Following in Partners’ Footsteps: An Uncertainty‐Reduction Perspective on Firms’ Choice of New Markets

• Author: Young‐Choon Kim,Alex Makarevich
• Date: 01 November 2019
• DOI: http://doi.org/10.1111/joms.12346
• Published date: 01 November 2019

© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies

Following in Partners’ Footsteps: An Uncertainty-

Reduction Perspective on Firms’ Choice of New

Markets

Alex Makarevich and Young-Choon Kim

Ramon Llull Uni versity, ESADE Bus iness School; UNIST Scho ol of Business Administrat ion

ABST RACT In this paper, we develop a new perspec tive on what determines firms’ choice of

new markets for entry. First, d rawing on the open-system theoretica l tradition and literature

on inter-organi zational networks, we advance and empirica lly test the proposition that fi rms

tend to enter new markets to which they a re connected by partnership ties. We then show that

this network inf luence is filtered thr ough the struct ure of firms’ network connections to new

markets and f irms’ experience. Specif ically, we find that multiplicity of con nections to new

markets, as well a s the extensiveness of firms’ exp erience and its relevance to new markets

weaken the effect of network t ies on firms’ choice of new markets. The result s of this study

indicate that f irms’ choice of new markets for entry is a nuanced process t hat is affected by the

interplay of fi rms’ collaborative ties, the str ucture of their network, and fi rms’ internal

capabilities. We test our hy potheses in the empir ical context of the U.S. venture capital ( VC)

industry us ing panel data over a 23-year period and f ind broad support for them.

Keywo rds: collaborative networks, f irm experience, new market choice, uncer tainty

reduction, venture capital syndicates

INTRODUCTION

Firms continuously seek new opportun ities in new product and service markets, ge-

ographies, technological doma ins and industries (e.g., George et al., 2008; Helfat and

Lieberman, 2002; K ing and Tucci, 2002; Klepper and Simons, 200 0; Kotha et al., 2011,

Sidhu et al., 2007). As they do so, they are usua lly faced with a decision regarding wh ich

new markets to enter. How do firms make thi s choice? This question is fundamental

because it determines how fir ms diversify and internationa lize and may ultimately de-

termine whether they succeed or fail in t he new markets. However, our understanding

of how firms choose new markets for entry is incomplete.

Address for re prints: Ale x Makarevich, E SADE Business School, Av. Torreblanca, 59, 08172 Sant Cugat,

Spain (alex.m akarevich@es ade.edu).

Journal of Man agement Studi es 56:7 November 2019

doi :10.1111/jom s.123 46

Following in Pa rtners’ Footsteps 1315

© 2018 John Wiley & Sons Lt d and Society for the Adva ncement of Management Stud ies

A diverse range of theories have been brought to explain factors affecting market

entry (e.g., Zachary et al., 2014). In terms of overarching theoretical explanations of

firms’ choice of new markets, however, two perspectives have been influential in the prior

literature. The resource-based theoretical tradition postulates that firms rely on their

internal resources and, therefore, opt for closely related new markets where they can

successfully apply their existing resources and capabilities (e.g., Chang, 1996; Chatterjee

and Wernerfelt, 1991; Erramilli, 1991; Gruber et al., 2013; Helfat and Lieberman, 2002;

Murthi et al., 1996). A second perspective proposes that firms imitate the behaviour

of other firms and engage in herding behavior (e.g., Baum et al., 2000b; Greve, 1995;

Haunschild and Miner, 1997; Henisz and Delios, 2001), either yielding to institutional

pressures (DiMaggio and Powell, 1983) or seeking to capitalize on the successful strate-

gies of other firms. Thus, firms may ‘follow the leader’ (Haveman, 1993) or competitors

(e.g., Cho et al., 1998) into new markets.

While undoubtedly valuable for understanding firms’ selection of new markets, these

perspectives do not account for the possibility that firms may also choose new markets

because the market-specific uncertainty in those markets is lower, compared to other po-

tential new markets. This is a perspective we develop in this study. In particular, we focus

on firms’ network ties as important sources of external information about new markets

that reduce market-specific uncertainty.

Prior research on market entry largely ignored networks and other resources situated

outside firms’ boundaries (Helfat and Lieberman, 2002; Klepper and Simons, 2000;

Lee, 2007; Lieberman and Montgomery, 1988, 1998). The few existing studies on net-

work effects in market entry indicate, however, that network ties play an important role.

Coviello and Munro (1997) showed that social networks mediate the relationship be-

tween internationalization and performance in small and medium-sized companies; Ellis

(2000) found that antecedent social ties help firms to identify exchange partners in new

markets; Lee (2007) showed that cohesive networks increase firms’ speed of entry into

emerging markets; Zhou et al. (2007) found that social networks mediate the relation-

ship between firms’ internationalization and performance; and Tuschke et al. (2014)

showed that in- and out-going board interlock ties vary in their effects on entry into new

emerging markets. While these studies provide valuable insights into different aspects of

network effects in market entry, there is a lack of a theoretical explanation for why firms

rely on and benefit from network ties in market entry. Neither the resource-based nor

the imitation theoretical perspectives provide such an explanation, because network ties

represent resources located outside firms’ boundaries and their effects uncovered by the

extant studies are not based on imitation. This theoretical deficit needs to be addressed

promptly if research is to produce an encompassing and realistic picture of the market

entry phenomenon.

A second major gap in our understanding of the role of networks in new market entry

concerns the interplay of network ties and contextual factors that affect new market

choice. Market entry is a complex process (Zachary et al., 2014) that is influenced by a

variety of factors that may interact with, complement or substitute for one another in

affecting new market entry. While prior studies on external influences on firms indicates

that such influences are filtered by firms’ local context (e.g., Chung and Kim, 2018;