The effect of experience and absorptive capacity on foreign market knowledge

Abstract

Learning about foreign markets often occurs through collaboration with other firms who have this knowledge. In this paper, we focus on one aspect of foreign market knowledge, which is the knowledge a partner in a dyadic relationship, has of the other partner and of their respective business network relationships. The concept ‘absorptive capacity’ [Admin. Sci. Q. 35 (1990) 128] is used to describe the firm’s ability to use its prior related knowledge and diverse background to identify the value of new information and to develop this into something creative. We develop and empirically test a model of how depth and diversity of experience affect absorptive capacity, and how this absorptive capacity affects the way a lack of foreign market knowledge is perceived as an obstacle in carrying out the ongoing business activity.

The results show that the lack of foreign market knowledge in the ongoing business is determined both by the firm’s absorptive capacity generated in dyadic relationships with foreign customers and the customer’s network. The dyadic and network absorptive capacities, however, appear to be used differently in the ongoing business. Dyadic absorptive capacity seems to decrease the lack of foreign market knowledge, whereas customer network absorptive capacity seems to increase it.

Introduction

The international expansion of a firm is a complicated task because the differences in markets are not very transparent. For instance, Canadian retailers expanded into the US because they considered the markets very similar, and had to face losses, re-organise operations, or even retreat because they underestimated the differences (O’Grady & Lane, 1996). This illustrates the implications of a lack of market knowledge in doing an international assignment.

Researchers have also placed great importance on lack of market knowledge, and incorporate it as an important element in studies and more theoretical models (Barkema, Bell and Pennings, 1996, Inkpen and Beamish, 1997, Johanson and Vahlne, 1977, Li, 1995). Lack of market knowledge is linked to modes of establishment so that those incorporating more resource commitments also acquire deeper local market knowledge (Inkpen & Beamish, 1997). It has also been shown that lack of market knowledge implies lower performance (Li, 1995) and difficulties in overcoming obstacles associated with cultural distance (Barkema et al.). According to the internationalisation process model, the lack of foreign market knowledge is reduced as a firm increases its market commitment (Johanson & Vahlne, 1977).

A firm’s lack of knowledge relates to a wide variety of issues handled in international business exchange, such as the transferability of knowledge (Kogut & Zander, 1993), institutional conditions (North, 1990), and organisational structure of the firms engaged in exchange (Bartlett & Ghoshal, 1989). International business exchange has been found to take place within the frame of international business relationships (Blankenburg Holm, Eriksson, & Johanson, 1996). Consequently, one approach to capture the firm’s lack of knowledge is to study its lack of knowledge about international business relationships. Such relationships have been found to be interdependent with other relationships in networks (Blankenburg Holm, Eriksson and Johanson, 1996, Chen and Chen, 1998, Coviello and Munro, 1997). Lack of foreign market knowledge can therefore be considered as lack of knowledge on networks of business relationships that are connected to each other (Johanson & Vahlne, 1990). This study builds on these findings and studies foreign market knowledge as the knowledge of a network of connected business relationships. Through their networks, firms obtain general knowledge such as marketing, technological, cultural and competitive information that enhances the success rate of a firm (Mohrman & Von Glinow, 1990). Knowledge of specific relationships in a network is different from generalised market information. General market information is gathered through market research and country reports, which is objective knowledge that can be easily transferred. Knowledge of specific relationships in a network is, however, learned by doing and is tacit and hard to transfer. This can be illustrated by the fact that conducting international business relies on experiential learning, which emerges from accumulated experiences of specific relationships (Barkema and Vermeulen, 1998, Delios and Beamish, 1999).

Lane and Lubatkin (1998) have found that internationalisation is a cumulative process, where prior experiences form the base for an ongoing business. The term ‘absorptive capacity’ can be used to explain a firm’s ability to turn experiences into useful knowledge in an ongoing business (Cohen & Levinthal, 1990). Cohen and Levinthal (1990: p. 1) define absorptive capacity as: ‘the ability of a firm to recognise the value of new, external information, assimilate it, and apply it to commercial ends’. The firm’s ability to evaluate this external information is determined by its prior related knowledge. A firm’s learning is seen as the ability of a firm to use its prior related knowledge and diverse background to identify the value of new information and to develop this into something creative.

It can therefore be expected that market knowledge developed in the past affects how a lack of foreign market knowledge is perceived as an obstacle to carrying out the ongoing foreign business activities. A firm’s prior related knowledge can be increased when it operates in diverse foreign markets, as it is exposed to different ideas and experiences (Abrahamson and Fombrun, 1994, Barkema and Vermeulen, 1998, Eriksson, Johanson, Majkgård and Sharma, 2000, Miller and Chen, 1994, Miller and Chen, 1996). This absorptive capacity refers to procedural knowledge that can be transferred from one market to another in the firm’s international expansion (Peteraf, 1993, Teece, 1982). A firm’s prior related knowledge can also be developed within the context of one specific market, where the firm acquires depth of knowledge on how to integrate the needs and resources of the network into the firm’s ongoing business. The increased absorptive capacity can thus be influenced by both experiences from diverse markets, on how to internationalise, and the extensive knowledge of a specific market’s unique features (Eriksson, Johanson, Majkgård and Sharma, 1997, Eriksson, Johanson, Majkgård and Sharma, 2000). Even though there has been conceptual development on learning through collaboration in foreign markets (Johanson and Vahlne, 1977, Johanson and Vahlne, 1990, Madhok, 1997), to our knowledge there has been no empirical studies on how a firm uses its previous experiences when conducting ongoing business in a foreign market. The purpose of this paper is therefore to develop and empirically test a model of how depth and diversity of experience affect absorptive capacity. This includes a detailed study of how absorptive capacity affects the manner in which a lack of foreign market knowledge is perceived as an obstacle to carrying out the ongoing business. The term ‘ongoing business’ is used for an activity that is well underway and the firm has already started doing business with its counterparts. Examples of this ongoing business are as follows:

• A contract with a new distributor or agent in a new country.

• A considerable expansion of business with an existing customer.

• Doing business with one or more new customers within an existing market.

• Entering new country markets with your existing customers.

• Doing business with new customers within a new market.

The rest of the paper is structured as follows: first, it reviews the literature to develop hypotheses and a conceptual model. This section is as follows: lack of foreign market knowledge, the effect of absorptive capacity on lack of foreign market knowledge, and the effect of depth and diversity of experience on absorptive capacity. Second, it describes the empirical investigation and the results. Third, the conclusions drawn from this study. Fourth, the managerial implications of this study. The paper ends with recommendations for future research.