Small and Medium Sized Enterprises. Which Internationalization Strategies Do They Have?


Bachelor Thesis, 2017
44 Pages, Grade: 1,0

Excerpt

Outline

Outline

Index of Figures

Abstract

1. Introduction

2. Key Terms
2.1 Internationalization
2.2 Small and medium-sized enterprises (SMEs)

3. Drivers for Internationalization of SMEs – The Rationale for Going Global
3.1 Internal Drivers
3.2 External Drivers

4. Barriers to Internationalization of SMEs – Does Size Matter?
4.1 The Liability of Smallness, Newness and Foreignness
4.2 Internal Barriers
4.3 External Barriers
4.4 The Switch of Barrier Perception over Time

5. Market Entry Modes of SMEs – The Agony of Choice
5.1 General Overview
5.2 Import
5.3 Export
5.4 Strategic Alliances
5.5 Foreign Direct Investment

6. Internationalization Models of SMEs – A Theoretical Overview
6.1 The Internationalization Process Model or Uppsala Model
6.2 International New Ventures or The Born Global Firm
6.3 The Network Model of Internationalization
6.4 A Holistic Approach

7. Discussion
7.1 Theoretical Implications
7.2 Managerial Implications
7.3 Limitations and Suggestions for Further Research

8. Conclusion

Bibliography

Index of Figures

Figure 1: The Internationalization Process Model

Figure 2: Types of International New Ventures

Figure 3: The Network Model of Internationalization

Figure 4: The Interplay Framework for SME Internationalization

Abstract

Intriguingly, most research on internationalization strategies focuses on large, multinational enterprises. This is unjustifiable given the economic importance of small and medium-sized enterprises (SMEs) or the emergence of small firm types such as “Born Globals”. The goal of this thesis is to undo the neglection of SMEs and provide fresh insights into the topic of SME internationalization from a strategic viewpoint. The thesis complements literature by thoroughly analyzing the relationships between the most important elements of small firm internationalization. By summarizing the extant literature about internationalization drivers and barriers, entry modes and strategies of SMEs, the understanding and appreciation of prevalent concepts will be fostered. The result, a conceptual interplay framework, provides a sound base for managerial decision-making and effective governmental policies that seek to promote SME internationalization. Furthermore, scholars might find it useful as a fruitful starting point for further research in the respective field. It is derived from the most relevant internationalization models and focuses on the strong interaction between networks, knowledge and the entrepreneur.

1. Introduction

It is an academic challenge to explain why a business already confronting the risks of young age and relatively small size would seek out the additional risk of being international (McDougall, Oviatt and Shrader, 2003, p.59-60).

Above statement captures the essence of the dilemma that small and medium-sized enterprises (SMEs) face. Small in size and confronted with resource constraints (Buckley, 1989; Zacharakis, 1997), it is particularly difficult to cross national borders. This handicap is further fueled by the lack of academic literature which predominantly focuses on internationalization strategies of multinational enterprises (MNEs) (Calof, 1993a; Jansson & Sandberg, 2008; McDougall & Oviatt, 2000). It is widely known, however, that SMEs are not just smaller forms of MNEs (Lu and Beamish, 2001; Man, Lau & Chan, 2002; Pangarkar, 2008; Shuman & Seeger, 1986). It follows that internationalization models for MNEs might not be suitable to describe small firm behavior. Olejnik (2013) thus argues that a distinction between process patterns of MNEs and SMEs has to be made. Differences between SMEs and MNEs exist, for example, in terms of resource endowment, knowledge levels or the importance of the owner/manager (Onkelinx & Sleuwaegen, 2008).

Given the challenges for SMEs it appears that there is no room for small firms in the international environment. And yet, new company breeds like the so called “Born Globals” (Rennie, 1993) seem to offset the liabilities of small businesses. At the same time, major changes in information systems, communication systems and transportation (Baronchelli & Cassia, 2008; Madsen & Servais, 1997; Onkelinx & Sleuwaegen, 2008) have enabled SMEs to pursue international endeavors. Furthermore, SMEs can take advantage of their firm-specific strengths and the positive effects of internationalization. According to Narula (as cited in Iplik and Kiliç, 2009) and Cavusgil & Knight (2015) the former refers, for instance, to the firm’s flexibility and innovativeness. The later describes knowledge, policy, financial and market advantages for the SME (Lu & Wu, 2007). Renata & Emöke-Szidónia (2009, p.212) thus rightly conclude that internationalization emerges as “an inevitable stage in their strategic evolution at a certain moment in time”.

These findings taken together suggest that internationalization strategies of SMEs are worthy of further study. The significance of SMEs for the economy and for literature lies at hand as well. Fliess & Busquets (2006, p.3) state that “SMEs are a major source of job creation and growth”. In a similar vein, Hessels & Parker (2013) confirm that SMEs belong to the key players in the economy. From a German viewpoint, more than 300,000 SMEs are actively exporting and account for about 40% of exported goods (Venohr & Meyer, 2007). The discrepancy between the empirical relevance of SMEs and the limited theoretical knowledge that literature provides about them is somewhat astounding. The upshot is that the internationalization process of SMEs has not been properly addressed yet. Consequently, there is an unjustified gap in current research streams. This thesis seeks to fill this gap. By presenting a comprehensive review of extant literature it provides a basis for further discussion. At the end of this critical revision a framework is proposed that can be used as a powerful tool for scholars and managers alike.

The remainder of this thesis is as follows. The following section briefly explains the key terms. After addressing the driving forces of SME internationalization, the main barriers for SMEs will be illustrated. Next, possible entry modes for SMEs in foreign markets are presented and outlined. Afterwards, a profound review of current internationalization strategies will be given. Within the subsequent section a conceptual framework that focuses on (1) the entrepreneur, (2) knowledge and (3) networks will be introduced and discussed, leading to theoretical implications and managerial recommendations. The same part also addresses the role of policy makers. Finally, the thesis accounts for potential limitations and suggestions for further research followed by some concluding thoughts.

2. Key Terms

An important prerequisite to understand the concepts used in this thesis is a clear and profound understanding of what is meant by “internationalization” and “small and medium-sized enterprises” (SMEs).

2.1 Internationalization

To date, the literature lacks a commonly accepted clarification of the phenomenon of internationalization (Iplik and Kiliç, 2009). Instead, there have been several attempts to define this term either in a broad or very specific manner. Following the definition of Calof and Beamish (1995, p.116), internationalization refers to “the process of adapting firms’ operations (strategy, structure, resource, etc.) to international environments”. Others have described internationalization as business activities that cross national borders (Welch and Luostarinen, 1988). Johanson and Vahlne (1977) provide a more ergodic perspective as they see internationalization as a sequential process of increasing foreign market commitments. Yet another definition offered by Lu and Beamish (2001) can be best described with an awareness process by which a firm begins to engage in transactions with firms in other countries.

Notably, however, internationalization is not limited to entering a foreign market via exporting etc., but instead it also considers any other activity concerning “developing and managing international operations” (Trąpczyński and Wrona, 2013, p.91). This will have an important impact when import will be discussed as one possible way to engage in international transactions. When this thesis refers to internationalization from now on, the definition by Calof and Beamish (1995) is understood.

2.2 Small and medium-sized enterprises (SMEs)

Calof (1993a) and McDougall & Oviatt (2000) point out a basic problem about the definition of SMEs: A direct comparison between past studies on SMEs has been difficult due to the individual and often versatile definitions applied by researchers. Among these, researchers use qualitative (e. g. ownership structure or managerial attitudes) or quantitative criteria (e. g. number of employees or annual turnover) to differentiate SMEs from their larger counterparts (Günterberg and Kayser, 2004; Schaper and Volery, 2004). Consequently, the demarcation line regarding SME categorization is blurred.

Even within the spectrum of quantitative descriptions, the exact definition can vary accordingly. For example, Calof and Viviers (1995) defined SMEs as businesses with less than 1,000 employees when they conducted a questionnaire with South African SMEs. The United States and Canada set this limit to 500 employees, whereas Japan specifies the definition in terms of the headcount in different sectors (Onkelinx and Sleuwaegen, 2008). Buckley (1989, p.89) concludes that definitions are author and context specific and therefore “not right or wrong, just more or less useful”. Hence, for the sake of clarity, the definition of the European Commission (EC) will be used in this thesis. The EC (2003) acknowledged the inconsistencies regarding SME definitions within the European Community and proposed the following general definition, using staff headcount and financial ceilings as the determining criteria:

The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. (p.39)

The definition stated above is clear, distinct and applies to a multitude of countries and businesses in the European Union. It is also useful when formulating SME-specific policy measures, since they can be addressed to the same target group (European Commission, 2003). Within the SME category, a micro firm employs less than 10 employees and a small firm employs less than 50 employees while their annual turnover and/or their annual balance sheet total does not exceed EUR 2 million and EUR 10 million respectively (European Commission, 2003; Hynes, 2010). Nevertheless, this thesis will refrain from further separating micro, small and medium- sized enterprises, as their behavior towards internationalization can be seen as interchangeably (Kaynak, Ghauri, and Olofsson-Bredenlöw, 1987).

Still, given the fact that above definition is coined quantitatively, this does not mean that SMEs are not different from Multinational Enterprises (MNEs) in qualitative terms. In fact, there are several qualitative differences that will be discussed in greater detail in subsequent parts of this thesis.

3. Drivers for Internationalization of SMEs – The Rationale for Going Global

In the course of the last decades, a plethora of academic work about advantages for SMEs associated with internationalization has emerged. The Organisation for Economic Co-operation and Development (2009), for instance, summarized the main motivations identified by 15 authors researching 18 countries worldwide. These “drivers” (Mundim, Alessandro & Stocchetti, 2000; OECD, 2009) sometimes referred to as push and pull drivers (Onkelinx & Sleuwaegen, 2008; Rodriguez, 2007) or proactive and reactive motivating factors (Forsman, Hinttu & Kock, 2002), are commonly divided into two categories. They can either relate to the internal context of the firm (“internal drivers”) or the external context of the firm (“external drivers”).

3.1 Internal Drivers

Internal drivers for internationalization are relating to the individual context within a firm such as growth and knowledge-related opportunities (Forsman, Hinttu & Kock, 2002; OECD, 2009; Rodriguez, 2007) or increased capabilities of the working force including the management (Madsen & Servais, 1997). Additionally, SMEs are often attracted by various cost drivers such as access to cheap labor or raw materials (Onkelinx & Sleuwaegen, 2008). Although not typical, internationalization might enable even small firms to develop economies of scale and exploit full production capacity (Mundim, Alessandro & Stocchetti, 2000; Rodriguez, 2007). Further drivers are higher chances of survival (Omer et al., 2015) by overcoming local constraints. However, one of the most dominant internal drivers of SME internationalization is the founder/entrepreneur himself. By actively seeking out for international business opportunities (Hynes, 2010), he often acts as the connecting link between a firm’s current domestic strategy and the impetus to internationalize. In a similar vein, Madsen & Servais (1997) observe that the founder/entrepreneur sometimes impels internationalization due to his international experience and foreign market knowledge obtained in previous positions. This is also one of the biggest differences between SMEs and MNEs. Partially, internationalization also depends on the “management’s perceived benefits or opportunities” (e.g. potential revenues), as Forsman, Hinttu & Kock (2002, p.5) conclude. Cavusgil & Nevin (1981) find similar results identifying managerial aspirations and expectations among the driving forces for internationalization when they studied export behavior of American manufacturers. Besides that, SMEs often possess a variety of firm-specific characteristics and strengths. In order to compete with the bigger players in the international market, a SME must leverage on its core capabilities, such as flexibility and specialization in certain niches. Cavusgil & Knight (2015) further mention that persistence, innovation and product diversification are co-responsible for making the path of internationalization a feasible one.

3.2 External Drivers

Hynes (2010, p.92) recognizes the origin regarding external drivers for internationalization in micro and macro factors in the firm’s environment, including “factors associated with the customer and competitive, social, cultural, economic and technological characteristics”. The latter often refers to quick spread of innovations, advancement in the areas of information and communication technology (ICT), and transportation (Baronchelli & Cassia, 2008; Forsman, Hinttu & Kock, 2002; Madsen & Servais, 1997; Onkelinx & Sleuwaegen, 2008).

Onkelinx and Sleuwaegen (2008) further categorize external drivers into market drivers, government drivers and competitive drivers. Market drivers take into account general new market conditions (Forsman, Hinttu & Kock, 2002), chances of enhanced market segmentation (Mundim, Alessandro & Stocchetti, 2000), a shrinking domestic or growing overseas market (Rodriguez, 2007; Hynes, 2010), and the opportunity to find new customers or follow existing ones (Onkelinx & Sleuwaegen, 2008). Government drivers of internationalization include the liberalization of trade, reduced entry barriers and strict laws and regulations in the domestic market (Baronchelli & Cassia, 2008; European Commission, 2004; Onkelinx & Sleuwaegen, 2008). Competitive drivers concern fierce competition in the domestic market, forcing companies to fall back on foreign markets (Baronchelli & Cassia, 2008). They further include following competitors abroad (Rodriguez, 2007) to successfully compete in the “exceedingly competitive “interlinked” markets” (Etemad, 2004, p.1). A final driver for internationalization stems from the opportunity to create network ties and supply chain links abroad (OECD, 2009). This endows firms with valuable assets and promising partnerships.

Intriguingly, some of the mentioned factors can have either a positive or a negative effect (Hynes, 2010). This implies that certain internal and external conditions can be drivers for some firms, or in some industries and countries, while they might be impedimentary for others (Onkelinx & Sleuwaegen, 2008), or in other words, resemble a barrier to internationalization. A high level of competition may, for instance, foster the innovation of some firms, while other SMEs could just be overwhelmed by their competitors’ actions.

4. Barriers to Internationalization of SMEs – Does Size Matter?

Various authors point out that SMEs are not just smaller forms of large multinational enterprises (MNEs) (Lu and Beamish 2001; Man, Lau & Chan, 2002; Pangarkar, 2008; Shuman & Seeger, 1986). SMEs have to face barriers of internationalization to a higher extent, mainly due to their resource-constraints (Cavusgil & Knight, 2015; Etemad, 2004; Fliess & Busquets, 2006; Forsman, Hinttu & Kock, 2002; Hessels & Parker, 2013; Hollenstein, 2005; Kirby & Kaiser, 2003; OECD, 2009; Ruzzier & Konečnik, 2006; Zacharakis, 1997). As a result, SMEs do not only face barriers affecting every organization, large and small. Quite the contrary, SMEs have to maneuver through a whole new set of challenges specific to their nature when going global.

4.1 The Liability of Smallness, Newness and Foreignness

These challenges can be best described by the “triple threat” of firstly, the liability of smallness (Calof, 1993a; Göritz, 2011), secondly, the liability of newness (Autio, Sapienza & Almeida, 2000; Zahra, 2005) and thirdly, the liability of foreignness (Lu & Beamish, 2001; Sui & Baum, 2014). The liability of smallness results from limited resources, for example in terms of capital or human resources, and structural disadvantages compared to MNEs (Göritz, 2011). Zahra (2005) complements this description by stating that SMEs do not possess slack resources, which are especially relevant during the process of internationalization. Following Autio, Sapienza & Almeida (2000, p.919), the liability of newness is characterized by a “lack of reputation, social capital, and tangible resources”. Logically, SMEs experience a lack of credibility regarding foreign stakeholders and potential viability (Zahra, 2005). Finally, the liability of foreignness addresses the additional costs of conducting foreign business (Sui & Baum, 2014), for instance, informational costs. Especially small and medium-sized enterprises are prone to a lack of sufficient market knowledge, since they cannot simply transfer the knowledge obtained in the domestic market (Lu & Beamish, 2001; Sui & Baum, 2014). The overall result stemming from this “triple threat”, summarized by Olejnik (2013), is the fact that SMEs face higher risk of failure than their larger competitors.

4.2 Internal Barriers

In the face of these obstacles, the process of internationalization is a daunting quest. Many SMEs are not able to overcome seemingly insurmountable obstacles while larger firms often withstand the challenges of internationalization with ease. In a comprehensive way, barriers are generally defined as “attitudinal, structural, operative or other constraints that hinder or inhibit companies from taking the decision to start, develop or maintain international activity” (Leonidou, 1995, p.31). Hence, when considering barriers to internationalization of SMEs it becomes apparent that it is a feasible step to divide them further into internal and external barriers similar to the internal and external drivers (Fliess & Busquets, 2006; Hynes, 2010; Toulova, Votoupalova & Kubickova, 2015).

Internal barriers can be understood as challenges that stem from the inside of a company and hence, are often easier to manage and control than external barriers (Onkelinx & Sleuwaegen, 2008). Kirby & Kaiser (2003) and Buckley (1989) divide internal barriers into a lack of financial, managerial and information resources. Similar approaches have been used by the OECD (2009) and Lu & Wu (2007). Limited financing, lower cash flows (Muhammad et al, 2010) and a shortage of working capital (OECD, 2009) count among the financial barriers. Insufficient motivation to internationalize (Hynes, 2010), a lack of personal networks (Onkelinx & Sleuwaegen, 2008; Zacharakis, 1997) and a sometimes risk-adverse attitude (Thai & Chong, 2013) belong to the lack of managerial resources. Lastly, shortage of information refers to limited knowledge about foreign markets, for example, about competitors or customers (Sui & Baum, 2014; Toulova, Votoupalova & Kubickova, 2015). Strikingly, however, Onkelinx & Sleuwaegen (2008) observe that many SMEs do not internationalize just because they have never considered it or are unaware of the potential advantages. This fact will have important implications when discussing appropriate measures for policy makers.

4.3 External Barriers

According to Hynes (2010) external barriers refer to environmental changes mainly outside of the owner-manager’s control. She further contends that these barriers are the outcome of “economic, political, societal/demographic, technological and regulatory aspects” (Hynes, 2010, p.89). Such barriers are often difficult to overcome, since SMEs do not possess, for instance, the same information networks as large companies do (Zacharakis, 1997). Unfavorable regulations, market imperfections and high tariff barriers are all inhibitors of internationalization to name but a few (Fliess & Busquets, 2006; Hollenstein, 2005). Societal barriers, including cultural and institutional differences (Sui & Baum, 2014) or different language norms (Zacharakis, 1997) further add up to the overall handicap that SMEs experience in foreign businesses. Moreover, besides host country barriers, there are also barriers stemming from the home country. The most salient home country barrier is a lack of government support (Muhammad et al, 2010; Toulova, Votoupalova & Kubickova, 2015).

Apart from general external barriers that are apparent in virtually all countries and just vary in terms of their prevalence and intensity, there seem to exist also country-specific challenges. Calof and Viviers (1995) suggest in their study of South African SMEs that an inward-looking culture is among the biggest barriers braking internationalization. Lack of language skills of employees is one of the major disturbing factors of Czech SMEs striving to internationalize, according to Toulova, Votoupalova & Kubickova (2015). In a case study about Jordan SMEs, Al-Hyari, Al- Weshah, & Alnsour (2012) identified “red tape” as one of the dominant inhibitors of internationalization. Consequently, when formulating policy measures aiming to reduce said barriers, a “one-size-fits-all” approach might not be a feasible strategy.

4.4 The Switch of Barrier Perception over Time

Generally, the negative impact or expected negative impact of internal and external barriers is situation-specific (Onkelinx & Sleuwaegen, 2008). However, an interesting pattern with respect to the perception of barriers has been documented by Fliess & Busquets (2006). According to their research findings, firms prior to their first internationalization attempt considered internal barriers to be higher. By contrast, firms that already internationalized to some extent regarded managing the external business environment to be more troublesome.

The crucial question, whether firm size alone is an inhibitor of internationalization produces mixed answers. By reviewing extant literature about the impact of size on internationalization, Calof (1993a) found either no relationship or a negative relationship. He concluded, as will be further elaborated on in subsequent chapters, that size alone does not have to be an inhibitor of internationalization per se (Calof, 1993a). Still, it might “severely limit a firm’s potential to internationalize” (Onkelinx & Sleuwaegen, 2008, p.26).

5. Market Entry Modes of SMEs – The Agony of Choice

The internal and external barriers eventually determine the strategic behavior of SMEs, since smaller firms are virtually forced to act accordingly to their scarce resource endowment (Ruzzier & Konečnik, 2006). As a direct result of this constraint they cannot draw on the same market entry modes like MNEs (Zacharakis, 1997). Instead, SMEs focus on a smaller number of key modes that allow them to go global despite the liabilities they suffer from. Since the success or failure of the first attempt to internationalize plays an essential role for the future of a small firm, this decision represents an “agony of choice”. Consequently, special attention will be paid to how SMEs exactly enter new markets.

5.1 General Overview

Following the remarks of Jones & Young (2009, p.7) market entry modes are the “methods of business organization employed by companies to enter international markets for the purpose of undertaking value-creating activities”. They include entering markets for finished products or services as well as factor markets (Jones & Young, 2009). It is generally acknowledged that market entry modes refer to the initial entry as well as the developing process over time, for example a mode change. Existing literature differs in the way these modes are exactly categorized, but usually, they are divided into equity based and non-equity based modes (Göritz, 2011). Non- equity based modes typically consist of direct or indirect exporting, licensing, franchising and other forms of contractual agreements whereas equity based modes normally refer to joint ventures and wholly owned subsidiaries (Calof, 1993b; Jones & Young, 2009; Lu & Beamish, 2006; Welch & Welch, 1996). However, given the resource constraints of small and medium-sized enterprises, it will be demonstrated that the most feasible entry modes are importing, direct and indirect exporting as well as strategic alliances.

5.2 Import

Taking into account above definition of entry mode, even importing is a means by which SMEs enter foreign markets, or at least, factor markets to undertake value- adding operations. In fact, it is often the first contact point SMEs have with internationalization (Forsman, Hinttu & Kock, 2002; Onkelinx & Sleuwaegen, 2008). Rodriguez (2007) further supports this view by stating that up to 30% of European SMEs import compared to 18% of European SMEs that export. Through importing, SMEs are granted access to cheap production factors of high quality (Hessels & Parker, 2013) which can be used to improve their own products. Furthermore, SMEs develop beneficial relationships with foreign suppliers and obtain additional knowledge including learning about foreign cultures and ways of doing business (Korhonen, Luostarinen & Welch, 1996; Welch & Luostarinen, 1993). Taken together, these effects might encourage a small firm to initiate outward activities as well (Forsman, Hinttu & Kock, 2002). In this way, importing frequently acts as a precursor for foreign revenue-driven activities by setting up the necessary conditions or partnerships beforehand (Liang & Parkhe, 1997; Rodriguez, 2007). Due to these stimulating effects, import should be considered more intensively in studies about internationalization of SMEs (Baronchelli & Cassia, 2008). Additionally, researchers demand that government programs should loosen the focus on the outward activities of internationalization (Fliess & Busquets, 2006) and consider the inward activities, too, since international activity is “a two-sided coin” (Liang & Parkhe, 1997, p.495). Interestingly, Onkelinx & Sleuwaegen (2010) note that importing and exporting are mutually beneficial modes of internationalization. Within a relatively short time frame, SMEs that import goods from other countries also start to export to the same or third countries and vice versa (Onkelinx & Sleuwaegen, 2010).

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Details

Title
Small and Medium Sized Enterprises. Which Internationalization Strategies Do They Have?
College
University of Tubingen
Grade
1,0
Author
Year
2017
Pages
44
Catalog Number
V477602
ISBN (eBook)
9783668958852
ISBN (Book)
9783668958869
Language
English
Tags
SMEs, Internationalization
Quote paper
Yannik Schmalstieg (Author), 2017, Small and Medium Sized Enterprises. Which Internationalization Strategies Do They Have?, Munich, GRIN Verlag, https://www.grin.com/document/477602

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