Embed Size (px)
Citation preview
The Internationalisation of Australian Firms: How Networks Help Bridge the Psychic Distance Between a Firm and a Market
Frances Van Ruth
Submitted in total fulfilment of the requirements of the degree of Doctor of Philosophy
October 2008
Department of Management and Marketing The University of Melbourne
i
Abstract This research explores the internationalisation of Australian firms in Latin America.
Latin America attracts seven per cent of worldwide inward foreign direct investment
(FDI) stocks but accounts for less than one per cent of Australian FDI stocks abroad.
This discrepancy led me to ask why and how some Australian firms have entered the
region when most of those that have gone abroad went elsewhere. Drawing on
constructs from the Uppsala model and the network perspective of internationalisation
I created an integrated research framework that encompassed both the internal and the
external drivers of internationalisation. I used a multiple case study research design
based on in-depth interviews with ten firms to explore the mechanisms by which
Australian firms overcome their perceived psychic distance to Latin America. I
conducted interviews with key decision makers at both headquarters and subsidiaries
in Australia, Brazil, Chile and Mexico.
My findings demonstrate that firms simultaneously draw on internal and external
resources to facilitate their internationalisation. By leveraging their networks firms are
able to succeed in psychically distant markets despite an initial lack of experiential
knowledge. My findings reveal that firms obtain market-specific knowledge vital for
internationalisation via their networks. Internationalisation knowledge on the other
hand is mainly acquired through first-hand, in-country experience.
In this research I systematically document the types of institutional, business and
social networks that impact internationalisation and categorise the numerous roles
they fulfil. In addition to providing market-specific knowledge, network connections
‘unlock doors’, provide reassurance and comfort, provide credibility and help find
employees, agents and local partners. Using networks to facilitate internationalisation
accelerates the process in comparison to the traditional ‘trial and error’ method
associated with in-country experiential learning.
The integrated framework I develop provides a more holistic understanding of how
firms internationalise than previous models. My research has implications beyond the
Australia-Latin America context as an example of the increasing phenomenon of FDI
from and to non-traditional markets.
ii
Declaration This is to certify that
(i) the thesis comprises only my original work towards the PhD, (ii) due acknowledgement has been made in the text to all other material used, (iii) the thesis is less than 100,000 words in length, exclusive of tables, maps,
bibliographies and appendices. Signed: ……………………………………………
iii
Acknowledgements I gratefully acknowledge the support of the many people who have contributed to the
completion of my thesis. I would like to express particular thanks to the following
people:
I am indebted to my supervisors Professor David Merrett and Dr. André
Sammartino whose encouragement and constructive feedback throughout the
past three years has helped me to produce a better thesis.
Thank you to Bernard Wheelahan and the Council on Australia Latin America
Relations for endorsing my research and providing financial support for my
fieldwork.
I would like to thank Roger Frankel from the Australia Latin America Business
Council for taking an interest in my work and lending his ear on numerous
occasions. I am also grateful for the contacts he passed on to me that facilitated
my data collection.
An important thank you is extended to all my research participants, both in
Australia and overseas, without whom I would have had nothing to write about.
Some participants (who will remain nameless for reasons of confidentiality)
went out of their way to welcome me and help me arrange additional interviews
and I am extremely grateful for their generosity.
Completing a PhD can be a very solitary exercise so I am grateful to my PhD
colleagues in Bouverie St with whom I shared this journey.
I thank my parents for instilling in me both a love of learning and a belief in my
own ability to achieve whatever I set my mind to.
Finally, and most importantly, I thank my husband Ignacio. Amor, your constant
love, encouragement and belief in me were invaluable in getting me through this
process. Thank you for everything.
iv
Table of Contents Abstract .......................................................................................................................... i Declaration.................................................................................................................... ii Acknowledgements...................................................................................................... iii Table of Contents......................................................................................................... iv List of Tables ............................................................................................................. viii 1. INTRODUCTION..................................................................................................1
1.1 THE CHANGING NATURE OF FOREIGN DIRECT INVESTMENT.......2 1.2 PURPOSE OF THE STUDY..........................................................................3 1.3 RESEARCH QUESTIONS AND METHODOLOGY...................................4 1.4 THESIS OUTLINE.........................................................................................5 2. BACKGROUND ....................................................................................................7
2.1 THE INTERNATIONALISATION OF AUSTRALIAN FIRMS..................7 The Internationalisation of Australian firms in Latin America ......................9 2.2 AUSTRALIA-LATIN AMERICA TIES......................................................15 2.3 THE LATIN AMERICAN BUSINESS ENVIRONMENT .........................19 The Historical Context..................................................................................21 The Current Business Environment ..............................................................23 2.4 LATIN AMERICAN CULTURE.................................................................26 Cultural and Institutional Distance between Australia and Latin America ..27 2.5 CONCLUSION.............................................................................................30 3. LITERATURE REVIEW ...................................................................................33
3.1 INTERNATIONALISATION PROCESS LITERATURE ..........................35 Psychic Distance ...........................................................................................38 Conflicting Definitions............................................................................39 Diverse Psychic Distance Stimuli ...........................................................42 Three Measures of Distance ...................................................................43 The Operationalisation of Psychic Distance ..........................................45 Empirical Results ....................................................................................48 Experiential Knowledge................................................................................53 Empirical Results ....................................................................................56 Conclusion ....................................................................................................60 3.2 THE NETWORK PERSPECTIVE OF INTERNATIONALISATION .......61 Business Networks........................................................................................63 Empirical Results ....................................................................................65 Social Networks ............................................................................................68 Empirical Results ....................................................................................70 Conclusion ....................................................................................................72 3.3 DRAWING CONCLUSIONS ......................................................................73
v
4. RESEARCH METHODOLOGY AND DESIGN .............................................75
4.1 THE CASE STUDY METHODOLOGY .....................................................75 Case Selection...............................................................................................78 4.2 DATA COLLECTION METHODS.............................................................79 Cross-cultural Considerations.......................................................................81 The Role of Language...................................................................................82 Caveats on Data Collection...........................................................................84 4.3 DATA ANALYSIS.......................................................................................84 Analysis Strategies........................................................................................85 Data Reduction and Display .........................................................................86 Reading and Annotating .........................................................................87 Creating and Assigning Categories ........................................................88 Splitting and Splicing..............................................................................89 Linking the Data and Making Connections ............................................90 Producing an Account.............................................................................90 4.4 ESTABLISHING TRUSTWORTHINESS ..................................................90 Credibility .....................................................................................................91 Triangulation ..........................................................................................91 Member Checks.......................................................................................92 Transferability...............................................................................................92 Dependability and Confirmability ................................................................93 Ethical Considerations ..................................................................................93 4.5 CONCLUSION................................................................................................94 5. THE CASES .........................................................................................................95
5.1 INDUSTRY ..................................................................................................97 5.2 FIRM SIZE AND OWNERSHIP .................................................................97 5.3 INTERNATIONALISATION EXPERIENCE.............................................98 5.4 INTERNATIONALISATION IN LATIN AMERICA ................................99 5.5 INTERVIEWEES .......................................................................................100 5.6 CONCLUSION...........................................................................................100 6. RESULTS ...........................................................................................................103
6.1 OPPORTUNITIES IN LATIN AMERICA................................................104 Comparisons to Asia and Elsewhere...........................................................108 6.2 LACK OF AWARENESS ..........................................................................109 6.3 PSYCHIC DISTANCE...............................................................................112 Psychic Distance Stimuli ............................................................................114 Geography.............................................................................................114 Language...............................................................................................116 Institutions.............................................................................................117 Culture ..................................................................................................120 Other Psychic Distance Stimuli ............................................................121
vi
Summary .....................................................................................................122 6.4 THE CHALLENGES OF INTERNATIONALISATION..........................123 Language.....................................................................................................124 Institutions...................................................................................................127 Bureaucracy and Legal Systems ...........................................................127 Other Institutions ..................................................................................130 Culture.........................................................................................................131 Business Practices ................................................................................133 Mis(trust)...............................................................................................134 Other Challenges of Internationalisation ....................................................136 Summary .....................................................................................................136 6.5 EXPERIENTIAL KNOWLEDGE..............................................................137 Internationalisation Knowledge ..................................................................139 Market-specific Knowledge........................................................................141 Host Country Staff and Champions ............................................................143 Summary .....................................................................................................144 6.6 NETWORKS ..............................................................................................146 Types of Networks......................................................................................146 Roles of Networks.......................................................................................150 Summary .....................................................................................................156 6.7 CONCLUSION...........................................................................................157 7. DISCUSSION AND CONCLUSION ...............................................................159
7.1 PSYCHIC DISTANCE...............................................................................160 Psychic Distance Stimuli ............................................................................160 Psychic Distance Stimuli and Equivalence.................................................165 Psychic Distance and International Market Selection ................................166 7.2 EXPERIENTIAL KNOWLEDGE..............................................................169 Internationalisation Knowledge ..................................................................170 Market-specific Knowledge........................................................................173 7.3 NETWORKS ..............................................................................................176 Types and Roles of Networks .....................................................................178 Institutional Networks...........................................................................179 Business Networks ................................................................................180 Social Networks ....................................................................................180 Earning Trust via Networks ........................................................................181 Summary .....................................................................................................182 7.4 THEORETICAL CONTRIBUTIONS AND DIRECTIONS FOR FUTURE
RESEARCH................................................................................................183 7.5 PRACTICAL IMPLICATIONS OF THE STUDY....................................185 7.6 LIMITATIONS OF THE STUDY..............................................................187 7.7 CONCLUDING REMARKS......................................................................189
vii
REFERENCES.........................................................................................................191 APPENDICES APPENDIX 1: MAP OF LATIN AMERICA .....................................................207 APPENDIX 2: BUSINESS ENVIRONMENT DATA .......................................211 APPENDIX 3: DISTANCE MEASURES ..........................................................219 APPENDIX 4: LETTER OF ENDORSEMENT.................................................229 APPENDIX 5: EXAMPLE INTRODUCTORY LETTER .................................233 APPENDIX 6: EXAMPLE INTERVIEW PROTOCOL ....................................237 APPENDIX 7: PLAIN LANGUAGE STATEMENT.........................................241 APPENDIX 8: CONSENT FORM......................................................................245 APPENDIX 9: INQUIRY AUDIT ......................................................................249 APPENDIX 10: MATRIX QUERIES.................................................................253
viii
List of Tables Table 2.1: Key Sources of FDI Inflows in Latin American Markets 1996-2006 ........12
Table 2.2: Destination of FDI Inflows in Latin American Markets 1997-2006 ..........13
Table 2.3: Australian Owned Foreign Affiliates in Latin America .............................13
Table 2.4: Examples of Australian Firms Operating in Latin America.......................14
Table 2.5: Selected Occupations of Iberoamerican-Australians..................................16
Table 2.6: Ranking of Latin American Markets ..........................................................20
Table 2.7: Cultural and Institutional Distance from Australia.....................................29
Table 3.1: Psychic Distance Measures in the Extant Literature ..................................45
Table 3.2 Empirical Findings – Psychic Distance and International Market Selection...
.......................................................................................................................49
Table 3.3 Empirical Findings – Experiential Knowledge and Internationalisation.....56
Table 3.4 Empirical Findings – Business Networks and Internationalisation .............66
Table 3.5 Empirical Findings – Social Networks and Internationalisation .................70
Table 5.1 Case Study Characteristics...........................................................................96
Table 6.1 Latin America Opportunities Node Tree ...................................................105
Table 6.2 Contrasting Descriptors of Brazil, Chile and Mexico................................107
Table 6.3 Psychic Distance Node Tree ......................................................................112
Table 6.4 Challenges of Internationalisation Node Tree ...........................................123
Table 6.5 Comments about Bureaucracy ...................................................................128
Table 6.6 Experiential Knowledge Node Tree ..........................................................138
Table 6.7 Type of Networks Node Tree ....................................................................147
Table 6.8 Role of Networks Node Tree .....................................................................150
Table 6.9 Matrix Query Summary .............................................................................153
Table A.1 Latin American Economic Indicators .......................................................213
Table A.2 Latin American Political Environment .....................................................214
Table A.3 Latin American Legal Environment .........................................................215
Table A.4 Latin American Social Environment ........................................................216
ix
Table A.5 Latin American Income Distribution ........................................................217
Table A.6 GDP at PPP per capita adjusted for Income Distribution .........................217
Table A.7 Cultural Distance from Australia - Hofstede (1980).................................222
Table A.8 Cultural Distance from Australia – House et al. (2004) ...........................224
Table A.9 Institutional Distance from Australia (2001) ............................................225
Table A.10 Cultural Dimensions – Hofstede (1980) .................................................226
Table A.11 Cultural Dimensions – House et al. (2004).............................................227
Table A.12 Institutional Dimensions (2001) .............................................................228
Table A.13 The Role of Institutional Networks Matrix Query Results .....................255
Table A.14 The Role of Business Networks Matrix Query Results ..........................256
Table A.15 The Role of Social Networks Matrix Query Results ..............................257
1
CHAPTER ONE
Introduction
This research explores the internationalisation of Australian firms in Latin America.
At its most basic level, it asks how these Australian firms ended up in these markets
when macro-level statistics and cultural heritage would suggest it would not happen.
Situated in the disciplinary area of international business (IB) this research is
concerned with behaviour at the firm level, rather than the macro-level. The field of
international business is still a relatively new area of research and whilst many
authors have offered models of internationalisation no dominant theory exists to
explain why and how firms internationalise (Wickramaskera & Oczkowski, 2004).
There is not even a universally accepted definition of the term ‘internationalisation’.
In this research I have adopted Beamish’s (1990, p.77) definition of
internationalisation as ‘the process by which firms increase their awareness of the
direct and indirect influence of international transactions on their future, and establish
and conduct transactions with other countries’. Coviello and McAuley (1999) cite
four alternative views but proffer that of Beamish (1990) as the most holistic
interpretation of the concept.
There are three streams of internationalisation research: 1) the economic school of
foreign direct investment (FDI) theory, 2) the behavioural school of the stage models
and 3) the relationship school of the network perspective (Coviello & McAuley,
1999). In this research I draw primarily upon the behavioural and relationship schools
of thought in an attempt to better explain the phenomenon of Australian foreign direct
investment (FDI) in Latin America. I argue that firms overcome their psychic distance
to a market though a combination of experiential knowledge and network connections
and, moreover, that by using their networks to overcome psychic distance firms can
expedite their internationalisation process. For the purposes of this research I have
defined psychic distance as a firm’s degree of uncertainty about a foreign market
resulting from its perception of differences between its home and host environments
that present barriers to learning about the foreign market and operating there.1
1 This definition borrows heavily from O’Grady and Lane (1996, p.330) and is further explained in Chapter 3.
2
By integrating aspects of the stage models of internationalisation and the network
perspective of internationalisation my research contributes to a broader understanding
of both the internal and external drivers of the internationalisation process.
Understanding internationalisation more completely is important because firms no
longer operate in domestic economies but rather in a regional or global one. The
reality facing Australian firms in 2008 is that if they fail to take advantage of global
opportunities they will not be able to compete, and yet (as discussed in Chapter 2)
Australian firms have been slow to internationalise and prefer to stick to more
traditional markets. My research casts light on how Australian firms have succeeded
in internationalisation in a region in which we would not usually expect much
Australian involvement in: Latin America. It is important to understand why and how
this ‘atypical’ type of FDI takes place. However, the story is not just an Australian
story; my research findings are also relevant to firms from other countries. My
findings help explain the success of FDI by multinational enterprises (MNEs) from
countries without a long history of FDI.
1.1 The Changing Nature of Foreign Direct Investment The global economy in 2008 is more integrated than ever before. This is evidenced by
the dramatic increase in the importance of FDI in recent decades. The stock of FDI
globally has increased more than 20 times since 1980 from US$551 billion to US$12
trillion in 2006 (UNCTAD, n.d.). Over this same period world GDP grew 4 times and
trade grew 6 times illustrating the increased importance of FDI in the global economy
(World Bank, n.d.-a). Not only has the volume of FDI increased but the nature of FDI
has changed across many fronts. The range of industries in which FDI is occurring
has widened as have the motivations for FDI. Most significantly for this research, the
sources and destinations of FDI have undergone dramatic change over the past two
decades. In 2008 MNEs from more and more countries are engaged in FDI in ever
more diverse destinations. As evidence of this, the 2006 World Investment Report
highlighted the emergence of South-South FDI. Furthermore, the shift in the centre of
gravity in the global economy away from the traditional triad and towards the BRIC
countries (Brazil, Russia, India and China) is widely acknowledged (United Nations,
2006).
3
In 1980 five triad nations (USA, UK, Germany, France and Japan) accounted for 70
per cent of FDI outflows, and 64 per cent of outward stock. In 2006 these same
countries account for just 44 per cent of outflows and 51 per cent of outward stock.
Developed countries combined accounted for 94 per cent of FDI outflows in 1980 but
only 84 per cent by 2006. Noteworthy in itself is the decrease in the relative value of
USA outward stock which accounted for 36 per cent of world stock in 1980 and only
19 per cent in 2006. Clearly, this is not to say the absolute value of US outward stock
has decreased (quite the opposite), but rather that the importance of this stock has
decreased in relative terms. There are simply now more ‘players’ in the FDI game.
China and India are emerging not only as destinations for FDI but also as sources.
Although both still account for less than one per cent of world stock the relative
increase in the value of their stock is dramatic. While the value of US outward stock
increased 11 times since 1980 India’s has increased 166 times and China’s over 1800
times (UNCTAD, n.d.). The destination of FDI has also changed over this period. FDI
inflows to developed countries accounted for 86 per cent of world inflows in 1980 and
only 66 per cent in 2006. As well as the aforementioned rise of the BRIC countries,
transition economies of the former Soviet Union and others in South-East Europe
have emerged as increasingly popular destinations for FDI (UNCTAD, n.d.).
These changes to FDI highlight for researchers a need to understand the process of
FDI from and to non-traditional markets. Firms from all over the world are
increasingly realising that they operate in a global economy and not just a domestic
one, forcing them to adopt an international vision. In essence there are a lot of new
‘boys and girls on the FDI block’. My research helps explain how these firms are
getting into the game.
1.2 Purpose of the Study The purpose of my research is to better understand the internationalisation of
Australian firms into Latin America. The research focuses specifically on Latin
America as it is a region that receives little Australian FDI, yet considerable
worldwide FDI. Some Australian firms have ventured to Latin America but most of
those that have gone abroad have gone elsewhere. A priori, Latin America is a more
4
difficult marketplace for Australian firms than more culturally and institutionally
similar markets such as the UK and the USA (this is explored further at a macro level
in Chapter 2 and at a firm level in Chapter 6). Initial background research caused me
to ask: why are some Australian firms in Latin America when others are not? and how
did these Australian firms get there?
There has been limited research thus far into the internationalisation of Australian
firms. Much of this research has focused on the expansion of Australian firms into the
Asia-Pacific region (For example, Lamb & Liesch, 2002; Maitland & Nicholas, 2002;
Patterson, 2004; Sim & Teoh, 1994) while other researchers have focused on a
particular sector or industry (For example, Merrett, 2002; Patterson, 2004;
Wickramasekera & Oczkowski, 2004). The book The internationalisation strategies
of small country firms: The Australian experience of globalisation (Dick & Merrett,
2007b) is a recent addition to the literature on Australian internationalisation and has
redressed this issue to a large extent. There is no known previous academic research
into the internationalisation of Australian firms into Latin America. As such, this
research not only furthers our understanding of how Australian firms internationalise,
it also broadens our understanding to include internationalisation to a less obvious,
but nonetheless viable region of the world. As indicated above, the
internationalisation of firms from non-traditional home countries to non-traditional
host markets is an increasing global phenomenon worthy of investigation.
1.3 Research Questions and Methodology In order to comprehensively explore the internationalisation of Australian firms into
Latin America I set the following research questions:
RQ1. What effect does psychic distance have on the internationalisation of Australian firms?
RQ2. What role does experiential knowledge and learning play in the internationalisation of Australian firms into psychically distant markets?
RQ3. What are the roles of business, institutional and social networks in facilitating the internationalisation of Australian firms?
5
As outlined in Chapter 3, each of these questions is associated with a set of secondary
questions that further explore these topics.
I used a descriptive multiple-case study methodology to conduct this research.
Situations such as the one I confronted, in which there are many more variables of
interest than available data points, are especially suited to a case study research design
(Yin, 2003). A case study methodology was also well suited to this research because
data were collected from cross-border and cross-cultural settings. In this context, the
case study design provided me with an opportunity to check and re-check my
interpretations and understandings with key informants.
I conducted case studies on ten Australian firms engaged in at least one of three
principal Latin American markets (Brazil, Chile and Mexico). Data collection
involved interviews with multiple informants both in Australia and Latin America. A
total of 39 interviews were conducted with 43 participants resulting in over 28 hours
of interview recordings.
1.4 Thesis Outline This thesis is structured in such a way as to logically lead the reader from the research
problem through to the results and conclusions. In Chapter 2 I set out the context of
my research. The chapter begins with a description of the internationalisation of
Australian firms to date. This broad overview leads into a more specific analysis of
the limited internationalisation of Australian firms in Latin America. In this chapter I
also review Latin America’s business environment and culture. The background
provided in Chapter 2 is important when interpreting the research results and
subsequent discussion presented later in the thesis. Following on from this
contextualisation, I establish the theoretical basis of my research and demonstrate the
shortcomings of the internationalisation process literature in Chapter 3. In this chapter
I critically appraise the stage models of internationalisation (e.g. Cavusgil, 1984;
Eriksson, Johanson, Majkgard, & Sharma, 1997; Johanson & Vahlne, 1977, 1990)
and the network perspective of internationalisation (e.g. Axelsson & Johanson, 2005;
Bell, 1995; Blankenburg, 1995; Forsgren, Holm & Johanson 2005; Johanson &
6
Mattsson, 1985, 1988) and develop the analytical framework which underpins my
research.
Chapter 4 includes a detailed explanation of my research methodology as briefly
described in Section 1.3 above. In this chapter I link my methodology to my chosen
relativist epistemology and outline the methods I used to collect and analyse my data.
A thorough understanding of the strengths and limitations of the multiple case-study
methodology is critical to assessing the implications of my findings. Chapter 5 can be
seen as an extension of my methodology chapter as it provides a rich description of
my ten case study firms. Chapter 6 and Chapter 7 are closely linked. While Chapter 6
sets out in detail my research findings, Chapter 7 presents a discussion of these
findings and links them back to the theoretical gaps identified in Chapter 3. I finish
Chapter 7 by drawing together the conclusions that can be made from my research
and discussing the implications of these conclusions for research, policy and practice.
7
CHAPTER TWO
Background
The first task for any author is to set the stage upon which their story will be told.
That is the aim of this chapter; it provides an explanation of the context within which
this research was carried out and in conjunction with Chapter 3 it establishes the
research justification. An understanding of the research context will be important
when interpreting the results outlined in Chapter 6 and the subsequent discussion and
conclusions in Chapter 7.
This chapter begins with the Australian component of the story as Section 2.1 charts
the flow of Australian internationalisation highlighting the scarcity of Australian
investment in Latin America to date. The nature of Australian-Latin American ties is
explored in Section 2.2; whilst small, the sustained growth in Australia-Latin America
relations in recent years provides good reason for this research. Section 2.3 provides
an assessment of Latin America’s business environment including a parsimonious
account of the historical economic and political context of the region. The two parts
of the story are united in the final section of the chapter with a comparison of the
cultural and institutional environments of Australia and Latin America.
2.1 The Internationalisation of Australian Firms Australia has an interrupted history of outward foreign direct investment (FDI) and
one dominated by investment in neighbouring and culturally similar markets. To this
end, Sim and Teoh (1994) purport that Australian outward FDI has been dictated not
only by economic rationale but also by cultural and language considerations. At the
end of the 19th century capital flowed freely in both directions between Britain and the
self-governing colonies of Australia in a hybrid form often classified as colonial
capital (not quite foreign and not quite local) (Dick & Merrett, 2007a). During this
time colonial firms often also expanded regionally to other parts of the British Empire
(e.g. India, Singapore and Hong Kong). Following Federation in 1901 the adopted
protectionist trade policy (exacerbated by two world wars and the Depression) largely
resulted in the de-internationalisation of Australian firms. Market incentives instead
8
called for investment in the profitable domestic market. Even given the will,
Australian manufacturers would have struggled to compete internationally at this time
due to high labour costs and inefficient scale. By the 1950s the Australian business
environment was inward-looking and lacking in business leaders with the cultural
aptitude for international operations (Dick & Merrett, 2007a). In 1969-70 the majority
of Australian FDI stocks aboard were invested in Papua New Guinea (40%), New
Zealand (23%) and the United Kingdom (16%) reflecting Australia’s heritage as part
of the British Empire. Despite an almost fivefold increase in the value of Australian
FDI stocks abroad by 1981-82 the distribution of FDI stock had diversified little and
still strongly favoured neighbouring economies (Papua New Guinea 19%, New
Zealand 15%, ASEAN 12%) (Bureau of Industry Economics, 1984, p.10).
The current internationalisation of Australian firms essentially began in the 1980s
coinciding with the market liberalisation undertaken by the Hawke-Keating
governments (1983-96) (Dick & Merrett, 2007a). In this sense Australia lagged
behind other OECD countries many of whose firms became multinationals in the
preceding decades. The absolute growth in Australian outward FDI stock since that
time is striking, rising from just over $2 billion in 1980 to $117 billion in 2003.
Australia’s ratio of outward FDI to GDP was initially well below that of other
developed countries (1% compared to 6% in 1980) and yet Australia managed to
catch and surpass the average in the ensuing decades (Merrett, 2007, pp.24-25).2
Whilst the volume and the composition (see Merrett, 2007) of outward Australian FDI
was changing dramatically, so to was its destination. The period 1980-2003 saw a
shift in destination from neighbouring Commonwealth countries to markets further
afield, albeit still sharing a common British heritage. Since the early 1990s the UK
and the USA have accounted the majority of Australia’s outward FDI stocks (55% in
1992 and 68% in 2003) (UNCTAD, 2005). The shift over time in the destination of
Australian FDI is illustrated in Figure 2.1. The preference of Australian firms to
internationalise into geographically and culturally close markets is consistent with the
findings of empirical research on other small-country firms including those in
Finland, Ireland, Norway, and New Zealand (e.g. Bell, 1995; Coviello & Munro,
1997; Grosse & Trevino, 1996; Holmlund & Kock, 1998; Kogut & Singh, 1988). 2 The 1990 FDI to GDP ratio was 10% for both Australia and the developed economies average. In 2000 Australia surpassed the average 26% to 21%.
9
Figure 2.1: Australian Outward FDI Stocks
05
101520253035404550
1969-70 1981-82 1992 2003
% o
f FD
I
PNG NZ UK USA*
*1969-70 data is for United States and Canada
Source: (Bureau of Industry Economics, 1984; UNCTAD, 2005)
The Internationalisation of Australian firms in Latin America In recent years the Australian government has increasingly drawn attention to
opportunities for Australian firms in Latin America.3 Although comprising more than
20 countries, the largest seven markets (Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela) account for 92 per cent of Latin America’s GDP and 85 per cent
of its population respectively. Since 2000, several government reports have been
published with the aim of generating interest in Latin American markets among
Australian firms (see C. Brown & Rennert, 2001; Department of Foreign Affairs and
Trade, 2000, 2001b; Joint Standing Committee on Foreign Affairs Defence and Trade,
2000; Unger & Frankel, 2002). In 2001 the Council on Australian-Latin American
Relations (COALAR) was established under the auspices of the Department of
Foreign Affairs and Trade. The Council’s broad objective is to enhance Australia’s
economic, political and social relations with Latin American countries by influencing
corporate Australia and assisting in the development of government policies (Council
on Australia-Latin America Relations, 2005). In 2007 the Council’s mandate was 3 Latin America includes Central and South America and encompasses Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic Ecuador, El Salvador, Falkland Isalnds, French Guiana, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Uruguay, and Venezuela. It does not include the Caribbean. Appendix 1 provides a map of Latin America.
10
extended indefinitely and its budget increased reflecting the government’s on-going
interest in the region. Overall, however, these efforts can be viewed as part of a wider
government impetus to increase exports and outward FDI in general, rather than a
particular focus on the region. Notwithstanding the recent attempts to increase the
region’s profile in Australia, Australia’s trade and investment in Latin America is
limited.
Fundamentally Latin America has been ‘terra incognita’ when it comes to Australian
exports and investment. Australia’s merchandise exports to the region averaged 1.2
per cent of total merchandise exports between 1995 and 2003 (Department of Foreign
Affairs and Trade, 1993, 1996, 2001a, 2004). Data from the Australian Bureau of
Statistics indicate fluctuations in Australia’s FDI stocks in Latin America between
1996 and 2005. Ranging from a low of A$442 million in 2003-04 to a high of A$2815
million in 1997-98, Australia’s FDI in the region accounted for an average one per
cent of total FDI stocks abroad for this period (see Figure 2.2) (Australian Bureau of
Statistics, 2006b). The 2000 report ‘Building Australia’s Trade and Investment
Relationship with South America’ called attention to the fact that whilst (at the time)
the largest six economies of Latin America––Argentina, Brazil, Chile, Mexico,
Colombia and Venezuela––were almost as large as the largest six economies of
‘emerging’ Asia––China, Malaysia, Indonesia, South Korea, Taiwan, and Thailand,
Australia’s trade and investment with ‘emerging’ Asia was (and still is) much greater
than that with Latin America (Joint Standing Committee on Foreign Affairs Defence
and Trade, 2000). Whilst the limited trade between Australia and Latin America may
be understood in terms of the regions being competitors in many areas (e.g. natural
resources and agriculture) and poor shipping links given the geographic distance,
much greater scope exists for two way investment.
Australia’s focus on other regions is clearly much greater than its focus on Latin
America. However, Latin America has historically attracted a substantial proportion
of worldwide FDI and continues to account for a much larger percentage of world
FDI stocks than of Australian FDI stocks (see Figure 2.2). At the beginning of the
twentieth century and up until World War II Latin America attracted more than 30 per
cent of world FDI stocks making it the largest recipient region during this time.
During the same period Asia accounted for just over 20 per cent of world FDI stocks
11
reflecting the importance of the developing world as the main recipient of FDI. World
War II and its aftermath brought about dramatic change in the volume and distribution
of FDI and by 1980 the focus of FDI worldwide had shifted to developed economies.
At this time Latin America accounted for 12 per cent and Asia for seven per cent of
FDI. By 1993 the regions had swapped places in terms of relative importance with
Asia receiving 13 per cent of world stocks and Latin America eight per cent (G.
Jones, 1996, pp.31-54). These figures have remained fairly stable to the present day.
Figure 2.2 illustrates Latin America’s share of worldwide FDI in recent years in
comparison to its share of Australian FDI. The ratio is approximately 7:1. As a
comparison, South, East and South-East Asia accounted for 15 per cent of world FDI
stocks over the same period, and approximately six per cent of Australian stocks
(UNCTAD, n.d.).
Figure 2.2: FDI Stocks in Latin America
0%
2%
4%
6%
8%
1997 1998 1999 2000 2001 2002 2003 2004 2005
Worldwide Stocks Australian Stocks*
* Australian data are for financial year ending Source: (Australian Bureau of Statistics, 2006b; UNCTAD, n.d.)
Whilst the relative importance of Latin America as a destination for FDI has
diminished considerably over time it is still evident that Australian firms are not
taking advantage of opportunities in the region to the same extent as firms from other
countries. In comparison to Australia’s limited investment in Latin America, other
OECD countries are the leading investors in the region with the United States, Spain,
the Netherlands and the United Kingdom consistently featuring among the top five
investors. With the exception of the Netherlands, these countries have a long history
12
of either colonial or extensive investment ties with Latin America (see Taylor, 2006).4
Table 2.1 provides a summary of the top five nations contributing to FDI inflows for
each of Latin America’s main markets over the period 1996-2006. Australia features
only once, accounting for five per cent of investment in Chile over this period
(ECLAC, 2007a).
Table 2.1: Key Sources of FDI Inflows in Latin American Markets 1996-2006 Arg Brazil Chile Col Mexico Peru Ven1 Country of Origin
% Spain 43 14 29 13 10 25 5 United States 11 21 18 20 61 16 31 Netherlands 9 14 - 5 10 5 10 United Kingdom - - 10 12 4 21 - France 6 7 - - - - Canada - - 16 - 3 - Panama - - - 10 - 6 - Portugal - 5 - - - - Australia - - 5 - - - - Italy 4 - - - - - Colombia - - - - - - 4 Switzerland - - - - - - 4 1 excludes hydrocarbons Source: (ECLAC, 2007a, pp.61-62)
Australia’s limited investment in Latin America is perhaps understandable when we
compare the sectoral breakdown of inward FDI in Latin America (see Table 2.2) to
the sectoral breakdown of outward Australian FDI. The vast majority of outward
Australian stock in 2002 was in manufacturing (53%) and finance (32%) (Merrett,
2007). Whilst manufacturing accounts for a reasonable portion of FDI inflows in
Latin America, we would generally surmise that Australian manufacturing firms have
limited ownership advantages that would lead them to Latin America. Similarly, the
services sector, which dominates regional FDI inflows, is culturally and language rich
which would also inhibit Australian investment in this area in Latin America (see
Sections 2.2 and 2.4 for further explanation). Where we could expect to see Australian
investment is in the natural resources sector which accounts for a sizeable portion of
inward FDI in Argentina, Chile, Colombia, Peru and Venezuela. Although mining
now only accounts for five per cent of Australian stocks abroad (Merrett, 2007),
Australian mining firms do possess ownership advantages that make them
internationally competitive and would warrant their presence in these markets.
4 Much of the FDI from the Netherlands is generated by firms originating in other countries that have chosen to operate in the Netherlands to take advantage of that country’s fiscal benefits (ECLAC, 2006).
13
There are currently 113 Australian owned foreign affiliates in Latin America. The
market and industry breakdown of these affiliates is provided in Table 2.3. The
majority of Australian investment in the region is located in Brazil, Chile and Mexico;
markets that account for 79 per cent of Latin America’s GDP (World Bank, n.d.-a).
Despite the apparent lack of ownership advantages, Manufacturing (31%) accounts
for the largest portion of Australian owned affiliates in Latin America, followed by
mining (18%).5
Table 2.2: Destination of FDI Inflows in Latin American Markets 1997-2006* Arg1 Brazil Chile Col Mexico Peru Ven2 Destination Sector
% Natural Resources 31 5 30 30 1 30 34 Manufactures 28 30 10 20 53 18 33 Services 29 65 60 50 46 52 33 Other 12 - - - - - - * data refer to the average annual inflows for this period. 1 1997-2004, 2 1997-2005 Source: (ECLAC, 2007a, p.60) Table 2.3: Australian Owned Foreign Affiliates in Latin America
Number % Brazil 39 35 Chile 27 24 Mexico 25 22 Other1 22 20 Industry
Manufacturing 35 31 Mining 20 18 Wholesale Trade2 17 15 Property & Business Services 11 10 Other1 30 27
1 Includes confidential data 2 Commonly sales branches operated by manufacturers Source: (Australian Bureau of Statistics, 2005)
Whilst indicative of Australia’s limited involvement in the region, the ABS data on
Australian investment in Latin America are incomplete. For example, it was explained
to me that BHP Billiton’s investment in Latin America is actually made by BHP
Billiton’s USA subsidiary and is therefore classed as United States investment in
Latin American rather than Australian investment (Davies, pers comm., ABS
International Accounts Research, Nov 24 2005). According to BHP Billiton’s 2005 5 Note this is a count of affiliates rather than a dollar value and as such presents a different picture to the abovementioned FDI data.
14
Annual Report its Latin American assets are worth US$5.7 billion and represent the
Group’s largest investment outside Australia. Whilst not directly comparable to the
ABS’s data on FDI in Latin America6, these data suggests that BHP Billiton’s
investments in Latin America greatly exceed that of all other Australian companies
combined. Through discussions with the Australian Bureau of Statistics I have come
to understand that it is not possible to obtain more accurate data on total Australian
FDI in Latin America.
Table 2.4: Examples of Australian Firms Operating in Latin America BRW 2005 Ranking1
Company Industry Latin American markets
Latin American Assets 20052 (in millions)
1 BHP Billiton Mining Brazil, Chile, Colombia, Peru, Suriname
US$5682
9 Rio Tinto Mining Argentina, Brazil, Chile
US$680
14 Amcor Packaging Argentina, Brazil, Chile, Colombia, Peru, Uruguay
A$992
15 AMP Financial services Chile n/a 17 QBE Insurance Insurance Brazil A$21183 19 Lend Lease (Bovis
Lend Lease) Services Argentina, Brazil,
Chile, Mexico A$16773
22 Brambles Industries (Chep)
Services Argentina, Brazil, Chile, Mexico
n/a
42 AGL Energy Chile n/a 43 Orica Chemicals, mining
services Argentina, Brazil, Chile, Guyana, Mexico, Peru, Venezuela
A$7403
120 Nufarm Agriculture Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Guatemala, Mexico, Panama, Venzeuela
A$4183
136 Village Roadshow Entertainment Argentina n/a 566 GHD Services Chile n/a
1 Business Review Weekly’s annual ranking of the largest Australian companies 2 Taken from each company’s annual report where specified 3 Assets in the Americas. Segregated data for Latin America not available
Table 2.4 provides some examples of large Australian firms currently engaged in FDI
in Latin America. This list is indicative rather than exhaustive. Whilst BHP Billiton’s 6 BHP Billiton's Annual Report provides the depreciated book value of assets in US dollars. The ABS data is reported in Australian dollars and is subject to fluctuations in market value and the exchange rate.
15
Latin American assets are by far the largest of any Australian company, Rio Tinto and
Amcor also report substantial assets in the region. These companies are the only ones
to report on Latin American assets as a separate geographic segment in their annual
reports.
The end result of this analysis is a picture of Australian investment in Latin America
involving one giant (BHP Billiton) and a number of ‘minnows’. Whilst the minnows
have limited impact on the FDI statistics they have entered the region and have been
successful. This research explores why these firms have been willing to invest when
others have not.
2.2 Australia-Latin America Ties Latin America’s status as ‘terra incognita’ in Australia is slowly changing and there is
a variety of data that provide testament to the increasing links between the continents.
From a small base, Australia-Latin America ties have increased substantially in recent
years such that the likelihood of Australian firms finding out about opportunities in
Latin America has also increased.
In regards to diplomatic ties, however, progress has been slow. The first Australian
embassy in Latin America opened in Rio de Janeiro, Brazil in 1945.7 An Australian
embassy was opened in Santiago, Chile in 1946 but closed shortly after in 1949.
Australia’s diplomatic presence in the region did not expand again until the 1960s
when embassies opened in Buenos Aires, Argentina (1964), Mexico City, Mexico
(1967) and Santiago, Chile (1968). In the 1970s two more embassies were established
in Lima, Peru (1974) and Caracas, Venezuela (1979), but both embassies have since
closed (Lima in 1986 and Caracas in 2003). Peru is the only APEC member country
where Australia does not have an embassy. In comparison to Australia’s diplomatic
presence in four countries in the region, seven Latin American countries have a
diplomatic presence in Australia. Whilst noteworthy, Australia’s limited diplomatic
presence in the region is unlikely to change in the near future.
7 The Australian Embassy in Brazil moved to Brasilia in 1971.
16
Another area that has served to increase Australia-Latin America ties is that of
migration. The 2006 ABS Census recorded 82,116 Latin American migrants in
Australia. More than a quarter of these come from Chile (23,305), with Argentina also
accounting for a large portion (14%). The majority of Latin American migrants (67%)
arrived in Australia before 1991 with most arriving on humanitarian visas as a result
of dictatorial regimes in many Latin American countries. The 1990s saw another
13,875 Latin Americans migrate to Australia and a similar number have arrived since
2000 (Australian Bureau of Statistics, 2006a). The 2006 Census also recorded 97,996
people whose primary language is Spanish and 25,781 whose primary language is
Portuguese. Whilst this might seem like a sizeable community8 whose contribution to
Australia in terms of cultural festivals is evident, there are very few among this
community in a position to influence Australia-Latin American business ties. Based
on data from the 2006 Census, Table 2.5 provides a summary of those in the
Iberoamerican9-Australian community who may be in a position to promote Australia-
Latin American commercial ties. Whilst this is only a very rough indicator it
demonstrates that less than five per cent of the community are in any position to
potentially influence trade and investment between the regions.
Table 2.5: Selected Occupations of Iberoamerican-Australians Profession Born in
Latin America
#
Spanish or Portuguese as main language spoken at
home #
Managers (nfd) 178 225 Chief Executives, General Managers and Legislators
251 322
Business Administration Managers 417 529 Construction, Distribution and Production Managers
774 975
Business, Human Resource and Marketing Professionals
2281 2806
Total 3901 4857 % of Total in Australia 4.8% 3.9%
nfd – not further defined Source: (Australian Bureau of Statistics, 2007b)
8 Albeit much smaller than the migrant communities of other nationalities (e.g. British, Greek, or Italian) 9 A term used to refer to Spain, Portugal and their former colonies.
17
Perhaps a more indicative measure of increasing ties between Australia and Latin
America is the trend in short term visitor movements10 between the two continents.
The total number of movements between Australia and Latin America has almost
doubled in the past ten years to over 90,000, as illustrated in Figure 2.3. The most
common reason for travel between the regions is ‘holiday’ and the number of
Australians travelling to Latin America for this reason has more than tripled over the
decade to 2006. Business movements have also increased in both directions with 60
per cent more Australian movements to Latin America and 156 per cent more Latin
American movements to Australia (Australian Bureau of Statistics, 2007c).
Figure 2.3: Short-term Visitor Movements
0
10000
20000
30000
40000
50000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Australians departing Latin Americans arriving
Source: (Australian Bureau of Statistics, 2007c)
Hand in hand with the increasing number of travellers is the increasing number of
flights between Australia and Latin America. Traditionally three airlines have
provided flights between Australia and South America; Qantas, LAN (Chile) and
Aerolíneas Argentina. As recently ago as 2000 a flight between Sydney, Australia and
Santiago, Chile with Qantas/LAN11 meant stopovers in New Zealand, Tahiti, and
Easter Island. Qantas/LAN now run seven flights per week from Sydney to Santiago
(via Auckland). Aerolíneas Argentina has increased the number of flights they make
from three to five per week flying from Sydney to Buenos Aires Argentina, once
10 These statistics relate to the number of movements of travellers rather than the number of travellers (i.e. multiple movements of individual persons during a given reference period are each counted separately). Short term movement refers to a stay of less than one year. 11 Flights are provided in a code sharing arrangement.
18
again via Auckland. Emirates and Malaysian Airlines have also recently entered the
market offering two flights per week each to Sao Paolo (via Dubai) and Buenos Aires
(via Kuala Lumpar) respectively. Qantas and LAN have recently announced they will
begin direct flights12 between Sydney and Buenos Aires three times a week in
November 2008. Despite the increase in the number of flights it is still difficult to get
a flight at short notice in peak season. The high demand and limited supply also
results in comparatively high prices.13
One area currently experiencing exponential growth in Australia-Latin American ties
is the area of post-secondary education. Since 1997 there has been an 11 fold increase
in the number of Latin American students studying in Australia. In the past five years
the number has increased 155 per cent (from 6,971 to 17,76214) with the majority of
this growth occurring in the past two years (see Figure 2.4). In 2007 the majority of
students came from Brazil (56%), while Colombia also accounted for a significant
portion (25%). The greatest growth over the 2002-2007 period, however, has been in
students from Peru (719%) and Chile (442%), albeit from a very small base. Just over
half of all students are studying English Language courses15 (52%) and this is also the
sector that has experiences the highest growth (221%) (Australian Education
International, 2007). Figure 2.4 illustrates the growth over time for each of the major
educational sectors with considerable growth also evident in the Vocational Education
& Training (VET) sector.16 Unfortunately the number of Australian students taking up
exchange opportunities to study in Latin America is small.
12 Once again, in a code sharing arrangement. 13 To travel to Central America from Australia it is most common to fly first to Los Angeles and the take one of many connecting flights to cities throughout Central America. 14 Total enrolments as at August 2002 and 2007 respectively. 15 Formally referred to as English Language Intensive Courses for Overseas Students (ELICOS) 16 It has been suggested that this growth relates to Brazilian students’ desire to qualify for skilled migrant visas based on the Australian government’s identified skill shortages.
19
Figure 2.4: Latin American Students in Australia 2002-2007
02000400060008000
1000012000140001600018000
2002 2003 2004 2005 2006 2007
Total ELICOS VET Higher Education Other
Source: (Australian Education International, 2007)
The data presented above combine to paint a picture of increasing engagement
between the regions. This engagement becomes somewhat of a self perpetuating
cycle; as more and more students and travellers move between Australia and Latin
America the attractive business environments on both continents are revealed to the
other encouraging further engagement.
2.3 The Latin American Business Environment Latin America accounts for eight per cent of the world’s population, six per cent of its
GDP and, as already demonstrated, seven per cent of the stock of worldwide inward
FDI. It is comparable in population to the European Union and, as this section will
explain, it provides attractive market opportunities for multinationals willing to
venture ‘south of the border’ or in Australia’s case ‘east of the pond’.17
Numerous factors influence market attractiveness including economic, political,
financial, legal, and social factors and the countries of Latin America vary markedly
on their performance in these areas. In addition to Brazil, Chile and Mexico (the focus
of this research); Argentina, Colombia, Peru and Venezuela make up the largest seven
markets in the region and accounted for 92 per cent of regional GDP in 2006 (World
17 Several Australian and Latin American diplomats and trade commissioners have commented that Australia and Latin America are ‘just across the pond’ from each other, in reference to the Pacific Ocean.
20
Bank, n.d.-a).18 The 2007 Latin American Business Environment Report produced by
the Centre for Latin American Studies at the University of Florida (McCoy, 2007)
rated the market attractiveness of 18 Latin American countries. Of the primary seven
regional markets, three are regarded as attractive (Chile, Mexico and Peru), three are
regarded as mixed (Argentina, Brazil and Colombia) and one is considered
problematic (Venezuela).
Table 2.6 ranks these 18 Latin American markets on key economic indicators, for
comparison purposes Australia is also included in the rankings. The raw data upon
which this ranking is based are provided in Table A.1 Appendix 2. Brazil and Mexico
are ranked first and second respectively in terms of total GDP and population;
however both are struggling with lower GDP growth and higher inflation than many
of their regional counterparts. Chile is ranked in the top three in Latin America for
GDP at PPP per capita, GDP growth and inflation. However it has a much smaller
population which limits its market attractiveness.
Table 2.6: Ranking of Latin American Markets
GDP (current $US
millions)
Population (millions)
GDP PPP per capita
(international $)
High GDP Growth
(1997-2006)
Low Inflation
(1997-2006) Brazil 1 1 7 11 7 Mexico 2 2 4 8 10 Australia 3 7 1 5 2 Argentina 4 4 2 12 6 Venezuela 5 6 11 13 16 Chile 6 8 3 1 4 Colombia 7 3 10 6 11 Peru 8 5 12 11 4 Ecuador 9 9 16 9 17 Guatemala 10 10 15 10 7 Dominican Rep. 11 11 8 2 14 Costa Rica 12 17 6 3 13 Uruguay 13 18 5 13 12 El Salvador 14 14 13 14 3 Panama 15 18 9 4 1 Bolivia 16 12 19 12 5 Honduras 17 13 18 7 15 Paraguay 18 15 14 8 8 Nicaragua 19 16 17 14 9
Australia’s GDP at PPP per capita is more than double that of the second ranked
country Argentina ($35,493 compared to $15,795). However, it is only when the data
are adjusted for income distribution that Latin America’s attractiveness as a consumer 18 The remainder of this section will refer primarily to these seven markets.
21
market is truly revealed. The highest quintile of Brazil’s population accounts for 61
per cent of the country’s GDP resulting in a population almost twice the size of
Australia (38 million) with a per capita GDP at PPP of $27,66819 (see Appendix 2,
Table A.6). Mexico is another highly attractive market in this regard with its highest
quintile (GDP at PPP pc $31,759) equal to the total population of Australia. Whilst
Argentina and Chile have much smaller overall populations, resulting in smaller
populations in their highest quintiles, the income distribution in these countries is
such that the middle classes also emerge as attractive markets (see Appendix 2, Tables
A.5 and A.6). Taking this comparison one step further we can see that the highest
quintile of Argentineans is the third wealthiest population in the world after
Luxembourg and the United States of America. Chile’s wealthiest come in at number
ten in the world, while the wealthiest 20 per cent of Mexico, Brazil and Colombia also
fall within the top 30 worldwide (23rd, 27th and 30th respectively) (World Bank, n.d.-
a). This is significant even though the majority of FDI in the region is not market
seeking as it paints a picture of Latin America, or at least parts of it, as more
developed and sophisticated than is otherwise reflected in standard PPP per capita
data.
The Historical Context In order to understand Latin America’s current business environment a brief
discussion of the historical context is warranted.20 The latter half of the 20th century
brought widespread political instability to Latin America. A battle of ideologies was
fought between socialism and capitalism as Latin Americans struggled to address the
inequalities inherent in the cultural and institutional legacies of Colonialism (Becker,
2004). Coups d’etat occurred in Brazil (1964), Peru (1968), Chile (1973), and
Argentina (1976), as well in as numerous smaller countries, ushering in a period of
military dictatorships across the region. Human rights abuses were widespread during
this time. In this era of increasing nationalism (roughly 1950s-1980s), Import
Substitution Industrialisation (ISI) became the norm, spelling the end of Latin
America’s extensive participation in the global economy to date (Bulmer-Thomas,
Coatsworth, & Cortes Conde, 2006). Tariff and non-tariff barriers alike were raised to
19 Note: this data is merely indicative of average income for this portion of the population. 20 For a more complete analysis of Latin America’s economic history see Reid (2007).
22
unprecedented levels and most countries were not signatories to the GATT at the time
of its formation. The nationalisation of key foreign-owned business assets was
common as were price controls and the expropriation of landed estates (Ward, 1997).
The economic ramifications of this period included contraction, debt crises and
hyperinflation, the hangover of which still affects the region’s image today. The debt
crisis of the 1980s marked the collapse of the ISI model in a decade commonly
referred to as the lost decade (e.g. Becker, 2004; M. Reid, 2007; Winn, 2006). In
Argentina inflation averaged 566 per cent per annum in the 1980s while in Brazil it
reached 355 per cent and in Peru 481 per cent. Brazil and Peru suffered even higher
rates of inflation in the 1990s at 843 per cent and 808 per cent respectively (World
Bank, n.d.-a). Mexico and Chile were able to control inflation to a much greater
extent throughout this time. The 1980s saw a slow return to democracy across the
region (see Appendix 2, Table A.2) albeit with a certain level of fear the pervasive
undercurrent of society. Latin American countries are still divided over the legacies of
their military dictatorships as witnessed during the recent (December 2006) intense
celebrations and mourning over the death of former Chilean dictator General Augusto
Pinochet.
The destinies of most Latin America markets during the 1990s were largely shaped by
the structural reforms laid out in the Washington Consensus (Winn, 2006).21
Throughout the region governments turned away from the ISI model and opened up
their economies, reducing barriers to trade and investment. The success of the New
Economic Model (NEM) (as proposed in the Washington Consensus) was generally
accepted until the fallout of the Asian crisis after which time its vulnerability was
exposed. As a result of the Asian crisis the region’s overall growth fell sharply while
unemployment and trade deficits rose (Reinhardt & Peres, 2000).22
21 The Washington Consensus, formed at the end of the 1980s, reflected an informal agreement between the IMF, the World Bank and the U.S. government on the policies that developing countries should follow to maximize economic growth. 22 For a comprehensive review of Latin American economic reform see Reinhardt and Peres (2000) or Welch (1996).
23
The Current Business Environment Latin America has prospered in recent years thanks to record high commodities prices
coupled with low inflation and strong capital flows (McCoy, 2007). GDP growth in
the seven largest markets averaged 3.5 per cent in the 1990s and has slightly exceeded
that mark in the first part of this decade (3.7%) (World Bank, n.d.-a). Although down
on the recent record high levels of the late 1990s, FDI continues to flow to the region
with 2007 expected to attract a higher level of FDI than 2006 (McCoy, 2007).
Latin American markets are locking in their economic reforms with all countries in
the region members of the WTO, most since its inception. There have been numerous
attempts at regional economic integration as well, including the Andean
Community23, the Central American Common Market24 and MERCOSUR25, though
outcomes are questionable. Most recently, the proposed Free Trade Area of the
Americas appears doomed for similar reasons as the failure of the Doha Round of
WTO negotiations.26 Latin American countries are fervent participants in the
mounting ‘spaghetti bowl’ of bilateral free trade agreements (FTAs) taking shape
around the world. Chile and Mexico lead the way with both countries signatories to
almost 20 FTAs including FTAs with the EU, the USA and Japan (APEC, n.d.).
Australia signed its first FTA with a Latin American country, Chile, in July 2008.
Despite a return to democracy in the region, or perhaps owing to it, political
instability is still a concern in some countries. In one historic fortnight in 2002
Argentina was governed by five presidents. The World Bank’s 2006 Governance
Indicators (see Appendix 2, Table A.2) show that six of the primary seven markets
rate below the 50th percentile for political stability27 with Venezuela (12.0) and
Colombia (7.7) being of particular concern. Argentina has stabilised considerably
23 Originally Bolivia, Chile, Ecuador, Colombia and Peru, formed in 1969; Chile has since left the agreement and Venezuela has joined. Currently operates as a customs union. 24 Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, proposed in the 1960s; collapsed in 1969 after war broke out between El Salvador and Honduras over a soccer match; has achieved limited progress to date. In 2003 the USA signalled its intention to negotiate a bilateral FTA with the group. 25 Brazil, Argentina, Paraguay and Uruguay, formed in 1990; accused of diverting more trade than it creates. 26 Developed countries’ insistence on the protection of intellectual property rights and expanded trade in services and developing countries’ repeated requests for an end to agricultural subsidies have stalled progress. 27 Political stability is a measure of the perceived likelihood that the government will be destabilised or overthrown by unconstitutional or violent means.
24
since that fortnight and has the second best rating of the seven markets at 44.7. The
exception among this group is Chile where political stability is rated above the 75th
percentile. Chile also rates higher on voice and accountability28 and government
effectiveness29 (87.5 on the former and 87.7 on the latter). The second highest rated
countries are Brazil for voice and accountability (58.7) and Mexico for government
effectiveness (60.7) (World Bank, n.d.-b). Additional measures of governance include
regulatory quality and rule of law (see Appendix 2, Table A.3). These indicators are
particularly important to an assessment of the business environment as regulatory
quality measures the ability of government to implement policies that encourage
private sector development and rule of law reflects the strength of contract
enforcement and public confidence in the police and the courts. Once more Chile
outranks its regional counterparts on these indicators (91.7 for regulatory quality and
87.6 for rule of law) (World Bank, n.d.-b). Brazil and Mexico also perform
comparatively well by regional standards. Understandably, given its strong
governance ratings, Chile also ranks highest in the region on the World Bank’s Ease
of Doing Business Index (33rd); Mexico also rates well at number 44 in the world
(World Bank, 2007).
The dramatic swing to the left predicted by some observers did not eventuate in the
13 presidential elections that took place in the region over the past two years. Whilst
three smaller Latin American countries (Bolivia, Ecuador and Nicaragua) did elect
leftist governments who have aligned themselves with Venezuela’s President Hugo
Chavez30, other presidents with leftist roots have chosen not to align themselves with
Chavez and have instead adopted more moderate policies. This was the case in the
primary markets of Brazil, Chile and Peru and also the smaller markets of Uruguay
and Costa Rica. The trend of power transfers taking place through regularly scheduled
elections is also worthy of note given the region’s turbulent history.
28 Voice and accountability is a measure of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, association and the media. 29 Government effectiveness is a measure of the quality of public service, the quality of the civil service and its independence from political pressures, the quality of policy formulation and implementation and the credibility of the government’s commitment to such policies. 30 Chavez’s government was elected in 1998 and promotes democratic socialism. He is a staunch critic of neoliberalism and globalisation.
25
Notwithstanding the important economic and political reforms the region has
undertaken which have clearly enhanced market attractiveness for foreign investors,
Latin America still faces substantial challenges. According to Enrique Iglesias,
president of the Inter-American Development Bank ‘the major problem confronting
the region at the turn of the [21st] century is the social question’ (as cited in Winn,
2006, p.637). Table A.4 in Appendix 2 provides a snapshot of social indicators for the
region’s primary seven markets. In spite of the economic growth brought about by
market liberalisation, Latin America still has the most unequal distribution of income,
land and wealth in the world. Commerce in Latin America continues to be controlled
by a small minority of Latin Americans of European descent while rigid class
structures lock out the largely indigenous majority of poor people.31 With the
exception of Chile (18%) and Argentina (27%), more than 30 per cent of the
population in Latin America’s largest markets live below the poverty line; although
poverty rates have fallen in recent years. It is easy to see why income distribution is
Latin America’s greatest challenge of the 21st century when the highest quintile of the
population in Colombia earns 25 times as much as the lowest quintile. In comparison
the highest quintile of Australians earns 5 times as much as the lowest quintile (see
Appendix 2, Table A.6). Inequality has been at the root of much of Latin America’s
unrest for centuries. If not addressed by the region’s current flock of moderate
governments the potential exists for future political upheaval with negative
ramifications for foreign investors.
As a result of widespread inequality, crime and corruption are major problems facing
the region today (see Appendix 2, Table A.3). Drug trafficking is a threat particularly
in Central America and Andean South America (Colombia, Ecuador and Peru) and
the risk of kidnapping in these areas is also considerable. Crime victimisation is of
particular concern in Mexico were 76 per cent of respondents to a 2002 survey
reported that they themselves or a member of their family had been a victim of crime
in the past year (McCoy, 2007). In comparison only 36 per cent of Brazilian and
Chilean respondents reported such victimisation (see Appendix 2, Table A.3). Public
security has become even more of an issue in Mexico in 2008. The drug war being
31 The indigenous percentage of the population varies markedly from country to country.
26
fought out between rival drug cartels has escalated this year and more than 2600
people have been killed to August 2008 ("12 headless corpses found," 2008).
The outlook for the Latin American business environment for 2008 is positive with
only one of 18 countries set to see a weaker business environment (Venezuela). The
prediction for the rest of the region is for continued growth and controlled inflation.
Clearly, Latin America has attractive markets that are stabilising and are open to
foreign investment. Section 2.1 illustrated that MNEs from other countries are taking
advantage of what Latin America has to offer. The question remains, why more
Australian firms are not following suit.
2.4 Latin American Culture Without dismissing the importance of intra-regional differences, it can be said that
Latin American countries share a common societal culture distinguishable from the
rest of the world. This common culture has its roots in the region’s shared Iberian
colonial past, civil law heritage and the dominance of Catholicism since colonisation.
Today Latin American culture is epitomised by three closely bound ‘Ps’; Personalism,
Particularism and Paternalism (Osland, De Franco, & Osland, 1999). The underlying
current of all three characteristics is yet another P; Power.
Personalism refers to a sense of connection and a desire for personalised,
individualised attention. As a result, personal relationships are an important precursor
to business relationships. A sense of personal loyalty rather than formal procedure is
often more likely to produce results in Latin America. Osland et al. (1999, p.221) cite
numerous examples of people making special arrangements for others once a personal
relationship is established. The trait of personalism lends itself to a Particularist rather
than Universalist societal order. Particularism, the second P of Latin American
culture, refers to making exceptions based on individual circumstances and the
obligations of family and friendship as opposed to treating everyone equally
according to bureaucratic rules and abstract societal codes (Universalism) (Osland et
al., 1999). In this vein, nepotism is an accepted practice is many parts of Latin
America. Particularism goes hand in hand with the legal pluralism inherited from the
Spanish and the Portuguese that has resulted in one set of laws for the elite and
27
another for everyone else. There is a Brazilian saying that typifies this mind-set, ‘for
my friends, everything; for strangers nothing, for my enemies the law.’
The final P of Latin American culture, Paternalism, derives its roots from the Iberian
monarchy, the Catholic Church and the extended patriarchal family (Rossen, 1988).
Family boundaries in Latin America are extended by compadrazgo (literally
translated as co-parenting) to include godparents and their families. Distant cousins
and close friends also form part of this expansive network. Compadrazgo implies
communal solidarity and belonging. It is common for members of an extended family
network to greet each other as compadre or comadre (literally translated as co-father
and co-mother, but used not only for the godparents of one’s children). Used
affectionately, these terms demonstrate a bond comparable to Australian mateship;
albeit deeper due to actual family bonds. Reflecting another aspect of paternalism, it
is often expected in Latin America that bosses take a personal interest in their
subordinates’ non-work lives by attending family functions such as baptisms and
weddings.
Cultural and Institutional Distance between Australia and Latin America
It is widely accepted that cultural and institutional differences affect businesses as
they internationalise. Latin American culture has been briefly discussed above and the
region’s institutions were described in Section 2.3. I have calculated measures of
cultural and institutional distance between Australia and the key Latin American
markets in an attempt to further illustrate the differences between the Australian and
Latin American business environments; differences that Australian firms need to learn
to manage as they internationalise in the region.32 Appendix 3 provides the complete
data in relation to these measures. These distances were measured using a Euclidean
distance calculation similar to that of Kogut and Singh (1988).33 For example the
institutional distance measure is calculated as follows:
32 It should be noted that cultural distance and institutional distance are not the only distances between countries that could affect internationalisation. Other potential influences include geographic distance as well as economic, legal, political and language differences. 33 It is acknowledged that such a measure must be used with caution due to the assumption of equivalence inherent in the index.
28
( ) 1414
1
2
∑=
⎥⎦
⎤⎢⎣
⎡ −=
i i
ijikk V
IIID
Where ID = Institutional Distance, k = host country, j = home country, I = indicator, and Vi = variance.
Cultural distance (CD) was measured using Geert Hofstede’s (1980) four original
dimensions of culture (power distance, uncertainty avoidance, individualism vs.
collectivism and masculinity vs. femininity). Hofstede collected data from more than
100,000 IBM employees between 1967 and 1973. The work included 13 Latin
American countries.34 Latin American countries generally score high on power
distance and uncertainty avoidance and emphasise collectivism over individualism.
Interestingly values on the masculinity vs. femininity dimension vary greatly within
the region, ranging from 21 in Costa Rica to 73 in Venezuela, making Costa Rica
highly feminine and Venezuela highly masculine (see Appendix 3, Table A.10).
I also measured cultural distance based on the work of House, Hanges, Javidan,
Dorfman and Gupta (2004). Building on the work of Hofstede, House et al. (2004)
measured nine core dimensions of societal and organisational culture. The dimensions
are power distance, uncertainty avoidance, institutional collectivism, in group
collectivism, humane orientation, assertiveness, gender egalitarianism, future
orientation and performance orientation. The work is based on data collected between
1995 and 1997 from over 17,000 middle managers from 951 organisations (House et
al., 2004, p.22). Given the dynamic nature of culture, this study provides a more
recent reflection of national level culture. Additionally House et al. (2004) measured
culture both as it is (practices) and as respondents felt it should be (values) providing
another facet on which to compare cultures. House et al. (2004) included ten Latin
American countries in their study.35
As a relatively new concept, there is not yet a universally accepted operationalisation
of institutional distance (ID). Some early attempts include those of Busenitz, Gomez
and Spencer (2000), Kostova and Roth (2002) and Gaur, Delios and Singh (2005).
34 Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Panama, Peru, Uruguay, and Venezuela. 35 Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, and Venezuela.
29
Table 2.7 provides a measure of ID derived from the work of Gaur et al. (2005). The
measure is based on 14 indicators encompassing normative and regulative aspects of a
country’s institutional environment. The regulative indicators are political
transparency, anti-trust regulation, intellectual property protection, judicial system
efficiency, fiscal policy, inflation, and market dominance in key industries. Indicators
capturing normative aspects include the responsiveness of the political system to
economic challenges, bureaucratic corruption, the adaptiveness of the government to
economic challenges, transparency towards citizens, political risk, bureaucratic
hindrance to economic development, and the independence of local authorities. These
indicators were complied from the World Competitiveness Yearbook. Gaur et al.
(2005) included the primary seven Latin American markets in their sample.36
As a comparison to the Australia-Latin America distances, the distances from
Australia to the USA and to the UK have also been calculated as these countries are
the recipients of the majority of Australian FDI. Table 2.7 provides a summary of the
distances from Australia to the primary Latin American markets as well as to the USA
and the UK (as Australia has a score of zero, a higher number represents a greater
distance from Australia). As illustrated, the UK and the USA are considerably
culturally and institutionally closer to Australia than the primary Latin American
markets. The three markets that form the basis of this research, however, are among
the culturally and institutionally closest to Australia in the region (see Appendix 3,
Tables A.7-A.9).
Table 2.7: Cultural and Institutional Distance from Australia37
CD (House et al., 2004) Country CD (Hofstede, 1980) Practice Values
ID (Gaur et al., 2005)
Argentina 0.61 2.24 1.42 3.45 Brazil 0.88 1.08 1.97 2.32 Chile 1.53 n/a n/a 1.12 Colombia 1.41 1.99 1.98 3.95 Mexico 1.29 0.88 1.52 2.22 Peru 1.49 n/a n/a 2.21 Venezuela 1.68 2.06 2.02 6.81 United Kingdom1 0.06 0.38 0.10 0.92 United States 0.01 0.11 0.18 0.53
1 House et al. (2004) measured CD to England not the United Kingdom 36 Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela 37 See Appendix 3 for complete data.
30
The measures shown in Table 2.7 are a composite indicator of all cultural and
institutional dimensions and should be interpreted with caution.38 Drilling further into
the data some interesting regional differences emerge. For example, most of the key
markets are quite close to Australia in terms of Hofstede’s masculinity dimension (see
Appendix 3, Table A.7), Chile however is much more feminine than Australia and
most of its neighbours with a distance from Australia on this dimension of 3.2.39
Similarly, Argentina is very close to Australia on Hofstede’s power distance
dimension (0.4) and yet Mexico and Venezuela are very far away (4.3).40 Hofstede’s
Individual/Collectivism dimension appears to reflect the greatest difference between
Australian and Latin American culture with distance ranging from 3 (Argentina) to 11
(Guatemala). Australia is a highly individualistic culture with a score of 90, whereas
Latin American countries score an average of 21 making them highly collectivist (a
reflection of the three Ps discussed above).
With the caveat that these indicators are merely illustrative, the Hofstede (1980),
House et al. (2004) and Gaur et al. (2005) studies demonstrate that Latin America is
both culturally and institutionally distant from Australia when compared to the United
Kingdom and the United States of America. This coupled with the lack of previous
research into Australian internationalisation in Latin America and the apparent desire
of the Australian government to increase our involvement in the region provides
justification for using Australian FDI in Latin America as the basis for this research.
2.5 Conclusion This chapter has set the stage for the remainder of the thesis. An understanding of the
research context (such as provided in this chapter) is important in order to adequately
interpret the results presented in subsequent chapters of this dissertation. In sum, the
research context includes: Australia’s history of limited internationalisation
dominated by neighbouring and culturally similar markets, the increasing emphasis on
Latin America by the Australian government since 2000, an increasingly favourable
business environment in Latin America and the cultural and institutional
38 See Appendix 3 for a discussion of caveats. 39 Australia scored 61 on the masculinity/femininity scale and Chile scored 28. 40 Australia scored 36 on the power distance scale, Argentina 49, and Mexico and Venezuela 81.
31
dissimilarities between Australia and the region. The next chapter critically analyses
the internationalisation process literature and the network perspective literature with
the aim of exposing the research gap from which the research questions logically
flow.
32
33
CHAPTER THREE
Literature Review
My research explores the phenomenon of Australian firms internationalising in Latin
America. The international business (IB) literature provides several concepts that help
explain this phenomenon, and yet no one existing theory or model sufficiently
explains the occurrence of Australian investment in Latin America. The aim of this
chapter is to comprehensively review the relevant theoretical and empirical IB
literature in order to reveal the gaps that are addressed by my research. Together with
Chapter 2 the literature review provides the justification for my research. A critical
appraisal of the literature, such as that provided here, helps situate my research within
the existing body of knowledge, and in conjunction with the discussion in Chapter 8
highlights my contribution to the advancement of the discipline. The analytical
framework I construct as a result of this literature review provides a better explanation
of Australian investment in Latin America than that provided by existing models.
This chapter begins with an overview of the IB discipline and proceeds with a
systematic review of two areas of IB research, the internationalisation process
literature and the network perspective of internationalisation literature. Four key
constructs; psychic distance, experiential knowledge, and business and social
networks are explored in depth. Particular attention is paid to their impact on
international market selection (IMS). These constructs are used to build an analytical
framework that helps explain the phenomenon of Australian investment in Latin
America.
My research seeks to understand the internationalisation of Australian firms into Latin
America. Chapter 2 described the limited commercial ties between Australia and
Latin America to date and the success that multinationals from other countries are
enjoying in the region. Some Australian firms have ventured to Latin America; most
of those that have gone abroad have not. A priori, Latin America is a more difficult
marketplace for Australian firms than more culturally and institutionally similar
markets such as the UK and the USA. Initial background research caused me to ask:
why are some Australian firms in Latin America when others are not? and how did
34
these Australian firms get there? These questions led me to the behavioural and
relationship schools of IB research.
The field of international business is a comparatively new area of research and
internationalisation is a topic at its core. Hymer (1960, 1968 as cited in
Hutzschenreuter, Pedersen, & Volberda, 2007) is said to have created the foundations
for the study of internationalisation in suggesting that internationalisation is about
overcoming the inherent disadvantages foreign firms experience when competing
with local firms, thus identifying the ‘liability of foreignness’. Internationalisation has
been tackled differently by different schools of thought within the IB discipline.
Numerous models of the internationalisation process have been put forth yet no
dominant theory exists to explain why firms internationalise (Wickramasekera &
Oczkowski, 2004). There is not even a universally accepted definition of the term
internationalisation. Coviello and McAuley (1999) cite four alternative definitions but
suggest that Beamish’s (1990) is the most holistic interpretation of the concept.
Beamish (1990, p.77) defines internationalisation as:
‘the process by which firms increase their awareness of the direct and
indirect influence of international transactions on their future, and
establish and conduct transactions with other countries’.
This definition integrates aspects of other definitions of the concept and
acknowledges both the behavioural and economic components of internationalisation.
The definition is process-based which suggests that internationalisation is dynamic
and evolutionary. The definition also implies that relationships established during
internationalisation might influence a firm’s future expansion. In the context of this
definition, three streams of internationalisation research can be identified: 1) the
economic school of foreign direct investment theory (e.g. Dunning, 1988), 2) the
behavioural school of the internationalisation process models (e.g. Johanson &
Vahlne, 1977) and 3) the relationship school of the network perspective (e.g.
Axelsson & Johanson, 1992; Johanson & Mattsson, 1988). My research is situated
within the behavioural and relationship schools of thought. These schools of thought
are most relevant to the study of the given phenomenon because they view the firm as
an entity made up of people whose decision making processes and interactions both
35
within and outside the firm affect internationalisation. In contrast, the economic
school of thought assumes hyper-rational thinking with profit maximisation the main
goal. Human action is not accounted for in the metaphor of the ‘black box’. It is this
human action, however, that is best able to explain why some Australian firms have
internationalised to Latin America and why others have not.
This study draws heavily on the research of Nordic scholars. Nordic international
business research has been dominated by a behavioural rather than an economic
perspective of the international firm which sets it apart from the majority of Anglo-
American research (Bjorkman & Forsgren, 2000). Nordic scholars have tended to
view the international firm as a learning organisation characterised by bounded
rationality, limited knowledge and action-based learning processes. The primary focus
of Nordic international business research has been the factors underlying the
internationalisation process rather than reasons behind individual international
business decisions (Bjorkman & Forsgren, 2000). This makes it relevant to my
research as it is the decision making behind internationalisation to Latin America that
I am interested in exploring.
Sections 3.1 and 3.2 below comprehensively review the internationalisation process
and the network perspective bodies of literature drawing out the contribution they can
make to explaining Australian investment in Latin America. The review clearly
illustrates the need for an integrated framework incorporating constructs from both
schools.
3.1 Internationalisation Process Literature Internationalisation is the product of a series of incremental decisions. This view and
a desire to map and explain this decision making process has driven the
internationalisation process literature to date. The literature is broad and has included
research in many allied areas including market selection, entry mode choice,
organisational learning and organisational performance. This review begins with a
summary of the theoretical development of the ‘Stage’ models of internationalisation
and then narrows to concentrate specifically on the relationship between psychic
distance, experiential knowledge, and international market selection (IMS).
36
Several different ‘Stage’ models have been put forth to describe the
internationalisation process (e.g. Bilkey & Tesar, 1977; Cavusgil, 1984; Czinkota,
1982; Johanson & Vahlne, 1977; S. Reid, 1981). These models are also knows as
establishment chain models and describe the process of internationalisation as one of
incrementally increasing commitment to successively psychically distant markets via
a sequence of low to high commitment modes of operation. The first and most
influential of these models, known as the Uppsala model, was proposed by Johanson
and Wiedersheim-Paul (1975) and further developed by Johanson and Vahlne (1977).
Drawing on the behavioural theory of the firm (Cyert & March, 1963) and Penrose’s
(1959) theory of the growth of the firm, the Uppsala model concentrates on the firm’s
‘gradual acquisition, integration and use of knowledge about foreign markets and
operations’ (Johanson & Vahlne, 1977, p.23). The emphasis of the model is on the
interplay between learning about foreign markets and operations on one hand and an
increasing commitment to international business on the other (Johanson & Vahlne,
1990, 2003). Basic assumptions of the model include that a lack of knowledge about
foreign markets and operations is a significant obstacle to internationalisation and that
such knowledge can be acquired primarily through experience from operating in
foreign markets. In this way, the model views the liability of foreignness as relating to
a lack of knowledge; through the process of internationalisation firms learn to reduce
their liability.
The Uppsala model is dynamic, meaning that the output of one cycle of events
constitutes the input for the next. The model identifies state and change aspects of
internationalisation. State aspects include the resources committed to foreign markets
and knowledge about foreign markets and operations. Change aspects refer to the
performance of current business activities and decisions about resource commitment
(Johanson & Vahlne, 1977, p.26).
37
Figure 3.1: The Basic Mechanism of Internationalisation––State and Change
Aspects
(Johanson & Vahlne, 1977, p.26)
As illustrated in Figure 3.1, the model assumes that the state of internationalisation
(comprising market knowledge and market commitment) affects perceived
opportunities and risks which in turn influence commitment decisions and current
activities. Current activities and commitment decisions also have an effect on
knowledge about the market and commitment to the market (Johanson & Vahlne,
1977, pp.26-27).
Since its conception, there has been a plethora of research studies that draw on the key
constructs of the Uppsala model. Results as to the impact of these constructs have
been mixed and are discussed in greater detail below. My research draws heavily on
the Uppsala model’s concepts of experiential knowledge and psychic distance to
explain Australian investment in Latin America rather than the model’s establishment
chain. The establishment chain has been rejected as inaccurate by numerous studies.
Internalisation (Buckley & Casson, 1998), rather than the establishment chain, is a
more accepted explanation for the FDI mode choice.
The concept of the establishment chain suggests that a firm will change the form of its
operations in a foreign market as it learns more about that market. The Uppsala model
specifically suggests that a firm will begin by exporting to a foreign market, will then
establish a marketing subsidiary and finally start foreign production. The chain of
Commitment decisions
Current activities
Market knowledge
Market commitment
State Change
38
establishment in other stage models varies slightly from the Uppsala model’s initial
explanation, however numerous empirical studies have found data that do not support
this progression. Much of the concern surrounding the Stage models has to do with
firms not following this stipulated linear progression from low to high commitment
modes of operation. Firms can do this by leap-frogging some stages, by stopping short
of FDI, or by making simultaneous use of multiple entry modes (Coviello & Munro,
1997). For example, Bell (1995), Holmlund and Kock (1998) and Chetty and
Campbell-Hunt (2003) all found that the firms in their samples most commonly used
indirect modes of market representation consistent with the initial stage of the
establishment chain. Whilst Holmlund and Kock (1998) suggest that this indicates
that the firms studied lack the necessary resources to continue the internationalisation
process, Bell (1995) and Chetty and Campbell-Hunt (2003) argue that the firms in
their studies made a deliberate choice to continue exporting even after years of
offshore experience thereby refuting the establishment chain. Lamb and Liesch’s
(2002) research, on the other hand, illustrates a deepening of market commitment in
the shift from indirect to direct modes of operation as market knowledge increases
which is consistent with the establishment chain perspective. My research examines
Australian firms already engaged in FDI in Latin America and as such the
establishment chain is not relevant to my analytical framework.
Psychic Distance The first key Uppsala model concept that contributes to a better understanding of
Australian investment in Latin America is psychic distance. The construct has been
widely used in IB research over the past 30 years and yet it is plagued with
definitional and measurement problems. Psychic distance has been linked to several
different dependent variables including organisational performance and entry mode
choice. This literature review focuses primarily on the use of psychic distance as a
construct for explaining international market selection (IMS). Intuitively, Latin
America is not an obvious market choice for Australian firms; psychic distance helps
explain why this is the case. Yet some Australian firms have engaged with the region
and have been successful. Alternative explanations of how these firms have overcome
their psychic distance are explored in later sections of this literature review.
39
Conflicting Definitions The term psychic distance was first used in the 1950s in the emerging international
trade flow literature. Beckerman (1956) made reference to the ‘special problem of
“psychic” distance’ referring to ‘language difficulties and so on’ as well as the time
required for air travel due to geographic distance. Simmonds and Smith (1968) later
conceptualised psychic distance as a measure of international outlook and the term
was sporadically used over the ensuing decades in this body of literature. The
construct acquired its prominence, however, in the behavioural school of international
business research that emerged from the University of Uppsala in the late 1970s. The
definition of psychic distance has varied considerably since it was first described by
Johanson and Vahlne as:
‘the sum of factors preventing the flow of information to and from the
market. Examples are differences in language, education, business
practices, culture, and industrial development’ (Johanson & Vahlne,
1977, p.24).
Johanson and Vahlne postulated that as the psychic distance between a home and a
host market increases, so too does the difficultly a firm experiences obtaining and
interpreting information. In the key element of their model relevant to IMS they
proposed that firms will begin their internationalisation in psychically close markets
before progressing to psychically distant markets. Since this time, the construct has
been redefined and operationalised in numerous different ways.
Psychic distance is frequently conceptualised as a distance between nations (e.g.
Chetty & Campbell-Hunt, 2004; Evans & Mavondo, 2002; Evans, Treadgold, &
Mavondo, 2000; Lee, 1998). This conceptualisation is reflected in Evans and
Mavondo’s (2002, p.517) attempt to clarify the construct as:
‘the distance between the home market and a foreign market resulting
from the perception of both cultural and business differences.’
This definition draws on the original description of the ‘factors’ referred to by
Johanson and Vahlne (1977, p.24) and is commendable insofar as it introduces into
the definition an important element of psychic distance that has emerged by referring
to the perception of cultural and business differences. The definition is problematic
40
however as perceptions do not exist at a national level; it follows therefore that
psychic distance should not be defined as a distance between nations.
Alternatively, other studies have focussed on psychic distance as a distance between a
firm and a foreign market (e.g. Barkema, Bell, & Pennings, 1996; Child, Ng, &
Wong, 2003; J.-B. Kim & Rhee, 2001; Nordstrom & Vahlne, 1994; O'Grady & Lane,
1996; Pedersen & Petersen, 2004). Defining psychic distance at the firm level is more
in keeping with the original conceptualisation offered by Johanson and Wiedersheim-
Paul (1975) as well as the broader discipline area of international business. Almost
two decades after psychic distance was first conceptualised, Nordstrom and Vahlne
(1994, p.42) redefined the concept as:
‘factors preventing or disturbing firms learning about and
understanding a foreign environment.’
This redefinition is noteworthy as it shifted the focus from the national level back to
the firm level and emphasised the important role of information and organisational
learning in internationalisation. Most recently, Brewer (2007b, p.79) has chosen to
focus on the learning aspect of psychic distance suggesting it is:
‘best conceptualised as the inverse of the availability of market
information’.
Yet rather than the availability, it is the ‘understandability’ of market information that
is hindered by psychic distance.
Choosing to emphasise the cognitive nature of psychic distance, Fletcher and Bohn
(1998, p.49), define it as:
‘a distance in the minds of individuals….the perceived distance
depends on the way the individual sees the world’.
The definition of psychic distance as a perceived distance in the minds of individuals
is at odds with the way in which the concept has been operationalised in many
empirical studies and yet, this cognitive element of the definition is paramount.
Taken in isolation from the rest of article in which it appeared, Johanson and Vahlne’s
(1977) original definition of psychic distance was vague and became further
41
obfuscated over the years. Clearly many attempts have been made to clarify it. For the
purposes of this research, and drawing on the vast body of literature on the topic, I
state the following about psychic distance:
Psychic distance interferes with the flow of information between a firm and a
foreign market and disturbs a firm’s learning about and understanding that
market.
Psychic distance is cognitive and therefore is different for different people and
different firms.
The factors that influence psychic distance are diverse but generally relate to
differences between the firm’s home and host environments.
An adaptation and extension of O’Grady and Lane’s (1996, p.330) definition of
psychic distance41 seems to best capture all of these elements. I have altered O’Grady
and Lane’s definition by placing emphasis on the firm’s perception of differences
between home and host rather than on the differences themselves. It is the perception
of differences that create psychic distance in the first instance. I have also removed
O’Grady and Lane’s original emphasis on cultural differences for reasons discussed
below. For the purposes of my research I have redefined psychic distance as:
A firm’s degree of uncertainty about a foreign market resulting from
its perception of differences between its home and host environments
that present barriers to learning about the foreign market and operating
there.
According to the Uppsala model’s proposition on the effect of psychic distance on
international market selection, we would superficially expect Australian firms to
internationalise elsewhere before going to Latin America yet this is not always the
case leading to my first research question.
RQ1. What effect does psychic distance have on the internationalisation of
Australian firms?
41‘A firm’s degree of uncertainty about a foreign market resulting from cultural differences and other business difficulties that present barriers to learning about the market and operating there.’
42
Diverse Psychic Distance Stimuli Much of the recent literature on psychic distance has focused on adding to the set of
explanatory factors alluded to in the construct’s original definition. Dow and
Karunaratna (2006) refer to these factors as ‘psychic distance stimuli’ and many
potential stimuli (some theorised and some empirically tested) have been suggested
over the years. The stimulus most commonly referred to in empirical research is
culture. Other commonly cited stimuli include political differences, economic
differences, differences in business practices, differences in language and geographic
distance.
Two recent studies (Brewer, 2007a; Dow & Karunaratna, 2006) have attempted to
empirically test a variety of potential psychic distance stimuli albeit with slightly
different emphases. Brewer focuses on the ties between the home and host markets,
hypothesising that the presence of such ties will result in a shorter psychic distance. In
contrast, Dow and Karunaratna focus on the differences between the two markets.
They hypothesise that such differences are likely to increase psychic distance.
Between the two studies, ten different potential psychic distance stimuli are identified
including cultural, political, educational, geographic, historical, developmental,
informational, religious and commercial differences and/or ties. Dow and Karunaratna
found strong support for the negative impact on psychic distance of differences in
education level, political systems, and religion and the positive impact of former
colonial ties. They provide slightly less emphatic, yet still significant, support for the
negative impact of differences in time zones and industrial development. Surprisingly,
they found no statistical support for the impact of cultural differences on psychic
distance. Brewer’s study had similar conclusions about the role of cultural ties in
reducing psychic distance. These important empirical findings in relation to culture
and psychic distance contradict the common belief that cultural differences are the
most important of all the possible differences that might exist between countries
(Evans & Mavondo, 2002; Hofstede, 1994; J.-B. Kim & Rhee, 2001; Swift, 1999).
Further discussion of this issue is warranted due to its implications for the psychic
distance construct.
43
Three Measures of Distance In order to fully understand the concept of psychic distance, we need to also
understand what it is not. Differences between countries undoubtedly influence the
internationalisation of firms and have been at the centre of much international
business research. In an attempt to quantify these differences a number of distance
measures have been conceptualised including psychic distance, cultural distance and
the more recently developed institutional distance. The distinction between these
constructs (particularly between psychic distance and cultural distance) is blurred in
much of the literature. I make an attempt here to delineate the important differences
between these measures so as to clarify the psychic distance construct.
Cultural distance can be defined as differences in collective norms and values
between countries (Harzing, 2004). The concept has been used extensively in FDI
research and has primarily been measured using Kogut and Singh’s (1988) composite
index based on Hofstede’s (1980) seminal work. Problems associated with the
overdependence on Kogut and Singh (1988) are discussed below in the section The
Operationalisation of Psychic Distance. Cultural distance is conceptualised and can
be measured as a distance between nations. Whilst culture is not constant, it changes
gradually making cultural distance a relative stable measure of differences between
nations. In numerous studies cultural distance has erroneously been equated with
psychic distance (Fletcher & Bohn, 1998; Klein & Roth, 1990; Lee, 1998; Shoham &
Albaum, 1995).
Emerging from institutional theory (Scott, 1995), institutional distance is a more
recently developed measure of differences between nations (Kostova, 1999; Xu &
Shenkar, 2002). Institutional distance is defined as ‘differences between the
institutional profiles of two countries’ (Kostova, 1999, p.316). The construct is three-
dimensional insofar as it captures the three ‘pillars’ of institutional environments
identified by Scott (1995). These are the regulatory, cognitive and normative aspects
of a country’s institutional profile. The regulatory pillar includes laws and rules in a
national environment that promote some behaviours and restrict others. Cognitive
elements relate to shared meanings in society and how people interpret reality (Scott,
1995). The normative component captures the norms and values held by individuals
in a given country (Kostova, 1999). The distinction between regulatory and normative
44
aspects of the institutional environment is important as institutions can be more or less
accessible to a foreign firm depending on their level of explicitness (Kostova, 1999).
Normative aspects of institutions create uncertainty for foreign firms, particularly in
weak institutional environments characterised by opacity and corruption. Regulatory
aspects of institutions, on the other hand, are much easier for foreign firms to
understand (Kostova & Zaheer, 1999). Like cultural distance, institutional distance is
conceptualised and can be measured at a national level. Changes in the institutional
environment also generally occur slowly making it a relatively stable measure. As
demonstrated in Chapter 2, Section 2.4, Latin American markets are culturally and
institutionally distant from Australia, when compared to Australia’s primary
recipients of FDI the United States of America and the United Kingdom.
Psychic distance is quite distinct from cultural and institutional distance. Psychic
distance was originally defined as the sum of factors that disturb the flow of
information between a firm and a market (Johanson & Vahlne, 1977). Such factors
were said to include differences in language, culture, business practices and political
systems and other stimuli have subsequently been proffered in the literature. From the
outset there has been a mismatch between how psychic distance is conceptualised and
how it is measured. Theoretically, psychic distance is best conceived as a perceptual
concept dependent on decision-makers’ prior knowledge about a market (Lindbergh,
2005a). With few exceptions however (e.g. Dichtl, Koeglmayr, & Mueller, 1990;
Holzmuller & Kasper, 1990; Nordstrom & Vahlne, 1994), psychic distance has been
measured using national level data. There is a manifest problem with the unit of
analysis if psychic distance is measured using national level data but conceptualised
as, for example, existing in the minds of individuals (Fletcher & Bohn, 1998) or being
reduced as a result of experiential learning (Johanson & Vahlne, 2003).
Psychic distance is the most dynamic of the three distances measures. Whereas
cultural distance and institutional distance relate to the differences between countries
that firms must to learn to manage, psychic distance represents a firm’s perception of
these differences. Whilst cultural distance and institutional distance are relatively
constant, a firm’s psychic distance to a foreign market will diminish as its perceived
ability to deal with cultural and institutional differences (among others) increases
(Lindbergh, 2005a).
45
As mentioned previously, there are other differences between countries that affect
firms in addition to cultural and institutional differences including geographic,
economic and language differences. In this research I will follow the example of Dow
and Karunaratna (2006) and refer to these factors as ‘psychic distance stimuli’. These
stimuli are all differences that can largely be measured at a national level and may
affect a firm’s psychic distance. Cultural distance and institutional distance measure
differences between countries and are illustrative of the factors firms must overcome
in their internationalisation. Psychic distance, on the other hand, is a subjective
measure of how firms perceive these stimuli.
The Operationalisation of Psychic Distance As is so often the case with appealing theoretical constructs, the operationalisation of
psychic distance has proven even more difficult that its definition. Different authors
have adopted different approaches to measuring psychic distance and no one measure
has been universally endorsed. Table 3.1 provides numerous examples of psychic
distance measures in the extant literature.
Table 3.1: Psychic Distance Measures in the Extant Literature
Authors Measure of Psychic Distance Linnemann (1966) Geographic distance and three dummy
variablesa
Gruber and Vernon (1970) Geographic distance and a dummy variableb Hirsch and Lev (1973) Geographic distance and a dummy variableb Leamer (1974) Geographic distance* Geraci and Prewo (1977) Three dummy variablesb,c,d Srivastava and Green (1986) Geographic distance* and three dummy
variablesb,c,d
International trade literature
Bergstrand (1989) Geographic distance* and two dummy variablesb,d
Vahlne and Wiedersheim-Paul (1977)
15 separate indicators Scandinavian research of the 1970s Johanson and Wiedersheim-
Paul (1975) Single ordinal scale based on Vahnle and Wiedersheim-Paul’s (1977) study
Kogut and Singh (1988) Single scale based on Hofstede (1980)* Benito and Gripsrud (1992) Single scale based on Hofstede (1980)* Grosse and Goldberg (1991) Geographic distance and the Hofstede scale* Grosse and Trevino (1996) Geographic distance and the Hofstede scale* O’Grady and Lane (1996) Scales based on Hofstede (1980), Jackson
(1976) and others. Fletcher and Bohn (1998) Single scale based on Hofstede (1980) Gaur, Delios and Singh (2005) Institutional distance and the Hofstede scale
Hofstede- based scales
Brewer and Sherriff (2007) Single scale based on the Globe study (House et al., 2004)
46
Dichtl, Koeglmary, and Mueller (1990)
Single-item instrument: self-reported, post-decision
Holzmuller and Kasper (1990) Single-item instrument: self-reported, post-decision
Klein and Roth (1990) Five-item instrument Kim and Hwang (1992) Four-item instrument*: self-reported, post-
decision Vahlne and Nordstrom (1992) Single-item instrument: applied to an
independent ‘expert’ panel Stottinger and Schlegelmilch (1998)
Free magnitude scales, self reported, post-decision.
Key informant-based scales
Dow (2000) Single-item instrument: applied to an independent ‘expert’ panel
Dow and Karunaranta (2006) Eight separate ‘stimuli’ Recent Multi-dimensional scales Brewer (2007a) Index based on seven indicators a Colonial linkages b Preferred trading relationships c A common language d A common border * Although the original texts do not explicitly discuss psychic distance, these studies are frequently cited as examples of psychic distance research and are deemed to be implicitly trying to measure psychic distance. Adapted and expanded on from Dow (2000)
Early research relied on geographic distance as a proxy for psychic distance (e.g.
Leamer, 1974; Linnemann, 1966). Geographic distance alone is clearly an inadequate
measure of psychic distance given the theoretical definition of the construct. The large
geographic distance between Australia and the United Kingdom, for example, and the
obvious cultural and institutional similarities clearly demonstrates that geographic
distance fails to capture many of the factors that may affect psychic distance. A more
recent stream of research has chosen to focus only on cultural distance (e.g. Benito &
Gripsrud, 1992; Grosse & Trevino, 1996; Kogut & Singh, 1988) or to use cultural
distance as a proxy for psychic distance (e.g. Brewer & Sherriff, 2007; Fletcher &
Bohn, 1998; Klein & Roth, 1990; Lee, 1998; O'Grady & Lane, 1996; Shoham &
Albaum, 1995). These approaches, however, are also inadequate. The former fails to
acknowledge the significance of other differences between countries and the latter,
whilst acknowledging the existence of such differences, fails to measure them.
The focus on cultural distance rather than (or as a proxy for) psychic distance can
largely be attributed Kogut and Singh’s (1988) index (based on Hofstede’s work)
which provided a convenient measure of the construct. Shenkar (2001) and Harzing
(2004) both draw attention to shortcomings in the way in which cultural distance has
been operationalised in International Business research. Of the 27 studies examining
cultural distance and entry-mode choice published after Kogut and Singh’s seminal
47
article, 21 use the Kogut and Singh index (Harzing, 2004). There are three problems
with this approach. Firstly, as indicated above cultural distance is only one of several
distances between nations that could affect psychic distance. Differences in
institutions, economic realities, language and geographic distance might well have an
equally strong influence on perceived psychic distance. In fact, Dow and Karunaratna
provide greater support for other potential stimuli, pointing out that ‘the Hofstede
measures of cultural distance are, at best, a minor component of a much broader set of
psychic distance stimuli’ (Dow & Karunaratna, 2006, p. 591).
Another problem with the Kogut and Singh index is its assumption of equivalence
(Shenkar, 2001). As a composite concept Kogut and Singh’s cultural distance index
ascribes equal importance to each of Hofstede’s cultural dimensions. However,
Hofstede (2001) himself has claimed that different dimensions of culture affect firms
differently and that distance on some dimensions would be more problematic than
others. Harzing (2004) calls for future research in the area of cultural distance to focus
on differences in individual cultural dimensions rather than the composite index. The
third problem with the use of Kogut and Singh’s index as a measure of psychic
distance is that the unit of analysis, the nation, does not match the theoretical
definition of psychic distance.
Yet another group of psychic distance research has relied upon asking key informants
to estimate psychic distance using Likert or free magnitude scales (e.g. Dichtl et al.,
1990; Holzmuller & Kasper, 1990; Stottinger & Schlegelmilch, 1998). This approach
is also problematic, however, as it measures perceived psychic distance post hoc and
as such may be influenced by managers’ post-decision experiences (Dow, 2000).
Ideally psychic distance should be measured by the perceptions of key decision-
makers at the time the decision is made. However, researchers rarely have access to
firms at such a critical time.
Thirty years after its arrival in the international business literature there is still a
chorus of calls for the better operationalisation of psychic distance (e.g. Evans &
Mavondo, 2002; Evans et al., 2000; Stottinger & Schlegelmilch, 1998, 2000), and
positive steps are being made in this direction. Two recent studies that responded to
this call both concluded that any operationalisation of psychic distance must capture
48
as broad a range of potential stimuli as possible (Brewer, 2007a; Dow & Karunaratna,
2006). Dow and Karunaratna made the important clarifying step of splitting psychic
distance into two sequentially related constructs; psychic distance stimuli and
perceived psychic distance. This clarification provides a breakthrough in the psychic
distance literature. The construct ‘psychic distance stimuli’ can be measured using
national level data that are relatively stable and easily accessible, lending itself to
large scale quantitative research. In contrast, perceived psychic distance (a function of
the psychic distance stimuli a manager is exposed to, moderated by their sensitivity to
those stimuli) is perhaps best investigated via qualitative approaches. Valuable
contributions can be made to the extant body of literature by pursuing both paths of
investigation.
The studies by Brewer (2007a) and Dow and Karunaratna (2006) both analysed
secondary trade data using quantitative methods to identify psychic distance stimuli.
There is clearly room to further explore the relative importance of these stimuli using
qualitative methods and in relation to other entry modes. Arguably, psychic distance
stimuli would have a greater effect on FDI than on exporting given the level of
contact required with the market. These studies, coupled with Shenkar (2001) and
Harzing’s (2004) concerns about the assumption of equivalence, generate my second
research question in relation to psychic distance:
RQ1.1 Which psychic distance stimuli (national level differences) have
the greatest effect on perceived psychic distance (e.g. cultural distance,
geographic distance, language)?
Empirical Results It is not surprising that empirical results relating to psychic distance are contradictory
when such diverse measures have been used to capture the phenomenon. In initially
proposing the existence of psychic distance Johanson and Vahlne (1977) suggested
that firms will begin their internationalisation in psychically close markets before
progressing to psychically distance markets. This aspect of the model has been
empirically tested in numerous studies; Johanson and Vahlne’s seminal paper itself
was based on empirical research.
49
Table 3.2 provides a summary of recent empirical research related to psychic distance
and international market selection (IMS). Although some of the works discussed here
do not explicitly refer to psychic distance, most are commonly cited as examples of
psychic distance research and are regarded as implicitly trying to measure the
construct. Other newer works (e.g. Galan, Gonzalez-Benito, & Zuniga-Vincente,
2007) whilst not specifically related to psychic distance provide findings that
contribute to this body of literature.
Table 3.2: Empirical Findings – Psychic Distance and International Market
Selection
Author(s) Methodology/ Methods
Sample Key findings
Bell (1995) Survey, in-depth interviews
Small software firms from Finland, Ireland, and Norway. Questionnaire (n=98), Interviews (n=24)
Inconsistent findings linking PD to IMS. 50-70% of firms initiated exports in countries with short PD, 30-50% started in countries with large PD.
Benito & Gripsrud (1992)
Analysis of secondary data
201 FDIs (1910-1982) by 93 Norwegian manufacturing firms
Sequence of IMS not related to CD.
Brewer & Sherriff (2007)
Linear regressions of secondary data
Aust. merchandise exports 1994-2004
Market attractiveness of growing East Asian countries outweighs the barrier created by CD.
Brewer (2007b) Analysis of secondary data
Australian exporters to 25 specified countries.
Strong negative correlation between PD and IMS.
Chetty & Campbell-Hunt (2004)
Survey 485 MNEs from NZ, Denmark, and Sweden.
In 63% of firms PD was negatively associated with IMS.
Child, Ng & Wong (2003)
Multiple-case study
5 Hong Kong MNEs Qualified support for link between PD and IMS.
Coviello & Munro (1997)
Multiple-case study
4 small NZ software firms
Firms began internationalisation in psychically close markets. Later internationalisation involved simultaneous entry into countries of varying PD.
Dow & Karunaratna (2006)
Analysis of secondary data
1254 country pairs based on 38 countries
Strong negative correlation between eight PD stimuli and trade intensity. No support for CD as stimulus for PD.
Dow (2000) Survey Analysis of secondary data.
315 Aust. firms 10 Senior Trade Commissioners
Strong negative correlation between PD and IMS and GD and IMS Hofstede based index not a significant predictor of IMS.
Galan, González-Benito & Zuñiga-Vincente (2007)
Survey 103 Spanish MNEs Spanish FDI in Latin America fuelled by social and cultural factors.
Grosse & Trevino (1996)
Multivariate regression of secondary data
228 observations of FDI from 23 countries
Negative correlation between CD and FDI and GD and FDI.
Holmlund & Kock (1998)
Survey 122 Finnish SMEs Links IMS to PD.
50
O’Grady & Lane (1996)
Multiple-case study, survey
Case studies -Canadian firms operating in USA (n=10) Survey – Canadian and US retail firms (n=271)
Market failure experienced in countries with a short PD. PD paradox identified, suggestion that familiarity breeds carelessness
Pedersen & Petersen (2003)
Survey 485 MNEs from NZ, Denmark, and Sweden.
Managers experience a ‘shock effect’ in countries with a short PD but not in countries with a large PD. Support for the PD paradox.
Sim & Teoh (1994)
Multiple-case study, secondary data analysis, interviews
6 Aust. firms operating in Asia-Pacific
Cultural and language differences are the main cause for the lack of Australian FDI in Asia-Pacific.
Stottinger & Schlegelmilch (1998)
Survey, comparisons to secondary data
104 US manufacturing firms
Strong positive correlation between PD and geographic distance. Inconsistent findings linking perceived PD to IMS. PD has no significant effect on export performance.
PD Psychic distance GD Geographic distance CD Cultural distance IMS International Market Selection
There is substantial support for the proposition that psychic distance influences the
internationalisation of firms. Numerous empirical studies have provided evidence of a
negative relationship between psychic distance stimuli and international market
selection regardless of entry mode. Three recent studies have illustrated a negative
correlation between psychic distance and the market selection of Australian exporters.
Dow (2000) found that psychic distance and geographic distance are the most
important predictors of export market selection amongst Australian firms, while Dow
and Karunaratna (2006) found a strong negative correlation between eight psychic
distance stimuli and trade intensity. Similarly, Brewer (2007b) demonstrated that
countries with the closest psychic distance to Australia also tend to have the largest
number of Australian exporters.
Moreover psychic distance causes difficulties when firms engage in FDI. For
example, Sim and Teoh (1994) cite cultural and language differences that make Asian
markets more difficult to penetrate (compared to the psychically closer ‘traditional’
markets of the UK, New Zealand and the USA) as the primary reason for Australia’s
limited investment and declining competitive position in Asia between 1980 and
1992. Similarly, in their study of FDI in the United States, Grosse & Trevino (1996)
found that both cultural and geographic distance were significantly negatively related
to inward FDI. That is to say, countries far away from and/or culturally dissimilar to
51
the United States contributed less to inward FDI. In a converse example, Galan et al.
(2007) found that one of the main competitive advantages that differentiates Spanish
MNEs from other42 MNEs operating in Latin America is their social and cultural
immediacy with the region. According to Galan et al. (2007) the cultural affinity
between Spain and Latin America is a key element that facilitates, hastens and
streamlines FDI.
A number of studies have provided mixed support for the psychic distance
phenomenon. The sample firms in Holmlund and Kock (1998), and Coviello and
Munro (1997) appear to follow the pattern set out by Johanson and Vahlne (1977)
insofar as they favoured both geographically and psychically close markets in the
initial stages of internationalisation. Although initial internationalisation was to
psychically close countries, in Coviello and Munro’s sample later stages of
internationalisation involved simultaneous entry into markets of varying psychic
distance, refuting the gradual, staged approach put forth in the Uppsala model. Bell
(1995), Chetty & Campbell-Hunt (2004), Child et al. (2003) and Stottinger &
Schlegelmilch (1998) also provide only partial support for the psychic distance-IMS
link. Whilst a majority of firms in these studies followed internationalisation paths
consistent with the Uppsala model, others entered markets that were neither
psychically nor geographically proximate suggesting there is another explanation for
why these firms chose these markets. It is precisely this phenomenon that my research
will address by examining Australian FDI in Latin America.
Some studies reject the theorised relationship between psychic distance and
international market selection entirely, while others provide support for an alternative
relationship. Evidence from Benito and Gripsrud (1992) suggests that the sequence of
FDI is in no way related to cultural distance. In their sample, the first instances of FDI
did not occur in culturally close countries and cultural distance did not increase for
subsequent investments. Likewise, Brewer and Sherriff (2007) attribute the shift in
Australian exports from Europe to East Asia to the growth of East Asian markets and
their demand for Australian commodities, insisting that economics trumps culture.
Importantly, both these studies focus on cultural distance (either in and of itself or as a
42 Whilst not explicit in the original paper, this obviously excludes Latin American MNEs.
52
proxy for psychic distance). Their findings are largely inconsequential to this research
when considered in light of Dow and Karunaratna (2006) and Brewer’s (2007a)
assertions on the limited role of culture as a psychic distance stimuli.
A psychic distance paradox emerged in the work of O’Grady and Lane (1996) as an
alternative explanation for the impact of psychic distance on internationalisation.
O’Grady and Lane found Canadian firms in the US retail industry failed in spite of a
close psychic distance (measured using cultural distance as a proxy) and suggested
that familiarity breeds carelessness. Another interpretation of their results is that they
failed to adequately capture the psychic distance construct. While there are cultural
similarities between Canada and the USA there are still significant differences in the
operating environments. Pedersen and Petersen (2004) provide support for the psychic
distance paradox demonstrating that firms experience a ‘shock effect’ in countries
with a short psychic distance but not in countries with a large psychic distance. Both
these studies suggest firms underestimate the difficulties they may encounter in
psychically close markets.
Despite all the criticism of the construct and the stage model itself, psychic distance
remains a widely cited and well supported influence on international market selection
(Dow, 2000) worthy of further study. There appears to be substantial support for the
influence of psychic distance on IMS; however there is less support for its influence
on subsequent internationalisation. This suggests, therefore, that psychic distance
provides a partial yet incomplete explanation for the internationalisation process of
firms.
The research questions I have drawn from the literature so far are:
RQ1. What effect does psychic distance have on the internationalisation of
Australian firms?
RQ1.1 Which psychic distance stimuli have the greatest effect on
perceived psychic distance?
Two other research questions emerge from my review of this body of literature. Dow
and Karunaratna’s (2006) recent clarification of the sequentially linked constructs
psychic distance stimuli and perceived psychic distance highlight the difference
53
between perception and reality. While a firm’s perceived psychic distance may be
affected by certain psychic distance stimuli (national level differences between
countries), it is entirely possible that these stimuli are not the same differences that
affect actual internationalisation. This dichotomy leads me to ask:
RQ1.2 Which psychic distance stimuli most affect actual internationalisation?
My final question in relation to psychic distance asks:
RQ1.3 How do firms overcome the psychic distance they experience?
The internationalisation process literature suggests that the only way for firms to
overcome psychic distance is through the gradual accumulation of experiential
knowledge; this mechanism is explored directly below. Section 3.2, however, presents
an alternative mechanism of internationalisation via networks.
Experiential knowledge Experiential knowledge, that which can only be acquired through personal experience
(Penrose, 1959), is the second key construct of the internationalisation process
literature relevant to this research. This construct has proven less contentious than
psychic distance and has received much less attention in the theoretical
internationalisation process literature. The focus of this section will be on the impact
of experiential knowledge on international market selection and on psychic distance.
The Uppsala model assumes that firms have imperfect knowledge of institutions and
customers abroad which creates a psychic distance between a firm and a market. The
model maintains that psychic distance is overcome via experiential learning.
According to Johanson and Vahlne (1977, p.23) it is the ‘gradual acquisition,
integration and use of knowledge’ that reduces psychic distance and fuels
internationalisation. They propose that a lack of knowledge creates an obstacle to
internationalisation and that the necessary knowledge can be acquired mainly through
experience operating abroad. The Uppsala model posits that experiential knowledge
affects international market selection and entry-mode selection, as well as expansion
within foreign markets. A lack of experiential knowledge is thought to result in higher
perceived risks prior to market entry and higher costs after market entry. In contrast,
54
market experience increases a firm’s confidence in its ability to gauge customer
needs, to estimate costs and returns, and to assess market potential (Davidson, 1980;
Eriksson et al., 1997).
There is an important distinction made between objective (or explicit) knowledge and
experiential (tacit) knowledge (Johanson & Vahlne, 1977). Objective knowledge,
acquired through standardised methods of collecting and transmitting information, can
be easily transferred to other countries and replicated by other firms. Objective
knowledge can be taught and is largely dismissed by Johanson and Vahlne (1977) as
of minor consequence to a firm’s internationalisation. On the other hand, the assertion
is made that experiential knowledge cannot be easily transferred and is often context-
specific. According to this line of thinking, it is only by doing business in a specific
market that a firm will learn how customers, intermediaries, competitors and public
authorities act and react in different situations (Johanson & Vahlne, 2003). Johanson
and Vahlne (1977) are heavily influenced in their model development by Penrose
(1959, p.53) who contends that experience itself can never be transmitted as it
produces change in an individual that cannot be separated from them.
Penrose’s seemingly tautological statement concerning experience is not necessarily
applicable to experiential knowledge however. Experience itself is non-transferable,
yet apparently the knowledge gained through experience is transferable when we
consider the counterclaim that experiential knowledge is located in a firm’s decision
making routines, structures and culture (Eriksson, Johanson, Majkgard, & Sharma,
2000; Lindbergh, 2005b). Even though individuals are the ones who learn, they are
clearly not the only repositories of knowledge. It could be argued that knowledge
management systems are designed to capture experiential knowledge and make it part
of the collective organisational memory enabling it to be drawn upon at a future date;
the vast body of Organisational Learning literature is evidence of just this. Nonaka
and Takeuchi (1995) identify four modes through which firms create knowledge.
Tacit (experiential) knowledge is passed from one individual to another in a process
termed socialisation. Through the emergence of coalitions, individuals share
experiences, perspectives and previously received knowledge. Tacit knowledge is
converted into explicit knowledge in another knowledge creation mode referred to as
externalisation. This process is facilitated by meaningful, formalised dialogue, or
55
face-to-face communication, between individuals as well as documentation (Knight &
Liesch, 2002). Other modes include combination which aggregates sources of explicit
knowledge and internalisation through which explicit knowledge is translated into
tacit knowledge (Nonaka & Takeuchi, 1995).
Accepting Penrose’s contention that experience changes the individual and that
knowledge transfer will never be absolute, I content that certain types of experiential
knowledge can be (and are) separated from the individual and absorbed into the
organisational memory. Furthermore, experiential knowledge can be transferred
between firms either via socialisation or when individuals transfer between firms.
Notwithstanding, it is accepted that experiential knowledge is ‘sticky’ and that some
types of experiential knowledge lend themselves to transfer more readily than others.
Eriksson, Johanson, Majkgard and Sharma (1997) specify three types of knowledge
that must be accumulated during the internationalisation process; 1) business
knowledge and 2) institutional knowledge, which combined constitute market-specific
knowledge, and 3) internationalisation knowledge. Business knowledge relates to the
competitive environment in specific markets, where as institutional knowledge
involves governance structures, laws, regulations and their implementation.
Internationalisation knowledge relates to a firm’s knowledge of how to organise and
develop its international operations (Eriksson et al., 1997). Pedersen and Petersen
(2004) question the emphasis placed on experiential or tacit knowledge in the Uppsala
model and suggest that at least some market-specific knowledge is explicit and could
therefore be acquired through pre-entry learning.
Whilst market-specific knowledge may be acquired via pre-entry learning, it is
difficult for firms to transfer accumulated market-specific knowledge between foreign
markets particularly where psychic distance is high (Eriksson et al., 1997). In contrast,
internationalisation knowledge is associated with spillover effects that make it
relevant to future international expansion. Internationalisation knowledge may also be
viewed as a firm specific advantage (FSA) as per Rugman and Verbeke (2001). Firm
specific advantages can be defined as knowledge bundles that take the form of
intangible assets or learning capabilities. What we end up with are two types of
knowledge (business and institutional) that can be acquired prior to entry but that are
56
not necessarily relevant across markets and one type of knowledge
(internationalisation) that is more difficult to acquire through non-experiential means
but that is highly transferable across markets. An important repercussion of the stage
models of internationalisation is that the development, integration and transfer of
knowledge is vital to the strategic management of the international firm (Johanson &
Vahlne, 2003).
Empirical Results Extensive research has been carried out, using a variety of methods, on the role of
experiential knowledge in internationalisation. This research has included firms
engaged in exporting and FDI from a diverse range of countries and industries.
Relevant studies are summarised in Table 3.3.
Table 3.3: Empirical Findings - Experiential Knowledge and Internationalisation
Author(s) Methodology/ Methods
Sample Key Findings
Barkema, Bell & Pennings (1996)
Analysis of secondary data
225 FDIs by 13 Dutch firms
EK acquired in the same country is most beneficial to expansion followed by EK acquired in a country from the same cultural block.
Benito & Gripsrud (1992)
Analysis of secondary data
201 FDIs by 93 Norwegian manufacturing firms
Findings do not support the notion of a cultural learning process.
Chetty & Campbell-Hunt (2003)
Histographic case research
10 NZ manufacturing SMEs
Accumulation of EK essential to continued internationalisation.
Chetty & Campbell-Hunt (2004)
Survey 485 MNEs from NZ, Denmark, and Sweden
Accumulation of EK is a key component of learning to internationalise for regional, global and born global firms. The pace of learning is more rapid in born globals.
Coviello & Munro (1997)
Multiple-case study
4 small NZ software firms
Accumulation of EK affects choice of entry mode. Accumulation of business and internationalisation knowledge lead to increased commitment to foreign markets.
Davidson (1980) Survey 180 US MNEs The accumulation of EK results in a reduction in the ‘uncertainty premium’ and less preference for ‘near and similar cultures’.
Eriksson, Johanson, Majkgard & Sharma (1997)
Survey 362 Swedish service firms
Lack of business and institutional knowledge leads to higher perceived costs. Internationalisation knowledge affects the accumulation of both business and institutional knowledge.
57
Eriksson, Johanson, Majkgard & Sharma (2000)
Interviews Survey
70 CEOs of Swedish service firms (interviews) 323 service firms (survey)
Variation in international experience has a strong positive direct effect on internationalisation knowledge and an indirect positive effect on business and institutional knowledge..
Eriksson, Majkgard & Sharma (2000)
Survey 362 Swedish service firms
Initial internationalisation to culturally similar countries results in greater accumulation of EK.
Erramilli (1991) Survey 151 US service firms Diverse international experience (SCOPE) is positively correlated with selection of culturally distant markets.
Fletcher & Bohn (1998)
Survey 541 Australian exporting firms
A high level of cultural knowledge amongst top managers leads to a greater tendency to engage with psychically distant markets.
Holmlund & Kock (1998)
Survey 122 Finnish SMEs EK ranked 6th out of 9 variables in terms of affect on internationalisation.
Lamb & Liesch (2002)
Multiple-case study
2 small Aust. Firms Accumulation of EK lead to greater commitment within and across foreign markets.
Pedersen & Petersen (2004)
Survey 485 MNEs from NZ, Denmark, and Sweden.
Managers overestimate their market knowledge prior to entry. Firms experience a ‘shock effect’ in relation to tacit knowledge.
EK Experiential knowledge CD Cultural distance SME Small and Medium Enterprises MNE Multinational Enterprise
Research has demonstrated that the experiential learning of key decisions makers and
the dissemination of experiential knowledge throughout the organisation are essential
to the continued internationalisation of the firm (Chetty & Campbell-Hunt, 2003;
2004). This is particularly the case at early stages of internationalisation when the
experiential knowledge of key decision makers has been found to influence both
commitment to internationalisation and international market selection (Lamb &
Liesch, 2002). In keeping with the Uppsala model, Coviello and Munro (1997) and
Lamb and Liesch (2002) provide evidence that the accumulation of market experience
through successful foreign expansion leads to greater internationalisation knowledge
and greater business knowledge which in turn leads to greater market commitment.
On the other hand, there is evidence that firms which begin their internationalisation
in culturally distant countries accumulate less internationalisation knowledge than
those who begin with a smaller cultural step (Eriksson, Majkgard et al., 2000)
suggesting that a lack of experience coupled with a large psychic distance hinders
learning.
58
Moreover, there is considerable evidence that supports a connection between
experiential knowledge and psychic distance.43 Davidson (1980) and Erramilli (1991)
are in agreement that over time firms shift from entry into culturally close countries to
entry into culturally distant countries and both attribute this shift to the accumulation
of experiential knowledge. Similarly, Fletcher and Bohn (1998) have shown that a
high level of cultural knowledge amongst top mangers increases the likelihood of
entry into psychically distant markets. As theorised, firms experience difficulty
transferring their experiential knowledge to new market contexts. Barkema, Bell &
Pennings’ (1996) results illustrate that experiential knowledge is most beneficial for
future expansion in the same country, followed by expansion into culturally similar
countries. Experiential knowledge acquired in culturally dissimilar countries is the
least beneficial. These findings imply that it is the market-specific business and
institutional knowledge that is most difficult to transfer to culturally and
institutionally different contexts.
In contrast, Eriksson, Johanson, Majkgard & Sharma (2000) found that experience in
diverse foreign markets positively affects internationalisation knowledge. Put another
way, the greater the variety of foreign markets a firm operates in the more knowledge
it accumulates about how to do business in international markets. This accumulation
of additional internationalisation knowledge has an indirect positive effect on both
business and institutional knowledge (Eriksson, Johanson et al., 2000). This supports
my earlier contention that internationalisation knowledge is not related to specific
country markets; rather it is a firm specific advantage relevant to all markets. In this
sense internationalisation knowledge is a type of procedural knowledge; increased
international experience and the accumulation of internationalisation knowledge
teaches firms what business and institutional knowledge to look for and how best to
access and absorb this knowledge. Eriksson and colleagues (Eriksson et al., 1997;
Eriksson, Majkgard et al., 2000) also demonstrate a significant relationship between a
lack of both business and institutional knowledge and the perceived cost of
internationalisation. Similarly, Benito and Gripsrud (1992) found that experience
lowers the perceived cost of operating in well-known cultures and, as such, affects
location choices. 43 Whilst the research mentioned here refers to cultural distance it is accepted that they are capturing an element of psychic distance.
59
Some studies suggest that other factors are more important in determining
international market selection than the accumulation of knowledge. In Holmlund and
Kock’s (1998) study of the internationalisation of SMEs management’s previous
experience did not rate highly as a factor affecting internationalisation. Five other
factors were considered more important including management’s commitment to
internationalisation and growth and management’s social networks. This is
particularly the case for small firms but it is possible that the low importance ascribed
to experiential knowledge in this case is a reflection of the limited experiential
knowledge of small owner/operators. Additionally, despite some support for
experience effects, Benito and Gripsrud (1992) conclude that market selection
involves discrete rational choices not a cultural learning process thus supporting the
economic school of international business thought (Dunning, 1988).
My review of this literature leads to one main, and two associated research questions:
RQ2. What role does experiential knowledge and learning play in the
internationalisation of Australian firms into psychically distant markets?
RQ2.1 To what extent are past experiences of the firm transferred to the
organisational memory bank and used in future internationalisation?
RQ2.2 To what extent is the personal experience of individuals within
the firm drawn upon in the internationalisation process?
As part of my analytical framework it is important that I explore the extent to which
the internationalisation of Australian firms in Latin America follows the experiential
learning process prescribed by the Uppsala model. I propose this is one, but not the
only, path to internationalisation. RQ2.2 is drawn from the contradiction in the
literature concerning the context-specificity of experiential knowledge. Drawing on
the experiential knowledge its executives have gained either at other firms or in other
parts of their lives is one way a firm may expedite internationalisation and circumvent
the gradual learning process proposed by the internationalisation process literature.
60
Conclusion The internationalisation process literature is not without its detractors. There have
been criticisms of the Uppsala model in relation to boundary assumptions of time and
space (Andersen, 1993; Bjorkman & Forsgren, 2000). Subsequent stage models (e.g.
Bilkey & Tesar, 1977; Cavusgil, 1984; Czinkota, 1982; S. Reid, 1981) have attempted
to address the lack of spatial boundaries by stipulating the unit of analysis as small
and medium-sized enterprises, although empirical support has been provided for the
model in relation to large firms as well. It has also been suggested that the Uppsala
model is less valid for firms with extensive international experience and firms in the
high-technology or services sector (Andersen, 1993).
Research has provided considerable, though not undisputed, empirical support for the
stage models of internationalisation. It seems that psychic distance does impede
internationalisation and that this distance can be overcome via learning. The
conceptual framework that I have drawn from the literature thus far is illustrated in
Figure 3.2. The perceived psychic distances of key decision makers within a firm
combine to create that firm’s psychic distance to a market. Depending on an
individual’s decision making power his/her perceived psychic distance may be more
or less significant in contributing to the firm’s overall perceived psychic distance. The
framework is incomplete however. Psychic distance does not entirely explain
international market selection in that whilst many firms appear to select psychically
close markets for their initial internationalisation, others do not and it appears psychic
distance does little to explain later instances of international expansion. Likewise, the
gradual acquisition of experiential knowledge does not fully explain how firms
overcome psychic distance as some firms internationalise much more rapidly than the
stage models would suggest. The implication is that there are phenomena external to
the firm, and therefore not captured by the Uppsala model, that may also affect the
firm’s internationalisation process. To return to Johanson and Vahlne (1977),
knowledge facilitates internationalisation and a lack of knowledge inhibits
internationalisation, but it is unclear whether or not such knowledge can only be
acquired through first-hand experience.
61
Figure 3.2: Partial Conceptual Framework
3.2 The Network Perspective of Internationalisation A more recent stream of international business research, the network perspective of
internationalisation, draws on theories of resource dependency (Pfeffer, 1981; Pfeffer
& Salancik, 1978), institutions (Scott, 1995) and social exchange (Cook & Emerson,
1978; Willer & Anderson, 1981). The perspective is descriptive and is aimed at
increasing understanding of the internationalisation process (Blankenburg, 1995). It
can be viewed as both alternative and complementary to the traditional
internationalisation process literature, and many of the same authors publish in both
streams. The network perspective does not negate the idea of psychic distance nor the
incremental nature of internationalisation; it does, however, posit that the process is
much more complex and less structured than previously implied (Bell, 1995). Whilst
stage models concentrate on the characteristics of individual firms, the network
perspective highlights the context in which a firm operates. If stage models are
viewed as an ‘internally-driven approach to internationalisation’ (Coviello & Munro,
1997, p.130) based on cognitive learning and competency development; then the
network perspective is best viewed as focussing on the external drivers of the process.
This review will focus on the network perspective literature in relation to international
market selection and access to knowledge.
The perspective suggests that a firm’s network of formal and informal relationships
will result in and shape internationalisation opportunities by providing access to
resources, mitigating knowledge asymmetries, bestowing legitimacy and attenuating
transaction costs. It is proposed that actors on all managerial levels, not only top
Firm Market Perceived Psychic Distance
Experiential Knowledge
I
I
I
I
62
executives, influence the internationalisation process, as do actors outside the firm
(Blankenburg, 1995). Like the stage models, the network approach views
internationalisation as a dynamic process in which the firm considers and reconsiders
its actions as conditions change. The network perspective speculates that a firm’s
progress and route towards internationalisation is largely dependent on its current
network positions (Axelsson & Johanson, 1992). In this way, the perspective
acknowledges an element of chance in internationalisation; the external drivers of the
process are largely beyond the firm’s control.
There are three types of networks specified in the literature as influencing
internationalisation; business, institutional and social. Business networks consist of
formal relationships with suppliers, customers, and competitors. These networks have
received the most attention in IB literature (e.g. Blankenburg-Holm, Eriksson, &
Johanson, 1996; D'Cruz & Rugman, 1996; Forsgren, Holm, & Johanson, 2005;
Johanson & Mattsson, 1985, 1988; Johanson & Vahlne, 2003, 2006) and are
alternatively referred to as industrial networks. Institutional networks encompass
relationships with government officials, banks and financial institutions, universities,
and public and private support agencies such as trade promotion organisations,
chambers of commerce and business councils (Hadjikhani & Ghauri, 2001; C. Welch
& Wilkinson, 2004; Yiu, Lau, & Bruton, 2007).44 Thirdly, social networks including
family, friends and ethnic groups are also said to affect a firm’s internationalisation
process (Chen & Chen, 1998; Presutti, Boari, & Fratocchi, 2007; Yli-Renko, Autio, &
Tontti, 2002). Business, institutional and social networks are not mutually exclusive
insofar as they overlap and are intertwined with one another. They also constantly
evolve over time (Chen & Chen, 1998). Investment in relationships within business
networks often results in close personal relations over time (Johanson & Mattsson,
1988). Business networks and social networks are explored in greater detail below
and a summary of relevant empirical research is provided.
44 Institutional networks have received limited attention in the extant literature and will not be discussed in a separate section in this review. Instead, empirical findings pertaining to institutional networks are included in the section on business networks.
63
Business Networks Business networks are commonly defined as sets of interconnected business
relationships in which each exchange relation is between firms conceptualised as
collective actors (Anderson, Hakansson, & Johanson, 1994). These relationships are
also described as network ties. All firms are considered to be embedded in one or
more network. Johanson and Mattsson (1988) describe this as a system of network
relationships between firms engaged in the production, distribution and use of goods
and services. Just as the internationalisation process literature, the network
perspective literature views internationalisation as a process of gradual learning and
increasing commitment (Johanson & Vahlne, 1990). The focus of the network
perspective, however, is on commitment to business relationships rather than
commitment to foreign markets. Business relationships lead the firm to expand into
new foreign markets, yet country boundaries lose their significance and the important
boundary becomes that of the network. Firms can change the boundaries of their
networks by developing new business relationships (Forsgren, Holm, & Johanson,
2005). However, network relationships are also considered path dependent; a firm’s
current network ties are dependent on their past activities and relationships, and future
ties will be influenced by current behaviour (Johanson & Mattsson, 1988). To this
end, investment in developing network relationships will pay dividends in terms of
future market access.
Opacity is another fundamental assumption of the network approach (Axelsson &
Johanson, 1992; Forsgren et al., 2005). Relationships between network actors are
invisible and fluid and can only be understood by actors engaged in the network. An
outsider can, at best, acquire a superficial sense of the network structure (Johanson &
Vahlne, 1990). This opacity emphasises the importance of network ties in gaining
access to new networks in foreign markets. Johanson and Mattsson (1988) identify
three ways in which firms can establish and develop their network positions to benefit
internationally: 1) establishing relationships in country-based networks that are new to
the firm, i.e. international extension; 2) further developing relationships in those
networks in which the firm already has a position, i.e. penetration, and 3) increasing
coordination between networks in different countries, i.e. international integration.
64
A firm’s strategic management of its international business networks is paramount
according to the network perspective. The firm’s ability to engage in strategic
decision making is hampered, however, by imperfect access to information and
constantly changing conditions and network structures (Forsgren et al., 2005).
Strategic management of networks is further complicated by the fact that a firm can
never fully control what happens within their networks. Instead, what takes place in
the network is a consequence of interactions between network actors (Axelsson &
Johanson, 1992). Within the network, firms’ resources are subject to adaptation,
making firms dependent on each other. As a result of this interdependency, the use of
the assets in one firm can be dependant on the use of other firms’ assets (Johanson &
Mattsson 1985). Whilst this interdependency somewhat decreases a firm’s control
over its own resources it simultaneously gives the firm some control over the
resources of others in the network. Furthermore, network interactions also result in the
creation of new resources (Blankenburg, 1995).
The most significant resource created and shared through network interactions is
knowledge. The internationalisation process literature maintains that three types of
knowledge are required for successful internationalisation; business knowledge,
institutional knowledge and internationalisation knowledge. The network perspective
implies that part of the internationalisation knowledge firms must acquire is
knowledge of the importance of networks to internationalisation, and how to
strategically develop these networks (Forsgren et al., 2005). Moreover, the network
perspective highlights that extensive knowledge of network partners and their likely
behaviour is vital to international market commitments (Johanson & Mattsson, 1988).
Business networks are theorised to provide access to market-specific business and
institutional knowledge. Firms can gain access to the knowledge of other firms in
their business networks without having to follow exactly the same experiences
(Eriksson et al., 1997; Guillen, 2002). This assertion challenges the theorised non-
transferability of experiential knowledge inherent in the Uppsala model. Another type
of knowledge accessible through networks is knowledge of market opportunities. This
knowledge arises in two ways. Existing network relationships may be used as bridges
to facilitate faster entry into new foreign markets when, for instance, a buyer invites,
or even insists, that a supplier follow them abroad (Johanson & Sharma, 1987). This
65
scenario is likely in the case of ‘late starter’ firms which operate in networks that are
already highly internationalised (Johanson & Mattsson, 1988). Secondly, large
‘flagship firms’ have the potential to provide a demonstrator effect for smaller firms
in their domestic network by bringing foreign market opportunities to their attention
(D'Cruz & Rugman, 1996).
It is evident that business relationships are important sources of capability (Forsgren
et al., 2005); this is acknowledged beyond the network perspective literature. Dunning
(1995) recognised the value of business networks when he incorporated relational
assets as one type of ownership advantage in his eclectic paradigm. Likewise, the
uniqueness of each firm’s configuration of network ties has the potential to lead to
firm specific advantages as per Rugman and Verbeke (2003).
Empirical Results Network perspective researchers have been criticised for including too many variables
in empirical studies (Bjorkman & Forsgren, 2000). Internationalisation is assumed to
be dependent not only on the firm’s own resources, activities and experience, but also
on the resources, activities and experience of numerous other actors with whom the
firm is engaged. Complicating the matter further, the firm’s and other actors’
subjective interpretations of the networks in which they are embedded are also said to
influence the firm’s internationalisation. A significant amount of network perspective
research relies on the case study methodology which allows for the inclusion of
numerous variables but cannot be generalised to broader populations.45 This research,
usually based on in-depth interviews and analysis of secondary data, enables greater
exploration of the intricacies of network relationships. Yet, other researchers have
investigated the role of networks using survey methodology and both types of
research have provided strong support for the theoretical perspective. Table 3.4
provides a summary of relevant studies which are discussed at length below.
45 See Chapter 4 for a discussion of the benefits of the multiple-case study approach.
66
Table 3.4: Empirical Findings – Business Networks and Internationalisation
Author(s) Methodology/ Methods
Sample Key Findings
Bell (1995) Survey In-depth interviews
Small software firms from Finland, Ireland, and Norway. Questionnaire (n=98) Interviews (n=24)
Existing network ties influence decision to export and IMS for a majority of firms in interview sample.
Belso-Martinez (2006)
Survey 285 Spanish manufacturing SMEs
Access to customers’ networks is linked to rapid internationalisation. Access to institutional networks is linked to gradual internationalisation.
Blankenburg (1995)
Multiple-case study
2 Swedish manufacturing firms
Network ties to customers, government agencies and parent companies fuel internationalisation in new foreign markets.
Chen & Chen (1998)
Survey 146 Taiwanese MNEs
Business networks provide access to internationalisation knowledge.
Chetty & Blankenburg Holm (2000)
Multiple-case study, longitudinal
4 NZ manufacturing firms
Institutional ties facilitate entry to psychically distant markets. A lack of network ties inhibits internationalisation.
Chetty & Campbell-Hunt (2003)
Multiple-case study
10 NZ manufacturing SMEs
Existing network ties in foreign markets facilitated expansion into neighbouring markets. Existing network ties with one large customer facilitate access to subsidiaries of the same firm in other markets.
Chetty & Campbell-Hunt (2004)
Survey 485 MNEs from NZ, Denmark, and Sweden
Founders of born globals use business networks established in their previous work to develop their new business.
Coviello & Munro (1997)
Multiple-case study
4 small NZ software firms
Existing business relationships with large firms drive internationalisation and influence IMS. Firms strategically pursue new business relationships in order to further their international expansion.
Guillen (2002)
Analysis of secondary data Interviews
117 South Korean MNEs in China. Interviews n=20
Evidence of an ‘imitation effect’ for IMS of firms in same domestic industry Imitation effects decrease in strength after a firm’s first foreign market entry.
Holmlund & Kock (1998)
Survey 122 Finnish SMEs Domestic business relationships with large firms result in inadvertent internationalisation for SMEs.
Johanson & Vahlne (2003)
Single case study
1 Swedish pharmaceutical research company
Business relationship drove IMS.
Lamb & Liesch (2002)
Multiple-case study
2 small Australian firms
Institutional network ties facilitate internationalisation. Network ties may inhibit ability to internalise knowledge.
Presutti, Boari & Fratocchi (2007)
Survey 107 small Italian born-globals
Network ties to key foreign customer are positively correlated to knowledge acquisition.
Yiu, Lau & Bruton (2007)
Survey, two waves
274 Chinese manufacturing firms
Domestic business and institutional network ties are positively correlated with internationalisation. Institutional networks more important
67
than business networks in emerging economies.
SME Small and Medium Enterprises MNE Multinational Enterprise IMS International Market Selection
Research illustrates that domestic network connections can facilitate entry into foreign
networks supporting Johanson and Sharma’s (1987) proposition to that end (Chetty &
Campbell-Hunt, 2003, 2004; Coviello & Munro, 1997; Holmlund & Kock, 1998).
Internationalisation can be influenced as much by a firm’s accumulating knowledge
of, and reputation with, a single global client as by its learning about market-specific
attributes (Chetty & Campbell-Hunt, 2003, p.811). This illustrates the importance of
both business networks and experiential learning to the internationalisation process.
Likewise, others have demonstrated that domestic business relationships with larger
firms can draw SMEs into foreign markets (Belso-Martinez, 2006; Chetty &
Campbell-Hunt, 2004; Coviello & Munro, 1997; Holmlund & Kock, 1998) thus
supporting D’Cruz and Rugman’s (1996) assertions on the role of flagship firms. On
the other hand, Chetty and Blankenburg Holm (2000) found evidence that some firms
attribute their failure to internationalise to their lack of business networks.
Numerous studies support the view that international market selection is influenced
by business network ties (e.g. Bell, 1995; Blankenburg, 1995; Chetty & Campbell-
Hunt, 2003; Coviello & Munro, 1997; Johanson & Vahlne, 2003). Customer
relationships play a particularly important role; examples include the provision of
market-specific knowledge (Coviello & Munro, 1997), preferential access to
subsidiaries in other foreign markets (Chetty & Campbell-Hunt, 2003), and an explicit
request to locate in a specific foreign market (Johanson & Vahlne, 2003). In these
instances network ties, and not psychic distance, dictated market choice. Guillen
(2002) found evidence of an imitation effect on international market selection
amongst firms in the same domestic industry, supporting the idea that competitors can
provide a demonstrator effect.
Overcoming a lack of market-specific knowledge is a key function of networks in
internationalisation and numerous empirical studies attest to business networks’ roles
in this regard (Chetty & Blankenburg Holm, 2000; Chetty & Campbell-Hunt, 2003;
Coviello & Munro, 1997; Presutti et al., 2007). Furthermore, business networks
68
provide technological assistance, logistical support and managerial know-how (Chen
& Chen, 1998), all of which might be considered types of internationalisation
knowledge. Institutional networks also play a role in overcoming knowledge
asymmetries. Studies by Chetty and Blankenburg-Holm (2000) and Yiu et al. (2007)
found domestic institutional networks provide access to market-specific knowledge
and mitigate problems associated with a lack of such knowledge as well as helping
firms to develop relationships in foreign market networks. Other studies also support
the role of institutional networks, such as trade promotion organisations and chambers
of commerce, in facilitating internationalisation (e.g. Blankenburg, 1995; Chetty &
Blankenburg Holm, 2000; Lamb & Liesch, 2002). Belso-Martinez (2006), however,
found that institutional networks were significantly linked to gradual rather than rapid
internationalisation, adding nuance to our understanding of their role.
On the downside, empirical results show business networks may inhibit
internationalisation by limiting choice of foreign market and entry mode (Bell, 1995;
Coviello & Munro, 1997). Network relationships may also limit the firm’s ability to
internalise market knowledge (Lamb & Liesch, 2002). This occurs in two ways;
firstly, by performing tasks for a firm that the firm would otherwise do for itself a
network partner may negate the opportunity for experiential learning. Secondly, a
network partner may deliberately withhold and or control the flow of market-specific
knowledge in order to maintain a power imbalance in the relationship.
These empirical results show that business and institutional networks serve an
important role in facilitating the internationalisation process of firms. I propose that
internationalisation using networks occur more rapidly than that dependent on the
gradual acquisition of experiential knowledge and that it may result in
internationalisation to unexpected markets.
Social Networks The impact of business networks on the internationalisation process is widely
addressed in the network perspective literature but the effects of social networks have
been more or less neglected to date. The pivotal role played by key individuals in the
internationalisation of some firms, particularly SMEs has also been under-represented
69
in internationalisation research (Andersson, 2000). My research takes the opportunity
to incorporate this important variable into the network perspective.
Social networks encompass extended family, friends, and ethnic ties as well as links
to others from the same home town or state. In some instances it can be difficult to
separate social networks from business networks as business relationships can lead to
social friendships. In reality this separation is somewhat redundant. For the purposes
of my research I look at the distinction as one between formal and informal ties.
Relationships based on a formal business connection such as a supplier-customer
relationship are clearly part of a business network. In contrast, the personal networks
of top executives, even if developed in the course of their professional career, are
considered social networks. These personal networks are not included in extant
theorising about business networks and yet their potential role in internationalisation
is considerable. Another distinction between business and social networks is to
consider that business networks are purposeful ex ante whereas social networks may
result to be purposeful ex post.
Social networks have been extensively researched outside the international business
literature in sociology with the development of social capital theory (Coleman, 1988;
Lin, 2001). Social capital can be defined as resources available in and through
personal and business networks (Baker, 2000). Another view describes it as the ability
of actors to secure benefits by virtue of membership in social networks (Portes, 1998).
Micro-level social capital is of most relevance to my research. At this level social
capital emphasises an individual’s ability to mobilise resources through local
networks, extended families and friendships. Knowledge is a key resource acquired
via social capital, which underscores its relevance to the internationalisation of firms.
Lin (2001) argues that strategically located social ties can provide useful information
about opportunities and choices not otherwise available. Furthermore, social capital
theorists differentiate between strong and weak ties and the varied roles they play in
building trust (strong ties) and providing access to new networks (weak ties)
(Granovetter, 1973). Burt (2004) argues that people who span a structural hole, in
other words individuals connected across distinct groups, act as brokers in a network
and provide alternative visions of options available. In international business, this
70
suggests access to knowledge of alternative market opportunities as well as alternate
interpretations of available information.
Whilst the theoretical literature on social networks and internationalisation is limited,
several distinct roles have been put forth. Lindqvist (1991 as cited in Bjorkman &
Forsgren, 2000) emphasises the potential of existing personal networks to facilitate
entry into new foreign networks. Social networks can also provide access to market-
specific knowledge which is vital for internationalisation (Presutti et al., 2007; Yli-
Renko et al., 2002). According to Holmlund and Kock (1998) social networks give
rise to a type of ‘capital of trust’ that emerges over time as the result of commitments
and non-opportunistic behaviour which in turn reduces uncertainties. In particular,
social networks based on ethnic ties are said to promote interpersonal trust, facilitate
job mobility, enhance firm performance and reduce uncertainties (Batjargal, 2007).
Notably, social capital is thought to be of increased importance to internationalisation
in emerging economies as a substitute for weak institutions (Chen & Chen, 1998;
Ellis, 2000; Yiu et al., 2007).
Empirical Results Empirical studies relating to the role of social networks in internationalisation are
few. Of the studies listed in Table 3.5, only four explicitly identified social networks
as a key construct of their research (Ellis, 2000; Holmlund & Kock, 1998; Johanson &
Vahlne, 2003; Wong & Ellis, 2002). Often, the role of social networks has been
discovered as a by-product of research into the role of business networks in
internationalisation.
Table 3.5: Empirical Findings – Social Networks and Internationalisation
Author(s) Methodology/ Methods
Sample Key Findings
Blankenburg (1995)
Multiple-case study
2 Swedish manufacturing firms
Personal contacts of key decision makers vital to IMS.
Chen & Chen (1998)
Survey 146 Taiwanese firms engaged in FDI
Personal ties to foreign networks facilitate internationalising for SMEs in spite of weak organisational strength.
Chetty & Blankenburg Holm (2000)
Multiple-case study – longitudinal
4 NZ manufacturing firms
Social tie with previous work colleague acted as bridge to new foreign networks.
Child, Ng & Wong (2003)
Multiple-case study
5 HK MNEs Personal networks bridge PD
Coviello & Munro Multiple-case 4 small NZ software Family tie drove IMS and market
71
(1997) study firms entry. Ellis (2000) Multiple-case
study Pilot, 11 Australian SMEs Follow-up, 42 HK manufacturing firms.
Social ties facilitate awareness of foreign market opportunities. Existing social ties play a significant role in identifying international exchange partners (i.e. buyer or seller).
Holmlund & Kock (1998)
Survey 122 Finnish SMEs
Social networks at home and abroad are an important resource for internationalisation.
Johanson & Vahlne (2003)
Single case study
1 Swedish pharmaceutical research company
Social ties facilitate market entry and influence IMS. Social ties reduce PD.
Lamb & Liesch (2002)
Multiple-case study
2 small Australian firms Personal contacts overseas affected attitude towards internationalisation
Wong and Ellis (2002)
Multiple-case study
18 Sino-HK joint ventures
Existing social ties play a significant role in identifying potential JV partners. Weak ties resulted in numerous potential partners yet final selection was more often based on strong ties.
IMS International Market Selection PD Psychic Distance
Numerous studies illustrate that a variety of social network ties influence international
market selection including previous working relationships (Chetty & Blankenburg
Holm, 2000; Child et al., 2003), family ties and long-term friendships (Johanson &
Vahlne, 2003; Lamb & Liesch, 2002). Chen and Chen (1998) particularly focus on the
role of ethnic ties, namely the Chinese Diaspora, in facilitating FDI. The ability of
social networks based on ethnic commonality to facilitate internationalisation is
limited, however, as these networks tend to be location specific. Johanson and Vahlne
(2003) found that the personal networks of key decision makers played a vital role in
determining the first and second foreign markets their case study firm entered. In the
first instance, a personal relationship developed through more than a decade of
professional interaction and cooperation resulted in increased market knowledge and a
reduction in uncertainty and perceived risk. In the second market entry, whilst the
choice of market was prompted by two international clients, market entry was
facilitated by a personal friend who negotiated access to key networks in the host
country. This supports Lindqvist’s (1991) view on the potential of existing personal
networks to facilitate entry into foreign networks.
Child, Ng and Wong (2003) identify a role for social networks in bridging psychic
distance. The presence of a trusted friend or loyal ex-employee in a given market
reduced the perceived risk for managers in their study. Social networks also play an
72
important part in partner identification for both exporters and investors (Ellis, 2000;
Wong & Ellis, 2002). Despite Granovetter’s (1973) proposition on the ‘strength of
weak ties’ most instances mentioned above refer to strong ties such as family links
and long-term friendships.
In Holmlund and Kock’s (1998) study of Finnish SMEs social networks both at home
and abroad were viewed as having had a greater effect on the internationalisation
process than management’s earlier professional experience. These results are a direct
contrast to the emphasis on experiential knowledge in the stage models and justify the
call for more extensive research on the importance of social networks in the
internationalisation process. In particular research is needed on how knowledge
gained from such relationships is used when engaging with foreign markets.
Conclusion The network perspective draws attention to the fact that a firm does not exist in
isolation of the networks in which it is embedded. It acknowledges that the
relationship between two firms involves more dimensions that are usually allowed for
in economic analyses. As a result, the perspective is purported to be more relevant
than economic perspectives, yet also more difficult to use for predictive purposes
(Bjorkman & Forsgren, 2000).
My review of the network perspective literature illustrates that the liability of
foreignness first proposed by Hymer (1960) is not only about a lack of experiential
knowledge but also about a lack of access to networks in foreign markets. It is clear
that networks play a role in internationalisation and may even expedite the process.
My research questions that stem from this literature are listed below.
RQ3. What are the roles of business, institutional and social networks in facilitating
the internationalisation of Australian firms?
RQ3.1 What specific types of network ties facilitate internationalisation
(e.g. customer-supplier relationships, alumni ties, chambers of commerce)
and do they fulfil different roles?
RQ3.2 What types of knowledge (e.g. internationalisation, business,
institutional) are provided via networks?
73
RQ3.3 Do networks expedite internationalisation?
RQ3.4 Are business and social networks more pivotal to entry into
psychically distant markets?46
The network perspective appears to be an attempt to redress the over-emphasis placed
on national level differences in past theory. Yet the assertion that country boundaries
no longer matter to internationalisation (Forsgren et al., 2005) goes too far. Despite
the argument that globalisation is resulting in more homogeneous cultural and
institutional settings it is ill-considered to disregard the very real boundaries country
borders present. As Ghemawat succinctly stated ‘distance still matters’(2001).
3.3 Drawing Conclusions It is evident that in isolation neither the internationalisation process view nor the
network perspective of internationalisation adequately explains firm behaviour.
Several authors have concluded that an integration of the stage models and the
network perspective offers the best opportunity for analysing the internationalisation
process of firms (Coviello & McAuley, 1999; Coviello & Munro, 1997; Johanson &
Vahlne, 2003; Lindbergh, 2005a). At the core of both approaches is a dynamic
perspective of the process and a focus on organisational learning. This literature
review clearly demonstrates separate theoretical and empirical support for the
important roles that psychic distance, experiential knowledge and networks play in the
internationalisation process of firms. If we are to fully understand the impact of
psychic distance on internationalisation the experiential learning process and network
relationships should be studied concurrently. The integrated conceptual framework
that I have developed to explore the internationalisation of Australian firms in Latin
America does just this and is presented in Figure 3.3. In this way, my research is
complementary to Johanson and Vahlne’s (2006) recent efforts to integrate these two
bodies of research. Johanson and Vahlne (2006) emphasise the multilateral aspect of
the internationalisation process highlighting the importance not only of commitment
to and knowledge of foreign markets but also with regard to network actors. This
46 This question will be explored with reference to the case study firms’ investments in psychically close markets as well as in Latin America.
74
paper focuses on network or partner commitment and its role in uncertainty avoidance
and opportunity development.
Figure 3.3: Integrated Conceptual Framework
I propose that in addition to experiential learning, business, institutional and social
networks can also be used to overcome psychic distance. This research investigates
the internationalisation of Australian firms into culturally and institutionally distant
markets using an integrated approach that explores the dual pathways to
internationalisation of experiential learning and entry via networks. It is my view that
this is not an ‘either/or’ scenario but rather that firms simultaneously utilise both
internal and external sources of knowledge to facilitate their internationalisation. In
other words, these phenomena work in conjunction with one another in an
environment of bounded rationality and time constraints to facilitate the
internationalisation of the firm.
Firm
Networks
Market Perceived Psychic Distance
Experiential Knowledge
I
I
I
I
75
CHAPTER FOUR
Research Methodology and Design
Chapters 3 explained the gaps in the relevant internationalisation literature and
provided the research propositions and questions that logically stem from these gaps.
Pursuantly, this chapter provides a detailed explanation of the methodology I used to
investigate the given phenomenon and its links to epistemology and methods. In order
to assess the contribution of the research results outlined in Chapter 6, it is important
to have a thorough understanding of the methodological framework within which the
results were produced. This chapter begins with a brief explanation of the
epistemological stance I adopted in order to clearly position the research. The case
study methodology is subsequently described and justified with particular reference to
its benefits in relation to my study. I explain my data collection and analysis methods
at length and acknowledge the limitations of both. The chapter concludes with an
account of the study’s academic rigour.
In this research I adopted a relativist epistemology. Similar to the positivist
perspective, relativism rests on the ontological assumption that reality exists
independent of the observer and the job of the researcher is to identify or uncover this
reality. The distinction between positivism and relativism lies in the assumed
difficulty ascribed by relativism to the observer gaining direct access to reality
(Easterby-Smith, Thorpe, & Lowe, 2002). Relativism suggests that truth requires
consensus between different viewpoints and that facts depend on the viewpoint of the
observer. The relativist position supposes that different observers may have different
viewpoints and that ‘what counts for truth can vary from place to place and from time
to time’ (Collins, 1983, p.88 as cited in Easterby-Smith et al., 2002, p.33).
4.1 The Case Study Methodology This research was conducted using a descriptive multiple-case study research strategy.
Yin (2003, p.13) defines a case study as ‘an empirical inquiry that investigates a
contemporary phenomenon within its real-life context, especially when the boundaries
between phenomenon and context are not clearly evident’. Likewise, Hartley (1994,
76
pp.208-09) defines a case study as ‘a detailed investigation…of one or more
organisations…with a view to providing an analysis of the context and processes
involved in the phenomenon under study’. Situations in which there are many more
variables of interest than available data points are especially suited to a case study
research design (Yin, 2003).
The case study methodology is consistent with the relativist epistemology I adopted.
Easterby-Smith et al. (2002, p.38) outline a research study within the relativist
tradition by Tsang (1997, 1999 as cited in Easterby-Smith et al., 2002) in which 19
Singaporean companies were examined using a multiple case study methodology. The
case study methodology is also common amongst Nordic scholars (Bjorkman &
Forsgren, 2000) upon whose work this research draws heavily. The use of a
descriptive strategy is consistent with Bjorkman and Forsgren’s (2000) assertions
regarding the descriptive rather than predictive nature of the network perspective.
Case study research is particularly appropriate for the investigation of a contemporary
problem when the questions posed are ‘how’ or ‘why’ questions and when there is
limited ability to control for all variables (Yin, 2003). My research was concerned
with ‘why’ and ‘how’ Australian firms internationalise into Latin America. A case
study methodology was also well suited to my research because I collected data in
cross-border and cross-cultural settings. In this context, the case study design
provided me with an opportunity to check and re-check my interpretations and
understandings with key informants. In comparison, international surveys and
experiments are beset by serious issues of equivalence and comparability of data
collected from different countries (Ghauri, 2004).
The case study methodology has many benefits. A key benefit of the design is its
emphasis on context. The case study design enables a researcher to retain the holistic
nature of the phenomenon in question and to study it in relation to its environment.
This view is upheld by McGrath et al. (1982). The case study design falls into
McGrath et al.’s (1982, p.73) field study category. This approach ensures maximum
‘realism of context’ (McGrath, 1982, p.75) as it takes place, unobtrusively, in
essentially ‘real’ settings. In the process of maximising realism the case study
approach sacrifices precision with regards to behaviour measurement and statistical
77
generalisability. Analytic generalisation, however, whereby a previously developed
theory is used as a template for comparison, rather than statistical generalisation, is
the goal of case study research (Yin, 2003). The case study design’s ability to deal
with a wide variety of evidence (such as documents, artefacts, interviews, and
observations) is also one of its unique strengths (Yin, 2003).
A multiple-case study design is preferable to a single-case design due to the increased
analytic power of multiple cases (Yin, 2003). Conclusions independently arising from
two or more cases are more powerful than those arising from a single case.
Eisenhardt (1991) highlights as a particular benefit of the multiple-case approach the
researcher’s ability to examine patterns common to cases and theory and to avoid
chance associations. This examination of patterns is discussed in more detail in
Section 4.3 Data Analysis. Increased external generalisability is also a benefit of the
multiple-case design due to inevitable variations in the contexts of cases studied (Yin,
2003).
Triangulation is a defining aspect of case study research and is also seen as a hallmark
of the relativist epistemology (Easterby-Smith et al., 2002). The goal of triangulation
is to integrate multiple data sources in a multi-method design (Pauwels &
Matthyssens, 2004). The main advantage of triangulation is its facilitation of ‘a more
complete, holistic and contextual portrait of the object under study’ (Ghauri, 2004,
p.115). The triangulation I carried out as part of this research is outlined in Section 4.4
Ensuring Trustworthiness.
Furthermore, my use of qualitative methods was particularly beneficial as numerous
authors have recently called for a qualitative approach to psychic distance (Brewer,
2007a; Dow & Karunaratna, 2006; Evans et al., 2000; Stottinger & Schlegelmilch,
2000). A qualitative approach can facilitate a better understanding of the relative
importance of psychic distance stimuli to perceived psychic distance as well as how
firms overcome their perceived psychic distance.
78
Case Selection Case selection requires a mix of theory and pragmatism (Ghauri, 2004). Whilst
theoretical sampling based on an a priori typology may be the ideal it is not always
possible as firms may refuse to participate or may be difficult to access. Additionally,
an appropriate a priori typology may not exist. In this situation Pauwels and
Matthyssens (2004) recommend seeking out polar cases in order to induce greater
variance. This polarity should be tempered however as cases must also share some
common features in order to make them comparable (Ghauri, 2004).
When first soliciting participation from a company, Daniels and Cannice (2004)
recommend using letters of support from trade promotion organisations or
government officials. My research was endorsed by the Council on Australia-Latin
American Relations (which falls under the auspices of the Department of Foreign
Affairs and Trade) and a letter of introduction from the Chairman was sent with each
invitation to participate.47
Case study organisations were drawn from the population of Australian firms with a
physical presence in Latin America. Firms in this population were identified via a
combination of methods including previous knowledge, web searches, chambers of
commerce and the snowballing technique. A list of 40 firms48 with a physical
presence in Mexico, Brazil or Chile was compiled from which 17 firms were
contacted and invited to participate in the research.49 Firms contacted were selected in
an attempt to vary industry, firm size, the Latin American markets the firms were
present in, and the length of time the firm had been in Latin America. Pragmatic
concerns including time and budgetary constraints restricted firm selection to those
with offices in Mexico City, Mexico; Sao Paulo or Rio de Janeiro, Brazil and
Santiago, Chile. Pairs of firms from a given industry were sought in order to allow
meaningful comparison. Twelve firms agreed to participate in the research but due to
time and data management restrictions a final set of ten cases was chosen.
47 See Appendix 4. 48 This list was not exhaustive. 49 See Appendix 5 for an example of the introductory letter.
79
4.2 Data Collection Methods The main method of data collection I used in this research was the semi-structured in-
depth interview.50 An interview is commonly defined as a conversation with a
purpose. The purpose of the interview is to allow us to enter into the informant’s
perspective. Interview-based research is often most favourable when the population
under investigation is small, as was the situation with this research project. The focus
of the research thus becomes the depth of data collected rather than the breadth
(Daniels & Cannice, 2004). I collected supplementary data from annual reports,
company websites, government reports and other documents. These reports and
documents were either supplied to me by informants or sourced from the internet.
I conducted in-depth interviews with key informants in Australia, Mexico, Brazil and
Chile between August 2006 and April 2007, with the majority of interviews taking
place between September 2006 and January 2007. Between one and seven interviews
were conducted with each case study firm. Additional interviews were conducted with
the Australian Ambassadors and Trade Commissioners in Mexico, Chile and Brazil,
as well as the Honorary Consul in Rio de Janeiro. The final group of research
participants represented related chambers of commerce both in Australia and Latin
America. In all but three instances I recorded the interviews using a digital voice
recorder. Three participants asked not to be recorded in which case I took extensive
notes.51 Most interviews were one-on-one but three interviews involved two
informants. These interviews proved particularly fruitful as the participants constantly
checked their understanding or recollection of events with one another and sometimes
challenged one another’s perspective. A total of 39 interviews were conducted with
43 participants52 resulting in over 28 hours of interview recordings. The average
length of the interviews was 43 minutes, although it varied from 21 minutes to 1 hour
and 33 minutes. For pragmatic reasons, a combination of face-to-face (35) and
telephone interviews (4) were conducted. The interviews were transcribed in full
resulting in 418 pages of data.
50 See Appendix 6 for an example of the interview protocol. 51 See Appendices 6 and 7 for the Plain Language Statement and Consent Form that were shared with participants. 52 Some participants were interviewed more than once.
80
In-depth interviews enable the researcher to develop a deeper rapport with informants
than is possible with other methods of data collection. This rapport is important in
several ways. First, it is important if informants are suspicious of how information
may be used. Rapport establish during an interview may help to overcome this
suspicion and lead to more candid responses. Good rapport with informants is also
important when it comes time to ask for follow up information. In their own
experience Daniels and Cannice (2004) found that once such rapport is established
informants will seek out accurate information for the researcher and facilitate
cooperation with other managers (both within and outside their own company).
Wilkinson and Young (2004, p.209) point out that informants are rich sources of two
kinds of knowledge; knowledge about the phenomenon itself and ‘knowledge of how
to discover and know’. This is particularly relevant in an international research
context. Informants are embedded in personal and business networks; even if they
cannot provide the researcher with the information themselves they may have useful
ideas about where to look, what to look for or who to ask. By suitably managing the
interview process researchers can build up a network of new data, insights and
referrals (Daniels & Cannice, 2004, p.187).
This type of snowball sampling was key to the success of my research project,
particularly once I was already ‘in the field’ in Latin America.53 Initial interviews
helped define later interviews both within the firm, with supplementary interviewees54
and with new case study firms. For example, an introduction via email provided after
the first interview for Case Study 1 (conducted in Australia) lead to an interview with
another ‘in-firm’ informant (in Brazil). This informant in turn provided
recommendations that led to interviews with two other ‘in firm’ informants (one in
Mexico and one in Chile), two joint venture partners and two clients (covering all
three Latin American markets) and six supplementary informants; a fruitful lead
indeed. In another example two supplementary informants mentioned a particular
Australian firm and its tie to Case Study 8 (a firm in a completely unrelated industry)
prior to my interviews with Case Study 8 informants. The topic of this particular firm
came up once again in my first interview with a Case Study 8 informant (before I had
a chance to raise it myself). Armed with an email address I contacted the head of this 53 For a discussion of the cultural basis of this see the section Caveats on Data Collection. 54 Such as Ambassadors and representatives of chambers of commerce etcetera.
81
firm in Chile and was able to mention three people who recommended I contact him.
He agreed to an interview hence turning the firm into Case Study 9. Once back in
Australia I conducted a further interview at headquarters with the firm’s founder.
Not all instances of snowballing proved fruitful. In one example a case study
informant arranged a meeting for me with a key client of the case study firm. Despite
turning up at the designated time and place three times (the interview was rescheduled
twice), this interview never eventuated. In another example a supplementary
informant provided me with contact details for two Australian firms based in Chile
who might prove to be interesting case studies. Although I contacted the firms citing
the recommendation of the supplementary informant I received no reply.
Cross-cultural Considerations The international nature of this research required appropriate acknowledgement of
cultural differences between Australia and Latin America.55 Keeping regional
diversity in mind there are certain behaviours and social norms common throughout
the region that affected data collection. Latin Americans are collectivist rather than
individualist. ‘Latin Americans manage their lives based on a web of overlapping
social circles’ (Jones, 2004, p.447) and tasks are often accomplished via relationships.
This collectivism is not universal and applies only to the limited context of one’s
family, friends and associates. For those within the group, there is almost no limit to
the amount of personal and professional help extended. As a result of this, access to
research subjects in Latin America is more likely to stem from relationships than from
credentials (Jones, 2004). This cultural trait without doubt affected my access to
informants as noted above.
Time is another area of cultural difference between Australia and Latin America.
Latin American’s have a polychronic rather than monochronic orientation towards
time, meaning that they do several things at once (Jones, 2004). If an informant is
running late for a scheduled interview it is not because he/she does not respect the
55 For further details of cultural distances between Australia and Latin American countries see Section 2.4 and Appendix 3.
82
researcher’s time but rather because they are showing respect to the people they were
with in the previous meeting. Due in part to this different perspective of time, but also
because of logistical considerations, Jones (2004) indicates that a series of interviews
that could be conducted in two days in the United States could take up to a week in
Latin America. On the basis of Jones’ advice I scheduled no more than two interviews
for any one day.
Whilst cross-cultural differences are clearly important, it has been suggested that
upper-level managers with international responsibilities behave similarly in interview
situations regardless of their nationality (Daniels & Cannice, 2004).
The Role of Language Language is another key concern in international research. Wright (1996, p.73) is
adamant that ‘cross-cultural studies should not be carried out in a unilingual English
language fashion’. There are numerous problems associated with adopting a
unilingual approach. Some informants may not be comfortable using English and as a
result either restrict themselves to brief answers or even worse modify their answers
to accommodate their limited English vocabulary. Some informants may withdraw
from the research all together in order to avoid embarrassment. Such withdrawal can
be a source of error as those who are fluent in English may have different perspectives
of the phenomenon than those who are not. This issue was particularly relevant given
the language difference between headquarters and subsidiaries in my research and the
different perspectives informants from these two locations could provided.
In this research project I primarily conducted interviews in English or Spanish
depending on the participant’s preference. In two instances interviews were conducted
in Portuguese via a translator. English is my native language, I also speak fluent
Spanish but I do not speak Portuguese.56 Marschan-Piekkari and Reis (2004) point
out that access to potential informants and the nature of the relationship between the
researcher and the interviewee is influenced by their shared language. They categorise
the role that language may have in cross-cultural interviews in three categories;
‘linguistic equality’, ‘linguistic advantage’, and ‘mutual linguistic challenge’ 56 Spanish is spoken throughout Latin America except in Brazil where Portuguese is the official language.
83
(Marschan-Piekkari & Reis, 2004, p.227). In my research ‘linguistic equality’ would
describe the situation in which I interviewed a native English speaker in English; this
occurred 20 times. A ‘mutual linguistic challenge’, although uncommon in my
research resulted in two instances with informants whose first language was
Portuguese and whose interviews were conducted in a combination of Spanish and
English. A much more common scenario was that of ‘linguistic advantage’; a
situation in which either the researcher or the interviewee is speaking their mother
tongue but not both. This situation occurred in 15 interviews. Marschan-Piekkari and
Reis (2004) recommend always granting the linguistic advantage to the interviewee
rather than the researcher. Although I always offered the linguistic advantage to the
informant there were several instances in which the informant wanted to speak
English. I think there are two possible explanations for this. A few informants had
studied at international schools or lived extensively abroad and were as equally fluent
in English as in their mother-tongue. Within the cultural context of Latin America the
informants were being chivalrous and it would have been impolite and
counterproductive for me to insist on speaking Spanish. The second explanation I see
is that some informants wanted to demonstrate their recently acquired English
language skills in which case the interviews were often conducted in a combination of
English and Spanish. Granting the linguistic advantage to my informants had the
potential to exacerbate the power imbalance in the interview already affected by my
gender and age and the fact I interviewed ‘elites’. In order to minimise the potential
for disadvantage in this situation I translated my interview guide into Spanish and
spent time familiarising myself with the specific language of my research topic in
Spanish. It was important that my interview questions were not only linguistically
correct but also culturally sensitive. As such I conducted pilot interviews with
bilingual interviewees to help uncover ambiguous expressions and meanings as
recommended by Marschan-Piekkari and Reis (2004).
In relation to interview transcription, Strauss and Corbin (1998, pp. 285-86) state that
if the researcher is bilingual it is unnecessary, and in fact undesirable, to translate
interview transcripts. Not only is this translation a time consuming process but
subtleties of language are often lost in the process. Instead, they suggest translating
key quotes or passages at the time they are to be included in the final research
84
document. I adhered to this advice in my research. Having thoroughly described my
data collection process I will now elaborate on the methods I used to analyse my data.
Caveats on Data Collection The great diversity among Latin American countries in areas such as infrastructure
and socioeconomic development raises some concerns about the representativeness of
my research. To what extent can this research be called Latin American? Jones (2004)
points out that for practical reasons, that unfortunately lead to oversimplification,
single-country research is often titled ‘Latin American’. My research focuses
primarily on Mexico, Brazil, and Chile as these are the three markets with which
Australian firms are most heavily involved.
4.3 Data Analysis It is useful to think of the qualitative analytical process as consisting of three
components; processes, procedures and outcomes. Processes, including data
reduction, data display and conclusions and verification, can be broken down into
procedures such as coding, categorisation, abstraction, comparison and integration
with the eventual outcomes being firstly description, but ultimately explanation and
interpretation. Experts differ in their recommendations regarding qualitative data
analysis, particularly as methodologies differ, for example grounded theorists
emphasise constant comparison whereas phenomenologists emphasise exhaustive
systematic reflections of lived experiences. What they do agree on, however, is the
need for a systematic approach to the analysis of qualitative data. Systematic data
analysis techniques are essential when working with qualitative data if one wishes to
avoid the ominous and much touted ‘death by data asphyxiation’ (Pettigrew, 1990,
p.281). More importantly however, adherence to such techniques increases the
likelihood of producing a trustworthy account of the research. Trustworthiness is
particularly germane given the frequent criticism of qualitative research as subjective
and sloppy (Lincoln & Guba, 1985).
85
Analysis Strategies This research was based on a multiple-case study research design. Yin (2003)
advances three general strategies for analysing case study evidence; 1) relying on
theoretical propositions, 2) thinking about rival explanations and 3) developing a case
description. This research used the first of these strategies. The most preferred
strategy for case study analysis, the use of theoretical propositions to guide data
analysis focuses the researcher’s attention on certain data whilst ignoring other data
and as such is an important first step in data reduction. This strategy also helps to
organise the entire case study around the theoretical propositions and to define
alternative explanations that need examining (Yin, 2003). The proposition that
business, institutional and social networks help bridge the psychic distance between a
firm and a market and thus facilitate internationalisation shaped the early stages of my
data analysis by providing deductive codes and by limiting the scope of analysis.
A central component of the multiple-case study research design I adopted is cross-
case analysis. Cross-case analysis involves the systematic comparison of multiple
cases (in this research project, ten) following a replication logic. Under this strategy,
the cases are treated almost like a series of independent experiments that confirm or
disconfirm conceptual insights (S. L. Brown & Eisenhardt, 1997). Cross-case analysis
involves looking for both similarities and differences between cases as well as
extreme cases with the view to producing more robust findings (Yin, 2003).
Keeping in mind the analysis strategies outlined above, this research drew primarily
on data analysis techniques recommended by Dey (1993), Miles and Huberman
(1994) and Yin (2003). In this research I used the specific analytical technique of
pattern-matching. In this technique, pattern models that emerge from single cases are
compared to each other and to patterns predicted in the extant literature (Pauwels &
Matthyssens, 2004). I undertook pattern matching in order to compare the empirical
findings of my research to the patterns predicted by the stage models and the network
perspective of internationalisation. Pattern matching is emerging as a promising
technique within case study research on two accounts. First, the technique can help
illuminate the logic that links the data to the propositions; a key component of
research design that helps avoid the situation in which the evidence does not address
the initial research questions. Secondly, if the empirical data coincides with the
86
predicted pattern, the results can help strengthen the internal validity of a case study
(Yin, 2003).
The use of rival explanations as patterns is an example of pattern matching for
independent variables. In this research the outcome––the internationalisation by an
Australian firm into Latin America––is known. In my analysis I examined the factors
affecting this internationalisation for congruence with the posited explanations. Whilst
Yin (2003, p.118) asserts that it is desirable for these rival explanations to involve
patterns of independent variables that are mutually exclusive, such that if one
explanation is valid the other cannot be, on the same page he offers an example in
which the empirical data best matched a combination of two of the three models
provided as rival explanations. Such a scenario is consistent with Coviello and Munro
(1997) and Coviello and McAuley’s (1999) assertions that a combination of the stage
models and the network perspective of internationalisation would best capture actual
firm behaviour.
Data Reduction and Display Before I could begin pattern matching I had to break down the data into palatable
chunks through a process of data reduction. Data reduction is a continual process that
takes place throughout the life of a research project. It is the process of selecting,
focusing, simplifying, abstracting and transforming the data as they appear in field
notes and transcriptions into a more manageable form. Through the process of data
reduction I was able to organise my data in such a way that conclusions could be
drawn and verified (Miles & Huberman, 1994). My reduction and display of the data
in this project was greatly aided by the use of NVivo 7, a software package
specifically designed for use in the analysis of qualitative data. The use of a computer
program does not replace time-honoured ways of learning from data, but it does
increase the effectiveness and efficiency of such learning (Bazeley, 2007). NVivo
supported my analysis in five ways.
1. Managing the data: Using NVivo enabled me to keep one project containing
all original source documents (in this case primarily interview transcripts as
well as links to hard copy materials and websites), my field notes and memos
87
(written during the data collection and analysis phases detailing my
impressions of interviews, concept development, and theorising ) and my
cases in which I grouped together transcripts and documents from one
company and assigned attributes to them (for example, firm size, industry and
length of time in the region).
2. Managing my ideas: Using NVivo I created a series of tree nodes and free
nodes for coding the data and was able to track the number of data chunks in
each node as well as the number of documents contributing data to each node.
In this way the program provided rapid access to my conceptual ideas as they
developed as well as to the data that supported them whilst at the same time
retaining access to the unchanged documents from which those data came.
3. Querying the data: NVivo enabled me to ask simple and complex questions
about my data and have the program retrieve from its databases all information
relevant to answering my query. I was able to save the results for further
enquiry and as such querying became part of the on-going analysis process.
4. Graphically representing ideas: NVivo allowed me to specify relationships
between concepts or cases and to present those ideas in visual displays using
models and matrices.
5. Reporting from the data: NVivo facilitated reporting by providing easy access
to the original data sources, my coding database, the ideas and knowledge
developed from the two and the processes by which these outcomes were
achieved.
Using NVivo to aid my data analysis I followed a modified version of the steps set out
by Dey (1993). These were: reading and annotating, creating categories, assigning
categories, splitting and splicing, linking data, making connections and producing an
account.
Reading and Annotating As an initial step in the process of data reduction reading and annotating helps the
‘digestion’ of data. According to Dey (1993, p.83) ‘we cannot analyse our data unless
we read it’. While such a comment may seem self-evident what Dey means is that
reading through the data whilst maintaining a free association prepares the ground for
analysis. Such a free association involves ‘setting the mind free of fixed assumptions
88
and encouraging a more sensitive and critical response to the data’ (Dey, 1993, p.86);
‘by digging over the ground we loosen the soil and make it possible for the seeds of
our analysis to put down roots and grow’ (Dey, 1993, p.83).
In this stage of analysis I read through each interview transcript while at the same
time listening to the recording of the interview. This simultaneous process refreshed
my memory about what had taken place and facilitated a richer interaction with the
data than just reading the transcript. After listening to and reading the transcript I took
brief notes or ‘memos’ about key concepts and ideas that emerged from the interview.
This step corresponds to the annotating recommended by Dey (1993). Annotating
continued through the analysis process particularly in relation to justifying or
explaining to myself the categories I created and highlighting the emerging links
between the data.
Creating and Assigning Categories The process of creating categories is described as abstracting those features most
relevant to the research from the vast detail and intricacy of the data. Categorising or
coding the data using NVivo is done via a system of free nodes and tree nodes. Free
nodes do not presume any relationships or connections between the data and serve as
a starting point for ideas or concepts that may be further developed as analysis
progresses. Tree nodes are hierarchical structures in which parent nodes serve as
connecting points for subcategories or types of concepts. I used a combination of a
priori or ‘theoretically derived’ (Bazeley, 2007, p.76) codes and inductive codes in
this research. A priori codes may be drawn from the literature or previous experience
and are a good starting point when it comes to categorising the data. Bazeley (2007)
warns, however, of the need to ‘hang loose’ and feel free to change or develop codes
as analysis progresses. In contrast, inductive codes are derived from the data itself
often using an actual expression of a participant as the title for the code. An example
which illustrates both theoretically derived codes and inductive codes used in this
research is the parent node ‘Psychic Distance’. Psychic distance is a theoretical
concept central to this research and as such was set up as an a priori code. A subset of
a priori codes was also created for stimuli theorised to influence psychic distance
including ‘cultural distance’, ‘geographic distance’ and ‘language’. Inductive codes
89
that emerged from the data were subsequently added to this node tree include ‘time
zones’, ‘tourism images’ and ‘infrastructure’.57
The process of assigning categories, also referred to as coding, in practice is a process
of transferring chunks of data from one context (the original transcript) to another (the
code or node created to store the concept). The data chunk is not actually transferred
but rather copied as the original transcript remains intact in NVivo. The same data
chunk may be coded at several nodes or data chunks may overlap in a process
sometimes known as co-occurring coding. Whilst the process may seem simple it
involves constant interpretation on the part of the researcher about what the data are
actually saying. One benefit of using NVivo for data analysis is that double clicking
on the coded data chunk will open the original source document with the coded data
highlighted enabling the researcher to easily return to the context of the comment to
double check the interpretation if necessary. Creating and assigning categories whilst
conceptually distinct more often than not take place as an iterative process closely
linked with the next phase of splitting and splicing (Dey, 1993).
Splitting and Splicing Splitting and splicing are techniques designed to refine and refocus analysis. Splitting
involves creating sub-categories or sometimes new categories all together that reflect
more detailed divisions within the data. For example, during the process of assigning
categories I found it necessary to split the data in the Psychic Distance node tree into
an entirely separate hierarchical set of nodes. I rearranged the data to reflect subtleties
in responses that differentiated between ‘Psychic Distance Stimuli’ and ‘The
Challenges of Internationalisation’.58
Splicing is the opposite of splitting and involves merging two or more categories to
enhance meaning resulting in greater integration and scope (Dey, 1993). In an
example of splicing I integrated the free node ‘local staff’ into the node tree
‘experiential knowledge and learning’ as a child node. This kept the node separate but
acknowledged that the content of the ‘local staff’ node was really a sub-set of firm
experiential knowledge. In fact, this splicing reflects theorising that took place insofar
57 A full diagram of the Psychic Distance node tree can be seen in Table 7.3, Chapter 7. 58 See Tables 7.3 and 7.4 in Chapter 7.
90
as one way in which firms overcome their psychic distance is by ‘hiring in’ the
experiential knowledge they lack.59
Linking the Data and Making Connections Linking the data involves recognising substantive relationships between data and
categories. Linking data guarantees that the context within which comments were
made is not lost. Furthermore it can illuminate relationships between comments that
were made close to each other but that in the process of assigning categories were
broken apart. If creating and assigning categories is viewed as breaking down the
data, then linking the data builds it back up. Dey (1993, p.152) aptly notes that
‘categories are the conceptual building blocks from which we can construct our
theoretical edifices’. This step in the data analysis process highlighted the order in
which issues were raised by informants which was subsequently interpreted as
lending weight to relative importance. The NVivo strengths of querying the data and
graphically representing ideas facilitated this aspect of my data analysis.
Producing an Account The final step in Dey’s progression of qualitative analysis, producing an account, is
not only a means of reporting results, but also another way of producing these results.
‘What you cannot explain to others, you do not understand yourself’ (Dey, 1993,
p.237). The challenge of explaining oneself helps to clarify and integrate concepts and
relationships. Accordingly, producing an account is testament to the iterative nature of
qualitative research. In my research the final account must not only be interesting and
accessible (as Dey recommends), it must also meet the standards set for rigorous
academic research. Using Lincoln and Guba’s (1985, pp.289-331) guidelines for
‘establishing trustworthiness’ I was able to ensure I adhered to these rigorous
standards. The following section outlines the steps I took in this process.
4.4 Establishing Trustworthiness Establishing trustworthiness is vital in qualitative research. The premise is simple;
how can a researcher convince his or her audience that their research findings are
worth paying attention to? Lincoln and Guba (1985) outline four criteria against
59 This is an extension of the Uppsala model and is discussed at greater length in Chapter 8.
91
which the trustworthiness of a qualitative research project can be measured. They are:
credibility, transferability, dependability, and confirmability. These criteria can be
likened to corresponding criteria in the dominant research paradigm; internal validity,
external validity, reliability and objectivity. This research project’s performance in
regards to each of Lincoln and Guba’s criteria is defended below.
Credibility Ensuring credibility involves both carrying out the research in such a way that the
findings are likely to be deemed credible and demonstrating the credibility of the
findings by having them approved by the research participants. Triangulation and
member checking (Lincoln & Guba, 1985) were carried out to achieve these goals.
Triangulation This research involved both triangulation of sources and methods. Data-source
triangulation can help reduce random measurement error (Pauwels & Matthyssens,
2004). Data-source triangulation is also useful insofar as different sources may cast
new light on the phenomenon under investigation. In order to achieve these benefits, I
used both synchronic and diachronic data source triangulation. Synchronic data
source triangulation involves interviewing numerous respondents about the same
topic. Where possible I sought multiple respondents for each case study (the mean
number of interviews I conducted per case study was three). Diachronic source
triangulation, on the other hand, is achieved by interviewing the same informant on a
particular topic more than once (Pauwels & Matthyssens, 2004). The international
nature of this research and the limited amount of time ‘in the field’ reduced potential
for diachronic data source triangulation, however I did achieve this type of
triangulation with some participants through follow up interviews, informal chats at
social gatherings ‘in the field’ and, more commonly, via email correspondence once
back in Australia.
Triangulation of methods, as opposed to triangulation of data sources, enables the
different types of data collected to provide cross-data validity checks. Research that
relies upon only one approach to data collection is more susceptible to errors
associated with that particular method than research that uses multiple methods.
Whilst this research is based primarily on semi-structured in-depth interview I
92
supplemented the data obtained in interviews with secondary data I collected from
websites, annual reports and other company documents.
Miles and Huberman (1994, p.266) refer to triangulation as ‘a near talismanic method
of confirming findings’. It is a common misconception regarding triangulation,
however, that its purpose is to show that different data sources or methods essentially
produce the same findings. Quite the opposite, the point is actually to test for such
consistency. Understanding inconsistencies in results across different types of data
can be highly informative and discovering such variations should not be viewed as
weakening the credibility of results (Patton, 2002, p.247).
Member Checks Member-checking involves submitting analytic categories, interpretations and
conclusions to scrutiny by members of those stakeholder groups from whom the data
were originally collected (Lincoln & Guba, 1985, p.314). This is a crucial technique
in establishing the credibility of qualitative research. By sending a report of my
preliminary findings to all research participants and inviting their feedback I
performed a modified version of the member-checking process outlined by Lincoln
and Guba. Given the fact that research participants were dispersed across four
countries it was not possible to follow their process more precisely. Through the
feedback I received I was able to confirm that my reconstructions of the given
phenomenon were recognisable as adequate representations of the multiple realities
present in the data.
Lincoln and Guba (1985, pp.315-316) take pains to emphasise the distinction between
triangulation and member-checking. Although superficially identical, triangulation is
a process carried out with respect to data, and member checking is a process carried
out with respect to constructions.
Transferability Qualitative research delves deeply into particular phenomena in a particular
environment at a particular time. External validity as measured in quantitative
research is not possible or even desirable in this context. Transferability is imperative
however so as to facilitate comparison with other studies. Lincoln and Guba maintain
93
that qualitative researchers must couple their findings with ‘a description of the time
and context in which they were found to hold’. Whether the findings hold in some
other context is an empirical issue dependant on the similarity between the former and
the latter. It is not the responsibility of the researcher to provide an index of
transferability, but rather to provide ‘the database that makes transferability
judgements possible’ (Lincoln & Guba, 1985, p.316). This ‘database’ most commonly
takes the form of a thick description. Elements of thick description can be found
throughout my thesis. Chapter 2 together with Appendices 1-3 provides a description
of contextual elements, including economic, political and cultural elements relevant to
this research. The sub-section Caveats on Data Collection in Section 4.2 of this
chapter provides further evidence of the cultural context in which the research took
place. Finally, Chapter 5 provides a description of the structural characteristics of the
case study firms.
Dependability and Confirmability Conducting an inquiry audit is an effective technique for demonstrating dependability
and confirmability in qualitative research. In an inquiry audit, much like a fiscal audit,
the auditor examines both the inquiry process and the ‘product’ (the data, findings,
interpretations and recommendations). Determining the acceptability of the process
attests to the dependability of the research. The confirmability of the research is
upheld if the ‘product’ is supported by data and is internally coherent. This research
project was audited by a fellow PhD candidate at the University of Melbourne. The
auditor satisfied several of Lincoln and Guba’s (1985, p.326) criteria for auditor
selection insofar as she was a disinterested party with sufficient methodological
expertise and equal peer status. The use of NVivo for data analysis expedited the
inquiry audit.60
Ethical Considerations A final ingredient in ensuring academic rigour is adherence to the ethical
requirements of the University. This research received ethics approval from the
Faculty of Economics and Commerce Human Ethics Advisory Committee. All
60 See Appendix 9 for the Inquiry auditor’s Letter of Attestation.
94
participants received a consent form61 and a plain language statement62 prior to the
interview taking place. Signed consent forms and research data have been kept
according to the University of Melbourne ethics standards.
4.5 Conclusion This chapter outlines in detail the multiple-case study research design I adopted for
this project and the justification for this choice. The specific steps taken in data
collection and analysis are explained as are the limitations of these methods. The
process of establishing trustworthiness described above imparts confidence in the
forthcoming results and discussion chapters.
61 See Appendix 8. 62 See Appendix 7.
95
CHAPTER FIVE
The Cases The aim of this chapter is to provide a description of the structural characteristics of
the firms which participated in my research. In combination with Section 4.4 of the
previous chapter this description helps establish the trustworthiness of my findings.
Providing a description of the research context helps establish transferability (Lincoln
& Guba, 1985). Transferability enables comparison with other studies and as such
heightens the study’s contribution to the broader discipline. Other parts of this thesis
also contribute to my description of the research context. In particular, Chapter 2 and
Appendices 1-3 provide a description of economic, political and cultural elements
relevant to this research.
This chapter describes the ten firms that participated in the research as well as
categorising the types of supplementary interviews that I conducted. Table 5.1
provides a summary of the cases and their characteristics. So as to obtain candid
responses I offered interview participants complete confidentiality. For this reason, I
am particularly conscious of not disclosing information that could identify either the
participants or their companies. This issue is particularly sensitive given the small
number of Australian firms investing in Latin America. To this end, this chapter is
presented by category rather than company. The firms are described according to their
industry, size and ownership, internationalisation experience, and internationalisation
in Latin America. Each characteristic is discussed in detail in Sections 5.1-5.4.
Section 5.5 describes the interviewees, including supplementary interviewees such as
Trade Commissioners, Ambassadors and representatives of chambers of commerce.
96
Table 5.1: Case Study Characteristics
Industry Firm Sizea
Ownership First Internationalisation
Extent of Int.b First Int. in Latin America
Type of Int. in Latin Americac
Extent of Int. in Latin America
Case 1 Manufacturing S Private 1990s Moderate 2000s Market seeking Multiple markets Case 2 Electricity
supply S Private 1990s Moderate 2000s Market seeking Multiple markets
Case 3 Manufacturing S Private 1990s Moderate 1990s Market seeking Multiple markets Case 4 Manufacturing M Public 1980s High 2000s Strategic asset
seeking Market seeking
Multiple markets
Case 5 Professional services
M Public 1970s High 2000s Market seeking One market
Case 6 Manufacturing S Private 1990s Moderate 1990s Market seeking Multiple markets Case 7 Professional
services S Public 1990s Moderate 2000s Resource seeking One market
Case 8 Manufacturing/ Professional services
L Public 1990s High 2000s Strategic asset seeking Market seeking
Multiple markets
Case 9 Food and beverage supply
S Private 2000s Moderate 2000s Market seeking One market
Case 10 Mining L Public 1890s High 1980s Resource seeking Multiple markets a S = 100-1000, M = 2,500-5,000, L = 10,000+ b Case study firms were bi-modal with respect to the extent of internationalisation. Moderate = 1-4 markets, High = 14-50 c As per Dunning (1980)
97
5.1 Industry The industry break down of the case study firms largely reflects Australian investment
in Latin America as described in Chapter 2. Pairs of firms from a given industry sub-
division were sought in order to enable meaningful comparison, although this was not
always possible. Of the ten63 firms, five are involved in manufacturing of some sort.
Three firms belong to the ANZSIC64 sub-division ‘basic chemical and chemical
product manufacturing’. The other two firms belong to the ‘polymer product and
rubber product manufacturing’ and ‘machinery and equipment manufacturing’ sub-
divisions respectively. Only one case study firm is involved in the mining industry,
although this is a primary area for Australian investment in Latin America. Three
firms operate in the allied industry of ‘professional, scientific and technical services’.
Of the two remaining firms one belongs to the ‘electricity supply’ sub-division and
one to the ‘food and beverage services’ sub-division. This last case study firm is the
only B2C (Business to Consumer) firm in my research; all other case study firms are
involved in providing products or services to other firms.
5.2 Firm Size and Ownership Both medium and large65 sized firms are represented among the sample firms. Six
firms have between 100 and 1,000 employees. Beyond this there is a large jump in
firm size; two firms have between 2,500 and 5,000 employees and two firms have
over 10,000 employees. To aid interpretation of the result presented in Chapter 6 I
will refer to firms as belonging to one of these three groups; small (100-1000
employees), medium (2,500-5,000 employees) or large (10,000+ employees). This
categorisation is my own and does not adhere to that of the Australian Bureau of
Statistics. The sample is equally divided between publicly listed and privately owned
firms. The majority of firms (6) in the sample are less than 30 years old, with one less
than 10 years old. One firm was established in the 1950s and one in the 1920s. Two
case study firms are more than 100 years old.
63 One firm is classified as operating in two industries. 64 ANZSIC – Australia and New Zealand Standard Industrial Classification. 65 According to the Australian Bureau Statistics definition of firm sizes.
98
5.3 Internationalisation Experience66 As indicated above, most case study firms are relatively ‘young’. Keeping that in
mind, six of the ten firms were engaged with international markets in some way
within 10 years of commencing operations; one of these was born global.67 One other
firm took slightly longer (13 years) to explore international opportunities while the
other three firms were much slower. One firm first exported 37 years after it began
and another waited approximately 50 years to internationalise. The final firm is
somewhat unique in that although it began life as an Australian firm in the 19th
century it was acquired by an international MNE in the 1970s and divested again in
1997. Internationalisation for this newly divested firm began in 1998.
With few exceptions, the sample firms began to internationalise in earnest in the
1990s (6). This coincides with the market liberalisation of the Hawke-Keating
governments (1983-1996) and the increasing globalisation of world markets (see
Section 2.1). One firm was exporting their services to Malaysia and the Philippines in
the 1970s and 1980s but this was via Australian government aid contracts;
internationalisation did not become a priority for this firm until 2000. Yet another
firm established a sales office in South-East Asia in the 1980s but identified their
major period of international expansion as beginning in 1994. The exception to this
trend is one firm that first exported as far back as 1891 and has had overseas
operations since the 1960s.
Since first internationalising a relatively short time ago the case study firms have
expanded rapidly. Two distinct groups exist within the sample. One group (4 firms) is
highly global with operations in between 14 to 50 markets (average 27). The other
group has comparatively smaller operations based in between one and four markets.
Despite manufacturing only in Australia, two firms have sales and services offices in
five overseas markets and one of these firms will commence manufacturing overseas
in 2009. The manufacturing firms in the sample export to between 25 and 100
66 Internationalisation is defined as ‘the process by which firms increase their awareness of the direct and indirect influence of international transactions on their future, and establish and conduct transactions with other countries’ (Beamish, 1990, p.77). 67 A commonly accepted definition of a born global firm is a firm that achieves sizable overseas sales within 2 years of inception (Gabrielsson, Kirpalani, Dimitratos, Solberg, & Zucchella, 2008).
99
markets. Although most began internationalisation recently, international markets
now account for more than half of all revenue for eight of the ten case study firms.
The case study firms have used a variety of entry modes in their international
expansion. Initial internationalisation took the form of exporting for seven firms. One
firm began internationalisation with a Greenfield operation, another via acquisition
and a third through franchising. Since initial internationalisation, acquisition has been
the main form of expansion for four firms. Four other firms have established
Greenfield operations (two in manufacturing and two in professional services)
through a combination of joint ventures and wholly owned subsidiaries. Exporting
continues to be the main entry mode used by three firms and one firm continues to use
the franchising mode.
5.4 Internationalisation in Latin America Experience in Latin America varies among the case study firms. One firm has more
than 20 years experience operating in the region and two firms began exporting to
Latin American markets in the mid-1990s. The other seven firms have entered the
region since 2000 which coincides with the Australian government’s increased focus
on the region (see Section 2.1). Chile is the most common initial market in the region
(4 firms), followed by Brazil (2) and Mexico (1). Three firms entered multiple
markets simultaneously via acquisitions. For these firms entry into Latin America was
incidental to the acquisition of global assets. The motivation for internationalisation in
Latin America amongst my case study firms was predominantly market seeking (8)
which is consistent with the motivation for the majority of Australian outward FDI
(Mortimer, 2008).
Since their initial market entry most firms (7) have expanded regionally. Four firms
have manufacturing operations in multiple markets.68 Although other firms may not
have operations in multiple markets they have still expanded their regional presence
through increased exporting and sales offices. One firm expanded from exporting to
Mexico to having sales and services offices in Mexico, Brazil and Chile and exporting
to all three (all manufacturing is still carried out in Australia). Another firm 68 Including Argentina, Brazil, Chile, Colombia, Peru, and Venezuela.
100
progressed from exporting to Brazil to manufacturing in Brazil and exporting to five
other regional markets. Yet another firm progressed from exporting via an agent in
Brazil to establishing a regional sales and marketing subsidiary in Brazil and
exporting to three other Latin American countries. This firm has now begun
construction of a manufacturing plant (its first outside Australia) in Mexico through a
joint venture with a local partner. The final three firms are still only operating in one
market (Chile), but all cite plans for future regional expansion.
5.5 Interviewees Between one and eight participants were interviewed for each case study firm. These
interviewees represented various roles including Chief Executive Officer, Chief
Financial Officer, General Manager, Vice-President, International Operations
Manager and Business Development Manager. Additional interviews were conducted
with actors in institutional networks (see Section 3.2) including the Australian
Ambassadors and Trade Commissioners in Mexico, Chile and Brazil, as well as the
Honorary Consul in Rio de Janeiro. Research participants also represented relevant
chambers of commerce both in Australia and Latin America. Interviews were
conducted in four countries with the largest number of participants interviewed in
Chile (14) followed by Australia (10), Brazil (9) and Mexico (6). Despite the location
of the interviews, the majority of participants were Australian. Seven Chileans, six
Brazilians, and three Mexicans were also interviewed. Only two interview participants
were women and although I did not ask, I would estimate only two participants were
less than 40 years of age.
5.6 Conclusion The description provided above helps establish the trustworthiness of my research by
situating it in time and place thus enabling better interpretation of the results
presented in Chapter 6. In the future, researchers will be able to assess whether or not
my findings are transferable to a new context by referring to this chapter.
This chapter has described the ten firms that participated in my research without
divulging identifying information. These firms represent a diverse range of industries
101
and are equally divided between public and private ownership. Particular attention has
been paid to the internationalisation patterns of the case study firms. Overall the firms
have a limited history of internationalisation, and yet since first internationalising
several have acquired a sizeable global presence. These firms are present in a variety
of Latin American markets and have established that presence via a variety of entry
modes. The predominant motivation for internationalisation into Latin America is to
seek new markets. The firms in my sample are representative of the broader
population of Australian firms in Latin America as per my analysis of this population
in Section 2.1.
The following chapter presents my findings in relation to the research questions I
derived from the literature and outlined in Chapter 3. What psychic distance did these
firms experience prior to entry into Latin America? and How did they overcome their
preconceptions? What role did experiential learning and networks play in their entry
and expansion in the region? These questions are addressed in Chapter 6.
102
103
CHAPTER SIX
Results
This chapter presents my research results and in doing so responds to the research
questions that were drawn from the literature review in Chapter 3. Chapter 6 and
Chapter 7 are closely linked. While this chapter sets out in detail my research
findings, Chapter 7 presents a discussion of these findings and links them back to the
theoretical gaps identified in the literature review.
My research explored the internationalisation of Australian firms in Latin America.
Areas of inquiry included the psychic distance experienced by Australian firms and
how they overcame this distance using experiential knowledge and networks. The
research questions are set out in Chapter 3. In order to address these questions I
conducted semi-structured interviews with informants at ten case study firms as well
as supplementary interviews with government and non-government support agencies
(a description of the characteristics of case study firms is provided in the preceding
chapter). I developed a distinct interview protocol69 for each interview, however the
interviews developed ‘organically’ such that not all interview topics were discussed in
every interview. In all interviews some topics were discussed to a greater extent than
others.
The aim of this chapter is to systematically lead the reader through the key findings
that emerged from my case studies and supplementary interviews. These findings are
presented using a combination of rich quotes that provide in-depth access to
interviewees’ thoughts and opinions as well as summary tables that present an overall
picture of the results regarding a particular area of the research. In this way the
chapter provides both a broad overview and a detailed understanding of the
phenomenon under investigation. Using the qualitative data software package NVivo
to assist my analysis enabled me to constantly switch between these macro and micro
level views in an iterative process.
69 See Appendix 6.
104
This chapter follows roughly the same order as the research questions listed in
Chapter 3. Section 6.1 briefly outlines participants’ views on the varying
attractiveness of Latin American markets and establishes that internationalisation in
Latin America was fruitful for case study firms firms. Section 6.2 – 6.4 relate to my
first set of research questions (RQ1-1.3). These sections describe in rich detail the
psychic distance stimuli that most affect Australian firms prior to engagement with
Latin America and how these stimuli differ from the actual challenges firms face in
the region. The remainder of the chapter explains the mechanisms firms use to
overcome both the psychic distance they experience and the actual challenges of
internationalisation. My findings illustrate that Australian firms use a combination of
experiential knowledge and network resources to facilitate their internationalisation in
Latin America.
6.1 Opportunities in Latin America This section summarises participants’ views on the opportunities available in Latin
America and provides a lead-in to my main research findings. The data support the
notion that Latin America presents attractive opportunities for Australian firms. This
research is an attempt to explore one region of the world where Australian firms are
underrepresented. Clearly, Latin America is not the only region that fits this
description. Future research may well aim to explore the limited presence of
Australian firms in Eastern Europe or Africa, for example. IB literature is primarily
focussed on decisions that are made, in contrast, by exploring in-depth the
internationalisation experiences of ten Australian firms in Latin America my research
casts light on decisions that are not made, i.e. why perhaps other firms do not go to
the region.
Table 6.1 provides a summary of the node tree for this coding category. The number
of sources indicates the number of interview transcripts70 that contributed to the node
while the number of references refers to individual comments. General comments
about commercial opportunities in Latin America were coded at the ‘parent’ node
Latin American Opportunities. Twenty-five comments were extracted from 11
interview transcripts that made reference to current or future opportunities in the 70 Some interviews involved multiple interviewees.
105
region. Comments that referred specifically to one of the three focus markets were
coded at separate ‘child’ nodes. Of particular note are the numerous comparisons that
were made between Latin America and Asia (or elsewhere). These comments have
been coded as part of this node tree.
Table 6.1: Latin America Opportunities Node Tree
Name Sources References Latin American Opportunities 11 25 Comparisons to Asia and elsewhere 13 37 Brazil 10 22 Chile 12 34 Mexico 6 14
Case study participants were in the main positive about their Latin American
operations and most predicted growth in these markets in future years. Numerous
participants suggested that Australian firms perceive Latin America as the United
States or Europe’s ‘backyard’ or ‘playground’ and that accordingly are missing out on
opportunities in the region. Mining and the related professional services industry
continue to present excellent opportunities for Australian firms. The region is rich in a
diverse range of natural resources (including copper, gold, silver, molybdenum,
nickel, coal and oil) with large areas of the continent yet to be geologically mapped.
Another industry offering potential for Australian firms is agribusiness, particularly in
Brazil and Mexico which are sometimes described as the world’s supermarkets. The
Southern Cone of South America71 offers a temperate climate, highly fertile soil and
comparatively cheap land making it ideal farming territory. New Zealand firms in
particular have been successful in transferring advanced farming techniques to
increase productivity in this region (Baynes, 2008).
Many of the comments in the Latin American Opportunities node relate to the varying
attractiveness of Latin American markets. Which markets are deemed attractive
depends largely on the industry the case study firm operates in (i.e. not all comments
are universally positive or negative about any particular market) but the general
perspective is that some markets are very attractive while others are less so.
71 Southern Brazil, Argentina, and Chile and Uruguay and Paraguay.
106
I know that if you’re working in Peru, for example, well, much harder work [in comparison to Chile]. Argentina, you don’t know what’s coming around the corner. Bolivia, a cot case. Mexico, well, when they decide who their president is – need I say more?
Case 7 (S)72, Interviewee 1
This differentiation between markets contrasts initial perceptions that frequently lump
all Latin American countries into one basket (see Section 6.2). It appears that once
people have some experience with Latin America they are much more discerning
about internal differences.73 It should be noted though that just because a market is
seen as more difficult or more risky it does not mean that the case study firm (or other
firms) would not do business there. Market opportunities and size can outweigh
difficulties.
Data analysis revealed an interesting trend in the adjectives used to describe Brazil,
Chile and Mexico. An illustrative sample of these terms is summarised in Table 6.2.
Brazil and Mexico are acknowledged as the biggest market opportunities in Latin
America due to their size. Brazil is particularly singled out for its large consumer
market and opportunities in mining and agribusiness. There is some perception that
Australian firms are not aware of the size and sophistication of Brazil’s consumer
market. Despite these positive comments, Brazil is predominantly perceived as a
complicated, high risk and difficult to penetrate market and Australian firms are said
to be timid and cautious in approaching it.
Here [in Brazil] you may be taking bigger risks, but the rewards are also much bigger.
Government Interviewee 4 (ESL)74
72 This indicates that Case 7 is one of the 6 smaller firms in my sample with between 100 and 1000 employees. The two medium case study firms have between 2500 and 5000 employees. The two largest case study firms have over 10,000 employees. 73 These regional differences are discussed at length in Section 2.3 – The Latin American Business Environment. 74 English as a Second Language. See Section 5.3 for a discussion of the role of language in this research.
107
Table 6.2: Contrasting Descriptors of Brazil, Chile and Mexico
Country Negative Descriptors Positive Descriptors Brazil Tricky, high risk, tough, so
different, complicated, under-achiever
Growing market, huge market, bigger risk = bigger reward
Chile Very small Predictable, pro-Australia, easiest, investor friendly, springboard/ gateway/stepping stone, hub transparent, safer, comfortable,
Mexico Image problem, males endémicos [translation endemic negatives], grandes dificultades [translation big difficulties]
Large middle class, international economy, vegetable basket for the Americas
Australian investment in Mexico is much smaller than in other parts of Latin
America; this is particularly notable when we consider Mexico’s large open economy
and the extent of involvement from other countries’ multinationals. It was suggested
that the lack of Australian investment in Mexico is for geographic reasons as many
Australian firms enter Latin America via Chile. The Mexican mining industry is
considered investor friendly and although this is an industry in which Australian firms
have competitive advantages few have ventured to Mexico and the industry is
dominated by Canadian firms.75 Interestingly, two participants (both Australian
government representatives) suggested that Mexico has an image problem relating to
its geographic location. One mused that if Mexico had a border with Chile rather than
USA we would see a very different story of Australian investment in the country.
Mexico is in a gap, in a huge gap, it is really neither North America nor South America, and doesn’t want to be part of Central America.
Government Interviewee 7
It was suggested that many Australian firms view Mexico as a secondary market to
the USA and think they can enter Mexico from there. The size of the US market and
the differences between USA and Mexico make this an unrealistic proposition in most
instances.
75 75 per cent of FDI in Mexico’s mining industry is Canadian (Roque, 2008).
108
The third focus market, Chile, received mainly positive descriptions. It was
commonly described as a gateway or a springboard to the rest of the region as it is
seen as a ‘smaller step’ from Australia.76
…if you really want to get to the nuts and bolts [of it], it’s to do with bridging that psychic distance and once you are here [in Chile] then you have halved your step into the rest of those big markets.
Case 8 (L), Interviewee 3
So if you survive that [entry into Chile], maybe you can bite off a bit more. Government Interviewee 1
While Chile was frequently referred to as safe, transparent and comfortable, all factors
that contribute to its appeal as a regional hub, its small size limits its attractiveness for
market seeking FDI. Chile is considered attractive, however, for FDI in mining and
professional services. Opportunities are also available in wine and agribusiness. The
best opportunities, however, are considered to be outside Chile in the rest of the
region; examples provided include Colombia, Brazil, and Peru.
Comparisons to Asia and Elsewhere Numerous respondents, both within the case studies and from support agencies made
comparisons between doing business in Latin America and doing business in Asia. It
was universally thought that doing business in Latin America was either easier or no
more difficult than doing business in Asia.77 One quote in particular captures this
sentiment. Whilst it is long and somewhat rambling it is also evocative and amusing
and is evidence perhaps of the frustration caused by the apparent lack of interest in
Latin America from Australian firms. The interviewee’s sense of exhaustion at having
to deal with so many cultural and institutional differences is especially noteworthy.
I lived in South East Asia and North Asia, and now I’m working in Latin America. I was based in Manila and I would hop on a plane and I would go four hours and I would be in Indonesia. I would deal with people who spoke Bahasa, I would deal in a country where there was the Muslim religion, a presidential system. I would then hop on a plane and go to Brunei and talk to another group of people who [are] a lot more British, they have an absolute monarchy and they practice a different type of Islam. I would then hop on my plane and go to Singapore, I’d deal with Chinese, English speaking with a different accent, Prime Minister rather than the presidential system, common
76 Chile’s status as an investment gateway is widely accepted and heavily promoted by the Chilean government. 77 Whilst several respondents used the term Asia in general I acknowledge the great diversity within the region.
109
law jurisdiction and no religion except money. Then I would go to Malaysia, and again they had a Sultan not a president, they had more orthodox Islam than in Indonesia, a much higher wealth etc. I’d then fly to Thailand and I’d do my visits there where they have a King, entirely different customs and in all these countries a degree of unacceptability of certain characteristics, habits and customs like touching somebody on the head in Thailand. I would then go to the socialist regime of Vietnam, very poor, they live in a particular way, then I fly back to Manila and I’d feel like I’d been through the wringer. You land in Chile, you speak Spanish and you go all over - Mexico and everybody’s got a presidential system, everybody has the Napoleonic code…you can understand them, you can move very easily…yet we prefer to go and work hard in that very complex Asian environment. Let alone going to China where, don’t even get me started – you can’t read the street signs and the prison looks like a school and the hospital looks like a factory and only the idiograms outside tell you the difference…and you can’t read them. You can’t hop in a taxi, nobody is taking you to the correct address. Yet we plough so much time and energy into that South East Asia region and we do well out of it don’t get me wrong. But compared to [that] trying to do business in Latin America is so much simpler.
Government Interviewee 5
The question that begs to be answered of course is if, as this interviewee suggests, it is
so much easier to do business in Latin America, why are more Australian firms not
taking advantage of opportunities in the region? The answer seems to be a lack of
awareness. Participants frequently made reference to Australia’s proximity to Asia
and greater familiarity with that region in comparison to Latin America.
6.2 Lack of Awareness The general lack of awareness and knowledge about Latin America amongst
Australian firms is the primary barrier to increased Australian involvement in the
region. This issue was raised repeatedly in numerous interviews and whilst it is coded
as part of the Psychic Distance Node Tree (see Table 6.3) I feel it is more of an
antecedent to psychic distance and warrants separate discussion. This finding is
consistent with the EFIC Global Readiness Index (Export Finance and Insurance
Corporation, 2008) in which a lack of market knowledge was the most frequently
cited ‘major barrier’ to international expansion (31% of firms) regardless of the
overseas market targeted.78
78 This survey included 462 Australian firms. The EFIC sample is comparable to my case study firms in terms of industry breakdown and firm size.
110
Before we begin to consider the psychic distance stimuli that most affect the
perceived psychic distance of Australian executives, this lack of awareness must be
addressed. The question I often asked was ‘what influences the perceptions of Latin
America held by Australian executives before they travel to the region?’ The
unfortunate truth is that in many instances there is no perception at all. Latin America
is not on the radar screen.
…we’d say ‘we’re about to invest in Chile’, ‘Chile?, Why Chile?’, And probably after the meeting they went and look[ed] it up in the atlas as to where it actually was. …Investors, banks even, don’t know very much about it. …It’s not Singapore…it’s off the beaten track, and so that does make it difficult.
Case 2 (S), Interviewee 2
A lot of people come here for the first time and are shocked by the similarities, not by the differences, and say why don’t we know about this place? Why aren’t more people here?
Government Interviewee 2
So when we sort of considered Latin America, it wasn’t something we sort of gave much thought to until we actually researched the market and then went wow, this is actually an amazing market.
Case 9 (S), Interviewee 2
Awareness is at the top of my list [of requirements for increased Australian investment in Latin America]. Unless people have up-to-date knowledge of what is happening in Latin America it is very hard for them to then take decisions about the region. They tend to put it [in the too] hard basket and go in favour of other markets where there is a greater knowledge base and a general perception of greater opportunities.
Chamber of Commerce Interviewee 3
This lack of awareness is also mutual however as there is very little known in Latin
America about Australia. Latin American interviewees invariably reported that their
knowledge of Australia prior to engagement with Australian firms encompassed
stereotypical elements of popular culture such as Skippy, Steve Irwin, Nicole Kidman,
and images of pristine Australian beaches.
One factor repeatedly mentioned as affecting the lack of awareness amongst
Australian executives is the Australian media. Latin America receives very little
exposure in the Australian press which, according to one participant leads to an ‘out
of sight out of mind’ mentality.
You go through a newspaper in Australia…and [see] how many stories about Latin America appear in there. People are confidently and consistently
111
reading about something in Indonesia, whether bad or good, something in China, something in Japan, something in the US. …so the thing is that Mexico and [other] Latin American countries typically just don’t get any press whatsoever and when we do get press its negative press, it’s about the Pinochets…79
Government Interviewee 7
Numerous respondents lamented the sensationalist or negative nature of the reporting
on Latin America in Australia. Recent stories relating to the region covered in the
America’s section of The Australian newspaper online (The Australian, 2008) include
‘Nine killed in Guatemalan drug shootout’ (26/03/08), ‘Man stole Easter Island
statute’s ear’ (26/03/08), ‘Argentina faces disappeared legacy’ (14/03/08), ‘Ten feared
dead in Rio copter crash’80 (13/03/08), ‘Colombian rebel kills boss and declares hand’
(10/03/08), and “‘War has began’ in Colombian stand-off” (06/03/08). Of 22 stories
reported about Latin America in March 2008 only one, a story about Cuba’s
ratification of two UN Human Rights Pacts (01/03/08) could be described as
positive.81
The situation is beginning to change as more Australian firms start doing business in
the region. One respondent claimed that in recent years the Australian business press
has given Latin America more coverage and positive coverage at that and that this has
had an impact on the knowledge pool of Australian executives.
The level of understanding and knowledge between the two regions was very poor. It is still poor but it’s much better than it was before.
Case 1 (S), Interviewee 5 (ESL)
Commerce in Australia is waking up to Latin America. Case 8 (L), Interviewee 2
People at corporate levels on boards who will make the decisions are talking with other board members as they share their board directorships with the Oricas of the world, the BHP Billitons of the world, with the Rio Tintos…Once you get a certain momentum going it becomes a fad, it becomes a flavour.
Case 8 (L), Interviewee 3
79 Chile’s ex-dictator General Augusto Pinochet had recently died at the time of this interview in December 2006. 80 This story related to a Rio Tinto helicopter crash in the Peruvian Andes. 81 Thirteen of the 22 stories related to the stand-off between Colombia, Ecuador and Venezuela over the killing of FARC deputy leader Raul Reyes, accounting for the higher than usual number of stories about the region.
112
As more and more Australian firms ‘wake up’ to the opportunities of Latin America it
will become increasingly important to understand the stimuli that drive their initial
perceptions of the region. The following section explores these stimuli in order of
importance.
6.3 Psychic Distance Psychic distance complicates internationalisation by interfering with information
flows between a firm and a market and is at the heart of my conceptual model. My
research questions explored how psychic distance affects the internationalisation of
Australian firms in Latin America and which psychic distance stimuli have the
greatest effect on perceived psychic distance. Psychic distance stimuli generally
include national level differences between the home and the host markets that
influence initial perceptions of a country or a region. Table 6.3 presents the coding
categories that I developed in relation to Psychic Distance. Some of these categories
were derived from the literature and established a priori, for example geography,
language and culture; others, such as personal security, infrastructure and tourism
images emerged during data analysis.
Table 6.3: Psychic Distance Node Tree
Name Sources References Psychic Distance 15 24 Lack of awareness or knowledge 17 52 Psychic Distance Stimuli 7 8 Geography 16 29 Direct flights 10 15 Time zones 6 8 Language 15 34 Institutions 2 3 Economic 11 18 Political 11 15 Legal 9 17 Corruption 4 4 Financial 2 3 Military 2 2 Bureaucracy 1 2 Culture 15 26 Business practices 1 2 Infrastructure 10 13 Personal security 9 10 Tourism images 6 8
113
One description that captures the essence of psychic distance is the idea that Latin
America ‘just seems so far away’. At its most elementary level psychic distance
seems to have the effect of making Australian executives baulk at the very idea of
doing business in Latin America.
…why would we ever do business in a place like that? That’s the first thing [I thought]. In fact I said to [Managing Director] at the time, I said ‘are you serious about this? Why Brazil? Why South America?’
Case 3 (S), Interviewee 2
In the case of several case study firms psychic distance had the effect of preventing,
or at least seriously delaying, market entry. Case 4, one of my medium cases,
indicated that they rejected a possible acquisition in Brazil in 1997 because they did
not feel capable of operating in such a different environment. It was seven years
before they felt confident enough to go ahead with an acquisition in the country
suggesting either that conditions changed in Brazil during that time or that Case 4’s
knowledge changed such that Brazil no longer seemed so far away. In all likelihood, it
was a combination of both with the final result being a reduction in the psychic
distance between Case 4 and Brazil. Case 4 has since made further acquisitions in
other parts of the region.
Other findings to emerge from the data include a preconception of high risk
associated with doing business in Latin America and a notion that firms must be
adventurous to invest in the region. These ideas resonate with the previously cited
quote that describes Chile as ‘off the beaten track’ and evoke images of Australian
executives heading off, Indiana Jones-style into the Amazon. It is possible that this
perception is fuelled by the concentration of Australian investment in the region in
mining. Mining companies by their very nature are ‘explorers’ and often operate in
remote areas. The dominance of this perception, however, belies reality as most
interviewees acknowledged. Initial perceptions were varyingly described as
‘outdated’, ‘erroneous’ and ‘stereotypical’. A few participants indicated that
Australian firms’ perspectives of Latin America are now realistic, suggesting a shift
from previous inaccurate perceptions which could arguably be associated with the
perceived improvement in knowledge available in Australia about the region.
114
It appears that psychic distance becomes a particular issue in relation to the
opportunity costs of internationalisation. Especially in the case of SMEs, regions or
project opportunities compete for limited human and financial capital. It was
suggested that other regions of the world received a higher priority because more is
known about them and firms are more ‘comfortable’ operating in them.
Psychic Distance Stimuli When questioned regarding their initial psychic distance to Latin America several
participants spoke of trying to leave their preconceived ideas behind which
undoubtedly is both commendable and constructive in international business. That
said, however, certain stimuli were repeatedly mentioned as affecting initial
perceptions of the region. These stimuli have been ranked in both Table 6.3 and the
discussion below according to the frequency with which they were mentioned as well
as the weighting attributed to them by research participants. Most psychic distance
stimuli are national level differences and many are related to a lack of market-specific
(business and institutional) knowledge. Notably, one interviewee suggested that a lack
of internationalisation knowledge also contributes to perceived psychic distance. This
issue is explored further in Section 6.5.
I believe what affects people in Australia when they’re thinking about internationalisation is ‘where do you start?’ ‘how do you do this?’.
Case 7 (S), Interviewee 1
Geography In conjunction with its child nodes direct flights and time zones, geography was most
frequently mentioned as the primary factor that influences Australian perceptions of
Latin America. This is despite the fact that Australia is geographically closer to Latin
American than it is to Europe and the United States of America. The geographic
distance to the United States and the United Kingdom does not appear to contribute to
the perceived psychic distance of Australian executives to these countries. This
suggests that psychic distance stimuli are not only not equivalent in contributing to
perceived psychic distance, as already suggested in the literature, but that these
stimuli have the potential to influence the perceived psychic distance of one
individual to different countries to varying extents. This suggestion is explored in
greater depth in Chapter 8.
115
Exacerbating the perception that Latin America is ‘so far away’ is the lack of direct
air links between Australia and most Latin American markets. There is a perception
that it is both expensive and time consuming to fly to Latin America and this cost and
time is seen as relative to other market opportunities.
We see in the newspapers that flights to Singapore are 700 bucks; Hong Kong 800 bucks, and we think well it doesn’t cost me too much to have a go.
Government Interviewee 7
I think there’s a big difference between getting on a plane and travelling 24 hours [to Brazil] and travelling 8 hours in the same time zone to Hong Kong, Manila, or Bangkok.
Government Interviewee 5
The contrary also is true. Numerous case study firms indicated that initial
internationalisation was driven by geography.
Q: ‘Why was Singapore the first overseas-’ A: Look, it was close…it was a convenient place to do business.
Case 4 (M), Interviewee 1
As discussed in Chapter 2, there are now frequent direct flights between Australia and
Chile and this has served to reduce psychic distance in many instances.
When I started here in 1990 you had to take a Qantas flight to Tahiti, which went via Auckland anyway, then you had to get onto a LAN Chile flight…so the four hop. Direct flights, now I take [them] for granted. Direct flights have been tremendous, just the best thing in the world. So geography is important, but because I have a direct flight I don’t see it as important anymore.
Case 7 (S), Interviewee 1
A direct flight from Australia to Santiago is so convenient for us. …So that is another reason as well for coming to Chile. Sounds a silly reason in a way, but it’s a good reason.
Case 5 (M), Interviewee 2 (ESL)
As also mentioned in Chapter 2, Qantas and LAN have announced a new non-stop
service from Sydney to Buenos Aires which will begin operating in November 2008.
This service will reduce the flying time to Argentina (and neighbouring Brazil,
Uruguay and Paraguay) and hopefully, due to increased supply, will also reduce the
cost of travelling to the region. This reduction in time and cost may serve to reduce
the perceived psychic distance for Australian executives.
116
Unfortunately, the difference in time zones is one characteristic of the geographic
distance that cannot be altered and some respondents (6) expressed concern about this
issue. The time difference between Australia and Brazil, Chile and Mexico ranges
from 13-18 hours. The time difference between Australia and the United States ranges
from 15-19 hours however, and yet the psychic distance to that country is generally
perceived to be small. I believe that time zone differences work in conjunction with
other stimuli to compound the psychic distance experienced by Australian firms rather
than having a primary role themself.
Language In combination with geographic distance, differences in language exacerbate the
perceived psychic distance between Australian firms and Latin American markets.
Australia has a limited pool of Spanish speakers particularly amongst business
executives and Portuguese is even less well represented (see Section 2.2).
I just couldn’t speak a word of Spanish. It was terrible. Case 8 (L), Interviewee 2
If you go to [United States of] America or even to England…you find people [who] speak Spanish easily and well. But that is not the case with Australia.
Chamber of Commerce Interviewee 2 (ESL)
As in the case of geography, several case study firms indicated that initial
internationalisation was fuelled by language considerations (i.e. they internationalised
to English speaking countries).
It was pointed out several times that unlike parts of Asia, where business is frequently
conducted in English it is the norm throughout Latin American to conduct business in
Spanish or Portuguese and anxiety about this contributes to the psychic distance
experienced by Australian executives.
…when they consider there’s a 13 hour time difference, a different language a different legal basis that they don’t understand very well, it becomes very daunting to do business that way.
Government Interviewee 5
…language, the other aspect of that which is extraordinary…and it’s really important in that [psychic] distance and how somebody personally feels is the ability of walking out of a meeting [having] thoroughly understood what was going on. …You can have a business meeting in English and sit three people around a table…and everyone can take notes and they can all come out with different opinions about that meeting. You put in another language and you
117
are lucky if anyone has got the same opinions about what was discussed. So that also doesn’t help the situation.
Case 8 (L), Interviewee 3
Conversely, speaking the language dramatically reduces not only an individual’s
psychic distance but also the psychic distance of others in his/her organisation.
The fact that I spoke the language is a huge help. …When he realised that I could actually talk to people and people understood me that also brought him closer.
Case 6 (S), Interviewee 1
Institutions
Data analysis produced a variety of nodes that could be grouped under the broad
category institutions (see Table 6.3). Three of this category’s child nodes, economic,
political and legal institutions, contribute substantially to the psychic distance
between Australian firms and Latin American markets. Four other aspects of
institutions, corruption, financial institutions, the military and bureaucracy, were
infrequently mentioned as psychic distance stimuli. Comments regarding economic,
political and legal institutions are examined in greater depth below.
There is a fundamental lack of understanding about Latin America’s economic
conditions amongst many Australian firms. Perceptions of poverty, hyperinflation and
economic volatility are still prevalent in the minds of Australian executives prior to
engagement with the region. Furthermore, several interviewees felt that Australian
firms underestimate the economic size of the region and the sophistication of many of
the region’s economies (certainly Brazil, Chile and Mexico).
They remember the previous days of hyperinflation; they remember the flow on effect of the 80’s economic crisis in Latin America and think that the same thing is likely to happen now, whereas in fact it’s pretty unlikely to happen now.
Government Interviewee 1
The current economic reality in Latin America (see Section 2.3) is generally one of
high growth, controlled inflation, liberalisation and diversification such that analysts
now talk of the emerging ‘Latin Jaguars’ (Panes, 2008) as compared to the more well
known ‘Asian Tigers’.
Ideas of military dictatorships and political instability also contribute to initial
perceptions of the region. This is despite the fact that most dictatorships in the region
118
ended during the early 1980s meaning there is a more than 20 year lag between
perception and reality.
So I believe that we have this impression in Australia of Latin America of men with big sashes, big moustaches and dictatorial regimes.
Government Interviewee 5
Another aspect of politics that impacts perceived psychic distance is fear about the
influence of extreme leftist political parties.
Most people would associate South America with Chavez82 and his policies, which don’t necessarily represent the policies that prevail in…the region.
Chamber of Commerce Interviewee 3
Some participants suggested that Chavez receives more than his share of global
attention because he ‘makes the most noise’ and in general the recent round of
presidential elections in the region did not result in leftist, ‘Chavez-style’
governments; the results were close however. Three small Latin American countries
(Bolivia, Ecuador and Nicaragua) did elect presidents who have aligned themselves
with Chavez and the election outcomes were close in Peru and Mexico. A final
margin of less than one per cent separated Mexico’s current president, Felipe
Calderon, (from the conservative Christian Democrat ‘National Action Party’) and his
opponent, Andres Lopez Obrador, (from the leftist ‘Party of the Democratic
Revolution’). When I was carrying out data collection in Mexico City in late
November 2006 I witnessed several street demonstrations in support of Obrador who
at that stage was refusing to concede defeat. Political protests such as these are
common through out Latin America yet highly uncommon in Australia. The different
resolution of political processes highlighted by these demonstrations represents
uncertainty for Australian firms. These election results suggests Australian firms are
somewhat justified in their concerns about Latin American politics but increased
understanding of the complexities of the region is required. It is the nature of Latin
American politics that although change occurs gradually it happens in discrete jumps,
rather than as part of a smooth predictable process which could explain the persistent
perceptions of instability.83 With this improved understanding in mind, only
82 President of Venezuela and staunch critic of neoliberalism and globalisation. 83 For a more in-depth analysis of the current political climate in Latin America see Reid (2007).
119
Venezuela and the smaller markets of Ecuador and Bolivia are thought to be going
through radical change in the region.84
The economic and political perceptions held by Australian executives before they go
to Latin America are problematic for two reasons. Firstly, as indicated above, they are
largely outdated remnants of a bygone era. Secondly, although actual political and
economic conditions vary markedly between countries in the region this distinction is
often missed in Australia because of the use of terms such as South America or Latin
America to refer to the region as a whole.
A lot of poor countries, a lot of poor Catholic countries that were rural and developing.
Case 2 (S), Interviewee 4
Chile is a very different country from the other countries of America, but it’s hard to explain that in an abstract [way] to somebody who has never come to Chile or to South America. They all believe that we are corrupt countries run by dictators where the laws or the rules change very often.
Chambers of Commerce Interviewee 2 (ESL)
Both of these problems stem from the general lack of understanding about the region
amongst Australian firms.
Concerns about differences between the common and civil law systems also affect
perceptions of Latin America in Australia. Participants commonly cited a lack of
knowledge or familiarity concerning tax and labour law, as well as concerns about a
lack of transparency. Equally, familiarity with the legal system was seen to reduce
psychic distance.
When confronted with the option of investing in a country that has the same language, has the same legal system or is closer to home, they would rather do that.
Government Interviewee 4 (ESL)
I could go to New Zealand easily because New Zealand has the same laws and it’s English law. It has English ways of doing things.
Case 7 (S), Interviewee 1
84 Radical political change equates to high political risk including issues such as complex and changing regulatory frameworks and the risk of nationalisation as has occurred recently in Venezuela.
120
Notably, without exception, the interviewees who mentioned bureaucracy and
corruption as affecting psychic distance were Ambassadors, Trade Commissioners
and representatives of the chambers of commerce. Although both these issues were
raised by case study participants as actual challenges firms faced in region (see
Section 6.4), it appears that initial perceptions of Latin America amongst Australian
executives are mainly driven by the most basic of differences and stereotypical, non-
business related images as demonstrated in the section below on Culture.
Culture
Cultural distance has frequently been used a proxy for psychic distance in previous
studies (see Section 3.1, The Operationalisation of Psychic Distance). However, as
illustrated in Table 6.3, my research findings suggest several other factors more
prominently affect perceived psychic distance than culture. Culture is still important
however, but perhaps more so in relation to the presence of ties rather than the
absence of them. As an example, Case 6 indicated that their initial international
market selection was dictated by cultural and language considerations. This firm first
internationalised to the United Kingdom in 1992 followed by the United States of
America in 1996. Prior to entry into the USA, Interviewee 1 repeatedly recommended
Mexico as an attractive market for the firm and yet was ignored. Despite this, initial
sales out of the USA were actually made into Mexico.
…even though I was saying, look [Managing Director], we’ve got to go to Mexico, you know, we’ve got to go to Mexico… He still wasn’t, was reluctant. He really didn’t understand, he didn’t really know that I knew something about this country.
Case 6 (S), Interviewee 1
Initial cultural perceptions of Latin America amongst Australian executives appear to
be based on stereotypical images and the region has no business reputation to speak of
in Australia. Whilst business practices were frequently mentioned as an actual
challenge of internationalisation in Latin America (see Section 6.4) they do not appear
to impact initial perceptions. Initial cultural perceptions are instead influenced by
images of sporting heroes and pop culture.
It wasn’t until you actually start to learn and understand [that you] realise that Brazil is not just a place where they play soccer.
Case 3 (S), Interviewee 2
121
I knew something of Maradona, Pele. I knew something of Colombian cocaine. I knew something of Pinochet and the Falklands… I’m being a bit silly about it, but it’s not so silly when you think about what Australians generally understand of Latin America.
Case 8 (L), Interviewee 2
…at the same time all you hear about Mexico is bandits, you know, and somebody, you know, with a little burro sleeping under a cactus…that’s basically all that people know about Mexico.
Case 6 (S), Interviewee 1
Whilst some of these images could be seen as harmless (equivalent images exist of
Australia) they do have negative repercussions because they fail to acknowledge the
sophistication of the business environment and detract from thinking about the region
in a business sense.
We have, you know, major international players [referring to Multinationals] that may be not well known because we’re known as the country of soccer and samba and that’s it.
Case 4 (M), Interviewee 2 (ESL)
Other Psychic Distance Stimuli Other factors that influence psychic distance to a lesser extent include infrastructure,
personal security, and tourist images. Once again some interviewees admitted to a
total lack of awareness and understanding in regards to the region’s infrastructure.
I thought it would be very backward and I didn’t realise until I turned up there that there [were] 180 million people in Brazil and Sao Paulo was the second largest city in the world.
Case 3 (S), Interviewee 1
This interviewee had had no previous international business experience before joining
this privately owned company (seven months prior to the interview) at which time the
firm was already involved in a joint-venture in Brazil.
Whilst not all respondents revealed such extreme views, there was a consistent theme
throughout many interviews of a sense of surprise at the ‘sophistication’85 of Latin
American cities. This included surprise at the size of cities (Mexico City and Sao
Paulo are among the world’s largest cities), the networks of freeways, the modern
airports as well as the provision of services such as broadband that is faster and
cheaper than that currently available in Australia. This sense of surprise infers an
85 I interpret sophistication to mean the level of infrastructure development.
122
initial perception of un-sophistication and under-development. These perceptions
expose, and several participants explicitly noted, the significant contrasts of Latin
America. Latin America’s largest cities have business districts and urban centres
comparable in their level of sophistication to any developed nation. However, this
sophistication often sits in direct contrast to other parts of the same cities as well as to
rural areas in the same countries, not to mention to other countries in the region. This
juxtaposition of development and under-development is particularly evident in Rio de
Janeiro where favelas (shanty towns) exist on the hills in and around up-market
suburbs.
Summary My data analysis demonstrates that psychic distance stimuli fuel perceived psychic
distance which in turn influences international market selection. Geography and the
related issue of direct flights were given the most weight by interviewees as stimuli
for the psychic distance between Australian executives and Latin American markets.
Whilst nothing can be done to reduce the geographic distance between the two
continents, the impact of this distance on psychic distance can be reduced with more
frequent, more direct flights to the region. Beyond the geographic stimulus, the
findings consistently show that a lack of understanding, whether of the language, the
legal system or the economic and political reality, augments psychic distance and that
increased understanding reduces it. Given this result, there is a clear role for
governments and chambers of commerce to continue and step up their education
campaigns about the region in Australia. Likewise, universities can also play a part in
promoting Spanish and Portuguese language courses. The increasing flow of students
in both directions between Australia and Latin America (as discussed in Section 2.2)
will also positively influence our understanding of one another.
Psychic distance deals with the perceived differences between home and host markets
and has the greatest impact during decision making stages of internationalisation, that
is at times of market entry or market expansion. In response to my questions about
psychic distance, several interviewees wanted to emphasise that ‘it’s not a psychic
effect’ and that there are very real differences between Australia and Latin America
that affect firms as they internationalise. This fact is not in doubt, but psychic distance
123
relates to the perception of these differences and their relative importance in
executives’ minds rather than to the differences themselves. The results discussed
above suggest that in many instances perceptions do not match reality. Furthermore,
the differences that most affect psychic distance may or may not cause concern during
actual internationalisation. On this basis, the next step in my data analysis was to
compare the stimuli that most influence perceived psychic distance to those factors
that most affect actual internationalisation.
6.4 The Challenges of Internationalisation The challenges Australian firms experience when internationalising in Latin America
differ from the psychic distance stimuli foremost in executives’ minds prior to market
entry. This reinforces the important educative role of information seminar series held
by governments and chambers of commerce in combating misconceptions. Table 6.4
provides a breakdown of the coding categories relating to the challenges Australian
firms face doing business in Latin America. Many of these categories echo those used
in the analysis of psychic distance stimuli; albeit with different degrees of importance.
However, some categories that did not feature in the previous section emerged as
specific challenges of operating in Latin America, for example (Mis)trust. The largest
number of comments about the challenges of operating in Latin America was made
regarding language. Institutions, specifically bureaucracy and legal systems, and
cultural business practices in Latin America also represent significant challenges for
Australian firms in the region.
Table 6.4: Challenges of Internationalisation Node Tree
Name Sources References The Challenges of Internationalisation 5 5 Language 23 43 Institutions 3 4 Bureaucracy 18 42 Legal 16 27 Corruption 10 16 Financial 5 8 Economic 6 7 Political 4 6 Military 1 4 Culture 19 43 Business practices 18 38
124
(Mis)trust 10 33 Geography 8 11 Direct flights 9 14 Time zones 7 8 Personal security/quality of life 8 12 Time required in the region 8 10 Cost of doing business 5 8 Infrastructure 3 5 Other 3 5
Language Language presents the most significant challenge for Australian firms investing in
Latin America. This category comprises both the largest number of sources and the
largest number of references of any of the nodes in the Challenges of
Internationalisation Node Tree. Not only was this issue the most frequently cited,
participants also gave it the most weight indicating that language and communication
barriers caused the greatest difficulty for their internationalisation in the region.
Importantly, at least one interviewee from every case study cited language as a
challenge for their firm. For six of the ten firms, their investment in Latin America
was their first in a non-English speaking market. As discussed below, bureaucracy
was also frequently mentioned as a challenge of doing business in Latin America. The
data suggest however that language barriers are more difficult to overcome than
institutional issues.
Several participants indicated that their firm initially underestimated the challenges
presented by language. Unlike Asia, where it is often possible to conduct business in
English, it is the norm throughout Latin America to conduct business in Spanish or
Portuguese and Australia lacks a pool of executives sufficiently qualified in this area.
Language skills are important not only for face to face contact but also for emails and
telephone calls, important forms of communication for Australian firms given the
geographic distance between Australia and the region. Email communication is not as
common a business practice in Latin America as in Australia and emails sent in
English are easily ignored.
125
Mexicans have made a very specific objective of trying to keep their culture and their language intact so even people that have been Harvard educated etc. etc. still prefer to speak Spanish, so language is an obstacle for the unprepared.
Government Interviewee 7
There are fewer people than we would have thought who spoke English and certainly business in the country [Chile] must be conducted in Spanish.
Case 5 (M), Interviewee 1
Despite these difficulties, several participants pointed out that once an Australian has
made an effort to communicate in Spanish or Portuguese Latin Americans are willing
to speak English. It was widely acknowledged however that English language skills in
the region are comparatively poor.86 This is particularly the case with older
generations yet the situation is changing as more young Latin Americans study abroad
in English speaking countries, Australia included (see Section 2.2).
If you make the effort to speak Spanish they will then use English if you get stuck.
Government Interviewee 3
‘But that difficulty is easily overcome by getting or hiring Chilean lawyers…and they have studied abroad so they can do the job in English and know what the client wants and put it in Spanish.’
Chambers of Commerce Interviewee 2 (ESL)
This last comment, made by a young Chilean lawyer with Australian postgraduate
studies, is legitimate to an extent insofar as this service fills a gap created by the lack
of Spanish (or Portuguese) language skills of Australian executives. Yet I feel he is
too quick to dismiss the difficulty the lack of language skills causes and in doing so
fails to acknowledge the complexity of language and the nuances involved. The
‘Spanglish’ that sometimes results in situations of poor language skills can be more of
a hindrance than a help and can lead to misunderstandings.
Then there’s this English that is not very well spoken or understood and can create even greater confusion because you think you know what she said and it works out exactly the opposite.
Government Interviewee 5
One interviewee, an Australian who has spent a large part of the past 15 years living
and working in Chile, felt particularly strongly about the importance of language and
nuance.
86 As compared to Asia or Europe.
126
A number of people after two years say ‘Yes. No, I understand most of what they’re saying. No, I get the gist.’ Now I’ve been studying for 15 years and I know that they’re talking bullshit because they’ve missed 75 per cent of the hidden cues, the slang, the body language and the culture. They’ve missed it. Yes they’ve picked up a few words…but not all the nuances. Now how do I know? Because I was there and I made the same statements.
Case 7 (S), Interviewee 1
Language skills are particularly important for informal interactions such as dinners
and lunches which are a crucial part of doing business in Latin America. Simply put,
speaking the same language makes people comfortable which is a first step towards
establishing trust. Furthermore, understanding the language provides an enhanced
understanding of the culture. The issues of trust and business practices are explored in
greater depth in the section on Culture below.
So language is a big, big, big issue…Once you get the language then you’re able to understand. You can pick up cultural differences a lot better when you’ve got the language.
Case 7 (S), Interviewee 1
Speaking the language undoubtedly facilitates understanding and, with that,
internationalisation. In an example of this a division of Case 8 acquired a majority
share in a family-owned Chilean firm. Whilst Chilean born, the patriarch of this
family was of English ancestry and spoke English with complete fluency. The lack of
language difficulties in this case expedited both the acquisition negotiations and the
subsequent transfer of knowledge to the new subsidiary. Knowledge transfer was also
facilitated in this case by a common organisational history. Interestingly both the
Australian MNE and the Chilean family-owned firm had once (until 1973) been part
of the same parent company (both had since been divested). Whilst none of the people
involved had ever worked together in the past their shared administrative heritage
enhanced their understanding of each other.
Language is clearly a challenge for Australian firms in Latin America.87 But it is not
an insurmountable challenge and is one that Australian firms encounter elsewhere. As
several participants pointed out, unlike Asia, one language is spoken throughout Latin
America (except for Brazil,) so an investment in learning Spanish provides dividends 87 It should be noted that language skills are much more important in the case of FDI (the basis of this research) than in exporting or other types of market entry.
127
across the region. Analysis suggests that the case study firms that had the most
success at overcoming the language barrier have done so in one of two ways. In four
cases firms were able to hire or partner with locals whose English language skills
were excellent (or at least very good) usually because of postgraduate studies in
English speaking countries as well as extended periods of time living and working
overseas. The second group of firms, three cases, hired Australians with excellent
Spanish language skills. These three men were all married (or at least had been) to
Latin American women prior to working for the case study firm. Case 8 did both these
things - partnering with a local with excellent English and hiring an Australian with
excellent Spanish, as well as throwing its original executive in at the deep end.
I just couldn’t speak a word of Spanish. It was terrible. Case 8 (L), Interviewee 2
Since first arriving in Chile in 1998 to manage the firm’s newly acquired subsidiaries
this interviewee has married a Chilean, had two children, and now works as a local
rather than an expatriate, carrying out his job88 in Spanish rather than in English.
Institutions The issues of institutions and culture received a similar number of comments in
relation to doing business in Latin America; although the comments about culture are
concentrated in fewer nodes (see Table 6.4). Many of the comments made about
culture are positive in nature, however, rather than negative and as such this issue has
been given less importance than institutions. The cultural challenges of
internationalising in Latin America are discussed after the institutional challenges.
Bureaucracy and Legal Systems The related issues of unfamiliar civil law systems and greater levels of bureaucracy
were frequently cited challenges for Australian firms internationalising in Latin
America. As well as influencing perceived psychic distance, differences between civil
and common law systems complicate internationalisation for Australian firms.
Bureaucracy, said to be inherent in the civil law system, received the largest number
of comments of any of the internationalisation challenges. In general, participants
complained about the amount of bureaucracy and described feelings of ‘frustration’ at
88 As CFO for the Latin American headquarters of one division of Case 8.
128
having to deal with it. A breakdown of the type of comments made regarding
bureaucracy is provided in Table 6.5. Three quarters of the bureaucracy comments
were negative and the majority of these were made in reference to Brazil.
Table 6.5: Comments about Bureaucracy
Negative Neutral Positive Brazil 20 3 - Chile 4 4 2 Mexico 3 - - Region/Unspecified 5 1 -
Brazil was singled out for complaint because of its complex tax system as well as the
delays involved in establishing a company or obtaining permits.
Brazil is not an easy jurisdiction to do business with, it is highly bureaucratic, something that for people coming from common law jurisdictions is very bothersome. There are a lot of things that don’t make any sense, but that you have to do…before you can start operating a business.
Government Interviewee 4 (ESL)
We’ve learned that Brazil…is far more bureaucratic than Australia and the Australians couldn’t understand that. They were very…they got crazy in dealing with and running in a country named Brazil.
Case 1 (S), Interviewee 5 (ESL)
Sudden changes to taxation rates, overlapping and unclear state and federal
jurisdictions and seemingly biased application of tax-related incentives are examples
of firms’ concerns about Brazil. My findings echo those of a recent KPMG report on
manufacturing in Argentina, Brazil and Chile in which the complexity and total
burden of corporate taxation in Brazil is cited as a prime concern for investors
(Achterholt & Walter, 2006). The basis of Australian firms’ ‘frustration’ with Brazil
is evident in the World Bank report Doing Business 2008. Starting a business in
Brazil requires 18 procedures and an average 152 days; this compares to nine
procedures in Chile and eight in Mexico and an average 27 days in both countries
(World Bank, 2007). Furthermore, the fact that Australia rates amongst the best in the
world in this area (alongside Canada and New Zealand) may explain why Australian
firms struggle to understand this bureaucracy; starting a business in Australia requires
two procedures and takes two days. Obtaining licenses in Brazil, an issue raised by
two case study firms, is unfortunately even more cumbersome than starting a
business. There are 18 procedures that deal with licenses in Brazil, which is similar to
129
both Chile and Australia (17) yet more than Mexico (11). However, whilst the time
required to deal with licenses in Chile, Australia and Mexico is comparable (155, 140,
and 131 days respectively), it takes 411 days to obtain a license in Brazil (World
Bank, 2006, 2007). These examples illustrate the large institutional distance between
Australia and Brazil.
It is no surprise that firms bemoan Latin American bureaucracy. It is a cliché.
However, as several participants observed it is unfamiliarity with the system that
presents the challenge rather than the bureaucracy itself. It should be noted though
that these comments were made in relation to Chile, rather than Brazil. The preceding
examples from the Doing Business 2008 report (World Bank, 2007) also suggest that
the institutional distance from Australia to Chile and to Mexico is shorter than that to
Brazil which may further explain this distinction.
I don’t think it’s necessarily worse than it is in Australia…you’ve just got to know the maze.
Case 2 (S), Interviewee 1
I mean there’s a – it’s reasonably bureaucratic in some ways. We certainly found that you know – and this isn’t a criticism of Chile at all it’s just that you know there’s probably just as much bureaucracy in Australia but we’re just used to dealing with it.
Case 5 (M), Interviewee 1
There was consensus that legal or bureaucratic difficulties are best overcome with
local help; a good local law firm or tax consultant, a local manager or all three. Locals
serve as a buffer between the Australian firm or manager and the bureaucracy. Local
law firms and local managers not only help avoid difficulties with the legal system but
also play an important role in providing access to local networks as explored in
Section 6.6 below.
I think [you] overcome these problems by hiring consultants that know the country well, that can show you the ways of how to manoeuvre within this bureaucratic world…Brazil is a country where you are required to be assisted by a good law firm.
Government Interviewee 4 (ESL)
…we have…the Spanish Civil Law and in Australia you have the British Law and they are completely different…that’s why I was saying it’s important…to have someone in this position [country manager], or at least assisting the
130
manager in making sure that he understands how the Chilean legal system works.
Case 5 (M), Interviewee 2 (ESL)
…from a business perspective [they’re] left with models that doesn’t include them interfacing with the bureaucracy. They have to come up with a business model that makes a Brazilian responsible for these kinds of things and not them.
Government Interviewee 5
Other Institutions Other institutions or aspects thereof were commented upon to a limited extent as
challenges of doing business in Latin America. Corruption was mentioned in a quarter
of interviews however in most cases it was not given much weight as a challenge in
the region. Once again a contrast is evident in the comments made about Brazil,
where corruption is a concern (half of all comments related specifically to Brazil) and
Chile which is seen as more transparent.89 There was a general feeling however that
the trend in the region is towards greater transparency and accountability and that
whilst corruption may exist ‘you don’t have to be corrupt to be successful’.
Comments about another type of institution, financial institutions, primarily related to
their difference from Australian financial institutions and the consequent need for
firms to learn and understand the way the system works.90 Beyond these general
comments, two case study firms both involved in manufacturing in Brazil commented
specifically on the challenges associated with the volatility of the Brazilian Real and
the difficulties of accessing long term finance in the country.
The economic and political concerns evident in the perceived psychic distance of
Australian firms are largely unfounded. Whilst images of economic and political
instability are prominent in the minds of Australian executives before they engage
with Latin America, once there they find the reality is quite different. These factors do
not feature highly as actual challenges for internationalisation in Latin America.
89 Only one comment related specifically to Mexico and suggested corruption can be a problem in the country although the interviewee had no personal experience of it. 90 One example given by a case study participant is Chile’s Unidad de Fomento (UF) which was introduced as a way to ‘inflation proof’ loans and contracts. Quoting prices in UFs rather than Chilean Pesos provides long term stability as the value of the UF in pesos is adjusted daily thus ensuring repayments are made in constant prices.
131
Culture There was a lot of talk in my interviews about culture and how it affects
internationalisation, yet views on the matter were mixed. Responses to the question
can be categorised into three groups. Whilst the three groups take slightly different
positions there was general consensus that culture does not constitute a significant
barrier to Australian firms in Latin America.91 The first group of participants
indicated that whilst cultural differences exist, they are not difficult to overcome, or
they do not affect their industry. This group included Australian government
representatives as well as interviewees from four of the case studies.
…apart from small cultural differences, they found it extremely easy to do business.
Government Interviewee 2
Most people see that [experiencing a different culture] as an opportunity more than as a problem, unless they are very narrow minded.
Case 5 (M), Interviewee 2 (ESL)
Cultural difference, look at the end of day the sort of business we’re in is putting food on people’s plates okay? So whether you’re a Mexican or an Argentinean or Ethiopian or whatever, everyone has to eat so the cultural difference it does affect your thinking but at the end of the day we are still talking about feeding human beings.
Case 3 (S), Interviewee 2
A second large group of participants, including interviewees from government and
four case study firms, chose to emphasise the similarities between Australian and
Latin American culture rather than the differences, particularly in comparison to Asia.
One interviewee suggested that Chileans are the ‘Anglos’ of the ‘Latin’ world and
that Australians are the ‘Latins’ of the ‘Anglo-Saxon’ world. This analogy highlights
Chile’s tendency to be more organised and structured than other parts of Latin
America and Australia’s tendency to be more laid back than other English speaking
countries and is a clear attempt to establish a cultural common ground.
91 Once more, this finding is consistent with the EFIC Global Readiness Index in which only 15 per cent of firms nominated cultural differences as a ‘major barrier’ to international expansion (Export Finance and Insurance Corporation, 2008).
132
...one of the things with Latin America that a lot of Australians don’t realise is our value based systems, the fabric of our society, are far more similar between Australia and Latin American countries than they are with many Asian countries.
Government Interviewee 7
…the similarities [of] the Chile[an] psyche to the Australian psyche, it was very, very similar. It’s a barbeque culture, it’s a fun culture. Other than the fact that they speak Spanish the similarities were actually quite staggering. So all the things lined up in a row for us.
Case 9 (S), Interviewee 2
These similarities do not mean that cultural differences can be ignored however, as
the third group of participants pointed out. This is particularly so when it comes to the
importance of relationship building and networking (discussed further in Section 6.6).
Furthermore, some participants highlighted intra-regional and even intra-national92
differences in culture that need to be understood. Chile was singled out by participants
as more conservative than the rest of the region as well as more closed off socially,
i.e. it is more difficult to break into social circles in Chile than in other Latin
American countries.93 It seems that in conjunction with the two primary challenges, of
language and bureaucracy, cultural differences can add to the complexity of
internationalisation in Latin America for the unprepared.
You cannot ignore the different cultures between Latin America and Australia, but also you cannot ignore the differences inside Latin America.
Case 1 (S), Interviewee 5 (ESL)
…that whole cultural thing makes it hard to separate legal from language from custom. They’re all entwined. Why do people think the way they do? Well, chicken and egg. Did the legal system cause that or is the legal system a result of that? I don't know the answer, but it’s all entwined.
Case 7 (S), Interviewee 1
This third group of participants differs from the other two groups insofar as it is
dominated by Latin Americans.94 Two Australians also expressed concerns about
cultural difficulties, one (the same man that emphasised the nuances of language) has
lived in Chile on and off for the past 15 years, the other (a representative of a
Chamber of Commerce) has been involved in doing business in Latin America for
92 For example, between coastal and highland areas or between the capital city and regional areas. 93 This is potentially due to the smaller population in Chile in comparison to Mexico and Brazil. 94 Note: not all Latin American interviewees expressed views that fit into this group. Both of the other two groups of opinion include Latin American participants (although both groups are dominated by Australians) furthermore some interviewees expressed no opinion about cultural differences and the challenges they cause for internationalisation.
133
decades and is of Spanish descent. What this suggests to me is that whilst Australia
and Latin American countries may, on the surface, share cultural similarities that aid
understanding (and therefore internationalisation) and endear us to one another, there
are cultural differences that exist at a deeper level and these differences are perhaps
missed by Australians with limited experience in the region.
Business Practices Business practices were coded as a subset of the cultural challenges of
internationalisation. Although business practices do not influence Australian firms’
initial perceptions of Latin America numerous participants highlighted aspects of
business practices as actual challenges of internationalising in the region. It is not so
much that Latin America presents a difficult business context in which to operate, but
rather that insofar as it differs from Australia it requires adaptation and understanding.
I mean this was early days for us in terms of our expansion and we found you know quite a few cultural differences in the way that business is conducted.
Case 5 (M), Interviewee 1
The number one challenge is treating it like Asia…[because of] our own success in Asia we come here expecting to repeat that success by using the same strategies and models and business practices and it doesn’t happen, so that’s number one.
Government Interviewee 7
Differences in business practices that emerged include the credence given to
ceremony and status in Latin America (alluding to Hofstede’s Power Distance). For
example, formal education is highly regarded in the region and is reflected in the
multiple personal titles used such as Licenciado95, the correct title for a lawyer or
Ingeniero (Engineer) (Becker, 2004). These titles are used with a person’s surname,
for example Licenciado/a Gomez (depending on the person’s gender), and
demonstrate respect for the person’s qualifications. Another title used to demonstrate
respect is Don or Doña which roughly translates in English to Sir or Lady. These titles
are always used with a person’s first name rather than their surname (e.g. Don Pablo)
and indicate a closer working relationship than titles such as Licenciado. The use of
the titles Don and Doña only ever occurs up a hierarchy and not down it.
95 Licenciado is a Spanish word but equivalent titles exist in Portuguese in Brazil.
134
Relationship building is another key aspect of doing business in Latin America that
emerged in my cases. Building relationships is time consuming and involves taking an
interest in other peoples’, and sharing details of one’s own, family and personal life.
It [business in Latin America] is based on relationships, people want to see you, people want to talk to you, people want to hear from you.
Government Interviewee 7
So you know when you get to a business meeting people will talk about their family, how things [are] go[ing]. We hug each other; we are very much of touching each other and all of that and not very much straight to the point [in Brazil].
Case 4 (M), Interviewee 2 (ESL)
Relationship building is complicated for Australian firms by both a lack of language
skills and the geographic distance that limits frequent trips to the region. Informal
gatherings over lunch or dinner are an important part of relationship building and it is
at these occasions where nuances of culture and language come to the fore. Moreover
it is difficult to build strong relationships from a distance. Some participants
suggested this difficulty is heightened by an over reliance on email by Australian
executives. The upshot of these practices is that it takes time and requires patience to
do business in Latin America. The primary goal of this relationship building is to
establish trust; an essential precursor to doing business in the region for reasons
discussed below.
Mis(trust) A key aspect of doing business in Latin America that Australian firms must
understand is the trust-mistrust dichotomy inherent in Latin American society. This
issue was a intriguing element that emerged in the interviews and can be linked to
House et al.’s (2004) in-group collectivism. Trust is a more prominent part of the
business culture in Latin America than in Australia. Rather than starting from an
assumption of trust (as is the case in Australia), there is an assumption of mistrust at
the point of departure and trust must be earned. This issue is tied to the civil law
system which involves a greater burden of proof (e.g. proof of identity, proof of
ownership) and leads to the frustration with bureaucracy discussed above.
…that is not the case in Chile, you don’t come to business arrangements so quickly, because there is an assumption of mistrust.
Government Interviewee 2
135
So you’d find that there is some innate distrust in business that I started to understand a little bit later. They’re very outwardly friendly [in Brazil] but under the surface there’s a fair amount of distrust.
Case 3 (S), Interviewee 1
Personal relationships and rapport are often the basis for doing business in Latin
America and trust must be built up over time. There are embedded layers of trust that
must be established at both a personal and a corporate level. Case study firms
struggled to establish this trust at both levels as in many cases both the brand and the
expatriates were unknown in the market, an innate aspect of the liability of
foreignness.
Pues bien las relaciones personales en este negocio son muy importantes como para que vayas desarrollando este sentimiento de confianza ¿no? [Translation Well, okay, personal relationships in this business are very important so that you can develop this feeling of trust, right?]
Case 1, Interviewee 3
It’s difficult when you are an unknown. …they have to trust that you’re going to deliver on time, that your company is going to stay in the country for long enough, [that you’re] not going to go away. You know it has happened, at least in engineering, …that especially American companies…have come to Chile and after three or four years…they go away because they couldn’t make it. To build up trust, to build that relationship with a client, it’s critical, really critical. Maybe when you sell a piece of copper it doesn’t matter, but when you sell engineering or you sell a service like ours, it really matters.
Case 5 (M), Interviewee 2 (ESL)
Establishing trust is about minimising risk and applies as equally to locals as it does to
foreigners. Trust is important in Latin America due to historically weak institutions
(in some cases this is an on-going reality). Furthermore the negative impact of
opportunistic behaviour on one’s reputation96 can be a greater deterrent to such
behaviour than legal recourse. In practice, establishing personal trust is almost like a
game of cards in which one exposes his/her credentials. ‘Aces’ include family
connections, school or university ties and coming from the same hometown or region.
Another analogy likens trust-building to the Six Degrees of Separation game in which
two people try to establish a personal connection in as few ‘moves’ as possible.
Section 6.6 discusses how case study firms were able to establish trust given their
initial lack of ‘aces’.
96 Either an individual or a firm
136
Other Challenges of Internationalisation Several other issues featured as challenges of internationalisation in Latin America to
a lesser extent. Some of these issues, such as personal security and geography also
featured as psychic distance stimuli while others, such as cost of doing business and
time required in the region did not. Geography and the related issues of direct flights
and time zones do feature as challenges in the region however not to the same extent
as they featured as psychic distance stimuli. The poor shipping links between
Australia and Latin America were a specific geographic concern for a few case study
firms although I think this would have been raised as a more significant issue if this
research had focussed on exporting rather than FDI.
Summary The actual challenges that Australian firms face in Latin America differ from the
psychic distance stimuli that affect initial perceptions of the region. In particular,
misconceptions about economic and political instability that affect perceived psychic
distance do not bear out in relation to Brazil, Chile and Mexico.97 The biggest
challenges for Australian firms in Latin America are language, bureaucracy and
business practices; all of which point to the important role of host country staff
(further explored in Section 6.5). These challenges, whilst significant in and of
themselves, compound one another to further complicate internationalisation. Once
more, as is the case with perceived psychic distance, it is a lack of knowledge and
understanding that causes these challenges. The disparity between the stimuli fuelling
psychic distance and the stimuli affecting actual internationalisation is important
because it shows us that prior to market entry firms are concerned about things they
do not need to be concerned about and they are not even aware of some issues that
actually cause difficulties.
So far in this chapter I have answered RQ1 (what effect does psychic distance have on
the internationalisation of Australia firms?), RQ1.1 (which psychic distance stimuli
have the greatest effect on perceived psychic distance?) and RQ1.2 (which psychic
distance stimuli most affect actual internationalisation?). RQ 1.3 asked how firms
97 Note: Other countries in Latin America do suffer from political and economic instability to a greater extent than these three countries, for example Bolivia and Venezuela.
137
overcome their perceived psychic distance. Answers to this question are explored in
Sections 6.5 and 6.6 which examine the role of experiential knowledge and networks
in internationalisation. The results presented so far make it clear that knowledge is the
key to overcoming psychic distance and the challenges of internationalisation. The
source of this knowledge is the focus of the remainder of this chapter. My findings
show that firms overcome psychic distance in several ways. Experiential knowledge is
one key factor. Networks also alleviate psychic distance by providing access to
knowledge, among other roles. Importantly, host country staff provide access to both
experiential knowledge and networks and are instrumental in overcoming the
challenges of internationalisation.
Although not a specific focus of this research, management characteristics emerged in
the data as an important factor in overcoming psychic distance. I suggested earlier
(see Section 6.3) that it is wrong to view internationalisation in Latin America as
something akin to an Indiana Jones adventure. While I stand by that assessment, it is
actually those managers that described themselves as adventurous (e.g. they had
backpacked or travelled the world in their youth) that were better able to acknowledge
and reduce their own perceived psychic distance.
6.5 Experiential Knowledge The stage models of internationalisation proffer that psychic distance can only be
overcome through experiential learning making internationalisation a gradual
stepwise process, yet there have been mixed empirical results on the matter to date
(see Chapter 3). Due to these conflicting results my research re-examines the role of
experiential learning in the internationalisation of Australian firms in psychically
distant countries. The literature specifies three types of knowledge that firms must
gain through their own experience in order to succeed in international business;
internationalisation knowledge, institutional knowledge and business knowledge.
These a priori categories were used in data analysis. Table 6.6 presents a summary of
my data analysis relating to experiential knowledge. Interviewees made many more
comments referring to internationalisation knowledge gained through prior
experience than business or institutional knowledge. In contrast, networks are a
significant font of market-specific knowledge (see Section 6.6).
138
Table 6.6: Experiential Knowledge Node Tree
Name Sources References Experiential knowledge and learning 11 21 Internationalisation knowledge 12 36 Institutional knowledge 7 10 Business knowledge 6 9 Host country staff 17 36 Champions 7 14
My results show that past experiences of the firm lead to a build up of knowledge, in
particular internationalisation knowledge, that serves to facilitate future market
entries. In three case studies the personal experiences98 of key executives or board
members also provided market-specific (business and institutional) knowledge about
Latin America at the outset which served to reduce psychic distance. Australian
executives with knowledge of Latin America are rare however and in most cases it
was host country staff that provided this vital market-specific knowledge.
There is a distinct split between my case studies in relation to experiential knowledge.
Not surprisingly, three of the four largest firms99 indicated that they rely primarily on
internal sources of knowledge when internationalising. These firms have generally
been internationalising for a longer period of time and also have more employees
whose past experience with other firms provides relevant experiential knowledge.
Once you become big enough, you’ll always find people within your organisation that have worked in a particular country, so that when opportunities arise, you can then call on their expertise in a particular field.
Case 4 (M), Interviewee 1
Although Case 4’s Australian executives had limited personal experience of Latin
America when they undertook due diligence for a Brazilian acquisition in 2003, they
were able to call upon the expertise of a Brazilian employee working in their French
operation. They also harnessed the knowledge of other employees in overseas
subsidiaries who had run manufacturing plants in other South American countries as
well as employees who had previously worked for US companies who had dealings
with Brazil. These internal resources, whilst not directly involved in the acquisition
were able to provide market-specific knowledge ‘about the questions to ask’. 98 Note: this experience was acquired before the individual worked for the case study firm. 99 Between 2,500-38,000 employees
139
The other large case study firm in my research provides insight into how the pace of
internationalisation can affect the accumulation of knowledge. Despite some
internationalisation (in South-East Asia) in the 1990s, the firm’s international strategy
commenced in earnest in 2000. In the space of 18 months the firm made acquisitions
in New Zealand, the United Arab Emirates and Chile. Through numerous
international and domestic acquisitions this firm tripled its size within five years. This
rapid internationalisation prevented the accumulation of experiential knowledge.
I don’t think we learned as much as we – you know all of these things followed very closely…so I think it was all too quick, happened too quickly for us to have learned very much you know from what we’d previously done. I think that you know…it’s fair to say we underestimated the challenge initially.
Case 5 (M), Interviewee 1
In contrast to these large firms, the smaller case studies were more likely to
internationalise organically rather than through acquisition and needed to rely more
on external sources of knowledge (see Section 6.6) due to limited internal resources.
Internationalisation Knowledge Eriksson et al. (1997) define internationalisation knowledge as relating to a firm’s
knowledge of how to organise and develop its international operations, yet additional
insight from my research leads me to suggest that there is more to it than this. At a
fundamental level internationalisation knowledge also encompasses the knowledge
that internationalisation is possible. Acquiring internationalisation knowledge often
results in a change in the way key decision makers view the world, particularly in
smaller firms, and as such this knowledge is vital in overcoming psychic distance.
Although psychic distance stimuli relate primarily to market-specific differences,
internationalisation knowledge plays a significant role in bridging perceived psychic
distance because it changes people’s attitudes to international markets.
I guess now I would see those sorts of regions as challenges that we should take [on] rather than ‘that’s impossible we can’t do it’, whereas maybe ten years ago I would have said ‘no you’re joking’… I mean if you’d said to me five years ago that we’d have a $3 million business in Africa I’d say you’re joking.
Case 3 (S), Interviewee 2
140
The knowledge that it could be done was important…So that’s a mental barrier that’s important to break because a lot of companies won’t even look past that.
Case 7 (S), Interviewee 1
My analysis shows that firms primarily gain internationalisation knowledge through
experience or ‘learning by doing’ as it was commonly described. Table 6.8 (see
Section 6.6) demonstrates that internationalisation knowledge was rarely gained from
external sources. This suggests that internationalisation knowledge is highly tacit and
difficult to transfer to another person. My findings also indicate however, that
internationalisation knowledge is not context-specific and can be transferred within
the firm and applied to new markets.
Some case study firms had extensive international experience prior to entering Latin
America and some firms had very little. For four case study firms, Latin American
markets represented their first overseas investments,100 although Case 1 and 3 had
previously exported goods and Case 7 had previously exported services.
Internationalisation knowledge gained in a wide variety of markets served to facilitate
market entry and expansion in Latin America. Interviewees made explicit reference to
experiential knowledge gained in the Philippines, China, Thailand, New Zealand, the
USA, and the UK, as well more broadly Asia and Europe. Given the considerable
differences between all these markets in regards to common psychic distance stimuli
it is evident that internationalisation knowledge is highly transferable across markets.
Participants referred to a wide variety of internationalisation knowledge gained from
the firm’s previous experience, although lessons learnt varied somewhat depending on
market entry type. My findings indicate that by internationalising firms learn about
the issues and challenges they will confront overseas and develop an understanding of
the complexity of some markets as well as the time and resources (both human and
capital) required to succeed in overseas markets. Furthermore firms become aware of
the important role networks can play in their internationalisation (see Section 6.6) and
also learn to leave preconceptions behind.
100 Cases 1, 3, 7 & 9. For Case 9 this was a franchise arrangement and not FDI. For Case 3 the manufacturing plant was financed through borrowings in Latin America in partnership with a local firm.
141
The biggest mistake a company can make is to think because you know what happens in Australia, therefore that automatically happens somewhere else, or because you’re present in Europe or the USA, you know what happens in a particular geography. And that’s a pure recipe for disaster.
Case 4 (M), Interviewee 1
Successful internationalisation in one market builds confidence and facilitates further
internationalisation even if these markets are quite distinct.
Chile probably wasn’t quite so uncomfortable for the board…We probably broke the ice in terms of internationalisation by going to the Philippines.
Case 2 (S), Interviewee 1
As illustrated by Case 1 and Case 10, firms also develop entry-mode and industry
specific competencies such as the ability to acquire and integrate new subsidiaries by
transferring technology and organisational culture as well as marketing skills related
to product launches.
To summarise, firms gain diverse knowledge through experience about how to go
about internationalising and while this knowledge is highly transferable from market
to market within the firm, it is difficult to transfer from person to person outside the
firm as it involves a change in attitudes. Acquiring internationalisation knowledge is a
key step in the internationalisation process regardless of the market the firm is
entering.
But I think it doesn’t matter if you go into Latin America first, or if you go into France first, or if you go into China first, your first experience is always difficult. It’s just ours was – we’d been to a lot of other places first before we went to South America
Case 4 (M), Interviewee 1
Market-specific Knowledge Market-specific knowledge comprises business knowledge about the competitive
environment and institutional knowledge about laws, regulations and their
implementation. Case 2 provides an example of a firm’s experiential learning
resulting in the accumulation of market-specific knowledge; although as Table 6.6
shows, this was not commonly discussed in my interviews. In fact, several comments
coded in the market-specific categories relate to the lack of such knowledge rather
than the possession of it. Case 2 first established an office in Chile in 2003 and
acquired assets in the country in April 2004. There was an underlying theme in my
142
interviews with multiple Case 2 informants of the need to convince its board and
investors of the attractiveness of the Chilean market (and by extension Latin America
in general). In order to facilitate the board’s learning about the market all directors
flew to Chile for a strategic management meeting in November 2004. This was a
‘groundbreaking trip for the board’ and resulted in board members acquiring
institutional and business knowledge that may have been difficult for them to gain by
other means. This market-specific knowledge gave the board confidence for a
subsequent acquisition in Brazil101 in 2007 at which time the board flew to Brazil,
once again resulting in experiential learning and market-specific knowledge
accumulation.
The personal experience of key individuals at some case study firms also provided
market-specific knowledge that helped overcome psychic distance. For example, at
Case 7 Interviewee 1’s institutional knowledge of Chile expedited market entry.
Interviewee 1 had worked at Case 7 between 1992-1997 prior to being head-hunted
by them to establish a Greenfield subsidiary102 in Chile in 2005. At this time
Interviewee 1 was already living and working in Chile and had been since 1998. This
subsidiary was established due to the skills shortage in Australia and at the time of my
interview (December 2006) only worked on Australia projects, i.e. it did not have to
seek work in the Chilean market, therefore business knowledge was not an issue.
Interviewee 1 believes that if he was not already living in Chile and available as an
immediate source of institutional knowledge Case 7 would not have entered the
market and would have instead solved its skill shortage closer to home by ‘going to
India, because everyone goes to India’.103
Most case study firms did not have personal experience of Latin America prior to
market entry and overcame this deficiency in two ways; by hiring high quality local
staff and through networks. The finding that market-specific knowledge can be hired
in or sourced externally suggests that it is more explicit than internationalisation
knowledge which is consistent with Pedersen and Petersen’s (2004) views (See
101 The firm has also considered opportunities in Peru, although it decided not to pursue them. 102 Case 7 operates in the professional services industry. 103 I was unable to conduct interviews with anyone else at Case 7 to get a different perspective on this.
143
Section 3.1). Although, as the example of Case 2 demonstrates market-specific
knowledge gained through first hand experience is persuasive.
Host Country Staff and Champions While the perceived psychic distance of Australian executives must first be overcome
in order to make the decision to invest in Latin America, post market entry host
country staff proved vital for my case study firms. The benefits that host country staff
offer relate directly to the most frequently cited challenges of internationalisation in
the region; language, bureaucracy and business practices. Local staff speak the
language (which Australian executives do not), possess market-specific knowledge
(that Australian executives lack) and are well connected in local networks (a key
element of business in the region). Despite the patent benefits, attracting high quality
local staff was a challenge for smaller case study firms given their status as an
‘unknown’ in the region.104
And probably the key to our success has been finding one or two individuals who have the network and the connections to attract others into the organisation…And of course from that you continue to build relationships and not all the recruitments have been through [Interviewee 3], but he became our Chilean face and allowed us to build our credibility.
Case 2 (S), Interviewee 4
If host country staff play an important role post market entry, champions105 play a
significant role prior to market entry in encouraging Australian firms to take the first
step. Put another way, champions help overcome psychic distance. Champions exist
both within and outside the firm and possess experiential market-specific knowledge
of Latin America (and usually internationalisation knowledge as well).
It’s often individuals that take companies to markets rather than corporate structures that take them to markets. …It did surprise me…the importance of key people even within large organisations; that one person with the drive, with the personal connection or with the interest that has been able to say ‘This is a good idea. We should pursue this market’.
Chamber of Commerce Interviewee 3
104 Section 7.6 discusses the role of networks in finding local staff. 105 I have chosen this term to describe this group of people as they support the cause of, defend, and argue in favour of (Moore, 2004) Latin America.
144
Case 7 provides an example of this type of internal champion. Interviewee 1 had spent
two years working in Chile with Case 10 before he returned to Australia and joined
Case 7 in 1992. In 1994 an opportunity arose for Case 7 in Colombia. At this stage
they had no international presence but around the same time they undertook projects
in New Zealand and Indonesia.106
It really came about because I happened to walk into somebody’s office and saw the pamphlet there and said, ‘Oh wow, this is Colombia’. I had just come back from Chile…I was still enthusiastic about Latin America and I talked to the directors and said, ‘I think we should do this job’ and generated enough enthusiasm to at least get us to prepare a tender and then it was a job that actually worked and was very successful for us financially.
Case 7 (S), Interviewee 1
The interviewee also emphasised the importance of others in the firm with
experiential knowledge of international markets in helping to overcome the directors’
reluctance to tender for the job; in particular an Englishman who had previously
worked in South Africa.
When I talked to him [the Englishman] about Colombia I had the brochure in my hand and I said ‘well have a look at this’…and I was pointing to…photos in the brochure and saying to him, ‘well this is what that’s really like’…and I could see him calling on his previous experience in Africa to say ‘Ah, okay well it’s the same only different’, but he had an understanding. So instantly I had an ally.
Case 7 (S), Interviewee 1
As mentioned in the section on market-specific knowledge above, 11 years after their
first project in Latin America Case 7 established an office in Chile.
External champions come from all three types of networks; institutional, business and
social. Important institutional champions for Latin America in Australia include board
members of the Council on Australia Latin America Relations (COALAR) and the
Australia Latin America Business Council (ALABC). The role of external champions
is explored further in Section 6.6.
Summary In this section I have illustrated one way in which Australian firms overcome their
perceived psychic distance to Latin America, partially answering RQ1.3. I have also
106 Exactly which project came first is unclear.
145
addressed RQ2 (what role does experiential knowledge and learning play in the
internationalisation of Australian firms into psychically distance markets?), RQ2.1 (to
what extent are past experiences of the firm transferred to the organisational memory
bank and used in future internationalisation?) and RQ2.2 (To what extent is the
personal experience of individuals within the firm drawn upon in the
internationalisation process?).
In most cases the past international experiences of the case study firms resulted in
internationalisation knowledge that was used by the firm during their entry into Latin
America.107 For several firms market-specific knowledge, in particular institutional
knowledge, accumulated during their time in one Latin American market facilitated
expansion into other regional markets. This was particularly the case for the smaller
case study firms who were more likely to internationalise gradually rather than the
larger firms who were more likely to internationalise by acquisitions that resulted in
simultaneous entry into multiple markets.
Experiential knowledge and networks work together to overcome psychic distance
and facilitate internationalisation. Section 6.6 discusses the multiple roles played by
networks in facilitating Australian firms’ entry into Latin America by helping to
overcome both perceived psychic distance and the challenges of internationalisation.
At times, the comments I coded in the host country staff node in the Experiential
Knowledge Node Tree (see Table 6.6) and the comments I coded in the local
partner/acquisition node in the Type of Networks Node Tree (see Table 6.7) were
very similar and the distinction is intellectual rather than practical. For example some
comments coded in the local partner/acquisition node (see Table 6.7) speak of
acquiring the knowledge of either the local partner or the local staff of the acquired
firm but after a period of time this network resource is internalised and becomes part
of the firm’s experiential knowledge (particularly in the case of acquisitions). When
exactly this switch from external resource to internal resource occurs is unclear and I
do not think the distinction is imperative to our understanding of the phenomenon.
107 One firm indicated that the pace of there internationalisation was too fast for experiential learning to occur. One other firm had no prior international experience.
146
6.6 Networks The network perspective of internationalisation focuses on the external drivers of the
process. For example, how a firm’s position in a business network can shape its
market and entry mode choices. I propose that networks are potentially a more
powerful and more expedient way for firms to gain the knowledge they need for
internationalisation than the ‘testing the waters’ approach advocated in the
internationalisation process literature. The results presented below identify the
specific types of networks that facilitate internationalisation and the multifarious roles
these networks play. In presenting these results I respond to Research Questions 3-
3.4.
Networks are integral to the internationalisation of Australian firms in Latin America.
As Table 6.7 and Table 6.8 illustrate interviewees spoke extensively about the
different types of networks and their roles in facilitating market entry and expansion.
The importance of networks in Latin America was a reoccurring theme throughout the
interviews and they were frequently described in similar ways by participants,
including ‘hugely important’, ‘crucial’, ‘fundamental for success’ and ‘paramount’.
Some interviewees were passionate about the importance of networks to conducting
business in Latin America and spoke at length about the intricacies of network
relationships. These interviewees had extensive experience operating in the region. It
was commonly felt that Australian firms’ lack understanding of the importance of
networks or that they discover this importance post-entry. In particular, Interviewee 3
from Case 8, who I met at an Australian Business Club108 Christmas function in
Santiago, volunteered for an interview because of his strong view that Australian
firms do not understand the importance of networks in the region.
Type of Networks Much attention has been paid in previous network perspective literature to the role of
business networks in influencing internationalisation. Outside this body of research
the role of social and institutional networks has also been explored to a limited extent.
My findings illustrate that all three types of networks play a significant part in
108 Organised by Austrade and the Australian Embassy.
147
expediting internationalisation in Latin America for Australian firms. Table 6.7
illustrates the specific types of institutional, business and social networks that were
mentioned in the interviews.
Table 6.7: Type of Networks Node Tree
Name Sources References Types of Networks - - Institutional networks - - Austrade109 24 52 Ties to government/embassies 19 46 Chambers of commerce 11 22
Latin American students in Australia110
10 24
Industry associations or Expos 11 16 Business networks 22 45 Local partners/acquisition 17 35 ‘In-country’ law firms 8 19 Pioneers 8 16 In Australia 8 13 Suppliers and customers 6 10 Internal (inter-divisional, parent-sub) 6 10 Social networks 19 45 Family 12 28 Expatriates 7 13
Austrade was identified as an important first port of call for Australian firms in the
region, particularly SMEs. Interestingly, whilst Austrade was seen to provide
extensive support to small and medium firms, the relationship was the other way
around with larger firms. Large Australian firms in the region, such as Case 8 and
Case 10 support Austrade out of a sense of good corporate citizenship. Various
chambers of commerce and industry associations were also mentioned as playing a
role in the internationalisation of Australian firms in the region as were the Australian
Embassies and Consulates. Government to government ties were thought to play an
important role in setting the framework or architecture within which business is
carried out. The specific roles that institutional networks play are discussed in the
Role of Networks section below.
109 Australian Trade Commission 110 These comments were coded here as Universities are considered part of institutional networks.
148
The business networks node shown in Table 6.7 contains comments that referred to
business networks in general terms. If the type of network was specified, for example
a business network tie developed in Australia or a tie to a supplier I coded the
comment at the ‘child’ node below. Comments were not coded at both ‘parent’ and
‘child’. Business networks undoubtedly expedite market entry for Australian firms
and comprise networks in Australia as well as in Latin America. In Australia these
network ties include inter-firm ties to customers and suppliers as well as ‘pioneering’
Australian firms. In Latin America important networks include those of local partners
and ‘in-country’ commercial advisors such as law firms.
…you then need to piggyback off those Australians that are…already in the marketplace and therefore have the ability to identify suitable allies or contacts.
Chambers of Commerce Interviewee 3
I think probably more so in Chile, [than in other non-Latin markets], I think that the key to integrating into a new market is finding good advisers, lawyers, accountants, so utilising those networks to their fullest.
Case 2 (S), Interviewee 4
Business networks were discussed by all case studies. Whilst some firms spoke more
about a particular type of business network than others there is no clear distinction in
the type of business network used by different size firms with one exception. ‘In
country’ law firms were not discussed by the two largest case studies111 suggesting
that their internal resources fulfil the roles carried out by these firms for the smaller
and medium-sized cases.
The third group of networks mentioned in my interviews are social networks, As
previously discussed, business is often carried out on the basis of personal
relationships in Latin America and as a result social networks played an important
role in facilitating internationalisation for case study firms. This includes social
networks in Australia as well as in Latin America. Social connections provide
validation and help build trust, which is an important aspect of business in the region.
111 10,000+ employees
149
In Latin America social networks are largely based on class and status and are linked
to the high school and university attended.112
In this country [Chile] although we are 15 or 16 million people everything happens in this part of the city and nowhere else and whether you’ve gone to the right school or [where] you’ve gone to university…that’s the way to make contacts. It’s not that you know everybody, but you know quite a few people because you went to university together, your children go to the same school…and so on and so forth.
Case 5 (M), Interviewee 2 (ESL)
To a lesser extent, other social networks were mentioned as playing a role in
facilitating business interactions including the Masonic lodge and religious
organisations such as Opus Dei. Comments about these types of networks were coded
at the ‘parent’ node social networks. Case 1 provides a specific example where a
personal link through the Masonic Lodge was used to secure a business meeting with
a high profile potential client after formal attempts to secure the meeting had been
unsuccessful. This meeting was the first step in securing a multimillion dollar
contract.
Participants made a significant number of comments about the role of family and
expatriate networks in facilitating internationalisation and these comments were
coded separately at ‘child’ nodes. It is difficult for Australian executives to gain
access to local social networks which are based on family and old school ties.
Expatriate networks, however, are equally inaccessible to local managers. The
effectiveness of expatriate networks varies somewhat between Mexico, Brazil and
Chile. Australian firms in Chile are concentrated in Santiago, making physical
networking easier, whereas firms in Brazil and Mexico are spread out in different
regions.
I would put number one as the social contacts and even higher than social contacts is family contacts…if you can get a reference, if you can get a link in via family, via commitment – it might be indirect family, it might be somebody who works for your company who has family members they can vouch for – [it] is infinitely more powerful than a business connection because somebody knew somebody who knew somebody.
Case 8 (L), Interviewee 3
112 University Alumni links in Australia also influence internationalisation. For example, Case 2 went to the Melbourne Business School looking for a Latin American graduate student who would be able to aid their understanding of the region because the firm’s CEO had completed his MBA there.
150
Something we thought about for quite a while [was] to bring an Australian retired [Case 5] guy just to do networking here. Go out and play golf for example, sit with the ladies having tea or things like that; as a networking thing. We haven’t done it and maybe it’s a silly thing to say but we thought about it...You know the foreign community here tends to rely on themselves very much, socially at least, and for me as a Chilean it’s difficult to get into that system, almost impossible I would say.
Case 5 (M), Interviewee 2 (ESL)
Roles of Networks My research casts light on the multifaceted roles of networks in internationalisation.
One of the primary goals of this research was to explore the role of networks as
conduits of knowledge as an alternative to the experiential learning proposition of the
internationalisation process literature. Table 6.8 clearly demonstrates that networks
play a role as sources of knowledge. However my findings also point to a much
broader function. Networks fulfil numerous other roles in addition to providing
knowledge that help to smooth the process of internationalisation.
Table 6.8: Role of Networks Node Tree
Name Sources References Role of Networks - - Provide knowledge (unspecified) 12 19 Business knowledge 22 36 Initial opportunity knowledge 16 28 Institutional knowledge 16 32 Internationalisation knowledge 5 6 Provide credibility and reputation 20 42 Provide contacts or ‘unlock doors’ 16 36 Provide customers or suppliers 21 32 Provide reassurance or comfort 15 29 Finding employees or agents 15 25 Share and learn from experiences 14 22 Finding a local partner 10 13 Other 6 10
Networks undoubtedly facilitate internationalisation by providing access to
knowledge. As noted in previous sections it is the lack of knowledge and
understanding that most contributes to both psychic distance and actual challenges in
internationalisation. Whether in relation to language, institutions, or business practices
increased knowledge and understanding both reduces the psychic distance between
151
Australian firms and Latin American markets and expedites market entry and
expansion. My findings indicate that networks serve a vital role in providing access to
market-specific business and institutional knowledge. In contrast, there is little
evidence that firms gain internationalisation knowledge via their networks. This result
suggests that firms overcome a lack of market-specific experience using their
networks and yet first hand internationalisation experience is still important. Gaining
market-specific knowledge through networks expedites the process of
internationalisation.
I remember talking to a couple of providers and saying ‘you should be going to Chile. There is a huge mining culture there’.…I remember I said ‘You should go there’ and eventually they did.
Case 7 (S), Interviewee 1
We know who the players are, we know who to avoid and we can quickly and rather accurately judge the substance of firms through a network of referrals.
Government Interviewee 5
We had a Brazilian MBA graduate from the Melbourne Business School…who we asked to do a study of Latin American markets…and that was really the basis on which we started to understand…primarily Peru, Brazil and Mexico as the next emerging markets.
Case 2 (S), Interviewee 1
As illustrated in Table 6.8, networks also perform a variety of additional roles that
facilitate internationalisation. The most important of these roles seem to be providing
credibility and ‘reputation by association’, generally ‘unlocking doors’, providing
access to customers or suppliers (often service providers) and providing reassurance
and comfort.
…the trust one is a characteristic of Brazilian business…a lot of that is done through personal relationships and relationships where the bona fides are assumed because of participation in the network.
Government Interviewee 1
…but it’s so very different when somebody rings ‘Buenos días, soy de la embajada Australiana [Translation: Good morning, I’m from the Australian Embassy]. Can I introduce you to Mr [Interviewee 1] he’s with [Case 6]?’ Boy that opened some doors. I mean, I didn’t know that.
Case 6 (S), Interviewee 1
I knew a little bit about Chile through some friends and felt comfortable bringing my family here; I’ve got three kids.
Case 8 (L), Interviewee 1
152
By expediting knowledge accumulation and fulfilling the abovementioned additional
roles networks serve to mitigate risk and reduce the liability of foreignness firms
experience when internationalising. Notably, it is not one specific type of network that
fulfils one specific role. Furthermore the types of networks described above are not
mutually exclusive, they overlap and intertwine. Just as the challenges of
internationalisation compound one another to complicate the process, so to do the
benefits of network connections with their potential to advance the process of
internationalisation. For example, Case 2 found a key local executive to work for the
company via a connection to a customer. This local executive then provided extensive
knowledge of the competitive environment as well as credibility and reputation due to
his years of experience in the local industry. Through his own personal networks he
was able to encourage other highly qualified locals to come and work for the firm
which expanded the firm’s reach in local networks even further.
To further explore the wealth of network data my research produced I conducted
additional analysis in NVivo to ascertain specifically which types of networks were
more frequently mentioned as fulfilling which roles. By carrying out matrix coding
queries I was able to retrieve all instances where the same data (comment) was coded
at both a type of networks node and a role of networks node. In this sense, matrix
queries are similar to quantitative cross tabulations. Table 6.9 presents a summary of
the roles fulfilled by the three different types of networks. The full results of this
analysis are provided in Appendix 10. The numbers in each cell represent the
frequency of comments about that specific type of network fulfilling that specific role.
For example, there were 24 instances retrieved from the dataset in which a type of
institutional network was described as providing institutional knowledge. Details of
the specific types of institutional networks that provided this knowledge are in Table
A.13 of Appendix 10. The emboldened numbers in Table 6.9 highlight which type of
network was most frequently mentioned as fulfilling each specific role. It is important
to note that Table 6.9 and the tables in Appendix 10 show the frequency of comments
about the different types of networks rather than the weight attributed to these
networks by interviewees. There are fewer comments about the role of social
networks in internationalisation than there are about business and institutional
153
networks and yet some interviewees felt strongly about the potential influence of
social networks over and above business and institutional networks.
Table 6.9: Matrix Query Summary
Institutional networks
Business networks
Social networks
Provide knowledge (unspecified) 14 13 6 Provide institutional knowledge 24 15 - Provide business knowledge 33 21 6 Provide initial opportunity knowledge 15 23 8 Provide internationalisation knowledge 4 5 - Provide reassurance or comfort 10 23 10 Provide customers or suppliers 29 21 11 Share and learn from experiences 21 20 11 Provide credibility and reputation 19 17 23 Provide contacts or ‘unlock doors’ 31 15 16 Finding employees or agents 28 9 4 Finding local partner 11 8 2 Other 16 7 3
Table 6.9 lists the roles of knowledge provision first as this was the primary function I
explored in my research. My findings illustrate, however, that while knowledge
provision in an important function of institutional and business networks, it is only a
secondary function of social networks. The most frequently discussed role of
institutional networks is providing business knowledge followed by ‘unlocking
doors’. Business networks were most frequently cited as providing knowledge of
opportunities and providing reassurance and comfort, whereas social networks most
frequently provide credibility and reputation. Yet it is possible to drill further down
into the data.
By looking at the data by role rather than by network type it is evident that market-
specific business and institutional knowledge is being provided primarily by general
business networks, ‘in-country’ law firms and local partners or acquisitions (types of
business networks) as well as Austrade and ties to government (types of institutional
networks) (see Appendix 9).
…that business is a joint venture and that probably goes towards your study a little bit in that we felt it was important in the [Name of Division] group to come into a totally new market for us with…a local partner, with extensive relationships and experience in the country [Chile] and that was important,
154
has been important for us, will continue to be important in terms of perhaps providing opportunities for further expansion by acquisition but not only that. It’s been a good marriage of local experience, local expertise and [Case 8’s] strength…
Case 8 (L), Interviewee 1
…in all that process Austrade plays a very important part in helping you first of all understand the way business is done in a particular region and then also finding you relative partners or distributor bases that you can work with. So particularly in South America we relied a lot on the Austrade…They helped our local people [in Brazil] with the legal issues and setting up a company with a foreign partner and all that sort of stuff. So Austrade plays a big part in all of that.
Case 3 (S), Interviewee 2
These two quotes provide a good contrast in that Case 8 is a large firm with over
10,000 employees and Case 3 is a small firm with a little over 100 employees. At the
time of the joint venture discussed by Interviewee 1, Case 8 already had extensive
internationalisation experience (albeit in a different division). Case 3’s joint venture in
Brazil, in comparison, was their first (and is still their only) overseas manufacturing
plant. Despite the vast differences between these two firms both relied on external
network resources to provide them with market-specific knowledge and in doing so
smoothed the process of their internationalisation in Latin America.
Accumulating market-specific knowledge rapidly is important during the early stages
of market entry as illustrated in the two quotes above. Market-specific knowledge
from other sources can be important at later stages of internationalisation however
when a firm considers expansion in the region. At this expansion stage, chance
sources of knowledge may influence the direction a firm takes.
I’ve probably met some really relevant guys through my wife’s friends and contacts, so through the school, through the Canadian Women’s Association…There are a lot of functions and I’ve met the regional manager of Atlas Copco, the regional manager of Caterpillar. In particular, what’s of interest to me, I met some people who have good knowledge of the gas markets in Peru and Columbia and Venezuela and Chile and have really been helpful in terms of me understanding the opportunity for [Case 8] to invest… so in that context there’s been some really good contacts made and helped me shorten the time line of learning about…the gas market in the Latin American world.
Case 8 (L), Interviewee 1
155
Another important role that networks fulfil is ‘unlocking doors’. It is not surprising
that Austrade plays a significant role in this capacity considering it is one of their
primary objectives. Social networks also play an important role in this regard.
Interestingly, the different types of business networks play only a minor role in this
area (see Appendix 9). Austrade’s function in this role is most important in the initial
stages of market entry when a firm has not yet established its own access to local
networks.
…we found Austrade generally to be quite helpful. I mean that only takes us so far. They can help make some introductions and that sort of thing but certainly having the support of our Government, or our Government agencies, you know we found it pretty helpful at least in the initial stages of getting established.
Case 5 (M), Interviewee 1
Once Case 5 had established itself in Chile and hired a Chilean country manager
(Interviewee 2), this person’s social networks were more effective at ‘unlocking
doors’ and Austrade’s role diminished.
Establishing credibility is another important role fulfilled by networks in the early
stages of market entry. Ties to Australia’s Embassies, rather than Austrade, lend
credibility to Australian firms in Latin America although once more this role seems to
be most effectively carried by social networks and family connections in the long
term. Several interviewees from four different case study firms made reference to
dinners held with potential clients at the Ambassadors’ residences (in Chile and in
Mexico). In this way the Ambassadors are lending their weight to smaller Australian
firms.
Networks’ role in providing reassurance and comfort is also vital in the early stages of
entry into Latin America. Pioneering Australian firms are crucial in demonstrating
that ‘it can be done’. Expatriate networks are also important in helping families to
settle in and feel at ease. The adjustment of an expatriate’s family is an important
factor in successful market entry.
[the presence] of the big companies here is very important and obviously makes smaller or medium size companies feel more comfortable, more at ease with entering the market here.
Government Interviewee 2
156
I think that certainly [Case 10 serves as a demonstration], of course, our vocation is not necessarily to spend a lot of effort promoting [that]… But, of course, it's a big catalyst.
Case 10 (L), Interviewee 1 (ESL)
I think there’s also the issue of support for families and wives, understanding – well I mentioned service providers, but schools, medical services and things like that. It makes the whole experience easier if they can talk to others that they trust.
Government Interviewee 5
Given the potential benefits of network connections described above, picking the
‘right’ partner or making use of the ‘right’ connections is imperative. Just as the
‘right’ network connections have the potential to facilitate market entry and
expansion, the ‘wrong’ connections can impede or even prevent success in the market.
Summary My research has systematically revealed the types of networks that play a part in the
internationalisation of Australian firms in Latin America and the numerous roles that
these networks fulfil. Whilst my findings reveal that small and medium-sized firms
use networks strategically to overcome their lack of internal resources, larger firms
also benefit from network connections albeit sometimes inadvertently. In an example
of this, Case 10 indicated that supporting smaller Australian firms to internationalise
in Latin America helps them obtain their ‘license to operate’. It is evident that
networks are more important in the early stages of a firm’s internationalisation
process. Institutional networks in particular play an important role at the time of
market entry by providing access to market-specific knowledge and, in doing so,
expedite internationalisation. This finding clearly demonstrates that firms can
overcome a lack of experiential knowledge via their networks.
When asked if networks were more important to business in Latin America than
elsewhere most participants thought not. Networks are important to business
everywhere; they are not a uniquely Latin American phenomenon. The importance of
networks is heightened in international business because firms are less knowledgeable
about the environment in which they are operating. In this way networks help firms
overcome the ‘liability of foreignness’ wherever they internationalise. In fact, part of
157
the internationalisation knowledge firms acquire through experience is an
understanding of the importance of networks.
There are some important caveats, however, that make networking in Latin America
unique. Certain conditions exist in Latin America that compound the role of networks.
There is a precedent in Latin America, both cultural and institutional, that places
greater emphasis on relational ties. Having acknowledged the importance of networks
and networking in Latin America it seems that it is easier for Australian firms than
networking in Asia; possibly due to the greater similarities in our cultural heritage.
Additionally, networks in Latin America are smaller due to wealth concentration.
6.7 Conclusion This chapter presents my research findings and answers the research questions set out
in Chapter 3. My findings illustrate that firms use a combination of experiential
learning and network connections to gain the knowledge they require to be successful
in Latin America. By using summary tables and rich quotes I have presented both an
overview and a detailed account of my research results.
The results presented here have both theoretical and managerial implications.
Theoretically, my findings provide a more holistic understanding of the
internationalisation process than that provided by either the stage models of
internationalisation or the network perspective. From a practical standpoint, the
findings illustrate that despite a lack of knowledge or understanding about the region
at the outset, the ten case study firms have been successful in Latin America. The
example set by these firms provides a demonstrator effect for other Australian firms
that if publicised can serve to reduce the ‘average’ psychic distance between the two
continents. The following chapter provides a discussion of the findings presented
above and explores these two implications, as well as others, in greater depth.
158
159
CHAPTER EIGHT
Discussion and Conclusion
The aim of this chapter is to draw out the implications of the results presented in the
preceding chapter by relating them back to conceptual frameworks in the IB literature.
The chapter also concludes my thesis by highlighting the contributions I have made to
the existing body of internationalisation research. My analysis of the results presented
in Chapter 6 involved pattern matching as described by Pauwels and Matthyssens
(2004). Pattern matching allows for comparison between cases as well as comparison
of empirical findings to patterns predicted in the theoretical literature. Using this
technique I compare my research findings to the predicted patterns of the stage
models and the network perspective of internationalisation as well as to my integrated
framework. Empirical findings that coincide with the predicted pattern strengthen
research credibility (Yin, 2003).
Throughout this chapter I argue that the impacts of psychic distance on
internationalisation are not as serious as previously thought and furthermore that there
is more than one way to overcome it. I discuss why it is that neither the Uppsala
model nor the network perspective adequately explains the way in which Australian
firms internationalise. Instead, as I demonstrate, the integrated framework I have
developed combining aspects of these two research areas provides a more holistic
understanding of how firms internationalise to psychically distant markets. My
research has implications beyond enhancing our understanding of the
internationalisation process. My findings in relation to psychic distance stimuli have
important ramifications for the measurement of this construct which is frequently
used in wider international business and international marketing research.
Furthermore, my findings have relevance beyond the Australia-Latin America context
insofar as they cast light on the process of FDI from and to non-traditional markets.
This type of FDI is gaining importance in the global economy. I discuss the practical
implications of my research in Section 7.5.
The chapter begins with a discussion of my findings in relation to psychic distance.
Although much used in international business research this construct has suffered
160
from poor definition and measurement. Following my attempt to address these issues,
I discuss the alternative paths for overcoming psychic distance drawn from the stage
models and the network perspective. Section 7.4 addresses the limitations of my
research in order to properly contextualise my contributions. This is followed by a
discussion of the implications for future research as well as for policy and practice.
The chapter finishes with concluding remarks that draw my thesis to a close.
7.1 Psychic Distance The psychic distance construct has been widely used in international business
research over the past 30 years and yet it continues to be poorly defined and
measured. In this research I defined psychic distance as a firm’s degree of uncertainty
about a foreign market resulting from its perception of differences between its home
and host environments that present barriers to learning about the foreign market and
operating there. This definition combines important elements of several previous
incomplete definitions (e.g. Fletcher & Bohn, 1998, p.49; Johanson & Vahlne, 1977,
p.24; Nordstrom & Vahlne, 1994, p.42; O'Grady & Lane, 1996, p.330) and redresses
errors made in others, for example Evans and Mavondo’s definition (2002, p.517)
which defines psychic distance at a national level. My definition classifies psychic
distance at the firm level and acknowledges that psychic distance is cognitive and is
therefore different for different people and different firms. Notably, my definition
does not refer specifically to cultural differences which have dominated much of the
psychic distance research to date (for example, Benito & Gripsrud, 1992; Fletcher &
Bohn, 1998; Grosse & Trevino, 1996; O'Grady & Lane, 1996). As discussed below,
the results presented in Chapter 6 support my new definition of the construct.
Psychic Distance Stimuli My research contributes to a better understanding of the psychic distance construct by
building on the important work of Dow and Karunaratna (2006). They split psychic
distance into two sequentially related constructs, psychic distance stimuli and
perceived psychic distance. Dividing the construct in this way addresses the
definition-measurement mismatch present in much of the existing literature (e.g.
Fletcher & Bohn, 1998; O'Grady & Lane, 1996) as psychic distance stimuli represent
161
differences between the home and host markets and can be measured using national
level data. Perceived psychic distance, on the other hand is a function of the stimuli
decision makers are exposed to, moderated by their sensitivity to those stimuli and
therefore exists at the level of the individual. My improved definition of psychic
distance coupled with Dow and Karunaratna’s work splitting the construct in two will
enable new research in the area to better explore both which psychic distance stimuli
most affect perceived psychic distance as well as the affect of perceived psychic
distance on numerous IB outcomes including international market selection and entry
mode.
Dow and Karunaratna (2006) and Brewer (2007a) recently tested a variety of potential
psychic distance stimuli using Australian trade flow data. Both papers based their
research on an extensive (yet not exhaustive) list of potential psychic distance
stimuli113 and related these stimuli to the intensity of trade between Australia and a set
of countries. In both cases the lists of potential psychic distance stimuli were drawn
from the existing literature. In contrast, the qualitative approach I have used in my
research enabled me to obtain first-hand data about which psychic distance stimuli
most affect the perceived psychic distance of Australian managers.
My findings in relation to this are significant because there is no previous research
that links the relative importance of individual psychic distance stimuli to perceived
psychic distance. Evans and Mavondo (2002, p.517) claim that the explanatory power
of psychic distance can only be understood when its individual aspects are fully
measured. My research has identified which aspects (stimuli) need to be included in
the measure. It is important to note that perceived psychic distance is an individual
construct, accordingly different stimuli will have a varying impact in shaping the
perceptions of different people depending on their sensitivity to those stimuli. Having
acknowledged this however, my research points to certain stimuli as contributing
more than others to perceived psychic distance.
Geography and the related issues of direct flights and different time zones contribute
most to the perceived psychic distance of Australian executives to Latin America.
113 Brewer (2007a) used different terminology.
162
This finding is consistent with early research that relied heavily on geographic
distance as a proxy for psychic distance (e.g. Gruber & Vernon, 1970; Hirsch & Lev,
1973; Leamer, 1974). More recent research has also found a strong correlation
between geographic distance and psychic distance (Dow, 2000; Stottinger &
Schlegelmilch, 1998). Notably, all these studies looked at psychic distance in relation
to trade data whereas my research was based on investment and yet still produced like
results. It is surprising that geographic distance is still at the forefront of executives’
minds when they consider opportunities for international expansion and the finding is
in contrast to the conventional wisdom of the Eclectic Paradigm (Dunning, 1980).114 I
believe the role of geographic distance in contributing to perceived psychic distance is
not straight-forward, however, and geographic distance alone is not an adequate
measure of the construct. The simple example of the geographic distance between
Australia and the UK or Australia and the USA demonstrates that geographic distance
alone does not adequately account for psychic distance. I suggest that in these cases a
common language and close colonial ties override the importance of geographic
distance to perceived psychic distance.
Another interpretation of the weight attributed to geographic distance is that the
problem has more to do with ease of access (for example the frequency and cost of
flights and the number of stop-overs involved) than the distance in kilometres per se.
This is consistent with a shorter psychic distance to those countries mentioned above
as flights from Australia to the UK and the USA are much more frequent than flights
to Latin America. This issue is particularly pertinent for SMEs for whom resources
are more severely limited. Internationalisation is a relative choice, particularly for
SMEs due to limited resources, and there are opportunity costs involved. As one
interviewee opined, Australian firms perceive that it is cheaper and easier for them to
‘try their luck’ in Asia than to invest the time and money required to pursue
opportunities in Latin America.115 Tellingly, although geographic distance contributed
significantly to the perceived psychic distance of interviewees it did not rate highly as
114 The Eclectic Paradigm suggests that firms will, where appropriate, locate different stages of the value chain in different countries in order to maximise efficiency. My finding suggests the Eclectic Paradigm may overstate the ease of location decisions. 115 This trying their luck attitude applies more so to exporting and other arms length entry modes than to investment given the more significant commitment required for the latter.
163
a challenge of doing business in Latin America highlighting the importance of
distinguishing between these constructs in IB research.
It is clear that when considered in isolation, geographic distance and its related issues
do not fully capture the psychic distance construct. The impact of geographic distance
on psychic distance is significant however when coupled with the other major psychic
distance stimuli, language. I suggest that psychic distance stimuli do not operate in
isolation from one another, but rather than their impacts compound one another.
My findings demonstrate that language differences contribute significantly to both
perceived psychic distance and the challenges of internationalisation and yet until
recently (for example, Brewer, 2007a; Dow & Karunaratna, 2006) these differences
have not been included in psychic distance measures (see Table 3.1). The over-
reliance on cultural distance as a proxy for psychic distance has resulted in side-lining
of potential measures. Galan, Gonzales-Benito and Zuniga-Vincente (2007) claim that
the social and cultural immediacy of Spanish MNEs to Latin America provide a
competitive advantage over other MNEs in the region. Arguably the language skills of
these MNEs play an equal if not greater role in ‘facilitat[ing], hasten[ing] and
streamlin[ing] the transfer and assimilation of the technology, knowledge, and
management systems’ (Galan et al., 2007, p.991) vital for successful FDI.
Communication difficulties complicate internationalisation regardless of the entry
mode and future psychic distance research must surely incorporate this important
stimulus.
Institutional distance is another key psychic distance stimulus to emerge from my
research that has been largely ignored in previous operationalisations of the construct.
My findings demonstrate that coupled with geographic distance and differences in
language, concerns over unfamiliar legal, economic and political institutions greatly
influence perceived psychic distance. Inclusion of institutional stimuli, such as those
captured in Gaur, Delios and Singh (2005) in future psychic distance research may
improve measurement of the construct. However, my findings point to a further
problem with using national level data to try and capture an individual level construct
(even with the psychic distance stimuli-perceived psychic distance split). Including
institutional distance in future composite measures of psychic distance stimuli may
164
not be enough to adequately capture perceived psychic distance. As discussed in
Chapter 6, the economic and political perceptions of Latin America held by my
research participants were often erroneous and outdated and as a result would not be
captured by institutional distance measures.
My research shows that institutions have a greater impact on perceived psychic
distance than culture and yet, arguably thanks to Kogut and Singh’s (1988)
convenient measure of the construct, cultural distance has dominated as a measure of
psychic distance in research to date (see Table 3.1). My research suggests that culture
plays a much smaller role as a psychic distance stimulus than conventional
international business wisdom, and previous psychic distance research would have us
believe (e.g. Evans & Mavondo, 2002; Hofstede, 1994; J.-B. Kim & Rhee, 2001;
Swift, 1999). My findings coincide with other recent research that points to a minor
role for cultural distance as a psychic distance stimulus (Dow & Karunaratna, 2006).
Importantly, aspects of culture such as business practices, do present challenges for
Australian firms operating in Latin America yet these issues do not feature in initial
perceptions of the region pointing to the difference between perceived psychic
distance and the liability of foreignness.
The problems associated with using cultural distance as a proxy for psychic distance
are multiple. Firstly, Hofstede (1980) and House et al. (2004) upon whose work
measures of cultural distance are based, measure culture as seen by a country’s
citizens, rather than as others (from another country) see them. Psychic distance on
the other hand is concerned with how others perceive a host country. The problem of
erroneous economic and political perceptions contributing to perceived psychic
distance can apply equally to cultural perceptions; who is to say that others perceive a
country’s culture as its citizens perceive it? Furthermore my research shows that
although aspects of Hofstede (1980) and House et al.’s (2004) cultural dimensions
were mentioned by participants as challenges in Latin America,116 initial cultural
perceptions fuelling psychic distance had nothing to do with cultural dimensions as
per Hofstede and House et al.. Unfortunate as it may be, initial cultural perceptions of
Latin America amongst Australian executives are based on stereotypical images of 116 For example, the issue of (mis)trust could be seen as a reflection of House et al.’s (2004) in-group collectivism.
165
sporting heroes and popular culture. Latin America lacks a business reputation in
Australia. What this tells us is that while an understanding of cultural differences
based on Hofstede or House et al. may aid internationalisation once a firm is already
in the market, the cultural distance construct as it stands does not contribute to a better
understanding of perceived psychic distance. A final issue with the common use of
the Kogut and Singh’s (1988) cultural distance index is its inherent assumption of
equivalence. This issue is equally relevant to psychic distance stimuli and is discussed
at greater length in the next section.
The distinction between psychic distance stimuli and perceived psychic distance made
by Dow and Karunaratna’s (2006) is an important step forward but this distinction has
the potential to draw attention away from another significant contributor to perceived
psychic distance inherent in the initial conceptualisation of the concept. Johanson and
Vahlne (1977) argued that psychic distance is overcome via experiential knowledge.
This includes not only market-specific experiential knowledge (business and
institutional knowledge), elements of which are captured by psychic distance stimuli,
but also internationalisation knowledge. Internationalisation knowledge is not
captured in any conceptualisation of psychic distance stimuli to date and, in fact, is
seen as a separate factor altogether. A lack of experience in internationalisation makes
the psychic distance to everywhere seem greater. This important psychic distance
stimulus should be taken into consideration in future operationalisations of the
construct.
Psychic Distance Stimuli and Equivalence My results illustrate that psychic distance stimuli are not equivalent in contributing to
perceived psychic distance. This finding is important for future measurement of the
construct. The issue of equivalence in distance measures has been raised previously in
relation to cultural distance (Harzing, 2004; Hofstede, 2001; Shenkar, 2001). Hofstede
(2001) notes that distance on some cultural dimensions is more problematic for firms
than distance on others. Dow and Karunaratna (2006) allude to the issue of
equivalence in relation to psychic distance in the varying statistical support their
hypotheses receive. Their results show that some stimuli have a stronger relationship
with trade intensity than others. My findings illustrate that the lack of direct flights
166
between Australia and Latin America and the effect this has on perceived geographic
distance, coupled with differences in language and institutions contribute most to
perceived psychic distance. The issue of non-equivalence of stimuli challenges the
usefulness of Brewer’s (2007a) psychic distance index which ascribes equal weight to
each stimuli (Brewer refers to these stimuli as ‘elements’).
I suggest the issue of equivalence is not only a problem in relation to different stimuli,
but also in relation to different countries. Not only are psychic distance stimuli not
equivalent in contributing to perceived psychic distance, but these stimuli also have
the potential to influence the perceived psychic distance of an individual to different
countries to varying extents. For example, I theorise that where a common language
and close colonial ties exist they trump geography and time zone differences as
weighted stimuli for perceived psychic distance. Also, the presence of direct flights
overrides the impact of geographic distance on psychic distance to a certain extent.
Exposure of the host country in home country media is another factor that may
override geographic distance as a psychic distance stimulus. My research focused on
only one geographic region, one area of future research is to explore the relative
importance of psychic distance stimuli in contributing to the perceived psychic
distance of an individual to different regions.
Psychic Distance and International Market Selection My research provides mixed support for the psychic distance-international market
selection link. This is consistent with several previous studies (e.g. Bell, 1995; Chetty
& Campbell-Hunt, 2004; Child et al., 2003; Stottinger & Schlegelmilch, 1998). On
one hand, the internationalisation stories of some of my case study firms support the
negative relationship between psychic distance and international market selection
predicted by the stage models of internationalisation. For example, Case 4’s
perceptions of the differences between Australia and Brazil led them to feel incapable
of operating in the latter country in the 1990s. At Case 6, despite the fact Interviewee
1 ‘championed’ Mexico as a great market for the firm’s product, the Managing
Director chose to first internationalise to the UK and then to the USA. Similarly Case
4 and 5 also indicated that initial internationalisation was dictated by psychic distance
stimuli (e.g. geography and language considerations). Case 4 first internationalised by
167
establishing a sales office in Singapore in the late 1980s. This market choice was
explained to me as one of convenience and proximity. This initial internationalisation
was followed five years later by an acquisition in the UK.
On the other hand, however, several case study firms entered Latin America, a region
that would generally be considered psychically far away from Australia, with limited
or no previous experience. There is a central theme in these cases relating to the role
of networks in helping to overcome psychic distance despite the individual stories
behind these market entries differing. The nature of Case 1’s business dictated that it
had to internationalise extensively if it were to continue to grow. As a result, the
psychic distance key decision makers experienced did not prevent the firm from
entering Latin America (initially via Brazil). A key step for Case 1 in overcoming the
challenges of operating in such a different environment was employing Interviewee 5
who at the time was working for one of Case 1’s parent companies. In another
example, Case 9 made its first international step into Chile thanks to an approach
from a Chilean partner of Case 8 who offered to take Case 9’s franchise to the
region.117 Although Case 9 was in the process of assessing overseas markets when
they were approached, Chile was not on its list of target markets (neither was any
other Latin American market for that matter) and its knowledge of the country and the
region was extremely limited. In yet another example, Case 3’s internationalisation
into Latin America came about as a result of the then owner and Managing Director
visiting his son who was on Rotary Exchange in Brazil. During this visit, which
would not have occurred had it not been for the family connection, Case 3’s owner
was exposed to the market potential of Brazil and upon return was able to overcome
the considerable psychic distance of his colleagues. These findings illustrate that
network connections can be instrumental in bridging the gap between a firm and a
market. Even if a firm lacks the experiential knowledge the Uppsala model suggests is
necessary to reduce its psychic distance to a foreign market it may still enter that
market and overcome its psychic distance with the aid of network connections.118
117 The Chilean partner had heard of Case 9 while in Melbourne signing the partnership with Case 8. Case 8 and Case 9 are in completely different industries and have no commercial ties. 118 The role of networks in internationalisation is discussed in more detail in Section 8.3.
168
Other firms in my sample were able to overcome the initial large psychic distance of
their executives through slightly different means, further challenging the negative
psychic distance-international market selection relationship. For example, Case 2 and
Case 7 drew heavily on the previous market-specific experience of individuals.
Cognizant of opportunities in Latin America in their industry but aware of their lack
of knowledge about the region, Case 2 hired a Chairman of the Board with extensive
experiential knowledge of Latin America. By sharing his knowledge the Chairman
was able to reduce the collective psychic distance of key decision makers. Similarly,
when faced with a skills shortage domestically Case 7 turned to a trusted former
employee to establish its first overseas subsidiary. This employee had been working
in Chile for many years. In doing this Case 7 circumvented its own large psychic
distance to the region. The examples of these firms remind us that psychic distance is
not a national level construct. It is based on perceptions and is therefore different for
every firm based on the unique experiences of key decision makers within the firm.
The results discussed above challenge traditional internationalisation process
literature wisdom confirming that, as suggested in Chapter 3, the Uppsala model’s
explanation of how firms internationalise is incomplete. The model does not
adequately explain the internationalisation pattern of Australian firms. As the two sets
of examples discussed above illustrate, network connections and the previous
personal experience of key individuals within the firm can bridge (in the case of
networks) or greatly reduce (in the case of previous experience) the psychic distance
otherwise experienced. Although my findings challenge the Uppsala model, they do
not negate the value of the psychic distance construct. Chapter 6 provides
considerable evidence that my case study firms experienced psychic distance prior to
and during their internationalisation in Latin America. However, the impact of
psychic distance on internationalisation is not as absolute as put forward in the
original model (see Johanson & Vahlne, 1977).
Firms operated under very different conditions when the Uppsala model was
conceptualised in the 1970s. Since that time globalisation has meant the removal of
many barriers to trade and, as discussed in Chapter 1 a twenty-fold increase in the
volume of FDI. Coupled with the transformation of information and communication
technologies, globalisation has served to facilitate internationalisation and, according
169
to some, has led to increasingly homogeneous world markets (e.g. Levitt, 1983). I
would argue that although this is true to an extent (for example the ever-expanding
reach of Western popular culture and its associated consumer trends and the instant
communication possible across continents thanks to mobile phone, emails and video
conferencing) distance still matters.
The unique contribution of my research is in demonstrating that firms may overcome
their psychic distance more easily than otherwise suggested. The incremental and
predictive nature of the Uppsala model is undermined by my research findings. My
research suggests that while psychic distance still exists, it does not necessarily the
barrier to market entry that the Uppsala model would have us believe. The following
sections discuss my findings in relation to how firms overcome their psychic distance,
via experiential knowledge and via networks.
7.2 Experiential Knowledge The Uppsala model posits that psychic distance is overcome through the ‘gradual
acquisition, integration and use of knowledge’ (Johanson & Vahlne, 1977, p.23). My
research findings clearly support the view that knowledge is central to overcoming
psychic distance yet I challenge the Uppsala model’s emphasis on gradual acquisition
via experience. Once more, advances in information and telecommunication
technologies mean that information is now available to an extent and accessible at a
speed unheard of in the 1970s. Admittedly, information must be interpreted in order
to create knowledge, but it is undeniable that the arrival of the internet has expedited
both knowledge creation and knowledge sharing, both within and between firms.
There is a large and significant body of literature that deals with inter-organisational
learning and knowledge management (e.g. Fiol & Lyles, 1985; Huber, 1991; Nonaka,
1994; Nonaka & Takeuchi, 1995; among many others). My research illustrates intra-
organisational learning within the network context and resonates with this literature. I
draw particular parallels to the work of Nonaka and Takeuchi (1995).
Three types of experiential knowledge are identified in the literature as requisite for
internationalisation; business knowledge, institutional knowledge and
internationalisation knowledge (Eriksson et al., 1997). My findings indicate that
170
experiential learning is central to the accumulation of internationalisation knowledge
whereas business and institutional knowledge can be acquired through other means.
This is an important distinction that, whilst alluded to, has not been empirically
demonstrated in previous research Significant amongst the means for acquiring
knowledge, is the role that networks play in knowledge conversion and transfer.
A major problem with the concept of experiential knowledge centres on the divide
between tacit and explicit knowledge and the transferability of such knowledge.
Johanson and Vahlne (1977) proffer experiential knowledge as a contrast to objective
knowledge. These two types of knowledge can be likened to the tacit and explicit
knowledge more commonly discussed in today’s knowledge management literature.
My research suggests that some knowledge classed as experiential in the
internationalisation processes literature is actually explicit and can therefore be
transferred relatively easily. This is particularly the case with market-specific business
and institutional knowledge, which is discussed in more detail below.
My findings with regard to the explicit nature of much market-specific knowledge are
in direct contrast to assertions of the original Uppsala model and follow up research
(Johanson & Vahlne, 1977, 2003). Nonaka and Takeuchi’s (1995) theory of
organisational knowledge creation explains how explicit knowledge can be
transferred within an organisation through the processes of combination and
internalisation. My research provides examples of this transfer occurring outside of
the organisation, in the context of the network, as well. My research also provides
evidence of the transferability, at least in part, of tacit knowledge consistent with
Nonaka and Takeuchi’s (1995) socialisation and externalisation processes. These
processes assist in the transfer of internationalisation knowledge, and as discussed
below, can occur both within an organisation and between organisations in a network.
Internationalisation Knowledge Evidence from my case studies indicates that internationalisation knowledge is
inversely related to perceived psychic distance and, other things being equal,
facilitates market entry. In other words, as internationalisation knowledge increases,
perceived psychic distance decreases. My findings also indicate that
171
internationalisation knowledge is accumulated primarily through experience. Initial
internationalisation experience is particularly important for SMEs and can
fundamentally change the way key decision makers see the world, as demonstrated by
Cases 3, 6 and 7. These cases demonstrated initial reluctance to internationalise to
psychically distant countries. However experience in markets psychically ‘closer to
home’ gave these firms the confidence to internationalise into Latin America. My
results contribute to a broader understanding of internationalisation knowledge and
suggest that Eriksson et al.’s (1997) definition needs to be expanded to include the
fundamental realisation that internationalisation is possible and, in many cases, is in
fact desirable. According to my findings, internationalisation knowledge includes an
understanding of what to expect when internationalising and how to adapt in different
institutional and competitive surroundings. In this way, accumulating
internationalisation knowledge increases a firm’s understanding of the types of
business and institutional knowledge it needs to amass and how best to access and
absorb this knowledge. Moreover, part of the internationalisation knowledge my cases
study firms accumulated was an understanding of the importance of networks to
internationalisation (discussed further in Section 7.3).
…Boy that [having an introduction from the Australian Embassy] opened some doors. I mean, I didn’t know that.
Case 6 (S), Interviewee 1
As firms mainly acquire internationalisation knowledge through experience, instead
of via network resources, this suggests that such knowledge is highly tacit and
difficult to transfer to other people. My findings also indicate however, that
internationalisation knowledge is not context-specific, supporting the theorised
spillover effects that make this knowledge so valuable in future international
expansion. For example, Case 8’s initial success in Latin America following its
acquisition of assets in the region was heavily dependent on the internationalisation
experience Interviewee 2 had gained in Asia.
As theorised in Chapter 3, internationalisation knowledge is clearly ‘sticky’ yet my
research still provides evidence of the transferability of this knowledge via networks
in some situations. This transfer occurs both within and between firms. Case 1
provides an example of externalisation; the transfer of tacit knowledge into explicit
172
knowledge. Described as the ‘quintessential knowledge-creation process (Nonaka &
Takeuchi, 1995, p.64), externalisation is a social process involving dialogue and
collective reflection. Difficulties Case 1 experienced in several overseas markets
relating to the inclusion of their component in clients’ relaunching of products led to
the development of a new technical services arm of the firm. This business unit was
specifically designed to smooth the transition to the new component and increase
acceptance of the component both within the client firm and the consumer market.
According to some within the firm the externalisation of the experiential
knowledge119 of a few key individuals into explicit company practices was central to
the firm’s future international success.
Socialisation is another way in which tacit knowledge can be shared (Nonaka &
Takeuchi, 1995). Socialisation is the process of sharing experiences and can occur
through discussion, observation and imitation. As with externalisation, I posit that
socialisation can occur both within and between firms. Case 2 provides an example of
socialisation between firms. At this firm, Interviewee 4 was hired because of the
internationalisation knowledge she had acquired while working for another firm (in a
completely different industry) in South-East Asia. Upon joining Case 2, Interviewee 4
shared her internationalisation knowledge with other senior executives and board
members and was able to reduce the collective perceived psychic distance of the firm.
This socialisation is also evident in work of Chetty and Campbell-Hunt (2003, 2004)
who refer to the ‘dissemination’ of internationalisation knowledge throughout the
firm.
To summarise, my findings in relation to internationalisation knowledge suggest that
this knowledge is largely tacit and is built up over time via experience in international
markets. My research also provides some examples however of the transfer of
internationalisation knowledge via externalisation and socialisation. This transfer
occurred both within and between firms. The accumulation of internationalisation
knowledge reduces psychic distance because it gives firms confidence operating
overseas. These findings are consistent with the Uppsala model. 119 Examples of this experiential knowledge include an understanding of the difficulties associated with retrofitting production equipment to best handle the new component, the reservations of clients’ production managers regarding the component and the best way to launch the changed product on the market so as to maximise consumer approval.
173
Market-specific Knowledge In contrast, my findings in relation to market-specific business and institutional
knowledge diverge from the internationalisation process literature. Market-specific
knowledge includes business knowledge about the competitive environment and
institutional knowledge about laws, regulations and their implementation. The
internationalisation process literature maintains that this type of knowledge is context-
specific and must be obtained through in-country experience. Consistent with
Pedersen and Petersen (2004) my findings demonstrate that, although context-
specific, a large amount of business and institutional knowledge is explicit and can be
acquired through non-experiential means. One important means of acquiring market-
specific knowledge is via network connections. Based on my research findings I
suggest that market-specific knowledge can be acquired via networks through the
processes of combination and internalisation (Nonaka & Takeuchi, 1995).
The process of combination aggregates sources of explicit knowledge and facilitates
their transfer between individuals (Nonaka & Takeuchi, 1995). This transfer can
occur between individuals in the same organisation, or in different organisations.
Combination involves exchanging and reconfiguring different bodies of explicit
knowledge by systemising concepts and sorting, adding, interpreting and categorising
information. This process can lead to the development of new knowledge, or the
contextualisation of knowledge for one specific firm.
Institutional networks are a particularly important source that firms draw on in the
combination process. A key function of Austrade (and other similar trade and
investment promotion agencies) is to collate explicit market-specific knowledge and
present it to firms via country fact sheets, seminars and networking events. There are
a multitude of other sources of market-specific information available to firms
including host-country investment attraction agencies, and supranational bodies such
as the World Bank, and the United Nations. Firms piece together information
garnered from a variety of sources in order to enhance their pre-entry understanding
of a market and in doing so accumulate explicit business and institutional knowledge.
174
Institutional networks are also important facilitators of internalisation through their
provision of case study examples of other firms’ international success either in the
form of written documents or seminar presentations. Internalisation is the process of
converting explicit knowledge into tacit knowledge and, according to Nonaka and
Takeuchi (1995) is closely related to ‘learning by doing’. Perhaps internalising the
experiences of other firms, whilst not the same, can be described as a type of ‘learning
by doing’ by proxy.
An important implication of my research is that a lack of market-specific knowledge
does not necessarily reduce the likelihood of market entry. One interpretation of this
finding is that the social capital of networks can replace the human capital of
experiential knowledge to facilitate internationalisation. This thinking contradicts
traditional Uppsala model thinking. My results are consistent however with the
internationalisation process literature insofar as the accumulation of experiential
market-specific knowledge post-entry is related to increased market commitment and
expansion (for example, Chetty & Campbell-Hunt, 2003; Coviello & Munro, 1997;
Lamb & Liesch, 2002).
Clearly experiential market-specific knowledge is valuable. Chapter 6 provided
examples of the benefits it provided Case 2 (in reassuring the Board) and Case 7 (in
overcoming an otherwise large psychic distance). Experiential market-specific
knowledge of Latin America is rare in Australia and is therefore arguably even more
valuable in an individual. Possessing it facilitates in-depth understanding and
alleviates the challenges of internationalising in the region. An important finding of
my research, however, is that a lack of experiential market-specific knowledge prior
to market entry did not prevent firms in my sample from internationalising into Latin
America.
My findings illustrate other ways of acquiring the knowledge necessary for
internationalisation that also correlate with the knowledge conversion processes
described above. Deeper, tacit market-specific knowledge and understanding is also
available through external means. For example, in-country law firms and consultants
effectively ‘lease’ their experiential knowledge (and their network connections for
that matter) to foreign firms for a fee. For example, Case 4 has a close working
175
relationship with a prominent commercial law firm in Brazil; one of my interviewees
for this case was actually their Brazilian lawyer. Whilst perhaps not as good as first-
hand experiential knowledge, this second-hand knowledge acts as a substitute and
expedites market entry as well as helping to deal with the challenges of the region.
Furthermore, tacit market-specific and internationalisation knowledge and
understanding is transferable between firms when individuals transfer between firms
and when firms form partnerships. Highly skilled executives are frequently ‘head-
hunted’ for their knowledge, regardless of its type.120 In the case of
internationalisation the ‘hunted’ may be either a home country executive with
experiential knowledge of the region (as occurred in Case 7 and Case 8) or, more
commonly, a host country executive (as in Case 1, 2, 5 and 8).121 Particularly for
Cases 1, 2 and 5, hiring host country executives with extensive market-specific
knowledge was crucial to market success. Other firms in my study gained market-
specific knowledge by entering a joint venture or a similar partnership arrangement
with a local firm (Cases 1, 3, 8 and 9). International joint venture (IJV) literature
provides ample discussion on knowledge transfer in this context (Aguilera, 2007;
Dhanaraj, Lyles, Steensma, & Thianyi, 2004; Janczak, 2008; Lyles & Salk, 2006).
Hiring in or partnering with existing experiential knowledge is not a perfect substitute
for first-hand experiential knowledge. Communication barriers and organisational and
national cultural differences will impact on the transferability and interpretation of the
knowledge on offer. This caveat aside, my findings demonstrate that firms overcome
their initial lack of knowledge through these and other external means.
My research has consistently shown that a lack of understanding whether of the
language, the legal system or the economic and political reality amplifies psychic
distance and that increased understanding reduces it. This is broadly consistent with
the Uppsala model, however, my unique contribution is in demonstrating that
experiential learning is not the only way to achieve increased understanding. By
illustrating how Nonaka and Taeuchi’s (1995) four modes of knowledge conversion
120 For example, market, industry or process-specific knowledge. 121 A third country national with experiential market-specific knowledge is also a possibility although it did not occur in my sample firms.
176
apply to the internationalisation process my research contributes to a better
understanding of how firms acquire the knowledge necessary to overcome psychic
distance and, as a result make further commitments to international markets. Rather
than being dependant on experiential learning, market-specific knowledge pieced
together from external sources, or hired in, also facilitates internationalisation into
psychically distant countries. By using network connections to access market-specific
knowledge rather than gradually acquiring it through first-hand experience firms can
expedite their internationalisation. Moreover, networks fulfil a variety of other roles
that also facilitate internationalisation, as discussed below.
7.3 Networks The network perspective of internationalisation emerged in the 1980s and 1990s (e.g.
Bell, 1995; Blankenburg, 1995; Coviello & Munro, 1997; Johanson & Mattsson,
1985, 1988) and is considered both alternative and complementary to the
internationalisation process literature. Both perspectives explain the process by which
firms internationalise. The internationalisation process literature focuses on the
internal drivers of the process of internationalisation whereas the network perspective
highlights the context in which a firm operates and how external factors influence
internationalisation. In light of the complementarities of the two perspectives
numerous authors have called for their integration (Coviello & McAuley, 1999;
Coviello & Munro, 1997; Johanson & Vahlne, 2003; Lindbergh, 2005a). A recent
attempt at such integration is that of Johanson and Vahlne (2006) and my empirical
research complements their theorising. My research demonstrates that internal and
external factors work in conjunction to influence the internationalisation process of
firms. Furthermore, my findings illustrate that by leveraging network resources firms
can succeed in psychically distant markets in spite of a lack of experiential
knowledge. Networks have enabled Australian firms to succeed in Latin America
even though they lacked the cultural and social factors deemed so important by Galan
et al. (2007).
The network perspective suggests that a firm’s speed and path towards
internationalisation is largely dependent on its current position in networks (Axelsson
& Johanson, 1992; Johanson & Mattsson, 1988). The perspective suggests that by
177
providing access to particular resources and attenuating specific transaction costs
business networks can pull a firm down a particular internationalisation path into
particular markets (e.g. Belso-Martinez, 2006; Chetty & Campbell-Hunt, 2003;
D'Cruz & Rugman, 1996). The perspective further claims that network ties are path
dependent. The ties a firm has now are dependent on its past behaviour and network
locations and future ties will be influenced by current behaviour (Johanson &
Mattsson, 1988). Whilst my research categorically supports the influence of networks
on internationalisation, some previous literature in this area, particularly in relation to
flagship firms (Chetty & Campbell-Hunt, 2003; D’Cruz & Rugman, 1996; Holmlund
& Kock, 1998), gives the impression that firms are passive actors in their
internationalisation rather than active participants. On the contrary, in keeping with
Johanson and Mattsson’s (1985) early theorising, I demonstrate that rather than being
at the mercy of their networks when it comes to internationalisation, firms actively
invest in network assets that pay dividends later on. For example, by exploiting
network resources such as boundary spanners (Burt, 2004), firms can expedite their
internationalisation into new markets. Furthermore, firms also act in order to place
themselves in new beneficial networks. This is also consistent with Johanson and
Vahlne’s (2006) re-conceptualisation of the Uppsala model that emphasised the
potential for firms to manage the process of building social capital via networks.
Insofar as network configurations are largely beyond the firm’s control the network
perspective also introduces the element of chance into our thinking about
internationalisation. My findings suggest chance is particularly relevant in relation to
knowledge of initial opportunities, although this finding may have added emphasis in
my research given the limited knowledge about Latin American markets in Australia.
In Chapter 6 I classed ‘initial opportunity knowledge’ as a subset of business
knowledge. The way in which Cases 2, 3 and 9 (three of the smaller firms in my
sample) found out about market opportunities in Latin America all involved an
element of chance. For Cases 2 and 9 this chance information came from a business
network tie, whereas Case 3 obtained this knowledge through a social network
connection. Acknowledging this element of chance in learning about opportunities
does not refute the assertive role a firm plays in its own internationalisation.
Regardless of the element of chance, a firm must firstly be able to recognise an
178
opportunity when it sees one and secondly be willing to take of advantage of the
opportunities with which it is presented.
My results extend existing network perspective literature by emphasising the role
played not only by business networks but also institutional and social networks. My
findings suggest that rather than one particular network relationship dictating the
internationalisation processes of firms, the totality of network ties fulfil different roles
at different times to positively influence internationalisation, a finding explored in
more detail below. Using networks to facilitate internationalisation accelerates the
process in comparison to the traditional ‘trial and error’ method associated with
experiential learning.
My research makes a valuable contribution to our understanding of the
internationalisation process of firms as it explores all three types of networks
mentioned in previous literature as influencing internationalisation; business
networks, institutional networks and social networks. Most previous research
identified as part of the network perspective literature has focussed primarily on the
role of business networks in facilitating internationalisation (e.g. Bell, 1995; Chen &
Chen, 1998; Chetty and Campbell Hunt, 2003, 2004; Coviello & Munro 1997;
Guillen, 2002; Holmlund & Kock, 1998; Presutti, Boari & Fratocchi, 2007). To a
lesser extent, the roles of institutional networks (e.g. Blankenburg, 1995; Welch,
Welch, Wilkinson & Young, 1996; Welch, Welch, Young & Wilkinson, 1998) and
social networks (e.g. Ellis, 2000; Johanson & Vahlne, 2003; Wong & Ellis, 2002)
have also been explored.
In Chapter 6 I provide a detailed analysis of the specific types of business, social and
institutional networks that played a part in the internationalisation of ten Australian
firms and cross tabulated these types of networks with the roles they fulfil. In
systematically exploring the function of all three types of networks my research
contributes to the discussion taking place within the network perspective stream of
internationalisation research.
179
Types and Roles of Networks As illustrated in detail in Appendix 9 the three different types of networks fulfil a
variety of functions that aid internationalisation. I set out in this research primarily to
investigate the role of networks as alternative sources of knowledge that can substitute
for experience in bridging the psychic distance between a firm and a market. Whilst
my findings confirm the role of networks as conduits of knowledge they also reveal
numerous additional roles carried out by networks that serve to reduce psychic
distance and facilitate internationalisation.
Institutional Networks Institutional networks comprise trade promotion agencies, chambers of commerce,
industry associations, government bodies and other similar organisations. These
networks are easy for firms to tap into and are largely transparent. All firms have
access to institutional networks. The raison d’etat for many of the organisations in
institutional networks, particularly trade promotion agencies, is to help firms
internationalise. Despite this, at the beginning of their internationalisation process
several firms in my sample were unaware of the extent to which these networks
facilitate internationalisation. This finding reinforces the idea that part of the
internationalisation knowledge firms must acquire experientially is knowledge of the
importance of networks.
My research demonstrates that the primary functions of institutional networks are to
provide business and institutional knowledge, ‘unlock doors’, provide customers and
suppliers and help find employees and agents (see Table A.13, Appendix 10). These
roles are carried out in both the home and host markets. I suggest that institutional
networks are most influential prior to and at the time of market entry. Organisations in
these networks are literally the ‘first port of call’ for many firms. Via seminars and
networking events institutional networks raise awareness of new markets and provide
access to explicit as well as tacit knowledge about these markets.
By providing relatively easy access to market-specific knowledge and expertise
organisations in institutional networks help firms fast track their internationalisation.
At this stage of the internationalisation process the knowledge provided is often
surface level and yet the depth is clearly sufficient to help firms overcome the psychic
180
distance they experience. Institutional networks play a further role in helping firms to
overcome their psychic distance by brokering new relationships.
Business Networks Business networks include ties to suppliers, customers, competitors, joint-venture
partners, pioneering firms and internal ties to parent companies as well as other
divisions. All firms are embedded in multiple business networks. Unlike institutional
networks, business networks are opaque and each firm’s configuration of networks is
unique. This implies that unlike institutional networks, from which all firms have the
potential to benefit equally, firms will benefit to differing extents from their unique
configurations of business networks. As a result, business networks have the potential
to provide ownership advantages (Dunning, 1995).
My research demonstrates that business networks fulfil slightly different roles to
institutional networks. Like institutional networks, business networks are an important
source of knowledge, specifically business knowledge and knowledge of
opportunities (see Table A.14, Appendix 10). More importantly however, business
networks provide reassurance and comfort prior to and after market entry. I suggest
there are two sources for this comfort. Firstly, ‘pioneering’ firms in the market
provide a demonstrator effect that signals to new firms that market entry is worth
considering. The sentiment is that ‘if XYZ firm can do it, then we can do it too’. This
demonstrator effect serves to reduce perceived psychic distance. Secondly,
reassurance and comfort comes from the depth of business knowledge provided
through business networks. Through these networks firms gain access to more
detailed industry-specific knowledge which complements the broader surface level
knowledge they obtain through institutional networks. Sharing knowledge through
business networks enables firms to co-opt the experiential learning of others. Learning
in this way expedites internationalisation beyond the gradual pace theorised in the
Uppsala model.
Social Networks The third type of networks that impact internationalisation, social networks, have
been underrepresented in network perspective research to date. Social networks differ
from institutional and business networks in that they are informal and exist at the
181
individual level rather than the firm level. For this reason social networks are unique
to each individual and tend to prove purposeful ex-post rather than ex-ante.
Unlike institutional and business networks, social networks do not play a primary role
in knowledge sharing; instead my findings indicate that social network ties provide
access to new networks by ‘unlocking doors’ and helping to establish trust, both in the
firm by providing credibility and ‘reputation by association’ and in the market by
providing reassurance and comfort. Establishing trust is of particular importance in
Latin American markets for historical reasons discussed in Sections 2.4 and 6.4. Host
country executives’ reputations in social networks helps new foreign firms establish
credibility and trustworthiness with potential customers. In my research this situation
occurred in Case 2 and Case 5. Trust in the market also comes about via social
network connections. For example, Case 7 was confident internationalising into Chile
because it could call upon a trusted ex-employee who already lived in Chile to head
up the subsidiary. Previous research has also alluded to the importance of executives’
personal networks in bridging psychic distance in this manner (Child et al., 2003,
p.50).122
Earning Trust via Networks Building up social capital in networks, helps firms establish their trustworthiness in
new markets. Establishing trustworthiness is more difficult for SMEs than it is for
large MNCs as SMEs lack a global reputation and are therefore unknown in the new
foreign market. As one interview participant explained, at the most basic level
customers need to trust that the firm will be in the market in the long-term. My results
indicate that social network connections are most effective in establishing this trust (in
particular family ties). However, ties to government and ties to customers (the former
an example of an institutional network tie and the latter a business network tie) also
help establish trustworthiness. My research provides numerous examples of the
variety of network ties that help firms earn trust (see Appendix 9). This idea of
‘reputation by association’ is consistent with Belso-Martinez’s (2006) hypothesis on
the role of networks in helping firms to gain legitimacy.
122 Unlike my research, Child et al. (2003) did not explicitly explore the role of networks in bridging psychic distance, rather this finding was a minor point in a broader study on psychic distance.
182
I propose that the role of trust in business relationships is more significant in
environments with weak institutions, such as Latin America. My findings suggest that
establishing trust through networks mitigates risk and attenuates transaction costs by
reducing uncertainties. Reid (2007, p.46) suggests that institutions, defined as rules
expressed in or applied by organisations, serve to reduce uncertainties and transaction
costs in human exchange. I would argue however that in the absence of reliable
institutions trust established via networks fulfils the role of reducing uncertainties and
transaction costs. The importance of networks in fulfilling this role emerges when we
consider that it takes 45 procedures and 616 days to enforce a contract in Brazil, and
Brazil is far from Latin America’s worst performer (World Bank, 2007).123 In contrast
enforcing a contract in Australia involves less than half the procedures and a third of
the time (World Bank, 2006). In this context, avoiding breach of contract is
paramount to minimising costs. I suggest that a breach of contract is less likely to
occur when a business relationship is founded on trust established via network
connections. To this end my results concur with those of other authors whose work
explored the role of networks in China and Russia (Batjargal, 2007; Guseva & Rona-
Tas, 2001). I propose that in an environment characterised by weak institutions the
negative impact of opportunistic behaviour on one’s reputation within a network is a
greater deterrent to such behaviour than the threat of legal recourse.
Summary It is clear that all firms are embedded in multiple business, institutional and social
networks and each firm’s configuration of these networks is unique. My findings
demonstrate that networks help firms overcome the psychic distance they experience
and facilitate successful internationalisation. Network ties enable a firm to fast track
its internationalisation process. Accordingly, the ability to leverage network ties to
maximise access to opportunities and knowledge could be considered a source of
competitive advantage. I theorise that networks have a greater effect on
123 It takes 1,346 days to enforce a contract in Colombia.
183
internationalisation at early stages of market entry when experiential market-specific
knowledge is most lacking and the liability of foreignness is greatest.124
7.4 Theoretical Contributions and Directions for Future Research My research adds to the body of knowledge about how firms internationalise and has
several theoretical implications for the behavioural and relationship schools of
international business research. First, my research contributes to the emerging
literature attempting to integrate the existing internationalisation process and network
perspective literatures and suggests a way forward for future research in
internationalisation. My findings demonstrate how in the 21st century some firms
internationalise at speeds and in directions that are at odds with the Uppsala model of
internationalisation. My research, like that of Johanson and Vahlne (2006), responds
to the chorus of calls (e.g. Coviello & McAuley, 1999; Coviello & Munro, 1997;
Johanson & Vahlne, 2003; Lindbergh, 2005a) for the integration of the stage models
and the network perspective and provides us with a more holistic understanding of the
internationalisation process. This is particularly significant given the increasing
involvement in FDI of SMEs from non-traditional (i.e. non-triad) markets. My
research contributes to our understanding of how these firms are able to compete in
the integrated global economy.
Second, my research contributes to the current discussion on the need for better
definition and measurement of the psychic distance construct (e.g. Brewer, 2007a;
Dow & Karunaratna, 2006; Evans & Mavondo, 2002; Evans et al., 2000; Stottinger &
Schlegelmilch, 2000). In contrast with much previous psychic distance research (see
Table 3.1), my findings clearly demonstrate the need for a reduced emphasis on
culture in measurement of the construct. At best, culture is one of several psychic
distance stimuli that affect perceived psychic distance. My research findings suggest
that geography, language and institutional factors are more prominent psychic
distance stimuli than culture. My research has also highlighted the non-equivalence of
psychic distance stimuli in contributing to perceived psychic distance thus building on
the work of Dow and Karunaratna (2006) and Brewer (2007a). Furthermore, my
124 My research demonstrates that the liability of foreignness is twofold relating to both a lack of market-specific knowledge and a lack of social capital in host country markets.
184
research raises questions about the impact of the various psychic distance stimuli on
perceived psychic distance to different markets. My contributions in relation to the
psychic distance construct resonate beyond the field of internationalisation research as
the construct is also popular in marketing research (e.g. Conway & Swift, 2000; Dow,
2001; Evans & Bridson, 2005; Sousa & Bradley, 2005).
Third, my research makes further contributions to the internationalisation process
literature in relation to experiential knowledge. Contrary to the emphasis on direct
experience inherent in the Uppsala model (Johanson & Vahlne, 1977, 2003), my
research demonstrates that market-specific business and institutional knowledge is
often explicit rather than tacit and can be acquired through non-experiential means.
Moreover, my research provides examples of the transfer of tacit market-specific
knowledge via externalisation and socialisation in networks further challenging the
non-transferability of such knowledge. My findings in this regard build on the work of
Eriksson et al. (2000) and Lindbergh (2005b). According to my findings,
internationalisation knowledge, on the other hand, is highly tacit and is not frequently
transferred between firms via networks.
Fourth, my research advances existing network perspective literature. By
systematically exploring the roles of business, institutional and social networks in the
internationalisation processes of firms my research contributes to a broader
understanding of the external drivers of the process of internationalisation. In contrast,
previous network perspective research has focussed primarily on the impact of
business networks on internationalisation (e.g. Blankenburg Holm, Eriksson, &
Johanson, 1996; D'Cruz & Rugman, 1996; Forsgren et al., 2005). My research
documents in detail the specific types of business, institutional and social networks
that facilitate internationalisation and the diverse roles these networks play. My
findings demonstrate that not only do network relationships supplement direct
experience in the acquisition of knowledge but they also simultaneously fulfil a
number of other roles that reduce psychic distance and expedite internationalisation.
In light of the theoretical contributions of my research, several directions for future
research emerge. One area of research worth pursuing is to explore the relative impact
of psychic distance stimuli on perceived psychic distance to different regions. This
185
could be done in the Australian context by exploring the internationalisation of
Australian firms to multiple regions. Such an approach would build on my research.
Alternatively, the relative importance of psychic distance stimuli could also be
investigated for firms from a different home country.
Keeping to the Australia-Latin American context, another worthy avenue of research
would be to study the perceived psychic distance of Latin American firms to
Australia. Although not a specific focus of my research, my interviews with Latin
American participants revealed a comparable lack of awareness about the Australian
business environment to that held by Australian participants in relation to Latin
America.125 Latin American FDI in Australia is an increasing phenomenon126 and fits
the description of FDI to and from non-traditional markets.
Finally, further exploration is warranted of the specific roles played by different types
of networks in facilitating internationalisation. A larger quantitative study could be
carried out to test the generalisability of my findings in this area. The inclusion of
multiple regions of the world in the study would be valuable to explore region-
specific differences in the importance of networks to internationalisation and the roles
that they play.
7.5 Practical Implications of the Study My research findings have several practical implications that warrant discussion in
this dissertation. A detailed report focusing on the practical implications of my
research has been supplied to the Council on Australia Latin American Relations in
return for sponsorship of my fieldwork. First, my findings illustrate that a lack of first-
hand knowledge does not prevent firms from internationalising to a particular market.
Despite the fact that most of my case study firms lacked experiential knowledge of
Latin America prior to market entry they still entered the region and, by their own
accounts, have been successful. The example set by these firms can provide a
demonstrator effect for other Australian firms. This effect applies particularly in
125 This lack of awareness existed prior to involvement with an Australian firm, of course. 126 Recent high profile examples include Conymet’s (Chile) acquisition of Duratray from Pacific Dunlop in 2001, and JBS Friboi’s (Brazil) acquisition of Swift and Company (Australia’s largest meat processor) in 2007.
186
relation to Latin American markets but is also relevant in general terms,
demonstrating that firms can draw on knowledge resources beyond the boundaries of
the firm to aid internationalisation. My findings illustrate that drawing knowledge
from network connections can fast track the internationalisation process.
Second, networks affect the internationalisation of firms in a variety of other ways.
For example, drawing on networks to aid internationalisation enables firms to ‘punch
above their weight-class’ in global markets. This implication is particularly significant
for SMEs who have limited internal resources in comparison to larger firms. All firms
have access to a variety of institutional, business and social networks that facilitate
internationalisation. Firms need to be aware of roles networks play and should
actively tap into these external resources prior to and during market entry. Firms’
internationalisation capabilities are enhanced through strategic use of network
resources.
Third, my research demonstrates that internationalisation is a learning process that
changes the way decision makers see the world. Acquiring internationalisation
knowledge through experience in overseas markets helps firms reduce their psychic
distance to all overseas markets. This fact is particularly highlighted by Case 2 and
Case 3, two of the smaller case studies in my research. Some decision makers within
these firms struggled initially to see the value of internationalising (Case 2 in relation
to the Philippines and Case 3 in relation to Brazil). Through the process of engaging
with these markets both firms learnt how to deal with the challenges of
internationalisation and gained the confidence to enter new overseas markets.
The fourth practical implication of my research is aimed at actors in institutional
networks, namely governments, chambers of commerce and similar organisations.
Whilst knowledge of Latin America in the Australian business community is
improving, the lack of awareness about the region continues to be the number one
barrier to increased Australian involvement.127 I urge institutional actors (both
Australian and Latin American) not to be disheartened by the naivety of the
stereotypical views about Latin America initially held by many of my interview 127 The recent signing of the Australia-Chile FTA on 30 August 2008 raises the profile of the region even further.
187
participants. In discussing my research findings with one such actor I was asked ‘but
are Australian firms really that stupid?’128 I do not think it is a question of stupidity
but rather bounded rationality. Encouragingly, this limitation can be overcome
through learning. My findings clearly illustrate that further work needs to be done in
drawing attention to the opportunities available in Latin American markets and yet the
good news is that inaccurate stereotypical views are quickly debunked when decision
makers travel to the region and see these markets first hand. Further hope for
increased awareness and understanding also lies in the increasing exchange of
students between Latin America and Australia.
7.6 Limitations of the Study McGrath (1982, p.70) argues that ‘all research strategies and methods are seriously
flawed’. Rather than pessimistic, he considers this realistic, and sees no merit in
pretending any research can produce non-contingent results. With this in mind, it is
important that I address the contextual and methodological limitations of my research.
My research context consisted of Australian firms investing in Latin America. Due to
time and financial constraints I focused my research on three markets, Brazil, Chile
and Mexico. These countries account for the majority of Australian investment in the
region. Jones (2004) warns against labelling single-country research ‘Latin
American’. Whilst I acknowledged the danger of oversimplifying the cultural and
institutional differences between Latin American countries I feel my key findings are
broadly applicable to the wider region. Specifically, my findings in relation to the
stimuli fuelling the perceived psychic distance of Australian firms and the challenges
Australian firms face in the region as well as the roles played by institutional,
business and social networks are applicable to other Latin American markets.
My research findings are limited however in their generalisability to other regions of
the world. In particular, as I discuss in Section 7.1 it is likely that the impact of
psychic distance stimuli on perceived psychic distance will vary for different regions
or countries. For example, the primacy of geographic distance as a stimulus for
Australian firms’ psychic distances to Latin America is unlikely to be repeated for 128 See comments in Section 7.3 about burros, bandits, cocaine, and soccer stars etc.
188
Australian firms’ psychic distances to Asian countries. Furthermore, my findings say
nothing of the psychic distance stimuli that fuel the perceived psychic distances of
non-Australian firms. Consequently, my findings in this area are limited to the
Australia-Latin America context. In other areas my research findings are more
broadly applicable, however. For example, I theorise that the roles that networks
played in facilitating internationalisation for my ten Australian case study firms would
also apply for firms from different home countries. Previous research upon which my
study builds has demonstrated the role of networks in internationalisation for firms
from more than ten different countries (see Tables 3.4 and 3.5).
Limitations associated with my research design and methods of data collection are
addressed at length in Chapter 4. In this research I used a multiple-case study
approach based on in-depth semi-structured interviews. Accordingly, the number of
firms in my sample was limited to ten. The small sample size raises questions about
the generalisability of my research. Furthermore, I was only able to study firms and
interview key informants that agreed, or were available, to participate. It is possible
that including different firms in my sample would have produced different results.
This is particularly true with regards to market attractiveness. Despite some
difficulties experienced, all my case study firms considered their Latin American
operations successful. Undoubtedly, however, there are other Australian firms that
have attempted to enter the region and that have been unsuccessful. It would have
been difficult to detect these firms and to persuade them to participate in the study.
Exclusion of such firms, however, runs the risk of overstating the attractiveness of the
region and the opportunities for success and as such is a limitation of my study.
It is also possible that had a different researcher conducted the interviews different or
more nuanced data would have been obtained. For this reason qualitative research is
sometimes criticised as subjective (Lincoln & Guba, 1985). In order to minimise
subjectivity in my data collection and analysis I adhered to Lincoln and Guba’s (1985,
pp.289-331) guidelines for ‘establishing trustworthiness’. This involved the use of
triangulation, member checks and an inquiry audit to ensure the credibility,
dependability and confirmability of my research findings.
189
7.7 Concluding Remarks The aim of this study was to explore the internationalisation of Australian firms in
Latin America in order to understand why and how some firms have been successful
in entering the region when the majority of Australian-based international firms have
not ventured in that direction. My research extends the growing body of literature on
the internationalisation of Australian firms, much of which has focused on the Asia-
Pacific region. There is no previous research on Australian firms in Latin America
and as a result my study broadens the scope of our understanding of Australian
internationalisation.
I explored the phenomenon of Australian FDI in Latin America using an integrated
framework comprising constructs drawn from the behavioural and relationship
schools of internationalisation research. My research demonstrates that experiential
learning is not the only way for firms to gain the knowledge necessary for
internationalisation. In reality, firms use a combination of internal and external
sources to learn about foreign markets. Both internal and external resources help
reduce the psychic distance between a firm and a market. Using external resources
rather than waiting for the accumulation of internal resources expedites the
internationalisation process and facilitates internationalisation to psychically distant
markets. The conceptual framework I developed in this research provides a better
explanation of Australian investment in Latin America than that provided by either
the Uppsala model or the network perspective in isolation.
My research expands our understanding of the internationalisation process of firms
and explains how firms from a non-traditional home market have succeeded in
investing in non-traditional hosts. This is a phenomenon we will continue to see more
of as the global economy becomes ever more integrated.
190
191
References
12 headless corpses found. (2008, 29 August). The Australian.
Achterholt, U., & Walter, L. (2006). Manufacturing in Argentina, Brazil and Chile: Challenges and opportunities: KPMG.
Aguilera, R. V. (2007). Translating Theoretical Logics across Borders: Organizational Characteristics, Structural Mechanisms and Contextual Factors in International Alliances: Commentary. Journal of International Business Studies, 38(1), 38-46.
Andersen, O. (1993). On the internationalization process of firms: A critical analysis. Journal of International Business Studies, 24(2), 209-231.
Anderson, J. C., Hakansson, H., & Johanson, J. (1994). Dyadic business relationships within a business network context. Journal of Marketing, 58, 1-15.
Andersson, S. (2000). The Internationalization of the firm from an entrepreneurial perspective. International Studies of Management and Organization, 30(1), 63-92.
APEC. (n.d.). Member economies FTA/RTA information. Retrieved 14/11/07, from http://www.apec.org/webapps/fta_rta_information.html
Australian Bureau of Statistics. (2005). Unpublished data on Australian outward foreign affiliates trade. Canberra: Commonwealth of Australia.
Australian Bureau of Statistics. (2006a). 2006 Census. Canberra: Commonwealth of Australia.
Australian Bureau of Statistics. (2006b). Unpublished data on Australian FDI. Canberra: Commonwealth of Australia.
Australian Bureau of Statistics. (2007a). Household income and income distribution. Commonwealth of Australia: Commonwealth of Australia.
Australian Bureau of Statistics. (2007b). Unpublished 2006 census data on occupation. Canberra: Commonwealth of Australia.
Australian Bureau of Statistics. (2007c). Unpublished data on short-term visitor movements. Canberra: Commonwealth of Australia.
Australian Education International. (2007). Monthly summaries of international student enrolment data (Publication. Retrieved 19/11/2007: http://www.aei.gov.au/Aei/Default.aspx
Axelsson, B., & Johanson, J. (1992). Foreign market entry - the textbook vs. the network view. In B. Axelsson & G. Easton (Eds.), Industrial Networks: A New View of Reality (pp. 218-234). London: Routledge.
Baker, W. (2000). Achieving success through social capital: tapping the hidden resources in your personal and business networks. San Francisco: Jossey-Bass.
192
Barkema, H. G., Bell, J. H. J., & Pennings, J. M. (1996). Foreign entry, cultural barriers and learning. Strategic Management Journal, 17(2), 151-166.
Batjargal, B. (2007). Network triads: transitivity, referral, and venture capital decisions in China and Russia. Journal of International Business Studies, 38(6), 998-1012.
Baynes, P. (2008, 3-4 April). Winning in Latin America: The PGG Wrightson story. Paper presented at the Excellence in Investment: Latin America Conference, Hilton Hotel, Sydney.
Bazeley, P. (2007). Qualitative data analysis with NVivo. London: Sage.
Beamish, P. W. (1990). The Internationalisation process for smaller Ontario firms: A research agenda. In A. M. Rugman (Ed.), Research in global strategic management - International business research for the twenty-first century: Canada's new research agenda (pp. 77-92). Greenwich: JAI Press Inc.
Becker, T. H. (2004). Doing business in the new Latin America: A guide to cultures, practices, and opportunities. Westport: Praeger.
Beckerman, W. (1956). Distance and the pattern of inter-European trade. The Review of Economics and Statistics, 38(1), 31-40.
Bell, J. (1995). The internationalization of small computer software firms: A further challenge to "stage" theories. European Journal of Marketing, 29(8), 60-75.
Belso-Martinez, J. A. (2006). Why are some Spanish manufacturing firms internationalizing rapidly? The role of business and institutional international networks. Entrepreneurship & Regional Development, 18(3), 207-226.
Benito, G. R. G., & Gripsrud, G. (1992). The expansion of foreign direct investments: Discrete rational location choices or a cultural learning process? Journal of International Business Studies, 23(3), 461-476.
Bergstrand, J. H. (1989). The generalised gravitation equation, monopolistic competition and the factor proportions theory in international trade. Review of Economics and Statistics, 71(1), 143-153.
Bilkey, W. J., & Tesar, G. (1977). The export behaviour of small-size Wisconsin manufacturing firms. Journal of International Business Studies, Spring/Summer, 93-98.
Bjorkman, I., & Forsgren, M. (2000). Nordic international business research: A reveiw of its development. International Studies of Management and Organization, 30(1), 6-25.
Blankenburg, D. (1995). A network approach to foreign market entry. In K. Moller & D. Wilson (Eds.), Business marketing: An interaction & network perspective. Norwell, Massachusetts: Kluwer Academic.
Blankenburg Holm, D., Eriksson, K., & Johanson, J. (1996). Business networks and cooperation in international business relationships. Journal of International Business Studies, 27(5), 1033-1053.
193
Brewer, P. A. (2007a). Operationalizing psychic distance: A revised approach. Journal of International Marketing, 15(1), 44-66.
Brewer, P. A. (2007b). Psychic distance and Australian export market selection. Australian Journal of Management, 32(1), 73-94.
Brewer, P. A., & Sherriff, G. (2007). Is there a cultural divide in Australian international trade? Australian Journal of Management, 32(1), 113-134.
Brown, C., & Rennert, P. (Eds.). (2001). Doing business in Brazil: An introductory guide. Canberra: Commonwealth of Australia.
Brown, S. L., & Eisenhardt, K. M. (1997). The art of continuous change: linking complexity theory and time-paced evolution in relentlessly shifting organisations. Administrative Science Quarterly, 42, 1-34.
Buckley, P. J., & Casson, M. C. (1998). Analyzing foreign market entry strategies: Extending the internalization approach. Journal of International Business Studies, 29(3), 539-561.
Bulmer-Thomas, V., Coatsworth, J. H., & Cortes Conde, R. (Eds.). (2006). The Cambridge economic history of Latin America (Vol. 2). Cambridge: Cambridge University Press.
Bureau of Industry Economics. (1984). Australian direct investment abroad: effects on the Australian economy. Canberra: Australian Government Publishing Service.
Burt, R. (2004). Structural holes and good ideas. The American Journal of Sociology, 110(2), 349-399.
Busenitz, L. W., Gomez, C., & Spencer, J. W. (2000). Country institutional profiles: Unlocking entrepreneurial phenomena. Academy of Management Journal, 43(5), 994-1011.
Cavusgil, S. T. (1984). Differences among exporting firms based on their degree of internationalisation. Journal of Business Research, 12, 195-208.
Chen, H., & Chen, T. (1998). Network linkages and location choice in foreign direct investment. Journal of International Business Studies, 29(3), 445-468.
Chetty, S., & Blankenburg Holm, D. (2000). Internationalisation of small to medium-sized manufacturing firms: a network approach. International Business Review, 9, 77-93.
Chetty, S., & Campbell-Hunt, C. (2003). Paths to internationalisation among small-to medium sized firms: A global versus regional approach. European Journal of Marketing, 37(5/6), 796-820.
Chetty, S., & Campbell-Hunt, C. (2004). A strategic approach to internationalization: A traditional versus a "born-global" approach. Journal of International Marketing, 12(1), 57-81.
194
Child, J., Ng, S. H., & Wong, C. (2003). Psychic distance and internationalization: Evidence from Hong Kong firms. International Studies of Management, 32(1), 36-56.
CIA. (n.d.). The world factbook. Retrieved 1/11/2007, from https://www.cia.gov/library/publications/the-world-factbook/index.html
Coleman, J. S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94(5), 95-121.
Conway, T., & Swift, J. S. (2000). International relationship marketing. European Journal of Marketing, 34(11/12), 1391-1413.
Cook, K., & Emerson, R. M. (1978). Power, equity and commitment in exchange networks. American Sociological Review, 43(October), 721-738.
Council on Australia-Latin America Relations. (2005). Strategic plan 2004-07. Retrieved 14/11/2005, from http://www.dfat.gov.au/coalar/coalar_purpose.html
Coviello, N., & McAuley, A. (1999). Internationalisation and the smaller firm: A review of contemporary empirical research. Management International Review, 39(3), 223-256.
Coviello, N., & Munro, H. (1997). Network relationships and the internationalization process of small software firms. International Business Review, 6(4), 361-386.
Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs: Prentice Hall.
Czinkota, M. R. (1982). Export development strategies: US promotional polices. New York: Praeger.
D'Cruz, J., & Rugman, A. M. (1996). Business networks for international competitiveness. In A. M. Rugman (Ed.), The selected scientific papers of Alan M. Rugman. Cheltenham, UK: Edward Elgar.
Daniels, J. D., & Cannice, M. V. (2004). Interview studies in international business research. In R. Marschan-Piekkari & C. Welch (Eds.), Handbook of qualitative research methods for international business (pp. 185-206). Cheltenham: Edward Elgar.
Davidson, W. H. (1980). The location of foreign direct investment activity: Country characteristics and experience effects. Journal of International Business Studies, 11(2), 9-22.
Department of Foreign Affairs and Trade. (1993). Composition of trade Australia 1992-1993. Canberra: Commonwealth of Australia.
Department of Foreign Affairs and Trade. (1996). Composition of trade Australia 1995-1996. Canberra: Commonwealth of Australia.
Department of Foreign Affairs and Trade. (2000). Doing business in Latin America: An introductory guide. Canberra: Commonwealth of Australia.
195
Department of Foreign Affairs and Trade. (2001a). Composition of trade Australia 2000-2001. Canberra: Commonwealth of Australia.
Department of Foreign Affairs and Trade. (2001b). Investing in Latin American growth: Unlocking opportunities in Brazil, Mexico, Argentina and Chile. Canberra: Commonwealth of Australia.
Department of Foreign Affairs and Trade. (2004). Composition of trade Australia 2003-2004. Canberra: Commonwealth of Australia.
Dey, I. (1993). Qualitative data analysis: A user friendly guide for social scientists. London: Routledge.
Dhanaraj, C., Lyles, M. A., Steensma, H. K., & Thianyi, L. (2004). Managing tacit and explicit knowledge transfer in IJVs: The role of relational embeddedness and the impact on performance. Journal of International Business Studies, 35(5), 428-442.
Dichtl, E., Koeglmayr, H.-G., & Mueller, S. (1990). International orientation as a precondition for export success. Journal of International Business Studies, 21(1), 23-40.
Dick, H., & Merrett, D. (2007a). Introduction. In H. Dick & D. Merrett (Eds.), The internationalisation strategies of small-country firms: The Australian experience of globalisation (pp. 3-17). Cheltenham, UK: Edward Elgar.
Dick, H., & Merrett, D. (Eds.). (2007b). The internationalisation strategies of small-country firms: The Australian experience of globalisation. Cheltenham, UK: Edward Elgar.
Dow, D. (2000). A note on psychological distance and export market selection. Journal of International Marketing, 8(1), 51-64.
Dow, D. (2001). The adaptation of host market positioning strategies: Empirical evidence on Australian exporters. Journal of International Marketing, 9(3), 41-62.
Dow, D., & Karunaratna, A. (2006). Developing a multidimensional instrument to measure psychic distance stimuli. Journal of International Business Studies, 37(5), 578-602.
Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. Journal of International Business Studies, 11, 9-31.
Dunning, J. H. (1988). The eclectic paradigm Of international production - A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1-31.
Dunning, J. H. (1995). Reappraising the eclectic paradigm in an age of alliance capitalism. Journal of International Business Studies, 26(3), 461-492.
Easterby-Smith, M., Thorpe, R., & Lowe, A. (2002). The philosophy of research design. In M. Easterby-Smith, R. Thorpe & A. Lowe (Eds.), Management research: An introduction (pp. 27-57). London: Sage.
196
ECLAC. (2006). Latin America and the Caribbean in the World Economy: 2007 Trends. Mexico City: United Nations.
ECLAC. (2007a). Foreign investment in Latin America and the Caribbean 2006. Santiago, Chile: United Nations.
ECLAC. (2007b). Social panorama of Latin America 2006. Santiago, Chile: United Nations Publications.
Eisenhardt, K. M. (1991). Better stories and better constructs: the case for rigor and comparative logic. Academy of Management Review, 16(3), 620-627.
Ellis, P. (2000). Social ties and foreign market entry. Journal of International Business Studies, 31(3), 443-469.
Eriksson, K., Johanson, J., Majkgard, A., & Sharma, D. D. (1997). Experiential knowledge and cost in the internationalization process. Journal of International Business Studies, 28(2), 337-360.
Eriksson, K., Johanson, J., Majkgard, A., & Sharma, D. D. (2000). Effect of variation on knowledge accumulation in the internationalization process. International Studies of Management and Organization, 30(1), 26-44.
Eriksson, K., Majkgard, A., & Sharma, D. D. (2000). Path dependence and knowledge development in the internationalization process. Management International Review, 40(4), 307-328.
Erramilli, M. K. (1991). The experience factor in foreign market entry behavior of service firms. Journal of International Business Studies, 22(3), 479-501.
Evans, J., & Bridson, K. (2005). Explaining retail offer adaptation through psychic distance. International Journal of Retail & Distribution Management, 33(1), 69-78.
Evans, J., & Mavondo, F. (2002). Psychic distance and organizational performance: An empirical examination of international retailing operations. Journal of International Business Studies, 33(3), 515-532.
Evans, J., Treadgold, A., & Mavondo, F. (2000). Comment: Explaining export development through psychic distance. International Marketing Review, 17(2/3), 164-168.
Export Finance and Insurance Corporation. (2008). EFIC Global Readiness Index: National results report. Canberra: Commonwealth of Australia.
Fiol, M. and Lyles, M. A. (1985). Organizational learning. The Academy of Management Review, 10(4), 803-813.
Fletcher, R., & Bohn, J. (1998). The impact of psychic distance on the internationalisation of the Australian firm. Journal of Global Marketing, 12(2), 47-68.
Forsgren, M., Holm, U., & Johanson, J. (2005). Managing the embedded multinational: a business network view. Cheltenham, UK: Edward Elgar.
197
Gabrielsson, M., Kirpalani, V. H. M., Dimitratos, P., Solberg, C. A., & Zucchella, A. (2008). Born globals: Propositions to help advance the theory. International Business Review, 17, 385-401.
Galan, J. I., Gonzalez-Benito, J., & Zuniga-Vincente, J. A. (2007). Factors determining the location decisions of Spanish MNEs: an analysis based on the investment development path. Journal of International Business Studies, 38(6), 975-997.
Gaur, A. S., Delios, A., & Singh, K. (2005). Institutional environments, staffing strategies and subsidiary performance: Lessons from Japanese MNCs. Paper presented at the 2005 Academy of Management Conference, Honolulu, United States of America.
Geraci, V. J., & Prewo, W. (1977). Bilateral trade flows and transport costs. Review of Economics and Statistics, 59(1), 64-74.
Ghauri, P. N. (2004). Designing and conducting case studies in international business research. In R. Marschan-Piekkari & C. Welch (Eds.), Handbook of qualitative research methods for international business (pp. 109-124). Cheltenham: Edward Elgar.
Ghemawat, P. (2001). Distance still matters: the hard reality of global expansion. Harvard Business Review, September, 137-147.
Granovetter, M. S. (1973). The strength of weak ties. American Journal of Sociology, 78(6), 1360-1380.
Grosse, R., & Goldberg, L. G. (1991). Foreign bank activities in the United States: An analysis by country of origin. Journal of Banking and Finance, 15(December), 1093-1112.
Grosse, R., & Trevino, L. (1996). Foreign direct investment in the United States: An analysis by country of origin. Journal of International Business Studies, 27(1), 139-155.
Gruber, W. H., & Vernon, R. (1970). The technology factor in a world trade matrix. In R. Vernon (Ed.), The technology factor in international trade (pp. 233-272). New York: Colombia University Press.
Guillen, M. F. (2002). Structural inertia, imitation and foreign expansion: South Korean firms and business groups in China, 1987-95. Academy of Management Journal, 45(3), 509-525.
Guseva, A., & Rona-Tas, A. (2001). Uncertainty, risk and trust: Russian and American credit card markets compared. American Sociological Review, 66(5), 623-646.
Hadjikhani, A., & Ghauri, P. (2001). The behaviour of international firms in socio-political environments in the European Union. Journal of Business Research, 52(3), 263-275.
Hartley, J. F. (1994). Case studies in organisational research. In C. Cassell & G. Symon (Eds.), Qualitative methods in organisational research: A practical guide (pp. 208-229). London: Sage.
198
Harzing, A. W. K. (2004). The role of culture in entry-mode studies: From neglect to myopia? Advances in International Management, 15, 75-127.
Hirsch, Z., & Lev, B. (1973). Trade and per capita income differentials: A test of the Burenstam-Linder hypothesis. World Development, 1(9), 11-17.
Hofstede, G. (1980). Culture's consequences: International differences in work-related values. London: Sage.
Hofstede, G. (1994). The business of international business is culture. International Business Review, 3(1), 1-13.
Hofstede, G. (2001). Culture's consequences, comparing values, behaviors, institutions and organisations across nations (2nd ed.). Thousand Oaks: Sage.
Holmlund, M., & Kock, S. (1998). Relationships and the internationalisation of Finnish small and medium-sized companies. International Small Business Journal, 16(4), 46.
Holzmuller, H. H., & Kasper, H. (1990). The decision-maker and export activity: A cross-national comparison of the foreign orientation of Austrian managers. Management International Review, 30(3), 217-230.
House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., & Gupta, V. (2004). Culture, leadership, and organizations: The globe study of 62 societies. Thousand Oaks: Sage.
Huber, G. P. (1991) Organizational learning: The contributing processes and the literatures. Organization Science, 2(1), 88-115.
Hutzschenreuter, T., Pedersen, T., & Volberda, H. W. (2007). The role of path dependency and managerial intentionality: A perspective on international business research. Journal of International Business Studies, 38(7), 1055-1068.
Hymer, S. (1960). The international operations of national firms: A study of direct investment. Unpublished PhD, Massachusetts Institute of Technology, Boston.
Jackson, D. (1976). Jackson personality inventory. New York: Research Psychologists Press.
Janczak, S. (2008). Knowledge and Learning in Strategic Alliances: How to Learn with Cooperation. Problems and Perspectives in Management, 6(1), 39-47.
Johanson, J., & Mattsson, L.-G. (1985). Marketing investment and market investments in industrial networks. International Journal of Research in Marketing, 2, 185-195.
Johanson, J., & Mattsson, L.-G. (1988). Internationalization in industrial systems - A network approach In N. Hood & Vahlne, J.-E. (Eds.), Strategies in Global Competition (pp. 287-314). Beckenham, UK: Croom Helm
Johanson, J., & Sharma, D. D. (1987). Technical consultancy in internationalization. International Marketing Review, 4, 20-29.
199
Johanson, J., & Vahlne, J.-E. (1977). The internationalization process of the firm - A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, Spring 1977(8), 23-31.
Johanson, J., & Vahlne, J.-E. (1990). The mechanism of internationalization. International Marketing Review, 7(4), 11-24.
Johanson, J., & Vahlne, J.-E. (2003). Business relationship learning and commitment in the internationalization process. Journal of International Entrepreneurship, 1(1), 83-101.
Johanson, J., & Vahlne, J.-E. (2006). Commitment and opportunity development in the internationalization process: a note on the Uppsala internationalization process model. Management International Review, 46(2), 165-178.
Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalization of the firm: Four Swedish cases. Journal of Management Studies, 12(October), 305-322.
Joint Standing Committee on Foreign Affairs Defence and Trade. (2000). Building Australia's trade and investment relationship with South America: Commonwealth of Australia.
Jones, G. (1996). The evolution of international business: An introduction. London: Routledge.
Jones, V. (2004). The rhythms of Latin America: A context and guide for qualitative research. In R. Marschan-Piekkari & C. Welch (Eds.), Handbook of qualitative research methods for international business (pp. 439-457). Cheltenham: Edward Elgar.
Kim, J.-B., & Rhee, D. (2001). The relationship between psychic distance and foreign direct investment decisions: A Korean study. International Journal of Management, 18(3), 286.
Kim, W. C., & Hwang, P. (1992). Global strategy and multinationals entry mode choice. Journal of International Business Studies, 23(1), 29-53.
Klein, S., & Roth, V. J. (1990). Determinants of export channel structure: the effects of experience and psychic distance reconsidered. International Marketing Review, 7(5/6), 27-38.
Knight, G. A., & Liesch, P. W. (2002). Information internalisation in internationalising the firm. Journal of Business Research, 55, 981-995.
Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, Fall, 411-432.
Kostova, T. (1999). Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24(2), 308-324.
Kostova, T., & Roth, K. (2002). Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects. Academy of Management Journal, 45(1), 215-233.
200
Kostova, T., & Zaheer, S. (1999). Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 24(1), 64-81.
Lamb, P. W., & Liesch, P. W. (2002). The internationalisation process of the smaller firm: Re-framing the relationships between market commitment, knowledge and involvement. Management International Review, 42(1), 7-26.
Leamer, E. E. (1974). The commodity composition of international trade in manufactures: An empirical analysis. Oxford Economic Papers, 23(3), 350-374.
Lee, D. J. (1998). The effect of cultural distance on the relational exchange between exporters and importers: the case of Australian exporters. Journal of Global Marketing, 11, 7-22.
Levitt, T. (1983). The globalization of markets. Harvard Business Review, 61(3), 92.
Lin, N. (2001). Social capital: a theory of social structure and action. Cambridge, New York: Cambridge University Press.
Lincoln, Y. S., & Guba, E. G. (1985). Naturalistic inquiry. London: Sage.
Lindbergh, J. (2005a, August 5-10, 2005). Do firms change the distances between countries, or are the firms' distances changed? A discussion of the conceptual differences between distance concepts and the role of experience in influencing psychic distance. Paper presented at the Academy of Management, Honolulu, United States of America.
Lindbergh, J. (2005b). Overcoming Cultural Ignorance: Institutional Knowledge Development in the Internationalizing Firm. Unpublished PhD, Uppsala University, Uppsala.
Linnemann, H. (1966). An econometric study of international trade flows. Amsterdam: North Holland Press.
Lyles, M. A., & Salk, J. E. (2006). Knowledge acquisition from foreign parents in international joint ventures: an empirical examination in the Hungarian context. Journal of International Business Studies, 38(1), 3-18.
Marschan-Piekkari, R., & Reis, C. (2004). Language and languages in cross-cultural interviewing. In R. Marschan-Piekkari & C. Welch (Eds.), Handbook of Qualitative Research Methods for International Business (pp. 224-243). Cheltenham: Edward Elgar.
McCoy, T. L., (with Fensom, M.). (2007). 2007 Latin America business environment report. Gainesville: Center for Latin American Studies, University of Florida.
McGrath, J. E. (1982). Dilemmatics: The study of research choices and dilemmas. In J. E. McGrath, J. Martin & R. A. Kulka (Eds.), Judgement calls in research (pp. 69-102). Beverly Hills: Sage.
Merrett, D. (2002). The internationalization of Australian banks. Journal of International Financial Markets, Institutions and Money, 12, 377-397.
201
Merrett, D. (2007). Australian multinationals in historical perspective: 'Do you come from a land down under?' In H. Dick & D. Merrett (Eds.), The internationalisation strategies of small-country firms: The Australian experience of globalisation (pp. 18-42). Cheltenham, UK: Edward Elgar.
Miles, M. B., & Huberman, A. M. (1994). Qualitative data analysis. Thousand Oaks: Sage.
Moore, B. (Ed.) (2004) The Australian Oxford dictionary. Melbourne: Oxford University Press.
Mortimer, D. (2008). Winning in world markets: Meeting the competitive challenge of the new global economy. Canberra: Commonwealth of Australia.
Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5(1), 14-37.
Nonaka, I., & Takeuchi, H. (1995). The knowledge-creating company. New York: Oxford University Press.
Nordstrom, K. A., & Vahlne, J.-E. (1994). Is the globe shrinking? Psychic distance and the establishment of Swedish sales subsidiaries during the last 100 years. In M. Landeck (Ed.), International trade: Regional and global Issues (pp. 41-56). New York: St Martin's Press.
O'Grady, S., & Lane, H. (1996). The psychic distance paradox. Journal of International Business Studies, 27(2), 309-333.
Osland, J. S., De Franco, S., & Osland, A. (1999). Organizational implications of Latin American culture: Lessons for the expatriate manager. Journal of Management Inquiry, 8(2), 219-234.
Panes, N. (2008, 3-4 April). Risky business: Minimising investment risk in Latin America. Paper presented at the Excellence in Investment: Latin America Conference, Hilton Hotel, Sydney.
Patterson, P. G. (2004). A study of perceptions regarding service firms' attitude to exporting. Australasian Marketing Journal, 12(2), 19-38.
Patton, M. Q. (2002). Qualitative research and evaluation methods. Thousand Oaks: Sage.
Pauwels, P., & Matthyssens, P. (2004). The architecture of multiple case study research in international business. In R. Marschan-Piekkari & C. Welch (Eds.), Handbook of qualitative research methods for international business (pp. 125-143). Cheltenham: Edward Elgar.
Pedersen, T., & Petersen, B. (2004). Learning about foreign markets: Are entrant firms exposed to a "shock effect"? Journal of International Marketing, 12(1), 103-123.
Penrose, E. (1959). The theory of the growth of the firm. London: Basil Blackwell.
Pettigrew, A. M. (1990). Longitudinal field research on change: Theory and practice. Organization Science, 1(3), 267-292.
202
Pfeffer, J. (1981). Power in organizations. Boston: Pitman.
Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations. New York: Harper and Row.
Portes, A. (1998). Social capital: its origins and applications in modern sociology. Annual Review of Sociology, 24(1), 1-24.
Presutti, M., Boari, C., & Fratocchi, L. (2007). Knowledge acquisition and the foreign development of high-tech start ups: a social capital approach. International Business Review, 16, 23-46.
Reid, M. (2007). Forgotten continent: The battle for Latin America's soul. New Haven: Yale University Press.
Reid, S. (1981). The decision-maker and export entry expansion. Journal of International Business Studies, Fall, 101-112.
Reinhardt, N., & Peres, W. (2000). Latin America's new economic model: Micro responses and economic restructuring. World Development, 28(9), 1543-1566.
Roque, N. (2008, 3-4 April). Mines, money and Mexico: The future of investment in Mexico. Paper presented at the Excellence in Investment: Latin America Conference, Hilton Hotel, Sydney.
Rossen, K. S. (1988). A comparison of Latin American and North American legal traditions. In L. A. Tavis (Ed.), Multinational managers and host government interactions (pp. 127-152). South Bend: University of Notre Dame Press.
Rugman, A., & Verbeke, A. (2001). Location, competitiveness, and the multinational enterprise. In A. Rugman & T. L. Brewer (Eds.), The Oxford handbook of international business (pp. 150-177). Oxford: Oxford University Press.
Rugman, A., & Verbeke, A. (2003). Extending the theory of the multinational enterprise: internalization and strategic management perspectives. Journal of International Business Studies, 34(2), 125-137.
Scott, R. W. (1995). Institutions and organisations. Thousand Oaks: Sage.
Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32(3), 519-535.
Shoham, A., & Albaum, G. S. (1995). Reducing the impact of barriers to exporting: A managerial perspective. Journal of International Marketing, 3(4), 85-105.
Sim, A. B., & Teoh, H. Y. (1994). Internationalization of Australian business in the Asia-Pacific region: Issues and prospects. The International Executive, 36(4), 435-464.
Simmonds, K., & Smith, H. (1968). The first export order: a marketing innovation. British Journal of Marketing, 2, 93-100.
Sirivastava, R. K., & Green, R. T. (1986). Determinants of bilateral trade. Journal of Business, 59(4), 623-640.
203
Sousa, C. M. P., & Bradley, F. (2005). Global markets: does psychic distance matter? Journal of Strategic Marketing, 13(1), 43-59.
Stottinger, B., & Schlegelmilch, B. B. (1998). Explaining export development through psychic distance: Enlightening or elusive? International Marketing Review, 15(5), 357-372.
Stottinger, B., & Schlegelmilch, B. B. (2000). Psychic distance: a concept past its due date? International Marketing Review, 17(2/3), 169-173.
Strauss, A., & Corbin, J. (1998). Basics of qualitative research: Techniques and procedures for developing grounded theory. Thousand Oaks: Sage.
Swift, J. S. (1999). Cultural closeness as a facet of cultural affinity. International Marketing Review, 16(2/3), 182-201.
Taylor, A. M. (2006). Foreign capital flows. In V. Bulmer-Thomas, J. H. Coatsworth & R. Cortes Conde (Eds.), The Cambridge economic history of Latin America (Vol. 2, pp. 57-100). Cambridge: Cambridge University Press.
The Australian. (2008). America's. Retrieved 01/04/2008, from http://www.theaustralian.news.com.au/theworld/americas/
The Heritage Foundation. (2007). Index of economic freedom. Retrieved 1/11/2007, from http://www.heritage.org/research/features/index/index.cfm
Transparency International. (2007). Corruption perceptions index. Retrieved 1/11/2007, from http://www.transparency.org/
UNCTAD. (2005). Australia FDI profile. New York: UNCTAD.
UNCTAD. (n.d.). FDI database. Retrieved 15/08/2008, from http://www.unctad.org
Unger, F., & Frankel, R. (2002). Doing business in Mexico: A practical guide on how to break into the market: Commonwealth of Australia.
United Nations. (2006). World investment report - FDI from developing and transition economies: Implications for development. New York.
United Nations Development Programme. (2006). Human development report 2006: Beyond scarcity: power, poverty and the global water crisis. New York.
University of Texas Libraries. (1990). Map of Latin America. Retrieved 09/05/2008, from http://www.lib.utexas.edu/maps/americas/latin_america.gif
Vahlne, J.-E., & Nordstrom, K. A. (1992). Is the Globe shrinking? Psychic distance and the establishment of Swedish subsidiaries during the last 100 years. International Trade and Finance Association's Annual Conference, Laredo, TX, April.
Vahlne, J.-E., & Wiedersheim-Paul, F. (1977). Psychic distance: An inhibiting factor in international trade, Working Paper No. 1977/2: Centre for International Business Studies, Department of Business Administration, University of Uppsala.
204
Ward, J. (1997). Latin America: Development and conflict since 1945. London: Routledge.
Welch, D., Welch, L., Wilkinson, I. F. & Young, L. C., (1996a). Network analysis of a new export grouping scheme: the role of economic and non-economic relations. International Journal of Research in Marketing, 13, 463-477.
Welch, D., Welch, L., Wilkinson, I. F. & Young, L. C., (1996b). Network development in international project marketing and the impact of external facilitation. International Business Review, 5(6), 579-602.
Welch, D., Welch, L., Young, L. C. & Wilkinson, I. F., (1998). The importance of networks in export promotion: policy issues. Journal of International Marketing, 6(4).
Welch, C., & Wilkinson, I. F. (2004). The political embeddedness of international business networks. International Marketing Review, 21(2), 216-231.
Welch, J. (1996). Capital flows and economic growth: Reflections on Latin America in the 1990s. The Quarterly Review of Economics and Finance, 36(Special Issue), 101-114.
Wickramasekera, R., & Oczkowski, E. (2004). Key determinants of the stage of internationalisation of Australian wineries. Asia Pacific Journal of Management, 21, 425-444.
Wilkinson, I., & Young, L. (2004). Improvisation and adaptation in international business research interviews. In R. Marschan-Piekkari & C. Welch (Eds.), Handbook of qualitative research methods for international business (pp. 207-223). Cheltenham: Edward Elgar.
Willer, D., & Anderson, B. (Eds.). (1981). Networks, exchange and coercion. New York: Elsevier.
Winn, P. (2006). Americas: The changing face of Latin America and the Caribbean (3 ed.). Berkeley: University of California Press.
Wong, P. L.-K., & Ellis, P. (2002). Social ties and partner identification in Sino-Hong Kong international joint-ventures. Journal of International Business Studies, 33(2), 267-289.
World Bank. (2006). Doing business 2007: How to reform. Washington DC.
World Bank. (2007). Doing business 2008: Latin America. Washington DC.
World Bank. (n.d.-a). World development indicators. Retrieved 29/10/2007, from http://devdata.worldbank.org.ezproxy.lib.unimelb.edu.au/dataonline/
World Bank. (n.d.-b). Worldwide governance indicators. Retrieved 1/11/2007, from http://info.worldbank.org/governance/wgi2007/
Wright, L. L. (1996). Qualitative international management research. In B. J. Punnett & O. Shenkar (Eds.), Handbook for international management research (pp. 63-81). Oxford: Blackwell.
205
Xu, D., & Shenkar, O. (2002). Institutional distance and the multinational enterprise. Academy of Management Review, 27(4), 608-618.
Yin, R. K. (2003). Case study research: Design and method. Thousand Oaks: Sage.
Yiu, D. W., Lau, C. M., & Bruton, G. D. (2007). International venturing by emerging economy firms: the effects of firm capabilities, home country networks, and corporate entrepreneurship. Journal of International Business Studies, 38(4), 519-540.
Yli-Renko, H., Autio, E., & Tontti, V. (2002). Social capital, knowledge and the international growth of technology-based new firms. International Business Review, 11, 279-304.
206
207
Appendix 1: Map of Latin America
208
209
Latin America stretches from Mexico in the north, to Chile and Argentina in the
south. It encompasses Mexico, Central and South America and as well as the
Caribbean islands of Cuba and the Dominican Republic. It is not synonymous with
the term South America, as is it often erroneously used.
Source: (University of Texas Libraries, 1990)
210
211
Appendix 2: Business Environment Data
212
213
The following tables provide data to support Chapter 2’s analysis of Latin America’s business environment. Mostly data are provided for the primary seven markets (accounting for 92% of regional GDP). Data on Australia are provided where possible to enable comparisons to be made. Table A.1: Latin American Economic Indicators
Population (millions)
GDP (current $US
millions)
GDP PPP per capita (international $)
GDP Growth % (1997-2006)
Inflation % (1997-2006)
Latin America 531.3 2,896,413 7,8670 3.5 9.5 Argentina 39.1 214,058 15,795 2.1 5.8 Bolivia 9.3 11,163 2,984 2.1 3.9 Brazil 188.7 1,067,960 9,054 2.5 7.0 Chile 16.5 145,841 12,655 5.1 3.5 Colombia 45.6 136,836 7,967 3.3 9.4 Costa Rica 4.4 22,145 11,160 4.0 11.3 Dominican Rep. 9.6 30,581 8,813 4.5 13.2 Ecuador 13.4 40,800 4,606 2.8 28.1 El Salvador 7.0 18,306 5,525 1.7 3.1 Guatemala 12.9 35,290 4,802 2.6 7.0 Honduras 7.3 9,235 3,668 3.1 13.3 Mexico 104.2 839,182 11,532 2.9 9.1 Nicaragua 5.2 5,369 4,094 1.7 8.8 Panama 3.3 17,097 8,369 3.6 1.1 Paraguay 6.0 9,110 5,054 2.9 8.7 Peru 28.4 93,269 6,624 2.5 3.5 Uruguay 3.3 19,308 11,451 1.9 9.9 Venezuela 27.0 181,862 7,503 1.9 24.3 Australia 21.1 768,178 35,493 3.4 2.6 Source: (World Bank, n.d.-a)
214
Table A.2: Latin American Political Environment Governance Indicators
(percentile rank) Return of
Democracy Political Stability1
Voice and accountability2
Government effectiveness3
Current President Political Party/Alliance
Term
Argentina 19834 44.7 56.7 49.3 Fernandez de Kirchner
FPV (centre)
2007-2011
Brazil 1985 43.3 58.7 52.1 Lula da Silva PT (left)
2006-2010
Chile 1989 77.4 87.5 87.7 Bachelet Concertación (centre-left)
2006-2010
Colombia 1958 7.7 41.8 55.9 Uribe Primero Colombia
(right)
2006-2010
Mexico 2000 32.7 52.4 60.7 Calderón PAN (right)
2006-2012
Peru 1980 18.8 51.0 36.0 García APRA (left)
2006-2010
Venezuela 1958 12.0 29.3 19.9 Chávez MVR (far left)
2001-2007
Australia - 76.9 93.8 95.7 - - - Source: (World Bank, n.d.-b) 1 A measure of the perceived likelihood that the government will be destabilised or overthrown by unconstitutional or violent means. 2 A measure of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, association and the media. 3 A measure of the quality of public services, the quality of the civil service and its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. 4 Interrupted democracies
215
Table A.3: Latin American Legal Environment Corruption Perception3 Economic Freedom4 Crime Victimisation6 Regulatory
Quality1 Rule of Law2 Index Rank Index Rank
Ease of doing business5
Rank % Yes
Argentina 22.9 35.7 2.9 105 57.5 95 109 47.1 Brazil 54.1 41.4 3.5 72 60.9 70 122 35.6 Chile 91.7 87.6 7.0 22 78.3 11 33 36.0 Colombia 55.1 29.5 3.8 68 60.5 73 66 37.4 Mexico 63.4 40.5 3.5 72 65.8 49 44 75.7 Peru 55.6 26.2 3.5 72 62.1 63 58 37.8 Venezuela 8.8 5.7 2.0 162 47.7 144 172 44.2 Australia 96.1 94.8 8.6 11 82.7 3 8 - 1 A measure of the ability of government to formulate and implement sound policies and regulations that permit and promote private sector development (World Bank, n.d.-b). 2 A measure of the extent to which agents have confidence in and abide by the rules of society, in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence (World Bank, n.d.-b). 3 A measure of the abuse of public office for private gain on a scale of 0 (totally corrupt) to 10 (virtually corruption-free) (Transparency International, 2007). 4 A composite measure of economic freedom on a scale of 0 (least free) to 100 (most free). The composite is based on 10 separate measures: business freedom, trade freedom, fiscal freedom, freedom from government, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, labour freedom (The Heritage Foundation, 2007). 5 The ease of doing business index averages country rankings on the 10 topics covered in Doing Business 2007 (World Bank, 2006). 6 As measured by Latinobarometro 2002. ‘Have you or someone in your family been assaulted, attacked, or been the victim of a crime in the past 12 months?’ ‘Don’t know’ and missing responses were excluded from results (McCoy, 2007).
216
Table A.4: Latin American Social Environment Population
(millions) Illiterate
Population %
GINI Index1 Human Development
Index2
Rank
Population in Poverty
%
Urban Unemployment
%
Argentina 39.1 2.4 52.8 36 26.9 11.6 Brazil 188.7 9.6 58.0 69 31.0 9.8 Chile 16.5 2.9 57.1 38 18.2 8.0 Colombia 45.6 5.9 58.6 70 49.2 14.0 Mexico 104.2 6.2 49.5 53 35.5 4.7 Peru 28.4 7.0 54.6 82 51.1 9.6 Venezuela 27.0 4.8 44.1 72 37.1 12.4 Australia 21.1 <1.0 35.2 (1994) 3 - - Source: (CIA, n.d.; ECLAC, 2007b; United Nations Development Programme, 2006; World Bank, n.d.-a) 1 A measure of inequality in the distribution of income or consumption. Zero represents perfect equality and 100 perfect inequality. 2 A measure of achievements in three areas: longevity, knowledge (a combination of the literacy rate and enrolment ratio), and standard of living (GDP at PPP pc).
217
Table A.5: Latin American Income Distribution
Highest Quintile
Fourth Quintile
Third Quintile
Second Quintile
Lowest Quintile
Argentina1 55.4 21.1 12.8 7.6 3.1 Brazil1 61.1 18.7 11.0 6.5 2.8 Chile2 60.0 17.8 11.1 7.3 3.8 Colombia2 62.7 18.1 10.6 6.2 2.5 Mexico1 55.1 19.7 12.6 8.3 4.3 Peru2 56.7 19.7 12.2 7.7 3.7 Venezuela2 52.1 22.0 13.9 8.7 3.3 Australia3 38.5 23.2 17.6 12.9 7.9 Source: (Australian Bureau of Statistics, 2007a; World Bank, n.d.-a) 1 2004 data, 2 2003 data, 3 2005-06 data Table A.6: GDP at PPP per capita adjusted for Income Distribution
Quintile population
Highest Quintile
Fourth Quintile
Third Quintile Second Quintile
Lowest Quintile
Ratio of Highest to Lowest
Argentina 7.8 43,791 16,657 10,130 5,966 2,465 18:1 Brazil 37.7 27,668 8,452 4,961 2,920 1,268 22:1 Chile 3.3 37,836 11,230 7,028 4,593 2,404 16:1 Colombia 9.1 24,940 7,183 4,218 2,467 987 25:1 Mexico 20.8 31,759 11,355 7,289 4,781 2,486 13:1 Peru 5.7 18,760 6,520 4,029 2,537 1,234 15:1 Venezuela 5.4 19,576 8,256 5,234 3,263 1,220 16:1 Australia 4.2 66,448 40,041 30,376 22,264 13,635 5:1
218
219
Appendix 3: Distance Measures
220
221
The following tables provide measures of distance from Australia to Latin American
countries and also the United States of America and the United Kingdom where Australia
equals zero and a higher number indicates a larger distance to that nation. The measures
have been calculated using a Euclidean distance measure similar to that of Kogut and
Singh (1988). The formula takes into account the variance in the entire sample (not just
those countries listed in the tables) when calculating the distance from Australia. The
composite indexes provided are an average of the distance measures of the individual
dimensions. For example the institutional distance measure is calculated as follows:
( ) 1414
1
2
∑=
⎥⎦
⎤⎢⎣
⎡ −=
i i
ijikk V
IIID
Where ID = Institutional Distance, k = host country, j = Australia, I = indicator, and Vi = variance. These distances are illustrative of factors that may influence a firm’s psychic distance to a
market. There are several caveats that should be acknowledged when interpreting this
data. Firstly, the composite index can mask even greater distances in relation to some
indicators, for example the overall cultural values distance based on House et al. (2004)
from Australia to Brazil is 1.97; however, the institutional collectivism values distance is
6.20 (see Table A.8) illustrating a much greater difference between Australian and
Brazilian values on this dimension. Marked differences such as these will surely affect
Australian firms as they internationalise into these markets.
Secondly, the erroneous assumption could also be made based on the composite index
that as Brazil and Mexico have similar institutional distances from Australia (2.32 and
2.22 respectively) they are institutionally distant in similar ways; this is not the case. For
example, the distance from Australia to Brazil in relation to anti-trust regulation is 5.31,
however the distance from Australia to Mexico is only 1.88 demonstrating that Australia
and Mexico are more similar in regards to anti-trust regulation than Australia and Brazil
(see Table A.9).
Finally, the Kogut and Singh index is an absolute value and as such does not indicate the
nature of the difference between two countries. For example, the individualism vs.
222
collectivism distance based on Hofstede’s (1980) data between Australia and Mexico is
5.57 (see Table A.7). However, this figure does not tell us which country scored higher
than the other on individualism. In order to answer that question one must return to the
raw data which is provided in Table A.10.129
129 Australia scored 90 on the Individualism Index while Mexico scored 30.
223
Table A.7: Cultural Distance from Australia – Hofstede (1980) Country Cultural
Distance Power Distance
Uncertainty Avoidance
Individualism/Collectivism
Masculinity/ Femininity
Argentina 0.61 0.36 2.07 3.00 0.07 Brazil 0.88 2.29 1.06 4.19 0.43 Chile 1.53 1.53 2.07 6.95 3.24 Colombia 1.41 2.02 1.42 9.18 0.03 Costa Rica 1.73 0.00 2.07 8.71 4.76 Ecuador 1.62 3.71 0.43 10.41 0.01 El Salvador 1.57 1.89 3.13 7.80 1.31 Guatemala 2.69 7.32 4.23 10.92 1.72 Mexico 1.29 4.26 1.63 5.57 0.19 Panama 2.21 7.32 2.07 9.66 0.86 Peru 1.49 1.65 2.19 8.48 1.08 Uruguay 1.27 1.31 4.06 4.51 1.58 Venezuela 1.68 4.26 1.06 9.42 0.43 UK 0.06 0.00 0.43 0.00 0.07 USA 0.01 0.03 0.04 0.00 0.00
224
Table A.8: Cultural Distance from Australia – House et al. (2004) Cultural
Distance Power Distance
Uncertainty Avoidance
Institutional Collectivism
In Group Collectivism
Humane Orientation
Assertiveness Gender Egalitarianism
Future Orientation
Performance Orientation
Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Argentina 2.24 1.42 4.88 1.66 1.50 1.26 2.19 3.53 3.37 1.28 0.39 0.00 0.03 0.75 0.06 0.01 4.77 2.42 3.02 1.91 Bolivia 1.49 1.47 0.32 3.25 2.96 1.41 0.35 2.04 3.17 0.50 0.24 4.06 1.74 0.02 0.17 0.32 1.08 1.40 3.37 0.23 Brazil 1.08 1.97 2.10 1.52 1.71 2.78 1.17 6.20 1.91 2.88 1.76 0.16 0.05 1.94 0.06 0.00 0.37 1.78 0.61 0.52 Colombia 1.99 1.98 4.05 4.49 1.84 2.72 1.27 4.00 4.57 2.00 1.44 0.01 0.05 0.35 0.54 0.00 3.14 1.71 1.06 2.53 Costa Rica 0.87 1.21 0.00 0.33 0.89 0.98 0.72 2.54 2.48 0.87 0.06 5.44 2.04 0.14 0.19 0.63 1.12 0.02 0.34 0.00 Ecuador 1.57 2.14 4.46 1.89 1.38 3.79 0.84 4.25 5.05 1.41 0.63 1.60 0.26 0.06 0.80 0.80 0.57 3.81 0.15 1.67 El Salvador 1.89 2.81 5.32 0.08 1.62 4.89 1.86 6.51 2.61 4.74 1.49 0.23 0.84 0.09 0.42 0.56 0.39 4.20 2.45 4.29 Guatemala 2.41 1.62 4.46 1.52 3.26 2.21 1.92 2.87 4.00 1.22 0.70 1.60 1.10 0.07 1.06 1.04 3.38 3.52 1.81 0.56 Mexico 0.88 1.52 1.39 0.04 0.12 4.46 0.29 1.13 4.45 0.32 0.41 3.60 0.21 0.00 0.42 0.36 0.23 3.07 0.40 0.66 Venezuela 2.06 2.02 2.62 1.97 2.47 4.46 0.60 4.08 3.47 1.41 0.00 1.14 0.02 0.55 0.36 0.17 2.56 2.50 6.48 1.91 England 0.38 0.10 1.01 0.00 0.19 0.05 0.00 0.03 0.02 0.32 1.44 0.35 0.12 0.03 0.54 0.10 0.17 0.05 0.47 0.00 USA 0.11 0.18 0.12 0.04 0.16 0.00 0.04 0.22 0.01 0.00 0.06 0.04 0.53 0.62 0.03 0.01 0.02 0.16 0.10 0.56
225
Table A.9: Institutional Distance from Australia (2001) Country Institutional
Distance Pol trans
Infla Gov debt
Corrup Anti trust
Intel prop
Judic Gov respon
Local auth
Markt domin
Pol sys
Gov trans
Burea Pol risk
Argentina 3.45 1.45 0.03 0.01 6.58 6.10 6.45 3.44 3.88 0.41 0.24 8.30 5.91 2.95 2.58 Brazil 2.32 4.17 1.56 0.05 4.62 5.31 2.66 1.10 0.84 1.60 1.17 2.59 1.69 3.00 2.14 Chile 1.12 0.42 0.03 0.29 0.75 0.24 0.79 0.65 2.40 2.60 1.09 2.59 2.88 0.64 0.38 Colombia 3.95 9.95 0.62 0.01 6.60 6.90 3.62 3.77 1.60 0.44 1.73 5.78 2.98 4.11 7.24 Mexico 2.22 4.17 1.41 0.01 5.93 1.88 2.60 3.16 0.08 4.97 0.92 0.80 0.43 2.78 2.01 Peru 2.21 5.82 0.21 0.05 1.11 2.33 6.57 3.41 0.42 1.18 0.06 1.59 3.44 1.94 2.84 Venezuela 6.81 4.96 8.34 0.05 7.60 4.31 5.21 11.48 13.39 2.75 1.97 11.23 6.95 5.50 11.55 UK 0.92 0.03 0.00 3.76 0.28 0.02 0.05 0.07 0.97 2.28 1.70 0.83 1.18 1.54 0.11 USA 0.53 0.00 0.00 2.98 0.40 0.09 0.07 0.01 0.12 0.60 2.44 0.00 0.01 0.70 0.02 Source: (Gaur et al., 2005) Key
Pol Trans Political transparency Infla Fiscal policy (inflation) Gov debt Fiscal policy (government debt – total foreign debt as % of GDP) Corrup Bureaucratic corruption Anti trust Anti trust regulation Intel prop Intellectual property protection Judic Judicial system efficiency Gov respon Government responsiveness to new economic realities Local auth Independence of local authorities from central government Markt domin Market dominance in key industries rare Pol sys Political system well adapted to today’s economic challenges Gov trans Government transparency towards citizens Burea Bureaucracy does not hinder economic development Pol risk Political risk rating
226
The following tables provide the raw data upon which the distance measures provided in Table A.7 to Table A.9 were calculated. Table A.10: Cultural Dimensions – Hofstede (1980) Country Power
Distance Uncertainty Avoidance
Individualism/Collectivism
Masculinity/ Femininity
Argentina 49 86 46 56 Brazil 69 76 38 49 Chile 63 86 23 28 Colombia 67 80 13 64 Costa Rica 35 86 15 21 Ecuador 78 67 8 63 El Salvador 66 94 19 40 Guatemala 95 101 6 37 Mexico 81 82 30 69 Panama 95 86 11 44 Peru 64 87 16 42 Uruguay 61 100 36 38 Venezuela 81 76 12 73 UK 35 35 89 66 USA 40 46 91 62 Australia 36 51 90 61
227
Table A.11: Cultural Dimensions – House et al. (2004) Power
Distance Uncertainty Avoidance
Institutional Collectivism
In Group Collectivism
Humane Orientation
Assertiveness Gender Egalitarianism
Future Orientation
Performance Orientation
Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Prac Val Argentina 5.64 2.33 3.65 4.66 3.66 5.32 5.51 6.15 3.99 5.58 4.22 3.25 3.49 4.98 3.08 5.78 3.65 6.35 Bolivia 4.51 3.41 3.35 4.70 4.04 5.10 5.47 6.00 4.05 5.07 3.79 3.73 3.55 4.75 3.61 5.63 3.61 6.05 Brazil 5.33 2.35 3.60 4.99 3.83 5.62 5.18 5.15 3.66 5.68 4.20 2.91 3.31 4.99 3.81 5.69 4.04 6.13 Colombia 5.56 2.04 3.57 4.98 3.81 5.38 5.73 6.25 3.72 5.61 4.20 3.43 3.67 5.00 3.27 5.68 3.94 6.42 Costa Rica 4.74 2.58 3.82 4.58 3.93 5.18 5.32 6.08 4.39 4.99 3.75 4.05 3.56 4.64 3.60 5.20 4.12 5.90 Ecuador 5.60 2.30 3.68 5.16 3.90 5.41 5.81 6.17 4.65 5.26 4.09 3.65 3.07 4.59 3.74 5.94 4.20 6.32 El Salvador 5.68 2.68 3.62 5.32 3.71 5.65 5.35 6.52 3.71 5.46 4.62 3.62 3.16 4.66 3.80 5.98 3.72 6.58 Guatemala 5.6 2.35 3.30 4.88 3.70 5.23 5.63 6.14 3.89 5.26 3.89 3.64 3.02 4.53 3.24 5.91 3.81 6.14 Mexico 5.22 2.85 4.18 5.26 4.06 4.92 5.71 5.95 3.98 5.10 4.45 3.79 3.64 4.73 3.87 5.86 4.10 6.16 Venezuela 5.40 2.29 3.44 5.26 3.96 5.39 5.53 6.17 4.25 5.31 4.33 3.33 3.62 4.82 3.35 5.79 3.32 6.35 England 5.15 2.80 4.65 4.11 4.27 4.31 4.08 5.55 3.72 5.43 4.15 3.70 3.67 5.17 4.28 5.06 4.08 5.90 USA 4.88 2.85 4.15 4.00 4.20 4.17 4.25 5.77 4.17 5.53 4.55 4.32 3.34 5.06 4.15 5.31 4.49 6.14 Australia 4.74 2.78 4.39 3.98 4.29 4.40 4.17 5.75 4.28 5.58 4.28 3.81 3.40 5.02 4.09 5.15 4.36 5.89
228
Table A.12: Institutional Dimensions (2001) Country Pol
trans Infla Gov
debt Corrup Anti
trust Intel prop
Judic Gov respon
Local auth
Markt domin
Pol sys
Gov trans
Burea Pol risk
Argentina 7.40 0.04 6.33 1.50 3.48 4.08 4.18 3.60 4.83 2.76 1.92 3.37 2.45 6.10 Chile 8.00 0.56 7.33 5.94 5.39 7.04 5.39 4.20 3.79 4.01 4.00 4.40 3.78 8.20 Brazil 6.50 2.33 6.83 2.59 3.64 5.71 5.11 5.10 4.16 2.28 4.00 4.96 2.43 6.40 Colombia 5.30 1.58 6.67 1.49 3.33 5.22 4.08 4.60 4.80 2.09 2.70 4.36 2.00 3.80 Peru 6.10 1.04 6.17 5.46 4.39 4.04 4.19 5.48 4.35 3.36 4.57 4.18 2.92 5.93 Mexico 6.50 2.23 6.33 1.84 4.54 5.74 4.27 6.00 3.13 2.38 5.17 5.87 2.52 6.50 Venezuela 6.30 4.99 6.17 1.00 3.86 4.54 2.41 1.20 3.74 2.02 1.15 3.08 1.54 2.30 UK 8.50 0.28 9.50 6.83 6.0 8.24 6.63 5.00 3.90 4.22 5.14 5.26 3.14 8.80 USA 8.70 0.26 9.17 6.55 6.15 9.09 6.19 6.90 6.34 4.43 6.68 6.95 3.73 9.20 Australia 8.70 0.30 6.50 8.21 5.86 8.63 6.32 6.40 5.51 3.16 6.63 6.79 4.94 9.50 Source: (Gaur et al., 2005) Key
Pol Trans Political transparency Infla Fiscal policy (inflation) Gov debt Fiscal policy (government debt – total foreign debt as % of GDP) Corrup Bureaucratic corruption Anti trust Anti trust regulation Intel prop Intellectual property protection Judic Judicial system efficiency Gov respon Government responsiveness to new economic realities Local auth Independence of local authorities from central government Markt domin Market dominance in key industries rare Pol sys Political system well adapted to today’s economic challenges Gov trans Government transparency towards citizens Burea Bureaucracy does not hinder economic development Pol risk Political risk rating
229
Appendix 4: Letter of Endorsement
230
231
232
233
Appendix 5: Example Introductory Letter
234
235
5th Floor Babel Building The University of Melbourne VIC 3010 18 August 2006 Name Position Company Name Company Address Dear Name: I am seeking your assistance as Company Name is one of a small number of Australian firms who have been able to do business in Latin America. Research into the reasons for the success or failure of multinational companies has emphasised the difficulties facing firms when they venture to another country.
My research seeks to understand how Australian firms going into Latin America, such as your own, have overcome the many obstacles standing in their way. It aims to understand how firms are affected by differences in language, culture, legal and political systems, business practices and so on. My research also explores the role of networks in facilitating internationalisation by providing access to knowledge.
Australian firms have a comparatively limited history of foreign direct investment (FDI) and one dominated by investment in neighbouring and culturally similar countries. In 2001, 78 per cent of Australian FDI stocks abroad were in New Zealand, the United Kingdom and the United States of America; three countries that are culturally and institutionally similar to Australia. In contrast, Latin American markets account for less than one per cent of Australian FDI stocks and are generally perceived as culturally and institutionally dissimilar to Australia.
Company Name’s recent investment in Chile makes it an ideal case study for my research. Participation in the research will involve interviews with key decision makers of no more than one hour. These interviews will address issues relating to market entry decisions, market expansion and the everyday issues of operating in the region.
The benefits of this research include an understanding of how firms can leverage their business and social networks to further their expansion into new foreign markets. Likewise the research will offer insight into how government agencies can further promote Australian trade and investment by creating or fostering networks in distant markets.
Should you require any further information about this project please do not hesitate to contact me at [email protected].
I look forward to the opportunity to discuss my work with you further.
Sincerely, Frances Van Ruth PhD Candidate Department of Management and Marketing
236
237
Appendix 6: Example Interview Protocol
238
239
Case 5, Interviewee 1 - CEO Wednesday 1 Nov, 3:00pm Introduction Aim of project Aim of interview - To understand the story behind Case 5’s internationalisation, and specifically Case 5’s internationalisation into Latin America. To set the scene – To help me understand the broader context, or where you are coming from What is your professional background and current role at Case 5? Have you ever lived outside Australia? Do you speak any other languages? Case 5’s internationalisation As I understand it, Case 5 first internationalised into South-East Asia in the 1970s. Can you give me a feel for the pattern of Case 5’s internationalisation? Can you tell me how entry into South America came about? Was Chile your first choice of market in the region? Why? What about future market expansion in the region? Are you currently looking at any other opportunities? What about Central America? The role and sources of knowledge Case 5 entered South America after having entered other countries. To what extent was the knowledge gained from previous market entries important when entering South America? Can you give me an example? Where or How does Case 5 gain knowledge about markets and opportunities in South America? For example, knowledge about governance structures, laws and regulations etc. or knowledge about the competitive environment. IF RELEVANT: Were there people in the organisation with existing knowledge of Latin America? Did you hire people in? Networks IF NOT YET RASIED: Did Case 5 go to outside agencies, (for example Austrade) for advice or information about the region? IF NOT YET RASIED: What was the role, if any, of Case 5’s business networks (for example relationships with partners, suppliers or customers) or perhaps even social networks in entering Latin America? IF RELEVANT: Were networks more or less important in Latin America than elsewhere? Can you give me an example? IF RELEVANT: Was there a specific player whose networks or experience was influential in Case 5’s entry into Latin America?
240
Psychic Distance One of the issues I’m exploring is a concept called Psychic Distance. This is a distance in the minds of individuals that interrupts the flow of information between a firm and a market. It is influenced by our perception of the differences between countries. If I could ask you to think back to before you had much exposure to Latin America. What was your perception of the region? What types of country level differences most influenced your perception of Latin America (or of Chile)? E.g. cultural, institutional, political etc. What specific aspects most affected your perception? What are the main challenges the company has faced in Latin America? Country level differences – cultural, language, institutional, economic, political/legal, geographic PROBE FURTHER: What aspects of culture/legal system etc. Can you give me an example? Were these challenges similar to issues faced elsewhere, or where they unique to Latin America? How were these challenges overcome? NOW: How has your perception of the region changed? IF RELEVANT: What caused the change in your perception? WIND UP From a commercial perspective, do you think the Australian government could be doing more to support Australian firms in Latin America? Is there anything we haven’t talked about that you think is particularly relevant to this discussion? I’m going to be in Chile in Dec. If possible I’d like to arrange a meeting with Interviewee 2. Is there anyone else I should speak to? Are there any documents or publications you can share with me relating to Case 5’s strategy or plans for Latin America? Can I contact you again if I have any more questions?
241
Appendix 7: Plain Language Statement
242
243
Plain Language Statement130
Project Title: The internationalisation of Australian firms: how business and social networks help
overcome the psychic distance between a firm and a market. Principal Investigators:
1. Ms Frances Van Ruth PhD Candidate Department of Management and Marketing University of Melbourne Victoria 3010 Email: [email protected] Tel: +61 3 8344 0804
2. Prof David Merrett Primary Supervisor Department of Management and Marketing University of Melbourne Victoria 3010 Email: [email protected] Tel: +61 3 8344 5337
3. Dr. André Sammartino Second Supervisor Department of Management and Marketing University of Melbourne Victoria 3010 Email: [email protected] Tel: +61 3 8344 6880
The current research is part of a Doctorate of Philosophy being conducted by Frances Van Ruth in the Department of Management and Marketing, The University of Melbourne, under the supervision of Professor David Merrett and Dr. Andre Sammartino. The research aims to understand how Australian firms internationalise. It will have a particular focus on the effect of cultural and institutional differences on internationalisation and how firms overcome such differences. The research focuses on the internationalisation of Australian firms in Latin America. The purpose of this interview is to gain an in-depth understanding of your perspective of the internationalisation of your organisation into Latin America. If you are willing, the discussion will be audio-taped; if not, I will simply take notes. The duration of the interview will be approximately one hour. While the comments and views that you express will form an important part of the research, every care will be taken to ensure that it will not be possible to attribute them to you. In other words, your specific views will remain anonymous and neither your name nor that of your organisation will appear in any documentation without your express consent. The information that you provide will be safeguarded subject to any legal requirements. Please be aware, however, that in cases where the sample size is small, it may be impossible to guarantee complete anonymity or confidentiality of identity. Please also note that you are free to withdraw from the project at any time without explanation or prejudice and to withdraw any unprocessed data previously supplied. The data obtained as part of the study will be stored under the responsibility of the principal investigators and will be kept in locked facilities in the Department of Management and Marketing. The data will be kept on file for a period of 5 years from the date of publication after which it will be destroyed. This project has received clearance by the Human Research Ethics Committee. If you have any concerns about the conduct of this research, you can contact the Executive Officer, Human Research Ethics, The University of Melbourne. Tel: 8344 2073. Fax: 9347 6739. If you are willing to participate, then please sign the accompanying consent form. Thank you for taking the time to participate and for sharing your valuable views and perceptions.
130 This statement was also provided in Spanish.
244
245
Appendix 8: Consent Form
246
247
Consent Form131
Project Title:
The internationalisation of Australian firms: how business and social networks help
overcome the psychic distance between a firm and the market. Name of participant:
Participant’s Organisation:
Name of investigators: Ms Frances Van Ruth, Prof. David Merrett, Dr. André Sammartino
1. I consent to participate in the project named above, the particulars of which – including details of the interview – have been explained to me. A written copy of this information has been given to me to keep.
2. I authorize the researcher or his or her assistant to interview me.
3. I give consent to the researcher to audio-tape the interview.
4. I acknowledge that:
a) the possible effects of the interview have been explained to me to my satisfaction. b) I have been informed that I am free to withdraw from the project at any time without
explanation or prejudice and to withdraw any unprocessed data previously supplied. c) The project is for the purpose of research as part of the researcher’s PhD. d) I have been informed that the confidentiality of the information I provide will be safeguarded
subject to any legal requirements.
e) In cases where the sample size is small it may be impossible to guarantee anonymity or confidentiality of identity.
5. I have been informed that I will be referred to in any publications based on the research by a
pseudonym unless I otherwise consent. Signature: Date:
131 This form was also provided in Spanish.
248
249
Appendix 9: Inquiry Audit
250
251
252
253
Appendix 10: Matrix Queries
254
255
The tables below illustrate the roles fulfilled by the various types of networks discussed by interviewees and relate to the results
presented in Section 7.6. These results were obtained by running matrix queries in NVivo. Similar to a quantitative cross tabulation a
matrix query searches all coded data and retrieves instances where the same data are coded at both the column and row values. For
example, Table A.13 below shows us that the data contained 10 comments in which unspecified business networks were discussed as
having provided business knowledge.
Table A.13: The Role of Institutional Networks Matrix Query Results Ties to
GovernmentAustrade Chambers of
Commerce Latin American
students in Australia
Industry Associations or Expos
Total
Provide business knowledge 10 14 3 4 2 33 Provide contacts or ‘unlock doors’ 5 17 4 2 3 31 Provide customers or suppliers 5 9 4 2 9 29 Finding employees or agents 5 6 2 7 8 28 Provide institutional knowledge 9 7 3 3 2 24 Share and learn from experiences - 9 11 - 1 21 Provide initial opportunity knowledge 2 6 - 1 6 15 Provide credibility and reputation 7 5 5 2 - 19 Other 6 6 2 2 - 16 Provide knowledge 3 7 3 1 - 14 Provide reassurance or comfort 4 3 3 0 - 10 Finding local partner 4 4 1 0 2 11 Provide internationalisation knowledge 2 2 - - - 4
256
Table A.14: The Role of Business Networks Matrix Query Results Business
Networks Internal Pioneers Law
firms Suppliers
and Customers
In Australia Local partner/
acquisition
Total
Provide initial opportunity knowledge 6 - 5 2 1 6 3 23 Provide reassurance or comfort 5 3 5 - 6 2 2 23 Provide customers or suppliers 15 2 - 1 - 2 1 21 Provide business knowledge 10 - - 4 - 1 6 21 Share and learn from experiences 10 1 3 2 1 2 1 20 Provide credibility and reputation 6 1 - 1 5 - 4 17 Provide institutional knowledge 2 - - 6 - - 7 15 Provide 'contacts' or unlock doors 5 - 3 1 - 2 4 15 Provide knowledge (unspecified) 4 - 3 3 - 2 1 13 Provide internationalisation knowledge 2 - - 1 - - 2 5 Finding employees or agents 3 1 - 3 1 1 - 9 Finding local partner 3 2 - - 1 - 2 8 Other - - 4 1 - 2 - 7
257
Table A.15: The Role of Social Networks Matrix Query Results Social Networks Family Expatriates Total Provide credibility and reputation 12 7 4 23 Provide contacts or ‘unlock doors’ 10 4 2 16 Provide customers or suppliers 6 - 5 11 Share and learn from experiences 3 - 8 11 Provide reassurance or comfort 2 2 6 10 Provide initial opportunity knowledge 3 5 - 8 Provide knowledge 1 3 2 6 Provide business knowledge 4 2 - 6 Finding employees or agents 1 3 - 4 Other 1 - 2 3 Finding local partner - 2 - 2 Provide institutional knowledge - - - - Provide internationalisation knowledge - - - -
Minerva Access is the Institutional Repository of The University of Melbourne
Author/s:
Van Ruth, Frances
Title:
The internationalisation of Australian firms: how networks help bridge the psychic distance
between a firm and a market
Date:
2008
Citation:
Van Ruth, F. (2008). The internationalisation of Australian firms: how networks help bridge
the psychic distance between a firm and a market. PhD thesis, Department of Management
and Marketing, The University of Melbourne.
Persistent Link:
http://hdl.handle.net/11343/35141
File Description:
The internationalisation of Australian Firms
Terms and Conditions:
Terms and Conditions: Copyright in works deposited in Minerva Access is retained by the
copyright owner. The work may not be altered without permission from the copyright owner.
Readers may only download, print and save electronic copies of whole works for their own
personal non-commercial use. Any use that exceeds these limits requires permission from
the copyright owner. Attribution is essential when quoting or paraphrasing from these works.
