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Master thesis
Internationalization and Performance of SMEs: the
moderating effect of Liability of Foreignness
MSc. International Business and Management
University of Groningen
Faculty of Economics and Business
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ABSTRACT
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Table of Contents
ABSTRACT ... 2
1. Introduction ... 4
2. Theoretical background ... 7
2.1 The process of Internationalization ... 7
2.2 Internationalization of SMEs ... 10
2.3 Internationalization of SMEs and performance ... 11
2.4 Liability of Foreignness (LoF) ... 13
3. Data and method ... 20
3.1 Research setting ... 20
3.2 Data source and Sample ... 21
3.3 Variables ... 22 3.3.1 Dependent Variable ... 22 3.3.2 Independent variable ... 22 3.3.3 Moderator Variables ... 23 3.3.4 Control variables ... 25 3.4 Preliminary analysis ... 27 4. Results ... 28 4.1 Descriptive statistic ... 28 4.2 Data analysis ... 29 5. Discussion ... 33 6. Conclusions ... 39 6.1 Theoretical implications... 39 6.2 Managerial implications ... 40
6.3 Limitations and suggestions for further research ... 41
References ... 43
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1. Introduction
Small and medium enterprises (SMEs) account for 95% of companies worldwide according to the International Trade Centre (2014), and have a key role for employment, income distribution and innovation. SMEs differ from larger companies not only in terms of dimensions, but they also have different organizational structures, different responses to environment, different management practices and they are dissimilar in the way they compete with other firms (Man, Lau, & Chan, 2002). It is interesting to notice that nowadays always more companies enter into international markets, led by the need to enhance the sales and therefore their profits.Firms that internationalize want to gain advantages, for example by exploiting cost efficiencies, because of the possibility to use economies of scales due to greater volume of business (Ghoshal, 1987). Furthermore, companies that internationalize want to take advantage of countries opportunities, for example by profiting from lower tax regulation or higher demand. Finally, theycan consider also the learning opportunities that they face while entering in different countries, and sometimes they can exploit the new knowledge even in their home country (Ruigrok & Wagner, 2003).
Typically, firms that start a process of internationalization follow the Uppsala model (Johanson & Vahlne, 1977), and therefore they proceed by steps, starting from indirect methods like exporting agents and trading companies, and after accumulating knowledge, they switch to direct export methods like sale offices and overseas distributors. Also SMEs follow the Uppsala model, and start internationalizing through indirect methods, and in particular they usually enter in foreign market using exporting agents (Nooteboom, 1993).
5 by acquiring local knowledge, especially compared to large MNEs, and therefore internationalization might be risky and not so beneficial for such companies. In fact, usually SMEs do not have the capabilities to perform global scanning, and therefore are not able to exploit international opportunities (Buckley, 1989). Moreover, SMEs are usually characterized by a lack of managerial competences and expertise (Karagozoglu & Lindell, 1998). Finally, another common problem faced by SMEs during the internationalization process is the increase of complexity and communication, and usually small firms are not capable to manage these new operations as the larger firms do.
Previous researches seem to show a positive correlation between the internationalization of companies and the performance they reach (Michael Geringer, Beamish, & DaCosta, 1989), but many researches shows contrasting results. In fact, in the research of Ruigrok and Wagner (2003), is shown a U shape relationship between internationalization and performance, and again in the study of Gomes and Ramaswamy (1999) is shown an inverted U shape relationship. Finally, in the study of Collins (1990) is shown a negative relationship, and seems therefore clear that further researches need to be done. Moreover, even in researches like the one of Lu and Beamish (2001), that seems to confirm a positive effect on performance for SMEs that internationalize, it is highlighted that there can be a country specific.
6 liabilities identified in the research of Zaheer (1995), namely Spatial distance, Lack of cultural roots, Host country environment and Home country regulation, in order to test the influence of its single components.The aim of this research is to study how these liabilities affect the relationship between internationalization and performance, and it focuses on the first three LoF. In fact, this study wants to shed light on the factors that constitute liabilities that arise because of the host country, and therefore it analyses the effect that Spatial distance, Lack of cultural roots and Host country environment have on the relationship between internationalization and performance.
In this research the Flash Eurobarometer 421 (Internationalization of Small and Medium-Sized Enterprises) is used as source of data, which is based on surveys conducted on 28 European countries. Therefore, many countries are included, and the database represents a variety of different institutions and cultures (Checkel, 2005), displaying a unique scenario; thus the data are expected to be very reliable and solve the country specific bias. This research focuses on the manufacturing sector, because it is usually characterized by high export intensity, thus providing a good sample for this research.
Therefore we can formulate the research question of this study as it follows: “Does the Degree of
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2. Theoretical background
2.1 The process of Internationalization
In this section are presented the theories used in previous literature in order to explain the internationalization process of companies, in particular highlighting the reasons that push firms to enter in new international markets and the strategies used in order to accomplish this goal. Previous researches identified three main drivers that move the internationalization of companies (Kamakura, Ramón-Jerónimo, & Gravel, 2012), and these are Resource-based view (RBV), Market-Based view (MBV) and Network–based view (NBW). The RBV considers the tangible and intangible resources within the company, and argues that these can generate a competitive advantage. By resources is meant any asset, capabilities, processes information and knowledge tied semi permanently to the firm, that allows the company to improve its efficiency (Wernerfelt, 1984). The assumption of this model is that strategic resources are not homogeneously distributed among the firms, and that these resources are not perfectly mobile between firms and tend not to change over time (Barney, 1991). This view explains that the competitive advantage of a company relies in its ability to use value creating strategies, and they have a sustained competitive advantage if other companies are unable to duplicate it. According to the RBV, companies that enter in new international markets exploit their existing resources, and their entry mode depends on the nature of them. Furthermore, according to this view firms decide their internationalization process based on the type of resources required for that entry mode. Finally, it justifies non exporting companies as the ones focused on their domestic market, and not willing to use abroad their limited resources (Westhead, Wright, & Ucbasaran, 2002).
8 by competitors.
Finally, the Network-based view (NBV) argue that firm’s critical resources can be shared in interfirm relations and that the competitive advantage comes from this interfirm linkage (Dyer & Singh, 1998). According to this view internationalization of firms is due to the exploitation of opportunities that come from network of relationships with their customers, suppliers and competitors, and this network provides tangible and intangible resources that can facilitate the internationalization process(Wright, Westhead, & Ucbasaran, 2007).
The Uppsala internationalization process model has been deeply used in this field, since it explains the internationalization as an evolutionary process. In fact, companies tend to enter in new markets with ad hoc exporting, and then they strength their export commitment with intermediaries, that represent the company in the new market (Johanson & Vahlne, 1977). Usually companies intensify their effort if they find the foreign market profitable, and therefore they invest in more direct export models, building up their own sales organization, and finally manufacturing their products directly in the foreign countries. This dynamic process is based on an increased commitment until the company finds the market more and more profitable. According to this model, this step by step process lowers the risks and the failure rate of the internationalization, and it is based on knowledge and experience growth (Shaver, Mitchell, & Yeung, 1997). In fact, the market knowledge is a critical factor for the success abroad, and companies need to acquire and gather it through foreign operations, and the lack of international knowledge is considered a big obstacle in the international process (Fletcher & Harris, 2012). Finally, the Uppsala model points out that companies which internationalize tend to move first to physically and culturally close countries, and just on the later steps they expand their international presence on more physically and culturally distant countries (Johanson & Wiedersheim‐Paul, 1975).
9 new markets, even in geographically distant ones (Benito & Gripsrud, 1992), with consistent investments from the beginning of the internationalization path. Even if an incremental expansion may lower the risks, with a decrease of failure rate, this may not be the best solution for the companies and for the profitability of them (Delios & Beamish, 2001). This is explained by the need to access to important markets before the competitors, in order to gain an immediate advantage, without proceeding in a slow step by step process. In fact, the strategy not to enter in new markets in a step by step process, but with consistent investments from the beginning might lower initial performance, but in the long term it could increase the profitability (Barkema & Drogendijk, 2007). It is also challenging for companies operating abroad the need to understand the foreign culture, and the way of doing business in the new countries, in order to successfully operate there (Eriksson, Johanson, Majkgård, & Sharma, 1997). Therefore, firms need to acquire knowledge about foreign institutions, and hence laws and written rules, that are part of the formal institutions. However, what is more challenging for companies operating abroad is to acquire and understand knowledge about informal institutions, and therefore all the norms and unwritten codes of conducts incorporated in the cultures of the foreign countries (North, 1990).
10 2.2 Internationalization of SMEs
There is not a unique definition of SMEs, and different countries adopted different criteria in order to identify this categories, involving employment, sales or investments (Ayyagari, Beck, & Demirguc-Kunt, 2007). In this research is used the definition applied within the EU in order to legally define SMEs, which categorizes them as companies with less than 250 employees and a maximum turnover of 50 million euros (Drew, 2003). Within the definition of SMEs it is also possible to distinguish among micro companies, with a maximum of 10 employees and a turnover of 2 million euros; and small companies, with a maximum of 50 employees and a turnover of 10 million euros. SMEs are not just smaller version of big companies, but many differences can be found in the type of ownership, in the resources they can utilize and in the management system (Lu & Beamish, 2001).
In the last two decades global trades increased enormously, with an annual growth of 6% on average from 2007 (Kamakura et al., 2012) and SMEs have been very active. Moreover, with the changes and the reduction of barriers in the global trade, together with advances in technologies, and the reduction of transportation costs, the role played by SMEs in the international context is expected to grow (Oviatt & McDougall, 1999) Internationalization of SMEs follows a path similar, but usually not identical, compared to large companies. In fact, SMEs willing to expand their customers or to fully utilize their competencies, sooner or later will start internationalize (Zahra, Ireland, & Hitt, 2000).
11 evidences from Wright et al. (2007) show, according to the NBV, how the internationalization of SMEs can depend from activities of larger firms partner that have already established relationships in foreign markets, and that push SMEs to the internationalization.
Thus, since SMEs usually don’t have the financial capabilities to enter into new markets with consistent investment at the beginning of the internationalization process, the Uppsala model is particularly explanatory as internationalization path, and also the model itself was built upon evidences from small companies (Steen & Liesch, 2007). In fact, proceeding by steps with incremental financial commitment, and acquiring the knowledge incrementally, is less risky and cheaper for SMEs. The problem of lack of resources is not just concerning the financial ones, but it refers especially to a lack of managerial resources, because SMEs don’t have specialists for international operations and lack the coordination needed to properly organize and carry out an internationalization plan (Pangarkar, 2008). However, SMEs have also advantages from being small in entering in new markets. In fact, the possible increase of profitability may have a greater effect compared to larger companies. Furthermore, given their small size, SMEs have usually the capability to be more flexible and to be able to adapt to changes faster than bigger company (Levy & Powell, 1998), thus they can easier modify their offer and their modus operandi, in order to faster respond to market challenges.
2.3 Internationalization of SMEs and performance
The firm performance indicates to which extent tactics and strategies used by companies attain financial and other objectives. SMEs tent to start a new business with many objectives, and the most important ones are financial goals, since they are interested in gaining market shares, in enhancing sales growth and, in general, in rising their profit (Knight, 2000). Thus, firm performance is defined as the degree to which these objectives are achieved (Cavusgil & Zou, 1994).
12 in the investigation of whether there is a positive relationship between them (Glaum & Oesterle, 2007). In particular, Glaum and Oesterle (2007) suggest that given the importance of this topic, and considering the difficulties in coming up with similar results, further researches has to be done in this sense. It is possible to find in total five streams in previous researches that investigated the relationship between the degree of internationalization (DOI) and the firm performance. Specifically, this relationship was found to be positive in the research of Dhanaraj and Beamish (2003), negative in the one of Collins (1990) and has not be found any relationship in the paper of Hoskisson and Hitt (1990). Furthermore, other researches that investigated this field taking into account the learning perspective and the increment of costs found a U shape relationship (Ruigrok & Wagner, 2003). Finally, in the study of Gomes and Ramaswamy (1999) this relationship was found to have an inverted U shape relationship, with a decrease of performance due to liabilities encountered at the beginning of the internationalization process, followed by an increase of performance, and again a decrease of them because of the arising of the coordination costs.
These contrasting results and the difficulties in finding an agreement on this topic can be attributed to the different measures that has been used in operationalizing these constructs, and in particular in quantifying the internationalization and the performance of firms (Pangarkar, 2008). Moreover, detailed data about SMEs are difficult to obtain compared to larger companies (Hussinger, 2010), and many of previous researches had problems due to the poor and incomplete data used in the investigation, and this in part explains the disagreement about a unique result about the influence of internationalization on performances (Pangarkar, 2008). Finally, difficulties in coming up with similar results can be also explained by the specificity of the sectors and the countries utilized in previous researches, thus leading to a poor generalizability of the results obtained (Lu & Beamish, 2001).
13 potential customers, and, especially using export as a method to internationalize, the capital required is relatively low (Johanson & Vahlne, 1977). Furthermore, economies of scale and scope can be exploited in international markets, reducing then the production costs and the competitiveness of internationalizing firms. In addition to that, by entering into different markets can be achieved a diversification of the revenues (Ramaswamy, 1992), and thus a diversification of the risk, which could be very useful during crisis periods (Michael Geringer et al., 1989). Moreover, SMEs are characterized by higher flexibility compared to larger firms, which allows them to quickly answer to the challenges that international markets display them (Nooteboom, 1993). This positive relationship between DOI and performance is showed in most of previous researches, and most of previous results shows that, after the effective adaptation of the companies to the foreign markets, the performance grows (Ruigrok & Wagner, 2003). Therefore, in this study is expected to be found a positive relationship between the Degree of Internationalization and the firm performance, thus:
Hypothesis 1: The higher is the degree of internationalization (DOI) of SMEs, the greater will be the firm performance.
2.4 Liability of Foreignness (LoF)
14 companies that enter in new markets face problems due to a lack of knowledge of the new market. Therefore, companies that internationalize have, especially at the beginning of their international operations, higher operating expenses. Thus, companies have to send abroad firm specific advantages in order to overcome these problems and need to develop new relationships with many stakeholders like distributors, customers, suppliers and government officials (Calhoun, 2002).
The concept of LoF was first introduced by Hymer (1976) and it was described as the major costs associated with international operations of companies that emerge from the lack of knowledge about the foreign environment, and in particular derived from the different culture, different political and economic institutions, and the major costs needed in order to control and coordinate the international activities abroad. Additionally, other researches focused on the role of governmental agents in the foreign institutions that can enhance or decrease transaction costs in new markets (Calhoun, 2002). Corruption also play a role in this major costs, since it displays the quality of institutions in governmental systems, and when a company starts internationalizing in a country with a different corruption level it incurs in additional costs due to the lack of this tacit knowledge due to the corrupted institutions (Acs, Morck, Shaver, & Yeung, 1997).
15 firms incur disproportionately to domestic firms, and benefits denied to foreign firms that are enjoyed exclusively by domestic firms” (Mezias, 2002). Thus, Lof is defined as all the additional costs for the entrants in foreign markets, and these costs can be divided in the one easily quantifiable and the one that are difficult to identify and measure (Calhoun, 2002). Previous paper focused mainly on the former (Davidson & McFetridge, 1985), and the aim of this paper is to integrate results also of the more tacit part of these costs.
Previous researches clearly highlighted the negative effect that the LoF produces on the firms that internationalize, arising the costs and the expenses they have to face, and therefore decreasing their performance. Moreover, as already explained, given the limited resources SMEs are even more vulnerable to these liabilities compared to larger firms. Thus, given the major costs in which SMEs have to incur in the internationalizing process, it is expected that the LoF negatively moderates the effect that the DOI has on the performance. Thus, it is hypothesized the following:
Hypothesis 2
Liability of foreignness negatively moderates the relationship between the Degree of internationalization (DOI) and the performance of SMEs.
16 goods, for instance the limitations on high-technology sales to certain countries imposed on U.S (Zaheer, 1995). Since the focus of this study is to understand the liabilities that emerge within the host country, and not on the specific home country regulation that might constitute weaknesses for certain companies, this research focuses on the first three LoF of Zaheer, thus Spatial distance, Lack of cultural roots in the host country and Host country environment.
As previously highlighted, each of the selected LoF might constitute itself major costs for the company that decide to internationalize. Thus, in the following part it is studied the impact of each of these liabilities considered as single variables. In fact, this research is interested in understanding the effect of each of these LoF on the DOI – performance relationship, in order to understand whether they all have an impact on SMEs internationalizing. This is because, even if previous literature tents to group them into the LoF, this research aims to study the effect that Spatial Distance, Lack of Cultural roots and the Host country environment has on the main relationship of this research, enriching previous literature with a more accurate analysis.
17 internationalize, and since these are related to the internationalization process of these companies, the spatial distance is expected to negatively affect the relationship between the DOI and the performance. Thus it is hypothesized the following:
Hypothesis 3a
The spatial distance between home and host countries decreases the positive impact of DOI on Performance
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Hypothesis 3b
The lack of cultural roots in the host country decreases the positive impact of DOI on Performance
Finally, the last Liability considered in this study is the Host country environment, which includes all the costs arising from the lack of legitimacy of the firms internationalizing in the new market and the costs arising from economic nationalism, that thus obstacle the entrance in the market (Zaheer, 1995). Legitimacy is defined as the acceptance of the organization by its environment (Kostova & Zaheer, 1999), and it is thus fundamental for an effective entrance in the new market, since it may act as an entry barrier. Furthermore, legitimacy plays also an important role for the success and the survival of the company in a new market. The legitimation process might be different in each country where the company internationalize, and it depends from the institution, the regulatory issues, the company characteristics and the nature of the product (Meyer & Rowan, 1977). It is thus clear that the host country environment plays a role in the increase costs that companies face during their internationalization process while entering in new markets, therefore this last liability is expected to negatively impact the main relationship between DOI and performance, thus it is hypothesized the following:
Hypothesis 3c
19 Theoretical model Degree of Internationalization of SMEs of SMEs Liability of Foreignness : 1-Spatial distance 2- Lack of cultural roots 3- Host country environment
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3. Data and method
3.1 Research setting
The purpose of this research is to understand if the internationalization of the SMEs leads to an enhancement of their performance, since previous researches struggled with coming up with a unique result. It is here introduced the LoF as a moderator for this relationship, according to previous literature that supported the negative effect on the internationalization process (Mezias, 2002). Moreover, it is investigated if also the components of LoF that focus on the host country (Zaheer & Mosakowski, 1997), namely spatial distance, lack of cultural roots and host country environment influence this relationship, negatively affecting the main relationship between Internationalization and performance. Previous researches highlighted the negative influence of LoF on the internationalization process, but one important limitation of them lies on the quantification of LoF, since this was measured as the difference of profitability between companies in their home and host countries, and has not been proposed a more detailed measurement of these liabilities (Zaheer, 1995). Thus, thanks to the database used, in this study is introduced a more detailed measurement for the LoF based on the manager perceptions. Moreover, the use of LoF as a moderator variable is novel in this field, and this study wants to shed light on it, investigating the possible influence of LoF on the main relationship. In fact, as shown in the research of Calhonun (2002), not many studies explored deeply the determinants of LoF, and the majority of them considered it as an assumption that remains unquestioned.
21 3.2 Data source and Sample
This research is focused on European SMEs, because of the high variety of different institutions and cultures, and therefore it solves the country specific bias that previous research faced. In fact in the study of Lu and Beamish (2001), the authors focused on the Japanese SMES, and it was expressed the will to test the relationship between internationalization of SMEs and performance in different countries. Moreover, this study focuses on the European countries given the high presence of SMEs that account for the 99% of companies in Europe (Floyd & McManus, 2005), and thus this study is of great relevance in this context.
In this research are used data from the Flash Eurobarometer 421 (Internationalization of Small and Medium-Sized Enterprises), and it is based on surveys conducted in the European states. In the database are represented the following countries: Albania, Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Germany, Denmark, Estonia, Spain, Finland, France, United Kingdom, Greece, Croatia, Hungary, Ireland, Iceland, Italy, Lithuania, Luxembourg, Latvia, Republic of Moldova, Montenegro, the Former Yugoslav Republic of Macedonia, Malta, Netherlands, Poland, Portugal, Romania, Sweden, Slovenia, Slovakia and Turkey (Flash Eurobarometer 421, 2015).
This survey is conducted by the European Commission, and includes many respondents for each country (see Appendix Table A6). According to the definition of SME (Wilkinson, 1999), are captured information regarding companied with a maximum of 249 employees, and this study focus on the manufacturing sector, with many industries included.
22 on the internationalization of SMEs, but are included questions regarding general information about the companies as well.
3.3 Variables
3.3.1 Dependent Variable
Performance: There is not a unique measurement of firm performance (Park & Luo, 2001), and previous studies have used for instance Return on Assets (ROA) or Return on Sales (ROS) (Hitt, Hoskisson, & Kim, 1997). However, in this research it is used Revenue per Employee to measure firm performance, as previously done in the research of Frydman, Gray, Hessel, and Rapaczynski (1999). This measure considers the revenues and standardize them by size, dividing them by the number of employees (Byrd, Lewis, & Bryan, 2006). In order to make this measurement reliable, it's critical that, as stated by Byrd et all (2006), there is a constant return to scale from labour.
Furthermore, this measurement is applied considering companies of the same sector, thus providing a valid measurement within the considered sample, and without the bias of different performance due to different sectors. Additionally, as explained below in the controls variable section (Chapter 3.3.4), in order to have an accurate measurement of performance with this measurement, it is controlled for the industries within the manufacturing sector, in order to consider together companies producing the same goods. Specifically, in this study performance it is obtained dividing question d9a (Table A1 appendix), which capture the total turnover in 2014, by the number of employees, from question d1a (Table A2 appendix), and it is operationalized as a continuous variable.
3.3.2 Independent variable
Degree of internationalization (DOI): This variable aims to measure how much the company is
23 421 (Table A3 appendix), which ask “What percentage of your sales come from your country”, and is therefore measured as 100 minus the answer to the question, in order to obtain the percentage of sales coming from other countries. It is thus operationalized as a continuous variable.
3.3.3 Moderator Variables
Liability of foreignness
The aim of this variable is to capture to what extent companies incur in major costs due to the unfamiliarity of the host country, the transportation costs, the coordination costs, and all the expenses that the company will not face in doing business in its home country. Previous researches used different measurements in order to quantify this major expenses, and Zaheer (1995) calculated it as difference in average profit between subsidiaries of MNEs in the host and in local country. However, a weakness of the measurement of Zaheer (1995) is that the differences in profitability might be due to a series of explanation not directly related to the LoF.
24 company lacks the language skills to deal with foreign countries, 6. Your company’s products and/or services are specific to your country’s market, 7. resolving cross‐border complaints and disputes is too expensive, 8. Your company does not have specialized staff to deal with exports, 9. Identifying business partners abroad is too difficult, 10. The administrative procedures are too complicated, 11. The financial investment is too large, 12. Your company does not know where to find information about the potential market. Specifically, in order to measure the Overall LoF, have been excluded question items 8 and 11, because associated to internal liabilities of the companies internationalizing, and therefore not consistent with any of the liabilities identified by Zaheer (1995).
Hence, the 10 residual answers have been selected to compute the Overall LoF. Similar to the paper of Petersen and Pedersen (2002), the liability of foreignness is calculated as the mean of the 10 selected answers, in order to obtain a single variable to test hypothesis 2.
The components of LoF
In order to operationalize the single selected components of LoF, namely spatial distance, lack of cultural roots and host country environment, the same 10 answers of question q5a of the survey, that has been used in the previous section to calculate the Overall LoF, have been sorted according to the definitions of LoF in the study of Zaheer (1995). Thus, in this section these answers are grouped in a different way, in order to generate 3 distinct variables measuring each of the LoF. In the following paragraphs is described how these components of LoF have been created, in order to test the moderating effect of each of them on the DOI – performance relationship.
Spatial distance
25 capture this form of LoF, it is used question item q5a_1 of the database, (Table A4 appendix) which refers to the costs of transportation.
Lack of cultural roots
Again, according to the study of Zaheer (1995) the lack of cultural roots in the host country is described as the major costs arising from the unfamiliarity with the host country. Thus, in order to create this variable, are used question items q5a_2, q5a_5 q5a_6, q5a_9 and q5a_12 of the database (Table A4 appendix). Specifically, these questions deal with costs arising from unfamiliarity related to different rules, different languages, different adaptability of products sold, difficulties in finding business partners and lack of knowledge related to the new market. Thus, each of these questions is directly related to the definition of Lack of cultural roots previously proposed. Then, in order to obtain the single variable measuring the lack of cultural roots, is performed the mean of the former answers.
Host country environment
Finally, the host country environment considered as a LoF includes the major costs due to the lack of legitimacy of the firms internationalizing and the costs arising from economic nationalism (Zaheer, 1995). Again, this is computed as the mean of the items q5a_3, q5a_4, q5a_7 and q5a_10 (Table A4 appendix), that all account for the major costs paid by the internationalizing firm because of the different environment of the host country. Specifically, they refer to the unsecure payments from the host country, the difficulties in dealing with foreign taxation, difficulties in resolving cross-border complaints and complexity in dealing with administrative procedures.
3.3.4 Control variables
26 database. In fact, even if the research is based on SMEs, and thus in the research are included companies with a maximum of 250 employees, some differences may emerge. In this research it is operationalized as a continuous variable.
Moreover, it is controlled for firm age, calculated as the number of years that companies operated in the business (Zhou, Wu, & Luo, 2007a). Specifically, it is here measured as 2014 (when the survey was done) minus item d2a (Table A5 appendix) from the database, in order to obtain the years since the company was established.
Furthermore, since within the manufactory sector are represented different firms, working in different manufacturing industries, in order to guarantee a constant return from scale to labor, it is controlled for the type of industry. Specifically, this control is performed by using the NACE code of Eurostat (Table A7 appendix), which groups the manufacturing firms in subgroups (industries) within the EU (Eurostat, 2008). With the NACE code, it is possible to distinguish companies in the manufactory sector producing different goods, for instance firms producing clothes by companies fabricating electronics and so on. This control variable is necessary in this research in order to effectively apply the performance measure used in this study and previously explained. In fact, since this measurement, as already illustrated, is computed dividing the total turnover by the number of employees working in the firm (Byrd et al., 2006), the control for the type of manufacturing industry is necessary to apply this measure, in order to analyze companies manufacturing different goods. Thus it is introduced a dummy variable for the industries within the manufacturing sector. Specifically, similarly to the study of Deloof and Jegers (1996), the 4 digits of the NACE code are used as dummy variables.
27 variable.
3.4 Preliminary analysis
In this research are tested the conditions that have to be examined in doing a linear regression analysis. In particular, the main relationship has to be linear, with data normally distributed, and there shouldn’t be multicollinearity and heteroscedasticity.
First, the linearity between the dependent and independent variable is tested with the creation of a scatterplot, that confirm the linear relationship in the regression.
According to Ghasemi and Zahediasl (2012), by applying the central limit theorem in a large sample of data the normal distribution of them can be ignored, thus since the database used in this research account for more than one thousand different firms, the normality of the distribution is not considered. It is then tested the absence of multicollinearity, that would indicate a high correlation of the independent variables, that could thus change the results (Farrar & Glauber, 1967). First of all, it is performed the Pearson correlation test, and then in order to check for multicollinearity it is calculated the Variance Inflation Factor (VIF). The results provide VIF values < 10, thus according to (Graham, 2003) the variables of this study don’t display multicollinearity.
Finally, in order to test for the presence of heteroscedasticity it is used the Breusch-Pagan test, which shows the presence of heteroscedasticity. Thus, since standard error would be biased, and it assumes that errors are both independent and identically distributed, it is used robustness standard error, that does not change the coefficients, but provide a more accurate p value.
Table Variance Inflaction Factor (VIF)
Variable VIF 1/VIF size 1.51 0.662725
age 1.56 0.640397
DOI 1.61 0.622094
28 Pearson correlation Matrix
1 2 3 4 5 6 7 8 --- 1- Performance 1 2- DOI 0.0827** 1 3 - LOFOverall -0.0637* -0.131*** 1 4 – LOFspatiald -0.0673* -0.0368 0.580*** 1 5 - LOFculturaldie -0.0631* -0.193*** 0.873*** 0.351*** 1 6 - LOFhostcountry -0.0352 -0.0504 0.873*** 0.417*** 0.574*** 1 7 - Age 0.0469 -0.0635* 0.0100 0.0407 -0.0159 0.0214 1 8 - Size -0.168*** 0.208*** -0.00762 0.0594* -0.0777** 0.0402 0.189*** 1 --- --- * p<0.05, ** p<0.01, *** p<0.001
4. Results
In this section are first presented the descriptive statistics of the variables used, together with the correlations between the variables. Then the results of the regressions are shown.
4.1 Descriptive statistic
The descriptive statistics is used to present an overview of the variables utilized in this research, in particular are displayed number of observations, the mean, the standard deviation and the minimum and maximum values for each of the considered variables. As it is possible to notice from Table 1, the number of observations changes for each variable, given the missing data from many companies in the database, with a maximum of 1824 to a minimum of 1240 observations.
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Table 1 – Descriptive statistics
Variable Obs Mean Std. Dev. Min Max
RevenuePerEmployee 1,824 251317.8 671437 0 1.30e+07 LOFOverall 1,330 1.601085 .4443651 1 3 LOFSpatialDistance 1,293 1.865429 .8008242 1 3 LOFCultural 1,329 1.50933 .4540286 1 3 LOFHostCountry 1,327 1.653667 .5704822 1 3 DOI 1,240 42.45161 34.50303 0 100 age 1,786 27.1355 24.6745 0 214 Size 1,824 42.73629 47.85616 1 249
The DOI has a mean of 42.4%, which shows that the percentage of total sales coming from international markets, showing thus that the majority of companies in the sample are mostly selling in their home country. Moreover, the average age of companies in the sample is of 27 years, and even if the maximum is quite high, with a remarkable maximum value of 214 years old, it seems in line with the expectations. Finally, the average size of companies in the sample is of 42 employees, thus the sample represent mostly small companies (Drew, 2003).
4.2 Data analysis
30 of the sample), and it has been generated a dummy for each country, in order to control if the country of origin might explain differences in performance. However, in the table the results of each dummy variable are not shown, in order to easily read the table, similarly to most of researches that include country dummies (Minbaeva, Pedersen, Björkman, Fey, & Park, 2003). Similarly, the results of the industry dummies by using the NACE code, in order to control for the type of business within the manufacturing sector, are not shown in the table.
Model 2 in Table 2 displays the results of the regression analysis between the dependent the independent variable, in order to test the first hypothesis of this study. The results show that the relationship is strongly statistically significant (p<0.01), with a positive coefficient, and thus confirms the Hypothesis 1, which then provides support for the main relationship of this study. Thus, the positive effect that the DOI has on the performance it is confirmed.
Model 3 introduces in the regression the moderating effect of the overall LoF, in order to test hypothesis number 2. Results from the table display that the direct effect of overall LoF has not significant effect on SMEs performance. Furthermore, once interacted with the DOI, LoF has negative coefficient, but the p-value displays no significance in the model. Specifically, the interaction between the DOI and the Overall LoF it is used in order to understand if there is a moderating effect of the Overall LoF on the main relationship. However, the results don’t confirm its moderating effect, thus Hypothesis 2 has to be rejected.
31
Table 2 – Regression analysis
VARIABLES Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
DOI 3,102*** 6,881** 5,727*** 5,941** 4,792** (874.4) (2,812) (2,007) (2,357) (2,276) LOFOverall 34,557 (48,992) DOI x LOFOverall -2,467 (1,540) LOFSpatialDistance 16,017 (28,319) DOI x LOFSpatialDistance -1,559** (736.8) LOFCulturalDistance 13,411 (46,227) DOI x LOFCulturalDistance -2,021 (1,379) LOFHostCountry 28,395 (37,796) DOI x LOFHostCountry -1,063 (1,175) Age 1,382 320.8 319.9 392.6 366.3 313.2 (1,823) (996.5) (996.1) (1,054) (1,011) (1,002) Size -2,236*** -2,550*** -2,508*** -2,506*** -2,579*** -2,531*** (611.1) (517.4) (510.1) (505.4) (526.3) (515.7)
Industry dummies YES° YES° YES° YES° YES° YES°
Countries dummies YES° YES° YES° YES° YES° YES°
Constant 351,744 444,511 376,871 410,591 406,640 383,423
(257,341) (302,910) (323,685) (304,372) (315,817) (321,921)
Observations 1,786 1,216 1,216 1,188 1,216 1,213
R-squared 0.253 0.240 0.245 0.258 0.244 0.242
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1, °Indicate that dummies for home countries and industries (within the manufacturing sector) are included in the model, although, the parameters are not shown in the table (Minbaeva et al., 2003).
33
5. Discussion
The aim of this research was to investigate whether the internationalization of the European SMEs generates a positive effect on their performance, since previous literature provided contrasting results in investigating this relationship. In addition, previous studies presented some limitations, for instance the research of Lu and Beamish (2001) has been biased of country specificity and the authors showed the willingness to test results on different countries and sectors. Furthermore, starting from the research of Zaheer (1995) where the sources of LoF have been identified and described, it has been provided a measurement of such liabilities, in order to investigate their effect on the main relationship. In particular, it has been hypothesized that these major costs that companies face during the internationalization process would have negatively moderated the main relationship between DOI and performance. Specifically, it has been firstly tested the moderating effect of the Overall LoF, and then it has been analysed if also the components of LoF (in particular focusing on Spatial distance, Lack of cultural roots and Host country environment have) have a moderating effect on the DOI – Performance relationship.
34 usually companies internationalizing proceed, and which are the steps that companies usually follow to start setting a new business abroad (Johanson & Wiedersheim‐Paul, 1975; Johanson & Vahlne, 1977).
The main relationship of this research consists in the effect that the internationalization of SMEs has on the firm performance. According to the results obtained regressing the DOI and the firm performance, hypothesis 1 is confirmed, showing thus that with the increase of DOI, and therefore of the percentage of sales coming from international sales, there is a positive repercussion on firm performance. This is in line with previous researches (Lu & Beamish, 2001), and thus supports this relationship for the European SMEs. The logic behind the relationship between DOI and performance is that companies entering into international markets have unique benefits and, according to the ideologies of the RBV, prior studies argued that the participation in global markets rises competitive advantage and boost the firm performance (Altaf & Shah, 2015). This research is mainly grounded on the RBV (Barney, 1991), since the theories previously described like NBV and MBV can be used to describe the determinants of the internationalization process, while the main relationship between DOI and performance can be addressed to the RBV. In fact, companies that internationalize can leverage their internal resources and capabilities on a broader base of customers, that can lead to an increase of performance.
35 firm performance is not subject to bias of country specificity, since all the European countries are taken into account, and thus it is provided a variety of different institutions and cultures (Checkel, 2005). Finally, the results are obtained considering SMEs from the manufacturing sector, thus it is here tested the DOI performance relationship in a different context than in the study of Lu and Beamish (2001), which expressed the willing to analyze this relationship in sectors and countries that were not took into account in their research.
The results of the estimation model show no support for Hypothesis 2, displaying no significance in the moderating effect of the overall LoF on the relationship between DOI and performance. Therefore, this hypothesis has been rejected. Thus, the overall LoF, contrary to expectations, seems not to influence the major performance that companies that internationalize reach. In fact previous researches highlighted the minor profitability of companies that enter into new markets (Zaheer, 1995). The reason why this hypothesis is not supported might be explained by a reduction of the impact that the LoF has on internationalization. In fact in the last years, thanks to globalization and reduction of barriers and costs related to international markets (Oviatt & McDougall, 1999), companies may suffer less from the effect of LoF, that thus might have decreased its effect. Moreover, more knowledge diffusion and global culture (Jackson, 2008), might have played a role in the reduction of LoF, thus allowing companies to boost their performance in international markets without suffering too much from these costs. Furthermore, this result might have been influenced by the presence of born-global SMEs (Chetty & Campbell-Hunt, 2004) in the sample. In fact, these companies, always more active in international markets, start their internationalization process at the beginning of their inception, taking advantage of their flexibility and of informal networks in order to successfully compete in international markets. These companies in fact tent to be profitable and exploit market opportunities more rapidly and efficiently compared to traditional firms (Zhou, Wu, & Luo, 2007b). Thus, these companies might be less affected by the LoF that typically influences companies that start internationalization as a later pattern.
36 effect of the Spatial distance between home and host country on the main relationship, is supported. This result means that the major costs that companies face during the internationalization process, and in particular the costs associated to the spatial distance, decrease the positive effect that the internationalization has on the performance. In particular, in this study have been considered the delivery costs that arise because of shipping goods into new markets. This means that even if the results provide no support for the negative moderator effect of the Overall LoF, the major costs related to the spatial distance (in particular the transportation costs), faced by SMEs that internationalize reduce the major performance due to internationalization. Therefore, the results seem to highlight that even if in the last years there has been a reduction of costs related the spatial distance (Hashai & Almor, 2004), in particular regarding the transportation costs, these are still reducing the positive outcome that the SMEs reach by internationalizing. In fact, costs of transport are for many SMEs the largest cost related to international activities, and in particular compared to larger firms, many SMEs do not have the possibility to lower these costs (Halldórsson et al., 2008). This means that there are still rooms for improvement for SMEs willing to internationalize, and a further decrease of these costs in the forthcoming years might foster their international performance.
37 Moreover, results reject hypothesis 3c showing no significance on the negative moderating effect of the host country environment on the main relationship. This evidence shows that the SMEs that internationalize don’t encounter a reduction on the positive relationship between DOI and performance due to lack of cultural roots in the foreign country. This might mean that SMEs are capable to face international markets without suffering from entry barriers in the host countries, legitimacy problems or regulatory issues that could compromise their performance (Meyer & Rowan, 1977).
38 of employees has been used as measure to quantify the firm size, thus it seems reasonable that the two variables are negatively correlated. Hence, with more data availability, another measurement of firm performance or of firm size might be used in further researches in order to clearly define this relationship.
39
6. Conclusions
The relationship between DOI and performance of SMEs has been widely study on previous researches, and the interest on this topic concerning the International Business field has been justified by the different outcomes of most of them (Pangarkar, 2008). This study has confirmed the significance of the positive influence that internationalization has on the firm performance in the European context. It is notable that the data used in order to investigate this relationship consider all the European countries, and therefore this research confirms this relationship in a vast context, providing generalizable results. However, no significance is shown in support to the moderating effect of the LoF, and only the Spatial distance, that composes it, has been found to negatively moderate this relationship.
In the following sections will be presented theoretical and practical implications for managers, followed by limitations concerning this study and by suggestions for further researches.
6.1 Theoretical implications
This study provides a few theoretical implications. First of all, it confirms the Internationalization – performance relationship, providing more evidences to the literature concerning this topic, and enhancing the reliability of the results, since it reveals the existence of a positive relationship among these variables in the European context. In particular, empirical results in support to this relationship are provided by companies from different countries, giving a more generalizable results. Therefore, the bias that affected previous researches regarding country specificity (Lu & Beamish, 2001) is here overcome, enriching the knowledge on this field of investigation. Moreover, this study confirms the positive relationship between DOI and Performance taking into consideration SMEs, and thus, similarly to the research of Knight (2000), it confirms this outcome for these specific kind of companies.
40 to previous studies, since are used measurements that capture tacit components of the liabilities faced by internationalizing companies. In fact, this study stands out from previous researches introducing a model that uses the LoF as moderator variable. Moreover, it is proposed a new measurement, in order to capture the Overall LoF, and in order to measure its components. The aim of this new method is to overcome previous weaknesses that might have affected previous studies in the measure of these LoF. In particular, this novel method might be used in other researches that are willing to investigate the LoF effect, and it might help in order to provide a broader knowledge about the effect of LoF on internationalizing companies, maybe comparing it with more objective measurements.
6.2 Managerial implications
This research presents results that can be significant for managers of SMEs, in particular within the European context. In fact, given the internationalization trend that characterized the last decades (Kamakura, Ramâon-Jerâonimo, & Vecino Gravel, 2012), the internationalization process might be a useful and profitable solution for SMEs that are willing to leverage their resources and gain access to international markets, which might offer them many benefits (Westhead et al., 2002). In particular, this study provides empirical support to the fact that the internationalization process is a concrete and profitable solution to managers that want to increase the firm performance, and it could be an important method in order to diversify the risk, in particular during crisis periods (Michael Geringer et al., 1989). However, managers should be aware of the potential major costs they might need to face during the internationalization process, and as previously discussed, the spatial distance costs in particular has an impact on the performance of SMEs internationalizing.
41 potential challenges they would need to face, and in order to successfully operate in the new market. In particular, there is agreement on previous studies about the role that strategic alliances with local partners has in the internationalization process, and this might be the best solution for SMEs, in order to acquire knowledge about the host country (Lu & Beamish, 2001). Furthermore, the results of this research show that the costs associated with lack of cultural roots and the host country environment don’t affect consistently the profitability of international operations, and therefore SMEs have the concrete possibility to benefit from the internationalization of their companies, being aware that the major costs that they will have to pay are balanced by a potential increase of the company performance.
6.3 Limitations and suggestions for further research
This study has to be read considering some limitation. In particular, most of them concern the data used, since it is difficult to find exhaustive and reliable databases relating to SMEs (Hussinger, 2010).
42 This field of research offers some suggestion for further research. In particular, future studies might perform a similar analysis, but it would be interesting to test the relationship with more data availability, and in particular with panel data, in order to understand the evolution of performance in the internationalization process over the time.
In conclusion, this research provides evidence that the internationalization process might be a valid choice for SMEs, in order to enhance their profits and take advantage of the benefits that the expansion in new markets implicates. In particular, this study seems to provide evidences that only the costs arising from the spatial distance, and specifically the transportation costs, might reduce the positive influence that the internationalization has on the firm performance. Thus, the other costs associated to the internationalization, and the liabilities of foreignness typically associated to this process, seem to have decreased their importance in the last decades, allowing SMEs to gain advantages from the internationalization process, without suffering from significant reduction of performance.
Acknowledgments
43
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