The firms and the relationships must be studied to understand the networks (Axelsson and Easton 1992, p. 3). Johanson and Vahlne define business networks as "webs of connected relationships" meaning in practice that exchange in one relationship is linked to exchange in another (2009, p. 1414). In a similar way, Durrieu and Soldberg (2006, p. 59) define networks "as interlinked relationships both at the individual and the organizational level". These networks usually consist of independent agents or distributors, and sales subsidiaries at later stages of exporter life, and further down the chain local dealers making business with the final customer. To put it short: trading partners and the final customer (Durrieu and Soldberg 2006, p. 58). The same distinction has also been made by Ford (2002, p. 30) who states that the two most important examples of firm‟s networks are supplier networks and distribution networks.
Anderson & al (1994) think in turn that consideration of the individual relationships and what occurs within them many times is incomplete. Rather they define networks as "sets of connected relationships" including a focal firm and its partner in a focal relation that is connected with other relationships. (Anderson & al 1994, p. 1) The point is that two connected relationships of interest themselves can be both directly 12
and indirectly in connection with other relationships that are part of a larger business network (Anderson & al 1994, p. 2).
The role of relationships in industrial networks can be best understood from the basic level where one firm has individual relationships with other firms. In a simplified manner, if those single relations are added together, that will provide massive opportunities for systemic structures yet the process of forming a network is not that simple or additive in a matter of fact. (Easton 1992, p. 8-21) The inter-firm relationships can be identified and put into two main categories: the firm may either seek to exploit the complementarities of an individual partner or enter into a relationship in order to exploit network access. That kind of relationship allows control over the other organization and therefore reduces the uncertainty and increases stability. (Easton 1992, p. 9)
A model of industrial networks by Håkansson and Johanson (1992, p. 28) presents the basic structure of the industrial network as combination of three variables: activities, actors and resources. All of these elements are linked together to describe the dimensions of industrial networks. To put it briefly, an actor can be anyone in the network who controls activities or resources. Activities occur when an actor combines, uses, develops, creates or exchanges resources in a way that creates value and finally, resources are anything that actor control. In an industrial network it is typical, that the relationships between actors are invisible and fluid and they cannot be seen from the outsider so that one, such as potential competitor, is unable to gain detailed idea of the network structure. Therefore making preparations such as pre-entry checklists to enter the market will be less useful for the outsider. (Axelsson and Johanson 1992, p. 221) 13
3.2 Development of relationships
According to IMP studies relationships develop through an experiential learning process by which firms learn about their partners' resources and capabilities and gradually increase their commitments. The relationship development is a bilateral process involving two parties who learn interactively and make a reciprocal commitment to the relationship. (Johanson and Vahlne 2009, p. 1414) According to Gulati & al (2000) also the social networks are significant because the economic actors are placed on them: development of inter-firm relationships is, in the final hand, a process of establishing individual relationships.
Relationships can develop in a network actively or passively. The basic difference is that seller is the one who takes the initiative in active networking whereas in passive networking the initiation comes from outside of the firm - buyer's side. It is widely pointed out, that active networking is important when a firm is willing to do learning, foreign expansion, knowledge acquisition, etc. So even without suitable network relationships the firm can take an active role and generate new connections to ease its market penetration. In the case of knowledge-intensive firms the internationalization many times occurs in a passive way. In that case their existing networks (such as customers, importers, intermediates, suppliers, etc.) lead them to foreign markets and open new opportunities. (Ojala 2009, p. 51)
3.3 The Network model
The network model of internationalization was born in the late 1980s by Johanson and Mattsson (Ojala 2009, p. 51). As Johanson and Mattsson (1989) is cited in Evers and Knight (2008, p. 545), to be able to survive in a business environment, firms need many organizational relationships extending the basic buyer-seller dyad. This wider network viewpoint was also supported by Axelsson and Easton (1992, p. 219) who 14
state that "the way in which those in the entry market are utilized in the entry process becomes an important issue for research. It can also be assumed that, because of the cumulative nature of network processes, the sequential order of entry activities is important in research terms." The need of considering networks in the internationalization process was later supported by Coviello and Munro (1995, p. 59) who confirm the need of the wider model by stating that the network theory offers a rich perspective into the international development patterns.
The internationalization processes of SMEs and MNEs are different. While the MNEs will follow the traditional hierarchical approach such as Uppsala model on their internationalization process, SMEs do not follow the same pattern. That is supported by Coviello and Munro (1995, p. 49) in the study of high-technology SMEs.
Networks have been studied quite a lot in the internationalization process. Since the first introduction of the network model some most significant studies have been made by Coviello and Munro (1995, 1997). They studied small software firms and found out that network relationships have an impact on foreign market selection and the entry mode in the context of ongoing network processes. Their model combines the process model and the network approach. Additionally in 1998 Martin, Swaminathan and Mitchell found that inter-organizational relationships of suppliers (especially those with buyers) affected international expansion pattern of the firm. There have been studies also on the networks in internationalization strategy (Welch and Welch 1996), the location of the foreign direct investment (FDI) (Chen and Chen 1998), the first step abroad (Ellis 2000), internationalization of small and medium-sized enterprises (SMEs) (Chetty and Blankenburg Holm 2000), rapid internationalization (Loane and Bell 2006) and internationalization of firms from emerging markets (Elango and Pattnaik 2007). The list is not complete, anyway. (Johanson and Vahlne 2009, p. 1413) 15
The network model puts the emphasis on the network of the firm - that is wider system than the firm itself or the individual relationship between two firms. In Johanson and Mattsson's model (1988) the focal firm is connected firstly in its own business network, but additionally the internationalization process also covers all the other relevant network structures in foreign markets (Johanson and Vahlne 2009, p. 1415). The existing domestic networks may also extend beyond country borders if a firm reaches to international markets. In some cases the company uses its domestic networks in order to form new networks in the foreign country. There are direct or indirect connections existing between firms and country networks which can be used in internationalization. (Hollensen 2007, p. 71)
Figure 3 illustrates the bounds between different network agents in home and the target countries. Country A is firm‟s home country and the firm has subsupplier there. Anyway, the subsupplier has also established a subsidiary in country B and simultaneously, the firm has also its production subsidiary in country B. Since there is a pre-existing relationship between the firm and the subsupplier from the country A, it is easy for the firm‟s production subsidiary to use subsupplier‟s subsidiary in country B. There are similar linkages between other actors in the model as well. Generally, these linkages work as bridges between firms networks in one country and the networks in foreign country. (Hollensen 2007, p. 71).
