UNIVERSITY OF VAASA FACULTY OF BUSINESS STUDIES DEPARTMENT OF MARKETING Paing Mei Lian BUSINESS RELATIONSHIPS DEVELOPMENT IN SOUTHEAST ASIA Master’s Thesis in International Business VAASA 2014 1 TABLE OF CONTENTS page Abstract 4 Acknowledgement 5 1. INTRODUCTION 6 1.1. Background 6 1.2. Research gap 8 1.3. Objectives and delimitations 11 1.4. Definitions 14 1.5. Structure of the study 15 2. LITERATURE REVIEW 16 2.1. Concept of business relationships 16 2.1.1. Business relationships in SEA 18 2.1.2. Process of business relationship development 27 2.2. Model of attraction 31 2.3. Interaction and communication 34 2.4. Trust and commitment 35 2.5. Interdependency 39 2.6. Theoretical framework 41 3. RESEARCH METHODOLOGY 43 3.1. Research approach 43 3.2. Research design 47 3.3. Data Collection 50 3.3.1. Interview I 52 3.3.2. Interview II 52 3.3.3. Interview III 53 3.3.4. Interview IV 54 3.4. Reliability and validity 54 2 4. CASE DESCRIPTION, CROSS-CASE ANALYSIS AND DISCUSSION 56 4.1. Case descriptions 56 4.1.1. Case I 56 4.1.2. Case II 61 4.1.3. Case III 65 4.1.4. Case IV 73 4.2. Cross case analysis 80 4.2.1. Initiation phase 80 4.2.2. Development phase 84 4.2.3. Maintenance phase / Termination phase 87 4.3. Discussion 96 5. SUMMARY 101 5.1. Summary 101 5.2. Theoretical contribution 103 5.3. Managerial implications 104 5.4. Limitations and suggestions for future thesis 105 REFERENCES 107 APPENDIX I. Questions of interview 124 3 LIST OF FIGURES page Figure 1. Theoretical framework. 41 Figure 2. Emphasis of induction approach to research. 45 Figure 3. Systematic combining. 47 LIST OF TABLES Table 1. Dimension of social capital. 20 Table 2. Studies of Asian business relationships. 23 Table 3. Business relationships development process. 28 Table 4. Similarities and differences of case studies. 91 4 UNIVERSITY OF VAASA Faculty of Business Studies Author: Paing Mei Lian Topic of the Thesis: Business Relationships Development in Southeast Asia Name of the Supervisor: Professor Peter Gabrielsson Degree: Master of Science in Economics and Business Administration Department: Marketing Major Subject: International Business Programme: Master’s Degree Programme in International Business Year of Entering the University: 2011 Year of Completing the Thesis: 2014 Pages: 126 ABSTRACT In research one may find many thoughts about steps and strategies with regard to initiate successful business relationships in a multicultural context. However, earlier business relationship research has less focus on the Southeast Asia (SEA) region, especially when it comes to studies focussing on the initial stages of business relationships. Hence, the purpose of this Master’s thesis is to study the nature of business relationships and the initiation of business relationships in SEA. In order to cover the research topic appropriately, the model of attraction, interaction, communication, and trust and commitment have been applied. The abductive approach is applied to conduct this study. Data collection is based on semi-structured in-depth interviews with four interviewees from Finnish manufacturing companies in a business to business environment, three of the interviewees are Finns, and one is from Thailand. The result of this thesis is to contribute as a supportive guideline for companies planning to newly enter into the SEA market. The result of this Master’s thesis showed that Finnish companies used local partners to enter into these unfamiliar markets. Local partners and foreign companies are attracted to each other due to the resources needed. Local partners exchanged local market knowledge with technical and financial supports from foreign partners. In SEA, personal relationships are important and impact the business to a certain extent in the local business environment; however foreign counterparts often prefer to keep distance from local partners. Moreover, trust and commitment are based on results and actions which could create significant good result to the business. KEYWORDS: Business relationship, Southeast Asia, model of attraction, personal relationship, trust 5 ACKNOWLEDGEMENT It would not have been possible to write this Master’s thesis without the help and support of the kind people around me during the stay in Vaasa. First of foremost, I would like to express my sincere appreciation and gratitude to my supervisor, Professor Peter Gabrielsson for his guidance and support in all stages of this Master’s thesis. Great gratitude giving as well to Professor Adam Smale and Richard Owusu who were guiding me at the early stage of drafting the thesis proposal. With their guidance, I was able to make crucial decision on studying business relationships for my Master’s thesis. I would like to thank the companies who accepted my invitations and spent time to conduct interviews for this Master’s thesis. Also, greatest appreciation to my family who is giving me support all the time. Besides, I would also like to thank my friends who are giving advice on my topic and encouragement. Last but not least, I would like to give special thanks to Klaus Kurka, giving me powerful supports and comments throughout the process. 6 1. INTRODUCTION Relationships are company’s most important assets as they enable a company to access to the resources of others (Ford, Gadde, Håkanson and Snehota 2003: 49). Though business relationships have been a long history in academic research however, little knowledge exists on how business relationships are initiated and developed (Mortensen 2012: 1206). Furthermore, researches are mainly focused on European and American markets but there is minor research on emerging and developing markets. In recent years, developing economies such as Brazil, Russia, India and China have become research targets for researchers due to the emergence of BRIC-countries. Yet, there is still a lack of research on some more emerging markets like Southeast Asia (SEA). Therefore, this Master’s thesis will shed light on how Western companies initiate and develop their business relationships in SEA with local business partners. This Master’s thesis provides insights into a more effective management of business relationships in SEA, especially for Western companies at their early phase entering the Southeast Asian market. 1.1. Background Fostering international business relationships have become more and more important over times, and a popular strategy to expand and compete in new markets. However, more than 60% of these partnerships fail (Phan, Styles & Patternson 2005: 173). Business partnerships can serve as a significant source of competitive advantage to a company (Bantham, Celuch & Kasouf 2003: 265). In the research, they note the causes of the failures have been attributed primarily to an insufficient focus and understanding to form and maintain successful interpersonal relationship with their partners. In the West, business dealings have been largely based on the concept of transaction. However, business is based on social relationships in Asian countries (Hitt, Lee & Yucel 2002: 354). 7 Formations of networks of relationships has been a way of overcoming commercial uncertainties created by political instability in many Asian countries, the incidence of ethnicity, the lack of rule of law and in some cases the nature of the political systems (Fletcher & Fang 2006: 431). Firms competing for profits against each other in an impersonal marketplace are increasingly inadequate in a world where firms are embedded in networks of social, professional and exchange relationships with other organisation actors (Gulati, Nohria & Zaheer 2000: 203). In order to be competitive, most firms need additional resources. Therefore, they attempt to develop their own networks to gain competitive parity or competitive advantage (Gulati et al. 2000: 203; Phan et al. 2005: 173; Mohr & Spekman 1994: 135). Firms with social capital have an advantage (Hitt et al. 2002: 353). Arnold (2000: 132) claims that multinationals (MNCs) need to cooperate with local partners to benefit from their unique expertise and knowledge of their own markets since MNCs start from scratch to enter new markets. Relationship development within Asian cultures is a critical component when conducting business (Theingi, Purchase & Phungphol 2008: 523). In a study conducted by Holmlund (2004b: 280), the author states that multifaceted character of the relationships, the temporal dimensions and the complex structure of relationships have made business relationships challenging to study. The new developing economies in Brazil, Russia, India and China, which commonly known as BRIC have attracted the attention of media and academic (Biggemann & Fam 2011: 5). As markets become global, a growing number of firms have increasingly committed themselves to search for growth opportunities beyond their home country (Sousa & Bradley 2006: 49). Several media has forecasted the growth of business opportunities in Southeast Asia (SEA). PricewaterhouseCoopers (PwC 2012) notes that SEA is a rising star of the global market due to the highly skilled but low-cost workforce. The growth can be evidenced by increasing levels of foreign direct investment (FDI) in this region (United Nations 2013). However, for a firm going international, it must often venture into the unknown (Sousa & Bradley 2006: 49) and opportunities are not risk free and still fraught with complexity and challenges for companies in business to business markets (PwC 2012; Homburg, Kuester, Beutin & Menon 2005). Companies are increasingly using local partners’ market knowledge and relationships with customers 8 and government to adopt international business and put SEA’s manufacturing competitiveness into the service of global demand. Business relationships have many advantages as discussed above. However, business relationships are also troublesome and problematic as it takes time to develop and require different types of investment to manage it (Ford, Gadde, Håkanson & Snehota 2003). Bantham et al. (2003: 267) claim that the investments can be tangible (monetary) and intangible (emotional). The economy is changing quickly. The market trend is moving towards developing countries with environments, cultures and business etiquettes being not familiar for Western companies. Relationships involving partners from different countries are generally complex and subject to a high level of uncertainty (Burkert, Ivens & Shan 2012: 544). Certainly, it is interesting to study how Western companies initiate their business relationships in new markets. 1.2.Research gap Two primary research gaps are defined to conduct this Master’s thesis. The first research gap is defined geographically, as a lack of study on Asian markets, assuredly even more limited attention on business relationships in SEA. The second research gap is a limited study on the initial stage of business relationships. More discussion regarding the defined research gaps will be discussed at this sub-chapter. Wilkinson (2001) discusses the history of network and channels thinking in marketing in his research. The study of interfirm relations or networks can be traced to early civilisations - however; the development has changed over the time according to economy changes. In the 1970s, the study on channel control gained increasing attention. The research methodologies of the studies are focused on distribution channels. This trend has been recognised as The First Wave of Behavioural Studies. Coming to 1980s, The Second Wave of Behavioural Studies has raised. Additionally, researchers from different continents, USA, European based Industrial Marketing and 9 Purchasing Group (IMP) and Australasia contribute in these developments. Each of these streams has different research agenda and research methodology. American research are more likely to be focusing on consumer goods and adopting a stimulus response, arms-length approach to the customer with the seller is the active party. Due to the different business context in Europe which is not dominated by fast moving consumer goods but more by cross border business to business marketing with longstanding relations, interest of IMP is placed on behavioural theories from sociology and organisation theory. The famous approach by IMP, the interaction approach was proposed to stress the importance of long term exchange relations (Håkanson 1982). The focus of IMP research is on the role and value of relationships to the parties involved. Good relationships are developed through mutual adjustment and cooperation. In contrast, American literatures are more adversarial focused and concerned about the dangers of excessive dependence, conflict and opportunism characterising being much debated in channels and strategy literature. For instance. Achrol (1991: 89) argues that network exchanges need to be on a flexible basis by insisting reciprocity as a shifting variable that cannot always be built into long-term interdependencies. Australasia literatures are based on relations and network studies having a closer relationship to IMP group as the interactive process in a relationship is emphasised. Australasia also collaborates with IMP group starting in early of 1990s to study networks by involving Asian firms (Japan). Increased research interest has been shown in the nature and role of relations and networks in non-western, particularly Asian countries. The reason behind of this interest is due to the fact that cultures are assumed to play a prominent role in business. Till date, relationships have been extensively studied in marketing channels, industrial, and some consumer settings in Western cultural contexts such as Europe, the USA, Australia, and UK (Chattananon & Trimetsoontorn 2009: 253). Since early of 90s, research regarding the role of relationships and networks in business activities in Asia has been increased (Fletcher & Fang 2006: 430). However the researches are mainly 10 focused on East Asia (China, South Korea and Japan). Hitt et al. (2002) study the importance of social capital in Asian countries (China, South Korea, and Japan). Since the 1980s, IMP research has evolved to other non-European countries (particularly in Asia) but work is still based on Western European relationships (Golfetto, Salle, Borghini & Rinallo 2007: 846). Relationship marketing has been widely researched in a domestic context; studies of cross-cultural relationship marketing remain scarce (Phan et al. 2005: 173). Business relationships in SEA are mainly based on Chinese foundations (Theingi et al. 2008: 524). Some firms may encounter prejudice when operating in other Southeast Asian countries. They attempt to overcome the problem of management networks through establishing a form of political guanxi with firms operating in this region. However, managing social capital in global networks represents a substantial challenge due to the complexity of relational capital in domestic networks (Hitt et al. 2002: 367). Theingi et al. (2008: 523) study the social capital in SEA due to lacking research of social capital in Southeast Asian business networks. Phan et al. (2005) examine the impact of manager’s relational competence on relationship performance. The investigated study is conducted from Australian firms’ perspective towards three SEA countries: Thailand, Indonesia and Malaysia. As mentioned earlier, cultures are assumed as a prominent role in SEA business. Therefore, personal relationships and social capital are key factors to establish good business relationships. Network principles guiding economic activities are built on quite different logics and principles in SEA region compared to the Nordic region (Jansson & Ramström 2005). In the same study, the authors state a main difference of the SEA and the Nordic region - local firms’ propensity for business networks is based on elaborating complex social networks. Jansson and Ramström (2005) assume that firms from Nordic and ethnic Chinese network contexts are likely to experience large challenges and difficulties when managing business relationships with each other due to different logics and principles applying to relationship process between these two network contexts. Today, Finnish or Swedish firms are increasingly present in Asia. Yet, the research with a focus on the overseas Chinese and Nordic context is very little. 11 Biggemann and Fam (2011: 6) claim that studies of relationship marketing and IMP group are conducted in traditional Western countries. As international business is shifting more attention to Asia and other non-western countries, the industrial network approach needs to be tested outside the western context (Fletcher 2003: 2). The initiation of relationships is a neglected research area (Stenroos 2008). Holmen, Roos, Kallevåg, Raesfeld, Boer and Pedersen (2005) have found most empirical investigations and conceptual work focusing on developing relationships and stable relationships; only minor attention is paid to the termination of relationships while almost no attention is paid to how relationships are actually initiated. This statement is also supported by Edvardsson, Holmlund and Strandvik (2007). The authors claim it is surprisingly to notice that very little explicit attention is being researched about how business relationships arise at all. Mortensen (2012: 1206) claims that the processes of and motivations behind business relationship building are still relatively unexplored. There is little work addressing issues about the interrelation between the characteristics of two firms that form a successful relation with each other (Wilkinson, Young & Freytag 2005: 669). Most of the research tends to be conceptual or based upon inductive exploration, which is somewhat disjointed and lacking coherence in content (Barnes 2005: 561; Yen & Barnes 2011: 346). 1.3.Objectives and delimitations Holmen et al. (2005: 6) stress that a beginning is always a necessary condition for the development of a relationship. While companies enter new markets, there is a must to establish relationships with new counterparts. In recent years, IMP Group has published various contributions being related to the construct of network pictures (Corsaro, Ramos, Hennerberg & Naudé 2011: 919). However, conceptual and empirical studies have not provided essential details or empirical evidence about the relationship between the 12 parties’ network view and their networking strategies within business networks. Therefore, in order to gain a more in-depth insight into the topic, the primary research objective of this Master’s thesis focuses on the following: To study the nature of business relationship types and initiation of business relationships in SEA. Achrol (1991: 89) argues that new organisational forms will make less use of capital and resource dependencies to obtain commitment and control over system activities. To further explain, the author claims that companies will rely on norms of sharing and commitment based on trust. Morgan and Hunt (1994: 34) explore the commitment-trust theory in relationship marketing and conclude that much more work must be done in order to study the validity of this theory in establishing, developing and maintaining successful business relationships. As mentioned above, social relationships are very important in building business relationships in SEA. Holmlund (2004a: 35) concludes that commitment and trust are the most common constructs to define relationship quality. Beugelsdijk, Koen and Noorderhaven (2009: 312) also support this with various empirical data by proving that concepts of dependence, trust, commitment and communication are related to succeed in buyer-seller relations and inter-firm cooperation in general. Social relationships, at least in some contexts, are preconditions to create trust and gain information for business exchanges (Björkman & Kock 1995: 520). However, the process to build trust and commitment is remaining abstract. Due to little study on business relationships in SEA, the management of business relationships is remained unclear. Thus, it is interesting to study how the firms manage business relationships in SEA. In order to address these issues in initiating business relationships, three main sub-objectives are defined as following: I. How do relationships begin in SEA? II. What characteristics are particular important in choosing a partner in SEA? 13 III. How do business partners build trust and commitment in SEA? In order to achieve the objectives of this Master’s thesis, an in-depth literature review of business relationships at its initial phase as well as social capital is conducted. Social psychology theories have always influenced and inspired business relationship research that seeks to explain relationships between companies (Mortensen 2012: 1206). This Master’s thesis intends to study how business partners attract each other when starting to contact, having motivation and willingness to engage in an efficient business relationship. The concept of attraction is acknowledged to be helpful to analyse relationships in social psychology. Mortensen (2012: 1207) claims that the concept of attraction is relatively new in explanations of initiation, motivation and development of business relationships. However, this concept may be ideally applied to understand the characteristics of the parties when to initiate a relationship. Harris et al (2003: 30) emphasise the need to focus on attraction in the explanation of dyadic relationship initiation and development due to the motivation for relationship development and a powerful explanation for relational continuity. The social exchange theory which refers to interpersonal relationships proposes cooperation and mutual reciprocity is suitable to be used when attempting to understand business relationships (Metcalf, Frear & Krishnan 1992: 29). Therefore, the literature of behavioural theories from sociology and organisation theory are discussed widely due to the importance of social capital in SEA. Mortenson (2012: 1215) suggests that attraction is a discussion in relation trust, commitment, power and dependency and the connections between them. Harris et al. (2003: 11) referring to Byrne (1971) state that attraction is fundamentally important in interpersonal relationship development. Additionally, the management and marketing literature has devoted specific attention to issues of trust, commitments and other relational elements of a more social nature. (Rašković, Brenčič, Fransoo & Mörec 2012: 103). Cultural background influences the parties to trust and affect what is needed for building trustful relationships (Gøril, Grønhaug & Nilssen 2012: 1083). 14 Consequently, theoretical framework and hypotheses are created. A qualitative research method is applied in order to test the hypotheses. Semi- structured interviews have been conducted in order to collect data from expatriates from Finnish companies going to SEA. By undertaking face-to-face interviews, the likelihood to obtain more detailed information is higher in order to explore how the initial phase of business relationship in SEA is being initiated. 1.4. Definitions Business relationship is the maintenance of the two parties’ goal interdependence (Blois 1998b: 257). Ford, Gadde, Håkansson and Snehota (2011: 18) define relationship as a pattern of interaction between companies and the mutual conditioning of their behaviour that takes place over time. A relationship is a place where some kind of interaction takes place, and something is produced (Håkansson & Snehota 1995: 27). Business relationship is also viewed as a result of the action of two firms (Johanson & Smith 1992: 3). Social capital is the relationships between individuals and organisations that facilitate action and thereby create value (Hitt, Lee & Yucel 2002: 355). Ostrom (2000: 30) defines social capital as the shared knowledge, understandings, norms, rules and expectations about patterns of interactions that groups of individuals bring to recurrent activity. Bowles and Gintis (2002: 354) state social capital describes relationships among people. Dyad relationship means that actors from at least two firms are involved. Dyadic relationship is a conjunction of two actors (Håkansson & Snehota 1995: 37). On the other hand, network is an object of analysis, meaning that there are firms in the net and at least three connected dyads are investigated (Salmi 2010: 42). Anderson, Håkansson and Johanson (1994: 2) define business network as a set of two or more connected business relationships. 15 Several different concepts have been applied in the starting phase of business relationships. Edvardson et al. (2007: 4) summarise the most common concepts as pre- relationship state (Ford 1980: 67 – 69), initiation process (Frazier 1983: 69), awareness (Dwyer, Schurr & Oh 1987: 15), interest stage (Frazier et al. 1988: 56), negotiation stage (Ring & Van de Ven 1994: 111), partner search and selection (Wilson 1995: 340), searching process (Batonda & Perry 2003a: 1463) and pre-engagement (Leonidou 2003: 130). All these different concepts will be used in this study referring to the initial phase of business relationships. 1.5. Structure of the study This Master’s thesis is categorised into two major parts which are literature review and empirical setting. An introductory chapter which contents the background of business relationships, research gap, research objectives, delimitations and definition is covered before the literature review. Chapter two is the literature review consisting of the discussion of the existing research on business relationships which are focused on pre-developing and developing phase. This leads to the model of attraction and the elements of interaction approach. This chapter has six subchapters discussing model of attraction and interaction and communication, trust and commitment, and interdependency. This part ends with a theoretical framework to examine the development of business relationship in the SEA markets. In an empirical setting, chapter three and four are compromise research methodology and result analysis respectively. The research approach, research design, reliability and validity are discussed at the research methodology part. The discussions with the interviewees are analysed at the following chapter. Ultimately, a summary including theoretical contributions, managerial implications and future research suggestions is presented. 16 2. LITERATURE REVIEW The second chapter of this Master’s thesis is provided with the literature review of business relationships. The first part of this chapter intends to shed light on the concept of business relationship and the initial phase of creating business relationships. Secondly, the concept of attraction is presented. The discussion is followed by the concept of social capital which is recognised as a crucial element to succeed in doing business in SEA. The concept of interaction and communication are discussed. The fourth part of the literature review is to discuss trust and commitment, followed by a discussion of interdependency. A theoretical framework is presented at the end of the discussion. 2.1.Concept of business relationships Ford and Mouzas (2013: 436) state relationships activate resources and activities. The logic of business relationships is that they provide the essential means for participating actors to combine, to adapt and to develop their resources and activities directly with those of others, to indirectly access remote activities and resources from elsewhere in the network and to address their respective and common issues and problems (Ford & Mouzas 2013: 436). The authors claim that smart companies use webs of relationships to create further opportunities, to create more value than they could on their own and to shed unwanted risk. Hsieh (1996: 13) emphasises that MNCs are being concerned about winning in Asia - in the long term they must form relationships with a view to support the whole range of growth opportunities as could be observed from previous players already winning in Asia. Having the right relationships can yield to a real competitive advantage, allowing participants to create value. Wilson & Jantrania (1993: 56) claim emerging economies should propel business to seek some form of alliance to protect and enhance their 17 competitive position. They believe that close relationships between firms could effectively manage the cost of transaction. Relationships lead to a strong and continuing interdependence between specific companies due to the adaptations that are made within them to suit the particular requirements of the parties (Ford & Håkansson 2006: 250). Neves, Castro and Cônsoli (2010: 5) affirm that real networks are being developed in order to focus on continuous and sustainable relationships. In addition, a company’s strategy in the business network is a process of building, managing and exploiting relationships with others (Araujo, Dubois & Gadde 2003; Håkansson, Ford, Gadde, Snehota & Waluszewski 2009). According to Blois (1997: 367), an existing relationship between two organisations requires an understanding of the motivation behind the observed behaviour. In business relationships, the success is not depending on the investment on one party but also depends on the efforts and intention from the other parties (Ford, Gadde, Håkansson & Snehota 2003: 18). Purchase and Ward (2003) claim the bonding of parties involved within an interaction process. This bonding consists of three important components which are reciprocity, commitment and trust. The nature of interaction between a buyer and a supplier has an important influence on their relationship (Leuthesser & Kohli 1995: 221). Interaction becomes intercultural and international, making the business relationship at least in some respects different from the purely domestic ones (Salmi 2010: 42). Features of satisfaction, trust and commitment are considered as key determinants of relationship quality (Thorsten, Kevin & Dwayne 2002; Hewett, Money & Sharma 2002; Smith 1998). Hewett et al. (2002) comment that these features affect the buyer-seller relationship. Relationship maintenance is very important to firms in order to increase their market share and profits. Firms have to satisfy customers in each interaction, thereby building stable long-term relationships and preventing from switching partners (Chang, Wang, Chih & Tsai 2012: 940). 18 2.1.1. Business relationships in SEA “It’s not what you know but who you know” is relevant to the concept of social capital (Hitt et al. 2002: 368). Purchase and Ward (2003:166 – 167) mention that Asian business people tend to emphasise on the relational aspects of their connections to the individual when forming business relationships. The authors have defined five characteristics of Southeast Asian business networks that differ from western business networks. 1. Each individual’s network differs due to the non-equivalence of differing normative ties – for example, the tie between immediate family members is much stronger than the tie between community members. 2. Ties are defined by the hierarchical and social position that individuals occupy within the network. 3. Networks have developed under codes of behaviour relatively to the individual’s position within the hierarchy. These pre-defined positions dictate the individual’s behaviour within the network, and each individual’s aim is to achieve a standard behavioural pattern as described in the unwritten code of behaviour. 4. Moral standards and honesty are not defined by legalized law, but are set by each person’s position within the network and the situation they encounter, and 5. Boundaries are not defined through industry characteristics, but through the social ties between individuals – as social ties are difficult to determine it makes network boundaries very difficult to determine. Western business behaviour is focused on relationships between and among organisations. In contrast, guanxi is based on personal relationships developed between and among individuals (Yen & Barnes 2011: 348). In a research conducted by Itthiopassagul and Blois (1997) regarding the attitudes of Thai managers towards business relationships with their business parties, the result shows that Thai managers are very helpful in a way that they consider not only business matters but also keep in mind personal favours. Also, some of the businesses are based on verbally agreed contracts instead of written contracts. However, companies predominantly managed by 19 Westerners consider it as more vital to do business with a written contract. The concept of “face” which seems to be found in all the Southeast Asian countries in some form is difficult for Westerners to fully comprehend. Palmatier, Dant, Grewal and Evans (2006: 151) suggest that customer relationships have stronger effects on exchange outcomes when their targets are individual persons, rather than an impersonal selling firm. The authors believe, by focusing on building interpersonal relationships between boundary spanners (e.g. dedicated sales person, social entertaining), it may be more effective than purely focusing on how to build and emphasise customer-firm relationships (e.g. team selling, frequency-driven loyalty programs). Gedeon, Fearne and Poole (2009: 219) summarise that the loss of a personal relationship may sometimes result in the termination of the business relationship. Nicholson, Compeau and Sethi (2001: 4) examine the role of interpersonal liking in building interpersonal trust between buyers and sellers – a trustful relationship is particularly essential as it can influence a meaningful cooperation with customers in the long run, especially important for sales representatives. Chattananon and Trimetsoontorn (2009) explore the impact of relationship marketing among salespeople in 30 steel pipe firms in Thailand. The result from the study is the image of a company, the degree of information exchange, and time – these are key factors in contributing to the building of bonding, empathy, reciprocity and trust. These elements are significantly related to the business performance. According to Bowles and Gintis (2002: 354), social capital describes relationships among people. In general, the authors believe that social capital refers to trust, generosity and collective action in social problem solving. Batt (2008: 487) derived the concept of social capital from Putnam (2000). Putnam addresses social capital as the connection among individuals, social networks and the norms of reciprocity and trustworthiness that arise from parties. Therefore, Batt (2008: 487 – 488) interprets social capital as mobilisation, use and benefits gained through accessing present and future resources through social, intra and inter firm networks. There are numerous definitions of social capital; however there are some common characteristics, the most 20 important of which is the role trust plays in gluing the network together. The author further emphasises that social capital plays a critical role in the enforcement and development of industry within developing economies. Finch, Wagner and Hynes (2010: 1021) examine that social capital is particularly important when parties draw upon close connection with economic capital, with its norms of developing and drawing upon goodwill, such as reciprocity, implying that partners undertake particular skilful and nuanced activities. Adler and Kwon (2002) propose a dimension of social structure which consists of three different types of relations: market relations, hierarchical relations and social relations to differentiate social capital from other types of social structure. The authors claim that is the third type of relationship – social relations underlying with social capital. Table 1. Dimension of social capital. (adapted from Adler & Kwon 2002) Dimension Market Relations Hierarchical Relations Social Relations What is exchanged? Goods and services for money or barter Obedience to authority for material and spiritual security Favours, gifts Are terms of exchange specific or diffuse? Specific Diffuse (Employment contracts typically do not specify all duties of employee, only that employee will obey orders. Other hierarchical relations imply a similar up-front Diffuse (A favour I do for you today is made in exchange for a favour and at a time yet to be determined.) 21 commitment to obeying orders or laws, even those yet to be determined.) Are terms of exchange made explicit? Explicit Explicit (The employment contract is explicit in its terms and conditions, even if it is not specific. Ditto for other kinds of hierarchical relation.) Tacit (A favour for you today is made in the tacit understanding that it will be returned someday.) Is the exchange symmetrical? Symmetrical Asymmetrical (Hierarchy is a form of domination.) Symmetrical (The time horizon is not specified or explicit, but favours eventually are returned. Palmatier, Gopalakrishna and Houston (2006: 478) indicate that interpersonal bonds take time and effort to produce. Jansson, Johanson and Ramström (2007) propose how social relationships are established and maintained as a critical aspect in business networks. However, Halinen and Salmi (2001) summarise that personal contacts are often seen to enhance initiation of business relationships. On the other hand, the authors point out the imbalanced research focus where the emphasis in research has so far mainly been concentrated on the positive features of personal relations while there are also might be some negative effects on relationship development. Batt (2008: 489) claims that relationships are established initially through personal references and 22 recommendations, reinforcing the need to build and maintain an extensive network of social contacts, even with those firms with whom business is no longer conducted. Jansson and Ramström (2005) conduct research on Chinese business networks in SEA from Nordic firms’ perspectives. The authors indicate the importance to build social relationships before coming to the points of making an offer. Furthermore, the length to build a relationship is mainly influenced by the value of the potential sale and the intricacy of the buying process, and it can take from a month to over a year to build. The author point out that performance is mostly measured with financial criteria in Nordic business networks. Therefore, the business relationship can be terminated if the performance is not satisfactory, or if the parties feel that the relationship does not work as expected. Surprisingly, Nordic firms operating in SEA work more according to the Chinese business network in a way that one party expects to continue the initiated business relationship as a friend, even if either party feels that the business relationship is not producing the desired outcomes due to the reputation protection of the company and also within the business network. Theingi et al. (2008) suggest western partners to develop a personal understanding and business interaction in order to achieve a win-win strategy in Thailand as Thai managers do not notably differentiate between social and business aspects; they expect the social aspects to be strong and fostered before business relationships begin. A lot of literature on Asian business is rather problem focused. Therefore, everyone has pre- understandings of business relationships in Asia around the idea that business in Asia might be very difficult, especially for those that have no personal experience in Asian markets (Jansson & Ramström 2005: 12). However, one also may consider that emerging markets are undergoing changes due to globalisation. Business relationships are changing from personal to impersonal, and slightly shifting from price to quality orientation. It is believed, that business practices are becoming more western-oriented (Jansson & Ramström 2005: 12). 23 The Table 2 shows a brief scan of some studies on Asian business relationships. Focusing on SEA, the studies are limited to particular countries and on broader structure view. Table 2. Studies of Asian business relationships. Author Title Purpose Scope 1990-1999 Ambler, Styles & Wang 1999 The effects of channel relationships and guanxi on the performance of inter-province export ventures in the People’s Republic of China Dyadic channel relationships by comparing guanxi and Western relationship marketing China Björkman & Kock 1995 Social relationships and business networks: the case of western companies in China To discuss the role played by social relationships when penetrating a foreign business network China Hong, Wang 1999 Co-ordination of international channel relationships: four case studies in the food industry in China To examine the pattern of relationships between foreign manufacturing firms and local third party distributors and the effective management and co- ordination of supplier- distributors relationships China Itthiopassagul and Blois 1997 Business to business relationships in Thailand To investigate the relationships between Thai companies and their organizational customers Thailand Itthiopassagul and Blois 1996 Managing business relationships in Thailand To examine the applicability of previous research by interviewing Thai managers Thailand Lim, Linda Y.C. The evolution of Southeast Asian business systems Argue that the entrepreneurial family business and ethnic networks heavily dependent on personal relationships will change gradually and Ethnic Chinese in SEA 24 incompletely. 2000- Present Barnes, Yen & Zhou 2011 Investigating guanxi dimensions and relationship outcomes: insights from Sino-Anglo business relationships To develop and test a concept for improving Anglo-Chinese business relationships Taiwan Batondo & Perry 2003 Influence of culture on relationship development processes in overseas Chinese/Australian networks To examine the impact of culture on inter-firm network development in international marketing Australia, Singapore, Hong Kong, Taiwan Batondo & Perry 2003 Approaches to relationship development processes in inter-firm networks To examine the dynamics of business networks: how these inter-organisational networks grow and decline Australia, China Chattananon & Trimetsoontorn 2009 Relationship marketing: a Thai case To explore the impact of relationship marketing in a Thai context by gathering both quantitative and qualitative data Thailand Dong, Tse & Hung 2010 Effective distributor governance in emerging markets: the salience of distributor role, relationship stages and market uncertainty To delineate the effect of fit between governance strategies and distributor role orientations on channel outcomes China Gao, Ballantyne & Knight 2010 Paradoxes and guanxi dilemmas in emerging Chinese-Western intercultural relationships To investigate guanxi dilemmas by using three paradoxes of IMP in Chinese-Western intercultural relationships China Hitt, Lee & Yucel 2002 The importance of social capital to the management of multinational enterprises: relational networks among Asian and Western firms To examine the importance of three types of social capital( guanxi, kankei and inmak) in Asian countries China, Japan and South Korea Jansson, Johanson & Ramström 2007 Institutions and business networks: a comparative analysis of the Chinese, Russian and West European markets To analyse the business network originating from Chinese, Russian and West European China, Russia , Western Europe 25 Jansson, & Ramström Facing the Chinese business network in Southeast Asian markets- overcoming the duality between Nordic and Chinese business networks To study the difference of the Nordic business network model and the ethnic Chinese business network model. How these differences take shape in certain types of relationships and behaviors. Finland, Sweden, Singapore, Malaysia and Thailand Phan, Styles & Patterson 2005 Relational competency’s role in Southeast Asia business partnerships To examine the impact of manager’s relational competence on relationship performance, mediated by interpersonal relationship quality and communication behaviour From Australian firm’s perspective to, Thailand, Indonesia and Malaysia Purchase & Ward 2003 ARR model: cross cultural developments To investigate cross cultural business networks between Australian engineering consultants and their Thai customers Australia, Thailand Racela, Chaikittisilpa & Thoumrungroje 2007 Market orientation, international business relationships and perceived export performance To investigate and uncovering the potential effect of exporters’ market orientation upon international business relationship with particular emphases on cooperation, dependence and relationship distance Thailand Richard Fletcher, Tony Fang 2006 Assessing the impact of culture on relationship creation and network formation in emerging Asian markets. To develop an alternative approach to researching the impact of culture on relationship creation and network formation in Asian markets. China Scheu & Hu 2009 Channel power, commitment and performance towards sustainable channel relationship To expand understanding of the sophisticated utilization of independent incentives and its influence on channel relationship Taiwan 26 commitment an performance towards sustainable channel relationship and competitive advantage Theingi, Purchase & Phungphol 2008 Social capital in Southeast Asian business relationships To investigate social capital structures, opportunity, motivation and ability within export relationships in Thailand From Thai firms’ perspective to other SEA countries. Trang, Barrett & Tho 20 Cultural sensitivity, information exchange and relationship quality: the case of Vietnamese exporters and their Asian vs European importers To examine the relationships between cultural sensitivity, information exchange and relationship quality between Vietnamese exporters and foreign importers Vietnam, Europe Welch & Wilkinson 2005 Network perspectives on interfirm conflict: reassessing a critical case in international business To see the contrasts of dyadic and network interpretations from conflict between Australian and Japanese Australia, Japan Woo & Ennew 2004 Business to business relationship quality: an IMP interaction-based conceptualization and measurement To provide alternative conceptualization of business to business relationship quality based on the well- established IMP interaction model and to clarify the relationship between relationship quality and service quality Hong Kong Yang, Zhou & Jiang 2011 When do formal control and trust matter? A context-based analysis of the effects on marketing channel relationships in China Apply social embeddedness theory and differentiates strong time from weak tie relationships to reveal the role of strong versus weak social ties in leading to parallel conclusions about the relationship between formal control and trust and their effects on relationship outcomes China 27 Yen & Barnes 2011 Analysing stage and duration of Anglo- Chinese business to business relationships To analyse a series of relational variables derived from the Western industrial buyer-seller relationship and Chinese guanxi literature Taiwan 2.1.2. Process of business relationship development The relationship development framework by Dwyer et al. (1987: 15) proposes the process of moving through four interrelated phases: awareness, exploration, expansion, and commitment. At the awareness phase, buyers unilaterally recognize a list of potential suppliers to conduct business with. Buyers begin to test suppliers by negotiating contract terms, setting product specifications, and placing small orders to determine if further relationship development is worthwhile. At expansion phase, buying firms make multiple purchases from suppliers or negotiate long-term contracts, and decide to seek benefits from current exchange partners rather than from alternate suppliers. Both buyers and sellers implicitly or explicitly pledge to establish stable relationships at commitment phase. Both parties will express willingness to make sacrifices to maintain their relationships and a confidence in the continuity of the relationships. Claycomb and Frankwick (2010: 253) debate that relationship development occurs as an ongoing process and no distinct hurdles specifically identify movement from one phase to another. However, the model explains how firms establish, develop, and maintain relationships. Early interaction will tend to be purely business oriented unless any of the parties involved share prior history of interactions, or if they have been introduced by mutual acquaintances (Huang & Wilkinson 2013: 459). In addition, the initial assessment of the performance and potential of the partners are based on perception of trust and commitment (Ford 1980). 28 Leuthesser and Kohli (1995) study the relational behaviour of buyers and sellers. According to the authors, initiating behaviour is likely to result in superior knowledge about a buyer’s requirements; the buyer is likely to perceive the supplier as being competent to meet its requirement. In addition, initiating behaviour is likely to send a signal to the buyer that the supplier genuinely cares about learning the buyer’s business, and is motivated to perform in the buyer’s interests. Consequently, the buyer is likely to be more satisfied with the supplier. Table 3 shows comparison of three identified business relationships development models by Ford (1980), Dwyer et al. (1987) and Wilson (1995). Table 3. Business relationships development process. (adapted Batonda & Perry 2003a) Dimensions Ford (1980) Dwyer et al. (1987) Wilson (1995) Searching process Phase 1 – the pre- relationship stage Evaluation of potential supplier based on experience uncertainty and distance No commitment at this stage Phase 1 – awareness Positioning and posturing of parties to increase attractiveness to one another Interaction between parties has not transpired Phase 1 – search and selection and assessing Finding and assessing appropriate potential partners based on reputation for performance and trustworthiness Initial interaction and social bonding may begin Starting processes Phase 2 – the early stage Potential suppliers are in contact with purchasers to negotiate or develop Phase 2 – exploration Parties gauge and test the goal compatibility, integrity and Phase 2 – defining purpose Determining and defining set of mutual goals and objectives 29 specifications Testing period for potential suppliers performance of the other in key sub- processes Termination of the fragile association is simple Laying out foundation for generating common understanding and sanctioning of the relationship Limited commitment between parties Development processes Phase 3 – the development stage Adapting to meet needs of other companies Honouring contacts and integration aspects Joint planning of responsibilities Phase 3 – expansion Continued increase in benefits and increased interdependence Trust and joint satisfaction lead to increased risk taking Additional gratification sought from the current exchange partners Phase 3 – boundary definition Defining set of informal rules on how partners may call on resources Commitment of resources and people to complete tasks Adaptation of process and product or services to accommodate partners Phase 4 – value creation Creation of value through synergistic combination of partners’ strengths and better cost 30 management in all aspects of firm’s operations Sharing of value depending on power/dependence relationship and structural bonding Maintenance processes Phase 4 – the long- term stage Characterised by companies’ mutual importance to each other Institutionalised patterns behaviour Phase 5 – the final stage Long established and stable markets Extension of the institutionalisation process Phase 4 – commitment Relational continuity between exchange partners measured by inputs, durability and consistency Partners resolve conflict and adapt fuelled by the ongoing benefits accruing to each partner Phase 5 - hybrid stability Commitment develops through combinations of key variables such as trust, performance and satisfaction Stable relationships result from partners’ active involvement Termination processes Phase 5 – dissolution The costs of continuation of modification outweigh the benefits Emphasis on 31 bilateral efforts for relationship development ; but dissolution is more easily initiated unilaterally 2.2.Model of attraction Attraction is important as this concept can be applied to highlight the future expectations of business relationships (Mortensen 2012: 1207). Wilkinson et al. (2005: 670) suggest that partners are attractive to each other because they have skills and/or technologies the other counterpart might lacking, but sufficient similarity is needed to be able to mesh one’s own operations with theirs. The authors mention the right combination of similarities and complementariness leads to a relationship that is more likely to survive and grow. According to Dwyer et al. (1987: 12), the basis for future collaboration may be supported by implicit and explicit assumptions – trust and planning. Harris et al. (2003: 12) define attraction practically as the extent to which relational partners perceive past, current, future or potential partners as professionally appealing in terms of their ability to provide superior economic benefits, access to important resources and social compatibility. The authors further explain that attraction judgements are made on a continuous basis and as such will determine the nature of the relationship as it progresses. Once the parties interact, this knowledge is updated and used in the next interaction. The model of attraction is developed from the social exchange theory which includes three behavioural constraints: expected value, trust and dependence (Hald, Cordón & Vollmann 2009). Social exchange is defined as “voluntary actions of individuals that are motivated by the returns they are expected to bring and typically do in fact bring from others” (Hald et al. 2009: 961; Blau 1964). This theory is 32 originally examined via interpersonal exchanges; however it has been extended to study relationship in different circumstances such as organizations between their partners, relationships between organizations and their environment (Levine & White 1961: 584; Jacobs 1974). Several researchers of business relationships have claimed that the social exchange theory is a relevant and fruitful theoretical perspective to examine business relationships due to its ability to integrate the relationship value perspective (Walter, Müller, Helfert & Ritter 2003; Walter, Ritter & Gemünden 2001), the trust perspective (Morgan & Hunt, 1994), and the power or dependence perspective (Anderson & Narus 1990; Jarratt & Morrison 2003). Dwyer et al. (1987: 16) argue that mutual attraction is important in developing relationships. It is also argued that this can be achieved through a range of perceptual approaches and actions, which enhance the performance between the parties being involved (Hald et al 2009: 960). In the model developed by Harris et al. (2003), the authors suggest determinants of the social exchange theory, as economic and resource elements to attraction have an impact on trust, commitment and interaction. Ellarm (1990) analyses the factors that are important to buyers engaging in a long-term partnership; showing that matched characteristics in terms of the following are particular very important: 1. Financial issues – economic performance and financial stability. 2. Organizational culture and strategic issues – feelings of trust, management attitude and outlook for the future, strategic fit, top management compatibility across levels and functions of buyer and supplier firms, suppliers’ organizational structure and personnel. 3. Technological issues – assessment of current manufacturing facilities/capabilities, assessment of future manufacturing capabilities, supplier’s design capabilities and speed in development. 4. Other factors include safety record of the supplier, business references, and supplier’s customer base. 33 On the other hand, Turnbull, Ford & Cunningham (1996: 47 – 48) categorise the matching resources that companies should seek for into three categories which are financial resources, company’s network position and the skills companies are possessing. Wilkinson et al. (2005: 673 – 674) find that firms prefer partnerships with those that are geographically, socially and/or psychically proximate to them. Therefore, firms who share similar objectives, attitudes, business philosophy, similar education, experience, and environments are more likely to build partnerships. In the research, the authors also indicate that the best matching firms may also be a firm’s direct competitors. Other than that, firms will seek partnerships with those displaying characteristics that reflect competitive fitness including the internal resources, skills and competences that are not so obvious to an outside observer, as well as external, more visible characteristics. The authors refer to Heider (1958) saying that some factors contribute to the formation of positive linkages between entities in relationships such as proximity, more frequent contact, familiarity, similarity of beliefs and goals, predisposition towards certain sentiments and perception of potential benefits. Supplier’s service quality has become an integral part of the vendor-selecting process and a prerequisite for establishing a business relationship (Homburg, Kuester, Beutin & Menon 2005). Webster and Wind (1972: 13) suggest that motives overlap in many important respects and need not to conflict; a strong sense of personal involvement can create more effective buying decisions from an organisational standpoint. Blois (1997: 370) addresses the fact that relationships should involve investments. However, should the investment be made to extend the distribution network rather than to build or strengthen a number of individual business relationships? In order to answer this, he suggests that all investment decisions should involve a degree of qualitative assessment and a proper interpretation of the information. 34 2.3.Interaction and communication The interaction model from Håkansson (1982) believes that buyer-seller relationships in business-to-business markets evolve dynamically over time and follow a relationship development process. Interaction means that no action by an individual is either isolated or independent (Ford & Håkansson 2006: 252). Leuthesser and Kohli (1995: 223) suggest that more frequent interactions are more likely to lead to the receipt of a greater amount of information; consequently reducing the uncertainty and ambiguity of both parties. Webster and Wind (1972: 14) mention that relationships with one another involve all the complexities of interpersonal interactions and it is influenced through the subsystems of task, structure (communication, authority, status, rewards, and work flow), technology and people. Öberg (2010) believes that business relationships of intercompany are built on interactions at the operational levels. Based on the day-to-day activities on operational levels, closeness would expectedly be greater on local levels than on top management levels. Huang and Wilkinson (2013: 460) indicate that interactions may take place in both social and business settings including social events, business meetings and encounters, communications and the negotiation and carrying out of marketing transactions between the parties. Nicholson et al. (2001: 6) believe that frequency of personal interaction is important in building trust due to the reason that increasing frequency in interactions enhances the likelihood to exchange information. Ford (1980: 71) states that both parties are likely to be involved in adaptations with regard to their own processes in order to accommodate with each other through an intensified interaction. Phan et al. (2005) find out that communication quality is a crucial element of international business relationship managers’ communication behaviour. The authors get insights from Australian partners regarding open, honest and frequent communication with partners – these are important factors to succeed in international business relationships in SEA as that enables partners to talk about problems, keeping each other informed and having frequent interactions. Moreover, Biggemann and Buttle 35 (2009: 550) propose that communication processes have an effect on the attributes of relationships and are essential in relationship development. Bantham et al. (2003) conclude that surrounded by an increasingly electronic-driven communication environment (i.e. characterized by heavy reliance on e-mail, fax, and shared database), face-to-face communication is critical for the success in a business partnership. Additionally, silence is communicative as well since parties can give meaning to it (Biggemann & Buttle 2009: 550). According to Mohr and Spekman (1994), communication is deemed to be a key indicator of a partnership’s vitality and it captures the utility of the information exchanged. The authors summarise that more successful partnerships are expected to exhibit higher levels of communication quality, more information sharing between partners, and more common participation in planning and goal setting. Gøril, Grønhaug and Nilssen (2012: 1082) emphasise that communication and exchange of information is important for building trust and reducing external uncertainties. 2.4.Trust and commitment Trust has been identified as a critical variable to establish relationships at the early interaction stage (Heffernan 2004). The author further explains that relationships are built at many different levels at the early interaction stage, but it is based on one of mutual respect, and mutual trust. According to Kumar (1996: 92), partners that trust each other generate greater profits, serve customers better, and are more adaptable. Nicholson et al. (2001: 4) define trust as confidence in the other party’s reliability and integrity. Black (2008: 47) suggests that trust and commitment lead to cooperative behaviours being conducive to relationship maintenance. The author believes that interpersonal relationships are basic features of all social situations to demand cooperation and interdependence. However, individuals must decide whether the risk becoming vulnerable and dependent is worth the risk involved. 36 Spekman (1988: 79) states that mutual trust is the cornerstone for strategic partnerships. There has also been a growing use of the concept of trust concerned with business to business relationship (Blois 1998a). Uzzi (1997) views trust as an expression of the belief that exchange partners would not act in self-interest at another’s expense and appeared to operate like a predilection to assume the best when interpreting another’s motives and actions. The heuristic quality is important as it speeds up decision making and conserves cognitive resources. Trust and mutual dependence between parties have been suggested as central factors in motivating each party to develop successful and jointly beneficial exchange relationships (Hewett & Bearden, 2001; Morgan & Hunt, 1994: 33). Kumar (1996: 95) states that the immediate response of most managers was that trust involves dependability. Uzzi (1997) claims that trust is important in exchanging relationships, as it enriches the firm’s opportunities to access resources. Trust is seen as a fundamental ingredient in the presentation of oneself being an attractive partner (Blau 1964). Blau also claims that trust will be developed through a regular discharge of obligations or by reciprocating for benefits received. Also, trust may be developed through the gradual expansion of exchanges over time. Creating trust is fundamentally a social process as it is linked to a governance structure residing in the social relationship and expectations expressing emergent features of a social structure that is created and reproduced through time (Uzzi 1997). Huang and Wilkinson (2013: 460 – 463) propose that trust changes depending on the experience, outcomes of the actions, interactions and other events taking places over time in the focal as well as in connected relations. Blois (1997: 379) summarises that trust underpins effective relationships. However, trust cannot be created but evolves. It is often over a quite lengthy period of time built, and trust is based upon relationships between individuals, but not organisations. The give and take in relationships often only produces equitable responses over a period of time and a great deal of trust may be required by one or both parties (Blois 1997: 369; Blois 1998b: 257). Trust has always been a part of business relationships and it is a construct in most models of long term relationships (Wilson & Jantrania 1993: 56). Jarillo (1988: 37) suggests that it may be more appropriate to emphasise on long-term relationships, in order to develop trust as it points out that the relationship by itself is considered as being valuable. Trust tends to 37 be developed when one has helped another party, since one assumes that the other counterpart will reciprocate one’s helpful behaviour (Pruitt 1983: 183). Spekman (1988: 81) indicates that commitment is nurtured by mutual trust and open communication. Hence, both the buyer and seller must invest in the relationship by showing commitment. In addition, the author believes short term contracts, price-driven negotiations and the implicit threat of future supply-allocation adjustments are not likely to engender commitment. Pruitt (1983: 181) states that problem solving seems to be more feasible and less costly if trust exists between the parties. Feasible trust in problem solving more likely can be found in mutual beneficial relationships due to the fact that a trusted partner can be expected to support the search in order to come up with appropriate solutions. Commitment is an explicit or implicit pledge of relational continuity in a relationship (Dwyer et al. 1987: 19). Beugelsdijk, Koen and Noorderhaven (2009: 313) believe that commitment is likely to influence the relationship performance as partners are more prepared to make sacrifices to make the relationship successful. Rašković, Brenčič, Fransoo and Mörec (2012) summarise that marketing literature has mainly addressed the issue of the impact of trust and commitment on buyer satisfaction and loyalty. Furthermore, they explain that trust can be categorised in two levels: interpersonal and interorganisational trust. Lenney and Easton (2009: 553) define commitment as an agreement between two or more social actors to carry out future actions. The authors also note that commitment is used alongside “trust” to describe positive affective, attitudinal and behavioural aspects of relationships between parties which are likely to lead to the continuation of a relationship in B2B business relationships. Commitment represents a long-term orientation towards a relationship. Rusbult and Buunk (1993) indicate that strong commitment not only makes individuals more likely to remain with their partners, but also promotes a variety of relationship maintenance behaviour such as adaptive social comparison and perceived relationship superiority, effective management of jealousy 38 and extra relationship involvement, willingness to sacrifice for the good of a relationship, and tendencies to accommodate rather than retaliate when a partner behaves poorly. Lenney and Easton (2009: 557) address the nature of commitment as being crucially affected by social capital existing between the parties involved, and also by the number and historical commitments that have been made and fulfilled. In addition, none of the commitments are entirely mutual or balanced; therefore, a commitment only can happen in exchange form. In a research conducted by Theingi et al. (2008) from the ethnic Chinese perspective in Thailand, the relationship between social capital and the concepts of renqing, guanxi and xinyong have been collectively received increasing attention. The results indicate that it was not uncommon to invest six to 24 months in only building the relationship before any exchange of goods or services took place. Furthermore, the commitment is extended to the need, on occasions, to support business partners who were in trouble in the expectation that such favours would be reciprocated in the future. Matters which do not fall within the contract are handled as well as it fosters the quality of a relationship (Blois 1997: 368). Mutual trust grows stronger, thus enhancing satisfaction within the exchange relationship (Dong, Tse & Hung 2010: 5; Leuthesser & Kohli 1995: 224). Siguaw, Simpson and Baker (1998) find out that trust, cooperative norms and commitment have a direct effect on the distributor’s satisfaction with its financial performance and this finding indicates the distributor’s market orientation and commitment to the relationships. Gøril, Grønhaug and Nilssen (2012) believe that trust, communication or information-sharing, power dependence symmetry and commitment are the few antecedents to influence satisfaction in cross-national business relationships. Lewis and Weigert (1985: 464) analyse that trust is built upon the mutual involvement of participants with personal knowledge and institutional attributes of trusted individuals. At an early stage, people only trust to each other when evidence is given that the other party is trustworthy. However, as trust is gradually established and deepened; the parties no longer need rational reasons to trust each other. 39 Campbell (1997) mentions that mutuality norms presume that both parties recognise the ongoing value of maintaining the relationship in order to reap shared gains whereas compliance presumes that constraints on behaviour stem from references to outside constituents. Coordinated activities and reciprocal behaviours resulting from mutual expectations strengthen the closeness of relationships. Consequently, it leads to cooperation and commitment. Gil-Gaura, Deltora and Taulet (2009) present that relationship value is contributing to generate trust, commitment and satisfaction in relationships. As the amount of evidence about the trustworthiness is increased, the partners will see more potential benefits from the relationship and are more willing to commit resources to the relationships (Black 2008: 49). Rylander, Strutton and Pelton (1997: 59 – 60) debate that commitment is more likely to be a personal involving in social interaction, process among individual actors representing partner organisations. Commitment is an essential part of a successful long-term relationship and connected across many complex responsibilities and multiple tasks (Gundlach, Achrol & Mentzer 1995: 78). 2.5.Interdependency The starting point of relationship development strategies is the interdependence of companies (Turnbull, Ford & Cunningham 1996: 47). The interdependence could be happen in different kind of forms. For instance, the need to generate revenue from other companies for continuous development, the need to use the knowledge and abilities of others, the need to acquire certain knowledge of other companies for itself or the wish to develop its own knowledge through interaction with the other company. When business relationships go mature, resources and activities involved become interdependent (Abrahamsen, Hennerberg & Naudé 2012: 260). Interdependency is concerned with how individuals in relationships influence each other and the nature of their interaction in obtaining valued outcome (Bantham et al. 2003: 40 266). Blois (1997: 369) discusses that business relationships may have an effect due to the changes in organisations. The author further explains that organisations do not make decisions but the people make it in the name of organisations. Unless protected with tight legal contracts, otherwise the interpretation of reciprocal relies on the behaviour of individuals. The effects happen on both parties when the individuals decide to leave organisations. Dependence is an actor’s expectation of another as being valuable (Hald et al. 2009: 962). The authors summarise that dependency is increasing as a relationship is growing with the increases in exchanged rewards. Reciprocity implies cooperation, collaboration, and coordination between the parties (Cooper & Gardner 1993: 17). Dwyer et al. (1987: 12) state that dependence is prolonged, performance is less obvious, uncertainty lead to deeper communication, the rudiment of cooperative planning and anticipation of conflict arise, and expectations of trustworthiness may be cured by personal characteristics. According to Palmatier, Dant, Grewal and Evans (2006: 140), cooperation captures the level of coordinated and complementary actions between exchange partners in their efforts to achieve mutual goals. The parties must have enough trust in the relationship to wait for its future reciprocation. Holm, Eriksson and Johanson (1999: 467 – 479) develop a structural model through investigating the cooperation of Ericsson with Tokyo Digital Phone. They point out that from a strategic perspective, the critical issue is not to avoid becoming dependent on the other party but to build and sustain mutual commitment enabling both partners to engage in value-creating coordination of interdependent activities. Palmatier. Dant, Grewal & Evans (2006: 150) argue that dependence is not very effective in building relationships though it can improve performance. However, this strategy may increase switching costs and barriers to exit. A higher openness and interactivity of relationships contributes to a higher awareness of interdependence. 41 Hence, this awareness of interdependencies consequently initiates the parties to invest in new resources, capabilities and activities (Roseira, Brito & Hennerberg 2010: 933). 2.6. Theoretical framework Dwyer et al. (1987: 12) and Mortensen (2012) consider that relationships exist between the concept of attraction, trust and commitment. The authors support the fact that attraction should be seen as an independent concept being linked, thus affecting the concept of trust and commitment. Hence, a theoretical framework is proposed accordingly. Figure 1. Theoretical framework. According to the theoretical framework, three stages of business relationship development process are presented: initiation stage, development stage, and continuous P e r s o n a l r e la tio n s h ip a n d s o c ia l c a p ita l Attraction Partners in SEA Finnish Firms Continuous Relationship / Termination Initiation Development Interdependency Trust & Commitment Interaction Communication 42 / termination stage. In SEA, business relationships are more likely being generated by personal relationships from the initiation stage to the continuous stage. At the initiation stage, Finnish companies and local partners from SEA are attracted to each other with their own ‘agenda’, which means that both parties require resources from the other party. It could be either the Finnish companies starting to take the initiative to approach the potential local candidate or vice versa. The beginning of the initial interaction process is most likely being influenced by personal relationships –an intensified mutual interaction and communication process supports to build trust and commitment between the partnerships. Furthermore, it may also help to increase interdependency of both parties. An efficient and effective communication and interaction process would bring the business relationships to further development towards the common business goal. However, unsatisfied interaction performance could result in creating less trust and commitment. Therefore, a termination relationship may happen. 43 3. RESEARCH METHODOLOGY In this chapter, research approach and research design will be discussed; followed by data collection. A discussion of reliability and validity also will be presented at the end of this chapter. 3.1. Research approach Gummesson (2003: 483) suggests that research methodologies have to be adapted to reality in a way that B2B firms live with complexity, ambiguity, chaos, uncertainty, fuzzy, boundaries and continuous changes in both technology and the marketplace. Shaw (1999: 60) indicates that the qualitative approach encourages the development of practical and theoretical understanding and is appropriate for the generation of new and alternative theories and concepts. Interpretive and qualitative methodology is adapted in this study by applying an adductive approach. This study is an exploratory study as the research objective is to study how Western companies manage their business relationships in SEA. Due to the limited business relationships research in this region, an exploratory research method is applied. Exploratory studies are a valuable means of finding out “what is happening; to seek new insights; to ask questions and to assess phenomena in a new light” (Robson 2002: 59). It is particularly a useful approach to clarify the understanding of a problem (Saunders, Lewis & Thornhill 2007: 133). Each business partner is embedded in their national, cultural and political context. This affects the intercultural interaction between international business partners. One should acknowledge two important factors: the context of the business partner and the context of the researcher in studying business relationships. Consequently, proper tools can be found in interpretive methodologies that network scholars often use (Salmi 2010: 42). Banthman et al. (2003: 270) mention that this methodology focuses on developing a 44 deep and rich understanding of the dynamics presented within settings. The primary unit of the analysis for the study is the partnership, focusing on the individual’s perceptions of the relationship. According to Saunders et al. (2007: 107), interpretive methodology has been believed as highly appropriate in the study of business and management research, particularly in organisational behaviour, marketing and human resource management due to the business situations complexity and also its uniqueness. What might be generally accepted as per today may not be applicable in the ever-changing world for business organisations in future. Zaefarian, Hennerberg and Naudé (2011: 866) state that interpretive sense-making on the part of the researcher, allows research to seek for meaning and in consequence limited superficial explanations. Qualitative design is more appropriate for the multidimensional of research questions compared to quantitative design (Maylor & Blackmon 2005). By consideration of the exploratory nature of the research, the qualitative research approach allows the researcher to view the research problem in its entirety, get close to participants, penetrate their realities and interpret informants’ perception as appropriate (Shaw 1999: 62). Saunders et al. (2007: 57) mention that a theoretical or conceptual framework firstly needs to be developed, and subsequently tested by using data at deductive approach. In general, a deductive approach requires testable proposition about the relationship between two or more concepts or variables (Saunders et al. 2007: 117). According to the authors, deductive tends to construct a rigid and highly structured methodology that does not permit alternative explanations of what is going on. On the other hand, inductive approach enables a cause-effect link to be made between particular variables without an understanding of the way in which humans interpret their social world (Saunders et al. 2007: 117). The inductive approach is more appropriate to work with if there is little existing literature. By generating data, followed by analysing and reflecting theoretical themes meaningful data are suggested. The strength of inductive research is in developing and understanding a specific topic. The data would 45 be collected and theory will be developed as a result of the data analysis. The authors also suggest that if there is a lack of prior knowledge of a subject, one simply may not be in a position to frame a hypothesis because s/he has insufficient understanding of the topic to do this. Furthermore, Gao, Ballantyne and Knight (2010) conducted a study of Chinese-Western intercultural relationships by using the inductive theory. Gummesson (2003: 488) claims that inductive research lets the reality tell its story on its own terms and not on the terms of received theory and accepted concepts especially in a B2B business environment. Figure 2. Emphasis of induction approach to research. (adapted from Saunders et al 2007) The research objective of this Master’s thesis is to explore the initiation of business relationships in SEA. The research on business relationships in SEA and initiation of business relationships are, as already mentioned, limited and not up-to date to the current economy. However, research of business relationships have a long historical and Induction Approach Gaining an understanding of the meanings human attach to events A close understanding of the research context The collection of qualitative data A more flexible structure to permit changes of research emphasis as the research progresses A realisation that the researcher is part of the research process Less concern with the need to generalise 46 consolidated background. Therefore, a combination of deductive and inductive approach is considered to apply in this Master’s thesis. Abduction approach is the middle ground between induction and deduction (Patokorpi & Ahvenainen 2009: 216; Svennevig 1997). Abduction-based design is a proactive tool to connect basic research to applied research, consequently to explore and exploit the truth innovatively (Patokorpi & Ahvenainen 2009: 216). In studies relying on abduction, the original framework is successively modified (Dubois & Gadde 2002: 559). In order to conduct a more scientific sense of study, this Master’s thesis has applied ‘systematic combining’, being grounded in an abductive approach of case study, a research strategy proposed by Dubois and Gadde (2002). According to the authors (2002: 554), systematic combining is a process where theoretical framework, empirical fieldwork, and case analysis evolve simultaneously. In systematic combining, the authors argue that there is no need to review all of the literature review beforehand as it might pose obstacles to the desired process, hence, researcher would not be able even to identify “all the literature” since the empirical fieldwork parallels the theoretical conceptualisation. In fact, the “need” for theory is created in the process (2002: 559). There are two processes in this approach. Firstly it is the matching theory and reality, and secondly, the direction and redirection. These two processes affect and are being affected by four major factors: what is going on in reality, available theories, the case that gradually evolves, and the analytical framework. In “matching” sections, the literature review, already discussed in chapter two evolved with an imaginary theoretical framework matching with the case studies in the empirical analysis. The matching process may be derived from various directions. Direction and redirection needs to be applied from different sources of data and different methods to collect data in order to discover new dimensions of the research problem (2002: 556). Figure 3 shows the research methodology has applied in this Master’s thesis. 47 Figure 3. Systematic combining. (adapted from Dubois & Gadde 2002) 3.2. Research design The purpose of this Master’s thesis is to study how western companies manage business relationships in SEA. Case studies are common research strategy used in industrial network research (Dubois & Gadde 2002: 553). A qualitative research method with multiple case studies strategy is applied in this study. A case study strategy enables one to generate answers regarding the question “why?” as well as the “what?” and “how?” questions. Additionally, a case study strategy is most often used in explanatory and exploratory research (Saunders et al. 2007: 139). The reason for that is to focus upon the need to figure out whether the findings of the first case occur in another case as well and also to explore existing theory (Saunders et al. 2007: 140). This Master’s thesis has applied research strategy combines with semi-structured and in-depth interviews. Semi- structured and in-depth interviews provide the opportunity to probe answers where the interviewer wants interviewees to further explain their responses (Saunders et al. 2007: 315). Therefore, semi-structured and in-depth interviews will be adopted in this study due to the exploratory nature of this thesis topic. Inductive Approach Deductive Approach Theoretical Framework Case Studies Literature Review Empirical Analysis Matching Direction & Redirection Direction & Redirection 48 Holmlund (2004a: 40) suggests that personal interviews are the ways to get most relevant data because the focus is on perceptions on the involved individuals as informants being asked to recall the relationships as they experienced it – both in real time and in retrospect. The author also agrees with the dynamic point of view as this one may concern both the process and outcome aspects of the interactions in the relationship. Saunders et al. (2007: 312) mention that semi-structured interviews are conducted with a list of themes and questions to be covered. However, they may vary from interview to interview. Shaw (1999: 62) suggests that the design used to guide the collection and analysis of data have to be flexible enough to permit the researcher to uncover and explore issues which emerged as interesting and potentially capable of understanding the substantive research problem. Therefore, face-to-face on one-to-one basic interview is the best method to conduct these semi-structured interviews as it allows researcher to discuss into more detail. This method is ideally to probe answers where researcher wants interviewees to explain, or build on their responses. In addition, this may lead researcher into areas that s/he wants to have in-depth data and area that previously not being considered but are significant for understanding (Saunders et al. 2007: 315 – 316). Guest, Namey & Mitchell (2013: 31) indicate that the advantages of a less structured approach comes with some trade-offs. For instance, it is difficult to compare responses between participants meaningfully. Therefore, structured and semi-structured interviews help to minimise the problem and are much better suited to comparative analysis. Video calling could be an option if it is more convenient to the potential interviewee. From the study Yin (2003: 7), the author suggests that questions based on “how” and “why” are the most appropriate for exploratory studies. Thus, the questions of interviews are based on “how” and “why” to explore issues regarding business relationships in SEA. Analysis of an international relationship (dyad) means that actors from at least two countries are involved (Salmi 2010: 42). Firstly, this study is to study the business relationships in SEA from a western company’s perspective. Secondly, the study scope of this thesis is from the beginning of the relationships and how it develops to become a quality business relationship. Therefore, it is essential to ensure that the candidate is 49 capable of contributing to insights and the understanding of the phenomena being studied (Batonda & Perry 2003b: 1559). Hence, the criteria to select interviewees are determined as follow: a. S/he must be working for a Finnish manufacturing company. b. S/he must have several years of experience in doing business in SEA. c. S/he is still having a on-going business relationship in SEA. In order to ensure that the selected interviewee still has a business relationship in SEA, additional criteria on current serving companies has been determined. Criteria to select companies are as follow: a. Any manufacturing firm from Finland having active business in SEA. b. Must have at least a representative office in the SEA region as the study is not focusing on exporting (indirect) business but is to study how western companies deal the business directly in this region. The role of linguistics is critical in international studies, as the language is affecting interviews (Marschan-Piekkari & Reis 2004; Salmi 2010: 44). Ideally, the interviews are conducted in the mother tongues of the interviewees as language is tied with cultural understanding (Salmi 2010: 44). In this Master’s thesis, the interviews will be conducted in English. It was decided that all interviews are audio recorded, and then transcribed for an in-depth analysis (Zaefarian et al. 2011: 867). Holmlund (2004a: 41) mentions that this is a proper condition for retrieving the interviews in order to come up with a detailed analysis. The interview questions are based on the research literature of the investigated pre-stage and developing stage of business relationships in SEA. Interview guides are used as checklists as well as to encourage significant issues and stress on getting examples to clarify general issues (Holmlund 2004a: 40). The covered main categories are criteria of business partners, selection process, interaction frequency and methods, importance of 50 personal relationships and its relation to business relationships in SEA, trust and commitment, conflicts, and quality of business relationships. The questions are designed from the range of pre-stage to the maintenance stage of relationships. Furthermore, few questions of termination are prepared in case any discussion should be leaded into this direction. 3.3. Data Collection Shaw (1999: 64) stresses researchers cannot remain distant from and being uninvolved in the social phenomenon in which they are interested. Instead, the researchers must adopt a role, such as “researcher as instrument for data collection”, which allows to get close to social subjects to be able to discover, interpret and understand participants’ perspectives of social reality. Invitation emails were sent to companies for the interview. General information about the thesis and reasons to invite the company in order to be part of the thesis topic were stated in the email. It has been explained that the interview will be audio reordered in the invitation emails. However, it has been stated that their anonymity will be ensured in the email. Once the confirmation emails were received, the interview questions were sent to the person for her/his convenience in order to be prepared in advance. Three interviews were conducted at interviewee’s companies and one interview was conducted via support of electronic media (Skype). The data were collected through face-to-face interview and video Skype interview with the person who are or were responsible for the business in SEA. All the interviews were conducted in English. Basically, the duration of the interviews lasted from one hour to three hours. As already mentioned, each interview was audio recorded with the permission of interviewees. According to Saunders et al. (2007: 334), advantages of audio recorded interviews are stated as below: 1. Allows the interviewer to concentrate on questioning and listening 51 2. Allows questions formulated at an interview to be accurately recorded for use in later interviews where appropriate 3. One can re-listen to the interview 4. Accurate and unbiased record is provided 5. Allow direct quotes to be used 6. Permanent record for others to use Prior of the interviews, interviewees were asked to give a brief record of their business experience in SEA and the companies’ background in SEA. The interviews were following the interview guide. Nevertheless, as the data collection process progressed, the interview framing was adapted and new questions were developed on the basis of the detailed answers and examples given by the interviewees. During the interviews, questions of what, how and why were used to address the business relationships dynamics. Consequently, the interviews are transcribed. The transcribed interviews from each interview consist of 16 to 35 pages. These transcribed interviews are used as an important source of data (Brito 1999: 100). According to Brito (1999), cross-case analysis is applied for the data analysis as this method is mainly exploratory and explanatory in nature. Basically cross-case analysis involves three basic steps: 1. Searching for similarities amongst the cases analysed. 2. Evaluating whether such similarities were causally relevant to the phenomenon under study. 3. Formulating general explanations on the basis of the similarities found. In total, four interviews are conducted with companies where headquarters are based in Vaasa, Finland. During the interview sessions, interviewees used examples mostly from the current companies which they are serving. However, the interviewees also mentioned some comparisons with different companies based on their experience in 52 SEA in order to explain their statements. At the next section, a brief introduction for each interview and the interviewees is presented. 3.3.1. Interview I The first interview was conducted with Interviewee K at company K. Interviewee K from company K is Finnish. He served company K as president and CEO. He was an expatriate in Hong Kong in 90s for another Finnish company. His business experience in Asia is approximately 20 years and about 11 years experience in the SEA market. He is responsible on monitoring the business in all regions including SEA. The company is an expert in plastic pipe industrial, infrastructure, building applications, environmental and low-energy products, pre-insulated pipe systems, special mac