Jurnal EB 2012 COMPLETO finale.pdf 47vol. 2, 2012 NETWORKS’ CONTRIBUTION TO SMALL-SIZED FIRMS’ INTERNATIONALIZATION1 1 Abstract This paper analyzes a new legislative instrument called “network contract” designed to abroad after joining the network, we also found that those with an international dimension do not seem to have changed their approach towards internationalization. Consequently, we argue that the network contract is not the most suitable tool for promoting internationalization relationships. Keywords: 1. Introduction to rethink their strategies and organizational structures in order to be competitive and survive long term. In this context, and especially in Italy, networking still appears to be the most viable market constraints and search for new opportunities for growth. latu sensu MARA DEL BALDO, University of Urbino “Carlo Bo”, Italy (*) SELENA AURELI, University of Bologna, Italy 48 Among the different types of networks that companies can establish, we decided to competitiveness. relationships characterizing other types of organizational networks, or even industrial districts all sectors, as well as the plurality of planned objectives and programs as recorded by Cafaggi networks contribute to starting or augmenting their international expansion. and networking. Second, we examined the formal objectives associated with existing network contracts. Third, we shifted our basic unit of analysis from networks to single nodes by internationalization. of small-scale Italian businesses willing to cooperate through the network contract. It reveals whether they focus more on upstream or downstream market expansion, preferred modes of entry into foreign markets, relevance, geographic scope, and duration of international activity. Second, it compares the usage of the network contract for the development of international cooperation. Lastly, but most importantly, it illustrates in which cases companies belonging to a formal network have succeed in starting or improving their international expansion. Information about the size of the company, the network’s dimension, the goals associated with 2. Literature review 2.1. Theories on small business internationalization Internationalization refers to the process of increasing involvement in international 49vol. 2, 2012 decision-making process, for optimizing the company’s production structure, penetrating new markets, obtaining access to inputs, and operating in more favourable conditions. The second which describes internationalization as an incremental process based on learning. The third activate when they do not directly possess the resources necessary to cross national borders. stress the importance of the learning process along with internationalization’s advancement steps. through export, creation of international subsidiaries, subcontracting, job orders, licensing, establishment of production sites abroad, and collaboration with foreign partners. Lastly, in production, supply, and R&D activities. functions involved (i.e. purchase, marketing, production, R&D), the extent of the company’s investment (i.e. indirect export, direct export, foreign direct investment), and the type of product exchanged (from goods to services and know-how). This highlights three key the international dimension through their initial stages of importation, and the most frequent form of internationalization is the export of goods. There is actually a wide agreement in the Among the different export-related theories of internationalization, it is interesting to note 50 As changes in business practices occurred, and the importance of networks in international Describing internationalization as an evolutionary process, the has been revisited in light of theoretical advances that view the business environment as a web of relationships relationships. The network represents a key factor for network theorists who interpret the internationalization of businesses as a natural development of network relationships. Some Sometimes internationalization is seen as opportunity-seeking efforts This internationalize because of its relations (usually as a sub-contractor) with a larger organization, developed inside the industrial district stimulate the crossing of national borders (Brown & 2.2. The role of networks may be interpersonal or organizational; thy may be limited to bilateral (or dyadic) relations, or they might assume the form of true networks (a combination of multiple sub-systems of links). They range from informal relationships to formal agreements, strategic alliances, constellations, reduce costs; obtain complementary resources, knowledge and capital; improve learning; Regardless of the theoretical perspective used, inter-organizational links emerge as facilitators of international expansion in several studies. and personnel constraints, which hinder internationalization, while also providing the best 51vol. 2, 2012 alternative to both international transaction costs and coordination costs associated with markets to distribution channels, infrastructures, or other resources owned and shared by a partner. In addition, knowledge of foreign markets is a key resource that can be shared and acquires outside knowledge that allows it to do something new and different (a process called international strategy (the decision to go abroad, the choice of the markets, and the mode of entry) is linked to the opportunities that emerge from network relations more so than to place in a network setting where business actors are linked to each other through business (with customers, suppliers, distributors, regulatory and public agencies as well as other market international marketing activities were impacted by larger network partners, whereas no connection has been detected between relationships created inside an industrial district and relationships related to entrepreneurs’ and managers’ personal and social relations, which usually generate more loosely coupled networks compared to inter-organizational ones. They a directorial style centred on direct relations promoted by the owner-entrepreneur. As noted and serve as a catalyst for the formation of formal inter-organizational relationships. They Lastly, it is important to note that networks can also be interpreted as a means of increasing of international opportunities. Other scholars emphasize the importance of the entrepreneur’s opportunity recognition is positively related to an entrepreneur’s social network. Social ties serve as conduits for the spread of information concerning new opportunities (Granovetter, 52 social ties with mentors and informal industry networks, the more positive are the effects on opportunity recognition. 3. Methodology and if it eventually increases the entrepreneurial capacity to recognize the opportunities in both international markets and in other business aspects. This study draws upon theoretical frameworks that consider the network as an important to interpret data from the following empirical analysis, which is as important as the deductive construction of the theories. inductive models of proposition development and theory construction ( This methodological orientation is particularly appropriate for the study of small businesses concurrence of ownership and control) which generate different behaviours from those of their larger counterparts. We made use of different sources of data (public documents and questionnaires) and different methods of analysis (document analysis and descriptive statistics). that companies had a minimum of one year of experience with the network contract at the time decisions toward internationalization after months of supposed reciprocal experiential learning and increased commitment. Thanks to the national system of the Chambers of Commerce, it was possible to examine the content of those written agreements and to identify their strategic objectives and network programs. This helped us discover the networks with a formally stated international scope. 21 common activities to be performed in foreign markets. population to study, followed by a telephone call to remind them to complete the questionnaire. functioning of the network (usually the entrepreneur or the company director). Approximately three-quarters of the questions were closed and coded, whereas the remaining were open-ended. internationalization strategies before and after joining the network contract, motives for networking and, lastly, the type and impact of common activities undertaken during the alliance. in contracts with no international aims (as revealed during the documentary analysis), were 53vol. 2, 2012 common activity of the network. We are aware of the small size of the sample, which hinders generalization. Since we the representativity of the sample. 4. Empirical results 4.1. The sample same province). This distribution is perfectly in line with national data provided by Unioncamere district and seldom contributed to creating trans-regional clusters. Table 1 – Basic descriptive statistics of the sample Variable Mean Standard deviation Median Turnover 2010 Turnover 2011 N. of employees 2010 N. of employees 2011 Total asset 2010 N. of nodes Companies of the sample belong to the manufacturing sector (mainly mechanics), followed At the national level, the manufacturing sector represents almost the entire phenomena Lombardia, with the Northern part of Italy counting for about half of all companies involved in a network contract. 54 Emilia Romagna Lombardia Veneto Graph. 1 – Italian regions with the highest number of network contracts 4.2. Network’s contribution to internationalization Regarding domestic companies, our results indicate that building formal alliances such as the network contract did not largely promote internationalization for the individual nodes after signing the network contract. sales representatives, participating in international trade shows, approaching some potential internationalization processes and activities are underway, they have still not experienced any tangible effects. initiatives regarding internationalization. 55vol. 2, 2012 Table 2 – Firms that have developed international activities Network's contribution to ITZ YES NO Internationalized firms A B Domestic firms C D Tot. 26% 74% companies) state that the network contract has not contributed to any increase in existing international operations (Tab. 2). When the network contract has impacted international international fairs and exhibitions, augmented export, and raised the number of foreign market representatives. changed its approach to internationalization describes the adoption of a collective strategy to enter new foreign markets. noticed that they are larger than the domestic ones and have been operating over national the companies surveyed export indirectly by selling their products and services to other Italian the third stage of development of Luostarinen’s model (Fig. 1). Cooperation is sometimes or a franchising contract. Figure 1 – Forms of internationalization Downstream internationalization 4 5 3 3 56 found that none of the companies analyzed receive foreign subsidiaries for commercialization. Foreign direct investments (FDI) are cited by only 2 companies, who utilize them for production purposes only. None of the companies investigated perform R&D activities at the international level. with an international orientation purchase inputs aboard; in these cases, they are mainly raw use intermediaries or forms of international cooperation. for international business is also demonstrated by the level of international turnover. On of respondents were trying to decrease production costs. Interestingly, none of the companies Figure 2 – Firms’ reasons for internationalization Main motives 4.3. Firms’ motives for networking and contract’s objectives In order to better understand the logic behind network contract usage, we posed some questions about the motives which directed the single nodes to sign the collaboration agreement. international expansion as the main reason for aggregation. 57vol. 2, 2012 Main reasons for networking To verify if internationalization was considered a less relevant reason for joining the network contract, we asked single nodes to specify other expected results deriving from network’s Figure 4 – Other reasons to start collaborating Secondary reasons for networking Focusing on internationalization, we noticed there is not always a perfect correspondence between an individual company’s purpose for signing the network contract, and the concrete 58 contribution of this instrument regarding internationalization. Nor did we note that their written concrete results. Table 3 – Objectives of internationalization Network’s contribution to ITZ YES NO Internationalized (n. 9) A 2° B Domestic (n.18) C D (°) companies attributing international expectations to network’s participation networks can generate new unplanned opportunities, we asked all of the companies in the sample if and how the idea of internationalization eventually appeared during their involvement in the network, regardless of any written provision or prior aims for international development. was neither included in the network’s written goals nor cited as a motive for aggregation. company, which was not necessarily the most experienced in international operations (i.e., the the network’s nodes), while it was formally scheduled during a network’s meeting in the The above-mentioned discourse then translated into (an) initial contact(s) with international the contribution of different network nodes). Reaching an international dimension did not person responsible for international operations was introduced. international visibility It is important to note that network contracts are mainly built by companies with previous 59vol. 2, 2012 value chain (i.e. client-supplier relationship); in two cases they came from equity links. entrepreneurs had previous contacts with members of the same cultural association or actors 5. In-depth analysis of different company situations international expansion only in a minority of cases, and rarely orients them towards foreign market changes. Thus, we decided to better understand the reasons for such differences by closely examining network size, motives for collaboration, and pre-existing links. Group A international activity after joining the network. These are the largest companies with a mean of cooperation is the development of marketing activities, while the most common secondary reason is product exchange and internationalization (in 2 cases). Considering that goals reported in network contracts concern internationalization only in one case (cited by a company that signed up for the contract for other reasons different from internationalization), it emerges that the network’s contribution to foreign expansion is mainly unexpected in this group of companies. Again, all companies belong to a network characterized by a focal organization with relationships. Group B application of the network contract, but who did not register any improvement in foreign operations. Together with the companies in group A, they are the largest organizations of the largest networks (with 11 nodes on average). one of them also expressing the unrealized expectation of foreign expansion. All companies belong to a network where there is one leading internationalized company, while only half of them indicate having experienced previous relationships with other network’s nodes. 60 Group C This group contains domestic companies that started some international activity, thanks to million, indicating a high rate of productivity per unit. These companies belong to very small The main reason for cooperation is the exchange of products and services, while information sharing represents the most common secondary reason (cited by all 4 companies). Thus, these which is also reported in two of the network contracts. Foreign expansion also occurred for the one company that did not have such expectations and joined a network without formally stated international objectives. In this case, all 4 companies of the group declared that they had previous relationships with other nodes, and that all networks to which they belong are characterized by the presence of a leading company with strong experience in international operations. Group D The most recurring reason for cooperation was launching common R&D activities (cited launch common projects and share risks and costs, so as to increase their power as an entity and to sustain knowledge-sharing in order to establish and improve their competitive advantages. that they were looking for new activities in foreign markets, and, indeed, internationalization not make any difference. not have client-supplier relations. favour foreign expansion (as demonstrated by group C); - Network contracts, including common international goals, are subscribed by both domestic and international companies. However, its use is more widespread among domestic businesses 61vol. 2, 2012 - The presence of printed objectives concerning internationalization in network contracts does not always translate into concrete results. Nor are companies’ individual expectations about international expansion automatically associated with subsequent foreign market entry. This suggests that the network contract may be too recent an innovation given priority; - The objectives of companies are more relevant than the written goals stated in the network B and D did not improve their international activities. This is in line with their lower personal - Additionally, we found that the network was responsible for starting some companies’ international operators (in groups A and C), though they did not plan for it nor had the contract foreseen it. This indicates that network interactions may nevertheless contribute to the - Companies that did not increase their international operations (group B and D) are purposes; however, these respondents also believe that the contract may contribute to internationalization, indicating that this strategy of development is not excluded; - The presence of a leading organization with strong experience in international markets does not seem to be associated with networks’ ability to favour foreign expansion, nor it is related to companies’ previous activities. Actually, almost all companies within the sample belong to networks that boast a focal company. Therefore, this variable is not determinant in - The network’s dimension, expressed in terms of nodes, seems to be slightly associated with the network’s contribution to international expansion, since the companies in groups A and C belong to the smallest networks; - The presence of prior relationships also seems to be higher among companies that declared that the network contract has increased their international operations. Thus, our sample seems attributes pre-existing links to the capability of favouring reciprocal trust and consequent international expansion, although it should be noted that the larger dimension of networks may limit the existence of previous links. 6. Conclusions foreign partners, or the recent birth of this legislative tool has not allowed network relationships In the latter case, network contracts may represent only the initial experimental steps toward comments, the majority of whom positively evaluate the capability of the network contract to impact international expansion while stating that it is too early to derive conclusions. 62 A different explanation for low internationalization could be attributed to companies’ responses indicating that participation in the network contract was mainly driven by other reasons (i.e. innovation, marketing objectives). Thus, low international expansion is not motives for collaboration. In other words, while the network contract’s nodes espouse positive attitudes toward cooperation (as also demonstrated by the presence of previous inter- Consequently, pre-existing relations can be considered a prerequisite for formal cooperation, but not a determinant variable for generating common international initiatives. a general inconsistency between international goals and outcomes generated by network participation. Such an inconsistency can be both positive and negative. A positive inconsistency emerges when internationalization develops, despite both domestic and internationalized companies (A and C groups). A negative inconsistency occurs when internalization is not reached, even though it was formally planned in the network cases is there a perfect match between the international motives for networking and their actual Finally, the network contract seems to stimulate an entrepreneur’s ability to recognize and exploit business opportunities in different areas (i.e. product development) and markets From a practical point of view, this study contributes to a fuller understanding of a new It also provides a set of practical implications for the Italian government, which introduced this without losing their independence (i.e., to innovate and strengthen their development), and to facilitate corporate dialogue across regions. In particular, the Italian government should question whether or not technical obstacles hinder the network contract’s adoption among European Economic Interest Grouping), and how it should be improved and adapted to include companies based abroad. At the same time, we are aware that this exploratory study has several limitations. On the one hand, our current research can be deepened. First, our sample should be enlarged to include more observations. Second, it should be deepened to include additional variables that could explain internationalization such as industry sectors, partners’ motives, and CEO’s characteristics. Third, it is necessary to monitor networks’ outcomes in the long term to verify should be performed to understand how key variables and networking processes have generated positive outcomes. Both of these trajectories may be pursued in future research projects. 63vol. 2, 2012 References Research Paper - Small Business Research Institute, Brussels. The Foreign Investment Decision Process Inter-organizational networks as a strategic Industrial Networks: A New View of Reality Routledge. Networks. 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