Export Channel Integration Decisions of Small and Medium-sized Enterprises. A Literature Review

List of Content

List of Figures

List of Tables

1 Introduction

2 Definitions
2.1 Exporting
2.2 Definition and Characteristics of Small and Medium-Sized Enterprises
2.3 Theories Explaining Export Channel Choice of Small- and Medium-Sized Enterprises
2.3.1 Transaction Cost Economics (TCE)
2.3.2 Internationalization Theory (Uppsala Model)
2.3.3 Resource-based View (RBV)
2.4 Minor Theories
2.4.1 Production (Cost) Theory
2.4.2 Agency Theory
2.4.3 Eclectic Paradigm Model
2.4.4 Institutional Theory
2.4.5 Psychic Distance

3 Discussion
3.1 Dependent Variables [Direct (integrated) vs. Indirect (independent)]
3.2 Independent Variables
3.2.1 External Uncertainties
3.2.2 Asset Specificity
3.2.3 Channel Volume and Export Intensity
3.2.4 Existing Channel
3.2.5 Market Similarity and Industry Characteristics
3.2.6 Firm Size and Characteristics (Sales/Employees)
3.2.7 Internal Uncertainties
3.2.8 Decision Makers
3.2.9 International Experience
3.2.10 Customer Service (Intensity) and Non-Selling Activities
3.3 Control Variables
3.3.1 Distribution of Multiple Product Lines
3.3.2 Distribution Costs
3.3.3 Ownership Mode
3.4 Moderator Variable
3.4.1 Market Power of the Firm

4 Conclusion and Implications

References

Appendix

Excel list

List of Figures

Figure 1 Differences between direct and indirect channel structure

Figure 2 Overview of the Importance of the independent Variables

Figure 3 Perceived Independent Key Variables

List of Tables

Table 1 Overview of TOP3 Theories

Table 2 Overview of previous theoretical research

Table 3 Overview of the Minor Theories

1 Introduction

“The opportunities for channel researchers to contribute to knowledge creation in the marketing discipline and, at the same time, affect business practice are almost endless” (Frazier 1999, p.238). While the theoretical understanding of internationalization and international marketing strategies of large firms has been the focus of research since a long time, attention has been given only recently to investigate the same questions for small and medium-sized enterprises (SMEs). Exporters need to question their export channel structure every day in order to stay competitive. Should the product be distributed directly or indirectly? Which way is more efficient, effective and/or profitable? Should export channels be changed? (John & Weitz 1988, Huan & Hsu 2003). The decision on channel integration, the extent to which the export channel is performed by the exporting firm without intermediaries, is extremely important, as it affects revenues, investments and costs (Shervani, Frazier & Challagalla 2007). As a research field, export channel structure is vital for two groups. First, there are scholars trying to find evidence for applied theories, and second, managers attempting to reduce risks and improve export performance. Wrong decisions in export channel choice may incur high costs and long-lasting difficulties, particularly for SMEs. These firms, if active in international exporting, tend to rely on one or few export channels. At the same time, SMEs operate the majority of export channels worldwide and are more inclined to switch their export channels than multinational firms.

The first export channel research was carried out in the 70s. Since then considerable progress has been made. Especially in the late 80s and early 90s researchers have focused on the structure of international distribution channels with increasing attention to SMEs. Several theories (Transaction Cost Economics (TCE), Internationalization Theory, and Resource-based View (RBV)) have been developed and applied to assess and explain the reasons of different export channel integration strategies. Within the research scope, although TCE is not complete in explaining the different strategies with regard to the degree of channel integration, it has been by far the most popular theory applied to this question. The results of the relevant empirical studies point out that channel structure control, knowledge and experience are the most important factors (see Klein, Frazier and Roth. 1990, Anderson 1987, Frazier 1999, Li 2010).

However, the channel integration research area still remains very fragmented and topics unsolicited, although research in this field has made substantial contributions to explanations of export channel choice. In particular, independent variables show different correlations (positive and negative) to the corresponding dependent variable. Consequently, the overall understanding of the phenomenon is still in need of more empirical researches.

The following bachelor thesis will provide a literature review, i.e. a systematic identification, evaluation and syntheses of completed articles composed by researchers and scholars (Fink 2005) of the theories explaining export channel choice of small and medium sized enterprises. It attempts to show consistencies and detect differences among the articles and their results, find gaps in the literature and identify relationships of the findings. Conflicting results in terms of significance will be evaluated and discussed and will thus provide a basis for future research.

Derived from the literature, the motivation for the thesis is to identify the factors relevant for SMEs and their selection of the export channel. On grounds of the growing importance and attention of export channel choice research, a fragmented field, the thesis attempts to serve as a literature review and answer the following research questions:

Which theories exist that explain SMEs’ export channel decisions?

Which are the most important determinants of SMEs’ export channel decisions?

The structure of the thesis is divided into two main parts:

1. After an explanation of exporting and SMEs, a theory section will provide information about the existing theories and their application.
2. Following the theory, a discussion about empirical findings in the context of peer-reviewed articles will evaluate the current state of research, compare results, and imply new opportunities in the conclusion.

Research for scholarly articles has been conducted via the ProQuest and EBSCO access of the WU. Definitions and other explanations were searched for in various libraries. The base of the discussion part consists of 20 articles with empirical studies and 10 theoretical articles of peer-reviewed journals. The focus lies on the empirical findings and their consistency and disparities. Furthermore, the majority of articles found cover TCE, whereas less articles deal with the internationalization theory and least approach the resource-based view. A targeted search was conducted for articles composed after the 1980s. The key words export channel integration, export channel choice and export channel selection illustrate the search strategy. The primary criterion for selecting the articles was their attention to channel integration.

The choice between an integrated and a non-integrated (independent) distribution channel structure is a complex issue. It is impossible to capture all relevant factors which have an influence on the decision makers, but studies have shown that some causes are common among the investigated companies. Exporters may pursue different individual combinations of the features of channel structure and design distribution channel to their specific situation. The paper is an attempt to identify all relevant factors and their significance within the theories.

2 Definitions

2.1 Exporting

Exporting is a discipline of both physical goods and intangible services. Cavusgil, Knight and Riesenberger (2008, p.5) define it as the “Sale of products or services to customers located abroad, from a base in the home country or a third country”.

Researchers have attempted to establish different classifications of exporting. The most basic distinction can be made between direct (integrated) and indirect (independent) exporting. The following table lists several different types of classifications of exporting:

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Figure 1 Differences between direct and indirect channel structure

There are also other non-dichotomous classifications of export channels. Klein and Roth (1990), for example, suggest four types of channel structure modes according to the degree of vertical integration (market commitment): 1. Market mode, 2. Intermediate mode, 3. Hierarchy (domestic) mode, 4. Hierarchy (foreign) mode.

Another classification of export channels, in the form of integrated and independent modes, exists. A channel structure is defined as direct (integrated) if the distribution (exporting) takes place via a company-owned distribution channel (company sales subsidiary or company owned distribution division). On the other hand, it is termed indirect (independent) if distribution is handled via an outside sales agent or distributor (Li 2010). The location of execution of the several distribution steps does not matter. This broad classification of two extremes seems appropriate and relevant as it describes a company’s forward integration into the distribution channel most objectively and therefore reasonably. In particular, it reveals who performs the steps of certain marketing and distribution functions.

Direct and indirect exporting can be combined and are not exclusive. Many companies use different approaches for different countries. According to Cavusgil et al. (2008), the key considerations are: 1. Resources (time, capital, and managerial expertise), 2. Strategic importance of the foreign market, 3. Nature of the firm’s product or service and 4.The availability of distribution channel intermediaries.

In general, companies pursue exporting for one or more of the following reasons: 1. Seek opportunities for expansion through market diversification, 2. Earn higher margins and profits, 3. Gain new ideas about products, services or business methods, 4. Better serve key customers that have relocated abroad, 5. Sourcing flexibility, 6. Gain access to preferable factors of production, 7. Develop economies of scale, 8. Confront international competitors and invest in potentially rewarding relationships with foreign business partners (Cauvsgil, Knight and Riesenberger 2008).

Exporting enables firms to diversify their customer base and simultaneously reduce their dependence on the home market. Furthermore, companies can stabilize fluctuation in their sales associated with certain markets and leverage their capabilities (business model, production efficiency, etc.) on a global scale or those of business partners in the distribution channel (Cauvsgil, Knight and Riesenberger 2008).

2.2 Definition and Characteristics of Small and Medium-Sized Enterprises

Small and medium sized enterprises are defined in Europe as companies with less than 250 employees, with annual sales of below €50m and with total assets of less than €43m. In North America, the characteristics of an SME differ slightly as it has to have less than 500 employees (Mugler 2008).

Small- and medium-sized enterprises account for a significant portion of international trade. They represent the majority of firms active in international business (Cauvsgil, Knight and Riesenberger 2008). In recent years, a new class has emerged due to the ever increasing globalization, the international small- and medium-sized enterprises (ISME). The importance of international trade for SMEs is illustrated by the increasing number of internationally active firms in this category. (Knight, p.490 in SAGE P. of Int’l Marketing)

Every firm is coined by its founder or entrepreneur. SMEs tend to be more shaped to the control of individuals than large multi-facetted organizations, e.g. multinational enterprises (MNEs). The smaller organizations are less formalized or structured. Most of the time, individuals provide personal relationships to customers, suppliers or other important business partners.

In terms of orders, SMEs are more likely to produce customized rather than standardized products or services. Connections between the management board and employees are tight, fast and informal. The firm is flexible in terms of adjustments to the environment or business opportunities and can therefore respond quicker. The company has a minor market share and is independent (Mugler 2008, Cauvsgil, Knight and Riesenberger 2008).

What distinguishes SMEs form large multinational enterprises are their managerial style, ownership, interests, behavior and independence (Coviello & McAuley 1999). In addition, limited resources (managerial, financial, information, etc.) may direct them to follow different strategic decisions than MNEs would (Brouthers & Nakos 2004).

Many SMEs strive to export in order to achieve one or more of the following goals:

(1) improve their financial position through more sales revenues,
(2) experience valuable marketing knowledge,
(3) back transfer technologies and knowledge from foreign markets and
(4) exploit existing capacities (Czinkota & Ronkainen 2006 in Katsikeas et al. 2009).

If the decision-makers of an SME plan to differentiate the strategy through internationalization, according to several theories, they most probably choose direct or indirect exporting, as this is less risk-intense than foreign direct investment (FDI).

2.3 Theories Explaining Export Channel Choice of Small- and Medium-Sized Enterprises

Channel strategy is the key to achieve substantial export marketing goals (market share, long-term profitability, etc.) (Chan & Mun 1995). There are several theories which attempt to explain the reasons for the export channel choice of SMEs. The applied theories can propose different strategies, but the general consensus is that SMEs tend to export more reactively instead of proactively, meaning that competitors’ actions matter significantly (Leonidou et al. 2007 in Katsikeas et al. 2009). For firms which decide to expand their businesses abroad, exporting often represents the first stage in the internationalization process.

The most popular theories in export channel integration research are TCE, internationalization theory and the resource-based view. The following table provides a short explanation and overview of those TOP3 theories in export channel integration research:

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Table 1 Overview of TOP3 Theories

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Table 2 Overview of previous theoretical research

2.3.1 Transaction Cost Economics (TCE)

As a widely used concept for export channel choice explanations, TCE has been a major base for channel structure investigations. In its core, it states that the costs linked to setting up and monitoring the distribution channel (screening and selecting distributors, agents, etc.) (ex-ante) and the governing of business relations to partners are transaction costs (ex-post) (measuring the performance, contracting) and part of a comparative analysis, called transaction cost economics, occasionally called transaction cost analysis or transaction cost theory (Williamson 1979, p. 233, Frazier 1999). Its premise is to lower costs by internalizing activities in which an organization has a cost advantage and rely on the market via market exchange for activities in which it does not have an advantage, but external providers do (Klein, Frazier and Roth., 1990 in Li 2010). As a consequence, TCE logic minimizes transaction costs through efficient organizational configuration (Williamson 1979, Bello & Briggs 2009, p.402 in SAGE P. of Int’l Marketing).

“Transaction Cost Theory has been widely used to study entry mode selection” (Brouthers, Nakos 2004, p.229). According to Brouthers & Nakos (2004), TCE proved to be also effective in explaining SME channel structure mode choice with a focus on exporting. Therefore, TCE represents a reasonable model to explain the export channel choice of SMEs. It enables decision-makers to analyze the impact of internalization or market-exchange. Concerning the market-exchange, contract renewals cause less transaction costs than first-time contracting (Williamson 1979, p.240).

Klein, Frazier and Roth (1990) claim that asset specificity and external uncertainty are critical factors in the transaction cost theory. Both factors make market exchange difficult as they can give rise to high transaction costs (Li 2010, Klein, Frazier and Roth 1990)

Williamson states that (1) uncertainty, (2) durable investment degree and (3) transaction frequency are the three critical factors of opportunism. Hereby, uncertainty of the environment can be characterized as the most important dimension, investment specificity as the second most important, and frequency as the least important (see Williamson 1979, p. 239).

Asset Specificity and Safeguarding

Asset specificity refers to specialized investments which have to be protected as they play a unique role for the functioning of the firm. Specific investments can be intangible, physical or human.

Intangible asset specificity consists of documents, e.g. patents, which secure technology, R&D or entire business models. Company policies and promotional activities can also be intangible assets. Human assets refer to the employees, their skills, experience and relationships (focus: salesperson), whereas physical asset specificity refers to special equipment or other significant capital expenditures. Knowledge-based assets can be found in either intangible or human assets. Safeguarding requires an increased governance of the distribution channel structure (Williamson 1979, p. 248).

As asset specificity increases, the hierarchical channel structure mode is more and more installed by the principals (Klein, Frazier and Roth 1990). This means that the channel structure shifts from independent to integrated exporting, meaning that asset specificity is positively related to higher control. Since TCE suggests that increasing control means increasing costs in terms of the commitment of resources, companies increasingly integrate the export channel as asset specificity is increasing.

In contrast to specific transactions, highly standardized transactions do not need governance of the distribution channel. In this case, decision-makers prefer a market exchange mode.

External Uncertainty

External uncertainty refers to unanticipated changes surrounding the exchange in the export-channel structure (Williamson 1979). Since unexpected environmental changes (e.g. political instability, economic fluctuation or market uncertainty) in the future cannot be contracted for (in advance), TCE logic implies integrated (high-control) governance, as hierarchical structure mode permits adjustments at minimal transaction costs (Klein, Frazier and Roth. 1990, Bello/Briggs 2009, p. 402 in SAGE P. of Int’l Marketing).

In particular, TCE can play an important role for the development of an SME. Above all, fixed transaction costs can influence SMEs which do not have as many cost units as MNEs and therefore less fixed costs degression. In general, SMEs face higher costs of legal enforcement and prevention causing disadvantages in creating business relationships.

In the long view, TCE proposes to convert single market transactions (and the adherent “variable” costs) into “fixed” continuous transactions through cooperation. This also encourages lower costs, trust and common goals with partners (Rößl, p.80 1996 in Mugler 2008, Mugler 2008). According to Eramilli & Rao (1993) cost-control logic becomes higher when: 1. Cost of integration is low; 2. Non-TCE benefits of control are considered; 3. Ability to integrate is high.

Frequency

In the light of TCE, transaction frequency has an impact on transaction and production costs. “In general, firms have an incentive to internalize production with increasing transaction frequency” (Williamson 1987). Implicitly, companies msust determine whether it is more economically reasonable to externalize certain high-volume transactions, especially in the age of the internet.

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