~ i Pergamon

P l h S0969-5931 (97)00010-3
lnwrnutional Business Review Vok 6, No. ~. pp. 361-3,~6, j 997
~ 1997 Elsevier Science Ltd. All tights reserved
Pri ated in Grea~ Britain
0960-5o31/97 $17.(10 + 0.0(1

Network
Network Relationships and the Relationships
and the
Internationalisation Process of International-
isation Process
Small Software Firms
Nicole Coviello* and Hugh Munro?
*Faculty of Management, University of Calgary, 2500 University Dr
NW, Calgary, AB, Canada T2N 1N4
tSchool of Business and Economics, Wilfrid Laurier University,
Waterloo, Ontario, Canada N2L 3C5

Abstract--This paper examines the influence of network relationships on the internationalisa-

tion process of small firms, using multi-site case research on the software industry. The study
empirically integrates the traditional models of incremental internationalisation with the
network perspective. The findings show that the internationalisation process of small software
firms reflects an accelerated version of the stage model perspective, and is driven, facilitated,
and inhibited by a set of formal and informal network relationships. These relationships impact
foreign market selection and mode of entry, as well as product development and market
diversification activities. The paper offers a conceptual framework of the small firm
internationalisation process which integrates the "stage" and "network" perspectives, and
concludes with a discussion of research and managerial implications. © 1997 Elsevier Science
Ltd

Key Words --Internationalisation Process, Networks, Small Firms, Software

Introduction
Historically, research on the internationalisation process has tended to focus on
large manufacturing organisations, in spite of the importance of small service
and/or knowledge-based firms to most economies. Such firms are of particular
interest given they often possess limited capabilities and management resources
(Erramilli and D'Souza, 1993; Buckley, 1989; O'Farrell and Hitchins, 1988).
However, the success of these firms, particularly those pursuing niche strategies
in small domestic markets, may depend on their ability to internationalise their
operations (Luostarinen, 1989). If the firm is faced with increasing demand,
sophisticated customers, and a volatile competitive market, as well as a product

*Dr Nicole Coviello is Associate Professor in the Faculty of Management, University of

Calgary, Canada. Her research interests focus on internationalisation issues, networks,
entrepreneurial firm growth, and the role of marketing in the current business environment.
*Dr Hugh Munro is Associate Professor of Marketing in the School of Business and Economics,
Wilfrid Laurier University, Canada. His research interests encompass international business,
strategy development, and new product development, with a current emphasis on the role of
networks in entrepreneurial firm growth.

361
362

International that is strategically important or unable to be standardised, successful

Business internationalisation may well require the firm to leverage the skills and
Review resources of other organisations (Hara and Kanai, 1994). This is supported by
6,4 McDougall et al. (1994) and Bell (1995), who highlight the potential impact of
network relationships on small firm internationalisation. More specifically,
Coviello and Munro (1995) found that the conduct of international marketing
activities of small firms was impacted by larger partners in their network. The
conclusions of each of these studies call for further research on the role of
networks in the internationalisation process of small firms.
The purpose of this research is to further our understanding of how network
relationships impact internationalisation patterns and processes. More
specifically, this research seeks to understand how network relationships
influence the small firm's approach to internationalisation, particularly in
terms of foreign market and entry mode selection.
While the primary interest is on small firm processes, the research also
focuses on software developers; firms characterised as high technology,
knowledge-based, and service-intensive. This sector is similar to those
examined by Bell (1995) and Coviello and Munro (1995), and provides an
interesting contrast to much of the internationalisation literature which focuses
on traditional manufacturing organisations. Examination of high technology
firms also allows for a deeper understanding of a global, fast-growing, and
pervasive industry which is receiving increased attention in the international
business literature (McDougall et al., 1994; Oviatt and McDougall, 1994).
The paper proceeds with a review of the internationalisation process
literature, discussed in the context of small firms. This review highlights the
need for research in the area, leading to the identification of two research
questions. This is then followed by a discussion of the research method and
research findings. The paper concludes by offering an empirically-based
framework describing the influence of network relationships on the
internationalisation process of small software firms, and a discussion of
research and managerial implications.

Literature Review
Since Welch and Luostarinen's (Welch and Luostarinen, 1988) comprehensive
analysis of the internationalisation concept, a number of useful reviews have
assessed and synthesised the general internationalisation process literature (eg
Johanson and Vahlne, 1990, 1992; Melin, 1992; Andersen, 1993). Each of
these reviews seems to agree that efforts to encapsulate the internationalisation
concept in a definitive manner have been inadequate.
If it is accepted that internationalisation is a dynamic concept (Johanson and
Vahlne, 1992; Melin, 1992), then the definition of internationalisation offered
by Beamish (1990) is perhaps appropriate:

"...the process by which firms both increase their awareness of the direct and indirect
influencesof internationaltransactionson their future, and establish and conducttransactions
with other countries."
 363

This view, like many others, is process-based, and incorporates: (1) the Network
internal dynamics and learning of the firm as it expands internationally, and (2) Relationships
the "outward" pattern of international investment exemplified by market and the
selection and mode of entry. Beamish's definition also allows for recognition International-
of the fact that firms may begin the internationalisation process through isation Process
involvement in activities such as foreign sourcing or countertrade, i.e.
reflecting an "inward" pattern of internationalisation (Welch and Luostarinen,
1988, 1993; Korhonen et al., 1995).
Efforts to understand the process of internationalisation have been
numerous. One area of the extant literature discusses an incremental approach
to international market expansion, whereby a series of "stages" of
internationalisation reflect the firm's increasing market knowledge and
commitment over time. A second area suggests the internationalisation
process involves, and is influenced by, the set of connected relationships a firm
develops as part of its "network". Both of these perspectives will be discussed
in turn, including a review of the small firm research in each area.

Models of Incremental Internationalisation

The notion of a firm expanding to international markets in an incremental,
stepwise manner is widely documented in the literature, with Johanson and
Vahlne (1977) providing the most commonly cited conceptual and empirical
base. Their research on the activities of large Swedish manufacturing firms
emphasises managerial learning during the internationalisation process, and
shows that a series of "stages" of internationalisation occur in order of
increasing commitment and investment in foreign markets. For example, the
model offered by Johanson and Vahlne (1977) suggests that initial
internationalisation activities are targeted to "psychically close" markets, i.e.
markets having similar culture, language, political systems, trade practices,
etc. Following initial expansion with low risk, indirect exporting to similar
markets, firms improve their foreign market knowledge. Over time and
through experience, firms then increase foreign market commitment and
expand to more "psychically distant" markets. This in turn enhances market
knowledge, leading to further commitment, including equity investment in off-
shore manufacturing and sales operations. Overall, the Johanson and Vahlne
model illustrates how managerial learning drives internationalisation. At the
same time, the model captures manifestations of the process in terms of market
selection and the mechanisms used to enter foreign markets.
In addition to the Johanson and Vahlne model, other important research also
reports an incremental approach to internationalisation (e.g. Cavusgil, 1984;
Czinkota, 1982: Reid, 1981; Bilkey and Tesar, 1977). For example, Cavusgil
(1984) empirically identifies five stages (Preinvolvement, Reactive/Opportu-
nistic, Experimental, Active, and Committed Involvement), reflecting
differences in the firm's orientation and management attitude to international
market expansion. As summarised by Andersen (1993) and Thomas and
Araujo (1985), this type of incremental approach is a result of innovation
adoption behaviour, whereby the perceptions and beliefs of managers
364

International influence, and are shaped by, involvement in foreign markets. Like the
Business Johanson and Vahlne model, these studies highlight the role of managerial
Review learning in the internationalisation process.
6,4
Models of Incremental Internationalisation and the Small Firm
The general literature discussing incremental internationalisation has led to a
number of efforts to validate earlier work across different firm characteristics,
including firm size. In a recent review of contemporary empirical research on
small firm intemationalisation, Coviello and McAuley (1996) identified eight
studies which either:

(1) support the traditional view of incremental internationalisation (Hakam et

al., 1993; Calof and Viviers, 1995);
(2) confirm a gradual process of intemationalisation, but note the prevalence
of inward investment preceding outward investment and foreign market
entry (Hyvaerinen, 1994);
(3) redefine the traditional perspective by describing different "stages" in the
context of firm and market characteristics (Rao and Naidu, 1992);
(4) identify a process of incremental commitment for small firms that may be
different to that of larger firms (Lau, 1992);
(5) identify stages of competitive strategy in the small firm internationalisa-
tion process, but no linear relationships between these stages and the
mechanisms used in internationalisation (Chang and Grub, 1992); or
(6) challenge the traditional view of incremental internationalisation
(Lindqvist, 1988; Bell, 1995).

As a result, while some recent small firm findings support the view that
finns follow an incremental process of internationalisation in terms of
increasing knowledge, commitment, and investment, others do not. This
apparent contradiction reflects patterns also found in the large firm literature,
where empirical findings both identify and support the incremental approach
(see Johanson and Vahlne, 1990; also Luostarinen, 1989; Buckley, 1989),
while others challenge it (e.g. Whitelock and Munday, 1993; Millington and
Bayliss, 1990; Tumbull, 1987; Sharma and Johanson, 1987).
Each of the studies examined by Coviello and McAuley (1996) provides a
contribution in its own right, however the findings of Bell (1995) and
Lindqvist (1988) are particularly interesting as they suggest that:

• the pace and pattern of international market growth and choice of entry
mode for small firms is influenced by (for example) close relationships with
customers (Lindqvist, 1988); and

• interfirm relationships (with clients, suppliers, etc) appear influential in both

market selection and mode of entry for small firms (Bell, 1995).

These results are perhaps not surprising, as both Bell (1995) and Lindqvist
 365

(1988) examined high technology industries; industries often characterised by Network

relationships between various organisations for product development and Relationships
marketing. Also, if the firms examined by Bell (1995) and Lindqvist (1988) and the
consisted of "committed internationalists" (Sullivan and Bauerschmidt, 1990; International-
Bonaccorsi, 1992), or "international new ventures" (McDougall et al., 1994; isation Process
Oviatt and McDougall, 1994) it might be expected that their international
growth patterns would differ from those proposed in the models of incremental
internationalisation (McDougall et al., 1994).
The findings of Bell (1995) and Lindqvist (1988) are exploratory in nature
and do not examine the influence of network relationships in detail.
Nevertheless, their results suggest that while the literature examining
incremental internationalisation describes certain patterns related to manage-
rial learning and market entry mechanisms, it may not fully capture the
internationalisation process. This is particularly relevant given the foreign
market entry process is increasingly recognised to be:

"...unclear, complex, continuouslychanging...strategyemerges out of interplay between

actors in the foreign market and the firm." (Johansonand Vahlne, 1992)

This interplay between actors is manifested in relationships (as identified by

Bell, 1995 and Lindqvist, 1988), and has received significant attention in the
network literature (e.g. Axelsson and Easton, 1992; Johanson and Vahlne,
1992). This perspective will now be discussed, in the context of the
internationalisation process.

Networks and the Internationalisation Process

As defined by Axelsson and Easton (1992), a network involves "sets of two or
more connected exchange relationships". Following from this, markets are
depicted as systems of social and industrial relationships among, for example,
customers, suppliers, competitors, family, and friends. According to the
network perspective, the nature of relationships established between various
parties will influence strategic decisions, and the network involves resource
exchange among its different members (Sharma, 1993). Members of the
network value relationships rather than discrete transactions, thus opportunistic
behaviour is expected to be controlled and minimised.
In the context of internationalisation, Johanson and Vahlne's (1992)
examination of two case studies found foreign market entry to be a gradual
process, resulting from interaction between parties, and developing/maintain-
ing relationships over time. This supports Sharma and Johanson (1987), who
found that technical consultancy firms operate in networks of connected
relationships; relationships which become "bridges to foreign markets",
providing firms with the opportunity and motivation to internationalise.
Similarly, Johanson and Mattsson (1988) suggest that a firm's success in
entering new international markets is more dependent on its position in a
366

International network and relationships within current markets, than on market and cultural
Business characteristics.
Review Overall, the network perspective goes beyond the models of incremental
6,4 internationalisation by suggesting that a firm's strategy emerges as a pattern of
behaviour influenced by a variety of network relationships. As stated by Benito
and Welch (1994):

"...the sometimeserratic character of internationalisationfor individual firms appears to be

related to the seeming randomness with which opportunities and threats relevant to
international activity arise in a company's external environment."

Such opportunities and threats may be presented to the firm by their network
relationships. As such, these external contact systems or relationships may
drive, facilitate, or inhibit a firm's international market development. Such
relationships might also influence the firm's choice of foreign market and
entry mode.

Networks a n d the Small Firm

Much of the small firm network research focuses on general network
influences on firm behaviour (e.g. Tjosvold and Weicker, 1993; Dubini and
Aldrich, 1991; Larson, 1991; Lorenzoni and Ornati, 1988). As noted
previously however, certain studies highlight the potential role of networks
in small firm internationalisation (Lindqvist, 1988; McDougall et al., 1994;
Bell, 1995).
Other findings also recognise the importance of networks to a small firm
(e.g. Hansen et al., 1994; Hara and Kanai, 1994; Coviello and Munro, 1995;
Kaufmann, 1995; Korhonen et al., 1995). For example, Korhonen et al. (1995)
found that over half of Finnish SMEs started their internationalisation process
with "inward" foreign operations, largely through the import of physical goods
or services. From this, Korhonen et al. (1995) conclude that such inward
operations allow for international network connections to be established, thus
supporting Welch and Luostarinen (1993). Also, Coviello and Munro (1995)
found that successful New Zealand-based software firms are actively involved
with international networks, and outsource many market development
activities to network partners.
Finally, Bonaccorsi's (1992) study of small Italian exporters suggests that
"access to external resources" (through for example, buyer-seller relation-
ships) can play an important role in the firm's internationalisation process.
This view is also held by Welch (1992), who provides a thorough discussion of
the potential use of alliances or cooperative arrangements by small firms in the
internationalisation process, concluding that while alliances are "no panacea,"
they can improve the potential for foreign market penetration by providing
access to a network of additional relationships.
Overall, research examining network issues in the context of small firms is
increasing. However, none of the above authors identify and examine specific
network and relationship influences in any detail, in the context of the
 367

internationalisation process. This weakness is particularly evident when Network

considering the causes or drivers of internationalisation, and how the process is Relationships
manifested in terms of foreign market selection and the mechanisms used for a n d the
market entry. International-
isation P r o c e s s
Summary and Identification of Research Questions
Empirical research to date shows that the various models of incremental
internationalisation provide useful frameworks for analysis of international
growth patterns, in terms of a finn's gradual learning and commitment to
international markets. Similarly, there is a growing body of literature
highlighting the potential influence of network relationships on the
internationalisation process. At the same time, while Johanson and Vahlne
(1990) suggest that researchers should investigate how internationalisation is
related to surrounding processes, and more fully understand the influences on
internationalisation strategies, little empirical work has been done in this
regard, in the specific context of small firms and networks.
Therefore, the purpose of this research is to empirically examine the
intemationalisation process of small firms, integrating the incremental or
"stage" views of intemationalisation with the network perspective. Using the
context of the software industry, the research seeks to understand:

(1) how the internationalisation process of small software firms is

manifested in their choice of foreign market and mode of entry; and

(2) how network relationships influence the small software firm's choice of
foreign market and model of entry.

Method
To most effectively identify and understand detailed international growth
patterns and processes, this research used multi-site case study methodology,
following the principles of data collection established by Eisenhardt (1989)
and Yin (1989). Multiple sources of evidence were used (depth interviews,
documents, archival records), and a case study data base was created using
four case sites.
The population from which the case sites were selected consists of New
Zealand-based software developers. These firms are small by international
standards, and have knowledge as a core competency. The industry is active
internationally, serving diverse and complex markets from a small domestic
base. While the findings of the study are perhaps limited to high technology
finns, the choice of a single sector minimises the impact of inter-industry
differences (as per Turnbull, 1987; Strandksov, 1986). Further, characteristics
of the software industry are similar to other knowledge-based industries
competing internationally, and are the same as those examined by Bell (1995)
and McDougall et al. (1994). Thus, a basis for comparison is provided,
368

International enhancing theory development, and our understanding of the internationalisa-

Business tion patterns and processes of an important business sector.
Review The case sites were chosen for theoretical rather than statistical reasons, to
6,4 replicate and extend the emergent theory under examination. Sites were
generated based on a number of different characteristics, as suggested by
Eisenhardt (1989). For the purposes of this research, the case sites had
differing product and market characteristics, and their histories included both
success and failure in foreign markets. Individual sample elements were upper-
level managers in the company, primarily the Managing Director/Chief
Executive, and key informants identified by the Managing Director. These
respondents were directly involved in decision-making for internationalisation,
and able to provide responses based on personal experience.
Data analysis was designed to identify patterns relevant to international
market growth and the influence of network relationships on the case firms.
The techniques of pattern-matching and explanation-building developed by
Yin (1989) were used. This approach was aided by a variety of analytical tools
applied within and across the cases, as suggested by Miles and Huberman
(1984). For example, Checklists, Time-Ordered Matrices, and Event Listings
were used to identify and chronicle critical events pertaining to growth,
product-market and relationship development, and decision-making. As is
consistent with qualitative research methods, no attempt was made to
operationalise and measure concepts on an a priori basis. Rather, verbatim
transcripts were content analysed, then interpreted and coded as a means for
labelling dimensions which emerged in the process of data collection. In most
instances, direct quotes from case informants were used, as they were believed
to best reflect the phenomena under investigation.
Given the historical and longitudinal perspective of the research, all analysis
was conducted chronologically as the basic sequence of cause/effect should
not be inverted. Further, a major area of the literature base on the
internationalisation process focuses on sequential stages, thus chronological
analysis was relevant. This approach is also supported by Axelsson and
Johanson (1992) and Melin (1992), as appropriate to the study of the
internationalisation process and network development. Finally, the processes
under examination may be context specific, requiring subjective and
interpretive analysis. An inductive approach to the research is therefore
warranted, following the relativist view (Hunt, 1991).

Findings and Discussion

To address the research questions developed previously, the international
growth patterns of the case firms will be presented, followed by a discussion of
the influence of network relationships on the internationalisation process. To
begin, the case firm characteristics are briefly summarised.
At time of data collection, each case firm had extensive experience in the
international software industry. All four firms were founded between 1978 and
1983, and had experienced significant growth. For example, firm size (at time
of data collection) ranged from 25 employees located in one country to 140
 369

employees in four countries. Annual turnover ranged from $2 million to Network

approximately $15 million, and the number of countries served ranged from Relationships
five to seventeen. The average per annum growth rate for these finns was 83%. and the
Their products ranged from modular applications packages for the financial International-
accounting market, to complex system programming software. isation Process

International Growth Patterns

The international growth patterns of the four case firms are summarised in
Fig. 1 (below). This figure captures the internationalisation process in terms of
the finn's orientation toward international expansion, the time frame
associated with internationalisation, the foreign markets entered, and the
modes of entry used.
Three "stages" of international activity are apparent in the case findings. In
terms of firm orientation, the small software firms had a largely domestic focus
in the initial stage (Year 0-1), but clear intentions to internationalise. The
second stage (Year 1-3) is characterised by the small finns becoming actively
involved in their first foreign market. Managers also began to seriously
evaluate potential market expansion opportunities. Finally, the third stage
(beginning at Year 3) is evidenced by each of the four firms showing
committed involvement across numerous markets, with international sales
dominating their growth.
Interestingly, while certain internationalisation stages are able to be
identified, they do not fully match the extant literature. For example, only
three stages of evolution are evident, and market expansion was not on a "trial"
or "experimental" basis. Rather, the internationalisation process began with
management exploring the feasibility of international expansion from the time
of firm inception. Thus, Fig. 1 depicts the compressed time frame in which the
internationalisation process occurs, with the small software firms commencing
operations with a foreign market intention, and being "committed"
internationalists within three years. This supports Sullivan and Bauerschmidt
(1990) and McDougall et al. (1994).
In terms of entry mode, the second stage of Fig. 1 shows that prior to
entering their first market, some firms established a product development
agreement with a large overseas partner. This in fact occurred for three of the
four cases, impacting their future growth patterns in that the agreements
provided them with development funding, and led to loose piggy-backing
arrangements being established. These relationships quickly evolved to
become formal distribution agreements,* in a psychically close market
(Australia). While the expansion to close markets supports Johanson and
Vahlne (1977) among others, the initial mechanism for internationalisation is
different, and the resultant pattern therefore supports Welch and Luostarinen

*While one firm attempted direct sales to its first market, it quickly realized it was unable to
invest the effort and time required for market development, and due to its limited resource base,
established a distributor.
Figure 1. "--1
The International Process of p.Ao ~..lo +
Small Software Firms
Firm Orientation Year Mode of Entry
-~Domestic Operations
Foreign
Market 0-1
Intention
~ Product Development Agreement with
Major Hardware Vendor
............................................................... Direct Sales to L ..........
Psychically Close
Active Market Piggy-backing
Involvement on Hardware
and 1-3 Vendor
Evaluation _l Distributor to I_ ]
- [ Psychically Close
Market
I
(to Psychically Distant Markets)
,+ + + +
Commitled 3+ I Distributors Piggy-backing Joint Marketing Development IDirect Sales]
Involvement Agreement Agreement
*Establishment of own sales office or offshore production facility typically occurs later in the
internationalisation process (e.g. Year 5 7)
 371

(1993), as well as the findings of Korhonen et al. (1995) and Hyvaerinen Network
(1994). Of note, the psychically close market was also physically close, Relationships
perhaps reflecting the importance of physical proximity for small firms that are a n d the
geographically distant from potential markets. International-
The third stage of Fig. 1 highlights that based on their initial experience off- isation P r o c e s s
shore, the case firms quickly began to develop more complex relationship
structures (cf. Welch and Luostarinen, 1993). They made simultaneous use of
multiple entry modes, including distributors, joint marketing and/or develop-
ment agreements, piggy-backing, and joint ventures. In addition, the markets
selected for international expansion in this phase were worldwide and
psychically "distant," often reflecting little psychic similarity or physical
proximity (e.g. Hong Kong, Spain). These patterns reflect the findings of Bell
(1995).
Finally, two firms established a foreign sales office during the inter-
nationalisation process, to support sales made through partner subsidiaries or
establish regional headquarters in a distant market. This occurred relatively late
in the internationalisation process (e.g. Year 5-7), and reflects internalisation of
activities in order to better support existing relationships and increase control
over marketing activities. Only one firm travelled the length of the
internationalisation process as described by Johanson and Vahlne (1977), by
attempting to establish an offshore product development facility in the US. As
this market was viewed as critical, and management believed their major partner
was unable to provide the necessary market access, technology, or capital, a
separate organisation was established for introduction of a new product,
independent of the partner. The subsidiary was closed within twelve months
however, and all software development activities returned to New Zealand.
Overall, if management is expected to show a gradual awareness of, interest
in, and involvement with foreign markets, the small software firm behaves
differently to those represented by the general models of incremental
internationalisation. The case firms began their internationalisation process
with the intent to enter foreign markets, and although their first entry was to a
psychically and physically close market, other relatively early expansion, was
not.
Similarly, if the internationalisation process of small software firms is
examined in terms of entry mode, and increased learning and commitment is
expected to result in the establishment of host country production, the
internationalisation process of small software firms is manifested differently
from those patterns generally found in the literature. According to Johanson
and Vahlne (1977, 1990) however, such patterns are typical only of firms: (1)
with large resources; (2) with experience in other markets with similar
conditions; or (3) competing in easily predictable market conditions. None of
these parameters fit the small, young, software firm, competing in volatile
markets with rapid growth and technological change.
Some of these findings are perhaps to be expected given the target market
for these small firms is inevitably beyond New Zealand, and usually, is
geographically distant. This, combined with the limited resource base of the
372

International small software finn at early stages of its lifecycle (when internationalisation
Business begins for these firms), would suggest that it would be difficult for such finns
Review to expand international operations on their own. This in fact, was the situation
6,4 in this research, and thus Oviatt and McDougall (1994), McDougall et al.
(1994), and Bell (1995) are supported. That is, the small software firms show a
pattern of externalising their activities during the internationalisation process,
often relying on network relationships for market selection as well as mode of
entry. This will now be discussed.

The Influence of Networks on the Internationalisation Process

As seen previously in Fig. 1, the small software firm's internationalisation
process is rapid, with the firm using a variety of mechanisms to enter a diverse
number of foreign markets in as little as three years. This activity appears to be
largely driven by existing network relationships. That is, the rapid and
successful growth of the case firms appears to be a result of their involvement
in international networks, with major partners often guiding foreign market
selection and providing the mechanism for market entry. Thus, network
relationships may not only drive internationalisation, but influence the pattern
of market investment.
To understand this, critical incident listings were used to describe the pattern
of international market development and network relationships in a
chronological manner. Table 1 (below) provides a summary of each firm's
internationalisation process over time, including information on the sequence
of foreign market development, the entry mode used for each market, and how
the direct and indirect network relationships influenced each firm's
internationalisation process.
Using one firm (FACT) as a representative example from Table 1, it can be
seen that FACT's major relationship was with a Japanese multinational
(Wang). In this relationship, FACT leveraged the market access provided by
Wang, and Wang harnessed FACT's technological capabilities for product
development. At a more subtle level, Wang played a significant role in directly
or indirectly providing FACT with market development opportunities world-
wide. For example, FACT's expansion to Australia was triggered by an
informal contact generated indirectly by FACT's product development
agreement with Wang.
Following expansion to Australia, FACT pursued the UK market
independently of Wang. However, the Wang relationship ultimately impacted
FACT's growth patterns in Australia and the UK in that the original distributor
relationships in both countries were terminated at the request of Wang, and UK
distribution rights were transferred to Wang's subsidiary. Beyond Australia
and the UK, Wang offered FACT market access to Hong Kong, Europe, and
the Eastern Bloc countries, through Wang's international subsidiaries. Thus,
Wang influenced FACT's international market selection and also provided the
entry mode.
A different pattern emerges for the US market in that FACT established a
 Foreign Market Entry CBA DSR FACT MSL

A. Initial Foreign • following successful NZ • while identifying product • following establishment • sold direct to major custo-
Market Entry distribution of product and market opportunities, o f a product development mer in Australia
for a US MNC, CBA D S R ' s CEO met a New agreement with a
management was Zealander managing the Japanese MNC, FACT
approached by a distributor Australian subsidiary of a was approached by a
in Australia (initiated by Japanese M N C hardware distributor in Australia
the US MNC both it and vendor (referred by a NZ-based
C B A represented) industry contact)
• Australian distributor • contact led to a joint • first Australian
signed* product development and distributor signed
marketing agreement for
Australia

All Products Product 1 All Products Product 1

B. Subsequent Market • Australian distributor • Australian partner helped • interested UK • established agent in Aus-
Entries grew to include a dealer established a distributor distributor identified and tralia through personal con-
network across Australia relationship with the signed tact of M S L ' s CEO; agency
Japanese M N C ' s US agreement terminated after 1
subsidiary year
• Singapore distributor for • DSR piggy-backed on • Australian sales office • selected a distributor in US
C B A ' s own range of pro- Japanese M N C ' s established (through active search) but
ducts established, initiated distribution network to distributor declared bank-
by a member of the Canada, Europe, and the ruptcy; MSL on verge of
Australian dealer network UK insolvency
• based on word-of-mouth, • second Australian
C B A was approached by distributor signed;
two distributors in the UK, initiated through
one of which distributed previous business
product for the same US contacts
MNC represented by CBA
in NZ and Australia

Table 1. o
~
Market Selection and Mode
of Entry Patterns for the
Four Case Firms (Presented
Chronologically)

t~
Table 1.
Continued ~'fi'~
Foreign Market Entry CBA DSR FACT MSL
• one UK firm signed for Product 2 • entered Hong Kong by Product 2
distribution and product • initially sold direct to piggy-backing on • approached several inter-
enhancement; informal Australia; success led to Japanese M N C ' s national hardware vendors
relationship established agreements with five distributor for product development
with the other finn (the agents and one distributor support, including a Japanese
distributor for the US MNC) MNC
• Malaysian distributor • Singapore distributor • used Japanese MNC's • contacted by NZ subsidi-
established, initiated established, initiated contacts to establish US ary of same Japanese firm, to
through the family and through a personal sales office (independent established a product devel-
business contacts of a contact of the DSR of the Japanese firm) opment agreement with the
member of the NZ Product Manager Japanese firm's Australian
dealer network. subsidiary, development
agreement evolved to in-
clude marketing activities
• CEO and management • at Japanese M N C ' s • entered Malaysia and
team used industry direction, terminated first Spain by piggy-backing on
contacts to identify two Australian distributor rela- sales of the Japanese MNC's
Scandinavian hardware tionship, acquired second Australian subsidiary
manufacturers to act as Australian distributor, and
distributors for Europe transferred U K distribution
rights to Japanese MNC's
UK subsidiary
• joint marketing and • entered Europe through • same Japanese MNC re-
development agreement Japanese MNC's German commended an independent
also established with the subsidiary, connected to distributor for Japan; Japa-
two Scandinavian firms subsidiaries in Holland, nese distributor signed
Belgium, Austria, and
Poland
• withdrew from the US • long-term product devel-
opment agreement estab-
lished with original Japanese
MNC partner, for world
markets
 Foreign M a r k e t E n t r y CBA DSR FACT MSL
Product 3 • Japanese MNC
• CEO and management experienced financial
team used industry difficulties
contacts and advice from
personal contact at • Japanese distributor
Japanese MNC partner to established (independent of
establish distributors in the Japanese MNC), initiated
Singapore, Hong Kong, by one of the distributor's
Canada, and the US NZ-born employees
Product 4 • Indonesian distributor
established, initiated by a
• UK distributor major competitor of the
established, initiated initial Japanese MNC partner
through DSR's Product
Manager and his industry • reentered US with US
venture capital, establishing
a US-based marketing
operation, independent of
initial Japanese MNC partner
Australian distributor became a joint venture in Year 3, and then a wholly-owned sales subsidiary in Year 7.
p..~.
~o
~...* • tq)
-
Table 1.
Continued
ta~
376

International local sales office independent of Wang's subsidiary network. Nevertheless, the
Business FACT office relied informally on Wang for market intelligence and support.
Review Of all the markets served by FACT, only Japan and Indonesia were entered
6,4 through contacts outside the Wang network. For example, the Japanese
relationship was initiated through previously established personal contacts (a
New Zealander working for the Japanese firm). Entry to Indonesia resulted
from an approach by another well-established hardware vendor: Compaq, a
competitor to Wang. Thus, additional sets of network relationships were
introduced to FACT.
Overall, FACT's internationalisation process was driven and shaped by a
complex set of network relationships, influenced by one large international
partner. As commented by the General Manager:

"...you congregate around a particular honey pot, and in the past it was called Wang. So, we
buzz around the Wang pot, and they [potential partners] buzz around, and Wang may put you
in contact or you may bump into each other."

In a pattern similar to FACT, the other case firms were also linked to
extensive, established international networks at a very early stage of their life
cycle. This presented the small software finns with new market opportunities
and established organisations as potential partners, thus accelerating and
shaping their internationalisation efforts. More specifically, each firm's choice
of foreign market and entry mode was clearly influenced by their early
partner(s) and resultant network relationships. Through network contacts, all
four case firms were well-established offshore within three years of company
formation, and actively looking to further their international expansion through
development of additional relationships. This supports Johanson and Vahlne's
more recent views, recognising the influence of networks and multiple market
relationships in the internationalisation process.
Of note, the early partners of these small software firms tended to be large,
internationally-established hardware vendors. As stated by FACT's General
Manager, small software firms are undercapitalised and created on the efforts
and strengths of only two or three people. Thus,

"...you have to be in some way associated with a hardware partner, or a substantial

company."

In the case of MSL, a product development relationship was critical to the

company's survival, and the Managing Director believed the only viable
option for international growth was to develop a relationship with an overseas
partner. As he commented:

"...if you have got a piece of the jigsaw they want, then you know its going to go very well
because you're not fighting to sell your product in isolation."
 377

Therefore, the findings of this study support Welch and Luostarinen (1993) Network
and Korhonen et al. (1995) in that the initial product development relationship Relationships
established with hardware vendors provided the catalyst and resources for and the
international growth. That is, the "inward" relationship facilitated "outward" International-
expansion. isation Process
This behaviour also supports the findings of McDougall et al. (1994) in that
the small software firms externalised certain activities in order to minimise
their financial and market risk during international expansion. Thus, network
relationships facilitate international growth. However, while network relation-
ships enhanced the internationalisation activities of all four case firms, they
also constrained the pursuit of other opportunities. Referring back to the FACT
example, market access and international reputation was strongly associated
with Wang. Thus, when Wang suffered financial difficulties in the late 1980s,
FACT found it necessary to establish separate, independent relationships with
parties outside the Wang network.
The case firms also experienced a number of difficulties associated with
internationalising through a large firm, primarily related to market and product
planning. For example, the Managing Director of MSL noted there was a
degree of vagueness in the MSL-Fujitsu relationship:

"...in some ways we seem to be extremely lucky that we are part of Fujitsu's dream for the
future, and they're feeding us a few bits and pieces of what that is [but] we don't actually
have a blue-print of what we are going to be doing in five years time...there's just no detail."

These constraints and the associated fears of total dependence* on a major

partner contributed to three of the firms developing new products for
diversified markets, or establishing separate support/service facilities. For
example, DSR's original product was strongly associated with their partner's
brand name in international markets, and the initial products for FACT and
MSL were developed specifically for their partner's hardware platform.
Therefore, DSR began to develop products outside their partner's area of
expertise, and FACT and MSL developed software that was compatible with
other competitive systems. All three firms also established separate service and
support facilities to decrease reliance on their partners for customer contact
and support.
The case findings also reveal that as each firm experienced market success,
it began to desire greater control in network relationships (i.e. more autonomy
in its decision-making with respect to product and relationship development,
market selection, and mode of entry). In two of the cases (CBA and FACT),
technological and market success allowed the New Zealand-based firm to
evolve over time to become the central firm in its network. DSR also increased
in strength and negotiating influence within its network. For these three firms,

*"Dependence" was the term used by informants to reflect the percentage of sales attributed to
a network partner.
378

International the case findings suggest that managerial learning occurred, whereby market
Business experience and success over time led to increased knowledge about both
Review markets and managing relationships. This in turn led to increased commitment
6,4 to foreign market development, and further learning. This pattern supports
Johanson and Vahlne (1977, 1990).
Finally, as the three firms became more successful in international markets,
they caught the attention of major organisations in their industry areas. In late
1990, FACT was acquired by a Canadian multinational outside their formal
network, but part of a wider industry network. DSR was acquired in 1991 by a
US company connected through product development to their formal network.
In 1993, CBA was also acquired by a US firm which was part of CBA's
informal industry network, and owned by a New Zealander familiar with the
local market. Each of these New Zealand firms had felt increasingly vulnerable
to acquisition due to their market success, and in fact, chose their new parent
through existing network relationships rather than risk a buy-out by existing
partners (e.g. FACT and DSR), or firms that were unknown to them (e.g.
CBA). For these three finns, it is apparent that the impact of network
relationships went beyond the internationalisation process per se, to affect their
ownership structure (and perhaps, future internationalisation efforts).
In the case of MSL, the fourth firm, diversification efforts were made to
minimise the risk in being associated solely with one large firm, as MSL's
growth was limited to that of its partner. Also, the partner restricted MSL's
direct access to existing and potential customers. These diversification efforts
(into service and support areas) were halted by the partner however, and MSL
remained positioned as a "development arm" for the partner's network. This
situation continued until 1993, when the "long-term" product development
agreement was completed, and the formal relationship between the two parties
was terminated, in a decision made by the larger partner. This had a severe
effect on MSL, causing it to downsize to half its employee base, and seek
alternative product development opportunities and relationships.
Overall, the case findings indicate that the internationalisation decisions and
growth patterns of small software firms, particularly with respect to initial and
subsequent market selection and mode of entry, are very much shaped by their
network of formal and informal relationships. Thus, both Johanson and Vahlne
(1992) and Johanson and Mattsson (1988) are supported, as are Benito and
Welch (1994) who suggest that network development is one of a number of
explanatory factors in the "ability and preparedness of a company to expand
it's foreign market servicing commitments". Further, the small firm empirical
findings of Lindqvist (1988), Bonaccorsi (1992), Hansen et al. (1994), Bell
(1995), and Kaufmann (1995) are also supported.

Conclusions
The general purpose of this research was to extend our understanding of the
impact of network relationships on the internationalisation patterns and
processes of small firms, with particular interest in the influence of network
relationships on the small firm's approach to foreign market selection and
 379

mode of entry. To achieve this, the international growth patterns of four small Network
software firms were empirically assessed relative to their network relation- Relationships
ships. Within the context of knowledge-based, non-manufacturing software and the
developers, the findings suggest that our understanding of the internationalisa- International-
tion process for small finns, at least small software finns, can be enhanced by isation Process
integrating the models of incremental internationalisation with the network
perspective. The specific findings of this study are elaborated on below.
To begin, the internationalisation process of small knowledge-based
software finns differs from those typically discussed in the literature in that:

• it is very rapid, with finns becoming established and committed

internationalists in as little as three years;

it is characterised by only three "stages," beginning with foreign market

intention, and excluding extensive foreign market trial, experimentation,
or evaluation; and

it is characterised by the small firms making simultaneous use of multiple

and different modes of entry; mechanisms which are part of a larger
firm's international network.

These findings are perhaps explained by the fact that the case firms were
"international new ventures" (cf. Oviatt and McDougall, 1994), competing in a
dynamic global market characterised by rapid market change and product
obsolescence. Thus, these findings support McDougall et al. (1994) and Bell
(1995).
Also, the case findings indicate that small software finns show a pattern of
externalising their international market development activities through
investment in network relationships. This is perhaps not surprising given the
nature of the software industry and the need for small, resource-constrained,
technically-oriented firms to leverage the complementary capabilities of other
organisations (Hara and Kanai, 1994; McDougall et al., 1994; Oviatt and
McDougall, 1994). As seen in this study, network relationships can drive
market expansion and development activities, including choice of market and
entry mode. In addition, they can both facilitate and inhibit product
development and market diversification activities.
Overall, this research has shown that we are better able to understand the
internationalisation process of small finns by expanding our research focus to
integrate the models of incremental intemationalisation with the network
perspective. Based on these findings, Fig. 1 (describing the basic inter-
nationalisation process of the small software finn) is extended to include the
role and influence of networks (Fig. 2 below). That is, the internationalisation
process of small software firms relative to surrounding network processes is
superimposed on the three "stages" of internationalisation previously discussed.
This framework also reflects how the characteristics of the small software
finn change as the finn moves through the internationalisation process.
Figure 2.
Growth Patterns, Network
Influences and Firm
Charactersitics through the
Internationalisation Process
of Small Software Firms

Foreign Market Active Involvement Committed Involvement

Intention & Evaluation (YEAR 3+)
(YEAR 0-1) (YEAR 1 3)

Firm pursues
Increased
continued
firm visibility, international
involvement, and growth & market
Firm enters J foreignC°mmitmentmarkets'
~ t oX" f development ~ Firm acquired
Firm has first (psychically Firm begins to I I by larger Continued
domestic focus close) market Idevelop formal and Firm begins to Firm establishes international growth and
with initial through initial I informal Rapid develop new own foreign market ~ firm (within international
relationship ---~partuer's network ~ " I relationships ~ international ~ products ~ support infrastructure or outside the ~ market
established for (largely a reactive within and outside growth and market and markets, (e.g. sales offices) immediate development
product development or opportunistic the initial network development separate from and/or seeks new network) through existing
decision) t initial partner ~ relationship~ but . . . . . i d . . . . . twork
locally-based
P. . . . p l a y s / / I
conflict begin Firm's diversification Firm
with initial
efforts halted by visibility
partner initial partner increases Firm's growth patterns
I controlled by initial partner
~" and initial network

Firm Characteristics: Firm Characteristics: Firm Characteristics:

• limited domestic market • reliant on network • most sales and all growth from foreign markets
opportunities for foreign market • trying to become less reliant on initial partner/seeks autonomy in market development
• technically-oriented access and
• more market-oriented
knowledge
• limited financial resources I • increased financial resources
• more sales-oriented
• limited human resources • increased financial • increased human resources
resources • serving multiple foreign markets
• limited human resources
• serving at least two
foreign markets
 381

For these firms, the pattern of internationalisation is depicted as evolving in Network

the following manner: Relationships
a n d the
(1) the small firm commences operations with the intent to internationalise; International-
isation Process
(2) an initial relationship with a larger firm is developed in the first year of
the small firm's lifecycle, often in an opportunistic or reactive manner,
and usually for the purposes of product development. This relationship
also provides a mode of entry to a psychically close market;

(3) over time, a network of formal and informal contacts is developed,

usually facilitated by the small firm's initial relationship. This network
provides market knowledge and potential access/mode of entry to
markets around the world. Network relationships facilitate international
market development and sales growth, with the small firm entering at
least two foreign markets in as little as three years;

(4) this growth then leads to increased visibility for the small firm in
international markets, as well as an increase in both financial and human
resource capabilities. Managerial experience in international markets
continues to increase, leading to greater knowledge and confidence in
market and relationship decisions;

(5) increased experience with network relationships, combined with strong

market performance, leads to the small firm desiring increased
autonomy and control over their market development activities. At this
point, one of two patterns may emerge:

the small firm may begin to: (1) diversify from its core product areas, (2)
proactively pursue new markets, and/or (3) establish its own sales and
marketing offices overseas (all independent from existing network
partners). The small firm may also actively pursue the development of
new network relationships, or such relationships may emerge from
product and market development activities. With the increased market
visibility, the small firm may become a prime candidate for acquisition by
another organisation, often a larger firm within or peripheral to the small
firm's main network (exemplified by the FACT, DSR, and CBA, and
consistent with Bell, 1995). This exposes the small firm to additional sets
of network relationships and further growth opportunities;

OR

• although the small firm may desired increased autonomy from initial
network relationships, the major network partner may have enough
control over the small firm (e.g. financial control), to limit its product and
market diversification opportunities (as in the case of MSL). Thus, the
382

International major partner continues to influence the small firm's internationalisation

Business process, and growth is restricted to the initial set of network relationships.
Review
6,4 The contribution of this framework is that it presents the internationalisation
process in the context of: (1) the stages of internationalisation evident in these
small software firms, (2) their network relationships, and (3) their firm
characteristics over time. By superimposing the three identified stages of
internationalisation onto the pattern of network influence, this framework
complements the earlier description of the internationalisation process (Fig. 1),
and provides an understanding of how a firm's international growth patterns
relate to surrounding network processes.
This integration is of particular importance given the network perspective
introduces a "more multilateral element" to the rather unilateral process found
in the traditional models of incremental internationalisation (Johanson and
Vahlne, 1990). On one hand, the "stages" view suggests an evolution to
internationalisation based on cognitive learning and competency development
which increases, through experience, over time. That is, more of an internally-
driven approach to internationalisation in which firms expand their market
scope and entry methods as managers gain confidence and learn from personal
experience. On the other hand, the network perspective shows that
international market development activities emerge from, and are shaped by,
an external web of formal and informal relationships. From this network-
driven behaviour, cognitive development also occurs, with learning focused
on: (1) the markets entered, (2) the modes of entry used, and (3) the
relationships developed during the process of internationalisation. Therefore,
both perspectives to internationalisation encompass cognitive processes.
Integration of these perspectives brings the internally and externally-driven
views together, allowing a richer understanding of both the drivers of
internationalisation, and the emergent patterns of international market
development activities.

Research Implications
This research was context specific in that it examined the internationalisation
patterns and processes of small software firms. Such firms tend to be owned
and managed by technical specialists who develop and market software; an
offering more intangible than traditional manufactured goods, and requiring
significant support and service to add value. At a market level, the ease with
which software can be distributed electronically may affect both foreign
market selection and mode of entry decisions. This is compounded by the fact
that development and marketing agreements between hardware vendors and
software developers is an industry norm, thus the industry is characterised by
interfirm cooperation. Finally, the small software firms examined in this study
are likely to be resource constrained, and serving a small domestic market.
This may contribute to (1) outsourcing and leveraging the capabilities of other
firms, and (2) managerial motivation to pursue international markets to sustain
 383

firm growth. Each of these factors may influence both the pattern and rate of Network
internationalisation. Relationships
Such contextual factors need to be considered when reviewing the results of a n d the
this study, and it is important to recognise that while theory development International-
specific to high technology firms is possible, the findings may not be isation Process
generalisable to a wider population. Therefore, it is suggested that future
research extend this investigation to other industrial contexts, including small
firms which are:

• low technology and knowledge-based;

• low technology and manufacturing-based; or

• high technology and manufacturing-based.

Also, given the small software firms studied in this research may have been
influenced by rapid industry growth, the findings of this study should be
compared with the internationalisation patterns of newer software firms; firms
which began the process of internationalisation in a maturing rather than new
industry.
Future research should also incorporate the perspectives of multiple players
in the network rather than just that of a single firm. This would yield richer
insights into the shift of positions within a network of relationships over time.
Network analysis may also be used to more fully examine the impact of
specific types of network relationships on foreign market selection, the
evolution of power and control in networks, and the specific effect of network
relationships on the rate and success of international growth.
In terms of method, the use of case research provides a richness and depth of
understanding to the internationalisation process which is not possible with
survey data. To enhance the qualitative approach in future, it is suggested that
in-depth, longitudinal, "in-process" methods be applied (cf. Benito and Welch,
1994).

Managerial Implications
From a practical viewpoint, the findings of this research suggest that managers
of small software firms need a better understanding of the impact of network
relationships on their internationalisation activities, and the potential for such
relationships to provide entry to foreign markets. Further, managers should be
aware of the speed at which internationalisation can occur through network
relationships, and that network partners may govern both market selection and
mode of entry.
Given the apparent reliance on network relationships for international
growth, more attention should be paid to how and with whom relationships are
established, and what network management skills are required over time.
Related to this, managers must understand the benefits and risks associated
with externalising activities to network partners. This is important since
384

International managers of small software firms tend to sacrifice some managerial control for
Business market access, potentially weakening their position in a relationship.
Review Management of established relationships also warrants more attention,
6,4 particularly when larger partners tend to take control over the activities of
smaller firms. Issues related to managing relationships with partners operating
in different cultures must also be considered, as well as how best to manage
multiple, complex relationship structures. Finally, it is important that managers
continue to successfully position their firms such that they have a wide array of
relationship options open to them. Their existing networks as well as their
ability to establish new network relationships should be managed as a key
competitive capability.

Acknowledgements - - The authors gratefully acknowledge the constructive comments of Rod

Brodie and two anonymous IBR reviewers, on earlier versions of this paper.

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Received January 1995

Revised February 1996