“SMEs internationalisation processes” An extension of the Uppsala model

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Master Thesis

“SMEs internationalisation processes”

An extension of the Uppsala model

Name: Seyyed Davoud Ansari Chaharsughi

Student number: S2224666 & B130026712

Study: Double degree IB&M (Groningen) and AIMM (Newcastle)

Supervisor Groningen University: Dr. Miriam Wilhelm

Supervisor Newcastle University: Dr. Markus Blut

University: University of Groningen & University of Newcastle, Business School

Course: Dissertation Dual Award

Semester: 1.1 & 1.2

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Preface

Writing this thesis was like a journey for me. Like every journey has its ups and downs this journey had also its ups and downs. During this journey I have got help from different people around me to overcome the down sides of this journey. Therefore, I would like to take the opportunity to thank and express my gratitude to my supervisors Miss. Wilhelm and Mr. Blut. They always provided me with comments, suggestions and positive feedback. Besides, their advice and support were valuable to me and guided me through this research process. Without their intensive presence my thesis would not be like it is now.

Furthermore, I would like to thank the managers of the SMEs who have devoted their precious time to participate in this study. They were very pleased to answer my questions and provided me with important insights which I have use in my study. Without their willingness to participate in this study, this study would be more difficult than it was.

Last but not least, my special thanks goes to my family and God for their support, endless patient, sympathy, motivational talks and just being there where I needed them. I appreciate your effort.

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Abstract

The internationalisation of SMEs is researched in the academic literature using conventional theories. Conventional theories are focused on MNEs and give little to no insight to SMEs’ internationalisation processes. It is shown that SMEs have the same internationalisation barriers as MNEs, only they apply to them in a different way. The major problem for SMEs compared to MNEs are the resource problems. Furthermore, it is also shown that the Uppsala model is the internationalisation theory which is most often used in the academic literature in explaining the internationalisation processes of SMEs. This theory gives some insights about the internationalisation processes of SMEs. However, when applying this theory to SMEs, SMEs could not proceed from one internationalisation step to another. This is because they are hindered by resource problems. Therefore, this theory is extended by investigating which specific resource problems hinder SMEs in each step of

internationalisation and how they overcome these problems. By extending the

internationalisation theory this way, it can give more insights in the internationalisation processes of SMEs. This has been investigated by interviewing two SMEs and triangulating the data with two case studies from academic literature. The results obtained by the research have been analysed. An insight from this analysis is that each investigated SME encounters mainly the same resource problems in each phase of internationalisation. However, the approaches to overcome these resource problems revealed both differences and commonalities. The pattern observed here gives general insight in how the investigated SMEs overcome these resource problems at each step. Finally, analysing the cases

individually provided this study with additional insights about the differences that were found. These insights are concerned with the implications of the strategies used by each investigated SME to solve their resource problems.

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1. Problem statement

1. Introduction

Nowadays, it is clear that due to globalization the global business environment has changed dramatically (Axinn & Matthyssens, 2002). The world economy became more integrated and it has changed the competitive environment (Fujita, 1998). This caused the scope of all businesses to become global, especially for Small- and Medium- sized Enterprises (SMEs) (Fujita, 1998). This increasingly competitive environment not only increased the domestic competition but also global businesses, which possess plentiful resources. The ability of SMEs to survive and deal with this competition depends significantly on the formulation of effective competitive strategies (Weinrauch et. al., 1991). This phenomenon puts pressure on Small- and Medium- sized Enterprises, in particular, to develop strategies for

internationalisation. Whilst, SMEs account for more than 98% of all business in Europe, they also provide 66% of total employment, and about 85% of all new jobs created in the past ten years in Europe, SMEs are not present in international business research as much as are large firms (Lamb & Liesch, 2002; Acs et al., 1997). In order words, research on

internationalisation processes in the academic literature has mainly focused on MNEs and their internationalisation processes (Etemad, 2004; Ruzzier et. al., 2006; Andersson, 2003; Hollensen, 1998).This means that the internationalisation patterns of SMEs are

underresearched. Furthermore, research has shown that SMEs compared to large companies (MNEs) have a lack of resources, capabilities and internationally oriented management (Li et. al., 2004; Lu & Beamish, 2006; Bell et. al., 2004; Doz & Hamel, 1998). The limitations that were considered with respect to SMEs, leads to disadvantages in competing with local as wll as global firms (Bell et al., 2004; Lu & Beamish, 2006; Hymer, 1976). Furthermore,

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Problem discussion

In the last decade, the internationalisation of SMEs has become an interesting research topic in the academic literature (Fillis , 2001). The research into this topic has been mostly

influenced by the conventional internationalisation theories which are used to explain the internationalisation of large firms (MNEs) (Bell, 1995; Ruzzier et. al., 2006; Hollensen, 1998). According to the findings of Bell (1995), Ruzzier et al., (2006), Hollensen, (1998) and De clercq et. al., (2005) previous researches on internationalisation patterns used

internationalisation theories, which were focused, and mainly explained MNEs market selection, entry mode selection and internationalisation. This is also shown by the empirical research of Carlsson & Dale (2011). According to Carlsson & Dale (2011, p. 193) “summary of empirical evidence indicates that the internationalization process of SMEs often follows a different pattern from that of larger firms”and they further argue that, “the conventional theories seem to underestimate the relevance of this difference” (Carlsson & Dale, 2011, p. 193). Furthermore, Lin (2012, p. 1) supports this statement and argues that “traditional internationalization theories focused mainly on big multinational enterprises (MNEs) and were less pertinent to SMEs”. Fillis (2001) also argues that “analysis of the literature shows that internationalisation research originally focused on the activities of the multinational enterprises…” Fillis (2001, p. 767). Finally, Etemad (2009) argues that “...the extant

theoretical developments in international business, including major theoretical contributions by Bartlett and Ghoshal (1986, 1989), Buckley and Casson (1976), Dunning (1977, 1980, 1981. 1988), Dunning and Rugman (1985), Hymer (1976), Rugman ( 1982), Vernon ( 1966) and many others have focused on internationalization of larger firms, especially MNEs, nearly to the exclusion of smaller or entrepreneurial firms (Kirzner, 1979)...” (Etemad, 2009, p. 1). These findings were confirmed by other scholars (Bell, 1995; Ruzzier et. al., 2006; Hollensen, 1998). Also according to these authors (Bell, 1995; Hollensen, 1998; Ruzzier et. al., 2006) the previous conventional theories were insufficient to describe the

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As explained above, previous internationalisation theories were insufficient in explaining the internationalisation of SMEs. This, because, for SMEs it is much more difficult to

internationalise compared to MNEs. SMEs have limited resources (Bell et al., 1991; Bonacorsi, 1992; Etemad, 1999, Mc Naughton & Bell, 2000; Miessenbock, 1988), they are home country focused and therefore expanding to foreign countries is a significant step for them (Lu & Beamish, 2001; Boter & Holmquist, 1996;Gankema et al., 2000; Li et al., 2004). Besides, SMEs have limited resources to acquire information and knowledge about foreign markets. Therefore, SMEs are inexperienced in international markets compared to MNEs (Li et. al., 2004; Lu & Beamish, 2006; Bell et. al., 2004; Doz & Hamel, 1998). Finally, differences in the legal system, cultures, and languages present higher risks to international expansion of SMEs than for MNEs. These risks are new for SMEs, but most MNEs have already

confronted with these internationalisation risks two or three decades ago (Li et. al., 2004; Yip et al., 2000; Acs et al., 1997; Johanson & Vahlen, 2009). As a result of the problem discussion described above a research gap is defined. Previous studies researched the internationalisation of SMEs by using conventional theories. These conventional theories are discussed to be insufficient to explain the internationalisation of SMEs, as they are focused on MNEs. How then can the internationalisation processes of SMEs be explained. This research gap is translated into a research question.

Research question:

“How can the internationalisation processes of Small and Medium- sized Enterprises (SMEs) be explained?”

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2. Theoretical background

In this chapter a literature review is provided. This is supported by a table where the findings of different authors on the internationalisation barriers of SMEs and MNEs are provided. After that, relevant theories are discussed which represent the previous internationalisation literature. Finally, the academic literature is linked to the research question.

2.1 Literature review on the internationalisation barriers between SMEs and MNEs

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For referring to MNEs there has been chosen for the definition of Shah et. al., 2012. According to Shah et. al., (2012, p. 28) “A multinational corporation (MNC) is a business enterprise that maintains direct investments overseas and that upholds value-added

holdings in more than one country. An enterprise is not truly multinational if it only operates in overseas or as a contractor to foreign firms. A multinational firm sends abroad a package of capital, technology, managerial talent, and marketing skills to carry out production in foreign countries.”(Lazarus, 2001). This definition is in the first place a recent definition. Furthermore, there is a variety of definitions, defining MNEs but this definition incorporates all the facets of MNEs in one definition (Lazarus, 2001). The objective of this study is to get a better understanding of how SMEs internationalisation processes can be explained. In order to get better understanding of SMEs internationalisation processes, the following literature review will investigate whether SMEs have the same internationalisation barriers as MNEs. This review will be comprehensive. This means that all possible academic articles about internationalisation barriers that SMEs and MNEs encounter will be analyzed. These findings will be illustrated in a table. Furthermore, it will be described why the previous

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Academic literature research about major internationalisation barriers of SMEs and MNEs

Internationalisation barriers Authors addressing this barrier to SMEs Authors addressing this barrier to MNEs

Limited resources: personnel and financial shortage

Bell et al., 1991; Bonacorsi, 1992; Etemad, 1999, Mc Naughton & Bell, 2000; Miessenbock, 1988;

Weinrauch et. al., 1991; Johanson & Vahlen, 2009; Baird et al. 1994; Buckley 1989; Coviello and Munro, 1997; Gilmore et al., 2001; Knight, 2000;De Chiara & Minguzzi, 2002 Acs & Terjesen, 2005; Malecki & Veldhoen, 1993; Fillis, 2001Lu & Beamish, 2001; Boter & Holmquist, 1996;Gankema et al., 2000; Li et al., 2004;De Chiara & Minguzzi, 2002

International coordination of resources, information and knowledge

Li et. al., 2004; Lu & Beamish, 2006; Bell et. al., 2004; Yip et al., 2000; Doz & Hamel, 1998; Weinrauch et. al., 1991; Sharma & Blomstermo, 2003; Pehrsson, 2009; Li et al., 2004; Reichel, 1988; Burpitt & Rondinelli 2000; Fujita, 1998

Li, 2005; Stephane & Rugman, 2005; Araujo & Rezende, 2003; Hill, 2007; Ambos et. al, 2009

Differences in foreign country legal system, cultures and languages

Li et. al., 2004; Yip et al., 2000; Acs et al., 1997; Westhead et. al., 2002

Cuervo Cazurra, 2006; Xu & Shenkar, 2002;Dunning & Lundan, 2008; Lanti et. al., 2009; Albaum & Tse, 2001; Gencturk & Kotabe, 2001; Lages, 2000; Karakaya, 1993; Katsikeas, 1994; Katsikeas & Morgan, 1994; Stephane & Rugman, 2005

Dependence on the business and social networks of the

entrepreneur/management

Gilmore et. al., 2001; Zyglidopoulos et al., 2006; Weinrauch et. al., 1991; Sharma & Blomstermo, 2003

Vaara & Tainio, 2003; Forsgren, 2002; Sampienza et. al., 2006; Collinson and Rugman, 2008

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Internationalisation barriers: SMEs compared to MNEs

Table 1 gives an overview of the internationalisation barriers of SMEs and MNEs. According to Porter (1981) internationalisation barriers are obstacles that prevent entrant companies from being established in a particular foreign market. In other words, internationalisation barriers prevent the company to choose to expand to foreign markets. Having discussed the internationalisation barriers of SMEs and MNEs, the table shows that most major

internationalisation challenges are the same for MNEs as for SMEs. Although, SMEs and MNEs face almost the same internationalisation barriers, but they apply to them in a

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This is because, they have the available expertise and skilled personnel with international experience to overcome this barrier. These authors also argue that competitor’s abroad absolute or variable costs advantages are also barriers for MNEs. MNEs also face

competitors in foreign markets that have cost advantages and do not have tariff and non-tariff barriers. However, compared to SMEs, MNEs have abundant financial resources

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This barrier can be explained as follow. The international expansion of SMEs is dependent on the business- and social networks of the entrepreneur. The SMEs entrepreneurs are mostly one person who is ruling and owning the SME. They are also deciding the

internationalisation plans, compared to MNEs which are ruled mostly by a group of

managers and entrepreneurs. This result in the barrier of having a smaller network around the SME entrepreneur compared to MNEs. In the process of deciding to go international, research has shown that entrepreneurs make a decision to go international based on after having discussed with his/her networks. In short, the network of the SMEs entrepreneur is an important factor and could prevent the SME from going international. However, authors also suggest that this is also in some extent a barrier to MNEs (Vaara & Tainio, 2003;

Forsgren, 2002; Sampienza et. al., 2006; Collinson and Rugman, 2008). They suggest that while the network of MNEs managers are more extended than SMEs, these extended network of different managers can come up with contrasting arguments. Besides, they take more time to come to a decision. The management should agree to tap in to which network and this takes more time to come to an agreement. However, MNEs could overcome this barrier. This is because, the managers are internationally experienced, skilled and therefore could perform extensive foreign market research. This, in order to find opportunities abroad and support this with their networks. In short, above is explained that SMEs and MNEs have mostly the same internationalisation barriers (Bell, 1995; Ruzzier et. al., 2006; Hollenson, 1998). However, it is more difficult for SMEs to deal with these internationalisation barriers compared to MNEs. This is because, they have personnel and financial shortageto overcome these internationalisation barriers (Lu & Beamish, 2001; Boter & Holmquist, 1996;Gankema et al., 2000; Li et al., 2004; De Chiara & Minguzzi, 2002; Bell et al., 1991; Bonacorsi, 1992; Etemad, 1999, Mc Naughton & Bell, 2000; Miessenbock, 1988; Weinrauch et. al., 1991; Johanson & Vahlen, 2009; Baird et al. 1994; Buckley 1989; Coviello and Munro, 1997;

Gilmore et al., 2001; Knight, 2000;De Chiara & Minguzzi, 2002 Acs & Terjesen, 2005; Malecki & Veldhoen, 1993; Fillis, 2001). Furthermore, SMEs have limited time and lack of

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In the academic literature previous internationalisation theories try to explain the internationalisation of SMEs. It showed that previous internationalisation theories are theories that are developed and created by explaining the internationalisation processes of mainly MNEs (Carlsson & Dale, 2011; Lin, 2012; Burca et. al., 2004). These

internationalisation theories takes mainly the internationalisation barriers of MNEs into account (Bell, 1995; Ruzzier et. al., 2006). Even though, SMEs have mostly the same

internationalisation barriers as MNEs, these challenges do apply in a different way to them. However, these internationalisation theories do not take the different application of barriers to SMEs into account (Christensen & Lindmark, 1993). For this reason, these

internationalisation theories are insufficient to describe the internationalisation processes of SMEs (Burca et. al., 2004; Ruzzier et. al., 2006). In the next section there will be further elaboration on this issue.

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2.2 Shortcomings previous internationalisation theories from the SME perspective

The main research stream of theories on internationalisation of firms began in the 1960s (Ruzzier et. al, 2006). In this time the focus was mainly on the large companies (MNEs), since the process of internationalisation were mainly performed by MNEs who had sufficient resources, searching for economies of scale abroad (Etemad, 2009; Hollensen, 1998). These theories were the main base for researchers that researched internationalisation of different companies, and also the internationalisation of SMEs (Ruzzier et. al, 2006; Hollensen, 1998; Dunning, 1988). According to Chen & Hambrick (1995) and Carlsson & Dale (2011)

endeavours to apply theories that are originally developed for MNEs will lead to

inconvenient results when applied to SMEs. This is because, when ideas and knowledge used to develop theories for internationalisation of MNEs will not necessarily work for SMEs. In other words, SMEs are not small versions of MNEs (Shuman & Seeger, 1986; Pehrsson, 2009).

One example of previous conventional theory that are mainly based on the

internationalisation of MNEs is the OLI model. This theory is developed by Dunning (1988). This model tries to explain the different forms of international production as well as the selection of a foreign country for internationalisation (Dunning, 1988). According to Dunning (1988) the decision of a firm to internationalise their economic activity depends on three interrelated variables: Ownership specific advantage; refers to the access of a firm to tangible and intangible assets/resources that foreign competitors do not have. Location

specific advantage; refers to the advantage that firms achieve through locating production

to foreign countries. Internalisation specific advantage; refers to the advantages added to the firm from the internal use of firms ownership specific advantages. According to Etemad & Wright (2003) this theory can explain the internationalisation of MNEs, with large

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In other words, the ability of large firms (MNEs) to get these three advantages is much bigger than for SMEs with their constrains to overcome the barriers of internationalisation and gather these resources (Ruzzier et al., 2006; Etemad & Wright, 2003; Fillis, 2001; Jones and Dimitratos, 2004). Beside this theory, there are also other theories that try to explain the internationalisation processes of firms and therefore also internationalisation of SMEs. From the previous conventional theories, the following theory is most used in the academic literature by explaining the internationalisation of SMEs and MNEs (Johanson & Vahlne, 1977). Therefore, in this study this theory is used as a theoretical lens. This theory is the Uppsala model. Researchers (Johanson & Vahlne) from the Nordic countries in Finland and Sweden were interested in the internationalisation dynamics of firms (Bloodgood et al., 1996; Ruzzier et. al., 2006). However, there were differences in the academic research objectives and contexts (Ruzzier et. al., 2006) therefore, they decided to start their own theory building. They developed the Uppsala model of internationalisation. This model propose that resource commitment of the firm and the general and experiential market knowledge of the firm affect the business activities and commitment decisions (Johanson & Vahlne, 1977; Forsgren, 2002; Ruzzier et al., 2006). “The state aspect are market

commitment and market knowledge about foreign markets and operations”(Ruzzier et al., 2006, p. 482). “The change aspects, in turn, increase the market knowledge and stimulate further resource commitment to foreign markets in the subsequent cycle” (Ruzzier et al., 2006, p. 482). In other words, firms increase their knowledge and international involvement in small steps and in a sequential pace (Johanson & Vahlne, 1977). When firms would like to internationalise, they first start gathering information and acquiring knowledge from the target market they would like to expand to (Johanson & Vahlne, 1977; Ruzzier et al., 2006). After they are ready to internationalise, the second step is starting with internationalising into foreign markets (Johanson & Vahlne, 1977). These markets are culturally and

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2.3 Linking theory to the research question

As explained in the problem section, SMEs internationalisation processes are researched by using conventional internationalisation theories. These theories are insufficient to explain the internationalisation processes of SMEs, because they are focused on MNEs

internationalisation. This literature gap has been justified by citations of articles in the academic literature. Moreover, these articles also confirm that previous conventional theories are focused on MNEs internationalisation and are not able to describe the internationalisation processes of SMEs. Therefore, a literature gap has been found

concerning the internationalisation processes of SMEs. In the theoretical section there was an investigation to examine whether SMEs internationalisation barriers also apply to MNEs and vice versa. Furthermore, if they apply to MNEs, to which extend do they apply. The results of the table showed that the most internationalisation barriers of SMEs are also barriers to MNEs. However, these internationalisation barriers do apply to SMEs in a different way as MNEs are usually equipped with more resources to overcome these barriers. Specific resource problems SMEs are facing are: skilled personnel, financial

resources, time, large network and network expertise, knowledge about foreign legal system and business regulation, absolute and variable cost advantages, foreign culture and language knowledge, foreign market knowledge, resource coordination expertise and international experience. This is also showed by examining a conventional theory “OLI model” in short. And extended this review with another conventional theory “Uppsala model”, which is the theoretical perspective of this study. The former internationalisation theory urges that firms have to have ownership, location and internalisation specific advantages in order to

internationalise. This theory does not take into account that SMEs suffer from a lack of skilled personnel and lack of financial resources to overcome the internationalisation barriers. This, in order to get these advantages and to internationalise compared to MNEs with abundant resources. In short, this theory is simply not able to explain

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However, when applying this theory to SMEs, there are huge amount of SMEs that cannot proceed from step one. This is because, they have resource problems to overcome the internationalisation barriers (Li et. al., 2004; Lu & Beamish, 2006; Bell et. al., 2004; Yip et al., 2000; Doz & Hamel, 1998; Weinrauch et. al., 1991; Sharma & Blomstermo, 2003; Pehrsson, 2009; Li et al., 2004; Reichel, 1988; Burpitt & Rondinelli 2000; Fujita, 1998). On the one hand, the Uppsala model provides some relevant insights about SMEs internationalisation (Yip et al., 2000; Acs et al., 1997; Karadeniz & Göçer, 2007; Li et. al., 2004). On the other hand it gives little practical insights when applying this theory to SMEs (Hollensen, 2001; Reid 1981; Andersen, 1993). Therefore, this theory can benefit from a theory extension. In table 1 is showed what the internationalisation barriers of SMEs and MNEs are. It is further explained that SMEs suffer from resource problems compared to MNEs in order to overcome the barriers of internationalisation. Therefore, on the basis of the literature review performed above different resource problems could be identified that SMEs have to overcome in order to internationalise. These resource problems are categorized in three categories and are presented in a table and it is showed below.

Specific resource problems SMEs have to overcome in order to internationalise

Skills Skilled personnel, large network and network

expertise, resource coordination expertise, international experience

Financial Financial resources, time, economies of scale

Knowledge Knowledge about foreign legal systems and

business regulations, foreign culture and

language knowledge, foreign market knowledge

Table 2: Specific resource problems for SMEs

The Uppsala model explains the internationalisation in steps. Therefore, this theory extension will try to specify which specific resource problem(s) becomes a challenge for SMEs in each internationalisation step. Furthermore, show the way(s) SMEs solve each resource problem in different steps. This study outcome gives more insight about SMEs internationalisation processes. Therefore, the outcome of this study would be able to answer the research question of this study. The research question is: “How can the

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3. Methodology

3.1 Research design

According to Bryman & Bell (2007) in order to conduct scientific research, it is crucial to connect theory with scientific data. To guide and influence the analysis of data there must be a consideration between a deductive and inductive approach (Bryman & Bell, 2007). Deductive data research approach starts with a theory and test some of its implications with the data (Bryman & Bell, 2007). On the other hand, the process of an inductive approach starts with collecting data first and then developing or extending a theory which explains patterns in data (Bryman & Bell, 2007). The approach of this study is inductive and is associated with qualitative research. This is because, the results of this empirical study will be used to extend the Uppsala theory of internationalisation. This Uppsala model could be relevant to explain the internationalisation of SMEs with limited resources. By explaining internationalisation of SMEs in small steps and in a slower pace than MNEs and with limited risk taking (Karadeniz & Göçer, 2007; Li et. al., 2004). However, as explained in the literature review there are shortcomings to this theory. Therefore, this theory will be extended to get a better understanding of the internationalisation processes of SMEs.

3.2 Case study method

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The best case selection approach that cover this approach is the “elaboration of the

emergent theory” (Eisenhardt, 2007). Furthermore, the source of the multiple case study will come from two different data collection methods; the primary and secondary data collection method. In the primary case study the researcher will contact SMEs, in order to have an in- depth interview with them.This method has been chosen since, it is useful for a researcher to focus on particular topic and gain additional information from interviewers (Yin, 2003). This in- depth interview will be semi- structured. This interview method allows the

researcher to gain additional information about the informant perspective and experience on the issue and is very flexible (Eisenhardt, 2007; Yin, 2003). Furthermore, it allows the researcher to gain knowledge and information about the issue on a much deeper level. This is because, the interviewer has the possibility to ask more questions and go deeper in some issues during the interview (Eisenhardt, 2007; Yin, 2003). The selection of the SMEs to have an in-depth interview with them will be structured as follow. The propose of this sampling selection is to select homogenous cases (Shakir, 2002). This means to have cases where the variation between the cases are minimized. In this way, a better understanding could be generated of how SMEs internationalisation could be explained. The search for the SMEs to have an in-depth interview will be as follow. From the theoretical point of view, having data from SMEs in different industries makes the results more generalizable. Moreover, the results received from different industries makes the study more validate. From the practical point of view, SMEs managers in the work field are mostly reserved. They mostly have no time for participating in research studies. Due to this, it is very difficult for the author to find suitable SMEs that are willing to participate in this study. In other words, finding a SME in all industries is very hard. When choosing a specific industry this makes it even harder to find SMEs which would like to participate in a research. For these theoretical and practical reasons, the author will not choose a specific industry and will approach all SMEs within different industries. Furthermore, the country where the SMEs will be approached will be structured as follow. From the theoretical point of view, the European definition of SMEs has been chosen from different definitions in the literature. This in order to test the SMEs

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From the practical point of view, the author is directly and indirectly familiar with two Dutch SMEs companies beforehand. For this reason, the SMEs are more trusted with the author and are comfortable to provide in-depth information. Furthermore, it is easier and quicker to get information from companies you know than from companies your are not familiar with. This approach resulted in two companies which are willing to participate in this study. The author knew the first company from the bachelor part of his study and knew that they were international. However, visited their website to confirm this. The second company was introduced to the author by the first company. Therefore, the second company was comfortable to provide sensitive information about their internationalisation processes. After visiting their website, the author confirmed that this company was also active in international business. For these theoretical and practical reasons, the SMEs approached for the in-depth interviews are Dutch SMEs. As explained earlier in this section, the purpose of this theoretical sampling selection is to select cases with minimized variation. In practice it is very difficult to find firms with the same internationalisation. However, the selected SMEs are international to a comparable extent. This allows the author to generalize the data found. Furthermore, when different strategies are observed in solving the resource

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3.3 Data collection method

The secondary data is collected as follow. As explained in the case selection method, the author have selected two cases from case studies available in the academic literature. The cases are selected from one academic article that fits best in the purpose of this study. These cases are used to describe the change in the internationalisation of SMEs. Therefore, the cases are used for another purpose than this study. However, the author is to some extent able to distinguish different Uppsala internationalisation stages of companies described in these cases. Furthermore, the companies described in these cases correspond with the SMEs definition of this study. Finally, the companies investigated in these cases were active in other industries than the companies interviewed for the primary data collection. Therefore, the information gathered will come from different industries. This could make this study more generalizable. For these reasons, these cases are suitable to use in this study. On the other hand the primary data is collected as follow.After searching for a long time for SMEs that correspond with the definition of SMEs of this study; “SMEs who has fewer than 250 employees and a turnover less than 50 million Euros”, are internationalised and are willing to talk about their internationalisation processes two SMEs in the Netherlands were found. The first SME which the author have found is a SME that he is familiar with. This is because, the author knew this company from the bachelor part of his study. After visiting their website the author e-mailed the general sales manager and asked him whether he is willing to participate in this research. He was positive about this research and was willing to

participate. After approaching a lot of SMEs to find a second SME to conduct the research, the author approached the first company. Whether the general sales manager knows other SMEs which are willing to participate in this research. He mentioned that there was a company in the same area who is willing to participate in this research. After approaching this SME, an appointment is made for the both in-depth interviews. The author was informed by the SMEs, that the author has one hour time for each interview. Further information about the interviewee, the background of these companies and their

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4. Empirical data collection

In this chapter data will be collected and described. The first data collection is the primary data collection, where in-depth interviews with two companies are described. Furthermore, the secondary data is collected by using and describing two case studies from the academic literature.

4.1 Case study 1

Background Company A

In describing this SME and its internationalisation processes, the company asked me to keep the name of the company private. Therefore, in this study the author will refer to this SME as Company A. Furthermore, the author was also not able to record the interview with this company due to privacy reasons. For this reason, the author made as much as possible notes to describe this conversation sufficiently. In the in-depth interview with this company there was a conversation with the general sales manager. He worked with this company for 6 years. Company A is originally a Dutch company and is founded in 1854. This company is a supplier of grounded herbs and spices to the international food industry. They are

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Therefore, the biggest weakness of this company is, when there is a disturbance in the international cinnamon market the sales could be declined. Furthermore, they are dependent on their customers; the bakery industry.

Internationalisation processes Company A

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The managers worked in this company were locally oriented and were focused on the Dutch market. This, in order to hold the leaders position in the market. These resource problems hindered them from internationalisation since, they needed more time in order to gather information. However, they overcome these resource problems by hiring managers with international knowledge. Other option could be hiring local agents. However, this option will make the company fully dependent on an external party. Therefore, they chose to hire a skilled manager, who could gather knowledge and solve the problem internally.

Furthermore, they gathered information and knowledge about the target market by sending the hired managers to visit trade fairs in the target market. After having gathered enough information Company A started to expand to the target market. In this second phase of internationalisation they encountered a lot of resource problems. Although, they hired skilled manager, they were not fully familiar with the target market’s local as well as business culture. Furthermore, they did not fully speak the language of the target market and they had not knowledge about the target market distribution channels. The industry they are operating in is a old industry, were business is done in an old fashion manner. Therefore, for entering this market you need to have knowledge about the distribution channel, which you could use to make contacts with customers. These resource problems hindered them in the sense that they needed more time and it was extra work to address these resource problems. In order to overcome these resource problems, the hired

managers went to trade fairs and trade missions in the target market. The main reasons to visit trade fairs and trade missions was to gather knowledge about the distribution channel. This knowledge could connect Company A with local customers. In this way, they could build long standing relationship with the customers. This would make the company better able to understand and meet the needs and wants of foreign customers. Furthermore, they could benefit from their knowledge about the local business culture. After a couple of years they managed to gain understanding about the target market distribution channel. This

connected them with foreign industrial bakeries. The hired managers visited these customers regularly. In this way, they could build a long standing relationship with these customers. This long standing relationship helped Company A to map in what these customers exactly wanted. In this way, they produced tailor made products for these

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This export mode also did not changed as both the company and its customers found this way the easiest way to do business. This resulted in penetrating the market and building a strong position through time. After developing a strong position in this market, they wanted to explore more distant markets. They started to expanding to markets outside Europe. In this third phase of internationalisation they also encountered resource problems. The main resource problems were that they were not familiar with the legal system, business

regulation and local culture of the markets outside Europe. This hindered the company in the way that they had managers which were not familiar with the culture and legal system of the target country outside Europe. Therefore, Company A entered in a network group of European spice and herbs suppliers. From this group the company received information about the legal system and local culture of these markets. This information were exchanged through the members by meetings and conferences organized by the network. This

knowledge were used internally, to train the hired managers for entering those distant markets by gaining knowledge about the distribution channels. After years they came in contact with customers there and successfully penetrated those distant markets.

Internationalisation step 1 (1-3 years) Internationalisation step 2 (3-5 years) Internationalisation step 3 (5-7 years) Company A

Resource problem Skilled personnel,

time, international experience and foreign market knowledge

Foreign culture and language knowledge and foreign

distribution channel knowledge

Knowledge about foreign legal system and business

regulations and

knowledge about local culture

Overcome resource problem Hiring skilled

managers and visiting trade fairs

Visiting trade fairs, networking with local businesses, visiting trade missions and building long standing relationship with the foreign customers

European network group

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Background Company B

The in-depth interview is conducted with the Technical sales manager, who has been

working with Company B for 2,5 years. In consultation with this manager, he asked me that I should not mention the company’s name in this study. This was mainly due to privacy reasons. Therefore, in this study this company will be referred as Company B.Furthermore, the author was also not able to record the interview with this company also due to privacy reasons. For this reason, the author made as much as possible notes to describe this conversation sufficiently. This company is originally a Dutch company and is founded in 1961. Furthermore, they have a total annual turnover of €7.5 Million and approximately 10% of their total turnover is from international sales from 7 foreign countries. Company B has 30 employees and is a supplier of grounded herbs and spices to the food industry. They are specialised in grinding and blending spices for the meat , fish, poultry and bread industry. In short, the herbs and spices of this company are used for the savoury segment. The strengths of this relatively young company is that they use natural raw materials without artificial substances and their high quality standards. Furthermore, they are flexible and try to find the best solution for their customers. However, on the other hand they do not have a clear grow and focus plan for the long term. This could be attributed as their weakness. Finally, as they are relatively young company, they do not have build international experience.

Internationalisation processes Company B

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Therefore, they started first to gather information and knowledge about these companies. In this first phase of internationalisation they were confronted with resource problems. The managers were mainly Dutch market focused so, they had little international experience. Therefore, they had a lack of knowledge about the foreign market. This hindered them in the way, that they needed to give more attention and focus on these markets. As mentioned earlier, this company is relatively young and has recently internationalised. Therefore, they did not have earlier international experience. Company B also mentioned that this is the main reason that the company could not build knowledge through experience. For this reason, they mainly rely on external parties to provide them resources and in this way solve the problems they encounter. In order to overcome the resource problems in this phase they decided to work together with the local University. As they had some thoughts about the potential of these neighbouring markets, they wanted to search this potential

structurally. Therefore, they assigned two Bachelor students from the local University to do the desk research. In this way, they could receive exact numbers about the potential of the market and about the best way to approach these markets. Besides, this approach was the cheapest way to receive the desk research information. The results of this research provided them with significant information about the target market. Furthermore, the desk research also revealed that the company needed to visit trade fairs to network. Networking was the main internationalisation strategy to come in contact with local customers, which are mainly the industrial butchers. This information were used to take the next step of

internationalisation. In this second phase of internationalisation the main resource problem that they encountered was the foreign business as well as local culture and language

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As the local agent speaks the same language as the local customers and the local agent knows the local culture, this makes the connection easier. Furthermore, the downsides of this strategy is that the company is fully dependent on the actions of the local agent. Finally, it is very hard to motivate them to act in the company’s interest and not only in their own interest. Taking this downside into account, the company mentioned that local agent was the best option for them as they are not able to solve their resource problems internally. Finally, after years of visiting trade fairs by the local agent it resulted in a successful

connection with a potential customers. These connections resulted finally in the first order from a foreign customer. These products were exported to the target market as it was easier and less riskiest option. Through time, more and more customers were found and so the company build a strong position in that market. As Company B had build a strong position as well as in Dutch as neighbouring markets they did not expand yet to culturally and

geographically distant markets yet. They are currently working on a long term plan to

expand to those distant markets. However, the technical manager was able to talk about the resource problems which he thinks the company will encounter while entering those

markets. According to him, the most important problem in the third phase of

internationalisation will be; the legal system, business regulation and the culture and language of distant markets. He mentioned that, these problems in a limited version were encountered by entering in neighbouring countries, let alone entering distant markets. To solve this future resource problem he mentioned that the company will hire local agents with knowledge about foreign local legal system, culture and language. This agent should network with local customers. Through this strategy the company will try to penetrate the target distant markets.

Company B Internationalisation step 1 (1-3 years) Internationalisation step 2 (3-5 years) Internationalisation step 3 (5-7 years)

international experience and foreign market knowledge

Foreign culture and language knowledge and network expertise

regulations and knowledge about local culture

Overcome resource problem Hiring students, visiting trade fairs for networking

Hiring an local agent and visiting trade fairs, network with local businesses

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As mentioned earlier in the methodology section there are limited case studies available about this topic in the academic literature. Let alone, finding case studies that perfectly describes the internationalisation processes of SMEs and distinguishes the different

internationalisation stages mentioned by Uppsala model. However, two case studies in the article of Nummela (2002) was used in this study which could add value to the data found from the primary data collection.

Background Company C

Company C is originally a Finnish company and is established in 1978. Furthermore, this company has 30 employees and has a turnover of more than €3 Million. Company C

manufactures products for contact-lens care as well as contact lenses, spectacle frames and other related products. This company was established when, the managing director who is an educated optician and his friend who has a degree in chemistry noticed that huge amount of liquids for contact-lenses are imported in the Finnish market. This was because, the prices of the foreign liquids for contact-lenses were lower than domestic prices. Therefore, they thought that there will be demand for contact-lenses liquids with high quality and

reasonable price in the Finnish market. After three years of research they developed their own contact-lens products and introduced the products to the Finnish market.

Internationalisation processes Company C

The internationalisation of this company began in 1994. After having penetrated the Finnish market they conquered a strong position in that market. They noticed that the demand in the market is decreasing. This gave them the motivation to gather information and

investigate opportunities in new markets for their products. In the first phase of

internationalisation they realised that they have lack of skilled personnel with international experience. By collaborating and networking with governmental organisation they were able to find export opportunities in those countries. After investigation of the opportunities abroad the second phase of internationalisation began. The company entered the

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In this phase of internationalisation they encountered a lack of foreign culture, language knowledge and financial resources. In order to overcome these resource problems, the company collaborated with governmental organisations in order to receive financial resources. Furthermore, they networked with foreign local businesses to gather cultural knowledge. After having established in those culturally and geographically close countries the company wanted to expanded to more distant European markets. This was the third phase of internationalisation. This expansion was blocked by strict legislation of European markets and they lack of knowledge about those foreign market culture. This was because Finland was not a member of the European Union. The legislation problem was partly solved when Finland joined the European Union. Furthermore, they have collaborated with public organisations by letting their managers participate in seminars and courses provided by these public organisations. These seminars and courses were used to increase their knowledge about international export to distant foreign markets.

Company C Internationalisation step 1 (1-3 years) Internationalisation step 2 (3-5 years) Internationalisation step 3 (5-7 years)

international experience and foreign market knowledge

Foreign culture and language knowledge and financial

resources

Overcome resource problem Collaborating and networking with domestic governmental organisations Collaboration with governmental organisations for financial resources and foreign local networking

Visiting courses and seminars about foreign markets

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Background Company D

Company D is originally a Finnish company and is established in 1977. In 2001 this company employed 21 persons and it has an annual turnover of approximately €4 Million.

Approximately 10% of the total annual turnover comes from international sales. This

company is operating in the metal and engineering industry. They produce screw conveyors and pumps. These products are used in various industries like; the pulp and paper industry, mechanical woodworking, mining and metallurgical industry and are mainly used for transportation of raw materials. Furthermore, these conveyors have a relevant role in industries where dust-free material transport are crucial. The strengths of this company is that it delivers tailor-made products to customers. Furthermore, they have a huge

experience in this industry.

Internationalisation processes Company D

The internationalisation of this company began in 1990. In the first phase of

internationalisation, the company started to gather information and knowledge about the Norwegian, Swedish and Austrian markets. Although, these foreign markets were

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41 Company D Internationalisation step 1 (1-3 years) Internationalisation step 2 (3-5 years) Internationalisation step 3 (5-7 years)

culture and language knowledge

Financial resources *

Overcome resource problem Hiring skilled managers Collaboration with governmental organisations for financial resources and gaining knowledge about foreign culture *

Table 6: Overview Company D: resource problems and how they overcome these problems

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5. Results and discussion of the empirical data

The information received from all the investigated SMEs regarding resource problems, has been summarized in table 7. This table shows the frequencies of resource problems mentioned by the investigated SMEs in all the internationalisation stages.

Internationalisation steps → Resource problems ↓ Gathering information (step 1) Expanding to culturally close markets (step 2) Expanding to culturally distant markets (step 3)

Skilled personnel A,B,C,D International experience and

foreign market knowledge

A,B,C

Time A

Foreign culture knowledge A,B,C,D

Language knowledge A,B,C

Foreign distribution channel knowledge

A

Network expertise B

Financial resources C,D

Knowledge about foreign legal system and business regulations and knowledge about local culture

A,B,C,D

Table 7: Frequency of resource problems encountered by all the companies investigated in

different internationalisation stages

Resource problems

As shown by table 7, there are differences in resource problems encountered by investigated SMEs in each step of internationalisation. In the first step of internationalisation only

Company A mentioned the resource problem; lack of time. “You know, if all your managers

are full-time busy with the domestic market, it is very hard to make time for searching for information about foreign markets” (Company A). Besides, referring to the in-depth

interview with Company A, the company mentioned they are market leader in the Dutch market. In order to hold the leading position, the managers of the company are fully focused on the Dutch market. This could be a reason why only this company mentioned lack of time as a resource problem. On the other hand, in this phase of internationalisation also

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“the managers working here are local managers which have been working here from the

beginning of their career. They are acting and thinking locally. In order to expand to foreign markets, you need managers who are willing to know the foreign culture and

language”(Company A). Lack of International experience “I am the only manager here with some international experience, all the managers have only worked in the Netherlands only”

(Company B). In the second internationalisation step only Company A mentioned the resource problem; lack of foreign distribution channel knowledge. “Look, in our field of

business it is very important to have knowledge about the distribution channels. Without this knowledge you cannot do international business” (Company A). Also mentioned in the

in-depth interview, that they are operating in the segment of the sweet spices and herbs. This is an old industry, were business is done in an old fashion manner. Therefore, you need to have knowledge about the distribution channel, which you could use to make contacts. Therefore, it could be concluded that this resource problem could be industry specific. Besides, in this phase of internationalisation Company B also mentioned a resource problem, which only this company encountered. This resource problem was; network expertise. “The

only way to enter the neighbouring market is via networking with local customers” (Company

B). As explained in the in-depth interview, this company has investigated the entrance to the neighbouring market. The results suggested that they need a local agent to come in contact with local customers. Furthermore, also in this second phase of internationalisation a pattern is observed in all cases. Overall, the cases encounter these resource problems; language knowledge “We do not have the language expertise internally” (Company B). Lack of financial resources “As they were a relatively small company, they needed financial resources to finance their export to these markets” (Company D). Finally, in the third internationalisation step there are no differences between the resource problems

encountered. All the firms encounter the same resource problems: Knowledge about foreign legal systems and business regulations and knowledge about local culture: “Within Europe,

for example, the German legal system differs a bit from the Dutch. When looking at markets outside Europe then this difference becomes way bigger, which creates a problem”

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Observing all the cases, an explanation for this could be found. The investigated SMEs are all European SMEs. They first expanded to neighbouring countries. As these neighbouring countries are in Europe, the regulation and legal system do not differ significantly enough to cause major problems. However, this problem becomes apparent when SMEs expand to distant markets. These markets are usually outside Europe with different regulation and legal system than European countries. Besides, the cultural differences between European countries are lower. When you expand to countries outside Europe this difference increases. Therefore, this resource problem becomes apparent in the third, and not the second phase of internationalisation. Having explained the differences and commonalities between the resource problems mentioned by the cases.It seems to be that each phase is connected with different general resource problems. However, there are also a couple of resource problems encountered by specific industries. Both types of resource problems observed in all cases are presented in a table below.

Gathering information (step 1) Expanding to culturally close markets (step 2) Expanding to culturally distant markets (step 3) General resource problem -Skilled personnel

-International experience -Foreign culture knowledge -Foreign language knowledge -Financial resources -Knowledge about foreign legal system and business

Industryspecific resource problem

-Time -Foreign distribution channel knowledge - Network expertise

Table 9: General resource problems encountered by mainly all SMEs and industry specific

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The differences and commonalities observed between the cases regarding resource problems are discussed above. However, it is not discussed why the general resource problems are encountered in that specific internationalisation step. In the first

internationalisation step, SMEs are trying to gather information about the foreign target market. In this phase they need skilled personnel to observe the target market and come with a plan of action. Furthermore, SMEs do not have experience in international business. In this first phase they need international experience of the managers to gather in-depth information about target markets. As they lack international experience, they also do not have knowledge about foreign market culture. This is needed to interpret and translate the acquired information about the foreign market into an export plan. In the second

internationalisation step, SMEs expand to culturally and geographically close foreign markets. As they need to make contacts with local buyers they need to know the local language. Furthermore, as SMEs have little financial power to finance their expansion, they need financial resources to finance their expansion. In the third internationalisation step, SMEs expand to culturally and geographically distant foreign markets. As these markets are mainly outside Europe, the regulation and legal systems differs significantly from the domestic market. Furthermore, the local culture between the domestic market and

culturally and geographically close markets are different. However, the local culture differs significantly more between the domestic culture and culturally and geographically distant markets. Therefore, this resource problem is logically more a problem when SMEs expand to distant markets.

Differences between individual case studies

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It shows that resource problems encountered in each step of internationalisation by the interviewed SMEs are mainly the same as companies in secondary case studies. However, with exception of some resource problems that were industry specific for Company A and B. Taking this into account, it can be learned that even SMEs’ characteristics differ as is shown above, they encounter mainly the same resource problems in each internationalisation step. As resource problems are discussed above, also different insights are observed about how SMEs overcome resource problems. The insights received from all the investigated SMEs concerning the frequencies of all actions taken to overcome the resource problems resulted in table 8. This table shows the frequencies of actions taken by the investigated SMEs in all the internationalisation stages.

Internationalisation steps → Overcome resource problems ↓ Gathering information (step 1) Expanding to culturally close markets (step 2) Expanding to culturally distant markets (step 3)

Hiring skilled managers A,D Visiting trade fairs A,B

Hiring students B

Collaborating and networking with domestic governmental organisations

C

Visiting trade missions and trade fairs

A,B B

Network with local businesses B A,B,C B

Building long standing relationship with the foreign customers

A

Hiring an local agent B

Collaboration with

governmental organisations for financial resources and

knowledge about foreign culture

C,D

Joining European network group A

Hiring an local agent B

Visiting courses and seminars about foreign markets

C

Table 8: Frequency of actions taken by investigated companies to overcome the resource

problems in different internationalisation stages

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Overcoming resource problems

In table 8 is shown that there are differences in approaches to overcome the resource problems. In the first internationalisation phase, only Company B mentioned hiring students in order to overcome the resource problems in this phase. “In this way you could receive

relevant information about the market, in a cheap way. Furthermore, the managers could focus on the domestic market ” (Company B). The results of the market research was to visit

trade fairs in the target market in order to acquire knowledge about the foreign market. As their managers were not internationally experienced, this was performed by local agents. Furthermore, Company C mentioned; collaborating and networking with domestic

governmental organisations. “By collaborating and networking with governmental

organisation they were able to find export opportunities in those countries” (Company C). At the time this SME wanted to internationalise and gather information. The company was owned and managed by two managers. They did not have knowledge of international business. Therefore, the only way they could receive information was via governmental organisations. For this reason, they decided to collaborate and network with governmental organisations to gather information. On the other hand, also commonalities of actions to overcome resource problems are observed. Almost all SMEs overcome the resource problems in the first internationalisation step by hiring skilled managers: “asI said, the managers here are local thinkers, we needed a manager who knows the foreign market”

(Company A). Visiting trade fairs “the results of the market research conducted by the

students highlighted that we needed to go visit trade fairs to network with potential customers” (Company B). These actions were successful, as all the SMEs gained significant

information about their target market. With these information they could make decisions how to penetrate those markets. In the second internationalisation step, Company A only mentioned; building long standing relationships with the foreign customers. As the company mentioned in the in-depth interview. This is part of the culture of the organisation. They want to know the company they are doing business with. This way, they are able to understand and meet their needs and wants. Furthermore, Company B mentioned; hiring local agents. “We cannot take the risk, to expand to foreign markets on our own, since we do

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However, also commonalities are observed how SMEs overcome the resource problems in the second phase of internationalisation. In general SMEs, visit trade missions and trade fairs and network with local businesses. Furthermore, collaborate with governmental organisations for financial resources and knowledge about the foreign culture. “The company collaborated with governmental organisations in order to receive financial resources” (Company C). These actions were successful, because Company A and B visited the trade fairs and successfully networked with local customers. Furthermore, this resulted in a successful expansion in to those markets. And Company C and D were able to come in contact with governmental organisation. Which helped them financially to finance the expansion and learn about the foreign market culture. Finally, the third step of

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Above differences and commonalities between the actions taken by the investigated

companies to overcome resource problems are explained. The commonalities observed in all the cases in general are entered in a table.

Gathering information (step 1) Expanding to culturally close markets (step 2) Expanding to culturally distant markets (step 3)* Overcome resource problem -Hire skilled

managers -Visit trade fairs

-Network with local businesses

-Collaboration with governmental organisations for financial resources and knowledge about foreign culture

-Visiting trade missions and trade fairs

-Network with local businesses

-Visiting trade missions and trade fairs

-Joining European network group -Visiting courses and seminars about foreign markets -Hire local agent

Table 10: Commonalities observed in general in all cases about the actions taken to

overcome resource problems in all internationalisation phases

* All the approaches to overcome resource problems are included here since, no pattern is observed in this phase of internationalisation.

Differences between individual case studies

The data received from the in-depth interviews regarding overcoming resource problems are triangulated with the secondary case studies. This triangulation has been analyzed. It is shown that differences observed in this part of data are greater than differences observed between resource problems. Therefore, all the cases will be discussed individually to show what the source is of this difference. This information could bring additional insights, which could enrich this study. First of all, Company A will be observed. It is shown that they overcome their resource problems in each phase of internationalisation by mainly building expertise and resources internally. This could be caused by their company culture. As

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This is also mainly shown in the third internationalisation step. Where in the first place information and knowledge is acquired by joining a network group, as this information was not sufficiently available in the company. The further actions to overcome the resource problems in this phase are performed internally. In this way they are not depended on external parties’ performance. Furthermore, they could develop resources internally that are suitable to their problems. On the other hand, it costs the SME more time and financial resources to solve the resource problems mainly internally. Furthermore, Company B has also been observed. It is shown that they overcome their resource problems in each phase of internationalisation by acquiring resources mainly externally. These external parties are mainly local agents. First of all, Company B has less financial resources compared to Company A to hire a skilled manager. Secondly, Company B is less experienced in

“SMEs internationalisation processes” An extension of the Uppsala model

Master Thesis