foreign-market expansion in newly-emerging markets

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Foreign-Market Expansion inNewly-Emerging MarketsZsuzsanna Vinczea Turku School of Economics and BusinessAdministration , Rehtorinpellonkatu 3, FIN-20500,Turku, FinlandPublished online: 23 Sep 2008.

To cite this article: Zsuzsanna Vincze (2004) Foreign-Market Expansion in Newly-Emerging Markets, Journal of East-West Business, 9:3-4, 107-135, DOI: 10.1300/J097v09n03_06

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Foreign-Market Expansionin Newly-Emerging Markets:

Finnish Companies in the Visegrád Countries–Results of a Grounded Theory Analysis

Zsuzsanna Vincze

ABSTRACT. The aim of this research project was to further understandforeign-market entry and expansion in two medium-sized Finnish manufac-turing companies (A and B) during the time period 1990-2000, in the Czechand Slovak Republics, Hungary and Poland. Six entries and further ex-pansions comprise the six cases analysed here.

My objective was to find out how the managers made and imple-mented their decisions to achieve the desired end–to sustain the growthof the company. I needed to discover more about the mechanisms in or-der to understand better the ongoing process of foreign-market expansion.

My preliminary understanding was that the business relationships withlocal intermediaries significantly influenced operations in the CEE mar-kets. Hence, both foreign-market expansions of the Finnish companiesand business-relationship-development processes were in focus in thestudy. Given this double focus, I chose as my unit of analysis so-calledbridgehead relationships.

I searched for answers to questions concerning how the differencesbetween the six cases arose. Why did they take different courses of ac-tion in similar external environments? How and why did the two Finnishcompanies make different choices? Why were the successes in one coun-try not replicated in another?

Zsuzsanna Vincze is affiliated with the Turku School of Economics and BusinessAdministration, Rehtorinpellonkatu 3, FIN-20500 Turku, Finland (E-mail: [email protected]).

Journal of East-West Business, Vol. 9(3/4) 2003http://www.haworthpress.com/web/JEB

2003 by The Haworth Press, Inc. All rights reserved.Digital Object Identifier: 10.1300/J097v09n03_06 107

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Inadequacies in the explanations of the foreign-market-expansion pro-cess offered within the international-business-research tradition sug-gested the relevance of a theory-building rather than a theory-testingresearch project. Accordingly, after the introduction, the first section ofthe article describes the theoretical departure of the research project andthe second section introduces the applied methodology in detail. Thethird section discusses the results, including the theoretical frameworkdeveloped through the grounded-theory analysis of the cases. The finalsection puts forward some managerial implications and future researchavenues in the light of the results of the project. [Article copies availablefor a fee from The Haworth Document Delivery Service: 1-800-HAWORTH.E-mail address: <[email protected]> Website: <http://www.HaworthPress.com> © 2003 by The Haworth Press, Inc. All rights reserved.]

KEYWORDS. Foreign market expansion, business relationship development,grounded-theory approach, case-based theory

INTRODUCTION

There are many companies that have been operating internationallyfor a long time, and many others are currently making important for-eign-market-entry decisions. Undoubtedly, there will be always com-panies entering markets and even entire industries moving from onemarket to another (cf. the “Flying geese pattern” of Akamatsu 1962,Kojima 2000, Ozawa 2002, and the Product life-cycle theory of Vernon1966, 1979). Entering a new market is one of the firm’s most importantstrategic decisions and requires major commitment of financial andmanagerial resources (Mitra and Golder 2002). Similarly, when it comesto further growth and expansion on a foreign market, equally importantdecisions are made.

With regard to the Visegrád countries, the development of the transitionprocess represented major political, institutional and economic changesduring the last decade (the 1990s). In contrast, organisational and envi-ronmental changes in developed markets were described as more or lessevolutionary and adaptive processes (Haveman 1992, Liuhto 1998).There are calls from both academics and practitioners to evaluate thesuitability of views on evolutionary adaptation (e.g., Meyer andMunchen 1999). In addition, even if two geographically-close countries(such as the Czech Republic and Hungary) have similar operating con-

108 JOURNAL OF EAST-WEST BUSINESS

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ditions and government policies at one point in time, these do not neces-sarily change in tandem over time (Mascarenhas 1992, Nasierowsky1996). Furthermore, customers’ responses to or behaviour during thetransitional changes may vary substantially within the region. The entryand exit of firms, related to a Visegrád country’s infrastructure,1 are of-ten controlled at the national-government level. In such situations, theremight be a need to involve local partners in the expansion strategy.

The research problem concerns how companies expand their foreignoperations in emerging markets (i.e., in the Visegrád countries in thisstudy). The epistemological assumption here is that it is not enough tostudy the phenomenon of FME on the level of the individual companyand the relationship level should be included in the investigation. Onthese levels, both behavioural and economic elements should be consid-ered equally important. Foreign-market expansion is the primary pro-cess (Figure 1). The relationship development is–although necessary–thesecondary process (Figure 1). In my opinion, the two processes are in-terdependent in such a way that the business relationships may be an ef-ficient tool for pursuing foreign-market expansion.

THEORETICAL DEPARTURE

The purpose of reviewing the existing literature on this subject mat-ter would be to extract critically what could be considered alreadyknown about what medium-sized companies do in order to expand inany foreign markets. However, it should be remembered that this studystarted with empirical data collection. I tentatively started with loosely-coupled assumptions that could not be considered solid hypotheses de-duced from any theoretical framework.

Within the research tradition of IB (International Business), the NordicSchool (Johanson and Vahlne 1977, 1990, Welch and Luostarinen 1988,with stages models and/or a network perspective Johanson andMattsson 1988) has attempted to explain the process of internationalisa-tion even for smaller-sized companies, i.e., how companies increasetheir foreign-market involvement. The theoretical frameworks devel-oped in the Nordic School have their background in the behavioural andsocial sciences. Other theoretical contributions within the tradition arerooted in economics and focus on why companies–especially large ones–operate internationally and why they apply certain forms of governancefor those operations.

Zsuzsanna Vincze 109

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The stages models with a process perspective (a branch of the NordicSchool) describe the process in terms of increased dependence on ex-port, which is in a cyclic relation to growing commitment. It seems to beagreed by supporters of the ‘Uppsala’ stages model (Johanson andVahlne 1990) that the company–from being unwilling to export tobeing determined–becomes an experienced and highly-committed mul-tinational. According to this establishment-chain model of internation-alisation, the company first chooses the market which is closest inbusiness distance, and by acquiring new experiential knowledge becomesinvolved in more risky and higher-investment modes of operation.

By that time, the company may enter markets at a greater distance.The assumption is that uncertainty avoidance is essential to foreign-market involvement (cf. Carlsson 1966) At the same time, acquiringexperiential knowledge is assumed to be the basic social process in pur-suing FME (e.g., Eriksson and Chetty 1998).

The concept of ‘psychic distance’ (Wiedersheim-Paul, 1972) has typi-cally been suggested to explain the sequence of market entry, and barri-ers to information flow have been considered key determinant. Vahlneand Wiedersheim-Paul (1973) first discussed the concept of psychicdistance,2 which is a multivariate concept denoting factors that inhibittrade and information flow between countries in a wide sense. Severalindicators of psychic distance were used, such as the level of economicdevelopment and how this varies between countries, the level of educa-tion and how it differs, and the differences in the language used in busi-ness as well as in everyday life. It was argued that psychic distancedisturbs the flow of information and knowledge between a firm and itsmarket, and thereby invokes risk and results in higher costs of doingbusiness abroad. Luostarinen and Welch (1988) explained the shift oflocation mainly in terms of internal driving forces.3 At any rate, uncer-tainty avoidance was ranked first, which requires knowledge creationalong with foreign operations. Involvement in a foreign market is a stepinto the unknown. According to this understanding, supporters of stagesmodels see firms as usually reluctant to initiate export.

According to the network approach to internationalisation, interconnectedexchange relationships evolve in a dynamic, less structured manner, andthey are the key drivers of international involvement. The increased mu-tual knowledge and trust leads to greater commitment between interna-tional market actors. The process is not solely dependent on thebehaviour of the focal firm (cf. the actors-resources-actions (ARA)model, Håkansson and Johanson 1992).


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Researchers with a network view of internationalisation and interna-tional growth explicitly discuss the advantages of relationships–comple-mentary and competitive–with other firms. The economic, technologicaland institutional factors relate to change. The changes are determinedby the market positions that the firms create, possess and try to defend(Johanson & Mattsson 1988). The market position is defined by the roleof firm in the network, by its importance in the network and by thestrength of the its relationships with other firms. Internationalisation isalso determined according to the position of the firm within the interna-tional value chain (Holmlund and Kock 1998). Defending its position inthe chain may be reason enough for a firm to become an exporter. It isalso possible that network contacts push it to operate in a foreign market(Holmlund and Kock 1988, Majkgård and Sharma 1998).

The argument behind the network theory is (Johanson and Mattsson1988) that through networking, the company increases mutual knowl-edge and trust, which, in turn, leads to competitive advantage. Thus, it isable to extend its external environment, which may include foreign mar-kets. Network factors influence the perception of barriers to foreign-mar-ket involvement, including business goals, attitude or commitment4 toFME as a business strategy, and competitive advantage.

Some loss of independence and revenue sharing is inherent in net-working. Nevertheless, it is assumed that inter-firm co-operation en-ables firm to position themselves in a foreign market more quickly. Thenecessary market expertise is earned with the help of others. Conse-quently, the time required may become shorter. The company can gaincomplementary strength from locals (Johanson and Mattsson 1988) inthe areas in which it lacks resources or suffers from foreignness, with-out time being lost and undue risks being taken. The network theorydoes not reject the psychic-distance concept and does not challenge theincremental nature of internationalisation, although it does suggest thatthe whole process is much more complex and less structured than thestages-model simplified view. Support for the sequential order of FME(foreign market expansion) is found in the envisioned cumulative na-ture of network processes, and in internationalisation being seen as a setof learning opportunities (Axelsson and Johanson 1992, Eriksson et al.1997). Admittedly, timing is difficult to incorporate into the explana-tions (Johanson and Mattsson 1988).

As the interest of this study lies equally in behavioural and social pro-cesses, the theoretical departure is strongly based on the Nordic School.Departure in this case means that I am attempting to challenge some ofthe key elements of the Nordic School because, in my opinion, they are


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either inappropriate or irrelevant in the rapidly globalising business en-vironment, and particularly in the turbulent Visegrád countries. I feelthat these frameworks might be in danger of withholding relevant evi-dence or understanding, and formulating the relationships between con-cepts inadequately.

The models in question propose an incremental-stages approach–al-though the precise number of stages is contested.5 They generally sup-port the notion of psychic distance, and little emphasis is placed on thedevelopment of alternative market-entry modes. In the spirit of theseframeworks, one could see foreign-market expansion as a goal-maxi-mising and uncertainty-minimising process pursued by managers mak-ing rational decisions. One could become skeptical as to whether thesecome together in reality. International business scholars contributing tothe Nordic School appear to accumulate evidence. Although some ofthat evidence clearly points to weaknesses in the explanatory and pre-diction capacity of these theories (McDougall et al. 1994, Coviello andMunro 1997, Madsen and Servais 1997, Pedersen and Myles 1999), itmight seem rather difficult to abandon them.

The aim of this study is to find a fresh way to analyse a well-studiedresearch area. For the data collection, I applied the characterisation-of-operation modes suggested by Young et al. (1989), together with theDOSch model (Dwyer, Schurr and Oh 1987). In conducting the empiri-cal study, I did not test any of the stages models discussed here, and thestudy pursued grounded theory development from the case studies.

THE METHODOLOGICAL CHOICES

The empirical study was set up as a series of longitudinal multiple-case studies (i.e., during 10 years of operations in the Visegrád mar-kets). The main source of data was retrospective and real-time interviews–on both sides of the actual bridgehead relationships.

The interrelated processes, foreign-market expansion and the devel-opment of bridgehead relationships, needed to be explained. Processesare generally not easy to observe, which justified the use of multiplesources of data. I selected medium-sized manufacturing companies thatwere entering the newly-emerging markets early. The cases could beconsidered critical in respect of being pioneers in the Visegrád coun-tries in the early nineties. My choice of critical cases was guided by theassumption that processes become more transparent. In addition, I pur-


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posefully went for comparative insight because I assumed I would findpolarisation among the cases in respect of performance.

The companies’ expansion on the Visegrád markets provided the re-search content. I had to select from the mass of qualities those that threwlight on that content.

The variety of variables that affect foreign-market expansion had tobe incorporated. Grounded-theory methodology utilises the breadth anddepth of the data, and hence incorporates a variety and range of vari-ables.

GT was developed for generating theory when little is already known,or for providing fresh insight into existing knowledge (Glaser 1992). Itis used in seeking theoretical explanations of data, based on the dataitself. GT analysis develops through specific coding steps (Glaser andStrauss 1967, Strauss and Corbin 1990, Glaser 1992, Partington 2000),which progress from raw data to a higher abstraction level. The analysisof the cases started with hundreds of pages of transcribed data (Fig-ure 1). It continued with the case descriptions and the data reduction(i.e., within the case coding the search for key words or concepts), andthe cross-case analysis. One of the points is that theory building alsoseemed to require rich descriptions, the richness that comes from anec-dotes.

Nevertheless, grounded theory analysis implies the systematic com-parison of small units of data, which then enable the gradual construc-tion of a system of categories (Figure 1). The extracted data itselffacilitated elaboration on the properties of the emergent category sys-tems and the identification of a small number of core categories. I ar-rived at categories referring to the internal (cf. Organism) or external(cf. Stimulus) context, and to deliberate or emergent consequences(i.e., content in terms of either stimulus or organisms). The bulk of thecategories, however, referred to actions (cf. Responses) connectingthe focus of the company with its external and internal environments.Concurrently, in building up the theory, I had to find all the three in or-der to see the actual mechanisms clearly. Mechanisms became the small-est units of the analysis. They refer to the inter-relation of action andcontext, as well as of action and content. The context (i.e., conditions)forced the action and, at the same time, the actions shaped the context.A similar argument should apply to the action and content relation.Finding the mechanisms enabled me to trace the positive and negativefeedback loops.

How was this done? The aim in the interview-based causal theorybuilding was to build up the theory while acknowledging the lack of ab-


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SUBSTANTIVE THEORY

Content

processesSense-making

Context (I) Context (E)

DATA

Case descriptions Data reduction, open coding

PreliminaryCategoriesBA

Category reduction

65B165A

24B24A

Selective coding, iteration for mechanisms

Core forces and processes

Category reduction, Axial coding

FIGURE 1. The Data-Analysis and Theory-Development Process According toGrounded-Theory Methodology

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solute causal certainty. I tried to explain certain events. Thus, I searchedfor the causal mechanism that connected the two events. I understoodthat the cause itself was not enough and that I needed the whole causalmechanism.

Given that I was aiming at scientific representation, how did I incor-porate, appropriate purposefully, collected evidence, systematic analy-sis and synthesis of the facts that both made sense and were true to theevidence? How was I able to capture more about the diversity of com-petitive situations, the range of actual strategy choices, and the extent towhich important parameters could not be fixed but were continually influx? How did I identify the relevant variables and the questions that theuser of the framework had to answer in order to develop conclusions tai-lored to a particular industry and company?

To achieve all of these aims, I incorporated the meta-theoreticalframework proposed by Pettigrew (1990) into the last phase of the GTanalysis. One major adjustment I made during the stage of theorybuilding was to apply the ‘content-context-process’ framework, i.e.,the contextual-mode of analysis. This became essential in sorting outthe theoretical elements meaningfully and coherently (see the next sec-tion). I believe that GT and the contextualist mode fit together verywell. The theory was able to link diverse facts in a coherent, useful andpragmatic way, and it became modifiable. The emerging main categories(sense-making processes and forces) ensured the tight integration of allthe theoretical concepts into a coherent whole, firmly rooted in the origi-nal evidence. Still, the resulting substantive theory is rather dense andmoderate in simplicity.

Discussion of the Results

Conceivably, the conditional matrix of grounded-theory methodol-ogy comes close to analysis in the contextualist mode (Pettigrew 1990).The main elements of the contextualist mode of investigation–context,content and processes–became the starting structure for the theory build-ing. Figure 2 summarises the main structural elements of the theory thatresulted from the grounded-theory analysis of the cases.

Two context categories became clear, which signified the internaland external forces. The external forces (Figure 2) came from the envi-ronment, with respect to the conditions that fall outside of the control ofthe operating cases. The four most relevant properties (Table 1) werethe progress of transition, the requirements of the customers, competi-tion barriers and cultural differences. Internal forces (Figure 2) referred


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to the internal conditions the cases created, and were within their con-trol. Here, I found the properties (Table 1) most relevant; leadership, or-ganisational culture, organisational structure and competencies.

The body of the framework signified the processes (Figure 2), whichare grouped into three large sense-making processes. The relevant prop-erties (Table 1) of the sense-making process of integration were gaininginitial experience, establishing/developing bridgehead relationships,changing structure and controlling. The properties of the adaptationprocess (Table 1) were gathering market information, relating to thecustomer, fighting competition and positioning.

Properties (Table 1) such as timing, allocating resources, guiding withrules and emergent strategies were the most meaningful for the strat-egy-in-making process.

The focus category (Figure 2) referred to the content of the ten-yearoperation of the six case relationships. First, the focus was on growthand expansion in the Visegrád markets. However, it was logical to seeother consequences–both deliberate and emergent–as properties of thiscategory. The category thus included properties (Table 1) such as or-ganisational growth, expectations, establishing the business idea in anew market, learning and integrating the local partners.

I identified 24 properties, processes and forces in the cases of bothcompanies A and B. In the following, the italic script signifies the prop-


Context(i.e., forces)Internal conditions

Context(i.e., forces)External condition

Strategy-in-Making, Sense-making

Mechanisms PROCESSES

Content, Focus, Consequence

Integration, Sense-making Sense-makingAdaptation,

FIGURE 2. Forces and Mechanisms of Foreign-Market Expansion

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erties that were extracted through grounded-theory analysis of the sixcases. The processes and forces, which are almost the same in the twogroups of cases, gave a reasonably deep understanding of the ten-yearexpansion of each case. The properties made it possible to explain someof the crucial differences that occurred among the cases.

I compared the theory developed (i.e., findings) from the empiricaldata to the findings of strategic-management and organisational-changeresearch in order to create more conceptual strength. A summary of thesecomparisons follows in the form of a discussion of the processes andforces from each building block of the theory, and consideration of the re-lations among them.

The right-hand corner of the triangle in Figure 2 signifies the envi-ronment, with respect to the forces in the business environment that arerelevant to the operating companies. In other words, the right-hand cor-ner of the figure represents the external conditions. The focus of this


TABLE 1. The Properties of the Six Categories Extracted from Cases 1, 2 and 3(i.e., Company A’s Cases) and from Cases 4, 5 and 6 (i.e., Company B’s Cases)

InternalforcesIC

IntegrationSMI

Strategy-in-makingSMS

AdaptationSMA

ExternalforcesEC

Focus,ConsequencesF

PropertiesIC/1-4

PropertiesSMI/1-4

PropertiesSMS/1-5

PropertiesSMA/1-4

PropertiesEC/1-4

PropertiesF/1-3

LeadershipIC-1

Gaining initialexperienceSMI-1

Guiding withrulesSMS-3

GatheringmarketinformationSMA-1

Progress oftransitionEC-1

OrganisationalgrowthF-1

OrganisationalcultureIC-2

Establishing/developingbridgeheadrelationshipSMI-2

TimingSMS-1

Relating tocustomersSMA-2

Requirementsof thecustomersEC-2

ExpectationsF-2

OrganisationalstructureIC-3

ChangingstructureSMI-3

AllocatingresourcesSMS-2

Fighting com-petitionSMA-3

CompetitionBarriersEC-3

Implementingthe businessideaF-3

Competence(s)IC-4

ControllingSMI-4

EmergentstrategySMS-4Only A!

PositioningSMA-4

CulturaldifferencesEC-4

LearningF-4

Integratingthe partnersF-5Only B!

Note: At this point, the table should be read column by column: more complex horizontal and verticalconnections are discussed in the text.

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study was on the bridgehead relationships that operate in the Visegrádmarkets. These markets are transition economies, and at the same timeare also considered emerging markets. The domestic business environ-ment had to be taken into consideration, too. It was my understandingthat foreign-market expansion was part of the overall growth strategy ofthe companies. Indeed, the respondents gave their accounts of the forcesin the domestic market. Thus, together these environments created forcesto which the companies had to adapt. Here is an example of how oneFinnish manager described the forces in the two environments, the do-mestic one compared to the company’s new markets during the early1990s.

BF97/01“When the network has been built up, it’s there. In Fin-land, just a year ago our networks were ready. There was a meet-ing about a year ago when it was said that the networks were moreor less ready in our country. After the Second World War the statesupported the building. But then there are places and periods forbuilding up new lines. This period of time is just now in the CEEcountries, because they are renewing everything . . . We’re build-ing systems to last for decades.”

As I identified through the analysis, the progress of transition had amajor effect on the moves of the customers and competitors. Thus, Ifully agree with Meyer and Munchen (1999) that the progress of transi-tion is a key force in operating on those markets. Nevertheless, custom-ers and competitors always create the most important external forces fora profit-oriented company.

One of the origins of differences between the country operations wasthe nature of the local rivalry (cf. Porter 1990), including incoming for-eign competitors. The most prominent factor preventing substitution wasuncertainty (Miller 1992, Noda and Collis 2001) about a strategy’sprofitability or the industry’s attractiveness. This finding referred mostlyto the foreign competitors that approached these markets later thanCompanies A and B did. The limits on imitation resulted from the char-acteristics of the resources or commitments underpinning the competi-tive advantage, which could explain why the local competitors did notemerge immediately. Resources were not instantly acquirable throughthe strategic factor market owing to “time compression diseconomies”and “temporal interconnectedness” in resource accumulation (Noda andCollis 2001). These types of competition barriers prevented imitationand substitution. If competition barriers were in place in one market, but


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not in the same way in another, then the competitors worked differently.Thus, differences between operations were enforced. Since the mid-1990s, however, the sustainability conditions became relatively loose inthe relevant industries in the Visegrád countries. Key resources– customers–were limited in number: they could readily be acquired if the firm waswilling to lower prices, be local, and adapt.

Indeed, competition on prices became a daily reality for Com-panies A and B in the Czech Republic and Poland. In order to showhow the process of FME differently unfolded, one could compare thefield of competition and the move of customers in Hungary and theother Visegrád countries. In the case of Company B, the new foreignowners were still willing to pay a higher price for reliable quality at theend of the 1990s. For Company A in Hungary in the late nineties, the sit-uation was that the customers demanded larger geographic coverage.They paid the price when the product was installed at their site. Com-pany A could supply from its high-standard new factory–built in Hun-gary in 1998–and had a reliable partner in the installation. It thus builtup strong buyer-seller relationships in Hungary and actually placed it-self in a favourable position in terms of competition barriers.

The bottom left-hand corner of Figure 2 refers to internal forces, whichinclude the people (i.e., leaders, executive managers and workers) in theorganisation. What sort of structure does the organisation apply in orderto make and implement decisions, given that the goal is to createwealth? The bridgehead relationships had to be included in the discus-sion on the internal forces, rather than restricting this category to theFinnish companies A and B. The counterparts in the Visegrád marketsadded significantly to the competencies in that they carried on the busi-ness as executives and workers. Thus, they became part of the organisa-tion, i.e., added to the structure.

The differences I saw were quite consistent with entrepreneurial andstrategic management behaviour, as discussed in the literature (i.e.,Julien et al. 1997). The mechanisms differed fairly substantially betweenthe two Finnish companies, since Company A realised the expansion moreas an entrepreneurial process, while for Company B, it was a strategic-management process. One important force, which determined thevariations between the two groups of cases, was entrepreneurial ver-sus managerial behaviour.

In terms of organisational culture, the argument is that differentstimuli from the external or internal environment are effective only ifperceived by the leaders (cf. Partington 2000, and Astrup 2000). Or-ganisational culture is the kind of shared interpretation of reality that in-


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visibly acts on non-reflecting matters of fact. Cultural codes graduallydevelop, structuring and shaping perceptions of organisational reality.Organisational culture determines what is important for the company,what is valued as positive or negative, how the company’s own past andenvironment is judged, and what people think about each other. There isa role to be played by companies’ historical development and by paral-lel evolving organisational culture (Holzmuller and Kasper 1991).

There were two properties that characterised organisational structure–one was the processual property of integration (see later), and the otherthe structural property of the internal force. Organisational structureamong internal forces refers to issues such as top management control-ling the means of doing business. In other words, it has the monopoly onresource allocation. Middle-level managers, often locals who were thestrategy activists, needed to win the confidence of the senior managers.Furthermore, the relationships had to achieve a delicate balance in re-spect of diversity of perspective and unity of purpose. Only unity leads todogma, and only diversity leads to fragmentation of resources (Hamel1996). In both groups of cases, the external environment forced moreunification of purpose.

The bridgehead relations became influential internal forces. The rea-son why these were visible among the internal forces was because thejoint interests and shared goals came into the picture in the case of Com-pany A. As far as Company B was concerned, the locals were integrated(see also the focus category later) in such a way that the corporate val-ues strongly applied to them.

One of the key forces comprised the competencies as defined by theproduct/production quality, capacity and processes–both productionand sales/marketing.

AF97/10 “This is our strategy to sell to companies who need morethan one/of the product/. . . who need the same type of/product/several times.”

AF97/11 “Design and manufacture are here in Finland. Usually, localstaff do the installation for us. The customers give us old manuals orbasic instructions; they show us the logo they are considering. Wedo the technical design, maybe also the visual design and the pro-duction.”

Understandably, the competencies of the two Finnish companieschanged during the ten-year period. In particular, their sales/marketing


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competence developed-partially by integrating the local partners.Sales/marketing competencies were a competitive weapon in the caseof the analysed network businesses (i.e., customers build networkswith the products bought from Companies A and B). The fixed-costpart was more or less constant and the companies thus had to sell moreto realise earnings.

How could the triangle (Figure 2) be further filled with meanings andexplanations specific to the data? These were responses that were con-nected to the forces (i.e., stimulus and organism) discussed above, whichI was able to group together to form three large sense-making processes.The body of the triangle refers to the sense-making responses that thecompanies applied.

Sense-making in organisational life (Weick 1983) is to give meaningto perceptions and includes the ability to reach intelligent conclusions.Most managerial situations feature gaps, discontinuities and loose tiesamong people and events, indeterminacy, and uncertainties (Weick 1983).The managers bridge these gaps, think themselves through them–tiethem together cognitively and in reality. The linkages between presump-tions, actions, consequences and meanings (Weick 1983) create the causalloops.

One of the sense-making processes was integration. When somethingis integrated into something else, the two together posses a unified qual-ity in their combination. I could see the integration process from twomain angles. Firstly, the Finnish companies (A and B) with their partnercompanies functioned as unified wholes, or incorporated the new localemployees into the larger unit (the Finnish company). Here, one assumesthat what is united should act in concert.

AH98/12 “Today, our relationships with customers, more and more,are based on tender applications. These are not only for one coun-try, but also for larger areas including several countries in EasternEurope. We have good chances of winning these tenders, as doesCompany A. Then, the local customers in each country are used tohaving a monopoly. They are still key players, so it is important toCompany A and to us.”

Integration also means an end to segregation and equal membershipin the organisation. This referred more to the second angle, namely theintegration of the new businesses into the old ones. Equal membership,or the need to bring into equal membership–actual integration–was cer-tainly dictated by the economic importance of the new businesses. In-


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ternal re-organisation prevailed, both in the Finnish headquarters and inthe relationship dyads (i.e., structural changes referred to other than justentry-mode change).

AP98/11 “. . . Of course, I’ve been trying to co-operate with ourcolleagues in Finland, especially recently when there was somemajor organisational changes being implemented in our company.That’s been the issue in the last couple of months. There were rev-olutionary changes in the company compared with earlier times.So, now is the time for us to be closer and to co-operate, so we canincrease the efficiency of our activities.”

Thus, given these two angles, integration, in this study, refers to thecompanies’ efforts to achieve correspondence and harmony between theirobjectives and their internal environment.

The proper meaning of the initial experience property also came to light.Companies tendentiously rely on their own experiences, especially in theface of uncertainty (Noda and Collis 2001). Noda and Collis (2001) re-ferred to the seminal findings of Cyert and March (1963), according towhich organisational search and learning, in the presence of uncer-tainty, is local rather than acquired from others, particularly competi-tors. This might explain why shifting success experience and strategiesbetween these countries could not really succeed. Furthermore, the pro-moters, local managers who participated in and effected early entry,soon established good customer relations, and gained recognition andpower within the extended organisations. They were thus able to influ-ence resource-allocation decisions. Probably the best indicator of thismechanism was the healthy competition between local partners that Icould sense during my discussions with the respondents.

The second property of integration was the establishment of the bridgeheadrelationship. Indeed, this relationship was the tool used by the two Finn-ish companies to implement their business ideas in the new markets. Itcould be said that a significant amount of tacit knowledge was acquiredregardless of the way in which the bridgehead relationships were estab-lished. Relationship ties among people in the extended organisations af-fected and were affected by the firm’s resource-allocation process.Personal ties carried the bargaining power of the members. This bar-gaining power was assumed within the bridgehead relationship partlybecause of the early recognition. Managers who had the authority tomake resource-allocation decisions in the HQs were not always able to


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evaluate the soundness of the investment proposals. The specific infor-mation about customers and competitors was held by the locals and thefrequently-travelling sales managers. Thus, there was an asymmetry ofauthority distribution and information. In this situation, top-level deci-sion makers relied on earlier successful business experiences, which in-creased the reputation and bargaining power of local managers. AsNoda-Collis (2001) argued, positive socio-political feedback dependsupon interpersonal relations within an organisation, particularly thosebetween the top managers and lower-level managers (i.e., local managers).

The integration of bridgehead relations was achieved through severalmechanisms. Meetings, both formal and informal, were significant intheir establishment, and involved both the operational and the behav-ioural elements. They also made the top management familiar with thebusiness, and were thus instrumental in building up the social fabric andtrust (Eisenhardt and Galunic 2000). Still, these two elements did notfall into place overnight. The roles emerged during the meetings, andthe relationships were clarified. This led the way to clearer communica-tion, more effective collaboration, decreased political tension and theclarification of opportunities. Revolutionary opportunities were identifiedthrough the process of searching for discontinuities, core competenciesand new rules. The top needed to stay close enough to the organisation’slearning process (Hamel 1996). The learning process could not beviewed by, or delegated to anyone other than a small elite group. The re-source holders and the field managers had to end up at the same place, atthe same time.

Establishing bridgehead relations was originally a guiding rule (seeamong strategy-in-making) for both Finnish companies. As Eisenhardtand Galunic (2000) argued, when business is complicated because ofturbulence and unpredictability, the strategy must be simple. The part-nering strategy was quite simple in these cases. However, collaborativelinks in turbulent markets should be updated according to how busi-nesses and markets emerge.

Long-term partnership is a strategic process in which collaborationmay also be counterintuitive rather than performance rewarded. It wasquite understandable that the rewards in those bridgehead relationshipswere related to individual performance rather than to collaboration(Company A in particular rewarded both). As Eisenhardt and Galunic(2000) argue, one should not forget that competition also gives a com-petitive edge to partner companies.


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Another mechanism was the actual operation mode used by the Finn-ish companies. These modes varied according to the market, and changeswere made during the ten-year period.

Structural changes, including the operational mode in each local mar-ket, were closely connected to the control mechanisms. There werechanges in the top-management teams at both Finnish companies.Whether or not managers’ mental maps are made explicit (Noda andCollis 2001), they create a bias towards some investments over others.Past successful business experiences reinforce existing mental mapsand favour previous patterns of investment. Nevertheless, thesechanges did not directly guarantee that the companies would be able tochange their evolutionary paths in certain markets. In all probability,the fact that efficiency was the focus of the organisational changeslessened the flexibility of the operations (Eisenhardt and Sull 2001).

The control mechanisms certainly appeared more connected in thelight of Oliver’s (1997) discussion. Firms possess both resource and in-stitutional ‘capital.’ Both types are complementary and thus need bothto be enhanced in order to sustain competitive advantage. Resource-capi-tal protection and the procurement of rare non-imitable assets and com-petencies require effective management in terms of resource decisionsconcerning distribution channels, a lean cost structure, patented core com-petencies, talents and customer loyalty (e.g., Company A at the time ofthe ‘forint’ devaluation in Hungary in 1995). Institutional capital com-prises the training programmes and information-technology systemsimplemented in order to diffuse information, management-developmentprogrammes, decision-support systems, and inter-firm alliances thatsupport the inter-industry distribution of resources.

The second sense-making process category was adaptation, which re-fers to adjustment to environmental conditions. Adaptation in this studymeans arriving at correspondence between the focus of the companies andthe chosen environment. The moves of the potential customers andcompetitors, as well as the macro-level changes, required responses fromthe company. Furthermore, the adaptation processes demanded ade-quate, and at the same time unique, mechanisms. The properties identi-fied were gathering market information, relating to customers, fightingcompetition and positioning.

Companies A and B redefined their customer base (Govindarajan andGupta 2001) by uncovering hidden customer segments in CEE markets.They both realised–in good time–that the same type of customers aswere in the domestic market would invest steadily in the Visegrád mar-kets. In Hungary, and to some extent in Poland, the Finnish case compa-


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nies, as pioneers, were able to create entry barriers. They were the firstones to establish strong customer relations with good references fromhome, and with the help of bridgehead partners, they provided good ser-vices to customers. For some time, they enjoyed a monopoly–at least atthe time of exploring the markets–enforced by the KEVSOS agreement.This bilateral free-trade agreement lowered their prices relative to otherWestern competitors.

All in all, sustainable competitive advantage referred to the imple-mentation of a value-creating strategy that is not susceptible to duplica-tion, and not currently implemented by competitors. The Finnish compa-nies created value for their customers on the Visegrád markets at a timewhen local competitors could not duplicate it, and foreign competitorswere not there with substitute products.

The Finns used their bridgehead relations to tap into ‘time compres-sion diseconomies,’ which are difficult to trade on the factor market (Oli-ver 1997). Furthermore, the two companies would not have anticipatedthose crucial changes if their operations had just been based on export.

According to my interpretation, positioning was the fourth process-typeproperty, when the companies desired to generate revenue in a marketwith an oligopolistic structure (presumed to have, or already featuring,such a structure). Thus, the two companies focused on positioning at thevery moment of entry into the Visegrád market, and not just when themarkets became oligopolistic. Positioning could be considered the cul-mination of relating to customers and fighting competition. The manag-ers of the companies might assume that others would come to sell simi-lar or substituting products. Thus, the two Finnish companies actedaccording to this assumption and chose to be pioneers on the Visegrádmarkets as a region. They performed excellently in this very generic mar-ket process.

During the second half of the nineties, up-front analysis was not asubstitute for real-time learning (Eisenhardt and Galunic 2000). In Po-land, for instance, there emerged a need for Company B to move awayfrom head-to-head competition for market share, towards exploiting otherresources (Barney 1995). Furthermore, Company A’s less successfultrial in the Czech Republic, and the voices of the Polish counterparts ofboth companies, indicated that it had become critical to measure perfor-mance externally against competitors rather than against plans, perfor-mance in preceding years or the results achieved by other divisions ofthe same organisation.

All in all, as the Visegrád markets were, indeed, dynamic markets dur-ing the nineties, strategies that centred more on processes (sales, promo-


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tion, installation, production) than on position reaction were probablyright (Eisenhardt and Sull 2001).

The third sense-making process was strategy-in-making. This refersto all of the mechanisms that are brought more directly into correspon-dence with internal and external contexts (Mintzberg 1994, Hamel 1996,Eisehardt and Sull 2001). It also refers to modification, according to thechanging circumstances on either side and to a pattern, example or prin-ciples (see the following quotation).

BF97/08 “I have always been in a simple system, having the ma-jority in every country . . . In Hungary it was first fifty-fifty, andthat was impossible, nobody took responsibility, so we thenchanged it to fifty-two, and now it’s seventy-six. There must bereal power on one side. Somebody has to take the responsibility.”

Strategy-in-making in this study refers to promoting close and exactcorrespondence or harmony between parts of processes, thus betweenmechanisms. The following is an example of how certain mechanismswere not in correspondence (Case 3, 1998).

AF99/13 “It was not his fault, we didn’t support him. He was trav-elling alone. Of course we gave him some office machines butthat’s not enough. He should have had somebody visiting the clientswith him. In the end, our account manager closed his business. Hesaw that there were only expenses and no business, nothing to beearned.”

The corporate strategy is an internally-consistent set of goals andpolicies which aligns a firm’s strengths and weaknesses with its exter-nal opportunities and threats. Considering the unit of analysis, however,the property of guiding rules could be applied instead. The dynamics ofthe bridgehead dyads played a significant role in unravelling the corpo-rate strategy during the ten years analysed. After all, the dyads also ex-hausted the internal resources. Thus, the guiding rule best reflected thedynamic interaction between the two sides of the bridgehead partner-ship in its strategy making.

The connection with external forces is clearly explained by Eisenhardtand Sull (2001): in times of predictability and focused opportunities, acompany should have more rules in order to increase its efficiency. Lesspredictable, more diffuse opportunities require fewer rules in order to


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encourage flexibility. Company B actually had more focused opportu-nities, knowing the actual customers in advance, whereas Company Awent searching for customers, and its potential success was less pre-dictable. The CEE environments could be characterised in many ways.Nevertheless, nobody could deny that these markets were moving quicklyduring the nineties. Eisenhardt and Sull (2001) referred to this situationas the edge of chaos, where simple rules should provide just enoughstructure to allow exploitation of the best opportunities. How well didthe case companies manage? They established bridgehead relations (assimple rules) exactly because they did not like the chaos. Here again,one needs to account for internal forces.

According to Eisenhardt and Sull (2001), few rules probably gavemore scope for manoeuvre, which suits the entrepreneurial culture. Thisapplies to engineers, too and affected both sides of Company A’s busi-nesses in Hungary and Poland at first. More rules, on the other hand,gave less room for manoeuvre, often characterised by the presence ofmore planning managers with their business calculations. As far as Com-pany B was concerned, it turned out every now and then to be a mis-match. The locals voted for having few rules, and this suited theirideology. The company, nevertheless, persisted in giving quite re-stricted space for manoeuvre to the locals, in particular by making themwait for decisions resulting from calculations and plans.

To some extent, going to the CEE markets was going in the oppositedirection from that which the fundamental conventions dictated. Com-panies A and B had abandoned the traditional uncertainty-avoidancethinking when they entered the CEE. Chaos, risk and uncertainty didnot stop them. Thus, as Hamel (1996) argued, it was a way to create rev-olutionary strategy. Nevertheless, deregulation and social change in thosemarkets had created a hospitable external environment by the earlynineties. With regard to the cases analysed in this study, one thing is cer-tain: simply evaluating the environmental opportunities and threats, andthen conducting business only in high-opportunity and low-threat envi-ronments, would not have led to sustained competitive advantage forthe two Finnish companies.

With respect to all of these, timing was found to be an importantprocessual property in its own right. It became a key determinant as itqualified many of the decisions and subsequent actions. In my opinion,this category deserves its own place among strategy-making mecha-nisms. It should be considered together with the action to which it re-fers, in the same way as thinking refers to action according to Weick(1983).


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Resource allocation was the third property creating an important linkbetween the internal and external forces. Sustained competitive advan-tage also depends on the unique resources and capabilities that the firmbrings into the competition in its environment (Barney 1995). Reve-nue-creating resources often cannot be instantly acquired on the factormarket (Oliver 1997, Noda-Collis 2001). They rather have to be devel-oped and accumulated by the firm over long periods and are, therefore,highly firm-specific. The two Finnish companies had been acquiringR&D expertise and technological capabilities on the domestic factormarkets since establishment. Knowledge that the company possesses isalso a resource, and creating new knowledge has to be among its objec-tives (i.e., content). The new buyer-seller relationships on the Visegrádmarkets involved learning by doing, especially for Company A, whereasCompany B was able to apply, to some extent, its cumulative experi-ence. Nevertheless, on the basis of the empirical material analysed here,I agree with the findings in studies of network (Johanson and Mattsson1988). The long period necessary for accumulating resources was short-ened by the existence of bridgehead relationships. This also explainswhy I had to make a clear distinction between the company’s own in-vestment and relation-specific investment. Aspects of the corporate strat-egy of the two companies emerged through trial-and-error learning, andas a response to unpredictable external forces. Opposition betweenplanning and emergent strategy could be detected in Company B’scases, which could be explained more in terms of the strategic-manage-ment behaviour of the company. The emerging nature of strategies wasmore prevalent in Company A’s cases. Part of the explanation certainlylies in this company’s already acknowledged entrepreneurial behaviour.Nevertheless, what was seen as emerging strategy at the Finnish compa-nies might have been the ready-made steps of the counterpart.

The final category comprised the focuses of the examined cases, inother words, the actual content of the operations. The case companiesfocused on growing and expanding in foreign markets in order to createwealth and revenue. This was brought to reality by deliberate action andits emergent consequences. Thus, the consequences shed light on theactual focuses, and ultimately on the content of the operations.

The forces evaluated as content in both Finnish companies through-out the six cases were growth, expectations, learning, and implementingthe business idea. Integration of the local partners was more specific inthe cases of Company B. These properties show how foreign-marketexpansion is not such a simple, linear, step-wise process. On the con-


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trary, the expansion in all six cases featured ever-developing feedbackloops, in both positive and negative directions.

Reputation, which relates to cumulative experience and the incorpo-ration of other people’s skills and experience (i.e., bridgehead partner),had continued to grow since establishment. There were indications thatcoming out of the domestic markets and achieving a long-term presencein the Visegrád markets increased the reputations of these companies inother Western European markets. Indeed, both companies were sellingmore than ever before to Western Europe in the late nineties.

The knowledge that the company possesses was seen as a resource.Evidently, creating new knowledge has to be among its focuses (i.e.,content), regardless of the way it chooses to do it. However complex isthe knowledge required to survive and grow in the competitive market,knowledge creation is not the main focus of a profit-oriented companyand the other properties in this category seemed to be equally relevant inthe cases analysed.

For instance, the growing importance of local businesses to the totalbusiness of the Finnish companies was understood as part of the con-tent. Given this or any other measure of growth–for any expanding busi-ness company–it should be understood that the idea was not to come to afinal, satisfying end result. On the contrary, as results were achieved,more were demanded.

CONCLUSIONS

In the interest of avoiding serious misunderstandings, it is impor-tant to realise that the framework developed using grounded theoryanalysis on a limited number of cases fits best to those cases. I believe,however, that the analysis in this study has brought us closer to the hu-man actors making-foreign market expansion happen than the stagemodels of internationalisation or network research have so far suc-ceeded in doing. The substantive theory was powerful enough to deal si-multaneously with environmental, strategic and operational issues.Therefore, I was able to explain variations in the actions/interactionspursued by the case companies.

In line with the bottom-up approach, this does not mean that I havefound every mechanism in the six cases. What I needed to do was togive conceptual meanings, to put together what was revealed, and toadd to it what could be speculated, whenever there was enough indica-tion in the empirical material. I was able to make suggestions as to how


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the mechanisms are connected, guided by the iteratively developing theo-retical framework.

The result of the data analysis was to establish the specific meaningsof the three corner elements, context, content and process, as well ashow they were connected through specific mechanisms. What has crys-tallised through the analysis is that, following the initial experiencegained in each market, it was possible to track down specific feedbackloops. More details of these mechanisms and how they created feedbackloops are given in my forthcoming doctoral thesis. The contribution isin the integrative theory-underwritten by the teleological process the-ory-developed to explain the process of international market expansion.In referring to the original research question, the specific mechanismssay a lot about how companies A and B made sense out of their conceptof business, in the light of external and internal forces. This substantivetheory suggests that companies grow in a manner that aims at achievingcorrespondence and harmony (sense-making) between the internal con-text and their focus, the external context and their focus, and also moredirectly between the external and internal contexts (Figure 1). Thus,three sense-making processes could be identified, namely integration,strategy-in-making and adaptation. These processes incorporated pro-cess-type properties, which were connected by the unique variety ofmechanisms that the companies employed.

In terms of the above-mentioned departure from the Nordic Schoolof International Business Research, my arguments are based on fiveproblem areas. The problems can be seen in the light of the empiricalquestions that were the focal points of scientific thought in this study.They have crystallised during the case-analysis and theory-building pro-cedures of the pursued GT methodology. My disagreements relate tothe central conceptualisations of the school. First, I argue that the varia-tion in how companies expand in foreign markets is not just an anomalyin terms of the established theoretical models. As the linearity implies,one loses sight of the fact that it is not a question of two companies im-plementing exactly the same expansion strategies. If it were, it woulddefeat the objective of competing for more revenues by better servicingthe customer. Focusing on a limited number of dependent variablesprobably created that problem. It is impossible to explain the complexprocess of FME in terms of determining changes in operational mode.

Second, I suggest that the strategic behaviour of managers and/or en-trepreneurs categorises them more as opportunity seekers and risk tak-ers than avoiders of uncertainty. FME should be seen as a managerial


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process in which opportunity seeking is primarily relative to uncertaintyavoidance.

My third argument is that ‘creating experiential knowledge’ shouldnot be seen as the basic social process underlying the process of interna-tional expansion. Knowledge is a resource, and the companies createother resources, too.

Fourth, foreign-market expansion (FME) is a strategic process, whichshould be explained in terms of its embeddedness6 in the overall corpo-rate growth strategy. This is probably the main reason why expansionon foreign markets is a really complex process.

The four problems referred to above, which I believe to be signifi-cant, are probably rooted in the life-cycle perspective on investigatingforeign-market expansion. It may be more realistic to apply the teleol-ogy-process perspective. In short, this may increase the number of de-pendent variables under investigation. Timing could be included in itsright place, which is the key part of any managerial decision that ismade and implemented. Ultimately, the elaboration of the complexityof the FME process in relation to overall growth might improve in con-sequence.

Choosing the teleology process perspective to underwrite the investi-gation must be a direct consequence of the first and fourth arguments.According to the second argument if the first, fourth and fifth ones areaccepted, advocating uncertainty avoidance prior to risk taking does notseem sensible. Further, to see experimental knowledge creation (3) asthe basic social process might be a mistake. The second and third argu-ments reveal contradictions between the views put forward by the NordicSchool and those that arise from the data analysis in this study.

I believe that there was enough empirical data analysed to put togetherthe substantive theories for the two groups (A and B). Furthermore, thissubstantive theory has good potential for extending its explanatory powerto other cases. The theory I developed will probably be applicable to dif-ferent content areas.

In every industry, and for every firm, the specific impact of each forceis different, and their interactions, in every case, determine a uniquepath in the expansion process. The value of the proposed framework isthat it identifies longitudinally the connections among the factors andmechanisms that we should study further in order to explain the for-eign-market-expansion phenomenon. There is no absolute weight of im-portance on any one element alone. Thus, the framework is readily mod-ifiable.


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Any theory development throughout a case analysis can produce rel-evant results if, and only if, the context is handled appropriately. Thus,one might be able to create chances in order to extend the findings. Itwill be possible to take a wider view of the pace of market change giventhe fact that it is not only the CEE markets that emerge and discontinueover time because of declining demand or production problems.

NOTES

1. I mention this issue early because it is assumed to be relevant to the cases in thisstudy.

2. According to Bell (1995), Burenstam-Linder (1961) first came up with this con-cept.

3. That is an alternative to the psychic-distance concept.4. Håkanson and Snehota (1995) discuss two types of commitment. Tangible com-

mitment is expressed by investments in the economic context. Intangible commitmentis investment in the social context.

5. Researcher associates with the Nordic School have created other models, whichdiffer in name and number of the stages (e.g., Anderson 1993, Coviello and Munro1995, Bell 1995, Coviello and McAuley 1999). I do not see the relevance in presentingthem all, because the idea of how the complex process of FME can be simplified is thesame.

6. In other words, FME is supportive to and interdependent on the company’s sur-vival and/or growth.

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SUBMITTED: May 2002FIRST REVISION: June 2002

SECOND REVISION: January 2003ACCEPTED: March 2003


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foreign-market expansion in newly-emerging markets

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