Sme selection of international markets and choice of foreign entry

6 2.2.1 External factors influencing international market selection ...6 2.2.2 Internal factors influencing international market selection ...8 2.3 SMEs’ Choice of Foreign Entry Modes

Luleå University of Technology BSc and MSc Programmes in International Business Administration and Economics

BSc Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce

Acknowledgements

This bachelor’s thesis is the result of ten weeks hard and interesting research It could not have been

done without help First, we would like to thank Associate Professor Manucher Farhang for his guidance, assistance and above all for his great patience Secondly, we would like thank AB

Älvsbyhus and their marketing manager Roland Kjellgren for his time and effort to make this thesis

possible We are also grateful to our fellow students who have been helpful in providing feedback

and useful comments on our work in process We would also like to thank Ph.D Candidate Tim

Foster for his inspiring lectures in International Marketing Last but not least, we would like to

thank our families and friends for their support and understanding during this time and a special

thanks to Assarina from Gunnar who has been reminding him of that life has its wonderful

moments even when the studies are intense

Luleå Technological University, Sweden

May, 2005

Abstract

The purpose with this thesis has been to study SMEs’ internationalization The process, which SMEs go through when selecting international markets, and what external and internal factors influence this selection have been studied Furthermore, SMEs’ choice of foreign entry mode has been studied and what external and internal factors influence this choice A case study has been conducted on AB Älvsbyhus that is the market leader in the Swedish woodhouse industry The case study is based on the theory discussed in the thesis which then is compared with AB Älvsbyhus actions Our findings show that AB Älvsbyhus internationalization behavior does not exactly match that in theory During our research study we also found that there has not been laid sufficiently attention on companies which proactively initiate their international activities Our conclusion is that each and every company must be analyzed individually on the basis of their specific prerequisites and abilities, in order to gain a better understanding of the company’s internationalization

Sammanfattning

Syftet med denna uppsats har varit att undersöka hur små och medelstora företag agerar när de börjar involvera sig på den internationella marknaden Uppsatsen undersöker den process som företagen genomgår när de väljer sina exportmarknader samt vilka externa och interna faktorer som påverkar detta val Vidare undersöks på vilket sätt företagen väljer att gå in på de valda exportmarknaderna, samt vilka externa och interna faktorer som påverkar detta val En fallstudie har genomförts på AB Älvsbyhus som är marknadsledare i Sverige inom trähusindustrin Fallstudien baseras på den teori som undersökts i uppsatsen, vilket sedan har jämförts med AB Älvsbyhus agerande Resultatet visar att AB Älvsbyhus internationella aktiviteter inte följer de mönster som teorierna visar Under våran undersökning märkte vi också att det inte har lagts tillräkligt med vikt på företag som på egen hand initierar sina internationella aktivititeter Varje företag måste analyseras individuellt utifrån dess specifika förutsättningar och förmåga

Table of Contents

1 Introduction 1

1.1 Background 1

1.2 Problem Discussion 2

1.3 Research Purpose 3

1.4 Research Questions 3

1.5 Demarcations 3

2 Literature Review 4

2.1 Internationalization of SMEs 4

2.2 International Market Selection of SMEs 6

2.2.1 External factors influencing international market selection 6

2.2.2 Internal factors influencing international market selection 8

2.3 SMEs’ Choice of Foreign Entry Modes 9

2.3.1 Types of foreign entry modes 10

2.3.2 External factors influencing choice of foreign entry modes 12

2.3.3 Internal factors influencing choice of foreign entry modes 14

2.4 Conceptual Framework 16

2.4.1 Internationalization of SMEs 16

2.4.2 International market selection of SMEs 16

2.4.3 SMEs’ choice of foreign entry modes 18

3 Methodology 21

3.1 Purpose of the Research 21

3.2 Research Approach 21

3.3 Research Strategy 22

3.4 Data Collection Method 23

3.5 Sample Selection 24

3.6 Analysis of Data 25

3.7 Quality Standards 26

4 Case Study: AB Älvsbyhus 27

4.1 Company Background 27

4.2 Internationalization of Älvsbyhus 28

4.3 International Market Selection by Älvsbyhus 29

4.3.1 External factors influencing international market selection 29

4.3.2 Internal factors influencing international market selection 31

4.4 Älvsbyhus’ Choice of Foreign Entry Modes 32

4.4.1 External factors influencing choice of foreign entry modes 32

4.4.2 Internal factors influencing choice of foreign entry modes 33

5 Data Analysis 35

5.1 Internationalization 35

5.2 International Market Selection 36

5.2.1 External factors influencing international market selection 37

5.2.2 Internal factors influencing international market selection 38

5.3 Choice of Foreign Entry Modes 39

5.3.1 External factors influencing choice of foreign entry modes 40

5.3.2 Internal factors influencing choice of foreign entry modes 41

6 Findings and Conclusions 44

6.1 Conclusions 44

6.1.1 How can SMEs’ internationalization process be described? 44

6.1.2 How can the influence of external and internal factors on SMEs’ international market selection be described? 45

6.1.3 How can the influence of external and internal factors on SMEs’ choice of foreign entry mode be described? 47

6.2 Implications and Recommendations 48

6.2.1 Implications for theory 48

6.2.2 Implications for practitioners 49

6.2.3 Implications for future research 49

References 51 Appendix I Interview Guide in English

Appendix II Interview Guide in Swedish

List of Figures

Figure 2.1: Elements of the Entry Strategy……… 10 Figure 2.2: Market Entry Methods………10 Figure 2.3: Conceptual Framework……….20

List of Tables

Table 3.1: Relevant Situations for Different Research Strategies……… 23 Table 4.1: Facts about AB Älvsbyhus……….28

1 Introduction

In this chapter background, problem discussion and purpose will be presented Furthermore, the research purpose and research questions will be discussed Finally the demarcations of the research area will be presented

1.1 Background

Czinkota & Ronkainen (2004) state, that participation in the international marketplace has become a reality for large, small and medium sized companies This participation can be very rewarding for both the companies and the employees According to Lewis III & Richardson (2001), companies that export grow faster, are more productive, and have employees that earn more However, it has to

be kept in mind that most companies do not become international overnight New activities in a new foreign environment moreover increase the company’s risk This leads to that companies must plan and organize their activities, as well as adjust these to the needs and opportunities of international markets, if they aim to become internationally competitive with a long-term perspective

According to Farhang (2001) the way in which some companies turn from being purely domestic companies, in terms of marketing goods and services, into international companies, has been the subject of research during the last three decades Researchers have been trying to come up with conceptual models that would explain why companies go international, how they do it and what kind of organizational forms they adapt to be able to manage the internationalization In other ways, researchers have searched for the motives and the determinants, as well as looked into the strategies and the methods in which companies manage and conduct operations abroad

Until recently most of the major actors on the global market have been the large 50 to 100 years old companies Going international has been enormously expensive not only in financial terms but also

in terms of top management’s time and commitment Due to the high costs, going international must generate added value for the company beyond extra sales In other words, the company needs

to gain a competitive advantage by going international Therefore, unless the company gains by going international, it should probably stay at home The task of managing international marketing

is also complex, especially when it has to operate in several markets The company has to adapt its marketing programs to the needs and preferences of customers that differ in forms of culture, purchasing power and tradition (Ibid)

According to De Búrca, Fletcher & Brown (2004), the changes in the international business environment has complicated the foreign market selection These changes, involving the formation

of regional trade groupings, the creation of strategic alliances between companies, and the exponential spread of information technology, are resulting in a breakdown of barriers between countries A marketer needs to see the world as an entity rather than as a series of national markets

As a consequence of this, it has been more difficult to choose the most appropriate international market As markets now can stretch across national boundaries, geographic segmentation may no longer be an appropriate basis for market selection This might still be the fact for large transnational companies who have the financial means to enter several markets at the same time However, for small and medium sized enterprises (further referred as SMEs, which are companies with 50 to 250 employees) with generally smaller means a venture into the international market is still unlikely

Decisions as to the form of market entry, for example exporting, joint ventures or franchising, logically follow the decision as to the most appropriate market to enter However, market selection and entry mode are closely linked due to the attractiveness of markets is influenced by the strategic thrust of the corporation, competitive action in those markets and government regulation relating to the possible forms of foreign entry Deciding on the most appropriate form of market entry involves understanding each of the various modes available and the conditions under which one mode might

be more suitable than others (Ibid)

Root (1994) states that to managers in SMEs, planning entry strategies may appear to be something only large companies can afford to do; these managers identify such planning with elaborate research techniques that are applied by specialists to a massive body of quantitative data However, this is a misconception of the entry plan process The truly important is the idea of planning entry strategies Once management accepts this idea, it will find ways to plan international market entry; how limited the company resources ever may be Without an entry strategy for a product or target market, a company has only a simple “sales” approach to foreign markets

A large number of problems may face SMEs when turning international What are the major obstacles for internationalization experienced by SMEs and do this influence their choice of international target markets and foreign entry modes, has not been sufficiently studied in the past

1.2 Problem Discussion

We believe that the internationalization of SMEs is open for research on many levels First of all, why a company should export at all and what criteria should be fulfilled before a company enters a foreign market We also think that research could be conducted on what markets SMEs should enter depending on several different factors, such as cultural differences, company tradition, product and competitors In addition, research could be conducted on how Internet can be used for a company’s internationalization and how an effective use of this media can help the internationalization of the company

While the literature often separates the process of internationalization from the factors that determine international market selection and choice of foreign entry mode, we consider that the factors in play for many SMEs are of a nature that creates conditions, where the process of going international and the decisions on international market selection and choice of foreign market entry mode become inseparable In short, we believe that SMEs’ decision for going international as well

as their internationalization process and the moves made by many of them, are less formal and deterministic and more natural in the context of the company’s generic growth than is often anticipated by researchers Having said this, a combination of external and internal factors may directly or indirectly influence SMEs internationalization activities

It is in view of the above discussion and research referred earlier, the purpose of our study can be identified as that stated below

1.3 Research Purpose

The purpose of this research is to examine how the process of SMEs’ internationalization is intertwined with the set of external and internal factors that determine international market selection and choice of foreign entry mode

To satisfy the above purpose of our study the following research questions shall be addressed

1.4 Research Questions

RQ1: How can SMEs’ internationalization process be described?

RQ2: How can the influence of external and internal factors on SMEs’ international market

selection be described?

RQ3: How can the influence of external and internal factors on SMEs’ choice of foreign

entry modes be described?

1.5 Demarcations

Since the existing theories discuss external and internal factors influence on companies’ international market selection and choice of foreign entry modes in general for both small and medium sized companies, our literature review will also address to both small and medium sized companies However, in our case study the external and internal factors influence on a medium sized company’s international market selection and choice of foreign entry modes will only be studied The company selected for our case study is a Swedish medium sized company operating in the woodhouse industry, which is in a transition stage of becoming a large international enterprise, when looking at the company’s turnover and their increasing number of employees The reader should keep in mind that the selection international markets and the choice of foreign entry modes are influenced by several factors in the company’s environment However, in this thesis the other aspects of the internationalization process, such as setting export goals and objectives, designing the marketing plan or control system for monitoring the export activities, will not be presented in detail

2 Literature Review

In this chapter a selection of the literature and existing research on SMEs’ internationalization is presented The reader should take into consideration the fact that SMEs’ international market selection and SMEs’ choice of foreign entry modes are highly connected and are often hard to separate in the literature At the end of this chapter, some of the theories reviewed will be used to develop a conceptual framework, which then will be used as a basis for the data collection

2.1 Internationalization of SMEs

Czinkota & Ronkainen (2004) state, that the internationalization process illustrates how a company progressively becomes a global actor on the international market In order to gain better understanding about what needs to be done and to push the company forward in the process; a deeper insight in to the level of company’s internationalization is needed Albaum, Duerr & Strandskov (2002) points out that theories about the internationalization identify several stages in the process and although each theory uses different classification scheme, the majority of the theories portray a common view of the gradual process that can be subdivided

According to Czinkota & Ronkainen the internationalization process is in most cases a gradual process Normally, a company starts its operations and activities in the domestic market and then gradually expands further to other markets These authors state that companies seldom are so called

initiate exporters from the very start of their business establishment, even though in some rare cases

it is possible to be “born global” and start the international activities from the set up of the

company However, Albaum, Duerr & Strandskov (2002) state that companies do not necessarily always internationalize in an orderly and sequential way Some companies may stop at a particular stage without proceeding further, skip stages or even reverse the sequential process by starting their international activities at a later stage Moreover it is not imperative that a company goes through stages in order to be internationalized and in many cases they can proceed through these stages in any way they want Yet, even these authors agree that it has been empirically proved that the majority of companies often follow the gradual internationalization process

Hollensen (2003) in his turn states, that in recent years an increasing number of companies do not

follow the traditional pattern of internationalization process In contrast, these “born global”

companies aim at international markets or even the global market right from the start of the company This type of companies are often SMEs with fewer than 500 employees and annual sales

under 100 million US dollars The “born globals” are also usually small, technology-orientated

companies that operate in the international markets from the very start of the establishment and have unique product and process innovations, as well as a visionary management

In the traditional gradual internationalization process the development follows several different stages According to Kotabe & Czinkota (1998), in each of these stages the company’s capabilities, problems and needs may measurably vary Most of the companies do not show any interest for

foreign activities from the very start of the process They are in this stage so called uninterested

exporters It may be possible that an unsolicited order from abroad is ignored within the company

from the management’s side, if it is just a sole one-time order However, if these unsolicited orders become more frequent and the international stimuli continue over time, the company may become a

partially interested exporter in order to fulfill the received foreign orders with the management

acceptance

In the next stage the company becomes more interested in international activities and begins to explore international markets in detail, as well as possibilities for further exports abroad In this

exploratory stage the company becomes an experimental exporter often to culturally close

countries Though, in this stage the management is not fully committed to international export activities In this stage, the impact which the exporting activities have had within the company will

be carefully evaluated This evaluation can lead to withdrawal from the unsatisfying export activities or to further expansion of the successful export activities

The final stage of the internationalization process is export adaptation In this stage the company becomes an experienced exporter that exports to a particular foreign market and adjusts its activities

to changing exchange rates, tariffs and other important variables that influence the exports The management here becomes interested in to explore the possibilities to export also in to some other countries that are psychologically farther away The adaptation level is often reached when the export transactions comprise 15 percent of the sales volume

Czinkota & Ronkainen (2004) state that when a company decides to go international unusual things can happen concerning risks and profits In order to gain international expertise from new activities abroad, there exists always some uncertainty of the new market environment within the company and its management, which causes the management’s view of risk exposure to grow In domestic markets the companies have gradually learned how to act on a market and known the environment during a longer period of time, and as a result of all this managed to reduce the domestic risks When companies are expanding internationally, they face increased risks by new and unfamiliar factors that do not always occur on well-known domestic markets International investments often are in large extent costly and the profits may slip in the beginning of the process Although, in a longer term the increasing knowledge and experience about the international market, as well as the benefits that follow when serving diversified markets will reduce the companies augmented risks abroad, as well as increase the profits margins of the company

According to Calof & Viviers (1995), the more experienced the company becomes on the international markets, the more profitable and the less risky the business abroad turns out to be over time However, managers of the company may face an unusual and sometimes even unacceptable short-term dilemma within the company when going international: increasing risk on a foreign market often accompanies declining profitability When taking into consideration these factors, the managers in some cases are more likely to either not to go international at all or to discontinue their international activities according to Czinkota (2001)

When looking at both the internationalization process and the behavior of the profit and risk at the same time, Czinkota & Ronkainen (2004) state that the management of the company can gain a better understanding for that high investment costs abroad and negative developments on the foreign markets in the beginning often are only short term reactions In order to be successful, every company has to take risks and know that to get there may take some time on the international markets A successful performance abroad can be attained by international effectiveness, efficiency and competitive strength Effectiveness can be measured by the largeness of the international market share and augmented sales Efficiency is characterized by increased profit margins Competitive strength in its turn refers to the benefits gained by international activities compared with the other competitive companies within the same industry The competitive strength is likely to grow at the same time as the international market experience of the company grows Every company which is considering the possibility to go international has to wage the overall benefits of international activities against the high investment costs and short-term negative developments of

going abroad In order to be successful with long-term perspective and over come the short-term setbacks even the time and performance dimensions associated with going abroad have to be taken

in to consideration

2.2 International Market Selection of SMEs

According to Johansson & Vahlne (1977) for SMEs the international market selection is often a reaction to a stimulus provided by a change agent This agent can appear in the form of an unsolicited order Government agencies, chambers of commerce and other change agents may also bring foreign opportunities to the company’s attention Such cases constitute an externally driven decision in which the exporter simply responds to an opportunity in a given market In other cases the international market selection of SMEs is based on the following criteria

• Low psychic distance: Low uncertainty about foreign markets and low perceived difficulty

of acquiring information about the market

• Low cultural distance: Low perceived differences between domestic and destination

cultures

• Low geographic distance: Countries nearby with cultural similarities

Lindholm & Sylvest (1997) state that using any one of these criteria often result in targeting the same foreign market The choice is often limited to the SMEs’ immediate neighbors, due to the fact that low geographic distance often is similar to low cultural distance and low psychic distance By limiting their consideration at a nearby country the SMEs effectively narrow their international market selection choice to a question: to utilize a neighboring country’s market or not Research has shown that young SMEs (established in 1989 or later) enter new foreign markets much earlier than older SMEs (established before 1960) The reason that young SMEs are entering foreign markets much faster is may be their status as sub suppliers to larger companies, where they are pulled out in the international market by their large customers and the larger company’s international network

Studies from the Uppsala school on the internationalization process of the company have suggested several potential determinants of a company’s choice of foreign markets Johansson & Vahlne (1977) classify the determinants in to two main groups:

• External factors: Environmental factors

• Internal factors: Company specific factors

2.2.1 External factors influencing international market selection

According to Hollensen (2001) the external factors influencing SMEs’ international market selection can be divided in Economic, Socio-cultural, as well Political and legal influences

small revenue Depending on what type of product the SMEs are selling may a market with low per capita income not be suitable for them The host country’s infrastructure is a factor that must be taken into serious consideration This includes the transportation structures (roads, railways, airports), communication systems (telephone, Internet, television, the press, radio), and energy supply (electricity, gas nuclear) A poor infrastructure may limit the ability to manufacture, advertise and distribute goods Problems with the ability to provide an adequate service back-up may also be a factor in markets with poor infrastructure A country that has an unstable exchange rate or one that is difficult to convert to hard currencies such as the dollar or euro may be considered too risky to enter

Socio-cultural influences

Social and cultural factors and their distance between countries are called psychic distance These barriers are created by cultural differences between the home country and the host country, and the problems of communication resulting from differences in social perspectives, attitudes and language Markets with low psychic distance are often more attractive for a company when conducting a for foreign market entry Less time and effort is required to develop successful business relationships Because of these factors companies often make their first foreign market entry in a market that is geographically close, like a neighbor country, and then gaining experience

in these countries before expanding operations into more distant markets

Political and legal influences

General attitudes of foreign governments towards imports and foreign direct investment, political stability and trade barriers must be taken into consideration when a company is examine potential target markets for their foreign market entry Positive attitudes from the government in the host country can be reflected in the willingness to grant subsidies to overseas companies and their imports Negative attitudes towards foreign companies by the host country’s government, may discourage imports and investment because of the threat of protectionism and expropriation of assets Countries with a history of political instability should be avoided because of uncertainty regarding their future

Market attractiveness

Jobber (2004) in his turn lifts up the external importance of Market attractiveness for the selection

of international markets This consists of several factors, such as Market size and growth rate, Competition, Costs of serving the market, Profit and market potential, as well as Market access

Market size and growth rate: Large and growing markets can often be seen as highly attractive for

export target market selection It can be stated that market growth is regularly considered as a more important factor influencing the choice of export target market than market size The expected future demand is therefore seen more significant than the existing demand especially for the foreign direct investments

Competition: Markets where strong and well-established competitors dominate may diminish the

potential attractiveness of an export target market Moreover, the explosive nature of competition may also reduce the attractiveness of a prospective market According to Jobber and Whitelock (1994), markets where various competitors enter and leave the market and where the market concentration is high are often highly unattractive

Costs of serving the market: Distribution and control are the two major costs of serving foreign

markets The costs rise when the geographic distance increases between the domestic and export markets, which leads to that the major export countries often are the nearby neighbor countries The

costs vary also dependent on the choice of entry mode For example foreign direct investment as an entry mode is initially more expensive than using distributors The entry can become more risky and less attractive also by the factor that the potential market is not suitable for low-cost entry option In the same way long internal distribution channels can augment the costs, since the middlemen may demand high provisions If using foreign direct investment, the labor costs and the supply of skilled employees have to be taken in to consideration when estimating the future costs In some countries even the high marketing expenditures can raise the costs

Profit and market potential: The industry structure can also make some potential markets less

attractive, if these markets have a poor profit potential For instance, if the customers have a high bargaining power, they may be able to push the prices down and this way lowers the potential profit margins on the market

Market access: There may also existent informal ties between the existing suppliers and

distributors, which can make it difficult for the new companies to penetrate on some foreign markets Therefore, it can be almost impossible for the new entrants to over win these tight entry barriers, if they do not have the resources and competences to build up a wholly new distribution chain within the new potential market In the same way, deep long-term relationships and ties between the existing suppliers and customers can create hard-overcoming entry barriers It should

as well be taken in to considerations that in some countries the national suppliers have possibilities

to enjoy of preferential treatments, for example from the government’s side, and this can give them competitive advantages that can be difficult to catch up with

2.2.2 Internal factors influencing international market selection

Company capability profile

Jobber (2004) takes also up the internal importance of Company capability profile for SMEs’ international market selection This involves factors such as Skills, Resources, Product adaptation and Competitive advantage

Skills: Concerning the skills, the company has to ask themselves if they have the necessary skills to

market abroad In the case of lack of this vital capability, the company has to ensure that they have the skills needed within their sales agents or distributors abroad, in order to be able to compensate for the possible shortfalls in the potential market The company has to also ask themselves, if they have the indispensable skills to understand the requirements of the potential export target market

Resources: The market servicing cost may vary depending on different countries The company has

to carefully calculate the potential costs for a new foreign market entry and see over if they have the necessary financial resources to compete within this market It is also important to calculate in the human resources needed, since some foreign markets may demand for domestically supplied personnel, at least in the beginning of the establishment

Product adaptation: In some markets local preferences and regulations may require product

adaptation The company should reflect over if they have the motivation, resources, skills and competences to redesign their product in order to fit the new market requirements

Competitive advantage: The major consideration should be laid on the question: Has the company

good prospects and possibilities to gain a competitive advantage on the new foreign market? The

potential export target market has to be studied carefully in order to calculate the actual possibilities for the company to create and sustain a competitive advantage on the market

Company’s potential

Dahringer & Mühlbacher (1991) state, that in order to take advantage of the environmental opportunities and to avoid the potential threats from the environment, the company has to analyze carefully its strengths and weaknesses The company’s skills, resources and the readiness of the personnel must be examined and adjusted to the international environment

Company’s management ability, flexibility and commitment: It is highly important that the

company’s management is able and willing to go international, as well as to manage the internationalization process of the company The management must be committed to achieving and maintaining the international activities, as well as be flexible in their decision-making processes to

be capable to adapt to the changing conditions abroad

Planning and control: Companies have to be managed by efficient and effective leadership,

organization, communication, planning and control in order to be successful internationally

Capacity, cost structure and productivity: The company should always carefully analyze its

capacity, cost structure, flexibility and productivity before going international For the long-term substantial foreign investments it is vital that that the company management is committed to back

up the strategic long-term decisions

Personnel’s motivations and qualifications: Motivations and qualifications of the personnel are

important and needs to be measured before going abroad This way the company can analyze what actions has to be taken, in order to develop further the actual human resources of the company To

be able to evaluate all the factors influencing a company’s potential success abroad, the company has to gather a lot of information put the different factors together and develop a general but still highly detailed picture of the company’s potential

2.3 SMEs’ Choice of Foreign Entry Modes

According to Root (1994), entry strategy for international markets is a comprehensive plan It sets forth the objectives, goals, resources, and policies that will guide a company’s international business operations over a future period long enough to achieve sustainable growth in world markets For most companies the entry strategy time horizon is from three to five years, which is the typical time period for achieving enduring market performance Many managers see the company’s entry strategy as if it were a single plan; it is actually a composite of several individual product/market plans Managers need to plan the entry strategy for each product in each foreign market

The product/market entry strategies require decisions, as seen in Figure 2.1, on (1) the choice of a target product/market, (2) the objectives and goals in the target market, (3) the choice of an entry mode to penetrate the target market country, (4) the marketing plan to penetrate the target market, and (5) the control system to monitor performance in the target market The elements in Figure 2.1 are shown as a logical sequence of activities and decisions, but the design of a market entry strategy

is actually interactive, with many feedback loops Evaluation of alternative entry modes, for instance, may force a company to revise its target markets objectives or goals, and may even initiate the search for a new target market (Ibid)

(3) Choosing the entry mode:

export, contractual arrangements or investment

(4) Designing the marketing plan: price, promotion, distribution, etc

Figure 2.1 Elements of the Entry Strategy

Source: Root (1994), Entry strategies for International markets.

2.3.1 Types of foreign entry modes

Brassington & Pettitt (2000) point out that the classification of market entry modes is not easy, but one possible classification can be seen in Figure 2.2 There are many relevant criteria to take into consideration For example such as the level of investment involved and whether it is indirect or direct and whether the goods or services are produced at home or abroad Other things to consider are if the exporter should deal directly with the buyer, as well as if the transaction involves exporting goods and services, knowledge and expertise or investment

Figure 2.2 Market Entry Methods

Source: Brassington & Pettit (2000), Principle of Marketing

Target market

(5) Control system: monitoring operations/revising entry strategy

Entry operations

- Joint ventures

Strategic alliances

Direct export

Indirect export Indirect export

International boundary

Direct export: According to Brassington and Pettitt (2000) when an organization produces the

product at home and then sells it to the foreign customer without the use of an intermediary direct exporting is conducted The seller has to take responsibility for attracting customers, negotiations, processing of orders and arranging shipment and after sales service The costs can be high, especially for a small company, but the seller maintains complete control by selling through its own export department and sales force The organization either run the selling from its home base with sales representatives making trips abroad, or it can be run from a sales branch office located in a foreign country As well as providing control over the selling process, direct exporting also has the advantage of building a clear presence on the market It creates stronger buyer-seller relationships, which might be an important factor for buyers looking for committed suppliers

Indirect export: When an organization produces goods at home and then sells them through an

intermediary, indirect exporting takes place The intermediary can act on behalf of the seller, on behalf of the buyer or totally independently An export agent acts on the behalf of the seller, undertaking to sell on a commission basis into a particular market An import agent acts on the behalf on the foreign buyers and earn commission from them An export merchant buys goods from

a number of manufacturers and resells them at a profit When using any of these market channels the producing company benefits from the intermediates knowledge and contacts on the targeted

market (Ibid)

Licensing: When an organization uses licensing as a mode of entry they grant a licensee the right to

manufacture a product, use patents, use particular processes or exploit trademarks in a specified market in return for a royalty payment Licensing helps to overcome high import tariffs, but also avoids the costs and commitment of direct investment The licensor does, however, need to be sure that the licensee can handle the necessary production and marketing Licensing is often viewed favorably by foreign government, as it brings in new technology and helps in the training and skill

of the local workforce Licensing involves several risks, mainly, that the licensee degrades or abuses the licensor’s name or intellectual property The licensee may also at the end of the contract period decide to start an own business and become a possible competitor instead (Ibid)

Franchising: Armstrong & Kotler (2005) point out, that a franchise organization is the most

common type of contractual relationship A channel member called a franchisor links several stages

in the production and distribution process Almost every kind of business has been franchised; from motels and fast-food restaurants to dental centers and funeral homes There are three types of

franchises The first type is the manufacturer-sponsored retailer franchise system, for example, the car industry, and its independent franchised dealers The second type is the manufacturer-sponsored

wholesaler franchise system, for example, Coca-Cola licenses bottlers (wholesalers) in various

markets who can buy Coca-Cola syrup concentrate and then bottle and sell the finished product to

retailers in local markets The third type is the service-firm-sponsored retailer franchise system, for

example, fast-food services like McDonalds and motel business like Holiday Inn Brassington & Pettit (2000) ads that it is the franchisee’s responsibility to use local knowledge and contacts to develop the network in a manner that is satisfactory to the franchisor The franchisee earns percentage of the fees or royalties paid by individual franchisees

Contracting: A manufacturing contract means that the manufacturer contracts a company in the

foreign market to produce or assemble the product on their behalf, according to Brassington & Pettitt (2000) This is both time and cost saving in comparison to physically transport the finished product abroad Like licensing, contracting also avoids the problems of currency fluctuations and import barriers, but potentially creates a new competitor The company awarded the contract has responsibility for operational matters such as human resource management, financial control,

marketing and service delivery The contractual company does not normally get involved in strategic or policy issues, nor does it have any share in the ownership of the business

Sales subsidiaries: A partner that does not play any part in producing the product, but does take

responsibility for marketing, selling of distribution is considered as a sales subsidiary The partner can be either a specially created partner or they can be developed from an existing acquired company The advantage of selling through sales subsidiaries rather than through the domestic sales force lays in the dedicated local knowledge and expertise that builds up the closeness to the customer In event of failure in the market, any losses can be confined to the subsidiary rather than having an extensive impact on the parent company (Ibid)

Manufacturing subsidiaries: The establishment of manufacturing subsidiaries involves assembling

or manufacturing the product in foreign markets Like sales subsidiaries can manufacturing subsidiaries be set up from scratch or be developed from an acquisition The subsidiary becomes a part of the manufacturing base of the host country, and contributes to the local economy Since operations like this create employment and wealth, governments in foreign countries are often keen

to attract these kinds of investments (Ibid)

Joint ventures: When two organizations come together and set up a jointly owned third company a

joint venture is created Both organizations share the ownership, control and profits, as well as the risks There are several reasons for making this decision The organizations on their own might not have the necessary resources to develop or make an impact on a foreign market This motivation could be especially important if they are up against larger and more powerful competitors A joint venture can be very successful, as long as both partners plan the venture carefully and are clear about their objectives (Ibid)

Strategic alliances: Wild, Wild & Han (2003) point out that a strategic alliance arise when two or

more organizations cooperate, but do not form a separate company, to achieve the strategic goals of each Strategic alliances offer several important advantages to organizations First, organizations use strategic alliances to share the cost of an international investment project Second, organizations use strategic alliances to tap into competitors’ specific strengths Finally, organizations turn to strategic alliances for many of the same reasons that they turn to joint ventures Some use the alliance to gain access to a partner’s distribution channels in the target market Others use them to reduce the same kind of risks from which joint ventures provide protection

2.3.2 External factors influencing choice of foreign entry modes

Socio-cultural distance: According to Hollensen (2001) countries that have similar business and

industry practices, language and cultural characteristics, as well as comparable educational levels are socio-culturally close to each other Great differences within these factors may influence greatly the company’s decision of mode of entry The greater the differences are, the more likely it is that the company stays away from direct investments and favors joint ventures instead, for the reason that the latter enhances the company flexibility to easily withdraw from the foreign market The companies favor entry modes that require relatively low resource commitments and high flexibility when the socio-cultural distance is high

Country risk and demand uncertainty: Foreign markets are often considered as more risky than the

domestic ones The market selected does not just create this risk by itself, but also the type of involvement there Risks concerning investments, inventories, receivables and exchange rates have

to be taken into consideration A careful market analysis and method of entry analysis have to be done However, not only economic but also political risks have to be taken in to consideration When the country risk is high companies tend to restrict their exposure on the foreign market and they will favor entry modes with relatively low resource commitment (Ibid)

Market size and growth: The key factors in determining the mode of entry are market size and the

rate of market growth The larger the market and the higher the market growth rate, the more likely companies commit resources for this particular market and consider establishing wholly owned sales subsidiaries or majority owned joint ventures Retaining control over operations abroad provide companies direct contact with the foreign market and the customer, as well as gives companies better possibilities to plan and direct market development more effectively Small markets, on the other hand, can be best served by exporting or licensing, if they are geographically isolated and hard to serve directly from the neighboring country This approach gives the company possibility to enter the market with lower resource commitment and frees resources for more lucrative potential markets (Ibid)

Direct and indirect trade barriers: Tariffs and quotas on the import products favor the

establishment of local production subsidiaries or assembly operations Product and trade regulations and standards, as well as local preferences also influence the choice of entry mode For example preferences to by “national” and “home made” products can encourage companies to consider joint ventures or other contractual arrangements with the local companies These local partners can provide information about local product and trade regulations and standards, negotiate sales, establish local contacts and distribution channels, as well as diffuse the foreign image When product regulations and standards necessitate significant product adaptation and modification,

companies often establish local production, assembly or finishing facilities (Ibid)

Competitive environment: If the intensity of the competition is high on a foreign market, the market

becomes less profitable and do not encourage heavy resource commitments Companies tend to avoid internationalization on this type of foreign markets Companies favor entry modes with low resource commitments when the competitive environment is intensive (Ibid)

Small number of relevant export intermediaries available: When there is only a small number of

relevant export intermediaries available on the foreign market, companies may decide to establish local production, assembly or finishing facilities in order to reduce the opportunistic behavior of the intermediaries The small number of export intermediaries can manipulate information about the market size or competitor’s prices on the market in order to obtain lower prices from the producers However, this kind of behavior can be avoided by paying a commission of the realized turnover for the export intermediary (Ibid)

Laws and regulations: De Búrca, Brown & Fletcher (2004) point out that in some international

markets laws and regulations within the target country may prevent or restrict imports into the target market or only permit local manufacturing in less attractive geographical locations Furthermore the form of entry mode may also be regulated or prescribed by the government of the target country

Geographical distance: When the geographical distance is great, transportation costs may become

too high and make it impossible to compete against the local goods in the target market, according

to Root (1994) In consequence high transportation costs favor other modes of entry, such as assembly operation, than direct and indirect exports which in this case become ineffective and expensive

2.3.3 Internal factors influencing choice of foreign entry modes

Speed: Brassington and Pettitt (2000) point out that depending on choice of entry mode, the time of

reaching the target market may vary Some market entry modes might take months or years to

implement, while others can be put into action in less time

Costs: The different types of entry modes require different investments Some times it might be that

the usage of one entry mode can justify higher costs than the usage of another due to higher benefits

in the long run (Ibid)

Payback: Payback time for the company’s investment can be crucial when an organization enters a

foreign market If this is the case, acquiring an established manufacturer might be more appealing than building a new factory, if it means that revenues can be generated within one year rather than five years (Ibid)

Long-term profit objectives: The organization must know what it wants to achieve in the future and

how it best can exploit the opportunities available in the foreign market The choice of entry mode

is just the first stage in a longer-term strategic plan for the international markets (Ibid)

Company size: According to Hollensen (2001) size of a company indicates the company’s resource

availability The larger the company is, the better resources it has for the foreign involvement However, SMEs often enter foreign markets by export modes for the reason that they do not have the necessary resources for the indispensable control of the heavy investments abroad Although, when the company grows and more resources become available, the company may start to invest more on foreign affairs and increase the level of company’s resource commitment abroad

International experience: Previous international experience of the company and managers influence

highly the choice of entry mode This kind of experience can be obtained either by operating in a particular country or in the general international environment Previous international experience reduces the costs and uncertainty to serve a new foreign market, as well as it increases the company’s likelihood to commit additional resources abroad (Ibid)

Product complexity and differentiation: When deciding where the production should be located, the

physical characteristics of a product or service are highly important to take in to consideration For example products that have a high value or weight are generally entered foreign markets by direct exporting, when there are considerable economies of scale or management control issues to take in

to consideration On the other hand the production may be located to the foreign market in order to save in shipment costs, especially on distant markets The characteristics, use and selling of a product may vary extensively from one product to another, which influence vastly the choice of entry mode Some complex technical products may require before and after sales services, which sometimes can create problems if the intermediaries are not able or competent enough to handle that This may encourage the company to use own local production, assembly or finishing facilities

By differentiating their products companies can gain higher profits, build entry barriers against new entrants, serve their customers better and thereby strengthen their competitive position In order to protect their competitive advantages and product differentiation companies often use local production, assembly or finishing facilities This way the distinguished details about the differentiated product in physical variation, brand name, advertising or before/after sales services

won’t be revealed to intermediaries and will be protected in order to maintain the competitive advantage on the foreign market (Ibid)

Risks: If the company does not want to take too many risks when entering a new foreign market, it

will prefer using direct and indirect export modes or an intermediate mode like licensing, for the reason that these entry modes require less financial and managerial resource commitment The export modes of entry provide low control, low risks and high flexibility for the company Joint ventures and other contractual intermediaries in their turn provide a way of sharing risks, financial exposure and costs of establishment for local distribution channels and hiring local personnel Although, it should be taken in to consideration that negotiating and managing joint ventures and other intermediaries still require considerable management time and effort These intermediate or contractual modes of entry provide the company shared control and risk, as well as split ownership The investment modes of entry, like local production, assembly or finishing facilities, are the most expensive entry modes to use and they provide high control, high risks and low flexibility for the company (Ibid)

Control: When deciding about the entry mode, the degree of control that the company requires over

international operations has to be taken in to consideration The level of control is often highly linked to the level of resource commitment abroad Modes of entry with minimal resource commitment, like indirect exporting, provide little or no control at all over the market conditions abroad When using licensing or contractual manufacturing, the company needs to use more control

in order to make sure that the quality standards are being met Joint ventures in its turn can also limit the degree of control and can even create major conflict when the goals and objectives of the partners differ The highest level of control is provided by the wholly owned subsidiaries, but they also require considerable amounts of financial and managerial resource commitment (Ibid)

Flexibility: Furthermore, the flexibility associated with each entry mode has to be weighted up The

export entry modes are the most flexible ones of the entry modes and a company using these can quickly and easily adapt to the changing market conditions or to flexibly make a withdrawal from the foreign market Intermediate or contractual entry modes limit somewhat the company’s ability

to adapt or change their strategies when the foreign market conditions are changing The least flexible and the most costly of all entry modes are the entry modes with high resource commitments, like the wholly owned subsidiaries (Ibid)

Managerial reasons: De Búrca, Brown & Fletcher (2004) state that the previous experiences of

international markets of the company’s management influence highly the choice of foreign entry mode Country of birth, years spent abroad and frequency of international business trips affect positively on managements willingness to go international, as well as the level of commitment abroad In addition the choice of foreign entry mode is influenced by management’s planning orientation, knowledge of international markets, business practices, transactions and different cultures, as well as of their ability and willingness to adapt to international strategic approaches, marketing orientation and long-term objectives abroad These factors influence management objectives, international resource commitment and desired level of control abroad, which in their turn affect the choice of foreign entry mode

Relationships: According to Fredrik & Webster (1992) the different types of relationships that a

company can have, among others with its suppliers and customers, are highly connected with the selection of a particular foreign entry mode Usually, the more complex the type of entry mode is the deeper and closer the relationships, commitment, trust and adaptation will be There exists a current trend to develop deeper and better relationships with the suppliers and customers, which creates networks between different companies Better relationships promote improved coordination,

cooperation and work for the companies involved This creates for example opportunities to share resources and services

2.4 Conceptual Framework

In this part, the aim is to develop a conceptual framework based on the theories and references that were reviewed earlier on concerning internationalization of SMEs, then going more in detail into international market selection of SMEs and there especially looking at the external and internal factors influencing the choice of foreign target market Finally, this part will be finished by the theory and references referring to SMEs’ choice of foreign entry modes, especially looking at the different types of foreign entry modes and the factors influencing the choice of specific entry mode

2.4.1 Internationalization of SMEs

According to Czinkota & Ronkainen (2004), internationalization process is a gradual process and

there are very few companies that initiate exporting from the very start, even though in some rare cases it is possible to be “born global” However, Albaum, Duerr & Strandskov (2002), state that

companies do not necessarily always internationalize in an orderly and sequential way Some companies may stop at a particular stage without proceeding further, skip stages or even reverse the sequential process by starting their international activities at a later stage Hollensen (2003) in his turn points out, that in recent years an increasing number of companies can be identified that do not

follow the traditional pattern of internationalization process In contrast, these “born global”

companies aim at international markets or the global market right from the start of the company According to Kotabe & Czinkota (1998) in the traditional internationalization process the company goes through four different stages:

Uninterested exporter Partially interested exporter Experimental exporter Experienced exporter

According to Calof & Viviers (1995), the more experienced the company becomes on the international markets, the more profitable and less risky the business abroad turns out to be Czinkota (2001) in his turn states that increasing risks on a foreign market habitually accompanies declining profitability, at least at the very beginning of the establishment of international activities Yet, this still is often only a short-term reaction Czinkota & Ronkainen (2004) point out that a successful performance abroad can be attained by international effectiveness, efficiency and competitive strength However, every company has to wage overall benefits of going international against the high investment costs and short-term setbacks; in addition the time and performance dimensions have to be taken in to consideration when going abroad

2.4.2 International market selection of SMEs

According to Johansson & Vahlne (1977), the decision to select international markets is based on an external factor’s influence and the exporter simply responds to an opportunity a given market However, in most of the cases the international market selection of SMEs is based on following three criteria:

• Low psychic distance

• Low cultural distance

• Low geographic distance

Lindholm & Sylvest (1997), state that using any of these criteria regularly results the selection of the same international target market Due to the fact that the low geographic distance is similar to the low cultural and psychic distance, the neighbor countries are often selected as the foremost foreign target markets Research has also shown that young SMEs enter foreign markets much earlier than the old SMEs

According to Johansson & Vahlne (1977), there are two main determinants that influence the selection of foreign target markets:

• External factors

• Internal factors

External factors influencing international market selection of SMEs

According to Hollensen (2001), several external factors influence the selection of a foreign target market:

• Economic influences: Per capita income, Infrastructure, Stage of economic development and

Exchange rate stability

• Socio-cultural influences: Social and cultural differences, Psychic distance, Communication,

Social perspectives, Attitudes and Language

• Political and legal influences: Political stability, Trade barriers, General attitudes towards

imports and direct foreign investment

Furthermore, according to Jobber (2004) the attractiveness of a particular target market influences the selection of an international market:

• Market attractiveness: Market size and growth rate, Competition, Cost of serving the

market, Profit and market potential, as well as Market access

Internal factors influencing international market selection of SMEs

According to Jobber (2004), internal factors influencing the international market selection of SMEs are connected with company capability profile

• Company capability profile: Skills, Resources, Product adaptation and Competitive

advantage

Dahringer & Mühlbacher (1991), state that company’s potential should be examined and analyzed

in detail when selecting foreign target markets In order to take advantage of the environmental opportunities and to avoid the potential threats from the environment, the company should analyze its strengths and weaknesses

• Company’s potential: Company’s management ability, flexibility and commitment,

Planning and control, Capacity, cost structure and productivity, as well as Personnel’s motivations and qualifications

2.4.3 SMEs’ choice of foreign entry modes

According to Root (1994), international entry strategy is a comprehensive plan and it sets forth objectives, goals, resources and policies that will guide the international business activities The selection of an entry mode involves following decisions:

1 Choice of a target/product market

2 Objectives and goals in the target market

3 Choice of an entry mode to penetrate the target market country

4 Marketing plan to penetrate the target market

5 Control system to monitor performance in the target market

Types of entry modes

The classification of foreign market entry modes is not easy and there are many relevant criteria to take in to consideration Brassington & Pettitt (2000) present several different types of foreign entry mode:

External factors influencing SMEs’ choice of foreign entry modes

According to Hollensen (2001) there following external factors influencing company’s choice of foreign entry mode:

• Socio-cultural distance

• Country risk and demand uncertainty

• Market size and growth

• Direct and indirect trade barriers

• Competitive environment

• Small number of relevant intermediaries available

De Búrca, Brown & Fletcher (2004) point out the importance of the following additional factor for the choice of foreign entry mode:

• Laws and regulations

Root (1994) also takes up an additional factor that influences the choice of foreign entry modes:

• Geographical distance

Internal factors influencing SMEs’ choice of foreign entry modes

According to Brassington & Pettitt (2000), when the company has decided which markets to enter,

it must then decide how to enter them A number of factors influence the choice of foreign market entry mode:

Source: Authors’ construction (2005)

Factors Influencing International

distance

- Per capita income

- Costs

demand uncertainty

Objectives

- Stage of economic development

growth

- International experience

- Exchange rate stability

- Direct/indirect trade barriers

- Product

environment

- Control Social and

relevant export intermediaries available

- Socio-cultural differences

- Managerial Reasons

-Social perspective

- Attitudes -Language Political and Legal Factors:

- Political stability

- Trade barriers

- General attitudes towards imports/

direct foreign investment Attractiveness of the Particular Export Target Market:

- Market size and growth rate

- Competition

- Cost of serving the market

- Profit and market potential

- Market access

3 Methodology

In this part the methodology used for conducting this research will be presented First the research purpose will be discussed, followed by what kind of research approach is used After this the research strategy and data collection method is being discussed, as well as sample selection and analysis of data Finally, the quality standards will be discussed

3.1 Purpose of the Research

According to Eriksson & Wiedersheim-Paul (2001) there are three basic purposes for scientific research: explore, describe and explain Winter (1992) in his turn states, that when modest amounts have been written about a problem, the exploratory research purpose is used The starting point is to find out which aspects that will fit into the research problem area, the most important and interesting aspects and the existing connections between different parts of the problem The result is composed of a conclusion of aspects of the problem, which are considered important to work with further

The descriptive research purpose is used when a problem is well structured and there is no intention

to examine the casual relationships The researcher wants to know which aspects of a problem are relevant and wants to describe these aspects more thoroughly The researcher gets an overview of the problem from other sources and focuses on the research around these important aspects The researcher uses methods that often result in relatively exact and detailed facts The conclusion of the study is derived from a conclusive description of the examined aspects or variables (Ibid)

When making assumptions on what kind of correlation exists between different variables, the explanatory research purpose is used This kind of study aims to prove or disapprove that a relation takes place or is of a certain character, as well as it aims to find correlation between causes, by using data collection methods that give exact hard data The result of the study confirms whether the hypothesis can be disapproved or not (Ibid)

The purpose of this thesis is to gain an understanding of how SMEs select and enter foreign markets In this field of research there is a relatively lot of theory available In order to develop an understanding of how both the internal and external factors influence SMEs’ choice of international market and foreign entry modes this thesis will be descriptive

3.2 Research Approach

According to Davidson & Patel (2003), the research approach can be quantitative or qualitative By choosing one of these approaches the researcher will know how to treat and analyze the gathered information Quantitative research is based on numerical data, which then are analyzed and presented in figures with statistics For the reason that the quantitative research often is more structured than the qualitative one, the planning of the quantitative research is more standardized A positive aspect of the quantitative approach is that it is rather easy to generalize from the gathered information However, according to Holme & Solvang (1997) it must be kept in mind that the gathered information should always be relevant for the problem definition

Holme & Solvang (1997) state, that qualitative research approach is less formal and based on unsystematic and unstructured observations This can be for example in-depth interviews or an interview guide with open answers According to Davidson & Patel (2003), qualitative verbal analysis is often used in order to gain better understanding The purpose of this approach is to understand and analyze the situation as a whole Holme & Solvang (1997) state moreover that the qualitative research must be kept flexible and the possibilities to change the planning open during the whole research process

The qualitative approach has been used in this thesis, since deeper and broader understanding is aimed to be reached within the research area From our point of view it is necessary to let the interview respondent freely describe the entire research area from his point of view The reader should however keep in mind that the empirical data in this thesis is highly based on the company’s and the respondent’s attitudes and perceptions, and therefore the empirical data will be easier to demonstrate in words instead of statistics

Holme & Solvang (1997) also point out that there are two different ways to do conclusions in a research: induction and deduction When using the inductive method, the researcher gathers information and empirical data in order to make conclusions and to formulate an own theory from them It is important to note that there exist no previous theories to base the problem on The deductive method is more structured and formalized and therefore easier to analyze and explain The deductive conclusions are made down from various common principles and existing theories The hypothesis is derived from an existing theory and the tested empirically in the actual case, according to Davidson & Patel (2003) However, it should be noted that a theory is never complete and it can be changed by testing new hypothesis and by asking “why” the theory is as it is Through empirical research the reliability and validity of the theory can be reinforced or weakened

This thesis follows a deductive approach The existing theories within the research area have been studied and the research problem and research questions have been drawn from these commonly recognized theories

3.3 Research Strategy

According to Yin (2003), there are five research strategies to choose among when conducting social science These are experiment, surveys, analysis of archival information, histories and case studies Each strategy has advantages and disadvantages and can be used for the same research purpose The difference between the strategies is the different way of collecting and analyzing the empirical evidence

What distinguishes the strategies depends on three conditions: the type of research question, the level of control an investigator has over actual behavioral events and the focus on contemporary as opposed to historical phenomena Relevant situations for different research strategies are illustrated

in Table 3.1 However, the boundaries between the strategies or the occasions when each strategy is

to be used are clear and sharp Even though each strategy has its own distinctive characteristics there are large overlaps among them (Ibid)

Table 3.1 Relevant Situations for Different Research Strategies

Source: Yin (2003), Case study research: design and methods

Form of research question

Requires control over behavioural event?

Focuses on contemporary events

Strategy

Who, what, where, how many, how much

No Yes/No

Davidson & Patel (2003) point out that an experiment is a term, which implies that only few variables are studied Other things that might affect these variables must also be determined Surveys are conducted with help of a questionnaire or an interview and the goal of the survey is to reach a large demarcated group Survey researches give the possibility to gather information about a greater number of variables, as well as a lot of information about a limited number of variables Archival analysis is based on secondary data that was developed for another purpose than helping the problem at hand However, it does not necessarily mean that focus is given to past events A historical strategy is not focused on contemporary events according to Yin (2003) Eriksson & Wiedersheim-Paul (2001) point out that a case study involves investigating few entities but many variables, in order to get an in-depth situational picture A case study can be either single-case or multiple-case The single-case study investigates on an entity, a company, a decision or a region, in-depth In a multiple-case study, two or more entities are studied which gives the opportunity for comparisons On the other hand, each entity will be less in-depth investigated

The case study in this thesis will be conducted on the largest woodhouse producing company in Sweden, AB Älvsbyhus, hereby only referred to as Älvsbyhus In order to reach our purpose and answer it, the case study will go in-depth on how Älvsbyhus selects their international markets and what type of entry mode they utilize We will also study what external and internal factors play a significant role in these decisions

3.4 Data Collection Method

According to Eriksson & Wiedersheim-Paul (2001), to be able to understand the research area more

in detail, empirical data must be collected There are two different types of empirical data that can

be collected: primary and secondary The primary data is collected for specific problems, while the secondary data is collected for a more general purpose

When collecting empirical data, the researcher has to choose between using question methods; like questionnaires, telephone or personal interviews; or using observations or documents according to Davidson & Patel (2003) The questions are often less structured in a questionnaire and the respondent answers to them without any explanation and without any influence from the researcher’s part However, by using telephone or personal interviews the researcher can pose more complex questions and explain possible misunderstandings The duration of an interview is often limited when doing telephone interviews, therefore personal interviews are from this point of view more preferable Concerning observations the researcher can only observe ongoing processes, situations and behaviors The positive aspect of observations is that they do not depend on the respondent’s willingness to reveal more personal information Documents are primarily used to collect secondary data For example statistics, registrations, official publications, letters, diaries, newspapers, journals, branch literature and brochures can be used for collecting secondary empirical data

In this thesis both the primary and secondary data have been collected The primary data has been collected specifically for the case studied and it has been conducted through a personal interview with a person who has the greatest knowledge about the selected company’s international market selection and selection of the modes of foreign market entry The secondary data has been collected trough various documents The selected company’s website, information brochure and DVD, as well as the selected company’s information in the database Affärsdata have been studied in order to gain more background information about the company in question Research reports, other scientific thesis, scientific literature, journals and articles, as well as previous marketing researches within the research area have also been studied in order to gain better understanding within the problem area for the case study

3.5 Sample Selection

When the research approach and research strategy have been chosen, the next step in a scientific research is to choose the sample company or sample companies which would be interesting to study more in detail within the case study In this part will be described the ways in which the area of research, the country, the industry, the size and the amount of companies were chosen, as well as how the selection of one particular company was made and the respondent selected found

Selective sampling, also called as intended sampling, is used in qualitative studies according to Johansson-Lindfors (2000) When the sample is selected in order to fit the purpose of the scientific research, the sampling is purposive If the sample fits and is relevant for the theoretical purpose, the sample can be either representative or not representative This means that the sample can be almost anything as long as the purpose of the research is present in the sample study

In this thesis the research has been started by looking at SMEs’ internationalization and what external and internal factors influence SMEs’ international market selection Additionally, the SMEs’ choice of foreign entry modes has been studied and in particular what external and internal factors influence these choices This specific area of research was found interesting and selected for this reason In order to study the external and internal factors influencing SMEs’ selection of international markets and SMEs’ choice of foreign entry mode were found especially interesting, for the reason that these explain why companies enter certain markets and why they decide to use certain foreign entry modes

Concerning the choice of country and industry, we have decided to look more closely at how the Swedish woodhouse industry selects its international markets and which foreign entry modes are the most frequently used The woodhouse industry in Sweden has its own particular features and similar woodhouses are rather hard to find outside the Nordic countries, where a large part of the houses are generally made of wood and there exist a consistent demand for this kind of houses However, the recent economic recession in Sweden has to some extent influenced the woodhouse industry and the demand has somewhat diminished during the past years Nevertheless, the economic upswing of today (2005) in Sweden has started to influence the demand towards a more positive and upgrading direction It should not be forgotten either that Sweden has also rich resources of wood and forests

Älvsbyhus, the largest woodhouse producing company in Sweden, was chosen as a subject for our case study This was practical, since the company is located in the vicinity of Luleå, where the research is conducted, and Älvsbyhus is one of the largest medium sized companies in the county of Norrbotten Älvsbyhus has in addition a very unique concept of constructing woodhouses: they build mobile woodhouses This unique concept of Älvsbyhus drew our attention and resulted the selection of Sweden as a sample country, Swedish woodhouse industry as a sample industry, and Älvsbyhus as a sample company

One case study will be accomplished in order to study in-depth the case of Älvsbyhus and to search answers to following questions: what external and internal factors have influenced Älvsbyhus international market selection and their choice of foreign entry modes In our case study we will also examine why a company, like Älvsbyhus, which has a great potential for larger export markets,

at the moment only exports within the Nordic countries

The respondent within Älvsbyhus was chosen by various criteria The most suitable and knowledgeable respondent, who was competent and capable to answer our interview questions within the research area of our thesis was selected The position of the respondent selected within the company is the Marketing Manager and he was willing to contribute some of his valuable time

in order to take part in the interview and our research

in order to find similarities and dissimilarities

In this thesis the within-case analysis has been used, since only one specific case study has been chosen to be conducted The data collected from the case study has been compared to the relevant frame of references, in order to find particular similarities and dissimilarities that influence the SMEs’ international market selection and their choice of foreign entry mode Finally, findings and conclusions have been made from these analytical comparisons

3.7 Quality Standards

Eriksson & Wiedersheim-Paul (2001) state, that reliability and validity of the information received within a research are highly important aspects of a scientific study Reliability shows the trustworthiness of the measuring instrument This means that another researcher with the same approach should be able to come up with the same results Validity is the ability of the chosen instrument to measure what it is supposed to measure According to Davidson & Patel (2003), the reliability and validity are often difficult to ensure when conducting qualitative research The subjects and variables in a qualitative research are often abstract and the personal experiences and perceptions are involved, which makes it difficult to measure the grade of reliability and validity of the research

In order to ensure the validity of this research, the interview guide was formulated from the emerged frame of references in order to answer to the research problem and the research questions The interview guide used was read and commented by several other persons in order to test the comprehension of the questions and in order to improve the formulation of the questions The interview was conducted face-to-face in order to gain better understanding of the situation and to be able to explain the possible misunderstandings of the questions The interview guide was send to the respondent by e-mail few days before the actual interview in order to let the respondent to read through the questions and prepare somewhat his answers The aim of the personal interview was to obtain comprehensive answers from the respondent’s side and to let the respondent describe the entire research area from their point of view Considerable efforts were made in order to find the most suitable and knowledgeable respondent, who was competent and capable to answer the interview questions within the company selected The time aspect was also considered and a telephone interview, as a shorter type of interview, did not feel like a suitable option for this research Careful notes were made during the whole interview and in order to ensure the validity the whole interview was recorded and both researchers made their own notes, which then later on were conducted together Multiple sources of evidence, like the interview and other documents, were used during the data collection in order to ensure even further increased validity The documents were furthermore used to verify the answers given by the respondent

In order to ensure the reliability of this research, Swedish was used as the interview language in order to avoid language barriers and to let the respondent freely and thoroughly answer to all of the questions Nevertheless, it should be noted that some unintentional translation interpretations may have occurred when translating the results from Swedish to English, as the English is not the native language of either the researchers or the respondent During the evaluation and handling the data collected the researchers have tried to be as objective as possible to ensure the reliability of the thesis However, it should be taken in to consideration that the same interview guide and the same respondent still might not lead to the exact same result as in this thesis, for the reason that the subjectivity has always some influence in an interview and a research Thus, subjectivity may have

in some extent affected the reliability of this thesis, but it has been beyond the control of the researchers