Internationalization and network strategies: Taiwanese firms' foreign direct investment in China and the U.S.A.

• Author: Tseng, Chi-Hsing

INTRODUCTION

Conventional theories view foreign direct investment (FDI) as an incremental progress model. However, over the last decade, several studies have focused on firms with such labels as International New Ventures (INVs), or Born Globals. Such firms engage in significant international activity soon after they are established, rather than incrementally. Some researchers consider this trend offers a strong opposition to the traditional models of internationalization. Some studies conclude that the stage models fail to provide an appropriate explanation as to why such firms operate on the international market rather than just their home markets (e.g., Aspelund and Moen, 2001; McDougall, Shane, and Oviatt, 1994; Oviatt and McDougall, 1997). Furthermore, some empirical studies indicate that the trend of gradual development among the small and medium-sized exporting firms may also be questioned (Moen, 2002; Moen and Servais, 2002). However, by applying the Johanson and Mattsson's (1988) network approach, Madsen and Servais (1997) suggest that the Born Globals trend does not represent any revolutionary pattern of internationalization and may behave according to an evolutionary framework. Similarly, Coviello and Munro (1997) claim that the internationalization process of firms is just an accelerated version of the stage model perspective, and is driven by a set of formal and informal network relationships. Formal network relationships include those co-operative business relationships with partners, such as strategic alliances and joint ventures. Informal network relationships include those social relationships with relevant organizations, such as informal connections and friendships. These network relationships will impact on the selection of a foreign market and mode of entry. There are an increasing number of researchers who apply the network theory to explore the FDI of small and medium-sized firms, and the internationalization process of Born Globals, from their inception. It becomes important to explore the relationship between internationalization models and network strategies.

Tracing the path of Taiwan's economic development reveals that the amount of FDI by Taiwanese corporations has grown enormously over the last decade. Among these foreign investment countries, China and the U.S.A. represent the most popular host countries. However, these international firms often possess limited capabilities and management resources. Furthermore, many small and medium-sized firms have gone abroad and played significant roles in foreign investments. On the other hand, an increasing number of Taiwanese firms are international from the outset. For instance, many Hi-tech firms in Taiwan start out with a pro-active international strategy. Therefore, it is worthwhile to focus on cases of Taiwanese FDI to investigate the phenomenon of Born Globals, and their corresponding international network strategies.

Drawing from the concept of internationalization networks, this study explores the relationship between the internationalization process and the adoption of network strategies. The study also attempts to determine whether there is a difference in the network strategies adopted when firms invest in China or the U.S.A. This study compares the two types of internationalization process - Born Global and Incremental - and then proposes two kinds of network strategies. A survey was conducted, to examine the influence of the internationalization process in association with a foreign investment country, on the adopted network strategies.

LITERATURE REVIEW AND HYPOTHESES

BORN GLOBAL PHENOMENON AND THE CHALLENGE TO EXISTING INTERNATIONALIZATION THEORIES

Recently, a stream of research has investigated the trend of newly established firms involved in significant international activities. Different terms have been used to consider the same trend. For example "International New Ventures" (McDougall, Shane, and Oviatt, 1994), "Born Globals" (Rennie, 1993; Knight and Cavusgil, 1996; Madsen and Servais, 1997), "Instant Internationals" (Preece, Miles, and Baetz, 1999) and "Global Start-ups" (Jolly, Alahuhta, and Jeannet, 1992). Despite the differences in terms and definitions, the essence of Born Globals is that these firms start their international activities very soon after they are established. Oviatt and McDougall (1994) define an INV as a business organization that seeks to derive significant competitive advantages through the use of resources and the sale of products in numerous countries. Born Globals, by theoretic definition, must be international from the beginning. That is a stringent research criterion. Scholars are rarely present to observe the initial set-up. One solution is to operationally define a Born Global as a firm that makes observable foreign commitments (i.e., foreign investments) within a conventionally accepted short period shortly after its inception. While the selection of any particular period is somewhat arbitrary, the first six years appear to be the crucial period during which a firm's survival is determined for the majority of companies ("The State of Small Business", 1989). In addition, if internationalization occurs during this period, it is likely to have occurred during the venture's formative stage (Oviatt and McDougall, 1997). Some scholars have used different cutoff points. However, Bantel (1998) argued that by the age of five many start-up firms having failed to build a strong market position become extinct. Older companies (up to the age of 12) have overcome the "newcomer" liability but have not yet reached the maturity of established firms. Therefore, there is a growing consensus that firms six years and younger are Born Globals (Brush, 1995, Zahra, Ireland, and Hitt, 2000).

As the phenomenon of Born Globals becomes more popular, recent research (Oviatt and McDougall, 1997) seems to refute, rather than support conventional theories about the internationalization process. According to the internationalization process theories, firms often expand internationally like "rings in the water," trying to gain market knowledge gradually, and hence reduce the uncertainty and risk over time for each country's market (Johanson and Vahlne, 1977). Several stage models of early firm internationalization have appeared (e.g., Bilkey and Tesar 1977; Czinkota, 1982; Reid, 1981) and have been comprehensively evaluated (Andersen, 1993; Leonidou and Katsikeas, 1996). Andersen (1993) labels them as "The Uppsala Internationalization Model" and "The Innovation-Related Internationalization Models". These models appear to demonstrate how firms which become international in a slow and incremental manner may lack knowledge of foreign markets have a strong aversion to risk a highly perceived uncertainty, or similar factors. However, researchers have argued that such stage models are too deterministic and of limited in value (e.g., Reid, 1983; Turnbull, 1987).

In their study of 24 International New Ventures, McDougall, Shane, and Oviatt (1994) found that none of them followed the incremental stages of internationalization. They concluded that the stage models failed to explain how firms operate on international markets in ways other than in regard to their home markets. An increasing number of studies appear to cast doubt on the applicability of stage models (e.g., Andersen, 1993; Sullivan and Bauerschmidt, 1990; Turnbull, 1987). Oviatt and McDougall (1994, 1997) further point out, that recent research challenges the internationalization process theory. Some empirical studies also indicate that the trend of a gradual international development among small and medium-sized exporting firms may be questioned (Moen, 2002; Moen and Servais, 2002).

NETWORK THEORY AND NETWORK STRATEGIES

The network theory was derived from social psychology and the inter-organizational theory. Generally defined, a "network" describes the ties between organizations. The network concept was initially used to describe the social relationships among individuals (e.g., Laumann, Galskewicz, and Marsden, 1978; Tichy, Tushman, and Fombrun 1979). Later, as co-operative strategies in business became more common, researchers applied the network concept to strategic management strategies (e.g., Jarillo, 1988; Johanson and Mattsson, 1987; Thorelli, 1986). In essence, network strategies refer to any formal co-operative strategies that can enhance the competitive advantage of network members. Regarding the nature of network relationships, this study concludes that there are two kinds of network strategies:

* Business network strategies--from the view of an international network, foreign investment is seen as an extension of the domestic network as well as a channel for acquiring important foreign resources. The strategic linkage theory also suggests that, in response to competitive global pressures, firms can establish a link with others of corresponding capability. In so doing, they can acquire the necessary strategic capabilities; or they can join with other firms having similar capabilities and incorporate each other's internal resources to strengthen their mutual capabilities (Chen and Chen, 1998a; Nohria and Garcia-Pont, 1991). Bartmess and Cerny's (1993) capability-centered approach suggests that corporations can obtain a permanent competitive advantage through the formation of global network capabilities. Therefore, FDI is no longer just the monopoly of the giant multinationals originating in advanced countries, but can also be viewed as an investor's attempt to link international markets and resources (Chen and Chen 1998b; Nohria and Garcia-Pont 1991; Porter and Fuller 1986; Richardson, 1972).

* Social network strategies--Gulati, Nohria and Zaheer (2000) introduce the notion of "strategic networks," which captures the impact of social networks on strategy. Hung (2002) argues that, rather than accepting a strategy as simply market given or...