SME internationalization: the influence of age and
industry on foreign entry modes choices of SME’s
moderated by international experience
Melanie Datema
Student number 1167.3583
MSc. Business Administration – International Management track Amsterdam Business School, Universiteit van Amsterdam
Supervisor mw. dr. V.G. Scalera Date submission March 23th, 2018
2 Statement of originality
This document is written by student Melanie Datema who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
3 Table of contents
Abstract ………..4
1. Introduction ………5
2. Literature review ………8
2.1 SMEs expand abroad ………8
2.2 Entry modes ………..9
2.2.1 Uppsala model ………11
2.2.2 OLI-paradigm ……….13
2.2.3 Alliances and joint ventures ………14
2.2.4 Acquisitions ………...…….16 2.3 Firm age ………..…17 2.4 Firm industry ………...19 2.5 International experience ………..22 3. Theoretical Framework ……….23 3.1 Firm age ………...23 3.2 Firm industry ………...25 3.3 International experience ………..26
3.4 Conclusion theoretical framework ………..28
4. Methodology ……….30
4.1 Research strategy and design ………..30
4.2 Research setting ………...31
4.3 Data and variables ………...33
4.3.1 Secondary data analysis ……….………..33
4.3.2 Dependent variable ………..34 4.3.3 Independent variables ………..34 4.3.4 Moderator ……….35 4.3.5 Control variables ………..35 4.3.6 Data preparation ………...36 4.4 Analysis ………37 4.4.1 Longitudinal research ……….………..37
4.4.2 Binomial logistic regression analysis ………...38
5. Results ………40
5.1 Normality check ………40
5.2 Descriptive statistics ……….40
5.3 Correlation matrix ……….42
5.4 Logistic regression analysis ………..44
6. Conclusion ………..49
6.1 Discussion ……….51
6.2 Limitations and future research directions……….51
Acknowledgements ……….53
References ………...54
4 Abstract
This thesis studies the effect of age and industry on SMEs’ entry mode choices, moderated by international experience. Worldwide SME data about joint ventures and acquisitions is
gathered from the databases Orbis and Zephyr from Bureau van Dijk. 21.163 valid cases in the period from 01/01/2008 until 31/12/2017 are analyzed, binomial logistic regressions are performed. The analyses have shown that there is statistical evidence that firm age of SMEs in general has a negative effect on the likelihood of choosing joint venture compared to
acquisitions. However, the analyses have shown there is statistical evidence that firm industry of SMEs in general has a positive effect on the likelihood of choosing joint venture compared to acquisitions, especially for technology intensive industries compared to knowledge
intensive industries.
Also the moderation interaction effect is statistical significant: international experience counted in years and international experience counted in number of previous joint ventures and acquisitions have statistical evidence. This moderation interaction effect is statistical significant for both technology intensive industries and knowledge intensive industries, with a really strong effect of technology intensive industries moderated by international experience in number. This moderation interaction effect is statistically significant for firm age,
moderated by international experience and has also a negative effect on the likelihood of choosing joint venture compared to acquisition.
Keywords: SMEs, entry mode choice, foreign direct investments, strategic alliances, joint ventures, acquisitions, firm age, firm industry, international experience.
5 1. Introduction
Since several decades, economists describe in multiple modern economies a shift of economic activity from bigger to smaller firms. Results from the European Observatory (1988-1993) demonstrate the growth of smaller firms (maximum of 500 employees) contributes more to the GDP growth than that larger companies contributes. In the OECD economies, over 95% of all firms are SMEs (OECD, 2000). Small and medium enterprises (SMEs) have gained an important role within the national economies. SMEs are called important elements for enhancing economic activities like employment, innovation and wealth (Birley and Westhead, 1990). SMEs account for 60% to 70% of all employment and produce a large share of new jobs (OECD, 2000). That is why in many countries, the policy support for improvement of international small businesses sector’s contribution has grown (OECD, 1997; OECD, 2000). Also, the SMEs’ internalization process gained more and more attention internationally (Boter and Holmquist, 1996).
The business environment in which SMEs (and all other companies) operate, are subject to many fast changes. The globalization of markets, the ever changing technology, as well as the related consumer needs and preferences, and the new possibilities in the
telecommunications canals, information technologies, manufacturing and automation are examples of trends which can influence the competitiveness of SMEs.
SMEs are facing inconvenient obstacles in SMEs’ international expansion process, such as being a foreign, new and small (Lu and Beamish, 2006). These obstacles are disadvantageous, because they lead to a worse competition position with local firms and limited in acquiring resources and capabilities. (Bell, Crick and Young, 2004). These obstacles by globalization are the reason that SMEs have to create and strengthen their capabilities quickly. SME entrepreneurs will need to evaluate their strategic choices on a regular basis. As most suitable development method, many larger companies are starting
6 strategic alliances. Using strategic alliances is a logical response to quick changes in the market, technology or globalization (Doz and Hamel, 1998). In this research, I will investigate the alliance in joint ventures. There are two challenges in becoming competitive: Firstly, globalization gives every firm opportunities to enter international markets. Secondly, firms are seeking for new opportunities, solutions and answers to fulfill customer needs (Doz and Hamel, 1998).
Not only larger firms, but also SMEs’ response to globalization is to increase developing strategic alliances in global market (Bell, Crick and Young, 2004). Many
researches investigate larger firms and multinationals, but are these theories also applicable to SMEs? There is already investigated whether SME’s companies respond in the same way to developments in their business environment by joining strategic alliances. But it is not
examined what the influence is having experience in alliances on the SMEs international entry mode choice.
The international strategy of SMEs has become an useful and interesting business research topic, because SMEs contributes more to the GDP growth than that larger companies contributes. The Uppsala model by Johanson and Vahlne (1977) was mostly affecting the business research in SMEs’ international strategy. The research examined firms’ market selections, their export decisions and their following internationalization processes (Bell, 1995). But, there is little research and support for SMEs that export to other market entry modes and partnerships between firms. These theories are limited in explaining non-linear behavior such as partnerships, networking and alliances.
In this research, I examine the impact of already having experience in foreign direct investments on the small and medium enterprises’ international entry mode strategy. Are the advantages and disadvantages of having international experience influencing the choice of entry mode when the firm is going to expand their firm abroad? I will combine this with the
7 characteristics firm age and firm industry of the SME, do these characteristics have also effect on the SMEs entry mode choice? This results in following research question:
How does firm age and firm industry, moderated by international experience, affect small and medium enterprises’ international entry mode choices?
The purpose of this study is to investigate and describe the further entry mode choices of SMEs which already have joint venture or acquisitions. The entry modes choices is a part of going abroad, the SMEs internationalization expansion and the firms development process. Understanding the entry mode choices of a firm is important to enhance to knowledge about characteristics and developments of SMEs entry mode strategy. Furthermore, the strategic alliance perspective broadens the knowledge about market entry choices and SMEs international strategy to create competitive advantage in the global competition. This can result in contributing to the growing knowledge and empirical studies on alliances and entry mode choices of SMEs, which can guide scholars and managers in dynamic changes by providing a coherent framework.
As research method, I used quantitative research with the Orbis and Zephyr databases form Bureau van Dijk for their information about worldwide companies and their joint
ventures and acquisitions. This thesis starts with the chapter literature review, here definitions of the key constructs and give a theoretical background for the empirical study about entry mode choices are described. In the chapter theoretical framework will be described the specification and justification of hypotheses. The chapter methodology will capture the data collection, analysis and justification of methods, description of the data, explanation of every research step, variables, measurements, data sources. In the chapter results, a description about the empirical results, with some descriptive statistics, analyses the data results. Finally, the chapter discussion and conclusion with significance of the findings and suggestions for future research and limitations about the field work and research results will follow.
8 2. Literature Review
In this literature review is described the definition of the key concepts SME’s,
internationalization, entry modes, age, industries and experience. The literature review is covering multiple, existing key papers in the research field of these key concepts. Starting with a definition about SMEs, definition of internationalization, the different types of entry modes by Pan and Tse (2000), the effect a firm’s age, industry types and international experience.
The definition of SMEs is an umbrella concept for the enterprise categories medium-, small- and micro-sized. Medium-sized enterprises have employment of maximum 250 people and maximum turnover of €50 million. Small-sized enterprises have employment of
maximum 50 people and maximum turnover of €10 million. Micro-sized enterprises have employment of maximum 10 people and maximum turnover of €2 million (European Commission, 2003).
2.1 SMEs expanding abroad
SMEs increased participating in international markets and made their activities more international focused. Nowadays, SMEs are playing a crucial role in the international trade (Kalinic and Forza, 2012; Ruzzier, Hisrich and Antoncic, 2006).
Entering a foreign market can be called the internationalization of an organization. Internationalization is the geographical expansion of a firms economic activities across national borders (Ruzzier et al. 2006). Nowadays, businesses internationalize earlier in their life-cycles than it was a few decades ago (Oviatt & McDougall, 1997). This is due to institutional factors (regulation), market factors (competition) and organizational factors (Brush & Vanderwerf, 1992). Internationalization will have a positive impact on an organizations’ survival rate, profitability and growth (Oviatt & McDougall, 1997).
9 Internationalization can be seen as a dynamic process which discusses both the manner of access and the choice for the international market (Andersen, 1997). Root (1987) sees the manner of expanding as the way in which international transactions are organized and executed by the company.
Research on SMEs internationalizing strategies started in the 1970s. Johanson and Vahlne (1977) developed one of the first models to describe a firms internationalization process. Johanson and Vahlne’s model is known as the Uppsala model. The Uppsala model describes firms gradual acquirement, integration and use of knowledge about foreign markets and operations. Firms increase their involvement in foreign countries gradually, in small steps (Johanson and Vahlne, 1977). More recent studies about SMEs internationalization focus on international new ventures (Oviatt and McDougall, 1994), born globals (Knight and Cavusgil, 2004) and international entrepreneurship (McDougall and Oviatt, 2000). These newer topics about born globals, international new ventures, international entrepreneurship and the Uppsala model will be further explained in the paragraph about entry modes.
2.2 Entry modes
International entry mode research explores the form of operation firms use to enter foreign markets. International entry mode research is important because it sets correct boundaries about the concept entry modes. These boundaries has significant performance implications because entry modes are difficult to change or correct, once established (Brouthers and Hennart, 2007). Firms can enter foreign markets in several different ways, for example joint ventures, greenfield investments, acquisitions, licensing, and exporting (Chang and
Rosenzweig, 2001; Pan and Tse, 2000; Root, 1994).
There can be made a distinction in expanding between autonomous and cooperative internationalization strategies. As companies operate independently during the
10 internationalization process there is an autonomous form of accession (Hessels et al., 2005). A company that chooses a cooperative internationalization strategy, on the other hand, gives her autonomy partly in order to internationalize through cooperation. SMEs cannot choose for every option in their internationalization strategy (Chiara and Minguzzi, 2002). The biggest internal constraint is the SMEs’ limited financial resources (Chiara and Minguzzi, 2002; Maeseneire and Claeys, 2012). Due to the limited financial resources, it is harder for SMEs to execute a foreign direct investment because this requires higher financial assets. Other
internal constraints for SMEs are their lack of management skills and lack of time (Chiara and Minguzzi, 2002). The purpose of cooperation is to generate more resources (in the form of cash and expertise) as SMEs have often less resources than larger companies. It is therefore important that as a SME, whether the availability of resources weighs against the
opportunities offered by the new market and whether expanding to this market is really necessary for the company (Oviatt and McDougall, 1994).
External barriers for SMEs limited internationalization are the adverse market
conditions and institutional rules. These constraint and barriers are different for firms in every internationalization stage (Uner, Kocak, Cavusgil and Cavusgil, 2013). SMEs could be
restricted in their choice for equity entry modes, such as equity joint ventures or wholly owned subsidiaries, for their internalization strategy due to these limitations, constraints and barriers (Hessels and Parker, 2013). SMEs often use non-equity modes, for example export or contracts (Chiara and Minguzzi, 2002; Maekelburger, Schwens and Kabst, 2012).
Within cooperative internationalization, distinction can be made between informal and formal cooperation. Formal partnerships can be subdivided into three basic forms: the 'non-equity strategic' alliance ', the' 'non-equity strategic alliance ' and finally the joint venture. Pan and Tse (2000) propose this hierarchical model of market entry modes. Non-equity-based and equity based entry modes are the first level of this hierarchy. An non-equity strategic alliance
11 is formed by drawing up contractual agreements. This should be considered agreements on the supply, distribution and production of goods. Non-equity-based entry modes are
contractual agreements and export (Pan and Tse, 2000). The second level of hierarchy for choosing an entry mode are the wholly owned operations, equity joint ventures, contractual agreements and export. When a firm chooses for the non-equity modes, it does not require establishment of an independent organization (Pan and Tse, 2000).
There is an equity strategic alliance if the organizations involved are all co-owners of the newly created organization. In the case of a joint venture, two or more organizations will set up a new organization and shared capital will be distributed evenly by the parties
concerned. Equity-based entry modes are wholly owned operations and equity joint ventures (Brouthers and Hennart, 2007; Pan and Tse, 2000). With wholly owned subsidiary, the firm keeps full ownership. With equity joint ventures, the firm shares the ownership of affiliates with other firms (Brouthers and Hennart, 2007). When the manager chooses for the equity model, it requires major resource commitment in the overseas location. It calls for an actual investment to set up an independent operation. The firm needs to assess the investment risk and return, location choice, adaptation to local environment and management, control of operation (Pan and Tse, 2000).
The hierarchical model of market entry modes by Pan and Tse (2000) is appealing because managers have a limited analytical capacity and often decompose a complex decision into a hierarchical process.
2.2.1 Uppsala Model
There has been much research in the field of science in the expansion of companies to international markets. Through improved telecommunications and improved transport
12 McDougall, 1994). In current theories and models, attention is also given to the way
companies internationalize their activities (Hessels et al. 2005). These process theories focus more on the process that a company goes through in the internationalization of activities. The theories that are meant by this are the Uppsala model, the innovation-related model and the network approach.
Thus, the Uppsala model in this chapter will be further elucidated as well as the term 'Born global' or 'international new venture' in combination with the OLI paradigm drawn up by Dunning (1993). This paradigm explains why companies have a good reason to
internationalize.
The Uppsala model serves to explain changes in the manner of joining an enterprise over time. The model describes how a company internationalizes in a number of phases in a step-by-step manner (see Appendix A). The various phases of internationalization are characterized by the ever-increasing management expertise, which means that international involvement continues to increase (Johanson & Vahlne, 1977). The first step in the
internationalization process is, according to the Uppsala model, that companies will first internationalize by joining international markets that are geographically close and in terms of language and culture resemble the home market. The next step in the internationalization process will be that a company will consider expanding to more foreign and distant markets. The last stage has been achieved by the company when all business functions are
internationalized and there are foreign production units (Johanson & Vahlne, 1977).
This cautious step-by-step expansion can be explained by type of company. Van de Velde et al. (2009) distinguishes the 'Born Global' company and the 'Home Based' company. Technological developments have recently attracted more attention to companies that do not carry out a gradual, step-by-step process as in the Uppsala model, but are active
13 international new ventures (Oviatt and McDougall, 1994), born globals (Knight and Cavusgil, 2004), or the international entrepreneurship (McDougall and Oviatt, 2000). 'Born Global' company will be very internationally oriented since its inception and want to quickly enter markets in several countries (Knight and Cavusgil, 1996). These firms use resources from and sell products and services in multiple countries from their start, to derive competitive
advantage. These new SMEs’ origins are internationally focused and have a proactive international focused strategy from their start, while traditional SMEs do not have this international focus from the very beginning. International new ventures and born globals expand not gradually abroad (Oviatt and McDougall, 1994). According to Van de Velde et al. (2009), home-based companies are still very careful with internationalization and will
therefore often want to use the step-by-step internationalization.
Other studies about international new ventures and born globals also highlight their rapid internationalization strategy from the very beginning (Autio, Sapienza and Almeida, 2000), these SMEs are using networks in their internationalization strategy (Lu and Beamish, 2001), and these SMEs are expanding in domestic and also in international markets (Coveillo and Munro, 1997). International entrepreneurship studies emphasize that entrepreneurs are important decision makers in organizations. International entrepreneurs are international oriented and influence SMEs’ internationalization patterns (Acedo and Jones, 2007; Oviatt and McDougall, 2005).
2.2.2 OLI-paradigm
Dunning (1993) states that with the eclectic or OLI paradigm, also called the OLI framework, three types of parts can be identified. These three parts together can explain international production, geography, industry choice and can form an important motive for direct foreign investment. The three sets of independent variables are ownership, location and
14 domiciled ones in a country; the higher the level of ownership, the more likely to increase of engage in foreign production. The variable location describes the attractiveness of countries or regions for adding value to firm activities. Finally, the greater the benefits of internalizing cross-border, international intermediate product markets, the more likely firms will engage in foreign production than licensing the right to do so (Dunning, 2000).
International entry mode research has tended to concentrate on large multinational firms. But majority of firms involved in international business are not large but can be classified as SMEs. Although there is far less research on SME mode choice decisions than has been undertaken on large firms, it appears that many of the same theories that explain large firm mode decisions are applicable to SMEs and young new venture (born global) firms (Brouthers and Hennart, 2007).
2.2.3 Alliances and joint ventures
According to Gulati (1998), the definition of alliances is “strategic alliances as voluntary arrangements between firms involving exchange, sharing, or co-development of products, technologies, or services. They can occur as a result of a wide range of motives and goals, take a variety of forms, and occur across vertical and horizontal boundaries” (p. 293). In this research, I use joint ventures and acquisitions as entry modes. Joint ventures are a type of alliances, so that is why here follows literature about alliances.
Alliances can give access to important resources and can increase the market power over their competitors (Barringer and Harrison, 2000). Therefore, firms enter alliances to use complementary assets of their partnerships (Ireland, Hitt and Vadyanath, 2002). Among other things, firms can examine their partner’s distribution channels and financial resources for their own firm. If a firm uses the broad resource based view, it can reveal alliance information about firm’s resources, like technology (Kogut, 1988). Firms can use strategic alliances to
15 obtain resources or to retain resources (Barringer and Harrison, 2000). Obtaining resources means that a firm uses a local partner’s crucial resources through entering international alliances, such as social connections, local facilities and knowledge (Beamish, 1987). Retaining resources means that a firm needs to enter and engage in alliances to keep certain resources, because the firm lacks the know-how to use or develop themselves the resources (Kogut, 1988). Firms prefer to start a partnership to secure their competitive advantage than selling their resources (Kogut, 1988).
According to Hamel (1991), the main purpose of starting an alliance is to internalize their partner skills. The advantages of having an alliance can be greater technological knowledge, organizational learning, innovation, knowing customer needs, reducing development costs, reducing product development time-span and entering new markets. Mixing capabilities and skills can enable firms to recognize and create learning opportunities (Iyer, 2002). By learning from their partner, firms can strengthen and broaden their
capabilities, skills and competitiveness (Iyer, 2002). The knowledge about managing a business with a partnership is a learning process which gives firms in the partnership the opportunity to do future entries into unexperienced businesses (Tsang, 1999).
Having an alliance is a strategy to strengthen the firm’s market power, political power, production, research and marketing (Barringer and Harrison, 2000) for example. Starting an alliance like joint venture can give firms an opportunity to solve market problems (Beamish and Bank, 1987). Sharing knowledge and information in a cooperation can reduce risks and uncertainty (Beamish and Bank, 1987).
Strategic alliances have a lot of advantages, but alliance can cause problems for all partners if not managed properly (Lorange and Roos, 1993). Ceveral studies have found high numbers of failed alliances (Reuer, 1999). Hench, alliances remain crucial for firms to receive
16 competitive advantages and create value chains with partners (Ireland, Hit and Vaidyanath, 2002).
To create and maintain successful strategic alliances, partner firms will have to learn how to organize this alliance process (Lorange and Roos, 1993). To employ successful strategic alliances, there are four main activities for firms: rethinking business, crafting alliances, making strategic structures for alliances and evaluating alliances (Yoshino and Rangan, 1995). But risks can influence alliances’ successes, so alliances’ management can be classified in four stages (Das and Teng, 1999). The firm has to select a partner for the
alliance, structure the alliance, needs effective cooperation while operating and finally evaluate their performances (Das and Teng, 1999).
There is also a difference in horizontal and vertical alliances. Horizontal alliances are alliances between firms which are delivering for the same group of customers in the same market. So the firms involved in horizontal alliances are working together with their
competitors. This horizontal alliance is a cross holding agreement between the participating firms. Horizontal alliance gives the competitive advantage to share raw material costs, logistical costs, research and development and marketing because of the larger volumes. Vertical alliances are not competing for the same group of customers and not working in the same market, but in the products value chain upstream and downstream (Teece, 1992).
2.2.4 Acquisitions
Last decades, there was a great increase of firms that adopted cross-border acquisitions to realize international expansion (Qian, Hong and An, 2012). An acquisition is the purchase the target company or parts of a target company, this target company become a part of the
acquirer company. Acquisition are purchased by own money or by the target companies debt to gain stock or shares. But an acquisition can also be made by exchanging the acquirer’s
17 stock for the target company’s stock. Acquisitions can be hostile or can be friendly. As an international expansion strategy, acquisitions are outstanding popular globally. Acquisitions can be an attractive entry mode, because acquisitions provide local brands, distribution
channels, suppliers, market knowledge, relationships in a network, brand reputation, customer base for the acquirer. With acquisitions, a firm can rapidly expand its scale, gain profitability and become market leader. By acquisitions, the acquirer company can enhance its capabilities, become cost-efficient and competitive position (Dikova and Witteloostuijn, 2007).
However, multiple researchers state that acquisitions can lead to bad performance for both the acquirer firm and the target firm (Dikova and Witteloostuijn, 2007). Owners from companies with acquisitions state that culture differences between the acquirer firm and the target firm, and home country and host country play a crucial role in the success of acquisition deals (Chkrabarti, Gupta-Mukherjee and Jayaraman, 2009). Dikova and Witteloostuijn (2007) add that failure could also be caused by integration failures and technological mismatches. Zollo and Meier (2008) found in their study at a large number of acquisitions of American commercial banks, that acquirer companies in general do not make significant from acquisitions.
2.3 Firm age
Entering global markets is becoming easier for firms, nowadays; which gives firms the opportunity to grow and expand sales (Keup and Gassmann, 2009). Firms are taking this advantage to grow by international expansion, although the firms have different capabilities and resources (Soriano and Dobon, 2009). These capabilities and resources are partly age dependent; young firms have fewer capabilities and limited resources than established firms (Zahra, 2005). The Uppsala model examined the potential difference of firm age and its influence on the decision to enter foreign markets and entry mode choice. First they are expanding to geographical and cultural close countries to their home country, after that also
18 going to expand to more foreign and distant markets. It is not evident when firms move into foreign markets, what sort of entry mode they choose, early or later in the firms’ life cycles. This brings up the question of what effect firm’s age has on the international entry mode choice.
In order to address this question in my study, I draw from the theoretical perspective liabilities of firm newness (Stinchcombe, 1965) and the theoretical perspective liabilities of firm aging (Barron, West and Hannan, 1994). The theory liabilities of firm newness proposes that younger firms have a disadvantage and are more likely to gain higher mortality rates than more established firms when expanding internationally (Stinchcombe, 1965). Younger firms has this disadvantage and higher mortality rate, because they often lack the levels of
legitimacy and recognition in the development of processes and routines, economies of scale, marketplace and alliances, partnerships or other relationships (Delmar and Shane, 2004; Zahra, 2008). Grant (1991) agrees with this, he says that skills of an organization are
developed and sustained only through experience, through practice over time. Advantage of an established firm over a newcomer is the organizational routines that it has perfected over time (Grant, 1991).
But younger firms have the advantage of learning new foreign knowledge relative to older firms. Younger firms can adapt more easily politic, cognitive and relational norms, patterns and rules than older firms can (Autio et al., 2000). A firm with an international identity from their start, is more aware, more capable and more willing to see and utilize international opportunities (Autio et al., 2000). In industries where technological change is rapid, new firms may possess an advantage of faster learning of new routines and less omitted to old routines (Grant, 1991).
The theoretical perspective liabilities of firm aging proposes that more established firms can have a disadvantage compared to younger firms, because established firms tend to
19 have rigid organizational routines and decision-making processes (Barron, West and Hannan, 1994). Firm rigidity could induce firms cannot make rapid change and adjustments in their products and services, this hinders recognizing or exploiting business opportunities (BarNir, Gallaugher, and Auger, 2003). When older firms are internationalize they should learn new patterns and routines, but to do so it requires unlearning their old habits (Barkema and Vermeulen, 1998).
2.4 Firm industry
This hierarchical model of market entry modes by Pan and Tse (2000) is also
appealing because it draws the dramatic differences that exist among the various entry modes and among the criteria of choice at each level (Pan and Tse, 2000). Pan and Tse categorizes these dramatic differences in eight factors which influence the firms entry choice: prioritized location, host country risk, risk orientation, power distance, interaction between host and home countries and industry factors (Pan and Tse, 2000; Brouthers and Hennart, 2007).
The last influence factor on entry mode choice is the type of industry (Pan and Tse, 2000). Two industry-specific variables are prominent: advertising intensity and capital intensity. Firms need to protect their brands by investing in brand building through advertising. Foreign firms are more likely to adopt equity modes in industries with high advertising intensity than with low advertising intensity. In industries with high asset
turnover, a given amount of the asset could generate larger sales. Foreign firms in industries with high asset turnover are more likely to adopt equity entry modes than with low asset turnover (Pan and Tse, 2000).
Transaction cost analysis argues that managers suffer from bounded rationality, whereas potential partners may opportunistically act if given the chance. Three factors influence decisions: asset specificity, uncertainty (both internal-behavioral and
external-20 market specific), and frequency. These tree factors can explain entry mode choice (Brouthers and Hennart, 2007).
Asset specificity occurs when suppliers or customers must make investments that are specific to the buyer. Investment can be categorized in vertical and horizontal investment. With vertical investment, the other firm endeavor to avoid the other party behaving
opportunistically. The firms and its partners will draft a contract to specify price. Vertical investment will fail if the unexpected happens. In that case, hierarchical coordination can be a solution (Brouthers and Hennart, 2007).
With horizontal investment, the firm can choose between licensing or integration. Licensing is chosen when the asset specificity is low; integration is chosen when there is a high level of asset specificity. There is a level of information asymmetry between the buyer and seller of knowledge when the firm chooses to exploit some innovations through licensing and others by integrating. But, buyers have limited knowledge of what they are buying and are unlikely to put it in the same valuation as sellers. Whether knowledge will be transferred by contract (licensing) or by equity (WOS or JV) depends on the characteristics of the technology: Newer and more tacit knowledge, and knowledge available from few sources, will be transferred through equity WOS or JV, whereas older and better known technologies will be licensed (Brouthers and Hennart, 2007).
The choice between full and partial ownership is influenced by the level of asset specificity. If an industry or market has higher asset specificity, firms choose for wholly owned subsidiaries and intermediate joint ventures. The choice is determined by a firms need for complementary resources that are hard to purchase on markets, on one hand, and the potential that a joint venture offers for free riding and spillovers on the other (Brouthers and Hennart, 2007).
21 Hard services industry are more likely to choose a low control entry mode; soft
services industry are much more likely to choose a high control entry mode. Hard services are services where the production and consumption of it can be decoupled. Like software or architectural services could be in a document, on a CD or some other tangible medium. Hard services could be standardized or transferred to mass production. Soft services are services where at the same time, production and consumption happen, no decoupling of it. The
employee of soft services need to physically be present, such as employees of hotels, hospitals or management consultancies have in their job. High control entry modes are wholly owned subsidiaries or majority owned subsidiaries. Low control entry modes are (Blomstermo, Deo Sharma and Sallis, 2006).
SMEs internationalization strategy is also determined by the technological intensity of the industry. The R&D costs in relation to the total sales is often the measurement for
technological intensity in the industry. Technologic intensive industries are characterized by firms that are more likely to expand across borders. Technological intensive firms have more tangible assets, intangible assets, accumulated knowledge and expertise; this makes foreign market entry more profitable and also easier (Driffield and Munday, 2000; Kuemmerle, 1999).
Industries that are characterized by a high level of knowledge intensity are performing better in a dynamic environment (Gaur, Mukherjee, Gaur and Schmid, 2011). Firms with high knowledge intensity also develop learning skills, these skills can be effective for expanding to new markets and countries (Grant, 1996). Firms in knowledge intense industries have often more international growth (Autio et al. 2000). Higher level of knowledge intensity increases that organizations expand, to minimize the influence of competition in their local region (Fernhaber et al., 2008).
22 2.5 International experience
SMEs internationalization is influenced by the firms previous international experience. Several studies have shown a positive relationship between international experience and international expansion (Chiara and Minguzzi, 2002; Sharma and Blostermo, 2003).
International expansions are learning processes and where firms receive international experience. If the firm has more international experience, the internal uncertainty is reduced (Brouthers and Hennart, 2007). Lower uncertainty in foreign markets increases firms’ commitment to foreign markets (Johanson and Vahlne, 1977; 1990; Forsgren, 2002). International experience give firms the opportunity to obtain business, institutional and internationalization knowledge (Sharma and Blostermo, 2003). International experienced firms can acquire business knowledge about clients’ preferences, acquire institutional
knowledge about national markets and their rules, and acquire internationalization knowledge by developing their internal capabilities and resources about international markets (Majocchi and Zucchella, 2003; Chiara and Minguzzi, 2002). International experience increases
knowledge and leads to better insight in opportunities in domestics and foreign markets (Maekelburger et al., 2012; Hulbert, Gilmore and Carson, 2013).
In the resource-based view, firms develop unique resources that they can exploit in foreign markets or use foreign markets as a source for acquiring or developing new resource-based advantages. One of the earliest resources to be explored is experience. Low and high levels of experience lead to full control entry modes, intermediate levels of experience to market-based modes. The possession of greater resource-based advantages lead to the use of internalized over market modes of entry (Brouthers and Hennart, 2007).
23
3. Theoretical framework
The international market is growing, and also SMEs are more and more focused on international trade (Kalinic and Forza, 2012; Ruzzier, Hisrich and Antoncic, 2006). Internationalization is an expansion of the firms economic activities to other countries (Ruzzier et al. 2006). Internationalization increases a firms’ profits, growth and survival rate (Oviatt & McDougall, 1997). There are several entry modes to enter foreign markets, such as wholly owned subsidiaries, joint ventures, greenfield investments, acquisitions, licensing and exporting (Pan and Tse, 2000). My interest in this thesis are focused on joint ventures and acquisition. Also my dependent variable in this research are SMEs’ entry mode choice, these are narrowed down to joint ventures and acquisitions, where joint ventures are 1 and
acquisitions are 0.
3.1 Firm age
A firms’ age influences the firms’ entry mode choice. The theoretical perspective liability of firm newness states that younger firms have a disadvantage and a higher mortality rate
(Stinchcombe, 1965). Because younger firms have lower levels of legitimacy and recognition, and lower levels of developed processes, less routines, economies of scale, less alliances or partnerships (Delmar and Shane, 2004; Zahra, 2008). Newer, younger firms have less resources compared to older, established firms (Zahra, 2005). Younger firms have less experience, so younger firms have more internal uncertainty than older firms (Brouthers and Hennart, 2007). Compared to older incumbents, younger firms have less due diligence. Newer firms also have less social capital than older firms, for example less partnerships, less
alliances, less connections with customers and suppliers, but also less experience and contact with NGO’s, the government, politics and policie changes (Delmar and Shane, 2004: Zahra,
24 2008). Stinchcombe (1965) and Barron, West and Hannan (1994) calls these disadvantages the liabilities of firm newness.
But younger firms are better at learning new, foreign knowledge (Autio et al., 2000). Firms that are international from the very beginning, called born globals, are better in recognizing and using international opportunities (Autio et al., 2000; Knight and Cavusgil, 1996). Born globals and international new ventures are international oriented from their inception, and want to enter different countries immediately (Knight and Cavusgil, 1996).
The theoretical perspective liabilities of firm aging states that older, more well-established firms have a disadvantage, because older firms have lots of routines,
standardizations and processes (Barron, West and Hannan, 1994). Older firms are more rigid and less good in rapid change, adapting quickly to the environment (BarNir, Gallaugher and Auger, 2003) and should unlearn habits (Barkema and Vermeulen, 1998). Older firms are less good in change because they have more habits to unlearn than younger firms. Co creating a joint venture means for older firms working together with a partner and adapting to some of the partner’s needs. And adapting is harder for older firms than for younger firms, so older firms are less likely to choose a joint venture as entry mode.
So the age of firms is not only a literal term on itself, it is an overarching concept which contains much more than only the years a firm is active in the economic market. The concept age of firms, covers a firm’s developed capabilities, their routines, their builded contacts and relationships over the years with stakeholders like employees, ex-employees, suppliers, competitors, customers, the government. The age of firms also contains if firms are established, if firms are stable, if firms have big uncertainties or not.
From these perspective, I build the argument that firm age could have impact on internationalization entry mode choices, such that younger firms can react on sudden change;
25 while older firms are already tied to their previous partnerships. Well-established firms will be more likely to invest in wholly owned acquisitions while expanding internationally, and relatively younger firms will invest in joint ventures. Younger firms will need a partner to expand; that is cheaper and the company needs less financial capital them self; a cooperation generates more resources, such as financial or knowledge (Oviatt and McDougall, 1994). The biggest limitation for SMEs is financial resources, and also lack of management skills and lack of time (Chiara and Minguzzi, 2002). Because an SME small, young, unexperienced, does not have many relationships and professional contacts yet, does not have a well know brand name, less legitimacy, does not have as many customers in a broad market compared to bigger, older, experienced firms (Delmar and Shane, 2004; Zahra, 2008).
Hypothese 1: Firm age has a negative effect on the likelihood for SMEs of choosing an joint
venture as entry mode compared to an acquisition.
3.2 Firm industry
The type of industry influences a firms entry mode choice (Pan and Tse, 2000). In a
knowledge intense industry, firms are gathering and maintaining their knowledge. These firms are training their learning skills while they are keeping their knowledge up-to-date. These learning skills can be very effective for expanding to new countries (Grant, 1996); these learning skills cause a good performance in a dynamic environment (Gaur, Mukherjee, Gaur and Schmid, 2011).
In an industry with a high technology or knowledge intensity or with newer and tacit knowledge, will be chosen for acquisitions or majority joint ventures. Because a knowledge intensive firm’s strongest asset is their knowledge and expertise, they have to protect their unique strengths for competitors. In an acquisition or a majority joint venture, firms can better protect their knowledge and expertise. Knowledge about their strategy, technics, routines,
26 capacities, distribution and supply chain, products, marketing and customer approach for example. For gathering knowledge, training employees, keeping learning skills high of employees, creating technology for the firm based on the market and needs of a buyer, a firm need to invest a lot (Brouthers and Hennart, 2007). Knowledge and technologies are
expensive to maintain, and firms don’t want that competitors copy their competitive advantage. In an acquisition the acquirer firm has more power than the target firm. In a majority joint venture, the majority firm has more power than the minority firm in the joint venture. With this power, the acquirer or majority firm can protect their knowledge and expertise, and decide better what they will expose about their knowledge and expertise.
Acquisitions as entry mode choice is even better for knowledge intensive firms, because they also buy new knowledge with the acquisition. High technological intensive industries have higher research and development costs than low technological intensive industries, so expanding the firm with an acquisition means buying a firm with knowledge. Buying an acquisition of a firm with a lot of knowledge can be lower than the costs of developing and researching by yourself (Driffield and Munday, 2000; Kuemmerle, 1999). While choosing joint venture as entry mode, the firm has to share its knowledge and
experience with their partner(s) in the joint venture. So joint venture is a less good option for firms in knowledge and technology intensive industries (Brouthers and Hennart, 2007).
Hypothesis 2: The knowledge and technology intensity of a SME’s industry has a negative
effect of on the likelihood of choosing a joint venture compared to an acquisition.
3.3 Experience
Previous international experience is influencing SMEs international entry mode choice. There is a positive relationship between experience and international expansion (Chiara and
27 By having more international experience, a firm learns more about international
expansions. Having more international experience, reduces the uncertainty about foreign markets (Brouthers and Hennart, 2007). Lower uncertainty will cause higher participation in foreign markets (Johanson and Vahlne, 1977; 1990; Forsgren, 2002). International experience gives firms knowledge about the international environment in fields like client preferences, institutional rules, develop international capabilities and resources (Chiara and Minguzzi, 2002; Majocchi and Zucchella, 2003; Sharma and Blostermo, 2003).
If a younger firm has already experience in expanding to domestic markets, the younger firm has knowledge about expanding. The younger firm already knows what the advantages and disadvantages are of expanding. The younger firm that is experienced in expanding to other countries, they reduced its internal uncertainty about international
expanding (Brouthers and Hennart, 2007). International experience increases knowledge and recognizing international opportunities (Maekelburger et al., 2012, Hulbert, Gilmore and Carson, 2013). So they also know how they can create an expansion again based on their experience.
According to Brouthers and Hennart (2007), the higher level of experience a firm has, it leads to choosing more full control entry modes like acquisitions. So the younger a SME is, the more likely it will choose a joint venture as entry mode, because the financial and social capital of the young firm is lower compared to established, older firms. But if a younger firm already has international experience by already having an expansion, the younger firm is more inclined to choose a acquisition. Because the young, but international experienced firm has more knowledge about other countries, rules of international markets, preferences of
international clients, better insight in international opportunities (Chiara and Minguzzi, 2002; Hulbert, Gilmore and Carson, 2013; Maekelburger et al., 2012; Majocchi and Zucchella, 2003).
28 Hypothesis 3a: Firm age, moderated by international experience, has a negative effect on the
likelihood of choosing a joint venture compared to an acquisition.
Knowledge, experience and expertise are strong assets for a firm, they have to protect their unique strengths for competitors. Acquisitions as entry mode choice is even better for knowledge intensive firms, because they also buy new knowledge with the acquisition. In joint ventures an international experienced firm has to share their knowledge and experience with their partner(s), so that is a less good option relative to acquisition. A firm in a
knowledge and technology intensive industry already have a lot of know-how about their business to protect form competitors. If a high knowledge and technological intensive firm already has international experience in expanding, the firm also wants the knowledge they gained by expanding, to protect from competitors.
Hypothesis 3b: The knowledge and technology intensity of a SME’s industry, moderated by
international experience, has a negative effect on the likelihood of choosing a joint venture
compared to an acquisition.
3.4 Conclusion theoretical framework
Concluding, a younger SME is more likely to choose a joint venture as entry mode when they want to expand, because they need the social and financial capital of their partner. An older, more established SME is more likely to choose an acquisition as entry mode when they want to expand, because already have enough social and financial capital and do not need a partner. The more knowledge and technological intensive a SME’s industry is, the more likely the SME will choose for an acquisition as entry mode, because they want to protect their
knowledge and technology from competitors or possible partners in a joint venture. The less knowledge and technological intensive a SME’s industry is, the more likely it will choose a joint venture as entry mode, because they want to gain from knowledge of their partner in the
29 joint venture. As the value of international experience increases, the less likely a young SME would choose for an joint venture as entry mode. As the value of international experience increases, the more likely an older SME will choose for acquisition as entry mode. As the value of international experience increases, the more likely a SME in a high knowledge and technological industry will choose for acquisition as entry mode. As the value of international experience increases, the less likely a SME in a low knowledge and technological industry will choose for a joint venture as entry mode.
Figure 1. Simplified figure of the relationships of all the variables.
To give an overview of the relationships between these variables, above is figure 1 with a simplified rendering of these relationships. Age of a SME means if a SME is young and recently founded, or if a SME is older and founded multiple years ago. Industry of a SME means if a SME is active in a low, medium or high knowledge or technological industry. Entry mode choice of a SME means that a SME can expand in multiple deal type forms. The deal types available where acquisitions, demergers, initial public offering (IPO), institutional buy-out, joint-venture, management buy-in, management buy-out, merger, minority stake, planned IPO, private equity, share buyback, venture capital, capital increase. In my research I choose for the two deal types as entry mode choice joint ventures and acquisitions.
Firm age Firm industry Entry mode choice of a SME International experience of a SME
30 4. Methodology
The methods that were used to conduct the research, will be explained in this chapter. First, the research strategy and the research design will be discussed. In this first part, the reasons for the choices of methods will be explained and outlined. In the second part, the units of analysis will be discussed. Here, more practical information on SMEs will be outlined to give some background and understand the context of SMEs. Thirdly, the data and analyses will be outlined. In this third part, will be explained that the database Orbis is suitable for researching SMEs international entry mode choices. Finally, the fourth part will briefly discuss the
preparation of the data prior to the real SPSS analyses. 4.1 Research strategy and design
My research examines the influence factors on SME’s international entry mode choices, moderated by the firm’s experiences. There are multiple ways to explore SME’s international entry mode choices (Hooimeijer, 1994 as cited in Jansen et al., 2011, p.12). The choice of a method to explore SME’s international entry modes is really context bound and depends on the goal of the research. The outcomes of each research method on SME’s international entry modes choices can be different, but no method is better or worse than the other method. Hence, the choice of research method in SMEs international entry mode choice is based on my research question and the variables (Hooimeijer, 1994 as cited in Jansen et al., 2011, p.12).
To examine the international entry mode choices among SMEs, a quantitative research strategy is used. A quantitative research strategy consists of a deductive approach the
hypothesis or multiple hypotheses will be tested (Bryman, 2008). In order to examine age effect on SMEs international entry mode choices, a longitudinal design is used where all the ages of SMEs are record and compared. This means that all the years of incorporation of SMEs where noted to measure the age effect on the international entry mode choice of SMEs.
A cross-sectional design would only reveal patterns of one particular moment in time, where a longitudinal design is able to show the time order of variables (Bryman, 2008) and will possibly give insight into differences between older and younger SMEs. This insight will contribute to a comprehensive overview of SMEs and the circumstances that shapes SMEs international entry mode choices. This longitudinal design takes the form of a study by
31 data about SMEs I collected. This study is a collection of multiple observations of multiple variables at multiple points in time; the characteristics of SMEs will be observed at different moments to detect patterns of association (Bryman, 2008).
Besides a longitudinal character of my research, it also compares the industry of the group of interest – SME’s with international expansion -. The multiple industry groups are categorized in knowledge-intensive and technology-intensive industries from high to low-intensity. By comparing the industry groups of SMEs, the industry groups are placed into their economic context. By comparing the industry groups of SMEs, it attempts to reveal the possible differences and similarities between the industry groups, thence contributing to a better understanding of SMEs that international expand. Comparing gives the possibility to conclude knowledge-intensive or technology-intensive SMEs are different or similar to other SMEs.
4.2 Research setting
In my research, the unit of analysis encompass SMEs. Using the European Commission standards, a SMEs is an umbrella concept for the enterprise categories medium-, small- and micro-sized. Medium-sized enterprises have employment of maximum 250 people and
maximum turnover of €50 million. Small-sized enterprises have employment of maximum 50 people and maximum turnover of €10 million. Micro-sized enterprises have employment of maximum 10 people and maximum turnover of €2 million (European Commission, 2003). This upper limit of 250 employees is the most frequent used upper limit worldwide, not only in the European Union (OECD, 2000).
OECD member countries are Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Latvia, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. In these OECD economies, over 95% of all firms are SMEs; SMEs account for 60% to 70% of all employment and produce a large share of new jobs (OECD, 2000). Because large firms outsource and downsize multiple functions, SME’s weight in the economy increased and is still increasing (OECD, 2000). Productivity and economic growth are strongly influenced by the competition of SME’s worldwide, this includes both the incorporation and exit of SME’s (OECD, 2000).
32 In the United States, the standards for the maximum number of employees of SMEs are a bit different. Medium-sized companies have fewer than 500 employees in the United States; these medium-sized companies employed 47.8% of the private sector payrolls in the United States in 2014. Small-sized companies have fewer than 100 employees in the United States; these small-sized companies employed 33.7% of the private sector payrolls in the United States in 2014. Micro-sized companies have less than 20 employees in the United States; these micro-sized companies employed 17.1% of the private sector payrolls in the United States in 2014 (SBE Council, 2018). Of all the companies in the United States, 99.7% are medium-sized companies with 500 employees or smaller in 2014. Of all the companies in the United States, 89.4% are micro-sized companies with 20 employees or less in 2014 (SBE Council, 2018). SMEs are accounted for 32.9% of the export value and 32.0% of import value in the United States in 2015 (SBE Council, 2018).
Because the most frequently used upper limit for SMEs is 250 employees, I also used this limit and not for example the American standards for SMEs.
SMEs are most found in the service sector, which covers around 67% of economic activity and employment in the OECD countries. Particularly, SMEs are active in the
wholesale and the retail trade, hotels and restaurants business, communication and businesses services, construction work and manufacturing firms. At least half of the OECD
manufacturing employment is provided by SMEs. SMEs are increasingly active in technology-intensive industries, for example in the Information and Communication
Technology (ICT) and in the bio-technology industries (OECD, 2000). SME’s prevail in the strategic business services, such as services about computer software, information processes, research and development, organization and management, marketing and human resource management. Big manufacturing firms increasingly outsource, use new technologies;
therefore, SMEs won market niches and grew with 10% in these knowledge-intensive services recent years. SMEs are only a fraction of the average size of the big firms and the whole economy they are working for; this indicates the importance of SMEs in these fields (OECD, 2000).
SMEs focus traditionally on domestic markets, many SMEs will continue to do this. But other SMEs become more and more globalized, often with the help of inter-firm linkages, networking, alliances and clusters. Around 25% of the manufacturing SMEs are
internationally active and this is increasing. About 20% of the manufacturing SMEs gain 10% to 40% of their turnover from their cross border activities. Nowadays, 25% to 35% of the
33 worlds manufacturing exports are by SMEs, and SMEs have a small share in foreign direct investment. Generally, international active SMEs grow faster than the SMEs that are only domestic active (OECD, 2000).
Modern communication tools are making it easier for SMEs to reach their foreign partners. This results in SMEs become increasingly involved in internationally strategic alliances and joint ventures, alone as well in groups. SMEs reach across borders to start international ventures and alliances consisting of globalized SMEs. And large multinationals are forming partnerships with SMEs with advantages, such as technological advantages, to save on research and development costs, minimize time for new products and to serve emerging markets across borders (OECD, 2000).
4.3 Data and variables
This part provides a description of were the data was gathered and of the variables that were used in this research and how these variables were measured. For this thesis, the data that was used, covers the period from 2008 to 2017.
4.3.1 Secondary data analysis
For my research multiple secondary data sets of SMEs and their entry mode choice for joint ventures or acquisitions, were used. Bryman (2008) states that secondary data analysis is executed by researchers who analyze the data but did not collected the data, and use the data for other research topics than it was initially researched.
Using secondary datasets for the analysis knows a great many of advantages, such as the databases Orbis and Zephyr. Using secondary datasets saves time and costs, it gives access to high quality data in relatively short time amount. Using the databases Orbis and Zephyr spares the multiple problems of developing and bringing outside a survey, make a sample, have non-responses. Besides that, the longitudinal nature of the databases Orbis and Zephyr, gives the opportunity to gain insights in the SMEs international entry mode choices in time worldwide, which was not possible if the data would be collected within the short time-frame for this master thesis research. Another advantage of using secondary data analysis is the option to conduct a subgroup analysis. This advantage is merely related to the sample size advantage and allows examining in a representative manner at SMEs that choose for joint ventures or acquisitions as entry mode to go abroad. The research case number of all SMEs
34 worldwide, with information on all the wanted variables for this research, makes that there are still enough cases to examine for trustworthy research results and conclusions.
In order to explore the SMEs international entry mode choices among multiple ages and multiple industries, already existing datasets were used, namely entry mode data from the databases Orbis and Zephyr from 2008 until 2017. The incorporation years of the SMEs vary between 1998 and 2017. This is data resulting from daily research to examine multiple economic variables. The databases Orbis and Zephyr are made by the company Bureau van Dijk, A Moody’s Analytics Company. Orbis and Zephyr contain extensive information about 275 million companies worldwide, both listed and unlisted firms. Among which 90 million European companies, 55 million American companies and 33 million Asian companies. I was especially interested in their information about companies that did joint ventures and
acquisitions, which I needed for the dependent variable entry mode. The companies that did not use acquisitions and not use joint ventures, those companies where not used in my dataset. The databases contained information on the age of companies, the industries companies are active in and mergers & acquisitions information. Furthermore, the databases contained a lot of other characteristics of companies, such as the number of employees and turnover. This made the databases Orbis and zephyr especially suitable for examining SMEs international entry mode choice.
4.3.2 Dependent variable
This research’s dependent variable is the SMEs entry mode choice. In order to measure the entry mode choice, this thesis follows the same approach as Cui and Jiang (2012). By doing so, entry mode choice is measured with a dummy that is assigned with number 1 when the SME choose for a joint venture and number 0 when the SME choose for an acquisition as entry mode (Cui and Jiang, 2012). Data about the SMEs and their entry mode choice was gathered from Bureau van Dijk’s (2018) Orbis and Zephyr databases.
4.3.3. Independent variables
As mentioned in the chapter theoretical framework, there are multiple firm specifics and characteristics that can influence an SME’s company choices and actions. The firm specifs and characteristics that are used in this research as independent variables, and thus can cause change in the dependent variable (Saunders and Lewis, 2012) SMEs entry mode choice, in this research are: (i) age of the firm, (ii) industry of the firm.
35 First, the age of the firm is a numerical variable that measures the age of the firm when it did a joint venture or acquisition. For example, when company X started in 2010, did a joint venture in 2013, then the age of the firm is 3 years old when it did a joint venture in 2013. This measure is used in order to examine if the age of a firm plays a role in the SME’s entry mode choice when it internationally expands. This data was gathered from the databases Orbis and Zephyr (2018) of Bureau van Dijk.
Second, the industry of the firm is a categorical variable that measures in which industry group the firm is active. I used for industry groups categorization the categories of Eurostat, they made classifications for the NACE Rev. industry groups. Eurostat grouped them into high-technology industry groups and knowledge-intensive services groups, from low, medium to high intensity in technology and knowledge groups separate (see appendix B for Eurostat industry classifications). This measure is used in order to examine if the industry of a firm plays a role in the SMEs entry mode choice when it internationally expands. This data was gathered from the databases Orbis and Zephyr (2018) of Bureau van Dijk.
4.3.4 Moderator
This thesis moderators are SME’s international experience. In order to measure the
international experience, this research follows the same approach as Barkema and Vermeulen (1998). In doing so, international experience is measured in two ways: in years of
international experience and in number of the foreign direct investments joint ventures and acquisitions. So for example, the way to calculate international experience in years: when company X started in 2010, did a joint venture in 2013, the company had zero years of international experience when it did a joint venture in 2013. But when the company did it’s second foreign direct investment for a joint venture in 2015, the company had 2 years of international experience in 2015.
The way to calculate international experience in number, is the total number of joint ventures and acquisitions summed up. So in the same example above, when company X started in 2010, did a joint venture in 2013 and did it’s second foreign direct investment for a joint venture in 2015, the company had an international experience in numbers of two. 4.3.5 Control variables
36 This research controls for the SME’s number of employees and turnover/revenue number, as they may influence the entry mode choice when the SME does a foreign direct investment (Tihanyi, Griffith and Russell, 2005).
The SME’s number of employees is the companies staff measured on the moment of when they did a joined venture or acquisition. Because the research measures SME’s staff, the maximum is 250 employees(European Commission, 2003). The data was collected from the database Orbis and Zephyr from Bureau van Dijk.
The SME’s turnover/revenue is the companies turnover measured on the moment of when they did a joined venture or acquisition. Because the research measures SME’s turnover, the maximum is 50million Euros (European Commission, 2003). The data was collected from the database Orbis and Zephyr from Bureau van Dijk.
4.3.6 Data preparation
As mentioned earlier in this chapter, available data of the SMEs mergers and acquisitions from 2008 until 2017 are combined in my research to create a longitudinal dataset, therefore differences and similarities in SMEs international entry mode choice are observable through time. In order to merge the datasets of each year (2008 till 2017), I recoded every variable so they fit in the same dataset. In each dataset, a variable for the year of entry mode and the year of incorporation, industry number, industry group, years of international experience in the entry modes joint ventures and acquisitions, number of international experience in the entry modes joint ventures and acquisitions was computed. After merging the different datasets together into on big dataset consisting all the variables information for each year, the missing values were eliminated.
To know the age of the company (independent variable) I downloaded year by year the incorporation dates and recoded these. For example, a company founded in 2010, did in 2013 a joint venture, so it’s age at the time was 3 years old (2013 – 2010 = 3). So the column for firm age was a calculation with years, that resulted into ages.
The industry of the companies (independent variable), where given in the NACE Rev.2 4 digits code. The first two digits gave the 99 main industry groups, the last two digits all the subgroups of these 99 industry groups. So I changed the column of industry into an extra column with only the first two digits to know the main industry categories. Then I made
