The Internationalization process of Dutch firms active in the
defence industry.
Date: June 21, 2017
By: Jelle Kies
Student Number: 11227206
MSc in Business Administration
Master Thesis International Management
1st supervisor: E. Dirksen MSc.
Statement of originality
This document is written by Jelle Kies who declares to take full responsibility for the
contents of this document.
I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.
Abstract
World military expenditure is estimated to have been $1760 billion in 2015 (Stockholm
International Peace Research Institute, 2016). Despite the magnitude of the industry there is a
relative little known about the industry. The Netherlands have a strong position in this
industry which is already in a process of internationalization. Therefore this study asks how
Dutch companies active in the defence industry internationalize. In the theoretical framework
we used seven different models, which describes different motives for Internationalization
and stated seven working propositions to link the theory with the defence industry. To
explore this phenomenon, a multiple case study was conducted using semi-structured
interviews with 10 managers active in the industry. This study shows that six out of seven
working propositions are supported by the research. Politics and the level of prosperity and
wealth of a country have a large influence on the international strategy of a Dutch company
in this industry. Also restrictions from the home and/or foreign government have a large
influence, in contrast to unfamiliarity with the local environment for company, discrimination
faced by foreign firms or the spatial distance of a country. Cost minimization and cultural
differences have a low influence on the internationalization process. The theory suggests in
order to protect a company's knowledge foreign direct investment is necessary, but the
research shows it has a low influence on internationalization. This study also shows that a
good reputation and a strong network is essential to win contracts and that slow learning is a
method to expand but is not the driver to choose for a certain country.
Keywords: Internationalization, defence industry, defence industry, governmental, politics,
Dutch company, culture, network and learning.
Acknowledgements
I would like to express my appreciation to my supervisor Erik Dirksen who could
always make time for me to discuss the progress of my work with valuable feedback and
support for my research.
I would like to thank all ten respondents for taking their time and effort to answer all
my questions to the best of their knowledge.
Table of content
1. Introduction………... 7
2. Theoretical framework………....……….9
2.1.
Internationalization………… ………9
2.2
Theories of Internationalization……… 10
2.3
Theoretical Integration……….………... 13
3. Data and Method………..16
3.1
Research design: a qualitative case study………..16
3.2
Data Collection Method……….16
3.3
Semi structured intervie……….16
3.4
Case sample………... 17
3.5
Data Collection………...18
3.6
Strength and Limitations………..………..19
4. Data Analysis………... 17
4.1
Research Philosophy………... 20
4.2
Case Selection………... 21
4.3
Interpretation of influence………..………23
5. Findings………26
5.1
Case A……… 26
5.2
Case B……… 27
5.3
Case C……….. 28
5.4
Case D………... 29
5.5
Case E……… 31
5.6
Case F………... 33
5.7
Case G……… 34
5.8
Case H………... 36
5.9
Case I………..37
5.10
Case J………. ………... 39
5.11
Overview Cases………. 41
6. Cross Case Analysis……….42
6.1
First working proposition………...… 42
6.2
Second working proposition………..……... 42
6.4
Fourth working proposition………. 43
6.5
Fifth working propositio………...44
6.6
Sixth working proposition………...44
6.7
Seventh working proposition………...45
6.8
Conclusion of findings………46
7. Conclusion and discussion………47
7.1
Conclusion………,………...47
7.2
Discussion……….. 48
7.3
Limitations and further research……… 48
References……...……….. ……… 50
Appendix………53
Appendix 1: Top 25 military spending nations 2015 ..………...53
Appendix 2: 20 largest arms importers 2015…………... 53
Appendix 3: 20 largest arms exporters 2015………. 54
Appendix 4: Template semi structured Interview managers compay...….. 55
Appendix 5: Template semi structured Interview managers foundation... 56
Appendix 6: Interviews………..57
1. Introduction
World military expenditure is estimated to have been $1760 billion in 2015,
representing 2.3 per cent of global gross domestic product or $228 per person (Stockholm
International Peace Research Institute, 2016). This commercial industry consists of R&D,
engineering, production, and servicing of military material, equipment, and facilities.
Departments of the government also operate in the defence industry, buying and selling
weapons, and other military items.
Despite the magnitude of the industry there is relative
little known about the industry. Surry (2006) describes that transparency in the government
military sector has been already on the political agenda since the 1970’s and has resulted in
in, among other things, increased public reporting of military expenditure and arms transfers.
However, Companies’ reporting of the military share of sales is rare and incomplete, while
reporting on the military share of their exports and research and development is almost
non-existent.
Research into transparency in the defence industry has generally focused either on the
broad topic of regulating transnational corporations or on the narrow subject of combating
corruption in the defence industry (Surry, 2006). It is remarkable that an industry of this
scope has a huge lack of transparency. Transparency is for big corporations and industries an
important factor in their corporate strategy, because the availability of information is alleged
to be a key determinant of the efficiency of resource allocation decisions and growth in an
economy (Bushman, Piotroski & Smith, 2004). Also transparency increases the reputation of
a firm or an industry (Bushman, Piotroski & Smith, 2004). The origin of the bad reputation of
the defence industry is because of its core that weapons kill human beings, but the lack of
transparency also contributes to this bad reputation. For example, if citizens don’t know how
the defence budget of a nation is spent and more important which parties benefit from it, the
lack of transparency contributes to this bad reputation.
Most countries traditionally have preferred to be self-sufficient in arms production,
and indigenous defence industries generally have been perceived as the most secure source of
weapons for meeting national security requirement (Blitzinger, 1994). Despite the lack of
transparency, there are from the late 1980’s different developments in the global defence
industry. Sköns and Wilf (1994) described the process of increasing international takeovers
and acquisition activities that are concentrated in Western Europe. It raised a lot of new
questions regarding the structure of the industry. Also Bitzinger (1994) describes that in this
process of internationalization or globalization in the defence industry entails a significant
shift away from traditional, single- country patterns of weapons production toward
internationalization of the development, production, and marketing of arms. This covers a
broad range of industrial activity including technology transfers, international subcontracting,
licensed production, and the multinational co-development and co-production of major
weapons systems. As military spending around the world declines and defence industries face
major contractions in their national arms markets, "going global" in arms production has
become a critical corporate and government strategy for ensuring the preservation and
economic viability of national defence industrial base (Bitzinger, 1994).
Also the Netherlands plays a big role in the arms export. As mentioned above, the
industry is already in a process of internationalization and the concentration of international
takeovers and acquisition activities are in Western Europe. SIPRI is an independent
international institute dedicated to research into conflict, armaments, arms control and
disarmament. In appendix 1 they summed up the 20 largest arms exporters of the world
between 2011 and 2015. The Netherlands is number 10 on the list of most arms exporting
country while the import figures are negligible (appendix 2).
There are different theories concerning internationalization. It is defined as the
process of increasing involvement in international operations (Welch, Lawrence and
Luostarinen, 1988). There are different theories explaining the drivers behind
internationalization such as the Uppsala model, Transaction Cost Theory and Network model.
These will be later discussed.
As mentioned before, from the late 1980’s this industry also globalizes and the
Netherlands has a big share in the arms trade. There is almost nothing written about exports
of Dutch firms active in the defence industry. The research question for this paper is:
How do different Internationalization theories and models correspond with Dutch companies
active in the defence industry?
In the next section I will expand with a theoretical review of Internationalization,
defence industry and how they correlate with each other followed by seven propositions
based on the theoretical framework. This review will continue with how the data is collected
and will show the data analysis, findings, cross - data analysis and finally the discussion and
conclusion.
2. Theoretical framework
In the theoretical framework I will first describe how different scholars think about
the meaning of Internationalization. Further I will discuss different well-known models in the
field of Internationalization.
2.1 Internationalization
One of the pioneers within the research area of firm internationalization, Sune
Carlson, started from the simple fact that firms which intend to go abroad suffer from lack of
knowledge about how to conduct a business in a foreign market (Carlson 1966).
Internationalization is a phenomenon that is investigated from a variety of viewpoints,
including: organization theory, marketing, strategic management, international management,
and small business management.
Since there is a lot of research on the topic Internationalization there is also a
discussion about how to define it. Welch and Luostarinen (1988) define internationalization
as a “process of increasing involvement in international operations”. Another definition is
explained by Calof and Beamish (1995), they define internationalization as a “process of
adapting the firm’s operations (strategy, structure, and resources) to the international
environment”. Another definition is
explained by Břečková (2003); Internationalization is a
process of firm’s involvement in international transactions, i.e. the internationalization is
based on the form and the level of this involvement.
There must be some motivations behind the decision to start internationalize.
Globalization of economy and intense competition force businesses to look for new
possibilities to sustain their competitiveness. One of the ways how to remain competitive,
achieve a long-term profitability, competitive success, and actually how to survive is, not
only for SMEs but also for large enterprises, the internationalization process
(Kubíčková,
Votoupalová & Toulová, 2014
).
Leonidou, Katsikeas and Percy (1998) determine that organizations are typically
willing to expand internationally for three reasons. First, it may be due to slow growth in the
domestic economy as evidenced by a reduction in the number of the home market
opportunities. Consequently, an organization will look for other opportunities by entering
new international markets (Chandra, Styles and Wilkinson, 2009). Second, the world trading
system may become more liberalized leading to a minimization of international market entry
barriers. Third, it might be more intensive global competition in the global business
environment.
2.2 Theories of Internationalization
Due to the complexity of the processes involved in the internationalization, several
theories have been designed by different scholars to enable the easy accomplishment of the
international emerging markets. As mentioned before, there are different theories explaining
the drivers behind internationalization such as the CAGE model, Liability of Foreignness,
Psychic Distance, Transaction Cost Theory, OLI Model, Network theory, and the Uppsala
model. In the next paragraph I will explain the different theories.
The key features of the Uppsala model are well known: that firms develop their
activities abroad over time and in an incremental fashion, based on their knowledge and
development, and that this development is explained by the concept of psychic distance, with
firms expanding first into markets which were psychically close, and into more distanced
markets as their know developed (Johanson and Vahlne, 1977).
It distinguishes state and change aspects of internationalization. Change aspects
concern internationalization behaviors in the form of commitment decisions and current
activities that are assumed to be dependent on state aspects, which are in turn affected by the
behavior of the firm. Decisions to commit resources to foreign operations are grounded on
the firm’s experiential knowledge and assumed to depend on what alternatives are raised and
how they are chosen (Johanson & Vahlne, 1977). Nevertheless, these assumptions do not
sufficiently explain the model’s contingent nature.
“ The commitment decisions of the Uppsala model are framed under an analytical formula
that regards risk as dependent on commitment and uncertainty realizing thereby the
internationalization mechanism and the contingent nature of firm’s growth and
internationalization. The model’s contingency derives from the alternatives raised and,
consequently, the internationalization process pattern and pace reflect the changes in a firm
and in its environment (Lemos, Johanson & Vahlne, 2011)”.
In the Transaction Cost Theory (TCT), as discussed by Williamson (1975), firms
always strive to minimize their cost at all points during their operations and decision making.
This is why firms would need to consider to either entering a foreign market with their total
assets or collaborating with their external partners as externalization (Williamson, 1975). The
failure of a foreign emerging market strongly depends on this decision (Williamson, 1979).
organized in the way that they are in the modern society (Williamson, 1994). Madhok (2002)
explained that the TCT is about why don't firms do what they don't? Transactions costs
comprise the ex-ante costs of (1) searching and information, (2) drafting and negotiating an
agreement, and (3) costs of safeguarding the agreement. The ex-post costs entail the costs of
(1) evaluating the input, (2) measuring the output, and (3) monitoring and enforcement
(Williamson, 1985).
The eclectic or OLI Model developed by Dunning (2001) has provided a unifying
framework for research on multinational enterprises. This framework determines the extent
and pattern of foreign owned activities. It posits that multinational activities are driven by
three sets of advantages, namely ownership, location and internalization (OLI) advantages. It
is the configuration of these sets of advantages that either encourages or discourages a firm
from undertaking foreign activities and becoming an MNE. Ownership advantages address
the question of why some firms but not others go abroad, and suggest that a successful MNE
has some firm-specific advantages which allow it to overcome the costs of operating in a
foreign country. Location advantages focus on the question of where an MNE chooses to
locate. Finally, internalization advantages influence how a firm chooses to operate in a
foreign country, trading off the savings in transactions, holdup and monitoring costs of a
wholly owned subsidiary, against the advantages of other entry modes such as exports,
licensing, or joint venture (Neary, 2009).
In the network model theory, the market is seen as a system of social and industrial
relationships among customers, suppliers, competitors, families and friends within a given
boundary and beyond. This is for the purpose of creating the opportunity and motivation for
internationalization. Following the network perspectives, the strategic decisions that are
usually taken by organizations strongly depends on the relationships between the various
parties and individual firms also depend on the resources that are controlled by other national
and international firms.
Psychic distance (
Ellis, 2008)
is about the intuitively appealing idea that a firm’s
early internationalization activities will be constrained by the psychic distance separating the
home and foreign markets. Psychic distance is defined as “the distance between the home
market and a foreign market, resulting from the perception of both cultural and business
differences” (Evans and Mavondo 2002, p. 517). In other words, a firm will sooner enter a
market that has a low market uncertainty with high opportunities instead of a market with a
greater psychic distance (Johansen and Vahlne, 1990). Also psychic distance can have an
impact on both the organizational performance as on the entry strategies (
Evans, Mavondo
and Bridson, 2008)
. Entry strategies can be classified according to two highly correlated
characteristics: (1) resource commitment required and (2) degree of control (Kogut and
Singh, 1988). Resource commitment refers to the dedication of assets, both financial and
nonfinancial, that cannot be employed for other uses without incurring costs (Osland, Taylor,
and Zou 2001). Control is the firm’s ability to influence systems, methods, and decisions in
the foreign market (Anderson and Gatignon 1986).
The CAGE framework is a useful model to analyse psychic distance when
investigating the internationalization process of a company. Ghemawat’s (2001) “CAGE”
model is the analysis of the cultural (religion, race, social norms, language), administrative
(political and economic relationships), geographic (physical distance), and economic (wealth
and income) dimensions of different countries, which can help businesses, examine barriers
to expanding in these countries and how to overcome them, or at least reduce their impact.
The Liability of foreignness is all of the additional costs that a firm operating in a
market overseas incurs compared to a local firm (Hymer, 1976). Zaheer (1995) further
elaborates that these costs may arise from at least four, not necessarily independent, sources:
(1) spatial distance (travel, transportation and coordination costs), (2) unfamiliarity with local
environment, (3) discrimination faced by foreign firms and (4) restrictions from the home
country. She also contends that though LOF may vary by industry or country, foreign firms,
all else being equal, will have lower profitability than local firms and perhaps even a lower
probability of survival. The Liability of Foreignness correlates positively with the psychic
distance mentioned before, so the larger the psychic distance the larger is the liability of
foreignness. The larger the psychic distance, other things being equal, the more difficult it is
to build new relationships.
All these internationalization models cover the broad theme of Internationalization
about which motives have an influence on the Internationalization models. Is culture (Psychic
Distance, CAGE model, and Liability of foreignness) important in their decision to expand to
a certain country? Or have cost effectiveness (Transaction Cost theory) and a slow learning
process (Uppsala model) a larger influence on these plans? First, in the next paragraph seven
proposition based on the theoretical framework and the characteristics of the industry will be
stated to approach the research question. Further in the next chapters I will explain how I will
research these propositions, what the findings are and if we can accept these propositions.
2.3 Theoretical Integration
In this section, the above-elaborated theoretical concepts are set in relation to the
underlying research question. Seven working propositions are stated to approach the research
question: which internationalization models correspond with Dutch firms active in the
Defence industry.
As mentioned before, the defence industry is one of the largest industries in the world.
What make this industry different to others are the drivers behind this industry. The military
expenditures (Appendix 1) of countries worldwide are the basis why it’s hard to compare this
industry with a typical commercial industry. So the impact on businesses would be that their
customer base is mainly (foreign) governments. So the companies in this industry are heavily
dependent on (worldwide) politics. This means that defence budgets, elections, and
cooperative treaties and export restrictions have a large influence on these companies.
In addition to the fact that politics plays a major role, it is also a capital-intensive
industry. In appendix 3 is stated that some countries spend more than 5 percent of their gross
domestic product for defence purposes and that the first ten countries spend more than 38,6
billion dollars on defence. These countries in appendix 3 (USA, China, Russia, Saudi Arabia,
France, UK, India, Germany, Japan, South Korea, Brazil, Italy, Australia, UAE, Turkey,
Israel, Canada, Spain, Columbia, Iraq, Poland, Netherlands, Taiwan, Algeria and Singapore)
are mostly countries with a prosperous economy. It’s for companies interesting to go to
certain areas in the world where there is a defence industry and the expenditure is significant.
So the wealth and income of a country has an influence on the international strategies of
Dutch companies active in the defence industry. However, cooperative treaties such as the
European Union can also enter trade sanctions for a specific country (Rijksoverheid, n.d.).
The CAGE framework overlaps with cultural differences between countries.
Administrative differences explain differences in political and economic relations between
countries and economic differences explain differences in wealth and income. Because of the
globalized nature of the industry and amounts of money involved, the physical distance and
cultural differences between countries have less influence on the international strategies. So
the first working proposition will be:
WP1: The CAGE model has a high influence on the international strategy.
The political influence from the home country to enter sanctions for a specific country
overlaps with the last pillar of the Liability of foreignness about restrictions from the
government. Spatial distance will play a minor role because it’s a capital-intensive industry.
And because of the nature of the business that foreign governments are mainly the customer's
unfamiliarity with local environment and discrimination faced by foreign firms have less
influence on the international strategy of the company
.
The second working proposition will
be:
WP2: The Liability of foreignness has a medium influence on the international strategy.
Companies in this industry have a presence all over the world. As mentioned before,
the last decennia the industry is heavily globalized. Which implies that companies expand to
both countries with a lower and higher psychic distance. So the third working proposition
will be:
WP3: The Psychic distance has a low influence on the international strategy.
The military industry is a knowledge based industry (Lord, 2004). Therefore high
quality is more important instead of cost minimization. This undermines the principle that
firms will expand to other countries with the purpose to minimize their cost during their
operations and decision making. So the fourth working proposition will be:
WP4: The Transaction Cost Theory has a low influence on the international strategy.
Instead of focusing on cost minimization firms will try to protect their knowledge. As
stated in the OLI model, sooner will have foreign entities abroad instead of licensing their
products to protect their knowledge, and that the ownership advantage from the good
reputation of the Netherlands as a knowledge-based economy will have a positive influence
on international expansion. So the fifth working proposition will be:
WP5: The OLI model has a high influence on the international strategy.
If (foreign) governments are the mainly customers an organisation need to lobby with
officials from these governments to persuade them in order to affect decisions in your
to have a good network so it’s easier to start a good lobby and win the contracts. So the sixth
proposition will be:
WP6: Networking has a high influence on the international strategy.
In order to do so, before an organisation expand to a specific country it is desirable to
first have a small operation in this country so a company has a start in a country to get the
first contacts and start building your network. But since the fact governments are mainly the
customers a company cannot follow a typical growth and learning process as in a commercial
industry. So the seventh proposition will be:
WP7: The Uppsala Model has a medium influence on the international strategy.
In the following chapters I will explain how this study will investigate these working
prospoistions and if the working propositions will be supported or rejected.
3. Data and Method
This chapter concerns the study that was conducted, its design, and data collection.
The purpose of this chapter is to explain how the data was collected and which method is
used.
I will explain why qualitative research is the methodological choice in this research and
explain the overall design of this research..
3.1 Research design: a qualitative case study
As mentioned before, there is not much data about Dutch firms active in the defence
industry. Therefore this study will be inductive and have an explorative approach due the
active search to identify and explain the investigated phenomenon. Because there is hardly
any data about this specific topic the research consists only of primary data (Eisenhardt,
1998). Therefore a multiple case study is the most appropriate research design. Simons
(2009) described a case study is an in-depth exploration from multiple perspectives of the
complexity and uniqueness of a particular project, policy, institution, program or system in a
“real life” context. Also the case study has a general advantage when a ‘how’ or ‘why’
question is being asked about a contemporary set of events over which the investigator has
little or no control (Yin, 2009). The multiple-case study consists of different
Internationalization models applied to one specific industry in one country.
3.2 Data Collection Method
The assumption of the research about reality will be relative and describes the
meaning and understandings of the respondents. The focus is to get a better understanding of
the respondents on the export of Dutch firms in the defence industry. Therefore a
semi-structured interview is the most suitable data collection method since it provides a more in
depth data about the investigated phenomenon, and it provides predetermined themes to
ensure the cover of essential issues by simultaneously leaving freedom to add and eliminate
questions during questionnaires (Saunders & Lewis, 2012). This method also offers a
balance between the flexibility of an open-ended interview and the focus of a structured
ethnographic survey and is highly suitable for exploring a research domain.
3.3 Semi structured interviews
There are two hundred fifty companies in the Netherlands who have business with the
Dutch Defence department. We used information-oriented selection in the sampling method
data will be generated by interviews held with managers from SME’s and multinationals that
produce weapons and weapon parts for the defence industry. To get a broader and less
prejudiced picture of this part of the industry we will interview, besides all the managers
working for a commercial company, two managers working for a foundation which are linked
to this industry.
To make my research more specific I will focus on one specific segment in the
defence industry. There will be conducted 8 interviews with commercial companies and 2
interviews with foundations active in this industry while there are only 20 corporations in the
Netherlands who are active in this segment. So this study will approach 40% of the total
market, which strengthens the validity and credibility of the research. In the next paragraph
there is stated what these criteria are.
3.4 Case Sample
The cases will be selected through a purposive sampling method (Saunders & Lewis,
2012). This kind of non-random sampling allows to replicate theoretical foundations
(Eisenhardt & Graebner, 2007). There is a database of the Dutch government called
Catalogue of Netherlands Defence Related industries. Here is an overview of all Dutch
companies active in the Defence industry. Despite there is little known about the defence
industry, there are 250 companies working in different segments. As mentioned before, to
make my research more specific I will focus on one specific segment in the defence industry:
corporation who produce weapons or weapon parts. This is most appropriate for my research
design because the research discusses the importance of transparency in an industry and
corporations producing weapons are on average less transparent (Surry, 2006). There is
access to all corporations in this specific segment on the government website with phone
number, email and (if there is) website. The respondents will working for an organisation
who is active in the defence industry, also the corporation has an international operation and
the respondent has knowledge about this international operation. A small part of the
interviewees are not working at a commercial company in this industry, but work for
different foundations who are active in the same industry.
3.5 Data Collection
The recorded interview responses will be categorized after transcription in order to
describe the data (Saunders & Lewis, 2012). Relevant data units will be applied to categories
to identify patterns (Saunders & Lewis, 2012). The focus of the interview will be on how the
international expansion evolved and the fundamental principle to go abroad of different
Internationalization models will be covered. There are 7 different topics about the reasoning
why corporations can go abroad and each interview will have an opening and a closing. The
duration of the interview will be approximately 40 minutes (5 minutes for every topic), but
since it is semi structured there will be a variance in the length of the interview.
As outlined in Table 1 eight interviews were held with managers from companies in
the defence industry and two interviews were held with managers from foundations active in
this industry. The interviews with all organisations were held with members in different
positions. In 3 cases the interviews were held with managers in these organisations instead of
directors. In 2 of these cases the director was not available for an interview, due to time
issues the researcher spoke to members in other positions. Their knowledge about the
interview themes were ensured via phone or e-mail before the actual interview.
Table 1: Overview interviewees
Organisation Company Position
Comapnies
A MIFA Sales Manager
B ADIMEC Department Manager
C Thales Director Corporate Communications D Van Halteren Metaal Technical & Commercial Director
E TNO Business Director International
F Ionbond Product Manager
G Fokker Vice President Business Development
H Hankamp Director
Foundation
I Stop Wapenhandel Director
J NIDV Director
The interviews with all companies and foundations covered 7 top themes based on the
theoretical framework: The Uppsala Theory, Transaction Cost Theory, OLI Model, Network
Theory, Psychic Distance, CAGE model and Liability of Foreignness. The first theme target
questions concerning learning, development and about small steps from export to foreign
direct investment. These questions are aimed to get an understanding if there is a process, and
if so at what pace, within this industry where companies increase their commitment in a
foreign country. The second theme targets questions about if cost and efficiency is a driver
for companies to start internationalize. The third theme targets questions about what is the
influence of ownership, locational or internationalization advantages on a company’s
international expansion. The fourth theme target questions concerning how important is a
strong network and relationships for international expansion. The last three topics I want to
discuss are about culture but all from a different angle. The fifth theme targets questions if
cultural distance has an influence on the international strategy of the companies. For the sixth
theme I tried to understand if political and economic relations, physical distance and wealth
and income play a role in the international strategy. The last theme target questions about
discrimination of international companies, unfamiliarity with the local environment, whether
restrictions from the government has an influence to expand to this country or not to expand
to this country.
3.6 Strengths and Limitations
The semi-structured interviews allowed us that certain aspects have been investigated
in more detail. To ensure good validity and reliability there was an initial interview with a
respondent to test the approach. This interview have not been included in the results. After
this initial interview the questions were adjusted to ensure higher quality and efficiency, and
to make sure that the intended ground was covered.
The interviews cover a large percentage of the total market, which strengthen the
validity and the credibility. But it is still only a small sample size; it is hard to generalize
conclusions from this sample. Also there is a possibility of an interviewer bias because of the
data collection method. However, it is a good starting point from which to advance this field
of research.
4. Data analysis
This chapter presents and analyses the results of the interviews. The propositions in
the next chapter will be based on this analysis. First, I will explain which philosophy fits this
research the most. Secondly, I will give in the case selection an overview of the different
characteristics of the different organisations. Thirdly, in the last paragraph is the coding
scheme stated and which approach is used in this process.
4.1 Research Philosophy
When conducting qualitative research one must be aware it is a subjective approach,
and this philosophy guides his or her analysis and interpretation of the facts. In management
research there are 4 main philosophies: positivism, realism, interpretivism and pragmatism
(Saunders et al., 2007). Epistemology, as branch of philosophy, is concerned with the
characteristics of what is deemed to be considered knowledge. Nevertheless it is difficult for
a research to fall perfectly inside one of these 4 categories (Saunders et al., 2007).
Regarding this thesis I would consider the philosophy behind the research carried out
to be “realist”. Realism relies on the idea of independence of reality from the human mind. In
other words, what our senses tell us about the world is the truth, which is similar to
positivism in the sense that it entails a scientific approach to the development of knowledge
(Saunders et al., 2007). Realism is somewhere in between interpretivism and positivism. This
philosophy states that the investigator is completely independent of the data being analysed, it
is just a mere observer of reality; but mechanisms such as related differences in social actors
and human interaction are important to understand its place (Saunders et al., 2007).
In the realist realm we can further differentiate between the “critical” and the ”direct”
one. Direct realism portrays the world through personal human senses. Critical realism, on
the other hand, argues that humans do experience the sensations and images of the real world
(Saunders et al., 2007). This research tends more towards the former subcategory. This says
that what we experience through our senses is an interpretation of reality, not the truth per se
(Saunders et al., 2007). A perfect example of this being optical illusions, these are images or
pictures that we perceive differently than they really are. Instead, a direct realist would say
that these pictures or images we perceive is the reality as it is. In the end I can describe the
epistemology of this thesis research as being “critical realist”, which means that what we
experience is the truth, but it is open to misinterpretation.
In the following paragraphs I will use this research philosophy to analyze all data of
the different respondents. I need to balance the role of different interviewees, what the
position was of their organisation in the industry, how mature the company is and how
developed their international operations are in order to balance the different answers in a
correct way. In the analysis I will discuss each model and scale all answers on what the
influence is on the international srategy of a company using this philosophy. By the use of a
coding scheme I will fullfil my role as a critical realist where what I experience is the truth,
but is open to misinterpretation. In paragraph 4.3 I will explain the concept of influence
further.
4.2 Case Selection
In order to get some idea of the different companies, there will be a brief overview of
these companies in Table 2, in which defence markets they are active, their international
activities and which percentage the defence business is from the total business. The pool of
managers included several managers from multinationals, few managers from small medium
enterprises and two managers from a foundation active in this industry. These companies
differ from each other and for example not all companies have a foreign direct investment. It
is also possible that these different companies have different motives for Internationalization.
Table 2: Overview characteristics companies
Case # Employees Defence markets Export FDI % Defence
A 220
Weapons, Wheeled vehicles/transport systems ,Sensors
(radar/sonar/optronics), Aircraft, Mechanical constructions/military
engineering materiel/hydraulics, Armoured vehicles, Missiles/torpedos Yes No 10%
B 100
Navigation/position/meteo, Missiles/torpedos,
Electronics/avionics/EW, Ships/ship equipment, Armoured vehicles, Miscellaneous, Sensors (radar/sonar/optronics),Ballistic
protection,Personal equipment Testing, measuring and calibration, Weapons, Operational software, Maintenance/repair/modification, Wheeled vehicles/transport systems,
Securitysystems/detection/alarm,Aircraft Yes Yes 10%
C 1200
Simulators, Miscellaneous, Ballistic protection,
Navigation/position/meteo, Sensors (radar/sonar/optronics), Mechanical constructions/military engineering materiel/hydraulics, Armoured vehicles, Ships/ship equipment,
Securitysystems/detection/alarm, Telecommunications, Wheeled vehicles/transport systems, Operational software, Missiles/torpedos, Maintenance/repair/modification, Weapons,
Engineering,Firecontrol/SAR, Testing, measuring and calibration,
Electronics/avionics/EW Yes Yes 50%
D 400
Weapons, ILS/LSA/PDM/MRO, Ballistic protection, Aircraft ground support equipment, Containers/packing, Mechanical
constructions/military engineering materiel/hydraulics, Light weight materials / material treatment, Armoured vehicles, Simulators, Wheeled vehicles/transport systems, Maintenance/repair/modification,
Ammunition, Shelters Yes No 40%
E 3000
Weapons, Personal equipment, Ballistic protection, Ammunition,
Light weight materials / material treatment Yes Yes 33%
F 150
Engineering, Mechanical constructions/military engineering materiel/hydraulics, Weapons, Light weight materials / material
treatment, Personal equipment Yes No 1-5 %
G 4900
Education/documentation/training/translations, Administrative software, Light weight materials / material treatment, Testing, measuring and calibration, Ships/ship equipment,
Maintenance/repair/modification, Ammunition, Telecommunications, Weapons, IT hardware, Consultancy, Armoured vehicles, Personnel, Engineering, Shelters, Navigation/position/meteo, Power supply/cabling, Missiles/torpedos, Medical equipment, Mechanical constructions/military engineering materiel/hydraulics,,
Infrastructure/buildings, Aircraft, Wheeled vehicles/transport systems, Operational software, NBC/climatecontrol/watertreatment, Containers/packing, Electronics/avionics/EW,
ILS/LSA/PDM/MRO,Simulators, Personal equipment,Ballistic protection, Sensors (radar/sonar/optronics), Aircraft ground support equipment, Firecontrol/SAR, Securitysystems/detection/alarm,
Propulsion techniques, Environmental/ARBO Yes Yes 33%
H 55
Missiles/torpedos, Weapons, Mechanical constructions/military engineering materiel/hydraulics, Wheeled vehicles/transport systems, Sensors (radar/sonar/optronics), Aircraft ground support equipment,
In addition to all commercial organisations described above I also conducted 2
interviews with different foundations. In table 3 there is an overview of the aim of the
foundations, how many employees are working there and what the percentage is of defence
related activities in the foundation.
Table 3: Overview characteristics foundations
Case Aim # Employees Defence
I
Independent research and campaign organisation against arms trade and
defence industry 5 100%
J
Facilitates the sustainable positioning of the Dutch Defence and Security-related Industry (NL-DVI) in national and international orders (from the government and elsewhere) and in national and international supplier
chains 13 100%
4.3 Interpretation of influence
In order to answer the research question the analysis takes a thematic coding approach
(Ryan & Bernard, 2003). The approach will be a combination between deductive and
inductive approach. First I will use pre-defined codes based on the theoretical framework.
But while coding I will be open to new emerging themes or codes, add new codes, merge or
separate codes, develop coding structures – create categories. The result of this process is
stated in Table 4.
The final result of the data analysis is essentially a summary of all organisations of
interest and their opinions about what the influence is of the theoretical models. This is
composed by quotations gathered from the interviewees, with colour coding and personal
notes to help me make a sense of all the information. As mentioned before, it was essential to
keep in mind the role of different interviewees, what the position was of their organisation in
the industry, how mature the company is and how developed are their international operations
in order to balance the different answers in a correct way. In the result chapter there is only
one or two quote(s) per organisation per model. I only included those quotations that I repute
important to understand the internationalisation of the firm. So every respondent answered
questions based on the different internationalization models. The influence is categorised on
low influence, medium influence and large influence. The answers of the respondents
combining the sub codes and indicators mentioned in the coding scheme will determine what
kind of influence a model has on the research question.
In order to decide wether a model has a low, medium or large influence on the
international strategy of an organisation I made a clear distinction about the motivation to
expand to a certain country:
• Low influence: this model and/or theory has no influence on the international
strategies.
• Medium influence: this model and/or theory has an influence on the
international strategies, but is not decisive.
• High influence: this model and/or theory has a decisive influence on the
international strategies.
For all seven propositions, ‘high influence’ was inferred if an answer yielded direct or
related uses of words such as ‘yes, ‘important’, ‘main’, and ‘essential’ preceded or followed
by words with positive contonations and/or combined with adjectives such as ‘always’.
Medium influence was inferred if an answer yielded direct or related uses of words such as
‘yes and no’, ‘normal’, and ‘medium’ by words with neutral contonations. Low influence was
inferred if an answer yielded direct or related uses of words such as ‘no’, ‘unimportant’, and
‘little’ by words with negative contonations and/or combined with adjectives such as ‘never’.
After conducting 10 interviews there are different outcomes with different
interviewees. In the next chapter I will show these different outcomes for each case, and in
the cross analysis I will test the working propositions stated in chapter 2.
Table 4: Coding Scheme
Code Sub-Codes Indicators
CAGE Model
Learning Government, defence budget, government strategy, wealth, income, regulations.
Influence High, low, important, unimportant, neutral
Liability of Foreignness
Cost and Efficiency
Government rules, local knowledge, restrictions, own industry.
Influence High, low, important, unimportant, neutral
Psychic Distance
Advantages Communicate, language, way of doing business
Influence High, low, important, unimportant, little
Transaction Cost Theory
Relationships Labour cost, material cost, efficiency, production.
Influence High,low, important, unimportant, neutral
Ownership, Locational, Internalization
advantages
Culture Reliable, knowledge economy, first customer, reputation, licence. knowledge protection.
Influence High, low, important, unimportant, neutral
Network Theory
Politics Partnership, relations, connections, treaties, lobbying.
Influence High, low, important, unimportant, neutral
Uppsala Model
Discrimination Learn, small steps, growth, commitment, involvement. development.
5. Findings
This section presents the results of the analysis providing relevant illustrative text
passages and quotes. The analysis indicates that companies have different internationalization
strategies but at macro level some aspects of the Internationalization theories have a large
influence on the industry as a whole. In the next paragraph I will analyse each case on the
seven different theories mentioned before. Thereafter, I will discuss all results in an overview
about which theories can be applied to Dutch firms active in the Defence industry.
5.1 Case A
The first case presents organisation A established in 1975. They have a presence on
the military and civil market. They deliver small parts of products in the defence industry and
so they don’t produce end products. Because of the knowledge base in the Netherlands the
production is based in the home country. Organisation A only exports to different countries,
and has no foreign direct investments. Their customer base is mostly in West Europe and
with small steps they expand their international influence over West Europe. Most important
is, since it is knowledge-based industry, it is a superb product.
Cost minimization doesn’t have an influence in the decision to start exporting to a
specific country, but is important for their international trade in general. Because of their
advanced technology based in the Netherlands they can offer their product for a better price
than the competitors. Combined with their strong network across West Europe they have a
strong presence in this niche market of components for military systems, weapons and planes.
They prefer to conduct business in more developed countries because it is less risky
and the chances in getting bad publicity are smaller. Companies in developed countries are
more regulated and have proven to be more reliable partners in comparison with companies
from less developed countries. Also it is sometimes difficult to expand to a specific country
because of existing local networks, they prefer to have a partner who speaks the same
language and is culturally close to their organisation. So culture has a large influence on the
business in their international trade. The supportive quotes are stated in Table 5.
Table 5: Case A
Unit of Analysis Influence Supportive Quote
CAGE model High “Companies in more developed countries are more regulated, reliable partners and they need to be careful not to attract any bad publicity.”
LOF Medium “Sometimes it's more like the locals know each other. And that it’s really hard to interfere because of their local contacts.”
Psychic Distance Medium “In terms of communication it is also a valid point, if you are doing business with the neighbors and it goes well, easier communication, why change?”
TCT High “We can offer it cheaper because we have a technique that other companies do not have. As a result, we can offer it cheaper. If you want to survive in Western Europe as a company from the
Netherlands then you need to be able to do stuff other companies can’t.”
OLI Model Medium “I know what you mean with these advantages, but sometimes it helps to have a good reputation, but that’s not everything.”
Network Theory High “Yes, relations in the industry are always very helpful.”
Uppsala Model High “With small steps our influence in a country gets larger”
5.2 Case B
The second case presents organisation B established in 1992. This young company is
active in the markets global security and healthcare. They have three offices overseas in
USA, Japan and Singapore. These foreign entities are sales and support offices, and the
research and development is based in the Netherlands. They have foreign direct investment in
these countries because these countries have an industry that is a strong fit with the markets
they are active in and with local presence they want to overcome the cultural differences.
This is also the only reason for the local presence; protection of knowledge is not relevant for
these sales and support offices. The good reputation of the company also helps to compete
with the local companies and protectionism of foreign governments towards their defence
industry also has an influence on the international strategy. The supportive quotes are stated
in Table 6.
Table 6: Case B
Unit of Analysis Influence Supportive Quote
CAGE model High “Because in those countries, the industries we serve are present. Those are richer, prosperous countries”.
LOF Medium ‘Yes, in some countries, yes. In Asia, that is less, you are restricted by the government. For example, in America, the government has a large influence.
Psychic Distance High “Our reason to expand to other countries is to overcome cultural differences.”
TCT Low “No, because it costs us more. But the revenues increase”
OLI Model Medium “Yes, our good reputation can compete with the local market, so I describe it as well.”
No, not specific, the reason for the foreign offices is only for sales and technical support. There is also no innovation or production in these offices.
Network Theory High “Local boys are really important in those areas, you need them if you want to expand in these areas.”
Uppsala Model Medium “You talk about a period of export to foreign investment. Then you are definitely talking about 20 years.”
5.3 Case C
The third case presents organisation C established in 1922. They have offices all over
the world including large offices in the Netherlands, France, Germany, USA and England.
They built technologies which are used in marine vessels, military airplanes and satellites.
Their focus right now is expanding to emerging markets.
Politics has a large influence in their expansion to different countries since the orders
are so capital intensive and most clients are foreign governments. These foreign governments
ask business with employment opportunities in return for their capital intensive orders. Often
these foreign governments want to create their own defence industry, organisation B can also
help with this knowledge development and so they can win the contract. To win such a
contract the good reputation of the Netherlands as a knowledge based economy contributes
doing business internationally. The supportive quotes are stated in Table 7.
Table 7: Case C
Unit of Analysis Influence Supportive Quote
CAGE model High “Nowadays, you see that when governments make large capital intensive purchases, they also expect business to return to that. So that means that instead of selling, you're taking over a piece of production.”
LOF Medium This is internationally regulated, agreements are made that those items can only be used by that government. If a country do not abide the agreement, the Dutch state can take action against it, for example, that it should not be sold in the future.
Psychic Distance Low “I think that, as a culture, we see far less barriers as cultures that are more focused on themselves.”
TCT Low “No, I can’t imagine cost minimization will be a ever a reason for international expansion because of the knowledge base in the Netherlands”
OLI Model Medium “Yes, certainly, the Netherlands with the reputation as a knowledge-based economy helps in conducting international business.”
Network Theory High “What you see is that in those big contracts that you work a lot with the same partners.”
Uppsala Model High “If you want to expand to a certain country, make sure you have already operations there.”
5.4 Case D
The fourth case presents organisation D that is for 40 percent active in the defence
industry. They produce road wheels, simulations and training, land systems parts for
production and NBC filter systems. It’s a family business and they have no international
offices for specific the defence industry. But they export almost everything all over the world
to mainly foreign governments. They try to win every contract by participating in a public
tender. In every country they have an agent who works for them to over win cultural
differences such as language and their network in a certain area. Their good reputation also
has positive influences to win contracts all over the world. Key for their business are their
relationships with customers and suppliers, so lobbying with different officials from
governments all over the world plays an important role to win these contracts. Because they
deliver high technology the sales market are countries that are rich and prosperous. The
supportive quotes are stated in Table 8.
Table 8: Case D
Unit of Analysis Influence Supportive Quote
CAGE model High “We deliver high technologies, and countries need to fit with their income to buy these technologies.”
LOF Medium “You have always the problem of discrimination. France for example, but we deliver to them, you are only affected.”
Psychic Distance Low “Cultural differences do not matter at all”
TCT Low “We produce here in the Netherlands because we are good at it. The costs need to be in control. but is not the most important section.”
OLI Model Medium “Certainly, our good reputation certainly helps to win contracts”
Network Theory High “Your network is really important. And you should also make sure that everybody you know, that they also like you. It is giving and taking. That’s the trick, you really need to build
relationships.”
Uppsala Model Low “But for our defence products. We don’t expand, we just deliver the components and that’s it.”
5.5 Case E
The fifth case presents organisation E that is a large research lab with a foreign entity
in Singapore. They are founded in 1962 with the purpose to close the gap between
fundamental research and the business society. In 2017 the defence industry is ⅓ percent of
their total business. The connections with countries who are member of the NAVO or EU are
important for their international customer base. Those treaty organisations are essential in
getting international contracts. They are focused on countries with economic growth, political
plans to invest in defence and where there is a solid knowledge base. Their office in
Singapore started with a normal assignment, but based on the assignments they decided to
open a larger office.The supportive quotes are stated in Table 9.
Table 9: Case E
Unit of Analysis Influence Supportive Quote
CAGE model High “Because we always look at economic growth and political plans. The interested markets are the markets where there are plans to invest in defence technology.”
LOF Medium “Countries with a lot of money can invest in defence and knowledge, but if they have their own industry and knowledge base, you should not be there. Because you can hardly add anything to it.”
Psychic Distance High “Moreover, they speak Portuguese and very bad English, and we speak bad Portuguese and good English and that has an influence. The same goes for
Japan and also India is kind of the same situation. So it’s very hard to communicate with somebody which is very bad in English.”
TCT Low “As a research agency, we must be somewhere where there is a solid knowledge base. We can not go to a country, for example Vietnam, where there is another knowledge base. For crafts if you need to sew gym shoes, that's interesting, but as a research agency, that knowledge must be higher.”
OLI Model Low “There are some research agencies, but there are no real competitors focusing on the defence market.”
Network Theory High “ In addition, I think that is much more important, companies, governments and other stakeholders from European countries must first join the EU, NATO, etc. There, of course, the contacts start, making it easier to get your margins here.”
Uppsala Model High “In this case we had existing contracts from which the
assignment originated. Based on these assignments, we decided to open a larger office”
5.6 Case F
The sixth case presents organisation F where the office based in Venlo mainly serves
the German market where the arms suppliers are. The office in Venlo is the largest office
worldwide and is expected to be the headquarters of organisation F in the near future. They
have offices all around the world in Europe, North America and Asia. A small part of their
total revenue comes from the defence industry. Due the lack of a defence industry in the
Netherlands they are focused on the compensating orders who are made possible by the
Dutch Government. The government buys for millions defence equipment abroad, and they
demand that a part of this amount will be invested back in the Dutch economy. Organisation
F focus on these so called compensation orders and to win those contracts their network is
really important in this old fashioned industry where all the companies are connected with
each other. Organisation F, because it is knowledge based industry, also tries to protect its
knowledge abroad by foreign direct investment. The supportive quotes are stated in Table 10.
Table 10: Case F
Unit of Analysis Influence Supportive Quote
CAGE model High “The Dutch army has bought parts in a foreign country, then they have to supply counter order back to the Netherlands. We have a technology that needs to make certain things better, and so we hope that they will choose us for the counter order”.
LOF Low “No, not for us. We never experienced discrimination”
Psychic Distance Low “No, culture doesn’t play a role.”
TCT Medium “You need to have a good product, after which costs are considered. So it depends. Yes and no.
OLI Model Medium “We protect our knowledge by opening an office in a specific country.”
No, in terms of our good reputation, we can’t benefit from it by asking a premium”.
Network Theory High “That's all connected. So we just want to do business with those companies, you can get the counter order.”
Uppsala Model Low “No, they can not buy anything what they already have bought.”
5.7 Case G
The seventh case presents organisation G that is established in 1911 in the
Netherlands. Following a bankruptcy in 1996 they are slowly developed in the current
situation as a subsidiary. As a parent company they are responsible for the aerospace part that
is ⅓ Defence related and ⅔ is related to the civil aviation construction. They have foreign
entities in India, Malaysia, Singapore, Romania, Turkey, England and a large part is
represented in the United States. Besides being a supplier of parts for the production of
defence production they also deliver a service to help companies to set up compensation
orders.
Politics has a large influence because they target areas based on how high a defence
budget is of a country, whether if it is a political sensitive country and if a country demands
the products that fits the markets where organisation G is active. In the next step to win the
contract their good reputation as a reliable supplier and their good international relations they
build over the years helps a lot. Also the good reputation of the Netherlands helps in this
process as a strong ecosystem with the collaboration between multinationals in the industry,
universities and research agencies. The supportive quotes are stated in Table 11.
Table 11: Case G
Unit of Analysis Influence Supportive Quote
CAGE model High “India is of course a good country, billion citizens. Growing defence industry and a growing defence budget of the government. Big American companies are selling weapon systems and we follow these companies”
LOF High “Yes, we are often discriminated in other countries. We have in India a Joint Venture because the government won’t allow us to go by our self.”
Psychic Distance Low “The influence of culture is limited.”
TCT Low “Cost minimization is a welcome advantage, only this is never a goal for us to go to such a region”.
OLI Model High “We are a fairly reliable supplier and this helps with our International expansion. We use always the same method: call, walk and run. First, to perform a good job in the Netherlands and if we succeed we can expand globally."
Network Theory Medium “If we go to another country we set up a multidisciplinary task force. There is program manager, brick manager, some locals and somebody of purchase. Most of the time they are stationed there for a few years.”
Uppsala Model Medium “Yes and no, we just go for countries with a high defence budget instead of a learning process.”
