Business Networks and International Trade

Business Networks and International Trade

The concept of business networks is new and very important nowadays. It plays an integral role in the international trade. In my review I look for the answers in the literature to several empirical questions. The definition of business networks will be given. Secondly, I will look for the reasons of network creation. I will try to explain the impacts, consequences and importance of networks for international trade. Finally, we will find what types of business networks there are: specifically focusing on the importance of Chinese business networks in the worldwide economics.

What is the definition of business networks? By surveying literature, it was found that the concept of business networks is very new. One of the early terms of 'network' was given by Mitchell (1969) who defined it as a type of relation, linking a defined set of persons, objects or events. Later Wellman and Berkowitz (1988) suggest that networks are types of social structures or exchange relationships between the members of the system. Later the term of 'business networks' was used by Forsgren and Johanson (1992) that understand it as relationships to control business activities by different actors. Among the recent works Todeva (2006:15) gives a clear definition of what business network are. In her opinion, business networks are 'sets of repetitive transactions based on structural and relational formations with dynamic boundaries comprising interconnected elements (actors, resources and activities)'.

What are the reasons for the creation of networks? And what are the consequences and impacts of business networks to international trade? Are they important? During the past several decades, the significance and importance of creating business networks has been extensively accepted by many researchers such as economists and non economists. Todeva (2006:3) states that one of the reasons for creation of business networks is 'globalisation of society and economy' that changes the 'paradigm in the neo-classical economic theory' (Todeva, 2006:4) where the central idea of study has changed from individual businesses and transaction expenses to business networks, groups, cooperative business connections and strategic partnerships. Another reason for business network creation is to transfer resources from the host country to the home country. According to Grant (1996) and Hansen (1999), knowledge is in the first on the list of critically important resources. Argote and Ingram (2000) agree by stating that knowledge is a tool to gain a competitive edge. Borghoff and Oliveira (2000) state that another advantage of business networks is that they provide selective specialization and flexibility of firms based on complimentary activity structures. According to Kogut and Zander (1993) sharing knowledge among organizations helps them to enter new markets. By entering new markets they can accumulate new knowledge. This creates a so called network pyramid where the initial knowledge serves as a platform for the accumulation of new knowledge across the borders, regions, and countries. Knowledge sharing is done on all levels from parent companies to its subsidiaries and then further.

Penrose (1959), Grant (1996), Nonaka, Toyama and Nagata (2000) thought that entrée of external knowledge is vital for maintainable innovation and long term survival of the firms. The formation and transmission of knowledge are a starting point for competitive gains in firms (Argote & Ingram, 2000). However, there is a question of how knowledge can be allocated while providing mutual and positive impact. The issue of knowledge allocation was stated in the research by Szulanski (2003) and Yayavaram and Ahuja (2008). It is justified that knowledge transfers and flows in complex organizations are not an easy task due to uncertainties and barriers. Since there are high risks of transfer failure in complex environments, the transmitter cannot make sure that knowledge will be safely obtained by the receiving party. The work by Argote & Ingram (2000) illustrated why knowledge transmission can be a problem and difficult to be implemented. They differentiated the types of knowledge that are the most uneasy to transfer into different backgrounds. It is the knowledge implanted in the interactions of humans, tools, instruments and tasks. They provide the crucial ground for competitive advantages in organizations. However, at the same time, they are the most hard and costly to transfer. One of the ways to overcome this challenge was proposed in a study by Rauch (1999), who employed the grativity model and Armington-Hecker-Ohlin-Vanek model to analyse the possibility to connect buyers and sellers of products in the most easy and cheap way so that the best match is achieved and it was not that costly. In his view it can somehow help increase the volume of international trade. In his