Business Networks and Cooperation in International Business Relationships Author(s): Desire Blankenburg Holm, Kent Eriksson, Jan Johanson

Source: Journal of International Business Studies, Vol. 27, No. 5, Global Perspectives on Cooperative Strategies (1996), pp. 1033-1053 Published by: Palgrave Macmillan Journals Stable URL: http://www.jstor.org/stable/155580 . Accessed: 02/03/2011 08:33
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=pal. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Palgrave Macmillan Journals is collaborating with JSTOR to digitize, preserve and extend access to Journal of International Business Studies.

http://www.jstor.org

BUSINESS NETWORKS AND COOPERATION IN INTERNATIONAL BUSINESS RELATIONSHIPS Desiree BlankenburgHolm, Kent Eriksson and Jan Johanson* Uppsala University Abstract. Cooperative relationships between firms can be better understood if they are examined in the context of a network of connected business relationships. Based on research on business relationships and business networks, this paper formulates a LISREL model that analyses cooperation in international business relationshipsbetween suppliers and customer firms. Theory suggests that cooperation can raise the value of business relationships, and that business network connections have an impact on cooperation. The model is investigated in a sample of 136 internationalbusiness relationships.The analysis shows that relationship profitability is directly affected by relationship commitment and, indirectly throughcommitment, by business network connections. INTRODUCTION The growing academic interest in cooperative strategies in international business has, during the last decades, focused mainly on formal cooperation as reflected in studies on international joint ventures, licensing, management contracts and strategic alliances [Contractor and Lorange 1988]. Parallel to this development, however, there has been a surge of interest in cooperative business relationships between supplier firms and customer firms in business markets. This interest has been manifested in studies in marketing [Anderson and Narus 1990; Dwyer, Schurr and Oh 1987], organization [Larson 1992; Powell 1990], accounting [Johnson 1992], and economics [Carlton 1986]. In all of these fields, the cooperative business relationships between suppliers and customers have been considered very important. It is surprising that, to our knowledge, no research on international business relationships has yet been presented in international business literature. This is even more surprising, when we consider that Toyne [1989] proposes international exchange as the foundation for theory building in international business. The relational exchange in business relationships is a very basic form of international exchange. Without questioning the relevance of received research on cooperative strategies in international business, we believe there is a need for studies on
*Professor Johansonis Professorof International Jan Businessat the Departmentof Business Dr. Studies, Uppsala University.E-mail is <Jan.Johanson@fek.uu.se>. Kent Eriksson is a researcher International in Businessand Organization the Departmentof BusinessStudies, at Uppsala University. Desiree BlankenburgHolm is a research assistant in International Businessat the Departmentof BusinessStudies,Uppsala University.
The authors wish to thank Professor Dag Sorbom, Department of Statistics, Uppsala University. 1033

1034

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

cooperation in relational exchange. This paper presents an empirical study of cooperation in international business relationships. Research on business relationships has focused primarily on the relations between antecedents and consequences within relationships [Morgan and Hunt 1994]. It has, however, been suggested that dyadic relations in business markets do not occur in isolation, but are connected to one another and can fruitfully be considered within a context of connected network relations [Achrol, Reve and Stern 1983; Anderson, Hakansson and Johanson 1994; Jacobucci and Hopkins 1992; Thorelli 1986]. Case studies provide a number of examples of the impact of surrounding networks on single dyadic business relationships [Forsgren and Olsson 1992; Lee 1991; HIakanssonand Snehota 1995], though until now, no empirical studies examining more general effects of networks on dyadic business relations have been published. This study looks at relationship cooperation in international business networks. We begin by outlining the theoretical conceptualizations of the relationships and networks employed. This discussion leads to the formulation of a structural model of cooperation in business relationships. The empirical section that follows describes the sample, data collection, operationalization of the constructs, and the LISREL method employed in the analysis. The following section shows the results of the empirical study, and in the fourth and final section we discuss the results. FROM BUSINESS TRANSACTIONS TO BUSINESS RELATIONSHIP According to the interaction approach applied in the European International Marketing and Purchasing (IMP) project, business relationships evolve as a result of interaction between the parties doing business [Ford 1990; H'akansson 1982; Turnbull and Valla 1986]. A business relationship, in turn, is a framework within which subsequent interactions take place. IMP empirical observations concerning international business relationships, that is, exchange relationships between a supplier firm in one country and a customer firm in another, demonstrate that the relationship interaction between suppliers and customers that are important to each other is not only - and in many cases not even primarily - a matter of buying and selling [Axelsson and Easton 1992]. On the contrary, interaction comprises complex patterns of information exchange concerning the firms' needs, capabilities and strategies with regard to production, logistics, development, quality, etc. [Cunningham and Homse 1986]. Thus, interaction in business relationships is a matter of coordinating activities and resources between two firms [Ha'kansson and Snehota 1995]. Often this coordination means that interdependent production, logistics, development, and administrative activities and resources are modified and adapted in order to bring about a better match between the firms [Hallen, Johanson and Seyed-Mohamed 1991]. Sometimes such adaptations involve discrete changes in products, production systems or processes. More often,

BUSINESS NETWORKSAND COOPERATION

1035

however, the changes are gradual, implying that over time, the firms adapt their business activities to each other's way of doing business. The evolution of interaction can been described as a social exchange process between two firms conceptualized as collective actors (cf. Blau [1964]; Emerson [1972]; Homans [1958]; Thibaut and Kelley [1959]). One of the firms - usually the supplier, but also often the buyer - takes the initiative to conduct business with the counterpart. If the counterpart responds, the interaction evolves, and gradually, commitments are made by both firms. During the evolving process, the firms learn about each others' competences and behavior [Fiol and Lyles 1985], and an understanding about how to coordinate their activities is reached [Alter and Hage 1993; Anderson and Narus 1990], a trust in each other is established [Axelrod 1984; Dwyer et al. 1987], and a strong commitment to the continuity of the relationship is created [Gundlach, Achrol and Mentzer 1995; Morgan and Hunt 1994]. The coordination of activities between the two firms creates an interdependence. Thus, the process transforms an ordinary market relation into a dyadic business relationship, in which the interdependent firms coordinate their exchange activities to create additional value from the relation by raising their joint productivity [Zajac and Olsen 1993]. If relationship coordination is successful, the process may lead to extension of the relationship to comprise, for instance, joint product development [Lundvall 1985],just-in-time exchange [Frazier, Spekman and O'Neal 1988], on-line EDB linkages, or other cooperative arrangements that require investment in the relationship. The social exchange perspective on business relationships stresses two important features. One is that the development process is by no means deterministic; the dyadic relationship is developed only if both parties consider it profitable or otherwise worthwhile to engage in future exchange. Evidently, there is a strategic element in the development of relationships. But no choice can be made unilaterally, since the counterpart must be continuously motivated to engage in business. For each important business relationship formed, a number of attempts to initiate business interaction are, for various reasons, terminated or never materialize into significant dyadic business relationships. Given the transformation process, the structure of a relationship is at every point in time a result of its history [Levinthal and Fichman 1988]. A second important feature of business relationships is their informal character (cf. Granovetter [1985]). They are based on relations that evolve between individuals in the firms. Single events such as specific transactions may be formalized, but uncertainties and possible opportunism are better handled through mutual understanding that is based on past experience of interaction with each other and expectations of future exchange (cf. Alter and Hage [1993]; Axelrod [1984]). Thus, cooperation in business relationships is primarily an informal process of coordinated action between two firms.

1036

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

BUSINESS NETWORKS Although business relationships are distinctive entities that can be analyzed per se, they can be better understood if they are looked at in context and not in isolation. Thus, the cooperation in a relationship between two firms is contingent on the firms' cooperation in relationships with other parties, and the dyadic relation should be considered within the context of the direct exchange network surrounding the dyad [Achrol et al. 1983; Anderson et al. 1994; Kogut, Shan and Walker 1992]. This suggests that the social exchange perspective on dyadic relations within social exchange networks [Cook and Emerson 1978; Willer and Anderson 1981], can also be used to analyze cooperation in business relationships within business networks [Anderson et al. 1994]. Accordingly, a business network can be defined as a "set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualized as collective actors [Emerson 1981]" [Anderson et al. 1994, p. 2]. Two relations are connected if exchange in one of them is contingent on exchange in the other. Social exchange theory distinguishes between positively and negatively connected relations, where positively connected means that exchange in one relation supports or complements exchange in the other [Emerson 1981]. Two relations are negatively connected if exchange in one hinders or competes with exchange in the other. The business network concept suggests that the coordination of activities between two firms in a business relationship also takes place within the wider business network context. Thus, each firm can be expected to be engaged in a limited number of connected business relationships, each one coordinating the firm's activities with those of the counterpart [Ha'kanssonand Snehota 1995]. When two firms cooperate in a focal business relationship they bring to the focal relationship their connected relationships. The evaluative criteria upon which they base their engagement in the focal relationship are influenced, at least indirectly, by their business network contexts [Anderson et al. 1994; Kelley and Thibaut 1978]. The more the connected relationships support cooperation in the focal relationship, or can be adapted so that they do so, the easier it is for the partners to coordinate their activities, increase the investment in the relationship, and thereby increase the joint productivity of the partner firms. Thus, a set of connected business relationships along the value chain can be conceived as a business network, in which the firms learn, through social exchange processes over time, to cooperate and thereby coordinate their activities. Through this, they bring to the value chain evaluative criteria affected by their connected relationships with other actors and, to the extent that they can coordinate these activities, are able to raise the joint productivity of the value chain. Furthermore, the firms can be engaged in business relationships other than those directly on the value chain. There may be other customer relationships or complementary supplier relationships which are connected to a focal

BUSINESS NETWORKSAND COOPERATION

1037

business relationship in such a way that cooperation in the focal business relationship is supported. This means that by allowing the firms to engage in more interdependent exchange, the business network can be expected to create additional value in the chain, as compared with a chain in which the firms transact at arm's length. The business network makes it possible for a set of interdependent firms to pursue a collective strategy that raises their joint performance [Astley 1984]. The business network can be a value creation network. In an analysis of cooperation and opportunism, Hill [1990] demonstrates that firms are more inclined to engage in cooperation with partners who have demonstrated their trustworthiness and cooperative ability in other relations. Cooperation is something that has to be learned, and those who have succeeded in learning how to cooperate in one relationship may be capable of cooperation in other relationships as well [Axelrod 1984]. This means that we can expect that two partners in a focal relationship may be more prepared to commit themselves to cooperation if the counterpart is engaged in other cooperative relationships. Partners will also be capable of cooperating more effectively if they both are engaged in business networks with connected relationships. In the following section, we formulate a structural model of cooperation in international business relationships. The model is intended to capture the development of cooperation within the relationship, and cooperation with the surrounding business network when explaining value creation in the relationship. A STRUCTURAL MODEL OF COOPERATION IN INTERNATIONAL BUSINESS RELATIONSHIPS The word "cooperation" is frequently used in a general sense with no specific definition [Axelrod 1984]. Contractor and Lorange [1988], and Ring and van de Ven [1992] define cooperation by listing a number of different cooperative strategies or relationships. According to the Concise Oxford Dictionary (fifth edition 1964), cooperation is "working together to the same end". In business relationships between suppliers and customers, "working together to the same end" can, as discussed above, basically be regarded as mutual understanding in coordinating exchange activities in the relationship (cf. Alter and Hage [1993]). This presupposes that the partners are able to handle unforeseen issues that may arise. In the following analysis, we call this basic quality of cooperation in business relationships relationshipunderstanding.In contrast to trust, which is frequently a central construct that captures the affective relation between the relationship partners [Morgan and Hunt 1994; Ring and van de Ven 1992], understanding places attention on the more cognitive aspects of cooperation. As suggested in the discussion of business relationships above, cooperation in a relationship can also be extended to comprise the coordination of both

1038

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

activities other than exchange activities and arrangements requiring investment in the relationship, thus implying a stronger commitment to the relationship by the partners. We label the construct relationship commitment. Commitment is a central construct in models of relationship development [Dwyer et al. 1987; Morgan and Hunt 1994]. It has also contributed to our understanding of international joint ventures [Beamish 1988]. According to the social exchange framework, there is reason to believe that, in coordination of exchange activities, understanding influences commitment to the relationship. If the partners have a mutual understanding concerning how to coordinate their exchange activities, they are prepared to invest in the relationship and to extend cooperation by including other activities as well. Thus relationship commitment can be expected to be positively affected by relationship understanding. We hypothesize the following. Hypothesis 1: In business relationships, relationship understanding will have a positive effect on relationship commitment. According to the preceding discussion of business networks, there is reason to believe that firms are more inclined to extend their engagement in a focal relationship if they can coordinate activities in this relationship with activities in other connected relationships [Anderson et al. 1994; Hill 1990]. They are better able to see opportunities to extend cooperation, as well as commit themselves to such cooperation, when engaged in and able to mobilize connected network relationships. We define business network connection as the degree to which a focal business relationship is connected to other business relationships, and expect it to have a positive impact on commitment to the focal relationship. It might be argued that the business network connection should also comprise indirectly connected relationships, when these are considered relevant by the partners in the enactment of their relationship. We suggest, however, that, to the extent that such indirectly connected relationships are important, their effect is mediated by the directly connected relationships [Achrol et al. 1983; Anderson et al. 1994]. Hypothesis 2: In business relationships, business network connection will have a positive effect on relationship commitment. The business network connection construct embodies connected relationships on both the supplier and customer sides. It might be argued that there is a difference between the connected relationships of the two sides, in that the supplier firm brings its connected relationships to the focal relationship, while the customer firm brings its connected relationships to the focal relationship. According to this view, two different networks would be connected to the focal relationship. The view presented in the business network section above is, however, that a focal business relationship is an affair shared by the two relationship partners, as are connected relationships brought to the focal relationship. This implies that international business relationships are em-

BUSINESS NETWORKSAND COOPERATION

1039

bedded in a single international business network and not two separate national business networks (cf. Johanson and Mattsson [1988]). Since firms cooperate in business relationships in pursuit of profit or some other payoff, and the theoretical discussion above suggests that cooperation is able to raise joint productivity of the relationship partners, we would expect that both understanding and commitment have a positive impact on the profitability of a relationship [Axelrod 1984; Hill 1990; Kalwany and Narayandas 1995; Zajac and Olsen 1993]. The effect of commitment on performance is also stressed in international joint venture research [Beamish 1988; Buckley and Casson 1988; Lee and Beamish 1995]. Hypothesis 3: In business relationships, relationship understanding will have a positive effect on relationship profitability. Hypothesis 4: In business relationships, relationship commitment will have a positive effect on relationship profitability. Finally, Morgan and Hunt [1994] argued in their model of relationship marketing that firms are more committed to developing relationships with partners that are highly valued because these partners delivered superior benefits. This means that there is reason to expect that relationship commitment is influenced by the profitability of a relationship. FIGURE1 Structural Model of Relations between Relationship Understanding, Relationship Commitment, Business Network Connection, and Relationship Profitability

usNetwok \ Connectwor

>Relationship Commitment

Relationship AP3 VUnderstanding/

relationslipt

Profitability

1040

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

Hypothesis 5: In business relationships, relationship profitability will have a positive effect on relationship commitment. According to this view, there is reciprocity between relationship commitment and relationship profitability. The five hypotheses are combined in the structural model, illustrated in Figure 1. The numbers of the arrows in the model correspond to the numbers of the hypotheses. The model shows that we may expect relationship profitability to be directly influenced by relationship understanding and relationship commitment, and indirectly by relationship understanding and business network connection through relationship commitment. There is also a reciprocal relation between commitment and profitability. DATA AND METHOD The empirical analysis is based on a database established in the second IMP project. Data was gathered on 136 dyadic business relationships of supplier firms in Germany, France and Sweden, with customer firms in France, Germany, Italy, Japan, Sweden, the U.K., and the USA. Thus a set of international business relationships has been investigated. The supplier companies in the study belong to different industries, ranging from raw materials to equipment. Interviews were conducted with marketing executives who were asked to select one of the firm's most important customers in a specific country so that an even distribution of relationships across the customer countries could be achieved. The sample of relationships investigated is fairly evenly distributed over the seven customer countries (France 23.5%, the United Kingdom 16.2%, Germany 14.0%, Sweden 14.0%, Italy 13.2%, the USA 10.3%, and Japan 6.6%). The respondents were also asked to select a customer relationship they were responsible for and of which they had personal experience. Thus the respondents selected play a key role in the firm's enactment of the relationship. Questions about the focal customer relationship were answered in a personal interview and followed a standardized questionnaire using five-point Likert scales ranging from "strongly disagree" to "strongly agree," or "not at all" to "very much." Missing values are accounted for in the analysis by pairwise deletion, so the number of missing values varies across variables. Pairwise deletion is applied primarily because there are few and sparsely distributed missing values. The total number of missing values is nine, and no single variable is missing more than two values. Data is processed by LISREL [Joreskog and Sorbom 1993], which is a statistical structural modeling method. The method uses two approaches to derive structural relations. The first is to approximate linear relations between

BUSINESS NETWORKSAND COOPERATION

1041

variables, which yields regular correlation coefficients. This linear approximation deviates from the observations by an estimated error term. The second component of the LISREL analysis uses this error term as a tool in tracing structural relations. The variation of the error term is assumed to be independent of the variation of the correlation coefficient, so LISREL uses standard correlations and error covariances as two independent indicators for relations between variables. This means that we obtain a more complete picture of the "true" variation of variables than we do through ordinary correlation analysis. Technically, the method first derives a model of structural relations from error covariations, and then tests that model on the corresponding correlation structure. (For further information on the method, see Joreskog and Sorbom [1993]; Bollen [1989]; Hayduk [1987].) On a more concrete level, LISREL makes it possible for several variables to be indicators of a higher order variable that is assumed to represent the underlying, or latent, commonalities of the indicators. In social science research, the latent variable often represents a variable at the construct level, whereas the indicators are more specified operationalizations of the construct. LISREL has found a number of applications for tracing relations between latent variables in social science research in general [Joreskogand Sorbom 1993], and business research in particular [Gupta, Dirsmith and Fogarty 1994; Hallen, Johanson and Seyed-Mohamed 1991; Morgan and Hunt 1994; Anderson and Gerbing 1988]. The primary uses of LISREL are to confirm a hypothesized model and/or to explore relations without predefinitions. In practice, it may be useful to use both confirmatory and exploratory approaches in tracing structural relations [Joreskogand Sorbom 1993; Anderson and Gerbing 1988]. To this end, we have formulated a structural model for further refinement and modification. The validity of the structural model is measured by the validity of the entire model (nomological validity) and the validity of the separate relations within the model. The validity of separate relations may be judged by the degree of separation between constructs (discriminant validity) and the degree of homogeneity of these constructs (convergent validity). In reviewing validity measurements of linear structural modeling, Bollen [1989, pp. 179-225] concludes that some of the traditional validity measures are not appropriate. We choose to follow the recommendations of J6reskog and Sorbom [1993, pp. 111-31] regarding validity measures. The validity of the entire model is measured by chi-square and probability measures, which are indicators of the match between model and data, and of the significance of the model. Provided that the model's key statistical measures are acceptable, we can turn to analysis of each relation within the model. This is done by analyzing t-values, and R2values. The t-value is a standard measure of statistical significance of variables, measured for each estimated relation in the model. The R2-value is a measure of the strength of the linear relation [Joreskogand Sorbom 1993, p. 121]. A low

1042

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

correspondsto a weak linear relation, which, together with an RJ2-value validity.For a constructto be insignificant t-value,indicatespoor convergent valid, we requirethat it is part of a valid model, and that the indicatorsare valid constituentsof the construct(i.e., the latentvariable). of for Factorloadingsand the coefficients causalrelationsareanothermeasure construct validity [Joreskogand Sorbom 1993, p. 20]. Factor loading is a measureof the extent to which the variation of one indicatorexplains the variation of the latent variable.If the fit of the entire model is good, the indicatorwith the highestfactorloadingis the most validindicatorof its latent variable.High factor loadings are thus good indicators of the convergent provide of The validityof constructs. coefficients causalrelationsmaysimilarly clues to validity. In a structural model, discriminantvalidity is high if construct. indicatorsload only on the hypothesized The validity of the constructs used in a structuralmodel may be further investigated by making a measurementmodel with no causal relations and [Joreskog Sorbom1993,pp. 15-19].This model makesit possibleto test if the betweenlatent the model is multidimensional, investigating correlations by is A variables. basic requirement that the correlationbetweenlatent variables should be significant,and also that the correlationshould not be equal to 1. The validity of the constructsused in our structuralmodel was tested in a model with no causal relationsbetween latent variables.Only measurement one correlation, between the two independent variables business network connection and relationship understanding (cf. below) was found to be non of the This findingmeansthat we can not approximate probability significant. the construct being two-dimensionalin our statistical computations,even though we see them as beingconceptuallyseparate. CONSTRUCTVALIDITY tested in a LISRELmodel The hypothesizedmodel (Figure 1) is empirically (Figure 2), which we arrivedat after some explorationof the hypothesized model. However,beforewe discussthe processesleadingup to the results,we investigate the validity of the constructs in the model. This is done by examiningthem in the context of the resultingmodel.
Business Network Connection

using a number The business network connection constructis operationalized of indicatorsthat have to do with the perceivedinfluenceof the partners' The indicatorsare with third parties on the focal relationship. relationships shown in Table 1, and relate to the influenceof both the supplier'sand the customer'sother relationshipsaccording to the respondentin the supplier firm. One indicatorconcernsthe importanceto the focal relationshipof the to a with a specificsupplier, second the importance the supplier'srelationship with anotherspecificcustomer. of focal relationship the supplier'srelationship

BUSINESS NETWORKSAND COOPERATION

1043

TABLE1 The Constructs and Their Indicators

Indicator Business NetworkConnection To what extent is your business with this customer with your own other affected by any relationship customers?(OTC) To what extent is your business with this customer with your own affected by any relationship suppliers?(OWS) To what extent is your business with this customer affected by any of his customer relationships?(OWC) To what extent is your business with this customer affected by any of his relationshipswith suppliers of products supplementaryto yours?(SPL) RelationshipUnderstanding It is easy to agree about how to handlethe various issues that arise in this relationship. (EASYA) Misunderstandings between us and this customer are quite rare.(MISUN) We usuallyreach agreements on contracts easily. (AGR_C) RelationshipCommitment We consider the exchange with this customer as with him.(W_REL) partof a wider relationship This customer is preparedto invest time and money in developing our relation.(MONEY) RelationshipProfitability Consideringall costs and revenues associated with how would you assess its this relationship, over the last five years? (PROFITS) profitability Factor Loading t-value R2-value

0.39 0.51 0.39 0.58

3.79 4.72 3.76 5.56

0.15 0.26 0.15 0.34

0.86 0.73 0.70

10.70 8.84 8.38

0.75 0.53 0.48

0.68 0.57

3.92 3.80

0.46 0.33

1.00

1.00

Note: Abbreviations in brackets are indicator names used in Figure 2.

The remaining two indicators concern the importance to the focal relationship of the customer firm's relationships with any of their specific customers, and with any other supplier, whose products are supplementary to the focal supplier's. Key statistical measures suggest that two of the four indicators are more valid indicators of the business network connection construct. The first of these concerns the supplier's supplier, and the second concerns the customer's suppliers of products supplementary to those of the responding supplier. Even though all indicators are statistically significant, the factor loadings and, in particular, the R2-values of these two variables are much higher. The R2-values for the other two indicators are low, but we have retained them as they are

1044

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIAL ISSUE 1996

relevant indicators of the business network connection construct. The implication of the statistical results is that the business network connection construct is validly represented by the indicators chosen, but that the supplier's supplier and the customer's supplementary suppliers are more central to the construct than either the supplier's other customer relationships or the customer's customer relationships. A further test of the construct shows that validity is not increased by dividing it into two different constructs that represent the supplier connections and the customer connections. This supports the view that international business relationships are connected to a single international business network and not to two separate national business networks. Relationship Understanding The indicators of relationship understanding all concern the responding manager's opinion of the smoothness of the exchange relation. This is done by focusing on an assessment of the ability of the partners to handle upcoming issues, reach agreements and avoid misunderstandings (Table 1). These assessments are based on the respondent's own experience of the cooperativeness evident in coordinating the relationship. The three indicators of relationship understanding shown seem to be valid representations of a common construct. All key statistical measures are very good. The t-values are above 8.38, factor loadings above 0.70, and R2-values above 0.48. The indicator relating to the ease of handling issues is fairly general compared to the others which concern specific misunderstandings and contract agreements. This is probably the reason why the first indicator received both higher factor loading and R2-values than the others. Relationship Commitment Relationship commitment concerns the engagement of the partners in the relationship. The construct is meant to elicit whether the relationship partners consider the relationship as encompassing more than just the present exchange. Within a business network context, this can be interpreted as having to do with strengthening of the relationship by relationship-specific investments or as having a wider scope than exchange. Indicators of the latent commitment construct are shown in Table 1, which also shows that the key statistical measures are good. The factor loadings are above 0.57, the t-values above 3.80, and both R2-values above 0.33. Relationship Profitability Relationship profitability is meant to capture profitability in a wide sense associated with the relationship between the supplier firm and the customer firm. It is based on the respondent's assessment of the profitability over a five-

BUSINESS NETWORKSAND COOPERATION

1045

year period, given all costs and revenues.The exact wording of this question is: "Considering all costs and revenues associated with this relationship, how would you assess its profitability over the last five years?" This formulation shows that the indicator, and consequently the construct, concerns a much wider outcome than accounting profit. We are limited here to the supplier's judgment of its own relationship profitability since there are, understandably, too many missing values in the estimation of the counterpart's relationship profitability.It is interesting, however, that analysis of the two measures suggests that they are valid indicators of a common construct. RESULTS Our original hypothesis was that relationship understanding and business network connection, which encompass important aspects of the relationship of two partners to each other and of their relations with other business network partners, affect relationship commitment. Understanding and commitment were then hypothesized to affect relationship profitability, which, in turn, was expected to influence relationship commitment. Two of the hypothesized causal relations are not supported, since the t-values are nonsignificant. We have therefore revised the model to exclude these relations. The result of the LISREL analysis based on the new model is displayed in Figure 2, which represents a model with a chi-square value of 43.28 at 31 degrees of freedom and a probability value of 0.070. The probability value is above 0.05 for significance at the 5% level, and the chi-square and degree of freedom measures also suggest that the model fits the data. Further support for this is found in the fact that all causal relations between latent variables have t-values above 2.48 and R2-values above 0.33. Comparing the hypothesized model (Figure 1) with the resulting model (Figure 2), we see that two causal relations have been omitted in the process leading up to the results. The relations from relationship understanding to relationshipprofitability, on the one hand, and from relationshipprofitability to relationship commitment, on the other, were not significant and therefore deleted from the computations. Starting with the dependent variable, we see that relationshipcommitment has a strong impact (with a coefficient of 0.58 and t-value of 3.80) on relationship profitability in the resulting structural model. Relationship commitment, in turn, is strongly influenced by both the independent variables, relationship understanding and business network connection. In particular, the causal relation from business network connection is strong, with a coefficient of 0.66. We also analyzed a structural model that used the supplier's assessments of both supplier and customer profitability as indicators of the latent variable relationship profitability.This model displayed results similar to the one above,

1046

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIAL ISSUE 1996

FIGURE 2 Structure of the LISREL Model lowc

0.39(3.76)) 0.68(3.92) 0.57(3.80)

|W_REL

MONEY

ISPL
0.58(5.56

\\I
Business 0.66(2.65)
SI>

0.39(3.7

Network

onnecti

Relationship

ommitment

0.51(4.72)
0.34(2.48) 0.58(3.80)

ows

-0.73(8.84)

IMISUN I
0.70(8.38),,

l 1

Relationship Understanding

\ Relationship Profitability

1.00

JAGR_C| Model statistics: Chi-square is 43.28 with 31 degrees of freedom, at a probability of 0.070. Figures are factor loadings followed by t-values in parentheses. Errorcovariance for OWS and W_REL added.

but was rejected because of three modifications that diminished its validity. There was a large number of missing values in the supplier's assessment of customer relationship profitability,which is probably the reason that the three modifications were necessary. Using a single-item construct like supplier profitability has the disadvantage that the error variance of the construct itself can not be identified. But this disadvantage is remedied by the fact that error covariances in relation to other latent constructs may be identified, and also that the construct is conceptually relevant. We also compared a model in which relationship understanding, commitment and business network connection are related directly to relationship profitability. We found that only relationship commitment influences relationship

BUSINESS NETWORKSAND COOPERATION

1047

profitability significantly. This suggests that relationship understanding and business network connection must work through relationship commitment in order to generate relationship profitability. The resulting model in Figure 2 also demonstrates that understanding, despite having no direct impact on relationship profitability, does influence profitability indirectly, as indicated by the causal chain via commitment. LISREL has a way of estimating indirect effects, and these estimates of the causal chain show the coefficient to be 0.20 with a t-value of 2.80. Business network connection has a corresponding yet stronger indirect effect, with the coefficient being 0.38 and t-value 4.15. Thus, both independent variables affect profitability via commitment. It is evident that relationship commitment is a key mediating variable in our model. One interpretation of the results is that there are two parallel processes that influence a relationship. One is the intra-relationship coordination process and the second is the business network connection processes that link the relationship to other important business partners. If the relationship coordination process is characterized by understanding, the focal partners are inclined to discover and place confidence in ways to develop the relationship. Correspondingly, when the relationship is strongly linked to a surrounding business network, that is, when the partners cooperate in other business relationships, the focal partners are able to discover and place confidence in opportunities to develop the relationship. This is the situation when the partners participate in coordinating the activities of several firms, for instance, along a value chain, or perhaps more correctly, in a value network. Moreover, as a consequence of the development of the focal relationship, the joint productivity and/or the value of the partners' exchange increases, which means that the supplier - and the customer, although not as well verified in our analysis - finds the relationship more profitable. Although data on relationship profitability of the customer is lacking, the data we do have indicates that relationship commitment increases this as well.

DISCUSSION
At the beginning of this paper, our hypothesis was that the business network connections of relationship partners have an impact on cooperative behavior in international business relationships. We also expected to find that cooperation in business relationships was built and developed in a social exchange process between the partners, in which the partners gradually commit to cooperation. Based on these expectations, we formulated a structural model that placed the hypothesized relations in the context of the profitability associated with focal business relationships. Analysis of the structural model yields important insights into the processes of

1048

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

cooperation in business relationships and business networks. In particular, we find two distinct, but related, cooperation processes: one that takes place between the relationship partners themselves, and another that occurs between the relationship partners and other business network actors. Both of these processes contribute to more intensive cooperation processes between the partners. We can speak of a network infusion process, in which the connected business network is brought into, and develops cooperation in, the focal relationship in such a way that the profitability of the relationship partners is increased [Forsgren, Holm and Thilenius 1996]. In this sense, we are also justified in labeling the business network a value creation network. Two of the hypothesized relations are not supported by the analysis. First, relationship understanding shows no direct impact on relationship profitability. If relationship coordination works smoothly, however, it may affect relationship commitment and thus, indirectly, relationship profitability. Second, relationship profitability does not lead to relationship commitment. Evidently, conclusions about causal direction cannot be drawn from an analysis of cross-section data, though our analysis does seem to indicate that the causal relation stems from commitment to profitability rather than from profitability to commitment. It is interesting that relationship commitment is influenced by understanding between the partners rather than by the profitability achieved in the relationship. Our study is based upon a sample of international business relationships that are considered to be important by the partners. It certainly demonstrates that some aspects of cooperation in such international business relationships are comprehensible and are strongly related to profit. This analysis comprises no international business variables, but does suggest a need for future comparative studies on the international business relationships of firms from different countries. This would give us the opportunity to investigate whether the cultural distance between partners has a bearing on cooperation processes. The sample investigated is not large enough for such comparisons. Although not the main purpose of the study, the analysis of the business network connection construct indicates that the business network connections of the relationship partners contribute to a single construct. This means that there is reason to discuss international business networks not only in a descriptive sense, as stretching over several countries, but also in the sense that they are brought into the cooperation processes of partners from different countries. We believe that it is a fruitful avenue for international business research to analyze the emergence and development of such international business networks. STRATEGY IMPLICATIONS Considering cooperative strategies,such as strategic alliances and joint ventures, our findings demonstrate first, much in line with earlier researchon cooperative

BUSINESS NETWORKSAND COOPERATION

1049

relationships, that the critical issues are related to the development of the cooperation process [Madhok 1995]. In terms of strategic fit between the potential partners, this suggests that fit is brought about in the relationship development process. In terms of contracts, the process view implies that contracting is one of many elements brought into the social exchange process. This also means that problems that arise after the formation of strategicalliances are rooted in the process that precedes alliance formation. More precisely,there seems to be a problem of formal cooperative arrangementsin that, for the most part, the process leading up to the formal agreement involves top management, while the process of implementation is handled by middle management. Our findings that business network connections influence relationship commitment directly, and relationship profitability indirectly, have strong implications for cooperative strategies. It indicates that the relationship development process has to be coordinated with ongoing processes in other connected relationships of the partners. This suggests that strategic alliances and joint ventures are more likely to be successful if the partners can bring their business networks into the alliance, as this can strengthen their commitment to the cooperation. Correspondingly, this implies that if the partners are unable, or unwilling, to link important business relationships to the alliance, it may be faced with considerable implementation problems. In an international business perspective, it is also interesting to consider the implications for foreign market entry. While most research on foreign market entry has focused on entry mode selection, our findings indicate that the development of cooperative relationships with customers, suppliers or other business partners may be critical. Moreover, the results show that this may be a matter of managing relationship development processes rather than of choosing an appropriate entry mode or organizational form. According to the process view, entry mode selection is primarily an element in a process of relationship development. Furthermore, the study shows that development of a central business relationship in a foreign market should not be considered in isolation from other business relationships. The focal relationship is part of an international business network, and its development is contingent on the willingness and ability of the relationship partners to coordinate activities in the focal relationship with activities performed in the surrounding business network. In this perspective, foreign market entry seems to be a process in which the entrant firm develops relationships with partners in the foreign market and coordinates its connected business network relationships with exchange in the focal relationship [Blankenburg 1995].

1050

JOURNAL OF INTERNATIONAL

BUSINESS STUDIES, SPECIAL ISSUE 1996

cl-0 >1 0 0
0 4-

4.1 cn
C) 0 0 N co

CL CL :3

o
> o c\j CD m c\j

cn
C".

0
CL 0 4.--0

c; c;

co

2
a

C.jE cn
C 0

0 CL CL 0 0

C)
o

0 0 co U-)
0 C\j
0

C\j
0 0

(D
m

co :3 E 'F o
C) 0 c 0 0 LO 0 -o

m .C
m

ci !E 0 C 0

co
L-

0 0

>

-5 0
o
c-

0 ;_-c- CZ (n
CL C
.0 C:

ci

Z
z

11:1-

(O

It

LLI M 0. x
m

U)

LO 0
c; c;

-r- 0
c; c;

0
c;

0 F 2? 0) C:
C13
-o 0

-t

-F a) 0 E c o +1 .0 .- .+1 CL acn co C- c:3 -T) cn cn 0 " C C .0 .0 'F 'F 4- 40 0 >N >1

C C

(t co

(t

C13 (t

Mm
2 >;

CD
>

4-

a)
:' CT

-o -o -o -o
4444-

.(Q 0 U) <
0 o M M W ":I(D LO 0 0 0 N
4-

4-

-0

a) cn -cn :3

(1) "
co

.0

co >' CL

"

4-0

w
z 0

CD m CD N
c;

0 rci

co (O co -r- c\j Tci c; c;

co
0 c;

co C")
c;

W
W Co

0 0 0 ' = E >;' co co E E 0 Co . > E o co 44cn cn (1)

:3 (n 03 (1) c> C 0
40 0 +'

0 0 a) 0
E E P 0 0 0 . . . cn cn cn
-F
4-

c3

-F
4-

-F
4-

-F
+-j

cn

-F

C: (.5 co 0

>

m (O m N "Zil P- 0 N
N 0

-o C

a) a) co co co 0 0 CL
m C IX 0 (D -0
Co

CD -0

(1)

a) cn cn cn cn D D D D E n -0 n n 0
0) 0 0 0 0 >1 >1 >1 >1 cn 0 0

0
4-

a)
E 0 o 4-

a) 0) co
C: CY)-0 Co cz

(n

.(n
C

U)
L uo cc CL o 0 C\j m ":I' N

Ft

ci C56 C5ci C; C; C5C5

m r-- oo m -r- -r- -r- N

r-- Lo -r- -r.0

4-

cy) -0

a) co
cn.-,
C
0

0 0 0
x

C: -0 '0

:3
0

>' a) 0 -0

co

a)

:3 (Z cn 0 0 0

+C'z

9 F- F- I C/) _j
w w fl)

C/) z
W

cr Z

-0

.5 t

< z LL W w >cro a: z m -

BUSINESS NETWORKSAND COOPERATION

1051

REFERENCES
Achrol, Ravi S., Torger Reve & Louis W Stern. 1983. The environment of marketing channel dyads: A framework for comparative analysis. Journal of Marketing, 47(Fall): 55-67. Alter, Catherine & Jerald Hage. 1993. Organizations working together Newbury Park, Calif.: Sage. Anderson, James C. & David W Gerbing. 1988. Structural equation modeling in practice: A review and recommended two-step approach. Psychological Bulletin, 103(3): 411-23. Anderson, James C., H'akan H'akansson & Jan Johanson 1994. Dyadic business relationships within a business network context. Journal of Marketing, 58(October): 1-15. Anderson, James C. & James A. Narus. 1990. A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(January):42-58. Astley, W Graham. 1984. Toward an appreciation of collective strategy. Academy of Management Review, 9(3): 526-87. Axelrod, Robert. 1984. The evolution of cooperation. New York: Basic Books. Axelsson, Bj6rn & Geoffrey Easton, editors. 1991. Industrial networks. A new view of reality. London, U.K.: Routledge. Beamish, Paul W 1988. Multinationaljoint venturesin developingcountries. London: Routledge. Blankenburg, Desiree. 1995. A network approach to foreign market entry. In K. M6ller & D. Wilson, editors, Business marketing:An interactionand networkperspective, 375-405. Boston, Mass.: Kluwer. Blau, Peter M. 1964. Exchange andpower in social life. New York: John Wiley. Bollen, Kenneth A. 1989. Structuralequations with latent variables.New York: John Wiley. Buckley, Peter J. & Mark J. Casson. 1988. A theory of cooperation in international business. In F.J. Contractor & P. Lorange, editors, Cooperativestrategies in internationalbusiness, 31-53. Lexington, Mass.: Lexington Books. Carlton, Dennis W 1986. The rigidity of prices. American Economic Review, 76(4), 637-58. Contractor, Farok J. & Peter Lorange, editors. 1988. Cooperative strategies in international business. Lexington, Mass.: Lexington Books. Cook, Karen S. & Richard M. Emerson. 1978. Power, equity, and commitment in exchange networks. American Sociological Review, 43(October): 721-38. Cunningham, Malcolm T. & Eric Homse. 1986. Controlling the marketing-purchasinginterface: Resource development and organisational implications. IndustrialMarketing and Purchasing, 1(2): 3-27. Dwyer, F. Robert, Paul H. Schurr & Sejo Oh. 1987. Developing buyer-seller relationships. Journal of Marketing, 51(April): 11-27. Emerson, Richard M. 1972. Exchange theory, part I: Exchange relations and network structures. In M. Zelditch & B. Anderson, editors, Sociological theories in progress, 2. Boston: Houghton Mifflin. Emerson, Richard M. 1981. Social exchange theory. In M. Rosenberg & R. Turner, editors, Social psychology: Sociological perspectives. New York: Basic Books. Fiol, C. Marlene & Marjorie A. Lyles. 1985. Organizational learning. Academy of Management Review, 10: 803-13. Ford, David, editor. 1990. Understanding business markets: Interaction, relationships and networks. San Diego, Calif.: Academic Press.

1052

JOURNAL OF INTERNATIONALBUSINESS STUDIES, SPECIALISSUE 1996

Forsgren, Mats & Ulf Olsson. 1992. Power balancing in an international business network. In M. Forsgren & J. Johanson, editors, Managing networks in international business. Philadephia, Penn.: Gordon and Breach. Forsgren, Mats, Ulf Holm & Peter Thilenius. 1996. Network infusion in the multinational corporation. In I. Bjorkman & M. Forsgren, editors, The nature of the internationalfirm: Nordic contributionsto international business research. Copenhagen, Denmark: Copenhagen Business School. Frazier, Gary L., Robert E. Spekman & Charles R. O'Neal. 1988. Just-in-time exchange relationships in industrial markets. Journal of Marketing, 52(October): 52-67. Granovetter, Mark. 1985. Economic action and social structure:The problem of embeddedness. American Journal of Sociology, 91(November): 481-510. Gundlach, Gregory T., Ravi S. Achrol & John T. Mentzer. 1995. The structure of commitment in exchange. Journal of Marketing, 59 (January):78-92. Gupta, Parveen P., Mark W Dirsmith & Timothy J. Fogarty. 1994. Coordination and control in a government agency: Contingency and institutional theory perspectives on GAO audits. AdministrativeScience Quarterly,39(June): 264-84. Hakansson, Hakan, editor. 1982. Internationalmarketingand purchasingof industrialgoods: An interactionapproach.London: John Wiley. Hakansson, Hakan & Ivan Snehota. 1995. Developing relationships in business networks. London: Routledge. Hallen, Lars, Jan Johanson & Nazeem Seyed-Mohamed. 1991. Interfirm adaptation in business relationships. Journal of Marketing, 55(April): 29-37. Hayduk, Leslie A. 1987. Structural equation modeling with LISREL. Baltimore, Md.: Johns Hopkins University Press. Hill, Charles WL. 1990. Cooperation, opportunism, and the invisible hand: Implications for transaction cost theory. Academy of Management Review, 15(3): 500-13. Homans, George C. 1958. Social behavior as exchange. American Journalof Sociology, 63(May): 597-06. lacobucci, Dawn & Nigel Hopkins. 1992. Modeling dyadic interactions and networks in marketing. Journal of Marketing Research, 29(February): 5-17. Johanson, Jan & Lars-Gunnar Mattsson. 1988. Internationalization in industrial systems: A network approach. In N. Hood & J.E. Vahlne, editors, Strategies in global competition, 287-314. New York: Croom Helm. Johnson, H. Thomas. 1992. Relevance regained: From top-down control to bottom-up empowerment.New York: Free Press. Joreskog, Karl G. & Dag Sorbom. 1993. LISREL 8: Structural equation modeling with the SIMPLIS commandlanguage. Hillsdale, N.J.: Lawrence Erlbaum. Kalwany, Manohar U. & Narakesari Narayandas. 1995. Long-term manufacturer-supplier relationships: Do they pay off for supplier firms? Journal of Marketing, 59 (January): 1-16. Kelley, Harold H. & John W Thibaut. 1978. Interpersonalrelations. A theory of interdependence. New York: John Wiley. Kogut, Bruce, Weijian Shan & Gordon Walker. 1992. The make-or-buy decision in the context of an industry network. In N. Nohria & R.G. Eccles, editors, Networks and organizations, 348-66. Boston, Mass.: Harvard Business School Press. Larson, Andrea. 1992. Network dyads in entrepreneurialsettings: A study of the governance of exchang relationships. AdministrativeScience Quarterly,37; 76-104.

BUSINESS NETWORKSAND COOPERATION

1053

Lee, Chol & Paul W Beamish. 1995. The characteristics and performance of Korean joint ventures in LDCs. Journal of International Business Studies, 26(3): 637-54. Lee, Jong W 1991. Swedishfirms entering the Korean market - Position development in distant industrialNetworks. Uppsala, Sweden: Department of Business Studies. Levinthal, Daniel A. & Mark Fichman. 1988. Dynamics of interorganizational attachments: Auditor-client relationships. AdministrativeScience Quarterly,33: 345-69. Lundvall, Bengt-Ake. 1985. Product innovation and user-producer interaction. Aalborg, Denmark: Aalborg University Press. Madhok, Anoop. 1995. Opportunism and trust in joint venture relationships: An exploratory study and a model. ScandinavianJournal of Management,11: 57-74. Morgan, Robert M. & Shelby D. Hunt. 1994. The commitment-trust theory of relationship marketing. Journal of Marketing, 58 (July): 20-38 Powell, Walter W 1990. Neither market nor hierarchy:Network forms of organization. In L.L. Cummings & B. Staw, editors, Research in organizational behavior, 295-336. Greenwich, Conn.: JAI Press. Ring, Peter S. & Andrew Van de Ven. 1992. Structuring cooperative relationships between organizations. Strategic Management Journal, 13: 483-98. Thibaut, John W & Harold H. Kelley. 1959. The social psychology of groups. New York: John Wiley. Thorelli, Hans B. 1986. Networks: Between markets and hierarchies. Strategic Management Journal, 7(January-February):37-51. Toyne, Brian. 1989. International exchange: A foundation for theory building in international business. Journal of International Business Studies, 20(Spring): 1-17. Turnbull, Peter & Jean P. Valla, editors. 1986. Strategies for international industrial marketing. London: Croom Helm. Willer, David & Bo Anderson, editors. 1981. Networks, exchange and coercion. New York: Elsevier. Zajac, Edward J. & Cyrus P. Olsen. 1993. From transaction cost to transaction value analysis: Implications for the study of interorganizational strategies. Journal of Management Studies, 30(January): 131-45.