marketing, BI Norwegian School of Management, Sandvika, Norway

Arne M. Ulvnes

Department of Marketing, BI Norwegian School of Management, Sandvika, Norway

Goksel Yalcinkaya

The Eli Broad Graduate School of Management, Michigan State University, MI, USA

This page intentionally left blank

xii

LIST OF REVIEWERS Gabriel R.G. Benito

BI Norwegian School of Management, Norway

Harald Biong

BI Norwegian School of Management, Norway

S. Tamer Cavusgil

Michigan State University, USA

Seyda Deligonul

St. John Fisher College, USA

Francois Durrieu

Bordeaux School of Management, France

David A. Griffith

Michigan State University, USA

Kjell Gro¨nhaug

Norwegian School of Economics and Business Administration, Norway

Ha˚kan Ha˚kanson

BI Norwegian School of Management Norway

Siv Marina Karlsen

Oslo University College, Norway

Tibor Mandjak

Bordeaux School of Management, France

Lars Gunnar Mattson

Stockholm School of Economics, Sweden

Tore Mysen

Oslo School of Management, Norway

Erik Nes

BI Norwegian School of Management, Norway

Bent Petersen

Copenhagen Business School, Denmark xiii

xiv

LIST OF REVIEWERS

Ragnhild Silkoset

BI Norwegian School of Management, Norway

Carl Arthur Solberg

BI Norwegian School of Management, Norway

Barbara Sto¨ttinger

Wirtschaftsuniversita¨t Wien, Austria

Chris Styles

University of Sydney, Australia

Lawrence Welch

Mt. Eliza Business School, Australia

J. Chris White

Michigan State University, USA

PREFACE This special volume of Advances in International Marketing is focused on international marketing channels. Specifically, it explores substantive issues relating to the role of foreign intermediaries in export channels. Independent distributors or agents are commonly engaged by exporting manufacturers, yet academic research in this area is very limited. We are delighted to feature the latest research findings and insights on this topic contributed by authoritative colleagues from around the world. It is guest edited by Carl Author Solberg of BI Norwegian School of Management. The idea for devoting a separate volume on foreign intermediaries originated from Professor Solberg. We issued a call for papers, which then attracted a variety of submissions of high quality. We owe gratitude to him for screening and evaluating these submissions, and for preparing the final set of chapters. We are also indebted to many colleagues who assisted in the review process. The resulting selections draw from a variety of perspectives and offer rich insights on foreign intermediaries. Our thanks go to Professor Solberg for his efforts in creating this volume. At Michigan State University, I would like to recognize the professional assistance of Ms. Kathy Waldie, Editorial Assistant for the Advances in International Marketing series. Kathy carries the responsibility of corresponding with the authors, guest editors, as well as the staff of Elsevier Science at various phases of the publication process. Finally, we express our appreciation to Ms. Hannah Collett and the other staff at JAI/Elsevier Science who saw the volume through the production process. S. Tamer Cavusgil Series Editor

xv

This page intentionally left blank

xvi

INTRODUCTION

It has been said that choice of entry mode – or more broadly, operation mode – is one of the most important decisions made by international marketers (Young et al., 1989). This decision determines many other variables of the international marketing effort such as monitoring and control, use of resources and financial risk. Much of the focus of the international marketing literature well into the 1990s was directed primarily toward the entry and operation mode decision. The main purpose of this line of research was to explain integration of firms’ international operations. From an international marketing viewpoint, the decision to set up a sales subsidiary instead of using independent middlemen such as agents or distributors was critical. Two theoretical approaches dominated the discussion: Transaction Cost Economics (TCE) and the Internationalization Process model (IP). The basic premise of TCE is that (in our context) a foreign middleman behaves opportunistically. The costs of controlling such opportunistic behavior are higher under conditions of high-asset specificity, uncertainty and volatility, leading the firm to integrate its market operations. IP is based on the theory of the growth of the firm (Penrose, 1959) and explains entry mode by the accumulation of experience over the years. Whereas TCE is concerned with structure, IP studies the internal processes of the firm that lead to a build up of resources allowing bolder steps in its international ventures. The issue of operation mode – however important it is – does not really explain why certain ventures are doing better than others. In fact a study among Norwegian exporters found no significant differences between operation modes concerning export performance (Solberg & Nes, 2002). Whatever operation mode, the international marketer needs to relate to people in organizations, be it its own employees in a subsidiary or an independent middleman – licensee, distributor, agent or other. One could therefore claim that the success of the international marketing effort hinges more on these relational factors than on the operation mode itself. The xvii

xviii

CARL ARTHUR SOLBERG

majority of the articles of this volume of AIM discuss different aspects of these relations. In contrast to the IP model that explores the internal processes of the firm, the study of exporter–middleman relations treats bilateral processes between trading partners, and therefore extends the field of study beyond the exporting firm. This field of study has only received attention the last 10 years or so. Indeed, research emanating from IMP1 – scholars such as Ford and Rosson did delve into different aspects of these relationships in the early 1980s (Ford & Rosson, 1982), but a more thorough and rigid analysis of exporter–middleman relations gained impetus only in the late 1990s with contributions from writers such as Aulakh, Kotabe, and Sahay (1996), Celly and Frazier (1996), Bello and Gilliland (1997), de Mortanges and Vossen (1999). Since then several contributions have appeared (see for instance Bello, Chelaru, & Li Zhang, 2003; Zhang, Tamer Cavusgil, & Roath, 2003). The main part of this volume of AIM could be seen as a continuation of this stream of literature, elaborating on different aspects of it, such as cultural and dynamic aspects of these relations, or delving more deeply into details concerning information capture and learning in international business relationships. Deligounul and Cavusgil in this volume claim that findings and interpretations in empirical studies of channel governance are rather disparate, blaming lack of agreement on its characteristics and underlying mechanisms. In particular, they assert that governance is conceived as process or structure, but each approach is incomplete. A focus on process overemphasizes control aspects and fails to explain informal governance arrangements, whereas a structural view ignores behavioral norms and sanctions. I believe that this sums up pretty neatly the issues at stake in exporter–intermediary relations. This volume is more concerned with the phenomena under study than with casting light on one particular theoretical perspective. The contributions represented here are therefore drawing on a number of different theoretical streams: agency theory, transaction cost economics, network theory, economic sociology, resource base theory and its applied ‘‘offspring’’, Internationalisation Process school of thought. I should also mention that the contributions to this volume come from researchers from universities in nine different countries: Australia, Belgium, Denmark, Germany, Norway, Singapore, Sweden, United Kingdom and the USA, representing both wellestablished and young academicians. This I believe is a manifest indication of the importance of this field of research. In fact, it is my conviction that success in exporting goes primarily through well functioning relations with the exporter’s trading partner(s) in its target market(s). It is therefore of

Introduction

xix

great interest to try and understand the underlying mechanisms of these relations. The volume is divided into four distinct parts, dealing with different aspects of exporter–intermediary relations: (1) Channel choice, partner selection and governance in international markets; (2) information and learning aspects of exporter–intermediary relations; (3) cultural aspects of exporter–intermediary relations; and (4) dynamics of exporter–intermediary relations. The remainder of this introduction will give a brief review of each contribution.

CHANNEL CHOICE, PARTNER SELECTION AND GOVERNANCE IN INTERNATIONAL MARKETS This part contains four papers. Even though this volume of AIM primarily concerns exporter–intermediary relations, the first two contributions deal with channel choice and partner selection. The first chapter by Kent Eriksson, Jukka Hohenthal and Jessica Lindbergh, ‘‘SME export channel choice in international markets’’, tests some of the fundamental factors proposed by the IP model explaining choice of entry mode (accumulation of knowledge of foreign markets determining foreign operation modes). Later developments of the model claim that experience and knowledge of local business relationships are also essential elements of the IP model. Whereas the IP model has been found to hold well for incremental resource commitments, it has – in contrast to transaction-cost theories – produced mixed results concerning its ability to explain operation modes. The authors present findings from research in 494 firms from Sweden, Denmark and New Zealand: factors included in the initial explanation of the IP model explain choice of channel, but later developments of the model do not. Implications are that the foreign market knowledge is, and that more incremental experiential knowledge accumulation is not relevant for export channel choice as regards integrated or non-integrated channel. The results show that for Small and Medium Sized Businesses (SMEs), expected market growth lead to use of integrated channels. Integrated channels make it possible to reap more of the profits from a growing market and to learn faster about what is going on in the market. They also found that use of integrated channels is correlated with cultural distance, contradicting the findings of Johanson and Vahlne (1977) and Kogut and Singh (1988). The IP model therefore offers a rather weak explanation of choice of integrated channel. The second chapter, ‘‘Beyond transaction cost determinants: an integrated framework for export intermediary selection in emerging economies’’, is

xx

CARL ARTHUR SOLBERG

written by Xufei Ma. He makes the pertinent remark that entry mode has been studied from a range of different theoretical perspectives, whereas partner selection has been given little attention. Discussing different theoretical approaches to partner selection – TCE, resource-based view, institutional theory and network perspective – Xufei Ma proposes an integrated framework to investigate export intermediary selection in emerging economies. His choice of setting is pertinent in that emerging economies overstate some of the variables that go into these different strings of theory: uncertainty, volatility, institutional structures and access to key persons. The chapter highlights the unique resources associated with the intermediaries’ institutional traits, organizational forms and micro–macro links in emerging economies. In their paper, ‘‘Legal versus relational ordering in channel governance: the case of the manufacturer and its foreign distributor’’, Seyda Deligounul and S. Tamer Cavusgil present governance as a manifestation of needs for safeguarding trust, adaptation, control and ability to predict. In their view, this explains a wide spectrum of governance issues, ranging from selfregulation to formal structural arrangements. The empirical context is the typical international distribution channel, in which the manufacturer partners with foreign distributors. Their results suggest that, when contemplating governance in a long-term relationship, an export manufacturer and its foreign distributor are confronted with a tradeoff between the costs of crafting a more complete agreement and the inefficiencies associated with less exhaustive arrangements. Also, the investigation suggests the role of organizational trust in a cross-border context to be redefined since it is at odds with what is touted in the literature for the domestic case. The study reveals that trust is not an alternative to formal control mechanisms as assumed by some. It can only serve to fill the gaps left by imperfect controls with a certain leap of faith. Carl Arthur Solberg extends recent research in international exporter– intermediary relations in his contribution, ‘‘Relational drivers, controls and relational quality in exporter–foreign middleman relations’’, by introducing relationship quality as a key-mediating variable in explaining export performance. He also broadens the repertoire of governance antecedents in international business relations to include power relations and social bonds between the relationship partners. He furthermore introduces a distinction between antecedents that are ‘‘easily’’ manipulated in the short term by the trading partners (social interaction, investments in relations, information exchange and flexibility) and more structural factors that are more difficult to change in the short term such as power relations, cultural distance and

Introduction

xxi

resource availability. In a study of a cross section of Norwegian exporters he finds that relationship quality is negatively affected by process control and positively by clan control, suggesting that centrally controlled and monitored marketing programs need to be backed by flexibility and social relations. Moreover, variance in export performance is to a large extent explained (68%) by relationship quality.

INFORMATION AND LEARNING ASPECTS OF EXPORTER–INTERMEDIARY RELATIONS This part consists of three contributions dealing with different aspects of market information and learning. The first chapter, ‘‘Delivering value: market orientation and distributor selection in export markets’’, is written by Andre Beaujanot, Larry Lockshin and Pascale Quester. They examine the proposition that in export markets, market-oriented firms are better able to capitalize on their market orientation if they do business with customers (overseas distributors) having business characteristics that are in accordance with the firm’s market orientation. Their investigation carried out among 77 Australian wine exporters, proposes the exporter’s market orientation has a direct effect on the exporter’s required international distributor characteristics. These characteristics are seen as a filter, as the exporter may use them to select the most appropriate international clients. They receive support for the hypothesis that exporters who are market oriented and select international distributors having business characteristics that are linked to their market orientation perform better as they can create and deliver superior customer value. Geir Gripsrud, Carl Arthur Solberg and Arne Morten Ulvnes investigate the role of partner relationships in market information collection behavior from foreign markets. They develop and test a conceptual model of the association between information collection from two different sources (the intermediary and ‘‘other’’) and performance in export relationships. The behavior of exporters in collecting information is posited to be influenced by the exporter’s trust in its foreign channel partner, and the association between information collection and performance is argued to be moderated by the length of experience with the trading partner. Data from 285 Norwegian exporters in the ‘‘bio’’-industry (food and wood) is presented. The findings suggest that trust correlates positively with information collection from the representative and negatively with information

xxii

CARL ARTHUR SOLBERG

collection from other sources. However, information from both these sources contributes positively to market performance. They finally conclude that the longer the relationship has lasted, the more positive effect information from other sources will have. Anthony Roath and Rudolf Sinkovics examine two distinct relational governance mechanisms in their contribution, ‘‘Utilizing relational governance in export relationships: leveraging learning and improving flexibility and satisfaction’’. They analyze 141 US exporting manufacturers to explore whether the manufacturer’s utilization of relationship governance helps to leverage learning, establish flexibility in dealing with distributors from disparate environments, and eventually contribute to satisfactory relationship outcomes. The empirical analysis provides support for the perspective of relational governance as a hybrid mechanism that both facilitates and augments learning between cross-border organizations. Flexibility is enhanced and relationship outcomes are more satisfactory. The results suggest a direction for appropriate management of international distributors. The fundamental changes in the technological, social, political and economic environment have shaped the trend of relationship marketing to go beyond the evolutionary stages of the idea to eventually evolve into a discipline. Initially, common conceptualization of relationship marketing involved distinguishing between the ‘internal’ organizational perspective and the ‘external’ (i.e., customer) perspective.

CULTURAL ASPECTS OF EXPORTER– INTERMEDIARY RELATIONS Culture is a particularly complex construct and is difficult to study (Shenkar, 2002). However, its obvious importance in cross-border business relationships makes it a ‘‘must’’ in a volume like the present one. This part consists of four contributions investigating different aspects of cultural factors on cross-border exporter–intermediary relations and using different methodological approaches to the subject. In the first article, ‘‘Managing channel relations in China: an exploratory study’’, Paul Matthyssens and Wouter Faes study channel leadership experiences by a number of Western principals in China. They introduce the reader to different levels of relationships in Chinese business culture: renquin (human feelings), bao (give and take) and the more commonly recognized guangxi (importance of relationships and networks). Based on depth interviews they report the

Introduction

xxiii

experiences of 14 companies suggesting the importance of a ‘dual approach’ in building trustful relations. In this environment, managing channel relations require a balancing act of positive actions and monitoring, joint decision making and guidance. The basics of channel theory remain valid in China, but the need for building deep trust (ren quin) in the relation with Chinese intermediaries implies a holistic approach rather than – perhaps more common in Western economies – an analytic approach only. Inger Beate Pettersen and Aksel Rokkan suggest in their article, ‘‘Buyer tolerance of conflict in cross national business relationships: an empirical study’’, that boundary spanning personnel are required to invest heavily in effort and adaptations in order to surmount cultural divergences. This chapter investigates how cultural knowledge and cultural adaptation efforts enhance the intermediaries’ capacity to communicate across cultures. Moreover, the study examines how intermediaries’ cultural knowledge, cultural adaptation and communication affect buyer tolerance of conflict in crossnational dyads. The authors conduct a survey of cross-national buyer– supplier relationship within the French seafood industry. The findings not only corroborate the conventional wisdom that cultural knowledge and cultural adaptation enhance the capacity to communicate across cultures, but also that high levels of intermediary communication are found to increase buyers’ tolerance of conflict. Moreover, the interaction effect between cultural knowledge and cultural adaptation is shown to enhance buyer tolerance of conflict. The extant literature suggests important differences between domestic and foreign business relationships, but ‘‘foreign relationships’’ is a broad category, and little is known about specific national relational behaviors. In the article, ‘‘Identifying differences in foreign customers’ buying behavior: a study using multidimensional scaling’’, Bjo¨rn Sven Ivens uses multidimensional scaling in order to analyze 121 business relationships between German firms and their trading partners in their home market and nine other countries: Sweden, Poland, Italy, France, USA, Brazil, South Africa, Japan and the People’s Republic of China. Investigating export managers’ perceptions of their foreign customers’ relational behavior he suggests that national business behaviors can be classified along two dimensions: ‘‘cooperation’’ and ‘‘social vs. efficiency orientation’’. Eight factors were identified and associated with the respective countries: Whereas USA and North European countries are characterized by ‘‘time is money’’ and ‘‘improvisation’’, Latin countries are featured by ‘‘frequent contacts’’ and ‘‘individual decision-taking’’. China is distinguished by three factors, ‘‘self assertion’’, ‘‘importance of context’’ and ‘‘private contacts’’ (corroborating some of the

xxiv

CARL ARTHUR SOLBERG

findings by Matthyssens and Faes in Chapter 8), and finally Japan with one factor, ‘‘formalization’’. The final chapter in part three investigates how self-perceived power in different countries is affected by culture. Research has found asset specificity, type of market and uncertainty to be important influencers of channel power. While these variables have been found to affect power in international channel relationships they have been examined in isolation and have excluded the influence of culture. Goksel Yalsinkaya and David A. Griffith endeavor in their article, ‘‘Factors influencing distributor self-perceived power in channel relationships: a seven country study’’ to fill this gap. Their study of relationships between 228 US firms and their distributors in seven countries (US, Canada, Chile, Great Britain, Mexico, the Philippines and Singapore) – using multiple regression and stepwise regression analysis – identify culture as a main antecedent of self-perceived power along with uncertainty and asset specificity (type of market does not affect self-perceived power in this study). Including culture increases explained variance from 13% to 24%.

DYNAMICS OF EXPORTER–INTERMEDIARY RELATIONS Building relations between trading partners takes time, and this aspect of exporter–intermediary relationships has been given little attention in the literature. In this part we investigate different aspects of the dynamism that lies in any relationship. Per Andersson and Lars-Gunnar Mattsson explore the importance of when an action is carried out during a firm’s internationalization process in their article, ‘‘Timing and sequencing of strategic actions in internationalization processes involving intermediaries – a network perspective’’. This is important to study because opportunities and restrictions change over time due to concurrent internationalization of other firms in its market context. The analytical problems and purpose of the paper are connected to this basic assumption. They discuss the timing issue in general and with reference to internationalization in a markets-as-networks perspective. A case of internationalization of an intermediary in the electronic components industry is used as an example of interdependent sequences in internationalization processes affecting an individual firm. A conceptual framework for analysis of timing is developed, and major aspects are identified in a number of propositions and some issues for further research is suggested.

xxv

Introduction

Bent Petersen, Torben Pedersen and Gabriel R.G. Benito examine the ‘‘termination dilemma’’ phenomenon of foreign intermediaries operating in export markets. In their paper, ‘‘The termination dilemma of foreign intermediaries: performance, anti-shirking measures and hold-up safeguards’’ the general experience by practitioners that both low- and high-sales performances evoke risks of termination is studied. The termination dilemma induces foreign intermediaries to make no more than a mediocre sales effort, thereby imposing losses to exporters. The paper investigates how antishirking measures (such as outcome-based remuneration and monitoring instruments) and hold-up safeguards (e.g., severance payment) put in place by exporters may mitigate such problems. The empirical study is based on a longitudinal data set of 258 Danish exporting firms and their relations to foreign intermediaries in major export markets over a 5-year period. The main findings support the hypothesis of a termination dilemma, and that termination is driven by factors such as difficulties of monitoring the intermediary. Contractual restrictions and severance payments hold back the decision to terminate the relationship. The final chapter, ‘‘Export governance of integrated and independent marketing channel members in international markets: the moderating effects of stage of relationships and operation modes’’, is written by Carl Arthur Solberg. This paper presents a model of exporter governance of marketing channel members in foreign markets, introducing two contingencies: modes of operation and stage of relationship between the middleman and the exporter. Based on the work by Bello and Gilliland (1997) it investigates the effects on performance of single and combined controls – output, process and clan control, and the moderating effects of the two contingency factors on the three modes of governance. Using data from 171 Norwegian exporting firms the author suggests that outcome controls are particularly effective in the introduction and growth stage of exporter–intermediary relationships and that clan control yields the best results in the mature stages. Outcome control also outperforms the other control modes (clan and process controls) in agent and distributor relations. Process control, when carried out alone gives positive effects, but when combined with the other two (outcome and clan controls) adds little to the overall performance of the exporting venture.

NOTES 1. IMP: International Marketing and Purchasing of goods is a loosely knit network of researchers dealing with relations between business partners.

xxvi

CARL ARTHUR SOLBERG

REFERENCES Aulakh, P., Kotabe, M., & Sahay, A. (1996). Trust and performance in cross-border marketing partnerships: A behavioural approach. Journal of International Business Studies, Special issue, 1005–1032. Bello, D., & Gilliland, T. (1997). The effect of output controls, process controls, and flexibility on export market performance. Journal of Marketing, 1(January), 22–28. Bello, D., Chelaru, C., & Li Zhang, T. (2003). The antecedents and performance consequences of relationalism in export distribution channels. Journal of Business Research, 6, 1–6. Celly, K. S., & Frazier, G. L. (1996). Outcome based and behavior based coordination efforts in channel relationships. Journal of Marketing Research, 33(2), 200–210. Ford, I. D., & Rosson, P. H. (1982). The relationships between export manufacturers and their overseas distributors. In: M. R. Czinkota & G. Tesar (Eds), Export management: An international context (pp. 257–275). New York: Preager. Johanson, J., & Vahlne, J-E. (1977). The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 28(Fall), 411–432. de Mortanges, C. P., & Vossen, J. (1999). Mechanisms to control the marketing activities of foreign distributors. International Business Review, 8, 75–97. Penrose, E. T. (1959). The theory of the growth of the firm. Oxford: Blackwell. Shenkar, O. (2002). Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 33(3), 519–536. Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Young, S., Hamill, J., Wheeler, C., & Davies, J. R. (1989). International market entry and development. London: Harvester. Zhang, C., Tamer Cavusgil, S., & Roath, A. S. (2003). Manufacturer governance of foreign distributor relationships: Do relational norms enhance competitiveness in the export channel. Journal of International Business Studies, 34, 550–566.

Carl Arthur Solberg

FACTORS AFFECTING SME EXPORT CHANNEL CHOICE IN FOREIGN MARKETS Kent Eriksson, Jukka Hohenthal and Jessica Lindbergh INTRODUCTION Determining market channels is usually considered a discrete decision made by the expanding firm (e.g., Anderson & Coughlan, 1987; Bello & Gilliland, 1997; Solberg & Nes, 2002). In reality, this decision is often limited by knowledge constraints and customer demands. We find an example of this in Gamma’s attempt at entering the Italian market (Hohenthal, 2001). Gamma is an export-oriented electronics company and has approximately 150 employees. To handle the service needs of its product, Gamma has established service subsidiaries in 13 of its markets. The product is manufactured to fit the specifications of the customer. Every product is different, and even small deviations from specifications can create big errors. The main tasks of the subsidiaries include installing

The listing of the authors is according to an alphabetical order and each of the authors have contributed equally to this paper.

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 1–22 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16001-3

1

2

KENT ERIKSSON ET AL.

the equipment, training the customer, and ensuring that everything works. Once in place, the service teams have to calibrate the product every 4 months. The subsidiaries also scan the market for new customers and competitors. Gamma is working in a market where it knows most of its competitors and their products. Gamma also has a good level of knowledge of potential customers around the world. This new deal was initiated by an Italian research institute. Gamma offered the Italian customer a standard system with a 5-year service agreement. Specifications and price were considered acceptable to the Italian institute, but the service agreement was a source of dispute. Gamma wanted its French subsidiary to be responsible for providing service, but the Italians wanted Gamma to establish a service unit in northern Italy. Gamma did not believe that the market was big enough to merit a subsidiary, but it would have to establish one to gain access to this new market. Gamma’s options were thus limited to one possible channel, and it could either take that option or forget about market entry at this point. In the end, Gamma decided not to set up a subsidiary.

Gamma’s attempted entry into Italy is not a unique situation facing internationalizing small- and medium-sized enterprises (SMEs). The array of possible channels is usually rather limited. A firm’s decision regarding what channel to use may be the result of the firm’s knowledge or indeed lack of knowledge about a specific customer and the foreign market in general, such as competitors or cultural differences. The internationalization process (IP) model is a theoretical framework that recognizes how a firm’s knowledge of a foreign market and the influence business relationships may have on the choice of market channel (Johanson & Vahlne, 1977, 1990, 2003). This framework postulates that firms with increased experience will increase their commitment in a market. Because firms wish to avoid uncertainty and initially lack foreign market knowledge, the IP model claims that firms expand their operations in small sequential steps, starting with no regular export activities and gradually increasing their commitment to the market and finally setting up a manufacturing subsidiary (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975). This outcome of sequential steps, also known as the establishment chain (Johanson & Wiedersheim-Paul, 1975), has been heavily criticized because empirical research has shown that the establishment patterns of firms are less restricted than proposed by the

Factors Affecting SME Export Channel Choice in Foreign Markets

3

model (Bjo¨rkman, 1989; Hedlund & Kverneland, 1985; Turnbull, 1987; Welch & Loustarinen, 1988). Even though firms use a variety of establishment patterns when internationalizing, a growing body of research shows that firms gradually develop knowledge from their experiences (Barkema, Bell, & Pennings, 1996; Barkema, Shenkar, Vermeulen, & Bell, 1997; Barkema & Vermeulen, 1998; Delios & Beamish, 1999, 2001; Eriksson, Johanson, Majkga˚rd, & Sharma, 1997; Hitt, Dacin, Tyler, & Park, 1997; Madhok, 1996; Zahra, Ireland, & Hitt, 2000). Thus, the model’s fundamental argument that knowledge is developed through experience is generally supported in internationalization research. Based on the critique of the establishment chain proposition, reconsidering the explanatory power of the IP model may be warranted. For example, it may be more appropriate to use the IP model to explain the sequential buildup of knowledge rather than discrete choices of mode of establishment. The accumulation of experience occurs before, during, and after the exact time when a decision to establish in a certain mode is made. Despite the extensive acceptance of behavioral-oriented arguments in foreign-entry mode research (export, joint venture, and subsidiary modes), surprisingly few studies have been conducted on the determinants of integrated and non-integrated channels (see Aulakh & Kotabe, 1997, for notable exception). Thus, a behavioral-oriented approach to the study of firms’ choices of market channels in foreign markets may prove enlightening. Adopting this approach is of particular interest because transaction-cost analysis has proved effective in explaining why firms choose either integrated or non-integrated channels (Hennart, 1991). Therefore, the question that needs to be answered is whether or not the IP model can be used to explain why firms choose integrated or non-integrated channels. If the IP model cannot be applied in this case, it should be clarified that this model can be used to explain sequential knowledge accumulation through experience but nothing else. The purpose of this study is to test which IP-related antecedents lead to the use of a specific channel in a foreign market. The two alternatives tested here are integrated and non-integrated channels. To accomplish this objective, we apply an IP approach to international business and then discuss channel choice from a knowledge perspective. Several hypotheses are developed concerning channel choice and tested on a sample of SMEs from Sweden, Denmark, and New Zealand. We use logistic regression to analyze our data. Based on this analysis, we present a discussion of our results and some managerial and research implications.

4

KENT ERIKSSON ET AL.

CHANNEL CHOICE AND THE INTERNATIONALIZATION PROCESS In furthering our understanding of the dynamics of the internationalization of firms, process models have played a significant role (Bilkey & Tesar, 1977; Cavusgil, 1980, 1984; Czinkota, 1982; Johanson & Vahlne, 1977, 1990; Loustarinen, 1980; Reid, 1983). In a review of IP models, Andersen (1993) distinguishes between the U-model (Uppsala) by Johanson and Vahlne (1977) and the I-models (Innovation) by Bilkey and Tesar (1977), Cavusgil (1980, 1984), Czinkota (1982), and Reid (1981, 1983). The U-model by Johanson and Vahlne (1977) was chosen as the basis for this study because it is assumed to be valid for firms of any size, whereas the I-models may be applied to only small firms (Andersen, 1993). However, these models do share some similarities. For example, the U-model and the I-model are all behavioral in nature. In addition, experiential knowledge plays a prominent role in the IP of these models. In this study, we use the term internationalization process model to denote the U-model. The IP model has its roots in the behavioral theory of the firm (Cyert & March, 1963) and the theory of the growth of the firm (Penrose, 1959). As a consequence, the IP model assumes that firms lacking knowledge of the characteristics of foreign markets will adopt an incremental behavior approach to minimize risks and avoid uncertainty when internationalizing (Johanson & Wiedersheim-Paul, 1975). It is, therefore, argued that firms tend to choose countries they perceive as having a similar institutional environment as their home markets (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). Each individual business activity conducted by a firm in a foreign market gradually contributes to the firm’s knowledge of that foreign market. This method of overcoming cultural ignorance is a result of knowledge developed from experience (Penrose, 1959; Johanson & Vahlne, 1977). However, the IP model has come under scrutiny. Because firms wish to avoid uncertainty and initially lack foreign market knowledge, the IP model predicts that firms entering a new foreign market will expand their operations in small sequential steps. From a starting point of no regular export activities in a foreign market, firms gradually increase their commitment by establishing agents, followed by joint ventures, then partially owned subsidiaries, and finally wholly owned subsidiaries (Johanson & WiedersheimPaul, 1975; Johanson & Vahlne, 1977). This outcome of sequential steps, also known as the establishment chain (Johanson & Wiedersheim-Paul, 1975), has been heavily criticized because empirical research has shown that firms’ establishment patterns are less restricted than proposed by the model

Factors Affecting SME Export Channel Choice in Foreign Markets

5

(Hedlund & Kverneland, 1985; Turnbull, 1987; Welch & Loustarinen, 1988; Bjo¨rkman, 1989). Even though differences in the establishment patterns of firms exist, a growing body of research indicates that firms gradually acquire knowledge from experience (Barkema et al., 1996, 1997; Madhok, 1996; Eriksson et al., 1997; Hitt et al., 1997; Barkema & Vermeulen, 1998; Delios & Beamish, 1999, 2001; Zahra et al., 2000). Thus, it seems that these developments of the IP model indicate that channel choice should be linked to experiential knowledge development in a less deterministic and sequential manner than as previously proposed. Channel choice will probably be affected by experiential knowledge but not in the same sequential way as the original IP model suggests. Considerable development has occurred in the IP model regarding the importance of business relationships. A substantial body of literature supporting the perspective of international business conducted within networks of business relationships has been generated (Chen & Chen, 1998; Coviello & Munro, 1997; Blankenburg-Holm, Eriksson, & Johansson, 1996). These studies have emerged as an answer to a call for the study of international business exchange in international business (Toyne, 1989). Empirical observations have also shown that market transactions often take place within the framework of lasting business relationships between business partners (Ford, 1990; Ha˚kansson, 1982; Turnbull & Valla, 1986). Market activities have been observed to consist of interactions within long-lasting business relationships (Anderson, & Narus, 1990; Halle´n, 1986). The activities in business relationships are usually complex processes that comprise knowledge not only of goods and services being transacted, but also of the wider business context of the firms (Cunningham & Homse, 1986; Halle´n, Johanson, & Seyed-Mohamed, 1991). These business relationships are linked to each other, resulting in the formation of networks of interdependent business relationships (Blankenburg-Holm et al., 1996). Studies examining business relationships can be partially related to studies of international joint ventures, licensing, management contracts, and strategic alliances (Beamish & Killings, 1997; Contractor & Lorange, 1988). Taken together, recent studies investigating the IP model emphasize the importance of experiential knowledge development and business relationships and networks (Eriksson et al., 1997; Johanson & Mattsson, 1987, 1988; Johanson & Vahlne, 1990, 2003). We also need to consider seriously the role of exploration in the IP (Madhok, 1997). Instead of ignoring the role of these factors for channel choice, we identify them as important and potential factors that that may explain channel choice. In light of these recent developments in the IP, we reexamine channel choice in the following section.

6

KENT ERIKSSON ET AL.

CHANNEL CHOICE IN INTERNATIONAL BUSINESS NETWORKS Our reasoning is based on the IP model’s argument that country knowledge, opportunity seeking, and cultural distance are the central concepts for explaining the international expansion of firms (Johanson & Vahlne, 1977). The paper continues with the subsequent development of the IP model (Eriksson et al., 1997) that claims that internationalization knowledge is an important factor in explaining internationalization, and the network aspects of customer and competitor knowledge (Johanson & Mattsson, 1987, 1988; Johanson & Vahlne, 1990, 2003). Building upon the theoretical framework discussed in the previous section, we propose six different hypotheses. Country Knowledge In a similar way, the organizational forms (foreign market operation methods) that the IP takes represent a gradual resource commitment. Initially, firms export incidentally and then systematically through local intermediaries; eventually, they establish a subsidiary. Separate studies (Johanson & Wiedersheim-Paul, 1975; Davidson, 1980; Gatignon & Anderson, 1988) have indicated that firms are more likely to select wholly owned subsidiaries as their experiential knowledge of the market increases. Klein and Roth (1990) also claim that greater experience in a foreign market stimulates exporters to integrate forward. Therefore, we claim that firms with more country experience tend to use integrated channels to capitalize on their knowledge. H1. Firms with more country experience tend to use integrated channels. Market Growth According to Penrose (1959), the immediate determinant of a firm’s behavior is its expectation of future outcomes, which is also a fundamental tenet of the IP model. A firm’s decision to commit to a market is based on its manager’s perceived ability to estimate the present and future outcomes of a market. Hence, if the expectation of a market’s potential for future growth is high, the estimated risk of adopting a high commitment mode is reduced, thus resulting in a firm’s increased tendency to use an integrated channel (Johanson & Vahlne, 1977). Calof and Beamish (1995) reported such a finding in their study of mode change patterns. Based on their interviews with managers, Calof and Beamish found that increased resource commitments

Factors Affecting SME Export Channel Choice in Foreign Markets

7

occurred as a result of firms having managers with greater confidence in the market (i.e., they perceive it as having the potential to be large enough). Agarwal and Ramaswami (1992) also found that firms tend to use integrated channels in markets with higher potential. Therefore, we suggest that firms expecting high market growth will position themselves to handle the increase in sales by using an integrated market channel. H2. Firms that expect a higher market growth tend to use integrated channels. Cultural Distance In the IP model (Bilkey & Tesar, 1977; Johanson & Vahlne, 1977), two dimensions of international expansion have been identified: geographical expansion and resource commitment expansion. The process model postulates that as the geographical and cultural distance between the home and host markets increase, the more difficult it becomes for firms to collect and interpret incoming information properly. This ‘‘psychic distance’’ between the home and foreign markets affects the selection of the market as well as the choice of foreign market operation method. The cultural distance between the home and host countries influences a firm’s knowledge about a market; the greater the degree of dissimilarity between countries, the greater the degree of difficulty of assessing the risk of conducting business, which, in turn, increases managers’ uncertainty (Carlson, 1966). Studies based on the logic of market uncertainty and organizational knowledge have shown that a high commitment mode, such as a subsidiary, is less preferable when the cultural distance between the home and host countries increases. Erramilli (1991) found that the choice of high commitment mode in service firms decreased as the distance increased. Davidson (1980) and Brouthers and Brouthers (2001) showed that the usage of licensing and/or joint ventures increased with cultural distance. A similar type of reasoning is found in the transaction-cost theory concerning the effect of cultural distance on the mode of operation. The degree of difficulty associated with managing an operation increases with cultural distance, which results in higher transaction costs (Hennart & Larimo, 1998). Therefore, multinational enterprises opt for a lower degree of equity when the cultural distance increases. With increased cultural distance, it may be more difficult to establish and manage integrated channels in markets because of cultural dissimilarities. As a consequence, we propose that firms prefer non-integrated establishment modes when the cultural distance increases.

8

KENT ERIKSSON ET AL.

H3. Firms prefer non-integrated channels in markets at a greater cultural distance. International Experience A recent development of the IP model (Eriksson et al., 1997) shows that international experiences generate a firm-specific procedural knowledge of how to internationalize. This type of knowledge is not specific to a particular market but is applicable to all markets. Thus, Eriksson et al. (1997) argue that international experience enhances a firm’s ability to search for and evaluate information about foreign markets. Firms with little international experience may feel less confident in estimating the risk and future returns of a market and thus prefer to be less committed to a market initially (Johanson & Vahlne, 1977; Davidson, 1982). Firms with more experience in international markets will be in a better position to handle sales in a specific market, thus making integrated channels more probable. That firms tend to opt for integrated channels at higher levels of international experience has also been supported by subsequent empirical findings (Gatignon & Anderson, 1988; Erramilli, 1991; Aulakh & Kotabe, 1997). We would thus expect firms with more international business experience to use integrated market channels. H4. Firms with more international business experience tend to use integrated channels. Customer Knowledge A firm’s ability to work closely with customers in markets is usually considered an integral part of market knowledge. The market orientation literature emphasizes that customer orientation (as a part of market orientation) involves not only selling to customers but also to organize the firm so a deeper understanding of their customers can be acquired. As a result of becoming familiar with their customers’ context and needs, firms are better prepared to provide the resources that customers need for long-term profitable growth (Hult & Ketchen, 2001). From a network perspective, becoming established in a market is a question of starting a specific business relationship with a new customer in that country. We would therefore expect the firm’s knowledge of the customer to influence channel choice. Initially, the firm’s knowledge concerning the other specific partner is naturally low. However, if the relationship continues, the interaction between the two concerned parties will lead to

Factors Affecting SME Export Channel Choice in Foreign Markets

9

a situation where they learn the counterpart’s capabilities and needs, which, in turn, develops trust and interdependence between the firms (Ha˚kansson & Snehota, 1995; Hohenthal, 2001; Ha˚kansson & Johansson, 2001). As a result, the internationalizing firm works in a market-oriented way. A study on business relationship development by Lindstrand (2003a,b) highlighted the importance of the acquisition of knowledge and the subsequent development of trust. The study found that knowledge of the counterpart increased the willingness to invest in the relationship and, thus, increased interdependence in the relationship. Indeed, if the firm has acquired knowledge about its counterpart, we believe that considerable time and effort have been put into the relationship, assuming that the need for coordination between the counterparts has increased (Johanson & Mattsson, 1987). Therefore, we suggest that if a firm has customer knowledge, it will more likely use an integrated channel when operating in the market. H5. Firms with a greater level of knowledge of the customer tend to use integrated channels. Competitor Knowledge Competitors have not been the main focus within the network literature (Chetty & Wilson, 2003). However, they have been considered a part of a firm’s network, and ‘‘the development of cooperative relationships with customers, suppliers or other business partners may be critical for foreign market entry’’ (Blankenburg-Holm et al., 1996, p. 1049), where one such other actor is the competitor. According to Chetty and Wilson (2003), competitors are an important source of complementary resources and also possess upto-date information concerning the market. If we assume an organizational capability view (Madhok, 1997) on the firm’s action, it does not differ on the basic assumption of firm activities when it comes to internationalization. Both views recognize interaction activities as a way of accumulating value to the firm, where competitors may be an important source of knowledge for the firm (Teece, 1992; Blankenburg-Holm et al., 1996). An integrated channel would increase the firm’s visibility and create a position within the network (Johanson & Mattsson, 1988). Based on this argument, we suggest that firms lacking knowledge of their competitors will choose an integrated channel as a means of benefiting from the competitors’ knowledge. H6. Firms with less knowledge about competitors in a market tend to use integrated channels.

10

KENT ERIKSSON ET AL.

METHOD To test the hypotheses, a questionnaire was sent out to 1830 smalland medium-sized firms in three countries: Sweden, New Zealand, and Denmark. These countries were chosen because they are small and, therefore, depend on international business. The respondents were CEOs or in some cases managers in charge of international operations in small- and medium-sized New Zealand, Danish, and Swedish firms. The sampling frame was the New Zealand, Danish, and Swedish Business Directories. All firms that exported more than 10% of total sales and had between 50 and 200 employees were selected from these directories. The net response rate was 20% (112 firms) for New Zealand, 27% (208 firms) for Denmark, and 35% (174 firms) for Sweden, giving a total response rate of 27% or 494 respondents. These firms, the average age of which was 41 years, had been involved in international business on average for 25 years. On average, the firms had 100 employees and conducted international business in 17 countries. Table 1 presents some general background data on the firms, such as age and amount of domestic and international turnover. The data in Table 1 show that the Swedish firms are in general older and have a larger turnover than the other firms whereas the New Zealand firms are the youngest and have the smallest turnover, both domestically and internationally. On average, the Swedish firms have been involved in international business longer than the Danish and the New Zealand firms (see Table 2). The New Zealand firms are on average selling to fewer markets than the Swedish and Danish firms. As for the managers’ international experience, all of the respondents reported having 15 years of international business experience. Table 1. Country

Denmark New Zealand Sweden Total

General Background Data on Sample Firms. Firm Age (years)

Domestic Turnover (EUR)a

International Turnover (EUR)b

29 23 50 31

6 3 9 5

4 1 6 3

Note: Median values were chosen because some outliers made mean values inappropriate. a In EUR, translated by the exchange rate by 1998.12.31: 8.74 SEK/1 Euro, 4.7 SEK/1 NZL Dollar, 1.3 SEK/1 DK. b In EUR, translated by the exchange rate by 1998.12.31: 8.74 SEK/1 Euro, 4.7 SEK/1 NZL Dollar, 1.3 SEK/1 DK.

11

Factors Affecting SME Export Channel Choice in Foreign Markets

Table 2. Country

Denmark New Zealand Sweden Total

Firms’ International Experience and Managers’ International Experience. Firms’ International Experiencea M (Mdn) 21 16 35 25

(18) (12) (28) (18)

No. of Countries M (Mdn) 18 (12) 11 (6) 21 (15) 17 (10)

Managers’ International Experiencea M (Mdn) 15 14 15 15

(15) (15) (15) (15)

a

The firms’ international experience and the managers’ international experience are expressed in years.

The research design is a real-world scenario in which we asked the respondents to select an ongoing customer relationship. The introductory text in the survey instrument reads as follows: ‘‘We would like you to select a business assignment where your company (if you work in a firm that is divisionalized or in other ways divided into units, answer for your business unit) is expanding internationally. Preferably, this assignment should be well underway so that you would have already started doing business with the counterparts. If this is not suitable for you, then we would appreciate it if you could choose a recently finished assignment. Examples of this assignment could be:  A contract with a new distributor or agent in a new country.  A considerable expansion of business with an existing customer.  Doing business with one or more new customers within an existing market.  Entering new country markets with your existing customers.  Doing business with new customers within a new market. Choose a business assignment that is important to your firm. Business assignments can be long-term and hard to separate from ongoing business activities, but this investigation wants to capture a larger change in ongoing business with a customer or distributor.’’ The questionnaire was developed based on our hypotheses and 10 indepth case studies of foreign market entry that showed how prior knowledge is connected to the success of an internationalization move (Hohenthal, 2001). The questionnaire was designed to capture knowledge development in international business. Ten test interviews were done to validate the questionnaire. An example of a real field scenario was a paint production

12

KENT ERIKSSON ET AL.

facility in China. The firm had located an employee there 3 years prior to making its first sales. In their 8th year of establishment there, they built a factory to service the car plant, which was their primary customer. At the time of response to our questionnaire, the assignments had been continuing for an average of 3 years. Half of the assignments had been operating for 2 years or less; but some assignments for more than 20 years. The median number of previous assignments in the host country was 1.5, and 75% of the sample had fewer than 7 assignments in their host country. Previous studies (Hohenthal, 2001; Lindbergh, 2005; Blomstermo & Sharma, 2003; Lindstrand, 2003b) have analyzed the country differences present in this sample. These analyses performed a number of checks on country differences and found that the variables involved in this study had little or no effect.

MEASURES Country experience: Using a 7-point Likert scale, country experience was measured based on the respondent’s assessment of whether the country is new or well known to the firm (1 ¼ new and 7 ¼ well known). Market growth: The expected market growth was determined by the respondent’s estimation of future market growth. The respondents were asked to estimate on a 7-point Likert scale, ranging from 1 ¼ none to 7 ¼ very positive. Cultural distance: Like Barkema et al. (1996), we created a cultural similarity/dissimilarity scale or a ‘‘cultural distance’’ measurement based on Ronen and Shenkar’s (1985) sociocultural clustering of countries (countries displaying similarity in religion, language, and geography). The scale contains 12 cultural clusters: Nordic, Germanic (including Holland), AngloSaxon (including South Africa), Latin European (including Belgium), Eastern European, Independent (Brazil, Japan, India, Israel), Latin American, Far Eastern, Arab, Middle Eastern (Turkey, Iran, Greece), African, and Others (the respondent was asked to specify the country in question). The clusters were evaluated on a scale from 1 to 12 (adapted to the context of Danish, Swedish, and New Zealand firms), where a value of 1 was assigned to the focal firm’s home cultural cluster and a value of 12 was assigned to the cluster farthest away.1 The advantage of this measure is that it does not assume that the four factors identified by Hofstede accurately portray national culture, nor does it assume linearity, additivity or normal distribution of the factors’ scores. Denmark, New Zealand, and Sweden were each excluded from the scale, depending on the origin of the respondent.

Factors Affecting SME Export Channel Choice in Foreign Markets

13

International experience: International experience was measured based on duration (the number of years a firm has been conducting business outside the home country) and variation (the number of countries to which a firm sells) values. Customer knowledge: We measured customer knowledge by letting the firm estimate to what extent a lack of customer knowledge is an obstacle when executing the business assignment. The respondents were asked to indicate on a 7-point scale (1 ¼ serious obstacle; 7 ¼ no obstacle) to what extent a lack of the following types of knowledge was an obstacle: (a) lack of knowledge about the customer’s product, (b) lack of knowledge about the customer’s way of doing business, (c) lack of knowledge about the customer’s production process, and (d) lack of knowledge about the customer’s cooperativeness. Competitor knowledge: We measured competitor knowledge by letting the firm estimate to what extent a lack of knowledge about its competitors is an obstacle when executing the business assignment. The respondents were asked to indicate on a 7-point scale (1 ¼ serious obstacle; 7 ¼ no obstacle) to what extent a lack of the following types of knowledge was an obstacle: (a) lack of knowledge about your competitors’ products, (b) lack of knowledge about your competitors’ way of doing business, (c) lack of knowledge about your competitors’ production, and (d) lack of knowledge about your competitors’ cooperativeness. Three control variables were included in this study: firm size, firm age, and power distance in the country of origin. Firm size was measured as the number of employees. The larger the investing firm, the greater its ability to handle the risks and costs of activities in a foreign market by itself (Buckley & Casson, 1976; Kogut & Singh, 1988). Thus, we predicted that bigger firms tend to use more integrated channels. Because older firms have a larger source of experiential knowledge from which to choose when internationalizing, they may also be more likely to use integrated channels. The cultural characteristics of the home market have also been argued to influence channel choice (Kogut & Singh, 1988). Firms originating in countries with a high-power distance are characterized by considerable dependence of subordinates on managers (Hofstede, 1991). To cope with subordinates’ dependence on them, managers will be more inclined to use management tools that allow them considerable control over subordinates. We would, therefore, expect firms from countries with a higher power distance to choose integrated channels whenever possible. Power distance was measured according to Hofstede’s index of power distance, where Sweden is indexed at 31 (out of a maximum of 100), New Zealand is indexed at 22 (22/100), and Denmark is indexed at 18 (18/100) (Hofstede, 1991, p. 28).

14

KENT ERIKSSON ET AL.

ANALYSIS Data analysis was carried out in two stages. The first stage entailed performing a factor and reliability analysis to reduce the data and check the constructs. We used multiple measures to determine the level of customer and competitor knowledge, and we therefore used factor analysis to develop and test the constructs. We then used the factors in the logistic regression. The second stage of data analysis involved preparing a logistic regression analysis to test the hypotheses. Because we used a dichotomous-dependent variable, logistic regression seemed to be the most appropriate method for data analysis. A correlation test was used to check for multicollinearity. As shown in Table 3, statistically significant relationships exist but none of them is large enough to indicate signs of multicollinearity (Hair, Anderson, Tatham, & Black, 2000). Factor analysis results for customer knowledge and competitor knowledge with varimax rotation and reliability measures of the scales are shown in Table 4. The analysis produced a two-factor solution with high commonalities and acceptable reliability for the scales (Nunnally, 1978). The results of the logistic regression analysis are summarized in Table 5. Overall, the logistic regression was significant at a po0.000 (w2 ¼ 100.59 at 17 df) and showed a high explanatory value with a correct classification rate of 75.4%, which is substantially higher than the chance rate. The chance rate was calculated as C ¼ a2 þ ð1 aÞ2 ; where C is the chance rate and a the proportion classified as belonging to group 1 (Morrison, 1969). Therefore, the chance rate in this case is as follows: C ¼ 0:612 þ ð1 0:61Þ2 ; C ¼ 52%: Table 3. 1 1. Country knowledge 2. Customer knowledge 3. Competitor knowledge 4. Expected market growth 5. Cultural distance 6. Number of countries 7. Years abroad 8. Age 9. Employees 10. Power distance

1 0.04 0.01 0.002 0.31 0.01 0.02 0.02 0.11 0.01

Correlation Matrix of Variables. 2

1 0.55 0.03 0.06 0.14 0.14 0.06 0.14 0.04

 Significant at the 0.05 level (2-tailed).  Significant at the 0.01 level (2-tailed).

3

1 0.02 0.00 0.07 0.12 0.03 0.07 0.15

4

1 0.05 0.13 0.03 0.05 0.06 0.07

5

6

1 0.23 0.13 0.06 0.06 0.06

1 0.41 0.13 0.35 0.15

7

8

9

10

1 0.66 1 0.27 0.24 1 0.27 0.26 0.22 1

Factors Affecting SME Export Channel Choice in Foreign Markets

15

Table 4. Varimax-Rotated Factor Matrix. Item

Factor 1

q81 q82 q83 q84 q817 q818 q819 q820

Factor 2

a

0.794 0.769 0.851 0.780

0.833

0.774 0.837 0.849 0.857

Table 5.

0.892

Logistic Regression Results (N ¼ 405). Parameter Estimates

Lack of knowledge about customer Lack of knowledge about competitors Expected market growth International experience Power distance Cultural distance Country knowledge Control variables Employees Firm age Constant

ns ns 0.355 ns 0.166 0.135 0.118

SE

0.092 0.022 0.039 0.055

ns ns 6.558

0.906

Note: ns, not significant; SE, standard error.  po0.05.  po0.01.

The logistic regression analysis provided support for some of our hypotheses.2 Country knowledge was connected to the use of integrated market channels; therefore, Hypothesis 1 was supported. Hypothesis 2 was also supported: Firms that expected a higher market growth opted for integrated channels. As for Hypothesis 3, the influence of cultural distance on channel choice was significant but opposite to what had been hypothesized. Our findings showed that these SMEs did tend to use integrated channels in markets at a greater cultural distance. Two of the three hypotheses, which were based on the original IP model proposed by Johanson and Vahlne (1977), were thus supported. Firms with a greater level of knowledge about a market were also found to choose integrated channels. In addition, firms

16

KENT ERIKSSON ET AL.

that see an opportunity in a market tend to use integrated channels. Our finding that firms use integrated channels in markets at a greater cultural distance contradicts both the IP model and later T-C based analyses of channel choice (Anderson & Coughlan, 1987; Gatignon & Anderson, 1988). Neither of the international experience variables influenced channel choice; as a consequence, Hypothesis 4 was rejected. A lack of knowledge about the customer was not found to be significant; therefore, Hypothesis 5 was not supported. A lack of competitor knowledge was also not significant; therefore, Hypothesis 6 was not supported. As for the control variables, the claim that firms from countries with a higher power distance would use integrated channels was strongly supported. Firms working in countries farther away would thus opt for integrated channels, and firms from countries with a higher power distance tend to use more integrated channels. Our findings did not support the control variables of size and age.

DISCUSSION AND IMPLICATIONS The purpose of this study was to determine which IP-related antecedents lead to the usage of a specific channel in a foreign market. Our results showed that for SMEs, more country experience was connected to the use of integrated market channels. We also found that expected market growth leads to the use of integrated channels. This finding is consistent with research based on the transaction-cost approach (Agarwal & Ramaswami, 1992). Integrated channels make it possible to reap greater profits from a growing market. They also make it possible to learn faster about what is going on in a market. We also found that these SMEs tend to use integrated channels in markets at a greater cultural distance. This result was contrary to our stated hypothesis. It can, however, be explained through opportunity-seeking behavior. We asked the respondents to choose an important assignment, and the difficulty associated with estimating and understanding information properly from culturally dissimilar markets might lead to the establishment of integrated channels as a means of attaining better control of the business. A significant correlation was found between one of the control variables and the usage of integrated market channels: Higher power distance did lead to the increased usage of integrated channels. This finding implies that firms from countries with more authoritarian command structures want to control their international activities. The variation is, however, rather low with only three countries of origin and all three of them on the low end of the scale. The other hypotheses did not find support at a 5% probability. We

Factors Affecting SME Export Channel Choice in Foreign Markets

17

can thus say nothing about the roles of customer knowledge, competitor knowledge, international experience, size, and age. Overall, our results indicate that IP-related factors can be used to explain the choice of a specific channel. We did not, however, find support for the developments of the IP model (Johanson & Mattsson, 1987; Johanson & Vahlne, 1990, 2003; Eriksson et al., 1997) as explanations for market channel choice. When we recall that Gamma (the example given in the Introduction) decided not to set up a subsidiary in Italy, it seems clear now that Gamma’s experience and its knowledge of business relationships with its customers and competitors were not instrumental in this decision. Apparently, experience accumulation and knowledge of specific business partners in Italy did not prompt Gamma to choose an integrated channel. Instead, the decision not to set up a subsidiary was based on Gamma’s conclusion that it could not achieve sufficient growth in this foreign market and, as a result, would not generate satisfactory economies of scale. We may infer from the findings of this study that the original IP model offers an explanation of choice of integrated channel. This study found that market growth, which is a factor that is central to Penrose’s (1959) theory of the growth of the firm, which is a foundation of the IP model, and country knowledge which is also an important concept within the IP model play important roles in the choice of channels. Cultural distance had the opposite effect on channel choice than the one suggested by the IP model. This unexpected finding may be due to the IP model’s inability to explain how strategic considerations might influence market channel choice. Even though cultural distance makes it more difficult to obtain information about a market, a firm that sees opportunities in that market might use an integrated channel. Future research can determine whether experience and knowledge of customers and competitors are of importance when a firm makes more incremental resource commitments, such as when it progresses from direct sales to agent or further to sales subsidiaries. It has already been found that the equity position in a subsidiary of a foreign investor increases with increasing foreign investor experience (Delios & Beamish, 1999). However, little is still known about the role of experience in less resource consuming modes of establishment. Further research is still needed to explain the choice of channels. Makino and Neupert (2000) find support for both transaction cost and national culture as predictors of mode of establishment. Delios and Beamish (1999), on the other hand, refute the explanatory power of transaction-cost theory and state that experience is the most important predictor of an increase in foreign investor equity in a subsidiary. Our study shows weak support for

18

KENT ERIKSSON ET AL.

the network-based arguments (knowledge of customers and competitors) in determining firms’ channel choice but strong support for market growth and national cultural characteristics such as power distance. These slightly conflicting results suggest that the mode of establishment may perhaps be best explained using an eclectic theory, which is for future research to determine. Our results indicate that internationalizing firms should be aware of the two different modes of learning about foreign markets. One mode of learning is associated with a large-step discrete investment, such as setting up a subsidiary, which entails learning aggregate market characteristics. The other mode of learning is associated with small-step incremental learning, such as moderate additional resource investment in a foreign market, which involves learning detailed information about foreign market network relationships. Market research should follow these guidelines when future expansion is considered.

NOTES 1. We also used a condensed scale where the countries farthest away (blocs 7–12) received the same value to reflect that relatively few business engagements were carried out in these blocs and that it is difficult for the firms to separate between distant blocs. This did not lead to any significant changes in the resulting model. 2. A significance level of 0.10 does not change the results.

REFERENCES Agarwal, S., & Ramaswami, S. N. (1992). Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Journal of International Business Studies, 23(1), 1–27. Andersen, O. (1993). On the internationalisation process of firms: A critical analysis. Journal of International Business Studies, 24, 209–232. Anderson, E., & Coughlan, A. T. (1987). International market entry and expansion via independent or integrated channels of distribution. Journal of Marketing, 51(1), 71–82. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(1), 42–58. Aulakh, P. S., & Kotabe, M. (1997). Antecedents and performance implications of channel integration in foreign markets. Journal of International Business Studies, 28(1), 145–175. Barkema, H. G., Bell, J. H. J., & Pennings, J. M. (1996). Foreign entry, cultural barriers and learning. Strategic Management Journal, 17(2), 151–166. Barkema, H. G., Shenkar, O., Vermeulen, F., & Bell, J. H. J. (1997). Working abroad, working with others: How firms learn to operate international joint ventures. Academy of Management Journal, 40, 426–442.

Factors Affecting SME Export Channel Choice in Foreign Markets

19

Barkema, H. G., & Vermeulen, F. (1998). International expansion through start-up or acquisition: A learning perspective. Academy of Management Journal, 41(1), 7–26. Beamish, P. W., & Killings, J. P. (Eds) (1997). Cooperative strategies, Vols. 1–3. San Fransisco: The New Lexington Press. Bello, D. C., & Gilliland, D. I. (1997). The effect of output controls, process controls, and flexibility on export market performance. Journal of Marketing, 61(1), 22–38. Bilkey, W. J., & Tesar, G. (1977). The export behavior of smaller Wisconsin manufacturing firms. Journal of International Business Studies, 9(Spring/Summer), 93–98. Bjo¨rkman, I. (1989). Foreign direct investments – An empirical analysis of decision making in seven Finnish firms. Ekonomi & Samha¨lle, Doctoral thesis no. 42, Helsinki: Swedish School of Economics. Blankenburg-Holm, D., Eriksson, K., & Johansson, J. (1996). Business networks and international business relationships. Journal of International Business Studies, 27(5), 1033–1053. Blomstermo, A., & Sharma, D. D. (2003). Learning in the internationalization process of firms. UK: Edward Elgar. Brouthers, K. D., & Brouthers, L. E. (2001). Explaining the national cultural distance paradox. Journal of International Business Studies, 32(1), 177–189. Buckley, P. J., & Casson, M. (1976). The future of the multinational enterprise. London: Macmillan. Calof, J. L., & Beamish, P. W. (1995). Adapting to foreign markets: Explaining internationalization. International Business Review, 4(2), 115–131. Carlson, S. (1966). International business research. In: Engwall, L. (Ed.), Uppsala contributions to business research (Vol. 18, pp. 11–25), Acta Universitatis Upsaliensis (1984). Uppsala: Department of Business Studies. Cavusgil, S. T. (1980). On the internationalization process of firms. European Research, 8, 273–281. Cavusgil, S. T. (1984). Organizational characteristics associated with export activity. Journal of Management Studies, 21, 3–22. Chen, H., & Chen, T.-J. (1998). Network linkages and location choice in foreign direct investment. Journal of International Business Studies, 29(3), 445–468. Chetty, S. K., & Wilson, H. I. M. (2003). Collaborating with competitors to acquire resources. International Business Review, 12, 61–81. Contractor, F. J., & Lorange, P. (Eds) (1988). Cooperative strategies in international business. Lexington, MA: Lexington Books. Coviello, N. E., & Munro, H. J. (1997). Network relationships and the internationalisation process of small software firms. International Business review, 6(4), 361–386. Cunningham, M. T., & Homse, E. (1986). Controlling the marketing-purchasing interface: Resource development and organizational implications. Industrial marketing & purchasing, 1(2), 3–25. Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice Hall. Czinkota, M. (1982). Export development strategies: US promotion policies. New York: Praeger Publishers. Davidson, W. H. (1980). The location of foreign direct investment activity: Country characteristics and experience effects. Journal of International Business Studies, 11(2), 9–22. Davidson, W. H. (1982). Global strategic management. New York: John Wiley. Delios, A., & Beamish, P. (1999). Ownership strategy of Japanese firms, transactional, institutional and experience influences. Strategic Management Journal, 20(10), 915–933.

20

KENT ERIKSSON ET AL.

Delios, A., & Beamish, P. (2001). Survival and profitability: The roles of experience and intangible assets in foreign subsidiary performance. Academy of Management Journal, 44(5), 1028–1038. Eriksson, K., Johanson, J., Majkga˚rd, A., & Sharma, D. D. (1997). Experiential knowledge and cost in the internationalization process. Journal of International Business Studies, 28(2), 337–360. Erramilli, K. M. (1991). The experience factor in foreign market entry behavior of service firms. Journal of International Business Studies, 22, 479–501. Ford, D. (Ed.) (1990). Understanding business markets: Interaction, relationships an networks. San Diego: Academic Press. Gatignon, H., & Anderson, E. (1988). The multinational corporation’s degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation. Journal of Law, Economics, & Organization, 4(2), 305–336. Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (2000). Multivariate data analysis. New York: Macmillan. Ha˚kansson, H. (Ed.) (1982). International marketing and purchasing of industrial goods: An interaction approach. Chichester: Wiley. Ha˚kansson, H., & Johansson, J. (Eds) (2001). Business network learning. Oxford: Elsevier Science Ltd. Ha˚kansson, H., & Snehota, I. (1995). Developing relationships in business networks. London: Routledge. Halle´n, L. (1986). A comparison of strategic marketing approaches. In: P. W. Turnbull & J.-P. Valla (Eds), Strategies for international industrial marketing. London: Croom Helm. Halle´n, L., Johanson, J., & Seyed-Mohamed, N. (1991). Interfirm adaptation in business relationships. Journal of Marketing, 55, 29–37. Hedlund, G., & Kverneland, A. (1985). Are strategies for foreign markets changing? The case of Swedish investment in Japan. International Studies of Management & Organization, 15(2), 41–59. Hennart, J.-F. (1991). The transaction costs of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science, 37(4), 483–497. Hennart, J.-F., & Larimo, J. (1998). The impact of culture on the strategy of multinational enterprises. Does national origin affect ownership decisions? Journal of International Business Studies, 29(3), 515–538. Hitt, M. A., Dacin, M. T., Tyler, B. B., & Park, D. (1997). Understanding the differences in Korean and U.S. executives’ strategic orientations. Strategic Management Journal, 18(2), 159–167. Hofstede, G. (1991). Cultures and organizations: Software of the mind. Berkshire, England: McGraw-Hill. Hohenthal, J. (2001). The creation of international business relationships: Experience and performance in the internationalization process of SMEs. Doctoral thesis no. 90, Uppsala: Department of Business Studies. Hult, T., & Ketchen, Jr. (2001). Does market orientation matter? A test of the relationship between positional advantage and performance. Strategic Management Journal, 22, 899–906. Johanson, J., & Mattsson, L.-G. (1987). Interorganizational relations in industrial systems: A network approach compared with the transaction-cost approach. International Studies of Management Organization, XVII(1), 34–48.

Factors Affecting SME Export Channel Choice in Foreign Markets

21

Johanson, J., & Mattsson, L.-G. (1988). Internationalisation in industrial systems – A network approach. In: D. Schendel, N. Hood & J.-E. Vahlne (Eds), Strategies in global competition (pp. 287–314). New York: Wiley. Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm – A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Vahlne, J.-E. (1990). The mechanism of internationalisation. International Marketing Review, 7(4), 11–24. Johanson, J., & Vahlne, J.-E. (2003). Business relationship learning and commitment in the internationalization process. Journal of International Entrepreneurship, 1, 83–101. Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalization process of the firm – Four Swedish cases. Journal of Management Studies, 12(3), 305–322. Klein, S., & Roth, V. (1990). Determinants of export channel structure: The effects of experience and psychic distance. International Marketing Review, 7(5/6), 27–38. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3), 411–432. Lindbergh, J. (2005) Overcoming cultural ignorance: Institutional knowledge development in the international firm. Doctoral thesis no. 114, Uppsala: Department of Business Studies. Lindstrand, A. (2003a). How to use network experience in ongoing international business. In: A. Blomstermo & D. D. Sharma (Eds), Learning in the internationalization process of firms (pp. 77–104). Cheltenham, UK: Edward Elgar. Lindstrand, A. (2003b). Internationalization through business networks. Doctoral thesis no. 104, Uppsala: Department of Business Studies. Loustarinen, R. (1980). Internationalization of the firm. Helsinki: Helsinki School of Economics. Madhok, A. (1996). Know-how-, experience- and competition-related considerations in foreign market entry: An exploratory investigation. International Business Review, 5(4), 339–366. Madhok, A. (1997). Cost, value and foreign market entry mode: The transaction and the firm. Strategic Management Journal, 18, 39–61. Makino, S., & Neupert, K. E. (2000). National culture, transaction costs, and the choice between joint venture and wholly owned subsidiary. Journal of International Business Studies, 31(4), 705–713. Morrison, D. G. (1969). On the interpretation of discriminant analysis. Journal of Marketing Research, VI, 156–163. Nunnally, J. C. (1978). Psychometric theory. New York: McGraw-Hill. Penrose, E. T. (1959). The theory of the growth of the firm. Oxford: Basil Blackwell. Reid, S. (1981). The decision-maker and export entry and expansion. Journal of International Business Studies, 12, 101–112. Reid, S. (1983). Firm internationalization, transaction costs and strategic choice. International Marketing Review, 1(2), 44–56. Ronen, S., & Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review and synthesis. Academy of Management Review, 10, 435–454. Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Teece, D. J. (1992). Competition, cooperation, and innovation – Organizational arrangements for regimes of rapid technological progress. Journal of Economic Behavior and Organization, 18, 1–25.

22

KENT ERIKSSON ET AL.

Toyne, B. (1989). International exchange: A foundation for theory building in international business. Journal of International Business Studies, 20(Spring), 1–17. Turnbull, P. W. (1987). A challenge to the stages theory of the internationalization process. In: S. D. Reid & P. J. Rossin (Eds), Managing export entry and expansion (pp. 21–40). New York: Praeger. Turnbull, P. W., & Valla, J. -P. (Eds) (1986). Strategies for international industrial marketing. London: Croom Helm. Welch, L., & Loustarinen, R. (1988). Internationalisation: Evolution of a concept. Journal of General Management, 14, 34–55. Zahra, S. A., Ireland, R. D., & Hitt, M. A. (2000). International expansion by new venture firms: International diversity, mode of market entry, technological learning and performance. Academy of Management Journal, 43(5), 925–950.

BEYOND TRANSACTION COST DETERMINANTS: AN INTEGRATED FRAMEWORK FOR EXPORT INTERMEDIARY SELECTION IN EMERGING ECONOMIES Xufei Ma INTRODUCTION The realities of economic life have forced most export-capable firms to ‘‘go global’’ because they will either ‘‘export or die’’ (Czinkota, Ronkainen, Moffett, & Moynihan, 2001). Exporting is the very first step of internationalization for many firms (Johanson & Vahlne, 1977; Cavusgil & Nevin, 1981) and most small businesses (Osborne, 1996). It continues to be an important mode of internationalization for firms (Charles & Beamish, 2003) and management research on export development has become ‘‘one of the most pioneering, established and mature streams of the export literature’’ (Leonidou & Katsikeas, 1996). It is a challenging task and exporting into emerging economies, which are low-income, rapid-growth countries using economic liberalization as their primary engine of growth (Hoskisson, Eden, Lau, & Wright, 2000), is perhaps more laborious and bothersome than exporting into developed economies. Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 23–48 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16002-5

23

24

XUFEI MA

Emerging economies not only provide tremendous business opportunities that export-capable firms can preempt but create challenges derived from the fragmented markets, unfamiliar organizational forms, inconsistent regulations, and ‘‘institutional voids’’ (Boisot & Child, 1996; Peng & Heath, 1996; Khanna & Palepu, 1997). As a result, many firms resort to overseas-based local import intermediaries to export their products in emerging markets more often than in other markets. While there is a wealth of literature on export marketing strategy for firms that export their own products (Aaby & Slater, 1989; Cavusgil & Zou, 1994; Leonidou & Katsikeas, 1996) or on the strategic choice between export internalization and intermediation (Anderson & Coughlan, 1987; Root, 1994; Anderson, 1997; Solberg & Nes, 2002), little is known about the export intermediary selection. Moreover, although Peng and colleagues (Peng & Ilinitch, 1998; Peng, Hill, & Wang, 2000; Peng & York, 2001) have constructed a research model, which contributes to a better understanding of the involvement of export intermediaries in foreign trade, we still lack indepth research on the overseas-based local import intermediary selection which may be more important to manufacturing firms. When emerging economies are concerned, the export intermediary selection is surprisingly understudied, and this issue becomes more urgent for researchers and practitioners in international marketing area. In response, the purpose of this chapter is to develop a framework to study the export intermediary selection in emerging economies. Overall, this research departs from existing work in three significant ways. First, the study analyzes the selection of export intermediaries with a focus on overseas-based intermediaries when manufacturing firms try their hands in exporting into foreign countries. Prior work only focuses on the channel design and the relationship between exporter and intermediaries (Rosson & Ford, 1982; Bello & Lohtia, 1995; Karunaratna & Johnson, 1997), or on home-based export intermediaries but overlooks those located in target markets (Peng & Ilinitch, 1998; Peng et al., 2000; Peng & York, 2001). Thus, this study can be taken as an extension to their research models and may contribute to the body of export literature by depicting the whole picture of the exporting channel selection. Second, this research models the export activities from an integrated perspective by investigating the intermediary selection. Prior work focuses on the economic relationship of exporter-intermediary and thus the intermediary is a passive ‘‘task-taker’’ or an agent to help reduce exporter’s export-related transaction costs and agency costs (Peng & York, 2001). From an integrated point of view, however, export intermediary is an active

Beyond Transaction Cost Determinants

25

partner in exporter’s networks by using its unique and complementary resources to offer value-adding services to both exporter and customers. Specifically, institutional and network perspectives, which are more behaviorally oriented approaches (Barringer & Harrison, 2000), will be integrated in this research to supplement prior research which is more ‘‘costbased’’ (Leonidou & Kaleka, 1998) or more on an economic rationale (Barringer & Harrison, 2000). Third, this study chooses emerging economies as the research field. According to Arnold and Quelch (1998), an emerging economy can be defined as a country that satisfies two criteria: a rapid pace of economic development, and government policies favoring economic liberalization and the adoption of a free-market system. Of the 64 emerging economies identified by Hoskisson et al. (2000), 51 are rapidly growing developing countries across Asia, Latin America, Africa, and the Middle East, which are also listed by the International Finance Corporation, and 13 are transition economies in the former Soviet Union, which used to be centrally planned countries and are classified by the European Bank for Reconstruction and Development. Since late 1980s and early 1990s, emerging economies are assuming an increasingly prominent position in the world economy and have become the fastest growing export markets (Luo, 1998; Dunning, 2000). These economies generate an institutional system that is only partially reformed, and therefore inconsistent and unstable (Meyer, 2001). On the other hand, the system provides an ideal and unique setting for identifying the ‘‘criteria’’ of intermediary selection in export trading. In contrast, most of prior literature ignores emerging economies and focuses mainly on developed countries such as UK (Balabanis, 2000), US (Peng & York, 2001), and France (Trabold, 2002). Consequently, my research highlights the importance of the institutional characteristics of emerging economies and the unique capabilities of overseas-based import intermediaries located in these economies. This chapter is organized in the following manner. In the next section, I start with a review and criticism of transaction cost approach (TCA) applied in management, export entry mode, and intermediary selection. Beyond that, I analyze the strengths and weaknesses of other theoretical approaches such as resource-based view (RBV), institutional theory and network perspective. I then move on to the recent development on the synthesis of different theories and further offer suggestions for blending the theoretical paradigms together. Specifically, by integrating these perspectives, I construct an integrated framework, derive a research model, and develop propositions for export selection in emerging economies. Discussions and conclusion follow.

26

XUFEI MA

TRANSACTION COST APPROACH Founded on economic premises, the TCA to the study of economic organization regards the transaction as the basic unit of analysis and suggests that the governance structure a firm chooses is driven by a desire to minimize the sum of transaction costs (Williamson, 1975, 1985, 1996). Theoretically, that research has focused on a particular strand of the Coasean inquiry (Coase, 1937), examining the conditions under which firms choose to abandon markets in favor of integration, and consequently the tenet to which all transaction-cost economists subscribe is that the choice among alternative organizational arrangements turns on a comparison of the costs of transacting under each. Transaction cost analysis argues that if adaptation, performance evaluation, and safeguarding costs are absent or low, economic actors will favor market governance. The logic behind this argument is based on two behavioral assumptions: bounded rationality and opportunism (Williamson, 1985). Williamson (1985, 1996) points out that the critical dimensions for describing transactions are (1) uncertainty, (2) asset specificity, and (3) the frequency with which transactions occur. These three variables will, according to the theory, determine whether transaction costs will be lowest in a market or in a hierarchy. Due to the intuitive appeal of transaction cost theory and its analytical rigor in predicting governance choices, Williamson’s work on transaction cost analysis has inspired the development of a theoretically rich literature on vertical integration (Monteverde & Teece, 1982), distribution strategy (Anderson & Schmittlein, 1984; John & Weitz, 1988), and international expansion (Buckley & Casson, 1976). In particular, much of the early literature on foreign market entry concerned the choice between exporting and Foreign Direct Investment (FDI) (Root, 1994). TCA, which ‘‘is the currently accepted paradigm that guides the subject of forward integration in marketing channels’’ (Rangan, Corey, & Cespedes, 1993), has also diffused widely among international marketing researchers. Depending on the degree of control exercised over the foreign assets necessary for the distribution of their products (Campa & Guille´n, 1999), the types of organizational structure involved in exporting products into the foreign market can be viewed as a channel integration continuum, with broadest classified into indirect exporting and direct exporting modes or into integrated versus non-integrated modes at one and the other extreme. In the exporting practice, manufacturing firms have three major options: (1) home-country export agents; (2) overseas-based import intermediaries who

Beyond Transaction Cost Determinants

27

do the distribution and sale of the final product abroad; and (3) a wholly owned sales subsidiary abroad to process the complete internalization of the marketing and distribution (Peng & Ilinitch, 1998). As pointed out by Williamson (1985), transaction costs are incurred from activities necessary for an exchange and for any exporters. Thus, no matter whether they utilize direct or indirect export channels, or where these channels are located, transaction costs exist ineluctably and those costs can be decomposed into three key constituent components involving search, negotiation, and monitoring/enforcement costs. The first two sets are ex ante costs, and the last set involves ex post costs. Accordingly, TCA suggests that an exporting firm should choose the more efficient governance mechanism to mediate transactions. In the literature, most of the empirical studies have found supporting results for the TCA framework on channel integration choice by examining the use of integrated versus independent distribution channels in foreign market entry ventures by exporting firms (Anderson & Coughlan, 1987; John & Weitz, 1988; Ramaseshan & Patton, 1994; Klein, Frazier, & Roth, 1990; Osborne, 1996; Aulakh & Kotabe, 1997). In a series of studies, Peng and colleagues have proposed a research agenda, mainly drawing on TCA, to explore the reasons behind the export intermediary choices (Peng & Ilinitch, 1998; Peng et al., 2000; Peng & York, 2001). Their framework indicates that to ensure that a particular intermediary can be chosen by exporting firms, this export intermediary must lower its clients’ exportrelated transaction costs (i.e., the sum of search and negotiation costs, and the costs of monitoring and enforcing export contracts) relative to those of the alternative choices. In spite of the trend that TCA has become an increasingly important anchor for the analysis of a wide range of strategic and organizational issues of considerable importance to firms, many authors have been critical of TCA and its ability to explain the formation of interorganizational relationships and strategies (Zajac & Olson, 1993; Ring & Van de Ven, 1994). Moreover, because ‘‘there is no systematic evidence that for any given kind of transaction the inherent superiority of one governance mode has effectively weeded out the other,’’ and because the assumptions and logic on which it is grounded are wrong, TCA is ‘‘bad for practice’’ and even ‘‘dangerous for corporate managers’’ (Ghoshal & Moran, 1996). The limitations of TCA also include its over-determination (Kogut & Zander, 1995), exaggerated threat of opportunism (Hill, 1990), ad hoc theorizing (Simon, 1991), and an under-socialized view of human motivation and an oversocialized view of institutional control (Granovetter, 1985).

28

XUFEI MA

When used to analyze interorganizational strategies such as export intermediary selection, the TCA has at least two major limitations (Zajac & Olson, 1993): (1) a single-party, cost minimization emphasis that neglects the interdependence between exchange partners in the pursuit of joint value, and (2) an over-emphasis on the structural features of interorganizational exchange that neglects important process issues. By addressing the issue from the exporter’s standpoint and allowing little room for strategic behavior by intermediaries, most transaction cost-based research investigates how manufacturers make channel choice decisions (Aulakh & Kotabe, 1997; Campa & Guille´n, 1999) and typically fails to consider that export intermediaries are not passive entities merely responding to exporters’ unilateral actions (Peng & York, 2001). Instead, intermediaries can also employ entrepreneurial strategies and organizational capabilities that can influence exporters’ selection and the relationship. A RBV, by regarding export intermediaries as the focal firms, is useful to explore how such firms utilize their endowments of resources to lower transaction costs for the clients and thus increase the likelihood of being selected by the exporters. Further, TCA – with its strong emphasis on the efficiency and cost side of transactions and the purely incentive-based logic premised on the assumption of opportunism – does not present a fully adequate picture of export intermediary selection in emerging economies. For this purpose it must also be supplemented by an institutional theory and network perspective. In the next section, I consider the theories that are beyond and complementary to the transaction cost determinants to figure out the export intermediary selection in emerging economies.

BEYOND TRANSACTION COST DETERMINANTS Resource-Based View In contrast to the transaction cost logic, which focuses on cost minimization, the resource-based rationale emphasizes value maximization of a firm through pooling and utilizing valuable, rare, imperfectly imitable, and nonsubstitutable resources to achieve sustainable competitive advantages (Dierickx & Cool, 1989; Barney, 1991). Building on Penrose’s (1959) seminal work, RBV of the firm shifts analysis from products back to the internal resources necessary to produce them (Wernerfelt, 1984) and articulates how competence is generated by the unique bundle of resources at the core of the firm (Prahalad & Hamel, 1990). Researchers have identified and examined

Beyond Transaction Cost Determinants

29

the examples of resources such as tacit knowledge-based routines (Nelson & Winter, 1982) and brand name capital (Combs & Ketchen, 1999). However, in his review of the RBV, Peng (2001) finds that although there is growing application of the theory, direct applications of the RBV in international business research are still not rich due to the conceptual and methodological issues. Both marketing theorists (Hunt & Morgan, 1995) and RBV proponents (Barney, 1991) directly address the most fundamental challenge at the heart of organizational survival: what gives rise to competitive advantage and how can it be sustained? Unfortunately, according to Srivastava, Fahey, and Christensen (2001), with only a few notable exceptions (Bharadwaj, Varadarajan, & Fahy, 1993; Capron & Hulland, 1999; Hunt & Morgan, 1995; Wernerfelt, 1984), marketing scholars have devoted remarkably little attention to applying RBV as a frame of reference in advancing marketing theory or in analyzing core challenges in marketing practice. Not surprisingly, as the hybrid of international business and marketing, international marketing in general and export intermediary selection in particular, have received little attention through the theoretical lens of RBV. Albeit its unpopularity among international marketing scholars, such a viewpoint is valuable in investigating the export intermediary selection because the central questions addressed by the RBV concern why firms differ. In the application to export intermediaries, the RBV of the firm suggests that the selection depends on whether they can acquire and deploy a bundle of resources in a way that cannot be easily imitated. In other words, in order to be selected by the exporting firms, export intermediaries should be able to assure that their resources will indeed be deployed to advance the exporting firms’ interests. As trade specialists, export intermediaries’ capability endowments should include market sensing, customer linking, and channel bonding, which both exporters and end users require but do not have (Day, 1994). Such resources are often intangible, embedded, and knowledge-based (Barney, 1991). In the case of overseas-based import intermediaries, these local firms with extensive knowledge about local markets and import processes stand a better chance of being selected. As marketing specialists embedded in the local market, the best export intermediaries will already know the products in which they specialize, and will have a ready list of customers in those markets (Peng & Ilinitch, 1998). Such skills as local market knowledge and negotiation ability to handle with local customers may play an important role in minimizing the search and negotiation costs associated with export transactions. These capabilities enable the intermediary to perform distribution functions better than exporters (Weitz & Jap, 1995). Otherwise,

30

XUFEI MA

manufacturers may attempt to develop export capabilities in-house or utilize the alternative export channels and intermediaries (Peng & York, 2001). Notwithstanding a very substantial number of high-quality studies adopting RBV and being published in top-tier academic journals, the field can still be considered as lacking maturity (Rugman & Verbeke, 2002). It has been criticized that ‘‘at some level, everything in the firm can become a resource and hence resources lose explanatory power’’ (Conner, 1991), that the RBV is ‘‘circular: successful firms are successful because they have unique resources’’ (Porter, 1994), and that the element of RBV is ‘‘not currently a theoretical structure’’ in terms of conceptual foundations (Priem & Butler, 2001). The main contribution of the RBV of export intermediary selection is perhaps its ability to treat the intermediary as the focal firm and evaluate its internal resources. However, it does not feature a distinct approach to analyzing the exporting environment (Foss, 1997) and has not looked beyond the properties of resources to explain enduring firm heterogeneity for export intermediaries (Oliver, 1997). In this vein, the RBV and TCA share a commonplace criticism in the debate that the environment has not been treated in detail or even neglected. For instance, TCA is restricted to the transaction cost-minimizing rationales, but the decision on export intermediary selection may be made or constrained for other reasons under different institutional contexts. Similarly, little research using RBV has examined strategy differences in the social context within which resource selection decisions are embedded (e.g., firm traditions, network ties, and regulatory pressures). Further, although some capabilities are standard across all economies, others are especially prominent in emerging economies (Hoskisson et al., 2000). Therefore, it is indispensable for foreign exporting firms to calculate the institutional contexts of the export-related costs and capabilities.

Institutional Theory Since no firm can be immune from institutional frameworks in which it is embedded, there is hardly any dispute that institutions matter (Peng, 2003). In addition to transaction- and resource-based perspectives, an exporting firm also needs to take into account wider influences from host country institutional sources, such as the state and society, when crafting and implementing its export marketing strategies and local import intermediary selections in emerging economies. In fact, as pointed out by Hoskisson et al. (2000), institutional theory is preeminent in helping to explain impacts on

Beyond Transaction Cost Determinants

31

enterprise strategies in emerging economies because government and societal influences are stronger in these countries than in developed economies. According to institutional theory, institutions are ‘‘the rules of the game’’ which include formal rules and informal constraints (North, 1990), ‘‘cognitive, normative, and regulative structures and activities that provide stability and meaning to social behavior’’ (Scott, 1995), or ‘‘the set of fundamental political, social, and legal ground rules that establishes the basis for production, exchange, and distribution’’ (Davis & North, 1971). Perspectives derived to examine these institutional forces have both an economic orientation which focuses more on efficiency (North, 1990) and sociological orientation which concentrates more on legitimacy (DiMaggio & Powell, 1983; Scott, 1995). New institutional economics focuses on the interaction of institutions and firms resulting from market imperfections (Hariss, Hunter, & Lewis, 1995). When exporting into a foreign country, firms must adapt their strategies to fit the institutional context (Khanna & Palepu, 1997). The fact that an exporting firm has to adjust its strategies to local institutional context is, in itself, not a problem. Problematic institutional context comes from the emerging economies entered. Unlike advanced economies, emerging markets suffer from weak institutions in all or most of these areas – the product, capital, and labor markets; the regulatory system; and the mechanisms for enforcing contracts. In other words, emerging economies fall short in providing the institutions necessary to support basic business operations. As a result, exporting firms have to meet the challenges of these institutional voids (Khanna & Palepu, 1997) which will inflate the export-related transaction costs. From a sociological orientation, institutional theory has been widely applied to explaining social, economic, and political phenomena such as organization’s adaptation to the external environment (Selznick, 1957). International business researchers have examined how coercive isomorphism (DiMaggio & Powell, 1983) results from pressures exerted on organizations by the institutional framework of host country environment. In her review of international strategic management studies (Lu, 2003), Lu points out that host country governments are typical representatives of such institutional forces in shaping the structure and strategies of foreign enterprises in various host countries (e.g., Rosenzweig & Singh, 1991; Peng & Heath, 1996; Khanna & Palepu, 1997; Kostova, 1999). Although there was a dearth of attention to the institutional context in marketing literature, researchers have increasingly acknowledged the importance of institutional theory in marketing (e.g., Pandya & Dholakia, 1992; Handelman & Arnold, 1999) and especially in channels (Heide, 1994;

32

XUFEI MA

Grewal & Dharwadkar, 2002). Exporting firms and their export intermediaries behave and interact in emerging economies, whose institutional environment inevitably influence their strategic choices. Therefore, export intermediaries should be able to mitigate pressures by the local institutional forces, in particular, the different levels of governments and the customers at large in the emerging economies. As suggested by Peng and associates (Peng & Heath, 1996; Peng, 2003), a network-based strategy is expected to be more viable in emerging economies. With this in mind, foreign exporting firms, apart from above-mentioned three theoretical approaches, should also employ a network perspective when selecting their export intermediaries in emerging economies.

Network Perspective Rooted in the open system view in sociological theory, the network perspective suggests that economic action is embedded in social networks (Granovetter, 1985). A social network is defined as: ‘‘a set of nodes (e.g., persons, organizations) linked by a set of social relationships (e.g., friendship, transfer of funds, overlapping membership) of a specified type’’ (Laudmann, Galaskiewicz, & Marsden, 1978, p. 458). The economic effects of social networks stem from two factors: relational and structural embeddedness (Granovetter, 1985). Relational embeddedness refers to the fact that economic actions and outcomes are affected by actors’ dyadic relations, while structural embeddedness refers to the fact that economic actions and outcomes are affected by the structure of the overall network of relations. A number of researchers have explicitly incorporated embeddedness, broadly defined, into the strategic management questions relating to the behavior and performance of firms (Gulati, Nohria, & Zaheer, 2000). By belonging to a network, a firm can access, combine, and share expertise, resources, and knowledge and coproduce additional knowledge in ways that would be impossible by acting independently. Business networks since the 1980s have also been of interest to a group of marketing academics in Europe (Hakansson & Johanson, 1993). According to Emerson (1981), a business network is a set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors. In other words, a network perspective pays more attention to the actions of both the ‘‘focal company’’ itself and of others around it, such as its distributors, subsidiaries, competitors, cooperators and its customers.

Beyond Transaction Cost Determinants

33

Seeking a compatible framework, a network perspective of international marketing emphasizes the extent to which a single marketing company and its successes and failures are affected by the actions of those around it (Ford, 2004). For example, the value of social and business networks has been shown to be linked to a firm’s ability to penetrate foreign markets (Ford, 1990; Welch & Welch, 1996) and to ease its entry and expansion into international markets (Gulati, 1998; Eriksson, Johanson, Majkgard, & Sharma, 1997). As Jarillo (1988) suggests, these long-term, purposeful arrangements among distinct but related for-profit organizations can be developed into strategic networks that allow those firms in them to gain or sustain competitive advantage vis-a`-vis their competitors outside the networks. In exports such networks are manifested in the form of activity chains that start from manufacturers, through export intermediaries and end with end users (Hakansson & Johanson, 1993). In the case of overseas-based import intermediaries, the focus of my study on export intermediary selection in emerging economies, they are local firms embedded in the institutional environments of the emerging economy. These specialized firms perform basic functions and provide local services for the foreign export firms, which might include obtaining market information, interpreting regulations, and enforcing contracts (Khanna & Palepu, 1997). Moreover, the top managers of these local firms may cultivate interpersonal informal ties with local government officials, who can help these firms in smoothing the aforementioned services and functions. Therefore, these social networks may also assert a significant impact on the foreign firms’ export intermediary selection in the emerging economies where formal institutions are weak (Xin & Pearce, 1996).

TOWARD AN INTEGRATED FRAMEWORK Synthesis It is known that institutional theory has a predominant power to explain strategic choices in emerging economies, but its limitation in the context of exporter-intermediary interorganizational relationship formation is that the theory is a narrow, behaviorally oriented paradigm (Barringer & Harrison, 2000). In addition, despite the fact that network perspective has a straightforward appeal, it may not be able to explain export intermediary’s role without borrowing concepts from TCA and RBV. Therefore, although each of these four theories may elucidate one aspect of the export intermediary

34

XUFEI MA

selection puzzle in emerging economies, using only one particular approach would result in a distorted or at least potentially incomplete picture of the phenomenon under investigation. For that reason, blending the theoretical paradigms together may provide a more useful means to capture the complete picture and hence may yield richer insights. Actually, the literature continues to see increasing convergence and integrative efforts among different theoretical approaches and these integrations have enabled us to better understand phenomena in various management areas. In the spirit of extending the RBV, Oliver (1997) provides a model of firm heterogeneity and sustainable advantage that incorporates the social context of resource selection. To this end, RBV is combined with insights from institutional theory (DiMaggio & Powell, 1983; Scott, 1995) and she argues that optimal resource selection is profoundly influenced, at the individual, firm, and interfirm level, by the institutional context of resource decisions. In order to strengthen the explanatory power of both TCA and institutional theory, Martinez and Dacin (1999) present an illustrative model of organization theorizing that combines relevant aspects of these two theories. Consequently, in an empirical study on Japanese firms’ foreign entry mode, Lu (2002) compares the predictions of these two theories and finds that the institutional model adds significant explanatory power over and above that of the TCA. More recently, Jacobides and Winter (2004) propose that transaction costs and capabilities are fundamentally intertwined in the determination of vertical scope, and identify the key mechanisms of their coevolution. Specifically, they argue that capability differences are a necessary condition for vertical specialization, and that transaction cost reductions only lead to specialization when capabilities along the value chain are heterogeneous. The combination of RBV and TCA would add rigor and predictive power to transaction cost theory, would provide more robust insights, and would allow researchers to resolve many of the criticisms of the transaction costbased explanation (Zhao, Luo, & Suh, 2004). Particularly, this combination is useful in explicating the export marketing channel selection in emerging economies. From a network perspective, when other activities (i.e., export-related activities) are farmed out to members of the network (i.e., export intermediaries), the exporter can specialize in those activities of the value chain that are essential to its competitive advantage, reaping all the benefits of specialization and focus (Jarillo, 1988). A very important benefit of a networking arrangement over an integrated solution is that efficiency is fostered through this mode of organization (Jarillo, 1988).

Beyond Transaction Cost Determinants

35

Based on the synthesis of these four theoretical paradigms, I construct an integrated framework suggesting that export intermediaries are an indispensable link between exporters and local customers through their own long-standing connections and networks in emerging markets. As long as the intermediary possesses the ability to offer more efficient and effective services than both exporters and customers themselves or any other intermediaries, its services will be sought and it will be selected by its clients (Balabanis, 2000). Starting from the integration of these theories, I derive a research model and develop propositions about the export intermediary selection in emerging economies.

Export Entry Mode Choice in Emerging Economies Export entry modes, a non-equity type of foreign market entry in which firms serve a foreign market from products manufactured in their home market, may be distinguished in terms of the level of a firm’s forward integration into exporting activities. As mentioned earlier, there are three export entry modes available to the manufacturing firms: exporting directly to foreign customers, via home-based export intermediaries, or through overseas-based local import intermediaries. While this integrated framework is developed in terms of exporting in emerging economies, it is relevant to all forms of market entry and draws on research focused on other types of entry modes. No matter whether firms enter the foreign markets via equity or nonequity modes, as outsiders and new comers, they will have to confront a liability of foreignness (Hymer, 1976) and institutional pressures (Kostova, 1999) that increase their vulnerability to failure because they have to learn new rules as social actors and create organizational routines (Baum & Oliver, 1991). In the international business literature, some studies have extensively relied on transaction cost theory to explain the choice between joint venture (JV) and wholly owned subsidiary (WOS) entry modes (Anderson & Gatignon, 1986; Hennart, 1991; Delios & Beamish, 1999). Their research suggests that a JV is preferred to a WOS when the investing firm needs to obtain complementary assets, which if purchased on the market entail high transaction costs, or when the needed complementary assets would be costly to obtain through replication or acquisition. Based on institutional theory (North, 1990; DiMaggio & Powell, 1983; Scott, 1995), Kostova (1999) develops a new construct – institutional distance – referring to the extent of dissimilarity between host and home institutions, and proposes that the larger the institutional distance, the more difficult it is for the

36

XUFEI MA

Multinational Enterprises (MNE) to establish legitimacy in the host country. All the above research in international business provides important insights for the study of export entry modes and export intermediary selection in emerging economies. For exporters from Western countries, knowledge about developing countries is critical to export success, and the search costs for distant, unfamiliar emerging markets where publicly available market information is lacking and organizational forms are different, can be especially prohibitive (e.g., export from the United States to Russia) (Peng & Heath, 1996). By the same token, negotiations to secure export contracts with buyers from these emerging markets may also be very costly due to cultural distance and barriers (Peng & Ilinitch, 1998). Moreover, the large institutional distance between developed countries and emerging economies inflates the cost of doing business abroad (Hymer, 1976), while the uncertainty of their political environments exacerbates the location-based disadvantages (Beamish, 1985). Prior studies have shown that the need for a local partner becomes more critical when multinational firms enter less developed countries than in developed countries (Beamish, 1985; Yan & Gray, 1994), and that strategic alliances are the dominant strategy used in emerging markets by multinational firms (Beamish, 1985). Similarly, overseas-based local import intermediaries, due to their embeddedness in a particular market which has high cultural and institutional distance from exporting country, may possess unique resources and complementary capabilities that the exporting firms themselves or the homebased export intermediaries lack in local markets. As a result, manufacturers may tend to use local import intermediaries to enter markets with high uncertainty in order to save export-related transaction costs, reduce institutional distance, and increase their legitimacy. Therefore, Proposition 1a. Market uncertainty (as epitomized by for cultural distance or institutional distance and political uncertainty) is associated with exporters’ selection of local independent import intermediaries. More specifically, on some aspects of exporter–intermediary relations there are differences not only between integrated and independent channel members, but also among two of the independent ones: intermediaries taking title to the goods and those not taking title (Bello & Lohtia, 1995; Peng & York, 2001). As pointed out by Solberg and Nes (2002), TCA and internationalization theories differ somewhat on the issue of risk, the former postulating that uncertainty is best coped with by integration and the latter by gradually increasing commitments in international markets.

Beyond Transaction Cost Determinants

37

Since the structure itself of the triad, exporter – intermediary not taking title to the goods – customer, leads the exporter in direct contact with the customer level and engenders greater control, it can be regarded as a ‘‘quasiintegration mode’’ (Bello & Lohtia, 1995; Solberg & Nes, 2002). However, this direct contact requires more resources and capabilities in order to deal with local environments. If foreign exporters lack such a bundle of resources when entering emerging economies, they tend to choose local intermediaries who are willing and able to take titles to the goods. By doing so, certain risks can be transferred to local intermediaries, who in turn can conduct more complementary tasks in the exporters’ value chain. Therefore, Proposition 1b. When exporting to emerging markets exporters’ resource inadequacy is associated with their selection of local independent title taking intermediaries (distributors). Local Import Intermediary Selection in Emerging Economies Given that overseas-based local import intermediaries may be the dominant export entry mode, I contend that the nature of these intermediaries is that of a value-adding partner for foreign manufacturing firms to enter emerging economies. With this in mind, the selection of local import intermediaries is analogous to that of local partners for foreign entrants to form an international strategic alliance, which has been extensively researched in the international business literature (Geringer, 1991). Partner selection is important everywhere and local partner selection is even more critical for the success of foreign firms entering emerging economies (Beamish, 1994; Luo, 1997, 1998; Hitt, Dacin, Levitas, Arregle, & Borza, 2000). Following this line of reasoning, I investigate ‘‘local partner’s’’ institutional traits, organizational forms, and micro–macro links to figure out the selection of export intermediaries in emerging economies. Institutional Traits In an emerging market context, a local firm’s institutional traits have important relational and economic implications. The spectrum in terms of ownership types, the critical dimension of a firm’s institutional traits in emerging economies, spans the continuum from state-owned to collective and private businesses (Nee, 1992). There are two contradictory predictions for the selection of state-owned firms as local import intermediaries: according to the institutional economics literature, a firm’s state-owned status lowers its efficiency due to the well-known ‘‘soft budget constraint’’

38

XUFEI MA

(Kornai, 1986), while the sociological version of institutional theory suggest that such status may have potential benefits resulting from the ‘‘institutional support’’ of the government (Boisot & Child, 1996; Peng & Heath, 1996; Xin & Pearce, 1996). This is because state-owned firms are supposed to contribute to the satisfaction of social development goals such as the employment rates. Moreover, it is fairly common for state-owned firms to have privileged access to state-instituted distribution channels and these channels can play a dominant role in product distribution in the emerging market (Luo, 1998). More directly, Shenkar (1990) suggests that the institutional advantages of state-owned firms in emerging economies include connections to central ministries that govern the corresponding industry segments. Such ‘‘institutional linkages’’ to government agencies as well as the social and relational embeddedness are a means of gaining competence (Baum & Oliver, 1991). Further, in emerging economies characterized by weak market structure and strong government interference, state-owned firms have the advantage in gaining access to scarce resources, materials, capital, and information (Luo, 1997). Thus, although non-state-owned firms may have more attractive bidding conditions owing to their hard budget constraint, foreign firms may not necessarily choose them as local import intermediaries. Otherwise, foreign export firms would have to pay the high prices of low transaction costs since non-state-owned intermediaries may not possess the problemsolving capability embedded in state-owned firms under the complex environment of the emerging economies. Therefore, Proposition 2. Exporters to emerging economies will tend to select local import intermediaries that are state owned. Organizational Forms A striking feature of emerging economies is the prominent role played by business groups (Khanna & Rivkin, 2001), which are coalitions of firms from multiple industries interacting over long periods of time and distinguished by elaborate interfirm networks of lending, trade, ownership, and social relations (Keister, 2000). The ubiquity of this special organizational form in emerging economies suggests that they may affect the selection of local import intermediaries for foreign exporting firms. In particular, group affiliates can share reputation, financial resources, and trading networks, all of which are critical to the export marketing in emerging economies (Ma & Lu, 2005). Firstly, group members share the reputation of the business group. Reputation is the knowledge about a firm’s true characteristics and the emotions toward the firm held by stakeholders of the firm (Fombrum & Shanley,

Beyond Transaction Cost Determinants

39

1990). According to RBV, a good reputation is a valuable asset that allows a firm to achieve sustained competitive advantages (Dierickx & Cool, 1989; Barney, 1991). When foreign export firms choose local group-affiliated firms as their import intermediaries in emerging economies, signaling theory implies that local stakeholders rationally believe that the foreign exporters and their products had ‘‘passed’’ the group’s and governments’ rigorous qualification tests. Secondly, group-affiliated firms have access to financial resources, which are of particular interest to export marketing in an emerging economy. Foreign manufacturers may require that intermediaries take title to the goods to reduce monitoring and enforcement costs (Bergen, Dutta, & Walker, 1992) as well as to share risks, which is basic to the long-term success of the relationship (Jarillo, 1988). However, not all import intermediaries are in a financial position to, or willing to risk, taking title to the goods. This is because in many emerging economies such as India and China, financial institutions are either absent or not fully evolved (Khanna & Palepu, 1997). Under this situation, insider lending and internal loans within the same business group appear to substitute for a formal financial system. Consequently, local group-affiliated import intermediaries that are willing to engage in taking title of export goods send a signal to potential clients that their transaction costs will be lower than those associated with other intermediaries (Peng & Ilinitch, 1998). Lastly, foreign export firms also intend to seek local import intermediaries to access local markets in an emerging economy. The internal trading networks embedded in business groups may serve this objective since groupaffiliated companies conduct extensive internal selling and purchasing of intermediate and final goods (Chang & Hong, 2000). With extensive vertical transactions internalized within the business groups, downstream group members can bring well-established distribution channels which are costly for foreign entrants to acquire (Anand & Delios, 1997). More importantly, a special and conventional trading practice – credit granting – should be addressed in the setting of many emerging economies. Credit granting is credit-extension in commercial activities which can temporarily mitigate the pressure of buyers’ cash flow pressure (Luo, 1997). Within a business group, the collection of account available can be guaranteed by the interlocks of its members, because interlocks may reduce informational asymmetries by facilitating the flow of information among firms (Keister, 2000). With the practice of internal credit granting, an affiliate may reduce its inventory and smooth its cash flows, which are important to the exporting marketing in emerging economies.

40

XUFEI MA

As a result, by choosing group-affiliated local import intermediaries, exporting firms may leverage the distinctive competencies – group-based resources – to mitigate liability of foreignness, obtain external legitimacy and gain competitive advantages in emerging markets. Therefore, Proposition 3. Exporters to emerging economies will tend to select local import intermediaries that are affiliated to business groups. Micro–Macro Links In an environment where formal institutional constraints like laws and regulations are weak, informal institutional constraints, such as those embodied in the interpersonal relationships cultivated by top managers at a micro level (e.g., blat in Russia, guanxi in China, or wasta in Arab countries), may play a more important role in facilitating economic exchanges and hence assert a more significant impact on firm’s competitive advantages at a macro level (Peng & Heath, 1996). As pointed out by Burt (1997), social capital is more important in an imperfect competition with weak institutional support and distorted information In particular, despite continued reforms in emerging economies, officials at various levels of trade-related government agencies such as those in charge of foreign trade administrations, customs controls, and quality inspections, still have considerable power. Personal connections with those officials are often more important than legal standards (Peng & Luo, 2000). Because local firms are well-entrenched and embedded in state-related corporate networks and governmental relations (Boisot & Child, 1996; Peng & Heath, 1996), managers of local import intermediaries typically have ties to government officials in power, a critical resource in emerging markets that not all firms may possess (Peng & Luo, 2000; Xin & Pearce, 1996). Similarly, local trade-related institutions, such as foreign exchange banks, insurance companies, and port authorities, are quasi-government agencies characterized by being bureaucratic, inefficient, and ineffective in emerging economies. Local import intermediaries may overcome these difficulties through their top managers’ personal relationships with those institutions. From a networks perspective, firms are embedded in social networks with other actors (Granovetter, 1985; Gulati et al., 2000). Through those social networks, they can get access to resources and capabilities outside the organizations, such as capital, services, and information. In other words, what is at work in emerging economies seems to be a process of boundary blurring in which interpersonal ties cultivated among managers and government officials as well as institutions executives are translated into interfirm ties

Beyond Transaction Cost Determinants

41

intended to confer sustained competitive advantages, leading to ‘‘network capitalism,’’ as suggested by Boisot and Child (1996). Therefore, Proposition 4. Exporters to emerging economies will tend to select local import intermediaries whose top managers have strong personal relationship with local trade-related government officials and institution executives.

DISCUSSIONS AND CONCLUSION In the international marketing literature, the TCA is arguably the leading theory to explain foreign market entry mode and export channel choice. However, when studying manufacturers’ export intermediary selection in emerging economies, the explanatory power of the TCA is discounted and consequently, researchers’ preference for this cost-based perspective has to be adjusted with other theories which are more behaviorally oriented and context concerned. In this research, I set out to develop an integrated framework for export intermediary selection in emerging economies. Overall, this study makes three contributions to the literature. First, it theoretically synthesizes four complementary perspectives. Since one of this research’s purposes is to systematically review the major theories that have been applied to the export entry mode in general and the export intermediary selection in particular, I start with a review and criticism of TCA as well as the strengths and weaknesses of other approaches. Based on the consciousness of the pros and cons of different perspectives, I move on to the recent development on the integration of TCA and institutional theory, combination of RBV and institutional theory, and coevolution of TCA and RBV. Clearly, what I have done in this research is to use TCA as the bedrock, beyond which I allow for resource-based propositions to emerge while taking the institutional context and networks into consideration. As a result, this integrated framework seems to have the explanatory power to capture the complete picture of the export intermediary selection in emerging economies. This integration may trigger further research to use some other theoretical lens such as learning and knowledge management to enrich our understanding of export intermediaries. Second, I see the present study as offering important implications for the extant literature on export entry strategy. By ‘‘importing’’ the insights from the research in international strategic management, I propose that a firm’s export entry strategy is similar to the entry mode choice: while selling

42

XUFEI MA

directly to foreign customers is like whole-owned subsidiary, exporting through home-based or overseas-based intermediaries is near to strategic alliances. Consequently, export intermediary selection is analogous to the partner selection of strategic alliances. In this way, I extend previous research on export channel choice (Anderson & Coughlan, 1987; Klein et al., 1990; Aulakh & Kotabe, 1997), which mostly concentrates on the ‘‘make’’ or ‘‘buy’’ decisions, and Peng and colleagues’ framework (Peng & Ilinitch, 1998; Peng et al., 2000; Peng & York, 2001), which focuses only on homebased export intermediary. Therefore, this study is a highly worthwhile endeavor, since it not only integrates different theoretical approaches but also enhances the status of export research within the larger literature in management, marketing, and international business (Peng & Ilinitch, 1998). Export development researchers may scrutinize the unique partnering strategy of exporting firms so that they can ‘‘exporting’’ their findings and ideas to other areas. Last but not least important of all, this study advances the awareness and understanding of export intermediaries to a new setting – emerging economies. Extending the export intermediary research to the context of an emerging market is complex as well as important. Its complexity arises from the unfamiliar and dynamic institutional environment of emerging economies. As argued earlier, the large institutional distance will inflate exportrelated transaction costs and liability of foreignness. Under this situation, TCA cannot provide satisfactory explanations and it is natural to borrow institutional theory. Here, the research locus has been switched from exporters to intermediaries and networks within a certain social context. By doing so, I focus on local export intermediaries’ unique profile of capabilities behind their institutional traits, organizational forms, and micro– macro links. Its importance is due to the huge market opportunities of these emerging economies that foreign export firms cannot neglect (Peng, 2003). This type of extension represents a useful stepping stone for future research and I suggest it will similarly be necessary to look for other factors derived from application of other theoretical lenses into emerging economies. Apart from the implications for academic research, this framework also has a number of specific implications for practitioners. A critical insight for Western exporters is that if the added value, reduced risk and decreased transaction costs should be taken into consideration as a whole, they may adjust their export entry modes and export intermediary selection in emerging economies based on the tenet of this conceptual framework. In particular, local state-owned firms, although notorious for their inefficiency, may transfer the institutional support gained from local governments to the

Beyond Transaction Cost Determinants

43

foreign firms and their export products; group-affiliated companies, which have group-based resources, may serve as qualified local import intermediaries; and local managers who have strong connections with local stakeholders often possess the capabilities to help foreign firms in solving export-related problems. At the same time, this framework may also provide a benchmark for export intermediaries to develop their own unique resources to win the contracts from exporters. In conclusion, I have proposed a conceptual framework by combining four different perspectives to investigate the export intermediary selection in emerging economies. Based on this integrated framework, the nature of export intermediaries in an emerging economy is that of a value-adding partner in the export networks, which has its own profile of capabilities to help minimize export-related transaction costs, share risks, and reduce institutional pressure and environmental uncertainty for exporters. The research model highlights unique resources associated with the intermediaries’ institutional traits, organizational forms, and micro–macro links in emerging economies. Development and refinement of this conceptual model of export intermediary selection is expected to provide the base for further empirical research.

ACKNOWLEDGMENTS The author thanks Professor Carl Arthur Solberg, the Editor of this Special Issue of Advances in International Marketing, and Professor Andrew Delios, the author’s supervisor, for helpful comments on earlier versions of this paper.

REFERENCES Aaby, N., & Slater, S. (1989). Management influences on export performance: A review of the empirical literature, 1978–1988. International Marketing Review, 6(2), 7–26. Anand, J., & Delios, A. (1997). Location specificity and the transferability of downstream assets to foreign subsidiaries. Journal of International Business Studies, 28(3), 579–603. Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17, 1–26. Anderson, E., & Schmittlein, D. (1984). Integration of the sales force: An empirical examination. Rand Journal of Economics, 15, 385–395. Anderson, E., & Coughlan, A. T. (1987). International market entry and expansion via independent or integrated channels of distribution. Journal of Marketing, 51(1), 71–82. Anderson, O. (1997). Internationalization and market entry mode: A review of theories and conceptual frameworks. Management International Review, 37(2), 27–42.

44

XUFEI MA

Arnold, D., & Quelch, J. (1998). New strategies in emerging economies. Sloan Management Review, 40(1), 7–20. Aulakh, P., & Kotabe, M. (1997). Antecedents and performance implications of channel integration in foreign markers. Journal of International Business Studies, 28, 145–175. Balabanis, G. (2000). Factors affecting export intermediaries’ service offering: The British example. Journal of International Business Studies, 31(1), 83–99. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120. Barringer, B., & Harrison, J. (2000). Walking a tightrope: Creating value through interorganizational relationships. Journal of Management, 26(3), 367–403. Baum, J., & Oliver, C. (1991). Institutional linkages and organizational mortality. Administrative Science Quarterly, 36, 187–218. Beamish, P. (1985). The characteristics of joint ventures in developed and developing countries. Columbia Journal of World Business, 20(3), 13–19. Beamish, P. (1994). Joint ventures in LDCs: Partner selection and performance. Management International Review, 34(Special Issue), 60–74. Bello, D., & Lohtia, R. (1995). Export channel design: The use of foreign distributors and agents. Journal of Academy of Marketing Science, 23(2), 83–93. Bergen, M., Dutta, S., & Walker, O. C. (1992). Agency relationship in marketing: A review. Journal of Marketing, 56(3), 1–24. Bharadwaj, S., Varadarajan, P., & Fahy, J. (1993). Sustainable competitive advantage in service industries: A conceptual model and research propositions. Journal of Marketing, 57(Oct.), 83–99. Boisot, M., & Child, J. (1996). From fiefs to clans and network capitalism: Explaining China’s emerging economic order. Administrative Science Quarterly, 41, 600–628. Buckley, P., & Casson, M. (1976). The future of the multinational enterprise. New York: Holmes and Meier Publishers. Burt, R. (1997). The contingent value of social capital. Administrative Science Quarterly, 42, 339–365. Campa, J., & Guille´n, M. (1999). The internationalisation of exports: Firm and location specific factors in a middle economy country. Management Science, 45(11), 1463–1478. Capron, L., & Hulland, J. (1999). Redeployment of brands, sales forces, and general marketing management expertise following horizontal acquisitions: A resource-based view. Journal of Marketing, 63(2), 41–54. Cavusgil, S., & Nevin, J. (1981). Internal determinants of export marketing behavior: An empirical investigation. Journal of Marketing Research, 18(February.), 114–119. Cavusgil, S., & Zou, S. (1994). Marketing strategy–performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58(1), 1–21. Chang, S., & Hong, J. (2000). Economic performance of group-affiliated companies in Korea: Intra-group resource sharing and internal business transactions. Academy of Management Journal, 43, 429–448. Charles, D., & Beamish, P. (2003). A resource-based approach to the study of export performance. Journal of Small Business Management, 41, 242–261. Coase, R. H. (1937). The nature of the firm. Economica, 14, 386–405. Combs, J., & Ketchen, D. (1999). Explaining interfirm cooperation and performance: Toward a reconciliation of predictions from the resource-based view and organizational economics. Strategic Management Journal, 20(9), 867–888.

Beyond Transaction Cost Determinants

45

Conner, K. (1991). A historical comparison of resource-based theory and five schools of thought within industrial organization economics: Do we have a new theory of the firm? Journal of Management, 17(1), 121–154. Czinkota, M., Ronkainen, I., Moffett, M., & Moynihan, E. (2001). Global business. Orlando: Harcourt College Publishers. Davis, L., & North, D. C. (1971). Institutional change and American economic growth. Cambridge, New York: Cambridge University Press. Day, G. (1994). The capabilities of market-driven organizations. Journal of Marketing, 58(October), 37–52. Delios, A., & Beamish, P. (1999). Ownership strategy of Japanese firms: Transactional, institutional, and experience influences. Strategic Management Journal, 20(10), 915–933. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511. DiMaggio, P., & Powell, W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48, 147–160. Dunning, J. (2000). The eclectic paradigm as an envelop for economic and business theories of MNE activity. International Business Review, 9, 163–190. Emerson, R. M. (1981). Social exchange theory. In: M. Rosenberg & R. Turner (Eds), Social psychology: Sociological perspectives. New York: Basic Books. Eriksson, K., Johanson, J., Majkgard, A., & Sharma, D. (1997). Experiential knowledge and cost in the internationalization process. Journal of International Business Studies, 28(2), 337–360. Fombrum, C., & Shanley, M. (1990). What’s in a name? Reputation building and corporate strategy. Academy of Management Journal, 33(2), 233–258. Ford, D. (1990). Understanding business markets: Interaction, relationships and networks. London: Academic Press. Ford, D. (2004). The IMP group and international marketing. International Marketing Review, 21(2), 139–141. Foss, N. (1997). Resources, firms and strategies: A reader in the resource-based perspective. Oxford: Oxford University Press. Geringer, J. (1991). Strategic determinants of partner selection criteria in international joint ventures. Journal of International Business Studies, 22, 41–62. Ghoshal, S., & Moran, P. (1996). Bad for practice: A critique of the transaction cost theory. Academy of Management Review, 21, 13–47. Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(3), 481–510. Grewal, R., & Dharwadkar, R. (2002). The role of the institutional environment in marketing channels. Journal of Marketing, 66(July), 82–97. Gulati, R. (1998). Alliances and networks. Strategic Management Journal, 19, 293–317. Gulati, R., Nohria, N., & Zaheer, A. (2000). Strategic networks. Strategic Management Journal, 21, 203–215. Hakansson, H., & Johanson, J. (1993). A model of industrial networks. In: B. Axelsson & G. Easton (Eds), Industrial networks: A new view of reality (pp. 28–34). London: Routledge. Handelman, J. M., & Arnold, S. J. (1999). The role of marketing actions with a social dimension: Appeals to the institutional environment. Journal of Marketing, 63(July), 33–48. Hariss, J., Hunter, J., & Lewis, C. M. (1995). The new institutional economics and third world development. London: Routledge.

46

XUFEI MA

Heide, J. (1994). Inter-organizational governance in marketing channels. Journal of Marketing, 58(January), 71–85. Hennart, J. (1991). The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science, 37, 483–497. Hill, C. (1990). Cooperation, opportunism, and the invisible hand: Implications for transaction cost theory. Academy of Management Review, 15, 500–513. Hitt, M., Dacin, T., Levitas, E., Arregle, J., & Borza, A. (2000). Partner selection in emerging and developed market contexts: Resource-based and organizational learning perspectives. Academy of Management Journal, 43(3), 449–467. Hoskisson, R., Eden, L., Lau, C., & Wright, M. (2000). Strategy in emerging economies. Academy of Management Journal, 43(3), 249–267. Hunt, S., & Morgan, R. (1995). The comparative advantage theory of competition. Journal of Marketing, 59(April), 1–15. Hymer, S. H. (1976). A study of direct foreign investment. Cambridge, MA: MIT Press. Jacobides, M., & Winter, S. (2004). The co-evolution of capabilities and transaction costs: Explaining the institutional structure of production. LBS Leverhulme Trust Digital Transformations Program Working Paper. Jarillo, J. (1988). On strategic networks. Strategic Management Journal, 9, 31–41. Johanson, J., & Vahlne, J. (1977). The internationalization process of the firm. Journal of International Business Studies, 8, 23–32. John, G., & Weitz, B. (1988). Forward integration into distribution: Empirical test of transaction costs analysis. Journal of Law, Economics and Organization, 4(Fall), 121–139. Karunaratna, A., & Johnson, L. (1997). Initiating and maintaining export channel intermediary relationships. Journal of International Marketing, 5(2), 11–32. Keister, L. A. (2000). Chinese business groups: The structure and impact of interfirm relations during economic development. Oxford, NY: Oxford University Press. Khanna, T., & Palepu, K. (1997). Why focused strategies may be wrong for emerging markets. Harvard Business Review, 75(4), 41–51. Khanna, T., & Rivkin, J. (2001). Estimating the performance of business groups in emerging markets. Strategic Management Journal, 22, 45–74. Klein, S., Frazier, G., & Roth, V. (1990). A transaction cost analysis of model of channel integration in international markets. Journal of Marketing Research, 27(2), 196–208. Kogut, B., & Zander, U. (1995). Knowledge and the speed of the transfer and imitation of organizational capabilities: An empirical test. Organization Science, 6, 76–92. Kornai, J. (1986). The soft budget constraint. Kyklos, 39(1), 3–30. Kostova, T. (1999). Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24(2), 308–324. Laudmann, E., Galaskiewicz, L., & Marsden, P. (1978). Community structure as inter-organizational linkages. Annual Review of Sociology, 4, 455–484. Leonidou, L., & Kaleka, A. (1998). Behavioral aspects of international buyer–seller relationships: Their association with export involvement. International Marketing Review, 15, 373–397. Leonidou, L., & Katsikeas, C. (1996). The export development process: An integrative review of empirical models. Journal of International Business Studies, 27(3), 517–551. Lu, J. (2002). Intra- and inter-organizational imitative behavior: Institutional influences on Japanese firms’ entry mode choice. Journal of International Business Studies, 33(1), 19–39. Lu, J. (2003). The evolving contributions in international strategic management research. Journal of International Management, 9, 193–213.

Beyond Transaction Cost Determinants

47

Luo, Y. (1997). Partner selection and venturing success: The case of joint ventures with firms in the People’s Republic of China. Organization Science, 8(6), 648–662. Luo, Y. (1998). Joint venture success in China: How should we select a good partner? Journal of World Business, 33(2), 145–166. Ma, X., & Lu, J. (2005). The critical role of business groups in China. Ivey Business Journal, 69(5), 1–12. Martinez, R., & Dacin, M. (1999). Efficiency motives and normative forces: Combining transaction cost and institutional logic. Journal of Management, 25, 75–96. Meyer, K. (2001). Institutions, transaction costs, and entry mode choice in Eastern Europe. Journal of International Business Studies, 32, 357–367. Monteverde, K., & Teece, D. J. (1982). Supplier switching costs and vertical integration in the automobile industry. Bell Journal of Economics, 13, 206–213. Nee, V. (1992). Organizational dynamics of market transition: Hybrid forms, property rights, and mixed economy in China. Administrative Science Quarterly, 37(1), 1–27. Nelson, R., & Winter, S. (1982). An evolutionary theory of economic change. Harvard Business School Press: Cambridge, MA. North, D. (1990). Institutions, institutional change, and economic performance. New York: Norton. Oliver, C. (1997). Sustainable competitive advantage: Combining institutional and resourcebased views. Strategic Management Journal, 18(9), 697–713. Osborne, K. (1996). The channel integration decision for SME’s manufacturing exporters. International Small Business Journal, 14(3), 40–56. Pandya, A., & Dholakia, N. (1992). An institutional theory of exchange in marketing. European Journal of Marketing, 26(12), 19–41. Peng, M. (2001). The resource-based view and international business. Journal of Management, 27(6), 803–829. Peng, M. (2003). Institutional transitions and strategic choices. Academy of Management Review, 28, 275–296. Peng, M., & Heath, P. (1996). The growth of the firm in planned economies in transition: Institutions, organizations, and strategic choice. Academy of Management Review, 21, 492–528. Peng, M., Hill, C., & Wang, D. (2000). Schumpeterian dynamics versus Williamsonian considerations: A test of export intermediary performance. Journal of Management Studies, 32(2), 167–184. Peng, M., & Ilinitch, A. (1998). Export intermediary firms: A note on export development research. Journal of International Business Studies, 29(3), 609–620. Peng, M., & Luo, Y. (2000). Managerial ties and firm performance in a transition economy: The nature of a micro–macro link. Academy of Management Journal, 43(3), 486–503. Peng, M., & York, A. (2001). Behind intermediary performance in export trade: Transactions, agents, and resources. Journal of International Business Studies, 32(2), 327–346. Penrose, E. (1959). The theory of the growth of the firm. New York: Wiley. Porter, M. (1994). Toward a dynamic theory of strategy. In: R. Rumelt, D. Schendel & D. Teece (Eds), Fundamental issues in strategy. Boston: Harvard Business School Press. Prahalad, C., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79–91. Priem, R., & Butler, J. (2001). Is the resource-based view a useful perspective for strategic management research? Academy of Management Review, 26(1), 22–41.

48

XUFEI MA

Ramaseshan, B., & Patton, A. (1994). Factors influencing international channel choice of small business exporters. International Marketing Review, 11(4), 19–34. Rangan, V., Corey, E., & Cespedes, F. (1993). Transaction cost theory: Inferences from clinical field research on downstream vertical integration. Organization Science, 4(3), 454–477. Ring, P., & Van de Ven, A. (1994). Developmental processes of cooperative interorganizational relationships. Academy of Management Review, 19, 90–118. Root, F. (1994). Entry strategies for international markets. Lexington, MA: Lexington Books. Rosenzweig, P., & Singh, J. (1991). Organizational environments and the multinational enterprise. Academy of Management Review, 16, 340–361. Rosson, P., & Ford, D. (1982). Manufacturer-overseas distributor relations and export performance. Journal of International Business Studies, 13(3), 57–72. Rugman, A., & Verbeke, A. (2002). Edith Penrose’s contribution to the resource-based view of strategic management. Strategic Management Journal, 23(8), 769–780. Scott, W. (1995). Institutions and organizations. Thousand Oaks, CA: Sage. Selznick, P. (1957). Leadership in administration: A sociological interpretation. New York: Harper and Row. Shenkar, O. (1990). International joint ventures problems in China: Risks and remedies. Long Range Planning, 23(3), 82–90. Simon, H. (1991). Organizations and markets. Journal of Economic Perspectives, 5, 25–44. Solberg, C., & Nes, R. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Srivastava, R., Fahey, L., & Christensen, K. (2001). The resource-based view and marketing: The role of market-based assets in gaining competitive advantage. Journal of Management, 27, 777–802. Trabold, H. (2002). Export intermediation: An empirical test of Peng and Ilinitch. Journal of International Business Studies, 33(2), 327–344. Weitz, B., & Jap, S. (1995). Relationship marketing and distribution channels. Journal of the Academy of Marketing Science, 23(4), 305–320. Welch, D., & Welch, L. (1996). The internationalization process and networks: A strategic management perspective. Journal of International Marketing, 4(3), 11–28. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180. Williamson, O. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press. Williamson, O. (1985). The economic institutions of capitalism. New York: Free Press. Williamson, O. (1996). The mechanisms of governance. Oxford: Oxford University Press. Xin, K., & Pearce, J. (1996). Guanxi: Connections as substitute for formal institutional support. Academy of Management Journal, 39(6), 1641–1658. Yan, A., & Gray, B. (1994). Bargaining power, management control, and performance in United States–China joint ventures: A comparative case study. Academy of Management Journal, 37, 1478–1517. Zajac, E., & Olson, C. (1993). From transaction cost to transactional value analysis: Implications for the study of interorganizational strategies. Journal of Management Studies, 8, 53–111. Zhao, H., Luo, Y., & Suh, T. (2004). Transaction cost determinants and ownership-based entry mode choice: A meta-analytical review. Journal of International Business Studies, 35(6), 524–544.

LEGAL VERSUS RELATIONAL ORDERING IN CHANNEL GOVERNANCE: THE CASE OF THE MANUFACTURER AND ITS FOREIGN DISTRIBUTOR Seyda Deligonul and S. Tamer Cavusgil Surprisingly, reports show that many manufacturers and their distributors eventually choose an abrupt break up in their partnership (Rosson, 1987). The blindness to benefits of keeping a long-term partnership1 is unexpected. Logic suggests that rational economic actors protect their cooperation by establishing effective governance arrangement that can be formed at the least cost. If existing social norms cannot assure that level, then additional, and costly, legalistic and contractual forms (including complete contingent claims contracts and sequential contracting) will help. If those are not sufficient, more elaborate and costly intermediate market forms will be sought (such as buying an equity stake in the partner). If even this level of governance is not adequate, then more costly hierarchical forms will be considered (buying out the partner) (Barney & Hansen, 1994). This spectrum is referred by Williamson (1985) as legal and relational ordering. Legal ordering consists of formal contracts that are promises or obligations to perform particular actions in the future (Macneil, 1978). Relational ordering is

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 49–79 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16003-7

49

50

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

informal governance, or arrangements which by remediableness and credible commitment ex ante (Williamson, 1994) will resolve subsequent conflicts. The expropriation rent is a principal reason for conflicts, which lead to break up in a manufacturer–distributor relationship. The economic rents amount to substantial sums. According to Ealey and Troyano-Bermudez (2000), the portion of revenue base that is up for grabs between the manufacturer and dealer for a midsize Ford is more than the sales price of a new car in this class. The authors report that 60 percent of the life-time revenue generated by a midsize car potentially resides outside the Ford company boundaries. Were these revenues internalized, Ford would more than double its top line. This is the amount that causes possible interest-clashes between the channel partners. Potential for conflict arises because Ford can extend into channel activities at least in part to capture this revenue. That was the intention when Ford bought an Internet insurance company, a company for aftermarket accessories, Kwikfit auto collections, Rescu Telematics, Collision Team of America, Gopher Brothers Auto Parts, and even dealerships to bypass dealers. As opposed to the option of integrating the company forward, Ford can also write contracts with dealers to govern the benefit split, as in the case of the Blue Oval Certification Program. Contracts may be very detailed to tighten the manufacturer’s grip on the partner, or loose enough to let a trusting relationship prevent, resolve, and sanction conflicts. This study explores the effect of four drivers on the make up legal/ relational ordering in a special context. In international setting, we explore the significance of trust, uncertainty, adaptation, and control as antecedents to governance arrangements. (Fig. 1 reveals the key constructs and measures employed in the study.) Such a topic is particularly interesting because the complexities in international setting expose the manufacturer to a higher risk of opportunistic behavior by distributor (e.g., Cavusgil, Deligonul, & Zhang, 2004). In cross-border partnerships the hazards are compounded by idiosyncratic factors. Included in the list are lax attitude toward copyright in certain countries; the difficulty of monitoring contract infringements; the insecurity of proprietary information (Bello & Gilliland, 1997); complexities due to special configuration (Craig, 2000); social, geographical, and lingual distance (Fladmoe-Lindquist & Jacque, 1995); gray markets (Bello & Gilliland, 1997); legal system incompatibility (Dutta, Heide, & Bergen, 1999) and lack of foreign court experience (Ghobril, 1997).2 The article is organized as follows: The next section introduces the theoretical framework for examining governance in the context of an export manufacturer and its foreign distributor. Details about the empirical study and data collection follow. Next, statistical procedures and empirical results

51

Legal Versus Relational Ordering in Channel Governance

• • • •

• •

• •

The distributor is dedicated to improvements that benefit the relationship as a whole. Both firms actively work together to carry out their responsibilities and commitments in this relationship. Both firms invest considerable resources and time to make the relationship a success. The relationship between the manufacturer and its distributor can be characterized by a high level of trust. The manufacturer trusts its distributor to remain within the terms of contract. Every piece of advice from the distributor is perceived to be believable by the exporter.

•

The manufacturer is comfortable working in foreign environments. The manufacturer’s staff is very knowledgeable about foreign distributors. The manufacturer’s staff is uneasy with other cultures (reverse coded).

Uncertainty

Trust

H4

H1 •

• •

• • •

Manufacturer strongly encourages its employees to share fresh ideas with distributors. Manufacturer works with distributors to continually improve capabilities. Manufacturer and its distributor jointly offer training programs to improve mutual learning.

The legal consequences for less than satisfactory performance are precisely stated in the agreement. The legal consequences for the distributor’s noncompliance with operational expectations are in the agreement. The operational responsibility of each party is stated in precise legal terms in the agreement.

Fig. 1.

Legal Ordering/Relational Ordering

Mutual Adaptation

H3

H2

Control

The Proposed Conceptual Framework, Construct, and Related Measures.

are discussed, followed by analysis of the findings. Finally, we note potential limitations, suggest managerial implications, and recommend directions for future research.

THEORETICAL FRAMEWORK Given the confluence of opportunism, bounded rationality, and asset specificity in a partnership, the participants may attempt to expropriate certain rents. This type of rent is called the quasi-rent, and it is the reason for participating in the relationship in the first place (Alchian & Woodward, 1988). A quasi-rent is the excess above the returns necessary to sustain the current use of resources. It can be the means to recover sunk costs, such as investments in assets in general, and relational assets in our context. A relational quasi-rent is that portion of the quasi-rent generated by a resource that depends on the partner’s resources (Hill, 1990). It stems from investment

52

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

in specialized assets to support a partnership. Also this rent is the amount, which a partner can expropriate without destroying the relationship. Suppose, we consider bounded rationality and uncertainty are given and hold them fixed. Transaction cost theory then suggests that the probability of behaving opportunistically is specified by the extent of relation-specific assets involved. This is known as ‘‘hostage asset’’ situation. The investment that is being held ‘‘hostage’’ by the manufacturer provides a safeguard against the noncooperative behavior of the distributor. In order to ensure the credible commitment of partner via a ‘‘hostage’’ asset, a firm incorporates proviso in contingent claims contracts. The pertinent costs include negotiation, bonding, monitoring, and enforcement costs. If the market value of these activities exceeds the bureaucratic costs of managing the exchange within a hierarchy, theory suggests the remedy of internalization of partner’s activities. In interorganizational setting, safeguards against partner’s opportunism are not necessarily symmetrical. When the underdog cannot offset the differential in ‘‘hostage’’ assets, the reciprocal risks are left to the regulation of at least three possible mechanisms. The first is social norms (the social contract is enforced within the enduring relationship), which provide the rules and sanctions that deter the dominant side from abusive use of its advantage. Another is institutional selection, which in the long run will eliminate ill-reputed actors whose behavioral repertoires do not fit the cooperative dictum. The third is the economic process, or the invisible hand of the market, which will discard opportunistic actors due to their poor earnings in the long run. Internal and external safeguards between the partners are effected by the ‘‘shadow of future’’ which is the speculation about possibility of unanticipated acts by the partner. The uncertainty of future behavior is argued to curtail cooperative behavior because possible opportunism is anticipated in the current strategy (Heide & Miner, 1992; Hill, 1990). In that case a preemption strategy may be a viable option especially when the future is important to the player. This option is aggrandized in an international setting, where partners may be more tempted to behave opportunistically, since importance of reputation is trivialized due to distant nature of the relationship. Included in the list of factors for opportunistic behavior are a high level of return from opportunism, low partner-switching costs, low relationship-exit costs, and the transient nature of a relationship. Also, participants may choose to act opportunistically when the forces of market efficiency or institutional selection are perceived to be too gradual to be effective in weeding out the abusers.

Legal Versus Relational Ordering in Channel Governance

53

CONSTRUCTS AND HYPOTHESIS DEVELOPMENT Trust as Social Coalignment The present study considers trust as an organization-level phenomenon.3 There are four important aspects to trust in this context: need for safeguarding, partner’s expected behavior, the predictability of that behavior, and partner’s attitude toward opportunism. Considering these four elements trust refers to the disposition: (1) in a situation where partners face a hold up problem as they make asymmetric, transaction-specific investments into the relationship (Barney & Hansen, 1994); (2) but the partner can be relied on to fulfill the obligations (Anderson & Weitz, 1989); (3) will behave in a predictable manner (Zaheer, Mcevily, & Perrone, 1998) and (4) will act and negotiate amicably when the possibility of opportunism is present (Anderson & Narus, 1990; Bromiley & Cummings, 1995). Therefore, trustworthiness is where the partners reciprocally invest in relationship-specific assets for mutual benefit within an amicable, committed, and responsible attitude. Interorganizational trust fosters open and honest communication, which mitigates the information asymmetries inherent in interfirm exchange. In transparency, the risk of opportunistic behavior is reduced. When unforeseen contingencies arise, such as costs not explicitly covered by the terms of the agreement, trust is particularly effective. In those situations high levels of trust immediately lessen the impact of negative consequences (Zaheer et al., 1998). Other benefits of entrusting relationships pertain to dampening of transaction costs. When there is little trust, lengthy and difficult negotiations over unforeseen contingencies are likely. In contrast, trusting partners are less inclined to rely on elaborate safeguards for specifying, monitoring, and enforcing contracts. Therefore, trust reduces transaction costs (Zaheer et al., 1998). Also trust curbs opportunism (Bromiley & Cummings, 1995) and generates strategic advantages. Mutual benefits increase as partners limit nonvalue-enhancing activities in their relationship. Resource-Based View (RBV) considers this capability an asset, hence source of competitive advantage. Since such capability is not imitable or transferable in the short run, it imputes sustainability to the competitive advantage. The expectation of such advantage may further inhibit opportunism. When interorganizational trust is high, negotiating positions are based not on the safeguard differential but on the similarity of expectations about the behavior of the other party. Then trust promotes negotiating efficiency by enabling one partner to be flexible about granting concession. The expectation that the other will reciprocate in the future will drive the positive

54

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

escalation. As the parties develop forbearance and take a longer view of the relationship, their amicability increases. The expectation of long-term compensation despite short-term disadvantages (losses) becomes rational. In that case, partnership gains endurance. From a different angle, some economists attribute trust real estate characteristics. According to Zucker (1986), trust is an economic asset that is produced and traded in the market. By assuring trustworthiness, companies promote themselves, avert partner-switching decisions, and build good reputation to attract better partners. By taking industry-wide measures, trustees seek to create or preserve monopoly, limit competition, or protect trust capital from erosion of abusive practices (Shapiro, 1987). As a consequence, the market mechanism enjoys a fiduciary functionality from trust; from a sociological perspective trust functions similar to a contract. In that trust is a silent norm, which very much like a legal system, becomes a social insurance and serves as a watchdog over relationships (Shapiro, 1987). International companies face particular difficulties in ensuring that partners meet obligations. At home, compliance is enforced by social norms (Granovetter, 1985), the legal system (Thompson, 1996), and the reputation effect (Hill, 1990). Abroad, there may be considerable distance between the partners in terms of geography, cultural norms, and institutions (FladmoeLindquist & Jacque, 1995). Against these impediments, agreements based on trust are effective because trust is self-sustainable. It does not require stringent legal agreements or equity-based (hierarchical) governance arrangements. It creates a concurrence, where enduring relationships flourish; opportunistic temptations vanish. The result is reliance on more relational configurations.4 According to Barney and Hansen (1994), this is an empirical issue worthy of attention. Therefore, we advance the following hypothesis: H1. In a cross-border relationship, when partners invest in relationshipspecific assets for mutual benefit, their committed, trustworthy, and responsible disposition drives a high propensity to form relational ordering. Functional Control as a Unilateral Shield In distribution channels, control can be achieved through structure (such as hierarchical arrangements) or process (such as pricing policies) (Hennart, 1993), or some hybrid form of both. The final choice addresses focus (the scope of activities), extent (the degree of grip), and type of control mechanism (the devices and arrangements). Standards facilitating controls can be

Legal Versus Relational Ordering in Channel Governance

55

oriented toward behavior or outcomes (Eisenhardt, 1989; Ouchi, 1977; Robertson & Anderson, 1993) in that they become proactive or reactive mechanisms (Coleman, 1990). Our construct includes both proactive and reactive components because, in practice, ex post and ex ante control methods are not substitutes but complements (Stump & Heide, 1996; Williamson, 1994). Also, we recognize control as functional only when obligations regarding specific aberrations are spelled out clearly. This is the necessary condition to achieve enforceable (reactive) provisions or to deter aberrant behavior (proactive). Control materializes as one entity influences the behavior and/or output of another (Ouchi, 1977) by specifying precise standards to monitor, deter, and sanction aberrant outcomes. This mechanism is negatively affected when disparate goals breed opportunism in the relationship. The hazards of opportunism compel the partners to establish safeguards in terms of relationship-specific assets. As noted earlier, the asymmetry between the levels of relationship-specific-assets imply a disparity between rents expropriable from the relationship. Control is a way to prevent those rents from being expropriated at the expense of the controller (Klein, 1989). Often, behavioral control of a foreign partner either is not possible or is capital-intensive (Bello & Gilliland, 1997; Jaworski & MacInnis, 1989). In this case the principal has two options. The first is to provide information about the agent’s conduct (in agency theory, information is a commodity) and reward good behavior. This requires an effective information mechanism, such as representation in management, participation in the planning process, and/or presence on the board of directors. These proactive means are particularly useful in the international setting but require an investment that becomes a hostage in itself. The second option for the principal agent is to reward the foreign partner based on outcomes, which in effect, a proxy for its behavior. According to agency theory (Lassar & Kerr, 1996), since the agent is compensated solely on the basis of performance outcomes (which may be influenced by factors other than the agent’s effort), the agent will demand a premium for bearing compensation risk. The premium is also a hostage in this relationship. Thus, an outcome-based contract is efficient only if the cost of transferring risk (the risk premium) and the cost of measuring outcomes are less than the cost of monitoring behavior (Eisenhardt, 1989). When monitoring is difficult, goal convergence is not high, and the relationship is risky, control tends to focus on outcomes (Eisenhardt, 1989; Lassar & Kerr, 1996). Then process monitoring and supervision are minimal. The problem with this is that under these conditions commitment

56

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

falters and opportunistic behavior perks up (Anderson & Oliver, 1987). The less informed the principal, the greater is the risk that opportunism will not be detected. Therefore, an output-oriented system calls for a governance with a tight grip. A tighter grip of controls are not symmetrically protective for partners, but from cost perspective they are efficient. Killing (1983) asserts that a relationship will be more successful with a dominant partner because two roughly equal parties will have management difficulties. This is consistent with transaction cost theory, which states that firms tend to choose structural arrangements, which minimize enforcement, monitoring, and administration costs. Coordination, conflict resolution, and security for proprietary assets are transaction costs associated principally with uncertainty, opportunistic behavior, and asset specificity, and such costs can limit the potential gains from the relationship. Dominant control (quasi-integration) is one way to reduce the risks, minimize the costs, and stabilize the relationship. Therefore, authority-oriented controls will tend toward quasi-integration through legal contracting, which is in line with the work of Erramilli (1992) in the international setting. We propose that: H2. Establishing functional controls by specifying obligations, aberrations and deterrents will be associated with a governance that is based on legal contracting. Behavioral Unpredictability of the Partner: Uncertainty Uncertainty is the perceived inability to predict (Milliken, 1987). In general it is captured into two categories: environmental and behavioral kinds. It has been used both as a descriptor of the state of company environment or the response behavior of competitors and associates (Milliken, 1987). In the literature, environmental uncertainty refers to ‘‘unanticipated changes in circumstances surrounding an exchange’’ (Noordewier, John, & Nevin, 1990). According to Klein (1990), this kind of unpredictability is a central factor in cross-border settings. While a number of researchers link environmental uncertainty to the level of integration in governance (Agarwal & Ramaswami, 1992; Aulakh & Kotabe, 1997; John & Weitz, 1989), other researchers find either weak support or none for this connection (Anderson, 1985; Dwyer & Welsh, 1985; Klein, 1990). The link between the governance and environmental uncertainty, therefore, needs further investigation (Anderson, 1985; John & Weitz, 1989).

Legal Versus Relational Ordering in Channel Governance

57

Behavioral uncertainty refers to the difficulty of monitoring the contractual performance of exchange partners (Anderson, 1988; Rindfleisch, 1997; Williamson, 1985). Some studies capture this concept with a proxy (Anderson & Schmittlein, 1984; Heide & John, 1990; John & Weitz, 1989; Weiss & Anderson, 1992) or multidimensional scales.5 While unpredictability is the common theme in all these studies, Anderson and Gatignon (1986) also recognize experience in international setting. We follow their lead and define behavioral uncertainty as the degree of experience with foreign partner given a comfort level of the firm with the unpredictable environment. This definition parallels the work of (Klein, 1980) and Klein (1990) on foreign market entry decisions, in which complexity plays a key role. It is also consistent with the consensual view of uncertainty that it is useful only in a specific context, such as suppliers, competitors, distributors, and customers (Milliken, 1987). Uncertainty is a critical element defining the nature of agreements. When unforeseen circumstances arise, market contracts can be strained because a partner may have an incentive to bend the provisions to its own benefit. To prevent this, relational arrangements are not effective because they are open to misrepresentation. Rigid contractual agreements to internalize the partner are supposed to be more effective, since internalization allows uncertainty to be absorbed. Through specialization and savings in communication expenses, it facilitates coordination and sequential decision-making. Furthermore, high structural integration saves on transaction costs by harmonizing goals and by fostering a wide array of sensitive incentives (Klein, 1990). Indeed, Klein (1980, p. 257) suggests that unpredictability encourages firms to write stricter contracts or take equity stakes in their agents’ operations, and Rindfleisch (1997) concur. In contrast to internalization, certain organization theorists argue for loose coupling because it avoids the inertia in tightly integrated structures (Pfeffer & Salancik, 1978). We agree with the international marketing literature, which argues that the more intense the various components of uncertainty, the less likely a firm will opt for an equity-based relational investment (Contractor & Kundu, 1998). Accordingly, H3. The greater a company’s comfort in working in an unpredictable environment, the greater is the propensity to form relational contracts. The Logic of Relational Governance: Purposive Adaptation The central problem of economic organization is adaptation. Adaptation entails coping with disturbances of all kinds efficaciously. It can occur

58

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

autonomously in the form of market exchange under price mechanism, or cooperatively as regulated by fiat (Williamson, 1994). For instance, given a volatile exchange rate for the currency of host country, the price discounts can be negotiated with the foreign distributor or regulated by fiat by the manufacturer. In either case the real world tradeoffs are required. According to Williamson (1994), a decentralized form of organization (very much like autonomous markets) supports strong incentives to accommodate shocks and adapts very well to disturbances, but it is poorly suited to cooperative adaptation. On the other hand, quasi-integrative forms and in particular hierarchical organizations have weaker incentives for and are worse at autonomous adaptation but better at adaptation based on fiat. Generally, when asset specificity is low, adaptation with a market-like process (contract) is more suitable even when the amount of capital at stake is considerable because the assets can be productively redeployed to alternative uses. We would, therefore, expect that a cross-border mechanisms entail contracts, where the asset specificity is low. In that case also, there would be incentives to form arms-length trading arrangements with a titletaking distributor that is compensated by a profit margin. However, a manufacturer in its relationship with a foreign partner may invest into the relationship to increase its switching costs. In that case arm’s-length trading arrangements may result in bargaining and operational inefficiencies due to slow information flows and poorly coordinated business functions (Cavusgil & Zou, 1994). As manufacturer spins off functions, and delegates them to the overseas partner, it increases intrinsic vulnerability (Bello & Gilliland, 1997). Its performance is burdened for idiosyncrasies of cross-border relationship such as foreign market distance or the necessary financial, operational, and strategic capabilities (Bello & Gilliland, 1997). Also, its performance is jeopardized further by lower information transfer from the foreign partner (Cohen & Loeb, 1990) and higher cost of adaptation, and knowledge transfer. Standardization pressures across the international markets (Cavusgil & Zou, 1994) also favor tighter governance arrangements. In order to simplify strategies and coordination efforts a firm may prefer long-term contracts. As opposed to spot contracts, these arrangements provide a tighter grip, improve unfavorable hostage asset differentials, and avert shifting of power to the foreign distributor. Accordingly, H4. As foreign partners share ideas for better adaptation and learn through mutual exchange to enhance capabilities, the propensity to form legal ordering increases.

Legal Versus Relational Ordering in Channel Governance

59

Remarks on Onthological Distinction of Constructs The colloquial use of such terms as trust, adaptation, and control often causes confusion about their meaning in a research context, so a review of our distinctions is in order. In this study, control refers to a structural arrangement in a relationship. By designing functional controls, the principal ensures that management of the relationship conforms to its own interests (Geringer & Hebert, 1989). Trust is not a design issue but an emergent disposition. It is self-enforcing, whereas control is imposed. Trust does not alter relational risk but modifies attitudes about the risk, whereas control is deliberately designed to alleviate risk for the principal. Because of its unilateral and ‘‘us-them’’ aspect, control is a negative notion. In contrast, trust has a conciliatory and positive connotation. Some scholars treat controls as coordinated influence on acts rather than as directives based on authority (Stern, 1993). In order to distinguish this construct from coordination, we treat controls as manufacturer-initiated directives aimed at persuading foreign distributors to support the principal’s objectives. This view of ‘‘dictated intervention’’ is shared by Jaworski and Merchant (1988) and Sachdev, Bello, and Pilling (1994). Additionally, adaptation and control constructs are distinct. Adaptation is an approach taken by the manufacturer to better structure channel activities either by arms length agreements or by fiat. In this study, adaptation refers to the outcomes of unilateral or bilateral adjustments to absorb disturbances, whereas the control construct addresses design of unilateral measures to protect selfinterest. In sum, for the purposes of this article, uncertainty is a condition pertaining to predict patterns, adaptation is a process absorbing effects of unpredictable events, control is a design issue, and trust is a disposition.

RESEARCH DESIGN AND METHODS Data Collection and the Sample Data for this study were gathered in two phases. First, in-depth interviews were conducted with approximately two dozen international trade lawyers and marketing managers knowledgeable about foreign distributor contracts. These interviews provided insights into the nature of relational governance in export channels. Content analysis of a large number of written contracts was also performed. Second, a mail survey was sent to internationally active US firms. The list was obtained from the Thomas Export Registry, and

60

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

selection criteria included companies with more than 50 employees that are likely to engage in overseas markets via foreign distributors. A random sampling by SIC code was then done to provide a certain level of company and industry diversity. In order to tap governance variations, we needed a sampling frame with a cross-section of industries (e.g., heavy equipment and machinery, appliances, medical equipment, electronics) and companies likely to view foreign distributorships as a key strategy in foreign market entry and growth. The unit of analysis is the contractual relationship between a US manufacturer and an independent foreign distributor. The key informant is the international/export manager or another executive who is directly involved with management of the distributor relationship. It was important that the informant be familiar with overall corporate activities as well. Pretest results yielded 800 potential respondents. A letter was sent to approximately 75 managers explaining the research, and telephone calls were made to request their support. Next, a cover letter and questionnaire were mailed to the sample and a follow up conducted. About 14.5 percent of the mailings were undeliverable for various reasons. The effective sampling frame was 623, and 162 firms (141 usable questionnaires) participated. The net response rate of 22.6 percent is acceptable, especially since some firms were downsizing or involved in mergers. Some companies declined to participate due to legal reasons, confidentiality concerns, or disclosure policies. Most respondents are vice presidents, managers, or directors who work extensively with export operations. The mean for their international experience is 23.3 years. About 30.7 percent of the respondents work in more than 40 markets. This wide range of experience indicates that the respondents are familiar with various aspects of international marketing; can offer varied insights into channel relationships; have good knowledge of the global environment, and appreciate the complexity of global issues. Key characteristics of the sample are highlighted in Tables 1 and 2. Table 1.

Characteristics of the Sample.

Dimension

Mean

Median

Range

% of Firms

Number of company employees Annual sales ($ millions) Export sales ($ millions) Years of international experience of respondent Number of distributors Number of markets

3,375 815 22.7 23.5 32.9 34.2

165 75 20 20 19 22

50–4,999 10–199 10–79 5–39 10–49 6–59

80.3 85.3 72.8 84.7 46.1 75.2

61

Legal Versus Relational Ordering in Channel Governance

Table 2. Industry Composition of the Sample. Industry

Household appliances Automotive Telecommunication Paper/Publishing Electronic equipments Pharmaceuticals Medical equipments Furniture Heavy machinery Industrial machinery Chemical Other

Country/Region of Distributora

Years of Overseas Experience (Mean)

Size of Export Staff (Persons)

Number of Distributors (Mean)

14.3

1.6

2.0

23.4 14.3 5.6 22.0

3.6b 4.6 2.0 3.5

9c 31.6 16.3 24.6d

Europe Middle East/Africa Pac Rim/China Pac Rim/China

Europe

26.6 9.3 28.8 28.8 29.1

3.8 6.0 3.0 19.7 3.2

5.0 73.3 14.3 48.8 24.1

Pac Rim/China Europe Pac Rim/China Pac Rim/China Pac Rim/China

26.9 21.5

20.7 7.5

38.2 30.2

Europe Pac Rim/China

a

Respondents reported on the region where their ‘‘most challenging’’ distributor was located. This number reflects the highest percentage (concentration) for the particular industry. The Pacific Rim/China area was reported most frequently as the region of the most challenging (40%), followed by Europe (23.7%) and Mexico/Central America (12.6%). b One company, which has 350 people dedicated to foreign operations, is excluded. c Two companies have more than 250 distributors. d This mean does not include two companies with more than 100 personnel dedicated to foreign operations.

Comparisons were made between early and late responses for all constructs in the model. None of the tests was significant. Respondent bias was also evaluated by comparing early and late participants’ characteristics in terms of annual sales, number of full-time employees (Armstrong & Overton, 1977), and firm experience. A t-test between the two groups for these characteristics did not exhibit any particular systematic pattern that violates randomization. The two-tail tests for differences in the means for sales, employees, and experience resulted in t-values of 0.53, 0.697, and 0.14, respectively. Missing Data, Outliers, and Multicollinearity Data were first screened for missing cases and outliers. A preliminary multiple regression, as suggested by Mertler and Vannatta (2001), was conducted

62

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

to calculate Mahalanobis distance to identify outliers and examine multicollinearity among the predictors. Inspection of the collinearity tolerance statistics from SPSS indicates that tolerance for all variables is greater than the suggested level of 0.1 (Mertler & Vannatta, 2001). Therefore, multicollinearity was not a problem. By setting a Mahalanobis distance threshold for outliers at c2ð6Þ ¼ 22:458 at p ¼ 0:001; no cases were eliminated. The 141 usable cases were prepared for logistic regression by substituting the means for missing data. Before any analysis was made, summary statistics to describe data characteristics were obtained. A good sense about the measures is useful to detect any possible violation of assumptions at later stages of the study. To this end, the means, standard deviations, kurtosis, and skewness of each item were computed. The largest kurtosis value was 1.4, which falls below the recommended level of 2.00, beyond which nonnormality would be a concern. The skewness of the items was acceptable and below 5.00. All items were within the range of normality.

Construct Validity and Refinement In conceptualizing the dimensions of relational governance, we benefited greatly from the insights of export managers and international trade lawyers. In addition, we conducted content-analysis of a large number of distributor contracts. These efforts helped verify constructs common in the literature (Bello & Gilliland, 1997; Celly & Frazier, 1996; Eisenhardt, 1989; Macneil, 1980), and revealed analogous relationships that could be examined. The reliability of constructs was tested following Churchill’s (1979) guidelines and then the Anderson and Gerbing (1982) two-stage procedure for structural models. Items with low correlations were eliminated. Initial reliabilities were assessed through Cronbach’s alpha calculations. An itemby-item correlation matrix is provided in Table 4, and reliability is reported as part of the factor analytic summary in Table 3 (column 2). The reliability estimates were greater then 0.80 for all the constructs except one, which was 0.74 and still higher than the threshold 0.60 suggested for an exploratory study by Nunnally (1978), and Hair, Anderson, Tatham, and Black (1992) exploratory factor analysis indicated that constructs all had an eigenvalue greater than 1.0, which adds support to the unidimensionality of the constructs (Moorman, Deshpande, & Zaltman, 1993). We discarded items that had cross-loadings (factor-to-factor) of more than 0.3, that did not load on relevant factors, or that did not add theoretically to the construct. The results are summarized in Table 3.

Item code

Construct

Factor Loadingsb

Reliability

1 L01

0.032

0.024

L02

0.055

0.918

0.096

0.001

L04

0.121

0.752

0.018

0.154

0.166

0.036

0.847

0.105

0.095

0.059

0.879

0.183

LS2

0.82

Communalitiesc

The legal consequences for less than satisfactory performance are precisely stated in the agreement The legal consequences for the distributor’s noncompliance with operational expectations are in the agreement The operational responsibility of each party is stated in precise legal terms in the agreement Manufacturer strongly encourages its employees to share fresh ideas with distributors Manufacturer works with distributors to continually improve capabilities

0.848

4

0.920

Adaptation

0.87

3

0.027

LS1

Control

2

Item Description

0.854

0.604

Legal Versus Relational Ordering in Channel Governance

Table 3. Factor Analysis and Reliability. a

0.757

0.818

63

64

Table 3. (Continued ) Item code

Construct

Reliabilitya

Factor Loadingsb 1

LS5

2

3 0.785

0.104

0.848

0.003

0.047

0.015

R04

0.796

0.249

0.142

0.014

R05

0.716

0.294

0.064

0.017

T01

0.832

0.220

0.025

0.153

0.86

Manufacturer and its distributor jointly offer training programs to improve mutual learning The distributor is dedicated to improvements that benefit the relationship as a whole Both firms actively work together to carry out our responsibilities and commitments in this relationship Both firms invest considerable resources and time to make the relationship a success The relationship between manufacturer and its distributor can be characterized by a high level of trust

0.639

0.721

0.716

0.603

0.764

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

0.079

Trust

Communalitiesc

4

0.077

R02

Item Description

0.807

0.087

0.128

0.122

T04

0.782

0.125

0.045

0.094

0.185

0.184

0.182

0.795

F05

0.059

0.235

0.297

0.741

F06

0.203

0.211

0.038

0.761

26.4%

17.5%

15.2%

12.6%

F03

Uncertainty

Percent variance extracted

0.74

The manufacturer trusts its distributor to remain within the terms of contract Every piece of advice from the distributor is perceived to be believable by the exporter The manufacturer is comfortable working in foreign environments The manufacturer’s staff is very knowledgeable about foreign distributors The manufacturer’s staff is uneasy with other cultures (r) Total variance extracted with factors

0.690

0.638

0.733

0.696

0.666

71.6%

Legal Versus Relational Ordering in Channel Governance

T02

a

Cronbach’s alphas. Extraction method: Principal component analysis. Rotation method: Quartimax with Kaiser normalization. c Reverse coded. b

65

66

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

Table 4.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

F03

F05

1 1.000 0.607 0.428 0.240 0.330 0.276 0.145 0.160 0.250 0.239 0.290 0.170 0.145 0.288 0.224

2 0.607 1.000 0.383 0.294 0.384 0.313 0.179 0.233 0.225 0.115 0.142 0.081 0.080 0.183 0.175

Item-by-Item Correlations.

F06

LS1

LS2

LS5

L01

L02

L04

T01

3 0.428 0.383 1.000 0.122 0.222 0.055 0.130 0.109 0.038 0.260 0.210 0.139 0.138 0.085 0.074

4 0.240 0.294 0.122 1.000 0.693 0.500 0.034 0.085 0.024 0.186 0.266 0.207 0.132 0.250 0.164

5 0.330 0.384 0.222 0.693 1.000 0.602 0.087 0.155 0.088 0.152 0.197 0.148 0.085 0.251 0.147

6 0.276 0.313 0.055 0.500 0.602 1.000 0.093 0.103 0.150 0.150 0.201 0.165 0.057 0.137 0.136

7 0.145 0.179 0.130 0.034 0.087 0.093 1.000 0.866 0.586 0.116 0.102 0.018 0.023 0.233 0.244

8 0.160 0.233 0.109 0.085 0.155 0.103 0.866 1.000 0.577 0.122 0.170 0.067 0.063 0.267 0.242

9 0.250 0.225 0.038 0.024 0.088 0.150 0.586 0.577 1.000 0.031 0.168 0.112 0.102 0.175 0.213

10 0.239 0.115 0.260 0.186 0.152 0.150 0.116 0.122 0.031 1.000 0.724 0.717 0.656 0.520 0.380

T02 11 0.290 0.142 0.210 0.266 0.197 0.201 0.102 0.170 0.168 0.724 1.000 0.582 0.552 0.596 0.548

T04

R02

R04

R05

12 0.170 0.081 0.139 0.207 0.148 0.165 0.018 0.067 0.112 0.717 0.582 1.000 0.613 0.472 0.384

13 0.145 0.080 0.138 0.132 0.085 0.057 0.023 0.063 0.102 0.656 0.552 0.613 1.000 0.649 0.549

14 0.288 0.183 0.085 0.250 0.251 0.137 0.233 0.267 0.175 0.520 0.596 0.472 0.649 1.000 0.717

15 0.224 0.175 0.074 0.164 0.147 0.136 0.244 0.242 0.213 0.380 0.548 0.384 0.549 0.717 1.000

An analysis was conducted to assess convergent, discriminant, and nomological validity. To construct a verifiable nomological network, we searched the text of articles in the ABI database for the keywords agency theory, transaction cost economics, game theory and the main keywords from the pertinent item set representing the dimension. Our goal was to identify distinct constructs with unique and theoretically specified relations. We selected an array of potential qualifiers from the studies revealed in the search. These descriptors were checked against our purported name for the dimension. Also in a preliminary factor analysis all items loaded on the correct variables. The results demonstrated exact alignment with our expectations. In all cases, the highest loads for each factor coincided with the items expected from that factor. We kept four factors that were extracted, which cumulatively explained 72 percent of the variation in the data. Loadings on all factors were strong, with a significant drop in value after several items (Table 3). The factor cross-correlations remained surprisingly small, as shown in Table 5, and none was statistically significant. Without any geometrical imposition, obtaining approximate orthogonality can be considered as evidence for unidimensionality. Discriminant validity was assessed by examining whether the confidence intervals around the correlation estimates between any two factors included 1.0. In no case did the confidence interval contain 1.0 (or –1.0), which indicates that discriminant validity was upheld. Using the criterion set forth by Dillon and Goldstein (1984), we also examined whether the average

67

Legal Versus Relational Ordering in Channel Governance

Table 5. Factors 1 2 3 4

1 1.000 0.049 0.004 0.011

Between-Component Correlations. 2

1.000 0.012 0.028

3

1.000 0.020

4

1.000

variance extracted for the items was greater than 0.5. This test examines whether the variation observed is due to the construct and not to measurement error. The average variance extracted was greater than 0.5 in all cases, which provides further evidence of discriminant validity.

Application of Logistic Regression The hypotheses were tested using logistic regression, which was carried out in stepwise fashion with forward selection option in the SPSS software. Logistic regression is tolerant in adherence to the assumption about the distribution of predictor variables (Tabachnick & Fidell, 1996). There are, however, several important issues related to the proper use of this technique. The first is the ratio of cases to variables included in the analysis. Our data set was large enough to avoid instability in parameter estimates and unduly large standard errors. A second issue, as with all varieties of multiple regressions, is that logistic regression is sensitive to high correlations among predictor variables. This condition was checked, and no problem was found. A third issue is sensitivity to outliers and extreme values on predictor variables were examined carefully. In the presence of outliers, a case that is actually in one outcome category may show a high probability for being in another category. In our study no outliers were detected. Table 6 details the results of logistic regression. The final step resulted in significance, with all values po0:02; indicating that these four variables were significant predictors of the dichotomous dependent variable. Also included in Table 6 are the percentages of correct classification based on the model. In the final step, the model correctly classified 93 percent of the cases. In addition, Table 6 includes several indices of overall model fit. The first, labeled –2Log Likelihood, is 31.15. The other measures, Cox and Snell and Nagelkerke R2, are essentially estimates of the proportion of variability in the dependent variable that may be accounted for by all predictor variables

68

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

Table 6.

Results From Logistic Regression.

Total cases

141

Selected cases 2Log likelihood Goodness of fit Cox and Snell – R2 Nagelkerke – R2

141 31.158 36.737 0.547 0.846

Classification 0 95 5

0 1

1 4 22

%Correct 95.96 81.48

Overall correct ratio: 92.86%

Variables in the equation

Variable Trust Control Adaptation Uncertainty Constant

B 1.2414 7.8138 1.5577 1.3216 7.3848

S.E

Wald

df

Sig

0.5453 2.0674 0.5891 0.5399 1.9705

5.1837 14.2852 8.9912 5.9922 14.0836

1 1 1 1 1

0.0228 0.0002 0.0082 0.0144 0.0002

R 0.1559 0.3063 0.1952 0.1746

Exp(B) 0.2890 2474.6300 4.7480 0.2667

 An odds ratio 40 represents the increase in odds of being classified into the hypothesized category when the predictor variable increases by 1. An odds ratio o0 represents the decrease in odds of being classified into the nonhypothesized category when the predictor variable increases by 1.

included in the model. They are equal to 0.55 and 0.85, respectively. These point to a good fit between data and model. Another component of Table 6 is a classification table for the dependent variable. The predicted values are obtained by computing the probability for each case so as to classify the case into one of the two possible categories based on that probability. If the calculated probability is less than 0.50, the case is classified into the first value on the dependent variable, legal ordering. The model correctly classified 96 percent of the legal ordering cases and 81 percent of the relational cases; the overall success rate is 93 percent. As shown in Table 6, all coefficients are statistically significant at po0:02; Trust and Uncertainty induce tendency to form relational contracting, whereas Control and Adaptation imply propensity to legal ordering. The tests were carried out with the Wald statistic. The value R in the table is the partial correlation coefficient between each predictor variable and the dependent variable, holding constant all other predictors in the equation. Exp(B) is the calculated odds ratio for each variable. It represents the increase – or decrease if Exp(1) is less than 1 – in odds of being classified in a category when the predictor variable increases by one. The model indicated more sensitivity (as revealed by a higher odds ratio) in classifying legal ordering.

Legal Versus Relational Ordering in Channel Governance

69

DISCUSSION The findings of this study point to the significance of trust and controls in governance mechanisms. Given the uncertainty levels and adaptation needs, managers formulate governance arrangements along the relational or legal lines. Trust and uncertainty dictates selection of relational ordering. Control and adaptation calls for legal ordering. These findings verify the earlier conceptual analysis. Furthermore, we find that the role of relational ordering in the cross-border context warrants a redefinition, which will be different than the one found in the literature for domestic case. The study reveals that trust is not an alternative to formal control mechanisms as assumed by some. It can only serve to fill the gaps left by imperfect controls with a certain leap of faith (see also, Solberg, also in this volume). Thus, this finding sheds light on the critical issue raised by Stump and Heide when they questioned ‘‘whether trust can serve to fill the gaps left by imperfect controls and actually permit firms to make investments in specific assets’’ (Stump & Heide, 1996). In general, it is believed that a fiduciary trust arises as an order derived within social ties. As such, trust is anchored to the environment surrounding the relationship, and sanctioned by reputation and societal value. In case of breach, norms function as punitory, and punish dishonest behavior by social ostracism, exclusion from marks of prestige, and so on. Similarly, a strong legal system serves as a deterrent against violation of agreements and, in addition, provides the mechanism for settlement when needed. The literature recognizes the saliency of a legal process to develop impersonal trading relationships (see Thompson, 1996). Another factor, in addition to social and legal forces, is reputation. It acts in tandem with the other two systems, and provides deterrents for noncompliance. Manufacturer’s care for reputation matters because it functions as a source of information, expert advice, and leveraging value. In breach of trust, the harm to reputation is not only between the manufacturer and its foreign distributor, but it is before the entire business community. Granovetter (1985), Shapiro (1987), and Zucker (1986) agree that, in the absence of formal arrangements, reputation will act as an informal authority for certification of expertise or performance binding. Therefore, a combination of the three forces – the legal institution, the social system, and reputation – provides the foundation for channel governance schema. In this discussion the role of trust requires special attention. It is generally agreed that trust provides a regulatory mechanism for goal incongruities. It limits the conflictive inefficiencies. An entrusting relationship tends to block

70

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

disruptive consequences (Walton & McKersie, 1965) and provide stability. These are expected because, as trust creates a convergence between partners, goal congruity reduces information asymmetries, and mitigates conflictive inefficiencies. However, the current findings suggest that managers recognize that these expectations themselves create vulnerabilities by influencing the assessment of commercial risk (probability of noncompliance). Under certain conditions, trust may create unanticipated exposure to opportunism, which then needs to be guarded by a functional control system. The control construct in this investigation provides us with an interesting finding. According to the empirical results, the choice of governance form is driven by the control mechanism (it has the coefficient 7.8, whereas the second highest coefficient is 4). This is a novel finding. It points to significance of functional controls in cross-border relationships. The pronounced significance of establishing controls, as compared to trust development, begs an explanation, however. One explanation for this finding comes from the TCA perspective. In the domestic case, the distributor, because of the fragmented nature of the channel, has little power to retaliate against the manufacturer. Also for them, possibility of backward integration is often a remote possibility. This contention has long been established in the channel literature. Especially in small and fragmented industries, the distributor faces a more pronounced threat of partner’s increased opportunistic threat. In their work, Heide and John (1988) recognize that the traditional safeguard, vertical integration, is infeasible for this channel setting. Manufacturers can and do use forward integration or formal contracts as a safeguard but small intermediaries cannot possibly integrate backward into manufacturing, nor do they have strong contractual provisions to safeguard them. Such safeguards might consist of long term contracts involving territorial protection that enable the agency to depreciate enduring specific investments. The roles are almost reversed in the cross-border setting. In cross-border relationships, the manufacturer has fewer risk-mitigating instruments. Geographical, cultural distance, heterogeneity of legal systems, norms and rules create disadvantages in terms of exiting and switching costs for the manufacturer. The distributors tend to be concentrated around a few large players within local standards. The high concentration brings the dominant intermediaries to fore in the channels (Grewal & Dharwadkar, 2002). For this reason a US manufacturer is likely to be exposed to dominant distributors on the foreign soil. In addition, governance arrangements tend to be more complex due to ancillary contracts. (As an example, Little Caesar’s Pizza was unable to find the right blend of cheese when they first entered the Turkish market. They had to contract a local dairy company to produce the

Legal Versus Relational Ordering in Channel Governance

71

cheese varieties especially for its franchisees, which required a three-way contract.) Moreover, the distributor, being indigenous to the environment, enjoys a stronghold, and it can often exercise the option to diffuse risk over a portfolio of manufacturers better than its counterpart in the manufacturer’s home market. Given these conditions, unlike the domestic case, strategic disadvantages accrue for the manufacturer in its relationship with a foreign partner. Simply put, as manufacturers cross borders, they lose their home field advantage. (Nevertheless, the manufacturer will still seek foreign markets in search of economic rents.) This is the rationale behind Fladmoe-Lindquist and Jacque’s (1995) conjecture that ‘‘The failure of a franchisee may derail an entire set of service units for a particular country with subsequent loss of strategic position. Such contracts are long term in nature and even with carefully worded cancellation clauses, the franchisor may find early termination too costly to litigate.’’ Given the idiosyncratic dependency imbalance enhancing the advantages of foreign distributor functional controls become critically important in cross-border relationships. The presence of relationship specific assets creates incentive to exercise control; in order to acquire control, the presence of a normative structure is essential (Heide & Miner, 1992). This leads to another explanation for the above finding, which comes from the institutional framework. Accordingly, norms apply at different levels (Heide & Miner, 1992), and only a meta-layer of institutional directives can guard the norms regulating a marketing exchange. As the supra institutional directives regulate the relationship, they confer legitimacy to certain acts. Such legitimacy manifests in the actions that are desirable, proper, or appropriate within some socially constructed system of norms, value, beliefs, and definitions (Grewal & Dharwadkar, 2002). As a regulatory mechanism, the institutional process ensures the legitimacy of the relationship by forming rules, laws, certification, accreditation, prevalence, and precedence. This process regulates the relationships, validates acts, and provides a substitute for formal control and coordination mechanisms. As such it empowers, constrains, and sanctions the partners. The institutional process is indigenous. It emerges within national boundaries. For example, one of the best examples of control is the Keiretsu system in Japan. Various examples of traditional control mechanisms are observed in other countries, including Guanxi in China, Blat in Russia, Pratik in Haiti, and Chaebol in South Korea (Xin & Pearce, 1996; Grewal & Dharwadkar, 2002). These systems, being indigenous to their birthplaces, are incommensurable; that is, they do not speak to each other. They may have overlapping norms but they hardly provide an overarching institutional

72

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

mechanism to provide a check for compliance for cross border obligations’’. Lacking a meta layer of institutional directives, cross-border commerce is incapable of providing universal normative prescriptions, structural, behavioral constraints, and sanctions. Had it existed, such a transcending system would function somewhat akin to a system between the substantive law and procedural law (Hart, 1961). Just as a constitution provides a framework for overseeing ancillary rules, conferring and defining legitimate power and constraints, such fiat would provide a custodian role for trustworthiness. From this perspective, international ties are more vulnerable to opportunism because of lack of overarching private constitution to regulate the inherently unrestrained behavior of partners whose actions breach the contract. Due to the lack of a fiduciary mechanism transcending cross-border relationships, an additional hazard arises; hence the desire for tighter functional control mechanism in international settings. Given the absence of supra norms in cross-border relationships, we expect that the international marketer will have a compelling reason to be defensive about corruption of guardianship of interests. Trust would be secondary. In Shapiro’s words, trust is guarded from higher level by the distrust of institutional norms (Shapiro, 1987). As a consequence, in the international setting trust only fills the gaps left by functional control systems.

LIMITATIONS AND SUGGESTIONS FOR FURTHER STUDY The results of this study should be considered in light of some limitations. First, although efforts were made to locate appropriate informants, the data are based on single-informant reports. Our findings reflect the dyadic relationship from the US manufacturer’s vista point. The distributor’s perspective in the cross-border relationship is an equally intriguing research question. A dyadic data would have addressed this issue and made the findings richer. Future research may include multiple perspectives in the crossborder channel relationships. Second, a potential shortcoming is the single relationship focus adopted here; that is, the manufacturer was instructed to select and comment on a single distributor relationship. Future research may project the issues to a broader context in order to enhance the generalizability of the findings. Third, in this study propensity to form governance choice is assessed in terms of a dichotomous dependent variable. Obviously, the grip provided by alternative governance mechanisms is a matter of

Legal Versus Relational Ordering in Channel Governance

73

degree. The degree of control the manufacturer creates with each channel relationship remains to be investigated by future scholars. In addition, there are further methodological issues of interest. First, we used firm-level data whereas our main focus was interaction. Primary or secondary data pertinent to cross-border relationships are simply unavailable at the transaction level. Second, although validity concerns were central to the methodological considerations, in this study constructs, including control and trust, carry connotations of normative flavor. Their interpretations by respondents may have easily led to common method variance problem. The threat of weak validity would then be a higher concern, if we had not disguised the purpose of study and had not had a panel of judges review the wording of the survey questions. Third, we do not know whether governance choices precede or succeed trust, control, adaptation, and uncertainty aspects of the relationships in our sample. Therefore, these findings results must be viewed as only associations recorded in a snapshot.

CONCLUSION Governance arrangements do not magically produce synergy. They need to be shaped and nurtured between apt partners. The place of trust and controls in governance mechanisms is a central choice of successful relationships. In general, a value gap between hostage assets becomes a source of risk. The higher the gap, higher is the risk. Against this risk, functional controls provide a partial shield in conjunction with trust. Neither controls nor trust alone will eliminate the possibility of a preemptive move of by partner, however. Controls are imperfect. Trust is only a predilection about behavior; it does not avert risk. This is the reason why Shapiro (1987) remarked that trust is protected by doubt. Trust and controls jointly render the overall governance scheme a strength. Once functional controls are in place, stability provided by entrusting relationship is a value-generating proposition. As the manufacturer and its foreign distributor become steadfast partners with predictable patterns of behavior, the harmonious relationship endures. Enhanced concert prevents transaction costs. In the long run, mutual understanding is reinforced, and relational reliability fortified. In addition, trust stabilizes the relationship as it enhances reciprocity in goodwill. Whether governance should rest on a system of self-regulation or quasi integration arrangement is a critical question that needs to be carefully considered by management. Our study concludes that when hazards come to

74

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

the fore, the governance arrangement establishes a tighter grip by precision, and comprehensive controls of legal ordering. Regulation in the form of relational ordering on the other hand, is evolutionary and self-emergent. The both must ensure a balance between risk, self-protection, flexibility, and stability. Manufacturers in the pharmaceutical, telecommunications, and electronics industries, for example, follow a strong negotiated orientation backed by quasi integration in order to protect intellectual property rights. At the same time, in order to meet strategic goals, they invest in relational capital even with their rivals. Manufacturers in the industrial machinery, electronic equipment, and heavy machinery industries may opt for greater use of relational ordering options because of their perceived need to develop trusting relations with companies in the host market. In short, relations can be fashioned to mitigate simultaneously both unnecessary anarchy and rigidity, creating a system that most closely approaches some ideal blend of governance arrangements. This endeavor invariably entails walking a fine line of compromise acceptable to the parties involved. The challenge cannot be underestimated: Rosson (1987) longitudinal study of manufacturer–distributor relationships in an international setting shows that the majority of foreign distributing partnerships had eventually been terminated and the remaining ones had failed to perform at acceptable level. This study reveals a possible reason: sole trust blurs the vision; dysfunctional control distorts it.

NOTES 1. When Chrysler instructed its parts suppliers to cut prices irrespective of its prior agreements, a 2.5 percent price cut shocked its suppliers worldwide and those who did not comply were weeded out. In 2002, Ford unilaterally cancelled its Blue Oval Certification Program, a rebate system that was intended to improve dealer services. Dealers felt ‘‘betrayed’’ after they had invested an ‘‘incredible amount of money’’ to comply with the program (Truby, 2002). From one perspective, explanation of these events is straightforward. In general, relationship-specific investments or assets pose a contractual hazard for the undertaker. In the auto industry case, suppliers and dealers (agents) invested in dedicated equipment and employee training specifically for the company with which they were associated. The manufacturer (the principal) expropriated a portion of benefits (for Chrysler, 2.5 percent of the price margin; for Ford, a hike of 3 percent in customer satisfaction) and then unilaterally withdrew from the agreement. The principals knew that the agents (the suppliers and distributors) were not fully equipped to retaliate against the move. 2. Other special challenges of international marketing relationships include: monetary and exchange rate instability (Alon & Banai, 2000); misrepresentation of

Legal Versus Relational Ordering in Channel Governance

75

product to foreign buyers; little or no after-sale support (Asugman, Johnson, & Mccullough, 1997); high partner switching costs (Bello & Gilliland, 1997); and high risk and volatility (Shane, 1996). In addition, high transaction costs are likely because of incongruities arising from supervision styles, quality control, price differentials (Batra, 1997), and absorptive inertia to technology transfer. Indigenous business practices may also create problems. For example, it is reported that up to 80 percent of businesses in Russia pay extortion money and that foreign companies operating there routinely engage in bribery (Alon & Banai, 2000). 3. Trust is a dual level concept treated separately at individual and organizational level. Distinguishing organizational trust from interpersonal trust has been widely studied in literature (Anderson & Narus, 1990; Bradach & Eccles, 1989; Ring, 1992; Zaheer & Venkatraman, 1989) and absence of such distinction has been recognized as the cause of ‘‘cross-level fallacy’’ (Zaheer et al., 1998). 4. The logic of this argument can be challenged. Some economists and game theorists maintain that trust does not remove risk. It merely changes attitudes about risk and lowers the defensive shield. The possibility of one-sided forbearance creates a hazard that translates into extra vulnerability for the less defensive partner. Given that one cannot fully account for the actions of the foreign distributor, the vulnerable party may seek added insurance. It will have a propensity to secure its interests by forming governance arrangements with better formal control shields. Contingent contract protection is very common to this end. If this were not true, the so-called prisoner’s dilemma would be easily resolved. Because then the parties would not escalate the tension as the reason to preempt the opponent vanishes. In reality, rival companies often face escalating tensions because of the anticipation of partner’s opportunism. Therefore, functional controls are always necessary even for reliable and entrusting relationships. Functional controls in this study refer to mechanisms in order to deter, and sanction deviations from standards. 5. There are also single-item measures of behavioral uncertainty (Anderson & Schmittlein, 1984; Bucklin & Sengupta, 1993; John & Weitz, 1989).

ACKNOWLEDGMENTS The authors gratefully acknowledge valuable comments from Professor Carl Arthur Solberg, the Guest Editor of this volume of Advances in International Marketing on earlier versions. Financial assistance for data collection of the Center for International Business Education and Research (CIBER), Michigan State University, is also gratefully acknowledged.

REFERENCES Agarwal, S., & Ramaswami, S. N. (1992). Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Journal of International Business Studies, 23(1), 1–28.

76

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

Alchian, A. A., & Woodward, S. (1988). The firm is dead; long live the firm. Journal of Economic Literature, 26(1), 65–79. Alon, I., & Banai, M. (2000). Executive insights: Franchising opportunities and threats in Russia. Journal of International Marketing, 8(3), 104–119. Anderson, E. (1985). The salesperson as outside agent or employee: A transaction cost analysis. Marketing Science, 4(3), 234–255. Anderson, E. (1988). Strategic implications of Darwinian economics for selling efficiency and choice of integrated or independent sales force. Management Science, 34(5), 599–619. Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17(3), 1–26. Anderson, E., & Oliver, R. L. (1987). Transaction costs as determinants of opportunism in integrated and independent salesforce control systems. Journal of Marketing, 51, 76–88. Anderson, E., & Schmittlein, D. C. (1984). Integration of the sales force: An empirical examination. The Rand Journal of Economics, 15(3), 385–396. Anderson, E., & Weitz, B. (1989). Determinants of continuity in conventional industrial channel dyads. Marketing Science, 8(4), 310–323. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnership. Journal of Marketing, 54, 42–58. Anderson, J. C., & Gerbing, D. W. (1982). Some methods for respecifying measurement models to obtain unidimensional construct measurement. Journal of Marketing Research, 19(November), 453–460. Armstrong, J. S., & Overton, T. S. (1977). Estimating nonresponse bias in mail surveys. Journal of Marketing Research, 14(August), 396–402. Asugman, G., Johnson, J. L., & Mccullough, J. (1997). The role of after-sales service in international marketing. Journal of International Marketing, 5(4), 11–28. Aulakh, P. S., & Kotabe, M. (1997). Antecedents and performance implications of channel integration in foreign markets. Journal of International Business Studies, 28(1), 145–176. Barney, J. B., & Hansen, M. H. (1994). Trustworthiness as a source of competitive advantage. Strategic Management Journal, 15(Winter), 175–190. Batra, R. (1997). Executive insights: Marketing issues and challenges in transitional economices. Journal of International Marketing, 5(4), 95–114. Bello, D. C., & Gilliland, D. I. (1997). The effect of output controls, process controls, and flexibility on export channel performance. Journal of Marketing, 61(January), 22–38. Bradach, J. L., & Eccles, R. G. (1989). Price, authority, and trust: From ideal types to plural forms. Annual Review of Sociology, 15, 97–118. Bromiley, P., & Cummings, L. L. (Eds), (1995). Transaction costs in organizations with trust. Research on negotiation in organizations. Greenwich, CT: JAI Press. Bucklin, L., & Sengupta, S. (1993). Organizing successful co-marketing alliances. Journal of Marketing, 57(2), 32–47. Cavusgil, S. T., Deligonul, S., & Zhang, C. (2004). Curbing foreign distributor opportunism: An examination of trust, contracts, and the legal environment in international channel relationships. Journal of International Marketing, 12(2), 7–27. Cavusgil, S. T., & Zou, S. (1994). Marketing strategy-performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58(1), 1–21. Celly, K. S., & Frazier, G. L. (1996). Outcome-based and behavior based coordination efforts in channel relationships. Journal of Marketing Research, 33(2), 200–210.

Legal Versus Relational Ordering in Channel Governance

77

Churchill, G. A. (1979). A paradigm for developing better measures of marketing constructs. Journal of Marketing Research, 16(February), 64–73. Cohen, S., & Loeb, M. P. (1990). On the optimality of incentive contracts in the presence of joint costs. International Journal of Industrial Organization, 8(3), 405–416. Coleman, J. S. (1990). Foundations of social theory. Cambridge, MA: Harvard University Press. Contractor, F. J., & Kundu, S. K. (1998). Model choice in a world of alliances: Analyzing organizational forms in the international hotel sector. Journal of International Business Studies, 29(2), 325–357. Craig, C. S. (2000). Configural advantage in global markets. Journal of International Marketing, 8(1), 6–26. Dillon, W. R., & Goldstein, M. (1984). Multivariate analysis: Methods and applications. New York: Wiley. Dutta, S., Heide, J. T., & Bergen, M. (1999). Vertical territorial restrictions and public policy: Theories and industry evidence. Journal of Marketing, 63(43), 121–134. Dwyer, F. R., & Welsh, A. M. (1985). Environmental relationships of the internal political economy of marketing channels. Journal of Marketing Research, 22(4), 397–414. Ealey, L. A., & Troyano-Bermudez, L. (2000). The automotive industry: A 30,000-mile checkup. McKinsey Quarterly(3), 72–79. Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management Review, 14, 57–74. Erramilli, M. K. (1992). Influence of some external and internal environmental factors on foreign market entry mode choice in service firms. Journal of Business Research, 25(4), 263–276. Fladmoe-Lindquist, K., & Jacque, L. L. (1995). Control modes in international service operations: The propensity to franchise. Management Science, 41(7), 1238–1249. Geringer, J. M., & Hebert, L. (1989). Control and performance of international joint ventures. Journal of International Business Studies, 20(2), 235–254. Ghobril, N. I. (1997). ‘‘Hope for the best, but y’’. World Trade, 10(11), 32–34. Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(3), 481–510. Grewal, R., & Dharwadkar, R. (2002). The role of the institutional environment in marketing channels. Journal of Marketing, 66(3), 82–97. Hair J. F. Jr., Anderson, R. E., Tatham, R. L., & Black, W. C. (1992). Multivariate date analysis with readings. New York: Macmillan. Hart, H. L. A. (1961). The concept of law. Oxford: Oxford University Press. Heide, J. B., & John, G. (1988). The Role of dependence balancing in safeguarding transactionspecific assets in conventional channels. Journal of Marketing, 52(June), 20–35. Heide, J. B., & John, G. (1990). Alliances in industrial purchasing: The determinants of joint action in buyer–supplier relationships. Journal of Marketing Research, 27(1), 24–46. Heide, J. B., & Miner, A. S. (1992). The shadow of the future: Effects of anticipate interaction and frequency of contact on buyer–seller cooperation. Academy of Management Journal, 35(3), 265–292. Hennart, J.-F. (1993). Explaining the swollen middle: Why most transactions are a mix of ‘‘Market’’ and ‘‘Hierarchy’’. Organization Science, 4(4), 529–547. Hill, C. (1990). Cooperation, opportunism, and the invisible hand: Implications for transaction cost theory. Academy of Management, 15(3), 500–513.

78

SEYDA DELIGONUL AND S. TAMER CAVUSGIL

Jaworski, B. J., & MacInnis, D. J. (1989). Marketing jobs and management controls: Toward a framework. Journal of Marketing Research, 26(4), 406–420. Jaworski, B. J., & Merchant, K. A. (1988). Toward a theory of marketing control: Environmental context, control types, and consequences. Journal of Marketing, 52(3), 23–44. John, G., & Weitz, B. (1989). Salesforce compensation: An empirical investigation of factors related to use of salary versus incentive compensation. Journal of Marketing Research, 26(February), 1–14. Killing, J. P. (1983). Strategies for Joing Venture Success. New York: Praeger. Klein, B. (1980). Transaction cost determinants of ‘‘unfair’’ contractual arrangements. The American Economic Review, 70(2), 356–362. Klein, M. W. (1990). Macroeconomic aspects of exchange rate pass-through. Journal of International Money and Finance, 9(4), 376–387. Klein, S. (1989). A transaction cost explanation of vertical control in international markets. Journal of Academy of Marketing Science, 17(3), 253–261. Lassar, W., & Kerr, J. L. (1996). Strategy and control in supplier–distributor relationships: An agency perspective. Strategic Management Journal, 17(8), 613–632. Macneil, I. R. (1978). Contracts: Adjustment of long-term economic relations under classical, neoclassical and relational contract law. Northwestern University Law Review, 72, 854–905. Macneil, I. R. (1980). The new social contract. New Haven, CT: Yale University Press. Mertler, A. C., & Vannatta, R. A. (2001). Advanced and multivariate statistical methods. Los Angeles, CA: Pyrczak Publishing. Milliken, F. J. (1987). Three types of perceived uncertainty at the environment: State, effect and response. The Academy of Management Review, 12(1), 133–143. Moorman, C., Deshpande, R., & Zaltman, G. (1993). Factors affecting trust in marketing research relationships. Journal of Marketing, 57(1), 81–101. Noordewier, T. G., John, G., & Nevin, J. R. (1990). Performance outcomes of purchasing arrangements in industrial buyer–vendor relationships. Journal of Marketing, 54(4), 80–93. Nunnally, J. C. (1978). Psychometric theory. New York: McGraw-Hill. Ouchi, W. G. (1977). The relationship between organizational structure and control. Administrative Science Quarterly, 22, 92–112. Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. New York: Haper & Row. Rindfleisch, A. (1997). Transaction cost analysis: Past, present, and future applications. Journal of Marketing, 61(4), 30. Ring, P. S. (1992). Structuring cooperative relationships between organizations. Strategic Management Journal, 13(7), 483. Robertson, D. C., & Anderson, E. (1993). Control system and task environment effects on ethical judgement: An exploratory study of industrial salespeople. Organization Science, 4(4), 617–644. Rosson, P. J. (1987). Time passages: The changing nature of manufacturer – overseas distributor relations in exporting. Industrial Marketing and Purchasing, 1(2), 48–64. Sachdev, H. J., Bello, D. C., & Pilling, B. K. (1994). Control mechanisms within export channels of distribution. Journal of Global Marketing, 8(2), 31–50. Shane, S. A. (1996). Why franchise companies expand overseas. Journal of Business Venturing, 11(2), 73–88.

Legal Versus Relational Ordering in Channel Governance

79

Shapiro, S. (1987). The social control of impersonal trust. American Journal of Sociology, 93(3), 623–658. Stern, L. (1993). Accomplishing marketing channel change: Paths and pitfalls. European Management Journal, 11(1), 1–8. Stump, R. L., & Heide, J. B. (1996). Controlling supplier opportunism in industrial relationship. Journal of Marketing Research, 33, 431–441. Tabachnick, B. G., & Fidell, L. S. (1996). Using multivariate statistics. New York: Harper Collins. Thompson, A. G. (1996). Compliance with agreements in cross-cultural transactions: Some analytical issues. Journal of International Business Studies, 27(2), 375–390. Truby, M. (2002). For guts dealer bonus program. The Detroit News. Detroit: 1A. Walton, R. E., & Mckersie, R. B. (1965). A behavioral theory of labor negotiations. New York: McGraw-Hill. Weiss, A. M., & Anderson, E. (1992). Converting from independent to employee salesforce: The role of perceived switching costs. Journal of Marketing Research, 29(1), 101–115. Williamson, O. (1985). The economic institutions of capitalism. New York: Free Press. Williamson, O. (1994). Visible and invisible governance. The American Economic Review, 84(2), 323–326. Xin, K. R., & Pearce, J. L. (1996). Guanxi: Connections as substitutes for formal institutional support. Academy of Management Journal, 39(6), 1641–1658. Zaheer, A., Mcevily, B., & Perrone, V. (1998). Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance. Organization Science, 9(2), 141–159. Zaheer, A. B., & Venkatraman, N. (1989). Relational governance and interorganizational strategy: An empirical test of the role of trust in economic exchange. Strategic Management Journal, 19(5), 373–392. Zucker, L. G. (1986). Production of trust: Institutional sources of economic structure. In: B. M. Staw & L. L. Cummings (Eds), Research in organizational behavior, (Vol. 8, pp. 726–743). Greenwich, CT: JAI Press.

This page intentionally left blank

80

RELATIONAL DRIVERS, CONTROLS AND RELATIONSHIP QUALITY IN EXPORTER–FOREIGN MIDDLEMAN RELATIONS$ Carl Arthur Solberg INTRODUCTION In an international setting, the potential conflict between the trading partners is thought to be more acute than in the domestic market, as cultural distance and ensuing misunderstandings make trading relations more complicated and demanding: the international marketer is confronted with the challenges of not only understanding the culture but also interpreting the local market information. This situation is often aggravated by limited resources put into the international marketing endeavour by the marketer. Evidently, opportunism is a serious impediment to mutually beneficial relations between business partners. Not only will it make the transaction less efficient, but also create a ground for mistrust between the partners, that eventually may lead to conflict and dissolution of the trading relations, or costly control activities involving information gathering and monitoring,

$

This research has been partly financed by the Globalisation Programme which has received financial support from the Research Council of Norway.

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 81–105 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16004-9

81

82

CARL ARTHUR SOLBERG

incentives. In agency theory, these conflicts are curtailed through controls and/or incentives (Eisenhardt, 1989), whereas conflicts in transaction cost analysis (TCA) are sought reduced through internalisation of the transaction (Williamson, 1975, 1985). However, other levers of control than those prescribed by TCA or agency theory are available to the international marketer; flexibility (Bello & Gilliland, 1997), relationalism (Bello, Chelaru, & Zhang, 2003), relational norms (Heide & John, 1992; Zhang et al., 2003), clan control (Ouchi, 1979), relational control (de Mortanges & Vossen, 1999), and social control (Aulakh, Kotabe, & Sahay, 1996). The paper espouses this string of contributions to the exporter–middleman literature and – while testing some of their propositions in another setting (Norwegian exporters) – endeavours to widen it in three ways: (1) It introduces the role of relationship quality, and analyses the impact of different control modes and governance antecedents on this construct. (2) It extends the repertoire of governance antecedents in international business relations to include power relations and social bonds between the relationship partners. (3) It also introduces a distinction between antecedents that are ‘‘easily’’ manipulated in the short term by the trading partners, process drivers— social interaction, investments in relations, information exchange, and flexibility, and factors that are more difficult to change in the short term, structural drivers, such as power relations, cultural distance and resource inadequacy. We develop a conceptual framework that helps understanding how the process and structural drivers promote different control modes and relationship quality, and how these in their turn relate to relationship performance. The model is pictured in Fig. 1.

FRAMEWORK AND DEVELOPMENT OF HYPOTHESES The model depicted in Fig. 1 indicates a number of relations that will be explicated below. The fundamental idea is that short- and long-term drivers will enhance the use of some control modes on the expense of others and that these in their turn will impact on relationship quality and performance. Also, the drivers will have a direct impact on relationship quality. In this chapter, we define control modes as being unilateral controls and bilateral

83

Relational Drivers, Controls and Relationship Quality

Process drivers Relational drivers -Social bonds -Investments in relations -Information exchange -Flexibility

Control modes -Output control -Process control -Clan control

Structural drivers -Power -Cultural distance -Resource inadequacy

Fig. 1.

Relationship quality

Performance

Model of Relations, Control Modes and Performance.

controls, the former being epitomised by the ‘‘traditional’’ agency theory control modes (process and outcome controls). Bilateral control is a family of different control modes where clan control is possibly the most widely used (Ouchi, 1979). In the present context, we define clan control as a relationship based on shared values and norms between the trading partners, whereby they can trust that the other partner always will act in the interest of both.

Process Drivers and Control Modes We have identified four process drivers: social bonding, investments in relations, flexibility and information exchange. Some of these have been investigated by other researchers: flexibility (Bello & Gilliland, 1997; Heide & John, 1992; Zhang, Cavusgil, & Roath, 2003; Bello et al., 2003), information exchange (Bello et al., 2003; Zhang et al., 2003), social bonding (Wilson, 1995; Wathne & Heide, 2000). Social Bonding Social bonding has been defined as ‘‘the degree of mutual personal friendship and liking shared by the buyer and seller’’ (Wilson, 1995, p. 339). Our basic proposition that strong social bonds or relationships lead to trust and

84

CARL ARTHUR SOLBERG

sharing of norms and values between the trading partners is partially based on writings on social embeddedness in transactions (Granovetter, 1985; Uzzi, 1997). Social bonds have also been postulated to lead to trust by writers in the IMP1 tradition (see for instance Ha˚kansson et al., 1982). Also it has been shown that commitment between buyers and sellers increases with strong personal relationship (Wilson & Mumalaneni, 1986; Mumalaneni & Wilson, 1991). We will propose that social bonds between members of the exporter organisation and those of the local middleman will lead to increased use of trust or more broadly clan control mechanisms including shared values and norms. Or, as stated by Wathne and Heide (2000, p. 47): ‘‘the effectiveness of socialization as a strategy for managing opportunism rests on its completeness, or its ability to promote values that apply across contexts or situations.’’ H1. Social bonding between key members of the exporter organisation and those of the foreign local middleman are related with clan control. Investment in Relations Relationship commitment (Morgan & Hunt, 1994) and commitment to partner companies (Nes & Solberg, 2002) have been discussed and subsequently operationalised. Both have found strong correlations between trust and commitment. Morgan and Hunt (1994, p. 23) define commitment: ‘‘as an exchange partner believing that an ongoing relationship with another is so important as to warrant maximum efforts at maintaining it; that is the committed party believes the relationship is worth working on to ensure that it endures indefinitely.’’ Moorman, Zaltman, and Deshpande´ (1992, p. 316) defined it as ‘‘an enduring desire to maintain a valued relationship’’. The way in which it has been operationalised (intentions, commitment, merit, desire) indicate that commitment is an attitudinal construct. We believe that the concept of investment in relations is more tangible, and therefore easier to relate to as an operational variable for company management. The two should, however, be strongly correlated. Other researchers have dealt with investments as adaptations to accommodate the partner (Ha˚kanson et al., 1982; Halle´n, Johanson, & SeyedMohamed, 1991). For instance, Halle´n et al. (1991) found that investments in adaptation ‘‘tie the firms together in strong customer–supplier relationships, [forming] the basis for both business expansion and for securing current sales or supply sources’’ (p. 35). They maintain that adaptation behaviour will vary over the lifetime of the relationship: in the early phases of the relationship, it is expected to be a way to develop trust, whereas in the

Relational Drivers, Controls and Relationship Quality

85

more mature stages, it will be a means of solidifying and expanding the relationship. Also, investments in the relations with the agent may be considered as specific investments increasing the exporter’s dependency of the middleman. The more the exporters invest in their relations with their foreign trading partner, the more we will expect that they use a combination of control modes in order to reduce their vulnerability to opportunism in the relations. This leads us to the next hypotheses: H2a. The exporter’s investments in its relationships with the foreign local middleman are positively correlated with clan control. H2b. The exporter’s investments in its relationships with the foreign local middleman are positively correlated with unilateral controls. Information Exchange Information exchange is defined as ‘‘formal and informal sharing of meaningful and timely information between firms’’ (Anderson & Narus, 1990, p. 44). Zhang et al. (2003) define information exchange as ‘‘bilateral expectation that parties will provide information useful to the other partner’’, and later they state that ‘‘This assurance enables transaction partners to cope better with the vulnerability related to environmental uncertainty and transferred control.’’ (p. 553) For Aulakh et al. (1996), ‘‘the expectation of getting all information on an ongoing basis enables the partner firms to cope better with internal processes and external market conditions’’ (p. 1012). Communication has been found to correlate with trust (Morgan & Hunt, 1994). Indeed, Nes and Solberg (2002) show that communication is the single most important factor leading to trust between the exporter and its partners in foreign markets. Moorman, Deshpande´, and Zaltman (1993) found that especially timely communication fosters trust. Furthermore, information asymmetry is a key concept in agency theory. In order to balance this asymmetry between the partners, information exchange is seen as critical. One thing is then the mere communication of results or reporting from the agent in order to keep the principal abreast with developments in the local market. Another matter is the richer concept of mutual exchange of information and of the appropriate ways of monitoring this exchange. We believe that information exchange is positively correlated to not only trust but also to a common set of beliefs and norms between the trading partners. Indeed Bello et al. (2003) and Zhang et al. (2003) suggest that relationalism respectively relational norms as a higher-order construct composed by three

86

CARL ARTHUR SOLBERG

factors, information exchange, solidarity and flexibility. In this paper, we see these constructs as being independent of one another and suggest that: H3. Information exchange is positively correlated with clan controls in exporter–foreign middlemen relationships. Flexibility Heide and John (1992) define flexibility as ‘‘a bilateral expectation of a willingness to make adaptations as circumstances change’’ (p. 35). Bello and Gilliland (1997) found that output control and flexibility of the trading partners correlate positively with performance, whereas no significant relationships were established between process control and performance. In their model, flexibility is introduced as a sort of bilateral governance mechanism in line with unilateral control modes. In a later article, Bello et al. (2003) establish the term relationalism, of which – as shown above – flexibility is an integral part. The relationship between flexibility and trust has, to the author’s knowledge, not yet been explored in academic research. One may argue that flexibility is an antecedent to trust rather than a governance mechanism (or constituent thereof) in its own right as it is one important part of the willingness expressed by the partners to mutually adapt to each other’s needs, eventually leading to a trusting relationship (Ha˚kanson et al., 1982). On the other, flexibility is deemed less related to unilateral controls. For instance, both process and outcome controls are generated by the need of the exporter to receive reports from the middleman on his activities and their outcome in order to be able to monitor or compensate the contract obligations. In this endeavour, there is conceivably little need for flexibility by the partners. We therefore posit that: H4. Flexibility is more strongly correlated to clan controls than to unilateral controls. Structural Drivers and Control Modes Structural drivers are – in this chapter – described as power relations, cultural distance and resources. Power Relations Dependence has been treated by a number of researchers of marketing (Hunt & Nevin, 1974; Gaski, 1986; Heide & John, 1988; Anderson & Narus, 1990). Dependence has been linked to investments in specific assets (Heide &

Relational Drivers, Controls and Relationship Quality

87

John, 1988) as well as other sources of power like the ones treated by French and Raven (1959). Agency theory assumes the notion of a powerful principal that has the power to design and enforce contracts. In contrast, in an exporter–intermediary relationship, power balance will vary according to the situation. One may assume that the exporter has more power over the sales subsidiary than over the distributor, partly because of mere hierarchical power (a blend of reward, reference, legitimacy and coercion). On the other hand, the expert and informational power (Raven, 1992) of the subsidiary may – at least in the early phases of market presence by the exporter – supersede the importance of these other power bases. Also, we have seen how subsidiaries at a later stage of the relationship have a tendency to become independent in their implementation of business strategies in the local market – principally because of expert-informational power (Ghauri, 1990; Prahalad & Doz, 1990). The distributor, furthermore, is often the stronger party in an exporter–distributor relationship – at least within the boundaries of the relevant market – partly because it normally represents a number of different principals in the market, thereby being less dependent on each individual principal (Leonidou, 1989). The extent to which this power plays a role will then depend on the importance attached by the exporter to attain a certain share in the market in question. The degree of dependence of one of the partners on the other is therefore assumed to impact on the mode of governance by the principal. Anderson and Narus (1990) suggest that the less dependent (or the more powerful) firm can enforce various strategies on the other party. Hence, it is proposed that the less dependent the exporter is on the next channel member, the more it is likely that it will content itself to recurring to outcome control (see also Frazier & Antia, 1995). On the other hand, complete dependence on the partner invites the principal to carry out trust-enhancing measures, thereby increasing trust, in order to compensate for the lack of power. Heide (1994) suggests that the dependent party should try to establish a ‘‘negotiated environment’’, in which the burden of dependency is alleviated and the risks of opportunistic behaviour lessened. Another argument is that controls are deemed to be more easily carried out in a setting of power exerted by the principal than in a setting of weakness. This is possibly particularly true to process control as this latter has been shown to yield limited results in terms of performance (Bello & Gilliland, 1997). Also instructions to the middleman given by the exporter (part of the process control concept) are possibly better carried out in an atmosphere of power by the exporter. Process control is in many ways akin to centralisation of decision power in that the exporter – through their

88

CARL ARTHUR SOLBERG

contract – influences the behaviour of the middleman. These propositions are partly consistent with the findings of Zhang et al. (2003). They found – contrary to their expectations – that relative dependence on the importer, correlated negatively with the manufacturer’s dependence on relational norms. By extension, the more power in the hands of the exporter, the better equipped it is to exert control and influence on the local foreign middleman. In other words, power is necessary in order for the exporter to carry out various measures that the local middleman has to accept, such as the reporting and monitoring routines introduced by the exporter, or norms and values instituted by the exporter. H5. Exporter power over the foreign local intermediary is positively related to outcome, process and clan controls. Cultural Distance The impact of cultural or psychic distance has been treated by a host of researchers in international marketing and business. Johanson and Vahlne (1977) make it mainstay argument in their incremental internationalisation theory, and it has been explored in a number of studies. Bello and Gilliland (1997) found that psychic distance reduces the use of output control, because ‘‘as psychic distance increases, monitoring and enforcement costs also increase’’ (Klein & Roth, 1990, p. 32) – ascribing the cost increases to difficulties in obtaining and processing control information from unfamiliar cultural settings. Even though this might well be the case, we propose that dealing with distributors and sales people from distant cultures, it is easier to measure their performance than to influence their behaviour. In a later study Bello et al. (2003) found that psychic distance had little impact on relationalism. Morgan and Hunt (1994) found in their study a correlation between shared values and trust. Extending the concept of shared values to that of closeness in national cultures, Nes and Solberg (2002) show that cultural distance – using Hofstede’s (1980) four cultural dimensions – correlates negatively with trust and commitment. Hewett and Bearden (2001) found in a study of relations between 66 US-based firms and 143 of their marketing subsidiaries that Hofstede’s (1980) individualism alone did not affect subsidiary cooperation. Coupled with trust, it did however correlate negatively with cooperation. Shenkar (2001) cautions against the use of different culture measures (such as Hofstede’s or other indices). The many contradictory findings may indicate that this is a particularly difficult variable to work with in research. In spite of this concern, we believe that cultural distance, being a critical dimension of international business, should

Relational Drivers, Controls and Relationship Quality

89

be included in a framework on exporter–middlemen relations. We posit that the closer the cultures between the exporter country and the importer country, the easier it is to implement clan controls. H6. Cultural closeness between the exporter and importer countries is positively related to the use of clan controls. Resource inadequacy Exporting requires a range of resources enabling the exporter to assess international market opportunities and carrying them out. In order to successfully compete against local incumbent firms, the exporter needs not only in-depth local market knowledge and an understanding of the intricacies of the local market mechanisms, but also time and financial resources to withstand ‘‘inevitable’’ temporary setbacks in the market place, particularly in the introduction stage of the product launch before the market knowledge has been fully adopted in the exporting organisation. Also ‘‘lack of resources inhibits manufacturers from being flexible in responding to distributor requests for change; altering export procedures and prior agreements require incremental management time and effort, as well as financial resources that a domestic-oriented manufacturer may be unwilling and/or unable to provide’’ (Bello et al., 2003, p. 4). Furthermore, lack of resources makes it harder for the exporter to invest in relation-building activities or assets, eventually leading to a more arms’-length relationship with its distributors. Resources in terms of market knowledge enable management not only to analyse the market situation, set marketing objectives, and carry out marketing operations, but also to monitor and control the results of these operations. Lack of resources may then indicate lack of experience to carry out behavioural control (Jackson, Deith, & Schlacter, 1983; Ouchi & McGuire, 1975), and to implement the investments necessary to achieve a clan culture within the ‘‘family’’ of distributors. On the other, even though Bello and Gilliland (1997) found that resource inadequacy was positively linked to outcome control because of the problems in obtaining control measures from foreign markets, we believe that resource inadequacy is even less related to process control and clan control. The argument here is that relatively less resources are required to carry out outcome controls than the two other modes of control. H7. Resource inadequacy is less associated with process and clan control than outcome control.

90

CARL ARTHUR SOLBERG

Antecedents of Relationship Quality Relationship quality is defined in this article as relationships characterised by stability, high potential, predictability and being well-functioning. We will argue that controls as well as some of their antecedents will impact on relationship quality. Controls and Relationship Quality A well-functioning relationship depends on mutual trust and respect (Morgan and Hunt 1994). When the partners know what to expect from one another, and they do not fail to live up to their mutual expectations, the relationships will prosper. Certain control measures are necessary to ascertain that the agent is meeting his obligations and is not behaving opportunistically. The agent in turn is expected to be comfortable being controlled as long as the control does not impinge on his local marketing operations. We therefore anticipate that some controls are necessary for the relationship to develop confidently. On the other hand process controls that seek to direct the behaviour of the agent are felt as a constraint on his independence, and will therefore have the potential to hamper his local marketing operations. This in turn will frustrate the relations between the exporter and its agent. We therefore posit that: H8a. Process control correlates negatively with relationship quality. H8b. Outcome and clan controls correlate positively with relationship quality. Process Drivers and Relationship Quality Relationships evolve over time with increasing levels of interaction – both professional and social (Ha˚kansson et al., 1982). These interactions take place in the form of among other things process drivers as described above. We therefore hypothesize that high levels of process drivers lead to high levels of relationship quality. H9. Implementation of relational activities such as social bonding, investments in relations, information exchange, and flexibility correlate positively with relationship quality. Impacts on Performance Performance is affected by a number of factors, most of which are not the object of this study. Bello and Gilliland (1997), found that outcome-based

Relational Drivers, Controls and Relationship Quality

91

control mechanisms have been shown to be positively linked to performance, the reason being the intermediaries know they are held accountable for the results (Anderson & Oliver, 1987) and that they bring about an alignment of interests of the parties involved (Eisenhardt, 1989). Process controls do not seem to produce the same amount of positive performance outcomes (Bello & Gilliland, 1997). Different variants of relational control have also been found to be associated with performance (Bello & Gilliland, 1997; Zhang et al., 2003; Bello et al., 2003). Our main contention is that these control modes are mediated by relationship quality, and that this latter impacts positively the performance of the firm in the local foreign market place. We suggest that relationship quality exerts the main impact on performance. H10. Performance of an exporter’s marketing activities in a local foreign market is positively correlated to the quality of its relations with its intermediary.

SAMPLE AND DATA COLLECTION A list of 469 Norwegian firms registered in the Norwegian Export Barometer2 were asked on telephone if they were interested in participating in the present study, 246 of which answering positively. Thus we obtained both the name of the most appropriate respondent in the firm, and a commitment by this person to respond. Immediately after the telephone conversation, we sent an e-mail containing an introductory letter and a questionnaire using the Questback data system. Before the deadline, we had received 178 valid answers – or a response rate of 72.4 per cent of the refined list or 38.0 per cent of the gross sample frame. Some of the fallout was due to travel and heavy workload of the potential respondents. Table 1 gives an overview of the composition of the sample. The respondents were asked to answer a number of questions pertaining to their relations with their local representative in their most important export market. This is slightly different from the research presented by Anderson and Narus (1990) and Bello and Gilliland (1997) who chose the focal relationship to be the fourth most important in foreign markets, in order to avoid a ‘‘positive evaluation bias’’ because ‘‘relations with a firm’s first- or second-largest-volume trading partner tend to be uniformly positive’’ (Bello & Gilliland, 1997, p. 29). We decided to use the most important one, first because not all exporters sell to four markets, and second, because

92

CARL ARTHUR SOLBERG

Table 1.

Composition of the Sample.

Sales a

Million NOK o25 26—50 51–100 101–500 4500 a

Exports to Most Important Market Per cent of Sample

Million NOKa

23.5 21.2 16.5 23.5 15.3

o25 26–50 51–100 101–500 4500

Per cent of Sample 14.9 9.5 14.3 34.5 26.8

1 Euro ¼ ca. 8,50 NOK; 1USD ¼ ca. 6,50 NOK (NOK ¼ Norwegian krone).

it is not obvious that all first- and second-volume relationships are troublefree. Also, we assume that the knowledge of details of the relationships between the trading partners is higher in the most important market, than lower down the row.

MEASUREMENTS The following constructs were measured on a 5-point Likert scale: outcome control, process control, trust/clan control, information exchange, social relations, flexibility, investments in relations, resource inadequacy, cultural distance (or rather cultural closeness), power in relations, relationship quality and performance. Table 1 shows the items used in each construct and their corresponding Cronbach alpha values. We have adapted measures used by Bello and Gilliland (1997) (output and process control, flexibility, resource inadequacy), Solberg (2000a) (social relations, investment in relations, incentives, cultural closeness), Morgan and Hunt (1994) (trust/clan control). In measuring power, we have developed measures to capture French and Raven’s (1959) five dimensions of power: legitimate, expert, coercive, identification and incentive. Only three of the power measures loaded in the factor analysis (see Table 1), the remaining ones being excluded from the further analysis. Relationship quality has been defined in various ways, and constructs like trust, absence of opportunistic behaviour, cooperation and stability may be included (Johnson, Sakano, Cote, & Onzo, 1993). In Johnson and Raven (1996), it was examined in terms of fairness, commitment, cooperation and communication intensity. In the present research, we define relationship quality more instrumentally, evoking associations of stability, potential and longevity rather than the more affective definitions of Johnson

Relational Drivers, Controls and Relationship Quality

93

and Raven (1996). The performance measures have been adapted from a range of contributions on export performance (Cavusgil & Zou, 1994; Diamantopoulos, 1998; Solberg & Nes, 2002). All the performance measures are loaded on the same factor (Table 2). We have controlled discriminant validity using Pearson correlations. The results are shown in the Appendix, indicating that most of the constructs are not correlated, although some are borderline cases – above 0.5 (output control/process control, power/output control, output control/investments in relations, information exchange/social relations, clan control/relational quality). However, perhaps with the exception of output and process controls, these are conceptually very different constructs and should therefore not reflect tautological effects.

PRESENTATION AND DISCUSSION OF RESULTS We tested the hypotheses using regression analyses, Table 3 showing the standardised correlations, F-values and adjusted R2. Table 4 gives a summary of the hypothesis tests. Tables 3 and 4 call for a number of comments. First, most of the hypotheses find support in our data. However, some are not supported, and some are even going in the opposite direction of what is hypothesised. This is particularly true with H7. Resource inadequacy is negatively and significantly related to outcome control, whereas the expectation was in the other direction (also when compared to the other two control modes). In other words, the more resources, the more the exporter recurs to outcome control, whereas resources do not significantly impact clan or process controls. This finding supports then Bello and Gilliland (1997) who suggest – in line with agency theory (Eisenhardt, 1989) – that it is difficult to measure the outcome of local marketing activities in foreign markets. However, we studied the most important foreign market of the sample firms, whereas Bello and Gilliland (1997) studied market number four, which one would allege is somewhat more distant and unfamiliar than the most important one (Johanson & Vahlne, 1977). This finding suggests therefore that outcome controls are particularly resource-demanding and that control information about outcome measures in foreign markets is difficult to obtain. This information is more easily attained in an atmosphere of trust among the partners (Gripsrud, Solberg, & Ulvnes, 2006). Neither social bonds, nor investments in relations, nor information exchange seem to have any impact on clan control in the presence of the other factors (cultural closeness, flexibility, power). This is surprising as these

94

Table 2.

Constructs Used in the Study.

Construct and Items Control modes Output control We follow up our agent regularly to check that profitability objectives are being met We follow up our agent regularly to check that sales objectives are being met We follow up our agent regularly to check that market share objectives are being met Process control We regularly monitor the activities of the agent We control how the agent introduces our product to the market Clan control Our agent is trustworthy Our agent has high integrity It is not necessary to follow up our agent since he always works to the benefit of the firm

Alpha

0.89 0.875 0.868 0.866 0.69 0.874 0.735 0.74 0.846 0.808 0.775 0.66 0.839 0.709 0.630 0.68 0.817 0.792 0.617 0.64 0.798 0.767 0.728 0.70 0.818 0.789 0.709

CARL ARTHUR SOLBERG

Short-term process drivers Social bonds Key personnel in our firm are good friends with key personnel in the agent firm We have extensive social relations with our agent There are well-defined guidelines between ourselves and the agent Investments in relations We invest considerably in developing our relations to our agent We invest considerably in developing our own knowledge about this market We give our agent special training to market and sell our products Information exchange The information flow between ourselves and the agent is satisfactory The information exchange in this relationship is frequent and informal It is expected that both parties keep each other updated on events or changes in the market that may affect the other party Flexibility/empathy Both parties are open to each other’s requests to modify a prior agreement When some unexpected situation arises, both parties would rather work out a new deal than hold each other to the original terms Both parties are flexible with regard to rush inquiries from the other party

Factor Loadings

Mediating and dependent variables Relationship quality Our relations with our agent may be described as: Stable–unstable Well functioning–difficult Predictable–unpredictable Having a great potential–having little potential Performance Our expectations on sales are satisfied Our expectations on sales growth are satisfied Our expectations on market shares are satisfied We are very satisfied with the market position that we have achieved in this market

0.65 0.804 0.727 0.643 0.76 0.893 0.854 0.704 0.80 0.804 0.785 0.754 0.749 0.78

Relational Drivers, Controls and Relationship Quality

Long–term structural drivers Power We have developed a tradition whereby we may instruct the agent in implementing marketing activities without him/her opposing to this It is clearly stated in the contract that no fulfilling will have negative consequences for the agent Our agent associates him/herself strongly with our firm’s good reputation in the market Cultural closeness There is no cultural difference between ourselves and our agent The cultural differences that might exist between the country of our agent and our country do not represent any problem in our relations with our agent There are no language problems between ourselves and our agent Resource inadequacy Our export expansion is limited by the time and effort that senior management can devote to exporting The limited human resources in our firm makes it difficult to increase our export activities Our firm lacks the financial resources necessary to develop our export activities The bulk of our resources are devoted to our home market, limiting our opportunities for exports

0.877 0.810 0.747 0.579 0.91 0.933 0.919 0.904 0.769

95

96

CARL ARTHUR SOLBERG

Table 3. Hypothesis Tests – Regression Analysis. Independent Variable

Clan Control

Outcome Control

Process Control

Relationship Quality

0.25 Social bonds 0.11 0.08 0.15 Investments in 0.07 0.31 0.34 0.07 relations Information exchange 0.13 0.07 0.06 0.12 0.08 0.01 0.16 Flexibility 0.30 Power 0.22 0.38 0.17 Cultural closeness 0.18 0.01 0.07 Resource inadequacy 0.08 0.21 0.02 Outcome control 0.04 Process control 0.15 Clan control 0.39 Relationship Quality F-value 11,034 17,705 7,698 18,319 Adj. R2 0.329 0.446 0.252 0.475

Performance

0.46 41,364 0.207

 po ¼ 0.10,  po ¼ 0.05,  po ¼ 0.01.

activities indeed are expected to foster an atmosphere of trust and shared values. For instance, Morgan and Hunt (1994) find that communication is related to trust, and the work of the IMP group of researchers suggests that social interaction and mutual adaptations eventually will lead to strong relationships (Ha˚kanson et al., 1982; Halle´n et al., 1991). On the other hand, flexibility is as expected strongly correlated with clan control. This strengthens the argument that flexibility may well be an antecedent to trust and the wider construct of clan control rather than a control mode in its own right as suggested by Bello and Gilliland (1997), or a component thereof (Zhang et al., 2003; Bello et al., 2003). Also, this may explain the weak correlations between clan control and the other process drivers and indicates that trading partners should first and foremost strive to adopt an empathetic attitude to each other. This construct supersedes the other relational drivers in creating a clan culture: excluding flexibility from the equation increases the importance of the other process drivers, but reduces the adjusted R2 to 0.258. Social bonds seem to foster an environment favouring process controls. Given that process controls stem from the need to monitor local activities initiated by the principal, this finding indicates that social relations are critical when carrying out strategies and activities that are developed at the

H# H1: H2a: H2b: H3: H4: H5: H6: H7: H8a: H8b: H9:

H10:

Summary of Hypothesis Tests.

Description Social bonds Investments in relations Investments in relations Information exchange Flexibility more related to clan control than to unilateral controls Power Culture Resource inadequacy more related to outcome control than to clan control and process control Process control Outcome clan controls Relational activities: Social bonds Investments in relations Information exchange Flexibility Relational quality

Expected

Result

Test

-4 -4 -4 -4

Clan control Clan control Unilateral controls Clan control

+ + + + +

ns ns + ns +

Not supported Not supported Supported Not supported Supported

-4 -4

All controls Clan control

+ + +

+ +

Supported Supported

-4 -4 -4

Relationship quality Relationship quality Relationship quality

+ +

ns +

Not supported Supported Not supported Supported

-4 -4 -4 -4 -4

Relationship Relationship Relationship Relationship Performance

+ + + + +

+ ns ns + +

Supported Not supported Not supported Supported Supported

quality quality quality quality

Relational Drivers, Controls and Relationship Quality

Table 4.

97

98

CARL ARTHUR SOLBERG

centre. Also investments in relations appear non-effective in promoting an environment nurturing a clan control setting. We may conclude that this kind of investments is required notwithstanding the level of clan control, and that it, therefore, does not vary with this latter. On the other, investments are strongly related to unilateral controls, suggesting that this kind of asset specificity in relations should be followed up by the principal by way of using different kinds of bureaucratic control modes. We suggest that the asset specificity represented by these investments induces the exporter to monitor and follow up much more closely on the activities of the local trading partner in order to curb potential opportunism, and that this mechanism therefore is much more powerful than most other drivers, particularly of process control. Turning now to the long-term structural drivers, we note that power is strongly related to clan and outcome controls as anticipated, and to a somewhat less extent to process control. One possible conclusion from this observation is that some kind of power is necessary to build clans. One may contend that setting up a network of partners in international markets and having them behave according to more or less the same rules of the game is particularly challenging, and that without some power base, the exporter will not succeed in this endeavour. Also, to have the partners comply with the routines for reporting results (distinctive of outcome control) – a certain level of power gives the principal more leverage in this effort. Process control is also driven by power, though much less than investments in relations. Cultural closeness is indeed related to clan control confirming our assertion that shared values across countries are important in building clan controls and trust. This has previously been found by Nes and Solberg (2002), and corroborates Morgan and Hunt’s (1994) finding that shared values foster trust. The hypotheses related to relationship quality and controls, receive support in our data. Particularly, the finding that process control relates negatively to relationship quality, is an important observation and corroborates the general impression from other studies on international marketing that central control of local marketing activity is not specially appreciated by the local middleman (see, for instance, Solberg, 2000b; Solberg & Nes, 2002). Also we observe that social interaction and flexibility foster relationship quality, whereas investments in relations and information exchange do not or only to a very limited extent, substantiating somewhat the findings above (clan controls and process drivers). Finally, we find as predicted that performance is strongly associated with relationship quality.

Relational Drivers, Controls and Relationship Quality

99

IMPLICATIONS Implications for Management These findings have a certain number of implications for management. First relationship quality is not surprisingly turning up as critical to achieve positive results in exporting. It is therefore imperative to analyse the factors that increase relationship quality. We have found that particularly clan control and – to a limited extent – outcome control enhance relationship quality, whereas process control seem to turn these relationships sour. The ability of the exporter to build clan control hinges first and foremost on its relative power, flexibility, and the degree of cultural competence at the centre. Factors such as information exchange and resources brought to the venture (like for instance personnel, management dedication), seem to a somewhat less extent to play a role here. Not all exporters have the necessary leverage in the exporter–middleman relations, which means that other levers of clan culture building than power should be used by these firms. Information exchange and flexibility seem to be two such areas deserving consideration in addition to investments in cultural understanding. The extent to which process control – and by extension, marketing programs developed and monitored at the centre – should be deployed, depends on three critical factors: (1) that the exporter–middleman atmosphere is characterised by social relations in addition to the more professional ones, (2) that the exporter has invested in the ‘‘professional part’’ of the relations (such as training the agent and investing in market knowledge at the centre), and finally (3) that the exporter has some power to influence the smooth implementation of this kind of control. This finding partly corroborates research by Solberg (2002) who observes that market insight at headquarters is critical to achieve an organisational ‘‘climate’’ necessary to carry out standardised marketing programs. Outcome control has little impact on relationship quality and seems to be substitutable by social bonds and resource commitment in the relations with the middleman in obtaining satisfactory results in the market. Outcome control therefore may be seen as an alternative to clan control and activities and factors leading thereto, given the fact that this latter so strongly is related to relationship quality. If the firm has invested in building a satisfactory clan control atmosphere, it may therefore seem redundant to invest in an onerous system of control routines given the problems of measurability of outcomes across borders (Bello & Gilliland, 1997).

100

CARL ARTHUR SOLBERG

Implications for Research This research extends the extant literature both in international marketing and the traditional agency research in that it introduces new variables to explain the use of controls in an international marketing setting. Moreover, it recasts some of the hypotheses on building a clan control culture involving trust and shared values and norms. For instance, contrary to our expectations, social bonds, investments in relations and information exchange had only limited or no impact on clan control. This finding and others should be tested in other settings. Since relationships are in the core of this research, longitudinal case studies should be carried out. Also, registering the viewpoint of the exporter only, is a considerable limitation and number of studies have in later years analysed these relations from an importer viewpoint (Lee, Sirgy, Brown, & Bird, 2004; Lye, 1998; Skarmeas & Katsikeas, 2001; Skarmeas et al., 2002), giving different perspectives. This shortcoming should be rectified by carrying out dyadic and even triadic studies involving also the relations to the final customer in the foreign market. This is of course a resource demanding research design, but should nevertheless be the goal of future studies in this field of research. Also a richer register of relational drivers may be included in the research. For example, in an exploratory study of Norwegian exporters’ relations with their middlemen in a number of countries it was found that role distribution between the partners was a source of potential conflict. Furthermore, the partners were in relative strong disagreement about guidelines from the centre (Solberg, 2000b). These concepts – guidelines and role distribution – need to be further refined and operationalised, and subsequently analysed. Another topic that to this author’s knowledge has been lacking in research on exporter–middleman relations is that of contracts. How are different contractual arrangements being formed and how do they impact on the relations are two important questions to ask in order to identify critical factors in exporter–middleman relations.

CONCLUSIONS Our research among 171 Norwegian exporters suggests that a number of relational drivers help explain an important part of different control modes, relationship quality and subsequently international market performance. Particularly important is the finding that process control is producing negative effects on relationship quality and eventually performance. On the

Relational Drivers, Controls and Relationship Quality

101

other hand it is also strongly correlated to social relations between the partners. In order to achieve good results with centralised developed international marketing programs necessitating close follow up and process controls, it is therefore concluded that management should create an atmosphere of friendship and social bonds with its distributors. Furthermore, the role of clan control as an important lever for management has been confirmed. This is critical in an international setting, where bridging cultural gaps is seen as paramount to achieve success. Clan control and unilateral controls are closely related to power of the exporting firm: power enables the exporter to exert control and influence the local foreign middleman to accept reporting and monitoring routines or norms and values of the exporting organisation. Finally, we have introduced the concept of relationship quality as a relationship that is functioning well, stable, predictable and embodying potential for the future. Clan control is essentially the most critical factor impacting on relationship quality. Relationship quality explains an essential part of the firm’s marketing performance in international markets.

NOTES 1. IMP ¼ Industrial Marketing and Purchasing, an informal group of researchers who focus on interactions between companies in buyer–seller relationships. 2. This list is the result of one year’s registration work of relevant firms representing a cross section of Norwegian exporting firms.

ACKNOWLEDGMENTS The author would like to thank Anniken Olsen, Sissel Olsvik and Lars Erik Ydstebøe for their assistance in the data collection for this research.

REFERENCE Anderson, E., & Oliver, R. L. (1987). Perspectives on behavior-based versus outcome-based sales force control systems. Journal of Marketing, 51(4), 76–78. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(January), 42–58.

102

CARL ARTHUR SOLBERG

Aulakh, P., Kotabe, M., & Sahay, A. (1996). Trust and performance in cross-border marketing partnerships: A behavioural approach. Journal of International Business Studies, Special issue, 1005–1032. Bello, D., & Gilliland, D. (1997). The effect of output controls, process controls, and flexibility on export market performance. Journal of Marketing, 61(January), 22–38. Bello, D., Chelaru, C., & Zhang, L. (2003). The antecedents and performance consequences of relationalism in export distribution channels. Journal of Business Research, 56, 1–16. Cavusgil, S. T., & Zou, S. (1994). Marketing strategy–performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58(January), 1–21. Diamantopoulos, A. (1998). From the Guest Editor. Journal of International Marketing, 6(3), 3. Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57–74. Frazier, G. L., & Antia, K. D. (1995). Exchange and interfirm power in channels of distribution. Journal of the Academy of Marketing Science, 23(4), 321–326. French, J. R. P., & Raven, B. (1959). The bases of social power. In: D. Cartwright (Ed.), Studies in social power (pp. 150–167). Ann Arbor: University of Michigan Press. Gaski, J. F. (1986). The theory of power and conflict in channels of distribution. Journal of Marketing, (Summer), 9–29. Ghauri, P. N. (1990). Emergence of new structures in Swedish multinationals. In: R. S. Farmer (Ed.), Advances in international comparative management. Greenwich, CN: JAI Press Inc. Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(November), 481–510. Gripsrud, G., Solberg, C. A., & Ulvnes, A. M. (2006). The effect of information collection behavior on market performance: The role of partner relationships. In: C. A. Solberg (Ed.), Advances of international marketing, 16. Amsterdam: Elsevier. Ha˚kanson, H. (Ed.) (1982). International marketing and purchasing of goods – an interaction approach. Chichester: Wiley. Halle´n, L., Johanson, J., & Seyed-Mohamed, N. (1991). Interfirm adaptation in business relationships. Journal of Marketing, 55(April), 29–37. Heide, J. B. (1994). Interorganizational governance in marketing channels. Journal of Marketing, 58(January), 71–85. Heide, J. B., & John, G. (1992). Do norms matter in marketing relationships? Journal of Marketing, 56(April), 32–44. Hewett, K., & Bearden, W. O. L. (2001). Dependence, trust and relational behaviour on the part of foreign subsidiary marketing operations: Implications of managing global marketing operations. Journal of Marketing, 65(October), 51–66. Hofstede, G. (1980). Cultures consequences; international differences in work-related values. Beverly Hills, CA: Sage. Hunt, S. D., & Nevin, J. R. (1974). Power in channels of distribution: Sources and consequences. Journal of Marketing Research, 11(May), 186–193. Johanson, J., & Vahlne, J. E. (1977). The internationalization process of the firm – A model of knowledge development and increasing foreign commitments. Journal of International Business Studies, 8(2), 23–32. Johnson, J. L., Sakano, T., Cote, J. A., & Onzo, N. (1993). The exercise of interfirm power and its repercussions in US–Japanese channel relationships. Journal of Marketing, 57(2), 1–12.

Relational Drivers, Controls and Relationship Quality

103

Johnson, J. L., & Raven, P. V. (1996). Relationship quality, satisfaction and performance in export marketing channels. Journal of Marketing Channels, 5(3–4), 19–48. Klein, S., & Roth, V. J. (1990). Determinants of export channel structure: The effects of experience and psychic distance reconsidered. International Marketing Review, 7(5), 27–38. Lee, D. J., Sirgy, M. J., Brown, J. R., & Bird, M. M. (2004). Importers benevolence toward their foreign export suppliers. Journal of the Academy of Marketing Science, 32(1), 32–48. Leonidou, L. C. (1989). The exporter–importer Dyad – An investigation. Journal of Managerial Psychology, 4(2), 17–28. Lye, A. R. (1998). The initiation and development of exporter–importer relationships. Unpublished Ph.D. thesis, New Zealand, Christchurch: University of Canterbury. Moorman, C., Zaltman, G., & Deshpande´, R. (1992). Relationships between providers and users of market research: The dynamics of trust within and between organizations. Journal of Marketing Research, 29(August), 314–329. Moorman, C., Deshpande´, R., & Zaltman, G. (1993). Factors affecting trust in market research relationships. Journal of Marketing, 57(January), 81–101. Morgan, R. M., & Hunt, S. D. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, 58, 20–38. de Mortanges, C. P., & Vossen, J. (1999). Mechanisms to control the marketing activities of foreign distributors. International Business Review, 8, 75–97. Mumalaneni, V. & Wilson, D. T. (1991). The influence of a close personal relationship between a buyer and a seller on the continued stability and their role relationship. Working Paper 4-91. The Institute for the Study of Business Markets, Pennsylvania State University, University Park. Nes, E. B., & Solberg, C. A. (2002). Precursors of commitment and trust in exporter-distributor relations and the effects on export performance. In: E. Bigne´, V. Johar & S. Hassan (Eds), Multicultural marketing conference of the Academy of Marketing Science. Valencia, Spain. Ouchi, W. Z. (1979). A conceptual framework for the design of organizational control mechanisms. Management Science, 25(September), 833–847. Ouchi, W. Z., & McGuire, M. (1975). Organizational control: two functions. Administrative Science Quarterly, 20(December), 559–569. Prahalad, C. K., & Doz, Y. (1990). Control, change and flexibility: The dilemma of transnational corporations. In: C. A. Bartlett & G. Hedlund (Eds), Managing the global firm. London: Routledge. Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32(3/ Third Quarter), 519–535. Skarmeas, D. A., & Katsikeas, C. S. (2001). Drivers of superior importer performance in crosscultural supplier–reseller relationships. Industrial Marketing Management, 30(2), 227–241. Skarmeas, D., Katsikeas, C. S., & Schlegelmilch, B. B. (2002). Drivers of commitment and its impact on performance in cross-cultural buyer-seller relationships: The importers perspective. Journal of International Business Studies, 33(4), 757–783. Solberg, C. A. (2000a). Modes of exporter governance of sales subsidiaries and distributors in international markets: Literature review, model and test of measurement instruments. Research Report no. 5, Handelshøyskolen BI, Sandvika Norway.

104

CARL ARTHUR SOLBERG

Solberg, C. A. (2000b). Standardization or adaptation of the marketing mix – The role of the local subsidiary/representative. Journal of International Marketing(1), 78–98. Solberg, C. A. (2002). The perennial issue of adaptation or standardisation of international marketing communication: Organizational contingencies and performance. Journal of International Marketing, 10(3), 1–21. Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Uzzi, B. (1997). Social structure and competition in interfirm networks: The paradox of embeddedness. Administrative Science Quarterly, 42, 35–67. Wathne, K., & Heide, J. B. (2000). Opportunism in interfirm relationships: Forms, outcomes and solutions. Journal of Marketing, 64(October), 36–51. Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: The Free Press. Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press. Wilson, D. T. (1995). An integrated model of buyer-seller relationships. Journal of the Academy of Marketing Science, 23(4), 335–345. Wilson, D. T., & Mumalaneni, V. (1986). Bonding and commitment in supplier relationships: A preliminary conceptualization. Industrial Marketing and Purchasing, 1(3), 44–58. Zhang, C., Cavusgil, S. T., & Roath, A. S. (2003). Manufacturer governance of foreign distributor relationships: Do relational norms enhance competitiveness in the export channel? Journal of International Business Studies, 34, 550–566.

Social Bonds Inv.relations Info exchange Flexibility Power Culture close Resource Outcome control Process control Clan control Relationship quality Performance

0.492 0.577 0.372 0.382 0.359 0.265 0.430

Investment in Relations — 0.253 0.221 0.382 0.058 0.362 0.563

Information Exchange

— 0.411 0.307 0.367 0.233 0.276

Flexibility

— 0.087 0.359 0.034 0.166

Power

— 0.043 0.219 0.601

Culture Closeness

— 0.045 0.066 0.067

Resource Inadequacy

Outcome Control

— 0.349

—

Process Control

Clan Control

Relationship Quality

0.388 0.396 0.560

0.478 0.188 0.319

0.300 0.420 0.461

0.186 0.456 0.432

0.336 0.288 0.302

0.362 0.282

0.205 0.126 0.170

0.564 0.251 0.367

— 0.149 0.135

— 0.604

—

0.437

0.368

0.222

0.165

0.295

0.119

0.304

0.310

0.137

0.271

0.460

Relational Drivers, Controls and Relationship Quality

APPENDIX

 p40.05

105

This page intentionally left blank

106

DELIVERING VALUE: MARKET ORIENTATION AND DISTRIBUTOR SELECTION IN EXPORT MARKETS Andre Beaujanot Q., Larry Lockshin and Pascale Quester INTRODUCTION The concept of market orientation has attracted attention from both academics and managers and it has been widely used in the marketing discipline to explain marketing phenomena in business and consumer markets (Deshpande, Farley, & Webster, 1993; Jaworski & Kohli, 1993; Kohli & Jaworski, 1990; Steinman, Deshpande, & Farley, 2000). The most common output or effect attributed by the literature to the market orientation concept has been the firm’s achievement of good or superior financial performance by delivering superior value to customers (Deshpande et al., 1993; Hunt & Lambe, 2000; Kohli & Jaworski, 1990; Narver & Slater, 1990). The market orientation concept has also generated a stream of research in both domestic and international markets (Breman & Dalgic, 2001; Cadogan & Diamantopoulos, 1995; Cadogan, Diamantopoulos, & de Mortanges, 1999; Dalgic, 1994; Siguaw, Simpson, & Baker, 1998). Along with the diverse effects attributed to the market orientation concept in both consumer and business markets, in domestic and international markets alike, a new research stream has recently emerged. It has been argued that the essence of market orientation is the successful management of a relationship between supplier and customer (Steinman et al., 2000). Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 107–133 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16005-0

107

108

ANDRE BEAUJANOT Q. ET AL.

Some recent literature has stated that strong business relationships are better developed with those customers that are able to understand the value created and delivered by the firm (Webster, 1994). In that sense, partner fit appears to act to increase the occurrence of functional conflict and decrease dysfunctional conflict between business partners (Morris & Cadogan, 2001). However, despite the attention focused on market orientation, there is a gap in the literature concerning the link between customer selection, market orientation, and business performance. This may be especially true in international markets, where the cultural and physical distances between the supplier and buyer may act as export barriers. This paper proposes a conceptual model that addresses part of this gap. We begin with a brief discussion and definition of the concepts involved in our study. Then, we present a theoretical model characterising the relationship between customer selection, market orientation, and business performance. Our empirical context relies on export companies’ distributor selection, as one of the most important choices a manufacturer will make in exporting (Cavusgil, Yeoh, & Mitri, 1995). Dealing with the correct overseas partner may allow the exporting firm to overcome the risk of unfamiliarity in overseas markets. This risk comes from environmental factors, which make the international arena different and unknown for the exporting firm. Moreover, these differences in overseas markets play against the implementation of the marketing concept (Cadogan & Diamantopoulos, 1995), and therefore also against the firm’s market orientation. In that vein, our investigation proposes that exporting firms having a local partner, for example, a distributor, whose business characteristics are in accordance with the market orientation of the exporting firm, may help the exporter to implement the marketing concept and market orientation. Thus, from our perspective, the business characteristics of the selected international distributors are seen as a ‘‘facilitator’’ that helps the exporter to implement their market orientation overseas. The results of our exploratory study are provided and we conclude with a discussion of their implications for both theory and practice as well as directions for further research.

THEORETICAL BACKGROUND AND RESEARCH PROPOSITIONS A Proposed Conceptual Model The roots of the market orientation concept are found in the marketing concept (Siguaw et al., 1998), which states that firms must be customer

Delivering Value: Market Orientation and Distributor Selection

109

oriented in order to deliver superior customer value (Kotler & Amstrong, 1969; Svensson, 2001). Previous studies in market orientation have established the importance of customer orientation and superior customer value delivery (Deshpande et al., 1993; Jaworski & Kohli, 1993; Kohli, Jaworski, & Kumar, 1993; Narver & Slater, 1990). In conceptualising market orientation, we follow the now classic definition offered by Narver and Slater (1990, p. 21) that market orientation is ‘‘the organisational culture that most effectively creates the necessary behaviours for the creation of superior value for buyers’’. The operationalisation of this definition has been found as purely behavioural (Cadogan & Diamantopoulos, 1995) because it reflects the firm’s business practices associated with the three behavioural dimensions of market orientation, namely, customer orientation, competitor orientation, and interfunctional coordination. Customer orientation is the understanding of one’s target buyer in order to create superior value for them. A customer orientation requires that a seller understands a buyer’s entire value chain, not only as it is today, but also as it evolves through internal and market dynamics (Narver & Slater, 1990). The customer orientation component itself is viewed as having two sub-components. The first relates to customer analysis, that is, a deliberate emphasis on understanding customer needs and wants. The second is customer responsiveness: responding to the information received about customer needs and preferences (Dawes, 2000). Competitor orientation means that a seller understands the short-term strengths and weaknesses and long-term capabilities and strategies of key competitors, both current and potential. The analysis of principal current and potential competitors must include the entire set of technologies capable of satisfying the current and expected needs of the seller’s target buyers (Narver & Slater, 1990). The third behavioural component is interfunctional coordination, the coordinated utilisation of company resources in creating superior value for target customers (Narver & Slater, 1990). Creating superior customer value is a major goal of market-driven firms (Day, 1994), and these firms develop a market orientation to facilitate the generation, dissemination, and utilisation of market information (Kohli & Jaworski, 1990). Previous researchers have identified some internal processes that enable a firm to become market driven (Vorhies, Harker, & Rao, 1999; Vorhies & Harker, 2000). These internal processes are driven by marketing capabilities (Vorhies & Harker, 2000), which are integrative processes by which market knowledge and firm resources come together to add value to its goods and services and meet competitive demand (Day, 1994). Among the marketing capabilities identified, as being part of

110

ANDRE BEAUJANOT Q. ET AL.

market-driven firms, are two that can be conceptually linked to the market orientation construct. These areas are market information capture capabilities and product development capabilities. The first capability refers to the development of information about specific customer needs, and the second capability relates to the firm’s product development processes that meet customers’ needs. These two capabilities can be related to the behavioural dimensions obtained by Narver and Slater (1990) of customer orientation and interfunctional coordination, respectively. These two behavioural dimensions of market orientation were deemed to have a role in value creation from a customer’s perspective. In that sense, the aim of the first dimension is to gather relevant customer market information oriented to drive the seller’s value proposition, while the second dimension reflects the capacity of the firm to understand and transform, through coordinated business activities, the gathered market information into superior value for their customers. Nevertheless, among the six marketing capabilities identified by Vohries et al. (1999), there were none that could be related to the third behavioural dimension of market orientation obtained by Narver and Slater (1990) ‘‘competitor orientation’’. The two dimensions – customer orientation and interfunctional coordination – are likely to have a more direct impact on superior customer value creation. Thus, we propose that the marketing phenomenon of superior value creation and its delivery is captured through the two different dimensions of market orientation included in our theoretical model. The conceptual framework presented in Fig. 1 depicts one of the most controversial consequences of market orientation, its impact on business performance. On the other side, the model also depicts our underlying research idea: exporting firms perceiving themselves as being market oriented perform better because they select international clients having business characteristics that are in accordance with the exporter’s market orientation. The theoretical fundamentals supporting our conceptual model and the research propositions are developed in the next section. The concentration given overall to customers within the market orientation literature is well established, but most of the research as cited above has focused on understanding the customer’s value chain and responding to customer needs. In doing so, the antecedent of choosing the proper customer has been ignored. As a result, customer characteristics, or in our case, the important attributes of an exporter’s distributor, would seem essential in determining the exporting firm’s success at market orientation. The ability of a firm to select the right customers seems to be a prerequisite to the delivery of customer value (Steinman et al., 2000; Svensson,

Delivering Value: Market Orientation and Distributor Selection

111

Customer Orientation

Distributor Characteristics

Business/export Performance

Interfunctional Coordination

Fig. 1.

Conceptual Framework.

2001; Tuominen, Rajala, & Mo¨ller, 2002; Webster, 1993, 1994). It has been argued earlier in this paper that superior customer value is a fundamental part of the market orientation construct. Thus, we expect that market orientation and customer selection are theoretically linked. Because customer value is considered as the customers’ subjective opinion of the firm’s activities (Ravald & Gronroos, 1996; Wimmer & Mandjak, 2002), carefully selecting the right customers in the first place has great importance. We believe that the business characteristics of the buyer (distributor) must match those of the seller (exporter) (Tamtam, 2001). The more market oriented, the more the seller will emphasise distributor capabilities. The literature on value creation between seller and buyer focuses on understanding the goals of the buyer (Webster, 1994). We were unable to find literature on matching characteristics of buyers and sellers, but our interviews with exporting wineries (see methods below) and checklists available from export advice websites (see Tamtam, 2001 for examples) provided specific testable characteristics (Appendix C), thus the first research proposition is stated: P1. The seller’s positive perception of the business characteristics of the selected overseas distributors is positively associated with the seller’s customer orientation. We measure, but do not model competitor orientation in this research. Our focus is on the antecedent to customer orientation of choosing the right customer, not on the competitor aspect of market orientation. We leave competitor orientation within the overall market orientation framework for

112

ANDRE BEAUJANOT Q. ET AL.

future research incorporating our customer selection construct. We retain interfunctional coordination within our research, because much of customer responsiveness relies on these activities. Previous research on market orientation has shown direct links between customer orientation and interfunctional coordination (Deshpande & Farley, 1998; Deshpande et al., 1993; Jaworski & Kohli, 1993; Kohli et al., 1993; Narver & Slater, 1990). We would expect, therefore, that selecting the right distributor, whose characteristics match those of the seller would positively influence the implementation of the seller’s interfunctional coordination. Therefore, the seller’s internal business processes, or the seller’s interfunctional coordination, must create and deliver value perceived as superior by the buyer. In that sense, if the international distributor’s characteristics help the seller’s interfunctional coordination implementation, then it is suggested that exporting firms will be more likely to create and deliver superior customer value. The second research proposition is as follows: P2. The seller’s positive perception of the business characteristics of the selected overseas distributors is positively associated with seller’s interfunctional coordination. Finally, our model tests the theoretical link between market orientation and business performance. Although the majority of studies on market orientation claim that there exists a positive association between market orientation and business performance (Jaworski & Kohli, 1993; Pitt, Caruana, & Berthon, 1996; Sin, Tse, Yau, Chow, & Lee, 2003; Sin, Tse, Yau, Lee, & Chow, 2002; Slater & Narver, 1994a), there is no unequivocal evidence about the positive impact of market orientation on business performance (Langerak, 2003). Even more, the relationship between both constructs is situation specific and subject to various moderating influences (Diamantopoulos & Hart, 1993). We acknowledge the current debate about the impact of market orientation on business performance, but in this study we postulate that market orientation is a source of superior business performance. Our view is supported as follows. Sellers that perceive themselves as being market oriented also select customers having business characteristics that are in accordance with the seller’s market orientation. Because customer’s characteristics are in harmony with the seller’s market orientation, it is supposed that the value created and delivered by the firm is more likely to be perceived as superior by the customers. The firm that consistently delivers superior value to their customers achieves a competitive advantage, which is a source of superior business performance (Slater & Narver, 1994b). Thus, the following proposition is postulated:

Delivering Value: Market Orientation and Distributor Selection

113

P3. Customer orientation and interfunctional coordination are positively associated with increased business performance. Methodology A total of six personal interviews were conducted with export managers, marketing managers, or CEOs in two main wine regions in Australia: Barossa and McLaren Vale. One of the most important aims in this preliminary stage of our research was to identify those business activities considered critical to achieving success in the export venture. Several broad ideas and topics related to our research aim were developed through each in-depth interview (see Appendix A for the protocol) in order to elucidate critical business activities for export success. Each interview was recorded for later analysis. Several patterns emerged from this qualitative phase. First, all interviewees made the point that distribution is one of the most critical issues to be successful offshore. The interviewees agreed that the selection of the correct distributor plays a major role in overseas business. How to manage the distributor and the communication system between the distributor and seller were cited as important factors for being successful overseas. Second, we found that companies must be efficient in their production and distribution systems if they expect to be successful in their export venture. Being innovative and producing products with high perceived and objective quality were named as important issues for export success. The preliminary and exploratory information obtained in this initial stage allowed us to develop two ideas, first – that the characteristics of the selected distributor might play an important role in export success and second – that the customer orientation and the correct coordination between production and distribution seem to be critical to achieve good export performance. Hence, we borrowed two dimensions from the market orientation literature – customer orientation and interfunctional coordination – that matched our preliminary findings well. In the next stage of the study, multi-item Likert scales were developed to measure these two dimensions of market orientation and some of the distributor’s characteristics. The measurement scales for the two dimensions of market orientation (Appendix B) were adapted from Narver and Slater (1990). The set of items belonging to the multi-item Likert scale developed to measure the importance of a set of distributor’s characteristics (Appendix C) that are supposed to be relevant for wineries when they select their overseas distributors come from the ideas obtained during the in-depth

114

ANDRE BEAUJANOT Q. ET AL.

interviews as well as from an internet website (Tamtam, 2001), which proposed a checklist for choosing overseas marketing partners. The measurement scale for business performance (Appendix D) was adapted from previous authors (Jaworski & Kohli, 1993; Matsuno & Mentzer, 2000). The questionnaire was pre-tested with a small group of wineries, and some questions were re-worded. The final questionnaire was mailed to 522 Australian wineries. The wineries included in the sample processed an average of 50–1,000 tonnes of grapes so this was really a population sample of small and medium-sized Australian wineries based on the Australian and New Zealand Wine Industry Directory (Winetitles, 2001). A total of 107 complete questionnaires were received. Respondents were asked to consider their most important distributor or agent in one of their key overseas markets when answering. Thus, the questionnaire was filled out in regard to this specific overseas customer. For the statistical analysis only companies in the sample already exporting were included, providing a final useable sample of 77 companies. It should be noted that only 19% of the smallest size wineries export and these account for 371 of the firms in the sample (Winetitles, 2001). This means the available sample is 522 wineries–371 small wineries  19% (70) (those who export) leaving an actual potential sample of 225 wineries. The sample size of 77 exporting wineries is a reasonable number (34%) of those exporting within the overall class. The statistical procedure used to investigate relations between the set of observed and latent variables was factor analysis (Byrne, 2001). We conducted two types of factor analysis, exploratory factor analysis (EFA) and confirmatory factor analysis (CFA). To run EFA we used SPSS 11, which allows us to understand the link between the observed and latent variables. Therefore, we could determine how and to what extent the observed variables are linked to their underlying factors. In order to find causal relations in our data set, we used Analysis of Moment Structures (AMOS 4) to run CFA and to test our structural model.

ANALYSIS AND RESULTS Market Orientation Narver and Slater (1990) found in their work that the three behavioural dimensions – customer orientation, competitor orientation, and interfunctional coordination – were measured by six, four, and five items, respectively. As mentioned before, our measurement scale was adapted from

115

Delivering Value: Market Orientation and Distributor Selection

Narver and Slater’s (1990) scale and some items were re-worded to make sense in the wine context. All items supposed to measure customer orientation were kept as part of our measurement instrument. After pre-testing our questionnaire, one of the items originally part of the interfunctional coordination dimension – interfunctional customer calls – was excluded because it did not seem to relate to the dimension in the interpretation of the winery-based sample. CFA was used first to test how well our data confirmed Narver and Slater’s market orientation measurement model. The preliminary CFA indicated poor fit: w2 ¼ 168:8; df ¼ 74; p ¼ 0:000; root mean square error of approximation ðRMSEAÞ ¼ 0:130; and GFI ¼ 0:778: Therefore, EFA was used to determine which items of the measurement scale best measured the various dimensions of market orientation. The items in the measurement scales were factor analysed using the maximum likelihood extraction method with Varimax rotation and Kaiser normalisation. The final factor solutions were obtained after analysing the rotated solutions. Our findings (Table 1) are consistent with Narver and Slater’s (1990) results and confirmed the three-factor structure for market orientation (see Appendix E for a detailed comparison between the two scales and Appendix F for the complete correlation matrix). The new three-factor model presents a better fit: (w2 ¼ 64:01; ½dfŠ ¼ 41; p ¼ 0:012; mbdi; RMSEA ¼ 0:086; and GFI ¼ 0:875). The results of the EFA showed us that practically all the items belonging to the original dimensions of market orientation stated by Narver and Slater (1990) also belong to the obtained dimensions of market orientation.

Customer Orientation The resulting measures of the dimension are as reliable (Cronbach a ¼ 0:84) as those provided by Slater and Narver (1990). Nevertheless, our analysis suggested that one of their items belonging originally to this dimension – measure customer satisfaction – should not be considered as part of the new measures. Table 1.

Exploratory Factor Analysis: Market Orientation.

Factor Name Customer orientation Competitor orientation Interfunctional coordination

Indicators

Cronbach Alpha

C82 – C83 – C84 – C85 – C87 C88 – C89 – C90 C92 – C94 – C95

0.84 0.80 0.82

116

ANDRE BEAUJANOT Q. ET AL.

Competitor Orientation The dimension found after conducting EFA has, again, most of the items belonging to the one stated in Narver and Slater (1990). However, the new dimension is more reliable (Cronbach a ¼ 0:80) and does not include one of the original items – Target opportunities for competitive advantage – associated with this construct. We provide this to show that we measured this dimension, but do not include it in our theoretical model. Interfunctional Coordination As happened previously, these measures are more reliable (Cronbach a ¼ 0:82) than the original one (Cronbach a ¼ 0:71) even though it does not include two of the items – interfunctional calls and functional integration in strategy – belonging to the original dimension. Therefore, our three factors of market orientation are consistent with the findings stated by Narver and Slater (1990) and can be used as good and valid indicators of market orientation. Nevertheless, and as stated before, our theoretical model will consider only the two dimensions of market orientation that have a more direct impact on superior customer value creation. Business Performance The construct for business performance was also examined via EFA, and yielded two factors. Each factor contained two items (see Table 2). The first factor can be seen as a measure explaining the financial performance of the company. The second factor measures business performance from a competitive positioning point of view. Both factors will be used as part of our model. Validity of the Model One of the first steps when conducting CFA is to run the observed indicators in a so-called measurement model, in order to evaluate convergent and discriminant validity. Table 2.

Exploratory Factor Analysis: Business Performance.

Factor Name Business performance 1 Business performance 2

Indicators

Cronbach Alpha

C119_1 – C120_1 C121_1 – C122_1

0.75 0.76

117

Delivering Value: Market Orientation and Distributor Selection

Convergent Validity A set of indicators presumed to measure the same construct shows convergent validity if their intercorrelations are at least moderate in magnitude (Kline, 1998). In other words, convergent validity assesses the degree to which two measures of the same concept are correlated. High correlations indicate that the scale is measuring its intended concept (Hair, Anderson, Tatham, & Black, 1998). From Table 3 we can see that all the indicators present a correlation at least moderate with its respective factor. Our new scale for distributor characteristics is the weakest of the set of scales. Nonetheless, it has factor loadings over 0.5 for all items. Discriminant Validity If the estimated correlation of the factors that underlie a set of indicators that are supposed to measure different constructs is not excessively high, Table 3.

Indicators Used in the Analysis – Convergent Validity.

Factor Name Distributor characteristics Cronbach a : 0:78

Interfunctional coordination Cronbach a : 0:83

Customer orientation Cronbach a : 0:84

Business performance 1 Cronbach a : 0:75 Business performance 2 Cronbach a : 0:76

Indicator

Mean

SD

Factor Load

R2 value

C41_1 C42_1 C43_1 C44_1 C38_1 C39_1 C40_1

2.00 1.63 2.32 1.72 2.40 2.81 2.07

0.84 0.70 0.80 0.75 0.93 0.98 0.80

0.512 0.714 0.586 0.641 0.542 0.547 0.524

0.26 0.51 0.34 0.41 0.29 0.30 0.27

C94_1 C92_1 C95_1

2.53 2.59 2.37

1.46 2.02 1.94

0.799 0.763 0.815

0.64 0.58 0.66

C84_1 C85_1 C83_1 C87_1 C82_1

1.98 2.57 1.72 2.40 1.67

1.08 1.26 0.95 1.29 1.12

0.859 0.751 0.697 0.678 0.621

0.74 0.56 0.49 0.46 0.39

C119_1 C120_1

3.25 3.93

1.26 1.45

0.767 0.788

0.59 0.62

C121_1 C122_1

3.42 2.7

1.24 1.21

0.794 0.773

0.63 0.60

118

ANDRE BEAUJANOT Q. ET AL.

Table 4.

Indicators Used in the Analysis – Discriminant Validity. Correlations

Distributor_characteristics Customer_orientation Business_performance 1 Interfunctional_coordination Distributor_characteristics Interfunctional_coordination Customer_orientation Customer_orientation Distributor_characteristics Distributor_characteristics

2 2 2 2 2 2 2 2 2 2

Customer_orientation Business_performance 1 Business_performance 2 Business_performance 2 Interfunctional_coordination Business_performance 1 Business_performance 2 Interfunctional_coordination Business_performance 1 Business_performance 2

0.355 0.521 0.566 0.605 0.381 0.342 0.340 0.353 0.077 0.229

then there is evidence for discriminant validity (Kline, 1998). In other words, each set of measures for a construct ought to be less associated with other constructs than with measures of the same construct. Table 4 exhibits the estimated correlations between the factors. Kline (1998) suggests that a correlation between factors greater than 0.85 can be considered as high. None of the correlations presented in Table 4 achieved this threshold. Therefore, from a preliminary analysis, the factors in our model can be considered distinctive.

Results Fig. 2 presents the empirical model under study. The model depicted in Fig. 2 yielded a w2 value of 172.916, with 144 degrees of freedom and a probability value, p, of 0.05, and a w2 =df ¼ 1:201 suggesting an acceptable fit of the data to the hypothesised model. According to Byrne (2001), other goodness-of-fit indexes (GFIs) have to be taken into account to provide a more pragmatic approach to the evaluation process. The GFI achieved a value of 0.819 and the parsimony GFI (PGFI) is 0.621 in our model. These indexes, classified as absolute indexes because they compare the hypothesised model with no model at all, support a relative good fit of the model. Moreover, the comparative fit index (CFI) achieved a value equal to 0.938, again suggesting that the model exhibits a good fit (Hu & Bentler, 1999). Finally, the RMSEA of 0.051 also is consistent with an acceptable fit (Byrne, 2001). The findings in our empirical model (see Table 5) suggest substantive support to our research propositions. First, the paths Customer Orientation

119

Delivering Value: Market Orientation and Distributor Selection

e41

C41_1

e42

C42_1

e43

C43_1

e44

C44_1

e38

C38_1

e39

C39_1

e40

C40_1

e84

e85

e83

e87

e82

C84_1

C85_1

C83_1

C87_1

C82_1 C119_1

e119

res1

C120_1

e120

res1

C121_1

e121

C122_1

e122

Customer Orientation

Business Performance 1

Distributor Characteristics

Interfunctional Coordination

Business Performance 2

C94_1

C92_1

C95_1

e94

e92

e95

Fig. 2.

Empirical Model.

- Distributor Characteristics and Interfunctional Coordination - Distributor Characteristics have a positive and significant regression weight (p valueo0:05). These findings allow us to support our first and second research propositions which stated that ‘‘P1: The seller’s positive perception of the business characteristics of the selected overseas distributors is positively associated with the seller’s customer orientation’’ and ‘‘P2: The seller’s positive perception of the business characteristics of the selected overseas distributors is positively associated with seller’s interfunctional coordination’’. The direction of the association, from customer orientation and interfunctional coordination towards the distributor characteristics, implies that the market orientation of the seller is positively associated with the choice of specific distributors based on their features. Second, our results are consistent with the position taken in this research in terms of the positive influence that market orientation has over business performance. This is supported in our study as three out of four paths in our model linking market orientation and business performance are positive and significant (pvalueo0:05). Therefore, we can support our third research proposition: ‘‘P3: Customer orientation and interfunctional coordination are positively

120

ANDRE BEAUJANOT Q. ET AL.

Table 5.

Regression weights for empirical model.

Regression Weights Distributor_characteristics Distributor_characteristics Business_performance 1 Business_performance 1 Business_performance 2 Business_performance 2 Business_performance 1 Business_performance 2 C43_1 C44_1 C42_1 C41_1 C38_1 C39_1 C40_1 C85_1 C83_1 C87_1 C82_1 C84_1 C94_1 C92_1 C95_1 C120_1 C119_1 C121_1 C122_1

Estimate S.E. ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’ ’

Customer_orientation Interfunctional_coordination Interfunctional_coordination Customer_orientation Customer_orientation Interfunctional_coordination Distributor_characteristics Distributor_characteristics Distributor_characteristics Distributor_characteristics Distributor_characteristics Distributor_characteristics Distributor_characteristics Distributor_characteristics Distributor_characteristics Customer_orientation Customer_orientation Customer_orientation Customer_orientation Customer_orientation Interfunctional_coordination Interfunctional_coordination Interfunctional_coordination Business_performance 1 Business_performance 1 Business_performance 2 Business_performance 2

0.201 0.094 0.187 0.818 0.316 0.331 0.457 0.128 0.979 1 1.034 0.9 1.026 1.102 0.874 1.443 1 1.333 1.057 1.419 0.728 1 1.03 1.071 1 1 1.133

C.R.

P

0.102 0.044 0.093 0.246 0.185 0.099 0.333 0.273 0.243

1.968 2.146 2.003 3.331 1.709 3.34 1.373 0.467 4.021

0.049 0.032 0.045 0.001 0.087 0.001 0.17 0.64 0

0.226 0.249 0.275 0.293 0.239 0.249

4.574 3.609 3.737 3.756 3.652 5.794

0 0 0 0 0 0

0.252 0.218 0.222 0.114

5.293 4.839 6.389 6.407

0 0 0 0

0.154 0.28

6.681 0 3.826 0

0.272

4.166 0

correlated with business performance’’. It is important to highlight that one path was not significant; the path Customer orientation - Business performance 2 was not significant (p value ¼ 0.087) in our model, but indicated the proper direction and near significance. On the other hand, none of the paths denoting a direct influence of the distributor’s characteristics on business performance is significant (p values ¼ 0.17 and 0.64). The focal point of market orientation is to create and deliver customer value (McNaughton, Osborne, Morgan, & Kutwaroo, 2001; Slater & Narver, 1994b, 1995) which is finally judged by selected customers (Webster, 1994). In that sense, our model acknowledges the relevance of doing business with customers having attributes that help the implementation of the seller’s market orientation. If customers perceive the value created and delivered as superior, a

Delivering Value: Market Orientation and Distributor Selection

121

fundamental issue for market-oriented firms, then the firm might achieve a competitive advantage, which is a source of superior business performance (Slater & Narver, 1994b). Thus, our two market orientation constructs – customer orientation and interfunctional coordination – affect business performance through the selection of distributors having attributes that are in accordance with the seller’s market orientation.

DISCUSSION AND IMPLICATIONS Our study demonstrates that market orientation guides customer selection. To our knowledge, this is the first study empirically establishing the notion that the choice of customers is as strategic as the development of the marketing strategy to serve them. Importantly, our model validates the concept of customer selection as intrinsically linked to the development of market orientation. The implications of our findings are interesting for both theory and practice. From a theoretical point of view our model highlights the importance for firms of having a set of required characteristics for choosing international customers. This idea enhances and supports the basis of market orientation, which is ‘‘the organisational culture that most effectively creates the necessary behaviour for the creation of superior value for buyers’’ (Narver & Slater, 1990, p. 21). In that sense, firms that perceive themselves as market oriented and do business with customers, who are not prepared to perceive the value created and delivered as superior, cannot capitalise on the potential benefits (e.g. superior business performance) of their business culture. Therefore, real market-oriented firms do not only perceive themselves as being market oriented, but they also care about customer selection and select customers carefully. The aim behind the seller’s market orientation is a willingness to be perceived so by the customer. In the international business arena, dealing with customers having a set of desired characteristics might help the seller to create and deliver the value expected by its customers. This is especially important when the psychic distance between an international buyer and a domestic seller is large, as it may act as a real trade barrier. The model shows that the distributor (buyer) features do not directly influence business performance, but act through the association with customer orientation and interfunctional coordination in accord with the Narver and Slater (1990) model. The direct paths are not significant, so it is the link between distributor characteristics as assessed by the seller that

122

ANDRE BEAUJANOT Q. ET AL.

helps the seller’s business perform better through the relationship established and evidenced by increased customer orientation and interfunctional coordination. This finding is extremely important as it shows that there is a need to understand the market orientation of the firm as a system, where the business culture transcends the firm and is embedded into the customers. The last theoretical implication of our findings relates to the evidence about the positive impact of market orientation on business performance. Our findings are not unequivocal. They give support to the positive relationship between market orientation and business performance, through the paths Customer orientation - Business performance 1; Interfunctional coordination - Business performance 1; and Interfunctional coordination Business performance 2 and the path Customer orientation - Business performance 2, which is only marginally significant in our model. It is possible that the way the business performance is measured has an effect on the relationship between business performance and market orientation; our results support the idea that the relationship between both constructs is situation specific and subject to various moderating influences (Diamantopoulos & Hart, 1993). Also, it is important to mention the nonsignificance of the paths Distributor characteristics - Business performance 1 and Distributor characteristics - Business performance 2. From a theoretical point of view, it seems that customer’s characteristics do not have a direct influence on business performance if they are seen in isolation. However, our results indicate that selecting the right customers influences customer orientation and interfunctional coordination and through them business performance. We believe that future research could focus on the relationship between the customer’s characteristics and business performance through the lens of the seller’s business culture, in our case under the seller’s market orientation. It is likely that the type of customer and the characteristics to be tested will differ in different industries, because the ones that fit our model are specific to the distribution of wine and probably would be similar for other types of food or even consumer products. Our findings are also interesting from a practical point of view. The actual characteristics of the distributors, which were important in our model, provide some insight into the customer qualities wine exporters find valuable. For example, we found that both physical and managerial attributes were important. Physical facilities (certainly important for storing wine), the sales force, and offices were all relevant. Less tangible but equally important characteristics included size, reputation, promotional and marketing support, and financial stability added to the desirability of the customer. From a managerial perspective, the importance of these characteristics is

Delivering Value: Market Orientation and Distributor Selection

123

not surprising, but it is now established, albeit in an exploratory fashion, that they also have empirical validity. The key finding is that these link directly and strongly into the two customer-value-driven dimensions of market orientation. Therefore, market-oriented firms trying to expand their business overseas should screen their potential customers under the lens of their business culture. This would be especially important when a large psychic distance between the seller and the buyer exists.

DIRECTIONS FOR FUTURE RESEARCH It is important to note the exploratory and specific nature of this study. By focusing on a mere 77 wine exporters, we could not hope to provide a more generalised picture of either the wine industry or other exporting sectors. However, our findings give support to the notion that the distributors’ characteristics need to be introduced into any model aimed at explaining the business performance of this type of business relationship. More broadly, our study may encourage other researchers from fields other than wine marketing to examine whether including customer characteristics would improve their ability to model and predict business performance. Certainly, the recent emphasis on customer value creation in business relationships (Beverland & Lockshin, 2003; Flint, Woodruff, & Fisher, 2002; Mo¨ller & Torronen, 2003) lends some credence to our use of customer characteristics in a business-to-business context. Our research suggests that dyadic research, of the type that measures and includes variables from both sides of the business relationship, would be useful in determining whether some characteristics exercise a greater or lesser influence over performance and from which viewpoint. Our research only used the producer’s viewpoint of desired customer characteristics. Future research should therefore endeavour to account for not only absolute but also relative differences between exporting partners as a means to predict the sort of performance that can be expected from a business relationship. Another area of importance for the next stage of studies would be to incorporate relationship measures as part of the dyad. Along with customer characteristics and market orientation, relationship measures would add to our understanding of how customer selection interacts with market orientation to form long-lasting relationships with a positive impact on business performance. Finally, future research is required in order to elucidate why customer orientation and interfunctional coordination have a distinct and separate

124

ANDRE BEAUJANOT Q. ET AL.

impact on each factor of business performance. Alternatively, the development of better objective measures for business performance may allow future researchers to strengthen and validate our findings in other empirical contexts. Our research has opened the door to an important consequence of two of the dimensions of market orientation. It is likely that different distributor characteristics will be important in different industrial sectors. There is a need to further investigate and empirically generalise those customer’s characteristics that might help exporting firms to implement their market orientation. In doing that, it is expected that exporting firms will be more able to deliver superior customer value, the central focus of market orientation. This is a useful direction for future research. Competitor orientation did not fit in our model, but should certainly be included in the next stages of research. We feel that there is not a great deal of competitor focus in the Australian wine industry, because Australian companies see themselves as promoting the overall ‘‘Brand Australia’’. This is probably not the case in other industries. This research has focused our thinking on how relationships are established and link into business performance and we hope will have some influence on how market orientation and relationship marketing constructs are linked with business performance.

ACKNOWLEDGMENTS The authors are grateful to the anonymous reviewer for the very valuable comments. Especially, we would like to thank the Guest Editor of this special volume, Associate Professor Carl Arthur Solberg, for substantial contributions to this paper.

REFERENCES Beverland, M., & Lockshin, L. (2003). A longitudinal study of customer’s desired value change in business-to-business markets. Industrial Marketing Management, 32, 653–666. Breman, P., & Dalgic, T. (2001). Exporting firms, the learning organization and market orientation: A conceptual and empirical investigation of Dutch exporters. Advances in International Marketing, 10, 339–383. Byrne, B. M. (2001). Structural equation modeling with AMOS. Basic concepts, applications and programming. Mahwah, NJ: Lawrence Erlbaum Associates. Cadogan, J. W., & Diamantopoulos, A. (1995). Narver and Slater, Kohli and Jaworski and the market orientation construct: Integration and internationalization. Journal of Strategic Marketing, 3(1), 41.

Delivering Value: Market Orientation and Distributor Selection

125

Cadogan, J. W., Diamantopoulos, A., & de Mortanges, C. (1999). A measure of export market orientation: Scale development and cross-cultural validation. Journal of International Business Studies, 30(4), 689–707. Cavusgil, S. T., Yeoh, P.-L., & Mitri, M. (1995). Selecting foreign distributors. An expert systems approach. Industrial Marketing Management, 24, 297–304. Dalgic, T. (1994). International marketing and market orientation: An early conceptual attempt at integration. Advances in International Marketing, 6, 69–82. Dawes, J. (2000). Market orientation and company profitability: Further evidence incorporating longitudinal data. Australian Journal of Management, 25(2), 173–199. Day, G. S. (1994). The capabilities of market-driven organizations. Journal of Marketing, 58(October), 37–51. Deshpande, R., & Farley, J. U. (1998). Measuring market orientation: Generalization and synthesis. Journal of Market Focused Management, 2(3), 213–232. Deshpande, R., Farley, J. U., & Webster, F. E. J. (1993). Corporate culture customer orientation, and innovativeness in Japanese firms: A quadrad analysis. Journal of Marketing, 57(1), 23–27. Diamantopoulos, A., & Hart, S. (1993). Linking market orientation and company performance: Preliminary evidence on Kohli and Jaworski’s framework. Journal of Strategic Marketing, 1, 93–121. Flint, D. J., Woodruff, R. B., & Fisher, G. S. (2002). Exploring the phenomenon of customers’ desired value change in a business-to-business context. Journal of Marketing, 66 (October), 102–117. Hair, J. F. J., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data analysis (5th ed.). NJ: Prentice-Hall. Hu, L. T., & Bentler, P. M. (1999). Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling: A Multidisciplinary Journal, 6, 1–55. Hunt, S. D., & Lambe, C. J. (2000). Marketing’s contribution to business strategy: Market orientation, relationship marketing and resource-advantage theory. International Journal of Management Reviews, 2(1), 17–43. Jaworski, B. J., & Kohli, A. K. (1993). Market orientation: Antecedents and consequences. Journal of Marketing, 57(3), 53–70. Kline, R. B. (1998). Principles and practices of structural equation modeling. NY: The Guilford Press. Kohli, A. K., & Jaworski, B. J. (1990). Market orientation: The construct, research propositions. Journal of Marketing, 54(2), 1–18. Kohli, A. K., Jaworski, B. J., & Kumar, A. (1993). MARKOR: A measure of market orientation. Journal of Marketing Research, 30(4), 467–477. Kotler, P., & Amstrong, G. (1969). Broadening the concept of marketing. Journal of Marketing, 33(January), 105–110. Langerak, F. (2003). An appraisal of research on the predictive power of market orientation. European Management Journal, 21(4), 447–464. Matsuno, K., & Mentzer, J. T. (2000). The effect of strategy type on the market orientation– performance relationship. Journal of Marketing, 64, 1–16. McNaughton, R. B., Osborne, P., Morgan, R. E., & Kutwaroo, G. (2001). Market orientation and firm value. Journal of Marketing Management, 17(5/6), 521–524.

126

ANDRE BEAUJANOT Q. ET AL.

Mo¨ller, K. E. K., & Torronen, P. (2003). Business suppliers’ value creation potential: A capability-based analysis. Industrial Marketing Management, 32(2), 109–118. Morris, B. G. A., & Cadogan, J. W. (2001). Partner symmetries, partner conflict and the quality of joint venture marketing strategy: An empirical investigation. Journal of Marketing Management, 17(1/2), 223. Narver, J. C., & Slater, S. F. (1990). The effect of market orientation on business profitability. Journal of Marketing, 54(4), 20–35. Pitt, L., Caruana, A., & Berthon, P. R. (1996). Market orientation and business performance: Some European evidence. International Marketing Review, 6(1), 5–18. Ravald, A., & Gronroos, C. (1996). The value concept and relationship marketing. European Journal of Marketing, 30(2), 19–30. Siguaw, J. A., Simpson, P. M., & Baker, T. L. (1998). Effects of supplier market orientation on distributor market orientation and the channel relationship: The distributor perspective. Journal of Marketing, 62(July), 99–111. Sin, L., Tse, A., Yau, O., Chow, R., & Lee, J. (2003). Market orientation and business performance A comparative study of firms in mainland China and Hong Kong. European Journal of Marketing, 37(5/6), 910–936. Sin, L., Tse, A., Yau, O., Lee, J., & Chow, R. (2002). The effect of relationship marketing orientation on business performance in a service-oriented economy. Journal of Services Marketing, 16(7), 656–676. Slater, S. F., & Narver, J. C. (1994a). Does competitive environment moderate the market orientation–performance relationship. Journal of Marketing, 58(1), 46–56. Slater, S. F., & Narver, J. C. (1994b). Market orientation, customer value, and superior performance. Business Horizons, 37(2), 22–28. Slater, S. F., & Narver, J. C. (1995). Market orientation and the learning organization. Journal of Marketing, 59(3), 63–74. Steinman, C., Deshpande, R., & Farley, J. U. (2000). Beyond market orientation: When customers and suppliers disagree. Journal of the Academy of Marketing Science, 28(1), 109–119. Svensson, G. (2001). Re-evaluating the marketing concept. European Business Review, 13(2), 95–100. Tamtam. (2001). Checklist: Choosing a market partner. Retrieved 6 Nov., 2001, from http:// www.tamtam.com Tuominen, M., Rajala, A., & Mo¨ller, K. (2002). Market orientation: A promising metaphor for culture and collaboration in industrial networks. Paper presented at the 18th IMP conference, Perth, Australia. Vorhies, D., Harker, M., & Rao, C. P. (1999). The capabilities and performance advantage of market-driven firms. European Journal of Marketing, 33(11/12), 1171–1202. Vorhies, D., & Harker, M. J. (2000). The capabilities and performance advantage of marketdriven firms: An empirical investigation. Australian Journal of Management, 25(2), 145–171. Webster, F. E. J. (1993). Defining the new marketing concept. Marketing Management, 2(4), 22–31. Webster, F. E. J. (1994). Executing the new marketing concept. Marketing Management, 3(1), 9–16. Wimmer, A., & Mandjak, T. (2002). Business relationships as value drivers? Paper presented at the 18th annual IMP conference, Dijon, France. Winetitles. (2001). The Australian and New Zealand wine industry directory: Fran Clancy.

Delivering Value: Market Orientation and Distributor Selection

127

APPENDIX A. PROTOCOL Set of ideas that have been used to run the in-depth interviews. The interviewer conducted the interview in order to go through all these aspects. These dot points were used as a guide only, and they were not asked directly to the interviewees.  What are the main difficulties that you (your company) found when you started to export wine?  How do you learn about the external market? (Information, market opportunities, consumer needs, distributors, etc.)  If you could start your wine business from scratch again, what would you do similarly or differently? Why?  How do you measure if you are successful in the export business?  Do you feel successful exporting?y Why?  Do you show long-term commitment to export markets? How?  Do you build long-term relationships by regularly visiting and staying in close contact with your export partners? Why?  Do you build an international reputation for quality: delivering continuous improvements in all areas?  Do you think that your wines are different?y Why? y How do you know that your wines are different or not?  Are your products oriented to customer preferences?y Who are your customers?

APPENDIX B. MARKET ORIENTATION SCALE In your opinion, how committed is your company of the following practices? Please answer the questions as follows (use a rating scale, where 1 ¼ high commitment and 7 ¼ no commitment): C82_1 C83_1 C84_1 C85_1 C86_1 C87_1 C88_1 C89_1

Focusing on customers Creating value for customers Understanding customer needs Setting customer satisfaction objectives Measuring customer satisfaction After-sales service Salespersons sharing competitor information Responding rapidly to competitor activity

128

ANDRE BEAUJANOT Q. ET AL.

C90_1 C91_1 C92_1 C93_1 C94_1 C95_1

Top managers discussing competitors’ strategies Targeting opportunities to gain a competitive advantage Sharing information across marketing and production department Gaining a functional integration in strategy All functions contribute to customers’ value Sharing resources across the whole firm

APPENDIX C. DISTRIBUTOR (CUSTOMER) CHARACTERISTICS SCALE When you select your distributor, how important are the following attributes in your final decision? Using the scale from critical to irrelevant, select your option for each of the following statements: C38_1 C39_1 C40_1 C41_1 C42_1 C43_1 C44_1

He must have an important sales force. Upkeep and condition of office and management facilities. He must have a good storage technology and warehousing capacity. He must have a good knowledge about the Australian wine industry. He must have a good reputation in the market. He must have a good capacity to invest in promotional and marketing support. He must show a healthy financial capability and stability.

APPENDIX D. BUSINESS PERFORMANCE SCALE What is your opinion about the export success and business performance of your company? Please answer the questions as follows (use a rating scale, where 1 ¼ strongly agree and 7 ¼ strongly disagree): C117_1 C119_1

Our sales growth has been better than our competitors over the last five years. Overall, our organization has an excellent business performance.

Delivering Value: Market Orientation and Distributor Selection

C120_1 C121_1 C122_1

129

Our Return On Investments (ROI) has been significantly better than our competitors over the last five years. Our new products have been more successful than our competitors. Our brands have a better-perceived quality than our competitors.

APPENDIX E. MEASUREMENT SCALES

Narver and Slater (1990) Customer Orientation Cronbach a ¼ 0.85 Customer commitment Create customer value Understand customer needs Customer satisfaction objectives Measure customer satisfaction After-sales service

Current Research Customer Orientation Cronbach a ¼ 0.84 Focusing on customer Creating value for customers Understanding customer needs Setting customer satisfaction objectives xx After-sale service

Competitor Orientation Cronbach a ¼ 0.71 Salespeople share competitor information Respond rapidly to competitor’s actions Top managers discuss competitor’s strategies Target opportunities for competitive advantage

Competitor Orientation Cronbach a ¼ 0.80 Salespersons sharing competitor information Respond rapidly to competitor’s activities Top managers discuss competitor’s strategies xx

Interfunctional Coordination Cronbach a ¼ 0.71 Interfunctional calls Information shared among functions

Interfunctional Coordination Cronbach a ¼ 0.82 Not measured Sharing information across marketing and production department

130

ANDRE BEAUJANOT Q. ET AL.

APPENDIX E. (Continued ) Narver and Slater (1990)

Current Research

Functional integration in strategy All functions contribute to customer value Share resources with other business units

xx All functions contribute to customer value Sharing resources across the whole firm

APPENDIX F. CORRELATION MATRIX

Correlation SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN (C38) (C39) (C40) (C41) (C42) (C43) (C44) (C82) (C83) (C84) (C85) (C87) (C92) (C94) (C95) (C119) (C120) (C121) (C122) SMEAN (C38)

SMEAN (C39)

SMEAN (C40)

SMEAN (C41)

SMEAN (C42)

Pearson correlation Sig. (2-tailed) N

0.1

0.432

0.170

0.220

0.471

0.195

0.368

0.165

0.022

0.058

0.094

0.094

0.194

0.209

0.267

0.113

0.089

0.108

0.143

– 77

0.000 77

0.138 77

0.054 77

0.000 77

0.090 77

0.001 77

0.151 77

0.851 77

0.616 77

0.417 77

0.415 77

0.091 77

0.067 77

0.019 77

0.329 77

0.440 77

0.348 77

0.216 77

0.1

0.436

0.225

0.272

0.125

0.080

0.099

0.226

0.111

0.128

0.252

0.237

0.014

0.237

0.264

– 77

0.000 77

0.049 77

0.017 77

0.277 77

0.491 77

0.391 77

0.048 77

0.336 77

0.268 77

0.027 77

0.038 77

0.904 77

0.765 77

0.038 77

0.020 77

0.209

0.042

0.112

0.196

0.267

0.148

0.166

0.175

0.216

0.096

0.017

0.090

0.155

0.069 77

0.718 77

0.331 77

0.088 77

0.019 77

0.199 77

0.150 77

0.127 77

0.059 77

0.407 77

0.886 77

0.438 77

0.179 77

0.248

0.097

0.262

0.242

0.247

0.192

0.266

0.111

0.185

0.020

0.086

0.029 77

0.402 77

0.022 77

0.003 77

0.009 77

0.034 77

0.030 77

0.095 77

0.020 77

0.335 77

0.108 77

0.865 77

0.455 77

0.131

0.085

0.115

0.207

0.062

0.274

0.177

0.159

0.019

0.093

0.206

0.171

0.257 77

0.461 77

0.321 77

0.071 77

0.594 77

0.016 77

0.123 77

0.167 77

0.871 77

0.420 77

0.072 77

0.138 77

Pearson 0.432 correlation Sig. (2-tailed) 0.000 N 77 Pearson correlation Sig. (2-tailed) N

0.170

0.436

1

0.138 77

0.000 77

– 77

0.000 77

Pearson correlation Sig. (2-tailed) N

0.220

0.225

0.443

0.1

0.054 77

0.049 77

0.000 77

– 77

0.323 0.314 0.004 77

0.005 77

0.443 0.353 0.304

Pearson 0.471 0.323 0.353 0.310 correlation Sig. (2-tailed) 0.000 0.004 0.002 0.006 N 77 77 77 77

0.002 77

0.007 77

0.310 0.370 0.006 77 0.1 – 77

0.001 77

0.421 0.528 0.000 77

0.000 77

0.332 0.297

0.035

APPENDIX F. CORRELATION MATRIX (Continued ) Correlation SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN SMEAN (C38) (C39) (C40) (C41) (C42) (C43) (C44) (C82) (C83) (C84) (C85) (C87) (C92) (C94) (C95) (C119) (C120) (C121) (C122) SMEAN (C43)

SMEAN (C44)

SMEAN (C82)

SMEAN (C83)

SMEAN (C84)

SMEAN (C85)

SMEAN (C87)

Pearson correlation Sig. (2-tailed) N

0.195 0.090 77

0.314 0.304 0.370 0.421

0.453

0.220

0.100

0.263

0.204

0.152

0.001

0.052

0.056

– 77

0.000 77

0.055 77

0.387 77

0.021 77

0.074 77

0.188 77

0.996 77

0.650 77

0.631 77

0.1

0.265

0.169

0.221

0.138

0.222

0.100

0.216

0.224

0.141 77

0.053 77

0.230 77

0.052 77

0.389 77

0.059 77

0.050 77

0.196

0.217

0.088 77

0.005 77

0.007 77

0.001 77

Pearson 0.368 correlation Sig. (2-tailed) 0.001 N 77

0.272

0.209

0.248

0.017 77

0.069 77

0.029 77

0.000 77

0.000 77

– 77

0.020 77

Pearson correlation Sig. (2-tailed) N

0.165

0.125

0.042

0.097

0.131

0.220

0.265

0.1

0.151 77

0.277 77

0.718 77

0.402 77

0.257 77

0.055 77

0.020 77

– 77

0.000 77

Pearson correlation Sig. (2-tailed) N

0.022

0.112

0.262

0.085

0.100

0.169

0.442

0.1

0.851 77

0.491 77

0.331 77

0.022 77

0.461 77

0.387 77

0.141 77

0.000 77

– 77

Pearson correlation Sig. (2-tailed) N

0.058

0.099

0.196

0.332

0.115

0.263

0.221

0.616 77

0.391 77

0.088 77

0.003 77

0.321 77

0.021 77

0.053 77

Pearson correlation Sig. (2-tailed) N

0.094

0.226

0.267

0.297

0.207

0.204

0.138

0.417 77

0.048 77

0.019 77

0.009 77

0.071 77

0.074 77

0.230 77

0.000 77

0.000 77

Pearson correlation Sig. (2-tailed) N

094

111

148

242

062

152

222

506

0.415 77

0.336 77

0.199 77

0.034 77

0.594 77

0.188 77

0.052 77

0.000 77

0.080

0.000 77

0.1

0.528 0.453

0.442 0.503 0.428 0.506

0.503 0.646 0.000 77

0.000 77

0.000 77

0.000 77

0.000 77

0.646 0.448 0.486 0.000 77 0.1 – 77

0.000 77

0.000 77

0.652 0.550

0.019 0.867 77

0.059

0.157

0.044

0.608 77

0.174 77

0.704 77

015

0.058

0.113

0.761 77

0.897 77

0.615 77

0.329 77

0.249

0.365

0.221

0.127

0.204

0.058 77

0.029 77

0.001 77

0.054 77

0.270 77

0.074 77

0.276

0.265

0.134

0.267

0.216

0.090

0.119

0.015 77

0.020 77

0.244 77

0.019 77

0.059 77

0.424 77

0.304 77

0.172

0.345

0.140

0.194

0.265

0.090 77

0.020 77

0.035

0.388 0.320

0.000 77

0.000 77

0.135 77

0.002 77

0.223 77

0.1

0.552

0.200

0.367

0.158

0.000 77

– 77

0.000 77

0.081 77

0.001 77

0.169 77

0.002 77

0.001 77

0.003 77

0.006 77

486

550

552

1

149

219

065

250

114

026

197

0.000 77

0.000 77

0.000 77

– 77

0.197 77

0.055 77

0.576 77

0.028 77

0.322 77

0.824 77

0.086 77

0.428 0.448 0.652

0.000 77

0.005 77

0.352 0.367 0.330 0.313

SMEAN (C92)

SMEAN (C94)

SMEAN (C95)

Pearson correlation Sig. (2-tailed) N

0.194

0.128

0.166

0.247

0.274

0.001

0.100

0.196

0.276

0.172

0.200

0.149

0.1

0.091 77

0.268 77

0.150 77

0.030 77

0.016 77

0.996 77

0.389 77

0.088 77

0.015 77

0.135 77

0.081 77

0.197 77

– 77

0.000 77

0.000 77

0.058 77

0.010 77

Pearson correlation Sig. (2-tailed) N

0.209

0.252

0.175

0.192

0.177

0.052

0.216

0.217

0.265

0.219

0.571

0.1

0.660

0.216

0.234

0.067 77

0.027 77

0.127 77

0.095 77

0.123 77

0.650 77

0.059 77

0.058 77

0.020 77

0.002 77

0.001 77

0.055 77

0.000 77

– 77

0.000 77

0.059 77

0.040 77

Pearson 0.267 correlation Sig. (2-tailed) 0.019 N 77

0.237

0.216

0.266

0.159

0.056

0.224

0.249

0.134

0.140

0.158

0.065

0.1

0.110

0.234

0.038 77

0.059 77

0.020 77

0.167 77

0.631 77

0.050 77

0.029 77

0.244 77

0.223 77

0.169 77

0.576 77

0.000 77

0.000 77

– 77

0.340 77

0.040 77

0.250

0.217

0.216

0.110

0.1

0.028 77

0.058 77

0.059 77

0.340 77

– 77

0.000 77

0.114

0.292

0.234

0.234

0.605

0.1

0.010 77

0.040 77

0.040 77

0.000 77

– 77

SMEAN Pearson (C119) correlation Sig. (2-tailed) N

0.113

0.014

0.096

0.111

0.019

0.329 77

0.904 77

0.407 77

0.335 77

0.871 77

SMEAN Pearson (C120) correlation Sig. (2-tailed) N

0.089

0.017

0.185

0.093

0.440 77

0.765 77

0.886 77

0.108 77

0.420 77

SMEAN Pearson (C121) correlation Sig. (2-tailed) N

0.108

0.237

0.090

0.020

0.206

0.348 77

0.038 77

0.438 77

0.865 77

0.072 77

SMEAN Pearson (C122) correlation Sig. (2-tailed) N

0.143

0.264

0.155

0.086

0.171

0.216 77

0.020 77

0.179 77

0.455 77

0.138 77

0.035

 Correlation is significant at the 0.05 level (2-tailed).  Correlation is significant at the 0.01 level (2-tailed).

0.019 0.867 77 0.059 0.608 77 0.157 0.174 77 0.044 0.704 77

0.035 0.365 0.761 77

0.267

0.345 0.367

0.388 0.352

0.001 77

0.019 77

0.221

0.216

0.897 77

0.054 77

0.059 77

0.005 77

0.001 77

0.322 77

0.058

0.127

0.090

0.194

0.330

0.026

0.615 77

0.270 77

0.434 77

0.090 77

0.003 77

0.824 77

0.113

0.204

0.119

0.265

0.313

0.197

0.329 77

0.074 77

0.304 77

0.020 77

0.006 77

0.086 77

0.015

0.000 77

0.002 77

0.320 0.367

0.571 0.646

0.646 0.660

0.217

0.292 0.379 0.429

0.001 77

0.009 77

0.429 0.455 0.352 0.000 77

0.000 77

0.002 77

0.001 77 0.272 0.017 77

0.000 77

0.001 77

0.000 77

0.297 0.352 0.009 77

0.001 77

0.002 77 0.272 0.017 77

0.430 0.310 0.000 77

0.006 77

0.1

0.614

– 77

0.000 77

0.310** 0.614** 0.006 77

0.000 77

0.381 0.455

0.605 0.365

0.379 0.381 0.297 0.365 0.430 0.001 77

0.001 77

0.000 77

0.1 – 77

This page intentionally left blank

134

THE EFFECT OF INFORMATION COLLECTION BEHAVIOUR ON MARKET PERFORMANCE: THE ROLE OF PARTNER RELATIONSHIPS$ Geir Gripsrud, Carl Arthur Solberg and Arne M. Ulvnes 1. INTRODUCTION This paper investigates the role of the foreign local middleman in the information flows between the market and the exporter. Whereas a number of studies have examined the information behaviour of exporters (Benito, Carl, & Lawrence, 1993; McAuley, 1993; Hart, Webb, & Jones, 1994; Diamantopoulos og Souchon, 1996, 1997, 1998), limited attention has been given to the role of the local foreign partner1 in this context. Once established in a market with a foreign intermediary as a partner, there are at least two reasons why information is needed by the exporter. First, the scope as well as the extent of information needed will depend upon the functional

$

The authors are listed alphabetically. They contributed equally to this paper.

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 135–155 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16006-2

135

136

GEIR GRIPSRUD ET AL.

‘‘division of labour’’ between the exporter and the middleman. The less responsibility left to the partner the more information is needed by the exporter to make appropriate decisions. Second, the exporter may want information to control the performance of the partner. Fear of opportunistic behaviour is the driving force in the latter case. According to Benito et al. (1993), the middlemen chosen as partners are also one of the most important sources of information. They found that exporters – in particular small companies – to a large extent rely upon market information from their channel partners in foreign markets (e.g. Benito et al., 1993). These middlemen may provide information about their own needs as well as the needs of the ultimate consumers, the activities of competitors and relevant regulations. Obviously, the partners do not have to be the sole source of information and the exporter may choose to gather relevant information about the middlemen and the market directly from other sources (e.g. final consumers, other middlemen, competitors) to supplement the information provided by the partner. However, the impact of information received from the partner compared to that received from other sources remains unexplored. This is an important issue, since generation of market information requires resources and has been shown to be directly linked to international market performance (Solberg 2002). On the one hand, it is cheaper and easier to obtain information through the local partner than, for instance, to hire a market research agency. Also, information received from a trusted middleman may be considered more reliable (Granovetter, 1973: Burt, 1992; Uzzi, 1997). On the other hand, relying on the middleman as the only source of information involves the risk that only information that benefit him/her will be conveyed to the exporter and important information might therefore be suppressed. The aim of the present paper is to analyse the relationship between exporters trust in partner, the exporters’ information behaviour and market performance. The two focal questions are to what extent – if any – the source of information exerts a separate influence on market performance, and the role of trust in the partner and experience with the partner in this context. We are not aware of any studies that have addressed this issue specifically, but the literature on market orientation, organizational control, marketing channels and the internationalization process of firms are all relevant in our context. A conceptual model and a series of hypotheses are put forward, and are tested empirically. The paper concludes with implications for management and research.

Effect of Information Collection Behaviour on Market Performance

137

2. CONCEPTUAL MODEL AND HYPOTHESES Information is a multidimensional construct, and in this study, we have decided to focus on the sources of information used by the exporters. In principle, the information collected concerning the partner and the market (for instance, trends in consumer preferences) may be acquired in a number of ways. One of these ways is to rely upon reports from the middleman in the market that the exporter is currently working with. Another way may be to undertake independent research, either in-house or by soliciting external agencies. We argue that information from either source have an impact on performance. Support for the link between information collection and performance can be found in the marketing orientation literature (Kohli & Jaworski, 1990), and the early organizational control literature, where control was studied as a problem in information flows and feedback (Ouchi & Maguire, 1975) with the purpose to enhance performance (Jaworski, 1988). Export performance has been the subject of a growing body of studies (see, for instance, Madsen, 1987; Axinn, 1988; Aaby & Slater, 1989; Cavusgil & Zou, 1994; Bello & Gilliland, 1997; Diamantopoulos, 1998; Shoham, 1998; Solberg & Nes, 2002; Lages & Lages, 2004). It has been linked to factors such as export commitment (Aaby & Slater, 1989), adaptation of marketing mix as well as distributor support (Cavusgil & Zou, 1994) and control (Bello & Gilliland, 1997). However, as far as we know the possible link between performance and the exporters’ sources of information has not been investigated. Indeed, Benito et al. (1993) examined the impact of export share – a performance measure used by some authors (Cavusgil & Zou, 1994) – on such behaviour, but they found only scant differences between different groups of exporters. Furthermore, the choice of information strategy pursued by the exporter is deemed to depend on the relationship established between the exporter and the middleman, both when it comes to the functional responsibilities of the two partners contained in the contract (explicit or implicit) and the degree of trust established between them. We investigate the latter in the present study. The setting is established exporter – representative dyads. It seems reasonable to assume that the more the exporter trusts his/her representative, the more the latter is used as a source of information regarding the market and the less other sources are consulted. Exporter performance is, however, likely to improve with more information regardless of the source utilized. In this context, the duration of the relationship (experience with partner) is argued to have a moderating effect. The general model is depicted in Fig. 1.

138

GEIR GRIPSRUD ET AL.

Relationship length

Amount of information from representative

-

+

+ Trust in representative

+ +

-

Exporters Performance

Amount of information from other sources

Fig. 1.

The Conceptual Model.

2.1. Source of Information and Performance In unfamiliar and changing environments the exporter needs information to be able to make the optimal decisions. Two distinct theoretical arguments can be put forth in this context. First, information gathering is an integral part and dimension of the market orientation construct. By the late 1980s, market orientation was typically identified as market information collection and usage (Siguaw, Simpson, & Baker, 1997). Market orientation was defined by Kohli and Jaworski (1990) as ‘‘the organization wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization wide responsiveness to it’’ (p. 6). Although the definition highlights the importance of information processing regarding customer needs and preferences, the scope of information is defined wider. Both end users and distributors are included, and it is explicitly stated that information regarding exogenous factors ‘‘such as government regulations, technology, competitors and other environmental forces’’ should be taken into account. Narver and Slater (1990) maintained that ‘‘market orientation consists of three behavioural components – customer orientation, competitor orientation and interfunctional coordination – and two decision criteria – long-term focus and profitability. Customer orientation and competitor orientation include all of the activities involved in

Effect of Information Collection Behaviour on Market Performance

139

acquiring information about the buyers and competitors in the target market and disseminating it throughout the business(es)’’ (p. 21). In later studies (e.g. Slater & Narver, 1994), market orientation has been limited to the three behavioural components, while long-term focus and profitability are viewed as consequences of market orientation. Thus, it is argued in this stream of literature that more market orientation, and hence more information, will enhance performance (e.g. Kohli & Jaworski, 1990). Second, the marketing channel literature focuses on different forms of formal and informal control mechanisms employed to curb opportunism and enhance performance (Dahlstrom & Nygaard, 1999; Jaworski, 1988; Wathne & Heide, 2000). In this perspective, information from the partner is used as a control device against the hazards of opportunism. For example, in an export channel context communication intensity was found to have an indirect effect on performance and satisfaction through its positive direct effect on cooperation and commitment (e.g. Johnson & Raven, 1996). Combining these two perspectives we make a distinction between the representative in the foreign market and all other sources of information. We argue that information about the market and the partner can be collected from the partner or other sources (for instance, the informal network). In both cases we expect more information to be beneficial: We assume that exporters will not collect information without utilizing the information as a basis for better decisions, thereby in accordance with behavioural-organizational theory enhancing performance (March, 1988). Information should have a positive influence on performance irrespective of the source utilized, given that the information acquired is reliable and valid. Hypothesis 1. There is a positive relationship between the extent of information collection by exporters from (a) representative and (b) other sources, and market performance. 2.2. The Moderating Role of Relationship Length The importance of information – or more generally knowledge – in the process of internationalization was pointed out by early contributors to the ‘‘internationalization process school’’ (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977, 1990). This school of thought suggests that companies gradually build up increased knowledge about foreign markets, which leads to increased commitment to internationalization by the managers. The process is continuous, and as more knowledge is acquired, the perceived risk of deeper involvement is reduced and the company will enter

140

GEIR GRIPSRUD ET AL.

more distant (measured by psychic or cultural distance) markets as well as utilize more resource-demanding operation modes. Knowledge developed over time guides the company in all its endeavours. Seringhaus and Rosson (1990) argue that ‘‘[the] company that is knowledgeable about exporting will be able to determine what information to collect and how to use it, to a greater extent than their less knowledgeable counterparts. In a sense knowledge is a special resource that is present to varying degrees in companies. Like other resources, we should recognize that, without husbanding and replenishment, export knowledge will be depleted over time’’ (pp. 154–155). The internationalization process theory posits that the learning process primarily depends on experience in the market (and through experience with its partner). Ford and Rosson (1982) suggest that the exporter-foreign representative dyad goes through a number of phases – new, growing, troubled, static, inert. Lye (1998) suggests a ‘‘smoother’’ development pattern – from introduction to decline – akin to the relationship development process taking place between buyer and seller as suggested by Dwyer, Shurr, and Oh (1987). During the build-up and development of the relationship from the introduction to the mature phase, the exporter learns the ‘‘ins and outs’’ of the representative and vice versa, through extensive exchange of information, and build-up of knowledge through learning by doing. In the present context, this implies that an exporting company new to a market have to make short-cuts in its information collection, leaning chiefly on the one link it has to the market: its local representative. Furthermore, in early phases of market entry it is assumed that networks such as members of industry associations are less developed and that the intermediary is the most important network member. Initially, in the formative stages of the relationship, information provided by the representative may play a relatively larger role and be perceived as the only reliable source of information, and consequently, it will have a greater impact on the firm’s market performance. Collecting information from other sources may be a more useful strategy when the relationship has lasted some time. Information provided by the partner may be more valuable in the early formative stages of the relationship. At this stage, the exporter has limited insights into the idiosyncrasies of the foreign market and is totally dependent on the amount of information given by his/her ‘‘only’’ contact point: the local middleman. At a later stage, following the ‘‘Uppsala model’’ (Johanson & Vahlne, 1977, 1990) when the exporter has gained market experience and knowledge it will presumably be better equipped to both generate information from other sources and to make use of these.

Effect of Information Collection Behaviour on Market Performance

141

Furthermore, as the relationship gets mature and the exporter develops its knowledge base over time, information from the representative might be supplemented with information from other sources. Even though, as the exporting company gets more embedded in the relationship with their partner, they also have learned more about the partner and the market from interaction with that partner, uncertainty and risk are reduced and performance is more easily assessed. It might therefore – as a result of experience – be easier to supplement information from the partner through access to other sources of information and different networks of other players in the market (Seringhaus & Rosson, 1990). If the exporter continues to utilize the representative as the sole provider of information, the partner may be tempted to conceal ‘‘unpleasant’’ pieces of information and dedicate fewer resources to promote the interests of the exporter. Thus over time, alternative information sources are important to control the partner and develop the exporter’s knowledge base further, thereby to enhance performance. Thus, the capability of the exporter to adopt the information collected is deemed to be better for ‘‘old timers’’ than for ‘‘newcomers’’, as the former are supposed to have better skills in sorting out relevant information (Seringhaus & Rosson, 1990). Hence, we suggest: Hypothesis 2. The association between information collection from (a) the representative and market performance will be stronger in shorter than in longer lasting relationships, and (b) other sources and market performance will be stronger in longer than in shorter lasting relationships. 2.3. Trust and Source of Information The observation that relationships often develop between exchange partners has formed the basis for a reconsideration of the traditional focus on transactions in marketing (Dwyer, Shurr, & Oh, 1987). Even if the emergence of relationships may be explained based upon an ‘‘economics of organization’’ type of reasoning, the relationship marketing paradigm typically relies upon concepts like commitment and trust (Morgan & Hunt, 1994). Stern and Reve (1980) argued that the traditional disparate economic and behavioural approaches to channel research should be viewed as complementary, each focusing on a part of the relevant entity only. In accordance with this view the use of trust has been regarded as an alternative to the price and authority in governing a relationship (Bradach & Eccles, 1989; Haugland & Reve, 1994).

142

GEIR GRIPSRUD ET AL.

Trust is defined as ‘‘the extent to which a firm believes that its exchange partner is honest and/or benevolent’’ (Deutch, 1958) and ‘‘a generalized expectancy held by an individual that the word of anotherycan be relied on’’ (Rotter, 1967). Moorman, Zaltman, and Deshpande´ (1992) define trust as ‘‘the willingness to rely on an exchange partner in whom one has confidence’’. Morgan and Hunt’s (1994) definition of trust is similar; ‘‘trust exists when one party has confidence in an exchange partner’s reliability and integrity’’. Concepts like belief, expectancy, willingness and confidence in these four definitions indicate that trust is closely related to taking risk, a view that Williamson (1996) and Moorman et al. (1992) support. Trust in the intermediary is an important aspect of exporters’ international involvement, since the level of uncertainty and risk normally is higher than in their domestic and more familiar markets. Furthermore, it has been maintained that trust and relations contribute to increase companies’ competitive ability (Geyskens, Steenkamp, & Kumar, 1998; Uzzi, 1997). Relationships involving trust have many benefits (Morgan & Hunt, 1994). Not only do they facilitate communication across organizational boundaries, but in a trusting atmosphere, companies are more prone to disclose information which they under other circumstances would conceal. This again may reduce the tendency to opportunistic behaviour. Trust has been called ‘‘a fundamental relationship model building block’’ (Wilson, 1995) and involves confidence that the other party will behave in a fair, noncoercive, concerned manner (Rotter, 1967). As argued by Siguaw et al. (1997), individuals trust organizations that allow open communication and the opportunity to participate. The access to valid information from the partner will therefore be greater when there is high trust. Moreover, trusting behaviour creates trust. Exporters who trust their partners are likely to rely on information collected from the partner, rather than from other sources. Rangan (1998) introduces the cost of information search and deliberation (or processing/adoption). His main argument is that firms relying on their networks are more capable of identifying business opportunities than firms relying on ‘‘objective’’ market research only. Referring to Granovetter (1973), he maintains (p. 6) that [s]uch networks can aid efficient and successful search because they are more likely to interconnect actors with non-redundant and pertinent information. yin reality, networks offer a cost-effective way of enhancing the probability of uncovering at least some of the relevant but latent economic opportunities out there.

The main argument is that information search is tremendously facilitated through social networks, and the commitment and trust inherent in such

Effect of Information Collection Behaviour on Market Performance

143

networks ensure the reliability of the information provided. Discussing the advantages of such information, Granovetter (1985, p. 490) maintains that: This is better information for four reasons: (1) it is cheap; (2) one trusts one’s own information best – it is richer, more detailed and known to be accurate; (3) individuals with whom one has a continuing relation have an economic motivation to be trustworthy; and (4) departing from pure economic motives, continuing economic relations often become overlaid with social content that carries strong expectations of trust and abstention from opportunism.

Given the resource constraints of exporters, it is expected that they will seek the most cost efficient way of collecting information through trusted networks, such as from the intermediary. This leads to our third hypothesis: Hypothesis 3. The higher the trust in the representative the (a) more information is collected from the representative and (b) less information is collected from other sources.

3. METHOD 3.1. Research Setting and Sample The research hypotheses were examined in the context of Norwegian exporters of bio-products and their relationship with their local representatives in their most important export market. Based on Kompass Norge (1999 edition), a Norwegian industry directory and a list received from The Norwegian Seafood Export Council, we randomly selected and interviewed altogether 285 Norwegian exporters among 1,089 firms in the combined sample frame. These were distributed as follows: (1) fishing industry, n ¼ 151; (2) forest related industry, n ¼ 117 and (3) agriculture industry, n ¼ 17: The interviews were carried out by telephone. 3.2. Measures Performance. A number of writers have operationalized and examined market performance from different angles (see, for instance, Madsen, 1987; Axinn, 1988; Cavusgil & Zou, 1994; Bello & Gilliland, 1997; Shoham, 1998; Styles, 1998; Solberg & Nes, 2002). The present survey has adapted the scale developed by Styles for its robustness in a cross-national comparative study (UK and Australia). In this study we distinguish between market success and profitability. The items used to measure market success were: (1) You

144

GEIR GRIPSRUD ET AL.

have achieved a good foothold in this market. (2) You have achieved to strengthen your market share in this market. (3) The exports to this market have succeeded particularly well the last five years. (4) Your most important competitors would claim that your firm has succeeded especially well in this market. The two items used to measure profitability were: (1) You have a better profitability in this market than the overall profitability of the firm. (2) You have a good profitability in this market. The items are scored on a 5-point scale ranging from ‘‘strongly disagree’’ to ‘‘strongly agree’’. Source of information. The measures of information sources were developed for this study as formative scales. We assessed the different sources of information directly by asking about the amount or degree of information collected from the representative and from other sources about the specific market and about the partner. The measures are: to what degree is the information that you possess about this specific market collected from: (1) the representative; (2) other sources. To what degree is the information that you possess about this representative and the results that the representative obtains collected from: (1) the representative; (2) other sources. This gives us four items that reflect both the amount of information from whom and about what. The items are scored on a 5-point scale ranging from ‘‘to a small extent’’ to ‘‘to a large extent’’. Trust in representative. This scale is mainly based on the Moorman et al. (1992), and reflects trust in a way that is closely related to risk. The measures are: (1) Your company is willing to let the representative make important market decisions without your involvement. (2) Your company trusts the representative to get the job done right without the need of monitoring during the relationship. (3) Your company trusts the representative to do things that we cannot do ourselves. (4) The representative is reliable. (5) We generally trust our representative to a great extent. Measures (1), (2), (3) and (5) are based on Moorman et al. (1992) and (4) is added based on prior research on trust and the formal definition of trust suggested by these authors. The items are scored on a 5-point scale ranging from ‘‘strongly disagree’’ to ‘‘strongly agree’’. Relationship length. Relationship length was measured by the following question: ‘‘How long have your company exported through this representative?’’ The exporters were asked to indicate the number of years the relationship had lasted. Research among Norwegian exporters have shown that a three to five year period is required to get an entrenched position in international markets (Solberg, 2000). In the data analysis the sample is split into two: short-term relationships (less than five years) and long-term relationships (more than five years).

Effect of Information Collection Behaviour on Market Performance

145

Control variables. We included trust and differentiation strategy as control variables on the two performance measures. Exploring the direct effect of trust on market performance enables us to test the mediating role of information collection behaviour. Companies that pursue a differentiation strategy (Porter, 1985) may benefit more from active information collection behaviour and have a higher profit compared with companies that do not pursue a differentiation strategy because it enables them to adapt their products to the individual market (Sandvik, 1997). We therefore expect that differentiation strategy will be associated with market performance. Differentiation strategy is measured through three items reflecting (1) reputation, (2) adaptation to individual customer needs and (3) flexibility (e.g. Nayyar, 1993).

4. ANALYSIS AND RESULTS 4.1. Measure Validation The measures of each construct were validated in terms of construct validity, discriminant validity and reliability. First, we inspected all items through item-to-item total correlation. None of the items correlated higher with items reflecting other constructs, and they all were therefore kept. Then we used factor analysis in SPSS, to test for construct validity. The items load as expected highly (above 0.3) on their respective construct, producing evidence for unidimensionality. Next, we validated the information source items. Because we used formative measures for the two information collection constructs, we employed principal component analysis as extraction method and varimax as rotation method in SPSS. The results from the test are reported in Table 1. The items loaded on two distinct factors forming the two information collection constructs, providing evidence that the two constructs are distinct from each other. Then we employed maximum likelihood as extraction method and Direct Oblimin as rotation method in SPSS to test for discriminant validity for the reflective measured constructs; trust, market success, profitability and differentiation strategy. As can be drawn from Table 2, the items load highly on their respective factor. In addition, because discriminant validity of the constructs deals with to what extent the constructs are different from each other, and thus nonredundant, the constructs on the same level of the causal model should not be highly correlated. Table 3 provides the results. As expected, market

146

GEIR GRIPSRUD ET AL.

Table 1.

Discriminant Validity of Information Collection Behaviour. Amount of Information from Representative

Representative about market Representative about partner Other sources about market Other sources about partner

Amount of Information from Other Sources

0.917 0.813 0.873 0.805

Note: Principal component analysis. Varimax rotation.

Table 2.

Profit 2 Profit 1 Trust 5 Trust 4 Trust 2 Trust 3 Trust 1 Diff 3 Diff 2 Diff 1 Success 2 Success 1 Success 3 Success 4

Discriminant Validity of Trust and Performance. Factor 1

Factor 2

0.983 0.546

0.117

0.141

Factor 3

Factor 4

0.138

0.143

0.954 0.906 0.513 0.340 0.322 0.893 0.700 0.471

0.104 0.230 0.128

0.218

0.797 0.687 0.635 0.608

Note: Maximum-likelihood extraction, Oblimin rotation. Two factor solution for performance. Lisrel estimates: w2 ð8Þ ¼ 64; po:05; CFI ¼ 0:94:

success and profitability have a low correlation, and none of the other constructs are highly correlated, and thus discriminant validity can be claimed to be satisfactory.

4.2. Reliability As a final test of convergence, the reflective constructs trust, market success, profitability and differentiation strategy all show a satisfactory reliability. The results are provided in Table 4.

147

Effect of Information Collection Behaviour on Market Performance

Table 3.

Correlation Matrix of the Constructs.

Profitability

Profitability Market Success Information from representative Information from other sources Trust Differentiation Strategy No. of years

Market Success

Information from Representative

Information from Other Sources

Trust Differentiation Strategy

1.000 1.000 0.313 0.117

0.179

1.000

0.015

0.039

0.360

1.000

0.074 0.290 0.024

0.136 0.294 0.008

0.298 0.087 0.100

0.249 0.045 0.108

1.000 0.045 0.147

1.000 0.010

 Correlation is significant at the 0.05 level (one-tailed test).

Table 4.

Reliability and Descriptive Data.

Amount information from representative Amount information from other sources Trust Differentiation Strategy Market Success Profitability Long-run ties

Number of Items

a

Mean

Standard Deviation

2 2 5 3 4 2 1

NA NA 0.723 0.684 0.809 0.741 NA

3.7 2.7 4.0

1.1 1.1 0.8

3.8 8.6

0.8 9.3

NA; not applicable.

4.3. Test of Hypotheses Since the test of convergent and discriminant validity above were satisfactory the conceptual model can be tested. We tested the three hypotheses outlined earlier by using regression analysis. First, we tested the effect of trust on the two sources of information. Then we tested the effect of both sources of information on performance. Tests of the moderating effect of relationship length were also conducted. The results are listed in Tables 5 and 6. Performance. The results indicate that the amount of information from the representative (b ¼ 0:20; po0:01), and from other sources (b ¼ 0:12; po0:05) has a positive and unique influence on market success. Furthermore, amount of information from the representative (b ¼ 0:15; po0:05)

148

Table 5. Regression Analysis for the Effect of Exporters Information Collecting on Market Performance. Dependent Variable

Market Success Direct effects

Amount of information from representative Amount of information from other sources Control variables Differentiation strategy

R2 Adj. R2 a

The moderating role of relationship experience

Direct effects

The moderating role of relationship experience

Whole sample

Less than 5 years

More than 5 years

Whole sample

Less than 5 Years

More than 5 years

0.20 (2.96) 0.12 (1.83)

0.23a (2.31)b 0.04 (0.41)

0.20 (2.01) 0.26 (2.71)

0.15 (2.16) 0.09 (1.39)

0.23a (2.34)b 0.04 ( 0.46)

0.00 (0.00) 0.14 (1.45)

0.30 (4.73) 0.13 (2.05) 0.14 0.13

0.37 (4.19) 0.03 (0.33) 0.22 0.19

0.14 (1.50) 0.19 (2.02) 0.14 0.11

0.26 (4.25) 0.05 (0.81) 0.12 0.11

0.32 (3.61) 0.08 (0.85) 0.19 0.16

0.26 (2.76) 0.11 (1.09) 0.10 0.06

Standardized regression coefficients. T values 4 1.296 are significant, p o 0.10; T values 4 1.671 are significant, p o 0.05; T values 4 2.39 are significant, p o 0.01 (one-tailed test).

b

GEIR GRIPSRUD ET AL.

Trust

Profitability

149

Effect of Information Collection Behaviour on Market Performance

Table 6.

Regression Analysis for the Effect of Trust on Exporters Information Collecting and Performance.

Trust in representative R R2 Adj. R2

Amount of Information from Representative

Amount of Information from Other Sources

0.30a (4.83)b 0.30 0.09 0.09

0.25 ( 3.95) 0.25 0.06 0.06

a

Standardized regression coefficients. T values 4 1.282 are significant, p o 0.10; T values 4 1.645 are significant, p o 0.05; T values 4 2.326 are significant, p o 0.01 (one-tailed test).

b

and from other sources (b ¼ 0:09; po0:10) has a positive and unique influence on profitability. Hence, the results therefore suggest that Hypotheses 1a and 1b are supported. Table 5 indicates that relationship length has a moderating effect. The results suggests that market success is positively associated with information received from partner, both in relationships that has lasted less than five years (b ¼ 0:23; po0:05) and in more mature relationships (b ¼ 0:20; po0:05). The effect information from other sources on market success on the other hand, is more in line with hypothesis 2. Information from other sources has a positive impact on market success for relationships that have lasted longer than five years (b ¼ 0:27; po0:01), and no significant effect for relationships that have lasted less than five years (b ¼ 0:04; NS). Furthermore, the results suggest that when the partner is used as a source of information to a higher degree, the profitability will be higher in relationships that has lasted less than five years (b ¼ 0:23; po0:05). In addition, the effect of information from other sources on profitability is significant in relationships that have lasted longer than five years (b ¼ 0:14; po0:1). In sum, the results suggest that the positive effect of other sources of information requires experience with the exchange partner, and therefore the market, and that a company should rely on the partner in the early stages of relationship development to benefit from more profitability and market success. Hence, in large we suggest that Hypothesis 2 is supported. The effect of trust as a control variable on performance is significant for market success (b ¼ 0:13; po0:05), but has no effect on profitability. The results further suggest that the effectiveness of trust depends on the maturity of the relationship. In more mature relationships trust have a significant

150

GEIR GRIPSRUD ET AL.

positive effect on market success. The results further suggest that the control variable, differentiation strategy, has a significant and positive impact on both market success and profitability regardless of the maturity of the relationship. (Table 5) According to the results in Table 6, Hypothesis 3 is supported. More trust in the partner leads the exporter to collect more information from the partner (b ¼ 0:28; po0:01) and less information from other sources (b ¼ 0:24; po0:01). (Table 6)

5. DISCUSSION AND IMPLICATIONS The analysis shows that information behaviour is affected by the trust, an exporter has in its partner and that information plays a role – albeit limited – in explaining performance. The low explained variance is not surprising, given other factors such as internal capabilities, strategy and environment (Zou & Cavusgil, 2003), having a far greater direct influence on performance. Also, it is conceivable that relationship length exerts a greater influence on performance than source of information. However, the main thrust of this article is to analyse the role of trust on information behaviour and performance – with more nuances concerning the importance of the source of information. An important implication of these findings is that information – although the explained variance is limited – correlates positively and significantly with performance. In other words, it pays off to collect information, both from the partner and from other sources. The greater importance of information from the partner may be ‘‘economic’’ in the sense that the exporter generally has limited resources and that ‘‘it is not necessary’’ to get information from alternative sources as long as the partner is trustworthy and knowledgeable. On the other hand, using information from other sources enhances market performance. Therefore, exporters should consider complementary information even in cases of good relationships with their partners. Close relationships based on unilateral trust towards the partner might actually create some problems for the exporter. The recent trend that firms increasingly prefer to have fewer but closer relationships with their partners, makes trust an essential ingredient for such relationships to realize their full potential (e.g. Geyskens et al., 1998). Williamson (1975) recognizes that close ties with a limited number of exchange partners represent a smallnumbers-bargaining situation that increases the exporters vulnerability. The data also suggest that trust in mature relationships may be hazardous. We

Effect of Information Collection Behaviour on Market Performance

151

found that information collected from other sources has an impact on market success (b ¼ 0:26) and profitability (b ¼ 0:14) in long lasting relations only, and that the representative as the source of information has no effect on profitability (b ¼ 0:00) in long lasting relations. On the other hand, we found that trust correlated negatively with collection from other sources of information (b ¼ 0:25). One may therefore presume that too much trust leads the exporter to rely solely on information from the representative and that – as a result – it will be potentially subject to opportunistic behaviour by the latter. The control element that is embedded in ‘‘other sources’’ seems to be particularly important in situations where the exporter trusts the partner. Also, there is a risk that the exporter is getting myopically entrenched in a particular network, with its own paradigms and explanations of market developments, that in the long run – because of the compounded effect of limited resources and a trusting atmosphere – divert the exporter from seeking other sources of information. Our findings suggest that firms that actively seek alternative information sources seem to be more apt to meet changing market environments. Furthermore, a major problem with trusting a partner as its main source of information is that ‘‘yall links between the customer and supplier activities make it more difficult for both parties to establish alternative links and ties as the companies become embedded into specific others’’ (cf. Ha˚kansson & Snehota, 2000, p. 81). Therefore, not only the control information will suffer from being collected from no other source than the partner, but the information obtained may also be obsolete or misleading because the partner may ‘‘belong to the wrong network’’. Whereas length of the relationship seems to be a critical moderating factor, we have not examined whether length of presence in the market (as the exporter may have switched partner over the years) has some moderating impact on the role of different information sources. The effect of experience in the market (and not only with the representative) should be the object of a follow up study. Furthermore, the information constructs used in this research should be supplemented with other measures such as satisfaction to see if they behave in the same way. Also, we have earlier in this paper argued that control information (on the partner and its activities) differs from market information (about general market conditions). The two load together in the present factor analysis. However, theoretically the two concepts are distinct and – given the appropriate operationalization – should be analysed separately. An interesting future avenue for research can be to study the method used to collect information. For example, the common denominator between the

152

GEIR GRIPSRUD ET AL.

internationalization process literature and the market orientation literature is the importance attached to information gathering and knowledge generation. The market orientation literature specifies to a larger extent the scope of information required (consumer, distributor, competitor, etc.) but does not place much importance on the method of information collection or source of information. The internationalization process literature maintains that ‘‘experiential knowledge generates business opportunities and is consequently a driving force in the internationalization process’’ (cf. Johanson & Vahlne, 1990). Experiential knowledge is acquired as part of a process you are involved in, and cannot be attained by formalized market information systems without involvement. It is reasonable to assume that a major part of the experiential knowledge has to be generated in informal ways (Benito et al., 1993). Research suggest that personal visits of company executives to their overseas markets are the main source of market information (Cunningham & Spigel, 1971), and that in general, informal information gathering is the most widely used method of gathering export marketing information (Benito et al., 1993). Related to market performance, however, we encourage future research to explore the relationship between the method used to collect information and market performance.

6. CONCLUSIONS Our analysis supports the notion that trust in the partner plays an important role in the choice of information source used by the exporter. The more the exporter trusts its partner the more it will rely on the latter to collect market information. In the same vein, the less it trusts its partner the more information will be sought from other sources. The data also suggest that information from partners has a greater effect on performance (b ¼ 0:21) than information from other sources (b ¼ 0:12). However, the length of the relationship moderates the effects of source of information on performance: the longer the relationship the greater the effect of information from ‘‘other’’ sources on performance.

NOTES 1. In the text we will use middleman, partner, intermediary and representative interchangeably.

Effect of Information Collection Behaviour on Market Performance

153

ACKNOWLEDGMENTS The authors would like to thank the Research Council of Norway for the financial support of this study.

REFERENCES Aaby, N. E., & Slater, S. F. (1989). Management influences on export performance: A review of the empirical literature 1978–88. International Marketing Review, 6(4). Axinn, C. N. (1988). Export performance: Do managerial perceptions make a difference? International Marketing Review, 5(2), 61–71. Bello, D., & Gilliland, D. I. (1997). The effect of output controls, process controls, and flexibility on export market performance. Journal of Marketing, 61(January), 22–38. Benito, G. R. G., Solberg, C. A., & Welch, L. S. (1993). An exploration of the information behavior of Norwegian exporters. International Journal of Information Management, 13(4), 274–286. Bradach, J. L., & Eccles, R. G. (1989). Price authority, and trust: From ideal types to plural forms. Annual Review of Sociology, 15, 97–118. Cavusgil, S. T., & Zou, S. (1994). Marketing strategy-performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58(January), 1–21. Cunningham, M. T., & Spigel, R. I. (1971). A study in successful exporting. European Journal of Marketing, 5(1), 2–12. Dahlstrom, R., & Nygaard, A. (1999). An empirical investigation of ex post transaction costs in franchised distribution channels. Journal of Marketing Research, 36(May), 143–159. Deutch, M. (1958). Trust and suspicion. Journal of Conflict Resolution, 2(4), 265–279. Diamantopoulos, A. (1998). From the guest editor. Journal of International Marketing, 6(3), 3–4. Dwyer, F. R., Shurr, P. H., & Oh, S. (1987). Developing buyer–seller relationships. Journal of Marketing, 52(April), 21–34. Ford, I. D., & Rosson, P. H. (1982). The relationships between export manufacturers and their overseas distributors. In: R. C. Micheal & T. George (Eds), Export management: An international context (pp. 257–275). New York: Preager Publishers. Geyskens, I., Steenkamp, J. B. E. M., & Kumar, N. (1998). Generalizing about trust in marketing channels relationships using meta-analysis. International Journal of Research in Marketing, 15, 223–248. Granovetter, M. (1973). The strength of weak ties. American Journal of Sociology, 78(6), 1360–1380. Ha˚kansson, H., & Snehota, I. (2000). The IMP-perspective. In: J. N. Sheth & A. Parvatiar (Eds), Handbook of relationship marketing. London: Sage. Hart, S., Webb, J. R., & Jones, W. V. (1994). Export marketing research and the effect of export experience in industrial SMEs. International Marketing Review, 11(6), 4–22. Haugland, S. A., & Reve, T. (1994). Price, authority and trust in international distribution channel relationships. Scandinavian Journal of Management, 10(3), 225–244. Jaworski, B. J. (1988). Toward a theory of marketing control: Environmental context, control types, and consequences. Journal of Marketing, 52(July), 23–39.

154

GEIR GRIPSRUD ET AL.

Johnson, J. L., & Raven, P. V. (1996). Relationship quality, satisfaction and performance in export marketing channels. Journal of Marketing Channels, 5(3/4), 19–48. Johanson, J., & Vahlne, J. E. (1977). The internationalization process of the firm – a model of knowledge development and increasing foreign commitments. Journal of International Business Studies, 8(2), 23–32. Johanson, J., & Vahlne, J. E. (1990). The mechanisms of internationalization. International Marketing Review, 7(Fall), 11–24. Johanson, J., & Wiedersheim-Paul, F. (1975). Internationalization of the firm; four Swedish case studies. The Journal of Management Studies, 12(October), 305–322. Kohli, A. K., & Jaworski, B. J. (1990). Market orientation: The construct, research propositions and managerial implications. Journal of Marketing, 54, 1–18. Lages, L. F., & Lages, C. R. (2004). The STEP scale: A measure of short-term export performance improvement. Journal of International Marketing, 12(1), 36–56. Lye, A. R. (1998). The initiation and development of exporter–importer relationships. Dissertation, Christchurch, University of Canterbury, New Zealand. Madsen, T. K. (1987). Empirical export performance studies: A review of conceptualizations and findings. In: S. T. Cavusgil (Ed.), Advances in international marketing, 2 (pp. 177–198). Greenwich, CT: Jai Press. March, J. G. (1998). Decisions and organizations. Basil: Blackwell Ltd. McAuley, A. (1993). The perceived usefulness of export information sources. European Journal of Marketing, 27, 52–64. Moorman, C., Zaltman, G., & Deshpande´, R. (1992). Relationships between providers and users of market research: The dynamics of trust within and between organizations. Journal of Marketing Research, 29(August), 314–329. Morgan, R. M., & Hunt, S. D. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, 58(July), 20–38. Narver, J. C., & Slater, S. F. (1990). The effect of market orientation on business profitability. Journal of Marketing, 54(October), 20–35. Nayyar, P. R. (1993). On the measurement of competitive strategy: Evidence from a large multiproduct U.S. firm. Academy of Management Journal, 36(6), 1652–1669. Ouchi, W. G., & Maguire, M. A. (1975). Organizational control: Two functions. Administrative Science Quarterly, 20(December), 559–569. Rotter, J. B. (1967). A new scale for the measurement of interpersonal trust. Journal of Personality, 35, 651–665. Sandvik, K. (1997). The effects of market orientation. Dissertation, Norwegian School of Economics and Business Administration, Bergen, Norway. Seringhaus, F. H., & Rosson, P. J. (1990). Government export promotion. London: Routledge. Shoham, A. (1998). Export performance: A conceptualization and empirical assessment. Journal of International Marketing, 6(3), 59–81. Siguaw, J. A., Simpson, P. M., & Baker, T. L. (1997). The influence of market orientation on channel relationships: A dyadic examination. Working Paper, Report no. 97-103, Marketing Science Institute. Slater, S. F., & Narver, J. C. (1994). Does competitive environment moderate the market orientation-performance relationship? Journal of Marketing, 58(January), 46–55. Solberg, C. A. (2000). Modes of exporter Governance of sales subsidiaries and distributors in international markets. Research Report no. 5, Norwegian School of Management.

Effect of Information Collection Behaviour on Market Performance

155

Solberg, C. A. (2002). The perennial issue of adaptation or standardisation of international marketing communication: Organizational contingencies and performance. Journal of International Marketing, 10(3), 1–21. Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Stern, L. W., & Reve, T. (1980). Distribution channels as political economies: A framework for comparative analysis. Journal of Marketing, 44(Summer), 52–64. Styles, C. (1998). Export performance measures in Australia and the United Kingdom. Journal of International Marketing, 6(3), 12–36. Uzzi, B. (1997). Social structure and competition in interfirm networks: The paradox of embeddedness. Administrative Science Quarterly, 42, 35–67. Wathne, K. H., & Heide, J. B. (2000). Opportunism in interfirm relationships: Forms, outcomes, and solutions. Journal of Marketing, 64(October), 36–51. Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: The Free Press. Williamson, O. E. (1996). The mechanisms of governance. Oxford: Oxford University Press. Wilson, D. T. (1995). An integrated model of buyer–seller relationships. Journal of the Academy of Marketing Science, 23(Fall), 335–345.

This page intentionally left blank

156

UTILIZING RELATIONAL GOVERNANCE IN EXPORT RELATIONSHIPS: LEVERAGING LEARNING AND IMPROVING FLEXIBILITY AND SATISFACTION Anthony S. Roath and Rudolf R. Sinkovics 1. INTRODUCTION AND PROBLEM Exporting manufacturers that pursue international expansion via foreign distributors face a trade off. Their decision to utilize international distributors as a market entry mode reduces some risks; however, the manufacturers do not enjoy control of the foreign channel. Given heterogeneity in global environments and often a significant geopolitical separation between manufacturers and international distributors, the ability to control the behavior of channel partners is inherently reduced. Consequently, natural conditions for opportunistic behavior are created (Karunaratna & Johnson, 1997; Klein & Roth, 1990). Mechanisms that help to offset opportunism include contract enforcement, forward integration (Klein, Frazier, & Roth, 1990), and management strategies including product and territorial exclusivity and information exchange (Karunaratna & Johnson, 1997). However, the enforcement of Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 157–185 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16007-4

157

158

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

contractual agreements is often difficult to rely upon, given the diversity of the economic, legal, and political markets. While contracts are signed in most business dealings, they are seldom used (Roxenhall & Ghauri, 2004). Furthermore, manufacturers may not be willing to inherit the commitment associated with increasing variations of forward integration. The Uppsala behavioral model of Internationalization (Johanson & Vahlne, 1977, 1990) suggests that firm’s resource commitment to foreign markets gradually increases as they develop their knowledge of foreign markets. The underlying basis of the model points to an established sequence of stages that are indicative of increasing resource deployment in the host market. Accordingly, we chose to investigate learning orientation, which we believe to be an important strategy as a firm enters a host market. Essentially, the governance of the interactive relationship leads to certain outcomes based upon the learning objectives. The focus of this study is on a cross-sectional analysis of manufacturing exporters and their partners, the foreign distributors, within the dynamic perspective of the Uppsala model. The study examines how the employment of relational governance mechanisms may help to offset opportunism while building satisfaction with the relationships as well as flexibility within the market. The approach is based upon the notion that relationships are fundamentally grounded in social interactions (Cova & Salle, 2000) that eventually exploit organizational interdependencies and are designed to achieve strategic or market objectives. Hence, the basis of this research is on the role of an organization’s learning orientation, which is leveraged by governance mechanisms (i.e., resource commitment and trust) to achieve relationship satisfaction and flexible market capability. Relational governance both facilitates and augments learning between cross-border organizations and is seen to instrumentally counter the dangers associated with the foreign distributor’s potential opportunistic behavior. Relational governance contributes to organizational flexibility in foreign markets and promotes satisfactory relationship outcomes, which underlies the firm’s desire to continue the relationship while supporting the development of global strategy (Kogut, 1985). The link between learning orientation and manufacturer commitment is related to and parallels the Uppsala link between an organization’s experiential knowledge (of foreign markets) and its resource commitment to the market (Johanson & Vahlne, 1977, 1990). However, this study explores a different perspective of learning. In fact, when contrasting the Uppsala perspective to the present definition, the study presumes a more proactive learning approach than Uppsala’s concept of learning (Forsgren, 2002).

Utilizing Relational Governance in Export Relationships

159

The Uppsala perspective refers to two different types of knowledge: (1) objective knowledge, which can be learned through formal training or market research, and (2) experiential knowledge, which can only be acquired through personal experience. Uppsala deals more or less exclusively with experiential learning (Forsgren, 2002). The present research’s perspective is proactive and focuses on the manufacturer’s aggressive search for market solutions. The Uppsala behavioral perspective of Internationalization involves almost a ‘default’ progression of increased market investment as the firm ‘learns’ about the market over time. The learning orientation perspective, which is used in this paper, however, implies that the manufacturer objectively puts into place an interorganizational environment that promotes market knowledge gains. Consequently, the manufacturer leverages this learning orientation with relational governance mechanisms (tools) which, if employed effectively, help to develop capabilities (e.g., flexibility) and secure relationships (e.g., maintain satisfying relationships). Achieving these goals helps the company to deal with the increased competitive challenges in the foreign environment. Hence, our perspective suggests that the manufacturer ‘balances’ the inherent tradeoff with lower-level market commitment and reduced risks, yet higher ‘‘intangible commitments’’ (Hadjikhani, 1997). Consequently, this study examines two distinct relational governance mechanisms, relationship commitment and trust. The Uppsala Internationalization model is incorporated to explore the issues associated with an exporting manufacturer’s overarching strategic objective of achieving effective market entry through a proactive approach involving market learning. Market learning is enhanced through governance.

2. PURPOSE The purpose of the research is to assess the role of relational governance in an exporting manufacturer–international distributor relationship. The objective is to determine whether certain relational governance mechanisms can provide alternative pathways to traditional mechanisms of dealing with distributor opportunism, such as forward integration and increasing marketing commitment via sales subsidiaries or manufacturing. The impact of relational governance on flexibility and the relationship-specific attribute of satisfaction with the relationship will be examined. Flexibility contributes to competitive advantages, whereas satisfaction indicates a surrogate measure to continue working with the relationship to provide and enhance the potential for future value. Subsequently, the model is presented which proposes the exporting

160

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

manufacturer utilizes relational governance to augment an active learning orientation to gain enhanced performance in the foreign environment.

3. CONCEPTUAL FRAMEWORK The Uppsala Internationalization model, which is predicated upon the behavioral theory of the firm (Aharoni, 1966; Cyert & March, 1963) and Penrose’s (1959) theory of the growth of the firm, perceives internationalization to be a process of increased involvement. As firms develop additional levels of knowledge about foreign markets and operations, they increasingly commit resources to foreign markets (Johanson & Vahlne, 1977). The model encompasses state and change aspects of internationalization, which build upon and reinforce each other in a causal cycle. Market commitment and market knowledge represent state aspects and current business activities, and commitment decisions characterize change aspects (Johanson & Vahlne, 1990). Two kinds of knowledge are distinguished, objective knowledge which can be learned by formal training or market research, and experiential knowledge which can only be acquired through personal experience. The model claims that a company’s engagement in a specific country market develops according to an establishment of a chain of events which reflects increasing resource commitment to the market. Using the Uppsala model as a background for understanding the mechanisms of initiating and maintaining international distributor relationships would lead us to conclude that exporting manufacturers may resort to forward integration and acquisition strategies to deal with opportunistic, performance weakening distributor behavior almost by default. However, the present study follows a relational governance approach to managing export manufacturer–foreign distributor interactions. It builds upon the notion that proactive management of the relationship augments learning that may, in turn, provide an alternative to forward integration while contributing to relationship satisfaction and an ability to be flexible in the market. Researchers in the international business marketing and channel management literature have increasingly drawn their attention to relational aspects of manufacturer and distributor interaction (Bello & Gilliland, 1997; Heide, 1994). Most of the research has focused on explaining how interorganizational management processes are dependent upon relational interaction such as cooperation, trust, and commitment (Gundlach, Achrol, & Mentzer, 1995; Morgan & Hunt, 1994). Additionally, some scholars have

Utilizing Relational Governance in Export Relationships

161

investigated direct linkages between the relational attributes of interorganizational structures and economic performance (Bello & Gilliland, 1997; Celly & Frazier, 1996; Lusch & Brown, 1996). Rationales for these investigations are grounded in the recognition that companies strive to reduce the transaction and agency costs inherent to the relationship. Furthermore, scholars and practitioners are aware that the successful governance of relationships provides a foundation to develop self-enforcing mechanisms that ultimately help to protect assets and reduce monitoring costs (Conn & Yip, 1997; Drucker, 1995). Indeed, some research has examined relational processes, such as cooperation, relational commitment, and trust as primary variables impacting performance (Lusch & Brown, 1996; Zaheer & Venkatraman, 1995). Furthermore, the relationship marketing literature argues that close, collaborative relationships between parties lead to beneficial outcomes for all. The tangible and intangible elements of the relationship that are created from close collaboration between firms (i.e., associated with commitment and trust) are key sources of competitive advantages, especially if they become relationship-specific assets (Dyer & Singh, 1998). Relationships include hard assets and resources that partners share as well as intangible components represented by knowledge-sharing routines, governance mechanisms, and relationship-specific assets. The conceptual framework presents a synthesis of the literature on relationship marketing, the resource-based view of the firm, and transaction cost economics (illustrated in Fig. 1). This model directs our empirical work and integrates relationship marketing perspectives with the governance of export manufacturer–distributor relationships. The factors are presented in more detail via hypothesized relationships.1 International channel management depends to a great degree upon an implicit or normative form of control. This form of control helps to coordinate activities between organizations as it facilitates the development of an interorganizational culture of shared beliefs (Dwyer, Schurr, & Oh, 1987; Weitz & Jap, 1995). The propensity to collaborate is encouraged as a result of companies that have a history of positive experiences working with each other. Firms’ interactions contribute further to the reinforcement of normative forms of governance control. In addition, the evidence from these normative forms implies that the parties seek the benefits that reflect longterm opportunities and profits from the relationship. The partners enhance the potential for achieving strategic goals through relationship marketing, which contributes, in part, to their ability to adapt to changing market situations (i.e., flexibility).

162

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS Governance

Outcome

F2 Relationship Commitment F1 Learning Orientation

F4 Flexibility

F5 Satisfaction

F3 Trust

Fig. 1. Conceptual Model.

3.1. Learning Orientation Weitz and Jap (1995) assert that organizations must work together to develop the factors of their relationship that underlie commitment and trust (i.e., relational norms). Bartlett and Ghoshal (1998) corroborate much of the sentiment of Weitz and Jap’s (1995) position through a study highlighting this interorganizational trend: the focus of managers in international organizations has shifted from organizational planning to an increased emphasis on organizational learning. This particular proposition suggests that relational norms can contribute to factors leading to interorganizational capabilities. Indeed, companies strive to develop comprehensive organizational capabilities to help them fully understand, interpret, and respond to environmental circumstances. Therefore, developing these relational norms would strengthen the interdependencies that support relationship-specific assets. The goal of developing interorganizational learning capabilities contributes to the working relationship between partners. In contrast to the somewhat passive and reactive form of learning associated with the Uppsala model of firm internationalization (Johanson & Vahlne, 1977, 1990), this paper posits an active perspective. This view encompasses the notion of exporting manufacturers sharing fresh ideas with international distributors and encouraging distributors to participate in joint training activities and programs that are designed to improve mutual learning (Hult & Ferrell,

Utilizing Relational Governance in Export Relationships

163

1997). Hence, learning orientation is not exclusively the domain of experiential learning, it is also a dimension which focuses on the search for new solutions and opportunities (Huber, 1991). Under this context, wherein geopolitical separation from distributors poses challenges to learning, an active approach helps to create opportunities to foster relationship commitment and trust. Learning creates an environment whereby the partners understand and appreciate the benefits that potentially can accrue from interfirm cooperation. This can be critical for guaranteeing core competencies and enhancing competitive advantage (Hamel, 1991). Building an interfirm environment that encourages the development of competencies through investing in learning and knowledge dissemination contributes to enhancing the sustainability of single organizations as well as interorganizational stability (Cavusgil, 1998). The idea is grounded on the basis of mutual partner commitment, trust, and a willingness to work with each other. Furthermore, Gold, Malhotra, and Segars (2001) set forth the argument that organizations must develop an environment that stresses the existence and magnitude of knowledge management in order to achieve success. Within the context of the international supply chain, learning orientation can be integrated between the firms to represent one of the most essential ways to develop strategic capability and competitive advantage (Nonaka, 1994). Hence, relationship commitment and trust serve within the relationship marketing context as viable governance mechanisms. Consequently, a direct relationship between learning orientation and relationship marketing (i.e., relationship commitment and trust) is posited. H1. Learning orientation will positively impact the governance of the export manufacturer–international distributor relationship; hence learning orientation results in higher levels of relationship commitment. In a similar vein, we argue that, H2. Learning orientation will result in higher levels of export manufacturer trust in a foreign distributor. 3.2. Relational Governance Weitz and Jap (1995) posit that the focus of practitioners in their approach to channel relationship management has shifted. Managers have reduced their emphasis on governing corporate channel structures through the use of power and dependence. As a result of these changes, managers have increased their interest in managing the relationship by investing in the

164

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

development of relational norms. These relational norms are advanced through ‘‘self-governance’’ mechanisms that help reduce an organization’s transaction and agency costs. In addition, relational norms are idiosyncratic, which implies that the manner in which a firm maintains its relationships could contribute to competitive capability. The present study adopts Heide’s (1994) view of governance, which he envisions to be a multidimensional interaction between two partners that embodies all aspects of relationship management and maintenance. This perspective is extended to define governance as a series of management decision-making processes that a firm may use within the relationship to affect desired objectives. Under this definition, governance is an integration of relationship commitment and trust, which Morgan and Hunt (1994) refer to as relationship marketing. Relationship commitment and trust separately are forms of governance, which the manufacturer employs when managing the relationship. Trust and relationship commitment are both rational means to improve the governance of the relationship yet they may also complement each other. Relationship commitment represents a tangible demonstration or intention to work with the partner, whereas trust implies that the partner is willing to work with the other under the auspices of mutual respect and the implication that vulnerabilities would not be exploited. Hence, these relational variables represent a hybrid form of governance. 3.2.1. Relationship Commitment Relationship commitment is the willingness of partners to make sacrifices when working together to achieve particular goals. It has been defined as an ‘‘implicit or explicit pledge of relational continuity between exchange partners’’ (Dwyer & Oh, 1988). Gundlach et al., (1995), echoing Macneil (1980), argue that commitment is an important element of a long-term and regulated exchange relationship. In addition, Morgan and Hunt (1994) define commitment as a partner’s willingness to place maximum effort into maintaining the relationship because of the belief that the relationship is worthy enough to ensure it endures indefinitely. Consequently, commitment seems to reinforce the social norms between the organizations, which in turn, contribute to effective long-term relationship exchange. This follows the concept that relationship commitment represents a deeper resolve between the parties to maintain the relationship (Dwyer et al., 1987). Morgan and Hunt (1994) support this consensus in the marketing channel literature by presenting the notion that organizations demonstrate their resolve by investing in the relationship to make the collaboration effort successful and competitive. Again, this investment leads to relationship-specific assets that

Utilizing Relational Governance in Export Relationships

165

are enhanced through trust. Part of the relationship reinforcement is indeed grounded in trust as trust is argued in the social exchange literature to be one of the central elements to all relational exchanges (Anderson & Narus, 1990; Ganesan, 1994; Morgan & Hunt, 1994). 3.2.2. Trust Trust has been investigated as a key component of relationships and an effective tool that the partners use to govern their relationship, both in national (see e.g., Doney & Cannon, 1997; Geyskens, Steenkamp, & Kumar, 1998; Zaheer, McEvily, & Perrone, 1998) and international contexts (e.g., Aulakh, Kotabe, & Sahay, 1996; Boersma, Buckley, & Ghauri, 2003; Dyer & Chu, 2000). The concept of trust in the literature is considered to have many dimensions. For example, two defining dimensions of trust are benevolence and credibility. The credibility dimension of trust outlines the confidence the partners have with each other after working together over time. Essentially, it is an indication that the partners have developed a degree of operational efficiency and the ability to work together (Ganesan, 1994). The benevolent aspect of trust indicates a willingness to show good faith toward the other. It is the extent to which partners express good intentions to the other without expressing specific commitments. In this case, trust is a developed mutual confidence that no partner will exploit the other (Sabel, 1993). It therefore expresses a willingness to be vulnerable to the actions of another party based on the expectation that the other party will perform a particular action regardless of the ability to monitor or control that other party (Mayer, Davis, & Schoorman, 1995). Accordingly, trust is examined as a benevolence issue since it supports better the paper’s proposition that the exporting manufacturer establishes a learning environment that actively utilizes relational governance. Presumably, credibility trust is developed as a result of the interaction. Building on Gundlach et al., (1995) conceptualization, there is a positive relationship between relationship commitment and trust. The parties’ commitment and desire to build a long-term relationship provides a foundation for trust. Furthermore, trust reduces uncertainty within a relationship and the perceived likelihood that one party will exploit the other (Parkhe, 1998a, b). In general, trust engenders a confidence of mutual reliance that leads to greater cooperative behavior, such as problem solving, communication, and knowledge sharing. Other intangible benefits of trust embody the idea that it promotes interorganizational cooperation (Ring & Van De Ven, 1992). In an international setting it signals the commitment of foreign subsidiary managers (Kim & Mauborgne, 1993). Gounaris and Venetis (2002)

166

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

established that trust proves to be a valuable tool for maintaining the relationship with the organizational client and ensuring its longevity. Moreover, Barney and Hansen (1994) argued that trustworthiness developed between organizations could become a source of competitive advantage since the primary contribution of trust is its value to relational exchange and a precursor to beneficial relational outcomes. Empirical research confirmed the benefits of trust in many contexts (Ganesan, 1994; Lambe, Spekman, & Hunt, 2000; Morgan & Hunt, 1994). The process of developing credible commitment is a vital ingredient of relationship monitoring because it mitigates opportunistic behavior (Gundlachet al., 1995; Macneil, 1980) while at the same time reduces perceived risks (Ganesan, 1994; Gruen, Summers, & Acito, 2000). The desire to reduce risk motivates firms to invest in the relationship, which increases commitment and subsequent relationship continuity. Hence, trust between partners in a relationship would lead to firm commitment as a relationship grounded in trust is one that fosters a greater potential to achieve the benefits that occur through long-term exchanges. In the same way that trust augments commitment, relationship commitment will reinforce the levels of trust – a reciprocal and positive relationship. H3. Relationship commitment and trust are positively related. 3.3. Relational Governance and Flexibility Flexibility is the ability to modify processes in rapidly changing environments to achieve strategic objectives while at the same time lower opportunity costs and reduce path dependencies (Sanchez, 1995). The geophysical and cultural separation of manufacturer and international distributors heightens the importance of flexibility and its impact on export performance (see e.g., Ling-yee Li & Ogunmokum, 2000). The ability to adapt to unforeseen contingencies, a crucial element of flexibility, is arguably a desired outcome of organizations because it provides a means to confront potential problems (Harrigan, 1988) as well as to recover from events that may disrupt the organization’s operations (Evans, 1991). Flexibility in this context represents a good-faith effort to modify interorganizational actions when confronted with changing circumstances. The environmental events and factors that affect one partner would potentially influence the other in a working relationship (Bello & Gilliland, 1997; Roath, Miller, & Cavusgil, 2002). The tangible and intangible benefits that are derived from the manufacturer’s relationship commitment include

Utilizing Relational Governance in Export Relationships

167

the idea that the partners will invest in processes and procedures that will enable the partnership to swiftly adapt to environmental changes, especially since environmental dynamics may dramatically affect both parties. Relationship commitment demonstrates the resolve to develop a mutual capability to react to these changes effectively. In addition, trust between the partners is illustrated through their mutual reliance to do their part skillfully to adapt to environmental dynamics. Consequently, the governance mechanisms associated with relationship marketing are essentially tools that an organization can employ to increase the potential for achieving flexibility. Dwyer and Oh (1988) as well as Frazier and Kale (1989), argue that satisfaction is a primary factor for evaluating channel performance. Satisfaction is not only a surrogate for the perceived effectiveness of relationship governance, satisfaction may also be predictive of future actions. For example, Nevin (1995) believes that relational exchange is a long-term process based upon recurring exchanges with the same individuals or firms. When the parties are committed to maintaining the relationship, they strive to make it work, which potentially leads to successful and mutually beneficial exchanges and outcomes. As firms work together to achieve benefits from their relationship, they also have an increased awareness or perception of compatibility and collaboration from their respective partner. The collaboration increases the ability to understand each other’s processes and capacity to work together better under different environmental circumstances. Collaboration efforts demonstrate a willingness to work to fulfill desired outcomes and thus results in increased flexibility in the relationship. Furthermore, the necessity to spend extra time and resources on monitoring efforts is diminished, thereby permitting the partners to concentrate more on developing interorganizational strengths. When faced with environmental uncertainty, the role of the governance mechanisms of relationship commitment and trust contributes to the relationship’s adaptation abilities because the partners have more confidence in allowing the other to address contingencies without having to constantly provide input. In effect, lesser degrees of control relate to higher degrees of flexibility. Noordewier, John, and Nevin (1990) propose that these adaptation abilities are especially important because not having adaptive capabilities in an uncertain environment could lead to undesirable circumstances. Thus, relational governance increases the partner’s confidence in the other to react independently in a beneficial relationship, even when confronted with different scenarios. This leads to the following propositions:

168

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

H4. Effective relational governance (as evidenced by relationship commitment) contributes to flexibility with the relationship. H5. Effective relational governance (as evidenced by trust) contributes to flexibility with the relationship. 3.4. Flexibility and Satisfaction Anderson and Narus (1990) define satisfaction in manufacturer–distributor relationships as a positive result of a partner’s assessment of the desired outcomes from the working partnership. According to Wilson (1995), satisfaction is one of the most critical variables in business relationships. Wilson relates satisfaction, in the context of business relationships, as the degree to which the transaction meets the performance expectations of the partner. Given this definition of satisfaction as ‘expectations met,’ the manufacturer will be satisfied if performance objectives are met or exceeded. Relationships that have developed continuity and have experienced mutually beneficial outcomes typically have partners that are satisfied with the relationship. These relationships impart a degree of confidence to the partners because they demonstrate the partners’ ability and desire to work together without having to be concerned about exploitation. Because the partners are satisfied with the relationship, they have a greater tendency to be cooperative and communicative. Theoharakis and Hooley (2003) provide support for the development of organizational resources that foster and enable relationships in business-to-business environments since such resources are linked with improved firm performance. Rosson and Ford (1982) demonstrated that relational outcomes are positively associated with information exchange in relationships that operate in an international environment. Moreover, Noordewier et al., (1990) empirically support their findings by providing evidence that flexible partnerships underscore the notion of communication and trust-oriented relational processes. H6. The flexibility dimension within the export manufacturer–distributor interaction is positively associated with the relationship’s satisfaction. 3.5. Learning Orientation and Flexibility Flexibility is the ability to alter methods of doing business to achieve strategic objectives while at the same time lowering strategic opportunity costs in rapidly changing environments (i.e., flexibility reduces path dependencies). Flexibility represents a desired outcome of the relationship, as it is a

Utilizing Relational Governance in Export Relationships

169

good-faith effort to modify actions when confronted with changing circumstances. Learning orientation is an attempt to instill a high value on learning activities, which include seeking and sharing market knowledge. Learning orientation increases the potential to successfully confront changing circumstances because the knowledge-sharing routines that are practiced between the organizations represent a good faith effort to collaborate. A result of cooperative behavior between the partners is information exchange. Knowledge sharing routines through learning orientation also increase access to a greater number of information sources, which offers alternative interpretations of market information (Slater & Narver, 1995). Consequently, the coordination, manifested through a learning orientation provides the advantage of increased efficiency in information dissemination and flexibility.Essentially, learning orientation encourages each party in the partnership to make variations in their processes and with each other in order to adapt to environmental dynamics. Thus, H7. Learning orientation encompasses greater coordination through information exchange, which contributes to a greater degree of flexibility. To the same extent that the development of interorganizational learning capabilities contributes to the enhanced working of the relationship between parties, there will also be a direct link with satisfaction. Not only does interorganizational learning foster relationship commitment and trust, it will also directly enhance the parties perception of their mutual collaborative efforts and satisfaction of their relationship. H8. Learning orientation is positively related to satisfaction.

4. METHODS In-depth interviews with 12 experienced international marketing executives and six international trade lawyers provided valuable insights into manufacturer–distributor relationships from managers’ perspectives. All executives were responsible for building and maintaining relationships with a set of foreign distributors. They were either directly involved with their company’s export operations or well informed about how their firm manages foreign distributors. The lawyers were involved in the formal establishment of contracts between the parties or dealing with issues of conflict resolution with foreign distributors. Consequently, they were all very well suited for

170

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

our research purposes and provided a useful starting point for specifying the domain of our research and questionnaire development (Churchill, 1979).

4.1. Sampling Frame Contact data was purchased from the Thomas Export Directory, a large proprietary database, by selecting entries on companies actively involved in global market expansion through the use of foreign distributors. We excluded small firms (fewer than 50 employees) on the basis of their often limited experience in dealing with foreign distributors and inconclusive research findings regarding firm size and export behavior (Cavusgil, 1984; Moen, 1999). Eight hundred firms were randomly selected and a questionnaire was mailed to senior managers most familiar with conditions and terms of their distributor relationships. A follow-up mailing was sent after three weeks to improve initial response. A total of 162 surveys were returned. After removing incomplete entries, 141 responses were retained in the database for further analysis. This represents an effective response rate of approximately 20% which is quite appealing given recent reports of deteriorating response rates (Ibeh, Brock, & Zhou 2004; Jobber, Saunders, & Mitchell 2004) and reduces potential problems of self-selection bias (Wilson, 1999). Responding firms represent a comprehensive industry cross-section, although response counts are skewed toward industrial machinery and electronic equipment industry. The industries include industrial machinery (24.1%), electronics (12.8%), chemicals (8.5%), and telecommunications (4.3%) among others. The use of foreign distributors in these industries is commonly found and reported (Cavusgil, 1984). Therefore, industry-specific bias was minimized, supporting possible generalizability of the hypothesized results. Non-response bias was tested following a procedure suggested by Armstrong and Overton (1977). The procedure involved testing for descriptive differences such as company sales and number of employees between early and late respondents. Comparing their answers did not reveal significant differences suggesting that non-response was not a concern for the data analysis and interpretation. Table 1 provides characteristics for the respondents.

4.2. Measure Development Qualitative input from interviews with experts was complemented with information about existing scales in academic marketing, channels, and the

171

Utilizing Relational Governance in Export Relationships

Table 1. Industry

Household appliances Automotive Telecommunication Paper/publishing Electronic equipment Pharmaceutical Medical equipment Furniture Heavy machinery Industrial machinery Chemical Other

Respondent Characteristics.

Country/Region of No. of No. of Years of No. of Export Distributora Personnel Distributors Firms Experience (Mean) (Mean) 3 6 7 3 18 5 6 4 4 34 12 39

9.7 32.8 14.3 5.6 22.0 26.6 21.0 13.2 28.8 29.0 26.9 21.5

1.6 3.6b 4.6 2.0 3.5d 3.8 6.0 17.3 14.8 3.1 20.7 3.7

2.0 9.0c 31.6 16.3 24.6 5.0 73.3 48.2 48.8 23.1 38.2 30.2

Europe Europe Middle East/Africa Pac Rim/China Pac Rim/China Pac Rim/China Europe Pac Rim/China Pac Rim/China Pac Rim/China Europe Pac Rim/China

a

Respondents reported the region where their ‘‘most important’’ distributor was located. This number reflects the highest percentage (concentration) for the particular industry. The Pacific Rim/China was reported as the region of the most challenging distributor (40%) by almost all industries, followed by Europe (23.7%) and Mexico/Central America (12.6%). b Two companies had more than 250 people dedicated to foreign operations and were excluded from the calculation of the mean. c Two companies have more than 250 distributors and were excluded from the mean calculation. d This mean score does not include two companies with more than 100 personnel dedicated to foreign operations.

international exporting literature. Multi-item measures and constructs were derived from these literature bases and subsequently modified and refined based on insights gained during additional preliminary interviews (Homburg & Giering, 1996). These interviews involved a number of academics and a separate group of managers who examined our modified scales for face and content validity. A questionnaire was developed and pretested on a sample of 35 respondents before further modification resulted in the final survey instrument. All items are measured using Likert-type attitudinal scales, anchored on 7-point instruments with endpoints of strongly disagree ¼ 7 and strongly agree ¼ 1. Standard procedures were employed for subsequent psychometric scale-development (Baumgartner & Homburg, 1996; Gerbing & Anderson, 1988). The measures used in this study and their sources are discussed subsequently; their reliability estimates and confirmatory factor analysis results are provided in Table 2. Measures for the learning orientation scale were adapted from Hult and Ferrell (1997) who build on conceptual work from Lyles and Schwenk

172

Table 2. id

Measurement Items and Properties.

Item

d

li,j

t

3.01 3.09 2.77

1.55 1.56 1.57

0.73 0.86 0.58

8.57 11.59 5.48

3.11

1.65

0.72

8.22

3.66

1.57

0.84

13.46

3.48

1.47

0.82

11.46

3.53

1.64

0.72

10.35

3.46 3.33 3.05

1.70 1.51 1.41

0.90 0.76 0.78

18.83 9.78 10.62

Learning orientation – adapted from Hult and Ferrell (1997) – a ¼ 0.82, r ¼ 0.82, AVE ¼ 0.53 ls1 ls2 ls3 ls4

We strongly encourage our employees to share fresh ideas with distributors Our company works with distributors to continually improve capabilities We encourage our distributors to participate actively in joint training activities. Joint training programs with our distributors are designed to improve mutual learning. Relationship Commitment–– taken from Gundlach, Achrol, and Mentzer (1995) – a ¼ 0.84, r ¼ 0.83, AVE ¼ 0.63

rel1 rel2 rel3

The distributor is dedicated to improvements that benefit the relationship as a whole, not just one single partner. Both firms actively work together to carry out our responsibilities and commitments in this relationship Both firms invest considerable resources and time to make the relationship a success Trust – adapted from Anderson and Narus (1990) – a ¼ 0.81, r ¼ 0.88, AVE ¼ 0.64

trust1 trust2 trust3

Our business relationship is characterized by a high level of trust We trust the distributor to remain within the terms of the contract Whenever the distributor offers us advice, we believe he is sharing his best judgment

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

m

We have not developed a strong sense of loyalty to the distributor (r)

3.74

1.85

0.75

11.44

4.38

1.71

0.78

11.86

3.12

1.75

0.76

9.99

3.01

1.45

0.61

7.48

3.91

1.91

0.76

13.20

3.67

1.95

0.76

11.86

3.46

1.64

0.75

11.60

2.87

1.49

0.71

9.62

Satisfaction – adapted from Cullen, Johnson, and Sakano (1995) –a ¼ 0.82, r ¼ 0.82, AVE ¼ 0.53 sat1 sat2 sat3 sat4

We are highly satisfied with the distributor’s performance compared with our initial expectations We intend to continue the relationship with this partner for the foreseeable future Our perception is that the distributor views our relationship as mutually beneficial We believe that the distributor needs to improve operational processes in several areas before we renew our contract (r) Flexibility – taken from Heide and John (1992) – a ¼ 0.78, r ¼ 0.78, AVE ¼ 0.55

flex1 flex2 flex3

The distributor has not helped to increase our flexibility in servicing this market (r) Together, we have developed processes to increase flexibility in response to customer requests We are unable to make adjustments in our relationship to accommodate changing circumstances (r)

Utilizing Relational Governance in Export Relationships

trust4

Note: All items formulated as Likert-type attitudinal statements, anchored on a 7-point scale (endpoints: strongly disagree ¼ 7 and strongly agree ¼ 1). m ¼ means, d ¼ standard deviations, l ¼ factor-loading lambda, t ¼ t-value, a ¼ Cronbach alpha, r ¼ Jo¨reskog’s rho, AVE ¼ average variance extracted. Measurement fit: w2 (df) ¼ 280 (123); Satorra–Bentler scaled w2 (df) ¼ 242.25 (123); po0.001; Comparative Fit Index (CFI) ¼ 0.902; Bentler–Bonnet Non-Normed Fit Index ¼ 0.878; Bollen (IFI) Fit Index ¼ 0.904; Root mean-square error of approximation (RMSEA) ¼ 0.084

173

174

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

(1994). Thus, learning orientation is conceptualized as the extent to which an organization actively manages learning among its employees and encourages the incorporation of new ideas from the learning process. Relationship commitment is defined as the demonstration of the desire to develop a long-term relationship with exchange partners by investing in assets that are specific to the relationship (Anderson & Weitz, 1992; Morgan & Hunt, 1994). Items pertaining to the attitudinal component were taken from Gundlach et al., (1995). Four items were adapted from Anderson and Narus (1990) to capture trust and assess loyalty between manufacturer and foreign distributor. Trust is defined as the willingness to show good faith in each other and demonstrate benevolence in either party (Moorman, Deshpande, & Zaltman, 1993). Flexibility is defined as the degree to which the relationship is able to adjust to contingencies in the environment. Items were taken from Heide and John (1992). Measures for satisfaction were extracted from Cullen, Johnson and Sakano (1995), conceptualizing satisfaction in a manufacturer–foreign distributor relationship as a positive assessment of the desired outcomes (Anderson & Narus, 1990), i.e., the degree to which the manufacturer’s relationship is better than previously expected (Cullen et al., 1995).

4.3. Measure Assessment Table 3 outlines the summary statistics and correlation matrix for the measurement scales. Coefficient alphas range between 0.78 and 0.84, which is within the limits of desirable/excellent boundaries for scales (DeVellis, 1991). A confirmatory factor analysis using EQS 6.1 was performed (Bentler & Wu, 2003). The Satorra–Bentler scaled w2 test, which corrects for distortions of the normal theory method when data are not normal (Satorra & Bentler, 1988, 1994) is statistically significant (w2 (123) ¼ 242.25, p ¼ 0:000). This undesirable result is considered unproblematic given the relatively small sample size and satisfactory additional fit indices. The comparative fit index (CFI), Bentler–Bonnet non-normed fit index (BBNFI), and Bollen’s incremental fit index (IFI) indicate a relatively good fit for the measurement model (CFI ¼ 0.902; BBNFI ¼ 0.878; IFI ¼ 0.902). The root mean-square error of approximation (RMSEA) also provides support on the upper limit of the acceptable range (RMSEA ¼ 0.084). Confirmatory factor analysis assesses content, discriminant, and convergent validity. All factor loadings exceeded 0.5; indicating content validity (Bollen, 1989). A 95% confidence interval was constructed around the

175

Utilizing Relational Governance in Export Relationships

Table 3.

Descriptive Statistics and Construct Intercorrelations. (1)

(1) Learning orientation (2) Relationship commitment (3) Trust (4) Satisfaction (5) Flexibility Mean SD a r AVE

(2)

(3)

(4)

(5)

1.00 0.747 (0.055) 0.730 (0.056) 13.53 5.45 0.81 0.88 0.64

1.00 0.794 (0.064) 14.39 5.52 0.82 0.82 0.53

1.00 9.99 4.25 0.78 0.78 0.55

1.00 0.226 (0.110)

1.00

0.268 (0.111) 0.803 (0.062) 0.057 (0.106) 0.914 (0.036) 0.366 (0.123) 0.747 (0.067) 11.93 10.67 5.04 11.93 0.82 0.84 0.82 0.83 0.53 0.63

Note: a ¼ Cronbach alpha; r ¼ Jo¨reskog’s rho; AVE ¼ average variance extracted, all correlations except a are significant at po0.01; correlations among independent variables reported in the lower diagonal; standard errors reported in parentheses.

estimates of correlations between the latent constructs. To the extent that the results do not include 1.0, this test provides some evidence of discriminant validity (Anderson & Gerbing, 1988; Bagozzi & Yi, 1988). In addition, a more stringent test was conducted to demonstrate discriminant validity. This involved examination of the amount of variance extracted by each construct (taking measurement error into account) in relation to the squared-correlation between pairs of constructs. All pairs of factors passed Fornell and Larcker’s (1981) test, providing evidence of discriminant validity among the measures. The established measures were used to perform additional descriptive analyses. Bivariate product-moment correlations were calculated to investigate whether the following were correlated: the number of years manufacturers had international activities, the number of distributors the manufacturers held outside the US, and the number of people in manufacturers’ organizations dedicated to managing foreign distributors. In line with expectations and suggestions from the Uppsala behavioral model of internationalization, all these variables were positively and significantly correlated. Thus, as manufacturers’ experience in international markets evolved over time, their commitment to the markets, as represented by the number of people in home offices dedicated to managing distributors (r ¼ 0:175; po0:05), increased. The number of distributors increased (r ¼ 0:330; po0:01) as well. Furthermore, correlations were performed to

176

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

investigate whether learning orientation differed or the governance mechanisms differed according to the respective descriptors, experience, and number of distributors or export personnel. However, no such differences emerged.

5. RESULTS The hypothesized model was estimated using structural equation modeling techniques (SEM) with Bentler’s (2003) EQS 6.1 program. The results of the analysis and hypotheses tests are reported in Table 4. The overall fit measures suggest that the hypothesized model provides a reasonably good fit for the data, which is particularly encouraging when considering the attenuation in fit measures based on relatively small samples. The Satorra–Bentler scaled w2 test (Satorra & Bentler, 1988, 1994) is statistically significant at the 1%-level (w2 (127) ¼ 244, p ¼ 0:000). However, CFI and Bollen’s IFI indicate a within-threshold fit for the measurement model (CFI ¼ 0.901; IFI ¼ 0.903). RMSEA was within the boundary of usually reported empirical research (RMSEA ¼ 0.083). The hypothesized relationships are illustrated graphically in Fig. 2. Of the eight hypothesized relationships, six relationships were supported at a level 0.05 statistical significance. The relationship between learning orientation and relationship commitment (H1) is not supported. The manufacturer may create a relationship environment that encourages learning between the partners, but the distributor may not necessarily reciprocate by committing its resources. Rather, the distributor may opportunistically take advantage of the information the manufacturer offers. Again, it is the manufacturer that is determined to enter the foreign market and would incur more risk relative to the foreign distributor. Learning Orientation does engender trust, however, as evidenced by support for H2. Relationship commitment and trust are positively correlated (H3). This result is consistent with earlier findings (Morgan & Hunt, 1994) and seems to hold in a cross-border relationship. Relationship commitment contributes to flexibility (H4). Committing resources is a factor that supports the ability to be flexible. However, the link between trust and flexibility (H5) is not supported, as a trusting relationship does not directly contribute to a flexible relationship. The ability to be flexible does lead to satisfaction (H6) and a learning environment helps to support the flexibility of the manufacturer (H7). Interestingly, the relationship between learning orientation and satisfaction with the relationship proved to be statistically significant, however, contrary to the hypothesized positive relationship, the relationship is

177

Utilizing Relational Governance in Export Relationships

Table 4.

Results of Structural Equations Analysis for the Hypothesized Model. Hypotheses

Path

Structural paths Learning orientation - relationship commitment Learning orientation - trust Learning orientation - flexibility Learning orientation - satisfaction Relationship commitment flexibility Trust - flexibility Flexibility - satisfaction Correlated variables Relationship commitment ’trust Model fit statistics w2 (df) Satorra–Bentler Scaled w2 Bentler–Bollen nonnormed fit index (BBNFI) Comparative fit index (CFI) Bollen IFI Root mean-square of approximation (RMSEA)

Std. Path Coefficient

t-Value

Supported

0.148

1.262

0.251

2.325

H2

0.294

2.695

H7

0.585

3.500

0.738

5.019

H4

0.125 0.212

1.091 9.491

H6

0.800

6.614

H3

Not Supported/ Rejected

H1

H8 ( )

H5

292.863 (127) 244.744 (127) 0.880

0.901 0.903 0.083

 po0.05.  po0.01, N ¼ 140.

negative. Encouraging a learning environment between the manufacturer and foreign distributor does not directly translate into satisfaction with the relationship. The relationship between the manufacturer and foreign distributor may require more tangible outcomes before the manufacturer is satisfied. On the other hand, if the manufacturer develops a learning

178

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS Governance

H1

F2 Relationship Commitment

F1 Learning Orientation

Outcome

H4*

F4 Flexibility

H3*

H2*

F3 Trust

H6*

F5 Satisfaction

H5

H7* -H8*

Fig. 2. Hypothesized Relationships. *Indicates Supported Hypotheses (see Table 4. for details), all Correlations Significant at 0.01, dotted-line between F2 and F3 Refers to Correlational Relationship. F1–F5 Sig. Negative Relationship (hypothesized as+rel).

environment, the foreign distributor may not reciprocate by readily sharing its knowledge. This situation could lead to the manufacturer’s dissatisfaction with the relationship.

6. CONCLUSION AND IMPLICATIONS This study investigates whether relational governance mechanisms can help exporting manufacturers create a cooperative and learning environment to offset its partner’s (foreign distributor) opportunism while contributing to relationship satisfaction and the organization’s market flexibility. Exporting manufacturers may wish to look for alternatives to risky and often expensive tactics such as contract enforcement or forward integration. Forward integration involves substantial increases in market commitment which, while suggested in the internationalization theory of the firm (Johanson & Vahlne, 1977; also Karunaratna & Johnson, 1997), may not represent export manufacturers’ optimal choice. The findings of this study suggest that relational governance mechanisms help to achieve satisfaction with the relationship and flexibility in the dynamic international environment.

Utilizing Relational Governance in Export Relationships

179

However, certain components of the governance mechanism influence the outcomes differently in this context. The relationship commitment component increases the manufacturer’s flexibility because the manufacturer has a more tangible perspective of the foreign distributor’s contribution to the relationship. For example, the foreign distributor helps to promote the manufacturer’s product or helps to establish the product in the appropriate distribution channel. These tangible elements of governance illustrate the manufacturer’s ability to monitor the distributor’s contribution to the relationship. However, the manufacturer may not be able to completely monitor the actions of the foreign distributor. This aspect of governance is demonstrated by the lack of connection between trust and flexibility. Essentially, the manufacturer may not be familiar with the host environment and would therefore not be able to understand the intangible relational factors associated with flexibility or the distributor’s contribution to the manufacturer’s success in the market (e.g., communication associated with processes, the necessary adjustments that the distribution has to make in the environment). The implication is that cultural distance plays a role in relational governance. Learning orientation is important to developing trust, although it is not necessary to have a trusting relationship in order to obtain flexibility. Learning orientation does contribute to flexibility directly but a learning environment does not satisfy the manufacturer’s perspective of the relationship. In the international channel context, the manufacturer is willing to learn as much about the environment as possible, yet the foreign distributor may not be as forthcoming. Perhaps the foreign distributor does not reciprocate by sharing market knowledge but would rather keep this information close to ensure that it remains valuable to the manufacturer. This situation may lead to the manufacturer’s dissatisfaction with the relationship. Relationship issues among firms in dedicated relationships are important to examine. The desire to understand how these relationships are governed is due to a substantial increase in global competitive and environmental challenges (Palmer, 2002) and the notion that active relationship management may help to overcome the distance to the partners and downstream customers. Conceptually, the resource-based view provides a foundation upon which to build a model of governance issues in manufacturer–distributor interaction. Relationship-specific investments, as expressed in the governance of commitment and trust, are seen to contribute to satisfying relationships and flexibility in the market, thus helping in the development of global strategy (Kogut, 1985) and supporting the creation of competitive advantage (Hamel, Doz, & Prahalad, 1989). The relational governance mechanisms

180

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

(i.e., commitment and trust) represent both formal and relational tools, which can be exercised by a manufacturer to achieve desired outcomes (e.g., flexibility). Learning orientation is seen as a prerequisite to the successful governance of manufacturer–distributor interaction. Manufacturers, who are not openly striving to develop behavioral and organizational characteristics to understand, interpret, and respond to environmental characteristics will not be able to develop a governance mode with their distributor. Relationship satisfaction outcomes will result in lower levels, since willingness to commit assets, share risks, or continue in a long-term relationship is not fully demonstrated. Consequently, partnering manufacturers and distributors will miss out on a ‘comfort zone’, i.e., experience lower levels of stability and higher levels of dissatisfaction. The strategic asset of ‘flexibility’ in interaction with their distributors will suffer as well. ‘Flexibility’ is a critical capability that allows a company to adapt quickly to changes in uncertain foreign environments; hence, a flexible manufacturer will be satisfied with this particular outcome in the international market. In other words, the company’s ability to react to market dynamism may be a competitive advantage that could be attributed to working with the foreign distributor. Therefore, the manufacturer would be satisfied with the relationship. Our conceptual research model is designed to appeal to both managers, involved in international distribution systems as well as scholars, interested in improving international distribution relationships and enhancing relationship marketing activities.

7. LIMITATIONS The findings from this study need to be evaluated in the context of several limitations. Additional empirical investigations might attempt to confirm or extend the proposed relationships thus contributing to generalizing the framework to various national and international contexts. It is very desirable to replicate the study with a range of firms and industries in an attempt to offset the sampling bias; which potentially limits the generalizability of this study. This research also failed to demonstrate the hypothesized direct link between learning orientation and satisfaction. It should be interesting to learn whether this is, in fact, specific to the study or indicates a general pattern. This study also suffers from a small sample size which does not allow for tests of moderating effects such as geographic region or international experience. Future research is needed to evaluate these interaction effects, provided the availability of larger samples.

Utilizing Relational Governance in Export Relationships

181

NOTES 1. The discussion follows the organization of the figure and reads from left to right.

REFERENCES Aharoni, Y. (1966). The foreign investment decision process. Boston, MA: Harvard University Press. Anderson, E., & Weitz, B. (1992). The use of pledges to build and sustain commitment in distribution channels. Journal of Marketing Research, 29(1), 18–43. Anderson, J. C., & Gerbing, D. W. (1988). Structural equation modeling in practice: A review and recommended two-step approach. Psychological Bulletin, 103(3), 411–423. Anderson, J. C., & James, N. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(1), 42–58. Armstrong, J. S., & Overton, T. S. (1977). Estimating nonresponse bias in mail surveys. Journal of Marketing Research, 14(3), 396–402. Aulakh, P. S., Kotabe, M., & Sahay, A. (1996). Trust and performance in cross-border marketing partnerships: A behavioral approach. Journal of International Business Studies, 27(5), 1005–1032. Bagozzi, R. P., & Yi, Y. (1988). On the evaluation of structural equation models. Journal of the Academy of Marketing Science, 16(1), 74–94. Barney, J. B., & Hansen, M. H. (1994). Trustworthiness as a source of competitive advantage. Strategic Management Journal, 15, 175–191. Bartlett, C. A., & Ghoshal, S. (1998). Beyond strategic planning to organization learning: Lifeblood of the individualized corporation. Strategy & Leadership, 26(1), 34–39. Baumgartner, H., & Homburg, C. (1996). Applications of structural equation modeling in marketing and consumer research: A review. International Journal of Research in Marketing, 13(2), 139–161. Bello, D. C., & Gilliland, D. I. (1997). The effect of output controls, process controls, and flexibility on export channel performance. Journal of Marketing, 61(1), 22–38. Bentler, P. M., & Wu, E. J. C. (2003). EQS 6.0 user’s guide. Encino, CA: Multivariate Software Inc. Boersma, M. F., Buckley, P. J., & Ghauri, P. N. (2003). Trust in international joint venture relationships. Journal of Business Research, 56(12), 1031–1042. Bollen, K. A. (1989). Structural equations with latent variables. New York, NY: Wiley. Cavusgil, S. T. (1984). Organizational characteristics associated with export activity. The Journal of Management Studies, 21(1), 3–22. Cavusgil, S. T. (1998). Perspectives: Knowledge development in international marketing. Journal of International Marketing, 6(2), 103–112. Celly, K. S., & Frazier, G. L. (1996). Outcome-based and behavior-based coordination efforts in channel relationships. Journal of Marketing Research, 33(May), 200–210. Churchill, G. A. (1979). A paradigm for developing better measures of marketing constructs. Journal of Marketing Research, 16(1), 64–73. Conn, H. P., & Yip, G. S. (1997). Global transfer of critical capabilities. Business Horizons, 40(1), 22–31.

182

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

Cova, B., & Salle, R. (2000). Rituals in managing extrabusiness relationships in international project marketing: A conceptual framework. International Business Review, 9(6), 669–685. Cullen, J. B., Johnson, J. L., & Sakano, T. (1995). Japanese and local partner commitment to IJVs: Psychological consequences of outcomes and investments in the IJV relationship. Journal of International Business Studies, 26(1), 91–115. Cyert, R. D., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall. DeVellis, R. F. (1991). Scale development – theory and applications (Applied Social Research Methods Series), Vol. 26. Neybury Park: Sage. Doney, P. M., & Cannon, J. P. (1997). An examination of the nature of trust in buyer–seller relationships. Journal of Marketing, 61(2), 35–51. Drucker, P. F. (1995). The information executives truly need. Harvard Business Review, 73(1), 54–63. Dwyer, F. R., & Oh, S. (1988). A transaction cost perpective on vertical contractual structures. Journal of Marketing, 52(2), 21–34. Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer–seller relations. Journal of Marketing, 51(2), 11–28. Dyer, J. H., & Chu, W. (2000). The determinants of trust in supplier–automaker relationships in the U.S., Japan, and Korea. Journal of International Business Studies, 31(2), 259–285. Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. The Academy of Management Review, 23(4), 660–679. Evans, J. S. (1991). Strategic flexibility for high technology manoeuvres: A conceptual framework. The Journal of Management Studies, 28(1), 69–89. Fornell, C., & Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39–50. Forsgren, M. (2002). The concept of learning in the uppsala internationalization process model: A critical review. International Business Review, 11(3), 257–277. Frazier, G. L., & Kale, S. H. (1989). Manufacturer–distributor relationships: A sellers’ versus buyers’ market perspective. International Marketing Review, 6(6), 7–26. Ganesan, S. (1994). Determinants of long-term orientation in buyer–seller relationships. Journal of Marketing, 58(2), 1–19. Gerbing, D. W., & Anderson, J. C. (1988). An updated paradigm for scale development incorporating unidimensionality and its assessment. Journal of Marketing Research, 25(2), 186–192. Geyskens, I., Steenkamp, J-B. E. M., & Kumar, N. (1998). Generalizations about trust in marketing channel relationships using meta-analysis. International Journal of Research in Marketing, 15(3), 223–248. Gold, A. H., Malhotra, A., & Segars, A. H. (2001). Knowledge mangement: An organizational capabilities perspective. Journal of Management Information Systems, 18(1), 185–214. Gounaris, S. P., & Venetis, K. (2002). Trust in industrial service relationships: Behavioral consequences, antecedents and the moderating effect of the duration of the relationship. Journal of Services Marketing, 16(7), 636–655. Gruen, T. W., Summers, J. O., & Acito, F. (2000). Relationship marketing activities, commitment, and membership behaviors in professional associations. Journal of Marketing, 64(3), 34–49.

Utilizing Relational Governance in Export Relationships

183

Gundlach, G. T., Achrol, R. S., & Mentzer, J. T. (1995). The structure of commitment in exchange. Journal of Marketing, 59(1), 78–92. Hadjikhani, A. (1997). A note on the criticisms against the internationalization process model. Management International Review, 37(2), 43–66. Hamel, G. (1991). Competition for competence and inter-partner learning within international strategic alliances. Strategic Management Journal, 12, 83–103. Hamel, G., Doz, Y. L., & Prahalad, C. K. (1989). Collaborate with your competitors – and win. Harvard Business Review, 67(1), 133–139. Harrigan, K. R. (1988). Joint ventures and competitive strategy. Strategic Management Journal, 9(2), 141–158. Heide, J. B. (1994). Interorganizational governance in marketing channels. Journal of Marketing, 58(1), 71–85. Heide, J. B., & John, G. (1992). Do norms matter in marketing relationships? Journal of Marketing, 56(2), 32–44. Homburg, C., & Giering, A. (1996). Konzeptualisierung und Operationalisierung Komplexer Konstrukte – Ein Leitfaden Fu¨r Die Marketingforschung. Marketing ZFP – Zeitschrift fu¨r Forschung und Praxis, 1(1), 5–24. Huber, G. P. (1991). Organizational learning: The contributing processes and the literatures. Organization Science, 2(1), 88–115. Hult, G. T. M., & Ferrell, O. C. (1997). A global learning organization structure and market information processing. Journal of Business Research, 40(2), 155–166. Ibeh, K., Brock, J. K.-U., & Zhou, Y. J. (2004). The drop and collect survey among industrial populations: Theory and empirical evidence. Industrial Marketing Management, 33(2), 155–165. Jobber, D., Saunders, J., & Mitchell, V.-W. (2004). Prepaid monetary incentive effects on mail survey response. Journal of Business Research, 57(4), 347–350. Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Vahlne, J.-E. (1990). The mechanism of internationalisation. International Marketing Review, 7(4), 11–24. Karunaratna, A. R., & Johnson, L. W. (1997). Initiating and maintaining export channel intermediary relationships. Journal of International Marketing, 5(2), 11–32. Kim, W. C., & Mauborgne, R. A. (1993). Effectively conceiving and executing multinationals’ worldwide. Journal of International Business Studies, 24(3), 419–449. Klein, S., Frazier, G. L., & Roth, V. J. (1990). A transaction cost analysis model of channel integration in. Journal of Marketing Research, 27(2), 196–208. Klein, S., & Roth, V. J. (1990). Determinants of export channel structure: The effects of experience and psychic distance reconsidered. International Marketing Review, 7(5), 27–38. Kogut, B. (1985). Designing global strategies: Comparative and competitive value-added chains. Sloan Management Review, 26(4), 15–20. Lambe, C. J., Spekman, R. E., & Hunt, S. D. (2000). Interimistic relational exchange: Conceptualization and propositional development. Journal of the Academy of Marketing Science, 28(2), 212–225. Ling-yee Li, E., & Ogunmokum, G. (2000). The effect of flexibility on export venture performance. Journal of Global Marketing, 14(3), 99–126.

184

ANTHONY S. ROATH AND RUDOLF R. SINKOVICS

Lusch, R. F., & Brown, J. R. (1996). Interdependency, contracting, and relational behavior in marketing channels. Journal of Marketing, 60(4), 19–38. Lyles, M. A., & Schwenk, C. R. (1994). The impact of organizational learning on joint venture formations. International Business Review, 3(4), 459–476. Macneil, I. R. (1980). The new social contract: An inquiry into modern contractual relations. New Haven, CT: Yale University Press. Mayer, R. C., Davis, J. H., & Schoorman, F. D. (1995). An integration model of organizational trust. Academy of Management Review, 20(3), 709–734. Moen, Ø. (1999). The relationship between firm size, competitive advantages and export performance revisited. International Small Business Journal, 18(1), 53–72. Moorman, C., Deshpande, R., & Zaltman, G. (1993). Factors affecting trust in market research relationships. Journal of Marketing, 57(1), 81–101. Morgan, R. M., & Hunt, S. D. (1994). The commitment-trust theory of relationship m arketing. Journal of Marketing, 58(3), 20–38. Nevin, J. R. (1995). Relationship marketing and distribution channels: Exploring fundamental issues. Academy of Marketing Science, 23(4), 327–334. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5(1), 14–37. Noordewier, T. G., John, G., & Nevin, J. R. (1990). Performance outcomes of purchasing arrangments in industrial buyervendor relationships. Journal of Marketing, 54(4), 80–93. Palmer, A. (2002). The evolution of an idea: An environmental explanation of relationship marketing. Journal of Relationship Marketing, 1(1), 79–94. Parkhe, A. (1998a). Building trust in international alliances. Journal of World Business, 33(4), 417–437. Parkhe, A. (1998b). Understanding trust in international alliances. Journal of World Business, 33(3), 219–240. Penrose, E. (1959). The theory of the growth of the firm. London: Blackwell. Ring, P. S., & Van De Ven, A. H. (1992). Structuring cooperative relationships between organizations. Strategic Management Journal, 13(7), 483–489. Roath, A. S., Miller, S. R., & Cavusgil, S. T. (2002). A conceptual framework of relational governance in foreign distributor relationships. International Business Review, 11(1), 1–16. Rosson, P. J., & Ford, I. D. (1982). Manufacturer–overseas distributor relations and export performance. Journal of International Business Studies, 13(2), 57–72. Roxenhall, T., & Ghauri, P. (2004). Use of the written contract in long-lasting business relationships. Industrial Marketing Management, 33(3), 261–268. Sabel, C. F. (1993). Studied trust: Building new forms of cooperation in a volatile economy. Human Relations, 46(9), 1133–1170. Sanchez, R. (1995). Strategic flexibility in product competition. Strategic Management Journal, 16(Special issue), 135–159. Satorra, A., & Bentler, P. M. (1988). Scaling corrections for statistics in covariance structure analysis, Ucla Statistics Series #2. Los Angeles, CA: University of California. Satorra, A., & Bentler, P. M. (1994). Corrections to test statistics and standard errors in covariance structure analysis. In: A. von Eye & C. C. Clogg (Eds), Latent variables analysis: Applications for developmental research (pp. 399–419). Thousand Oaks, CA: Sage.

Utilizing Relational Governance in Export Relationships

185

Slater, S. F., & Narver, J. C. (1995). Market orientation and the learning organization. Journal of Marketing, 59(3), 63–74. Theoharakis, V., & Hooley, G. (2003). Organizational resources enabling service responsiveness: Evidence from Greece. Industrial Marketing Management, 32(8), 695–702. Weitz, B. A., & Jap, S. D. (1995). Relationship marketing and distribution channels. Journal of the Academy of Marketing Science, 23(4), 305–320. Wilson, D. T. (1995). An integrated model of buyer–seller relationships. Journal of the academy of marketing science, 23(4), 335–345. Wilson, E. J. (1999). Research practice in business marketing: A comment on response rate and response bias. Industrial Marketing Management, 28(3), 257–260. Zaheer, A., McEvily, B., & Perrone, V. (1998). Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance. Organization Science, 9(2), 141–159. Zaheer, A., & Venkatraman, N. (1995). Relational governance as an interorganizational strategy: An empirical test of the role of trust in economic exchange. Strategic Management Journal, 16(5), 373–393.

This page intentionally left blank

186

MANAGING CHANNEL RELATIONS IN CHINA: AN EXPLORATORY STUDY Paul Matthyssens and Wouter Faes INTRODUCTION AND PROBLEM STATEMENT Channel management deals with the establishment of an efficient and effective distribution channel. It implies the stepwise development of channel leadership and channel relations. International channel management and the establishment of cross-border relations between exporting suppliers and their foreign subsidiaries and intermediaries are key in international marketing performance (Madsen, 1989; Cavusgil & Zou, 1994; Solberg & Nes, 2002). Li (2003) proves that an export channel is a very complicated phenomenon and a number of factors, both contextual and historical, affect simultaneously the exchange modes and their operation. However, managing channel relations is ‘people business’. Crossing borders implies therefore being confronted with different cultural expectations vis-a`-vis the role and behavior of the ‘ideal’ channel leader. Also, the effectiveness of certain channel management practices might be undermined or reduced. The impact of culture cannot be underestimated when it concerns distribution, as is amply demonstrated with the difficulties of Western companies in Japan (Usunier, 2000). Also Rosenbloom and Larsen (2003) have proven how cultural distance (high versus low-context culture) impacts on Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 187–211 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16008-6

187

188

PAUL MATTHYSSENS AND WOUTER FAES

communications between channel members and might act as a barrier to the application of electronic marketing within channels. The Chinese economy is growing continuously at high rates for several years. The country has been very successful in attracting foreign investments. Since its entry into the World Trade Organization, ever more investors and exporters are attracted by this giant market and labor pool. Investing in China has become easier from an administrative and organizational point of view. However, the cultural differences cannot be neglected. Doing business in China still means facing huge cultural challenges. The Western businessman has to adapt to the very nature of Chinese social life, which is based on smooth and harmonious interpersonal relationships, based on ren quin (human feelings), leading to bao (give and take), as Gudykunst, Ting-Toomey, and Nishida (1996) have mentioned. It is moreover and in connection with these concepts widely accepted that specifically guanxi, the importance of relationships and network connections, makes the development of business relations an awkward undertaking for many Western investors and exporters (Luo & Chen, 1997; Bjo¨rkman & Kock, 1995). Recently, Kriz and Fang (2003) report that guanxi is not enough: it is deep trust (xinren) that determines success in business relations with Chinese partners. In this paper, we focus on the impact of cultural differences on channel relations between Western suppliers and their Chinese intermediaries. More specifically, we zoom in on the impact of ren quin, bao, guanxi and xinren and how these concepts influence channel leadership management practices of Western exporters. We apply a qualitative methodology to uncover critical incidents, experiences and practices by both Western exporters and Chinese intermediaries. More specifically, this research aims at providing exploratory ideas on the following issues:  showing how channel leadership/management interacts with Chinese perspectives on relationships by pinpointing drivers and inhibitors; and  providing a culturally sensitive channel leadership/management approach, apt for the Chinese market. The structure of the paper is as follows. First, the essential thrusts of channel management are described. In the second paragraph, we focus on the international aspect of channel management. The third paragraph describes relations in the Chinese market and introduces briefly typical cultural concepts such as guanxi, bao and xinren. Next, the exploratory research is introduced by focusing on the methodology (cases and interviews) and a brief description

Managing Channel Relations in China

189

of the cases. In the fifth paragraph, the findings are presented. The sixth paragraph contains a discussion. In the conclusions, some limitations are presented as well as recommendations for researchers and for managers.

CHANNEL MANAGEMENT In this paper, we conceive channel management as consisting of the efforts by suppliers to design, manage and control intermediaries in order to organize the commercial, logistics and administrative tasks in their supply chain. This implies a certain form of cannel leadership, i.e., the establishment of channel relations and their coordination and control. Building upon an in-depth literature review, Stern and El-Ansary (1988, p. 412) summarize the factors which impact on channel leadership as follows:  Environmental and/or specific channel member characteristics, such as expertise, resources and channel position, determine the ‘power sources’ of the channel leader.  The power sources of the channel leader (rewards, penalties, expertise, reference and legitimacy) will be accumulated over time, and is a key aspect of channel leadership.  Power is issue-oriented and depends on the sources of power and the power dependence relationship of the channel leader vis-a`-vis the other channel parties.  Leadership, or the exercise of power, depends on the existence of power by a channel member over issues and the desire to influence and exercise power.  Channel control will only materialize when leadership/power is used and other channel members accept the exercise of power (tolerance).  Effectiveness of channel control is measured by a reduction in the level of intra-channel conflict, the increase in the level of channel member satisfaction and the improvement of performance. Leadership style and channel climate act as mediating variables.  Three leadership styles (participative, supportive and directive) differ in their effectiveness containing conflict, depending on the kind of conflict (e.g., over administrative issues versus product/service issues) (Schul, Pride, & Little, 1983). The channel climate is supposed to be positively related to (a) channel leading initiating structure, (b) channel leader consideration (e.g., trust or mutual respect), (c) autonomy, and (d) reward orientation (Schul, Little, & Pride, 1985).

190

PAUL MATTHYSSENS AND WOUTER FAES

It should be clear that channel management is a complex challenge. Two issues are particularly relevant. First, each of the companies involved in a channel relation has its own goals and dominant logic. Baden-Fuller and Stopford (1994) have illustrated how companies tend to converge around unquestioned managerial mindsets. The channel leader faces the task of coordinating and often changing the different mindsets of itself and of the (independent) intermediaries. Second, given the increased dynamics of markets, it is not possible anymore to make a clear distinction between the roles performed by suppliers, intermediaries and customers (Ford, Gadde, Ha˚kansson, & Snehota, 2003). That way, the effectiveness and efficiency of channel members might be questioned and conflicts might arise. A lot of inter-organizational issues are raised. This is all the more evident when considering international channel management.

CHANNEL RELATIONS IN INTERNATIONAL MARKETS According to Usunier (2000), the nature of the country concerned and especially the links between domestic producers and their distributors, determine the difficulty of entry for a foreign company. Kale and McIntyre (1991) reflect on the influence of the Hofstede dimensions on channel relationship initiation and implementation. Shoham, Rose, and Kropp (1997) demonstrate how cultural distance impacts on the degree of channel conflict. At the same time it was shown how positive supportive actions to foreign distributors could reduce channel conflict. Karunaratna and Johnson (1997) posit nine propositions concerning the initiation and maintenance of channel intermediary relationships. They also propose a framework that explains how an exporter can reach a positive operating climate and a state of satisfaction with its foreign channel intermediaries. Their framework and the proposed interaction between the variables rest on the positive impact of pre-contractual screening of partners and non-coercive monitoring on goal congruence and coordination between exporter and foreign distributor. Goal congruence is thought to have a positive impact on channel performance and satisfaction.

RELATIONS IN THE CHINESE MARKET Building, managing and maintaining relations in China is considered a difficult cross-cultural challenge (Bjo¨rkman & Kock, 1995). Matthyssens and

Managing Channel Relations in China

191

Wursten (2003) show the highlights of relational marketing thrusts for this ‘family’ culture: (a) indirect and contextual communication, (b) hierarchy must be respected, (c) high willingness of Chinese to cooperate among themselves but less with outsiders, and (d) a strong in-group feeling. They also pinpoint a dilemma: vis-a`-vis Western suppliers, Chinese want to be seen as ‘in control’, while at the same time expecting the supplier to outline the path. They recommend a specific management style emphasizing: clear briefings, ‘a benevolent but strict father’ attitude, relatively high levels of inspection, and playing internal and external networks. The key concepts underpinning this way of doing business are ren quin, bao, guanxi and xinren. Of these ren quin and bao represent two important dimensions of interpersonal transactions, leading to the Chinese understanding of a person’s self definition as a member of a social group and society. Ren quin is ‘human feeling’ (Gudykunst et al., 1996) and involves different layers, such as feelings between people, a person’s natural inclinations and interpersonal choices (Yang & Su, 2003). Once ren quin (favour) is present between different human beings, one becomes indebted. This ‘give-and-take’ helps to build a relational bond among people, called bao. Bao, a Chinese verb can be translated as ‘to report’, ‘to repay’ or ‘to retribute’. Bao refers to being ‘other-centred’ and thus constitutes a cornerstone of Chinese society. It bonds people even more closely. Time and patience in building and exercising it are extremely important. Moreover, as it is an essential part of interpersonal ‘well-feeling’, the give-and-take attitude does not seem to imply any negative ‘bribery’ connotations in Chinese society (Steidlemeyer, 1997). It may further be that this concept also leads to the typical Chinese way of negotiations of which continuous ‘give-and-take’ tactics are a prominent feature (Gudykunst et al., 1996). Ren quin and bao are the basis for interpersonal relations in China and are at the heart of a wider development of business relationships between social entities or groups, such as ‘interconnected’ companies. Thus, a key concept in managing business relations in China is guanxi, Chinese for relations and connections. It shares some common traits with the Western concept of networking, especially as it refers to the continuity of cooperative business relationships (Usunier, 2000). However, Luo and Chen (1997) pinpoint particularities of guanxi such as the fact that the exchanges among members of the network are not only commercial but also personal. Moreover, the concept implies ‘social and humanized obligation’ and social status. A reduction to pure business relations and a neglect of the personal and social aspects might lead to mistrust on the side of the Chinese vis-a`-vis the

192

PAUL MATTHYSSENS AND WOUTER FAES

Western partner. The development and maintenance of appropriate connections is key to business in China. Wong and Tam (2000) put forward that due to poor legal systems and government discouragement of private ownership, Chinese people appear to save ‘symbolic’ capital in terms of guanxi in business networks. They stress that guanxi generally involves a hierarchically structured network of relationships embedded with mutual obligations. According to Wong and Tam (2000), guanxi leads to trust networks for efficient and dynamic mobilization of resources through close and mutually beneficial connections. This leads, eventually, to empathy, reciprocity, adaptation and flexibility within these networks. An even more refined and somewhat divergent view, however, is recently offered by Kriz and Fang (2003). These authors introduce the concept of xinren (deep trust) as the real key success factor in Chinese networks: In Chinese markets it becomes evident that guanxi opens the door but it is xinren that determines how well you will be treated once you are in (p. 1).

Kriz and Fang (2003) posit the following assertions (pp. 4–8):  When trust is high, the Chinese will do business as a gentleman and do not play the role of strategist.  Trust implies much more than the Western conception of liking and confidence. It is also based on concepts such as confidence, being sincere and honest, belief, and being loyal.  To have xinren, you must have guanxi, but guanxi is no guarantee for deep trust. Only having guanxi without affection and deep trust gives the Westerner only a weak position. The above implies that Western suppliers going to China have to establish high understanding of the (potential) Chinese intermediaries and their culture. Enough time must be foreseen to build relationships and gain trust. Cross-cultural learning and management of cultural differences must be blended with channel management.

RESEARCH METHOD There were two data sources used for this study: (1) Five case-studies describing experiences of suppliers and their Chinese intermediaries based on minimally two interviews (a two-sided view).

Managing Channel Relations in China

193

(2) Eight interviews with export managers and business managers of suppliers acting as principals in the Chinese market (a one-sided view). The discussions aimed at illuminating the unique aspects of building and managing channel relations in China. They centred on the following topics:  How and why did the company enter the Chinese market?  A description of the initiation, negotiation and management of the channel relation with their partners. The major focus lied on difficulties and critical incidents.  The evaluation of the present status of the relationship. The interviews were done by five groups of ‘Executive MBA’ students. In each group at least one of the students was a Chinese native. All groups got the same in-depth briefing from the authors and read the same material: the Kriz and Fang (2003) article, the first part of Usunier (2000) on culture dimensions, the Stern and El-Ansary (1988) model on channel management, and the Karunaratna and Johnson (1997) article. The sample consisted of the following cases:  Case Alpha: a producer of shock absorbers, supplier to the automotive market, and part of a global company, present in China since 1994.  Case Beta: a mid-sized multinational selling hi-tech supplies to the pharmaceutical market. In China since 1999.  Case Gamma: part of a Japanese global industrial group. Offers a broad assortment of industrial, electrical and medical supplies sold to diverse niche markets in electronics, energy and ecology. In China since 2002.  Case Delta: a mid-sized multinational company, selling a heating system to installers through intermediaries. Present in China since 2002.  Case Eta: a multinational, selling hi-tech imaging, display and visualization solutions to the international market. In China since 1994, and having ‘joint venture offices’ in two major commercial centres in the P.R. of China for sales to China. A case was only considered when at least two interviews could be realized representing managers from the European principal and the Chinese partner. In case no triangulation could be achieved and only a one-sided view could be obtained, the data were treated as an in-depth interview. This results in five cases and eight interviews, in total experiences of 13 companies. The eight interviewed managers for the depth interviews were all from mid-sized international companies in diverse industries (measurement

194

PAUL MATTHYSSENS AND WOUTER FAES

devices, racing pigeons, electronics, beer brewing, etc.). The interviews focused on the same topics as the cases. In Table 1, the most significant opinions of the interviewees are reported in brief summary statements (no literal replication in most instances).

FINDINGS FROM THE FIVE CASES Case Alpha The managers in case Alpha learnt that negotiations take a lot of time. While establishing relations with their partners, they experienced that the Chinese partner never directly says what they really think. Face saving is conceived by the Western partner as a time-consuming issue. Negotiations ‘spiraled’ from general screening and scouting (the ‘test’ stage) over getting familiar (‘trial’) to coming to the point (‘real’ collaboration). It took several days to become acquainted. ‘Connections’ blocked the company somewhat in its early expansion in China: Chinese partners seemed to prefer buying from well-known suppliers within their guanxi-network, even through comparative quality tests turned out negative for the Chinese competing brands relative to the Western offer and the price was nearly equal. The Belgian company had critical disputes with the partner over the productivity of the Chinese service personnel, but they generally hail the flexibility and the positive working mentality. ‘They even keep the link with the company even during holidays!’, the Western manager pinpointed. They learnt gradually that rewards are not as effective as punishment versus Chinese employees and partners. The company found out that it is very difficult to make ‘real friends’ in China. ‘They do not really trust us, and want to keep us at a distance’, the former manager in China claims. The Western partner feels very well that Chinese are ‘in-group’ oriented. To the contrary, the Chinese spokespersons stressed that they do trust ‘the Belgians’, although it was not always shown and a certain sense of selfpreservation ‘made the Chinese simultaneously seek some distance’. Partners clearly stressed that they have very different attitudes with respect to planning. The Chinese channel partners are very flexible to adapt agreed upon targets and approaches. The Belgian channel leader sticks clearly more to its plans and schedules. The Belgians stress that communication takes a lot of time: you cannot simply assume that they ‘know what you mean’. You have ‘to clarify’,

Managing Channel Relations in China

Table 1.

195

Most Significant Findings From Eight Interviews (One-Sided View).

Manager 1: – You must build a relationship with your direct partner at two levels: top and middle management – Frequent visits to China and inviting the Chinese partner to Europe is appreciated a lot, but also innovative and good products and sharing a lot of knowledge about these products have proven successful in creating partnership – You should open up to their culture and history Manager 2: – Chinese expect from their partners more flexibility and cost efficiency than they could realize themselves – A thorough screening of business partners must be done up-front. During negotiations try to involve high-rank managers. Do not rush into a business relationship without a very hard look at expectations, costs and risks. Do not rush – We work with intermediaries because of their connections. Sometimes there is a thin line between commissions paid and bribingy – There are two big problems entering China: the use of trademarks and brands without authorization (opportunistic behavior outside China) – Chinese people are very pragmatic and tactics seem more important than strategy – Communication, explanations and win-win possibilities are essential in relationship building (give-and–take) – Trust-building is capital to guanxi as it makes connections long-lasting Manager 3: – This company failed twice in establishing a joint venture with a Chinese intermediary. According to the general manager/owner, the first two joint ventures failed because of a lack of control (‘we were totally dependent on the goodwill and honesty of our partners’) and there were no efforts done to build a relationship – In the third and present joint venture, the agent was invited to the Belgian headquarters and lived for several months with the owners’ family. That way a relationship of mutual trust was built. Knowledge, intuition and patience are key – The company seeks to control the whole selling process Manager 5: – Building trust is more important than quanxi. This company considers its Chinese partner a close partner (ren quin). A lot of information is shared (both directions) – The Chinese partner is supported, but is quite free in making marketing-mix adaptations Manager 6: – It is very important to have Chinese working for you when entering the Chinese market because they understand the culture, open up their networks and make contacts – ‘You have to build a mutually beneficial relationship. But we have noticed a paradox. Once the Chinese partners have achieved their goals, it seems they loose interest in the relation’ Manager 7: – The negotiations when setting up the initial partnerships were tough, largely due to the hard bargaining style of the Chinese

196

PAUL MATTHYSSENS AND WOUTER FAES

Table 1. (Continued ) – Major initial problems: (a) violation of copyright, (b) partner did not follow earlier agreed upon policies vis-a`-vis its clients, and (c) claims for regional exclusivity on behalf of the Chinese intermediaries – Conflicts arise over which products to push. The Western partner wants to sell the whole assortment, but the Chinese intermediaries push mainly the high margin products, without good results though. The high-end products need a lot of support and so far both parties have not taken enough time for training and education – The Western company will increase its commercial support to the Chinese and tried over and over to obtain from its intermediaries a blend of advanced Western selling techniques and traditional Chinese ‘quanxi’-type of relational marketing Manager 8: – ‘We were not well prepared for entering the Chinese market. So we had a rough time starting’ – Initial problems are mainly with understanding diffuse messages. But once you have built your ‘image’ and become accepted, their relationships work for you, not against you – Business in China is extremely hard as the Chinese drive a hard bargain. They always tend to bluff and you can only answer by bluffing back. Otherwise you are considered as weak. In their negotiations the Chinese really want everything: a quality product, exclusivity, large margins, y – Chinese people easily deviate from planning objectives and do not always stick to what was agreed upon. They test your will. But do not want you to loose your self-respect, certainly not if they know you and trust you. Chinese are very flexible with respect to working hours, holidays, etc. y

explain and make explicit the whole business process. A more formal framework for the cooperation was gradually built in order to specify procedures, quantities, schedules, etc. and reduce conflicts. The Chinese flexibility must be limited, claim the Belgians. In this company, it seems that corporate culture dominates over national culture and channel relations are approached in a very rational sense. Notwithstanding this observation, there are differences in working and relational attitudes which have an impact on the channel relation. Overall, both parties share a good feeling about their relation though. The Chinese partner feels treated as an internal customer, and the Belgians feel that the Chinese partner considers them as an important relation. Guanxi is nearly established but deep trust is not yet achieved.

Case Beta The Chinese agent and its European principal have worked together for several years. The cooperation seems very positive. They sell to producers of pharmaceutical products. It is based on equality and a very supportive

Managing Channel Relations in China

197

leadership style by the principal, as is being confirmed by both parties. Nevertheless, cultural differences regularly bring the harmony somewhat in danger. The polychronic nature of the Chinese time orientation seems the opposite of the Belgian attitude to schedule and plan in a detailed mode (socalled monochronism). The Chinese reckon to be less strict on objectives and schedules. They are very flexible whereas the partner is rather rigid, they claim. Both parties have also experienced very different intellectual styles with the European company emphasizing problem analysis and problem solving based on (performance) data, and the Chinese mostly stressing ‘friendship’ (leading to renquin, trust, relation and helping each other out (so-called bao). ‘Connection’ and ‘mutual help’ were the first words the European managers learnt in Chinese y . Especially channel climate is said to be a key determinant of channel performance. Both parties acknowledge that they have a different view on this matter, though. The European principal considers the growing of trust as a consequence of good results. The Chinese view the establishment of trust as following from a growth in relational quality. In the beginning of the relation the reputation of the principal was an indicator, but now it ‘earned’ real trust.

Case Gamma This company mainly sells to converters and distributors. The company experienced some problem with some of their Chinese partners copying new products, but careful monitoring and coaching could block this early practice. Trust is a key concern and the way orders are paid is a clear indication of this. In the beginning, the Western supplier had some negative experiences with distributors which were not loyal and did not pay goods received. Now, after a year, relationships are established and the business partners trust each other. Since the growth of trust, the array of cooperation and negotiation modes has become larger, and business relations have become more personal. Networking keeps the business alive, but ‘tit for tat’ might also lead to tricky situations y. The Chinese partners stressed the humorous, kind and effective working relation of the Belgian partner. Trust was not easy to gain, though. In the beginning, the reputation of the Belgian/Japanese supplier was taken as a ‘proxy’ indicator. Gradually, the personal characters of the negotiator and of the channel manager were taken into account. Overall, trust grew because

198

PAUL MATTHYSSENS AND WOUTER FAES

of perseverance and willingness by the Western partner to help the Chinese out in difficult moments (part of bao). Also the feeling of being taken seriously as a partner and the idea that the partner is showing its real identity contributed a lot to the generation of deep trust.

Case Delta This medium-sized company won the Export Grant of the Flemish Region some time ago. They started their Chinese entry two years ago. They work via a Chinese trading company, who proposed at an exhibition in China to becoming their exclusive trader for China. The problems the company encountered while setting up the deal and making it work are numerous. Import duties are prohibitively high, language and communication problems slowed down the process, the necessary certificates turn out to be complicated and initially a ‘copying fear’ blocked the Belgian company of revealing necessary data to the Chinese partner. In order to build a relationship, the Chinese ‘bureaucrats’ responsible for the certification and the Chinese partner were invited to Belgium to visit the factory and see how well quality was taken care of. So far, negotiations are not really finalized. The deal has still to be concluded. Some trial shipments have been expedited, and gradually, the Belgians try to ‘build a relationship of trust’ with their Chinese partner. This process is fuelled by market information provided by the Belgians and resulting in direct sales leads, and by a ‘give-and-take’ attitude (renquin). They hope the Chinese partner will open its ‘guanxi-network’ soon, but so far this did not really happen. An inhibitor is that the Chinese partner is well aware of the low priority the Chinese market gets in the international expansion of the Belgian company. As such, bao and xinren are not yet on the agenda.

Case Eta The managers in Case Eta have learned over a period of 10 years that patience pays of in China in spite of the high priority the Chinese market had in the strategic plans of the company. The most important problems encountered initially by them were the relatively ‘closed’ character of the Chinese market due to import restrictions and the poor legal system in place (which is constantly changed and thus creates instability). They also mentioned the difficulty of building relations not only with your partners, but

Managing Channel Relations in China

199

also with local and supra-local government institutions. ‘Apparently a whole network of ‘mutual friends’ has to agree to do business with you’, said the Western manager. So they had great difficulty in finding the ‘right’ partners and in building the ‘right’ relations on different levels. A major inhibitor for them was that Chinese never initially wanted to give away details when questions were asked. You first have to have the patience of building a personal relationship before something is answered at all and then only at the ‘give-and-take’ level (bao). The more your network of ‘good relations’ extends, the better this works, the more ‘trust’ will be embedded in you – and your joint venture– in China, and the easier new contacts will be laid (the ‘guanxi-network’ is gradually opened). The Chinese manager stated: ‘You have to be accepted as a person first, then your company must act as a ‘family member’ and finally you may be a partner for us’. One can state that the Belgian company, which took extreme care in selecting its partners, selected them and was selected by them at the same time. It led to the establishment of a joint venture, which according to company Eta, is a very good solution as it gives the Chinese more sense of autonomy and saying in the development of the Chinese market. They said that they also had to cope with different work ethics of the Chinese ‘personnel’ in their actual joint venture, which they describe as dedicated, skilled (after an initial training period), extremely hard working, but unfortunately sometimes ‘sloppy’ (not as strict as Belgians) in planning. Better monitoring by the Belgian principal and constant training are considered a help in this respect. Chinese, according to the Belgian managers of Eta, are very loyal to their employer (they consider it part of their extended ‘family’, as one manager put it) during their contract. ‘If your wife is more important to you than your customer, you are considered a ‘loser’ ’, were the exact words of the Chinese manager in this respect. Since money is an important motivator, Chinese are however very mobile on the labor market. Once they leave the company, they start belonging to a different ‘family’ and may then start talking quite differently about you and your company. Our Chinese interviewee stressed that only status (called ‘miamzi’ in Chinese) is a more important motivator for Chinese employees or business partners. The Belgian managers mention that their efforts at building relations never stop. ‘Servicing’ the ‘guanxi-network’ is a constant worry after it has been initially established. One has to continually guard that each relationship, which was established with so much pain, is not endangered by being disrespectful of the typical ways of doing business in China. Specifically, the importance of ‘face-saving’ of the Chinese employees in their own group, the fact that indirect ‘hints’ and group motivations are more useful to influence

200

PAUL MATTHYSSENS AND WOUTER FAES

and change behavior than direct, straightforward talk were mentioned in this respect. Chinese counterparts hinted that Belgian partners are flexible and willing to take these Chinese feelings into account very well and are thus valuable relations. For negotiations, and regular business meetings for instance, the right people with equivalent authority must relate with their Chinese counterparts. Otherwise negotiations may break down, as the Chinese may feel ‘downgraded’ inappropriately. In two such instances, where insufficient care was taken to this aspect and the manager of the Chinese customer considered his negotiation partner to be situated too low in the local organization of Eta (situation 1) and where the Chinese network-partner felt ‘offensively’ (conflicts were not ‘managed’ well according to the Chinese partner and played too much out into the open) treated (situation 2), it took the case-company two years to rebuild previously very good and trustworthy relationships. Moreover, the Belgian managers stressed that even though relations are better again, they never became as cordial as before. Some of the ‘trust’ certainly was lost forever.

FINDINGS BASED ON HIGHLIGHTS FROM EIGHT IN-DEPTH INTERVIEWS Managers told us the (relatively similar) stories on their companies’ expansion in China. During eight in-depth interviews managers made a lot of interesting statements. We mention highlights of their ideas in Table 1. The eight personal interviews, on the one hand, add some additional insights to the case data and, on the other hand, reinforce certain issues also experienced by the case companies. An additional issue raised by managers 2 and 4 is the importance of a thorough screening process. But also the initial negative experiences of manager 3 were largely (but not solely) provoked by a poor partner choice. The problems mentioned by the interviews are largely similar to the problems experienced in the case studies. Here, however, more ethical issues were explicitly mentioned: opportunistic behavior with trademarks, patents or brands (managers 2 and 7) and ‘give-and-take’ (bao) leading to a thin line between ‘concessions’ and ‘bribes’ (managers 2 and 4). Several managers experienced problems with the difficulty Chinese seem to face in sharing information. In line with the cases, interviews stress the importance of creating a positive channel climate involving the need for the Western partner to

Managing Channel Relations in China

201

give a lot of information in the beginning (manager 4), and trust and relationship building based on mutual and shared benefits (most managers). Overall, the dialectic nature of relations is stressed. They can be termed tight–loose relations and strategy frames (managers 5, 7 and 8).

DISCUSSION This exploratory study shows the cultural issues involved in WesternChinese channel relations. The cases and the interviews give insight into the experiences of Western channel leaders and their Chinese intermediaries. In Table 2 the main observations from the five cases are briefly compared. Besides the traditional language and communication problems nearly all Western principals and Chinese intermediaries experienced cross-cultural tensions in the areas of time orientation, intellectual style and relational patterns. This is in line with Usunier (2000). According to Usunier, timerelated cultural differences might be the area with the largest differences among people. Perceptions related to time lead to different views regarding scheduling (‘agenda society’ versus ‘simultaneous scheduling’), temporal orientation, etc. y . Intellectual style relates to differences in how people relate theory and data into action. An in-group orientation refers to the condition that trustworthiness and cooperation can only be obtained when an individual has group membership (Usunier, 2000). An ‘outsider’ will have difficulty to be accepted when in-group orientation is strong and will be treated differently as the ‘in-crowds’. A first important tension results from the difference in time orientation. As is shown in the empirical data, the polychromic sense of time by the Chinese leads to a less strict attitude vis-a`-vis planning and objectives, and to a more flexible working attitude than their Western ‘monochromic’ principals (such as in cases Beta and Eta). This finding is in line with Hall (1983) who described how people with monochromic time orientation adhere better to preset plans and schedules. A polychromic time orientation of a counterpart seems very hectic to them. Another time aspect is the long-lasting process of building a relation (all cases). A second tension arises from the different intellectual styles. The Western partner is result-driven and is very analytic. The Chinese intermediary, to the contrary, is mostly pragmatic (cases Alpha and Beta), more holistic (case Eta), person-oriented (case Beta) and opportunistic (case Gamma). The third area of misunderstanding results from the in-group orientation of the Chinese, which mostly results in the Western principal’s sense of being

202

Table 2. Cultural Tensions, Problems and Differences

Alpha

Cross-Case Analysis.

Beta

Gamma

Delta

– Negotiations lead show down – Chinese not strict on times and goals

– Polychromism of Chinese versus monochromism of Belgians

– Growing relationships takes time

– Process needed

Intellectual style

– Importance goals attached to planning and targets not equal to both parties – Chinese less strict on objectives – In-group orientation of Chinese perceived as ‘blocking’ of Belgians

– Chinese less strict on objectives and less ‘analytic/rational’

– Careful monitoring and coaching necessary on opportunistic behavior prevails

– Opportunistic behavior observed (fear of copying)

– No problem

– Network within Chinese in-group somewhat tricky to foreigners

– Chinese do not open up their network

In-group nature of Chinese culture

– Rough start due to early Western imposed time pressure – Long run perspective needed on relationship development – Chinese have a ‘holistic’ and ‘macro’attitude – Forceful style, but not wanting to impose

– Initially mistrust existed – A ‘foreigner’ will immediately be made to ‘pay’ for an error in relationship management

PAUL MATTHYSSENS AND WOUTER FAES

Time orientation

Eta

– Thorough screening

– Initially reputation as proxy – ‘Good’ negotiation process

– Initially reputation as proxy – ‘Good’ negotiation process

– None: met at trade show

Relational outcomes

– ‘Guanxi’ connections at first unaccessible: very difficult to reach ‘real friends’ status and trust remains difficult to obtain – ‘Bao’ is really a verb: you must work at it – ‘Guanxi’ eventually reached

– ‘Win-win’ (equality) – Connection and mutual help (‘renquin’, ‘bao’) central (supportive) to quality of relationship – Real trust (‘xinren’) achieved now

– In the beginning ‘opportunistic’ behavior – ‘Guanxi’ established now, also ‘boa’ (tit for tat) being taken seriously – Deep trust growing

– ‘Give-and-take’ attitude contributes (‘renquin’) – Via markets leads and information, Belgian principal helps Chinese out – No ‘bao’ and ‘guanxi’ yet established – Balgian partner has limited view on ‘guanxi’

– Initially mistrust existed – A ‘foreigner’ will immediately be made to ‘pay’ for an error in relationship management – ‘Give-and-take’ (‘bao’), regular visits and servicing the ‘guanxi’ network is necessary to grow trust – You should never endanger trust

Managing Channel Relations in China

Partner screening and early negotiations

203

204

PAUL MATTHYSSENS AND WOUTER FAES

‘excluded’ (cases Alpha, Delta and Eta), and less trusted. As stressed by some spokespersons, this in-group orientation might have a side-effect, i.e., the need for some autonomy in decision-making on behalf of the Chinese intermediary (probably a consequence of self-preservation in the in-group) such as in cases Alpha and Gamma. This need for autonomy was expressed in case Eta by the establishment of a joint venture. Similar differences in perceptions and attitudes were also uncovered in a study of Sino-American joint ventures by Walsh, Wang, and Xin (1999), referring to different time horizons and planning attitudes, standards and decision-making styles. Also Ghauri and Fang (2001, p. 323) mention the need to neutralize tensions due to Chinese ‘tactics’: ‘A trusting relationship is also the best way to neutralize the Chinese stratagems’. Very careful partner screening and a thorough first stage of the relationship building/ negotiation process contribute to this (case Alpha and Eta), but also using ‘reputation’ as a proxy of trustworthiness (cases Beta and Gamma). Trust-building is an incremental process, but mistrust between Westerners and Chinese is often present due to the above cross-cultural differences and a lack of experience in dealing with one another. This slows down the process. For instance, the Westerners often withhold information as they fear opportunistic behavior by the Chinese (e.g., case Delta). On the other hand, it is difficult for Chinese to give information in the early stages of the collaboration due to the lack of trust and (probably) the initial nonexistence of ‘ren quin’ (reported by several spokespersons). In line with Wong and Tam (2000), bonding between partners can only take place if the initial conflict will be converted to a long-term mutual compromise through empathy and fine-grained adaptations. The present outcome of the interaction process between Western principals and Chinese intermediaries/partners is mixed over the five cases (see Table 2). Notwithstanding this diversity, the cases illustrate diverse aspects of the central relational constructs. In the cases where a strong relationship has been established (cases Beta and Eta) and those where trust is growing (cases Alpha, Gamma and, to a lesser degree, Delta) one observes how a key to building channel relations in China is a combination of bao and renquin. A long and determined effort by the Western principal to share information during mutual visits, the organization of joint training sessions and of frequent meetings for joint strategic decision-making are necessary to show commitment and prove dedication to the Chinese. After a lot of time this will result in a positive channel climate and the opening up of the Chinese guanxi network. If this ‘win-win’ climate can be nurtured, a trustful relation (guanxi) will gradually be built. Eventually, deep trust follows when equality

Managing Channel Relations in China

205

is shown and mutual benefits accrue.We observe two patterns in the cases and the interviews (see Fig. 1). The first pattern consists of companies doing poor partner screening and showing too much eagerness in early relational stages. It creates an early negative climate. Limited commitment is shown and some normal cultural differences derail into real tensions and result in an ever more difficult channel relation. The principal seeks to gain control and relies merely on penalties, legitimate power and a directive leadership style. That way, he interprets guanxi as ‘connections’ and it is clear he is only interested in the market contacts of the Chinese partner. In a way, the limited success on the Chinese market provokes a weakening of the trust among the partners. Also the Chinese intermediary looses interest and acts as an ‘opportunist’ (analogous to what Kriz & Fang, 2003, call ‘strategist’ behavior). Case Delta and the companies from the managers 3, 6 and 7 have gone through this cycle. At the maximum a ‘polite collaboration’ might result y for sometime. The second pattern implies mutual trust building. Tools here are a proper partner screening, the establishment of relations at different levels of the network, and a patient and an incremental relationship building approach with frequent mutual visits. Another aspect is the establishment of a ‘framework’ for collaboration within which freedom and flexibility is built-in thereby allowing local fine-tuning of the market strategy. Another building stone is the constant monitoring and coaching by the principal (e.g., see cases Beta and Eta and managers 2 and 8). Also, regularly new objectives must be agreed upon as was stressed by managers 6. Eventually this approach, resulting in a positive spiral towards deep trust, results in relational quality and open communication within the guanxi-network. These observations seem to be in line with most of the (international) channel literature, but re-frame some of its findings. In Western-Chinese channel relations, the ‘carrot-and-stick’ approach proposed in recent channel literature (Pahud de Mortanges & Vossen, 1999; Karunaratna & Johnson, 1997) seems to be the best approach. Particularly for China, channel leaders might seek goal congruence via non-coercive monitoring. This way, a ‘bao spiral’ comes into being. In line with Shoham et al. (1997) supportive actions are important in international channel relations, but the Chinese partners ‘expectations’ seem to require a blend of a participative, supportive and directive leadership style. Three of the four variables from Schul et al. (1985) must be managed simultaneously to gradually build trust: frame (mission, perspective), consideration (bao, patience, coaching, expert support), and autonomy (room for initiatives) are needed.

206

PAUL MATTHYSSENS AND WOUTER FAES (a) pattern 1: Poor partner screening/negotiations and early stages for quick wins

Tensions due to differences in: . time orientation . intellectual styles . in group orientation

Limited experience by Western exporter . in exporting to China . in channel leadership/management

Limited commitment of Chinese partner

Western principal seeks formal control based on negative power sources negative spiral

Poor channel management

Opportunist behavior and short term ‘jockeying’ negative experience Guanxi as ‘polite’ connections at the maximum

(b) pattern 2: Good partner screening and ‘testing’ during early stages

Tensions due to cultural differences overcome by . frequent visits (multilevel) . patient ‘trialling’ & ‘teaming’

Growing mutual commitment shown Non-coercive monitoring Deep trust Open framework ‘contract’ mutual benefits

International experience Real channel management approach: . broad objectives, clear strategic intents (frame) . coaching and consideration . positive power sources . some room for initiatives

Renquin, Bao, Guanxi in a real sense Positive experience

Fig. 1.

Channel Leadership/Management from Chinese Relational Perspective: Two Models.

Managing Channel Relations in China

207

In exercising ‘power sources’, diplomacy by the channel leader might be a key determinant of the relationship and the establishment of trust in the long run. In the early stages ‘reference power’ might be present (the reputation of the channel leader), but the Chinese partner expects a gradual issue-oriented ‘roof’of additional expertise and (participative) decisionmaking. This way, our paper also reinforces the findings from Coote, Forest, and Tam (2003), who concluded that managers seeking to build commitment and trust should (1) encourage the two-way exchange of meaningful and accurate information and (2) seek to avoid conflict and minimize the exchange of harsh words. Linking back these findings to the channel management literature, it should be clear that the traditional power sources of the channel leader such as expertise, resources and channel position (Stern & El-Ansary, 1988) will be ‘valued’ initially by the Chinese partner with the proxy measure ‘reputation’ (reference power). Next, when the initial cultural frictions can be overcome, the Western channel leader will gradually accumulate power and legitimacy. In the Chinese context, channel leadership will result only when the principal manages to build a mix of support and direction (thereby showing expertise). A subtle power-dependence strategy is needed. This study supports the idea that channel control is dependent on leadership style and channel climate (in line with Stern & El-Ansary, 1988). However, channel climate influences dramatically the tolerance of Chinese partners vis-a`-vis the exercise of control. Further, the formulation of strategy intent and frame for the cooperation/ venture will only be accepted by the Chinese under conditions in which they keep a ‘reedom to act’ Hence, this situation is characterized by an extreme need for a channel leadership style based on mutual respect. One important aspect observed is that ‘inren’must be constantly cared for. In that sense it is very much like an ‘mage’or ‘perception’ in marketing terms: it takes years to build and can be lost in a few moments. For the Chinese partners their image will partly depend on the image of the channel leader. Losing ‘trust’ with a relationship (a customer for instance) means losing some ‘trust’ in the whole channel and sets in motion a ‘negative spiral’ opposed to the ‘positive’ one depicted before (as mentioned in case Eta). Such a negative spiral can be stopped if immediate action is taken, but results never match the previous ones anymore. Trust-building is thus a successful pattern which, if one wants to stay successful as a principal, must not be lost and should lead to a ‘constant’ balancing of the mutual benefits of the channel leader and the Chinese partners. The managerial style dilemma as proposed by Matthyssens and Wursten (2003) is experienced by many managers in China. The Chinese want to be

208

PAUL MATTHYSSENS AND WOUTER FAES

‘in control’ while simultaneously expecting ‘to be guided’. It takes some time to learn to balance these seemingly conflicting channel approaches. Finally, this paper is a first illustration of Kriz and Fang’s (2003) concept of deep trust and shows how complex the building of xinren is in channel relations. Without deep trust, the channel endeavour might fail though! This study is also an application of Wong and Tam’s (2000) relationship building approaches in a channel management context.

CONTRIBUTION AND LIMITATIONS This paper used qualitative data to scrutinize channel relations in China. Cultural sensitivities, that is the way in which relationships are built in China, were its major focus. As expected, divergent cultural views on this topic, turned out to be leading to tensions between Western principals and their Chinese partners in many cases. Our findings contribute to the literature by indicating on how to deal with these tensions. Two patterns of channel leadership in China, depicted in Fig. 1, emerged. Only one of these can lead to the necessary xinren and guanxi in a real sense since it is closely intertwined with the basis of ‘interpersonal relationships’ (ren quin and bao) in Chinese culture. The road to a trustful relationship can only be obtained via a constant and long-lasting ‘patient balancing act’ by the principal and requires a positive channel climate. A thus built up pattern of mutual confidence will dislodge all the positive power from both partners necessary for structurally positive results on the Chinese market. If one does not take care, the other pattern will arise, leading to mistrust and a negative spiral of gradually disintegrating interest in one another and a loss of major opportunities on the Chinese market. The study also indicates that the propositions from Karunaratna and Johnson (1997) hold potential for the study of channel relations in a cross-cultural setting. This topic needs a lot of further research. In fact, our study was only exploratory and relatively small in scope. It further suffers from all the weaknesses of a qualitative approach. In further studies, the dialectic channel approach and the establishment of deep trust might be interesting topics for further scrutiny. Longitudinal studies of dyads seem most promising in this respect. These studies should make use of the ‘dynamic guanxi mapping’ theory by Wong and Tam (2000) and of the IMP-model for building relationships in an industrial context (Ford et al., 2003). For this purpose, a

Managing Channel Relations in China

209

multicultural research team of Chinese and Western partners is, in our view, best situated to reveal more details when undertaking such a longitudinal study. This would present researchers with better opportunities to ‘triangulate’ (Miles & Huberman, 1994; Yin, 1994) data and present more indepth results on the basis of guided interviews with both Western principals and their Chinese network partners. Another interesting area for further research is building further on Ralston, Egri, Stewart, Terpstra, and Yu’s (1999) ‘generational shift’ idea. In fact, the conflicts potentially leading to pattern one are deeply rooted in cultural differences. It would be intriguing to compare Western–Chinese channel relations with a group of new generation Chinese managers versus ‘old, traditional’ managers.

CONCLUSIONS AND IMPLICATIONS FOR MANAGEMENT Our research confirms the theory of Stern and El-Ansary (1988) in as far as the establishment of rewards and penalties is concerned. But it appears to be a typical aspect of the Chinese market that other power sources, also mentioned in literature, such as expertise, reference and legitimacy become more predominant. In exercising ‘power sources’, diplomacy by the channel leader might be a key determinant of the relationship and the establishment of trust in the long run. In the early stages of the venture, ‘reference power’ might be present (the reputation of the channel leader), but the Chinese partner expects a gradual issue-oriented ‘proof’ of additional expertise and (participative) decision-making. It could well be that this is due to the fact that culturally speaking the outward showing of intra-channel and mutual conflict is avoided in Asian cultures. So the level of conflict management clearly is the major determinant of channel management effectiveness, as Stern and El-Ansary (1988) have pointed out, even to the point that guanxi and xinren relationships are established. And, not only the level of conflict management seems to be important, also the way in which this is done will play a major role. For Chinese partners, to be willing to build on trust, a shrewd combination of ‘soft guidance’ and ‘freedom to act’ (non-coercive monitoring) seems to be proof of the additional required expertise. Business and marketing managers can both learn from our cases and from similar experiences of other managers. Our paper offers a framework on how to do (or not to do) business with Chinese intermediaries. It clarifies that one should adapt to the Chinese way of building a business network in order to be successful, without losing one’s own identity. Patience,

210

PAUL MATTHYSSENS AND WOUTER FAES

endurance and a gradual internal learning from previous experiences are the major key success factors in this process. The most important thing to avoid seems to be the desperate willingness to ‘control’ everything, which prominently features in the failed pattern one. According to the guanxi relationship development theory (Wong & Tam, 2000), a relationship network in China is not only controlled, it is also ‘living’ and ‘lived’. In line with Kriz and Fang (2003), our research thus teaches managers that deep trust, based on guanxi, is key to success for a successful relation with a Chinese value chain. And, as in any relationship, every single exchange episode (Ford et al., 2003) will be of importance in this process. Constant attention has to be paid to mutual trust building, since the slightest misstep might set a negative spiral in motion. Xinren really matters!

REFERENCES Baden-Fuller, C., & Stopford, J. M. (1994). Rejuvenating the mature business. Boston: Harvard Business School Press. Bjo¨rkman, I., & Kock, S. (1995). Social relationships and business networks: The case of Western companies in China. International Business Review, 4, 519–535. Cavusgil, S. T., & Lou, S. (1994). Marketing strategy performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58(1), 1–21. Coote, L. V., Forest, E. J., & Tam, T. W. (2003). An investigation into commitment in nonWestern industrial marketing relationships. Industrial Marketing Management, 32, 595–604. Ford, D., Gadde, L. E., Ha˚kansson, H., & Snehota, I. (2003). Managing business relationships. Chichester: Wiley. Ghauri, P., & Fang, T. (2001). Negotiating with the Chinese: A socio-cultural analysis. Journal of World Business, 63(3), 303–325. Gudykunst, W. B., Ting-Toomey, S., & Nishida, T. (1996). Communication in personal relationships across cultures. London–New Delhi: Thousand Oaks. Hall, E. T. (1983). The dance of life. New York: Anchor Press. Kale, S., & McIntyre, R. (1991). Distribution channel relationships in diverse cultures. International Marketing Review, 8(3), 31–45. Karunaratna, A. R., & Johnson, L. W. (1997). Initiating and maintaining export channel intermediary relationships. Journal of International Marketing, 5(2), 11–32. Kriz, A., & Fang, T. (2003). Interpersonal trust in Chinese relational networks: Moving from Guanxi to Xinren. Paper presented at the IMP Conference in Lugano, Switzerland, 11 pp. Li, L. (2003). Joint effects of factors affecting exchanges between exporters and their foreign intermediaries: An exploratory study. Journal of Business and Industrial Marketing, 18(2), 162–178. Luo, Y., & Chen, M. (1997). Does guanxi influence firm performance? Asia-Pacific Journal of Management, 14, 1–16.

Managing Channel Relations in China

211

Madsen, T. K. (1989). Successful export marketing management: Some empirical evidence. International Marketing Review, 6(4), 41–57. Matthyssens, P., & Wursten, H. (2003). Internal marketing. In: R. Rugimbana & S. Nkwankwo (Eds), Cross-cultural marketing (pp. 243–256). London: Thomson Learning. Miles, M. B., & Huberman, A. M. (1994). Qualitative data analysis (2nd ed.). Thousand Oaks: Sage. Pahud de Mortange, C., & Vossen, J. (1999). Mechanisms to control the marketing activities of foreign distributors. International Business Review, 8(1), 75–98. Ralston, D. A., Egri, C. P., Stewart, S., Terpstra, R. H., & Yu, K. C. (1999). Doing business in the 21st century with the new generation of Chinese managers: A study of generational shifts in work values in China. Journal of International Business Studies, 30(2), 415–427. Rosenbloom, B., & Larsen, T. (2003). Communication in international business-to-business marketing channels: Does culture matter? Industrial Marketing Management, 32, 309–315. Schul, P. L., Little, T. E., & Pride, W. M. (1985). Channel climate: Its impact on channels members’ satisfaction. Journal of Retailing, 61(Summer), 9–37. Schul, P. L., Pride, W. M., & Little, T. E. (1983). The impact of channel leadership behavior on intra channel conflict. Journal of Marketing, 46(Summer), 21–34. Shoham, A., Rose, G., & Kropp, F. (1997). Conflicts in international channels of distribution. Journal of Global Marketing, 11(2), 5–27. Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and control in integrated and independent export channels. International Business Review, 11, 385–405. Steidlemeyer, P. (1997). Gift giving and bribery: Ethical management of business relationships in China. Journal of Business Ethics, 20(2), 121–132. Stern, L. W., & El-Ansary, A. I. (1988). Marketing channels. Englewood Cliffs, NJ: PrenticeHall. Usunier, J.-C. (2000). Marketing across cultures. Harlow: Pearson Education. Walsh, J. P., Wang, E. P., & Xin, K. R. (1999). Same bed, different dreams: Working relationships in Sino-American joint ventures. Journal of World Business, 34(1), 69–93. Wong, Y. H., & Tam, J. L. M. (2000). Mapping relationships in China: Guanxi dynamic approach. Journal of Business and Industrial Marketing, 15(1), 57–70. Yang, F., & Su, D. (2003). Interpersonal feelings as the basis for business interconnectedness in China. International Journal of Asian Management, 2(3), 116–125. Yin, R. K. (1994). Case study research: Designs and methods (2nd ed.). Sage: Thousand Oaks.

This page intentionally left blank2

212

BUYER TOLERANCE OF CONFLICT IN CROSS-NATIONAL BUSINESS RELATIONSHIPS: AN EMPIRICAL STUDY Inger Beate Pettersen and Aksel I. Rokkan INTRODUCTION Research within the inter-organizational field has until recently focused on the formation and maintenance of business relationships, while less research has been directed toward the study of relationship ending. Lately, however, research on dissolution and related constructs, such as exit intention and switching has emerged (Halinen, Havila, & Ta¨htinen, 1999a; Prim-Allaz, 2000; Ta¨htinen & Havila, 2004; Vaaland, Haugland, & Purchase, 2004). Some literature focuses on the reasons and antecedents to relationship dissolution (Ping, 1999; Haugland, 1999; Wathne, Biong, & Heide, 2000), while other research investigates the process and consequences of relationship dissolution (Grønhaug, Henjesand, & Koveland, 1999; Giller & Matear, 2001; Alajoutsija¨rvi, Mo¨ller, & Ta¨htinen, 2000). Yet, few studies have investigated relationship dissolution in cross -national dyads. Specifically, the current research examines how supplier reps’ cultural knowledge, cultural adaptation and communication affect buyer tolerance of conflict in crossnational business relationships. The construct tolerance of conflict refers to Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 213–243 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16009-8

213

214

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

the intention to discontinue the business relationship with the current partner given conflict situations. This construct is therefore conceptually close to exit intention; a construct frequently used in relationship dissolution studies (e.g. Ping, 1993,1995; Halinen & Ta¨htinen, 1999b). While little research has been done to investigate the impact of personal contacts in the termination phase (Halinen & Salmi, 2001), an emerging body of research has examined the effect of interpersonal relationships in other phases, such as the formation and commitment phases (Luo, 2001; Haytko, 2004). In these studies relationships between boundary spanning personnel are found to facilitate the development of trust, suppress opportunism and to enhance communication. Further, these organizational members typically are responsible for making informal and formal adaptations, reducing negotiation costs, facilitating relational conflict solving, and thereby ensuring the continuance of the relationship (e.g. Dwyer, Schurr, & Oh, 1987, Doney & Cannon, 1997; Zaheer, McEvily, & Perrone, 1998; Luo, 2001). Personal attachment between boundary spanners refers to the interpersonal history of learning and socialization during involvement in exchange activities (Seabright, Levinthal, & Fichman, 1992). Different forms of interpersonal attachment, such as affective bonds, liking, trust, and interpersonal idiosyncratic assets in the form of specific understandings and competence are assumed to enhance both perceived and real switching costs and thereby reduce the likelihood of relationship dissolution (Seabright et al., 1992; Doney & Cannon, 1997; Nicholson, Compeau, & Sethi, 2001). Breaking long-term interpersonal relationships within a business relationship thus involves mental, emotional, and monetary costs. Hence, personal attachment is presumed to produce ‘immobility’ with respect to exiting. Additionally, attachment between boundary spanners is expected to increase individuals’ ability and willingness to resort to voice when defections and conflicts arise. This research investigates business relationships between French importers and worldwide suppliers of seafood products. In cross-national exchange the importance of personal attachment is assumed to be even higher since both cultural and geographical distance creates additional challenges with respect to the governance of business relationships (Thomas, 1991; Nielson, 1997; Zaheer et al., 1998). Cultural distance is presumed to exist between partners in these dyads because of differences in language, laws, and regulations, business practices, and consumer attitudes (Johanson & Vahlne, 1990; Lee & Jang, 1998). Cultural distance between these firms may also include divergences in norms and values which equally are considered a

Cross-National Business Relationships

215

potential obstacle in order to establish and maintain cross-national relationships (Williams, Han, & Qualls, 1998; Nakata & Sivakumar, 2001). While the greater part of cross-cultural research has emphasized problematic effects of cultural distance and national cultural differences (Nakata & Sivakumar, 2001; Shenkar, 2001), we aim to study how boundary spanners cope with cultural distance and thereby improve the functioning of cross-national business relationships. Related to this we argue that personal attachment between boundary spanners may function as a counterforce to cross-national differences between partner firms, in the sense that these individuals can strengthen mutual understandings, enhance trust and facilitate information exchange and cooperation despite cultural distance (Luo, 2001). Boundary spanners effort to make substantial investments in such attachments is hence thought to improve governance in cross-national dyads, and thereby reduce exit intentions. With respect to the focal business relationships, boundary spanners therefore are required to invest heavily in effort and adaptations in order to overcome cultural differences. Yet, individuals’ abilities and liabilities to deal with cross-cultural interactions are not equally distributed. The ability and willingness to develop personal attachments across cultures would depend on cultural competence, fluency in foreign languages, social orientation, cultural awareness, international experience, and cultural flexibility etc. (Kim, 1988; Thomas, 1998; Bhawuk & Brislin, 2000). These personal factors and competencies are found to enhance individuals’ coping skills when dealing with cross-cultural exchange (Kim, 1988; Weaver, 1994; Downes & Thomas, 1999). In this research, boundary spanning personnel are generally presumed to invest with respect to cultural knowledge, cultural adaptation and communication. Further, these investments and efforts toward the partner rep are proposed to reduce the perceived cultural distance in the dyads. Moreover, individuals’ cultural knowledge, cultural adaptation, and communication efforts are proposed to increase buyer tolerance of conflict and thereby lower exit intentions. The contribution of this research is therefore to investigate tolerance of conflict in interorganizational relations. More specifically we examine how interpersonal investments affect tolerance of conflict in cross-national dyads. This paper is organized as follows. First, we discuss how boundary spanners deal with cultural distance in business relationships. Second, we develop the conceptual model and hypotheses. We then describe the method, data collection and construct measures. Last, we present and discuss the findings.

216

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

COPING WITH CULTURAL DISTANCE: THE CRITICAL ROLE OF BOUNDARY SPANNERS In most research examining cross-national business relationships the concept of culture has been associated to the national level (Hofstede, 1980; Kale & Barnes, 1991; Nakata & Sivakumar, 2001). Hofstede (1980) defines national character as the ‘‘collective mental programming’’ of people in one environment. The concept of culture in these studies is therefore not a trait of individuals, but of a large number of persons conditioned by similar background, education, and life experiences (Nakata & Sivakumar, 2001). Crossnational interactions are however principally influenced by three distinct, yet highly inter-related constructs: national character, organizational culture, and individual competence and personality factors (Kale & Barnes, 1991; Luo, 2001; Vaaland, Haugland, & Purchase, 2004). In this research we aim to investigate the role of boundary spanners in cross-national business relationships, and more specifically the effect of these organizational members’ cultural competence and cultural adaptation efforts in international dyads. Further, we propose that cultural distance in international dyads can be reduced by the competence of as well as the efforts undertaken by boundary spanners. Hence, while we acknowledge that national cultural differences between partners in dyads typically represent additional challenges in the governance of business exchange, we suggest that individuals competence and efforts equally influence the functioning of international dyads. Moreover, we take a human agency approach in the sense that individuals are presumed capable to learn and adapt to other people and new environments (Adler, 1987; Weaver 1994; Bandura, 2002). This argument is highly related to the idea of individuals as open human systems (Kim, 1988). In line with this view, individuals naturally and continuously receive, process and encode information, process and encode information by participating in human interactions with others, such as with culturally different business partners (Kim, 1988; Weaver, 1994). Related to this basic assumption is the perception of cultural identity as a potentially flexible structure1 (Kim, 1988; Bandura, 2002). Even though most individuals’ cultural identity is formed in one particular sociocultural environment2, this cultural identity can be questioned and challenged when confronted to new cultures. This is because individuals naturally learn and acquire facets of other cultural identities when interacting with people from other cultures. This process of acquiring knowledge of a new culture is called acculturation (Kim, 1988; Shenkar, 2001). Further, acculturation can generally be assumed to reduce cultural distance (Kim, 1988; Shenkar, 2001). Through the process of acculturation

Cross-National Business Relationships

217

individuals normally increase their internal capacity to cope with diverse cultural surroundings. In addition to the general increase in individuals’ internal capacity, acculturation processes are also expected to enhance individuals’ cognitive complexity and cognitive flexibility (Kim, 1988; Weaver, 1994). People having high cognitive complexity are likely to have developed refined and complex perceptions of other cultures as well as being able to identify own cognitive patterns as different from those of the other culture and to gradually increase the capacity for other viewpoints and social interaction with members of the host culture. In consequence, people that possess cognitive complexity are highly qualified to acquire, interpret, and respond to the information necessary to perform satisfactorily in intercultural interactions. Closely related to cognitive complexity is the concept cognitive flexibility. This concept refers to the capacity to be mentally flexible in dealing with ambiguity and unfamiliarity. Thus, an individual’s cognitive flexibility is ‘‘y dependent upon the number of descriptive and explanatory ideas at his or her disposal for the ability to make sense of and to integrate new information into a pre-existing cognitive structure’’ (Kim, 1988, p. 97). The preponderance of cognitive flexibility in cross-cultural adaptation is related to his or hers ability to bend their way of thinking and to be responsive to foreign cultural patterns. This flexibility of thinking patterns is a key to openness and tolerance of unfamiliar cultures and is thought to bring forth successful cross-cultural adaptation. Consistent with the above outline, individuals generally develop their cultural competence and cognitive capacities to cope with other cultures through cross-cultural experience, and hence through the process of acculturation. Further, individuals’ cultural competence and cognitive capacity are presumed to reduce perceived cultural distance. Consequently, in accord with the above presented view, cultural identity is not seen as a static phenomenon, but rather evolves over time as it is continuously constructed and reconstructed during interaction (Kim, 1988; Luo, 2001).

DEVELOPMENT OF THE CONCEPTUAL MODEL In this research we advance boundary spanners’ cultural competence as well as their cultural adaptation efforts to enhance communication in the crossnational dyads. Individuals’ ability to deal with disagreements and conflicts across firms is additionally supposed to be strengthened by cultural competence and cultural adaptation efforts. More specifically, we investigate how

218

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

supplier reps cultural knowledge, their cultural adaptation efforts and their communication affect buyers’ tolerance of conflict. Supplier rep cultural knowledge is associated with general cultural competence about the partner’s national culture and language, and hence refers to a personal competence asset. Supplier rep cultural adaptation and communication are relationship specific activities and assets, i.e. activities undertaken and assets developed with and through the buyer rep. With regard to the variable buyer tolerance of conflict, we presume the buyer rep3 to report in a global fashion on behalf of the firm (Rousseau, 1985; Heide & John, 1994). This is because buyer reps, such as purchasing agents, are organizational members and hence are presumed to make decisions in accord with their firms’ strategies, norms and procedures (Grønhaug et al., 1999; Blois, 1999; Humphrey & Ashforth, 2000). In the sections that follow we explain the conceptual relationships between the variables in the postulated model, but first we explain challenges related to conflict resolution in the selected crossnational dyads, second we present the construct tolerance of conflict.

Cross-Cultural Dyads and Differences in Conflict Resolution Purchasing in the global seafood industry involves dealing with numerous business partners’ worldwide. Hence, seafood importers are daily confronted to people representing businesses in different cultures. Of critical importance in this exchange is the handling of disagreements and conflicts. Dealing with business exchange in marketing channels, actors typically are confronted with defections or deterioration of performance or quality of products (Hirschman, 1970; Kaufmann & Stern, 1988). Requirements with respect to assessment of product quality, logistics and management are additionally high in important seafood markets, such as the French market (Produits de la Mer, 2004). In consequence, disagreements and conflicts related to critical exchange requirements have to be dealt with on a frequent basis. Furthermore, high fluctuations in resources and markets create the need for continuous adaptations and negotiations on various matters, such as price (Nilssen, 1994; Pettersen, 1998; Produits de la Mer, 2004). According to cross-cultural research, problems related to conflict resolution are greater when cultures are very different than when they are similar in basic cultural values and norms (Triandis, 2000; Bhawuk & Brislin, 2000). This is because conflict management behaviors are found to differ as a function of cultural norms and values (Kirkbride, Tang, & Westwood, 1991; Morris et al., 1998). Conflict resolution styles are further highly connected to ways

Cross-National Business Relationships

219

of communication, since communication is central in order to resolve current disagreements and disputes (Borisoff & Victor, 1998). Tolerance of Conflict As described, tolerance of conflict is conceptually related to the more widely used construct in dissolution studies, exit intention. Exit intention has been defined as the intention to discontinue the relationship with the current partner (Ping, 1993, 1995). By the construct tolerance of conflict we aim to measure buyers’ exit intention given specific conflict situations. Conflict situations or critical incidents or events are highly associated to decisions of relationship dissolution (Keaveny, 1995). This is because dissolution processes typically are initiated by minor or major conflicts related to the ongoing business exchange, such as dissatisfaction with product quality, late delivery etc. (Ping, 1992; Giller & Matear, 2001). These conflicts or critical events may alter the current state of the relationship leading to a termination process. Responses to such failings are presumed to differ among firms, as they materialize via two alternative mechanisms: the voice option (i.e. trying to resolve the conflict) or the exit option (i.e. stop buying the firms products) (Hirschman, 1970). It is therefore not the factors per se which lead to relationship ending, but the responses to them (Kaufmann & Stern, 1988; Stewart, 1998; Halinen & Ta¨htinen, 1999b). In this research tolerance of conflict refers to the extent to which the buyer intends to discontinue the relationship with the current partner given conflict situations. The measure is composed by a number of hypothetical conflict issues, and the purpose is to measure buyers’ tolerance toward the supplier given prospective conflict situations. Buyers who exhibit high tolerance of conflict are assumed more willing to resort to voice and conflict solving, and consequently postpone exit, while buyers who demonstrate low tolerance of conflict more likely would leave their current partners. With respect to responses to critical events and ways to resolve conflicts, we presume additional challenges because of the cultural distance between the dyadic partners. This is because communication barriers as well as differences in conflict resolution exist across cultures.

CULTURAL KNOWLEDGE In this research we propose supplier rep cultural knowledge to be positively related to supplier rep communication and buyer tolerance of conflict. By

220

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

cultural knowledge we refer to knowledge of the partner’s society, culture, norms, customs, and the ability to speak the language of the partner. In this study the variable refers to supplier reps general cultural competence. Knowledge and familiarity with the partner’s culture are critical in crosscultural exchange (Kale & Barnes, 1991; Thomas, 1998; Bhawuk & Brislin, 2000). This is because boundary spanners holding comprehensive knowledge on foreign cultures are assumed to be aware of differences in morals, customs, beliefs, and lifestyles in numerous countries. Foreign language fluency is equally found critical in intercultural business exchange (Kale & Barnes, 1991; Thomas, 1998). Previous experience with and knowledge of the other culture likewise seems to increase individuals’ openness and tolerance, and thereby reduces ethnocentrism. Further, when business people know about the partner’s culture and their language competence is excellent, these individuals are likely to perceive the others as less different and the perceived cultural distance between business partners typically decreases (Bhawuk & Brislin, 2000). This is because individuals’ experience and knowledge of the other culture are likely to have broadened their internal cognitive capacity to understand and cope with culturally different partners. Further, culturally competent people are typically aware of differences in communication patterns. Language is equally a central mode to encode and decode crucial information in cross-cultural interactions. We therefore suggest cultural knowledge to constitute a critical basis of competence that enhances supplier reps capacity to communicate across cultures. Likewise, people that possess cultural knowledge are likely to be attentive to culturally induced differences connected to conflict management. Additionally, cultural competence is typically associated to openness and tolerance toward differences in conflict resolution styles. Further, language competence facilitates the understanding and assessment of the conflict in question as well as the search for ways to resolve the conflict. In consequence, boundary spanners with cultural knowledge are expected to be highly competent to anticipate and manage conflicts that occur in cross-cultural dyads. Accordingly, we hypothesize: H1. Supplier rep cultural knowledge is positively associated with supplier rep communication. H2. Supplier rep cultural knowledge is positively associated with buyer tolerance of conflict.

Cross-National Business Relationships

221

CULTURAL ADAPTATION In addition to the importance of cultural knowledge, the ability and willingness to adapt culturally to the partner rep is considered critical. In this research we suggest supplier rep cultural adaptation to positively affect supplier rep communication and buyer tolerance of conflict. By the construct cultural adaptation we refer to the ability and willingness to adapt culturally to the partner rep on a number of dimensions. Hence, while the variable cultural knowledge refers to general cultural competence, the variable cultural adaptation reflects the ability and willingness to apply cultural competence in the form of relevant and critical adaptations toward the buyer rep. Drawing on cross-cultural research, we propose the following dimensions to be central aspects with respect to cultural adaptation; the partner rep’s psychological mind-set, values and beliefs, way of negotiating and the handling of disagreement (Peterson, Kameda, & Shimada, 1981; Kale & Barnes, 1991; Simintiras & Thomas, 1998; Mintu-Wimsatt & Gassenheimer, 2000). We expect cultural adaptation to positively affect communication across cultures. Adaptation to the norms of a foreign partner is usually recommended as one solution to communication difficulties. This is because adaptation is assumed to reduce the probability of inappropriate behaviors and misunderstandings. Further, adaptability involves rather the ability to understand the culturally different partner, to display empathy and tolerance for cultural differences, to exhibit great knowledge of communicative and interactional styles in various cultures and to be flexible with respect to way of thinking and working styles (Mead, 1990; Matveev & Nelson, 2004). According to Condon (1974) there are four categories of cross-cultural communication problems: (1) language and language behavior, (2) nonverbal behavior, (3) values and (4) patterns of thought. Apparently, it is possible to reduce cross-cultural communication problems within all the four categories mentioned above by adapting culturally to the partner. Moreover, by altering communicating styles and adjusting to differences in beliefs, cultural distance between the partners can be reduced and crosscultural communication performance enhanced (Francis, 1991; Matveev & Nelson, 2004). In line with prior theory outline, individuals having developed high cognitive complexity and flexibility through acculturation processes are likely to be qualified to capture differences in communication patterns as well as to adapt their communication behavior in accordance with the specific cultural and personality factors.

222

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

Further, cultural adaptability is advantageous with regard to conflict resolution in cross-national dyads. Since cultural differences related to conflict resolution styles may be present, it is critical to comprehend the cultural perspective of the partner rep, as well as adjusting to the partner’s way of conflict solving. Moreover, adaptability is important because conflict handling typically is not a static procedure, but requires flexibility and continual evaluation to be productive and effective. Furthermore, stereotyped assumptions, narrow mindedness and lack of willingness to adapt are found detrimental to conflict management (Borisoff & Victor, 1998). Hence, we suggest cultural adaptation efforts toward the partner rep to facilitate conflict solving in the focal marketing dyads. Accordingly, we hypothesize: H3. Supplier rep cultural adaptation is positively associated with supplier rep communication. H4. Supplier rep cultural adaptation is positively associated with buyer tolerance of conflict.

INTERACTION EFFECTS In addition to the direct effects of cultural knowledge and cultural adaptation on communication and tolerance of conflict, we hypothesize an interaction effect between cultural knowledge and cultural adaptation. For boundary spanners it is assumed beneficial to possess high levels of cultural knowledge as well as to invest heavily in cultural adaptations. We argue that cultural knowledge becomes even more valuable for the business exchange when this knowledge is converted into cultural adaptations on dimensions thought to be critical in cross-national business exchange. Further, when individuals have cultural knowledge, such as awareness of differences in values and beliefs and conflict solving, these individuals would be highly competent to make the appropriate cultural adaptations in the specific setting. Supplier rep cultural knowledge and supplier rep cultural adaptation are therefore assumed to have a reciprocal reinforcing effect upon the outcome variables, supplier rep communication and buyer tolerance of conflict. Accordingly, we hypothesize: H5. Supplier rep cultural knowledge and supplier rep cultural adaptation will have a positive mutual reinforcing effect on supplier rep communication.

Cross-National Business Relationships

223

H6. Supplier rep cultural knowledge and supplier rep cultural adaptation will have a positive mutual reinforcing effect on buyer tolerance of conflict.4

COMMUNICATION Communication across cultures represents a great challenge in international business dyads (Simintiras & Thomas, 1998; Mintu-Wimsatt & Gassenheimer, 2000; Matveev & Nelson, 2004). One reason for this is that communication is closely linked to culture. Within cultures individuals normally share a common communication system that is conditioned and shaped by cultural traits such as cultural values, norms and thinking patterns. Furthermore, communication modes serve as the carrier and means of these cultural patterns, since social and culturally derived behavior involves communication in either an explicit and implicit sense (Kim, 1988; Weaver, 1994). Prominent communication problems in cross-cultural interactions are lack of common values and methods, divergent cognitive approaches, operating styles and preferences (Anderson & Weitz, 1989; Nakata & Sivakumar, 2001). In this research communication is proposed to increase buyer tolerance of conflict. According to the literature communication is considered central with regard to conflict resolution (Borisoff & Victor, 1998). This is because conflict management is effected through communication. In order to resolve conflicts communication is fundamental with regard to assessment of the conflict, such as obtaining an understanding of the nature of and cause of the conflict, as well as to find creative solutions for the problem, such as the appropriate conflict-handling behavior (Borisoff & Victor, 1998). In crossnational dyads, communication is even more critical and challenging because of cultural differences related to communication patterns as well as to conflict resolution styles (Morris et al., 1998). Hence, individuals are expected to make an extra effort to surmount various cultural differences. Contact between boundary spanners is the key mechanism for information gathering and communication in business dyads (Hakansson, 1982; Mohr & Nevin, 1990; Nielson, 1997). High-quality communication between boundary spanners fosters interpersonal trust, increases coordinative behaviors and enhances problem-solving capabilities, which in consequence reduce the likelihood of business relationship termination (Shapiro, 1988; Anderson & Weitz, 1992). Likewise boundary spanners are central in resolving disputes and misunderstandings by aligning perceptions and

224

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

expectations (Dwyer et al., 1987; Anderson & Weitz, 1989). We therefore suggest that high levels of communication raise the likelihood of appropriate and successful conflict management, and thereby heighten buyers’ tolerance of conflict. In this research, supplier rep communication refers to the ability and willingness for a two-way communication. Important aspects with respect to communication are the motivation for open two-way information sharing, the willingness to allow weaknesses and strengths to be seen as well as to share confidential information (Anderson & Weitz, 1992; Doney & Cannon, 1997). With respect to the focal dyads, we propose supplier reps’ ability and willingness to communicate to be positively related to buyers’ tolerance of conflict. We therefore hypothesize: H7. Supplier rep communication is positively associated with buyer tolerance of conflict.

CONTROL VARIABLES In the research we need to control for factors presumed to affect buyers’ tolerance of conflict or the conceptually related construct exit intention. In line with prior theorizing, business partners usually remain in relationships because they have to or because they want to (Ping & Dwyer, 1992). We therefore control for dependence and overall satisfaction in the model. Buyer’s dependence to dyadic partners is assumed to create lock in situations where buyers may be forced to remain with suppliers despite recurrent problems and conflicts, and consequently be obliged to exhibit high tolerance of conflict. The construct availability of alternative partners is found to affect business firms’ probability to leave their current partners (Ping, 1993; Prim-Allaz, 2000). Buyers having few alternative suppliers would be reluctant to terminate current supplier relationships. Rather, they would remain in the relationship despite high conflict levels and dissatisfaction, and in consequence be forced to demonstrate high tolerance of conflict. Moreover, actors overall satisfaction with a current relationship is likely to influence actors exit intentions. In this study we incorporate the construct overall satisfaction with relationship which refers to a firm’s global evaluation of relationship fulfillment as well as an affective evaluation of different aspects of a relationship (Dwyer, Schurr, & Oh, 1987; Ladega˚rd, 1997). In business dyads partners may be satisfied with some aspects of the relationship, while dissatisfied with other aspects. Usually buyers evaluate the overall satisfaction

225

Cross-National Business Relationships

Cultural knowledge Cultural adaptation Cultural knowledge x Cultural adaptation

Communication

Buyer tolerance of conflict

Control variables Availability of alternative suppliers Overall satisfaction with supplier relationship Length of relationship

Fig. 1.

The Conceptual Model.

with the supplier relationship when making decisions whether to remain in the current relationship or to search for a new supplier (Ping, & Dwyer, 1992; Giller & Matear, 2001). Dissatisfaction with one aspect of the relationship therefore does not necessary lead to termination. Consequently, buyers’ perception of the overall satisfaction with the supplier relationship is assumed to affect buyers’ tolerance of conflict. Additionally, we control for relationship length. A number of studies have demonstrated that relationship length reduces the likelihood of dissolution (Anderson & Weitz, 1989; Heide & John, 1990; Heide & Miner, 1992). The reason for this is that parties make adjustments and learn about each others procedures and values over time. Business partners may also have survived several crises. Substantial adaptations and investments during several years may additionally create exit barriers. Related to our study and the dependent variable, we expect that relationship length would increase buyer tolerance of conflict. In the model, we therefore control for buyers availability of alternative suppliers, buyers’ overall satisfaction with the relationship and relationship length. The conceptual model is presented in Fig. 1.

METHODOLOGY Research Context The French seafood industry is selected as the empirical setting. The seafood industry today is generally characterized by globalization of markets and

226

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

production. France represents one of the largest seafood markets in Europe. Further, French buyers mainly depend on imports and typically apply a global sourcing strategy to ensure supply (Produits de la Mer, 2004). The purchasing activity of French buyers therefore implies dealing with geographically and cultural distant business partners. The unit of analysis in this research is the relationship between French buyers of seafood and suppliers worldwide. The sample consists of relationships between French buyers and their suppliers from all continents; Europe, Asia, Africa, North- and South America. A buyer perspective is adopted for the study and data are collected from French seafood companies in three geographical clusters: Boulogne-sur-Mer, Paris and Marseille/Montpellier. The major population of the French seafood industry is covered within these geographical clusters. Actors included in the sample are fish wholesalers, seafood traders and companies involved in salting and curing, canning, shrimp cooking, filleting, and in the production of ready-cooked, dishes and value-added products. The target population is drawn from two different sources: (1) the Seafood Sector Guide for Boulogne-sur-Mer in France (2001–2002) and (2) The Seafood Directory France –(2002). Both sources include a list of seafood companies in France as well as useful information about their activities. In total, we obtained a sample of 96 companies with an average response rate of 58% for all regions.5 The main reason for not participating in our research was busy work schedules in the specific period of the planned interviews. The sample exhibits substantial variation with respect to the size of the companies included. The average size of the seafood companies is in terms of number of employees 33, 8, ranging from very small (1 employee) to very large (700 employees).

METHOD AND DATA COLLECTION To test the hypotheses, we employed a quantitative, cross-sectional approach in the form of a structured questionnaire. To collect data we used personal interviews. The main reason for this data collection strategy was to ensure an acceptable response rate within the specific business setting. Further, the key informant method is chosen, which comprises a collection of information about the organization – or the focal business relationship in question by using selected knowledgeable organizational members (Seidler, 1974). Key-informants usually are selected because of their role and position in the company, and because they possess knowledge and experience about

Cross-National Business Relationships

227

e.g. specific business relationships. Moreover, they are expected to report on business-related phenomena and patterns of behavior in a global fashion. In our research we apply Campbell‘s (1955) criteria for selecting keyinformants. First, informants should be knowledgeable about the phenomena under study. Hence, we selected purchasing agents and/or general managers also responsible for buying tasks. These organizational members were the major responsible for managing supplier relationships and thereby possessed comprehensive knowledge of relevant exchange issues. Judgment of key-informants’ knowledge was facilitated by the personal interview situation. Second, key-informants ought to be able and willing to communicate with the researcher. A presentation letter of the project was sent by fax to the buyer firm. Next, purchasing agents were contacted by telephone to schedule personal interviews. The number of relevant and available key informants was generally limited. In consequence, even though multiple informants are thought to increase the reliability and validity of reports (Kumar, Stern, & Anderson, 1993; Heide & John, 1994), the limited number of purchasing agents within each company made an intrafirm multi-informant validation strategy infeasible.

INSTRUCTIONS With respect to the survey-instrument, key-informants were asked to select a current supplier relationship. The following instructions regarding the supplier firm were given: (1) the supplier should be the second or third most important supplier, (2) the supplier should be of foreign origin (preferably from either a Nordic or overseas country), and (3) no financial ties expect the exchange of goods and services could exist between the buyer and supplier firm. The purpose of the first criterion is to reduce selection bias. When buyers are asked to select the second or third most important supplier, the researcher ensures some variation among the selected supplier relationships i.e. the selection of highly privileged suppliers is precluded. In addition, the buyer chooses a sufficiently important supplier, and is qualified to answer questions concerning this supplier (Anderson & Narus, 1990). The purpose of the second criterion is to ensure cultural distance between the buyer and the supplier firm, while the third is to ensure the independence of the dyadic partners. The sample exhibits considerable variation. The average length of relationship is 7, 6 years, ranging from 1 to 30 years. With respect to dependence, the average volume of supplies for one specific fish species provided by the selected supplier firm is 37%, ranging from 1% to 100%.

228

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

MEASUREMENT The framework provided by Churchill (1979) was used when developing measures. When available and adequate for the study existing validated measures were chosen. When developing new measures, conceptual dimensions were drawn from relevant literature. All measures were multi-item measures, with the exception of two control variables, which are one-item measures. All constructs in the study were measured on a 7-point Likert scale, with the exception of relationship length. An overview of scale items and anchors are given in Appendices A and B. When generating items a combination of an inductive and deductive approach was employed. Reviews of the literature, discussions with colleagues as well as an extensive reading of available industry related information, was effected in order to generate relevant items. A pre-test in France including 22 companies gave important guidelines for improvements of ambiguous questions, imprecise vocabulary and scaling methods. All measurement scales were initially developed in English. The back translation procedure recommended in crosscultural research (Brislin, 1976; Cavusgil & Das, 1997) was employed to translate the survey instrument from English to French.

MEASURE DEVELOPMENT Tolerance of Conflict Buyer firm tolerance of conflict refers to whether the buyer intends to discontinue the relationship with the current partner given conflict situations. This measure is developed for the study and is conceptually related to exit intention. The measure includes hypothetic or prospective elements, since key informants are asked to what degree they would leave the current partner given hypothetical but relevant conflict issues in the specific industry. Acknowledging that hypothetical situations cannot substitute recalled conflict experiences or actual interaction behavior, prospective methods can nevertheless produce insights which suggest what situational factors that could affect predictable strategy choices (such as exit) (Harre´ & Secord, 1973; Baxter, 1982). The scale was developed based on conceptual dimensions from the market channel conflict literature (e.g. Lusch, 1976a; Lusch, 1976b; Wilkinson, 1981) and an exploratory critical incident study (Keaveny, 1995). The following conflict dimensions were found relevant for the study: Product quality, holding back information, pricing, and response to failures.

Cross-National Business Relationships

229

Supplier Rep Communication Supplier rep communication taps the ability and willingness for a two-way communication. The communication scale is based on the scales by Anderson and Weitz (1992) and Doney and Cannon (1997). The scale encompasses dimensions including partner’s willingness to maintain open and frequent two-way interchanges on relevant issues, showing weaknesses and strengths, and to share confidential information.

Supplier Rep Cultural Knowledge Supplier rep cultural knowledge taps the degree of cultural knowledge the supplier rep has about France. The scale includes the following dimensions; society, culture, norms, customs and language. The scale is developed based on dimensions drawn from the cross-cultural literature (Kale & Barnes, 1991; Thomas, 1998; Bhawuk & Brislin, 2000; Nakata & Sivakumar, 2001).

Supplier Rep Cultural Adaptation Supplier rep cultural adaptation describes the ability and willingness to adapt culturally to the partner rep on a number of dimensions. The scale consists of the following dimensions; psychological mind-set, values and beliefs, way of negotiating, and the handling of disagreements. The scale is developed based on dimensions drawn from the cross-cultural literature (Peterson et al., 1981; Kale & Barnes, 1991; Simintiras & Thomas, 1998; Schultz, Evans, & Good, 1999; Mintu-Wimsatt & Gassenheimer, 2000; Bhawuk & Brislin, 2000; Nakata & Sivakumar, 2001).

CONTROL VARIABLES Availability of Alternative Suppliers Availability of alternative suppliers refers to the degree to which a buying firm has alternative sources of supply (Ladega˚rd, 1997; Cannon, Perrault, & William, 1999). In the study we employ a one-item scale, and the wording of the item is adapted from Ladega˚rd (1997).

230

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

Overall Satisfaction with Supplier Relationship Overall satisfaction with relationship refers to the buyer’s global evaluation of relationship fulfillment in addition to an evaluation of different aspects of the relationship (Dwyer, Schurr, & Oh, 1987; Ladega˚rd, 1997). In our study, we use a measure reflecting buyers’ overall satisfaction with the supplier relationship and buyers’ satisfaction with specific relationship aspects, such as quality of products and services. The multi-item measure is based on existing scales (Ping, 1997; Prim-Allaz, 2000). Length of Relationship Length of relationship refers to the length of time a company has done business with a partner firm. We measure this variable by asking informants to report on the length of time the company has done business with the current supplier. Relationship length has been measured in a similar way by Anderson and Weitz, (1989); Doney and Cannon, (1997) and Ping (1995). We use the wording of Ping (1995) with an open-ended question: How many years have you done business with your supplier?

MEASURE VALIDATION We run factor analysis to assess convergent and discriminant validity of the measures. Further, we inspect the internal consistency of the measures, examining the reliabilities of the measures by computing Cronbach’s coefficient alphas. We estimated the factor matrix for each multi-item construct and eliminated items based on low-item-to-total correlation, and related indications of increased Cronbach’s alpha after deletion (Hair, Anderson, Tatham, & Black, 1998). All measures demonstrate satisfactory internal consistency and reliability, with coefficient alphas well above the 0.7 criterion suggested by Nunnally (1978). Coefficient a for the scales is: buyer tolerance of conflict, 0.80, supplier rep cultural knowledge, 0.89, supplier rep cultural adaptation, 0.86, supplier rep communication, 0.85, and overall satisfaction with supplier relationship, 0.92.

THEORY TESTING AND EMPIRICAL FINDINGS In harmony with the previous theory outline, we estimated two models to test the hypotheses, Model 1 to test the hypothesized effects upon supplier

231

Cross-National Business Relationships

Table 1.

Dependent Variable: Supplier Rep Communication.

Variables Cultural knowledge Cultural adaptation Cultural knowledge  cultural adaptation R2adj ¼ 0.258 R2 ¼ 0.279 F-value ¼ 11,543 sig. ¼ 0.000

b

T

Sig. T

Tolerance

VIF

0.193 0.424

2.028 4.291 0.651

0.023 0.000 0.517

0.903 0.835 0.912

1.108 1.198 1.097

0.062

Note: n ¼ 96, b ¼ Standardized coefficients.  po0.05;  po0.01 (one-tailed).

rep communication of cultural knowledge, cultural adaptation and the interaction term, and Model 2 to test the hypothesized effects upon buyer tolerance of conflict of cultural knowledge, cultural adaptation, the interaction term and communication. We conduct multiple regression analysis to test the hypothesized relationships between the variables. We mean-centered the scales of the variables entering the interaction terms, in order to reduce multicollinearity problems (Cronbach, 1986). Collinearity diagnostics displayed acceptable tolerance measures (variance inflation tolerance (VIF) for all variables (cf. Tables 1 and 2).

EFFECTS ON SUPPLIER REP COMMUNICATION In accord with previous theory outline, supplier rep communication is assumed to be a function of supplier rep cultural knowledge; supplier rep cultural adaptation and the interaction between supplier rep cultural knowledge and supplier rep cultural adaptation. The results are shown in Table 1. The empirical findings provide support for hypotheses H1 and H3. Supplier rep cultural knowledge and supplier rep cultural adaptation show positive significant effects upon supplier rep communication (t ¼ 2.028, po0.05, t ¼ 4.291, po0.01). These findings are in harmony with previous theory outline predicting that high levels of communication across cultures are contingent on cultural knowledge and cultural adaptation. Hypothesis 5 receives no empirical support, as the interaction term (cultural knowledge  cultural adaptation) is non-significant (t ¼ 0.651, p40.05).

232

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

Table 2.

Dependent Variable: Buyer Tolerance of Conflict.

Variables Cultural knowledge Cultural adaptation Cultural knowledge  cultural adaptation Communication Availability of alternative suppliers Overall satisfaction with supplier relationship Length of relationship R2adj ¼ 0.090 R2 ¼ 0.161 F-value ¼ 2,269 sig. ¼ 0.018

b 0.147 0.021 0.183 0.325 0.027 0.056 0.034

T 1.327 0.161 1.710 2.415 0.261 0.475 0.292

Sig. T Tolerance

VIF

0.094 0.437 0.045 0.009 0.397 0.318 0.385

1.210 1.679 1.135 1.785 1.024 1.354 1.344

0.826 0.596 0.881 0.560 0.977 0.739 0.744

Note: n ¼ 96, b ¼ Standardized coefficients.  po0.05;  po0.01 (one-tailed).

EFFECTS ON BUYER TOLERANCE OF CONFLICT In harmony with prior theorizing, buyer tolerance of conflict is assumed to be a function of supplier rep cultural knowledge, supplier rep cultural adaptation, the interaction between supplier rep cultural knowledge and supplier rep cultural adaptation, and supplier rep communication. In addition, we included three control variables; availability of alternative suppliers, overall satisfaction with supplier relationship, and relationship length, in the regression analysis. The results are shown in Table 2. Supplier rep cultural knowledge and supplier rep cultural adaptation both have a non-significant effect upon buyer tolerance of conflict (t ¼ 1.327, p40.05, t ¼ 0.161, p40.05). Thus, H2 and H4 receive no empirical support. The interaction between supplier rep cultural knowledge and supplier rep cultural adaptation, however, is positive and significant (t ¼ 1.710, po0.05). Thus H6 receives empirical support. This result indicates that supplier rep cultural knowledge and supplier rep cultural adaptation are contingent upon each other in order to have a positive impact upon buyer firm tolerance of conflict. Separately they exhibit no positive effect upon the dependent variable. Supplier rep communication shows a positive and significant effect upon buyer tolerance of conflict (t ¼ 2.415, po 0.01), and H7 is supported. To sum up, the empirical findings provided support for hypotheses H6 and H7, while H2 and H4 receive no empirical support. The three control

Cross-National Business Relationships

233

variables; availability of alternative suppliers, overall satisfaction with supplier relationship and relationship length, show no significant effects upon buyer tolerance of conflict (t ¼ 0.247, p40.05, t ¼ 0.417, p40.05, t ¼ 0.292, p40.05).

DISCUSSION Cultural knowledge and cultural adaptation demonstrate a positive, significant mutual reinforcing effect upon buyer tolerance of conflict. Hence, boundary spanners knowledge about the partner’s culture as well as their ability and willingness to adapt culturally are needed in cross-national dyads. More specifically, speaking foreign languages and knowing about others’ cultures is an important basis of knowledge that reinforces the ability to make adaptations to foreign cultures. Besides, cultural knowledge primarily becomes useful in the business relationships when this knowledge is converted into cultural adaptations on relevant aspects. To possess cultural knowledge is therefore not sufficient, additionally; individuals should use this knowledge to reduce cultural distance toward the partner rep. Further, the findings demonstrate that communication is critical with regard to conflict resolution, since communication increases buyer tolerance of conflict. Our research findings provide support for the human agency approach in cross-national studies. Human beings are open systems and are able to learn from cross-cultural interactions. Further, boundary spanners that operate in global markets and consequently are confronted to people belonging to other cultures are likely to increase their cultural awareness as well as to acquire appropriate coping skills to deal with culturally different people. Hence, despite cultural differences, individuals’ cultural competence and efforts can improve the functioning of cross-cultural interactions (Searle & Ward, 1990; Thomas, 1998; Bhawuk & Brislin, 2000). Our findings show that cultural competence, cultural adaptability and communication enable boundary spanners to cope with cultural distant business partners.

MANAGERIAL IMPLICATIONS A great number of industries today are confronted to the process of globalization in different ways. Importers worldwide are involved in global sourcing in the search for products and services. This evolution includes establishing and managing business exchange with geographically and

234

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

culturally distant actors. Considering the increased focus on issues such as traceability, consumer power, and branding, it is incumbent upon actors, such as importers, to organize well functioning value-chains. That is to say, importers should know their business partners and adopt a long-term perspective with respect to their suppliers in order to ensure product traceability as well as product quality and associated brand image (Produits de la Mer, 2004). When dealing with culturally different business partners actors should be aware of culturally induced differences related to critical aspects in business exchange. In order to anticipate and deal with these cultural differences individuals responsible for the business exchange can reduce cultural barriers by using their cultural competence and cultural adaptability to approach the partner. The findings of the study suggest that boundary spanner’ cultural competence and cultural adaptation efforts are of great importance for business relationship outcomes. Companies should therefore increase their consciousness with regard to culture and implement initiatives in order to improve organizational members’ cultural competence. Possible initiatives could be to emphasize cultural competence, cultural awareness, and cultural flexibility when selecting new organizational members. Moreover, employees within the company who frequently deal with culturally distant business partners could benefit from cross-cultural training (e.g. Bhawuk & Brislin, 2000). By implementing these initiatives, cultural competence would increase and organizational members’ ability to carry out business exchange with cultural distant business partners would improve.

LIMITATIONS OF THE STUDY AND FURTHER RESEARCH This study has several limitations. Only one particular industry is examined; the seafood industry. Findings from this study may not be generalizable to other global industries or businesses. Further, the sample in the study is small, and a larger sample could increase the statistical power of the study and give additional and stronger findings. Moreover, the research investigates only the business relationship from one point of view (French buyers) and at one point in time. Research with a supplier perspective would give additional and interesting knowledge about these international dyads. Likewise, longitudinal research using qualitative methods could provide deeper insights with regard to boundary spanners confrontation with and learning

Cross-National Business Relationships

235

from cross-national encounters as well as the functioning of cross-national business relationships. Despite its limitations, the study provides knowledge about cross-national dyads. In particular the research reveals the importance of intangible assets (Lee & Jang, 1998), exemplified in this study by cultural knowledge, cultural adaptation, and communication. Additionally, the study supports the idea that cultural distance can be reduced by the effort of boundary spanners. Cultural distance, therefore, is not a static phenomenon, but may be overcome or made manageable by personal contact and mutual efforts undertaken by individuals across partner firms.

NOTES 1. Contrary to the perception of cultural identity as a fixed personality structure, which can be considered an implicit assumption in a number of cross cultural business studies. 2. This statement is however questionable since it takes for granted the assumption of spatial homogeneity within nations and communities. A great number of nations and communities are multicultural and hence individuals are presumed influenced by diverse cultures (Shenkar, 2001; Bandura, 2002). 3. The buyer rep is equally the key-informant in this research (cf. the methodology section). 4. In more technical terms we expect the interaction term of supplier rep cultural knowledge and supplier rep cultural adaptations to be positive with regard to supplier rep communication, cf. H5, and buyer tolerance of conflict, cf. H6. 5. The target population for all cluster regions is 165 companies. The target population is smaller than the initial list of all companies in the sources. This is because a number of criteria define the inclusion of companies in the target population, such as being in direct contact with suppliers, financial independence from suppliers, localization of the buying department in the cluster, being an independent firm etc.

ACKNOWLEDGMENT The authors acknowledge comments from Professor Arnt Buvik, Professor Arne Kalleberg, Professor Sven Haugland and one anonymous reviewer.

REFERENCES Adler, P. S. (1987). Culture shock and the cross-cultural learning experience. In: L. F. Luce & E. C. Smith (Eds), Toward internationalism. readings in Cross cultural communication, (2nd ed.). Cambridge, MA: Newbury House.

236

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

Alajoutsijva¨rvi, K., Mo¨ller, K., & Ta¨htinen, J. (2000). Beautiful exit: How to leave your business partner. European Journal of Marketing, 34(11/12), 1270–1290. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(1), 42–58. Anderson, E., & Weitz, B. (1989). Determinants of continuity in conventional industrial channel dyads. Marketing Science, 8(4), 310–323. Anderson, E., & Weitz, B. (1992). The use of pledges to build and sustain commitment in distribution channels. Journal of Marketing Research, 24(February), 18–34. Bandura, A. (2002). Social cognitive theory in cultural context. Applied Psychology: An International Review, 51(2), 269–290. Baxter, L. A. (1982). Strategies for ending relationships: Two studies. The western journal of speech communication, 46(summer), 223–241. Bhawuk, D. P. S., & Brislin, R. W. (2000). Cross-cultural training: A review, Applied Psychology: An International Review, 49(1), 162–191. Blois, K. J. (1999). Trust in business relationships: An evaluation of its status. Journal of Management Studies, 36(2), 197–215. Borisoff, D., & Victor, D. A. (1998). Conflict management—a communication skills approach (2nd ed.). Boston, MA: Allyn and Bacon. Brislin, R. W. (1976). Comparative research methodology: Cross-cultural studies. International Journal of Psychology, 11(3), 215–229. Campbell, D. T. (1955). The informant in quantitative research. American Journal of Sociology, 60(January), 339–342. Cannon, J. P., Perrault, J. R., & William, D. (1999). Buyer–seller relationships in business markets. Journal of Marketing Research, 36, 439–460. Cavusgil, S. T., & Das, A. (1997). Methodological issues in empirical cross-cultural research: A survey of the management literature and a framework. Management International Review, 37(1st qtr), 71–96. Churchill, G. A., Jr. (1979). A Paradigm for Developing Better Measures of Marketing Constructs. Journal of Marketing Research, XVI(February), 64–73. Condon, J. C. (1974). Perspectives for the conference. In: J. C. Condon & M. Saito (Eds), Intercultural encounters with Japan. Tokyo: Simul Press. Cronbach, L. J. (1986). Statistical tests for moderator variables: Flaws in analysis recently proposed. Psychological Bulletin, 102(3), 414–417. Doney, P. M., & Cannon, J. P. (1997). An examination of the nature of trust in buyer–seller relationships. Journal of Marketing, 61(April), 35–51. Downes, M., & Thomas, A. S. (1999). Managing overseas assignments to build organizational knowledge. Human Resource Planning, 22(4), 33 Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer–seller relationships. Journal of Marketing, 51(April), 11–27. Francis, J. N. P. (1991). When in Rome? The effects of cultural adaptation on intercultural business negotiations. Journal of International Business studies, 22(3,(3rd qtr.)), 403–426. Giller, C., & Matear, S. (2001). The termination of inter-firm relationship. Journal of Business & Industrial Marketing, 16(2), 94–112. Grønhaug, K., Henjesand, I. J., & Koveland, A. (1999). Fading relationships in business markets: An exploratory study. Journal of Strategic Marketing, 7, 175–190. Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data analysis (5th ed). New York: Prentice Hall, Inc.

Cross-National Business Relationships

237

Hakansson, H. (1982). International marketing and purchasing of industrial goods: An interaction approach. Chichester: Wiley. Halinen, A., & Salmi, A. (2001). Managing the informal side of business interaction: Personal contacts in the critical phases of business relationships. Competitive paper for presentation at the IMP conference. September 2001, Oslo, Norway. Halinen, A., Havila, V., & Ta¨htinen, J. (1999a). Ending exchange relationships: What do we know about them? Proceedings of the 16th IMP annual conference, September 2000, Bath. Halinen, A., & Ta¨htinen, J. (1999b). Towards a process theory of relationship dissolution. Series discussion and working papers 9:1999. Publications of the Turku School of Economics and Business Administration. Harre´, H., & Secord, P. F. (1973). The explanation of social behavior. Totowa, NJ: Littlefied, Adams and Co. Haugland, S. (1999). Factors influencing the duration of buyer–seller relationships. Journal of Business Research, 46, 273–280. Haytko, D. L. (2004). Firm-to-firm and interpersonal relationships: Perspectives from advertising agency account managers. Journal of the Academy of Marketing Science, 32(3), 312–328. Heide, J. B., & John, G. (1990). Alliances in industrial purchasing: The determinants of joint action in buyer-supplier relationships. Journal of Marketing Research, 27, 24–36. Heide, J. B., & John, G. (1994). Measurement issues in research on interfirm relationships. In: D. T. Wilson & K. Mo¨ller (Eds), Business marketing: An interaction and network perspective (pp. 531–554). Boston. MA: PWS-Kent. Heide, J. B., & Miner, A. S. (1992). The shadow of the future: Effects of anticipated interaction and frequency of contact on buyer-seller cooperation. Academy of management journal, 35(2), 265–291. Hirschman, A. O. (1970). Exit, voice and loyalty: Responses to decline in firms, organizations and states. Cambridge, MA: Harvard University Press. Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hillls, CA: Sage Publications. Humphrey, R. H., & Ashforth, B. E. (2000). Buyer–supplier alliances in the automobile industry: How exit-voice strategies influence interpersonal relationships. Journal of Organizational Behavior, 21, 713–730. Johanson, J., & Vahlne, J. (1990). The mechanism of internationalization. International Marketing Review, 7(4), 11–24. Kale, S. H., & Barnes, J. W. (1991). Understanding the domain of cross-national buyer–seller interactions. Journal of International Business Studies, 1992(1st qtr), 101–132. Kaufmann, P. J., & Stern, L. W. (1988). Relational exchange norms, perceptions of unfairness, and retained hostility in commercial litigation. Journal of Conflict Resolution, 32(3), 534–552. Keaveny, S. M. (1995). Customer switching behavior in service industries: An exploratory study. Journal of Marketing, 59(April), 71–82. Kim, Y. Y. (1988). Communication and cross-cultural adaptation: An integrative theory. Clevedon: Multilingual Matters. Kirkbride, P. S., Tang, S., & Westwood, R. I. (1991). Chinese conflict preferences and negotiation behavior: Cultural and psychological influences. Organization Studies, 12(3), 365–386.

238

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

Kumar, N., Stern, L. W., & Anderson, J. C. (1993). Conducting interorganizational research using key informants. Academy of Management Journal, 36(6), 1633–1651. Ladega˚rd, G. (1997). Forming strategic alliances: The role of social compatibility. Dissertation submitted to the Institute of Organization Sciences as the Norwegian School of Economics and Business Administration, in partial fulfilment of requirements for the degree of dr.oecon. Lee, D., & Jang, J. (1998). The role of relational exchange between exporters and importers evidence from small and medium-sized Australian exporter. Journal of Small Business Management, 1998(October), 12–23. Luo, Y. (2001). Antecedents and consequences of personal attachment in cross-cultural cooperative ventures. Administrative Science Quarterly, 46, 177–201. Lusch, R. F. (1976a). Sources of power: Their impact on intrachannel conflict. Journal of Marketing Research, 13(November), 382–390. Lusch, R. F. (1976b). Channel conflict: It’s impact on retailer operating performance. Journal of Retailing, 52(2), 3–12, 89–90. Matveev, A. V., & Nelson, P. E. (2004). Cross cultural communication competence and multicultural team performance. International Journal of Cross Cultural Management, 4(2), 253–270. Mead, R. (1990). Cross cultural management communication. New York: Wiley. Mintu-Wimsatt, A., & Gassenheimer, J. B. (2000). The moderating effects of cultural context in buyer–seller negotiation. Journal of Personal Selling & Sales Management, XX(1), 1–9. Mohr, J., & Nevin, J. R. (1990). Communication strategies in marketing channels: A theoretical perspective. Journal of Marketing, 54(October), 36–51. Morris, M. W., Willimas, K., Leung, K., Larrick, R., Mendoza, M. T., Bhatnagar, D., Li, J., Kondo, M., Luo, J., & Hu, J. (1998). Conflict management style. Accounting for crossnational differences. Journal of International Business Studies, 294(4th qtr.), 729–747. Nakata, C., & Sivakumar, K. (2001). Instituting the marketing concept in a multinational setting: The role of national culture. Journal of the Academy of Marketing Science, 29(3), 255–275. Nicholson, C. Y., Compeau, L. D., & Sethi, R. (2001). The role of interpersonal liking in building trust in long-term channel relationships. Journal of the Academy of Marketing Science, 29(1), 3–15. Nielson, C. C. (1997). An empirical examination of the role of closeness in industrial buyer– seller relationships. European Journal of Marketing, 32(5/6), 441–463. Nilssen, F. (1994). A review of four theoretical accounts of the exchange process: Exchange relationships, Interaction, Political economy, Transaction cost analysis. Dissertation presented in partial fulfilment of the requirements for the degree of M. Sc. in Marketing University of Stirling (1993–1994). Nunnally, J. (1978). Psychometric theory. New York: McGraw-Hill. Peterson, J. S. R. B., Kameda, N., & Shimada, J. (1981). The relationship between conflict resolution approaches and trust – a cross cultural study. Academy of Management Journal, 24(4), 803–815. Pettersen, I. B. (1998). Fiskeeksport til Frankrike. Er det muligheter for økt integrasjon mellom aktørene i verdikjeden? [Seafood exports to the French market. Is it possible to increase vertical integration in the value chain?] Kystnæringssenteret – Honningsva˚g. Produits de la Mer, (2004). [Seafood products, The European Seafood Magazine], no. 82, December/January & No. 83, February/March

Cross-National Business Relationships

239

Ping, R. A., Jr. (1992). A preliminary model of relationship termination in marketing channels. Advances in Distribution Channel Research, 1, 215–233. Ping, R. A., Jr. (1993). The effects of satisfaction and structural constraints on retailer exiting, voice, loyalty, opportunities and neglect. Journal of Retailing, 69(3), 320–352. Ping, R. A., Jr. (1995). Some uninvestigated antecedents of retailer exit intention. Journal of Business Research, 34(3), 171–180. Ping, R. A., Jr. (1997). Voice in business-to-business relationships: Cost-of-exit and demographic antecedents. Journal of Retailing, 73(2), 261–281. Ping, R. A., Jr. (1999). Unexplored antecedents of exiting in a marketing channel. Journal of Retailing, 75(2), 218–241. Ping, R., & Dwyer, F. R. (1992). A preliminary model of relationship termination in marketing channels. Advances in Distribution Channel Research, 1, 215–233. Prim-Allaz, I. (2000). Les ruptures de relations de long terme entre organizations: contribution a` l’e´tude des determinants. Une application aux relations Banque-PME. Ph.D. Dissertation [Interorganizational long term relationship terminations: A study of the antecedents- an empirical study on banks-SME relationships]. Unpublished Ph.D Dissertation: Universite´ Paris IX—Dauphine. Rousseau, D. M. (1985). Issues of level in organizational research: Multi-level and cross-level perspectives. Research in Organizational Behavior, 7, 1–37. Schultz, R. J., Evans, K. R., & Good, D. J. (1999). Intercultural interaction strategies and relationship selling in industrial markets. Industrial Marketing Management, 28, 589–599. Seabright, M. A., Levinthal, D. A., & Fichman, M. (1992). Role of individual attachments in the dissolution of interorganizational relationships. Academy of Management Journal, 35(1), 122–160. Searle, W., & Ward, C. (1990). The prediction of psychological and sociocultural adjustment during cross-cultural transitions. International Journal of Intercultural Relations, 14, 449–464. Seidler, J. (1974). On using informants: A technique for collecting quantitative data and controlling measurement error in organization analysis. American Sociological Review, 39, 816–831. Shapiro, B. P. (1988). Close encounters of the four kinds: Managing customers in a rapidly changing environment. Working paper no.9-589-015. Harvard Business School. Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32(3, (3rd qtr.)), 519–535. Simintiras, A. C., & Thomas, A. H. (1998). Cross-cultural sales negotiations. A literature review and research propositions. International Marketing Review, 15(1), 10. Stewart, K. (1998). The customer exit process – a review and research agenda. Journal of Marketing Management, 14, 235–250. Ta¨htinen, J., & Havila, V. (Eds.) (2004). Editorial: Enhancing research in exchange relationship dissolution. Journal of Marketing Management, 20, 919–926. Thomas, D. C. (1991). Boundary spanning behavior of expatriates: A model of internal exchange in the multinational corporation. Academy of Management Proceedings, 5, 110–114. Thomas, D. C. (1998). The expatriate experience: A critical review and synthesis. Advances in International Comparative Management, 12, 237–273.

240

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

Triandis, H. C. (2000). Culture and conflict. International Journal of Psychology, 35(2), 145–152. Vaaland, T. I., Haugland, S. A., & Purchase, S. (2004). Why do business partners divorce? The role of cultural distance in inter-firm conflict behavior. Journal of Business-to-Business Marketing, 11(4), 1–21. Wathne, K. H., Biong, H. & Heide, J. B. (2000). Supplier choice in embedded markets: Relationships and marketing mix effects. Presented at FIBE XVII, Norwegian School of Economics and Business administration, January 6-7, 2000. Weaver, G. (1994). Culture, communication and conflict: Readings in intercultural relations. Londen: Simon & Schuster Custom Publishing. Wilkinson, I. (1981). Power, conflict and satisfaction in distribution channels – an empirical study. International Journal of Physical Distribution and Materials Management, 11(7), 20–30. Williams, J. D., Han, S., & Qualls, W. J. (1998). A conceptual model and study of cross-cultural business relatiosnhips. Journal of Business Research, 42, 135–143. Zaheer, A., McEvily, B., & Perrone, V. (1998). Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance. Organization Science, 9(2), 141–159.

APPENDIX A Table A1. Description of Items Scale Cultural knowledge (CK) Reliability: a ¼ 0.89)

Cultural adaptation (CA) Reliability: a ¼ 0.86)

Sample of Items CK1: This supplier representative has good knowledge about French society and culture CK2: This supplier representative has a good understanding of French norms and customs CK3: This supplier representative speaks well French (Response anchors; 1–7: ‘‘Strongly disagree – strongly agree’’) CA1: This supplier representative has put a lot of energy in understanding my way of thinking CA2: This supplier representative has invested much time to comprehend my values and beliefs CA3: This supplier representative has put a lot of energy into adapting to my way of negotiating CA4: This supplier representative has made an effort to become accustomed to my way of handling disagreements (Response anchors; 1–7: ‘‘Not at all – to a large degree’’)

241

Cross-National Business Relationships

APPENDIX A Scale Communication (C), Reliability, a ¼ 0.85)

Tolerance of conflict (TC) Reliability a ¼ 0.80)

Availability of alternative suppliers

(Continued ) Sample of Items

C1: This supplier representative keeps us well informed about what is going on in their firm and related activities C2: This supplier representative seeks our advice and counsel concerning their marketing efforts C3: This supplier representative is willing to let us see their weaknesses as well as their strengths C4: This supplier representative will share confidential information to help us (Response anchors; 1–7: ‘‘Strongly disagree – strongly agree’’) TC1: If this supplier occasionally delivers products of lower quality than our firm require, we would consider to leave the current partner TC2: If this supplier holds back information that could be useful to us, we would consider leaving the current partner TC3: If this supplier demands too high prices, we would consider to leave the current partner TC4: If this supplier occasionally does not respond in order to correct failures, we would consider to leave the current partner (Response anchors; 1–7: ‘‘Very likely – not likely at all’’) If this supplier-relationship is dissolved other firms can deliver what we buy from this supplier

(Single-item construct) (Response anchors; 1–7: ‘‘Not true at all – perfectly true’’) Satisfaction with supplier relationships (s) Reliability a ¼ 0.92) S1: Overall, we are satisfied with the supplier representative S2: In general, we are satisfied with the supplier firm

242

INGER BEATE PETTERSEN AND AKSEL I. ROKKAN

APPENDIX A Scale

(Continued ) Sample of Items

S3: Our relationship with this supplier is not at all pleasant S4: All in all, the quality of products delivered from this firm is satisfactory S5: All in all, the quality of services provided from this supplier is satisfactory S6: Overall, the quality of the relationship with this supplier is good (Response anchors; 1–7: ‘‘Strongly disagree – strongly agree’’) Relationship length RL: How many years have you done business with your supplier? (Open ended question)

Table A2. Correlation Matrix and Descriptive Statistics Variables 1. Tolerance of conflict 2. Communication 3. Cultural knowledge 4. Cultural adaptation 5. Cultural knowledge  cultural adaptation 6. Availability of alternative suppliers 7. Overall satisfaction with supplier relationship 8. Relationship length

1

2

1.00

0.336

3

4

0.014

1.00

0.333 0.502 1.00 0.274

0.163

1.00

5

6

7

8

0.232

0.084

0.149

0.042

0.174 0.044

0.143 0.057

0.404 0.287

0.122 0.135

0.285

0.039

0.285

0.280

1.00

0.045

0.035

0.172

1.00

0.020

0.017

1.00

0.212

1.00

243

Cross-National Business Relationships

Table A2. (Continued ) Variables Descriptive statistics Mean values Standard deviation Minimum Maximum

1

4.48 1.4 1.00 7.00

2

3

4

5

3.94 1.8 1.00 7.00

4.45 1.9 1.00 7.00

3.77 1.7 1.00 7.00

0.8 3.57 7.7 9.5

6

5.78 1.7 1.00 7.00

7

8

5.26 0.7 2.7 6.2

7.6 6.3 1.00 30.0

Note: Values given for the interaction term were divided by 12 (3  4). Length of relationship is given in number of years.  Correlation is significant at the 0.01 level (1-tailed).  Correlation is significant at the 0.05 level (1-tailed).

This page intentionally left blank2

244

IDENTIFYING DIFFERENCES IN FOREIGN CUSTOMERS’ RELATIONAL BEHAVIOR: AN EXPLORATORY STUDY USING MULTIDIMENSIONAL SCALING Bjo¨rn Sven Ivens INTRODUCTION In the literature on relationships, many important aspects such as relationship outcomes (e.g. relationship quality, customer satisfaction) (Holmlund & Kock, 1995; Crosby, Evans, & Cowles, 1990; Homburg & Rudolph, 1997), antecedents (e.g. power, trust, commitment) (Kaufmann & Dant, 1992; Doney & Cannon, 1997; Morgan & Hunt, 1994), or the structure of relationships (e.g. processes, organizational approaches) (Parvatiyar & Sheth, 2000; Homburg, Workman, & Jensen, 2000) have been discussed as well as analyzed empirically. Other issues have received less attention. For example, summarizing the research on international relationships in the 1980s, Douglas and Craig (1992) state: ‘‘While the management of buyer–seller relationships has become an increasingly important issue (...), the complexity of buyer–seller relationships in an international context has been sadly neglected’’. A more Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 245–266 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16010-4

245

246

BJO¨RN SVEN IVENS

recent meta-analysis (Kiedaisch, 1997) shows that, although new contributions to the field have been published, the appreciation made by Douglas and Craig remains valid. This outcome is astounding, given that empirical studies reveal important effects of the international setting on relationships. For example, they show that, as compared to domestic relationships, in an international context:  the frequency and intensity of contacts between buyers and suppliers are lower (Johanson & Wootz, 1986; Ha˚kanson, 1986; Halle´n, 1986);  the social distance between the parties to a relationship is higher (Johanson & Halle´n, 1989);  the willingness for adaptation and investments into the relationship is lower (Cunningham, 1986; Valla, 1986; Halle´n, Johanson, & SeyedMohamed, 1987);  the average duration of buyer–seller relationships is lower (Spencer, Wilkinson, & Young, 1996); and  the level of governance (market governance as well as trust) is lower (Homburg, Kiedaisch, & Cannon, 1997). All of these studies focus on differences between, on the one hand, domestic relationships and, on the other, relationships with partners from a foreign country. The underlying assumption appears to be that a customer’s or a supplier’s foreign origin exerts an important influence on relationships, whereas his specific nationality receives no particular attention. This stream of research has generated general insights into the difficulties of relationship management with foreign partners. Nevertheless, current contributions to the field of relationship marketing suggest that it is not simply a customer’s foreign origin in general which matters, but rather the specific characteristics of his particular cultural background (Bjo¨rkman & Kock, 1995; Palmer, 1995). If this is the case, then export managers need frameworks describing: (a) along which dimensions foreign customers and their relational behavior can be classified; and (b) where specific national cultures are positioned along these dimensions. In order to identify such dimensions, two approaches are possible (see Fig. 1): the first is the conceptual development of a theoretical framework (1); the second is empirical exploration using adequate multivariate methods (2). Empirical exploration can take place in two different forms: Either the researcher formulates a set of statements (or variables) allowing to describe foreign cultures and then attempts to identify an underlying factor structure

Identifying Differences in Foreign Customers’ Relational Behavior

247

Identification of dimensions

(1) Conceptual development

(2a) Analysis of factor structure

Fig. 1.

(2) Empirical exploration

(2b) Mind mapping

Alternative Approaches for the Identification of Dimensions of National Relational Behaviors.

(2a), or he uses a method where no ex ante formulation of statements is required (mind mapping, 2b). The conceptual approach (1) is represented by the work of Macneil (1978, 1980). It has been largely drawn upon in empirical relationship marketing studies. He defines a set of 10 dimensions along which relational behavior can vary. However, his work shows some weaknesses. In fact, Macneil (1980) himself admits that his framework has not been developed through theoretical deduction and is somewhat arbitrary. He states: ‘‘This cake can undoubtedly be sliced in many ways’’ (p. 40). Moreover, he has never attempted to operationalize his constructs for empirical research. Operationalizations made by authors in the field of marketing provide little help since they are fragmentary and selective (Ivens & Blois, 2004). Finally, cultural differences along Macneil’s dimensions have never been studied. Other authors (e.g. Hall & Hall, 1990; Hampden-Turner & Trompenaars, 2000) have formulated dimensions (such as e.g. context orientation, time orientation, inner vs. outer direction, or universalism vs. particularism) along which cultures vary. However, they also lack theoretical foundation and we do not know to what extent they are relevant in the context of business relationships. The second approach, empirical exploration (2), also does not provide specific results for international relationship marketing. Representative for studies of type (2a) is the work of Hofstede (1991) which has received tremendous attention. His research identifies four dimensions (power distance, masculinity, uncertainty avoidance, and individualism) along which national cultures can be positioned. However, the underlying questionnaire focused upon employees’ attitudes toward the workplace. Whether these

248

BJO¨RN SVEN IVENS

results can be applied to the field of international relational behaviors has never been examined. Hence, the dimensions along which international marketers evaluate or classify their foreign business partners remain largely unknown. My main purpose in this article is to present the results of an exploratory study aiming at identifying such dimensions along which export managers classify foreign customers’ relational behavior. In order to do so I follow a research approach of type (2b), i.e. I use a statistical method, which is not primarily based upon an ex ante formulation of statements about cultures. This research contributes to the study of international business relationships in two ways. Firstly, it employs a new method in order to study an underresearched topic. Secondly, a comparison of the results obtained with the Hofstede classification should provide some empirical evidence whether Hofstede’s results might be transferable to the field of international relationship marketing. In the remainder of this article, I first describe the methodological approach chosen for this purpose. Next, I present and discuss the results of a survey conducted among German export managers using multidimensional scaling (MDS). These results comprise the initial MDS configuration, property fitting, and the determination of the extracted dimensions’ relative weights. Finally, limitations of the study are discussed and possible future extensions presented.

THE RESEARCH APPROACH The Choice of Multidimensional Scaling Identifying the criteria along which an object is being classified in an observer’s mind implies discovering the dimensionality of the judging individual’s perceptual space (Machay, Easley, & Zinnes, 1995). Globally, two alternative methods exist for perceptual mapping, factor analysis, and MDS (Bijmolt & Wedel, 1999; Lewis-Beck, 1994). Whereas the objective of confirmatory factor analysis is to verify whether a factor structure posited on the basis of deductive theoretical reasoning corresponds to the structure of empirical data, exploratory factor analysis verifies whether it is possible to reduce the dimensionality of a set of items characterizing an object to a lower number of factors representing the original items. In both cases, the researcher needs to dispose of some certitude concerning the characteristics that adequately describe an object. Whenever this is not the case, to

Identifying Differences in Foreign Customers’ Relational Behavior

249

providing respondents to a survey with characteristics describing an object may lead to incorrect results (factor structures) because the characteristics given may not cover all relevant aspects. MDS, on the other side, does not require any ex ante specification of items describing the object(s) studied (Cooper, 1983). It is based on global similarity judgements a respondent makes about a given number of objects. In the method’s purest version, the criteria on which the respondent bases his judgements remain concealed. In the context of international relationships, undoubtedly a large number of characteristics potentially underlying export managers’ perception of their foreign customers (e.g. their trustworthiness, their flexibility, their planning behavior, or their role integrity) exist. However, to the best of our knowledge, even in a domestic setting no comprehensive set of items describing customer behavior in relationships is available. Existing operationalizations of the construct ‘relational behavior’ differ considerably (see e.g. Leuthesser & Kohli, 1995; Lusch & Brown, 1996; Kaufmann & Dant, 1992). Furthermore, no empirical research examining cross-cultural variations in the dimensions of relational behavior exist. Hence, the character of our study is exploratory. Accordingly, we opted for the method, which exerts the least ex ante influence possible on the potential outcome of our study. This method is MDS. The Design of the Study In order to detect the implicit dimensions along which international salesmen perceive their foreign customers’ relational behavior we conducted a written survey among German export managers. The research setting chosen for the study comprised five industries in which German companies hold strong positions on export markets: electronics, machine building, pharmaceutics, food processing, and chemical products. These groups were selected in order to capture a sufficient variety of selling relationships. Our sampling frame consisted of a list of companies with their headquarters located in Germany. The companies were contacted by telephone in order to identify qualified respondents who had sufficient experience in selling relationships with customers from all countries included in the study and in order to solicit their participation. It was also required that participants be of German nationality in order to exclude potential bias. The final response (after follow-up) comprised 130 questionnaires. Of these questionnaires, 121 proved to be usable. The managers were asked to evaluate the similarity of business-to-business relationships with customers from 10 selected countries. The nationalities

250

BJO¨RN SVEN IVENS

included in the study cover Germany’s main trading partners on four continents: Sweden, Poland, Italy, France, USA, Brazil, South Africa, Japan, and the People’s Republic of China. Domestic relationships with German customers were included as a tenth object to obtain a reference point. Respondents were asked to make pairwise similarity judgements about the behavior a typical customer from each country shows in relationships, attributing ranks from 1 ¼ very similar to 7 ¼ very dissimilar (see Appendix A). The number of similarity judgements required in a complete questionnaire is nðn 1Þ=2 ¼ 45: Hence, the administration of the sole similarity section of the questionnaire represented a time-consuming task for respondents with obvious consequences on the samples willingness to participate in the study.

THE RESULTS OF THE BASIC MDS SOLUTION The main advantage of MDS in its most basic form is the easy presentation of data, displaying interrelationships among stimuli (Carroll & Green, 1997). MDS is based on an iterative process with the aim of mapping objects in a space of low dimensionality in which the perceived dissimilarity between two stimuli is represented by a corresponding distance. In the final solution, more similar objects will be located closer to each other than more dissimilar objects (Kruskal & Wish, 1989). The main task for the researcher is to determine the dimensionality of the perceptual space which best fits the data. Data analysis has been conducted using nonmetric MDS in SPSS. For the aggregation of individual similarity judgements, the replicated MDS (RMDS) technique has been applied. RMDS is considered to lead to relatively exact solutions as compared to alternative approaches. It offers the additional advantage that (based upon programs like e.g. INDSCAL) the individual weights attributed to the dimensions in the final solution by respondents may be represented. This method is called weighted MDS (WMDS) (Schiffmann, Reynolds, & Young, 1981). In order to determine the dimensionality of German managers’ perceptual space, solutions for one to six dimensions have been calculated using WMDS. For each solution, the stress value is represented in Table 1. The stress measure permits to evaluate the coherence between an n-dimensional configuration and the original data. The lower the stress measure, the better the configuration. The stress measure may be reduced by a modification of the configuration or by increasing the number of dimensions. Based upon Fig. 2, a three-dimensional solution appears to best represent the data on the lowest possible dimensionality.

251

Identifying Differences in Foreign Customers’ Relational Behavior

Table 1. Correlation between Preferences for Relationships with Customers from Specific Countries and the Total Annual Turnover Realized with the Country. Country

Correlation Coefficient (Spearman–Rho)

Brazil P.R. of China France Italy Japan Poland Sweden South Africa USA

Level of Significance

0.394 0.438 0.088 0.167 0.350 0.104 0.413 0.151 0.085

Non Non Non Non Non

0.05 0.05 significant significant 0.05 significant 0.01 significant significant

0.35 0.30

STRESS

0.25 0.20 0.15 0.10 0.05 0.00 1

2

Fig. 2.

3 4 Dimensions

5

6

Stress Graph.

A second criterion applied to the determination of a perceptual space’s dimensionality is coefficient Q. Q permits to evaluate the level of compression the data suffers through the process of iteration. It is calculated by dividing the number of similarities by the number of output data. A common rule is that Q should be equal or superior to a value of two (Backhaus, Erichson, Plinke, & Weiber, 2000). Figure 3 shows the values of coefficient Q for one- to six-dimensional configurations. On the basis of this criterion, a maximum of two dimensions should be extracted from the data.

BJO¨RN SVEN IVENS

252 5 4.5 4 3 Q

2.25 2

1.5

1.125

1

0.9

0.75

0 1

2

Fig. 3.

3 4 Dimensions

5

6

Graph for Coefficient Q.

A third and final criterion to be applied to the determination of the optimal dimensionality of an MDS configuration is whether the solution is interpretable. Only those dimensions which can be interpreted contribute to the objective of MDS. Or, to put differently: ‘‘Dimensions that cannot be interpreted probably do not exist’’ (Schiffmann, Reynolds, & Young, 1981, p. 143). Accordingly, a configuration may represent a ‘good’ solution despite high stress values (Borg & Groenen, 1997). By anticipating the following section, the introduction of an additional third dimension to the configuration did not lead to an improved interpretability. Hence, the twodimensional space appears to best fit the empirical data collected on German managers’ perception of their foreign customers’ relational behavior. This solution is presented in Fig. 4. In this configuration, a clear distinction between, on the one hand, ‘the western world’ in a broad sense of the term, and on the other, the two Asian countries included in the study, Japan and the P.R. of China, appears. Obviously, German managers perceive a wide gap between the relational behavior of these two groups of customers. The horizontal axis of the configuration is the one which accounts for this variance. Clearly, western customers merely differ on this dimension. However, dimension two is the one which permits to differentiate between the (culturally very heterogeneous) countries in this group. The visual impression that two groups, one situated in the southern hemisphere and comprising Romanic cultures such as France and Brazil, one located in the northern hemisphere and comprising Anglo-Germanic and Slavic cultures, has been tested using cluster analysis. The results confirmed the three cluster solution. Although this configuration hints to some important variation between the relational behaviors of foreign customers with different national backgrounds,

253

Identifying Differences in Foreign Customers’ Relational Behavior 2 Poland Sweden 1

Germany USA

Japan 0

France China -1

Italy South Africa Brazil

-2 -2

-1

Fig. 4.

0

1

Basic Two-dimensional Perceptual Space.

it does not grant us with any information on how to interpret the two dimensions. This shortcoming of traditional MDS may be overcome by including information about typical characteristics of the stimuli into the analysis. Such an approach is called property fitting. The results of the property fitting analysis conducted are presented in the next section of this article.

INTERPRETATION USING PROPERTY FITTING In order to facilitate the interpretation of the final MDS configuration, the questionnaire comprised additional scales to measure to what extent respondents considered specific properties to be characteristic for their foreign customers’ relational behavior. A total of eight properties was included in the questionnaire. The respective statements were derived from existing studies on cultural dimensions (Backhaus et al., 2000; Mead, 1994; Usunier, 1991). The scales measuring the properties are included in Appendix B. The properties cover the following aspects: Formalization, frequency of contacts, importance of context in communication, improvisation, selfassertion, importance of private contacts, individual vs. collective decisionmaking, and time orientation.

BJO¨RN SVEN IVENS

254

On the basis of these data, property fitting was conducted. Since not all properties included in the questionnaire dispose of natural ideal points, an ideal vector model was chosen for this part of the analysis. In addition, a comparison of F values showed higher significance of the ideal vector as compared to the ideal point model. The calculation of the property vectors was conducted on the basis of regression analysis (Backhaus et al., 2000). The resulting property vectors were then compared with the two dimensions extracted in the initial MDS analysis. The positions of the eight property vectors allow the following interpretation of the two-dimensional configuration (Fig. 5). The horizontal dimension discriminates between two types of business cultures. On the one hand, relationships with nationalities located toward the left extreme are characterized by high formalization, self-assertion, and the importance of context for communication. Customers from Japan and the P.R. of China represent this relational style. German export managers consider them to concentrate rather on their own interests than on mutuality, they feel that numerous explicit and implicit rules govern relationships in these two countries, and, when communicating with their sellers, the verbal content of Japanese and Chinese customers’ messages is often accompanied and completed by contextual information, such as gestures, status, or timing.

1

formalization Japan

0

efficiency vs. social ⇐ orientation ⇒

2 Poland Sweden time is money Germany USA improvisation

⇐ cooperation ⇒ self-assertion China

frequent contacts France

importance of context

-1

private contacts

Individual decision-taking Italy South Africa Brazil

-2

-2

-1

Fig. 5.

0

Perceptual Space with Property Vectors.

1

Identifying Differences in Foreign Customers’ Relational Behavior

255

On the other hand, we find the nationalities located toward the right of the horizontal dimension. They comprise all non-Asian business cultures included in our study. Properties characterizing this group are improvisation, frequent contacts, and individual decision-making. Businessmen from countries such as the USA, France, or Italy are considered to be able and willing to show flexibility when new situations arise. Hence, German managers consider their relational style to be characterized by a talent for adaptation or improvisation. Finally, the correspondents feel that, in business relationships with partners from these countries, contacts take place frequently and on diverse levels. Based upon the proximity between the six properties discussed and the horizontal dimension it appears that the central aspect it grasps is the way the continuous cooperation between buyer and seller takes place. Hence, we name this dimension ‘‘cooperation’’. The second dimension spans between the extremes efficiency orientation vs. social orientation. Sweden, Germany, Poland, and the USA are situated on the efficiency side of this dimension. German export managers feel that the attitude of their customers from these countries is best described by the statement ‘‘time is money’’. Accordingly, close personal interaction or friendship are not attributed high importance. Rather, their customers expect a convincing quality/cost ratio and value timely and correct execution of orders. In relationships with countries like Italy, South Africa, France, and Brazil, on the other hand, close personal relationships with the respective partners play an important role. In some cases, like for example China, personal relationships are not so much the result of, but may often constitute a prerequisite for repeated economic transactions.

Weights and Preferences As the above presented results show, two dimensions, cooperation and efficiency vs. social orientation, structure the respondents’ perceptual space. However, the configuration does not give any indications as to how much importance export managers attribute to these distinct aspects of relational behavior. The WMDS method used for analysis also calculates the subjective weights each individual attributes to the dimensions. These weights are represented in Fig. 6. Each subjective weight represents the end of a vector starting at the point of intersection of the two dimensions. The graphic representation clearly indicates that the way foreign customers cooperate in an relationships is attributed higher importance by respondents than the question if the customer emphasizes personnel interaction and

BJO¨RN SVEN IVENS

efficiency vs. social orientation

256

cooperation Fig. 6.

Individual Weights for the Two Dimensions of the Perceptual Space.

friendship. Note that this result, at least as much as the basic configuration, may be culturally biased. German export managers come from a culture which, on the customer side, is considered to attribute low importance to social aspects of business relationships. As a consequence, it is not astounding, that an efficient and frictionless coordination of transactions with foreign customers is more important to them than the degree of human exchange their customers seek. We would expect that the distribution of subjective weights would be different from the one in this study if it was to be repeated in a different cultural setting, e.g. in countries such as the P.R. of China or Brazil. In addition to the scales measuring certain properties of relational behavior, the marketers participating in our study were asked to rank the different nationalities according to their preferences for specific national relationship styles (see Appendix C). Again, a choice had to be made between the ideal point and the ideal vector model. A comparison of F-values indicated that the vector model would be more appropriate. In addition, 14 ideal points calculated proved to be anti-ideals, rendering their interpretation difficult. The individual preference vectors of the participants are represented in Fig. 7.

257

Identifying Differences in Foreign Customers’ Relational Behavior 2 Poland Sweden

1

Germany USA Japan

0 France China

-1

Italy South Africa Brazil

-2

-2

Fig. 7.

-1

0

1

Individual Preference Vectors in the Perceptual Space.

In fact, only three managers show preferences differing from the prevailing attitude represented by the field of vectors directed toward the right of the figure. The majority of German export managers clearly appreciate customers whose interaction behavior is characterized by flexibility, frequent contacts, and individual decision-making. An assumption made in certain schools of thought (e.g. Carlson, 1975; Halle´n & Wiedersheim, 1979) is that preferences for certain cultures exert an impact on the importance (e.g. in terms of time or financial investments) attributed to transactions with economic actors from the respective countries. In order to examine whether this assumption could be verified on the basis of our sample we also asked respondents to provide the relative annual turnover they made with customers from each of the countries integrated in the study. The results are represented in Table 1. On the basis of these data, the hypothesized relationship cannot be confirmed on a general level. While we observe a significant impact of cultural closeness on turnover for certain countries, in others the correlation is not statistically significant. This hints to the fact that export managers do not dispose of complete freedom concerning the choice of their customers. In certain cases his company’s global sales strategy may oblige him to execute imperatives, irrespective of his personal likes and dislikes. It appears possible that cultural proximity may be relevant whenever export managers

BJO¨RN SVEN IVENS

258

have the choice which markets they want to allocate time and money to. In certain cases, however, they may be obliged to deal with customers even if they feel a strong cultural distance (e.g. because their company is in an economically difficult situation or because they receive the order to do so).

CONCLUDING REMARKS Discussion The initial observation made in the introduction of this article was that today, despite considerable emphasis given to relationship marketing in management practice and theory, the literature about the impact of national culture on relational behavior in relationships is merely developed. Hence, we attempted to contribute to the development of empirical evidence on international relationships. Our study analyzes whether export managers perceive their foreign customers’ relational purchasing practices to vary systematically. Particularly, we attempted to detect those dimensions along which this relational behavior varies. Summarizing our results, international relationships prove not to be all alike. Export managers distinguish between different national relationship styles. Two major dimensions have emerged from our study. The first dimension distinguishes between relationships with customers from cultures showing a rather formalized, distant, and egoistic relational style. The second dimension differentiates between, on the one side, those cultures which are relatively more content oriented, focusing on the core business and following a ‘‘time is money’’ mentality and, on the other, cultures in which private contacts play a more important role when conducting business. The German export managers constituting our sample clearly attribute more importance to the first dimension. In addition, they show a clear preference for the relational styles of their western customers as compared to customers from the Asian countries included in our study. When examining the link between these preferences and the relative economic importance of customers from different countries, no general relationship could be detected. Managerial implications of these results are at least threefold. First, the breadth of the distribution of national cultures along the two axes show that export managers are facing a wide array of different relational styles in their set of potential customers. It could be argued that such large distances

Identifying Differences in Foreign Customers’ Relational Behavior

259

between perceptions of nationalities are somewhat surprising in international business markets. The actors on business markets are often expected to behave in a more rational manner than customers on consumer markets. One could even hypothesize that following today’s globalization logic, cultural distances should almost represent ‘‘vestiges of the past’’ (Levitt, 1983, p. 17). However, it appears that national relational styles exist. For industrial companies this means that the cultural dimensions cannot (yet?) be neglected in international sales management. This observation leads to the second implication. If cultural distances are large and if managers have likes and dislikes for certain cultures, then companies’ recruitment policy should take this factor into account. Several criteria, such as selling skills, product knowledge, or competitive capabilities, may be relevant when selecting an export manager for a specific region. The results of this study suggest that perceptual proximity with the target market(s) should have its place in the selection process for international sales managers. The third implication applies to companies in which export managers must work with customers from cultural backgrounds they do not feel close to, for example because they are the sole employee in the export department or because they have been selected for their job based on criteria which are not related to cultural features. Controlling departments often doubt whether investments into cultural trainings are necessary. They have problems measuring investments into soft skills. However, cultural distance is not necessarily an invariable personality trait. Cultural distance may be reduced through the acquisition of knowledge about a market or culture (Johanson & Vahlne, 1977). Hence, where export managers have customers from a variety of cultural backgrounds, specific trainings may reduce potential problems.

Limitations Obviously, the generalizability of the results from this study is restricted. Given the exploratory character of our analysis, various limitations need to be highlighted. First, the empirical basis of our study is relatively restricted. On the basis of a sample of 121 respondents, we were able to conduct all intended analysis. Nevertheless, compared to many other empirical studies in the field of relationship marketing, this sample size is situated toward the lower end of the size continuum. However, the requirements concerning potential

260

BJO¨RN SVEN IVENS

respondents were exceptionally high. Particularly, the export managers initially contacted needed to have a substantial experience in conducting business with customers from nine different countries. These countries are located on four different continents and their economic and cultural background is very heterogeneous. Given the often prevailing regional organization of foreign sales and export departments, only few managers actually work with customers worldwide throughout their carrier. Hence, it was difficult to identify a large number of competent respondents. Given this situation, we consider our sample to be of a reasonable, if not completely satisfactory size for this type of study. Second, concerning the origin of the respondents, our study has a clear mono-national focus. In fact, the sample is exclusively made up of German export managers. Again, this situation is based upon a deliberate decision to restrict the scope of the study. The nature of this work is exploratory. Hence, we considered it appropriate to focus on respondents from only one country. The concentration on a single nationality allowed us to control for cultural bias in the data gathered. Third, only a limited number of target markets or ‘‘customer-country-oforigins’’ has been included in this study. We restricted our questionnaire to 10 large foreign trading partners of Germany covering four continents and very heterogeneous cultural backgrounds. Of course it would have been desirable to obtain results about perceived cultural similarities or distances for a larger number of countries, like for example in the large scale work conducted by Hofstede (1991) which covers over 50 countries, describing each national culture through five dimensions. However, a conflict exists between the method chosen for this study, MDS, and the number of nationalities that can be studied. MDS is based upon similarity judgements individuals make about given stimuli. Different approaches exist in order to collect the similarity judgements required (Cox & Cox, 2001). The approach chosen in our case, pair-wise similarity judgements, necessitates the lowest possible number of similarity judgements. In our case including 10 nationalities, a total of 45 similarity judgements were required from each respondent. Thus, the sole similarity judgements in the questionnaire were time consuming and respondents needed to concentrate on each pair to be compared. With each additional stimulus included, the number of required similarity judgements increases progressively, limiting both the sample frame’s willingness to participate in the study and the reliability of the respondents’ judgements. On the other hand, given the current state of theoretical knowledge and the aim of our study, we wanted to benefit from the relative openness of the MDS approach as compared to factor analysis.

Identifying Differences in Foreign Customers’ Relational Behavior

261

Clearly, in order to include a larger set of stimuli, a switch from the purely exploratory approach MDS represents to factor analysis will be inevitable. Nevertheless, we believe that for the purpose of this study, MDS has proven to be a helpful analysis instrument. Despite these limitations, we feel our study hints to the importance of taking inter-cultural differences in relational behavior into account. It represents a first step toward detecting perceptual spaces. By applying the same concept to additional countries, on the exporter as well as on the customer side, a large set of position variables may be constituted. These variables, integrated into a larger cross-cultural study with relevant outcome variables might allow more profound insights into the effect of behavioral differences and managerial perceptions of these differences on the management of international business relationships.

Research Directions As highlighted at the beginning, the character of this study is exploratory. Hence, it is meant to provide first insights into a potential field of research. From our results as well as the limitations of our work, different research directions emerge. First, since the sample was only constituted by German export managers, our study should be replicated in different national contexts. Reliable and valid results about the dimensions that structure the perceptual space of e.g. American, French, or Japanese export managers will allow to verify whether the dimensionality of the space and the denomination of the dimensions are alike in different cultures or not. If so, then a matrix containing the distances export managers perceive between them and their foreign customers might be constituted. Second, in an inverse perspective, it would be interesting to study the perceptions of customers about their foreign sellers’ relational behavior. This way, the results of the studies on the selling side might be validated. Also, it could be verified whether the dimensions underlying purchasing managers’ perceptions are identical with the ones identified among their sellers. Moreover, additional countries will have to be looked at. Depending upon the export market studied, different nations constitute important trading partners. Even if similar studies to this one will not cover all potential target markets on earth, at least more major industrialized and emerging markets should be studied.

BJO¨RN SVEN IVENS

262

Finally, the relationship between the preference for specific national relational styles and important outcome variables in relationship market should be studied using other performance measures than turnover. Particularly, idiosyncratic relationship outcomes, such as trust, commitment, or loyalty might be focused upon. In addition, these variables would more appropriately be measured on the customer than on the seller side of the dyad. On this basis, future studies in the field of international relationships, e.g. in the area of export management, might integrate relationship styles into their analysis by considering the similarity of relational behaviors between buyer and seller. Behavioral distances might prove to be an important explaining variable for different key constructs in relationship marketing, such as relationship quality or customer satisfaction. Currently, Hofstede’s cultural dimensions are usually drawn upon in order to represent cultural distance. However, it may be doubted whether these universally used and recognized characteristics of national culture are the most appropriate descriptors of the gap between the relational behaviors of an export manager from country A and his customer from country B. A more relationship marketing-focused set of descriptors might prove to be a useful tool for studies in the field of international relationships. However, we are far from disposing of even a sketch of what these descriptors might be. The purpose of this study is to contribute some first insight into what relational descriptors might look like.

REFERENCES Backhaus, K., Erichson, B., Plinke, W., & Weiber, R. (2000). Multivariate analysemethoden. Berlin: Springer Chapter 9. Bijmolt, T. H. A., & Wedel, M. (1999). A comparison of multidimensional scaling methods for perceptual mapping. Journal of Marketing Research, 36(2), 277–285. Bjo¨rkman, I., & Kock, S. (1995). Social relationships and social networks: The case of western companies in China. International Business Review, 4(4), 519–535. Borg, I., & Groenen, P. (1997). Modern multidimensional scaling – theory and applications. New York: Springer (p. 38). Carlson, S. (1975). How foreign is foreign trade? A problem in business research. Studiae Oeconomiae Negotiorum, 11, 11–26. Carroll, J. D., & Green, P. E. (1997). Psychometric methods in marketing research: Part II, multidimensional scaling. Journal of Marketing research, 34(2), 193–204. Cooper, L. G. (1983). A review of multidimensional scaling in marketing research. Applied Psychological Measurement, 7(Fall), 427–450. Cox, T. F., & Cox, M. A. A. (2001). Multidimensional scaling. Boca Raton: Chapman-Hall.

Identifying Differences in Foreign Customers’ Relational Behavior

263

Crosby, L., Evans, K., & Cowles, D. (1990). Relationship quality in services selling: An interpersonal influence perspective. Journal of Marketing, 54(3), 68–81. Cunningham, M. (1986). The British approach to Europe. In: P. Turnbull & J.-P- Valla (Eds), Strategies for international industrial marketing: The management of customer relationships in European industrial markets. London: Croom Helm. Doney, P. M., & Cannon, J. P. (1997). An examination of the nature of trust in buyer–seller relationships. Journal of Marketing, 61(2), 35–51. Douglas, S., & Craig, C. (1992). Advances in international marketing. International Journal of Research in Marketing, 9, 291–318 p. 297. Ha˚kanson, H. (1986). The Swedish approach to Europe. In: P. Turnbull & J.-P- Valla (Eds), Strategies for international industrial marketing: The management of customer relationships in European industrial markets. London: Croom Helm. Hall, E. T., & Hall, M. R. (1990). Understanding cultural differences – Germans, French and Americans. Yarmouth: Intercultural Press. Halle´n, L. (1986). A comparison of strategic marketing approaches. In: P. Turnbull & J.-P. Valla (Eds), Strategies for international industrial marketing: The management of customer relationships in European industrial markets. London: Croom. Halle´n, L., Johanson, J., & Seyed-Mohamed, N. (1987). Relationship strength and stability in international and domestic industrial marketing. Industrial Marketing and Purchasing, 2(3), 22–37. Halle´n, L., & Wiedersheim, P. F. (1979). Psychic distance and buyer–seller interaction. Organisasjon, Marked og Samfunn, 16, 308–324. Hampden-Turner, C. M., & Trompenaars, F. (2000). Building cross-cultural competence – how to create wealth from conflicting values. New Haven: Yale University Press. Hofstede, G. (1991). Cultures and organizations: Software of the mind. London: McGraw-Hill. Holmlund, M., & Kock, S. (1995). Buyer perceived service quality in industrial networks. Industrial Marketing Management, 24, 109–121. Homburg, C., Kiedaisch, I., & Cannon, J. P. (1997). Governance mechanisms in transnational business relationships, Working Paper No.6, Center for Market-Oriented Management, Otto Beisheim Graduate School, Koblenz/Germany. Homburg, C., & Rudolph, B. (1997). Customer satisfaction in industrial markets: Dimensional and multiple role issues, Working Paper No.4, Center for Market-Oriented Management, Otto Beisheim Graduate School, Koblenz/Germany. Homburg, C., Workman, J. P. Jr., & Jensen, O. (2000). Fundamental changes in marketing organization: The movement toward a customer-focused organizational structure. Journal of the Academy of Marketing Science, 28(4), 459–478. Ivens, B., & Blois, K. J. (2004). Relational exchange norms in marketing: A critical review of Macneil’s contribution. Marketing Theory, 4(3), 239–263. Johanson, J., & Halle´n, L. (1989). International business relationships and industrial networks. In: L. Halle´n & J. Johanson (Eds), Advances in international marketing, Vol. 3. London: Routledge. Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm – a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Wootz, B. (1986). The German approach to Europe. In: P. Turnbull & J.-P Valla (Eds), Strategies for international industrial marketing: The management of customer relationships in European industrial markets. London: Croom Helm.

BJO¨RN SVEN IVENS

264

Kaufmann, P., & Dant, R. (1992). The dimensions of commercial exchange. Marketing Letters, 3(2). Kiedaisch, I. (1997). Internationale Kunden-Lieferanten-Beziehungen: Determinanten – Steuerungsmechanismen – Beziehungsqualita¨t, Wiesbaden: Gabler Verlag (pp. 11–36). Kruskal, J. B., & Wish, M. (1989). Multidimensional scaling. Newbury Park: Sage Publications. Leuthesser, L., & Kohli, A. J. (1995). Relational behavior in business markets. Implications for relationship management. Journal of Business Research, 34, 221–233. Levitt, T. (1983). The globalization of markets. In: T. W. Meloan & J. L. Graham (Eds), International and global marketing (pp. 13–23). Boston: McGraw-Hill (reprinted in 1998). Lewis-Beck, M. S. (1994). Factor analysis and related techniques. London: Sage Publications. Lusch, R. F., & Brown, J. R. (1996). Interdependency, contracting, and relational behavior in marketing channels. Journal of Marketing, 60(4), 19–38. Machay, D. B., Easley, R. F., & Zinnes, J. L. (1995). A single ideal point model for market structure analysis. Journal of marketing Research, 32(4), 433–443. Macneil, I. R. (1978). Contracts: Exchange transactions and relations. Minneola: The Foundation Press. Macneil, I. R. (1980). The new social contract. New Haven: Yale University Press. Mead, R. (1994). International management – cross-cultural dimensions. Cambridge: Blackwell. Morgan, R., & Hunt, S. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, 58(3), 20–38. Palmer, A. J. (1995). Relationship marketing: Local implementation of a universal concept. International Business Review, 4(4), 471–482. Parvatiyar, A., & Sheth, J. N. (2000). The domain and conceptual foundations of relationship marketing. In: J. N. Sheth & A. Parvatiyar (Eds), Handbook of relationship marketing. Thousand Oaks: Sage Publications. Schiffmann, S., Reynolds, M., & Young, F. (1981). Introduction to multidimensional scaling – theory, methods, and applications. New York: Academic Press. Spencer, R., Wilkinson, I. F., & Young, L. C. (1996). A comparative study of the nature and function of interfirm relationships in domestic and international industrial markets. In: J. N. Sheth, & A. So¨llner (Eds), Development, management, and governance of relationships, Proceedings of the 1996 International Conference on Relationship Marketing, March 29–31. Berlin: Humboldt Univ. Usunier, J.-C. (1991). Business time perceptions and national cultures: A comparative survey. Management International Review, 31(3), 197–217. Valla, J.-P. (1986). The French approach to Europe. In: P. Turnbull & J.-P- Valla (Eds), Strategies for international industrial marketing: The management of customer relationships in European industrial markets. London: Croom Helm.

APPENDIX A Questionnaire: collection of similarity judgements Example: You feel that business relationships with customers from P.R. of China and from Brazil are very similar whereas you feel that business

265

Identifying Differences in Foreign Customers’ Relational Behavior

relationships with customers from France and from Germany are not similar at all: China Germany France

Brazil 7

China Germany 1

Brasil China Germany France Italy Japan

China Germany France Italy Japan

Poland

Poland

Sweden South Africa

Sweden South Africa

USA

APPENDIX B Scales for the measurement of properties characterizing different nationalities’ relational behavior.  To what extent does ‘‘time is money’’ appropriately characterize the behavior of customers from the following countries? (7-point scales for each country, 1 ¼ completely correct, 7 ¼ absolutely not).  Sometimes in business, what is said is less important than how, where, and by whom it is said. Does this appropriately describe your business relationships with the following countries? (7-point scales for each country, 1 ¼ completely correct, 7 ¼ absolutely not).  To what extent would you say that business relationships with customers from the following countries are formalized? (7-point scales for each country, 1 ¼ very formalized, 7 ¼ not formalized at all).

BJO¨RN SVEN IVENS

266

 To what extent would you say that customers from the following countries seek frequent personal contacts in an ongoing purchasing relationship? (7point scales for each country, 1 ¼ very frequently, 7 ¼ very rarely).  To what extent do customers from the following countries make decisions on an individual basis? (7-point scales for each country, 1 ¼ only individuals make decisions, 7 ¼ only the group decides).  In situations of conflict, do customers from the following countries rather seek to impose their own interests or do they seek a solution that fits both parties? (7-point scales for each country, 1 ¼ impose own interest, 7 ¼ seek mutually beneficial solution).  To what extent do customers from the following countries typically show flexibility in new or unexpected situations? (7-point scales for each country, 1 ¼ completely flexible, 7 ¼ absolutely not flexible).  To what extent are private contacts and a close personal relationship with you important to customers from the following countries? (7-point scales for each country, 1 ¼ very important, 7 ¼ not important at all).

APPENDIX C Question for the measurement of preferences. With customers from which countries do you prefer to collaborate? Please attribute ranks from one (preferred country) to nine (least preferred country). Brazil

.......

China

.......

France

.......

Italy

.......

Japan

.......

Poland

.......

Sweden

.......

South Africa

.......

USA

.......

AN EXPLORATORY EXAMINATION OF THE FACTORS INFLUENCING DISTRIBUTOR SELF-PERCEIVED POWER IN CHANNEL RELATIONSHIPS: A SEVEN-COUNTRY STUDY Goksel Yalcinkaya and David A. Griffith The ability to compete in today’s global marketplace is reliant upon the development and coordination of effective business relationships. Power is used by organizations to coordinate activities in business relationships (Brown, Lusch, & Nicholson, 1995; Welch & Wilkinson, 2005) and as such has become a central construct of study by channel researchers (e.g., Beier & Stern, 1969; Duarte & Davies, 2004; Gaski, 1984; Lusch, 1976; Moore, Birtwistle, & Burt, 2004). Self-perceived power, i.e., the power a firm perceives itself to have in its relationship with a channel partner, influences a firm’s actions in relation to the relationship and therefore becomes an important aspect of channel management. While organizations emphasize relationship management practices at a strategic level (e.g., Johnston, McCutcheon, Stuart, & Kerwood, 2004), tactical aspects of business relationships continue to emphasize power to establish a leader who coordinates activities.

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 267–285 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16011-6

267

268

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

Research focusing on the antecedents of power in business relationships has indicated the importance of a number of variables, including assets specificity, type of market, and uncertainty (e.g., Frazier, Gill, & Kale, 1989; Ganesan, 1994; Kale, 1986; Sheth & Parvatiyar, 1992; Srivastava, Shervani, & Fahey, 1998). While these variables have been found to be influential in the development of power, they have been examined in isolation, thus providing both academics and practitioners with a limited view of their relative influence. Further, although these variables have provided considerable insights into this important area, research has excluded the influence of culture. This is an important limitation in the literature given the continued significance of cultural differences in the development and maintenance of effective international business relationships (cf., Johnson, Sakano, & Onzo, 1990; Johnson, Sakano, Cote, & Onzo, 1993; Kale & McIntyre, 1991; Money & Graham, 1999). Researchers and practitioners indicate that the ability to effectively manage international relationships is reliant upon cultural understanding (Sirmon & Lane, 2004; Trompenaars & Hampden–Turner, 1998). While critical to the development of effective international business relationships, few researchers have devoted attention to the area (cf., Johnson et al., 1990; Johnson et al., 1993; Kale & McIntyre, 1991; Moore & Birtwistle, 2004). Further, some researchers indicate that while the conceptualization of power may be consistent cross-culturally, its perception and employment may not (Hofstede, 2001; Johnson et al., 1990; Raven, 1992; Johnson et al., 1993; Laaksonen, 1977; Nygaard, 1994). The suggestion of cultural differences in power indicates the need for examining culture’s role in the development of power a firm perceives itself to have in international channel relationships. In this study, two fundamental issues are examined. First, does the under lying culture of a channel partner influence that partner’s self-perceived power in the relationship? Hence, culture’s role as an antecedent of the power one perceives itself to have in its channel relationships is explored. Second, rather than exploring culture as a single explanatory variable, an overall model of the antecedents of self-perceived power is developed. The integration of culture, asset specificity, type of market, and uncertainty, into a single model of the antecedents of self-perceived power may increase our understanding of the relative influence of each factor. A method section specifies the sample, the pre-testing used, and the variable measurements. Finally, a discussion of the results, their implications for academics and practitioners and a review of the limitations of this study along with directions for future research are presented.

An Exploratory Examination of the Factors

269

BACKGROUND Power Power is the potential ability of one individual or organization to directly influence another (Dahl, 1957; Emerson, 1962, French & Raven, 1959). The potential to influence another emanates from a number of social power bases. Six bases of power have been enumerated in the literature: reward, coercive, legitimate, referent, expert, and informational (French & Raven, 1959; Raven, 1965, 1992). Reward power emanates from the capability of one party to reward another. Coercive power originates from one party’s expectation that he/she will be punished by his/her partner if he/she fails to conform to the influence attempt. Legitimate power is derived from the internalization of values that dictate his/her partner has a legitimate right to influence him/her and he/she has an obligation to accept this influence. Referent power is defined by the identification of one partner with the other. Expert power is the extent that the knowledge that one partner attributes to the other provides for influence. Informational power is defined as the logical argument that a partner presents to another in order to implement change. The aggregation of the six power bases determines an individual’s or organization’s overall power. Research indicates power to be one manner of developing effective business relationships (Brown, et al., 1995; Frazier & Summer, 1986; Lederhaus, 1984; Welch & Wilkinson, 2005). More powerful partners become leaders and are able to more effectively coordinate scarce resources to ensure the efficient operation of the relationship (Sheth & Parvatiyar, 1992). The future orientation of channel relationships requires not only the restraint of the use of power (e.g., Molm, 1997), but also the stimulation of relational attitudes and behaviors (Masterson, Lewis, Goldman, & Taylor, 2000). For example, Brown et al. (1995) found that the use of power can lead to increased levels of commitment within business relationships. The issue of power becomes even more complex in the context of international business relationships where little is known regarding how culture influences power (Nygaard, 1994; Raven, 1992). Raven (1992) indicates that we have made little progress in understanding culture’s role in the development of power. Although some research has addressed power in international business relationships (e.g., Moore et al., 2004), research has not directly addressed Raven’s concern. Given the importance of power and culture in international channel relationships, it is necessary to examine a cultural framework that could increase the theoretical understanding of culture’s role in the development of power.

270

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

Culture Culture is an elusive concept to define (Clark, 1990; Kroeber & Kluckhohn, 1952). While a number of cultural frameworks have been proposed in the literature (e.g., Clark, 1990; Markus & Kitayama, 1991; Triandis, 1987), the work of Hofstede (2001) is most directly applicable to this work as the norms and values approach underlying Hofstede’s framework is directly related to the attitudinal approach under study here (cf., Doney, Cannon, & Mullen, 1998). Further, as Doney et al. (1998, p. 608) indicate, ‘‘the striking correspondence between Hofstede’s empirically derived dimensions and those based on theory affords researchers an opportunity to combine theoretical rigor with empirical discipline.’’ As such, we argue that the work of Hofstede (1980, 2001) is theoretically applicable to understanding culture’s influence on self-perceived power, while also being an accepted framework (cf., Hennart & Larimo, 1998; Kogut & Singh, 1988; Sondergaard, 1994). Hofstede (1980) treats culture as ‘‘the collective programming of the mind which distinguishes the members of one human group from another.’’ Inclusive within the definition of culture is the ‘‘system of values’’ the individual holds. These systems of values are the foundation of cultural type. Hofstede (2001) distinguishes five dimensions upon which cultural types (i.e., the aggregation of a nation’s specific position along the dimensions) can be defined: individualism, power distance, uncertainty avoidance, masculinity, and long-term orientation. While the five dimensions provide an understanding of cultural types that can be used to investigate a specific phenomenon, Hofstede (1981, 1983) and others (e.g., Triandis, 1987, 1995) suggest that researchers should be parsimonious in their application of the cultural dimensions. They indicate that researchers should use only those dimensions that provide the strongest theoretically explanation for the relationships under study. Conceptual and empirical research suggests three dimensions of culture (i.e., individualism, power distance, and uncertainty avoidance) are directly linked to self-perceived power.1 The dimension of individualism refers to the strength of the relationships formed between members of a cultural type (Hofstede, 1980, 2001; Triandis, 1987, 1995). At one end of the dimension the ties between individuals are very loose (i.e., individualistic), characterized by members attempting to preserve their own self-interests, or the self-interests of small social groups to which they are tied, such as their immediate family. The other end of the dimension is characterized by strong interrelationships between individuals (i.e., collectivist). Within a collectivist cultural type, individuals are less concerned with individual self-interests, but are primarily concerned with

An Exploratory Examination of the Factors

271

the prevailing interest of the group (Hofstede, 1980; Triandis, 1987, 1995). Whereas the group protects individual members in a collectivist cultural type, individuals are on their own in an individualistic cultural type. Individualistic cultural types are commonly Anglo, while collectivist members are more commonly associated with Asia, Africa, Latin America, and Southern Europe (Markus & Kitayama, 1991). The dimension of power distance refers to how a cultural type manages physical, intellectual, and/or social inequalities. Hofstede (1980, 1983, 2001) notes that some cultural types allow inequalities to grow over time until there is a great separation of wealth and power, whereas other cultural types attempt to minimize the inequalities by redistributing wealth and power. Those cultural types that minimize inequalities are termed small power distance, whereas those that allow inequalities to exist and grow are termed large power distance. The dimension of uncertainty avoidance refers to the manner in which a cultural type addresses the uncertainty associated with the future (Hofstede, 1980, 1983, 2001). The fact that the future is uncertain forces a cultural type to either accept this uncertainty or devise means of controlling it, such as laws, technology, or religion. A cultural type that does not attempt to control future uncertainty is termed weak uncertainty avoidance, whereas those that try to control, or minimize, future uncertainty are termed strong uncertainty avoidance. Hofstede (2001) argues that a country can be positioned along its cultural dimensions to provide an overall summary of a country’s cultural type. For example, Australia, Canada, Ireland, Great Britain, Netherlands, Sweden, and the United States are generally more individualistic, smaller in power distance and weaker in uncertainty avoidance whereas Argentina, Chile, Japan, Mexico, Peru, the Philippines, Singapore, Taiwan, Thailand, Turkey, Venezuela, and Yugoslavia are generally more collectivist, larger in power distance and stronger in uncertainty avoidance. While Hofstede’s (2001) dimensions provide a manner of classifying a country’s culture (cf., Newman & Nollen, 1996), it is important to note that countries share both similarities and differences across cultural dimensions. Thus, when categorizing countries the ‘‘general’’ pattern across the dimensions for each country is used.

HYPOTHESIS DEVELOPMENT Culture The cultural type of a business partner (individual and firm) directly influences his/her perception of his/her power (Hofstede, 1983, 1985, 2001).

272

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

Culture is refers to ‘‘the collective programming of the mind which distinguishes the members of one human group from another’’ (Hofstede, 2001). Embedded within the definition of culture is the ‘‘system of values’’ the individual holds. In some cultural types, individuals are socialized to perceive themselves to have power over others, while in other cultural types they learn to view power as equally distributed amongst members. Three dimensions of culture (individualism, power distance, and uncertainty avoidance) are theorized to influence the self-perceived power of an individual. Collectivist, large power distance, strong uncertainty avoidance cultural types are typically characterized by a two-tier social structure (Hofstede, 1980; Triandis, 1995). To maintain social order in countries with a great separation of wealth and power between the classes and where uncertainty is attempted to be minimized, stringent rules structuring behavior have evolved. Societal rules established to maintain the social structure of the country are founded on the values of rigid adherence to order, rank, and authority (Hofstede, 1980). These social values strongly adhered to in a collectivist, large power distance, strong uncertainty avoidance cultural type, result in higher levels of legitimate, referent, expert, and informational power of the upper tier of the culture. For example, business people, by virtue of employment and the control of assets, are part of the upper tier of society in which they live. In this cultural type these individuals are socialized to believe that by their status they have greater knowledge than others, as evident in the two-tier social structure. Further, given their status in society, referent power is developed as those who engage in business with these individuals would be viewed as referents. As such, it is argued, that these individuals (and the firms they represent) become accustomed to being the more powerful member in many of their social relationships and thus may extend this socialized belief structure to their relationship with other, such as channel partners. In addition, given the status afford to these members, they set forth the rules that assist in minimizing uncertainties in the society. As such, these individuals are socialized to believe they have power (through the use of technology, rules, etc.) to control the future (Hofstede, 1980, 1983). The perception of power over uncertainty, carries-over to power in their channel relationships and can be exhibited through reward and coercive power development. As such, we theorize:

H1. The cultural type of collectivist, large power distance and strong uncertainty avoidance is positively related to self-perceived power.

An Exploratory Examination of the Factors

273

Asset Specificity The allocation of scarce resources significantly influences business relationships (Ganesan, 1994; Sheth & Parvatiyar, 1995). Asset specificity refers to those assets, whether physical or informational, that are directly tied to a specific business relationship and that have no alternative use. Examples of such assets include: physical assets, such as special handling equipment or facilities, knowledge to perform an activity, or knowledge of how the firm operates (i.e., procedures, methods, etc.) (Anderson & Coughlan, 1987; Heide & John, 1988; Klein, 1991; Rindfleisch & Heide, 1997). The investment in assets specific to the relationship increases a partner’s dependence as result of the member controlling the asset that is required for the relationship to operate efficiency, thus enhancing the investing partner’s power (Brown, Lusch, & Muehling, 1983; Buchanan, 1992; Klein, 1991). That is to say, when these assets are created for business relationships, a firm and its partner are locked into the transaction (Williamson, 1985). As John and Weitz (1988, p. 124) note, ‘‘Because nonredeployable specific assets make it costly to switch to a new relationship, the market safeguard against opportunism is no longer effective.’’ Under these situations, firms would optimally utilize internal sourcing to avoid opportunism (a result of interdependence and asymmetrical power). Indeed, Murray, Kotabe, and Wildt (1995) found that manufacturing firms tend to source major components requiring highly specific assets internally. However, as Chiles and McMackin (1996) note, inclusion of trust in the transaction cost analysis model reduces the perception of opportunism and its associated transaction costs for any given level of asset specificity. As such, we argue, consistent with Brown et al. (1983) that the investment in assets specific to the relationship enhances a channel partner’s self-perceived power. More formally: H2. Asset specificity is positively related to self-perceived power. Type of Market The type of market in which the organization operates will directly influence a partner’s power (Butaney & Wortzel, 1988; Frazier et al., 1989; Kale, 1986). Type of market refers to the number of buyers and sellers within the marketplace. A sellers’ market can be described as a market in which demand for goods and services far exceeds supply, and a buyers’ market is defined as a market where the supply of goods greatly exceeds demand (Kale, 1986). Within a sellers’ market, excess demand tends to increase the power of the seller as a result of limited supply. Kale (1986) found that within sellers’ markets manufacturers

274

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

have increased power. In buyers’ markets, where the supply of goods exceeds demand, a distributor’s perceived power will increase making their manufacturer more dependent on them (Frazier et al., 1989; Kale, 1986). The influence of the type of market on the perception of power can be stated as follows: H3. Channel partners operating in markets characterized by more buyers than sellers will have more self-perceived power than those who operate in markets characterized by more sellers than buyers. Uncertainty The stability of a business partner will significantly influence how the relationship operates (Anderson & Weitz, 1986; Ganesan, 1994; Sheth & Parvatiyar, 1995; Rindfleisch & Heide, 1997). For example, Skarmeas, Katsikeas, and Schlegelmilch (2002) found that heightened commitment within a channel relationship, where commitment infers stability of the relationship, enhances channel performance. Uncertainty in this study refers to the stability and predictability of the firm’s partner. Stable business partners are more powerful than unstable ones as stability in business relationships allow organizations to operate more effectively as a result of being able to more accurately plan and forecast. Past research indicates the importance of power to influence channel coordination, especially when the external environment is highly turbulent (Clopton, 1984; Gaski, 1984). If a business partner is relatively stable, its partner is better able to plan and coordinate activities, thus enhancing the partner’s self-perceived power. Given this, we hypothesize the following: H4. Partner uncertainty is positively related to self-perceived power.

METHOD To test the hypotheses, the relationships between U.S. export manufacturers (standard industrial classification 20–39) and their distributors in Canada, Chile, Great Britain, Mexico, the United States, the Philippines, and Singapore. This setting and research perspective were selected for three key reasons. First, due to the independent nature of the manufacturer–distributor relationships, these relationships are more likely characterized by the use of power to coordinate activities as opposed to integrated relationships of multinational corporations. Second, while a great deal of research has been conducted in relation to export manufacturers, little is known regarding

An Exploratory Examination of the Factors

275

the behaviors and perceptions of independent distributors. Because very little is known about these relationships from the independent distributor’s perspective, this study provides an opportunity to increase knowledge of this area. Third, the countries selected provide a diversity of cultural types from Asia, Europe, North America, and South America and therefore allow us to gain greater insights into how culture influences self-perceived power across a number of country contexts. A systematic random selection method was used to identify distributors in the countries of study. The Commercial Service International Contacts (CSIC) index of the National Trade Data Bank was used to identify distributors in Canada, Chile, Great Britain, Mexico, the Philippines, and Singapore. U.S. distributors were selected from the American Distributors and Wholesalers Directory. The sample frame was restricted to those firms identified as small to medium in terms of number of employees (less than 20) in order to reduce single key informant bias (cf., Lusch & Brown, 1996). The survey was translated into Spanish (for Mexico and Chile) by an independent translator in accordance with accepted standards and checked for form and meaning equivalence through pre-testing of pre- and post-backtranslated instruments (cf., Sperber, Devellis, & Boehlecke, 1994). Next, two native language speakers, respective to country examined each survey. Minor changes were then incorporated into the final version of the instrument. Of the 1,350 surveys mailed, 547 were returned. Two hundred and ninetyone were returned undeliverable and 28 indicated that they were no longer conducting distributor business. A total of 228 usable questionnaires were retained for analysis for an effective usable response rate of 22.1%. Effective response rates varied by country (Canada: 28.1%; Chile: 21.4%; Great Britain: 26.0%; Mexico: 17.5%; the United States: 18.1%; the Philippines: 31.1%; and Singapore: 18.5%). Nonresponse bias testing examined early versus late respondents on the variables under study (cf., Armstrong & Overton, 1977). No significant differences (po0.05) were observed, suggesting that nonresponse bias was minimal. Firm characteristics of the respondents (available though the source directories) were compared to the sample frame. No significant differences (po0.05) were found across SIC code or length of operation.

Measures All scales were seven-point Likert-type scales measured on ‘‘‘Definitely true’ to ‘Not at all true’’’ (cf., Johnson et al., 1990). Self-perceived power relative

276

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

to exporters was measured by a 12-item scale (a ¼ 0.75) capturing French and Raven’s (1959) and Raven’s (1965) six bases of social power (two items per power base: reward, coercive, legitimate, referent, expert, and informational). Reward and coercive power were measured by adapting Brown et al. (1983) scale. Measures of expert, legitimate and referent power were adapted from Gaski (1986). The two-item scale for informational power was developed for the study. Culture was operationalized using an index of Hofstede’s (1980) dimensions of individualism, power distance, and uncertainty avoidance. The culture index was computed using an approach similar to Kogut and Singh (1988) and Hennart and Larimo (1998). The index was developed by first reverse coding the individualism dimension. Next, the actual scores on each dimension (as reported by Hofstede, 1980) were aggregated and averaged to provide a single measure of cultural type (see Table 1). Although, the use of Hofstede’s scores has become accepted in the literature, direct value inference (cf., Lenartowicz & Roth, 1999) can provide a stronger test of culturebased assessments. Asset specificity was measured through the use of a single-item scale. Specifically, respondents were asked whether their company had made a large investment in equipment and facilities in order to market their partner’s products. Type of market was assessed at the industry level, using a two-item scale (a ¼ 0.78), based on the conceptual description provided by Kale (1986) and Frazier et al. (1989). Specifically, respondents were asked (1) with respect to this market, there are more distributors than are necessary (reverse coded), and (2) with respect to this manufacturer’s products, there are more people selling products similar to my manufacturers than the market really needs. Table 1.

Cultural Characteristics And Aggregate Cultural Index.

Power Distance Individualism Uncertainity Avoidance Aggregate Cultural Canada Chile Great Britain Mexico United States Philippines Singapore

39 63 35 81 40 94 79

80 23 89 30 91 32 20

Source: Hofstede (1980) and authors’ calculations.

48 86 35 82 46 44 8

36.67 76.33 28.00 78.67 32.67 69.67 55.00

277

An Exploratory Examination of the Factors

Uncertainty in the relationship was assessed using a single-item scale. Uncertainty was captured by asking whether or not their business partner was predictable.

ANALYSIS Hypotheses were tested using regression analysis.2 The relative influence of culture, asset specificity, type of market, and uncertainty were modeled. A stepwise regression analysis was then conducted to determine the relative explanatory power of each variable. Table 2 reports that the regression equation explains 24.5% of the variation in self-perceived power. The results support the antecedents of culture (H1: b ¼ 0.347, t ¼ 5.779, po0.000), asset specificity (H2: b ¼ 0.256, t ¼ 4.270, po0.000), and uncertainty (H4: b ¼ 0.337, t ¼ 5.625, po0.000). The influence of type of market (H3: b ¼ 0.020, t ¼ 0.338, p ¼ 0.736) was not supported at the 0.05 level. Stepwise regression analysis was conducted to more thoroughly examine the contribution of each predictor variable in the regression model. Of the four independent variables, three entered the model (see Table 3). The results of the stepwise regression analysis are consistent with the initial multiple regression analysis. Asset specificity was the first variable to meet the entry criteria for the stepwise regression (H2: b ¼ 0.265, t ¼ 4.075, po0.000, R2 ¼ 0.070). The second stepwise regression included asset specificity (H2: b ¼ 0.269, t ¼ 4.280, po0.000) and uncertainty (H4: b ¼ 0.266, t ¼ 4.241, po0.000) and explained 13.3% of the variance in self-perceived power. The final stepwise regression included asset specificity (H2: b ¼ 0.246, t ¼ 4.152, po0.000) uncertainty (H4: b ¼ 0.373, t ¼ 6.001, po0.000) and culture (H1: b ¼ 0.340, t ¼ 5.459, po0.000) and explained 24.5% of the variance in selfperceived power. Table 2.

H1 H2 H3 H4

Multiple Regression Results (Dependent Construct: Self-Perceived Power).

Independent Construct

Standardized Coefficients

t Value

p Value

Culture Asset specificity Type of market Uncertainty

0.339 0.243 0.013 0.372

5.414 4.019 0.212 5.976

0.000 0.000 0.832 0.000

F(4, 216) ¼ 18.70, po0.000, R2 ¼ 0.245, Adjusted R2 ¼ 0.231

278

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

Table 3.

Stepwise Regression Results (Dependent Construct: Self-Perceived Power). Standardized Coefficients

t Value

p Value

4.075

0.000

F(1,219) ¼ 16.603, po0.000, R ¼ 0.070, Adjusted R ¼ 0.066 Equation (2) Asset specificity 0.269 Uncertainty 0.266

4.280 4.241

0.000 0.000

F(2,218) ¼ 17.939, po0.000, R2 ¼ 0.141, Adjusted R2 ¼ 0.133 Equation (3) Asset specificity 0.246 Uncertainty 0.373 Culture 0.340

4.152 6.001 5.459

0.000 0.000 0.000

Equation (1) Asset specificity

0.265 2

2

F(3,217) ¼ 23.474, po0.000, R2 ¼ 0.245, Adjusted R2 ¼ 0.235

DISCUSSION AND MANAGERIAL IMPLICATIONS The findings of this study provide a number of unique theoretical and managerial insights into international channel relationships. First and foremost, results indicate the importance of including culture when examining international channel relationships. Building on the findings of Hofstede (2001) in work-related values, the results indicate that the values associated with the cultural dimensions of individualism, power distance, and uncertainty avoidance help to explain the self-perceived power of a channel partner in international business relationships. Culture influences how individuals relate to one another. This is critical to understand when coordinating international channel activities. The results indicate channel partners emanating from collectivist, large power distance, strong uncertainty avoidance cultural types tend to view themselves as leaders within a relationship. As such, one would expect the behaviors of these partners to differ significantly (e.g., attempting to coordinate activities, setting priorities) from those of other cultural types (ceteris paribus). This suggests that international channel strategies should be culturally adapted to account for the culturally based enhancement in self-perceived power. For example, when a manufacturer from a cultural type characterized as individualistic, small power distance, and weak uncertainty avoidance (e.g., the U.S. or Canada), develops a relationship with a distributor from a cultural type

An Exploratory Examination of the Factors

279

characterized as collectivist, large power distance, and strong uncertainty avoidance (e.g., Mexico or Chile), there is the potential that the distributor perceives itself to be more powerful than the manufacturer perceives it to be. As such, the distributor may exhibits leadership behaviors, i.e., attempt to exert influence strategies, even when the manufacturer believes the distributor should be a follower in the relationship. This suggests that these manufacturers would need to be sensitive to the cultural type of its partner, and its resulting behavioral expectations, thus adjusting its administrative policies accordingly in order to coordinate the relationship. The investment in assets specific to the on-going administration of the relationship was found to be the most significant antecedent of selfperceived power of those variables examined. As one increases its investment in assets specifically applicable to the relationship, its business partner becomes more dependent on it. Thus, one method of enhancing one’s power position within a business relationship, thus gaining a leadership position, is the investment in assets specific to the operation of the relationship. Firms who control such assets increase in the dependence of its partner resulting in more powerful channel positions. Asset specificity tends to create contracting hazards because of the impact of opportunism (Hill, 1990; Williamson, 1985). The threat of opportunism can be minimized by long-term contracts (Williamson, 1985). Transaction cost theory suggests that less integrated exporter–distributor relationship provide more efficient organizational structures when there is an increased threat from opportunism (Hill, 1990; Williamson, 1985). In addition, trust plays an important role in the development of exporter– distributor relationships. Inclusion of trust in the transaction cost analysis model reduces opportunism and its associated transaction costs for any given level of asset specificity (Chiles & McMackin, 1996). Results do not support type of market as an antecedent of self-perceived power. Prior research on type of market developed from a study conducted within India (cf., Kale, 1986). India is characterized as a collectivist, large power distance, and weak uncertainty avoidance cultural type. Given this, there is a possibility that the results found within previous research may be partially attributable to cultural type. However, these results do highlight the fact that researchers must be cautious when interpreting the influence of one variable on another when examined in isolation. Uncertainty was found to be the next most important antecedent of selfperceived power. Businesses function optimally under conditions of low uncertainty. Power is accumulated and then exercised (i.e., control) to minimize uncertainty within a relationship. Predictability in one’s business

280

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

partner results in increasing one’s level of self-perceived power. As partner predictability increases, an organization’s self-perceived power increases. This power may then be used to coordinate activities, reduce uncertainty and ensure efficient operation of the relationship, thus increasing the overall returns. The results indicate that asset specificity, uncertainty, and culture all have important roles as antecedents of self-perceived power. Further the results of the stepwise regression analysis indicate that culture’s role is both important and secondary (based upon entry sequence) to economically oriented business issues. This confirms, to some extent, the belief that while culture is an important aspect that needs to be addressed, in many cases its overall impact is relatively limited. That is not to say that culture’s role is unimportant. Rather, it indicates that while culture is important in many aspects of business relationships, it is not the only factor influential in international business relationships, nor is it relevant to the same extent in all aspects of business.

CONCLUSION Overall, this study provides a number of unique contributions to the literature. First, previous research was integrated to develop a more comprehensive understanding of the antecedents of self-perceived power. While previous research has addressed these variables in isolation, here they have been incorporated them into a single model of the antecedents of selfperceived power to examine the relative importance of each. As such, the understanding of the antecedents of self-perceived power within international channel relationships has been broadened. Possibly the most important contribution was the integration and examination of the relative influence of culture. Culture continues to be one of the largest hurdles in international business, both from an academic and practitioner perspective. This study suggests not only that culture plays an important role in understanding self-perceived power, but also provides a theoretical foundation to understand this issue. More so, this study emphasizes the importance of neither excluding culture nor using culture as the sole explanatory variable in the investigation of a phenomenon. As with previous studies, this study has its limitations. One of the most important is the context used to test the hypotheses. Export manufacturer– distributor relationships were examined. This setting was selected as a result of the growing importance of exporting to all economies. With the growth of

An Exploratory Examination of the Factors

281

the world economy, the export manufacturer–distributor relationship has become one of the most vital links in international business. However, the relative small size of distributors studied could be a limitation of this study. Given the small size of these firms, it is possible that they may be more culturally sensitive than larger multinational organizations. Thus, generalization of the findings beyond the sample frame is cautioned. Second, relationships examined were between distributors and their primary U.S. manufacturer. While only investigating relationships with U.S. manufacturers allowed for comparability, it also limits generalizability. For instance, it is unclear whether similar results would be found in relationships between Mexican manufacturers and U.S. distributors, or Chilean distributors working with Canadian manufacturers. Future research in this area should rectify both of these limitations by expanding the scope of organizations that are included. A third limitation emanates from the data itself. Given the desire to examine a broad range of cultural types, data collection per country was relatively limited. Small sample sizes restricted our ability to conduct fullmetric invariance testing. Mullen (1995) argues that for stable results when conducting metric invariance testing, samples should be greater than 25 observations and 50 or more observations are preferred. Similarly, given the sample size limitations for each country, individual confirmatory factor analysis (CFA) were not able to be performed (see Bollen, 1989) for a more detailed discussion on sample size limitations). Further, the employment of single items measures and two-item measures also presents challenges to the validity of the findings. As such, the results offered in this study should be viewed with caution as, although the results are supported theoretically, the lack of metric invariance testing and measurement concerns raises validity and reliability issues. Future research addressing this topic should engage upon a larger data collection per country and provide for a more sophisticated measurement of constructs. Finally, aggregate power was explored in this study. The decision to focus on aggregate power was based on Raven’s (1992) indication of the conceptual equivalence of power at the aggregate level. However, it can be argued that culture would have differential influences on each element of power and therefore greater understanding of culture’s influence on self-perceived power could be gained by exploring individual power dimensions. Further, although power may be conceptually equivalent cross-culturally, the employment of power, i.e., control, may not (Johnson et al., 1990, 1993; Raven, 1992). Researchers indicate that the theoretical development of power, and ensuing research, has developed from an Anglo-American perspective, and

282

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

as a result, may be limited in its applicability to cross-cultural research (Nygaard, 1994; Raven, 1992). For instance, Laaksonen (1977) argues that the power bases exercised were quite different between collectivist (e.g., socialist China) and individualistic cultures (e.g., traditional Anglo-American capitalistic countries). Further, Johnson et al. (1993) indicate that power structures, and power-based utilization, between U.S. and Japanese channel members are quite different. The advancement of theory relating to culturebased influence strategies would help academics and practitioners better understand the consequences of power in international business relationships.

NOTES 1. The dimensions of masculinity and long-term orientation (Hofstede, 1980, 1991, 2001), while important cultural dimensions, have not been shown, either conceptually or empirically, to influence self-perceived power. Masculinity details the separation of social roles within a nation between the sexes. Long-term orientation (Confucian Dynamism) indicates the temporal focus of individuals within a cultural type. Given that no theoretical or empirical linkages have been made between these constructs and selfperceived power, parsimony necessitated their exclusion from this study. 2. Prior to modeling the antecedents of self-perceived power, a number of bivariate regression equations were used to explore the underlying issue of whether culture influenced the perception of a business partner’s power, self-perceived power, and the distribution of power within the relationship. Results indicate that cultural type of business partners significantly influences self-perceived power within the relationship (b ¼ 0.240, t ¼ 3.664, po0.000, F(1,219) ¼ 13.425, po0.000). No differences were found in the perception of their partner’s power (b ¼ 0.071, t ¼ 1.056, po0.000, F(1,219) ¼ 1.114, p ¼ 0.292). Finally, the distribution of power across partners was examined. Results indicate that in relationship to their partner’s power, cultural type was significant in explaining the distribution of power in the relationship (b ¼ 0.180, t ¼ 2.660, po0.000, F(1,219) ¼ 7.073, po0.008). These results provide added support to the theoretical importance of culture as an antecedent of power. While partner power did not significantly differ by cultural type, self-perceived power was significantly different, thus resulting in a difference in the distribution of power within the relationship as perceived by the distributor.

REFERENCES Anderson, E., & Coughlan, A. T. (1987). International market entry and expansion via independent or integrated channels of distribution. Journal of Marketing, 51, 71–82. Anderson, E., & Weitz, B. A. (1986). Make-or-buy decisions: Vertical integration and marketing productivity. Sloan Management Review, 27(1), 3–19.

An Exploratory Examination of the Factors

283

Armstrong, J. S., & Overton, T. S. (1977). Estimating nonresponse bias in mail surveys. Journal of Marketing Research, 24, 396–402. Beier, F. J., & Stern, L. W. (1969). Power in the channel of distribution. In: L. W. Stern (Ed.), Distribution channels: Behavioral dimensions (pp. 92–116). Boston, MA: Houghton Mifflin Company. Bollen, K. A. (1989). Structural equations with latent variables. New York: Wiley. Brown, J. R., Lusch, R. F., & Muehling, D. D. (1983). Conflict and power-dependence relations in retailer–supplier channels. Journal of Retailing, 59, 53–80. Brown, J. R., Lusch, R. F., & Nicholson, C. Y. (1995). Power and relationship commitment: Their impact on marketing channel performance. Journal of Retailing, 71, 363–392. Buchanan, L. (1992). Vertical trade relationships: The role of dependence and symmetry in attaining organizational goals. Journal of Marketing Research, 29, 66–75. Butaney, G., & Wortzel, L. H. (1988). Distributor power versus manufacturer power: The customer role. Journal of Marketing, 36, 85–96. Chiles, T. H., & McMackin, J. R. (1996). Integrating variable risk preferences, trust, and transaction cost economics. Academy of Management Journal, 21, 73–99. Clark, T. (1990). International marketing and national character: A review and proposal for an integrative theory. Journal of Marketing, 54, 66–79. Clopton, S. W. (1984). Seller and buyer firm factors affecting industrial buyers’ negotiation behaviour and outcomes. Journal of Marketing Research, 21, 39–53. Dahl, R. A. (1957). The concept of power. Behavioral Science, 2, 201–215. Doney, P. M., Cannon, J. P., & Mullen, M. R. (1998). Understanding the influence of national culture on the development of trust. Academy of Management Review, 23, 601–620. Duarte, M., & Davies, G. (2004). Trust as a mediator of channel power. Journal of Marketing Channels, 11, 77–102. Emerson, R. M. (1962). Power-dependence relations. American Sociological Review, 27, 31–41. Frazier, G. L., Gill, J. D., & Kale, S. H. (1989). Dealer dependence levels and reciprocal actions in a channel of distribution in a developing country. Journal of Marketing, 53, 50–69. Frazier, G. L., & Summers, J. O. (1986). Perceptions of interfirm power and its use within a franchise channel of distribution. Journal of Marketing Research, 23, 169–176. French, J. R., & Raven, B. H. (1959). The bases of social power. In: D. Cartwright (Ed.), Studies in social power (pp. 157–167). Ann Arbor: University of Michigan Press. Ganesan, S. (1994). Determinants of long-term orientation in buyer–seller relationships. Journal of Marketing, 58, 1–19. Gaski, J. F. (1984). The theory of power and conflict in channels of distribution. Journal of Marketing, 48, 9–29. Gaski, J. F. (1986). Interrelations among a channel entity’s power sources: Impact of the exercise of reward and coercion on expert, referent, and legitimate power sources. Journal of Marketing Research, 23, 62–77. Heide, J. B., & John, G. (1988). The role of dependence in balancing in safeguard transactionspecific assets in conventional channels. Journal of Marketing, 52(1), 20–35. Hennart, J.-F., & Larimo, J. (1998). The impact of culture on the strategy of multinational enterprises: Does national origin affect ownership decisions? Journal of International Business Studies, 29, 515–538. Hill, C. W. L. (1990). Cooperation, opportunism, and the invisible hand: Implications for transaction cost theory. Academy of Management Review, 15, 500–513. Hofstede, G. (1980). Culture’s consequences. Beverly Hill, CA: Sage Publications.

284

GOKSEL YALCINKAYA AND DAVID A. GRIFFITH

Hofstede, G. (1981). Do American theories apply abroad? A reply to Goodstein and Hunt. Organizational Dynamics, 10, 63–68. Hofstede, G. (1983). The cultural relativity of organizational practices and theories. Journal of International Business Studies, 14, 75–89. Hofstede, G. (1985). The interaction between national and organizational value systems. Journal of Management Studies, 22, 347–357. Hofstede, G. (1991). Cultures and organizations: Software of the mind. Berkshire, England: McGraw-Hill. Hofstede, G. (2001). Culture’s consequences. Thousand Oaks, CA: Sage Publications. John, G., & Weitz, B. (1988). Forward integration into distribution: Empirical test of transaction cost analysis. Journal of Law, Economics, and Organization, 4(2), 337–355. Johnson, J. L., Sakano, T., Cote, J. A., & Onzo, N. (1993). The exercise of interfirm power and its repercussions in the U.S.–Japanese channel relationships. Journal of Marketing, 57, 1–10. Johnson, J. L., Sakano, T., & Onzo, N. (1990). Behavioral relations in across-culture distribution systems: Influence, control and conflict in U.S.–Japanese marketing channels. Journal of International Business Studies, 21, 639–655. Johnston, D. A., McCutcheon, D. M., Stuart, F. I., & Kerwood, H. (2004). Effects of supplier trust on performance of cooperative supplier relationships. Journal of Operations Management, 22, 23–28. Kale, S. H. (1986). Dealer perceptions of manufacturer power and influence strategies in a developing country. Journal of Marketing Research, 23, 387–393. Kale, S. H., & McIntyre, R. P. (1991). Distribution channels relationships in diverse cultures. International Marketing Review, 8, 31–45. Klein, S. (1991). Selection of international marketing channels. Journal of Global Marketing, 4, 21–37. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19, 411–432. Kroeber, A. L., & Kluckhohn, C. (1952). Culture: A critical review of concepts and definitions. New York, NY: Vintage Books. Laaksonen, O. J. (1977). The power structures of Chinese enterprises. International Studies of Management and Organization, 7, 71–90. Lederhaus, M. A. (1984). Improving marketing channel control through power and exchange. Journal of the Academy of Marketing Science, 12, 18–34. Lenartowicz, T., & Roth, K. (1999). A framework for culture assessment. Journal of International Business Studies, 30(4), 781–798. Lusch, R. F. (1976). Sources of power: Their impact on intra-channel conflict. Journal of Marketing Research, 13, 382–390. Lusch, R. F., & Brown, J. R. (1996). Interdependency, contracting, and relational behavior in marketing channels. Journal of Marketing, 60, 19–38. Markus, H. R., & Kitayama, S. (1991). Culture and the self: Implications for cognition, emotion, and motivation. Psychological Review, 98, 224–253. Masterson, S. S., Lewis, K., Goldman, B. M., & Taylor, M. S. (2000). Integrating justice and social exchange: The differing effects of fair procedures and treatment on work relationships. Academy of Management Journal, 43, 738–748. Molm, L. D. (1997). Risk and power use: Constraints on the use of coercion in exchange. American Sociological Review, 62, 113–133.

An Exploratory Examination of the Factors

285

Money, R. B., & Graham, J. L. (1999). Salesperson performance, pay, and job satisfaction: Tests of a model using data collected in the United States and Japan. Journal of International Business Studies, 30, 149–172. Moore, C. M., & Birtwistle, G. (2004). The Burberry business model: Creating an international luxury fashion brand. International Journal of Retail & Distribution Management, 32(8/9), 412–422. Moore, C. M., Birtwistle, G., & Burt, S. (2004). Channel power, conflict and conflict resolution in international fashion retailing. European Journal of Marketing, 38, 749–769. Mullen, M. R. (1995). Diagnosing measurement equivalence in cross-national research. Journal of International Business Studies, 26, 573–596. Murray, J. Y., Kotabe, M., & Wildt, A. R. (1995). Strategic and financial implications of global sourcing strategy: A contingency analysis. Journal of International Business Studies, 1, 181–202. Newman, K. L., & Nollen, S. D. (1996). Culture and congruence: The fit between management practices and national culture. Journal of International Business Studies, 27, 753–779. Nygaard, A. (1994). The falsification perspective on theories in channel research. Journal of Marketing Channels, 3, 19–43. Raven, B. H. (1965). Power and leadership. In: C. I. Steiner & M. Fishbein (Eds), Current studies in social psychology (pp. 371–382). New York, NY: Holt, RineHart and Winston. Raven, B. H. (1992). A power/interaction model of interpersonal influence: French and Raven thirty years later. Journal of Social Behavior and Personality, 7, 217–244. Rindfleisch, A., & Heide, J. B. (1997). Transaction cost analysis: Past, present, and future applications. Journal of Marketing, 61, 30–55. Sheth, J. N. (1995). Relationship marketing in consumer markets: Antecedents and consequences. Journal of the Academy of Marketing Science, 23, 255–271. Sheth, J. N., & Parvatiyar, A. (1992). Toward a theory of business alliance formation. Scandinavian International Business Review, 1, 71–87. Sirmon, D. G., & Lane, P. J. (2004). A model of cultural differences and international alliance performance. Journal of International Business Studies, 35, 306–319. Skarmeas, D., Katsikeas, C. S., & Schlegelmilch, B. B. (2002). Drivers of commitment and its impact on performance in cross-cultural buyers–seller relationships: The importer’s perspective. Journal of International Business Studies, 33, 757–783. Sondergaard, M. (1994). Research note: Hofstede’s consequences: A study of reviews, citations and replications. Organization Studies, 15, 447–456. Sperber, A. D., Devellis, R. F., & Boehlecke, B. (1994). Cross-cultural translation: Methodology and validation. Journal of Cross-Cultural Psychology, 25, 501–524. Srivastava, R. K., Shervani, T. A., & Fahey, L. (1998). Market-based assets and shareholder value: A framework for analysis. Journal of Marketing, 62, 2–18. Triandis, H. C. (1987). Collectivism vs. individualism: A reconceptualization of a basic concept in cross-cultural social psychology. In: C. Bagley & G. K. Verma (Eds), Personality, cognition and values: Cross-cultural perspectives of childhood and adolescence. London: Macmillan. Triandis, H. C. (1995). Individualism and collectivism. Boulder, CO: Westview Press. Trompenaars, F., & Hampden-Turner, C. (1998). Riding the waves of culture (2nd ed). New York: McGraw-Hill. Welch, C., & Wilkinson, I. (2005). Network perspectives on interfirm conflict: Reassessing a critical case in international business. Journal of Business Research, 58, 205–213. Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.

This page intentionally left blank2

286

TIMING AND SEQUENCING OF STRATEGIC ACTIONS IN INTERNATIONALIZATION PROCESSES INVOLVING INTERMEDIARIES: A NETWORK PERSPECTIVE Per Andersson and Lars-Gunnar Mattsson INTRODUCTION Management, over time, takes a series of specific strategic actions. As strategic actions we define actions aimed at influencing how the actor is related to other actors. We propose that when a strategic action is committed affects the outcome of the action. An important reason for this is that strategic actions over time can be regarded as interdependent sequences of actions. Timing and sequences may be more or less – or is not at all – preplanned by an actor. In a network perspective a focal actor is dependent on other actors that commit strategic actions. This creates interdependencies that vary over time, which a focal actor influences in a proactive, interactive and/or reactive way. The timing of strategic actions is a general, quite complex and

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 287–315 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16012-8

287

288

PER ANDERSSON AND LARS-GUNNAR MATTSSON

elusive phenomenon to be handled in practice and theory. Despite its importance, very little research has been published. We are in this article concerned with timing in a firm’s internationalization process, specifically with processes involving intermediaries between exporters and end-users. Internationalization for the exporter implies a combination of continuity and change in relationships to intermediaries. Initiatives to change relationships might come from the focal exporter or from a present or potential counterpart. There are many combinations and sequences possible and found in real cases of internationalization. Timing issues enter for many types of strategic actions during such processes of internationalization. An example often mentioned in textbooks, based on early research on internationalization is that a firm might enter a market by direct exports, then turn to an agent and later switch to sales subsidiary or to another agent (Johanson & Wiedersheim-Paul 1975; Johanson & Vahlne 1977). The timing of the switch between different modes of internationalization might be important, especially as the access to potential counterparts, at each point in time is limited and varies over time. In addition, the timing of such internationalization moves tend to be also complex because one needs to take into account the moves of existing and potential counterparts, and of other actors in the moving network context. As the context changes, it is assumed that the timing of the strategic actions need to be adapted. For the exporter, one aspect of this moving context is internationalization processes of the intermediaries themselves. Vice versa, for the intermediaries, internationalization of their suppliers (and their customers) are aspects of their moving context. The timing and internationalization processes of firms are in this article put into a dynamic context of connected firms’ internationalization processes. We apply a ‘‘markets-as-networks’’ approach. Our purpose is to discuss and analyze the timing and sequencing concepts and their role for understanding strategic actions driving internationalization processes of firms and markets. As an empirical illustration of interdependent sequences of strategic actions in a network context we use a case describing internationalization of suppliers, intermediaries and users in the electronic components industry. The involvement of intermediaries in our analysis helps to put network interdependencies in focus. We also aim to generate a set of propositions and issues for research on timing and internationalization. The disposition of the rest of the chapter is as follows. First, we discuss the timing issue and its problematic nature: Why is timing an important aspect of strategic management? Second, we briefly outline our network perspective on markets and how internationalization processes are an aspect

Timing and Sequencing of Strategic Actions

289

of network dynamics. Third, we present our case on internationalization in the electronic components industry and identify a number of sequences of strategic actions committed by the focal firm and by other firms in the network. Fourth, in the analytical section we discuss interdependencies within and between sequences and the role of timing and coordination of such sequences. Finally, we offer, in conclusion some propositions about internationalization processes with reference to timing, sequencing and coordination and present some ideas about future research.

THE TIMING ISSUE AND ITS PROBLEMATIC NATURE In the business press comments on strategic moves by companies often concern timing. ‘‘The timing of the acquisition was perfect’’, ‘‘the timing of the introduction of the new extended product brand could have been better’’, ‘‘the company failed due to the bad timing of market entry’’ and similar evaluations are common. Timing is sometimes described as a central management parameter open for any voluntary actions of management. But, reference to timing can also entail descriptions of ‘‘pure luck’’ etc., giving images of either determinism or stochastic processes. The apparently ‘‘good’’ timing can in a longer time perspective often be reevaluated. Thus, in practice, timing seems to involve management in contradictions and paradoxes, and in considerable dilemmas. Timing is obviously considered important, but few dare take it as startingpoint for research, neither empirically nor theoretically. As stated by Albert (1995), ‘‘timing has been studied within management, including both strategy and marketing, in very limited and specific ways’’ (p. 2). Hence, despite its importance, research into the full complexity of timing seems to be difficult to find. What is Timing? Why and When do we Need to Bother about it? Timing refers to when an act is performed, not in isolation but in a dynamic context. ‘‘When’’ matters for the outcome since conditions change over time. Timing refers to a number of points in time when an act could have been taken and actually was taken. Timing relates separate acts to each other in terms of a sequence of acts. A sequence might be more or less explicitly planned. Owing to uncertainty about contextual interdependencies

290

PER ANDERSSON AND LARS-GUNNAR MATTSSON

it can only be determined afterwards as realized sequences. Since strategic actions are aimed at affecting a firm’s relations to its environment, or in our perspective its network connections, strategic actions by others need to be considered. This is obviously so when actors decide to merge or ally. It is, to further complicate the issue, also a matter of judgment what actions to include in a sequence. Some sequences are reasonably well controlled by an actor or by a coordinated set of actors. An example of this is a planned logistic system where specific resources are committed for flow of goods, information and payments according to routine behavior. Even if there are important timing issues to be resolved in routine processes we do not consider them here. What we do consider however, in the case of e.g. logistics, are the strategic actions committed to establish and change relationships between actors to be involved in the development and implementation of the routine activities in a logistic system. When do we need to bother about timing? If each action is independent of other actions, by the focal actor and by others, that is if sequences and other actors’ behavior are unimportant, then timing is of little importance. If acts are reversible, i.e. if commitments can be nullified, and if availability of specific resources does not change over time then timing is of little importance. However, such conditions are atypical, given a network perspective. By definition strategic actions are aimed at influencing the focal firm’s relations in its network context. Other actors are thus important because they influence to what extent the focal actor’s objective can be realized and they continuously change the contextual attributes. To sum up, timing can be assumed to be important: (1) if an act commits and influences limited resources and/or serves to develop resources and thereby influences future resource availability, (2) if an act is aimed at committing other actors’ resources and those resources change over time, (3) if timing and sequencing of interdependent complementary strategic actions will influence the effectiveness of the joint outcome, and (4) if acts imply irreversible resource commitments under uncertainty and competitive acts. We believe that such conditions are typical in internationalization processes.

Timing in the Literature Every strategic action has its own particular temporal profile. When a particular action is performed in sequences of events is only one of the temporal aspects determining the impact and development of the change processes

Timing and Sequencing of Strategic Actions

291

and the actual change contents, within the dynamic context (Sztompka 1993). The sequential structure, the duration, the speed and the recurrence/ uniqueness of a strategic change episode will be part of the temporal characteristics, its temporal profile. We focus here on two dimensions, timing and sequences. Several aspects or elements can be acknowledged as part of the diffuse concept of timing. While some organization and management researchers focus on the principal components or theoretical terms by which timing can be analyzed (e.g. Albert, 1995), others categorize the different types of strategies associated with timing (e.g Gro¨nmo & O¨lander 1991; Pfeffer, 1992). One of the most in-depth, theoretical discussions on timing is provided by Albert (1995). Albert brings in both the context and its dynamic properties when he states that: ‘‘A reason for acting at a given time, is a product of learning; that is, it depends on past context, and by definition refers to some aspect of the continually unfolding context that defines the plot into which actions will be inserted’’ (p. 7). Hedaa and To¨rnroos (2002) proposes the term kairology to denote the theory of appropriate timing for action in differentiated managerial situations and contexts. They acknowledge that timing is both an aspect of the orderly world of routines and of the complex world of unforeseen events. In a similar type of reasoning, Tikkanen and Parvinen (2002), however, not explicitly referring to timing aspects, discuss how in the ‘‘emerging network society’’, the opportunities to plan economic activity, due to advances in information and communication technology is related to a contrasting development, also related to these technology attributes, of spontaneous ordering of economic activity. They conclude that the network society reinforces neither planned nor spontaneous order but rather the interplay between the two. Timing appears in mainstream marketing and international business literature in three different shapes. First, as noted by many researchers, timing is dominated by a competitor oriented perspective. Research on the advantages and disadvantages of the so called ‘‘first mover’’ and ‘‘follower’’ strategies dominate the concept in several sub areas of marketing. For example, international marketing research on new market entry strategies often base its discussions on considerable amount of prior research on order-of-entry modeling (Lieberman & Montgomery, 1998). In a similar fashion, order of entry assumptions form the basis for much research on new product and brand positioning in both established and new markets. There are examples also of how both these research traditions have been combined (e.g. Bowman & Gatignon, 1996; Delios & Makino 2003).

292

PER ANDERSSON AND LARS-GUNNAR MATTSSON

Second, timing can be found in the use of sequence based models, assuming that before one type of action can be taken one or several other actions have to precede it in order to reach the best result. Especially, textbook marketing is dominated by such sequential models, with its implicit timing assumptions e.g. in product development models. To this we can also add literature on logistic processes. For our purpose it is interesting to note the sequential emphasis in literature on internationalization. The Uppsala model (Johanson & Vahlne, 1977) and how it is used to explain the increasing commitments of resources in intermediaries, the later research on knowledge development in the multinational firm, (e.g. Sharma & Blomstermo, 2003) and on the born global (e.g. Madsen & Servais, 1997) are examples of, at least implicitly, timing related research. Sharma and Blomstermo (a.a.) find that the literature treats knowledge accumulation over-simplistically as linear and continuous, and argue that it should be seen as nonlinear and discontinuous. Events disrupt, and cause tensions, contradictions and ambiguities (Andersson, 2002). Third, timing issues are at least implicit in markets-as-networks based research on industrial markets. A natural consequence and an important strategic managerial implication for a company being embedded in a dynamic, network context is the fact that the outcome of strategic actions and position changes will be dependent on when they are performed. While timing is present in many in-depth empirical case studies, timing is seldom treated as a theoretical and conceptual issue. One exception is To¨rnroos (2003).

Putting Timing Decisions in Context Important for our assumptions about timing, is that strategic actions connected to the internationalization of firms are, for the single firm, not likely to be experienced as smooth evolutions, characterized by a clear temporal linearity of the change processes. Actors have different perceptions of time and the time dimension is in different ways included in the actors’ cognitive models. The timing of strategic actions becomes connected to the change agents’ perceptions of ongoing change processes in its context and of their readiness to act on these changes, and on their general readiness to change (Andreasen, 1991). Reflected in the change agents’ behavior, they act with different time horizons and take different time perspectives when they make efforts to change

Timing and Sequencing of Strategic Actions

293

relationships in the ‘‘moving context’’. The dynamics of strategic actions, including timing, evolve with actors with different time perspectives (Pieters & Verplanken, 1991). From the embeddedness of strategic actions also follows that a change agent’s time perspective – the vantage point and the viewing direction (towards the past, present or future) – partly, is determined by changes in the context. This can be acknowledged in our empirical data, e.g. in accounts from decision makers describing various dimensions of timing. When timing is accounted for, it is often in relation to various events more or less distant from the present, in the past or related to expected events in the future. Actions are perceived in different ways in different schools of thought. Pro-action is the implicit view of action permeating the ‘‘design schools’’ for e.g. strategic management and marketing management. Timing then becomes one of a set of choice and decision parameters open for the proactive management to use in planning, decision, and implementation processes. At the other end of the voluntaristic–deterministic scale, the long-term development of the organization ultimately is determined by the environment and the ‘‘evolutionary laws’’ governing what type of organizations will survive. To simplify, at the deterministic end of the scale, single strategic acts do not matter much, giving (the implicit) picture of action as characterized by inaction, giving no role for timing whatsoever. Reaction is the implicit way for the organization to handle this situation, and timing will be restricted to the development of a preparedness to react on environmental changes affecting the organization. Our standpoint is neither ‘‘over-voluntaristic’’ nor ‘‘over-deterministic’’. Strategic action is voluntary but its content and effects are determined by network conditions of which strategic actions by other actors are important. With a dynamic network perspective on markets presented next, timing will be part of the interactions taking place between actors. This will have implications for our view on timing.

A NETWORK PERSPECTIVE ON MARKETS AND INTERNATIONALIZATION The Network Perspective and Strategic Action The market is an evolving, socially constructed institution characterized by both cooperation and competition. A market can be described in terms of

294

PER ANDERSSON AND LARS-GUNNAR MATTSSON

connectivity, i.e. how actors are directly and indirectly connected to each other. The market processes are to an important extent endogenously driven through voluntaristic behavior by actors in the market. Change and stability in exchange relationships and in the interdependencies between exchange relationships are thus, aspects of market dynamics. Strategic actions are aimed at influencing own and other actors’ network positions and by definition thereby also aimed at influencing the connectivity pattern and the relationship content in the network. A strategic action does not necessarily succeed in influencing the connectivity since, this is obviously dependent on actions, interactions and re-actions by other actors (Johanson & Mattsson 1992). There are two bases for strategic actions by a focal actor: its position in the network and its ‘‘network theory’’ (Johanson & Mattsson a.a.). The position is important, since, an actor’s ability to influence the network depends on how it is connected to other actors and the quantity and quality of its internal resources. The actor’s network theory, is defined as the actor’s set of systematic beliefs about market structure, processes and performance and the effects of its own and others’ strategic actions. The network theory is important because, it affects what strategic action is taken. An important determinant of strategic action in a network context is the actor’s network horizon, i.e. how far from its own position it perceives change processes to be relevant for its own actions. The network horizon may change over time, e.g. from local to regional, from a specific industry to a wider constellation of substitute, and complementary industrial activities and might also differ between actors. Strategic actions are both constrained and facilitated by the market structure and by strategic actions by others. Strategic actions can, and we usually do believe, cause multiple, sequential and interrelated strategic actions in a market. Such sequences of actions can be analyzed as caused by ‘‘domino effects’’ (Hertz 1998). We also believe that the perceived interdependence between actors as regards to their future network positions increases their sensitivity to the timing aspect of their strategic actions. An example of this is that during specific time periods a market experiences a ‘‘wave’’ of mergers and acquisitions. The electronics industry case presented later is an example of this. Our way to approach the complicated timing problem is that we consider each individual actor to more or less explicitly consider sequences of strategic actions influenced by its time horizon and network horizon. This can be seen as an ‘‘imperfectly planned sequence’’. This sequence is contingent upon changes in the context. For some such contingencies alternative actions may be planned. For others, that are unexpected, the actor may react or stay

Timing and Sequencing of Strategic Actions

295

inactive. The ‘‘planned order’’ and the ‘‘unplanned order’’ interact in the sense that a strategic action, an individual actor plans (and commits), might become an unplanned influence on another actor’s planned order. (Cf. Hedaa & To¨rnroos 2002; Tikkanen & Parvinen 2002 that present similar ideas.) Coordination of strategic action sequences, resulting in temporary network structures, is in itself a network process. Networks are governance structures also regarding how individual actions and action sequences affect network structure. Societal norms and actors, e.g. in areas like industrial policy, competition law, also need to be considered. We will discuss this later in the article.

Internationalization in Markets as Networks Perspective International business studies in the network tradition (e.g. BlankenburgHolm & Johanson, 1997) are predominantly focused on internationalization processes within network structures. Johanson and Mattsson (1988) introduced a model of firms’ internationalization, differentiating internationalization situations. Based on earlier research on internationalization they distinguished between three central aspects of internationalization processes: extension, penetration and integration. They implied a sequence in the sense that extension to a specific country is a necessary phase before penetration of that country takes place and international integration becomes an important dimension only after extension and penetration had reached rather high levels. The network view of the market implies that the context of the firm can be regarded as being internationalized to a varying degree. This is of great importance for our analysis. The market in which the firm acts is changing over time. Thus, each firm has to consider that they act strategically within a ‘‘moving context’’ (Andersson, 1996). According to Johanson and Mattsson (a.a.), the ‘‘Early Starter’’, for whom both its own and the market’s internationalization are at low faces quite different from internationalization challenges compared to, for e.g. the ‘‘Internationalization Among Others’’ for whom both the firm and the market are highly international or the ‘‘Late Starter’’ who begins to internationalize in a highly internationalized market. This has also implications for timing. Mattsson (1998) introduced the notion of overlapping networks to describe internationalization processes. For example, the concept can be employed to describe the dynamic process when two firms merge, thereby changing the interconnections and interdependencies between the two networks in which the companies are positioned.

296

PER ANDERSSON AND LARS-GUNNAR MATTSSON

Several actors belonging to different networks might jointly act to restructure the networks through an overlapping process, through mergers or strategic alliances for example, which in turn will affect the ongoing process of other network actors. Coupled to internationalization, in this way business processes in different geographical regions will be connected and created. When spatial overlapping takes place in an international context, it might be linked to the creation of ‘‘new’’ market regions (see also Mattsson, 1995; Chandler, Hagstro¨m, & So¨lvell, 1998; Dunning, 1998; Enright, 1998). We argue that timing of strategic actions are important for the outcome of these processes. With specific reference to the case below internationalization implies a combination of continuity and change in relationships to intermediaries. Initiatives to change relationships might come from the exporter, from a present or potential intermediary or from the user. Other network actors might influence such decisions. Even if the textbook follows the sequence: ‘‘direct export – agent – own sales subsidiary – own manufacturing subsidiary’’, there are in reality many combinations and sequences possible. Internationalization, in which distribution activities play a major role, can be seen as on-going, never-ending reorganization processes within dynamic network contexts (Mattsson, 2003). It follows that timing of strategic actions aimed at (re)organizing distribution through intermediaries is an important and complicated issue.

INTERNATIONALIZATION OF AN ELECTRONIC COMPONENT WHOLESALER This paper extracts one case from a study of 17 wholesalers in various industries. (The case has earlier been described in Andersson 2002.) The case describes internationalization in the electronic component industry, during the 1990s. The focal firm is Hatteland (JHE), a Norwegian wholesaler. This industry, where suppliers, wholesalers and buyers at the end of the studied period to a large extent are large global actors, was characterized by intensified and concurrent internationalization during the 1990s (Fig. 1). It was chosen to provide an illustration of timing and sequencing issues during internationalization processes, but was not explicitly focused on timing. The text below describes the internationalization of JHE in three main process phases. After this we specify sequences of strategic actions during the period, for JHE and for six other firms in the market, also adding some to strategic acts not commented on in the text.

297

Timing and Sequencing of Strategic Actions

Fig. 1.

Suppliers

Wholesalers

Siemens Philips Sharp Huyundai Harris Linear Tech.

Arrow Avnet Marshall SEI JHE VEBA

Customers Ericsson Nokia Motorola (IT Manuf.)

Three, concurrently Internationalizing Actor Groups in the Electronic Components Network.

THE START OF THE INTERNATIONALIZATION PROCESS Impulses to start internationalizing came from JHE’s big component suppliers. JHE had exclusive rights to distribute the components in Norway for some 40 suppliers, but its supplier relationships were dominated by a set of big multinational companies, like Siemens, Hitachi, NEC, Philips, Motorola, SGS Thomson, Temic, and Texas Instruments. To sell outside JHE’s own home market was difficult as the distribution rights for an individual manufacturer’s components were spread among different wholesalers, and gave distributors exclusive rights in each country. However, suppliers increasingly centralized their marketing functions and created larger market regions, going from a national to a regional level. To be able to provide services to larger regions most of the important suppliers were actively reducing the number of distributors in the late 1980s and early 1990s. To overcome the problem of exclusive distribution rights and to adapt to the suppliers developing a regional strategy, JHE expanded by buying wholesalers in the other Nordic countries. In 1991, a Swedish wholesaler, Deltron, was acquired, followed by the acquisition of Danish wholesaler P. Petersen. JHE’s CEO commented the timing of the Deltron acquisition: The time for our acquisition of Deltron in 1991 was a natural consequence of the fact that we had seen that some suppliers, especially Philips, started to treat the Nordic market as one instead of four separate national markets. We decided to approach Deltron already in 1989–1990 when Philips announced that all their distributors in the Nordic countries were from then on free to sell in all other Nordic countries. JHE was a small company and Norway was only one tenth of the Nordic market so we had to act quickly. We saw Deltron as the best match and the Swedish market as the easiest to start

298

PER ANDERSSON AND LARS-GUNNAR MATTSSON

with. Unfortunately, the timing was not the best in 1989–1990; Deltron was not ready and we had to make a second proposal in 1991 when Deltron also acknowledged the ongoing market changes and said that they, as they said, ‘saw the new trends emerging’ (interview with Jakob Hatteland )

When entering Finland in 1993, a green field investment was the only option. The entry into Denmark and Finland was commented in the following way: We entered Denmark quite soon after Sweden, in order to build up a the Nordic position in a short period of time. We waited a little bit with Finland, because we first wanted to build up experiences from Sweden and Denmark, and secondly, there were no distributors to acquire for us in Finland so we had to make green-field investments there. (interview with Jakob Hatteland)

The first phase of internationalization focused mainly on expanding into the national markets of the Nordic region. An important reason why major suppliers of components wanted to regionalize activities was the international reorganization of big international customers in the telecommunication, IT and electromechanical engineering industries (Other electromechanical firms (OEM) firms such as Nokia, Alcatel, ABB, and Siemens). Several of the largest global component suppliers continued to actively drive globalization and restructuring of distribution during the 1990s. For JHE and other internationalizing distributors, these ongoing internationalization processes required adaptations. The globalization trend drove suppliers to close cooperation agreements with globalizing distributors. The large, internationalizing customers using electronic components in their production were becoming important drivers of the distributors’ continued internationalization. This was to an important extent related to these OEM firms intensified outsourcing of production and purchasing to other firms, the equally internationalizing, global contract manufacturers.

JHE’S CONTINUED INTERNATIONALIZATION THROUGH STRATEGIC ALLIANCES To meet this new situation and increased competition in the mid-1990s, JHE’s large, international competitors engaged in intensified attempts to buy other distributors and to establish international alliances in North America, Europe and Asia. The two biggest American distributors Arrow and Avnet continued to buy smaller distributors in the three regions. While Arrow and Avnet led the charge overseas, predominantly through

Timing and Sequencing of Strategic Actions

299

acquisitions, the big German conglomerate Veba Electronics Group (VEBA) increased its presence in North America in 1997 by acquiring the USA based Wyle Electronics. The large French distributor, Sonepar Electronique International (SEI) established an alliance with the third big American wholesaler, Marshall. Many wholesalers defended their home region and expanded in this way, becoming part of international alliance networks of wholesalers connecting the three major regions. In Europe, there was increased competition from Arrow and Avnet. Their dominance towards the end of the decade was achieved through successive mergers, acquisitions and alliances. Avnet had a global strategy, according to which larger regions were covered by acquiring and integrating new companies into its global network of companies. Arrow approached Europe by recognizing that the region was made up of unique sectors requiring different customer adaptations. During this intensified internationalization of the industry came the second major step in JHE’s internationalization. In 1995, JHE established a strategic alliance with SEI. SEI’s comments to the alliance with JHE was: The importance of forming strategic alliances in the evolving distribution environment has become more and more evident. The contract with the Hatteland Group offers us the last step to become a true pan-European player with the possibility of progressive equity integration. It is an innovative way to mean more to our customers, suppliers and employees in this very competitive market environment. We are now able to offer customers and suppliers sales and marketing outlets in more countries in Europe than any other competitor. (Jean Fribourg, CEO, press release)

JHE’s comments: To secure our continuity and growth in the future, we found in SEI and its strategic alliance Marshall Industries, partners with the same business values and principles. The contract with SEI allows us to have a strong local identity in the Nordic countries with all the benefits a global partner can offer. (Jakob Hatteland, CEO, press release)

It was a result of continued and increased pressures from competitors and from the companies’ internationalizing suppliers, who in turn were driven by their internationalizing customers. The need to establish larger, more efficient sales regions was accentuated. Part of this process was also SEI’s move to establish an alliance with the third big American wholesaler, Marshall Industries. Driven by these processes, SEI and JHE began to reorganize and coordinate the activities in Europe into a northern and a southern region. This

300

PER ANDERSSON AND LARS-GUNNAR MATTSSON

was also due to the fact that their large suppliers were moving production internationally and were beginning to establish production in the Baltic countries. JHE continued to expand into the Baltic countries through green field investments: We moved into Estonia in 1997 as part of the strategy to create a Nordic–Baltic region. We moved there early expecting that the market would become increasingly important as more and more companies would move their production to the three Baltic states. (interview with Jakob Hatteland)

This paralleled the 1995–1996 process to penetrate the Swedish and Danish markets by acquiring an additional wholesaler in each of the two countries. JHE continued, step-by-step, to spread the distribution rights for a particular supplier’s products that it had in one country to other countries in northern Europe. Having left most of the responsibility for the coordination process in northern Germany to SEI, JHE could concentrate on the Nordic and the Baltic countries. In some cases, where the company had the distribution rights for one manufacturer’s components in one country (e.g. for Hitachi’s components in Norway), JHE was able to get the same rights for Sweden, Denmark and Norway. In other cases, this was hindered by the fact that the supplier had already signed over the rights to a competing wholesaler in one or more of the countries. JHE’s internationalization processes were coupled with substantial reorganizations of wholesale functions. During the initial M&A-based expansion period, the inventory holding function was successively centralized to the company’s original Norwegian home market organization. In the second, alliance-based expansion period, internal integration and co-ordination of inventory holding routines between alliance partners was initiated. This internal co-ordination was partly driven by the international sales contracts signed by SEI and JHE with large multinational customers like Alcatel, ABB, and Siemens, as commented by JHE’s CEO: We could see the emergence of requirements for more centralised contracts from some of the big customers like ABB who signalled that they would like to have only three preferred distributors in Europe. (interview with Jakob Hatteland)

The integration and co-ordination phase meant that several activities had to be reorganized. Market overlaps between JHE and SEI had to be reduced, involving international transfers of distribution rights, centralization and internal co-ordination of purchasing, inventory holding and logistics and co-ordination of the handling of international key customer relationships.

Timing and Sequencing of Strategic Actions

301

THE INTERNATIONALIZATION PROCESSES TAKE NEW DIRECTIONS The processes took radically new turns towards the end of the 1990s. In mid1999, JHE’s competitor Avnet, as part of its continued internationalization, acquired the US-based international competitor, Marshall Industries. Avnet assumed ownership interest in Marshall’s European partner SEI, the major alliance partner of JHE. In connection with the deal, Avnet announced a second large deal, which was a continuation of its positioning process in Europe. Avnet acquired the remaining ownership interest in SEI. Through SEI, Avnet gained access to new markets including Belgium, the Netherlands, Portugal, and Spain; and boosted its presence in Austria and Switzerland. Uncertainties emerged about how to handle SEI’s alliance partnerships, including JHE. A few months after the deal, Arrow responded to Avnet’s move by acquiring JHE, finalizing the break-up of the former alliance between JHE and SEI. Arrow continued to strengthen its European and already strong French position by acquiring the French based distributor Tekelec, which principally served France, but is also present in Benelux, Denmark, Germany, Italy, and Spain. The next big change in the internationalization processes came in mid2000. European based VEBA was the third largest of the emerging global distributors. VEBA was broken up and sold to three companies: Arrow acquired VEBA’s three American operations that VEBA had acquired during its intensified internationalization in 1997–1998. Arrow’s competitor, Avnet, acquired VEBA’s European EBV Group consisting of four companies based in Europe. A German venture capital group acquired the three remaining VEBA companies. Combined with the prior acquisition of SEI, the EBV buyout was expected to bolster Avnet’s presence in France, Scandinavia, the United Kingdom, and the Benelux region. In Arrow’s case, the regionalization of the European market was further strengthened. Three major European regions were established (northern, southern, and central). Internally, Arrow further strengthened the ‘‘single points contact’’ strategy (i.e. for each customer and each supplier one unit was designated as responsible for the relationship.) The continued internationalization of the major suppliers and customers was an important reason for the development of new single points of contact. The same process was already being implemented in the North American region. With this step, JHE became part of a multinational distribution network and new processes of internal co-ordination were started.

302

PER ANDERSSON AND LARS-GUNNAR MATTSSON

Internationalization Sequences in the Case We can describe the internationalization of JHE as a sequence of strategic actions committed by JHE. Its internationalization process changed directions at least twice during the 1990s. The Nordic expansion through acquisitions dominated the first phase. During the second phase, the attempt to create a pan-European business through strategic alliances dominated. During the third phase, alliances were broken as the company was acquired and integrated into a new, emerging global network of wholesalers. The case also refers to internationalization processes of a number of other firms: component suppliers, other wholesalers, OEM customers, and contract manufacturers. These processes are in the case arguably to an important extent interdependent. If we compare the electronic component industry in the beginning of the 1990s to the situation a decade later we find considerable differences. Generally, international integration has increased substantially. Through M&A’s, alliances and greenfield investments some wholesale firms have internationalized through extension, penetration, and integration, leaving wholesaling at the end of the decade dominated by two major global firms. Had we taken another firm, mentioned in the case as the focal firm, e.g. Marshall, Philips or Siemens we would have identified different sequences of strategic actions that at some point in time related to the sequence focusing JHE. There are also other firms, not mentioned in the case whose internationalization was affected by the process we have described. For example, logistic firms providing transport services also need to adapt to internationalization in the electronic component industry. Below we identify sequences of strategic actions in the case, starting with JHE’s internationalization, about which we know much more than about the other firms. Actions which explicitly connect individual sequences to each other are in italics. We lack information about how the remaining actions directly or indirectly affect the specific other individual sequences. However, since they are all actions related to the specific firms’, and thereby also the market’s, internationalization processes we believe such interdependencies exist.

Sequence 1: JHE a. A Swedish wholesaler, Deltron, was acquired (1991). b. A Danish wholesaler P. Petersen was acquired (1992). c. A greenfield investment is made in Finland (1993).

Timing and Sequencing of Strategic Actions

303

d. JHE reorganized wholesale functions within the Nordic region (1994). e. Efforts were initiated – sometimes hindered by a supplier0 s prior agreements with a competing wholesaler—to spread JHE exclusive distribution rights for one country to other countries (1994). f. JHE joined SEI-led strategic alliance (1995). g. Europe was divided within the alliance between a Northern and Southern regions, and processes were started to transfer distribution rights, centralize, and to co-ordinate purchasing, inventory holding and logistics (1995–). h. Efforts to co-ordinate handling of international, key customer relationships within the alliance. (1995–) i. JHE acquired an additional wholesaler, Mer-El a/s, in Denmark (1995) and GLSi Elektronik AB in Sweden (1996). j. Greenfield investments in the Baltic countries were made (1995–96). k. JHE left Germany to SEI, and started to concentrated on the Nordic and Baltic countries (1996–). l. JHE was acquired by Arrow, a few months after Avnet’s entry in SEI, finalizing the break-up of JHE’s alliance with SE (2000). m. JHE was integrated in the global Arrow organization (2001). Sequence 2: Sonepar Electronique International (SEI) a. Internationalization efforts intensified in SEI in the early 1990s. Within four years from 1992, SEI had market presence in Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the United Kingdom (1992–1996). b. Marshall and SEI established strategic partnership during sequence indicated by the above (1994). c. Strategic alliance with JHE was established (1995). d. Marshall acquired 16% ownership in SEI’s European interests. The deal also gave the American company Marshall an option to increase the investment up to 49%. SEI had an option to purchase a 5% interest in Marshall within the next 24 months (1997). e. Coordination between SEI and JHE in Europe intensified including joint international SEI/JHE sales contracts with large customers (1997–). f. SEI and Marshall created an alliance with Diploma (UK, Ireland), and the new partnership ranked in the top four of worldwide electronic component distributors (1997).

304

PER ANDERSSON AND LARS-GUNNAR MATTSSON

g. Avnet, which had acquired Marshall in 1997 and thereby also ownership in SEI, acquired remaining ownership of SEI and integrated SEI in the global Avnet organization (2000). h. SEI’s alliance with JHE, previously acquired by Arrow, was broken (2000). Sequence 3: Marshall a. Increased efforts by Marshall to acquire distributors in North America and Europe (1992–). b. Marshall established a strategic alliance with Wyle Electronics (1996). c. The company broke the alliance with Wyle Electronics due to acquisition of Wyle by German distributor Raab Karcher AG (1997). d. Marshall Industries officially became a 16 percent owner of the panEuropean components distribution group SEI (1997). e. Marshall Industries’ acquisition of Sterling Electronics Corp. was completed (1998). f. Avnet acquired Marshall Sterling. As a result of the merger, Avnet became the largest electronic components distributor in the Americas (1999). Sequence 4: Arrow a. Arrow engaged in increased efforts to acquire small distributors in North America, Europe and Asia (1985). b. Arrow acquired 40% interest in Germany’s largest electronics distributor, Spoerle Electronic (1985). Arrow successively increased its ownership to 100% (2000). c. Expansion into Asia was started with the acquisition of Hong Kongbased Components Agents (1993). d. Arrow acquired New Zealand’s Components+Instrumentation (1995). e. Arrow’s Italian subsidiary Silverstar acquired Eurelettronica, one of Italy’s biggest semiconductor distributors (1996). f. Continued efforts to acquire wholesalers in Europe, e.g. the UK-based electronics distributor Premier Farnell (1997). g. Arrow acquired components distributor Richey Electronics and the Electronics Distribution Group of Bell Industries (1999). h. Arrow joined rival Avnet and others to form online electronics distribution ventures Chip Center (in 1999) and Viacore (in 2000). i. Arrow acquired French based distributor Tekelec (2000). j. Arrow acquired JHE (2000).

Timing and Sequencing of Strategic Actions

305

k. Arrow purchased Wyle Components and Wyle Systems from German utility giant EON AG (2000). l. The company acquired European group VEBA’s three American operations. (2000) (These hese were acquired in 1997 by VEBA during VEBA’s intensified internationalization efforts.) m. Arrow’s recognized that Europe is made up of unique sectors requiring different customer adaptations. Three regions were established (2001). n. The company strengthened the ‘‘single points contact strategy’’ (2001). Sequence 5: Avnet a. Efforts were made to acquire small distributors in North America, Europe and Asia. Avnet spent more than $100 million for acquisitions strategic to the European market (1991–). b. Avnet outbid Wyle Laboratories for Hall-Mark Electronics, the U.S.’s third-largest distributor (1993). c. Avnet acquired Penstock, the top U.S. distributor of microwave radiofrequency products. Thanks to its purchases, Avnet was Europe’s #2 electronics distributor by 1994, despite having had almost no European operations prior to 1990 (1994). d. The company continued to expand globally, acquiring Hong Kong distributor WKK Semiconductor, among others (1995). e. Avnet saw increasing demand from customers on a transatlantic basis for services. Companies like Nokia began to recognize the need for globalization. Avnets European customers were behind the American, but they were soon following the example of progressive customer companies like Nokia. Nokia was among the 50 to 100 global customers Avnet had active conversations with on their emerging global strategy (1996–). f. Avnet reorganized around separate global computer and electronics businesses. A global strategy was stabilized, where larger regions were covered by acquiring, and integrating new companies into its global network. (1998–) g. Acquisition of Marshall (1999). h. Avnet acquired IBM distributor Savoir Technology Group, making Avnet the leading distributor of IBM midrange products (2000). i. The company acquired a part of Germany-based EBV Group (semiconductor distribution) and RKE (computer products and services), both from German utility giant EON AG (2000). j. Avnet acquired remaining ownership of SEI and SEI was integrated in the global Avnet organization (2000).

306

PER ANDERSSON AND LARS-GUNNAR MATTSSON

k. Avnet acquired smaller rival Kent Electronics (2001). l. Avnet bought Chinese competitor Sunrise Technology (2001). Sequence 6: Philips (as an example of a supplier) a. Philips gave exclusive distribution rights for each country to individual wholesalers (including JHE) and increased efforts to regionalize marketing organization (1990–). b. Efforts were made to select wholesalers that covered a whole region and closer cooperation with fewer, internationalizing wholesalers were initiated (1994–). c. Philips concentrated on working with its existing distributors to coordinate activities on a global basis. The company’s global regions included North America, Europe and Asia (1997–). d. Philips main distributors in North America were established: Arrow, Avnet, Marshall and Future. In Europe, the company used primarily Avnet and Arrow, with regional augmentation from Eurodis Electronics and SEI. Asian distribution was handled through Arrow and regional distributor World Peace (1997–). e. Philips’ intention to integrate with its distributors took on additional importance as production shifted across national borders and distributor relationships had to be adjusted to fulfill customer needs (1997–). Sequence 7: Nokia (as an example of a customer) a. After profits fell in 1988, Nokia entered a period of retrenchment. Its data division was sold in and Nokia electronics focus was narrowed to 3 main business groups: telecommunications, mobile telephones, and consumer electronics (1991). b. Nokia bought UK mobile phone maker Technophone, which had been #2 in Europe, after Nokia (1991). c. Nokia formed numerous international alliances and agreements with other firms. The company worked to overcome weaknesses in marketing and distribution by forming international marketing alliances and developing marketing expertise (1992–). d. The United States became Finland’s second largest supplier of electronic components, with a market share of 16%. The real growth of electronic components imports was about 30%. This was due in large part to the extensive use of imported components by large Finnish electronics exporters, particularly ICL and Nokia (1992).

Timing and Sequencing of Strategic Actions

307

e. Nokia were among the 50 to 100 global customers Avnet had active conversations with on their emerging global strategy (1996–). f. Through continued internationalization related to strategic action Nokia by 2005 sold its products in more than 130 countries, had manufacturing plants in 10 countries and research and development centers in 15 countries (1999–2005).

ANALYSIS Types of Interdependencies within and between Sequences Within each sequence there are interdependencies of three kinds. First we can identify sequences that are part of a preconceived strategy. Given the way the case has been focused on internationalization such interdependencies are quite common. A few examples are JHE’s initial move into other Nordic countries (1a-1c), Avnet’s global strategy (5e and onwards) and Philips strategy to reorganize relations to distributors (6b–e). Second, we can identify sequences where a prior action is a necessary or at least very important precondition for a later action. An example is efforts to integrate international activities within a region that are dependent on prior changes in affiliations. (E.g. Arrow 4 m is dependent on prior acquisitions in Europe, e.g. 4 a,b,e,f,i—l.) Avnet’s acquisition of Marshall is a precondition for Avnet’s later acquisition of SEI. (5f is a precondition for 5 i). Third, we can identify negative effects between different actions. For Philips, the exclusive distribution rights contractually awarded national wholesalers might negatively have influenced the efforts to work with wholesalers covering a whole region (6a affecting 6c and 6e). We believe that negative effects are more common than what we, given the nature of our empirical observations (mostly secondary information and interviews with the focal firm JHE) have been able to document. Between sequences there are interdependencies of three kinds. First, by definition changes in cooperative relationships between two or more actors usually require actions by all the actors involved. Examples concerning M&As and alliances are numerous. E.g. 1f and 2d, 1 l and 4j. Second, an act may be dependent on a specific act by a competitor. An example is how Avnet’s acquisition of Marshall (5f) made Avnet part owner of SEI, which influenced Arrow to buy JEH (4j). Third, an act may be dependent on sets of action sequences in the network. The general trends and interdependencies discussed in the case concerning

308

PER ANDERSSON AND LARS-GUNNAR MATTSSON

internationalization of suppliers and customers affects the wholesalers. (E.g. 6b influenced by 7e affects 1h/2f.)

Timing and Interdependent Sequences The case illustrates connected, concurrent internationalization processes. During a decade the wholesaler went through three phases of internationalization involving extension, penetration and integration, involving also acquisitions, green field investments, alliance formation and dissolution, and, at the end of the period being acquired by a major wholesaler to become an integral part of a global distribution network. Afterwards it is possible to describe and rationalize/explain this process. If we had taken any other firm mentioned as the focal firm we would have discovered different stories, but no doubt directly or indirectly connected to the JHE story. If we had begun our investigation in late 1990, could we have foreseen the process and predicted that JHE 10 years later had become part of Arrow? Or, if we had taken SEI’s perspective, that JHE was to become a partner in a strategic alliance that was later to be dissolved? Perhaps both analysts and managers could have successfully speculated about the general trend towards more internationally integrated activities in the studied industry but hardly about the more specific strategic actions and their effects on the network structure, including the survival of specific firms and the connections between them. We suggest that the interlocking sequences that our case describes are partly (a few steps in a sequence) planned but quite imperfectly and implicitly planned, based on a dominant and evolving network theory, in this case about international integration. When JHE extends to the Nordic region it has likely planned a sequence involving extension to Sweden, Denmark and Finland. It is also likely that the acquired firms had some sequence planned about how they could adapt to the regionalization of the suppliers, even if perhaps their network theories might have evolved later, or earlier, than for JHE. Some pre-planned sequences that other actors had, might have fitted more or less well with JHE’s acquisition plans. How does timing enter into this reasoning about partly preplanned sequences of strategic actions? We suggest that it is because the fit between the strategic actions undertaken by different actors in the network changes over time. If e.g. JHE had timed its preplanned ‘‘nordification’’ sequence differently, Deltron’s and/or P. Petersen’s preplanned sequences might not have allowed for an acquisition by JHE e.g. because they had already been

Timing and Sequencing of Strategic Actions

309

acquired by a competitor to JHE or because their network theories led them to prefer to stay local. (Cf, the comment by JHE (p. 13) that Deltron preferred to stay local, when JHE first approached it in 1989—1990.) If JHE had began its ‘‘nordification’’ long before its suppliers began to prefer regional distribution arrangements with fewer distributors, it might have invested too early to get a sufficient return. What we say above is of course only speculations about what could have happened with different timing of strategic actions. We do suggest that to know more about the role of timing we should study sequences of actions from more than one actor’s point of view and furthermore to what extent the sequences are partly preplanned and dependent on unforeseen strategic actions in other network actors’ also partly pre-planned sequences. To understand what actors network theories (including network horizon and time horizon) are and how they evolve is important to understand timing and the effects of timing. We suggest that an approach to understand the role of timing of strategic actions is to explicitly consider how interdependencies between partly and imperfectly pre-planned sequences by two or more actors are coordinated. We also need then to keep in mind how an actor’s strategic action is influenced by its network theory and network position. As we have stressed several times, an individual strategic action relates (stabilizes and/or changes) the actor to its context. Coordination of strategic actions in the overall network context is an important aspect of network governance, thus, affecting network structure. Sequences of strategic actions committed by individual actors are interdependent and by coordination we mean the mechanisms by which such interdependencies are handled: First, such coordination may involve direct interaction between actors in terms of cooperation and/or competition. An example is interaction in terms of implicit or explicit negotiations between two actors (e.g. for an M&A or a strategic alliance), thus, directly affecting two individual actor sequences. The coordination is affected by the network theories of the involved actors. During this interaction the network theories might be changed, e.g. one actor influences the network horizon and time horizon of another. Second, coordination might also occur indirectly as when an actor not directly involved adapts to strategic actions committed by other actors. I.e. concurrent sequences affect each other. Third, coordination might be affected by intermediation of third parties (e.g. a third actor acts directly or indirectly to promote or hinder an M&A or an SA).

310

PER ANDERSSON AND LARS-GUNNAR MATTSSON

Fourth, signalling by actors about their potential further strategic actions (thus, revealing aspects of their network theories) may influence other actors’ strategic actions. Many of these coordinating activities are taking place concurrently in the network and thereby affect the network structural change process. Furthermore, but outside our ambitions in this article, societal norms (e.g. competition law, government policies, political and legal authorities) and diffusion of information from consultants and academics, affect timing, sequencing and coordination. To recapitulate, we get two central dimensions and concepts connected to timing of strategic actions; sequencing of such actions and coordinating between sequences (Fig. 2). Below we comment on how we see the mechanism portrayed by the double-headed arrows 1–3 between the three concepts in Fig. 2. Arrow 1. Timing influences sequencing because the specific actions are imperfectly preplanned as a sequence. The sequence relates the individual actions within a time order and to phases or stages in the process, in this study concerning internationalization. Sequencing also affects timing because sequencing might change the preplanned timing of actions due to changed conditions. Arrow 2. Sequencing is dependent on coordination because coordination between sequences involves more than one actor and coordination within a sequence is affected by unforeseen conditions. Coordination is dependent on sequencing. If concurrent interdependent sequences are in conflict with each other, coordination is different from a case when such sequences are complementary. Arrow 3. Timing of specific actions is dependent on coordination because opportunities and restrictions for specific actions are affected by type of coordination, e.g. internal coordination of a sequence within an actor, interaction with another actor, thirdparty intermediation or signalling. Coordination is also affected by timing of specific actions. As we have argued Coordination

3 Timing

Fig. 2.

2 Sequencing 1

Timing, Sequencing and Coordination of Strategic Actions.

Timing and Sequencing of Strategic Actions

311

earlier opportunities and restrictions for strategic actions in the network change over time. If at specific time a firm decides to internationalize by M&A rather than by organizational growth then interaction with potential counterparts will be a more dominant mode for coordination.

IN CONCLUSION Propositions Concerning Major Aspects of Internationalization with Reference to Timing, Sequencing and Coordination Based on our conceptual discussion and empirical findings we formulate, as conclusions on which further research might be based, a set of propositions concerning timing and sequencing during internationalization involving intermediaries: 1. Timing of strategic actions is important for the outcome of internationalization processes. 2. An intermediary’s internationalization process can be described as a set of (sub) sequences, dependent on the contextual (sub) sequences. 3. Timing and sequencing of strategic actions in internationalization processes need to be adapted to internationalization processes in the dynamic network context. 4. Coordination between sequences in internationalization processes involves direct or indirect interaction between actors (including signalling). 5. Internationalization – in which distribution activities play a major role – is on-going, never-ending reorganization processes within dynamic network contexts. Timing, sequencing and coordination activities have a central role in the outcome of such internationalization processes. 6. A distributor’s internationalization process is dependent on the suppliers and the customers international integration. Therefore the intermediary’s international extension and penetration – including their timing and sequencing – is driven by integration objectives. 7. There is an inherent logic to most strategic action in internationalization, created by each actor’s network theory, time horizon and network horizon. 8. The interdependence between the internationalization sequences is influenced by an evolving network theory, shared by many actors about the trend towards increased international integration. This network theory also includes temporal aspects of the network’s development, hence influencing actors’ views on timing.

312

PER ANDERSSON AND LARS-GUNNAR MATTSSON

9. Some actions of internationalization can be undertaken only if resources (internal and external that may be accessed) are available, and they are not equally available at all times. Due to continuous integration and coordination between sequences, there is only during some, more or less extended time period that they are accessible, hence making timing important. Suggestions for Future Research The role and effects of timing and sequencing of strategic actions in internationalization processes are very complex, little researched phenomena, but arguably of considerable importance when international interdependencies in markets (networks) are high. The overriding question, given our network perspective, is how strategic actors perceive and evaluate their own and others’ opportunities and restrictions for specific actions. We have conceptualized this as the timing and sequencing of strategic action being based on actors’ network theories, network positions and perceptions of network dynamics (network horizons and time horizons). Specific research questions can, given these propositions be formulated as aspects of sequence identification, sequence interdependencies and coordination between sequences. It is methodologically of course then important to study actors’ cognitions and actions. 1. Internationalization sequence identification: How do actors’ perceive their own and other actors’ sequences of strategic actions concerning internationalization? How are they related to their network theories, network horizons and time horizons? How specifically are the sequences preplanned? How do the actors’ network theories relate to internationalization theories presented in academic research? 2. Internationalization sequence interdependencies: What interdependences between their own and other actor’s internationalization sequences do actors perceive and how do these interdependencies vary over time? How do the processes and patterns of overlapping in networks affect actors0 perceptions of the range of ‘‘the window of opportunity’’, when timing strategic actions? How are network horizons (and psychic distance) influenced by overlapping. Related to overlapping, will some network processes, defined as internationalization sequences, have a dominating influence on other such processes, dominating others? Is e.g. internationalization of the OEM customers and/or of the manufacturers of electronic components dominate internationalization of distributors?

Timing and Sequencing of Strategic Actions

313

Why will they dominate? Another part of the question of overlapping is how the processes and patterns of overlapping in networks, including the way different ‘‘plots’’ in the different networks will come to dominate, affect change agents’ timing of strategic actions. In overlapping processes, the dominant network process will affect the time horizon and timing strategies of actors in other network processes. 3. Coordination within and between internationalization sequences: How does coordination within and between sequences take place? What is e.g. the role of proaction, reaction, interaction? Flexibility? Preparedness to act? The role of feed back? How do the processes and patterns of overlapping in networks, including the way different ‘‘plots’’ in the different networks will come to dominate, affect actors timing of marketing actions? How is timing related to the coordination of different interacting actors’ time and timing perceptions? Can companies over time adjust for ‘‘bad’’ timing of actions in networks by various actions of repositioning in the network? It can be assumed that the evaluation of ‘‘bad’’ and ‘‘good’’ timing is a matter of how companies over time learn to adjust, compensate for and calibrate the immediate consequences of the interconnected actions by the company and other actors in the network. When an actor is positioned in the intersection of many overlaps, will the propensity to act short-term increase? In stable relationships and network positions can it be assumed that timing is perceived as less important? Will actors in stable relationships be better prepared to take joint, and rapid strategic timing actions in response to actions external to the relationships?

Some Managerial Implications Our analysis of internationalization processes of individual firms as interdependent sequences of reorganization in market networks has some nontrivial managerial implications. Below we comment on three aspects. First, concurrent and potential internationalization sequences not only for the focal firm but also for other firms in the market (such as suppliers, competitors and customers) should be identified, analyzed and interpreted. This is in contrast to traditional textbooks that focus the individual firm’s market entry and entry mode decisions in a more generalized and more static market context. The manager’s base for interpretation of the market processes and its strategic actions need to include a subjective network theory. The network horizon and the time horizons likely need to be widened. An important part of the information is based on interaction in the network.

314

PER ANDERSSON AND LARS-GUNNAR MATTSSON

Second, the actor will need to be able to influence the behavior of other actors, either through direct interaction or by more general signals. Such influence may be aimed at the other actors’ network theories, at delaying or speeding up their strategic actions. Third, the actor needs to be prepared to act and react in the on-going processes in the network coordination between interdependent internationalization sequences. Our observations above are relevant also here but we also like to add that the internally controlled resources are of importance.

REFERENCES Albert, S. (1995). Towards a theory of timing: An archival study of timing decisions in the Persian Gulf War. Research in Organizational Behavior, 17, 1–70. Andersson, P. (1996). Concurrence, transiton and evolution—Perspectives on industrial marketing change processes. Stockholm: EFI. Andersson, P. (2002). Connected internationalization processes: The case of internationalizing channel intermediaries. International Business Review, 11, 365–383. Andreasen, A. R. (1991). Readiness to change: Theoretical, empirical and managerial issues. In: G. Antonides, W. Arts & W. F. van Raaij (Eds), The consumption of time and the timing of consumption—Toward a new behavioral and socio-economics (pp. 138–148). Amsterdam: North-Holland. Blankenburg Holm, D., & Johanson, J. (1997). Business network connections and the atmosphere of international business relationships. In: I. Bjo¨rkman & M. Forsgren (Eds), The nature of the international firm: Nordic contributions to international business research (pp. 411–432). Copenhagen: Handelshojskolens Forlag. Bowman, D., & Gatignon, H. (1996). Order of entry as a moderator of the effect of the marketing mix on market share. Marketing Science, 15(3), 222–242. Chandler, A. D., Jr., Hagstro¨m, P., & So¨lvell, O¨. (Eds) (1998). The dynamic firm. Oxford: Oxford University Press. Delios, A., & Makino, S. (2003). Timing of entry and the foreign subsidiary performance of Japanese firms. Journal of International Marketing, 11(3), 83–105. Dunning, J. H. (1998). Globalization, technological change and the spatial organization of economic activity. In: A. D. Chandler Jr., P. Hagstro¨m & O¨. So¨lvell (Eds), The dynamic firm. Oxford: Oxford University Press. Enright. (1998). Regional clusters and firm strategy. In: A. D. Chandler Jr., P. Hagstro¨m & O¨. So¨lvell (Eds), The dynamic firm. Oxford: Oxford University Press. Gro¨nmo, S., & O¨lander, F. (1991). Micro–macro relationships in the study of time and consumption. In: G. Antonides, W. Arts & W. F. van Raaij (Eds), The consumption of time and the timing of consumption—Toward a new behavioral and socio-economics. Amsterdam: North-Holland. Hedaa, L., & To¨rnroos, J.-A˚. (2002). Towards a theory of timing: Kairology in business networks. In: R. Whipp, B. Adam & I. Sabelis (Eds), Making time. Time and Managememnt in Organizations. Oxford University Press. Hertz, S. (1998). Domino effects in international networks. Journal of Business to Business Marketing, 5(3), 3–31.

Timing and Sequencing of Strategic Actions

315

Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalization of the firm – four Swedish case studies. Journal of Management Studies, 3(Oct), 305–322. Johanson, J., & Vahlne, J-E. (1977). The internationalization process of the firm – a model of knowledge development and increasing foreign market commitment. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Mattsson, L-G. (1988). Internationalization in industrial systems—A network approach. In: N. Hood & J. E. Vahlne (Eds), Strategies in global competition. London: Croom-Helm. Johanson, J., & Mattsson, L-G. (1992). Network positions and strategic action – An analytical framework. In: B. Axelsson & G. Easton (Eds), Industrial networks – a new view of reality (pp. 205–217). London: Routledge. Lieberman, M. B & Montgomery, D. B. (1998). First-mover (dis)advantages: Retrospective and link with the resource-based view. By: Strategic Management Journal, 19 Issue 12, 11. Madsen, K. T., & Servais, P. (1997). The internationalization of born globals: An evolutionary process. International Business Review, 6(6), 561–583. Mattsson, L-G. (1995). The Nordic countries as a home market. In: T. B. Holmesland, K. J. Ims & A. Pedersen (Eds), Essays in honour of Kjell Gro¨nhaug (pp. 257–266). Bergen: Fagbokforlaget. Mattsson, L. G. (1998). Dynamics of overlapping networks and strategic action by the international firm. In: A. D. Chandler Jr., P. Hagstro¨m & O¨. So¨lvell (Eds), The dynamic firm. Oxford: Oxford University Press. Mattsson, L.G. (2003). Reorganisation of distribution in globalisation of markets-The dynamic context of supply chain management. Supply chain management-An International Journal. Pfeffer, J. (1992). Managing with power. Boston: Harvard Business School Press. Pieters, R. G. M., & Verplanken, B. (1991). Changing our minds about behavior. In: G. Antonides, W. Arts & W. F. van Raaij (Eds), The consumption of time and the timing of consumption—toward a new behavioral and socio-economics (pp. 63–67). Amsterdam: North-Holland. Sharma, D. D., & Blomstermo, A. (2003). A critical review of time in the internationalization process of firms. Journal of Global Marketing, 16(4), 53–71. Sztompka, P. (1993). The sociology of social change. Oxford: Blackwell. Tikkanen, H. & Parvinen, P. (2002). Planned and spontaneous orders in the emerging network society. (work-in-progress manuscript) To¨rnroos, J. A˚. (2003). Internationalization of the Raiso Group. In: P. Mannio, E. Vaara & P. Yla¨-Antilla (Eds), Our path abroad. exploring post-war internationalization of Finnish corporations. Helsinki: Taloustieto.

This page intentionally left blank2

316

THE TERMINATION DILEMMA OF FOREIGN INTERMEDIARIES: PERFORMANCE, ANTI-SHIRKING MEASURES AND HOLD-UP SAFEGUARDS Bent Petersen, Torben Pedersen and Gabriel R. G. Benito 1. INTRODUCTION For many exporting firms, success in foreign markets hinges to a large extent on the performance of their foreign intermediaries (Albaum, Strandskov, & Duerr, 2002; Ellis, 2000; Root, 1987). In spite of the key role played by intermediaries in foreign markets – i.e. sales agents and independent distributors (Solberg & Nes, 2002) – exporters often regard them as temporary arrangements and second-best alternatives to conducting foreign marketing, sales, and service activities in-house. The typical assumption is that foreign intermediaries are low-control entry modes (Hill, 2003; Root, 1987) that do not have the potential of exploiting the full sales potential of export markets. In other words, foreign intermediary arrangements could have inherent limitations that foster mediocre rather than excellent market performance. Several studies report that exporters generally distrust foreign intermediaries Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 317–339 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16013-X

317

318

BENT PETERSEN ET AL.

and suspect them of shirking at any given occasion (Beeth, 1990; Nicholas, 1986; Petersen, Benito, & Pedersen, 2000). Poor performance is sometimes expected. On the other hand, foreign intermediaries often find that exporters put in place incentive structures that do not induce them to achieve excellent performance. Hence, it is asserted that foreign intermediaries may deliberately seek mediocrity rather than very poor or outstanding performance. On this background, our study addresses the following four questions: First, how do different exporter-provided incentives affect the performance of foreign intermediaries? Second, what is the interrelationship between the market performance of foreign intermediaries and exporters’ propensity to terminate the relationship, i.e. are foreign intermediaries caught in a termination dilemma? Third, do exporters differentiate the way they terminate the relationship depending on whether the intermediaries are low or high performers? Fourth, is the propensity of exporters to end intermediary relationships affected by the incentives put in place? To answer these questions, we draw on longitudinal survey data about the development – including termination – of relationships between Danish exporting firms and their foreign intermediaries. The answering of the four questions is of great value to exporters in their efforts to design appropriate incentive structures for foreign intermediaries. In the absence of goal congruence between the two parties the exporters risk sacrificing potential sales revenue in foreign markets, and/or incurring the otherwise avoidable costs of prematurely establishing a sales subsidiary in a given market. The business press regularly quotes exporters for experiencing red digits during the first years of operation of sales subsidiaries, and occasionally reports shutdowns of non-profitable foreign affiliates, supposedly as a result of over-ambitious entries into markets where the sales revenue generated did not support the considerable fixed costs of setting up and running a sales subsidiary. These issues are general in the sense that they are relevant for entries into any market. In this study we look at the behavior of a sample of Danish exporters and their entries into, mainly, other developed markets. The importance of adequate incentive structures for foreign intermediaries is probably even more crucial in relation to entering emerging markets, such as China, India, and Vietnam (Ellis, 2000; Estrin & Meyer, 2004). Exporters may ‘‘miss the train’’ completely in these emerging market because competitors accrue important first mover advantages in terms of pre-emption of sales channels, sales outlets, and shelf space, or in terms of erecting other barriers to entry (Peng, 2000). The rest of the paper is organized as follows: In the next section (Section 2) we develop our conceptual model, account for the basic incentives that exporters may put in place for dealing with intermediaries, and delineate the

Performance, Anti-Shirking Measures and Hold-Up Safeguards

319

relations between exporter incentives, intermediary performance, and termination of exporter–intermediary relationships. In Section 3 we develop hypotheses pertaining to the four research questions mentioned above. Section 4 accounts for the empirical methodology of the study, and Section 5 reports descriptive statistics and the results regarding testing the hypotheses. Finally, in Section 6 we conclude and discuss the implications of the study.

2. CONCEPTUAL FRAMEWORK Research on export channels reveals that the relationships with foreign intermediaries are hard to coordinate and high performance is difficult to achieve (Bello & Gilliland, 1997; Rosson, 1984; Rosson & Ford, 1982; Solberg & Nes, 2002). Basically, poor performance can be explained in two ways (Porter & Lawler, 1968): (1) the intermediary does not possess the skills needed for carrying out the marketing and sales responsibilities in a proper way, and as a result the intermediary cannot perform satisfactorily; (2) the intermediary is well qualified, but does not want to devote or invest the time and resources needed to fully exploit the sales potential of the exporter’s products, because, say, its interests are misaligned with those of the exporter. Hence, the intermediary under-performs deliberately. Agency theory explains such shirking behavior by the reservation utility of the agent (Jensen & Meckling, 1976; Levintahl, 1988). Because agents find other activities (or leisure time) to be more rewarding, the sales effort they are willing to make is usually less than optimal from the viewpoint of the principal. In many principal–agent relationships the principal prevents the agent from shirking through monitoring. Since monitoring is both difficult and costly to employ in exporter–intermediary relationships, the anti-shirking instrument sine qua non that has traditionally been used is outcome-based compensation. Intermediaries get their income mainly, and sometimes exclusively, through outcome-based compensation, i.e. resale profits or sales commissions. This is in contrast to behavior-based compensation or fixedsalary schemes (Anderson & Oliver, 1987). To the extent that the sales performance is a direct function of the intermediary’s effort, such arrangements should discourage shirking (Anderson & Oliver, 1987; Bergen, Dutta, & Walker, 1992). Hence, the ‘‘no-effort/no-compensation’’ principle is the baseline anti-shirking instrument used in exporter–intermediary relationships characterized by a fundamental information asymmetry and numerous alternative income opportunities for the intermediary. Nevertheless, asymmetrical information also implies that exporters may have serious difficulties in

320

BENT PETERSEN ET AL.

verifying to what extent the actual sales performance in the foreign market is a result of the intermediary’s effort or should be ascribed to fortunate or adverse exogenous factors. In some cases, intermediaries undeservedly take credit for sales generated through customers’ familiarity with an exporter’s product due to experience with it gained in another market, by wordof-mouth effects, from the exporter’s website, etc. Conversely, intermediaries may blame poor sales performance on adverse exogenous factors, such as special local customer preferences, particularly tough competition, slow and protectionist local bureaucracy etc. In both cases, some degree of monitoring of the intermediary serves as an important anti-shirking supplement to outcome-based compensation, and hence a measure that potentially improves the performance of the foreign intermediary (Hennart, 1991). Furthermore, monitoring reduces the information asymmetry gap that exists in the exporter–intermediary relationship (Wathne & Heide, 2000) and makes it easier to assess and – if so needed – to exit the relationship with the intermediary. Anti-shirking measures, including outcome-based compensation, monitoring, but also dual distribution (Dutta, Bergen, Heide, & John, 1995) and short notice of termination (Beeth, 1990), constitute only a part – although an important one – of the entire range of incentive mechanisms that is available to exporters. Likewise, outcome-based compensation, and a certain degree of exclusivity in terms of sales territory and/or product lines are standard parts of agency and distributor contracts. Exclusivity is granted with the purpose of encouraging the intermediary to undertake marketing investments with public good characteristics, such as advertising campaigns aiming to increase the awareness of the exporter’s brand. Without the exclusivity rights, the intermediary assumes the risk of free-riding by other vendors in the trading area (Corey, Cespedes, & Rangan, 1989). In contrast, it is the exception that intermediaries are protected against adverse, exogenous factors. Agency theory prescribes that in relationships where the agent is risk adverse relative to the principal, behavior-based compensation should substitute for outcome-based. As a result, the risk neutral principal rather than the agent carries the risk burden of a volatile environment (Bergen et al., 1992). Presumably, the reduction in risk premium is traded-off against the anti-shirking benefits offered by outcome-based compensation. Whereas foreign intermediaries almost by definition enjoy protection against free-riding, but not against adverse exogenous factors, it is largely up to the individual exporters whether or not the intermediary should be granted protection against opportunistic hold-up attempts of the exporters themselves.1 Exporters may provide hold-up safeguards in order to induce intermediaries to engage in dedicated marketing and sales activities (Bello &

321

Performance, Anti-Shirking Measures and Hold-Up Safeguards

Performance of foreign intermediaries (t0) • Sales (volume, m/s, growth) • Profit generation • Effort H3 ±

H1, H2 + +

Incentives provided by exporters (t0) • Hold-up safeguards • Anti-shirking measures o Outcome-based compensation o Monitoring

Fig. 1.

H5, H6 + −

Termination propensity of exporters (t1) • Intra-mode shift (replacement) • Inter-mode shift (internalisation) H4

Conceptual Model of the Study.

Gilliland, 1997). With safeguards in place, the intermediary can make the requisite relationship-specific marketing investments without risking getting held up by the exporter. Because of the safeguards the exporter is denied the potential short-term gain of exploiting the intermediary’s dependency. Ideally, the safeguards establish a common interest of the two parties in maintaining a long-term business relationship. As with monitoring instruments, hold-up safeguards potentially affect intermediary performance in a positive way, and thereby also the propensity to terminate the relationship. Nonetheless, the direct effect of hold-up safeguards on exporters’ propensity to terminate a relationship is opposite to monitoring; by their very nature, safeguards make it more difficult and costly to terminate relationships. To sum up, the various exporter incentives have as a common objective to enhance intermediary performance. In addition, the incentives also affect exporters’ propensity to terminate relationships both directly and indirectly. This triad of exporter incentives, intermediary performance, and relationship termination is illustrated in Fig. 1, which shows the conceptual model of the study.

3. DEVELOPMENT OF HYPOTHESES 3.1. Effects of Incentives on the Market Performance of Intermediaries When optimizing their reservation utility opportunistic intermediaries may concentrate on sales and marketing of other principals’ lines and just cash in

322

BENT PETERSEN ET AL.

on the windfall gains that the line of the focal exporter yields (Bergen et al., 1992). In order to mitigate such moral hazard problems exporters may choose to supplement the outcome-based compensation with another antishirking measure, namely monitoring (Nicholas, 1986). For those intermediaries that achieve below-average market performance monitoring implies an increased risk of being terminated. Under the threat of outright termination of the relationship that exporters impose intermediaries will shun below-average performance, which pulls in the direction of better performance. Therefore, H1. Exporters that use monitoring of the intermediary as an anti-shirking measure will experience higher performance in the foreign market. Foreseeing a risk of being held up by the exporter, i.e. being terminated or forced to accept less-favorable terms under the threat of cessation (Heide & John, 1988; Williamson, 1983), the foreign intermediary may under-perform deliberately and effectively breach the distributor agreement. The exporter, on the other hand, has an evident interest in taking advantage of the full sales potential of the export market, since this means maximum sales revenue and usually lower average unit costs due to economies of scale in production and other value chain activities at home. Hold-up risks tend to discourage the intermediary from doing a wholehearted sales and marketing effort. As long as the safeguarding costs are not exceeding the resulting additional revenue from export sales and/or lower unit costs in production, it is in the exporters’ own interest to safeguard the foreign intermediaries against the hold-up risks invoked by the exporters themselves. Ideally, the foreign intermediary should receive a hold-up risk-adjusted payoff that increases proportionally or progressively with the sales generated in the foreign market, and that could even surpass the turn-over threshold that the exporter would need to run a sales subsidiary in that market. Exporters commonly offer their foreign intermediaries remuneration schemes that increase progressively with the sales volume generated in the local market. In the case of a sales agent the commission rate usually increases with sales growth, whereas independent distributors are often offered increasing resale profits via lower ex-factory buying-in prices as a result of quantity discounts extended by the exporter. Although such salesvarying compensation schemes spur the sales effort of the foreign intermediary, the attenuated risk of being replaced by a sales subsidiary has a countervailing effect that – in the absence of safeguards – may completely offset the incentives provided by the compensation scheme. The hold-up

Performance, Anti-Shirking Measures and Hold-Up Safeguards

323

risks of foreign intermediaries are increased by unilateral exporter-specific investments, of which a full writing-off of the specific investment depends on continued cooperation with the exporter. Hence, when intermediaries are safeguarded they should be able to perform well without having to assume the risk of a hold-up, which in turn would pull in the direction of better performance (Jap & Anderson, 2003). Accordingly, H2. Exporters that extend hold-up safeguards to their foreign intermediaries will experience higher performance in the foreign market. 3.2. Intermediary Performance and Exporters’ Termination Propensity Several empirical studies have shown that it is not uncommon for exporters to exit their relationships with foreign intermediaries (Benito, Pedersen, & Petersen, 2005; Calof, 1993; Johanson & Wiedersheim-Paul, 1975; Rosson, 1984). In the marketing literature dealing with distribution channels, dissatisfaction is pointed out as a fundamental reason for manufacturers and distributors to part their ways (Anderson & Narus, 1990; Shamdasani & Sheth, 1995; Stern & El-Ansary, 1992). Also, in the internationalization literature Calof and Beamish (1995) report that exporters’ dissatisfaction with their foreign distributors over a prolonged period is an important reason for terminating a relationship. In all, previous studies, and what one may call ‘‘conventional wisdom’’, suggest that exporters’ termination propensity increase proportionately with the degree of dissatisfaction. Exporters may replace the foreign intermediary with another intermediary in the same market. In this case, some degree of dissatisfaction with the intermediary is usually a triggering factor. In other words, poor performance of the intermediary, as conceived by the exporter, increases the likelihood that the collaboration comes to an end. Alternatively, the exporter may replace the intermediary with his/her own sales organization operating from the home country or located in the export market. In this case, it is less obvious that dissatisfaction with the intermediary is the only decisive motivator for the termination. The exporter’s decision to integrate the sales and marketing responsibilities may be triggered by a large sales volume in the local market, which could in fact mainly be the result of the effort made by the intermediary (Klein, Frazier, & Roth, 1990; Nicholas, 1986). To the extent that ending the intermediary relationship can be ascribed to the successful sales generation of the same intermediary, this is an unfortunate and somewhat paradoxical consequence for the intermediary.

324

BENT PETERSEN ET AL.

Presumably, intermediaries are, by and large, aware of the termination risk they are facing. In order to keep the assignment (i.e. the sales agency or the distributorship) intermediaries are therefore likely to aim for a medium performance. However, intermediaries cannot know exactly what the exporters consider as conditional for termination. Put differently, there are limits as to how well foreign intermediaries know the utility functions of their exporters. Furthermore, exogenous factors may affect the foreign market performance in an unforeseeable positive or negative direction. The sales revenue achieved in the foreign market, being only partially controlled by the intermediary, may turn out to be less than acceptable to the exporter, but also more than sufficient for establishing a sales subsidiary. In both cases, a likely result is termination. Hence, both low and high performance will put the foreign intermediary at risk of being terminated. If performing poorly, the exporter may lose patience, terminate the relationship, and then appoint another intermediary in the foreign market (Beeth, 1990; Petersen et al., 2000); if the intermediary is doing well and boosting the sales in the foreign market, the exporter may find it lucrative to terminate the distributor contract and take over the sales and marketing responsibilities (Benito et al., 2005; Pedersen, Petersen, & Benito, 2002). Caught in this dilemma the foreign intermediary is better off staying ‘‘in the middle of the road’’, i.e. generating a certain level of local sales, but not reaching a volume that economically justifies the exporter’s establishment of a sales subsidiary in the foreign market. As an alternative to conventional wisdom we therefore conjecture a ‘‘termination dilemma’’ of foreign intermediaries as follows: H3. Exporters’ propensity to terminate relationships with their foreign intermediaries is first a decreasing function of intermediary performance, but then an increasing function of intermediary performance, i.e. Ucurved. The two alternative predictions, ‘‘conventional wisdom’’ versus ‘‘the termination dilemma’’, are displayed graphically in Fig. 2.

3.3. Different Forms of Relationship Termination The international marketing literature is full of accounts of the risks and problems associated with entry into foreign markets, and exporters do not expect foreign ventures to be totally trouble-free (Karunaratna & Johnson, 1997; Leonidou & Katsikeas, 1996). They anticipate and accept that entry

325

Performance, Anti-Shirking Measures and Hold-Up Safeguards

” Probability of termination p(T)

the termination dilemma”

conventional wisdom”

” Market performance of foreign intermediaries

Fig. 2.

Hypothesized Relationships between Performance of Foreign Intermediaries and Exporters’ Propensity to Terminate.

into a market may take some time and that sales growth may be slow initially. Most exporters also recognize that foreign sales partly depend on a range of factors that are beyond the control of particular firms, such as exchange rates, changes in laws and regulations, weather etc., for which the appointed foreign intermediaries should not be blamed. They are nevertheless not prone to accept what could be regarded as consistent underperformance. Intermediaries that under-perform are hence likely to have their contracts terminated at some point. As pointed out earlier, wellperforming intermediaries are also likely to see their contracts terminated since their market development work may turn out sales in excess of what is needed to cover the fixed costs of servicing the market through a sales subsidiary (Buckley & Casson, 1981). As a result, exporters may see the opportunity to set up their own businesses in the market. While both low- and high-performers may therefore face higher likelihood of contract cessation than medium-performers, as hypothesized in H3, the type of switch is likely to differ depending on the behavioral characteristics of the intermediaries. Given that the exporter decides to stay in the market despite the unsatisfactory results,2 poorly performing intermediaries are principally likely to be replaced by other intermediaries that the exporter believes will perform better (Benito et al., 2005). Such switches are of an intra-mode kind since they do not entail any change away from the original

326

BENT PETERSEN ET AL.

mode of operation. Conversely, high-performers, having made the groundwork in the market, may see themselves substituted by a sales subsidiary set up by their former export contractor. These are inter-mode switches as they bring about a change in the operation method used in the foreign market: H4. Low-performing foreign intermediaries are the most likely to be replaced by other intermediaries (intra-mode switch), and high-performing foreign intermediaries are the most likely to be replaced by a sales subsidiary (inter-mode switch). 3.4. Effects of Safeguards on Exporters’ Termination Propensity Exporter–intermediary relationships are characterized by a fundamental information asymmetry between the two parties. The asymmetrical information implies that exporters encounter serious difficulties in verifying to what extent low- or high-sales performance in the foreign market is a result of the intermediary’s effort or should be ascribed to various adverse or positive exogenous factors (Bergen et al., 1992; Wathne & Heide, 2000). Taking advantage of exporters’ widespread ignorance about local market conditions intermediaries may well piggyback on windfall sales gains that really are positive spillovers from other markets. Conversely, intermediaries may justify poor sales results by negative factors on which they have little or no influence, e.g. sluggish demand in the local market, pre-empted sales channels, or fierce price competition. Monitoring holds the potential of reducing the fundamental information asymmetry between exporters and foreign intermediaries (Wathne & Heide, 2000). Accordingly, monitoring makes it easier to evaluate and – if so needed – to exit the intermediary relation. As shown in Fig. 3, for any given performance level we propose that monitoring efforts shift the exporters’ termination propensity upwards. Therefore, H5. Exporters that apply monitoring as an anti-shirking measure have a higher propensity to terminate the relationships with their foreign intermediaries. Transaction cost economics predicts that business relationships in which non-reciprocal investments in specific assets are required are more likely to develop successfully when suitable hold-up safeguards are introduced to support the relationship (Anderson & Weitz, 1992; Rindfleisch & Heide, 1997; Williamson, 1983). When safeguarded against hold-up, intermediaries become more willing to meet the exporters’ expectations about relationship-specific investments, and this may in turn lower exporters’ proclivity to terminate the

327

Performance, Anti-Shirking Measures and Hold-Up Safeguards Tmonitoring

Probability of termination p (T )

Tbaseline

Tsafeguards

Market performance of foreign intermediaries

Fig. 3.

Hypothesized Effects of Monitoring and Safeguards on Exporters’ Propensity to Terminate.

relationship (Weiss & Anderson, 1992). By the same token, exporters’ introduction of hold-up safeguards also works as a termination barrier in a more direct way: exporters that consider exiting intermediary relationships for other reasons than dissatisfaction (say, for example, due to unexpectedly strong export market growth) may be reluctant to do so because the hold-up safeguards that have been put in place make switches excessively costly (Benito, Pedersen, & Petersen, 1999). The self-imposition of termination costs is essentially what hold-up safeguards are about, and exporters may need this selfpunishing mechanism to signal a credible commitment to the establishment of long-term relationships with foreign intermediaries. Contractual restrictions constitute barriers to exit, and it appears that distributor contracts regularly include clauses that make it difficult for the exporter (or for both parties) to walk out of the collaboration (Root, 1987; Rosson, 1984). Typical examples are long periods of notification or stipulated rights to compensation upon termination (severance payment). Although exporters’ safeguards may differ considerably as to the design of specific instruments, they share a common purpose of protecting the foreign intermediaries against opportunistic cessation or exploitation under

328

BENT PETERSEN ET AL.

the threat of termination. Hence, as shown in Fig. 3, irrespectively of their actual performance intermediaries are expected to be at lower risk of being exited when exporters provide safeguards. Therefore, H6. Exporters that provide hold-up safeguards have a lower propensity to terminate relationships with their foreign intermediaries than those that do not.

4. METHODS 4.1. Research Design Because our model of the dynamics of export channels explicitly incorporates a time dimension, longitudinal data are needed to test it. For that purpose the data collection was conducted in two steps. The first step was to collect data about the distribution channels being used in the various foreign markets, and to map respondents’ perceptions on a range of issues related to the relationship between exporters and their foreign intermediaries. These entry data were collected in 1992. The next step was taken in 1997, when information was again obtained about the status of operation modes in foreign markets. These data basically consist of information about changes in the distribution channel on the particular markets since 1992, the type of changes, and the year of a change given that it had taken place. 4.2. Data Collection Data were collected in a survey of Danish manufacturing companies with export activities. The sampling frame consisted of basically all Danish exporters of some size and significance, in total 1,365 companies.3 In 1992, the identified export managers or, alternatively, managing directors of all companies received a detailed, mailed questionnaire. An earlier version of the questionnaire had been tested twice on export managers of two companies. Before answering the thirty questions, the companies were asked to select one export market that had been served by an independent intermediary over a continuous period of at least one year. In those cases where several export markets fulfilled the criteria, the respondents were asked to choose the market representing the largest sales potential (see Petersen (1996) for a detailed discussion of the selection criteria). Usable replies were received from 349 companies.

329

Performance, Anti-Shirking Measures and Hold-Up Safeguards

In 1997, the 349 companies were again contacted for a telephone interview on possible changes since 1992 in the operation mode used in the particular foreign market. Most of the interviewed persons were export managers responsible for the activities on the particular market. The aim of the interviews was to check whether the foreign market was still served in 1997 through an independent intermediary, or whether the Danish exporter had changed the operation mode on the particular market. In case they had carried out a mode change, we asked the respondents to list all changes of operation mode on that market from 1992 to 1997. For various reasons we had to exclude 91 companies from the initial sample of 349 companies.4 The final sample consists therefore of 258 companies.

4.3. Changes in Firms’ Foreign Distribution from 1992 to 1997 Table 1 shows changes in foreign distribution channels from 1992 to 1997. The data provide interesting information about the frequency of switches of foreign operation mode: in 1997, 183 companies (about two-thirds of the sample) were using the same intermediary as in 1992. However, the remaining 75 companies had made some kind of change since 1992 in how they serviced the focal market. Of these, 40 companies (16 percent) were still represented in the foreign market by means of an independent intermediary, but had shifted to a new agent/distributor. Internalization had occurred in 35 companies (14 percent): These switches involved going from an independent intermediary to setting up their own sales organization (such as a establishing a sales subsidiary, a local sales office, or a home-based sales force), thereby ‘‘internalizing’’ the sales and marketing activities in the foreign market. All in all, the data show that changes in entry mode and shifts of foreign partner are quite frequent events.

Table 1.

Changes of Foreign Market Servicing Method from 1992 to 1997.

Categories

No. of Cases

a. No major change in foreign distribution since 1992 b. Had replaced the intermediary c. Had switched to in-house operation

183 40 35

Total

258

330

BENT PETERSEN ET AL.

4.4. Measurement Performance of intermediary, one of the dependent variables of the study, was measured as the exporters’ perception of the focal intermediaries’ performance. It was constructed on the basis of their responses to three questionnaire items: How does the company perceive the performance of the intermediary in terms of; (i) market penetration; (ii) profitability of export; and (iii) the effort made? The three items were then added to one single variable providing a summary measure of performance. Cronbach’s coefficient a for the variable is 0.83. Termination of intermediary relationship, the other dependent variable, was measured as a dummy taking the value of 1 if changes had occurred in the foreign distribution arrangement in the period covered by the study and 0 otherwise. The monitoring variable was constructed on the basis of the questionnaire, where respondents were asked to assess the extent to which they found it difficult to monitor the effort of the foreign intermediary. Obviously, this is a proxy and not a direct measure of exporters’ monitoring efforts. It is far from trivial to measure monitoring activities directly, and perceptions of the extent and intensity of monitoring may differ substantially among managers – in particular across industries. With increasing difficulties in monitoring agents, principals get diminishing returns to scale in conducting such activities. Accordingly, it should be expected that exporters who perceive significant monitoring difficulties would make relatively modest use of monitoring. Two different hold-up safeguards were used; contractual restrictions and severance payments. Contractual restrictions were measured, as the period of time the intermediary should be notified in advance in case of termination of the agreement. It was coded as a binary variable with the value 1 if the notification period exceeded one year and 0 otherwise. Severance payment was measured by asking the exporters whether the intermediary was entitled to a portion of sales revenue for a specified period after termination of the contract. This was also coded as a binary variable with the value 1 if the intermediary should receive severance payment and 0 otherwise. The level of asset specificity and characteristics of the focal markets were included as control variables in the empirical models. The two market variables were included in order to control for market developments outside the scope of the intermediary, such as a particular strong growth in a market. Thus, a lagged compounded growth rate of GDP in the foreign market was used as a measure of market growth. Sales potential was measured as the perceptions held by exporters of the sales potential in the foreign market.

331

Performance, Anti-Shirking Measures and Hold-Up Safeguards

Table 2. Description of Variables and Data Sources. Variables Termination of intermediary Performance of intermediary

Monitoring

Contractual restrictions Severance payments Market growth

Sales potential

Asset specificity

a

Measurement Dummy: same intermediary as in 1992 (0), otherwise (1) Exporters’ perception of the performance of the intermediary in terms of: (a) market penetration, (b) profitability, (c) effort made (Scale: 1 ¼ very dissatisfactory, 6 ¼ very satisfactory) Question: ‘‘It is rather simple to monitor the effort of the intermediary’’ (Scale: 1 ¼ fully agree, 6 ¼ completely disagree)b Advance notice in case of termination of the agreement (Dummy: 0 ¼ less than one year, 1 ¼ one year or more) Provision of severance payment in case of termination of contract? (Dummy: 0 ¼ no, 1 ¼ yes) Growth in GDP at constant prices in the particular market, 1990–1995 Question: ‘‘Sales potential in that country is such that it could support having one’s own sales organization for that market’’ (Scale: 1 ¼ fully agree, 6 ¼ completely disagree)b Question: ‘‘To what extent are the sales of the intermediary contingent on marketing investments specific to the lines of the exporter?’’ (Scale: 1 ¼ not at all, 6 ¼ very much)

Data Sourcesa Telephone interview Questionnaire

Questionnaire

Questionnaire

Questionnaire

World Marketing Data and Statistics 1997 Questionnaire

Questionnaire

Questionnaire data were collected in 1992 and telephone interviews were conducted in 1997. Reversed scales.

b

Finally, asset specificity was also constructed on the basis of the questionnaire. The respondents were asked to what extent the foreign intermediary was expected to undertake investments in marketing assets in order to service the given exporter. The operationalization of the variables is summarized in Table 2.

5. RESULTS AND DISCUSSION The correlation matrix and descriptive statistics of the variables are shown in the appendix. All correlations coefficients are relatively small, and do not

332

BENT PETERSEN ET AL.

give any indication of potential multicollinearity problems. In fact, the highest coefficient is found between the two safeguards (r ¼ –0.27), but perhaps surprisingly, this correlation is significantly negative. This suggests that these two safeguarding instruments are substitutes rather than complementary. The first two hypotheses (H1 and H2) regarding the impact of monitoring and safeguards on intermediary performance were tested in an OLS-regression model (see Table 3). The first model only includes the three control variables, while the second model is a full model that includes all explanatory variables. Both models are significant (Fbase ¼ 2.37, po0.10, Ffull ¼ 2.70, po0.05), but the full model has substantially higher explanatory power, albeit still a modest one (R2full ¼ 0.06). In model 2, monitoring turns out to have a significant positive effect on intermediary performance thereby supporting H1. Conversely, none of the two safeguards seem to affect the intermediary performance. Hence, H2 is not supported by the data in the study. Asset specificity is the only control variable that is significant in the full model; the results indicate that relation-specific investments made by intermediaries have a negative impact on intermediary performance. Hypotheses H3, H5 and H6 were tested by estimating a logistic regression model with termination of intermediary as the dependent variable. The results are shown in Table 4. In all, we run four models: one that only includes Table 3.

OLS Regressions of Effects on Foreign Intermediary Performance. Parameter Estimates (Standard Errors in Parentheses) Model 1

Intercept Market growth Sales potential Asset specificity Monitoring Contractual restrictions Severance payment Model statistics F-value Adjusted R2 Number of cases  Significance at the 10% level.  Significance at the 5% level.  Significance at the 1% level.

2.98 (0.22) 0.01 (0.01) 0.08 (0.03) 0.07 (0.04)

2.37 0.03 258

Model 2 2.31 (0.56) 0.01 (0.01) 0.05 (0.04) 0.07 (0.03) 0.12 (0.04) 0.04 (0.25) 0.12 (0.19) 2.70 0.06 258

333

Performance, Anti-Shirking Measures and Hold-Up Safeguards

Table 4.

Logistic Regression Estimations of Exporters’ Propensity to Terminate Foreign Intermediaries (n ¼ 258). Parameter Estimates (Standard Errors in Parentheses) Model 3

Intercept Market growth Sales potential Asset specificity Performance Performance2 Monitoring Contractual restrictions Severance payment Model statistics w2 Pseudo R2 Hosmer-Lemeshow

0.29 0.01 0.01 0.11

(0.48) (0.01) (0.08) (0.08)

Model 4

Model 5

Model 6

2.92 (1.13) 0.01 (0.01) 0.02 (0.08) 0.08 (0.08) 1.55 (0.70) 0.20 (0.11)

3.35 (1.16) 0.01 (0.01) 0.03 (0.08) 0.08 (0.08) 1.50 (0.71) 0.20 (0.11) 0.18 (0.10)

0.50 (1.84) 0.01 (0.01) 0.04 (0.08) 0.07 (0.08) 1.52 (0.72) 0.20 (0.12) 0.17 (0.10) 2.39 (1.06) 0.76 (0.42)

2.62 (3 df) 12.29 (5 df) 15.51 (6 df) 26.13 (8 df) 0.01 0.07 0.08 0.14 7.20 (p ¼ 0.52) 12.73 (p ¼ 0.12) 6.49 (p ¼ 0.59) 4.26 (p ¼ 0.83)

 Significance at the 10% level.  Significance at the 5% level.  Significance at the 1% level.

the three control variables (model 3), and which does not reach an acceptable w2 value, and three that include predictors (models 4–6). Models 4–6 are all significant, but it is evident that the model including the full set of explanatory variables (model 6) is by far the best in terms of fit.5 Results are very consistent across models, and adding predictors did not produce any substantial changes in the estimated relationships. To test the hypothesized U-shaped effect of performance on termination propensity (H3), the performance variable was also entered in quadratic form. The firstorder effects of performance turn out to be significantly negative, while the second-order effects are significantly positive. This gives support to the hypothesis of a U-curved relationship between performance and the propensity to switch, i.e. a termination dilemma. The regressions reveal that monitoring has the expected positive effect on termination propensity, while both safeguards have the expected negative effects. This provides support for both H5 and H6. Hypothesis H4 was tested in an ANOVA-analysis testing for differences in the mean performance for inter-mode and intra-mode switches, respectively. While the average performance was found to be higher for inter-mode

334

BENT PETERSEN ET AL.

shifts (2.84) than for intra-mode shifts (2.68), which is as expected, the difference in performance was not significant (p ¼ 0.47).

6. CONCLUSIONS, IMPLICATIONS, AND FUTURE RESEARCH Some recent studies, in particular Calof (1993), Clark, Pugh, and Mallory (1997), and Benito et al. (2005), demonstrate that foreign distribution arrangements are considerably more dynamic than what has traditionally been portrayed in the literature dealing with companies’ choice of entry modes into foreign markets (Anderson & Coughlan, 1987; Anderson & Gatignon, 1986; Klein et al., 1990). This study adds to the increasing evidence that changes are commonplace in foreign distribution. Changes typically involve either that exporters replace a foreign intermediary with another (intra-mode change) or that they chose to integrate forwardly, i.e. carry out the sales, distribution and service tasks in a particular foreign market themselves, usually by setting up an affiliate in that country (inter-mode change). This study of a sample of 258 Danish exporters finds that about one-third of the studied cases had made such changes, fairly evenly split between the two types of changes just mentioned. The study has limitations – especially with regard to the restricted empirical context that was investigated and the somewhat crude measures that were used for some variables – and restraint should therefore be observed when interpreting and generalizing the results. The findings are nevertheless essentially consistent with the conceptual framework for the study. The main contribution of this study is above all its extension of previous investigations of export channel dynamics by giving particular attention to the so-called termination dilemma in foreign distribution: because not only low but also high performance may increase the risk that a foreign intermediary faces regarding having its contract with the exporter ended, it makes sense for the foreign intermediary to settle for a moderate rather than excellent performance. This study indicates that there is indeed such a termination dilemma, but the analysis also investigates various ways in which exporters may deal with it. While it may be difficult to fully resolve the dilemma, at least there are measures that can alleviate problems to some extent. Two crucial issues for managers of exporting firms are: (i) how to provide incentives that stimulate their foreign intermediaries to aim for abovenormal performance and (ii) how to ensure that foreign intermediaries are willing to commit resources to relation-specific investments. Both these issues can be of vital importance for succeeding in foreign operations, but if

Performance, Anti-Shirking Measures and Hold-Up Safeguards

335

left unresolved the termination dilemma facing intermediaries is likely to be an effective barrier to achieving superior returns. Providing safeguards against contract termination is an apparent way for exporters to induce intermediaries to make the requisite efforts and investments. One could hence expect that exporters by using safeguards of various kinds, i.e. generous advance notification clauses and/or severance payment schemes, were also able to reap the potential benefits of smoother, longer-term, and possibly more trust-based relations with their foreign intermediaries. The findings of this study demonstrate that such reasoning – even if appealing in its positive vision of inter-firm relationships – is based on a one-sided and too optimistic view of the relationship between exporters and intermediaries. Providing safeguards without curbing intermediaries’ self-interested behavior with appropriate anti-shirking measures, may well be in the interest of the intermediaries, but seemingly not helpful in achieving superior performance in the market place. As it turns out, the data in this study suggest that whereas monitoring is a major driver of performance, neither severance payment nor contractual restrictions have significant effects on performance. On the other hand, the results of this study do indicate that safeguards indeed reduce exporters’ propensity to replace their intermediaries. Hence, safeguards help solving the termination dilemma that foreign intermediaries may face when entering into the higher end of performance. The key implication of the analysis is hence that managers should take both safeguards and anti-shirking measures into careful consideration when designing their governance of foreign intermediary relationships. Safeguards have not been investigated in much detail so far. There are potentially many kinds of safeguards and this study has focused on two particular instruments: contractual exit impediments in the form of (i) advance notification and (ii) severance payment. As it turned out, these safeguards were negatively correlated with each other, which indicates that they are truly different types. Other types of safeguards are also used by firms, including offsetting investments (Heide & John, 1988) and development of personal ties across firms (Jap & Anderson, 2003). However, the full range of safeguards has not yet been mapped and there is evidently a need to explore such inter-organizational governance instruments in much more detail.

NOTES 1. Commercial law in many countries provide indemnification as a safeguard for sales agents against hold-up by a principal – in casu the exporter. In contrast,

336

BENT PETERSEN ET AL.

merchant distributors, who usually take title to the goods and are being remunerated by the resale profit of these goods, often have limited protection from being held up by other parties. Because we cannot subdivide our sample of foreign intermediaries into categories of sales agents (commission agents) and independent merchant distributors, we cannot take this potentially important institutional safeguard into consideration. 2. Unsatisfactory results may of course also lead exporters to exit from the market altogether, at least temporarily. For analyses of market-withdrawal processes, see Welch and Wiedersheim-Paul (1980), Matthyssens and Pauwels (2000). Since our data contain very few reported cases of total withdrawal from a market, we do not consider this option further. 3. Companies that in 1992 had only limited experience with exports (i.e. they only exported to neighboring countries) or had equity below US$ 15,000 (at the 1992 DKK/USD exchange rate) were excluded from the sampling frame. 4. The three main reasons for sample dropout were: (i) liquidation or acquisition by another company (23 cases), (ii) lack of market information (22 cases), and (iii) cessation of sales to the particular market (15 cases). Additional reasons were, inter alia, that companies refused to answer (7 cases), and that we could not get in touch with the right person (6 cases). 5. The Hosmer-Lemeshow statistics is based on the difference between observed and expected frequencies for groups of intermediaries. The model is first used to calculate each intermediary’s predicted probability of switch, and then to rank the intermediary according to this risk. The intermediaries are then grouped into ‘‘deciles of risk’’ and the goodness-of-fit statistics is calculated as a comparison of the expected and observed frequencies for the groups. If the Hosmer-Lemeshow statistics is low and the corresponding p value is large, the model is well-calibrated and with good fit to the data.

REFERENCES Albaum, G., Strandskov, J., & Duerr, E. (2002). International marketing and export management (4th ed.). London: Financial Times/Prentice-Hall. Anderson, E., & Coughlan, A. T. (1987). International market entry and expansion via independent or integrated channels of distribution. Journal of Marketing, 51(1), 71–82. Anderson, E., & Gatignon, H. A. (1986). Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17(Fall), 1–26. Anderson, E., & Oliver, R. L. (1987). Perspectives on behavior-based versus outcome-based salesforce control systems. Journal of Marketing, 51(4), 76–88. Anderson, E., & Weitz, B. A. (1992). The use of pledges to build and sustain commitment in distribution channels. Journal of Marketing Research, 29(February), 18–34. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturing firm working partnerships. Journal of Marketing, 54(1), 42–58. Beeth, G. (1990). Distributors: Finding and keeping the good ones. In: H. B. Thorelli & S. T. Cavusgil (Eds), International marketing strategy, (3rd ed.) (pp. 487–493). Oxford: Pergamon. Bello, D. C., & Gilliland, D. I. (1997). The effect of output controls, process controls, and flexibility on export market performance. Journal of Marketing, 61(1), 22–38.

Performance, Anti-Shirking Measures and Hold-Up Safeguards

337

Benito, G. R. G., Pedersen, T., & Petersen, B. (1999). Foreign operation methods and switching costs: Conceptual issues and possible effects. Scandinavian Journal of Management, 15(2), 213–229. Benito, G. R. G., Pedersen, T., & Petersen, B. (2005). Export channel dynamics: An empirical investigation. Managerial and Decision Economics, 26(3), 159–173. Bergen, M. S., Dutta, S., & Walker, O. C. (1992). Agency relationships in marketing: A review of the implications and applications of agency and related theories. Journal of Marketing, 56(3), 1–24. Buckley, P. J., & Casson, M. C. (1981). The optimal timing of a foreign direct investment. Economic Journal, 91(1), 75–87. Calof, J. L. (1993). The mode choice and change decision process and its impact on international performance. International Business Review, 2(1), 97–120. Calof, J. L., & Beamish, P. W. (1995). Adapting to foreign markets: Explaining internationalization. International Business Review, 4(2), 115–131. Clark, T., Pugh, D. S., & Mallory, G. (1997). The process of internationalization in the operating firm. International Business Review, 6(6), 605–623. Corey, E. R., Cespedes, E. F., & Rangan, V. K. (1989). Going to market – Distribution systems for industrial products. Boston, MA: Harvard Business School Press. Dutta, S., Bergen, M., Heide, J. B., & John, G. (1995). Understanding dual distribution: The case of reps and house accounts. Journal of Law, Economics, & Organization, 11(1), 189–204. Ellis, P. (2000). Social ties and foreign market entry. Journal of International Business Studies, 31(3), 443–469. Estrin, S., & Meyer, K. (Eds) (2004). Investment strategies in emerging markets. Cheltenham: Edward Elgar. Heide, J., & John, G. (1988). The role of dependence balancing in safeguarding transactionspecific assets in conventional channels. Journal of Marketing, 52(1), 20–35. Hennart, J.-F. (1991). The transaction cost theory of multinational enterprise. In: C. Pitelis & R. Sugden (Eds), The nature of the transnational firm (pp. 81–116). London and New York: Routledge. Hill, C. W. L. (2003). International business: Competing in the global marketplace (4th ed.). Boston: McGraw-Hill. Jap, S. D., & Anderson, E. (2003). Safeguarding interorganizational performance and continuity under ex post opportunism. Management Science, 49(12), 1684–1701. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360. Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalization of the firm: Four Swedish cases. Journal of Management Studies, 12(3), 305–322. Karunaratna, A. R., & Johnson, L. W. (1997). Initiating and maintaining export channel intermediary relationships. Journal of International Marketing, 5(2), 11–32. Klein, S., Frazier, G. L., & Roth, V. J. (1990). A transaction cost analysis model of channel integration in international markets. Journal of Marketing Research, 27(2), 196–208. Leonidou, L. C., & Katsikeas, C. S. (1996). The export development process: An integrative review of empirical models. Journal of International Business Studies, 27(3), 517–551. Levintahl, D. (1988). A survey of agency models of organizations. Journal of Economic Behavior and Organization, 9, 153–185. Matthyssens, P., & Pauwels, P. (2000). Uncovering international market-exit processes: A comparative case study. Psychology & Marketing, 17(8), 697–719.

338

BENT PETERSEN ET AL.

Nicholas, S. (1986). The theory of multinational enterprise as a transactional mode. In: P. Hertner & G. Jones (Eds), Multinationals: Theory and history. Aldershot: Gower. Pedersen, T., Petersen, B., & Benito, G. R. G. (2002). Change of foreign operation methods: Impetus and switching costs. International Business Review, 11(3), 325–345. Peng, M. W. (2000). Business strategies in transition economies. Thousand Oaks, CA: Sage. Petersen, B. (1996). Explaining cost-effective export market penetration via foreign intermediaries. PhD Series 4.96. Copenhagen Business School, Copenhagen. Petersen, B., Benito, G. R. G., & Pedersen, T. (2000). Replacing the foreign intermediary: Motivators and deterrents. International Studies of Management and Organization, 30(1), 45–62. Porter, L. W., & Lawler, E. E. (1968). Managerial attitudes and performance. Homewood, IL: Richard D. Irwin. Rindfleisch, A., & Heide, J. B. (1997). Transaction cost analysis: Present, past, and future. Journal of Marketing, 41(October), 30–54. Root, F. R. (1987). Entry strategies for international markets. Lexington, MA: Lexington Books. Rosson, P. J. (1984). Success factors in manufacturer–overseas distributor relationships in international marketing. In: E. Kaynak (Ed.), Managing export entry and expansion. New York: Praeger. Rosson, P. J., & Ford, D. (1982). Manufacturer–overseas distributor relations and export performance. Journal of International Business Studies, 13(2), 57–72. Shamdasani, P. N., & Seth, J. (1995). An experimental approach to investigating satisfaction and continuity in marketing alliances. European Journal of Marketing, 29(4), 6–23. Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Stern, L. W., & El-Ansary, A. I. (1992). Marketing channels (4th ed.). Englewoods Cliffs, NJ: Prentice-Hall. Wathne, K. H., & Heide, J. B. (2000). Opportunism in interfirm relationships: Forms, outcomes, and solutions. Journal of Marketing, 64(October), 36–51. Weiss, A. M., & Anderson, E. (1992). Converting from independent to employee salesforce: The role of perceived switching costs. Journal of Marketing Research, 29(1), 101–115. Welch, L. S., & Wiedersheim-Paul, F. (1980). Initial exports – A marketing failure? Journal of Management Studies, 17(3), 333–344. Williamson, O. E. (1983). Credible commitments: Using hostages to support exchange. American Economic Review, 73(4), 519–540.

Table A1.

Correlation Coefficients (p Values in Parentheses) and Descriptive Statistics for Independent Variables. 1.

1. Market growth 2. Sales potential 3. Asset specificity 4. Contractual restrictions 5. Severance payment 6. Monitoring 7. Intermediary performance 8. Switch of intermediary Mean Standard deviation

2.

3.

4.

5.

6.

7.

8.

0.04 (0.53) 1.00 0.05 (0.44) 0.19 (0.01)

1.00

1.00 0.13 (0.03) 1.00 0.06 (0.31) 0.20 (0.01) 1.00 0.10 (0.13) 0.06 (0.35) 0.03 (0.63)

1.00

0.01 (0.95)

0.06 (0.37)

0.01 (0.98)

0.27 (0.01)

0.05 (0.45) 0.01 (0.88)

0.11 (0.08) 0.09 (0.13)

0.01 (0.87) 0.05 (0.41) 0.11 (0.07) 0.02 (0.78)

0.04 (0.49)

0.01 (0.86)

0.09 (0.16)

0.15 (0.02)

0.06 (0.32) 0.14 (0.03)

0.09 (0.13)

1.00

2.94 1.81

3.59 1.85

0.08 0.26

0.86 0.35

2.50 1.01

0.29 0.45

27.7 14.1

1.00

3.06 1.46

Performance, Anti-Shirking Measures and Hold-Up Safeguards

APPENDIX. THE CORRELATION MATRIX AND DESCRIPTIVE STATISTICS OF THE VARIABLES ARE SHOWN IN TABLE A1.

 Significance at the 10% level.  Significance at the 5% level.  Significance at the 1% level.

339

This page intentionally left blank2

340

EXPORTER GOVERNANCE OF INTEGRATED AND INDEPENDENT MARKETING CHANNEL MEMBERS IN INTERNATIONAL MARKETS: MODERATING EFFECTS OF STAGE OF RELATIONSHIPS AND OPERATION MODE$ Carl Arthur Solberg INTRODUCTION In later years a number of articles have been published on the issue of exporter–importer relations either from the exporter viewpoint (Bello & Gilliland, 1997; Mortanges & Vossen, 2000; Solberg & Nes, 2002; Bello, Christitan & Li, 2003; Zhang, Cavusgil & Roath, 2003) or from the importer perspective (Lye, 1998; Skarmeas & Katsikeas, 2001; Skarmeas, katsikeas, & Schlegelmilch, 2002). The main focus has been on how to develop relations

$

This research has been partly financed by the Globalisation Programme, which has received financial support from the Research Council of Norway.

Relationship between Exporters and their Foreign Sales and Marketing Intermediaries Advances in International Marketing, Volume 16, 341–358 Copyright r 2006 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1474-7979/doi:10.1016/S1474-7979(05)16014-1

341

342

CARL ARTHUR SOLBERG

with and control of the foreign partner. Taking a principal-agent view of the channel management issues, Bello and Gilliland (1997) suggest a model where they test how unilateral (through process control or outcome control) and bilateral governance structures (flexibility) are being influenced by a number of antecedents, and how they in their turn impact on exporter performance. Process control may be described as the principal’s influence on the way in which distributors/subsidiaries carry out the marketing activities (advertising, sales calls, etc), whereas with outcome control the firm is content with controlling the result of these activities (profit, sales volume, market share, etc). They found that outcome control and flexibility of the trading partners correlate positively with performance, whereas no significant relationships were established between process control and performance. Other models have later been introduced, where the effects of relational controls or relational norms have been explored (Bello et al. 2003; Zhang et al. 2003). The present article explores the relationships between three forms of control with export performance: outcome and process control and control through trust or clan control. It departs from the above studies that it explores the effects of these control modes in different contingent situations. Although these types of control may coexist, there is reason to believe that the effects by the one or the other on export performance depend on the stage in the relationship between the partners (Ford & Rosson, 1982; Lye, 1998) and degree of integration between the partners (Solberg & Nes, 2002; Bello & Lohtia, 1995). To the author’s knowledge, the moderating effect of these two contingencies has not yet been explored. Fig. 1 shows that different control modes affect performance, depending on the stage of relations and degree of integration. The rest of the article will describe this model and present a number of ensuing hypotheses. Next the methodology and the results are presented. Finally, implications for research and management are discussed. In the following we use the terms middlemen and representatives interchangeably, whereas trading partners denote the two parties of the exporter–importer relations, the exporter and the middleman (subsidiary, agent or distributor).

DEVELOPMENT OF HYPOTHESES Export Performance and Control Modes The main contention of the model in Fig. 1 is that controlling export activities and outcomes in some way or another will have positive effects on

Exporter Governance of Integrated and Independent Marketing

343

Mode of operation

Control modes

Performance

Stage of relationship

Fig. 1.

Export Governance Model and Export Performance.

the exporter’s performance. Bello and Gilliland (1997) sum up the extant literature on how performance may be affected by unilateral control mechanisms. Outcome based control mechanisms have been shown to be positively linked to performance (Munro & Beamish, 1987; Bello & Gilliland, 1997), the reason being the intermediaries know they are held accountable for the results (Anderson & Oliver, 1987) and that they bring about an alignment of interests of the parties involved (Eisenhardt, 1989). Although outcome control in many ways is the governance mechanism of the independent distributor (market governance) and process control is more the domain of hierarchical governance (Eisenhardt, 1989), one may conceive of both types of control in both the types of governance systems. In both cases of unilateral governance the control of the distributor/daughter company is mainly based on information from the representative (Gripsrud, Solberg, & Ulvnes, 2000). However, Bello and Gilliland (1997) found no correlation between process control and performance in international marketing relations. Agency theory posits that different controls (outcome- or behaviourbased) prevail given different situations – such as outcome uncertainty, outcome measurability, length of relationships, and task programmability (Eisenhardt, 1989). In any given situation these contingencies appear at the same time, but with different ‘‘answers’’ concerning the content of the contract. For instance an agent operating in a competitive market, where the outcome of the bidding is uncertain should favour behaviour-based

344

CARL ARTHUR SOLBERG

contracts, should be controlled by process control mechanisms. If at the same time the tasks are complex (consulting services or large project deliveries) the contract should be outcome based, supporting outcome controls. This suggests that both types of unilateral controls should coexist for the firm to successfully monitor its foreign representatives. Mishra (1995) has argued that combined controls yield better outcome and Jaworski and MacInnis (1989) and Jaworski, Stathakopoulos, and Krishnan (1993) maintain that both formal and informal controls are needed to improve job satisfaction among marketing managers. Furthermore, information is less accessible in an international marketing setting and it is fair to assume that performance ambiguity is more critical than in domestic markets (Bello & Gilliland, 1997). Stump and Heide found that increasing performance ambiguity is related to less monitoring in an industrial relationship context, whereas Mishra, Heide, and Cort (1998) suggest that performance ambiguity favours a combination of controls. Trust seems to pervade business relationships (Morgan & Hunt, 1994) and is seen by Bradach and Eccles (1989) as an alternative governance mechanism to price (market) and authority (hierarchy). Bello and Gilliland (1997) introduce in their model the concept of flexibility, implying the willingness of both parties to change the terms of an agreement, as a bilateral ‘‘control mechanism.’’ The relationship between flexibility and trust has only received scant attention in academic research (Aulakh, Kotabe, & Sahay, 1996 ; Zhang et al., 2003). One may argue that flexibility is an antecedent to trust rather than a governance mechanism in its own right as it is one important part of the willingness expressed by the partners to mutually adapt to each other’s needs, eventually leading to a trusting relationship (Ha˚kanson, 1982). Halle´n, Johanson, and Seyed-Mohamed (1991) introduce the concept of adaptations and found that commitment through investments in adaptation ‘‘tie the firms together in strong customer–supplier relationships, forming the basis for both business expansion and for securing current sales or supply sources’’ (p. 35). We will propose that trust in general leads to better overall performance than does either of the two other control mechanisms. Uzzi (1997, p. 37) states that ‘‘embeddedness creates economic opportunities that are difficult to replicate via markets, contracts, or vertical integration.’’ He later on (p. 43) shows how trust promotes access to ‘‘privileged and difficult to price resources that enhance competitiveness but are difficult to exchange in arm’s length ties.’’ Heide (1994, p. 83) emphasises that ‘‘to the extent that initial socialisation efforts are ineffective, a failure to engage in systematic monitoring efforts represents exposure to opportunism.’’ One conclusion of this

Exporter Governance of Integrated and Independent Marketing

345

observation is that unilateral monitoring vehicles must be organised to reduce the propensity of the partner to behave selfishly (Bello & Gilliland, 1997). On the other hand, it also suggests that the possibilities of socialising with individual key members of the partner organisation should be considered a key concern in pre-contractual screening of partners. Summing up this section, we postulate that: H1a. A combination of control modes of intermediaries in overseas markets outperforms each of the individual control modes in explaining export performance. H1b. Clan control outperforms unilateral control modes in explaining export performance. Stages of Relationship and Effects of Control The use of one form of control mechanism does not exclude the use of either of the other forms. On the contrary, although they are distinct from one another, they are strongly correlated (Bello & Gilliland, 1997; Celly & Frazier, 1996; de Mortanges & Vossen, 1999). In other words, all three forms seem to coexist, but to the author’s knowledge no attempt has been done to untangle the conditions under which one form is more preferable than the two other in international channel relationships. The basic assumption of the Bello/Gilliland model is that the more control (outcome/ process) or cooperation (flexibility), the better the performance. As we have seen, they did not find support for the hypothesized relationship between process control and performance, suggesting that ‘‘inadequate knowledge about the foreign transformation process may prevent optimal manufacturer specification of marketing behaviours for overseas distributors’’ (1997, p. 34). This plausible explanation leads us to introduce stages of relationship (Ford & Rosson, 1982; Lye, 1998) as a moderating variable. Ranging the three governance mechanisms it seems as though there is an escalating order of commitment to the market starting with outcome control in the early phases of the relationships, partly due to limited resources (in terms of market insight) by the exporter restraining his opportunities to monitor the local representative. Later, with more knowledge, the exporter should be in a position to give advice and instructions to the local representative thereby making process control relevant. In a mature phase, after a period of adaptation, socialisation and goal alignment trust, or clan control will take over as the most committed mode of control by the exporter. On the other hand, Eisenhardt (1989) suggests that ‘‘the length of the agency relationship

346

CARL ARTHUR SOLBERG

is positively related to behavior based contracts’’ (p. 63), because the principal will be better equipped to assess the behaviour of the agent and reward it accordingly, supporting thereby process control in the longer term. Borrowing from Lye (1998) and Ford and Rosson (1982) we will generally postulate that the more entrenched the relationships between the partners, the more the exporter will recur to trust or clan control as its main mode of governance. This is akin to the relationship development process taking place between buyer and seller as suggested by Dwyer, Schurr, and Oh (1987) where they describe a gradual process of increasing commitment and shared value systems between the trading partners. To sum up this section, we will propose that, H2. Outcome control is more effective in the early stages of an exporter– intermediary relationship and clan controls are more effective in the mature stages of this relationship, process control being more effective in an intermediary stage. Integration and Effects of Control Even though there are obvious differences between fully integrated channel systems (like exporter-foreign sales subsidiary) and independent distributors and agents, there are also some notable similarities. First, they both operate as members of a system to promote the exporter’s products, and therefore aim at creating value in the chain. Second, fully owned foreign sales subsidiaries as well as foreign independent distributors are located overseas and have therefore not only a different perspective of the marketing situation than the exporter, but have also in common the expert power of the agent (French & Raven, 1959; Sharma, 1997). However, the differences are equally important, primarily residing in the fact that the power balance between the parties – or at least the base on which it rests – may be different in the two cases. First, the contract power of the exporter towards the distributor is not matched by the possibility of the principal in the integrated operation to exert both coercive and legitimate power (French & Raven, 1959). Second, the distributor often has a disproportionate size relative to the generally smaller exporter, which in this case gives the former the upper hand in the relationship. Indeed it has been found that both importers and exporters perceive the former to have the greater impact on marketing decisions (Leonidou, 1989). Also, it has been claimed that organisational structure itself represents a control mechanism; according to Jaworski (1988), organisational structure (like for instance

Exporter Governance of Integrated and Independent Marketing

347

vertical integration) is an additional control mechanism in that it ‘‘directs influences and shapes individual and group behavior’’ (p. 27). Solberg and Nes (2002) show that exporting through sales subsidiaries gives better marketing control than exporting through agents, the latter in turn providing better control than distributors. However, they did not find support for the hypothesis that sales subsidiaries yield better financial returns than independent representatives. The limited effect of process controls in general (Bello & Gilliland, 1997) leads us to believe that this group of controls yields better results in given circumstances. Bello and Lohtia (1995) argue that agents may be regarded as quasi-integrated intermediaries as opposed to distributors who operate independently of the exporter. One such major difference is that the agent does not take title to the goods, whereas the distributor buys the goods and resells them. Given the differences between the three modes of operation (sales subsidiary, agent, and distributor – Solberg and Nes, (2002)) we postulate that the effect of process controls in integrated marketing channels is positive, whereas in independent channels it is negative. The main argument for such prediction is that in integrated or quasi-integrated channels the power balance tilts in favour of the principal, whereas in fully independent channels in foreign markets the power is primarily in the hands of the representative (Leonidou, 1989). It is furthermore expected that clan controls become more effective as the degree of integration increases. The line of reasoning is here that integrated channels involve more commitment, resources, and contact between the partners than independent channels (Solberg & Nes, 2002). The relationships will therefore be denser than in independent channels. H3. The effects of control modes on export performance are moderated by different operation modes, so that process and clan controls are more effective in integrated channels, and outcome control is more effective in independent channels.

METHODOLOGY Sample and Data Collection A list of 469 Norwegian firms registered in the Norwegian Export Barometer1 were asked on telephone if they were interested in participating in the present study, 246 of which answering positively. Thus we obtained both the

348

CARL ARTHUR SOLBERG

Table 1.

Composition of the Sample.

Sales Million NOK o25 26–50 51–100 101–500 4500

Exports to Most Important Market Percent of sample

Million NOK

Percent of sample

23.5 21.2 16.5 23.5 15.3

o25 26–50 51–100 101–500 4500

14.9 9.5 14.3 34.5 26.8

 1 Euro ¼ ca. 8.50 NOK; 1USD ¼ ca. 6.50 NOK (NOK ¼ Norwegian krone).

name of the most appropriate respondent in the firm, and a commitment by this person to respond. Immediately after the telephone conversation, we sent an e-mail containing an introductory letter and a questionnaire using the Questback data system. Before the deadline we had received 178 valid answers – or a response rate of 72.4% of the refined list, or 38.0% of the gross sample frame. Some of the fallout was due to travel and heavy workload of the potential respondents. Table 1 gives an overview of the composition of the sample. The respondents were asked to answer a number of questions pertaining to their relations with their local representative in their most important export market. This is slightly different from the research presented by Anderson and Narus (1990) and Bello and Gilliland (1997) who chose the focal relationship to be the fourth most important in foreign markets, in order to avoid a ‘‘positive evaluation bias’’ because ‘‘relations with a firm’s first- or second-largest volume trading partner tend to be uniformly positive’’ (Bello & Gilliland, 1997, p. 29). We decided to use the most important one, first because not all exporters sell to four markets, and second because it is not obvious that all first and second volume relationships are troublefree. Also, we assume that the knowledge of details of the relationships between the trading partners is higher in the most important market, than lower down the row.

Measurements The following constructs were measured on a 5-point Likert scale: outcome control, process control, trust/clan control, and performance. Table 2 shows the items used in each construct and their corresponding Cronbach alpha

349

Exporter Governance of Integrated and Independent Marketing

Table 2.

Constructs Used in the Study.

Construct and Items

Outcome control We follow up our agent regularly to check that sales objectives are being met We follow up our agent regularly to check that profitability objectives are being met We follow up our agent regularly to check that market share objectives are being met Process control We regularly monitor the activities of the agent We control how the agent introduces our product to the market If our objectives are not being met, we intervene and consider if processes can be changed to improve the chances of success Clan control Our agent is trustworthy Our agent has high integrity It is not necessary to follow up our agent since he/she always work to the benefit of the firm In our firm we have traditions, norms and values that direct the decisions and activities of the agent Performance Our expectations on market shares are satisfied Our expectations on sales growth are satisfied Our expectations on sales are satisfied We are very satisfied with the market position that we have achieved in this market Our agent has carried out our marketing strategies to our complete satisfaction

Factor Loading

Cronbach Alpha 0.89

0.936 0.893 0.890 0.69 0.805 0.788 0.720

0.74 0.866 0.841 0.687 0.657 0.91 0.922 0.915 0.904 0.831 0.686

values. We have adapted measures used by Bello and Gilliland (1997) (outcome and process control), Morgan and Hunt (1994) (trust/clan control). The performance measures have been adapted from a range of contributions on export performance (Cavusgil & Zou, 1994; Solberg & Nes, 2002). Discriminant validity was controlled for using Pearson correlations. The results are shown in Table 3, indicating that none of the constructs are strongly correlated, although one is a borderline case – above 0.6 (outcome control/process control).

350

CARL ARTHUR SOLBERG

Table 3.

Outcome control Process control Clan control Performance

Pearson Correlations.

Outcome Control

Process Control

Clan Control

0.616 0.357 0.323

0.354 0.278

0.349

 All correlations are significant at the 0.05 level.

Table 4.

Stages of Relationships in International Marketing Channels. N

Introductory Growth Mature Stagnation/Inert Decline

14 61 56 27 9

We have also identified the stages of relationships between the trading partners. We asked the respondents to classify the stage of their relationship with the relevant middleman: introductory, growth, mature, inert/stagnant, and decline, based on the work of Ford and Rosson (1982) and Lye (1998). We have also measured the length of the relationships between the partners. However, there is only a weak, though significant, correlation between relationship length and stage of relationship (0.249, p ¼ 0:001). The five stages of relationships were distributed as described in Table 4: We have collapsed companies in the two first and the two last stages in order to achieve a sufficient number of respondents in each category. In doing so we risk losing some information, and we also risk mixing categories of firms that do not necessarily belong together. On the other hand, the delineation between the categories is not clear-cut. We have also divided the sample in three categories according to entry mode: sales subsidiary (N ¼ 41), agent – selling in the name of the exporter (N ¼ 52), and independent distributor (N ¼ 49).

RESULTS Hypothesis 1 (clan control is superior to unilateral controls and a combination of controls yield better results) was tested using regressions between

Exporter Governance of Integrated and Independent Marketing

Table 5.

351

Performance Effect of Combination of Controls vs Individual Controls – H1. Model I 0.323

Model II

Model III

Model IV

Model V

— — 0.349

0.175 0.073ns 0.248

0.255 — 0.256

Outcome control Process control Clan control

— —

— 0.278 —

ANOVA statistics F-value P-value

18.195 0.000

12.084 0.000

21.123 0.000

9.466 0.000

16.406 0.000

0.099

0.071

0.116

0.149

0.168

R2Adj

Note: Significance levels: ns ¼ not significant.  po0.10;  po ¼ 0.01.

each of the three control mechanisms and performance and combinations of the controls (Table 5). Table 5 indicates that H1 is supported by the data: a combination of control methods yields better results than each individual control method (models IV and V). The best combination of controls however is that with only outcome and clan controls. Table 5 also suggests that clan control (model III) explains most of the variance in performance when using single controls only, whereas outcome control (model I) comes next. Process control alone affects performance (model II), but together with the two other control modes (model IV), process control does not seem to have any significant effect. H2 seeks to investigate the effects of stage of relationships between the partners, the main contention being that the different controls work differently in different stages of relationships. Table 6 shows the results. Table 6 indicates that H2 receives partial support. As we had to collapse two of the stages to achieve a meaningful number of respondents in each category, the stages have a slightly different content than suggested in the hypothesis section. In stage 1 (introduction and growth stages) and 2 (the mature stage) the control mechanisms have different effects. In stage 1, outcome control has significantly better effect on performance than the two other control methods. When running a regression with a ‘‘clean’’ subsample including only the respondents in the growth stage (N ¼ 61) we achieve a slightly different outcome – see Table 6a. Although none of the betas are significant, we may still discern a tendency where the effects of process controls are improved (b ¼ 0:201), thus lending partial support to

352

CARL ARTHUR SOLBERG

Table 6.

Effect of Stage of Relationships on the Effect of Control Methods – H2. Stage 1 Intro/Growth

Stage 2 Mature

Stage 3 Stagn/Decrease

Standardised beta coefficients Outcome control 0.292 Process control 0.137ns Clan control 0.059ns

0.056ns 0.003ns 0.339

0.067ns 0.133ns 0.253ns

ANOVA statistics F-value P-value

4.395 0.007

2.414 0.079

1.114 0.361

R2Adj

0.141

0.080

0.012

Note: Significance levels: ns ¼ not significant.  po0.10;  po ¼ 0.05.

Table 6a.

Effect of Control Modes in the Growth Stage (N ¼ 61).

Standardised beta coefficients Output control Process control Clan control

0.269ns 0.201ns 0.141ns

Anova statistics F-value P-value

5.777 0.002

R2Adj

0.223

Note: Significance levels: ns ¼ not significant.

H2 (the ANOVA statistics being significant with p ¼ 0:002). In the mature stage, clan control seems to yield better rewards, fully supporting H2. In stage 3 (stagnation/decline) the lack of significant findings leads us not to conclude, although there is a tendency of clan control to yield better rewards. H3 posited that operation mode moderates the effects of control methods. We tested H3 using regression analysis. The results are shown in Table 7. H3 is supported in that the different control modes work differently depending on the operation mode. More specifically: outcome control seems to work extremely well in independent channels (such as agent and distributor), whereas clan control works better in integrated channels. It is noteworthy

353

Exporter Governance of Integrated and Independent Marketing

Table 7.

Moderating Effects of Operation Modes on the Effects of Control Modes – H3. Sales subsidiary

Agent

Distributor

Standardised beta coefficients Outcome control Process control Clan control

0.117ns 0.189ns 0.402

0.328 0.233ns 0.132ns

0.470 0.266ns 0.138ns

ANOVA statistics F-value P-value

2.229 0.103

7.410 0.000

2.445 0.078

R2Adj

0.093

0.309

0.092

Note: Significance levels: ns ¼ not significant.  po0.10;  po ¼ 0.05.

that process control does not have any significant effect in any of the cases. Relative to the distributor, process control seems to have a negative effect – although not significant – on export performance. It is furthermore worth mentioning that as much as 31% of the variance in export performance in exporter–agent relations is explained by the three control modes.

DISCUSSION This research has demonstrated the strengths of multiple controls and of the more ‘‘soft’’ control methods such as trust or clan control. We may conclude that clan control is an effective way of monitoring foreign middlemen. This corroborates the general hypothesis that shared values and norms between trading partners lead to better working relationships and hence better performance (Morgan & Hunt, 1994; Nohria & Ghoshal, (1994); Bello et al., 2003; Zhang et al., 2003). We furthermore note that outcome control is most effectively used in early stages of the relationships, whereas clan control is found to have greater effect in the mature stages of the relationships. This is in line with our expectations. Process control seems not to follow the expected pattern, even though there is a tendency that this group of controls may yield positive results in the intermediary (growth) stages of an exporter–middleman relationship. One possible reason for such an impact in this stage of the

354

CARL ARTHUR SOLBERG

relationship may be the increased knowledge and experience by the exporter, enabling the exporter to give instructions and to control them. We may moreover speculate that the limited impact of process controls in the mature stage stem from the fact that the relationships by that time have evolved into a mutual understanding and commitment between the partners reducing the effects of directives and control thereof from the centre. Process control in general seems to yield little in terms of improved performance. In exporter distributor relationships – as opposed to relations with agents or subsidiaries – there is a tendency (although not significant) that process controls are even counter-productive. This substantiates the findings of Bello and Gilliland (1997) who analysed exporter–distributor relationships. A possible explanation is that distributors are even more independent than agents (Bello & Lohtia, 1995) – not to mention subsidiaries (Solberg & Nes, 2002), and hence will more ardently than the two other types of middlemen oppose any external influence on their local marketing activities. Another explanation may be that the arrow goes in the other direction: when the performance is poor, the exporter tends to increase process controls. However, there is no specific reason why this should be the case for distributors only. We also note that outcome control should be the preferred control mode in independent channel structures. This is particularly true for distributors. This finding further underscores the differences between the two independent operations modes – agent and distributor – discussed by Bello and Lohtia (1995) and Solberg and Nes (2002).

Implications for Management Most managers have developed their own paradigms concerning different aspects of international marketing strategy and how to control and monitor the activities of their partners in international markets, including a certain management style according to the beliefs expressed by these paradigms. They are however often confronted with foreign sales subsidiaries or distributors that behave more like ‘‘self-governing’’ local petty kings, or rebellious middlemen that make life a real challenge for the international marketer (see for instance Lipman, 1987; Ghauri, 1990; Forsgren & Holm, 1990; Petersen, Welch, & Welch, 2000; Solberg, 2000b). Research in other settings (Stenberg, 1992) suggests that steering systems (of foreign affiliates) be ‘‘a rather dispersed activity’’ (p. 210) and that most of the steering systems generally are being established as a response to detrimental developments in the relations with subsidiaries rather than in an anticipatory way.

Exporter Governance of Integrated and Independent Marketing

355

The present research has demonstrated that some governance modes yield better results than others, and that these also vary according to the context (degree of integration and stage of relationship). Managers do well to differentiate their control instruments and their investments in relationship building activities accordingly in order to achieve optimal outcomes of their foreign marketing operations.

Implications for Research This research has developed and tested a model of governance of middlemen in foreign markets. The model explains a limited but significant part of the variance in export performance. The purpose here was not to try and explain a large part of export performance; rather we aimed at untangling the conditions under which different modes of control are providing the desired results. Further research is needed in order to uncover patterns of behaviour and impacting forces on this behaviour. The present paper has adopted some of the concepts and measurements used by Bello and Gilliland (1997), but comes to somewhat different results when introducing the two contingency factors. Process control was found to have a negative and nonsignificant impact on performance by Bello and Gilliland (1997), whereas the present research has demonstrated that process control in some instances may have the opposite effect. This may indicate that some of the phenomena under study are context and culture (US vs Norway) specific. Indeed, Stump, Kim, and Oh (2002) found – using transaction cost theory to study seller–middlemen relations in the US and Japan – that theoretical explanations may be culture bound. It is therefore of interest to study the effects of the two contingencies in other cultural settings.

CONCLUSIONS The present research has demonstrated that combinations of control modes explain more of the variance in export performance than single controls. However, it also makes clear that there is no unambiguous answer to the question of modes of governance. Stage of relationships and degree of integration are factors that impact on the effects of control modes. Whereas unilateral control modes may be implemented in the introductory stages, clan controls need time to have some noticeable effect. We therefore studied the impact of different levels of clan controls on the effect of unilateral

356

CARL ARTHUR SOLBERG

controls on performance. The main conclusion here is that in strong clan settings unilateral controls are if not redundant, so at least not particularly effective. The present research has been carried out in a Norwegian exporter setting, and needs to be supplemented by similar studies in other contexts, in order to cast light on the moderating effects of the contingency factors introduced here.

NOTES 1. This list is the result of one year’s registration work of relevant firms representing a cross section of Norwegian exporting firms.

ACKNOWLEDGMENT The author would like to thank Anniken Olsen, Sissel Olsvik, and Lars Erik Ydstebøe for their assistance in the data collection for this research, and Prof. Geir Gripsrud and Harald Biong for invaluable comments to previous versions of this article.

REFERENCES Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(January), 42–58. Anderson, E., & Oliver, R. L. (1987). Perspectives on behavior-based versus outcome-based sales force control systems. Journal of Marketing, 51(4), 76. Aulakh, P. S., Kotabe, M., & Sahay, A. (1996). Trust and performance in cross-border marketing partnerships: A behavioural approach. Journal of International Business Studies, Special Issue, 27, 105–1032. Bello, D., & Gilliland, G. (1997). The effect of output controls, process controls, and flexibility on export market performance. Journal of Marketing, 61(January), 22–38. Bello, D., & Lohtia, R. (1995). Export channel design: The use of foreign distributors and agents. Journal of the Academy of Marketing Science, 23(5), 83–93. Bello, D., Christitan, C., & Li, Z. (2003). The antecedents and performance consequences of relationalism in export distribution channels. Journal of Business Research, 56, 1–16. Bradach, J. L., & Eccles, R. G. (1989). Price, authority and trust: From ideal types to plural forms. Annual Review of Sociology, 15, 97–118. Cavusgil, S. T., & Zou, S. (1994). Marketing strategy – performance relationship: An investigation of the empirical link in export market ventures. Journal of Marketing, 58(January), 1–21. Celly, K. S., & Frazier, G. L. (1996). Outcome based and behavior based coordination efforts in channel relationships. Journal of Marketing Research, 33(2), 200–210.

Exporter Governance of Integrated and Independent Marketing

357

Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer–seller relationships. Journal of Marketing, 51(April), 11–27. Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57–74. Ford, I. D., & Rosson, P. H. (1982). The relationships between export manufacturers and their overseas distributors. In: R. Czinkota Micheal & George Tesar (Eds), Export management: An international context (pp. 257–275). New York: Preager Publishers. Forsgren, M., & Holm, U. (1990). Internationalization of management: dominance and distance. AIB Conference, Glasgow, April. French, J. R. P., & Raven, B. (1959). The bases of social power. In: D. Cartwright (Ed.), Studies in social power (pp. 150–167). Ann Arbor: University of Michigan Press. Ghauri, P. N. (1990). Emergence of new structures in Swedish multinationals. In: R. S. Farmer (Ed.), Advances in international comparative management. Greenwich, Conn.: JAI Press Inc. Gripsrud, G., Solberg, C. A., & Ulvnes, A. M. (2000). The role of trust in shaping information collection behaviour of exporters. Proceedings from the EIBA conference, Maastricht, December. Ha˚kanson, H. (Ed.) (1982). International marketing and purchasing of goods – An interaction approach. Chichester: Wiley. Halle´n, L., Johanson, J., & Seyed-Mohamed, N. (1991). Interfirm adaptation in business relationships. Journal of Marketing, 55(April), 29–37. Heide, J. B. (1994). Interorganizational governance in marketing channels. Journal of Marketing, 58(January), 71–85. Jaworski, B. J. (1988). Toward a theory of marketing control: Environmental context, control types, and consequences. Journal of Marketing, 52(July), 23–39. Jaworski, B. J., & MacInnis, D. J. (1989). Marketing jobs and management controls: Towards a framework. Journal of Marketing Research, XXVI(November), 406–419. Jaworski, B. J., Stathakopoulos, V., & Krishnan, H. S. (1993). Control combinations in marketing: Conceptual framework and empirical evidence. Journal of Marketing, 57(January), 57–69. Leonidou, L. C. (1989). The exporter–importer dyad – an investigation. Journal of Managerial Psychology, 4(2), 17–28. Lipman, J. (1987). Marketers turn sour on global sales pitch guru makes. Wall Street Journal, (May 12), 1. Lye, A. R. (1998). The initiation and development of exporter–importer relationships. Unpublished Ph.D. thesis, University of Canterbury, Christchurch, New Zealand. Mishra, D. P. (1995). Signaling and monitoring strategies of service firms. Advances in Services Marketing and Management, 4, 249–288. Mishra, D. P., Heide, J. B., & Cort, S. G. (1998). Information asymmetry and levels of agency relationships. Journal of Marketing Research, XXXV(August), 277–295. Morgan, R. M., & Hunt, S. D. (1994). The commitment–trust theory of relationship marketing. Journal of Marketing, 58, 20–38. de Mortanges, C. P., & Vossen, J. (1999). Mechanisms to control the marketing activities of foreign distributors. International Business Review, 8, 75–97. Munro, H. J., & Beamish, P. (1987). Distribution methods and export performance. In: P. Rosson & S. Reid (Eds), Market Entry and Expansion Modes (pp. 316–331). New York: Praeger Publishers.

358

CARL ARTHUR SOLBERG

Nohria, N., & Ghoshal, S. (1994). Differentiated fit and shared values: Alternatives for managing headquarters-subsidiary relations. Strategic Management Journal, 15, 491–502. Petersen, B., Welch, D. E., & Welch, L. S. (2000). Creating meaningful switching options in international operatioins. Long Range Planning, 33, 688–705. Sharma, A. (1997). Professional as agent: Knowledge asymmetry in agency exchange. Academy of Management Review, 22(3), 758–798. Skarmeas, D. A., & Katsikeas, C. S. (2001). Drivers of superior importer performance in crosscultural supplier-reseller relationships, 30(2), 227–241. Skarmeas, D. A., Katsikeas, C. S., & Schlegelmilch, B. B. (2002). Drivers of commitment and its impact on performance in cross-cultural buyer-seller relationships: The importers perspective. Journal of International Business Studies, 33(4), 757–783. Solberg, C. A. (2000b). Standardization or adaptation of the marketing mix – The role of the local subsidiary/representative. Journal of International Marketing, 8(1). Solberg, C. A., & Nes, E. B. (2002). Exporter trust, commitment and marketing control in integrated and independent export channels. International Business Review, 11(4), 385–405. Stenberg, E. (1992). Steering of foreign subsidiaries: An analysis of steering system development in six Finnish companies. Acta Academiae Oeconomicae Helsingiensis, The Helsinki School of Economics and Business Administration. Stump, R. L., Kim, S., & Oh, C. (2002). Relative influence in marketing channels: An empirical test of the influence of distributor specialized investments in eastern versus western culture. Proceedings Academy of Marketing Science Conference, Valencia, June. Uzzi, B. (1997). Social structure and competition in interfirm networks: The paradox of embeddedness. Administrative Science Quarterly, 42, 35–67. Zhang, C., Cavusgil, S. T., & Roath, A. S. (2003). Manufacturer governance of foreign distributor relationships: Do relational norms enhance competitiveness in the export channel? Journal of International Business Studies, 34, 550–566.