Internationalization, Entrepreneurship and the Smaller Firm: Evidence from Around the World

Internationalization, Entrepreneurship and the Smaller Firm Internationalization, Entrepreneurship and the Smaller Fi...

Author: Marian V. Jones | Pavlos Dimitratos | Margaret Fletcher | Stephen Young

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Internationalization, Entrepreneurship and the Smaller Firm

Internationalization, Entrepreneurship and the Smaller Firm Evidence from Around the World Edited by

Marian V. Jones Professor of Internationalization and Entrepreneurship and Co-Director, Centre for Internationalization and Enterprise Research (CIER), Department of Management, University of Glasgow, UK

Pavlos Dimitratos Assistant Professor, Athens University of Economics and Business, Greece and Senior Research Fellow (on a visiting basis), CIER, Department of Management, University of Glasgow, UK

Margaret Fletcher Research Fellow, CIER, Department of Management, University of Glasgow, UK

Stephen Young Professor of International Business and Co-Director, CIER, Department of Management, University of Glasgow, UK

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© Marian V. Jones, Pavlos Dimitratos, Margaret Fletcher and Stephen Young 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009921529

ISBN 978 1 84720 830 9 Printed and bound by MPG Books Group, UK

Contents List of figures List of tables List of contributors Foreword 1

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7 8

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vii viii ix xi

Introduction. SME internationalization: current themes of study and modern challenges Marian V. Jones, Pavlos Dimitratos, Margaret Fletcher and Stephen Young Does entry mode matter? Reviewing current themes and perspectives Marian V. Jones and Stephen Young Exploring opportunity creation in internationalizing SMEs: evidence from Scottish firms Lucrezia Casulli Growth and learning spillovers from international markets: empirical evidence from Greek firms Emmanuella Plakoyiannaki and Ioanna Deligianni Perspectives on the interrelationships between domestic and international markets for the smaller firm Maria Karafyllia Learning processes in the development of absorptive capacity of internationalizing SMEs Margaret Fletcher Clients as a ‘hidden’ resource in rapid internationalization Sharon Loane and Jim Bell Networks and the internationalization of firms: what we believe and what we might have missed Yee Kwan Tang The development of e-commerce and the international growth of established SMEs: a capability perspective Anna Morgan-Thomas Core rigidities of micromultinationals: the Scottish experience Pavlos Dimitratos, Jeffrey E. Johnson, Kevin I.N. Ibeh and Jonathan Slow v

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37

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73 91

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123 139

vi

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13 14

Contents

The international entrepreneur: entrepreneurial orientation of local and global firms Erik S. Rasmussen, Tage K. Madsen and Per Servais Local bridging ties and new venture internationalization: exploratory studies in Bangalore and Cambridge Shameen Prashantham and Girish Balachandran International new ventures: a new organizational form? Rod B. McNaughton Conclusion. SME internationalization: where do we go from here? Marian V. Jones

References Index

150

166 185

191

204 239

Figures 2.1

How entry modes relate to the internationalization process of SMEs 2.2 Informal internationalization behaviours relating to entry modes over time 3.1 The opportunity process 3.2 Antecedents and dimensions of international opportunity 6.1 Research framework: learning processes of internationalizing SMEs 7.1 Weak ties available to the small rapidly internationalizing firm 7.2 Clients as a resource in rapid internationalization 8.1 The conceptual model of a behavioural approach to networking in the internationalization of firms 9.1 Research model 9.2 International online growth reported by firms 10.1 Core rigidities of mMNEs 14.1 Motivations, modes and processes in SME internationalization

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14 15 21 29 80 93 103 121 127 133 144 201

Tables 2.1 4.1 5.1 6.1 6.2 7.1 8.1 9.1 9A.1 11.1 11.2 12.1 14.1

Typology of internationalization modes by primary motivation 17 Growth, knowledge transfer and locus of learning of the two case study companies 50 Constructs emerging from the four research streams 70 Types of firms, sector and internationalization 83 Types and sources of new knowledge 84 Main barriers to internationalization for entrepreneurial SMEs 101 Main sources of resources in the internationalization of the cases 114 Regression model 134 Measurement model 138 Item-total statistics (N 5 281) 160 Entrepreneurial orientation and type of firm (N 5 281) 161 Local bridging ties and new venture internationalization 180 The chapters: conceptual approach, research design and focus of enquiry 194

viii

Contributors Girish Balachandran is Associate Director at Pleon, Europe’s leading communications consultancy. Jim Bell is Professor of International Business Entrepreneurship at the University of Ulster, UK. Lucrezia Casulli is a Doctoral Researcher in International Entrepreneurship at the University of Glasgow, UK. Ioanna Deligianni is a Doctoral Researcher in the field of Strategy and Entrepreneurship at the Athens University of Economics and Business, Greece. Pavlos Dimitratos is Assistant Professor at the Athens University of Economics and Business, and a Senior Research Fellow (visiting) at the Centre for Internationalization and Enterprise Research (CIER), University of Glasgow, UK. Margaret Fletcher is a Research Fellow at CIER at the University of Glasgow, UK. Kevin I.N. Ibeh is Professor of Marketing and International Business and Director of Research, Department of Marketing, University of Strathclyde, UK, and Visiting Professor of International Business at Anglia Ruskin University, Cambridge, UK. Jeffrey E. Johnson is Associate Professor of International Business and the Director of the Center for Global Business Studies at St Mary’s University in San Antonio, TX, USA. Marian V. Jones is Professor of Internationalization and Entrepreneurship at CIER, Department of Management, University of Glasgow, UK. Maria Karafyllia is a Doctoral Researcher in International Business at the University of Glasgow, UK. Sharon Loane is a Lecturer in the School of International Business at the University of Ulster, UK. Tage K. Madsen is Full Professor at the Department of Marketing and Management, University of Southern Denmark. ix

x

Contributors

Rod B. McNaughton is Eyton Chair in Entrepreneurship and Professor of Management Sciences at the University of Waterloo, Canada. Anna Morgan-Thomas is a Lecturer in International Marketing at CIER, University of Glasgow, UK. Emmanuella Plakoyiannaki is a Lecturer in Marketing at the Aristotle’s University of Thessaloniki, Greece, and an Honorary Visiting Research Fellow at CIER, University of Glasgow, UK. Shameen Prashantham is a Lecturer in International Business and Strategy at CIER, University of Glasgow, UK. Erik S. Rasmussen is Associate Professor at the Department of Marketing and Management, University of Southern Denmark. Per Servais is Associate Professor at the Department of Marketing and Management, University of Southern Denmark. Jonathan Slow is a Manager with Scottish Development International, Scotland’s Internationalization and Inward Investment Agency, and Honorary Research Fellow at CIER, University of Glasgow, UK. Yee Kwan Tang is a Research Associate at CIER, University of Glasgow, UK. Stephen Young is Professor of International Business at CIER, University of Glasgow, UK.

Foreword It is a great pleasure to introduce this volume on current research themes and modern challenges in SME (small and medium-sized enterprise) internationalization. Prepared by leading scholars from the Centre for Internationalization and Enterprise Research (CIER) at the University of Glasgow, it contains a collection of original and insightful chapters that were first presented as papers at the launch of CIER in April 2007. While the formation of CIER is a recent development, it has had a long gestation, stretching back more than two decades, as an international network of researchers on small-firm internationalization. Much of the impetus for its development can be attributed to Stephen Young, whose enthusiasm, encouragement and support have provided a catalyst for the foci of several generations of SME internationalization and international entrepreneurship researchers, including many of the present contributors. In singling him out for particular mention, I should also like to commend Marian Jones, Pavlos Dimitratos and Margaret Fletcher for all of their endeavours in putting this volume together and for their strong commitment to advancing enquiry in the field. Jim Bell Professor of International Business Entrepreneurship University of Ulster May 2008

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1.

Introduction. SME internationalization: current themes of study and modern challenges Marian V. Jones, Pavlos Dimitratos, Margaret Fletcher and Stephen Young

The subjects of the internationalization of small and medium-sized enterprises (SMEs) and international entrepreneurship are very exciting and topical ones. In particular the growth of the global knowledge economy is associated with the emergence of many intellectual-capital-intensive SMEs, whose adventurous and entrepreneurial strategies may lead to early and rapid internationalization and globalization. These phenomena are not confined to developed countries as, for example, the expansion of the Indian software industry in Bangalore and the rapid growth of private sector internationalized SMEs from China have revealed. However, international entrepreneurial behaviour is not limited to early internationalizing SMEs. Thus opportunity recognition, for example, may be associated with ongoing business operations, and hence include low-technology and traditional SMEs and cautious as well as ambitious firms. The internationalization of small firms has traditionally been capturing a major share of investigation on the international business agenda. Despite the fact that big multinationals have been increasingly engaging in the exchange of goods and services in the international business arena, significant market, resource or network opportunities appear for internationalized small firms also. It is of significant importance to their managers to find out which strategies work best in the international marketplace. In addition, policy-makers are keen to discover how they can assist their national small firms in their endeavours abroad. This edited research-based volume has its genesis in a one-day seminar organized by the Centre for Internationalization and Enterprise Research (CIER – http://www.gla.ac.uk/cier) at the University of Glasgow on 23 Apri l2007. The editors gratefully acknowledge the support of the Department of Management at the University of Glasgow, Targeting Innovation Ltd and Scottish Enterprise in undertaking this event. The seminar was designed to 1

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Internationalization, entrepreneurship and the smaller firm

showcase the work of the newly formed CIER and its close networks and was designed specifically with publication in mind. The book presents evidence from a number of countries around the world, including Europe (the UK, Denmark and Greece), China and India in a variety of sectors (hightechnology and traditional, and manufacturing and services); and from both early and rapid, and late and slow internationalizers. It also presents a number of conceptual models relating, for example, to the internationalization process, and the processes of learning and opportunity recognition respectively in the context of international trade and development. Several chapters contain critical discussion on the literature pertaining to the role of entry modes and different forms of organization such as domestic and international firms and the international new venture (INV). Authors of chapters in the volume represent ten countries and include some of the best-known academics in the field of internationalization and international entrepreneurship, as well as emerging scholars and doctoral researchers, some of whom have the potential to be leading academics of the future. The major contributions of the volume are to: ● ● ●

● ●

Highlight the state-of-the-art in research on internationalization and international entrepreneurship in SMEs. Identify gaps in research evidence and potential for future research. Apply a range of theoretical perspectives including internationalization process and international new venture, and network and social capital frameworks; and knowledge, learning and absorptive capacity perspectives. Include case studies of internationalizing SMES. Provide important insights for international entrepreneurs and policy-makers.

Overall this research-based volume is designed to be state-of-the art and forward-looking, theoretical and empirical, and provide practitioner as well as academic contributions – with a global focus.

CHAPTER COMMENTARY The book comprises 14 chapters, beginning with this Introduction, and followed by Chapter 2 by Jones and Young entitled ‘Does entry mode matter? Reviewing current themes and perspectives’. The topic of methods of entering foreign markets is an appropriate one to lead with since there are questions as to whether many SMEs engage in higher-commitment entry

Introduction

3

modes such as foreign direct investment. The authors argue that insufficient attention is paid to mode variety in the literature on small firm internationalization and that motivation for internationalization is an important but under-researched topic in mode choice. Similarly the interrelationships between informal networks and formal modes of international business activity require further investigation. Chapters 3–8 contain both empirical and conceptual papers, but have a broad common theme around the notions of opportunities, knowledge, learning, and resources and capabilities. The contributions begin with Chapter 3 by Casulli, ‘Exploring opportunity creation in internationalizing SMEs: evidence from Scottish firms’, focusing upon the role of experience and networks in the process of opportunity recognition. The author defines international opportunity as an activity that creates ‘value in organizations through a combination of innovative, proactive and risk-seeking behaviour that crosses national borders’. Major dimensions of international opportunity investigated concern: the opportunity creation process versus instant eureka experience; solo versus network opportunity creation; and active versus passive, serendipitous opportunity creation. Chapters 4, 5 and 6 are all concerned with a topic of major and exciting research significance for the future, namely, that of the interrelationships between domestic and international operations of firms, especially concerning learning and knowledge transfers. Based on two Greek in-depth cases, Chapter 4 by Plakoyiannaki and Deligianni, ‘Growth and learning spillovers from international markets: empirical evidence from Greek firms’ suggests that knowledge and skills transfers between domestic and international markets are two-way and perhaps two-stage, indicating a need for a holistic examination of firm growth. A similar conclusion is reached in the review undertaken in Chapter 5 by Karafyllia, ‘Perspectives on the interrelationships between domestic and international markets for the smaller firm’, which draws upon four strands of literature, namely: firm growth and development; economics; internationalization process; and international entrepreneurship. The theme of Chapter 6 by Fletcher, ‘Learning processes in the development of absorptive capacity of internationalizing SMEs’, is more specifically that of types of knowledge and learning processes in internationalization. This longitudinal case study research concludes that firms acquire and combine market, product or technological, and internationalization knowledge from both internal and external sources. However, of particular significance is the distinction made between two forms of internationalization knowledge: first, that which is specific to the internationalization process; and second, generic knowledge which is applicable to both domestic and international markets (thus contributing further to the topic of domestic–international market interrelationships).

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The absorptive capacity process suggests a sequence of knowledge acquisition, assimilation and exploitation leading to the generation of resources and capabilities and performance enhancement. Chapters 7 and 8 consider two dimensions of resource creation – clients as a resource and networks as a resource. In Chapter 7, ‘Clients as a “hidden” resource in rapid internationalization’, Loane and Bell highlight some interesting and largely unexplored mechanisms by which clients can act as a conduit for knowledge that will enhance the firm’s resources and capabilities, and not simply as a source of revenue generation. There is also ample evidence available concerning the significance of networks as an important resource or capability in successful internationalization. The thesis presented in Chapter 8 by Tang, ‘Networks and the internationalization of firms: what we believe and what we might have missed’, is that networks are not universally beneficial to the business development of firms. According to the author, the emphasis must, therefore, be on deliberate networking efforts, and on constant adaptation and adjustment of the firm’s networking activities as part of a dynamic process. The third group of contributions in this volume, Chapters 9–13, contains some similar themes to earlier chapters especially in respect of resource and capability development, but is distinguished by the focus upon the type of internationalizing and internationalized firm, an area where additional research is much needed. Based upon a large survey of established SMEs, Chapter 9 by Morgan-Thomas, ‘The development of e-commerce and the international growth of established SMEs: a capability perspective’, shows how complementary capabilities in internationalization and e-commerce, together with external knowledge sources and proactive efforts of the firm, affect online growth. While Morgan-Thomas focuses upon dynamic capabilities, in Chapter 10, ‘Core rigidities of micromultinationals: the Scottish experience’, Dimitratos, Johnson, Ibeh and Slow show that core competencies may be transformed into core rigidities, thereby reducing the competitive advantage of the firm and leading to ‘incumbent inertia’. The Dimitratos et al. study extends the limited literature on one particular category of internationalized SMEs, that is, micromultinationals (mMNES). The final three chapters in this section deal with international new ventures (INVs), unsurprisingly the most researched topic in SME internationalization in the recent past. In Chapter 11, ‘The international entrepreneur: entrepreneurial orientation of local and global firms’, Rasmussen, Madsen and Servais compare domestic new ventures (DNVs) and INVs. Their empirical results from Denmark show that on most measures of entrepreneurial orientation (including, for example, their focus upon innovation and bold orientation towards competitors), the INVs score significantly higher than the DNVs.

Introduction

5

The research of Prashantham and Balachandran in Chapter 12, ‘Local bridging ties and new venture internationalization: exploratory studies in Bangalore and Cambridge’, considers the influence of the environmental context for new venture internationalization. Specifically, the chapter compares the spatially dispersed Bangalore (India) software cluster with the spatially concentrated Cambridge electronics cluster in terms of their relative effects upon network relationships and the internationalization of new ventures. According to the authors, a clear prescription for new ventures is to consider the local milieu as an active source of network relationships to facilitate internationalization. Traditional internationalization process theory, international new venture theory and network models underpin much of the research in the SME internationalization field as a whole. While these approaches are evident in a number of the chapters in this volume, it is interesting that the resource- and knowledge-based views of the firm and learning models are also in evidence, reflecting a holistic approach to firm operations and the requirement for management capabilities and competencies for success, whether in domestic or international markets. In a stimulating contribution in Chapter 13, however, ‘International new ventures: a new organizational form?’, McNaughton considers INVs as part of a broader phenomenon addressed by organizational science, that is, the emergence of new organizational forms. Topics included in organizational form research include decision rights, organization members, channels for information and control, governance and agency. As the author notes, the extant literature does not typically characterize INVs in this way. Potentially a new research stream may be opened up based on these ideas. The final chapter in the volume is by Marian Jones (Chapter 14, ‘Conclusion. SME internationalization: where do we go from here?’), who deftly synthesizes the preceding chapters (Table 14.1) and presents an interesting model (Figure 14.1) linking a range of issues which have been developed in this volume, namely, motivations, modes, organizational processes (networking behaviour, entry modes and absorptive capacity), new value creation (represented by new modes, new products/services and new country markets) and performance outcomes. An important proviso which is highlighted (and which should signal a cautionary note for all internationalization researchers) is that there are significant contingencies moderating the relationships proposed in the model, relating inter alia to country, industry and firm-level effects. The chapter ends with a series of research questions on ‘Where do we go from here?’ a fitting end to a volume which we hope will stimulate new and existing researchers in this exciting field of SME internationalization.

2.

Does entry mode matter? Reviewing current themes and perspectives Marian V. Jones and Stephen Young

SUMMARY The mode of doing business across national borders was considered a pioneering topic in the late 1970s when concern was with the mode as a means of foreign market entry. Today, barriers to international trade and investment are significantly eroded and internationalization eased by improvements in technology, infrastructure and deregulation, and it is pertinent to ask: ‘Does entry mode matter?’ The question is addressed through a discussion of literature explicitly focused on entry modes, and that examining internationalization and international entrepreneurship more widely. Concluding that insufficient attention is paid to mode variety and motivations in both bodies of research, a series of models positioning modes within the internationalization process are advanced. The models demonstrate the confluence of influences from dynamic processes, and decision criteria on entry mode selection, motivations and internationalization path. While the role of the entry mode in current internationalization processes has evolved with changes in the world economy, it remains an important topic for research. Specifically, the authors call for research on the influence of technological change on entry modes; and deeper investigation of specific modes such as exporting, and of the role of social capital in the formation of formal modes of international business activity.

INTRODUCTION The mode of foreign market entry was considered a pioneering topic for research in the late 1970s, but much of the literature related to multinational enterprises (MNEs), and the question is whether the subject is still worthy of research today. The last decade of the twentieth century was one in which small firms for the first time were seen to internationalize early, quickly and using a variety of modes of business activity; a trend that was 6

Does entry mode matter?

7

previously unprecedented. Given that internationalization is now feasible and possible for so many firms, and entry barriers much eroded, the question we ask in this chapter is: ‘Does entry mode matter?’ To answer this question we discuss the definitional nature of entry modes and provide a typology; explore two distinct bodies of literature, the entry mode (EM) and international entrepreneurship (IE) literatures; determine extant knowledge on entry mode motivations; and through a series of conceptual models discuss potential research questions for future investigation.

WHAT ARE INTERNATIONAL ENTRY MODES? International market entry modes refer to the methods of business organization employed by companies to enter international markets for the purpose of undertaking value-creating activities. They represent the formal mechanisms and relationships employed in cross-border activities. Since these refer to both initial entry into a new foreign market and also subsequent development in that market, a more accurate term is ‘international market entry and development’ (Young et al., 1989). The notion of a ‘foreign market’ refers not only to markets for finished or intermediate good and services, but also to factor markets of various types. ‘Mode’ refers to electronic as well as other forms of transactions (Fletcher et al., 2004). Authors have offered different typologies of market entry modes: for example, Anderson and Gatignon (1986) listed 17 mode structures ranging from small shareholder organizations to wholly owned subsidiaries (WOS); whereas Erramilli and Rao (1990) identified 11 mode types ranging from licensing and franchising to WOS and greenfield ventures. By contrast Hennart (1988) classifies modes into two categories, contracts and equity, the distinction being made on the basis of the methods by which payments are made to input providers (Brouthers and Hennart, 2007). The approach pursued here follows that of Young et al. (1989) and others (Anderson and Gatignon, 1986; Erramilli and Rao, 1990; Hill et al., 1990) in which modes represent a spectrum of involvement from exporting through to wholly owned manufacturing subsidiaries. This categorization assumes a continuum of control, commitment and risk, but also differences in the nature of resources and rights transferred. For analytical purposes, however, we have collapsed the range of modes into three categories: exporting, collaboration and investment, as discussed later in the chapter. The relationship between modes of entry and international strategic alliances is an important issue of note. By one definition (Contractor and Lorange, 1988; Inkpen, 2001), strategic alliances include all activities other than market-based transactions and mergers. A continuum of

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ten organizational forms is identified, ranging from industry consortium and technical training through to licensing, franchising and non-equity cooperative arrangements and to equity joint ventures (Inkpen, 2001: 404). These are all modes of entry, and aside from equity joint ventures, define the boundaries of collaborative entry modes. Because of the higher control, commitment and risk, equity joint ventures are a form of investment mode with greater similarities to wholly owned subsidiaries, whether formed as greenfield ventures or mergers and acquisitions. The link between strategic alliances and collaborative entry modes is strengthened when consideration is given to the motivations for entering foreign markets. Historically the notion of entry modes has been associated with market-seeking activities, as is most obviously apparent with export modes, but also with, for example, investment modes when a manufacturing facility is established abroad to overcome barriers to exports. However, globalization and its constituents such as e-connectivity, international labour and capital mobility, alongside the liberalization of trade and investment markets, have led to much greater flexibility in international entry modes. With collaborative modes and strategic alliances, the motivations and objectives may thus be very wide-ranging, including achieving greater scale economies through resource pooling in supply sourcing, research and development (R&D), manufacturing, and marketing and distribution; risk reduction; access to knowledge and capabilities where there are asymmetries between firms; and legitimacy, where the local partner provides reputation benefits for a newcomer to the market (Inkpen, 2001). Aside from the above categorization of modes, other important distinctions may be made. First, the term ‘entry modes’ implies outward internationalization activity, but as Luostarinen (1980) revealed, modes may refer to both inward and outward operations (see also Jones, 1999). For the purposes of this chapter emphasis is placed upon outward international business modes, accepting that this represents a major gap: as, for example, in industries like biotechnology where in- and out-licensing would commonly be undertaken at the same time. Second, a distinction may be drawn between direct and intermediated modes. This has always been apparent in respect of exporting, with the differentiation between direct and indirect modalities. Direct exporting entails the use of agents and distributors in overseas markets as well as direct selling and the establishment of local sales offices; indirect modes refer to the use of export intermediaries in the home market such as export houses, buying houses and piggybacking (Young et al., 1989; Peng and Illinitch, 1998; Peng and York, 2001). Currently, however, greater attention is being paid to the role of the MNE as a key intermediator for small and medium-sized enterprise (SME) internationalization; and thereby introducing multinational theory concepts


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into explanations for SME (and especially international new venture – INV) mode choice and internationalization (Acs et al., 2006).

EXTANT KNOWLEDGE ON ENTRY MODES It is now over 30 years since Wind and Perlmutter (1977) identified the topic of cross-border entry modes as a frontier issue in international marketing. More recently, Kotabe (2001) highlighted market entry decisions as one of the major topics for international marketing study during the 1990s, distinguishing four main areas of research interest: conceptualization, entry mode choice in service versus manufacturing firms, managerial ‘how-to’, and tools for market entry. However, a relatively small number of studies were cited in the latter work, and it was not until 2007 that a more complete literature review was undertaken on international entry mode research (Brouthers and Hennart, 2007). These authors reviewed about 100 empirical studies published during the preceding 15-year period, although they limited these to articles associated with four theoretical perspectives – transaction cost analysis (TCA), resource-based view (RBV), institutional theory, and Dunning’s eclectic framework – and therefore, to MNEs. Thus internationalization process theory (IPT) (Johanson and Vahlne, 1977) and international new venture (INV) theory (Oviatt and McDougall, 1994) were excluded, and hence much of the research on SMEs, international marketing and the process of internationalization. Notwithstanding this limitation, the conclusions of the Brouthers and Hennart (2007) review are worth summarizing, as follows: 1.

2.

3.

In respect of theory, TCA was viewed as an appropriate analytical tool, although development of concepts and measures was regarded as necessary. The eclectic paradigm was considered as a potentially useful framework for combining insights from the other three popular theories evaluated. In relation to multinational strategies, only a few studies considered how different entry motives may affect decisions. For example, Erramilli and Rao (1990) found that client-following firms used significantly different entry modes compared with market-seeking firms; and Gil et al. (2006), by comparison, found that market-seeking and resource-seeking motives significantly influenced entry mode choice. Existing theories explained entry mode choice whatever the origin or destination of the investment. However, industry effects (manufacturing versus services) may moderate the relationship between transaction

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4.

5.


costs and mode choice. Competitors, both domestic and foreign, also appear to influence entry decisions. In respect of firm boundaries and performance (mainly joint ventures versus wholly owned subsidiaries and greenfield versus acquisitions), there have been relatively few studies and results are somewhat ambiguous because of failures to account for endogeneity. Brouthers and Hennart (2007: 17) comment that: ‘From its inception, international entry mode research has tended to concentrate on large multinational firms’; and cite Brouthers and Nakos (2004) as an illustration of the value of TCA in explaining SME mode choice.

Finally, in respect of future research, Brouthers and Hennart (2007) call for: the deepening of existing theories; the application of new and different theories (particularly strategic decision-making research concerning, for example, the impact of managers, management teams and other stakeholders on the firm boundary decision); and new and different methodologies (including longitudinal research rather than the much more common use of cross-sectional data).

THE INTERNATIONAL ENTREPRENEURSHIP (IE) LITERATURE Since the late 1980s a growing body of research has emerged under the generally accepted label of ‘international entrepreneurship’. This body of literature, while not restricted to SME studies, has tended to focus on the early and rapid internationalization of the firm which is viewed as innovative, proactive and risk-seeking, and hence entrepreneurial in nature (McDougall and Oviatt, 2000). Entry modes are key in IE literature in defining the characteristics and international scope of the ‘born global’ firm and international new venture (Oviatt and McDougall, 1994), and in demarcation of the patterns and processes of a firm’s international expansion as an entrepreneurial behaviour in time (Jones and Coviello, 2005). Examination of the literature on international entrepreneurship indicates two issues of some importance. Firstly, there seems to be less overlap between the EM literature and the IE literature than could be expected, given the importance of the entry mode in the internationalization process. Secondly, these two bodies of research are relatively distinct in their theoretical approach and focus, as indicated by commonly used units of analysis. To illustrate, Brouthers and Hennart’s (2007) literature search criteria identify journal articles that distinguish between entry mode choices based on strategic alternatives, thus emphasizing decision criteria


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and specific entry mode issues. The favoured unit of analysis in the entry mode literature is the entry mode itself. Our search of the IE literature distinguished articles that directly and explicitly integrate theory and concepts from international business and entrepreneurship as the main antecedent schools of thought (following the search criteria in Coviello and Jones, 2004). Articles on SME internationalization but without concepts from entrepreneurship were excluded, noting that Brouthers and Hennart (2007) would have picked up internationalization articles with an entry mode focus. We identified 140 articles published between 1989 and early 2007. Of these 140 articles, 59 make some mention of entry modes, with 26 focusing on exporting only, while 33 discuss entry modes more widely. Amongst the 33 IE papers that discuss entry modes, the favoured unit of analysis is almost universally the firm. We found that the IE literature tends to treat the entry mode as a component part of the internationalization process and/or decision criteria in various ways: 1.

2.

3.

Entry modes are used by researchers as an identification variable, identifying the sample and/or identifying that internationalization has taken place. Thus most of the papers reviewed that limited their focus to exporting as the mode of entry did so mainly to distinguish internationalizing firms from non-internationalizing firms, an approach common amongst studies of the so-called ‘born global phenomenon’. Entry modes are also indicative of the degree of internationalization of the firm. For example, Ruzzier et al. (2007) examine the effect of human capital on the diversity of modes formed, and Hashai and Almor (2004) retrospectively associate modes achieved as indicative of gradual incremental growth. Following the approach typical of ‘entry mode research’, several authors have looked at the relationship between entry mode choice and performance, amongst new ventures rather than established firms, thereby introducing perspectives from entrepreneurship research such as the mindset, competence and orientation of owner-managers (Burgel and Murray, 2000; Shrader, 2001; Lu and Beamish, 2001, 2006; Ojala and Tyrväinen, 2006). The establishment of entry modes either simultaneously or in succession provides tangible evidence of the timing, pace and scope of internationalization (Jones, 1999, 2001; Burgel and Murray, 2000; Shrader et al., 2000; Zahra et al., 2000; Crick and Jones, 2000; Yli-Renko et al., 2002; Dimitratos et al., 2003; Bell et al., 2004; Chetty and CampbellHunt, 2004; Moen et al., 2004). Identification of international patterns of activity from establishment of different types of entry modes, at points in time, in different countries (Jones and Coviello, 2005) is one

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4.

5.

6.


of the most exciting developments of entry mode research and offers significant potential for the development of more meaningful measures of internationalization activity amongst SMEs than do export sales, or levels of foreign direct investment (FDI) alone. Entry modes are viewed as a component part of more extensive strategies or strategic processes such as market entry, innovation and internationalization (Zahra et al., 2000; Kuemmerle, 2002; Andersson et al., 2004; Loane et al., 2004; Arenius et al., 2005; Freeman et al., 2006; Garvey and Brennan, 2006; Spence and Crick, 2006; Chetty and Agndal, 2007; McGaughey, 2007). Unfortunately some studies do little more than observe the entry modes that are reported by respondents and add little to extant knowledge on strategic choices. Important developments however are those by Zahra et al. (2000) who determined that entry mode choice is influential on the development of a firm’s technological learning, and by Kuemmerle (2002) in which entry modes are viewed as part of a knowledge augmentation or exploitation strategy, so extending the scope of SME internationalization beyond market-seeking motivations to accommodate active solicitation for resources. Entry modes lend characteristics to firms that distinguish them from other categories of firm, for example exporters from non-exporters (Shaw and Darroch, 2004; Gleason et al., 2006), and have helped identify new types of international firms such as the ‘born-global’ (Chetty and Campbell Hunt, 2004) and micromultinationals (Dimitratos et al., 2003; Ibeh et al., 2004). Importantly, entry modes are identified as emergent from other processes, typically network processes and the formation or exploitation of social capital. This indicates that there are international activities and processes that occur before the establishment of the first entry mode, and between entry modes, and which may trigger and facilitate changes in mode at a later stage (Sharma and Blomsterno, 2003; Moen et al., 2004; Crick and Spence, 2005; Chetty and Agndal, 2007; Gleason and Wiggenhorn, 2007). Entry modes themselves, as forms of business activity, involve various social processes and the formation of routines and competencies that result from the firm being involved internationally (Sapienza et al., 2006).

The main difference between the ‘entry mode’ and the ‘international entrepreneurship’ literatures is that the former focuses on the entry mode decision as central to the research question, whereas in the latter the entry mode is less likely to be the central focus and, rather, is a descriptive, moderating or explanatory variable in relation to a wider set of decisions


13

or processes of behaviour relating to internationalization. The bodies of literature also differ with regard to their theoretical ontologies. As discussed earlier, Brouthers and Hennart (2007) identified the predominant theoretical perspectives in the entry mode literature as the TCA approach, the RBV, institutional theory and the eclectic framework. Of the 33 IE papers dealing with entry modes, 25 explicitly identified the theoretical perspectives underpinning their research. In most cases authors drew on or discussed the relevance of more than one theory and those mentioned include: the INV approach (14 papers); learning and process approaches (ten papers); network and social capital approaches, and stage approaches (seven papers each); the RBV and TCA approaches (three papers each); and social capital theory, albeit not explicitly related to networks (one paper). Most of the theory-based empirical papers in the IE literature draw on more than one theory for explanation, while comparison of the adequacy or inadequacy of individual theories is common. Finally, while the EM literature tends to treat entry modes as discrete, mutually exclusive strategic alternatives, in the IE literature there is a general acceptance that modes may be mutually supportive, established concurrently or in succession, and may be complex arrangements with several partners and elements of reciprocity. The entry mode, as a formal part of the internationalization process, and indicative of the competitive stance of SMEs in foreign and global markets, would seem fundamental to a fuller understanding of international entrepreneurship and it is somewhat surprising that of the 140 IE studies reviewed, around 80 failed to accommodate any discussion on the role of the entry mode or mode of operation as a component of international venturing.

HOW DO ENTRY MODES RELATE TO THE PROCESS OF INTERNATIONALIZATION? The establishment of an entry mode is an important part of the process of internationalization. It signifies the formal organizational arrangements of business practices that; (1) cross borders; (2) transfer aspects of the business into the host country; and (3) indicate the form of return in terms of revenue and investment. The entry mode therefore has legal, accounting, organizational and strategic implications. It tends to be neglected or underplayed in process and network studies where concern is with the development of relationships rather than the governance of business activity. Recent conceptual advances in IE research suggest in various ways the means by which modes contribute to the understanding of internationalization as a

14

Internationalization, entrepreneurship and the smaller firm Organizational learning

Environmental change: • internal • external

Process

• Mode choice • Country --- change

Decision/ action • Mode choice • Country --- change

Outcome • Internationalization event --- change

Resource commitment

Source:

A Simple Model of The Internationalization Process (Jones and Coviello, 2005).

Figure 2.1

How entry modes relate to the internationalization process of SMEs

temporal process (Bell et al., 2003; Jones and Coviello, 2005). Building on Brazeal and Herbert’s (1999) model of the entrepreneurial process, Jones and Coviello (2005) propose a simple, descriptive model of internationalization as process-linked events consisting of organizational learning, leading to mode and country choice in a dynamic process of resource commitment and change (Figure 2.1). The mode is positioned as a formal event linking post and antecedent processes. The model is cognisant of Johanson and Vahlne’s (1990) state and change notion of internationalization, and internationalization as entrepreneurial behaviour marked by innovations in the form of new entries, to new markets (Andersen, 1993; Knight and Cavusgil, 2004). Essentially Figure 2.1 describes internationalization as a dynamic process triggered by endogenous and exogenous change leading to the establishment of an entry mode (innovation) in a specific country. This in turn triggers a process of activity through which the original ‘internationalization state’ of the firm is altered, leading to more, or less, resource commitment. Further change may trigger the establishment of a new (or the same) mode in a new (or the same) country. Thus internationalization is depicted as a dynamic and entrepreneurial process of behaviour wherein each entry mode established in each country represents a radical or incremental (path-dependent) innovation. Following Schumpeter (1934b) each adjustment of mode and country potentially creates new value for the firm. The usefulness of this model is that in a non-prescriptive way it describes internationalization as a ‘temporal process’ in which the formal establishment of an entry mode is an event occurring at a specific point in time because certain ‘processes’ have led to and enabled its formation. Similarly, the formation of an entry mode in a country triggers new processes that in turn may lead to a future event or decision. Viewing internationalization in


15

Organizational learning

Motivations • Markets • Knowledge • Resources • Efficiency

Decision/action • Mode • Country

Decision/action • Mode • Country

Time

Networking Trigger for change (motivations) Source: Adapted from Jones and Coviello (2005).

Figure 2.2

Informal internationalization behaviours relating to entry modes over time

this way enables both event (entry modes and market entries) and temporal process (internationalization) perspectives to be considered (Van de Ven and Engleman, 2004). It also illustrates the importance and interdependence of variance research designs (typical in entry mode research) with event and process designs (typical in IE research) in understanding the relationship between entry mode decisions and outcomes, and processes such as networking, knowledge development and the establishment of organizational routines. So far, we have established that the entry mode is important in internationalization but is treated differently in the EM and IE literatures, and illustrated how the entry mode is positioned within a temporal process of internationalization. If entry mode decisions are emergent from or trigger processes of activity or behaviour, the motivations for their formation may differ from those conventionally associated with market entry decisions. Figure 2.2 attempts to develop the previous model a little further. Internationalization is again described as a process, occurring over time, as a series of loops in which motivations trigger processes such as networking and learning, interspersed with entry activities or decisions that trigger new processes of learning and networking, continuing on into the future (dotted lines). The model resembles an establishment chain approach but differs in that it is not prescriptive of the order in which events and processes occur, nor in the types of event or process or their duration. The figure does

16


illustrate that initial motivations may alter in time, and may be driven by the processes and relationships formed by the firm, and by internal or external triggers, along with or in place of the factors indicated as influencing choice of mode in strictly rational approaches such as TCA-type theorizing.

MOTIVATIONS FOR MODE SELECTION The major premises of this chapter are, first, that insufficient attention has been paid to mode variety in SME, IE and EM research, and in particular to both formal and informal collaboration modes and their relationships with networks. Second, insufficient attention has been paid to the links between the motivations and objectives of internationalization and mode of entry, with most emphasis still upon traditional market-seeking activities associated with sales and marketing of finished and intermediate goods and services across borders. Very little is known about SME motivations to establish modes of activity associated with upstream value chain activities, and what motivators lead to the establishment of formal modes in relationships and networks. As mentioned earlier in the chapter, collaboration modes are identified as all formal arrangements that lie between market-based transactions and foreign direct investment (whether greenfield or merger, wholly owned subsidiary – WOS – or equity joint venture), as listed following Inkpen (2001: 404): ● ● ● ● ● ● ● ● ●

Industry consortium. Technical training. Supplier/buyback arrangement. Production/assembly arrangement. Patent licensing. Know-how licensing. Franchising. Management/marketing/service agreement. Non-equity cooperative arrangements (in exploration, research partnership, development, co-production).

Many variants and interrelationships among these collaborative modes can exist, depending upon the specific objectives of the international collaboration. To the best knowledge of the authors, there has been no research attempting to understand the significance of these collaborations in SME growth. Yet the choice process may have important implications for the success of firm strategy internationally.


Table 2.1

Typology of internationalization modes by primary motivation

Primary motivation Mode

Resourceseeking

Knowledgeseeking

Exporting

Marketseeking ● ●

Collaboration

● ● ●

Exploration R&D Development

● ● ●

Exploration R&D Development

● ● ● ●

Investment (equity modes)

● ●

Source:

17

Joint ventures Wholly owned subsidiaries

● ●

Joint ventures Wholly owned subsidiaries

● ●

Direct exports Indirect exports Management Marketing Service Patent and know-how licensing and franchising Joint ventures Wholly owned subsidiaries

Efficiency-seeking

●

●

● ●

Production/ assembly agreement Supplier buy-back agreement Joint ventures Wholly owned subsidiaries

Drawing on Inkpen (2001).

Existing literature also largely fails to distinguish satisfactorily between networks and collaborations. The latter are defined here as formal contractual arrangements, whereas network activities are deemed to be informal and non-contractual. In earlier work on networking for international development, Coviello and Munro (1995: 58) refer to ‘foreign market selection and entry initiatives’ (emphasis added) rather than entry modes, reflecting the informal associations which may emanate from contacts of various sorts. But clearly an early formalization of such relationships is important if even minor disputes about terms are not to lead to damaging effects on international business activities. While not addressing the issue specifically, the recent work of Coviello (2006: 726) indicates that international new venture networks are ‘somewhat volatile’ and ‘often end in the short and/ or medium term’. Clearly there is work to be done on the ‘formalization of networks’ in an entry mode context, meaning the establishment of formal collaborative arrangements. The second premise concerns the limited study of relationships between the motivations and objectives of international market entry, and choice of mode of entry. A useful categorization of motives distinguishes between market-seeking, resource-seeking, knowledge-seeking and efficiencyseeking motivations (see also Dunning and Lundan, 2008). Table 2.1 links

18


broad mode categories (exporting, collaboration and investment modes) with this typology of motivations. Market-seeking motivations are well known as discussed above, and present the widest range of opportunities for mode choice. By comparison, resource-seeking activity (referring to natural resources, principally raw materials, minerals and oil and gas, but also tourism) is more constrained because of locational immobility. Nevertheless, there are a range of collaborative mode possibilities such as industry consortia designed to defer exploration, development and production costs for very large-scale projects. Knowledge-seeking activity refers to foreign operations which are specifically aimed at sourcing of knowledge through research and development ventures of various sorts. While the forms of modes are in broad terms similar to resource-seeking operations, the range of potential partners can be wide-ranging, including arrangements among SMEs and between SMEs and multinationals, universities and research institutions, and various public bodies. Efficiencyseeking motivations focus primarily upon cost reduction for goods and services through offshoring modes of various types, ranging from outsourcing from third party vendors to various collaborations with suppliers and equity arrangements. A final observation is that while in Table 2.1 we relate motivations and goals for market entry with the entry modes that best satisfy these goals, it is worth noting that much of the literature on country and mode choice stems from the established MNE literature. In that literature country choice and mode decision tend to be coupled in a rational and strategic decision-making process designed to optimize or balance market imperfections with firm-specific capabilities.

CONCLUSIONS The conclusion of this chapter is that entry mode does indeed matter. From the literature reviews and conceptual discussion above, it is very clear that there are big gaps in our understanding of the topic of international market entry and development. In part these derive from the rapid and farreaching changes in the external environment associated with the global knowledge economy and its institutions, and include: declining national barriers to trade and investment; the growth of global sourcing and dispersion of value chain activities; the faster pace of innovation and knowledgeintensity of production; and the expansion of networks, alliances and connections as sources of knowledge and competitive advantage. Deriving directly or indirectly from features of the global knowledge economy, topics on which research is required include the following:


1.

2.

3.

4.

5.

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The influence of technological change on entry mode. For example, with the growth of human capital as compared with physical capital in business operations and the dominance of service industries, highcommitment modes such as wholly owned manufacturing facilities are much less significant, at least for internationalization from developed economies. On the other hand, offshoring of production (and services) is significant for SMEs as well as for large MNEs. Motivations for internationalization and entry mode choice. Although most entry mode research has historically emphasized market-seeking motivations, there are numerous other motivations and objectives in the present era which need to be investigated (Jones, 1999, 2007), as this chapter has revealed. For example companies may internationalize a range of value chain activities in a direct search for knowledge and competences. In-depth investigation of specific modes. A case in point is that of exporting. Thus a number of studies of high-technology firms found little evidence of entry modes other than exporting in their samples (Lindqvist, 1997; Bell, 1995); while Brouthers and Nakos (2004) propose that SMEs rely on exporting modes because of behavioural uncertainties and knowledge deficiencies. The choice of direct versus intermediated (especially involving the MNE) modes of exporting is an emerging area of significance. In regard to licensing, we know little about the impact of strengthened intellectual property protection through the World Trade Organization (WTO) TRIMs Agreement. Has licensing become more important, since companies should have greater protection against counterfeiting? Associations and choices between networks and social capital and the establishment of formal entry modes. Zahra et al. (2000) found high-control modes of internationalization associated with faster technological learning, since they were conducive to the creation of firm-internal social capital (Yli-Renko et al., 2002); but an interesting question is whether deepening commitment may be achieved through network relationships rather than by extending formal modes. Entry mode research in the current era is thus both important, timely and requires depth and subtlety, within a context in which many SMEs have increased prospects for growth (Autio et al., 2000) but decreased prospects for survival (Sapienza et al., 2006). The subject is highly relevant for scholarship (both conceptual and empirical) and for management practice.

3.

Exploring opportunity creation in internationalizing SMEs: evidence from Scottish firms Lucrezia Casulli

SUMMARY The chapter investigates empirically how opportunities for internationalization arise in internationalizing small and medium-sized enterprises (SMEs). Specifically, it looks at the role of experience and networks as antecedents to the process of opportunity recognition of internationalizing Scottish SMEs. The aim is to contribute to the international entrepreneurship literature by exploring the relatively under-researched issue of international opportunity creation (Zahra and George, 2002b). To achieve this aim, the study draws on both entrepreneurship and internationalization literatures to review briefly relevant work on experience and networks, linking those to the entrepreneurship literature on the opportunity recognition process. A theoretical framework is developed which identifies experience- and network-based antecedents and dimensions of the international opportunity concept. The empirical component of the study comprises semi-structured interviews with managing directors (MDs) of nine internationalizing Scottish SMEs. Firms participating in the study had previously completed a programme tailored to internationalizing SMEs with growth potential, namely, the Global Companies Development Programme (GCDP), funded and run by Scottish Enterprise. Findings show that the international opportunity process is multistage, including both network-based and ‘solo’ instances of opportunity creation. Antecedents to international opportunity are not separated in time from the process of international opportunity creation; on the contrary, they are an integral part of the process.

INTRODUCTION How do opportunities for internationalization arise in small and mediumsized enterprises? And what are the elements influencing the creation of such 20

Opportunity creation in internationalizing SMEs

Opportunity identification

Source:

21

Opportunity exploitation

Adapted from Shane (2000).

Figure 3.1

The opportunity process

opportunities? Those are the questions that this chapter aims to address through a review of the literature and exploratory empirical research on internationalizing Scottish SMEs. The issue surrounding the way in which opportunities arise is central to international entrepreneurship (IE) research (Zahra and George, 2002b), yet opportunity is relatively underresearched by IE researchers to date. Therefore, investigating how opportunities for internationalization arise in SMEs will contribute to the further development of the theory of entrepreneurial internationalization, as well as be attractive to empirical researchers looking for a new, opportunity-rich research stream to explore. An enhanced understanding of opportunity arising in internationalizing firms also will provide constructive advice to practitioners and governmental agencies aiming to develop their firms and national economies. In fact, once the mechanics of opportunity arising are identified, it will be possible to channel resources towards developing firm- and individual-level characteristics that have the potential to enhance opportunity identification. The assumption is that opportunity identification is the antecedent to opportunity exploitation, which in turn leads to business growth (see Figure 3.1). However, before entering a discussion about factors impacting on international opportunity and the opportunity creation process, the author aims to answer a more fundamental question: What exactly is an international opportunity, and how can it be defined? To answer this question, insights are drawn from both entrepreneurship and internationalization literature and discussed as follows.

WHAT IS AN INTERNATIONAL OPPORTUNITY? Opportunity is central to entrepreneurship (Shane and Venkataraman, 2000), and a number of conceptualizations and definitions have been advanced within the field over the years. The Schumpeterian theory of entrepreneurship emphasizes innovation

22


and progress (Schumpeter, 1934a). Thus from a Schumpeterian perspective, innovative ideas represent opportunities for value creation. Innovation, and consequently opportunities, may come in a variety of forms, including new methods of production, exploitation of new markets, exploitations of new sources of materials and new organizational methods (Schumpeter, 1934a). Alternatively, Kirzner (1973) focuses on information asymmetry, innovation and market gaps in his definition of opportunities as ‘the ability to see where new products have become unsuspectedly valuable to consumers and where new methods of production have, unknown to others, become feasible’ (Kirzner, 1973: 81). Also, Kirzner clearly distinguishes between entrepreneurial opportunities and other types of opportunities, in that entrepreneurial opportunities are characterized by the discovery of new means–ends relationships (Kirzner, 1997). Thus, Kirzner’s view of entrepreneurial opportunity introduces a further distinction between radical and incremental innovation. Casson (1982) considered entrepreneurial opportunities to be those situations in which new goods, services, raw materials and organizing methods may be introduced and sold at greater than their cost of production. Thus, his conceptualization of opportunity revolves around value creation and innovation. From the brief overview presented above, it emerges that the idea of innovation is the common theme throughout the most widely recognized theories of entrepreneurial opportunity. Turning to internationalization theory, to the best of the author’s knowledge, internationalization theory does not offer a single, widely recognized definition of international opportunity, but does emphasize value creation. International new venture theory, which considers internationalization to be a process of entrepreneurial behaviour, offers what has become a widely accepted definition of International Entrepreneurship (McDougall and Oviatt, 2000): ‘International entrepreneurship is a combination of innovative, proactive, and risk seeking behaviour that crosses national borders and is intended to create value in organizations.’ As noted by Jones and Coviello (2005), ‘innovation’ appears to be central to international entrepreneurship theory. Equally, the idea of ‘value creation’ is in line with that of entrepreneurship research. However, differently from entrepreneurship but core to internationalization theory, the aforementioned definition highlights the role of non-domestic, crossnational value creation. Thus, drawing on McDougall and Oviatt’s (2000) definition of International Entrepreneurship, for the purpose of the current research, international opportunity is defined as an opportunity to create value in organizations through a combination of innovative, proactive and riskseeking behaviour that crosses national borders. This concurs with but


23

differs from Oviatt and McDougall’s (2005: 540) definition of international entrepreneurship in which the opportunity process itself extends across borders: ‘International entrepreneurship is the discovery, enactment, evaluation, and exploitation of opportunities – across national borders – to create future goods and services.’ Common between the two is that the opportunities may emerge from certain entrepreneurial processes that extend across borders, but the effect of the opportunities is to create value in the organization, and the value created may be local or international. However they differ in that in the latter it is the opportunity recognition process that extends across borders, whereas in the former a broader range of crossborder behaviours is indicated as relevant to value-creating opportunities.

ANTECEDENTS TO INTERNATIONAL OPPORTUNITY The literature on the antecedents to the opportunity process is fragmented, especially with regard to international opportunity and opportunities leading to international growth. However, entrepreneurial opportunity recognition has been linked to a variety of factors; for example Ardichvili and Cardozo (2000) found three main antecedents to opportunity recognition: (1) entrepreneurial awareness; (2) access to social networks; and (3) prior knowledge of markets. The concept of entrepreneurial awareness, better known as ‘entrepreneurial alertness’ (Kirzner, 1973; Busenitz, 1996), has been criticized from both a conceptual and an operational point of view (see, for example, Gaglio and Katz, 2001). On the other hand, there is significant consensus on the impact that both social ties and networks (Arenius and DeClercq, 2004) and experiential knowledge (Shane, 2000) have on entrepreneurial opportunity recognition. There follows an exploration of relevant literature on social ties and networks and on entrepreneurs’ knowledge and experience, and these two antecedents are worth discussing further. Social Ties and Networks Social ties and networks are widely recognized both in the entrepreneurship and the internationalization literatures. Within the former, the chapter looks at the quality of networks in relation to the resources they can provide, focusing on information variety for the purpose of opportunity recognition. From the latter we borrow the idea of networks as sources of foreign market information for the purpose of entry mode decisions, as well as looking at studies on international network formation. Within the entrepreneurship literature, networks and social capital are

24


viewed through the ‘resources’ lens, required at both the opportunity creation and the opportunity exploitation stages (Timmons and Spinelli, 2004). Hills et al. (1997) highlight the importance of entrepreneurs’ networks in the opportunity recognition process. It is asserted that, particularly during the early stages of new venture creation, networks consist mainly of strong ties, such as families and close friends (Greve and Salaff, 2003). In some countries, entrepreneurs will keep mainly investing in small, close-tie networks (for example, Greece); whilst entrepreneurs in countries such as the United States tend to nourish larger, loose-tie networks (Dodd and Patra, 2002). According to Burt’s (1992) ‘structural holes’ theory larger, loose-tie networks provide entrepreneurs with more variety of information and greater novelty than small, close-tie networks, thus paving the way for opportunity creation (Hills et al., 1997). Birley (1985) concluded that closetie networks may limit the sources of information and support available to the entrepreneur. The high relevance of networks is also highlighted by the finding that wider social ties – consisting of customers, employees, suppliers, personal friends and professional acquaintances – are considered the most important sources of new ideas for the entrepreneur (Hills, 1995). From the internationalization literature it emerges that firms gather information on international opportunities through their social ties rather than through systematic market research (Ellis, 2000). They favour informal sources of market information – represented by social networks – to official sources (Souchon and Diamantopoulos, 1999). Firm social networks provide unique information benefits on foreign markets (Ellis, 2000) which impact on foreign market choice as well as mode of foreign market entry (Coviello and Munro, 1997). Yet, how do social networks form in the first place? How do firms build their social network? According to Welch and Welch (1996) network ties are an outcome of internationalization, resulting from deliberate efforts to build strategic connections in foreign markets. The resulting intended network leads to further social connections as the internationalization process goes on. Ultimately the firm network will include both intended ties (that is, those strategically pursued) as well as unintended ones (that is, those incidentally acquired through the international growth process) (Welch and Welch, 1996). An alternative view on the network building process states that the firm’s inward activities, such as purchasing and procurement, result in inward connections. In turn those inward connections may provide opportunities for building relationships with foreign players, or provide information on foreign markets, leading to the firm’s establishment of outward connections (Karlsen et al., 2003). Mirroring the networks literature from entrepreneurship, the inter-


25

nationalization literature reiterates that relationship quality in networks negatively affects information acquisition (Yli-Renko et al., 2001). That is, the stronger the ties among firms in the network, the more insular they become, and the less they are exposed to new sources of information (Uzzi, 1997). Ultimately, the main benefit gained through social networks at the international opportunity creation stage consists of information, and its possible application to commercial ends. It follows that networks must provide information that is directly relevant to cross-national borders business opportunities. The aforementioned information types are linked to the export market information literature. Research in this area makes a valuable contribution to internationalization in recognizing that the types of desirable information on foreign markets differ from the information required on domestic markets. Therefore, it is expected that the information types mentioned above in relation to export hold valid for other international market entry modes, as well as for the international opportunity identification that precedes the mode of market entry. Entrepreneurs’ Knowledge and Experience Individuals recognize opportunities that are related to the knowledge that they possess. (Venkataraman, 1997; Shane, 2000). Such knowledge may be acquired through experience. Since experience is idiosyncratic to each individual’s own life, some individuals and not others may know about a particular problem, a particular market characteristic or distinctive ways to create products and services. This distinctive knowledge – acquired through work, education, exposure to role models and so on – allows some people to recognize the value of new information and to apply it in ways that those lacking such previous knowledge cannot imitate (Roberts, 1991). The concept is in line with the ‘absorptive capacity’ construct stemming from the seminal work of Cohen and Levinthal (1990: 128), who assert that the ‘ability to recognize the value of new information, assimilate it and apply it to commercial ends’ depends on prior related knowledge. Absorptive capacity is cumulative and path-dependent (Cohen and Levinthal, 1990). Thus, it is expected that entrepreneurs may recognize the value of new information, acquire it and use it to create opportunities only when the new information is linked to the entrepreneur’s existing knowledge base, acquired through work experience and education. Shane (2000) conducted a survey of US high-tech firms and concluded that prior related knowledge, acquired through work experience or education, determines opportunity recognition in a field of knowledge specialization. His findings support the idea of path-dependency and knowledge specialization seen above in the concept of absorptive capacity.

26


The internationalization literature makes a further distinction between experience types, namely international experience and industry experience. Following a series of in-depth interviews with Australian international new ventures, Evangelista (2005) found that international experience of founders is instrumental in identifying opportunities for internationalization and in having the confidence to start an international venture. From the study it also emerged that industry experience is a determinant in early firm internationalization, providing founders with knowledge of industry conditions as well as confidence to operate within such industries. McDougall et al. (2003) found that international new ventures’ management teams have higher levels of both international experience and industry experience in comparison to domestic new ventures. Therefore, it is anticipated that firm MDs will possess knowledge acquired through direct experience that will impact on international opportunity recognition. Experiential knowledge may be acquired through schooling, role models or work experience. The latter may consist of international experience, industry experience or both.

THE PROCESS OF INTERNATIONAL OPPORTUNITY CREATION The previous sections have explored attributes that are believed to underpin international opportunity creation. In a sense, an attempt has been made to answer the question as to why some firms are able to generate international opportunities. To identify how international opportunities arise, and from whom, some of the dimensions of opportunity creation, emerging mainly from the entrepreneurship literature, are now explored. The relevant dimensions identified include the following: ● ● ●

Opportunity creation process versus instant eureka experience. Solo opportunity creation versus network opportunity creation. Active opportunity creation versus passive serendipity-led opportunity arising.

The aforementioned dimensions are explored further below. Opportunity Creation Process vs Eureka Experience Opportunity creation may consist of a multi-step process that takes place over time, usually referred to as opportunity development. This appears to be in contrast with the unexpected, sudden crystallization of an idea that


27

is referred to a ‘eureka experience’ (Hills and Shrader, 1998). Which path do firms follow to generate new opportunities? According to Lumpkin et al. (2004) the two paths are not mutually exclusive. On the contrary, they concur in the creation of new opportunities through a five-stage process. The five stages are referred to as: (1) preparation; (2) incubation; (3) insight; (4) evaluation; and (5) elaboration. The preparation stage is associated with firm-level information gathering. In line with the organizational learning and absorptive capacity concepts discussed above, information gathering is usually an incremental process based on previous knowledge (Lumpkin et al., 2004). The incubation stage starts when the firm or the entrepreneur begins contemplating a specific idea or problem. The insight stage coincides with the eureka experience, when the opportunity is first identified or the problem is suddenly solved. Although the actual idea takes shape at this stage, it is a direct result of the incubation stage and would not have happened in isolation from it (Lumpkin et al., 2004). In the last two stages of evaluation and elaboration, the original idea is then analysed, dissected and evaluated in the light of the firm’s resources and capabilities, leading to the final concept of opportunity (Lumpkin et al., 2004). This finalized idea takes the form of a feasible business opportunity, as opposed to the original, vague idea arising from the eureka moment (Hills and Shrader, 1998). Therefore, the two paths to opportunity creation are not mutually exclusive and can coexist in the process of opportunity development. In fact they generate two different types of opportunity altogether. The identification of one path rather than another at fieldwork stage is therefore likely to depend on the definition of international opportunity. Solo vs Network Opportunity Creation It has been argued that opportunity creation as an activity at the entrepreneur level takes two distinct forms. The first is referred to as solo opportunity recognition, as it sees the entrepreneur as the only actor in the opportunity creation event. In this form of opportunity creation, the entrepreneur uses his creativity and feel for the market to arrive at new opportunity creation (Hills et al., 1997). The second is described as network opportunity arising, with the entrepreneur gathering ideas and information through his network activities. Ideas development and evaluation rely on open discussions with the entrepreneur’s social ties (Hills et al., 1997). As for the process versus eureka dimension (see above), the alleged mutual exclusivity of the current two approaches to opportunity creation appears unconvincing. In fact, the description of the opportunity

28


development process seen above would suggest that information gathering and ideas evaluation are multi-actor processes, whereas the insight experience may emerge out of the individual’s thinking process (Lumpkin and Lichtenstein, 2005). Therefore, process theory seems to accommodate both solo and network opportunity creation in the opportunity development approach. Active Opportunity Creation vs Passive Serendipitous Opportunity Another dimension along which it is possible to distinguish opportunity creation is the firm’s proactiveness. That is, discerning between firms or entrepreneurs that make an active use of their cognitive processes in creating opportunities, and those firms that discover opportunity by chance, without employing cognitive effort. Cognitive approaches state that an active pattern-recognition exercise leads to opportunity recognition (Baron, 2006). Pattern recognition takes place when the individual links together apparently unrelated events in the external world, identifying an opportunity. This ability to ‘connect the dots’ is enabled by the individual’s cognitive frameworks, acquired through the person’s idiosyncratic life experience (Baron, 2006). Through experience and previous knowledge, individuals develop unique prototypes and exemplars of situations. When a new situation arises, the individual will use his existing prototypes and exemplars to make sense of it. This cognitive effort may result in the recognition of new patterns and hence in the recognition of new opportunities (Baron, 2006). At the opposite end of the spectrum are firms and entrepreneurs that discover opportunity by mere chance. Serendipitous opportunity in internationalization has been linked to networks (Meyer and Skak, 2002). This makes intuitive sense, as the opportunity idea is likely to arise out of social ties, to then be communicated to the firm or the entrepreneur. Therefore, serendipitous opportunity is expected to be a direct outcome of networks and social ties at both entrepreneur and firm level.

A CONCEPTUAL MODEL OF INTERNATIONAL OPPORTUNITY: ANTECEDENTS AND DIMENSIONS From the literature reviewed thus far it is possible at arrive at an initial conceptual model of entrepreneur-and firm-level antecedents to international opportunity creation and its dimensions. The model is reported in Figure 3.2.

Opportunity creation in internationalizing SMEs International opportunity antecedents 1. Social ties and networks • Weak ties vs strong ties • Market information generation (market feasibility, adaptation information, country background) • Intended vs unintended networks

29

International opportunity dimensions • Opportunity development Process vs Eureka moment • Solo opportunity creation vs network opportunity creation • Active pattern recognition vs passive serendipity led opportunity arising

2. Entrepreneurial background, knowledge and experience • Firm founder / MD’s education and work experience • Absorptive capacity • International and industry experience

Figure 3.2 Antecedents and dimensions of international opportunity

EVIDENCE FROM SCOTTISH FIRMS The empirical study consisted of semi-structured, in-depth interviews with nine chief executive officers (CEOs) of internationalizing small and medium-sized enterprises (SMEs) located in various regions across Scotland. Firms constituting the sample were all participants in the Global Companies Development Programme (GCDP). The GCDP is a programme funded and managed by Scottish Enterprise. The aim is to equip Scottish SMEs having the potential for international growth with the managerial tools to do so. Firms involved in the study were multi-industry, including a variety of service and manufacturing firms, both established and new ventures (Knight and Cavusgil, 1996). The varied nature of the firm sample employed in this research is to be considered an advantage in an exploratory study. It enables a general understanding of the elements influencing opportunity creation across industries and across different products and service providers to be gained, thus generating potentially generalizable findings. Interviews were conducted between May and July 2006. Interviewees were invited to give accounts of the history of the international development of the firm, with particular reference to events resulting in opportunities for initial and or further international expansion of the business.

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Related issues emerging from the literature were also included in the interview topics (that is, entrepreneur’s personal background, working history, schooling, social capital, and so on.). Interviews were recorded digitally and professionally transcribed. Interview transcripts were analysed using a non-quantifying method (Collis and Hussey, 2003). Following the structure of the literature review on antecedents to opportunity recognition, results are reported on networks, and on knowledge and experience. An unexpected outcome of the research is also included. In fact, the external environment was found to be a factor playing a significant role in international opportunity arising and it could not be left out without biasing our understanding of the phenomenon. Social Ties and Networks As far as social ties and networks are concerned, evidence from the interviews suggests that international opportunity creation is heavily influenced by the entrepreneur’s personal contacts. More specifically, weak ties – that is business-related acquaintances, suppliers, customers, occasional encounters – are those most frequently reported to have either a direct or an indirect input in opportunity arising, providing either market or product/servicesrelated information. This finding is in line with the literature reviewed above, and with the suggestion that weak ties provide entrepreneurs with novel and more diverse information (Hills et al., 1997; Burt, 1992). The literature reviewed also highlighted the importance of networks in international opportunity creation in relation to market information acquisition. Evidence was also found of market information generation through informal networks. Market information was mainly related to market feasibility, with little evidence on the acquisition of other general country background information through the firms’ social ties. A few examples may illustrate the significance of weak ties and the market information they can provide firms with: [Consultant’s name] is based in Nottingham and has his own consultancy. He introduced me to this guy in South Africa who has set up a [firm] partnership. A few comments I got back from some of my clients made me think there was a great need for this. I was speaking to another ex-pat guy and he was saying have you looked at Azerbaijan yet. We have done a lot of business in India on the jute side. So we’ve got good contacts out there.


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I have personal contacts throughout the world with people and I would contact them every so often, because the personal contact is a big factor.

As far as the separation between intended and unintended networks is concerned (based on Welch and Welch, 1996), only in one instance was there evidence of the firm actively making contacts with a potential foreign customer with the specific intent of creating the opportunity for business with them: Most of the information we would glean would be from the magazines in the steel industry. There are regular publications that come out which give information on various projects which are likely to take place. . . . Then we would make contact with the steel companies through the information gathered from those magazines.

Entrepreneurial Background, Knowledge and Experience Entrepreneurs’ prior knowledge was also a recurrent feature in the antecedents to international opportunity. However, only prior knowledge emerging from previous work experience emerged from the data, as opposed to knowledge acquired through schooling or role models. This finding is in line with the outcome of a study by Bloodgood et al. (1996), who found that international work experience is positively related to internationalization but international schooling is not. As outlined in the literature review above, entrepreneurs’ experience was both industry-specific and international. Experience proved to equip the entrepreneur with either industry-related expertise or international business knowledge, with the latter applying when the entrepreneurs had previous international work experience: I was working for a consultancy but I was going offshore myself, and actually making changes to the control systems offshore. These were having quite a dramatic impact on the performance of production on the oil platforms . . . I started a small printing business from my house and that used a lot of print cartridges; they were one of my biggest costs. I’ve always worked internationally . . . There’s a huge European Market on our doorstep that wasn’t being touched. So we decided we were going to move into Europe. I am from the electronics industry, have worked for the electronic industry a number of years, always for multinationals. Scrap companies would take the [excess inventory] and it would go to the local site and it would be buried.

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Unexpected Research Outcome: The Role of External Environment A significant factor emerging during data analysis was the strong impact of the external environment on international opportunity creation. Therefore, a holistic model of international opportunity creation may be achieved by incorporating the role of the larger environment in the theoretical model, along with the internal factors considered here. The impact of the external environment on the firm was found to be either constraining or enabling. In the first instance the environment would put a constraint on the firm which would prevent it from preserving the status quo, ‘pushing’ it into searching for international opportunities. In such cases the external environment was considered a ‘push’ factor. Examples of the external environment pushing firms into new international opportunities include the decline of profitability in the domestic oil and steel industries, as well as the strain placed on the domestic manufacturing industry due to competition coming from Asian countries. Below is some of the evidence found in the firms interviewed: We had the first oil price drop in the mid-80s, about 86, and that was a bit of a wake up call, because suddenly your single marketplace almost evaporated overnight. In the last ten years markets have disappeared offshore, which everyone has suffered from . . . The horse rug people no longer sew them here, they get them done in China. In the 1980s the main customer was British Steel. But then British Steel were not spending money, and we had to look overseas.

At times, entrepreneurs’ personal circumstances may also be considered a push factor impacting directly on opportunity creation. Those circumstances may represent constraints in the entrepreneur’s freedom to act, leading to one course of action rather than another. In a specific instance, one entrepreneur was unable and unwilling to accept yet another position within a multinational company since that would conflict with his ability to spend time with his newly formed family: ‘I was fairly recently married and had a very young son, so I wanted to do something in Scotland.’ However, as mentioned above, the impact of the external environment was at times enabling. That is, it created new international opportunities for the firm. In those cases, the external environment was labelled a ‘pull’ factor. External environment pull factors emerged on more than one occasion from the findings. Examples included new laws on environmental issues, calling for new business concepts, and foreign countries requiring


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specific services from the firms interviewed due to lack of local provision. Some quotes from the interviews may illustrate the point better: In 1999 there was a thing being discussed about environmental issues, called the WEEE Directive, and about what to do with excess inventory . . . So the company started to look at, what do you do with this excess inventory? We will help you find a new market for it. And that may be a developing market. The [oil geology software] was a project that was funded by Total and at that time Total financed the writing of it. It was the time that there were some high profile pollution incidents. There was the Sea Empress down off Milford Haven. There was the Exxon Valdez up in Alaska. There was the Piper Alpha out in the North Sea . . . There was the Pioneer. There was . . . the ship which sunk and what was the other one? There was the Erica and the Prestige.

It must be pointed out that the individual antecedents do not necessarily operate independently of each other. On the contrary, in the majority of cases a multitude of antecedents concurred in setting the scene for the international opportunity arising. Those antecedents may not, therefore, be considered in isolation. Rather, it is the synergy created by them that ultimately enables international opportunity creation. This synergetic interaction of the antecedents may be considered a key finding of the study.

DIMENSIONS OF INTERNATIONAL OPPORTUNITY AND THE PROCESS OF OPPORTUNITY CREATION Dimensions of international opportunity were classed along three broad categories: 1. 2. 3.

Opportunity development process versus eureka experience. Solo opportunity creation versus network-based opportunity creation. Active pattern recognition process versus passive serendipity-led opportunity.

In relation to the first dimension, it was pointed out in the literature that the opportunity development process and the instant crystallization of the opportunity idea are not necessarily mutually exclusive. They may coexist in the same multi-step process to opportunity creation (Lumpkin et al., 2004). This was echoed by research findings. In fact, on no occasion was

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there evidence of a eureka experience that was not part of a wider opportunity development process. On the other hand, there was substantial evidence of opportunities emerging out of multi-step processes that did not include eureka moments. The latter result may be explained by the fact that interviewees were not always thorough in their recall of the development of the international opportunity idea. Therefore, although their account suggests an idea development process, it is not always possible to gather evidence on all stages involved. Evidence on the second dimension was inconclusive, with two interviewees explicitly making reference to a solo act in the international opportunity idea creation. In both cases, the single-actor opportunity creation event was linked to an active, pattern-recognition cognitive process. This makes intuitive sense, as the entrepreneur who identifies opportunities using his own means relies mainly on his cognitive schemas and information-processing abilities (Baron, 2006; Hills et al., 1997). Evidence of network-based opportunity recognition was sparse. Generally, the account given would not clearly state the impact of networks at the actual opportunity creation stage. Nevertheless, networks, both at personal and firm level, were significant antecedents to opportunity creation. It follows that opportunities emerging from them can be considered network-based. Furthermore, if international opportunity recognition is ultimately recognized as being a process, by its very nature it will involve a variety of stages each impacted upon directly or indirectly by one or more antecedents. By the same token, the process may involve both active pattern recognition and passive serendipity-led opportunity arising, as some of the cases studied show. It follows that the temporal line of divide between antecedents to international opportunity and opportunity creation itself is blurred, and that the various dimensions of international opportunity are synergetic rather than mutually exclusive. The discussion above is relevant to cases reporting evidence of active pattern recognition in the opportunity development process. At the opposite end of the spectrum are two cases in which the opportunity arises out of chance, without any apparent active input on the side of the firm or the entrepreneur. In both cases, serendipity-led opportunity is linked to firm networks. In fact, in those cases it is the network that provides the firm with an opportunity for internationalization, with the firm taking an active role at the opportunity exploitation stage. Therefore, it may be asserted that the main line of divide between international opportunities is that between those actively created and those emerging passively. The former involves a time-bound process including multiple antecedents and multiple opportunity dimensions, with the latter being enabled primarily by networks.


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CONCLUSIONS The questions at the core of the current research were the following: ● ●

What determines international opportunity creation in SMEs? How do those international opportunities arise?

Following a literature review drawing on both entrepreneurship and internationalization research, the original questions were translated into a conceptual model covering: ● ●

Antecedents to international opportunity creation. Dimension of international opportunity arising.

The research was conducted on nine internationalizing Scottish SMEs. It took the form of a phenomenological study consisting of semi-structured interviews with firm managing directors. Research findings are summarized below. Antecedents to International Opportunity Entrepreneurs’ personal networks and previous knowledge, based mainly on work-related experience, are key to the creation of international opportunities. Personal networks consisted largely of weak ties and impacted positively on information provision and consequently on opportunity creation. Networks of weak ties were often found to be a source of market information. Entrepreneurs’ experience resulted in either international business knowledge or industry expertise or both. Unexpectedly, entrepreneurs’ personal circumstances occasionally proved to impact upon international opportunity creation, mainly though creating constraints. Therefore, they were referred to here as push factors. An interesting finding consisted of the strong impact of the external environment as an antecedent to international opportunity. Its impact was found to be both enabling (pull) and disabling (push) for the firm. Mostly, a number of antecedents were found to work in synergy with each other to enable opportunities. Their impact on opportunity may not be considered individually. International Opportunity Creation Process International opportunity creation was found to consist largely of a timebound stage process, involving solo active pattern recognition as well as

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network-based consultation. Also, antecedents were not always separable from the actual process of opportunity development. On the contrary, they were an integral part of it. A distinction may be made between opportunities that are actively created, both solo and network-based, and those emerging passively.

4.

Growth and learning spillovers from international markets: empirical evidence from Greek firms Emmanuella Plakoyiannaki and Ioanna Deligianni

SUMMARY This chapter seeks to investigate whether there is any transfer of knowledge and best practices from international to domestic business activities; and if so, in what aspects of the firm’s activities. It also seeks to examine the moderating effect that age at international entry and the firm’s entrepreneurial orientation have on this international knowledge transfer to the firm’s domestic activities. Such questions are essentially unexplored in international business literature, which tends to view the international growth activities of the firm as rather separate from those of the domestic market. Two in-depth case studies of Greek internationalized firms took place. One of those firms was an incremental internationalizer and the other a ‘born global’ firm. The evidence suggests that firms that grow abroad may transfer knowledge and skills from international to domestic operations in terms of redefining their target markets, introducing new products and redesigning their logos irrespective of their age at international entry or their entrepreneurial orientation. Therefore, growth of the internationalized firm can significantly affect that of the domestic market, and hence a comprehensive examination of the firm’s growth is warranted.

INTRODUCTION The international business literature has approached growth as strictly an internationalization phenomenon. The stages theory (Johanson and Vahlne, 1977, 1990) would argue that the firm grows abroad after having gained momentum and experience in the domestic market, 37

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describing internationalization as the firm’s reactive response to external pressures. On the other hand, the born global approach (Oviatt and McDougall, 1994; McDougall et al., 1994) describes internationalization as a proactive, opportunity-driven process. In this light, the two internationalization frameworks are considered to be mutually exclusive rather than complementary and the research debate has been structured on an ‘either/or’ approach. Nonetheless, the examination of these two approaches offers a viewpoint implying that once the firm has entered the international marketplace, growth will take place in that arena. Even if the firm continues to grow domestically, in neither of these two approaches is the interchange of potential learning or knowledge from the international back to domestic activities examined. In addition, although both frameworks recognize the key role of the timing of initial foreign entry and the firm’s entrepreneurial orientation (reactive versus proactive firms) on further international growth, they disregard the effect of these factors on international knowledge transfer to the firm’s domestic activities. Therefore, the international business literature seems to underestimate the fact that growth of the firm may be a holistic process in which learning spillovers from the international to the domestic market may take place (Dimitratos et al., 2007). On this issue, Oesterle (1997) stresses that a question warranting further research is how an internationalized firm makes its strategic choices among a range of potential opportunity alternatives. We seek to provide some evidence on this under-investigated theme in the current chapter. Such an examination would additionally have managerial significance inasmuch as management practitioners would be informed on the potential benefits that could accrue to their firms from their international activities, and how they could take advantage of any learning acquired in the international marketplace. Therefore, this study aims to address the following research questions. Is there any transfer of knowledge and best practice from international to domestic business activities? If so, how do aspects of the firm’s activities, the age of the firm at international entry and its entrepreneurial orientation affect this knowledge transfer? Towards this objective, the study examines the international activities of two Greek internationalized firms through in-depth case study examination. Evidence from Greece provides insights from the viewpoint of a small advancing economy. The structure of the chapter is as follows: the next Section presents the theoretical background of the study. The third Section explores the methodological details of the research, followed by the presentation of the case study findings. Drawing on the case study evidence, the chapter concludes with a discussion and lessons learned.

Growth and learning spillovers from international markets

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LITERATURE REVIEW In the internationalization business literature, growth has been approached in a rather narrow context, with the main focus placed on the international dimension of the growth phenomenon. Growth is defined as the engagement of the firm in foreign business activities, seemingly disregarding other growth potential in the domestic markets. Under this prism, researchers have widely addressed the factors that drive internationalization but have rarely examined the effects of international growth on the firm’s expansion in the domestic markets (Zahra et al., 2000; Sapienza et al., 2005). The theoretical frameworks that have dominated the field of international business research are the stages (or process) theory of internationalization (Johanson and Vahlne, 1977, 1990) and the born global (or new venture internationalization) framework (Oviatt and McDougall, 1994; McDougall et al., 1994). On the surface, the two theories seem to be at odds, with their main difference relying on the dissimilar importance they place on the value of organizational versus individual prior experience and knowledge. The process theory places emphasis on the history of the firm, implying that internationalization is a path-dependent process; whereas in the international new venture framework, the individual skills and competences of the manager or founder are considered to be the main drivers of internationalization. However, under a more analytic prism, the two frameworks could be considered complementary rather than contradictory. First, they both focus on the international growth that follows the firm’s initial international entry. Indeed, both approaches imply that once the firm internationalizes, growth will occur in the international battlefield, thus disregarding other domestic growth alternatives potentially triggered by the firm’s internationalization. Second, although the two frameworks emphasize the role of different types of learning (organizational versus individual learning) in the internationalization process, drawing upon the learning theory of the firm, organizational and individual learning could be considered interrelated rather than independent. Learning theory suggests that organizations learn when their routines, systems and policies assimilate individuals’ activities and experiences (Grant, 1996a), implying that organizational learning begins at the individual level. In this perspective, the learning activity is a path-dependent process, where new knowledge is maximized in domains close to the existing individual and organizational knowledge base (Cohen and Levinthal, 1990). Viewed in this light, learning has a great impact on international growth (Barkema and Vermeulen, 1998; Eriksson et al., 1997;

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Johanson and Vahlne, 1977), an assertion implied by both frameworks. Studies supportive of this assertion are conducted by several researchers. Indeed, Ghoshal (1987) notes that learning is a significant objective for firms pursuing international diversification. Similarly, Teece et al. (1994) suggest that as the firm enters distant countries its ability to learn expands, while Brush (1995) argues that learning modifies the way in which the internationalized firm interprets the environment. In empirical studies, Zahra et al. (2000) provide evidence showing that foreign market entries are associated with high degrees of technological learning. Nonetheless, neither of the two theories extend the assertion regarding the role of learning to the domestic growth of the internationalizing firms. They both disregard the corresponding impact of potential learning from international markets on the firm’s domestic activities. Of relevance to this issue, DeClercq et al. (2005) and Sapienza et al. (2005) find that the degree of internationalization is (mildly) positively related to international learning effort, but negatively related to domestic learning effort. Hence, it may be that knowledge development in the domestic market is too general to reduce uncertainty associated with foreign activity. Alternatively, knowledge gained from domestic activities can require more time to be assimilated in order to be useful for future internationalization (DeClercq et al., 2005). The evidence of Dimitratos et al. (2004) is rather contradictory to this statement as they find that uncertainty in the domestic market can play a positive role in the international performance of the entrepreneurial firm. Thus, the associations between learning for domestic and international activities on the one hand, and the degree of internationalization on the other, may be quite complex. Third, both theories recognize the key role of the timing of initial foreign entry and the firm’s entrepreneurial orientation on internationalization. Evidence supportive of the impact of these factors on international growth is provided by several researchers. In an empirical examination investigating international new ventures, Autio et al. (2000) argue in favour of the ‘learning advantage of newness’. This implies that early pursuit of international opportunities for the young firm may induce greater entrepreneurial behaviour, inhibit learning impediments and confer an international growth advantage. This is akin to the suggestion of Cyert and March (1963) who note that when the firm discovers a solution to a problem by searching in a specific way, especially early in its life cycle (Levitt and March, 1988), it may search in the same way for future problems of a similar kind. Put differently, early development of domestic competencies focuses learning on domestic issues (Barkema and Vermeulen, 1998) and may constrain activities in foreign settings. Corroborating the learning advantage of newness conjecture for born globals, Kuemmerle (2002) argues that these firms


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use fewer established routines than older internationalized enterprises for augmenting their organizational stock of knowledge. In the same line of thought, Sapienza et al. (2005) offer evidence suggesting that early internationalization may create a company-wide learning culture, inasmuch as the earlier the firm engages in international activity, the greater its international and domestic learning efforts. Indeed successful international new ventures learn by actively seeking knowledge concerning foreign markets in unfamiliar environments (Craig and Douglas, 1996). As far as entrepreneurial orientation is concerned, DeClercq et al. (2005) find that the entrepreneurial orientation of the firm is positively related to the intensity of learning effort undertaken in international and domestic markets. In addition, Lumpkin and Dess (1996) suggest that the extent to which a firm engages in learning efforts in new markets is related to its entrepreneurial orientation. Nonetheless, the two theories seem to pay insufficient attention to the moderating effect of the two factors – that is, age at first foreign entry and the entrepreneurial orientation of the firm – on international knowledge transfer to the firms’ domestic activities. Indeed, late or reactive internationalizers could experience a different level of international knowledge spillover to their local activities than early or proactive ones. To summarize, the stages theory of internationalization and the international new venture theory should not be treated as two frameworks providing diverging views on the association between international growth and learning on the one hand, and domestic business activities on the other. Both theories emphasize the role of experiential knowledge on internationalization, examining at the same time the effect on international growth of age at international entry and the entrepreneurial orientation of the firm. However, these theories fail to investigate the domestic growth that can be triggered by internationalization through the potential transfer of knowledge from international to domestic firm activities. Thus, the two theories should be examined in conjunction rather than in isolation, under a new perspective also incorporating the knowledge spillover effects from international to local business activities. We adopt this suggestion in the current study.

METHODOLOGY The case study method was selected since it is related to the research questions of the study. To elaborate, the case method offers an in-depth understanding of both the investigated phenomenon of activities of internationalized firms, and the broader context of organizational behaviour

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in which this phenomenon occurs (see Carson and Coviello, 1996; Dubois and Gadde, 2002). The research design was a multiple case study drawing insights from two Greek firms that have grown in the international arena. Therefore, the case study firms were selected on conceptual rather than statistical grounds, and thus, purposeful sampling was employed in this research (see Eisenhardt, 1989). The first investigated firm, Haitoglou, which operates in the food industry, is an incremental internationalizer that has grown through exporting activities in international markets. The second case study company, Folli Follie, is a born global manufacturer of jewellery and accessories. The examined firms met the following criteria: (1) were independent firms; (2) employed more than 250 employees; and (3) had achieved enhanced (above industry average) international and domestic performance during the previous three years. Performance was based on annual international sales growth, profitability from international activities and profitability from all (international and domestic) activities. Evidence from Greek firms would provide insights from operations of firms from advancing small economies in an area where most research tends to be dominated by firms from the US and other large countries. Based on the recommendations of Yin (1989), we obtained evidence from a variety of data sources including: (1) ten in-depth personal interviews that took place in 2005–06; (2) examination of enterprise documents, archival data and trade publications; and (3) observation in the settings of investigated firms. The interviews were conducted with owners and management who played a critical role in the initiation and coordination of international activities of investigated firms, such as managing directors, and managers involved in international operations, exporting, marketing or sales. The identification of respondents relied on a snowballing method and followed recommendations by Huber and Power (1985) for improving the accuracy of retrospective reports. Each interview was individually conducted and lasted between one and one-and-a-half hours. All interviews were tape-recorded and transcribed. During the interview process, respondents were invited to elaborate freely (see Oppenheim, 2000) on themes relevant to: international activities; perception of opportunities in the international marketplace; knowledge acquired abroad; possible transfer of this knowledge to the domestic or other international activities; and organizational characteristics that respondents thought were likely to be associated with capturing opportunities. The data from interviews were supplemented with other sources of information including enterprise archival data and documents as well as trade publications and observation. The study of enterprise data and


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trade publications enabled the researchers to understand better the modus operandi of investigated firms in foreign markets as well as the ways that these internationalized firms used knowledge obtained from international or domestic markets. Additionally, detailed observation was undertaken involving attendance at meetings related to international activities and internal presentations in order to illuminate aspects of the organizational environments of the case study firms with respect to the investigated theme. In order to increase the accuracy of the findings, the impressions and insights gleaned from the field were converted into detailed field notes on the same day of the data collection, as the 24-hour rule of Eisenhardt and Bourgeois (1988) recommends. The analysis of results was based on inductive logic and drew on recommendations by Glaser and Strauss (1967), Miles and Huberman (1994) and Strauss and Corbin (1998). Data were analysed based on the constant comparative analysis approach.

PRESENTATION OF THE CASE STUDY FINDINGS Haitoglou Haitoglou Bros SA was founded in 1924 by three brothers in Thessaloniki, a large city in northern Greece. The firm first engaged in the production of a Greek delicacy called halva, using the traditional recipe the owners had inherited from their grandfather. Their grandfather was a halva producer in Asia Minor. Halva (halvah) is a traditional confection, dating back to the Byzantine era. It is a nutritious product made out of sesame seed with no sugar additives. Haitoglou SA was the first to enter the halva market in Greece, being a pioneer in the Greek food industry. In 1930, the small family business acquired its first company-owned factory, located in the centre of the city. Thirty years later, in 1962, the introduction of new products in the firm’s product portfolio such as marmalade and jams rendered the company’s relocation to the industrial area of Thessaloniki necessary. This relocation proved to be a move of high strategic importance, signalling the beginning of a period of extremely rapid growth for the company. Indeed, in the years that followed, the company dominated the Greek market, placing emphasis on developing a high-quality image and making its flag product – the Macedonian halva – the ‘top product’ of the specific subsector. To achieve this goal, the corporate brand illustrated a traditionally attired Macedonian woman, symbolizing the purity and traditional values that the firm has been promoting since its founding. The selection of this logo was indicative both of the

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firm’s adherence to the Greek tradition and culture, and of its perseverance to high product quality. Continuing its successful growth in the domestic market, the company bought 25 per cent of the stock of Papagiannis Bros SA, one of its major competitors, becoming the leader in the Greek halva market. In 1994, Haitoglou SA was ranked 207th among the 500 biggest Greek companies, and in 59th place among all companies competing in the Greek food industry. Given its high performance, the company received an award from a well-known Greek foundation for its long-term contribution to the Greek economy. In the late 1980s, operating in a mature Greek sector, the company chose to enter the international market to increase its customer base. Nonetheless, its international engagement was gradual, accompanied by an incremental resource commitment to the new geographic markets. This incremental internationalization involved low risk and uncertainty, diminishing the potential challenges to the firm’s survival and growth. The first stage in the Haitoglou internationalization process involved exports in countries and communities with low psychic distance compared to the firm’s domestic market, such as the Greek and Arab community in the USA and the Greek community in Australia. These communities were already familiar with the halva delicacy and sesame products in general, having already included them in their diet. For the Arabs and Greeks of the diaspora, halva is a product highly linked to both tradition and religious matters; and so the company in this case addressed a market need that already existed, adopting the same marketing strategy as in its domestic market. Key factors behind this early stage of internationalization were the knowledge the firm had accumulated domestically, competing successfully for almost six decades in the local market. Domestic knowledge facilitated international entry, affecting both the pace and the direction of the firm’s internationalization. It stimulated the company to pursue an incremental involvement in global markets and exploit opportunities close to its already existing knowledge base. During this first phase of internationalization, Haitoglou had not fully exploited the potential advantages of its products. The company owners viewed their product as idiosyncratic – linked to the Greek tradition and to orthodox Christian religious beliefs – without identifying alternative product attributes that could be addressed to a wider customer base. This strategy limited its focus to only target customers familiar with the Greek culture and customs. Although the first phase of Haitoglou internationalization had increased the company’s customer base and its sales, in the 1990s both the US and the Australian market had reached their maturity, indicating a rather flat


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demand for halva. To achieve higher growth, the company had to search for alternative product markets. At that time, in the European Union (EU) market a new trend seemed to dominate the alimentary habits of the Europeans. Specifically, the increased scientific interest in healthy nutrition and the Mediterranean diet created a high-quality image for Mediterranean food products in European consumer minds. This fact, combined with the scientific evidence on the beneficial attributes of sesame to human health, offered a new opportunity for expansion to Haitoglou. Seizing this opportunity, the company entered the EU market, engaging mainly in exports of its flagship product. The psychic distance in this case was higher than that involved in the first phase of internationalization. European customers, in contrast with the Arabs and the Greeks in the USA and Australia, were not familiar with the Greek tradition, searching only for health and high-quality assurances in the halva product. This attitude pushed the company to adopt a totally new philosophy. It had to detach its product from any cultural and religious issues and approach it under a new perspective: that is a delicatessen product targeted at health-conscious consumers. This new perspective actually reoriented the company’s whole philosophy. It allowed the company’s owners to identify product advantages other than those that had structured the firm’s strategy till then. The new knowledge gained from the expansion in the EU market triggered the beginning of a new era for the firm. It boosted the revamping of the corporate brand, rendering the sophistication of the prior marketing strategy compulsory. The new marketing strategy of the company placed emphasis on the high quality, status and health dimension of the product, making the customers’ lifestyle and personality rather than the customers’ origin and demographic characteristics the main factors that segment the market. Folli Follie Folli Follie was established by a Greek entrepreneur in 1982 and constitutes an excellent example of a highly successful born global company. The initial target of the firm was to provide branded, fashionable and affordable jewellery of excellent quality mainly to 20–40-year-old women around the world. Given that the jewellery market was highly fragmented (with only 15 per cent of the market consisting of branded products, mainly positioned in the high price range), the company’s choice of the target segment was highly pioneering, rendering it the only global branded company within the medium price range. The company started its operations by establishing a shop in the centre of Athens, the capital of Greece. From inception, the owner had realized

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that an international presence would be the key to success and, hence, he had engaged in international partnerships since the firm’s founding. After four years of successful operations, in 1986 the company broadened its product portfolio, introducing watches and fashion accessories to its product base. Additionally, it set up its own production unit in an effort to control its product quality and place emphasis on its customers’ specific needs. At the same time, the company’s presence in the Greek market was further strengthened through the establishment of several points of sale all over Greece. The expansion in the Greek market was achieved through franchising, which allowed the company both to reduce the risk taken and to control the quality of the product offering. A key point in the company’s international development was the entry of Folli Follie to Japan in 1995. The Japanese market is difficult and demanding, displaying very high psychic distance from the European markets. This is why most European firms operating in the fashion industry choose to enter Japan after they have dominated Europe. However, the owner decided to be a pioneer and assumed the great risk of entering Japan first. This choice was not driven so much by a rational decision-making process, but rather by the founder’s intuition and high risk propensity. Due to the limited financial resources of the firm, the initial entry was achieved through the establishment of a joint venture with a well-known Japanese firm. The cooperation with a local firm provided Folli Follie with the necessary knowledge of the local market and the advantage to promote its products as if they were local. The firm’s sales were growing at a high rate, while at the same time its exports from Greece to Japan were also increasing fast. The Folli Follie brand became really strong in the Japanese market and approximately 60 points of sale were quickly established in the country. Although Greece and Japan were the basic growth markets for Folli Follie, the founder did not limit the firm’s operations to these two countries alone. Driven by his vision for a globally successful firm, he decided to enter several international markets through either the creation of subsidiaries or the establishment of points of sale. A major criterion behind the selection of the markets to enter was mainly the market size, that is, big markets constituted the firm’s main targets. Subsidiaries were founded in Great Britain (1998), Hong Kong (1998), France (1999), the Czech Republic (2001), Slovakia (2001), Poland (2001) and Spain (2002). The expansion in these countries further boosted the firm’s international growth, providing the company with the opportunity to exploit the local, high-quality distribution channels as well as several local tax advantages. Another critical point in Folli Follie’s international growth was its successful entry to China in 2001 through the initial establishment of a point of sale. China has been evolving as one of the most powerful economies of the world, constituting


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one of the largest consumer markets, and so playing a crucial role in the development of global firms. The company has continued its successful international expansion in other foreign markets in the 2000s. Its main targets are Asia and the Arab countries, while the USA is also included in its future plans. A chief contributor to the achievement of its goals has been the company’s entry to the duty free zones around the world. International travel is growing rapidly, creating an increasing market segment that firms can target, that is, travellers. Folli Follie has seized this opportunity and has established over 40 points of sale in airports and duty free zones, extending its brand recognition worldwide. The company’s global success is reflected in its financial results. In 2006, its international sales accounted for almost 80 per cent of its total net sales, with Asia accounting for 50 per cent of the company’s sales, followed by Japan, accounting for 18 per cent of its sales. As far as the distribution of its total sales across its main product categories is concerned, 62 per cent of the firm’s sales were jewellery while 32 per cent were watches and 6 per cent accessories. Given that Greece is not one of the countries traditionally linked to watch manufacturing (such as Switzerland), the high proportion of the firm’s sales attributed to watches is rather impressive. It seems that Folli Follie has managed to overcome the country-of-origin effect accompanying its products.

CONCLUSIONS AND LESSONS LEARNED The purpose of this study was to explore whether knowledge transfer exists between domestic and international environments of firms; and, if so, in what areas and how the age at entry and the firm’s entrepreneurial orientation affect this knowledge transfer. The case study evidence illustrates that the investigated firms have grown in the international arena using different routes and entry modes (compared with one another), and employed knowledge acquired from international activities to domestic activities. To illustrate, the internationalization process of Haitoglou SA is consistent with the process theory of internationalization (Johanson and Vahlne, 1977, 1990). International entry was accomplished relatively late in the firm’s history, and internationalization was gradual, involving a continuous interaction between domestic and international experiential knowledge. Analytically, the first phase of internationalization assisted the firm to build on its (Greek) strengths and weaknesses, involving relatively low risk, and thus did not represent a threat to its survival and growth prospects. This evidence corroborated previous insights that a firm’s domestic operations

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can be replicated internationally or positively affect the firm’s international operations (Dimitratos et al., 2004; Porter, 1990; Welch and Welch, 1996). The firm expanded in terms of employees and revenues, a fact that positively affected the probabilities of success in potential future expansions. The second phase of internationalization reoriented the philosophy of the firm, moving it toward the adoption of a more sophisticated strategy. Learning acquired in international markets spilled over into domestic activities through the restructuring of the corporate brand, its detachment from any culture and religious issues and its link to the concept of a more balanced and healthy life. Viewed in this light, the evidence suggests that internationalization can have a major impact on the stock of knowledge of the firm and may materially affect its domestic strategy and operations. This evidence is in conflict with that of DeClercq et al. (2005) and Sapienza et al. (2005), who found that the degree of internationalization is negatively related to domestic learning effort. This may be due to the fact that the authors in their studies measure domestic learning, whereas we evaluate the effect of international learning on domestic operations, thus making the evidence from the two study findings somewhat non-comparable. Overall, Haitoglou pursued internationalization in a rather reactive manner. It was pushed to be involved in international activities in order to face domestic market maturity and overcome domestic competition. Nonetheless, international expansion constituted a valuable source of learning for the firm, which contributed to the enrichment of its existing knowledge base, acquired from its domestic market. The knowledge acquired in the international market was transferred to practices of Haitoglou in the domestic market, including through a contact with international partners that generated new ideas for the firm. This finding confirms that networks can be valuable learning sources for the internationalized firm (Lu and Beamish, 2001; Sharma and Blomstermo, 2003). It is also interesting that the firm expanded its product diversification when operating internationally and also used its new ‘healthy’ products in its domestic activities. This result highlights the importance of internationalization for domestic marketing activities, a theme that has not been explored in previous marketing studies. Related to that is the finding that the development of a market-oriented philosophy by the firm placed emphasis on symbolic elements of the product such as status, high-quality, green and healthy products. These product innovations resulted from the firm’s interactions with its international stakeholders, that is, its customers, competitors and network partners. This finding can enrich the marketing literature (see Craig and Douglas, 1996). The internationalization process of the other investigated firm, Folli Follie, is consistent with the international new venture framework. Folli


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Follie was a born global firm which pursued opportunities in the international arena from inception in a rather proactive manner. The main driver behind this early internationalization was mainly the founder’s characteristics. His alertness toward international opportunities combined with his propensity towards risk provided global vision, and stimulated the firm to cross Greek boundaries and extend its brand awareness worldwide (see Minniti and Bygrave, 2001). This international expansion was further facilitated by the owner’s ability to network. Given that at inception the firm was facing liabilities of newness and smallness, the development of network relationships with partners was of crucial importance for the company’s international activities, providing the firm with the necessary resources to compete successfully in the international ‘battlefield’. This evidence corroborates existing research findings, which argue in favour of a network’s positive impact on increased organizational foreign market commitment and international growth (O’Farrell et al., 1998; Yli-Renko et al., 2002). A chief reason that contributed highly to the firm’s success and growth in the international markets was also its focus on producing high-quality branded products, which were positioned in the medium price range. This choice differentiated the firm from its competitors, providing it with the opportunity to operate in a market void that other businesses did not cover. Most of Folli Follie’s competitors placed emphasis on offering either unbranded products of low to medium price, or branded products positioned in the high price range. As far as learning is concerned, since the firm entered foreign markets from the very beginning, it accumulated international knowledge from its inception. This international knowledge shaped the company’s culture as well as its whole market-oriented philosophy. The company adopted an outward behaviour, acting proactively upon opportunities in both domestic and international markets. This evidence supports the view that early internationalization can mould the culture of the firm and facilitate learning (Autio et al., 2000; Kuemmerle, 2002). The lessons learned from international activities were transferred to domestic practices of the firm, converting the Folli Follie brand into a global one. The firm managed to overcome an indifferent (or negative) country-of-origin effect and become a successful multinational company. As in the Haitoglou case, product diversification for the born global firm primarily emerged from international activities and was subsequently transferred to the domestic activities of the firm. Also, the development of a market-oriented philosophy that placed emphasis on customer needs and dynamics of a particular target audience originated from the contact of the firm with consumers and partners in international markets.

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Table 4.1

Growth, knowledge transfer and locus of learning of the two case study companies Growth

Knowledge transfer

Locus of learning

Haitoglou S.A. Domestic International International

Domestic Domestic International

Domestic Domestic International

Follie Ollie

International

International

Domestic International Domestic

International International Domestic

Growth, knowledge transfer and locus of learning of the two case study companies are presented in Table 4.1. At the beginning of its operations, Haitoglou SA grew in the domestic market, exploiting its domestic knowledge base solely in the direction of further domestic market penetration. During its first stage of international growth, the company went a step further and leveraged its domestic knowledge in the international markets. However, this step was rather incremental, not involving a shift to the company’s locus of learning, which remained mainly domestic. On the contrary, the second phase of the company’s international growth involved radical changes to its knowledge base. The locus of the firm’s learning became international, and knowledge spillovers were realized from international to domestic activities. As far as Folli Follie is concerned, the direction of organizational growth was international from the beginning. The firm learned in the international market and leveraged this knowledge in both its international and domestic activities. The case studies conducted are indicative of the two theoretical frameworks that dominate the international business literature that is, the stage theory of internationalization and the born global approach. The findings provide useful insights on the potential effects that the process of internationalization might have on the examined knowledge transfer. In that regard, international growth is proved to affect domestic growth irrespectively of how internationalization occurred. Knowledge spillovers from international to domestic activities are recorded in the case where internationalization is a path-dependent process, and the case where the firm goes global from inception, undertaking a higher degree of risk. It may be inferred from the above that age at international entry as well as entrepreneurial orientation are proved not to moderate the relationship between global and local growth. Both early and late internationalizers as well as proactive and reactive ones seem to experience the same spillover effects from their international operations to several areas of


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their local activity such as strategy, marketing activities, corporate brand and so on. These findings extend current internationalization literature, providing evidence on an underestimated dimension of internationalization, that of international knowledge spillovers to the domestic markets. The examination of this dimension complements previous studies on the effect of international learning to further international growth, suggesting that international growth is not made at the expense of domestic growth but rather in support of domestic growth. Furthermore, the case study evidence suggests that the age at entry and entrepreneurial orientation do not affect international knowledge transfer, contradicting previous research assertions and thus suggesting a different perspective on the issue. More specifically, as far as age at entry is concerned, a plethora of studies in the current literature report a negative relationship between age at entry and international learning, implying that the earlier firms internationalize, the more they identify themselves as international firms and, thus, the higher the growth they achieve internationally (Autio et al., 2000), leaving little space for growth in the domestic market. They also suggest a positive relationship between age at entry and domestic learning, arguing that late entrants build habits and routines that encourage greater attention to the domestic markets (Ocasio, 1997). However, the current study did not detect any differences between early and late international entrants in their domestic knowledge transfer, challenging current assertions. Regarding entrepreneurial orientation, a positive relationship is suggested for both the international and the domestic learning effort by many researchers (McDougall and Oviatt, 2000; Sapienza et al., 2005 and so on). Nonetheless, the current study suggests the exclusion of entrepreneurial orientation from the explanations of the international knowledge spillover phenomenon. The implications of this research refer to a need for a comprehensive examination as far as growth of the firm is concerned. It would be unwise to examine the growth process of the internationalized firm by only looking at its international activities. In that light, Ansoff’s (1957) ‘either–or’ matrix of growth seems to be outdated. International markets may provide opportunities in other markets or product domains. In particular, the evidence from the current study suggests that prior domestic learning is important (as the process and born global models have stressed), but also that international learning may affect parallel or subsequent domestic growth in terms of strategy, marketing activities, corporate brand and accumulation of knowledge stock. This last statement has been essentially unnoticed in the international business (and marketing) literature and merits further examination.

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Moreover, in this research it is posited that international knowledge triggers not only further international expansion but also domestic growth. Nonetheless, no reference is made to the knowledge mechanisms that direct these types of growth. More precisely, the mechanism that governs international knowledge spillover to new international markets can be totally different from that governing knowledge transfer to domestic markets. Differences between the two may be built around several aspects such as the type of organizational activities the knowledge transfer affects, the speed of transfer, and so on. These issues were not taken into account in the current research; however, they can constitute the subject of future research. Another implication of the study that warrants future research has to do with the contention that firms that grow in international markets are likely to have different characteristics from those that grow in domestic market niches. In other words, it might be that firms choosing to grow abroad (as the ones examined in this study) can have different organizational characteristics than those that pursue growth domestically in other subsectors or product markets of their home nations. Such characteristics may refer to characteristics of the managers: risk attitude, learning predisposition, and so on. This is conjecture that we could not test for the current chapter, inasmuch as no firms that pursued growth domestically were investigated. However, future research attempts could shed light into this interesting surmise. A principal implication of this study for management practice is that managers can consider that discovery of profitable opportunities in the marketplace is very likely to occur across different countries. Furthermore, managers have to be alert and use their advantage skills, knowledge and learning acquired internationally. Such international learning may be transferred into the domestic markets or other product markets, and can provide alternative ways to pursue growth for the internationalized firm.

5.

Perspectives on the interrelationships between domestic and international markets for the smaller firm Maria Karafyllia

SUMMARY The interrelationships between domestic and international markets emerge as an important and under-researched theme for the smaller firm. Significant interdependencies between domestic and international performance seem to exist for the smaller as compared to the larger firm. Management studies however tend to approach domestic and international markets in isolation, offering a one-sided view of the complex nature of small firm growth. This chapter examines the origins and definitions of this theme, the main issues and debates, the key contributions from four research strands, the theoretical and practical implications and the fruitful areas for future research. Specifically, it synthesizes research on firm growth, economic approaches to internationalization, process internationalization and international entrepreneurship. Emerging research issues encompass growth patterns, business decisions, market strategies, resource allocation, planned strategic growth, knowledge development and learning, and opportunities development.

INTRODUCTION The distinction between domestic and international markets is a fundamental one for business development. The domestic environment can influence firm formation and expansion (Wiedersheim-Paul et al., 1978), and international performance (Dimitratos et al., 2004). International markets may be perceived and understood on the basis of psychic distance, that is, perceived differences from the domestic market (Johanson and Vahlne, 1977; Johanson and Wiedersheim-Paul, 1975; Luostarinen; 1979). Those 53

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differences may concern language, culture, and business norms and rules. In turn, differences can influence risk perception in international expansion. Smaller firms may be more resource-restricted and have lower survival probability than larger firms. The latter are more likely to have a more sophisticated management and better knowledge of opportunities in the markets. Therefore, the distinction between domestic and international markets can be more important and topical for smaller firms. Indicatively, Salomon and Shaver’s (2005a) recent study shows that domestic and export sales are complementary and interdependent for smaller firms that focus on the domestic market. On the other hand, domestic and export sales are found to be substitutes for larger firms. It seems that international decisions for larger firms are more complex and taken in a broader multinational context. Research also indicates interesting domestic and international patterns that can give rise to significant interdependencies for smaller firms between the two types of markets. Scholars suggest that firms often commence operations at home before they expand abroad (for example, Blomstermo et al., 2004b; Johanson and Vahlne, 1977; Johanson and Wiedersheim-Paul, 1975; Luostarinen, 1979) while they may use international knowledge to improve their domestic competitive position (Salomon and Shaver, 2005b). Firms may start their internationalization on the inward side or they may move from outward to inward international operations (Jones, 1999). In addition, firms with a domestic focus for many years can internationalize very quickly or experience phases of partial or complete de-internationalization and concentrate on the domestic market (Bell et al., 2001). Although various literature streams offer useful insights, the interchange between domestic and international markets has received limited attention. Management studies tend to approach the domestic and international markets in isolation and from a rather narrow perspective (Dimitratos et al., 2007; Salomon and Shaver, 2005a; Wolf, 1977). For example, the strategic management perspective emphasizes the strategic options for a firm in terms of different market segments and products but pays little attention to the domestic and international idiosyncrasies (for example, Ansoff, 1965, 1987). On the other hand, the international business perspective analyses international growth, assuming a perspective that neglects domestic or product market strategic choices (for example, Johanson and Vahlne, 1977). It is obvious that these two fields have complementary views on the interrelationships between domestic and international markets for the smaller firm. Surprisingly, little interchange between them has taken place in that regard (Dimitratos et al., 2007). This chapter examines the origins and definitions of the theme of the interrelationships between domestic and international markets, and

Interrelationships between domestic and international markets

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the main issues and debates. It brings together key contributions from various research strands and pinpoints fruitful areas for future research. The chapter is structured as follows. The second section provides perspectives on firm growth from the perspectives of strategic management and international business. The third section outlines the relation of economic approaches to internationalization with the investigated theme. The fourth and fifth sections discuss contributions from internationalization process and international entrepreneurship approaches, respectively. Finally, the last two sections synthesize the key points discussed and present concluding remarks and implications for theory and practice.

APPROACHES TO GROWTH AND DEVELOPMENT The origins of this theme are identified within the early literature on firm growth and development. It mainly highlights strategic options for growth and patterns of expansion. More specifically, this section reviews Penrose’s (1959), Ansoff’s (1965, 1987) and Luostarinen’s (1979) contributions and research on inward–outward international links. Two relevant empirical studies from Wolf (1977) and Salomon and Shaver (2005a) are also discussed. Penrose (1959) argues that the main objective of owners or managers of firms is to increase total long-run profitability. Firms expand through diversification which emerges when opportunities in existing markets become less profitable than opportunities for new investment. Diversification takes four forms, which are: 1. 2. 3. 4.

Additional products within the firm’s technology and markets. Products involving the same technology but new markets. Products involving new technology but the same markets. Products involving new technology and new markets.

Along these lines, Ansoff (1965, 1987) associates the strategic options for growth with the degree to which competitive position may change or improve. His expansion matrix suggests that firms can: 1. 2. 3. 4.

Protect and build on existing products and markets through consolidation and market penetration. Develop new products in existing markets (product development). Develop existing products in new markets (market development). Expand in new products and markets (diversification).

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Luostarinen (1979) develops Ansoff’s model and distinguishes between home and overseas expansions. However, he is more interested in international expansion. His classification of alternative expansion modes and value chain activities arises from a quite holistic understanding of the internationalization process. Viewed in this light, internationalization is part of and inseparable from the overall growth and development of small firms (see also Bell et al., 1998; Bell and Young, 1998; Jones, 1999). Luostarinen’s classification departs from the expansion of firms with only domestic operations, which is the very basic type of firm in terms of complexity of business operations. He suggests that firms can expand in three ways. These are: 1. 2. 3.

Expansion through geographical diversification, which can be domestic geographical expansion and/or international geographical expansion. Expansion in old market segments through existing products. Expansion through product or industrial diversification, which can be domestic product or industrial diversification, and/or international product or industrial diversification.

Internationalization is manifested in the international expansion modes, which may be international geographical expansion, and, international product or industrial diversification. Luostarinen explains internationalization around three strategies: product, operations and market. These are associated with products/services, selection and assessment of markets, nature and role of functions, technology, and entry and development strategies. It is suggested that firms move from goods to services, to systems and finally to know-how with a progression from non-direct to direct investment marketing operations. In terms of market selection, firms are found to initially enter psychically close countries in physical, cultural, political and economic terms (Luostarinen, 1979). Taking a more holistic view of internationalization, another important aspect of the growth and development of the smaller firm is the inward aspect of internationalization. While there has been extensive research on the outward internationalization of the smaller firm, the link between inward and outward international activity has received limited attention (Buckley and Ghauri, 1993; Jones, 1999, 2001; Korhonen et al., 1996; Luostarinen, 1970, 1979; Luostarinen and Welch, 1990; Welch and Luostarinen, 1993). These links refer to firms’ core value chain functions – that is, research and development, production, marketing and distribution – and individuals and organizations based in foreign markets (Jones, 1999). They may cover multiple forms and operational modes, such as imports of good and services, finance and technology through franchising,


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licensing, direct investments and cooperative agreements (Luostarinen and Welch, 1990). To some extent, inward internationalization can be viewed as a mirror of the outward process (Luostarinen and Welch, 1990). Thus, before or while firms move to outward internationalization and enter foreign markets in order to sell their products, there can be an equivalent inward process of developing international sourcing activities. Jones (1999, 2001), Korhonen et al. (1996) and Welch and Luostarinen (1993) support the notion that inward–outward links can shed light on the ‘roots of internationalization’, that is, how internationalization commences. They suggest that inward and outward links are likely to be very important at the early stages of international growth and development of small firms. It is found that many small firms may commence their international operations on the inward side and then move outwards. Jones (1999) also finds that some small high-technology firms might move from exporting to importing. Regardless of the inward–outward sequence, the inward process can have important performance implications for outward activities. Any form of inward activity signals the start of a relationship between a local buyer and a foreign seller, which is added to the firms’ foreign network. As a result, this relationship can be a source of knowledge about a foreign market and give rise to further market opportunities. Viewing domestic and international expansion as different aspects of firm growth, Wolf’s (1977) study represents one of the first empirical attempts to examine directly interrelationships between domestic and international activities. This study investigates expansion abroad through exporting and foreign investment, and the expansion through domestic industrial diversification as part of a single diversification strategy. Wolf’s (1977) work associates diversification positively with technological intensity. Although the average firm size of his sample is large, the author shows that domestic and international activities have a common basis as part of the firm’s complex innovation, production and marketing strategies. In a more recent study, Salomon and Shaver (2005a) test the interrelationships between export and domestic sales, hypothesizing that they are determined simultaneously. Whilst Wolf (1977) focuses on internal factors, Salomon and Shaver examine the influence of both internal factors (research and development – R&D – and advertising investments) and external factors (market growth and exchange rate changes) on the domestic and export sales in Spanish firms. They find significant differences between foreign-owned firms operating in Spain and smaller, Spanishowned firms with a focus on the domestic market. Domestic and export sales are found to be complementary for Spanish-owned firms. These authors suggest that strength in the domestic market drives the export sales of these firms. On the other hand, domestic and export sales are found to

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be substitutes for foreign-owned firms. It seems that these firms operate within a broader multinational network, and so their export decisions are taken in this multinational context. The next section discusses the insights for larger firms in greater depth.

ECONOMIC APPROACHES TO INTERNATIONALIZATION The economic approaches to internationalization were developed almost at the same period as the growth and development research. However, all these streams cannot all be distinguished clearly. For example, Penrose’s (1959) argument about when firms go abroad resembles Hymer’s (1976) market power approach, which is analysed below. The theories of the multinational enterprise (MNE) and foreign direct investment, which are also reviewed in this section, deal with the growth of the firm directly. Nevertheless, they take a more international perspective in comparison with the approaches of the previous section. In general, the economic approaches to internationalization recognize the importance of domestic growth to international operations. They nonetheless view a one-way relationship of domestic with international markets rather than a two-way relationship. Firstly, Burenstam-Linder (1961) argues that internationalization is based on the domestic networks of firms. Perlmutter (1969) refers implicitly to the importance of domestic operations to internationalization in his examination of the evolution of MNE. In his view, the firm may evolve gradually from ethnocentrism to polycentrism and ultimately to geocentrism. Ethnocentrism relates to the focus on the domestic market; polycentrism emerges as the firm internationalizes and encounters challenges in its interaction with international institutions, rules and regulations; geocentrism delineates global focus and growth. In the product life-cycle model (Vernon, 1966), the importance of domestic activity is more explicit. It states that innovation and production start initially in the domestic market and that domestic operations can be a source of competitive advantage. Later, foreign production starts as the market potential evolves abroad. Finally, foreign producers become competitive in their international markets and competition from abroad emerges in the home base. Furthermore, research on foreign direct investment and MNEs stresses the importance of domestic operations (Anderson and Gatignon, 1986; Beamish and Banks, 1987; Gatignon and Anderson, 1988). For example, in Hymer’s market power approach (1976), international expansion occurs when the domestic market is dominated by few firms and it becomes


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difficult to increase industry concentration, and the firms’ market power and profits further. When the process of industry concentration continues, the profits that result from monopoly power in the domestic market are invested in foreign production. In Kogut and Zander’s (1993) evolutionary perspective of the MNE, the tacitness of knowledge of firms determines both international and domestic growth. The tacitness of knowledge, which underlies organizational knowhow and technology-based assets, ensures inimitability of knowledge by competitors (Nelson and Winter, 1982). Inimitable knowledge encodes the advantages of the firm growth (Kogut and Zander, 1993). However, Teece (1977) positively associates tacitness of technology with the additional cost of technology transfer to a new location. Kogut and Zander (1992) suggest that the differential capabilities of a firm for growth determine its advantages over its competitors. These capabilities concern the speed of internal creation and replication of new knowledge concerning the external imitative and innovative efforts of competitors (Kogut and Zander, 1993). On the other hand, Casson (1992) stresses transaction costs in the knowledge transfer between different activities and locations. Therefore, domestic R&D and marketing can be internalized at a negligible cost when both types of knowledge are held by the integrating firm. He also argues that technical knowledge is universal in its geographical coverage whereas market knowledge is location-specific. Moreover, this author approaches international expansion as a process of incremental ownership, starting with cooperative agreements between domestic R&D and foreign marketing, and proceeding to a joint venture and full ownership of the foreign operations. As a result, incremental ownership takes place more often in international business operations than in domestic business operations. Domestic cooperative agreements are not likely to occur when firms have wholly owned marketing subsidiaries abroad. Finally, market knowledge is implicitly assumed as more important in international operations. In addition, in a more recent study, Bernard and Jensen (1999) associate outstanding exporters with positions of strength in the domestic market. They consider that internationalization comes after the establishment of the firm at home. They find that future exporters have exceptional performance characteristics several years before they internationalize. In addition, in the years just prior to the start of exporting, these firms are growing faster than solely domestic firms. Employment growth and survival are also found to be greater for exporters than non-exporters, but productivity and wage growth are not. Overall, the economic approaches to internationalization consider the influence of the domestic market on the international one, but they fail to

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operationalize it. These approaches primarily deal with the large corporation. They offer useful insights, however, into the research on the smaller firm, such as the process approaches to internationalization, which are discussed in the next section.

PROCESS APPROACHES TO INTERNATIONALIZATION Process approaches to internationalization build on the economic ones, but they shift the focus of analysis from large corporations to smaller firms. They recognize that although these are relatively small and cannot undertake large investments, they can initiate international operations. Process approaches take a behavioural and path-dependent view and approach internationalization through stages of development. In similar vein to the economic approaches, the various process models implicitly or explicitly consider domestic operations as an initial stage in the internationalization process (Barret and Wilkinson, 1985; Bilkey and Tesar, 1977; Cavusgil, 1984a; Crick, 1995; Czinkota, 1982; Johanson and Wiedersheim-Paul, 1975; Lim et al., 1991; Moon and Lee, 1990; Rao and Naidu, 1992). However, they elaborate on the effect of domestic on international market operations to a larger extent than the growth and economic approaches do. Johanson and Vahlne (1977) argue that there are lifelong basic experiences of the firm and specific experiences of individuals, organizations and markets that support domestic operations. Nevertheless, there is no such basic experience to start with in international operations. They posit that market-specific knowledge generated through experiences in the international market is the main driving force in internationalization and it is acquired gradually through operating there. Johanson and Vahlne (1977) also distinguish between general knowledge and market-specific knowledge and suggest that both types of knowledge are essential to establishment and performance in every market. Nevertheless, the way that general knowledge is acquired is not explicitly explained (Forsgren, 2002). Interestingly, Johanson and Vahlne (1977: 28) note that as general knowledge is transferable between markets, it can induce ‘lateral growth; that is the establishment of technically similar activities in dissimilar business environments’. However, they do not consider this point when they refer jointly to domestic and international operations. Moreover, Johanson and Vahlne (1977) use the concept of psychic distance between domestic and international markets in order to explain market selection. Psychic distance is defined as ‘the sum of factors


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preventing or disturbing the flows of information between firms and market’ (Johanson and Wiedersheim-Paul, 1975: 18). Accordingly, firms initially enter psychically close countries, in terms of geography, language, culture, political and economic systems. Johanson and Vahlne (1977) suggest that psychic differences between home and host markets mainly distinguish international from domestic operations. The concept of psychic distance has been refined since 1975 and has still remained relevant (Dow and Karunaratna, 2006; Ellis, 2008; O’Grady and Lane, 1996; Stöttinger and Schlegelmilch, 2000). For instance, Nördstrom and Vahlne’s (1992: 3) argument is that psychic distance involves ‘factors preventing or disturbing firms learning about and understanding a foreign environment’. This statement emphasizes the role of learning in internationalization and the importance of generating an understanding of the market and adapting to it (O’Grady and Lane, 1996). Nördstrom and Vahlne (1992) add that an inability to learn about important differences impedes adaptation and affects performance. In this vein, Blomstermo et al. (2004b) take a knowledge perspective and examine the effect of the length of domestic operations prior to internationalization on knowledge development in internationalizing firms. Based on Eriksson et al. (1997), they consider three types of knowledge that could be transferred between domestic and international markets. These are: business knowledge, which is market-specific experiential knowledge pertaining to customers, market conditions, and competitors; institutional knowledge, which is market-specific experiential knowledge pertaining to the government, institutional framework, rules, norms and values; and internationalization knowledge, which is firm-specific experiential knowledge pertaining to a particular firm’s ‘way of going international’. Blomstermo et al. (2004b) argue that business knowledge and product knowledge are more easily transferred from the domestic market to the international market compared with institutional knowledge. This may suggest that psychic differences are larger in institutional than businessrelated issues nowadays. Blomstermo et al.’s (2004b) main finding is that international expansion can be harder for late than for early internationalizers. Blomstermo et al. (2004b) advocate that firms with domestic experience develop a way of learning about market expansion in general; but this learning does not pertain to internationalization directly. The longer firms operate at home, the more processes and routines are developed. However, when firms with long domestic experience decide to expand abroad, they are required to change mental models and processes. This finding is further supported in Autio et al.’s (2000) and Cohen and Levinthal’s (1990) works. Autio et al. (2000) positively associate early internationalization with knowledge

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intensity and rapid internationalization. Cohen and Levinthal (1990) support the view that as firms get older, they develop mental models that hinder their ability to grow in new environments. One of Blomstermo et al.’s (2004b) arguments is that firms with domestic operations develop a general understanding about market expansion. Wiedersheim-Paul et al. (1978) and Welch and Wiedersheim-Paul (1980) develop a behavioural model that illuminates this aspect of domestic operations. They specifically examine the pre-export phase and its role in the start of internationalization process. In accord with Luostarinen (1979), they emphasize the locational dimension of firm growth. Wiedersheim-Paul et al.’s (1978) model suggests that when firms expand domestically and are ready to make further growth decisions, three factors and their interactions influence export decisions. These are: 1.

2.

3.

The decision-maker, in terms of attitudes, experiences and mental maps. This variable incorporates the international outlook on orientation and risk perception about international operations. The external environment of the firm, which includes domestic environment and location of the firm. This variable concerns transport costs, information flows and connections with other countries and competition. The firm, which encompasses goals of the firm and their degree of achievement, product characteristics and history of the firm. The first aspect refers to the relationship of survival with specific growth strategies, including international expansion. Product characteristics concern the degree of standardization and the degree of complexity. Finally, the history of the firm relates to experience from domestic expansion. Interestingly, Wiedersheim-Paul et al. (1978) suggest that domestic expansion is a type of internationalization, the ‘domestic internationalization’ notion, implying that there is a common base behind these two types of expansion.

This model also includes internal and external attention-evoking factors or triggers, which are: unique competence; excess capacity in the resources of management, marketing, production or finance; fortuitous orders from foreign customers; market opportunities; competition; and government export stimulation measures. Ultimately, those factors influence and are influenced by the pre-export information activities. The dimensions of these activities are: willingness to start exporting, information transmission activity and information collection activity. The degree of interest of firms in these activities results in three groups of firms: active, passive and domestic.


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The most important contribution of process approaches to the simultaneous examination of domestic and international markets is the inclusion of specific, useful concepts and variables, such as psychic distance, path-dependence, types of knowledge and resources, environment and decision-maker. There is not, however, much empirical research on this area in comparison with international entrepreneurship research, which is analysed below.

INTERNATIONAL ENTREPRENEURSHIP RESEARCH International entrepreneurship (IE) research has traditionally focused on the smaller firm and especially the early and accelerated internationalization of new ventures. At the same time, it has contributed to the theme of the interrelationships between domestic and international markets. On the other hand, it seems that IE research does not build to an adequate extent on previous relevant conceptual works. In one of the first studies that offers support for the notion of IE, McDougall (1989) finds significant differences between the strategy and industry structure profiles in new venture firms operating entirely in the domestic market (DNVs) and new venture firms that began receiving revenues from international markets (INVs). She shows that DNVs seek strategies of production expansion and customer specialization. DNVs achieve this through operating in limited geographical markets, maintaining excess capacity, pursuing forward integration and producing a specialty product that is purchased irregularly. On the other hand, she shows that INVs pursue strategies of broader market coverage through accessing numerous distribution channels, targeting numerous customers in diverse market segments and achieving high market or product visibility. INVs seek more aggressive entry to multiple geographical markets on a large scale, seek external financial and production resources, and secure patent technology. In addition, McDougall et al. (2003) find differences between INVs and DNVs in their entrepreneurial team experiences. They argue that INVs’ decision-makers have relatively more managerial experience in their industries and are more internationally experienced than DNVs’ managers. Hence, DNVs might be reluctant to internationalize early due to the perceived complexities involved. Since internationalization constrains resources further, industry experience of entrepreneurial teams is even more necessary. McDougall et al. (2003) also argue that managers’ personal characteristics, such as strong interest in international operations,

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can justify both their prior international experience and the international entries of their current venture. However, not all types of prior experience can explain the strong international focus of INVs. It is found that prior technical experience is negatively associated with overseas activities and that the decision-makers of DNVs are mainly scientists with highly technical backgrounds. Andersson (1990) also distinguishes between technical entrepreneurs and marketing entrepreneurs. He suggests that technical entrepreneurs are mainly interested in product and production development, and internationalization may occur as a result of the product for technical entrepreneurs, whereas marketing entrepreneurs are more proactive in the internationalization process. Expanding McDougall’s (1989) work, McDougall et al. (2003) also show that INVs compete in more globally integrated industries with more aggressive strategies than DNVs in terms of entry order into the industry, market share and growth objectives. INVs, moreover, pursue differentiation strategies on the basis of product innovation, quality, service and marketing compared with the low-cost strategies of DNVs. On the other hand, cost considerations do not restrain INVs from going international (McDougall, 1989; Brush, 1992). McDougall et al. (2003) assert that INVs’ greater emphasis on product innovation as a competitive strategy is supported by their extensive strategies on quality, service and marketing. INVs’ unique knowledge leads to innovative products that give them a competitive advantage over solely domestic firms (Brush, 1992; Coviello and Munro, 1994; Jolly et al., 1992; Oviatt and McDougall, 1994). Although McDougall (1989) and McDougall et al. (2003) suggest two different firm behaviours and structures, namely domestic and international, they do not examine the interrelationships between the two types of markets within the same firm. Sapienza et al. (2005) provide more evidence on this issue. They investigate the antecedents of international and domestic learning effort and show how much effort internationalized firms might commit to process both domestic and international knowledge. In particular, they study how the degree of internationalization, the age at international entry and the entrepreneurial orientation of the firm are associated with attention to learning activities in domestic and international markets. Sapienza et al. (2005) find that the degree of internationalization is negatively associated with the domestic learning effort. The scope of international activity thus seems to affect domestic strategy. On the other hand, the degree of internationalization is found to be only marginally positively associated with international learning effort. Early internationalization and entrepreneurial orientation are also found to be positively related to both domestic and international learning effort.


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Acedo and Jones (2007) investigate internationalization speed from a more cognitive perspective. In their study, internationalization speed (that is, rapidity of the first international market entry) results in three groups of entrepreneurs. These are international entrepreneurs, exporters and nonexporters. International entrepreneurs go abroad faster than exporters, and non-exporters have not internationalized at all. The cognitive elements involved are proactivity, international orientation, tolerance to ambiguity and risk perception. Acedo and Jones (2007) specifically examine the relationship between these four cognitive constructs with internationalization speed. Acedo and Jones (2007) argue that in general, less risk-perceptive entrepreneurs are more likely to internationalize faster. For all firms, higher international orientation of individuals results in higher levels of proactivity and a lower perception of risk. No significant positive association between international orientation and tolerance to ambiguity is found. However, they show that higher tolerance to ambiguity results in lower risk perception and proactive disposition levels. Moreover, more proactive individuals are less perceptive of risk. Furthermore, Acedo and Jones (2007) find differences between international entrepreneurs, exporters and non-exporters. While international entrepreneurs’ international orientation leads to higher tolerance to ambiguity, non-exporters are the least internationally oriented. Although non-exporters demonstrate a stronger association of tolerance to ambiguity with proactivity, in their case this relationship does not affect internationalization. When Acedo and Jones (2007) compare exporters to non-exporters, the relationships between international orientation and proactivity and risk perception are significant. Therefore, higher tolerance to ambiguity for non-exporters increases proactivity and, in turn, reduces the risk from international markets. Dimitratos et al. (2004) bring environmental determinism into the picture to a greater extent. They find that uncertainty in the domestic environment and uncertainty in both domestic and international environments positively moderate the entrepreneurship–international performance relationship. Hence, they show that uncertainty in domestic and international markets may enhance international outcomes of entrepreneurial activities. It is suggested that the alignment of entrepreneurship with domestic environmental conditions can reinforce international performance. Consequently, market selection that matches the uncertain environmental conditions of the domestic market can result in superior international performance. In addition, such a market selection is likely to improve learning that is essential for international market development (Williamson, 1997). As mentioned above, there is more empirical research on the interchange

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between domestic and international markets in IE research than in the internationalization process research (and also in other streams). Nonetheless, it does not draw on previous relevant conceptual work to a great extent. This observation brings the neglected complementarities between research streams within the management field to the fore again. The next section discusses the key findings of this review in depth.

DISCUSSION The study of the interrelationships between domestic and international markets emerges as an important and under-researched theme for the smaller firm. Significant interdependencies appear to exist between domestic and export performance for smaller firms compared with larger companies (Salomon and Shaver, 2005a). Management studies, however, tend to approach the domestic and international markets in isolation and from a rather narrow perspective (Dimitratos et al., 2007; Salomon and Shaver, 2005a; Wolf, 1977). This review brings theoretical and empirical contributions from the various research strands together. It discusses research on firm growth, economic internationalization approaches, process internationalization and international entrepreneurship. The origins of this theme are identified within the early literature on firm growth and development in the strategic management and international business streams. Penrose (1959) identifies existing or new products, technology and markets as the dimensions of these options. Ansoff (1965, 1987) does not include technology in his matrix but emphasizes the strategic aspect of ‘product’ and ‘market’ options. Luostarinen (1979) stresses the distinction between domestic and international expansion and his analysis evolves around products/services, selection and assessment of markets, nature and role of functions, technology, and entry and development strategies. The research on international inward and outward interactions highlights the aspect of buying within the firm context (Jones, 1999, 2001; Korhonen et al., 1996; Luostarinen and Welch, 1990; Welch and Luostarinen, 1993). Wolf (1977) examines the relationships among domestic expansion, international expansion and technological intensity. Salomon and Shaver (2005a) investigate the association between export and domestic sales, examining a mixture of micro- and macro-level factors, such as R&D and advertising investments, market growth and exchange rate changes. Overall, these growth approaches group strategic options for growth and emphasize patterns of expansion. The distinction between domestic and international markets emerges unavoidably, but the interchange between those markets is not investigated much.


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The economic approaches to internationalization suggest that domestic operations and strength in the domestic market precede and assist the international development of the firm. Bernard and Jensen (1999) provide empirical support for this view. Hymer (1976) concludes that increased competition at home forces firms to expand abroad. Casson (1992) perceives international expansion as a process of incremental ownership, starting with cooperative agreements between domestic R&D and foreign marketing, and proceeding to joint ventures and full ownership of foreign operations. He also distinguishes between technical and market knowledge. Casson (1992) posits that technical knowledge is universal in its geographical coverage and market knowledge is locationspecific. Kogut and Zander (1993) propose that inimitability of firm knowledge over competitors determines both international and domestic growth. Overall, the economic approaches view a unilateral relationship of the domestic with the international market rather than a bilateral relationship. The process approaches to internationalization draw on the economic ones, but they shift the focus of the analysis from large corporations to smaller firms. They view internationalization as development through stages. The various process models conclude that firms start operations and accumulate experience at home and enter international markets afterwards. The process approaches consequently take a behavioural and pathdependent view (Eriksson et al., 2000). Path-dependence can be defined as the process by which current strategies and patterns of firms’ behaviour are contingent on and constitute a function of past strategies and patterns (Madhok, 1997). A similar concept is that of organizational imprinting. Organizational imprinting refers to the process by which events occurring at important developmental phases have persistent and possibly lifelong effects (Hannan, 1998; Stinchcombe, 1965). Research on the growth of the firm builds on path-dependence and organizational imprinting (Autio et al., 2000; Eriksson et al., 2000; Sapienza et al., 2006). Viewed in this light, these ideas can be important concepts to the investigation concerning the interactions between domestic and international patterns. Going back to the process approaches, Johanson and Vahlne (1977) stress the role of learning in internationalization. They also distinguish between general knowledge and market-specific knowledge. Moreover, Johanson and Vahlne (1977) use the concept of psychic distance between domestic and international markets in order to explain market selection. These authors suggest that psychic differences mainly distinguish international from domestic operations. Since then there has been much research on psychic distance, yet the findings are inconclusive. Some scholars find this concept valuable (Dow, 2000; Johanson and Wiedersheim-Paul, 1975),

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in contrast with others who do not (Benito and Gripsrud, 1992; Engwall and Wallenstål, 1988). It appears that the concept has evolved since its introduction by Johanson and Wiedersheim-Paul (1975) and is now more sophisticated (see also Dow and Karunaratna, 2006; Ellis, 2008). For instance, Blomstermo et al.’s (2004b) findings may suggest that psychic differences are now greater for institutional as opposed to business-related issues between countries. In addition, Blomstermo et al. (2004b) show that international expansion can be harder for late than for early internationalizers. They suggest that firms with domestic experience develop a general way of learning about market expansion. The longer firms operate at home, the more their processes and routines are developed. However, when firms with long domestic experience decide to expand abroad, they are required to change their mental models and processes. Furthermore, Wiedersheim-Paul et al. (1978) examine this pre-export domestic phase and its role in the start of the internationalization process. The process approaches usually concentrate on the influence of domestic operations. Wiedersheim-Paul et al. (1978) consider the influence of both domestic operations and environment. They suggest specific factors that may influence the export decisions of solely domestic firms. These refer to the decision-maker, the domestic environment, the firm goals, the product or service and the history of the firm. These factors interact with internal and external triggers, such as: unique competence; excess capacity in the resources of management, marketing, production or finance; fortuitous orders from foreign customers; market opportunities; competition; and government export stimulation measures. Factors and triggers influence the degree of interest of firms in pre-export information-related activities. International entrepreneurship research mainly contributes to the investigated theme through empirical quantitative studies, while there is much theoretical research in the internationalization process research. International entrepreneurship moreover appears not to draw on previous relevant conceptual studies to an adequate extent, such as WiedersheimPaul et al.’s (1978) work on the effect of the firm’s and decision-maker’s characteristics on pre-export decisions. McDougall (1989) and McDougall et al. (2003) find significant differences between the strategy and industry structure profiles in domestic and international new ventures. Both these studies explain the internationalization of INVs and their outstanding performance through the differences between INVs and DNVs. They do not consider the interchange between domestic and international markets within the same firm. DNVs are defined as solely domestic without any international revenues, and there is no emphasis on domestic activities of the INVs.


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More specifically, McDougall (1989) and McDougall et al. (2003) show that INVs compete in more globally integrated industries with more aggressive strategies than DNVs in terms of entry order into the industry, market share and growth objectives. INVs also pursue differentiation strategies on the basis of product innovation, quality, service and marketing compared with low-cost strategies of DNVs. In addition, McDougall et al. (2003) find differences between INVs and DNVs in their prior entrepreneurial team experiences. In agreement with WiedersheimPaul et al. (1978), they examine the effect of decision-makers’ prior experiences and personal characteristics on the willingness to internationalize. INV decision-makers are found to have relatively more managerial experience in their industries and to be more internationally experienced than DNV managers. DNV managers are mainly from a highly technical background. Furthermore, Acedo and Jones (2007) investigate international entrepreneurs, exporters and non-exporters. These authors examine entrepreneurs’ cognition in terms of international orientation, tolerance for ambiguity, risk perception and proactivity. Sapienza et al. (2005) show how much effort internationalized firms commit to process both domestic and international knowledge. They study international and domestic learning effort in relation to the degree of internationalization, early internationalization and entrepreneurial orientation. Dimitratos et al. (2004) bring environmental determinism more into the discussion. They find that uncertainty in the domestic environment, and uncertainty in both domestic and international environments, positively moderates the entrepreneurship–international performance relationship. Table 5.1 summarizes and groups the constructs emerging from the review of approaches to growth and development, economic approaches to internationalization, internationalization process and international entrepreneurship research. Those constructs are both internal and external to the firm. Some of them overlap among the streams, such as decisions, strategies, resources, knowledge, technology, learning, performance, decisionmaker’s and product characteristics, market growth, entry modes, growth and market orientation, market opportunities, and competition. Those overlaps denote complementarities among the streams and important issues for future research on the theme of the interrelationships between domestic and international markets. The complementarities among the streams may also concern the types of research carried out. For example, there is much relevant conceptual and qualitative work on the economic and process approaches to internationalization. However, empirical and quantitative studies mainly exist in international entrepreneurship. The review furthermore shows that the boundaries among the streams have not

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Table 5.1

Constructs emerging from the four research streams

Research stream

Constructs

Approaches to growth and development

●

Economic approaches to internationalization

●

●

●

●

Process approaches to internationalization

● ●

● ● ●

International entrepreneurship

●

●

● ●

Growth options and patterns, decisions, strategies, inward operations, networks Geographical and product markets, technology, entry modes, market choice, technological intensity, market growth, exchange rate changes Motives to expansion, market power, ownership and locational effects, incremental ownership Knowledge: technical and market knowledge; geographical scope of knowledge; tacitness and inimitability of knowledge Employment growth, wage growth, survival, productivity, performance Path-dependence, psychic distance, time and stage development Growth orientation, decision-maker’s and product characteristics, learning, pre-export information activities, degree of internationalization/international orientation, market commitment Knowledge: general and market-specific; business, institutional and internationalization Resources: management, marketing, production, finance; unique competences Environment: market opportunities, fortuitous orders, competition, government investment stimulation measures Industry and strategy structure profile: degree of industry global integration, industry entry order, market share, growth objectives, product innovation, marketing, quality and service, cost-effectiveness Prior entrepreneurial team experiences and decisionmakers’ characteristics: managerial, technical and international experience; international outlook Cognition: international orientation, proactivity, risk perception, tolerance for ambiguity Internationalization speed, degree of internationalization, entrepreneurial orientation, performance, learning effort, environmental uncertainty

been flexible enough to permit beneficial interchanges of ideas. Therefore, a more holistic approach should be taken to integrate these four research streams and perhaps others (for example, knowledge management, learning and finance).


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CONCLUSIONS AND IMPLICATIONS The study of the interrelationships between domestic and international markets emerges as an important and under-researched theme for the smaller firm. Significant interdependencies appear to exist between domestic and export performance for smaller firms (Salomon and Shaver, 2005a). Management studies, however, tend to approach the domestic and international markets in isolation, offering a one-sided view of the complex nature of small firm growth (Dimitratos et al., 2007; Salomon and Shaver, 2005a; Wolf, 1977). This review brings key contributions from various research strands together. It synthesizes research on firm growth, economic approaches to internationalization, process internationalization and international entrepreneurship. The chapter highlights considerable scope for research on the theme, which encompasses growth patterns, business decisions, market strategies, resource allocation, planned strategic growth, knowledge development and learning, and opportunities development. Those constructs are found to be common and emerge from different fields, but without considering the contributions of each other. Psychic distance and the recent research on it can prove conceptually useful when applied to the distinction between domestic and international markets. A joint examination of domestic and international markets, however, transcends geographical boundaries. The review shows that it warrants a holistic examination of small firm growth. This is in line with similar calls in the literature relating to small firm growth (for example Bell et al., 1998; Bell and Young, 1998; Dimitratos et al., 2007; Jones, 1999). The theme should consequently benefit greatly from a comprehensive approach that combines those four research streams reviewed, and perhaps other fields also (for example, knowledge management, learning and finance). In terms of managerial implications, a joint investigation into domestic and international market activities can assist managers of smaller firms in becoming more aware of: (1) the effects of environmental differences across markets on growth; (2) the outcomes of past growth strategies; and (3) the links between past and future domestic and international strategies. From a learning perspective, Zahra et al.’s (1999) argument increases the importance of this implication. Zahra et al. (1999) suggest that managers and employees might not fully understand how much they have learnt from the firm’s expansion, and how important this learning might be for the firm. Moreover, when knowledge integration takes place, the learning gained from prior expansion strategies becomes an integral part of firm routines and guides future growth decisions (Zahra et al., 1999). Hence, the ‘extraction’ of knowledge from organizational routines that leads to

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its utilization is particularly significant. In turn, this utilization can lead to other benefits, including potentially aiding innovation and performance outcomes. Furthermore, growth decisions that focus on domestic or international markets in isolation can lead to suboptimal firm choices. This argument is consistent with Bernard and Jensen’s (1999) and Salomon and Shaver’s (2005a) findings that firms should undertake international strategies from ‘strong positions’ in the domestic market.

6.

Learning processes in the development of absorptive capacity of internationalizing SMEs Margaret Fletcher

SUMMARY Although there has been a growing recognition of the importance of learning in the internationalization of firms in the international business literature, there have been few empirical studies, and these have been mainly quantitative. In order to secure deep understanding of learning processes of internationalizing firms the study in this chapter adopted a qualitative approach based on 12 longitudinal case studies of internationalizing firms. Data collection involved multiple, semi-structured interviews with chief executive officers conducted over three consecutive years. Secondary data and expert opinion provided both a means of validation and enrichment of the interview data. Internationalization process theory emphasizes the importance of experiential market knowledge in explaining the gradual internationalization of firms. International new venture research places more emphasis on knowledge intensity and unique product knowledge to explain the early and rapid internationalization of new firms. Based on a framework of absorptive capacity, the research provides new insights into the nature of knowledge used by internationalizing firms, clarifies distinctions between different types and sources of knowledge and examines the assimilation and exploitation of knowledge acquired by firms. Implications for management and policy-makers are discussed.

INTRODUCTION Relevant international business theory namely, internationalization process theory (Johanson and Vahlne, 1977, 1990) and international new venture research (Oviatt and McDougall, 1994) have identified knowledge accumulation and learning by firms as one of the key influences in their internationalization. This research develops a framework based on a firms’ 73

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absorptive capacity where learning is a result of a firm’s ability to acquire, assimilate and exploit new knowledge (Cohen and Levinthal, 1990; Zahra and George, 2002a). International business theory emphasizes the importance of internal experiential learning, whereas absorptive capacity emphasizes a firm’s acquisition of external knowledge. In this context, the aims of the study are to investigate: 1. 2.

The development of absorptive capacity by firms through the acquisition, assimilation and exploitation of new knowledge. The outcomes of that new knowledge and learning by firms in terms of strategic decisions, performance and competitive advantage.

KNOWLEDGE, LEARNING AND THE INTERNATIONALIZATION PROCESS International business literature identifies three types of knowledge that are important in the internationalization of firms: market, internationalization, and product and technological knowledge (Eriksson et al., 1997; Yli-Renko et al., 2002). Internationalization process theory (IPT) identifies the former two types. International new venture (INV) research highlights the importance of product and technology knowledge. Market Knowledge IPT emphasizes the acquisition of market knowledge whereby managerial learning and the acquisition of experiential market knowledge determine a firm’s internationalization (Johanson and Vahlne, 1977). Experiential knowledge is implicit and tacit and is acquired through operating in the marketplace (Penrose, 1959; Eriksson et al., 2000). The Uppsala model of internationalization developed by Johanson and Vahlne (1977) suggests that internationalization is incremental: in stages, as a firm acquires market knowledge through experience, it uses more advanced entry modes. The more a firm knows about the market the lower the perceived risk and the higher the investment. Lack of knowledge about foreign markets is a major obstacle to internationalization. Although knowledge can be objective and experiential (Penrose, 1959), an assumption of the Uppsala model is that objective knowledge is of minor importance. It is experience that generates business opportunities and is the driving force behind the internationalization process. Objective knowledge is acquired through standard methods of collecting and transmitting information such as market research, whereas experiential knowledge is more costly to accumulate and cannot be transferred

Absorptive capacity of internationalizing SMEs

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between firms (Eriksson et al., 1997). Johanson and Vahlne (2006) recently point out that the Uppsala Model is not the ‘establishment chain’, where firms progressively go from adhoc exports to establishing manufacturing subsidiaries. The model concerns learning and commitment building, and the interplay between knowledge development and a firms increasing foreign commitments. Other internationalization process models largely support the Uppsala model and the importance of experiential knowledge (Reid, 1981; Cavusgil, 1984b; Bilkey and Tesar, 1977; Czinkota, 1982). Recent research (Eriksson et al., 2000; Eriksson et al., 1997) has identified two types of market knowledge: business and institutional knowledge. Foreign business knowledge means experiential knowledge of clients, competitors and market conditions in a particular market. Foreign institutional knowledge refers to experiential knowledge of government, institutional frameworks, rules, norms and values in particular markets. Research since the early 1990s has shown that firms can acquire market knowledge in other ways, highlighting a weakness of IPT. Inward activities such as manufacturing might precede and influence the development of outward sales activities (Korhonen et al., 1990). Firms may de-internationalize, then internationalize (Luostarinen, 1994). Firms can learn by imitative learning through observing other firms, by acquiring or hiring people with the necessary knowledge, licensing, strategic alliances, company acquisitions and by conducting focused market research for new information rather than through experiences from their own activities (Welch and Welch, 1996; Forsgren, 2002). Through networks, firms can gain access to another firm’s knowledge without going through the same experiences (Johanson and Mattsson, 1988; Johanson and Vahlne, 2003; Eriksson et al., 1997), enabling them to enter new markets and expose themselves to new opportunities (Chetty and Blankenburgh Holm, 2000). Learning and network development are important drivers and outcomes of foreign market expansion (Welch and Welch, 1996). The accumulation of experience and a company’s ability to retain and update knowledge and expertise, especially if key staff exit the firm, are important organizational learning processes (Welch and Welch, 1996). Internationalization Knowledge The Uppsala model has been criticized as it focuses on specific market knowledge, neglecting experience relevant to all markets and internationalization knowledge (Eriksson et al., 1997; Li et al., 2004). Eriksson et al. (2000) identify internationalization knowledge which concerns accumulated experience gained from operating in the international environment. It is specific neither to country nor to mode of entry. It is firm-specific:

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for example it may include a particular firm’s ‘way of going international’ (Eriksson et al., 1997: 345). It concerns a firm’s knowledge of its capabilities in engaging in international operations and of its resources for doing so. These are embedded in the firm’s routines, procedures and structure (Eriksson et al., 2000). Such knowledge is generalizable from market to market and impacts on the firm’s ability to gain experiential knowledge about foreign markets and institutions. The more firms lack business and institutional knowledge, the higher the cost of their internationalization process (Eriksson et al., 1997). Product and Technological Knowledge A key component of a firm’s overseas investment decision is the nature of the product or service the company offers and the technology in its products and processes (Luostarinen, 1980). The issue of a firm’s knowledge intensity has become of increasing interest to researchers in the field of new venture internationalization (Yli-Renko et al., 2002: Autio et al., 2000; Zahra et al., 2000). In the case of technology-based firms the accumulation of product and technological knowledge allows firms to recognize and exploit new productive opportunities; knowledge is a key resource driving international growth (Yli-Renko et al., 2002). INVs go straight to overseas markets from inception rather than incrementally, enter psychically distant markets and use advanced entry modes. These firms are technology-based firms in knowledge-intensive sectors, often operating in volatile markets. Rapid internationalization is facilitated by the knowledge intensity of a firm’s core resources and is essential to its growth. INV theory suggests that the inherent mobility of knowledge allows for an earlier and more rapid internationalization of INVs (Oviatt and McDougall, 1997). Technological knowledge is inherent in an INV’s activities and outputs (McDougall et al., 1994). Unique product or service knowledge is one of the success factors (Oviatt and McDougall, 1995; Zahra et al., 2000). Knowledge intensity is an important facilitating condition for INVs (Oviatt and McDougall, 1994; Autio, 2005). Founders of INVs are alert to new international opportunities because of the previous knowledge and learning acquired in earlier activities (McDougall et al., 1994). INV theory suggests that by going international early, INVs are often not fettered by the inertia that limits established companies’ ability to learn, and may outperform competitors (Oviatt and McDougall, 1994), suggesting that INVs may enjoy ‘learning advantages of newness’ (Autio et al., 2000). Zahra (2005) suggests it is how firms compete once they enter global markets that determines competitive advantage, but there is little known about what and how INVs learn in the global marketplace.


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In conclusion, three types of knowledge have been identified in the international business literature: market, internationalization, and product and technological. Sources of knowledge can be internal, experiential for example, from operating in the market, or past experience of CEOs; or from external sources, for example networks, investors, trade missions, government sources, recruiting people, acquisitions, joint ventures and inward activities such as licensing (Forsgren, 2002; Vissak, 2005). The accumulation of knowledge and learning are important drivers in foreign market expansion for firms that follow traditional incremental approaches to international expansion and INVs that internationalize early and rapidly (Johanson and Vahne, 1977; Oviatt and McDougall, 1995). However there are limited empirical studies of different types of knowledge used by internationalizing firms and they are not clearly distinguished in the literature.

KNOWLEDGE RESOURCES, ORGANIZATIONAL LEARNING AND ABSORPTIVE CAPACITY Knowledge Resources The knowledge-based view (KBV) of the firm emphasizes the role of knowledge and learning as a vital resource and source of competitive advantage (Grant, 1996a, 2002; Spender, 1994, 1996). Knowledge resources can be viewed as a system of codifying information which enables it to be made useful (Kogut and Zander, 1995). Knowledge can be tacit or explicit. Tacit knowledge is embedded in individuals and cannot be expressed explicitly or codified in written form (Nonaka, 1994); it is subjective, experiential and hard to formalize, for example beliefs, perspectives, mental models and ideals (Nonaka et al., 2000). Explicit knowledge, on the other hand, is objective information in the form of quantifiable data, coded procedures, universally accepted principles, scientific formulas, specific actions and manuals which are codifiable and thus transferable (Nonaka, 1991; Nonaka et al., 2000). Tacit knowledge is more likely to be a unique, inimitable and immobile resource (Barney, 1991). Tacit, idiosyncratic knowledge can become a key strategic asset and source of competitive advantage (Nelson and Winter, 1982; Autio et al., 2000). However when knowledge is not embodied in well-defined physical artefacts it can be difficult to replicate accurately (Nelson and Winter, 1982). Knowledge can be difficult to encode and constantly changing in high-technology industries (Li et al., 2004). Thus, the transfer of knowledge is low for tacit knowledge and high for explicit knowledge (Grant, 2002).

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Organizational Learning and Absorptive Capacity Organizational learning is described as knowledge acquisition, knowledge sharing, knowledge utilization and unlearning (Huber, 1991). Organizational learning involves the assimilation of new knowledge into the organization’s knowledge base (Autio et al., 2000). Learning is most efficient in areas close to an existing knowledge base (Cohen and Levinthal, 1990). It begins at the individual level and is incorporated into organizational knowledge only when it is shared and assimilated into organizational routines, documents and practices (Kim, 1993). An important difference between individual and organization learning is that organizational learning depends on communication and knowledge sharing between individuals, which results in cross-fertilization between ideas and knowledge (Huber, 1991). Thus organizational learning is constrained by the flow of information between individuals. Lower-level employees have an important role. Organizational learning theory presumes a necessary relationship between the learning and an employee’s active involvement in the organizational learning process, rather than being managed top-down by the entrepreneur or senior management team (Spender, 1996). Organizational learning theory identifies two levels of learning. Single loop or adaptive learning occurs within the learning boundary of the firm, and double loop or generative learning occurs when the firm questions long-held assumptions (Argyris and Schon, 1978; Senge, 1990). Single loop learning allows things to be done better, whereas double loop learning concerns the capability to do new things and problem-solve. Existing organizational knowledge can be reinforced as knowledge is accumulated, becoming increasingly embedded in a firm’s routines and practices. This can result in inertia (Barkema and Vermeulen, 1998). Bringing about fundamental change or higher-level learning (double loop) is difficult for organizations and the adoption of new knowledge involves the unlearning of old (Nonaka, 1994). A firm’s ‘learning’ or ‘absorptive’ capacity is described by Cohen and Levinthal (1990: 128) as ‘an ability to recognize the value of new information, assimilate it, and apply it to commercial ends’. The accumulation or failed accumulation of knowledge is critical to a firm’s innovation capability and to its later growth (Cohen and Levinthal, 1990). A firm’s ability to evaluate and utilize outside knowledge is a function of its prior related knowledge and intensity of effort, thus the development of absorptive capacity is history- or path-dependent (Cohen and Levinthal, 1990; Kim, 1998). When a firm wishes to expand its prior knowledge it must intensify its learning effort to create absorptive capacity (Kim, 1998). Absorptive capacity requires learning capability, develops problem-solving skills and


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the capacity to create new knowledge (Kim, 1998). Absorptive capacity does not simply depend on the firm’s direct interface with the external environment, it depends on the transfer of knowledge across and within units. Thus a firm’s absorptive capacity is not resident in any single individual but depends on the links across a mosaic of individual capabilities (Cohen and Levinthal, 1990). Absorptive capacity can be viewed as a dynamic capability (Eisenhardt and Martin, 2000; Teece et al., 1997) where relationships between a firm’s innovative output and other outcomes create competitive advantage (Zahra and George, 2002a). Zahra and George (2002a) distinguish between a firm’s potential (acquisition and assimilation of information) and realized (transformation and exploitation) absorptive capacity and posit that only when absorptive capacity is realized can competitive advantage and performance be assured. Absorptive capacity is a type of learning that is different from ‘learning by doing’ where firms become more practised and efficient at what they are already doing (Arrow, 1962). With absorptive capacity a firm may acquire outside knowledge that will permit it to do something different (Cohen and Levinthal, 1989) and thus requires double loop, generative learning. March (1991) suggests that firms need to combine exploration and exploitation behaviour. Exploration, where firms engage in new research, is expensive and may result in ideas that do not come to market. Too much emphasis on exploitation, the development of ideas, is unlikely to lead to generative learning. In conclusion, the discussion above highlights the importance of firmlearning and absorptive capacity in internationalizing firms. Research into internationalization knowledge acquisition and learning is an area where there are few empirical studies, and these are mainly quantitative (Eriksson et al., 2000; Sapienza et al., 2005). This study seeks to address these gaps through rich insights into how SMEs acquire new knowledge and develop absorptive capacity in the internationalization process.

RESEARCH QUESTIONS AND CONCEPTUAL APPROACH This research aims to examine the learning processes of SMEs as they develop their business through internationalization. The research questions driving the investigation are: ●

What are the types and sources of new knowledge acquired by firms?

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Firms prior knowledge: International markets Internationalization Product/technological

Absorptive capacity: Acquisition of new knowledge – Internal/external

Absorptive capacity: Assimilation by firm – Sharing/transfer

Absorptive capacity: Exploited by firms – new capabilities, knowledge

⫹

Forces of change/stability: Critical events Problems/opportunities Inertia Tacit/explict knowledge

Outcomes: Strategic decisions Performance Competitive advantage

Firm internationalization learning

Figure 6.1

● ●

Research framework: learning processes of internationalizing SMEs

How is new knowledge assimilated within firms? How is new knowledge and learning exploited by firms?

Based on the literature and research questions above, a model of the research framework is presented in Figure 6.1. Research Design and Methodology The research project was developed in cooperation with Scottish Enterprise, the regional development agency in Scotland. Access was gained to firms that participated in the Global Companies Development Programme (GCDP). This is an empirical study which reports the findings of a longitudinal, qualitative, multiple case study research project based on 12 firms that had completed the GCDP and were in the process of implementing an internationalization strategy. An interpretivist approach is taken which recognizes that business situations are complex, unique and context-specific. The approach is inductive, whereby theory building takes place after the data has been collected (Saunders et al., 2003). Ghauri et al. (2002) suggest that cases in a multiple case study investigation should be selected to serve a particular purpose in the study. The criteria used for selection were richness of data and replication logic (Perry, 1998) and purposeful, rather than random selection (Patton, 2002). Validity is enhanced through confirmation of emergent relationships; theory can be refined or extended where cases disconfirm the


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relationship (Eisenhardt, 1989). Case studies are generalizable to theoretical propositions, not populations as in survey research (Yin, 2003). The firms selected were different types of Scottish firms wishing to expand internationally, from a mixture of manufacturing and service industries, high and low technology, and international new ventures and traditional small and medium-sized enterprises (SMEs). Firms participating in the GDCP were approached; 15 out of 18 agreed to participate in the research. Three firms then dropped out during the research period: one was taken over, a second relocated its business to the USA and a third was not an SME and felt the programme was not relevant. Case studies can be exploratory, descriptive and explanatory (Yin, 2003); all three approaches are used in the study. A descriptive approach is taken to portray an accurate profile of the events and situations. An explanatory approach seeks to establish causal relationships between variables and answer ‘How?’ and ‘Why?’ questions. Multiple case studies allowed a search for cross-case patterns and themes to provide accurate and reliable theory and capture novel findings in the data (Eisenhardt, 1989; Miles and Huberman, 1994). Data Collection The research involved in-depth, semi-structured interviews with the chief executive officers (CEOs) of the firms carried out over three consecutive years, 2003, 2004 and 2005. Each interview lasted approximately one hour. The interviews were taped and transcribed. The longitudinal nature of the research has enabled the study of the change and development of the firms over time (Pettigrew, 1992). This allows the researcher to unravel the complexity of the dynamic behaviour of firms and foreign investment decision-making processes (Welch and Luostarinen, 1988). The CEOs were the prime focus of attention as they are the key decision-makers in the SMEs, and the researcher had access to other key informants in several firms. Data collected from the interviews in earlier settings provided the context for the interpretation of later events and data collected later provides confirmation about the new insights into the interpretation of data collected on earlier occasions (Huxham, 2002). The research used multiple sources of data allowing data triangulation (Yin, 2003) which included Scottish Enterprise records, consultants’ reports, associated data on each firm, and expertise within Scottish Enterprise which enhanced the validity of the research through cross-checking and provides a more complete and holistic portrait of the phenomena (Ghauri et al., 2002). Background reports on the companies were consulted before each interview. A semi-structured interview schedule was prepared in advance of the

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interviews, which helped the researcher to control the situation, ask the right questions, adapt to new or unexpected situations and develop trust. Analysis The case study analysis used both within-case and cross-case methods as recommended by Miles and Huberman (1994). Case data were categorized into variables, then matrix and text tables were created to undertake and present the analysis. An analytical framework was constructed during the analysis whereby four groups of firms were identified: start-up firms, internationalizing technology firms, internationalizing manufacturing firms and firms that were not actively internationalizing or de-internationalized. Profile of the Case Study Companies The 12 companies involved in the research were from a variety of industry contexts (see Table 6.1). Seven firms started international activities within six years of starting up and were classified as international new ventures. Five were incremental internationalizers that started internationalization after at least six years of domestic trading (Table 6.1). All firms had some international experience when they joined the programme and were team managed. They were all independent Scottish firms, except for one firm which had been a technology SME that merged with a foreign company but retained the original business unit in Scotland. Three of the firms were spin-outs from other organizations. One was a spin-out from an SME, another was a university spin-out and a third was a GCDP-participating manufacturing firm that went into liquidation during the research and the CEO started a new venture. Five firms were small firms with less than 50 employees at the beginning of the research. Seven were medium-sized firm, of which six firms had less than 250 employees. One firm had experienced high growth in the previous few years and had 360 employees. The four groups of firms were given names to preserve anonymity as follows: three start-up firms (SU1, SU2, SU3), three technology-based firms (TECH1, TECH2, TECH3), four manufacturing firms (MAN1, MAN2, MAN3, MAN4) and two firms that were inactive internationalizers (IN1, IN2). Two of the start-up firms began trading during the research; the third was still in the process of developing the new idea. All of the technology-based firms grew the businesses internationally. Two manufacturing firms grew and two (after a period of growth) focused on market consolidation. Two other firms did not internationalize further to focus on the UK business. One of these maintained its previous level of international business and the other de-internationalized.

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Alloy processing manufacturer Hi Fi manufacturer

MAN1

IN2

IN1

TECH2 TECH3

TECH1

MAN4

MAN3

MAN2

Manufacture

Manufacture

Manufacture

Technology/ manufacture Manufacture

Service Technology

Sector

1979

1973

1996

2005

2002 2001

Start year

1996 exporting and subsidiaries 1973 exporting 1996 subsidiaries 1986/87 exporting

2005 joint venture

2002 exporting 2001 joint venture

Internationalization year and market entry mode

Acquisition 1980s exporting 1960s Optical eye testing Technology/ 1993 1999 exporting and technology/manufacturer manufacture subsidiary Digital media technology Technology 1991 2000 exporting Biotechnology – diagnostic Technology/ 1987 (1993 Pre 1993 exporting testing products manufacture float/merge) Mobile telephone repairer Service/repair Acquisition 2000 exporting and 1992 subsidiary Advertising agency Service 1979 1990s exporting

Oil and gas product manufacturer Clothing manufacturer

Education provider Aviation software development Clothing manufacturer

SU1 SU2

SU3

Business type

Types of firms, sector and internationalization

Firms

Table 6.1

Incremental

Incremental

Incremental INV

INV

Incremental

Incremental

INV

INV

INV

INV INV

Pace of international growth

Traditional

Knowledge intensive

Knowledge based Knowledge based

Knowledge based

Traditional

Traditional

Knowledge intensive

Traditional

Knowledge intensive

Knowledge intensive Knowledge based

Knowledge based/ intensity

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FINDINGS AND DISCUSSION Types of Knowledge All three types of new knowledge – market, internationalization and product and technological – identified in the literature were acquired by the firms (see Table 6.2). They were often interrelated. Firms were involved in acquiring new business and institutional market knowledge when they entered new geographical markets. The start-ups required market knowledge to adapt the new products for the overseas markets and gain market presence. Entering new markets required intense effort by the technology and manufacturing firms. It was more timeconsuming and costly than expected, resulting in slower expansion into other markets. As a result of this, firms continued their growth through penetration in the new market or existing overseas markets, and by planning to enter other markets once the new one became profitable. Where firms had underperformed overseas there was a period of consolidation before continued expansion. This resulted in the conversion of specific market knowledge to general internationalization and management know-how, for example improving overseas project management skills, Table 6.2

Types and sources of new knowledge

Firms

SU1 SU2 SU3 MAN1 MAN2 MAN3 MAN4 TECH1 TECH2 TECH3 IN1 IN2

Market knowledge KB/KI/T KI KB KI T KI T T KB KB KB KI T

I √ √ √ √

E √ √ √ √

√ √ √

√ √ √

International knowledge I √ √

√ √ √ √ √ √ √ √

E √ √ √ √ √ √ √ √ √ √ √

Product/ technological knowledge I

E

√ √

√ √

√

√

√

√ √ √ √ √

Notes: KB – Knowledge-based firm; KI – Knowledge-intensive firm; T – Traditional firm; I – Internal sources; E – External sources.


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worldwide sales and marketing processes, overseas franchising and web design. Inactive internationalizing firms acquired market knowledge of UK customers to develop new products and services and enter new UK regional markets. Acquiring internationalization knowledge was important (and the most frequent type of knowledge) for all firms. Firms were concerned with how to manage overseas partnerships including legal aspects, licences, and using overseas contract manufacturers. As firms grew internationally they acquired new knowledge on how to improve management structures and delegation in order that both UK and overseas managers became involved in decision-making within the firms. Where firms had overseas subsidiaries and sales employees, international knowledge of how to operate these would be applied to different overseas markets. The process often involved firms improving UK structures – for example, reviewing human resource management practices and head office administration. Most companies, except the manufacturing firms and a service start-up (SU1), acquired new product and technological knowledge. The startup firm developed a service to supply existing products by partners and was not concerned with new product knowledge at this stage. The two other start-up companies (SU2 and SU3) were developing new innovative products to launch the new ventures. The firms had technical or market expertise which they brought to the new ventures from previous businesses and the products were initially developed based on UK market knowledge. The technology-based firms were involved in research and development of new technology products to support their international growth. Improving the efficiency of research and development (R&D), commercialization and profitability of the ideas was an area of new knowledge acquired by the firms. Thus, as these firms developed new products they acquired new related internationalization knowledge. For example, TECH1 needed to improve the management of UK subcontractors. Another firm transferred manufacturing under licence to overseas contractors to reduce costs, acquired knowledge on how to protect its intellectual property and set up a licence agreement. The manufacturing firms had well-defined product ranges and focused on developing their overseas markets for existing products. Only one manufacturing firm (MAN2), the technology-intensive firm, was concerned with acquiring new product expertise and created a new product development function to combine product and market knowledge. MAN4 continued to introduce new consumer products from its existing knowledge base and did not require new expertise. The inactive internationalizers identified and acquired new product or service knowledge to develop new products and services to support their UK expansion.

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Sources of Knowledge Firms acquired knowledge from both internal and external sources (Table 6.2). New knowledge was acquired internally from groups and individuals within the firm, for example, creating cross-functional project groups, CEO prior expertise and experientially through visits to overseas markets. All firms combined these internal sources with external knowledge sources from the UK and abroad such as suppliers, competitors, customers, local community, government sources, published reports, partnerships and recruiting new employees. Combining internal and external knowledge sources was the most common knowledge source. There were some occasions where firms used only external sources of new knowledge, but there were very few occasions when firms only used internal sources of new knowledge. Whilst this study supports the view of IPT that firms acquire market knowledge from operating in the market (Johanson and Vahlne, 1977; Eriksson et al., 1997), findings suggest that firms used both internal experiential and external sources to acquire market knowledge. For example, the start-up firms combined internal experiential knowledge from operating in and visiting overseas markets, with external expertise by recruiting sales and marketing staff, accessing UK government support organizations and overseas networks, consultants and other advisers and published sources. One manufacturing firm, MAN1, acquired market knowledge as it expanded into a new region in the US. It acquired market knowledge of the different US states experientially, by its UK senior managers visiting the market to develop its new US sales subsidiary. In addition, it used external sources from US local agencies and Scottish Enterprise. Two technology-based firms acquired market knowledge externally. Firms recruited staff externally to acquire market knowledge to increase sales and marketing expertise (TECH3) or carry out market research (TECH1). The aim was to integrate the new market knowledge into the firm. One firm, TECH2, acquired experiential knowledge internally through visits to overseas markets. Acquiring new internationalization knowledge involved firms combining internal expertise from both management and employees with outside consultants, partners, recruiting new management, mentors, Scottish Enterprise and other public sector support. Only one firm, TECH1, used only internal knowledge. In this case the CEO and management relied on their previous experience and did not acquire external help. Acquiring new internationalization knowledge was very important for manufacturing firms. The firms used external sources to support the development of overseas operations. For two firms, MAN2 and MAN3, this was important to


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improve performance where they had experienced poor profitability. The inactive internationalizing firms used both internal and external sources to improve the general management structures and procedures of the businesses. A CEO with international experience was recruited to turn IN1 around and a new external advisory board was created by the CEO in IN2. Where firms required new product knowledge they acquired it externally as suggested by absorptive capacity theory (Cohen and Levinthal, 1989). The firms sourced the new knowledge externally from the market, working closely with customers to develop the new products, and acquired market and industry reports, and expertise from local networks, consultants, Scottish Enterprise and recruiting employees with technical and specialist knowledge. The inactive internationalizers sourced new product knowledge externally to develop new products and services for the domestic market. Assimilation and the Transfer Process The CEOs and top management teams were very important to the assimilation of the new knowledge within the firms. The transfer process involved sharing new knowledge internally amongst functional, technical and commercial managers, project teams, overseas managers and overseas sales employees. Sharing knowledge and communicating with middle managers and all employees was important as firms grew and became medium-sized for both internationalizing and inactive internationalizing firms. For example, SU2 commented that it was run collectively so that all information was shared and teams were informed, ensuring that one person did not have all the knowledge in a particular area. Thus it was important that firms made tacit knowledge explicit through knowledge sharing (Nonaka, 1994). Sharing marketing knowledge involved a two-way process of firms assimilating market knowledge from and transferring knowledge to overseas sales employees to support their activities. The CEO of SU1 developed marketing materials for the new overseas sales team from his experience. Internal marketing information systems and formal structures were developed to transfer overseas market information to management and project teams; for example MAN3 set up a company-wide computer information system. Firms worked closely with overseas agents, distributors and partners to share knowledge to support overseas activities. TECH3 and MAN4 recruited and trained overseas sales employees to support agents. Firms brought partners to the UK for meetings and conferences and visited overseas markets regularly. Inactive internationalizing firms shared market

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expertise through improved communication and regular management and team meetings. Internationalization knowledge sharing was similar within the different groups of firms and there were some cases of issues being important across the groups. The start-up firms were concerned with learning how to manage overseas partners and transferring knowledge to these firms. This involved presentations to partners, regular visits and providing high levels of support for the partners. SU2 provided sales training for its US partner and SU3 provided hands-on ‘consultancy’ support for an importer to market to UK retailers. The manufacturing firms set up formal management systems and increased delegation to the UK and overseas operations to share knowledge. Firms shared UK head office expertise and knowledge with overseas employees. This was supported by firms making frequent visits to their overseas markets. The managers worked closely with the management teams in the overseas sales subsidiaries. Knowledge was shared in the UK through cross-team working and project groups were created. The technology-based firms were concerned with increasing internationalization knowledge to manage sales operations abroad, improving monitoring of sales and marketing processes. This involved one firm, TECH1, communicating regularly with staff in the UK and abroad to share reasons for changes in procedures and strategy. Inactive internationalizing firms shared knowledge by improving communication with all staff, increasing delegation and participation in decision-making. Mentoring for senior staff, training of managers and access to consultants supported the knowledge sharing. Product knowledge was shared by firms to integrate internal technical product and market knowledge. New knowledge from customers and suppliers was absorbed to support new product development. Firms made regular overseas visits to customers and suppliers to develop new products. However firms did experience problems in assimilating the knowledge. This resulted in firms engaging in processes to communicate this knowledge throughout the firms to overcome inertia (Zahra, 2005). For example, TECH1, an INV, held weekly conferences for all staff video-linked to its US subsidiary. Technical directors and project leaders were appointed, and staff were trained in new technologies. IN1 used a mentor to help managers implement change. Both firms lost staff. Exploitation and Outcomes of New Knowledge Firms exploited the new market, internationalization and product knowledge by acquiring new capabilities which resulted in changes in how things were done and problem-solving. These in turn influenced firms’ strategic decisions, competitive advantage and performance.


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New market knowledge resulted in firms acquiring and building close relationships with overseas partners, customers, suppliers, manufacturers, distributors and agents. They acquired increased knowledge of overseas markets, and developed customer-focused sales models and processes throughout the firms which could be transferred to other markets. Customer-focused product development processes were created to support future growth. Firms increased sales by market penetration, consolidating or entering markets and gaining market profile in new overseas markets. Inactive internationalizing firms formed domestic partnerships, developed sales focus and increased sales operations in the UK. Increases in internationalization knowledge resulted in strategic approaches to decision-making, new management systems, better costing and control and project management and planning. Market entry models were developed that could be applied to new markets. Firms developed strategies which enabled them to compete worldwide, for example increasing supply flexibility, achieving scale of operations with less reliance on few customers, and employing intellectual property protection strategies. These resulted in increased sales and improved profitability. Inactive internationalizing firms increased sales to existing and new customers in new UK regional markets. New product and technical knowledge enabled the start-ups and technology-based firms to use technology to develop new innovative products, adapt and launch products to meet worldwide customer needs, and use technological innovations to add value to manufacturing output. For example, MAN2 created a new customer-focused strategy which was incorporated into a new product development function to support future growth. The inactive internationalizers developed new services, one with supporting software.

CONCLUSIONS: IMPLICATIONS FOR THE LITERATURE, LESSONS FOR MANAGEMENT AND PUBLIC POLICY The distinctions between the types and sources of knowledge are often blurred and not clearly distinguished in the literature. The in-depth approach used in this study revealed that firms acquired and combined market, internationalization, and product and technological knowledge. Learning is a result of acquiring different types of knowledge from internal and external sources. Findings support the idea of international knowledge suggested by Eriksson et al. (1997), and extend this concept, proposing that general internationalization knowledge can be of two types. First, it

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can be specific to the internationalization process and transferable to different markets, for example knowledge of market entry modes, managing overseas agents and partners, overseas franchising, overseas project management. Second, there is generic knowledge which is applicable to overseas and domestic markets, for example delegation, knowledge sharing systems, web design. This research extends previous internationalization process research which has focused on market knowledge and includes internationalization and product and technological knowledge acquisition. It provides new insights into internal and external sources of these knowledge types. Lessons for management are that to increase absorptive capacity firms created internal procedures and systems to convert tacit and individual knowledge to explicit and shared knowledge. To do this it is important that firms recognize what they do not know, and develop generative learning processes within the firm to help them problem-solve. The GCDP, as a public policy initiative, successfully provided specific market, internationalization, and product and technological knowledge to meet the individual companies’ needs. However the GCDP is not currently about learning processes within firms, an omission which should be addressed, explicitly recognizing the importance for firms of increasing their absorptive capacity to support their growth.

7.

Clients as a ‘hidden’ resource in rapid internationalization Sharon Loane and Jim Bell

SUMMARY Existing approaches explaining the accelerated or rapid internationalization of small firms are incomplete as they do not capture the key role of the firm’s client base in this endeavour. While the extant networking literature implicitly recognizes clients as influential in rapid internationalization, their specific contributions to the process have not undergone detailed scrutiny to date. Consequently, the chapter explores the various ways in which clients can act as a knowledge conduit and a valuable resource in the internationalization effort. Important dimensions of the relationships between clients and rapidly internationalizing firms include their role in: international small firm formation; internationalization through client followership; reputation-building; innovation and new product development; lessening entry barriers; and social capital and human resource acquisition. The authors posit that the network approach and both the resource-based view (RBV) and the knowledge-based views (KBV) of internationalization may be extended by further exploration of these issues. Propositions are developed and concluding remarks presented, including implications for public policy-makers.

INTRODUCTION The rapid internationalization of small and medium-sized enterprises (SMEs) has emerged as an area of research interest, as increasingly such firms are actively and aggressively engaged in international activity, often from inception. Pioneering global start-ups now account for a substantial proportion of exports in many countries (Verity and Hof, 1994; Luostarinen et al., 1994; Jones, 1999; Coviello and McAuley, 1999). Various trends in recent years have led to the involvement of SMEs in global activity; for example, the emergence and diffusion of information 91

92


and communication technology (ICT) and related technologies. Various theories have emerged over time in an attempt to explain accelerated internationalization. However, the internationalization of small companies is by no means a deterministic, or even a homogeneous process. Internationalization pathways reflect different strategies that relate market scope to timing advantages in an attempt to lever value from the business model. Moreover, any decision to pursue an international strategy is not solely dependent on the availability and adoption of new technologies. Rather, it is also influenced by many other factors, such as the international orientation of management, product/service characteristics, the availability of human and financial resources, the existence of networks, and the ability of the firm to leverage resources and knowledge both internal and external to the firm. While the extant networking literature implicitly recognizes clients as influential in rapid internationalization, their specific contributions to the process have not been the subject of detailed scrutiny. Consequently, this chapter explores the various ways in which clients can act as a knowledge conduit and a valuable resource in the internationalization effort. The authors posit that the network approach and both the resource-based view (RBV) and the knowledge-based view (KBV) of internationalization may be extended by further exploration of these issues.

SYNTHESIS OF THE LITERATURE Network Approaches to Internationalization Many responses have emerged in an attempt to explain rapid internationalization including the network approach, offering a behavioural perspective of a firm’s international activities. Blomstermo et al.’s (2004a, 2004b) insightful contribution builds on the seminal contribution of Granovetter (1973), who posited that ‘strong ties’ with family or close friends do not supply the diversity of knowledge provided by relationships with ‘weak ties’, such as acquaintances, business contacts and so on, highlighting the importance of ‘weak ties’ in internationalization networks (see Figure 7.1). There is strong empirical support for this approach (Johanson and Vahlne, 1992; Blankenburg and Johanson, 1992; Coviello and Munro, 1995, 1997; Chetty and Blankenburg Holm, 2000; Crick and Jones, 2000; Jones and Tagg, 2001; Chetty and Campbell-Hunt, 2004; Loane et al., 2004). Indeed, Coviello and Munro (1995, 1997) find that the

‘Hidden’ resource in rapid internationalization Consultants and sweat equity1 partners

R&D/science partners

Centres for collaboration

COMPETITION

Professional associations

Investment networks

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Government agencies

SUPPLIERS

The Firm

CLIENTS

DISTRIBUTORS

Trade associations

Business clubs

Note: 1. ‘Sweat equity’ is a commonly used term among practitioners: a term used to describe the contribution (other than cash) that founders or others have made to a project, and for which the founders usually want to get compensated.

Figure 7.1 Weak ties available to the small rapidly internationalizing firm internationalization of smaller firms is often driven by their networks. They further posit that firms’ entry mode decisions and choice of markets are also influenced by their network partners, supporting the view of Johanson and Vahlne (1992) that network relationships, as opposed to strategic decisions, play an essential part in international market entry. More recently, Loane and Bell (2006) have demonstrated that network building by rapidly internationalizing small firms is more strategic in intent than previously acknowledged. The network approach lacks predictive power. Indeed, Young et al. (1999) posit that the cause-and-effect relationships can be ambiguous, as networks may be seen as ways to overcome resource deficiencies rather than being the actual drivers of internationalization. Indeed, Johanson and Mattson (1993: 36) note that: ‘through its activities in the network the firm develops its relationships that secure it access to important resources’.

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Coviello and Cox (2006) comment that networks are key mechanisms whereby small internationalizing firms gain access to resources they are unable to develop themselves (Oviatt and McDougall, 1994). Zahra et al. (2000) and Loane and Bell (2006) consider the networks themselves to be a resource, which are unique and inimitable, and therefore hard to replicate, as each firm’s network position is itself unique. Clearly the firm does not have to possess all resources in order to gain access, and leverage them to its competitive advantage. It must be noted that the network approach views relationships as being continuously established, developed, maintained and dissolved with the aim of achieving company objectives. Relationships are developed through ongoing interaction where parties build mutual trust and knowledge. This presupposes that a firm’s networks are not static, but evolutionary, and will change and evolve over time in order best to meet the needs of the focal firm. However, there are gaps in our understanding of a firm’s weak ties and their activities with network partners. Heretofore, the role played by the firm’s clients in supplying resources, including knowledge, has been underinvestigated. Whilst the entrepreneurship literature acknowledges the clients’ role in the growth and development of the firm, this has remained unacknowledged by the internationalization and international entrepreneurship literatures. Research is required, illuminating how the resources, activities and actors within the network affect its various dimensions (Håkansson and Snethota, 1995; Kundu and Katz, 2003), including the clients of the focal firm. Resource-based View of Small Firm Internationalization (RBV) Recognition that small firm internationalization may be affected by multiple influences over time (Melin, 1992; Young et al., 1999) has led to a renewed interest in contingency approaches, initially articulated by Reid (1983) who contends that smaller firms adopt contingency approaches based upon the limited internal resources available at the time an international opportunity is presented. Indeed several authors later developed and tested contingency frameworks in an international context (Welch and Luostarinen, 1988; Woodcock et al., 1994; Yeoh and Jeong, 1995; Kumar and Subramaniam, 1997). Reid’s seminal work set the scene for these authors to argue that market selection and mode of entry are interdependent decisions. Indeed, Bell et al. (2003) argue that the range of the firm’s internationalization decisions, incorporating product decisions, market choice and entry modes, are made in a holistic manner (a notion first presented by Luostarinen,

‘Hidden’ resource in rapid internationalization

95

1979). As a consequence, an integrative resource-based view (RBV) of firm internationalization is currently re-emerging with a focus on the dynamic capabilities and resources of firms (Young et al., 1999). The RBV views the firm as a bundle of linked resources, combined with resource conversion activities (Rumelt, 1984). Similarly, Wernerfelt (1984) observes firms from a resource perspective instead of looking at their products, positing that the firm’s optimal growth is a balancing act between the exploitation of existing firm resources and developing new resources. Firms have also been described as bundles of heterogeneous resources (Barney, 1991; Grant, 1991). Different resource types, such as technological, financial, human, physical and organizational, are well acknowledged. RBV highlights the role of the firm’s internal resources, which are very often both specific and intangible (Wernerfelt, 1984; Barney, 1986, 1991). Such resources may include trade secrets, embedded technological knowledge, managerial, marketing and production skills, which are valuable and difficult to imitate (Dollinger, 1995), providing the sustainable competitive advantage needed for internationalization. Loane and Bell (2006) attempted to link the external network approach and the internally focused RBV, suggesting that a firm’s networks are themselves a resource, and are a key mechanism whereby small, rapidly internationalizing firms can access resources (including knowledge) which they themselves do not possess, or could not develop (Oviatt and McDougall, 1994). The RBV has applicability for the growth of small firms and also for their internationalization activities. Wernerfelt (1984) acknowledged international contacts as valuable resources and also that international market diversification had a role in new resource building. International contacts, including clients, are vested in the members of the management team, and such teams are vitally important in resource building. Peng and Luo (2000) comment that entrepreneurs in rapidly internationalizing firms attempt to translate their micro interpersonal links with managers at other firms into improved macro-organizational performance. Such embedded social capital or network link is an inherent firm-specific intangible resource that is difficult to replicate, and may provide competitive advantage (Peng and Luo, 2000; Mitchell et al., 2000). Therefore the knowledge of other network partners emerges as important (Chetty and Wilson, 2003; Jones and Coviello, 2005). Recently the RBV has been criticized, as much of the literature takes resource stocks as given and pays little attention to the process of resource development, and therefore is somewhat static in nature and lacking a dynamic element (Kylaheiko, 1998). Nevertheless, the RBV imparts a powerful theoretical perspective with wide applicability to internationalization,

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presenting a unifying framework from within which activities of firms may be examined. Knowledge-based View of Firm Internationalization (KBV) A major barrier to small firm internationalization is a lack of knowledge. Consequently, knowledge-related issues have provoked much interest in the literature (Reid, 1983; McAuley, 1999b). Knowledge is central to the Uppsala model and recently a knowledge-based view (KBV) of the firm has emerged as an extension to the RBV. The KBV, while accepting much of the content of the RBV, pays more attention to the process or path by which specific capabilities evolve and develop over time, adding a more dynamic element (Kuivalainen, 2003). The latter observes that the evolution of resources, capabilities and knowledge over time is rooted in evolutionary economics (Nelson and Winter, 1982; Foss and Eriksen, 1995), where learning is seen as key for long-term competitive advantage and superior performance (Teece et al., 1997). Interaction with the client base of the firm provides alert entrepreneurs with the opportunity to gain information and knowledge on clients’ requirements, foreign market conditions and industry trends. An individual firm may be viewed as the combination of accumulated tangible and intangible resource stocks unique to that firm. These resource stocks can be described as internal attributes of the firm – including assets, capabilities, processes, routines and knowledge – that are tied semi-permanently to the firm or controlled by it (Wernerfelt, 1984; Barney, 1986, 1991; Dierickx and Cool, 1989), often through network partners, including clients. Miller and Shamsie (1996) also observe that in increasingly dynamic and turbulent environments knowledge-based resources and capabilities contribute most to firm performance. More recently, Kuivalainen (2003) posits that firms may be seen as repositories of knowledge. Those that can create and manage knowledge, which is valuable, rare and difficult to substitute, are able to increase their value and strengthen their international competitive advantage. Entrepreneur(s) are the mechanism that triggers off variation-generating new combinations (technical artefacts, new routines, new methods of management and new organizational types) upon which the selection process works. The KBV takes an evolutionary view of internationalization, and the emphasis is not on resources per se, but on dynamically evolving internationally acquired routines and capabilities through which a web of coordinating relationships or networks connecting firmspecific resources are replicated (Kuivalainen, 2003), of which the client base may form a key element.


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CLIENTS AND RAPIDLY INTERNATIONALIZING SMALL FIRMS Firms’ relationships with their clients, while relatively under-researched in the extant internationalization literature, have long been acknowledged as important with regard to firm growth (Larson, 1991; Venkataraman and Van den Ven, 1998; Yli-Renko et al., 2001). These studies have principally focused on high-technology firms, corporate sponsors (Venkataraman and Van den Ven, 1998) or key selected clients (Yli-Renko et al., 2001). However, given that such firms tend to have a greater international orientation, they do provide insights into how clients affect small internationalizing new firms. Zander and Zander (2005) also acknowledge the important role of customers as a source of competitive advantage and firm growth, albeit from a large firm perspective. Given that internationalization is regarded as a legitimate strategy for growth, we now explore various dimensions of such relationships between clients and rapidly internationalizing firms.

CLIENTS AND INTERNATIONAL SMALL FIRM FORMATION Entrepreneurial foundations are at the heart of rising numbers of early and rapidly internationalizing small firms. They represent bottom-up processes, where the origin of the decisions and the drivers of the process are the spinout entrepreneurs who want to exploit unused potential based on experiences acquired within parent companies, who often remain core clients for the new firms. Similarly, some of the parent firms spin out an independent subsidiary to specialize in a niche activity, remaining as a core client for the firm. In both the former and the latter, the client is actually responsible for the very existence of the new firm, which may seek to internationalize rapidly in order exploit its capabilities and gain first-mover advantage. Small firms founded in such a manner often have the explicit aim of satisfying a known customer need. Frequently, the technology is already proven, customer needs have been established and team members with a mix of technical and commercial experience can be identified, recruited and incentivized (BVCA/Library House, 2005). Effectively, such spin-outs are launched at the cusp between market and technology development and product and business development, as many of the resources (technical, financial, networks, and so on) and a great deal of the knowledge embedded in the parent (who is typically also the client) are transferred to the new firm. As the core client may be a well-known firm, it becomes a dual

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resource, as it is not only a ready-made client, but also often a ‘reference client’, adding to the new venture’s marketing collateral at an early stage.

CLIENT-LED INTERNATIONALIZATION Clearly the market selection process for some firms is influenced by the activities of their clients rather than by any consideration of psychic proximity. Indeed, the relationship between a client and the SME may be the driver of the internationalization process. Bell (1995) demonstrates that some small firms, already established in their home market, follow domestic clients into overseas markets. These clients may be indigenous firms, but they are just as likely to be local subsidiaries of large multinational enterprises (MNEs). Indeed those firms that initially follow a domestic client to overseas markets often go on to capitalize on other opportunities in those markets. Small firms may also benefit from referrals to third parties from existing clients. ‘Client followership’ has benefits as many of the barriers to small firm internationalization are reduced or eliminated. Networks, learning and knowledge generated in individual country operations by the larger client are often shared with the newly internationalizing firm, leading to the SME’s increased knowledge stock of foreign operations. This ability to absorb new knowledge places the rapidly internationalizing small firm in a better position from which to capitalize upon new client opportunities abroad due to its enhanced market and technical knowledge stocks.

CLIENTS SIGNALLING REPUTATION Reuber and Fischer (2005) explore how small young firms signal reputation to their customers, concluding that reputation-building is not about establishing hierarchical status relative to other companies. Rather, some small young firms position themselves in the market as the provider of specific products or services to particular clients. Often they confer reputational signals to this marketplace via their customer base. This view resonates with Loane’s (2005) enquiry, which found that firms were deliberately targeting particular customers as ‘reference clients’. In doing so, they sought to send strong reputational signals and augment their marketing collateral early in their development. Intuitively the benefits of a ‘halo effect’ gained from dealing with ‘blue chip’ clients would appear to be important for small rapidly internationalizing firms who are exploiting niche markets, as many of these clients have a strong global presence.


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CLIENTS AND INNOVATION Large firms can ‘unlock mutual competitive advantages’ (Hines, 1994) and stimulate innovativeness in their supplier networks. They may use smaller suppliers as the source of new ideas and technological innovations. Clients may also wish to increase their own competitiveness by relying on their smaller suppliers to undertake part of the responsibility for elements of product design. The degree to which this responsibility is delegated may well rest on the level of trust in the client–supplier relationship. Such closeness at early stages of the product design process means that the smaller firm has an intimate knowledge of their client’s requirements, allowing them to develop their technological offerings; in short, clients often do not want products as such – they require solutions. This new product development (NPD) process can be divided into different steps with subsequent or overlapping stages with decisional gates (Cooper, 2001). The start of an NPD project usually consists of the idea generation stage, and its conclusion is the market launch. The range of activities in between and the terms used to describe them varies between firms and in their conceptualization in the literature, but leads to a common goal of commercialization. Clients can play a key role in all of these stages. They can contribute to joint idea generation, which reduces the risk of new product failure as there is a guaranteed outlet to the client. In addition, client support in the form of key personnel, network access, technical support and financial resources can all lead to reduced risk during NPD. Bell (1995) identifies examples of small software firms’ collaborations with clients that were larger manufacturers, where the latter part-financed R&D with the understanding that offerings could run on their hardware platform. Thereafter, offerings were often specified by the client and distributed through its channels. A further benefit of joint R&D–NPD with influential clients is enhanced firm credibility in any search for outside equity, often at a pre-revenue-generation stage of development. Clearly, client-driven innovation can be key in the product development process, ensuring robust and easy-to-use product/service offerings. Through formal usability testing and other client-centred design practices, small firms can work closely with clients, ensuring ease of use of the product and the creation of new products, services, and experiences. Once technology has been developed in this manner, it is then possible to expand the client base for the technology or product/service offering, and to achieve success in new international markets. The joint R&D process necessitates intense communication with the client and the transfer of knowledge from each partner to provide the right solution. Therefore the

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process of solving client ‘problems’ or client-inspired knowledge creation increases the knowledge base of the firm. This in turn may lead to an expanded client base, as the firm’s reputational signals grow stronger in a chosen niche. Additionally, such joint product development may mean that the smaller rapidly internationalizing firm, which is by its nature resource-constrained, may tap into the larger firm’s resource base, leading to accelerated internationalization.

CLIENTS AND THEIR ROLE IN LESSENING EXPORT BARRIERS Many previous enquiries have investigated barriers to exporting (for comprehensive reviews, see Katsikeas and Morgan, 1994; Leonidou, 1995; Morgan, 1997). Rather less attention has been paid to perceptions of barriers to internationalization among smaller entrepreneurial firms. Given recognition of their growing economic importance, Shaw and Darroch (2004) observe that this is a notable gap in the literature. They contend that smaller firms may be more severely affected by potential export and internationalization barriers than their larger counterparts, due to inherent resource constraints (see Table 7.1 for a summary of the main barriers for entrepreneurial SMEs). In addition, those internationalizing rapidly may suffer from many barriers concurrently. Clearly, a further gap in the literature is the lack of scrutiny of the potential role of clients in overcoming such barriers and/or in reducing the perceived and actual risks involved in internationalization. Reference clients may lessen barriers for small rapidly internationalizing firms, as their credibility and legitimacy can help in garnering financial and managerial resources. A client base containing high-profile customers may positively influence venture capitalists and other commercial funders and/ or improve the prospect of gaining support from government agencies. Similarly, in terms of limited managerial expertise, key clients can provide access to networks that will address gaps in knowledge or experience that limit effective strategic decision-making. They can also help alleviate partner formation difficulties by effecting appropriate introductions. In terms of market-based barriers, clients can often help to minimize legal and/or regulatory problems, in terms of complying with standards, facilitating market access or dealing with non-tariff issues. Finally, a client may ‘force’ improvements in performance. For example, if a firm becomes part of the client’s supply chain, then it may have to adopt new management information systems and procedures to enable it to interact effectively, thus improving its own management processes.


Table 7.1

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Main barriers to internationalization for entrepreneurial SMEs

Category

Type

Authors

Finance

General finance

Campbell, 1996; Burpitt and Rondinelli, 2000; Ward, 1993 Resource availability Karagozoglu and Lindell, 1998; Ali and Camp, 1993 Cost of operating overseas Rhee, 2002 Limited access to capital Buckley, 1989; Coviello and and credit McAuley, 1999; Ward, 1993

Managerial

Managerial attitudes

Market-based

Liability of foreignness Government regulations (tariff and non-tariff barriers) Economic conditions Lack of market knowledge Cultural /psychic distance

Zahra et al., 2000; Andersson, 2001; Manolova et al., 2002; Burpitt and Rondinelli, 2000 Lack of international Rhee, 2002; Karagozoglu and experience and skills Lindell 1998; Chandler and Jansen, 1992; Manolova et al., 2002 Limited management time Coviello and McAuley, 1999; Limited commitment Buckley, 1989 Coviello and McAuley, 1999; Lamb and Liesch, 2002 Partnership difficulties Karagozoglu and Lindell, 1998

Access to distribution Strong domestic market

Rhee, 2002; Lu and Beamish, 2001 Coviello and McAuley, 1999; Campbell, 1996; Karagozoglu and Lindell, 1998 Burpitt and Rondinelli, 2000 Karagozoglu and Lindell, 1998; Lamb and Liesch, 2002 Bell, 1995; Karagozoglu and Lindell, 1998 Karagozoglu and Lindell, 1998 Autio et al., 2000

Industryspecific

Competition Technology

Karagozoglu and Lindell, 1998 Chetty and Hamilton, 1996; Fontes and Coombs, 1997; Karagozoglu and Lindell, 1998

Firm-specific

Liability of newness Limited resources

Rhee, 2002; Lu and Beamish, 2001 Buckley, 1989; Coviello and McAuley, 1999; Fillis, 2001 Calof, 1993; Coviello and McAuley, 1999; Chetty and Hamilton, 1996; Campbell, 1996; Ali and Camp, 1993

Small size

Source:

Adapted from Shaw and Darroch (2003), p. 19.

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THE CLIENT’S SOCIAL CAPITAL AND HUMAN RESOURCE ACQUISITION The liability of newness and the additional liability of foreignness (Zaheer, 1995) are often cited as major hurdles for the young, small, rapidly internationalizing firm. Indeed, such firms are assumed to lack bases of influence and endorsement, stable relationships with important external constituents, and legitimacy (Stinchcombe, 1965). As Arenius and Autio (2005) comment, new organizations must be accepted by the social system, which extends upstream and downstream. One of the most important constituents of any knowledge-based firm is its people, as these human resources are often the only ‘real’ assets of the firm. Indeed, as previously discussed, founding members of new ventures may become the firm’s core client (Loane et al., 2007). Whilst these individuals are undoubtedly invaluable, they are not the only human resources required. Because small new firms can lack credibility in the eyes of prospective employees, they may be regarded as unattractive secondtier employers. Here relationships with important clients may help to overcome liabilities of newness in terms of recruitment as they signal the firm’s high-level core capabilities to a potential employee. Similarly, the opportunity to work alongside employees of a well-recognized client on joint NPD projects may prove a powerful attraction.

DISCUSSION Reuber and Fischer’s (2005) work has begun the examination of the role of clients as resources – albeit in one aspect only, signalling reputation – but this area remains under-researched. As these authors observe, our understanding of the ‘meanings and roles of different kinds of customer relationships remains limited’ (2005: 58). Consequently, the authors consider that the preceding elaboration on ways that clients assist in rapid internationalization serves to signal avenues for further exploration and highlight the need for a more systematic investigation of the issues (see Figure 7.2). From our previous enquiries, we conclude that the clients’ roles and the resources that they can bring to bear on internationalization are more extensive than previously articulated in the literature. They are also situationally specific, very valuable and difficult to imitate by the competition (Dollinger, 1995). We further posit that influential and collaborative clients help augment the knowledge and resource capabilities required for sustained international competitive advantage. Moreover, such relationships


The Firm

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Other clients/ markets

Client Knowledge Markets (competitive, legal, regulatory environment) Networks and channels Resources: Innovation, R&D, NPD support Financial assistance Managerial expertise Human and social capital

Knowledge/resource flows

Potential benefits from other clients/markets

Figure 7.2 Clients as a resource in rapid internationalization

are not static but dynamic. Contact with the ‘right’ clients will continue to enrich the focal firm’s knowledge and resource base. Flows from and to clients may well change as networks evolve over time (Coviello and Cox, 2006), and knowledge or resources acquired from one client may impact on activities with others and strategic decisions taken in regard to other markets. These issues are interesting from a theoretical perspective as they suggest clear linkages between alternative conceptualizations on the rapid internationalization of entrepreneurial firms, notably between network views and the RBV and the KBV. The authors postulate that the knowledge base of the firm, some of which is derived from influential clients, is the one facilitating force behind rapid internationalization and the development of cohesive international strategies. The acquisition and leveraging of external resources is a key aspect of (international) entrepreneurial behaviour and central to the RBV and the KBV. Knowledge is increasingly regarded as a key strategic asset in international competitiveness. This chapter highlights the role of clients who form an important part of firms’ networks and who are an invaluable source of such knowledge. Therefore, the development of appropriate networks with clients enables rapidly

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internationalizing entrepreneurial firms to acquire and leverage knowledge that facilitates the process. In this context clients may be viewed not just as a source of revenue, but also as a conduit for knowledge that will enhance the firm’s capabilities. Indeed, clients may be central to the internationalization process, as arbiters of knowledge and resource accumulation and mobilization, and as such are worthy of research effort. Because of their pivotal role in knowledge acquisition activities, it may be suggested that both the RBV and the KBV can also be enriched by drawing on social capital theory, which refers to the accrual of benefits, notably information, to actors embedded in these (and other) network relationships (Adler and Kwon, 2002). This chapter has sought to extend the RBV and the KBV by explicitly highlighting the pivotal role that clients often play in the rapid internationalization of small firms by acting as dynamic knowledge and resource conduits, thus reducing the liabilities of both foreignness and newness. The potential augmentation of the focal firm’s resource and knowledge base as a result of interaction with key clients is an important area. Kuivalainen (2003) posits that firms may be seen as repositories of knowledge. Those that can create and manage knowledge, which is valuable, rare and difficult to substitute, are able to increase their value and strengthen their international competitive advantage. Kuivalainen (2003) views alert entrepreneurs as the mechanism that triggers variation-generating new combinations, including networks on which the selection process works. In the evolutionary KBV, the emphasis is not on resources per se, but on dynamically evolving internationally acquired routines and capabilities through which a web of coordinating relationships or networks connecting firm-specific resources are replicated (Kuivalainen, 2003), of which the client base may form a key element. This view has the potential to update the more static RBV and addresses one of the major criticisms of this perspective, in which resource stocks are given. To that end further investigation of clients’ roles in resource and network accumulation, and into their role as knowledge conduits, is desirable. Therefore a number of propositions are put forward regarding the role and impact of clients as regards rapid internationalization. Their further investigation may improve our understanding of how small firms internationalize rapidly and provide greater insights into how they garner knowledge and leverage scarce external resources in pursuit of such objectives: P1: Small firms that view relationships with their key clients as knowledge and resource conduits are more likely to engage in rapid and dedicated internationalization.


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P2: Small firms that exploit clients’ knowledge and resources are likely to overcome liabilities of foreignness and/or newness more easily and are less likely to face major barriers to internationalization. P3: Small firms that leverage knowledge and other resources from key clients are more likely to have superior marketing collateral and enhanced credibility to advance their early internationalization. P4: Small firms will utilize resources, networks and knowledge from the ‘right’ clients as a means of enhancing their own international capabilities and competitiveness. P5: Small firms that leverage the networks and resources of key clients may experience a spillover effect that may improve transactions with their entire client base. The importance of the client base as resource and knowledge brokers has implications for firm strategy and public policy. For company managers, there are many potential benefits from close collaborative interactions with their client base. Exploiting sources of resources and knowledge external to the firm, available from their clients, may well enhance their growth and internationalization trajectories. This requires that managers are flexible in attitude and be cognisant that the capabilities of the firm may need to change over time in order to meet the requirements of a dynamic and turbulent international business environment. Public policy in support of internationalization must recognize that smaller rapidly internationalizing firms can avail themselves of resources and knowledge externally, including from clients, and that such assets may well be gleaned from domestic as well as international players. Therefore small firms should be supported to a greater extent in network building and maintenance activities, particularly those that may assist them to exploit the knowledge available from clients. Thus, greater emphasis should be placed on assisting smaller firms to become integrated and embedded in the supply chains and networks of larger domestic and international firms, rather than focusing almost exclusively on export development activities.

8.

Networks and the internationalization of firms: what we believe and what we might have missed Yee Kwan Tang

SUMMARY This chapter seeks to provide an improved understanding of networks as an influential factor in the internationalization of firms. While the important role of networks in the business development of firms is accepted as common wisdom, the author cautions against the tendency to interpret networks as ‘a natural given’ to firms and as universally beneficial to their business development. Through a study on the role of personal networks in the foreign development of smaller firms in the Chinese context, a gap between the commonly presumed and the actual effects of networks on internationalization is revealed and the limitations of personal networks in supporting the foreign business development of firms are illustrated. The chapter highlights the need to move from a one-sizefits-all analysis of networks to one that accounts for specific contextual conditions. Accordingly, a behavioural approach that puts emphasis on the active influence of a firm on its networking behaviour, and regards the effects of networks as the firm’s behavioural outcomes, is proposed. This approach contributes to enhancing the explanation and prediction of variations of network effects on firms, and providing concrete practical implications regarding a firm’s deliberate networking efforts in achieving internationalization.

INTRODUCTION If the statement, ‘Networks are beneficial to the business development of small firms’ is put forward, it is likely to win agreement from most researchers. Networks are an important means for small firms to access 106

Networks and the internationalization of firms

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and mobilize a wider resource base external to the boundaries of the firm (Jarillo, 1989). They are a significant factor influencing the internationalization patterns of small firms, when constraints in resources and market recognition are exacerbated in foreign markets in which small firms have limited experiential knowledge and viability (Zaheer, 1995). Considering that greater resource commitment is needed and a higher degree of risk is involved, internationalization of small firms, if possible, should follow a gradual process of incremental steps proposed by the internationalization model (Johanson and Vahlne, 1990). This presumption, however, is challenged by the phenomenon observable across the world of rapid internationalization of smaller firms at an early stage of their formation (Chen, 2003; Dana, 2001; Knight and Cavusgil, 1996; Madsen and Servais, 1997; McAuley, 1999a; Oviatt and McDougall, 1994; Rennie, 1993). In the search for key explanatory factors for the ‘distinctive’ phenomenon of small ventures internationalizing rapidly, networks are deemed to be a facilitating factor, providing access to critical external resources and capabilities, transferring information and knowledge, providing moral support, establishing firms’ legitimacy, and creating new opportunities for small firms to accelerate their internationalization (Andersson and Wictor, 2003; Coviello and Munro, 1995; Madsen and Servais, 1997; Oviatt and McDougall, 1994; Sharma and Blomstermo, 2003). It is rare for a study on the internationalization of smaller firms, especially on topics pertaining to rapid internationalization, that does not factor in networks as a major driver (for example Oviatt and McDougall, 2005; Vatne, 1995). Since the benefits of networks for business development of small firms are accepted as common wisdom, networks are often discussed as if they are universally beneficial to business activities in general (Barringer and Harrison, 2000; Inkpen and Tsang, 2005; Loane and Bell, 2006; O’Donnell, 2004). In the internationalization literature, discussions of the benefits of networks draw significantly on empirical evidence from entrepreneurship and small business studies. While these provide important ideas regarding the general role of networks, many of them do not explicitly consider the specific dimensions involved in international business development (Witkowski and Thibodeau, 1999). I consider that it is necessary to propound the standpoint that networks are not universally beneficial to all business activities. This study illustrates and promotes this standpoint: it proposes an approach to examine the specific (as opposed to general) effects of networks on the internationalization of a firm based on the firm’s networking behaviour, hence enabling a more precise explanation and prediction of variations in network outcomes.

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The structure of the chapter is as follows. The chapter first lays a theoretical foundation to highlight the contingent effects of networks on different business activities. It then uses a focal study on the role of personal networks in the internationalization of small firms in the Chinese context to illustrate this standpoint. The significant role of personal networks in the business development of small firms is stressed in the entrepreneurship and small business literature. In the Chinese context, personal networks are claimed to be fundamental to all business activities. Thus it is appropriate to use the Chinese context for comparing and contrasting this deeply rooted belief with the actual effects of personal networks on the foreign business development of firms. The focal study draws on observations made by researchers in earlier studies and findings of four case studies that I conducted. The chapter concludes with theoretical and practical implications. Based on the conclusions, a behavioural approach that shifts the focus from the network per se to a firm’s networking behaviour in examining the effects of networks on internationalization is proposed. By highlighting the active influence of a firm in directing its networking efforts, and regarding networks as outcomes of these efforts, explanation as well as prediction of variations in the effects of networks on firms is enhanced. A conceptual framework is developed to elaborate this proposed causal relationship among networking and networks and internationalization, to support further studies in this direction.

DOES ONE SIZE FIT ALL? CONTINGENT EFFECTS OF NETWORKS ON INTERNATIONALIZATION Networks are not universally beneficial to firms. The mere availability of networks does not necessarily provide the requisite benefits in support of the business development of a firm in whatever directions it aims to pursue. To quote Coleman’s (1988: 98) comment on social capital – defined as equivalent to the functions of networks: ‘[social capital] is not completely fungible but may be specific to certain activities. A given form of social capital that is valuable is facilitating certain actions [which] may be useless or even harmful for others.’ The comment implies that the effects of networks are contingent: networks can present both strengths and constraints to the individual business development activities of participating firms (Chetty and Campbell-Hunt, 2003; Lechner and Dowling, 2003; Nahapiet and Ghoshal, 1998; Ritter, 1999). Granovetter’s seminal work (1973) differentiates the functions of strong- and weak-tie networks: strong ties provide reliable resources in routine and stable environments, and weak ties channel novel information


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and enable mobility opportunities. Subsequent studies provide evidence of different strengths (and weaknesses) of networks of different structural attributes in serving business functions (Burt, 1992; Coleman, 1988; Dubini and Aldrich, 1991; Elfring and Hulsink, 2003; Gargiulo and Benassi, 2000; Lechner and Dowling, 2003). An appropriate combination of networks is crucial to making opportunities and the requisite resources available to support firms in pursuit of internationalization (Oviatt and McDougall, 2005; Sharma and Blomstermo, 2003; Zaheer and Bell, 2005). Networks are also a two-edged sword that can facilitate as well as inhibit the development of firms (Chetty and Campbell-Hunt, 2003; De Wever et al., 2005; Portes, 1998; Witt, 2004). A key constraint exerted by networks on participating firms is the lock-in effect. This occurs when a firm is over-embedded with existing network partners: the firm fails to broaden its network horizons with prospective partners and to identify potential business opportunities beyond the predefined network boundary (Adler and Kwon, 2002; Gadde et al., 2003; Han et al., 1993; Portes, 1998; Uzzi, 1996; Gulati et al., 2000). Smaller firms are more likely to be locked in and subject to inertia in networks due to their liabilities, whereas firms which are larger and better-established within networks often exercise stronger power over smaller firms (Johnsen and Johnsen, 1999; McAuley, 1999a; Meyer and Skak, 2002; O’Donnell, 2004). The possible captivity of firms by networks implies that while firms need to maintain long-term stable relationships with network partners (in order to cultivate commitment and trust to enable reciprocal exchanges of resources), they also need to review and adapt their networks responsively to match emerging conditions and resource demands in the course of business development. Based on the aforementioned, the effects of networks on internationalization should be analysed in terms of whether the potential strengths of networks match the requirements for foreign business development. The effects are also influenced by whether the potential strengths of networks can actually be realized by the firm in support of corresponding activities. This notion draws upon Madhok and Tallman’s (1998) suggestion that the potential value attainable through inter-firm collaborations should be distinguished from the actual realization of the value by firms. The effects of networks, therefore, are contingent upon network attributes and their utilization by the firm. The ‘one-size-fits-all’ analysis of networks is inadequate to capture and explain their specific effects on internationalization.

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SPOTTING THE GAP: THE PRESUMED AND ACTUAL ROLES OF PERSONAL NETWORKS IN THE BUSINESS DEVELOPMENT OF SMALL FIRMS The Prevailing Belief: Personal Networks Are Significant to Small Business Development Earlier studies in the small business and entrepreneurship literature confirm that entrepreneurs’ personal networks are a significant source of business ideas, financial resources, information and advice, and emotional support for small firms, in particular at their formation stage. Relationship-building is a resource-intensive process. Continuous investments into building a firm’s legitimacy and market position, and into cultivating network relationships, are necessary before resources can be generated by and accessed for use through reciprocal exchanges (Bourdieu, 1983; Forsgren and Johanson, 1992; Larson, 1991). It is relatively difficult for smaller firms, in particular new ventures, to overcome the initial entry barriers to develop formal business relationships with prospective network partners (Forsgren and Johanson, 1992; Stuart et al., 1999; Zahra, 2005). The likelihood of small firms accessing external resources from formal organizational networks other than arm’s-length transactions is presumed to be relatively lower than that of their larger counterparts. Pre-existing personal networks of the entrepreneur, therefore, become a vital pool of ready resources which he or she can immediately access to support business development (Dubini and Aldrich, 1991; Johannisson, 1988, 2000; Ostgarrd and Birley, 1996; Witt, 2004). In particular, personal networks of strong ties are believed to lay the groundwork for independent new ventures (Brunderl and Preisendorfer, 1998; Starr and MacMillan, 1990). Numerous studies have provided the evidence that an entrepreneur first accesses personal ties such as family, personal friends and former work colleagues for the initial resources and social support which will transform a business idea into business reality (Birley, 1985; Greve and Salaff, 2003; Jack, 2005; Witt, 2004). It is suggested that strong-tie personal networks are conducive to speeding up the venturing process of small firms at minimum cost (Dubini and Aldrich, 1991; Gartner et al., 1992; Hite and Hesterly, 2001; Larson and Starr, 1993; Zhao and Aram, 1995). In the internationalization literature, the presence of the entrepreneur’s proprietary networks is highlighted as a differentiating attribute enabling a small new venture to internationalize rapidly (Ellis, 2000; Harris and Wheeler, 2005; Madsen and Servais, 1997; Oviatt and McDougall, 1994, 1995; Vatne, 1995; Vesper and Vorhies, 1979).


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In the Chinese context, personal networks are emphasized as fundamental to all business activities (Hamilton, 1996; Lovett et al., 1999; Redding, 1990; Yeung, 2000). Guanxi, the most widespread research topic on Chinese business networks, is basically understood as interpersonal relational practices that rely on socially binding relationships building on mutual trust, affection and favour at the personal level to fulfil instrumental purposes such as business gains (Chow and Ng, 2004; Chung and Hamilton, 2002; Guthrie, 1998; Lee et al., 2001; Lovett, et al., 1999; Lui, 2002; Luo, 1997; Tong and Yong, 1998; Tse, 2006; Xin and Pearce, 1996). Personal networks are particularly essential to resource-deficient Chinese small and medium-sized enterprises (SMEs) which do not enjoy much privilege and support under the formal institutional system in comparison to larger firms. Ethnic Chinese business people rely heavily on personal networks to search for contractual partners; small Chinese firms in Hong Kong, Taiwan and Nanyang manoeuvre within a small circle of personal relationships for business dealings and partnering (Zhou et al., 2003; Yu, 2001). From a market efficiency standpoint, trust-based personal networks have lower levels of uncertainty and opportunistic behaviour. Thus, they allow business activities a higher level of risk-bearing and flexibility at lower transaction costs (Chung and Hamilton, 2002; Hitt et al., 2002; Lovett et al., 1999; Peng, 2005; Ring, 1999; Tong and Yong, 1998). In the Chinese business context, personal networks are not simply a primary source of external resources, but they constitute an informal institution for smaller firms to obtain visibility and protection in a weak formal institutional context (Boisot and Child, 1999; Chan, 2000; Flynn and Xu, 2001; Krug and Metha, 2004; Li, 2000; Peng, 2001a; Peng, 2004). Boisot and Child (1996) label the system ‘network capitalism’ and signify it as a driver for the transnational economic power of Chinese ethnic networks. A Picture of the Reality: The ‘Limited’ Role of Personal Networks in the Internationalization of Firms – Observations by Researchers of Earlier Studies While the majority of research continues to highlight the significant functions of personal networks in the Chinese business context, Guthrie’s (1998) controversial opinion about the decline of guanxi (informal personal connections) amidst the rapid economic development of China seems to have gained support in subsequent years. Peng (2001a) states that exaggeration of the importance of personal networks is one common and erroneous belief in studies on the business development of Chinese firms. The opinion is shared by other researchers (for example Li, 2000; Trimarchi and Tamaschke, 2004).

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It can be observed that the perception of a diminishing role of personal networks in the Chinese business context has emerged in an era that is seeing fuller integration of China into the international economy, and the active outward foreign business development of Chinese firms. International business development involves higher risks and uncertainties, heavier resource investment and greater demand for experiential knowledge (Johanson and Wiedersheim-Paul, 1975). A diverse network is required to create the opportunities and access the resources needed to pursue foreign business venturing (Chow and Ng, 2004; Hitt et al., 2002; Krug, 2004; Lee and Tsang, 2001; Zhao and Aram, 1995). Personal networks, especially strong ties alone, are not adequate. Yan and Sorenson (2004) highlight studies showing that successful overseas Chinese entrepreneurs rely both on informal community-based networks and on formal networks, but the latter are largely absent in Chinese SMEs. A major barrier to Chinese companies expanding abroad is a lack of international knowledge and experience (Wong and Chan, 2003). Most of the owners-managers of Chinese SMEs are unfamiliar with foreign (especially Western) countries’ market conditions, business rules and practices. A major reason for this limitation is that many Chinese entrepreneurs are self-made business-people who do not have much formal schooling, a strong family background, prior business expertise or other privileges (Li, 2000). They require network partners who can provide them with foreign market knowledge and management and business expertise in order to progress in internationalization. The personal networks of these ownersmanagers are often locally concentrated with limited global exposure themselves, and so are not effective in supplying the requisite resources for foreign business development (Krug, 2003; Krug and Polos, 2004). In addition to their inadequacy to provide resources for foreign business development, reliance on personal networks in business dealings is perceived as showing a lack of professionalism and formalism, the two practices that are essential to gaining recognition as a global market player. Guthrie (1998) points out that in order to maintain competitiveness in the global market, economic actors in China should consider business decisions that make the most economic sense rather than those based on social relations that have fewer economic incentives. Krug and Belschak (2002) observe the increasing role of economic factors in choosing and maintaining business relations by Chinese entrepreneurs. Liu and Roos (2006) and Tse (2006) share the same view. Liu and Roos (2006) further comment that the blind pursuit of personal networks in business dealings can result in ‘liabilities, deal-killing, and an image that implies inadequate quality of offerings’ (p. 434). Referring to the lock-in effect of networks that constrains business development, it is believed that networks of strong cohesiveness and


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obligation, such as the high social content and affection inherent in strongtie personal networks, are more likely to create overembeddedness (Gulati and Gargiulo, 1999; Nahapiet and Ghoshal, 1998). Peng (2005) points out that the difficulty in turnaround after the Asian financial crisis to a certain extent indicates the problem of overembeddedness of strong personal ties for many Asian companies. Tseng et al.’s (2004) study shows that the existence of strong domestically oriented personal networks of SME owners is negatively related to foreign expansion of the firms.

PRIMARY EVIDENCE FROM FOUR ‘IN-CONTEXT’ CASE STUDIES Building on the aforementioned observations in earlier studies, case studies on four rapidly internationalized Chinese SMEs were conducted to collect primary data on the role of personal networks in the context of internationalization of smaller firms. The cases examined two companies in traditional industry (named Venus and Saturn) and two companies in high-technology industry (named Mercury and Terra). All the companies were founded and managed by ethnic Chinese. They were founded and started internationalization as small firms defined by the number of employees (fewer than 100 staff). They rapidly internationalized, and had already progressed to different stages of internationalization beyond exporting. In-depth face-to-face interviews with the key informants of the companies were conducted for primary data collection. The personal interview protocol followed a predefined set of semi-structured questions on the utilization of networks and the acquisition of network resources for internationalization. Interviewees were encouraged to express their opinions openly to ensure the richness of the data collected. Secondary data which were used to validate and enrich the primary data included inquiries with third parties who had knowledge of the companies, key informants, company publications and records, press speeches of the key decisionmakers, and news scripts of the companies. Within- and cross-case analysis was conducted following the recommendations of Eisenhardt (1989) and Miles and Huberman (1994). The qualitative case findings provide finegrained knowledge for a comprehensive understanding of the research subject in the specific context of internationalization. The role of networks is presented in Table 8.1 in terms of the resources they provided for the internationalization of the firms. Resources are categorized into financial resources, human resources, foreign business networks, foreign market information and knowledge; these resources are most relevant and critical to the foreign development of smaller firms. The

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Ongoing

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Ongoing

Saturn Start-up

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Operating capital

Funding from partners

Operating capital

Funding from partners

Financial resources

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Job market

Spouse (partners) Local relatives Job market

Job market

Colleagues (partners) Job market

Human capital

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Retailing shops (closed in 2004) Internal sales force Key business customers Trade fairs

Retailing shops Trade fairs Industrial association

Referrals by key business contacts Internal sales force Agent Direct marketing

Previous business contacts Agents Trade fairs Internal sales force

Foreign business network

Main sources of resources in the internationalization of the cases

Venus Start-up

Table 8.1

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Internal marketing staff Informal information collection Official trade council Industrial associations Exchanges with key customers

Foreign suppliers and customers Informal information collection Official trade council Industrial associations

Informal information collection by founder Foreign clients Suppliers

Informal information collection by founder Foreign clients Suppliers

Market information

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Operating capital Equity capital

Funding from the founding team An anonymous investor

Operating capital Equity capital

Funding from the founding team Venture capitalists A foreign company in the same industry

Note: Personal networks in italic.

Ongoing

Terra Start-up

Ongoing

Mercury Start-up

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Job market Acquisitions Collaborations

Business associates (the founding team) Job market Acquisitions

Job market Academic institutions Collaborations Subcontracting

Colleagues (the founding team) Job market Subcontracting

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Referrals by key business contacts Foreign branches Direct marketing Exhibitions and conferences Acquisitions Collaborations and affiliation

Previous business contacts Exhibitions and conferences Acquisitions Direct marketing

Referrals by key business contacts Exhibitions and conferences Internal sales force Authorized sales representatives

Previous business contacts Exhibitions and conferences Internal sales force Authorized sales rep. and dealers

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Direct and indirect marketing networks Strategic partners

Direct and indirect marketing networks

Direct and indirect marketing networks Strategic clients/ partners

Direct and indirect marketing networks

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network channels utilized to obtain the external resources were specified, and among them personal networks were highlighted. The cross-case analysis of the four case studies appears to present a picture which differs from the prevailing belief about the role of personal networks in the internationalization of firms. It was found that the pre-existing personal networks of the entrepreneurs did, to a certain extent, compensate for the liabilities of smallness and newness of the companies in an early stage of start-up (Ellis, 2000; Lipparini and Sobrero, 1997; Starr and MacMillan, 1990; Witt, 2004). The entrepreneurs who had a rich industrial background, as in the case of Venus, Mercury and Terra, had proprietary networks for securing initial capital, foreign business contacts and customer orders right at the beginning. Nevertheless, personal networks were not only inadequate for providing the requisite resources for starting and sustaining foreign business development, but may also have imposed barriers to its achievement. In the cases of Venus and Saturn in traditional industry, starting the companies on a manageable scale and in a flexible form minimized the start-up capital. The founders were reluctant to approach personal contacts for funding because of the high risk and uncertainty involved in the international venturing process. Any potential failure was seen as disruptive to existing personal relationships and risked a loss of face among personal contacts. Because they found application for funding from formal institutions complicated and the amount of subsidies and loans insignificant, Venus and Saturn self-funded start-up on a smaller scale and reinvested operating profit into subsequent foreign business growth. This approach is elaborated by Starr and MacMillan (1990: 81) as the ‘asset parsimony’ strategy commonly applied by new ventures. In the cases of the two high-tech firms operating in knowledge- and capital-intensive industries, wider sources of funding were necessary to survive and grow their foreign business. Due to high operating costs, a slow development cycle, and unpredictable research and development (R&D) outcomes, substantial capital investments were required to kick-start operations. Mercury and Terra could not rely exclusively on the collective resources of the founding teams to self-fund the international ventures: external finance was vital to start the businesses. Mercury and Terra were able to secure substantial initial investments from venture capitalists because of the strong industrial track record of the founding teams as formal organizational entities in the industry. These investors were well informed about the teams’ capabilities and potential to justify the investment decisions. Establishment of the organizations’ market position and legitimacy was essential to broaden their business horizons to compete in foreign markets. The founding teams of both


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companies recognized that it was impractical to rely on network partners, not to say informal personal networks, for long-term financing. Hence, they turned to the equity market for long-term financing through public listing within a few years from start-up. Partnerships with personal contacts created a solid business foundation of collective resources to form the companies. Frequent personal interactions are crucial to cultivate the level of trust and confidence in establishing business partnerships. However, trust and confidence between the business partners of the case study companies were rooted in professional considerations that included shared business vision and goals, a similar work approach and attitude, and visible contributions by the partners to the business on an ongoing basis. The presence of personal ties including blood ties, on the other hand, was not an adequate criterion. Personal networks were not utilized as a channel for recruiting human capital. Professional management was highlighted as a crucial element to lead a company into the global marketplace (Chen, 2003). Formal channels, rather than personal contacts and connections, were used to locate and recruit qualified staff in all cases (Chell and Baines, 2000). High demand for talent and for knowledge workers made it a common practice for the two high-tech companies to collaborate with universities, research institutes and other market players to take advantage of collective human capital at shared cost. Collaboration and cooperation, which were conducted as organizational-level resource exchanges (Powell, 1998), occurred only after the companies had established a secure market presence as organizational entities. Strong personal ties such as kinship did not play any role in the start-up and subsequent foreign business development of the companies. With the exception of Saturn, which had once used two local relatives to oversee its foreign operations, involvement of kin and personal friends was not observed. The founders of Saturn replaced the relatives involved as soon as their operations became stable, and were reluctant to employ relatives again because they constituted an obstacle to professional management practices. The high social content and affection inherent in strong-tie personal relationships made them a burden on the entrepreneur, and put the entrepreneur in a difficult position in making sound business decisions when problems arose (Chell and Baines, 2000; Elfring and Hulsink, 2003; Gulati and Gargiulo 1999; Uzzi, 1997). The limited role of strong personal ties can also be explained by the fact that the founders of the companies were ‘self-made’ business people, who did not have strong family business backgrounds. Their strong-tie networks, particularly kinship networks, were domestically focused and could not provide the resources required to support foreign business development (Chow and Ng, 2004; Krug and

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Polos, 2004; Tseng et al., 2004). The founder of Venus mentioned that she could not find any family member or personal friend who had the necessary skills and experience to take up work in the company. The personal contacts she had established during her postgraduate study in the UK also did not provide the resources and support needed for her business development in that country. The findings are, to a certain extent, in contrast with the common understanding of the important role of strong personal ties in the venturing process of small firms. Personal networks provided the opportunities to establish initial contacts with prospective business associates. The founders of Venus, Mercury and Terra achieved their initial entrance into foreign business networks at the formation stage through referrals by pre-existing business contacts. Referrals only occurred between network parties in long-term mutually satisfying relationships with a high level of trust. In the case of Saturn, business relationships had to be sought and established from scratch. Nevertheless, referrals only opened access to prospective relationships. The outcomes still depended on the relationship-building and maintenance efforts of the companies, and were largely rooted in practical business considerations around costs and benefits. Motivation to use and rely upon informal personal networks to acquire information and knowledge by the entrepreneurs was low. The founders of Venus, Mercury and Terra had a clear vision and comprehension of the global business environment based on their own industrial knowledge and experience. The entrepreneurs with rich experience were more confident and capable of formulating strategies. Saturn, whose founders had limited prior business experience, acquired information and learned from experienced customers and suppliers with whom they had business relationships. One of the founders pointed out that they did not have personal friends who could provide them with relevant market information and business knowledge at the start-up stage because they had not worked in the industry. Even though they had established certain personal contacts in the industry after several years in business, and some of the latter had become personal friends, information exchanges with these contacts on business issues were still kept to a minimum to avoid conflict of interests. The founders preferred to collect market information informally by themselves and formally through an in-house marketing department. In sum, findings with relation to the four rapidly internationalized small firms show that personal networks did, to a certain extent, provide initial resources to facilitate start-up, but their role was very limited. Personal networks were inadequate to support business development of the case study firms, not to mention their foreign business development that demanded a larger amount and greater variety of resources. The utilization of personal


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networks by the entrepreneurs of the firms was also of low intensity. The entrepreneurs found the utilization of personal networks not only an insufficient means to obtain resources for foreign business, but also a violation of the professional business practices essential to doing business in global markets.

CONCLUSIONS AND IMPLICATIONS Drawing on observations in earlier studies and primary case findings regarding the role of personal networks in the internationalization of small firms in the Chinese context, the chapter provides an explicit and vivid illustration of the possible gap between the commonly presumed and actual effects of networks. This supports the proposition of contingent effects of networks upon business development of firms. Even though deeply rooted in the culture and performing an ostensible function of supporting the business development of ethnic Chinese firms across the Asian region, personal networks can in fact limit and even constrain firms’ international business expansion. Social networks and personal ties may be crucial to laying the groundwork for the business development of firms in the Chinese context, especially at an early stage of the start-up. It can nevertheless be remarked that Chinese firms require broader network horizons to cope with the specific conditions and resource demand involved in their foreign business development. In the specific context of internationalization, the effects of networks can be highly dynamic and contingent. The gap between the believed and the actual role of personal networks in the Chinese context illustrated in this study has important academic and practical implications. Earlier studies on networks in the context of general business have laid a solid foundation for network research in the internationalization literature. Nevertheless, the comprehension of the particular role and effects of networks in the internationalization of firms requires a specific reference to the context and its dynamics; generic findings relating to networks within the overall business development of firms are inadequate for provision of an explicit picture. As Inkpen and Tsang (2005: 161) suggest, researchers should ‘move beyond one-size-fits-all analyses of networks’. For business practitioners, this study provides them with a more realistic view of the effects of networks on international business development. Analysis of the contingent effects of networks on different directions of business development (in this study, foreign business development) suggests possible situations where networks may have limited, zero or even negative effects on business development. This can increase business

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practitioners’ awareness of their active role in directing networking activities purposefully and effectively, in order to cultivate networks that present the specific strengths to fulfil the business function and resource demands for the pursuit of internationalization. It is particularly essential for resource-constrained SMEs because excessive, ineffective networking may result in networks that provide no added value to the business development of the firm, but are rather another resource burden. It is necessary for practitioners to adapt and adjust the networks of the firm responsively, in order to cope with contextual changes for achieving internationalization.

GETTING HOLD OF CONTINGENCY: A BEHAVIOURAL APPROACH TO ‘NETWORK’ IN THE INTERNATIONALIZATION OF FIRMS Networks are not universally beneficial to the business development of firms! This chapter has presented evidence of the contingent effects of networks in different contexts of business development. A static analysis of the role and effects of networks based on network attributes is unable to capture the contingency and dynamism in different contexts; it is hence limited in its ability to explain and predict variations in the effects of networks. Furthermore, this analytical approach that focuses on networks per se presumes networks to be a natural given to firms. It disregards the fact that networks are a product of a firm’s networking efforts or ‘investment strategies’ (Bourdieu, 1983, in an English translated version online). In addition, the actual function of networks in business activities depends on their utilization by the firm (Bjorkman and Forsgren, 2000; Hite, 2005; Loane and Bell, 2006; Lorenzoni and Lipparini, 1999; Neergaard, 2005; O’Donnell, 2004; Zaheer and Bell, 2005). Recognizing the influence of a firm on preconditioning its networks, a behavioural approach that examines a firm’s networking behaviour as the key variable of the function of networks on the firm’s internationalization is proposed. The approach clearly differentiates ‘networking’ and ‘network’ as two separate constructs (Dubini and Aldrich, 1991; O’Donnell, 2004; Shaw, 2006). Chell and Baines (2000: 196) distinguish the noun ‘network’, the verb ‘to network’, and the participative form ‘networking’. The latter is denoted as the actions of formulating, developing and maintaining contacts by the actors. Neergaard (2005: 259) associates ‘networking’ with the actor’s behaviour and its ability and inclination to form relationships. Based on these denotations, a firm’s networking behaviour precedes and preconditions its network relationships and network position, which in turn determine the effects of the networks on its business activities.


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Resources made available by networks Networking behaviour of the firm Internationalization Effects of networking

Figure 8.1

Feedback

The conceptual model of a behavioural approach to networking in the internationalization of firms

The proposed approach further differentiates the direct and indirect effects of a firm’s networking on its internationalization. Networking can directly drive a firm’s internationalization by the gain of ‘primary economic transactions’ (Larson, 1992) through the establishment of business relationships with foreign clients/customers. Networking activities may also indirectly influence a firm’s internationalization through making external resources available for the firm to utilize in support of its business activities, including internationalization. This aspect is particularly useful in explaining the business development of resource-constrained smaller firms. The fundamental ideas behind such an approach are conceptualized in the causal model illustrated in Figure 8.1 that outlines the correlations between the networking behaviour of the firm, network resources made available by the networks, and the internationalization of the firm. The distinction between the direct and indirect effects of a firm’s networking behaviour finds support in Johanson and Mattsson’s (1987: 36) illustration that ‘through its activities in the network the firm develops the relationships that secure its access to important resources and the sale of its products and services’. Although these two aspects of effect are often discussed inclusively in the majority of studies, they need not necessarily be related (Larson, 1992; Turnbull et al., 1996). A firm’s networking activities may lead to the establishment of foreign business relationships that provide only economic value from arm’s-length transactions and no additional resources. It is therefore proposed that the two should be analysed separately, in order to provide a more comprehensive understanding of how networks pertain to internationalization. The proposition of networking and networks as two separate but dependent constructs, and of the active influence of a firm on directing its networking to develop and maintain networks (networking outcomes) to fulfil specific business purposes, corresponds to the idea of networking as

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a potential capability of firms which impact upon their resource base. It underlines the core concept of the resource-based view (RBV) about the firm being the primary driving force of its own business behaviour and performance through the utilization of its resources and capability (Penrose, 1995). In particular, it integrates the idea of dynamic capability extended from the RBV, which takes into account the development of external contacts (networks) of a firm as one of the important means for new resources and capabilities to be acquired and integrated into its resource base (Eisenhardt and Martin, 2000; Teece et al, 1997). Eisenhardt and Martin (2000: 1109) suggest that the experience and know-how accumulated from the building and deployment of external linkages (that is, networks) constitute a core dynamic capability of the firm (2000: 1114). Moller and Svahn (2003) propose applying the dynamic capability perspective to enrich the understanding of networking behaviour, which involves influencing and leveraging strategic networks, as a competitive advantage of a firm. Based on the concept of dynamic capabilities, while a firm invests its existing internal resources in its network development and expansion activities, the network developed in turn provides external resources which enable modification and reconfiguration of the firm’s internal resource base (Dyer and Singh, 1998; Moller et al., 2002). Therefore, it indicates a dynamic process of constant adaptation and adjustment of a firm’s networking activities in the course of its business development, as indicated in the bilateral correlations between networking and network resources, and between networking and internationalization. Profiling a firm’s networking behaviour as the key variable, identifying key behavioural attributes, and associating them to the effects of networks also directly addresses the limitation of the lack of predictive power in most network research. The latter focuses upon the network per se and regards networks as a pre-existing static construct. This approach also contributes to providing business people with a practical analysis of the behavioural aspects of networking, so that influential behaviour on internationalization patterns and performance can be identified for initiating change and improvement.

9.

The development of e-commerce and the international growth of established SMEs: a capability perspective Anna Morgan-Thomas

SUMMARY Developments in Internet-based e-commerce offer smaller firms an unprecedented opportunity to expand their business by harnessing opportunities outside the home market. A question of whether to get involved and how to best shape their involvement in online business represents a key strategic decision for many internationalizing small and medium-sized enterprises (SMEs). Focusing on the dynamics of online growth, the study is concerned with the question of how firm capabilities affect international performance. In contrast to existing studies on e-commerce and internationalization, the focus is not on Internet new ventures but on established firms which have developed e-capabilities in the context of their conventional business operations. Considering firms’ international capabilities and e-capabilities and using a sample of 603 UK SMEs, the chapter analyses conditions that accompany dynamic online growth. Building on the capabilities perspective, the study examines how complementary capabilities in internationalization and e-commerce, together with external knowledge sources and intentional efforts on the part of the firm, affect online growth. The results show that whilst some capabilities stimulate online growth, others have detrimental effects. E-capabilities directed at building relations are most strongly associated with growth. The findings have important implications for policy and practice.

INTRODUCTION Studies on international entrepreneurship have drawn attention to factors which facilitate rapid international growth of small firms (Oviatt 123

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and McDougall, 1994; Knight and Cavusgil, 1996; Madsen and Servais, 1997; Jones, 1999; Autio et al., 2000). Focusing on the speed with which internationalization commences in newly established firms, this growing body of work is dedicated to understanding the internal and external conditions associated with accelerated international growth (Jones and Coviello, 2005; Rialp et al., 2005). Recent developments in e-commerce present a new context for the study of international entrepreneurship (Lohrke et al., 2006; Matlay and Westhead, 2005). Providing international growth opportunities for new ventures and older firms alike, digitization is advocated as a key route to SME globalization (Gabrielsson et al., 2004). Academic studies emphasize the significance of e-commerce in lowering the barriers’ to SME internationalization (Hamill and Gregory, 1997; Lituchy and Rail, 2000; Moen et al., 2003), in shortening psychic distance between countries (Yamin and Sinkovics, 2006) and in accelerating the speed and increasing the geographical spread of market entries (Kim, 2003). Although there has been some interest in conditions which enable dynamic international growth through e-commerce (Kotha et al., 2001; Kim, 2003), the explicit focus on Internet new venture firms undermines the relevance of these studies to other types of firms. Unlike high-technology Internet ventures, the e-commerce efforts of traditional exporters are typically constrained by the nature of their products and existing resources and capabilities, which developed over time and in the context of conventional business operations. Whilst it is reasonable to expect that existing capabilities play a role in the adoption of e-commerce, it is unclear whether they hamper or complement the effectiveness of e-capabilities. This study is concerned with the international online growth of traditional exporting SMEs. The purpose of this chapter is to examine two interrelated questions: (1) how existing capabilities affect online growth in internationalization; and (2) which e-capabilities contribute most to dynamic growth. Building on the Zahra and George (2002a) model of dynamic capability development, it is argued that complementary resources together with international efforts on behalf of the firm represent important moderators of capability development. These assertions are tested using empirical data from a detailed survey of 603 small firms. The rest of the chapter is organized as follows. The next section briefly outlines the Conceptual Approach. Subsequent sections deal with Research Hypotheses, Research Methodology and Scope, Sample Profile and Descriptive Findings, and Hypothesis Testing. The chapter ends with the final two sections on Discussion and Conclusions.

A capability perspective

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CONCEPTUAL APPROACH Recent years have seen significant interest in the dynamic international growth of SMEs (Jones and Coviello, 2005; Zahra and George, 2002b; Rialp et al., 2005). Rather than adhere to the incremental patterns of internationalization, some small, often inexperienced and resource-starved firms grow at unexpected speed, quickly attaining high levels of international sales (Madsen and Servais, 1997; McDougall et al., 1994; Jones, 1999). This behaviour is attributed in part to growth opportunities external to the firm such as the increasingly global nature of supply and demand, advances in production or technological developments in information and communication technologies (Coviello and Munro, 1997; Knight and Cavusgil, 1996; Madsen and Servais, 1997; Moen, 2000). However, a key factor affecting growth is the inertia of the firm including its products, knowledge, capabilities and resources (Madsen and Servais, 1997; Oviatt and McDougall, 1997; Knight and Cavusgil, 2004; Sharma and Blomstermo, 2003). From the international entrepreneurship perspective, the most salient property of e-commerce is its international reach. By establishing company websites, the firm can connect with a high number of firms or individuals quickly and cheaply, regardless of temporal and spatial borders. By making the products available to a global audience, the firm instantaneously enters multiple foreign markets (Kim, 2003; Kotha et al., 2001). Virtual entry into a foreign market does not require investment in assets and activities abroad because the process can be managed through a website located in the home country (Yamin and Sinkovcs, 2006). This allows the firm to minimize both resource commitment to foreign direct investment and the time and effort involved in managing foreign market operations. Consequently, unlike in conventional business where foreign market entries are often separated, typically by years, to allow the firm to recoup the investment, growth patterns in online environments are much more compressed and more dynamic (Kim, 2003; Loane and Bell, 2002; Loane et al., 2004). Considering growth opportunities afforded by e-commerce, most extant studies focus on the benefits of online internationalization for the internationalizing SMEs. For example, research highlights the critical role of the Internet in retrieving information and learning about foreign markets (Nguyen and Barrett, 2006; Yamin and Sinkovics, 2006), in advertising and global promotions (Bennett, 1997; Lituchy and Rail, 2000), communications (Hamill and Gregory, 1997; Quelch and Klein, 1996) or other informational barriers to exporting (Yamin and Sinkovics, 2006). Similarly relevant are the relational benefits of e-commerce including

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increased interaction, enhanced network ties or better customer relationships (Haugh and Robson, 2005). Finally, research considers the effects on export channels (Houghton and Winklhofer, 2004; Lohrke et al., 2006; Samiee, 1998). Given that e-commerce allows the customer to place orders directly with the firm, these studies posit that adoption of e-channels may have a dramatic effect on the shape and the cost of export channels leading to a substantial reduction in transaction costs, operational savings and shortening of export channels (Lohrke et al., 2006). There is a small, but valuable field of studies on the internationalization of Internet firms (Kotha et al., 2001; Petersen et al., 2002; Kim, 2003). From these studies, some indications may be gained into the conditions that accompany online growth. Petersen et al. (2002) consider a range of possible impacts of the Internet on internationalization, hypothesizing that the extent of its impact will depend on the extent to which it is able to overcome information asymmetry and transact effectively. Kotha et al. (2001) provide valuable insights into the impact of the Internet’s firmspecific capabilities based on analysis of 86 Internet firms, but focus only on a limited subset of intangible assets (media visibility, reputation and the existence of technology-and-knowledge related assets) and the impact of these on the number of foreign domain websites rather than on more traditional measures of international performance. Kim’s (2003) study on the internationalization of US portals indicates a sequence pattern in which market entries were very close to each other, typically separated by days and weeks rather than years. The study highlights the vital role of firm’s capabilities and resources in moderating online growth. Although these studies provide some insight into successful online internationalization, the explicit focus on new venture firms raises the question whether the results are applicable to other firms. Unlike new ventures, older firms typically have developed organizational routines and are strongly influenced by the past (Madhoc, 1996). The existing resources and capabilities can act as a barrier to change and as an inhibitor of new ideas (Autio et al., 2000), and for these organizations, e-commerce represents a relatively new capability. It is reasonable to expect that the existing resources and capabilities will play an important role in the adoption of e-commerce and will represent an important moderator of the effectiveness of e-capabilities. The question of small firm internationalization through e-commerce can be framed as capability development (Ray et al., 2005). A capability refers to the ability of an organization to perform a coordinated set of tasks, utilizing organizational resources, for the purpose of achieving a particular end result (Helfat and Peteraf, 2003). Capability is reflected in an activity that produces outputs (Winter, 2000). An activity represents a capability


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Complementary capabilities

Capability development efforts

Effective E-capability

International online growth

External sources of knowledge

Source:

Based on Zahra and George (2002a).

Figure 9.1

Research model

only when it has reached a threshold of practice – to qualify as a capability it must work in a reliable manner (Helfat and Peteraf, 2003). Capabilities are viewed as bundles of path-dependent assets but at the same time emerge as a result of deliberate actions dedicated to creating new forms of competitive advantage. They emerge from learning-by-doing and as a result of deliberate investments (Ray et al., 2005). Expanding these notions, Zahra and George (2002a) suggest that a firm’s success in exploiting new capabilities for competitive advantage depends on its complementary capabilities, capability development effort and external sources of knowledge. Applying Zahra and George’s model (2002a) to the context of e-commerce, it is proposed that the online growth of a traditional exporting firm is dependent on two sets of complementary capabilities: international capabilities and information technology (IT) capabilities including IT resources and e-capabilities (see Figure 9.1). The model also includes external sources of knowledge as important triggers to resource reconfiguration (Zahra and George, 2002a).

RESEARCH HYPOTHESES Complementary International Capabilities International capabilities are critical to the success of internationalization. Success builds on: having the knowledge of a particular country’s environment (Chetty and Campbell-Hunt, 2003); general awareness arising from operations in multiple international markets (Oviatt and McDougall, 1995); or competence gained through the development and implementation of particular international strategies (Padmanabham and Cho, 1999). Prior exposure to international business has consistently been found to be an important moderator of international growth of the small firm both

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in conventional internationalization (Madsen and Servais, 1997; Oviatt and McDougall, 1997; Knight and Cavusgil, 2004) as well as in online internationalization (Yamin and Sinkovics, 2006). H1: Complementary international capabilities positively affect online growth. Complementary IT Resources The information and communication technologies, which represent the backbone of electronic channels, require specialized expertise to develop, maintain and operate (Merthens et al., 2001; Kowtha and Choon, 2001). Empirical evidence suggests that the successful implementation of such novel technologies depends on complementary organizational resources (Grewal et al., 2001; Sakar et al., 1998; Tiessen et al., 2001). For example, high levels of computerization and general sophistication of existing IT systems and technologies have been indicated as important predictors of success (Chatterjee et al., 2002; Grewal et al., 2001). In general, firms that have highly integrated computerized processes are better at generating value (Chircu and Kauffman, 2000). Conversely, a relatively low computerization level of operations makes the integration of sophisticated information systems difficult, necessitating costly expenditure on capital, people, and technology (Christiaanse and Venkatraman, 2002). H2: Complementary IT resources positively affect online growth. Intentional Efforts Firms develop competences not only by accumulating experience but also by investing time and effort in capability development (Zahra and George, 2002a). Internet presence is neither free nor or a one-time expense. Substantial financial resources are required for its initial development and installation (Samiee, 1998). More resources, often in the form of an ongoing budget, are needed to cover the ongoing expenditure during usage, maintenance, subsequent enhancements and upgrading costs. For example, it has been estimated that the cost of maintenance of a website can be two to four times higher than the cost of the initial launch (Samiee, 1998). Successful implementation requires a vision and support from an IT manager without which an innovation is not likely to be adopted (Chattereje et al., 2002). H3: Intentional efforts positively affect online growth.


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External Influences on Capability Development The development of e-commerce capability can be motivated by factors external to the adopting firm. For example, the decision might be responsive to the social and relational context in which it takes place, in particular in relation to customers and competitors (Chircu and Kauffman, 2000). Some organizations engage in Internet activities simply because other firms do. This mimicking behaviour can occur because organizations dealing in a technologically intensive environment are perceived as technologically savvy. Having such an image is seen as a definite advantage (Tiessen et al., 2001). The adoption might also represent an act of ‘competitive necessity’ (Clemons and Row, 1991). The more competitors and customers become Internet capable, the more inclined firms are to adopt the Internet in order to maintain their competitive position. H4: External knowledge sources have a positive effect on online growth. Effective E-capabilities SMEs develop qualitatively different capabilities in e-commerce (Daniel et al., 2002; Daniel, 2003; Fillis and Wagner, 2005; Lohrke et al., 2006; Raymond et al., 2005; Saban and Rau, 2005). Some SMEs simply digitize information provision and develop informational e-capabilities. Others follow relational strategies aimed at enhancing two-way interactions with customers and business partners (Balasubramanian et al., 2003; Zeithaml et al., 2002) whilst some SMEs develop fully fledged transactional capabilities that facilitate customer ordering, payment and the management of delivery. In such instances, the entire process of selling is based on e-capabilities, allowing the consumer to accomplish transactions in a self-directed manner without the need for a sales force (Johnson and Bharadwaj, 2005). The development of transactional e-capability is considered to be the pivotal stage in the digitization processes (Daniel et al., 2002; Quelch and Klein, 1996; Lohrke et al., 2006; Saban and Rau, 2005). Relational e-capabilities play a critical role in building and maintaining customer and business relationships (Jayachandran et al., 2005) and in shaping appropriate responses to customer needs, thus leading to repeated interactions with customers and enhanced trust, loyalty and satisfaction (Balasubramanian et al., 2003). Transactional capabilities have a direct effect on international growth through the generation of international sales and a reduction in costs of export transactions (Quelch and Kline, 1996; Samiee, 1998; Saban and Rau, 2005). It is therefore expected that:

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H5: Online growth is positively affected by the presence of ● relational e-capabilities ● transactional e-capabilities

RESEARCH METHODOLOGY AND SCOPE Conclusions are based on the analysis of primary data collected through a cross-industry survey of UK firms. The focus of the study was on the impact of digitization on the internationalization of SMEs. Using the British Export Directory 3136 firms operating company websites were surveyed. Data collection involved a fully structured questionnaire addressed to named export executives. Questionnaire Development Questionnaire development followed a multistage process as recommended by Churchill (1979). Insights from a literature review and pre-study work involving detailed case studies of two knowledge-intensive companies generated an initial pool of questions. These were evaluated using three methods: expert panel pre-test; pre-test with convenience sample; and a pilot study. In the first instance the draft survey was submitted to three university doctoral researchers and two academic staff for evaluation. Revisions regarding content, wording, structure and presentation were introduced. In the second phase, the revised version was presented to three export executives. They were advised that they were taking part in a pre-study and were encouraged to evaluate the questionnaire critically. The answers were timed and evaluated for ease of response. As part of the final test, the questionnaire was piloted on a random sample of 98 exporting companies with the aim of obtaining a preliminary assessment of the internal validity of the measures. Response Rate and Non-response Bias Two mailings generated an overall response rate of 24.9 per cent (705 firms) including 603 replies from SMEs, that is, firms employing no more than 250 employees. The non-response bias was assessed using three alternative methods: response rate, the reasons related to non-response, and differences between early and late respondents. In spite of the length of the questionnaire (116 questions), the overall response rate was quite high – almost 25 per cent. The non-respondents were encouraged to return the questionnaire and explain why it had not been completed. A variety of


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reasons were given, such as company policy, or that the respondent had moved on, or that they did not have the time. In summary, one can assert that the reasons for non-replying were not related to the substance of the questionnaire, thus reaffirming that non-response was not a significant problem. Finally, non-response bias was evaluated by assessing the differences between early and late respondents with regard to the means of the key variables. The comparison of the means generated no significant differences. Measures The following measures were constructed for the study’s dependent, independent and control variables. Online growth The study uses two different measures of online growth. Firstly, the respondents were asked to provide as exact a figure as possible of international sales growth attributable to e-activities. This figure provides the subjective assessment of e-commerce contribution to international growth of the firm (Prasad et al., 2001). About half of the responding firms (315) provided this percentage figure. Secondly, a multiple item scale of growth was constructed, measuring respondents’ satisfaction with the e-commerce contribution to export sales, profits, number of foreign markets and cost of international marketing. International capabilities The study employs four indicators that reflect the breadth and depth of firms’ capabilities in internationalization: the intensity of international sales (a ratio of foreign sales to domestic sales); international diversity (the number of foreign markets served); the length of international experience; and decision-specific experience (having own export department) (Padmanabham and Cho, 1999; Tallman and Li, 1996). Effective e-capability The qualitative differences in e-capabilities were mapped by recording website features oriented at information provision, relationship building and accomplishing online transactions (Daniel et al., 2002; Hamill and Gregory, 1997; Lituchy and Rail, 2000). These enabled a distinction between two types of e-capabilities: transactional, that is, those aimed at conducting transactions; and non-transactional, that is, informational and relational websites.

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Intentional efforts The measure concerns the financial and non-financial resources allocated to the development of e-commerce. External influences on capability development This measures the extent to which sources outside the company affect the adoption of e-capabilities. Control variables The regression equation includes six dummy variables to represent the industry sectors of the sample with one withheld and a firm size measure based on the logarithm of the number of employees. Furthermore, the equation controls for competition intensity and time since the adoption of e-commerce. Construct Validity and Reliability All multi-item measures of constructs were developed using a procedure suggested by Churchill (1979) and updated by Anderson and Gerbing (1988) using exploratory and then confirmatory factor analysis (CFA). The results of CFA are satisfactory with c2 5 458.25, df 5 288; root mean square error of approximation, RMSEA 5 0.054; comparative fit index, CFI 5 0.97; normed fit index, NFI 5 0.95]. All constructs display acceptable levels of reliability, high internal stability and good composite reliability (Hair et al., 1998). The details of the measurement model are presented in the Appendix, Table 9A.1

SAMPLE PROFILE AND DESCRIPTIVE FINDINGS Respondent firms (603) represent a range of industries including manufacturing and service firms. The average firm in the sample had 40 employees and generated just over £5 million in total sales. On average, the firms had initiated foreign activities seven years prior to the survey, offered their products in 14 countries and had reached a level of 35 per cent of foreign sales. The key export market was the US. Considering their e-capabilities, just over half (356) of the responding firms had website features aimed at enhancing the relationship. Only a minority 22 per cent (133) conducted transactions online, thus displaying fully digitised export transactions. The firms which reported online growth figures (315 out of the total sample of 603) indicated growth in international sales ranging from 0 to 80


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100 89

Number of firms

80 64 60

62 52

40

33 15

20

0 < 1%

Figure 9.2

1–4%

5–9%

10–19%

20–49%

> 50%

International online growth reported by firms

per cent with an average increase of 8.62 per cent (see Figure 9.2). Within this subsample, 226 firms had seen some increase to their export sales following the adoption of e-business but 89 firms reported no effects on their international growth. Interestingly, just over a third of this subsample (111 firms) reported significant growth of 10 per cent or more, including 15 firms that increased their sales by more than 50 per cent.

HYPOTHESIS TESTING Research hypotheses H1–H4 were tested by regressing the independent variables onto the multi-item measure of online growth (Table 9.1). The data suggest partial support for H1 concerning the impact of international capabilities on online growth. Whilst the data support positive interaction between growth and international intensity, there was no significant relationship with international diversity. Contrary to expectations, the length of international experience was negatively related to the development of e-capabilities. There was a positive relationship between online growth and decision-specific experience. The results do not support for the contention that IT resources represent complementary assets in case of the development of e-capabilities – H2 is insignificant in cases of both new capability development and international growth. By contrast, H3 is strongly supported across both models – the intentional efforts directed at capability development are positively

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Table 9.1

Regression model

Dependent variable: international online growth (4-item measure) Independent variables Beta

Sig.

International intensity Length of international experience International diversity Decision specific experience: own export department Complementary IT resources Effort based capability development External sources of knowledge Control variables Time since adoption Industry sector Completion intensity

0.15 20.28 20.12 20.20 0.01 20.03 20.25

0.02 0.00 0.06 0.01 0.48 0.00 0.00

0.07 20.03 0.09

0.00 0.69 0.00

No. of observations F statistics R2 Adjusted R2

603 20.52 0.282 0.265

related to the emergence of that capability and its effect on firm growth. Finally, we find a positive relationship between external knowledge and e-commerce capability: H4 is strongly supported. To confirm the final hypothesis (H5) concerning the effects of effective e-capabilities on online growth, the statistical test uses the single-indicator measure of growth, that is, the percentage growth of international online sales. The initial analysis revealed that the focal variable does not meet normality assumptions and is therefore unsuitable for parametric tests such as ANOVA or regression analysis. Instead, a non-parametric test was employed (Chi2). The respondents were divided into three categories, taking into account the reported figure of international growth: (1) negligible or no growth (below 1 per cent); (2) moderate growth (between 1 and 9 per cent); and (3) significant growth (10 per cent or more). These were cross-tabulated against the type of e-capability, that is, transactional versus non-transactional. The results of analysis proved insignificant (Chi2 5 3.52, p 5 0.172) indicating that H5 concerning the association between the level of development of e-capability and international growth could not be confirmed. Additional tests (not presented here) confirm that the presence of relational tools is associated with online growth.


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DISCUSSION The chapter set out to examine two interrelated questions: how existing capabilities affect the online growth in internationalization, and which e-capabilities contribute most to dynamic growth. Framing the problem as the issue of capability development, it is argued that e-capabilities emerge as a result of intentional building as well as learning-by-doing. Building on Zahra and George’s (2002a) model, online international growth is deemed to depend on firms’ existing resources as well as deliberate efforts aimed at capability development. It was also hypothesised that international capabilities, e-commerce resources, external sources and efforts will play a role in that process. The findings largely support these notions. In particular, international growth of the SMEs seems strongly related to international intensity, international efforts and outside pressures to adopt e-commerce. These results strongly confirm the evidence of path-dependence in the development of new capability. For example, the online growth of the internationalizing SME seems strongly dependent on its international capability as manifested by high intensity of internationalization. Firms with existing competence in internationalization grow faster that those without, thus supporting Petersen et al.’s (2002) contention that effective Internet usage favours internationalization. For firms that have already achieved a measure of international success, e-commerce capability seems another key advantage for the exploitation of growth opportunities. These results relate well with research on international new ventures which highlight the importance of international capabilities in internationalization (Knight and Cavusgil, 2004; Moen and Servais, 2002). There is also some correspondence with research on Internet new ventures which identifies the value of firm-specific capabilities in internationalization (Kotha et al., 2001). However, the results also provide some indication that experience accumulated passively can act as an obstacle in developing new capabilities. When it comes to the development of e-capabilities, there are certain advantages of ‘newness’ (Autio et al., 2000). Although the age of the firm was not the focus of this study, our results concerning the length of international experience parallel international entrepreneurship studies where younger firms were found to adopt more novel approaches to internationalization than older firms, and where ‘newness’ was related with flexibility, risk-taking and a more entrepreneurial posture (Autio et al., 2000; Jones and Coviello, 2005). A key finding concerns the effect of relational e-capabilities on online growth. When it comes to the development of e-capability it seems that the key benefit to internationalizing SME lies in supporting customer

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relationships and not transacting online. This contradicts the literature on Internet new venture firms which advocated the adoption of transactional e-commerce (Quelch and Klein, 1996). Similarly, the results seem to undermine the wisdom of process models of e-capability development which perceive transactional capability to be a pivotal stage of digitization (Daniel et al., 2002; Lohrke et al., 2006; Saban and Rau, 2005). The primary leverage of e-commerce in the context of internationalization is that of enhancing customer and business relationships. The results seem to confirm that e-business solutions aimed at increasing connectivity and two-way communications between the firm and its environment make a difference to international development. In that respect, the results corroborate previous findings, further confirming the relevance of customer relationship to performance in the context of digitization (Zeithaml et al., 2002). Importantly, the evidence provides strong support for international entrepreneurship research that posits a strong association between the dynamic growth of the firm and the presence of network ties and relationships (Chetty and Blankenburg Holm, 2000; Coviello and Munro, 1995, 1997).

CONCLUSION The study takes an initial step in teasing out the importance of firm capabilities and estimating their impact on online growth. The focus of this enquiry is on established firms and not new ventures. Findings suggest that for these firms the inertia of the firm and its existing capabilities are important for the development of e-capability, and that capabilities evolve over time to reflect the joint effects of passive learning-by-doing and deliberate firmlevel investments in learning and making improvements. Online growth is associated with international intensity, the scale of efforts directed at the development of e-capability and the presence of relational e-capabilities, but not with IT resources or transactional e-capabilities. The study extends the focus of the international entrepreneurship literature into the context of e-commerce and into the realm of established enterprises. This highlights the applicability of international entrepreneurship perspectives to other research contexts where dynamic growth is of interest. By accounting for the existing capabilities and capability development effort and showing their effects on online growth, an empirical test of the capability development model presented by Zahra and George (2002a) is undertaken. The results make an important contribution to the literature on dynamic capabilities by showing where the capabilities come from and how they matter to firm performance. The results also resonate with calls


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for research into the dynamics of internationalization, in particular the means by which dynamic growth can be achieved by the smaller firm. These findings have important practical and policy implications. Digitization represents a viable avenue for growth and a resource leverage enabling SMEs to reach international markets. A question of whether to get involved and how to shape the involvement in digital business is a key strategic decision for many SMEs. This chapter provides some guidance to internationalizing SMEs on the best practice and the most effective approaches to online growth. The key conclusion in this respect would be that SMEs interested in the development of export activities are best advised to abstain from transactional strategies. Rather than investing in transactional e-commerce, SMEs are encouraged to develop a relational presence aimed at enhancing and maintaining customer relationships. The findings suggest that these strategies seem to generate the highest returns to internationalizing SMEs. These lessons should be taken on board by policy-makers and government agencies which support the development of e-capabilities in SMEs. By highlighting the value of relational strategies for online growth, the results support calls for policies aimed at a tailored and incremental internationalization strategy rather than the pursuit of ‘revolutionary’ high-impact and technologically advanced solutions. Although the findings represent a significant step towards understanding the impact of capabilities on online growth, the results are based on cross-sectional data, which do not fully capture the complexities of capability development. In particular, the dynamics of the system and the richness and multidimensionality of capability constructs are only partially explored. The approach to data presented here is, by default, broad but shallow, and as a result many of the analysed relationships are only touched upon. Further research should concentrate on longer-term studies and more detailed exploration of the constructs involved.

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APPENDIX Table 9A.1

Measurement model

Multi-items measures (CFA model) Intentional effort (a 5 0.79, CR 5 0.78, AVE 5 0.54 ) Level of initial investment in Internet-related hardware/software was high* Ongoing internet budget is very high There is substantial planning for Internet activities Top management is committed and supportive of the Internet* Overall investment in terms of time and resources is high International online growth (a 5 0.93, CR 5 0.93, AVE 5 0.62) The internet has significantly improved . . . . . . export profits . . . number of foreign markets served . . . export sales . . . overall performance Complementary IT resources (a 5 0.82, CR 5 0.82 , AVE 5 0.54) My company operates complex and very sophisticated IT infrastructure Employs a high proportion of IT support and IT-literate staff Invests heavily in IT systems and applications Prior to the Internet, has been using IT system(s) that support sales and marketing (e.g. electronic databases, EDI)* External influences on capability development (a 5 0.68, CR 5 0.66, AVE 50.50 ) We are under pressure from our customers to adopt the Internet Many of our competitors use the Internet Competition intensity (a 5 0.79, CR 5 0.78, AVE 5 0.64) The level of competition in my industry is very high There are many competitors in our market Note: * Items removed in measure development procedures. CR 5 Construct reliablity AVE 5 Average variance extracted CFA 5 Confirmatory factor anlysis.

Standardized factor loading

0.62 0.70 0.87

0.88 0.87 0.94 0.80 0.78 0.65 0.90

0.67 0.84 0.66 0.92

10.

Core rigidities of micromultinationals: the Scottish experience Pavlos Dimitratos, Jeffrey E. Johnson, Kevin I.N. Ibeh and Jonathan Slow

SUMMARY While there are many studies concerning internationalized small and medium-sized enterprises (SMEs), examination of a special type of internationalized small firm, notably the micromultinational (mMNE) is particularly scant. Following the definition of Dimitratos et al. (2003: 165), the mMNE is an SME ‘that controls and manages value-added activities through constellation and investment modes in more than one country’. Drawing on the resource-based view and an in-depth case study analysis of 15 firms in Scotland, the chapter discusses core rigidities that may inhibit growth of mMNEs. Six interrelated areas of organizational rigidities are identified, namely, failure to monitor external changes; existence of production orientation; failure to prioritize opportunities; existence of an opportunistic and reactive international management style; failure to acquire access to financial resources; and the existence of a centralized and non-participative organizational culture. Propositions are developed for further empirical study, and implications are drawn for research, management and policy.

INTRODUCTION Traditionally, small and medium-sized firms (SMEs) were considered seldom to proceed beyond the export stage in their internationalization ventures. Advanced modes of internationalization involving ‘constellation and investment modes’ (licensing, franchising, joint ventures, strategic alliances and wholly owned subsidiaries) were typically used to characterize the international growth of large firms. The word ‘multinational’ has 139

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conventionally been reserved for activities of these large internationalized firms (for example Caves, 1982; Oman, 1984). Nevertheless, constellation and investment modes of internationalization have increasingly been used by SMEs that increasingly seek to gain competitive and collaborative advantages worldwide. Recent research (Dimitratos et al., 2003; Ibeh et al., 2004; Allison and Browning, 2006) has acknowledged the emergence of the so-called micromultinationals (mMNEs), which are those SMEs ‘that control and manage value-added activities through constellation and investment modes in more than one country’ (Dimitratos et al., 2003: 165). Further research into this growing and special category of internationalized firms is warranted and so the mMNE forms the focus of enquiry in this chapter. Specifically, we seem to be short of evidence on barriers related to mMNE international activities. Our knowledge of SME export operations is extensive, yet we seem to be lacking studies that investigate the obstacles to internationalization for small firms that go abroad through constellation and investment modes. In order to study this theme, we refer to concepts from the resource-based view of the firm. This view can provide valuable insights into how these small firms can overcome their resource constraints and effectively manage to prevail over complexities stemming from both organizational inefficiencies and environmental challenges abroad. Providing insights into these issues would have valuable research, managerial and policy interest. Researchers would be able to develop a more coherent body of knowledge concerning this unique category of internationalized SMEs. mMNEs should not be confused with other categories of internationalized SMEs such as international new ventures or global small firms: mMNEs refer to the mode of entry; international new ventures to the speed of entry in the international marketplace; and global SMEs to market presence. In addition, the insights of the current study may assist mMNE managers to handle effectively organizational rigidities that inhibit international growth of their firms. Moreover, policy organizations can formulate courses of action and intervention measures designed to assist mMNEs in overcoming barriers in their internationalization ventures. Therefore, the research objective in this study refers to identifying the obstacles to growth for mMNEs in the international marketplace. This chapter proceeds as follows. In the second section, we explore the existing body of knowledge on mMNEs and key themes in the resourcebased view literature that are related to organizational rigidities of these firms. In the third section, we elaborate on the case study methodology and data analysis we followed to collect evidence on the investigated firms. The fourth section discusses the empirical findings concerning

Core rigidities of micromultinationals

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the organizational rigidities that these firms face, advancing six related research propositions. The concluding section draws implications for theory and practice at both the firm and the policy levels.

RESEARCH BACKGROUND Although there are many studies on the internationalization of small firms (see for example, Coviello and McAuley, 1999 and Manolova and Manev, 2004 for related literature reviews), no cohesive body of literature on mMNEs seems to exist. Perhaps the body of literature that may be regarded to be closest to mMNEs is that of international new ventures or born globals. These firms become international from the beginning of their business activities, often disregarding their domestic markets (McDougall et al., 1994; Oviatt and McDougall 1994, 1997). Research suggests that these firms habitually employ networks in order to service foreign markets (Oviatt and McDougall, 1995; Madsen and Servais, 1997; Coviello, 2006). However, examination of mMNEs emphasizes the market servicing mode criterion rather than the speed to internationalization criterion, the latter being the dimension referring to international new ventures. It is likely that mMNEs that go abroad through constellation and investment modes have to develop different resources in order to internationalize, and require different policy interventions than other internationalized firms (Dimitratos et al., 2003). This is the reason why study into mMNEs should involve firms irrespective of the speed to internationalization, the age of the firm or its sector. Only three published articles on mMNEs appear to exist. In these works some exploratory insights into primarily success factors of mMNEs are provided. In the first article, Dimitratos et al. (2003) note that successful mMNEs tend to be distinguished by a founder and a top management team that have the determination, vision and experience to succeed worldwide; and that they possess capable human resources, necessary financial capital, competent networking capability in many countries, and implement adaptation strategies in order to meet the demands of foreign customers. In the second article, Ibeh et al. (2004) note that a core competence of mMNEs is their global assertiveness. In the third article, Allison and Browning (2006) generally find support for these characteristics and additionally suggest that mMNEs should cultivate an organizational climate likely to be conducive to enhanced performance. Analytically, they argue in favour of a decentralized decision-making system that supports entrepreneurial leadership at all levels of the mMNE as well as staff and customer engagement.

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Success factors related to mMNEs can be linked to the tenets of the resource-based view that we employ in the current chapter. This view regards the firm as a unique bundle of tangible and intangible resources (Barney, 1991; Penrose, 1959; Wernerfelt, 1984). The resource-based view posits that specialized resources or core competencies of the firm must possess four attributes in order to provide sustainable results. In particular, these resources must be valuable, rare, imperfectly imitable and imperfectly substitutable. Nevertheless, core competencies may be transformed into core rigidities, inhibiting the innovative ability and growth of the firm (Leonard-Barton, 1992). This same author posits that core competencies may be impeded by their dysfunctional side, failing to incorporate blends of skills, capabilities or knowledge. In turn, this can reduce the competitive advantage of the firm, leading to ‘incumbent inertia’ (Lieberman and Montgomery, 1988). This is likely to take place due to changes in the internal or the external environment of the firm. In short, our knowledge of mMNEs is limited, fragmented and essentially unexplored. Hence, we set out to examine the core rigidities of mMNEs that may lead to reduced growth and lower levels of performance abroad.

METHODOLOGY AND DATA ANALYSIS This research is based on the case study method, which is advised when little knowledge exists on the phenomenon under investigation and when the researcher wishes to acquire evidence on organizational phenomena that take place over a long period of time (Yin, 1989). Since we aim at obtaining a dynamic and holistic view of mMNE capabilities in the study, a case approach effectively identifies critical constituents of such complex phenomena (Patton, 2002). The firms that participated in this study were included in the Global Companies Development Programme of Scottish Enterprise, the main public policy organization for internationalized SMEs in Scotland. These Scottish firms voluntarily took part in this programme in an attempt to identify areas of weaknesses that hampered their growth abroad. Scottish Enterprise pledged appropriate support and intervention for the firms that participated in the programme. The firms operated in a variety of sectors and could be of any age, and had to have (a degree of) international sales activities. In this chapter, we present data on these firms in the Global Companies Development Programme that additionally met the mMNE criteria, namely: were SMEs, independent (not subsidiaries of large firms), and employed constellation and investment modes to go abroad (however,


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they could also have exporting activities at the same time). Therefore, we present data on the international activities of 15 Scottish mMNEs. This number of firms was deemed an adequate figure for providing us with an accurate picture of the phenomenon under investigation. The firms scored differently across a range of international performance measures, and thus we argue that they offer a reliable account of the core rigidities of mMNEs. The examined firms operated in a wide variety of sectors, for example medical product manufacturing, metal processing, web-based software development services and semiconductor production. The average number of employees was 75. Many of the firms serviced their international markets through foreign direct investment (primarily overseas sales offices), while others utilized strategic alliances, joint ventures and licensing agreements. Four of the firms chose not to export at all, instead favouring constellation and investment modes to reach their foreign markets. Interestingly, two of the firms derived 100 per cent of their sales from international markets, effectively bypassing their domestic markets. Our research into these 15 mMNEs involved multiple key informant interviews, examination of archival data, observation, and examination of secondary sector data. The interview guide comprised semi-structured open-ended questions focusing on the barriers to growth of these firms. These barriers may have emerged in the organizational or external environment of the mMNEs. Secondary data contained more than 150 text pages for further elaboration and analysis. The analysis of the findings was based on the content analysis technique and conducted by means of the NUD*IST software index. Organizational documents such as company websites were also used either to support or disconfirm the material analysed from other sources. The use of content analysis is of value to this study for four reasons, notably it: (1) facilitates the elaboration of verbal data and particularly case studies (Carney, 1972; Krippendorff, 1980); (2) is appropriate for exploratory research and theory-building purposes (Easterby-Smith et al., 1991); (3) serves to detect patterns emerging from the text data; and (4) assists the analysis of deeper meaning embedded in the data and the inference-making process (Holsti, 1969).

PRESENTATION OF FINDINGS The core rigidities that may hamper mMNE international growth can be summarized in Figure 10.1. In particular, the evidence from this indepth study suggests that there are six interrelated areas of organizational rigidities that tend to inhibit growth of mMNEs in the international marketplace.

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Monitor external changes

F A I L U R E T O

Prioritize market opportunities

Production orientation

Obstacles to mMNE international growth

Opportunistic & reactive international management style

E X I S T E N C E O F

Acquire access to financial resources

Centralized & non-participative organizational culture

Figure 10.1 Core rigidities of mMNEs

Failure to Monitor External Changes When mMNEs fail to scan and pay sufficient attention to the changes taking place in the economic, political, social, technological and competitive international environment, they tend to lag behind their competitors and underperform. This is especially true for mMNEs operating in high-technology sectors, which seem to disregard the market or industry dynamics since they often lack intelligence to keep abreast of environmental changes. However, firms in traditional sectors are also likely to underperform because they fail to stay up to date with environmental challenges. For instance, one firm was ‘caught in the middle’ selling through private labels for which there was no adequate profit margin due to the increasing bargaining power of international distributors. As the interviewed manager revealed, the firm should have relied more on its own


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brand, attempting to build brand recognition among its target customers and pay attention to their needs. It may be that firms do not wish to track changes in their environment frequently since such a process forces them to dedicate resources continuously, with a subsequent detrimental impact on performance (Haveman, 1993; Slater and Narver, 1994). This especially holds in the case of mMNEs, which are enterprises of small size. Therefore: Proposition 1: mMNEs may face barriers to their growth abroad due to their organizational rigidity associated with the failure to monitor external (environmental) changes. Existence of Production Orientation This is very often cited as a major problem among the investigated firms. mMNEs routinely base their strategy on an innovative product or superior technology, which is the result of a creative idea generated in the research and development (R&D) laboratories. The potential difficulty with this approach is that this innovation may have been very costly to produce in the first place, or, have failed to pass the stage required to realize its wider market potential. This is argued to be a major problem, particularly for examined high-technology firms (see Oakey, 1991). For example, one investigated firm relied on its pioneering technology which proved to be costly to maintain owing to high development expenses and the prohibitive outlay of maintaining a large number of patents worldwide. This mMNE lacked the marketing orientation that would make its unique product valuable to its customers and profitable to the firm. Consequently: Proposition 2: mMNEs may face barriers to their growth abroad due to their organizational rigidity associated with the existence of production orientation. Failure to Prioritize Market Opportunities Examined mMNEs were producing and selling products that could be of value to different customer segments in many countries for a variety of uses. Often firms were rather unsuccessful in prioritizing these market opportunities and subsequently servicing their customers. For example, an mMNE service provider should have selected among a wide range of target customers in the oil, gas or cryogenic industries in order to be successful. The customers of this firm could be private or public sector organizations

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in the UK, Europe, the USA, the Caribbean, Australasia or the Far East. However, failure to prioritize market opportunities resulted in spreading scarce organizational resources too thinly, with subsequent detrimental performance consequences. Such a failure to give priority to the most attractive opportunities is often cited to be a problematic area for firms that do not utilize their scarce resources effectively (Edgett, 1994; Miller and Doyle, 1987). Hence: Proposition 3: mMNEs may face barriers to their growth abroad due to their organizational rigidity associated with the failure to prioritize market opportunities. Existence of an Opportunistic and Reactive International Management Style Another obstacle to the growth of mMNEs can be related to a lack of strong commitment to internationalization. Frequently firms are not prepared to go abroad, and when they do this, they do it in a rather unplanned and ad hoc basis. For instance, firms may have staff consisting of people with no international capabilities and no experience in operating abroad, or may be distinguished by an opportunistic management style, acting rather spontaneously to international orders and responding to customers only when a need arises. This behaviour is conducive to short-term positive foreign outcomes, disregarding that activities of a company in the international marketplace may yield successful results mainly in the long run (for example, Karafakioglu, 1986). The findings suggest that there was among some mMNEs no steadfast and determined attitude towards internationalization, which was probably due to their inability to prioritize market opportunities at the international market level. Based on this discussion: Proposition 4: mMNEs may face barriers to their growth abroad due to their organizational rigidity associated with the existence of an opportunistic and reactive international management style. Failure to Acquire Access to Financial Resources It is suggested that failure by firms to acquire access to financial resources is the most frequent core rigidity facing mMNEs as they grow internationally. Because the growth of mMNEs can take place rather opportunistically and erratically, possibly centred on an innovative product, firms may realize that they do not have the necessary financial backing required


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for advanced international modes. Examined firms are likely to focus on developing a ground-breaking concept for their innovative products sold in countries all over the world. Nevertheless, they appear to forget that their growth in volatile markets demands financial support through bank funds or public offerings. Viewed in this light, this finding is in agreement with those of other studies suggesting that financial difficulties are often a key organizational rigidity to the growth of the internationalized firm (Sullivan and Bauerschmidt, 1989, 1990; Yang et al., 1992). This problem is exacerbated by the fact that examined mMNEs prefer international acquisitions rather than alliances in order to expand. These acquisitions can drain firms of limited financial resources, making them urgently seek external funding and possibly impelling them towards severe financial difficulties. Consequently: Proposition 5: mMNEs may face barriers to their growth abroad due to their organizational rigidity associated with the failure to acquire access to financial resources. Existence of a Centralized and Non-participative Organizational Culture As mMNEs grow in international markets, it is likely that they have to rely increasingly on new stakeholders, such as international suppliers, distributors, partners and customers. This implies that mMNEs that follow a rather centralized decision-making style may find international expansion difficult. This finding corroborates the evidence suggested by Allison and Browning (2006) in their recent study on mMNEs. The case in which the owners of investigated firms wish to absolutely retain control of the mMNE with a non-participative organizational culture can be rather problematic. In the current study, this was regularly the case among firms that were owned by successful founders pursuing a rather authoritative management style (see Makridakis et al., 1997). The evidence of this research suggests that a centralized and bureaucratic structure may inhibit growth of the firm abroad. Related to this is the statement that poor internal communication, which is typically associated with a non-participative organizational culture (Gilly and Wolfinbarger, 1998; Hauser et al., 1996), can be an impediment to international growth. We can conclude that: Proposition 6: mMNEs may face barriers to their growth abroad due to their organizational rigidity associated with the existence of a centralized and non-participative organizational culture.

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CONCLUSIONS Based on an in-depth case study of 15 mMNEs in Scotland, the current research has identified six areas concerning core rigidities for these firms. These refer to failures to monitor external (environmental) changes, prioritize market opportunities and acquire access to financial resources. Also, they refer to existences of a production orientation, an opportunistic and reactive international management style, and a centralized and nonparticipative organizational culture. In doing so, this research has added insights into the emerging mMNE research area. These firms constitute a unique type of internationalized small firms having special characteristics. The prevalence of these firms is expected to grow in the future (Dimitratos et al., 2003), and hence research into the core rigidities related to their international growth is required. These core rigidities deal with organizational characteristics and stem from changes in either the internal or the external environment of the firm. The implications for research on mMNEs relate to incorporating the resource-based view to a larger extent in relevant future studies. The resource-based view has received significant attention in international business studies (Peng, 2001b). The findings of the current research suggest that there is merit in incorporating this view in studies linked to how mMNEs grow, succeed or fail abroad. However, while this research has identified areas of core rigidities, it remains unclear how these factors evolve over time. In other words, why do mMNEs acquire these core rigidities? Also, given that some of the suggested core rigidities are the flip side of core competencies, a related question is, how does this happen? How do competencies become rigidities, and evolve from success factors into barriers and organizational inefficiencies for mMNEs? Additionally, because investigated firms were based in a small country on the European periphery, further research can identify to what degree these characteristics exist for mMNEs originating from different home countries. In other words, to what extent are these characteristics specific to the Scottish case per se? Managers of mMNEs have to pay special attention to managerial aspects that can make the difference to the growth of the firm abroad. Overall, it appears that managers of mMNEs have to make sure that they are not hampered by a production orientation that may end up in financial distress and that they do not fail to prioritize market opportunities in a changing international environment. Also, they have to ensure that they follow a decentralized decision-making system, whereby key organizational participants have a say in the major internationalization decisions of the firm (see Kanter, 1985; Stopford and Baden-Fuller, 1994).


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Policy-makers have to make certain that they intervene appropriately in the management systems of mMNEs. The most frequently recurring theme that emerges from the findings of this study is that managerial attributes play a catalytic role in the growth of mMNEs. The role of appropriate management and strategic planning for international expansion can be highlighted and communicated to mMNE management during communication initiated by policy organizations. Also, suggesting sources of financial capital in the domestic environment, and mMNE management possibly liaising with interested banks and venture capitalists seems to be a prudent policy to take. Through these measures, policy-makers can work with mMNE management and ensure that organizational resources do not end up being core rigidities that inhibit the international growth of the firm.

11.

The international entrepreneur: entrepreneurial orientation of local and global firms Erik S. Rasmussen, Tage K. Madsen and Per Servais

SUMMARY During the 1990s more attention has been given to the increasing number of new firms choosing to enter the international marketplace, but only little empirical insight has been supplied on how those differ from more local firms. This chapter identifies two types of new ventures – domestic new ventures (DNVs) and international new ventures (INVs) – based on the scale and scope of two value chain activities (sales and sourcing). These two categories are tested empirically in a national setting with respect to differences in their entrepreneurial orientation based on the scales of Covin and Slevin (1989) and Miller and Friesen (1982), incorporating four dimensions: innovativeness, risk-taking propensity, proactiveness, and competitive aggressiveness. For three of the nine hypotheses tested in this chapter there were no significant differences between the two types of firm. Support was found for INVs to be the first businesses to introduce products/services, administrative techniques and technologies; in addition, INVs typically initiated actions to which competitors then responded. Likewise, INVs were found to have a stronger proclivity for high-risk projects than local firms, and typically adopted a very competitive, ‘get rid of competitors’ posture.

INTRODUCTION Over the 1990s there have been several studies which have focused on international new ventures (INVs), that is, smaller, entrepreneurial firms which tend to adopt a global focus from the beginning and operate in international markets from the first day of their establishment (Madsen 150

The international entrepreneur

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and Servais, 1997; Moen and Servais, 2002; Oviatt and McDougall, 1994; Rennie, 1993). The focus of earlier research on INVs can mainly be divided into four dimensions: (1) extent or degree of internationalization of a firm’s sales; (2) time between the year of foundation and first foreign sales; (3) scope (that is, number and diversity of target countries or markets); and (4) drivers or antecedents (for example managerial and firm characteristics) of rapid internationalization (Bloodgood et al., 1996; Knight and Cavusgil, 1996; Zahra and George, 2002b). From a theoretical point of view the research on INVs has traditionally been combined with research in entrepreneurship, as in the seminal articles of Patricia P. McDougall and Benjamin M. Oviatt (McDougall and Oviatt, 1996, 2000; McDougall et al., 1994; Oviatt and McDougall, 2005, 1994, 1995). The field of international entrepreneurship per se is not new, but lately there has been an increased interest in research combining internationalization of the firm – and especially the early internationalization as seen in the born global firm – and entrepreneurship. This interest can be seen in a number of review articles (Autio, 2005; Dimitratos and Jones, 2005; Rialp et al., 2005; Zahra, 2005). The knowledge regarding the internationalization of entrepreneurial firms is quite extensive, but one area has received limited interest: the founder or the founders of the INVs. We have previously, in Rasmussen et al. (2001), analysed the founding process with data from case studies and a focus on sensemaking and networks. The problem with case studies is that it is difficult to compare the cases with a larger population or firms that do not have the case characteristics. It is thus not possible to compare the founders of INVs with founders of, for example, slowly internationalizing firms. One key question to be asked of many newly started firms is whether it is better to start the internationalization process right away or to postpone the international entry until the firm has accumulated significant resources (Autio et al., 2000). The managerial decision will depend heavily on what it takes to be an INV. In order to illuminate this issue, we use a large-scale study of all types of industrial firms in Denmark to compare the different types of firms to see whether there is any difference between global firms and local firms in respect of how they perceive their customers, competitors and themselves.

A TYPOLOGY OF FIRMS McDougall et al. (2003) looked into the differences between INVs and DNVs using a sample of 214 new ventures that were six years old or less. They found INVs to be significantly different on the basis of their entrepreneurial team experience, strategy and industry structure. Specifically,

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the entrepreneurial teams of INVs exhibited higher levels of previous international and industry experience. The strategies of INVs were more aggressive, and they operated in more channels of distribution than the DNVs. INVs competed on the basis of differentiation, placing greater emphasis on product innovation, quality, service and marketing as strategic weapons. In addition, INVs were more likely than DNVs to operate in industries characterized by a high degree of global integration; they did not, however, research into the differences of entrepreneurial orientation. In accordance with Oviatt and McDougall (1994), we expand the definition of international firms to include a larger number of international activities; but whereas Oviatt and McDougall (1994) referred to the number of value chain activities that are coordinated and the number of countries entered, we investigate sales as well as sourcing activities. From this we introduce a typology of firms: the local firms (DNVs) and the most international firms – the international new ventures (INVs). Drawing on this typology we will be able to show that large differences exist between the founders of different types of firms. The differences can be seen in the entrepreneurial orientation of the founders of different types of firms based on the well-known scale of entrepreneurial orientation (Covin and Slevin, 1989). An operational definition used by Knight and Cavusgil (1996) of an international new venture is: ‘a firm that has reached a share of foreign sales of at least 25% after having started export activities within three years after its birth’. As demonstrated by empirical research carried out for example by Madsen et al. (2000) and by Moen and Servais (2002), this definition is, however, difficult to use in a European setting. In small countries many firms meet this criterion, and they are usually quite small and have international activities in a limited number of neighbouring countries that are quite similar to the home market. In order to overcome this problem, we follow the suggestion made by Knudsen and Madsen (2002) to use the proportion of foreign activities outside the firm’s own continent (and not just outside its own country) as a more valid measure of the firm’s international or global scope, at least for European firms. Considering today’s market conditions, involving easy and inexpensive transportation as well as communication, many firms sell products or, at least, source input from neighbouring countries. A new Belgian firm sourcing input from France and selling its product in the Netherlands is probably the rule rather than the exception. Following McDougall, Oviatt, and Shrader (2003) we therefore supplement the focus from Knight and Cavusgil (1996) on the selling side with the inclusion of the sourcing of input as well as a dimension in the categorization of international new ventures. We propose to classify firms according to the scale of foreign activities, operationalized as levels of sales as well as sourcing: one group with no


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foreign activities (DNVs), and a group with more than 25 per cent of sales outside own continent (INVs). The cut-off point (25 per cent) is somewhat arbitrary, but it is in accordance with the definition suggested by Knight and Cavusgil (1996).

PROPOSITIONS ON ENTREPRENEURIAL ORIENTATION As mentioned above, the perception of the founder is of pivotal interest. Knight and Cavusgil (2004) stress that born global firms’ entrepreneurial orientation is associated with an innovative and proactive approach to internationalization, suggesting that the development of new knowledge occurs under conditions in which there are little or no existing organizational routines to unlearn (Autio et al., 2000; Cohen and Levinthal, 1990). This implies that entrepreneurial firms are better equipped to obtain knowledge about international business. Knight and Cavusgil (2004) furthermore underline that an international entrepreneurial orientation implies that born global firms make the leap into international markets because of unique entrepreneurial competences and outlook (Autio et al., 2000; McDougall et al., 1994). Since we are about to compare different types of firms (and not only born global firms) we are to use an entrepreneurial orientation scale. Theoretical support for INVs is derived initially from innovation theory, which views innovation as the pursuit of novel solutions to challenges that confront the firm, including the creation of new products and the pursuit of new markets (Miller and Friesen, 1982). In the context of pursuing new markets, internationalization is an innovation within the firm (Cavusgil, 1980) and innovation theory provides a useful framework because, even in the face of limited financial and human resources, early internationalization is a fundamental characteristic of INVs. In older firms, embedded structure tends to constrain strategic choice. Companies that venture abroad late in their existence must unlearn routines rooted in domestic operations before new and internationally oriented routines can be learned. Unlearning established practices becomes more difficult as firms get older, because new knowledge that leads to new practices tends to conflict with existing operations and the management’s embedded mental models (Autio et al., 2000; Barkema and Vermeulen, 1998). In contrast, from their earliest days, INVs tend toward a culture and strategic approaches substantially more appropriate for operating in foreign markets. Managers experience fewer infrastructural and mental barriers to overcome in the internationalization process. There is comparatively less cultural and strategic momentum to constrain new strategic

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initiatives. These young firms exercise greater flexibility and agility, which are particularly important for success in diverse foreign markets. When organizational culture is oriented toward international sales from the firm’s earliest days, management is likely to be more effective in international marketing, and the organization as a whole more adroit in pursuing and mastering international opportunities. In short, there are inherent advantages to being young when venturing abroad (Liesch and Knight, 1999; Oviatt and McDougall, 1994). Entrepreneurial orientation can be regarded as entailing aspects of new entry and especially how new entry is carried out (Lumpkin and Dess, 1996). Defining entrepreneurial orientation as the processes, practices and decision-making activities that lead to new entry is consistent with the conceptualization of Slater and Narver (1995). The scale of entrepreneurial orientation has been widely used to analyse entrepreneurial activities (as in Becherer and Maurer, 1997; Dimitratos and Plakoyiannaki, 2003; Knight, 1997) and has formed the theoretical and methodological basis for the construction of the entrepreneurship questions in the Danish survey. This chapter draws from the scales of Covin and Slevin (1989). These authors operate with nine items which are linked to different dimensions of entrepreneurship. Please refer to the Appendix, Box 11A.1, for the original scale. Later in the chapter we will go into detail about the nine items and some of the results from the Danish survey. This will be followed by a principal components analysis of all items compared with the results from the initial survey. All items originate from Covin and Slevin (1989), but some of these are adapted from other sources. Items V1, V2 and V3 assess the firm’s risk-taking propensity and are adapted from Miller and Friesen (1982). Items V4, V5 and V6 assess the firm’s proactiveness and competitive aggressiveness and are developed by Covin and Slevin. Items V7, V8 and V9 assess the firm’s risk-taking propensity; items V7 and V8 are adapted from Miller and Friesen whereas V9 is developed by Covin and Slevin. Entrepreneurial orientation is often associated with proactive competitive posture, the founders’ interest in risky projects, and the firm’s need to engage in ‘bold, wide-ranging acts’ to achieve objectives (Covin and Slevin, 1989; Miller and Friesen, 1982); hence three dimensions are in focus: ‘innovativeness’, ‘risk-taking propensity’ and ‘proactiveness’. In some research a fourth macro-construct can be seen too: ‘competitive aggressiveness’. It is not our intention in this chapter to focus on these dimensions or macroconstructs but instead we primarily intend to use the nine underlying items for the analyses which we use as nine propositions to be tested. Innovativeness is clearly the concept which is typically associated with entrepreneurship in both theoretical and empirical publications. Used as the process of ‘creative destruction’ in a Schumpeterian way (as in


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Schumpeter, 1989), the creation of wealth in society and in the single firm is seen as a process in which new goods and services are introduced and replace the old ones, and this process equals innovation. The concept can be seen as a basic willingness to use new technology or methods and depart from the existing path of development. Often a distinction is made between product-market innovation and technological innovation, but this distinction can be hard to use in practice. Frequently innovativeness is related to the research and development (R&D) expenses of an existing firm, but as we are focusing on the foundation of new firms, this measure cannot be relevant. Instead we have given the respondents a number of questions regarding their willingness to innovate. The entrepreneurial orientation scale as a whole can be said to relate to innovativeness, meaning that no single item is related to innovativeness. Following this discussion, proposition one (P1) is established as: (P1) INVs have a stronger emphasis on R&D, technological leadership and innovation than DNVs. A similar proposition can be seen in McDougall et al. (2003) in which one of the main results was that INVs have a significantly stronger emphasis on product development, quality, service and marketing than the DNVs. Proactiveness has been a key concept in the entrepreneurship literature (Penrose, 1995; Schumpeter, 1934b, 1989). Proactiveness in entrepreneurial activities can be seen as taking the initiative by anticipating and pursuing new opportunities and by taking part in emerging new markets (Lumpkin and Dess, 1996, 2001). In practice, proactiveness can be seen if a firm or an entrepreneur shapes the environment, such as introducing new products, new technologies or new ways of administration, instead of just reacting to changes; hence focus must be on whether the firm seeks new opportunities, thinking ahead of its competitors. The opposite of proactiveness is, as Lumpkin and Dess (1996) suggest, to be passive. A proactive firm or entrepreneur can be seen as a leader instead of a follower, with the will to pursue new opportunities. Being proactive does not mean the same as being aggressive towards competitors, even if the two concepts are frequently related. Instead, proactiveness is related to the market, that is, how to meet demand in a market or even how to create it. This does not mean that one has to be aggressive towards competitors. We propose: (P2) INVs launch new lines of products or services to a higher extent than the DNVs. Furthermore, (P3) the INV is the first business to introduce products/services, administrative techniques, technologies, and so on compared to the DNV.

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These propositions are in line with the findings of McDougall et al. (2003). As can be seen with innovativeness, risk-taking is often directly associated with being entrepreneurial. Risk-taking is typically defined by the willingness of an entrepreneur or an entrepreneurial firm to make large and risky resource commitments (Lumpkin and Dess, 2001). In the same vein, Autio et al., (2000) stress that high-technology firms may proactively choose to go international or are forced to do so to recover significant R&D costs, and that these knowledge-intensive firms have greater downside risks in the face of technological obsolescence. McDougall et al. (2003) highlight that INVs will operate in industries that have higher levels of technological change than DNVs. Hence the founders’ attitude towards change, and above all risk, will be paramount. Therefore the founders were asked whether they consider themselves to be risk-takers or risk-averse. We therefore suggest: (P4) INVs perceive changes in product or service lines to have been quite dramatic more often than DNVs. Likewise (P5), the INV typically initiates actions which competitors then respond to, and hence (P6) INVs have a stronger proclivity for high-risk projects than DNVs. Competitive aggressiveness is, as mentioned above, often seen as a parallel concept to proactiveness, or even as the same as this concept as in the original survey by Covin and Slevin (1989). Nevertheless, where proactiveness is about the market, competitive aggressiveness focuses directly on actions towards competitors. Competitive aggressiveness can be seen as a firm’s propensity to challenge its competitors directly to improve its position or with the purpose of entering a new market. The aim of the firm or the entrepreneur is to outperform its rivals in the marketplace, and not to seek new opportunities in the market as with the previous concept. Competitive aggressiveness can assume the form of a head-to-head challenge of a competitor or a more reactive form as, for example, the lowering of the price as a reaction to actions from one or more competitors. Autio et al. (2000) state that it is a challenge to the international firms, and that global expansion has increased many firms’ exposure to expropriation and imitation efforts. They also stress that a firm’s international growth may be limited to the extent that host-country competitors can reproduce the benefits offered to its products and services. Hence the purpose for an INV is to achieve a competitive advantage in the market by challenging competitors. McDougall et al. (2003) furthermore argue that INVs will operate in industries with higher competitive intensity than DNVs. We therefore propose:


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(P7) compared to the DNVs, INVs typically adopt a more competitive, ‘undo-the-competitors’ posture. In the same vein, we propose: (P8) INVs to a higher extent than the DNVs find that wide-ranging acts are necessary to achieve the firm’s objective; and (P9) INVs to a higher extent than DNVs display an aggressive posture in order to maximize the probability of exploiting potential opportunities.

METHODOLOGY The empirical review of the propositions stems from a Danish project, ‘Market Strategy of Firms in Global Environments’, which was primarily focused on new (international) business ventures. The founders of the companies as well as the structure and processes of the firms’ internal organization were included in the study, and so were their relationships with external business partners like suppliers, intermediaries and customers. Business firms of interest in the project are manufacturing firms including information technology (IT) firms and other high-tech firms. In accordance with the discussion above, when defining an INV we will assume that such a company within the first three years of its lifetime should have achieved international sales or sourcing. Since the project has no interest in studying quite small firms, only firms with a minimum of ten employees and a maximum of 500 employees were included. Furthermore, the population was reduced to include only limited companies, because these firms are obliged to publish their economic performance which is an important dependent variable in the project. The population of business firms studied was identified by means of the database CD-Direct which lists all private Danish business firms. We selected from CD-Direct business firms according to the criteria mentioned above. A total of 3048 firms met the criteria, but some wrong registrations were identified in the process of data collection, and some of the firms were impossible to approach. As a consequence, the number of units in the final population was reduced to 2527 business firms. Information regarding the entrepreneurial process and the establishment of the firm was sought from the founder of the firm, or in some cases from its present chief executive officer (CEO). Data Collection Initially, a letter was sent to the CEO of the firm. Attached to the letter were seven questions of central importance to the total project. These seven questions are the basis for classifying firms as different types (INVs

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and DNVs). The letter was addressed to the CEO with their actual name as it appears in CD-Direct. As a next step, as preconditioned in the initial letter, all CEOs were approached by telephone in order to ask them to participate in the survey and answer the questions. If it was not possible to reach the CEO after five phone calls, the firm was defined as unreachable, and thus as not eligible to participate in the study. This was the case for a total of 381 firms, which led to the effective population size of 2527 firms. About 57 per cent of the firms in the effective population of 2527 firms (1456 firms) refused to participate in the survey; 370 firms, however, only wanted to answer the set of initial questions. As to questions regarding the entrepreneurial process, information was collected from 331 firms, but not all firms answered all questions, meaning that we have information from 281 firms. In all these 281 cases the CEO had been either the founder of the firm, or one of the founders, or had personal knowledge regarding the founding years. The number of respondents regarding the questions of entrepreneurial orientation is thus 281, with an average number of employees of 129.

FINDINGS AND RESULTS As mentioned above, one of the questions concerned the firms’ international sales within the first three years, and another question regarded their international sourcing within the first three years. This cut-off point of three years is often seen in the literature (Knight and Cavusgil, 2004; Madsen et al., 2000; Madsen and Servais, 1997; Moen and Servais, 2002; Rasmussen and Servais, 2002). If a firm has any international sales or sourcing, it was put in one of the international types. The cut-off point for moving from being international to being global has been set to 25 per cent of international sales or sourcing, again according to the practice in born global research (Knight and Cavusgil, 2004, 1996; Madsen et al., 2000). Traditionally there has been no differentiation between different types of geographical markets, but in the case of Danish firms there are large differences between firms oriented towards the European markets and firms exporting and sourcing on a global scale. Accordingly we operated with a typology consisting of five different groups. In this chapter we intend to focus only on the domestic and the highly international firms. The DNV with no export or international sourcing at all is a quite distinctive type of firm with a clear profile as not being active internationally in any way. The INV has a global perspective on the sales or the sourcing side and a global or European perspective on the other side. It is important to remember that


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this classification into five groups, of which we present comparisons on two of the groups, has been done on the basis of the activities in the firm within the first three years after its foundation. In McDougall et al. (2003) the local and the global firms are compared in a similar vein regarding the firms’ internationalization strategy and entrepreneurial orientation. Some of the main findings from the abovementioned article are that INVs were significantly more aggressive than DNVs, supporting the belief that new ventures go international to pursue aggressive goals (Jolly et al., 1992; Oviatt and McDougall, 1995). For the INVs, the strategic weapons in the article were product innovation, service, quality and marketing. The INV entrepreneurs in this research believed it was important to have product innovation of unusually high quality, to promote the product with strong marketing, and to provide a high level of service to the customers. It can thus be concluded that INVs in McDougall et al. (2003) had a much stronger entrepreneurial orientation than the DNVs. As mentioned in the literature, (Madsen et al., 1999, 2000), it has often been expected that the existence of firms that are born global can be explained through differences between industries. In the Danish survey one can observe only a few significant differences between industries. There are a considerably higher number of INVs in industries like production of software, research and development (science), production of office machinery, telecommunications, and a few others. But these differences cannot explain why one observes a large number of INVs in all types of industries. So, even low-tech industries like the furniture industry have firms that are operating on a global scale, right from their foundation. Considering industry as the explanatory variable behind the existence of global oriented firms is important, but not enough to explain why in the same industry within a few years of difference between the foundation years, we find local and global firms. Instead one perhaps has to take a closer look at the entrepreneurial orientation of the founders. Entrepreneurial Orientation When using a scale like the entrepreneurial scale it must of course be examined whether the single items together form a scale with high reliability and validity. One of the methods for this is to use the calculation of Cronbach’s Alpha. The result for the Danish survey is an Alpha value of 0.861. This can be supplemented by an analysis of each item’s influence on the total result and on the Chronbach Alpha value. The results are listed in Table 11.1, where it is seen, that the Cronbach Alpha values generally lie at high levels.

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Table 11.1

Item-total statistics (N 5 281)

Item

Scale mean if item deleted

Scale variance if item deleted

Corrected item-total correlation

Squared multiple correlation

Cronbach’s Alpha if item deleted

V1 V2 V3 V4 V5 V6 V7 V8 V9

29.37 29.61 29.60 29.15 29.00 29.67 29.57 29.71 29.53

101.712 96.168 97.791 101.759 95.918 101.373 96.889 96.349 98.271

0.404 0.557 0.580 0.564 0.631 0.545 0.694 0.729 0.663

0.220 0.580 0.601 0.486 0.549 0.404 0.602 0.747 0.692

0.867 0.850 0.847 0.849 0.842 0.850 0.837 0.834 0.840

The two different types of firms studied in this chapter, DNV and INV, can be analysed as to their entrepreneurial orientation by using the nine items of the scale of entrepreneurial orientation as displayed in Table 11.2. In Table 11.2 the mean of each of the nine statements combining the entrepreneurial orientation for each of the two types of firms is calculated. For three of the nine questions there were no significant differences between the two types. For the remaining six there were significant differences between the two types. Hence no support is found for the two propositions that (P1) INVs have a stronger emphasis on R&D, technological leadership, and innovation than DNVs; and that (P4) INVs perceive changes in product or service lines to have been quite dramatic more often than DNVs. Nor is proposition (P9), supported that INVs display an aggressive posture to a higher extent in order to maximize the probability of exploiting potential opportunities. Support was found for proposition two (P2) that INVs to a higher extent launch new lines of products or services than DNVs, but the support was only at the 0.10 level. Support at 0.05 level was found for proposition three (P3), that INVs are the first businesses to introduce products/services, administrative techniques and technologies; and proposition five (P5), that the INVs typically initiate actions which competitors then respond to. Likewise support is found for: proposition six (P6) that INVs have a stronger proclivity for high-risk projects than DNVs; (P7), that INVs typically adopt a very competitive, ‘undo-the-competitors’ posture; and (P8), that INVs to a higher extent find that wide-ranging acts are necessary to achieve the firm’s objectives.


Table 11.2

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Entrepreneurial orientation and type of firm (N 5 281) Domestic new ventures

V1. A strong emphasis on R&D, technological leadership, and innovation V2. Many new lines of products or services # V3. Changes in product or service lines have usually been quite dramatic V4. Typically initiates actions which competitors then respond to * V5. The first business to introduce products/ services, administrative techniques, technologies, etc. * V6. Typically adopts a very competitive, ‘undo-the-competitors’ posture * V7. A strong proclivity for high-risk projects (with chances of very high returns) * V8. Bold, wide-ranging acts are necessary to achieve the firm’s objective * V9. A bold, aggressive posture in order to maximize the probability of exploiting potential opportunities

International new ventures

3.51

4.43

3.27 3.41

4.48 4.05

3.63

4.90

3.96

5.24

3.11

3.57

3.33

4.48

3.03

4.05

3.44

4.00

Note: *5statistical significant difference at 0.05 level; # 5 statistical significant difference at 0.10 level.

If we compare the DNVs with the INVs it is evident that the international firms on each of the questions have a stronger entrepreneurial orientation than the local-oriented firms. One can observe that the local firms have a distinct profile and that the INVs have quite another profile. The DNVs are careful, develop slowly, and wish to avoid confrontations with competitors; whilst the INVs are much more bold and proactive in their behaviour. The DNV can thus be characterized as a firm with a conservative strategic posture, to use the term of Covin and Slevin (1989). Firms with this posture are characterized by a low level of technological and product innovation, an extremely cautious competitive orientation, and risk-avoidance by the management. On the other hand, the global-oriented INVs had a strong emphasis on the marketing of new products in the first years, a rather bold attitude towards the competitors, and a strong focus on being the first in the market with new products, processes and methods. Especially if one takes a closer look at the opposites in the typology – the local firm and the global firm – it is obvious that they are quite different in their entrepreneurial orientation.

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CONCLUSION The findings above show that internationalization can be seen as an integrated part of the entrepreneurial orientation of the founder. As Miller and Friesen (1982) argue, the entrepreneurial position of a firm (or a founder) must be seen as a strategic posture with a number of components that are interwoven. An entrepreneurial firm must be innovative, risk-taking, proactive and aggressive towards its competitors at the same time. This type of firm can be seen amongst the INVs in the survey of Danish industrial firms. Comparing the DNV with the highly international INV, the difference between the two types is quite evident. The local firm fits into the description of Covin and Slevin (1989) as a firm with a conservative, strategic posture characterized by minimal technological, product and market innovation, a cautious orientation towards the competitors and a management with a wait-and-see posture. On all nine items in the entrepreneurial orientation scale the local firm scores lower than the INV. In opposition to the DNVs, the INVs have a strong entrepreneurial strategic posture with a focus on innovation, bold orientation towards the competitors, and a strong risk-taking propensity by the founders. On all items except one in the scale of entrepreneurial orientation, the INV has the highest score, indicating that this type of firm is the most entrepreneurial amongst all industrial firms in Denmark. In a Danish context, being highly international (whether it is on a global or a European scale) is linked to a strong entrepreneurial orientation. It can of course be explored further what comes first: the entrepreneurial orientation or the global orientation of the firm. Nevertheless it is clear that a firm that has a global orientation from its foundation also has to have a strong entrepreneurial orientation. The next step for further research, therefore, is to go deeper into the relationship between internationalization and entrepreneurial orientation through a large number of case studies. Though most items in this chapter are different from those used by McDougall et al. (2003), one is the same, namely aggressiveness. McDougall et al. (2003) found in their study that strategy played an important role in the internationalization of new ventures. They established that INVs were significantly more aggressive than DNVs, supporting the belief that new firms go international as a means of pursuing aggressive goals (p. 77). One could perhaps claim that aggressiveness is a prerequisite for going international, but not necessarily for being more successful. In order to address this issue, more research is needed into the interplay between internationalization, aggressiveness and performance.


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The comparison between the local and the global firms shows some interesting differences between the two types of firms, but what is still lacking in the research is to examine whether there are any differences in export performance over a longer period of time, or in performance in general. It could be expected that the most international firms would perform best, but in other articles we have shown that the fastest-growing firms are not the most international, but those that focus on Europe (Madsen et al., 2000). Therefore, further investigation into these export performance issues is much needed.

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APPENDIX BOX 11A.1

THE ORIGINAL COVIN AND SLEVIN (1989) SCALE

In general, the top managers of my firm favour . . . V1 A strong emphasis 1 to 7 A strong emphasis on on the marketing of R&D, technological leadtried and true products ership, and innovation and services How many new lines of products or services has your firm marketed in the past 5 years? V2 No new lines of 1 to 7 Very many new lines of products and services products or services V3 Changes in product or service lines have been mostly of a minor nature

1 to 7

Changes in product or service lines have usually been quite dramatic

In dealing with its competitors, my firm . . . V4 Typically responds 1 to 7 Typically initiates actions to actions which which competitors then competitors initiate respond to V5 Is very seldom the first business to introduce new products/ services administrative techniques, operating technologies, etc.

1 to 7

Is very often the first business to introduce new products/services, administrative techniques, operating technologies, etc.

V6 Typically seeks to avoid competitive clashes, preferring ‘live-and-let-live’ posture

1 to 7

Typically adopts a very competitive, ‘undo-thecompetitors’ posture


In general, the top managers of my firm have . . . V7 A strong proclivity 1 to 7 A strong proclivity for for low-risk projects high-risk projects (with (with normal and chances of very high certain rates of return) returns) In general, the top managers of my firm believe that . . . V8 Owing to the nature 1 to 7 Owing to the nature of of the environment, the environment, bold, it is best to explore wide-ranging acts are it gradually via timid, necessary to achieve the incremental behaviour firm’s objective When confronted with decision-making situations involving uncertainty, my firm . . . V9 Typically adopts 1 to 7 Typically adopts a bold, a cautious, ‘wait-andaggressive posture in see’ posture in order order to maximize the to minimize the probprobability of exploiting potential opportunities ability of making costly decisions

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12.

Local bridging ties and new venture internationalization: exploratory studies in Bangalore and Cambridge Shameen Prashantham and Girish Balachandran

SUMMARY The research question addressed here is: How does the nature of local embeddedness of network relationships influence new venture internationalization? The authors distinguish between the spatial embeddedness of ties as dispersed or concentrated. They explore the differential effects of local bridging tie embeddedness on new venture internationalization, based on a case study pertaining to each spatial embeddedness type. The cases concern a Bangalore (India) start-up engaged in spatially dispersed joint activity with Microsoft India, within the Bangalore software cluster; and a Cambridge (UK) venture with spatially concentrated links to a local venture capital (VC) firm, located within the Cambridge electronics cluster. The authors posit that the spatial embeddedness of local ties could have differential effects on the internationalization of new ventures in terms of: (1) differing trajectories of opportunity creation; (2) distinct knowledge-bases that are accessed; and (3) varying potential constraining effects. An implication is the utility of a holistic approach whereby internationalizing new ventures cultivate and utilize both forms of network relationships. Future research directions highlighted include the development of organizational capabilities by international new ventures (INVs) through interacting with local bridging ties such as multinational corporation (MNC) subsidiaries and VC firms; and the influence of local bridging ties on internationalization routines.

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Local bridging ties and new venture internationalization

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INTRODUCTION A significant strand in the international entrepreneurship literature focuses on the role of network relationships in facilitating and accelerating new venture internationalization (Oviatt and McDougall, 2005; Zahra, 2005). This literature thus brings together two key domains of research at the strategy–entrepreneurship interface, namely: internationalization, an important growth strategy (Lu and Beamish, 2001); and networks, a valuable resource (Yli-Renko et al., 2001) for growth-seeking resourceconstrained ventures. Often invoking social capital theory (McNaughton and Bell, 1999), research on this topic suggests that network relationships in international markets provide vital information (Johanson and Vahlne, 2006), new opportunities (Coviello, 2006) and strategic partnerships (Arenius and Autio, 2005). Within this stream of research, an emergent interest lies in the spatial aspect of networks, with a specific focus (somewhat counterintuitively) on the role of local social capital in facilitating new venture internationalization. Brown and colleagues have noted that regional clusters potentially comprise an especially effective source of local social capital that could, for instance, facilitate joint international business development efforts among ventures (Brown and Bell, 2001; Brown and McNaughton, 2003). Building on this work, Prashantham (2004) points to the utility of such local milieux1 in also providing ventures with access to international links. Prashantham and McNaughton (2006) recently developed this notion further, highlighting the potential for links with local MNC subsidiaries to facilitate innovation and internationalization outcomes for knowledge-intensive new ventures. Thus network relationships with significant local actors could offer intriguing possibilities for internationally minded knowledge-intensive new ventures,2 a phenomenon that warrants further scholarly attention. A fruitful angle for such exploration pertains to embeddedness, that is, the notion that economic activity is undertaken within a context of social relations (Granovetter, 1985). The embeddedness of actors in local milieux can vary in their extent and nature (Uzzi, 1997). The thesis that we seek to explore is that local embeddedness types may be associated with differential effects on internationalization-seeking new ventures. Prior research appears silent on this matter. Exploring these differences further will provide a more nuanced understanding of the role of local social capital in new venture internationalization. The research question addressed here is: How does the nature of local embeddedness of network relationships influence new venture internationalization? More specifically, we delve into the effects of the spatial

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orientation of the embeddeness of major actors – and therefore of their network relationships involving new ventures – within a local milieu by distinguishing between spatially dispersed and concentrated embeddedness.3 We explore their differential effects on new venture internationalization based on a case study pertaining to each of these embeddedness types. Spatially dispersed embeddedness characterizes ties with major actors that are co-embedded in the local milieu and in a global network, while spatially concentrated embeddedness is associated with major actors with significant local roots that are consequently deeply embedded in the local milieu. Thus we present an altercentric, rather than an egocentric, perspective of embeddedness which seems appropriate when the focal actor is a smaller young firm and the other actor (alter) is a major local player.4 With respect to spatially dispersed embeddedness, we discuss a case study of a software start-up within the Bangalore cluster – which has attracted significant foreign direct investment (FDI), that is, capital inflows, in recent years – that has leveraged a network relationship with Microsoft India to enhance its visibility in international markets. Subsidiaries of multinational corporations (MNCs) represent an interesting case of local embeddedness in that they are embedded (to varying degrees) in both the intraorganizational MNC network and the local milieu (Young and Tavares, 2004). New ventures’ ties with MNC subsidiaries are hence likely characterized by spatially dispersed embeddedness. With respect to spatially concentrated embeddedness, we present a case study of a spin-off venture from Cambridge University that formed a network relationship with Amadeus, a venture capital firm with strong roots in the local milieu – including with the venture’s laboratory of origin – through which it has attracted further funding and recently commenced prototype production in Dresden, Germany. A strong innovation ecosystem comprising a technical university and sources of venture capital – as represented by the Cambridge electronics cluster – can be a vital source of network relationships for new ventures (Wright et al., 2006). These network relationships are more likely to demonstrate spatially concentrated embeddedness, thus presenting an interesting comparator to MNC subsidiary ties. The chapter sheds light on the notion that local embeddedness could vary in nature and have differential effects on internationalization of new ventures in terms of: differing trajectories of opportunity creation; distinct influences on value chain activities through the differing nature of knowledge-bases that are accessed; and varying ways in which these ties potentially have a dark side, that is, constraining effects. An implication of the above is the utility of a holistic approach – in both managerial and public policy terms – whereby clusters possess both forms of network


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relationships that new ventures can cultivate and utilize as they seek internationalization success.

LITERATURE REVIEW Local Network Relationships and New Venture Internationalization The idea that new ventures benefit through networks is a major theme at the strategy–entrepreneurship interface, as is the phenomenon of international expansion as a means of growth for new ventures (Hitt et al., 2001). Potentially, some network relationships provide new ventures with legitimacy (Lee et al., 2001) and access to new knowledge (Yli-Renko et al., 2001). New ventures in knowledge-intensive sectors often exhibit a proclivity to cultivate and leverage network relationships owing to their innovation propensity and resource poverty (Prashantham and Berry, 2004). Specifically, in relation to research in new venture internationalization, there is a long-standing tradition that emphasizes the role of network relationships (Coviello, 2006; Coviello and Munro, 1997). International entrepreneurship researchers have recently invoked social capital theory in studying the international growth of new ventures (Arenius and Autio, 2005; McNaughton and Bell, 1999; Yli-Renko et al., 2002). Social capital is ‘the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit’ (Nahapiet and Ghoshal, 1998: 243). According to Putnam and Goss (2002: 6): ‘the idea at the core of the theory of social capital is extremely simple: Social networks matter’. Social capital theory is complementary to knowledge-based theories and particularly relevant to new ventures that must ‘develop firm-specific assets while obtaining complementary external resources through their social networks’ (Lee et al., 2001: 616). Social capital emanating from network relationships has been found to provide access to valuable information and opportunities (Coviello, 2006; Prashantham, 2006; Johanson and Vahlne, 2006; YliRenko et al., 2002). The emphasis in the literature has, understandably, tended to be on network relationships in international markets. Less explored is the somewhat counterintuitive notion that network relationships in the local milieu could influence new ventures’ international expansion. Notable among the few studies that have taken this perspective is the work of Brown and colleagues that highlights the utility of SME (peer) networks within a regional cluster (Brown and Bell, 2001; Brown and McNaughton, 2003).

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Their work in the Christchurch electronics cluster suggests that SME networks can facilitate joint promotion activities and referrals. Exploring the idea of local networks further, Prashantham (2004) found evidence of new ventures in the Bangalore software industry – another regional cluster – being able to access international links locally, through ties with local MNC subsidiaries. More recently, Prashantham and McNaughton (2006) have built on the idea of regional clusters yielding valuable network relationships for internationalizing new ventures. Like Prashantham (2004), they focus on dissimilar companies as a source of bridging social capital (Putnam, 2000). Specifically they focus on MNC subsidiaries as a source of local social capital to internationalization-seeking new ventures through joint innovation activity (that is, new product development) and, subsequently, international business development. Drawing upon case study research in the Scottish software industry, they find that these potential benefits of local bridging ties are more likely to accrue when a bridging mechanism fosters the development and sustenance of these relationships. Types of Bridging Tie Embeddedness Prashantham and McNaughton’s (2006) work resonates with the broader study of networks in the strategic management field. Research by McEvily and colleagues, for example, indicates that within clusters smaller firms could potentially gain access to bridging ties (McEvily and Zaheer, 1999) and embedded ties (McEvily and Marcus, 2005). Bridging ties refer to relationships marked by non-redundancy, that is, the other actor is not strongly connected to the focal actor’s network of relationships (Burt, 1992). Consequently there is a greater chance that these ties yield novel information, ideas and opportunities (McEvily and Zaheer, 1999). Embedded ties refer to relationships that, as distinct from arm’s-length relationships, are characterized by fine-grained information sharing, trust and joint problem-solving (Uzzi, 1997).5 Drawing upon the work of Granovetter (1985) and other social network scholars, Dacin et al. (1999: 320–21) suggest that embeddedness refers to: ‘the contextualization of economic activity in on-going patterns of social relations . . . Embeddeness arguments take economic activity seriously but look beyond the rhetoric of intentionality and efficiency and make a strong commitment towards understanding relational aspects of organizations.’ Uzzi and colleagues echo this notion. Embeddedness theory, ‘argues that the process of embedding commercial transactions in social attachments instills into future exchange expectations of trust and reciprocity that promotes unique value creation in the relationship’ (Uzzi and Gillespie, 2002:


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598); embeddedness creates ‘cooperative exchanges of trust and ongoing reciprocal exchanges’ (Uzzi and Lancaster, 2003: 391). Embedded ties are particularly useful in transferring private, as opposed to public, knowledge (Uzzi and Lancaster, 2003). Recently, network scholars have tended to view embeddedness not as a dichotomy (embedded versus arm’s-length ties) but as a continuum (McEvily and Marcus, 2005). The network relationships that Prashantham and McNaughton (2006) refer to between new ventures and MNC subsidiaries – which can be influential local actors – clearly share both of these characteristics, that is, bridging and embedded. Furthermore, they found that the new ventures in their Scottish sample collaborated with the local subsidiary of Sun Microsystems, a significant employer in the region and a constituent of Sun’s global network of subsidiaries. Thus, as Young and Tavares (2004) point out, the peculiar nature of such an actor (MNC subsidiary) lends an interesting spatial dimension to its embeddedness within the local milieu in that it is, simultaneously, embedded within a local mileu (Scotland) but also a global intra-organizational network (Sun Microsystems). We refer to such embeddedness as ‘spatially dispersed embeddedness’. We also suggest that, surely, other influential actors exist in a given local milieu that could constitute a potential source of bridging embedded ties. Whereas an MNC subsidiary may be somewhat loosely embedded within the local milieu (Young and Tavares, 2004), other influential actors may be more deeply rooted (Wright et al., 2006) – thus, their embeddedness within the cluster is qualitatively different. It is not difficult to conceive of, for example, more locally rooted actors in a regional cluster that possesses a strong regional innovation system. This may be particularly so within a milieu characterized by a strong tradition of university research where a number of actors could wield considerable influence – thereby constituting valuable sources of social capital to new firms; these include major indigenous companies and investors (Wright et al., 2006). Often such entities are closely associated with a university around which the cluster may have developed, and are thus deeply rooted in the local milieu. Their embeddedness, we refer to – in contrast to that of MNC subsidiaries – as ‘spatially concentrated embeddedness’. We argue that the way in which local bridging ties influence new venture internationalization will vary according to the nature of the (influential) other actor’s spatial orientation vis-à-vis the local milieu, and therefore of the tie’s embeddedness, that is, spatially concentrated or dispersed, as discussed above. Consistent with the view of international entrepreneurship scholars such as Jones and Coviello (2005), we argue that the further exploration of this novel issue is best served inductively through exploratory

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empirical research in order to get a better understanding of these differential effects; hence exploratory empirical work using an inductive case study method seems appropriate.

METHODOLOGY In order to address the research question, an exemplar case study is used from each of two regional clusters – the Bangalore software industry and the Cambridge electronics industry. The exemplar case-studies are drawn from wider exploratory studies undertaken, in parallel, during July 2006. The rationale for choosing Bangalore and Cambridge is that different regional clusters may have a greater concentration of certain ties; thus, some clusters may have a strong presence of MNC subsidiaries (for example the Bangalore software industry) and others of VC firms (for example the Cambridge electronics industry). The comparative aspect of the study is deliberate, with a view to enhancing its potential to yield valuable exploratory outcomes. Bangalore and Cambridge bear certain similarities but also differ in significant ways. Similarities include the fact that the local network is a source of international links. Also, there is considerable competition for the attention of key actors within the milieu, which means being highly innovative is a necessary condition if a new venture is to engage with a local MNC subsidiary or VC firm. A key dissimilarity is the emerging versus advanced economy distinction which undoubtedly is reflected in Bangalore’s access to MNC subsidiaries (being a significant FDI destination) and Cambridge’s to VC firms (driven by a mature university-based ecosystem). Given the exploratory nature of the research, a set of in-depth interviews (Ghauri and Grønhaug, 2002) were undertaken in Bangalore and Cambridge. The interviews covered a range of new ventures and other key local actors including MNC executives (Bangalore) and investors (Cambridge) in addition to experts such as local academics; thus interviews with entrepreneurs were supplemented by interviews with other industry experts including academics and trade body officials. In addition, a large amount of secondary data from company websites and industry reports were studied. The use of multiple respondents and secondary data sources was a means to achieve triangulation (Miles and Huberman, 1994). The Bangalore fieldwork was undertaken in July 2006 by Shameen Prashantham. Fifteen interviews were conducted covering six software ventures, four MNC managers and four other experts including officials of the trade body for software, Nasscom. The ventures were identified through suggestions made by Nasscom. The objective was to interview


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highly innovative companies and the interviewees had all been recognized for meritorious innovation. An interview guide was used to ensure some uniformity in the content of the interviews to facilitate data analysis. Interviews lasted on average for 90 minutes. In addition to the extensive field notes taken, the interviews were recorded. The Cambridge fieldwork was undertaken in July 2006 as well by Girish Balachandran. A similar approach was adopted as in Bangalore, and 20 interviews were undertaken covering four electronics ventures as well as serial entrepreneurs, business angels, academics and support service providers. Again interviews lasted 90 minutes on average and were taperecorded with extensive field notes also taken. Interviewees were identified through the assistance of Library House, a local resource for venture capitalists and entrepreneurial firms, with strong local network ties. Data were analysed in keeping with the approach advocated by Yin (1994). Thematic analysis of the content was undertaken first for each case-firm and then across cases. The additional expert interviews were then analysed with a view to identifying the reiteration of or contradiction to themes identified from the interviews with the case-firms’ entrepreneurs. This chapter focuses on one exemplar case-study from each of the two datasets, that is, the exploratory studies in Bangalore and Cambridge. Both are young firms with fewer than 250 employees and thus also represent small and medium-sized enterprises.

CASE-STUDY FINDINGS Bangalore Case Study: Spatially Dispersed Embeddedness Skelta was founded in Bangalore in 2002 as a software product company. Skelta’s product orientation is relatively uncommon among Indian software companies, the vast majority of which operate predominantly as services companies. Although some are sceptical about India’s prospects for producing genuinely world-class software products companies, Skelta’s co-founders have been adamant in their self-belief that the venture could achieve global success. The founders include chief executive officer (CEO) Sanjay Shah, whose previous experience includes co-founding another software venture in India, iCode, which sought to offer enterprise-wide resource planning software for small and medium-sized enterprises (SMEs). Prior to this he co-founded Accel, a retailer of personal computers (PCs), in Washington DC. Shah is a graduate of the prestigious Indian Institute of Technology (Mumbai) and holds a postgraduate engineering degree from the US.

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Another co-founder is Paritosh Shah, who also has previous entrepreneurial experience in India and abroad and is responsible for marketing. Skelta’s flagship offering is known as Skelta BPM.NET. As evident from the name, this software application is focused on business process management (BPM) which involves the application of information technology to streamline and manage efficiently a variety of organizational processes. The second half of the product’s appellation indicates that the offering is built on Microsoft’s .Net platform technology, the underlying component on which software applications can be written for a Windows operating environment. The decision to ally its product technologically with Microsoft was a significant decision taken early on by the company founders. Microsoft technology was seen as attractive, given its widespread adoption by a range of companies across several countries. Technology solutions like Skelta’s that are built on a Microsoft platform stand a better chance of being integrated with client companies’ extant Microsoft-based applications. From Microsoft’s viewpoint, such applications are of benefit too. Every time a Skelta product licence is sold, so is a Microsoft operating system licence. Not surprisingly, then, a core part of Skelta’s strategy has been to cultivate a deep relationship with Microsoft. Evidence of how seriously this relationship is taken is seen from the fact that the company has a separate function, alongside other conventional functions such as sales and finance, headed by a senior manager, which is referred to as the Microsoft relationship function. As CEO Sanjay Shah observes: Skelta shares a deep, symbiotic relationship with Microsoft and the Microsoft development community . . . As a member of Microsoft’s Technology Adoption Program, we have had the opportunity to work on new Microsoft technologies much in advance of their release.

It is interesting to note, however, that Skelta was able to build a cross-border, multifaceted relationship with Microsoft through efforts that began in Bangalore – its own backyard, as it were. Rajiv Sodhi, the Microsoft manager in Bangalore responsible for forging relationships with technology partners such as Skelta, notes that it was Skelta that had proactively approached Microsoft. Skelta’s technology impressed Microsoft, as did the proactive approach of the top managers in seeking to gain visibility for the venture. As Sodhi comments; ‘We are helping Skelta. More importantly, they are helping themselves.’ The Skelta–Microsoft relationship initially began at the local level through Skelta’s participation in Microsoft events and other promotional activities. For example, Skelta was invited to participate in Microsoft roadshows whereby the product could be demonstrated to prospective clients in different parts of the country. Skelta’s CEO was invited to speak at a seminar


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organized for partner organizations of Microsoft in India on how Indian software product companies could achieve local and global success. Also, when Microsoft hosted an industry-wide workshop on the topic of innovation, Skelta was showcased as an example of an innovative company. Before long, the Indian subsidiary of Microsoft started promoting Skelta within the wider Microsoft network. To illustrate, in 2004 Skelta was invited to participate in the Microsoft Worldwide Partner Conference in Canada. The following year, Skelta was nominated by Microsoft India to be considered for an international innovation award at the Microsoft Conference in Boston which it went on to win. In 2006, Skelta was among a set of internationally selected companies featured on Microsoft’s Vista promotion website, resulting in global visibility. By this stage, Skelta had acquired about 200 clients across a range of advanced economy markets including the US, the UK and Canada. Microsoft’s Sodhi describes Skelta’s strategic posture in this way: Skelta fostered a very strong link with Microsoft India and this link is on multiple levels . . . smart people like them very quickly align themselves to Microsoft’s agenda because then, you have the whole subsidiary standing behind you . . . What happens as a result is that it’s not a very distant point in time when you [i.e. companies like Skelta] start getting elevated to regional levels, to global levels, given the way the hierarchy works.

Thus, the Skelta experience illustrates that, given relational capabilities of proactively establishing a valuable relationship with a significant player such as Microsoft, Bangalore provides local firms with access to international networks via the local environment. Clearly, the local milieu in Bangalore was able to attract the presence of large players like Microsoft, and this has greatly facilitated Skelta’s progress. As Skelta’s relationship with Microsoft has prospered, so has the company, as evident from various distinctions achieved by Skelta in 2006. It was selected for a special innovation award from the national trade body for software companies, Nasscom. It was recognized as one of Asia’s fastest-growing technology companies by the trade publication Red Herring which had famously recognized Google’s potential before many other industry observers had. Perhaps most significant of all, Skelta, which had thus far been privately held, received its first round of venture capital amounting to $1.5 million from an Indian venture capital fund. It appears that despite its considerable success, Skelta is not resting on its laurels. The company has recently retained a Seattle-based management consultancy to facilitate its collaboration with strategic partners such as Microsoft, and hired a former Infosys executive to head the company’s sales function for the US, based in Atlanta.

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Cambridge Case Study: Spatially Concentrated Embeddedness Plastic Logic was founded in Cambridge in 2000 as a developer of plastic electronics. Plastic Logic was spun off from Cambridge University’s renowned Cavendish Laboratory where its technology had been developed over the preceding decade or so. The company operates in the specialist area of plastic electronics which it describes as entailing ‘the fabrication of electronic devices such as thin film transistors using semiconducting polymer materials.’ The company focuses on a new technology for manufacturing electronics and depicts its approach as one that ‘solves the critical issues in manufacturing high resolution transistor arrays on flexible plastic substrates’. The company is working on commercializing the new technology through application in flexible active-matrix displays which are used in devices such as laptops and sophisticated mobile phones. Some experts estimate that plastic electronics will be a multi-billion-dollar industry by 2015. From inception, the company has seen itself as a global company with employees, investments and (in due course) markets coming from around the world. The company had been initially christened Cambridge Polymer Logic, but the word Cambridge was subsequently dropped to signal the company’s global, as opposed to parochial, mindset. (‘Plastic’ was preferred to ‘Polymer’ to make the name more accessible to a lay audience.) Former CEO and current vice-chairman Stuart Evans described Plastic Logic’s orientation with respect to the international marketplace in this way: We are a global firm based in Cambridge. I wouldn’t want anybody to think parochially about Plastic Logic. We hire people from all over the world, our investors are from all over the world, our market is all over the world, it just happens that we started in Cambridge . . . when we think of solving a problem, we begin looking at the world and not at Cambridge.

Notwithstanding this global orientation, it would be a fallacy to assume that the local milieu has been insignificant to Plastic Logic’s birth and development; indeed, the venture’s strong association with Cambridge University is striking. Apart from its origin within the university’s Cavendish Laboratory, it is clear that key individuals associated with the local milieu have been influential in the company’s formative stages. For instance, a co-founder is Sir Richard Friend, Cavendish Professor of Physics at the university. Another key individual has been Hermann Hauser who holds a PhD from the Cavendish Laboratory and is cofounder of Amadeus Capital Partners, a venture capital firm with offices in Cambridge and London. Amadeus was a major source of seed capital for Plastic Logic. Stuart Evans, a Harvard MBA with prior stints at IBM and McKinsey, was brought on board at Amadeus’s recommendation.


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Its decision to ally closely with Amadeus at an early stage has had various effects on Plastic Logic. One of the most significant has been the attraction of funding beyond the seed capital stage. To illustrate, one of the investors in the next round of funding of $8 million in 2002 was the Bank of America, itself an investor in Amadeus. During this round, other investors – from Germany and Japan – were attracted as well; Amadeus’s involvement with Plastic Logic from the start undoubtedly instilled confidence. Thus the seeds of many of the company’s subsequent relationships were sown, as it were, in its own backyard of Cambridge – and in particular, through its links with Amadeus. Favourable publicity was another outcome of the link with Amadeus in general, and Hauser in particular. Plastic Logic received front-page coverage in the Financial Times during its launch thanks to Hauser’s timely positive comments to a journalist. Such assistance has complemented the considerable profile-enhancing efforts made by the company itself; indeed, Evans reckons that he ‘must have given 25 talks, one every couple of months all around the world, about the company and its interesting story’. Evans acknowledges that the company is ‘helped a lot by Hermann [Hauser], who’s very high profile and talks about Plastic Logic with great endearment’. Another non-trivial effect of the tie with Amadeus relates to the company’s accommodation in the Cambridge Science Park. When Plastic Logic sought accommodation, the general level of demand (fuelled by the Internet boom) was so high that space was not available. So when one vacancy came up, competition for it was understandably fierce. Hauser was able to use his influence to obtain that space for Plastic Logic. But it is the attraction of further funding where Amadeus’s influence appears to have been the most significant. A major and, in Cambridge, unprecedented development occurred in early 2007 when Plastic Logic attracted a further infusion of $100 million to fund production of its prototype in Dresden, Germany. This is of course indication that Plastic Logic has an impressive technological base and has been managed adeptly by individuals such as Evans. Although several other actors were involved, notably the American VC firms Oak Investment Partners and Tudor Investment Corporation, it is significant that Amadeus was a participant in this round as well. As Hauser commented in the press at the time: Having backed Plastic Logic from day one, I am delighted that the first full commercialization of plastic electronics is now firmly in our sights. With this investment we are not only scaling up a great company – we are also creating a new electronics industry that will become a significant addition to silicon.

Thus, the Plastic Logic experience illustrates that, given a strong platform of innovation combined with business-savvy leadership, Cambridge

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provides local firms with access to significant resources, directly and indirectly, through venture capitalists with deep links to Cambridge University such as Amadeus. Plastic Logic has continued to win accolades from industry commentators. The ultimate recognition of the company’s potential is, of course, the recent $100 million funding, one of the largest funding rounds seen in Europe. Plastic Logic is determined to build on its initial successes and expects that, all being well, the first sale could come by the end of 2008. Evans was not prepared to conjecture where that business may come from, which is testimony to the company’s global orientation.

ANALYSIS AND DISCUSSION Opportunities In both cases, consistent with the strategy (McEvily and Zaheer, 1999) and international entrepreneurship (Oviatt and McDougall, 2005) literatures, valuable opportunities accrued to the new ventures through bridging ties. A key consequence of these opportunities was greater credibility, and thereby legitimacy (Hitt et al., 2001). During the period of the ventures’ development covered by our study, there were some noticeable differences in the manner in which opportunities accrued. For Skelta, the major influence in terms of opportunities generated through the relationship with Microsoft could be seen in international markets. Specifically, Skelta enjoyed greater international visibility through participation in international events, recognition (for example through awards) of its technical competence and promotion on global promotional websites. By contrast, for Plastic Logic, significant financial resources were attracted into the company and therefore into its local milieu (notwithstanding subsequent decisions of where to locate the production function); the company’s profile within Cambridge has been significantly enhanced as a consequence. Of course, in both cases the opposite can be argued too – Skelta has gained local opportunities as well thanks to Microsoft; and Plastic Logic has achieved international recognition through affiliation with Amadeus. But in these initial stages of both companies, the predominant influence has been in international markets for Skelta and in the local milieu for Plastic Logic. This suggests to us that there are differences in the trajectory of opportunity generation for new ventures depending on the spatial orientation of the other actor; in the case of spatial concentration the trajectory seems to be ‘magnet-like’ (witness Plastic Logic’s infusion of finance) whereas in the case of spatial dispersion the trajectory is more ‘propeller-like’ (witness Skelta’s international promotion).6 As such, we propose:


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Proposition 1: Spatially concentrated embeddedness in a new venture’s bridging ties is associated with a ‘magnet-like’ mechanism for the generation of opportunities; spatially dispersed embeddedness is associated with a ‘propeller-like’ mechanism. Knowledge The generation of opportunities resulted in new knowledge being accessed by the ventures, which in turn influenced various economic activities pertaining to the value chain (Dacin et al., 1999; Uzzi, 1997). Irrespective of which activities were engaged in, a common benefit to both ventures was the reduction in resource poverty as a consequence of the network relationship (Prashantham and Berry, 2004). Again, differences between the two cases can be identified. In the case of Skelta, the knowledge that it accessed was technologically more diffuse, reflecting the far greater breadth of Microsoft’s knowledge base. Such knowledge – for instance, pertaining to global software product sales – supplements locally available knowledge in Bangalore which is services-oriented. In the case of Plastic Logic, however, the knowledge that it accessed was strongly reinforcing of local specialisms. A respondent pointed out to us that a notable previous success story from the Cavendish–Amadeus stable had a similar interest in plastic electronics. Put differently, whereas Skelta was exposed to a wider knowledge base, Plastic Logic was able to access a deeper knowledge base; in both cases, these facilitated and intensified the opportunities generated for the ventures. Reflective of the particular stages in the ventures’ life cycle, in the former case the accessed knowledge was applied in downstream value chain activities (witness Skelta’s international promotional efforts) and in the latter case, in upstream value chain activities (witness Plastic Logic’s prototype production). In summary: Proposition 2: Spatially concentrated embeddedness in a new venture’s bridging ties is associated with access to a knowledge base that reinforces local milieu specialisms; spatially dispersed embeddedness is associated with access to a knowledge base that supplements local milieu specialisms. Vulnerabilities Notwithstanding the positive effects, as seen above, of local bridging ties on new ventures, the embeddedness literature points to a potential ‘dark side’ of network relationships (Uzzi, 1997; Yli-Renko et al., 2001). Although

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there is no reason, per se, to suggest that it is inevitable for the two casefirms to succumb to the vulnerabilities associated with ‘overembeddedness’, our wider set of interviews in each of the two milieux points to potential, contrasting difficulties. In the case of Skelta (or more generally, Bangalore), respondents raised concerns about the genuineness of MNC subsidiaries’ commitment to the local milieu. They pointed out that, ultimately, these subsidiaries were concerned with targets in the Indian market (set for them by the MNC headquarters), and that their incentives to promote local actors in international markets were weak and transitory. Thus, ventures like Skelta may suffer from the vulnerability of insecurity.7 By contrast, in the case of Plastic Logic (or Cambridge, more generally), respondents raised concerns about the strong influence of key members – such as Amadeus’s Hauser – of what they refer to as the ‘Cambridge mafia’. While these influential individuals have contributed to many success stories, they were depicted by some interviewees as promoting a fairly standard way of doing things. Such an approach could be constraining to a new venture like Plastic Logic, which could then be vulnerable to falling into a trap of ‘groupthink’. It is, of course, the very characteristics of local bridging ties that yield opportunities and access to new knowledge as argued above, which present potential vulnerabilities. Thus, our argument concerns possible tendencies that new ventures must guard against rather than inevitable outcomes. Indeed, both ventures demonstrate characteristics that may help avoid these pitfalls – witness Skelta’s dedicated Microsoft relationship function that possibly increases the security of the relationship, and Plastic Logic’s international portfolio of funders which exposes it to a range of stimuli. Even so, caution is required about the following: Proposition 3: Spatially concentrated embeddedness in a new venture’s bridging ties is associated with the vulnerability of groupthink; spatially dispersed embeddedness is associated with the vulnerability of insecurity. Table 12.1 summarizes the above arguments. Table 12.1


Opportunities Knowledge Vulnerabilities

Dispersed embeddedness (MNC)

Concentrated embeddedness (VC)

‘Propeller-like’ Local specialisms supplemented Insecurity

‘Magnet-like’ Local specialisms reinforced Groupthink


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FUTURE RESEARCH DIRECTIONS We believe that our work contributes to the international entrepreneurship literature by suggesting a further angle – namely the distinction in spatial embeddedness of local bridging ties – to guide future research that seeks to extend the burgeoning body of network-related research in the field. Numerous research avenues can be identified at the intersection of the key constructs or concepts drawn upon in this chapter such as new venture internationalization, local bridging ties and dynamic regional clusters or local milieux. In particular, we highlight directions that relate to capability learning in new ventures, a topic of considerable importance at the strategy–entrepreneurship interface (Zahra et al., 2006), especially to international entrepreneurship researchers (Sapienza et al., 2006). These research avenues are not mutually exclusive. In both cases, Bangalore and Cambridge constitute potentially interesting research settings in which to pursue these avenues. Also, in-depth case-study methodologies would appear an appropriate research method. First, future research could fruitfully focus on the development of organizational capabilities by internationalizing new ventures through interacting with local bridging ties such as MNC subsidiaries and VC firms. This is a somewhat more specific focus compared to the rather broad objective function (dependent variable) of the present chapter which was the internationalization process in general. Of particular interest, of course, is the development of internationalization capabilities through these interactions. The present chapter provides anecdotal evidence to suggest that this is plausible. Future research could, however, more robustly unearth: ● ●

●

The differential effects of bridging ties with local actors with varying types of embeddedness in the local milieu. Processes and practices (for example joint problem-solving) that underpin the interactions within these ties, and in particular the evolution of these ties over time. The relational capabilities on the part of the new venture (focal actor) that facilitate effective interorganizational learning.

A second avenue would be to consider how local bridging ties influence new ventures’ internationalization routines on an everyday basis. Recent conceptual work has suggested that learning outcomes of internationalizing new ventures depend, in part, on variability in the micro-aspects of their everyday routines (Prashantham and Floyd, 2007). This perspective is consistent with recent developments in strategic management emphasizing

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the significance of individuals’ activities, as encapsulated in Johnson and Huff’s (1998) notion of ‘everyday innovation/everyday strategy’. The enactment of everyday internationalization routines is contingent upon strategic choices made by new ventures in terms of international markets and entry modes. These choices, in turn, may be influenced by local bridging ties in ways that are both facilitative but also constraining (Coviello, 2006; Uzzi, 1997). Detailed research into the role of everyday internationalization routines in new ventures’ capability learning – and the moderating influence of local bridging ties – could deepen insight into a key topic in international entrepreneurship. Furthermore, relating to both lines of research, a variety of institutional forces may emanate from a regional cluster that influence new ventures’ interactions within bridging ties and the enactment of everyday internationalization routines. These institutional forces may include aspirations for upgrading the cluster on the part of policy-makers and/or anchor tenants. To illustrate, in Bangalore there are institutional pressures on companies to engage in increasingly high-end value chain activities, while in Cambridge there are institutional pressures to develop homegrown ‘gorillas’, that is, large companies. Incorporating the role of the macro environment would help redress a deficiency identified by Zahra (2005) in the international entrepreneurship literature, namely that the role of economic geography and the institutional environment has been overlooked. Finally, we also note in passing that while the wider network literature in the strategic management field focuses on the embeddedness of the focal actor, that of other actors with which it has ties (alters) is not generally considered. This seems an oversight because, particularly when the focal actor is a new venture, the embedded nature of the other influential actor (alter) could be very significant. Thus, we make a contribution to the wider network literature as well through our conceptualization of tie embeddedness from the perspective of the other actor (alter). Internationalization provides an interesting organizational context in which future research may further explore this notion.

NORMATIVE IMPLICATIONS A clear prescription for new ventures is the need to consider actively the local milieu as an important source of network relationships that can facilitate their internationalization. Another implication is the utility of a holistic approach in cultivating and utilizing both forms of network relationships in the pursuit of internationalization success: new ventures


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could benefit from the strong emotional commitment evident in Plastic Logic’s tie with Amadeus, and from the entrepreneurial behaviour of Microsoft’s dealings with Skelta. Reflecting our specific case-findings, we suggest that this holistic approach would entail, for example, new ventures forging links with VC at an early stage that may facilitate upstream activities, and subsequently with MNCs which could improve the efficacy of downstream activities. Similarly, policy-makers would do well to develop an innovation ecosystem in settings that are already strong in terms of MNC presence, and to attract FDI in settings with an innovation culture but limited MNC presence. Indeed, such a holistic approach may be emerging in the settings studied – witness the proposal in Cambridge for a ‘super-cluster’ through links with Thames Valley which is a major FDI destination, and efforts to build an innovation ecosystem in Bangalore, marked by higher-end technology offerings. We would encourage more such holistic efforts.

ACKNOWLEDGEMENTS The authors thank Jaideep Prabhu and Stephen Young for helpful comments on an earlier version of the chapter. Financial support for the Bangalore fieldwork from the Carnegie Trust for the Universities of Scotland is acknowledged. The Cambridge fieldwork was part of an investigation by communications consultancy Pleon, recently declared ‘European Consultancy of the Year’ by the Holmes Report, into the role of marketing services in helping Cambridge companies internationalize.

NOTES 1. Here, ‘local mileu’ is taken as a subnational entity, within which regional clusters may be found. 2. Research on traditional SMEs has found an absence of such effects (Young and Tavares, 2004). 3. We use this admittedly unconventional terminology to go beyond the traditional weak– strong dichotomy to capture the qualitative aspect of spatial embeddedness that we emphasize. 4. As one reviewer has pointed out, these forms of embeddedness may represent a continuum rather than a dichotomy, and may vary over time. 5. Thus ‘bridging’ and ‘embedded’ are not mutually exclusive attributes of a tie. 6. At the risk of appearing frivolous, we suggest that there is a parallel between the magnetlike mechanism and the TV show The Apprentice where resources are drawn upon and provided to contestants with a view to grooming the successful one to serve the interests of the sponsor rather directly (for example running a business for Donald Trump or Alan Sugar). By contrast, there is a parallel between the propeller-like mechanism and the TV show X-Factor where the key benefit to the contestants is exposure ‘out there’ with a view

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to identifying the most popular contestant who can then serve their own interests – and thereby that of the sponsor – chiefly in terms of generating sales of subsequent music offerings. A key distinction here is in the basis of judging success: the sponsor’s opinion in the former, and popularity with viewers in the latter. This, in turn, reflects the differing nature of the opportunities being derived – as would appear to be the case for these ventures (see Proposition 2). 7. We are, in a sense, highlighting the opposite of the security that may mark actors within networks with a high degree of closure. In this specific context, of course, insecurity may emanate from a lack of autonomy on the part of the MNC subsidiary (Young and Tavares, 2004) with which the SME engages.

13.

International new ventures: a new organizational form? Rod B. McNaughton

SUMMARY The chapter presents an argument for refocusing the study of international new ventures on the question of whether they represent a unique organizational form. Oviatt and McDougall’s original description of the phenomenon raised this important question, but subsequent empirical studies have yet to provide an answer. The uniqueness of INVs is important to define the phenomenon, and legitimize international entrepreneurship as a distinct area of scholarship. Viewing INVs from the perspective of organizational form suggests new theoretical perspectives, research questions and methods. Thus the empirical literature on organizational form focuses upon decision rights, and tracks measures such as organizational members, channels for information and control, governance and agency. Introducing such measures may provide new and interesting ways of characterizing INVs as compared with the extant literature, and promote comparative research with other types of organization.

INTRODUCTION International Entrepreneurship emerged as a new field of study in the early 1990s. The majority of researchers argue that this area of study lies in the intersection between the disciplines of entrepreneurship and international business (IB). However, the core theories of neither discipline provide a strong explanation of the phenomenon of ‘international new ventures’ (INVs). Entrepreneurship theories generally argue that new firm formation is a locally embedded process, while IB theories do not posit a role for smaller and inexperienced firms in international markets. Since McDougall, Shane and Oviatt (1994) reviewed the core theories of international business and found them lacking as an explanation of INVs, no unifying theory has arisen. Indeed, the majority of the extant literature 185

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is descriptive, characterizing the various patterns of internationalization and antecedents of this behaviour. Much is known about the motives for establishing INVs and their variants, but a fundamental question remains: are INVs a unique organizational form? In searching for theory to explain the INV phenomenon, researchers pursue two approaches. The first argues that INVs are a challenge to extant theories and see a need to develop a new theory (for example Knight and Cavusgil, 1996), while the second argues that INVs are not fundamentally different from other firms and that their development can be explained by refinement of existing theory (for example Madsen and Servais, 1997). From the later perspective, INVs are a variant of new venture in which the marketing strategy involves rapid expansion into a number of national markets. In their seminal paper that introduced INVs to the academic literature, Oviatt and McDougall (1994) defined INVs as: ‘a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries’. They clearly suggested viewing INVs through the lens of organizational form; however, in the subsequent literature a focus on the question of uniqueness of organizational form has been lost. A significant exception is Madsen and Knudsen (2003) who developed a typology of international organization forms. This chapter calls for a renewed emphasis on INVs as an organizational form. Clarifying the uniqueness of the phenomenon is important to create legitimacy for international entrepreneurship as a distinct field of study. After more than a decade of intensifying research, no unifying theory of INVs is on the horizon and empirical research progresses slowly. One reason is lack of agreement on how to identify and measure INVs, making it difficult to piece studies together as the building blocks of theory. To progress this field, researchers must first decide on a common definition of INVs, and determine if the phenomenon is sufficiently distinct to warrant attention from researchers and policy-makers separate from that already devoted to international and/or new ventures. The chapter proceeds by introducing the study of new organizational forms. It then suggests implications for adopting this approach to studying INVs, including avenues for new research directions.

ORGANIZATIONAL FORM Instead of positioning INVs as a phenomenon at the interstices of entrepreneurship or IB, INVs can be seen as part of a broader phenomenon


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addressed by organizational science – the emergence of new organizational forms. The issue of distinctiveness of organizational form arises in several specialized areas of research about (supposedly) new types of organizations, for example project-based firms (Whitley, 2006) and professional services firms (Teece, 2003). Child and McGrath edited a special issue of the Academy of Management Journal in 2001 on new organizational forms. Their introduction identifies additional potentially new organizational forms such as the ‘network organization’, the ‘virtual corporation’, the ‘reengineered corporation’, the ‘knowledge creating company’, and the ‘flexible firm’. Intriguingly for the study of INVs, Child and McGrath (2001) concluded that information intensity and internationalization are two major forces in the emergence of these forms. The empirical literature on INVs consistently finds an association between speed and scope of internationalization and the knowledge intensity of firms and the internationalization of the market in which they operate. Thus, it may be that new ventures are reacting to the same pressures that influence the form of existing and large organizations. Romanelli (1991) defines organizational form as: ‘those characteristics of an organization that identify it as a distinct entity and, at the same time, classify it as a member of a group of similar organizations.’ The empirical literature on organizational form focuses on decision rights, and tracks measures such as organization members, channels for information and control, governance and agency. The extant literature does not typically characterize INVs in this way. Instead many empirical studies adopt the definition of ‘born globals’ suggested by Knight (1997),that is, firms established after 1976 having a share of foreign sales of at least 25 per cent and having foreign operations within three years after inception. This focus on foreign sales is problematic for several reasons, including the influence of regional trading blocs, and its emphasis on outward internationalization (which may be dominated by exporting). Oviatt and McDougall (1994) intended a more holistic interpretation of internationalization, evidenced by their mention of both resources and sales. However, they also emphasized the number of countries in which a firm is active. A proliferation of INV-related terms and definitions further obfuscates the phenomenon and makes comparisons between studies difficult. For example, the study of INVs is closely linked to the concepts of ‘born global’ firms and ‘rapid internationalizers’. In addition, the identification of so-called ‘born-again global’ firms suggests that the phenomenon need not be limited to new ventures (Bell et al., 2001). The plethora of terms suggests there may be sub-types of INVs, distinguished by characteristics like the timing of internationalization, extent of internationalization

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of inputs versus outputs, international scope, or degree of coordination of value chain activities. However, most extant empirical studies are not sensitive to these variations. Oviatt and McDougall (1994) suggested a number of ‘necessary and sufficient’ elements of sustainable INVs: internalization of some transactions, alternative governance structures, foreign location advantage and unique resources. Each of these elements distinguishes INVs from broader organizational forms, establishing INVs as a ‘special kind of MNE’. The first element distinguishes INVs from solely market transactions; the second highlights INV’s unique organizational form, the third differentiates INVs from domestic new ventures; and the last distinguishes INV’s from temporary or ‘project-based’ organizations. Madsen and Knudsen (2003) are among the few researchers in the field that have pursued Oviatt and McDougall’s first and second elements in detail. Their contribution explicitly positions the study of INVs within organizational economics by focusing on the organizational structure or ‘architecture’ of INVs. Madsen and Knudsen developed a typology of new ventures, based on knowledge of organization members, the channels through which they pass information, the rules that help shape the flow of information, and their right to make decisions on behalf of the organization. By focusing on decision-making, Madsen and Knudsen use both a unit of analysis (the agent) and a set of variables (decisions about the profit potential of alternative strategies) that is uncommon in the INV literature. They define decision rights as: ‘The right to individually make a decision that alters the net present value of the organization’s future income stream’. In the case of INVs they postulate that decisions about marketing and sales may be delegated to external agents because of limited resources and simultaneous activities in many country markets. Thus, a form of market or hybrid governance structure is likely. While a focus on decision rights dominates in the literature on organizational forms, there are alternative approaches. For example, Polos et al. (2002) suggest an intriguing approach based on the idea that form is a type of socially coded identity. Thus, form is defined in terms of social cognition: ‘you know social codes exist when one observes that departures from the codes after periods of conformity cause a devaluation of the entity by relevant insiders and/or outsiders.’ This raises the question of who are the relevant observers for INVs, for example, entrepreneurship or IB scholars, private equity investors or export development agencies. This approach also lends itself to use of research methods that are not currently common in the study of INVs. For example: identification of organizational form by measuring social equivalence in networks; mapping the boundaries of a ‘form’ from the view of different audiences; identification of ‘codes’ from


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semiotic or language analysis; or analysis of the dynamics of the population of a form (or forms). Again, the seeds of this approach are seen in Oviatt and McDougall’s seminal article. At the beginning of the article they argue for both the novelty and the importance of the topic by noting increased attention from the business press to such organizations, but a relative lack of attention from organizational scientists. In other words, social actors in the business community recognized the phenomenon of INVs as a possible departure from traditional notions of the ‘new venture’ before they became a topic of scholarly study.

IMPLICATIONS Research concerning the distinctiveness of INVs as an organizational form is important for choosing between theories to explain the INV phenomenon, the social legitimacy of international entrepreneurship as a field of study, and the development of policy to support the growth of these new ventures and their contribution to local economies. A focus on organizational form also expands the repertoire of theories that provide insight on the phenomenon of INVs, and suggests new variables and processes to study. The concept of organizational form may lead to different ways to define and measure INVs, and promote comparative research with other types of organization. For example, external and internal conditions may be identified that force a newly established firm to delegate decision rights in new ways. Madsen and Knudsen (2003) posit that a short lead time in a narrow niche market may skew new firms toward market forms as their limited resources make it ‘difficult to cover all important country markets in the first few years of existence’. They also speculate that it may be possible for firms to use ICT and other technologies to invent new hybrid organizational forms not traditionally found in international settings (for example supplementing a market form with hierarchical control to customize products for buyers after they are acquired through a distributor or agent). If such research concludes that INVs are not a distinct organizational form, the question can be asked in the context of existing larger multinational firms (the traditional focus of IB research). Given the extent of internationalization, is it still meaningful to study ‘international’ as distinct from ‘domestic’ organizations and their transactions? Concluding that INVs are not distinct would also support the argument of those who suggest that existing theories can be adequately adapted to account for the phenomenon of INVs. Finally, concluding that INVs are not distinct

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would mean that public agencies, regulation and policies are less likely to require major changes to address market gaps experienced by rapidly internationalizing new ventures. To advance research on INVs, commonly used empirical measures must be supplemented with other criteria. Extant empirical research about INVs and born globals includes diverse organizations. A conceptual clarification of the phenomenon is vital. If such clarification leads to the identification of a unique group of similar organizations, then the study of INVs will have important implications for a broader group of organizational scientists, and lend legitimacy to the emerging discipline of international entrepreneurship.

14.

Conclusion. SME internationalization: where do we go from here? Marian V. Jones

INTRODUCTION This volume results from the inaugural seminar held to mark the launch of the Centre of Internationalization and Enterprise Research (CIER). Like many international new ventures (INVs), CIER was effectively ‘born global’. Its core founding entrepreneurs, Young and Jones; Dimitratos, Morgan-Thomas and Prashantham, and contributing post-doctoral and doctoral researchers Fletcher, Casulli, Karafyllia and Tang; brought a wealth of international human and social capital to the Centre from countries (in alphabetical order) as diverse as China, Greece, India, Italy, Poland and the UK. Similarly our wider network of research colleagues is represented in this volume by: Bell, Deligiannni, Ibeh, Johnson, Loane, Madsen, McNaughton, Plakoyiannaki, Rasmussen and Servais, from or representing: Canada, Denmark, Greece, Ireland, Nigeria, Peru, the UK and the USA. Colleagues from industry, Slow and Balachandran, bring insights from public policy in Scotland and the software industry in Cambridge (UK) and Bangalore (India). Like many INVs too, CIER has a prehistory, which extends back over at least 20 years. The stream of research on internationalization that core members of CIER have advanced was perhaps formally marked by the publication in 1989 of the International Market Entry and Development book, authored by Steve Young and colleagues who at that time were located at the University of Strathclyde, and also in the city of Glasgow. At that time, internationalization and foreign market entry modes were new and pioneering topics for research triggered by early works in the 1970s, for example by Johanson and Weidershiem-Paul (1975) and Johanson and Vahlne (1977), but emerging almost simultaneously as an exciting new field of study identified in seminal publications from authors in different parts of the world (for example Root, 1987; Welch and Luostarinen, 1988; McDougall, 1989; Young et al., 1989). 191

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Global and regional economic integration initiatives in the early 1990s had a significant external influence on small and medium-sized enterprises (SME) internationalization. Evidence emerged that the nature of SME internationalization was changing towards more varied mode choices and more rapid market entry, marking what now popularly is known as the ‘born global phenomenon’. Study of early and rapid internationalization of SMEs has focused on the international new venture (INV), leading to the evolution of INV approaches to internationalization, and the field of international entrepreneurship led primarily by Patricia McDougall and Ben Oviatt from the USA.

OVERVIEW, CONTRIBUTIONS AND DIRECTIONS The chapters in this volume include traditional and new perspectives on SME internationalization. Excluding the Introduction and Conclusion, Table 14.1 shows that the 12 chapters include six that are predominantly conceptual or review pieces; five present exploratory case studies; and two are hypothesis-driven empirical surveys. The preponderance of conceptual and review chapters perhaps reflects the stage of development of SME internationalization research as a field of study. The international new venture phenomenon has raised questions about the nature of SME internationalization that has led scholars into theoretical domains and perspectives that were previously uncommon in this field of study. Theories and perspectives underpinning the chapters in this volume include: social capital and network approaches, absorptive capacity, cognition and orientation, opportunity, resource and dynamic capability perspectives, institutional and governance approaches, and various perspectives pertaining to process, temporality and spatiality. The focus and/or level of enquiry across the chapters is also wide and includes: the entry mode; the individual (entrepreneur, manager and network actor); the firm; the network and its structures; the market and country; capabilities, behaviours and strategies; development and expansion processes; and finally, performance. Contributions in this volume are at the forefront of the evolving scholarly understanding of small firm internationalization and, while diverse, across the chapters there is significant convergence in ideas, and there are potential synergies and opportunities for thematic integration for future research. The following discussion is an attempt to draw some of these issues together. Jones and Young (Chapter 2) draw attention to the need for research into the process through or by which formal entry modes are established within the context of networks and relationships, and the extent to which

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the formation of formally constituted modes may influence future internationalization pathways. Concentration within the entry mode and economics literature on the generic entry modes of exporting, licensing and investment modes masks a very complex social and management process associated with internationalization. Fundamentally, further research on the role of the formal entry mode within the social, temporal and social processes of internationalization is needed, suggesting that finer detail and longitudinal perspectives are required to enhance our knowledge in this area. Specifically, further integration between the traditional views of international business and more recent international entrepreneurship perspectives are needed to enhance knowledge on internationalization as an entrepreneurial and potentially strategic process of behaviour in a globalizing world. Similar indications are advanced by Dimitratos et al. (Chapter 10), and by Fletcher (Chapter 6). In identifying core weaknesses in the management styles and processes of micromultinationals (mMNEs) Dimitratos et al. note that core competencies initially supporting the firm’s development and growth may become core rigidities (Leonard-Barton, 1992) thus potentially inhibiting growth and forcing firms down path-dependent internationalization routes. An interesting question emerging from their exploratory study concerns the necessary and sufficient conditions that identify firms as mMNEs. Micromultinationals do not appear to fall into the new venture category since, from the authors’ account, they seem to have reached a state of some maturity as multinational firms. Nor is it clear what distinguishes them from other MNEs, born globals, INVs and other such categories of organization. Similar issues regarding organizational form are identified by McNaughton in Chapter 13 in which he questions the institutional form of the INV and calls for research on their governance and organizational features, and conceptual clarification of the INV phenomenon. What Dimitratos et al. have identified is a group of firms that do not fit neatly into the category of INVs, or established MNEs; nor are these firms merely exporters. They are described as relatively small firms with a range of cross-border business activities other than exporting, that demonstrate a degree of internal structuring suggestive of some maturity in terms of development. What is not clear is whether the defining characteristics relate to their organizational form, internationalization behaviour, strategic choices or growth potential. What is particularly interesting about these so-called mMNEs is that they are sitting on the cusp of international development between stability, and further international growth. Micromultinationals, therefore, may be firms at an intermediate stage of international development, neglected in the literature and difficult to pin down in empirical research. Further development of this line of enquiry

194

Social capital/network

Chapters

X

X

X

2

X X

X X X

3

X

X

X

X

4

X

5

X

X

X

6

X

X

X

7

8

X

X

The chapters: conceptual approach, research design and focus of enquiry

Absorptive capacity Cognition/orientation Opportunity Resource/knowledge based Dynamic capability Governance/institutional form Process/temporality/ spatiality Research design Conceptual/review Empirical case based Empirical survey based

Approach/ perspective

Table 14.1

X

X

9

X

X X X

10

X

X

X

11

X

X

X

X

12

X

X

13

Authors

Focus of enquiry

Entrepreneur/manager/ network actor The firm/structure The network/structure Entry mode Capability/behaviour/ strategy Development/expansion process Market/country Performance X

X

Jones and Young

X

X

Casulli

X

X

Plakoyiannaki and Deligianni

X

X

X

X

Fletcher

X

Karafyllia

6 X

7

X

8

Tang

Loane and Bell

5

X

X

X

10

X

X

X

9

Morgan-Thomas

4

Dimitratos, Johnson, Ibeh and Slow

3

X

X

11

Rasmussen, Madsen and Servais

2

X

X X

12

X

X

13

McNaughton

Chapters

Prashantham and Balachandran

195

196


towards conceptual and definitional clarity will be important to our understanding of multinational development; and is of some importance in small peripheral economies such as Scotland that historically have had limited success in growing the largest, most successful multinational enterprises. Exploration of how rigidities and path-dependencies occur in internationalizing firms is a step forward in that regard. Dimitratos et al. usefully draw attention to the orientations and abilities of firms in managing international growth in ways that may enable or inhibit innovation and path-breaking international expansion. Also concerned with the development of capabilities is Morgan-Thomas’s chapter (Chapter 9) in which she conceptualizes e-commerce capabilities as being complementary to the international growth of SMEs. In contrast to studies that have attempted to position e-commerce as an entry mode, she conceptualizes e-capabilities as a process of capability-building emerging from the firms’ accumulated experiential knowledge in other aspects of their business and a purposeful intention to develop e-capabilities in support of their international business operations. Her detailed study highlights the need for more attention to be paid to the impact of the digitized world on the nature of SME internationalization and how SMEs might better use e-commerce to launch, support or enhance their international business strategies. There is a great need for the development of new theories to explain and accommodate e-commerce and its role in internationalization. To date, with the exception of studies that focus explicitly on e-commerce, the position of e-capabilities in empirical and conceptual research on internationalization remains unclear, and Morgan-Thomas’s research has significant potential to address this gap. Fletcher’s study (Chapter 6) of learning and knowledge generation amongst internationalizing Scottish SMEs identifies three types of knowledge relevant to their international development: product knowledge, market knowledge and internationalization knowledge. She notes that the sources and types of knowledge are often blurred and it is the processes of acquisition, assimilation and exploitation as indicated in the notion of absorptive capacity that enable firms to realize potential in their knowledge stocks for international growth. Policy implications emerging from her research are that support agencies have come a long way in their ability to provide information through formal sources and knowledge-building facilitation through networking, peer events and consultancy arrangements. However, to develop absorptive capacity it is important for firms to develop internal processes to subsequently assimilate, transfer and process knowledge towards development and growth. Further extension of the internationalization learning and knowledge perspective is provided in the chapters by Plakoyiannaki and Deligianni

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197

(Chapter 4), and also by Casulli (Chapter 3). The former authors establish that learning spillovers from a firm’s international marketing operations may significantly influence its domestic operations. Their case-firms were found to redefine target markets, introduce new products and redesign their logos on the basis of what they learned through internationalization. This reverse transfer of knowledge from foreign to domestic operations is a neglected topic in internationalization research, as confirmed by Karafyllia (Chapter 5) in her review of the extant literature on internationalization in which she establishes that domestic and foreign operations are seldom compared. In response to this gap in extant knowledge, Rasmussen et al. (Chapter 11), in an empirical survey, distinguish between international new ventures (INVs), which have achieved international sales or sourcing within three years of inception; and domestic new ventures (DNVs) which are firms with no international sales or sourcing at all. Based on the premise and understanding that INVs are innovative, proactive and competitively aggressive, they propose that DNVs, having no international operations, should differ fundamentally in their orientations and strategic posture. In conclusion they found that DNVs tended to be more conservative with minimal technological, product and market innovation and a cautious stance towards competitors. INVs on the other hand had a strong entrepreneurial strategic posture, a focus on innovation, and bold orientation towards competitors and risk-taking propensity. Further research to examine differences in growth rates and sustainable performance, as well as distinguishing between domestic versus international new ventures, will shed further light on the potential impact of internationalization on the home base. Picking up the earlier call by Jones and Young for further integration of international business and international entrepreneurship research, a more pressing concern is that while globalization renders the distinction between domestic and international operations less clear for many of the firms involved, from a policy perspective the impact of internationalization on the growth of the local economy remains a matter of some importance. Thus the distinctiveness and direction of domestic and international flows of knowledge, payments and value added is critical if useful and meaningful support is to be offered to the SME sector. Implications from Plakoyiannaki and Deligianni, and Karafyllia, are that we need to know more about internationalization as an important discovery and learning process for firms. Through this process, open-minded management may discover, from their international involvement, better ways of going about their business and improving its quality and performance. Further research might also usefully examine how experiential knowledge is developed through internationalization, how it may add to the quality and

198


performance of the domestic business, and render entrepreneurs and managers more alert to opportunities in the international domain. As Casulli notes, opportunities arise through an interaction of the founder and firm’s experiential knowledge, network involvement and information generation activities, and evolutionary perspectives on network formation. Several chapters emphasize the importance of networks and network partners in providing opportunity (Casulli, Chapter 3) and access to resources and knowledge development (Loane and Bell, Chapter 7; Prashantham and Balachandran, Chapter 12). While Loane and Bell identify the client as a neglected, value-creating resource, Prashantham and Balachandran suggest that small firms might usefully utilize links with local multinational subsidiaries to provide social capital which bridges domestic and international growth opportunities. They advise that newly internationalizing firms explore and cultivate ties in networks that are locally concentrated as well as those that are geographically (spatially) dispersed. The firms may thereby maximize the innovation potential from non-redundant links between spatially dispersed networks, while benefiting from transaction efficiency from those more locally concentrated. In common with Jones and Young, and Dimitratos et al., their research implicitly suggests a number of future research questions. These address relationships and trade-offs concerning flexible growth and innovation, through networks and informal processes in relation to stability, structure and governance. While Casulli, and Loane and Bell, emphasize the positive aspects of networks on opportunity, learning and knowledge potential, Tang (Chapter 8), and Prashantham and Balachandran caution against network ties and structures that may inhibit or prevent growth both locally and internationally. Their work thus implicitly indicates that rigidities in ties, relationships and network structures exist, representing an interesting avenue for research in internationalization. Tang further suggests that it is the firms’ networking behaviour towards networks and network partners that researchers should be addressing in explanations of internationalization, over and above their network structure. This introduces a welcome perspective of the entrepreneurial firm as one involved in a consciously proactive process of network activity, in keeping with the development of the INV approach. The latter suggests that early and rapidly internationalizing firms are identified as ‘innovative, proactive and risk-seeking’ (McDougall and Oviatt, 2000: 903), rather than passive players in a gradual and linear process of export development as portrayed in some more conventional theories of SME internationalization. Another avenue of research worthy of consideration is the role of cognition and cognitive processes in relation to internationalization. Casulli’s

Conclusion

199

review and framework links experience as well as strong and weak network ties with the opportunity process and, in accordance with Fletcher, identifies experiential knowledge as a mechanism in the generation and enhancement of absorptive capacity, and hence the development of sustainable competitive advantage. Understanding cognitive influences in SME internationalization is imperative, especially with regard to small, young and/ or entrepreneurially managed firms where the decision-making process may be tacit, based on subconscious cues and not articulated in established schemas, protocols or routines. Cognition is the basis of an ‘entrepreneurial mindset’ which is an important concept in internationalization research and features in several chapters in this volume. A deeper understanding of the psychology of cognition in the context of international business and internationalization will further enrich the field, and Casulli’s review and line of enquiry are both timely and appropriate.

CONVERGENT THEMES With access to such a wide range of extant knowledge as reviewed and discussed in the chapters, the temptation for new researchers, in CIER in particular and in the field in general, is to attempt to construct comprehensive, holistic models of SME internationalization with a ‘shopping list’ of variables from the available research. Following the suggestion of Jones and Coviello (2005), it is probably easier and more appropriate to seek agreement on common themes, and from there build a series of research questions and models that are potentially integrative. The following section attempts to bring together some of the ideas from the volume into a very preliminary model that may indicate a potential line of enquiry for future research. For example, the following research question is one that is partially but not fully addressed in a number of chapters: How do learning and networking behaviours relate to entry modes in internationalization? Building on the reasoning and theory underpinning Figures 2.1 and 2.2 in Chapter 2, the following discussion and model presents internationalization as a process of firm development in which motivations for foreign market entry influence networking processes and the establishment of formal modes. From there the processes of learning and knowledge accumulation, as encapsulated in the absorptive capacity concept, influence opportunity and the creation of new value and hence changes in performance outcomes. Having discussed the extant literature on the motivations for entry modes, it is apparent that there is a dearth of both conceptual and empirical

200


work on the relationship between the entry mode and internationalization, and motivations for entry mode, market entry and the internationalization process. As Jones and Coviello (2005) note, internationalization is a complex process and therefore it is unlikely that any model could fully explain the whole process and/or all of the factors that impact on it. They suggest, however, that free-standing but articulated models may contribute to an improved understanding of SME internationalization. At this point we will attempt to advance a rudimentary model linking the key elements of the arguments that we have emphasized in Chapter 2 and drawing on insights and questions raised in other chapters, thus incorporating motivations, modes, organizational processes, market entry (described here as new value creation) and performance outcomes. In contrast to the models presented in Chapter 2 (Figures 2.1 and 2.2), this model (Figure 14.1) is a variance rather than a process model and suggests relationships between and amongst the constructs and variables. A structural equation modelling analysis is indicated. It is worth pointing out that there are important contingencies moderating the relationships between motivation and mode, relating inter alia to country-, industry- and firm-level effects. Therefore the model illustrated in Figure 14.1 indicates that contextual factors from the internal and external environment will influence motivations for internationalization, market entry and development modes. For example, in respect of country, the size of the domestic market will influence the motivation for internationalization and hence mode. Also, and sector-related, the existence of lead foreign markets will influence firm strategies and motivations. Similarly a number of modes are strongly sector-specific, most obviously franchising and know-how licensing. Internally, firm-specific factors are influential, including the firm’s resource base, its entrepreneurial orientation and international mindset (Jones and Coviello, 2005; Nummela et al., 2004). Amongst numerous organizational processes, those we have emphasized in this chapter are related to networking and learning. While these are processes, the model indicates that variables, capturing the elements of the process and thus indicating differences in networking behaviour between firms (Tang, 2007) and absorptive capacity (Eriksson and Chetty, 2003), are key. In explanation of Figures 2.1 and 2.2, we suggested that the firm’s internationalization state is influenced by processes such as organizational learning, leading to changes in mode and resource commitment. This suggests that the firm’s absorptive capacity – in our case facilitated by market entry through an appropriate entry mode – underpins learning in internationalization. Thus variables differentiating between firms regarding their acquisition, assimilation and exploitation of internationalization

Conclusion

201

Internal environment

Networking behaviour

Motivations • Markets • Knowledge • Resources • Efficiency

Absorptive capacity

New value creation • New modes • New products/services • New country markets

Performance outcomes (+ / -) • sales • profitability • growth

Formal business modes Exporting Collaboration Investment (equity modes) • WOS • Equity JVs External environment

Figure 14.1

Motivations, modes and processes in SME internationalization

related knowledge (Fletcher, 2007) are important here. The two processes captured in the model, therefore, are networking behaviour and absorptive capacity, which influence and are influenced by, first, the motivations for internationalization, and second, the modes through which internationalization is accomplished. The result of dynamic interaction between these constructs results in market entry, indicated as value creation in the form of new modes, new products/services or new countries (Andersen, 1997; Jones and Coviello, 2005) and performance outcomes, such as an increase or decrease in sales, profitability and growth. The reasoning behind this very preliminary model is that motivations for internationalization, influence or are influenced by, the nature of the firm’s networking behaviour, and choice of entry mode (Chetty and Agndal, 2007). The entry mode established indicates different kinds of business processes: for example, exporting is likely to involve sporadic, arm’s-length and relatively superficial interaction with foreign customers, resulting in weak ties; whereas collaborative modes require more interaction and the development of relatively stronger ties with foreign partners. The choice of mode enables the development of new relationships and networks, which differ depending on the mode selected. In turn, the firm’s absorptive capacity (learning and application of knowledge from external sources) is altered, and influences motivations for further market entry and performance outcomes. The process may be relatively path-dependent. A final point is that while we have discussed the entry mode in this model as a ‘choice’, in reality the choice may be limited, emergent or derived from antecedent relationships or processes. Development and refinement of the

202


model constructs and determination of explicit variables is welcome in future research in this area.

CONCLUSION AND RESEARCH QUESTIONS The purpose of the seminar and this resulting volume, as mentioned in the introductory chapter, is to showcase the work of CIER as an international new venture in the business of advancing internationalization research, alongside and in collaboration with like-minded scholars in the field. The chapters represent a range of conceptual and empirical works, at different stages in research projects, and from different countries. Our intention was not to produce a comprehensive review or statement on SME internationalization; rather, we have tried through the various chapters to present an open commentary on our research and ideas and potential future directions at the founding stages of CIER. Our intention has been to advance the field and to this end we conclude with a series of research questions which emerge from the various chapters individually or in combination, as follows: ●

●

●

●

●

●

●

What are the motivations for SME international market entry, and to what extent, if at all, do resource-related motivations predominate? Therefore, what are the implications for public policy in building the local resource base? At what points in the internationalization process are entry modes formalized, and why? What are the relationships and interfaces between formal modes and informal processes? What combination of personal attributes, for example experience and orientation, and network attributes provide the best potential for international opportunity recognition, creation and exploitation? What types and forms of international involvement would best enable SME managers to transfer knowledge towards the development of the domestic business? How might domestic and international organizations be distinguished; and similarly, how might domestic and international operations be distinguished, measured and monitored? To what extent are SMEs proactive and strategic in their identification and use of network partners, for example clients, and multinational partners? What are the institutional forms, behaviours, strategies and boundaries of SME organizations in international business today? How

Conclusion

●

●

203

might they be defined, distinguished and empirically identified in internationalization research? What specialized and complementary capabilities support SME internationalization, and how are they developed or acquired? What are the direct and indirect effects of internationalization-related capabilities on firm performance? Are there real differences in orientation, strategy and capability between domestic and international firms, and between those which internationalize early, rapidly and late?

A truly rich and wide-ranging research agenda lies ahead for SME internationalization scholars.

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Index absorptive capacity 29, 78–80, 194, 200 cumulative and path-dependent 25, 201 dynamic capability 79 generation of 199 learning and knowledge 192, 199 process 4 requires learning capability 78–9 to support firm growth 90 Academy of Management Journal (2001) 187 aggressiveness, prerequisite for going international 162 Aldrich, H. 109–10, 120 Allison, M.A. 140–41, 147 Amadeus Capital Partners 176–8 ANOVA or regression analysis 134 Ansoff, H.I. 51, 54–6, 66 Arab countries, Folli Follie 47 Arenius, P. 12, 102, 167 Asia, Folli Follie 47 Asian countries competition from 32 ‘asset parsimony’, strategy applied by new ventures 116 Australasia 146 Australian market 44 Autio, E. e-commerce 124–6, 135 early internationalization 61, 151 learning and knowledge 40, 49, 51, 76–8 path-dependence 67 relationships 102, 167 risks 156 SMEs and growth 19 Balachandran, G. 5, 173, 194–5, 198 Bangalore, Indian software industry 1, 5, 166, 181–2 interviews by S. Prashantham 172–3 Barkema, H.G. 39–40, 78 Barney, J.B. 77, 95–6, 142

Beamish, P.W. 11, 48, 58, 167 Belgian firm, sourcing input from France 152 Bell, J. clients and small firms 98–9, 198 internationalism 4, 11, 14, 19 INVs 187 network building 93–5, 107, 109, 120 network research 191, 194–5 small firm growth 54, 65, 71, 125 social capital theory 167, 169 Bernard, A. 59, 67, 72 biotechnology, in-and out-licensing 8 Blankenburg Holm, D. 75, 92, 136 Blomstermo, A. 12, 48, 53, 61–2, 68, 92, 107, 109, 125 born global firms 12, 37–8, 141, 153, 187, 190, 192, 193 Bourdieu, P. 110, 120 British Export Directory 130 Brouthers, K.D. 7, 9–11, 13, 19 Browning, S. 140–41, 147 Burt, R.S. 24, 30, 109, 170 BVCA/ Library House 97 Cambridge, Plastic Logic 176–9, 183 Cambridge electronics cluster 5, 166, 168, 172 fieldwork by G. Balachandran 173 Cambridge Science Park 177 Cambridge University network, relationship with Amadeus (a VC firm) 168, 181 Campbell-Hunt, C. 11–12, 92, 108–9, 127 capabilities 78, 136 activity that produces outputs 126 dynamic 79, 122, 135–6, 192–3 international 127, 135–6 passive learning-by-doing 136 Caribbean 146 Casulli, L. 3, 191, 194–5, 197–9 239

240

Index

Cavendish Amadeus 179 Cavendish Laboratory 176 Cavusgil, S.T. international capabilities 135 international entrepreneurship 124–5 internationalism 14, 60, 128, 151 INVs 152, 186 Scottish firms 29 Uppsala model 75 CD-Direct, lists all private Danish business firms 157–8 Centre for Internationalization and Enterprise Research see CIER Chetty, S. entry modes 11–12, 201 international capabilities 127, 136 networks 75, 92, 108–9, 200 China 2, 191 Folli Follie entry in 2001 46 horse rugs 32 lack of international knowledge in companies 112 networks 108, 111 private sector international SMEs 1 Chinese context, gap between presumed and effects of networks 119 Chinese entrepreneurs, self-made business-people 112 Chinese firms, require broader network horizons 119 Chow, H.S. 111–12, 117 Christchurch electronics cluster 170 Chronbach Alpha value 159–60 CIER 1–2, 191, 199, 202 client-following firms, different modes from market-seeking 9 client-led internationalization 98 clients arbiters of knowledge 104 innovation and 99–100 international small firm formation 97–8 KBV of firm internationalization 96 network approaches to internationalization 92–4 rapidly internationalizing firms 91–2, 97 RBV of small firm internationalization 94–6

resource in rapid industrialization 102–3 role in lessening export barriers 100–101 social capital and human resource acquisition 102 clients signalling reputation 98 cognition basis of an ‘entrepreneurial mindset’ 194, 199 Cohen, W.M. 25, 39, 61, 74, 78–9 collaboration mode 7, 17–18 interrelationships among 16–17 strategic alliances and foreign markets 8 competitive aggressiveness, proactiveness and 156 core rigidities, 15 mMNE firms in Scotland 139, 143–4, 148 Coviello, N.E. global start-ups 91 IE literature 10–11 internationalization 17, 22, 42, 107, 124–5, 135, 171, 199–201 INVs 64 mMNEs 141 networks and foreign markets 24, 92–5, 136 new opportunities 167 Covin, J.G. 150, 152, 154, 156, 161–2 ‘creative destruction’ 154 Crick, D. 11–12, 60, 92 cross-border entry modes 9 Czech Republic 46 Daniel, E. 129, 131, 136 Danish business firms, database CDDirect 157–8 Danish project, ‘Market Strategy of Firms in Global Environments’ 157 Danish survey, Alpha value of 0.861 159 DeClercq, D. 23, 40–41, 48, 109 Deligianni, I. 3, 191, 194–5, 196–7 Denmark 2, 191 conclusion 162–3 findings and results 158–9 entrepreneurial orientation 4, 159–61 methodology 157

Index data collection 157–8 propositions entrepreneurial orientation 153–7 INVs and DNVs 155–7, 160–61 study of industrial firms 151 typology of firms 151–3 Dess, C.G. 41, 154–6 Dimitratos, P. CIER and 191 entrepreneurial activities 154 entry modes 11 environmental determinism 65–6 internationalization 40, 48, 53–4, 69, 151 research 194–5, 198 small firm growth 71 spillovers 38 distinctive knowledge, value of 25 diversification, four forms 55 DNVs 4, 63–4, 68–9, 150, 153, 155–6, 197 domestic new ventures see DNVs Dubini, P. 109–10, 120 dynamic interaction, results in market entry 201 e-capabilities 136, 196 e-commerce 182 conceptual approach 124–7 conclusion 124, 136–7 discussion 124, 135 hypothesis testing 124, 133–4 international reach 125 research hypotheses 124, 127–8 complementary IT resources 128 effective e-capabilities 129–30 intentional efforts 128–9 research methodology and scope 124, 130 construct validity and reliability 132 control variables 132 effective e-capability 131 external influences on capability development 132 intentional efforts 132 international capabilities 131 measures 131 online growth 131

241

questionnaire development 130 response rate and non-response bias 130–31 sample profile and descriptive findings 124, 132–3 SMEs and 196 e-commerce capability, growth opportunities 135 eclectic framework 9 efficiency-seeking 17 Eisenhardt, K.M. 42–3, 79, 81, 113, 122 Ellis, P.D. 24, 61, 68, 110 EM literature 13, 15 embeddedness 170–71 concentrated 168,176–8, 180 dispersed 180 local 167–8 propositions 179–80 spatially dispersed 168 entrepreneurship of IB 186 ‘entrepreneurial alertness’ 23 entrepreneurial orientation calculations 160–61 four dimensions 150 learning effort and 41 new entry 154 entrepreneurial orientation of local and global firms findings and results 158–9 entrepreneurial orientation 159–63 methodology 157 data collection 157–8 propositions on 153–7 typology of firms 151–3 entrepreneurs’ circumstances, may be a push factor 32 entrepreneurs’ experience, international business knowledge or industry expertise 35 entrepreneurship literature networks and social capital viewed through ‘resources’ lens 23–4 proactiveness a key concept 155 entry decisions, competitors and 10 entry modes 7–8, 11–12, 14–15, 192, 199 choice, market-seeking and resourceseeking motives 9

242

Index

difference between and international entrepreneurship literatures 12–13 different kinds of business processes 201 do matter 18 formal part of internationalization process 13–14, 193 influence of technological change 19 relationship with internationalization 200 equity joint ventures, investment mode 8, 16 Eriksson, K. 61, 67–8, 74–6, 79, 89, 200 EU market, halva and 45 ‘eureka experience’ 27 Europe 2, 146 evaluation and elaboration, stages of opportunity 27 Evans, Stuart, on Plastic Logic’s orientation 176 evidence from Scottish SMEs 29–30 entrepreneurial background, knowledge and experience 31 social ties and networks 30–31 unexpected research outcome: role of external environment 32–3 experiential knowledge 26, 61, 74–6, 197, 198 explicit knowledge 77 exploratory studies in Bangalore and Cambridge 166–9 analysis and discussion knowledge 179 opportunities 178–9 vulnerabilities 179–80 case study findings Bangalore 173–5 Cambridge 176–8 future research directions 181–2 literature review, local network relationships and new venture internationalization 169 normative implications 182–3 export decisions, three factors influence 62 export market, information literature 25

exporting, direct and indirect modalities 8 exporting mode 7–8, 17–18 external environment, pull and push factors 32 Far East 146 FDI 2–3, 12–16, 58, 168, 172,183 feasible business opportunity 27 Financial Times 177 findings and discussion assimilation and the transfer process 87–8 exploitation and outcomes of new knowledge 88–9 sources of knowledge 86, 87 types of knowledge 84–5 firms knowledge-based view (KBV) 77 Fletcher, M. 3, 7, 191, 193, 194–5, 196, 199, 201 Folli Follie born global manufacturer of jewellery 42, 45, 49 INV framework 48, 50 foreign direct investment see FDI Forsgren, M. 75, 77, 110, 120 France 46 Friesen, P.H. 150, 154, 162 Gargiulo, M. 109, 113, 117 GCDP 20, 29, 80–82, 142 generic knowledge, applicable to domestic and international markets 3 George, G. 20–21, 74, 79, 124–5, 127–8, 135–6, 151 Ghauri, P. 56, 80–81, 172 Ghoshal, S. 40, 108, 169 Global Companies Development Programme see GCDP global knowledge economy 1, 18–19 global-oriented INVs, emphasis of 161 globalization 1, 8, 124, 137, 197 Granovetter, M. 92, 108, 167, 170 Grant, R.M. 39, 77, 95 Great Britain, Folli Follie in 46 Greece 2, 191 close-tie networks 24 Folli Follie franchising of jewellery 46

Index halva production 43 insights from small advancing economy 38 studies of internationalized firms 37, 42 greenfield ventures 7–8 versus acquisitions 10 Gregory, J.K. 124, 125, 131 guanxi (informal personal connections) 111 Gulati, R. 109, 113, 117 Haitoglou Bros SA bought 25 per cent of stock of Papagiannis Bros SA 44 halva producer 43, 45 international activities transferred to domestic activities 49–50 internationalization 44–5 internationalization in reactive manner 48 leveraged domestic knowledge in the international markets 50 process theory of 47 ‘halo effect’, ‘blue chip’ clients and 98 Hamill, J. 124, 125, 131 Hauser, Herman, co-founder of Amadeus Capital Partners 176–7 Hennart, J-F. 7, 9–11, 13 Hills, G.E. 24, 27, 30, 34 Hitt, M.A. 112, 169, 178 Hong Kong 46 Huberman, M. 81–2, 113, 172 human capital growth, compared with physical capital 19 IB 185–6 activity and informal networks 3 larger multinational firms 189 literature 38 internationalization of firms in 73 prior exposure 127 scholars 188 theory 74 Ibeh, K.I.N. 4, 12, 140, 191, 194–5 IE 10–13, 15, 27, 63, 185, 190, 193 IN1 82–3, 87–8 IN2 82–3, 87 incubation stage of opportunity 27 India 2, 191

243

industry experience, firm internationalization and 26 informal networks and formal modes, international business activity 3 information and communication technology (ICT) 91–2 infrastructure 6 Inkpen, A.C. 7–8, 16–17, 107, 119 ‘innovation’, central to international entrepreneurship theory 22 insight experience, individual’s thinking process 28 insight stage, coincides with eureka experience 27 institutional knowledge 61 intellectual property 85, 89 international business see IB international entrepreneurship see IE international entry modes, greater flexibility 8 international growth, impact of learning 39 international knowledge, triggers international expansion and domestic growth 52 International Market Entry and Development 191 international market entry modes, international markets and 7 international markets growth, different from growth in domestic market niches 52 international new venture see INV international new venture theory, SME internationalization 5 international opportunity, entrepreneurs’ prior knowledge 31 international process theory see IPT international reach, salient property of e-commerce 125 international routines, bridging ties on 166 internationalization 6 based on domestic networks of firms 58 cognitive process and 198 complex process 200 different routes to 47 dynamic process, endogenous and exogenous change 14

244

Index

economic approaches 59, 70 feasible for many firms 7 impact of on local economy 197 importance for domestic marketing activities 48 incremental 44 integrated part of entrepreneurial orientation of founder 162 international work experience related to 31 INVs and 192 inward and outward 56 knowledge 85, 88 literature 26 occurring over time 15–16 proactive, opportunity-driven process 38 process 67, 70, 73, 90 role of learning in 61, 67 second phase of 48 stage theory and born global approach 50 technological learning 19 temporal process 14–15 theory, emphasizes value creation 22 two forms 3 internationalizing firms, 12 longitudinal case studies 73 Internet firms, studies on internationalization 126 interrelationships 16, 54, 66, 71 INV research 73 INV theory, definition of International Entrepreneurship 22 investment mode 7–8, 17–18 INVs 2, 4–5, 9, 13, 150 cultural and strategic approaches 153 decision makers and experience 69, 74, 76 divided into four dimensions 151 go straight to overseas markets 76 implications 189–90 international markets 63–4 internationalization of 68, 76 local bridging ties and 166 organizational form 186–9 risk-seeking 198 strong entrepreneurial posture 197

sub-types 187 technological knowledge inherent in 76 uniqueness of 185, 189 weekly conferences 88 INVs and DNVs differences between evident 162, 197 differences between using sample of 214 new ventures 151–2 entrepreneurial orientation analysed 160–61 inward connections network building process and 24 IPT 9, 74–5 Italy 191 Japan Folli Follie, entry to in 1995 46–7 Jensen, J.B. 59, 67, 72 Johanson, J. entry modes 191 general and specific knowledge 60–61 internationalization 14, 37, 39–40, 47, 107, 110, 112 IPT 9 network relationships 93, 121 psychic distance of markets 53–4, 60–61, 67–8 social capital 169 Uppsala model 74–5 joint ventures, versus WOS 10 Jones, M.V. 5, 194–5 CIER and 191 cognition in terms of international orientation 69 dynamic integration and 201 entry mode 2, 8, 10–11, 19, 192 innovation 22 international entrepreneurship 151, 171, 197 international growth of SMEs 124–5, 135 internationalization 14, 54, 56–7, 91–2, 200 cognitive perspective 65–6 networks 95 research on small firm growth 71, 198–9

Index Karafyllia, M. 3, 191, 194–5, 197 KBV 91–3, 96, 103, 104 Kim, D.H. 78–9, 124–6 Kirzner, I.M. 22–3 Klein, L.R. 125, 129, 136 Knight, G. advantages of young firms 154 ‘born globals’ 187 international entrepreneurship 124–5 internationalism 14, 107, 128, 135, 151 INVs 152, 186 Scottish firms 29 knowledge 40 acquisition how to protect its intellectual property 85 internal and external sources 86 sequence of 4 business 61 general and market-specific 60 generic 90 international 52, 75–6 key resource driving international growth 76 leverage 105 market entry modes 90 new market 88–9 objective 74, 77 location specific 67 product 61, 77, 88 product and technological 76 transfer 47, 50 two types of market 75 knowledge, learning and the internationalization process 74 market knowledge 74–5 product and technological 76–7, 89 knowledge-based view see KBV knowledge-seeking 17–18 Knudsen, T. 152, 186, 188–9 Korhenen, H.R. 57, 66, 75 Kotha, S. 125–6, 135 Krug, B. 111–12, 117 Kuemmerle, W. 12, 40, 49 Larson, S. 97, 110, 121 learning different types 39, 50, 71 domestic 51

245

experiential 74 organizational 14–15, 78 tehnological 19, 40 Lee, D.Y. 111–12, 169 Levinthal, D.A. 25, 39, 61–2, 74, 78–9 Li, C. 111–12, 131 Lituchy, T.R 124–5, 131 Loane, S. clients 98, 102, 194–5, 198 internationalization 4, 12, 191 network building 93–5, 107, 120 online environments and 125 Lohrke, F.T 124, 126, 129, 136 longitudinal case study research 3 low-technology and traditional SMEs 1 Lu, J.W. 11, 48, 167 Lumpkin, G.T. 27, 33, 41, 154–6 Luostarinen, R. 8, 53–7, 62, 66, 75–6, 81, 91, 94, 191 firms can expand in three ways 56 Madhok, A. 67, 109, 126 Madsen, T.K. entrepreneurial orientation 4 European firms 163 inertia of the firm 125 internationalization 107, 110, 124, 128, 191, 194–5 INVs 150–52 networks 141, 186, 188–9 MAN1 82–4, 86 MAN2 82–6, 89 MAN3 82–7 MAN4 82–5, 87 managing directors, nine internationalizing Scottish SMEs 20 market information in-house marketing department 118 market feasibility 30 market-based transactions 16 market-seeking 17–18 Mattsson, L.G. 75, 93, 121 McAuley, A. 91, 96, 107, 109, 141 McDougall, P.P. aggressiveness 162 entry modes 9–10 IE literature 167, 178 international entrepreneurship 22–3, 51

246

Index

internationalization 38–9, 73, 109, 124–5, 127–8, 152, 198 INVs 26, 63–4, 68–9, 76, 151–2, 155, 185–9, 192 networks 94–5, 107, 110, 141 risks 156 McEvily, W. 170–71, 178 McNaughton, Rod B. 5, 167, 169, 171, 191, 193, 194–5 Mercury company 113, 115–16, 118 mergers and acquisitions 8 micromultinationals see mMNES Microsoft, dealings with Skelta 183 Microsoft Worldwide Partner Conference (Canada), Skelta and 175 Miles, M.B. 81–2, 113, 172 Miller, D. 150, 154, 162 mMNEs 4, 12 activities of 15 Scottish 143 barriers related to international activities 140 conclusions 148–9 core weaknesses 193 on cusp of international development 193 definition 139 presentation of findings 143–4 centralized and non-participative organizational culture 147 existence of production orientation 145 failure to acquire access to financial resources 146–7 failure to monitor external changes 144–5 failure to prioritize market opportunities 145–6 opportunistic and reactive international management style 146 RBV of 142 research background 141–2 MNEs 9, 98 evolutionary perspective of 59 intermediator for SME internationalization 8 INV as special type of 188 literature 18 mode of foreign market entry and 6

offshoring of production 19 theories of 58 ‘mode’, electronic and other forms of transactions 7 mode selection, motivations for 16–18 mode variety and motivations, insufficient attention paid to 6 Moen, O. 11–12, 124, 135, 151–2 Morgan-Thomas, A. 4, 191, 194–5, 196 ‘multinational’, use of the term 139–40 multinational enterprises see MNEs multinational strategies, entry motives and 9 Munro, H.J. 17, 24, 64, 92, 107, 125, 136, 169 Nelson, R. 59, 77, 96 network opportunity, entrepreneur and network activities 27 network research, lack of predictive power 122 network-based opportunity recognition, evidence sparse 34 networking and networks, dependent constructs 121 networks 192, 198, 200 behavioural approach in internationalization of firms 120–22 contingent effects of 108, 120 cross-national borders business opportunities 25 effects on international business development 119 firm opportunity for internationalization 34 foreign market information 23 locally concentrated ties 198 lock-in as key constraint 109, 112–13 not universally beneficial 107, 120 one-size-fits-all analysis 106, 109, 119 personal inadequate for business development 118–19 smaller firms often driven by 93 networks of strong ties, new ventures and 110 new laws on environmental issues, pull factors and 32 new opportunities, five stage process 27

Index new product development (NPD) 99, 102 new venture internationalization, network relationships 169 new venture networks, ‘somewhat volatile’ 17 Ng, I. 111–12, 117 NUD*IST software, index analysis and 143 O’Donnell, A. 107, 109, 120 opportunity/opportunities 2–3, 155, 192–3 active creation vs passive serendipitous 28 antecedents to international 35–6 central to IE 21 dimensions of international 33–4 entrepreneurial 22–3 entrepreneurs’ prior knowledge 31 eureka experience and 34 international 24–6, 28–33, 154 knowledge of 54 potential 157 process 21 strong and weak network ties 199 profitable 52 serendipity-led 33 SMEs and 20–21 solo vs network creation 27–9 organizational imprinting 67 Oviatt, B.M. advantage of young firms abroad 154 entry modes 9–10 IE literature 167, 178 inertia of the firm 125 international entrepreneurship 22–3, 51, 123–4, 192 internationalization 38–9, 107, 109, 127–8, 198 INVs 64, 73, 76, 151–2, 185–9 networks 94–5, 110, 141 Padmanabham, P. 127, 131 pattern recognition 28–9 Peng, M.W. 8, 95, 111, 148 Penrose, E. 58, 66, 74, 142, 155 personal circumstances, as push factor 32

247

personal networks, weak ties and opportunities 35 personal networks in small firms 110–13 Plakoyiannaki, E. 3, 154, 191, 194–5, 196–7 Poland 46, 191 pollution incidents 33 Polos, L. 12, 118, 188 Prashantham, S. 5, 169–73, 181, 191, 194–5, 198 preparation stage of opportunity, firmlevel information 27 proactiveness, market and 155 process theory 39 process vs Eureka moment 29 product knowledge 77 product and technological knowledge 76 psychic differences 61, 67–8 psychic distance 45, 53, 60–61, 63, 71, 98 e-commerce shortening 124 psychically distant markets 76 Quelch, J.A. 125, 129, 136 R&D 8, 66 costs 156 development 57, 155 domestic 59, 67 improving efficiency of 85 INVs emphasis on 155 laboratories and mMNEs 145 part financed 99 technology-based firms involved in 85 unpredictable 116 R&D-NPD benefit of joint 99 Rail, A. 124–5, 131 rapid internationalization 1, 76, 91–2, 98, 107, 198 Rasmussen, E.S. 4, 151, 191, 194–5, 197 RBV 9, 13, 91–2, 95–6, 103–4, 122, 194 Red Herring (trade journal) 175 ‘reference client’ 98 Reid, S.D. 75, 94, 96 relationship-building resource-intensive process 110

248

Index

research and development see R&D research hypotheses 133–4 research model 127 research questions and conceptual approach 79–80 analysis 82 data collection 81–2 profile of the case study companies 82–3 research design and methodology 80–81 research streams 69–70 resource seeking 17–18 resource-based view see RBV resources and capabilities elaboration and evaluation and 27 Rialp, A. 124–5, 151 risk 8, 65, 107, 135, 150, 156, 197–8 ‘roots on internationalization’, inwardoutward links 57 Salomon, R. 54–5, 57, 66, 71–2 Samice, S. 126, 128–9 Sapienza, H.J. domestic and international markets 64, 67 entrepreneurial orientation 51, 69 entry modes 12, 19 internationalization 39–41, 48, 79 Saturn company 113–14, 116–18 Schumpeter, J. 14, 22, 155 Schumpeterian theory of entrepreneurship 21–2 Scotland small peripheral economies 196 study of 15 firms 139 Scottish Enterprise 80–81 Scottish sample, collaboration with Sun Microsystems 171 Scottish SMEs 12 firms involved 82–3 internationalizing 20–21 interviews between May and July 2006 29–30 Scottish software industry 170 second phase of internationalization 48 Servais, Per DNVs and INVs compared 4 internationalization 107, 110, 124–5, 128, 135

INVs 151–2, 186 networks 141 research 191, 194–5 Shah, Paritosh, responsible for marketing Skelta 174 Shah, Sanjay (CEO of Skelta) 173–4 Shane, S. 21, 23, 25, 185 Sharma, D.D. 12, 48, 61, 68, 107, 109, 125 Shaver, J.M. 54–5, 66, 71–2 Shaw, V. 12, 100–101, 120 Shrader, R.C. 11, 27, 152 Sinkovics, R. 124–5, 128 Skelta founded in Bangalore (2002) 173–5, 178, 180 Skelta – Microsoft relationship 174–5 Slevin, D.P. 150, 152, 154, 156, 161–2 Slovakia 46 small firms 6, 104–5, 113, 123, 126 small and medium-sized enterprises see SMEs SME internationalization conclusion and research questions 202–3 convergent themes 199–202 digitized world on nature of 196 nature of 192 overview, contributions and directions 192–9 SMEs 1, 18 absorptive capacity 73–4 barriers for entrepreneurial 100–101 collaborations in growth of 16 digitization and globalization 124, 137 e-commerce and international growth of 4, 123, 196 early and rapid internationalization 192 growth related to international intensity 135 intellectual-capital-intensive 1 international entrepreneurship in 2 internationalization cognitive influences in 199 process 13–15, 80 rapid 91, 123 ventures and 139, 191–2 learning process of 79

Index multinational theory concepts and 8–9 networks 170 offshoring of production and 19 opportunities for internationalization 20–21 relationships between motivation and mode 200–201 sample of 603 in UK 123 social capital 19, 23–4, 30, 102, 169, 192–3, 198 MNC subsidiaries as source of local 170 not completely fungible 108 theory 167, 169 social ties 24, 29 social ties and networks, entrepreneur’s personal contacts 30 Sodhi, Rajiv (Microsoft manager) 174–5 Spain 46 spillovers 38, 41, 50–52, 105, 200 spin-outs 97 strong ties 108 personal relationships 117 SU1 82–5, 87 SU2 82–5, 87–8 SU3 82–5, 88 tacit knowledge 77 Tang, Y.K. 4, 191, 194–5, 198, 200 Tavares, A.T. 168, 171 TCA 9–10, 13, 16 TECH1 82–6, 88 TECH2 82–4, 86 TECH3 82–4, 86–7 technical knowledge, universal in geographical coverage 67 technological knowledge 76–7 technology 6 Teece, D.J. 40, 79, 122, 187 Terra company 113, 115–16, 118 transaction cost analysis see TCA transactional capability, stage of digitization 136 transfer of knowledge 41 does it exist? 47 from international to domestic business 37 joint R&D process and 99

249

question of from international to domestic business 38 Tsang, W.K. 107, 112, 119 UK 2, 146, 191 Uppsala model 74–5 US 146, 191 high-tech firms, survey by Shane 25 internationalization of portals 126 loose-tie networks 24 Uzzi, B. 25, 109, 117, 167, 170–71, 179, 182 Vahlne, J-E. entry modes 191 general and market-specific knowledge 60 internationalization 14, 37, 39–40, 47, 107 IPT 9 learning in internationalization 67 network relationships 93 psychic distance of markets 53–4, 60–61 social capital 169 Uppsala model 74–5 ‘value creation’ in line with entrepreneurship research 22 Venkataraman, S. 21, 25, 97 venture capital (VC) 166, 183 Venus company 113–14, 116, 118 weak ties 30, 35, 92–4, 108 WEE Directive, excess inventory and 33 Welch, D.E. 24, 31, 48, 75 Welch, L.S. 24, 31, 48, 56–7, 66, 75, 81, 94, 191 wholly owned subsidiaries (WOS) 7–8, 16 Wiedersheim-Paul , F. 53–4, 61–2, 68–9, 112 Winter, S. 59, 77, 96, 126 Witt, P. 109–110, 116 Wolf, B.M. 54–5, 57, 66 WTO TRIMS Agreement 19 Yamin, M. 124–5, 128 Yin, R.K. 42, 81, 142

250

Index

Yli-Renko, H. clients 97 entry modes 11 internationalization and learning 19, 74, 76 network relationships, dark side 179 networks, effect of 25, 49, 167 social capital 169 Young, S. CIER and 191 domestic and international markets 71 entry modes 2, 7–8, 192–3 internationalization 56, 197 intraorganizational MNC network 168 MNC subsidiary and 171 networks 93, 198 RBV of internationalization 95

Zaheer, A. 102, 107, 109, 120, 170, 178 Zahra, S.A. absorptive capacity 79 dynamic capability development 124–5, 127–8, 135–6 e-commerce 127 entry modes and internationalization 11–12 IE research 20–21 internationalization 39, 94, 151, 167 learning 40, 71, 74, 76, 181–2 networks 110 networks and social capital 19 new knowledge to overcome inertia 88 Zander, U. 59, 77, 97

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