ABSTRACT

THE EVOLUTION OF FIRMS' INTERNAT1ONALISATION FROM A NETWORK PERSPECTIVE AN AUSTRALIAN CASE STUDY

by
Richard Fletcher and Nigel Barrett School of Marketing, University of Technology, Sydney P.O. Box 123, Broadway, NSW 2007, Australia

Over the last twenty years a number of approaches that attempt to describe and explain the internationalisation of business organisations have been postulated, namely, the "stages", "learning", "contingency" approaches, and, more recently, the "network" approach. By means of a case study, this paper describes the evolution of a relationship between an Australian manufacturing firm and a Thai firm which has now been in existence for almost twenty years. This relationship is studied in the context of applications of the network paradigm to the internationalisation of the firm. The case analysis highlights the dynamic, complex and multidimensional nature of the internationalisation process. It also shows the potential contribution that both the case study methodology and the network paradigm can make to enhancing our understanding of the internationalisation process.

123

THE EVOLUTION OF FIRMS' INTERNATIONALISATION FROM A NETWORK PERSPECTIVE - AN AUSTRALIAN CASE STUDY. by Richard Fletcher and Nigel Barrett School of Marketing, University of Technology, Sydney P.O. Box 123, Broadway, NSW 2007, Australia Intel-nationalisation. Internationalisation is a complex and multidimensional process (Barrett, 1986). There are many definitions of internationalisation (eg Welch and Luostarinen, 1988; Rao and Naidu, 1992; Easton and Li, 1993; Johanson and Vahlne, 1993). Various approaches to explaining internationalisation have been postulated such as the 'stages' approach (Cavusgil, 1980; Reid, 1981), the 'learning' approach (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) and the 'contingency' approach (Turnbull, 1987; O'Farrell and Wood, 1994). These traditional ways of viewing internationalisation have focussed on it being an activity driven by the desire to penetrate overseas markets. A more recent approach is found in the network paradigm (Johanson and Mattsson, 1984, 1988) which potentially can more effectively addresses some of the omissions of the other approaches, for example: international activities can extend beyond direct foreign investment, internationalisation can involve inward activities such as importing, inward activities may lead to outward activities and vice versa such as when the Macdonald's franchisee in Sydney becomes the franchisor in Papua New Guinea, international behaviours can include situations in which inwards and outwards activities are linked as often happens with strategic alliances, countertrade and cooperative manufacture downsizing or withdrawal in one market can be undertaken with the objective of improving international competitiveness overall. Networks and Relationships A generally accepted way of describing the network paradigm is the ARA (Actors/Resources/Activities) Model. At the core of this paradigm is the concept of relationships which imply interdependency, a longer time horizon and the need for the parties to the relationships to build up knowledge about each other. Networks involve multiple relationships which are interdependent and this interdependency is reflected in the links between the activities, the ties that connect the various resources each party brings to the relationship and the bonds that connect the actors in the organisations directly or indirectly involved. Figure 1 illustrates this model.

124

FIGURE 1 - The Network Model

Models applying the network approach to intemationalisation have previously been proposed but not tested to date. Johanson and Mattsson(1984) argue that at any point in time, the firm has a position in the network of which it is a member regardless of whether that network is domestic or international. The position occupied in the network characterises its relationship with other firms and provides opportunities for development as well as constraining future activities. They postulate that firms can internationalise by establishing and developing positions in overseas networks in three ways. In the first place, they can establish positions in nets in the other country that are new to the firm (international extension); in the second place, they can further develop positions in nets in the overseas country where the firm already has a position (international penetration); and in the third place, they can increase the coordination between the positions they already occupy in different nets in various countries (international integration). These authors (1984, 1988) also categorise firms on the basis of the degree to which the market is internationalised (ie the strength of linkages between various national sections of the global production net for the product) and the degree to which the firm is internationalised. The resulting categories are as follows: Early Starter (low intemationalisation of the firm/low intemationalisation of the market). These firms usually begin exporting to nearby markets - usually via agents so as to take advantage of networks established by others.

125

Lonely International (high internationalisation of the firm/low Intel-nationalisation of the market). Because the firm already has international experience it has the knowledge to enter and adjust to the requirements of new markets. Late Starter (low internationalisation of the firm/high internationalisation of the market). Firms in this category are likely to become involved in international activities at the bidding of their customers or suppliers rather than of their own volition. Those who 'pull' them into international involvement will introduce the firm to the nets to which they already belong. As a result 'lonely starters' may engage in internationalisation at any stage and may be disadvantaged because of lack of experience. International Amongst Others (high internationalisation of the firm/high internationalisation of the market). Because they are already established in overseas markets, these firms can use their position in one national net as a bridge into other national nets. Having production capacity in one overseas market may result in using such capacity to supply other overseas markets. Figure 2 illustrates this categorisation: FIGURE 2 - Internationalisation And The Network Model
Degree of Internationalisation of the Market LOW HIGH

LOW
Degree of Internationalisation of the firm

Early Starter

Late Starter

HIGH

The Lonely International

The International Among Others

Applying the network approach to internationalisation highlights the relevance of relationships in international business, the role of interdependency, the need for buyers and sellers to build up knowledge about each other so as to facilitate both the creation of business and the accessing of resources, and the need to treat internationalisation of the

126

firm as a dynamic and evolutionary process. Furthermore, it helps to describe and explain global competition and cooperation in the international environment of the firm. By considering the firm in the context of the network of relationships in which it is involved, both domestically and internationally, and by examining how the networks in which it is involved change over time, an understanding of the evolution of the internationalisation of the firm will be facilitated. Methodology Two previous surveys on the internationalisation of firms in Australia (Barrett 1983, and Fletcher 1994) were used to identify firms which had responded to both surveys and which had increased their internationalisation over the eleven year period between the surveys. Australian subsidiaries of foreign companies were excluded as their international expansion is often circumscribed by the parent (eg franchise limitations on countries to which the subsidiary can export). The remaining firms were further culled in terms of convenience for contact (ie should be located in Sydney), continuity of international involvement and breadth of such involvement both in terms of market diversification and level of involvement in chosen markets. It was decided to adopt a case study approach as this allows a much richer understanding of the process of internationalisation which is necessarily limited by the more conventional cross sectional studies and those involving multiple respondent firms. For purpose of case analysis, one firm was selected - James N. Kirby Pty Ltd of Milperra in Sydney. This firm is involved in refrigeration, air conditioning, engineering and via a wholly owned subsidiary, in automotive activities. It is a family owned company, established in 1924 with a turnover of A$200 million and 1700 employees. Its international involvement dates back to 1960 when it commenced exporting to New Zealand and South East Asia. By 1994, its most important overseas markets were China, USA, Thailand and Japan. In the period from 1983 to 1993, the percentage of the firm's turnover from international business increased from 2% to 18%. The firm engages in outward international activities (direct export, sales branch overseas, and production overseas to serve overseas markets), inward international activities (direct import, production overseas to cater for the Australian market and licensing in the domestic market) as well as linked international activities (countertrade). As of 1997, it had two overseas manufacturing plants and five overseas sales branches. The network analysed in detail centred around the focal relationship between James N. Kirby Pty Ltd and the Simakulthorn Group which resulted in the Kulthorn Kirby joint venture in Thailand. In fact, James N. Kirby had been exporting to Thailand since the early 1970's. This joint venture relationship was established in order to manufacture compressors in Thailand to supply the Thai market. It has evolved to the point where the operation in Thailand (a) now produces compressors for the Australian market and production in Australia has ceased, and (b) produces pump kits for compressors for the original US licensor, Tecumseh. This relationship began in 1979 and continues to the present.

127

Two interviews were held with James N Kirby in Sydney. The first was with the General Manager Corporate Planning James N. Kirby Pty Ltd and the Group General Manager and Director, James N. Kirby Engineering on 10 April. 1997. This interview explored the overall internationalisation of the firm. As a result of this interview, it was decided to focus on the firm's activities in Thailand, and a second interview was therefore arranged with the Managing Director of James N. Kirby Pty Ltd and the Business Manager, James N. Kirby Refrigeration which took place on 8 May, 1997. This interview focussed on Thailand in general and, in particular, on the evolution of their relationship with the Simakulthorn Group. A visit was then made to Thailand where both the Executive Chairman and the Technical Adviser (Australian) of the joint venture, Kulthorn Kirby were interviewed on 5 June, 1997. Evolution of the Network In order to analyse the relationship between James N. Kirby and the Simakulthorn Group, the network in which it is embedded, its dynamic nature and the stages through which it has evolved, the structure used by Wilkinson and Young (1997) in their "Interfirm Relations and Network Management in China Project", has been employed. Nature and Importance of the Relationship James N. Kirby Pty Ltd supply research and development, technical expertise, training and some machinery. They are increasingly dependent on their relationship with Kulthorn Kirby as inputs from the Thai operation impact on the ability of the Australian firm being able to compete in other markets. Kulthorn Kirby currently supply 60% by volume and 40% by value of all refrigeration compressors distributed in Australia by James N. Kirby Refrigeration. Kulthorn Kirby also services all Kirby Refrigeration equipment throughout South East Asia and is a major customer for the refrigeration manufacturing equipment produced by Kirby Engineering. The costs of research and development in the refrigeration sector incurred by Kirby Refrigeration are able to be defrayed by that R & D also being supplied to the Thai operation. Finally, Kulthorn Kirby in which James N. Kirby have a 23% equity are supplying increasing quantities of pump kits for compressors to the original licensee viz Tecumseh of USA. Should this relationship cease, both parties would incur considerable transaction costs in replacing the other. Relationship History - Prior to Start Up James N. Kirby developed a range of compressors under their own brands suitable for the Asian market where noise levels must be lower because of the smaller size of average residential accommodation. Tecumseh of USA developed new superior compressor technology (heat exchange based) and James N. Kirby became one of their earliest licensees with rights to export to anywhere other than the USA. They exported the Tecumseh compressors to Toshiba, Hitachi and Sanyo in the Thai market. At that stage, they had little involvement with the Simakulthorn Group. James N. Kirby realised in the mid 1970's that they were losing money on their exports of compressors to Thailand and other parts of Asia. At the same time, the Simakulthorn

128

Group was importing compressors from Tecumseh and had an established distribution network with refrigeration manufacturers and wholesalers in Thailand. The Thai Government wanted compressors made in Thailand instead of their being imported and offered an attractive package of investment incentives including a monopoly on producing the product in Thailand for five years and tariff protection. This led to a decision by James N. Kirby in the mid 1970s to manufacture in Thailand. The first arrangement known as Metal Kirby did not work out. The President (International) of Tecumseh was closely associated with the Simakulthom family on the one hand and with the Kirby family on the other and introduced Sumet Simakulthorn, (Managing Director) to Kevin Kirby (Joint Managing Director and son of the founder). Relationship History Start Up Period and Initial Exchanges Based on the above personal relationships, negotiations were initiated and resulted in a submission in the name of Kulthorn Kirby being made to the Thai Board of Investment to manufacture Tecumseh compressors in Thailand on a joint venture basis. It was one of six proposals lodged with the Board of Investment for the rights to manufacture refrigeration compressors in Thailand. The relationship was facilitated by the preference of the Thai Government for a proposal which did not involve a refrigerator manufacturer as they wanted the compressor manufacturer to supply all OEM's on the same basis. Kulthorn Kirby won the rights in 1979, the company was formally established in May 1980 and the plant commenced operation in 1982. The major shareholders were the Simakulthorn group, James N. Kirby Pty Ltd and Tecumseh Inc, all of whom were family run firms. There was some minor equity allocated to the main refrigerator manufacturers in Thailand. Relationship History - Development Sanyo, who wanted to manufacture compressors in Thailand and who were unsuccessful in obtaining Board of Investment approval, sought and obtained approval to fully manufacture refrigerators in Thailand. They then used this approval, granted by the Deputy Minister for Industry, as an excuse to manufacture compressors in Thailand as from 1983. This breached the undertaking given to Kulthorn Kirby of exclusivity and called into question the viability of their operation which, at that stage, was operating well below capacity due to the slow growth of the Thai market. During the official visit to Australia by Thai Prime Minister Prem, official representations were made by the Australian Government on behalf of James N. Kirby and the Prime Minister undertook to investigate the issue on his return to Thailand. Following investigation, it was decided that it was too late to stop Sanyo making compressors and as compensation, investment privileges to Kulthorn Kirby were extended from five to ten years. Due to low volumes, the operation was not profitable until 1987/88 when the volume demanded increased due to Japanese refrigerator manufacturers with operations in Thailand using that country as a base to supply global markets. Sanyo ceased making refrigeration compressors in Thailand in 1990 and in that year, when Kulthorn Kirby issued a new share offering, Sanyo increased their equity in the company to 9%. In addition, two other major customers of Kulthorn Kirby (the Thai operations of the Japanese manufacturers Toshiba

129

and Hitachi), also increased their shareholdings to 2%. Contributing to this development has been the need for Kulthorn Kirby to improve product quality by investing in equipment, R & D and procedures so that their compressors conform to JEMA (Japanese Electronic Manufacturers Association) Standards for freon gas compressors. This was necessary due to the increasing number of compressors being produced by Kulthorn Kirby for Japanese branded refrigerators manufactured in Thailand. A factor in the development of the relationship between James N. Kirby and the Simakulthorn Group was the frequent visits of executives from James N. Kirby to Kulthorn Kirby, the continuous secondment by Kirby Refrigeration of technical personnel to the joint venture (some being seconded several times) and the fact that current senior executives of Kirby Refrigeration had previously been based in Thailand with the joint venture. Relationship History - Activities and Resources Initially there was very limited contact between James N. Kirby and the Simakulthorn Group as the latter operated as a distributor of imported compressors and refrigeration products. Then the Simakulthorn group became a joint venture partner with James N. Kirby in an operation to manufacture compressors for the Thai market. Subsequently the joint venture became the supply source for compressors to other Asian countries instead of Kirby Refrigeration. Commencing in 1983, Kirby Refrigeration began importing some models of compressor from Kulthorn Kirby instead of manufacturing them in Australia. This replacement process steadily increased over the years and by 1997, compressors were no longer manufactured in Australia by Kirby Refrigeration. The Kulthorn Kirby operation was strengthened by the firm increasing the percentage of components it produced 'in house' or in the premises of affiliated firms in Thailand. In the process, it strengthened its alliances with potential competitors and reduced the possibility of threat from them. In 1989, it joined with Mitsubishi Heavy Industries to manufacture rotary compressors for air conditioning systems and in 1990 it established its own foundry. Since that time, Kulthorn Kirby have formed Thai Sintered Products under licence to Hitachi to produce compressor components and established Kulthorn Controls to produce both controls for domestic refrigerators and enamel wire. Research and development assistance from James N. Kirby has increased over the years and another division of the firm, Kirby Engineering, established an operation in Thailand to provide technical support to Kulthorn Kirby and technical back up for machinery sales to the joint venture. Current State of the Relationship Apart from there being at least one James N. Kirby technical person based at Kulthorn Kirby at any one time, there are frequent exchanges of visits by senior executives of each party in the focal relationship. There continues to be a close liaison between Tecumseh, James N. Kirby and the Simakulthorn Group and the fortunes of the joint venture are still heavily bound up with the international success and profitability of the James N. Kirby

130

Group. The three founding parties have similar views, are family companies and invest in developing employee loyalty (eg via apprenticeship schemes and management shareholdings). Executives interviewed in both Australia and Thailand volunteered the above as being the major reasons why arrangements between the two parties had continued amicably for almost twenty years. Both parties view the relationship as being very satisfactory. The relationship is now a mature one akin to a long established marriage where the partners intimately know each other, trust one another yet are 'free to do their own thing' within the confines of the relationship, whilst keeping each other informed. Connected Relations Relations with government appear strong for both parties to the joint venture. James N. Kirby are an active participant in government sponsored international promotions and frequent winners of international business awards. They are well placed to solicit the assistance of the Australian government as they did when representations were made to Prime Minister Prem in 1983. The Simakulthorn Group is also well connected with the various political parties and government officials in Thailand and had as one of the shareholders in Kulthorn Kirby, the influential Industrial Finance Corporation of Thailand. Relations with suppliers strengthened as a result of the arrangement in Thailand as some of the suppliers to James N. Kirby, also became suppliers to the joint venture. Also, as a result of James N. Kirby expanding their engineering/machinery manufacturing operation in Australia, new suppliers were recruited and the sale of the machinery overseas is likely to result in the further internationalisation of these suppliers through their becoming linked with Kulthorn Kirby. Relations with customers have also undergone change. Over the twenty years of the relationship, there was a major change in the refrigeration industry in Australia/New Zealand whereby the number of domestic manufacturers in the region reduced to three and the market for compressors in Australia shifted from OEM to replacement. However, the joint venture enabled Kirby Refrigeration to supply compressors to the manufacturers of a number of the refrigerators being imported into Australia - they now come from Thailand instead of Japan. Kirby Refrigeration became an assembler and wholesaler of refrigeration equipment in Australia serving previous customers as well as new ones. In Thailand, the main customers were Japanese assemblers of refrigerators. These Japanese firms increased their level of manufacture over the years, exported increasing volumes of finished product from Thailand and became minor equity holders in the Kulthorn Kirby joint venture with a vested stake in its continuity and success. Relationships with competitors also underwent change. In Australia, Email ceased producing compressors with the result that there are no longer areas in which Kirby and Email compete in the refrigeration sector. In Thailand, Kulthorn Kirby's competition from Japanese firms diminished as the Japanese refrigeration manufacturers ceased supply/manufacture of compressors and became equity holders in the joint venture.

131

Implications for Intel-nationalisation Earlier in this paper, possible applications of the network paridigm to internationalisation were discussed. The evolution of the relationship between James N. Kirby and the Simakulthorn Group is considered in terms of these applications. ARA MODEL The network in which the focal relationship between James N. Kirby and the Simakulthorn group was embedded, underwent change during the almost twenty years that the relationship has existed. This has impacted on the internationalisation of the parties to this relationship. Using the ARA Model described earlier in the paper, the following comments can be offered as far as the impact of the network on the internationalisation of the parties was concerned. Actors Given the increasing involvement in international operations in Thailand over the period, it can be argued that as a result of their relationship, both firms have increased their internationalisation. Furthermore, the process was facilitated by exposure to Japanese influences due to the increasing equity participation of Japanese customers in Thailand in the joint venture. Activities The joint venture was initiated by a desire on the part of James N. Kirby to establish a presence in an overseas market because it was not possible to compete profitably in Asian markets by supplying product from Australia. Initially the joint venture supplied the Thai market, then some product went to other Asian markets. A major change in the pattern of internationalisation occurred when the James N. Kirby commenced importing compressors from the Thai joint venture which ultimately led to their ceasing production in Australia. The international activities went from being a licensee of an overseas firm, to exporting to a third country, to establishing a joint venture in that country and being the licensor, to importing from that country. The joint venture in turn began exporting components to the original licensor. The Simakulthorn Group also increased their internationalisation by becoming involved in exporting, by becoming involved in new licensing arrangements and by exporting product back to its licensee. Resources Internationalisation changed for both parties when the Thai joint venture began increasing its production of inputs as opposed to external sourcing. James N. Kirby became involved through the venture in equity in factories to produce these inputs which in several cases were manufactured under licence to Japanese principals. The supply of resources by James N. Kirby to the Thai operation was not confined to technology and equipment, but also included management practises as evidenced by the introduction of an apprentice training scheme into the joint venture.

132

Atmosphere The degree of trust in the relationship between the parties has continued to grow as the joint venture assumes more responsibility for activities of Kirby Refrigeration in Asia and the supply of product to the wholesaling end of the Australian operation. The atmosphere is influenced by the increasing dependence of Kirby Refrigeration on the Thai operation. Environment Triggering the relationship was a decline in the ability of Australian manufacturers of refrigeration compressors to be competitive on the one hand and the reduction in whitegoods manufacture in Australia in the face of import competition. Relationships between Australia and Thailand continued to be strong over the twenty years of the history of the relationship providing security for increasing commitment of resources by James N. Kirby to Thailand. The enhanced potential for using Thailand as a base for export to other parts of Asia (particularly South East Asia), is due to Thailand's membership of ASEAN. CHANGES IN INTERNATIONALISATION CLASSIFICATION Johanson and Mattsson (1984) classified firms' internationalisation as 'international extension', 'international penetration' or 'international integration'. In these terms, James N. Kirby adopted an extension strategy in their initial entry into Thailand and a penetration strategy when they commenced manufacture there. As the relationship evolved, it could be argued that their activity reflected a strategy of international integration as Kulthorn Kirby not only became the focus for export in Asia but also the supply source for the Australian operation and a major component source for the US licensor. When considered in relation to Johanson and Mattsson's (1984, 1988) categorisation of firms in the international environment as 'early starters', 'lonely internationals', 'late starters' and 'internationals amongst others', James N. Kirby were 'early starters' in their first attempts to export to Thailand, and over time it could be argued that they became an 'international amongst others'..

Conclusion
The foregoing case illustrates the dynamic, complex and multidimensional nature of the internationalisation process. The application of the case study methodology and aspects of the network paradigm to internationalisation highlights that no longer is it realistic to assume that internationalisation ceases at the joint venture or foreign direct investment stages, or, that it solely consists of outward or export driven activities. The analysis further emphasises the importance of understanding the relationships which underpin the ongoing internationalisation process of the firms involved.

10

133

BIBLIOGRAPHY Barrett, N.J., (1986) "A Study Of The Intel-nationalisation Of Australian Manufacturing Firms" , PhD Thesis, University of New South Wales. Cavusgil, S.T., (1980) "On The Intel-nationalisation Process Of Firms", European Research. Vol 8, No 6 (November), pp 273-281. Easton, G. and Li, Z.X., (1993) "Ther Dynamics Of Export Channels - A Case Study Of Exporting From the UK To The Peoples Republic Of China", Paper presented at the 9* Industrial Marketing and Purchasing conference, University of Bath. Fletcher, R. (1997) "A Holistic Approach To Intel-nationalisation And Government Assistance" Proceedings Of The 26th EMAC Conference. Warwick business School, 20 - 23 rd May. Johanson, J. and Mattsson. L-G, (1984) "International Marketing And Internationalisation Processes - Some Perspectives On Current And Future Research", Paper presented at University of Manchester Institute of Science and Technology (UMIST) Conference on Research Developments in International Marketing, September 10-12. Johanson, J. and Mattsson, L-G. (1988) "Internationalisation In Industrial Systems - A Network Approach", Reprint Series, No 1, Department of Business Administration, University of Uppsala. Johanson, J. and Vahlne, J.E., (1977) "The Internationalisation Process Of The Firm A Model Of Knowledge Development And Increasing Foreign market Commitments", Journal of International Business Studies, Spring/Summer, pp 23-32. Johanson, J. and Vahlne, J.E., (1993) "Management Of Internationalisation" in Zambou, Z.L. and Pettigrew, A.M. (Eds), Perspectives on Strategic Change. Klewer Academic Publishers, Boston, pp43-78. Johanson, J. and Wiedersheim-Paul, F. (1975) "The Internationalisation Of The Firm Four Swedish case Studies", Journal of Management Studies. Vol 12, No 3, October, pp 305 - 322. O'Farrell, P.N. and Wood, P. A. (1994) "International Market Selection By Service Firms: Key conceptual Issues And Methodological Issues" International Business Review , Vol 3, No 3, pp 243-261. Rao, T.R. and Naidu, G.M. (1992) "Are The Stages Of Internationalisation Empirically Supportable?" Journal of Global Marketing, Vol 6, No Vi, pp 147-170.

134

Reid, S.D. (1981) "The Decision Maker And Export Entry And Expansion", Journal Of International Business Studies. Vol 12. No 2. pp 101 112. Turnbull, P.W. (1987) "A Challenge To the Stages Theory Of The Intel-nationalisation Process" in Rosen, P.J. and Reid, S.D. (Eds), Managing Export Entry and Expansion. Praeger, New York, pp 21 - 40. Wilkinson, I.F. and Young, L. C. (1997) "Interfirm Relations And Network Management In China", unpublished description of a research project, University of Western Sydney, Nepean

12

135

136