Master Thesis
The relationship between the formation of
international equity alliances and SMEs’ scale and
scope of internationalization: The moderating role of
ownership structure
Jaël Hopma
10655239
Semester 2, 2013/2014
Msc Business Studies: International Management
Supervisor: Dr. N. Pisani
Second Reader: Mr. R. Kleinknecht
2 ABSTRACT
Extant research on the internationalization of SMEs documents their increasing usage of international equity alliances (IEAs) in order to overcome internationalization constraints, predominantly their difficulty to acquire resources. This thesis aims to analyse the relationship between the formation of IEAs and SMEs’ scale and scope of internationalization. Since family ownership also plays an important role in the internationalization process of the smaller firm, the ownership structure will be tested as a moderating variable of the main relationship.
For the empirical analysis a Spanish panel survey was used, the Survey on Business Strategies (SBS), for the years 2006-2011. The multiple regression analysis provided overall support for the conceptual model. The relationship between IEAs and the scale and scope of internationalization can be depicted as an inverted U-shape, whereby this effect on the scale of internationalization is stronger for family-owned compared to non-family owned SMEs. Family ownership provides no significant proof of a moderating effect on the relationship between IEAs and the scope of internationalization. The results have important academic and managerial implications which will be discussed at the end of the manuscript.
Keywords: SME · IEAs · Scale and scope of internationalization · Family ownership
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TABLE OF CONTENT
1. INTRODUCTION ... 4
2. LITERATURE REVIEW ... 8
2.1 Entry modes of internationalization ... 8
2.2 Scale and Scope of internationalization ... 12
2.3 SME ownership structure and internationalization ... 15
3. THEORETICAL FRAMEWORK ... 20
3.1 The formation of international equity alliances and the scale and scope of internationalization ... 20
3.2 The moderating effect of family versus non-family ownership ... 25
4. METHODS ... 28 4.1 Data collection ... 28 Dependent variables ... 28 Independent variable ... 30 Moderating variable: ... 30 Control variables: ... 30 4.2 Data analysis ... 33 4.3 Results ... 36 5. DISCUSSION ... 40 5.1 Academic relevance ... 40 5.2 Managerial implications ... 42
5.3 Limitations and suggestions for future research ... 43
6. CONCLUSION ... 45
4 1. INTRODUCTION
Despite the financial crisis in 2008, the figures on Small Medium Enterprises (SMEs) still show a growing tendency in the EU over the past few years (Eurostat, 2011; EU SMEs in 2012, 2012). SMEs in the EU-27 account on average for 36.6% of the total value added and over one third (37.8%) of the total employment rate (Annual Rapport on European SMEs, 2013), thereby marking their importance in today’s economy.
Not only do figures on SMEs’ number of affiliates abroad show a growing tendency, their total value added and employment have also increased in recent years. It is therefore that they have become important players in the International Business field (Lu and Beamish, 2001; 2006a; 2006b), either crossing borders because nowadays competition forces them to (George, Wiklund and Zahra, 2005), or internationalizing rapidly from inception due to technological advances they possess (Oviatt and McDougall, 1994; Kontinen and Ojala, 2010). Taken together, the role of SMEs in today’s economy and their increasing multinationality prompts for more empirical research on their internationalization (Lu and Beamish, 2006a).
Several researchers claim that SMEs today still run into more difficulties when crossing borders as compared to their large counterparts, with a strong emphasis on the problem of resource acquirement (Lu and Beamish 2001; Fernández and Nieto, 2006). The division of scarce resources may bind the firm to a specific region and is therefore responsible for its spread of international firm activities (George et al., 2005; Lu and Beamish, 2001; Lu and Beamish, 2006a; Chetty and Campbell-Hunt, 2003). Hence, resource acquirement is an important factor in determining SMEs’ internationalization capabilities (George et al., 2005). Also, firms need to be able to access host-country specific resources if they choose to establish a Wholly Owned Subsidiary (WOS) in the host country. Considering resource acquirement remains a SMEs’ main impediment, scholars agree that as a consequence, the
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entry mode still most widely selected by SMEs is the non-equity mode of exporting (Vatne, 1995; Kirby and Kaiser, 2003; Ruzzier 2007).
However, SMEs increasingly make use of international equity alliances (IEAs) in their internationalization process (Fernández and Nieto, 2006; Lu and Beamish, 2006a; Coviello and McAuley, 1999). It is due to these IEAs that SMEs are better able to gain access to resources through its partners’ network of suppliers, distributors and clients which otherwise would be hard to gain access to. This way the firm can expand its international boundaries whilst simultaneously establishing a stronger presence in the host country as compared to entry by exporting. It is therefore that IEAs may play an important role in the facilitation of the scale and scope of SMEs’ international activities (George et al., 2005).
Nevertheless, the formation of IEAs is not an exhaustive strategy and the costs will outweigh internationalization benefits when too many alliances are established (Freeman, Edwards and Schroder 2006). Also, there is the problem of over-internationalizing the firm (Qian, 2002). Especially smaller firms that do not possess the capacity to manage large, complicated organizations, can run into problems when the firm becomes too large and firm activities are spread over too many diverse countries. This creates transaction and governance costs that eventually outweigh the profits of internationalizing the firm (Lu and Beamish, 2004; Lu and Beamish, 2001).
The ownership structure - family or non-family – also plays an important role in the strategic decisions and performance of the SME. Whereas family-firm characteristics to some researchers are considered as advantageous for the growth of the firm (Zahra, 2003), others demonstrate that family firms’ primary interests lie in the pursuit of family socio-emotional wealth (Gomez-Meija, Makri and Larazza-Kintana, 2010) and this ownership type therefore brings the firm more disadvantages than non-family firms because of the lack of insight into firm’s best interest (Schulze, 2001; Fernández and Nieto, 2006; Gomez-Meija et al., 2010).
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The negative outcomes of family-ownership can, however, be overcome by attracting external agents in the management and board of the firm (Arregle et al., 2012), which indicates that the formation of IEAs could stimulate the degree of internationalization for family-managed firms, even more so than for non-family firms.
The purpose of this research is therefore to gain insight into the effect that the formation of IEAs by SMEs has on their degree of internationalization i.e. their scale and scope of international operations, whilst examining if this effect is stronger for family than non-family owned SMEs. This thesis thereby answers to the call for further academic research on the gap of literature concerning SME IEA formation as a way to overcome their internationalization constraints and expand their scale and scope of international operations. Also, ownership types have become more important in the extant literature in the past few years, but their exact effect on SME internationalization remains point of discussion. The results could thus provide academic importance in providing a better insight into the role ownership plays in SME internationalization activities. The conceptual model developed for this research is given below:
I hypothesize that there will be an inverted U-shape relationship between the formation of IEAs and scale and scope of SME internationalization, whereby I expect this relationship to be stronger for the family-owned SME as compared to the non-family owned SME. To be able to analyse the direct relationship between the formation of IEAs and the
Family versus corporate ownership
The formation of equity alliances The scale and scope of SME internationalization
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scale and scope of internationalization of SMEs, I will conduct the OLS regression analysis at the firm level. The data used for this analysis is collected from the Spanish panel Survey on Business Strategies (SBS), created by the SEPI foundation in cooperation with the Spanish ministry of industry. For the purpose of this thesis only the years 2006-2011 will be used.
The remaining of this thesis is organised into five sections. In the literature review I will provide a detailed overview of the concepts of SME internationalization, non-equity entry modes, the growing importance of equity entry modes, the scale and scope of internationalization and SME ownership types. These detailed descriptions are followed by the hypotheses development. Finally, I will discuss the results and subsequently conclude my thesis with the limitations and directions for further research.
8 2. LITERATURE REVIEW
2.1 Entry modes of internationalization
When crossing borders, firms are confronted with many choices concerning their internationalization strategy. A fundamental pillar is the selection of the mode of entry into a foreign country. In their hierarchical model of entry modes, Pan and Tse (2000) developed a well-recognized theory concerning firms’ entry mode decision, arguing that firms logically follow a hierarchical decision process that consists of two distinctive phases. The first decision a firm needs to make when crossing borders is that of expanding either through equity or non-equity. Then, at the following stage, the firm narrows their strategy down to: (1) exporting or (2) strategic alliances for non-equity modes of entry, and (3) equity alliances or (4) wholly owned subsidiaries (WOS) for equity modes of entry (Pan and Tse, 2000).
While this model - as most other theories in the IB field - is based on research done among large MNEs, SMEs have been gaining ground in the IB literature (Lu and Beamish, 2006a). Not only has the number of SMEs kept showing a growing tendency in the past few decades, the amount of SMEs crossing borders has also increased (Eurostat, 2011; EU SMEs in 2012, 2012).
The internationalization process of larger firms shows a different pathway from that of smaller firms (Coviello and McAuley, 1999). These diverse pathways are caused by the size-related characteristics and choices firms make to be able to overcome their challenges (Coviello and McAuley, 1999). Although internationalizing SMEs have in the past few decades profited from technological developments, infrastructure improvements and the liberalization of markets, nevertheless these smaller firms still face many more liabilities compared to larger firms (Fernández and Nieto, 2006). The liabilities mostly referred to in the literature are: the liability of newness, the liability of foreignness (Lu and Beamish, 2006a), risk aversion (Kirby and Kaiser, 2003) and above all the acquirement of resources (Lu and
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Beamish, 2001; Chetty and Campbell-Hunt, 2003; Vatne, 1995; Johanson and Vahlne, 2003; Fernández and Nieto, 2006). Acquiring resources remains challenging for SMEs because of their small size and their lack of experience in the host country and therefore remains their main impediment towards internationalization. (Lu and Beamish, 2001; Lu and Beamish, 2006a; Chetty and Campbell-Hunt, 2003; Vatne, 1995; Johanson and Vahlne, 2003; Fernández and Nieto, 2006). Whereas some SMEs are able to develop and acquire resources over time, others overcome this problem by obtaining them from other firms through networks and alliances (Fernández and Nieto, 2006).
According to some researchers it is therefore the formation of IEAs that can help SMEs overcome their problems towards internationalization with a relatively limited commitment. While most established, large MNEs often internationalize using WOS (D’Angelo et al., 2013) recent studies show that SMEs tend to establish equity alliances with larger partners with easy access to local resources. Ideally, this partner is a foreign shareholder from the host country were the SME desires to establish an affiliate (Cerrato and Piva, 2012; Lu and Beamish, 2006a). This way, the IEA can help the SME to overcome its internationalization problems (Lu and Beamish, 2001; Lu and Beamish, 2006a; Chetty and Campbell Hunt, 2003) and facilitate rapid growth from inception (Johanson and Vahlne, 2003).
As mentioned earlier, equity-based entry modes can be divided into IEAs and WOS (Pan and Tse, 2000). Equity alliances arise when two or more parent companies combine their complementary firm-specific resources by establishing a new legal organisation (Kogut, 1988; Lyles and Salk, 1996; Buckley and Casson, 1996), whereas international equity alliances are separate firms created ad hoc in the host country (Kogut, 1988). Wholly owned subsidiaries, on the contrary, consists of greenfield market entry’s and acquisitions, where the
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internationalizing firm does not share their ownership in the affiliate abroad with another firm, thus enjoying full ownership (Pan and Tse, 2000). The choice between the alternative modes depends upon several factors. Most firms choose acquisitions and WOS over IEAs when they are relatively large and experienced in the host country (Chiao, Lo and Yu, 2010), when they possess many tangible and intangible firm specific assets, when they possess high levels of R&D capabilities which need protection (Chiao et al., 2010), or in case the home and host countries are characterized by low cultural distance (Kogut and Singh, 1986).
Most SMEs prefer engaging in IEAs rather than in WOS, simply because the former is considered more advantageous and generally comes with less risks, e.g.: the reduction of the threat of opportunism, the small numbers dilemma, uncertainty bounded rationality (Beamish and Banks, 1987), the possibility to gain access to local resources and markets which might otherwise would be hard to get access to or can mainly be developed through experience (Johanson and Vahlne, 2003; Kirby and Kaiser, 2003; Gleason and Wiggenhorn, 2007; Lu and Beamish, 2006a) and the creation of ‘competitive advantageous’ knowledge (Johanson and Vahlne, 2006). In addition, firms need strong management and sufficient infrastructure to be able to establish a successful WOS. Moreover, because of the above mentioned challenges, SMEs can expect initial low returns after their acquisitions in the host environment (Gleason and Wiggenhorn, 2007).
Although IEAs could thus ease SME internationalization efforts, the non-equity entry mode of exporting remains the internationalization strategy mostly preferred by SMEs because of its’ perceived minimum risk, its overall high flexibility and ultimately because it requires relatively low investments (Vatne, 1995; Buckley and Casson 1998; Kirby and Kaiser, 2003; Ruzzier, 2007).
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Although it seems that exporting is the most profitable entry strategy for SMEs positioned in the high-technology sector, this is not necessarily true for SMEs operating in other sectors (Raymond and StPierre, 2013). Exporting and equity entry modes are generally both positively related to the growth of the firm, but only equity modes of entry shows a U-curve relation with profitability whereas this relation remains negative for exporting (Lu and Beamish, 2006b). In addition, exporting is not a risk-free strategy because risk increases when countries are sensitive to heavy currency fluctuation, subject to tariff and non-tariff barriers, and distributor opportunism. Depending on the presence of such costs the firm might therefore privilege equity entry modes over non-equity (Lu and Beamish, 2006b).
In fact, some researchers stress that the choice of entry mode is based on numerous factors and is highly situation-bound (Pan and Tse, 2000), thereby arguing that it is impossible to identify specific modes of entry that are always leading to better outcomes compared with alternatives ones (George et al., 2005; Taylor and Jack, 2013; Raymond and StPierre, 2013). In other words, although non-equity entry modes are still the most common entry mode strategy among internationalizing SMEs, equity modes of entry could sometimes be more desirable and profitable, depending on industry and situational factors (Lu and Beamish, 2006b; Taylor and Jack, 2013).
Besides resource acquirement incentives, other factors also push SMEs towards the choice of IEAs over exporting. If members of the management team possess a strong international orientation, experience or desire to cross borders, the management will be more inclined to manage their firm towards an international expansion. If the firm operates in a market with only small cultural distance, the step towards internationalization would be perceived as relatively easy and non-equity entry mode risks would decline accordingly. Additionally, if the firm produces highly imitable products and/or services or the firm operates in a highly competitive market, equity modes of entry are preferred over non-equity
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modes (George et al., 2005; Gleason and Wiggenhorn, 2007; Freeman et al., 2006; Taylor and Jack, 2013).
2.2 Scale and Scope of internationalization
Crossing borders means that firms have to make decisions about their desired degree of internationalization. The degree of internationalization consists of the scale and scope of a firm’s international activities (Hilmersson, 2014; Pangarkar 2008), which are important variables to comprehend the internationalization process itself (Sullivan, 1994). This definition is, however, not unambiguous and the degree of internationalization has been assigned different explanations throughout the literature. In this research it will be used as two separate constructs.
The scope of internationalization is generally defined as the geographic spread of affiliates across countries (Lu and Beamish, 2001). The scale of internationalization is referred to as ‘the extent to which a firms’ activities depend upon foreign markets’ (George et al., 2005: p.213; Hilmersson, 2014).
Concerning the effects of the degree of internationalization on firm performance, most researchers stress the positive effect that internationalizing the firm has on performance in the longer term (Lu and Beamish, 2001; Hilmersson, 2014; Cerrato and Piva, 2012; Almodóvar and Rugman, 2014). Most SMEs experience an increased scale of internationalization of the firm as beneficial for their firms’ performance and income, since the potential market reach
expands (Pangarkar and Hussain, 2013; Taylor and Jack, 2013; Hilmersson, 2014). Especially for firms selling highly imitable products/services, an increased scale of operations has a positive effect on firm performance. This is because the high imitability forces the SME to early mark its presence in various markets to be able to outperform its competitors (Taylor
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and Jack, 2013). This increased scale then gives SMEs the opportunity to expand further, because of increased international experience and resources (Hilmersson, 2014).
The graphic slope of the relationship between internationalization and firm performance is, however, still subject to discussion. Whereas it was initially introduced as a simple positive or negative linear relationship (Grant, 1987; Dealios and Beamish, 1999; Lu and Beamish, 2001; Almódovar and Rugman, 2014), soon after the U-curve, inverted U-curve and subsequent S-curve were introduced as alternative descriptor of the association under scrutiny (Almódovar and Rugman, 2014; Lu and Beamish, 2004). These models generally stress the importance of the downsides of the liability of foreignness, followed by a phase in which firms grow because of overcoming these liabilities by developing firm specific assets, and ultimately the overruling costs of over-internationalization become relevant and bring the relationship again in negative territory (Qian, 2002; Lu and Beamish, 2001; Lu and Beamish 2004; Almódovar and Rugman, 2014). Recently, the M-curve relationship has been introduced, adding another growing phase to the S-curve analysis which precedes the other phases. They identify this phase as that of misconception of successful internationalization after answering to occasional sales opportunities abroad. It is only after this phase that firms realize to have many more bridges to gap (Almodóvar and Rugman, 2014).
While much has been written on traditional MNEs, the body of research on the scale and scope of internationalization of SMEs is still small (Chetty and Agndal, 2007; George et al., 2005). Scale and scope of internationalization have received attention in the IB literature, although mostly in relation to large MNEs. Having said that, recent research also focuses on SMEs (e.g. Almodóvar and Rugman, 2014; Hilmersson, 2014), recognizing their differences compared to MNE internationalization on the degree of internationalization. In particular, SMEs’ reaction to the positive and negative effects of internationalization on firm
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performance are expected to show stronger volatility: a steeper slope of the S-curve and M-curve, since performance differences are more sensitive for SMEs (Hilmersson, 2014).
For instance, resource acquirement is considered an important factor in determining a firm’s internationalization strategy, its mode of entry, and the scale and scope of internationalization. Since SMEs’ resources are generally limited (Lu and Beamish, 2001; Lu and Beamish, 2006a; Chetty and Campbell-Hunt, 2003; Vatne, 1995; Johanson and Vahlne, 2003; Fernández and Nieto, 2006), some researchers believe that SMEs’ decisions concerning the degree of internationalization i.e. the scale and scope of internationalization, deserves more attention than it has been granted in the literature so far (George et al., 2005; Zahra, 2005).
Not only do MNEs and SMEs differ in their internationalization pathway, also among SMEs very diverse results concerning their scale and scope of internationalization can be identified (George et al., 2005). This corroborates the notion that SMEs internationalization strategy depends upon many factors. The literature tries to explain these variations by focusing on the following variables: home country market, host country market, industry conditions (Dunning, 1988; Taylor and Jack, 2013), the market definition, the firm’s current and potential resources, the firm’s motivation to internationalize and the usage of its networks (Zahra, Korri and Yu, 2005). Additionally, Coviello and McAuley (1999) found that SMEs base their choice of scale and scope upon management preferences, instead of pursuing a mere economic rationale like MNEs are more tended to. Other explanations for the varying internationalization choices among SMEs were found in the psychic distance experienced towards its host country (Vatne, 1995; Pangarkar, 2008; Taylor and Jack, 2013; Brock, et al., 2011) and SMEs’ ownership structure (George et al., 2005). In particular, ownership structures have been associated to particular internationalization trajectories, either to describe
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specific pathways to internationalization (e.g. Fernández and Nieto, 2006) or to determine the degree of internationalization (e.g. Banalieva and Eddleston, 2011).
2.3 SME ownership structure and internationalization
Ownership types have proven to influence firms’ attitude towards risk aversion and ability to acquire resources, thereby influencing their strategy and performance (Fernández and Nieto, 2006). Researchers argue that a relationship exists between the type of ownership and the degree of internationalization, thereby referring to their scale and scope of internationalization (Zahra, 2003; Fernández and Nieto, 2006; Arregle et al., 2012).
Concerning the effect that ownership structure has on the scale and scope of internationalization of the SME, two main directions of research can be identified in the literature: those that exclude family presence in the management of the firm from the analysis, and those that include family presence in the firm in the analysis. The ones that exclude family presence, separate family ownership from non-family ownership and thus solely focus on the actual ownership of the firm, not controlling for family participation in the management or board (e.g. Zahra, 2003; Fernández and Nieto, 2006). The ones that include family presence, take a somewhat deeper approach towards family ownership by including family involvement in firms’ board and management, which they refer to as: family-led firms (Arregle et al., 2012; Sirmon et al., 2008; George et al., 2005; Sciascia et al., 2012). The literature on family-led firms generally agrees about the effect of family involvement in the management of the firm on the degree of internationalization. Researchers found a positive effect related to the scale of internationalization, whereas family participation in the firm is negatively related to the scope of internationalization (Zahra, 2003; Kontinen and Ojala, 2010, Gomez-Meija et al., 2010; George et al., 2005).
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The literature on the internationalization of family-owned SMEs is still limited (Kontinen and Ojala, 2010) and researchers that do examine the construct provide contradictive results (Sciascia et al., 2012). A family business in this sense concerns a firm in which the family owns the majority of shares and that has at least one family member in the management team (Fernández and Nieto, 2006; Cerrato and Piva, 2012). Whereas some argue that family ownership is negatively related to a firm’s degree of internationalization (Schulze,
2001; Fernández and Nieto, 2006), others state that this relationship is positive (Zahra, 2003), or stress that both relationship apply, combined into an inverted U-shape (Sciascia et al., 2012) where family ownership enhances internationalization at lower levels but causes impediments towards internationalization at higher levels (Sirmon et al., 2008; Sciascia et al., 2012; Banalieva and Eddleston, 2011). Because of the strand of literature that considers family versus non-family ownership, the focus of this thesis will therefore be on the differences between family-owned and non-family owned firms.
Theories stressing the positive influence of family ownership on SME internationalization are mostly referred to as the stewardship theories. Stewardship can take three forms: through continuity (the firm’s main goal is maintaining the business for the posterity), employees (act in best interest of the workforce) or customer loyalty (Miller, Le Breton-Miller and Scholnick 2008; Sciascia et al. 2012). These values prosper commitment, stability, trust, a motivated and loyal workforce and the creation of an environment in which management will act upon whatever it takes to ensure a future for the firm (Zahra, 2003; Sciascia et al., 2012). Because of the presence of these values, internationalization will be pursued if necessary since the firm’s maintenance comes first. Some researchers therefore suggest that family ownership actually stimulates internationalization (Sciascia et al., 2012).
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Although family ownership can positively influence firm internationalization, this outcome is based on several choices concerning the strategy that the management wants to pursue. In general, family firms either base their strategy on the firms’ best interest at the expense of family’s socio-emotional wealth, or on the family’s best interest at the expense of the firm. Because the second strategy predominates in most family firms (Gomez-Meija, Makri and Larazza-Kintana, 2010), some researchers argue that family firms do not act upon the firm’s best interest and are therefore an impediment towards internationalization – mostly referred to as stagnation theories (Fernández and Nieto, 2006; Schulze 2001; Schulze 2003b; Gomez-Meija et al., 2010; Sciascia et al, 2012).
Besides the main focus on the family well-being, other constraints have also been pronounced in the literature, e.g.: the centralized decision making process in family firms (whereas crossing borders requires more complicated structures), risk-averseness (and reluctance to acquire new resources, of which intangible resources in particular), not willing to lose control (Fernández and Nieto, 2006), the hiring of lower-quality agents and employees (Cerrato and Piva, 2012) and the rise of agency costs due to the mere focus on family wealth and subsequent lost sight of the firm’s best interests (Schulze 2001; Schulze 2003b; Banalieva and Eddleston, 2011; Sciascia et al., 2012). The agency problems specifically, are stronger and harder to resolve for family firms because of altruism: their desire for self-control and self-monitoring allows managers to be too generous when it comes to relatives (Schulze, 2001; Schulze, 2003b).
In order to overcome these problems towards internationalization experienced by family firms, the involvement of external parties could provide a solution (George et al., 2005; Arregle et al., 2012; Sirmon et al., 2008). Non-family members in the management team could facilitate internationalization because they provide the firm with a business orientation and are not biased by the interest of mere family wealth increase (Arregle et al., 2012;
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Fernández and Nieto, 2006). In other words, the involvement of non-family members in the management team could turn the negative effects of family-managed firms into positive effects on the scale and scope of internationalization (Arregle et al., 2012).
Overall, the usage of IEA thus represents an important strategy for SMEs in order to better be able to cope with the experienced difficulties towards internationalization. The research on internationalization patterns and the formation of IEAs is mostly focused on large, established MNEs. In most empirical work discussing SME internationalization, researchers generally already assume that SMEs only engage in non-equity internationalization. The study done by Taylor and Jack (2013) elaborates on this, arguing that firms in their research were not so bound to non-equity entry modes as generally suggested in the literature. Research on this subject focused on SMEs is therefore still to be undertaken (Lu and Beamish, 2006; Kirby and Kaiser, 2003). The literature on SMEs’ usage of IEAs is mainly focused on the effects of the IEA on SMEs internationalization performance (Lu and Beamish, 2006), on the maintenance of the relationship between the SME and the alliance partner, or on the success of the alliance itself (Nakos and Brouthers, 2008).
Despite the growing interest in the internationalization process of SMEs and their growing tendency towards forming IEAs in order to overcome internationalization constraints, not much research on these topics has been done so far. Scholars call for further research on SME internationalization and especially the way they use their IEAs to overcome their constraints towards internationalization (Fernández and Nieto, 2006; Cerrato and Piva, 2012; Taylor and Jack, 2013). In addition, the ownership structure of the firm seems to play an important role in the choice of entry modes as well as on the degree of internationalization. In sum, this thesis will try to contribute to the existing literature by exploring SMEs’ usage of IEAs in order to overcome internationalization constraints and the influence of these alliances on the scale and scope of SME internationalization. The importance of ownership
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structures has become an essential topic of discussion over the past few years in SME literature. Hence, my research question will be:
How does the formation of international equity alliances affect SMEs’ scale and scope of internationalization? What is the moderating effect of ownership structure on such relationship?
20 3. THEORETICAL FRAMEWORK
3.1 The formation of international equity alliances and the scale and scope of internationalization
As the literature review highlighted, using IEAs as a mode of entry can enhance SMEs’ degree of internationalization (Lu and Beamish, 2001; Lu and Beamish, 2006a; Chetty and Campbell Hunt, 2003; Johanson and Vahlne, 2003). Having said that, expanding the firms’ boundaries is not an exhaustive strategy for increased firm performance and there are some important downsides which cannot be overlooked (Gleason and Wiggenhorn, 2007; Freeman et al., 2006).
First of all, there is the discussion about the concept of globalization and the extent to which firms have become truly international (Ghemawat, 2001; Rugman and Verbeke, 2004; Pangarkar, 2008; Rugman and Verbeke 2011). Some argue that globalization and the ease with which firms can cross borders nowadays has been heavily overestimated (Ghemawat, 2001). The fact that companies cross borders does not directly translate into the notion that the world is perfectly global. As a matter of fact, regional forces remain very strong, with the majority of MNEs still preferring a regionalization strategy over a global one (Ghemawat and Pisani, 2013; Rugman and Verbeke, 2004). Only 38% of the 500 largest MNEs are truly global against an 80% which merely pursue a home regionalization strategy, meaning >50% of sales comes from their home region (Rugman and Verbeke, 2004). Hence, the majority of larger firms only internationalize within their home regions (Pangarkar, 2008; Rugman and Verbeke, 2011).
A possible explanation is the fact that managers have become blind sighted by the potential benefits of internationalization, not realizing that crossing borders brings many challenges to their firm. A fundamental challenge mentioned in the literature is the concept of distance, which besides geographical challenges includes cultural, administrative, political
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and economic distance (Ghemawat, 2001). Researchers claim that distance is still an important impediment towards internationalization (Ghemawat, 2001; Rugman and Verbeke, 2011; Brock Johnson and Zhou, 2011; Taylor and Jack, 2013; Almodóvar and Rugman, 2014). Not only do MNEs experience distance as a serious impediment, this might even be more so for SMEs, when expanding their business across the national border (Pangarkar, 2008; Taylor and Jack, 2013; Brock, et al., 2011).
To be able to overcome the impediments caused by distance, management needs to ensure a combination of location (LB) and non-location bound (NLB) firm specific advantages (FSAs), whereas the NLB FSAs generally require a higher degree of resource recombination (Rugman and Verbeke, 2008a). NLB FSAs enables a greater scale and scope of firm activities, whereas LB FSAs are most successful inside a smaller, national context (Rugman and Verbeke, 2008b). Smaller firms generally experience more difficulties in transferring their LB FSAs into NLB FSAs, since resource recombination, because of their difficulty in acquiring resources, is a harder task for them than it is for larger firms (Rugman and Verbeke, 2011).
The literature therefore argues that SMEs nowadays still enter only culturally close countries when they start expanding their business abroad, before slowly expanding into more distant markets (Taylor and Jack, 2013; Almodóvar and Rugman, 2014; Johanson and Vahlne, 1977). The focus on the home region is stronger when the SMEs’ home country is positioned in a heavily integrated region with its neighbors, like the European Union (Rugman and Verbeke, 2008a)
The costs of psychic distance are still more important to firms than the possible benefits the market has to offer (Taylor and Jack, 2013). This is especially true when considering crossing the region’s borders. Distance will be so large that it will press
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performance and SMEs will need time and extensive investments to overcome this distance (Almodóvar and Rugman, 2014).
Second, although internationalization may positively influence firm performance and growth (Lu and Beamish, 2006b; Pangarkar, 2008), too much internationalization may be detrimental to SMEs performance and longevity (Qian, 2002; Lu and Beamish, 2004; Almodóvar and Rugman, 2014). Increased multinationality entails increased governance and transaction costs until a point comes where the costs outweigh the benefits. At the same time, the costs of uncertainty rise because of the spread of firm activities over a more diverse and larger area (Lu and Beamish, 2004; Lu and Beamish, 2001). The importance of carefully considering the scale and scope of firm activities has largely been overlooked (Rugman and Verbeke, 2008b). Most SMEs do not possess the infrastructure or strategies to manage large, complex firm structures that result from increased scale and scope of internationalization (Lu and Beamish, 2001; Fernández and Nieto, 2006).
In order to ensure a sustainable and profitable future, SMEs should learn from their larger counterparts by carefully selecting their host countries, instead of rapidly spreading economic activity across borders (Rugman and Verbeke, 2008b). When further inspecting Almodóvar and Rugman’s (2014) 4-phase M-curve, after initial performance improvements, the firm will need to overcome the challenges of distance which will negatively influence performance. In the third phase performance will increase because of the firm’s FSAs, which brings them to the most crucial phase for the SME considering its scope. If international activities of the firm exceed a certain level, firm performance will decline. SMEs in particular will experience difficulties coordinating the unstable environment they have created by ‘over-internationalizing’ (Qian, 2002; Almodóvar and Rugman, 2014). SMEs should therefore pursue a strategy whereby they establish an optimal scale and scope of international activities.
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It is therefore that the formation of IEAs has become an increasingly popular entry strategy amongst SMEs, and mentioned as a key construct in the fast internationalizing process of smaller firms (Fernández and Nieto, 2006; Lu and Beamish, 2006a; Oviatt and McDougall, 1994; Kirby and Kaiser, 2003; Freeman et al., 2006). IEAs help firms overcoming their main problem of internationalization: their lack of resources. Because of these alliances firms are not only able to pursue a greater scope, but also a greater scale of international activities (Lu and Beamish, 2006a; Chetty and Campbell-Hunt, 2003).
The formation of IEAs, however, does not come without potential downsides. The choice of an appropriate, reliable partner to make the best out of the cooperation for both parties is crucial. Moreover, the geographic distance, information asymmetry, maintaining the relationship, and a partner’s capabilities are hard to assess (Freeman et al., 2006). A firm
therefore needs to integrate various governance structures in order to monitor this relationship and reduce risk (Freeman et al., 2006; Gleason and Wiggenhorn, 2007). As discussed in the above, most SMEs do not possess the capabilities to manage large, complex firms with many affiliates spread over a large number of countries (Lu and Beamish, 2004), of which family owned firms in particular (Fernández and Nieto, 2006).
IEAs can be beneficial for SMEs internationalization in overcoming internationalization constraints (Lu and Beamish, 2001; Lu and Beamish, 2006a; Chetty and Campbell Hunt 2003). It is only up until a moderate level of IEA formation (thus, until the number of IEAs formed by the focal firm does not surpass a certain threshold) that firms’ degree of internationalization keeps increasing. After this level, forming new alliances will not further stimulate SMEs’ scale and scope of internationalization as the firm encounters new internationalization-related problems for which the usage of IEAs does not provide a solution (Almodóvar and Rugman, 2014) and because of the downsides of over-internationalizing (Lu
24
and Beamish, 2004; Qian, 2002; Rugman and Verbeke, 2008b). I therefore expect an inverted U-shape relationship between the formation of IEAs and the scale and scope of internationalization. Moderate levels of IEAs will provide the highest scale and scope of internationalization, after this moderate level the scale and scope of firm activities will decline. Hence,
Hypothesis 1: The relationship between the formation of international equity alliances
and SME’s scale of internationalization has an inverted U-shape
Hypothesis 2: The relationship between the formation of international equity alliances
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3.2 The moderating effect of family versus non-family ownership
Caused by their preference for low-risk investments, family owned SMEs probably prefer to keep a small scope of countries that are culturally and geographically not too distant from their home country (Kontinen and Ojala, 2010; Gomez-Meija et al., 2010), which could indicate that these firms prefer to pursue a home regionalization focus (Rugman and Verbeke, 2004; Gomez-Meija et al., 2010). Banalieva and Eddleston (2011) combined the assumption of family firm’s preference for a smaller scope of internationalization with Rugman and Verbeke’s theory (2004) of home region focus (HRF). They showed what effects ownership have on a firm’s strategy and performance, by demonstrating that family firms perform better than non-family firms from a low HRF, whereas the reverse is true for a high HRF (Banalieva and Eddleston, 2011).
Family firms seem to profit from a low degree of internationalization. The reverse is true, however, for higher degrees of internationalization (Banalieva and Eddleston, 2011). In addition, when family firm ownership passes an intermediate level of 53%, any positive family firm characteristics as described by stewardship theories will be overruled by the negative effects of family ownership (stagnation). This leads to the conclusion that family ownership and the internationalization of firms show an inverted U-shape relationship (Sciascia et al., 2012).
As a solution to the downsides family-owned firms experience at higher degrees of internationalization, researchers suggest the involvement of external parties in the management and ownership of the firm (George et al., 2005; Sirmon et al, 2008; Arregle et al., 2012; Sciascia et al., 2012). An external shareholder positively influences family firm internationalization by allowing the firm access to an increased network of suppliers, distribution channels, technologies, managerial experience and resources (Fernández and Nieto, 2006; Arregle et al., 2012; Sciascia et al., 2012; Buckley 1989). This shareholder, in
26
return, expects the firm to improve on its efficiency, management and monitoring and thereby reduces the chances of agency problems known to be present at family firms (Fernández and Nieto, 2006; Schulze, 2001; Schulze, 2003b; Arregle et al., 2012; Sciascia et al., 2012). In addition, external board-members inhibit the mere pursuit of family interests and bring the focus more towards the pursuit business interests (Fernández and Nieto, 2006). Thus, external ownership can stimulate family firm internationalization, both through direct and indirect effects (George et al., 2005; Sciascia et al., 2012).
It is, however, only when ownership held by an outside shareholder reaches a substantial level, these positive effects will be enabled. If family ownership exceeds 50% of the total stock available, the negative effects of family ownership as described by stagnation will continue to outweigh the positive effects of external ownership (Sirmon et al, 2008; Sciascia et al., 2012), meaning that firms continue to be risk-averse and therefore reluctant to internationalize on a greater scale and scope (Sciascia et al., 2012). Also, greater ownership percentages by the external owner increases goal alignment between the owners, which positively (but indirectly) influences the performance of the firm (Lu and Beamish, 2006a). Researchers therefore argue that governance structures that integrate family ownership with external ownership optimize a firms’ possibilities (Sirmon et al., 2008).
Yet, the literature provides mixing results concerning the effect of external ownership on the scale and scope of internationalization. Whereas George et al. (2005) found that the inclusion of external owners inside the firm positively affects scale of internationalization, this was not supported for the scope of internationalization (George et al., 2005). Sciascia et al. (2012) measured internationalization by only using the scale of internationalization, thereby neglecting the scope. However, Sirmon et al. (2008) only used the scope of a firm’s international activities to measure the degree of internationalization and found similar, significant results concerning family ownership and the internationalization of firms.
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In sum, the involvement of external partners in the ownership of the family firm positively influences family firm internationalization (Sirmon et al., 2008; George et al., 2005). If the relationship between IEA formation and the scale and scope of internationalization is to be depicted as an inversed U-shape, this effect is expected to be stronger for family firms since they significantly seem to profit from external ownership. I therefore hypothesize:
Hypothesis 3: All else equal, the relationship between IEAs formation and scale of internationalization is stronger for family (versus non-family) ownership
Hypothesis 4: All else equal, the relationship between IEAs formation and scope of internationalization is stronger for family (versus non-family) ownership
To illustrate the hypotheses constructed, I have developed the following conceptual model, which is illustrated in figure 2:
Figure 2: Conceptual Model Family versus corporate ownership
The scale and scope of SME internationalization
28 4. METHODS
4.1 Data collection
To be able to answer my hypotheses, I will conduct a multiple regression analysis at the firm-level, based on secondary panel data available form a large database created in Spain. This database - the ESEE (Survey on Business Strategies) – consists of a panel survey conducted on a yearly basis by the SEPI Foundation (the Spanish Industrial Firm Association) between 1990 and 2011, in cooperation with the Spanish Ministry of Industry. For this research the years 2006 – 2011 will be used.
In the SBS survey, approximately 1800 SMEs per year within the manufacturing industry were asked numerous questions on various topics concerning their business. Although there is no general definition of the SME and its number of employees (Lu and Beamish, 2001), the European Union maintains an upper limit of a maximum of 250 employees (European Commission, 2013b). All SMEs included in the SBS were randomly selected using a stratified, proportional and systematic method.
The strength of the survey is based on four main arguments. First, the number of SMEs participating in the survey and the subsequent amount of data available is exhaustive (e.g. 9641 observations for the years 2006-2011 only). Second, professional institutions are responsible for conducting the survey. Third, several fundamental articles (e.g. Fernández and Nieto, 2006; Almodóvar and Rugman, 2014) have used this database in their research. It is therefore that I consider this panel survey appropriate for the purpose of this research.
Dependent variables
Scale of internationalization: The of scale of internationalization captures a SMEs
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measurement for scale is the percentage of sales derived from international activities compared to total sales or, in other words, the export intensity (Sullivan, 1994; George et al., 2005; Almodóvar and Rugman, 2014). This export intensity is mostly referred to as the FSTS (foreign sales to total sales) ratio (Sullivan, 1994). For the completeness of the measurement of foreign sales in this thesis, I include the sales generated from export activity as well as sales obtained from all affiliates abroad.
Scope of internationalization: Measuring internationalization requires combining
multiple variables to represent the most reliable picture of a firms’ degree of internationalization (Sullivan, 1994; Pangarkar, 2008; Cerrato and Piva, 2012). Discussion about the right measurement of internationalization of the firm, however, still exists as researchers disagree about the best way to measure this concept (Sullivan, 1994; Cerrato and Piva, 2012; Hilmersson, 2014). Having said that, I use a combined method for the measurement of such construct. Instead of merely counting the number of countries in which the firm performs business activities (Zahra, 2003; George et al. 2005; Hilmersson, 2014), I use the number of regions entered and the spread of sales over these regions.
SMEs in the survey indicated their spread of export sales throughout four main regions: Europe, the OECD (without Europe), Latin America and the rest of the world. Following Rugman and Verbeke (2004), I divided the percentages of sales in the varying regions into subgroups and assigned scores to each subgroup. This will result in the following: firms with no sales in Europe will be graded 0. Firms with foreign sales percentages between 1% and 19% in Europe will be graded 1. Firms with foreign sales percentages between 20% and 50% sales in Europe will be graded 2 and firms with >50% sales in that region will be graded 1. The maximum score for each firm will be 8 when applying these scores to all four regions. This grading is made based on the impressive market
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entry that is established when reaching 20%-50% of total foreign sales in one region, whilst simultaneously being present in another region (Rugman and Verbeke, 2004). Dividing the total score by 8 gives scope of internationalization, on a scale between 0-1, not only accounting for the number of regions entered but also the spread of sales throughout these regions. The closer to 1, the higher the geographic scope of firm activities.
Independent variable
Number of international equity alliances: IEAs exist when two or more parent companies
from different countries create a separate legal entity into another country in order to overcome barriers to entry (Kogut, 1988; Buckley and Casson, 1996). SMEs in the dataset indicated the highest equity involvement into a foreign affiliate abroad. A score of 0-50% ownership percentage in the affiliated firm means that the firm uses IEAs as a mean of entry. A score of 51% or higher indicates entry by other means. If the firm uses IEAs as their primary mode of entry, the independent variable equals the number of affiliates spread over different areas in the world. In other words, the independent variable indicates the number of affiliates that are the result of an IEA.
Moderating variable:
Family Ownership: A firm is family-owned when the family owns the majority of shares and
holds one or more family members in managerial positions (Fernández and Nieto, 2006; Cerrato and Piva, 2012). Following Fernández and Nieto (2006), this variable will categorize SMEs by either being family-owned taking on the value of 1, or not family-owned, taking on the value of 0.
Control variables:
Firm age: Firm age has been argued to positively influence firm internationalization when
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contrary, can negatively influence SMEs propensity to internationalize and internationalization performance (Autio et al., 2000; Lu and Beamish, 2006b).
Firm size: Firm size is measured by the number of employees the firm holds. Firm size can – amongst all – influence the perceived risk (Coviello and McAuley, 1999; Kirby and Kaiser, 2003) and the quantity of resources available (George et al., 2005; Lu and Beamish, 2001).
Corporate Blockholder: External ownership influences SME scale and scope of
internationalization (George et al., 2005; Fernández and Nieto, 2006). The presence of a corporate blockholder in the firm has been positively associated with SME – both family and non-family - internationalization (Fernández and Nieto, 2006) and is therefore used as a control variable.
Foreign ownership: The level of foreign ownership plays an important role in
internationalization efforts and performance of the SME, as it has proven to increase the firms’ propensity to internationalize (Cerrato and Piva, 2012; Almódovar and Rugman, 2014)
Innovation intensity: Innovation intensity belongs to a firms’ FSAs (Rugman and
Verbeke, 2011) and is likely to be responsible for its level of export (Fernández and Nieto, 2006). A firms’ FSAs play an important role in overcoming constraints towards internationalization (Almodóvar and Rugman, 2014) and I therefore control for innovation intensity. The level of innovation intensity is measured by R&D expenditures as a percentage of total sales (Lu and Beamish, 2001; Fernández and Nieto, 2006).
Advertising intensity: A firms’ marketing skills are also an important FSA that – as
innovation – can help a firm overcoming constraints towards internationalization (Almodóvar and Rugman, 2014; Rugman and Verbeke, 2011). Advertising intensity will be measured by dividing advertising expenditures by total sales.
Alliances with retailers and wholesalers: Network ties can ease SMEs access to the desired resources and thereby reduce a firms’ uncertainty when internationalizing (Chetty
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and Camp-Bell Hunt, 2003; Chetty and Agndal, 2007; Fernández and Nieto, 2006; Lu and Beamish, 2001). Network ties can therefore positively influence SMEs’ internationalization efforts (Fernández and Nieto, 2006; Chetty and Campbell-Hunt, 2003). This variable is conducted by indicating whether or not the SME is involved in commercial agreements with wholesalers and retailers, by using dummy variables.
Industry effects: Some industries might be more attractive to firms than other industries
(Fernández and Nieto, 2006). SME internationalization patterns have therefore often been attributed to industry characteristics (Dunning, 1988; George et al., 2005; de Jong and van Houten, 2014; Taylor and Jack, 2013). Industries are categorized by the following characteristics: basic needs, raw materials, processed materials, machinery & electrical products and other – for which I will use five dummy variables accordingly.
Year: Since panel data is used for the years 2006 – 2011, I will control for the different
years by the using 4 dummy variables for the year 2006 – 2010.
33 Table 1 Variables included in the analysis Variable Operationalization
Dependent
Scale of
internationalization
All sales generated from exporting and affiliates divided by total sales Scope of
internationalization
Geographic spread of export percentages throughout 4 world regions
Independent
Number of alliances
The total number of affiliated companies established by IEAs, in the various regions in the world
Moderating
Family ownership The firm is a family-owned SME, (0,1) dummy variable used in models
Control
Firm age Number of years of existence, from inception until the year of measurement
Firm size Number of employees
Corp. blockholder Part of corporate block holding, (0,1) dummy variable used in models Foreign ownership Percentage of foreign ownership in the firm
Innovation int. R&D expenditures divided by total sales Advertising int. Advertising expenses divided by total sales
Alliances WR The firm has alliances with retailers and wholesalers, (0,1) dummy variable used in models
Industry Industry in which the firm operates, (0,1) dummy variables used in models
Year Year in which survey was conducted, (0,1) dummy variables used in the models
4.2 Data analysis
The descriptive statistics and correlations are presented in Table 2. None of the correlations scored higher than 0.8 which indicates there is no multicollinearity problem (de Jong and van Houten, 2014). This is also found true when testing for multicollinearity by calculating the Variance Inflation Factor (VIF) for each coefficient. All variables scored below 5 on this VIF value which confirms the absence of multicollinearity.
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The average age of the SME is 31.8 years and the average firm employs 62 people. Family firms represent 44% of the sample. The largest percentage of SMEs in this survey operates in the basic needs sector (25.8%). The fabricated metal products industry however, which is part of the electronics and machinery sector, represents the mode of firms (1393 out of 9641 observations). 22% of the SMEs in the survey enjoy the presence of a corporate blockholder that owns at least 5% of the shares, whereas the average percentage of foreign ownership in the SME is 8%. To be able to compare the firms’ FSAs - innovation and advertising intensity, both variables were divided by total sales. The mean is given in percentages, which indicates that both FSAs represent less than 1% of total sales.
The mean value of the dependent variables scale and scope of internationalization is respectively 0.163 and 0.191. The mean scale of internationalization is 0.163, where a score of 1 would mean that the SME generates all of his sales from foreign markets. This result of foreign sales (exporting and subsidiary turnover) is on average only 16.3% of total SME income, which is less than half of the 40% that most large MNEs generate from foreign sales (Banalieva et al., 2012; Banalieva and Eddleston, 2011). The mean scope of internationalization shows that SMEs on average reach a geographic spread of firm activities of 0.191, where a score of 1 would indicate an equal 25% spread of firm activities in the four world regions included in this dataset (Europe, OECD – Europe, Latin America and the rest of the world). This indicates that SMEs generally maintain a small scope of international activities.
All variables show a correlation with the dependent and independent variables. Control variables firm size and the presence of a corporate blockholder or foreign firm in the ownership of the SME, strongly and positively correlate to scale and scope of internationalization. These results are consistent with the literature, arguing that external
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ownership positively influences SME internationalization (George et al., 2005; Fernández and Nieto, 2006).
4.3 Results
For the regression analysis I used the Ordinary Least Squares (OLS) method, for which the results follow in Table 3 and 4. A total of 4 models are presented in each table. Model 1 considers the control variables only. Model 2 includes the control variables and dependent variable number of alliances. Model 3 tests for the former and adds the quadratic term of the independent variable, necessary to test the inversed U-shape relationship that is hypothesized. The last model tests the hypotheses on the full sample, including the moderating variable
family ownership and the interaction variable family ownership x number of international equity alliances. In both regression analyses the industry and year effects are included as a
mean of control.
The P-value of (p < 0.000) for all models included in the regression analyses suggests that these models are valid. In other words, I can reject the option that none of the variables included in my model are responsible for the outcome of the dependent variables. The increasing R² suggests that the full model fits the data better than when excluding certain variables (de Jong and van Houten, 2014), although these differences are small.
Analysing Table 3 leads to the conclusion that foreign ownership and firm size are the strongest predictors of the scale of internationalization. Further, almost all of the control variables are significantly related to the scale of internationalization (p < 0.01). It is only SMEs’ advertising intensity that is negatively related to scale (β = -0.022) and has a lower significance level (p < 0.05) than the other control variables. This means that the scale of international activities slightly decreases when advertising intensity rises. This might be due
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Table 3 International equity alliances and the Scale of Internationalization
Model 1 Model 2 Model 3 Model 4
Nr alliances 0.035*** (0.009) 0.085** (0.016) 0.068*** (0.019) Quadratic term -0.060*** (0.003) -0.066*** (0.003) Family own. 0.019** (0.005) Family own x Nr alliances 0.027* (0.019) Firm age 0.101*** (0.000) 0.099*** (0.000) 0.098*** (0.000) 0.096*** (0.000) Firm size 0.252*** (0.000) 0.249*** (0.000) 0.248*** (0.000) 0.248*** (0.000) Blockholder 0.080*** (0.005) 0.079*** (0.006) 0.077*** (0.006) 0.078*** (0.006) Foreign own. 0.158*** (0.000) 0.159*** (0.000) 0.159*** (0.000) 0.163*** (0.000) Innovation 0.076*** (0.001) 0.074*** (0.001) 0.073*** (0.001) 0.072*** (0.001) Advertising -0.022** (0.001) -0.022** (0.001) -0.022** (0.001) -0.023** (0.001) Alliances rw 0.047*** (0.005) 0.046*** (0.006) 0.045*** (0.006) 0.045*** (0.006) Industry and
Year effects Included Included Included Included
R² 0.260 0.262 0.265 0.269 Adj. R² 0.259 0.261 0.263 0.267 F-stat 196.641 186.557 178.747 163.949 P-value 0.000 0.000 0.000 0.000 * p < 0.10 ** p < 0.05 *** p < 0.01
to increased home country sales derived from more intense marketing, which changes the balance between foreign sales and total sales in favour of home country sales.
Considering hypothesis 1, Table 3 provides strong support for the theorized inverted U-shape relationship between the number of IEAs and the scale of internationalization. First of all, both the independent variable and the quadratic term are significant at the (p < 0.01) level. Second, because the coefficient for the independent variable is positive (β = 0.068) and the quadratic coefficient of the independent variable is negative (β = -0.066), the inverted U-shape is proven.
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Table 4 International equity alliances and the Scope of Internationalization
Model 1 Model 2 Model 3 Model 4
Nr alliances 0.040*** (0.008) 0.117*** (0.014) 0.106*** (0.016) Quadratic term -0.093*** (0.002) -0.096*** (0.003) Family own 0.061*** (0.004) Family own x Nr alliances 0.016 (0.017) Firm age 0.110*** (0.000) 0.108*** (0.000) 0.107*** (0.000) 0.102*** (0.000) Firm size 0.291*** (0.000) 0.289*** (0.000) 0.287*** (0.000) 0.287*** (0.000) Blockholder 0.053*** (0.005) 0.051*** (0.005) 0.049*** (0.005) 0.051*** (0.005) Foreign own 0.069*** (0.000) 0.070*** (0.000) 0.071*** (0.000) 0.081*** (0.000) Innovation 0.115*** (0.001) 0.112*** (0.001) 0.111*** (0.001) 0.109*** (0.001) Advertising 0.125*** (0.001) 0.125*** (0.001) 0.125*** (0.001) 0.122*** (0.001) Alliances rw 0.124*** (0.005) 0.124*** (0.005) 0.122*** (0.005) 0.121*** (0.005) Industry and
Year effects Included Included Included Included
R² 0.260 0.262 0.265 0.269 Adj. R² 0.259 0.261 0.263 0.267 F-stat 196.641 186.557 178.747 163.949 P-value 0.000 0.000 0.000 0.000 * p < 0.10 ** p < 0.05 *** p < 0.01
In Table 4 the regression analysis concerning the dependent variable scope of
internationalization is presented. Although firm size is still the strongest predictor of the
dependent variable, other relations have changed in relation to Table 3. The SMEs’ FSAs advertising and innovation intensity as well as alliances with retailers and wholesalers, are positively and strongly related to the scope of internationalization. These variables are therefore important predictors of the scope of SMEs’ international activities.
The independent variable is significantly related (p < 0.01) to the scope of internationalization. The coefficient for this variable is positive (β = 0.106), whereas the quadratic term is negative (β = -0.096). These results support the inverted U-shape
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relationship between het number of IEAs and the scope of SME internationalization as proposed in hypothesis 2.
The coefficients of the main relationships investigated and reported in Model 4 of Tables 3 and 4 are rather small, which means – as discussed previously - that other variables have an important influence on SMEs’ scale and scope of international activities and this degree of internationalization is not mainly due to the formation of IEAs (e.g.: Dunning, 1988; Taylor and Jack, 2013; Brock et al., 2011). The focus of this thesis is, however, on providing support for the hypotheses that this influences exists. IEAs facilitate the scale and scope of internationalization, up until a certain point is reached. After this point the number of IEAs negatively influences SME internationalization, which is indicated by the negative coefficient of the quadratic term.
In model 4 the moderating variable family ownership was introduced, which is expected to positively moderate the role between the number of IEAs and the degree of internationalization. For the moderating role to be statistically supported, the interaction term needs to be positive and significant. The coefficient for the interaction term in Table 3 is positive (β = 0.035) and significant, which provides support for hypothesis 3, although significance only appeared at the (p <0.05) level. The coefficient of the interaction term for the second dependent variable, scope of internationalization, is positive (β = 0.016) but not significant which forces me to reject hypothesis 4.
