1 s2.0 S1090951621000778 Main

Journal of World Business 57 (2022) 101266
Contents lists available at ScienceDirect
Journal of World Business

journal homepage: www.elsevier.com/locate/jwb
Foreign market entry knowledge and international performance: The

mediating role of international market selection and network capability
Oscar Martín Martín a, c, 1, Sylvie Chetty c, d, e, 1, Wensong Bai b, c, *, 1
a
Institute for Advanced Research in Business and Economics (INARBE) and Department of Business Administration, Public University of Navarre, Arrosadia Campus,
31006 Pamplona, Navarre, Spain
b
Department of Innovation, Entrepreneurship and Investment Management/Center for Vietnamese Studies, Zhejiang University of Technology, China
c
Department of Business Studies, Uppsala University, Box 513, 75120 Uppsala, Sweden
d
School of Business, Economics & Law, Gothenburg University, Gothenburg, Sweden
e
Department of Business, University of Eastern Finland, Kuopio, Finland
A R T I C L E I N F O A B S T R A C T
Key words: While the literature emphasizes the importance of knowledge and foreign market knowledge for international
Foreign market entry performance, it is unclear about the intervening/mediating relationships. From a knowledge-based view and
International market selection network approach, we posit that previous foreign market entry (FME) knowledge can be used in the selection of
Business relationships
international markets and to enhance network capabilities and international performance. We test the re
Business networks
lationships between these constructs in a sample of 140 Australian SMEs. We contribute to the international SME
Network capability
International performance literature by explaining important mechanisms through which FME knowledge affects SMEs’ international
performance. International market selection and network capability mediate its relationship with international
performance.
1. Introduction (cf., Ciabuschi, Forsgren, & Martín Martín, 2011) where difficulties to
transfer information and knowledge from subsidiaries to HQs and de
Firms possessing international market experience and knowledge are cisions from HQs to subsidiaries call for a better-grounded view of the
expected to follow a less uncertain internationalization process, and to modern MNE. Although SMEs are different in structure (e.g., size and
commit to international markets (Johanson & Vahlne, 1977; 1990). ownership) and behave differently (e.g., flexible) compared to MNEs
Previous foreign market entry (FME) knowledge constitutes a critical (Knight & Liesch, 2016), we purport internationalizing SMEs are
subset of international market experience and knowledge when SMEs another suitable context where we need to understand the relevance of
face new FME decisions. FME knowledge is expected to be reflected in international market knowledge, in particular the role of FME knowl
the extent to which early FMEs have been useful in subsequent FMEs in edge, and business networks.
aspects such as understanding the market, learning from previous op As regards the network approach, an underlying assumption is that
erations and developing new technical knowledge. FME knowledge is markets are borderless and that internationalization occurs in a network
important given that it not only implies less uncertainty in subsequent setting (Johanson & Vahlne, 2003; 2006; 2009). The customer, and not
FMEs, but it can also benefit SMEs in terms of FME success (Chetty, the country, is the most appropriate unit of analysis in many industries
Karami, & Martín Martín, 2018). (Andersen & Buvik, 2002). As a result, the traditionally country-based
SME internationalization research in the last 20 years has moved international market selection approach may be irrelevant in this
from a more rationalistic perspective where market knowledge plays a context. Being an insider in a network allows firms to discover and
salient role to a more pragmatic approach in which firms’ relationships create opportunities (Chetty et al., 2018; Knight & Liesch, 2016) more
and ties and firms’ position in business networks are seen as the main effectively than the pursuit of what has been seen as theoretical op
drivers of internationalization (Johanson & Vahlne, 2003; 2006; 2009). portunities (Johanson & Vahlne, 1977; 2009) based on blurred market
The rationality perspective has been questioned in the context of MNEs potential knowledge. Scholars have considered network (Manolova,
* Corresponding authors.
E-mail addresses: [email protected] (O. Martín Martín), [email protected] (S. Chetty), [email protected] (W. Bai).
1
All authors contributed equally to this manuscript.
https://doi.org/10.1016/j.jwb.2021.101266
Received 21 January 2021; Received in revised form 8 September 2021; Accepted 10 September 2021
Available online 2 October 2021
1090-9516/© 2021 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
O. Martín Martín et al. Journal of World Business 57 (2022) 101266
Manev, & Gyoshev, 2010; Walter, Auer, & Ritter, 2006; Young, Dimi Holmström Lind, & Johanson, 2016; Falahat et al., 2020; Martin &
tratos, & Dana, 2003) and effectuation theories (Sarasvathy, Kumar, Javalgi, 2019). Uncovering the black box of mechanisms driving SMEs’
York, & Bhagavatula, 2014; Schweizer, Vahlne, & Johanson, 2010) as international performance offers managers and policy makers new
relevant for resource-poor SMEs in the early phases of their interna possibilities to make better informed FME decisions and design more
tionalization (Sarasvathy, 2001). effective incentives, actions and programs aiming at enhancing inter
When firms have an effectual resource-driven approach in their national performance. Systematic international market selection and
networking then they tend to be open to contingencies rather than network capability mediate the relationship between FME and SME in
having a fixed goal and plans (Bai, Johanson, Oliveira & ternational performance.
Ratajczak-Mrozek, 2021; Prashantham, Kumar, Bhagavatula, & Sar In the next section, we provide theoretical background to our model
asvathy, 2019; Sarasvathy et al., 2014). Several empirical studies have and then we elaborate five hypotheses explaining the relationships be
confirmed that SMEs are inclined to use network and effectuation ap tween the constructs included in the model. Later, we continue with a
proaches in the early phases of internationalization to acquire relevant description of the methodology employed to implement our ideas. We
resources and new opportunities to thrive in their internationalization present the empirical results in the fifth section. We finally discuss our
efforts (Galkina & Chetty, 2015; Prashantham et al., 2019; Vissak, findings, elaborate on their implications and outline avenues for future
Francioni, & Freeman, 2020). The effectuation approach can also be research.
used to explain the behavior of more traditional and older internation
alizing SMEs (Galkina & Chetty, 2015). One explanation for this is that 2. Theoretical background
traditional and older SMEs experience similar challenges as new ven
tures when they enter new foreign markets, as they suffer from liabilities We combine two main steams of literature to develop the theoretical
of smallness (Hannan & Freeman, 1984) newness (Stinchcombe, 1965) framework for our research, which includes the knowledge-based view
and foreignness (Zaheer, 1995) and have overstretched resources and (Grant, 1996; Kogut & Zander, 2003) and the network approach to
high uncertainty (Fraccastoro, Gabrielsson, & Chetty, 2021; Freixanet & internationalization (Johanson & Vahlne, 2003; 2006; 2009). First, be
Renart, 2020; Sarasvathy et al., 2014; Tolstoy, Nordman, Hånell, & sides the value creation potential of knowledge, there is a stream of
Özbek, 2021). literature relating to the role of knowledge in firms’ internationalization
Our study combines a rational approach related to an effective use of (Johanson & Vahlne, 1977; Eriksson et al., 1997; Freixanet & Renart,
knowledge and a more systematic international market selection, with 2020; Yli-Renko, Autio & Tontti, 2002). A corollary is that it is important
the effectual network approach (Johanson & Vahlne, 2003; 2006; 2009) for firms to understand the foreign markets in which they do business to
linked to more resource-driven networking and relationships with col succeed internationally. Second, the network approach to internation
laborators, as the mediating mechanisms that link FME knowledge and alization emphasises the importance of being an insider in the business
international performance. While the literature suggests that systematic network in the foreign market where the firm is conducting business
international market selection has a positive effect on international (Johanson & Vahlne, 2009). The partners that SMEs collaborate with
performance (Brouthers, Mukhopadhyay, Wilkinson, & Brouthers, help them to gain access to useful information, contacts with other
2009; Brouthers & Nakos, 2005), more recent literature explaining partners and opportunities (Galkina & Chetty, 2015; Sarasvathy et al.,
internationalization and international performance in the context of 2014; Walter et al., 2006), and include suppliers, distributors, cus
SMEs has typically relied on networks and business relationships as the tomers, etc.
main drivers (e.g., Torkkeli, Puumalainen, Saarenketo, & Kuivalainen,
2012). 2.1. The knowledge-based view and internationalization
Against this background, and from a knowledge-based view and
network approach, we propose that SMEs’ previous FME knowledge has The knowledge-based view of the firm purports that knowledge is the
a positive effect on systematic international market selection and most important asset in value creation and that the main role of the
network capabilities and is conducive to international performance. organization is coordinating how knowledge is applied (Grant, 1996).
Since (i) the internationalization literature suggests that the relationship The firm gains advantage when it has the ability to learn from experi
between knowledge and international performance should consider ence and to accumulate superior knowledge that is difficult for its
broader conceptualizations and new constructs measuring network re competitors to imitate. In the context of internationalization, a firm
lationships (Papadopoulos and Martín Martín, 2010) and (ii) there is acquires knowledge mainly through experience and this knowledge is
scant literature about the relationships between the four concepts, we collected gradually over a period of time as it expands into foreign
focus on some important mechanisms through which FME knowledge markets (Eriksson, Johanson, Majkgård, & Sharma, 2001; Johanson &
affects SMEs’ international performance. Our first objective is, there Vahlne, 1977; Kogut & Zander, 2003). The mechanism to transfer
fore, to addresses this research gap by modeling and testing the re specialized knowledge embedded in distinct sections within the firm is
lationships between these four constructs. Second, despite its essential for its efficient integration and co-ordination so that the cu
undisputed theoretical relevance, there are no conceptualizations and mulative knowledge is applied effectively, and it becomes a capability
operationalizations of the construct FME knowledge in the literature, that other firms do not have (Grant, 1996). When the firm has standard
which precludes its potential integration in empirical studies. We build procedures, routines, and evaluation systems, it demonstrates shared
on Eriksson, Johanson, Majkgård and Sharma’s (1997) measure of knowledge that is easily transferable within the organization. This
experiential knowledge regarding foreign business and foreign institu knowledge can be subsequently recombined with new knowledge when
tional knowledge but also add technical knowledge (Saemundsson, the firm enters new foreign markets. Knowledge that is difficult to
2005) to develop our concept and measure of FME knowledge. observe, teach or codify will be transferred within the firm but it is not
Our main contribution to the international SME literature is by easily transferable outside the firm (Argote & Miron-Spektor, 2011;
presenting novel intervening/mediating relationships between FME Kogut & Zander, 2003).
knowledge and positive international performance. While the literature One of the major obstacles for firms during their internationalization
emphasizes the importance of knowledge and foreign market knowledge is the lack of market knowledge rather than their capacity to acquire this
for international performance (e.g., Autio, Sapienza, & Almeida, 2000; market knowledge (Johanson & Vahlne, 1977; 2009; Figueir
Jin & Jung, 2016; Stoian, Rialp, & Dimitratos, 2017), it pays limited a-de-Lemos, Johanson & Vahlne, 2011). Indeed, the development of
attention to the role played by FME knowledge and the mediating knowledge plays a central role in the internationalization process of the
mechanisms connecting knowledge and international knowledge with SME, and this happens primarily through experience (Bai, Johanson, &
performance and/or international performance (for exceptions see Bai, Martín Martín, 2017; Hilmersson, 2014; Johanson & Vahlne, 1977). One
2
assumption in Johanson and Vahlne’s internationalization process markets gain access to wide knowledge and this has a positive impact on
model, which is valid for firms of any size (Eriksson et al., 1997), is that their performance (Choquette, 2019; Delios & Beamish, 2001; Kuiva
prior to internationalization, the firm’s main experience is accumulated lainen, Sundqvist, and Servais, 2007).
in their domestic market. Consequently, they have limited access to There are at least four different types of experiential knowledge,
knowledge in their foreign markets, but as firms gain knowledge during including internationalization knowledge, foreign business knowledge,
active engagement in a foreign market, they will commit more resources foreign institutional knowledge (Eriksson et al., 1997), and relationship
to that market. The gradual accumulation of this knowledge reduces specific knowledge (Johanson & Vahlne, 2003). Based on Johanson &
uncertainty and subsequently prepares the firm for entering other new Vahlne (2003), we consider relationship specific knowledge as the learning
foreign markets or to expand within an existing foreign market. Previous and opportunity discovery and development that occurs within business
knowledge gained from foreign markets can be transferred to another relationships in foreign markets. We build on Eriksson et al.’s (1997 p.
foreign market, especially if the markets are homogenous (Carre`re & 343) definition of internationalization knowledge, foreign business
Strauss-Kahn, 2017; Hilmersson & Johanson, 2016; Johanson & Vahlne, knowledge and foreign institutional knowledge. Internationalization
1977; Johanson & Wiedersheim-Paul, 1975). knowledge relates to experiential knowledge of the firm’s resources and
The lack of experiential knowledge is costly for the firm as it is un capabilities to conduct business in foreign markets, and this knowledge
able to identify what knowledge is useful to overcome challenges in is entrenched in firms’ routines. Foreign business knowledge relates to the
foreign markets (Barkema, Bell, & Pennings, 1996; Carre`re & Straus firm’s experiential knowledge about customers, competitors, and the
s-Kahn, 2017; Eriksson et al., 1997). This could include the cost of way of doing business in foreign markets. Foreign institutional knowledge
acquiring knowledge about the rules and regulations, governments and relates to experiential knowledge about the government, institutions,
cultures in foreign markets (Eriksson et al., 1997), and the administra standards, rules, regulations, and norms in specific foreign markets.
tion and coordination costs for international sales and network re Eriksson et al. (1997) found that when the firm lacks internationaliza
lationships that are in geographically and culturally diverse countries tion knowledge then this also reduces its foreign business knowledge
(Abdi and Aulakh, 2018). The costs refer to the time and money the firm and foreign institutional knowledge, which subsequently impedes its
invests to visit the foreign market to seek, build and maintain relation internationalization efforts. FME knowledge, the relevant subset of in
ships with partners in the host country, to adapt products and produc ternational market experience and knowledge used when SMEs face new
tion processes to adjust to the partners’ requirements and the cost of FME decisions, is a distinct construct closer to the content domain of
doing market research. As the firm acquires relevant useful knowledge foreign business knowledge and foreign institutional knowledge but also
about the foreign market this influences how it perceives the cost of its encompassing technical knowledge. Technical knowledge (Sae
internationalization efforts (Eriksson et al., 1997). This cost can be mundsson, 2005) deals with machines, processes, and materials such as
reduced by collaborating with partners who have this knowledge mechanical equipment, tools, programming languages, design pro
(Argote & Miron-Spektor, 2011; Bai et al., 2021; Monaghan and Tipp grams, etc. relevant for completing complex tasks and successful inter
mann, 2018). Advances in information and communication technology nationalization of SMEs in many industries.
reduce the cost of gaining access to the knowledge their partners possess Through market research, SMEs can also obtain objective knowledge
(Nambisan, Zahra and Luo, 2019; Ojala, Evers, and Rialp, 2018). For from facts. Reports, brochures, websites, social media, and other infor
example, the cost of travelling to visit their partners could be reduced by mation sources on the Internet are typically used by firms targeting
using social media and the Internet. As a result of this experiential foreign markets (Fraccastoro et al., 2021). Objective knowledge is
knowledge gained through its partners, the firm does not have to invest explicit and created and stored within the firm. It is thus specific to the
additional resources to determine where to seek information and what firm but transferable (Grant, 1996). Objective knowledge facilitates a
information is reliable and relevant to exploit emerging opportunities systematic approach to selecting foreign markets (Pellegrino and
(Eriksson et al., 1997; Hilmersson, 2014). McNaughton, 2017) rather than relying on ambiguous and sparse in
The accumulation of new knowledge depends on the firm’s existing formation about a market. In contrast, experiential knowledge accu
knowledge and its ability to integrate new knowledge, which Cohen and mulated through collaboration in business relationships is specific to a
Levinthal (1990) name ‘absorptive capacity’. While internationalizing particular relationship. It can only be gained through interaction and is
firms gain experience sequentially in foreign markets, they develop their hard to codify and thus not easily transferable (Eriksson et al., 1997;
organizational structures, capabilities, and routines to recombine and 2000; Hilmersson and Johanson, 2016). This interaction in business
accumulate new knowledge (Autio et al., 2000; Barkema et al., 1996; relationships, which more recently also occurs digitally through social
Eriksson et al., 1997; Johanson & Vahlne, 1977). Firms that conduct media and global platforms (Fraccastoro et al., 2021; Nambisan et al.,
business in a diversity of foreign markets accumulate rich knowledge 2019; Ojala et al., 2018), enable firms to gain experiential knowledge
from this array of very different institutional and cultural contexts (Scalera et al., 2018). Scholars such as, Johanson and Vahlne (1977),
(Barkema & Vermeulen, 1998; Eriksson, Johanson, Majkgård, & Denis and Depelteau (1985) and Reid (1983) consider that objective
Sharma, 2000; Johanson & Vahlne, 1977; Zahra, Ireland, & Hitt, 2000) knowledge is of minimal importance in the firm’s internationalization.
and some firms are better at absorbing and recombining this new This is supported by Eriksson et al. (1997) and Hilmersson (2014) who
knowledge than others. provide empirical evidence that experiential knowledge is the critical
Similarly, prior research has shown that heterogeneous experiences factor in advancing the firm’s internationalization.
are more useful to increase the firm knowledge than homogeneous ex
periences (Argote & Miron-Spektor, 2011; Chetty, Johanson, & Martín 2.2. Network theory and internationalization
Martín, 2014; Johanson and Johanson, 2021; Pellegrino and
McNaughton, 2017; Schilling, Vidal, Ployhart, & Marangoni, 2003). Several studies have confirmed that networks play an important role
Heterogeneous experiences in a diversity of foreign markets strengthen in the internationalization of SMEs (e.g., Ellis, 2000; Galkina & Chetty,
the firm’s organizational routines and increase its capability to search 2015; Hohenthal, Johanson, & Johanson, 2014; Prashantham et al.,
for information and to interpret this new information (Eriksson et al. 2019; Yli-Renko et al., 2002). To understand the behavior and perfor
1997). Heterogeneous experiences from culturally and geographically mance of SMEs, it is therefore important to consider the networks in
diverse countries increase the firm’s absorptive capacity to accumulate which they are embedded (Gulati, Nohria, & Zaheer, 2000; Johanson &
new knowledge as it expands internationally compared to homogenous Johanson, 2021; Powell, 1998). An influential stream of literature is
experiences of firms engaged in repetitive activities in a few similar based on Johanson and Vahlne’s (2003; 2006; 2009) markets as net
markets (Chetty et al., 2014; Johanson and Johanson, 2021; Scalera, works approach where business occurs in multiple relationships in a
Perri and Hannigan, 2018). Firms operating in several diverse foreign network setting, and internationalization is an outcome of interactions
3
in these relationships. When the firm gains a central position (insider) as relationships such as to strategically select new partners (Gulati, 1999;
opposed to being in the periphery in the business network in a foreign Ozcan & Eisenhardt, 2009), and to combine their knowledge with their
market, the firm overcomes its liability of being an outsider and partners’ knowledge to create something novel to pursue new oppor
foreigner (Johanson & Vahlne, 2009). Insidership positions in the rele tunities that emerge (Galkina & Chetty, 2015; Robson, Katsikeas,
vant foreign market provides credibility, legitimacy, and new opportu Schlegelmilch, & Pramböck, 2019; Yli-Renko et al., 2002). As SMEs
nities. Being an insider in a network means that the firm gains access to participate in networks, they learn more about the partner when they
new information, new ideas for products, technology or processes that interact and get to know each other’s competencies and shortcomings.
cannot be acquired through market research. When a firm is outside the Over time, they mutually commit to the relationship by adapting to each
relevant network then it suffers from the liability of foreignness and thus other (Chetty et al., 2018; Johanson & Vahlne, 2009), such as ensuring
lacks knowledge about the foreign market. Johanson and Vahlne (2009) that they have the production capacity and flexibility to accommodate
purport that it is challenging for the firm to become an insider in foreign their customers’ product requirements and jointly finding solutions to
markets. Furthermore, insiders in the network have to be motivated to customers’ problems.
invest time and resources to accept the newcomer into the network,
especially if the network is tightly knit and closed (Yamin & Kurt, 2018). 3. Model and hypotheses
Collaboration with other firms occurs in a dyadic relationship which
is connected to other business relationships that are embedded in a We present first the rationale for an impact of FME knowledge on
business network, thus extending the firm’s knowledge base (Anderson, international market selection, network capability and international
Håkansson, & Johanson, 1994; Blankenburg Holm, Eriksson, & Johan performance. We continue with the hypothesized effects of network
son, 1996; Johanson & Vahlne, 2009). The commitment and value capability on international market selection and international perfor
creation in a focal relationship increases when the knowledge and ad mance. The third subsection provides the logic for a relationship be
aptations are connected to the focal firm’s other relationships in a tween international market selection and international performance.
network (Blankenburg Holm, Eriksson, & Johanson, 1999). Business Fig. 1 presents our hypothesized model.
relationships become interdependent when firms commit to each other,
for example, by making adaptations to their products or production 3.1. Foreign market entry (FME) knowledge effects
systems to suit their customer requirements. As the firms interact with
each other, they learn about their partners’ resources and capabilities Managerial cognition has a critical role to play in the internation
and develop mutual commitment in the relationship. Consequently, they alization of firms (Niittymies & Pajunen, 2020). A deep knowledge and
find solutions to problems by building on their strengths to develop new understanding not only of the decision but also of the setting in which it
knowledge and opportunities, such as products and innovations that will be made is a typical requirement for the adoption and imple
they could not accomplish on their own (Andersson, Dasi, Mudambi, mentation of systematic decision-making methods by managers. FME
Pedersen, 2016; Bai, Johanson, & Martín Martín, 2019; Galkina & knowledge provides part of this knowledge from previous and earlier
Chetty, 2015; Keupp & Gassmann, 2009; Nordman and Tolstoy, 2016; SMEs’ market entries. Uncovering international customers’ preferences,
Sarasvathy et al., 2014). understanding international standards and regulations such as technical
Internationalizing SMEs generally suffer from lack of resources barriers and customs tariffs, new technological knowledge, and inter
(Chandra, Styles, & Wilkinson, 2009; Sarasvathy et al., 2014; Tolstoy national experience can be conducive to formal approaches of interna
et al., 2021) and lack of market knowledge (Argote & Miron-Spektor, tional market research and selection. Experienced managers are able to
2011; Gulati, 1999; Johanson & Vahlne, 2009). Therefore, they rely on create a more detailed cognitive representation of problems (Maitland &
collaborating with partners to acquire the necessary knowledge and Sammartino, 2015) and managers having international experience are
resources (Ellis, 2011; Galkina & Chetty, 2015; Hohenthal et al., 2014). expected to better understand the importance of properly researching
During this process they also learn how to collaborate, so that they can and analyzing foreign markets (Pellegrino and McNaughton, 2017).
use this knowledge in other situations (Powell, 1998). Knowledge According to Simon (1972), “Theories that incorporate constraints
generated in a relationship depends on what is happening within the on the information-processing capacities of the actor may be called
connected relationships in the partners’ domestic and international theories of bounded rationality”. International market selection is a
networks (Bai et al, 2019; Chetty, Eriksson, & Lindbergh, 2006; bounded rational decision (Papadopoulos & Martín Martín, 2011)
Hohenthal et al., 2014). During their internationalization, SMEs involving risk, uncertainty, lack of information and managerial cogni
continuously learn from their business partners and about the business tive limitations. Decision-making in this context is constrained by
and institutional environment in foreign markets (Chetty et al., 2006; managers’ cognitive ability and is expected to be influenced by factors
Eriksson et al, 1997). This knowledge is useful for the SME when it such as personal goals and evaluation criteria (Aharoni, Tihanyi, &
enters other countries, as it can build on this by adding new knowledge Connelly, 2011). Managers, experience pressure to make accurate and
through further collaborations (Andersson et al., 2016; Chetty et al., timely decisions, which typically also require cognitive efforts. There is
2006; Johanson & Vahlne, 1977). In particular, if the knowledge a tradeoff between speed and accuracy of decision making (Clark, Li, &
required in the new countries is similar to their existing knowledge. Shepherd, 2018), and managers are more willing to put more effort in
While networks provide opportunities, they can also hinder the the decision-making process when they are knowledgeable about how to
firm’s international expansion because firms can become locked into better solve a problem. They prefer managerial approaches that they
poorly performing relationships that become a liability and they sub expect to provide better results. Thus, when this is the expectation,
sequently miss out on new opportunities that can emerge (Gulati, 1999). managers can accept more formal and analytical decision making. This
In addition, SMEs can become ensnared in strong relationships that approach implies effortful and deliberate calculations that are slower
provide poor quality information, which subsequently results in low but also more accurate, controlled, and rational (Clark et al., 2018;
performance (Musteen, Francis, & Datta, 2010). However, as SMEs Kahneman, 2003), while rationality is a characteristic of behaviors that
accumulate more knowledge and experience about foreign markets, are logical in pursuing goals (Dean and Sharfman, 1993; Elbanna and
they develop network capabilities to form and maintain new networks. Child, 2007).
These network capabilities enable them to seek suitable partners that A decision-making process is systematic if it follows an ordered set of
provide valuable resources to achieve their goals, and to terminate rules and procedures (Papadopoulos & Martín Martín, 2011). Rules and
existing networks that do not provide the required resources and hinder procedures guide decision makers and can avoid or limit mistakes and
their goals (Prashantham et al., 2019). Furthermore, prior knowledge uncertainties arising from intuitive decision making and mental models.
and experience enhances their capabilities to develop future Managers knowledgeable about models and tools incorporating these
4
Fig. 1. Hypothesized model.
rules and procedures will feel comfortable when making use of them. can be reduced, firms prefer a careful selection of international partners
SME managers reduce international market uncertainty and considering predefined network goals and following a causal process
information-related problems as they increase their FME knowledge and (systematic, plan-driven) of partner selection (Galkina & Chetty, 2015).
use it in systematic international market selection approaches. Based on Lack of market information creates uncertainty while FME knowledge
the rationale above we propose: reduces it and can be conducive to identification and creation of suitable
international business relationships and networks. The following quote
Hypothesis 1. Foreign market entry knowledge has a positive relationship
by a CEO from our qualitative study2 demonstrates how a firm with
with systematic international market selection of SMEs.
networking capability acquired from prior FMEs uses the capability to
As the firm learns from its prior foreign market entries, it acquires the develop international partnerships systematically in foreign markets:
capability to successfully develop new networks (Gulati, 1999; Hohen “The whole strategic technology alliance idea was basically
thal et al., 2014). Thus, in our study, we focus on the effects of having conceived for the UK market, and then we decided to do it [strategic
FME knowledge on network capabilities. By network capability we refer technology alliance] in Australia as well. I guess that structure was
to “a firm’s ability to develop and utilize inter-organizational relation conceived as a way to hit Europe. Anything we learn, in any country,
ships” (Walter et al., 2006). As such, it is expected that SMEs possessing comes back to Australia, and is then distributed back out [to other
network capabilities are able to regularly, flexibly and constructively foreign markets]… But each country manager adapts their strategy to
collaborate with agents, distributors, customers, suppliers and other that country. And the key thing for us is, ‘how was the product decision
network members to successfully solve problems together. Developing made’? So, in the Netherlands the wholesaler has a lot more impact
this network capability occurs through learning from prior experience in [when deciding what product to use], whereas in the Nordics it is the
network partnerships (Anand & Khanna, 2000; Hohenthal et al., 2014). manufacturer and in Australia it is the consulting engineers who have
Firms engage in networking under uncertainty and networking more influence. So, each market is learning from the other market, but
processes involve unpredictability, goal ambiguity, and an interactive each market strategy is tailored to that particular country, and we’re
and changing environment (Engel, Kaandorp, & Elfring, 2017). Hence, constantly adjusting our strategy, and responding to what’s working and
we suggest that FME knowledge can decrease uncertainty (Johanson and what’s not” (firm AL).
Vahlne, 1977) and unpredictability of networking processes in inter SMEs lacking FME knowledge tend to use opportunity seeking be
national markets. FME knowledge can increase the decision-makers’ haviors in developing their networks, such as relying on unsolicited
perceived ability to understand the market and market-influencing
factors. Lack of knowledge due to differences across international mar
kets in terms of language, culture and institutions creates difficulties to 2
Before the survey, we conducted an in-depth qualitative study by inter
decision making connected with the development of international op viewing CEO’s and senior management involved in international business de
erations (Johanson & Vahlne, 1977) such as selecting the right partners cisions in five small Australian manufacturing firms. By drawing on this
and business relationships in foreign markets. qualitative evidence we strengthen the development of our hypotheses. This
When uncertainty is high, effectuation (resource-driven) guides ac approach is similar to Prashantham’s (2011) study on SME internationalization
and Autio, Sapienza and Almeida’s (2000) study on international entrepre
tion (Kerr & Coviello, 2019) and firms network with interested partners
neurial firms where they use qualitative evidence to support the development of
to increase resources and to create goals jointly, while when uncertainty
hypotheses.
5
orders or experimenting, while SMEs possessing knowledge tend to use a customers, distributors) from heterogeneous countries to enter foreign
more systematic approach in developing their networks during the markets, we suggest that network capability leads to more systematic
internationalization process (Chetty, Ojala, & Leppäaho, 2015; Vissak search, identification and selection of business relationships, partners,
et al., 2020). We put forward our second hypothesis: and foreign market entry opportunities. Over a period of time, firms may
realize that they have run out of business opportunities from their
existing relationships, and they would need to seek out new relation
with network capabilities of SMEs.
ships in foreign markets (Prashantham & Dhanaraj, 2010; Yli-Renko
As explained above, the knowledge based-view of the firm posits that et al., 2001). While this phenomenon could happen in weakening or
knowledge is the most important source of firms’ value creation and redundant relationships (Burt, 2002; Jack, 2005; Poppo, Zhou & Zenger,
competitive advantage (Spender & Grant, 1996). A relevant type of 2008) it may also occur when relationships are strong (Prashantham &
knowledge during internationalization is FME knowledge. Early foreign Dhanaraj, 2010; Yli-Renko et al., 2001). As firms learn relationship skills
market entries provide firms with international experience and knowl when they collaborate (Powell, 1998), such as how to leverage their
edge which can be useful elsewhere when markets are similar (Johanson existing relationships to build new relationships (Fraccastoro et al.,
& Vahlne, 1977). Previous foreign market entries can be a source of 2021; Pinho & Prange, 2016; Prashantham & Dhanaraj, 2010), they
knowledge and competence when responding to international cus develop their network capability. This network capability enables firms
tomers’ needs and wants and competing with local and international to be focused and skillful in selecting partners, collaborators, and foreign
market offerings to pursuit new opportunities. market entry opportunities, and thus making them more likely to rely on
Similarly, doing business in a foreign market requires some degree of formal strategy and procedures. Network capability implies more sys
familiarity with the foreign market, understanding customers’ prefer tematic networking leading to the identification of a group of possible
ences and cultural norms, and adapting to technical and legal re partners and an increased interest in the characteristics of their coun
quirements of the market (Eriksson et al., 1997; Bai et al., 2019). Part of tries. Similarly, several scholars consider that firms using a goal-oriented
this marketing and technical knowledge could have been obtained in approach to networking will deliberately target strategic trustworthy
early foreign market entries and be useful in later foreign market entries. partners who will help them to achieve their goals efficiently (Hallen &
Effective integration of this knowledge into the firms’ knowledge is Eisenhardt, 2012; Prashantham et al., 2019; Sarasvathy et al., 2014).
expected to result in increased innovation (Bai et al., 2019; Kleinsch Thus, we argue that a firm’s ability to develop and utilize inter-
midt, De Brentani, & Salomo, 2007; Yli-Renko, Autio, & Sapienza, organizational relationships is conducive to a more systematic search
2001). Innovation is positively related to SMEs’ international perfor and selection of foreign market entry opportunities and international
mance in terms of international sales growth, return on investment from markets. SMEs with this ability are better equipped to fruitfully explore
international business, market share in international markets, interna and exploit international market entry opportunities implying the
tional profitability and overall international performance (Donbesuur, evaluation of potential partners and collaborators. Furthermore, stra
Ampong, Owusu-Yirenkyi, & Chu, 2020). For instance, a firm could have tegic selection of partners consumes considerable resources, and thus
entered a foreign market with an innovative product and through reg the firm has to carefully select its foreign markets so that it does not
ular ongoing interactions with local partners and actors discover that extend itself too thin across multiple foreign markets that may over
they can combine their knowledge with their local partner’s knowledge stretch existing resources (Prashantham et al., 2019).
to adapt the product or to create a new product that can be used in a International market selection methods are multi-criteria and many
different industry or country setting. use indicators dealing with customers, competitors and other stake
This FME experience and learning about international customers’ holders which require international market research in their assessment
preferences and development of new technical knowledge provides the (Papadopoulos & Martín Martín, 2011). As SMEs develop their
firm with the knowledge to skillfully integrate the new systems, pro networking capability to form successful relationships abroad, they are
cesses, and products within the firm to achieve positive outcomes. The also more systematic in their foreign market entry opportunity selection
process of learning from one FME to adapt the product for a different approach. SMEs possessing networking capability are more likely to be
industry and country context is illustrated by the following quote from a able to define relationship and network-related criteria and collabora
CEO in our qualitative study of Australian manufacturing firms: tors’ requirements that can be used in systematic market entry oppor
“One thing we developed for New Zealand was that they wanted a tunity selection. Being able to study what SMEs would be likely to
completely different feature in our product because they wanted to use achieve with partners and collaborators will have a positive impact on
the product in a different industry. So, we adapted the product with this the interest of the firm in researching foreign markets and in conducting
new feature for them, but then we introduced that to the UK, and they systematic and formal international market research activities for
loved it, and then we brought it back to Australia, and they loved it as identifying, evaluating, and selecting potential relationships and foreign
well. So, a big lesson is to take lessons that you’ve learned from one market entry opportunities. Therefore, we posit:
market and share them with your other markets, because they could
Hypothesis 4. Network capabilities have a positive relationship with sys
really be very profitable” (Firm AE).
tematic international market selection.
When SMEs have the knowledge required to make international
business and marketing decisions, they can avoid mistakes and more The firm’s ability to collaborate in networks is a useful resource
effectively satisfy customers’ preferences and demand, meet legal re because it is challenging, time consuming and costly to form and
quirements, develop new products, and take advantage of opportunities maintain networks (Gulati et al., 2000). Network capability includes the
in foreign markets (Stoian et al., 2017). As a result, we suggest our third relational skills that firms possess to initiate, develop, and coordinate
hypothesis: their business relationships for mutual gain (Fraccastoro et al., 2021;
Walter et al., 2006) and how firms actually behave during these in
teractions with business partners, under conditions of uncertainty
with international performance of SMEs.
(Engel et al., 2017; Sarasvathy et al., 2014) such as in unknown foreign
markets. This network capability could be either systematic plan-driven
or effectual resource-driven (Prashantham et al., 2019). Systematic
3.2. Network capability effects plan-driven involves SMEs having sufficient knowledge about their
existing partners or deliberately searching for partners to achieve a goal.
Although Galkina and Chetty (2015) found that SMEs often form Effectual resource-driven involves SMEs collaborating with easily
business relationships serendipitously with interested partners (e.g.,
6
available partners and being flexible, adaptable, experimenting by Li, 2010) and the potential links between information search and SMEs’
combining their resources, and joint problem solving with their partners performance have been well studied (Choo, 1998; Julien & Ram
in foreign markets to co-create new opportunities. angalahy, 2003). Thus, systematically collecting and using information
Since network capability is idiosyncratic and embedded within the about foreign markets is considered a positive enabler of SMEs’ inter
firm to use its resources efficiently, it cannot be imitated by competitors national performance and a systematic approach to selecting foreign
(Gulati et al., 2000; Walter et al., 2006). The SME’s network capabilities markets is important when making international decisions (Papado
enable it to acquire resources, legitimacy and to develop new opportu poulos & Martín Martín, 2011). In particular, Julien and Ramangalahy
nities in foreign markets (e.g., Galkina & Chetty, 2015; Hohenthal et al., (2003) indicate that export-related information boosts the competi
2014; Johanson & Vahlne, 2009; Rovira Nordman, & Melén, 2008). tiveness of SMEs’ export strategy and international performance. By the
Network capabilities also enhance the collaboration with trustworthy same token, Brouthers and Nakos (2005) reveal that SMEs that apply a
local partners in foreign markets. This enables SMEs to gain access to systematic market selection strategy outperform SMEs that use an ad hoc
reliable and valuable local knowledge (Barkema & Vermeulen, 1998; foreign market selection. In view of the above we formulate our sixth
Galkina & Chetty, 2015; Blankenburg Holm et al., 1999) which subse hypothesis:
quently may increase their international performance (Zahra et al.,
Hypothesis 6. Systematic international market selection has a positive
2000; Musteen et al., 2010). This local knowledge could include
relationship with international performance of SMEs.
discovering how codified rules and regulations are actually applied in
practice, the nuances of forming business relationships in a specific
foreign market and flexibility to adapt to local product standards and 4. Methods
customer preferences. Through ongoing regular interactions with their
partners, SMEs learn about how they can combine their own knowledge 4.1. Sample and data
with their partners’ knowledge to develop unique products or processes
that are of mutual benefit and can lead to better performance outcomes. This study involves survey data collected from 140 manufacturing
The idiosyncratic knowledge acquired through networks enables SMEs SME respondents in Australia who have international sales and 250 or
to recognize new opportunities that are not transparent to other firms. fewer employees. We used the Dunn and Bradstreet database to build a
The SMEs network capabilities provide them with skills to determine total population frame of 2,595 potential firms from three Australian
whether they have adequate knowledge and resources to pursue these States (New South Wales, Victoria, and Queensland) because most
new opportunities with their partners, which could subsequently in manufacturing in Australia occurs in these states and they are repre
crease their international performance. sentative of Australian SME manufacturers with international sales. The
Prior research also shows that network capabilities have a positive Dunn and Bradstreet database provides details that include industry
influence on a firm’s performance indicators such as sales growth, sales classification code, number of employees, international sales, contact
per employee and profit attainment (Walter et al., 2006) and that social person, email, telephone numbers, location, website, and other relevant
capital, an expected outcome of network capabilities, has a positive and information. The computer-assisted telephone interview (CATI) system
significant relationship with small firm performance (Stam, Arzlanian, & that was used to collect the data, automatically randomized the 2,595
Elfring, 2014). SMEs with network capabilities have the skills to initiate SMEs to select a pilot population frame of 470 SMEs for a pre-test. The
and maintain business relationships in foreign markets that provide remaining 2,125 SMEs constitute the main sampling frame used to
privileged access to resources and new opportunities, which has an collect the final data to estimate our model.
impact on the firm’s international performance. The randomly obtained 140 collaborating firms are quite experi
Hypothesis 5. Network capabilities have a positive relationship with in enced in manufacturing, having been in operations for close to 39 years
ternational performance of SMEs. on average, and with a mean of 36.2 employees. They are also inter
nationally experienced, as they, on average, have been doing interna
tional business over 21 years. The sampled SMEs have an incipient level
of internationalization, operating in 12.9 foreign markets and obtaining
3.3. International market selection and international performance 25.5% of sales abroad on average. Most firms use several foreign market
entry modes, including direct sales to final customers (74.3%), exporting
Despite the fact that we have recent holistic models of entry choices via distributors (41.4%) and agents (35.7%). Foreign direct investment,
integrating important interlinked entry aspects (Markman et al., 2019; which requires a relatively higher degree of international commitment,
Zachary, Gianiodis, Payne, & Markman, 2015), “it remains unclear how was used less frequently (26.4%). The respondents are either the owner
managers make the complex, demanding, and critically important de or the international manager of the firms, which, on average, have been
cision of foreign market selection” (Clark et al., 2018, p. 443). Previous working in the company more than 17 years, and have close to 20 years
research illustrates that a formal and systematic approach to export of international business experience. Accordingly, the respondents have
policy, planning, and market information influences the firm’s inter good knowledge about their companies, as well as the details about their
national performance (e.g., Aaby & Slater, 1989; Brouthers & Nakos, international business operations. As Powell (1998) states, a large
2005; Cavusgil & Zou, 1994). In their meta-analysis of the relationship amount of knowledge about the firm resides with the key decision
between business planning and performance in small firms, Brinck makers, and according to Ozcan and Eisenhardt (2009) such re
mann, Grichnik and Kapsa (2010) confirm that firms with systematic spondents provide reliable information. Our choice of respondents is
and formal business plans have superior performance. They also found also consistent with previous studies on SME internationalization that
that the cultural context of the country and attitudes towards high and have interviewed owners or senior managers who are key players in
low uncertainty avoidance (Hofstede & Hofstede, 2005) moderates the decision-making (Melén Hånell, Rovira Nordman, & Sharma, 2014;
relationship between business planning and performance, and that Musteen, Datta, & Francis, 2014; Pinho & Prange, 2016).
business planning is less useful for performance in cultures with high
uncertainty avoidance (Brinckmann et al., 2010) because firms stick
closely to their business plans, which prevents them from quickly 4.2. Questionnaire and field research
adapting to changes in the environment.
Similarly, information about foreign market regulations, customers The questionnaire included questions dealing with the firm and its
and overall conditions is important for firms’ decision-making when managers, business relationships, FMEs, and international performance.
entering foreign markets (Belich & Dubinsky, 1995; Lu, Zhou, Bruton, & Considering that the measures of both the exogenous and endogenous
7
constructs were going to be obtained from the same respondents, we research company randomly contacted 441 firms (29 from the pilot
tried to minimize the potential impact of common method bias during population frame of 470 were unusable and had to be omitted) during
the design of the questionnaire. We used different end points in our the pilot interviews. After some small changes to improve the adminis
seven-point scales (e.g., strongly agree – strongly disagree”, “never – tration of the questionnaire, the research company called 966 randomly
always”, “completely unsuccessful – completely successful”, “extremely selected firms from the main sampling frame of 2,125 firms used for the
useless – “extremely useful” and “very low – very high”) and asked first main study. The final sample of 140 responses was collected in the first
about international performance. quarter of 2017 and the interviews lasted an average of 28 minutes.
We added the following question that we expected to be unrelated to
the main constructs included in our model: “Please specify to what 4.3. Measures
extent you use the Web when searching for advertising information”. We
used a seven-point scale (1 = “Never”; 7 = “Always”) and three items: The conceptualization of each construct and, where existent, scales
“When searching for advertising services in general”; “When searching and measures used in previous studies, guided us in the development of
for advertising information relating to pre-specified advertising ser our measures. The specific items used to operationalize each construct in
vices”, and “When searching for information that compares online the model and their descriptive statistics appear in Table 2.
advertising with traditional advertising”. We followed the CFA marker
technique (Williams, Hartman, & Cavazotte, 2010) and estimated a se 4.3.1. Foreign market entry (FME) knowledge
ries of models (see Table I) by bringing this additional construct as a We wanted to measure the extent to which early FMEs had been
marker construct in the hypothesized model. The comparison of the useful in subsequent FMEs in terms of relevant aspects such as the
Method-C with the Method-R model provides the statistical test of the development of technical knowledge, understanding the market, and
biasing effects of the marker variable on substantive relations and re learning from previous operations. Specifically, we instructed managers
veals whether the correlations of investigated constructs were signifi to think of their early foreign market entries and asked them about the
cantly biased. The results show that the chi-square difference between extent to which their firms’ foreign market entries have been useful in
the Method-C and Method-R is 0.10, lower than the 0.05 chi-square subsequent foreign market entries to develop new technical knowledge,
critical value for 6 degrees of freedom of 12.59, therefore supporting uncover international customers’ preferences, understand international
the claim that the estimated constructs’ correlations are not significantly standards and regulations, and acquire international business experi
biased. In conclusion, the research design and the ad hoc analyses ence. To the best of our knowledge, there are no previous measures of
indicate that common method bias is of limited concern in our data. this construct in the literature.
We carried out a qualitative pre-test with scholars to enhance the
readability of the questions. Later, we engaged a reputable independent 4.3.2. Systematic international market selection
market research company to conduct the interviews. To encourage these The four items included in our scale are adapted from Brouthers and
manufacturers to participate in the study, we mailed an invitation letter, Nakos’ (2005) study. Thus, we focused on the extent to which the se
using the university logo, to each of the firms to introduce the research lection of foreign market entry opportunities was well-informed and
project and the market research company who was conducting the in systematic and expected this to be reflected in four items capturing
terviews. In this letter we also guaranteed the confidentiality of the in whether international market research activities for selecting foreign
formation that they provided. The independent market research markets are systematic and formal; secondary sources of information are
company conducted the CATI with senior managers who made the in effective learning tools about products in foreign countries; the firm uses
ternational business decisions for their organization. The market specific criteria to assess foreign markets, and much effort is put into
foreign market research.
Table 1
CFA marker technique results. 4.3.3. Network capability
2
We developed our measure of network capability based on Walter
Model χ df CFI
et al. (2006). The first two items, “We analyze what we would like to
1.CFA 224.49 142 0.97 achieve with our collaborators” and “We discuss with collaborators
2. Baseline 232.17 146 0.97
regularly on how to support each other to achieve success” are measures
3. Method-C 204.95 130 0.97
4. Method-U 224.84 144 0.97 of the coordination dimension of networks (Walter et al., 2006). The
5. Method-R 224.74 150 0.97 third and fourth items, “We can deal flexibly with our collaborators” and
Chi-Square Model Comparison “We almost always solve problems constructively with our collabora
Tests tors” capture relational skills regarding the use of relationships to
△ χ2 △ df Chi-Square Critical Value;
partners (Walter et al., 2006).
△Models
0.05
1.Baseline vs. Method-C 7.33* 2 5.99
2.Method-C vs. Method-U 19.83 14 23.68 4.3.4. International performance
3.Method-C vs. Method-R 0.10 6 12.59 There are two modes to assess performance and international per
* if △χ 2 is bigger than the Chi-square critical value, the chi-square difference is formance, and these include subjective and/or objective measures
significant. (Katsikeas, Leonidou, & Morgan, 2000; Katsikeas, Morgan, Leonidou, &
CFI = comparative fit index Hult, 2016). Many empirical studies use subjective measures such as
CFA model: A normal confirmatory factor analysis (CFA) that allows a complete asking respondents to evaluate a set of performance indicators over a
set of correlations among the six investigated constructs and the marker vari certain period. We followed this approach and used four common in
able. dicators to measure firms’ international performance over the past three
Baseline model: Correlations between the marker construct and other constructs years in a seven-point scale (where 1 means “completely unsuccessful”
are forced to zero.
and 7 means “completely successful”) in terms of international sales
Method-C model: From the baseline model, all items of investigated constructs
volume, international sales growth, international profitability, and
load on the marker construct, and the factor loadings are constrained to be
equal. overall international performance. Similar items and scales have been
Method-U model: From the baseline model, all items of investigated constructs used in a plethora of international business studies (e.g., Gerschewski,
load on the marker construct, and the factor loadings are freely estimated. Rose, & Lindsay, 2015). Excellent reviews of international and export
Method-R model: Based on the Method-C model, the correlations of investigated performance can be found in Hult et al. (2008) and Chen, Sousa and He
constructs are restricted to values obtained with the baseline model. (2016).
8
Table 2 Table 2 (continued )

Operationalization of the constructs. Construct/ Items Mean S.D. Standardized CR AVE
Construct/ Items Mean S.D. Standardized CR AVE loadings
loadings
Overall international
Foreign market entry 0.91 0.71 performance
knowledge (FMEK) Firm Age 39.53 26.88 1.00 1.00 1.00
Think of your early foreign Firm Size 36.23 34.23 1.00 1.00 1.00
market entries. To what International Experience 22.51 14.75 1.00 1.00 1.00
extent have they been useful Industry 0.39 0.49 1.00 1.00 1.00
in subsequent foreign Entry Mode (FDI) 0.26 0.44 1.00 1.00 1.00
market entries in terms of Level of 0.26 0.27 1.00 1.00 1.00
helping to develop new 4.17 1.81 0.82 Internationalization
technical knowledge? Education 2.54 1.09 1.00 1.00 1.00
uncovering international 4.58 1.54 0.87 Geographic Distance 3.84 3.00 1.00 1.00 1.00
customers’ preferences? Cultural Distance 1.94 1.97 1.00 1.00 1.00
understanding international 4.98 1.60 0.83
All standardized coefficient loadings are significant at p<0.01.
standards and regulations?
acquiring international 5.08 1.53 0.85 CR = Construct reliability; AVE = Average variance extracted for each multi-
business experience? item construct in the research model.
Systematic international 0.87 0.63
market selection (SIMS)
4.3.5. Controls
Think of the way your firm
finds or selects foreign
We used several controls having the potential to explain part of the
market entry opportunities. variance of international performance: Firm age (number of years
To what extent do you agree operating), firm size (number of employees), international experience,
or disagree with the industry (light vs. heavy manufacturing), entry mode (whether or not
following statements?
the entry mode implied more commitment in terms of foreign direct
Our international market 3.12 1.77 0.76
research activities for investment), level of internationalization (the average ratio of foreign
selecting foreign markets sales to total sales in the past three years), and managers’ educational
are systematic and formal qualification. We also controlled for geographic distance and cultural
We learn about product- 3.83 1.96 0.70 distance. For geographical distance we calculated de number of km
related activities in foreign
countries by reading
between the capital of the most important foreign market of the SME and
magazines, journals, Canberra. The calculation of cultural distance used Kogut and Singh’s
websites etc. (1988) index, which is based on four Hofstede’s cultural value di
We have specific criteria to 4.23 1.93 0.83 mensions (individualism, uncertainty avoidance, power distance, and
help us determine whether a
masculinity), and differences between the SME’s most important foreign
foreign market is
worthwhile market and the home country.
We put considerable effort 3.80 1.92 0.87
into researching foreign
4.4. Data analysis technique
markets
Network capability (NC) 0.92 0.75
Think of your international We designed the study including four latent variables to measure the
business relationships with main constructs in our model. As a consequence, we used Structural
your collaborators and
Equation Modeling (SEM) to estimate it. Mplus 8.3 was the software
partners (such as suppliers,
distributors, customers,
applied to this purpose.
etc.). To what extent do you
agree or disagree with the 5. Results
following statements?
We analyze what we would 4.88 1.62 0.72
like to achieve with our
Following standard SEM procedures, we tested the measurement
collaborators model before considering the structural model. First, we assessed the
We discuss with collaborators 5.13 1.70 0.85 reliability and validity of the constructs. The results of an exploratory
regularly on how to support factor analysis indicated that all items loaded on their respective con
each other to achieve
structs without cross, or low, factor loadings (Ju, Jin, & Zhou, 2018).
success
We can deal flexibly with our 5.61 1.47 0.94 Furthermore, a confirmatory factor analysis of the measurement model
collaborators (including FME knowledge, systematic international market selection,
We almost always solve 5.83 1.31 0.94 network capability, and international performance) demonstrated
problems constructively satisfactory fit indices (Chi-square = 174.33; d.f. = 98; RMSEA = 0.075;
with our collaborators
CFI = 0.97; NNFI = 0.96) and a good model fit (Bentler, 1990). Table 2
Construct/ Items Mean S.D. Standardized CR AVE also presents the standardized loadings on the corresponding constructs,
loadings
the construct reliability values, and the average variance extracted
International performance 0.92 0.74 (AVE) for each construct. As mentioned, all items loaded on their
(IP)
respective constructs (standardized loadings ≥ 0.67), and the construct
Please evaluate your firm’s
performance over the past
reliability values for all constructs range between 0.87 and 0.92 (see
three years in terms of the column 5 in Table 2), which are appropriate (Werts, Lin, & Jöreskog,
following: 1974). Besides, all AVE values are clearly over the threshold point of
International sales volume 4.40 1.53 0.91 0.50, which provides support for convergent validity (Fornell &
International sales growth 4.37 1.63 0.92
Larcker, 1981).
International profitability 4.61 1.47 0.67
4.50 1.46 0.92 To complete the assessment of the measurement model results,
Table 3 presents the square root of the AVE statistics for each latent
variable along the diagonal, which are greater than the corresponding
9
Table 3
Correlation matrix of constructs (N = 140).
Construct (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) FME knowledge 0.84

(2) Systematic Int’l market selection 0.33** 0.79
(3) Network capability 0.42** 0.40** 0.87
(4) International performance 0.39** 0.36** 0.40** 0.86
(5) Firm age -0.06 0.07 0.04 -0.09 1.00
(6) Firm size 0.05 0.13 -0.01 0.12 -0.01 1.00
(7) International experience 0.06 0.06 -0.04 0.13 0.14 0.14 1.00
(8) Industry 0.01 0.01 -0.02 0.04 -0.13 0.01 -0.07 1.00
(9) FDI entry mode 0.06 0.27** 0.07 0.20* -0.05 0.12 0.15 -0.08 1.00
(10) Level of internationalization 0.32** 0.19** 0.04 0.36** -0.16 -0.04 0.23 0.00 0.10 1.00
(11) Education 0.01 0.12 0.02 0.03 -0.12 0.14 0.11 -0.01 0.06 0.04 1.00
(12) Geographic distance 0.17* -0.12 -0.05 0.07 -0.03 0.06 0.08 0.04 0.05 -0.03 -0.04 1.00
(13) Cultural distance 0.01 0.01 0.00 -0.10 0.14 -0.01 -0.02 0.08 -0.18* 0.02 -0.03 0.04 1.00
*p < .05; **p < .01 (level of confidence, two-tailed tests)

Diagonal values in bold are the square roots of the variance shared between the constructs and their measurements.
For discriminant validity to be established, the diagonal elements must be greater than the off-diagonal elements in the corresponding rows and columns.
inter-construct correlations in the off-diagonal elements. This provides (light industry) is negatively related to international performance (γ =
evidence in favor of the discriminant validity of the constructs. Based on -0.19, p = 0.021). Lastly, the goodness-of-fit indices show a good model
the above results, our measures present adequate measurement prop fit (Chi-square = 418.537; d.f. = 248; RMSEA = 0.07; CFI = 0.91).
erties and, thus, can be used for hypothesis testing. The significant relations between FME knowledge, systematic in
As a second step, we ran the structural model to test the hypothesized ternational market selection, network capability and international per
relations. As presented in Table 4, the results support four out of the six formance hint at three potential mediating effects. In other words,
hypotheses. Specifically, FME knowledge is significantly and positively network capability and international market selection can be regarded
associated with systematic international market selection (H1) (γ = as mechanisms for conveying the effects of FME knowledge on inter
0.42, p = 0.000) and network capability (H2) (γ = 0.33, p = 0.000). The national performance. Accordingly, we conducted mediation tests for
latter is significantly and positively associated with systematic market further investigation. We applied the bootstrapping procedure to test
selection (H4) (γ = 0.46, p = 0.000) while systematic international mediation effects in Mplus. Specifically, we draw on the coefficients of
market selection is in turn significantly associated with international the direct paths (a1, a2, b2, b3, b4) (see Fig. 1) to calculate the products of
performance (H6) (γ = 0.39, p = 0.006). Yet, the relations between FME the direct paths that form the three indirect paths FMEK→SIMS→IP,
knowledge (H3) (γ = 0.04, p = 0.732) and network capability (H5) (γ = FMEK→NC→IP, and FMEK→NC→SIMS→IP (including a1b4, a2b3, and
-0.05, p = 0.634), with international performance, are not significant. a2b2b4). We then used bias-corrected percentile bootstrap to generate a
The effect size is medium for the two determinants of systematic inter 95% confidence interval (CI) for “a1b4”, “a2b3”, and “a2b2b4” respec
national market selection, and small for the relation between FME tively (Lau & Cheung, 2012). The indirect effect intervals provide evi
knowledge and network capability, and between systematic interna dence of the indirect effect significance when they do not include zero.
tional market selection and international performance (see the fifth The results (see Table 5) show that the mediating effect of systematic
column in Table 4). In addition, all control variables except industry are international market selection on the relation between FME knowledge
not significant, and there were no substantial changes in path co and international performance is significant, while the mediating effect
efficients when control variables were included or excluded. Industry of network capability on the indirect path FMEK→NC→IP is not signif
icant. In addition, the mediating effect of both network capability and
Table 4
systematic international market selection on the indirect path
Model’s paths, significance, and results. FMEK→NC→SIMS→IP is significant.
Hypothesis Standardized t-value Decision f2

estimate (p-value) 6. Discussion, implications, limitations and future research
H1 FME knowledge → 0.42 5.73 Supported 0.291
Systematic international (0.000)
We discuss our findings’ theoretical contribution, identify implica
market selection tions for practice and present limitations and future research directions.
H2 FME knowledge → 0.33 3.95 Supported 0.117
Network capability (0.000)
H3 FME knowledge → 0.04 0.34 Not 0.000 6.1. Discussion
International (0.732) supported
performance Our study offers one main theoretical contribution. The existing in
H4 Network capability→ 0.46 6.48 Supported 0.308
ternational business literature has paid limited attention to the
Systematic international (0.000)
market selection
H5 Network capability→ -0.05 -0.48 Not 0.003 Table 5
International (0.634) supported Mediating test results.
performance
H6 Systematic 0.39 2.75 Supported 0.068 Mediating path
international market (0.006) Point estimate Correct bias percentile
selection → bootstrap 95% confidence
International interval1
performance Lower Upper
Controls: Industry (-0.19, t = -2.01, p = 0.04) is significant. Firm age (-0.09), FMEK→SIMS→IP (a1b4) 0.163 0.001 0.632
FMEK→NC→IP (a2b3) -0.017 -0.140 0.120
Firm size (0.11), International experience (-0.07), FDI entry mode (0.09), Level
FMEK→NC→ SIMS→IP (a2b2b4) 0.057 0.009 0.164
of Internationalization (-0.15), Education (0.04), Geographic distance (0.07),
Cultural distance (-0.03) all are not significant. 1.The number of bootstrap samples is 5000.
10
mediating mechanisms between SMEs’ knowledge/international embodied in the conceptualization and operationalization of FME
knowledge and international performance. Our study contributes to the knowledge. International business studies have largely ignored, and not
international SME literature by presenting novel insights on the mech explicitly hypothesized and empirically tested, the effects on subsequent
anisms linking FME knowledge and SMEs’ international performance. internationalization of FME knowledge that is obtained through previ
The results from our study imply that SMEs’ systematic market selection ous international market entries. Building on influential international
and network capabilities play a significant role in attaining successful business literature (Eriksson et al., 1997), we provide this construct and
international performance. While the extant literature (Delios & measure and test it in a sample of SMEs.
Beamish, 2001; Jin & Jung, 2016; Stoian et al., 2017) considers the
positive association between previous foreign market knowledge and 6.2. Managerial relevance
international performance, our study reveals that FME knowledge does
not per se have a significant direct relationship with international Among the implications for managers and policy makers, we suggest
performance. that previous international market and technical knowledge and inter
We interpret this finding to mean that FME knowledge alone is not national business experience be considered as key drivers of successful
sufficient because knowledge emerges from complex processes later foreign market entries. As such, it is particularly important to
involving multiple factors. It could be that with the exception of tech ensure that there is an effective way implemented in the firm to store,
nical and international standards and regulations knowledge, most FME retrieve, and share FME knowledge. By providing resources and struc
knowledge is appropriate for a single foreign market or homogenous ture to SMEs, internationalization support programs can facilitate FME
foreign markets (Hilmersson & Johanson, 2016; Johanson & Vahlne, knowledge integration and use within these firms. Helping firms to
1977) so it cannot be easily transferred into heterogeneous foreign understand and have better information about foreign markets, use
markets (Eriksson et al., 1997; 2000) and immediately improve per systematic tools for international strategic decision making and plan
formance. Our results also imply that FME knowledge cannot leverage ning, and strengthen their relational skills can be effective means of
opportunities and innovation and lead to performance in isolation but enhancing SMEs firms’ international performance. Internationalization
with the assistance of some intervening factors (e.g., network capabil support programs could be geared towards ultimately reducing inter
ities). This is consistent with recent findings emphasizing the mediating national market uncertainty and enhancing FME. SMEs could benefit
role of competitive capabilities in the relationship between international from additional support to have a more formal and systematic approach
knowledge and international performance (Falahat et al., 2020). to their foreign market research and selection of FME opportunities. This
Specifically, our findings reveal that instead of a direct route there foreign market research could be carried out by a supporting organi
are two indirect ones to convey the effects of FME knowledge on in zation conducting formal and systematic research on behalf of the SME.
ternational performance. A systematic approach to the search and Supporting organizations could use their websites to provide easily
evaluation of foreign market opportunities plays a relevant role in both, accessible resources, such as market research reports about specific
while network capability is also a driver in the long route. By uncovering countries, and templates with specific criteria to assess foreign markets.
important mechanisms through which FME knowledge has a positive These resources would encourage SMEs to select their FMEs
impact on international performance, our study highlights not only the systematically.
ultimate relevance of previous FME knowledge in successful interna In addition, supporting organizations could organize networking
tional performance but also the connections between network capability events and workshops to train SMEs to develop their international
and systematic international market selection in SMEs’ internationali relational skills as these, in turn, will help them enhance their interna
zation. As firms gain FME knowledge they reduce uncertainty and tional performance. This networking support could also be in the form of
unpredictability, develop their networking capability, and rely more on trade missions to specific foreign markets, and internationalization ad
systematic, formal, and informed international market selection. They visors with expertise about specific foreign markets and relational skills.
become more systematic in their selection of new partners who have the Such assistance would enable SMEs to be systematic in finding suitable
relevant resources to achieve their goals and foreign market entry op business partners with the relevant resources to become insiders in
portunities. Thus, our study confirms that SMEs that systematically foreign markets. SMEs that are operating successfully in foreign markets
select foreign market entry opportunities and the right partners to build could be invited to share their valuable knowledge and experiences in
fruitful relationships can improve their international performance. seminars or mentoring programs. International market uncertainty and
Network capabilities enable firms to avoid spreading their resources too complexity can be reduced by organizing an ecosystem in the home
thinly through ad hoc entry into a wide range of very different inter country where multiple organizations such as government, education,
national markets that can be time consuming and expensive. customs control, credit office and international trade promotion orga
By the same token, while our study highlights that knowledge from nizations are aligned to provide trustworthy information and advice for
prior foreign market entries has a positive effect on network capability, internationalizing SMEs.
these network capabilities do not necessarily lead directly to superior Since our study is based on data from Australia, a country that has a
international performance of SMEs. As Gulati, Lavie and Singh (2009) relatively low uncertainty avoidance score (Hofstede & Hofstede, 2005),
state, prior experience in one partnership cannot necessarily be trans our results confirm that systematic market selection has a strong impact
ferred into another partnership because trust and knowledge sharing on performance in a culture with low uncertainty avoidance (Brinck
routines may be specific to one partner. They differentiate between mann et al., 2010). An implication for managers who use systematic
partner specific experience and general partnering experience and found selection of FME opportunities is that they need to be flexible to changes
that general experience in partnerships is not necessarily beneficial for in the environment and the exploitation of FME knowledge. A word of
the firm. Similarly, Eriksson et al. (1997; 2000) state that because caution for SMEs with prior experience in partnerships and who have
knowledge developed in a relationship is specific to that relationship, it developed network capability is that they should not become over
is hard to transfer it into other relationships. These studies imply that confident about their abilities to find and create opportunities in future
network capability does not necessarily mean that all new partnerships partnerships to directly enhance their international performance.
will be successful and lead to new opportunities and positive outcomes.
As firms enter diverse foreign markets with very different cultural and 6.3. Limitations and future research
institutional settings, they may face challenges when transferring their
network capabilities into new relationships to become insiders in these Among the limitations of our empirical study is the use of cross-
very diverse foreign markets. sectional data from one country. Future studies can capitalize on lon
A second contribution to the international SME literature is gitudinal research designs that can test the causality of our hypothesized
11
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Journal of World Business 57 (2022) 101266

Contents lists available at ScienceDirect

Journal of World Business

Foreign market entry knowledge and international performance: The

Fig. 1. Hypothesized model.

Table 2 Table 2 (continued )

(1) FME knowledge 0.84

*p < .05; **p < .01 (level of confidence, two-tailed tests)

Hypothesis Standardized t-value Decision f2

relationships. Although common method bias was not found to be an References

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