J Int Entrep (2012) 10:177–199 DOI 10.1007/s10843-012-0091-8 The role of social networks and institutions in the internationalization of Russian entrepreneurial firms: Do they matter? Galina Shirokova & Patricia McDougall-Covin Published online: 30 May 2012 # Springer Science+Business Media, LLC 2012 Abstract Drawing upon network theory and institutional theory, this paper examines the influence of networks on the internationalization of Russian entrepreneurial firms. Our case analysis suggests that within the context of the Russian environment, networks play a much less important role in the internationalization process than it is usually assumed in the literature. For the Russian entrepreneurial firms examined in our study, the most important factor in their internationalization was their engagement in honest business practices that established trust and commitment in their relationships with international business partners. This study underscores the importance of the institutional context of an entrepreneurial firm’s country. Keywords Networks . International entrepreneurship . Institutions . Russia Case study . Honest business practices Introduction As interest in international entrepreneurship (IE) has grown over the past two decades, the field has attracted scholars from many different countries. Correspondingly, IE researchers have given increased attention to examining the influence of the We would like to thank the three anonymous reviewers who each provided constructive feedback that enabled us to significantly improve our work. We would also like to give special thanks to the editor who has given us helpful guidance throughout the review process. G. Shirokova Graduate School of Management, St. Petersburg University, 3 Volkhovsky pereulok, St. Petersburg 199004, Russia e-mail: shirokova@gsom.pu.ru P. McDougall-Covin (*) Kelley School of Business, Indiana University, Bloomington, IN, USA e-mail: mcdougal@indiana.edu 178 G. Shirokova, P. McDougall-Covin institutional context and a firm's national business environment on the internationalization process of entrepreneurial and small- and medium-sized businesses (Descotes et al. 2007; Yamakawa et al. 2008; Cieslik and Kaciak 2009). This interest is amplified by the special research attention that has been given to developing countries whereby the institutional environment differs considerably in terms of speed of change, the unpredictability of these changes, and the influence of institutions on entrepreneurial development from the business environment in more developed countries (Ahlstrom and Bruton 2010; Wright et al. 2005; Puffer et al. 2010). In countries identified as emerging markets, institutional constraints or poorly developed institutions limit the range of strategic choices for doing business (Hoskisson et al. 2000; Puffer et al. 2010). The institutional-based approach to international business allows us to examine how the institutional environment affects the process of internationalization of firms from emerging markets (Wright et al. 2005). For firms operating in emerging markets, the speed and quality of institutional changes have been found to vary greatly between different countries (Peng 2003; Bruton et al. 2008). Thus, it is important that IE researchers expand their studies across a wide range of countries. As Russia is one of the BRIC countries, we believe that studying the specifics of the internationalization process of Russian entrepreneurial firms is especially useful and relevant both for IE research and for better understanding the processes occurring in this important emerging economy. Despite the rapid growth of entrepreneurship research throughout the world, there has been a lack of research on entrepreneurial activities in Russia (Djankov et al. 2005; Zhuplev et al. 2004). Even though small- and medium-sized enterprises (SMEs) in Russia are receiving more and more financial support from the Russian government, the level of international activity of these firms remains very low. For comparison, the average level of exports of small enterprises is 15–20 % worldwide, while Russian small and medium enterprises export less than 5 % of their products (Ermoshin 2007). One reason for this low activity may be a relatively low level of competitiveness of Russian goods and services. In addition, institutional barriers may prevent the development of entrepreneurial firms within the country. The massive flow of capital, technology, and managerial knowledge which has poured into emerging markets have intensified competition among firms. As a result, domestic firms can no longer grow and develop independently from global competition in a relatively stable environment (Zhu et al. 2007). Thus, these firms must look to internationalization for greater growth opportunities. However, entrepreneurial firms from emerging economies often lack sufficient resources, including financial, managerial and technological resources (Filatotchev et al. 1996; Zhu et al. 2007). As these firms attempt to gain access to needed resources, they often face a number of barriers in relation to “institutional voids” in their markets, resulting in the need to use informal institutions, including social networks and informal communication as compensation for deficiencies of formal institutions (Ahlstrom and Bruton 2010). Research on emerging economies has emphasized the importance of networks and connections (Peng 2003; Peng et al. 2005; Zhu et al. 2007). Networking has long been identified as a powerful tool for the entrepreneur (Dubini and Aldrich 1991), and was first highlighted by IE researchers in the early works of Coviello and Munro (1995, 1997). Network theory and analysis have been identified as fundamental to IE research (Oviatt and McDougall 2005; Coviello 2006). In their recent comprehensive The role of social networks and institutions 179 review of the IE literature, Jones et al. (2011) noted that IE studies have been slow to link the institutional context with networks. Exceptions to this include studies by Kiss and Danis (2008, 2010) which (1) conceptualize how a country's level of institutional progress directly shapes the composition of social networks, and (2) models the speed of new venture internationalizations during institutional transition. While both business and social networks are important to the entrepreneur and are at times intertwined (Söderqvist 2011; Johanson and Mønsted 1988), IE research has identified social networks as one of the most important factors in the process of internationalization (Andersson 2000; Kiss and Danis 2008). Prior studies suggest that social networks play an important role in the decision to go abroad and in facilitating the identification of new international partners (Holmlund and Kock 1998). Social networks are also a source of necessary information and contacts (Welch 2004). In comparison to large companies, entrepreneurial firms seeking to internationalize have had to rely more heavily on their social networks and personal contacts given that entrepreneurial firms possess only limited financial and human resources (Musteen et al. 2010). Despite the fact that social networks in emerging markets are considered as one way to help overcome the shortcomings of formal institutions (Ahlstrom and Bruton 2010), the role of social networks in the internationalization of entrepreneurial firms from emerging markets, remains poorly explored. Research on social networks is of particular interest in Russia because so called “connections” and “blat” have historically played a key role in gaining access to generally unavailable goods, especially in Soviet times (Bashkirova 2001). Blat is a system that emerged in Russia to enable individuals to get around the bureaucracy and restrictions that existed within the Soviet system. Blat has often been used to circumvent formal procedures or to secure goods or services which were often in short supply. Blat is often based on using one's personal contacts (see Ledeneva 1998 for an extensive discussion of blat). After the collapse of the Soviet Union and the movement to create a market economy, the importance of personal relations did not decrease, but rather changed its nature as these “connections” became important in the entrepreneurial process and new venture development (Batjargal 2005). Given the particular importance of social networks on Russian business dealings, several researchers (e.g., Bashkirova 2001; Batjargal 2005; 2006; Rogers 2006) have examined the impact of social networks on the creation of entrepreneurial firms, but none have examined the impact on firm internationalization. The question of the influence of social networks on the internationalization process of Russian entrepreneurial firms is highly relevant for a complete understanding of the entrepreneurial process in Russia and other emerging markets. Given the significant differences in the political, economic, and cultural environments of emerging economies, there is a need for IE scholars to investigate the internationalization of entrepreneurial firms in emerging markets as the results of studies done in developed economies may not be generalizable to emerging market firms. Furthermore, given the development of the post-socialist countries, it is quite likely that the process of internationalization of firms from post-socialist countries may differ from the findings of studies conducted in other emerging economies or in developed countries. These differences may be particularly pronounced at the very beginning stage of internationalization when a domestic entrepreneurial firm has no 180 G. Shirokova, P. McDougall-Covin experience in international business relationships and has to solve problems associated with searching for new partners and negotiating contracts the first time. Therefore, the focus of our paper is to examine the role of networks in the internationalization of entrepreneurial firms within Russia. Following Söderqvist (2011), we are careful to include both business and social networks. Because social networks have been identified as being of particular importance within the Russian economy, we pay special attention to their inclusion. Using the case study method, we studied the internationalization process of three Russian entrepreneurial firms that internationalized during the early years of their operations. We identify the entrepreneurial firm as a firm which was created by entrepreneur/entrepreneurs and has potential to become a high-growth business (Timmons and Spinelli 2003). The paper consists of four parts. In the first part, we review the literature and develop our research question. In the second part, we present the research methodology and each of our three case studies. We also provide some brief background on Russia and its business environment. The third part consists of the results of our cases analyses, and in the fourth part, we provide a discussion of our findings. Literature review The institutional environment, including the legal system, social norms, and cognitive structures (Scott 1995), defines the context for market interactions defining the rules of the game (North 1990) and the conditions of legitimacy of the firm (Meyer and Rowan 1977; Spenser and Gomez 2004). From the new institutional economics' point of view, the considerable importance of networks in the emerging markets is defined by their role as a substitute for legitimate forms of interactions between firms (Yiu et al. 2007; Cumming et al. 2009; Ahlstrom and Bruton 2010). Entrepreneurs operating in emerging markets which lack adequate legal regulation and stable political environments may turn to their networks as they seek to internationalize their firms. According to recent research, the higher the level of uncertainty and hostility of the institutional environment, the more entrepreneurs and managers rely on their social networks rather than on business relations to influence the pace of internationalization process (Musteen et al. 2010; Kiss and Danis 2008, 2010). In his study of the role of social networks in identifying international opportunities in the open and closed economies, Ellis (2011) provided empirical evidence of the lesser influence of social networks on the internationalization process of firms from emerging markets than of firms from developed economies. The institutional business environment affects the characteristics of both business and social networks within the country. According to Jansson and Johanson (2007), when building relationships with firms from other countries, one must take into account three important aspects of networks: patience, suspicion, and performance. In Russia the level of patience is quite low, which fosters a short-term orientation in business relationships. It also means that the Russian business environment expects immediate results from the new relationship. Patience is very closely linked with suspicion, which determines the level of negative perception of the relationship in the future, for example, the expectation of fraud in business deals. The Russian business environment is characterized by a high level of suspicion, regardless of the stage of The role of social networks and institutions 181 development of relationships in business networks. At the same time, it should be noted that the presence of previous social relations can reduce the level of suspicion, although not as strongly as, for example, in China (Jansson and Johanson 2007). If the business network is based on the previous social relations of an entrepreneur, that fact may increase the performance of relations within a business network. The role of networks in the internationalization process is one of the most popular topics in the literature on IE. Since the end of the 1980s, a stream of research has been developed that can be denoted as a “network theory of internationalization” (Johanson and Mattsson 1988; Holmlund and Kock 1998; Coviello and Munro 1995, 1997; Söderqvist 2011). These authors suggest that firms engaged in networks with mutual knowledge and trust have a competitive advantage and are able to go abroad easier than the firms that are not included in any social or business networks. The arguments for the importance of studying networks and for the relevance of network theory to IE research has been presented by several authors (e.g., Ellis 2000; Arenius 2002; Andersson and Wictor 2003; Sharma and Blomstermo 2003; Harris and Wheeler 2005; Autio 2005; Coviello 2006; Sasi and Arenius 2008). In general, this research suggests that the process of network interactions create social capital, and that social capital represents one of the most critical resources of the entrepreneurial firms in both enhancing their abilities to go abroad and in influencing the direction and organization forms of their internationalization process. While the bulk of studies have found support for the importance of networking to the internationalization of entrepreneurial firms, Rasmussan and Madsen's (2001) study of five born globals found that neither the business nor the social networks played an important role for several of the firms in their study. For those firms that did demonstrate some reliance on their networks, it was their business networks that had played a limited role. In addition, a recent study by Ghannad and Andersson (2012) also found that networks did not play an important role in the internationalization of the born global Swedish firms that they studied. Much of the IE literature has focused on the firm as the unit of analysis (McDougall and Oviatt 2000; Autio et al. 2000). However, it is also noteworthy that for many entrepreneurial firms engaging in internationalization, researchers have found that the characteristics and behavior of the entrepreneur have been a key to the firm's internationalization (Wright et al. 2007; Cumming et al. 2009; Ghannad and Andersson 2012). As such, an examination focused exclusively on business networks neglects the value of the entrepreneur's social network. Business networks and social networks have a different scope: social networks represent all relationships of an individual with other people in the society (Burt 1992), while business networks include only the relationships between firms (Ellis 2011). This difference has significant consequences from the entrepreneurial point of view. First, the social network may be very important for recognizing new business opportunities and it is well-known that these opportunities are more often perceived by individual entrepreneurs than by companies (Ozgen and Baron 1990; Singh 2000; Ellis 2011). Second, the focus on business networks may limit the scope of analysis to interfirm relationships while the study of social networks includes relationships with friends, relatives, classmates, etc., all of whom may be important for entrepreneurs. It is crucial for entrepreneurship scholars to include social networks in any analysis of internationalization. However, it should be noted that it is often difficult to separate business and social networks. Söderqvist 182 G. Shirokova, P. McDougall-Covin (2011) aptly described these relationships as more likely to appear in a continuum rather than being distinct. This study has been careful to include both social and business networks, recognizing that it is sometimes difficult to clearly separate whether a network is a primarily business or social. Various researchers articulate different aspects of the role of networks in the internationalization process. To provide a systematic review of relevant network literature, we structured the remainder of this review into two sections: why networks are important for internationalization and how networks influence internationalization. Moreover, we consider each of these aspects in terms of the specific institutional environment in Russia and its impact on the internationalization of Russian entrepreneurial firms. Importance of networks in internationalization Many researchers believe international transactions cannot be built without trust (Axelsson and Johanson 1992). Trust helps the actors to learn and to develop new knowledge (Granovetter 1985; Arenius 2005), to share information and to deal in the situation of uncertainty (Johanson and Vahlne 2009). Trust allows the transfer of the decision-making processes to a trustworthy agent (Arenius 2005). Trust may be defined as an ability to predict the behavior of another person, characterized by high ethical standards (Johanson and Vahlne 2009). Trust enables people to share information and is of particular importance in the situation of uncertainty (Johanson and Vahlne 2009) as well as reducing the need for control in complex situations (Höhmann and Malieva 2005). Trust can even be used to serve as a substitute for knowledge if the entrepreneur lacks knowledge in a particular field, as the entrepreneur can transfer decision-making process to a trustworthy middleman (Arenius 2005). It is worth noting that personal relationships supporting internationalization could not be built without trust and commitment from both sides. Hence, trust and commitment building also becomes a significant issue in developing both social and business networks in internationalization. According to the network theory of internationalization, networks are created slowly with increased trust and commitment. Three issues are of critical importance with respect to the internationalization process (Axelsson and Johanson 1992). First, a firm cannot be merely an observer of a network; it must participate and be an active insider. Second, resources are invested in these relationships; hence foreign market entry is a process of continuous resource commitment. Third, presence in valuable networks is of strategic importance, and business opportunities appear from having the membership. To develop those business opportunities trust has to be built. Moreover, trust is an important component for successful learning and development of new knowledge within networks (Granovetter 1985; Arenius 2005). Trust plays a major role in the development of entrepreneurship in Russia. Given the lack of well-developed institutions for protecting property rights and allowing the normal functioning of businesses, entrepreneurs rely primarily on their networks and build “friendly” relations with the “right” people (including those in government) who can help them in business development (Ahlstrom and Bruton 2010). Quite often, blat has filled the void of a well-developed institutional environment, serving as a facilitator within the social network (Puffer et al. 2010). At the same time, it should be noted that in Russia there is a fairly high level of mistrust towards those people who do not belong to a social network and are located The role of social networks and institutions 183 outside (Ayios 2004). Moreover, Russia has traditionally been regarded as a low-trust society (Kuznetsov and Kuznetsova 2008). This means that trust exists only within a group of family members, friends, and colleagues, while people outside these groups (outsiders) usually are not trusted because they do not share common values with insiders (Puffer et al. 2010). Thus, it is fairly difficult to build relationships with outsiders in Russia, which in turn can lead to difficulties when seeking to enter foreign markets. In addition to the value of helping to create trust, an entrepreneur's network may serve as a source of information about new markets. An entrepreneur's limited knowledge of foreign markets poses additional challenges in the context of internationalization. Some researchers argue that prior foreign market knowledge positively influences the process of internationalization, especially for international new ventures (Oviatt and McDougall 2005). Informal relations are crucial as a source of information about new markets (Hakansson and Snehota 1995) and as a key way of gaining cultural knowledge (Styles and Ambler 2000). Informal relations fulfill very important functions that are needed during the internationalization process. These personal relations are often originated from the social life of an individual and may not necessarily derive from business. The role of such relations in business development could be recognized much later as the relationship evolves and more common interests arise (Harris and Wheeler 2005). In addition, social networks may serve as a source of information for new business opportunities in foreign markets (Zhu et al. 2007; Ellis 2011) and as a facilitator for overcoming the “liability of foreignness” (Zaheer 1995; Eden and Miller 2004) when entering foreign markets. For Russian entrepreneurs, social networks that span international boundaries are less likely than in more developed countries. Twenty years ago, very few Russian people were allowed to travel. All information about other countries was strictly controlled, and it would have been difficult for a Russian to obtain accurate information about foreign markets and cultural characteristics of other countries. A third reason that networks have been recognized as important for internationalization is that networks may serve as a source of needed resources. As an entrepreneurial firm seeks to enter a foreign market, the firm needs additional financial and human resources for conducting marketing research, finding partners, holding negotiations, making contracts, delivering the product, etc. While many of the resources needed by entrepreneurial firms are garnered through relationships with other actors in their business network (Holmlund and Kock 1998), social networks may also be relied upon for resources. The social network has traditionally served as the main source of resources for Russian entrepreneurs. The historical roots of this tradition derive from the centrally planned era in which the blat network served as an informal barter system, where the exchange of favors was built on such favors as access to goods and services (Michailova and Worm 2003). Influence of networks on internationalization When internationalizing, the firm has to interact with people from remote territories. Geographical distance is a well-studied barrier in the international trade literature (Beckerman 1956; Learner 1974). Geographic distance is defined as a set of factors, 184 G. Shirokova, P. McDougall-Covin which make a foreign environment difficult to understand (Johanson and Wiedersheim-Paul 1975). Internationalizing to some countries, due to their geographical remoteness, incurs high transaction costs in trade, specifically in the physical movement of goods (Morrissey and Filatotchev 2000). Generally, we may expect that companies will prefer to internationalize to countries closer to their home environment in geographic distance terms. Networks may serve as a useful instrument of overcoming the geographical barriers because networks may be helpful in finding partners and facilitating the creation of a necessary level of trust and mutual understanding, even at very remote distances. However, the more geographically distant the potential country of entry, the less probable is the presence of personal contacts in that country. Thus, one might expect there to be a contradictory influence of remoteness on the use of social networks. A more geographically distant country increases the value of any preexisting personal contacts, but at the same time, decreases the probability that these contacts exist. Researchers have also found that cultural distance plays a crucial role in the attitudes of entrepreneurs from different countries towards the choice of their partners abroad. A more similar culture makes establishing new business contacts easier. That is why it is referred to as cultural distance (Kogut and Singh 1988) or psychic distance (Wiedersheim-Paul 1972; Estrin et al. 2009), rather than physical distance between the home country and the foreign country. Given that both cultural distance and psychic distance are correlated with differences in language (Hutchinson 2005; Ellis 2011), international activities in SMEs often start with markets which are close in a cultural and/or geographical respect (Caughey and Chetty 1994). Networks may be helpful in addressing the problem of cultural differences. Styles and Ambler (2000) believe that social networks may provide necessary cultural knowledge when the entrepreneur enters culturally different markets. Cultural proximity plays a key role in establishing networks among Russian entrepreneurs. Given that the states of the former Soviet Union share a common language and similarities in their histories and in many of their values, the likelihood of inclusion of potential partners from these countries in the network of a Russian entrepreneur is increased. However, when Russian firms seek to enter the markets of developed countries, a strong focus only on their network may impede access to these markets, due to the fact that business relationships in those markets are built on a different basis. According to Jansson and Johanson (2007), social networking in Western European cultures is built on the basis of a rational approach and is considered to be a means of achieving certain goals from the viewpoint of a strategic perspective. By contrast, relations in Russia bear an emotional and sensual connotation, “heart” being an important part of Russian business culture (Jansson and Johanson 2007). Russians are not afraid to quite openly show their feelings, and often add this emotional component to business relations. Research question The literature review shows that there is a significant influence of networks on the internationalization of entrepreneurial firms and small and medium-sized enterprises. The role of social networks and institutions 185 When the special character of post-Soviet development with the associated social and political isolation of these countries during several decades is considered, entrepreneurs operating in the institutional environment of a post-Soviet country may face difficulties in creating and using networks in the internationalization process. Many entrepreneurs in Russia do not speak any foreign languages and need interpreters' services which itself may be a barrier for establishing personal contacts and partner relations in other countries. Besides this, the reputation of Russian business persons and entrepreneurs often plays a negative role in the process of establishing international business contacts. In summary, networks may play an important role in the creation and development of firms operating in emerging markets, including Russia. Facing environmental challenges, continuous changes in legislation, comparatively underdeveloped institutions and the considerable size of a “grey economy” (Smallbone and Welter 2001), Russian firms very often rely on their personal contacts and relationships for survival and growth (Batjargal 2003). Our research question is: What role, if any, do business and social networks play in the internationalization of Russian entrepreneurial firms? Method Given the need to collect rich data in order to investigate our research question, the case study method is most appropriate (Yin 2003; Coviello and Jones 2004). The case method is recognized as being effective in collecting confidential information and establishing relationships between the top manager's thinking and process of decision making (Rouse and Daellenbach 1999). The empirical base of our research includes three cases of Russian entrepreneurial firms that have internationalized. All firms selected for research were established and fully owned by Russian entrepreneurs and are registered in St. Petersburg. All three companies are manufacturing enterprises. The companies operate in three highly diverse industries: electronics, confectionary, and car filters, but they have similar age, size, and international operations. Data collection and analysis Data were collected through personal interviews with companies' top managers according to procedures established in prior research (Wright et al. 1988; Eisenhardt 1989; Yin 2003). The unit of analysis was the network of the company's top manager, i.e., the owner, the entrepreneur, or the hired top manager of the firm. The top managers were the primary source of information about the company because of their involvement in the process of evolution and development of the firm. Data collection was done in two stages. The first stage was characterized by the retrospective approach (Miller et al. 1997), which allowed us to gain a basic understanding of the history and early development of each of our three case companies. Two researchers conducted a series of interviews from September 2008 to May 2009. The interviews included various categories of employees: founders of the companies, top managers, managers of departments, employees of various departments and 186 G. Shirokova, P. McDougall-Covin workers. On the basis of these interviews, we acquired an understanding of the history of the establishment of the company and the initial several years of its development. Moreover, we carefully studied all archive documents of the company, including financial reports, organizational charts and minutes from managerial meetings. Regular, semi-structured telephone interviews helped the researchers stay abreast of the changes in the company. Three teaching cases were developed based on the information collected during the first stage. The second stage of data collection was conducted in the period of December 2010 to March 2011 and included more focused interviews that were conducted by a team of researchers that included one of the coauthors of this paper. These interviews were devoted specifically to the internationalization process of the companies and were with the companies' top manager. They were in-depth and ranged from 1 to 3 h. We used the approach “what, who, where, when and how” as was recommended by Pettigrew et al. (2001). All interviews were taped and transcribed. Besides the top managers of the companies, we also interviewed other principal managers of the companies including the co-owners and middle managers. In addition, we continued to collect and examine secondary data about the companies, including the documents provided by the companies, their web sites and advertising materials. The transcripts were used for analysis and comparative examination of each case. The results were analyzed on the basis of labeling, categorization, and summarizing. Data analysis was performed with the help of the conventional grounded theory approach that permits consequent comparison of the available data with an emerging theoretical framework (Miles and Huberman 1984; Fendt and Sachs 2007). In the following sections, we present the case profiles of each of the studied companies. However, because Russia is such a unique business environment and is relatively unknown to most entrepreneurship and strategy scholars, we preface the case profiles with a brief summary of key points related to the Russian business environment. The Russian business environment The business environment of Russia differs significantly from that of developed economies, as well as from economies which have not been influenced by Communist rule. The process of moving from communism to capitalism has been a rocky process, with rapid, discontinuous change creating social and economic pressures that pose unique challenges to Russian business entrepreneurs and investors. In 1991, the USSR was dissolved and 15 post-Soviet states were created. In the following period, the Russian people endured rapid inflation and shortages of food in grocery stores. The current stage of economic development in Russia is characterized by significant transformational processes and the development of newly created institutions. As a consequence of relatively stable oil revenues, today's Russia is characterized by relative political and macroeconomic stability (Sala-i-Martin 2009). Businesses have benefitted from growing consumer consumption. Russia has become one of the largest economies among a diverse group of emerging markets in terms of gross market volume. In recent years, the Russian government has issued a variety of laws aimed at fighting against corruption, and in support of economic development and human The role of social networks and institutions 187 rights (Latuhina 2010). However, despite the official government data, a different picture appears in a number of independent studies (e.g., PriceWaterhouseCoopers 2009; Riaño et al. 2008, 2009; Sala-i-Martin 2009). International studies indicate that there is an overall prevalence of corruption in Russia and other illegal business practices. Corruption has been highlighted as a major impediment to starting and growing businesses in Russia. The extra expense of bribes has dampened the interest of business people in starting new companies or investing in others' business initiatives. Studies have noted that bribery, official corruption, and unfair competition have been the main forces holding back the active growth of entrepreneurial firms (Zhuplev et al. 2004) . While state support to various political and social associations, and continuing legislative activity of the Russian government suggests that SMEs have become a focus for national economic development, entrepreneurs and their firms in Russia have never received sufficient support either from the government, the Russian business environment, or from cultural traditions, as compared with the level of support observed in most developed economies of the world (Zhuplev and Shein 2008; Ahlstrom and Bruton 2010). There are numerous forms of administrative barriers for starting a new business, including excessive documentation requirements, lengthy registration periods, artificially imposed regulatory obstacles, redundant complexity of formalities, and unsupportive attitudes from public and government institutions (Luo and Junkunc 2008). According to the Global Entrepreneurship Monitor, only 4.6 % of the adult population in Russia were involved in the process of starting a new business in 2011 (Global Entrepreneurship Monitor: Russia 2011). SMEs in Russia have created only 11 % GDP (for comparison, the U.S. share of SMEs in the country's GDP exceeded 50 %, while China had more than 65 %) (Zoidov et al. 2009). Despite the fact that entrepreneurship is one of the most rapidly developing trends in research worldwide, there has been a lack of research on entrepreneurial activities in Russia (Djankov et al. 2005; Zhuplev et al. 2004). Case profiles General information on each of the companies studied is presented in Table 1. In a country where most companies focus exclusively on the domestic market, the initial idea to internationalize was developed during the early years in each of these companies. All three companies had internationalized within 7 years from founding. Table 1 Profiles of case companies Number of employees in 2011 Year of foundation Year of internationalization Level of global diversification (number of countries) in 2011 Degree of internationalization (share of export in annual total sales) in 2011, % Big Filter 1988 1994 More than 20 10 150 Lubimy Kray 2000 2005 More than 10 12–15 400 Dipaul 1992 1999 5 7–10 250 188 G. Shirokova, P. McDougall-Covin Case I: Dipaul The company was originally founded in 1992 in St. Petersburg as a supplier of metrological (precision measuring) equipment and as a developer of automated design engineering systems. By 1998, the company was very close to ruin. Two Dipaul employees, Nikolay Kovalev and Sofya Chestnikova, saw something worthwhile in the company and decided to purchase it. They restructured the company and the new Dipaul began to pursue ambitious growth goals. Within a year, they were seeking to enter the international marketplace. To do so, they participated in exhibitions and other events. They also provided information about their intentions to Finish and Swedish consulates. Their first international contract, which came 2 years later, was with a Swedish company and was initiated by the Swedish Consulate in St. Petersburg. The Swedish Consulate contacted Dipaul on behalf of Pendalum Instruments, a Swedish company seeking a Russian supplier of measurement equipment. In 2005, the company then launched the Surface Mounted Technology line to develop and supply turnkey systems for companies building circuit boards. This technology allowed components to be mounted directly on the surface of the printed circuit board instead of having to be mounted via wire leads soldered into holes in the circuit board. It was a desirable technological advance because it significantly reduced the weight of the circuit board. Dipaul then sought additional international expansion for the primary purpose of acquiring knowledge and sources of ideas. Dipaul's CEO, Nikolay Kovalev, explained the company's motivation, “We are working in a highly innovative area, i.e., electronics, and unfortunately, in this area we are not the leaders. And leaders are, as a matter of fact, the U.S. in the development and Europe both in the development and manufacturing. So naturally, to develop business, one has to focus on those centers of innovation.” When questioned about the role that personal contacts had played in the internationalization of the company, its CEO expressed, “I've never had personal connections, in fact, I knew little English then….what helps in dealing with foreigners—is openness.” At a later point in his interview, he expressed that because Dipaul was in a technical business, the fulfilling of all obligations to standards was more important than any of the benefits that might be associated with any informal relationships. Dipaul has been successful not only in knowledge transfer from the U.S. and Europe but has also achieved approximately 10 % of its sales from international markets. It has distributors in the Netherlands, Germany, and France. Case II: Big Filter Big Filter was formed in 1988 in St. Petersburg. In its earliest years, the company generated revenues from a wide range of activities dealing with cars: repairing, production of the instruments for repair, selling, and even transportation. Its founder and single owner of the company, an engineer, quickly recognized that there was an opportunity for producing quality filters for old carburetors in Russia if the filters could be produced at a reasonable price. The filters in the Russian marketplace were being imported from Southeastern Asia and were of very low quality, or if purchased from the West, the filters were very expensive. By 1993, Big Filter had begun to produce car filters in the Russian market and the following year aggressively sought to move into international markets. The founder's vision for competing in international markets came during a private trip to the USA when he noticed plastic car filters being sold in a supermarket. He The role of social networks and institutions 189 recognized that some American car owners still used the obsolete models of filters and that supplying this secondary market could be an attractive niche. In an interview, he noted that Russia is a big country, but is limited, and the secondary market is “boundless.” Big Filter's main export product was a cheap filter for carburetor cars. There would be no demand for the product by car manufacturers in countries with a high standard of living as carburetor automobiles would have been mostly replaced by more modern automotive technologies. Thus, Big Filter planned to target the secondary market in developed countries or car producers in lesser developed countries. In 1994, the company presented its products at Automechanika which the founder regarded as the leading trade fair for the automotive industry in Frankfurt, Germany. Following their successful showing at the trade fair, Big Filter's strategy has been to continue participation in international exhibitions and trade shows as its primary means of finding new customers and partnerships and for increasing its international market share. By 1997, the company had expanded rapidly and was supplying filters to a wide range of countries all over the world (USA, Israel, Egypt, Canada, Belgium, UK, Germany, Greece, Italy, Finland, Turkey, Taiwan, Thailand, Costa Rica, Syria, United Arab Emirates, Iran, Poland, etc.—more than 20 countries). The company's product assortment had increased to about 400 different types of filters by this time and included filters not only for the secondary market, but also for new cars. When asked to describe the company's strategy, Boris Beylin, Big Filter's founder and CEO stated, “The strategy is copying the world leaders. We are following them and not going to invent anything new.” Mr. Beylin also noted his strong belief that trust is critical and described trust as being “90 percent of success.” He explained that “One cannot do business without trust. You can abuse, one, two or even three times. That's all. It is impossible to do business without trust.” In 2007, Big Filter was named by the St. Petersburg government as one of the best exporters of the year. Case III: Lubimy Kray The company was founded in 2000 by a team of three entrepreneurs. The idea for creating the company came when one of the future founders of the company received a phone call from someone interested in buying cookies who wanted to know the price and location of the warehouse. It turned out that an advertisement of a cookie company did not provide the Moscow area code, so many of the potential customers responding to the advertisement were calling the St. Petersburg cell number of the individual who later founded Lubimy Kray. The calls were so numerous that the idea of building a confectionary factory was born. Lubimy Kray produces a wide range of gingerbread and such cookies as oatmeal and wheat cookies with various fillings (e.g., almond, chocolate bits, baked milk, etc.). Its major market is in the northwestern portion of Russia, and its production facilities are located in a suburb of St. Petersburg. In the first 3 years of the company's operations, the three owners took turns in managing the company. During this period, the company was unprofitable and there were many serious problems, so the owners determined to employ a manager to run the company on a daily basis. They hired Elena Streltsova. Ms. Streltsova had an MBA from St. Petersburg University. After a short trial period, she was made CEO in 2004. She immediately began to transform the company. She established a business 190 G. Shirokova, P. McDougall-Covin process management system and developed a new sales strategy which included international expansion. The following year, the company began to export its product. Its motivation for internationalizing was that many of their Russian friends who were now living in other countries kept asking why the products were unvailable in their countries. Company executives reasoned that geographical areas with populations of former Russians would be an attractive market target as the types of cookies Lubimy Kray produced were distinctive to Russia and were unavailable to Russians living in other countries. This proved to be an effective market strategy as nearly 90 % of the company's exports were to countries that were in the former Soviet Union, with the remaining 10 % going to selective markets in countries where there are significant populations of Russian immigrants—primarily Germany, the USA, and Israel. When asked to describe the process Lubimy Kray used to establish its export business, one of the company's top managers described the first step as identifying countries with Russian immigrant populations and then trying to determine the size of the group. Based on that information, they would conduct a search for partners. For the search of partners, he described that process as having two components—a formal search for partners or informally through friends. In describing the company's success in one of its international negotiations, one of the managers attributed the positive negotiations to the trust that the Belgium company had in Lubimy Kray, noting “… because we are open. We openly say that this is our pricing system, here are our plans for the future.” Results Market information For the firms in our study, networks did serve as a source of marketing information. The effect of networks during internationalization was influenced by the type of the product. If the company exported a culture-specific product such as cookies that are unique to Russian taste, then its potential consumers were represented by the expatriate communities in other countries. In this situation, we may expect a higher probability of using personal ties abroad. We observed that Lubimy Kray indeed used some informal personal ties in social networks such as friends or relatives for gathering marketing information and establishing business partnerships. Gathering information through social contacts was part, although relatively minor, of Lubimy Kray's internationalization process in the countries to which the company exported when the size of the Russian expatriate community was substantial. Personal relationships as a way of receiving additional information about the market potential were also mentioned by the founder and top manager of Dipaul. Dipaul management conducted a preliminary market overview through personal ties before their expansion into some countries. While we did find some evidence of social networks being used as a source of market information, it nevertheless appears that locating international business partners through social networks takes place less often than many studies suggest. For example, our findings on the role of social networks as a source of market information are more consistent with Coviello's (2006) finding that social ties did not play an instrumental role in the initial foreign market entry of the New Zealand firms that she The role of social networks and institutions 191 studied and with the study by Rasmussan and Madsen (2001) on Danish and Australian born globals. There were only a few examples of the use of social ties as a source of market information in our cases. In the following three paragraphs, we describe how each of our case companies used networks to locate international business partners. Locating international partners In the Lubimy Kray case, a producer of cookies and wafers from Belgium approached a Russian marketing agency to find new business partners in Russia. Lubimy Kray was a customer of this marketing agency and some representatives within the agency had informal friendly relations with managers of Lubimy Kray. The Russian marketing agency informed Lubimy Kray about the existing opportunity and a fruitful business relationship was developed as a consequence. There is no guarantee that Lubimy Kray would have been recommended to the Belgians in the absence of this informal relationship. As the top manager of Lubimy Kray pointed out “good informal relations help a lot in doing business.” Dipaul's first contract with an international partner came about through its professional network, not a social network. When the representatives of Pendalum Instruments addressed the Swedish Consulate in St. Petersburg in search of potential business partners in Russia, Dipaul's growing potential was well-known to the Swedish Consulate, and as a result, Dipaul was recommended. The founder of Big Filter noted that in establishing good partner relationships, he did not use his personal contacts because he did not have any such contacts. Rather, his company attended an international trade fair where his company's first business contacts with future customers were established. A major problem for Big Filter in the process of establishing these contacts was a limited knowledge of English language. That is why the entrepreneur felt he could not rely on close personal relationships with partners as a prerequisite of business transactions. Practically all companies admit that efficient formal relations need to be strengthened by informal connections, otherwise doing business is impossible. The founder of Dipaul said that at the beginning, only formal relations are built, but then they are transformed into friendly ones. For example, his relations with Pendalum Instruments transformed from purely formal to informal. The owners of Dipaul and Pendalum Instruments are still friends, although the business transactions between the two firms are long over. Cultural similarities and differences The more familiar an entrepreneur is with the cultural peculiarities of a certain nation, the easier it is considered for him/her to build formal and informal networks with the entrepreneurs of that culture. This assumption is supported by some examples from our data, but there are also some exceptions. Two companies from our cases reported substantial difficulties when contacted by Eastern cultures. For instance, the founder of Big Filter mentioned the problems he faced while trying to establish formal relations with potential partners from Egypt. He indicated that when he was in conversation with an Egyptian during the Automechanika exhibition, the Egyptian would always preface the conversation by highlighting the importance of the Egyptian origin which had descended straight from pharaohs and claiming that this fact should be taken into consideration in the negotiation process. At first, such behavior seemed to be insignificant to the Big Filter founder, 192 G. Shirokova, P. McDougall-Covin but later he began to find it really irritating because of what he considered to be its time-consuming and useless character. It took some time for company managers to learn how to deal with such challenges. Lubimy Kray was successful in building relations with companies in the postSoviet space, i.e., countries that were once part of the USSR. Its top managers found it easier for people to understand each other because of their common language and similarities in values and attitudes toward business. Surprisingly, we found that the companies in our study felt that building relations with Russian expatriates in other countries was not a desirable option for facilitating their internationalization. Practically all top managers mentioned that building contacts with the Russian expatriate community in other countries was not always easy. According to them, Russian expatriates do not appreciate honest and long-term relations, but instead focus on quick profits and sometimes use dishonest methods. The reputation of the Russian business community internationally may undermine the image of Russian entrepreneurs because many Western managers and business owners often perceive Russian entrepreneurs as disorganized and unreliable. As a result, some foreign partners may pursue only short-term purposes when dealing with Russian partners. For example, a Finnish partner of Dipaul tried to sell Dipaul some electronic components at an artificially high price. Dipaul's managers noticed discrepancies and ceased relationships with this partner. One strategy to remove cultural barriers in finding new partners abroad is to hire the representatives of host countries. For example, Dipaul hired two top managers from the Netherlands who were able to increase the level of trust among its European partners towards the company. Despite the fact that social network formation is supposed to be easier among more similar cultures (Caughey and Chetty 1994), we did not find any evidence of a more significant role of social networks in the internationalization process to countries with similar cultures in the Russian entrepreneurial firms we studied. Perhaps, in our cases, the advantage of cultural similarity is eliminated by the low trustworthiness of potential Russian entrepreneurs and potential Russian immigrant partners. Internationalization of industry It may be assumed that the importance of networks depends on the degree of internationalization of the industry. The higher the degree of internationalization of the industry, the more developed is the organizational structure of the market, and, correspondingly, the lower is the value of networks in establishing new business contacts. Big Filter operates in the market for auto parts that is highly internationalized. Thus, the majority of business contacts were established through international conferences and industrial exhibitions, the most important exhibition being Automechanika in Frankfurt where Big Filter has been participating since 1994. Big Filter's process of establishing business relationships through attendance at conferences and exhibitions was described as rather simple. A short first conversation typically occurred during the exhibition, followed by Dipaul attempting to gather information on the potential customer, followed by contacting the potential customer after the exhibition and discussing the potential sale. About 3 % of the contacts established during exhibitions led to reaching agreements and final delivery of the product. Management expressed The role of social networks and institutions 193 that practically all the companies who ordered once then became regular clients and business partners. The electronics industry is also highly internationalized with many industry players from different countries and regular international trade fairs where there is an opportunity to make new contacts. Dipaul visited one of such trade fairs where they met individuals who they later hired as distributors in Netherlands, Germany and France. These distributors were found in the process of signing contracts with electronic producers in these three countries, where established distribution networks were already developed. The case of Lubimy Kray is quite opposite as the company operates in a market with very low internationalization. Following the general assumption, the value of social networks should be of particular importance in this situation. The company indeed gathered some of the information about the market potential of specific international markets through their personal network rather than through formal events. At the same time, it is worth noting that the top managers of the company take an active part every year in the international trade fairs of the confectionary industry with the purpose of establishing new business contacts. We may conclude that the degree of industry internationalization does determine the importance of networks in the process of internationalization of Russian entrepreneurial firms. Big Filter and Dipaul entered the highly internationalized markets and were able to use existing organizational infrastructure for the search of new partners. However, because Lubimy Kray produced a quite specific product (cookies with a distinctive Russian influence) without a developed international market the company did use their social networks to some degree when internationalizing. Strong versus weak ties Lastly, we examined the issue of strong versus weak ties in our three cases. The concept of strong and weak ties was introduced by Granovetter (1973). The strength of a tie is defined as a “combination of amount of time, the emotional intensity, the intimacy and the reciprocal services that characterize the tie” (Granovetter 1973, p. 361). At the one end of this continuum, there are strong ties that exist between people who interact with each other often because they live together or work together. At the other end there are weak ties that exist between people who interact very seldom because they live rather far from each other or they worked together in the past but now they work in quite different places. A weak tie usually connects two networks of strong ties. Some previous research has shown that the lower the level of development of the institutional environment, the more important is the role played by the strong ties in the social networks of entrepreneurs in the process of establishing new business contacts and the process of internationalization (e.g. Kiss and Danis 2008, 2010; Musteen et al. 2010). Russia is a country with a weakly developed institutional environment. Thus, it may be assumed that the strong ties in the social networks of our entrepreneurs should play a decisive role in the internationalization process. Nevertheless, the case analyses present contrary evidence. For example, the founder of Big Filter emphasized that he never used strong ties for establishing business relationships because at the moment of foreign market entry, he lacked any suitable ties abroad. Besides, he stressed that establishing good partner relationships depends more on the trust between partners, and trust grows out of their preceding successful dealings. The 194 G. Shirokova, P. McDougall-Covin same evidence is provided by the top managers of Lubimy Kray who tried at one time to use their kin relationships in the process of going abroad, but eventually this ended in some cheating and non-compliance with given commitments. That is why the top managers of Lubimy Kray prefer to establish business relationships without any preexisting relationships. They believe that the success of any relationship strongly depends on the transparency and full openness of the partners that creates trust and true mutual commitment. The owner of Dipaul confessed that in the very beginning of the internationalization process he made an attempt to rely more on friends and relatives but he found that these contacts did not make any difference in establishing long-term business relationships. He thereby abandoned the practice. Summarizing this evidence, we may conclude that we found no empirical support for the thesis that strong ties play a more important role than weak ties within the context of the less developed institutional environment of Russia. Both strong and weak ties appeared to play a rather unimportant role in the internationalization process for the Russian entrepreneurial firms that we studied. Discussion The purpose of the paper was to examine the role of both business and social networks in the internationalization process of entrepreneurial firms in Russia, an emerging market which lacks a strong institutional environment. Despite the results of the overwhelming number of prior research studies which found a significant role of networks in the internationalization process, we did not find sound evidence of a similar importance of networks in the Russian entrepreneurial firms that we studied. When compared to previous research studies, both social and business networks played a relatively minor role, if any, in the internationalization process of each of the three entrepreneurial firms which we studied. Our results can be explained in two ways. First, we offer three Russian-specific factors resulting from the economic and historical development of the country. These three factors are not prevalent in the countries in which most of the prior research has been conducted. Second, we discuss some implications from the general theory of networks that influence the internationalization process. First, we assume that the low significance of international networks in the process of internationalization of Russian entrepreneurial firms is in part a result of the historical past of Russia, in that the country had been isolated from the rest of the world for 70 years. Thus, contacts between Russian and foreign people were rather limited and most Russian entrepreneurs typically lack an international business or social network or a social network in which members have international connections. The second Russian-specific factor relates to the attitudes of Russians. Although the outflow of immigrants was quite high after perestroika (i.e., the restructuring of the Soviet political and economic system during the 1980s) and today there are many former Soviet citizens living abroad, these social contacts play a rather insignificant role in the development of business contacts. Russian immigrants usually demonstrate rather low willingness to help their countrymen. Russian immigrants are focused on the fast short-term benefits and are known to often cheat their partners from Russia. As our research showed, Russian entrepreneurs use their contacts only The role of social networks and institutions 195 to gather information about potential foreign market, but they prefer to search for business contacts on their own or with the help of some organized marketing events like trade fairs. Our third and final Russian-specific factor relates to cultural differences and mental structures, as well as the negative image of Russian entrepreneurs held by foreigners. The distrust of and negative image of Russian entrepreneurs prevents Russian entrepreneurs from relying solely on their social networks in the process of internationalization. Rather, the Russian entrepreneurs that we interviewed for this research feel that the most important thing for their company is to consistently demonstrate honesty and transparency with their business partners in order to establish trust between business partners. There are also some implications of the general theory of how networks influence the internationalization process of firms which we feel help explain our results. First, network theory predicts that the higher the geographical distance between countries, the less likely it is that the social network of an entrepreneur will be useful in the process of expanding operations into new territories. That is why the social networks should be expected to play a rather less significant role in international expansion as compared to domestic expansion. This is supported by our empirical data as we found the use of social networks was rather limited in the internationalization process. Second, the role of networks is influenced by the degree of internationalization of the industry. If an industry has a high degree of internationalization, this allows the firm to enter any country regardless of cultural differences and geographical distance and without significant use of business or social networks. This proposition is also fully confirmed with our empirical data. In addition to the above theoretical implications, our findings support the value of trust in the internationalization process. For entrepreneurial firms competing in an emerging market characterized by a lack of strong institutional systems, we found that trust between business partners which was built over time through transparency and repeated transactions was the most valuable mechanism fostering internationalization. We believe that the results of our research may have important practical implications as well. An important practical implication is the idea that effective international transactions may be started and conducted without the use of any informal relations. Our findings suggest a greater significance of building trust within a firm's business networks rather than using social networks in the internationalization process. For Russian entrepreneurs who lack strong or wide social networks, our research is encouraging in that they may be able to lead their companies in successfully internationalizing. Our results also underline the importance of building trust—a process that requires a degree of transparency and repeated transactions—to entrepreneurs operating in markets characterized by a high level of distrust. Public policy implications suggest that governmental and university efforts to foster entrepreneurship in Russia should seek to instill the importance of operating in a trustful manner. The theoretical implication that networks do not appear to play a major role in the internationalization process of Russian entrepreneurial firms should be considered carefully with some allowances for our data limitations. We chose a case research methodology as it provided us with rich data and allowed us to develop a rapport with the entrepreneurs who we interviewed. Given the natural high level of distrust in Russian society, we felt it was important to be able to establish some level of trust 196 G. Shirokova, P. McDougall-Covin with entrepreneurs in order to gather the confidential data we needed to address our research question. Nonetheless, our small sample size is a limitation that suggests the need for future research. It is our hope that our research will motivate other scholars to pursue additional research in this area. 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