International market selection: developing a model from Australian case studies

International Business Review 10 (2001) 155–174 www.elsevier.com/locate/ibusrev

International market selection: developing a model from Australian case studies P. Brewer

*

University of Queensland, Graduate School of Management, St Lucia, Qld 4072, Australia Received 17 March 2000; received in revised form 22 May 2000; accepted 17 October 2000

Abstract This paper develops a theory that firms seek out new country markets on the basis of expected commercial returns. These expectations depend on judgements about the attractiveness of the market and the firm’s competitive position in it, which in turn are influenced by informants. It is the number and strengths of these informants that will underlie the probability of a country being identified and assessed as a new market by any firm.  2001 Elsevier Science Ltd. All rights reserved. Keywords: International market selection; Internationalisation

1. Introduction One of the central features of international business is the international market selection (IMS) process employed by firms to pick those foreign countries or regions that will form a firm’s geographic target markets. IMS is an element of operations that firms need to get right (Kay, 1993; O’Farrell & Wood, 1994; Papadopoulos & Denis, 1988). However it remains difficult and contentious because of “the bewildering array of countries and markets throughout the world%” (Douglas, Craig, & Keegan, 1982, p. 27). By IMS the author means the complete decision process by a firm which ultimately results in the application of marketing resources to the market(s) concerned. Whilst the selection may not ultimately be successful, it is this last step of applying, or not, marketing resources that signals a completion of the IMS process. * Corresponding author. Tel.: +61-7-3365-6475; fax: +61-7-3365-6988. E-mail address: [email protected] (P. Brewer). 0969-5931/01/$ - see front matter  2001 Elsevier Science Ltd. All rights reserved. PII: S 0 9 6 9 - 5 9 3 1 ( 0 0 ) 0 0 0 4 9 - 4

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This paper investigates the manner in which Australian firms, already involved in international business, make international market expansion decisions. The research covers country market selection without regard to the mode of entry selected by the firm. Although it is recognised that there is a close connection between IMS and mode decisions there is considerable value to be derived from separating the issues in research because the decisions require different inputs and have different implications for action (Papadopoulos, 1987). For the purposes of this research I have made the assumption that firms select markets first and decide modes later (or already have them as a given because of the nature of their business). This is a simplification but reflects the parameters of much research (eg. Dunning, 1988; Kim & Hwang, 1992) into the determinants of “factors that influence the choice of an entry mode for a selected target market” (Agarwal & Ramaswami, 1992, p. 2) (my italics). The paper begins by highlighting relevant research issues. Attempts to explain and predict IMS processes are canvassed through extant IMS literature. Psychic distance, the most widely cited determinant of IMS, is reviewed and questioned in the Australian context. A brief summary of the research methodology is provided followed by analysis of the case data collected through the research process. Finally, a model of country selection is developed from the research data and some recommendations are made for extending the model’s conceptual foundations and geographic validity.

2. The research issues Various traditional economic theories have contributed significantly to an understanding of trade at a national level. However, such explanations are incomplete (Vernon, 1966), face paradoxes (Leontief, 1953) and do not adequately illuminate the forces driving major international business between similar countries in the same industries (Dunning, 1988). The incomplete nature of classical explanations of trade led to the emergence of firm level explanations, the so-called behavioural school (e.g. Kay, 1993; Porter, 1990), which assert that within economic parameters, it is the judgement and decisions of firm managers that define internationalisation and its consequences (Chetty & Holm, 2000). Whilst recognising the contribution made by national trade theories, this paper looks for additional explanation through the firm perspective. Much normative work has been done on how firms should select foreign country markets (see Papadopoulos & Denis, 1988, for a taxonomy), but less is available on how firms actually go about IMS within their international expansion process. It is this latter vein that this research seeks to explore, particularly because work so far demonstrates a considerable gap between normative models and practice (Andersen & Strandskov, 1998; O’Farrell, Wood, & Zheng, 1998). Indeed it has been argued that generally firms are not entirely rational in IMS and that it is a very unpredictable, disjointed process (Toornoos, 1991). Whilst generally agreeing that normative IMS models are rarely used, researchers nevertheless have found that certain influences do affect real world IMS activity.

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The difficulty is that existing explanations of business internationalisation are only partial and sometimes misleading (Leonidou & Katsikeas, 1996). Major research results so far available in the practice of IMS follow. 2.1. Business factors Research into international business mode choice has uncovered a number of location specific advantages that in influencing foreign direct investment decisions should also consequently be relevant to IMS. These include the overall attractiveness of a market, which in turn is a function of its sales potential (size and growth) and risk (Agarwal & Ramaswami, 1992). The importance in IMS of the likely “size” in sales terms of a potential country market has also been supported by Terpstra and Yu (1988). Strategic considerations are also important to firms’ investment decisions and to that extent, might affect IMS choices (Hill, Hwang, & Kim, 1990). For example, a firm may establish an operation in an overseas market which is unlikely to be profitable to act as a watching post on the activities of competitors in the region (Kim & Hwang, 1992). 2.2. Chance In addition to commercial factors there is evidence of the importance to IMS of chance circumstances. For example, one factor affecting market selection outcomes for some firms is the so-called client following phenomenon (Erramilli & Rao, 1990). Sometimes firms are attracted into foreign markets because a domestic client has established offshore operations and an opportunity is seen to win sales through existing relationships with that company. The client thus “leads” the supplying firm into new country markets. This is particularly important in the business services sector (O’Farrell et al., 1998). Similarly, firms may seek to follow competitors into new foreign country markets (Terpstra & Yu, 1988). There is also a view that foreign markets are often selected through reactive processes (Hoang, 1998). For example, in researching the kind of stimuli that influence firms to begin to internationalise it has been found that a firm’s first export sale (and therefore its first export market) may well be determined by an enquiry from a foreign customer who is searching for new suppliers of a particular product. In other words sales are generated by reactive rather than proactive factors and this seems especially pertinent in the case of small firms (Hoang, 1998). Obviously a successful first export sale into a particular market under these circumstances will encourage further activity in that market, thus perhaps defining in the longer term the geographic boundaries of the firm’s activities. Other similar “chance” market selection processes could include encouragement by an institution such as a Chamber of Commerce for a firm to “test” a particular market, referral to a particular market by business acquaintances and so on. Examples can also easily be found to support this idea and the “following clients” and “enquiries” explanations of IMS. Yet they seem only partial, for many firms they

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are irrelevant and they do not seem sufficiently powerful in themselves to provide a theory of international market selection. 2.3. Psychic distance Within the international market selection literature, the theory most widely accepted is that of internationalisation via psychic distance, developed by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977). This phenomenon forms the centre piece of much IMS research and is worthy of close examination. Psychic distance conceptualises the idea that firms tend to internationalise through country markets from which information flows are relatively unimpeded because those countries can more easily be understood by managers. The “easy” countries are targeted first and the more difficult later. As firms become more international in their activities the effects of psychic distance become less significant (Langhoff, 1996), however it does remain a “significant predictor of country selection” (Dow, 2000, p. 51). Driscoll and Paliwoda (1997) found socio-cultural distance between countries continues to be important in entry mode choice without consideration of experience. The researchers also developed at the same time a theory of “stage” internationalisation which argues that firms consolidate their positions in their markets in stages, developing their businesses through higher and higher levels of commitment over time, broadly from export through distributors to a local marketing office to joint venture or subsidiary operation as appropriate (Andersen, 1997). “Stages” theories of ongoing deeper commitments to foreign markets over time have been supported by many researchers (Crick, 1995; Rao & Naidu, 1992). The combined theories of psychic distance and increasing commitment thus broadly define the countries that firms will begin to export to, which are also the countries in which the firms first consolidate and expand. Although psychic distance theory has wide credibility within the international business research community, it has also been the subject of some well founded criticism. Andersen (1993) argues that the concept is simplistic and too deterministic. Langhoff (1996, p. 136) describes the concept as “poorly defined and measured” arguing that different firms handle cultural differences in different ways. O’Grady and Lane (1996) found that Canadian retail firms did follow a psychic distance route into the US market but performed poorly and concluded that the concept is more complex than normally acknowledged. 2.4. The psychic distance conundrum In spite of the criticisms, support for the psychic distance concept remains substantial (Dow, 2000). Taking the implications further, if psychic distance identifies the markets a nation’s firms are initially attracted to and if those countries are the ones the firms first consolidate and expand operations in, then that might help explain differences in the nation’s trading pattern with other countries. If this were valid

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theory then obviously Australia’s total export performance would be skewed towards those countries which were psychically near, as it is those countries that Australian firms would initially sell to and it is those countries that would be the subject of the firms’ increasing commitment to international activities, as suggested by the “stages” model. The extraordinarily high levels of market penetration achieved by Australia in New Zealand’s import market (DFAT, 1999) supports the explanatory power of psychic distance. Pursuing this line of explanation, the author looked at Australia’s export performance over a range of diverse trading partners against the dimension of psychic distance as measured by cultural factors, a common surrogate indicator (Kogut & Singh, 1988). Using Fletcher and Bohn’s (1998) development of psychic distance measures for Australia, Argentina is considered at a medium level of psychic distance from Australia and Malaysia is at a much further distance. Yet Malaysia is one of Australia’s major trading partners and Argentina is insignificant in terms of both dollar values and market share (DFAT, 1999). Similar difficulties arise in attempting to understand the relationship between trade and psychic distance between Australia and China, one of Australia’s most important markets and yet at the extremity of psychic distance. Australia’s largest export market by far, Japan, is mid way along the psychic distance continuum. Whilst the psychically close markets of the US and the UK are important to Australia’s exports in dollar terms, they are much smaller in terms of Australia’s market share than many more “distant” countries. Inconsistencies exist with many other countries. Thus, there appears to be something fundamentally flawed with either the psychic distance concept in explaining Australia’s internationalisation or in the way it has been defined or operationalised.

3. The research question The only partial IMS explanations currently available, the inconsistencies in widely cited theories, the claimed irrational behaviour of managers and generally uncertain empirical IMS evidence defines the research problem. The question addressed is “How do internationally active Australian companies select new foreign country markets?” Within the question there are three primary elements which are reported on in the results section. The first is to map the IMS decision process, the second is to define any relevant IMS selection criteria and the third is to identify the means of assessing those criteria.

4. The research design This research seeks to describe and explain a business phenomenon and in accordance with much of today’s explanatory research employs a non-positivist approach (Remenyi, Williams, Money, & Swartz, 1998). It aims to develop new theory and the project was designed in a manner that would provide for theory development

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grounded in primary research data (Glasser & Strauss, 1968). The project design is based on the road map developed by Eisenhardt (1995), which utilises qualitative study of cases to develop theory through analytic induction. Eisenhardt’s (1995) design calls for a sample of between four and 10 cases, a range supported by Remenyi et al. (1998). For this work some 25 firms were sequentially approached until six had agreed to participate. A purposive sampling technique was employed to select the firms originally approached and finally selected. The cases were chosen to span different sizes, different industries and different degrees of international involvement to capture “generic” practices. As a secondary consideration diversity in age and ownership form were sought. The only conditions applied were that the firms be registered in Australia and owned by Australian based interests and that they already be involved in international business in two or more countries over two or more years. This last condition was intended to exclude issues relating to the commencement of internationalisation which was not the subject of interest. The case firms have the characteristics shown in Table 1. Interviews were conducted by the author with the executive in each firm chiefly responsible for selection of new markets. This was usually a designated international business development manager, but in two cases it was the managing director. The interviews were held over a number of weeks and included four to six sessions of 2–3 hours each with each firm. In all cases except one they included interviews with a second executive within the same organisation to provide triangulation support. Interviews were unstructured although a protocol was employed to ensure the same themes were covered with each firm. Interviews were recorded and later transcribed into hard copy for analysis. In addition, relevant documentation, such as newspaper reports, annual reports, business plans and brochures, was studied in the expectation of eliciting further evidence of the IMS processes employed by the firm.

Table 1 Case study characteristicsa Case no.

Industry

1 2 3

Horticultural products Lighting systems Prefabricated builidings Mining equipment and associated services Education services Software

4 5 6 a

Size (employees)

35 24 700 219 5000 17

Ownership

International sales as % of total

Private company Public company Subsidiary of public company Subsidiary of public company University Private company

50 95 20 65 12 65

All firms are exporters and all except case 6 have some form of overseas production.

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5. Research results Content analysis was the central analysis procedure. Data was sifted and categorised, utilising coding systems and pattern seeking techniques as widely employed in qualitative research. 5.1. Mapping the market selection process As foreshadowed, the first part of the research question sought to map the country selection process at a level sufficiently generalised to be applicable to all the case firms. It was found that there is an identifiable sequence which firms move through to achieve country selection closure. This sequence and its underlying drivers provide the elements of the IMS model depicted in Fig. 1. 5.1.1. Step 1. Establish a country market set Responses from firms indicated that they were interested in developing markets any where in the world providing the potential returns were attractive. One case manager indicated that “politics or religion or anything doesn’t keep us out of any country%”. Later the same manager said “the big mining and infrastructure markets, construction markets that we operate in are very global”. Another manager said “we want to be opportunistic and we’ll go wherever the projects are”. The firm’s advertising material includes the motto “(product) where it’s needed, when it’s needed, anywhere in the world”. Another case manager said: “I’ve struck a marketing approach to the world” and “we just look directly at the global market”. Soon after the company’s commencement “we looked at how we could build a plan to take us worldwide”. Another case manager referring to world markets said: “It’s globalisation%things move around the world that quickly these days people just use the whole market as a shopping place”. Another manager said: “the whole world’s our oyster”. Some markets for some firms, however, were simply not feasible. Case 3 is not permitted to operate in New Zealand because of corporate policy. Case 5 is also not able to operate in New Zealand as a foreign market because of Australian Government education policy. Case 6 cannot operate in China and Japan because of technical constraints on its software language. Thus the firm’s managers establish in their own minds a potential country market set which consists of the world less those countries which are recognised by managers at any point in time as being unfeasible because of practical considerations applying to the firm. Importantly this potential country set might include countries which are in fact not feasible (perhaps because of legal prohibitions) but are not recognised as such by the firm. These latter countries might emerge as possibilities during the IMS process, only to be discarded. 5.1.2. Step 2. Identify a country Thus, whilst firms generally had a global view, their objective lay in identifying and evaluating particular markets that offered minimum or better levels of potential returns. One manager said: “generally we do get enquiries for a lot of projects” and in addition “we’ve been trying to ride the back of these other Australian companies”.

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Another manager visited a country “at the suggestion of the manager of the export division (of another company)”. A country was identified by firms in either a reactive or proactive manner and provided the market was feasible, that is not excluded from sales in some recognised practical sense, it was then accorded a notional priority. Countries with a sufficiently high priority moved on through the next step. Lower priority countries, however, even when identified as having potential, may be left in abeyance. One case has not targeted a number of countries identified as potentially profitable “because we haven’t got the resources”. Another manager regards a region as “second tier” and it has been left because “we’ve got enough on our plate”. 5.1.3. Step 3. Evaluate the country Once a country was initially identified and accorded priority an evaluation process ensued. Case firms were focused on the potential returns from a country, underpinned by the attractiveness of the market and on their own competitive positions in that country. These were the only criteria that were mentioned in discussions as being important in the evaluation decision. 5.1.3.1. Attractiveness A case manager said that the board of his company: “used to get investment proposals from all quarters of the world, and they were all based on someone’s own idea on how attractive a particular market was”. He also said in respect of a country: “the market in (country) really isn’t long term, isn’t big enough”. On another country he said: “%there is a vast amount of activity there%” and another manager from the same firm said about the same country: “(it is) very attractive actually”. Another case manager, referring to a new project which his firm is looking at in a new country said: “this operation in China is just simply huge”, “absolutely enormous” and in respect of China as a whole: “the way things are going I think there are a lot of opportunities there”. In terms of new product development through research and development one case is “looking at Japan, the US and Europe (because)%that’s where the volume sales are%and the wealth”. Another case has its sights firmly fixed on market size, “first big markets, that’s the first (criterion)”. When asked why the firm had focused on Europe and the United States the manager said: “the single two biggest markets in the world”. Another case is also focused on US market entry because “you know that’s where the big money is”. 5.1.3.2. Competitive position In addition to attractiveness, firms are conscious of the need to successfully compete for market share within attractive markets and their competitiveness within different markets was assessed. One case group’s annual report emphasises competitive position worldwide, stating: “we aim to develop differentiated products and secure the strongest competitive position wherever we operate”. The firm is not active in the US because, according to one manager: “%we’re not good at this macro distribution” and “The end result is that the threat of (a major US firm) just crushing us is great enough%”. On the region in which the firm is most active, the manager said: “%we have less competition here%international competition I should say%”. The fact that attractiveness by itself does not define markets is underlined by the comment in respect of a high value market: “%in (the country)

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we do nothing because there’s a couple of big competitors to us%down there, with fairly equal capabilities”. Another manager indicated that while a particular market had great potential “we’ve got nothing to differentiate our product”. The firm sees itself as exploiting a competitive advantage in certain Asian markets because “we have got an advantage there in technology, management, products”. There is a recognition that in some markets an advantage may not exist. One manager said “when you get into some of these other countries where we’re really not internationally competitive%”. Another said: “if the trade connections aren’t efficient and the freight’s too expensive it just puts you out of the market place for the larger stock”.

5.1.4. Step 4. Select market Following evaluation, firms select those countries which are considered profitable and worth further development. Resource allocation decisions are based on assessments of profitability, either measured objectively or subjectively. There is a recognition that some markets might well present some potential, but they are still not allocated marketing resources because they don’t meet hurdles. In discussions on South America a manager said “whilst it might be quite a nice healthy business in South America if we went there, in the scheme of (the group) it is not big enough to divert the attention%” and “there’s no money put aside for a trip to South America”. Resource constraints on pursuit of new markets were highlighted by the same manager: “and we really have very, very limited resources”. Similarly, China was not considered worthy of scarce resources: “we’ve had few numbers of resources” he explained when discussing lack of activity in that country. According to a manager: “you can’t be everywhere all the time” and referring to a region the firm had not evaluated “I’m sort of tied up that much with what I’m doing I don’t get a chance to”. In allocating resources they “feel it’s better to concentrate on the major markets for us with the greatest opportunity” and one overseas project “has taken up a lot of my time”. Another case manager had not pursued a potential market because of “the number of weeks there are in the year and how much marketing dollars there are”.

5.2. Informing decisions — the “informants”

One major aim of this research was to identify how firms made judgements about the criteria employed in country selection. It was found case firms identify countries and then conceptually evaluate country attractiveness and the firm’s competitive position through the accumulation of knowledge using a number of sources and channels, which I refer to as “informants”. For any country these informants are available in different numbers and strengths for different firms, depending on their own circumstances. To some extent at least the information flowing via informants and the consequent knowledge developed by managers is subject to the vagaries of chance. The major informants important to the case firms were found to be as follows.

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5.2.1. Allies Firms make country choices using the knowledge and other resources of associated business units, business associations, government agencies or other entities with which they have shared interests. One case manager said: “our reputation is growing there because of our (referring to another of the group’s activities) business”. Another case first visited what is now one of their main markets “at the suggestion of the manager of (an allied firm)” and a short time later a relative of the managing director who worked for a firm involved in the project “knew that there was a lot of landscaping to come up and he said to us why don’t you contact them?”. Their first important project “came about because a landscape architectural firm in Western Australia was doing work in (the country) and %we were recommended to them”. Another case follows clients of an ally because “virtually every one of their clients is potentially our client”. 5.2.2. Enquiries Unsolicited business enquiries are an important source of both country identification and evaluation information. One case said: “the enquiries %come from a million different sources”. Another manager said: “generally we do get enquiries for a lot of projects%”. The export business of another case started in 1990 when the firm sent a shipment to Japan as a result of “an enquiry that just came directly to us” and shortly after “we were approached by (a customer)%” to supply to the same country. First sales to China were made to a customer who “wrote to us%and said he was coming out”. When discussing their first overseas joint venture project a manager said: “a sizeable landscape architectural company%had heard about us and approached us about projects%”. Referring to the addition of the Middle East market a manager said: “I supposed what sparked it%we had a meeting from the Department of Fisheries and Agriculture of Kuwait, in fact we had the Minister in this very office%”. The firm is examining a new potential project because “we have also been approached about looking at a similar project in China”. Another case firm receives enquiries from “everywhere” and “every single day from the US”. Sales eventuated in Israel after an “Israeli got in touch with us directly” and “we’ve got four or five enquiries from Chile at the moment which we are talking to quite seriously”. 5.2.3. Exhibitions Exhibitions are regularly used by all the case firms as informants. When looking to diversify outside Asia a manager said: “it was actually through a mining show that actually started us off”. Another case participates in exhibitions especially in newly identified countries requiring further evaluation. A manager said “(we) have participated in any number of promotions in (various countries)”. Referring to Indonesia “I went up there” said the manager “for a flower promotion (and) we started developing linkages”. Another manager said “another thing we did%was also attend international exhibitions” and “we’ve been in a number of% exhibitions in Japan”. She sees such exhibitions as “a stepping stone to entering that market”. Exhibitions are an important part of another firm’s operations and provide a basis for information gathering and product promotion, “our traditional marketing is put

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a display stand in a%fair” said a manager, “Some of the work is coming now from the exhibitions that we did”. Referring to requests for product distribution rights the manager said “they saw us in Light Fair in May” and the enquiries were a result of “either that or Hanover Fair”. 5.2.4. Experience Whilst not of primary importance across firms, some influence was exerted on firms’ IMS by past experiences. One case began its international operations in Singapore and Malaysia where the managing director had spent a number of years working. When asked if his previous experience there influenced his directions in Asia he said: “sure, sure”. He has known their primary business ally in Malaysia “for 20 years from my Singapore days”. When asked which countries had proved the most successful to date his response was: “Malaysia%but that’s because of the contacts and Singapore%and again that’s contacts”. 5.2.5. Government programs Government business support programs (both in the home country and in foreign markets) can help firms to identify markets and then to develop business there. When discussing past business successes in China, one case manager explained: “%the (Chinese) government used to offer capital goods incentives to international investors”. The firm’s Asian regional office was established in Malaysia “purely because we got some good incentives from the government to set up a regional office”. Government programs were helpful in targeting and evaluating new markets for another case. According to a manager “we were the first (industry) to receive funding through the Austrade IAMP project program” and “the Middle East at that stage was a totally new market for us, and the funding we received there%helped us get into the Middle East market”. In fact “Austrade has played a big part in our business development in some countries”. The same firm’s operations in the Philippines has “pioneer status% which gives us a tax break”. 5.2.6. Networks Having access to knowledgable networks provides data, intelligence and contacts that help firms’ managers inform decisions. Referring to the firm’s investment in a country, a manager said “probably sub consciously it probably helped that yes as we had been there before and yes we knew various people”. Networks of informants and “talking to those sorts of people” were responsible for an assessment by a manager that “probably (country A) is more attractive than (country B)”. According to another case manager: “it’s the linkages you build in horticulture that are very very important” and “if you can keep those linkages, you can literally ride on their coat tails into the market”. Another manager thought “it was just getting out there and being known in the market place” that contributed to their success, because “unless you’ve got those connections you’d never know”. The same manager said: “the best thing is to make contact with people in the market place in your industry and find out what’s happening”.

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5.2.7. Previous customers Case firms often followed valued previous or existing customers (both local and foreign) into new markets. It is those customers that are defining the new country markets in this situation. One case manager said: “when Australian food companies go overseas we’ve done work for them here in Australia so we follow them to some extent%”. When discussing Australian clients active in a country the manager said “They were natural customers% and we did a lot of work for a lot of them” and “for the last three years probably the only work we’ve done in (a country) is from older clients from four, five, six years before”. Another case keeps close contact with customers in Australia and it was “through (a customer)%that we first moved into the Philippines”. In fact, one business line “just happened because we have (existing) clients that wanted us to do it for them”. An enquiry received for a new project in China was from “the landscape conceptual architects in (another project)% and it was their senior partner in Hong Kong that asked me to go to China”. That firm is “a catalyst” for the opportunity and subsequently the firm has “been in contact with other landscape architectural companies here” one of which “has a very large project there as well so they want us to look at that”. The manager sees the firm as “going in on the coat tails of other companies”. In another example, an American firm specified another case firm’s products on a project in Australia and subsequently the same firm has specified their products on project bids “in Korea, Saudi Arabia and Spain right now”. 5.2.8. Primary research The firms exhibited a strong tendency to undertake primary research to satisfy their own particular information requirements for country evaluation. When explaining the basis for the firm’s withdrawal from manufacturing in a country, one manager said “%that was one of the studies we did last year%” Where managers in that firm are not satisfied with their quantitative model output (referred to in the next section), “we go and do another study, talk to competitors, talk to customers, whatever and test the data”. A small case company is heavily committed to primary market research. “On (a product) we do market surveys, massive market surveys” and the firm has “business plans as big as this for every country”. In America “we did market surveys” and “Europe was done the same way”, “we did research on% Asia in general% Europe as a region and USA as a region”. Discussing South America the manager said when they were in a position “one of them (from the US partner firm) and myself will fly down to South America and do the survey together”. When asked about possible interest in South America, another case manager said: “I think what we really need to do is do some market research”. The same manager said in reference to their decision to target the Middle East: “we commissioned Austrade to do the market research for us in the Middle East” because “one of the most important parts is to do your research”. 5.2.9. Published reports Keeping track of market opportunities through publicly published material is important for some firms. One case manager said opportunities in South East Asia

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“just appear in front of you”. When evaluating another market a second manager said; “there was certainly a lot of publications out” and in respect of market intelligence “we were given most of that information prior to us leaving”. In another case, within its industry “public domain of what’s happening worldwide is exceptionally well distributed”. 5.2.10. Quantitative models Quantitative models are generally not used by the case firms for IMS. However, one of the larger cases uses a quantitative model to assist with market selection decisions. A manager said “we’ve got a couple of marketing analysis programs that we use”. “It’s a generic assessment tool that combines the market aspects of the decision with the financial aspects of the decision”. “The philosophy (of the model) was that a proposal that I put up for (a product line) in Indonesia can be measured against the same sort of investment criteria as a (another product line) in the United States” thus providing decision makers with a more objective decision platform. However, the model is not used for country screening as such but rather evaluation of particular (usually investment) proposals. No other firms used quantitative IMS systems. 5.2.11. Seminars Market seminars and the like were not generally important, however one firm finds public seminars and similar presentations on markets useful. One manager “made a point of attending any of the seminars related to these (identified) markets”. 5.2.12. Representatives Representation including agency appointments can be a strong market selection informant. Apart from official agents one firm also has informal representatives in markets that help provide information on opportunities and thus help assess market potential and competitive position. The manager said: “we’ve got people working for us from third countries in%” and “%they are doing actual representation for us”. Another case relies on representatives in various forms, “pre-existing networks” in the words of the manager, in all its significant overseas markets because the right agents can make “a huge difference”. When asked whether there were problems finding out essential project information one manager replied their real interest was in “finding somebody who knows that information”. For example, the firm has a “German distributor % just put on” and the aim of the firm “once we establish all the distributors” is to introduce “global marketing meetings”. Referring to one of their major markets a manager said: “we’ve got linkages there” and “you’ve really got to have a presence of some kind in a country like that”. In Bali “we have, if you like, a joint venture type agreement” and “we have a very good working relationship with a company in Saudi Arabia”. 5.2.13. Visits to markets Visits to markets were a commonly used informant in assessing attractiveness and competitiveness. While Taiwan has not proven a strong market for one firm “(when)

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we happen to be in Hong Kong we commonly go over there and shake the trees as we say”. To evaluate a venture in the Philippines another case manager “flew there (for) a two day, if you like, recce of the place”. The firm uses visits to exhibitions “to go around and look at the market place%” and business has eventuated through visits “into the market place, which we’ve done quite regularly”. While seeking prospective German distributors another manager “went over there” for negotiations, “my European guy sets up all his appointments and then I fly in”. Referring to new potential markets the manager said: “once we start talking to these people seriously, I would have to go and visit, it would be a nonsense not to be talking to these people”. Another case manager returned from a trip via Kuala Lumpur “to just, you know, try and get the ball rolling”.

6. The importance of the informants The various informants had differing impacts across firms. Whilst not statistically convincing the total number of citations of each informant by the case firm managers during interviews provides insight into their relative importance. The data are set out in Table 2. The data show the most important means of identifying and evaluating markets for attractiveness and competitive position amongst the case firms were knowledge provided by overseas representatives, enquiries from potential buyers, visits to markets, following existing customers and knowledge provided by allies. The least important were public seminars, referrals from customers, quantitative models and government programs. Table 2 Number of citations of each informant by case firms Informant

Case 1

Allies 2 Enquiries 28 Exhibitions 6 Experience 1 Govt. programs 5 Networks 8 Previous 14 customers Primary research 7 Published reports 0 Quantitative 0 models Referrals 3 Representatives 5 Seminars 1 Visits 8

Case 2

Case 3

0 12 10 5 1 3 2

3 4 2 0 3 2 15

6 1 0 0 15 0 7

Case 4

Case 5

Case 6

Total

4 8 1 3 0 1 5

9 3 11 1 0 12 0

17 10 4 6 0 3 13

35 65 34 16 9 29 49

7 4 4

0 1 0

3 3 0

3 6 0

26 15 4

0 6 0 6

0 18 0 3

0 20 0 20

1 23 2 14

4 87 3 58

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7. A market selection model The case data demonstrate that there are common influences at work in IMS processes. The identification of the country selection criteria and informants above provide the basis for a model, shown in Fig. 1, which describes the market selection process of firms in an Australian context. Internationally active Australian firms establish their feasible country market set. Informants help managers to identify a potential new country in which to expand operations. Identified countries are accorded a priority and the firm evaluates highpriority countries within its resource availability. Evaluations are made by forming judgements about the two primary selection criteria: attractiveness of the market and the firm’s competitive position. These judgements however are difficult and subject to error. They are made through the accumulation of knowledge drawing on inform-

Fig. 1.

The country market selection model.

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ants which operate on the firm in respect of differing countries. If the country meets the firm’s profitability hurdles, market entry resources are allocated accordingly. The decision to allocate resources is, of course, no guarantee of success. No action is taken in countries that are not sufficiently attractive or in which the firm is not competitive (i.e. countries not assessed as sufficiently profitable). Finally, as country environments change, the same set of informants are used to re-evaluate the countries and the resources allocated to them. The conclusion to be drawn from the model is that an Australian firm will tend to select first those country markets where (1) informants for the firm are most powerful and (2) they most strongly support a judgement that the country has high sales potential and the firm is competitive. That is, the number and strength of positive informants linking a country to a firm will determine its position in the firm’s country selection sequence through their effect on the behaviour of its managers.

8. Implications The research findings and the inductive model have some important connections to the extant literature. Firstly, the crucial part that knowledge plays in the IMS process (Denis & Deppeteau, 1985 Edwards & Buckley, 1998; Liesch, 1999) is supported, but in addition, the important issue of what it is that firms seek to know is revealed. The cases studied in this work clearly place most importance on market attractiveness and competitive position. The former is at the centre of normative IMS literature (Papadopoulos & Denis, 1988) and some empirical research (e.g. Terpstra & Yu, 1988), but the latter is only rarely mentioned and even more rarely adequately operationalised (e.g. Kumar, Stam, & Joachimsthaler, 1994 simply counts the number of competitors). Competitiveness has been at the centre of business strategy literature for some time (Kay, 1993 Porter, 1985), but has not been found by the author in research reports on actual IMS practice to date. Thus whilst the research shows case firms rarely attempt to use quantitative models to screen or assess markets, supporting conclusions reached by a number of other researchers (Andersen & Strandskov, 1998; O’Farrell et al., 1998), it also shows firms are nevertheless much more rational in IMS than often given credit for and that there are some “good” business principles involved in Australian IMS practices. Secondly, in addition to mapping the decision process and identifying the major selection criteria, the case studies reveal the important sources of market selection knowledge. The informants identified include a number of IMS influences already found in the literature, namely following existing clients and incoming trade enquiries. However, they were not found to be defining influences in themselves. An enquiry did not inevitably lead to selection of the country concerned but sometimes played a part. Also many customers of the Australian case firms moved off shore without being followed by their suppliers. However, sometimes they were. These two influences were found to be only part of a much wider web of informants which act together to inform managers on their competitive position in markets and the attractiveness of those markets, thus establishing knowledge and confidence in

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markets sufficient to allocate scarce marketing resources (Liesch, 1999). It is the number and strength of these informants available to a firm which affect the likelihood of a country being identified and assessed by it as a new market. Two of the most important informants are opportunity identification by overseas representatives and investigative visits to country markets identified by managers but not yet selected. These two IMS influences are not identified as such in extant literature. The emergence of the “informant” concept in discussions with case firms is entirely consistent with the theme of the relatively recent networks approach to internationalisation (Johanson & Mattson, 1988). That is, firms develop their domestic and international businesses through the development of personal relationships between the managers and a host of related persons (Chetty & Holm, 2000). The case firms’ knowledge of markets was often (but not always) gained through interaction with other participants in the business process (Johanson & Vahlne, 1992). Thirdly, it was found that psychic distance as usually defined and operationalised (Fletcher & Bohn, 1998; Johanson & Wiedersheim-Paul, 1975) is not an important factor in the Australian firms’ IMS decision processes at least after initial market entry. The various interpretations of psychic distance, “resemblance to the home country” (Petersen & Pedersen, 1996), “ease of information flows” (Johanson & Wiedersheim-Paul, 1975) and “cultural similarities” (Cicic, Patterson, & Shoham, 1999) do not affect IMS choices of the case firms. In fact most case firms’ best markets lie in the opposite direction. Another interpretation, “familiarity of the market” (Edwards & Buckley, 1998), however, did sometimes have a bearing where applicable and consequently is included in the list of informants (under “experience”). It was apparent, however, that most case firms were affected in the selection of their first market by circumstances related to some interpretations of psychic distance. Case 1 sold first to an Australian client in Japan. Case 2 first sold to the Managing Director’s recent home country, Singapore/Malaysia. Case 4 sold first to its then owners’ home country, the US. Case 6 first sold to an Australian company in the country of origin of its Managing Director, Zimbabwe. 9. Conclusion This paper attempts to provide some answers to the intriguing and important question of how Australian firms select new foreign country markets. In particular, it seeks to develop a theoretical model of foreign country selection as part of the firm’s internationalisation process. The contribution of this model is that it not only incorporates previously reported partial IMS explanations, it also incorporates new explanations and provides a synthesis of the two. 10. Suggestions for future research This paper does not claim that the research results can be generalised to the entire Australian business community. The methodology is inappropriate for such a gener-

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alisation. The work has been used to develop theory. Further research could provide support (or otherwise) for generalisation, especially through quantitative testing of the hypotheses based on the model. Why informants interacting with a firm vary from country to country and from firm to firm within countries is easy to speculate on. Close geographic proximity would seem to be important because it encourages a greater level of general knowledge and also can deliver real competitive advantage through lower freight costs. Similarly, culture as expressed through common language and business regulation should also be relevant. Strong existing commercial relationships between nations, especially where supported by preferential trade agreements, should encourage other firms to investigate opportunities. Historical ties, for example, through common development paths and allied war experiences, should bring firms in nations closer together. Close political/military ties should provide support for commercial exchange. Further research would help validate such speculation. Another question for further research is whether the concepts and relationships exemplified in this work by Australian firms also apply in other countries. A cross national project involving firms from a number of nations would be helpful in addressing that issue.

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