20.07.2009
M ASTER T HESIS
I NTERNATIONAL B USINESS S TRATEGY OF G ERMAN S MALL AND
M EDIUM E NTERPRISES: AN E XTENSION OF A LAIN V ERBEKE´S T HEORETICAL F RAMEWORK
Master of Science in international Business and Management (M.Sc.) Rijksuniversiteit Groningen
University of Groningen Faculty of Economics and Business
P.O. Box 800, 9700 AV Groningen, the Netherlands
Philipp Gruner Supervisor: Prof. dr. S. Beugelsdijk
S1842099 Co-Supervisor: Prof. dr. L. Karsten
P.Gruner@student.rug.nl
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Table of Content0. Abstract 3
1. Introduction 3
2. Literature Review 6
2.1 Verbeke´s Model 6
2.2 How Small and Medium Firms differ – Why resources matter 10
2.3 Negative SME characteristics 11
2.4 Positive SME characteristics 14
2.5 Problem Indication 16
3. Research Methodology 17
3.1 Conceptual Model & Research Design 17
3.2 Data Set 19
3.2 Data Collection 20
3.4 Data Analysis 21
3.5 Empirical Data Set 21
4. Theoretical Extension – Cross-case analysis 27
4.1 Liability of Expansion 28
4.2 Liability of Foreignness 32
4.3 Liability on Newness 35
4.4 Evolutionary FSA-transfer 36
4.5 Complementary resources 39
4.6 One-man-approach 40
5. Future Research and Verbeke´s modified theoretical Framework 42
5.1 Future Research 42
5.2 Verbeke´s modified theoretical Framework 43
6. Managerial implications and Limitations 45
6.1 Measures to downsize the risk of investment failure 46 6.2 Measures to facilitate an efficient international FSA-transfer 49
6.3 Limitations 52
7. Conclusion 53
8. References 55
9. Appendix 61
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9.1 Interview Guidelines 61
9.2 Questionnaire 62
9.3 Interview firm A 63
9.4 Interview firm B 67
9.5 Interview firm C 70
9.6 Interview firm D 75
9.7 Interview firm E 79
Index of Figures
Figure 1: The essence of international business strategy 7
Figure 2: SME Factors influencing internationalization 16
Figure 3: Conceptual model 18
Figure 4: Verbeke´s modified theoretical framework 44
Figure 5: Internationalization consequences 47
Figure 6: Necessity of foreign market research 49
Figure 7: “one-man” FSA-transfer 50
Figure 8: “two-man” FSA-transfer 51
Index of Tables
Table 1: Empirical Data Set Characteristics 26
3 Abstract
This master thesis is based on empirical case studies and is designed to extend Verbeke’s model about international business strategy with small firm dimensions. Differences between large multinational corporations (MNCs) and small and medium sized enterprises (SME) are highlighted and used as a starting point for an explorative research approach with German SMEs. Results show that SMEs’ internationalization behavior differs significantly from that of their larger counterparts. SMEs are confronted with higher liabilities of expansion, foreignness and newness. Such negative impacts combined with bounded resources and limited international experience increase SMEs’ risk of expanding abroad. Complementary resources and a gradual expansion process gain thus in importance for small firms. A main finding is that SME’s initial stage of internationalization is typically carried out by a single person and is thus more person- than organizational oriented. This leads to several theoretical and managerial implications.
Keywords: SME, internationalization, Resource based View, FSA-transfer 1. Introduction
Impediments to international trade such as quotas, tariffs and barriers to FDI disappear continuously. At the same time, improvements in global telecommunications and transportation modes, as well as a harmonization of international law and business practices and a strengthened protection of intellectual property rights make foreign business operations more attractive, even for small and medium sized firms (SME) (Coviello & McAuley, 1999).
While large enterprises are increasingly involved in cross-border operations, these operations
and the globalization process present challenges and opportunities for the development of
small and medium-sized enterprises (OECD 1997). In light of the above it is interesting to
understand how resource-bounded SMEs overcome size-related obstacles and establish
subsidiaries beyond national borders. Primarily, because SMEs play an important role in
today’s business world, especially within the European economy: In the European Union of
25 countries, some 23 million SMEs provide around 75 million jobs and represent 99% of all
enterprises. SMEs provide 60 to 70 percent of total employment in manufacturing and most of
the jobs in services (OECD 2002, 7–8). SMEs represent the vast majority of the population of
firms in developed and developing countries and are considered as the real giants of the
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European economy (European Commission, 2002). Besides, such companies are major
sources of entrepreneurial skills, innovation and employment (European Commission). This
master thesis contributes to existing literature about SME international growth for several
reasons. First, it exclusively focuses on foreign direct investment (FDI), which is exceptional
since SMEs generally prefer different modes for their internationalization process (Lindqvist,
1991). Lindqvist for instance reports that the preferred entry modes of the Swedish firms in
her sample were direct exporting and foreign sales through intermediaries such as agents and
distributors. This hampers the access to SMEs with transnational FDI experience. Research
focus on SMEs’ international FDI is in particular worth mentioning, since prior studies about
FDI-modes have predominately concentrated on the world’s largest firms. The reasons for
that are twofold. First, it is assumed that the largest firms are more likely to establish new
ventures abroad (e.g. Gil et al. 2006; Brouthers and Brouthers 2003) and are consequently
more involved in extensive foreign activities (e.g. Yiu and Makino, 2002). This again
facilitates the information and data gathering process required for research studies. Second
and related, most SMEs are family-owned and are not listed on stock markets. Due to their
legal form they are also not obligated to publish annual reports which in turn hinders the
identification and information collection process and makes SMEs complex and time-
consuming research candidates. However, there is a growing tendency of SMEs to realize that
without globalizing their activities, they will fall behind in the world market. As SMEs can
obviously globalize, the question is whether their patterns differ from large firms and how and
why some of them succeeded and others failed. Early studies, like Van Hoom (1979)
identified limited resources as an important factor that distinguishes the strategic behavior of
small firms from that of large firms. As SMEs are confronted with limited resources and
capabilities in the fields of research and development, human resources, financial resources,
managerial and marketing capabilities as well as international experience, it is interesting to
investigate how such constraints affect their internationalization strategy. The focus on SME’s
internationalization strategy in Verbeke’s context deserves a special note, as Verbeke himself
observed that most of the world’s 500 largest MNCs are not global but rather regionally based
(Rugman and Verbeke, 2004). While even the largest firms are not really international, I
argue that this effect must actually be more significant for SMEs. From this point of view and
given the differences between SMEs and large firms, I expect that the patterns of international
business vary considerably with firm size. Case studies which supplement Verbeke’s model
about international business strategy are exclusively based on large firms implying that
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typical SME patterns remain unconsidered. This in turn explains the need for extending research and leads to another significant contribution of the master thesis, as Alain Verbeke´s model about international business strategies is extended with SME characteristics and dimensions which makes it more applicable to a wider range of firms. This master thesis sheds more light on the international transfer of firm-specific advantages (FSAs), a central component of the resource-based view (RBV) of the firm to which Verbeke’s model belongs.
The RBV-typical focus on firms’ ´strengths displays its major shortcoming at the same time:
firm-specific weaknesses are frequently blanked out. This point of critique becomes more profound when the model is applied to SMEs that are by its very nature more constraint than their larger counterparts (e.g. Yip, Biscarri, & Monti, 2000). This thesis uses this shortage as a starting point and investigates the following research question:
“Is Verbeke´s conceptual framework about international business strategies applicable to SMEs and how can it be extended to SMEs?”
An explorative qualitative research is the appropriate method in this aspect since it assists in understanding the underlying action, the why and the how (Buckley and Chapman 1996).
Concepts and variables under study are often difficult to quantify since there are too many variables to be considered and the interrelationships between the variables are quite unexplored, which makes survey methods inappropriate (Ghauri and Gronhaug 2002). Case studies are conducted in order to deepen the understanding about how resource-constrained SMEs transfer firm-specific advantages (FSA) internationally. Firm-specific advantages are crucial to survival and business performance so that a more comprehensive knowledge about such processes is enriching for both researchers and managers. This is in particular true since this model is not limited to a specific industry which makes it applicable to a wide range of settings.
The thesis is organized in seven sections, including the introduction and the conclusions. The
second section presents a literature review about Verbeke´s model and points out differences
between SMEs and large MNCs which finally leads to the bias of Verbeke’s model. The
research methodology is outlined in the third section. The fourth section deals with the
theoretical extension of Verbeke´s model. The forth section outlines the methodology used,
and includes the description of the data sample. Section 5 summarizes Verbeke´s modified
theoretical model and points to avenues for future research. Section 6 draws the main
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managerial implications and addresses the limitations of the study. The paper is completed with a conclusion.
2. Literature Review
2.1 Verbeke´s Model
Alain Verbeke´s Model synthesizes several theoretical models into one conceptual framework about how to improve business performance in a complex international business setting.
Thereby he pursues the goal of explaining what lies at the heart of a successful international business strategy. In this context, Verbeke describes international business strategy as
“effectively and efficiently matching an multinational enterprise´s internal strengths (relative to competitors) with the opportunities and challenges found in geographically dispersed environments that cross international borders” (Verbeke, 2009, p.3). A multinational enterprise (MNE) is defined as a firm with business operations in at least two countries. MNE face several disadvantages as compared to firms from the host country when crossing its home country border, because local firms possess a comprehensive knowledge base that is more appropriately matched to local stakeholder demands. Additional costs of doing business abroad result from economic, cultural, institutional and spatial distance between home and host country environments. Such distance-related issues increase resource consumption and costs and make it more demanding to transfer and implement routines and assets abroad.
Internationally transferable firm-specific assets such as proprietary knowledge and brand names are thus requisite to establish a competitive advantage in the target country.
The most complex issues in international business strategies are based upon seven concepts in Verbeke´s model. These are:
1. Location Advantages
2. Non-transferable (or location-bound) firm-specific advantages (FSA)
3. Internationally transferable (or non-location-bound) firm-specific advantages (FSAs) 4. Investment in – and value creation through – recombination
5. Complementary resources of external actors 6. Bounded rationality
7. Bounded reliability
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Figure 1: The essence of international business strategyDistinct Resource Base
The first three concepts (Location advantages, Non-transferable FSA and internationally transferable FSA) reflect the distinct resource base available to the firm, which is critical to achieving success in the marketplace.
Location advantages are fundamental in two regards. First, many firms are successful because they benefit from favorable local environments, like a superior local education system, natural resources or sophisticated market characteristics. Such local attributes contribute to the development of a distinctive firm’s resource base. Second, a MNE engages only in transnational FDI when the host country offers a location advantage relative to the home country, meaning that certain foreign operations are more attractive than business activities in the home country. Thus it becomes obvious that location advantages and firm performance are closely related. An efficient and effective use of location advantages can improve existing FSA or even generate new FSA.
Bounded rationality
Bounded reliability
Location Advantages
Non- transferable FSA
Internationally transferable FSA
Complementary Resources
Stand- alone FSAs
Routines
Recombination capabilities
Host Country Home Country
Routines Stand- alone FSAs
Recombination capabilities
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The second concept deals with firm-specific advantages (FSA) that can be divided into internationally transferable (or non-location-bound) and non-transferable (or location-bound) FSAs. Home-country location bound FSA cannot be transferred abroad so that corresponding location-bound FSAs in each host-country need to be created abroad or acquired from third parties. Location-bound FSA are crucial as they may function as linking investments to match MNE’s transferable FSA with target-country specific characteristics. Verbeke classifies non- transferable or location-bound FSA into four categories:
1) Stand alone resources linked to location advantages (e.g. privileged retail locations) are immobile and therefore inherently non-transferable.
2) Other resources such as local marketing knowledge and reputational resources may not have the same value across borders.
3) Local best practices may not be considered as such abroad by a variety of stakeholders.
4) The firm´s domestic recombination capability may not be adept enough to confront the additional complexities of foreign markets
Finally, non-location-bound FSAs “do not stop creating value when transferred across borders” (Verbeke, 2009, p.14). Even though such assets are transnationally transferable, they are still negatively connotated due to the presence of generic differences between home and host countries, including cultural distance and a lack of local experimental knowledge. In order to overcome these obstacles and to create value, such assets must exhibit superior proprietary internal strengths relative to competitors, such as technological, marketing or administrative knowledge. This set of MNE internal strength is called internally transferable, or non-location-bound FSAs and can be exploited successfully across borders.
Stand-alone FSA, Routines and Recombination
Both internationally transferable and immobile FSA consist of different components. The first unit is called Stand-alone FSA and captures financial, physical und human resources.
According to Verbeke, such assets usually do not represent an important strength when faced
with competition. More important are rather the other two elements, called routines and
recombination capabilities, which are a firm’s higher-order FSA. Prahalad and Hamel (1990)
refer to those components as “core competencies” that constitute the most important source of
MNE´s success and argue that the company´s main strategy should be to build core
competencies. Such core competencies are vital for the establishment of a sustainable
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competitiveness and “result from the combination of stand-alone-resources into bundles of location-bound and non-location-bound FSA in technology, marketing and reputation, and from the capability to recombine these knowledge bundles with newly accessed resources to produce goods and services that meet stakeholders’ needs internationally” (Verbeke, 2009, p 38). Routines and recombination capabilities need to be distinguished. Routines reflect
“patterns of decisions and actions that coordinate the productive use of resources, and thereby generate value, whether domestically or internationally” (Verbeke, 2009, p.6) Routines are a higher-order FSA, because they are more complex than distinct stand-alone resources. The MNE´s highest-order FSA and the heart of international business strategy is its recombination capability which allows a firm to grow by innovation and diversification. A prerequisite for resource recombination are both entrepreneurial skills of the employees and unused resources that can be tapped. Resource recombination is both a key driver for innovations required to stay ahead of competition and a key constraint of the firm due to limited (slack) resources.
The recombination capability cannot just be transferred abroad but is also a significant instrument and a precondition to overcome differences between national and foreign environments, and thereby creates new knowledge by combining and exploiting local and foreign resource bases. Nevertheless, transnational knowledge diffusion causes difficulties due to the cultural distance and a lack of experimental knowledge. In consequence, a firm´s success abroad greatly depends on its ability to link transferable FSAs with foreign location advantages. This again shows that FSA and location advantages are related, particularly since foreign location advantages are the reasons why the MNE expanded there in the first place.
One paradox deserves an explicit note: strong routines are crucial to the MNE´s, but can sometimes impede the MNE´s recombination capability.
Complementary resources of external actors
Complementary resources of external actors represent the additional resources, provided by
external but accessible actors to the MNE, which may be necessary to fill resource gaps and
achieve success in the market-place. If the firm does not possesses sufficient FSAs internally,
complementary resources of external economic actors become crucial in order to achieve
strategic goals in the host country. External actors may then add their own complementary
resources to the foreign operation and thereby further strengthen the MNE’s position in the
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foreign market. Here again it becomes obvious that the corresponding FSA in each host country needs to be created or acquired from third parties operating in these foreign markets.
Bounded rationality and reliability
Finally, bounded rationality and reliability reflect behavioral characteristics that can impede international success. Bounded rationality reflects “scarcity of mind” and refers to information problems that managers always face when making (strategic) decisions. Two problems are relevant in this context. First, any information about the environment, especially about the future economic evolution and trends is incomplete due to the complexity and uncertainty that is characteristic to the environment. Second, even if all relevant information is accessible, senior MNE management faces a problem of processing this information and assessing its implications. These two problems are even more intense when a firm operates in multiple geographic settings, each with different characteristics and therefore different implications for international business strategy.
Bounded reliability reflects “the scarcity of effort to make good open-ended promises”.
Bounded rationality is about the imperfect assessment of a present or future state of affairs, thereby leading to incorrect beliefs; bounded reliability is about imperfect effort towards pre- specified goal achievement, thereby leading to incomplete fulfillment of promises.
2.2 How Small and Medium Firms differ – Why resources matter
According to Verbeke, the first three concepts (Location Advantages, FSAs) consist of seven components: Physical resources, financial resources, human resources, upstream knowledge, downstream knowledge, administrative knowledge and reputational resources. Those concepts reflect the distinct resource base that is available to firms and consequently embed the model into the resource-based view (RBV) of the firm.
The RBV of the firm can be ascribed to Penrose (1959). According to this theory, a firm is
seen as a collection of productive resources and capabilities that are specific to the firm rather
than to the industrial environment the firm is operating in. Such resources and capabilities are
used to generate products or services that provide value for customers. The RBV is also called
internal perspective of the firm, since it does not consider any demand-related aspects. A
central proposition is that firms are heterogeneous. Each firm possesses a unique set of
tangible and intangible resources and capabilities that are acquired, developed and expanded
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over time. A sustainable competitive advantage results from the inimitability and non- tradability of such unique sets of capabilities (Barney, 1997) and such capabilities are a key source of inter-firm performance differences (Barney, 1991). A resource has to be valuable, rare, difficult to imitate, and difficult to substitute in order to sustain advantage (Barney, 1991). Naturally, only a few resources in the firm are the basis of the firm’s advantage (Ray et al., 2004). Brand names, firm’s competencies, employee’s know-how, efficient procedures, organizational processes, customer- and supplier-relations and technological know-how are typical unique assets (Wernerfelt, 1984; Hall, 1992). According to the internal perspective of the firm, such resources are also fundamental for corporate and business strategy (Peteraf and Barney, 2003) as they constitute the possible strategies managers can perform, especially in an international setting. Foreign expansion faces greater managerial complexities and liability of foreignness which in turn demands more resources to buffer oversea-related costs and risks. To overcome such obstacles and compensate for resource-related shortages, a firm should possess certain intangible resources that competitors cannot copy or buy easily.
Therefore it is important to understand how FSA are created and where they come from.
Winter (1990) understands the development of FSA as a historical path-dependent process, which involves investments in routine-specific human and physical capital over time. But the development of capabilities and routines requires deliberate and sustained investment of financial and managerial resources. It is management’s task to identify and evaluate resources (Barney 1991), and then decide how to best utilize them (Castanias and Helfat 1991).
However, especially SME face resource constraints that limit the scope of strategic possibilities. Especially resource restraints are significant to the understanding of SME’s behavior, since a firm chooses a strategy that can better utilize the existing pool of limited resources (Madhok, 1997). Constraints that hamper internationalization as well as positive SMEs´ characteristics that facilitate transnational expansion are presented in the following section.
2.3 Negative SME Characteristics
Several SME characteristics hamper the internationalization process as the resource base
clearly differs and varies with firm size. Researchers often start with the assumption that firms
are in general willing to grow but certain factors prevent that from happening (Yli-Renko et
al., 2002). Early studies, like Van Hoom (1979) identified limited resources as an important
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factor that distinguishes the strategic behavior of small firms from that of large firms. Firm size has important implications for firms and their growth opportunities. For instance, larger companies have a greater possibility of realizing economies of scale and scope and a greater bargaining power towards clients and suppliers leading to enhanced efficiency. Company size is also vital concerning odds of firm´s survival (e.g. Shaver et al., 1997). Greater size allows for more diversification of business operations, which in turn facilitates dealing more successfully with possible market changes and high-risk situations (Fiegenbaum and Karnani, 1991). Moreover, large firm size implies the existence of slack resources that enable firms to get over the early period of its (foreign) operations, and increases again larger firms’ chances of survival. But resource shortages are a common problem for internationalizing small firms, as they have to absorb high costs of adapting products, distribution, promotion, and communications to fit different foreign markets (Carson and Gilmore 2000). Expansion requires and consumes plenty of resources, so that extra resources allow firms to operate and compete in international markets with less binding constraints. From there, an adequate level of slack resources is essential for a firm aspiring to expand abroad (Chiung-Hui Tseng et al., 2007). In particular foreign expansion requires more resources to buffer costs and risks incurred overseas based on greater managerial complexity and liability of foreignness (e.g.
Tseng et al. 2007). Measured in relative terms, any foreign market operation will require a larger proportion of resources of an SME than a large firm. In the event of failure of the particular initiative, the impact on a SME may be greater, which increases the risk levels of SMEs (Buckley, 1999; Lu & Beamish, 2001).
In the context of capital-intensive international expansions, SMEs´ financial constraints are worth mentioning. Financial resources include “access to equity and loan capital” (Verbeke, 2009, p.4) and are in general essential to multinational expansion (Doukas and Lang, 2003).
Both internal and external funds play a critical role for SMEs. Yet, small firms prefer internal
funds to external capital, since the latter is more difficult to access and causes at the same
time losing control and decision-making power. Abundant internal financial resources enable
firms to contemplate a wider range of foreign expansion possibilities resulting in a smoother
and less problematic expansion process (Mishina et al., 2004) and thereby circumvent the
problems related with external funds. But SMEs are more constrained by limited internal
funds than large firms and hence depend on access to external capital. Berger and Udell
(1998) found that small firms in both developing and developed countries have less access to
external finance which in turn constrains their operations and growth possibilities. Schiffer
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and Weder (2001) asked firms to rate inter alia financing obstacles in terms of their impact on firm’s operations and growth and showed that small firms report remarkable higher growth obstacles than medium-size or large firms. This is also due to the fact that larger firms tend to be more diversified and go bankrupt less often than smaller ones (Pettit and Singer, 1985) which again reduces credit risk. Aside from problems of getting access to external capital, such funds slow down multinational expansion since firms are bounded by capital costs and instructions from capital providers who try to keep firms away from precarious foreign operations
(Chiung-Hui Tseng et al, 2007). The accessibility to sufficient financial sources is thus either a handicap or a brake to growth (Bechetti and Trovato 2002). Therefrom it is not surprising, that small firms finance a smaller share of their investment with external finance (Beck et al., 2004b). Finally, Beck et al. (2005c) find that the higher obstacles faced by smaller firms indeed translate into slower growth. Small firms’ financing obstacles have almost twice the negative effect on annual growth compared to large firms’ financing drawbacks (Beck and Demirguc-Kunt, 2006)
In addition, international expansions require considerable human resources. Human resources include “both individuals and teams. These individuals and teams have both entrepreneurial and operational skills” (Verbeke, 2009, p.5). Intangible resources such as human capital demonstrable enhance firm performance (Amit and Schoemaker 1993). Larger firms can benefit from knowledge that exists in many locations and include the presence of other key executives with different know-how (Cross and Sproull 2004). Diverse knowledge bases are tremendously important for international expansion in order to detect opportunities for growth. But SMEs regularly do not perform global scanning and hence lack the information necessary for exploiting international business opportunities efficiently (Buckley, 1999). Qian (2002) found that this information shortage is attributable to the lack of managerial resources.
Furthermore, constraints in management time result in short-cuts in information collection and decision making with catastrophic consequences for SMEs (Buckley, 1999). In line with that, Karagozoglu and Lindell (1998) found that the lack of information, managerial expertise and competence are major difficulties faced by small firms in internationalization. Besides information shortages due to restricted management time and a limited scope of global operations, managerial expertise and competence are thus important factors (Grant, R. M., 1996) as prior (international) experience in an industry substantially improves small firms’
chances for survival, growth and profitability (e.g. Bosma et al.,2004). Finally SME’s
bounded managerial resources are further tensed as international expansion enhances the
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requirements for coordination and communication among different units of the firm located in different geographic areas (Qian, 2002).
Finally, a comprehensive knowledge about local market characteristics is compulsory in order to link firms’ ´products/services with foreign location advantages. Downstream knowledge “is critical to the interface with customers and related to marketing, sales, distribution and after- sales-service activities” (Verbeke, 2009, p.5). Marketing resources are assets used to differentiate products from competitors and to build a positive brand image (Erramilli et al., 1997), such assets include brand names, trademarks, and patents. Resource constrained SMEs tend to pursue marketing strategies that they believe will deliver the greatest benefit to the organization and thereby most effectively utilize restricted resources (Gilmore et al. 1999). A lack of marketing knowledge due to lack of experience or limited size lead to difficulties in designing marketing campaigns, conducting market research und interpreting marketing information (Raymond, Brisoux, and Azami 2001; Huang and Brown 1999). For instance, Carson and Gilmore (2000) found that SME’s marketing concepts are often based on intuition and experience and tend to be more reactive, in terms of responding to customer needs, rather than proactive. Especially replicating a firms’ marketing know-how in different environments is difficult, due to cross-country and cross-cultural differences (Erramilli et al., 1997).
Moreover, international entrepreneurial firms’ success depends largely on keeping knowledge creation in line with the dynamics of local market conditions (Knight and Cavusgil 2004) which is more sophisticated in multiple international settings. In terms of sales, smaller companies are at a disadvantage, because larger companies have a greater ability to bear competition and to keep prices above the competitive level (Fiegenbaum and Karnani 1991).
2.4 Positive SME characteristics
Small firms are also characterized by several attributes that facilitate international growth.
Almus and Nerlinger (1999) point out that small firms enjoy certain innovation advantages over their larger counterparts in international markets, including low overhead costs and flexibility. Scherer (1988) refers innovative strengths to less bureaucratic firm structures.
Especially flexibility and innovative strengths enable small firms to faster switch to new
products or enter new markets more quickly in their exports than large firms (Karagozoglu
and Lindell 1998). Especially the uniqueness, innovativeness or distinctive quality of the
(niche) product/service that SMEs typically offer (e.g. Autio et al., 2000) triggers market
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demand even in foreign countries (Oviatt & McDougall, 1994). Several studies have highlighted the importance of innovation, technological competency and quality on firm performance and international growth (e.g. Chiung-Hui Tseng et al, 2007). Innovative and high quality products/services stimulate demand beyond national boundaries and pull SMEs into foreign markets. In addition, Schumpeter (1934) argues that innovations grant firms temporary monopolies which in turn raise funds for further innovations and growth. There is an interrelationship between internal strengths, expansion and growth, since quality affects innovativeness, which in turn affects growth (Cho and Pucik, 2005).
Most literature about strategy and marketing advocates that small firms can compete effectively in niche markets. A SME can be pulled or pushed to pursue a market-seeking strategy. Small firms are sometimes stimulated and pulled into foreign markets by demand for firm products that spans international boundaries (Oviatt & McDougall, 1994). On the other hand, it may be beneficial for SMEs to push into foreign markets in order to exploit a similar market niche in different countries, leading to enhanced revenue as well as profit potentials (Luostarinen, 1979, Lu & Beamish, 2001). In addition, an early internationalization enables a SME to take advantage of a narrow window of opportunities (McNaughton, 2003) and to exploit products in international markets before competitors establish market presence (McDougall, Shane, & Oviatt, 1994). First movers have higher market-shares than followers (Kerin et al., 1992). Higher sales volumes due to an increased customer base allow SMEs to amortize R&D costs, realize economies of scale (Hout, Porter, & Rudden, 1982), increase profitability (Lu & Beamish, 2001) and thereby devote sufficient resources to sustain competitiveness (Kobrin, 1991). Finally, the boost to profitability realized by international expansion is greater on a proportional basis for SMEs than for their larger counterparts (Loth
& Parks, 2002). Moreover, national differences can also be exploited to enhance efficiency by
shifting production to locations in response to changes in wage-levels, exchange rate
variations or other trade barriers as tariffs or quotas. Strategic resource-seeking is important
with regard to knowledge and knowledge accumulation, which are central elements in
international strategies (Grant, 1996) and also constitute the basis for competitive advantages
(Martin and Salomon, 2003). By venturing abroad a SME enjoys remarkable learning
opportunities (Kostova & Roth, 2002). Knowledge can be augmented directly by accessing
foreign resources, and indirectly through the impact of the learning processes on the parent
company. Notably, the drive for innovation and the need for technology transfer pull
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particularly knowledge-intensive firms into foreign markets more rapidly than earlier (Jones, 1999).
2.5 Problem Indication
Figure 2: SME Factors influencing internationalization
According to Verbeke´s model, the major impediments to internationalization are bounded rationality and reliability. In addition, problems can result from economic, cultural, institutional and spatial distance between home and host country environments. But the simple listing of such distance-related issues does not realize the concrete problem.
Internationally transferable and immobile FSA, as central components of the model, consist of stand-alone FSAs, routines and recombination. However, stand-alone FSAs capture financial, physical und human resources and (according to the model) usually do not represent an important strength when faced with international competition. Routines and recombination capabilities are the core competences and key drivers when it comes to international competition and originate from the combination of stand-alone resources. Stand-alone FSAs are a prerequisite for recombination capabilities, but as such they are not mentioned in greater detail in Verbeke´s model. However, as mentioned in the section about SME characteristics, small firms are notably resource-constrained so that stand-alone resources significantly gain in importance when it comes to SME internationalization. Resources constitute a key constraint in the development of routines and recombination capabilities needed to overcome economic, cultural, institutional and spatial distance. This implies that a firm’s resource endowment may still constitute an additional major impediment to internationalization. Stand- alone FSA, but also related routines and recombination capabilities determine the scope of
Internationalization
Positive Factors:Uniqueness Flexibility
Innovative strengths Niche products
Negative Factors:
Bounded human resources
Limited international experience
Greater relative risk Limited financial resources
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growth and internationalization possibilities as well as the options how the FSA-transfer can be accomplished. The underestimation or non-consideration of such aspects may be the result of the theoretical framework in which Verbeke’s model is imbedded. Verbeke´s model belongs to the resource-based view (RBV) of the firm. As a result it is mainly centered around firm´s specific resources and capabilities. The RBV-typical focus on firms ‘strengths displays its major shortcoming at the same time: firm-specific weaknesses are frequently blanked out.
This point of critique becomes more profound when the model is applied to SMEs that are by its very nature more constraint than their larger counterparts (e.g. Yip, Biscarri, & Monti, 2000). As a result, the complexities of international operations are more challenging for SMEs (Craig & Douglas, 1996). For small firms internationalization is a sophisticated act, and suggests the existence of processes that distinguish them from better-resourced, larger firms (Knight & Cavusgil, 2004). The section above has shown that SMEs´ flexibility combined with their innovative strengths disburden challenges caused by limited international experience and restricted resources, but do not explain how a greater relative risk is absorbed.
This is in particular true, as expansion and growth increase a firm’s coordination demand and thus elevate requirements for strong routines in order to efficiently govern the firm. As Verbeke has already mentioned this paradox: strong routines are crucial to MNEs, but can sometimes impede the MNE’s recombination capability. Hence, SME do not simply face a higher relative investment risk, but also run the risk of impeding their flexibility and innovative strengths by the installation of strong routines necessary for governing the growth and internationalization process. Despite certain factors that attract SMEs to foreign markets, most notably their niche products, the central question how SMEs circumvent size-related problems in transferring FSA abroad remains entirely unanswered. That is why an explorative research needs to be conducted in order to detect which additional impediments to the FSA- transfer exist and how SMEs manage the international FSA- transfer. The model will subsequently be extended with new SME parameters derived from empirical insights about SME behavior.
3. Research Methodology
3.1 Conceptual Model and Research Design
In order to extend the model, it is indispensable to determine by which strengths and
weaknesses small firms are affected and in what way. In this regard, a distinction between
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size-related upsides and disadvantages is adjuvant in order to control for small firm size.
Empirical observations are planned to shed more light on the impact of firm size on the FS- transfer. In this regard typical firm size-related factors such as flexibility, innovative strengths, niche products but also limited resources and experience and a higher level of relative investment risk are of major interest.
A further differentiation between firm-specific strengths and weaknesses is instrumental in order to approach the RBV in a broader way. As most of the RBV-based models focus solely on firm-specific strengths, an extension with firm-specific weaknesses enables the investigation of the reciprocity between both parameters. The main interest is placed on the restraining impact of firm-specific weaknesses on the international deployment of FSAs. This is done for the purpose of compensating the underestimation of firm-specific weaknesses in Verbeke’s model by incorporating additional mitigating factors. Based on that, the question is approached how SMEs circumvent size-related problems in transferring FSA abroad.
Figure 3: Conceptual model
A case study is the appropriate method in this aspect since it assists in understanding the underlying action, the why and the how in a contemporary set of events over which the investigator has little or no control (Yin 2003). A case study method in this research project is justified for three reasons: (1) the aim is to explore the phenomenon since there were no earlier studies on SME’s international FSA-transfer; (2) the research questions focus on the HOW and WHY; (3) the phenomenon is contemporary. With regard to the extent to which research findings can be generalized beyond the immediate sample, external validity becomes crucial (Gill and Johnson 2005). Thus, a comparative or multiple case studies should be
SME FSA-transfer
Firm-specific strenghts Firm-specific weaknesses
Size-related advantages
Size-related disadvantages
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applied since general explanations and theory should be drawn from diverse observations in order to achieve a high level of generalizability. In particular, I have chosen a comparative case study approach because it permits the induction of richer explanations more than a single-case study approach (Yin, 2003). Data collection in a comparative case study is done for the purpose of comparing the phenomenon in a systematic way, to explore different dimensions of the research issues and aiming at generalizations. More cases allow for more replication and eventually result in a more externally valid outcome (e.g. Leonard-Barton 1990). An interview-based case study is a fitting vehicle, because this case study method provides excellent opportunities for respondents and researchers to check their understanding and keep on asking questions until they obtain sufficient answers and interpretations. As firm- specific advantages are highly delicate and sensitive phenomena, I believe that a qualitative study with intensive fieldwork is able to capture them more effectively than a survey-based study. This also explains why alternative methods like surveys and quantitative research in general are inappropriate for this research question. Concepts and variables under study are often difficult to quantify since there are too many variables to be considered and the interrelationships between the variables are quite unexplored, which makes survey methods inappropriate (Ghauri and Gronhaug 2002).
3.3 Data Set
The key objective in the selection of the case companies for this research was based on
theoretical considerations because in a case study the random selection of cases is neither
necessary nor preferable, and extreme examples are most appropriate when seeking to extend
theory (Eisenhardt 1989). In order to analyze SME’s international FSA-transfer in a
comprehensive sequence, at least one firm that is currently planning to start its initial foreign
subsidiary is needed to be included. Besides, at least one firm that has slightly exceeded SME
dimensions should also be contained. This allows to approach the problem in the preparation
stage (small firm that is currently planning to grow internationally), the realization phase
(main set) as well as from counterexample perspective to SMEs (large firm). The key criteria
used in the selection of case companies consisted of (1) fulfillment of SME definition, (2) at
least one wholly owned foreign subsidiary, (3) different industries, and (4) different target
countries. Different target countries and industries were fundamental in order to in order to
achieve a high level of generalizability and to analyze the issue in a more holistic way. As the
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FSA-transfer is a highly sensitive subject, cultural and linguistic differences are likely to occur when interviews are conducted in foreign countries. Thus, I decided to focus on German firms. Data about German SMEs with foreign subsidiaries was obtained from the German chamber of commerce and industry (Deutsche Industrie und Handelskammer).
Potential firms were approached via mails and follow-up phone calls. Thereby, the purpose of the research study was made clear. In general, the probability of getting an interview is increased when anonymity is guaranteed. Therefore, it was explicitly stated that the participating company´s name will not be mentioned or identified in the research paper.
Moreover, individual anonymity and confidentiality in terms of data processing was assured.
Unfortunately, the large majority of firms declined to participate for one of the following reason: (1) they generally do not participate in research projects, (2) due to the economic crisis , they do not have the time to participate (3) the research focus is too sensitive or (4) they were simply not interested. The final data set comprises a total of four SMEs and one larger company.
3.4 Data collection
Data is collected from personal interviews. A foregoing literature review is in particular
relevant for two reasons. First, it shows what is unknown in literature and what need to be the
focus of the study. Second, it determines what kind of questions need to be asked. The
interviews were held in person, and if additional questions occurred at a later time, these were
addressed via e-mail or telephone-based. The interviews were structured in different sections
of questions in order to gradually approach the required information. Thereby, the first section
dealt with personal information in order to figure out the interviewee´s personal and
professional background within the firm under investigation. The second part dealt with firm-
specific characteristics. This included information about firm-specific advantages, weaknesses
as well as size-related issues. The third section finally approached the internationalization
process from a wide-ranged perspective. During the interviews, I let my dialog partners talk
freely about their international expansion strategy in order to generate new, so far not
considered, aspects. Nevertheless, all interviews followed the same pattern that makes
comparisons among different enterprises possible. Before starting interviews, a pilot study
was conducted in order to identify and correct any potential problems in the questionnaire
(Gill, Johnson, 2005). Additionally, all interviews have been recorded and notes have been
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taken. Finally, the data has been augmented with accessible company documentations, websites, archives and observations.
3.5 Data Analysis
In case study research, interweaving data collection and data analysis right from the first case is the best policy (Miles and Huberman, 1994) since it reveals blind spots, new questions and deficiencies of data collected and the researcher can improve his techniques in the subsequent cases. Overall, it is important that data has to be interpreted against the background of the context in which they are produced (Hammersley and Atkinson, 1983). Hence, I tried to conduct all interviews with the founder as they are clearly the most knowledgeable sources of information about their venture creation activities (Shook et al. 2003). Theoretical propositions were constructed in three steps.
First, all interviews were transcribed, a database was compiled for each case. Second, a within-case analysis was accomplished in order to compare data across all interviews. Based on that, themes and constructs were identified (Miles & Huberman, 1994), and a cross-case analysis was conducted (Eisenhardt, 1989). Third, a comparative, iterative and interpretive approach was applied to find similarities in order to finally come up with a set of propositions. Thereby, recommendations of Yin (2003) were followed and multiple sources of evidence were used, such as company-reports, brochures, websites and interviews to allow for a well-rounded analysis. In addition, the triangulation of data was done to construct external validity. Moreover, an iterating between theory and data was employed to constructs and built the most defensible arguments (Yin, 2003).
3.6 Empirical Data Set
The complete transcripts of all conducted interviews can be found in the appendix. This
section comprises just a summary of the most important aspects. Firm-size, measured in terms
of employees and revenues for the fiscal year 2008, is listed in order to guarantee that the
sample firms meet the official SME criteria. According to the European Commission (2005),
SMEs are defined as firms with an annual turnover equal or less than 50 million euro and a
maximum of 250 employees. All firms except for firm E meet these criteria. Firm E was
deliberately incorporated in order to investigate the growth consequences from a counter
perspective and to benchmark SME internationalization behavior against a larger MNC. The
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other listed aspects include: core competences, key-success factors, weaknesses, problems and foreign penetrated countries. The number of foreign penetrated countries is displayed in order to indicate the stage of internationalization and international experience. Firm A does not have a foreign subsidiary so far but is currently planning to establish its first foreign branch. Firm A is also deliberately chosen in order to ex ante shed light on the internationalization process. Core competences and key-success factors stand for the RBV- typical firm-specific strengths. Firm-specific weaknesses and problems are fundamental characteristics for the theoretical framework´s extension.
Firm A
The interview with firm A took place on the 26th of May, 2009 from 11-1 p.m. in Konstanz, Germany. Firm A was established 1997, has currently 6 employees and generated 2 m. € revenues in the fiscal year 2008. Firm A trades with mixed herbs, thereby it functions as a connector between spice producing firms and the food industry, the exclusive consumer of such mixed herbs. My dialog partner is the founder and director of firm A, he is completely responsible and involved in the internationalization process. Before that, my interviewee was executive export manager for another spice producer. Firm A develops spice mixtures according to customer preferences, refines and improves existing products. Flat firm structures and a high-performance data processing system are the basis for quick processing of orders. Its business operations mainly concentrate on countries in the Middle East. The reasons for that are threefold. First, competition in Europe and North America is too fierce, so that small new firms face insurmountable market entry barriers. Second, market entry barriers in the Middle East are also substantial, but firm A can benefit from an abundant knowledge and experience its founder gathered in its previous professional life in circumventing such obstacles. The circumvention of such hurdles grants a quasi-monopoly. Moreover, firm A can profit in such countries from typical German virtues such as timeliness and confidentiality, which clearly distinguishes firm A from local competitors. Another advantage is the unvarying high product quality that most local rivals cannot offer.
Negatively, firm A does not have any foreign offices, inventories or laboratories. Current
customers are only served via exports. This is expensive, time-consuming and does not
facilitate an extensive customer interaction. Financial constraints hamper firm A from
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opening subsidiaries in all relevant target markets. That is why firm A is currently planning to establish a first subsidiary abroad in Dubai, which is planned function as a hub for the entire Middle East market.
Firm B
The interview with firm B was conducted on the 25th of May 2009 and took place from 11:15 till 12:15h in Rheinfelden, Germany. Firm B, is operating in the publishing and media service industry, has currently 250 employees and generated 50 Million € in the fiscal year 2008. My interviewee has been working for the company since 01.01.1999, is managing partner and one of the founders. The broad range of communication related service, ranging from creative services (media consulting, acquisition of new customers, merchandising), data services (database maintenance and pre-press services), production services (print and post-press services) as well as distribution services (logistics management) constitute a firm-specific advantage and is not offered by any other competitor in this specification. Innovative marketing methods and formats, combined with high-quality printing machineries for a sound price performance ratio, as well as an abundant network represent key success factors.
Foreign subsidiaries are located in the Switzerland, Poland and France. International subsidiaries are perceived as a measure for quality and competence in the advertising industry. Especially German high quality work combined with a sophisticated quality consciousness of the Swiss market are important marketing tools for the acquisition of new orders. But firm B suffers from limited international experience which inhibits the transnational expansion process. Limited international experience resulted in a market entry failure in Poland. Besides, firm B faces serious problems in getting access to capital markets.
The interlaced firm structure consisting of independent profit centers facilitates a high degree of control and flexibility but makes firm operations intransparent for firm outsiders.
Moreover, firm B´s core business, the printing business, is characterized by high fixed costs and a fierce industry-level competition.
Firm C
The third interview took place on the 27th on May 2009, from 10 – 11 a.m. in Wasserburg am
Inn, Germany. The firm under investigation, called firm C, is operating in the field of utility
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billing and trading with related measurement devices. Trading includes sales and leasing operations. The offered products and services also aim at more efficient utility consumption and reduction. It currently employs approximately 120 persons and generated about 8 million
€ revenues in the fiscal year 2008. My interviewee has been working for firm C since 1978 and currently functions as the chairman of the board. In this position he was totally responsible and involved in the internationalization process. The main competitors in this industry are the manufacturer of measurement devices for utility consumption. Such firms consider the production of such instruments as their core business and related services as a necessary evil. Firm C derives its strengths from an unique and broad customer service that augment the products it sells. Thereby, firm C attaches importance to customer’s individual preferences and tailors products and services according to their needs. The high service quality, combined with a frequent and personal customer interaction constitute its main success factors. Firm C also benefits from a superior electronic data processing (EDP) that allows for an efficient coordination and communication between dispersed business units. Its weaknesses primarily result from antiquated firm structures and bounded human resources that hamper growth in general and foreign expansion in particular. Problems to growth follow from financial constraints, as the acquisition of new customers is very time- and resource- intensive. Foreign subsidiaries are situated in Italy, Poland and Austria.
Firm D
The interview with firm D took place on the 29th of may 2009, from 10 until 11:30 p.m. in Huerth, Germany. The company under observation currently employs 121 members of staff.
100 employees work in the headquarter located in Huerth, Germany. The subsidiary in
Vienna has 10, the one in New York 7 and finally the branch in London 4 employees. The
total revenues in 2008 accounted for 5,5 Mio. €. The firm was established in 1999 and
provides online-feedback processes and feedback process related software. Key success
factors are an extraordinary large service team which is responsible for consulting tasks and
offers a 24h customer support. Moreover firm D can tap abundant process know-how, as it
conducts worldwide surveys for large German firms such as Deutsche Bank, Bayer AG and
Deutsche Telekom. This service know-how and method expertise is a unique selling point, as
many competitors concentrate mainly on the software and neglect related services. The
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second firm specific advantages are its special tools for online surveys, in particular its location processor that enables to precisely depict organizational structures which is elemental in terms of who gets which questionnaire and who receives which report.
Firm D. is characterized by flat hierarchies and a network structure. The employees have great degrees of freedom in their daily working atmosphere. These conditions are fundamental for an innovative and flexible enterprise. Weaknesses result from the fact that user interfaces so far only exist in German and English which hampers transnational growth. Growth provoked two additional problems: An increase in firm size reduces flexibility and resource constraints limit further growth.
Firm E
The fifth interview took place on the 29th of May, from 3. – 4.30 p.m in Aachen, Germany.
The firm under investigation, called firm E, is operating in the area of power train development, mainly on combustion engines, but also related systems, such as transmission systems, drive sections, carriages but also alternative propulsion systems. The second focus is on measurement technology in the area of automotive engineering. The total group has 1700 employees, 900 in the headquarter in Aachen and 200 in the four other German branches.
Approximately 600 employees work in foreign subsidiaries. The total revenues in the year
2008 accounted for 130 m €. Firm E was established in the year 1978, and my interviewee has
been working for it since 1990. He is department head in the field engine construction, and
responsible for the German branches in Wolfsburg and Stuttgart. Moreover, he is the
president of the subsidiary in Krakow, Poland. Foreign Subsidiaries are located in the United
States, England, Italy, France, China, Poland, and India. Firm E´s success factors are the sum
and broad range of offered services, its comprehensive international network of suppliers and
manufacturers, as well as a flat hierarchy and an international orientation of business
operations that allow to operationally hedging regional economic crises. Negatively, national
and international growth led to inertia symptoms and administrative complexity. Major
problems arise due to the fact that business operations significantly dependent on market and
short-term opportunities which complicates the pursuit of long-term strategies.
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Firm A Firm B Firm C Firm D Firm E
Number of employees 6 250 120 121 1700
Revenues 2008 2 m € 50 m € 8 m € 5,5 m € 130 m €
Industry Food industry Media service Utility billing Software industry Engineering Number of foreign
penetrated countries
0 3 3 3 7
Self perceived:
Core competence Individual and high- quality mixed herbs for food processing firms
High quality printing and related
marketing services
Utility billing;
Selling and leasing of measurement devices augmented with an unique and broad customer service
Online feedback software and related tools
Development of power trains and related systems
Key success factor Serve unattractive countries with high- quality products;
unvarying product quality;
improvement of existing products and development of new spice products; on time delivery; efficient data processing,;
confidentiality
A broad range of communication related services;
Innovative printing products, services and formats; an abundant and diverse network;
high-technology printing machines that provided a unique product quality
Quick and flexible reaction to market changes and customer needs;
high service quality;
personal and frequent interaction with customers;
superior EDP
consulting capabilities;
service know-how and method expertise; tools for online surveys;
innovative strengths
sum and broad range of services;
comprehensive international network of suppliers and manufactures;
flat hierarchy;
international orientation;
diversification to related businesses
Weaknesses No foreign subsidiary so far:
high costs of shipping, upgradable customer interaction
interlaced firm structure hampers access to capital markets, limited international experience
Manpower and
internal structures slow down growth
Software , user interface and service manuals
so far only in English or German available
inertia symptoms;
administrative complexity; rejection of small but
fascinating projects
Problems Financial
constraints
Printing industry characterized by high competition and fixed costs.
Acquisition of new customers time and resource-intensive;
financial constraints
Increase in firm size reduces flexibility;
resource constraints to firm growth
Dependence of market and short- term opportunities
Table 1: Empirical Data Set Characteristics
