Export mode and internationalization process

When analyzing the export behavior of firms and the export-risk relationship, the incorpora- tion of the theoretic framework with regard to export development models is essential. In this regard, Leonidas and Constantine (1996) first have reviewed empirical work in this stream of literature. They reviewed articles in order to identify the main models and their structural characteristics, to evaluate the methodologies used and to analyze the key conceptual issues on the subject. The objective is to explain adequately the firm’s export expansion behavior. In this regard, the export expansion behavior is also associated with costs.

Nevertheless, firms can be classified by several criteria according to their stage of export de- velopment. The often-used segmentation parameters are export sales intensity, length of ex- porting experience and foreign market entry mode (Leonidas and Constantine, 1996). This section deals with the internationalization process and the foreign market entry mode. Refer- ring to this, Lu and Beamish (2001) claim, that SME choice of entry mode affects their per- formance and therefore the risk as well.

The existing literature related to entry mode choice primarily concerns MNEs, whereby the activities of SMEs have received less attention (Nakos and Brouthers, 2002; Decker and Zhao, 2004). Nevertheless, there also exists evidence of entry mode choice regarding to SMEs. SMEs, as opposed to MNEs, have individual characteristics that are able to influence their foreign market entry mode choice in terms of the level of commitment to the foreign market, how they deal with risks in the host country, and the controllability of foreign market activities (Laufs and Schwens, 2014). Different authors have suggested that SMEs interna- tional entry mode selection is an important research area in the present stream of literature

67 (e.g. Burgel and Murray, 2000; Zacharakis, 1997; Jones, 1999; Nakos and Brouthers, 2002; Brouthers and Nakos, 2004; Decker and Zhao, 2004; Laufs and Schwens, 2014). One reason is that the entry mode type is significantly related to SME performance and choosing the right international entry mode can have important performance and risk implications for SMEs (Lu and Beamish, 2001; Nakos and Brouthers, 2002). This section should give an overview, to assess the basis of this field, how knowledge can be added and how future entry mode re- search should proceed.

It is supposed that firms which possess the necessary knowledge and the infrastructure of ex- portation have two sources of flexibility. The first one is the arbitrage between markets and the second is the leverage. The arbitrage permits a sales reduction in markets which are nega- tively affected by the exchange rate risk, country risk or demand reduction. It also permits increase sales in markets not affected by the mentioned risks or where the impact is lower (Roberts and Tybout, 1997). The leverage permits that gathered knowledge about a particular foreign market facilitates the entry in new but cultural, psychological and institutional close markets to the previously entered one (Johanson and Vahlne, 1977; Lu and Beamish, 2006). It is not only the whole exporting activity generates compulsively knowledge and has signifi- cant implication on firm performance or risk. It depends strongly on the entry mode. Thus, the involvement of an internationalization strategy includes the development of a comprehensive product or market plan, by choosing a foreign market entry mode. In this regard, entry mode is defined as an institutional arrangement, that allows firms to use their product or service in a country exchange or an institutional arrangement that enables the entry of firm’s products, technology, human skills, management, or other resources into a foreign country (Root, 1987; Rasheed, 2005). The decision regarding the entry mode choice is essential, because it is an important factor whether the firm will be successful in the entered market or not, which in turn has important implications on firm’s performance and risk (Canabal and White, 2008). Thus, firms entering new foreign markets choose from numerous different forms of entry, ranging from licensing and franchising, through exporting, to foreign direct investment (Rashed, 2005). As a result, by deciding to enter an international market, firms have to select an appropriate organizational structure, or entry mode (Erramilli and Rao, 1993; Burgel and Murray, 2000). Consequently, entry mode research is related to the international activity of firms (Canabal and White, 2008). It includes the predictors of entry mode choices, of interna-

68 tional equity ownership levels, as well as the consequences of entry mode decisions (Werner, 2002).

Entry modes can be divided into two different categories which are equity and non-equity ones. The two mentioned categories can be distinguished by their investment requirements and control. Equity modes are e.g. joint ventures and wholly owned ventures such as green- fields, brownfields, and acquisitions, whereby non-equity models refer to e.g. contractual modes such as licensing, R&D contracts, and alliances (Pan and Tse, 2000). As already de- scribed, the present work is analyzing SMEs rather than MNEs, thus the preferred entry mode is based on non-equity models because of the limited resources and capacities that SMEs are enabled with.

Different empirical studies have also applied export development models to examine interna- tionalization strategies under uncertainty, such as the internationalization process, their mar- ket entry and exit decisions and their entry mode choices (e.g. Rangan, 1998; Belderbos et al., 2014; Fernandez and Diez-Vial, 2015). This stream of literature is especially important for the present work. This is because it allows to draw a conclusion on firm’s risk implications. As already mentioned in the previous section, the internationalization’s implication on firm risk is the central issue this scientific work deals with.

Canabal and White (2008) developed a ranked listing of the most commonly used theories and constructs in entry mode research. Regarding to this, the 10 most commonly used theories and constructs in entry mode research are listed in the following. The most frequently used theory is the transaction cost theory, which views each choice of entry mode as an individual transaction that involves a trade-off between control and resource commitment (Anderson and Gatignon, 1986). The subsequent theories are OLI/location factors, cultural distance, control, internationalization, risk, institutional theory, resource-based view (RBV), foreign direct in- vestment, organizational/competitive capabilities, knowledge and uncertainty.

In conclusion, the findings from this section suggest that the entry mode decision and the in- ternationalization process can have a significant effect on performance and risk. Thus, it is important to consider the entry mode choice and its impact on performance and risk in the present empirical work. Referring to this, the next section explains the creation of internation- al knowledge in relation to the chosen entry mode.

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