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Building capabilities for international operations through networks: a study of Indian firms

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Abstract

In this study we seek to explain how firms from emerging markets build capabilities to operate in international markets through learning from parental networks. The building of these capabilities is of particular interest, as firms from emerging markets may not necessarily possess the monopolistic advantages commonly referred to in IB literature, which allow a firm to succeed in international markets. Using lagged cross-sectional regression models on a sample of 794 Indian firms, we found that firms draw on the international experience of their parental and foreign networks to build such capabilities. Findings also indicate that network scope is beneficial for increasing exposure to international markets only in the case of networks that are either small or medium sized. Additionally, we found that firms lacking market power in their home market benefit through foreign partnerships when internationalizing operations.

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Notes

  1. Eriksson et al. (1997) argue that knowledge consists of external and internal components. The external component is made of two sets of knowledge: ‘foreign business knowledge’ (knowledge of clients, markets and competitors); and ‘institutional knowledge’ (knowledge of foreign institutions, governments, rules, norms and values). They refer to the internal component as ‘internationalization knowledge’ (a firm's capability to engage in international operations). To help differentiate between the two types of knowledge, Hadley and Wilson (2003) refer to the former type of knowledge capture as the ‘know-why’ aspect and the latter as the ‘know-how’ aspect of knowledge.

  2. One suggestion posed by the Uppsala model is to acquire such knowledge from outsiders, i.e., through mergers and acquisitions or hiring of talent from the market (Johanson and Vahlne, 1977; Johanson and Mattsson, 1988; Barkema and Vermeulen, 1998). While this option is feasible to a certain extent in the case of business and institutional knowledge, internationalization knowledge based on institutional history and memory stored in a firm's routines and structures is hard to decipher (Nonaka, 1991). Moreover, acquisitions in foreign markets are usually expensive and beyond the reach of most emerging market firms. Acquisitions are also characterized by many pitfalls wherein firms overpay for the acquired assets, face paralysis due to organizational cultural dissimilarities, acquire undesirable assets associated with the transaction, and fail to successfully integrate operations (Balakrishnan and Koza, 1993; Hennart and Reddy, 1997). Obviously, a less costly and risky approach for emerging market firms is the hiring of individuals with relevant expertise. While the acquisition of such talent lies within the realm of possibilities for emerging market firms, its efficacy is likely to be limited, as experience cannot be transmitted (Johanson and Vahlne, 1977). Additionally, firm knowledge and capabilities embedded in organizations cannot be replicated through the hiring of one or more individuals, as such knowledge is path-dependent, socially complex, and causally ambiguous (Barney, 1991; Nelson, 1991).

  3. This law states that ‘The larger the variety of actions available to a system, the larger the variety of perturbations (input variations) it is able to handle’ (Page 1: Adapted from Heylighen and Joslyn, 2001).

  4. Another potential solution for correcting endogeneity is to use a two-stage modeling methodology. However, that approach is not adopted here owing to a lack of supporting literature on variables identifying the internationalization equation in the structured model setting.

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Acknowledgements

The authors are thankful for the suggestions of Ivan Abel and Chris Anderson during the earlier phases of this study. We also thank the Special Issue editors and reviewers for their suggestions on improving the manuscript.

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Authors and Affiliations

  1. Management and Qualitative Methods Department, College of Business, Illinois State University, Normal, IL, USA

    B Elango

  2. Yonsei School of Business, Yonsei University, Seoul, Korea

    Chinmay Pattnaik

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  1. B Elango
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Correspondence to B Elango.

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Accepted by Rosalie L Tung and Yadong Luo, Departmental Editors, 13 November 2006. This paper has been with the authors for two revisions.

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Elango, B., Pattnaik, C. Building capabilities for international operations through networks: a study of Indian firms. J Int Bus Stud 38, 541–555 (2007). https://doi.org/10.1057/palgrave.jibs.8400280

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