Uncovering the role of arbitrage strategies on SMEs’
scale and scope of internationalization:
The case of the Dutch horticultural industry
Master Thesis
MSc Business Studies – International Management Amsterdam Business School – University of Amsterdam
Student name: Judith van Duijn First Supervisor: Dr. Niccolò Pisani Student number: 10665730 Second Supervisor: Dr. Lori DiVito Date: June 27th 2014
ABSTRACT
This research investigates the role of arbitrage strategies on small and medium-sized enterprises’ (SMEs) internationalization paths. The goal of this study is to determine how the cultural, administrative, geographical, and economic dimensions of arbitrage relate to the scale and scope of SME internationalization. To achieve this goal, an in-depth qualitative multiple case study is used in which qualitative data is acquired through semi-structured interviews with CEOs and top management team members of four Dutch horticultural SMEs. Secondary data sources are used to complement this data. The results show that arbitrage strategies play a determinant role in the internationalization of SMEs, in combination with adaptation strategies. Moreover, SMEs’ ability to exploit cultural, geographical and economic differences positively influences the scale and scope of their internationalization.
ACKNOWLEDGEMENTS
I would sincerely like to thank my supervisor Dr. Niccolò Pisani. His input, patience, and feedback were highly valuable. His insightful comments and suggestions pushed me in the right direction and have been of great importance for the completion of this thesis. Furthermore, I would like to thank all the respondents for their time and valuable contributions to this study. Their participation has been of utmost importance. Last but not least, I would like to thank my family and friends for their support, encouragement and feedback.
TABLE OF CONTENTS ABSTRACT ... 2 ACKNOWLEDGEMENTS ... 3 1. INTRODUCTION ... 6 2. LITERATURE REVIEW ... 8 2.1. Internationalization of SMEs ... 8
2.2. Factors affecting internationalization of SMEs ... 10
2.2.1. Country-level factors ... 10
2.2.2. Industry-level factors ... 12
2.2.3. Firm-level factors ... 13
2.3. International strategy ... 17
2.3.1. International strategy of SMEs ... 17
2.3.2. Global integration – national responsiveness tradeoff ... 18
2.3.3. The AAA Triangle ... 18
2. 4. Research gap and research question ... 20
3. THEORETICAL FRAMEWORK ... 22
3.1. International strategies for SMEs ... 24
3.2. Cultural arbitrage ... 25 3.3. Administrative arbitrage ... 26 3.4. Geographical arbitrage ... 26 3.5. Economic arbitrage ... 27 4. METHODS ... 29 4.1. Research design ... 29 4.2. Data collection ... 30
4.2.1. Sampling and selection of the cases ... 30
4.2.2. Collecting the data ... 33
4.3. Data analysis ... 34
4.4. Results ... 35
4.4.2. The influence of cultural arbitrage on SME internationalization ... 37
4.4.3. The influence of administrative arbitrage on SME internationalization ... 38
4.4.4. The influence of geographic arbitrage on SME internationalization ... 39
4.4.5. The influence of economic arbitrage on SME internationalization ... 40
5. DISCUSSION ... 45
5.1. Scientific relevance and managerial implications ... 47
5.2. Limitations of research ... 47
5.3. Suggestions for future research ... 48
6. CONCLUSION ... 49
7. REFERENCES ... 50
1. INTRODUCTION
Small and medium-sized enterprises (SMEs), being the majority of enterprises in the private sector, are the engine of modern developed economies. They are an essential source of employment, drive economic growth, create entrepreneurial spirit, and stimulate innovation (European Commission, 2005; Hessels & Parker, 2013). Advances in information and communication technology have contributed to their internationalization. As a result, SMEs are responsible for a major share of export growth and economic prosperity in many countries (Knight, 2001). In 2012 the European Union counted 20.7 million SMEs, corresponding to more than 98 percent of the total number of enterprises and employing 67 percent of the population (Ecorys, 2012; Eurostat, 2009).
In order to be classified as an SME, a firm needs to be non-subsidiary, independent, and of a limited size. This size can be related to a number of quantitative measures, such as the number of employees, the amount of total sales or total assets of the firm (Hsu, Chen & Cheng, 2013). Such quantitative definitions can differ among countries; for example, relating to the number of employees. The limit most frequently used for designating SMEs is 250 employees, which is maintained in the European Union. However, the maximum number in the United States is 500 employees, while other countries consider only firms with fewer than 200 employees to be SMEs (OECD, 2005).
The European Commission defines medium-sized firms as companies counting less than 250 employees and with an annual turnover of less than €50 million or an annual balance sheet total of less than €43 million. Small firms count less than 50 employees and have an annual turnover of less than €10 million or an annual balance sheet total of less than €10 million (European Commission, 2005). This definition is widely employed in industrialized countries as well as in several academic articles focused on SMEs (Majocchi, Bacchiocchi & Mayrhofer, 2005; Hessels & Parker, 2013). Accordingly, it will also be used in this thesis.
This thesis starts with an overview of the significant literature available regarding the internationalization of SMEs, followed by a discussion of the most relevant country-, industry-, and firm-level factors affecting SME internationalization. Then, we will focus on the international strategy of SMEs, and present the AAA Triangle first proposed by Ghemawat (2003; 2007; 2008). The research gap will then be established and the research question of this master thesis will be formulated. In the following chapter we will introduce the theoretical framework and the propositions that will be tested. The methodology of the research will come after this, followed by the results obtained. The validity of the propositions will be reviewed in the results and discussion section. The study will conclude with a summary of the key findings, scientific relevance, managerial implications, research limitations and recommendations for future research.
2. LITERATURE REVIEW
2.1. Internationalization of SMEs
Since SMEs increased their involvement in international markets and internationalized their activities, they have started to play a critical role in international trade (Coviello & McAuley, 1999; Kalinic & Forza, 2012; Ruzzier, Hisrich & Antoncic, 2006).
Internationalization can be defined as the process of geographical expansion of economic activities across national borders (Ruzzier et al. 2006). This internationalization process can be driven by several motives. Dunning (1998) distinguishes four motives that can drive internationalization. The first motive is resource seeking, as foreign markets can be interesting because of the availability, price, and quality of natural resources. Market seeking is the second motive, which can push firms to expand across borders in search of new clients. Firms can be attracted to foreign markets with a high growth rate. Another motive is efficiency seeking. Low labor costs or other factors that can lead to lower production costs can be drivers for firms’ internationalization. Lastly, companies can cross borders to seek strategic assets. This motive involves the availability of knowledge-related and other intangible assets.
Research regarding internationalization of SMEs started around the 1970s. One of the first models that describes the internationalization process of the firm is developed by Johanson and Vahlne (1977). This model, also known as the Uppsala model, explains how firms gradually acquire, integrate and use knowledge about foreign markets and operations. The Uppsala model focuses on the increasing involvement in foreign countries (Johanson & Vahlne, 1977). According to the Uppsala model, firms internationalize in small steps. More recent studies explaining SME internationalization have opened new research streams that have become relevant in the literature of internationalization (Rialp, Rialp, Urbano & Vaillant, 2005), focusing on born globals (Knight & Cavusgil, 2004), international new
ventures (Oviatt & McDougall, 1994), and international entrepreneurship (McDougall & Oviatt, 2000). International new ventures or born globals can be defined as business organizations, that from their very inception, seek to derive significant competitive advantage from the use of resources and the sale of output in multiple countries. Thus, they differ from traditional SMEs insofar as their origins are international and they start with a proactive international strategy from the very beginning. In other words, they do not gradually expand abroad (Oviatt & McDougall, 1994). Studies identifying and describing born globals and international new ventures emphasize their early and rapid internationalization (Autio, Sapienza & Almeida, 2000), the use of networks in SME internationalization (Lu & Beamish, 2001), and the expansion in domestic and international markets (Coviello & Munro, 1997). Studies regarding international entrepreneurship focus on the importance of entrepreneurs as the decision makers within the organization. Their international orientation and attitude towards internationalization thus influences the internationalization patterns of SMEs (Acedo & Jones, 2007; Oviatt & McDougall, 1994; 2005). Although born global and international new ventures play an important role in the literature of SME internationalization, this study focuses on traditional SMEs using the gradual approach for internationalization (Kalinic & Forza, 2012). Therefore, hereinafter the term SME refers to traditional SMEs.
SMEs cannot enjoy all the options in the internationalization process due to several constraints (De Chiara & Minguzzi, 2002). Limited financial resources represent the biggest constraint for smaller firms (De Maeseneire & Claeys, 2012). This makes it harder for them to follow an internationalization strategy based on direct foreign investments, or that anyway require a high amount of financial assets (De Chiara & Minguzzi, 2002). Other internal constraints faced by SMEs are the lack of management skills and time. However, besides these internal difficulties there are also external barriers limiting the internationalization possibilities for SMEs, like adverse market conditions or institutional arrangements. The
perception of barriers differ for firms in different stages of internationalization (Ulner, Kocak & Cavusgil, 2013). For instance, the results of Hessels & Parker’s (2013) study demonstrate the importance to distinguish different dimensions of internationalization and inter-firm collaborations – in particular between importing and exporting, and between formal and informal collaborations – as well as context-specificity of strategies. The limitation in resources can restrict SMEs in their usage of equity entry modes for their international activities, such as equity joint ventures or wholly owned subsidiaries. Therefore, SMEs tend to use non-equity modes, such as export and contractual agreements (De Chiara & Minguzzi, 2002; Erramilli & D’Souza, 1993; Maekelburger, Schwens & Kabst, 2012).
2.2. Factors affecting internationalization of SMEs
The internationalization of SMEs is influenced by several factors, which can be mainly divided into three levels; country-level factors, industry-level factors, and firm-level factors.
2.2.1. Country-level factors
The internationalization of SMEs is affected by several country-level factors. Birkinshaw et al. (1995) identify the differences in comparative advantage across countries as the main drivers of internationalization. Comparative advantage – or location-specific advantage – influences the decision of where to source and market (Kogut, 1985). Factor costs, such as wages, materials, and capital can significantly differ from country to country, favoring cross-border activities in industries that use this factor intensively (Johnson Jr., Arya & Mirchandani, 2013; Kogut, 1985; Porter, 1986). Ghemawat (2008) emphasizes the importance of considering sustained differences between countries as an important driver of global integration strategy. Examples are the international variation in the availability of specialized inputs, taxes, labor costs, and the legal environment (Johnson Jr. et al., 2013).
Another country-level determinant of internationalization is country risk. Country risks are the uncertainties in political, legal, cultural, and economic environments, which can
threaten the stability of business operations. Higher country risk in a host country leads to a lower likelihood of that country being selected by an internationalizing firm (Demirbag & Glaister, 2010; Rasheed, 2005). When entering a foreign market, firms aim to minimize the risks associated with these uncertainties, because they complicate the structural, transactional, and resource dynamics of transnational activities (Demirbag & Glaister, 2010; Ghoshal, 1987; Rasheed, 2005).
The influence of the home institutional context on the internationalization of SMEs has also been widely studied. However, the results regarding this relationship remain inconclusive (Schwens, Eiche & Kabst, 2011). Institutions can be defined as “the rules of the game in a society” and focus on social actors and “the ways that differently constituted groupings of social actors control economic activities and resources” (North, 1990: 3; Whitley, 1999: 32). Institutions can be distinguished in informal and formal institutions. Informal institutions refer to cultural background and behavior concerning trust, collaboration, identity, and subordination (Peng, 2000; Schwens et al., 2011; Whitley, 1999). Formal institutions are manifested in political rules, legal decisions, and economic issues (Peng, 2000). Large informal institutional distance increases the challenge of doing business in the host country (Xu & Shenkar, 2002). The larger the cultural differences between host and home country, the larger the risks of doing business, and the greater the informal institutional distance. In return, it is more difficult to transfer in the host country the management model used at home and adapt to local practices and preferences (Gelbuda, Meyer & Delios, 2002; Slangen & Van Tulder, 2009). Despite the fact that the direct influence is still inconclusive, several studies show a moderating effect of institutional context. Schwens et al. (2011) find a moderating influence of institutions on the relationship between international experience, proprietary know-how, and strategic importance and the entry mode choice of SMEs. Existing research also indicates that institutional factors
moderate the relationship between export strategy and firm performance (Nguyen, Le & Bryant, 2013).
2.2.2. Industry-level factors
The internationalization of SMEs is also influenced by industry-level factors, like the amount of competitors, the size, maturity, and technological intensity of the industry.
Research documents that the size of the domestic market affects the internationalization process of SMEs (Bell, Crick & Young, 2004; Crick & Jones, 2001; Elango, 1998). A firm needs to make a tradeoff between entering foreign markets and accessing its domestic market. If the domestic market is sufficiently large and accessible compared with the foreign markets, it is likely for the firm to stay within the home market. When the size of the domestic market is insufficient, firms are more likely to cross borders and enter international markets. This is also the case if firms have to compete in a hostile or mature domestic industry (Elango, 1998). The number of competitors and the degree of rivalry have an impact on the prices offered to customers and hence profits to the firms. In addition, saturation of the domestic market forces companies to search for additional foreign markets (Bell et al., 2004; Crick & Jones, 2000; Fan & Phan, 2007).
Another determinant of internationalization at the industry level is the technological intensity in the industry, which is often measured by R&D expenditures as a percentage of sales. Firms competing in a technologically intensive industry are more likely to internationalize. This relationship can be explained by the ownership advantages possessed by companies operating in technologically intensive industries, which make foreign market entry easier and more profitable. Moreover, these firms are characterized by higher levels of both tangible and intangible assets as well as accumulated knowledge, which clearly enhance the likelihood to expand across borders (Anand & Kogut, 1997; Driffield & Munday, 2000; Kim & Lynn, 1987; Kuemmerle, 1999).
2.2.3. Firm-level factors
Prior studies show that firm and entrepreneurial characteristics also influence the internationalization of SMEs. For instance, the size of the firm influences the internationalization of SMEs. The relationship between firm size and export intensity is one of the most widely analyzed links in the international business literature. However, this relationship is still controversial as the empirical findings remain contradictory (Majocchi et al. 2005; Pla-Barber & Alegre, 2007). Some studies show a positive relationship between the two variables (Wagner, 1995), while other articles do not find any support for this relationship (Bonaccorsi, 1992; Moen, 1999; Pla-Barber & Alegre, 2007). According to Fernhaber et al. (2008) firm size has a moderating influence on the positive relation between location and new venture internationalization. Results show that firm size is the most important firm characteristic influencing this relationship. Majocchi et al. (2005) confirm a strong positive relationship between firm size and export performance and this relationship holds even if the analysis is longitudinal. According to Johanson & Valhne (1977) export activities can be an important step in the process of internationalization. Exporting can contribute to the acquisition of international experience and can help to reduce uncertainty in foreign markets. Export activities can be considered as valuable means of internationalization, because firms are allowed to accumulate institutional, business, and internationalization knowledge (Sharma & Blostermo, 2003). Therefore, exporting can be an effective way to enhance internationalization. Having said that, it takes time to gain the knowledge and the organizational capabilities necessary to craft an effective international strategy (Majocchi et al., 2005).
The age of the firm seems to have a negative relationship with international growth. Young firms have learning advantages over old firms in terms of assimilating new foreign knowledge. First, young SMEs can adapt and modify the cognitive, political, and relational patterns more easily than older firms (Autio et al. 2000). Internationalizing SMEs have to
learn new routines, which requires the unlearning of old ones. This is becoming more difficult as the firm gets older (Barkema & Vermeulen, 1998). Secondly, early internationalizing SMEs will adopt an international identity, which allows firms to be more aware, capable, and willing to pursue international opportunities (Autio et al. 2000; Penrose, 1959).
Another firm-level determinant of internationalization is knowledge intensity. Knowledge intensity can be defined as the extent to which a firm depends on the knowledge inherent in its activities and outputs as a source of competitive advantage (Autio et al. 2000). Knowledge creation and exploitation lead to developing learning skills, which can be used for adaptation and growth in new markets and environments (Grant, 1996). Furthermore, firms with a higher level of knowledge-intensity perform better in dynamic environments (Gaur, Mukherjee, Gaur & Schmid, 2011; Miller & Shamsie, 1996). Several studies support the positive relationship between knowledge-intensity and international growth. For instance, the study of Autio et al. (2000) shows that firm knowledge about international markets and the efficiency by which such knowledge is learned represent an important driver of international sales growth. Knowledge is also indispensable when an SME enters markets in which it has little or no previous experience. In such markets new knowledge on how to compete and prosper must be apprehended, shared, and assimilated (Autio et al. 2000). Fernhaber et al. (2008) quantify knowledge-intensity by dividing the R&D expenditures by the total number of employees. The results of this study suggest that a higher knowledge-intensity helps organizations expanding across multiple geographic regions to minimize the effects of competition in the local region (Fernhaber et al., 2008).
The internationalization of SMEs is also influenced by their previous international experience. Prior studies show a positive relationship between international experience of the firm and international growth (Forsgren, 2002; Sharma & Blostermo, 2003; De Chiara & Minguzzi, 2002). International expansion is a learning process where firms gain international
experience, reduces uncertainty in foreign markets, and leads to increasing commitment to foreign markets (Forsgren, 2002; Johanson & Vahlne, 1977; 1990). International experience allows firms to acquire institutional, business, and internationalization knowledge (Sharma & Blostermo, 2003). Firms can discover different national market rules (institutional knowledge), become familiar with different clients’ preferences (business knowledge), and develop internal resources that can be useful in other international markets (internationalization knowledge) (De Chiara & Minguzzi, 2002; Majocchi & Zucchella, 2003; Majocchi et al. 2005). International experience leads to better knowledge and insight in business opportunities in both the domestic and international domain (Hulbert, Gilmore & Carson, 2013; Maekelburger et al., 2012).
Network relationships also positively influence SME internationalization (Maekelburger et al., 2012). Ojala (2009) finds that network relationships are actively utilized and developed to achieve market entry. Eberhard & Craig (2013) distinguish network relationships in inter-personal networking and inter-organizational networking. Inter-personal networks enable the decision maker to access new and different types of information and ideas (Cao, Simsek & Zhang, 2010; Sharma, Young & Wilkinson, 2006), while inter-organizational networks are primarily helpful for opportunity exploitation through mobilizing resources and boosting firm reputation (Eberhard & Craig, 2013). Dai & Liu (2009) show a positive relationship between international inter-personal networks and firm performance. Furthermore, inter-personal networks play an important role in the innovation processes of the firm because the knowledge necessary for innovation is derived from multiple individual sources (Kanter, 1983; Nelson & Winter, 1982). Individuals with more informal contacts outside the organization are critical for importing novel knowledge contributing to innovation (Allen, 1977). Through innovation firms can enter new markets with novel and better products, which make export more successful (Cassiman & Golovko, 2011; Golovko &
Valentini, 2011). Inter-personal network activity can be seen as an important predictor of managers’ involvement in innovation and consequently in internationalization (Eberhard & Craig, 2013), especially early in the institutional transition process (Danis, Chiaburu & Lyles, 2010). Inter-organizational networks also affect the internationalization process positively. SMEs usually suffer from a lack of established resources, which are required for expanding abroad (Dubini & Aldrich, 1991; Hitt, Bierman, Uhlenbruck & Shimizu, 2006). Inter-organizational networks help to access key resources, skills and knowledge controlled by others (Jarillo, 1989), and therefore have a positive effect on internationalization. This effect is larger for geographically diverse networks and firms sharing a common language (Musteen, Francis & Datta, 2012).
Organizational ambidexterity represents the ability of an organization to efficiently exploit existing market opportunities while exploring the innovativeness to meet the challenges of future markets, which can contribute to successful internationalization (Patel, Messersmith & Lepak, 2013). Voss & Voss (2013) show a positive relationship between product ambidexterity and revenues in larger firms, while market exploration benefits smaller firms.
Specific strategic focus is another determinant of internationalization, because it allows SMEs to internationalize operations rapidly and to change the speed and the commitment to internationalization (Hagen, Zucchella, Cerchiello & De Giovanni, 2012). In addition, strategic flexibility inures the fast development of commitment in the host country. This allows SMEs to react quickly to feedback and changing environments (Kalinic & Forza, 2012).
Not only firm-specific factors can drive firms to internationalization, also entrepreneur-specific determinants are important in the internationalization process, especially for SMEs. As a matter of fact, entrepreneurs play an unique and crucial role in the SME and
the internationalization the firm (Keupp & Gassmann, 2009). The decisions in the organization are often made by the entrepreneur (Westhead, Wright & Ucbasaran, 2001; Zucchella, Palamara & Denicolai, 2007). Prior studies researched the importance of entrepreneurs and their influence on international growth. The findings show a positive relationship between the entrepreneurs’ international attitude, orientation, experience, network, and positive international development (Kuemmerle, 2002; Preece, Miles & Baetz, 1998; Westhead et al., 2001; Zucchella et al. 2007). Literature regarding the relationship between the international experience of managers and internationalization show similar results. Managers with international experience move SMEs more quickly toward internationalization than managers that lack international experience (Fernhaber et al., 2008; Reuber & Fischer, 1999). Personal characteristics of the entrepreneur also play an important role and influence the international orientation of entrepreneurs. For example, a high level of education and previous work experiences are related to a strong international orientation. Personal life experiences like foreign education, or work experience, travel, foreign birth or knowledge of foreign languages also shape entrepreneurs’ international orientation, allowing them to discover and filter international opportunities (Cavusgil, 1984; Filatotchev, Buck & Wright, 2009; Ganotakis & Love, 2012; Ibeh, 2003; Jones & Coviello, 2005; Stoian, Rialp & Rialp, 2011; Zucchella et al., 2007).
2.3. International strategy
This section reviews the available literature regarding international strategy of SMEs. Furthermore, we will present Ghemawat’s AAA Triangle (Ghemawat, 2003; 2007; 2008). 2.3.1. International strategy of SMEs
The relationship between strategic orientation, strategic behavior, and international performance is a relevant issue for entrepreneurs and managers (Hagen et al., 2012). Melin (1992) emphasizes the link between internationalization and strategy. However, the
international strategy of SMEs has been a relatively neglected topic in international business research (Hagen et al., 2012; Ricard, Enright, Ghemawat, Hart & Khanna, 2004). The international business literature is in fact dominated by studies on the large multinational enterprises (MNEs). Consequently, the international strategy of SMEs remains a relatively neglected research field (Bell et al., 2004; Hagen et al., 2012). The lack of research of the international strategy of SMEs can be partially explained by the unplanned and reactive or opportunistic behavior of SMEs (Bilkey & Tesar, 1977; Westhead, Wright & Ucbasaran, 2002). This behavior makes it even more difficult to gather data regarding international strategy. However, the absence of an explicit and formal strategy does not equate to the lack of strategic vision, whether or not this involves a global focus (Bell et al., 2004).
2.3.2. Global integration – national responsiveness tradeoff
Traditionally, the literature regarding international strategy emphasizes a tradeoff between global integration and local responsiveness (Bartlett & Goshal, 1989; Ghemawat, 2008). This tradeoff can be traced back to Fayerweather (1969), who discusses the tension between the pressure for companies to unify and standardize their products and activities, and the pressure to adapt to local environments and to differentiate. Prahalad and Doz (1987) elaborate on this tension into the global integration – national responsiveness tradeoff. However, Prahalad and Doz (1987) argue that companies do not have to focus on one alternative or the other, as the multifocal strategy allows firms to be both globally integrated and locally responsive.
2.3.3. The AAA Triangle
Ghemawat (2007) adds a third dimension to this discussion for his new framework for approaching strategy, called the AAA Triangle. This framework allows managers to see which of the three strategies – or combination of strategies – is likely to afford the most leverage for their companies or in their industries overall. The three As represent distinct types of global strategy; adaptation, aggregation, and arbitrage. Each A is associated with
different organizational types. Adaptation strategies seek to increase revenues and market share by maximizing a firm’s local relevance. When adopting adaptations strategies, the firm adjusts to differences between the home country and host country. If adaptation is the main objective for a firm, a country-centered organization suits best. Aggregation strategies attempt to deliver economies of scale by overcoming differences between countries. This can be done by creating regional or global operations, thus involving a high degree of standardization. Cross-border groupings are best when aggregation is emphasized. Arbitrage is the exploitation of differences between national or regional markets. Ghemawat (2003) distinguishes four dimensions of arbitrage; cultural, administrative, geographical, and economic arbitrage. The cultural, administrative, geographical, and economic differences between countries can be a source of value creation, rather than a constraint. This argument is based on Kogut’s (1985) initial assessment of arbitrage to which firms differ in location of sourcing of their production, which enables firms to acquire a competitive edge based on the superior exploitation of the comparative advantages among countries. Arbitrage is best pursued by a vertical or functional organization that plays explicit attention to the balancing of supply and demand within and across organizational boundaries (Ghemawat, 2007; 2008).
Although many companies follow strategies that involve the pursuit of just one of the three As, there are also companies that attempt to employ a combination strategy. These AA strategies can lead to success in two different ways. Some companies win by beating its competitors along both dimensions at once. More commonly, companies win because they manage the tensions between two As better than their competitors do. However, the pursuit of AA strategies requires considerable organizational and material innovation (Ghemawat, 2007). Table 1 explains and compares the three As in more detail.
TABLE 1
Comparing adaptation, aggregation and arbitrage
Adaptation Aggregation Arbitrage
Competitive advantage Why globalize at all?
To achieve local relevance through national focus while exploiting some economies of scale.
To achieve scale and scope economies through international standardization.
To achieve absolute (non-scalar) economies through international
specialization. Configuration
Where to locate overseas?
Mainly in foreign countries that are similar to the home base, to limit the effects of cultural, administrative, geographic, and economic distance.
In a more diverse set of countries, to exploit some elements of distance. Coordination
How should international operations be organized?
By country, with emphasis on achieving local
presence within borders.
By business, region, or customer, with emphasis on horizontal relationships for cross-border economies of scale. By function; emphasis on vertical relationships, including across organizational boundaries. Checks
What to watch out for strategically?
Excessive variety or complexity.
Excessive standardization, with emphasis on scale.
Narrowing spreads.
Corporate diplomacy Which public issues need to be addressed?
Potentially discrete and robust given emphasis on cultivation of a local face.
Appearances of and backlash against homogenization or hegemonism. The exploitation or displacement of suppliers, channels or intermediaries; potentially most prone to political disruption. Corporate strategy
What strategic levers do we have?
Scope selection, variation, decentralization,
partitioning,
modularization, flexibility, partnership,
recombination, innovation.
Regions and other country groupings, product or business, function, platform, competence, client industry. Cultural (country-of-origin effects), administrative (taxes, regulations, security), geographic (distance, climate differences), economic (differences in prices, resources, knowledge). Derived from Ghemawat (2003; 2007; 2008).
2. 4. Research gap and research question
As discussed, the international strategy of SMEs has been a neglected topic in international business research, since the main focus has been on multinational enterprises (Bell et al., 2004; Hagen et al., 2012; Ricard et al., 2004). Additionally, the arbitrage strategy is often undervalued as a global strategy (Ghemawat, 2003). This partly reflects the tendency of companies to equate size with a global presence, which emphasizes on scale economies rather than on the absolute economies that underlie arbitrage. However, arbitrage may offer relatively sustainable resources of competitive advantage.
This study contributes to international business literature by investigating the strategic intent behind SME internationalization, focusing on the arbitrage concept and applying it to SMEs. Thus, the emphasis will be on different dimensions of arbitrage and their influence on the internationalization of SMEs. Stated otherwise, the research question that will be investigated is:
3. THEORETICAL FRAMEWORK
Internationalization can be divided into three main dimensions; scale, scope and pace of firm internationalization (Taylor & Jack, 2012). The speed or pace of internationalization refers to the time taken between the inception of the firm and its entry into international markets (Taylor & Jack, 2012). However, this study focuses on traditional SMEs, which have gone – by definition – through a gradual internationalization process and therefore a relatively stable pace of internationalization (Kalinic & Forza, 2012). Therefore, the pace of internationalization will not be investigated.
The scale and the scope of firm internationalization concern the degree to which the firm involves itself in international operations – also referred to as the degree of internationalization (Hilmersson, 2013; Taylor & Jack, 2012). The scale of internationalization relates to the extent of a firm’s international operation. Determination of scale can be assessed by looking at the percentage of turnover derived from international markets and thus refers to the reliance on foreign sales. Companies are acknowledged to be international if at least 25 percent of their total annual turnover is generated in foreign markets (Knight & Cavusgil, 1996; 2004; Moen, 2002; Taylor & Jack, 2012). The scope of internationalization can be determined by the number of markets served and denotes the international geographic reach of the business (Crick, 2009; Hilmersson, 2013; Kuivalainen, Sundqvist & Servais, 2007; Taylor & Jack, 2012).
Building on the literature introduced in the preceding chapter, this study presents six propositions on the arbitrage strategy and the influence of cultural, administrative, geographical and economic arbitrage on the scale and scope of SMEs’ internationalization. The conceptual framework is detailed in Figure 1.
P3 FIGURE 1 Conceptual Framework P5 P6 P4 P2 P1 International Strategy Adaptation Aggregation Arbitrage Cultural arbitrage Administrative arbitrage Geographic arbitrage Economic arbitrage Scale of SME internationalization Scope of SME internationalization
3.1. International strategies for SMEs
Ghemawat (2003; 2007; 2008) distinguishes three international strategies; adaptation, aggregation, and arbitrage. Research has shown that SMEs face internal and external constraints, such as limited financial resources, small firm size, lack of management time and skills (De Chiara & Minguzzi, 2002; De Maeseneire & Claeys, 2012). Due to these constraints, SMEs cannot aim to leverage on scale and scope economies, which are required for the aggregation strategy (De Chiara & Minguzzi, 2002; Ghemawat, 2003; 2007; 2008). In addition, the adaptation strategy requires the achievement of local relevance, while some economies of scale are exploited (Ghemawat, 2003; 2007; 2008). The constraints faced by SMEs also make it difficult to apply a pure adaptation strategy.
Because it is hard for SMEs to pursue aggregation or pure adaptation strategies, we posit that SMEs’ international strategies are mostly related to the notion of arbitrage. The arbitrage strategy is about exploiting differences between countries and achieving absolute economies, which is best suited for SMEs, and can be a critical source for their creation of value. For instance, differences between countries offer greater access to a variety of knowledge and sources of learning, and can also provide the opportunity to optimize the value chain through creative locational disaggregation (Zaheer, Schomaker & Nachum, 2012).
Although some level of awareness of and attention to each of the three As is necessary in international competition, it is not possible or advantageous to focus on all three As. Companies should focus on one or at most two international strategies. When firms attempt to pursue a combination of two international strategies – an AA strategy – this will be a combination of arbitrage and adaptation strategies, because these strategies are best suitable and achievable for SMEs. Therefore, we posit the first and second proposition as follows:
Proposition 2: When SMEs cross borders and rely on a combination of international strategies, they adopt a combination of arbitrage and adaptation strategies.
3.2. Cultural arbitrage
Arbitrage strategies have long exploited differences in culture and country-of-origin effects. For instance, French culture has underpinned the international success of French haute couture, cuisine, wines, and perfumes. The country-of-origin effects are often used in marketing. Several producers use cultural stereotypes to promote their products to their target groups. For example, when Molson Coors Brewing Company launched its brand A Marca Bavaria – a premium beer imported from its Brazilian subsidiary – in the Canadian market, they used its association with Brazil’s high-energy and sensual image to promote its products (Ghemawat, 2003). New opportunities for reinforcing cultural arbitrage appear all the time. For example, The European Union restricts labels, such as Cognac brandy and Parma ham, to only those products that actually come from those places to reinforce the natural advantages of particular geographical areas. Firms can exploit these country-of-origin effects to make their products more attractive to customers in foreign markets, which can stimulate firms to expand across borders. (Ghemawat, 2003).
When cultural differences between home and host country are present, firms can use cultural arbitrage – and especially country-of-origin effects – to create value for customers in the host country. Cultural arbitrage can therefore stimulate firms to internationalize and exploit cultural differences across borders (Ghemawat, 2003; 2007; 2008). Accordingly, the third proposition is framed as follows:
Proposition 3: SMEs’ ability to exploit cultural differences between the home and host country is positively associated to their scale and scope internationalization.
3.3. Administrative arbitrage
Opportunities for administrative arbitrage occur when there are legal, institutional, and political differences across countries. The most obvious example of administrative arbitrage are tax differentials. Tax differentials have always been present and research corroborates the notion that such differentials have played a large influence on multinationals’ investment and financing decisions over time (Desai, Fritz Foley & Hines Jr., 2006). Another example of administrative arbitrage is the membership in different regional trading agreements, like NAFTA. Despite the important role of these types of administrative arbitrages, the most commonly used kind involves working with or around given rules. In some cases companies can even leverage political power in the host country to try to modify specific rules in their favor (Ghemawat, 2003).
Although the use of administrative arbitrage sounds unattractive to many, the potential for using government influence to create administrative arbitrage opportunities remains high, and can be a driver for internationalization (Ghemawat, 2003). Lower tax rates or a favorable legal or institutional environment in foreign markets can be particularly attractive for SMEs. Therefore, administrative differences across countries can positively affect the scale and scope of SME internationalization. Hence, the fourth proposition is framed as follows:
Proposition 4: SMEs’ ability to exploit administrative differences between the home and host country is positively associated to their scale and scope of SME’s internationalization.
3.4. Geographical arbitrage
The exploitation of geographical distance and climate differences are examples of geographical arbitrage. Last few decades, the transportation and communication costs have dropped significantly. However, this drop does not necessarily translate into a decrease in the scope of geographic arbitrage strategies. Geographical arbitrage uses the differences in
physical location as an advantage. A well known example of geographical arbitrage is the import of fresh products during the winter. The cut flower business exploits geographical differences to sell flowers throughout the year (Ghemawat, 2003). The advantages offered by geographical arbitrage make internationalization for firms more attractive, and therefore positively affects the scale and scope of SME internationalization. Hence, the fifth proposition is framed as follows:
Proposition 5: SMEs’ ability to exploit geographical differences between the home and host country is positively associated to the scale and scope of SME’s internationalization.
3.5. Economic arbitrage
Economic arbitrage refers to the exploitation of specific economic factors that are not derived directly from culture, geography, or administrative context. Examples of economic arbitrage are differences in the costs of labor and capital, as well as variations in more industry-specific inputs, such as knowledge or the availability of complementary products, technologies, and infrastructures. The exploitation of differentials in labor costs represents the best-known type of economic arbitrage, which can also be applied to R&D (Ghemawat, 2003). Via the exploitation of knowledge differentials companies can recruit knowledge workers from graduates of leading businesses and other professional schools around the world (Ghemawat, 2003).
Differences in costs are the main reason for the exploitation of economic differences. Therefore, economic arbitrage can be linked to Dunning’s (1998) efficiency seeking motive and strategic asset motive. Dunning’s (1998) efficiency seeking motive argues that lower costs, such as lower labor costs, production costs or capital costs can be drivers for internationalization. The exploitation of knowledge and other industry-specific inputs can be linked to Dunning’s (1998) strategic asset motive, which relates to the availability of
knowledge-related or other intangible assets that can drive internationalization. Based on this overview of economic arbitrage, we posit:
Proposition 6: SMEs’ ability to exploit economic differences between the home and host country is positively associated to the scale and scope of SME’s internationalization.
4. METHODS
This chapter discusses the methodology used in our study. First, we will discuss the research design and explain the methodological choices. Thereafter, we will discuss the sampling method and the selection of the cases. The chapter proceeds by discussing and explaining the data collection and analysis methods,. Finally, we will show the results obtained.
4.1. Research design
The research design explains the structure, the conduction and the analysis of the research (Van der Velde, Jansen & Anderson, 2004). When researchers aim to discover causal links between two or more phenomena, quantitative research is most useful. Qualitative research is most appropriate when researchers study the motivations, perceptions and beliefs of certain variables (Eisenhardt, 1989; Van der Velde et al., 2004). Given that the precise influence of arbitrage strategies on SMEs’ international growth has not been studied in-depth yet, a qualitative approach may help to understand this relationship and the complexities underlying it.
This study applies a qualitative multiple case study design, which is considered as a particularly valuable research technique in this context, with the firm as the main unit of analysis (Eisenhardt, 1989; Yin, 2009). The multiple case study design can be defined as “the research strategy that focuses on understanding the dynamics present within single settings” (Eisenhardt, 1989: 534). This approach aims to describe, rank, and explore data with the aim of generating propositions or illustrating existing theory. This is particularly useful in those research contexts where previous theory seems inadequate or incomplete and deeper theoretical development is required (Yin, 2009; Eisenhardt, 1989). The multiple case study approach is preferred over a single case study, because the analysis of multiple cases enables the use of replication logic among cases.
The case study in this research leads to greater insights in the motivations and perceptions of SMEs to internationalize (Yin, 2009). Having said that, the case study also brings some disadvantages and limitations. The investigation of a phenomenon with few units of analysis results in the perceived inability to statistically generalize the findings to a broader level (Yin, 2009).
4.2. Data collection
Semi-structured interviews were used as a primary source to collect the qualitative data necessary for the purposes of this study. This section gives an overview on the sampling of the cases and on the collection of the data.
4.2.1. Sampling and selection of the cases
Unlike quantitative studies that benefit from random sampling, in qualitative studies samples are best chosen purposively to yield information-rich cases that exhibit the researched phenomenon (Bangara, Freeman & Schroder, 2012; Patton, 2002). We aimed to compare the phenomenon in companies in the same industry, in this case the Dutch horticultural industry.
The Dutch horticultural industry is recognized by the Dutch government as one of nine leading sectors in the Dutch economy, and employs approximately 4,4 percent of the Dutch labor force (Topsectoren, 2013). In addition, the Dutch horticultural industry is the second largest exporter of nutritional horticulture products in the world (Topsectoren, 2013; 2014). The Netherlands represent the heart of an international network for floriculture, bulbs, fruit and vegetables. The central location of the Netherlands and the presence of important logistical hubs – such as the Port of Rotterdam and Amsterdam Airport Schiphol – contribute to an easy and efficient connection to foreign markets. Moreover, 99 percent of the Dutch horticultural companies are SMEs, which is substantially equal to the percentage of SMEs in the Dutch economy (Economisch Instituut voor het Midden- en Kleinbedrijf, 2014; Panteia,
2014). Therefore, the Dutch horticultural industry is particularly well suited to test the six propositions advanced in the previous section.
To employ the multiple case study design, we considered four Dutch horticultural SMEs. As anticipated in the introduction, we utilized the definition maintained by the European Commission (2005) as our first selection criterion; companies counting less than 250 employees, and reporting an annual turnover less than €50 million or an annual balance sheet total less than €43 million. The second selection criterion is that the chosen firms should be internationally active, so their international strategy can be investigated. The four companies were judgmentally selected from the Hillenraad100 2013, which is a list of the 100 leading companies in the Dutch horticulture industry. Judgmental selection is often used for small sample, qualitative research and is the most appropriate choice for the sample selection of this research (Short, Ketchen Jr. & Palmer, 2002). In the following paragraph we will discuss in detail each of the four companies and highlight the rationale behind their selection.
The four selected companies are; a producer and packer of snack vegetables (Firm 1), an international leading consultancy and research company (Firm 2), a supplier of process automation in the horticultural industry (Firm 3), and a producer of micro-vegetables (Firm 4). These four companies are suitable cases for the purpose of this study. First of all, the four companies all gradually internationalized their activities, and are recognized companies in the Dutch horticultural industry. Although the companies compete in the same industry, they all focus on different segments, which broadens the understanding of arbitrage strategies.
Contact with the CEOs and top management team members of the firms was established by telephone and e-mail. After explaining the aim of the study, the entrepreneurs agreed to participate in the study. Detailed descriptions of the selected cases are shown in tables 2 and 3.
Description of the selected cases
Firm 1 Firm 2 Firm 3 Firm 4
Description Firm 1 is a producer and packer of snack vegetables. The company was established in 2005, when several tomato growers combined their strengths and started to produce and pack snack vegetables together. Originally, the firm focused on the domestic market. However, the small Dutch market forced the company to look across borders for new opportunities. In 2006, the company started to export the snack vegetables to Germany, other countries followed quickly. Nowadays, the company owns six production locations in the Netherlands and has joint ventures in Spain, Morocco and Mexico.
These production locations
contribute to the supply of snack vegetables throughout the year, which is essential for the company. In addition, the firm exports to Europe, Russia, the Middle East, the United States, Japan and Hong Kong. Currently, the firm is looking for possibilities to produce in Japan.
Firm 2 is a consultancy and research company, which supplies specific knowledge and expertise to improve and optimize the cultivation process of covered crops.
The company was forced to internationalize their activities, due to a strong player in the domestic market and a mismatch with the demands of the domestic markets. However, there was demand for this type of knowledge supply in foreign markets. Shortly after the establishment of the firm, knowledge was exported to Canada, Poland and the United States. Today, the company also exports to Mexico, Europe, Azerbaijan, Russia, Kazakhstan, China, East Africa and South Africa. The firm has a joint venture with a local company in Japan. In Poland the firm has a wholly owned subsidiary with six employees. At the moment, the company is setting up wholly owned subsidiaries in China and Turkey.
Firm 3 is founded in 1959 as a trade organization for agricultural products, and has developed into one of the leading supplier of
process automation in the
horticultural industry. The company became a large player in the domestic market before it started to export to Belgium, Germany and the United Kingdom in the seventies. The company’s growth objective was the main driver to expand abroad.
When the Dutch horticultural industry expanded abroad, the firm also took the step to enter foreign markets, such as France and Spain. In the eighties the company set up offices in the United Kingdom, Belgium and France, followed by Spain in the nineties. Due to the maturation of the market, the offices in the United Kingdom and Belgium have been closed in 2012. These markets are now served by the Dutch location. In the same year the firm set up offices in Mexico and the United States. Nowadays the company serves sixty countries all over the world – mainly by using partnerships.
Firm 4 is a producer of micro vegetables. Although the company is established in 1988, the major successes were initiated when the current owner took over the company in 2002. Before the takeover, the company already exported products to Belgium, Germany and the United Kingdom. The small domestic market was the main reason to internationalize. Over the years, the company also started to supply to other countries in Europe, such as Italy, Spain, Portugal, France and Scandinavia. Furthermore, the firm has a production location in Kenya, and set up a franchise formula in Japan. In 2006, special greenhouses were prepared on Long Island to generate a reliable supply of fresh products in the United States.
Firm characteristics of the selected cases
Firm 1 Firm 2 Firm 3 Firm 4
Established 2005 2004 1959 1988
Main product Snack vegetables Horticultural
knowledge
Process
automation Micro vegetables
Year of
internationalization 2006 2004 1970 Early Nineties
Initial foreign markets Germany Canada / Poland
Belgium / Germany / Great Britain Belgium / Germany / Great Britain Subsequent foreign markets Europe, Russia, US, Japan, Hong
Kong.
US, Mexico, Europe, Russia,
Azerbaijan, Kazakhstan, China,
Japan, East Africa and South Africa
France, Spain, Canada, US, Mexico, South Africa Western Europe, Scandinavia, US, Japan Percentage of revenue generated abroad 70 % 25 % 70 % 90 %
Main informant Top management
team member CEO CEO CEO
4.2.2. Collecting the data
To achieve construct validity multiple information sources are used to establish triangulation. The primary data source are four semi-structured interviews with either the CEO or a top management team member of the firm, who are thus involved with key decision-making in the internationalization of the firm. In addition, internal documentation, company websites, firm brochures and other secondary data are used (Andersen & Skaates, 2004; Ghauri, 2004). The interviews were in-depth and semi-structured in nature and conducted using an interview protocol to guide the discussion (Appendix A). All interviews lasted from 45 to 90 minutes each and took place in April 2014. Because the native language of both the researcher and the interviewees is Dutch, the interviews were conducted in Dutch. Three interviews were conducted in the company’s premises, one interview was conducted by telephone. The interviewees were informed that the interview would be conducted and reported anonymously. At the beginning of each interview the research was explained and the interviewees were asked if it was possible to record the interview. All interviewees agreed to
the recording. Through the data analysis phase, we maintained contact with the interviewees via e-mail or telephone to clarify issues as they arose.
4.3. Data analysis
After the collection of the required data by conducting the semi-structured interviews, the data were analyzed to test the propositions formulated. This section gives an overview of the data analysis methods.
After each interview, the impression and memories of the interview were noted. The recorded interviews were subsequently transformed into verbatim transcriptions. These verbatim transcriptions were used to code the data. As the interviews were conducted in Dutch, the transcriptions were also conducted in Dutch and analyzed in this form. The quotes reported in the text are an accurate English translation of the original quote in Dutch. The information obtained through interviews was compared with internal documents and the companies’ websites. The use of different sources of data leads to triangulation, which improves the reliability and validity of the research (Andersen & Skaates, 2004). The next step in the analysis process is the thematic analysis of the transcriptions, which is a key technique in the analysis of qualitative data (Ryan & Bernard, 2003). This refers to the method of identifying and investigating themes of which the objective is to establish an understanding of a particular phenomenon and to find patterns within the data (Ryan & Bernard, 2003). Ryan & Bernard (2003) connote these themes as the fundamental concepts to describe the phenomena.
In this study, based upon the conceptual framework and propositions about SMEs’ internationalization and the arbitrage strategy, the following themes were identified for analyzing: ‘drivers of internationalization’, ‘entry modes’, ‘arbitrage strategy’, ‘arbitrage/adaptation strategy’, ‘cultural arbitrage’, ‘administrative arbitrage’, ‘geographical arbitrage’, and ‘economic arbitrage’. These themes are used to categorize the data in
meaningful clusters of analysis (Miles & Huberman, 1994). Sub-codes were assigned to these main themes in order to categorize more specific information, causes and links in the data, and to find evidence for their relevance (O’Dwyer, 2004). The transcriptions were coded and analyzed using the qualitative data analysis software program NVivo. After the data analysis, we produced a document with quotes from the transcriptions to support the trustworthiness of the results (Guba & Lincoln, 1994; O’Dwyer, 2004).
4.4. Results
In this section we present the results of the case analysis. After a general assessment of companies’ international activities, we will focus on the application of arbitrage strategies. Table 4 gives a summary of the findings and table 5 presents illustrative or ‘proof’ quotes from the key respondents of each firm. The use of proof quotes highlight prevalence of a point and enhances the triangulation of qualitative data (Pratt, 2008; 2009; Taylor & Jack, 2012).
4.4.1. SMEs’ adoption of the arbitrage and adaptation strategy
All four companies use several aspects of arbitrage strategies in their internationalization. Having said that, only Firm 1 categorizes its international strategy as a pure arbitrage strategy. Firm 1 exploits several aspects of differences between countries. Examples of the use of such differences are discussed in the next sections. Firm 1’s top management team member highlights the importance of the benefits coming from the differences between the home and host countries.
“When I look at the three international strategies, I think the arbitrage strategy is the one that is closest to our strategy. Our company is like a chameleon and uses the differences between the home and host countries in our advantage”. (Top management team member, Firm 1)
In contrast to Firm 1, the other three companies (Firm 2, 3 and 4) highlight the adaptation strategy as their key strategy. However, these three respondents indicate that arbitrage advantages are also used in combination with their adaptation strategies. The CEO of Firm 2 emphasizes the necessity to adapt to the local market, and to match the knowledge provided by the company to the demand in the market and the clients. While the process of adaptation is recognized as the success factor of the company, the firm is deliberately combining this strategy with the arbitrage strategy.
The application of the adaptation strategy is also recognized in the case of Firm 3. The CEO of the company states that the success of the company precisely lies in the adaptation of the technology owned by the company to local needs in the host country. Because the Dutch technology is well ahead of the technology compared to the foreign markets served, the firm has to adapt its products to the requirements of the local markets. Next to the adaptation strategy, the company also applies the arbitrage strategy. This is also the case in Firm 4, which adopts the adaptation strategy as the key strategy of the firm, but also applies several dimensions of the arbitrage strategy. A finer grained assessment of the particular types of arbitrage strategies adopted by the surveyed companies will be examined in the following sections when discussing the CAGE differences.
“We even mention our adaptation strategy in our marketing plan. Our success lies in the adjustment of the technology. However, I think we will always look for a combination”. (CEO, Firm 3)
Furthermore, all interviewees acknowledge that SMEs have to deal with several limitations in their cross-border operations. Such limitations include, among others, limited financial resources, a small firm size, and lack of management time. These restrictions make it
hard to achieve scale and scope economies, thus the application of an aggregation strategy appears as an impossible venue for them. The CEO of Firm 3 states that because of their small size SMEs tend to be more flexible. However, this flexibility is also restricted by limitations in financial resources and lack of management time. For instance, Firm 3 set up locations in Canada and Mexico at the same time. This required too much time, as well as too many financial resources from the local organization in the Netherlands to support these setups. To avoid these occurrences in the future, Firm 3 realized the need to make thoughtful decisions when considering to internationalize.
These findings indicate support for propositions 1 and 2. All four companies apply several dimensions of the arbitrage strategy. Three of the four surveyed companies adopt the adaptation strategy as key strategy and complement this strategy with aspects of the arbitrage strategy.
4.4.2. The influence of cultural arbitrage on SME internationalization
All four firms exploit differences in culture to create value. Especially the country-of-origin effects are commonly used. Dutch horticultural companies are well known for their knowledge, expertise, and experience in the industry. The four companies use their Dutch origin in their marketing, and exploit this image to increase international sales. However, the respondents from Firm 2 and Firm 3 indicate that using this image can also lead to an opposed effect. For some countries the Dutch technology is too expensive, advanced and high-tech. That is the reason why these two companies try to balance the use of the country-of-origin effects.
“The Netherlands are known as the best of the best of the horticultural industry. We want to let our customers know that we are a Dutch company with a good position in the Dutch market”. (CEO, Firm 2)
The CEO of Firm 4 recognizes the exploitation of differences in national culture to create new products. These advantages mainly come from differences between host countries, and do not involve the country-of-origin effect. The firm gets inspired by foreign cultures, and uses some elements of these cultures in other countries. Many concepts and products come from Japan and are translated to fit in the European markets. The inspiration also comes from other countries, such as Chile, Peru, France and Scandinavia. Firm 4 recently launched new herb leaves in the European market. These herb leaves are commonly used in the Asian cuisine. In sum, the findings regarding cultural arbitrage support our third proposition.
4.4.3. The influence of administrative arbitrage on SME internationalization
None of the companies exploit administrative differences between countries. This aspect of arbitrage is seen as not important or as an impediment, rather than an advantage. The CEO of Firm 3 sees legal, institutional, and political differences as barriers, which lead to higher costs. The respondent of Firm 3 admitted there might be aspects that drive companies to locate in certain countries, such as Brazil. These countries have high import tariffs to force foreign companies to locate equity affiliates there, in order to bypass their high import tariffs. However, CEO from Firm 3 recognizes that it takes considerable time and effort to get the administrative and legal aspects right. Intercompany supply, transfer pricing, and other tax receipts are also seen as barriers, rather than advantages. In addition, the Netherlands are the top ranked country on the DHL Global Connectedness Index, which is an analysis of the state of globalization around the world. This analysis shows that the Netherlands are considered as one of the best places to do business in the world (DHL, 2012). Because the host countries are lower ranked in the Global Connectedness Index than the Netherlands, the host countries are less attractive to do business. This can be another explanation for the fact that the CEOs and top management team member of the surveyed companies consider administrative differences as irrelevant. Therefore, the fourth proposition is not supported.
