The impact of the entrepreneus social networks on performance of the firms during the early state of internationalization

THE IMPACT OF THE ENTREPRENEUR’S SOCIAL NETWORKS ON THE PERFORMANCE OF THE FIRM DURING THE EARLY STAGES OF INTERNATIONALIZATION Muhammad Muzahidul Islam Patowary, Taha Javaid, Le Thi B

THE IMPACT OF THE ENTREPRENEUR’S SOCIAL

NETWORKS ON THE PERFORMANCE OF THE FIRM

DURING THE EARLY STAGES OF INTERNATIONALIZATION

Muhammad Muzahidul Islam Patowary, Taha Javaid, Le Thi Bao Quynh, Prisca Thiru

School of Business, Engineering and Science, Halmstad University, Halmstad, Sweden

ABSTRACT

Purpose – In entrepreneurship literature network has been considered as an important factor behind the

success of INVs, though much importance has been given to business networks while overlooking the impact of social networks This paper aims to investigate the impact of the entrepreneur’s social network

on the performance of the firm during the initial stages of internationalization maintaining a balanced consideration between the bright side and dark side of the impact

Design/methodology/approach - This paper employs a qualitative approach Secondary sources of

data were used as a case company from Navid Ghannad’s (2013) dissertation work named ‘Polaris’ was selected

Findings - The utilization of the entrepreneur’s personal or social networks in the early stages

of internationalization has been evident from both an academic and practical perspective in this paper During the early stages of internationalization, entrepreneurs get considerable benefits from their personal and social networks in terms of market knowledge, ease of access to resources and business networks, etc while faces challenges regarding conflict of interests, lack of capabilities of the network, and untrusted ties

Originality/value – This study suggests that during the early stage of internationalization, entrepreneurs may take advantage of their social or personal networks in exploring market potentials, however, they should be aware of the untrusted and incapable ties to ensure the expected performance of the firm

Keywords - social network, performance, internationalization, INVs

1 INTRODUCTION

The importance of networks in the context of internationalization has been emphasized by many researchers (Andersson & Wictor, 2003; Autio, 2005; Oviatt & McDougall, 2003, Sharma & Blomstermo, 2003) The network is considered to enrich social capital for INVs and

a resource that was originally affiliated with the nascent entrepreneurship (Davidsson & Honig, 2003), accordingly enables the entrepreneurial firm’s growth While the network has long been considered to be fundamental for SMEs to achieve international growth (Johansson & Mattson, 1988; Coviello & Munro, 1997; Hadley & Wilson, 2003), much of the literature has focused

on the business networks and overlooked the importance of social networks These two types

of networks differ in their scopes: while social networks include all relationships of the entrepreneur with others in the society (Burt, 1992), business networks consist of only the relationships between firms (Ellis, 2011) Putting more focus on business networks may narrow the scope of analysis of the effect of the network on a firm’s internationalization because social networks incorporate a wide range of relationships such as friends, relatives, classmates, etc.,

in general, all the relationships that matter to the entrepreneur Among studies that emphasize

the significance of social networks to the firm’s internationalization (Coviello & Cox, 2006;

Lu, 2010); the most focus was on the positive influence of social networks on internationalization, there are just a few studies that have highlighted the detrimental effects of social networks on internationalization efforts (Coviello & Munro, 1997) It can be seen that very little attention has been paid to the adverse effects of an entrepreneur’s social network which subsequently may end up with the failure of the entrepreneurial firm in international markets Since the entrepreneur’s social networks play an important role in the early stages of internationalization of entrepreneurial firms, this paper aims to maintain a balance consideration between the social networks’ effect on both of its bright and dark side Therefore,

the research question of this paper is:

“How do the entrepreneur’s social networks influence the performance of the

firm during the early stages of internationalization? ”

and they elaborated on the impact and benefits of international trade; hence the idea foreign expansion can be tracked as the factors of transformation from a local small business entity to

an international venture

2.1.1 Uppsala Internationalization Model

The most discussed and widely accepted model of internationalization has been developed by Uppsala School (e.g Johanson and Vahlne, 1977; Johanson and Wiedersheim-Paul, 1975) In this model, internationalization has been seen as a gradual and sequential development of firms’ commitment and investments over time, and four distinct forms of internationalization have been identified by Johanson and Wiedersheim-Paul (1975) namely - no regular export activities; export activities via independent representatives or agents; the establishment of an overseas subsidiary; and overseas production/manufacturing units Along with the incremental commitment, the selection of markets to enter is another important factor in this theory as authors discussed the pattern of market selection (Farooqi & Miog, R, 2012) Firms initially feel comfortable to go into foreign markets that are closer in psychic terms or less psychically distant due to difficulty in understanding the markets, however, the firms would eventually target markets that were further away in psychic distance terms as they have more knowledge

of the market and greater control of resources (Vahlne & Wiedersheim-Paul, 1973) The model also describes the interdependence of market knowledge and market commitment using a model of the positive correlation between market knowledge and commitment decisions, as

well to emphasize the sequential development of market activities and its positive correlation

to market commitment

Figure 1: Uppsala model, state and change aspects (Johanson and Vahlne, 1977)

From the above state and change model, we can see that as the firm gains experience and increase knowledge, and which influence its decision to increase market commitment Now, as the firm's commitment level shifted in an upward level, it stimulates more learning Hence to develop knowledge is crucial to a firm's internationalization and especially that knowledge that grows out of experience in current operations is decisive in the learning process (Johanson and Vahlne, 2009)

2.1.2 Network theories of Internationalization

Networks are identified as an influential factor in a firm’s internationalization journey (Coviello, 2006); thus, a firm’s internationalization has been widely examined through its network perspective and in this process, less emphasis was given to the knowledge about the foreign market, compared to the network relationship that the firm is part of (Laufs and Schwens, 2014) According to this approach, cooperation rather than competition among firms

is better for their development, as they can combine and share their resources and expertise efficiently (Johanson and Mattsson, 1988) and the firm doesn’t have to commit substantial physical resources and still be an important international player Network models of internationalization describe the process of internationalization of firms as the establishment and nourishment of networks and interdependencies among different parties in different markets (Ratajczak-Mrozek, 2012) hence, by establishing cooperation, performing joint actions, and mutually adapting resources, each party creates its network of relations which in turn are connected to the networks of other entities that are beneficial for all

Along with the role of networks in the internationalization of SME (Hanell & Ghauri, 2015; Johanson & Vahlne, 2009; Wilkinson, Mattsson, & Easton, 2000), other dynamics such as types of networks (Aldrich, 1999), the impact of networks on the pace of internationalization (Oviatt & McDougall, 2005) also got significant space in academics According to Chandra and Wilkinson (2017, p 692) “Relationships and networks affect firm internationalization in two main ways: they affect international opportunity recognition (discovery, creation, and actualization) and a firm’s ability to develop and exploit international market opportunities”

2.1.3 Business Network Incorporated Uppsala Model

With the change of perspective regarding the business environment from a neoclassical market with many suppliers and buyers to a web of relationships and networks, Johanson and Vahlne realized the need of incorporating business networks as a crucial element in the internationalization model ( Johanson & Vahlne, 2009) In the new model, Johanson and Vahlne have described internationalization as a process of creating and utilizing the multitiered network (Farooqi & Miog, 2012) Keeping the basic structure unchanged, “recognition of opportunities” and “knowledge” were added as an opportunity in the market is the main driver

of the internationalization process, and relationships or networks can develop knowledge, trust, and commitment (Johanson & Vahlne, 2009)

2.1.4 Innovation Related Models of Internationalization

Innovation refers to the transformation of creative ideas into new products and services and or processes of production and distribution that can create a sustainable competitive advantage for the firm (Kyläheiko, Jantunen, Puumalainen, Saarenketo & Tuppura, 2011) The main argument underlying the innovation models of internationalization that every stage of internationalization is considered as innovation (Farooqi & Miog, 2012)

of born globals has been presented by Rennie based on an Australian study (Andersson &

Wictor, 2003) While discussing born globals researchers has identified mainly three types of factors that have contributed to the emergence of this type of firms – a) unique resources that enable them to offer in the international market, b) non-equity modes of entry and c) rapid innovation in communication and transportation (Hennart, 2014) Andersson (2011) has analyzed born globals internationalization process and entrepreneur’s decision-making process using the theory of effectuation which shows that entrepreneur’s prior competencies and abilities and networks are crucial factors influencing success in the early stage of internationalization

2.2 Network, social networks and the role of social networks toward entrepreneurial firm’s internationalization

2.2.1 Network Theory

Network theory is one of the methods that interpret and assist in understanding systems that consist of relationships between several subjects (Kalso, 2018) It is usually used in many different areas of studies such as economics, the internet, ecosystems, and others All these different actors will form the fundamentals for entrepreneurial networking and will create obstructions and opportunities which are significant for the entrepreneurial process (Prell, 2012)

Social network theory is connected to entrepreneurship with the inspiration of Birley (1986), Aldrich & Zimmer (1986), and Johannison (1988) In the network theory, there are two main basic classes: the ties and the nodes Nodes imply different actors, which are represented as people, groups, organizations, or businesses Therefore, ties are the connections that nodes have established with each other They will determine whether the relationships are strong, weak, or absent, and therefore give better insight into the influence of the network (Brass and Halgin, 2012) To be more precise, in a graphic presentation, the outcome is to connect the dots, which represent individual players through different ties creating a universal network (Borgatti and Foster, 2003)

Networks have significant structural functions such as who interacts with whom as well as the nature of the connections among individuals (Fleisher, 2005) Those functions define the type

of each network, and its structure and size An entrepreneur needs to obtain support from his surroundings to be able to have another vision of certain situations (Brass and Halgin, 2012) Therefore, by increasing your network size, more information will be shared to develop a

business successfully It takes time for any entrepreneur to build a trusted personal network Information can be used against, and this might lead to failure

2.3 Social and Business Networks

Networks are assessed by the following main factors: the nature of their members, the nature

of links between them, and the dependence of the links (Wasserman & Faust, 1998) Networks

are divided into two types: social networks and business networks A social network is a range

of people, mostly family members and friends of the entrepreneur interacting and helping each other towards the success of the business especially in the early and critical stages (Gurung, 2013) The connection between members of social networks can differ in closeness or strength and results in different exploitations of business opportunities (Jackson & Young, 2016) The closeness of those relationships can be used in social networks to find business-related knowledge, attain strategic information, share ideas, and establish new business contacts

A Business network is determined as a set of connected exchange relationships in which one relationship has some influence on another (Cook & Emerson, 1978) The different players in this specific network are people or organizations that influence someone's career, business, or project A business network is complicated due to its structure that comprises several actors and various links (Halinen & Tornroos, 2005) Moreover, those links can be directly and indirectly connected (Jackson & Young, 2016)

Social networks are influenced by business networks, as well as business networks are influenced by social networks, which can result in an exchange of knowledge (Jackson & Young, 2016)

2.4 The network of Strong and Weak Ties

Empirical findings argue that to understand the strengths of social networks, it is of great

importance to analyze Granvotter's (1973) model of strengths of ties In the light of

Granovetter, strong social ties are a relationship between two individuals that can extend someone's network far beyond someone's normal reach

Strong ties are referred to as friends and weak ties as acquaintances (Granovetter, 1973) It is essential to understand that strong and weak ties are crucial for the process to achieve specific opportunities To begin with, a strong tie is someone people know well, where trust is built,

and where people share the same information A weak tie is a more fragile relationship, where two people share different interests and possess new relevant information However, the weak ties are crucial since they will be mutually beneficial for each other and they will encourage to share information across different groups (Granovetter, 1973) There are business connections that the entrepreneur meets in the entrepreneurial phase This will allow new opportunities for new start-up businesses, new job opportunities, network clusters, and many other areas that an entrepreneur needs to reach, for a more central network position (Burt, 2011) It is of great importance to maintain those relationships because weak ties will also be more critical towards the personal work instead of a friend who will mostly support you as an entrepreneur (Rost, 2011) Entrepreneurs who possess only a few weak ties will lack essential information and will

be too dependent on their friends and family (Granovetter, 1973)

2.5 Social Networks

Social networks are often perceived by individual entrepreneurs than by companies (Ozgen & Baron, 1990; Ellis, 2011) In the context of entrepreneurship literature, social networks are

defined as “a collection of individuals who may or may not be known to each other and who,

in some way contribute something to the entrepreneur, either passively, reactively or proactively whether specifically elicited or not” (Gilmore & Carson, 1999, p.31) Social

networks are also characterized as a web of personal connections and relationships that are to

be utilized for securing favors in personal and/or organizational action (Granovetter, 1985; Burt, 1992)

Social networks have been considered as the most important network resources during the early stages of internationalization (Adler & Kwon, 2002) because they stimulate the entrepreneurs

to recognize new business opportunities in international markets (Shirokova & Covin, 2012) Opportunity exploration is initiated by individuals, not firms (Aldrich & Zimmer, 1986; Singh, 2000); consequently, the flow of information exchange during the early stages of internationalization happens by the force of interpersonal network, not inter-organizational network (Ellis, 2011) In the context of organizational settings, social networks may comprise social relationships among individuals within the structure of business relationships or strategic alliances (Bjorkman & Kock, 1995); however, in this paper, we make

McDougall-a focus only on personMcDougall-al relMcDougall-ations concerning geogrMcDougall-aphicMcDougall-al, sociMcDougall-al, or institutionMcDougall-al spMcDougall-ace (Hitt, 2002) Chen (1994) affirmed that such social networks at the individual level are mostly portrayed and built upon goodwill and trust Many researchers also considered the importance

of trust in an international transaction (Axelsson & Johansson, 1992) Shirokova and McDougall-Covin (2012) also asserted that personal relationships that lead to internationalization could not be built without trust and commitment from both parties A few studies have emphasized that social networks contribute to shaping the foundation of which business linkages are developed across the borders (Chen & Chen, 1998; Chen, 2003) Liesch (2002) pointed out that setting up and preserving social relationships is a crucial part of the internationalization process considering both outcomes and inputs into the process As an outcome, it is critical for the entrepreneurial firm to enhance social relationships, especially in foreign markets (such as guanxi in the Chinese market, kankei in Japan, immak in Korea, or blat in Russia) to get valuable information benefit (Ellis, 2000) As input, applying useful information about social networks impact positively the firm’s performance in international markets (Liesch & Knight, 1999) This will be illustrated more in part 2.3

2.6 The role of social networks toward entrepreneurial firm’s internationalization

Shirokova and McDougall-Covin (2012) confirmed that social networks act as a core in facilitating all aspects of the entrepreneurship process, including internationalization Mainela (2002) argued that social networks inescapably attached to the business practice of both domestic and international markets as they were built up around the action of the people who act on behalf of the organization Johansson and Vahlne (2003) affirmed that an entrepreneur’s network can strongly influence the internationalization path of the firm, especially in the early stages of internationalization Coviello and Munro (1997) also raised the awareness that one important factor that contributes to the entrepreneur’s decision to choose the location is their social networks

Social networks play an important role in the internationalization process as they provide guidelines to the new business opportunities (Aldrich & Zimmer,1986) in the international marketplace, the mobilization of resources (Stuart & Sorenson, 2005), and access to tacit knowledge (Sorenson & Audia, 2000) Coviello & Cox (2006) also affirmed that social networks can provide tangible resources such as financial capital and intangible resources such

as knowledge about foreign markets (Lu, 2010) to the entrepreneurial firm Some researchers contended that without prior foreign market knowledge, the firm faces difficulties during the process of internationalization (Oviatt & McDougall, 2005) Zhou, Wu, and Luo (2007) considered social networks as the mediating role between internationalization and firm performance in the context of born-global SMEs; which was illustrated in three main benefits:

(1) knowledge of foreign market opportunities (2) advice and experiential learning, and (3) referral trust and solidarity

Besides, social networks have been considered as an important means to promote new business activities and influence the firms’ strategic choices and performance (Batjargal, 2003) Throughout international transactions, social networks play a fundamental role in proceeding economic exchange and the entrepreneurs are likely to devote substantial time to expand such networks (Dannis, 2010)

Kiss and Danis (2010) asserted that social networks provide rich and trusted sources of appropriate information that satisfy the institutional voids and help entrepreneurs understand more about new markets Many researchers agreed that such social ties are critical to the firm’s survival and growth in international markets (Lloyd-Reason, 2005; Peng & Luo, 2000)

Social networks are additionally added as a critical factor that accelerates the speed of internationalization Oviatt and McDougall (2005) stated that social networks are moderating forces including knowledge and network influence to push up the speed of internationalization Utilizing the entrepreneur’s social networks, the firm improve the access to market knowledge (Arenius, 2005), get an acquaintance to the newness and foreignness through business relationship learning (Johansson & Vahlne, 2003), meanwhile screen and evaluate potential exchange partners (Ellis, 2000); therefore the firm strengthens competitive advantage (Greeve, 2006) and improves overall firm performance (Arenius, 2005; Johanson & Vahlne, 2003) Oviatt and McDougal et al., (2005) asserted that trust-based personal connections and referral can also form the key capabilities of the firms regard to the fast and flexible response to international markets Because of that, the firm reduces the information redundancy and overcomes the knowledge barriers, therefore makes progress in business operation and improves the transactional cost as well (Zhou, Wu & Luo, 2007)

Social networks researchers tended to examine the strength of social relationships in terms of positive relationships, it is important to extend the understanding of those social ties to include negative relationships (Labianca & Brass, 2006) Research in social network tradition also pointed out the individual’s social network provides the individual both opportunities and constraints in approaching valuable resources including trust, knowledge, information, power, social and political support (Borgatti & Foster, 2003; Brass, 2004) Some studies asserted that social networks can have some detrimental effects on internationalization efforts such as

unreliable contacts (Mort & Weeawardena, 2006) which accordingly can collapse the firm’s reputation and damage the firm’s performance (Coviello & Munro, 1997) and international growth (Sepulveda & Gabrielsson, 2013) As mentioned by Granovetter et al., (1985), social networks are characterized as a net of personal connections and relationships that used to be utilized under the favor of personal and/or organizational action; it can be seen that besides the positive effects to the firm’s internationalization, it may embrace the risk of failures because all relationships have both positive and negative aspects (Labianca & Brass, 2006) The negative outcomes that may be brought out by negative social relationships include performance, turnover absenteeism, etc (Labianca & Brass et al., 2006)

2.7 The impact of social networks on the internationalization performance

Social Networks are basically the means of extracting required benefits from social structure, memberships, and most importantly privileged connections (Davidsson & Honig, 2003) Numerous studies were done (e.g., Peng & Luo, 2000) in the past in international business have highlighted the importance of social networks of an entrepreneur for performance outcome (Watson, 2007) There are several pros of networking for internationalization like networking, firms exchange information, and divide the risk of failure amongst them in foreign adventures (Chetty & Patterson, 2002) YliRenko, Autio, & Sapienza (2001) are of the view that firms mainly resort to external relationships to gain strategic knowledge for conducting global activities, whereas from the point of view of social networks it is the knowledge and experience

of entrepreneur that plays a vital role in developing the firm's asset base and new operational capabilities (Leonidou, Katsikeas, & Piercy, 1998; Oviatt & McDougall, 1995) This is completely in line with what Geletkanycz and Hambrick (1997) pointed out by giving important implications of social ties for performance

Like any other performance, international performance can also be measured in the numerical

or non-numerical term, which is financial and non-financial respectively (Yoon & Kim, 2009) According to Yoon and Kim (2009), financial performance comprises of return of investment, sales growth, market share, economic value-added, profitability, etc It’s the fact that financial performance indicators are straight and clear, but they have a major drawback when comparisons are made For instance, when comparing two different entrepreneurial adventures with different aims and objectives, size, nature, and strategic vision, financial indicators will not reflect the real story, whereas in these cases non-financial indicators will be more pertinent

(Jaworski & Kohli, 1993) Non-financial indicators are subjective in nature like the satisfaction one derives from the good financial performance or strategic performance

Studies done in the past on international performance have mostly emphasized financial and non-financial measures (Child and Yan, 2003), without paying any heed to strategic aspects to measure performance Cavusgil and Zou (1994) are of the view that measuring performance only in terms of sales, the return of investment, and profit neglects the ultimate strategic goals

of the entrepreneurial firm, like balancing out the competitive pressure and establishing their footprints in foreign markets As going international is itself a strategic and an economic act of

an entrepreneur, it requires a strategic aspect of internationalization performance together with financial (Cavusgil and Zou 1994)

According to Jeong (2016), the social network which has its bases on close relationships with family and friends creates a positive impact on internationalization performance There was an in-depth study done by Zhou et al., (2007) where he found that different informal social networks in different countries (i.e “guanxi” in China, “immak” in Korea, “blat” in Russia, and “kankei” in Japan) play a crucial role in internationalization and performance of entrepreneurial ventures Further, the study pointed out that these informal social networks have positive influences on profitability, exports, and sales of the ventures in the early stages

of internationalization These close relationships with acquaintances play a mediating role between internationalization and performance (Zhou et al., 2007)

By using home-based networks entrepreneurial ventures get to know about the opportunities

in foreign markets, get advice and experiential learning, and sense of solidarity (Zhou et al., 2007), which definitely plays a positive role in increasing exports (sales) and profits, giving financial performance satisfaction, and achieving the strategic goals Thus, internationalization performance is dependent on how effectively the entrepreneur uses his web of personal

connections and relationships

3 METHODOLOGY

Qualitative collection of data and analysis has been used to collect secondary data because as far as the quality of data is concerned, secondary data has the upper hand when compared with its counterpart, primary data (Saunders, Lewis, & Thornhill, 2009) This accentuates that the approach we utilized is exploratory in terms of nature (Patton, 1999) Moreover, secondary saves a lot of time, is not expensive to get, and most importantly the data is collected quickly

A qualitative approach was preferred to collect data, as it is an effective way of “finding out what others feel and think about their worlds” (Rubin & Rubin, 1995) This approach leads to

“fine-grained” understanding regarding the experiences or events by exploring these in detail and then giving out logical reasoning (Lechnner & Dowling, 2003) Qualitative data is descriptive in nature and has nothing to do with statistics and numerics This data collection technique produces insights into and helps to clarify, the social dynamics within which an individual operates (Atherton & Hannon, 2000) To find the occurrences of things qualitative research is preferred (Creswell, 2009) Owing to these things qualitative research is the right approach to be employed to figure out how entrepreneurs’ social networks play a part in internationalization performance in the early phase of internationalization, including the

downside of social networks

We selected one of the companies from Navid Ghannad’s (2013) dissertation work named

‘Polaris’, as we were very interested in finding out the impact of an entrepreneur’s social network on a firm’s performance in the early phase of internationalization We searched for secondary data from where we found inferences for the impact and importance of the personal network in internationalization performance The aim of the search here was also to highlight the dark side of social networks which is mostly overlooked as compared to the positive impacts of social networks To gather the right articles, exclusion, and inclusion criteria were developed where the focus was on the entrepreneur’s personal and social network peer-reviewed papers English was the language of publication and where the text had full access

A search was done for the articles that included words like a social network, performance, internationalization, advantages, and disadvantages of social networks, and foreign ventures Databases like Google Scholar, Emerald, and ABI Inform were used which gave an accumulated result of around 31000 articles with the keywords Then we narrowed down the articles to the ones concerning only entrepreneur’s social networks and internationalization performance which made the figure plunge From these left-over articles, we utilized the ones