How does a mix of strong and weak network influence business performance? : a case of Fintech entrepreneurship while facing emerging market

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The Amsterdam MBA Company project

How does a mix of strong and weak network influence

business performance?

---- A case of Fintech entrepreneurship while facing

emerging market.

Student Ling Cao 11352795

Date August 31th 2017

Supervisor Dr. M.P. (Markus) Paukku

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Abstract

With the development of emerging market, Fintech entrepreneurs have more opportunities to replace traditional finance service provided by banks. However, entrepreneurship and

emerging market, which is related to liability of newness and liability of foreignness respectively, also means higher rate of failure. For years, researchers have indicated the importance of network towards business success, especially a mix of strong and weak network. In this in-company project, I am trying to elaborate more insights of how network influence on business performance of entrepreneurship while facing emerging market.

The case is a Fintech start-up called Kable, which provides fast and cost-effectively

international payment service leveraging block-chain technology. Kable was only established in 2017 but have already set up a feasible global service infrastructure. One of the most important service is transferring payment between Europe and China, which is one of the most important emerging market nowadays. There are four types of challenges of Kable, namely challenge of business opportunities and new clients, challenge of building access to local resource and legitimacy, challenge of emerging market risk. I will address these challenges by studying how do four business operations (discovery of opportunity, access to resource, gaining legitimacy, and risk control) are influenced by strong and weak ties.

The outcome of this project indicated that strong and weak network, each have their own advantages and disadvantages, help to improve four business operation in their own ways. Entry model, which is the practical contribution of this in-company project, is also linked to the exploration and exploitation of network. The best entry model choice is Joint Venture with local partner with bitcoin infrastructure and knowledge about finance and block-chain regulation and institution.

Key words

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1. Introduction

The importance of networks is widely accepted by entrepreneurial academic studies. Fintech, as one of the hot topics among both business and academia, still faces a lot of challenges while operating in emerging market. In this thesis, I would like to evaluate the influence of network to business performance while facing emerging market, which is based on an in-deep case study of Fintech start-up. The influence of network, normally known as the power of network, is discussed in detail by examining how does a mix of strong and weak tie impact on four business operations, namely discovery of business opportunity, access to resource, gaining legitimacy, and risk control. Due to the requirement of MBA in-company project, the thesis is divided into two parts.

The first part is a theoretical study. Firstly, the former studies of network are examined from difference perspectives regarding the contribution to business survival. The advantages and disadvantages of strong tie and weak tie are discussed individually. Secondly, the four business operations (discovery of opportunity, access to resource, gaining legitimacy, and risk control) are also separately linked to network and how they are influenced by strong and weak ties. To make the literature review more relevant to the case study, all theoretical discussions are eventually concluded into specific context, which is Fintech entrepreneurship facing emerging market.

The second part will focus on practical recommendation for the company. The contribution point here is the entry model. I am going to discuss how network affects the choice of entry model and provide specific suggestion about entry model choice based on the Chinese market.

Despite the fact that Fintech entrepreneurship, emerging market and network has been heated topics for years, little literature has explored the combination of these three areas. In

particular, few academia focused on how network could influence the performance of start-up in the Chinese context. According to my observation based on Kable, which is one typical Fintech start-up facing a typical emerging market (China), I come up with a list of four types

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of challenge for entrepreneurship, namely challenge of business opportunities and new clients, challenge of building access to local resource and legitimacy, challenge of emerging market risk. This in-company project will try to address these challenges from network perspective based on in-deep case study.

1.1. In-company project

From February to June, I had been working as an internship in a fin-tech start-up called Bit4coin (mother company of Kable), which focuses on bitcoin and block-chain technology. Working close with CEO and CFO, I get a great opportunity to experience first-hand the power of network in entrepreneurship and how does it determine the success of business, especially while facing emerging market.

Bit4coin was founded in 2013 in Amsterdam with a team of former managers from BCG and PwC. Bit4coin is mainly a bitcoin gift voucher provider and the business model is similar to another online gift card. After purchasing the vouchers, customers can redeem them for bitcoins online at the company website. Vouchers are size and shape of credit cards and the concept is instantly familiar even to someone who has never heard of bitcoin. With the development of bitcoin’s reputation, Bit4coin reached monthly revenue of 1 million euro in March 2017. However, the CEO felt that the current B2C business model constrains the scale and was convinced that bitcoin could be used to solve international money transfer problem. In February of 2017, Bit4coin launched a subsidiary called Kable to exploit opportunity in B2B field.

1.2. about Kable

The value proposition of Kable is straightforward. It provides solutions to the pain of international money transfer caused by traditional bank transfer model. Normally, the banks charge the customer a combination of transfer fee, foreign exchange fee and correspondent banking fee. The current process for cross-border payments relies on intermediaries, known as correspondent banks, before reaching the ultimate physical location. The process is slow

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and it often takes 5 days for a European importer to pay a Chinese exporter. For corporates, all-in banking costs amount to approximately 1% to 2% of the payment, while SMEs and start-ups often have to pay up to 5% through hidden fees.

Kable, as a Fintech start-up, uses bitcoin and block chain technology to disrupt the current landscape. The technology offers new possibilities, with no geographical borders, middlemen or opacity that has plagued legacy international payments. To make things clearer, a typical transfer made by Kable is consistent of 5 steps:

1. The client transfer the fiat currency (e.g. Euros or U.S. Dollars) to Kable 2. Kable converse the funds into bitcoin;

3. Transaction from one bitcoin wallet to another (which is in the destination country); 4. Withdrawal into local currency (e.g. Chinese Yuan or Brazilian Real);

5. Transfer to local bank account of beneficiary.

With a strong technology platform and relationship with banks, Kable ensure the entire process above typically takes less than 4 hours to complete with a total fee of less than 0.5%.

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1.3. business challenge

With a vision of becoming fast and cost-effective international payment service provider leveraging state-of-art Fintech technology, Kable have several business challenges to deal with.

First of all, Kable is facing challenge to expand its clients to generate revenue to survive and eventually scare-up. Potential clients of Kable are the companies with international operation or with need to pay over boarder. These companies either rely on traditional bank payment or have already been used to other international payment service provider. Despite the fact that Kable’s value proposition is more attractive in terms of cost in both money and time,

companies are more willing to stick with current way, especially when the service is about payment involving large among of money. Another important issue is that a large pool of client portfolio can enable Kable to benefit from scale of economy, which in turn grants Kable to provide more attractive pricing. Consequently, the first big challenge for Kable is to find and explore business opportunity in order to gain more clients.

Secondly, Kable is facing challenge to build up partnerships in emerging market to optimize the business model infrastructure. As we can see from the business process above, the fourth step of a typical transfer made by Kable is to withdrawal Bitcoin into local currency. This step is normally conduct by a local partner with access to local Bitcoin trading market and ability to make final step bank transfer to beneficiary. Currently Kable has already been connected to two partners in Asia Pacific region but need more partnership to penetrate in each county in this region to reduce pay-out cost. Moreover, Kable notice business potential in other emerging market including Latin America and Africa, in which region local

partnership is still blank. From the point of view of potential partners, they need to trust the business model of Kable and believe the suitability of partnership. Due to the newness of Kable and limited case to present, Kable is struggle with current legitimacy and is lack of proper endorsement. In order to do so, Kable need to generate access to local resource (not in term of natural resource or financial resource, but network resource to locate qualified partner) and improve legitimacy.

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Thirdly, Kable is facing challenge of high business risk due to the target market of Kable is highly related to emerging market. International money transfer between two companies both located in developed counties is not Kable’s aim. Bank transfer within two developed

counties, such as international transfer within Europe, is not as expensive and costly than bank transfer involved developing counties. Thus, the clients of Kable can be categorized into three types. 1) payment from developed counties to emerging market, such as European companies importing from India and China. 2) payment from emerging market to developed continues, such as Asian companies buying high-tech device from US. 3) payment within emerging market, such as India companies importing phones from China. All these types challenge Kable with higher business risk, due to the culture distance, target countries policies, political risk and other factors. Liability of foreignness, institutional weakness and political risk require Kable to be able to control risk in order to achieve business success.

Lastly, Kable is facing a challenge of choosing among different entry models into China. China is the biggest exporting country and second biggest importing country according to statistic.com. Kable is determined to entry China in terms of setting up a subsidiary to get closer to this unique and important market. However, more than half of international companies indicated that their business performance in China was worse than planned

(Ghemawat, 2001). Consequently, Kable need to find a proper entry perspective to maximize the profitability and to minimize potential risk which lead to undesired business performance. Each entry model, including green field, joint venture, and acquisition, has its own

advantages and disadvantages. It is the challenge of Kable’s decision maker to balance the choice and it is also challenge for me to provide practical advice in this in-company project.

According to my four-month engagement with Kable, I believe the answer to the challenges Kable facing (challenge of business opportunities and new clients, challenge of building access to local resource and legitimacy, challenge of emerging market risk) is a mix of strong and weak network. In the following part of in-company project report, I am going to discuss it in detail.

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2. Literature review

2.1. Fintech

The term of “Fintech”, which is the short for “Financial technology”, is used to state technology for delivering financial solutions. With the development of technology, the traditional financial industry is heavily influenced by fast growth of Internet-based services. The business focus of Fintech companies has also expanded from online payment system to more advanced and sophisticated financial service, including online funding, Internet-based private banking services and high-tech international payment (Shim and Shin, 2016).

Broadly speaking, Fintech can provide a large variety of service, including third-party

payment, MMF, insurance products, risk management, authentication, and peer-to-peer (P2P) lending (Barberis, 2014). The development of Fintech is due to the fact that financial sector benefits from Internet-based technologies’ ability to intergrade offline tradition service with online technology, such as mobile phone, social network, big data and cloud technology. In the case of Kable, we can clear witness the traditional international payment system was upgraded with block-chain technology.

Technology development is viewed as a tool to break down geographic boundary and empower globalization (Shim and Shin, 2016). More and more companies are expanding their product and service internationally, thus the international payment business of Kable is among one of the most popular Fintech services.

2.2. Emerging market

Emerging market has been considered as regions suffering from immature financial system and weak financial institution. In recent years, some leading developing countries, like China, has been gradually developed into an important market in terms of finance and technology

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(Shim and Shin, 2016). Despite the fact that we have witnessed a lot of local Fintech startups, the emerging counties are still lack of management skill, product know-how and cutting-edge system to fully benefit from global Fintech trend. The development of economic in emerging market has been creating more and more demand of Fintech service but local companies are facing limited option of Fintech vendor. Such imbalance has created business opportunity for Europe and US based Fintech entrepreneur to expand in emerging market.

It is also well known that emerging market is different and difficult in which many companies have lost billions (Hochberg et al, 2015). The losses did not come from poor service, improper marketing, nor underdeveloped supply chain, but mainly from unfamiliar with local regulation, culture, competitor and customer (Sethi and Guisinger, 2002). The CAGE model proposed by Ghemawat (2001) concluded such unfamiliarity into four types, namely Culture, Administrative, Geographic, and Economic. In Fintech industry, the

geographic issue is not as important as the rest three due to in-time communication and little logistic burden. Consequently, the study focus will be limited to the distance of culture and administrative and economic. These three-distances listed above is significantly linked to business risk, which can be alleviated by network. I will discuss more about CAGE model and how network can contribute to risk control in theoretical framework.

2.2.1. China as unique

It is worthy of a highlight of Chinese market due to the current business scope of Kable. In a survey conducted by Harvard, among 100 international companies, more than half concluded that their business performance in China was worse than planned, comparing with just one quarter claiming better than planned (Ghemawat, 2001).

As one of the remaining communist counties, China’s economy is well known for high degree of state ownership and control. The People’s Bank of China (PBC) functioned as central bank since 1983 and all independent financial institutions had been nationalized under PBC (Kumaravadivel, 2013). In 2003, the China Banking Regulatory Commission (CBRC) was officially established and its main function is to supervise PBC and it has full authority to regulate the banking sector in China. As an industry viewed by government as of national

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strategy importance, financial service has remained largely under government control. For instance, the five largest Chinese banks are majority-owned by the central government, and the four state-owned banks carry out commercial banking functions (Kumaravadivel, 2013). The international payment service Kable provides is a direct competition with traditional bank transfer service, thus the regulation banks in China are facing is likely to include Fintech vendors (like Kable) as well.

Not long ago, accumulation of regulation on Fintech industry can be seen while e-commerce was developing in China. After initial development, China’s e-commerce industry is

currently supervised by five different government departments, including the Ministry of Commerce, the Ministry of Industry and Information Technology, the PBC, the State Administration of Industry & Commerce, and the State Administration of Taxation (Leung and Xia, 2011). Regulation is just one of many uncertainties Kable might encounter in Chinese market. I am going to discuss how network can address these uncertainties and improve the performance of Fintech in China.

2.3. Network

Many literatures have indicated that developing a well-designed network is an essential step to achieve good business performance in China (Ambler, 1994; Xin and Pearce, 1996; Luo, 1997). Guanxi, which refers to a close business relationship, is often considered as a required condition to start a new business in China (Xin and Pearce, 1996). Realizing the importance of network to this specific emerging market, the founders of Kable deliberately built up the roadmap of the network right after determined to enter China and provided me with unique opportunities to witness how network influence the business performance first-hand.

Network relationship has been a basis for strategic decision making by more and more international companies (Freeman & Sandwell, 2008). Due to the nature of Kable’s business model, the founders focus the network building for B2B at beginning. With the development of network, more and more insight of Chinese strong governmental control was collected and the network roadmap started including government networks. However, the business only

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started at February of 2017 and the limited time constrain the actual engagement with government networks. Consequently, the parties involved in my network study will be limited to main business parties and a few individuals with political/regulation knowledge.

Most of researchers chose to differentiate network into two categories. First one is strong network or strong tie, which is mainly associated with high level of trust and close-grained interchange of finance, personal, key information and endorsement (Uzzi, 1997); the other one is weak network or weak tie, which refers to infrequent or irregular contact and normally contribute to novel information (Granovetter, 1973). A clear definition about the strength of tie had not been established. However, Granovetter (1982) suggested four factors to consider about, namely the amount of time and frequency of communication, the emotional intensity, the level of intimacy, and the reciprocal services which characterize the tie.

2.3.1. Advantage of weak network

The value of network in different form was debatable at early stage of the academic research. Some researcher claimed that weak network benefited the company more. Most of these kinds of researches focused on the argument that network in loose union provide linkage to divergent regime and more possibility to retrieve other network due to easy-maintain and large volume. Burt (1992) claimed that weak network contributed to financial benefit in terms of brokerage advantage while parties in strong networks lost the possibility to leverage and arbitrage information exchange.

Moreover, some academics indicated the weakness of strong network. Gargiulo and

Benassi’s study (1999) showed that strong network might bring more damage than advantage to organizations by limiting manger’s control on the composition of network and thus

endangering adaptability to dynamic environment. The notion of locked-in was constantly mentioned while discussing the shortcoming of strong network. Intense connection tends to build entrenchment and isolated internal members with outside environment (Johannisson, 2000). Especially in Fintech industry, the technology competition is decentralized and thus external information or technical breakthrough in other industry might be crucial to the survival of start-ups.

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2.3.2. Advantage of strong network

Other researches indicated the other way. Strong business network was viewed as more important because it provides rear but curial resource like tacit expertise, trust-based

governance, and resource co-optation (Rowley et al., 2000). Coleman (1988) built up a model showing that strong network formed better cooperation and more communication.

Some literatures indicated the dynamic environment start-up facing is better served by strong network. One of challenge entrepreneurship facing is the fast changing competitive landscape, which require fast response and flexibility. High level of engagement with other parties

provides time and energy saving shortcut to critical information and resource. Uzzi(1997) mentioned the concept of economies of time and Pareto improvement, which articulate the capability of leveraging strong network to reduce time-to-market by decreasing time spend on upfront bargaining and internal monitoring. Moreover, strong network promote trust which can empower start up with more flexibility by granting more option while facing competition and market pressure. Another important factor strong network can provide is the protection and safety. Most entrepreneurship is innovative in either concept, business model or

technology. Such innovation lead to possibility of immature market, high change of technical failure, long market incubation period and lack of trust from clients. Strong network is a more valid and reliable pool to search for financial support, endorsement and join problem-solving (Rowley et al., 2000).

2.3.3. A mix of strong and weak network

With the developing of theories, more and more articles articulate that strong and weak tie are not necessarily conflicting but both show positive link to the performance of entrepreneurial. Burt (1998) improved his study in 1992 and suggested that two types of network both have beneficial impact on performance of company but at different stages. Uzzi (1997) suggested the best fit for entrepreneurial is a particular combination of strong and weak network. Another study indicated the influence of two types network is mostly positive but dependent

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on industry context, with a case analysis in steel and semiconductor industries (Rowley et al., 2000). However, there is no study focus on the influence of network in Fintech industry. This leave me with opportunity to contribute this case study to theoretical research.

2.3. Network and performance

Tom Elfring and Willem Hulsink (2003)’s framework highlighted three entrepreneurial processes, namely discovery of opportunities, securing resources, and obtaining legitimacy. These three processes are significantly linked to the survival and performance of start-up. In addition, the framework also evaluates the influence of strong and weak ties and how these network ties support these three entrepreneurial processes. Based on the business operation of Kable, I added another entrepreneurial process, namely risk control.

The risk related to the business of Kable comes from distance of culture, administrative and economic. First of all, Kable is a typical western culture oriented companies. The CEO comes from Germany and the CFO comes from Dutch. They appreciate flat organizations structure and straightforward communication way, which is fundamentally different from Chinese hierarchy and implicit way. Other culture related issue, such as language obstacle, religion difference and social norm difference, will be discussed in detail later in liability of

foreignness. Second, Administrative distance increase business risk in terms of government policy change, political hostility, and intuitional weakness, which I will further discuss later in paragraph about institutional weakness and political risk (Ghemawat, 2001). Lastly, the economic distance, which articulate the risk cause by economic related issue such as difference in consumer income and price sensitivity, will be also addressed in liability of foreignness.

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Figure 2: theoretical framework

2.4. Discovery of Business Opportunity

One crucial activity of start-up is to discovery new business opportunity to establish business model, generate revenue and eventually expand market share. Stevenson (1985) suggested that the ability to identify and validate proper business opportunity is one of the most

important skill set for a successful entrepreneur. For entrepreneurship like Kable to find new business opportunities, such as potential list of clients, newly issued government contract opportunities, and emerging customer needs of current industry, unique information is the key. In this part, I am going to conduct literature review to see which kind of network influence the discovery of business opportunity better while facing emerging market.

2.4.1. Identify opportunity

There are several factors influence the process of recognition of business opportunity, among which information asymmetry, prior knowledge and social network were highly related to our topic (Ardichvili et al,2003). The nature of entrepreneurship is to locate unnoticed market or to exploit innovative technology, which exist because of information asymmetry (Hayek, 1945). Information asymmetry is created by the speed of information penetration. In other

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words, holding information, which is not public yet, empower entrepreneur to discovery new business opportunities. The source of such unique information is normally linked to close network such as strategic business partner and holding company, but also novel information from weak business network, such as industry association, former supplier and external consultant.

Start-up will notice business opportunity because prior knowledge generates

acknowledgement of the value of new lead (Shane,1999). Shane even insisted that people only discover opportunities related to existing knowledge stored in their mind. Such prior knowledge can be generated from explicit study process, but most likely from inadvertent communication with network. Granovetter (1973) supported this argument by testing casual and weak network has better change to provide knowledge which eventually lead to business opportunity because entrepreneur have much more number of weak network than strong ones.

Social network itself is another important factor of business opportunity exploration. Start-ups with better network were proved to have access to more business opportunity (Hills et al, 1997). A social cognitive framework indicated that interaction with network promote

cognitive activities lead to opportunity recognition, namely information collection, thinking out aloud and assessing resource (De Koning ,1999). This framework also emphasised the importance of both strong network and weak network. Personal connect of manager of start-up, the employee of the company, business partner and a loose network of third parties all plays important roles in the framework. Ardichvili (2003) conclude that fruitful business opportunity identification is determined by the ability to exploit current strong network and the ability to explore external weak network.

2.4.2. Validate opportunity

After reorganization of business opportunity, it is rational to test the change of success and validate the business plan. Researcher found entrepreneurs proactively seek advice and feedback of their business plan from social network (Birley ,1985). The validation process can be either formal, including engaging with formal social network like banks, consultants, lawyers and accountants, or informal, like talking with friends, family and business contact.

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However, Briley (1985) found strong network is more willing to take effort to collect

information and validate the opportunity more seriously, thus contributes more in validation.

To sum up the literature review about discovery of business opportunities, network

contributes to both identify and validate process. Strong network provides entrepreneurs with business opportunities with high quality due to their willingness to share more confident information and willingness to go through trouble. Weak network, on the other hand,

provides entrepreneurship with more possibility to access to novel information and potential clients pool due to its own large numbers.

HYPOTHESIS 1a

Strong network provides start-ups with business opportunities with high quality.

HYPOTHESIS 1b

Weak network provides start-ups with business opportunities in large volume.

2.5. Resource

Social network provides new ventures with access to resource. In the initial stage, the start-ups barely have ability to generate internal resource, thus the survival is mainly depended upon the ability to mobilize external resource (Elfring & Hulsink, 2003).

2.5.1. Cost of resource

One of the most important notion is “asset parsimony” raised by Hambrick and MacMillan (1984). All resource comes up with a price but start-up need to figure out a way to get

minimum cost. Leveraging social network, critical resource can be obtained below the market price. In many literatures, strong network benefits the entrepreneur by providing 1) social asset, including trust, connection and intimacy, 2) financial support, personnel, and authorization (Jack, 2005; Bian, 1997; Coviello, 2006). Moreover, the network itself can be

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view as a resource, due to the possibility of self-reproduction, a proper mix of strong and weak network can reduce the cost of developing further network.

2.5.2. Access to tangible resource

With limited financial resource at early stage, most of entrepreneurs found it difficult to get access to external tangible resource. Social network normally supported start-ups with finance, distribution channel, and human capital (Brüderl & Preisendörfer, 1998). Even if the support is not always direct, strong network and weak network still may provide information and introduction to possible resource. However, Child and Möllering (2003) emphasised that in emerging market such as China, strong network leads to higher level of trust and thus leads to better access to tangible resource.

2.5.3. Access to intangible resource

Lack of convincing background and publicity is one of the challenges start-ups facing. In the case of Kable, I have witnessed some clients refused the fast and cost-saving international payment service due to lack of media report. Social network can provide endorsement to improve trustworthy and publicity. In the industry to Fintech, intangible resource, such as innovative technology, patent, management skills, and production know-how, might be even more important than tangible assets. Psychological resource also shows significant

importance at initial stage of entrepreneurship, including the perception of stability, feeling of belonging, and staff morale.

HYPOTHESIS 2

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2.6. Legitimacy

Gaining legitimacy is urgent if the purpose is to introduce something innovative. People tend to recognize and go after things they are familiar with, instead of trying unheard, unknown, and untested product or service. DiMaggio (1992) listed legitimacy as one of the most important factor of determine the success of introducing innovation. Particularly, a study by Delmar and Shane (2004) indicated that companies which proactively deal with legitimacy pressure during the first year after establishment could significantly reduce the risk of business termination. Kable, as a disruptive start-up, is trying to replace traditional bank international transfer with a more advanced block chain technology. Thus, legitimacy is directly linked to the business performance of Kable. I am going to discuss how legitimacy contributes to performance from two aspects, namely liability of newness and legitimacy in building network, and how does strong and weak network influence the process of building legitimacy.

2.6.1. Liability of newness

The concept of liability of newness is often mentioned while discussing start-ups. The concept was first raised by Stinchcombe (1965) and he argued that young or innovative organizations witness a higher possibility of failure that old or established organizations. The underline reason was that innovative organization suffer from incapability to compete

effectively with mature companies and their low level of legitimacy. A follow-up study indicated liability of newness was supported by mass empirical studies in many industry, especially in industry involving with technical innovation (Singh et al, 1986).

One of major theoretical argument is about selection pressure at early stage of

entrepreneurship (Singh et al, 1986). Selection pressure elaborated that start-up facing more pressure primarily due to low levels of external legitimacy, which lead to incapability to build an intense exchange relationship with critical environmental constituencies. To address such issue, strong network can break the dilemma and empower new organization to stand the same change while connecting to external environment. Weak network, on the other hand, is

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difficult to improve start-ups’ position in exchange relationship with external environment communities.

Another theoretical argument is the unfavourable competitive position of entrepreneurship. Normally innovative start-ups are the challenger or disrupter in an existing industry and it means start-ups have to compete with established organizations. These current players have already built up a mature costumer relationship, skilled workforce, sophisticate institutional role, and extra finance saving, all of which granted them better competitive position. Start-ups, on the contrary, still need to develop all these resources and suffer from other’s

preconceived advantage (Baum et al., 2000). Such disadvantage can be even worse when new technology firms are trying to introduce radical innovation product or service, without

endorsement from industry leader. To improve opportunity of survival in terms of competition, new ventures tend to join prestigious business affiliate to gain visibility and recognition, and eventually leverage network in business association to result better financial and product performance (Elfring & Hulsink, 2003). In order to gain necessary visibility and recognition among association members, start-ups have to interact intensely with them and build up strong network.

2.6.2. Legitimacy in building network

Conversely, legitimacy also plays significant role in the formation of strategic network. Kumar and Das (2007) indicate the legitimacy, or “credibility”, is critical for the formation of strategic partnership. Provan, Kenis and Human (2008) conduct a more detail research and claimed that legitimacy is vital in all steps of building new network, including understanding current network, forming new network and evolving newly built network. Despite the fact that political, economic, and resource acquisition factor are commonly known as importance influencer to network building, growth and mature, legitimacy is the key to understand why some network is more fruitful (in term of attracting resources and improving services). and sustainable (in term of mutual benefit) than others.

To sum up, legitimacy is important to the business performance of entrepreneurship,

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to current industry. Liability of newness, which can be explained from selection pressure and unfavourable competitive position, can be mitigated by legitimacy cultivated by strong network. Weak network, on the other hand, has limited contribution to legitimacy which can deal with liability of newness. Legitimacy, in return, accelerates the formation of both strong and weak network.

HYPOTHESIS 3a

Strong network can cultivate legitimacy to deal with liability of newness.

HYPOTHESIS 3b

Legitimacy accelerates the formation of both strong and weak network.

2.7. Risk

The fact that an internationally operating firm, which is more familiar with business in its home country, facing more risk on expanding abroad is well appreciated by both managers and scholars. Several studies have already discussed the nature and effect of such risk, taking culture distance, target countries policies, political risk and other factors (Alon and Herbert, 2009; Liesch et al, 2011; Hochberg et al. 2015).

Goldman Sachs has estimated that it cost their customer an average of 5% doing international payment. However, Goldman Sachs claim it is difficult to estimate the cost of payment to China specifically for poor institution, but extra fee can be anything between 3% and 10% across the entire transaction. This translates into unpredictability and thus risk in China.While discussing emerging market, liability of foreignness, institutional weakness and political risk are three main theoretical research direction.

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Liability of foreignness was first raised by two articles, namely Hymer (1976) and

Kindleberger (1969), which studied the fact that multinational enterprises facing more cost of doing business abroad than local firm. Normally, the reason for liability of foreignness was conclude in three categories (Zaheer, 1995). Firstly, international business must face cost from geographic distance, including the cost of travel, transportation, logistic, and low

efficiency in long-distance communication. Secondly, the unfamiliarity with local market and local culture results in miss-informed decision and ill-judgement. Thirdly, the cost due to difference between host country environment and home country environment, such as restriction, nationalism, environment law and lack of skilled workforce.

There are currently two categories of theory to address liability of foreignness, one of them is resource based view of strategy. This strategy emphasised the importance of parent company and claimed the firm-specific resources and organizational capability extract from parent company can on some level overcome the liability of foreignness (Barney, 1991). Such strategy showed significant impact when multinational’s operation is focused on

homogeneous product or service and parent company can easily hand over technology, brand recognition, management practice and even relocated key personnel. Most of companies in Fintech industry, including Kable, meet such requirement due to the homogeneous nature of internet-based service and nature of easy-duplicate and easy-handover between headquarter and subsidiary. Parent company, of course, falls into strong network for high level of engagement and dependency.

Another theory is rooted in institutional theory and the key point is that international

expansion is most likely to learn from and eventually imitate local competitors (DiMaggio & Powell, 1993). Subunits of international organization tend to localize the service to meet the demand of local market and to survive in host country environment. Normally, the subunit need to benchmark best performers in the local industry and then attempt to mimic the local leaders. I would argue competitors are weak network due to hostility and infrequent/ irregular engagement. However, such weak network still provides critical information for

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2.7.2. Institutional weakness

Institutional weakness refers to the business norm structure are absent, arbitrary, or ambiguous. Institutional weakness often resulting in an unstable environment which significantly increase business risk (Puffer et al, 2010). In other word, a country witness institutional weakness means the behaviour unpredictability in this nation and thus lead to risk of international business operation. The level of institutional weakness is highly

depended on whether the society is rule-based or relationship-based. Normally, in rule-based settings, institutions are more transparent and predictable than in relationship-based settings like China.

The intuitional weakness is reflected on several aspects. One of the heated research fields is the enforcement weakness, especially about protecting of intellectual rights. Due to Kable’s high-tech and internet-based service, I believe intellectual right risk is inevitable in China. Another field is about corruption and bribery. Facilitating payments are not uncommon in emerging market with weak intuitional setting, troubling companies from development counties with laws against bribery abroad (such as the Foreign Corrupt Practices Act of US).

Institutional weakness creates a void which usually filled by informal ones (Puffer et al, 2010). To reduce risk due to unfamiliarity of informal institution, start-ups operating in emerging market tend to either partner with local firms with know-how or learn from local network. There is no literature directly indicate what is the different role of strong and weak network in dealing with institutional weakness, but I would argue strong network provides more possibility of industry-specific partnership and weak network provides information related to how local company deal with general institutional weakness.

2.7.3. Political risk

In the 50s and 60s, corporations and academia put a low priority on political risk with limited research approach, which mainly focus on risk of expropriation and contract breach. Since OPEC embargo and oil crisis of 1973, political risk showed potential to large-scale economic

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crash. Currently, the research about political risk are divided into two categories, namely macro political risk and micro political risk.

Macro political risk is a risk on national level. The extent of distance between home-host institutions and culture can exacerbate macro political risks. One observation to highlight is that macro political risk is only elaborate in emerging market or developing counties. The list ranges from embargoes and sanctions in Cuba and North Korea, terrorism in India, Pakistan and Iraq, boycotts of Shell in Nigeria, to hostage taking in Colombia and expropriation in Russia.

Micro political risk is on industry level or firm specific. As discuses in China as Unique, financial service is viewed as national importance in China. Consequently, Fintech dealing with Chinese market should always keep an eye on change of finance policy and regulation. Due to the value of such insight knowledge, it is more likely to be shared among strong network than weak network.

HYPOTHESIS 4a

In terms of dealing with liability of foreignness, strong network reduces the risk by offering parent-subsidiary engagement.

HYPOTHESIS 4b

In terms of dealing with liability of foreignness, weak network reduces the risk by offering local benchmark information.

HYPOTHESIS 4c

In terms of dealing with institutional weakness in China, strong network provides more industry-specific information and insight compare to weak network.

HYPOTHESIS 4d

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insight knowledge than weak network.

2.8. entry model

As we can see from Kable’s business model, one of the biggest internal challenges comes from our Chinese partner, DZ. He is the last piece of puzzle to complete the transfer process yet he is an independent trader who cannot be controlled by Kable. To gain a more reliable access to Chinese market and diminish potential risk, Kable has already decided to make foreign direct investment in China and to establish Kable China Company in the near future. The modes of establishing an FDI project can be classified into three types, namely

Greenfield, Acquisition, and Joint Venture (Kogut and Singh, 1988; Anand and Delios, 2002; Elango and Sambharya, 2004). As stated in business challenge part, choosing which entry model fit Kable’s strategy the best is essential to future business performance.

2.8.1. Institutional view and entry model

The stronger the market supporting institutions in an emerging economy, the less likely foreign entrants are to enter by joint venture, as opposed to Greenfield or Acquisition (Meyer et al, 2009). However, the Chinese market does not have strong institution, especially when it is about bitcoin. First of all, Chinese government put stricter rules upon Greenfield, especially in terms of business scope, audit rules and tax standard. Second, the informal norms, such as norms concerning whether bribery is acceptable, may favour locally owned firms over MNEs (Peng, 2003). Doing business in China have to face bribery to smooth negotiation, to build government relationship and to avoid negative media publicity. Third, in many emerging economies like China, weak institutional arrangements may magnify information

asymmetries so firms need to spend more resources searching for information (Tong, Reuer, and Peng, 2008). Despite the fact that strong network can help Kable to overcome the obstacles listed above on some level, Greenfield is not the best way to leverage current network in China. Greenfield means building up subsidiary from scratch and start to

accumulate knowledge and network. To sum up, Greenfield is not the best option for Kable whiling taking institutional weakness and leverage of current network into consideration.

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Moreover, Acquisition also has several disadvantages in China. First, the weakness of institutions in China lead to smaller, more unstable, and less liquid stock markets, which reduces the potential for acquisitions (Lin et al., 2008). In addition, weak institutions lead to a lack of transparent financial data and other information on firms and a shortage of specialized financial intermediaries (Khanna et al., 2005). In other words, Kable may overpay too much trying to buy a local firm if buying is possible. Another issue need to be highlight is that acquisition internalize current external network. The impact of such internalization is not studied by literatures, but the rate of unsuccessful acquisition in China is high (Lin et al., 2008). To sum up, acquisition is neither the best option for taking while taking information transparency and internalization of network into consideration.

HYPOTHESIS 5a

Greenfield and Acquisition is not the best entry model to exploit and explore network in emerging countries.

2.8.2. Resource view and entry model

Entry by Acquisitions or JVs takes the form of pooling resources between a foreign entrant and a local firm. In contrast, Greenfield projects do not provide access to resources embedded in local firms.

There are three types of resource which determine the success of Kable in China. First of all, the information about bitcoin policy and bitcoin market trend is dynamic yet critical. Since the uniqueness of China market and its informal system of business information

dissemination, it is hard for foreign company to gain such information without the help of local firm. Second, Kable’s current partner owns asset specificity resource, namely a self-build OTC platform, in which more than 100 independent traders sell and buy bitcoin and granted DZ’s ability to deal more than 5-million-euro bitcoin trader per day. Last but not least, tacit knowledge about bank transfer inside China and Chinese bitcoin market volatility is difficult to transfer. All these three of types resource listed above are industry specific and industry specific which is very difficult to build in-house. Specially the network as a resource

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itself, which is very important as discussed in China as Unique part, determines the best entry strategy is Joint Venture.

HYPOTHESIS 5b

Joint Venture is the best entry model considering leverage local resource and network, for Fintech entrepreneurship like Kable.

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3. Methodology

The objective of this study is twofold. First, the discussion of a theoretical framework concerning the way a mix of strong and weak network benefit the entrepreneurship’ performance in emerging market. The research field is limited to B2B network and some individual with political insight. The mix of network contributes to better ability to discovery business opportunity, access to resource, gain legitimacy and reduce risk. The second

objective is to provide practical suggestion about choose of entry model based on this specific Fintech case.

In order to differentiate from theory-testing case study, I list proposition after theoretical literature review and case study (Yin, 1984). Followed Yin’s suggestion in his Case Study Research: Design and Methods, I form this research in the following ways: 1. This thesis started with a literature review covering related concept I am going to further research based on case study; 2. Data collection and analysis; 3. Case study and proposition; 4. Practical suggestion based on both theoretical research and real-life practice.

Data collection was conducted through interview and face-to-face discussion with founder, CFO and office manager of Kable. As a former intern in Kable for 4 months, I also collect data through my daily work and communication with partners and business opportunities in emerging market (mainly in China mainland). Multiple data sources were explored to check the validation of data.

However, the methodology limitation of research is also straightforward. Due to the

requirement of MBA thesis, I narrowed my case study to the company I was working for. It is not possible to conduct field research in multiple companies which can represent diversity in terms of company size and industry choice.

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4. Analysis of case

As mentioned in introduction, Kable is currently facing four challenges, namely challenge of discovery new business opportunities and new clients, challenge of building access to local resource and legitimacy, challenge of emerging market risk, and challenge of choosing entry model in China. According to literature review, some of the challenges can be addressed by a mix of strong and weak network. I listed several hypotheses about exactly how strong and weak network can influence discovery of business opportunity, access to resource, gaining legitimacy, and risk control. However, the theoretical framework is not fully supported by literature review. Some literatures did not cover emerging market and some other literatures were not focus on entrepreneurship. In the analysis of case part, I am going to test my hypotheses based on one particular Fintech start-up which is facing Chinese market.

4.1. The network

The network of Kable is still developing. As a newly bored start-up, the number of network is limited. Based on emotional intensity, contact frequency, intimacy, and reciprocity, the manager of Kable and I come up with a list of strong and weak network (Granovetter, 1982).

Strong network Weak network

Bit4coin BCG & PwC

Chinese partner:DZ University of Amsterdam

Sutor bank B.Amsterdam & Startupbootcamp

Competitors

Table 1: a mix of strong and weak network of Kable

4.1.1. Strong tie network

Bit4coin is one of most important partners determine the survival of Kable. Bit4coin generates the cash flow from its B2C operation to finance the daily operation of Kable. As

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the mother company, Bit4coin also provide working place, human resource and social connection to make sure the smooth development of incubation stage. The acting general manager of Kable is the CFO of bit4coin and he leverages the resource from bit4coin. During the process of business development, Kable cooperate with a Chinese partner to complete the transfer steps. As you can see from the business process, the 4th step of international transfer involves withdrawal bitcoin into local currency. This should be conducted by a local partner with knowledge about local bitcoin market, local bank account and credibility. After several screenings, Kable built a strategic partnership with a Chinese independent trader called DZ, who has already been trading bitcoin for 5 years and has the ability to handle large volume. DZ enable Kable to finish the “last mile” of transfer and make sure Chinese factories receiving RMB without the bother of knowing bitcoin and all other transfer process.

Sutor bank, which is the partner of Bit4coin at the very beginning, also built a relationship with Kable that is more than just client-and-bank connection. Sutor bank view Kable as a substitute of traditional international bank transfer, especially in terms of special need with limited time or in sensitive area (for example, Iran). Sutor bank even leverages the fin-tech nature of Kable to improve its exposure. Sutor bank launched an article to introduce its innovation approach and spend half of context presenting Kable.

These three networks are the strong ties providing critical resource and information to Kable. They have built relations Kable can rely upon both in good time and bad time.

4.1.2. Weak tie network

Weak tie, on the other hand, mainly provides access to industry information and irregular or infrequent support to Kable. First of all, the CEO had worked for BCG for 5 years and CFO had worked for PwC for 8 years. During their corporation career life, they have built personal connection with their colleagues and clients. Occasionally, these connections provide

industry information and business opportunities. Second, Kable has a stable relationship with University of Amsterdam. Kable recruit interns from business school and CFO is invited to give guest lecturer to MBA students. The university offers expertise about strategy and

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entrepreneurship, as well as alumni network to Kable. Lastly, Kable is located in an

incubation centre called B.Amsterdam, which is famous for its community of start-ups and innovation. Kable gains a lot of opportunity to talk to accelerators, investors, and other start-ups in B.Amsterdam.

To sum up, strong and weak ties are combined together to benefit the growth of Kable in their own unique ways.

4.2. Discovery of Opportunity

Kable’s first business opportunity is exploited by the strong network with mother company Bit4coin. Bit4coin has a large pool of B2C bitcoin clients and Kable launched a campaign of introduction email to all these existing clients about the newly built B2B bitcoin service. Kable got five positive responses from Bit4coin’s client and one Romanian TV factory want to use Kable to pay its business partner in China. After some trial transfer, the Romanian clients find Kable’s service both fast and cost-efficient and signed a long-term contract with Kable of 20K euro (volume) per month. Such high response rate and productive final outcome validate Hypothesis 1a that strong network provides start-ups with business opportunities with high quality.

Information is always critical to successful business development in start-ups (Fiet, 1996). In many cases, weak ties actually provide more diversify set of information and resource than strong ties do (Bloodgood et al., 1995). Kable is located in B.Amsterdam, which is the

incubation centre of more than 200 companies. By talking to these companies during lunch hours and attending activities and conference, Kable is able to identify which ones have need to make international payment. Elevator pinch and company introduction inside B.Amstedam also present the fast and cost-effective payment service to whoever visit this centre, including Prince Constantijn of the Netherlands. This publicity among weak network provide Kable with several business inquiries. This has proved Hypothesis 1b that weak network provides start-ups with business opportunities in large volume.

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4.3. Securing Resource

Strong network provides access to resource to make Kable survive. As an early staged start-up, Kable’s revenue is small and has to offer extra coupons as a market strategy to attract new clients. Bit4coin provides cash injection and capital injection to guarantee that the Kable can pay its bills and salaries. Apart from financial support, Bit4coin also provides human

resource with proper expertise to develop Kable’s business. The CTO of bit4coin built up the B2B bitcoin transfer platform and the company website. In other words, strong network provides Kable with resource at the price which is far below market price.

Weak network, on the other hand, provides other resource to make Kable prosper. Just been built in February, Bit4coin has already get several media exposure together with big

companies. Apart from the Sutor Bank report, one of the biggest bitcoin news website called Coindesk has already finished an interview with CEO of Kable and the report will be online next month. Kable also wrote an article about the hidden fee of corresponding bank and this article has been reviewed by several bitcoin news websites and will be in the air within next week. B.Amsterdam also contributes to Kable’s publicity by organizing investors and accelerators to visit on a regular basis. That is to say, weak network provides Kable with access to intangible resource.

In terms of tangible resource, weak network contributes directly to success of finding

business partner in China. The CEO of Kable has been selling and buying bitcoin as personal investment for more than 5 years and thus built a network with traders around the world. When he decided to set up Kable to provide solution for international transfer, this network enable him to come up with a list of credible Chinese trader in short time. Since the

partnership built is a two-way selection process, his reputation built during his personal investment also contributes to Chinese trader’s trust to Kable, even though they never do bitcoin trading with each other directly.

To sum up, Hypothesis 2 is not completed in terms of describing the benefit of weak network towards access of critical resource. It is true that strong network provides financial and human resource that guarantee the survival of Kable. However, weak network contributes to

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both tangible resource, such as business partner, and intangible resource, such as media reports and publicity.

4.4. Gaining Legitimacy

Legitimacy is important to the business of Kable. Dealing with international payment, the clients will first transfer money to the account of Kable and wait for Kable to deliver to beneficiary. Despite the fact that Kable can finish the payment loop in hours, client’s money is still exposed to risk for the transfer period. After realizing the importance of legitimacy to ensure clients about the safety of their payment, Kable is applying for the licence of pay-out in Europe. Moreover, Kable’s service is introducing innovative technology to replace the traditional bank transfer. Clients also need legitimacy to have faith in the sustainability of the technology innovation. Block-chain is a heating tech breakthrough but still need time to become a mutual innovation in the eyes of public. Generally speaking, Fintech entrepreneurs are likely to face the same legitimacy need while trying to convert innovative tech to business function. To sum up, the case of Kable validates Hypothesis 3a that Legitimacy is critical for Fintech entrepreneurship.

Limited by newness of technology, some clients find it is difficult to understand the concept of block chain and the nature of bitcoin. Even for the decision maker who has already know bitcoin, it would still take some effort to accept Kable’s international transfer service as

appropriate and comfortable. Compared to weak tie, strong tie network brings more

legitimacy to deal with liability of newness. First of all, the CEO and CFO both worked for large cooperation for years. They have a clear view of the importance of a set of

institutionalized roles and tasks, stable customer ties, and experienced constituents. Besides, their career backgrounds directly carry legitimacy and this has been mentioned frequently in business pitch and company introduction. Second, strong tie with prestigious business partner

like Sutor bank enhance Kable’s visibility and gain recognition. Thirdly, Mckinsey, as the CEO’s former business partner, provide legal consultancy to Kable. The name of Makinsey and its professional legal advice improve legitimacy and enhance the confidence of clients. In other words, liability of newness, which means start-ups’ incapability to build an intense

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exchange relationship with critical environmental constituencies, is well covered by strong network of Kable (proof of Hypothesis 3b).

In return, I also witness how Kable’s legitimacy speed up the building of both strong and weak network. As one of the leading Fintech companies focusing on international payment, Kable has been invited to several conference or boot-camp show to pinch and present the value proposition. During such events, Kable get the opportunities to meet and build network with potential clients, business partners, accelerators and investors. For instance, Kable was invited to Rabobank’s 2017 Fintech Start-up-boot-camp for its current reputation in Dutch Fintech society. In this event, we received around 100 business cards from companies and individuals who are interested in Kable. Such example supports Hypothesis 3c that

legitimacy accelerates the formation of both strong and weak network.

4.5. Reduce of Risk

Two strategies to deal with liability of foreignness, namely resource base view of strategy and institutional theory, can be only validated after Kable start to launch its Chinese subsidiary. Resource base view of strategy emphases the interaction between Kable and its future Chinese subsidiary. Institutional theory articulates the importance of future

subsidiary’s ability to localize the service to meet the demand of Chinese market by learning from local market leaders. Therefore, Hypothesis 4a (strong network reduces the risk by offering parent-subsidiary engagement) and Hypothesis 4b (weak network reduces the risk by offering local benchmark information) cannot be sufficiently researched due to lack of

subsidiary.

Institutional weakness in this case study comes from Chinese government’s ambiguous attitude towards bitcoin. All bitcoin exchange platforms in China are under strict examines. In March of 2017, the centre bank issued a sudden announcement that both individuals and companies are forbidden to withdrawn Chinese Yuan from Bitcoin trading platform since. To be more specific, March’s prohibition makes international payment from European to China impossible visa bitcoin exchange platform since Chinese currency cannot get out of platform

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account to pay manufactures. Luckily, Kable was able to build up a partnership with local bitcoin trader and avoid a total breakdown.

To deal with these risks, Kable leverage its network and cooperate with local partner to share risk and eliminate uncertainty. The Chinese partner is called DZ, who is an independent bitcoin operating in OTC. DZ has strong personal network in Chinese bitcoin community and he can handle 5 million euro every day. Besides DZ’s ability to accept bitcoin and withdrawn it into Chinese currency, he also provides knowledge and insight about Chinese regulation and policy towards bitcoin and Fintech. Thus, hypothesis 4c, which claims strong network provides more possibility industry-specific information and insight in terms of dealing with institutional weakness in Chinese Fintech industry, is validated. The contribute of weak network to eliminate institutional weakness is not discovered in this case.

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5. Conclusion

Based on the case study of Kable, network once again showed its importance while facing emerging market. There are four types of challenges which entrepreneurs have to deal with in emerging market like China, namely challenge of business opportunities and new clients, challenge of building access to local resource and legitimacy, challenge of emerging market risk. This case study indicates the key to answer these challenge is a mix of strong and weak network.

Strong and weak network, each have their own advantages and disadvantages, help to improve four business operation (discovery of opportunity, access to resource, gaining

legitimacy, and risk control) in their own ways. First of all, Strong network provides start-ups with business opportunities with high quality and weak network provides opportunities in large volume. Secondly, unlike what former studies indicates that strong network contributes more critical resource to start-ups than weak network does, weak network also contributes to both tangible resource, such as business partner, and intangible resource, such as media reports and publicity. Thirdly, strong network cultivate legitimacy to deal with liability of newness and legitimacy in return accelerates the formation of both strong and weak network. Fourthly, in terms of dealing with Chinese institutional weakness, which bring significant risk to entrepreneurs in West, strong network provides more industry-specific information and insight compare to weak network.

Entry model, which is the practical contribution of this in-company project, is also linked to the exploration and exploitation of network. Based on literature review and Kable’s network, the best entry model choice is Joint Venture with local partner with bitcoin infrastructure and knowledge about finance and block-chain regulation and institution.

This in-company project has several limitations. First of all, Kable as a newly-bored start-up, only possess a limited number network, which brings in high possibility of survivorship bias. Secondly, entry model, as an agreement with Kable’s leadership, should be one part of research. However, the hypothesises based on former studies can only be validated after actual launch of Chinese subsidiary. Thirdly, I did not study the dynamic change between

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strong and weak network. According to my observation, there are several cases in which weak networks become strong networks and strong networks in February become weak network in July. Should I follow the in-company project and the development of Kable for a longer time, such limitations should be covered with a more in-detail case study.

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How does a mix of strong and weak network influence business performance? : a case of Fintech entrepreneurship while facing emerging market

The Amsterdam MBA Company project