SMEs’ ability to establish a sustainable international joint venture in institutional weak countries

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SMEs’ ability to establish a sustainable international

joint venture in institutional weak countries

Master thesis (final version)

Christian Waelen (10669485)

MSc. Business Administration – International Management Amsterdam Business School, University of Amsterdam Supervisor: prof. Dr. Suzana B. Rodrigues

Second reader: Dr. Johan Lindeque June 26, 2015

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Abstract

This study aims to contribute to the literature on international joint ventures in emerging countries and to develop a practical guideline for firms which are considering to start an IJV in a developing country. In such case this study can be useful for the evaluation of elements crucial for the success or failure of the IJV. Because of the almost exclusive focus in the past on MNEs, this study will only focus on SMEs as the foreign partner of the IJV. The main relationship investigated is the one between social and economic value creation by the IJV in its host country. The research results show that social and economic value creation are interrelated and that the firm’s social commitment to the local community has a positive effect on the firm’s economic performance. Empirical findings also suggest that the institutional environment of the emerging country and the quality of the relationship between the IJV’s partners act as moderators on the IJV’s overall performance. The data for the research is collected through the conduction of 8 interviews with managers of Dutch SMEs which in the past established or have tried to establish an IJV in a Sub-Saharan African country.

Statement of originality

This document is written by Student Christian Waelen who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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1. Introduction

1.1 Background and research gap

‘We have the clock, they have got the time’, this quote was made by a Dutch businessman to describe his view on the differences between European and African work ethic. Few people or academic schools will deny the existence of significant differences in the way of doing business between developed countries and emerging (African) countries. But since the beginning of the globalization in the early 1990s managers and academics began to realize that research into these differences is necessary to find out how companies from emerging and developed countries can work together and how a sustainable global market can be established. An important part of this field of research studied the strive of firms to become globally interconnected by establishing international joint ventures (Lane, Salk, & Lyles, 2001). Most literature is written about the operations and performance in developed countries. Until now limited research has been done on the results of partnerships in developing countries and in specific partnerships between SMEs of developed and emerging countries (Lee & Beamish, 1995; Hitt et al., 2000; Rodrigues & Olie; 2015). For the last 10 to 15 years the share of SMEs in foreign direct investment (FDI) by establishing IJVs is rapidly growing (Kirby & Kaiser, 2003). Although practice has shown that SMEs has become active players in the field of IJVs (Ruzzier, Hisrich, & Antoncic, 2006), research on this subject is still lagging behind. Khanna and Palepu (2010) and Jackson (2012) argue that because of this almost exclusive focus on MNEs, SMEs lack the confidence in their ability to develop a sustainable business in emerging markets.

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1.2 Research objectives and questions

The objective of this research is to improve the theoretical knowledge on the ability of SMEs to establish sustainable IJVs in an emerging country and the development of a guideline for firms which are considering to set up an IJV in an emerging country. The main focus will be on the results of both economic and social value creation in the IJVs’ host country. Besides, this research will investigate the firm’s capacity to survive in institutional weak environments which are characteristic for emerging countries and the effect of liabilities with which small firms have to deal during their internationalization process. Finally the role of the local partner of the IJV will be studied. The question at which this research hopes to find a decent answer is:

‘To what extent are small firms able to establish a sustainable IJV in institutional weak countries by creating social value?’

Four sub questions are formulated to find results of the influence of the previous described elements:

1) How do economic achievements and social value creation relate to each other? 2) What is the influence of the institutional environment?

3) Are SMEs, given their characteristic liabilities, capable of creating shared value? 4) How important is the role of a local partner in overcoming deficiencies in the host

country and making the joint venture a success?

1.3 Research method and sample

The data necessary for the research will be gathered through 8 semi-structured interviews with managers of Dutch SMEs. These SMEs all established or have tried to establish an IJV in

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a Sub-Saharan African country and in this IJV they worked together with a local partner. The research sample is composed out of firms which all got financial support for the establishment of their IJV from the Private Sector Investment (PSI) Program. This program is established by the Netherlands Enterprise Agency in order of the Dutch Ministry of Foreign Affairs. Due to the firms’ participation in this program the reliability of the research will be ensured, all firms have to meet the same requirements.

1.4 Structure of the study

In chapter 2, the literature review will introduce and describe the relevant literature on the topic of this study. First, a small introduction will be given on the context of the internationalization process of SMEs. Next the literature on social value creation, hybrid organizations and institutional voids will be described. The work of Porter and Kramer (2011), Hoffman et al. (2010) and Khanna and Palepu (2010) will be of great importance in this chapter. The literature review concludes with the integration of the theoretical topics and the conceptual framework. In chapter 3 the methodology and research sample will get further explained. Chapter 4 will present the results of the research findings and will come up with the first propositions regarding these findings. In chapter 5 the empirical findings and the propositions will be discussed. The study ends with chapter 6 in which the research findings and contributions will be used to develop a conclusion and an answer to the research question.

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2. Literature review

This chapter consists of a review of important literature about the relevant research streams. First, the context of SMEs’ internationalization process will briefly be described. Next the literature about the influence of social value creation will be reviewed. The third part consists of a review of literature about the characteristics of hybrid organizations and finally the literature about institutional voids will be discussed. At the end of this chapter all research streams will be merged into a draft of a relevant research gap and the formulation of the research question.

2.1 SMEs’ internationalization context

2.1.1 The origin of internationalization of SMEs

In fast internationalizing businesses firms need to adjust continuously to the trends of the market to retain their competitive advantage. The huge increase in level of internationalization started in the early 1990s. Until then most firms only traded within the borders of their home country, but due to the increasing globalization these firms faced the opportunities of new markets as well as the threats of upcoming international competition (Kirby & Kaiser, 2003). Barkema et al. (1996) mention that most of the increase in level of internationalization is attributable to large multinational enterprises (MNEs) rather than to SMEs (Barkema, Bell, & Penning, 1996). In the beginning of the internationalization trend it were indeed the large firms which represented the biggest share in worldwide foreign direct investment (FDI) (Kirby & Kaiser, 2003). But nowadays large MNEs are not the only players in the international market. According to Kirby and Kaiser (2003) there is evidence of increasing FDI activity by SMEs. While in the past SMEs were seen as ‘passive victims rather than active players in the internationalizing market’ (Ruzzier, Hisrich, & Antoncic, 2006), nowadays SMEs

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also become active players and ‘many SMEs have successfully set up activities beyond their home markets and their role is increasingly crucial in contributing to future growth’ (Gjellerup, 2000; Ruzzier, Hisrich, & Antoncic, 2006). Because of changes in the global marketplace, SMEs can face the same opportunities and operational problems as large MNEs (Ruzzier, Hisrich, & Antoncic, 2006).

There are multiple ways in which a firm can enter new foreign markets. A tool useful to distinguish these different entry modes is the ‘Hierarchical model of choice of entry modes’ by Pan and Tse (2000). This model devides entry modes into two groups; non-equity modes and equity modes. Whereas non-equity modes get subdevided into export and contractual agreements, equity modes get subdevided into equity joint ventures and wholly owned subsidiaries (Pan & Tse, 2000). It depends on the available resources, the type of firm and project and the intentions of the firm’s management which entry mode is best suitable for their internationalization process. A commonly used entry mode is an (international) joint venture. For this research the focus will be only on this type of entry mode.

2.1.2 Difficulties during the process

Although there should be no reason why SMEs cannot become international operating firms by applying FDI (Kirby & Kaiser, 2003), there are some difficulties for them to overcome during their internationalization process. These difficulties can be explained by the fact that SMEs often lack the knowledge and/or resources to become an international operating enterprise (Kirby & Kaiser, 2003). This lack of knowledge and resources is part of the so called liability of smallness. SMEs have limited resources and capabilities compared to bigger MNEs (Lu & Beamish, 2006). Besides liability of smallness Lu and Beamish (2006) define two other kinds of liabilities that firms will experience in their urge for international expansion:

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Liability of foreignness and liability of newness. Liability of foreignness is caused by the lack of knowledge about the host country and its local market, this lack can lead to competitive disadvantages compared to local firms (Lu & Beamish, 2006). Liability of newness is caused by the fact that the internationalizing firm has to deal with new challenges (Lu & Beamish, 2006). Existing international firms had to deal with these challenges already so they gain competitive advantage over the internationalizing firm. Smallness of the firm can influence its survival in a negative way and even make it problematic (Aldrich & Auster, 1986). Often do liability of smallness and liability of newness occur together. Kale and Arditi (1998) mention that research into the effect of newness and smallness on firm’s performance conclude that both factors have an impact but the impact of newness is stronger. The researches also conclude that an increase in size will result in a decrease in the liability of newness (Kale & Arditi, 1998). Liability of smallness emerges from the lack of financial resources and support. It will result in a inability to create financial buffers for market contractions (Aldrich & Auster, 1986). Besides it will affect the firm’s survival negatively due to its inability of attracting qualified and competent personnel (Kale & Arditi, 1998).

2.2 Social value creation

In this part of the literature review relevant literature about social value creation and social impact will be discussed. A concept which covers elements of both these subjects is the concept of ‘shared value’ by Porter and Kramer (2011). These authors state that capitalism as we know it is under siege. Companies can not focus anymore only at economic results. According to them it is time to create a connection between societal and economic progress. ‘’Companies must take the lead in bringing business and society back together’’ (Porter & Kramer, 2011, p. 64).

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2.2.1 Definition of social impact and shared value

The concept of shared value is based on the idea that creating economic value can also create social value by adressing the needs and challenges of the society. If this idea gets widely adopted by firms all around the world it will drive the next wave of innovation and productivity growth in the global economy (Porter & Kramer, 2011). ‘’Social value creation is viewed as a positive aspect of business because of improvements in competitiveness, economic performance, opportunities it creates for entrepreneurship and legitimacy’’ (Rodrigues & Olie, 2015). Important to note is that this concept rests on the principle that both economic and social value creation rely on strict value principles. Value is defined as benefits relative to costs, not benefits alone.

Businesses and communities both depend on each other. A business needs the community not only as a market for their products but the community can also act as a critical public asset and a supportive environment (Porter & Kramer, 2011). On the other hand does the community depend on the business for the creation of employment and wealth for its people. The one can not live without the other. The sole dependency of communities on businesses is a basic, but outdated, principle of capitalism. Due to globalization this principle is not accurate anymore. Businesses are transformed, their activities are relocated and spread all over the world. The business does not have one location and is not dependent of just one community. The transformation of business structures has also changed the interrelationship between business and communities. Businesses are getting more and more dependent on their environment. Shared value creation and social impact are of great importance for this transition. ‘’The concept of shared value rests the boundaries of capitalism’’ (Porter & Kramer, 2011, p. 68).

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2.2.2 Three ways of shared value creation

Porter and Kramer (2011) mention that the reinforcement of the relationship between a company’s economic performance and social value creation will result in better ways to serve new needs, gain efficiency, create differentation and expand markets. Economic value creation through social value creation can be done in three distinct ways. 1. By reconceiving products and markets; Do our products really serve the social needs? Do our products harm the environment? Are we focusing on the right market? Constantly asking these kind of questions and when needed adjusting their products or activities is one way companies can create social value. 2. Redefining productivity in the value chain; A company’s value chain has a tremendous effect on societal issues. These issues, such as natural resources or water abuse, health and safety, working conditions etc., can create social costs for the environment and economic costs for the company. By introducing shared value initiatives the societal issues can be solved and economic and social costs can be decreased. This new thinking reveals a huge congruence between societal progress and productivity in the value chain (Porter & Kramer, 2011). 3. Enabling local cluster development; Companies are never self-contained. Every company depends on other supporting companies and infrastructure. These required elements form clusters. These clusters do not only consist of companies but can also include all kind of institutions. By enforcing the capabilities of the clusters through training, development of transportation, distribution channels, market organizations etc. the cluster’s productivity will get a boost. This boost creates economic as well as social value for the environment. Porter and Kramer (2011) mention that cluster-focused initiatives will be much more effective than community-focused corporate social responsibility programs. The latter would have limited impact because they take on too many areas without focusing on value (Porter & Kramer, 2011, p. 76). Porter and Kramer also mention that ‘’the most

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successful cluster development programs are ones that involve collaboration within the private sector, as well as trade associations, government agencies, and NGOs’’ (Porter & Kramer, 2011, p. 76).

The three avenues by which companies can create shared value are mutually reinforcing. Porter and Kramer give the example when a company’s cluster gets enhanced it will result in more local procurement and less dispersed supply chains. Shared value initiatives will create a snowball effect. Once started, the degree of impact will increase and the results will get more and more evident for the all participants. ‘’The opportunity to create economic value through creating social value will be one of the most powerful forces driving growth in the global economy’’ (Porter & Kramer, 2011, p. 76).

2.2.3 Differences between CSV (creating social value) and CSR

Lately a lot of companies are trying to be philanthropic in some way, they become more interested in Corporate Social Responsibility (CSR) and are investing more time and money in it (Epstein & Hanson, 2005). But by doing this, these firms are not creating shared value. CSR is used a lot lately as a label for everything which has to do with organization’s social awareness and engagement. For this research it is important to make a clear distinction between CSR and Creating Social Value (CSV). CSV transcends CSR. CSR is mainly focused on the company’s image. Whereas the improvement of their image is just a side-effect for social value creating companies. Besides, CSR programs have a limited connection to the business, their only value in this point of view is ‘doing good’. This makes it hard to justify and maintain over the long run. In contrast, the value of CSV is ‘doing well by doing good’ (Rodrigues & Olie, 2015). It is integral to the competitive position and the profitability of the company. ‘’It leverages the unique resources and expertise of the company to create economic value by creating social value’’ (Porter & Kramer, 2011, p. 77). The reason why CSV

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is so important for this paper is the fact that CSV integrates social value/impact with business value (Grayson & Hodges, 2004). According to Austin (2000) and Porter and Kramer (2002) there are reasons to hold that firms can dispose of resources and capabilities which provide these firms with a competitive advantage in the creation of social value and impact.

2.3 Hybrid organizations

Companies which create shared value are good examples of a hybrid organizational form (Doherty, Haugh, & Lyon, 2014) (Pache & Santos, 2012). These companies are dual-purposed. They do not have one core goal, they want both to achieve financial goals and create social value. Hybrid organizations differ from traditional nonprofit organizations (Dart, 2004). Hybrid organizations use the market system where upon for-profit organizations are built to improve environmental and social sustainability challenges (Hoffman, Badiane, & Haigh, 2010). Hybrids can not be described as a pure private, public or non-profit organization, they act as a combination of these three.

2.3.1 The concept of hybrid organizations

Hybrids are the result of combining two or more different species. In the case of organizations this results in organizations which operate in multiple functional domains and in this way are able to span institutional boundaries (Ruef, 2000). Drawing on the previous conceptualizations of hybridity, Doherty, Haugh and Lyon (2014) define the hybrid organizational form as: ‘structures and practices that allow the coexistence of values and artefacts from two or more categories’. An organization which does not fit perfectly in the picture of one of the three economic sectors gets labelled as hybrid. Hybrids have both financial goals, which are characteristic for private organizations, and social goals, which are characteristic for non-profit organizations.

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In the beginnings most hybrids start as pure for-profit organizations. Later they decide to add social value creating goals to their mission statement and so turn into a hybrid organization. With this transition the need for new innovative strategies, new resource configurations and novel governance structures arises (Doherty, Haugh, & Lyon, 2014). In their review Doherty, Haugh, and Lyon (2014) give an enumeration of the attributions of the strategic innovativeness of hybrids: ‘’managing the demands of multiple stakeholders, combining resources in new ways to meet social needs, building social capital and finding new ways to advance social change. It has also been linked to resource constraints that, in turn, have created opportunities for new markets, products and services’’ (Doherty, Haugh, & Lyon, 2014).

2.3.2 The Sustainability-driven business model

Hybrid firms differ from traditional nonprofit or for-profit firms. Therefore traditional business models will not be useful for addressing the social and environmental challenges faced by hybrid organizations. Hoffman, Badiane and Haigh (2010) mention that ‘’hybrid organizations call for mission-centered business models that employ market tactics to address social and environmental issues’’. Due to the overlap of financial targets and social goals hybrids are ‘’both market-oriented and mission-centered’’(Boyd, et al., 2009; Hoffman, Badiane, & Haigh, 2010). Hoffman et al. (2010) note that allthough hybrid organizations form a growing market segment, research on them is notably lacking and is mainly focused on CSR. Which, as mentioned in the previous part, is only focused on ‘doing good’ instead of ‘doing well by doing good’. In their article Hoffman et al. go beyond the CSR perspective and develop a ‘Sustainability-Driven Business Model’. This business model refers to hybrid organizations connecting economic profitability with social and environmental sustainability. By using this business model hybrid firms will be able to create positive social outcomes at

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multiple levels. The sustainability-driven business model consists of three elements: 1) social change as organizational objective, 2) mutually-beneficial relationships and 3) progressive interaction with markets, competitors and industry institutions (Hoffman, Badiane, & Haigh, 2010).

The main characteristic of a hybrid organization and the first element of the business model is ‘social change as organizational objective’. Social change can be realized by three firm-level qualities: 1) a socially and environmentally embedded mission; unlike for-profit firms do hybrid firms want to gain benefits for themselves as well as for the environment and society. ‘’Hybrids consider economic profitability as a mean to achieve its sustainability goals’’ (Hoffman, Badiane, & Haigh, 2010). 2) longer-time horizons for patient and autonomous growth; achieving social change is a slow process. Where traditional for-profit firms have short term goals and time horizons, do hybrid firms need to be patient and set longer time horizons. 3) Positive leadership; even more than any other traditional firm do hybrids need positive leadership. It is of great importance the leader embodies the firm’s culture and strong social values. The leader needs to transfer the social values to all employees through the daily activities and approaches to management.

The second element of the sustainability-driven business model is ‘mutually-beneficial relationships’. ‘’The creation of mutually-‘mutually-beneficial relationships enables hybrid organizations to create positive social change among suppliers, communities, employees and customers’’ (Hoffman, Badiane, & Haigh, 2010). There are three types of mutually beneficial relationships; 1) With suppliers and communities; hybrid organizations need to develop strong personal relationships with their suppliers and communities and develop a clear understanding of each others expectations for the relationship to be mutually beneficial. 2) With employees; It is a leader’s task to establish strong mutually beneficial relationships with

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employees. They can do this by socializing the employees into the social change objective of the hybrid firm. 3) With customers; products from hybrid firms differ from products produced by for-profit firms. The products project specific (social) values in which the firm believes. Hybrid firm’s customers are highly loyal to the firm and its products. By developing a strong relationship, the customers can contribute to the growth of the firm and help them meet their social change objectives (Hoffman, Badiane, & Haigh, 2010, p. 13).

The third element of the sustainability-driven business model by Hoffman et al. (2010) is ‘Progressive interaction with markets, competitors and industry institutions’. Unlike traditional business models, the sustainability-driven business model is not only developed for the firm itself. Due to the sustainable character of the model the efforts will also affect markets, competitors and institutions. 1) Markets; hybrid firms are a relative new type business model. The firms are actively building new markets for sustainable products, not only for their own benefit but for other firms in the sustainable market as well. They do this by applying high levels of transparency and open source models which can be used by associated firms. 2) Competitors; hybrid firms are becoming more and more successful, as a result the competition increases together with the successes. Competition will threaten the autonomy of the firms. But competition can also be roused on purpose to reach larger markets and meet the shared social change objectives on a larger scale. 3) Institutions; drawn upon the transparency and rousing competition mentioned before, hybrids encourage other firms to enter their markets. Traditional firms will influence institutions to reduce regulation and external costs to protect their market position, hybrids on the other hand will influence institutions so other firms can follow their example and make an entry in the sustainable market (Hoffman, Badiane, & Haigh, 2010, p. 15). Instead of creating entry barriers, hybrids create possiblities for entry by influencing institutions in a positive way. This

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part of the sustainability-driven business model has strong similarities with the third way of creating social value (‘redefining productivity in the value chain’) as mentioned in the previous part.

As argued in the beginning of this chapter do hybrids blur the boundaries of the three types of organizations and enact nonprofit and for-profit activities (Johnson, 2001) (Dart, 2004). This makes them the perfect business form to bridge institutional fields and span institutional voids (Doherty, Haugh, & Lyon, 2014). These characteristics of institutional weak environments will be discussed in the next chapter.

2.4 Institutional voids

A major problem a company can face while starting a collaboration with a joint venture partner from an emerging market is the insuperability of dealing with so called institutional voids. Due to the existence of institutional voids, companies in emerging markets cannot access capital or talent as easily as when they were active in a developed market (Khanna & Palepu, 2006). As a result it will be hard for these companies to invest in R&D or to build a global business. But institutional voids do not only throw up obstacles for internationalizing firms, according to Khanna & Palepu (2010) (Jackson, 2012) can institutional voids also create major opportunities. They argue that ‘’the primary exploitable characteristic of an emerging market is its lack of institutional infrastructure’’. Instead of focusing on size or growth potential they claim a firm should focus on the lack of institutional infrastructure. The lack or poorly functioning of specialized intermediaries in capital, product and labor markets will create opportunities instead of obstacles for foreign firms.

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2.4.1 The concept of institutional voids

There are multiple definitions of institutional voids being used. A couple examples: ‘absent or weak institutions’ (Khanna & Palepu, 2010), ‘institutional imperfection and ineffectiveness’ (Pinkse & Kolk, 2011), ‘gaps in rules’ (Kolk & Van Tulder, 2005). ‘gaps between formal rules and norms, and their enforcement in daily practice’ (Rodrigues, 2013). The definition best suitable for this research is given by Rodrigues and Olie (2015); ‘the absence of specialized intermediaries, regulatory systems and contract-enforcing mechanisms’. Institutional voids arise in emerging markets with a rapid economic growth. In such case the economy of the market grows faster than its social and institutional structures. When this happens it becomes difficult for the social and institutional structures to grow along with the economical development of the market. Besides economical consequences institutional voids can also have social consequences. Due to the rapid growth of the market, human and natural resources can become victim of the urge for economic growth. These resources are risking to become over-exploited, with all its consequences. Because some participants gain from institutional voids, Jackson (2012) argues that building market infrastructure is a matter of politics as well as economics. Emerging markets are characterised by the absence or low level of formal rules. Khanna and Palepu define formal rules as ‘soft’ infrastructure. Instead of doing business according to the formal rules of the game, the business activities on these markets are much more based on informal agreements and habits. Because of this way of doing business in an informal way the economy in these emerging countries is ‘invisible’, the actors and deals are not registered and therefore not subjected to regulation. Jackson (2012) mentions that the most important, but in emerging market missing, feature of any market is ‘’the ease with which buyers and sellers can come together to do business’’. In developed markets this is the task of instutions

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which operate as intermediaries in the market, in emerging markets these institutions are missing. Khanna and Palepu (2010) write ‘’ideally, every economy would provide a range of institutions to facilitate the functioning of markets, but developing countries fall short in a number of ways’’.

In informal economies the actors normally do not focus on the long run of their business. These businesses pop up when there occurs an imbalance in demand and supply. In short time they want to fill this niche. Because they are doing business in an informal way and need to improvise due to lack of time and resources, it is impossible for the government or other institutions to control or regulate these businesses. Khanna and Palepu (2010) confirm that the market failure in emerging markets has three main causes; absent or unreliable sources of market information, an uncertain regulatory environment and inefficient judicial systems (Jackson, 2012). The absence of these three elements makes a clear distinction between developed and emerging markets. ‘’In developed markets, a range of specialized intermediaries provides the requisite information and contract enforcement needed to consummate transactions. Most developing markets fall short on this count’’ (Khanna & Palepu, 2010; Jackson, 2012).

2.4.2 Dealing with institutional voids

For companies that are considering to start an IJV in an emerging country it is of great importance to study the intensity of institutional voids and the possible effect on the IJV’s performance. For many years western companies avoided doing business in emerging markets. But in the 1990s these emerging countries have been the fastest-growing markets in the world for most products and services (Khanna, Palepu, & Sinha, 2005). Institutional voids arise when an emerging market develops economically at a high rate. When the first companies seized the economical opportunities provided by the emerging markets the

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successful companies introduced new strategies for doing business in countries with little formalisation and legislation. Besides, they developed specific approaches to deal with institutional weakness (Khanna, Palepu, & Sinha, 2005). Institutional weakness can lead to dissapointing performance (Rodrigues, 2013). Economic and social performance are crucial for the success of dual-purposed IJVs. No company wants to be in an IJV with dissapointing performances, therefore it is of great importance to pay attention on institutional voids and find a way how to exploit them. In their book Khanna and Palepu (2010) come up with four rules every firm which has to deal with institutional voids in emerging markets needs to remember. First, ‘’they should accept that they are unlikely to get things right the first time and be willing to experiment to adapt and fit their business models to emerging markets’’. Second, ‘’they should position themselves as ‘partners in progress’ – building businesses that also advance market development, creating jobs, generating tax revenues etc.’’. third, the firms should ‘’balance ambition with humility in emerging markets – not only because they may be viewed with suspicion, but also because they may not have the requisite knowledge or capabilities to succeed’’. Finally, internationalizing firms in emerging markets need to ‘’appreciate the risks of emerging markets, including abrogation of contracts, wanton expropriation as well as competitive responses’’ (Khanna & Palepu, 2010; Jackson, 2012).

2.4.3 Results of institutional voids

The impossibility of institutions to control or regulate can result in negative outcomes such as poor quality or even dangerous services or products, illegal activities and the market becomes congested. Another result of a business system mainly based on informal interactions is pointed out by North (1990). According to North societies are more intensively controlled by informal interactions than by formal rules. The informal interactions can both reinforce or undermine the effect of formal laws. This will affect the

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institutions’ capacity and legitemacy to enforce these laws. Especially in emerging countries with a strongly rooted preference for informal agreements this negative effect on enforcement by institutions will be evident. It is impossible to define the outcomes of institutional voids as positive or negative. Possible negative outcomes can be over-exploitation of human and natural resources or facilitation of illegal activities and creation of social costs which results as a backfire on the economical growth of the country. But institutional voids can also have positive outcomes for the company, the market, the country and all social partners. When the business activities which have to deal with institutional voids are thought out well it can create opportunities for new businesses and entrepreneurial activities. Khanna and Palepu conclude that institutional voids can present opportunities for entrepreneurs (Jackson, 2012). Rodrigues (2013) mentions that because of the economical opportunities created, the emergence of institutional voids can result as a benefit to economies experiencing transition and growth. The main determinant of whether the result of an institutional voids can be valued as positive or negative is the intension of the actor. The gap between formalisation and enforcement creates the opportunity for these actors to take advantage of the situation and resources. In a positive case the actor has the right intentions which will lead to profit-seeking, employement creation and resource exploration. In a negative case the actor will act as a rent-seeker which will lead to employee exploitation and resource depredation (Ngo, 2009).

2.5 Integration and contribution

Now that the existing literature and theories about the internationalization process of SMEs, social value creation, hybrid firms and institutional voids have been introduced and discussed, it is time to integrate these subjects to give direction to the purpose of this study.

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As mentioned in part 1 and 2.1, most literature is written about the internationalization process of MNEs. This research will use the existing literature to investigate and complement the theories about SMEs’ internationalization process. The aim is to contribute to enhance knowledge on the formation and management of international joint ventures which involves firms from developed and emerging countries. The goal is to improve knowledge on both SMEs’ capacity to survive in institutionally weak environments as their ability to create social value. ‘’Due to the almost exclusive focus on MNEs in the past, SMEs lack the confidence in their ability to yield both high returns and socio-economic development in emerging markets’’ (Khanna & Palepu, 2010) (Jackson, 2012). But Jackson (2012) mentions that leading business schools in emerging markets are starting to realize that ‘’they have to go beyond their traditional boundaries to support the development of a profitable small and medium-sized enterprise sector with an outsized social impact’’. Initiatives which support the SME segment may ultimately be more crucial for social development in emerging markets than initiatives undertaken by MNEs (Jackson, 2012, p. 180).

Austin (2006) and Sakarya et al. (2012) state that social purposed collaboration in same-sector and cross-sector partnerships are an increasingly important but understudied form of partnership. The practical contribution of this research is the potential applicability of the results for firms in the improvement of the firm’s sustainability and the achievement of positive impact on the host country’s local community. The research will also be of practical use for policy-makers and public agencies such as The Netherlands Enterprice Agency and its PSI program by providing feedback on how to better support firms to achieve their joint venture goals.

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2.5.1 Research question

The goal of this research is to explore the benefits of social value creation and the collaboration with a local partner. The goal of the institutional funder is to induce a social impact in the host country. As mentioned in the introduction, the institutional supported SMEs in this research will be funded by the PSI program. In the next chapter the background and objectives of the PSI grant program will be explained more clearly. In first place the host country environment of the IJV should benefit from the social value creating activities. But besides that it is expected that the IJV itself benefits to from the social value creation.

A social engaged and internationalizing SME is a hybrid organization and therefore has two goals. First the SME wants to internationalize and make a profit by entering an emerging market and cooperate with a local partner. The second goal is to induce a social impact in the host country, this is where an institutional supported IJV differs from a normal (non-supported) IJV. This research aims to explore what the influence of the attainment of the second goal is on the results of the first goal. The first goal, gaining a market share and making profit, can be counteracted by institutional voids. For foreign companies which want to invest in the emerging country these institutional voids can be an struggle but they can overcome the disadvantages. In such case this study expects to prove that a social engaged partnership can contribute to conquer insitutional voids in at least two different ways. First will the firms benefit from the fact that they are hybrids and can follow the sustainability-driven business model. According to Fligstein (1997) and Lawrence (1999) can hybrid firms influence institutions in a positive way and so overcome institutional voids as a result of its desire for creating positive social change. The second way to conquer institutional voids by social value creation is a result of the firm’s collaboration with a local partner. The foreign partners of the IJVs have to deal with the same institutional voids as the local companies.

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The difference being that the foreign company lacks the experience because it is not used to work in institutional weak environments. The local partner on the other hand has the experience and knows how to deal with institutional voids and how to overcome the disadvantages. By combining their forces the foreign and local partner can improve each others business model, overcome their liabilities and together compete with foreign multinational giants (Khanna & Palepu, 2006). The research question for this research will be:

‘To what extent are small firms able to establish a sustainable IJV in institutional weak countries by creating social value?’

The research will focus on four relationships. The core relationship is the effect of social value creation on the overall performance of the firm. Besides this relationship there are three moderating effects on which need to be focused. First, the effect of institutional weakness on the relationship between social impact and firm performance. Second, the effect of a local partner at the deficiencies in the host country. Third, the effect of liabilities characteristics for the internationalization process of small firms at their capability to create shared value. In order to get a clear answer to the research question these four relationships need to be translated into four sub questions. 1) How do economic achievements and social value creation relate to each other? 2) What is the influence of the institutional environment? 3) Are SMEs, given their characteristic liabilities, capable of creating shared value? 4) How important is the role of a local partner in overcoming deficiencies in the host country and making the joint venture a success?

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2.5.2 Conceptual framework

The following model shows the conceptual framework of this research with all relevant elements and the relationships between them.

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3. Data and method

After laying down the theoretical background and the conceptual framework of this study, this chapter will outline a description of the sample and the methodological aspects of the study.

3.1 Sample

The data necessary for this study is gathered among participants of the Private Sector Investment Program (PSI program), formerly known as PSOM, ‘Programma Samenwerking Opkomende markten’ (Program for Cooperation with Emerging Markets). This program is established by the Netherlands Enterprise Agency in order of the Dutch Ministry of Foreign Affairs. The goal of this program is to support Dutch SMEs to invest in innovative projects and to cooperate with local business partners in developing countries. The aim of the PSI program is formulated clear and straightforward; ‘to make relevant, positive contribution to self-reliance and poverty reduction by creating economic activity and jobs and raising income levels’ (Subisidies and programmes/PSI, 2015). The PSI program is intended for mainly Dutch SMEs with a serious intention of cooperation with a local partner for the long-term (Subisidies and programmes/PSI, 2015). To be entitled to a grant out of the PSI program a firm has to comply with a lot of requirements. Three major requirements are: the firm needs to have a private local partner company that is registered in the country where the project is to be implemented, the project is significantly innovative for the host country, in terms of the type of product or service, production method or the way in which the service is provided and it needs to be a pilot project so it can be used in the future for follow-up investments (Subisidies and programmes/PSI, 2015). When the application has been approved by the Dutch Ministry of Foreign Affairs the partner project gets an advanced

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payment. The maximum duration for a project is 30 months (36 for agricultural projects). After this time the project will be evaluated, if the results meet the expectations and agreements set in the beginning the grants will be determined (Subisidies and programmes/PSI, 2015). The ultimate goal of the PSI program is to create impact on the local economy of the country in which the partner project is operating. This impact will be on four different levels: company level, chain level, sector level and national level (Netherlands Enterprise Agency, 2014). Especially the impact on national level will be relevant for this research. Examples of questions asked at the application form are: ‘’How will the project affect the environment?’’, ‘’Will the project encourage local authorities to develop infrastructure?’’, ‘’Will the project have any influence on local laws and/or regulations or the compliance thereof?’’ ‘’In what way will the authorities be affected by the project?’’ (Netherlands Enterprise Agency, 2014, p. 32). All these questions are clear indicators of the social value creating motives of the PSI program and the firms involved.

Of all IJVs in this sample the foreign partner is of Dutch origin. A study by Barkema and Vermeulen (1997) found a significant effect of the partners’ nationality and the performance of the IJV. The Dutch SMEs which will be used for this research are operational in Sub-Saharan African countries. The reason why all firms are active in Sub-Saharan African countries is the fact that these countries all score low in terms of level of formalization and enforcement. In a cluster analysis made by Rodrigues (2013) the countries with the lowest level of formalization and enforcement (and therefore the highest level of institutional voids) are Uganda and Zimbabwe, both Sub-Saharan African countries. The aim is to study eight cases of IJVs between a Dutch SME and a local partner. All IJVs are supported by the PSI program and are therefore required to be engaged in social value creation. For privacy purposes the names of the firms and IJVs remain confidential and will not be included in this

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research. Figure 2 gives an overview of the firms composing the research sample, their industries and when the joint ventures were established.

Firm Host country Industry Start date of IJV

A Ghana Transport December 2006

B Namibia Agriculture / fruit production July 2009 C South-Africa Agriculture / animal breeding May 2005

D Ethiopia Flower production January 2004

E South-Africa Agriculture / fruit production July 2004

F Ethiopia Flower production December 2003

G Sierra Leone Agriculture / potato production September 2009

H Ghana Transport July 2009

Figure 2. Composition of the sample

The participants of the interviews are all managers of the Dutch partner of the IJV. They all were involved with the establishment of the IJV and were, or still are, actively involved in the management and decision-making processes of the IJV.

3.2 Data collection

This study has an exploratory character. The research question will be used to develop a clear focus on why and how social value creation can influence IJVs’ overall performance. A qualitative research method is best suited to investigate this exploratory research topic. In order to gather information on the firm’s engagement in social value creation and their experiences in the emerging markets semi-structured interviews were used. The interviews consisted of a combination of open-ended and closed questions. A semi-structured interview

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is best suitable for this research because this type of interview provides a clear structure but at the same time provides enough space and opportunity for the respondents to be flexible and give direction to their answers.

The interviews were recorded as audio files and after the conduction of the interviews these audio files were used to write a full transcript of each interview. A qualitative data analysis software program was used to analyze the unstructured data provided in the interview transcripts. Appendices 1 and 2 show the interview checklists as used for all interviews. Because this study used semi-structured interviews it is no matter of course the questions at the checklist are the exact same questions asked during the interviews. It happened that during an interview some questions appeared to be irrelevant for that case, these questions were skipped. In other cases it was necessary to add questions which were not formulated at the checklist. These adjustments were necessary to guarantee the quality of the dataset.

During the data analysis sets of codes were composed to bundle data provided in the transcripts. Every set of codes represented cohesive information on the elements and their interrelationships as given in the conceptual framework. After composing these sets of codes analysis lead to the identification of different patterns. Using these patterns it became possible to formulate clear propositions which in return were useful for the creation of conclusions.

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4. Results

In order the get a decent answer to the question whether small firms can use social value creation as a way to establish a sustainable IJV in institutional weak countries, the results of the interviews will be discussed next. This chapter will consist of four parts. In every part one specific research subject will be discussed to analyze the data obtained by the conduction of the interviews. This analysis will result in the formulation of multiple propositions. The first part will focus on the relationship between economic achievements and social value creation. Second, the influence of the institutional environment will be analyzed. The third part will give an analysis of the effect of SME’s characteristics. The fourth and last part will analyze the effect of a local partner. Figure 3 gives some first results, these results will, along with others, being discussed and analyzed in the following parts of this chapter.

Firm Host country

Industry Start date of IJV Still in progress Previous experience in Africa Level of social commitment

A Ghana Transport December

2006

Yes Yes Job creation only

B Namibia Agriculture /

fruit production

July 2009 Yes Yes More than job

creation only

C

South-Africa

Agriculture /

animal breeding

May 2005 Yes Yes More than job

creation only

D Ethiopia Flower

production

January 2004 Yes Yes More than job

creation only

E

South-Africa

Agriculture /

fruit production

July 2004 No No Job creation only

F Ethiopia Flower

production

December 2003

Yes Yes More than job

creation only G Sierra Leone Agriculture / potato production September 2009 No Yes Non

H Ghana Transport July 2009 No Yes Job creation only

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4.1 Social value creation and economic achievements

The two main subjects of interest for this research are social value creation and economic achievements. As shown in the conceptual framework this study expects to find a positive relationship between these two subjects. Before any conclusions can be drawn it is necessary to give an insight in the experiences of the firms which were interviewed.

Because the IJV’s were all funded by the PSI program they were required to create some kind of social value in their host country. Several managers mentioned that the aim of social development was indeed part of the PSI program, but it was also part of the firm’s strategy or CSR-statement. Also without participating in the PSI funding program they would have created social value in their host country. The information provided by the PSI program is unclear on what is meant with ‘making a relevant, positive contribution to self-reliance and poverty reduction’ (Subisidies and programmes/PSI, 2015). It is a clear indicator of the requirement to create social value in the host country but it is vague about the implementation of social value creation. Therefore in figure 3 an additional column is added about the level of social commitment. For some firms social value creation encompasses only job creation whereas other firms implemented a higher level of social commitment in their business operations. From the moment a company starts providing jobs in the host country it is improving the social conditions of the community and therefore it is already creating social value, company A stated:

‘’The most important social goal is the creation of employment. But of course due to our presence, there indirectly emerged more new employment near our facility. And besides the creation of new employment you also create general developments in the host country’’ (Company A).

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This explanation was given by most of the interviewees. By creating economic value in their host countries, SMEs will simultaneously create social value. The creation of new employment is for all firms the main result of social value creation. But it also works out the other way, social value creation is a necessity for the achievement of economic goals in emerging countries. In the emerging countries the people are poorly educated and the environment is undeveloped. In order to create economic value for both the firm and its environment it is necessary to foster social development. Based on the findings about the relationship between social value creation and economic achievements the first proposition can be formulated:

P1. Social and economic value creation are interrelated, the one cannot succeed without the support of the other.

a. By creating economic value in their host country, IJVs will simultaneously create social value.

b. Social value creation is a necessity for the achievement of economic goals in emerging countries.

According to the interview results the first step of fostering social development is education and training, described by company A as ‘distribution of knowledge’.

‘’We have built a modern workshop in Ghana and trained our employees how they efficiently can work in this workshop with all kind of tools they have never seen or used. By doing this you raise the quality of work and production to a higher level. So you can speak of distribution of knowledge and this will be beneficial for everyone, not only the employees’’ (Company A).

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Company B also stated that education and training is important for the impact of the created social value.

‘’We started in Namibia with 20 small farmers which we educated to operate independently in the end. In the beginning we had to learn them everything, their level of education was zero. But the farmers got accompanied by the production managers which supervised and guided them. This project is still operating and the farmers are almost working independently. So in the end this business model should create a sustainable model’’ (Company B).

As mentioned in the beginning and represented in figure 3, there is a distinction between the levels of the firms’ social commitment. Whereas some firms, like company A, only provide education for their employees in terms of job related knowledge, other firms took the distribution of knowledge to a higher level. Company C for instance is convinced that the success of a business depends on its people as well as the partner and family behind its personnel. Therefore they insisted during the startup period of the IJV on a decent management of the kids and women of the community.

‘’We learned the people about job related issues but also about general subjects like personal care, hygiene and communication. We wanted to be more for the community than only employer. By doing this you will get the support of the whole community which in the end will result in happy, motivated and productive personnel’’ (Company C).

The provision of different levels of education and training is a perfect practical example of the concept of ‘shared value’ given by Porter and Kramer (2011). Social and economic value creation are interrelated, the one cannot succeed without the support of the other.

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Education will create shared value through two out of three avenues. First, education will result in higher productivity and a better functioning value chain. The employees have more knowledge about how to work efficiently, effectively, safe, thrifty, etc.. Due to this distribution of knowledge the employees and the community will notice the increase in social impact and the firm will get better economic results. The findings on the importance of education and training leads to the following proposition:

P2. Education and training are crucial for the impact of ‘shared value’ creation.

a. Education will result in higher productivity and a better functioning value chain. b. Education will foster the development of the community and its educational level.

The interview results give more arguments for shared value creation than only by redefining productivity in the value chain. The interviews provide also examples of enabling local clusters in practice. The development of a workshop or new facilities will affect the occurrence of local clusters in a positive way.

‘’Before we entered this market the products were all used for export because in Namibia weren’t any facilities for the cooling of fruits. We developed a cooling facility and since then the people can also buy the local grown products at the local market. This development will increase the local economy and the whole community will benefit from this’’ (Company B).

Company D also wanted to do more for the community than only providing jobs. Besides jobs for 1,200 local people they also provide a decent meal for all their employees and established a clinic on their farm so all the people from the community can get primary healthcare. These kinds of investments in facilities and infrastructure will result in more employment, improvement of institutions, the occurrence of supporting firms, competition

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and market organizations. All this will create a boost for the firm and its environment. A boost in social as well as economic terms. The manager of company F gives a persuasive explanation of their motives for a high level of social commitment:

‘’We try to get embedded in the local community and by doing this we hope they will get a positive image of our business. This works out pretty well. We experience that by doing something for the community they regard us as a trusted organization. In return they are willing to help us if needed’’ (Company F).

Based on the results of shared value creation on the enabling of local clusters, the following proposition can be made:

P3. Shared value creation will affect the occurrence of local clusters in a positive way and will create a boost for both the firm and the community.

4.2 Institutional weak environments

The sample consists of firms which are all active in Sub-Saharan African countries. All these countries are characterized with absent or weak institutions. For the IJVs this can result in difficulties in getting access to capital or talent, low level or absence of formal rules and lack of institutional infrastructure. The answers to the question whether institutional voids harmed the survival of the IJV were really consistent. Institutional voids will not threaten the survival of the IJVs but they will create a lot of operational problems.

‘’You shouldn’t forget that it is never easy to operate in a developing country, you have to deal with different legislation or laws. Sometimes it takes you straight to the wall and this is not always easy to solve. It always gets more complicated than you wish to’’ (Company A).

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Based on these first results on the influence of the institutional weak environment the following proposition can be made:

P4. Institutional voids will not threaten the survival of the IJV but it will create operational problems for the IJV.

Remarkable is that initially the managers do not face it as real barriers. Only when asking further on this subject they gave some examples and recognized the problems as barriers characteristic to institutional weak environments. Company B gave a good example of barriers due to institutional voids.

‘’Decisional terms can take really long. Decisions have to go through a lot of different levels. It can be difficult for the institutions to make a decision, they either don’t know who has to make the decision or they just don’t want to make it. They simply pass the bucket to others and don’t know what their own tasks and responsibilities are’’ (Company B).

With this example he gave a perfect practical example of lack of institutional infrastructure as mentioned by Khanna & Palepu (2010). Government officials not knowing their tasks and responsibilities are indicators of a lack of institutional infrastructure and a low level of formal rules. A term often heard when asking for experiences with institutional voids was ‘bureaucracy’. As mentioned earlier, Company B had to deal with bureaucracy in terms of delay due to the length of decisional terms. Company D experienced difficulties due to the strict regulations in Ethiopia on the flows of different currencies, the value of the exported products has to be equal to the amount of money entering the country. For a multinational

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company this can cause operational and financial problems. The manager of Company D did not understand anything of this regulation, it is unbeneficial for the companies as well as for the economy of the country. They even had a meeting with the Ethiopian Central Bank to convince them that these regulations are a boundry for international firms and will scare other firms to start a project in Ethiopia. The manager argued that these kind of rules are so embedded in their regulations and mindset that it is impossible to convince the local authorities about the necessity of change.

Another example of a experiences that indicates the deficiencies of dealing with institutional voids was given by company A. Problems with getting access to capital or talent is one of the characteristics of institutional voids given by Khanna and Palepu (2006). Company A faced these problems multiple times when it needed to purchase a building plot for the development of new facilities. In emerging countries this is not regulated and a mediating institution is missing. It will result in a delay of building time or worse.

‘’In these countries it is most of the time difficult to find out who has the property rights of that specific piece of land. On these pieces of land the government will issue the property rights, but after the issuing you discover that the piece of land was already issued with old property rights. In such case you have to deal with local tribes or other people who claim to be the owner of that specific piece of land. Than you have to be sure you are not going to pay twice for the same land’’ (Company A).

In some cases it was inevitable to make adjustments to the firm’s strategy or business plan to overcome the deficiencies caused by institutional voids. Company B needed to hire an HR-manager. The company faced the high level of protection of labor in their host country. When the firm has a small dispute with one of its employees the government requires that it

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needs to be discussed in a hearing with the employee. Then the case will need go to a labor commission. The manager of company A believed that in case of a foreign employer labor is even more protected.

‘’It is really protected and terribly bureaucratic. It is difficult to correct people. You just need to accept the way of doing business in these countries and find a good solution of working with the bureaucracy. For example, we hired our own HR-manager, which was unforeseeable. His only task was to do these hearings and its administrative requirements’’ (Company B).

With these results on the effect of institutional voids on the IJV’s operations the following proposition can be made:

P5. Bureaucracy, the lack of institutional infrastructure and low level of formal rules causes most of the operational problems.

Khanna and Palepu (2010) developed four rules how to deal with institutional voids in emerging markets, see chapter 2.4.2 of this paper. The story of company B needing to hire an own HR-manager is a good example of the first of these four rules, the necessity of adaptability for the fit of the business model with the institutional weak environment. From these findings proposition 6 can be drawn:

P6. Adaptability is sometimes inevitable to fit the business model with the institutional weak environment.

Given the interview results, the third rule (finding a balance between ambition and humility) was self-evident. In the beginning of the project the foreign firm needs to act modest.

SMEs’ ability to establish a sustainable international joint venture in institutional weak countries