Internationalisation and the small business
This chapter is concerned with internationalisation of small and medium-sized enterprises (SMEs). It starts with some reflections on the now-established status of SMEs as international market actors and the economic and technological imperatives that have driven policy making and research on SMEs’ internationalisation since the 1970s. It next considers theories of smaller firm internationalisation, covering such relevant approaches as the incremental internationalisation models, the network theories, and the arguably integrative resource-based perspectives. Further discussions centre on the factors that stimulate SMEs’ internationalisation; the range and variety of barriers that impede them from so doing; the decision-maker and firm-specific characteristics that enhance the likelihood of successful internationalisation among SMEs; and the policy initiatives for assisting the internationalisation of SMEs across OECD countries.
This chapter has five learning objectives:
1 To explain internationalisation and discuss the various ways in which it can be attained.
2 To appreciate the changing face of SME internationalisation, including its underlying dynamics.
3 To present the major theories for explaining SME internationalisation and identify the critical decision-maker, firm and environmental influences on the phenomenon.
4 To examine the major barriers and problems that impinge upon SME internationalisation.
5 To review the policy measures and institutional mechanisms commonly employed to assist SME internationalisation and make relevant recommendations.
Firm-level internationalisation has witnessed a phenomenal level of growth since the latter part of the twentieth century. Driven largely by the remarkable, and even revolutionary, changes in their external environments, companies, large and small, have increasingly embraced the international growth path as a way of leveraging technological, organisational and inter-organisational resources, and reducing business costs and risks (Ibeh, 2000; Royer, 2004). SMEs are not insignificant actors in this changing landscape. As recent OECD findings suggest, internationalised SMEs account for about 25-35% of world’s manufactured exports, with their export contribution to GDP representing 4-6% for OECD countries and 12% for Asian economies (OECD, 1997a).
This seems very different from the period, not too long ago, when internationalisation was regarded as the domain of large corporations. Based on their presumed lack of internationalisation potential, small firms were largely ignored by most governments, policy makers and researchers, seeking to promote national economic position through greater firm-level internationalisation. This explains why the dominant theories and models of internationalisation - product life-cycle, market imperfection, internalisation/ transaction cost and the eclectic paradigm - have an essentially multinational enterprise (MNE) focus, explaining the conditions under which MNEs extend and establish their activities, particularly production, overseas.
The serious difficulties experienced by western MNEs during the 1970s and early 1980s, and the knock-on effects on their national economies, however, served to expose the weakness of this exclusive reliance on the large firm. Assailed by such developments as the oil crisis of 1973-74, depressed global demand, intense international competition from Japan and the newly industrialising countries, and revolutionary new technologies, western MNEs lost their grip on world trade and were forced into plant closures, down-sizing and process re-engineering. Their governments soon reacted with massive programmes of de-regulation and privatisation. From the ashes of resulting redundancies, however, emerged many new small firms - their formation fuelled by rising trends in outsourcing, greater demand for services, and microelectronics (Bell, 1995). Subsequent evidence of the small-firm sector’s economic contribution was reported in a number of studies, notably the Bolton Commission’s (1971) in the UK; Birch’s (1979, 1981) in the US; and Storey and Johnson’s (1987) in the European Community.
Concerns were, however, expressed about the disproportionate under-representation of small firms in the international market. Cannon and Willis (1983), for example, observed that while small firms accounted for nearly 25% of the UK’s gross national product, they contributed less than 10% of all manufactured exports. Even more insightful was the indication that a significant proportion of SMEs with exporting potential had restricted themselves to domestic operations, in the erroneous ‘belief that size is an insuperable disadvantage’ in internationalisation (Bolton, 1971). It was hardly surprising, therefore, that policy makers, faced with burgeoning trade deficits and an inert large firm sector, would begin to focus on developing the little-tapped export potential of smaller firms (Bell, 1995). This favourable policy climate transformed SME internationalisation into an important area of inquiry - a situation that has continued to date.
The term ‘internationalisation’ commonly refers to the process of increasing involvement in international operations (Welch and Luostarinen, 1988; Bell et al., 2004). It describes the continuum that stretches from the firm’s first import activity or extra - regional expansion or domestic internationalisation to full globalisation (Wiedersheim - Paul et al., 1978; Luostarinen, 1994). Full company globalisation is characterised by the establishment of manufacturing plants and marketing affiliates across major international regions; extensive outsourcing of inputs and marketing of outputs across borders; and worldwide integration and coordination of resources and operations in pursuit of global competitiveness. Sometimes used interchangeably with globalisation (its most evolved form), internationalisation is attained through a variety of international market entry and development modes (Young, 1990). These include: direct and indirect exporting; licensing; franchising; management contract; turn-key contract; contract manufacturing/international sub-contracting; industrial cooperation agreements; contractual joint venture; equity joint venture; strategic alliances; mergers and acquisitions; and wholly owned subsidiaries.
A number of authors have tried to classify internationalisation modes. This chapter employs Luostarinen’s (1980) approach, whose distinctions between home and overseas production, and direct and non-direct investments, offer useful insights into understanding SME versus large firm internationalisation. In general terms, the progression from home-based internationalisation modes to overseas production modes, and from non-direct investment modes to direct investment modes, is marked by increased resource commitments/transfer and risks. Given their obvious resource (financial and managerial) and attitudinal (to risk/control) differences, small and large firms have tended to adopt divergent internationalisation modes. Indeed, SMEs are more likely to supply their international markets from domestic production bases (through indirect and direct exporting, and sales/service subsidiaries). This explains why the bulk of the literature on SME internationalisation originates from exporting research.
According to a recent report (OECD, 1997), SMEs’ share of export in each of the surveyed OECD and Asian economies ranges between 15% and 50%, with 20% and 80% being active exporters (Table 24.1). In general, SME internationalisation is greater in small, open economies and less in larger, more self-contained economies. This, however, is not always the case. France and Italy still have 30% and 70% of exports respectively contributed by SMEs, while internationalisation in small, open economies like Australia, Malaysia and Greece is less than might be expected (OECD, 1997).
That SMEs are not restricting their internationalisation forays to exporting, however, is evident in the rising trend towards small firms’ adoption of more direct forms of international marketing, including low-level foreign direct investments (FDI), strategic alliances, licensing, joint ventures and similar cooperation-based modes (Young, 1987; Dimitratos et al., 2003). A recent study (OECD, 1997) indicates the extent of SME internationalisation thus:
About 10% of SMEs are engaged in FDI and about 10% or more foreign investment appear to be attributable to SMEs. Around 10 to 15% of SMEs have licences, franchises or other arrangements with firms outside their home country... It is estimated that about 1% or less
Table 24.1 Estimates of the extent of SME internationalisation
Source: OECD (1997a)
of SMEs (30,000 to 40,000) can be said to be global, in the sense of being active in multiple countries and/or across several continents, or having the ability to operate wherever they see fit. . . another 5 to 10 % of SMEs in manufacturing. . . can be said to be extensively internationalised. . . (with) a further 10 to 20% . . . active in up to three foreign countries.
These internationally active SMEs are growing faster than their domestic counterparts. Those in niche markets and new (including high-tech) industries constitute the fastest-growing segment (20%), while those in traditional industries (around 50%) internationalise incrementally via exporting. It would, indeed, appear that most SMEs now see internationalisation as not only fashionable but imperative. This is based on the realisation that pressures from inward internationalisation are likely to be most unkind to firms that stand still and are not internationally active. As the OECD (1997) reports, probably less than 40% of SMEs are insulated from any effects of globalisation and the proportion of such firms (mainly small service providers) is expected to contract further to 20%. This does not imply that service firms are not active internationally. Many play an increasingly important international role (Erramilli and Rao, 1990; Sharma, 1993; Hellman, 1996), although measurement difficulties prevent an overall picture of the extent of service SMEs’ internationalisation. It should be noted, nevertheless, that the easily measured physical manufactured exports are often accompanied by significant international SME service activity, including customer service, design, distribution, marketing, etc. (OECD, 1997).
Firm internationalisation has been studied from both the perspective of export development (involving mostly SMEs) and the emergence of the MNEs (Bell and Young, 1998). Focusing on SME internationalisation, four theoretical approaches can be identified:
■ incremental internationalisation (or stage of development) models,
■ network theory,
■ resource-based perspectives (incorporating business strategy, contingency and international entrepreneurship perspectives).
A number of ‘stage’ models have emerged to explain the process of a firm’s development along the internationalisation route. Common to all these models is the view of export development as a sequential, ‘staged’ process. All have their roots in the behavioural theory of the firm (Cyert and March, 1963) and Penrose’s (1959) theory of the growth of the firm. According to the ‘stage’ theorists, firms adopt an incremental, evolutionary approach to foreign markets, gradually deepening their commitment and investment as they gain in international market knowledge and experience (Johanson and Vahlne, 1977, 1990). Firms are also believed to target neighbouring, ‘psychically close’ countries initially, and subsequently enter foreign markets with successively larger psychic distance. Psychic distance refers to extent of proximity in geography, language, culture, political systems and business factors like industry structure and competitive environment (Zafarullah et al., 1998).
Pioneering this approach was Johanson and Vahlne’s (1977) model of knowledge development and increasing foreign market commitment, which built on Johanson and Wiedersham-Paul’s (1978) study of the internationalisation behaviour of four Swedish firms from their early beginnings. They found that the internationalisation process was the consequence of a series of incremental decisions, rather than large, spectacular foreign investments. Four different stages were identified in relation to a firm’s international involvement: no regular export; export via independent representation (agents); sales subsidiaries; production/manufacturing. As Johanson and Vahlne (1990) stated: ‘the firm’s engagement in a specific foreign market develops according to an establishment chain, i. e. at the start no export activities are performed in the market, then export takes place via independent representatives, later through a sales subsidiary, and, eventually manufacturing may follow’.
A further dimension was added to the internationalisation process model by Wiedersheim-Paul’s et al. (1978) work on pre-export behaviour, which extended the establishment chain backwards to include a pre-export stage. Export start was found to be influenced by the interplay between ‘attention-evoking factors’ and the individual decision maker, and the environment and history of the firm, including experience in extra-regional expansion (domestic internationalisation). Thus, the establishment-chain model attempts to explain the whole process of a firm’s internationalisation, from the pre-export stage to post-export stage, including FDI.
Cognisance should be taken of the differences in perspectives adopted by these ‘stage theorists’. Anderson (1993) for example, distinguished between the ‘Uppsala internationalisation (U) models’ and ‘innovation-related (I) models’. While the former clearly refers to the models that emerged from a Swedish school of that description, the composition of the latter is not so clear. It seems appropriate, however, to include as innovation-related models those works that present export development as an innovation-adoption cycle (Lee and Brasch, 1978; Reid, 1981) and those that see it as a ‘learning curve’, influenced by external attention-evoking stimuli (e. g. unsolicited orders or enquiries) and internal factors, such as managerial ambitions and excess capacity (Bilkey and Tesar, 1977; Cavusgil, 1980; Czinkota and Johnston, 1982; Crick, 1995). The actual number of ‘stages’ undergone by internationalising firms also differs according to models, but this, as observed by Anderson (1993), ‘reflects semantic differences rather than real differences concerning the nature of the internationalisation process’. Anderson’s (1993) major criticisms, however, are ‘the lack of proper design to explain the development process’, the absence of clear-cut boundaries between stages, and the lack of ‘tests of validity and reliability’.
The incremental internationalisation models have also been faulted on grounds of limited applicability. Indeed, many studies involving firms from small domestic markets, service firms, high-technology firms, knowledge-intensive firms, entrepreneurial firms, subcontractors and international new ventures have reported evidence that counter the incremental approach (e. g. see Bell, 1995; Etemad, 2004). As Bell (1995) explains, stage theories use linear models to explain dynamic, interactive, non-linear behaviour. Clark et al. (1997) observed that the establishment model was one of several paths to FDI, noting that ‘firms often bypass the intermediate stages to FDI’. The remarks by Bell and Young (1998) that the incremental internationalisation models merely identify the internationalisation patterns of certain firms, but not of others, and that they fail to explain adequately the processes involved seem to reflect the consensus position on the topic. Madsen and Servais (1997) sought to clarify the situation by categorising internationalising firms into three. First, the traditional exporters whose internationalisation patterns largely reflect the traditional stages model; second, firms that leapfrog some stages, for example late starters that have only domestic sales for many years, but then suddenly invest in a distant foreign market; and third, the born global firms. Suffice it to say that ‘the stages theory has merit in its use as a framework for classification purposes rather than for an understanding of the internationalisation process’ (Turnbull, 1987).
Findings supportive of the ‘psychic distance’ concept have been reported in a variety of studies, including Styles and Ambler’s (1994) research, which concluded that ‘firms should focus on those countries which are closest in ‘psychic distance’ for early export endeavours’. There have, however, been refutations of the psychic distance concept, most notably by Czinkota and Ursic (1987) and, to a lesser degree, by the ‘network school’ (Johanson and Mattsson, 1988). The latter ascribes limited relevance to the concept in the face of vastly improving global communications and transportation infrastructures, as well as increasing market convergence. Evidence of ‘client followership’ has also been reported (Bell, 1995), which is inconsistent with the ‘intuitive logic’ (Sullivan and Bauerschmidt, 1990) of the psychic distance concept. O’Grady and Lane’s Canadian study further identified a ‘psychic distance paradox’: operations in psychically close countries are not necessarily easy to manage, because assumptions of similarity can prevent executives from learning about critical differences (O’Grady and Lane, 1996).
Despite valid criticisms, the stage of development perspective remains a significant contribution to the understanding of SME internationalisation. Prior to its emergence, internationalisation was essentially theorised and discussed in terms of the MNE. It is also the case that its focus on initial internationalisation attracted considerable research attention and illumination to SME internationalisation, extending even to the pre-export stage. The postulations on psychic distance may now appear dated, given recent advancements in IT, but few would disagree that they resonate with the market selection pattern intuitively associated with exporters (Madsen and Servais, 1997). Criticisms of the model, based on its failure to reflect the internationalisation behaviour of entrepreneurial, high-technology, knowledge-intensive and service firms, are acknowledged. Nevertheless, most studies involving firms in mature industries have been consistent in supporting the model’s basic propositions.
Another significant strand of internationalisation research was the development, from international industrial marketing, of the network or interaction and relationship concepts. The basic tenet is that internationalisation proceeds through an interplay between increasing commitment to, and evolving knowledge about, foreign markets, gained mainly from interactions in the foreign markets. These interactions - dynamic, evolving, less-structured - yield increased mutual knowledge and trust between international market actors and, subsequently, greater internationalisation commitment. In summary, ‘a firm begins the export process by forming relationships that will deliver experiential knowledge about a market, and then commits resources in accordance with the degree of experiential knowledge it progressively gains from these relationships’ (Styles and Ambler, 1994).
In network theory, markets are seen as a system of relationships among a number of players including customers, suppliers, competitors, family, friends and private and public support agencies. Strategic action, therefore, is rarely limited to a single firm, and the nature of relationships established with others in the market influences and often dictates future strategic options. For example, firms can expand from domestic to international markets through existing relationships that offer contacts and help to develop new partners and positions in new markets. At the same time, network relationships may restrict the nature of a firm’s growth initiatives.
Internationalisation driven by customer/client followership, or what Hellman (1996) referred to as ‘customer driven internationalisation’, has been seen in service, high - technology and knowledge-intensive sectors (Bell et al., 2004; Ibeh et al., 2004). As observed by Johanson and Mattsson (1988), a firm’s success in entering new international markets is more dependent on its relationships with current markets, both domestic and international, than it is on the chosen market and its cultural characteristics. This subtle shift from the core Uppsala internationalisation model (the psychic distance concept) was further endorsed by Johanson and Vahlne’s (1992) remarks that many firms enter new foreign markets almost blindly, propelled not by strategic decisions or market research, but social exchange processes, interactions, and networks.
A growing body of evidence exists on the role of network relationships in SME internationalisation. Coviello and Munro (1995, 1997), for example, found that successful New Zealand based software firms are actively involved in international networks, and that they outsource many market development activities to network partners. As they observed, ‘the network perspective goes beyond the models of incremental internationalisation by suggesting that firm’s strategy emerges as a pattern of behaviour influenced by a variety of network relationships’. Coviello and Munro’s evidence, while supportive of network theory, recognised the occurrence of internationalisation stages, albeit in a much condensed and accelerated form. This attempt to reconcile the network perspective with the work of the stage theorists and the ‘international new venture’ scholars also formed the substance of Madsen and Servais’ (1997) theory-building effort.
There is no doubt that the network perspective has brought immense value to the understanding of the internationalisation process, particularly among SMEs. It presents a view of SME internationalisation that should be seen more as a complement than an alternative to the incremental internationalisation model. More importantly, it moves discussion away from the largely sterile debate, which, until recently, raged for and against the Uppsala model. It can, arguably, be credited with stimulating recent efforts being made towards a more holistic view of small firm internationalisation (Madsen and Servais, 1997; Bell and Young, 1998; Ibeh, 2001; Bell et al., 2003). It is to this emerging perspective that the discussion now turns.
A major recent development in the SME internationalisation research has been the increasing adoption of the resource-based theory as an integrative platform for explaining firm-level internationalisation (Bell and Young, 1998; Peng 2001; Ibeh, 2001, 2005). As Bell and Young (1998) explained, ‘the resource-based perspective presents a holistic view of the firm’, such that decisions on country market choice, mode of entry, and product strategies are made not on a stand-alone basis, but within a coordinated framework of resources and capabilities (whether internal or externally leveraged), as well as environmental (including competitive) realities. They elaborated that ‘firms will have a different mix of resources/competencies and resource/competence gaps, and their strategic responses to these allow for the possibility of different paths to growth and internationalisation’. It could be argued that the resource-based theory of internationalisation is actually a more grounded restatement of the business strategy and contingency frameworks. It would appear to have met the need ‘to root contingency frameworks within an underlying theory’. As its proponents observe, there is a close relationship with contingency approaches, which are designed to show the influence of a range of internal and external variables. This perspective is equally implicit in the business strategy frameworks and the recent work on international entrepreneurship.
The business strategy perspective proposes a strategically planned, rational approach to internationalisation, such that decisions on foreign-market entry and servicing strategies (entry mode) are made in the context of the firm’s overall strategic development, and guided by rigorous analysis of relevant internal and external environmental factors (Young, 1987; Young et al., 1989). This is consistent with Chandler’s (1962) view that ‘structure follows strategy’. It also reflects the Turnbull et al. (1987) conclusion that a company’s stage of internationalisation is largely determined by the operating environment, industry structure and its own marketing strategy. The business strategy perspective is implicit in much of the mainstream export literature, notably Aaby and Slater’s (1989) model (widely referred to as the ‘strategic export model’); Namiki’s (1994) taxonomic analysis of export marketing strategy; Cavusgil and Zou’s (1994) path analysis of export marketing strategy and performance, as well as Reid’s contingency framework (Reid, 1983a).
The contingency approach to internationalisation views foreign expansion and export mode choice as severally influenced and situation-dependent. Reid (1983a) argued that: ‘since exporting results from a choice among competing strategies that are guided by the nature of the market opportunity, firm resources and managerial philosophy, it represents a selective and dynamic adaptation to the changing character of the foreign market. . . Market factors and requirements are, therefore, closely intertwined with deciding whether to go international and what form this expansion should take’. Reid (1983b, 1985) further employed the economics-orientated transaction cost theory to explain firms’ export mode decisions as dependent on the costs involved in initiating, negotiating and coordinating export transactions, reflecting Williamson’s (1975) observation that transactional considerations are ‘typically decisive in determining which mode of organisation will obtain in what circumstances, and why’.
International entrepreneurship researchers have generally sought to explain the behaviour of such recently identified firm categories as ‘born globals’, ‘global start-ups’, ‘international new ventures’, ‘born internationals’, ‘rapidly internationalising firms’, ‘committed internationalists’ and ‘micromultinationals’, by highlighting the quality of their knowledge assets (including the knowledge and experiential resources embedded in their top management), internationally focused entrepreneurial orientation, privileged access to network resources, social capital, and other market-based assets, among others (Oviatt and McDougall, 1994a, 1994b; Bell, 1995; Knight and Cavusgil, 1996; Madsen and Servais, 1997; Jones, 1999; Dimitratos et al., 2003; Etemad, 2004; Ibeh,
Young and Lin 2004; Ibeh, Johnson, Dimitratos and Slow, 2004; Zahra, 2004). According to this emerging literature, firms, including SMEs, would seem to have become more entrepreneurial and sophisticated with regard to their appreciation of international growth opportunities and feasible entry mode options; this has, thus, resulted in a faster pace of internationalisation (rapid internationalising firms) and more ambitious entry mode selection behaviour (micromultinationals).
A common denominator of these frameworks is the recognition that internationalisation is affected by multiple influences and that a range of the firms’ internationalisation decisions, incorporating products, markets and entry modes, are made in a holistic way. There appears to be an increasing realisation of this extended base of internationalisation parameters. This is apparent in the emerging trend towards a more inclusive and holistic explanation of firm (particularly small firm) internationalisation. Having identified partial and situational relevance for each of the existing internationalisation models, Bell and Young (1998) invited more attention to their ‘potential complementarities’. Researchers seem to have accepted this challenge. For example, Coviello and Munro’s (1997) study of New Zealand software SMEs reported evidence of incremental internationalisation, network-driven internationalisation, as well as accelerated internationalisation (international new ventures), similar to the range of propositions offered by Madsen and Servais (1997) in their conceptualisations on ‘born globals’. It will be interesting to see what other explanatory frameworks will emerge in the growing area of small firm internationalisation. Of more immediate relevance, however, is the role of internal (firm/decision maker) and external (environmental) factors that stage theorists, network scholars, resource-based theorists, business strategy and international entrepreneurship scholars have identified as significant to SMEs’ initial internationalisation decisions.
To initiate and subsequently develop international activity, a firm must first be influenced by stimulating or ‘attention evoking’ factors. The nature of these stimuli may offer invaluable insights into why some SMEs successfully internationalise while others do not. Building on previous typologies of internationalisation stimuli, Albaum et al. (1994) identified the following four categories:
■ internal-proactive - factors associated with the SME’s own initiative to exploit its unique internal competencies (e. g. potential for export-led growth);
■ internal-reactive - responding to pressures from the internal environment (e. g. accumulation of unsold goods);
■ external-proactive - active exploitation by management of market possibilities (e. g. identification of better opportunities abroad);
■ external-reactive - reaction to factors from the external environment (e. g. receipt of unsolicited foreign orders).
Nevertheless, research on initial internationalisation suggests that stimuli are not sufficient on their own. They need to be supported by facilitating factors associated with the decision maker, the organisation and the environment. These factors constitute the real impetus behind the firm’s decision to go international.
Decision-maker characteristics are generally considered to have, in Brooks and Rosson’s (1982) words, ‘a decided impact on export decision’. All the major review articles on empirical exporting research have similarly concluded on the decisive importance of decision-maker characteristics. As Reid (1981) noted, ‘empirical evidence points exclusively to the decision makers’ attitude, experience, motivation and expectations as primary determinants in firms engaging in foreign marketing activity’. This is particularly so ‘in small firms, where power, particularly decision-making power, is generally concentrated in the hands of one or very few persons’. According to Miesenbock (1988), ‘the key variable in small business internationalisation is the decision maker of the firm. He or she is the one to decide starting, ending and increasing international activities’. Empirical findings on the specific decision-maker characteristics that increase the likelihood of SME internationalisation have, however, been inconsistent. This is particularly true of findings on decision makers’ age and level of educational attainment. Garnier’s (1982) remarks that it was not possible to ascertain whether there were statistically significant differences between managers of internationalised and noninternationalised firms with respect to age and level of education would appear to reflect the available evidence.
With regard to international orientation, variously defined as foreign education or work experience, travel, foreign birth or world-mindedness (Boatler, 1994), the balance of empirical evidence is that decision makers of internationalised SMEs are likely to have spent part of their lives abroad, and are generally less affected by foreign business-related uncertainties. Miesenbock (1988) concluded, from an extensive review of the literature, that ‘the external contacts of the decision maker seem to be the most important objective characteristic’. Closely related to international orientation is another characteristic that may be referred to as international ethnic ties or contact networks. There is growing evidence that decision makers whose contact networks (see Chapter 16) are internationally spread are more likely to exploit international market opportunities than those who lack such ties. Jackson (1981), indeed, found the Zionist links of British Jews to be significant in explaining the flow of Israeli exports into Britain. Further supportive evidence has been reported by Crick and Chaudhry (1995) and Zafarullah et al. (1998) in their respective studies of British-Asian and Pakistani SMEs (see Chapter 10).
Decision makers’ psychological traits are a further set of variables that have been widely studied. A large number of empirical findings have associated decision makers of internationalised SMEs with such characteristics as: favourable perception of exporting risks, costs, profits and growth; more positive attitudes towards exporting; aggressiveness and dynamism; flexibility; and self-confidence. As observed by Ford and Leonidou (1991), ‘firms with a decision maker perceiving risk in the export market as being lower versus risk in the domestic market, profits in the export market as being higher versus profits in the domestic market, and costs in the export market as being lower versus costs in the domestic market are more likely to become exporters’.
Nevertheless, as Miesenbock (1988) stated, ‘the explanatory power of psychologically - oriented research in internationalisation. . . (is) controversial’.
Very few issues in SME internationalisation research have as much empirical support as the positive link between management support, commitment, perceptions and attitude, and internationalisation behaviour. As Aaby and Slater (1989) remarked, ‘management commitment and management perceptions and attitudes towards export problems and incentives are good predictors of export (behaviour)’. Studies have also found a much higher propensity to internationalise (export) among firms with market (or organisational) planning or exploration. As Aaby and Slater (1989) concluded, ‘the implementation of a process for systematically exploring, analysing, and planning for export seems to be a very powerful discriminator between. . . exporters and nonexporters’.
Findings on the impact of firm size (whether measured by employee number, sales, ownership of capital equipment, financial capability or a combination of criteria) on internationalisation behaviour have been mixed, if not outright controversial. The balance of evidence, however, suggests the importance of size, particularly in initiating international activity. As a general rule, larger firms are more likely to internationalise than small firms. Beyond some point, however, exporting would appear not to be correlated with size, a view corroborated by Withey’s (1980) critical mass of 20 employees for crossing the internationalisation threshold. Reid (1982) explained it thus: ‘absolute size using traditional indicators (assets, employees, functional specialisation and sales) predominantly affect. . . (small firms’) export entry’. The above standard does not, however, apply to SMEs in high-technology, knowledge-intensive and service sectors (Bell, 1994). Indeed, the use of e-commerce and online marketing via the web and Internet is increasingly removing whatever deterrence size brings to internationalisation of SMEs, even in traditional industries (see Chapter 22).
The SME’s industry or product type has also been found to influence international market entry. As Tybejee (1994) remarked, industry membership, or the structural characteristics of the industry determine the conditions in which a firm competes and consequently its internationalisation. Garnier (1982), for example, in a study of Canadian printing and electrical industries, reported that ‘the most immediate cause of export(ing) ... is the nature of the product or service offered by the exporting firm’. While SMEs in industries characterised by low skill level, low intrinsic value, bulkiness and high transportation costs are less likely to internationalise, those in sectors marked by short life-cycles are ‘motivated to accelerate their entry into the international markets’ (Tybejee, 1994; McGuinness and Little, 1981). Another firm characteristic that appears to influence an SME’s internationalisation is its history, including previous experience of extra-regional expansion, importing experience or ‘inward internationalisation’. Such experiences and attendant (networks) relationships have been found to be significant precursors of internationalisation.
Empirical studies on SME internationalisation have also underscored the importance of firm competencies. It has, indeed, been suggested that ‘firm competencies are probably more important than firm characteristics’ (Aaby and Slater, 1989). The specific dimensions of firm competency which, on balance, have been empirically supported include: technology intensity; research and development (R&D); systematic market research; product development; unique product attributes and quality; distribution, delivery and service quality; and advertising and sales promotion.
Relative to larger firms, SMEs tend to lack the necessary resources and political clout to control their operating environment. Empirical findings can broadly be categorised into two: those related to the firm’s domestic environment and those concerned with foreign (target) market attractiveness.
As observed by Miesenbock (1988), ‘the home country of the firm also determines the performed export behaviour’. The legal system ‘may facilitate (e. g. tax advantages in exporting) or complicate (e. g. foreign exchange regulations) international business. The same holds for infrastructure (e. g. distribution facilities or impediments).’ The Wiedersheim-Paul et al. (1978) model of pre-export behaviour and Garnier’s (1982) theoretical model of the export process in a small firm both reflect the impact of the domestic environment. The former suggests that firms’ location within an ‘enterprise environment’ facilitates an efficient exchange of information as well as creating ‘possibilities for “contagion transmission” of ideas from other firms, in different stages of expansion’. Garnier (1982) also sees general characteristics of the environment as well as industry in which small firms operate as affecting their decision ‘to export or refrain from so doing’. Bilkey (1978) and Pavord and Bogart (1975) identified ‘adverse home market conditions’ as a push factor in export initiation, one example being ‘home market saturation’.
With respect to the foreign (target) market environment, studies have reported foreign government-imposed barriers and poor infrastructure - road and telephone systems - to be significant impediments to export market choice. Ford and Leonidou (1991) concluded that ‘firms producing products which have to be modified in order to conform with the rules and regulations of foreign governments. . . are less likely to become exporters’. Further discussions on these and related issues are undertaken in the next section on internationalisation barriers and problems.
This section reviews empirical evidence on the obstacles that confront SMEs at different stages in the internationalisation process, including the export initiation stage. Leonidou (1995) defined export barriers as ‘all those attitudinal, structural, operational and other constraints that hinder the firm’s ability to initiate, develop or sustain international operations’. Different classificatory schemes have been used in the literature with respect to these problems. In an extensive review of export barrier research, Leonidou (1995) combined his earlier framework with Cavusgil’s (1984) into a ‘twodimensional export barrier schema’ (Kaleka and Katsikeas, 1995). This identified four categories of problems:
These problems encompass obstacles emanating from within the firm, and relating to its home country environment. They include: the lack of personnel with requisite information and knowledge about export marketing, including expertise in handling such problems as foreign government regulations; negative perceptions of risks involved in selling abroad; and management emphasis on developing domestic market activities, particularly large-sized domestic markets.
These problems arise mainly from the SME’s limited marketing ability and are experienced in the foreign (target) market environment. For some SMEs, international market entry is inhibited if product modifications are required to meet foreign safety or health standards or customers’ specifications. As Moini (1997) remarked, ‘adapting a product to foreign standards may require a large initial investment which many nonexporters lack’. Similar difficulties have also been reported with regard to providing repair and technical services, pricing as well as communicating with overseas customers. Other typical obstacles here include both high transportation cost and transportation, service and delivery-related difficulties.
These problems emanate from the SME’s domestic environment, but are typically beyond its control. Among the most cited obstacles in this category are the vast amount of time and complex documentation involved in international marketing. Also often reported is the absence of adequate government support - incentives and infrastructural - to overcome internationalisation barriers and the lack of reasonable access to (or prohibitive cost of) capital needed to finance internationalisation.
These problems originate from outside the SME and are typically experienced in the international markets. Several studies have reported on the inhibiting impact of foreign government-imposed restrictions, including exchange rate, import and tariff regulations. Equally problematic for the SME is the development of reliable overseas contacts/ distributors/representatives, including the overcoming of language and cultural differences. Other often-cited internationalisation barriers in this category are the intensity of competition in international markets or SME’s lack of price competitiveness and the difficulties of getting payments.
The nature of a firm’s response to these obstacles depends broadly on the background decision-maker and firm characteristics, specifically organisational size, international business experience, international market research orientation and export involvement. Inexperienced exporters, relative to regular exporters, perceived strict import quotas and confusing import regulations as much more important in hindering their entry into the Japanese market (Namiki, 1988). Marginal exporters, compared with their more active counterparts, have significantly different perceptions of shipping complexity, uncertainty of shipping cost and complexity of trade documentation. Similar conclusions were reached by Tesar and Tarleton (1982) in respect of passive and aggressive exporters among their Wisconsin and Virginia sample; and Bell (1997) with regard to occasional, frequent and aggressive exporters.
It appears, also, that firms at different stages of internationalisation face problems of differing types and severity (Bell, 1997; Bilkey, 1978; Bilkey and Tesar, 1977). A three-nation study by Bell (1997), for example, reported that while ‘finance-related problems often intensify with increased international exposure . . . marketing-related factors tend to decline as firms become more active in export markets’.
This section highlights the existing policy frameworks and support programmes that underpin SME internationalisation in most OECD countries. Currently used measures can be classified into direct and indirect, in terms of whether they are specifically designed for export development, or with a general aim of enhancing SME overall competitiveness - internationalisation benefits being only implied (Bell, 1994). As observed by Seringhaus and Rosson (1991), direct assistance encapsulates ‘an array of programmes that range from awareness-creating, interest-stimulating, research support, export preparation, export market entry, to export market development and expansion - focused activities’. These have been categorised broadly by Crick and Czinkota (1995) into export service programmes (e. g. seminars for potential exporters, export consultancy and export financing) and market development programmes (e. g. dissemination of sales leads to local firms, participation in trade shows and preparation of market analyses). Indirect assistance extends to those aspects described as economic infrastructure (Owualah, 1987), whether hardware (financial, fiscal, and plant and machinery leasing) or software (training, advice and information). They are generally aimed at effecting structural and process change within companies (Seringhaus and Rosson, 1991) and are often integrated into the industrial policy implemented by various governments at central and/or regional levels (Bell, 1994). Such programmes also, increasingly, seek to facilitate the adoption of innovative new technologies and best practices (including networking) among firms. Programmes of direct and indirect support include
■ providing access to foreign market information;
■ providing some form of financial assistance (export credit or foreign investment guarantees, venture capital, grants and subsidies);
■ improving SMEs’ capability through management advisory services and help with R&D and technology;
■ providing SMEs with a better business environment, by facilitating networking and sub-contracting arrangements and offering simplified, one-stop assistance units, industrial parks and arbitration assistance.
Importantly, the extent of involvement of the government and the private sector in actual support provision varies between countries. While government involvement appears to be dominant in countries such as the UK, Ireland and Canada, others like Finland, Denmark and Germany tend to emphasise private sector leadership in support provision. Yet, a few others, notably France, The Netherlands and Austria, seem to provide highly rated support at both public and private sector levels. Granted that no firm conclusions have been reached regarding the relative merits of public versus quasipublic sector support mechanisms (Bell, 1997), it is safe to suggest that ‘delivery systems that make use of existing and potential private sector activities are more likely to be cost-effective’ (OECD, 1997a).
Despite the sophistication and comprehensiveness of policy measures available in advanced (as well as developing) economies, empirical findings on SMEs’ level of awareness, usage and satisfaction with these programmes have been generally negative. This highlights the challenging nature of the task of seeking to improve SME internationalisation policy - a task the concluding section attempts to address.
It would appear from the unremitting pressures of globalisation drivers that the trend towards SME internationalisation can only intensify. The OECD’s (1997a) prognosis of a continuing shrinkage in the percentage of SMEs insulated from (inward) globalisation effects implies also that SMEs that ignore internationalisation realities risk losing their competitiveness. This makes it even more imperative that as many SMEs as possible are given whatever support is necessary to encourage their internationalisation.
A consensus appears to have emerged among academic researchers and policy makers that SMEs negotiate varying paths to internationalisation. Having been extensively and successfully challenged, the ‘stage’ approach would seem to have lost its traditional hegemony to a more inclusive, integrative view of SME internationalisation. This perspective, recently articulated by Bell and Young (1998), presents extant frameworks - incremental models; network-driven, including the accelerated ‘born internationals’ perspective; and the rationalistic strategy/resource-based models - as complementary rather than competing explanations. It is now clear that while some SMEs internationalise in an incremental manner, others accelerate through the process, driven possibly by their existing network relationships or entrepreneurial factors, and yet others adopt a rational, strategy-based process involving some consideration of relevant internal and external factors. Thus, it behoves policy makers to seek greater understanding of SMEs as the objects of their policy measures. Such an understanding should inform the segmentation of these SMEs for policy-making purposes and subsequently lead to needs-based targeting of appropriate assistance and support.
The idea of segmenting assistance targets is not new in the literature and is integral to the much-criticised stage models. What should, perhaps, be new is the rethinking of the segmentation framework, such that the ‘stage-by-stage’ approach is seen, not as the way, but as one of the ways to internationalise - across a spectrum that includes network - driven, including accelerated internationalisation as well as strategy/resource-based internationalisation. Hopefully, this perspective would translate to a broadening of the focus of programmes supporting SME internationalisation beyond their traditional exporting emphasis (Bell, 1994). Whatever the approach taken, policy makers should recognise the existence of different internationalisation pathways. For incrementally inclined firms, usual methods of assistance targeting based on stages of internationalisation may be appropriate. SMEs at lower stages may need intensive information support and one-to-one counselling to nudge them along their learning curve, while those at more advanced stages may require more experiential-type knowledge and perhaps assistance aimed at easing the financial obstacles facing foreign target customers (Crick and Czinkota, 1995). Proper acknowledgement of the reality of accelerated internationalisation should imply, for example, programmes of support for network building and activation among SMEs. Existing efforts in this direction, at industry, national and regional levels, should be strengthened. It seems appropriate, also, to widen the assistance programmes on offer to reflect a more diversified mix of internationalisation possibilities than is currently the case, such that SMEs who wish to establish joint venture operations overseas or engage in strategic alliances, or even acquire a production plant abroad, would find requisite support and encouragement. Given also the widely appreciated opportunities offered by e-commerce and online marketing, SMEs should be sensitised and supported with appropriate training and consultancy to optimise the benefits of Internet-based internationalisation.
To target SMEs and their decision makers effectively with the appropriate competence-enhancing support, it may be useful to employ a classification scheme built around their current characteristics and competencies, thus: internationalised entrepreneurial firms; internationalised less entrepreneurial firms; non-internationalised entrepreneurial firms; and less internationalised non-entrepreneurial firms (see Figure 24.1).
For the non-internationalised, less entrepreneurial SMEs, the focus should be on improving the entrepreneurial and international orientation of their key decision maker(s) through seminars and workshops, export information provision, sponsorship to trade fairs, and ‘experiential knowledge assistance programmes’ (Knight et al., 2003). This should also involve introducing an external agent (Wiedersheim-Paul et al., 1978) on a part-time or consultancy basis. Ideally, non-internationalised SMEs, lacking in entrepreneurial orientation, should be assisted in the search for, and employment of, managers with requisite profiles: experienced, internationally orientated and connected decision makers. Other measures that may be useful here include encouraging networking and linking them with foreign customers. The latter could be particularly crucial given the strength of empirical evidence on the impact of unsolicited orders from abroad in stimulating initial internationalisation.
As the name indicates, non-internationalised entrepreneurial SMEs have not yet internationalised but appear to have the right entrepreneurial disposition to do so. This category of firm, by definition, is likely to have top management or key decision makers with the requisite characteristics. Their resource gap may arise from any areas of firm competencies - product quality and technology, market intelligence or intermediaries’ network. These areas of resource slack would have to be addressed in order to
Entrepreneurial Less entrepreneurial
Encourage best practices - R&D, IT, innovation Facilitate participation in network structures Mitigate operational problems: assist foreign customers, ease market access, etc.
Seek positive reinforcement Deploy liaison officer/problemsolver
Encourage networking; export clubs
Establish mentoring scheme
Assist to redress competency gap
Provide consultancy support and training
Ease access to available support Introduce mentoring scheme Encourage best practices - R&D, IT, innovation, networking
Introduce change agents Provide training/information support
Help with foreign market contacts
Encourage networking Establish and utilise international market brokers
Source: Adapted from Ibeh (1998)
enable these firms to internationalise, as they apparently wish to do. Potentially useful support measures may comprise providing access to market survey reports, assisting with consultancy and foreign market contacts and networks, including mentoring relationships.
Internationalised, but less entrepreneurial SMEs are those that have found themselves in the international market, but appear to lack a strong motivation for so doing. Such firms may have started exporting accidentally, through the receipt of unsolicited foreign orders or allied external-reactive stimulus (Albaum et al., 1994). The policy focus here should be on ensuring that such SMEs receive positive reinforcement from their international market experience. Suggested measures include: providing requisite assistance - information, training, counselling; easing operational problems; seconding ‘change agents’ or helping them to employ more decision makers with requisite qualities; and encouraging private sector organisations to draw them into their networks, hence giving them opportunities for sharing of experiences and learning.
Finally, the policy focus in respect of internationalised entrepreneurial SMEs should be on shoring up their key competencies and renewing their international and entrepreneurial vision. Such firms should be equipped to continually respond to the inevitable
competitive challenges of an increasingly globalised market through appropriate adjustments and innovations in products, processes, organisations, markets and technology (Hyvarinen, 1990; OECD, 1997a). Increased attention needs to be given to relationships with key market actors (regular market visits and so on), particularly given the strength of empirical support on the potential benefits of so doing (Styles and Ambler, 1994, 1997; Bell, 1994). SMEs in this category, relatively speaking, need less assistance from the government and its relevant agencies. The direction in which government assistance would, nonetheless, be most appreciated is the minimisation of operational or access problems in foreign markets (Katsikeas, 1994; Morgan and Katsikeas, 1995). This is the standard service provided by government to its businesses, the most notable example, arguably, being the US government’s deployment of their might in favour of their international companies. Policy makers can also make a real difference by facilitating sectoral and/or industry-level export cooperative arrangements among SMEs to assist them in meeting the increasingly stiff competition from other regions (Arnould and Gennaro, 1985). The potential benefits of this initiative may be quite immense, extending to cost-sharing in R&D and technology sourcing, more innovative and quality products, better reputation of a country’s products in export markets, better leverage in relationships with distributors, agents, government officials (domestic and foreign) and, indeed, a whole lot of other network-related spin-offs (Ibeh, 2000).