How Firms Learn about Entering International Markets: An Examination of Indonesian Companies

Abstract

This thesis presents empirical research that examines how Indonesian firms learn about entering international markets. It extends the contribution of the organisational learning literature to the field of international business, which has stressed experiential knowledge, by examining both first- and second-hand experience in the firm's learning process for entering international markets. Specifically, as this study was conducted in Indonesia, it also extends the contribution of institutional theory to the field of international business. Two research questions underlie the study: how Indonesian firms absorb knowledge about entering international markets and how Indonesian firms use their absorptive capacity to approach international markets. Nine hypotheses were developed. Hypotheses 1-7 examine the process of how Indonesian firms absorb, acquire and assimilate knowledge about entering international markets, through their first- and/or second-hand experience. Hypotheses 8 and 9 examine the process of how Indonesian firms use their absorptive capacity to approach international markets. In order to empirically test the hypotheses, this study adopted a mixed methodology research approach. Qualitative and quantitative approaches were employed sequentially. The study involved export manufacturing firms from low- and high-technology oriented industries. The qualitative study was used to confirm, extend and modify the set of independent variables originating from the literature. For the quantitative stage, a self-administered survey was sent to 1575 Indonesian manufacturing firms, identified using the official exporters database as well as information from related industry associations. After extensive follow up, including phone contact, distributing questionnaires in person at association meetings and using personal networks, the sample consists of 103 usable responses, for an 8% response rate. This study has four major findings. First, absorptive capacity (AC) about entering international markets has four dimensions: market, operational technology, strategic technology and international business strategy. These four dimensions differ to the two dimensions generally identified in the absorptive capacity literature: market and technology. The previouslyidentified technological dimension was split into two (operational technology and strategic technology), based on factor analysis of the sample data, while the international business strategy dimension was added, based on literature associated with experiential knowledge. This suggests that Indonesian firms are developing not only strategic, but also operational, technology in order to be able to compete in international markets. This finding differs to the current literature that stresses absorptive capacity related primarily to strategic technology. Moreover, this study also found that international business strategy may be developed from both first- and second-hand experience. Second, this study measured first-hand international experience using three indicators: country experience, ratio of exporting and length of exporting. First-hand international experience with respect to sales ratio relates to the market and operational technology dimensions of absorptive capacity. However, when the analysis was conducted including both first- and secondhand experience, different results were obtained. The development of market and operational technology AC was no longer associated with any of the measures of first-hand experience, but rather with buyers. Third, this study identified key contributors from which firms access second-hand experience for the development of their absorptive capacity about entering international markets, considering both buyer-supplier and non buyer-supplier relationships. In a model that included both first- and second-hand experience, the aspects of second-hand experience that was positively associated with the firm's absorptive capacity development are: main buyers (which contribute to all dimensions of absorptive capacity), foreign competitors and universities (which contribute to strategic technology AC), and attending foreign exhibitions (which contributes to operational and strategic technology AC). In addition, when the model only included second-hand experience, domestic competitors appeared to be positively associated with market related AC. Contrary to predictions, reading published standards was negatively associated with the development of strategic technology AC. Fourth, this study found that Indonesian firms tend to follow the lead of foreign multinational enterprises (FMNEs) operating in Indonesia, in terms of their decisions about choosing target markets and entry modes. These findings were surprising, as the analysis suggested that the actions of FMNEs in Indonesia were not related to firms' absorptive capacity development. This finding provides evidence of the applicability of institutional theory for developing country firms' learning about entering international markets. In summary, this study found that both first- and second-hand experience, in both buyer-supplier and non buyer-supplier relationships, matter in the development of a firm's absorptive capacity pertaining to internationalisation. The organisational learning and institutional literatures complement the international business literature, in terms of understanding how Indonesian firms learn about entering international markets. The mixed sequential qualitative-quantitative methodology proved useful for developing this more nuanced consideration of learning and internationalisation in this exploratory study.