Is there a pattern in the internationalization process of SMEs in the fashion industry? : what are the similarities and differences? : a multiple case study on the internationalization process of SMEs in the fashion ind

Is there any pattern in the internationalization process of SMEs in the fashion

industry? What are the similarities and differences?

A multiple case study on the internationalization process of SMEs in the fashion

industry.

Faculty Economics and Business – Master Business Administration

Master thesis International Management

Lisa van Heeswijk

Student number: 10105697

1

_{supervisor: E. Dirksen MSc.}

2

_{supervisor: Dr. I. Haxhi}

Academic year 2016 – 2017

Date: March 24

_{, 2017}

Final version

Statement of Originality

This document is written by student Lisa van Heeswijk 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.

Acknowledgements

I would like to thank my supervisor, professor E. Dirksen, for his feedback and support during the entire process of this research. His guidance was of great help and therefore I want to express my gratitude towards him. Perhaps most important of all, I would like to thank the interviewees of all the companies who wanted to participate in this research, and were willing to speak to me. Writing this thesis would not been possible without your help and patience. Finally, I would like to thank my family and friends for their encouragement and moral support.

Abstract

Due to the global competition, internationalization is becoming increasingly important for companies today. The aim of this research is to investigate the internationalization process of SMEs in the fashion industry. The fashion industry in Europe consists for most part of small businesses. The following research question is formulated: “Is there any pattern in the internationalization process of SMEs in the fashion industry?” This study is based on a qualitative approach to achieve its objectives. Ten interviews were conducted with several managers of SMEs in the fashion industry, with its headquarters based in Europe. The data collected from the interviews has been categorized by using open coding into a model containing different concepts. This study provides insights in different aspects such as the entry mode choice and motives during the internationalization process of the chosen SMEs particular for this research. The findings of this study indicate that indirect exporting is the most chosen entry mode among SMEs in the fashion industry. The most important motive for expansion appears to be efficiency and market seeking. The market selection during the internationalization process of the specific fashion companies used in this research are mostly countries with low geographic distance, as well as low cultural and psychic distance. However, this research has found evidence that network is one of the most important aspect regarding the internationalization process. In some cases even more important than the foreign market selection itself. The findings of this research support and contribute to the current literature of internationalization process. Future research is encouraged to explore the risk related to internationalization for fashion companies.

TABLE OF CONTENT

1. INTRODUCTION ... 8

2. LITERATURE REVIEW ... 9

2.1 Definition SME... 9

2.2 Retail Internationalization ... 10

2.2.1 Dimensions In The Internationalization Process ... 11

2.2.2 Internationalization Pattern ... 12

2.3 Theories For Internationalization ... 13

2.3.1 Uppsala Model ... 13

2.3.2 Eclectic Paradigm ... 19

2.3.3 Transaction Cost Theory ... 21

2.3.4 Entry Modes ... 23

2.3.5 Motives For Internationalization ... 25

2.3.6 Network Approach ... 27 2.4 Conceptual Framework ... 29 3. METHODOLOGY ... 31 3.1 Research Design ... 31 3.2 Data Collection ... 33 3.2.1 Interviews ... 33 3.3 Sample Selection ... 34

3.3.1 Overview of the Cases ... 35

3.4 Data Analysis ... 35

3.5 Quality of Research Design ... 36

4. RESULTS ... 37

4.1 Within-Case Analysis ... 37

4.1.1 Company A ... 37

4.1.3 Company C ... 39 4.1.4 Company D ... 40 4.1.5 Company E ... 41 4.1.6 Company F ... 42 4.1.7 Company G ... 43 4.1.8 Company H ... 44 4.1.9 Company I ... 44 4.1.10 Company J ... 45 4.2 Cross-Case Analysis ... 46 5. DISCUSSION ... 50 6. CONCLUSION ... 56

6.1 Sub questions and Research question ... 56

6.2 Contributions and Managerial Implications ... 58

6.3 Limitations and suggestions for Future Research ... 58

7. REFERENCES ... 60

APPENDICES ... 67

Appendix A: Characteristics of Traditional, Born Global and Born-again Global International Patterns ... 67

Appendix B: Multiple case-study research process ... 68

Appendix C: Coding Scheme within-case analysis ... 69

LIST OF FIGURES

Figure 1 The Basic Mechanism of Internationalization - state and change aspects Figure 2 The Business Network Internationalization Process Model

Figure 3 A Hierarchical Model of Choice of Entry Modes Figure 4 Internationalization and Network Model

LIST OF TABLES

1. INTRODUCTION

In the past several decades, the rapid rise of globalization has become a significant part of the fashion industry. The changing dynamics in the fashion industry are a result of the internationalization process of fashion companies, whereby internationalization can be explained as a process to increase the involvement of the firm in international activities. This results in department and brand stores in Europe selling fashion brands from across the globe. The European textile and clothing industry is a leader in the global market (European Commission, 2015). It provides an important contribution to the European economy with 5 million people directly employed in the fashion value chain. Despite the economic crisis, many European companies in the sector have been able to defend its position in the global market (European Commission, 2015). Turmoil in the economy and currency devaluation propel some small and medium-sized local companies to succeed in the fashion industry in key large cities (Kaerney, 2009). The fashion industry in Europe is based around small businesses. When all we see are fashion houses and big high street brands, behind this visible face of the industry thousands of small companies and craftsmen are hidden who contribute to Europe’s leading position in the fashion market (European Commission, 2015).

Internationalization of European fashion enterprises is ever increasing. Due to European unification, it facilitates doing business in various countries in Europe. This is one of the main reasons for the fast internationalization. Operating within a foreign market is essential for the brand’s reputations and makes a significant contribution to its overall turnover (Hines and Bruce, 2007). Due to global competition, internationalization is becoming increasingly important for companies today. Many companies increase its international business activities in order to increase its global competitiveness, which results in a globalized business world. Expanding abroad could increase a company’s sales and it will diversify sources of sales and suppliers. In addition, new resources could be acquired and it should minimize competition risk (Daniels & Radebaugh, 1998). However, the way companies expand abroad can vary significantly per company and per country. A range of factors contribute to companies’ entry modes into foreign markets differing from case to case. Internationalization for fashion retailers could be more complex than for other companies since retail companies cope with constantly changing customer demands which makes it much harder to expand and adjust internationally (Christopher, 2014).

Internationalization has been a common research topic in recent years. Early research on internationalization is mostly focused on multinationals . This is in contrast to this research

which differentiates itself from other papers by focusing on SMEs in the fashion industry. Moreover, research on internationalization merged with research on fashion retailers is very scare. The purpose of this study is to explore the internationalization process of several SMEs in the fashion industry and attempt to understand what factors are playing an important role when a company decides to expand its business activities abroad. Furthermore, the motives for expanding abroad will be investigated and which entry modes are used. Eventually, a cross-case analysis will be made between the fashion companies. This research will look for any pattern in the internationalization strategy of the different fashion companies, its similarities and its differences. This leads to the following research question of this thesis:

Is there any pattern in the internationalization process of SMEs in the fashion industry? What are the similarities and differences?

The remaining part of this research is structured as follows. The second chapter will present the existing literature that is relevant for this research. It will introduce concepts regarding the internationalization process of fashion companies. Furthermore, it provides a theoretical framework and an overview of the sub questions that this research will investigate. Thereafter, the data of the multiple case will be analyzed in-depth and the results of the research will be discussed. Lastly, a conclusion will follow together with the limitations of this research and suggestions for further research.

2. LITERATURE REVIEW

This chapter contains literature regarding this research topic. It starts with the definitions of SME and retail internationalization. In addition, this chapter gives in-depth information about internationalization and all relevant concepts, thus helping to give more understanding. 2.1 Definition SME

Small and medium-sized enterprises are the backbone of our economy, creating over 85% of employment in Europe. The SMEs drive job creation and ensure social stability, therefore it is seen as the engine of the European economy (European Commission, 2005). According to the European Commission (2005), “an enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form. This includes, in particular, self-employed people and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity.” However, there is no unified

definition of SMEs across the world (OECD, 2002). In other parts of the world the SME definition differs from the EU standards. The European SME definition takes the following three criteria into account: staff headcount, annual turnover, and annual balance sheet (European Commission, 2005). A distinction between small and medium-sized enterprises can be made within these three criteria. Small enterprises employ fewer than 50 people and have an annual turnover or annual balance sheet total that does not exceed €10 million. Whereas medium-sized enterprises employ fewer than 250 people and either have an annual turnover that does not exceed €50 million, or an annual balance sheet that is less than €43 million (European Commission, 2005).

2.2 Retail Internationalization

Internationalization is a broadly used concept for which many definitions exist. Piercy (1981) explains internationalization as the outward movement of a firm’s activities. Welch and Luostarinen (1988, pp. 36) define internationalization as “the process of increasing involvement in international operations”, this is one of the most general definitions of internationalization. It is an overall definition of the concept, which takes into consideration all essential aspects of the fashion globalization such as: export and import of fashion products, Foreign Direct Investment (henceforth FDI) and knowledge transfer (Hanf & Pall, 2009). Tsang (1999) defines internationalization as “the transfer of a firm’s physical and organizational technologies from one country to another.” This definition is formed from the standpoint of a resource-based view and refers to specific features of assets which are required to be transferred to host countries (Hanf & Pall, 2009). According to Johanson and Wiedersheim-Paul (1975) the concept of internationalization itself can be seen as an experience. Internationalization brings changes into a company, which subsequently changes the attitude of the company towards internationalization in the future. A distinction is made between the firm’s perspective and its current behavior. The bases of a firm’s global involvement is formed by the former. This refers to when a firm continues to operate in its home country, but may engage in importing or sourcing of management ideas in a foreign country. The latter, which refers to when a firm is exporting of producing abroad, has an influence on the firm’s perspective on internationalization and is the result of the international experience of the firm (Hanf & Pall, 2009). The different definitions are focusing on different aspects of the internationalization process. All foregoing definitions of internationalization summarized, Hanf and Pall (2009) define internationalization as "internationalization is a process of increasing involvement in cross national operations, which requires the

commitment of resources and the adaptation to international markets, changing the attitude of the firm and influencing the decisions on further internationalization.”

From the degree of involvement and the perspective of international activities, internationalization can be distinguished into two different types (Hanf & Pall, 2009). The first type is inward internationalization, this means that the company is solely focused on the activities on the home market. Furthermore, this means that the knowledge in the foreign market is used in order to satisfy the home market demand. The second type is outward internationalization, which relates to the opposite of the inward internationalization. Hereby, companies are using knowledge gained in its home country in order to satisfy the host market demand. It can be achieved through different operational modes that are focused on exporting or producing company’s products (Hanf & Pall, 2009). According to Welch and Luostarinen (1993) inward internationalization is as equally important as outward internationalization. 2.2.1 Dimensions In The Internationalization Process

All fashion retailers have a different approach to internationalization in terms of pace, scope, and rhythm of expanding abroad. In this section those different dimensions regarding the internationalization process will be discussed. The first factor is the pace of foreign expansions, which refers to the speed of foreign expansion. This time criterion explains the amount of time needed to achieve certain objective (Lin, 2012). The pace dimension relates to the foreign expansion in a given time frame, in terms of the established foreign subsidiary of a company (Vermeulen and Barkema, 2002). According to Vermeulen and Barkema (2002) there is a negative relationship between the pace and the impact of the foreign operations on its profitability. The faster the pace, the lower the profitability. This is because it has little time to evaluate its foreign experience, incorporate it, and implement it to commercial ends (Cohen and Levinthal, 1994).

The second key factor refers to the geographic scope of a firm’s expansion process, this describes the geographical dispersion of a company’s internationalization. It describes the number of countries in which the company operates, including exports, investments, subsidiaries and where it facilitates production (Lin, 2012). It becomes more difficult to absorb the experience when a company operates in more countries. This could lead to diseconomies of time compression. The higher the geographic scope is, the more the company has to learn about particular nation settings compared to when expansions are taking place in a lower amount of countries. The company has to absorb different experiences such as experiences related to new customers, building new relationships with new suppliers,

understanding and identifying the competitors. All this demands a company’s absorptive capacity (Vermeulen and Barkema, 2002). According to Vermeulen and Barkema (2002) there is a negative relationship between the foreign subsidiaries and company performance and its geographic scope. This because the larger the geographic scope is, the more time the company needs to absorb the accompanying experience.

The third dimension regarding foreign expansion is rhythm. The profits that are realized through foreign expansions are not only influenced by the pace and scope of the internationalization process. The rhythm at which new subsidiaries are established also plays a role (Vermeulen and Barkema, 2002). The rhythm relates to the regularity of the internationalization process, for example one company could establish one subsidiary per year, while others may prefer irregular expansions alternating between rapid and slow expansions. When a company has a low absorptive capacity, it tends to follow an irregular expansion path. Vermeulen and Barkema (2002) argue that firms that are expanding with a constant rhythmic pace could benefit more from its foreign expansions than companies with irregular pace. It is able to interpret and absorb its experience to similar actions in its recent past and relate to them to future expansions.

2.2.2 Internationalization Pattern

There is a certain pattern of activities that companies follow when it decides to expand abroad. This pattern can be defined as an internationalization strategy of a company, in order to be as successful as possible. The internationalization patterns shows a company’s behavior at specific points of time. Those patterns goes beyond national borders and can be distinguished into three different forms: gradual internationalization, radical internationalization and late radical internationalization. The choice of internationalization pattern depends on the current stage of internationalization of the company. The three different forms will be explained (Jones and Coviello, 2005).

The first form relates to gradual internationalization. This applies to the first part of the internationalization process, when the commitment level is low. Companies are gaining knowledge about foreign markets and the level of commitment on host markets is subsequently raising. The internationalizing happens in a slow pace during this stage and the psychic distance from the home market is rather low. Export is a widely used entry mode when there is a low level of commitment in the host market, with this entry mode is also has control over the host markets’ operations (Jones and Coviello, 2005). Later on, the Uppsala model will be explained, which analyzes in particular dependencies between the level of

knowledge of a company and its commitment towards foreign markets. Radical internationalization is related to the born global concept. Knight (1996) defines born globals as companies that operate internationally from an early stage in its development. It creates competitive advantages by using resources and operate in great geographic dispersion (Oviatt and McDougall, 1994). The radical internationalization patterns are significantly different from the gradual internationalization pattern, especially in terms of pace. There’s also a difference in the scope of the foreign expansion, since born globals neglect the psychic distance between home and host country (Bell et al., 2003). The last pattern, late radical internationalization, applies to companies which operate in the home country for a long period of time and do not have an interest in foreign expansion until some significant event occurs such as change of ownership and/or management. Those companies are called born-again globals, and possess already relevant resources for foreign expansion. It is expanding in the initial internationalization stage, the expansion process is radical and committed. Furthermore, this means that the pace is slow since there is no time limitation for beginning with international activities, and the scope is wide due to several market’s expansions at the same time. The main characteristics of all different forms are summarized in Appendix A.

2.3 Theories For Internationalization

After the introduction, an overview of the literature about internationalization, concepts and theories about foreign expansion will be presented. In order to cover the most important theories regarding fashion retail internationalization the following theories are explained: Uppsala model, Eclectic Paradigm, Transaction Cost Theory, entry modes, motives for foreign expansion and the Network approach.

2.3.1 Uppsala Model

Johanson and Vahlne (1977) have developed a model to increase the understanding of the internationalization process, which is called the Uppsala model. This incremental model underlies three basic assumptions. First, the lack of knowledge of the foreign market increases the difficulty to go abroad. Second, firms are internationalizing incrementally due to the market uncertainty. Last, knowledge differs per individual and is difficult to transfer to others. Johanson and Vahlne (1997) assert that knowledge is very important for expanding abroad. The prerequisite for internationalization is to increase knowledge and experience on the domestic market first. After saturation on the domestic market, companies start to expand its

activities through simple business agreements, such as export, until it is developed enough to establish complex business models such as FDI (Johanson and Vahlne, 1977).

Johanson and Vahlne (1977) are claiming that there is lower risk and better understanding in markets with lower psychic distance and cultural distance. Cultural differences should be taken into account when a company decides to expand in a host country. The Uppsala model asserts that knowledge gained in lower distance markets could help in the future for operating international in markets with higher distance.

Figure 1 - The Basic Mechanism of Internationalization - state and change aspects

(source: Johanson and Vahlne, 1977) In the Uppsala model a distinction is made between state and change aspects of internationalization. The current market commitment and market knowledge have an influence in the decision making regarding future commitment of resources and the performance of the current activities, which in turn is affected by both current activities and commitment decisions. The process can be described as a casual cycle, which is shown in figure 1 above.

State aspects

The state aspects consist of market commitment and market knowledge. There is a direct relation between market knowledge and market commitment. Knowledge is considered a resource, the greater the knowledge about a market, the more valuable the resources are which strengthens the commitment to the market. This is especially true for experiential knowledge. Market commitment is dependent upon two factors. The first factor is the amount of resources that have been committed which is determined by the amount of investment in a given market. The second factor is the degree of commitment that is defined as the difficulty

of finding an alternative use for resources and transferring them to a new location. Johanson and Vahlne (1997) distinguished four sequential steps in, where each consecutive step means an increase in resource commitment to a particular market. Its establishment chain consist of the following steps:

1. irregular export activities

2. export via independent sales representative 3. establishment of overseas sales subsidiary

4. establishment of foreign manufacturing subsidiaries.

Johanson and Vahlne (1977) demonstrated that a firm will enter a new market at the lowest resource commitment possible and begins to expand from this level following the establishment chain. Hereby, the Uppsala model explains an internationalization pattern when a company operates in small steps and begins its internationalization process with irregular export activities. Later on, companies start to cooperate with sales representatives, who operate as independent agents. Once the company has obtained enough knowledge about the market, it can create a subsidiary which eventually will lead to moving its production operations in a foreign market. The gradual integration process, which begins with export and eventually leads to joint venture or wholly owned subsidiary, tries to reduce the level of risk as well as the uncertainty.

The other state aspect is the market knowledge, which “relates to present and future demand and supply, to competition and to channels for distribution, to payment conditions and the transferability of money” (Johanson and Vahlne, 1977, p. 27). A distinction can be made between objective knowledge, which can be taught, and experiential knowledge, which can only be learned through personal experience. In this model the authors believe that experiential knowledge is the critical kind of knowledge regarding the Uppsala model (Johanson and Vahlne, 1977). Knowledge can be divided into general knowledge and market-specific knowledge. General knowledge concerns marketing methods and common characteristics of certain types of customers and does not depend on the geographical location. Market-specific knowledge is described by Johanson and Vahlne (1997, p.28) as “the knowledge about characteristics of the specific national market-its business climate, cultural patterns, structure of the market system, and, most importantly, characteristics of the individual customer firms and their personnel.” Both general and market-specific knowledge are required to establish and perform a certain kind of operation or activity in a country.

According to the Uppsala model companies are entering markets of which it has the best knowledge and will move to more distant and unfamiliar markets after the company has gained sufficient knowledge. Market knowledge is seen as a function of psychic distance between home and host countries and the experience the firm has gained in each given market. Johanson and Wiedersheim-Paul (1975) introduced the concept of psychic distance in international business to measure a market’s foreignness. They believe that besides geographical barriers, psychic distance also has an influence on the internationalization process (Hosseini, 2008). Nordstom and Vahlne define psychic distance as “factors preventing or disturbing firm’s learning about and understanding a foreign environment” (Nordstorm and Vahlne, 1994). They assume that learning and understanding are the most important element in planning a foreign market entry. Lee (1998) defines psychic distance as “the distance between the home market and a foreign market, resulting from the perceptions about both cultural and business differences, where business differences are said to be attributed to differences in language, education, business practices, political and legal systems, economic environment, religious, and industry structure” (Lee, 1998, cited in Hosseini, 2008, pp. 941). To analyze psychic distance, the CAGE framework is commonly used to investigate opportunities in international expansion. Within this framework the attractiveness of foreign markets is analyzed by the distance between the home and host country with four basic dimensions: cultural, administrative, geographic, and economic. The culture of a country affects the way of interaction between actors. There could be a difference in language, ethnicities, religion, and social norms. This creates barriers that can be harmful for the success of business expansion. Administrative distance refers to the distance in politics, the link between countries from historical and political point of view. Preferential trading agreements, political union, and common currency could also increase trade and investments. In general, it is harder to conduct business in a country that is far away. However, geographical distance does not only refers to how far you are away from a country. Ghemawat (2001) argues that it is important not to forget both information networks and transportation infrastructures when determine the influences that geographical distance has on cross-border economic activity. Economic distance takes into account the differences between countries in terms of wealth and consumer income. This has a remarkable effect on the types of partners a country trades with as well as the trade level.

The second pattern that the Uppsala model explains is that companies enter psychically close markets first in internationalization before moving to psychically distant markets. Those

markets are easily to understand, and the level of perceived market uncertainty is relatively low (Kogut and Singh, 1998). A logically and implicit conclusion that follows naturally from the theory above is that expanding in psychically close countries should improve the company’s chances of success in these markets. This conclusion is drawn from the assumption that “psychically close countries are more similar and that similarity is easier for firms to manage than dissimilarity, thereby making it more likely that it will succeed in similar markets” (O’Grady and Lane 1996, pp. 310). However, some empirical studies disagree with this assumption and found that a psychically close country does not always ensure success. Evidence is found in the research of O’Grady and Lane (1996) that by entering a market with small psychic distance may result in poor performance and possibly failure due to the perceived similarity and unpreparedness for dissimilarities. This is called the psychic distance paradox.

Change aspects

The change aspects consist of current activities and decisions to commit resources to foreign activities. Regarding business activities, there is almost always a time lag between the current activities and its consequences for example marketing activities only results in sales growth when it is done repeatedly. The longer the gap, the higher is the company’s commitment to the market. Johanson and Vahlne (1977) assume that the more differentiated and complicated the product is, the more important the commitment will be. Current business activities are the most important source of experience.

The other change aspect is the decision to commit resources to foreign activities. These decisions depend on what the decisions alternatives are, and how it is chosen. Commitment decisions are made in response to perceived problems and opportunities on the market, which are assumed to be dependent on experience. Both firm experience and market experience are relevant. A distinction can be made between an economic effect and uncertainty effect of each additional market commitment. Economic effect concerns the operations and its increase in scale, whereas uncertainty effect is associated with the market uncertainty. Commitment decisions are made in small steps. However there are three exceptions in this assumption. Companies can make larger international steps when: the market conditions are stable, the company owns large amount of resources and if the company has enough experience and knowledge with similar markets (Johanson and Vahlne, 1997).

Revisited Model

The Uppsala model has been developed 30 years ago, which leads to critiques on this model on many aspects. Due to the globalization, companies are not expanding in a slow pace with small steps anymore. The competition has increased since the globalization and the technological development. Companies have to adjust faster to the market change and the behavior of consumers. One of the biggest critiques and limitations of the old Uppsala model, is that it is solely focused on internal factors within the company. Hereby, it neglects the external factors such as existing competition and market potentials (Hollensen, 2007). Additionally, there has been a critique about the knowledge that is necessary when entering a market. If the risk of not being present in a particular market is higher than the risk of entering without sufficient knowledge, the company will invest anyway. Hereby, the learning process does not have to go in incremental steps. Another point of critique is that the Uppsala model is not applicable to born global companies. Knight (1996) defines born globals as “companies that expand into foreign markets and exhibit international business prowess and superior performance, from or near their founding.”

Figure 2- The Business Network Internationalization Process Model

(source: Johanson and Vahlne, 2009)

The Uppsala model is revisited in 2009 by Johanson and Vahlne. The basic structure of the model is the same but they have made some changes, which are shown in figure 2. They acknowledge that a company’s relationships with others and networks in general are important for internationalization. In the state aspect they added “recognition of opportunities” to the knowledge concept. By adding this variable, Johanson and Vahlne (2009) consider “opportunities to be the most important element of the body of knowledge

that drives the process. Other important components of knowledge include needs, capabilities, strategies, and networks of directly or indirectly related firms in its institutional contexts.” In the revisited model exploitation of opportunities and network position are seen as crucial determinants of the commitment level. A company needs to build a relationship among companies within the same network, which are based on knowledge, trust and commitment. This way companies can gain its knowledge, which can contribute in detection of new opportunities. In the change aspects current activities has been changed to learning, creating, and trust building. Whereby, learning includes experiential and other types of learning, and knowledge, trust and commitment have a strong effect on the learning process. The change aspect was originally a commitment decision but is now adjusted to relationship commitment decision, which describes the commitment to relationships and networks. In general, companies involve into two types of commitment decisions. First, it could strengthen and protect an existing relationship, and second, it could invest in new relationships. All in all, the revisited Uppsala model is pointing out that internationalization process highly depends on networks, due to development of knowledge, commitment and trust building (Johanson and Vahlne, 2009). The importance of networking activities are further explained within the network approach later in this research.

In addition to the Uppsala model, the Eclectic Paradigm of Dunning is used to explain the internationalization process. The eclectic paradigm generally concerns the static nature of internationalization since it focuses on selective factors in the single changes during the internationalization process. In contrast to the Uppsala model, which is a dynamic process which embodied a recycling process, and changes in terms of commitment and knowledge accumulation (Margardt, 2009). In de next section the eclectic paradigm will be presented in order to explain when is it beneficial for a company to engage in FDI.

2.3.2 Eclectic Paradigm

The eclectic paradigm from Dunning (1988), which is also known as the OLI framework, is a theory that is used to analyze determinants of foreign direct investment. The OLI framework shows the essential conditions that are necessary in order to gain more advantages and to better perform in foreign markets. According to Dunning (1988) the strength of each advantage determines the entry mode’s choice. A company could engage and increase its international activities when its internationalization strategy meets the following three factors: ownership (O), location (L), and internalization advantages (I).

When a company decides to go international it has to possess ownership advantages over local firms in the host country. Owning foreign production generates more ownership advantages, which increases its competitiveness compared to others. Ownership advantages looks at the competitive capabilities within the firm, which will help it to expand and compete in an international environment. In addition, it compensates the costs related to new market entry and operating overseas. Local producers do not have to face these costs, since it is only relevant to foreign companies (Dunning, 1988). The ownership advantages relate to the internal part of the company, namely tangible and intangible assets in terms of resources and capabilities. This includes the ability to decide and choose the right location and establish the right strategic decision in order to utilize and even amplify these assets (Dunning, 2001). Ownership advantages include not only capital and technology and natural resources, but also technological knowledge, organization structure, human capital and management skills, brand equity and recognition, financial resources, competence, as well as firm size and other advantages that improves the competitiveness of a company (Dunning, 2000; Rugman, 2010). According to Dunning, the nationality of a company and some country factors can be turned into ownership advantages (Dunning, 1988; 2001).

The second condition is related to the location advantages which relates to the attractiveness of a specific country (Dunning, 1993). Companies prefer to enter countries that possess high degree of location advantages that foster FDI. IMF defines FDI as “ a category of international investment that reflects the objective of a resident in one economy (the direct investor) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise).”Countries with location advantages differentiate themselves with resources that cannot be found in other countries, in this case a country has a location advantage and motivates companies to continuing to manufacture in foreign countries with location advantages (Dunning 1980, 2000). Together with the ownership advantages, the company decides to go abroad. Local advantages can be country risks and tariffs, market size, the education system, natural resources, appropriate technology, political factors, government activity like public intervention, tax system labor availability and costs (Dunning, 1977; Rugman, 2010,). The location advantage concerns different aspects, which should provide an opportunity to engage in foreign expansion (Dunning 1980, 2000).

The third factor of the eclectic paradigm is the internalization advantages. The internalization advantage is inspired by the Transaction Cost Theory (Coase, 1973), which embodied the internalization advantage through the firm’s internal activities. The internalization advantages show whether a company should engage in FDI rather than

contracting out certain activities to other foreign companies by licensing or franchising (Dunning, 1993). When transferring ownership advantages within the company across borders is more beneficial than selling advantages to other companies, internalization should occur. A wholly owned subsidiary is then a more attractive foreign market entry mode than other entry modes like franchising with a local firm, licensing, or joint venture, which exploits the ownership advantages of a company. The company should only continue to use its advantage when it is beneficial and profitable. If not, it has the option to sell the right for use, for example patents; or to sell these advantages to other companies. In addition, when costs or market failure are related to licensing of franchising, internalization is preferred in a form of wholly owned subsidiary where there is full control (Dunning, 1988).

The eclectic paradigm is a further development of Dunning’s (1993) internalization theory. The internalization theory itself is based on the transaction costs theory. This theory says if the internal transaction costs are higher than the external costs, the company should outsource. This process is called internalization. The transaction cost theory is evolved as the internalization advantage in Dunning’s OLI framework. In the next section the transaction cost theory will be presented.

2.3.3 Transaction CostTheory

The transaction cost theory (TCT) has been founded by Coase (1937) and can be applied to the entry mode decisions. This theory is grounded in neoclassical theoretical assumptions regarding the conditions for a stable equilibrium. Transaction cost theory helps to explain the existence of a company, and the reasons why a company decides to expand abroad and outsources activities to the external environment. This theory is broadly used to analyze organization issues and different strategies. Williamson (1981) defines the transaction cost analysis as “an interdisciplinary approach to the study of organizations that joins economics, organization theory, and aspects of contract law” (p. 573). Ronald Coase (1937) argued that “a firm will tend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of an exchange on the open market or the costs of organizing in another firm” (Coase, p.395). He asserts that firms and markets are alternative forms of organization which ultimately manage the exact same transaction. The costs of the price mechanism are represented in the transaction costs. According to Coase (1937) there is no market mechanism when there are no costs. The fundamental idea of the transaction cost theory concerns the question which entry mode is most suitable in a certain situation where the firm can minimize its costs of exchanging

resources with the environment. This theory is used to theoretically and empirically examine the decision of the entry modes (Brouthers and Hennart, 2007). The firm is seen as a hierarchy that adds value by minimizing transaction costs and production costs. Williamson (1991) defines a transaction as “ when a good or service is transferred across a technological separable interface”. It has three key characteristics: frequency, uncertainty and asset specificity. An example of transaction costs is the commission paid when selling or buying a stock. A distinction can be made between ex-ante and ex-post costs (Williamson, 1985). Ex ante costs include searching costs, and costs of negotiating, safeguarding an agreement, and drafting. Ex post costs include insurance costs, implementation costs, verification and certification costs, and monitoring and enforcement costs.

The transaction costs and therefore the choice of market entry mode are dependent on four different aspects (Anderson and Gatignon, 1986). The first factor relates to the transaction-specific assets, which are the proprietary knowledge that generates from research and development in a company. For the buyer it is uncertain what the value of this knowledge is worth, so the solution is to use an entry mode with a high level of control. The second aspect concerns external uncertainty. Cultural distance between the home and the host country and the formal environment become the two main sources of external uncertainty. In uncertain situations there is more need for control. The third aspect is internal uncertainty, which is harder to surmount in an international market rather than domestic market. This aspects relates to the lack of good and clear measurement of output, and when there are problems with the assessment of employee’s performances. When this occurs control is more sought-after. A variety of internal uncertainty is the distance in socio-cultural distance. In this case the greater the difference, the lower degree of control is required. The last aspect is the free-riding potential. There is always the risk of free-riding, this means you receive the benefits without paying the costs. To avoid the free-riding problem, a high control entry mode should occur. Wholly owned subsidiary is an example of a high-control mode, franchising is a medium-control mode, and licensing agreements are interpreted as a low-control entry mode (Anderson and Gatignon, 1986).

The transaction cost theory is a broadly and commonly used theory on the foreign market entry modes. However, this theory has been criticized a lot. The main disadvantage of transaction cost theory is that it’s difficult to define clearly and to measure it (Ghoshal, & Moran, 1996). Furthermore, the purpose of the theory is to provide a model for the decision-making on which entry mode should be chosen, but transaction costs could be measured only after the use of that specific entry mode. Boudreau et al. (2007) claims that the theory is only

focused on the transaction costs and ignores the benefits of the transactions. The transaction costs theory helps to explain the entry mode decision. In the next section the entry modes are presented and its differences will be discussed.

2.3.4 Entry Modes

The previous theories including the Uppsala model, eclectic paradigm, and the transaction cost theory all state that entry mode decisions are determined by various factors. In this sector different entry modes will be presented and explained how it differs from each other. Additionally, it will show when a company should apply a certain entry mode. The main distinction between the entry modes are the level of control and risk. As the transaction cost theory clarifies that in each situation the degree of control should vary when expanding abroad. Moreover, the return on investment and the mandatory resources are also taken into account for the decision on entry modes.

Figure 3 - A Hierarchical Model of Choice of Entry Modes

(source: Pan and Tse, 2000)

Pan and Tse (2000) have created a hierarchical model concerning the choice of market entry modes, which is shown in figure 3. Entry modes can be viewed as two major categories of equity-based and non-equity based entry modes. It can be seen that within the equity-based

modes, the choice can be made between wholly owned subsidiary and equity joint venture. While within non-equity based modes there is a choice between contractual agreements and export. The choice of entry modes depends on different types of factors, including firm-specific, industry-firm-specific, and country-specific factors. First, the main non-equity market entry modes are determined, namely export and licensing. Thereafter, joint venture and wholly owned subsidiary of the equity market entry modes will be discussed respectively. Export is a common entry mode as a first step by manufacturing firms to enter a foreign market. One of the advantages of exporting is that it could avoid the costs of establishing a manufacturing operation. Moreover, it helps the company to realize its experience curve and on location economies such as economies of scale (Hill, 2007). However, exporting will not be profitable if the production of the good abroad is much cheaper than producing in the home market. High transport costs may be incurred, and tariff and quota barriers may make export uneconomical and risky. A distinction can be made between indirect and direct export (Wild et al., 2014). Direct export involves selling directly to the target customer in the market. Hereby, the firm takes full responsibility to export its own products. This approach is related to a higher level of commitment compared to indirect export. Indirect export means selling to or through an intermediary, who in turn sells your product directly to the customers. Intermediaries are typically agents or distributors based in your target export market. One main advantage is that the firm does not need to have export expertise and it is relatively cheap.

“A Licensing Agreement is an arrangement where a licensor grants the rights to intangible property to another entity for a specified period, and in return, the licensor receives a royalty fee from the licensee” (Hill, 2007, p489). By choosing this entry mode a company does not have to face the costs and risk of operating directly in a foreign market. Drawbacks to licensing include that the company does not have tight control on the licensee, which could lead to risk of losing competitive advantage by licensing know-how.

The equity entry modes can be distinguished in equity joint venture (JV) and wholly owned subsidiary (WOS). A Joint Venture is a company owned by two or more independent companies established in different countries (Hill, 2007). In a JV, the tangible and intangible assets are pooled; it shares ownership and control the new pool (Kumar and Subramaniam, 1997). An advantages of a JV is that the foreign partner could benefit from the local partner in terms of knowledge of the business environment, but also culture and language of the host country. Additionally, the development costs and risks are shared among the partners.

However, this entry mode has the risk of losing know-how; there is no tight control over its technologies to its partners. The partners mutually could have different views on strategic goals and objectives. There exist different JV, which are shown in figure 1. Minority, 50%, and majority JV, which stands for the percentage a company owns in the Joint Venture. In contrast to Joint venture, in a Wholly Owned Subsidiary the company owns 100 percent of the stock (Hill, 2007). Subsidiaries may be established trough Greenfield venture, which means that a company sets up a new operation in a foreign country, or it could acquire an established firm in a foreign market. Advantages are that it has tight control over the operations and the use of know-how, which means that strategic coordination is also possible. A disadvantage is that it is very risky and the costs of establishment are very high.

In order to find the most suitable entry mode, the company should consider what its motives are to involve in international activities. In the section below several motives for internationalization will be discussed.

2.3.5 Motives For Internationalization

Fashion companies could have different motives to expand abroad. The listed motives below are not necessarily reasons for successful moves, but it is important to consider when companies go international. Dunning (2000) has strengthen the eclectic paradigm with motives for FDI. The eclectic paradigm uses the OLI framework to determine outward FDI on the basis of opportunities in host countries, where the variables are analyzed from the point of view from the host country. Therefore, the four motives all appear as reasons for FDI in a host economy. The motives for expansion could be divided into four categories: market seeking, resource seeking, efficiency seeking and strategic asset seeking (Dunning, 2000).

Companies that invest in a particular country with the intention to supply goods and services are called market seekers. There are several reasons why companies invest for market seeking in foreign countries (Dunning, 1993). The home market of a company could be limited and saturated, and therefore the growth is also limited or it holds back the revenues. Companies can then decide to invest in new markets that are more attractive regarding growth potential and market size. Companies could also engage in market seeking FDI in order to seek physical on leading markets. Products and services may have to be adapted to host markets, and a direct presence on a local market may be imperative, since companies that are not close to markets could have a disadvantage in adapting to services and goods.

Resource seeking motives are based on location advantages which can be distinguished into three main types. The first type is physical natural resource seeking, which

includes raw materials and energy sources which are scare of even inadequate in the home country. The second type is seeking cheap and well-motivated but poor to mediocre skilled labors for investment in labor-intensive industries. The third type is seeking for resources regarding skills and expertise in management, marketing and organization and technology capabilities (Dunning, 1993).

The focus of efficiency seeking companies is often economies of scale and economies of scope. Furthermore, it takes advantages of the differences in consumer tastes, supply capabilities, and risk diversification. Another reasons why companies seek efficiency seeking FDI, is that in this way it is “taking advantage of differences in the availability and relative cost of traditional factor endowments in different countries” (Dunning & Lundan 2008, p.72). A company can take advantages of the differences of factor endowments in different countries, for example availability and cost, whereas economies of scope and scale regards differences within similar countries.

The last FDI motive of Dunning’s taxonomy concern the strategic asset seeking. Strategic resources are intangible resources that deal with the core competence of a company and the technology such as employees skills, patents, strategic supplies, and knowledge (Dunning, 1993). Strategic asset seeking FDI is chosen in order “to protect or augment the existing O (ownership) specific advantages of the investing firms and/or to reduce those of their competitors” (Dunning, 2000, pp.165). The company has to focus on developing strategic resources in order to improve its competitiveness in the long-term. One way of gaining knowledge is to acquire assets from other foreign companies.

According to Williams (1992) there are several other factors that are motivations for firms to engage in expansion of international retailing:

 Various growth-rated motives, when internationalization is a means to increase sales and profits, expansion into underdeveloped markets with larger higher growth rates, and when expansion goals cannot be achieved domestically.

 Limited opportunities for growth in retailers domestic markets due to the market maturity, saturation and dominance, increased competition exhausted or unsuitable diversification prospects and excessive regulations.

 Motives derived from an internationally appealing and innovative retail concept

 Various passive and subjective motives including imitating competitors responding to offer from foreign retailers, surplus resources and depressed share prices.

 Motivations related to the transfer of retail “know-how” and techniques, senior management drive and economies of scale.

2.3.6 Network Approach

The network perspective has been added to the revisited Uppsala model of Johanson and Vahlne (1977), since the internationalization process highly depends on networks. In the revisited model, knowledge is not only considered to be the existing knowledge within a firm, instead it is the sum of the individual knowledge and the knowledge established through networks or interrelated business relationships. According to Johanson and Vahlne (2009) knowledge is a determining factor of uncertainty, being part of a network is critical to reduce the company’s risk level. The network approach explains in more detail the importance of relationships regarding the internationalization process. Emerson (1981) defines a business networks as “a set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors.” In contrast to the Uppsala model, the network approach is not a gradual process in nature (Ojala, 2008). The firms do not exhibit an incremental process, but it internationalizes in a fast pace through earlier experiences and resources of network partners (Mitgwe, 2006).The internationalization is seen as a natural development from network relationships with people and firms in a foreign market. The network relationships play an important role in the internationalization process, since these contacts can act like a bridge to a foreign market (Johanson and Vahlne, 1990). Networking is seen as a source that provides market information and market knowledge, which are often acquired in longer term when there is a lack of relationship with the host county (Mitgwe, 2006). The network approach is focused on bringing involved parties closers to each other by using information that is gained from the close relationship between the firm and its customers, suppliers, and industry and other market actors. In a market, all firms are in a way embedded in some kind of networks, which provides them relationships between its suppliers, customers, subcontractors, and other market actors (Johanson and Mattsson, 1988). The network approach consists of three elements: actors, activities and resources (Johanson and Mattsson, 1988). Institutions, firms and individuals are the main actors in the internationalization process. It interacts and exchange resources in order to gain its mutual benefits (Johanson and Mattsson, 1998; Johanson and Vahlne, 2003). The second element activities are related to the direct and indirect form of exchange between actors. Direct activities affect the exchange process

directly, whereas indirect activities are latent and performed by governments and multilateral organizations. The firm is dependent on resources from its network. Resources within the network include products, information, finance, raw materials, technology, research and even the network itself. In order to get access to those resources, a firm should develop its position in the network.

When a firm considers to expand abroad it is important to first understand the market where it operates, its environmental conditions and the firm’s relationships (Madsen and Servais, 1997). The number and strength of a firm’s relationship could increase by operating international, which in turn will help its international extension. Trust and increasing commitment established in foreign networks will result in penetration. International integration could be reached by using different ties. Firms should use its network and get involved with other firms in various countries. This way relationships are build, which eventually gives them access the resources of the network and the market (Johanson & Mattsson, 1988). To build a valuable network, it should be based on mutual trust, knowledge and commitment towards each other.

Johanson and Mattson (1988) distinguish four different categories of firms in different market situations characterized by the level of internationalization of the firm and market. These four categories are shown in figure 4 below. The first category is the Early Starter, where the company tends to have only a few relationships and little market specific knowledge. For the firm it is not possible to get this kind of knowledge using its current relationships. The Early Starter often invests in markets with little geographical distance and in order to obtain knowledge about the foreign market, it rather uses agents to enter a foreign market than invests in subsidiaries. Using this strategy helps the firm to minimize both risk taking and investment. When a firm has a low degree of internationalization and wants to internationalize in a market that is characterized with a high degree of internationalization, the firm can be described as a Late Starter. The firm has indirect relationships with the network and is able to go international by using those relationships. Due to the shortcomings of knowledge, the Late Starters have a disadvantage compared to its competitors. Furthermore, it is hard to get a place in the existing network (Johanson and Mattson, 1988).The Lonely International firm resides in an highly internationally but inexperienced network. There is a higher degree of commitment, which is reflected by its relatively high degree of internationalization. Relative to the Early and Late Starter, the firm has a greater level of experiential knowledge about the foreign market and environment. This is the result of direct or exchange specific relationships

(Johanson and Vahlne, 1992). In addition, it has more access to external resources due to its former investments. The International among Others is characterized by a high degree of internationalization both market and firm. It has established and developed resources and positions in foreign markets. The level of knowledge about foreign markets is high, which helps the firm to set sales subsidiaries. The firm has a lot of international networks which gives it opportunities and access to many external resources. It gives the firm the ability to coordinate activities in different markets.

Figure 4 - Internationalization and Network Model

(source: Johanson and Matsson, 1988)

2.4 Conceptual Framework

In this section a conceptual framework will be presented, which is developed to provide a summary of the internationalization concepts from the theoretical framework. As previously emphasized, the purpose of this thesis is to investigate the internationalization process of SMEs in the fashion industry and the choice of its internationalization model. An in-depth analysis will be presented in order to compare different companies and its strategies, and to understand what the similarities and differences are regarding its internationalization process.

There are multiple models available for companies who wish to internationalize on wide scale. Even though, there is a lack of research available, especially for SMEs in the fashion industry, where these models and its effect on the internationalization process of companies are compared. This research will fill this gap in literature. In order to increase the

understanding of the internationalization process of fashion companies, different aspects concerning internationalization theories are combined. A short summary will follow which will eventually lead to the research question of this thesis.

One of the most discussed and dynamic theories to explain the internationalization process is the Uppsala model. The model states that the prerequisite for internationalization is to increase knowledge and experience on the domestic market first. The expansion in foreign markets depends on the distance between the home and host country. including psychic distance which could be analyzed by the CAGE framework, which stands for cultural, administrative, geographic, and economic distance. Companies start expanding through simple business agreements and once it developed itself enough it could involve in complex business models such as FDI. The model has been revisited in 2009, which includes the importance of relationships among companies within the same network. The network approach explains in more detail how important networks are for internationalization. Companies could gain foreign market information and knowledge through networks which in turn will help its international extension. Expansion in a foreign market could be done through different entry modes. The eclectic paradigm from Dunning (1988) analyzes the determinants of outward FDI. According to OLI framework a company could engage and increase its international activities when a company meets ownership, location, and internalization advantages. The strength of each advantage determines the choice of the market entry mode. The eclectic paradigm is a further development of the internalization theory from Dunning (1993), which is inspired by the transaction cost theory developed by Coase (1973). This theory helps to explain why companies expand abroad and outsources activities to the external environment. The transaction costs theory is a broadly and commonly used theory to decide on the foreign market entry mode. A distinction could be made between equity and non-equity entry modes. Export and licensing are examples of equity modes, whereas joint venture and wholly owned subsidiary are non-equity entry modes. Each entry mode differs per level of control, risk and return. The last theory discussed in this thesis concerns choosing the most suitable entry mode. In order to find the most appropriate entry mode, companies should decide what its motives are for expanding abroad. Dunning (2000) has strengthen the eclectic paradigm with four motives for FDI. The motives could be divided into four categories: market seeking, resource seeking, efficiency seeking and strategic asset seeking. These theories summarized should give more insight into the internationalization process of SMEs in the fashion industry.

In order to find out why certain companies chose a particular internationalization model and to discover how the use of this model influences its globalization, a multiple case study will be set up. First the cases will be discussed and analyzed separately, and later in this thesis a cross-case analysis will be presented. This case study will compare different fashion companies and its internationalization models. The main objective of this case study is to find the answer to the following research question:

Is there any pattern in the internationalization process of SMEs in the fashion industry? What are the similarities and differences?

In order to answer this question successfully, the paper consists of multiple sub questions which are formed by the existing literature of internationalization. The following sub questions will be answered before answering the research question:

 Do the SMEs in the fashion industry have an internationalization strategy?  Which entry mode is used, and why?

 How do the SMEs in the fashion industry select a foreign market or host country?  What are the motives behind the internationalization process?

 To what extent does network affects the internationalization process?

3.

METHODOLOGY

This section will first start with a discussion on the research design and the chosen context of this research, followed by a discussion on the case selection. Then this section will continue to present the data collection and the analysis process. Finally, concluding remarks will be made together with the trustworthiness of the thesis.

3.1 Research Design

Internationalization has been a common topic in research. However, there are several gaps in the literature regarding the internationalization process of SMEs in the fashion industry. The goal of this research is to investigate the internationalization process of SMEs in the fashion industry and to discover how different factors have affected the host country selection, the entry mode choice, motives for expansion and other aspects for internationalization. This research requires an in-depth analysis of multiple fashion companies and its behavior towards internationalization to answer the research question and its sub questions. In order to investigate this, a qualitative research approach is adopted. The aim of the qualitative method