The Internationalization Process of Knowledge-Intensive SMEs:

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The Internationalization Process of Knowledge-Intensive SMEs:

An In-depth Case Study at Bronswerk Heat Transfer B.V.

by

Wout Vrijkorte

University of Groningen

Faculty of Economics and Business

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PREFACE

This report is the result of an internship to conclude the Master Technology Management at the University of Groningen. The main research area of this thesis is the internationalization process of knowledge-intensive small and medium firms. During my internship at Bronswerk Heat Transfer Bv., I found out that internationalization is a complicated and interesting research subject. Most important, at Bronswerk I learned that the internationalization process is not always as theory describes it to be.

Not only did I learn a great deal during my internship at Bronswerk, I also had a wonderful time doing so. In this connection, I am delighted that Bronswerk has offered me the opportunity to write this Thesis. I seize this opportunity to thank everybody that helped me in finishing this Thesis. First, my gratitude goes to all the people within Bronswerk that participated in this research: ‗Mr. Schaefer, Mr. Wallet, Mr. Remmerswaal, Mr. Kruit, Mr. Mulder, Mr. van Essen, Mr. Van der Kamp, Ms. Schaefer, and Mr. Hermkes‗, without whom I would not have been able to execute this research.

In specific, I would like to thank my supervisor from the University of Groningen Dr. Maruster, for providing feedback, insights, and guiding me through the whole process of writing a Master Thesis. Finally, I would like to thank my company supervisor, Mr. Johnny Makhoul, for his continuous support, feedback and patience.

Groningen, 2011

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ABSTRACT

This thesis examines the internationalization process of knowledge-intensive SMEs. Knowledge-intensive SMEs differ from Multinational Enterprises, because of their relatively small share in the market. Besides that, they are managed by owners or part-owners in a personalized way, and a formalized management structure is not present. Only limited research is available on the internationalization of knowledge-intensive SMEs. Hence, the goal of this thesis is to gain more insight in the internationalization process of knowledge-intensive SMEs and to identify the patterns associated with it. A research framework that explains this process is proposed in this thesis. The findings are based on a case study conducted at Bronswerk Heat Transfer BV. A grounded theory approach is used to determine the applicability of this research framework for Bronswerk. Most determinants indentified in the literature review were in some degree applicable. Other determinants were not applicable, such as the threat of losing key employees associated with operating in international markets. Finally, two additional determinants are found in the case study. A bad product-market fit is identified as an important threat for the internationalization of Bronswerk. Besides that, the entry mode selection of Bronswerk was partially determined by previous experiences with the different entry-modes. All determinants that are applicable to the case of Bronswerk are presented in the modified research model on page 51.

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LIST OF ABBREVIATIONS

 EPC - Engineering, Procurement and Construction  FDI – Foreign Direct Investment

 MNE – Multinational Enterprise  M&S - Möring & Steenaart

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1. INTRODUCTION

Internationalization is often seen as an activity that is initiated by large multinational enterprises (MNE). In the scientific literature this supported by the fact that there is a large number of studies covering this area. Nowadays more and more firms are forced to expand abroad. Small and Medium firms (SMEs) in general are expected to initiate more expansion activities in the future (Lu & Beamish, 2001). SMEs differ in many ways from larger companies, not only in just their size. A difference is that they tend to interact differently with their environment, which is mainly due to their size (Shuman & Seeger, 1986). SMEs usually have a relatively small market share and they are managed by owners or part-owners in a personalized way, and not through the medium of a formalized management structure (Committee, 1971)‘. A special example is the phenomenon of born-global firms. Born-born-global firms are small firms, who see the world as their market (McKinsey, 1993). According to Cavusgil (1994) every firm can start to operate in international markets, because everybody has access to information about the export markets. Still, also firms that started by serving the domestic market are more and more considering internationalization (Lu & Beamish, 2001). SMEs play an important role in economies worldwide (Acs & Audretsch, 1990). Despite that, previous research on SME internationalization tends to ignore the international mode choice determinants of SMEs (Burgel & Murray, 2000; Zacharakis, 1997).

1.1 Knowledge-intensive SMEs

There are many sorts of SMEs, like there are many different firms in general. The focus of this thesis is on the internationalization process of knowledge-intensive SMEs. Knowledge-intensive companies, as opposed to labor-intensive or capital-intensive companies, are characterized by the following factors (Alvesson, 1993):

 Significant incidents of problem solving and non-standardized production  Creativity on the part of the practitioner and the organizational environment

 Heavy reliance on individuals and a high degree of independence on the part of practitioners  High educational levels and a high degree of professionalization on the art of most employees  Traditional concrete assets are not a central factor

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7 strategic perspective. The three perspectives are all relate to the same process, however their basis is different, as is explained in chapter 2.

1.2 Objective

The research objective consists of two parts. First the main objective is to gain more insight in the internationalization process of knowledge-intensive SMEs. Second a case study is conducted at Bronswerk Heat Transfer BV. For Bronswerk it is useful to assess its internationalization process by considering the insights obtained from the different perspectives. With this knowledge they can improve their internationalization strategy in the future. Furthermore, evaluating the identified concepts can help in creating a more structure internationalization approach. The research objective of this thesis is therefore defined as follows:

Identify the decision-making determinants that are important in the various stages in the internationalization process for a knowledge-intensive SME and assess how these are applicable to Bronswerk‟s internationalization process.

1.3 Research question

It is important to understand the relevant aspects of the internationalization process, in order to meet the research objective stated above. Therefore, this thesis answers the following research question:

What are the determinants that drive internationalization of a knowledge-intensive SME, and which determinants are applicable to Bronswerk?

The first two research sub questions are important for the literature study, in order to identify the characteristics of the internationalization process of knowledge-intensive SMEs:

1. What patterns explain the internationalization process of knowledge-intensive SMEs? 2. Which determinants influence the internationalization process of knowledge-intensive SMEs?

2a. How are company resources influencing the internationalization process of SMEs? 2b. How are transaction-costs influencing the internationalization process of

knowledge-intensive SME?

2c. How are strategic motives influencing the internationalization process for knowledge-intensive SMEs?

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1.4 Relevance

This thesis aims at contributing to scientific development in the field of knowledge-intensive SMEs, by proposing a framework for the internationalization process of knowledge-intensive SMEs. Coviello & Martin (1999) have suggested that studying SME internationalization in a comprehensive and integrative manner is appropriate. However, so far only a few researchers have tried to do so (Coviello & Martin, 1999). Most researchers studied internationalization based on one perspective (Coviello & Martin, 1999). Perspectives that are used to study internationalization are for example: the resource-perspective, the transaction-cost perspective, the strategic perspective, stage-models, and the network perspective. According to Coviello and McAuley (1999) the transaction-cost perspective, the stage models (Johanson & Vahlne, 1977), and the network perspective are complementary rather than distinct views on the internationalization process. For this study the transaction cost perspective, resource-based perspective and strategic perspective are combined, because it provides the most comprehensive overview of the internationalization process. Each of the three theoretical perspectives can partly explain the internationalization of knowledge-intensive firms SMEs. Therefore, an integrative approach is beneficial for our understanding of the complexity of the processes and issues faced by managers in knowledge-intensive SMES.

The second important challenge is that this thesis is considering knowledge-intensive firms. Contemporary research on the internationalization of knowledge-intensive SMEs appears to be also quite limited. Other determinants for internationalization than for example labor-intensive or capital-intensive firms are expected to influence internationalization. Combining determinants from SME literature, and literature on knowledge-intensive firms allows the researcher to propose a framework relevant for knowledge-intensive SMEs. An understanding of knowledge-intensive SME internationalization is of interest, because these firms differ from MNEs and traditional SMEs in their managerial style, independence, ownership, and scale/scope of operations (O'Farrell & Hitchens, 1988).

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1.5 Structure of the thesis

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2. LITERATURE REVIEW

This chapter answers the first two research sub questions presented in chapter 1. The literature review starts with an introduction on internationalization in general. Secondly, the different internationalization models are described. Thereafter, an extensive review of existing literature is used to find the determinants that drive internationalization for knowledge-intensive SMEs. Finally, a framework is proposed, introducing the determinants, deducted from the three perspectives that influence the internationalization process of knowledge-intensive SMES.

2.1 Internationalization

Internationalization is the process of increasing involvement in international markets according to Welch and Luostarinen (1988). A frequently mentioned theory in the field of internationalization is the Uppsala theory, which elaborates on the incremental character of internationalization decisions. Johanson & Vahlne (1977) state that: ‗firms typically start exporting to a country via an agent, later establish a sales subsidiary, and eventually, in some cases, begin production in the target country‘. Johanson & Vahlne (1977) did not make a distinction between MNEs and SMEs. Another important insight of the Uppsala model is that expansion to geographically closer countries is preferred, especially for SMEs (Johanson & Wiedersheim-Paul, 1975). The main reasons for this preference are the lower economic and managerial costs in those countries. That internationalization decisions have an incremental character is largely due to the lack of market information by the firms (Johanson & Wiedersheim-Paul, 1975). Besides that, researchers found that internationalization processes between firms differed, because of the differences in resources the firm possessed (Bell, McNaughton, Young, & Crick, 2003; Erramilli & D‘Souza, 1993; Lu & Beamish, 2001; Zacharakis, 1997). A specific research area is the network perspective, which elaborates on the relations that influence the firm in its internationalization (Coviello & Munro, 1995). Anderson & Gatignon (1986) state that transaction-cost influence firms in the decision they took regarding internationalization. Finally, the different choices firms make in internationalization can be explained by different strategic motivations (Rugman & Verbeke, 2003), the different sectors in which they are operating, and the different customers they are serving.

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11 2.1.1 The internationalization process divided into internationalization steps

Many researches thought of dividing up the internationalization into different conceptual steps, in order to gain a better understanding on the process. Which is illustrated in the following definition: ‗Internationalization is the result of the adoption of a range of strategies which take into account the resources and capacities of the firm as well as the opportunities and threats of the environment‘ (Galán, Galende, & González-Benito, 1999).

The first two decisions that can be distinguished in literature are: whether the firm should initiate internationalization in the first place, and a second decision related to which specific country to enter (Jaffe & Pasternak, 1994). Buckley et. al. (2004) have a slightly different perspective on the decisions in the internationalization process. He distinguishes the two steps: ‗Where should the activity be located?‘ and ‗How should it be controlled?‘ Another model which elaborates on the internationalization process is that of Root (1994). The decision making process of Root includes: ‗what internal expansion opportunities are available to us?, which international expansion opportunities would suit us best?, which country and which business form do we opt for?, what is our marketing plan?, and what control system are we using to monitor performance?‘. According to Galán & González-Benito (2001) studying the internationalization process, encompasses three basic questions: ‗why does a firm decide to initiate this process?, how (trough which form) are the international activities realized?, and where does the firm locate its foreign activities?‘. Gunhan and Arditi‘s (2005) flow chart of the International Expansion Decision Model provides the most useful and complete overview and of the internationalization process, because the others are either to simple or to extensive to apply it to knowledge-intensive SMEs. A generic model of internationalization is adopted, because it increases the chance that it can be used for knowledge-intensive SME. In total the model includes four decision steps, which are presented in Figure 1. The first step is an analysis of internal readiness of the firm, the second relates to the external readiness (including the analysis of the opportunities and threats in international markets). The third step is a country-specific analysis and the final decision is the selection of the entry-mode. One important consideration should be taken into account, namely all decision steps are not as separate as presented. The internationalization process is not completely linear and the different decisions are interconnected (Buckley & Casson, 1998; Hennart & Park, 1994).

Assessing company strengths

Assessing Opportunities and Threats in International Markets

Country Selection Decision Selection of an entry-mode

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2.2 The resource-based perspective

From the three perspectives regarding internationalization, the resource-based view is the first perspective which is discussed. This perspective focuses on the resources that are needed to engage in international expansion. For example, resources are needed for absorbing the high costs of setting up operations, and marketing of products and services in foreign countries (Agarwal & Ramaswami, 1992). The resource-based perspective also includes aspects of the network-based perspective, because these perspectives have a certain overlap. Relations and networks can be described in terms of resources that the firm has access to, however it can also be explained by the strategic perspective as a trigger to internationalize. However, in this thesis the network perspective is incorporated in the research framework, while both the resource-based perspective and the strategic perspective take the network of firm in to account. Burgel et. al. (2000) stated that using ‗resource based approaches to internationalization‘, may be a good way to combine both the Uppsala stage model and the internationalization theory, because it can link the decision to internationalize to the resources and capabilities of the firm. The resource-based perspective provides a comprehensive focus on the internationalization process and therefore it is necessary to take into account when studying the internationalization of knowledge-intensive SMEs.

2.2.1 Assessing company strengths

Internationalization is only relevant for firms that are strong enough to do operate in international markets. Therefore, firms considering internationalization should first assess their internal readiness. Expected is that the resource based perspective offers important determinants in this first internationalization step. Three determinants are described below, that influence whether the firm is ready for internationalization.

Organizational capacity

Lu & Beamish (2001) state that organizational capacity has a different role in knowledge-intensive SMEs than in large firms. In this thesis organizational capacity includes: ‗financial resources, human resources, and international experience‘, based on the fact that these constructs were found to influence knowledge-intensive SME internationalization (See Appendix 1).

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13 processes and systems for managing foreign operations (Zacharakis, 1997). International experience can provide an indication of the organizational capabilities that a firm has in undertaking internationalization activities, therefore it is also incorporated in the organizational capability determinant. The owner or entrepreneur often plays an important role in the strategic decision making of SMEs (Bell, Crick, & Young, 2004; Miesenbock, 1988) and therefore also in knowledge-intensive SMEs. For example, entrepreneurs provide tangible and intangible resources to a firm, therefore also the international experience of the entrepreneur is relevant (Aulakh & Kotabe, 1997). Besides that, the experiences, skills, and competencies of an entrepreneur are generally regarded as key factors influencing business survival and development (Storey, 1994). It is claimed that the three constructs: financial resources, human resources, and international experience are important in assessing the readiness of a knowledge-intensive SMEs

Network and relations

The dependence on customer-relationships and partners is described as the ‗network‘ determinant. Relationships between firms or individuals have been seen as determinants of internationalization, especially in research related to SMEs in the knowledge-intensive sector (Coviello, 2006; Coviello & Martin, 1999). Hakansson and Snehota (1989) suggest that the invisible assets of companies, consisting largely of knowledge, abilities, fame, and reputation, are mainly created in external relationships. These relations play a fundamental role in knowledge-intensive SMEs. This is also stated by Alvesson (1993): ‗Knowledge is maintained, developed and communicated through such interactions and the best way of indicating that a knowledge-intensive firm has knowledge to offer is to have prestigious customers or partners, well known for their knowledge‘. Several studies showed that internationalization is influenced heavily by the firm's networks of formal and informal relationships (Coviello & Martin, 1999; Welch & Welch, 1996).

Competitive advantage

The competitive advantage that knowledge-intensive SME can exploit is the third determinant influencing whether the firm is ready to initiate internationalization. A competitive advantage itself is not a resource, however it encompasses the resources and abilities required to create such an advantage. This competitive advantage can either be a cost or differentiation advantage (Grant, 1991). The constructs incorporated in this thesis for competitive advantage are: ‗specialist expertise, and reputation‘, based on the fact that these constructs are found to influence knowledge-intensive SME internationalization (See Appendix 1).

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14 personnel. For knowledge-intensive SMEs this can also be described as dependence on specialist expertise (Gunhan & Arditi, 2005). The skills and expertise required in the operations of a knowledge-intensive SME are not market-specific but generally can be transferred to many different markets (Coviello & Martin, 1999), therefore the specialist expertise should also be considered for knowledge-intensive SMEs to assess its strength to internationalize. The internationalization behavior of knowledge-intensive SMEs can also be reflected by their project-based service. In this context reputation is especially important (Coviello & Martin, 1999). Most studies indicate that a knowledge-intensive SME‘s reputation is important in its competitive advantage (Alvesson, 1993; Shapiro, Sheppard, & Cheraskin, 1992). Galán et al. (1999) found that reputation in the national market is not always considered as an important determinant by companies, on the contrary he did found high levels of relevance for reputation in his study.

2.2.2 Assessing opportunities and threats in international markets

Every internationalization process begins with the recognition that expanding internationally is necessary (Koch, 2001). This recognition is based on an analysis of the company objectives and this relates most to the strategic perspective. Therefore, only one determinant from the resource-based perspective is found as important in this internationalization step.

Loss of key employees

From the resource-based perspective an important issue for knowledge-intensive SMEs, in the context of internationalization, is the probability of losing key employees. The occurrence of knowledge loss, through key employees leaving the companies is the main disadvantage of expanding abroad (Finn & Philips, 2002; Wickert & Herschel, 2001; Wong & Radcliffe, 2000). SMEs are prone to this phenomenon, since individuals are constantly seeking better careers and job prospects, and higher salaries in larger organizations (Wong, 2005). Besides that, internationalization also encompasses the situation in which key employees are sent abroad for a long period of time, for example to set up an establishment abroad. Although the employees are still working for the same firm it may be an argument for the management to postpone the expansion plans. It appears that managers can be afraid to lose key employees with special talents and skills such as knowledge of foreign language and ability to understand different cultures, in addition to technical and managerial skills (Gunhan & Arditi, 2005).

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15 opportunities. Forrest (1990) state that despite their successful achievements in the earlier stages of the innovation process, many small technology-based companies lack the business skills and resources to commercialize these achievements. Small technology-based companies and knowledge-intensive SMEs are not similar concepts, underlined by the fact that the study of Forrest (1990) considers relatively new companies. However, it is plausible that Forrest‘s (1990) findings also apply for to a knowledge-intensive SME.

2.2.3 The country selection decision

According to Koch (2001) the country selection decision relates to the examination of the available alternatives. Depending on the amount of information available, market dynamics, urgency of the move for the company and the formalization of the process, this stage may take anything between a few weeks and several years (Koch, 2001). The competitive use of resources, and the network and relations are the two determinants in this perspective found to influence the country selection decision for knowledge-intensive SMEs.

Competitive use of resources

The competitive use of existing resources is a determinant that is introduced in the resource-based perspective. A firm possesses different resources and it is of strategic importance whether it can use those in an international context. Examples of competitive use of resources that are found to influence the country selection are for example knowledge about: the country, the suppliers, the culture, and the customers. These resources can be complementary to existing ones and permit an investing firm to efficiently exploit and enhance existing competitive advantages (Anand & Delios, 2002).

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16 and consumer (Anand & Delios, 2002). The competitive use of resources is more important for knowledge-intensive firms than for MNEs, because knowledge-intensive SMEs normally do not have the time and resources to conduct the extensive analysis most MNEs can afford. Also building a sales force system from scratch is difficult (Anand & Delios, 2002), so experience and knowledge of the country is relevant for knowledge-intensive SMEs. In which countries these resources can be effectively used therefore influences the country selection decision.

Network & relations

Network and relations are perceived to be essential in gaining a firm-specific competitive advantage (Dwyer, Schurr, & Oh, 1987; Webster, 1992). According to McDougall et. al. (1994) a network helps founders of international new ventures to identify international business opportunities. Moreover, these networks appeared to have more influence on the founders‘ country choices than the physical distances of the countries. Existing customers, suppliers, partners, or other relations may influence the firm‘s decision-makers in the country selection decision. Network & relations relates to the determinant ‗competitive use of existing resources‘, as already stated in the previous paragraph. Network and relations are often referred to as influencing the country selection decision (Zain & Imm, 2006), therefore it is considered as a separate determinant.

2.2.4 Selection of an entry-mode

The selection of the entry-mode is the fourth decision in the internationalization process. Two determinants are found in the literature, that influence the entry-mode decision, namely: organizational capability, and network & relations.

Organizational capability

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17 Network & relations

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2.3 The Transaction-cost perspective

The transactions costs are the costs of participating in a market (Anderson & Gatignon, 1986). This perspective is based on economic fundamentals and focuses on the costs incurred by making economic transactions. There are no significant determinants found influencing the firm‘s readiness, therefore paragraph 2.3 begins with the second step in the internationalization process: assessing the opportunities and threats in the international markets.

The transaction-cost theory provides insight in the opportunities in international markets for knowledge-intensive SMEs firms. Brouthers & Nakos (2004) made a distinction between general environmental uncertainties and behavioral uncertainties. This paragraph elaborates on both two determinants.

General environmental uncertainties

According to Brouthers & Nakos (2004) there are significant uncertainties associated with establishing foreign activities, related to the political climate, the economic situation and the legislation in the foreign markets. One uncertainty that is often mentioned relates to inflation and fluctuation of the currency (Gunhan & Arditi, 2005). A relatively high or sudden increase in inflation rate may threaten the business prospects of the firm, and the same goes for a sudden increase in the interest rate.

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19 Behavioral uncertainties

The sectors in which knowledge-intensive SMEs are operating are characterized by information asymmetry. Information asymmetry means that one party has more or better information than the other party. Malhotra & Hinings (2010) argue that the type of organization influences the internationalization process of the firm. Most knowledge-intensive SMEs are project-based organizations. Each type of organization reacts differently to critical elements of the internationalization process, like for example the degree of presence and physical presence requirements (Malhotra & Hinings, 2010). A larger degree of information-asymmetry reinforces the need to be physical present in the country, because the client is more included in the process, and is sometimes even indispensable (Sharma, 1997). The greater the information asymmetry between the knowledge-intensive SME and client, the more the client expects consultation and participation in the process of service creation (Coviello & Martin, 1999; Malhotra & Hinings, 2010). In that case, the client also expects handholding and continuous assurances (Malhotra & Hinings, 2010). Besides that, good relationship management is often regarded as a key source of competitive advantage (Hinings, Brown, & Greenwood, 1991). It requires a high degree of interaction, which is facilitated by being physically present at the client‘s location (Malhotra & Hinings, 2010). Concluding, the nature of the relationships between the firm and its clients influence the internationalization of the firm.

This paragraph elaborates on the ‗location factors‘ determinant derived from the transaction-cost perspective. This broad category is claimed to be relevant in the country selection decision. The location factors presented below, mainly relate to the characteristics of the specific target country, while the general environmental uncertainties presented in paragraph 2.3.1 are less country-specific.

Location Factors

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20 For example, the economic risks associated with operating in the target country with unstable economic conditions are high, and can create losses for the firm (Gunhan & Arditi, 2005).

The determinants found in the internationalization steps ‗assessing opportunities and threats in international markets‘ and ‗the country selection decision‘ are useful in explaining the internationalization behavior of knowledge-intensive SMEs. However, most studies associated with the transaction-cost perspective consider the selection of an entry-mode. This paragraph elaborates on the behavioral uncertainties related to the selection of an entry-mode.

Behavioral uncertainties

Transaction cost are regarded as an important aspect explaining the choice of entry-mode, studies have used it to explain why MNEs utilize different modes in expanding abroad (Anderson & Gatignon, 1986; Erramilli & Rao, 1993). Behavioral uncertainties are found to influence the entry selection mode of firms in general (Brouthers & Nakos, 2004). The following constructs are related to behavioral uncertainties: protection of knowledge, and cost of controlling the entry-mode.

Companies adopt a certain organizational structure when expanding abroad, based on how efficient one structure is compared with the alternative structure (Williamson, 1985). According to Brouthers & Nakos (2004) there are two entry-mode structures: a market structure (non-equity modes), and a hierarchy structure (equity modes). Knowledge-intensive SMEs may be vulnerable for opportunistic behavior, while knowledge is the key of their business (Malhotra, 2005). Hence, for knowledge-intensive SMEs it is important to protect this knowledge. Protecting a firm‘s know-how is part of the transaction-cost perspective (Anderson & Gatignon, 1986). Operating in an international context may make the firm more vulnerable to knowledge leakage. A company can protect its proprietary know-how and minimize its market transaction costs by integrating its foreign operations, and choosing for a hierarchy structure (Anderson & Gatignon, 1986).

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2.4 The strategic perspective

The third perspective is the strategic perspective. This perspective is based on the strategic behavior theory (Kogut, 1988). The strategic perspective complements the other two perspectives, while it includes the strategic motivations of knowledge-intensive SMEs. A firm's global strategy refers to the determination of how it will compete in a given business, and position itself among its competitors (Aulakh & Kotabe, 1997). The strategic perspective is interrelated with the resource-based perspective, while configurations of strategy arise as the result of inter-dependencies between activities and resources (Chetty & Campbell-Hunt, 2003).

2.4.1 Assessing company strengths

The strategic perspective offers another set of determinants that decision-maker may take into account to determine if a firm is ready to expand abroad. These determinants are for example related to the firm‘s differentiation strategy. Questions that decision-makers might ask themselves are (Porter, 1980):

 Do we have access to leading edge technology?

 Is our company offering customer value that no competitor can offer? Network & relations

'Network & Relations' is a determinant that is already described in the resource-based perspective. However, it can also be considered as a strategic determinant. Firms can enhance their competitive advantage by their network. Assessing the opportunities in the network may lead to new internationalization opportunities. Researchers argue that cross-national-border networks moderate the speed with which international entrepreneurial opportunities are exploited (Oviatt & McDougall, 2005).

Technology level

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23 internationalization decision. The technology level of a firm relate to the degree of ‗specialist knowledge‗, this determinant is described as a construct of the ‗competitive advantage‘ determinant in paragraph 2.2.1. Therefore, it can be clustered as one construct of this determinant.

SMEs strive to serve a narrow market segment more effectively than competitors competing more broadly. Niche marketing is usually the only strategy available to knowledge-intensive SMEs, because of the constraints imposed by the firms‘ size. If a firm is focusing sharply on a given niche‘s needs, the firm is able to use resources more efficiently and provide their consumers with superior value (Hannan & Freeman, 1977; Kotler, 1991). It also allows the firm to avoid direct competition with larger, broad-based competitors that tend to target mass markets (Mascarenhas, 1986). However, the particular motive to initiate internationalization may differ from time to time (Koch, 2001). For knowledge-intensive SMEs the following strategic determinants may influences the internationalization decision: the availability of new service areas, business expansion, acquiring resources, and minimizing risks.

Availability of new service areas

The availability of new service areas relate to new products or service available to the firm. Bell et al. (2004) found that new product development was an essential prerequisite to internationalization for knowledge-intensive SMEs. Bell (2004) also found that the development of ‗leading edge‘ products enabled firms to expand from its existing markets into new countries and regions and that product and process innovation provide an important stimulus to overseas expansion. These new innovations can be introduced in underdeveloped overseas markets, or give the firm the opportunity to develop markets oversea as a springboard for further development at a later date (Tatoglu, Demirbag, & Kaplan, 2003). Besides that, Bell (2004) also found that the starting point for a knowledge- intensive SMEs‘ marketing strategy is the product offering, therefore the new product development process (NPD) is critical. An important aspect for many of the knowledge-intensive firms is that the NPD is focused upon products that could be marketed internationally (Bell, 2004). The availability of new service areas fit in the strategic perspective and can be a strategic motive for knowledge-intensive SMEs to initiate internationalization.

Business expansion

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24 for business expansion do not have to be initially planned to be strategic, changes in the environment may induce the firm to initiate an expansion, for example privatization activities in emerging economies can creates new business opportunities for firms. Another example is that beneficiary international agreements provide opportunities for initiating business activities (Gunhan & Arditi, 2005). Other examples for business expansion are a growing market abroad (Cavusgil, 1984) and the opportunity to broaden the product range in target country (Cavusgil, 1984). The difference between business expansion and the availability of new service areas is the fact that the former does not include the introduction of new (innovative) products.

Acquiring resources

Acquiring resources can be a strategic motive to internationalize for knowledge-intensive SMEs. This determinant often relates to a research and design motive. However, other strategic resources can also be included. The benefits of for example innovative clusters have led affiliates of MNEs to become increasingly embedded in target country innovation systems. That is why there is a growing geographic dispersion of R&D activities. Besides that, the number of patents registered by MNEs outside their home country has also increased (Cantwell, 1989; Kuemmerle, 1999; Shan & Song, 1997). Resource-seeking or capability augmenting are important motivations for German MNEs to initiate FDI investments (Ambos, 2005). While knowledge-intensive SMEs operate often in sectors with high-technology it is claimed that acquiring resources may be strategic motive to internationalize.

Minimizing risks

Diversification is a strategy used by firms to spread their risks. According to Koch (2001) reducing risk is one reason for firms in general to internationalize. This may be useful, because operating in only one specific market may leave the firm vulnerable to fluctuations in this market. Riahi-Belkaoui (1996) found that there is a positive relationship between performance of French MNEs and the degree of diversification of these firms. SMEs have limited resources which may limited their opportunities to diversify. However, Lu and Beamish (2001) argue that growth by international diversification is an important strategic option for both small and large firms.

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25 Tapping into new and booming markets

In many cases, knowledge-intensive SMEs are forced to enter physically distant markets for strategic reasons to reach opportunities for their niche products (Bell, et al., 2003; Ojala, 2008; Ojala & Tyrväinen, 2007). Certain markets might be preferred for a knowledge-intensive SME to market its innovative products. While technology enables faster internationalization (Oviatt & McDougall, 2005), it is claimed that targeting markets that are ready for these innovations are preferred for knowledge-intensive firms. Not just knowledge-intensive SMEs are interested in markets that are ready for their innovative products, also large firms choose to expand to countries characterized by a prosperous markets.

Foreign competitors in the target country

Another issue influencing the speed of internationalization is the motivating force of competition (Oviatt & McDougall, 2005). According to Oviatt & McDougal (2005) competitors encourage or even force the internationalization of a firm. On the other hand, too much competition can also prevent them from expanding to a certain country (McDougall, et al., 1994). Many entrepreneurs are motivated to take advantage of technological opportunities in foreign countries, because they fear that competitors would respond quickly to a new product introduction. It is therefore claimed that competition can influence the country selection decision.

Prestige

Prestige is important for all sorts of firms, and is associated with track record, and brand management. Prestige can be a determinant influencing the country selection decision. There are different ways in which a firm can increase its reputation, such as: operating worldwide, or an establishment in a prestigious country. This kind of motive can influence the internationalization process. Spence & Essoussi (2010) argue that firms are influenced in their country selection by the image of prestige and high quality perpetuated by international media. Du (2003) states that certain firms adopt a strategic approach to internationalization, in which first brand names are developed with the introduction of innovative products. Then, in the second stage, export activities are initiated to gain prestige and to establish strong brand names. Furthermore, Lejpras (2009) argued that the internalization approach neglects a variety of non-transaction cost stimuli including ‗enhancing firm prestige‘, which is an important determinants of firm internationalization (Bell, et al., 2004; Erramilli & Rao, 1993).

Technologically advanced Country

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26 country is technologically advanced can be described in terms of: skilled labor, a strong technology and knowledge base, government support, and culture (Porter, 1990). R&D is the least internationalized of MNEs activities (Patel & Pavitt, 1991), however affiliates of foreign MNEs have begun to account for a considerable proportion of domestic innovative activity in a number of countries (Kumar, 2001). It is claimed that initiating internationalization to acquire strategic resources is possible strategy for knowledge-intensive SMEs. This means that, the fact whether a country is technologically advanced, may influence the country selection decision.

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2.5 The research framework

The flow chart of the international expansion decision model (Gunhan & Arditi, 2005) is used as input for the research framework, and goal of this thesis is to test the applicability for Bronswerk. The different decisions in the internationalization process are presented on the left-hand side of the figure. The different determinants related to each decision are presented on the right-hand side. The Research Framework presents the determinants for internationalization for knowledge-intensive SMEs. In Appendix 1 the extensive overview of the literature review is presented. The determinants are included in the research framework if three or more authors found a relation between the determinant and the internationalization process. See Appendix 2, to find out how the different determinants are deducted from each perspective. Furthermore, that figure also indicates which determinants are incorporated from the SME literature, and which are derived from literature that is focused on knowledge-intensive firms.

Internationalization decision process Knowledge-Intensive SMEs

Assessing Opportunities and Threats in International

Markets

§ Organizational capability

§ Network & relations

§ Competitive advantage

§ Organizational capability

§ Behavioral uncertaintIes

§ Loss of key employees

§ Behavioral uncertainties

§ General environmental uncertainties

§ Availability of new service areas

§ Business expansion

§ Acquiring resources

§ Minimizing risks

§ Competitive use of resources

§ Location factors

§ Technologically advanced country

§ Prestige

§ Tapping new and booming markets

§ Foreign competitors in the target country

Determinants

Country Selection Decision

Selection of an Entry-Mode Assessing Company

Strengths

Figure 2 Research Model

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3. METHODOLOGY

This chapter presents the research strategy used in this thesis. First, it elaborates on the characteristics of a case study. The data collection and data analysis are presented afterwards, focusing on the implications of using structured- and unstructured-interviews.

3.1 Case study

The term case study does not only relate to the methodological choice, but also to the object to be studied (Locke, 2001). According to Yin (1993), there are three types of case study research, namely: ‗exploratory, descriptive and explanatory‘. This study has an exploratory character, because a new framework is proposed and the main purpose of this paper is to test its applicability in a case study. There are different research strategies available relevant for different situations (Yin, 1993). Yin distinguishes 5 different research strategies, namely: experiment, survey, archival analysis, history, and case study. According to Yin (1993) there are three conditions that suggest when to use each strategy:

- Form of the research question

- Requires control of behavioral events - Focuses on Contemporary events

The main research question of this thesis is a ‗what‘ question, namely: What are the determinants that drive internationalization of a knowledge-intensive SMEs, and which determinants are applicable to Bronswerk? The main research question of this thesis is an exploratory one. In general, ‗what‘ questions may either be exploratory or about prevalence (Yin, 1993). With the former type of research question any of the strategies could be used, while with the latter surveys or the analysis of archival records would be favored (Yin, 1993). According to Yin a further distinction among history, case study, and experiment is the extent of the investigator‘s control over and access to actual behavioral events. A case study is the preferred research strategy for this thesis, while it is examines contemporary events. Besides that, also the behaviors in the study cannot be manipulated. Analyzing history would be preferred if there were no relevant persons alive to approach (Yin, 1993) Furthermore, an experiment would be the preferred research strategy if the researcher has control over and access to the actual behavioral events (Yin, 1993)

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Tests relevant for case studies Definition

Construct validity Establishing correct operational measures for the concepts being studied

Internal validity (for explanatory or causal studies only, and not for descriptive or exploratory studies): establishing a causal relationship, whereby certain conditions are shown to lead to other conditions, as distinguished from spurious relationship

External validity Establish the domain to which a study‘s findings can be generalized

Reliability: Demonstrating that the operations of a study- such as data collection procedures –

can be repeated, with the same results

Table 1 Different Case study tests, adopted from Yin (1993) The construct validity is especially an important test in this case study. There are two steps are included in testing the construct validity according to Yin (1993). The first step is to select the specific types of changes that are to be studied and relate them to the original objectives of the study. Furthermore, demonstrate that the selected measures of these changes do indeed reflect the specific types of changes that have been selected. The three tactics used in this thesis to meet the test of construct validity are:

1. Use multiple sources of evidence. In the data collection triangulation is used, by consulting different sources, namely: structured interviews, open interviews, documents (e.g. reports on previous expansions), archival records, and strategic plans. Based on one source it is impossible to make a statement about a determinant. Therefore, in this thesis the majority of experienced managers need to confirm or reject a pattern in order to make a proper statement about that determinant.

2. Establish a chain of evidence. In the chapter 4, the first findings will be extensively elaborated in order to create a chain of evidence.

Yin (1993) stated that the internal validity test is inapplicable to descriptive or exploratory studies. The external validity test deals with whether a study‘s findings are generalizable beyond the immediate case study. Finally, Yin (1993) identified the reliability test for case studies. The objective of this test is that a later investigator who follows the same procedure as described and conducts the same case study all over again, should arrive at the same findings and conclusion. Reliability is important to minimize errors and biases in the thesis, therefore the questions of the structured interviews are included in Appendix 4.

3.2 Data collection

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30 Round 1. Semi-Structured interviews

For the first round of the data gathering process, a structured interview is used to find out which determinants are regarded as important by the decision-makers within a knowledge-intensive SME. Five managers involved in the internationalization process are selected to rate the different determinants. The three members of the board are selected, just like the manager of strategy and business development. A former director, who is currently the manager of risk and control, is also selected. Based on preliminary interviews, these managers are selected on their experience with internationalization decisions and their involvement in the strategic decisions of the firm. A complete overview of the selected respondents is found in Appendix 3.

The main determinants and concepts are explained before the manager starts with the rating process. The decision-makers are the best judges regarding the internationalization decisions, because they are the experts in the company. Besides that, these decision-makers have taken such a strategic internationalization decisions before. A decision-maker is asked to rate a determinant based on importance. A 5-points Likert-scale is used to rank the concepts. A score of 1 represents not important and the score of 5 indicates that the determinant is considered really important by the manager. Some fake determinants, which are not found in the literature, are included in the structured interview to assess whether the right constructs are selected in the research framework. Besides that, it also shows if the respondent fully understands the questions. See Appendix 4 for the complete structured interview.

Round 2. Unstructured interviews

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31 about critical determinants for the firm. For example, reports about previous expansions can provide more insight in the determinants for knowledge-intensive SMEs. All interviews are recorded and the manuscripts are used in the data analysis process.

Respondent Function of the Respondents

Respondent O Entrepreneur and owner Bronswerk Heat Transfer

Respondent P Director of Bronswerk (2x)

Respondent Q Manager of Sales (2x)

Respondent R Manager Strategy and Business Development (2x)

Respondent S Manager Risk and Control (2x)

Respondent T Chief of Design (2x)

Respondent U Head of Marketing

Respondent V Sales engineer Middle East

Respondent W Sales Representative Abroad

Respondent X Bronswerk‘s Agent Iran

Respondent Y Bronswerk‘s Agent Oman

Respondent Z Bronswerk‘s Agent Syria

Table 2 Respondents selected for the unstructured interviews

3.3 Data Analysis

Data analysis consist of examining, categorizing, tabulating, testing, or otherwise recombining both quantitative and qualitative evidence to address the initial propositions of the study (Yin, 1993). In this study the concepts in the research framework are the implicit propositions. This paragraph elaborates on both the analysis of the structured interviews and the analysis of the unstructured interviews.

3.3.1 Analysis of the structured interviews

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32 whether the initial research framework covers the relevant determinants. However, the structured-interviews are only used to provide a first indication on the different concepts.

3.3.2 Analysis of interviews

The data analysis of the, in total 17, interviews is based on the grounded theory model of Glaser and Strauss (Glaser & Strauss, 1964), the line of investigative action moves from empirical observation to the definition of concepts. As a research approach, the set of practices that comprise the grounded theory style of research are designed to help researchers make the move from empirical observation to composing conceptual categories and to delineating the ways in which the categories relate to each other (Locke, 2001).

The four stages, which are based on the grounded research practices, defined by Locke (2001) will be used to analyze the data gathered from the interviews. The four stages are:

 Comparing incidents applicable to each category  Integrating categories and their properties  Delimiting the theory

 Writing the theory

The first step is to assign a common meaning to multiple data observations, which is captured in a conceptual category. The method of theoretical coding is used to analyze the data from the unstructured interviews. First codes are attached to the various incidents in the manuscripts, where the codes represent the researcher‘s interpretation of what is happening in that incident. The codes are assigned out of the text to discover gaps in the theory. Theoretical coding provides a different perspective on the data in relation to the findings from the structured interviews. It allows the researcher to distinguish patterns in the decisions and to make valid statements on the determinants presented in research framework. The researcher has to judge whether particular findings would be valid in other circumstances (Stuart, McCutcheon, Handfield, McLachlin, & Samson, 2002).

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4. FINDINGS

The case study, described in the previous chapter, is conducted to find which determinants are applicable to Bronswerk‘s internationalization process. This chapter will elaborate on the applicability of the research framework for Bronswerk, and is thereby answering research sub question 3. It starts with the introduction of the case. Then, the findings of the structured interviews are presented. This allows one to see just how realistic the determinants presented in the research framework are. Finally, the findings of the unstructured interviews are discussed.

4.1 Introduction of Bronswerk

Bronswerk Heat Transfer BV (Bronswerk) delivers high-quality and innovative solutions for complex heat exchange questions. Bronswerk designs and manufactures heat transfer equipments for customers worldwide. Heat transfer equipments and complete systems are produced in the manufacturing plant in Nijkerk. Bronswerk is capable of producing a wide range of heat transfer equipments with different dimensions, materials and pressures. A tailor-made solution is designed to match the demand of each customer.

Bronswerk can be classified as intensive firm, because of their emphasis on knowledge-intensive operations. It matches the 5 criteria of Alvesson et al. (1993). Bronswerk‘s operations are characterized by non-standardized production, creativity on the part of the practitioner, heavy reliance on individuals, high educational levels, and the traditional concrete assets are not a central factor. Furthermore, Bronswerk can be categorized as SME. It currently has 150 employees worldwide, most of them are located in Nijkerk. Bronswerk fits within both other requirements of the European commission, their assets on the balance sheet were in 2008 and 2009 well within the criterion of the European commission of 43 million. Furthermore, the annual profits also felt within the criterion for SMEs. The Bronswerk Group is a holding that consists out of different establishments. Bronswerk Heat Transfer BV, The Netherlands forms an integral part of the holding. Bronswerk has expressed its intention to continue to grow, even in the most diverse market situations. The mission that is conveyed is based on 5 pillars, namely: ‗continuity, flexibility, stability, quality, safety and satisfaction‘.

4.1.1 Internationalization of Bronswerk

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34 because of the price, delivery time, relations, and service level. When entering a new market Bronswerk evaluates a suitable entry-mode. Bronswerk has made complex decisions regarding their internationalization strategy in the past and is still doing so. However, a formal internationalization strategy is not present at the current time.

4.2 Findings of the structured interviews

This paragraph elaborates on the findings from the structured interviews, to see if the determinants presented in the research framework are relevant for the firm. All the figures of the structured interviews can be found in the Appendix 5. The questions in the structured interview include both the determinants from the research framework and a couple of fake constructs. The determinants included in the research framework are selected based on the number of times researched in the literature. In the structured interview some questions were asked about determinants that are not included in the research model. These fake or less relevant determinants are included in the structured interview to see if they were rated as less important by the managers.

The decision whether the firm is ready for internationalization is the first internationalization step presented in chapter 2. The determinants that have a median of 4 or higher are regarded as important in the internationalization process and are presented in Figure 3. As expected, managers have evaluated the fake determinants: physical resources, marketing expertise as less relevant. Surprisingly sufficient capabilities to deal with additional projects, and project management capabilities scored high in the structured interviews. These constructs are found in the literature, however they were not incorporated in the research model. The reason was that these concepts were only described by one Author.

Determinants scored high on: Assessing Company strengths Median

The financial resources that are necessary to initiate internationalization 4

Human resources, necessary to initiate and support the establishment 4

International experience gained by operating in an international context 4

Competitive advantage 5

Reputation & successfully completed projects in the past 5

Sufficient capabilities to deal with additional projects 4

Specialist expertise, competitive advantage of the firm to operate on the technological frontiers and niches 4 Network relationships, namely qualitative well-established and prosperous relations in the target country 5 Project management capabilities, the ability to complete projects on time, within budget and quality standards 4

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35 risks scored a median of: 2 and 3. The fake determinants: opportunities of privatization and access to market information, were both not regarded as important. The determinants that relate to threats in international markets (See: Figure 2) surprisingly all had median scores of 3 or lower, which means that they were regarded as less important by the managers. Loss of key employees and general environmental uncertainties (including currency risks, inflation risks and risk of cultural differences) are included in the research framework. In the structured interview the fake determinant ‗Potential reputation damage by operating with bad partners‘ is included. It is striking to observe that neither the two threats in the framework, nor the fake threats were regarded as important in the internationalization process.

Determinants scored high on: Opportunities in international markets Median

Internationalization improves the communication, because it enables Bronswerk to use more forms of direct communication.

4

Availability of new service areas, new types of heat equipment markets, because of technological developments. 4

Business expansion, Expanding the business‘ horizons through developing markets 4

Reduce Cultural barriers 4

Table 3 Results of structured interviews: assessing opportunities & threats in international markets

As expected, a couple of location factors scored high on importance in the structured interview. Most of the determinants that are included in the research framework were regarded as relevant in the internationalization process. Only the determinants: technologically advanced country, prestigious country, and activities of competitors in the target country seemed to be less important to the managers.

Determinants scored high on: Country selection decision Median

Competitive use of resources 4

Economic risks, unstable economic conditions in the target country that can create losses for foreign companies. 4 Political risks, unstable governments in the target country that can harm the operations of foreign companies 4 Security risks unsafe environment in the target country that can harm the operations of foreign companies 4

Unethical practices 4

Taking advantage of the profitable markets; market potential 4

Cultural barriers , impede business operations 4

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Determinants scored high on: Entry-mode selection Median

Financial resources 4

Human resources, necessary to initiate and support the establishment 4

Behavioral uncertainty that the firm experiences, for example degrees of dependency on other parties 4

Network, reliable partners can influence the organization in its decision process. 4

Table 5 Results of structured interviews: Entry-mode selection The Alpha Cronbach value is used to evaluate the internal consistency of the structured interviews. This measure is widely believed to indirectly indicate the degree to which a set of items measures a single construct. The internal consistency is important because the inter-correlations among test items are maximized when all items measure the same construct. The overall alpha is 0.871 which is high and indicates a strong internal consistency among the different determinants. However, calculating the Cronbach alpha value for each separated internationalization step makes more sense. It is found that the value for the first three internationalization steps correspond with an acceptable internal consistency. First, for the internationalization step ‗assessing the company strengths‘ a value of 0,702 was found. Then, a Cronbach alpha value of 0,783 is found for the internationalization step ‗assessing opportunities and threats‘. For the determinants related to the country selection decision a value of 0,871 was found. This means that respondents who tended to select high scores for one item also tended to select high scores for the others. A completely different value was found for the selection of entry-mode, namely -0,088. This value indicates a low internal consistency for the internationalization step ‗selection of an entry-mode‘. The explanation is that the entry-mode is not a variable that is either high or low, i.e. it is not a single one-dimensional construct. The determinants influence the selection of an entry-mode, which can either be a representation office, acquisition, or a joint venture. It is important to consider this in the discussion chapter of this thesis.

4.2.1 Conclusion structured interviews

The Internationalization Process of Knowledge-Intensive SMEs: