AMSTERDAM BUSINESS SCHOOL International Management Track
Master Thesis
27-11-2013Supervisor: Msc. Erik Dirksen Second Reader: Dr. Johan Lindeque
Internationalization behavior of Internet SMEs
How Internet SMEs internationalize: a qualitative research
Student Remi van der Zijde
Studentnumber 5898323
Address Bosboom Toussainstraat 28-2, 1054 AS Amsterdam
1 Introduction ... 4 1.1 Overview ... 4 1.2 Contribution ... 5 1.2.1 Theoretical contributions ... 5 1.2.2 Managerial contributions ... 6 2 Theory ... 8 2.1 Internationalisation theories ... 8
2.1.1 Transaction costs theory ... 9
2.1.2 Internalization theory ... 11
2.1.3 Eclectic paradigm ... 14
2.1.4 Uppsala model ... 16
2.2 Entry modes ... 19
2.3 Internationalization of SME firms ... 22
2.4 Internationalization of Internet firms ... 23
2.5 Sub-questions ... 27 2.5.1 Psychic distance ... 27 2.5.2 Stages approach ... 29 2.5.3 Knowledge ... 30 2.5.4 Entry modes ... 32 3 Methodology ... 33 3.1 Research Design... 33 3.2 Semi-structured interviews ... 34 3.3 Samples ... 34 3.4 Data processing ... 36 4 Results ... 37 4.1 Psychic distance ... 37 4.2 Stages approach ... 42 4.3 Knowledge ... 46 4.4 Entry modes ... 50 5 Discussion ... 57 6 Conclusion ... 57 References ... 62 Appendices ... 66
Abstract
The main internationalization theories are emerged in the ‘70s and ‘80s. Major changes have occurred in the business environment since then. Questionable is: are those ‘old’ theories still applicable for today’s firm’s internationalization behaviour. This is especially interesting when we take Internet SMEs into considering, who possess other characteristics comparing to large manufacturing firms, where most internationalization theories are build on. In this study we investigate how Internet SMEs internationalize with four sub-questions, discussing psychic distance, velocity and stage's approach, knowledge and entry modes. With a literature review and a qualitative research of own empirical data obtained from 12 Internet SMEs the research question is answered. This study contributes to the understanding of the internationalization behaviour of Internet SMEs and gives deep insights how this type of firm internationalizes.
1 Introduction
1.1 Overview
During the past decades, the Internet has changed a lot in our everyday lives. Computers and especially laptops, tablets and smartphones made it possible that people are online throughout the day. Businesses have responded to these developments by opening online shops besides their physical stores. Some companies are using the Internet as their only channel of sales, so called ‘Internet firms’. Firms that are present at the Internet are accessible from all over the world, whether they want it or not. Interesting is to look at this business environment and how Internet firms deal with their internationalization opportunities.
To form a well-funded base the main internationalization theories are studied, which have their roots in industrial organization and economics and originate from the 1970s and 1980s (Axinn & Matthyssens, 2002; Forsgren & Hagström, 2005). An example of such a theory is the Uppsala model. This model, developed by Johanson and Vahlne (1977), explains internationalization behavior in gradual patterns. The amount of knowledge of the foreign country is critical for the commitment firms invest in a country. The transaction costs theory and the internalization theory are also developed in that era. These theories are relying on the ‘learning-by-doing’ concept of Multinational Enterprises (MNEs).
The Internet has changed the way firms handle some of the concepts that the main internationalization theories use. For example, the Internet has the capacity to significantly increase the efficiency of market transactions and enhance the learning process about international operations though faster, cheaper and more extensive access of relevant information. Therefore, the Internet has the potential to lower entry barriers and decrease costs (especially transactions costs) in the internationalization process, therefore is able to reduce market uncertainties (Dung Le, Rothlauf, 2008). In this light it is not strange that some Internet firms have received attention for their incredible speed of internationalization (Forsgren & Hagstrom, 2007). The scientific world is despite of these developments still heavily relying on the relatively old internationalization theories of the 1970s and 1980s. Therefore we need to critically
assess whether those theories are still applicable for contemporary Internet firms, especially smaller firms comparing to MNEs, so called small and medium sized enterprises (SMEs).
To investigate this phenomenon I formulated the following research question: How do Internet SMEs internationalize?
1.2 Contribution
By answering the described problem statement, this study contributes to the understanding of the internationalization process of Internet SMEs. By diving deeply into the internationalization behaviour of Internet SMEs, this study present findings of this relatively new phenomenon. Besides providing an overview of the internationalization behaviour of this type of firm (descriptive character) this study will also attempt to explain this phenomenon (explanatory character).
1.2.1 Theoretical contributions
This research is relevant to the academic community because the findings of this study are not available in the scientific world yet. By adding qualitative data from Internet SMEs this research is filling an empirical gap that contributes to the current level of scientific knowledge about internationalization theories and especially of internationalization of Internet SMEs. A lot of previous research is conducted in the United States of America where the transferability of the findings and the replicatibility of the studies are, giving the differences in context, difficult. Moreover, most former research about internationalization of Internet firms is becoming aged. For instance, Forsgren & Hagström (2005) collected empirical data for their research from 1995 till 2000. When we look at the incredible speed of development of the Internet it is safe to state that most existing research on Internet firms is investigated in a completely different environment compared to the temporary environment. Furthermore, most
research in this field is done on MNEs, where this study concentrates on SME firms. With the global integration of economic environments and increasing internationalization of all type of firms, SMEs are becoming the pillars of economic growth and change (European Commission, 2007; Hassouneh & Brengman, 2011). Therefore, Ruzzier, Hisrich and Antoncic (2006) state that SME internationalization research will remain one of the most important areas for contemporary scientific research. In addition, Fillis (2001) state that more research is needed on SME firm internationalization with testing of existing conceptualizations and forming of new frameworks based on industry specific studies. In line with Filis (2001), Dung Le and Rothlauf (2008) suggest future research needs to broaden our understanding about what makes Internet firms different from ‘traditional’ companies in their internationalization behavior. They argue that primary data from both MNEs and SMEs outside the US needs to be gathered and compared (Dung Le & Rothlauf, 2008). Besides that it is necessary for the scientific world, as stated above by several authors, it also very interesting and relevant to gather insights about this phenomenon. For example because the Internet is (and will remain so during the coming years) one of the biggest drivers of global economic growth (McKinsey & Company, 2011). The practical implications are outlined in the next part of the introduction.
1.2.2 Managerial contributions
This study is interesting for executives or entrepreneurs in the field who are going to or already have internationalized their Internet SME. Since it is relatively easy to find a product worldwide on the Internet, Internet firms are receiving more and more demand from clients from all over the world without actively investing in this. That's why a big part of Internet firms start internationalizing and expand abroad. The provided insights in this study can give executives or entrepreneurs a handhold in their internationalization process. Furthermore, this study gives public policy makers valuable insights. Knowing what is important for Internet SMEs who want to internationalize or are already doing business around the globe is necessary to develop their policies. Only then are public policy makers able to formulate incentives for
Internet SMEs in their country to internationalize or attract this type of firm from abroad, for example to stimulate their economy.
2 Theory
The theory part is divided into four parts. First, the main internationalization theories are discussed. Second, literature about entry modes is described. Third, theories about the internationalization of SME firms are outlined and fourth, characteristics about Internet firms are reviewed. After these parts the sub-questions are presented that help answer the research question. The brief review of the literature does not intend to cover the sometimes extensive body of work in this area, but aims to position this thesis in relation to previous research. After reviewing the key propositions of these theories the foundation is laid for the evaluation of own empirical data.
2.1 Internationalisation theories
Over the past decades many researchers studied internationalization behavior of firms worldwide. The main internationalization theories date back from the 1970s and 1980s, influenced by industrial organization and economics (Axinn & Matthyssens, 2002). This was the era when American multinationals started to internationalize to Europe and when European SMEs started to export their activities, often to neighboring countries (Axinn & Matthyssens, 2002; Forsgren & Hagström, 2005). A definition of internationalization is presented by Beamish (1990, p. 77): “The process by which firms both increase their awareness of the direct and indirect influences of international transactions on their future, and establish and conduct transactions with other countries”. Firms who internationalize have to deal with the ‘liability of foreignness’. This is referring to the costs that firms experience when doing business abroad that is not experienced by local firms (Hymer, 1976). Hymer (1976) identified four types of extra costs that can come along with doing business abroad, namely: (1) lack of necessary information, (2) barriers that arise from discrimination by the government, consumers and suppliers, (3) the firm’s home country environment may give the firm a different treatment, for instance by charging higher taxes comparing to local firms and (4) exchange rates can be a great risk (but doesn’t have to be influence the firms in a negative way). Thus, the concept of liability of foreignness is influencing the
internationalization of firms. In the next chapter the historically four most important internationalization theories are discussed, namely: the transaction-cost theory, the internalization theory, the eclectic paradigm and the Uppsala model. All the theories have their origin in economics, except the behavior Uppsala model (Johanson and Vahlne, 2009).
2.1.1 Transaction costs theory
In 1979 Williamson developed a transaction costs theory (TCT), which sees transactions as the basic unit of economic analysis of firms. He argues that an understanding of transactions costs economizing is central to the study of organizations (Williamson, 1981). Williamson based his theory on the ‘grandfather of transaction costs approach’ from Coase (1937) (Rugman, 1986). Coase (1937) demonstrated that, in many situations, firms are efficient alternatives to markets (Rugman, 1986). Williamson’s (1979) TCT relates to Coase’s (1937) view that “the boundary of the firm was a decision variable for which an economic assessment was needed” (Williamson, 1981; p. 550). Williamson developed his study to explain MNE behavior (Axinn & Matthyssens, 2002). His theory requires transactions to be dimensionalised and that alternative governance structures are described. Following Williamson (1979) is economizing accomplished by assigning transactions to governance structures in a discriminating way. His study is positioned in an interdisciplinary field of economics, organization theory and aspects of contract law. During the emergence of the theory it was the counterpart of institutional economics and it relied heavily on comparative analysis (Williamson, 1979).
According to Williamson, the determinants of transaction costs are asset specificity, frequency (with which transactions occur), uncertainty, opportunistic behavior and bounded rationality. Asset specifity is seen as the most important dimension for describing transactions as well the most neglected attribute in prior studies of organizations (Williamson, 1981). Human factors as opportunistic behavior and opportunism interact with environmental factors as uncertainty and the problem of small numbers. They produce by interaction ‘information impactedness’, which means that markets signals fail to function. Bounded rationality and opportunism are not
directly ‘transaction costs’ but they are the cause of why effecting transactions (outside or inside the firm) can be costly. These, as Williamson defines, ‘limitations of human nature’ makes market transactions inefficient when environmental factors as uncertainty and small numbers conditions are present (Williamson, 1979). Williamson (1981) gives an example that human agents are subject to bounded rationality and he assumes that at least some agents are driven by opportunism.
Williamson (1979) applied his TCT to organizations at three levels of analysis. Namely, the enterprise, operating parts and human assets. Williamson (1981) takes two organizational alternatives in considering finding efficient boundaries for governance structures. An enterprise can either make a component itself or buy it from a supplier. The TCT is based on transaction costs reasoning. However, Williamson (1981) argues that the trade-off between production cost economies (market may be presumed to enjoy certain advantages) and governance costs economies (advantages may shift to internal organization) need to be recognized. Williamson describes four central points in the model: (1) physical asset specifity (most important dimension) is never valued by itself but only because demand is by means of increased in performance or design respects, (2) such consequences in demand are mostly realized only at greater production expense (think of scale economies of standardized items), (3) optimal choice of asset specifity requires that production and demand are taken into account at the same time and (4) costs of governance will vary with asset specifity.
The TCT is focused on MNE behavior and is most relevant for commercial firms. Williamson (1981) argues that transaction costs economizing is nevertheless important to all different forms of organizations. He states that governance structures that have better transactions costs economizing properties will eventually displace those are that have worse transactions costs economizing properties. Williamson (1979) describes that many broad features of different transactions fit within the framework. He confirms the importance of transaction costs to the organization of economic activity. But also mentions that the world of contract is enormously complex and the theory cannot be expected to capture more than main features (Williamson, 1979). This decennia old theory is still used today for explaining a number of different behaviors. Besides the obvious cases of transactions like buying and selling, also day-to-day emotional interactions, informal gift exchanges etc. are incorporated.
attempt to explain the practice but also aims to influence it. Ghostal & Moran (1996) follows this and argues that outcomes from the theory are not only wrong but also dangerous for corporate managers, by the assumptions and logic on which it is founded. Following TCT, organizations are substitutes for structuring efficient transactions when markets fail. Ghostal & Moral (1996) state that organizations possess unique advantages and practice economic activities that are very different comparing to a market. Therefore they judge TCT as “bad for practice” because it fails to recognize that difference. Furthermore, David & Han (2004) criticize the theory on empirical grounds. Their analysis shows a mixed result. Finding support in the area of asset specifity, disagreements in the operation of some central constructs and propositions and low empirical support in some core areas, namely uncertainty and performance (David & Han, 2004).
When we look at the TCT and Internet firms, some comments can be made. Dung Le and Rothlauf (2008) argue that it is generally acknowledged that the Internet reduces transactions costs. When we look in more detail to this statement, we can identify that the Internet decreases search and information costs, and bargaining and decision costs. For example, by searching on Google’s search engine valuable information can be gained which reduces the search and information costs. This also influences the determinants of the TCT. Uncertainty and bounded rationality are reduced, for example by providing extensive amounts of information and reviews of a product or supplier. Consequently, this will increase trade that forces firms to innovate and to be efficient (Dunning & Wymbs, 2001). In the next part of the main internationalization theories, the internalization theory will be discussed, which builds on the transaction cost theory developed by Coase (1937) and Williamson (1979).
2.1.2 Internalization theory
Buckley and Casson (1976) developed an internationalization theory named: the ‘internalization theory’. This theory is based on three assumptions: first, in a world of imperfect markets firms maximize profits. Second, when markets in intermediated products are imperfect, an incentive is created to bypass them by creating internal
markets. Third, MNEs are generated by internalization of markets across national boundaries. This theory follows the assumption of profit-maximization instead of perfect competition and is consistent with the transaction costs approach where hierarchical organization structures replace markets. The MNE is a good example of such a hierarchy (Rugman, 1986). Originally the objective of this theory was to develop a model of growth of the firm, but later this is abandoned by writers who take technological capabilities, marketing and management skills as given (Buckley, 1988).
More than a decennium later, Buckley (1988) refined his internalization approach and explains that the theory rest on two pillars. The first pillar is about firms who choose the least costs location for each activity. The second pillar is about firms who internalize until the benefits are outweighed by the costs. Four factors are playing a central role in the decision of internalization. Namely, industry-, region-, nation- and firm-specific factors. Industry-specific factors relate to the nature of the product and the external market structure. Region-specific factors relates to geographic and social characteristics of the regions linked by the market. Nation-specific factors links to the political and fiscal relations between nations. Firm-specific factors concern the management’s ability to organize an internal market (Buckley & Casson, 1976). Industry-specific factors are seen as the most important of these four factors.
Costs and benefits are playing an important role in this theory. Following the pillars, the idea is that firms are searching to develop their own internal markets whenever transactions can be made at lower costs within the firm, which will continue until the benefits no longer outweigh the costs of further internalization. Costs are involved with creating an internal market for example with higher resource and communication costs. Also, costs are playing a role with possessing foreign ownership and control, for example with political problems. But with imperfect markets profits can be gained, which is the main variable of the profitability of the internalization. According to Hymer (1976) market imperfections are structural, arising from deviations from perfect competition in the final product markets, due to exclusive control of, for example, technology, access to resources, scale economies, control over distribution systems etc. Ultimately, the net benefit depends on the ability of the management of the firm to successfully organize the internalization (Buckley & Casson, 1976). Internalization can be operated by vertical integration, bringing new operations and activities, which were formerly carried out by others, under the ownership and
governance of the firms. This especially happens when markets are imperfect (Ruzzier, Hisrich, Antoncic, 2006). Internalization in intermediate product markets results often in a vertically integrated producer. Where the internalization of knowledge markets usually brings forth an integration of marketing, production and R&D (Buckley & Casson, 1976). Internalization a market is done as a strategic move and especially to increase profits. It can be advantageous for a firm to internalize and it is by definition disadvantageous to other firms (Buckley, 1988). The top three reasons to internalize markets are asset specificity, bounded rationality and information asymmetry, which are also partly determinants of the transaction costs theory.
Similar to the TCT, the internalization theory is not spared with criticism. Some scientists argue that it is tautological since “firms internalize imperfect markets until the costs of further internalization outweighs the benefits’ (Rugman, 1986, p. 104). Critical writers also state that it is a ‘concept in search of theory”. Rugman (1986) states that due to its generality this theory can be seen as an approach rather then a theory. Rugman (1986) argues that it is still valuable due to its ability to generate powerful predictions and because it lies at the core of new MNE theories (Rugman, 1986). The theory argues that the driving factor is the reducing of costs by internalization. In contrast to this view, McDougall, Shane and Oviatt (1994) demonstrate with their research that firms do not always follow the lowest price assumption, not with their internationalization choice and not as a benchmark of how far they must internalize their markets.
Internet influences the top three reasons to internalize markets (asset specificity, bounded rationality and information asymmetry). The Internet reduces asset specificity since it allows increased specialization of activities along the value chain. Moreover, it reduces bounded rationality because it makes an extensive amount of information available. And in some cases it also diminishes information asymmetry. Therefore, Internet firms are able to internationalize with less capital and at a fast pace. Nevertheless, valuable information from the Internet the firms can use is also available to their competitors. The next part will discuss another main internationalization theory, namely the eclectic paradigm from Dunning (1977).
2.1.3 Eclectic paradigm
Another important study is conducted by Dunning (1977), which developed the eclectic paradigm. It is the most widely used and dominant analytical framework for examining the determinants of MNE activity in international business (Dunning, 2001). The eclectic paradigm, also called the OLI-framework, attempts to explain why firms invest and produce abroad. Dunning combines roots and elements (eclectic) from the mainstream economic and behavioral theories like the industrial organizational theory, the internalization theory and the transaction-cost theory (Axinn & Matthyssens, 2002, Dunning, 2000). The theory incorporates a conceptual framework of context-specific and operationally testable theories, which explains a particular part of the internationalization process (Dunning, 2000). The eclectic paradigm expanded its scope comparing to the transaction costs theory by making it able that trade is a possibility rather than a investment in reaching foreign markets (Axinn & Matthyssen, 2002).
The eclectic paradigm hypothesis is that firms engage in foreign activities if three (interacting) conditions are met. The first condition is the ownership (O) specific advantage that consists of specific competitive advantages of the firm seeking to engage in FDI. These are always specific to the ownership of the investing firms (Dunning, 1997). The greater a firm possess a competitive advantage in comparison with other firms, the more likely the firm engages into (increasing) foreign production. Dunning (2000) differenced on three types of ownership specific advantages, namely: (1) advantages derived from the exploitation or possession of monopoly power, (2) advantages that comes with the possession of a bundle of resources and capabilities which are characterized as scare, unique and sustainable and (3) advantages that relate to the capabilities of the management. An example of ownership specific advantages is that firms possess property rights, intangible assets like a corporate culture or governance advantages (Dunning, 1977).
The second condition is the locational advantages of regions or countries other then the domestic market for undertaking value adding activities of MNE’s. When market or production opportunities are superior comparing to available elsewhere, like the domestic market, firms will engage in FDI (Dunning, 2000). For example, because certain types of resources are scarce in the domestic market and highly immobile in the
host country. Dunning (1977) outlines three (classical) locational motivations: foreign-market seeking, efficiency seeking, and resource seeking.
The last condition is the internalization advantage. This means that it must be more beneficial to the firm to undertake certain activities on its own rather than outsource or selling this to other (foreign) firms, referring to the transaction costs approach (Dung Le & Rothlauf, 2008). Extending the existing value chain or adding new ones can achieve this condition. This sub-paradigm relates to the protection against or exploiting of market failures. For example, to avoid buyer uncertainty and government intervention (Dunning, 1977). Advantages of this condition offer a powerful explanation for the rise of MNEs (Hennert, 2001).
To sum up, the greater ownership advantages of firms, the higher the chance firms utilize this in other countries. Also the degree of internationalization of a particular country depends on to which extent domestic firms possess advantages and locational favorable conditions compared to other countries. Furthermore, the possibilities of internalization activities are important in the internationalization of firms (Dunning, 1977). Both the eclectic paradigm and the ‘internationalization theory’ are based on MNE activities and are therefore less applicable for SME firms (Fillies, 2001). Since the paradigm emerged, it has been frequently modified and further developed in response to criticism and the changing global economic environment.
As every theory of significance, also the eclectic paradigm received criticism. For instance on the point that there are so much explanatory variables involved that its predictive value is ‘almost zero’ (Dunning, 2001). The author responded to this critique that there is a modest amount of truth in this critique but also counters the statement by arguing that the paradigm is well grounded in economic and organizational theory. In addition, he writes that this is the case for every general theory and only partial theories do not suffer from this deficiency, but as a result they only explain small parts of internationalization. Another critique is given in the way that the paradigm is static, by not allowing differences in the strategic response of firms of the configuration of the OLI variables. Therefore, the paradigm is not able to incorporate the dynamics of the internationalization process. Dunning (2001) acknowledges this.
Dunning & Wybs (2001) argue that the eclectic paradigm appears to hold well in combination with Internet firms in the basis principles and predictions. When we look at the Internet, it is a facilitator of international business; creating new markets that
both substitute and complement existing markets and hierarchies. The paradigm is able to explain differences in the context of Internet firms. Furthermore, Internet firms use the Internet to exploit existing ownership advantages when they search for a suitable location to reach their corporate goals, similar to their offline counterparts. Dunning & Wybs (2001) also argue that online markets are markets on their own, appropriate their own unique characteristics. When we look at the OLI variables of the paradigm they seem to be still relevant for Internet firms. Ownership advantages can be technological (website-based) know-how or intangible assets such as brand names (Dung Le & Rotlauf, 2008). The locational variable can be the size of Internet users and the existence of other Internet firms. The next chapter outlines the last main internationalization theory that I will discuss, the famous Uppsala model.
2.1.4 Uppsala model
Johanson and Vahlne developed a famous and influential internationalization theory in 1977, well known as the Uppsala model. The model describes how firms set an internationalization process. The model identified four evolutionary stages and is characterized by gradual expansion and increasing commitments to foreign markets. The underlying assumptions of the Uppsala model are bounded rationality and uncertainty. With foreign activities a firm gains experience and that will increase the firm’s knowledge of that market. The increased knowledge will result in the next level of commitment in that market, which will start the next stage (see figure 1). Companies are either in the following stages, (1) a non-exporter, (2) an indirect exporter, (3) abroad sales operator or (4) abroad production units (Johanson & Vahlne, 1977). Johanson and Vahlne (1977) argue that this process of learning and commitment takes time. Physical distance is an important concept in the model, where liability of foreignness plays a role (Johanson and Vahlne, 1977). This explains why a foreign investor needs to have a firm-specific advantage to offset this liability, as described in the eclectic paradigm (Zaheer, 1995).
Psychic distance represents all determinants that negatively influence information flows between a market and a firm for example: culture, language, political, legal, and educational systems. The further the psychic distance between a market and a firm, the less resources a company is willing to commit to those markets. (Andersson & Wictor, 2003).
In 2009 Johanson and Vahlne (2009) revisited their model. They incorporated two aspects to the model. First, the network of relationships is included, where firms are linked to other firms in different forms, often in a complex way. Second, the authors describe that relationships can be important for learning and building trust and commitment. They see this as a precondition for internationalization. Being part of a network of interconnected business relationships provides a firm with a valuable
Figure 1: Uppsala model
knowledge base (Kogut, 2000). If a firm does not possess a relevant network in the country to be entered, Johanson and Vahlne (2009) argue that the firm will suffer from the liability of outsidership and liability of foreignness. Also new into the model is the prior experience of management teams and the effect on the internationalization in new and/or small companies. Johanson and Vahlne (2009) argue that this can be very important knowledge for a firm’s internationalization. Furthermore, the revisited model highlights trust as an important part of knowledge (Johanson and Vahlne, 2009).
Several authors criticize the Uppsala model (1977). Some general critique comes from Anderson (2003), which states that the model is very broad and does not consider specific situations, phases, firms or foreign markets. Petersen et al. (2003) write that the model is too deterministic and Axinn and Matthyssens (2002) point out that the model does not include hybrid entry modes (which happens often, see the next chapter about entry modes). More critique is derived from the aspect of a relatively new and unique type of firm: Internet firms. Madsen & Servais (1997) state that the order in which companies enter foreign markets is not always dependent on physical distance, especially when we look at Internet firms. In addition, Forsgren (2002) argues that the model exaggerates the gradual nature of the internationalization process. Hedlund and Kverneland (1985) exemplified this critique with the existence of the concept of ‘leapfrogging’; skip one or more stages of the model, which is often seen by high-tech (Internet) firms (Knight, 1997). Related to this, Oviatt & McDougal (1994) argue that the model does not match with developments of firms who internationalize immediate or soon after their inception, so-called ‘born globals’. An example for the reason why a firm becomes born global is a situation where the risk of not investing abroad is seen as more risky then the internationalization itself. The firm sees the first-mover advantage as critical because there is possibly no second chance (Forsgren, 2002). Johanson and Vahlne (2009) responded to some of these critiques, one of the most important is ‘there is nothing in our model that indicates that international expansion cannot be done quickly. In fact it can, as long as there is sufficient time for learning and relationship building’ (Johanson & Vahlne, 2009: p. 1421). This broadens the possibilities of internationalization but is still no answer to the phenomenon of born globals (or do they possess relationships/did they learn from previous experiences and used this for their new born-global firm?). The authors of the model also respond on the role of physical distance. They admit that this has been weakened during the past decades.
Nevertheless, they argue that this still has an impact on the processes of learning and relationships and therefore is still of importance.
After looking at some contemporary internationalization behavior it seems to be that the model has a hard time to explain some forms. Especially from Internet firms, which are often high-tech firms that can internationalize extreme rapidly, sometimes from day one (born globals). Forsgren & Hagstrom (2000) agree with this that the model is not able to fully explain this. Nevertheless, when we look at these firms from another point of view we can see that knowledge, one of the main variables in the model, still plays a role. Although, in a different form. It shifted from foreign market knowledge (experiential) to foreign customer knowledge (virtual learning) though online interactivity (Copignatti, 2013). But can successful knowledge of customers via online contacts also deliver a successful entry in a country? Probably other knowledge is still valuable and necessary to succeed in a foreign country, such as local marketing practices, culture (how do you communicate with someone?) etc. Therefore the model still interfaces with the new behavior of Internet firms. The next chapter will focus on the theory of entry modes and the relevancy and application for Internet firms.
2.2 Entry modes
Entry modes are widely described in the literature. Choosing the right entry mode is from great importance because it determines the success of a company’s international operation. When a firm chooses the wrong entry mode, it cannot be revised without serious consequences for the firm’s future performance (Andersen, 1997, Loane et al., 2004). Dunning & Wymbs (2001) differentiate three main modes, namely trade, international strategic alliances and foreign direct investment (FDI). Hill et al. (1990) describes three entry modes: license agreements, joint ventures and wholly owned subsidiaries. Pan and Tse (2000) examined a hierarchical model of market entry modes (see figure 2).
Following Pan & Tse (2000) the choice of an entry mode is a hierarchical process that starts with the choice between a non-equity and equity entry mode. After choosing a non-equity mode a choice has to be made between export and contractual agreements. Subsequently choosing an equity entry mode, the choice is between a joint venture and a wholly owned subsidiary, such as a greenfield or acquisition. At the non-equity versus equity modes choice, macro-level factors play a role, for example country risk. After this choice firms move down the hierarchical line to a lower level for a choice where micro-level factors plays a more important role, for example human resources, distribution channels etc. (Pan & Tse, 2000).
At first sight, one may wonder: do they still need an entry mode to gain sales in a Source: Pan & Tse (2000) Figure 2: A Hierarchical Model of Choice of Entry Modes
foreign country? Because why should they not just sell it from their website in their home country? In practice, I think that most Internet firms do need an entry mode in the country where they want to compete with local competitors, for example to adapt to local customer practices or to comply with government regulations and match local distribution channels. This (important) knowledge is seldom developed through the Internet because it requires experiential (tacit) knowledge, comparing to the explicit knowledge that is available on the Internet (Petersen et al., 2002). The Internet does decrease the barriers of entry modes for Internet firms, especially for SMEs who have to deal with limited resources. The choice of an entry mode depends on how a firm perceives the risks concerned with the targeted foreign market, which is traditionally too high for SMEs. The Internet changes this remarkably by providing information about the risks of an entry. Therefore, new opportunities to internationalize are born. For instance, an Internet SME can internationalize with a non-equity entry mode that is flexible and require low resource commitment. Hence, less risk is taken and the SME is able to internationalize. To sum up, both types of knowledge (experiential and tacit) are also for Internet firms important and the Internet itself cannot deliver all the needed knowledge for them (only explicit). This forces Internet firms to entry a foreign country with a non-equity or equity mode (Chrysostome & Rosson, 2004). The Internet has increased the possibilities of Internet firms to internationalize and decreased the risks involved with their internationalization.
Since it still seems to be important for the success of Internet firms to enter a country with an entry mode, what type of entry modes are used by Internet firms? Loane et al. (2004) investigated Internet born globals and discovered that all of the investigated firms used direct exporting in combination with partnerships of large global firms. Borsheim and Solberg (2004) found in their research no homogeneity in entry modes of their investigated four Internet born globals. The firms differed in entry modes from a partnership for the distribution of products to a greenfield investment for an R&D subsidiary. In the study of Dung Le and Rothlauf (2008) large Internet firms (Google, Expedia, Monster and Amazon) all used FDI in combination with partnerships, indicated that partnerships are crucial for their success abroad. With partnerships the firms has access to local intangible resources such as market knowledge, which they used to exploit network effects on a wide scale. Interesting is that in this study all companies used wholly owned subsidiary equity modes (FDI, Greenfield and
Acquisitions), seeing physical presence important for an effective market entry and to penetrate the market (Dung Le & Rothlauf, 2008). After this discussion of entry modes, we dive into the internationalization of small and medium sized firms (SMEs).
2.3 Internationalization of SME firms
More and more SME firms are involved in internationalization and show behaviour that is not seen before (Fillis, 2001). SME firms are defined as firms that have less then 250 employees or less than 50-million euro turnover/43 million euro balance sheet total (European Commission, 2009). Internationalization research originally focused on MNEs before attention went to the smaller firms. SMEs are an important and integral part of every country’s economy. If we look at the European Union for instance, it considers 23 million SMEs that provide the majority of the jobs within the EU and this type of firm is considered as crucial to a country’s economic success (Hassouneh & Brengman, 2011). SMEs, especially ‘young technology firms’ suffer besides a liability of foreignness also from a ‘liability of size and newness’ (Singh, Tucker, & House, 1986; Schwens & Kabst, 2010). Therefore, there is the need for a competitive advantage or the ability to mimic local firms.
Fillis (2001) argue that the main existing paradigms fail to explain SME internationalization and that it is important to investigate the effect of firm size on internationalization behaviour. Bell, McNaughton, Young and Crick (2003) developed an integrative model about SME firm internationalization in which they identify the existence of different internationalization paths. Their model claims that knowledge intensity can act as a major source of international competitive advantage. Low knowledge intensity results in a gradual expansion and high knowledge intensity in a speedy expansion. The model also describes that short eras of rapid internationalization and de-internationalization are possible. Moreover, Bell et al. (2003) add incremental and network models to the integrative model.
Loane (2006) states that knowledge has always played an important role in internationalization theories. Knowledge of local business counterparts or local social values for example is of importance. In SMEs the owner or manager is often working in
the "frontline" and is therefore likely to possess or acquire that kind of knowledge that seems to influence internationalisation behaviour of firms (Loane, 2006). Bell et al. (2003) looks at this topic that knowledge is a source for a competitive advantage that can impel a small firm upwards on the internationalisation stage and so influences the patterns and pace of the internationalisation.
Although SMEs play an important role in an economy, the amount of research on the internationalization of those firms falls behind the more widely investigated internationalization of MNEs. Bell et al. (2003) developed an interesting model about the role of knowledge and the internationalization of SMEs. Internet SMEs possess some unique characteristics that differentiated them from more traditional SMEs, like manufacturing firms. The next chapter will outline the internationalization of Internet firms.
2.4 Internationalization of Internet firms
There is (not yet) an official accepted definition of Internet firms, which makes it hard to classify them. Dung Le and Rothlauf (2008, p. 2) defines this type of firm as: “Companies that solely rely on the availability and use of the Internet to fulfil the unique value proposition of their business model”. This type of firm is engaged in electronic commerce (e-commerce), which is defined as “the buying and the selling of products and services over the Internet or other electronic networks” (Mougayar, 1998: 11). Rosson (2004) states that customers have the opportunity of purchasing “wherever they are, whenever they want“ from Internet firms, referring to the fact that Internet firms can sell their products to customers 24/7 at every place on earth (if the place has a connection to the Internet, of course). If customers follow this opportunity by actually purchasing wherever they are, whenever they want, equity entry modes by Internet firms will be extinct. In practice, Internet firms do use them. This is because some Internet firms have to be close to their customers, or to their business partners. Other Internet firms have to internationalize due to foreign country restrictions or due to high import quotas. The ‘instantaneously’ presence on many foreign markets of Internet firms stated by Petersen, Welch and Liesch (2002), will, following my beliefs, not directly result in
orders from all those foreign markets. I think probably more work has to be done to actually receive orders from foreign countries.
So following this belief, we take a look at the advantages Internet firms have over their offline counterparts when they internationalize. An often-used advantage is that the Internet has the potential to lower entry barriers, making borders between countries less relevant (Chrysostome & Rosson, 2004; Rosson, 2004; Dung Le & Rothlauf, 2008). Chrysostome and Rosson (2004) argue that (marketing) communication costs can be reduced which positively influences internationalization opportunities. An advantage mentioned by Loane (2004) is that Internet firms are more easily able to develop and maintain direct relationships with their customers, clients, producers and suppliers abroad. In relation to this argument, Chrysostome and Rosson (2004) state that the costs of finding suitable foreign strategic alliances are reduced. This is especially valuable for SMEs, since they have to deal with limited firm resources. Another argument that is related to the former advantage is that the Internet provides firms the opportunity to learn faster and easier about their host country and they are able to target markets that are offering the best chance of success (Chrysostome and Rosson, 2004). This can increase the pace of internationalization (confirmed in a study by Lituchy and Rail, 2000), which agrees with the Uppsala model that when more knowledge of the host country is gained, more commitment and activity is followed.
The Internet with its unique characteristics brings also disadvantages for Internet firms. The first things to deal with are the huge expectations that come with the ‘extensive’ opportunities, which are not always realizable. Many of the advantages and benefits have proven to be illusory. For instance, the cost-effectiveness expectation of doing business through the Internet is not proven. The costs that come with building and maintaining a website can be great (Chrysostome and Rosson, 2004). Additionally, Internet firms who engage in foreign business can suffer from potential serious legal issues, with possible very expensive consequences. For example, when there is a dispute with a foreign customer who ordered a product in the home country, which country’s law should be applied? Furthermore, a disadvantage of the Internet can be that competition becomes greater and more global, particularly regarding price. The increased competition of SMEs with MNEs can be harmful, since they can be outcompeted by their limited resources (Chrysostome and Rosson, 2004).
effect that derives from the advantages is that foreign market uncertainties are reduced. For example, by obtaining easier, faster and cheaper valuable knowledge of foreign countries. This also makes it possible to find easily suitable strategic alliances. Moreover, Internet firms are able to target markets that offer the best chance of success (Chrysostome & Rosson, 2004). Also transaction costs can be reduced, for instance with search and information cost. Furthermore, Internet firms are more easily able to compete worldwide (although they are not competing automatically worldwide by just going online). As a result the playing field of SMEs and MNEs are leveled, which can be a disadvantage for SMEs (Chrysostome & Rosson, 2004). Another consequence is the speed of internationalization, which can be highly increased, leapfrogging stages of the Uppsala model. An extreme example of this phenomenon is the born global firm (Oviatt & McDougall, 1994). In general, scientists argue that the Internet brings more possibilities to internationalize, especially for SMEs (Loane, 2004).
Although not much research attention so far went to Internet firms who internationalize, some noteworthy empirical research is done. The first comprehensive study is executed by Kim (2003). The author researched the, at that moment, largest Internet companies of the US. The main results of the study shows that the large firms first form joint ventures before they set up any localised services. Additionally, they enter strategically important markets first instead of markets that are psychic close. Remarkable is the rapid speed of some of the Internet companies when entering foreign markets, often with more than one market a time (Kim, 2003). He concludes that the internationalization of the large US Internet firms followed the gradual pattern of the Uppsala model relatively well. This research is concentrated on the big Internet firms, comparable in size to MNEs. In contrast with Kim (2003), Hassouneh and Brengman (2011) studied SMEs and conclude in their research about Virtual Worlds that the Internet gives Internet firms a unique opportunity to internationalize faster and smarter. The authors argue that geographic distance is less important, which challenges the Uppsala model.
To conclude, the Internet with its unique characteristics brings advantages and disadvantages for Internet firms. It is acknowledged that it is able to remove some traditional internationalization barriers. This helps especially SMEs to internationalize, since they have to deal with limited resources (Axinn & Matthyssens, 2002). But we have to be aware of the high expectation that often comes with internationalization of
Internet firms. In practice, Internet firms do probably also need to gain knowledge of their host country to succeed. In this belief it seems to be that most internationalization theories are still, sometimes only partly, relevant for Internet firms. To investigate this I formulated my research question as follows:How do Internet SMEs internationalize?
2.5 Sub-questions
To be able to answer the research question (How do Internet SMEs internationalize?) I formulated four sub-questions derived from the theory part, which I discuss briefly in the coming parts.
2.5.1 Psychic distance
The main internationalisation theories are assigning an important role in explaining factors for choosing the target market. For instance, the Uppsala model builds on the proposition that firms, in order to reduce market uncertainty and lower their risk, target markets that are positioned psychically close first (Johanson & Vahlne, 1977). In this model psychic distance is thus leading in the order firms choose their target markets. As described in the Uppsala chapter, psychic distance represents all determinants that negatively influence information flows between a market and a firm. For instance: differences in culture, language, political, legal, and educational systems. This is related to Hofstede’s (1983) research about four cultural dimensions that differentiate countries from each other, describing the effect of a society’s culture on the values and behaviors of its members. These dimensions are individualism-collectivism, uncertainty avoidance, power distance and masculinity-femininity. Later research added a fifth dimension, long-term orientation and recently a sixth dimension to the model, namely indulgence versus self-restraint (Hofstede et al., 2010). Communication and negotiation between countries are examples that are influenced by these dimensions and at the same time critical to a firm’s internationalization path.
Ghemawat (2001) developed a framework that identifies cultural, administrative, geographic and economic (CAGE, therefore also called the ‘CAGE framework’) differences or distances between counties that companies should address when they create international strategies. Cultural distance refers to differences in language, social norms, religion etc. Administrative (and political) distance points to legal and financial institutions, monetary associations etc. Geographic distance refers to physical remoteness, different time zones and lack of common borders. Economic
distance addresses to rich/poor countries, costs of human resources, information etc. and the economic size (Ghemawat, 2001). The author states that companies routinely exaggerate the attractiveness of foreign markets that can lead to expensive mistakes. He also mentions that most of the costs and risk results from barriers that are created by distance. Ghemawat (2001) argues that in general, the farther you are from a country, the harder it will be to conduct business in that country. Physical distance can be related to the internalization theory and the eclectic theory, referring to the locational and internalization variables. For instance, one factor that plays a role in the decision of the internalization is the region specific factor, which relates to geographic and social characteristics of the regions linked by the market. Moreover, Axinn & Matthyssens (2002) state that the world is becoming increasingly culturally homogenous, which diminishes dimensions of the physical distance between countries.
When we look at Internet firms and the role psychic distance plays in their internationalization process, some scholars argue that this is diminishing. An extreme example is stated by Rayport & Sviokla (1994) who argue that the market space will shift from a physical domain to a virtual environment. Moreover, studies found that for Internet firms who internationalize geographic barriers are reduced, little similarity between target market and psychic similarity are found and that the order in which Internet firms enter foreign markets is not longer dependent on physical distance (Bell, 1995; Madsen & Servais, 1997; Rosson, 2004). This has been described by Castells (2000) as the ‘death of geography’ and by Carincross (2001) and Ghemwat (2001) the ‘death of distance’. For Internet firms also other factors are playing a role, for instance market potential in terms of Internet usage (Forsgren & Hagstrom, 2007). But do they completely neglect the concept of psychic distance; or is it still important for them? And if so, to what extent? To be able to answer these questions the sub-question 'do Internet SMEs support the notion of psychic distance?' is formulated.
2.5.2 Stages approach
The described main internationalization theories, especially the Uppsala model, are describing that firms internationalize on a gradual, stage wise, mode. With foreign activities a firm gains knowledge of that market, this knowledge influences the level of commitment the firm will invest in that market. The increased knowledge results in the next level of commitment and therefore a new stage is commenced (see figure 1). Johanson and Vahlne (1977) state that this process of learning and commitment takes time. They argue that only a few exceptions are possible. This is when a firm possesses extensive resources that help it to skip one or more stages, a firm has enough experience from similar markets in a way that the firm can generalize its knowledge and when the market is stable and homogeneous in a way that market knowledge can be acquired in other ways than through experience (Johanson and Vahlne, 1990). The concept of knowledge of a foreign market, in both experiential or tacit and explicit knowledge, is found critical for a firm’s internationalization success. Moreover, the research states that firms develop their domestic market first before they internationalize (Johanson & Wiedersheim-Paul, 1975).
As already described in the Uppsala chapter, the contemporary business landscape shows some examples of firms which the Uppsala model is not able to explain. This especially is the case when we look at the phenomenon of ‘leapfrogging’ and born globals (Oviatt & MCDougal, 1994). Some empirical studies of Internet firms show that the stages approach does not seem to hold up well. Forsgren and Hagstrom (2007) show in their study of eight Internet firms the internationalization process was not slow and incremental but fast en discontinuous. Moreover, Rosson (2004) and Loane et al. (2004) found in their research that Internet firms internationalize quickly in their early stages. Although Kim (2003) found the same high speed internationalization, he concludes that his investigated firms followed the gradual pattern of the Uppsala model relatively well. Furthermore, Shaprio and Varian (1999) found that scalability is one of the features Internet firms have to deal with. This is related to the fact that some firms sell full digital or partial digital goods where the production costs of serving an additionally foreign market are very low. Hassouneh and Brengman (2011) conclude that the Internet gives Internet firms a unique opportunity to internationalize faster and
smarter.
As described in the Uppsala chapter, knowledge still plays a role for Internet firms in the internationalization process. It is more focused on foreign customer knowledge rather than foreign market knowledge. Gaining this type of knowledge still costs time (although it can be quicker gained then market knowledge). Therefore, it is a possibility that the incremental ‘stages’ approach is not worthless for Internet SMEs and still (partly) used. Moreover, it is also interesting to look at the speed of the internationalization of the firms, because several authors indicate that the Internet gives Internet firms the opportunity to internationalize faster, we want to know if this is the case in practice. To investigate this I formulated the sub-question: what is the velocity of the internationalization of Internet SMEs and do they follow an incremental 'stages' approach in this process?
2.5.3 Knowledge
In the history of internationalization theory, knowledge has had always played a prominent role. As one of the first scholars in internationalization research, Carlson (1966) observed that firms intending to internationalize suffer from a lack of knowledge about how to conduct business in the market they want to enter. He states that firms handle this problem with trial and error together with gradual expansion that comes with the increasing knowledge. Johanson & Vahlne (1977) used this principle as a foundation for their Uppsala model. Penrose (1959) distinguished two important types of knowledge, namely objective/general (explicit) knowledge and experiential/market-specific (tacit) knowledge. The first can easily be taught and the second can only be gained by personal experience, which makes it hard(er) to transfer. Internationalization requires both types of knowledge. In the internationalization process both the Uppsala model and the eclectic paradigm concentrate on the autonomy of the firm in a way that the firm (actually the individuals within it) determines how it will enter a specific foreign market and how successful this will be (Whitelock, 2002). This is strongly related to the resource-based view (RBV), which Wernerfeld developed in 1984. The RBV sees the firm as a bundle of heterogeneous resources combined with
resource conversion activities. He states that optimal growth is achieved when a firm balances between the exploitations of existing firm resources and developing new ones. Wernerfeld (1984) highlights the role of (often specific and intangible) internal resources in the competitive advantage firms have to possess if they want to succeed internationally. He acknowledges that international contacts/networks are valuable resources that can help firms to develop new resources. This reflects the network perspective that is widely used to try to understand and explain the rapid internationalization of firms (Johanson and Mattsson, 1988). Gulati, Nohria and Zaheer (2000) outline the value networks can deliver, they state that “a strategic network potentially provides a firm with access to information, resources, markets, and technologies; with advantages from learning, scale, and scope economics; and allow firms to achieve strategic objectives, such as sharing risks and outsourcing value-chain stages and organizational functions” (Gulati, Nohria & Zaheer, 2000; 203). It seems to be that with a relevant network essential knowledge to succeed in a foreign country can be gained. Coviello and Munro (1995, 1997) state that the networks smaller firms possess or develop drive the internationalization process. They argue that a firm’s choice of target market and type of entry mode is influenced by its network. This view agrees with the revisited model Uppsala model of Johanson and Vahlne (1990) that highlights that the knowledge of firms derived from a network of relationships is needed to overcome the liability of foreignness and outsidership. So knowledge can be gained from a firm’s network. This is illustrated by Schwens and Kabst (2010: 63) ‘knowledge not only to accrue from the firm’s own activities, but also from the activities of the partners and the interaction with partners’.
To conclude, after noticing that knowledge has been integral to most internationalization theories it seems to be that (different types of) knowledge plays an essential and crucial role in the internationalization process of firms. To investigate if this is still as essential and crucial for Internet SMEs, I developed the sub-question: to what extent is knowledge important in the internationalization of Internet SMEs and which type of knowledge is most important?
2.5.4 Entry modes
It seems to be still important for Internet firms to enter a foreign market with an entry mode. However, the Internet changed the business environment remarkably which can lead to different entry mode strategies by Internet firms (already discussed in the entry mode chapter, 2.1.4). To research this I formulated the following sub-question: which types of entry modes are used by Internet SMEs?
3 Methodology
This chapter outlines the research design, semi-structured interviews, the sample selection and the way the data is processed.
3.1 Research Design
The research question will be answered by a qualitative study. A combination of academic literature and semi-structured interviews is used to answer the research question. A case study approach suits this research best, because this study researches a phenomenon that is quite new, Internet SMEs, which do not posses a strong theoretical foundation yet (Yin, 2003). It is a multiple case study, with 12 Internet SMEs. The research has a descriptive and exploratory character. The unit of analysis is Internet SMEs and the unit of observation is the founder/CEO. This is selected by the reasons that it is relevant, timely, interesting and significant (see for more details part 1.2 contribution). A deductive research approach suits this research best; because internationalization is widely researched, a start list of codes can be derived from the literature. The list of codes is modified along the way of the research (Saunders et al., 2009). The ‘force of example’ is valuable in this research, which Flyvberg (2006) claims that this is underestimated in the scientific world. By giving examples of 12 Internet SMEs, deep insights will be outlined about this phenomenon.
Anteby (2008) argues that it is important to show my 'position in the field' and the relationship with my interviewees. I work at Hotelkamerveiling.nl (Dutch Internet Company) and therefore had knowledge about firms in the industry who were suitable for this research, using purposive sampling. Because I want to be a truly observer, I did not invite people in the industry that I knew beforehand. Moreover, I never participated or did any work for the interviewed firms.
3.2 Semi-structured interviews
I used semi-structured interviews to be able to obtain deep insights of relevant data from 'experts' in the field. According to Saunders et al. (2009) semi-structured interviews contain a particular structure but this can be varied within the different interviews. Standard questions are developed before the interviews take place. I audio-recorded the interviews and make a verbatim transcription of the interview for later analysis. On average the interviews lasted 45 minutes. The interviews were taking at the office of the interviewee or in a bar and the language during the interviews was always Dutch. Each interview started with an introduction of the interviewer, the purpose of the study and some background information on the research topic. The standard interview questions and the completed interviews transcriptions are outlined and can be found in the appendix.
3.3 Samples
While searching on the Internet I found suitable firms for this research. I used the definition of the European Commission (2009) to select SMEs, namely that SME firms are firms that have less then 250 employees or less than 50-million euro turnover/43-million euro balance sheet total. Furthermore, I investigated if the firms relied on the availability and use of the Internet to fulfill their business. I developed a list of 18 Internet SMEs that fits these requirements. Six out of 18 firms did not want to do the interview, some argue they were to busy, others did not reply at all. Fortunately, 12 Internet SMEs do respond positively to the invite. See table 1 for more details of the sample selection. The interviews were all conducted within two months.
Table 1: Characteristics of the sample selection of 12 Internet SMEs
Company Product Interviewee Foun
ded Empl oyee s Intern ationa l after Main markets TRVL Travel Magazine App Michel Elings (founder/CEO) 2010 17 Direct World SellanApp App development platform Aernoud Dekker (founder/CEO) 2012 7 Direct World
WappZapp Online video content App
Colin Elles (founder/CEO)
2011 3 2 years The Netherlands, Germany
Sweebr Online cash-machine in the cloud
Bart Jaspers (founder/CEO)
2010 6 Direct The Netherlands, Belgium, Germany, Poland, France Wercker Developers release platform in the cloud Micha H. van Leuffen (founder/CEO) 2012 8 Direct World Adyen Online payment/transac tion company Chris Brouwer (Head internationalizatio n) 2006 120 Direct World Flipit Online discount/coupon platform
Jelle van der Bij (founder/CEO)
2008 30 Direct The Netherlands, Belgium, Germany, Poland, Switserland France, Spain, India Local Sensor Location based
mobile advertisement platform
Rob van Buuren (founder/CEO)
2011 5 2 years The Netherlands, United States, Germany Joining Social activity
platform for expats Evert Schraven (founder/CEO) 2012 1 4 month s The Netherlands, Belgium, United Arab Emirates
Usabilla Visual feedback tool for website's
Marc van Agteren (Managing Director)
2009 10 Direct World (157 countries) Elasticsearch Real-time big
data analysis Steven Schuurman (founder/CEO) 2012 50 Direct World GetYourGuid e Activities platform Edial Dekker (founder/CEO)
2009 100 Direct Europa and United States
3.4 Data processing
All the interviews have been, with the permission of the interviewee, recorded in order to be transcribed and further analyzed for coding. Because the language spoken during the interviews was Dutch, all the interviews are transcribed and coded in Dutch. The quotes in the results section are translated to English. The written interviews are used in the qualitative data analyze software 'Nvivo10'. In this software program nodes are developed to categorize the data. The nodes enable to analyze the data on a structural way. The following categories and nodes are developed, based on the literature (the Nvivo10 file is available if wanted):
- Psychic distance: administrative/laws, politics, economics, cultural/language, geographic, market/industry.
- Velocity/stages: moment of internationalization, velocity of internationalization, saturated domestic market.
- Knowledge: objective/general (explicit) knowledge, experiential/market-specific (tacit) knowledge, external knowledge, in-house knowledge, network, investor. - Entry modes: local presence, from domestic market.
In the result section I place the firms into categories of importance. For example, 6 out of 12 interviewed firms (from now on written as 6/12) found cultural differences very important. I use the following categories:
• Very importance • Important
• Moderate importance • Reasonable importance • No importance
4 Results
The results section will be organized according to the structure of the sub-questions. Therefore, the first part of the results will be discussing the psychic distance. The second part will handle the stages approach. The third part will present the knowledge item. The fourth and last part will outline entry modes. The data from the interviews will be discussed along the propositions from the literature overview.
4.1 Psychic distance
The internationalisation theories discussed are assigning an important role in explaining factors for choosing a target market. For example, the Uppsala model is built on the proposition that firms target markets that are situated psychically close first (Johanson & Vahlne, 1977). Psychic distance represents all factors that negatively influences information flows between a market and a firm, for instance geographic distance but also differences in culture, language, politics, laws etc. In relation to this, Ghemawat (2001) developed the CAGE-framework that identifies cultural, administrative, geographic and economic differences and distances between countries. It states that most of the costs and risk results from barriers that are created by distance. The more differences and the larger distance, the harder it will be to internationalize. Empirical studies about Internet firms who internationalize argue that geographic barriers are becoming less important and that the order in which the firms enter a foreign market is not longer dependent on physical distance (Bell, 1995; Hassouneh and Brengman, 2011; Kim, 2003; Madsen & Servais, 1997; Rosson, 2004). This is powerfully stated as the 'death of distance (Cairncross, 2001). With own empirical data we can answer the sub-question: do Internet SMEs support the notion of psychic distance?
Every interviewed company was asked to what extent geographical distance and cultural/language, economical, political/administrative and market/industry differences played a role in their internationalization. Geographical distance was found
