The Internationalization of Small Firms: A Cognitive Perspective

An Empirical Assessment of the Relationship between Decision Makers´ Global Mindset and Norwegian Small Firms´ Internationalization Behavior


Doctoral Thesis / Dissertation, 2006
192 Pages, Grade: Excellent Cum Laude

Free online reading

CONTENTS

INTRODUCTION

1. RESEARCH CONTEXT: NORWEGIAN CHALLENGES
1.1 Norway - economic status quo
1.2 Aberrations and challenges ahead
1.2.1 Value creation challenges
1.2.2 Dependence on natural resources
1.2.3 Level of research and development
1.2.4 Innovation and productivity
1.2.5 Knowledge-based export
1.3 Concluding remarks

PART 1 - CONCEPTUAL FOUNDATIONS

2. A COGNITIVE PERSPECTIVE ON MANAGEMENT
2.1 Managerial cognition - a capability
2.2 Cognition, mindsets and behavior
2.3 Bounded rationality and beyond
2.4 Cognition’s position in management literature
2.5 Managerial cognition and methodology

3. FIRM INTERNATIONALIZATION
3.1 Behavioral oriented internationalization models
3.1.1 The psychic distance construct
3.1.2 The stages model
3.1.3 The innovation model
3.1.4 Criticism of the behavioral models
3.1.5 Networking, learning and social interaction - new dimensions of internationalization
3.1.6 Born global and re-born global firms
3.1.7 Internationalization as entrepreneurship
3.1.8 Internationalization and the resource-based view
3.1.9 Internationalization indicators
3.2 Internationalization of small firms - cognitive perspectives
3.2.1 International market selection
3.2.2 Antecedents of the internationalization decision
3.2.3 The global mindset construct
3.2.4 A holistic approach to internationalization
3.2.5 Cognition from an internationalization-capability perspective
3.3 Literature review - concluding remarks

4. THE CONCEPTUAL MODEL
4.1 Research questions
4.2 The conceptual model’s constructs and hypotheses
4.3 Conceptual model
4.4 Operationalization of variables: causality direction of formative versus reflective indicators
4.5 Data collection instrument and questionnaire-design
4.6 Questionnaire distribution channel
4.7 Use of reply incentive

PART 2 - EMPIRICAL RESEARCH

5. RESEARCH DESIGN

6. DATA COLLECTION, METHODOLOGY AND ANALYSIS
6.1 Data collection
6.1.1 Population and sampling frame
6.1.2 Random sampling procedure
6.1.3 Pre-survey-publishing confirmation of e-mail addresses
6.1.4 Key informants
6.1.5 Self-administered questionnaire - data collection logistics
6.1.6 Feedback from the sample
6.1.7 Data collection method - concluding remarks
6.2 Descriptive statistics
6.3 Data characteristics
6.4 Methodology
6.4.1 Structural equation modeling
6.4.2 The conceptual model in structural equation notation
6.5 Measurement instrument and estimation of the conceptual model
6.6 Model development
6.7 Validation of the proposed hypotheses
6.8 Discussion of the findings

PART 3 - CONCLUSIONS

7. CONCEPTUAL THEORY AND EMPIRICAL FINDINGS -

A COMPARISON

7.1 Validation of the theory-based conceptual model
7.2 Implications and recommendations for future research

BIBLIOGRAPHY

LIST OF FIGURES

LIST OF TABLES

LIST OF CONSTRUCT ABBREVIATIONS

APPENDICES
Appendix 1 : Sample list
Appendix 2: Survey participation invitation and reminder e-mails
Appendix 3: Questionnaire
Appendix 4: Descriptive statistics
Appendix 5: Data characteristics
Appendix 6: LISREL-result of the conceptual Model A
Appendix 7: LISREL-result of the final Model B

ABSTRACT

Internationalization of firms has been studied from perspectives ranging from resources, entrepreneurship, networking, marketing and strategy to learning. Although the literature does cover small firms (which the EU defines as enterprises with between 10 and 50 employees), most research focuses on larger firms’ internationalization. Moreover, the latter kinds of studies tend to adopt a behavioral and descriptive approach, traditionally focusing on outbound internationalization activities that usually begin with exports. The existing literature largely assumes that firms have a natural propensity to internationalization. This research adopts a cognitive perspective on management in order to explore the formation of the global mindset and the relationship between the global mindset of small firm decision makers and firm internationalization behavior. A conceptual model and measurement instrument are developed that are based upon a review of the managerial cognition- and the firm internationalization literature. Using structural equation modeling, the theoretical conceptual model is estimated based on empirical data for Norwegian small firms. The model is then developed and partially confirmed. The results indicate that the factors most strongly influencing the formation of a global mindset are the decision-maker’s international work exposure and experience; market dynamism and turbulence; the degree of market internationalization; and the decision-maker’s personal characteristics (e.g. cross disciplinary collaboration, reflection and flexibility). The model indicates a clear causal relationship between the global mindset and firms’ internationalization behavior. One implication of the research is that firms may most easily influence the formation of the global mindset by ensuring that CEOs and employees gain access and exposure to international work experience. A second implication is the finding of a positive relationship between a dynamic and internationalized business environment and the formation of a CEO global mindset. A third implication of the research is that for resource-scarce small firms, domestic performance satisfaction does not positively influence the formation of a decision-maker’s global mindset.

Keywords: small firms; managerial cognition; global mindset; internationalization

INTRODUCTION

“[...] examine instead, everyday events, places and questions, micro-organizations and absurd organizations. In these sites, organizationally relevant phenomena are more visible and available for hypothesis generation than in complex organizations”. (Weick, 1984, p. 237)

In line with the citation above, this research is motivated by a desire to contribute to the understanding of small firm decision makers’ perception of the competitive consequences of globalization. For some decision makers, however, a truly balanced perception of internationalization may require a change in the way they actually think about and do their business, how they interpret their business environment and how they define and understand the concept of internationalization.

The research project is also motivated by the author’s 20 years of international experience - 10 years as a corporate employee in the USA and the last 10 as an internationalized entrepreneur of a small Norwegian firm. The experience has given food for thought as to why some small firms’ chief executive officers (CEOs) and entrepreneurs appear to have a propensity to think and act internationally while others do not. Personal experience has also led me to wonder about the cognitive processes that lead some CEOs and entrepreneurs to see access to new resources (possibly through collaboration with others) while others in comparable situations only perceive complexities and problems.

It is an objective of the research to explore the relevance of managerial cognition phenomena in the internationalization of small firms. The research considers the existence of cognitive phenomena in the form of mindset or mindsets as a possible firm specific resource and capability (Teece et al, 1997; Barney, 1991; Grant, 1996) and it argues that the decision makers’ global mindset is a construct with consequences for how the decision makers’ cognitive processes may cause or impede internationalization behavior. In line with Schutz (1953, p. 319), is: “[...] purposive abstention from acting being considered an action in itself" - i.e. a decision-maker’s choice, conscious or unconscious, to respond, or not to respond, to the perceived possibilities or threats of internationalization.

In line with other scholars (Hodgkinson & Sparrow, 2002; Peteraf & Shanley, 1997; Jenkins & Johnson, 1997), the present research argues that it is reasonable to view small firms as a collective cognitive actor and that the small business context is particularly appropriate for exploring the linkages between cognition and action. As an antithesis, it may also be reasonable to deduce that small firms, often dominated by a headstrong owner-entrepreneur, may be particularly at risk of cognitive inertia arising from defensive routines which may hinder or delay adaptation to changes in the environment.

Much has been written about the importance of small companies for employment, innovation and growth. “Small is beautiful” is a well-known metaphor and the flexibility, dynamism and creativity of small enterprises are often the envy of bigger corporations. In general, smaller firms are important. Small and medium sized companies account for over 95% of all businesses, create roughly 50% of total value added worldwide and, depending on the country, generate between 60 and 90% of all new jobs (Knight, 2001). In Norway, small firms account for more than 95% of the employment in the private sector and 45% of the value creation (Statistics Norway, 2003), while 97% of all Norwegian companies have 20 or fewer employees. Taking into account the country’s population density of 14 persons per square kilometer and a long, rugged coastline, it is evident that much of the small firms are dispersed and very small primary, industrial and/or commercial operations (Kyvik, 2003).

In the literature, small firms’ internationalization has been analyzed from disciplinary angles ranging from strategy and marketing to entrepreneurship and networking. Though many theoretical approximations focus on how smaller companies may learn to be globally competitive and the specific skills required for successful internationalization, existing literature with some notable exceptions (Welch & Luostarinen, 1993; Fletcher, 2001; Leonidou et al, 1998) does not offer a holistic perspective on internationalization, takes the propensity to internationalize for granted, and frequently limits its focus to outbound activities of larger firms in the form of export.

Inspired by Schutz’ (1953) common-sense and scientific interpretation of human action, the research design seeks to keep the perspective and motives of the practicing manager in mind while attempting to explore the relationship between cognitive phenomena, their measurements and firms’ behavior. As will be seen, the underlying assumptions and the hypothesized measurable relationship between the managers’ global mindset and firms’ internationalization behavior are intuitive and appear to make common sense. For small firm managers, however, the realities of day-to-day managerial tasks, their motivations for decision-making and behavior are commonly neither parsimonious nor do they always appear rational. Small firm-behavior and their performance are often judged on a benchmark of survival rather than growth. Both Weick’s (1989) view of a scholarship as grounded in common sense and Ghoshal’s (2005) call for the inclusion of practitioners in academic studies, influenced the decision to base this research firmly on practical knowledge and data collected in situ from small firm decision makers.

The organization of the thesis is as follows. Chapter 1 provides an overview and context for the research with a benchmarking of Norwegian economic performance indicators with comparable developed economies. Chapter 2 discusses cognitive perspectives on management, situating it as an enriching, compatible and knowledge- and capability based view of management. Chapter 3 reviews literature pertaining to the established models and constructs in the firm internationalization scholarship and with emphasis on how this research attempts to add cognitive dimensions to the existing literature. Chapter 4 outlines the conceptual model developed as a result of the preceding literature review, presents the proposed refutable hypotheses and describes the operationalization of the variables. Chapter 5 summarizes the chosen research design. Chapter 6 outlines the data collection process, the methodology and the sequences of the data analysis and model development phase. Chapter 7 presents overall conclusions of the research, outlines its limitations and makes recommendations for future research.

1. RESEARCH CONTEXT: NORWEGIAN CHALLENGES

1.1 Norway - economic status quo

Norway is a small country in an increasingly globalized world and is on the northern edge of Europe. Rich in natural resources such as wood, hydroelectric power, fisheries and oil and gas, the structure of the Norwegian industry is generally geared towards exploiting these resources. Partly due to its unique resource position, the Norwegians have so far decided in two referendums to remain outside the EU.

The Norwegian economy has some attractive features. Oil and gas, maritime transportation and marine industries including aquaculture are strong national clusters. These are all characterized by being complete clusters and include world-leading industrial and service companies, a strong competence-base, and strong linkages supporting knowledge transfer and development. Strong capabilities are also found in light-metals and in niches within the information and communication technology industry (Reve et al, 2004).

The oil and gas sector is particularly vital and Norway is at present the world’s second largest exporter of crude oil, and a significant supplier of gas to Europe. The two major domestic oil-companies Norsk Hydro and Statoil, both partly publicly owned, dominate the industry. However, several oil majors and most leading international oil service companies are important players on the Norwegian continental shelf. Highly specialized services have developed as sub-sectors to the oil and gas industry and companies based in Norway have world-leading competences, and for instance have gained an edge in sub­sea exploration given the need to deal with severe weather conditions in the North Sea.

The maritime transportation sector has for long been the most complete internationalized and competitive Norwegian industry and the country is headquarters to leading international companies in the shipping, shipbuilding, equipment production and services, ship broking, maritime classification, ship finance and insurance, and related consulting sectors. Shipping and related services account for more than half of all export of services from Norway.

The Norwegian marine fishing industry has a strong international position, being the world’s largest exporter of seafood. Based on massive investments in research and development during the 1970s and 80s, Norwegian firms were pioneers in aquaculture, particularly in the development and industrialization of salmon. The industry has, however, in recent years struggled to sustain growth and suffered financial losses until recently.

As with most other modern economies, Norway has been characterized by strong growth in the service sector. The majority of the 100 largest companies are service and network companies. While much of the growth has been sustained by domestic demand, strong international positions are found in niche markets, commonly linked to the strong industrial clusters mentioned above.

As illustrated in Figure 1, Norway belongs to the most prosperous economies in the world and was recently announced as the second richest nation in Europe (Statistics Norway/Eurostat, 2005).

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As can be seen in Figure 2, as a main exporter of oil and gas, Norway has greatly benefited from the current high crude oil prices. The oil and gas industry has played a major role in sustaining the growth in the Norwegian gross domestic product (GDP) and the high standard of living. Figure 3 illustrates how the GDP growth on average actually has been sustained over a period of more than 10 years. The figure also indicates the relative strength of the Norwegian economy compared to neighboring Scandinavian countries and the OECD average. Reportedly (Reve et al, 2004) a comparative analysis of economic performance in the Nordic region, shows that Norway in the period from 2000 to 2003 had a lower GDP growth rate, lagging markedly behind Denmark, Sweden and Finland. These findings, however, have not been corroborated and more recent data from Statistics Norway indicate that the growth in GDP in fact has picked up, fuelled by high oil prices.

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The importance of the oil and gas exports is illustrated in Figure 4 and 5. Both figures are time series of Norwegian foreign trade. The black line is total national export and the grey line is total import. As can be seen, the relationship between export and import has

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Figure 4, Norwegian trade balance (1983-2002) Source: Statistics Norway, 2002

resulted in a positive trade surplus most years. Figure 5, more specifically, illustrates the relative importance of the oil and gas exports in the Norwegian economy. The black line shows total exports, while the dark grey column is export of traditional goods, the medium grey column is export of ships and oil platforms and the light grey column is export of crude oil and natural gas. The chart clearly reveals that the trade surplus moves in Exports. Total, a nde oil and natural gas, ships and oil platforms, traditional goods. 1983-2002. NOK billion parallel with the peaks in the export of crude oil and gas.

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Figure 5 Norwegian exports (1983-2002)

Source: Statistics Norway, 2002

There are indications that the income of the oil and gas exploration in the North Sea has had some inflationary effects. To counterpart inflationary pressures, legislation has been enacted that requires the major part of oil revenues to be deposited in a Government Petroleum Fund[1] (the Fund). The Fund has the twofold purpose of smoothing out and limiting domestic spending of oil revenues and at the same time acting as a long-term savings vehicle required as a contingency reserve to meet the extra spending implied by an ageing population. By the end of 2005, the Fund reportedly is of a size equivalent to approximately €36.000, - per inhabitant[2].

Norway has a wealthy and growing public sector comparable to other Nordic and some European countries, however the growth rate has recently been substantially higher. GDP growth and high income in the oil and gas sector combined with the burgeoning public sector have led to pressure on the cost of Norwegian labor. As illustrated in Figure 6, the Norwegian manufacturing unit labor cost has during the last decade increased to levels difficult to sustain by labor intensive firms, with industrial structural consequences and tight margins for many land-based businesses competing internationally.

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There are data and data interpretations which indicate that Norway’s privileged industrial position may be fragile and questions have been raised concerning the sustainability of the economy (Reve & Jakobsen, 2001; Reve et al, 2004). Norway recently fell from 6th to 9th position in the World Economic Forum’s “growth competitiveness” index ranking, falling behind Nordic neighbors Finland (ranked as 1st), Sweden (3rd) and Denmark (4th).

1.2 Aberrations and challenges ahead

1.2.1 Value-creation challenges

The national revenue from oil and gas exports will wane over the next few decades as oil wells become depleted and the discovery and exploration of new fields are expected to come to an end.

“Hence, over time level of value creation will either decline or Norway has to succeed in creating new business activity and improve international competitiveness of current industries to be able to sustain current GDP level" (Reve et al, 2004, p. 9).

The value creation challenge is widely recognized by Norwegian politicians. In the words of the government[3] :

“At present, public sector wealth stands in the way of a much-needed appreciation of the need for adaptation of the Norwegian economy. The fallout from failing to adapt may be dramatic - at first, for businesses in the sector exposed to competition and their employees".

The following paragraphs discuss some status quo indicators of the Norwegian industry’s preparedness for renewed innovation and value creation.

1.2.2 Dependence on natural resources

The Norwegian industry- and business structure is significantly raw material oriented. Large exports of oil and gas, fish, aluminum, electricity, fertilizer and cellulose put Norway at the top of the European raw-material export league.

As illustrated in Figure 7, other countries have significantly moved away from natural resource-dependency and towards higher added value and knowledge-based production during the last decades. By contrast, Norwegian exports are still comparatively raw- material intensive. Natural resources are obviously not a liability. However, the problem arises when these resources are traded as raw materials and commodities. Such an approach can all too easily lead to industrial production that is cost-oriented instead of being based on customer and market-driven innovation. Furthermore, raw-material based production easily leads to exposure to global price fluctuations on the world markets.

1.2.3 Level of research and development

A large chunk of Norwegian industry is based on raw-material processing and related service-industries. A consequence is that Norway today is among the OECD countries that invests least in research and development (R&D) (Reve & Jacobsen, 2001) (Figure 8). Calculated as percentage of GDP (1999) Norway spends 1,65% while the OECD- average is 2,25%. In comparison, among Norway’s Nordic neighbors, Sweden invests 3,8% and Finland 3,2%. Two more reasons given for this lackluster performance are the smaller size of Norwegian industry, which makes it harder to attain the critical mass

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Given the foregoing points, it is hardly surprising that the level of innovation in Norwegian firms (as measured by the OECD's definition as share of innovative products) is low compared with international benchmarks (Figure 9).

Norwegian businesses’ low scores in industrial innovation might, however, be compensated for by high cost efficiency and high productivity. Figure 10 illustrates average productivity-growth in manufacturing over the period 1995-2005 measured as output/hour. Again, however, the findings indicate a lackluster aggregate performance of Norwegian firms based on international comparisons.

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Figure 10, Productivity-growth (output/hour in manufacturing) 1995-2004

Source: US Department of Labor, 2005

I. 2.5 Knowledge-based export

Knowledge-based exports (as measured by high-tech products in the information and technology industry as a share of total exports) may serve as an indicator of knowledge production and facilitate export comparisons between countries. With reference to Figure II only about 13% of total exports by Norwegian companies fall in the knowledge-based category. Again, at the macro-economic level, the aggregate score for Norwegian firms is far lower than for comparable developed economies.

1.3 Concluding remarks

Allegedly, there are significant measurement problems related to international comparisons of economic performance indicators. Nevertheless, the differences in several of the preceding measures, for instance for research and development investments, innovation, productivity and knowledge-based exports appear both logically consistent and too large to be ignored as a measurement issue. It also appears that several of the indicators (e.g., for research and development and innovation) may be related, which may imply a more fundamental business, social-political and educational challenge.

In spite of this, one should not generalize. Several individual Norwegian firms in the maritime shipping industry, the fishing industry, and the oil and gas sector are at the forefront of international development and innovation.

PART I - CONCEPTUAL FOUNDATIONS

Based on a cognitive perspective on management and with a focus on the internationalization of small firms, the research draws on literature from several research paths and bodies of literature. With the objective of developing and testing a model depicting a hypothesized causal relationship between the formation of the global mindset construct and small firms’ internationalization behavior, the literature review is based on an interdisciplinary research perspective.

As illustrated in Figure 12, the conceptual development of the research went through various stages of literature exploration, beginning with the broad question of how globalization creates challenges and opportunities for Norwegian small firms. The contributions of the resource-based view of internationalization were reviewed given the small firm’s lack of in-house resources may be alleviated by access to external resources through network collaboration, the networking literature focusing on small firms was reviewed. Thirdly, since a fair number of Norwegian small firms are engaged in knowledge-intensive industries and this research considers knowledge as a renewable and developmental capability, the organizational learning literature was reviewed and the central role played by the mindset in firms’ behavior and strategic development re­affirmed. Finally, the connection was made between the global mindset and small firm internationalization by combining features of the internationalization and the managerial cognition literature to form the conceptual platform for the research.

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common perception that resources limit small firms’ internationalization. Secondly, as a

The following definitions are central in the further conceptual development:

Decision-maker(s): The decision-maker(s), individually or collectively, serve as chief informant and indicate level of analysis. It is reasoned that these respondents have both operational and strategic responsibility as principal shareholders and/or CEOs. It is suggested that owner- managers’ personalities, in particular their values and goals, are indistinguishable from the goals of their businesses (Kotey & Meredith, 1997) and at the center of all enterprise behavior. “When a firm is led by a single top decision maker, as many small firms are, the cognitive processes of the CEO are arguably the same as those of the firm...” (Peteraf & Shanley, 1997, p.167).

Firm size: Small firms are defined according to EU- standards as enterprises with between 10 and 50 employees (de Chiara & Minguzzi, 2002; Andersson et al, 2004).

Cognition: Cognition refers to belief systems that individuals use to perceive, construct and make sense of their world and to make decisions about what actions to take (Weick, 1979; Swan, 1997).

Mindset or mental model: A mindset is defined as a concrete presentation of a situation, which forms the basis for reasoning (Atkinson et al, 2000). Senge (1990) and Johnson-Laird (1989) describe mental models as deeply ingrained assumptions, generalizations, or even pictures and images that influence how we understand the world and how we take action. In other words, a mental model is one’s way of looking at the world, represents a framework for the cognitive processes of the mind and determines how we think and act. The forces that nurture, shape and reshape our mental models include education, specific training, influence of others (social learning), rewards and incentives, and personal experiences (Wind & Crook, 2005).

Global orientation: The global orientation construct refers to a manager’s positive attitude towards international affairs, his or her ability to adjust to different environments and cultures and is demonstrated through the manager’s commitment to international markets, international vision, pro-activeness, customer orientation, responsiveness, marketing competence, and the use of advanced communication technologies (Nummela et al, 2004; Knight, 1997; Moen & Servais, 2002).

Global mindset: The global mindset construct is defined as a mindset that combines a manager’s openness to and awareness of diversity across cultures and markets with a propensity and ability to synthesize across this diversity (Gupta & Govindarajan, 2002). “A global mindset is said to describe a manager’s openness to and awareness of cultural diversity and the ability to handle it” (Nummela et al, 2004, p.54). The construct is similar to the global orientation construct, but in this research it is considered a more global and holistic concept reflecting itself in the sensibility, awareness, vision and willingness to take risks in building cross-border relationships. The construct includes awareness that internationalization is as much about transmission of knowledge, learning and dialogue as about exporting and importing goods and services.

Internationalization: Internationalization is defined as the process of adapting firms’ operations (strategy, structure, resources, etc.) to international environments (Calof & Beamish, 1995). This definition leaves the door open for inward connections, i.e. transactions into the country or outward connections, i.e. transactions out of the country, in internationalization and encompasses upstream as well as downstream activities and commitments by the firm. Furthermore, the definition is not restricted to the flow of physical goods, but includes information, exchange of technology, know­how and competencies and is sufficiently open to include an extension as well as a contraction of cross-border activities and commitments (Havnes, 2001).

The proceeding literature review will elaborate on aspects of the cognitive perspective of management in Chapter 2, before discussing the substantive phenomena of firm internationalization in Chapter 3.

2. A COGNITIVE PERSPECTIVE ON MANAGEMENT 2.1. Managerial cognition - a capability

Concepts of managerial cognition, in the view of this research, represent a potentially underutilized intangible, idiosyncratic and proprietary difficult-to-trade dynamic capability, particularly in knowledge-intensive organizations (Teece et al, 1997). In line with the resource-based view of the firm in the strategy-literature (Barney, 1991; Wernerfelt, 1984) and particularly the emerging knowledge-based view (Grant, 1996), the research project specifically emphasizes the potential utility of the small firm’s collective mindset as a firm- specific capability when considering firms’ overall resources. In line with this argument, Sutcliffe and Huber (1998) make the point that difference in the perceptive scheme in a firm may offer a competitive differentiation:

“However, if environmental perceptions vary across organizations in an industry, firms that do not share the common perception and therefore undertake “uncommon” actions either may achieve an advantage over competitors or may perform less well if their actions are incongruent with the environment” (ibid, p. 794).

The foundations of the cognitive perspective on management were originally laid with the development of cognitive psychology and were in part a response to a development of an overtly behavioral focus in management science. Rejecting the central theoretical tenets of behaviorism, cognitive scientists emphasized the analysis of the various intervening mental processes that mediate responses to the environment. Studying managerial and organizational cognition means focusing on the most accessible (because it is intrinsic to our own lives) and most elusive (because it is not directly observable) of subjects (Huff, 1997). Including sensitivity to and an understanding of cognitive phenomena in the managerial toolbox appears to offer new dimensions and new concepts to the practical management of organizations, literally on-site and in-action.

Discussing the implications of cognitive processes and how knowledge is evaluated in a relational context and assessed based on structural changes and its effects on the environment, Maturana and Varela (1987) observe:

“It is in reference to the effect the observer expects that he assesses the structural changes triggered in the organism. From that standpoint, every interaction of an organism, every behavior observed, can be assessed by an observer as a cognitive act” (ibid, p. 174).

Consequently, cognition forms a natural and integral part of all personal and inter- and intra-firm activity. The construct has its roots in philosophy, possibly first advanced in form of Socrates’ exploration of innate knowledge in form of Platonic dialogue, and later further developed in cognitive science and psychology, where cognitive psychology is a theoretical perspective that focuses on the realms of human perception, thought and memory. Schutz’ social phenomenology may be seen as developing in parallel with the advances in cognitive psychology, with both research paths solidly anchored in the idea of interpretative practice. In Schutz’ (1953) view, the social sciences should focus on the ways that the real-life world - the world every individual takes for granted - is experienced by its members through processes of common sense meaning-making, while cognitive psychology focuses specifically on the role of the mind in everyday perception and sensemaking.

The relationship between managerial-cognition and psychology quickly becomes a difficult task. However, a synthesis reveals as common threads that 1) sensation and perception serve as basic ingredients in cognition and occur automatically, 2) conception involves a process of abstracting, integrating and retaining information, 3) concept formation and categorization are developmental processes, and 4) hierarchical and dynamic conceptual structures emerge over time to create consistence between cognition and the objective reality (Cowan & Skidd, 1991).

In management, the focus of the cognitive perspective is to study how firms’ decision makers conceptualize strategic information and how this impacts decision-making (Lyles & Schwenk, 1992). In a more narrow sense, cognition refers to cognitive structures, mental models or mindsets and the cognitive processes whereby these mental constructs are constructed, manipulated and used in decision-making (Swan, 1997; Hodgkinson & Sparrow, 2002). In a sensemaking perspective, however, the cognitive perspective is extended to assume a reciprocal influence between subjects and objects (Weick, 2001) by suggesting that managers shape their environment through “enactment” by noticing, by giving data meaning and developing mental models for understanding and interpreting and finally acting.

2.2 Cognition, mindsets and behavior

A review of basic psychology-literature (Atkinson et al, 2000) seems to indicate, according to Freud and Maslow, that personality is partly biologically determined, and partly sociologically determined based on social learning and cultural embeddedness and that social values are grounded in social interaction (family, education, religion, etc.).

Several managerial cognition scholars have reported that research has failed to build a convincing empirical evidence of the relationship between managerial cognition and organizational outcome. Meindl et al (1994) state:

“There are strong pressures within the organizational cognition literature to forge links from cognitive processes and structures to important organizational outcomes such as profitability, innovativeness, and adaptability to change. [...] (ibid, p. 291-292).

Finding such linkages would do much to legitimize the study of managerial and organizational cognition among both academics and business managers. [...]

Unfortunately, cognitive constructs prove difficult to measure in the field. Even when they are measured, cognition is so tightly intertwined with other organizational variables that it is difficult to disentangle their casual impact on behavior and outcomes" (ibid, p. 292).

However, Jenkins and Johnson (1997) comment that:

“Despite the lack of empirical support management researchers continually infer the existence of a linkage between thought and action" (ibid, p.77).

Management scholars do customarily assume a causal relationship between cognitive processes, thinking and behavior. According to Weick (1984), thinking is inseparably linked to action: “[...] managers behave thinkingly" (ibid, p.222).

Also in Fishbein and Ajzen’s scholarship (Fishbein & Ajzen, 1975) cognition and behavior appear to be causally implied:

“Each intention is viewed as being related to the corresponding behavior" (ibid, p. 15).

Rokeach (1973) links human values and value systems to behavior, stating that:

“More than any other concept, it [value system] is an intervening variable that shows promise of being able to unify the apparently diverse interests of all the sciences concerned with human behavior" (ibid, p. 3).

Other scholars (Senge, 1990; Argyris & Schön, 1996; Porac et al, 1989; Hodgkinson & Sparrow, 2002; Wind & Crook, 2005, etc.) similarly make an assumption of a causal relationship between managerial thinking and individual and collective firm behavior.

The further elaboration aims at establishing, in line with the majority of management scholars, a firm conceptual acceptance for the thesis of a relationship between cognitive managerial constructs and firm behavior with the web of evolving “work-in-progress” managerial mindsets being established and maintained through a dynamic processional development between values, education, experience and personality. Managerial cognition is thus based on the premise that the various intervening mental processes that mediate responses from the environment via interpretative cognitive processes do in fact influence individual and collective behavior. As illustrated in Figure 13, the various overlapping cognitive concepts have in common that they convey the idea that actors develop internal representations of their world, which in turn are linked to organizational action. That is to say the concepts signify processes that influence individual and collective perception and interpretation of the surrounding reality and that the outcome of these perceptual and interpretative processes influence decision-making and behavior. It is emphasized, however, that Figure 13 only simplistically alludes to the complexity of cognitive processes and its direct and tacit, conscious and unconscious, impact on decision-making. The illustration implies that learning takes place based on multidirectional interactions between the cognitive concepts and learning based on behavioral experiences.

The logic of the illustration in Figure 13 thus corresponds closely to the conceptualizations of the relationship between beliefs, attitudes and behavior depicted by Fishbein and Ajzen (1975), the relationship between value systems and conduct argued by Rokeach (1973) and is in line with Wind and Crook’s (2005) statement that the mindset and mental models:

“[...] not only shape what we see and how we understand the world but also how we act in it. In a real sense, what we think is what we see, what we see is what we think” (ibid, p. 5).

However, also from Wind and Crook (2005):

“Your mental models shape the way you see the world. They help you quickly make sense of the noises that filter in from the outside, but they can also limit your ability to see the true picture” (ibid, p.4).

Accordingly, mental models may cause cognitive biases and effectively bound decision makers’ conception of rationality.

2.3 Bounded rationality and beyond

As theories of rational expectations and managerial choice continue to dominate the syllabi of business schools, the cognitive view of management has grown out of a rejection of the presupposition that managerial decisions can be analyzed adequately by using these hyper-rational notions of complete data, well-defined objective functions and rigorously logical decision making. It is argued that managers form personal models of the focal situation, personal in the sense that they differ significantly from the abstract models which formal choice theories presupposes (Eden & Spender, 1998). The construct of bounded rationality (Simon, 1978, 1982; Foss, 2001), which suggests that actors are unable to take decisions in a completely rational manner due to the fact that they are constrained by fundamental information processing limitations, has been a pillar in the development of modern cognitive theory and research in organizational settings (Hodgkinson & Sparrow, 2002).

The observation that the business environment has gradually increased in complexity and the notion of information overflow has led scholars to appreciate the relevance of Simon’s construct. Forest and Mehier (2001), with reference to Simon’s scholarship, point out practical limits of rationality in decision-making caused by imperfect or limited knowledge, limited abilities of calculation and impossibility of considering all solution-options and limitations of attention to all relevant information and suggest that the concept of bounded rationality does not imply irrationality, but rather serves to underline the constraints on individual and collective human actions based on the fact that decisions are individual, but are usually determined in a social context and setting.

Thus, beyond the theorem at the heart of the neoclassical economic theory of Homo Economicus, both behavioral and cognitive oriented scientists have attempted to augment traditional ideas of economic rationality with decision-making models from psychology and sociology. Both camps appear to agree that man’s rationality is bounded; real-life decision problems are too complex to comprehend and therefore firms cannot maximize over the set of all conceivable alternatives. Relatively simple and heuristic decision rules, rules of thumb, procedures and routines are often used to guide actions. Because of the bounded rationality problem, these rules and procedures cannot be too complicated and cannot be characterized as optimal in the sense that they reflect the results of global calculations taking into account information and decision costs; however, they may be quite satisfactory for the purposes of the firm given the problems it faces. Thus firms “satisfice”; i.e. a firm is unlikely to possess a well-articulated global objective function in part because individuals have not thought through all of their utility tradeoffs and in part because firms are coalitions of decision makers with different interests that are unlikely to be fully accommodated in an inter-firm social welfare function (Nelson & Winter, 1982). The issues related to the decision-making process remain subject to interpretation. This is because of small-firm management’s day-to-day operational focus, and the assumption of rationality versus satisficing behavior (partly due to: bounded rationality; the variety of decision-makers’ non-economic motives and the implications of inaccurate managerial perceptions) (Maule & Hodgkinson, 2003). This ambivalence is corroborated by the scholarly debate between Simon, Shackle and March surrounding the concepts of rationality, imagination and intelligence and the idea that different versions of bounded rationality exist (Augier & Kreiner, 2000).

Decision-making based on satisficing, heuristics and simplified mental representations has the advantage of limiting the information processing requirements, but may lead to sub-optimal outcomes by deciding without evaluating better options. This conceptual bias is known as framing bias or cognitive bias (Eden & Spender, 1998; Hodgkinson & Sparrow, 2002) and is arguably not restricted to the individual level but may in fact reflect itself in an accumulation of cognitive biases, a process which amasses organizational inertia and bias towards currently-followed strategy until the status quo of existing cognitive processes are revised.

Cognitive oriented management scholars claim that the managerial and organizational cognition approach to management differ from previous schools of thought in that it focuses on the models that drive actual managerial action, rather than on abstract, rational models. Similarly, the point is made that in practice managers make their decisions under conditions of information inadequacy and other forms of uncertainty. Actually Spender (1996) goes much further, claiming that management science’s adoption of overly positivist methodologies is to the detriment of more interpretive systems and encourages more openness within the philosophy of science:

“To overlook the incommensurability of the positivist and interpretive programs is to overlook the irrevocable uncertainties of the human condition and thereby everything that makes our knowing, learning and memorizing processes interesting" (ibid,p. 72).

Other examples of alternative philosophies or management perspectives can be found in Nonaka and Takeuchi (1995) in their discussion of epistemological differences between western and oriental management and also in Williams (1983) in his discussion of the relationship between psychology, brain functioning and entrepreneurship. Williams in particular (in line with the discussion of bounded rationality above), questions the relationship between cognition (how we think and make judgments), the existence of a culturally determined left-hemisphere bias represented by a tendency to reason logically, linearly and sequentially, and how this may impact innovation and entrepreneurship.

Nooteboom (2003) puts forward a more situated and contextual perspective on managerial cognition. Focusing on elements of a distinct cognitive theory of the firm, the author conveys a perspective on the firm as a “focusing device” grounded in the cognitive processes embedded in the firms’ raison d'être as well as in the individual minds - much in line with Weick’s (2001) sensemaking construct. Nooteboom’s reference to the trade­off between cognitive distance needed for novelty and variety and cognitive proximity needed for mutual understanding and agreement may be seen as similar to the potential stimuli gained by small firms’ internationalization through management’s exposure to new ideas, learning and the potential unblocking of domestic operational myopia. This reasoning is in line with organizational renewal theorists Brown and Eisenhardt (1997), who argue that organizations can administer limited shocks to their system in order to renew and refresh their (technological) knowledge base at regular intervals, in particular through controlled strategies for new products or entering geographical markets (e.g. through internationalization).

2.4 Cognition’s position in management literature

Cognitive processes have to do with knowledge, judgment and decision-making and it “goes on” on at all organizational levels and “exists” in all managerial contexts. Cognition is interdisciplinary and involves internal as well as external activities. This observation is reflected in the extensive body of literature discussing cognitive concepts.

As argued by several scholars, cognition has been recognized as a central concept within the literature of strategic management. The full title of Hodgkinson and Sparrow’s (2002) textbook is indicative, i.e. “The Competent Organization - a Psychological Analysis of the Strategic Management Process”. Similarly, Eden and Spender’s (1998) collection of articles contains several that focus on managerial cognition’s role in strategic positioning. The relevance of cognition in strategic choice is echoed by Mintzberg and Lampel’s “Reflecting on the Strategy Process” (1999) while Gosling and Mintzberg (2003) in their “The Five Minds of a Manager” argue for managers and management to get their minds set on a more holistic and integrative management perspective in order to manage effectively.

A number of publications from leading scholars rigorously argue the cognitive view of management with themes ranging from the relationship between mental models and responses to competitive conditions (Porac et al, 1989), determination of strategic knowledge structures (Lyles & Schwenk, 1992), intra-industry group strategic perception (Reger & Huff, 1993), the variation between individual and collective strategic perception (Hodgkinson & Johnson, 1994) and change management (Kanter, 2003).

Porac et al (1989) analyze the competitive behavior of small firms within the Scottish knitwear industry, particularly how the mental model impacts the interpretation of the competitive milieu. The study points out that some environmental cues are missed or misinterpreted because of the limits to human rationality, and draws attention to how the cognitive processes of the decision makers are influenced by a multitude of factors (beliefs about the identity of the firm, competitors, suppliers and customers and competitive perceptions). The authors focus on explaining the relationship between a group of companies within the same industry and how the collective mental model of their industry is implicitly reflected in the collective cognitive reasoning of the regional network- integrated industry.

Similarly, other scholars study the relationship between the cognitive processes, the mindset and the impacts on firm strategy and implementation. Hodgkinson and Johnson (1994) study a limited number of firms in the UK grocery retail industry using a variant of the “cognitive taxonomic interview” to interview 23 managers. While the study reveals considerable variation in the nature and complexity of the cognitive categories elicited from the interviewees, it also reveals considerable intra-organizational agreement on categories describing self-identity and the competitive ambience of the industry. In other words, the firm, the industry and the environment form and continuously impact the managers’ mental model used as an interpretation device.

“The conclusion to be drawn from this analysis is that within each organization, there is a salient focal area associated with each informant’s cognitive taxonomy which seems to be widely shared throughout the organization" (ibid, p.544).

Lyles and Schwenk (1992) make references to the role played by the decision-maker in interpreting and enacting changes in the environment which may be of particular relevance for small firms.

“These decision makers have a strong influence on the development of the organizational knowledge structures since it is primarily they who interpret the importance of the environmental events and who communicate their view of the knowledge structure through speeches and statements" (ibid, p.158).

Thus once the key decision-makers have determined that the change challenges the core elements of the knowledge structure or current mindset and interpretative scheme of the organization, they make changes in the knowledge structure and communicate these changes to others in the organization.

Several cognition-oriented scholars consider that cognition and learning are seen as two sides of the same coin and without particular distinction between individual and collective learning (Hodgkinson & Sparrow, 2002). Contemporary organizational learning theory argues that a fundamental cognitive change in the individual and collective mindset or mental model is required to achieve lasting actionable learning and that this may not happen until the underlying and tacit value system within the organization changes (Argyris & Schön, 1996; Senge, 1990). Many scholars have investigated the propagated relationship between strategic organization learning aimed at gaining competitive advantages, focusing on the relationship between organizational learning, strategic capability as a firm-specific resource and organizational learning and organizational change (Moingeon & Edmondson, ed., 1996; Connor & Prahalad, 1996).

Several scholars, while supportive of the relevance of introspection in the form of dialogue and inquiry, and the idea of intervening in organizational development to prevent falling into learning paradoxes and defensive routines in the learning processes (Argyris & Schön, 1996), question this somewhat simplified approach to organizational learning from both procedural and psychological perspectives (Spender, 1996; Kegan, 1994; Weick, 2002). From a pragmatic and empiric point of view, and possibly from a small firm perspective in particular, one might argue that any business managing to survive or succeed is necessarily a learning organization. Some firms, collectively, learn more effectively than others, whether consciously or not. Depending on the firm-specific context and industry, a knowledge management system may thus reflect itself simply through standards, routines, files, records, information systems or even tacit (rule-of- thumb) heuristics, organizational culture or “esprit du corps”.

Cognitive concepts are central in the scholarship on strategic- and organizational change management and it is hard to draw a clear distinction between the various bodies of literature and research paths. Strategy literature concerning firm networking or internationalization indicates a clear overlap between behavioral, descriptive and cognitive procedural concepts. This also appears reasonable from a more practical managerial perspective, since no implementation of strategy can take place without cognitive phenomena and reflections being part of the process (Johansen & Vahlne, 1993;

Gnyawali et al, 1997; Kanter, 2003; Moingeon & Edmondson, ed. 1996). Since all strategic, organizational or operational changes in business take place through people’s minds, as individuals or collectively in groups, cognitive management constructs become critical in exposing, describing and understanding processes of initiation of relationships, processes of interchange of various knowledge types (codified and tacit) both within the firm and externally between firms, and in understanding how new knowledge is created in organizations (Knight, 2001; Ripsas, 1998; Granovetter, 1983; Gupta & Govindarajan, 2002; Nummela et al, 2004; Sadler-Smith et al, 2003; Äyväri & Möller, 2004; Amabile, 1997). The referenced literature, nevertheless, also shows that managerial cognition constructs and processes are underrepresented in the adjacent bodies of literature and that a further disciplinary integration is called for (Hodgkinson & Sparrow, 2002).

2.5 Managerial cognition and methodology

Construct definition, data elicitation procedures, measurement and data-analysis methodology becomes a critical part of research related to cognitive phenomena, as the research field gives researchers ample room for interpretation in the research process.

In contrast to the traditional positivistic research criteria, the epistemology of managerial cognition is based on a social constructivist and interpretive perspective. The common aim of cognitive methodologies is thus to use qualitative methods to describe and explain phenomena as accurately and completely as possible so that their descriptions and explanations correspond to the way the world is and actually operates. The underlying scientific philosophy is that the social world (as opposed to the physical world) is socially, politically, and psychologically constructed, as are human perception, interpretation, understanding and explanation of the physical world (Patton, 2001). The focus of interpretive research is on the ways in which we attach meaning to our experiences and this process is meaningful and commensurate only when experience reveals reality, i.e. when it provides privileged insight into the nature of the universe (Spender, 1996). Weick’s scholarship, for one, challenges the long-established notion of an objective environment emphasizing that humans interact and actively and reciprocally influence and construct their own reality (Weick, 1979).

Scholars have noted the very real challenges that need to be met to ensure the reliability and validity of the various assessment techniques currently commonly used in the field of managerial and organizational cognition (Hodgkinson & Sparrow, 2002). Eden and Spender (1998) take the issue further by suggesting that the question of validity should be viewed from an interpretative rather than a positivistic perspective, with methodology being considered along an epistemological validity-reliability-practicality continuum. Accordingly, validity might be considered from a phenomenological perspective by asking whether the researcher has gained full access to the knowledge and meanings of informants.

The general positivistic view is that reliability is concerned with replicability (Easterby- Smith et al, 1996). While some have argued that the concept of reliability might be inappropriate for qualitative studies (Taylor & Bogdan, 1984), there seems to be agreement among scholars that reliability means ensuring that errors are as evenly distributed as possible - i.e. there is no systematic bias caused by preconceptions held by the interviewers (the researcher), coders or other individuals which may affect the data (Eden & Spender, 1998).

Neither Eden and Spender (1998) nor Hodgkinson and Sparrow (2002), however, specifically elaborate on the challenges of identifying reliable, valid and measurable observable indicators or variables as proxies for non-observable cognitive phenomena. The difficulty of observing and measuring cognitive phenomena has led researchers to propose related observable indicators as proxies. Markóczy (1997), however, commenting on using managers’ external characteristics (age, functional background, etc.) as proxies for measurement of individual cognition, alludes to the possible lack of empiric foundation for doing so and suggests using causal mapping techniques to measure individual beliefs and the strength of the causal relationships between them. Similarly, Hodgkinson (2002) debates the sources of bias causing measurement errors when attempting to compare cognitive maps elicited to determine managers’ mental models of competition at two different time intervals.

As outlined above, managerial cognition methodologies have traditionally mainly been of a qualitative nature (although statistical analyses are often added to support the findings). However, there appears to be renewed interest in legitimizing more quantitatively- oriented analysis. Recent methodological advances have occurred in the quantitative assessment of managerial and organizational cognition that have created the potential for larger-scale theory testing and analysis of cause-effect relationships based on empiric data (Hodgkinson & Sparrow, 2002). In addition, researchers are enjoined to combine the traditional methods of managerial cognition, as outlined above, and use them in conjunction with structural equation modeling procedures. “These methods could also be fruitfully employed to evaluate competing models leading to further understanding of the causal antecedents and consequences of executive cognition in top management teams [...]." (ibid, p. 319).

In the internationalization literature, scholars have also been encouraged to further investigate the relationship among the explanatory variables so far ignored due to analytical complexities. “Much of this has been due to methodological constraints, which can be overcome by using advanced statistical methodologies such as path analysis and structural equation modeling" (Dhanaraj & Beamish, 2003, p. 244).

It is this approach and methodology which will be followed in this research’s empirical phase as elaborated in Part 2 of the thesis.

3 FIRM INTERNATIONALIZATION

In the following, the firm internationalization construct is defined broadly and understood as the process of adapting firms’ operations (strategy, structure, resources, etc.) to international environments (Calof & Beamish, 1995).

3.1 Behavioral oriented internationalization models

3.1.1 The psychic distance construct

The concept of psychic distance for mapping relations between cultural proximity and foreignness of international markets has attracted considerable attention in research related to internationalization (Johansen & Vahlne, 1977; Holzmüller & Kasper, 1990; Andersen & Rynning, 1994; Liesch & Knight, 1999). It is based on the assumption that managers, as individuals and as part of an organization, are less likely to initiate and/or pursue business relations with firms in countries perceived to be dissimilar. Conversely, the lower the perceived psychic distance towards a market, the more likely it is that commercial activities with this country will be extended. Consequently, empiric data should confirm (and partly do) that firms have a tendency to establish relations with foreign firms in markets with low psychic distance as this will limit their learning needs and accelerate their internationalization. Though the concept of psychic distance has been well established and generally perceived as a logical explanatory concept, few attempts have been made to rigorously operationalize and empirically test the concept in isolation. In a debated article, Stöttinger and Schlegelmilch (2000) argue that past research has mainly relied on factual indicators, such as publicly available statistics on economic development, education, language, etc. while only few have encompassed the perceptual component of psychic distance, i.e. the perceptual component of perceived psychic distance of the individual manager or decision-maker. The authors argue that using an extended basket of objective variables in an attempt to operationalize the summary character or index of the concept, indicates that based on cognitive mapping, people, i.e. individual managers, develop subjective mental maps of space and distance which need not necessarily correspond to reality or which alternatively simply reflect individual motives and needs. Based on the conflicting results of their research, the authors’ raise questions regarding the psychic distance construct’s high explanatory ability and power to predict internationalization performance and call for an identification of additional key factors in the form of explanatory variables that make up the psychic distance construct.

“Psychic distance from a market is a function of the uncertainty that the market holds for an entrant" (Liesch & Knight, 1999, p. 387).

The perceived psychic distance thus appears to depend partly on the individual decision­maker’s subjective mindset and partly on more formalized objective and testable organizational decision-making routines.

3.1.2 The stages model

A number of theoretical models have been used to describe firms’ internationalization process. Of these, the model introduced by the Swedish scholars Johansen and Vahlne in their seminal (1977) article on the internationalization process of the firm, laid the foundation for what since has been labeled as the “stages” or “Uppsala”[5] model (U-model) of internationalization. The model distinguishes specific stages of gradually increasing foreign involvement that firms follow as they internationalize, with emphasis on incremental stage-wise internationalization and use of knowledge concerning foreign markets. The firm enters new markets with increasing psychic distance, defined as aspects of language, culture, business practices, and industrial development, which tends to reduce the efficiency of information flows between the market and the firm (Johansen & Vahlne, 1977; Andersen, 1993). Based on empirical research in larger Swedish enterprises, the central theme of the research is the gradual acquisition, integration and use of knowledge about foreign markets and operations, and on the incrementally increasing commitments to foreign markets. The model portrays firms as minimizing risk and overcoming uncertainty in a step-by-step learning process on the road to internationalization. The sequential stages are a process by which enterprises gradually move from a state of irregular export activities, export via independent agents, creation of an offshore sales subsidiary, and finally towards the establishment of an overseas production facility.

3.1.3 The innovation model

The innovation model (I-model) is similar to the U-model, and suggests that internationalization results from a series of management innovations in the form of processes within the firm that evolve as learning stages (Reid, 1981). Scholars seem to disagree on the empirical explanation for what initiates the internationalization process; i.e. whether the managerial innovation to internationalize starts with a “push” mechanism i.e. an external change which motivates a change in managerial and subsequent organizational behavior or whether these changes are due to an internal “pull” or change agent as relevant explanation for why firms move to the next stage (Andersen, 1993).

3.1.4 Criticism of the behavioral models

According to the traditional internationalization literature, both the U-models and the I- models can be regarded as behaviorally rather than cognitively oriented and the gradual pattern of the firm’s internationalization process can mainly be attributed to 1) lack of knowledge by the firm and 2) indecisiveness and uncertainty associated with the decision to internationalize. Cognitive reasons for small firms’ hesitance to internationalize (despite the fact that these firms often have internationalization potential) will be discussed in paragraph 3.2.

The stages models, in spite of their popularity, have been increasingly criticized:

“A problem of the stage models is that these assume a considerable span of time through which a firm can gain experience, accumulate resources, and develop the managerial capabilities required for international operations. The globalization of markets and competition, however, is dramatically reducing that time span and constraining the ability of small firms to control their own development paths” (Dana, 2001, p. 58).

As mentioned above, criticism of the stages models has also focused on the inherent problems of finding logical delimitation of stages. They mostly lack an explanation of the mechanisms that takes the firm through the stages, and the unidirectional change pattern given in these models is almost deterministic in nature (Hauge, 2001; Andersen, 1993; Havnes, 2001). It is argued that the stages models’ unilateral focus on internationalization in form of a stage-wise development from export towards the establishment of a foreign operation applies mainly to larger, multinational companies embedded in the old-world industrial economy paradigm; a paradigm considered outdated in today’s dynamic, heterogeneous and networked economy. For instance, the literature on the globalization of services argues that service firms tend to internationalize in a different way from their manufacturing counterparts and thus the explanatory power of the stages theory is questionable for the service sector. It is claimed that the robustness of the process models may be diminishing as boundaries between “product” and “service” offerings become increasingly blurred (Bell et al, 2003).

3.1.5 Networking, learning and social interaction - new dimensions of internationalization

Johansen and Vahlne (2003), in a conceptual paper responding to the claim that established models of firms’ internationalization do not capture some important phenomena in the modern international business world, discuss the benefits of reconciling the old process-oriented stages model with an experimental learning-commitment network model of the internationalization of the firm. The authors argue that experimental learning and commitment interact as the driving mechanisms focusing on the learning possibilities arising from business network relationships. The network theory emphasizes the “space” between organizations involved in an exchange (Granovetter, 1983). Firms invest in internal assets and external market assets, the latter bringing greater certainty to the inter- organizational space. The acquisition of information on the market and its actors' (i.e. external assets) interaction in this process is fundamental to the network perspectives brought forward. In a concluding remark, the authors stress the perceived borderlessness of modern global firms and indicate that this may imply that traditional national-market stages and the concept of psychic distance may no longer be as relevant. The authors’ argue in favor of a renewed focus on the micro-level and individual relationships to explore the phenomena of experimental learning and trust-building processes.

Many scholars try to understand the decision-maker’s role, the significance of the individual’s social leveraging capability, and personal attitudes and belief systems in the internationalization process. In this context, Chetty and Campbell-Hunt (2003) specifically identify the decision-maker’s determination, social networking skills and risk propensity as main driving forces. The authors conclude:

“The implications for theory are that to improve understanding of the internationalization of SMEs (Small and Medium Sized Enterprises) researchers need to integrate internationalization theories with the characteristics of SMEs. Moreover, it is important to note that the attitudes and motivations of decision makers in the SMEs determine the path and pace of internationalization. The implications for managers are that they need to be aware of the importance of issues such as their own attitudes and motivations, timing, coherence, managed growth, business networks and learning in the internationalization process. In fact, managers need to be aware that the mental models they have could be their main barriers to internationalization" (ibid, p. 814).

3.1.6 Born global and re-born global firms

Literature on born global firms (i.e. small entrepreneurial firms with a global focus from the outset and embarking on rapid internationalization) emerged in the early 1990s (Bell et al, 2003). These firms’ behavioral and strategic pattern is often founded on a knowledge- based competitive advantage and often implies a managerial and/or technological innovation. For instance, it is indicative that in the majority of cases a dramatic change in strategic focus converting a small enterprise into a re-born global firm is precipitated by a critical incident or a combination of incidents - in many cases a takeover, a management buy-out or sudden change of decision-maker.

Moen and Servais (2002) debating the concept of born-global firms, argue that market knowledge, the personal network of the entrepreneur, international contacts and experience transmitted from former occupations, relations and education are examples of such international skills obtained before the birth of the firm. This seems to indicate a pre­existing construct or vision of the firm being “born global” or “reborn global” - and that this has to do with the decision makers’ or leaders’ existing mental model or mindset or change thereto. The authors clearly link the born global concepts to the degree of managers‘ and personnel’s international orientation, concluding that:

“[...] for all firms, the necessity of having a global orientation when they develop new products should be stressed" , and “[...] the results presented in our study underscore the importance of firms having a global orientation, particularly when firms in the establishment phase are developing their first product generation" (ibid, p. 68).

3.1.7 Internationalization as entrepreneurship

Several scholars relate internationalization and networking to the concept of entrepreneurship; i.e. a change process model based on an entrepreneurial paradigm to identify opportunities arising from new combinations of capabilities or resources in response to external demand (Havnes & Senneseth, 2001). McDougall and Oviatt (2000) observe that businesses in an increasing number of countries are seeking international competitive advantage through entrepreneurial innovation while pointing out the theoretical difficulty of overlap with other constructs such as innovation, change management, strategy and inclusive networking. Their definition of international entrepreneurship as a combination of innovative, proactive, and risk-seeking behavior that crosses national borders and aimed at creating value in organizations, in fact implies a multitude of both explicit and implicit concepts, including many of those concepts discussed herein. Discussing small companies and marketing strategy, Knight (2000) reasons in favor of the role of a proactive entrepreneurial orientation in the operation of small firms under globalization. Similarly, Havnes and Senneseth (2001) hold that an alternative use of resources and active networking are important features of entrepreneurial development processes.

3.1.8 Internationalization and the resource-based view

Firm resources have traditionally been regarded as one of the main explanations for internationalization and internationalization has been positively related to firm size (Philp, 1998). As the definition and perception of firm-specific resources and capabilities have been reevaluated, several scholars have reverted to the resource-based view of the firm as a parsimonious explanatory model of firm internationalization - emphasizing the resource-based view as a logical and deceptively simple model that is easy to understand (Peng, 2001). Offering a more strategic and systematic evaluation of small firms’ resources, including codified as well as tacit knowledge, competencies and strategic flexibility, the resource-based view has helped specify the resources by which (social) entrepreneurs can leverage. The resource-based view may be used to analyze how social capital embedded in social ties, networks, and contacts can be regarded as an intangible resource that is difficult to replicate, thus giving small firms possessing such resources a significant and sustainable competitive advantage. Referring to the resource- based view, Knight (2001) states that its basic premise is that it is the firm’s ability to generate and build or leverage resources and competencies that is the key to competitive advantage and organizational survival. Small internationalizing firms will respond differently in their efforts to overcome resource/competence deficiencies and such responses will also be contingent on the present level of resources the firm has at its disposal (Bell et al, 2003). For a small firm, one of the deciding elements in this complexity appears to be the underlying mental model which determines how the individual decision-maker perceives the organization’s resources and the environment in which it operates. With reference to the preceding discussion of the born global firm, the resource-based view and internationalization, empiric findings appear to give general support of a positive causal relationship between firm size and internationalization. However, this causality has been explained by so many factors ranging from differences in risk aversion to human resource policy and management attitudes (Calof, 1994) that a generalization is dubious and it would appear that firm size matters only for very small firms. This preliminary conclusion also coincides in principle with Mittelstaedt et al.’s findings (2003) that firm’s with fewer than 20 employees appear to be too small, in isolation, to acquire the knowledge or experience necessary to engage in the exporting process. However, the findings on the relevance of size and internationalization are inconclusive beyond general statements and may as well be interpreted to emphasize the relevance of the underlying managerial mindset or mental model; i.e. that the size of the firm, its resources, capabilities and strategic perception are rooted in the mind of the interpreting decision maker.

3.1.9 Internationalization indicators

Focusing on export potential and identification of potential exporters, Yang et al. (1992) identify the manager’s perception of external (e.g., general environmental) and internal (e.g. firm specific) barriers to exporting as explanatory constructs for small enterprises’ hesitance to export. Wiedersheim-Paul et al. (1978) identify firms’ pre-export activities as predictors of export. Among the predictors are specific firm objectives, possibly including export as diversification, product line, firm history and regional expansion. The authors also draw attention to the importance of the decision-makers’ perception in what they characterize as attention evoking factors or triggering cues influencing a firm towards exporting. Principal attention evoking factors are identified as the decision-makers’ experience, internal slack capacity and external stimuli in form of a market opportunity or fortuitous foreign orders. Havnes (2001) deliberates on the conceptual power of the volition of the leading person in the firm and how this volition may be explicitly expressed in clear, precise and deliberate strategies and implicitly reflected in the objectives, motives and attitudes and embedded in the firm’s operational procedures. Other scholars relate export propensity to the decision-maker’s characteristics and management perceptions of internationalization, but without being able to identify good discriminatory explanations beyond general notions of its relative significance.

Simmonds and Smith (1968) explore nine cases of medium-sized English manufacturing firms’ behavior at the start of their internationalization venture and with main focus on outbound activities. Considering export as a type of managerial innovation, the authors discuss explanatory personality characteristics and firm-ambience factors influencing the export decision. Much in line with later studies in the field, reward motivation, tolerance of risk, owner/manager/decision maker’s enterprise-drive, slack firm-resources and receptiveness to new ideas and change were found as the main explanatory factors. So too was what the authors’ call a “supra-national outlook”:

“[...] an attitude of almost complete unconcern for national boundaries where business was concerned” (ibid, p. 97).

Notable, particularly for smaller firms, is the authors’ emphasis on internationalization in the form of export initiated by a request from either existing, new domestic or international clients - i.e. an initiative from outside of the firm. Similarly, the authors allude to the interrelationship between outbound and inbound activities in describing one of the firms as having no hesitation in reaching across national boundaries for supplies - a behavioral attitude closely linked to the supra-national outlook. Simmonds and Smith’s article, as emphasized by the authors’, is exploratory in nature and the findings cannot be generalized. The time that has past since its publication and the authors’ very English perspectives, for instance on the relevance of language skills, must also be taken into account for a current interpretation of their findings.

Leonidou et al (1998) discuss how managerial characteristics influence firms’ export behavior and confirm general scholarly agreement that decision-makers’ age, education, professional experience, foreign country exposure are objective explanatory variables. On a more subjective level, perception of risks and budgetary consequences of foreign ventures are emphasized as well as the decision-makers’ level of innovativeness, flexibility, commitment and the perceived complexity of the internationalization project. Other explanatory factors of firms’ international orientation are foreign language skills, (Dichtl et al, 1990; Holzmüller & Kasper, 1990), foreign travels and living abroad (Reid, 1981). Clear limitations, as also pointed out by the authors, are the discussion’s unilateral focus on export (outbound processes) and limitation to manufacturing firms. Notably, the article does not discuss the possible underlying origins of the cognitive concepts driving firms’ internationalization behavior.

3.2 Internationalization of small firms - cognitive perspectives

The significance of firm size was mentioned in discussing the resource-based view on firm internationalization. Also from a cognitive capability perspective firm size may matter. From this perspective, it is worth noting that research has recognized that small firms are different from larger enterprises. Baird et al (1994) point out that:

“Small firm characteristics such as limited financial and managerial resources, personalized objectives of owner/managers, and informal centralized planning and control systems indicate that global strategies and structures of small firms may differ from those of larger firms" (ibid, p. 48).

Similarly, Shuman and Seeger (1986) state that:

“[...] smaller businesses are not smaller versions of big businesses... smaller businesses deal with unique size-related issues as well, and they behave differently in their analysis of, and interaction with, their environment" (ibid, p. 8).

With the small firm as the unit of analysis, the further focus is on how cognitive reasoning forms an integral part of the internationalization discourse and the implication of the observation that concepts of cognitive significance are in fact commonly used in parts of the existing internationalization literature (Figure 14). With reference to the preceding review of the managerial cognition literature, attention is drawn to how central managerial perceptions may be for small firms’ propensity to internationalize. In other words, such propensity may partly depend on the decision maker’s perception and interpretation through the mindset of resources and capabilities, psychic distance and the firm’s need to acquire knowledge and its ability and willingness to share in-house knowledge.

illustration not visible in this excerpt

[...]


[1] Government Petroleum Fund act of June 22, 1990

[2] http://www.aftenposten.no/nyheter/okonomi/article1188107.ece, 31.12.2005

[3] “From idea to value - the Government’s plan for a comprehensive innovation policy”, 2003, p. 5

[4] “Det norske forsknings- og innovasjonssystemet - statistikk og indikatorer” (Norges forskningsrâd, 2001)

[5] University of Uppsala, Sweden

192 of 192 pages

Details

Title
The Internationalization of Small Firms: A Cognitive Perspective
Subtitle
An Empirical Assessment of the Relationship between Decision Makers´ Global Mindset and Norwegian Small Firms´ Internationalization Behavior
College
University of Ramon Llull  (ESADE Business School)
Course
Doctorate
Grade
Excellent Cum Laude
Author
Year
2006
Pages
192
Catalog Number
V163495
File size
2044 KB
Language
English
Tags
Internationalization, Small, Firms, Cognitive, Perspective, Empirical, Assessment, Relationship, Decision, Makers´, Global, Mindset, Norwegian, Firms´, Behavior, Excellent, Laude
Quote paper
Oyvin Kyvik (Author), 2006, The Internationalization of Small Firms: A Cognitive Perspective, Munich, GRIN Verlag, https://www.grin.com/document/163495

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Title: The Internationalization of Small Firms: A Cognitive Perspective


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