The Importance of Second-Hand Knowledge in the Revised Uppsala Model: Can European Textiles Producers Export to China?

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The Importance of Second-Hand Knowledge in theRevised Uppsala Model: Can European TextilesProducers Export to China?Susana Costa e Silva a , Eugénia Pacheco b , Raquel Meneses c & Carlos Brito ca Catholic University of Portugal–Porto, Porto, Portugalb Board of Directors at JAP Group, Porto, Portugalc Faculty of Economics, University of Porto, Porto, PortugalVersion of record first published: 06 Dec 2012.

To cite this article: Susana Costa e Silva , Eugénia Pacheco , Raquel Meneses & Carlos Brito (2012): The Importance ofSecond-Hand Knowledge in the Revised Uppsala Model: Can European Textiles Producers Export to China?, Journal of GlobalMarketing, 25:3, 141-160

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Journal of Global Marketing, 25:141–160, 2012Copyright c© Taylor & Francis Group, LLCISSN: 0891-1762 print / 1528-6975 onlineDOI: 10.1080/08911762.2012.741963

The Importance of Second-Hand Knowledgein the Revised Uppsala Model: Can European

Textiles Producers Export to China?

Susana Costa e SilvaEugenia PachecoRaquel Meneses

Carlos Brito

ABSTRACT. The authors studied how knowledge derived from firms’ relationships—the so-calledsecond-hand knowledge—is likely to influence their internationalization process. In this article, theyexamine how a European producer of textiles is able to sell worldwide, including to China, a highly com-petitive player in this industry. This article discusses models of firms’ networks and the extent to whichsuch networks generate important knowledge that can explain internationalization behavior—how it isable to influence the selection of foreign markets and the entry mode used. The authors use the revisedversion of the Uppsala model of internationalization, which emphasizes the roles of trust-building,knowledge, and creation of opportunities within relationships.

KEYWORDS. Internationalization, knowledge, relationship, Uppsala model

INTRODUCTION

International business literature lacks new ex-planations for internationalization that are moreconsentaneous with the new business milieu.A specific interest emerged in studying andunderstanding how companies establish rela-tionships and how these relations can influ-ence their internationalization processes (Chris-tensen & Lindmark, 1993; Kaufmann, 1994;O’Farrell & Hitchens, 1988). These relation-ships generate knowledge that is believed to becrucial in the firm’s future internationalizationdecisions.

Susana Costa e Silva is Assistant Professor at the Catholic University of Portugal–Porto, Porto, Portugal.Eugenia Pacheco is Assistant on the Board of Directors at JAP Group, Porto, Portugal. Raquel Meneses isAssistant Professor and Carlos Brito is Associate Professor in the Faculty of Economics at the University ofPorto, Porto, Portugal.

Address correspondence to Carlos Brito, Faculty of Economics, University of Porto, Rua Dr. RobertoFrias, 4200-464 Porto, Portugal. E-mail: [email protected]

This is even more significant in the case ofsmall and medium-sized enterprises with limitedresources that, according to Rochester (2005),has to do with the “liability of smallness.”In this context, business relationships gainedrelevance and therefore new explanations aredemanded. One attempt to explain the need toinclude relationships into the analysis of interna-tionalization processes is the business networksapproach, which regards markets as networks offirms (Ford, 2002). According to this approach,the creation and development of relationshipsbetween the different actors of a network arecrucial (Ford, Gadde, & Hakansson, 1988). In

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fact, relationships gained importance in both themanagerial and academic worlds. The recentlyrevised model of Uppsala (Johanson & Vahlne,2009) embraces some of the main insights pro-vided by the advent of the relationships’ impor-tance. This theoretical framework can be usedto understand how relationships and the knowl-edge driven by it can influence internationaliza-tion processes.

The revised Uppsala model is based on thewell-known model of Uppsala (Johanson &Vahlne, 1977; Johanson & Widersheim-Paul,1975) that suggests that firms internationalizegradually and progressively. This means thatthere is a preestablished internationalization pat-tern: in terms of the entry modes used (fromsimpler to more complex modes) and in termsof the countries served (from closer to far dis-tant countries). However, Ford (2002) suggeststhat despite the evidence of business practical-ity of the Uppsala model, empirical studies inthe 1970s and 1980s did not accommodate thisattitude. Suppliers were regarded as the protago-nists of the transactions, and markets were con-sidered to be built of a huge number of smalland faceless actors at play, taken individually.Hence, new developments were brought up by agroup of academicians to whom the market wasseen as a net of relationships between differentactors. This new approach is based on a contin-uum number of relationship exchanges among asmall number of identified actors (Hakansson &Snehota, 1995).

Here, the authors stress that companies es-tablish relationships with suppliers, customers,and other stakeholders that are characterized bybeing close, complex, and durable (Ford et al.,1988; Hakansson, 1982; Hakansson & Snehota,1995; Hallen et al., 1991). The aim of this arti-cle is to understand how business relationshipsestablished by small and medium-sized enter-prises (constrained by the liability of smallness)may influence their internationalization processand the knowledge resulting from it. In orderto uncover this, we focus on the case of a firmthat holds sales subsidiaries in the United States,Spain, and China, currently with more than 3,000customers spread all around the world.

The article is structured as follows. The nextsection provides a literature review with a special

emphasis on the evolution of the Uppsala modelsince its first version in 1977. Then, we presentour model and, in the section that follows, themethodology is described and justified. Then thecase analysis is presented. The final section in-cludes the main conclusion, limitations, and sug-gestions for further research.

LITERATURE REVIEW

The studies developed at the University ofUppsala on international operations of Swedishcompanies (Johanson and Vahlne, 1977; Johan-son & Widersheim-Paul, 1975) show that theirdomestic business relationships are frequentlylongstanding and affect their international per-formance. The basic structure of the model isbased in the distinction between state and changevariables, according to Figure 1.

When looking for explanations for the firms’internationalization process, knowledge is a cen-tral issue. According to the Uppsala model, themajor obstacle to internationalization is the lackof knowledge about foreign markets. Firms canonly overcome this constraint by learning. How-ever, firms’ own experience is considered thebasic source of the learning process. Hence, theonly way to obtain valuable knowledge aboutforeign markets is by internationalizing. “Onlyby doing business in a specific country is it possi-ble to learn how customers, intermediaries, com-petitors, and public authorities act and react indifferent situations” (Johanson & Vahlne, 2003,p. 90). Knowledge cannot be transferred eitherfrom a country to another, or from one actor toanother, so only first-hand knowledge is consid-ered valuable, “experience itself can never betransmitted, it produces a change—frequently asubtle change—in individuals and cannot be sep-arated from them” (Johanson & Vahlne, 1977,p. 30)., & because perceived risk is inverselyrelated to knowledge, more knowledge meansmore commitment and therefore less perceivedrisk. The original Uppsala model is built on thebasis of these premises, which results in the ideaof internationalization as a gradual process.

However, this internationalization model laterreceived some criticisms, addressed mainly toits deterministic orientation, which the au-thors themselves acknowledged. In 2009, when

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FIGURE 1. Uppsala Model: Basic Mechanism of Internationalization—State and Change Aspects.Source: Johanson and Vahlne (1977).

revising the model, Johanson and Vahlne had thechance to assess and update some of its premisesand produce some counterarguments.

With reference to the establishment chain,the authors state that it was mainly used asan inspiration and should not be consideredas a postulation of the model. In fact, in 2006they clarified that the model is not about theestablishment chain; this was the empiricalphenomenon observed. “The model is onlearning and commitment, or more precisely, onthe interplay between knowledge developmentand increasing foreign market commitment”(Johanson & Vahlne, 2006, p. 166). In somecircumstances, “jumps” in the value chain arepossible and acceptable.1 Moreover, regardingthe phenomenon of “born globals,” the authorsstate that even though it may seem to beincongruent with the assumptions of the model,it is not. The reasoning is that these firmsfirst locate regionally. So, before being “bornglobal,” they are “born regional.”

Another issue that was raised by some au-thors regarding the model was the relationshipbetween psychic distance and the entry mode.

Concerning this issue, the authors consider thatthe link may indeed have weakened. This is dueto the fact that some firms are now much moreexperienced in the international setting and havegained skills that allow them better to deal withinternationalization. Additionally, similarly toDunning (2001), Johanson and Vahlne (2009)came to the conclusion that joint ventures andstrategic alliances are becoming a much morecommon way of internationalizing than was thecase in the late 1970s. Thus, there is a fracturebetween the Uppsala model assumptions andmanagerial practice. In fact, the original modeldoes not admit cooperation to be a driver of bothmarket selection and operations mode decisions.However, in the 2009 article, the authors pointout that empirical studies have shown that net-works of relationships do indeed have an impacton the internationalization process of firms.

Additionally, the authors recognize nowthat internationalization is a multilateral pro-cess of developing relationship networks. Thisgoes in line with the previous commentsmade to the model by authors such as Holm,Eriksson, and Johanson (1999), Johanson and

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Mattsson (1988), Johanson and Vahlne (1990,2003, 2006), and Sharma and Johanson (1987),who also called attention to the importance ofrelationships. Since the 1990s, they have as-sumed that “the concepts ‘commitment, knowl-edge, current activities and commitment deci-sions”’ are “multilateral rather than unilateralas in the original model” (Johanson & Vahlne,1990, p. 19), so “the process is also interorgani-zational and not just interorganizational” (Johan-son & Vahlne, 1993, p. 51). The authors highlyvaluate these thoughts and tried to incorporatethem into the model. They also highly regardedthe Johanson and Mattsson (1988) internation-alization model, which regards internationaliza-tion as the establishment and the developmentof positions of a firm in relation to other actorsbelonging to foreign networks. In fact, Johansonand Vahlne in 2003 tied their vision closer tothe Network Theory, considering building andchanging relationships as a critical issue. Hence,a firm’s degree of internationalization can be in-ferred by the firm’s position in a network andby the importance of that position in terms ofrelationships established. Many links and strongpositions in a global network may foster the in-ternationalization process.

We understand that the Uppsala modelupdated in 2009 incorporates the insightsof the network theory. Johanson and Vahlne(1990) acknowledge this and therefore onecan assume that they embrace the networkapproach of the IMP Group (Whitelock, 2002).In fact, when looking for explanations for theinternationalization process of firms, therelation to other bodies (clients, suppliers,competitors . . .) in the international market wasconsidered by many academicians as very im-portant., & the same is true of the importance ofa firm’s experiential knowledge. These studiessuggest that the interdependence and interactionbetween the actors of a network have an impacton how they relate and the configuration of theproducts traded (Hakansson & Waluszewski,2002). According to Welch and Welch (1996, p.12), “an important part of a company knowledgeis often created and maintained though actors inits relevant networks.” Hence, networks meaninformation and experience flows. Therefore,firms can use second-hand knowledge (i.e.,

knowledge derived through other firms’ expe-riences or observing the actions of the otheractors), following a mimetic option of following-the-leader (Haveman, 1993) or following-the-herd. In imitative behavior, firms learn byobserving other firms and acting in a similar way(see, for example, Haunschild & Miner, 1997;Huber, 1991; Levitt & March, 1988). “As ideasand practices are diffused among organizations,there is no reason why similar processes shouldnot be present regarding the internationalizationbehavior of firms” (Forsgren, 2000, p. 10).

Organizations tend to imitate actions thathad had a good result with a large numberof other organizations, because their successis “taken for granted” (Haunschild & Miner,1997; Haveman, 1993; Kraatz, 1998; Levitt &March, 1988). Therefore, firms can follow-the-herd (learning with others’ experience) usingsecond-hand knowledge. In fact, firms can, also,gain access to the knowledge by following-the-leader. Learning with high legitimacy firms (thesuccessful ones) reduces its perceived uncer-tainty about foreign market. Firms can also learnthrough their partners: “It has been shown thataccess to a network of business relationships cre-ates the opportunity to learn from other firms”(Forsgren, 2000, p. 112). This is significant be-cause using this second-hand knowledge, firmscan reduce international perceived risk with-out having to wait until they develop first-handknowledge (derived from their own experience).

Another important insight of the revisedmodel is that, while in 1977 Johanson and Vahlneadmitted that uncertainty (via psychic distance)was an important factor in the decision of theentry mode to use, when adding a business net-work perspective to the analysis, they admit thatuncertainty results mainly from the absence ofa strong position of the firm in its network. Infact, they assume that relationships have con-siderable influence on the selection of foreignmarkets and on the entry modes to use. Essen-tially, by being linked to a great number andvariety of agents, firms must be exposed to agreat number and variety of knowledge sources.If a weak position is held, the knowledge sharedis smaller and the level of uncertainty higher.On the other hand, if a strong position is held,partners will tend to have more access to more

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knowledge, which diminishes the uncertainty.This is due to the development of knowledge andcommitment that take place within the relation-ship., & because some types of knowledge areonly accessible within the network (because it istacit), being part of a network is important andhaving a strong position in that network is evenmore important. “A firm’s success requires that itbe well established in one or more networks [. . .]it is to a large extent via relationships that firmslearn, and build trust and commitment—the es-sential elements of the internationalisation pro-cess” (Johanson and Vahlne, 2006, p. 5). Thismay allow these firms to be more aware of op-portunities and threats in the environment and,additionally, to be better prepared to go beyondthe liability of foreignness in international mar-kets (Zaheer, 1995).

All of this considered, Johanson and Vahlnerevised the model proposed in 1977 and modifiedthe variables of state as well as the variables ofchange (Figure 2), by considering the following:

• “Knowledge opportunities” (instead of“market knowledge”). Authors highlight

that there are other types of valuableknowledge: needs, capabilities, strategies,and networks, but opportunities are the“most important element of the bodyof knowledge that drives the process”(Johanson & Vahlne, 2009, p. 1424).

• “Network position” (instead of “marketcommitment”). This concept is character-ized by “specific levels of knowledge, trustand commitment that may be unevenly dis-tributed among the parties involved, andhence they may differ in how they promotesuccessful internationalisation” (Johanson& Vahlne, 2009, p. 1424).

• “Relationships commitment decisions”(instead of “commitment decisions”). Thisnotion is adapted from the original modelto underline the idea that commitment is torelationships.

• “Learning, creating and trust-building” (in-stead of “current activities”). This is a wayof clarifying the output of current activ-ities. As in the original model, learningplays an important role (not only the expe-riential learning). Creating highlights the

FIGURE 2. The Basic Mechanism of Internationalization: State and Change Aspects—The Busi-ness Network Model. Source: Johanson and Vahlne (2009).

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idea that interfirm activities create knowl-edge and opportunities, and trust-buildingstresses that all the processes may be facil-itated by trust.

Variables affect each other, with the currentstate variables influencing the change variables,and vice versa. An increase in the level of knowl-edge will produce positive or negative influenceson trust building and commitment. These pro-cesses can occur on both sides of a relationshipin any part of the network from which the focalfirm is member. Network position reflects thequality and variety of relations; it reflects bridgesto other agents and it influences firms’ relation-ship commitment decisions, which affects thenetwork position.

In terms of the implications of this new ver-sion of the model for the internationalizationexplanations, we may say that international re-lations can be considered, simultaneously, asthe explanatory and the explained variable. Go-ing international and the degree of internation-alization thus depend on the relationships thefirm establishes with national or internationalpartners. Thus, it is expected that the companyinternationalize its operations where it, or itspartners, detects opportunities. If the companydoes not have yet relevant partners in foreignmarkets, the alternative is to go where it iseasier to connect to a company already posi-tioned (maybe an agent or a distributor)., &this is how the internationalization process maystart. As the internationalization process is car-ried out, firms must make decisions about rela-tionship commitment and they must learn oneto each others, creating more connections andbuilding trust. As result, firms get more com-mitment with the market and, simultaneously,knowledge and opportunities to gain knowl-edge improve. Therefore, internationalizationis regarded as a self-sustaining process. Even-tually, as time goes by and relationships de-velop, the company will be able to eliminatethe middleman and create a subsidiary., & thisis how the revised model explains situations ofextending already existent internationalizationprocesses.

MODEL

Considering this network approach in the in-ternationalization process of a firm (Figure 3),we may thus claim that the beginning of the pro-cess is arbitrary. Just the process itself may beknowable, not when it starts. That implies thatwe have no means to tell when the international-ization process is going to start, because it willdepend on state variables. This could raise theissue of the “born global” again since they claimthat the model has difficulties predicting whenthe internationalization process is going to start.However, they also claim that state variables candetermine this and we know that state variablesinclude knowledge and that knowledge is madeup of experiences.

In this line, Johanson and Vahlne (2009) re-state that it is experience (firm and partners’experience), and not the size of the firm, thatdefines the internationalization process since itsbeginning. This is the reason why we may saythat experience is critical in this model. In fact,firms sometimes follow-the-herd or follow-the-leader; firms learn through the imitation of otherorganizations–network partners. So, the rela-tionship development should also be included ina model of internationalization behavior. Firmscan use bridgehead partners to develop new re-lationships in the foreign market, and firms canlearn with the old and the new partners.

As firms internationalize, they are learningabout their markets (first-hand knowledge) andfrequently this occurs through their business net-works (second-hand knowledge). As firms inter-nationalize, they develop relationship and expe-rience and through both they acquire the neces-sary knowledge to internationalize.

METHODOLOGY

Unit of Analysis and Variables

Considering the problem that we wanted toaddress—how can relationships influence firms’internationalization process—relationships andexperience may be considered the independentvariable and the internationalization process thedependent one, as displayed in Figure 4.

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FIGURE 3. The Internationalization Process on the Basis of Experience and Relationships Devel-opment (Color Figure Available Online)

FIGURE 4. Internationalization and Relationships Development (Color Figure Available Online)

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According to Johanson and Vahlne, thepremises of the model consider that rationality islimited and that gaining access to a business net-work is necessary for the development of busi-ness. In fact, relationships offer a potential forlearning, trust-building, and commitment, whichare considered preconditions for international-ization. Consequently, we admit that market se-lection and market entry modes are influencedby the existing and prospective relationships ofa firm. Additionally, it is considered that the sumof factors hindering the flow of information fromand to the market, that is, the psychic distanceamong partners, is going to affect the type of re-lationships that firms are going to establish. Themain underlying idea is that psychic distancebetween the individuals who represent compa-nies is likely to impact the process of accessingrelevant networks.

Firms own both tangible and intangible re-sources, and they can also access other networkfirms’ resources through relationships. Thus, re-garding resources, one can say that a focal firmcan get access to resources it does not ownbut that belong to network members, throughrelationships.

With regard to experiences, one can say thatthey provide knowledge that can be controlledand shared by actors at play. Raises in thelevel of knowledge of one firm can positivelyor negatively impact trust building and com-mitment. Ideally, learning, trust-building, andcommitment would reinforce a firm’s positionin the network. Commitment with partnersmay increase a firm’s knowledge and thereforefacilitate a better recognition of businessopportunities. Consequently, the international-ization process may be fostered through partnercommitment. So it is important that there is aminimum (unknown) level of experience andrelationship commitment between partners forthe internationalization process to start.

Henceforward we may understand interna-tionalization as a virtuous circle. The interna-tionalization process depends on the networkposition of a firm. Relationships are bridgesto international opportunities. If a firm has astrong network position (connected with a lotof different partners who have different expe-riences and connections), it has indirect access

to partners’ knowledge. So, as a firm combinesits own knowledge from its own experiences(first-hand knowledge) with partners’ knowl-edge (second-hand knowledge),2 it will havethe necessary conditions to internationalize. Ac-cording to Johanson and Vahlne (1990, p. 20), in-ternationalization is the “process of developingnetworks of business relationships in other coun-tries through extension, penetration, and inte-gration.” Therefore, starting internationalizationcreates the necessary conditions for its develop-ment, in a self-sustaining and virtuous process.

The Case Study Approach

We aim to study how firms’ relationshipsmay influence their internationalization process,namely their international operation modes andtheir international geographic expansion. Whenissues under analysis involve a “how” type ofquestion, when the researcher has no controlover events, and when the focus is on a con-temporary phenomenon in a real context, Yin(2003) advises the use of case studies.

The proposed case study is based on Abyss& Habidecor (A&H), a Portuguese textile com-pany. In the past, the textiles sector was a clusterwhere Portugal had a competitive advantage onthe basis of low labor costs along with the WTO’srestrictions on textile exports from developingcountries. However, this scenario has changed:nowadays Portugal no longer holds such a com-petitive advantage, and Chinese textiles are in-vading the domestic market. Thus, A&H’s expe-rience in this sector, namely in what concerns itsinternationalization process, seemed to be veryinteresting. The company is not just deepeningits international presence, but it is able to exportto China.

According to Yin (2003), the use of manysources of evidence is advised to produce agood case study. Thus, we tried to collect pri-mary and secondary data from different sources.We conducted a semistructured interview withA&H’s senior manager in Portugal, at the com-pany’s factory and head office in Viseu, on Oc-tober 29, 2008. This data collection method waschosen in order to give the interviewee moreflexibility to respond and express his thoughts,allowing unanticipated themes to emerge, thus

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providing richer data than a less open frameworkwould permit. The interview session of about5 hours was audio recorded and later transcribed.The in-depth interview was complemented withtwo subsequent short telephone interviews onSeptember 7 and November 2, 2009.

Data were also collected through exami-nation of written documents (organizationaldocuments, press articles, websites, and pho-tographs). We also collect data through directobservation of behaviors and organizational ac-tivities. The nature of the data collected wasboth qualitative and quantitative. Content anal-ysis was used, as well as a data triangulationtechnique, as proposed by Yin (2003). In thefollowing section, we proceed to the case de-scription, based on data collected.

THE ABYSS & HABIDECOR CASESTUDY

The Beginning

In the late 1960s, the co-founders of A&Htook off to Belgium where, after a period ofstudies in textile engineering, they began theiractivity in the textile sector working in the Tour-nai tapestry industry. On returning to Portugal inthe mid 1970s, drawing on the experience andcontacts developed in Belgium, the two boyhoodfriends became independent sales agents for sev-eral Portuguese textile firms. Soon afterward,they started up their own bathroom floor matmanufacturing company: Abyss & Habidecor.Although the goal of A&H was, from its foun-dation, to serve the international market, in itsearly stage of development, products of the smallfirm based in Viseu were primarily sold in thedomestic market.

The participation in textiles trade fairsboosted the development of A&H’s network ofcontacts internationally, which generated newbusiness opportunities. Through preestablishedcontacts with foreign wholesalers and agents,A&H started its international activity via directexports, predominantly to Western Europe, mostnotably to Germany, France, Belgium, Switzer-land, the United Kingdom, Italy, and Spain.A&H produced in large volumes, at relativelylow cost per unit, to fulfill orders from whole-

salers to whom price was a determinant factor intheir buying decision.

The “strategy of selling cheap” allowed A&Hto rapidly increase its sales volume and grow.However, it left the company in a position ofdeep dependence and weak bargaining powerwith big intermediaries, which kept its profitmargins down. The state of dependence was fur-ther imbalanced after the WTO’s Agreement onTextiles and Clothing, which dealt a death blowto many Portuguese textile firms.

This adverse scenario led A&H to rethink itsbusiness strategy and invest in the developmentof a new, less price-sensitive, value proposition,which would ensure its long-term survival in themarket. Thus, in order to set itself apart fromdirect competition with the new players, A&Hredirected its product to high-end market seg-ments. Pursuing a niche strategy, A&H made aclear bet on increasing the level of differentiationof its market offering. They did this by invest-ing in product design, the use of quality materi-als, the aggregation of a service component, andextensive investment in its brand image, thusadding intangible value to it. The strategic re-orientation implied the repositioning of A&H’sbrand, which impelled the firm to seek new part-ners and develop new business relationships.

The U.S. Market: Agent and SalesSubsidiaries

At the end of the 1980s, A&H began explor-ing business opportunities in the United States byparticipating in a textiles fair in New York, whereit established contacts with an independent lo-cal sales agent, based in New Jersey, with ex-perience and business contacts in the East Coast(Figure 5). In close collaboration with the Amer-ican agent, A&H progressively started to exportits products to the U.S. market. Exports to theUnited States grew very slowly in the first 4 yearsbut began to pick up pace later. In 1992, A&H es-tablished a sales subsidiary in New Jersey, invit-ing the trusted local agent to run its U.S. branch.The U.S. subsidiary activity is currently focusedon managing the American accounts and onthe development of local business relationships.Presently, A&H exports to the United Statesstand for about 25% to 30% of its global sales.

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FIGURE 6. Summary of A&H Internationalization Activity in Spain

The Spanish Market: Direct Export andSales Subsidiaries (Shop-in-Shop)

A&H has since 2004, and at their initia-tive, established 22 corners at El Corte Inglesstores across Spain and Portugal (Figure 6).This happens within the context of a long-termrelationship—since the early 1980s—with ElCorte Ingles, Spain’s leading department storechain.

Based on this experience with El Corte Ingles,A&H developed similar partnerships with a re-tailer in Japan, another one in Belgium, and yetanother one in Switzerland.

The Chinese Experience: SalesSubsidiaries

China’s opening-up policies and economicreforms heralded fresh opportunities and chal-lenges to economic agents. In 2003, A&H es-tablished a relationship with a Chinese businessconsultant in Beijing through one of its Por-tuguese contacts (Figure 7). The local businessconsultant, who had experience in organizinginbound business missions to China involvingPortuguese entrepreneurs and official represen-tatives, has played a very important role in A&Hventure into China, acting as liaison with Chi-nese contacts and facilitator.

During his business trips to China, plannedout with the local consultant, the A&H Grouppresident established contacts with a householdproducts retail firm, which became a client. Em-bracing a business opportunity detected by theclient, A&H opened its first store in China inDecember 2005. Since then, that local partner-

ship flourished in the form of 11 additional A&Hbrand stores in China. The local partner providesthe space and service and manages the stores,while A&H supplies the products and invests inmerchandising equipment and promotional ac-tivities.

Regarding the Chinese market, A&H under-stands that it is essential to gain the trust ofpartners in order to develop successful businessrelationships. Personal contacts are essential toget to know and build trust with business part-ners. Obviously, partner selection is also crucialand the company acknowledges that. Also, thequality of their branded products and excellentdistribution systems is fundamental.

We can say that the relationship with theChinese partner has reached a stable stage. To-gether, they have 12 A&H stores in China. Evenso, A&H believes that the Chinese market hasmuch more potential. In 2008, the Chinese mar-ket represented only 5% of A&H’s sales andA&H is currently working together with the Chi-nese partner on increasing the sales. The firmis also committed to finding new opportunitiesin smaller but attractive Chinese cities, wherethe middle- and upper-middle classes are ex-panding. The firm believes that its knowledgeof the Chinese market, along with its experi-ence and the relationships established, shouldprovide a good ground from which to launch asales subsidiary. China is regarded as a flourish-ing country for A&H products. However, that isnot true on an outsourcing point of view, fromwhich China does not look so appealing. In fact,A&H believes the expertise on which they basethe quality of their products is only available in

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FIG

UR

E7.

Sum

mar

yof

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HIn

tern

atio

naliz

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ityin

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na

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their headquarters. On another hand, Portugueseproducts or brands seem not to have a majordisadvantage in the Chinese market, comparedwith other products originated in countries thatmay benefit from a better country-of-origin ef-fect. The important thing here is to have openeda store in one major city like Paris, New York, orLondon, because Chinese clients get inspirationin reference cities.

DISCUSSION AND FINDINGS

In this article, we addressed the fundamentalquestion of how relations can influence the inter-nationalization process, using a Portuguese caseto illustrate the point. We focus our analysis onthe Uppsala model (Johanson & Vahlne, 1977,1990, 1993, 2003, 2006, 2009) and the networkapproach (Hadley & Wilson, 2003; Johanson &Mattsson, 1988; Johanson & Vahlne, 2009).

We were able to understand (Table 1) that afirm starts exporting to psychically near markets(Europe), by means of its experiential knowl-edge (first-hand knowledge), and using exportsonly, a very simple entry mode. However, as timegoes by, and experience increases, it is time tomove forward to locations where firm has no ex-periential knowledge yet, in which case it usessecond-hand knowledge. To internationalize tothe United States, A&H went first to trade fairsand there established contacts. Through thosecontacts, it got second-hand knowledge (usingpartners’ experience) to get information aboutopportunities in more distant markets. To in-ternationalize to China, the firm established arelationship with a Chinese business consultantin Beijing using one of its Portuguese links. Itused relationships to begin exporting and moveafterward to a sales subsidiaries approach.

As internationalization evolves, A&H devel-ops trust in their partners., and when this hap-pens, the firm gathers the conditions to move tomore complex modes of internationalization.

The International GeographicalExpansion of A&H

A&H has mainly gone through three stages inits internationalization process (Figure 8).

First, the firm was just producing and sellingin the domestic market even though with a clearintention of exporting. The firm started export-ing 3 years after its foundation and did it to geo-graphically and psychically closer countries, inEurope. Afterward, it expanded its internationalactivities to other countries, namely the UnitedStates and China, which are far geographicallyand very far psychically.

The Entry Modes Used by A&H

With regard to the foreign operations modesused, A&H started with direct export and con-tinued to do so during the second internation-alization stage. In the later stage of its inter-nationalization process, with a reduction in theperception of uncertainty, with trust built in localpartners and with an increase in the ability to de-tecting opportunities, the firm also started to usesales subsidiaries. Still, it did it simultaneouslywith the export modes.

In the third stage, some intermediaries wereeliminated. The firm got better and quicker in-formation from the market, and this fostered itsability to respond to market trends. The interna-tionalization process was gradual and progres-sive, not just geographically but also in termsof the entry mode used. In Table 2, we combineentry modes and markets selected.

Our research extends the internationalizationUppsala theory by combining it with the net-work approach. In the original Uppsala model,Johanson and Vahlne (1977) posit that the mainobstacle to the internationalization of a firm isthe lack of knowledge about the foreign mar-ket. This means that firms would only be ableto obtain that knowledge through their own ex-perience of operations in foreign markets (i.e.,learning-by-doing). This was the reason why ac-cording to the first version of the Uppsala modelinternationalization had to be done progressivelyand gradually. In short, the experiential knowl-edge was considered as a key driver to inter-nationalization. Consistent with that view, theyanalyzed firm starts as a domestic firm, andthen it gets some exports. It internationalizesto neighboring countries using its experientialknowledge.

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TAB

LE1.

Syn

thes

isof

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ss&

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tern

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port

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1990

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Costa e Silva et al. 155

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156 JOURNAL OF GLOBAL MARKETING

TAB

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FIGURE 9. The Influence of Knowledge on the Internationalization Process According to the Upp-sala Model (Original and Revised; Color Figure Available Online)

According to the network approach, firms usetheir partners as a knowledge source. This is con-sidered as second-hand knowledge that resultsfrom partners’ experience. Yet consistent withthis approach, the firm uses this kind of knowl-edge to expand further, into places where it doesnot have experiential knowledge (Figure 9).

A&H used its own experience to internation-alize to Europe, namely at first place to Spain (amarket considered closer). When it detected anopportunity in more distant markets (geographi-cally and psychically), it did not stopped becauseit did not have enough knowledge. For example,in China, A&H established a relationship witha local business consultant though a contact inPortugal.

It used the contact’s knowledge to meet a Chi-nese consultant and it used Chinese consultant’sknowledge to internationalize there. So, whenit had had knowledge through its own experi-ence A&H used it; when it did not had first-hand

knowledge (from a previous experience), it usedsecond-hand knowledge (through partner’s ex-perience)

In line with the Uppsala model, in all mar-kets A&H begins with exports (a simple en-try mode), and in line with the revisited Up-psala model, as internationalization evolves itlearns, creates more opportunities, and—veryimportant—it evolves in a trust-building processwith its partners. In doing it, it obtains second-hand knowledge. So it passes to the next stagewith more complex international modes.

CONCLUSION

This case encompasses both theoretical andmanagerial findings. In what concerns theoret-ical ones, we can argue that first-hand knowl-edge as the first source of knowledge is usedwhen going international. Frequently this means

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going to psychically closer markets. Second,second-hand knowledge (resulting from part-ners’ experience) as a source of internationalknowledge is used in case of a lack of first-hand knowledge. In a recent work, Bruneel et al.(2010) argue, following the same line, that “in-terorganizational learning” (i.e., from where oursecond-hand knowledge comes from) is an im-portant mechanism through which business rela-tionships influence internationalization process.Frequently, this type of knowledge encouragesthe decision to move to more distant markets.Third, internationalization can be regarded asa snowball process due to the internationaliza-tion process itself that allows the development ofconditions: learning, opportunity creation, andtrust-building. So, it is a self-sustaining processin stages.

From a managerial standpoint, our article alsohighlights the strategic importance of networksas sources of knowledge. These sources allow afirm to gain foreign market access and, in time, togain international capabilities through and withthe partners.

Nonetheless, this study has some limitations,thereby providing avenues for future research.First, it is based on just one case, raising thequestion of whether our results would hold inother firms or reflect an idiosyncratic situation.We believe that further studies of more firmsin different sectors and countries would help togeneralize our findings.

Factors such as partners’ location (nationaland foreign), the specific type of business rela-tion (agent/client/distributor, formal/informal),personal relationships, and the relative absorp-tive firm capacity (Cohen & Levinthal, 1990)could also be introduced in future research.

The research design also does not allow fortesting the different roles played by the en-trepreneur’s knowledge and the firm’s knowl-edge. Indeed, we treat in our study all previousknowledge as the firm’s knowledge and we donot clarify the situation in which the knowledgeis transferred from the entrepreneur to the firm.In fact, there might be differences between theknowledge as experienced by the firm and theentrepreneur. If the knowledge is experiencedby the entrepreneur, there is no guarantee thatthe firm absorbs it throughout and entirely. So,

other studies may focus on this query in thefuture.

While beyond the scope of the current study,future research should examine the conditionsunder which second-hand knowledge (result-ing from interorganizational learning) is inter-preted and fully absorbed by the firm. Indeed,knowledge acquired from partners results fromtheir experience and, according to Baum, Li, andUsher (2000), it might not be directly applicableto the focal firm. It requires interpretation and, asin any case where interpretation is needed, per-sonal values and perceptions would have to beused, which can bias the meaning of information.

Generally speaking, the mechanism of afirm’s internationalization and learning is a veryrich field for research and there will always behints to follow and new suggestions to incorpo-rate. With this article we tried to contribute to abetter understanding of how learning takes placewithin networks and how that can be used tofoster internationalization (Cumming, Sapienza,Siegel, & Wright, 2009; Meyer, 2007; Mc-Dougall & Oviatt, 2005; Simonin, 2004; Zahra,2005).

NOTES

1. In 1993, Johanson and Vahlne had already pre-sented three exceptions to this pattern.

2. In the sense used by Fricker (2006).

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