Does relationship psychic distance matter for the learning processes of internationalizing SMEs?

International Business Review 23 (2014) 30–37

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Does relationship psychic distance matter for the learning processes of internationalizing SMEs?§ Emilia Rovira Nordman 1,2, Daniel Tolstoy * Stockholm School of Economics, Holla¨ndargatan 32, P.O. Box 6501, S-113 83 Stockholm, Sweden

A R T I C L E I N F O

A B S T R A C T

Keywords: SME Knowledge transfer Psychic distance Relstionship

This study builds on two theoretical assumptions: (1) Because SMEs tend to internationalize fast on a wide global scale, their market selections do not seem to be dictated by distance measures. (2) Business relationships seem to be vital for these firms when acquiring knowledge and developing their ongoing businesses in foreign markets. Based on these assumptions, this study applies Linear Structural Relations (LISREL) analysis to investigate the relationships of 314 Swedish SMEs and their most important foreign customers. In specific, we investigate what potential effects relationship psychic distance has on SMEs’ knowledge transfer in ongoing foreign customer relationships. The results demonstrate, rather counterintuitively, that relationship psychic distance actually enhances knowledge transfer in the investigated customer relationships. ß 2013 Elsevier Ltd. All rights reserved.

1. Introduction Researchers investigating the internationalization processes of firms have argued that there exists a psychic distance (PD)3 between markets (Ho¨rnell, Vahlne, & Wiedersheim-Paul, 1973; Nordstro¨m, 1991) and that the sequence of internationalization seems to be related to the PD between the home market and foreign countries (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975). Building on this idea, The PD concept has been widely used in IBliterature to explain how firms internationalize in terms of market selectivity and how they develop knowledge about foreign markets (Dikova, 2009; Prime, Obadia, & Vida, 2009). As a consequence, the current discourse about PD-effects is elaborate and International Business Review is a particularly important forum for this debate (e.g. Dikova, 2009; Dow & Ferencikova, 2010; Ellis, 2007; Pla-Barber,

§ We gratefully acknowledge the financial support of the Jan Wallander and Tom Hedelius’ foundation. The authors would also like to thank the guest editors, the two anonymous reviewers, and the participants at the MaSt-seminar series at Stockholm School of Economics for their constructive comments, which helped to improve the manuscript. * Corresponding author. Tel.: +46 704502535. E-mail addresses: [email protected] (E.R. Nordman), [email protected] (D. Tolstoy). 1 Tel.: +46 8 736 95 37; fax: +46 8 33 43 22. 2 The authors appear in alphabetical order and have contributed equally to the paper. 3 The concept of psychic distance is conceptualized as: ‘‘factors preventing or disturbing the flow of information between potential or actual suppliers and customers’’ (Nordstro¨m & Vahlne, 1992). These factors can, for example, be differences in language, education systems, business approaches, political systems, or culture (Ho¨rnell et al., 1973).

0969-5931/$ – see front matter ß 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.ibusrev.2013.08.010

2001; Prime et al., 2009; Yamin & Sinkovics, 2006). Given that previous studies about the effects of PD generally have focused on the PD between markets, the aim of this study is to focus on PD at the relationship level of Swedish small and medium-sized enterprises (SMEs) and their foreign customers. The rationale for this is that SMEs seem to be inclined toward niche market strategies which give them incentives to make multiple market entries worldwide early on in their development, regardless of PD (Knight, Madsen, & Servais, 2004; Rovira Nordman & Mele´n, 2008; Weerawardena, Sullivan Mort, Liesch, & Knight, 2007). Hence, the nature of these firms’ strategic motivations implies that PD has a relatively modest effect on their market selection whereas it may have a greater impact on their business operations after foreign market entry. In this study we have therefore chosen to focus on the PD-effects that come into play in the period following SMEs’ foreign market selections and foreign market entries. By investigating the potential effects of PD on SMEs’ knowledge transfer in ongoing foreign customer relationships, we can make an incremental contribution to the body of literature that focuses on how resource constrained SMEs use their foreign customer relationships to alleviate business impediments related to internationalization (Jonsson & Lindbergh, 2010; Rovira Nordman & Mele´n, 2008; Tolstoy, 2012). We, moreover, respond to the recent calls for more research about the ‘‘role of interfirm psychic distance in the development and management of cross-border business partnerships’’ (Katsikeas, Skarmeas, & Bello, 2009: 149) and ‘‘the impact of PD on relational phenomena in cross-border dyads’’ (Obadia, 2012: 2). The rest of the paper is organized as follows: first, the theoretical building blocks on which the paper’s argumentation is built are presented, and hypotheses are proposed. Second, the

E.R. Nordman, D. Tolstoy / International Business Review 23 (2014) 30–37

method and data analysis are presented. Third, Linear Structural Relations (LISREL) analysis is employed to examine a sample of 314 Swedish SMEs that were surveyed about their foreign customer relationships. Finally, the results of this study are presented, followed by a concluding discussion, a discussion about the limitations and suggestions for future research. 2. Theoretical background and hypothesis presentation 2.1. PD and the internationalization of SMEs The term psychic distance was coined by Beckerman (1956) and was later popularized by Johanson and Vahlne (1977). Within the internationalization process theory (see Johanson & Vahlne, 1977), PD is viewed as an underlying factor that determines the geographical pattern of internationalization where firms first establish business in psychologically near markets and expand farther in a gradual manner as more knowledge about international operations is acquired. Even though the concept of PD is well-researched, few generally accepted conclusions can be drawn about its effects (Ellis, 2007). In general, the problem with PD is that it causes communication problems which challenges knowledge transfer and impedes knowledge acquisition, which in turn increases costs and risks of making mistakes (e.g. Dow & Ferencikova, 2010; Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975; Nordstro¨m, 1991). One of the most frequent critiques against the process theories of internationalization (which conceptualize PD at the market level) is that these models fail to explain the internationalization of SMEs (Andersson & Wictor, 2003; Crick & Jones, 2000). Instead of internationalizing in a stepwise manner (avoiding psychic distant markets before gradually acquiring the knowledge to handle them), many recent studies have described the internationalization processes of SMEs as being characterized by an internationalization pattern where firms enter many different markets simultaneously (Coviello & Munro, 1995; Knight et al., 2004; Rovira Nordman & Mele´n, 2008; Tolstoy & Agndal, 2010; Weerawardena et al., 2007). One common explanation for how resource constrained SMEs can pursue such strategies is that they are able to effectively leverage their existing business relationships, which often are established before the start of the firm, to expand into new markets (Crick & Spence, 2005; Rovira Nordman & Mele´n, 2008). 2.2. Business relationships and the internationalization of SMEs Both recent internationalization process research and research focusing on the broad and simultaneous internationalization patterns of SMEs are paying increasingly more attention to the instrumental part that foreign business-relationships play for internationalization (Sigfusson & Harris, 2013). Studies on internationalizing SMEs have even indicated that firms’ internationalization decisions can be based on relationship-oriented motivations rather than market-oriented motivations (Coviello & Munro, 1995, 1997; Johanson & Vahlne, 2003; Lindstrand, Mele´n, & Rovira Nordman, 2011; Rovira Nordman & Mele´n, 2008). Examples of relationship-motivated internationalization can be found among firms that follow customers/clients abroad (Erramilli, 1991; Majkga˚rd & Sharma, 1998). They can also be found among SMEs that open foreign subsidiaries in specific locations due to the circumstance that someone in the staff has access to well-working business relations there from previous employments (Johanson & Vahlne, 2003). On a conceptual level, any business relationship can be viewed as a reflection of the (presumptively multitude of) relationships it is connected to. For this reason relationships can even be understood as collective actors representing bundles of

31

connected entities (Cook & Emerson, 1978). Research on SMEs have demonstrated that the business partners that these firms are connected to in foreign environments will to a large extent determine what knowledge and what opportunities that are available to them (Tolstoy, 2010). Drawing on these studies, we here use the term relationship inter-connectedness to explain the extent to which a focal business relationship is dependent on connected business actors in a specific foreign market setting. Building on the idea that certain relationships set the agenda for important internationalization decisions, Johanson and Vahlne (2009) argue that firm internationalization is becoming less a matter of country or market specificity and more a question of relationship specificity. Based on these arguments and on empirical observations on SMEs, we find it relevant to focus on PD effects that come into play after foreign market entry and measure these effects at the business relationship level (i.e. dyads4), rather than on the market level. 2.3. Business relationships and knowledge transfer A well-working business relationship is the result of a considerable investment and is, therefore, a significant firm resource (Dyer & Singh, 1998). Internationalizing SMEs’ foreign business relationships can, for instance, help the firms to become more integrated in local business, learn from experience, and get access to novel knowledge inputs (Chetty & Blankenburg Holm, 2000; Rovira Nordman & Mele´n, 2008; Sharma & Blomstermo, 2003; Tolstoy, 2010). Because knowledge is considered one of the most important resources that a firm can possess (Murray & Peyrefitte, 2007), the transfer of knowledge is a highly strategic activity in any business. Within the internationalization process literature, experiential (or tacit) knowledge is considered to be a particularly critical resource for enabling international expansion (Eriksson, Johanson, Majkga˚rd & Sharma, 1997; Johanson & Vahlne, 1977, 2009). The concept of experiential knowledge is similar to the concept of absorptive capacity5, because both concepts tend to regard knowledge development as a cumulative process. Because experiential knowledge is a resource that can only be transferred through interactions in foreign business relationships, relationship exchange is a fundamental mechanism for generating and transferring experiential knowledge (Andersen & Buvik, 2002; Blankenburg Holm & Eriksson, 2000). Through relationship exchange with customers or suppliers, firms often obtain access to external knowledge (Turnbull, Ford, & Cunningham, 1996) that they can transfer into their existing knowledge base and develop it further (Cohen & Levinthal, 1991; Eriksson & Chetty, 2003). Knowledge transfer is, here, viewed as a process by which knowledge is mutually shared between firms (Nonaka, 1994). Building on the idea that PD inhibits the interpretation of knowledge between country markets (e.g. Johanson & Vahlne, 1977; Nordstro¨m, 1991), we suggest that PD also has a particular effect on knowledge transfer within foreign customer relationships. The main reason for this is that psychologically distant trading partners often differ in regards to factors such as culture and language (Katsikeas et al., 2009). PD, thus, impedes the efficient coordination of work owing to attitudinal and behavioral disparities between the trading partners (Graham, Mintu, & Rogers, 1994). For example perceptions of fair-dealings and non-opportunistic exchange are compromised by distorted 4 The dyadic relationships investigated in this study are the business relationships between Swedish SMEs and their foreign customers. We consider these dyads as being embedded in a structure of other relationships that are connected to them (Chetty & Eriksson, 2002; Coviello & Munro, 1997). 5 Defined as the ‘‘ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends’’ (Cohen & Levinthal, 1991, p. 128).

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communications and consequential misunderstandings that accompany high levels of PD between partners (Katsikeas et al., 2009). Consequently, differences between foreign counterparts will affect perceptions, and the access to local knowledge (Bertrand & Mol, 2012) and even firms whose employees possess a high level of intercultural competence can experience problems adjusting to the local habits of business counterparts (see Prime et al., 2009). Hence, PD in business relationships will have a direct effect on relationship management as it calls for greater investments and more active participation by the involved parties (Conway & Swift, 1999; Shaladi, 2012). Building on this argumentation, we posit that it will be more difficult for Swedish SMEs to transfer knowledge in psychologically distant business relationships (e.g. customers in Brazil) in comparison to knowledge transfer in relationships with more psychologically similar counterparts (e.g. customers in Norway). Hence, the following hypothesis is suggested: H1: Relationship PD has a negative effect on relationship knowledge transfer in SMEs’ foreign customer relationships. 2.4. PD and relationship inter-connectedness A dyadic business relationship does not exist in isolation from the surrounding business relationships that it is connected to (Andersen & Buvik, 2002; Blankenburg Holm and Eriksson, 2000). Individual business relationships can, thus, be instrumental in linking a firm to new customers or to new suppliers in a business environment (Sigfusson & Harris, 2013). When doing business in foreign markets, studies have shown that connected relationships can provide an extended knowledge base which contextualizes and, ultimately, enhances market learning (Chetty & Blankenburg Holm, 2000; Tolstoy, 2010). According to Johanson and Vahlne (2009), the liability of outsidership is a situation when a firm enters a business environment without knowing who the business actors are, or how they are related to each other. Liability of outsidership is thus constituted by a lack of knowledge about the foreign environment. If a firm has the advantage of already being involved within one or several business relationships within the business environment, the firm is, however, to be considered an insider. According to the authors, insidership is regarded as a necessary condition for access to market knowledge and to successfully develop foreign business. When being insiders in foreign environments, firms can tap into information and knowledge about its business partners and can thereby develop a comprehensive understanding of the business climate and the nature of local conditions. The establishment of business relationships in a particular environment also enables coordination between constellations of firms which may spread risk and provide better access to diverse knowledge based resources (Coviello & Munro, 1997). Given these benefits, we argue that relationship inter-connectedness at the foreign market level can open up avenues for transferring and accessing knowledge that, ultimately, can propel the international growth of SMEs (Coviello & Munro, 1997; Rovira Nordman & Mele´n, 2008). Several studies focusing on PD on the market-level have indicated that there exists a relationship between a firm’s struggle to overcome PD hurdles and its reliance of individual customers and suppliers (Dikova, 2009; Yamin & Sinkovics, 2006). Other studies have shown that firms which perceive a large PD to a foreign market commit more resources to develop knowledge about local conditions (e.g. Evans & Mavondo, 2002; Evans, Treadgold, & Mavondo, 2000). Even though these studies focus on the market level, we build on them to suggest that SMEs can alleviate relationship-specific PD-effects by committing more resources to become integrated in particular foreign market

settings. Based on these arguments, we propose the following hypothesis: H2: Relationship PD has a positive effect on SMEs’ relationship inter-connectedness at the foreign market level. 2.5. The impact of relationship inter-connectedness on relationship knowledge transfer The idea that firms need prior related knowledge to assimilate and use new knowledge is supported by many researchers interested in the organizational-learning aspects of firms (Cohen & Levinthal, 1991; Petersen, Pedersen, & Lyles, 2008). To generate knowledge about a new environment, firms tend to apply the experiences that have proven to work for them in the past (Blomstermo & Sharma, 2003). This procedure, however, can lead to learning myopia which increases a firm’s tendency to: (1) sacrifice the long-run for the short run, (2) ignore the larger picture, and (3) overlook possible future failures (Levinthal & March, 1993). Even firms which already have established foreign business relationships which they have cooperated in for years, risk being affected by learning myopia. One reason for this is that managers who do not conceive that they actually lack knowledge about foreign environments tend to grow overconfident and become subjects to superstitious learning.6 Altogether, this means that firms will begin to overestimate the knowledge that they actually possess about a particular environment (Petersen et al., 2008). Firms which can accumulate experimental knowledge from operating in foreign business environments can also cumulatively increase their absorptive capacities. As a consequence, these firms will become more conscious of what they do not know which will diminish the actual knowledge gaps between the firms and their environments (Petersen et al., 2008) as well as hampering the risk of learning myopia and superstitious learning. When internationalizing firms succeed to generate experiential knowledge about a foreign environment they can use it to develop specific relationships with firms (Chetty & Eriksson, 2002; Eriksson et al., 1997) and transfer knowledge between them (e.g. Coviello & Munro, 1997; Rovira Nordman & Mele´n, 2008). Hence, a firm’s ability to exchange knowledge within certain relationships is determined by its abilities to learn from past experiences as well as its abilities to identify how these experiences can be applied in the relationship (Chetty & Eriksson, 2002; Cohen & Levinthal, 1991). In this vein, the framework of multiple business relationships that firms operate in can provide meaning, applicability, and combinative opportunities for continual knowledge transfer. Based on this idea, we suggest that SMEs experiences of cooperating within previously established business relationships can enhance knowledge transfer with key customers in foreign markets. To test this relationship, the following hypothesis is suggested: H3: Relationship inter-connectedness at the foreign market level has a positive effect on relationship knowledge transfer in SMEs’ foreign customer relationships. Fig. 1 shows the overall structure of the hypothesized model and the paths of the causal relationships. 3. Methodology Internationalization has been argued to be overt and demonstrable, and thereby manifested in recognizable ways. Evidence of 6 Learning is superstitious when confidence in one’s competence resulting from experience accumulation develops faster than the competence itself (Zollo, 2004).

[(Fig._1)TD$IG]

E.R. Nordman, D. Tolstoy / International Business Review 23 (2014) 30–37

H2+ Relationship psychic H1distance

Relationship interconnectedness at the foreign market level

H3+

33

Relationship knowledge transfer

H1Fig. 1. The hypothesized model.

such behavior can thus be operationalized using theoretically deduced measures (Jones & Coviello, 2005). The use of a surveybased method will presumably enhance knowledge of the behavior of international SMEs. In this study, the survey questions revolved around a specific relationship with a foreign customer that was chosen by the respondent. Respondents were instructed to select one customer relationship that fit the following criteria: (1) located in a foreign market, (2) on-going and (3) resulted in realized sales transactions. These criteria were chosen to ensure that the selected customer relationship constituted a focal point in the network. Respondents were asked to respond to the survey questions using a seven-point scale, with ratings ranging from low (1) to high (7). To ensure the validity of the study, the variables included in the survey were based on empirical observations and theory in the field of international business. 3.1. Sampling and data collection Firms included in this study had to fulfill two formal criteria. First, they had to be active in foreign markets (at least 10% of their turnover derived from international sales). Second, they had to fit the definition of an SME in that they could not have more than 250 employees (OECD, 2002). In 2003, the investigators received a stratified random sample of Swedish SMEs operating internationally from Statistics Sweden’s Business Register. The sample consisted of two groups: small firms (6–49 employees) and medium-sized firms (50–250 employees). As microenterprises are typically defined as enterprises that have, at most, five or ten employees (OECD, 2002), firms with less than 6 employees were excluded from the sample. A stratified sample was used to ensure variation in size among the SMEs. If the sample had not been stratified, most firms would likely have been small, as 97% of firms in Sweden have 50 or fewer employees. From each of these two groups, a random sample of 1000 firms was selected. This sample covered about 28% of all small Swedish exporters that met our sampling criteria. Data collection was conducted in two phases using two different methods. In the first phase, the investigators of the research group focused on a sub-sample of 339 firms from the Ma¨lardalen area from the total sample of 2000 Swedish firms. After contacting individuals in these firms by telephone, the investigators excluded some firms from the study on the grounds that they had grown too large (i.e. they were no longer SMEs), they did no longer sell their product to foreign customers, or they were no longer in existence. As a result, the total study sample for phase one consisted of 233 SMEs. 188 completed questionnaires were collected, yielding a response rate of approximately 81%. The two major reasons for the non-responding firms’ declination to

participate were: (1) a lack of time and (2) a reluctance to release information. Precautions were taken to ensure the reliability of data before and during the collection stage. Prior to the distribution of the questionnaire to the final sample, a pilot study was conducted in which the questionnaire was tested on six SMEs in Stockholm and Uppsala. The results were assessed and subsequent improvements were made. To further ensure reliability, the investigators personally administered the questionnaires to the Swedish SMEs. By visiting the firms (duration of visit: 0.5–1 h), the research group sought to ensure that the correct individual answered each questionnaire and that a high response rate with a low number of missing values was obtained. A single key informant approach was used, which is common practice in marketing research (Phillips, 1981). Individuals who were considered key informants included chief executive officers (CEOs) and marketing managers – executives who influenced decisions related to foreign operations. In the second phase of data collection, an internet-based questionnaire (a duplicate of the original survey) was distributed to the remaining of 1428 firms in the full sample. 126 responses were received. Taken together, this yielded an overall response rate of 18.9%. When comparing the two subsamples, we checked for statistical differences concerning industry, sales turnover, revenue, number of employees and firm age. The statistical data showed no remarkable differences between the means, while a Levine’s test showed equal variance between the groups at the 0.05 level. We also divided the total sample on the basis of the data collection method and then looked for differences in the hypothesized structural model. In this regard, we found that both models were significant at the 0.05 level. Furthermore, we analyzed missing values in both data samples. Little’s missing completely at random (MCAR) test revealed that the missing data did not follow a systematic pattern (p > 0.05) in either subset, which indicates that the missing values were not related to other observed or unobserved values. As the missing data did not occur in a systematic pattern it is fair to conclude that multiple imputation (expectation-maximization [EM] algorithm) is a suitable method for dealing with missing values. With multiple imputations, missing values for any variable are predicted based on the means of other variables. 3.2. The measurement model In this article we followed the established two-stage procedure (Anderson & Gerbing, 1988) using LISREL 8.7. The first stage comprises a confirmatory factor analysis in a measurement model. The second stage involves the devising of a structural model to

E.R. Nordman, D. Tolstoy / International Business Review 23 (2014) 30–37

34 Table 1 The constructs and their indicators. Construct

Indicator

Relationship PD (RPD)

The following factors have been obstacles in the foreign business relationship:  Language  Business culture  To what extent is the business relationship dependent on your experience of cooperation with customers in the foreign market?  To what extent is the business relationship dependent on your experience of cooperation with customers of the customers in the foreign market?  To what extent is the business relationship dependent on your experience of cooperation with suppliers in the foreign market?  The business relationship is characterized by frequent exchange of information  The business relationship is characterized by general exchange of knowledge  The business partner is an important source of knowledge

Relationship inter-connectedness at the Foreign Market Level (RIC)

Relationship Knowledge Transfer (RKT)

b

r2

t-value

CR

AVE

0.96 0.95 0.94

0.91 0.91 0.89

22.69 22.53 22.37

0.96

0.93

0.94

0.88

0.96

0.92

23.05

0.91

0.83

20.92

0.94 0.94 0.95

0.87 0.88 0.90

22.04 22.23 22.64

0.94

0.89

Note: AVE, average variance extracted; CR, construct reliability.

estimate the path coefficients and to test for relationships between constructs. 3.3. Development of measures The measures used in this study were chosen based on theory and previous studies. The statistical data related to indicators and constructs are presented in Table 1. Table 2 shows a correlation matrix comprising all indicators. The operationalization of the construct relationship PD differs from traditional PD measures that include both macro factors (such as educational-/political-/institutional-systems, market competitiveness, and level of industrial development) and micro factors that are experienced in relationships (such as language and business culture) (see review by Sousa & Lages, 2011). Relationship PD can only be represented by factors that are experienced in the interaction with the foreign customer. Indicators of PD at the relationship level are, thereby, perceptive rather than objective (see Dow & Karunaratna, 2006). Although PD measures often contain a multitude of indicators, language and culture have been argued to emerge as particularly significant (Shaladi, 2012). In this study we, consequently, capture relationship PD by using indicators reflecting to what extent the investigated firms perceive that (1) language and (2) business culture have been obstacles in their relationships with their foreign customers. Relationship interconnectedness at the foreign market level reflects the extent to which the selected foreign customer relationship is dependent on the experience of cooperation with various connected business relationships in the foreign market such as customers, suppliers, and customers of the customers (Blankenburg Holm, Eriksson, & Johanson, 1996). Relationship knowledge transfer reflects learning at the relational level. Drawing on the scale used by Rovira Nordman and Tolstoy (2009) we created a measure which reflects to which degree the investigated firms perceived their relationships with the specific foreign customers to be: (1) characterized by frequent

exchange of information, (2) characterized by general exchange of knowledge, and (3) an important source of knowledge. To check for other effects on the dependent variable (relationship knowledge transfer), we used the following control variables: age, size (dummy where 0 = 49 employees and 1 = 50 employees), duration of the selected relationship (in years), and level of commitment of foreign market entry (dummy where 0 = non equity modes of foreign market entry and 1 = ownership modes of foreign market entry). The analysis of the control variables (age, size, duration of relationships, and level of commitment of foreign market entry) revealed no significant effects on the relationships within the structural model (see Table 3). Hence, the hypothesized relationships appear to have general validity across the sample. 3.4. Validity of the measurement model The validity of the measurement model was estimated with regard to both the validity of the entire model (nomological validity) and the specific constructs within the model (convergent validity and discriminant validity). First, the overall fit of the measurement model was verified using chi square (x2), degrees of freedom (df) and a probability estimate (p value). The debate about which measures are appropriate for assessing nomological validity is ongoing (Bollen & Long, 1993). Three frequently used measures are the goodness-of-fit index (GFI), which checks for sample size effects and should be above 0.90; the root mean square error of approximation (RMSEA), which measures population discrepancy per degree of freedom and should be below 0.08; and the comparative fit index (CFI), which checks for non-normal distributions. Values of CFI that are close or equal to 1 indicate a good fit, while those above 0.90 indicate an acceptable fit (Jo¨reskog & So¨rbom, 1993). The model’s key statistical measures indicate nomological validity (x2 = 10.88, df = 17). The RMSEA is at the zero-level, the GFI is 0.99, and the CFI is 1. Second, the convergent validity of the constructs was evaluated by analyzing t values (significance), R2 values (linearity) and factor loadings (correlation). As recommended by Hair, Anderson,

Table 2 Correlation matrix.

RPD1 RPD2 RKT1 RKT2 RKT3 RIC1 RIC2 RIC3 * **

RPD1

RPD2

RKT1

1 .659** .139* .064 .066 .046 .037 .042

1 .064 .063 .025 .118 .083 .004

1 .487** .420** .228** .170** 0.071

Significant on the 0.05-level. Significant on the 0.01-level.

RKT2

1 .524** .160** .129* .047

RKT3

1 .159** .201** .072

RIC1

1 .594** .366**

RIC2

1 .290**

RIC3

1

Table 3 Statistics of three models in LISREL. Statistics

Harman

Measurement model

Structural model

Chi-square Df RMSEA GFI CFI

821.16 20 0.355 0.61 0.82

10.88 17 0 0.99 1

10.88 17 0 0.99 1

Note: CFI, comparative fit index; df, degrees of freedom; GFI, goodness of fit index; LISREL, Linear Structural Relations; RMSEA, root mean square error of approximation.

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Table 4 Relationships in the structural model and control variable effects. Hypothesis

Causality

b

t-value

H1 H2 H3

RPD ! RKT RPD ! RIC RIC ! RKT

0.72 0.65 0.23

14.02 12.20 5.42

Control variable

Test

b

t-value

Age Size Duration of relationship Level of commitment of foreign market entry

AGE ! RKT SIZE ! RKT DURATION ! RKT COMMITMENT ! RKT

n.a. n.a. n.a. n.a.

Not Not Not Not

Tatham, and Black (2005), convergent validity was further assessed by checking for construct reliability (CR) and average variance extracted (AVE). The constructs (displayed in Table 1) appear to be statistically valid because all CR and average variance extracted (AVE) values are above the recommended levels of 0.7 and 0.5, respectively (Hair et al., 2005). Consistent with statistical convention all r2 values range from 0.83 and higher. Common methods bias is always a considerable risk when cross-sectional survey data are used. Such a bias can have negative effects on the discriminant validity of constructs. In addition to a confirmatory factor analysis of the measurement model, posterior statistical tests and a Harman’s one-factor test were applied to check for such unwanted effects. First, the 8 indicators in the study were entered into a factor analysis (using component analysis with varimax rotation) to determine the number of factors necessary to account for the variance in the variables. In this context, if a substantial amount of common method variance is present, one of the following occurs: (a) a single factor emerges from the factor analysis, or (b) one general factor accounts for the majority of the covariance among the variables. The principal component analysis highlighted three factors with eigenvalues greater than 1 that together accounted for 69% of the total variance. The largest factor did not account for the majority of variance (24.9%), thus indicating a low degree of common methods bias. In a final check, variables were loaded onto one factor in a Harman’s one-factor test. The test is designed to indicate common methods bias if the one-factor model fits the data well. However, the results revealed the opposite (x2 = 821.16, df = 20). Hence, based on these tests, common methods bias does not appear to be a major threat in this study and should not affect the interpretation of the results (see Table 3). 4. Results of the structural model The structural model (see Table 3) shows nomological validity (x2 = 10.88, df = 17). The model also shows discriminant validity between constructs. A basic requirement for confirming discriminant validity is that the correlations between latent variables should be significant but not equal to 1, as a value of 1 would suggest unidimensionality (Jo¨reskog & So¨rbom, 1993). The structural model reveals the causal relationships between constructs, and can disclose both direct and indirect effects. As shown in Table 4, Hypothesis 1 is not supported by the model since the relationship between ‘‘relationship PD’’ and ‘‘relationship knowledge transfer’’ is (significantly) positively correlated within the causal structure. This implies that the more a firm perceives PD in relation to a specific foreign customer, the higher is the level of knowledge transfer in the relationship. This relationship could be explained by the idea that when firms perceive PD in an ongoing customer relationship they will start to commit resources to this relationship (if they can expect high payoffs) which enable them to acquire knowledge that is useful in the particular market context.

significant significant significant significant

Hence, the results indicate that active attempts of closing the PDgap will lead to increased knowledge transfer in the realm of Swedish SMEs and their foreign customers. This finding can also be related to previous market-level research showing that firms which perceive a large PD to a foreign market commit more resources to develop knowledge about local conditions (e.g. Evans & Mavondo, 2002; Evans et al., 2000). The results also show that ‘‘relationship PD’’ has a positive effect on ‘‘relationship inter-connectedness on the foreign market level’’, confirming Hypotheses 2. This finding can be related to previous research indicating that market specific knowledge about individual customers and suppliers is critical in overcoming the effects of PD (Dikova, 2009; Yamin & Sinkovics, 2006). Taking a starting point in this idea, it is likely to assume that SMEs which perceive a large PD between themselves and their foreign customers will view cooperation and ‘‘insidership’’ in local market environments as a way to become integrated and to overcome the PD gap (see Johanson & Vahlne, 2009). The structural model also supports Hypotheses 3, revealing that ‘‘relationship inter-connectedness at the foreign market level’’ has a positive effect on ‘‘relationship knowledge transfer’’. This finding is in line with research that posits that business relationships that are connected to SMEs contextualizes knowledge and, thus, is instrumental for interpretation and transfer of knowledge in specific foreign environments (Crick & Jones, 2000; Crick & Spence, 2005; Lindstrand et al., 2011; Sharma & Blomstermo, 2003). Given these results, we can see that the direct relationship between ‘‘relationship PD’’ and ‘‘relationship knowledge transfer’’ is somewhat more complex than was first anticipated. The model implies that not only is ‘‘relationship PD’’ positively related to ‘‘relationship knowledge transfer’’, but ‘‘relationship PD’’ can also be an antecedent of ‘‘relationship inter-connectedness at the foreign market level’’ which, in turn, has a discrete impact on ‘‘relationship knowledge transfer’’. These results suggest that SMEs proactively pursue knowledge based opportunities and circumvent presumptive problems of PD through the pursuit of relationship management. 5. Concluding discussion Even though internationalizing SMEs are likely to have limited funds to use for research and development or to speed up their production processes, their flexibility, lack of bureaucracy and motivated employees can often give them an advantage over larger firms. These qualities, moreover, allow for fast decision making which can enable SMEs to develop country-spanning business relationships and quickly launch specialized business solutions in foreign markets (Cui, Griffith, & Cavusgil, 2005; Knight & Cavusgil, 2004). Because internationalizing SMEs often compete in nichemarkets they tend to sell their products to a relatively large number of country markets to reach critical profit margins. These

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strategies imply that PD is likely to have a greater impact on SME’s ongoing operations after foreign market entry than it has on market selection decisions. Hence, we argue that it is highly motivated to investigate the effects of PD on SME’s operations in situations where the firms have already entered foreign markets. Moreover, recent theory holds that ‘‘insidership’’ has become more important than countries’ macro-level characteristics for smaller firms when developing business abroad which would augment SMEs’ proclivities toward relationship-based modes of foreign market entry (Johanson & Vahlne, 2009). From this vantage point we believe it is salient to measure PD on the relationship-level. Consequently, we have created a model that measures the effects of relationship PD on relationship inter-connectedness and relationship knowledge transfer of SMEs’ at the foreign market level. When studying the nature of these effects we, interestingly, found that the effects were partly paradoxical vis-a`-vis current theory. The study shows that relationship PD is actually positively related to relationship knowledge transfer in the post foreign market-entry stage of SMEs. This counter-intuitive finding can be explained by drawing on learning myopia theory which suggests that rapidly internationalizing smaller firms are not bound by institutionalized systems, routines, and prior experiences (which they often lack). These firms are thus not path-dependent in terms of learning and may, therefore, be particularly willing to adapt to foreign customers and to be receptive to new knowledge in these relationships. While the process models of internationalization (see Johanson & Vahlne, 1977) stipulate that PD leads to riskavoiding behavior, the results of this study rather suggest that PD, at least at the relationship level, in fact triggers proactive behavior which produces learning opportunities for SMEs. Because many international SMEs are operating in niche markets in a wide scope of countries they cannot afford to be intimidated by the knowledge gaps that they may face. If the expected pay-offs are high, they may instead rise to the challenges and become inclined to devote considerable time and resources to business exchange and learning. The active attempts to bridge large knowledge gaps may thus enable SMEs to take major leaps in extending their knowledge bases which ultimately could reinforce their international competitiveness. Furthermore, our model empirically demonstrates that a large relationship PD leads to increased relationship inter-connectedness at the foreign market level, which in turn positively affects knowledge transfer in the relationships between SMEs and their foreign customers. This finding suggests that relationship PD provides incentives to pursue ‘‘insidership’’ in foreign market settings. The model, furthermore, shows that relationship interconnectedness at the foreign market level has a positive effect on relationship knowledge transfer as it can enhance the contextual understanding of knowledge and, thus, enable firms to interpret knowledge generated in specific customer relationships. When making a comparison we find that the effect that relationship inter-connectedness at the foreign market level has on relationship knowledge transfer is weaker than the direct effect that relationship PD has on relationship knowledge transfer in customer relationships. The probable reason for this is that relationship inter-connectedness at the foreign market level does only mediate a part of the impact that relationship PD has on relationship knowledge transfer within the parsimonious structural model. It is conceivable that we, in this model, have not taken into account other possible mediating variables that could be structural or strategic in nature, e.g. resource complementarity, strategic decision-making, and customer orientation. We, thus, recommend that future research expands our model and investigates additional potential mediating variables that could further explain the mechanisms through which relationship PD influences relationship knowledge transfer in customer relationships.

The overall conclusion that can be drawn from the results of this study is that relationship PD may trigger proactive relationship management in the pursuit of learning opportunities in foreign customer relationships. The study shows that relationship PD can play an important role for deciding how learning processes, intertwined with entrepreneurial processes, unfold in foreign markets. We can thus contribute to research on international SMEs by showing how they use customer relationships, as well as connected relationships, as leverage to alleviate business impediments related to internationalization. In comparison to previous research that have focused on related issues (e.g. Jonsson & Lindbergh, 2010; Rovira Nordman & Mele´n, 2008; Tolstoy, 2012), we can here provide a detailed model that outlines a learning process that takes place at the relationship level in the period after foreign market entry, and thus can be vital for the sustained growth of the firm. We also contribute to a new understanding of the PD concept by measuring it at the relationship level which enables us to capture the actual exposure of its effects. The implications for managers concerning the results of this study are connected to the necessity of being aware that you need knowledge to avoid learning myopia. Managers who lack international experience often make the mistake of undervaluing the PD between the home and foreign business settings. O’Grady and Lane (1996) provides an example of this when they describe a group of Canadian retailers whose expansion into the US-market was unsuccessful because they had assumed no differences between the US and Canadian markets and hence perceived that they could operate in the US in the same way as they did in Canada. Rather than focusing on pure economic factors, both internationalization process theories and theories about the internationalization of SMEs focus on learning as a predictor of international success. The importance of acquiring knowledge about the foreign environments that you operate in is also highlighted in this study. The results, moreover, show that connectedness in foreign business settings is instrumental to develop this specific type of knowledge. Many SMEs are dependent on a single product and, therefore, often seek collaborations that can provide complementary competences. While firms may have pre-existing contacts in the foreign market, they also need to put resources into developing new relationships continually. Based on this argument, an important aspect of an international business manager’s work duties is to scan the market for relationships with eligible foreign counterparts that can provide new opportunities for business and learning. By partaking in strategic relationship management firms can increase the chances of acquiring new and diverse knowledge that they need to improve their international businesses. It is, however, important to point out that while the friction that PD confer on the exchange in business relationships indeed can trigger learning it can also be costly for smaller firms to overcome all the problems that may arise in the process. Hence, managers should continually evaluate if the learning outcomes will provide a sufficient long term payoff. Finally, this study has some limitations that have implications for the direction of future research. One limitation involves the scope of the data sample, which consisted of data collected from only Swedish SMEs. Future research focusing on larger and broader samples of internationalizing firms is recommended to validate further the results of this study. The data that the study is based on is, moreover, collected solely from one side of the customer relationships under examination. The extent to which the counterparts of the firms investigated would have concurred with the answers in the data collected is, therefore, unknown. Additional insight could be gained from future studies involving dyadic data sets. Finally, the study does not relate the effects of PD on performance. Further studies could be conducted to follow up the performances of these investigated firms and, thereby, present

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