Internationalization of Small and Medium Enterprises: Market and Entry Mode Selection in the Asian Market - The case of OleoTest

Internationalization of Small and Medium Enterprises: Market and Entry Mode Selection in the Asian Market The case of OleoTest® Inês Margarida Russo Figueiredo [email protected] Dissertation Proposal Master in Management Advised by Professor Dr. Miguel José Ferros Pimentel Reis da Fonseca 2016 II Biographical Note Inês Margarida Russo Figueiredo was born in Almeirim on 9th June 1993. Graduated in Economics from Nova School of Business and Economics in 2014, she joined the Faculty of Economics in Porto to do her Master degree in Management in the same year. During the academic period she had the opportunity to participate twice on the Erasmus + programme, first moving to Cologne, in Germany, during the second year of her bachelor and then moving to Warsaw, in Poland, during the first year of her master. During the second year of the Master she had the opportunity to do a curricular internship at Castro, Pinto & Costa, Lda. This period represented an advantageous opportunity of learning by having a closer contact with the reality of Portuguese SMEs and at the same time acquiring knowledge regarding the internationalization process of those types of companies. This master dissertation comes in the sequence of the internship realized at CPC. III Acknowledgements For the elaboration of this master dissertation there are several people who were fundamental for me and it would never be possible without them. A special thank to my supervisor, Professor Miguel Fonseca, for all the help, for sharing his knowledge and support during the elaboration of this project. To Joana, my internship partner, for helping me during all the six months, for sharing the same concerns and doubts. To my family and friends for making this desire possible, particularly to my parents and brother that even being far were a fundamental support, for their advices and help. To all the people that somehow helped me during the elaboration of this dissertation. Lastly, to Castro, Pinto & Costa for the possibility of doing the internship, especially to all workers for being helpful and making me feel welcome in the firm. IV Abstract The market saturation, trade liberalization and easiness of market’s access are some of the new challenges companies are currently facing. In this sense, internationalization is increasingly being considered an option which is no longer only available for large companies. Small and Medium Enterprises (SME) are investing more than never in their international expansion and consequently, in Portugal as in many other countries, these firms are playing particularly important roles in the economy of their home countries. The present work results from a curricular internship developed at Castro, Pinto & Costa (CPC), a small Portuguese enterprise that was responsible for the development of OleoTest (OT): a cheap, quick and reliable test used in the control of cooking oil quality. On the basis of the literature review, and after the analysis of the different internationalization models, it is made an international market selection in Asia followed by the recommendation of the best entry mode for CPC. The firm’s expansion strategy selected the Asian region for entrance, since it is one of the most important and largest economic areas in the world and also a large consumer of vegetable oils. China was the elected market and exporting the most suitable entry process for the company. Key-words: Internationalization, Small and Medium Enterprises, International Market Selection, Entry Mode Selection, Asian Market, China. JEL-Codes: F60, F20, F23 V Index Biographical Note II Acknowledgements III Abstract IV Abbreviations VIII 1. Introduction 1 2. Literature Review 4 2.1 Characterization of Small and Medium Enterprises 4 2.2 Definition of Internationalization 4 2.3 Motives to internationalize 5 2.4 Barriers to internationalization 6 2.5 Main Internationalization theories 7 2.5.1 International theories based on market’s perspective 7 2.5.2 International theories based on firm’s perspective 9 2.5.3 International theory based on entrepreneurship’s perspective 12 2.6 International Market Selection 14 2.7 Entry Mode Selection 17 I. Exporting 18 II. Contractual Agreements 20 III. Cooperative Strategies 21 IV. Ownsership (Foreign Direct Investment) 22 2.8 Similar studies 24 2.9 Conclusions and critical analysis 24 3. The Case of OleoTest 26 3.1.Castro, Pinto & Costa, Lda 26 3.2 The Product: OleoTest 28 3.2.1 The process of deep-frying 29 3.2.2 Competitors 30 3.2.3 Clients 31 3.2.4 International legislation 31 3.2.5 OleoTest international presence 33 3.3 Application of the literature in CPC’s case 33 VI 3.4 The Internship 34 4. Methodology 36 Research Questions 36 Research Selection 36 Steps of the Study 37 5. OleoTest expansion to the Asian Market 39 5.1 CPC’s current strategy 39 5.2 PEST Analysis 40 5.3 SWOT 42 5.4 Selection of target markets in Asia 43 5.4.1 First Step – country identification 44 5.4.2 Second Step – preliminary screening 45 5.4.3 Third Step – in depth screening 48 5.4.3.1 Analysis of existing regulation 48 5.4.3.2 Sector and Market numbers 49 5.4.3.3 Cultural Distance 49 5.4.4 Fourth Step - Final selection 50 5.5 The actual situation of cooking’s oil consumption in China 51 5.6 Entry Mode Strategy 51 5.6.1 International fairs in China 52 5.6.2 Who are the possible partners? 53 5.6.3 Regions 54 6. Conclusions 55 7. References 57 Annexes 64 Annex I 64 Annex II 68 Annex III 67 Annex IV 68 Annex V 76 VII Index of Tables Table 1: Resume of the main theories of Internationalization 13 Table 2: Primary factors influencing IMS 16 Table 3: Advantages and disadvantages of the different entry modes 22 Table 4: Comparison between non electronic & electronic devices 30 Table 5: List of countries with international regulation/recommendation 32 Table 6: Type and source of information 37 Table 7: The Ansoff matrix 39 Table 8: Asian countries GDP in 2014 (values and rankings) 44 Table 9: Selected countries 45 Table 10: Macroeconomic indicators 47 Table 11: Easiness of doing business 47 Table 12: Analysis of the existent regulation 48 Table 13: Sector analysis 49 Table 14: Hofstede model – differences between Portugal and the target country 50 Table 15: The decision matrix 50 Table 16: List of recommended international fairs in China for 2016 53 Table 17: Selected Chinese regions 54 Index of Figures Figure 1: Root’s model (1998) compared with Johanson’s model (1997) for IMS 15 Figure 2: How can we use OleoTest? 28 VIII Abbreviations B2B – Business to Business B2C – Business to Consumer CEO – Chief Executive Office CPC – Castro Pinto & Costa, Lda. CFDA – China Food and Drug Administration EMS – Entry Mode Selection FDIForeign Direct Investment FEP – Faculdade de Economia e Gestão FFA - Free Fatty Acids GDP – Gross Domestic Product HORECA – Hotels, Restaurants, and Catering IMS – International Market Selection MNE – Multinational Enterprise OTOleoTest SME – Small and Medium Enterprise TPM – Total Polar Materials 1 1. Introduction Following the trend of world globalization, companies are increasing the demand for international markets and small and medium enterprises (SME) are no exception. Globalization has been described as the process of making possible the integration of economies and societies all over the world, liberalizing the global market, reducing entry barriers and obstacles that prevent foreign investments (Lee, Lee et al. 2015). Smaller companies are going international in an earlier phase, looking not just for growth but also for decreasing the risk of competing only domestically (Fahy 2002). SME are defined in the European Union recommendation 2003/361 and are dependent on the staff headcount and in the balance sheet total or turnover (European Commission 2003). In Portugal as in other countries, SME have an increasing importance and impact in the country’s economy especially due to their importance in the stabilization of the balance of payments. Indeed the value of exports of these firms already represent 40% of the business volume created in all the small companies, however the number of Portuguese exporting small firms has been slightly decreasing and in 2014 only 13% of all SME were selling outside the domestic market (Zurich 2014). Although, for many decades the main focus of internationalization theories had been on Multinational Enterprises (MNE). The size of these firms was seen for a longtime as an advantage to overcome internationalization barriers. However, there are many other obstacles for companies to overcome in the process of internationalizing: capacity, financial and resources’ constrains are some of the examples (Stinchcombe and March 1965, Storey 1994). The existence of several theories trying to explain the reasons and the process of going international proves the importance and pertinence of this operation. The current work is focused on Castro, Pinto & Costa (CPC), a Portuguese company competing in the food safety industry. Divided in three different sectors of activity - laboratory, auditing and products - the focus of the work is on the internationalization of the product OleoTest (OT). Developed by CPC, it is currently the leading brand in the Portuguese market for testing the cooking oil quality. The Portuguese legislation, as in other countries, limits the percentage of polar components (which are formed after heating the cooking oil) present in the cooking’s 8 process that must be made collecting and gathering information for the manager to select the best expansion path (Mitja, Robert et al. 2006). An attempt to integrate internationalization factors is done in the Eclectic Paradigm (also called OLI Paradigm) which asserts the different ways of international production as well as the right selection of a country for foreign direct investment (FDI). This approach identifies three types of advantages coming from internationalization: ownership advantages, internalization advantages and location advantages (Dunning 1988, Dunning 2000). Ownership advantages are inherent to the firm´s resources and include factors as, for example, the background of the top management group which can have crucial influence in the survival and growing of the firm (Fischer and Reuber 2003). Besides the background, other studies tried to demonstrate that other characteristics of the CEO or the decision maker, like the age, can also be differentiator factors regarding international expansion of companies (Andersson, Gabrielsson et al. 2004). Internalization advantages are related with gains from internalizing operations for exploiting ownership advantages as control over operations, and reduction of transaction costs. A firm will prefer FDI as greater are the benefits from internalizing the operations. Location advantages result from productive and institutional factors present in the specific geographical new location (e.g. low-cost labor, lower price of raw materials, government incentives). The theory of Monopolistic Advantage is based on the assumption that MNE have an exclusive source of supremacy over foreign companies in their markets resulting from ownership advantages that cannot be acquired by others (Hymer 1976). Furthermore, firms can take advantage of this benefit abroad having no additional costs than when exploiting that advantage in their domestic market, making local competitors unable to compete despite of their advantage of being in their own domestic market (Caves 1971). An example of this superior knowledge can be found in the form of the brand name, differentiated products, organizational talents, or patented technology (Hymer 1976). 9 2.5.2 International theories based on firm’s perspective The Uppsala Internationalization Model (U-model) is one of the stage models explaining internationalization as being an incremental learning process that occurs in a stepwise manner (Johanson and Vahlne 1977, Mitja, Robert et al. 2006). Companies start expanding to geographically closer markets and gradually move to those which are further. Cultural distance between home and host country is mentioned as being one of the variables influencing the learning process (Johanson and Vahlne 1977). There are different frameworks trying to explain factors of cultural dimension to proxy the physicdistance, contrasting with the indicators used in the U-model, which considers cultural differences as education levels in both countries, language and business practices (Oliveira and Teixeira 2011). However, the model has been criticized by being deterministic (Reid 1981) but also by considering that firms would not have space to take any strategic decisions (Andersson 2000). The model neither explain the emergence of Born-Global (Knight 1996, Madsen and Servais 1997, Andersson and Wictor 2003), international new-ventures (McDougall, Covin et al. 1994), instant exporters (McAuley 1999) and global start-ups (Oviatt and McDougall 1994) firms which are international since its birth meaning that companies did not follow the traditional path of internationalization proposed by the Nordic School. The model does not explain also why some firms go international and others stay in the domestic market. Nonetheless, the critics do not invalidate the criteria used in the model as being valid, but rather demonstrate the need to be complemented with different criteria (Fischer and Reuber 2003). The Model of Innovation-Related (I-models) is another stage model where, as proposed by Rogers (1962 cited in (Gankema, Snuif et al. 2000), each step of internationalization process is an innovation for the firm. Having the main focus only on export development of SME (Reid 1981), authors conclude that the number of models is fixed, although the number of stages could vary between models. Three generic stages were identified as: pre-export stage, initial export stage, and advances exported stage. The two stage models presented are mainly applied to the study of SME although they can also be used in larger firms. 10 The general conclusion of stage models is that internationalization has to be done in a stepwise manner in terms of activities and resources. Both stage models consider individual learning and top managers as relevant aspects to the understanding of the firm’s international behavior (Andersson 2000). Seen as an evolution of the Uppsala model concept, some researchers started to study the process in terms of Network Perspective (Johanson and Vahlne 2009). Firm’s network can influence partners and transmit knowledge relative with the process and the choice of the entry mode in foreign markets. In this context, the notion of internationalization is more connected to an interactive process between competitive advantages of the company and advantages from all the other members of the network where the firm is inserted, and the sum of all the advantages plus the localization advantages of countries. Thus, the network theory gives special attention to cognitive and social links formed between the ones who act and are involved in business relations (Björkman and Forsgren 2000), emphasizing the importance for companies to invest in new networks to the firm. However, if analyzing the relationship between companies as networks, one possible argument would be that firms would go international, specially firms with services, production, and distribution when their main partners (networks) would also go. There is a strong dependence on each other (Mitja, Robert et al. 2006) meaning that it is not an entirely decision of the firm but rather a consequence of belonging to a certain network. Moreover, there is a great diversity of definitions for network that have to be mention. A business network is a group of two or more firms connected and where the relations take place via commercial firms being contextualized by collective actors (Chetty and Holm 2000). There are several actors as competitors, providers, consumers, distributors and the government, being connected through direct and indirect relationships. In that matter, it is possible to define business networks as “sets of international business relationships, in which each exchange relation is between businesses firms conceptualized as collective actors” (Johanson and Vahlne 2003). Contrarily, it is important to highlight that all companies are involved in some type of group relationships with clients, suppliers and even competitors being all part of a wide social and business network. 11 This theory helped on the understanding of the internationalization process by demonstrating that there are specific advantages not just for the company but also for the network. In this way, the model differentiates four particular situations: a low or high degree of internationalization of the firm, and low or high degree of internationalization of the production network (Hollensen 2007). The network model provides different solutions of internationalization pattern for each type of scenario. In the first case, where the company and network enjoy limited international participation, the company starting to develop foreign markets is classified as an early starter. The second scenario describes the case of a lonely international firm reaching a higher internationalization degree, and already being involved in a set of relationships with foreign organizations/markets. By consequence, the firm has earned knowledge and resources to face different cultural and institutional environments when comparing to the home market, but the network continues to be less internationalized. In the third alternative, the late starter serves as an example of a network with a high level of internationalization, contrasting with a lower level in the firm. In this particular case, one solution for the firm to increase the internationalization process is through their customers or complementary suppliers. The last alternative presents the case of international among others, suggesting that the firm has the chance to develop global activities using the position and knowledge from the network, and also using the international knowledge accumulated in order to simplify their entry in new networks (to extend their activities in existing markets, and to enter into new ones) (Hollensen 2007). Some of the theoretical problems related to networks include variables like control, trust, and resources. However, most of those researches seem to ignore the strategic position and influence of individuals, for example entrepreneurs, in the internationalization process of SME (Mitja, Robert et al. 2006). Considering network to SME, it was also shown that small firms are able to trade and gain information with one another, using social network, which leads them to duplicate and accelerate export entry. (Mitja, Robert et al. 2006). The network theory is able to provide the context for international activities, despite the fact that is necessary a further review on the development strategies and resources of the firm. 12 Resource-Based Approach is based on existing models of internationalization (Mitja, Robert et al. 2006), particularly on the assumption that the main purpose of the firm is to develop internal resources and capabilities that should be adapted to the specific market to create a feasible competitive advantage (Andersen and Kheam 1998). Ownership resources have an important role in the strategy of internationalization, being possible to affirm that competitive advantage may come from variables as the number of employees, technology of the product, share of total sales or perceived firm strengths (Cavusgil and Naor 1987). As the heterogeneity tendency of small firms and the operating environment are several difficulties when defining the critical resources needed for internationalization, different authors propose other characteristics for these resources. For example, according to (Barney 1991) they should be valuable, rare, imperfectly imitable, and not substitutable (VRIO). However, there are yet few researches providing examples of resource-based SME’s internationalization, although it is proved that the resources capabilities have special impact on the method and mode of foreign market entry. 2.5.3 International theory based on entrepreneurship’s perspective The ultimate approach to SME’s internationalization has a particular focus on the role of the entrepreneurship (McDougall and Oviatt 2000). The definition of International Entrepreneurship suggests a new are of search as “the combination of innovative, riskseeking behavior that crosses national borders and is intended to create value in organization” (McDougall and Oviatt 2000). Entrepreneurs are the agent of change with specific and distinctive characteristics facilitating the exploitation of new opportunities and having different positions dealing with the risk (Andersson 2000). This theory defends that not all the entrepreneurs process the same competencies and only few are able to combine resources in the domestic marketplace as a basis for internationalization (Mitja, Robert et al. 2006). For that reason, this theory is sustained on entrepreneur’s competencies and knowledge as a source of advantage, being them the main responsible for the company’s internationalization process. 13 In conclusion, SME’s internationalization will remain in the future one of the most important and challenging areas of research, due to the globalization phenomena and the important role that the internationalization of small firms is playing in the world’s economy. The Table 1 below presents a sum-up of the main internationalization theories, that have to be adapted in order to follow this natural evolution. Theory Definition Authors Internationalization Theory The firm wants to achieve its own internal markets. Internationalization can involve vertical integration. Buckley and Casson (1993) Eclectic Paradigm Different forms of international production; explains country section. Identifies three variable forces: ownership, location and internalization. Dunning (1988, 2000) Monopolistic Advantage Internationalization as consequence of the monopolistic advantage (no additional costs). Hymer (1976) Stage Models Uppsala Model Starting internationalization to countries geographically closer. Evolutionary process of internationalization (stepwise manner). Johanson and Vahnle (1977, 2009) Innovation Related Internationalization as a set of evolutionary steps providing a consequent learning process. Gankema et al. (2000) The Network Approach Internationalization resulting from multilateral relationships (business and social network). Hollensen (2007), Johanson and Vahlne (2009); Resource-Based Approach Internationalization due to competitive advantage of the firm related to competences and resources. Barney (1991), Mitja, Robert et al. (2006) International Entrepreneurship Internationalization based on the decision makers (entrepreneurs) and their experience. McDougall et al. (1994), Andersson (2000) Source: Own Elaboration Table 1: Resume of the main theories of Internationalization 14 2.6 International Market Selection (IMS) One of the central decisions for a firm during its internationalization process is the complex topic of market selection (Root 1998, Papadopoulos, Chen et al. 2002). However, it is surprising that given the importance of the theme, there is such a limited research available (Brouthers and Nakos 2005). The International Market Selection (IMS) was conceived as a set of a rational decision process lead by the company. This decision‐making perspective of IMS, together with the diversity and the large number of foreign markets, provides theoretical foundation trying to turn all the international market process selection as efficient and effective as possible. In this process, low‐cost secondary sources of comparative information about countries, usually macro indicators, would offer the information for eliminating possible countries for deeper analysis. There are two main traditional approaches considered in the IMS: a systematic and a non-systematic approach (Papadopoulos and Denis 1988). In the systematic approach, the firm uses a formalized decision process, including different statistical methods, in order to analyze the potential of target markets. There were suggested various models about systematic IMS differing basically on the number and type of stages in which the process of market selection was constructed (Koch 2001). The importance of systematic approach for the selection of foreign markets is emphasized by various researchers who created different selection models (Douglas, Craig & Keegan, 1982; Johanson, 1997; Root 1998; Rahman, 2003). The major differences between these models are the number and type of steps composing the process (Koch 2001). Two of the most recognized IMS models are Root’s model (1987, 1998) and Johanson’s model (1997). Root (1998) defined a model where the market selection is a three step process composed by: i) a preliminary screening, ii) an estimation of the industry market potential, and iii) an estimation of company sales potential. The first step is carried out using simple quantitative variables to quickly and cheaply diminish the total number of markets to be covered in the following phase, or simply by using some predefined criteria set internally by the company. The goal of the second step is to determine the total market potential in the remaining markets, while in the final step it is possible to do a prediction of firm’s sales potential (sales volume forecasting, projected 15 operational costs) along with other variables as marketing costs needed to determine the forecasted level of sales. In another hand, Johanson’s model developed in 1997 is composed by four steps. The main differences to the model described above are related with the existence of two preliminary screening stages, more concretely the country identification and the preliminary screening. Johanson’s third step resembles Root’s second step, while the final stage can be compared in both models. Johanson’s model adds the observation of other variables as geographic distance which includes the influence of cultural distance in the decision process. Some examples of cultural distance can be noticed in the differences in languages, cultures, political systems, and level of industrial development (Musso and Francioni 2012). Cultural distance is frequently mentioned in the literature as being one of the most significant predictors for IMS (Johanson and Vahlne 1977). In the analysis of Root and Johanson's models, it has been proved that firms who adopt a systematic approach normally check out several factors before the selection of international markets (Musso and Francioni 2012). Those factors can be divided into three different groups: firm-specific factors, host country factors and entry barriers, presented in Table 2. Figure 1: Root’s model (1998) compared with Johanson’s model (1997) for IMS 16 Categories Factors Influencing IMS Type of product Firm Specific Factors Management characteristics Firm size International experience Country attractiveness Host Country Factors Market attractiveness Marketing infrastructure Competition Country risk Entry Barriers Physical distance Geographic distance In fact, various empirical studies showed that SMEs typically do not adopt systematic approaches for the market selection since entry decisions are usually made by “no rational” reasons that apparently ignore the optimizing logic of the market (Musso and Francioni 2012). Kothary (1978) proved that 83% of companies from his sample of SME do not did any search before entering their first international market (Papadopoulos and Denis 1988). The inherent complexity of the knowledge required means that few decision makers have enough knowledge to carry out a systematic market selection process (Papadopoulos, Martín Martín et al. 2011). Much of the limitations faced by companies are related with limited amount of time for the decision making, the limited amount of information available, and some cognitive limitation. When comparing SME to multinational enterprises, findings suggested that smaller companies commonly do not successfully develop administrative policies and procedures, and have a tendency for the adoption of opportunistic, relatively to systematic strategic decisions (Van Hoorn 1979). So, the non-systematic approach is rather used by the majority of the small firms in the IMS decision process. By using “physical distance” variables such as the language, the Source: Fabio Musso & Barbara Francioni 2012 Table 2: Primary factors influencing IMS 17 level of industry development, and the political system, enterprises usually selected those markets which are geographically closer and offer a higher level of similarities, what suggests that there is a higher level of knowledge of the “neighbors” (Papadopoulos and Denis 1988). However, one of the principal problems is the preexclusion of some potential markets if this criteria is followed, simply because they are geographically too far. 2.7 Entry Mode Selection The selection of an entry mode by SME has been considered, together with IMS, some of the most important investigation areas with regard to the internationalization of firms (Burgel and Murray 2000). However, in this decision there are other important aspects that need to be considered, as several studies proved the importance of internal and external factors affecting entry mode decisions (Böttner and Hollensen 2011). Among the external factors it is possible to distinguish: Social and cultural Distance: the diversity in values and norms between home and destination country (Böttner and Hollensen 2011). The rise on social and cultural distance is proved to lead to the choice of an entry mode with a lower control level (Root 1998). In the case of cultural proximity there is a lower level of perceived risk (Wrona and Trąpczyński 2012). Market Potential: high investment modes are positively correlated with the size and growth of a country (Suseno and Ratten 2007). Trade Barriers: if trade barriers are removed or decreased, more firms will consider internationalization as a solution (Suseno and Ratten 2007). Competition Intensity: if the competitive market conditions are intensive in a specific country, small companies have difficulties to expand into these markets and tend to choose low investment alternatives (Suseno and Ratten 2007). Business Networks: by setting networks or alliances, SME can diminish the lack of resources’ problem and also be useful for high investment entry modes (Suseno and Ratten 2007). Political and Economical Risk: the political and economic situation of a country directly affects the risk of investing in that specific market being less risky to invest in 24 Concerning the EMS process, a considerable part of SMEs adopt a passive behavior, meaning that entry modes are not actively chosen by companies, but rather result as a consequence of agreements with foreign partners (in the majority of the situations local distributors and importers). In this manner, companies do not have an actual choice and the used entry mode results from a passive response to an external incentive (Musso and Francioni 2014). Theory propose that the trade-offs between risks and returns are the base for choosing an international market entry mode. 2.8 Similar studies There are some studies analyzing the selection of international markets or the entry mode selection conducted by SMEs in their internationalization process. However, there are few centering the attention on the Asian region reinforcing the importance of this work, together with the specificity of the company and the product under analysis. Musso and Francioni (2014) analyzed together international market selection and entry mode using a sample of 221 Italian firms proving that most of them adopted a nonsystematic IMS approach being in accordance with most of the literature in the area and, with regard to EMS, the passive behavior tends to prevail. It also proved that the two decisions are usually performed at the same time without following any specific criteria. In 2013, Céline Gaultier developed a project analyzing the behavior of French wine companies in entering the ASEAN markets, concluding that due to their small size and limited resources SME do not have much choice regarding the choice of the entry mode strategies. 2.9 Conclusions and critical analysis The literature proves the importance of looking at the main motivations of a firm to internationalize and what are the main barriers in the target market they want to reach. Different theories and models try to explain the internationalization process looking at different forces. In the decision for international market selection firms can opt between a systematic approach, following a rational decision process, or a non-systematic approach where decision is simply based on instinct or company’s strategy. In the case 25 of entry method, the literature suggests that different strategies will have different impacts on firms control level, investments and costs, being the main entry options exporting, contractual agreements, strategic cooperation and ownership. The main critics to the literature are related with the appliance to limited and very particular cases. Furthermore, the existing one usually uses samples geographically limited to only one country or limited to a particular industry, being this one of the main weaknesses. Not mentioning reasons behind the choice of systematic or non-systematic approaches by SMEs regarding to Entry Mode Selection can also be pointed as another limitation of the literature. This project contributes to the knowledge of international expansion of SMEs by analyzing the particular case of a Portuguese Small and Medium firm and a very specific product, OleoTest, entering in one or more selected Asian countries and recommending the best entry mode. 26 3. The Case of OleoTest The present section provides a more detailed explanation of the company Castro, Pinto & Costa (CPC), particularly describing the selected product for internationalization - OleoTest (OT). In this chapter, our aim is to provide a deeper knowledge of the history of the company, the different products available, and the path that the company has been following in order to provide helpful information when recommending international expansion. The information presented was gathered through informal interviews with the CEO of the company – Eng.ª Inês de Castro (contained in Annex I), firm’s internal information and independent researches through institutional websites. In the end of this chapter, there is a resume of the internship realized, specially mentioning its main goals and the tasks realized. 3.1. Castro, Pinto & Costa, Lda. The company was founded in 2000 by four students of the University of Minho. The absence of firms in the field of food safety and the incentive of professors were the main impulses for the creation of CPC, in such a way that still today the company maintains a close relationship with that university. Being present in the market for already 15 years, the company expanded its activities and had become a reference in businesses, being three times recognized as “PME Líder” in years 2010, 2011 and 2012. CPC had to deal with several challenges since the moment of its creation: the lack of financial support, the scarcity of capital for investment and growth, and the inexperience on management. However, CPC always tries to maintain a strategy based on innovation and in stable growth, keeping as main differentiators the quality and innovation of products commercialized, as well as the services provided. Moreover, throughout these 15 years CPC accomplished multiple successful projects which were responsible for vitalizing the company. The key product of CPC is OleoTest. Firstly launched in the market in 2003, OT has been described as a quick measuring test allowing users to control the quality of the frying oil, being their launch an important mark on the firm’s life. OT is today the leading brand in the Portuguese market for the control of the quality of cooking oil. 27 Besides OT, the company has also launched a vast range of products, utensils and different equipment considered essential for industrial activities, as well for the HORECA (hotels, restaurants and cafes) sector. Since 2007, CPC is settled in ‘Zona Industrial da Maia’, where it was possible to build their own IDI (investigation, development and innovation) lab, allowing the development of a settle of environmentally and hygiene-sanitary tests. In the same year, CPC achieved the Certification ISO 9001, a certification of quality management systems that has been renewed since then. In 2015, on the occasion of the 15th anniversary of the brand, this firm concluded a process of rebranding, by launching a new image symbolizing the search for new innovation strategies and business modernization. Nowadays, after being consistently established in the Portuguese market, especially with OleoTest, the firm wishes to continue the expansion to more international markets, moving to markets physically more distant as the Uppsala Model determines, after being successful in the markets where it is already competing. CPC is a Portuguese SME operating with OT, an innovative product, in a Business-toBusiness (B2B) environment and within an unexplored sector. All these particularities are determinant to the company which saw a good opportunity in the creation of an agreement for internships with the Faculty of Economics of University of Porto in order to develop a structured internationalization strategy. CPC has three different business units, which complement each other: i) services of support to firms through consulting, auditing and professional training in terms of quality control and food safety; ii) a laboratory which provides a set of different services of investigation, development and innovation (IDI) and analytical control; and iii) a diverse list of products and equipment for the food quality sector. Currently, CPC has nine employees divided through the different business units of the company. Two employees work only in the laboratory, one employee is responsible for products department and all the others are working in the area of services. However, all of the employees help when necessary in other areas, such as for example, once a month during the production of OT, when all them stop their work to help in the filling and 28 packaging process. CPC does not have a formal organizational structure neither an established hierarchy. Nowadays, only two of the four original founders are still working in the company, with responsibilities in the management area. Regarding international activities, the managers together with other employee dedicate some of their time to the process. However, all of the internationalization questions are done together with other functions. 3.2 The Product: OleoTest OleoTest (OT) is an innovative test developed by CPC in year 2002. The firm saw an opportunity in the absence on the market of a quick and reliable test for controlling cooking oil’s quality, as the existing methods were very demanding in terms of laboratory equipment and technical knowledge. OT is a mixture of chemical reagents for the evaluation of Total Polar Materials (TPM), a compost formed during the frying process and that is one of the responsible for oil’s degradation. The test in contact with a small sample of the oil will turn in a particular color, telling the user if the oil is safe or not to continue to use it. The test has a shelf life of 18 months and takes around 2 minutes to determine the amount of TPM present in the frying oil being possible to be used in different types of oils (palm, bean, and soya oil). OT's chemical formula is unique and kept in secret between its developers. The product is an innovation in this segment of business, very hard to copy and successful, especially due to three distinctive features: easiness of use, reliability of results, and low cost. Figure 2: How can we use OleoTest? 29 3.2.1 The process of deep-frying Fried food is consumed worldwide and has facing increasing popularity due to distinctive sensory properties as flavor, color, texture and palatability, which are greatly appreciated by consumers (Mlcek, Druzbikova et al. 2015). The process of deep-fat frying is described as “a process of immersing food in hot oil with a contact among oil, air and food at a high temperature of 150ºC to 190ºC” (Choe and Min 2007) and it is a much appreciated cooking method since it is quick and provides characteristic smells and flavors to the food, being one of the oldest processes of food preparation used in kitchens all over the world (Varela, Bender et al. 1988). However, there are a set of complex changes and reactions that can cause several degradation in compounds during the process (Fritsch 1981). The quality of used oil has a major influence on the quality of the final product. During the process of deep-fat frying, due to the moisture contained in food, atmospheric oxygen and high temperatures, several reactions can occur, such as hydrolysis, oxidation and polymerization (Choe and Min 2007). These reactions change the chemical and physical composition of the frying oil, leading to the creation of unwanted compounds. The main products of decomposition created during the frying process, and normally those that quick tests are able to measure are total polar materials, which are extremely harmful for health as they can cause a deterioration in the cardiovascular system and also contribute for the development of stomach cancer (Fernandes 2012). However, there are some tests that only measure the presence of free fatty acids (FFA) in the oil. Those components are also harmful but they represent only one part of the total compounds created, being this a less efficient measure. In some countries there is legislation for the quantities of TPM and FFA. Once TPM are present in a higher percentage in used frying oils, this is one of the most frequently used and accepted criteria for controlling the quality of frying oils (Chen, Chiu et al. 2013). The official technique, ISO 8420:2002, Animal and Vegetable fats and oils - Determination of content of polar compounds, used to measure TPM in order to control oil quality, is complex, requires several hours, and should be developed in very specific and specialized laboratories with proper equipment (Chen, Chiu et al. 2013). For this 30 reason, the technique is not suited for small industry or sellers to use on their establishments (Chen, Chiu et al. 2013). The problem has been noticed by different companies that developed rapid tests to control oil quality based either on chemical properties as the FFA, iodine value and the content of TPM, or based on physical characteristics as the color, for example. 3.2.2 Competitors In the market of cooking oil quality control there are several products competing with OleoTest in two main categories of products: the electronic devices and the nonelectronic tests. In the first segment,, electronic devices require larger initial investments (since their prices vary between 400€ to 700€) and also imply maintenance costs, as for example, calibration that should be done every year in order to guarantee the veracity of the results. Some of the disadvantages of electronic instruments are the need of source of energy to realize the test (battery or plug-in electricity), the possibility of contamination since tests are done immersing the device directly in the oil, the risk of break, and the necessity of cleaning the devices every time they are used. The main advantages of non-electronic devices are the low price and the easiness of use for the same level of reliability. They cost on average 1€ per unit, what represent a more economic option for smaller companies that use a small number of tests,, and do not need any type of maintenance or any special storage conditions. The Table 4 below presents a sum-up of the main advantages of non-electronic devices comparing with the electronic ones. Source: CPC internal documentation Non-Electronic Devices (including OT) Electronic devices Low Price (± 1€ test) High Investment (± 600€ device) No battery needed Battery or be plug in Possibility of storing samples Registered only digitally Table 4: Comparison between Non-Electronic & Electronic Devices 31 Considering the information collected during the internship period, it is possible to identify that the main competitors in the segment of electronic devices are Fom, Testo 270 and Vito. In another hand, in the segment of non-electronic tests, where OleoTest is included, there are two types of tests (measuring the levels of TPM and FFA) and being the biggest competitor 3M Strips (FFA). As it is described in Annex II, the majority of OT competitors belong to big multinational firms which have much more resources available highlighting the importance of a good strategy from CPC for its success. 3.2.3 Clients The main clients of quick oil tests are companies or entities where the quality standard mentioned before need to be applied, as well as one of the main target groups is an activity where it is necessary to use and manipulate heated edible oils to cook or produce food products. OT can be used in the following sectors: Food Industry; Laboratories/Companies specialized in food safety control, Catering firms, Restaurants and Cafes, and Official Inspectors for food safety control. As it is possible to conclude, OT is exclusively sold in the Business-to-Business (B2B) segment, and besides the obvious users of OT (food manufacturers), tests can be used by official control entities/agencies during legal inspections to kitchens or industries in order to monitor the quality of frying oils. In fact, the use of OT is very attractive to these agencies since the test itself allows the storage of the results for a long period of time, serving as a legal prove of the inspection. 3.2.4 International Legislation The necessity of controlling the quality of the cooking oil is a question of public health and it has been creating a growing concern, especially due to serious consequences that they can have to human’s health. All over the world there are countries legislating or just making recommendations for the control of cooking oil quality. The regulation / recommendation generally imposes legal limits to the quantity of Total Polar Materials or Free Fatty Acids (FFA), that in the majority of the cases cannot be higher than 25% 32 and/or could not exceed 3%, respectively. However, there is the need for a global harmonization in terms of parameters and limits. A study from the European commission (2013) regarding recycling cooking oil suggests that for TPM the value should be between 25% and 28%, and for FFA lower than 5%, while in Portugal the legislation requires a quantity of TPM lower than 25 %. The responsible agency for ensuring enforcement of the law in Portugal is ASAE (Autoridade de Segurança Alimentar e Económica) using OT for the control, once it allows keeping a proof of the results. Table 5 below contains a list of the countries where there is legislation/ recommendation and the respective limits. Not surprisingly, the majority of the countries are European, since there are some official documents from the European Commission advising countries to do so. Table 5: List of Countries with International Regulation/Recommendation Country Legislation Recommendation FFA TPM Austria X 27% Belgium X 2,50% 25% Brazil X 0,90% 25% Canada X 24% France X 25% Germany X 27% Hungary X 30% India X 0,25% Italy X 25% Netherlands X 27% Panama X 3% 24% Poland X 25% Portugal X 25% Spain X 25% Switzerland X 27% Source: CPC internal information 33 3.2.5 OleoTest International Presence OleoTest was launched for the first time in the market in 2002 and rapidly CPC managers realized the potential of the product abroad, particularly in countries with legislation for the control of TPM. In 2007, after CPC presence in the international fair Alimentária Barcelona, the company established an exclusivity partnership with Biomedal, the distributor agent responsible for OT in Spain. Later, and also after a meeting during an international fair, ALLA France contacted CPC in order to establish an exclusivity agreement to be OT agent in France. The enlargement of CPC networks and the knowledge acquired from these negotiations revealed to be advantageous for CPC, allowing the firm to increase its internationalization. CPC’s expansion in Europe continued with exclusivity contracts in Poland and Turkey but also in other European markets with no exclusivity contracts, as Austria, Italy, Belgium and Greece. The total value of exports of OT in 2015 was 126 000€, representing 25% of the total volume of business of the company on that year, although the exports level slightly decreased when comparing to the previous year (-3.82%). In the current year of 2016, the firm already expanded their presence to the United Arab Emirates, with a non-exclusivity agreement with Specifico. Concluding, the company used the strategy of direct exporting in their international activities, despite of the main limitations associated to this entry mode like the limited control over promotion, price, and place. However, CPC does not require any type of report from their distributors neither receives substantial feedback from their international agents, what should be taken in account in future agreements. 3.3 Application of the literature in CPC’s case As it has been mentioned during this report and after analyzing the main internationalization theories, it is essential to examine how they can be applied to this firm. CPC´s strategy confirms in some extend the relation between reality and theory and its plan of action can be incorporated in the majority of the internationalization theories. At the beginning of their internationalization process, CPC opted to enter 40 5.2 PEST Analysis One of the most useful frameworks helping companies to have a first impression of the main factors affecting target markets is PEST. By looking at political, economic, socialcultural and technological aspects of certain regions or markets, firms have a first perception of the situation and general attractiveness. In this specific case the analysis is performed for the Asian region. Political Factors - Rapid changes in political leaderships in several Asian countries (e.g. Philippines, Thailand and Indonesia). - Political systems can vary from democratic (e.g. India and Indonesia) with multiple centers of power, none of which is powerful enough to completely control the decision making process, to totalitarianism (e.g. Myanmar and Laos) where the political power is highly concentrated in small elite groups. - China, for example, is a mixture of capitalism, where private ownership of business enterprises is encouraged, and socialism, where public ownership of a business is common. - Political instability in some regions has a crucial negative effect on foreign investment (e.g. few foreign investors dare to invest in Indonesia right now). - Corruption is still rife in many Asian countries. - The existence of closed economies for change between partners (e.g. ASEAN formed in 1967). - China entered WTO in 2001 and had a profound effect on other Asian economies. Economic Factors - About 60% of the world’s population lives in this region, making it a desirable market to enter. - Very different stages of development represent threats and opportunities ranging from underdeveloped nations (e.g. Laos and Myanmar), developing nations (e.g. Malaysia), newly industrialized economies (e.g. Singapore and Taiwan) and fully developed nations (e.g. Japan). 41 - Asian region has some of the most successful economies in the world with constant GDP growth rates between 7%-8% per year (e.g. South Korea, Taiwan, Hong Kong and Singapore). - Each Asian market has its own currency. - Governments impose various exchange restrictions to control their limited supplies of foreign exchange, as for example, fixing the exchange rate by the government. - Currency exchange rates can be greatly affected by political changes (e.g. Indonesian rupiah changes substantially with each major political development). Socio-Cultural Factors - Asian region is completely different from Europe, being extremely important to understand diversity of cultures as it will influence needs and business practices. - Japanese, for example, favor Japanese made products. - The demand for goods and services from Asian governments is usually directed to local companies. - Product features, packaging and advertising strategies must be adapted and sensitive to Asian cultural habits. - Business negotiations involve individuals from different cultural backgrounds, and misunderstandings can arise from lack of knowledge of those differences. - The main elements of culture which have impact on marketing are religion, values and attitudes, language (verbal and non-verbal), names and customs, manners. - China and Japan wealth dominates most of the Asia, being important to notice some of their negotiation principles: they are tough negotiators, they are relation oriented, they have larger negotiation teams, they do not like detailed and restrictive contracts, Chinese have a more hierarchical approach in decision making whereas Japanese are more consensus seeking. Technological Factors - IT and communication infrastructure advance at different rates in different countries and even inside the same country. 42 - Singapore is highly developed in the IT and communications infrastructure, but India is the IT capital of Asia, yet barely half of the population own home computers. - Product and process technology change is also modifying the competitive environment of many Asian countries. In conclusion, the Asian region is very heterogeneous, representing at the same time a set of threats and opportunities, and CPC should be aware of the existence of big cultural differences in order to avoid misunderstandings. 5.3 SWOT Considering all the frameworks analyzed before and the characteristics of the company and OT, a SWOT analysis helps in the identification of factors analyzing internally strengths and weaknesses and externally opportunities and threats. Strengths - Characteristics of the product - Price/quality ratio - Easiness of Use - Experience and knowledge in internationalization - Recognition of the brand - Difficulty to imitate Weaknesses - Small Size of the company (financial and resources constraints) - Weak control over distributors and agents - Not suitable for all types of oil Opportunities - Increasing number of countries legislating the quantity of TPM - Increase awareness in Asia for the importance of food quality control - Increase consumption of oils in Asia 43 Threats - Size and power of competitors - Unawareness of the necessity of controlling the quality of cooking oil - Substitute products - The size of counterfeiting business in Asia - Frying without oil techniques - International unawareness of the brand - Dependency of OT international sales In order to boost the business, it is necessary to carefully look at opportunities and strengths as a path to follow, trying at the same time to reduce the impact of weaknesses and threats. 5.4 Selection of Target Markets in Asia As mentioned in the literature review at the beginning of this report, the international market selection is one of the most important and challenging decisions that firms have to take in the internationalization process as there are several aspects that can be considered as criteria for ranking countries’ attractiveness. In the process of selection it is applied the Johanson’s model (1997). Being a rational and still valid method, it is believed to be adequate for CPC market selection. According to this model there are four different phases: 1) Country Identification: A first selection excludes undeveloped Asian countries (based on GDP) and countries which do not fit in the firm’ strategic objectives (Middle East). 2) Preliminary Screening: An analysis of macroeconomic indicators (GDP, GDP growth rate, population, inflation, unemployment, value of imported goods and services and the easiness of doing business ranking) is performed. 3) In depth Screening: Analysis of the number of hotels, global food security, vegetable oil consumption and cultural distance. 4) Final Selection: Country final selection and analysis of potential partnerships. 44 In this phase, data collection is gathered from different sources including internal information from CPC reports. The main sources of external information are institutional websites as the World Bank, the International Monetary Fund, AICEP, the Hofstede Centre, and national agencies for food control from specific countries. 5.4.1 First Step – Country Identification In this first phase, there are identified the potential target countries. From the overall 36 countries belonging to Asia, in a first approach some are considered not suitable for CPC’s market expansion. Firstly, countries belonging to the Middle East were excluded for the purpose of this work, as well as poor and underdeveloped countries, using nominal GDP as selection factor. In Table 8 were marked the Asian countries that are selected, considering their nominal GDP, and consequently Table 9 presents the ten countries that will be considered for a later analysis. Table 8: Asian Countries GDP in 2014 (Values and Rankings) GDP Rank in Asia GDP Rank in the World Name of the Country Nominal GDP ($) 1 2 China 10.354.832 2 3 Japan 4.601.461 3 9 India 2.048.517 4 13 South Korea 1.410.383 5 16 Indonesia 888.583 6 19 Saudi Arabia 746.249 7 28 Iran 425.326 8 29 Thailand 404.824 9 30 United Arab Emirates 399.451 10 35 Malaysia 338.104 11 36 Singapore 307.860 12 37 Israel 305.675 13 40 Philippines 284.777 14 44 Pakistan 243.632 15 47 Iraq 223.508 16 50 Qatar 210.109 17 48 Kazakhstan 217.872 18 54 Vietnam 186.205 19 55 Bangladesh 172.887 45 20 64 Oman 81.797 21 65 Sri Lanka 78.824 22 73 Uzbekistan 62.644 23 86 Turkmenistan 47.932 24 88 Lebanon 45,731 25 92 Yemen 35,995 26 93 Jordan 35.827 27 95 Bahrain 33.851 28 108 Nepal 19.770 29 112 Brunei 17.105 30 115 Cambodia 16.778 31 132 Mongolia 12.016 32 140 Tajikistan 9.242 33 146 Kyrgyzstan 7.404 34 164 Maldives 3.062 35 168 Bhutan 1.959 36 174 Timor-Leste 1.417 Table 9: Selected Countries Name of the Country China Japan India South Korea Indonesia Thailand Malaysia Singapore Philippines Vietnam 5.4.2 Second Step – Preliminary Screening In the second step of Johanson’s model, there are analyzed different macroeconomic factors from each of the countries. Some of the variables used as decision criteria are: GDP per capita as an indicator of development, total population as an indicator for the Source: International Monetary Fund 46 market size, and the easiness of doing business as a sign of the facilities that can be found in each country (e.g. legal, infrastructure). Table 10 below contains the indicators mentioned above, and the best four indicators of each category are marked with the green color. 47 Source: World Bank Source: World Bank Country Ease of Doing Business Rank Starting a Business Dealing with construction permits Getting electricity Registering Property Getting credit Proctectoring minor investors Paying taxes Trading across borders Renforcing contracts Resolving Insolvencie s China 11 22 6 2 18 59 25 39 65 16 21 India 130 155 183 70 138 42 8 157 133 178 136 Indonesia 109 173 107 46 131 70 88 148 105 170 77 Japan 34 81 68 14 48 79 36 121 52 51 2 Malaysia 18 14 15 13 38 28 4 31 49 44 45 Philipines 103 165 99 19 112 109 155 126 95 140 53 Singapore 1 10 1 6 17 19 1 5 41 1 27 South Korea 4 23 28 1 40 42 8 29 31 2 4 Thailand 49 96 39 11 57 97 36 70 56 57 49 Vietnam 90 119 12 108 58 28 122 168 99 74 123 Table 10: Macroeconomic Indicators Country GDP 2012 GDP 2013 GDP 2014 GDP growth GDP per capita 2014 Population 2014 Population Density Inflation Imported goods and services (GDP%) Unemployment Rate (% of Labor force) 2012-2013 2013-2014 China 8,46162E+12 9,4906E+12 1,03548E+13 12,16% 9,11% 7590 1,364,270,000 145 2 18,9 4,7 India 1,83178E+12 1,8618E+12 2,04852E+12 1,64% 10,03% 1581,5 1,295,291,543 436 6,4 25,5 3,6 Indonesia 9,1787E+11 9,10479E+11 8,88538E+11 -0,81% -2,41% 34919 254,454,778 140 6,4 24,5 6,2 Japan 5,95448E+12 4,91956E+12 4,60146E+12 -17,38% -6,47% 36194,4 127,131,800 349 2,7 19 3,7 Malaysia 3,14443E+11 3,23343E+11 3,38104E+11 2,83% 4,57% 11307,1 29,901,997 91 3,1 64,6 2 Philippines 2,50092E+11 2,71927E+11 2,84777E+11 8,73% 4,73% 2872,5 99,138,690 332 4,1 32,4 7,1 Singapore 2,89936E+11 3,02246E+11 3,0786E+11 4,25% 1,86% 56284,6 5,469,700 7,736 1 163,2 3 South Korea 1,22281E+12 1,3056E+12 1,41038E+12 6,77% 8,03% 27970,5 50,423,955 517 1,3 45,3 4,1 Thailand 3,97472E+11 4,20167E+11 4,04824E+11 5,71% -3,65% 5977,4 67,725,979 133 1,9 62,6 0,9 Vietnam 1,5582E+11 1,71222E+11 1,86205E+11 9,88% 8,75% 2052,3 90,730,000 293 4,1 83,1 2,3 Market prices (USD) Table 11: Easiness of Doing Business 48 Table 12: Analysis of the existent regulation Countries like Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam are excluded in this second phase, due to its lower GDP, since there is no point in doing a deeper analysis once they do not represent potential markets for expansion. 5.4.3 Third Step – In depth Screening In the third step there are considered in depth factors that might have a decisive impact on the market selection. The existence of legal regulation or recommendation for the control of the cooking oil quality is one of the elements considered. The importance of briefly analyzing the market sector is emphasizing by the data collection from the total number of hotels and vegetable oil consumption in the four remaining countries. 5.4.3.1 Analysis of existing regulation As it has been mentioned during the elaboration of this report, the control of cooking’s oil quality is fundamental to guarantee an improvement of the public health. However, in the majority of the cases there is a lack of awareness regarding the possible consequences of not controlling the presence of harmful compound in the oil. In this phase it is important to look at the existence of regulation, once if there is already legislation (meaning that by the law it is mandatory to control the quality of the cooking’s oil), it would be easier for OT to be recognize when comparing to a country where there no such awareness. In Table 12 below, there is a list of who is the responsible agency for food quality control in each country, and if there is (or not) legislation/recommendation in the area. For ranking purposes, countries with legislation receive a lower score than countries with no legislation. Country Name of the responsible entity Legislation Recommendation Level FFA TPM China China Food and Drug Administration (CFDA) - Yes <27% India Central Drugs Standard Control Organization (CDSCO) Yes - <,25% Japan Pharmaceutical and Medical Devices Agency (PMDA) - Yes ≤2,5% South Korea Ministry of Food and Drug Safety (MFDS) No No Source: Own Ellaboration 49 Table 13: Sector Analysis 5.4.3.2 Sector and Market Numbers In Table 13 it is possible to look at some numbers about Vegetable Oils consumption, the importance given to food security in each country, which is illustrated by the global food security index, and also look at the number of hotels as a proxy for potential clients. 5.4.3.3 Cultural Distance One of the advantages of Johanson’s model is the addition of the cultural distance as a selection variable. For a deeper understanding of the cultural aspects for each of the four countries, it is used the Hofstede 6 Dimensions Model (power distance, individualism, masculinity, uncertainty avoidance, long term orientation and indulgence). Chinese society, for example, is mentioned as being adaptable and entrepreneurial, driven and oriented to success. In India, there is a great influence of Hinduism, leading to general acceptance of imperfection and delays, since there is the notion that time is not important. In an opposite side, Japan is a culture extremely concerned with time, with the belief that life is a short and everything should be planned (long-term oriented society). On the other hand, South Korea is a society oriented for the long term and focused on work but also privileges free time and flexibility. In Annex IV, it is possible to find a deeper explanation of all the dimensions for the different countries. 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European Management Journal 30(4): 295-315. 64 Annexes Annex I: Interview with the CEO of CPC – Eng. Inês de Castro, realized on March 2016 1) When was the company founded and what does it offer? Castro, Pinto & Costa, Lda. was created in the year of 2000, by four graduated students from the University of Minho after acknowledging the existent gap in the area of food safety control. CPC positioned itself in the market by being one of the rare companies in Portugal that has three integrated and complementary business units (BU): BU services providing support to business customers through consulting, auditing and training; BU laboratory including the research services, development & innovation (RDI) and analytical checks; and BU products providing products and equipment for the food processing industry. Currently the UN services represent about 45% of company turnover and are gradually losing some weight (represented about 65% in 2003). The company is strongly dependent of the BU products which are now representing more than 50% of the entire turnover. The CPC works closely with the University of Minho particularly with regard to R & D activities and has launched some other products on the market related with computer applications. 2) What is OleoTest and how was it developed? How does OleoTest differentiate from its competitors? The product OleoTest had been developed during 3 years and the official launch occurred in 2003. OleoTest is an innovative and a unique formula kept in secret by its founders for the control of cooking oils and emerged in the market as simpler solution and offering a higher level of reliability when comparing to other tests. OleoTest is a colorimetric test that measures the quantity of Total Polar Materials (TPM), compounds that are formed after the heating of the cooking oil and when present in excess can be harmful for human health. The test gives to users the information of when should the oil be substitute. In Portugal, as in many other countries there is legislation for maximum quantity of TPM and other compounds as FFA present in the cooking oil. In our country the legislation is only for the presence of TPM and sets that the oils must be changed when the quantity is higher than 25%. OleoTest differentiates from competitors in terms of savings for clients by not requiring special conditions for storing nor is any calibration necessary. The easiness of use, the fastness of the results (available in 2 minutes), and the possibility of being used with different types of oils (peanuts, corn, soy, and sunflower oils) are also some of the advantages of the product. OleoTest is an internationally registered brand since 2009. 65 3) Who are OleoTest clients? What is the profile of OleoTest users? The main clients of OleoTest are other distributors selling equipment for food quality control and healthcare instruments. The company acts primarily in the Business to Business (B2B) segment but in Portugal, it also sells directly to the final client playing in this case in the Business to Consumer (B2C) segment. Internationally the characteristics of the clients are similar to national customers with the exception that OleoTest is only plays in the B2B environment. The main users of OleoTest are small companies which do not want to make big investments for the control of the cooking oil considering their business volume. As it was stated before, one of the main advantages of OleoTest is the low price when comparing to substitute products. Furthermore, the product does not have any maintenance either calibration additional costs. Smaller clients that do the control of the oil two or three times a week will rather prefer OT than other electronic device that represent a big initial investment. OT is also the test used by the Portuguese Food Authority agency (ASAE) since it is possible to keep the sample for further prove, if necessary, what is not possible when using electronic devices which only register in the moment the values measured. 4) Who are the main competitors of OleoTest? The main competitors of OT are divided in two big groups: electronic and non-electronic devices. The electronic devices, for example Testo and Ebro Fom, are more expensive and require to be calibrated once a year to guarantee the accuracy of the results. Those instruments are usually used in firms where it is necessary to test the cooking oil two or three times per day since in the end it compensates the initial investment. Chinese products are reinforcing their presence in the market offering similar test being the outside aspect very similar to Testo 270 and Ebro Fom but costing half of the price. In the non-electronic category there are test very similar to OT, as is the example of the Portuguese company VeOléo. There are also other quick colorimetric tests as 3M strips which in contact with the oil assume a certain color. It is important to mention that not all the tests present in the market measure the same components in the oil, some measure the total quantity of polar materials (TPM) the most indicated indicator and others only measure the quantity of free fatty acids (FFA). 5) When did OleoTest internationalization process start? How did the process occur? After the success of OleoTest in the Portuguese market and considering the limited size and saturation of our domestic market we wanted to start the internationalization of OT. The first country selected for the international expansion was Spain, due to the evident similarities between both countries and the geographical location. Similarly to what happens in Portugal, there is legislation in Spain for the control of the quantity of total polar compounds present in 72 - Uncertainty Avoidance: India has a medium low preference for avoiding uncertainty. In India imperfection is widely accepted; nothing has to be perfect nor has to go exactly as planned. People generally do not feel driven and compelled to take initiatives and comfortably settle into established rolls and routines without questioning. Long Term Orientation: In India the concept of “karma” dominates religious and philosophical thought. Time is not linear, and thus is not as important as to western societies. Countries like India have a great tolerance for religious views. Hinduism is often considered a philosophy more than even a religion; an amalgamation of ideas, views, practices and esoteric beliefs. Typically the forgiveness of punctuality or the exchanging of plans is common. - Indulgence: India is a Restraint society having the tendency to cynicism and pessimism and they do not put much emphasis on leisure time and control the gratification of their desires. South Korea - Power Distance: South Korea is a slightly hierarchical society. People accept a hierarchical order in which everybody has a place with no need for further justifications. Hierarchy in an organization is seen as reflecting inherent inequalities, subordinates expect to be told what to do and the ideal boss is a benevolent autocrat - Individualism: South Korea is a collectivistic society which is manifested in a close long-term commitment to the member 'group'. Loyalty in a collectivist culture is 73 paramount, and over-rides most other societal rules and regulations. Offence leads to shame and loss of face, employer/employee relationships are perceived in moral terms, hiring and promotion decisions take account of the employee’s in-group, management is the management of groups. - Masculinity: South Korea is a Feminine society with focus on “working in order to live”, where managers strive for consensus, people value equality, solidarity and quality in their working lives. Conflicts are resolved by compromise and negotiation and incentives such as free time and flexibility are favored. An effective manager is a supportive one, and decision making is achieved through involvement. - Uncertainty Avoidance: South Korea is one of the most uncertainty avoiding countries in the world maintaining rigid codes of belief and behavior and being intolerant of unorthodox behavior and ideas. There is an emotional need for rules, time is money, people have an inner urge to be busy and work hard, precision and punctuality are the norm, innovation may be resisted, security is an important element in individual motivation. - Long Term Orientation: South Korea is one of the most pragmatic countries, longterm oriented societies. People live their lives guided by virtues and practical good examples and not by God. Long term orientation gives priority to steady growth of market share rather than to a quarterly profit. - Indulgence: South Korean society is Restraint and do not put much emphasis on leisure time and control the gratification of their desires. People have the perception that their actions are restrained by social norms and feel that indulging themselves is somewhat wrong. Japan 74 - Power Distance: Japan is a borderline hierarchical society. Japanese are always conscious of their hierarchical position in any social setting. Some foreigners experience Japan as extremely hierarchical due to their business experience of painstakingly slow decision making process: all the decisions must be confirmed by each hierarchical layer and finally by the top management. - Individualism: Japanese show many of the characteristics of a collectivistic society: putting harmony of group above the expression of individual opinions and people have a strong sense of shame for losing face. Japan has been a paternalistic society and the family name and asset was inherited from father to the eldest son. Company loyalty is something, which people have chosen for themselves, which is an Individualist thing to do. - Masculinity: Japan is one of the most Masculine societies in the world. However, in combination with their mild collectivism, it is not seen assertive and competitive individual behaviors which are often associated with the Masculine culture. What is observable is a severe competition between groups. From very young age children learn to compete on sports for their groups. Employees are more motivated when they fight for a winning team. In Japan there is a drive for excellence and perfection in the material production and in material services (hotels and restaurants) and presentation (gift wrapping and food presentation) in every aspect of life. It is still hard for women to climb up the corporate ladders in Japan with their Masculine norm of hard and long working hours. - Uncertainty Avoidance: Japan is one of the most uncertainty avoiding countries on earth. This is often attributed to the fact that Japan is constantly threatened by natural disasters from earthquakes, tsunamis, typhoons to volcano eruptions. Under these circumstances Japanese learned to prepare themselves for any uncertain situation. In corporate Japan, a lot of time and effort is put into feasibility studies and all the risk factors must be worked out before any project can start. Managers ask for all the detailed facts and figures before taking any decision. This high need for Uncertainty Avoidance is one of the reasons why changes are so difficult to realize in Japan. 75 - Long Term Orientation: Japan scores as one of the most Long Term oriented societies. Japanese see their life as a very short moment in a long history of mankind. Long term orientation is reflected in a constantly high investment rate in R&D even during difficult economical periods, and priority is given to steady growth of market share rather than to a quarterly profits. - Indulgence: Japan shown to have a Restraint culture. Societies with a low score in this dimension have a tendency to cynicism and pessimism. Restrained societies do not put much emphasis on leisure time and control the gratification of their desires. People with this orientation have the perception that their actions are restrained by social norms and feel that indulging themselves is somewhat wrong. 76 Annex V Table II: Chinese Regions by population in 2014 Region 2014 (in million inhabitants) Guangdong 107,24 Shandong 97,89 Henan 94,36 Sichuan 81,4 Jiangsu 79,6 Hebei 73,84 Hunan 67,37 Anhui 60,83 Hubei 58,16 Zhejiang 55,08 Guangxi 47,54 Yunnan 47,14 Jiangxi 45,42 Liaoning 43,91 Heilongjiang 38,33 Fujian 38,06 Shaanxi 37,75 Shanxi 36,48 Guizhou 35,08 Chongqing 29,91 Jilin 27,52 Gansu 25,91 Inner Mongolia 25,05 Shanghai 24,26 Xinjiang 22,98 Beijing 21,52 Tianjin 15,17 Hainan 9,03 Ningxia 6,62 Qinghai 5,83 Tibet 3,18 Source: Statista 77 Source: China Briefing Table III: Chinese Regions by GDP in 2014 Figure 1: Chinese GDP Growth by Region in 2014 Rank Region GDP (billion USD) Growth Rate (%) 1 Guangdong 930 8,2 2 Jiangsu 881 10,1 3 Shandong 814 9,8 4 Zhejiang 563 8 5 Henan 485 10,1 6 Hebei 433 9,6 7 Liaoning 404 9,5 8 Sichuan 387 12,6 9 Hubei 363 11,3 10 Hunan 361 11,3 11 Shangai 327 7,5 12 Fujian 321 11,4 13 Beijing 290 7,7 14 Anhui 280 12,1 15 Inner Mongolia 260 11,7 Source: China Briefing