Research on Knowledge, Innovation and Internationalization, Volume 4 (Progress in International Business Research)

RESEARCH ON KNOWLEDGE, INNOVATION AND INTERNATIONALIZATION PROGRESS IN INTERNATIONAL BUSINESS RESEARCH Series Editor:...

Author: Jorma Larimo | Tiia Vissak

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RESEARCH ON KNOWLEDGE, INNOVATION AND INTERNATIONALIZATION

PROGRESS IN INTERNATIONAL BUSINESS RESEARCH Series Editor: The European International Business Academy (EIBA) Recent Volumes: Volume 1:

Progress in International Business Research – Edited by Gabriel R. G. Benito and Henrich R. Greve

Volume 2:

Foreign Direct Investment, Location and Competitiveness – Edited by John H. Dunning and Philippe Gugler

Volume 3:

New Perspectives in International Business Research – Edited by Maryann P. Feldman and Grazia D. Santangelo

PROGRESS IN INTERNATIONAL BUSINESS RESEARCH VOLUME 4

RESEARCH ON KNOWLEDGE, INNOVATION AND INTERNATIONALIZATION EDITED BY

JORMA LARIMO University of Vaasa, Finland

TIIA VISSAK University of Tartu, Estonia

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2009 Copyright r 2009 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Editor or the publisher. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-84855-956-1 ISSN: 1745-8862 (Series)

Awarded in recognition of Emerald’s production department’s adherence to quality systems and processes when preparing scholarly journals for print

CONTENTS LIST OF CONTRIBUTORS

ix

PREFACE

xiii

INTRODUCTION

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PART I: INTERNATIONALIZATION PROCESSES THE INTERNATIONALIZATION PROCESSES OF THE MULTINATIONAL CORPORATION – A NEW RESEARCH AGENDA Desireé Blankenburg Holm, Rian Drogendijk, Jukka Hohenthal, Ulf Holm, Martin Johanson and Ivo Zander WHY DO SOME INTERNATIONAL NEW VENTURES BECOME GLOBAL START-UPS? AN EXPLORATORY STUDY OF THE FINNISH ICT INDUSTRY Niina Nummela, Kaisu Puumalainen and Sami Saarenketo A BEHAVIOR-BASED ANALYSIS OF THE CHANGES OF THE STRUCTURE, SYSTEMS, AND CULTURE IN THE INTERNATIONALIZATION PROCESSES OVER TIME Bernhard Swoboda, Martin Jager, Dirk Morschett and Hanna Schramm-Klein

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CONTENTS

PART II: FOREIGN OPERATION METHODS GLOBAL ONLINE ENTREPRENEURSHIP: THE REVIEW OF EMPIRICAL LITERATURE Anna Morgan-Thomas, Marian V. Jones and Junzhe Ji

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INTERNATIONALIZATION PATTERNS OF CHINESE PRIVATE-OWNED SMES: INITIAL STAGES OF INTERNATIONALIZATION AND CLUSTER AS TAKE-OFF NODE Susanne Sandberg

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INTERNATIONALIZATION OF GOODS AND SERVICES: A COMPARISON OF THE INTERNATIONALIZATION OF SERVICE PROVIDERS AND MANUFACTURERS IN SWITZERLAND Ralph Lehmann

115

PART III: KNOWLEDGE AND INTERNATIONAL BUSINESS DO JAPANESE INVESTORS USE THEIR JOINT VENTURES WITH EUROPEAN PARTNERS IN EUROPE AS TROJAN HORSES TO CAPTURE THEIR KNOWLEDGE? Shinichi Ishii and Jean-Franc- ois Hennart

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INNOVATION PROCESSES AT UNIT LEVEL: A STUDY OF HEADQUARTERS INVOLVEMENT, INNOVATION IMPACT, TRANSFER PERFORMANCE, AND ADOPTION SUCCESS Francesco Ciabuschi and Oscar Martıń Martıń

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EXTERNAL FACILITATION IN THE INTERNATIONALIZATION OF HIGH-TECH FIRMS Anita Juho and Tuija Mainela

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Contents

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PART IV: EMERGING ECONOMIES: INNOVATION AND KNOWLEDGE CREATION MARKET CONCENTRATION AND INNOVATION IN TRANSNATIONAL CORPORATIONS: EVIDENCE FROM FOREIGN AFFILIATES IN CENTRAL AND EASTERN EUROPE Liviu Voinea and Johannes Stephan

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ESCAPING THE TRAP OF LOW-COST PRODUCTION AND HIGH DEPENDENCY: A CASE STUDY OF THE INTERNATIONALIZATION NETWORKS OF SMALL SUBCONTRACTORS FROM THE BALTIC STATES Hans Jansson and Mikael Hilmersson

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INFORMATION PROVISION BY PUBLIC AUTHORITIES AND BUSINESS PARTNERS IN SOUTHEAST EUROPE: EFFECTS ON FIRM PERFORMANCE Alexandra Kaar and Alma Sˇehic´

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LIST OF CONTRIBUTORS Francesco Ciabuschi

Department of Business Studies, Uppsala University, Sweden

Rian Drogendijk


Jean-Franc- ois Hennart

Center and Department of Organization and Strategy, Tilburg University, The Netherlands

Mikael Hilmersson

Baltic Business Research Center, Baltic Business School, University of Kalmar, Sweden

Jukka Hohenthal


Desireé Blankenburg Holm


Ulf Holm


Shinichi Ishii

Graduate School of Business, Osaka City University, Japan

Martin Jager

Faculty of Business Administration, Economics and Sociology, University of Trier, Germany

Hans Jansson

Baltic Business Research Center, Baltic Business School, University of Kalmar, Sweden

Martin Johanson


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LIST OF CONTRIBUTORS

Marian V. Jones

Centre for Internationalisation and Enterprise Research, University of Glasgow, UK

Anita Juho

Department of Marketing, University of Oulu, Finland

Junzhe Ji


Alexandra Kaar

Department of International Management, Johannes Kepler University, Austria

Ralph Lehmann

University of Applied Sciences HTW Chur, Switzerland

Tuija Mainela

Department of Marketing, University of Oulu, Finland

Oscar Martıń Martıń

Department of Business Administration, Public University of Navarre, Spain

Anna Morgan-Thomas


Dirk Morschett

Department of International Management, University of Fribourg, Switzerland

Niina Nummela

Turku School of Economics, Finland

Kaisu Puumalainen

Lappeenranta University of Technology, School of Business, Finland

Sami Saarenketo

Lappeenranta University of Technology, School of Business, Finland

Susanne Sandberg

Baltic Business School, University of Kalmar, Sweden

Hanna Schramm-Klein

Department of Marketing, University of Siegen, Germany

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List of Contributors

Alma Sˇehic´

Department of International Management, Johannes Kepler University, Austria

Johannes Stephan

Chair of International Economics, Technical University Freiberg, Germany

Bernhard Swoboda

Faculty of Business Administration, Economics and Sociology, University of Trier, Germany

Liviu Voinea

National School of Political and Administrative Studies, Romania

Ivo Zander


PREFACE This is the fourth volume in the book series Progress in International Business Research with selected papers from the annual conferences of the European International Business Academy (EIBA). It is with this title that the series was launched by the co-editors Gabriel R. G. Benito and Henrich Greve (BI Norwegian School of Management), based on papers presented during EIBA’s annual conference in December 2005 in Oslo. In their preface to the first volume, the previous series editors Torben Pedersen and Ulf Andersson at that time wrote: ‘The aim of the serial is to have an impact on the development of the field of international business by publishing interesting, high quality papers and research ideas that for different reasons might not reach the usual publication outlets.’ The second volume in the series Progress in International Business Research was based on the 32nd annual EIBA conference held in Fribourg, Switzerland in December 2006. The volume was given the subtitle ‘Foreign Direct Investment, Location and Competitiveness’ and was co-edited by John H. Dunning (Rutgers Univesity, USA and Reading University, UK) and Philippe Gugler (University of Fribourg). The selected papers were spread over four parts which dealt with: recent advances in the determinants and strategy of multinational business activity; determinants of location competitiveness of countries; emergent and developing countries’ competitiveness and the location of firms; and suggestions ‘towards a more coherent international policy framework on FDI fostering firms’ and locations’ competitiveness’. The papers included in the second volume of the EIBA series fully succeeded in their purpose to analyze from several angles the factors which might explain and/or influence the relationship between the competitiveness of multinational enterprises (MNEs) and the countries in which they operate. The third volume of Progress in International Business Research concentrated on ‘New Perspectives in International Business Research’. Maryann P. Feldmann (University of North Carolina, USA) and Grazia D. Santangelo (University of Catania) as co-editors selected the papers from those presented at the 33rd annual meeting of EIBA in Catania, Sicily in December 2007 with the theme ‘International Business, Local Development xiii

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and Science–Technology Relationships’. The new perspectives chosen by the editors of the third volume related to issues about differences in culture, governance, international entrepreneurship; and technology and international expansion. For this fourth volume the co-editors Jorma Larimo (Vaasa University, Finland) and Tiia Vissak (University of Tartu, Estonia) were able to rely on the papers from EIBA’s 34th annual conference hosted by Enn Listra (Tallinn School of Economics and Business Administration of Tallinn University of Technology) in Tallinn, Estonia in December 2008. The theme of the conference was ‘International Business and the Catching-Up Economies: Challenges and Opportunities’, while the subtitle chosen for this fourth volume is ‘Research on Knowledge, Innovation and Internationalization’. This new volume maintains the standards set up by its predecessors and brings together papers about the internationalization process, the modes of international operations, the relevance of knowledge for international business activities, and innovation and knowledge creation in emerging/ transition economies. The book series Progress in International Business Research over the past four years has provided access to interesting interdisciplinary papers to EIBA members and other interested parties. The volumes include both conceptually stimulating and empirically founded papers, often followed with relevant policy recommendations useful to practioners in business, government and international organizations. The authors, editors of the volumes and Emerald Group Publishing Limited should be congratulated for their efforts in preparing these valuable scientific contributions to International Business. Danie¨l Van Den Bulcke Series Editor

INTRODUCTION This volume of Progress in International Business Research comprises of a selection of 12 competitive papers from the 34th EIBA (European International Business Academy) annual conference, which was held in Tallinn, Estonia in December 2008 with the theme ‘‘International Business and the Catching-up Economies: Challenges and Opportunities’’. It addresses two main issues – (1) the internationalization process and (2) the role of knowledge and innovation for internationalization – that are important in the current economic slowdown both for catching-up and for other economies, scholars, and practitioners. The volume is divided into four parts. The contributions in the first part concern the internationalization processes of multinationals and international new ventures, and the changes of different factors during these processes. In the second part, the main attention is paid to foreign operation methods: online internationalization, the methods used in the beginning of internationalization activities, and the comparison between internationalizing with goods and services. The third part focuses on the importance of knowledge for internationalization: how it is acquired from subsidiaries or headquarters and how the state could help firms in it. The last part of the volume discusses the importance of knowledge and innovation for the international expansion and performance of enterprises from Central, Eastern, and Southern European transition economies, but also for those entering these countries. The volume provides new theoretical, managerial, and policy insights in the field of international business research and it should interest scholars, top managers, and policy makers, but also others intrigued by these issues. Part I starts with the chapter ‘‘The Internationalization Processes of the Multinational Corporation: A New Research Agenda,’’ which is a conceptual paper by Desiree´ Blankenburg Holm, Rian Drogendijk, Jukka Hohenthal, Ulf Holm, Martin Johanson, and Ivo Zander. The authors examine the assumptions and features of the Uppsala internationalization model (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). They state that for studying the internationalization processes of today’s multinational companies (MNCs), it is necessary to have a wider view than xv

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the one proposed by the Uppsala model as the latter still has several gaps and it neglects some important issues regarding such firms’ internationalization processes. The authors emphasize the need to study three important issues in relation to modern MNCs’ internationalization processes: (1) the opportunity-recognition process that precedes their internationalization (how managers search for, recognize, and exploit opportunities leading to their firm’s internationalization and how this depends on the company’s strategy, activities, structure, and other characteristics); (2) the internationalization of these firms’ multiple products (how the first, second, and the following products are entered into various international markets; how entering with the following products differs from entering a market for the first time with the first product); and (3) the internationalization of their foreign units (how foreign subsidiaries begin their own internationalization activities, how being foreign-owned drives or restricts this, and how decisions about their internationalization are made). The second chapter ‘‘Why Do Some International New Ventures Become Global Start-Ups? An Exploratory Study of the Finnish ICT Industry’’ is an empirical paper by Niina Nummela, Kaisu Puumalainen, and Sami Saarenketo. They use the classification developed by Oviatt and McDougall (1994) for analyzing international new ventures (INVs). The authors pay attention to three important dimensions: (1) the time dimension (at what age they entered their first international markets), (2) the extent of these firms’ international sales (are they global or only international), and (3) the scope of their international sourcing (which resources they acquire from abroad). They define global start-ups as firms that have internationalized rapidly, obtained sales from five or more countries, and have at least two different types of international activities, compare global start-ups (also called ‘‘born globals’’ in some studies) with other types of INVs and discuss why some INVs become global start-ups, while most of others do not. Based on Web-based survey data about Finnish ICT companies’ inward and outward activities, they state that global start-ups are strongly driven by the international growth orientation of their top management, they have a higher export share and more foreign markets, they also seem to be more active in learning, they tend to perform better, and they are usually more satisfied with their international performance than other types of INVs. They also suggest that INVs’ managers should internationalize their value chain as a whole, but for managing the resultant global value networks, they need to obtain capabilities. The third chapter ‘‘A Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture in the Internationalization Processes over Time’’ is an empirical paper by Bernhard Swoboda, Martin Jager, Dirk

Introduction

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Morschett, and Hanna Schramm-Klein. The chapter focuses on changes in 20 partial dimensions of German family-owned firms’ internal (organizational) structures, information and strategic planning systems, and organizational culture (including leadership characteristics and cultural transfer) along with changes in their target countries (measured according to Ruzzier, Antoncic, & Hisrich, 2007) and establishment chains/operation modes (measured according to Calof & Beamish, 1995; Chang & Rosenzweig, 2001; and Manolova, Brush, Edelman, & Greene, 2002) in 10 years. Based on survey and interview data, the authors show that internationalization is not always an incremental (linear) process: over time, many companies follow periods of expansions and reductions (e.g., divestment). They conclude that changes in internationalization – quickening, stagnation, and reduction – affect firms’ internal structures relatively fast while changes in systems usually take place later and changes in leadership and culture are even slower. The authors state that this impact can be also reversed: changes in structures, systems, and culture can also lead to some changes in internationalization. Thus, if firms wish to expand abroad successfully, they should pay attention to their organizational structures, information and planning systems, growth, and risk orientation. Part II starts with the chapter ‘‘Global Online Entrepreneurship: The Review of Empirical Literature,’’ which is a conceptual paper by Anna Morgan-Thomas, Marian V Jones, and Ji Junzhe. The authors analyze 45 empirical works published in 1997–2008 in peer-reviewed academic international business, information technology, entrepreneurship, and economics journals and those containing quantitative and/or qualitative data in the field of global online entrepreneurship (GOE). The authors define GOE by rephrasing McDougall and Oviatt’s definition (2000, pp. 903) of international entrepreneurship as a ‘‘ya combination of innovative, proactive and risk-seeking behavior that involves using e-commerce technologies to cross national boundaries and create value in organizations.’’ They compare these studies’ main objectives, theoretical frameworks, methodologies, main findings, and other characteristics and also develop research implications. The authors conclude that most of these studies have focused on US-based enterprises and those from other Englishspeaking countries; such studies are often confirmatory (statistically verifying theory-driven hypotheses) and focus either on the internationalization of Internet new ventures and e-commerce corporations or on the impact of the developments in e-commerce on the internationalization of non-Internet-related firms. They also state that such studies have used different conceptual approaches and theoretical frameworks, applied a wide

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array of research methods, and used different data sources. The authors suggest that in the future, more attention should be paid to theory and methodology development and to conducting quantitative and qualitative longitudinal studies. The fifth chapter ‘‘Internationalization Patterns of Chinese Private-Owned SMEs: Initial Stages of Internationalization and Cluster as Takeoff Node’’ is an empirical paper by Susanne Sandberg. The chapter analyzes the takeoff and initial stages of internationalization of Chinese SMEs and the importance of clusters and other network relationships for such firms. Based on case study data from five privately-owned firms from the Yangtze River Delta region, the author concludes that these companies follow different internationalization paths. While some of them start from domestic sales and then continue with indirect exports like the Uppsala model (see, e.g., Johanson & Vahlne, 1977) predicts (this seems to be the most dangerous path as the companies learn the least and create no direct relationships with foreign firms), some of such firms try to develop local and foreign activities in parallel, while some neglect vast domestic growth opportunities and start fast foreign expansion through clusters. So, they follow the ‘‘born global’’ route (see, for instance, Knight & Cavusgil, 1996). They can access clusters and create useful network relationships through making foreign acquisitions, creating joint ventures, attracting inward investments, participating in trade fairs, co-operating with local firms, and through other methods. The author also states that some of the network relationships built for advancing international activities in a certain market can be also useful for expanding further to other markets or increasing a firm’s market share in its domestic market. The sixth chapter ‘‘Internationalization of Goods and Services: A Comparison of the Internationalization of Service Providers and Manufactures in Switzerland’’ is an empirical paper by Ralph Lehmann. The chapter studies how the internationalization of service and manufacturing firms differs and whether service exporters need different export promotion measures than manufacturers. Based on interview materials and survey data from 132 Swiss service providers and 198 production enterprises, the author concludes that service exporters are often younger and smaller, and they sense the psychological, linguistic, and cultural distance more strongly than manufacturing firms as they have to create personal contacts with their customers. Moreover, they use direct sales forms more often and for that they need local personnel. Thus, the availability of such personnel is an important criterion for service firms’ foreign market selection. In addition, compared to manufacturing companies, service providers use direct distribution systems more often, and they also tend to enter more foreign

Introduction

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markets at the same time as their internationalization is more frequently triggered by their customers. Thus, service exporters need special export promotion programs as their needs differ from the ones of manufacturers. The author suggests that special attention should be paid to marketing, information provision about different cultures and market conditions, and risk management. Part III starts with the chapter ‘‘Do Japanese Investors Use their Joint Ventures with European Partners in Europe as Trojan Horses to Capture Their Knowledge?,’’ which is an empirical study by Jean-Franc- ois Hennart and Shinichi Ishii. The chapter investigates if the partnership behavior of Japanese partners in joint ventures (JVs) with European partners is better explained by (1) the Trojan Horse Hypothesis (THH; assuming that Japanese firms establish JVs to steal their partners’ knowledge and dissolve JVs – liquidate them, buy out their European partners, or sell off their stakes to their partners or other firms – as soon as they have achieved their goal; see, e.g., Reich & Mankin, 1986) or by (2) the ‘‘cooperative specialization’’ view (CS; arguing that Japanese firms set up JVs to achieve long-term cooperative specialization; see, for instance, Zeng & Hennart, 2002). Based on the data of 38 two-partner Japanese-European manufacturing JVs in Europe in 1987 and the same JVs in 1996 (if they still existed), the authors state that the partnership behavior of Japanese firms is more consistent with the CS view as the majority of JVs have not dissolved, but there was also some evidence in support of the THH view as some JVs have ended with buyouts. Still, this does not mean that all these buyouts occurred because the Japanese partners stole their partners’ knowledge and wanted to liquidate the JVs after that: some also took place because the European partners changed their strategies and were interested in selling their stakes. The eighth chapter is ‘‘Innovation Processes at Unit Level: A Study of Headquarters’ Involvement, Innovation Impact, Transfer Performance, and Adoption Success’’ by Francesco Ciabuschi and Oscar Martı´ n Martı´ n. The chapter investigates the impact of headquarters’ (HQ) involvement in innovation development and transfer at their business units’ level (innovation is defined as ‘‘putting into practice product designs and manufacturing processes that are new to the firm’’; see Nelson, 1993, while innovation development is conceptualized ‘‘as transforming an idea into a completed entity’’). The empirical part of this paper is based on face-to-face interview data about 71 innovations in 52 business units from 14 countries from Europe, Asia, and the USA, and the authors use partial least squares technique (PLS) in the data analysis. Based on the results the authors propose that higher HQ involvement in innovation development process

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may lead to a stronger innovation impact for its subsidiaries (HQ may also contribute with additional resources, their own competence and technology) and this, in turn, may increase its role in innovation transfer not only to the particular unit, but also to its other units. On the other hand, if HQ is actively involved in interunit innovation transfer, this may negatively impact the innovation transfer process performance as it may result in higher costs and lower subsidiary satisfaction. The authors suggest that HQ should be more selective in deciding which innovations they should actively transfer: this should be done only if these innovations are important and if this may increase overall MNC performance in the future, while if innovations are ‘‘marginal,’’ then HQ should not actively try to transfer them. Part III ends with the ninth chapter ‘‘External Facilitation in the Internationalization of High-Tech Firms,’’ which is an empirical paper by Anita Juho and Tuija Mainela. They study how internationalization can be facilitated through an external development program. Based on a longitudinal case study of two small high-tech Finnish firms that participated in a one-year business development program Global Clusters, the authors conclude that internationalization depends on the firm itself (e.g., its knowledge, experience, technology, relationships with other companies, and other resources), the network consisting of institutions and actors whose main task is facilitating internationalization (see, for instance, Prashantham & McNaughton, 2006; Welch, Welch, Wilkinson, & Young, 1996), and the firm’s ability to participate in such a network and benefit from it, for instance, to learn and create relationships. The authors state that internationalization facilitation networks have different roles: they may participate in knowledge transferring, experience sharing, diagnosing firms’ problems, and analyzing their business concepts and potential, searching for potential partners – including customers, venture capitalists, and business experts – and helping to create and maintain such partnerships, and they should also offer different services for different companies depending on their needs and capabilities. If these issues are taken into account, then small and inexperienced firms can compensate their deficiencies by actively participating in such networks and, as a result, internationalize more successfully. Part IV starts with the tenth chapter ‘‘Market Concentration and Innovation in Transnational Corporations: Evidence from Foreign Affiliates in Central and Eastern Europe,’’ which is an empirical paper by Liviu Voinea and Johannes Stephan. The chapter studies if local market concentration impacts R&D and innovation activities of transnational companies’ foreign affiliates in five transition economies: Romania, Poland, Croatia, Slovenia, and East Germany. The authors investigate how the innovation activities of

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foreign affiliates operating in concentrated home markets (those where competition is low, e.g., where monopolies or large oligopolies exist) differ from the activities of those operating in nonconcentrated markets. Based on data from 736 manufacturing companies (most of them SMEs), they state that the firms from concentrated markets export more to their foreign owner’s network and use more of its technology, are more active in conducting basic and applied research (without spending significantly more on it) but less active in process innovation and acquiring knowledge from outside their owner’s network. Thus, they can be considered as ‘‘implementing agents’’ (according to the term introduced by Gupta & Govindarajan, 1991) of their owners. These firms are not actively stimulating innovation; moreover, the risk of transfer pricing is higher in such affiliates. The authors suggest that as foreign affiliates operating in nonconcentrated markets are more active technologically and are more likely to transfer new technologies to firms not belonging to their foreign owner’s network, policy makers should focus their support policies on such companies. The eleventh chapter ‘‘Escaping the Trap of Low-Cost Production and High Dependency: A Case Study of the Internationalization Networks of Small Subcontractors from the Baltic States’’ is an empirical paper by Hans Jansson and Mikael Hilmersson. The authors analyze how small exporting subcontractors from emerging markets leap over the barrier of low technology and high dependency. Based on a case study of eight small and medium-sized internationalizing enterprises from the Baltic Sea Region (four of them from Western Europe exporting to Eastern Europe and four from Eastern Europe exporting to Western Europe, all in the beginning of the internationalization process as defined by Johanson & Vahlne, 2003), the authors state that Baltic subcontractors have been seriously affected by the current economic crisis: it has increased their vulnerability as demand has decreased, and they are getting out-competed by new low-cost producers. For escaping the trap of low-cost production and high dependency, firms use two main strategies: (1) lowering costs and integrating themselves more into the contractors’ (customers’) production processes and (2) becoming more independent, developing their own products and moving upstream in the value chain or the vertical customer network. They also show that for small subcontractors, it is very important to learn, develop marketing competencies, participate in international business networks, and concentrate on increasing sales rather than reducing costs; in other words, the second strategy should be preferred. The final chapter ‘‘Information Provision by Public Authorities and Business Partners in Southeast Europe: Effects on Firm Performance’’ is an

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empirical paper by Alexandra Kaar and Alma Sˇehic´. The authors study how local employees, public authorities, and local business partners (suppliers, customers, competitors, and other firms in the region) provide information about the host country environment to foreign firms investing to Southeast Europe (SEE), how this helps them to overcome the liability of foreignness (for more information about the concept, see Hymer, 1976) and affects their success in the particular foreign market. Based on their results from survey data of 80 Austrian firms operating in SEE (most of them SMEs active in several countries and getting a substantial share of their turnover from that region – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, the Kosovo, Montenegro, Romania, Serbia, and Slovenia), the authors conclude that getting information from local business partners influences firm’s performance positively and significantly, while there was no significant impact of information provision by public authorities on firm’s performance. The results also showed that local employees’ proactivity (their ability to suggest improvements, develop solutions, and also successfully implement them) facilitates information provision by local business partners. The authors suggest firms of all sizes to establish local networks or participate actively in them as this enhances their performance. We hope that the important topics covered in the 12 chapters of this volume will provide both enjoyable and intellectually stimulating reading and somehow have an impact on the research agenda of the participants in future EIBA conferences. To conclude, we would like to thank Dr. Huu Le Nguyen for his valuable help in the preparation of the manuscript and Matthias Baum, Jim Bell, Jarna Heinonen, Jukka Hohenthal, Pia Hurmelinna-Laukkanen, Leila Hurmerinta, Piotr S. Kaczmarek-Kurczak, Stephane Lhuillery, Krzysztof Obloj, Eriikka Johanna Paavilainen, Lucia Piscitello, Shameen Prashantham, Erik Stavnsager Rasmussen, Alex RialpCriado, Matija Rojec, Toñu Roolaht, Sami Rumpunen, Maksim Saat, Birgitta Marianne Sandberg, Pamela Sharkey Scott, Maria Smirnova, and Marius Wehner for reviewing the articles.

REFERENCES Calof, J. L., & Beamish, P. W. (1995). Adapting to foreign markets: Explaining internationalization. International Business Review, 4(2), 115–131. Chang, S., & Rosenzweig, P. M. (2001). The choice of entry mode in sequential foreign direct investment. Strategic Management Journal, 22(8), 747–776.

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Gupta, A. K., & Govindarajan, V. (1991). Knowledge flows and the structure of control within multinational corporations. Academy of Management Review, 16(4), 768–792. Hymer, S. H. (1976). The international operations of national firms: A study of direct investment. Cambridge: MIT Press. Johanson, J., & Vahlne, J.-E. (1977). The internationalisation process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Vahlne, J. E. (2003). Business relationship learning and commitment in the internationalization process. Journal of International Entrepreneurship, 1(1), 83–101. Johanson, J., & Wiedersheim-Paul, F. (1975). The internationalisation of the firm – Four Swedish cases. Journal of Management Studies, 12(3), 305–322. Knight, G. A., & Cavusgil, S. T. (1996). The born global firm: A challenge to traditional internationalization theory. In: S. T. Cavusgil & T. K. Madsen (Eds), Advances in international marketing: Export and internationalizing research – Enrichment and challenges (Vol. 8, pp. 11–26). Greenwich, CT: JAI Press. Manolova, T. S., Brush, C. G., Edelman, L. F., & Greene, P. G. (2002). Internationalization of small firms: International factors revisited. International Small Business Journal, 20(1), 9–31. McDougall, P. P., & Oviatt, B. M. (2000). International entrepreneurship: The intersection of two research paths. Academy of Management Journal, 43(5), 902–906. Nelson, R. (Ed.) (1993). National innovation systems: A comparative analysis. Oxford: Oxford University Press. Oviatt, B. M., & McDougall, P. P. (1994). Toward a theory of international new ventures. Journal of International Business Studies, 25(1), 45–64. Prashantham, S., & McNaughton, R. B. (2006). Facilitation of links between multinational subsidiaries and SMEs: The Scottish technology and collaboration (STAC) initiative. International Business Review, 15(5), 447–462. Reich, T., & Mankin, E. (1986). Joint ventures with Japan give away our future. Harvard Business Review, 64(2), 78–86. Ruzzier, M., Antoncic, B., & Hisrich, R. D. (2007). The internationalization of SMEs: Developing and testing a multi-dimensional measure on Slovenian firms, entrepreneurship and regional development. An International Journal, 19(2), 161–183. Welch, D., Welch, L., Wilkinson, I., & Young, L. (1996). Network development in international project marketing and the impact of external facilitation. International Business Review, 5(6), 579–602. Zeng, M., & Hennart, J.-F. (2002). From learning race to cooperative specialization. In: F. Contractor & P. Lorange (Eds), Cooperative strategies and alliances (pp. 189–210). London: Elsevier.

Jorma Larimo Tiia Vissak Editors

PART I INTERNATIONALIZATION PROCESSES

THE INTERNATIONALIZATION PROCESSES OF THE MULTINATIONAL CORPORATION – A NEW RESEARCH AGENDA Desireé Blankenburg Holm, Rian Drogendijk, Jukka Hohenthal, Ulf Holm, Martin Johanson and Ivo Zander ABSTRACT Purpose – We examine the fundamental assumptions and features of the Uppsala model of internationalization and argue that we need to look beyond this model for studying internationalization processes in the multinational corporations (MNCs) of today. The purpose of our paper is to identify gaps and neglected issues regarding MNCs’ internationalization processes that demand further theoretical and empirical study. Methodology – Our approach is conceptual: based on the most cited model on internationalization, the Uppsala model, we approach the complex internationalization processes that continuously go on in modern MNCs. We use related bodies of literature, on MNC structure and Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 3–20 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004005

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DESIREÉ BLANKENBURG HOLM ET AL.

strategy, headquarters–subsidiary relationships, MNC subsidiary strategy and development, and opportunity seeking and entrepreneurship, to fill in the gaps and develop the emerging research themes. Findings – We identify the following three issues that need further investigation: the opportunity recognition process preceding internationalization processes in MNCs, the internationalization of multiple products within the confines of the growing MNC, and the internationalization of foreign MNC units. Research limitations – In this paper, we open up new research fields, but do not offer empirical studies to inform us about these relevant issues. Future research should study these issues empirically, preferably through case study methodologies and/or with longitudinal designs. Originality – The contribution of our paper is its identification of three research issues in relation to internationalization processes of modern MNCs, which we argue are neglected by contemporary research.

INTRODUCTION Now more than 30 years ago, researchers at Uppsala University published two seminal papers that conceptualized the internationalization process of the firm (Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). In contrast to mainstream research at that time, what became known as ‘‘the Uppsala model’’ built upon the behavioral assumptions (see Penrose, 1959; Cyert & March, 1963) that managers are boundedly rational and uncertainty avoiding. By taking small steps outside the home country, managers could work their way around limited international experience and gradually reduce their uncertainty about foreign markets. Accumulating knowledge about foreign markets allowed them to subsequently perceive new business opportunities and to act upon them by making more far-reaching commitments. Internationalization was thus perceived as an incremental process, starting with geographically and culturally closest markets and gradually extending further away from the firm’s country of origin. The Uppsala model has had a significant impact in the field of international business, inspiring a stream of research that has mainly supported but also challenged the original model’s assumptions and predictions (for a summary of this extensive literature, see, e.g., Johanson & Vahlne, 1990, 2006). At the same time, and perhaps because of the

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model’s broad-based success and impact, work within the confines of the original model has prevented the exploration of several conceptually and empirically relevant issues in the internationalization process of the firm. In this paper, we set out to investigate a number of gaps in our knowledge about internationalization, mapping out three areas of research that have slipped through the net cast by the original model and remaining largely ignored by contemporary research. In the following sections, we start by delineating some of the mostly implicit assumptions of the original Uppsala model to illustrate what types of issues and questions have been left unanswered in the extant literature. We place particular emphasis on the prehistory of internationalization, the internationalization of multiple products within the confines of the growing multinational corporation (MNC), and the internationalization of foreign units. We then go through each of the three unexplored areas of research in more detail, explore some emerging hypotheses to be tested in future research, and finally summarize our arguments in a new agenda for internationalization process research.

THE ORIGINAL UPPSALA MODEL IN PERSPECTIVE To understand why several conceptually and empirically relevant issues have remained unexplored in the internationalization process literature, three mostly implicit assumptions or features of the original Uppsala model need to be considered. First, the original model is based on the assumption that managers act only once entrepreneurial opportunities have been identified and proven in the domestic market. While cumulative processes play a central role in the subsequent internationalization of the firm, what precedes its first step into foreign markets is by and large treated as a ‘‘black box’’. Indeed, how the underlying opportunity recognition process works, that is, how managers search for, recognize and act upon opportunities that lead to internationalization in the first place is still an underdeveloped field in the international business literature (Mathews & Zander, 2007). The lack of attention to preinternationalization processes may partly explain why internationalization process theory has only recently come to address the particular characteristics of international new ventures or the so-called ‘‘born globals’’ (Oviatt & McDougall, 1994, 1995; Bloodgood, Sapienza, & Almeida, 1996; Madsen & Servais, 1997).

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Second, the Uppsala model describes the internationalization process of a single-product firm, picturing the linear internationalization of a firm’s first major product or ‘‘first hit’’ as it is exploited in foreign markets. Most MNCs, however, develop into multiproduct or multibusiness firms, and any observed internationalization processes, therefore, soon become a mix of several products finding their way into various international markets. Yet, we know very little about the internationalization processes of additional products or ‘‘second hits’’ and how these relate to the firm’s first internationalization process. Several largely unexplored questions emerge in this context. Do empirically observed internationalization processes reflect several products finding potentially differentiated ways into international markets? To what extent have additional products or second hits benefited from commitments made and experiential knowledge gained through the initial process of internationalization? Are internationalization processes of these second hits dependent upon or in various ways dictated by the initial attempts to enter foreign markets? Third, the original model assumes incremental commitments to foreign markets and the stepwise introduction of new activities in each local market. The fundamental perspective is internationalization from one focal point and added resources and activities in a number of foreign locations. As a consequence, very little research has considered and addressed how foreign units may internationalize themselves, that is, how these units in turn expand outside the borders of the national market in which they are located. This is a highly relevant issue as current research suggests that foreign units are increasingly able to contribute to the strategic and technological development of the MNC group (Andersson, Forsgren, & Holm, 2002) and it is known that they are increasingly active in international markets themselves (Forsgren, Holm, & Johanson, 1992; Holm & Pedersen, 2000). The internationalization processes of individual foreign units introduce several questions linked to the opportunities and constraints imposed by the existing multinational organization. For instance, to what extent do internationalization processes of foreign units draw upon the accumulated experiential knowledge developed in the MNC, specifically the knowledge gained from first, second, and additional hits (or the knowledge accumulated in other internationalizing units)? Do foreign units draw upon already established structures of the MNC when entering foreign markets, or do they design internationalization processes specifically suited for locally conceived products? To what extent does the internationalization of foreign units invoke economic, political, or other trade-offs in the internationalization of the entire multinational group?

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Paradoxically, because of these three mostly implicit assumptions that underpin the Uppsala model more than three decades of research has produced in-depth knowledge about a limited period and part of the internationalization processes of the firm. This is not to say that the approach has been mistaken or incorrect, but merely points to the fact that there are broad areas of research that have remained essentially unexplored in the international business literature. To illustrate, the shaded areas of Fig. 1 highlight the scope of the Uppsala model’s original internationalization process, starting from the home country unit and gradually extending into a number of foreign locations and units. A first hit is manifested by its exploitation in one or several foreign markets, which can be considered established in terms of volume and acceptance among relevant business network actors (Blankenburg, 1995). The nonshaded areas indicate internationalization processes that have not been captured by the Uppsala model, but which are all common aspects of the evolving MNC. Because these processes may occur in parallel and also emanate from different parts of the established international organization, we find it relevant to talk about the internationalization processes of the firm

FOREIGN LOCATION Foreign Unit

FOREIGN LOCATION Foreign Unit Preinternationalization activities

Fourth hit FOREIGN LOCATION Foreign Unit

HOME COUNTRY Home Country Unit

FOREIGN LOCATION

Preinternationalization activities

First hit


Foreign Unit Second hit



Third hit


Fig. 1.

The Internationalization Processes of the Firm.

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and in the case of internationalizing foreign units also about the internationalization of the already established MNC. Internationalization thus refers to international expansion processes initiated anytime and anywhere in the firm or the MNC and not exclusively to the path from nonexporting domestic firm to internationalized firm as described by the original Uppsala model.

THREE UNEXPLORED ISSUES IN THE INTERNATIONALIZATION PROCESS LITERATURE We now turn to a more in-depth discussion of three unexplored issues in the internationalization process literature, specifically related to opportunity seeking and the prehistory of internationalization, the internationalization of multiple products within the confines of the growing MNC, and the internationalization of foreign units. Internationalization as an Opportunity-Seeking Process Studies of internationalization processes, where the firm develops opportunities, are an unexplored research area. The roots of the concept of opportunity development can be traced back to two influential researchers in entrepreneurship, Schumpeter (1934) and Kirzner (1973). Their legacy has during the 1990s initiated an emerging research tradition where entrepreneurship is viewed as an opportunity development process. But, in the field of international business, research on the proactive firm that develops internationalization opportunities is still missing. Traditionally, research on internationalization has viewed export and production as the main activities driving the process and internationalization has been thought to be driven by a reduction of perceived uncertainty by acquisition of experiential knowledge. However, this is a rather simplistic view of the firm, which often is a complex organization operating in a dynamic and complex environment. Therefore, we suggest a more extended definition of the firm and the internationalization of the firm (Andersen, 1993). Whereas the original Uppsala model views the firm as a reactive actor, we define it as a proactive opportunity-seeking actor that not only reacts, but also deliberately and nondeliberately acts upon and creates business opportunities. In line with Schumpeter’s and Kirzner’s conceptualization of opportunities, we view opportunities in the form of new customers, new suppliers, new products and


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production technologies, and new ways of organizing the internal operations as important means that, if recognized and acted upon, will enhance and accelerate the internationalization of the firm (Mathews & Zander, 2007). Consequently, opportunities refer to something new for the firm, but also to something that is perceived to have a positive impact on the performance of the firm. The proactivity of the firm implies that it actively searches for and tries to create opportunities. Traditionally, finding opportunities has not always been seen as a product of deliberate search; instead various scholars argue that opportunities are also a product of characteristics of the finder, like alertness (Kirzner, 1992), or events and causes that are nonpredictable and out of control for the firm, like accidents (Hayek, 1980), serendipity (Denrell, Fang, & Winter, 2003), and luck (Barney, 1986) and thereby to a large extent out of logic. Other approaches indicate that, while still viewing opportunity as something relative and perceptual, a logic how firms find and exploit opportunities can be identified. For instance, the strategy, in terms of activities (Johanson & Johanson, 2006), or the context like the firm’s network (Andersson, Blankenburg Holm, & Johanson, 2006) or the character of the market entered (Johanson & Johanson, 2006) are observed to influence the finding of opportunities. In addition, also the firm’s and its top-management’s prior knowledge base (Shane, 2000) and social networks (Ardichvili, Cardozo, & Ray, 2003; Ellis, 2000) and the firm’s ability to make sense of an opportunity (Weick, 1995) can play a role in the internationalization of the firm. Depending on the firm’s existing body of knowledge, finding an opportunity can be ranged on a continuum from discovery to recognition (Hohenthal, Johanson, & Johanson, 2003; Shane, 2000). An opportunity that is perfectly discovered by the firm is completely unknowable ex ante, which means that discovery of opportunities is accompanied by surprise; it was not expected (Demmert & Klein, 2003). On contrary, an opportunity that is recognized is possible to define and specify in advance; the firm recognized it when it appeared. A perfect recognition of an opportunity corresponds exactly with what was expected ex ante and does not mean a surprise. We, therefore, advance that the firm finds opportunities based on what it does, what it knows and where it is. The assumption that firms are opportunity seekers and not only uncertainty reducers or cost minimizers has several consequences for theories on the internationalization of the firm. A specific field that we identify as under-researched is the preinternationalization of the firm. We do not know enough about how and why firms begin to internationalize.

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One way of approaching preinternationalization is by viewing finding and exploiting opportunities as a driving factor. Opportunities are not found in isolation. They are not autonomous, but are more or less likely to be found and exploited dependent on the firm’s strategy, organizational structure, and knowledge bases. But, they are also contingent on the firm’s context. Thus, two critical questions that follow are: 1. How do, for instance, the firm’s strategy and performed activities influence the type of opportunities found and exploited? 2. Moreover, how do the firm’s context and organizational structure have an impact on what type of opportunities the firm is likely to find? Most new business opportunities are found in the vicinity of existing business activities (see Cyert & March 1963) and as the firm is active in specific markets, while it is entering new foreign markets, the characteristics of these markets in terms of stability or turbulence, customers and suppliers, and institutional framework, are likely to influence both how opportunities are found and what type of opportunities are found. For instance, a stable market where the firm is able to build long-lasting relationships with other firms and where the institutions are transparent and universal is likely to offer different opportunities for the firm than those found in a dynamic market where institutions as well as relationships with other firms are opaque and where it is difficult to make forecasts. Thus, it follows that internationalization is usually directed toward specific counterparts situated in specific contexts and the firm thus tends to find opportunities connected to what it does in that specific context. However, this does not mean that all firms from a specific industry, entering the same markets, will find and exploit the same opportunities. What type of opportunities and how the opportunities are found and exploited is also a result of the knowledge the firm possesses. The firm develops knowledge connected to the specific context as well, thus opening up new business opportunities that could not have been seen without the situated learning process connected to that specific context. These opportunities can usually only be seen from the particular viewpoint of the firm that has developed this unique knowledge configuration. Opportunities are more or less opaque for firms, which makes that some opportunities can be found by many firms, while the finding of other opportunities is limited to firms with the specific resources and knowledge demanded to exploit that opportunity. The resources and knowledge of a specific firm will have been developed to handle the needs of that firm and in connection to its specific products and business counterparts. The skills and


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capabilities of the firm will thus be connected to its history and will be more or less unique. When it enters a new market the firm will see some business opportunities that are relatively opaque or difficult to see for other firms. Although the entering firm is confronted with the liability of newness, it also has an advantage based on bringing a unique set of knowledge to that market. In line with this argumentation, we propose the following research question: 3. How does the firm’s knowledge configuration and learning process, when entering a market, influence the type of opportunities found, and the way in which they are found and exploited? Entering a new market is usually connected to exploiting the unique set of knowledge in a new setting, but as the firm acts in that setting it expands its knowledge, thus widening its opportunity horizon. Within a wider opportunity horizon the chances of finding opportunities will increase. In large complex organizations, this opportunity horizon is influenced by both the specific knowledge set of the unit and that of other units within the organization. The chances of finding opportunities will thus be even bigger in these types of organizations.

The Internationalization of Multiple Products within MNCs According to the Uppsala model (Johanson & Vahlne, 1977, 1990), firms incrementally increase their knowledge and commitment on international markets. The original model was based on observations of the successive steps that firms make in each foreign market (Johanson & Wiedersheim-Paul, 1975). Johanson and colleagues argued that managers who operate locally learn from experience about how to do business in the local market and such specific experience is difficult to transfer between markets. Another observation made is that firms may decrease the risks resulting from the lack of knowledge about foreign markets by starting their internationalization first in markets nearby and similar to the home market, then move further away (Johanson & Wiedersheim-Paul, 1975). This suggests that knowledge about how to do business is somewhat usable across borders: apparently, having experiences in nearby markets decreases the perceived risks of markets further away. These observations made in the 1970s and the internationalization process model based on them start from the idea of a parent company in a home market deciding on internationalization: that is, a single, linear process. This assumption may hold for initial

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internationalization processes of single-business line firms starting to internationalize, but not for MNCs. MNCs are multiproduct, multibusiness, and multiexperience corporations and this complicates the processes of international expansion, but the received literature evolving from the original Uppsala model does not take this into account when studying internationalization processes. Rare exceptions to this are the studies of sequential entry processes at the level of business lines of firms by Chang (1995) and Chang and Rosenzweig (2001), though their studies are limited to entry into one market (the United States) and they do not explain potential relations between internationalization processes of different business lines within firms. Based on the original Uppsala model, we could argue that the internationalization of subsequent businesses can build upon the experiential knowledge acquired in the first process. Market specific knowledge acquired in the first process could be used for establishing a second business in the same market. Subsequent internationalizations (second or later ‘‘hits’’) should then be seen as expansions of the first market entry, maybe even organized and managed by the first generation managers. Alternatively, it is possible and even likely that subsequent internationalization is initiated and managed at a higher level in the firm; corporate or business headquarters. In that case, we need to describe and explain internationalization of the multinational as being initiated and occurring at several organizational levels, including HQ and subsidiary levels and to consider experiential knowledge among individual managers as well as other forms of organizational learning (see Forsgren, 2002). Are such subsequent internationalization processes of later hits faster, more efficiently executed and less incremental, that is, are prior experiences beneficial and has the perceived risk related to subsequent internationalization decreased? Can we, therefore, expect that the internationalization process(es) of the MNC occur at an increasing pace, and can we expect that the gradual accumulation of market knowledge allows radical changes in foreign investment behavior (Forsgren, 2002)? A related issue is that with increasing size and resources that follow from being a MNC, the relative risk associated with a certain foreign investment will decrease in the sense that the consequence of failure has a limited impact. Further, this thinking implies that new foreign investment may occur within the multinational without substantial market experience, which would challenge the assumption on the role of experience driving decisions about foreign investments. Our paper addresses important questions including the following: where are internationalization processes initiated and organized in the multinational firm? Can we distinguish the internationalization processes of


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subsequent businesses from the first? Are subsequent internationalization processes path dependent upon prior internationalization? What factors drive internationalization of the multinational in more than one dimension? MNCs are multiproduct, multimarket, multiunit, and multitechnology firms and we propose that initiating internationalization consists of two steps. In the first step, the MNC commits resources toward a specific business in a foreign market, which can either be a completely new foreign market for the MNC or a market where it is already operating. In both cases, we speak of increased internationalization. The second step is when the MNC begins to exploit the fruits of committed resources and thereby integrates the business into the on-going international operations. Various units in the MNC can initiate new business, not only the HQ or units in the home market. How the MNC or specific units within the MNC act upon the new business is contingent on (i) the degree of decentralization and room of maneuver given to the respective units, (ii) how resources are allocated and used within the MNC, and (iii) to what extent the MNC and its units have prior knowledge about this type of business. These three aspects follow Hayek’s analysis (1945) of how resources and knowledge are used in a hierarchical economic organization. Regarding the first aspect, the extent to which the various units in the MNC can act upon new businesses is dependent on the degree of decentralization in the organization: in a decentralized MNC the units enjoy a high degree of freedom to act without consulting the HQ or other units within the MNC and consequently they are likely to act quicker than units in MNCs with a more centralized structure. For MNCs and businesses operating in dynamic markets, a decentralized structure is preferred as a unit that perceives changes can also act upon the changes. However, and relating to the second aspect, in order to internationally expand units need resources, since acting implies costs; thus, the unit has to make investments in new resources like products, technologies, competence, and others. The unit can sometimes accumulate resources in order to be used when needed, but there are also resources that are allocated by the HQ or other units in the MNC. Thirdly and finally, prior knowledge of expanding business internationally, which resides in the MNC, is tightly linked to action taken upon new business, new products, and new markets, as prior knowledge is likely to have given the MNC a cause to develop organizational routines. Such routines concern, for instance, how decisions are made, communication is performed, and opportunities are evaluated. Accepting that internationalization processes in MNCs are not just linear processes initiated at HQ, but instead concern the international expansion

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processes of the complex organization that characterizes the MNC, issues like centralization–decentralization, resource allocation processes, and knowledge and knowledge transfer cannot be ignored.

The Internationalization of MNC Subsidiaries Received research on internationalization processes describes and explains how firms internationalize, not how units within a firm internationalize. However, today’s reality is that internationalization differs among units within the MNC and that many subsidiaries are internationally active (Forsgren, Holm, & Johanson, 2005). Large subsidiaries have themselves developed into multinational organizations: they coordinate activities within the MNC and they source, produce, and sell in other markets than their own. However, the internationalization processes of subsidiaries are unexplored fields of study. In the study of the MNC, most researchers have taken a ‘‘HQ-perspective’’ and devoted attention to HQ-subsidiary relations (Hedlund, 1981; Ghoshal & Nohria, 1989; O’Donnell, 2000) and subsidiary roles in MNCs (Bartlett & Ghoshal, 1986; Jarillo & Martinez, 1990; Gupta & Govindarajan, 1991). Others have taken a subsidiary point of view and studied subsidiary strategy (Taggart, 1998), subsidiary development (Araujo & Rezende, 2003; Birkinshaw & Hood, 1998; Holm & Pedersen, 2000), and subsidiary influence (power) over flows of intraorganizational resources and strategic decision-making (Ghoshal & Bartlett 1990, Andersson, Forsgren, & Holm, 2007). However, the internationalization of subsidiaries themselves has not been extensively associated to these issues. Foreign subsidiaries are the actual manifestations of the MNC’s international expansion. Successively, subsidiary managers gain business experiences, take initiatives, and sometimes make resources available for internationalization beyond their national markets. Whereas the internationalization of the firm from the HQs’ domestic country has been labeled internationalization of the first degree, the latter has been labeled internationalization of the second degree (see Forsgren et al., 1992, 2005). With a few exceptions (e.g., Araujo & Rezende, 2003), there has been no explicit investigation of how subsidiaries internationalize and what mechanisms drive internationalization processes at the subsidiary level. Research has yet to study to what extent and in what way belonging to an MNC drives or possibly restricts the internationalization of subsidiaries. It is in this context unclear how experiences collected and business opportunities created by subsidiaries themselves result in subsequent internationalization steps


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(Forsgren, 2002). Opportunities and initiatives for international expansion may arise in several subsidiaries in the MNC. However, given that subsidiaries do not exercise full control over the necessary resources and to the extent that their possibilities to influence corporate decisions are limited they cannot undertake whichever internationalization step they want. In our conception then, the MNC is likely to contain a portion of business opportunities for internationalization at the subsidiary level, which remains unrealized (or delayed) due to the inability of subsidiaries to act upon them, because of limited resources, the inability to communicate their potential, or due to limited influence on political processes within the MNC. This dilemma is contingent on the extent of separation between the units experiencing the opportunities for internationalization (the subsidiaries) and the unit(s) controlling the resources for expansion (e.g., headquarters). In a contrasting scenario, the internationalizing subsidiary more straightforwardly receives and utilizes experiences and resources of other units within the MNC. For instance, the experience from a prior internationalization process, say from an earlier ‘‘hit’’ initiated at the home-based unit or another subsidiary, can facilitate the internationalization of the subsidiary in related areas. Bartlett and Ghoshal (1989) touch upon this issue when stating that subsidiaries ‘‘may exploit parent company knowledge and capabilities through world-wide diffusion and adaptation’’; although they do not specifically stress the issue of subsidiary internationalization (see also Taggart, 1998). A subsidiary may also receive resources for development of its business, when that is in the interest of its peer units: those units that are engaged in internal business relationships with that subsidiary (Forsgren et al., 2005). Furthermore, for the purpose of reaching economies of scale, central R&D units develop new products for world-wide exploitation offering the subsidiary a possibility to exploit new business with low or reduced costs. In such ways, corporate strategic decisions can drive the internationalization of a subsidiary although it (initially) lacks relevant experiences or other resources. Internationalization of the subsidiary is in these cases based on the experience, resources, and initiatives controlled and taken by other units than the subsidiary itself. On the basis of the above discussion, we conclude that an issue that deserves attention is where in the multinational business experience is collected and decisions are made regarding internationalization of subsidiaries. This associates to the role of resource interdependencies and cooperation in the intracorporate network and political processes in the MNC. An assumption in the Uppsala model is that the locus of learning is at the business ‘‘frontline’’. In the MNC, this becomes challenging since

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hierarchical levels to some extent separate centralized resources and strategic decisions from business experience of units at the operational level. Additionally, an MNC may consist of several units with different experiences and capabilities that seek to internationalize (Araujo & Rezende, 2003; Forsgren, 2002). This complicates the making of commitment decisions at different levels in the MNC: several units at different levels will all hold experiences regarding certain product and market combinations that are not necessarily consistent, but some units are more able to act in line with their experience due to stronger control over necessary resources than others.

A NEW RESEARCH AGENDA While the theoretical underpinnings of the Uppsala model have been explored and tested in detail (for overviews see Johanson & Vahlne 1990, 2006), several of the underlying assumptions or features of the original model have remained mainly implicit and unchallenged. Three of these implicit assumptions stand out as particularly important in our paper: (1) internationalization starts with a given, original product, or business that has no prior history of search and development, (2) the internationalization process is represented by one single product or business expanding into international markets, and (3) internationalization starts in the firm’s country of origin and stops at the level of individual foreign units, that means, once a particular foreign market has been entered it represents a geographical end point in the firm’s internationalization process. Of course, the literature has not been ignorant of the resulting biases in theoretical and empirical work, but the issues of preinternationalization, the internationalization of second hits, and internationalization of foreign units of the established MNC have been largely neglected in the extant literature. While the internationalization process literature has traditionally drawn upon these simplifying assumptions, it does not accurately reflect the operations of firms and evolving MNCs as we know them. The implicit assumptions underpinning the Uppsala model may be applicable during a short period of initial international expansion of the firm, but relatively soon the picture becomes more complex as new products are discovered and make their ways into foreign markets and foreign units become the initiators and drivers of their own internationalization processes (e.g., Zander & Zander, 1996). While to date most empirical work has built on the


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assumptions and features of the original Uppsala model, acknowledging the complexity of the evolving MNC opens up a broad set of both theoretical and empirical issues. The overarching questions we need to investigate to create a more comprehensive picture of the internationalization processes of the firm include the opportunity-seeking processes that precede and influence internationalization, how second and additional hits of the growing firm internationalize, and how foreign units of the established MNC design and implement their own internationalization processes. Addressing and answering these questions will give us a better understanding of the evolving and ultimately complex multinational, multiproduct organizations. They are also issues of sustained managerial relevance in the growing and evolving MNC, highlighting a number of trade-offs in decisionmaking that concerns products with potentially different resource requirements and units at different organizational levels. As the MNC is associated with exceptional variance in both dimensions, sustained and broadened empirical research on the internationalization processes of the firm promises to provide unique insights and input into other domains of research (Roth & Kostova, 2003). Inspired by the calls to identify the big future questions in the wider field of international business (Buckley, 2002; Peng, 2004), and given the scope of the issues explored in the present paper, we aim to infuse new steam into this maturing field and open up a new agenda for research on the internationalization processes of the firm.

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WHY DO SOME INTERNATIONAL NEW VENTURES BECOME GLOBAL START-UPS? AN EXPLORATORY STUDY OF THE FINNISH ICT INDUSTRY Niina Nummela, Kaisu Puumalainen and Sami Saarenketo ABSTRACT Purpose – This study analyzes international new ventures (INVs) by means of the classification developed by Oviatt and McDougall (1994): global start-ups (GSUs) are compared with other types of INVs. Design/methodology/approach – The empirical data for the study were collected via a Web-based survey of Finnish ICT companies. Particular emphasis was placed on the operationalization of the key constructs as well as on the sample formation, in which both the number of international markets served and the coordination of international activities were taken into consideration.

Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 21–40 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004006

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NIINA NUMMELA ET AL.

Findings – The findings of this study indicate that GSUs are particularly driven by the international growth orientation of the top management. They also seem to perform better than other types of INVs. Practical implications – From the managerial point of view, the findings of this study indicate that managers of INVs should be encouraged to internationalize their value chain as a whole, despite the risks. However, those managers making these decisions should also be aware of the capabilities needed for managing the global value networks they create. Originality/Value – This exploratory study reveals that studying INVs from a holistic perspective – including both inward and outward activities – produces interesting findings and opens new avenues for future research. This theme clearly deserves more attention. Our classification of INVs into smaller subgroups also proved to be fruitful, not least concerning GSUs.

INTRODUCTION International entrepreneurship (IE) as a discipline has emerged at the crossroads of international business and entrepreneurship (McDougall & Oviatt, 2000), and during the last 15 years the theme has aroused increasing interest among researchers (see, e.g., Rialp, Rialp, & Knight, 2005). One of the path-breaking studies in this field – which was also acclaimed as the 2004 JIBS article of the decade – was the one written by Oviatt and McDougall (1994). Their study has also been referred to as a ‘‘ymajor milestone in international business research’’ (Autio, 2005). Oviatt and McDougall tried to explain the phenomenon of early internationalization within a framework that combined the key elements of sustainable international new ventures (INVs). They defined an INV 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’’ (Oviatt & McDougall, 1994, p.49). The definition incorporates three dimensions: (1) time to the international market, (2) the extent of international sales, and (3) the scope of international sourcing. As the authors explicitly point out, the focus of this definition is on the firm’s age rather than its size or other characteristics. This definition of INVs is probably most commonly used in later studies, especially those of an empirical nature. However, there is considerable

Why Do Some International New Ventures Become Global Start-Ups?

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variation in operationalization, and it seems that most of the studies have classified companies as INVs only in terms of age/time to market and the number of markets served (Hurmerinta-Peltoma¨ki, 2004). Market spread has also aroused interest, that is, whether the company could be called global, or if it is just international. However, a more serious deficiency in earlier research is the fact that the majority of studies have completely ignored the aspect of sourcing resources from international markets (Servais, Zucchella, & Palamara, 2006). Furthermore, researchers seem to treat all companies that meet the abovementioned two criteria (age and sales) for an INV en masse (Hallba¨ck & Larimo, 2006), although Oviatt and McDougall (1994) stated that the basic elements manifested themselves in many ways, and that companies could be classified into smaller categories (see Fig. 1). In other words, there are ventures that coordinate the conversion of resources from many parts of the globe into outputs that are sold in whatever locations they are most greatly valued. On the other hand, there are also INVs that are mainly exporters, adding value by shifting outputs from where they are to locations in which they are needed. The former – labeled global start-ups (GSUs) in Oviatt and McDougall’s classification – are the ones that are closest to the ‘‘born globals’’ of other studies (Hallba¨ck & Larimo, 2006), whereas the latter just share the time dimension of the original definition, that is, they have entered international markets quite soon after their inception.

Number of countries involved Few I

Many

II Multinational trader

Export/import Start-up

Few Number of value chain activities coordinated across countries

Many

III

IV Geographically Focused Start-up

Global Start-up

Fig. 1. Types of International New Ventures. Source: Oviatt and McDougall (1994, p. 59).

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This study represents an attempt to respond to calls for the investigation of two issues in the literature on IE. First, as Coviello and Jones (2004) have emphasized, in terms of development of the IE field it is imperative that researchers devise a commonly understood vocabulary. This should then be used in the construct development in order to make it more rigorous, as McDougall and Oviatt (2000) demanded. We have therefore tried to take into consideration all three dimensions in the original definition put forward by Oviatt and McDougall (1994). Second, including the aspect of resources is our response to calls for further study of international sourcing (see, e.g., Servais et al., 2006). However, the focus of this study is on the process of becoming a GSU; in other words we were interested in why some INVs become GSUs, whereas others perhaps do not. So far our knowledge about the outcomes of early internationalization is limited (Zahra, 2005), and in our opinion this would be worth investigation. In line with Hallba¨ck and Larimo (2006), we attempt to analyze the rapidly internationalizing firm in accordance with Oviatt and McDougall’s (1994) typology. Using survey data from Finnish ICT firms we hope to identify not only the distinctive characteristics of GSU, but also their links to company performance.

A TYPOLOGY OF INTERNATIONAL NEW VENTURES Fig. 1 depicts Oviatt and McDougall’s (1994) classification of different types of INVs. These different types are distinguished according to the number of value-chain activities the firm coordinates across borders, and to the number of countries entered. GSUs appear as an extreme type comprising firms that coordinate many activities across many countries, but also obtain sales from numerous markets. New international market makers (Types I and II) are the most common category of INVs, profiting mainly from the importing or exporting of goods to/from countries in which they are from/to countries in which they are required to import/export. Although the typology is rather static, both Oviatt and McDougall (1994) and, later, Hallba¨ck and Larimo (2006) have demonstrated that firms actually move between categories, and thus it includes a dynamic element (the arrows in the figure indicate some potential developmental paths). In fact, this movement between categories slightly resembles the traditional process model of internationalization, in which companies gradually increase their involvement on international markets (see, e.g., Johanson & Wiedersheim-Paul, 1975; Bilkey & Tesar 1977; Johanson & Vahlne, 1977;


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Luostarinen, 1979). As examples of these kinds of companies, researchers have introduced other types of rapidly internationalizing firms as extensions to the classification, such as ‘‘born-again globals’’ (Bell, McNaughton, & Young, 2001) and ‘‘globalizing internationals’’ (Gabrielsson & Gabrielsson, 2004). Our thoughts are quite strongly in line with the arguments of other researchers who have pointed out that, in fact, the internationalization process of INVs is not that different from the process in other firms, particularly when the focus is on the longer term and not just on the time of entry to the first foreign market (Jones & Coviello, 2005; Hashai & Almor, 2004; Moen & Servais, 2002). The decisive differentiating factor seems to be the managers’ commitment to internationalization: this international growth orientation (see Jantunen, Nummela, Puumalainen, & Saarenketo, 2008; Nummela, Puumalainen, & Saarenketo, 2005) is either there from the start or it develops incrementally. All in all, internationalization could be described as a time-based entrepreneurial process, which is steered by the strategic decisions companies make in the course of time (Jones & Coviello, 2005). These strategic decisions are discussed next.

STRATEGIC DECISIONS MADE BY INTERNATIONAL NEW VENTURES Internationalization is generally understood as an evolutionary process during which a company adapts to the international environment (e.g., Calof & Beamish, 1995). The traditional models view this as a step-by-step process with clearly distinguishable separate phases (for a review of process models, see, e.g., Leonidou & Katsikeas, 1996). It is possible to identify the different phases by following changes in operational mode, attitudes toward internationalization, information acquisition and transition, and the level of export involvement, for example. In the majority of cases, companies progress from one phase to another without an explicit strategy, although important decisions are made, such as the choice of a more complex operational mode on international markets. Thus, it could be argued that according to traditional process models the firm’s behavior is affected more by internal or external stimuli than by the deliberate development of strategies (Jones & Coviello, 2005; Moen & Servais, 2002). In the case of INVs the key strategic decision – to go international – is made very early in the company’s life cycle, possibly at the time of its

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founding (Autio, Sapienza, & Almeida, 2000) or even before it legally exists. Later strategic decisions include the choice of country and entry mode (Andersen, 1993, 1997), and the two are strongly intertwined in SMEs (Papadopoulos, 1987). According to the traditional view of internationalization, the number of served international markets evolves gradually from few to many. In contrast, the literature on IE and new ventures suggests that firms may enter multiple countries from inception (Oviatt & McDougall, 1994; Madsen & Servais, 1997). As an appealing determinant of these firms’ behavior, Autio et al. (2000) introduced the concept of ‘‘learning advantage of newness,’’ positing that firms entering international markets early on develop knowledge and routines that facilitate entry into additional foreign markets. Ventures that internationalize later on in their life cycle, on the other hand, may have developed routines within the domestic market that hinder their capability or willingness to absorb knowledge about opportunities and practices in foreign markets. It has often been argued that INVs tend to initiate their internationalization in lead markets and when they become saturated, they expand to other countries (see Rialp et al., 2005). However, according to Crick and Jones (2000), these firms often utilize a two-phase strategy in their market selection: first, they engage in market-spreading in order to identify opportunities globally, and then they focus their resources on selected and the most promising markets. What, then, are these lead or preferred markets? Recent empirical studies among software firms indicate that market size (in terms of purchasing power), and a short geographical distance in particular, are good market-selection indicators (Ojala & Tyrvaïnen, 2007, 2008). The number of markets served, on the other hand, seems to be positively related to the company age, the nature of the products, the internationalization of the industry, and the small size of the domestic markets (McNaughton, 2003). On the other hand, researchers appear to agree that INVs choose lowcommitment entry modes in order to reduce resource constraints and risks involved (Aspelund, Madsen, & Moen, 2007). This is in line with the findings of Mullins and Forlani (2005) that high-growth successful companies are very risk-averse, particularly when investing their own money. After all, later change of entry mode may be costly, risky, and laborious (see Pedersen, Petersen, & Benito, 2002; Petersen & Welch, 2002; Petersen, Welch, & Welch, 2000; Calof & Beamish, 1995). It may be that the use of networks in the selection of entry mode and market (Crick & Jones, 2000; Crick & Spence, 2005; Mort & Weerawardena, 2006; Moen, Gavlen, & Endresen, 2004) is an attempt to decrease the risk related to these


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decisions. In this respect, INVs do not seem to differ significantly from firms that internationalize at a slower pace. This is probably due to the fact that the choice of entry mode reflects the company’s resources and capabilities, which need to be adjusted if it is to pursue its growth strategy (see Bernardino & Jones, 2003). Additionally, among software firms the entrymode choice is intertwined with the product strategy and the choice of service model (Ojala & Tyrvaïnen, 2006). No decisions are made in a vacuum. In other words, the context is also of importance (on the role of industry in internationalization, see, e.g., Boter & Holmquist, 1996; Johanson & Mattsson, 1988). Prior studies note that the industry conditions in which the firm operates determine its international market strategy to a significant extent. For example, McNaughton (2003) found in his study on Canadian micro-exporters that firms operating in international industries had larger export-market portfolios. On the other hand, knowledge-intensive firms often operate in nascent industries in which there is so far no direct competition. These industries are also quite fast moving and volatile, which often requires speedy adaptation and decisionmaking (see Crick & Spence, 2005; Andersson, 2004; Autio et al., 2000; Eisenhardt & Brown, 1998). Therefore, in order to be successful companies should select strategies that are flexible and support constant opportunity recognition from the environment. However, the international activities discussed above reflect only one dimension of internationalization, that is, outward internationalization, and a more holistic view has often been often called for. The linkage between inward- and outward-led activities – such as buying and selling – has been addressed in particular (Korhonen, Luostarinen, & Welch, 1996; Fletcher, 2001; Servais & Jensen, 2001). Given that for an INV the international sourcing decision may be highly strategic – it has even been labeled an entrepreneurial act (Servais et al., 2006) – there is an obvious need also to consider the question of the international value chain as a whole.

THE INTERNATIONAL VALUE CHAIN OF INVS The literature provides several ways of measuring the degree of internationalization in firms, such as foreign sales as a percentage of total sales, the proportion of foreign to total assets, and that of foreign to total numbers of employees (Sullivan 1994; Geringer, Beamish, & daCosta, 1989). Given the number of other spread/diversity indices, however, these measures do not capture the essence of the degree of internationalization of the value

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chain as a whole. As Asmussen, Pedersen, and Petersen (2007) state, the renewed attention in global sourcing and off-shoring among international firms has further exposed the inadequacies of the measures, which are entirely insensitive to how firms configure their international value chains and hence fail to capture important aspects of the phenomenon. The location of a firm’s value-added activities is one indication of the extent of its globalization. According to Yip (1989), a multi-domestic strategy represents a situation in which most of the value chain is reproduced in every country, whereas with another form of international strategy – exporting – most of it is kept in one (home) nation. Finally, a global strategy represents a condition in which the value chain is splintered in order to reduce costs so that each activity may be conducted in a different country. In addition to internationalizing sales, INVs have also shifted toward a more international value chain as a whole, and have thus adopted a different business model than many traditionally internationalizing small firms (Servais et al., 2006). This development is probably most evident among GSUs, which build their international business on both international sourcing and sales. What, then, drives some INVs toward this new business model? In our opinion, the decisive differentiating characteristic of GSUs is probably the commitment of top management to internationalization, which has previously been measured among knowledge-intensive firms in terms of international growth orientation (Jantunen et al., 2008; Nummela et al., 2005). Therefore, we propose the following: P1. Global start-ups are characterized by a higher international growth orientation than other firms. Further, as mentioned earlier, we are also interested in exploring the linkage between GSUs and their performance. We aim to respond to Zahra’s (2005) call for a better understanding of performance variation in different types of INVs. However, investigating performance is never straightforward, and it is clearly a ‘‘double-edged sword’’ in the case of GSUs in that the coordination of both the international value chain and sales is taken into consideration. Namely, one might expect that because of their increased efficiency and the cost benefits due to international sourcing, as well as increased sales from numerous markets, GSUs would enjoy greater profits than other firms. On the other hand, international growth is often expensive and requires considerable investments. Furthermore, coordination of the fragmented international value chain is a laborious


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task requiring special capabilities, which these firms do not necessarily possess. Therefore, given the exploratory nature of this study, we propose the following: P2. Global start-ups differ from other firms in terms of performance.

RESEARCH DESIGN Data Collection New-venture internationalization may be subject to industry effects such as knowledge intensity, maturity, concentration, and appropriability (Fernhaber, McDougall, & Oviatt, 2007). In order to control for such effects we concentrated our analysis on a single industry, and defined the population of interest as small- and medium-sized Finnish companies providing valueadded services in the ICT sector. These include content providers and software providers for service-platform and management systems. Hardware manufacturers and companies providing mainly educational or consultancy services were excluded from the study. Due to the rapid development of the ICT sector and the unsuitability of standard industry classification codes, there was no single up-to-date sampling frame available for our purposes. Therefore, the names and contact information of the companies were sought from multiple sources, including the Kompass Finland database, The Statistical Bureau of Finland database of Finnish companies, IT magazines, and the Internet sites of the companies themselves, universities, cities, science parks, incubators, venture capitalists, and industry organizations. The data were collected by means of a structured questionnaire. Since the companies of interest were operating in the ICT sector, an Internet-based questionnaire was considered an appropriate data-collection tool. A total of 493 companies were identified, and contacted by telephone between November and December 2001. In this phase, 34 companies were found ineligible, and 74 refused to participate in the study. On the following day the 385 companies that agreed to participate received an e-mail message containing instructions for answering the web-based questionnaire. A reminder message was sent to companies that had not responded within two weeks. Of this sample, 123 companies replied, resulting in an effective response rate of 26.8 percent (123/459) of the eligible target population. This rate could be considered adequate as the questionnaire was rather extensive

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and the respondents were mainly chief executive officers or managing directors with busy time schedules. Firms established before 1981 were eliminated from the analyses, as well as firms that did not have any international operations at the time of data collection and those whose internationalization had not started within eight years from establishment. Thus, the analyses were conducted on an effective sample of 46 INVs. The validity and reliability of the results were secured by several means. For example, the questionnaire was carefully pre-tested in a number of firms. Furthermore, it was targeted at CEOs and managing directors, who are considered the most knowledgeable informants regarding internationalization issues in SMEs. A comparison of the early and late respondents (the late respondents being assumed to be similar to non-respondents) was conducted in order to assess non-response bias (see Armstrong and Overton, 1977). No significant differences were found between these two groups, and non-response bias was therefore not expected to have an effect on the results of the study.

Measures The GSU construct is an essential element in this study, and a lot of attention was paid to its operationalization. Thus, GSUs were defined as firms obtaining sales from five or more countries, and having at least two different types of international activities. The classification of companies according to these two dimensions is illustrated in Table 1; there were 20 GSUs in the sample. Another key concept in the study is the international growth orientation of the top management. In this case the measure was adapted from Nummela et al. (2005). The scale was based on four items, and the responses for each item were collected on a five-point Likert scale with the anchors 1 ¼ totally disagree and 5 ¼ totally agree. A composite measure was formed from an Table 1.

0–1 activities 2–6 activities Total

International Activities of the Companies Studied. 1–4 Countries

5þ Countries

Total

8 13 21

5 20 25

13 33 46


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average of the items, and the internal consistency was good (Cronbach’s a ¼ 0.85). The items were: We will have to internationalize in order to succeed in the future. The growth we are aiming at can be achieved mainly through internationalization. The risks brought about by internationalization are too great (reversed). The domestic market still offers sufficient growth potential (reversed). We were also interested in how the GSUs performed compared to the other firms in the data set. However, the operationalization of performance is never straightforward, although international performance has attracted a lot of attention among researchers during the last couple of decades. There is still no common valid operationalization of the concept, however. It appears from the literature that the two primary approaches to performance assessment are the objective and the subjective (e.g., Cavusgil & Zou, 1994; Katsikeas, Leonidou, & Morgan, 2000). As an objective indicator we applied export intensity (foreign turnover as a percentage of total turnover), and as subjective performance measures we used multiple perceptual indicators. The respondents were asked to indicate their agreement (1 ¼ totally disagree; 5 ¼ totally agree) with the following statements: We are generally satisfied with our performance in international markets (1). We have achieved our international-sales objectives (2). We have achieved our international-market-share objectives (3). Internationalization has enhanced our profitability (4). Internationalization has improved our image (5). Internationalization has enhanced our learning (6). Our investments in internationalization seem to pay off well (7). The average of items 1, 2, 3, 4, and 7 was named subjective quantitative performance (Cronbach’s alpha ¼ 0.910), and items 5 and 6 were combined and termed subjective qualitative performance (Cronbach’s alpha ¼ 0.692). Regardless of the firm’s international growth orientation, other firmspecific factors could also have an impact on internationalization and performance. We therefore controlled for firm size and international experience in the analysis (see Jantunen et al., 2008). As larger firms have larger pools of resources to exploit and the possibility of achieving advantages of scale in international operations, firm size is assumed to have a positive effect on the scope of activities, market diversification, and international performance. Annual sales turnover (reported in million

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euros) was used as an indicator. International experience also has a potentially positive impact, according to theories of experiential learning and stages theories of internationalization (Johanson & Vahlne, 1977; Welch & Luostarinen, 1988), and was therefore measured as the number of years that the firm had operated in international markets.

FINDINGS The International Activities of INVs Our operational definition of GSUs included the number of activities abroad and the number of countries in which the firm operated. A closer examination of the various activities in Table 2 reveals that they did, indeed, have distribution, sales, and marketing activities abroad significantly more often (Fisher’s exact test based on a 2 2 contingency table). In general, inward activities were not as common as outward activities, and this difference was even more highlighted among the GSUs. Table 3 gives some more descriptive comparisons concerning the internationalization of INVs. GSUs were, on average, two years older than the other INVs: the average age of the companies at the time of data collection was between five and seven years. The differences in size are not statistically significant, as there is very large variation among GSUs. The average international experience was about six years, implying that the typical time to starting international activities was less than two years from establishment. The other INVs had two or three years’ less experience. In line with our operationalization, GSUs had, on average, 10 more target countries than other INVs, and also a significantly wider scope of activities. Table 2.

Percentages of Firms with Various Activities Abroad. Other INVs Global Start-Ups Chi Square Fisher 1-Tailed p.

Manufacturing abroad Sales and marketing abroad Distribution and retailing Delivery and logistics abroad OEM abroad Buying subcontracting abroad Purchasing abroad N

23.1% 42.3% 38.5% 15.4% 23.1% 23.1% 3.8% 26

45% 90% 70% 25% 25% 20% 15% 20

2.47 11.04 4.51 0.66 0.02 0.06 1.77

0.105 0.001 0.033 0.328 0.575 0.547 0.211

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Table 3.

Descriptive Statistics of the INVs. Other INVs

Year established Employees Turnover Years of international experience Time to start Countries Activities abroad, max 7 IGO Export intensity Subj. quantitative performance Subj. qualitative performance

GSU

T

N

Mean

S.D.

N

Mean

S.D.

26 25 24 26 26 26 26 26 26 25 25

1996.58 19.96 1.91 3.31 2.11 3.27 1.69 3.63 21.46 2.41 3.60

3.239 27.552 3.222 1.738 2.321 3.715 1.490 0.985 29.653 0.921 0.559

20 20 11 20 20 20 20 20 18 20 20

1994.20 84.00 12.80 6.00 1.80 14.10 2.90 4.10 52.64 2.85 4.20

4.819 169.163 24.395 4.401 2.118 10.290 1.165 0.670 33.594 1.104 0.594

1.90 1.68 1.48 2.59 0.47 4.49 2.99 1.79 3.25 1.46 3.48

The international growth orientation of GSUs turned out to be significantly higher than among other INVs. In terms of international performance, GSUs scored significantly better than other INVs on two indicators. The average international share of turnover was 53 percent among GSUs whereas other INVs received, on average, 21 percent of their sales income from abroad. GSUs had been able to enhance their image and learning very well, given the mean of subjective qualitative international performance of 4.2 (on a scale from 1 to 5). Satisfaction with more quantitative objectives such as sales, market share, and profitability was generally lower, and other INVs in particular tended to show dissatisfaction.

Global Start-Ups, International Growth Orientation and Performance Simple comparisons of internationalization characteristics between GSUs and other INVs revealed many statistically significant differences. However, a more rigorous test of our propositions required multivariate analysis in order to account for the effects of the control variables. We therefore used multiple regression analysis. The first proposition concerned international growth orientation (IGO), and the results of the binary logistic regression are given in Table 4. The binary variable of being a GSU (coded 1) versus other INV (coded 0) was used as the dependent variable, company size and international experience as control variables, and international growth orientation was

34


Table 4.

Logistic Regression Results: IGO Drives Global Start-Ups.

Model Fit

Independent Turnover Years of international experience IGO Constant

Chi Square (df)

Nagelkerke R Square

Hosmer and Lemeshow Goodness of Fit

% Correctly Classified

21.09 (3)

0.636

2.69 (7)

85.7

Coefficient

Std. error

Wald (df ¼ 1)

Exp (B)

0.051 0.585

0.029 0.312

3.154 3.511

1.052 1.795

2.913 16.158

1.615 7.850

3.252 4.237

18.406 0.000

po0.10. po0.05. po0.01.

the proposed independent variable. The model turned out to be significant at the 1-percent level according to the overall Chi square test, and the pseudo R square and Hosmer and Lemeshow tests also indicated a good fit. The model correctly classified 96 percent of the other INVs and 64 percent of the GSUs, totaling 86 percent of all cases. Company size and international experience had the expected positive effects on the likelihood of being a GSU, and the effects were significant at the 10-percent level. The IGO also showed a positive and significant effect, implying that even when size and experience are accounted for, firms with higher IGO are more likely to pursue the GSU type of internationalization than INVs with a lower level of IGO. Thus, we received support for our first proposition P1 ‘‘Global start-ups are characterized by higher international growth orientation than other firms.’’ The second proposition concerned the international performance of GSUs in comparison with other INVs. This time we used multiple linear regression analysis. The three international performance variables were used as dependents, and size and experience as controls. The independent variables included international growth orientation and a dummy variable indicating whether the firm was classified as a GSU (coded 1) or other INV (coded 0). The results are shown in Table 5. The first two models turned out to be significant with a slightly higher Rsquared for export intensity than for the subjective performance evaluations. Somewhat surprisingly, neither of the control variables had any

35


Table 5.

Regression Results: The International Performance of GSUs vs. Other INVs.

Dependent

Export Intensity

Model fit

Independent

Turnover Years of international experience IGO Global start-up dummy

Subjective Qualitative

Subjective Quantitative

R squared

F

R squared

F

R squared

F

0.384

4.68

0.235

2.23

0.206

1.89

Std. coefficient

t

Std. coefficient

t

Std. coefficient

t

0.208 0.157

0.887 0.660

0.239 0.019

1.387 0.101

0.174 0.345 0.372 0.277

0.857 1.678 2.490 1.718

0.028 0.140 0.050 0.411

0.121 0.599 0.295 2.230

po0.10. po0.05. po0.01.

significant effects on international performance. Firms that were more internationally growth-oriented performed better in terms of international sales ratio. Over and above the effects of the controls and IGO, the GSUs showed higher international sales ratios and were more satisfied with the qualitative aspects of internationalization. The effect on export intensity was significant only at the 0.10 level, but given the small effective sample size and the exploratory nature of our analysis, we conclude that the proposition P2 ‘‘Global start-ups differ from other firms in terms of performance’’ is supported by empirical evidence.

DISCUSSION AND CONCLUSIONS This exploratory study reveals that studying INVs from a holistic perspective – including both inward and outward activities – produces interesting findings and opens new avenues for future research. This theme clearly deserves more attention. Our classification of INVs into smaller subgroups also proved to be fruitful, not least concerning GSUs. Our findings support the results of previous studies in that GSUs are no longer anomalies among INVs: almost half of the firms in our study could

36


be classified as such in that they had internationalized rapidly, sold their products in multiple countries, and had also at least two different valuechain activities located abroad. Our findings also imply that GSUs are by no means a homogeneous group of ventures: there was more internal variation (e.g., in firm size, experience, scale, and scope of operations) within this group than among other types of INVs. Another interesting finding that would deserve further examination is the fact that GSUs carried out relatively more outward than inward activities in comparison to other types of INVs. Obviously, this study builds on previous empirical inquiries on INVs in both emphasizing the holistic perspective on the value chain of INVs and including the number of value-chain activities explicitly in the analysis. Of particular interest is that we found only 5 out of 25 INVs that had internationalized rapidly into multiple countries but had only a few valuechain activities in those countries. This would support the frequently expressed assumption that GSUs do not differ in practice from born globals, even if definitions of the latter do not directly consider the ‘‘number of value-chain activities.’’ On the other hand, this might also indicate that the linkage between inward and outward activities in early internationalizing firms is not as strong as we might expect. With regard to our P2 we found that GSUs differed from other ventures in terms of subjective qualitative performance. This is a major finding given the emphasis in earlier research (see, e.g., Zahra, 2005) on the importance of examining the performance variations in different types of INVs, and the gap in the literature. The GSUs perceived the effects of internationalization on their image and learning as stronger than the others did. However, there were no differences in perception with regard to the more quantitative measures such as market share. This suggests that the strategic posture (GSU or other type) of the venture does not explain the stronger or financial differences in performance, but some of the qualitative differences are noteworthy. In terms of enhanced learning, we would suggest that GSUs operating in multiple countries are more exposed to different learning opportunities that may enhance further internationalization (see, e.g., Saarenketo, Puumalainen, Kuivalainen, & Kyla¨heiko, 2004). We could also argue that the presence of the firm in multiple countries may enable it to build up a more coherent and dynamic company image. The fact that there were no differences in performance on the marketshare dimension could be attributable to the possibility that GSUs have more ambitious market-share goals in the first place. Another rationale would be that a new venture operating in multiple countries often targets its


37

business on a niche that might be very thin in one country, and thus it may be very hard to estimate the market in terms of size and market share across competing companies. From the managerial point of view, the findings of this study indicate that managers of INVs should be encouraged to internationalize their value chain as a whole, despite the risks. However, those making these decisions should also be aware of the capabilities needed for managing the global value networks they create. In spite of the interesting results, we have to keep in mind that this study also has its limitations. It is a cross-sectional snapshot of one industry, and has a relatively small sample size. Moreover, the companies vary in their speed of internationalization. We therefore suggest that these tentative results should be tested in further studies on both quantitative and qualitative data.

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A BEHAVIOR-BASED ANALYSIS OF THE CHANGES OF THE STRUCTURE, SYSTEMS, AND CULTURE IN THE INTERNATIONALIZATION PROCESSES OVER TIME Bernhard Swoboda, Martin Jager, Dirk Morschett and Hanna Schramm-Klein ABSTRACT Purpose – This article addresses the internationalization processes focusing on changes of firms’ internal structures, systems, and culture over time. These changes are analyzed in relation to the firms’ developments in the last 10 years along a country and/or mode dimension, comparing firms with county or mode increase, two-dimensional expansions, stagnation/reduction, as well as comparing incremental one step versus multistep developments in a holistic way. Methodology/approach – Conceptually, the changes in country dimension and establishment chain form a primary level, and structure, systems, and culture a secondary level of the framework. Managers of family-owned Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 41–65 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004007

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BERNHARD SWOBODA ET AL.

firms, able to evaluate the past, were asked about these dimensions in terms of their situation today and 10 years ago. Findings – This study shows that internationalization causes changes in internal systems in particular, followed by changes in internal structural and slowest by changes in leadership and firm’s culture. Even if stagnations or reductions take place, they are related to changes in internal structure, systems, and culture. Research limitations/implications – Limitations are related to the retrospective design based on managerial perceptions, the use of less proven scales, as well as the analyses of family-owned firms. This exploratory study suggests more empirical insights on dynamic internationalization processes. Practical implications – The study provides insights for managers into structural, systemic, and cultural changes when future internationalization steps are planned. Originality/value of the paper – This paper shows holistic evidence of changes in 20 partial dimensions of internal structures, systems, and culture within the internationalization process over time empirically.

INTRODUCTION Internationalization of a firm is, by its very nature, a dynamic process and still one of the most critical challenges, particularly for small- and mediumsized enterprises (SMEs) (Ruzzier, Antoncic, & Hisrich, 2007). Dynamic internationalization over time is addressed by a wide body of research, spanning various theoretical, conceptual, and empirical studies (see reviews by Leonidou & Katsikeas, 1996; Ruzzier, Hisrich, & Antoncic, 2006). Some studies focus on incremental and/or revolutionary perspectives, several dimensions (such as resources, commitment, establishment chain), or determining factors. Structural, systemic, and culture changes are seldom addressed (see, e.g., the contingency analysis of environment, organization, strategy, and managers within different groups of exporters by Macharzina and Engelhard (1991)). The present study addresses this research gap. From a holistic perspective, the development of firms in the establishment chain and/or countries is linked to the changes in internal structure, systems, and culture. Thus, the main focus lies on forming a holistic picture of the overall development, as

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture

43

underlined by the aims mentioned in the abstract, and not on the relationships between individual variables. Conceptually, the establishment chain and country dimensions form a primary level, and structure, systems, and culture a secondary level of the framework. Its practical relevance results from the assumption that it would be a tremendous advantage for managers to be able to initiate early impulses in the shaping of internal structure, systems, or even culture in line with future internationalization steps. Based on the present research on internationalization processes along the establishment chain and the country dimension, or both of these in combination, their impact on structure, systems, and culture are conceptualized. Generally formulated basic hypotheses address the relationship between the primary and the secondary level, as well as addressing the strength of the structural, systemic, and cultural changes in isolation. Based on measurements of the relevant constructs, a large sample size questioning managers of mostly family-owned firms about their situation today and 10 years ago, the results from part of an empirical study are discussed, then leading to overall conclusions.

CONCEPTUAL FRAMEWORK AND HYPOTHESES Conceptualization of the Primary Level: Establishment Chain and Country Dimension Behavioral-based process models that describe internationalization as a selfstrengthening, cyclical, and predominantly incremental process (Johanson & Vahlne, 1977, 2003; Steen & Liesch, 2007) are well known. They are limited in terms of their original explanatory horizon (Johanson & Vahlne, 2006; Elango & Pattniak, 2007), as well as being criticized for their lack of measurability (Andersen 1993; Sousa & Bradley, 2006; Brewer, 2007). Nevertheless, some basic assumptions have been supported by empirical studies (e.g., Barkema, Bell, & Pennings, 1996; Chetty & Eriksson, 2002), while other studies provide contrary results (Sullivan & Bauerschmidt, 1990; Benito & Gripsrud, 1992). In particular, born global research challenges the assumption of incremental internationalization both conceptually (Knight & Cavusgil, 1996; McNaughton, 2003; Rialp, Rialp, & Knight, 2005) and empirically (Knight & Cavusgil, 2004; Freeman & Cavusgil, 2007). Further approaches integrate other aspects, such as internationalization in terms of evolution (incremental, internal process), episodes (decision-based, larger steps) and epochs (fundamental changes) by Kutschker, Baeurle, and Schmid (1997).

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For the present study, the question of incremental and/or revolutionary development is not crucial. It focuses explicitly on primarily relevant dimensions of internationalization. Since the traditional use of foreign sales volumes as a predictor of internationalization in early export stage models can be criticized as well, the following conceptualization of the resulting dimensions is based on the patterns of internationalization mentioned by way of example in behavioral-based process models: (1) The ‘‘establishment chain,’’ with its known incremental progression of (operation) modes, no regular export activities, export via an independent agent, sales subsidiaries and production subsidiaries abroad. (2) The sequence in which international markets are entered based on the geographical/cultural assumption. Clearly, internationalization is not restricted to these two macro dimensions only. The authors argue, however, that a combination of two dimensions and the resulting matrix – integrating developments on the establishment chain and the country axis – allow analysis of specific development options (understood as specific paths) within a period of time: country market expansion, that is, developing exclusively along the country dimension; penetration, that is, developing exclusively along the establishment chain; two-dimensional expansion, that is, developing in combination along both dimensions; unchanged, which could be understood as a phase of stagnation or consolidation; and reductions/divestments in one or in both dimensions.

Conceptualization of the Secondary Level: Structure, Systems, and Culture In both behavioral-based and born global research there seems to be a gap relating to firms’ internal structure, systems, and culture. Possible theoretical backgrounds for their conceptualization are widespread. Integrating concepts may be found in configurational and contingency approaches (Galbraith, 1977; Miller & Friesen, 1984; Vorhies & Morgan, 2003), or in the international gestalt approach (Macharzina & Engelhard, 1991). The latter, for example, consider strategies, structure, and processes that have to be balanced to suit the external environment: Lawrence and


45

Lorsch (1967) argued that building up effective organizations involves a well-balanced package of strategy, structure, processes, and management ideology, while Ouchi (1979) examined market, bureaucratic, and informal/ social dimensions. For the present study, the assumption of ‘‘fit’’ is not central. The authors try to enhance such a traditional dialectic process theory view (of unfreezing, moving, and refreezing), arguing in the sense of teleological or evolutionary theories (with continuous processes of variation, selection, and retention), as well as self-organizational theories (Van de Ven & Poole, 1995). Structure, systems, and culture are considered separately in the following discussion and they can be subject to variations, modifications, or alterations over time. This is based partly on arguments (e.g., by Hult, Cavusgil, Deligonul, Kiyak, & Lagerstro¨m, 2007) looking at global firms as an integrative set of organizational dimensions and the relationships between soft dimensions (strategy, leadership, and culture), structure, and planning. Of course, the main focus here lies on family-owned firms, and in addition to structure and systems, culture should also be considered as a dimension of (internal) dynamics (Koguth & Singh, 1988; Leung, Bhagat, Buchan, Erez, & Gibson, 2005). These are now conceptualized, while related empirical studies are discussed in the next section. Conceptually, the primary (organizational) structure is reviewed in terms of structural changes, that is, the visible structure of the firm (Mintzberg, 1979; Fredrickson, 1986). Westney and Zaheer (2005) conceptualize primary structure. In addition, centralization, formalization, and specialization are discussed (e.g., Ruekert, Walker, & Roering, 1985; Ghoshal & Nohria, 1993, or even Mintzberg, 1979). Centralization refers to the extent to which a firm is controlled centrally by its top management. Formalization relates to formal rules and standards applying to the organizational structure (e.g., Bartlett & Ghoshal, 2002). Specialization refers to the degree of functional specialization. In view of the increasing complexity in the internationalization process of SMEs, it would be reasonable to extend these formal aspects by adding a secondary organization or informal instruments, such as international project teams or cross-national work groups (Edstro¨m & Galbraith, 1977). Conceptually, firms can be considered as systems in which information is processed (Galbraith 1977). Important elements here are the reporting system and controlling (Chenhall, 2003; Mukherji, Kedia, Parente, & Kock, 2004). Since internationalization processes by SMEs are also characterized by limited knowledge of internationalization, it can be concluded that instrumental controlling or market research processes should be a part of the information system. The importance of strategic planning systems increases

46


as the environment becomes more dynamic within the internationalization process (Li, Li, & Dalgic, 2004). In literature and in the following discussion, various aspects of information and planning systems are analyzed, such as importance and intensity of use, formalization, centralization, and network compatibility (Papadakis, Liukas, & Chambers, 1998; Mukherji et al., 2004). Conceptually, firm’s culture is a multilayer construct that is anchored in international management, but is not clearly defined (see Leung et al., 2005; Johnson, Lenartowicz, & Apud, 2006 on cross-cultural competence). Schell and Solomon (1997) generally consider culture to be the ‘‘glue’’ that holds firms together. In international firms, influence is both national and international (Tung, 2008; Makino, Isobe, & Chan, 2004). In the present context, the authors model not only the general culture of the firm and cultural transfer, but also (managerial) leadership characteristics (Acedo & Jones, 2007) – because these are relevant in SMEs – with such aspects as risk and growth orientation (Macharzina & Engelhard, 1991; Acedo & Jones, 2007), as well as managerial attitudes/commitments and perceived cultural– psychic distance (Sousa & Bradley, 2006).

Conceptual Framework Having provided a brief review of the literature and description of the authors’ understanding of the constructs used, this section concludes by setting forth a conceptual framework and the general hypotheses (see Fig. 1). For the purpose of maintaining the focus of the present analysis, the following considerations are preliminarily based on the primary level, although the authors are well aware that internationalization takes place in interdependency of both levels. Here, the authors can draw upon the studies mentioned that deal with development along the establishment chain and the country axis. The combination of both dimensions and thus, twodimensional expansion and also consolidation/stagnation are conceptualized in the framework. While the latter has barely been considered in detail in literature so far, reductions have been considered, for example, by Benito (2005). Based on these considerations, the authors argue: H1. Firms develop over time along the establishment chain and the country dimension, but also in a combination of both, or demonstrate consolidation/stagnation or reduction. To maintain the purpose of the present analysis, the first exploratory hypothesis is not the primary focus, but it is vital for the overall context. The

Behavior-Based Analysis of the Changes of the Structure, Systems, and Culture (-) (-)

Primary Level of Change

Reduction

Changes of Modes

(0

e tri

(+)

)

(0)

s/

47

Two dimensional expansion

(+

)

un Co s of ion s g ge e Country an R expansion Ch

Penetration

Consolidation/ Stagnation

Secondary Level of Change

Alteration

Structures

Systems (Processes)

Va ria tio n

Culture Modifica

Fig. 1.

tion

A Conceptual Framework.

same can be argued for the second hypothesis. The conceptual framework makes it possible to analyze firms that have developed more or less on the country dimension and/or the establishment chain. This can be compared with assumptions from behavioral-based models and with the simultaneous evaluation of mode increases and reductions conducted by Calof and Beamish (1995). Based on this, the following can be formulated: H2a. The mode change H2b. The change in the country dimension over time take place not only in incremental steps, but also in the form of multiple steps, and in reductions. The observation relates to analysis on the secondary level and its link to the primary level. An investigation in isolation on the secondary level forms the basis of many empirical studies on organizational structure. The connection between strategy and structure is raised, for example, by Wolf and Egelhoff (2002) or by Barth (2003) or Xu, Cavusgil, and White (2006) on performance and environment. Other studies focus on the link between various organizational dimensions and performance (Meijaard, Brand, & Mosselman, 2005) or between centralization, formalization, and entrepreneurship (Caruana, Morris, & Vella, 1998).

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Studies on information and planning systems deal, for example, with the relevance of market research and with more intensive (market-related) information processes for the internationalization process (Yip, Biscarri, & Monti, 2000). Furthermore, the connection between strategy formation and strategic planning is analyzed (Andersen, 2004; Upton, Teal, & Felan, 2001) or related to firm’s success (Xu et al., 2006). The same applies for formalization and standardization (Chae & Hill, 1997; Dibrell, Down, & Bull, 2007). While planning processes are rather not formalized or standardized to a large extent in the initial internationalization steps, this increases as internationalization progresses. Obviously, the question of periodicity (the planning period related to international activities) can be assessed in a similar way. Studies focusing on firms’ culture discuss (global) leadership culture (Hmieleski & Ensley, 2007), cultural transfers (Brock, Shenkar, Shoham, & Siscovick, 2008), risk orientation and growth orientation of entrepreneurs (Weber & Hse, 1998; Acedo & Jones, 2007), and their attitudes toward foreign markets (Gripsrud, 1990). The situation is similar when looking at cultural–psychic distance (Brewer, 2007). However, this relates to psychological processes, where it is assumed that changes to these processes take place over a longer period. The following hypothesis deals with the relation between the three dimensions over time: H3. Internal international changes take place overtime primarily in the firms’ systems, followed by firms’ structure, and least so in firms’ culture. Forming relations between the primary and secondary level is more difficult. Basically, firms develop continuously in their structure, systems, and culture (see Mintzberg & Westley, 1992), even in the event of consolidation/ stagnation (similar to Hadjikhani, 1997, who speaks of intangible commitment). Based on the behavioral-based models, the following can be hypothesized: H4a. Firms that develop strongly/less strongly along the country dimension over time demonstrate differing extents of changes in structure, systems, and culture. H4b. Firms that develop strongly/less strongly along the establishment chain over time demonstrate differing extents of changes in structure, systems, and culture. It is more problematical to provide evidence of the effects of the five paths on primary level of the conceptual framework. Even if consolidation/


49

stagnation and reduction are factored out, argumentation must be done carefully. It can be assumed that exclusive country expansion evokes lower changes in structure, systems, or culture than two-dimensional expansion. The changes based on penetration could be located somewhere in between, but on the other hand, cultural aspects are related more strongly to country expansion. In this respect, the following is formulated: H5a. Firms that only develop by countries have smaller changes in structure, systems, and culture than those that develop along the establishment chain. H5b. Firms that only develop through the establishment chain have smaller changes in structure, systems, and culture than those with twodimensional expansion.

METHODOLOGY Measurement of the Primary Level The establishment chain was measured according to Calof and Beamish (1995), Chang and Rosenzweig (2001), and Manolova, Brush, Edelman, and Greene (2002), and the country dimension according to Ruzzier et al. (2007). Here, managers were asked to state which modes and country groups they used or served today and 10 years ago (see Table 1).

Measurement of the Structural, Systemic, and Cultural Dimensions Many measurements of structural, systemic, and cultural dimensions are not related to SMEs (see Meijaard et al., 2005). Nevertheless, the authors tried to apply approved measurements and scales/items adapted by face-to-face interviews and used as pretests. Cronbach’s a (each W0.6) and explorative factor analyses were calculated for constructs measured with more than one item. In order to be able to compare constructs measured on the basis of individual items (see Bergquist & Rossiter, 2007, e.g., on the acceptance of this procedure) with the factor-based constructs, arithmetical index values were formed for the latter (by summing the extent to which each activity was reported as being important and then dividing the summarized score by the total number of items). This approach seems reasonable for behavioralbased analyses and reflective scales.

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Table 1.


Measurement of the Primary Dimensions: Today and 10 Years Ago.

Construct

Items

Establishment chaina Dichotomous question (yes–no)

Country dimensionb Dichotomous question (yes–no)

Domestic operations only Indirect exports Direct exports (without own presence) Direct exports (with own presence/office) Sales subsidiary Owned production subsidiary Operating domestically only Operating in German-speaking neighboring countries Operating in Western Europe Operating in Eastern Europe Operating in one overseas market/region (e.g., North America, Asia) Operating all over the world (three continents)

a

Additional questions: Relevance of each mode based on seven-point Likert-type scales (1 ¼ not important at all to 7 ¼ extremely important), dominating mode, use of direct investments, number of foreign production subsidiaries. b Additional questions: Dominating mode in a region, number of countries entered, existence of a dominating country.

Organizational structure (Westney & Zaheer, 2005), centralization, and secondary structure were measured as conceptualized (Edstro¨m & Galbraith, 1977; Swoboda & Anderer, 2008) (see Table 2). Formalization was only measured in the context of the systems. Specialization was neglected because the assumption of explicitly functionally differentiated systems does not really apply to SMEs. Information gathering including reporting/controlling systems (Yip et al., 2000; Mukherji et al., 2004), and the planning dimensions (Kellermanns & Eddleston, 2006) are systemic aspects. In the planning system (Wally & Baum, 1994; Upton et al., 2001), five aspects were measured (see Table 3 and Swoboda & Anderer, 2008). The general culture, cultural transfer, and leadership characteristics were measured as conceptualized (see Table 4).

Empirical Study Design and Sample The empirical study uses a behavioral and retrospective design. This was a fundamental decision because the authors had access neither to detailed


Table 2.

51

Measurement of the Structural Dimension: Differences between Today and 10 Years Ago.

Construct Primary (organizational) structurea Dichotomous question (yes–no)

Secondary structureb Seven-point Likert-type scales (1 ¼ not important at all to 7 ¼ extremely important) Centralizationc Alternative question (central– decentral–jointly)

Items No/only marginal reporting Direct reporting to the headquarters in home country Responsible export manager in home country Responsible export division in home country Holding structure Resort and/or regional structure Combined structure (for example, a matrix) International project teams Cross-national work groups International groups for exchange of experiences International workshops Selection of country markets Market entry strategy to country markets Investment/financial decisions Engagement of sales persons Allocation of executive positions Extension of customer services Reorganization of international activities

a

Interpretation of the seven items as a vertical scale (1 ¼ no/only marginal reporting to 7 ¼ combined structure). b Aggregation to an arithmetical index value, that is, by summing the extent to which each activity was reported as being important and then dividing the summarized score by the total number of items. c Interpretation of the number of mentions of ‘‘central’’ as a vertical scale (1 ¼ only marginal to 7 ¼ extremely centralized).

secondary data on SMEs, nor to panel-based options (with time and cost problems, panel availability, mortality, attrition; see Van de Ven & Huber, 1990; Solga, 2001). In spite of the shortcomings connected with the measurement of perceptions over time, this method is widespread in internationalization research (Acedo & Jones, 2007; Freeman & Cavusgil, 2007). Basic knowledge of the situation 10 years ago could be obtained by interviewing firms’ owners, who are part of the top management and who have also lived through the firm’s development in the long run. Possible recall errors in content or lack of detail in statements (Solga, 2001) were taken into account. The authors contacted every fifth firm from a German address database and selected those where it was possible to identify the firm as being familyrun or having had stable management over a longer period of time. Over

52

Table 3. Construct


Measurement of the Systemic Dimension: Differences between Today and 10 Years Ago. Items

Information system (seven-point Likert-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Relevance of market research Systematic foreign market research Analysis of political/economic environmental factors Intensity of (foreign) market Analysis of country markets researcha Analysis of market opportunities Information about developments of customer industries Analysis of local competitive strategies Analysis of fit between product and target market Relevance of controlling General relevance of (international) controlling Regularity of foreign country reports Relevance of country reportsa Reports on market developments (e.g., customer needs) Turnover Use of controlling key figuresa Key figures on profits Personnel key figures Planning system (seven-point Liker-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Planning of turnover/profits Intensity of (foreign) planninga Financial planning Personnel planning Timing/scheduling Strategic/prospective planning Formalization Formal/written fixing of planning Periodicity Existence of medium-term plans for internationalization Standardization Standardization of market planning Centralization of planning Direction of planning processes ‘‘top down’’. a

Aggregation to an arithmetical index value (see the legend in Table 2).

2,000 questionnaires were sent out (after initial contact and ex-post phone calls), resulting in 261 questionnaires available (244 with information for both points in time measured, including 50 face-to-face interviews). A further 46 (belonging to a group) and 39 (national activities only or unstable management) had to be excluded from the study. Since this was a step-bystep process of 10 weeks without real-time lag between sending out the questionnaires and their return, nonresponse bias should not be a critical issue. Nevertheless, key variables were compared between early to latest


Table 4. Construct

53

Measurement of the Cultural Dimension: Differences between Today and 10 Years Ago. Items

Firms culture (seven-point Likert-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Private contacts of staff members General culturea Encouragement of unconventional ideas Priority of group decision making compared to individual decisions Active communication beyond departmental borders Use of culture as management instrument Cultural transfera Transfer of culture to foreign countries Influence of foreign national cultures at headquarters Leadership characteristics (seven-point Likert-type scales; 1 ¼ not important at all to 7 ¼ extremely important) Equality of chances/risks leads to acceptance of Risk orientationa decisions Anticipation of customer needs rather easy Readiness to assume risk compared to retention Abstinence of acquisition or displacement threats Growth orientationa Consistent growth and profit orientation Consistent trust in own strength Influence of market globalization on firm Attitudesa Encouragement of international orientation Future of the firm in international markets No intentional travels abroad to get to know cultures/ Cultural–psychic distancea countries Foreignness of Asiatic/South American culture Problem of geographic distance to overseas markets a

Aggregation to an arithmetical index value (see the legend in Table 2).

responding firms, and also tests between responding and nonresponding firms (industry and if available number of employees and total sales) show insignificant (po0.05) differences (Armstrong & Overton, 1977). The firms in the sample come from highly internationalized German industries, particularly mechanical engineering (35.2 percent), chemicals (24.1 percent), textiles/clothing (23.9 percent), polymer processing (10.0 percent), and miscellaneous (7.6 percent). The firms’ size, measured in terms of current sales, was in 67.8 percent of cases under and in 32.2 percent of cases over 50 million EUR. Two hundred twelve firms specified their foreign sales: 35.2 percent with a foreign sales ratio under 30 percent, 31.1 percent with a foreign sales ratio between 30 and 50 per cent, and 33.7 over 50 per cent.

54


HYPOTHESES TESTING AND DISCUSSION Combined Patterns of Internationalization: Development Paths The combination of developments over mode and country dimension was tested with the full sample (see Table 5). Of the 244 firms involved, the majority achieved positive international development, while 28 firms suffered a reduction of countries or modes. The result in Table 6 goes beyond this. Twenty-two firms reduced the number of regions, 19 restricted the modes. One hundred twenty three firms demonstrated no changes in modes, 112 firms no changes in countries/ regions. In 67 firms, both dimensions remained unchanged. This lends support to many results indicating that development is not only incremental, even if this is only the initial solution for subsequent tests.

Changes in Structure, Systems, and Culture Table 7 permits a holistic view, where the patterns are of interest in horizontal and vertical comparison, but less so looking at each individual value (which is why the F-values were only shown in addition). The organizational structure changes least in the case of reductions, following by consolidation. The latter possibly indicates that there is a substantial proportion of internationally ‘‘stagnating’’ firms in this group. Structural changes resulting from country expansion are in the middle. This is particularly connected to changes in the primary structure and in centralization. The results obtained when comparing penetration and two-dimensional expansion are surprising because they contradict expectations. Structural changes are higher in penetration, with the exception of centralization. The correlations between the three dimensions should be mentioned here because they amount to approximately 70.50, which implies that there is remarkable interdependency between the changes in structural aspects. Table 5.

Total Development of the Firms in Last 10 Years.

Change of countries/regions

Change of modes Reduction 29 Unchanged Enlarged

Unchanged Stagnation/consolidation 67 Country expansion 48

Enlarged Penetration 38 Two-dimensional expansion 62


Table 6.

55

Partial Development of the Firms in Last 10 Years. Change of modes Reduction Unchanged One-step Two-step Multistep Total increase increase increaseb

Change of countries/ regions

a

Reduction Unchanged One-step increase Two-step increase Multistep increasea Total

12 7 – – – 19

8 67 28 11 9 123

1 18 10 8 6 43

– 4 6 6 7 23

1 16 7 3 9 36

22 112 51 28 31 244

Including five firms with stronger than three step changes. Including eleven firms with stronger than three step changes.

b

The effects in the systems are more linear (correlations between the partial systemic dimensions amount to more than 0.60, and for centralization of planning more than 0.30). In the information system, all changes increase successively from reduction to two-dimensional expansion. The differences between penetration and two-dimensional expansion are marginal. The relative change in market research in the path of country expansion, where its main application should lie, is relatively low. Intensity of controlling increases most in penetration. The findings on planning system are similarly clear. The changes in intensity, periodicity, and centralization (the latter with increasingly lower intensities) are strongest in the last path, while changes in formalization and standardization are strongest in the second last path. The results for culture are also largely according to expectations (correlations between the partial cultural dimensions mostly more than 70.30). General culture and cultural transfer changed more or less continuously – from the first to the third and fourth path, respectively. Change in leadership characteristics took place at a low level. From the vertical-holistic viewpoint, the changes in systems are a little stronger than for structure. Cultural changes, particularly changes in leadership characteristics, are very slight, which supports the hypothesis formulated.

Specific Analysis of the Establishment Chain and of the Country Dimension The changes in structure, systems, and culture linked to change along the establishment change are shown in Table 8. The right-hand columns show

56


Table 7.

Structural, Systemic, and Cultural Dimensions in Analytical Paths. Reduction Consolidation Expansion Penetration Combination F-Value (5) (1) (2) (3) (4)

Sig

Na

29

67

48

38

62

Structural dimension Primary structure Secondary structure Centralization

0.48 0.88 1.17

0.70 1.07 0.81

1.15 0.71 1.57

1.61 1.89 2.20

0.73 1.50 2.34

4.06 6.72 5.27

0.003 0.000 0.000

0.07

1.19

1.00

1.82

1.89

12.70

0.000

0.16

0.87

1.27

1.73

1.86

16.23

0.000

0.17

0.91

1.47

2.05

1.92

13.13

0.000

1.93

0.85

1.51

2.32

2.00

9.19

0.000

0.07

0.57

0.84

1.32

1.43

9.67

0.000

0.28

1.05

1.08

1.77

1.83

12.61

0.000

0.38 0.76 1.00 1.75

1.12 1.30 0.90 1.31

1.32 1.43 1.34 0.91

2.05 1.74 1.61 0.95

1.78 1.98 1.49 1.41

7.51 4.55 2.62 1.42

0.000 0.001 0.036 ns

0.66 0.59

0.70 0.45

1.03 0.64

1.11 0.83

1.00 0.86

2.00 2.06

0.095 0.087

0.25 0.21

0.21 0.22

0.11 0.15

0.05 0.28

0.75 3.28

ns 0.012

0.86 0.45

1.44 0.53

1.64 1.16

1.64 1.13

7.27 2.11

0.000 0.081

Systemic dimension Information system Relevance of market research Intensity of market research Relevance of controlling Relevance of country reports Use of controlling key figures Planning system Intensity of foreign planning Formalization Periodicity Standardization Centralization of planning Cultural dimension Firms culture General culture Cultural transfer

Leadership characteristics Risk orientation 0.03 Growth 0.17 orientation Attitudes 0.85 Cultural–psychic 0.75 distance a

Differences of assessments (today and 10 years ago, seven-point Likert-type scales); marginal variation of population.


Table 8.

Change of Structural, Systemic, and Cultural Dimensions in Relation to the Establishment Chain. Steps No Change One-step Two-step Multi-step Decrease Increase increase Increase

Na Structural dimension Primary structure Secondary structure Centralization Systemic dimension Information system Relevance of market research Intensity of market research Relevance of controlling Relevance of country reports Use of controlling key figures Planning system Intensity of foreign planning Formalization Periodicity Standardization Centralization of planning Cultural dimension Firms culture General culture Cultural transfer

Sigb

Other Production Sigb Modesc Subsidiaryc

19

126

41

22

33

0.84 1.18 1.89

0.83 0.90 1.06

1.14 1.37 1.93

1.05 1.56 2.36

1.27 2.02 3.44

ns

0.63 1.05 1.45

1.65 2.14 3.24

0.01

1.06

1.59

2.04

2.01

1.44

2.14

0.01

0.98

1.59

1.91

2.02

1.58

1.94

0.26

1.06

1.54

2.14

2.35

1.58

2.22

0.16

0.56

1.78

2.09

2.53

1.77

2.33

0.01

0.64

1.04

1.02

2.00

0.91

1.75

0.58

0.96

1.61

1.85

2.04

1.49

2.02

0.68 1.05 1.42 2.58

1.09 1.27 1.01 1.07

1.98 1.91 1.32 1.05

1.38 1.91 1.19 0.77

2.09 1.74 2.06 1.59

1.74 1.72 1.42 1.02

1.94 1.86 1.31 1.35

1.01 0.95

0.78 0.48

0.95 0.68

0.86 0.80

1.22 1.05

ns

0.70 0.54

1.28 1.05

0.25 0.19

0.17 0.27

0.31 0.22

0.33 0.13

0.31 0.27

0.17 0.11

ns

1.06 0.42

1.50 0.94

1.77 1.00

1.70 1.33

1.72 1.07

1.50 1.06

ns ns


57

60

51

ns

Differences of assessments (today and 10 years ago, seven-point Likert-type scales); marginal variation of population. b pr0.05; pr0.01; ns, not significant; F-values. c Comparison of firms who established a new mode or a production subsidiary for the first time.

58


initial set-up of a production subsidiary – with substantial changes to structure, information system, and planning intensity – compared to initial adoption of other modes (subgroups of the overall sample form the basis here). In change of modes, there are distinct changes in virtually all structural, systemic, and cultural dimensions. The strongest (successive) changes are found in the information system, particularly in the relevance and intensity of market research and in use of controlling key figures. In planning system, some discontinuous changes are found: for example, extent of formalization and periodicity. In the structural dimension, successive change takes place depending on mode changes. In comparison, cultural–psychic distance decreases more in reduction of modes, that is, change to a less direct mode with lower commitment obviously serves to bridge the cultural–psychic distance. Overall the effects are consistent (in stages), but with differing intensity for structure, systems, and culture, respectively. Changes in the country dimensions are shown in Table 9. Once again, the right-hand columns contrast selected crucial decisions, for example, the initial entry to an overseas market. The results show the strongest changes in the information and planning systems. Surprisingly, changes in the structural and cultural dimensions are less strong in comparison. The differences in terms of cultural–psychic distance are not significant, although the opposite was expected here for the country dimension in particular. A glance at those firms with initial entry to an overseas market shows substantial differences, above all for change in structural and system dimensions. Centralization, in particular, drops substantially, and aspects of secondary organization gain importance. However, leadership characteristics barely change in comparison. All in all, an incremental view of development in the country dimension shows largely consistent effects (in stages), but not quite as clearly as for the establishment chain.

DISCUSSION AND IMPLICATIONS Key Results The aim of the present paper was to analyze the perceived structural, systemic, and cultural changes in relation to (1) development based on the country and/or establishment chain dimensions, (2) incremental developments in these two dimensions, and (3) selected crucial decisions, in a

59


Table 9.

Change of Structural, Systemic and Cultural Dimensions in Relation to the Country Dimension. Steps No Change One-step Two-step Multi-step Decrease Increase Increase Increase

Na Structural dimension Primary structure Secondary structure Centralization Systemic dimension Information system Relevance of market research Intensity of market research Relevance of controlling Relevance of country reports Use of controlling key figures Planning system Intensity of foreign planning Formalization Periodicity Standardization Centralization of planning Cultural dimension Firms culture General culture Cultural transfer

22

112

51

25

24

0.27 0.74 1.68

1.04 1.36 1.24

0.98 1.04 0.67

0.48 0.65 1.15

1.25 1.78 2.19

0.14

1.36

1.57

1.04

0.03

1.15

1.62

0.14

1.30

2.81

Europec Overseasc

Sigb

48

66

ns

0.33 0.51 0.51

1.32 1.52 2.92

1.76

1.07

1.77

1.14

2.13

1.33

1.83

1.75

1.36

2.08

1.46

1.92

1.34

1.65

1.60

2.28

1.39

2.07

0.15

0.80

1.16

0.80

1.54

0.98

1.30

ns

0.07

1.32

1.42

1.06

1.88

1.10

1.68

0.18 0.41 0.91 1.00

1.42 1.48 1.17 1.36

1.62 1.62 1.34 1.20

1.56 1.80 1.40 2.35

1.46 1.82 1.57 3.07

1.33 1.05 0.90 0.10

1.71 2.14 1.75 1.89

0.52 0.38

0.86 0.64

0.79 0.57

1.22 0.72

1.27 1.06

ns

0.64 0.33

1.27 1.00

0.15 0.03

0.01 0.30

0.64 0.14

0.39 0.33

0.24 0.52

0.05 0.30

1.13 0.71

1.67 0.99

1.67 0.68

1.56 0.56

1.44 0.71

1.76 0.94

ns ns


Sigb

ns

ns

ns

ns

Differences of assessments (today and 10 years ago, seven-point Likert-type scales); marginal variation of population. b pr0.05; pr0.01; ns, not significant; F-values. c Comparison of firms who entered European or overseas markets for the first time.

60


holistic way. Not surprisingly, Hypotheses 1, 2a, and 2b are supported, as is Hypothesis 3. Hypotheses 4a and 4b, as well as 5a, are slightly supported, and Hypothesis 5b must be rejected. In detail, the results indicate – not particularly surprisingly – that firms developed internationally in different ways over time: phases of consolidation/stagnation, of country expansion or establishment chain penetration take place, as well as two-dimensional expansions or reductions. From a holistic ‘‘vertical’’ perspective, the data indicate that internationalization processes result primarily in changes of systems and structure, while cultural changes take place rather slowly. The ‘‘horizontal’’ comparison of country expansion or establishment chain penetration shows stronger effects (on structure, systems, and culture) caused by mode changes. In a comparison, the paths of country expansion and establishment chain penetration show similar results. The structural, systemic, and cultural changes are not consistently stronger in the two-dimensional expansion path (compared to country expansion). Reductions and consolidation/stagnation (related to countries/regions and modes) also involve changes, which indicate an ongoing internationalization process. These holistic results, as well as the individual results, offer some initial implications for managers if they look at the change in subdimensions, such as centralization and information system, or even question their own behavioral or attitudinal aspects. Links to other studies can be suggested. Ghoshal’s (1987) assumption that there is a greater degree of centralization with increasing internationalization cannot be verified, but the increasing importance of secondary organization proposed by Caruana et al. (1998) certainly can. Decreasing centralization with increasing internationalization supports the positive influence on knowledge generating and market penetration mentioned in Cummings (2004). In the distinct changes in information and planning systems, the argumentation by Yip et al. (2000) may also be reflected: the more systematically and advanced the internationalization of firms, the more use is also made of systematic information and planning systems. In terms of culture, reference could be made to the changes in growth orientation and risk orientation, which have also been emphasized elsewhere (Harveston, Kedia, & Davis, 2000; Acedo & Jones, 2007).

Limitations and Further Research Methodical limitations that were known before starting the study, but which could hardly be avoided, are related to the retrospective design based on


61

managerial perceptions, as well as the use of less proven scales that were checked in only a small number of interviews and by reliability analyses. Furthermore, possible biases from using single informants restrict the robustness and generalizability of our conclusions (see also Yip et al., 2000). In terms of content, limitation to family-owned firms and the unexplored effects of a change in management should be mentioned. Nevertheless, there are some interesting points of contact for further research. One example would be the inclusion of further dimensions on secondary level, such as changes in target systems and competitive or marketing strategy. A second example would be to consider internal and external determinants of development, which could provide a third level in the conceptual framework. This could relate to external and internal environmental variables according to Calof and Beamish (1995), as well as to success. A final example concerns the relation to the gestalt approach, which would imply a different conceptualization of the primary level in the present framework. Modeling of individual stages (integrating modes and countries) in combination with the firm’s success in each stage would help answer the question of internationally successful structure, systems, and culture in a dynamic and integrative view.

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PART II FOREIGN OPERATION METHODS

GLOBAL ONLINE ENTREPRENEURSHIP: THE REVIEW OF EMPIRICAL LITERATURE Anna Morgan-Thomas, Marian V. Jones and Junzhe Ji ABSTRACT Purpose – To identify and systematically analyze empirical works in the emerging field of global online entrepreneurship. Design/methodology/approach – A review of empirical articles published in peer-reviewed academic journals (1997–2008) focused on global online activities of entrepreneurial firms. The methodology purposefully compares a large number of recent studies on the main objective, type of research, theoretical framework, methodology, and main findings. Findings – The systematic analysis of 45 articles reveals the most relevant publications in the field highlighting the collective contribution of this body of literature. The review offers insight into the state of the art of the field, discusses the implications for future development, and provides insights into the entrepreneurial aspects of e-commerce use.

Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 69–88 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004008

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Research limitations/implications – The review is limited to empirical articles published in academic journals and does not cover important conceptual contributions, book chapters, or conference publications. Practical implications – The review highlights avenues for the future development of the field and provides guidelines for practitioners involved in global online business. Originality/value – This paper provides a consolidation of an emerging field and offers practical advice to firms involved in global e-commerce.

INTRODUCTION The developments in global e-commerce have redefined the nature of international business in the last decade (Karavic & Gregory, 2005). By facilitating a direct link between the firm and a foreign customer, the e-commerce technologies provide new possibilities to access and service foreign markets impacting the number of firms involved in international trade and the volumes of transactions (Clarke, 2008; Etemad & Wright, 1999). The online environments have given rise to a new breed of global enterprises, the e-commerce corporations (Singh & Kundu, 2002). Entrepreneurial opportunities presented by this new trading environment have also attracted some non-Internet firms, and the engagement in global online entrepreneurship (GOE) has translated into accelerated and more widespread internationalization (Arenius, Sasi, & Gabrielsson, 2006; MorganThomas & Bridgewater, 2004). Yet, in spite of the practical relevance of online activities to international business firms, the research into GOE seems marginalized in the mainstream internationalization literature. A state-ofthe-art review of the literature is needed to highlight the cumulative contribution of the field and move the research forward. The paper addresses this research gap by identifying and examining the current empirical research on GOE. This work is positioned at the intersection of the international business (IB), e-business, and entrepreneurship research. We define GOE by rephrasing McDougall and Oviatt’s (2000, p. 903) definition of international entrepreneurship as ‘‘ya combination of innovative, proactive and risk-seeking behavior that involves using e-commerce technologies to cross national boundaries and create value in organizations’’. The definition encompasses e-commerce initiatives of existing international businesses as well as internationalization of Internet new venture firms.

Global Online Entrepreneurship: Review of Empirical Literature

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The objective of the review is to retrieve and evaluate the most current empirical research on online activities of international firms in order to (1) identify the key contributions and weaknesses; (2) offer insight into the state of the art of the field; (3) discuss the implications for future development of the field; and (4) provide insights into the entrepreneurial aspects of e-commerce use. The purpose is to provide a state-of-the-art review with the hope of moving the field forward by integrating the existing literature. The structure of this paper is as follows. A description of methodology for the systematic literature review is presented. This is then followed by a general assessment of the studies highlighting the key research objectives, theoretical frameworks, methodology, and main findings and conclusions. The analysis reveals the most relevant contributions of the field and its drawbacks, limitations, or major discrepancies. The review concludes with suggestions and implications for further research.

METHOD The review focuses on the contemporary empirical literature in the field of GOE. To identify the relevant articles, we conducted a systematic keyword search of titles and abstracts in articles published in scholarly (refereed) journals in Ebsco, Web of Science, and Science Direct databases. We used two sets of keywords: (1) those capturing e-commerce activity including Internet, virtual, cyberspace, marketspace, net, web, information superhighway, communications network, world wide web, electronic, on-line, networked, connected, wired, digital, digitization, web site, home page, internet site, e-marketing, e-entrepreneurship, e-business e-commerce, e-strategy, computer technology, information technology, IT, or ICT and (2) those capturing international business including global, international, world, foreign, multinational, export, or cross-cultural. Once an article was identified, the following criteria were used to assess its eligibility: (1) published in English in an academic and peer-reviewed journal; (2) empirical in nature, that is, contains empirical data of either qualitative or quantitative form; (3) closely related to international business and e-commerce; and (4) focused on firm-level activities. The review focuses on empirical studies and excludes important theoretical contributions, for example, Andersen (2005); Ekeledo and Sivakumar (2004); Hamill (1997); Karavdic and Gregory (2005); Petersen et al. (2002); Poon and Jevons, (1997); Samiee, (1998); Sharma (2005), and

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Singh and Kundu (2002). At a general level, studies eligible were those explicitly integrating theory and concepts from both international business and e-commerce. This criterion eliminates from the review single country studies not focusing on international business activity (e.g., Bollen, Hassink, & Bozic, 2006; Chung, Yam, & Chan, 2004; Hsieh, Lai, & Shi, 2006; Lal, 1996; Rao et al., 2003; Sharma, Ahmed, & Wickramasinghe, 2004) or works where the e-commerce activities do not represent the focal construct of investigation (Gabrielsson & Kirpalani, 2004). At a more specific level, the focus here is on a subset of information and communication technology (ICT) applications, that is, Internet-related e-business, and the review does not include works which examine the general effects of ICT on internationalization (e.g., Andersen & Foss, 2005; Carpano & Rahman, 1998; Chari, Devaraj, & David, 2007; Lal, 1996; Lal, 2004; Nahar, Lyytinen, Huda, & Muravyov, 2006; Santangelo, 2001). Also excluded are papers where the unit of analysis in not the firm but the consumer (e.g., Sinkovics & Penz, 2006).

RESULTS The systematic review of databases generated 37 potentially relevant articles after excluding the duplicates. The manual search of their references generated a further 8, bringing the total to 45. Table 1 presents a list of the reviewed articles. To provide a general overview of the field, the contributions are categorized in terms of date of publication, publication type, and the research setting (country). In terms of the chronological development of the field, the empirical research into online internationalization begins in 1997 with the seminal work by Hamill and Gregory (1997). As the popularity of the topic increases, so does the number of publications reaching the peak of interest in 2006. The majority of studies are published in years 2004 (seven articles), 2005 (six articles), and 2006 (nine articles). The articles appear in a variety of journals including, amongst others, international business outlets (Journal of International Marketing, Global Marketing Journal, International Business Review, Journal of International Business Studies, International Marketing Review); information technology (International Journal of Information Management, Journal of Organizational Computing and Electronic Commerce, The Information Society); entrepreneurship (Entrepreneurship and Regional Development, International Small Business Journal, Journal of International Entrepreneurship); and economics (International Journal of Production Economics, Information Economics

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Table 1.

Overview of the Reviewed Studies.

Author Arenius et al. (2006) Bennett (1997) Berry and Brock (2004) Cerotti and Clifton (1998) Chang and Wang (2008) Clarke (2008) Farhoomand et al. (2000) Fortune and Aldrich (2003) Gabrielsson and Pelkonen (2008) Gregory et al. (2007) Hamill and Gregory (1997) Haugh and Robson (2005) Hinson and Abor (2005) Hinson and Sorensen (2006) Houghton and Winklhofer (2004) Jaw and Chen (2006) Johnston and Wright (2000) Kim (2003) Kotha et al. (2001) Kraemer et al. (2005) Lewis and Cockrill (2002) Lituchy and Rail (2000) Loane (2006) Loane et al. (2004) Luo et al. (2005) Moen (2002) Moen et al. (2003) Moodley (2003) Moodley and Morris (2004) Moon and Jain (2007) Morgan-Thomas and Bridgewater (2004) Mostafa et al. (2006) Nguyen and Barrett (2006) Niento and Fichman (2006) Piscitello and Sgobbi (2004) Pitis and Vloksy (2000) Prasad et al. (2001) Ramsey and Ibbotson (2006) Raymond et al. (2005)

Location

Method

Finland UK Germany Australia Taiwan Eastern Europe and Central Asia Finland and Hong Kong USA Sweden and Finland Australia UK UK Ghana Ghana UK Taiwan Canada, Japan, China, and Mexico USA USA Multi-country UK Canada and USA Canada, Ireland, Australia, and New Zealand Canada, Ireland, Australia, and New Zealand USA Norway Norway South Africa South Africa USA UK

Case study Survey Survey Case study Mixed Secondary data

Secondary data Survey Case study Survey Case study Survey Survey

UK Vietnam Spain Italy USA USA Ireland Canada

Survey Survey Secondary data Case study Survey Survey Survey Survey

Case study Case study Case study Survey Survey Survey Survey Survey Case study Mixed Case study Secondary data Secondary data Survey Survey Survey Case study

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Table 1. (Continued ) Author Rothaermel et al. (2006) Saban and Rau (2005) Servais, Madsen, and Rau (2006) Tiessen et al. (2001) Yamin and Sinkovics (2006) Yip and Dempster (2005)

Location USA USA Denmark Canada UK Europe and USA

Method Secondary data Survey Case study Case study Survey

Policy, World Development). Clearly, the topic is interdisciplinary in nature and of interest to a broad spectrum of scholarly interests. In terms of geographical locus of research, GOE has been studied in a number of diverse country environments and a spectrum of cultures and languages. Although the majority of studies examine North American, UK, or other English-speaking countries (notably Australia, Ireland, and New Zealand), there is some representation of the continental Europe (Italy, Germany, Spain) and other parts of the world including Asia (Jaw & Chen, 2006; Nguyen & Barrett, 2006), Latin America (Johnston & Wright, 2000), and Africa (Hinson & Sorensen, 2005; Moodley, 2003). Closer look at the studies reveals, however, that when the new entrepreneurial firms are the subject of analysis (Kim, 2003; Kotha, Rindova, & Rothaermel, 2001; Loane, McNaughton, & Bell, 2004; Loane, 2006; Luo, Hongxin Zhao, & Du, 2005; Rothaermel, Kotha, & Steensma, 2006), the geographical focus narrows to reflect only the English-speaking world with a significant bias toward US firms. To an extent, the bias might reflect the digital divide: the disproportionately large representation of US-based enterprises in the global e-commerce as well as first-mover advantages which the US firms tend to enjoy. However, there is a concern that the focus on USA obscures sources of advantage that might be related to the country of origin, the use of English language, as well as certain cultural biases, notably, the distinctively Western nature of much of the GOE research. Having considered the general parameters of the reviewed articles, the remainder of the review presents the assessment of the studies. In order to evaluate the contributions, each study’s content was analyzed with particular emphasis on the type of research, main objective, theoretical frameworks, methodology, and main findings and conclusions.


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Type of Research Considering the type of research, we organized the contributions into three groups: exploratory, descriptive, and confirmatory. The first group consists of studies where the key objective is theory building where the data collection tends to involve qualitative methods. The second group of descriptive studies aims to provide a quantitative assessment of phenomenon under study by providing data on prevalence, frequency, or intensity. Lastly, there are confirmatory contributions where the objective is to statistically verify a range of theory-driven hypotheses. The review sample includes 19 studies employing confirmatory design, 14 exploratory studies, 9 descriptive, and 2 including both case study and hypothesis testing (Chang & Wang, 2008; Jaw & Chen, 2006). In terms of the progression of the field, there is some evidence of evolution from descriptive and explorative studies which dominated in the early years (1997–2002) to more theoretically driven exploratory and confirmatory studies.

Main Research Objective In general terms, all studies deal with the impact of e-commerce on internationalization of firms. There are, however, two distinctive themes within this research. First, there is a small group of works devoted to the internationalization of Internet new ventures and e-commerce corporations (Gabrielsson & Pelkonen, 2006; Kim, 2003; Kotha et al., 2001; Loane et al., 2004; Loane, 2006; Luo et al., 2005; Rothaermel et al., 2006). These studies focus on the activities of a new type of entrepreneurial firms – the e-commerce corporations (Singh & Kundu, 2002). Empirical research within this area addresses several specific objectives. For example, there is interest in the speed, patterns, and particular internationalization strategies of Internet new ventures (Fortune & Aldrich, 2003; Kim, 2003; Loane et al., 2004; Luo et al., 2005), degree of internationalization, and its antecedents (Kotha et al., 2001; Loane, 2006). Some authors consider market-entry decisions of e-commerce corporations and the effects of cultural distance, market conditions, or firm characteristics (Kim, 2003; Kotha et al., 2001; Luo et al., 2005; Rothaermel et al., 2006). Second, there is interest in how the developments in e-commerce affect the internationalization of non-Internet-related firms. For example, studies examine the uses of Internet in international marketing (Bennett, 1997; Cerotti & Clifton, 1998; Hamill, Lewis, & Cockril; Litchy & Rail, Moen,

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Endresen, & Gavlen, 2003, Niento & Fichman, 2006; Pitis & Vloksy, 2000; Yip & Dempster); the impact of e-commerce on barriers to internationalization (Arenius et al. 2006; Bennett, 1997; Berry & Brock, 2004; Hamill & Gregory, 1997; Hinson & Sorensen, 2006; Moodley & Morris, 2004; Yamin & Sinkovics, 2006); or the barriers to the adoption of international e-commerce (Farhoomand, Tuunainen, & Yee, 2000; Lewis & Cockrill, 2002; Piscitello & Sgobbi, 2004; Tiessen, Wright, & Turner, 2001). Several studies have focused on the question of integration between the Internet and export strategy (Nguyen & Barrett, 2006; Moon & Jain, 2007; Prasad et al., 2001; Gregory & Karavic, 2007). The objective was to show the moderating role of the Internet activities on firms’ export performance. Building on export performance research, these studies typically consider the impact of the Internet alongside a range of external and internal factors influencing export strategy. There has also been some interest in capturing and quantifying the impact of online entrepreneurship on the performance of firms. There are two different approaches to conceptualizing and measuring the impact. Some studies model the use of Internet as an intermediary variable moderating the effects of the environment on a firm’s strategy and export performance (Moon & Jain, 2007; Nguyen & Barrett, 2006; Prasad et al., 2001) or a firm’s performance (Kreamer et al., 2005). Others attempt to measure online entrepreneurship directly by quantifying the contribution of e-commerce to export performance. For example, Morgan-Thomas and Bridgewater (2004) measure the performance of online export channels and suggest a number of its antecedents. The question of e-commerce adoption and its determinants has received some attention. For example, the level of assimilation of e-commerce has been investigated (Raymond, Bergeron, & Blili, 2005; Saban & Rau, 2005). There has also been some interest in the different forms or levels of adoption and their impact on performance.

THEORETICAL FRAMEWORKS A certain number of conceptual approaches and theoretical frameworks can be found in the contemporary literature on GOE. The frameworks reflect the cross-disciplinary nature of the field being derived from international business theories, entrepreneurship, management, marketing, and information technology research. However, the extent to which these frameworks


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are explicitly proposed lacks uniformity and consistency, and only a minority of studies can be considered highly theoretical. Encouragingly, the theory-grounded contributions are increasingly present in published research, and there is an upward trend toward more theory-driven analyses. Several streams of international business theory are evident in the theoretical underpinnings of the reviewed studies. Possibly most pronounced are internationalization theories of either the Scandinavian school (Johanson & Vahlne, 1997) or the born global literature (Jones, 1999; McDougall & Oviatt, 2000) and, related to the internationalization theory, the issues of barriers or stimulants to international growth (Leonidou, 1995a, 1995b). The internationalization literature seems to accompany particularly well the research questions concerning GOE’s impact of firms’ international growth (Bennett, 1997; Gabrielsson & Pelkonen, 2008; Hamill & Gregory, 1997) or the examination of the trajectories of international growth (Kim, 2003; Loane et al., 2004; Loane, 2006). In terms of specific theoretical constructs, liability of foreignness (Arenius et al., 2006) and the concept of psychic distance (Kim, 2003; Yamin & Sinkovics, 2006) have received some attention. Interestingly, there is an ongoing debate whether the patterns of online internationalization reflect the Scandinavian approach to internationalization or whether they are more suited to the field of international entrepreneurship (Gabrielsson & Pelkonen, 2008; Kim, 2003). Some authors adopt the entry mode perspective either explicitly (Rothaermel et al., 2006) or implicitly (Luo et al., 2005; Morgan-Thomas & Bridgewater, 2004). For example, entry mode approach, more specifically eclectic theory (see Dunning, 1980), served as the underpinning theory for the study of internationalization patterns of e-commerce corporations (Kotha et al., 2001). Similarly, a number of antecedents originating in entry mode literature have been considered to explain entry mode choice (Rothaermel et al., 2006). The concepts of risk and uncertainty are featured in this stream (Rothaermel et al., 2006) here. In particular, there is also some consideration for the cultural distance or psychic distance in the research (Kim, 2003). Although cultural distance seems relevant, one potential drawback affecting the generality of results concerns the cultural bias inherent in the studies: all studies considered in this review and concerned with entry mode approaches focused solely on US firms and their entry mode choices. It is questionable whether results on the impact of cultural distance obtained from one country perspective, and an English-speaking country, can be extended to other firms in other cultural settings.

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Some recent works build on export performance literature (Zou & Stan, 1998). For example, Prasad et al. (2001), Gregory et al. (2007), and Moon and Jain (2007) present export-performance-derived models of Internet integration to suggest a number of antecedents of e-commerce integration as well as to show performance effect. This research is also to some extent influenced by the resource-based view as well as the marketing concepts of market orientation (Prasad et al., 2001). Entrepreneurial theories are evident in several studies (Arenius et al., 2006; Piscitello & Sgobbi, 2004; Fortune & Aldrich, 2003; Loane et al., 2004). For example, Mostafa et al. (2006) consider the effects of entrepreneurial orientation and risk taking. In a similar vein, the study of Ramsey and Ibbotson (2006) of entrepreneurial firms in Ireland examines entrepreneurial orientation, identification of e-opportunities, and planning. Within the context of entrepreneurship, the notions of networks, social capital, and relationships are also explored (Piscitello & Sgobbi, 2004; Houghton & Winklhofer, 2004). Worth noting is a strong explorative study by Houghton and Winklhofer (2004) which frames the problem of the effects of adoption of e-commerce for conflict with intermediaries within the authoritative control and relationship paradigms. Studies examining the question of adoption of e-commerce and levels of adoption (Johnston & Wright, 2000; Haugh & Robson, 2005; Raymond et al., 2005) draw from innovation diffusion theories, typically Rogers (1983). There have also been some efforts to incorporate general management theories. For example, the resource-based view received some attention (Gregory et al., 2007) as does knowledge perspective to internationalization (Nguyen & Barrett, 2006). Given the widely discussed effects of online internationalization on the cost of transactions, transaction cost analysis has also been mentioned (Niento & Fichman, 2006). Overall, the question of finding and fitting the phenomenon of GOE within a well-grounded theoretical framework represents a major challenge within this emerging field. The multiplicities of theoretical frameworks that characterize the majority of contributions are but one outcome of the researcher’s struggle to establish suitable theoretical frames. An interesting dilemma is to what extent this struggle highlights the inadequacy of the existing theories to explain the phenomenon, that is, the novelty and paradigm-breaking nature of GOE. To illustrate, most of existing IB research on technology and innovation deals with product innovation and not the innovation of business processes. Consequently, there is a difficulty in adopting innovation perspective or entrepreneurial theories to the phenomenon of GOE.


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METHODOLOGICAL APPROACHES IN GOE A wide array of research methods have been used to capture GOE reflecting the complex nature of the phenomenon as well as the diverse research objectives. The reviewed papers include explorative, theory-building studies (Arenius et al., 2006; Yamin & Sinkovics, 2006); descriptive analyses (Bennett, 1997), and confirmatory studies (Morgan-Thomas & Bridgewater, 2004). Although quantitative approaches prevail, these include a significant number of descriptive studies aimed at providing an illustration for the prevalence of a phenomenon, for example, certain psychological barriers to GOE adoption (Bennett, 1997; Moodley & Morris, 2004) or the patterns or forms of GOE (Lituchy & Rail, 2001). Many of the qualitative, case-study approaches could also be considered descriptive, given the lack of underpinning theory. In essence, the overall assessment of methodological approaches highlights the emerging nature of the field. In terms of data sources, most studies use primary data collected via surveys or interviews. An exception to this general pattern are studies where the data were collected through Web-content analysis and searches of secondary information such as firms’ reports, the press, and other sources (Kim, 2003; Luo et al., 2005). In addition, some authors relied on secondary data from panel surveys of industry and used proxy measures from the data collected for other purposes (Haugh & Robson, 2005; Niento & Fichman, 2006). Interestingly, there is not much evidence of triangulation of sources with most research relying on a single informant, interview, or questionnaire. In terms of the coverage of different industries, the reviewed literature demonstrates a degree of bias toward certain sectors. In fact, there seem to be two approaches to samples: the research samples either include a wide cross-section of industries (Moon & Jain, 2007; Morgan-Thomas & Bridgewater, 2004) or tend to focus on knowledge-intensive or high-tech sectors (Arenius et al., 2006; Kim, 2003; Loane, 2004). The cross-sectional design is rarely defended either in terms of its applicability or the choice/ formulation of industry groups. The bias toward high-tech industries can be traced to the epistemological origins of the field and the association with born global firms and international entrepreneurship. Incidentally, these two fields are also mostly associated with these sectors (Rialp, Rialp, & Knight, 2005). A very positive aspect of the empirical research concerns the geographical distribution of studies. In terms of global online activities of traditional (non-Internet) firms, there is an encouraging spread of results. Aside of the

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usual ‘‘suspects’’ (of the English-speaking world), there is evidence from other parts of Europe (Italy, Germany, Spain, Norway, Denmark). The firms investigated have been found also in Asia (Vietnam, India, Taiwan, Japan), Latin America (Mexico), and, encouragingly and somewhat against the notion of digital divide, in Africa (Ghana, South Africa). However, the geopolitical spread of research does not seem to apply to the phenomenon of e-commerce corporations which seems to be limited to English-speaking North America, UK, Ireland, New Zealand, and Australia. Future research could devote more effort to identify cases of global e-entrepreneurship in other parts of the world. The data, either in the form of survey questions or interviews, are collected from key groups of individuals (managing directors, export managers) usually in charge of the internationalization/export processes. Mail surveys dominate. Where surveys have been used, samples tended to be small. For example, a significant proportion of the reviewed studies has sample sizes of around 100 respondents and in only three articles did the sample exceed 500 (Jaw & Chen, 2008; Kraemer, Gibbs, & Dedrick, 2005; Morgan-Thomas & Bridgewater, 2004). The average sample size presents some concern, given the large number of variables investigated and the multivariate technique used. From the standpoint of statistical validity of results, it could be expected that larger samples are employed to allow for the estimation of the complex models. Aside of sample sizes, sampling procedures could also be improved: responding firms tend to be chosen for convenience rather than for generalization. These issues provide opportunities for future research: there is need for adoption of the probability-based approaches to sampling, large samples, and a finely defined industry focus. The question of measurement represents another key concern. The extent to which the variables investigated are defined and validated, as well as the number and complexity of the proposed measurement scales vary greatly between the studies. Single-indicator measures prevail upon multiple-scales, although some analyses employ scales that have been previously published and validated (Prasad et al., 2001), and there is a growing trend toward the use of multiple indicators (Gregory et al., 2007; Moon & Jain, 2007; Nguyen & Barrett, 2006). Particular concerns apply to the focal variable of use or assimilation of e-commerce, the key construct in this emerging field. Despite the recognition that levels of adoption matter (Raymond et al., 2005), a large proportion of studies define it only in very broad terms and capture with single estimators. In the simplest format, for example, some authors use a basic distinction between users and non-users of Web sites, assuming that each group is homogeneous and that all levels of use and types of use are seen as


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uniform (Bennett, 1997). Later studies mark an important methodological development: departure from dichotomous scales of integration toward more precise ordinal measures of business models. For example, some model assimilation (Raymond et al., 2005), types of strategy, or the level of implementation (Saban & Rau, 2005). Worryingly, there is no consistency in the definition and operationalization of this focal variable, and the variations in measurement make it difficult to compare and contrast the results thus undermining the collective contribution of the field. In terms of data analysis, there is evidence of progression from descriptive approaches based on frequency analysis (Bennett, 1997; Lituchy & Rail, 2001) to comparative approaches using T-tests or ANOVAs. More recently, multivariate techniques and SEM have started to be employed on larger samples (Morgan-Thomas & Bridgewater, 2004; Moon & Jain, 2007; Nguyen & Barrett, 2006). Concerning the qualitative investigations making use of case-study based approach, interviews prevail although a certain degree of triangulation of data sources exists. There is a worry about the lack of research protocols particularly with reference to the selection of cases. The cases tend to be descriptive and presented in an exploratory and highly narrative manner. This adds to the problem of generalizability. One positive development is the use of multiple cases (Houghton & Winklhofer, 2004, Loane et al., 2004) and also longitudinal case studies (Gabrielsson & Pelkonen, 2008). In summary, it can be argued that more effort could be devoted to the design and implementation of the empirical studies. In a quantitative context, one possible avenue for improvement concerns the sampling procedures: probability sampling with an emphasis of representatives and, possibly in parallel, more specific focus on industry context would be welcome. More deliberate selection of case studies and greater emphasis on theory would enhance the qualitative contributions. Given the dynamic nature of international entrepreneurship in general (Jones & Coviello, 2004) and GOE in particular, there is a dire need for longitudinal studies both in qualitative and quantitative settings.

KEY FINDING AND IMPLICATIONS While each study provides a detailed examination of research findings, this section highlights some general patterns and commonalities. The discussion is organized around major themes and highlights conclusions as well as points of disagreement.

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The first problem concerns the effects of GOE on the dynamics of internationalization. Many agree that for some enterprises the use of e-commerce means faster and more widespread internationalization (Kim, 2003; Morgan-Thomas & Bridgewater, 2004). The literature discusses several mechanisms that generate the acceleration in global growth. For example, e-commerce provides resource leverage in internationalization when online activities are used to replace less effective off-line practices (Arenius et al., 2006) or as a means for increasing corporate visibility (Cerotti & Clifton, 1998; Moen et al., 2003). E-commerce tools seem particularly useful for enhancing the quality of international networks and relationships (Chang & Wang, 2008; Houghton & Winklhofer, 2004); or as platforms for knowledge acquisition and learning thus alleviating the impact of psychic distance and knowledge barriers to internationalization (Nguyen & Barrett, 2006; Yamin & Sinkovics, 2006); as facilitator for network connections and platforms for enhanced relationships (Chang & Wang, 2008; Houghton & Winklhofer, 2004); and as a means for increasing corporate visibility (Cerotti & Clifton, 1998; Moen et al., 2003). In general, there seems to be some consensus that e-commerce is complementary to and not a substitute for conventional internationalization. In particular, GOE seems conducive to rapid internationalization strategies, specifically those associated with international entrepreneurship and the born global phenomenon (Gabrielsson & Pelkonen, 2008). The results concerning the relationship between the level of internationalization and the firm’s reliance on GOE are somewhat inconclusive. While some discover that the level of internationalization and e-commerce adoption go hand in hand (Clarke, 2008; Jaw & Chen, 2008; Kraemer et al., 2005), others find no association (Niento & Fichman, 2006). The question of the strength of the relationship between a firm’s internationalization and the use of e-commerce as well as the direction of the causal link (if any) deserve more attention. In particular, there is an interesting conundrum whether internationalization precedes GOE as suggested by some (Morgan-Thomas & Bridgewater, 2004), or whether the use of technology represents one of the preconditions for rapid internationalization. The issue remains unresolved partly due to the problems inherent in the measurement and conceptualization of e-commerce. The question of fitting e-commerce activities into the existing thinking in internationalization seems problematic. For example, some consider GOE to be a distinct internationalization channel and model its contribution to international performance separately, for instance, as online export performance. Others consider the Internet to be a moderator for other activities within the firm


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such as knowledge acquisition or marketing strategy. These studies do not provide a conclusive assessment of the value generated by the Internet and therefore make it difficult to judge whether and how the Internet generates value. Both approaches are difficult to compare and contrast making cumulative assessment hard. Another issue of contention concerns the patterns of online internationalization. The question is whether these patterns can be best described as gradual, following the Uppsala model of internationalization (Johanson & Vahlne, 1977), or whether they are better explained by international new venture patterns (Jones, 1999). There is some empirical evidence to show that foreign market entries in the virtual marketspace are much more dynamic and widespread, often being separated by months rather than years. The compression of internationalization in time as illustrated by the studies of e-commerce corporations (Kim, 2003) provides a strong support for the born global school. However, some authors argue that psychic distance still plays an important role in entry decisions, and that when considered in longer perspectives, the gradual, constraints of resource and psychic distance patterns do seem to fit the Uppsala thinking (Gabrielsson & Pelkonen, 2008). More research employing longitudinal designs is required to resolve these issues. Given that language represents an important component of psychic distance and that what we know about the effects of culture is based, so far, on the English-speaking world, more research is required into the activities of firms from non-English-speaking countries. One area of disagreement concerns the antecedents of a firm’s participation in GOE. Research shows clear variations in the range and the nature of benefits attained from online internationalization (MorganThomas & Bridgewater, 2004). There is a certain degree of empirical controversy and debate among the researchers concerning the variety and disparity of factors associated with adoption and success in GOE. There is some agreement that factors internal to the firm, such as product online transferability, IT capabilities, management commitment, and market orientation, play an important function in explaining online export performance (Moon & Jain, 2007; Gregory et al., 2007). Research also identifies a number of factors external to the firm which are also of relevance. For example, the external demand for e-commerce seems to be a significant moderator of adoption and effectiveness of GOE (Gregory et al., 2007). Within the context of internal factors, the length of export experience represents an interesting conundrum. A number of studies including Morgan-Thomas and Bridgewater (2004) and Moon and Jain (2007) have

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found the length of export experience to be inversely correlated with the level of reliance on GOE and its contribution to export performance. There is an interesting parallel between this finding and the notions of time compression found in international entrepreneurship literature (Jones & Coviello, 2004). It seems that advantages of newness (Autio et al., 2000) apply to the GOE too. More attention could be devoted to contrasting and comparing the dynamics of online internationalization with conventional internationalization.

CONCLUSION The purpose of this paper was to provide a review of the empirical literature in the emerging field of online global entrepreneurship. We systematically analyzed 46 papers as the basis for surveying the state of the art of this research stream. The review of literature provided a critical assessment of the most relevant benefits and potential drawbacks, and highlighted possible avenues for further research. The assessment led to the following conclusions. Consistent with the emerging nature of this field of enquiry, much of the identified literature seems exploratory and descriptive. There has been notable absence of solid theoretical frameworks which would guide the analysis. The descriptive studies coincided with a shortage of theory-building approaches. There are further problems with measurement and the design of the research samples. Lack of longitudinal studies, both quantitative and qualitative, represents a particular shortcoming given the dynamic nature of the field. Several directions are proposed to move the field forward. Better application of theory and search for new theories to explain the phenomenon is called for. Promising avenues include entrepreneurship research, IT theories, as well as general management theories. The question of business process innovation might present some promise. Empirical analyses could be enhanced by adopting more defined and sophisticated operational definitions of constructs. Efforts could be devoted to capturing the different forms of GOE, the levels of firms’ engagement in GOE, and the performance outcomes of this engagement. One promising direction in that quest might come from the field of IT which has moved in that direction (Barua et al., 2005). Finally, given the dynamic nature of GOE and the unresolved issues of causality, more longitudinal studies are called for.


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INTERNATIONALIZATION PATTERNS OF CHINESE PRIVATEOWNED SMES: INITIAL STAGES OF INTERNATIONALIZATION AND CLUSTER AS TAKE-OFF NODE Susanne Sandberg ABSTRACT Purpose – To describe and analyze the situation prior to and during the initial stages of internationalization of Chinese SMEs, as well as analyzing the role of clusters as take-off nodes for such firms. Methodology – A multiple case study is conducted based on semistructured interviews with five private-owned exporting Chinese SMEs. Also, data on Chinese industrial clusters are analyzed. Findings – The findings complement the model presented with new knowledge. In the take-off situation, Chinese SMEs deviate from assumed paths due to disadvantages in the emerging Chinese market. In the initial stages of internationalization, the focus on indirect exports hinders the building of international relationships being the key for further international expansion. Cluster localization is a take-off node for individual dedicated exporters into international markets. Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 89–114 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004009

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Research limitations – Few cases, co-location of firms in the advanced Yangtze River Delta region and issues of Chinese versus Western SME definitions limits the possibility to generalize the findings of the study. Practical implications – Chinese as well as foreign firms can gain from this paper regarding, for example, that competitiveness built up abroad can be utilized for increasing the market share in an attractive domestic market, the pitfall of indirect exports can be overcome by developing direct international relationships, and cluster localization can spur the internationalization of (individual) Chinese SMEs. Originality – Empirical contribution of internationalization patterns of Chinese private-owned SMEs as well as pinpointing the importance of the domestic market as trigger for internationalization.

INTRODUCTION Major changes in the global marketplace are seen due to former closed markets opening up and entering the world economy. The liberalization and privatization of emerging markets offer huge potential markets for business, but also challenges such as enhanced international competition since firms from the emerging markets have started to enter the global marketplace in an increasing pace (Meyer, 2001; Jansson, 2007a, 2007b). The rapid economic and structural development of the emerging markets is current and continuous as they are predicted to be the main growth areas of the world for the first two decades of the 21st century (Cavusgil, Ghauri, & Agarwal, 2002). China is the largest emerging market and the ‘‘factory’’ of the world. By bringing the demand and supply of 1.3 billion inhabitants as well as millions of firms outside its country boarders, China will for sure affect the global economy today and in the future to come. Chinese international business activities were initiated by the ‘‘Open door’’ policy in the late 1980s and were further spurred by the liberalization of the centrally planned economy in the 1990s (Du, 2003; Kanamori, Lim, & Yang, 2006). One result of the transition is a tremendous growth of smaller firms (Anderson, Li, Harrison, & Robson, 2003), reaching a number of 39.8 million SMEs in 2006, accounting for 60 percent of the country’s exports (Kanamori et al., 2006). Nevertheless, the international activities outside China are still mainly performed by larger Chinese firms, of which a majority are state-owned enterprises (SOEs) rather than privately owned enterprises (IBM, 2005). Overall, the degree of internationalization of Chinese firms is

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low (Child & Rodrigues, 2005; IBM, 2005; Jansson, So¨derman, & Zhao, 2007; Lou & Tung, 2007) and the research focus has been on Chinese MNCs and FDI (e.g., Buckley et al., 2007; Child & Rodrigues, 2005; Lou & Tung, 2007), and less on the internationalization pattern of Chinese SMEs. Note here that Chinese SME covers a range up to 3,000 employees (Natural Bureau of Statistics of China, 2003), which differs from the classification of the European Union (250 employees) and the United States (500 employees). The rapid development of the emerging Chinese market implies that the large MNCs of today were SMEs not so long time ago, thus indicating the latter as an important ground in the global catching up of China. Thereby, the internationalization pattern of SMEs from the Chinese market is inevitably an important and current research topic. When discussing larger multinational firms, they tend to have more resources and former experience of foreign business and are therefore able to adjust to and take advantage of new business opportunities (Cavusgil et al., 2002; Meyer & Gelbuda, 2006). Smaller firms, however, are considered to have less experiential knowledge of international business, thus facing challenges in performance (Eriksson, Johanson, Majkga˚rd, & Sharma, 1997). In addition, small firms are considered to face severe managerial, financial, and informational constraints (Zyglidopoulos, DeMartino, & Reid, 2006), which could be reduced by developing relationships and networks (Ding, 2007; Jansson & Boye, 2006; Zeng & Williamson, 2003). Yet, with a rapidly changing business world, the traditional theories on how firms internationalize are challenged (Forsgren, 2002). For example, Lou and Tung (2007) describe that firms internationalizing from emerging markets like China face a too different environment to fit the traditional Western models. In addition, Liu, Xiao, and Huang (2008) declare the Chinese experience in terms of internationalization unique, and it can be only partially explained by the existing theories. Such a call for theory development and new models of internationalization is also supported, for example, by Fillis (2001), Johanson and Vahlne (2003), and Meyer and Gelbuda (2006). The purpose of this paper is to describe and analyze the take-off situation and the initial stages of internationalization of SMEs from the emerging market China. The take-off situation is when firms start international business and it is discussed whether or not firms have domestic experience prior to the take-off. Thereafter, the initial stages of the internationalization process are discussed in terms of the chosen entry mode and its effect on the firms’ experience, knowledge development, and network relationships. In addition, it is elaborated upon the influence of industrial clusters as take-off nodes in order to leverage a springboard effect on Chinese SME

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internationalization. As a framework for analyzing the empirical contributions in this paper, and also open up for theory development from the same, a model based on behavioral theories on firm internationalization is presented. Since they are challenged regarding internationalization of Chinese firms in line with the discussion above, the framework is complemented with theoretical developments made on how Chinese firms internationalize and how this relates to traditional theories. After the theoretical overview, the research method for this exploratory study is accounted for. It is followed by a description and analysis of the take-off situation, initial stages of internationalization, and cluster localization of Chinese SMEs. The main conclusions drawn concerning internationalization patterns of Chinese private-owned SMEs based on the five cases presented finalize the paper.

THEORETICAL FRAMEWORK A Behavioral Model of Internationalization of Firms The well-known Uppsala model (Johanson & Vahlne, 1977), suggests the internationalization of firms to be process driven by an interplay between learning about international business operations and commitment to international markets (Johanson & Vahlne, 2003). This traditional model comes from the behavioral research stream influenced by, for example, Cyert and March and their seminal work from 1963, which also influenced the process model by Cavusgil (1980). With this focus, other views on internationalization of firms such as the economic or evolutionary view (Coviello & McAuley, 1999) are not included in the framework of this paper. Over the years, the Uppsala model has been continuously tested, mainly for Western MNCs but to some extent also for SMEs (e.g., Hohenthal, 2001) and has shown to be valid by most empirical studies (Vahlne & Nordstro¨m, 1993 in Fillis, 2001). The model is considered especially useful when studying early stages of internationalization, while it needs complementing insights concerning the preinternationalization phase according to Tan, Brewer, and Liesch (2007). Such a phase would include domestic market activities, being where firms start their business before entering any international markets according to the traditional internationalization process model. Criticism regarding the need of domestic sales experience as well as the overall usefulness of process models is highlighted in research on small firms with a rapid, nonincremental internationalization process often driven by an entrepreneur/manager with global vision and/or a technological


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break-through, otherwise known as born globals (Bell, 1995; Blomstermo, Eriksson, & Sharma, 2004; Gabrielsson, Kirpalani, Dimitratos, Solberg, & Zucchella, 2008; Knight & Cavusgil, 1996; Oviatt & McDougall, 2005). A common definition of the born global firms is having more than 25 percent exports within 3–6 years from start (Knight & Cavusgil, 1996). For all firms going abroad, and the smaller ones in particular, network relationships are considered useful or even crucial in initiating as well as facilitating firm internationalization (Bell, 1995; Coviello & McAuley, 1999; Coviello & Munro, 1997). It connects well to the industrial network approach, which discusses internationalization of the firm in terms of establishing and developing network positions in foreign markets (Johanson & Mattsson, 1988). This branch of the Uppsala school sees relations as significant for firm internationalization since the business network constitutes of relationships spurring international business activities (e.g., Forsgren, Holm, & Johanson, 2005; Johanson & Vahlne, 2003, 2006). Through operating in the local market and building relationships, the firm gains both network and internationalization experiential knowledge (Johanson & Vahlne, 2003), being essential for further internationalization of the firm. The industrial network theory and internationalization process theory can be integrated into a Five/Five stages model (Jansson & Sandberg, 2008). The model relates the five stages of the relationship-building model by Ford (e.g., in Ford, Gadde, Ha˚kansson, Snehota, 2003) to the five stages of Cavusgil’s (1980) internationalization process model. The relationship-building model goes through five stages, starting with a prerelationship stage followed by early/development/long term and final stage of relationship building (see, e.g., Ford et al., 2003). It concerns how network experiential knowledge is gained in a country. The Cavusgil (1980) model of internationalization relates to the building of internationalization knowledge, and it covers domestic/ pre-export/experimental/active and committed involvement in exports. Thus, the more developed the customer relationships in a country are, the more experience the firm has in that particular foreign country market. Thereby the process is driven by relationships, for example, when building experiential knowledge through network relationships (Jansson & Sandberg, 2008). The Five/Five stages model views the internationalization process as an incremental process where firms move further along the internationalization process by establishing more and more relationships abroad. The larger the number of established relationships, the larger is the portion of a firm’s resources and capabilities that are dedicated to international business, and the larger the proportion of resources located abroad (Jansson & Sandberg, 2008). From a network approach, the entry mode of the firm becomes entry

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node, that is, how the firm plugs into the local market network (Jansson, 2007b). Alternative entry nodes for exporting firms are direct relationships (dyads) between a buyer and a seller, or indirect relationships (triads) through an intermediary (Jansson & Sandberg, 2008). In terminology of export entry modes, usage of an intermediary in the foreign markets is direct exports, while indirect exports take place via a domestic company, and cooperative exports via collaborative agreements with other firms. Additional entry modes are intermediary, for example, franchising and partnership, and hierarchal, for example, sales office or FDI (Hollensen, 2007). While entry mode and node discuss the way firms enter a foreign market or connect into a foreign business network, this paper also discusses the takeoff of firms into foreign markets. This is seen from two angles: the usage of direct or indirect exports, and also starting from either the domestic market or directly on international markets (Jansson et al., 2007). For smaller firms, as mentioned above, network relationships are useful or even crucial in initiating firm internationalization (Bell, 1995; Coviello & McAuley, 1999; Coviello & Munro, 1997). Especially in the initial international steps, firms face different barriers (Tan et al., 2007). Reid, DeMartino, and Zyglidopoulos (2005) argue that managerial, financial, informational, and competitive constraints met by resource poor SMEs can be reduced by cooperation and/or being part of a cluster. As a cluster member, the competitiveness of a firm can be enhanced by the external features of the cluster: for example, cost advantages due to the co-location, access to competent personnel, information and joint marketing, as well as connections to institutions and public goods (Porter, 2000). Cluster externalities are shown to enhance the competitiveness of the SMEs involved and thus giving a positive impact on the internationalization process of the same (Jansson & Boye, 2006; Zeng & Williamson, 2003).

Internationalization of Chinese Firms In research of Chinese firm internationalization, the relevance of traditional internationalization models is discussed and challenged (e.g., Du, 2003; Jansson, Hilmersson, & Sandberg, 2008; Liu et al., 2008; Lou & Tung, 2007). Since the degree of internationalization of Chinese firms in general is still low and concentrated to larger firms (Child & Rodrigues, 2005; Jansson et al., 2007), there tends to be a supportive notion of the traditional models (e.g., Buckley et al., 2007). Elango and Pattniak (2007) point out that since emerging market firms still are in their early stages of internationalization,


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the Uppsala model is a highly useful tool of research. This is partly supported by Liu et al. (2008), also finding some support of the born global/ international new venture literature. However, they strongly point out that traditional theories cannot to full extent explain internationalization of indigenous private-owned Chinese firms since they have unique characteristics. In addition, Lou and Tung (2007) describe that MNEs undertaking outward FDI from emerging markets face a too different environment to fit the traditional Western models. These firms seldom follow an incremental path as suggested by traditional behavioral models. Instead, they react on, for example, late-mover positions, global competition and domestic institutional constraints (Child & Rodrigues, 2005). Notably though, Lou and Tung (2007) suggest that even if MNEs in emerging markets follow a less incremental internationalization than traditional models would suggest, the elements of organizational learning and global experience are still the key in their internationalization process. The emerging market MNEs discussed above, for example, Chinese multinational firms such as Haier, Huawei, Lenovo and ZTE (Lou & Tung, 2007) can be classified as national champions. Other types of Chinese internationalizing firms going abroad from China are competitive networks, dedicated exporters and technology upstarts as defined by Zeng and Williamson (2003). Relating to the SMEs studied in this paper, they belong to at least one of the latter three types. In China, there are many competitive networks, which is a type of (industrial) clusters of hundreds of small colocated entrepreneurial and flexible low-cost producers, mainly within commodity goods such as shoes, toys, and pens. Firms in these clusters are seen to be interconnected and with governmental support they manage to enter international markets (Zeng & Williamson, 2003). Many industrial clusters in China are located in the economic and export processing zones of the coastal areas. The production focus of such clusters is often standardized consumer or low-technology goods intended for mass markets. The level of innovation and R&D tends to be low (Kanamori et al., 2006). The clusters to a large extent consist of SMEs that face fierce price competition within the domestic market (Ding, 2007). Kanamori et al. (2006) point out Chinese firms to face growth problems due to the specific constraints caused by the transition of China. Also, due to low levels of technology spill over, limited local entrepreneurship and less governmental support, the existing clusters tend not to adequately support SME development. For an SME belonging to a more domestic-focused competitive network or industrial cluster, internationalization can be possible through acting as a dedicated exporter. As such, the firm neglects the domestic market potential

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and expands into (mass) markets abroad, either alone or as subcontractor of MNEs. The advantages of dedicated exporters are low-cost production, manufacturing skills, and economies of scale, while they tend to lack experience of marketing and service. Even if a dedicated exporter entered the international market directly when China opened up in the late 1970s, their competitive advantages were commonly built up beforehand in the domestic market. In comparison with the dedicated exporters, technological upstart firms are small high-tech firms with origin from state-owned research institutes. Thus, they are run by researchers rather than business people. This type of firms often takes advantage of relations with overseas Chinese when and if they enter foreign markets (Zeng & Williamson, 2003). In their research on internationalizing Chinese firms, Child and Rodrigues (2005) find three routes of internationalization: the original equipment manufacturer (OEM)/joint venture (JV) route, the acquisition route and the organic expansion route. The two latter routes both involve ‘‘outward’’ internationalization by FDI; either acquisition or greenfield, and tend to be too cost-demanding for small firms with a lack of resources in their early internationalization. The first route, however, is the partnership route, enabling ‘‘inward’’ internationalization of the Chinese firm by gaining access to knowledge and competences from the multinational partner. In OEM, the relationship is based on the cost advantage of the Chinese partner and the brand advantage of the foreign firm. According to Jansson et al. (2007), Chinese firms involved in OEM tend to be passive suppliers with an internationalization process driven by the foreign demand. This route is often used by Chinese family firms, but is also relevant for firms involved in competitive networks as well as for dedicated exporters. A more direct relation is formed through JVs, where the Chinese firm can reach into the internal network of its foreign partner (Child & Rodrigues, 2005). Though, in a JV the Chinese firm might be restrained from building its own international reputation, as possible if being an excellent OEM. According to Lou and Tung (2007), ‘‘inward’’ investments bring benefits for Chinese firms stimulating their ‘‘outward’’ internationalization.

RESEARCH METHOD Due to challenges in research of Chinese firms, such as lack of access to information and case companies, as well as considerations of reliability of translated primary and official secondary data, an exploratory study was conducted in order to contribute to the less researched field of


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internationalization of Chinese SMEs. A qualitative case study was conducted, being a sufficient research method for theory testing (Yin, 2003) as well as for potential theory development (Merriam, 1998). In line with Eisenhardt’s (1989) recommendation of four to ten cases, five case firms were included in this holistic multiple case study. It was seen to be a reasonable number of cases in order to fulfill the purpose of the study. The five firms are private owned (over 50 percent owned by private investors) (IBM, 2005) exporting SMEs. They were chosen with a purposeful sampling technique (convenience sampling) (Merriam, 1998) following a replication logic (Yin, 2003). The selection was made by collaborating researchers at the Shanghai University, based on their access to suitable firms. Thereby all case firms are located in the Jiangsu province or Shanghai in the Yangtze River Delta region, which is one of the most expansive and company dense regions in China and thus a suitable area for research of international Chinese firms. In terms of size classification, Chinese industrial SMEs can have up to 2,000 employees and construction SMEs up to 3,000 employees (Natural Bureau of Statistics of China, 2003), which differs widely from, for example, the EU SME definition of o250 employees and the US standard of o500 employees. In this paper, the case firms are manufacturing firms in mainly traditional manufacturing industries with between 80 and 2,200 employees. Thereby they are discussed as SMEs, while in fact four of them are large firms by Western measures. One reason to keeping the SME discussion is the notion of Chinese firms holding relatively more employees overall than Western firms due to lower salaries and lower efficiency levels so far. Also, with scarce resources and lack of knowledge, these firms act as inexperienced smaller firms. The study is a result of collaboration between researchers at the University of Shanghai, China, and the University of Kalmar and the University of Stockholm in Sweden. A semistructured questionnaire (Merriam, 1998) was developed by the Swedish researchers in spring 2006. It was based on a thorough literature review and concerned the firms’ foreign market entry process (e.g., internationalization steps, establishment, and development of new foreign business relationships). The semistructured interviews were made between July 15 and September 15, 2006 by Chinese master students led by Prof. Zhao at the University of Shanghai. The case companies were visited and at least three representatives in leading positions (e.g., CEO/founder/owner/manager) from each case company were interviewed in total for 5–20 h. The advantages of having native interviewers include less language and cultural barriers, thus the interviewer might get access to more information from the respondents than if the interviews

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would have been conducted in English or via an interpreter. Still, there are reliability issues due to the multiple translations of the questionnaire and responses to it. To counteract this, all interviews were carefully documented in both Chinese and English. Additionally, the Chinese collaborators presented the gathered material at two occasions (late July and mid-October 2006) to the Swedish researchers. Each discussion included joint interpretations lasting for about 10 h. The case material was then summarized in written form in English and the informants gave their approval concerning publication of data and conclusions, which further strengthens the reliability of the study. In addition to the primary data from the multiple case study, complementary and validating information on the cases was collected from websites and company databases. Secondary data from reports and articles concerning industrial clusters in China are also presented in the paper.

EMPIRICAL ANALYSIS Presentation of the Case Companies The five case companies are all exporting Chinese SMEs located in the expansive Yangtze River Delta region, either in the Jiangsu province or Shanghai. A brief description of the internationalization of the case companies, as well as main characteristics, is presented below. The ‘‘Far East Cable Co. Ltd.’’ (henceforth FE Cable) is a private cable and wire producing midsized firm located in Yixing. It started as a township enterprise in 1990. The firm got import and export rights endowed by the state in 1998 and started to sell to international markets in 2001. In 2002, the company Far East bought all stocks and Far East Cable became headquarters of the group. Its major export markets are Southeast Asia, West Asia, and Africa. FE Cable mainly works as a subcontractor to large Chinese SOEs in their foreign projects, however under the FE Cable brand. Active export markets for ongoing projects in 2006 were Indonesia, Pakistan, and Philippines. FE Cable also has some direct exports, for example, to the Philippines, but in total the export share was only 5 percent. Additional to the 2,200 employees in Yixing, there are more than 600 outlets and over 1,000 own salespeople covering all of China. The ‘‘Shanghai Yaselan Advertising Material Co. Ltd.’’ (henceforth Yaselan Printers) is a private firm with 80 employees situated in Shanghai. The company was established in 1993 and is producing large inkjet printers.


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In 1994, the manager attended the Canton Fair and spotted US-produced printers. The following years were dedicated to developing similar printers of a lower price. Expanding within the low-end market of inkjet equipment in the domestic market, the first foreign sales took place in 2002. Yaselan Printers are sold under its own brand to Southeast Asia, Europe, America, Oceania, Africa, and other regions. Exports are mainly undertaken through distributors in foreign markets (one per market, e.g., in Japan, Australia, India, Turkey, Thailand, Mexico, and Pakistan), and through presence in domestic and foreign exhibitions. The firm works with the devise ‘‘going forward side by side of home and abroad, direct marketing and agents in parallel,’’ and has an export share of 60 percent. The ‘‘Yangzhou 5A Brush Industrial Co. Ltd.’’ (henceforth 5A Brush) is a private midsized firm with 1,500 employees that produces toothbrushes. It is located in Hangji – the ‘‘city of toothbrush’’ of China. The firm was a former SOE production unit that became private in 1993. The ‘‘new’’ firm started to sell 100 percent to the international market instantly due to weak competitiveness and being closed out from the sales network provided by the state-owned companies. To enter the domestic market, it had to build new distribution channels in the market that would be too costly. Therefore, they had to exploit the international market directly which was made through the Guangzhou (Canton) Trade Fair. Thus, from 1993 to 2001, 5A Brush got orders at the Canton Fair as well as undertook indirect export through middlemen at Chinese foreign trade departments. In 2000, the company acquired a Chinese firm and made it to the company’s self-run export company. It also started to promote their own brands ‘‘5A’’ in the domestic market and ‘‘CORONA’’ in the international market. In 2006, there was a 50/50 division between these markets. Of the exports, approximately 55 percent were sold via the Canton Fair, 20 percent via overseas or domestic distributors and agents, and 25 percent via own exports of CORONA. The main export markets were other emerging markets: for example, South America and Africa. The ‘‘SuZhou XingXin Knitwear Company Ltd.’’ (henceforth XX Knitwear) is a private midsized firm with 1,300 employees located in a textile and knitting machinery cluster in Suzhou. It produces apparel of wool, silk, cotton, and other products, for example, woman suits and baby clothes. The firm was established in 1986 through privatization of a SOE production unit, and until 1992 it was a township enterprise producing clothes for a foreign trade firm in Shanghai exporting to the Japanese market. The export share of the firm has always been close to 100 percent due to its heavy dependence on OEM: that means, producing for other firms

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and brands. From 2004, when the XX Knitwear gained export rights, the firm started to accept orders also from the United States (e.g., GAP), Canada, and Europe (e.g., Germany: Esprit, and Denmark: Inwear). Japan still accounts for 60 percent of the exports, but its share is decreasing. The full focus of XX Knitwear has been OEM for the international market, thereby having close to 100 percent export. In 2003, the company registered an own brand for the domestic market, which in 2006 accounted for 5 percent of the sales. The ‘‘Suntech Power Co. Ltd.’’ (henceforth Suntech) is a private firm with 2,000 employees located in Wuxi. The firm was established in 2001, firstly undertaking R&D and production of solar-cell lines (solar cells and solar modules) in China. The start-up was secured by governmental support, as well as professional management and financing from eight SOEs. The first production line was ready in 2002 and due to a nonexistent solar cell industry in China the firm was international from inception, selling through fairs in Europe. Starting off with a quick expansion in Germany, Suntech expanded to France, Spain, Holland, and Italy. In 2004, Europe accounted for 92 percent of total sales. The exports were undertaken via agents and to some extent also OEM. In 2005, Suntech entered the United States by registering at the New York Stock Exchange and establishing a subsidiary in Delaware. Expansion was also made in South America and Asia, where they acquired a Japanese firm in 2006. At this time, Suntech was the no. 3 silicon cell manufacturer in the world and had an export share of 90 percent. The remaining 10 percent was sold to the domestic market, being a potential market for further growth. As an overview, the main characteristics of the case firms are found in Table 1. The Take-Off Situation Traditionally firms are considered to take-off into foreign market with former experience from the domestic market, and thus rely on competitiveness built up there. This is the case of FE Cable and Yaselan Printers, having respectively 11 and 9 years of domestic experience before entering international markets. FE Cable started to export after receiving (unsolicited) orders from foreign intermediaries, while Yaselan Printers discovered the opportunities of exports via participation in domestic and foreign trade fairs. The competitive advantage from the domestic market was foremost cost competitiveness. Both firms have also established own brands to complement their low-cost production, manufacturing skills and

Firm characteristics Primary scope of business Turnover (M Yuan) 2005 Foreign sales (%) 2005 No. of employees Start year Start international business Export rightsa International spread

Entry modes

Table 1.

Firm Characteristics of Case Companies.

5

530

Production of cable wire (own brand)

80 1993 2002

60

17

Production of digital inkjet printers (own brand)

Shanghai Yaselan Adv. Mat. Co. Ltd.

1,500 1993 1993

50

Production of toothbrushes (own brand) 400

Yangzhou 5A Brush Ind. Co. Ltd.

1,300 1986 1986

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80

Production of knitting garment and sweaters (OEM)

SuZhou Xing-Xin Knitwear Co. Ltd.

– Europe (Germany, Holland, Spain), North America (United States), Asia (Japan) (1b) Agents in foreign markets, competitors sales channels (3) Subsidiary USA, acquisition Japanese firm

2,000 2001 2003

90

Production of solar cells/modules (own brand/OEM) 2,800

SunTech Power Co. Ltd.

Company

2,200 1990 2001

2004 Asia (Japan, Taiwan) North America (United States), Europe (Germany, Denmark) (1a) Via SinoJapanese firm in China, foreign trade firms in China (main) (1b) Some foreign customers

Far East Cable Co. Ltd.

1998 Southeast and West Asia, (Indonesia, Philippines, Vietnam), Africa

– Europe (Italy, United Kingdom), Oceania (Australia), United States, Africa, Southeast Asia (1a) Chinese agents (1b) Distributors and agents in foreign markets (one/ market) (main)

2001 North and South America, Europe, Middle East, Africa, Southeast Asia (1a) Chinese trade firms: Canton Fair, agents, distributors (main: 80%) (1b) Own export company (20%) (1a) Project subcontractor to large Chinese SOE (main) (1b) Some Chinese foreign intermediaries


1. Export modes (a) Indirect (b) Direct (c) Cooperative 2. Intermediate 3. Hierarchical

Source: Interviews made in 2006. The year of receiving export rights from the Chinese government (before that own direct exports were not allowed). a

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economies of scale (characteristics of dedicated exporters) in order to try to build a differentiation advantage. In contrast to going abroad with experience from the domestic market, some firms move directly into the global market, that is, act similarly to the born globals (Knight & Cavusgil, 1996). However, 5A Brush and XX Knitwear used to be production units during the centrally planned era and became private firms in 1993 and 1986, respectively. As a limited company, 5A Brush was forced to sell to international markets at once since it was left outside the state distribution channels in the centrally planned economy of China. Yet, the exports were passive and the company was ‘‘chosen by the market.’’ In comparison, XX Knitwear used the route of OEM when starting indirect exports to Japan via a foreign trade firm in Shanghai. Both 5A Brush and XX Knitwear managed their early internationalization due to cost advantages and their international business was built up through indirect exports from geographically concentrated (domestic) industrial clusters, that is, competitive networks, specializing in toothbrushes and textiles, respectively. In comparison to 5A Brush and XX Knitwear, Suntech is a born global in accordance with the definition by Knight and Cavusgil (1996), since it is a high-tech firm international from inception. The firm spent 2 years for R&D and production in the domestic market before entering the international markets due to a nonexistent solar cell industry in China at that time. The founder, a Chinese researcher educated in Australia, was driving the internationalization but had no former experience of international business. The competitive advantage of Suntech was its leading technology, that is, a differentiation advantage, which was built on the founder’s former knowledge and skills from research in Australia. In addition there were cost advantages in terms of production and R&D in China.

The Initial Stages of Internationalization Once the firm has taken off from the domestic market, either with former experience from it or going international from inception, the firm enters the initial stages of the internationalization process. Related to the Cavusgil (1980) internationalization process model, all the case companies have moved past the pre-export stage. With the exception of Suntech, all firms are more or less in the experimental export stage. Here the exports are said to be limited as seen in the case of FE Cable having only a 5 percent export share. The other firms have export shares exceeding 50 percent, which would


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indicate a committed involvement in exports with a high degree of international experience. However, this is not the case for Yaselan Printers, 5A Brush, and XX Knitwear – instead they mix a high export share with insufficient international experience due to mainly indirect exports. In terms of stages, the indirect export mode can be seen as a stage between the preexport and the experimental (direct) export stages. In the case of Suntech, the firm leapfrogged through the stages and became an active exporter immediately without prior experience of domestic or even international sales.

Firm Experience and Knowledge Development From the initial stages, firms move on in their internationalization process through increasing their experiential knowledge and strengthening their international commitment. The firms the most involved in indirect exports are FE Cable, working as a project subcontractor to large Chinese SOEs, thus undertaking indirect exports in the form of piggybacking, and XX Knitwear, being heavily dependent on OEM. The advantage of these kinds of indirect exports is that piggybacking means an opportunity to ride on the brand and recognition of the larger Chinese firm making projects abroad while OEM provides an opportunity to gain knowledge from the foreign partner. Both firms have also managed to start some direct exports, though this seems to be more connected to overseas Chinese trade intermediaries. Thereby, a low level of experience and knowledge of the foreign country market and its domestic customers is obtained. After several years with only indirect exports, both Yaselan Printers and 5A Brush have tried to gain more direct exports. Yaselan Printers has focused on direct exports by having agents in several countries all over the world. Relations are strengthened by visiting the foreign agents and customers abroad. At the same time, the firm learns about the development in overseas markets, helps with problems, discusses future improvements of products as well as promotes new products. Thus, the firm is willing to learn from foreign intermediaries and customers, which lays ground for further international expansion. In comparison, 5A Brush learned that branding impacts profits from the establishment of a global US competitor in the cluster. Thus, the firm introduced both a domestic and an international brand bringing more profits and recognition to the firm. As a result of this and in addition to the opening of the Chinese domestic market, the export share of total sales has gone down from 100 to 50 percent – or the domestic sales have increased from 0 to 50 percent. To be able to handle more direct

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international contacts and gain international experience, an own self-run export company was acquired. Suntech shows a different and more rapid internationalization path than the other firms – being active from start having direct exports via agents in foreign markets as well as using the sales channels of competitors. The firm has also undertaken FDI through setting up a subsidiary in the United States as well as making an acquisition of a Japanese firm. This kind of outward internationalization has given the firm the needed experiential internationalization knowledge that it lacked from start.

Network Relationships The building of international relationships is connected to the export mode of the firm. However, through indirect exports no international relations are established since the exports are made via an intermediary in the domestic market, for example, the Canton Fair and/or domestic trade companies. Instead, FE Cable, Yaselan Printers, 5A Brush, and XX Knitwear have been able to build up domestic business networks, which they to a various extent take usage of when obtaining more direct international relationships. Both FE Cable and Yaselan Printers have built up strong relationships, however in different types of networks. FE Cable has mainly indirect exports in terms of piggybacking on large domestic SOEs. The relation and cooperation with the domestic business network of the SOEs is mature, thus being direct (dyad) and stable resulting in continuous business. Beside the domestic business network, only a few direct relations are established with foreign contacts in close-by Asian markets. Thus, the level of international relationship building is low. One possible line of action for FE Cable could be to take advantage of the reputation of the domestic business partners and try to find own contacts in the markets served by the SOEs. At Yaselan Printers, the clients are mainly served through direct exports via distributors and agents all over the world through classical triad relations. The firm’s devise of developing markets both ‘‘home and abroad’’ with ‘‘direct marketing and agents in parallel’’ indicates an understanding of the importance of relationship building in the internationalization of the firm. As a result of being former domestic production units, in combination with the cluster localization and being involved in competitive networks, both 5A Brush and XX Knitwear have a strategy in terms of extending their networks. The business model of 5A Brush includes to take advantage of domestic networks and to use the direct international contacts established


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by the self-run export firm in order to find further direct international relations. However in the direct contacts with international end-customers, 5A Brush has only reached the prerelationship stage. The contacts are still mainly indirect (triads) and the communication is mainly to secure orders and deliveries. In comparison, the XX Knitwear strategically uses its domestic network of business companions and friends (guanxi) to reach new direct business relationships. One key point for internationalization of the firm was when they received their first international direct (dyad) contacts in the United States and in Europe. But still these direct relations are limited and only in the beginning of their development. Overall, the firms above relying on indirect exports do not gain any direct international relations but can use their strong domestic business networks to find international customers. Still though, the direct relationship-building capacity of the firms above is limited. With the exception of Yaselan Printers having quite developed business relationships, the other firms are still in the prerelationship and early stages in building an international network. This implies that these firms are less internationally experienced in terms of relations than the firms having more direct export relationships or even having own subsidiaries abroad, such as Suntech. They have the most developed relations and relied heavily on both own and others’ domestic and international networks, as well as the personal network of the founder, in order to enable instant internationalization. The local contacts of a Chinese fellow researcher/friend and later also business partner, rendered governmental support for the project. When internationalizing, Suntech used international fairs, relationships with agents, and competitors’ sales channels in foreign markets. With both agents and customers, the aim was to build long-term relationships, for example, by setting up collaboration agreements. Through that, the firm has connected to a global business network and is thereby highly internationally experienced.

Export Cluster as Take-Off Node An exit or rather export cluster, as discussed by Jansson et al. (2008), is a domestic cluster (geographical base) and take-off node from where a firm could take-off into a foreign market network. Of the five cases discussed above, 5A Brush and XX Knitwear are established in industrial clusters and competitive networks, which have the potential to spur the member firms’ international take-off.

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The Case Firms and the Clusters 5A Brush is located in Hangji – the ‘‘city of toothbrush’’ in China. The manmade toothbrush production in the city started in 1827. There are more than 1,000 individual units located in Hangji producing toothbrushes, corresponding to 70 percent of the toothbrush manufacturing firms in the whole country. More than 90 percent of the firms in Hangji are small family-owned firms. Most firms in the cluster target the domestic market only, while some of the larger firms have started to sell to the international market. The annual output from Hangji is 3 billion toothbrushes (and it is growing), being the largest toothbrush production base in the world (Jian, 2003). According to the Li and Fung Research Centre (2006), the Hangji toothbrush cluster is formed as a result of expansion of a few large enterprises, stimulating the growth of other firms in the cluster. Receiving governmental support suggests the Hangji cluster to be close to a competitive network (Zeng & Williamson, 2003). XX Knitwear is situated in the city of Suzhou, a textile center concerning cotton, silk, and wool. Suzhou was beside Shanghai the largest exporting city in the Yangtze River Delta in 2005, and has industrial clusters in textiles, as well as in knitting machinery (Li & Fung Research Centre, 2006). Clothing and textiles is one of China’s pillar industries and the production accounts for more than 9 percent of the GDP and more than 25 percent of the foreign exchange revenue. The export from China in terms of knitwear is rising steadily. In 2005, it accounted for 20 percent of the world output. The main way of exports is OEM, corresponding to about 90 percent of the export. Thus, Chinese self-branded textile products only represent 10 percent of the exports. Clusters like the textiles cluster in Suzhou are often, according to Li and Fung Research Centre (2006), traditional selfinitiated clusters in which the firms are entrepreneurial and family owned. They are often labor-intensive, low technology and low threshold of entering. Thus, also Suzhou has similarities to the competitive network as discussed by Zeng and Williamson (2003).

Advantages Gained and Challenges Met Through Cluster Localization The advantages of being established in the Hangji cluster is according to the 5A Brush case description the availability to the same labor costs, manufacturing technology, and management level as other firms in the industry. Also, by being established in the cluster, 5A Brush was able to


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learn from the case of Colgate Sanxio (a JV between the US MNC Colgate and a Chinese SOE) in terms of importance of branding for performance and thus got a peak in both the international and domestic sales. An advantage is also the quality distribution system of the Hangji cluster, making it possible to get new products into the domestic market within 1 week. The overall challenges are mainly connected to profits and competition of the firms, for example, the crowded domestic market, the low profits of toothbrushes caused by low-price competition, and the regional battles within the industry. For XX Knitwear, the main advantage of being established in the cluster is the usage of the domestic network, including friends and business partners to obtain international orders and contacts. It is a well-known company that has long-term relationships with most of the biggest clothing trade companies in the surroundings. Since the main competitors of the firm are also established within the Suzhou cluster, the location enables the firm to keep track of these. XX Knitwear, still being a typical OEM with low returns, meets challenges in terms of lack of management expertise, limited access to export markets, and difficulties to conform to international operations in order to meet market demand. Coming challenges are increasing costs of raw material and labor costs. Some of the challenges mentioned above could be counteracted through more active collaboration in the competitive networks that the firms actually are part of, but not so much use. For example, access to competent management personnel, information sharing such as introduced in the Hanji cluster and joint marketing, as well as connections to institutions and public goods. Such connections could be exemplified by the governmental support of the development of the 5A Brush brand. One reason for lacking cooperation between firms in the industrial clusters of China seems to be the characteristics of being a former centrally planned economy. Many firms, including 5A Brush and XX Knitwear went from a situation with a predetermined number of customers and distribution channels. Changing to a mode of cooperation is not easily done since it is costly, takes time and demands a certain level of trust. After the privatization 5A Brush was closed out from the sales channels of the state-owned firms, so the firm had to adjust to a market with free competition through entering international markets. Both firms are clearly influenced by the different features of the transition process of China. Also, both firms lack experiential international experience and should be able to identify actors within the cluster for collaboration in terms of learning and relationship building with new (direct) entry nodes into foreign markets.

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CONCLUSIONS The relevance of the traditional internationalization theories, developed from and mainly tested for larger Western firms, has been discussed and challenged in research on internationalization of Chinese firms. It seems that traditional theories need to be adjusted and complemented to be suitable frameworks for studying firms taking off from a turbulent emerging market as China. In this paper, the Five/Five stages model developed was used as a framework for analyzing the international take-off by five Chinese privateowned SMEs. It can be concluded that the reality of the Chinese firms diverged somewhat from the predicted paths of the model: for example, it faces challenges in terms of the indirect exports undertaken by four of the Chinese firms, and also by the fifth firm being a born global firm. A high level of indirect exports is a pitfall for firms since it hinders the establishment of direct international relationships on which the Five/Five stages model is built. Still, however, the importance of such direct relationships for further international expansion of the Chinese firms is stressed. Concerning the operationalization of the Cavusgil (1980) model based on export shares, it is not useful for firms undertaking indirect exports since they might have a 100 percent export share but no international knowledge or experience. Since not the whole internationalization process of the case firms is studied, the Five/Five stages model as such is not tested. Rather, it is used as a framework and this study complements the model by adding more knowledge on the initial stages of the internationalization process of firms. An additional insight is the notion of the importance of the domestic market as a trigger for a firm taking off into foreign markets. In terms of the complementing theories on internationalization of Chinese firms, it has in this paper been found relevant for further understanding of the take-off by Chinese firms into foreign markets. Below, conclusions drawn concerning the take-off situation, initial stages of internationalization, as well as clusters as take-off nodes will be presented, followed by limitations of the study and ideas for further research. In the take-off situation, firms are traditionally considered to go abroad with former experience from the domestic market, thus exploiting a competitive advantage built up there. When it comes to firms from emerging markets, facing a more complex institutional context, one cannot always assume that such firms follow the paths traditionally suggested. The internationalization pattern in the take-off situation of the Chinese SMEs studied shows that they tend to either (1) start doing business on the domestic market as traditionally suggested, then go international, or


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(2) start directly on the international market without former domestic experience. These paths can at a first glance be interpreted as following either the traditional internationalization process model or the born global models of firms international from inception. However, there are some characteristics distinguishing the international take-off by Chinese SMEs from the take-off by firms originating from mature markets. The first path concerns Chinese SMEs that take-off from the domestic market, that is, follow a traditional internationalization process where experience is gained in the domestic market before starting with international business. Though, while firms in mature markets usually build their international take-off on some kind of differentiation advantage, the two Chinese SMEs within this path took off by exploiting a cost advantage relative to foreign competitors. Thereafter the domestic and foreign markets are developed in parallel. By learning from the international markets, the firms have been able to start developing possible future differentiation advantages such as own brand and products. The second path concerns Chinese SMEs performing international business from start. Here two kinds of firms are seen. Two firms were production units within traditional industries during the centrally planned era. They became privatized in the 1980s and 1990s and once limited companies, they both started 100 percent indirect exports to international markets. One firm was forced out since they could not enter the distribution channels of the SOEs, and one became heavily dependent on international orders (OEM). The other kind of firm is the high-tech firm, becoming international from inception. The firm had a differentiation advantage in terms of new technology but also enjoyed the cost advantages of being located in China. In addition, the domestic solar-cell market was nonexistent at the time of the take-off so there where no alternatives but to go globally directly. Thus, the main difference between firms being ‘‘born globals’’ in mature markets versus the Chinese SMEs studied in this paper is that the latter includes firms that are trigged to early internationalization by the characteristics of the emerging home market. Another common trait of the Chinese firms is that they develop the international markets first and thereafter they tend to go back to the domestic market in order to develop it in parallel. Here the firms use their international experience in order to develop or utilize existing differentiation advantages such as own brands or high-tech products. When moving from the take-off situation into the initial stages of internationalization, most of the studied Chinese SMEs rely on indirect exports. Some of the firms even were prohibited to perform direct exports due to no export rights from the Chinese government. In terms of export share,

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the firms can mix a high export share (suggesting it to be an experienced exporter) but still have insufficient experience due to the indirect exports. As a result of indirect exports, close to no international knowledge or experience is gained, and no direct relationships with international customers are built. On contrary, the firms can build up strong domestic business networks that can be used in order to find international customers. Overall, the capacity of the studied Chinese SMEs to build direct international relations is limited since it is a process of experiential learning. The Chinese SME furthest in building international relationships was spread in more foreign markets than the other firms, thus being the most internationally oriented firm. It indicates that in order to gain international experience and knowledge, as well as more and deeper international relationships, the firms need to get past the pitfall of indirect exports. For this, building direct international relations and taking usage of the network (guanxi) seems to be the key. Firms located in cluster environments have the potential of gaining a springboard effect into foreign markets if the firm utilizes the advantages of co-location and collaboration, for example, information sharing and economies of scale. However, it seems like the clusters studied have mainly played the role of export clusters, from where the two cluster-based firms have entered the international market on their own as dedicated exporters. Then the cluster becomes a take-off node, wherefrom the firms take-off from the (domestic) local market network into a foreign market network. Thereafter, a parallel development of the international and domestic market is seen, facilitated by collaboration and learning from the cluster. Partnerships and other collaborative actions are examples on ‘‘inward’’ investments that bring benefits for cluster-located firms in order to stimulate their ‘‘outward’’ internationalization, that is, FDI as urged for by the Chinese government through the ‘‘Go abroad’’ policy. By this, Chinese SMEs could move further in their internationalization and grow larger, which would spur the catching up process of China. When studying internationalization of Chinese SMEs, there are many possible aspects that can influence the firms’ take-off and initial internationalization. A limited number are discussed in this paper: for example, characteristics of the emerging Chinese market, the impact of the chosen entry mode on the firms’ experience, knowledge development and network relationships, as well as clusters as a take-off node. Many possible influencing aspects, such as the role of the manager (entrepreneur), psychic distance, and selection of foreign markets as well as the timing of internationalization in relation to performance (e.g., in Liu et al., 2008) were excluded due to the frame chosen for the study. It is an exploratory


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study aiming at describing and analyzing internationalization patterns of the Chinese SMEs studied. Even though multiple cases are studied, the few case companies limit the possibilities to draw general conclusions from the findings. Additionally, the location of firms in the more advanced areas of China (being substantially different from other areas in the country) and also the size issue in relation to Western standards of size classifications of SMEs further limit the possibility to generalize the findings of this paper. Thereby, the conclusions pointed out in the discussion above should be seen as indicators of potential areas for theory development and/or further research areas, for example, concerning the importance of an (emerging) home market as a driver of early internationalization of the firm, in order to enhance the understanding of the internationalization patterns of the unique and less researched Chinese SMEs.

ACKNOWLEDGMENTS The author wishes to thank the EIBA 2008 Conference Proceedings Editors, Prof. Jorma Larimo and Dr. Tiia Vissak for their support, as well as the EIBA 2008 Conference anonymous reviewers for helpful comments given on an earlier version of this paper. Acknowledgments are also given to collaborating research colleagues: Prof. Hans Jansson, University of Kalmar, Prof. Sten So¨derman, University of Stockholm, and Prof. Xianjin Zhao, University of Shanghai for granting the author access to the Chinese case database; as well as to the research team at the Baltic Business Research Center at the Baltic Business School, University of Kalmar, for questionnaire compilation and overall valuable and insightful comments upon this paper.

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INTERNATIONALIZATION OF GOODS AND SERVICES: A COMPARISON OF THE INTERNATIONALIZATION OF SERVICE PROVIDERS AND MANUFACTURERS IN SWITZERLAND Ralph Lehmann ABSTRACT Purpose – In the Swiss economy, the service sector has gained a great share of international trade and foreign investments. Export promotion measures, though, are mainly focused on the internationalization of manufacturing companies. From the literature it remains unclear if the internationalization behavior of service and manufacturing firms differs and if promotion measures should be adapted. The present study describes the internationalization of service firms and compares it with the internationalization of manufacturing companies. Methodology – The study is structured into two consecutive surveys: the first one is explorative, qualitative-empirical, and examines the Research on Knowledge, Innovation and Internationalization Progress in International Business Research, Volume 4, 115–135 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1745-8862/doi:10.1108/S1745-8862(2009)0000004010

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internationalization behavior of 12 service companies, four each from the industries of corporate consulting, engineering, and information technology. The resulting hypotheses are tested in a subsequent confirmatory, quantitative-empirical survey of 443 service providers from the sectors of consulting, information technology, and education, as well as 553 production enterprises from the sectors of food, textiles, and chemical products. Findings – The results show that the psychological distance to foreign markets has a greater importance for service providers than for production companies. Service providers prefer direct distribution systems and develop foreign markets more simultaneously than production companies. Practical implications – The conclusion is that export promotion programs should be tailored to the specific needs of different segments of the economy. Originality of paper – The study offers an empirical support to the position that the internationalization behaviors of service providers and manufacturers differ, and that internationalization models which are substantially based on the examination of manufacturing companies should be verified.

INTRODUCTION The service sector has achieved a significant position in Switzerland. More than three-quarters of corporate turnovers are generated in the tertiary sector (value added tax statistics, 2003). Service providers, however, do not only render their services in and for Switzerland, but also increasingly in and for foreign countries. In 2003, service accounted for almost 80 percent of all exports of the Swiss economy, according to the value added statistics of the Swiss tax authorities. The share of service companies in direct investments abroad amounted to approximately two-thirds according to the figures published by the Swiss National Bank (Monthly Bulletin of Banking Statistics, March 2007). Reasons for the increasing internationalization of the tertiary economic sector can be found in the international adjustment of service requirements, the increasingly complementary correlation between real assets and service, the higher mobility of employees thanks to provisions like the Act on the General Freedom of Movement, improved means of communication with remote customers, and the liberalization of service markets through a

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reduction of trade barriers (GATS) (Bruhn, 2005; Porter, 1991; Czinkota & Ronkainen, 2000; Hermanns & Wissmeier, 2001; Javalgi & White, 2002). The increasing significance of the service sectors in international competition remained largely disregarded by economic policy. Osec Business Network Switzerland, like most export promotion organizations in Europe, focused their investigations on traditional export sectors like mechanical engineering, electronics, pharmaceuticals, and food industries. Service-providing sectors such as tourism, education and advanced vocational training, and the health care sector remained largely disregarded (Reynolds, 2005), although the World Investment Report 2004 revealed that the tertiary sector still bears a large potential for internationalization (UN, 2004, p. 114). This heaviness of the Swiss internationalization promotion organization on production is now to be corrected. Thus, the question arises as to how and to what extent internationalization of manufacturing firms is different from service-providing firms. To this day, research has not been able to conclusively answer this question for the international business sector (Javalgi & White, 2002; Vinh, 2005). The scientific interest in the internationalization of service-providing companies was generated in the late 1980s. It reached a peak in the mid-1990s and then lost momentum again (Bruhn & Stauss, 2005). Subjects of research were the significance of services in various world regions (e.g., Kassem, 1989), internationalization processes within specific service-providing industries (e.g., Bhuian, 1997; Terpstra & Yu, 1988), and differences between the various kinds of services and their implications on marketing (e.g., Nicoulaud, 1988; Patterson & Cicic, 1995). All in all, the number of studies seems to be small in relation to the significance of the service-providing industries; the research seems to be fragmented into noncoherent topics without having built a sufficient theoretical basis, and it seems to be purely exploration-oriented, which shows that the ‘‘research on international services marketing is still very much at an early stage’’ (Knight, 1999, p. 348). Models to describe and explain the internationalization of service-providing companies are to this day mainly based on the investigation of manufacturing firms, and the question arises whether these models are able to adequately map the internationalization behavior of service-providing firms (Mo¨sslang, 1995). Services are distinguishable from commodities with regards to characteristics such as their materiality, storage and transportability, intensity of customer contact, and differentiation degree – characteristics which may have an essential influence on internationalization. The literature is divided in its opinion (Gro¨nroos, 1999). Some authors hold the view that the internationalization of the service-providing and

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manufacturing industries goes through a similar process, and there is no need to adjust the existing internationalization models: Boddewyn, Halbrich, and Perry (1986), Terpstra and Yu (1988), and Elango and Abel (2004) investigated to what extent the theoretical approaches for the explanation of direct investments in foreign markets are suitable to map the behavior of service-providing companies. They came to the conclusion that there is no need for a fundamental adaptation of the existing models, and that internationalization of service-providing firms can be explained by simple qualitative differentiations, for example, regarding the significance of the advantage of a location. Katrishen and Scordis (1998) analyzed to what extent multinational insurance companies are in a position to gain advantage from the internationalization of their field of business activities due to the company size and came to the conclusion that service-providing companies – similar to manufacturing companies – practice economies of scale. Javalgi, Cutler, and Winans (2001) examined the question what influence the country of origin has on the marketing of services in foreign markets and came to the conclusion that the significance of the country of origin for a service corresponds approximately to that for the marketing of tangible goods. The second group of authors argues that there are distinct differences between the internationalization of a material product and an immaterial service: Javalgi (2003) analyzed the motives for internationalization of business-to-business service providers on the basis of Dunning’s eclectic theory (Dunning, 1980) and came to the conclusion that internationalization models that are based on the examination of manufacturing companies cannot simply be transferred to service-providing companies. ‘‘Rather, each underlying assumption from the manufacturing literature must be carefully examined (both theoretically and empirically) to determine its appropriateness for application in the service industry’’ (Javalgi, 2003, p. 195). Dunning (1993) and O’Farrell, Wood, and Zheng (1995) showed that the special characteristics of a service, like its intangibility, perishability, lack of transportability, and close customer contact exert a significant influence on the target markets that are selected by service providers. Ekeledo and Sivakumar (2004) examined a resource-based model to explain market entry strategies of service-providing companies and showed that service providers strive for a stronger control of their foreign business than manufacturers do. The third group of authors holds the opinion that the internationalization of service-providing companies cannot be viewed generally, since a distinction must be made between different kinds of services: Erramilli (1990) and Blomstermo and Sharma (2006) showed that the entry strategies of service providers strongly vary between different sectors. The behavior of suppliers of


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the so-called hard services (like software and engineering) tends to be similar to that of manufacturers, whereas the behavior of companies offering soft services is very different. Coviello and Martin (1999) examined the internationalization behavior of engineering consulting firms. They found out that the internationalization process of these firms was significantly determined by specific service features, such as the great importance of the personal know-how of the employees, the strong involvement of the customer in the performance process, the high capital intensity, and the projectdependent organization. Neither the direct investment theory nor the stage models or the networking approach proved to be suitable to explain the behavior of these enterprises. Moreover, it turned out that the deviations from the internationalization behavior of manufacturing firms became less when comparing the consulting firms to small manufacturing enterprises. Coviello and Martin therefore posed the question ‘‘whether industry influences are less important than those related to size’’ (Coviello & Martin, 1999, p. 60). All in all these studies present an inconsistent answer to the question: Is there a difference between the internationalization behavior of service and manufacturing firms? The results suggest that service providers tend to exert a stronger control on their foreign activities. They contradict themselves as far as the criteria and the scope of the target market selection are concerned, and they imply that the extent of the difference between the internationalization of service providers and manufacturers depends on the type of service offered. However, evaluation of these different positions remains difficult. The empirical research base is still too weak in order to be able to judge whether the currently applied internationalization theories are suitable to map the behavior of service providers, or if they have to be adapted to the specific characteristics of immaterial products. The objective of the present study was to describe the motives, the process, and the challenges associated with the internationalization of service-providing firms and to compare them with those of manufacturing firms. The following paragraphs will introduce you to the research methodology applied in the project, the findings resulting herefrom, as well as their scientific and economic significance.

METHODOLOGY The study was structured into two consecutive surveys: the first one was explorative, qualitative-empirical. The sample consisted of 12 internationally active service companies, 4 each from the industries of corporate

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consulting, engineering, and information technology. In each company the CEOs were questioned by means of partly structured interviews for the motives, the process, and the challenges of their internationalization. The interviews were subjected to a standardized content analysis and then compared with each other. Based on the results, a focus group consisting of scientists, entrepreneurs, and export specialists formulated theses on the internationalization behavior of service providers. The following second survey was confirmatory, quantitative-empirical. As the basis for the sample the Export Directory of the Osec Business Network Switzerland – the official state-financed Swiss export promotion agency – was used. The sample consisted of 996 organizations: 443 service providers from the sectors of consulting, information technology, and education, as well as 553 production enterprises from the sectors of food, textiles, and chemical products. A questionnaire was developed to measure the agreement with the theses resulting from the qualitative survey. The questionnaire was written in German and French and was based on an Internet-based survey instrument (Survey Generator). Questions were subjected to a pretest: incomprehensive formulations and incomplete answer categories were re-edited. The questionnaire was finally sent to the persons responsible for the international activities of the businesses (i.e., heads of exports, marketing managers, CEOs). Nonresponding companies were contacted a second time and encouraged to answer the questionnaire. Feedback contained 330 answers (132 serviceproviding firms, 198 manufacturing firms), which is equivalent to a 33 percent response rate. The companies participating in the quantitative study had 213 employees on average (production companies 296, service providers 77). They are on average 55 years old (production companies 68, service providers 35) and generate a foreign sales volume of 47 percent of total sales (manufacturers 50 percent, service providers 42 percent). The figures illustrate that the examined service providers were considerably younger and smaller than the manufacturers. All in all, the companies achieved a large foreign market share which is probably due to the fact that, on one hand, all entries were selected from the Osec Export Directory and, on the other hand, the nonresponse effect only led internationally active companies to participate in the study. Large companies are over-represented in the study. On average, Swiss companies have 11 employees (Federal Office for Statistics, 2005). The allocation of companies to individual industry sectors revealed that consulting agencies are heavily over-represented within the service category compared with information technology and training firms. Within the


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production sector, companies are relatively equally represented in the three sectors: chemicals, textiles, and food. The methods used for evaluating the questionnaires were cross tabulation and logistic regression analysis in SPSS. By means of the cross tabulation, answers provided by the service and manufacturing companies were compared to one another and first hints were given concerning their significance of difference through Pearson’s chi square test. Logistic regression analysis was then applied for testing step-by-step as to what extent the dependent variables (motives for internationalization, criteria for the selection of a foreign market, speed of market development, type of market entry, challenges associated with the internationalization) were influenced by the independent variables (age of the corporation, size of the corporation, degree of internationalization (foreign market revenue share), and industrial sector), and if the differences between service providers and manufacturers were maintained if the influence of the other independent variables was controlled. Contributions made through the independent variables are rated ‘‘significant’’ if the value reached fell below 0.05 (asymptotic difference), and ‘‘highly significant’’ if the value reached fell below 0.01. The significance levels of the chi square tests are marked in the figures with asterisks (/).

RESULTS The following paragraphs illustrate the findings resulting from the surveys. Within the framework of the quantitative survey, the degree of agreement to the theses generated from the qualitative study will be illustrated, as well as to what extent service providers and manufacturers differ in their agreement.

Motives for Internationalization From the qualitative survey of service-providing companies, eight different reasons were found which had induced internationalization. The nature of these reasons is partly reactive, like the limitation of the domestic market, forcing service providers to go abroad. Partly, however, their nature is proactive, like using internationalization as a competitive reference (also see Bruhn, 2005; Meffert & Bruhn, 2003).

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RALPH LEHMANN What reasons have caused you to start serving foreign markets? (*Significance

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