The internationalization process of small service firms:

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The internationalization process of small service

firms:

The lack of explanatory power of Born- Global and Gradualist models

by

Marthe van der Molen

University of Groningen Faculty of Economics and Business

MSc Thesis IB&M

July, 2012

Name student: Marthe van der Molen

S2026791

Supervisor: Dr. I. Kalinic

Co-assessor: Dr. M.M. Wilhelm

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The internationalization process of small service

firms:

The lack of explanatory power of Born- Global and Gradualist

models

University of Groningen Faculty of Economics and Business

ABSTRACT: This MSc thesis analyzes the under-researched area of service SME

internationalization by comparing it to existing internationalization theories. Four case studies are elaborated to give an in-depth perspective on service SME internationalization. Results show that service SMEs have some unique characteristics. They show a reactive and unplanned approach towards internationalization, lacking pro-active behavior and risk taking propensity. Firms were still able to internationalize rapidly because of a global mindset and networks stemming from previous experience. Results therefore suggest a lower importance of entrepreneurial orientation and planned strategy for service SMEs and a higher importance of pre-founding experience and the use of networks, emphasizing the lack of transferability of current theories to service SMEs. Relevant implications for managers and academics and suggestions for future research are derived from these results.

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1. INTRODUCTION

Nowadays globalization reaches almost every part of the world. Not only large multinational corporations (MNCs) are involved in this process, but also many small and medium- sized enterprises (SMEs) are doing business on a global scale. In 2010, 99,8 percent of all enterprises in the European Union (EU) were SMEs (EUROSTAT, 2010). Despite the great importance of SMEs for local economies, research has been focusing mainly on MNCs and their internationalization process (Burgel & Murray, 2000; Jones, 1999). Literature on SME internationalization has mostly focused on firms from the manufacturing sector (Cardone-Riportella et al., 2003) and has left the field of small service firms largely unobserved.

In the last couple of years the service industry grew into the largest sector of the global economy in developed nations (Patterson and Cicic, 1995; Sanchez-Peinado et al., 2007; Styles et al., 2005). EUROSTAT reports that in 2010 more than half of all European SMEs were engaged in services, compared to just above 10 percent active in manufacturing. Because of the growing importance of the service industry, the internationalization process of service SMEs merits great attention and the activities and processes involving this internationalization are important to understand for both researchers and managers.

Literature on the internationalization of service MNCs argues that service firms tend to internationalize in a different way than manufacturing MNCs (Chadee & Mattson, 1998; Erramilli & Rao, 1991, 1994; Knight, 1999). The explanatory power of stage models and Born- Global theories for the internationalization of small service firms is therefore questionable (Bell et al., 2003).

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and require production and consumption at the same time (Boddewyn et al., 1986; Buckley, Pass & Prescott, 1992). Literature has therefore emphasized the necessity to investigate small service firms’ internationalization to be able to explain the internationalization behavior of these specific firms (Javalgi & Martin, 2007) and recommended while doing this not to consider services as a homogeneous group (Boojihawon, 2007; Coviello & Martin, 1999). Prior research in the manufacturing industry has shown that a founders’ level of international market knowledge and his role in networks influence the internationalization process of firms (Madsen & Servais, 1997; McDougall, Shane & Oviatt, 1994.) Moreover, existing literature is inconclusive on whether or not SMEs show pro-active internationalization behavior. Earlier research on Born- Global firms has emphasized the pro-active behavior of firms in international markets (Oviatt & McDougall, 1994, 1997), however more recent research has shown that Born- Globals have a more reactive approach in their internationalization process (Sharma & Blomstermo, 2003). Considering these contradicting findings and the lack of research on small service firms, it is important to investigate the internationalization process of service SMEs from a holistic perspective, incorporating the role of knowledge, networks and strategic orientation of firms.

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by analyzing the internationalization process of firms via the attributes of knowledge, networks and strategic focus, developing theory that is able to explain this phenomenon.

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2. LITERATURE REVIEW

Since this thesis seeks to explain the internationalization process of small service firms and to compare it to existing theory, this section starts with an overview of the existing literature on the internationalization process of MNEs and SMEs and continues with the literature in the field of (small) service firm internationalization.

2.1 Internationalization theories of the firm

Research on the internationalization of SMEs started in the 1970s with the development of gradualist models of internationalization. Johanson & Wiedersheim-Paul (1975) were the first to theorize that firms internationalize in an incremental way. Johanson & Vahlne (1977) developed this theory further introducing the Uppsala model (U-model), stating that internationalization is a function of market knowledge, commitment decisions and current activities of the firm, emphasizing the role of experiential knowledge. According to the U-model, a firm will increase its commitment to a foreign market when lower risk is perceived because of experience stemming from the firms current activities. The U-model assumes that firms internationalize in a gradual manner, because firms have a lack of resources, information or experience. Sporadically, firms can also establish strong ties through domestic activities, following clients abroad into psychic distant countries (Bell, 1995). Recently, the gradualist model is challenged by firms that internationalize quickly from start-up, leaping stages of gradual internationalization (Bell, 1995; Madsen & Servais, 1997; Oviatt & McDougall, 1994).

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significant competitive advantage from the use of resources and the sale of outputs in multiple countries” (p.49). Research showed that INVs success frequently depends on having an international vision from start-up, having an innovative product or service, a strong network and a focus on international sales growth (Oviatt & McDougall, 1994). It is argued that especially knowledge intensive firms can internationalize rapidly by using the experience and resources of network partners (Autio et al., 2000).

Between the gradual model and early internationalization literature, Bell et al. (2003) identified companies with another internationalization trajectory, that of Born-again Globals. These firms internationalize following the gradual model but then all of a sudden internationalize rapidly. Bell et al. (2003) argue that the Born-again global approach is more likely to be adopted by service-intensive firms, because of a propensity of the firms towards more costly and direct modes of investment after the firms have devoted a significant amount of time to develop a stable base for their service in the home market.

Recently research has identified different forces of influence on the internationalization process of firms. Oviatt & McDougall (2005) in their model of forces influencing internationalization speed mention several factors of possible influence. Oviatt & McDougall (2005) consider competition to be a motivating force in the internationalization process of firms, pushing firms into foreign markets to exploit their product or service. The entrepreneur is a mediating force in the model. Its perceptions determine the future direction of SME internationalization. INV entrepreneurs tend to be more innovative, pro-active, opportunity seeking (Brush, 1995; Karagozoglu & Martin, 2002; Lumpkin & Dess, 1996; Frishammar & Andersson, 2009) than gradualist entrepreneurs.

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argued that firms with previous international experience internationalize quicker than firms who do not have such experience present in their firms (Crick & Spence, 2005; Knight & Cavusgil, 1996; Sharma & Blomstermo, 2003). Also previous literature found a firms’ knowledge intensity to speed up the internationalization process (Autio et al., 2000; Bell et al., 2003, McNaughton, 2001, 2003; Oviatt & McDougall, 2005; Rennie, 1993). Moreover, network relationships are often valuable sources of information and help overcoming the so called liability of foreignness (Ghauri, Lutz & Tesfom, 2003; Johanson & Vahlne, 2009), aiding entrepreneurs to identify international opportunities and establish credibility abroad, facilitating the firms’ rapid international expansion (Coviello & Munro, 1995; Coviello, 2006; Oviatt & McDougall, 1994, 2005).

2.2 The internationalization of services

Previous research addressing services is low in comparison to research on manufacturing companies (Grönroos, 1999; Javalgi, Griffith & White, 2003; Li, 1994; Katrishen & Scordis, 1998; O’Farrell et al., 1998; Patterson & Cicic, 1995). Erramilli & Rao (1990) make the distinction between hard and soft services. According to their theory, hard services are more tangible, standardized and less customized and allow for separation of production and consumption of the service (e.g. banking, software, engineering design, R&D) and would therefore be easier to internationalize. It is argued that soft services on the other hand have a higher degree of intangibility and are more customized (e.g. management consultancy and advertising). These services require local presence in foreign markets and theoretically have a limited number of alternatives to internationalize (Majkgard & Sharma, 1998).

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higher control entry modes. Ekeledo & Sivakumar (1998) support Erramilli & Rao’s (1990) theory by proposing that foreign entry decisions for hard services do not differ significantly from manufactured goods, but that entry mode decisions do differ between hard and soft services. Erramilli (1991) investigated the impact of service firm’s international experience on the market choice and entry mode choice and found that MNCs that became more experienced also entered more distant countries. Furthermore, Erramilli (1991) found that there was a U shaped relationship between international experience and entry mode choice, meaning that experienced MNCs started to use entry modes that required less commitment. Erramilli (1991) therefore concluded that service firms did not internationalize completely following the gradual model. Others as well showed that existing theories of internationalization were not appropriate for service MNCs (Sharma & Johanson, 1987; Engwall & Wallenstal, 1988; Buckley et al. 1992). Agarwal & Ramaswami (1992), on the other hand, found that entry mode choice did not differ between manufacturing and service firms, arguing for the transferability of existing theories to services, indicating contradicting findings on the internationalization process of service MNCs.

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Vahlne, 1977). Therefore indicating the lack of explanatory power of current theories for the internationalization of small service firms. Some research has focused on the network dynamics of service firms (Boojihawon, 2007; Moen et al., 2004) and concluded that network relationships determine which entry modes are chosen and also partially which markets are entered. Furthermore, literature found managerial commitment and pro-activeness to be the most important factors influencing internationalization (Chadee & Mattson, 1998). Coviello, Ghauri & Martin (1998) found that for software firms the early focus on international markets and the commitment of the founder were very important for its success.

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3. RESEARCH FRAMEWORK

Prior research has identified a number of factors influencing the internationalization pathways of SMEs and produced models with characteristics for distinguishing these different pathways (Knight & Cavusgil, 1996; Oviatt & McDougall, 1994, 2005; Rialp, Rialp, Urbano et al., 2005. Recently, Rialp et al. (2005) developed a framework that can be used to distinguish traditional pathways from those of Born- Globals and constructed several factors to identify these two rival models of internationalization. Rialp et al. (2005) identified three levels of analysis: founder characteristics, organizational capabilities and strategic focus. These three levels of analysis are derived from previous studies on the internationalization behavior of firms and resulted in ten attributes that are associated with both paths of internationalization.

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Table 1: Research Framework: Expected patterns associated with INV/Born-global and

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4. METHOD

Given the insufficiency of previous research in investigating the internationalization process of service SMEs from a holistic perspective, the complexity of the phenomenon and the need to develop new theory to explain the internationalization of small service firms, a method is used that allows for gathering rich and extensive longitudinal data. The case based methodology is chosen for this research, since it involves a subject where previous theory is insufficient and new theory needs to be developed (Eisenhardt, 1989).

4.1 Selection criteria

For this research the Dutch market was selected, since it has a small domestic market and it is the second largest exporter in the European Union (EUROSTAT/CBS, 2009) and therefore highly dependent on international trade. These conditions allowed for observation of the phenomenon of service SME internationalization. Since this research has the aim to develop new theory and will not test theory, the sampling was theoretical (Eisenhardt & Graebner, 2007; Glaser & Straus, 1967) rather than statistical. For selection purposes the framework of Patterson & Cicic (1995) was used to select firms from different industries (see Figure 1). This ensures that results are not biased by a specific industry but represent different type of firms.

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Fig. 1: Service typology according to Patterson & Cicic (1995)

Source: Patterson & Cicic (1995)

Knowledge Intensity (KI) was used to indicate the degree to which the production of the firm’s services relied on an extensive body of complex (technological) knowledge (Starbuck, 1992; Winch & Schneider, 1993). The reasoning of Autio et al. (2000) was used to determine the knowledge intensity of the case firms. Autio et al. (2000) use three dimensions of measuring KI: 1. the reputation of a firm for technological excellence, 2. knowledge intensity as a characteristic of their business and 3. the knowledge embedded in the service. Therefore in this research firms were asked if they perceived their services to be of knowledge intensive nature and why. Answers on this question were analyzed on the overall knowledge intensity as a characteristic of the business, the reputation of the firm on technological excellence and the knowledge component in the service. In this research firms were classified as knowledge intensive when all signs were present.

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(Oviatt & McDougall, 1994), Born- Again Globals (Bell et al., 2003) and characteristics of the Gradual U- Model (Johanson & Vahlne, 1977). A description of the selected case firms can be found in Table 2.

Table 2: Description of case data

a

The names of the firms are altered for the purpose of this thesis

4.2 Data collection

The principle of triangulation was used during data collection to reach an increased level of credibility and construct validity of the research (Eisenhardt, 1989; Yin, 2003).Triangulation was guaranteed by making use of three different methods of data collection: documentation, semi-structured interviews and observation (Yin, 2009). Interviews had the preferences over survey questions, since it allowed informants to give extra information, which increased the possibility of gaining a more holistic understanding of the internationalization processes present in the small service firms.

4.2.1 Semi-structured interviews

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directors or managers. Informants were carefully selected making sure they had profound knowledge of the internationalization process of their firms. The interviews were constructed semi-structured, since the purpose was to gain insight into the internationalization behavior and motives of internationalization and it was important that the informants were not guided to giving specific answers. Informants received the case protocol in advance so they were informed on the topics under investigation. The interviews lasted 1,5 to two hours. The interviews were conducted using thematic analysis, sub-dividing the interview questions into several subjects. It contained a number of structured questions designed to gather data for classification purposes (firm size, age, %of turnover from abroad, first export markets, knowledge intensity, current markets etc.) The second part of the interview consisted of open ended questions, based on the general process of internationalization including history of the firm on foreign market selection and entry modes, founder experience, networks and general questions (for the interview protocol see appendix A). The interviews started by guaranteeing the informants’ privacy and asking permission to record the interview. All interviews were recorded and transcribed. To confirm the interviews, the informants were contacted for verifying whether all information was described rightly, this was done to avoid interviewer bias (Thomas, 2004) and to check for accuracy.

4.2.2 Documents and observations

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4.3 Data analysis

For the data analysis, data were combined from all three sources, creating single case summaries, improving the reliability and internal validity of results (Yin, 2003). Data analysis was performed in two phases: case summaries and cross case analysis. This process resulted in the identification of patterns for all cases, and the comparison of these patterns across cases (Eisenhardt, 1989). To allow for this process, data reduction techniques were used, selecting, summarizing and coding data (for coding categories see Table 3). The different subjects were analyzed for differences across cases, improving the likelihood of accurate and reliable theory (Eisenhardt, 1989). Because of the historical trait of the research all data was analyzed chronologically. Often, direct quotes from the informants were used, reflecting the internationalization pathways, motives and choices of the firms best, resulting in theory that most likely matched empirical observations. After the cross case analysis, new theory was compared with existing literature “enhancing the internal validity, generalizability and theoretical level of theory building from case study research” (Thomas, 2004, p. 223).

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5. INTERNATIONALIZATION OF SMALL SERVICE FIRMS

In this section the results of the case-based analysis are presented. The section starts with a description of the single case firms and is followed by the cross-case analysis, comparing the cases with each other and to the theoretical framework.

5.1 Within case analysis

Company #A

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Company #B

This firm has been globally active since its inception in 1992 providing engineering and design of products for luxury yachts that involve hydraulics, such as elevators and hull doors. The firm operates in a niche market, delivering their services worldwide to the larger yacht building companies. The firm internationalized via connections from previous working experience of the founder, who was working in a similar industry before. The first market of the firm was the USA. The firm uses agents situated in St Petersburg, Germany, the Middle East, and Indonesia to enter new foreign markets. Company B did not experience entry barriers and had a global focus from start up. The director mentions that there was no preference for physically close markets. The firm has been aiming to stay small, guarantying the quality it wants to deliver to clients and therefore also rejects assignment when they do not require their specific expertise or when they are perceived to be too risky. They mention that clients know they exist, because of their good reputation. With most important yacht building docks, contact already was established before founding and in the first years after founding. The company is risk averse, only does business with reliable partners and uses pre payments. The knowledge intensity in the firm is high, because every solution or design for a client requires great technical knowledge and expertise.

Company #C

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also operated internationally in their previous jobs. The clients they serve stem from contacts from these previous jobs. The company is not pro-actively searching for new clients. The director mentions new clients come to them with unsolicited orders and heard of the company via word of mouth. Besides the two subsidiaries the company has agents in the Philippines, Indonesia, China, Russia, Romania and Montenegro. They show risk-averseness in doing business, only doing business with reliable clients and establishing long-term and intense relationships with their clients.

Company #D

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5.2 The internationalization process of small service firms

Firm A and B can be characterized as Born- Global firms, both operating internationally from day one, meeting the Born- Global definition from Oviatt & McDougall (1994). Both firms internationalized via networks they acquired out of previous working experience. In addition, both firms do not show pro-activeness in developing new networks or searching for new clients and markets abroad. Interesting similarity is that both firms show risk averse behavior in their internationalization, both unwilling to take too many risks, often rejecting big international assignments. Moreover both firms did not show signs of a planned strategy, waiting for unsolicited orders and following clients abroad. Also both firms point out that they gain new clients via word of mouth because of their good reputation. The only difference between the companies is that firm A is not innovative nor provides services that are knowledge intensive. Firm B on the other side provides knowledge intensive services and is a very innovative company, providing tailored hydraulic solutions for luxury yachts.

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firms intensively used contacts from previous working experience for internationalizing to distant countries, immediately from start-up or in the case of firm C, three years after start-up. Interesting case was the internationalization of firm D, a software firm with a pro-active attitude on national level. Firm D can be characterized as a Born-Again Global, after being locally active for more than ten years it suddenly internationalized to Latvia and three years later to the USA. The company was able to internationalize quickly via its (local) network contacts and following large clients abroad. Two of the firms owners show risk averse behavior, aiming for controlled internationalization, slowing down the internationalization of the firm. The firm is therefore not pro-actively seeking for new possibilities and markets abroad. Firm D has in common with the other three firms that it is risk averse, does not have a planned strategy and exhibits a lack of pro-activeness in approaching new foreign customers and searching for new markets. In addition, similar to the other firms, firm D gains new clients via word of mouth, relying on its reputation. Moreover, similar to firm A and C, firm D follows clients abroad as main reason to internationalize, showing reactive internationalization behavior.

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early and quickly because of contacts they established in previous working experience. Firm D was the only company who did not have prior international experience, also showing the first internationalization of the firm after ten years. Therefore, according to this analysis international experience and networks stemming from this experience were a crucial factor determining the speed and scope of internationalization of the service firms under investigation and are in line with theoretical predictions stemming from Born-Global theory.

When looking at the third attribute of the research framework, managerial commitment, it can be concluded that firms A, B and C had equal levels of commitment to internationalization. Only firm D, was very committed to developing their local market share, and still is. When looking at the activeness of the firms, it can be seen that the pro-activeness to search for new clients and markets was lacking in the firms. Only firm D, was very pro-active on a national level, but did not show the same pro-active attitude on an international level. Furthermore, all of the firms were risk averse in their behavior, turning down unsolicited orders that were too big or did not require their special expertise.

The researched firms all used their networks intensively to internationalize. Firms A, B and C used their international contacts, acquired in previous international working experience. Firm D used national contacts to enter foreign markets, being an active actor in diverse national entrepreneurial networks. The from theory derived stronger use of networks by Born- Globals was therefore partially supported, although the other two firms, not qualified as Born- Globals did also intensively use their networks to internationalize and did not rely on experiential knowledge. Therefore the behavior of the firms was similar to the predictions of the Born-Global theory.

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knowledge and commitment in service firms speed up internationalization. Firm D did not have this market knowledge and showed more characteristics of the Gradual model.

In three of the four firms (B, C, D) intangible assets were present. They all possessed unique know how in software, engineering or human resources. In firm A, a Born-Global firm, these assets were not present. Which is contradicting theory on Born-Global internationalization. Also, firm D, the software firm, was not able to internationalize rapidly although it possessed unique intangible assets.

Concerning the value creation sources present in the case firms. Only firm B and D possessed value creation sources, providing leading edge technological services and being very innovative seeking for new ideas and new services. The internationalization of Born- Globals is also associated with inimitable and more sophisticated products. In this research this was not confirmed, since the most imitable service was a Born- Global firm (Firm A) and one of the most inimitable firms had a Born-again Global pathway (Firm D), focusing on the local market for the first ten years.

Two of the four firms (firm B and C) are operating in a niche market, but none of the firms show signs of a pro-active strategy. Furthermore, three of the four firms follow clients into new markets, showing signs of a reactive strategy. Therefore in terms of pro-activeness, service firms show more signs of the gradualist pathway.

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When analyzing the firms on the last attribute flexibility it can be seen that two of the four firms were very flexible (Firm B and D), being able to offer tailored solutions to the clients and rapidly responding to wishes of clients internationally. Firm A and C showed signs of limited flexibility for responding to new demand. As the Born- Global theory predicts, firms are very flexible to adapt their demand to changing circumstances or wishes of clients. In our cases, two of the firms (B and D) were flexible, including the Born-again Global, firm D. Firm A, the Born- Global was not flexible in adapting his demand. Therefore, in service firms the attribute of flexibility occurs not to be in line with theory, considering the fact that the firms under investigation exhibit characteristics that are contradicting theory.

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Table 5: Case firms compared to existing internationalization theories Company #A

Key dimension Attribute BG/INV theory Traditional/gradual model

Founder’s (and/or founding team’s) charac- teristics Managerial vision

Global vision is associated with the company at birth

Prior international experience

High degree of previous international experience of the founder

Managerial commitment

Openness from founder to early internationalization

Networking Strong use of both personal and business networks stemming from previous experience at the international level Organisational capabilities Market knowledge and market commitment

High market commitment from the beginning due to superior internationalization knowledge at inception

Intangible assets Knowledge management

unimportant Value creation

sources

Less innovative and leading edge nature of products, only customer relationship

Strategic focus Extent and scope of international strategy

A reactive international strategy, employing client following behavior and acting upon unsolicited orders Selection, orientation, and relationships with foreign customers

Strong customer orientation and close and direct client relationships

Widely defined customer base

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Company #B

Founder’s (and/or founding team’s) charac- teristics Managerial vision

Internationally oriented from start-up

Prior international experience

High degree of previous international experience

on behalf of founder in similar industry

Dedicated commitment with early internationalization

Networking Strong use of business

networks from previous experience at the international level

Organisational capabilities Market knowledge and market commitment

High from the very beginning due to superior internationalization knowledge at inception

Intangible assets Knowledge management is a critical source for international competitiveness

Value creation sources

Leading edge technology, innovativeness and quality leadership

A reactive and unplanned international strategy, awaiting unsolicited orders Selection, orientation, and relationships with foreign customers

Niche focused approach with strong customer orientation and close client relationships and contact

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Company #C

Founder’s (and/or founding team’s) charac- teristics Managerial vision International markets developed gradually after a some domestic market base Prior international

experience

High degree of previous

international experience on behalf of founding entrepreneurs both in a relevant industry

Dedicated commitment with early internationalization

Networking Strong use of business

networks from previous experience for development of international markets Organisational capabilities Market knowledge and market commitment

High from the very beginning due to superior internationalization

knowledge at inception

Intangible assets Knowledge management is

not important as a source of competitive advantage Value creation

sources

Less innovative and leading edge nature of products. Customer relationships are most important source

A more reactive international strategy, following clients abroad and reacting upon unsolicited orders Selection, orientation, and relationships with foreign customers

A niche focused approach with strong customer orientation and close and intensive contact with clients

Widely defined customer groups

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Company #D

Founder’s (and/or founding team’s) charac- teristics Managerial vision International markets to be developed gradually after a signiﬁcant domestic market base Prior international experience No degree of previous experience in international issues. Managerial commitment

General commitment with objectives and tasks but not related to internationalization, focus on developing home market.

Networking Tight network of local

business partners. Use of agents for internationalization.

Organisational capabilities

Market knowledge and market commitment

Slowly growing with accumulated domestic and foreign market knowledge Intangible assets Unique intangible assets are present

Value creation sources

High value creation through leading-edge technology products, technological innovativeness, and quality leadership

A reactive and less niche-focused international strategy. Following local clients abroad. Selection,

orientation, and relationships with foreign customers

In the hands of intermediaries (agents.)

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6. DISCUSSION

The findings from the analysis show that small service firms have strategy elements in common with both Gradualist models of internationalization and Born- Global literature. Although the previous experience of managers and the use of networks seem to overlap with Born- Global theory, the strategic focus of the firms has elements from Gradualist models, as all firms did not exhibit pro-activeness and lacked risk taking propensity. Therefore at the general level, the results from this thesis support the argument that existing theories of internationalization are unable to explain the internationalization process of small service firms. In this section the findings of the research are compared to findings from previous literature resulting in propositions considering the internationalization of small service firms.

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considered to be of less importance to the internationalization process of small service firms, since they were not present at any of the firms, but the firms were still able to internationalize in a rapid manner. Hence, it can be argued that a lack of pro-activeness and low risk-taking propensity are not obstacles to the rapid internationalization of small service firms.

Proposition 1: Entrepreneurial capabilities are less important for the internationalization process of small service firms, without these capabilities service firms are also able to internationalize quickly.

The firms under investigation exhibited client-following behavior and the use of their reputation to internationalize quickly. Therefore it could be argued that for small service firms the lack of pro-activeness and risk taking propensity can be compensated by the mechanism present in all the service firms that were investigated: the use of good reputation, reacting upon unsolicited orders.

When looking at the influence of market knowledge and knowledge from previous experience on the internationalization process of small service firms, it was found that having market knowledge present at the founders or owners resulted in faster internationalization of the firms. These findings are in line with previous theory (Oviatt & McDougall, 2005; Westhead et al., 2001). On the other hand, these results are contradicting the theory developed by Autio et al. (2000) who theorize that it is nowadays more important for firms to have the ability to learn quickly and assimilate new information than it is for firms to have pre-founding experience. Results from this analysis show that previous experience is a crucial determinant in the internationalization process of small service firms.

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knowledge intensive value creation sources were not necessarily of influence on the speed and pace of internationalization of the firms under investigation. Therefore it is proposed that pre-founding experience and knowledge stemming from this experience are more important to the rapid and early internationalization of small service firms than the knowledge intensity of the service SME, resulting in the following proposition:

Proposition 2: Pre-founding knowledge of the firm rather than knowledge intensity of the firm determines the internationalization process of small service firms.

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7. CONCLUSION

Research in the area of internationalization processes has mainly investigated large MNCs and focused on the manufacturing industry, neglecting the field of service SME internationalization. To be able to understand the processes of influence in the internationalization of service SMEs, this thesis analyzed the internationalization process of four service SMEs from different sectors and compared these to existing theories of internationalization of the firm.

Findings from this research show that service SMEs exhibit signs of both Born- Global and Gradual patterns of internationalization. It is inferred that service SMEs have some characteristics that can be depicted as unique to these type of firms. Despite of the internationalization processes (Born- Global, Traditional or Born- Again Global) of the firms, service SMEs show a reactive and unplanned approach to internationalization, lacking pro-active behavior and risk taking propensity. Firms were still able to internationalize rapidly, because of a global mindset and networks stemming from previous experience. Results therefore suggest a lower importance of entrepreneurial orientation and planned strategy for service SMEs and a higher importance of pre-founding experience and the use of networks, emphasizing the incongruence of findings with current internationalization theories.

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this research, the previous experience from managers and the networks stemming from this experience increase the speed of internationalization. Therefore when a small service firm aims to internationalize rapidly, it aids to have international experience and networks already within the firm. Therefore when lacking this experience, it is suggested to hire an international experienced manager or companion.

There are some limitations applicable to this research. Due to the qualitative nature of results, results are only theoretically generalizable to similar research settings and are not statistically significant. The narrow scope of this thesis, focusing on firms from a single country: The Netherlands, does not allow for broad generalizations to be made based on these findings. In addition, the retrospective trait of this research, relying on the informants’ memory, might have biased the results. Therefore it is suggested to perform this research in a survey setting, supporting the results gained from this case based analysis. Moreover, is it suggested to use a longitudinal perspective for future research, following companies for multiple years, eliminating the possible time perspective bias in analyzing their internationalization processes.

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APPENDIX A: Interview Protocol

(Translated from Dutch)

Introduction

This interview is conducted for the purpose of a MSc thesis research. For this research I investigate the internationalization process of various service firms. All the information gathered from the interview and document search is considered confidential. The name of the company and your name will not be used in the research or in the thesis. The interview is semi-structured, therefore we will discuss various subjects and your responses might lead us towards new subjects.

Structured general questions

1. In what year was your company established? 2. In what industry is your company active?

3. Are the services your company provides of a knowledge intensive nature? Why? 4. What is your function within the firm? Were you the founder of the firm? When did

you join the firm?

5. How many employees does your company have?

6. What is the percentage of turnover coming from abroad?

Open questions

Internationalization process

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8. Could you elaborate on the first market you entered and why?

9. When did you enter subsequent markets and what markets were these?

10. What entry mode does your company use? Does this differ per market? Did this change over time? What is the reason for using these entry modes?

11. Do you encounter barriers to internationalization? Or did you in the past? 12. How do you gather information about opportunities abroad?

13. Did you hire experienced (foreign) employees?

14. Did you hire external advice, such as governmental advice or foreign marketing advice?

15. How did these ways of acquiring knowledge on foreign markets impact your internationalization decisions?

16. Would you characterize your internationalization as a planned process? Why? Or Why not?

Entrepreneur

17. What was your experience with internationalization before you started working at the company/ when you founded the company?

18. What type of education did you follow? Did this include studying abroad? 19. What is your strategic vision for the firm?

20. How often do you look for new opportunities abroad?

21. Do you feel like your company takes a lot of risk with internationalization decisions? 22. How innovative is your company? Could you name several innovations over the

years?

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Networks

24. How would you describe your network? Is it a big network? To what degree does it include international contacts?

25. How did the network develop since founding of the firm? Did it become larger or smaller, did it stabilize?

26. How often do you get in touch with your network partners?

Concluding questions and remarks:

27. Do you have other things that you would like to discuss considering the internationalization of your firm, which were not treated yet?

28. For the validity of the research it is important that my interpretations are correct. Therefore are you willing to read the case summary, and give feedback on the way the interview was interpreted?

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APPENDIX B:

Coded case summaries

(In Dutch)

Firm #A

The company Wij zijn actief in de op en overslag van voornamelijk bevroren vis. In Noord-Nederland waren we het eerste koelvrieshuis en we zijn tot op heden nog steeds het enige. Via vrachtauto’s of schepen komen er goederen binnen, die we dan in het vrieshuis opslaan voordat ze verder vervoerd worden. Dit betreft voornamelijk bevroren vis, maar we hebben ook een andere terminal voor droge lading. We hebben geen eigen schepen, maar contracten met rederijen. Die brengen bevroren vis naar hier en nemen stukgoederen mee terug. Onze missie is: “We behoren niet tot de grootste in onze industrie, maar we willen wel tot de besten behoren”. We kunnen niet concurreren met havens zoals Rotterdam. Daarom zetten we in op klantcontact, accuraatheid en vertrouwen.

Internationalizat ion process

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wel eens bij de concurrent, hier vangen we dan signalen op van klanten die niet tevreden zijn en dan kijken we of ze misschien over kunnen nemen. Heel actief wordt er nu niet naar gezocht, omdat we het erg druk hebben, maar we proberen altijd wel signalen op te vangen.

Founder De huidige directeur was hiervoor directeur bij een ander scheepvaart bedrijf wat ook internationaal erg actief is. De oprichter van het bedrijf kwam uit een scheepvaartgezin, en heeft via familiebanden en ervaring op de internationale vaart veel internationale contacten gelegd die als basis dienen voor onze internationale activiteiten. “Ik heb zout bloed, ik kom uit een redersgezin.” Ik werkte in Engeland, waar ik de vraag kreeg om eens te kijken naar een vrieshuis voor de goederenstroom die vanuit het Midden-Oosten kwam. Rotterdam had wel vrieshuizen, maar die lagen niet aan de kust en zo was het idee geboren om zelf een vrieshuis op te richten.

Networks “Netwerk is erg belangrijk, zonder contacten ben je nergens.” Ik kende de meeste operators al vanuit mijn vorige werk. Tegenwoordig komen we via via aan nieuwe contacten. Nieuwe klanten horen dat je hier zit en dan melden zij zich zelf. We hebben nu een brede klantengroep die intact blijft. Het netwerk is op dit moment veelal internationaal, en dit is altijd zo geweest. “Als onze klanten tevreden zijn treedt er een sneeuwbaleffect op”. Dit zorgt er weer voor dat nieuwe klanten via via met ons in aanraking komen.

Entrepreneurial orientation

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Firm #B

The company Wij ontwerpen en installeren liften en andere hydraulische oplossingen voor producten op het water zoals luxe jachten. Dit varieert van voedselliftjes tot grote liften of andere hydraulische oplossingen.

“We zijn direct internationaal gegaan”. Dit komt door onze markt en klanten. Er zijn in Nederland niet veel werven die zulke grote jachten kunnen bouwen. We hebben geen vestigingen in het buitenland. Wel hebben we agenten in Rusland, Abu Dhabi, Indonesië en Duitsland, deze werken op provisiebasis. We hebben altijd zo gewerkt met agenten. “We hebben klanten over de hele wereld, onze eerste kwam uit Amerika, daarna is er geen patroon aan te wijzen, ze komen uit Australië, Indonesië, Engeland, het Midden-Oosten, Rusland, Spanje, België Griekenland.” We hebben eigenlijk nog nooit barrières ervaren in het zakendoen in en met het buitenland. “Wat ik merk is dat sommige landen veel bureaucratischer zijn, zoals Rusland met alle stempels die nodig zijn voor douane en zo. Maar dat weet je als je eraan begint en dat maakt het ook wel weer leuk” Wij gaan één keer per jaar naar een beurs toe om ons netwerk te onderhouden en mogelijke nieuwe klanten op te doen. We hebben gestaan op de Miljonair fair en een jachtshow in Monaco. Je hebt vaak hetzelfde publiek. In Nederland zijn we in de RAI geweest, hier staan we dan op de Metz. “We staan niet op iedere beurs maar proberen geregeld eentje te bezoeken.”

Founder Mijn man heeft de HTS gedaan, de richting werktuigbouwkunde. Daarna heeft hij alleen maar voor mezelf gewerkt. Via via is hij de scheepsbouw ingerold en heeft hier voor Shell in de Offshore business gewerkt. Dit is al jaren geleden. “Hij had al veel internationale contacten uit zijn vorige werkzaamheden.”

Networks Het netwerk is in de afgelopen jaren weinig meer uitgebreid. “We hebben geen intensief contact met het netwerk, zij weten ons te vinden.” “Het netwerk is voor 90% internationaal. Wij hebben bijna geen contact met Nederlandse werven.”

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Firm #C

The company Wij regelen het hele personeelsbeleid voor rederijen. Dit houdt in dat wij personeel “inkopen” in bijvoorbeeld, China, de Filippijnen en Rusland en deze plaatsen op schepen van de klant en zorgen dat het schip goed bemand is en alle documentatie geregeld is.

We zijn begonnen in 2002. In 2005 hebben wij ons daadwerkelijk gevestigd in het buitenland, nabij een belangrijke klant die zich vestigde in Duitsland. In 2010 is daar nog Odessa, Oekraïne bij gekomen. Dit zijn allemaal officiële vestigingen in het buitenland. Doormiddel van een vestiging in het buitenland hebben we onze grip op de inkoop van personeel en affiniteit met de cultuur van het land vergroot. Verder hebben we wereldwijd contacten die als agent fungeren in de Filippijnen, Indonesië, China, Rusland, Roemenië en sinds kort Montenegro. Vanuit vorige functies van mijzelf en mijn compagnon waren er al veel internationale contacten die we als basis hebben gebruikt voor onze internationaliseringbeslissingen. “Wij gaan niet naar beurzen en congressen, wij proberen via onze eigen contacten aan relevante nieuwe contacten te komen.”

Founder Ik en mijn partner waren al actief in de scheepvaart als HR manager en bedachten dat we dit ook als zelfstandige zouden kunnen doen. Zo is het bedrijf geboren. Zo hebben we ook onze contacten in de Filippijnen gekregen, waar agenten onze belangen vertegenwoordigen. Ook het kantoor in Oekraïne komt voort uit het netwerk (jaren 90) en werkervaring van mijn compagnon. “De zeevaart is een behoorlijk internationale wereld”. In mijn vorige werk had ik ook ervaring met de inkoop van personeel in Rusland en de Filippijnen.

Networks Via onze lokale contacten ontmoeten we internationale partijen. We hebben een zeer intensief contact met het netwerk, bijna dagelijks. Het netwerk is niet groot maar wel erg intensief. “Het is een klein netwerk, maar we hebben zeer intensief contact”. “Zo gaan we ieder ongeveer acht keer per jaar op zakenreis om onze partners te bezoeken of om bij nieuwe leveranciers langs te gaan”.

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Firm #D

The company Wij zijn in de creatieve industrie werkzaam. We zijn gestart als bedrijfje naast onze studie. In het begin deden we alles wat met software/hardware en internet te maken had. Tegenwoordig focussen we ons op de echte toegevoegde waarde voor bedrijven met het leveren van online software en gebruiksvriendelijke interfaces. “De klant moet wat wij maken intuïtief snappen”. “We leveren altijd meer dan de klant verwacht, dat zit in onze aard.”

“Voor ons was Amsterdam al een hele stap.” We zitten in Nederland (hoofdvestiging Sneek) en met nevenvestigingen onder, het door mij bedachte, label Fryslân House in Amsterdam, Riga (2006) en New York (2009). Dit zijn echt vernieuwende concepten. Dat zijn onze satellietkantoren waar onze agents zitten. Er zit een agent voor meerdere partijen die een stukje vooronderzoek voor ons doet. “Nederland heeft nog zoveel te bieden, het zou gekkenwerk zijn om ons op het buitenland te storten, zonder dat we hier alles benutten”. “We hebben het razend druk in Nederland”. Onze internationalisering bestaat op dit moment vooral uit grote Nederlandse klanten die internationaal ook erg actief zijn. “Wij leren door te doen, en we leren van andere bedrijven zodat we niet in dezelfde valkuilen stappen”. “Ik houd niet van vliegen, dus we gaan niet te ver weg”. Acquisitie en marktonderzoek doen de agenten ter plaatse. Het echte denkwerk en documentatie wordt in Sneek gedaan. “Dit zal ook altijd zo blijven, we zijn een bedrijf met Friese roots en het hoofdkantoor blijft in Sneek.” Pas recentelijk in 2010 en 2011 zijn we begonnen met het bezoeken van internationale beurzen om eens te kijken wat er te koop is. “Ik ben bestuurder van het platform internetbureaus Nederland, daar zitten ook grotere bureaus in die internationaal georiënteerd zijn en hier delen we veel kennis mee”. “Je wisselt hier makkelijk kennis uit, want het is directeur tegenover directeur.” “Zo leren we van andere bedrijven en stappen we niet in dezelfde valkuilen.”

Founder We zijn met drie compagnons begonnen met het bedrijf. Twee waren technisch geschoold en ik heb commerciële economie gestudeerd. Mijn twee compagnons remmen mij wel eens af. “Ik had een mega opdracht uit Amerika binnengehaald, op dat moment hadden mijn compagnons gelukkig een helder moment.” “Als er iets mis gegaan was hadden we dat niet overleeft.”

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hebben, maar wel de mooiste handel hebben”.

Wij hebben niet echt een duidelijke visie wat betreft internationalisering. Ik doe dingen omdat ik er een goed of slecht gevoel bij heb. Wel zeggen we vaak nee tegen aanbiedingen uit het buitenland, of opdrachten waar onze toegevoegde waarde niet in uitkomt. “Voor gewoon een website laten bouwen ben je bij ons aan het verkeerde adres”. “In het begin waren de kernwoorden groot en gaan en de wereld lag aan onze voeten, maar nu slaap ik er een nachtje over”. “Het lijkt dat klanten komen aanwaaien, maar het belangrijkste is dat je nee moet durven verkopen”. “We zijn erg innovatief, altijd bezig met nieuwe dingen, we organiseren pizza avonden waar we brainstormen en proberen steeds in ontwikkeling te blijven”.

The internationalization process of small service firms:

The internationalization process of small service

firms:

The lack of explanatory power of Born- Global and Gradualist models

by

Marthe van der Molen

July, 2012

The internationalization process of small service

firms:

The lack of explanatory power of Born- Global and Gradualist

models

TABLE OF CONTENTS

1.

INTRODUCTION

2.

LITERATURE REVIEW

3.

RESEARCH FRAMEWORK

4.

METHOD

5.

INTERNATIONALIZATION OF SMALL SERVICE FIRMS

6.

DISCUSSION

7.

CONCLUSION

REFERENCES

APPENDIX A: Interview Protocol

APPENDIX B:

Coded case summaries